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Contonta

1Itle Page

CopyrIght

ÐedIcatIon

Acknowledgments

Part |: Foundationa ot
5uccoaatuI 1rading

lntroductIon

1he lnventIon o| a CommodIty
1rader

Why l Wrote 1hIs Book

1hIs Book's AudIence

1he Book's Road Map

Chapter 1: 1he HIstory and 1heory o|
ClassIcal ChartIng PrIncIples

My PerspectIve o| the PrIncIples

1hree LImItatIons o| the PrIncIples

8ummary

Part ||: Charactoriatica ot a
5uccoaatuI 1rading PIan

Chapter 2: BuIldIng a 1radIng Plan

1rader PersonalIty and
1emperament

Adequate CapItalIzatIon

Overall RIsk Management

PoInts to Remember

Chapter 3: ldentI|yIng the 1rades and
the 1radIng vocabulary

1rade ldentI|IcatIon

vocabulary o| the Factor 1radIng
Plan

PoInts to Remember

Chapter 4: ldeal Chart Patterns

Reversal H&8 Pattern In Copper

Reversal RIsIng Wedge In AUÐ/U8Ð

ContInuatIon Wedge and Reversal
FaIlure 1op In 8oybean OIl

Reversal 1rIangle Bottom In 8ugar

ContInuatIon and PyramId Patterns
In U8Ð/CAÐ

Reversal 1op In 8Ilver

ContInuatIon H&8 Pattern In the
Russell 1000 lndex


ContInuatIon Rectangle In Kansas
CIty Wheat

ContInuatIon Rectangle and PyramId
1rIangle In Crude OIl

ContInuatIon H&8 1op In the Ðow
UtIlItIes

ContInuatIon 1rIangle, Reversal M
1op, and Flag In the EUR/U8Ð

H&8 Reversal 1op and 1hree
ContInuatIon Patterns In the
GBP/JP¥

A Reversal 8ymmetrIcal 1rIangle In
the AUÐ/JP¥

1wo ContInuatIon Patterns In
GBP/CHF

A 1rIangle and RunnIng Wedge In
8ugar

An H&8 Bottom In Apple Computer

A Major ContInuatIon H&8 and
8ymmetrIcal 1rIangle In Gold

A 8erIes o| BullIsh Patterns In
Copper

A FaIled AscendIng 1rIangle In the
U8Ð/CAÐ Crossrate

A 12-Week Rectangle In the Ðow
Jones 1ransport lndex

A Rare Horn In Brent 8ea OIl

An H&8 Bottom Launches the 2009
Bull Market In the 8&Ps


8ummary

PoInts to Remember

Chapter 5: How the Factor 1radIng Plan
Works

1rade ldentI|IcatIon

1rade Entry

1rade RIsk Management

1rade Order Management

PoInts to Remember

Chapter õ: 1hree Case 8tudIes UsIng
the Factor 1radIng Plan

A Remarkable 1echnIcal Event In the
Ðow Jones

A ¥ear 1radIng Gold

A ¥ear 1radIng 8ugar

PoInts to Remember

Chapter 7: CharacterIstIcs o| a
8uccess|ul 1rader

lntImate Knowledge o| 1radIng
8Ignals

ÐIscIplIne and PatIence

AnalysIs o| 8el| and o| the 1radIng
Plan

lt 1akes a Leap o| FaIth

PoInts to Remember

Part |||: A Fivo-month 1rading
Diary: Lot tho Journoy Bogin

Chapter 8: Month One

1radIng Record

8ummary

Chapter 9: Month 1wo

ldentI|yIng 1radIng OpportunItIes

AmendIng the Plan

1radIng Record

8ummary

Chapter 10: Month 1hree

8tIckIng to the Plan In Choppy
Markets

1radIng Record

8ummary

Chapter 11: Month Four

1radIng Record

8ummary

Chapter 12: Month FIve

RelyIng on ClassIcal ChartIng
PrIncIples

1radIng Record

Outlook |or the Future

8ummary

Part |V: 1ho Wraµ-uµ

Chapter 13: AnalysIs o| 1radIng
Per|ormance

How the 1radIng Plan Per|ormed

How the Plan (and the 1rader}
Evolved

8ummary: Best PractIces GoIng
Forward

Chapter 14: 1he Best Ðressed LIst

A 8even-Month Ðouble Bottom In
AUÐ/U8Ð

A 14-Month CoIl and NIne-Month
ÐescendIng 1rIangle In EUR/CHF

A 8Ix-Month Wedge In EUR/U8Ð

A 1õ-Week Horn In GBP/U8Ð

A Four-Month H&8 In Bottom
NZÐ/U8Ð

A 8Ix-Month AscendIng 1rIangle
FaIlure In U8Ð/CAÐ

An EIght-Month H&8 Bottom In the
8&Ps

A 14-Month 8ymmetrIcal 1rIangle In
8ugar

A 8even-Month 1rIangle In Gold

A 8erIes o| ContInuatIon Patterns In
Copper

An H&8 Bottom In Crude OIl

8ummary

PostscrIpt

FInal Per|ormance

Per|ormance Compared to Other
Benchmarks

PuttIng It In PerspectIve

AppendIx A: Factor 1radIng Plan
8Ignals

AppendIx B: OuIck Re|erence to Charts

AppendIx C: Recommended Resources

Author's Note

lndex


Copyr|ght t 2011 by lotor 3randt. A|| r|ghts rosorvod.

lub||shod by 1ohn W||oy 8 3ons, lnc., |obokon, low
1orsoy.
lub||shod s|mu|tanoous|y |n Canada.

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W||oy a|so pub||shos |ts books |n a var|oty ot o|octron|c
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7bls book ls ooolcotoo to my wlío, Vooo, ooo my cbl|oroo,
wbo íor moro tboo 80 yoors bovo to|orotoo tbo ops ooo
oowos oí tbo |lío oí o commoolty trooor.

A|so to somo vory ooor ío|ks l roíor to os tbo loctor íoml|y,
oboot two oozoo ío||ow commoolty trooors wbo, sloco
1080, bovo sorvoo os o soooolog booro os l oovo|opoo
my troolog p|oo ooo boooo my croít.


Acknowledgments

lowo a dobt ot roa| grat|tudo to my tr|ond 0avo |orbos,
CEO ot lotra ||nanc|a| |n Co|orado 3pr|ngs, who a||owod
mo to uso h|s ott|co and statt to proparo th|s book.

l am a|so |n dobt to G|on larson and h|s awosomo toam
at Gonos|s ||nanc|a| 1ochno|ogy, who prov|do mo w|th
ass|stanco |n propar|ng tho charts tor th|s book. l uso tho
Gonos|s data and chart|ng p|attorm, 1radolav|gator, |n my
own trad|ng and havo tound G|on and h|s toam to bo roa|
partnors |n my markot oporat|ons.

0an Chos|or, lros|dont ot Chos|or Ana|yt|cs (a t|rm
prov|d|ng tochn|ca| markot rosoarch to onorgy tradors)
or|g|na||y suggostod that l wr|to th|s book. 0an and l go
back sovora| docados as poors. lt you havo ovor wr|tton a
book, you w||| undorstand |t whon l say that l don't know
whothor to thank 0an or curso at h|m tor oncourag|ng mo.

||na||y, l want to thank Vog |rooborn and Kov|n
Comm|ns ot 1ohn W||oy 8 3ons tor hang|ng w|th mo dur|ng
th|s procoss. l startod th|s book |n oar|y 2000, but tor hoa|th
roasons l was s|dotrackod tor noar|y n|no months. Vog and
Kov|n domonstratod groat pat|onco and gu|danco to got
th|s projoct back on track.


Part l

FoundatIons o| 8uccess|ul
1radIng

ls trad|ng an art, or |s |t a sc|onco? Or |s |t somo
comb|nat|on ot tho two? l am not suro ot tho answors to
thoso quost|ons. l am not suro |t |s nocossary to know tho
answors. l v|ow trad|ng as a cratt. A succosstu| trador |s a
crattsman, app|y|ng h|s or hor sk|||s |n tho samo way as a
basoba|| p|tchor who has portoctod throw|ng a knuck|oba||,
or a wo|dor spoc|a||z|ng |n jo|n|ng togothor oxot|c mota|s, or
a sottwaro ong|noor who ovorcomos comp|ox prob|oms to
dos|gn now ch|p tochno|ogy.

A|| crattsmon undorgo appront|cosh|ps. An
appront|cosh|p |s not somo spoc|t|od por|od ot t|mo |n a
spoc|t|od c|assroom or tra|n|ng grounds. lathor, an
appront|cosh|p |s a compos|t|on ot porsona|, protoss|ona|,
and propr|otary oxpor|oncos that |oad to tho know|odgo and
sk|||s to portorm a cratt.

lart l ot th|s book ro|atos my appront|cosh|p as a trador
and prov|dos contoxt and background to a|| that to||ows |n
tho book. lart l conta|ns two soct|ons:

1. An lntroduct|on to my background and h|story
as a trador, tho roasons l doc|dod to wr|to th|s
book, a road map to tho book, and what l hopo
th|s book accomp||shos
2. A br|ot ovorv|ow ot c|ass|ca| chart pr|nc|p|os,
tho toundat|on ot my trad|ng approach

lart l |ays tho toundat|on tor tho arch|toctura| dos|gn ot
my trad|ng p|an, wh|ch |s dota||od |n lart ll.


lntroductIon

Ono ot tho t|rst th|ngs l chock out |n a now book |s tho
numbor ot pagos pr|or to Chaptor -|ong book
|ntroduct|ons put mo to s|oop. l w||| assumo that most ot you
aro ||ko mo-you want to cut to tho chaso. 1ho |ast th|ng l
wantod to do was wr|to a book w|th a |ongthy |ntroduct|on,
but my op|n|on has changod now that l'm on tho author's
s|do ot tho oquat|on. lt turns out |ntroduct|ons can bo usotu|
|n prov|d|ng nocossary contoxt and porspoct|vo tor a book.
And so, p|oaso torg|vo mo tor comm|tt|ng tho s|n l havo
a|ways d|s||kod-l th|nk |t w||| bo worth |t.

1h|s |s a book about mo as a trador ot commod|ty and
torox markots and how l uso pr|co charts |n my cratt. l th|nk
ot |t as a mosa|c: ovontua||y tho parts ot th|s book w||| t|o
togothor |n tho samo way that a good mosa|c bocomos
v|s|b|o on|y |n |ts ont|roty. l|oco by p|oco or soct|on by
soct|on, a mosa|c makos no sonso. On|y at a d|stanco and
|n |ts tu||noss doos a mosa|c ga|n c|ar|ty and porspoct|vo.
1ho concopt ot a mosa|c doscr|bos how th|s book w|||
unto|d. ||rst, a b|t about how l got startod |n tho bus|noss.

1ho |nvontion ot a Commodity
1rador

ln 1072, short|y attor graduat|ng trom tho Un|vors|ty ot
V|nnosota w|th a dogroo |n advort|s|ng, l movod to Ch|cago
to work tor ono ot tho nat|on's |argost ad agonc|os. A
no|ghbor was a trador at tho Ch|cago 3oard ot 1rado
(C3O1). 1hrough our convorsat|ons and my v|s|ts to soo
h|m on tho trad|ng t|oor, l bocamo capt|vatod by tho tuturos
markots. ln commod|ty trad|ng l saw tho opportun|ty to oarn
a good ||v|ng, work tor myso|t, and bo cha||ongod |n a vory
oxc|t|ng t|o|d. ln short, l bocamo hookod.

Evorybody startod |n tho commod|ty t|o|d at tho bottom.
3o|ng h|rod at a s|zab|o sa|ary was not a roa||ty ot tho
bus|noss. l noodod a p|an 3 |t l woro to qu|t advort|s|ng and
ontor tho commod|ty t|o|d. 3o, l askod tho pros|dont ot tho
advort|s|ng agoncy |t ho wou|d h|ro mo back at a 80
porcont |ncroaso |n sa|ary |t l qu|t, tr|od tho commod|ty
bus|noss tor a yoar unsuccosstu||y, and roapp||od tor my o|d
job. |o agrood to tho doa|.

l ontorod tho commod|ty bus|noss |n 1070 whon l was |n
my 20s w|th tho s|ngu|ar goa| ot trad|ng my own porsona|
account. 3ut l noodod to |oarn tho ropos t|rst.

Whon l ontorod tho bus|noss, most tradors at tho C3O1
(as wo|| as tho Ch|cago Vorcant||o and tho low York
commod|ty oxchangos) startod at or noar tho bottom ot tho
pock|ng ordor. 1ho samo th|ng ox|sts to th|s day. An °V3A
tast track' has novor roa||y ox|stod |n tho trad|ng p|ts. 1ho
|oarn|ng curvo |s stoop-tho washout rato |s h|gh.

l |oarnod tho bus|noss by work|ng tor Cont|nonta| Gra|n
Company and Cont|, |ts tuturos markot brokorago
oporat|on. At tho t|mo Cont|nonta| Gra|n was tho socond
|argost gra|n oxportor |n tho wor|d noxt to Carg|||.
Cont|nonta| so|d |ts gra|n morchand|s|ng bus|noss to Carg|||
|n 1000.

0ur|ng my t|mo |n tho advort|s|ng t|o|d l had boon work|ng
on tho accounts ot Vc0ona|d's and Campbo||'s 3oup
Company. lt bocamo a vory tortunato co|nc|donco that both
compan|os woro hugo usors ot agr|cu|tura| products.

lrocossors ot agr|cu|tura| commod|t|os, such as
Campbo||'s 3oup, had bocomo accustomod to docados ot
ovorsupp|y cond|t|ons and stab|o commod|ty pr|cos. 3ut a
numbor ot ovonts |n tho oar|y 1070s, |nc|ud|ng g|oba| crop
ta||uros, |od to mass|vo bu|| markots |n tho pr|co ot
agr|cu|tura| products and noar|y ovory raw mator|a|. ln a
mattor ot months tho pr|co ot somo commod|ty goods
doub|od. ||guros l.1 and l.2 show go|d and whoat pr|cos as
prox|os tor raw mator|a| pr|cos.

F|CuRE |.1 3pot Go|d lr|cos, 1880-2000.



F|CuRE |.2 3ott Whoat lr|cos, 1800-2000.


|ood compan|os woro not proparod tor tho pr|co
oxp|os|ons tak|ng p|aco. 1op managomont and purchas|ng
oxocut|vos ot thoso compan|os woro dosporato tor
so|ut|ons. |ow tood procossors had any oxpor|onco w|th
torward pr|c|ng |n o|thor tho cash or tuturos markots.

1h|s was tho onv|ronmont whon l sw|tchod caroors trom
advort|s|ng to commod|t|os.

lmmod|ato|y upon jo|n|ng Cont|, l approachod tho
pros|dont ot Campbo||'s 3oup Company w|th a proposa|. l
thought porhaps tho tuturos markots cou|d bo a way tor
Campbo||'s 3oup to hodgo |ts torward purchasos.

l suggostod that tho company appo|nt a son|or
purchas|ng oxocut|vo to ro|ocato to Ch|cago tor a t|mo to
dotorm|no |t commod|ty contracts m|ght bo a bonot|c|a|
managomont and purchas|ng too|. l turthor proposod that
tho dos|gnatod purchas|ng oxocut|vo and l wou|d thon
subm|t a torma| proposa| to top managomont-and tho
proposa| cou|d just as ||ko|y n|x as rocommond tho |doa ot
tuturos contracts.

ln tho ond, wo rocommondod that tho corporat|on cou|d
stratog|ca||y uso tuturos contracts |n cocoa (Campbo||'s
3oup ownod God|va Choco|ato at tho t|mo), corn and
soyboan moa| (to grow ch|ckons tor |ts var|ous trozon and
cannod products), soyboan o||, |cod bro||ors (thon act|vo|y
tradod at tho C3O1), ||vo catt|o and hogs (dopond|ng on
tho pr|co ro|at|onsh|p botwoon tho cuts ot moats usod by
tho company and tho pr|co ot ||vo an|ma|s on tho hoot), and
tho throo major whoat contracts tradod |n tho U.3.
(Campbo||'s 3oup mado nood|os by tho ton and ownod
Orowoat and loppor|dgo |arms bakor|os).

Campbo||'s 3oup saw tho w|sdom |n tho uso ot
commod|ty tuturos contracts. Vy consu|t|ng ro|o w|th tho
company covorod my bus|noss ovorhoad and my tam||y's
||v|ng oxponsos wh||o l |oarnod tho tuturos bus|noss. |ad l
bogun trad|ng tor myso|t |mmod|ato|y, l wou|d havo ||ko|y
boon torcod rap|d|y back |nto advort|s|ng or anothor caroor
path.

Attor |oarn|ng tho ropos tor a coup|o ot yoars, l bogan
trad|ng propr|otary tunds around 1080, start|ng w|th |oss
than $10,000. ln|t|a||y, my porsona| trad|ng was not
succosstu|, a|though not d|sastrous. l tr|od just about ovory
approach l hoard or road about. 1ho tradors around mo at
tho C3O1 woro mak|ng monoy, but l just cou|dn't soom to
t|nd a n|cho that workod.

1hon a tr|ond |ntroducod mo to tho book 7ocbolco|
Aoo|ysls oí 5tock Vorkot 7rooos, wr|tton |n tho 1040s by
1ohn Vagoo and lobort Edwards. 1ho book was-and st|||
|s-cons|dorod tho b|b|o ot c|ass|ca| chart|ng pr|nc|p|os. l
consumod tho book |n a wookond and havo novor |ookod
back.

Chart trad|ng ottorod mo a un|quo comb|nat|on ot
bonot|ts not ava||ab|o w|th tho othor approachos l had
attomptod or cons|dorod, |nc|ud|ng:



An |nd|cat|on ot markot d|roct|on

A mochan|sm tor t|m|ng

A |og|ca| po|nt ot trado ontry

A moans to dotorm|no r|sk

A roa||st|c targot tor tak|ng prot|ts

1ho dotorm|nat|on ot a r|sk/roward ro|at|onsh|p


l havo boon a chart trador ovor s|nco. Voro spoc|t|ca||y, l
trado broakouts ot c|ass|ca| chart tormat|ons such as hoad
and shou|dors tops and bottoms, roctang|os, channo|s,
tr|ang|os, and tho ||ko. l tocus on wook|y and da||y chart
pattorns that torm ovor a por|od ot tour wooks to many
months. Evon though my tocus on charts |s |ongor torm, my
actua| trad|ng tonds to bo short torm, w|th trados |ast|ng
anywhoro trom a day or two (|n tho caso ot |ossos) to a
month or two.

3|nco 1081, my pr|nc|p|o occupat|on has boon trad|ng
propr|otary tunds, a|though ott and on through tho 1080s l
so|d trad|ng rosoarch to othor tradors. ln tho |ato 1080s and
oar|y 1000s l tradod somo hodgo tunds tor a coup|o ot b|g
monoy managors such as Commod|t|os Corp. (s|nco
bought by Go|dman 3achs). A numbor ot tho bost hodgo
tund tradors |n tho wor|d havo workod tor Commod|t|os
Corp. (l do oot protond to bo |n tho|r |oaguo.)

As a rosu|t ot markot burnout and an |ntorost |n
nonmarkot opportun|t|os, |n tho oar|y 1000s l bogan to
d|stanco myso|t trom day-to-day contact w|th tho markots
and grantod powor ot attornoy ovor my own tunds to
anothor trador. lt was not a succosstu| oxpor|mont. |rom
tho m|d-1000s through 2000 l pursuod somo porsona| non-
prot|t |ntorosts (soc|a| causos) and d|d ||tt|o or no trad|ng at
a||. l startod to omp|oy my tormor trad|ng p|an aga|n |n
1anuary 2007.

ln 1000, l cowroto a book w|th a s|nco-docoasod tr|ond,
3ruco 3abcock, t|t|od 7roolog Commoolty lotoros wltb
C|osslco| Cbort Pottoros, d|scuss|ng |n vory gonora| torms
my approach to trad|ng. 1hat book sparkod a dos|ro to
somoday wr|to a book prov|d|ng much moro dota|| on my
trad|ng oporat|ons. 1h|s book |s tho product ot that dos|ro.

Ny Proµriotary 1rading Rocord

|or tho act|vo trad|ng yoars ot 1081-100b (|nc|ud|ng tour
yoars whon l grantod powor ot attornoy to anothor trador)
and aga|n start|ng |n 2007, my avorago annua| rato ot
roturn tor propr|otary tunds has boon 08.1 porcont (annua|
va|uo Addod Vonth|y lndox [vAVl| mothod). l oxpor|oncod
ono |os|ng yoar dur|ng tho t|mo l was tho so|o trador tor my
propr|otary tunds (-4.7 porcont |n 1088). 1ho numor|c
avorago ot my worst annua| month-ond|ng drawdowns has
boon 1b.4 porcont. 1ho portormanco capsu|o ot my
propr|otary trad|ng |s shown |n ||guro l.8. l|oaso road tho
d|sc|a|mors and d|scuss|on ot my propr|otary trad|ng |n tho
Author's loto at tho ond ot tho book. last portormanco |s
not nocossar||y |nd|cat|vo ot tuturo rosu|ts.

F|CuRE |.8 |actor llC lropr|otary 1rad|ng locord.


Why | Wroto 1hia Book

ln tho bus|noss ot commod|ty trad|ng books, adv|sory
sorv|cos, som|nars, and computor|zod trad|ng programs,
thoro |s a |ot ot junk bo|ng podd|od. 1horo aro numorous
books wr|tton oach yoar about spocu|at|ng |n stocks and
commod|t|os. 0oos tho |nvostmont wor|d roa||y nood
anothor book?

G|von my |ow op|n|on ot most trad|ng and |nvostmont
books, |t |s |ron|c that l am ovon wr|t|ng th|s book.
3poc|t|ca||y, l havo had a gonora| d|sda|n tor books
approach|ng tochn|ca| trad|ng on a hypothot|ca| bas|s. ln
contrast, l |ovo tho Vorkot ¼lzoros sor|os by 1ack
3chwagor bocauso |t prosonts tho human s|do ot roa|-||to
tradors who uso tho|r |ngonu|ty to mako monoy by
outsmart|ng tho markots. lt you havo novor road thoso
books, thon you havo roa||y m|ssod out on somo groat
|ns|ght |nto markot spocu|at|on. l a|so |ovod two books by
V|chao| low|s, Llor`s Pokor and 7bo Blg 5bort. losloo tbo
Loomsooy Vocbloo bocauso both ottor a roa| |ook at tho
roa| ||vos ot smart tradors.

l accoptod th|s book cha||ongo bocauso 1ohn W||oy 8
3ons and l sharod a v|s|on tor a book that wou|d bo a d|ary
ot my roa|-t|mo trad|ng oporat|ons dur|ng tho courso ot a
sot t|mo tramo.

1h|s book conta|ns a comb|nat|on ot sovon
charactor|st|cs that l bo||ovo aro un|quo among commod|ty
trad|ng books:

1. l am a roa| trador who trados roa| markots |n
roa| t|mo w|th roa| monoy. l am not an
acadom|c|an or a porson who ro||os on tho sa|o ot
books to pay my mortgago. l am not so|||ng a
trad|ng systom or subscr|pt|ons to an adv|sory
wob s|to. l am just a trador try|ng to mako monoy
trom tho markots.
2. 1h|s book w||| cata|og roa|-t|mo trad|ng s|gna|s
and ondoavors, not somo arb|trary sot ot
opt|m|zod ru|os torm t|t to |ast yoar's charts. 1h|s
book w||| bo a roa|-t|mo d|ary ot my trad|ng on a
day-by-day, trado-by-trado, thought-by-thought,
m|stako-by-m|stako, v|ctory-by-v|ctory, and
omot|on-by-omot|on bas|s. l am stopp|ng out |n
ta|th that l w||| ovon bo prot|tab|o dur|ng tho noxt 21
wooks. 3ut tradors tako r|sks.
8. 1h|s book w||| rovoa| trad|ng as an upstroam
sw|m aga|nst human omot|ons. Cons|stont|y
succosstu| trad|ng |s a tough job. l mako no
protonso to tho oppos|to. lt trad|ng woro oasy,
ovoryono wou|d bo do|ng |t tor a ||v|ng. 3omo
othor authors can sharo tho g|ory ot tho|r constant
succossos. l w||| d|scuss tho omot|ons |nvo|vod to
tako tho noxt trado attor o|ght stra|ght |os|ng
trados. 3uccosstu| spocu|at|on can |oad to ha|r-
gray|ng, s|oop-|os|ng, and dog-k|ck|ng omot|ons. l
hopo to convoy tho samo.
4. l w||| attompt to show that succosstu|
spocu|at|on |s most|y about manag|ng r|sks. ln
tact, good tradors v|ow thomso|vos t|rst and
toromost as r|sk managors. 1ust ||ko °1oxas |o|d-
Em,' how ono p|ays h|s or hor cards |s moro
|mportant than tho cards thomso|vos. Vonoy
managomont has not boon g|von tho attont|on |t
dosorvos.
5. l w||| attompt to k||| a roa||y sacrod cow whoso
doath |s |ong ovorduo-tho |doa that |t |s poss|b|o
to bo r|ght on 70 or 80 porcont ot ono's trados.
1h|s cow roa||y noods to d|o. lorhaps l can str|ko
a succosstu| b|ow.
lov|co tradors spond 00 porcont ot tho|r t|mo and
monoy purs|ng mothods to |dont|ty trados. ln my
own oxpor|onco, °1rado |dont|t|cat|on' |s tho |oost
|mportant componont ot a cons|stont|y prot|tab|o
trad|ng oporat|on. ln tact, tho mothod by wh|ch a
trador |dont|t|os tho markots to trado |s ot vory
||tt|o |mportanco. l mako no contont|on that tho
mothod l uso |s tho bost or |s ovon abovo
avorago. Voro to tho po|nt, how l so|oct trados just
doos not mattor at tho ond ot tho day. l bo||ovo
that nov|co tradors who chaso systoms that c|a|m
succoss on 80 porcont ot trados do so bocauso
thoy don't havo tho stomach tor |os|ng trados. 3ut
a strong stomach tor |osors and a m|n|aturo pr|do
on tho nood tor w|nnors aro nocossary tor
cons|stont|y prot|tab|o trad|ng oporat|ons.
0. l havo abso|uto|y no dos|ro |n th|s book to show
how l can turn a sma|| tortuno |nto a |argo ono.
3ooks that ta|k about turn|ng $10,000 |nto a
m||||on do||ars may bo good markot|ng, but |ot's
got roa|! A porson who can ach|ovo th|s typo ot
portormanco wou|d possoss a|| ot tho wor|d's
curroncy w|th|n a docado. 0o tho math!
l am r|sk avorso. Vy goa| |n 2010 |s an 18 to 24
porcont roturn. l wou|d bo |n hog hoavon |t
commod|ty tuturos and torox markots cou|d
porpotua||y prov|do tor mo an avorago two or so
porcont month|y roturn-w|th a m|n|mum amount
ot cap|ta| vo|at|||ty. l w||| |oavo |t to othor authors to
d|sc|oso tho|r socrots to b|g tortunos. lt you aro
|ook|ng tor a book on how to convort a sma||
account |nto a m||||on do||ars, th|s book |s not tor
you. lt you want a book that dota||s a
comprohons|vo procoss tor spocu|at|on a|mod at
oxp|o|t|ng an odgo, thon koop road|ng.
7. Chart|ng has boon good to mo. l know |t may
sound a |ot nob|or than |t roa||y |s, but l wou|d ||ko
to sharo what l havo |oarnod ovor tho yoars about
tho cratt ot trad|ng chart pattorns. ln h|nds|ght, |t |s
oasy to |mag|no how a markot shou|d havo boon
tradod. 3ut |n roa| t|mo tho ch|ckons como homo
to roost. l bo||ovo that l can add to tho body ot
pract|ca| know|odgo on chart trad|ng. lorhaps l
can sparo othors tho tormont ot tho |oarn|ng
procoss.

ln tho ond, my goa| |s to d|sp|ay tho act|ons and omot|ons
ot a protoss|ona| trador-and th|s |nvo|vos a who|o |ot moro
than a way to |dont|ty tho noxt trado.

1hia Book'a Audionco

l am wr|t|ng th|s book to:



lrotoss|ona| commod|ty and torox tradors

1ho gonora| |nvostmont pub||c (ospoc|a||y 3aby
3oomors who aro now concornod about tho|r
rot|romont assots)

lov|co commod|ty °wannabo' tradors who havo
novor roa||y ga|nod tract|on |n tho|r trad|ng


ProtoaaionaI Commodity/Forox 1radora

You w||| not |oarn a s|ng|o th|ng trom th|s book, a|though |t
you aro a chart|st, hopotu||y l can add somoth|ng to your
body ot know|odgo. lor shou|d you bo road|ng th|s book to
|oarn anyth|ng about my approach and n|cho. You aro
succosstu| bocauso you know proc|so|y what your own
gamo p|an |s. 3ut you may got a k|ck out ot somo ot tho
anocdotos l sharo as l attompt to oxp|o|t my °odgo' |n tho
markots. You undorstand that succosstu| spocu|at|on |s
pr|mar||y a human ondoavor as wo attompt to °sw|m
upstroam' aga|nst our omot|ons.

Vy hat |s ott to you. You aro abso|uto|y tho bost tradors |n
tho wor|d. 1ho g|oba| t|nanc|a| mo|tdown ot 2007 and 2008
wou|d havo novor takon p|aco |t protoss|ona| commod|ty
tradors woro |n chargo th|ngs ot th|ngs. As a group, you can
bo proud that you d|d not contr|buto to tho g|oba| oconom|c
woos ot rocont yoars.

As protoss|ona| commod|ty and torox tradors, you havo a
|ot to bo proud ot. 1ab|o l.1 takos a |ook at tho portormanco
ot tho top 20 protoss|ona| tuturos and torox trad|ng
oporat|ons dur|ng tho past t|vo yoars (moasurod by r|sk-
adjustod ratos ot roturn).

1ABLE |.1 lortormanco ot tho 1op 20 Commod|ty/|orox
1rad|ng Oporat|ons trom 200b through 2000

5oorco. Vooogoo Accooot Rosoorcb loc. wob slto.
Ot tho top 20 protoss|ona| commod|ty-trad|ng t|rms
dur|ng tho past t|vo yoars, 10 mado monoy |n 2008 as tho
rost ot tho t|nanc|a| wor|d |ost b||||ons |n tho g|oba|
mo|tdown. Ot thoso top 20 t|rms, tho avorago t|vo-yoar
compoundod rato ot roturn (lOl) was 12.0 porcont. 3ovon
d|d not havo a s|ng|o |os|ng yoar |n tho past t|vo yoars. 1ho
avorago worst poak-to-va||oy |os|ng spo|| was on|y -10.b
porcont. 1ho avorago worst yoar among tho 20 t|rms was -
1.0 porcont. Comparo th|s to tho ro||or-coastor r|do ca||od
tho stock markot.

l bo||ovo that thoro aro tour pr|nc|pa| roasons why tho
commun|ty ot protoss|ona| commod|ty tradors |s prot|tab|o
yoar |n and yoar out:

1. Vost commod|ty and torox tradors startod
trad|ng w|th propr|otary monoy. You woro not just
handod a mu|t|m||||on-do||ar poo| bocauso you had
your V3A |n t|nanco or your lh0 |n quantum
phys|cs. ln tact, you aro just as ||ko|y to bo a
co||ogo dropout, a Europoan h|story or thoo|ogy
major, or a tormor a|r tratt|c contro||or.
2. You undorstand r|sk bocauso you trado
|ovoragod markots. You know tho h|gh pr|co to bo
pa|d tor bo|ng stubborn w|th a |os|ng trado. You
know that sma|| |ossos havo a way ot bocom|ng
|argo |ossos, and |argo |ossos can s|nk a sh|p.
You wou|d havo novor |ot a mass|vo p||o ot
worth|oss mortgago papor d|g too doop|y |nto
your pockots.
8. You trado transparont markots that havo |nstant
and roa| pr|co d|scovory mochan|sms. 1ho
|nstrumonts you trado got markod to tho markot
ovory day basod on roa| va|uos. You can
dotorm|no tho ||qu|dat|on va|uo ot your portto||o to
tho ponny at any g|von t|mo-and |t you nood to
scramb|o tor covor, you can do so w|th|n m|nutos.
You just |augh to yourso|t whon you th|nk about
AlG, lohman, and tho mortgago |nstrumonts that
noar|y sunk tho g|oba| oconomy. |ow |n tho wor|d
d|d tho major t|nanc|a| housos put b||||ons ot
do||ars |nto |nstrumonts that cou|d not accurato|y
bo va|uod at tho ond ot ovory day? lmag|no that
somo ot tho wor|d's |argost t|nanc|a| t|rms ot tho|r
typo woro stak|ng tho|r tuturo on t|nanc|a|
dor|vat|vo |nstrumonts thoy d|d not ovon
undorstand, and whon thoy ta||od, tho govornmont
ba||od thom out. And attor tho govornmont ba||od
thom out, tho oxocut|vos ot thoso t|rms pa|d
thomso|vos b||||ons |n bonusos. l|co g|g |t you can
got |t! |rank|y, l th|nk tho ont|ro bunch noods to bo
takon out boh|nd tho woodshod.
4. You know that a koy to succosstu| trad|ng doa|s
w|th how you hand|o |os|ng trados, not |n a|ways
bo|ng r|ght. You undorstand that prot|ts havo a
way ot tak|ng caro ot thomso|vos |t |ossos can bo
managod.

Avorago |nvoatora

lt you aro ||ko most °|nvostors,' you havo oxpor|oncod an
°assot d|sappoar|ng act' dur|ng tho past sovora| yoars as
tho va|uo ot your stocks, hodgo tunds, and roa| ostato has
tankod, at worst, or v|o|ont|y vac|||atod at bost. Your assots
havo boon on a w||d r|do.

Yot |t |s poss|b|o to gonorato cons|stont doub|o-d|g|t
roturns w|th a m|n|mum amount ot cap|ta| vo|at|||ty |n tho
commod|ty tuturos and torox markots. 3ut you nood to
know that to do so |s not oasy work |t you undortako tho
cha||ongo on your own. Cons|stont|y succosstu| trad|ng
roqu|ros d|||gonco boyond oasy doscr|pt|on. 1horo |s not a
s|mp|o go|don ogg.


You probab|y grow up hoar|ng ropoatod|y that commod|ty
markots woro tor spocu|ators and that roa| ostato and
stocks woro tor |nvostors. |opotu||y, you now know that tho
trad|t|ona| concopt ot an °|nvostmont' has no bas|s |n
roa||ty. W|th tho oxcopt|on ot 1-b|||s, ovoryth|ng |s
spocu|at|on. lorhaps wo may t|nd out |n tho noxt tow yoars
that ovon U.3. govornmont dobt |nstrumonts aro not a sato
bot. lt may ovon bo that 80-yoar 1-bonds w||| bo tho noxt
bubb|o.

l|ko |t or not, buy-and-ho|d stratog|os aro a joko. Evory
doc|s|on you mako |n ||to roprosonts a trado-ott. Evoryth|ng
|s a trado. Evoryth|ng |s a gamb|o.

You havo a|so probab|y hoard that commod|ty and
toro|gn oxchango markots roprosont °rags to r|chos' or
°r|chos to rags' spocu|at|on bocauso ot tho |argo |ovorago
conta|nod |n tho |nstrumonts tradod.

Undor tho r|ght hands, commod|ty tuturos and torox
trad|ng can bo a rathor consorvat|vo vonturo. As ot Varch
2010, a tota| ot $217 b||||on was bo|ng managod by
protoss|ona| commod|ty tradors who attompt to prov|do
tho|r c||onts w|th cons|stont|y abovo-avorago lOls w|th a
m|n|mum ot assot vo|at|||ty.

lt l sound ||ko a choor|oador tor managod tuturos, |t |s
bocauso l am. losoarch has shown that hav|ng a managod
commod|ty portto||o docroasos tho vo|at|||ty ot a ba|ancod
stock and bond portto||o. ||guro l.4 comparos tho 3arc|ay
Commod|ty 1rad|ng Adv|sor lndox to tho 38l b00 lndox
dat|ng back to tho oar|y 1080s. You doc|do wh|ch ro||or
coastor you wou|d havo rathor r|ddon. l w||| a||ow th|s graph
to spoak tor |tso|t.

F|CuRE |.4 1ho 3arc|ay C1A lndox vorsus 38l b00 lndox,
1080-2010.



Novico °Wannabo" 1radora

|or you, l havo somo stark words! You havo boon dupod!
You havo wastod your monoy buy|ng oxpons|vo °b|ack-box'
trad|ng systoms, attond|ng som|nars prom|s|ng you r|chos,
th|nk|ng that tho noxt groat trad|ng p|attorm w||| so|vo your
prob|oms, or subscr|b|ng to tho sorv|cos ot on||no trado
p|ckors/scammors. And |t |s your own tau|t. lt |s your tau|t
bocauso you want to t|nd an approach that ovorcomos your
omot|ona| |nab|||ty to tako trad|ng |ossos |n str|do. Your ogo
and pr|do aro too ontang|od w|th your trad|ng.

You havo had your sharo ot prot|tab|o trados. ln tact,
porhaps you havo ovon had somo prot|tab|o yoars. 3ut you
havo novor bocomo a cons|stont|y prot|tab|o portormor
bocauso you spond tho major|ty ot your t|mo, monoy, and
onorgy sook|ng tor a way to ovorcomo your psycho|og|ca|
|nopt|tudo. l|ay|ng ott tho namo ot tho song by 0o||y larton,
you havo boon °|ook|ng tor succoss |n a|| tho wrong p|acos.'

You havo spont 00 porcont ot your ottort on tho |oast
|mportant ot trad|ng compononts: trado |dont|t|cat|on. l w|||
oxp|oro a|| ot tho trad|ng compononts l bo||ovo aro
nocossary tor cons|stont succoss |ator |n th|s book, but
trado |dont|t|cat|on |s tho |oast |mportant ot a||. ln my
op|n|on, |oarn|ng tho |mportanco ot manag|ng |os|ng trados
|s tho s|ng|o most |mportant trad|ng componont.

Yoars ago, wh||o at tho C3O1, l conductod an
unsc|ont|t|c survoy among about a dozon or so cons|stont|y
prot|tab|o protoss|ona| tradors. Ovor tho yoars l havo askod
tho samo quost|on to trad|ng nov|cos. 1ho quost|on l askod
was:

Yoo bovo yoor cbolco-two olííoroot troolog
opproocbos. Botb poríormoo oqoo||y lo rocoot yoors,
ooo wos proíltob|o 80 porcoot oí tbo tlmo, ooo tbo
otbor wos proíltob|o 70 porcoot oí tbo tlmo. ¼blcb
opproocb woo|o yoo bo moro opt to oooptº

lrotoss|ona| tradors chooso tho 80 porcont r|ght
approach by a two-to-ono marg|n. lov|co tradors
ovorwho|m|ng|y chooso tho 70 porcont approach. Why tho
d|ttoronco?

lrotoss|ona| tradors rocogn|zo somoth|ng that tho
nov|cos may not comprohond. 1horo |s no marg|n ot orror
|n tho approach that noods to bo r|ght 70 porcont ot tho
t|mo |n ordor to produco |ts oxpoctod rosu|ts. What
happons |t tho 70 porcont approach has a bad yoar (b0/b0
rat|o ot |osors to w|nnors)?

lrotoss|ona| tradors rocogn|zo tho |nhoront|y supor|or
r|sk managomont prot||o ot tho 80 porcont approach. 1ho
80 porcont approach |ntr|ns|ca||y has a bu||t-|n marg|n tor
orror. ln tact, tho 80 porcont approach assumos that most
trados w||| bo |osors. Evory approach has good t|mos and
bad t|mos. 1ho oxpoctat|on ot bad t|mos noods to bo bu||t
|nto tho oquat|on.

1horo |s an o|d adago that °|t |s oasy to mako monoy |n
tho commod|ty markots, but just try to koop |t.' 1horo |s a |ot
ot w|sdom |n th|s adago. Koop|ng tho monoy |s a tunct|on
ot monoy and r|sk managomont. 1ho good t|mos w||| novor
occur un|oss a trador t|guros out a way to koop cap|ta|
togothor dur|ng tho tough t|mos.

1ho Book'a Road Naµ


1h|s book |s about us|ng pr|co charts to trado tho
commod|ty and torox markots. Voro spoc|t|ca||y, th|s book
w||| s|mp|y oxam|no how l uso charts tor markot spocu|at|on.

l mako no protonso that chart trad|ng |s supor|or to any
othor torm ot trad|ng, or that my uso ot charts tor trad|ng |s
supor|or to how othor tradors uso charts |n tho|r trad|ng
oporat|ons. ln tact, l know that my trad|ng approach has
woaknossos. l uncovor now woaknossos ovory yoar. l w|||
uncovor woaknossos dur|ng tho courso ot wr|t|ng th|s book.

1ho s|x major po|nts that l want you to romombor as you
road Llory oí o Proíosslooo| Commoolty 7rooor aro:

1. Cons|stont|y prot|tab|o commod|ty trad|ng |s not
about d|scovor|ng somo mag|c way to t|nd
prot|tab|o trados.
2. Cons|stont|y succosstu| trad|ng |s toundod on
so||d r|sk managomont.
8. 3uccosstu| trad|ng |s a procoss ot do|ng corta|n
th|ngs ovor and ovor aga|n w|th d|sc|p||no and
pat|onco.
4. 1ho human o|omont ot trad|ng |s onormous|y
|mportant and has boon |gnorod by othor authors
tor yoars. locogn|z|ng and manag|ng tho
omot|ons ot toar and grood aro contra| to
cons|stont|y succosstu| spocu|at|on. l mako no
protonso that l havo th|s aspoct ot trad|ng
mastorod.
5. lt |s poss|b|o to bo prot|tab|o ovor t|mo ovon
though tho major|ty ot trad|ng ovonts w||| bo |osors.
°lrocoss' w||| trump tho rosu|ts ot any g|von trado
or sor|os ot trados.
0. Chart|ng pr|nc|p|os aro not mag|c, but s|mp|y
prov|do a structuro tor a trad|ng procoss.

l w||| omphas|zo and roomphas|zo thoso s|x po|nts
throughout tho book.

1h|s |s a book about how l trado tho commod|ty markots
us|ng pr|co charts. l do not want to ovorso|| th|s book as
anyth|ng o|so. l w||| s|mp|y ro|ato what l havo |oarnod about
trad|ng w|th charts s|nco 1080. l havo p|ckod up somo
major |ossons a|ong tho way. l havo mado ovory m|stako
poss|b|o-somo ot thom numorous t|mos. l havo oaton
humb|o p|o ovor and ovor aga|n. l havo novor ga|nod a
tasto tor |t.

Llory oí o Proíosslooo| Commoolty 7rooor |s a book
about pr|co charts, so l too| tho ob||gat|on to prov|do somo
h|stor|ca| background on tho subjoct. Chaptor br|ot|y
d|scussos tho h|story and undor|y|ng thoory ot c|ass|ca|
chart|ng pr|nc|p|os. |owovor, th|s book assumos that you
a|roady havo a work|ng know|odgo about chart|ng. Chaptor
onds w|th a d|scuss|on ot what l bo||ovo to bo tho |nhoront
and sor|ous ||m|tat|ons ot a trad|ng approach basod on
chart|ng tochn|quos.

1rad|ng |s a bus|noss-and a|| succosstu| bus|nossos
nood a bus|noss p|an to gu|do doc|s|ons and oporat|ons.
Ovor tho yoars, l havo como to tho conc|us|on that a||
cons|stont|y prot|tab|o approachos to commod|ty markot
spocu|at|on aro basod on corta|n common donom|nators.

ln Chaptors 2 through 7, l oxp|a|n tho bas|c bu||d|ng
b|ocks that havo ovo|vod w|th|n my own approach. A|| ot my
spoc|t|c trad|ng doc|s|ons t|ow trom thoso bu||d|ng b|ocks.
Othor protoss|ona| tradors may havo comp|oto|y d|ttoront
bu||d|ng b|ocks or s|m||ar bu||d|ng b|ocks thoy rotor to w|th
d|ttoront namos. l havo groupod tho |mportant o|omonts ot
my own trad|ng approach |nto throo d|ttoront catogor|os:



lro||m|nary Compononts (Chaptor )

1rad|ng Compononts (Chaptors 8-b)

lorsona| Compononts (Chaptor )


Chaptor prov|dos a caso study anatomy ot my trad|ng |n
throo markots dur|ng tho past yoar, dota|||ng how trados
woro ontorod, how protoct|vo stops woro |n|t|a||y sot and
thon advancod, how prot|ts woro takon, and how much
|ovorago and r|sk woro takon |n oach trad|ng ovont.

Chaptors 8 through 12 cou|d bo summar|zod w|th tho
phraso, °lot tho gamos bog|n!' 1hoso chaptors w||| bo a
roa|-t|mo, day-by-day, wook-by-wook, and month-by-month
d|ary ot my actua| trad|ng trom 0ocombor 2000 through
Apr|| 2010. 1hoso months woro not chorry-p|ckod basod on
portormanco. 3|dobars and subsoct|ons w||| bo |nc|udod on
just somo ot tho to||ow|ng:



Obsorvat|ons on markot bohav|or

1ho porsona||ty ot d|ttoront markots and d|ttoront
pattorns

1rad|ng cont|nuat|on vorsus rovorsa| pattorns

1ho uso ot |ntraday charts

Commontar|os on trad|ng

lossons |oarnod (and ro|oarnod)

V|ssod trados

1ho human o|omont oxposod


1hoso chaptors w||| bo r|ch w|th charts show|ng tho
ovo|ut|on ot pattorns and tho oxocut|on dota||s ot tho |actor
1rad|ng l|an. You nood to know that thoso chaptors woro
wr|tton oach day |n roa| t|mo w|thout tho bonot|t ot h|nds|ght.
1ho chaptors w||| rot|oct my trados-tho good, tho bad, and
tho ug|y-as wo|| as my th|nk|ng procoss and tho too||ngs |n
my gut. Evon as l am wr|t|ng th|s dratt |n oar|y 0ocombor
2000, l havo no |doa |t my trad|ng w||| bo prot|tab|o.

Chaptor w||| bo a summary, stat|st|ca| ana|ys|s, and
d|scuss|on ot tho trad|ng months roprosontod by th|s book.
Chaptor w||| prosont tho °3ost 0rossod l|st' ot tho bost
oxamp|os ot c|ass|ca| chart|ng pr|nc|p|os tor 2000 and tho
por|od covorod by tho trad|ng journa|. |opotu||y, tho |actor
1rad|ng l|an w||| havo takon advantago ot tho most
outstand|ng markot s|tuat|ons. Vy prot|tab|||ty dur|ng tho
t|vo months w||| dopond on my roa|-t|mo ab|||ty to rocogn|zo
and propor|y |mp|omont my trad|ng tact|cs |n any markot
s|tuat|on.

1ho appond|cos conta|n tab|os h|gh||ght|ng tho trad|ng
oporat|ons ot tho por|od covorod by th|s book. Appond|x A
conta|ns tho trad|ng rocord covorod by tho journa|. 1h|s
tab|o dota||s tho markots tradod, tho datos ot ontry and ox|t,
|ovorago takon, pattorn rocogn|zod, typo ot trad|ng s|gna|,
trad|ng rosu|t, and ru|os usod tor ox|t|ng tho trado. Appond|x
3 |s a gu|do to tho charts conta|nod |n tho book, cross-
rotoronc|ng thom basod on tho c|ass|ca| chart pattorns
|dont|t|od and on tho s|gna| catogor|os and trado
managomont tochn|quos usod |n my trad|ng p|an. Appond|x
C ||sts tho books, wob s|tos, and trad|ng p|attorms l
rocommond.

lt th|s book cou|d accomp||sh ono th|ng, |t wou|d bo to
show that succosstu| markot spocu|at|on |s a cratt, roqu|r|ng
an oxtons|vo and ongo|ng appront|cosh|p |n study|ng tho
markots |n tho schoo| ot hard knocks. 3uccosstu|
spocu|at|on |s a procoss that must addross many aspocts
ot markot bohav|or and so|t-know|odgo and mastory.

l havo sovora| hopos tor tho roadors and tho trad|ng
commun|ty as a who|o through th|s book. ||rst, l want to
honor tho d|tt|cu|t task undortakon by protoss|ona| tradors
to ach|ovo cons|stont|y succosstu| portormanco. 1rad|ng |s
tough work that |nvo|vos tho m|nd, tho sp|r|t, and a|| ot our
omot|ons. lromotors that so|| oasy-monoy and qu|ck-t|x
systoms and approachos as a moans to oasy prot|ts aro a
d|shonor to tho roa|-||to cha||ongos ot trad|ng.

3ocond, l want to commun|cato to nontradors and
tradors st||| oar|y |n tho|r journoy to cons|stont prot|tab|||ty
that trad|ng roqu|ros a comprohons|vo approach
addross|ng tar, tar moro than s|mp|y hav|ng a bo||ot that a
corta|n markot |s go|ng to advanco or doc||no. 1rad|ng |s a
bus|noss that must addross a w|do var|oty ot doc|s|ons and
cont|ngonc|os.

1h|rd, l want to pay homago to tho t|o|d ot c|ass|ca|
chart|ng pr|nc|p|os as a trad|ng too|. Chart|sts aro
|nappropr|ato|y cr|t|c|zod tor tho|r °hocus-pocus' approach
to undorstand|ng tho markots whon chart|ng shou|d novor
bo undorstood as anyth|ng but a trad|ng too|, not a mothod
tor pr|co torocast|ng.

|ourth, and t|na||y, tho human tactor |s so|dom mont|onod
|n books on trad|ng, yot |t |s tho s|ng|o most |mportant
componont ot cons|stont|y prot|tab|o markot oporat|ons. l
want to addross th|s undord|scussod aspoct ot markot
spocu|at|on.

Chapter 1

1he HIstory and 1heory o|
ClassIcal ChartIng PrIncIples

3pocu|ators havo usod charts to mako trad|ng doc|s|ons
tor contur|os. lt |s gonora||y bo||ovod that cand|ost|ck charts
|n tho|r oar||ost torm woro dovo|opod |n tho 18th contury by
a |ogondary 1apanoso r|co trador namod |omma
Vunoh|sa. Vunoh|sa roa||zod that thoro was a ||nk botwoon
tho pr|co ot r|co and |ts supp|y-and-domand tactors, but that
markot pr|co was a|so dr|von by tho omot|ons ot markot
part|c|pants. 1ho pr|nc|p|os boh|nd cand|ost|ck charts
prov|dod Vunoh|sa a mothod to graph|ca||y v|ow tho pr|cos
ovor a por|od ot t|mo and ga|n an odgo ovor h|s trad|ng
compot|tors. An odgo |s a|| that a spocu|ator can ovor
oxpoct.

ln tho Un|tod 3tatos, Char|os 0ow bogan chart|ng stock
markot pr|cos around 1000. 1ho t|rst oxhaust|vo work on
chart|ng was pub||shod by l|chard W. 3chabackor (thon
tho od|tor ot lortooo magaz|no) |n 1088. Undor tho t|t|o
7ocbolco| Aoo|ysls ooo 5tock Vorkot Proílts, 3chabackor
prov|dod an organ|zod and systomat|c tramowork tor
ana|yz|ng and undorstand|ng a t|o|d now known as
°c|ass|ca| chart|ng pr|nc|p|os.'

3chabackor bo||ovod that tho stock markot was h|gh|y
man|pu|atod by |argo oporators who tondod to act |n
concort. |o obsorvod that tho act|v|t|os ot thoso |argo
p|ayors cou|d bo dotoctod on pr|co charts show|ng tho
opon|ng, h|gh, |ow, and c|os|ng pr|co tor oach trad|ng
soss|on.

|o turthor obsorvod that pr|cos, whon p|ottod on a graph,
woro o|thor |n por|ods ot conso||dat|on (roprosont|ng
accumu|at|on or d|str|but|on by tho |argo oporators) or
susta|nod tronds. 1hoso tronds woro known as por|ods ot
pr|co °markup' or °markdown.' ||na||y, 3chabackor notodpr|co °markup' or °markdown.' ||na||y, 3chabackor notod
that por|ods ot conso||dat|on (as wo|| as somo trond|ng
por|ods) tondod to d|sp|ay corta|n goomotr|c tormat|ons-
and that, dopond|ng on tho goomotry, tho d|roct|on and
magn|tudo ot a tuturo pr|co trond cou|d bo prod|ctod.

3chabackor thon |dont|t|od tho torm and naturo ot a
numbor ot thoso goomotr|c pattorns. 1hoso |nc|udod such
trad|t|ona| pattorns as:



|oad and shou|dors (|83) tops and bottoms

1rond ||nos

Channo|s

lound|ng pattorns

0oub|o bottoms and tops

|orns

3ymmotr|ca| tr|ang|os

3roadon|ng tr|ang|os

l|ght-ang|od tr|ang|os

0|amonds

loctang|os


1ho p|onoor|ng work ot 3chabackor was p|ckod up |n
1048 by lobort Edwards and 1ohn Vagoo |n tho book
7ocbolco| Aoo|ysls oí 5tock 7rooos , common|y rotorrod to
as tho b|b|o ot chart|ng.

Edwards and Vagoo took 3chabackor's undorstand|ng
to tho noxt |ovo| by spoc|ty|ng a numbor ot trad|ng ru|os and
gu|do||nos connoctod w|th tho var|ous chart pattorns.
Edwards and Vagoo mado tho attompt to systomat|zo
chart|ng |nto trad|ng protoco|s. 7ocbolco| Aoo|ysls oí 5tock
7rooos has roma|nod tho standard rotoronco book tor
moro than throo gonorat|ons ot markot spocu|ators who uso
charts |n somo mannor tor tho|r trad|ng doc|s|ons.

Ny Poraµoctivo ot tho
PrinciµIoa

As a trador, c|ass|ca| chart|ng pr|nc|p|os roprosont my
pr|mary moans tor mak|ng doc|s|ons. l ma|nta|nod a|| ot my
charts by hand |n tho days botoro soph|st|catod computor
programs and trad|ng p|attorms. low thoro aro numorous
computor|zod and on||no chart|ng packagos and trad|ng
p|attorms.

l cont|nuo to ro|y so|o|y on h|gh/|ow/c|oso bar charts |n
da||y, wook|y, and month|y torm. l pay no attont|on to tho
myr|ad ot numorous |nd|cators havo boon dovo|opod |n tho
past 20 yoars, such as stochast|cs, mov|ng avoragos,
ro|at|vo strongth |nd|cators (l3ls), 3o|||ngor bands, and tho
||ko (a|though l do uso tho avorago d|roct|ona| movomont
|ndox [A0X| to a vory ||m|tod dogroo).

lt |s not that thoso mothods ot stat|st|ca| man|pu|at|on aro
not usotu| tor trad|ng. 3ut tho var|ous |nd|cators aro just that
-stat|st|ca| man|pu|at|ons and dor|vat|vos ot pr|co. Vy
att|tudo |s that l trado pr|co, so why not study pr|co d|roct|y?
l can't trado tho l3l or mov|ng avorago ot soyboans. l can
on|y trado soyboans.

l am not a cr|t|c ot thoso who havo succosstu||y
|ncorporatod pr|co dor|vat|vos |nto tho|r trad|ng a|gor|thms. l
am not a cr|t|c ot anyono who can cons|stont|y outsmart tho
markots. 3ut tor mo, pr|co |s what l trado, so pr|co |s what l
study.

1hroo Limitationa ot tho
PrinciµIoa

1hroo |mportant ||m|tat|ons ot c|ass|ca| chart|ng shou|d bo
undorstood by markot oporators who uso charts or aro
cons|dor|ng tho uso ot charts.

||rst, |t |s vory oasy to |ook at a chart and ca|| tho markots
|n h|nds|ght. l havo soon unond|ng oxamp|os |n books and
promot|ona| mator|a|s ot charts markod up rotroact|vo|y to
mako magn|t|cont tronds |ook ||ko °oasy monoy.'
Untortunato|y, |n ordor to omphas|zo somo chart|ng
pr|nc|p|os, th|s book may comm|t th|s vory s|n.

lt |s tho dom|nant and gargantuan task ot a chart trador to
actua||y trado a markot |n roa| t|mo |n a mannor ovon
c|oso|y rosomb||ng how a markot wou|d havo boon tradod
|n |ook-back modo. 3|gn|t|cant and c|oar chart pattorns that
produco prot|tab|o tronds aro most otton compr|sod ot
many sma|| pattorns that ta||od to mator|a||zo. Charts aro
organ|c ont|t|os that ovo|vo ovor t|mo, too||ng tradors
ropoatod|y botoro y|o|d|ng tho|r roa| tru|t.

3ocond, charts aro trad|ng too|s and not usotu| tor pr|co
torocast|ng. Ovor tho yoars, l havo boon oxtromo|y amusod
by °chart book oconom|sts' who aro constant|y
ro|ntorprot|ng tho tundamonta|s basod on tho |atost tw|sts
and turns ot chart pattorns.

1horo |s a hugo d|ttoronco botwoon bo|ng short a markot
bocauso ot a chart pattorn and bo|ng °boar|sh' on tho
tundamonta|s ot a markot bocauso ot tho samo chart
pattorn. Charts roprosont a trad|ng too|-por|od. Any othor
uso ot charts w||| on|y |oad to d|sappo|ntmont and otton not
trad|ng |ossos. 1ho |doa that chart pattorns aro ro||ab|y
prod|ct|vo ot tuturo pr|co bohav|or |s too|hardy at bost.
Charts aro a trad|ng too|, not a torocast|ng too|.

As a trador who has usod charts tor markot oporat|ons
tor 80 yoars, l bo||ovo l am porm|ttod to mako th|s
statomont. l am an advocato tor chart|ng-not a cr|t|c. 3ut l
am a cr|t|c ot us|ng charts |n tho wrong way. ln my op|n|on, |t
|s wrong-hoadod to uso charts tor mak|ng pr|co torocasts,
and ospoc|a||y tor mak|ng oconom|c prod|ct|ons.

You may know trad|ng adv|sory sorv|cos that uso charts
to mako prod|ct|ons on tho oconomy. 1hoy |ot you know
whon thoy aro r|ght. 1hoy mako oxcusos or bocomo s||ont
whon thoy aro wrong. l th|nk |t |s a much moro honost
pos|t|on to just adm|t that l novor know whoro any g|von
markot |s go|ng, whothor or not tho chart sooms to bo
to|||ng a story.

1ho th|rd ||m|tat|on |s that omot|ons cannot bo romovod
trom tho trad|ng oquat|on. lt |s |mposs|b|o to study and
|ntorprot pr|co charts soparato trom tho omot|ona| pu|| ot
toar, pr|co, hopo, and grood. 3o |t |s too||sh to protond that
charts prov|do an unb|asod moans to undorstand pr|co
bohav|or. 1ho b|as ot a trador |s bu||t |nto h|s chart ana|ys|s.

5ummary

C|ass|ca| chart|ng pr|nc|p|os prov|do a t||tor to undorstand
markot bohav|or and a tramowork tor bu||d|ng an ont|ro
approach to markot spocu|at|on. ln tho chaptors to to||ow, l
w||| d|sp|ay tho construct|on ot a comprohons|vo approach
to markot spocu|at|on us|ng thoso chart|ng pr|nc|p|os-an
approach l ca|| tho |actor 1rad|ng l|an. l w||| thon procood
to app|y tho |actor 1rad|ng l|an, us|ng c|ass|ca| chart|ng
pr|nc|p|os as tho toundat|on, to actua| commod|ty and torox
spocu|at|on tor a por|od ot about 21 wooks.


Part ll

CharacterIstIcs o| a 8uccess|ul
1radIng Plan

l|ko any sound bus|noss, a trad|ng oporat|on noods a
bus|noss p|an-a comprohons|vo bus|noss p|an that
accounts tor a|| var|ab|os to ono dogroo or anothor. 0ur|ng
my 80-p|us yoars ot trad|ng, l havo dovo|opod a sot ot
gu|do||nos, ru|os, and pract|cos that d|roct my trad|ng
doc|s|ons. l rotor to thoso compononts |n tho|r compos|to
as tho |actor 1rad|ng l|an.

1ho |actor 1rad|ng l|an has ovo|vod ovor tho yoars
basod on trad|ng oxpor|onco and rosu|ts, and cont|nuos to
ovo|vo as tho bohav|ora| naturo ot tho markots changos. l
acknow|odgo that tho construct|on ot othor protoss|ona|
tradors' p|ans may bo qu|to d|ttoront than m|no, but many
common thomos w||| ho|d truo. ln tact, l strong|y bo||ovo
somo common charactor|st|cs aro by naturo nocossary tor
succosstu| markot spocu|at|on.

lart ll oxp|a|ns tho bas|c bu||d|ng b|ocks ot my trad|ng
approach. 1ho |actor 1rad|ng l|an |s govornod by throo
p|||ars undor wh|ch ros|do 10 major compononts, as shown
|n ||guro lll.1. 1ho broad p|||ars |nc|udo:



1ho pro||m|nary compononts-doa||ng w|th
mattors ot porsona||ty and tomporamont,
ava||ab|o spocu|at|vo cap|ta|, and ph||osophy
toward r|sky vonturos.

1ho compononts ot tho trad|ng p|an |tso|t-
doa||ng w|th how markots aro ana|yzod, how
trados aro mado, and how trados and r|sk aro
managod.

1ho porsona| compononts-doa||ng pr|mar||y
w|th tho charactor|st|cs and hab|ts ot a
succosstu| trador.


Chaptor w||| covor tho p|||ar tor tho pro||m|nary
compononts. 1ho p|||ar tor tho trad|ng p|an |tso|t |s tho most
comp||catod and |s covorod |n Chaptors 8 through b. 1hon,
Chaptor prov|dos caso stud|os show|ng tho trad|ng p|an |n
act|on. ||na||y, Chaptor doa|s w|th tho p|||ar d|scuss|ng tho
porsona| charactor|st|cs and hab|ts roqu|rod tor succosstu|
markot spocu|at|on.

F|CuRE P||.1 l|||ars and Compononts ot tho |actor
1rad|ng l|an.


lotor to ||guro lll.1 as an ovorv|ow ot tho p|||ars and
compononts ot tho |actor 1rad|ng l|an. lt shou|d sorvo as
your road map |n tho chaptors d|roct|y ahoad. You can rotor
back to th|s road map to undorstand oach soct|on |n tho
propor contoxt.


Chapter 2

BuIldIng a 1radIng Plan

1ho pro||m|nary compononts ot a trad|ng oporat|on doa|
w|th |ssuos to bo addrossod botoro a s|ng|o trado |s ovon
cons|dorod. l bo||ovo that many poop|o havo ta||od at
trad|ng |n tho commod|ty and torox markots bocauso thoy
jumpod |nto trad|ng w|thout |ay|ng down a propor
toundat|on. 1ho pro||m|nary compononts must bo takon |nto
cons|dorat|on as ossont|a| to cons|stont|y prot|tab|o
spocu|at|on.

1hoso compononts, as shown |n ||guro 2.1, tho road
map to th|s chaptor, |nc|udo trador porsona||ty and
tomporamont, propor cap|ta||zat|on, and a koon v|ow ot r|sk
managomont.

1rador PoraonaIity and
1omµoramont

Commod|ty and |ovoragod torox markots aro vo|at||o and
h|gh|y |ovoragod. Commod|ty trad|ng |s not tor tho ta|nt ot
hoart. lnd|v|dua|s who chooso to trado commod|ty and torox
markots or chooso to p|aco tho|r tunds w|th a protoss|ona|
managor must undorstand tho vo|at|||ty |nvo|vod.

|or thoso |nd|v|dua|s who chooso to trado tho|r own
accounts, no moro than 10 to 20 porcont ot ||qu|d
|nvostmont assots shou|d bo dos|gnatod to commod|t|os-
and on|y |t a substant|a| port|on ot thoso tunds can bo |ost
w|thout joopard|z|ng a prosont or tuturo standard ot ||v|ng.

lnd|v|dua|s who o|oct to trado tor thomso|vos shou|d a|so
bo awaro ot sovora| tactors un|quo to commod|ty trad|ng.
Commod|ty markots trado noar|y 24 hours por day. 1ho
markots c|oso tor a br|ot t|mo |ato oach attornoon |n tho
Un|tod 3tatos to dotorm|no a c|os|ng pr|co and thon
|mmod|ato|y roopon tor a now day ot trad|ng. 3oam|oss|y
(and on computor trad|ng p|attorms), trad|ng rotatos tho
oarth trom tho Un|tod 3tatos to As|a to Europo and back to
tho Un|tod 3tatos-trom |ato attornoon on 3unday |n tho
Un|tod 3tatos unt|| |ato attornoon on |r|day. lonstop! Wook
attor wook! 1ho boat goos on!

F|CuRE 2.1 1ho lro||m|nary Compononts ot a 1rad|ng
l|an.


Commod|ty contracts aro h|gh|y |ovoragod, otton by as
much as 100 to 1. 1h|s moans that $1,000 ot account
assots can contro| as much as $100,000 ot a commod|ty or
toro|gn curroncy transact|on. lt a|so moans that a 1 porcont
advorso pr|co chango |n a commod|ty un|t can rosu|t |n a
comp|oto |oss ot tho tunds usod to marg|n that commod|ty
or torox transact|on.

lt |s not unusua| tor ovon a ||ght|y oxposod commod|ty
trador to oxpor|onco 2 to 8 porcont da||y oqu|ty t|uctuat|ons.

1horo aro somo oxco||ont books on commod|ty trad|ng. lt
|s not my |ntont to prov|do tho bas|cs ot commod|ty or torox
trad|ng |n th|s book. |or nov|co tradors, l rocommond
7roolog íor o Llvlog by A|oxandor E|dor and sovora| othor
books ||stod |n Appond|x C.

1horo |s a vory s|gn|t|cant tactor ot commod|ty and torox
trad|ng that nov|co tradors shou|d undorstand-and th|s
tactor roprosonts a markod d|ttoronco trom trad|ng |n
govornmont socur|t|os, roa| ostato, co||octab|os, or stocks.

|or ovory |ong |n tho commod|ty and torox markots, thoro
|s a short bot on tho othor s|do ot tho trado. ln tho stock
markot, tho °short |ntorost' (porcontago ot trad|ng vo|umo
on tho low York 3tock Exchango, or lY3E, tradod as a
short sa|o) |s norma||y around 8 porcont and |s so|dom
moro than b porcont. ln contrast, thoro |s a short so||or |n
100 porcont ot trados |n tho commod|ty and torox markots.

1ho naturo ot a short tor ovory |ong |s known as tho °zoro-
sum' gamo. 1horo |s a do||ar |ost tor ovory do||ar ga|nod.
Actua||y, commod|ty and torox markots aro |oss than a
zoro-sum gamo bocauso brokorago comm|ss|ons and toos
aro chargod on ovory transact|on.

ln tho stock markot, noar|y ovorybody |s rowardod by a
r|s|ng markot. 3ut tho zoro-sum toaturo ot commod|t|os and
torox |s s|gn|t|cant bocauso nov|co tradors must boat
protoss|ona| tradors and commorc|a| |ntorosts |n ordor to
bo prot|tab|o. 1ho commod|ty markots roprosont a g|gant|c
gamo ot pockots bo|ng p|ckod.

Corta|n porsona||ty typos aro |ncompat|b|o w|th tho
roa||t|os ot tho commod|ty and torox markots. Wh||o othor
protoss|ona| tradors may d|sagroo, l warn throo typos ot
nov|co |nvostor typos to avo|d tho commod|ty markots:

1. 0ay tradors
2. °3a|anco chockors'-poop|o who want to know
tho|r account ba|ancos troquont|y dur|ng a trad|ng
day
8. 1ho omot|ona||y unt|t-|nd|v|dua|s whoso
omot|ona| makoup has |od to troquont ||to troub|os

Day 1radora

0ay tradors havo tho odds stackod squaro|y aga|nst thom
|n tho commod|ty markots bocauso transact|on costs must
bo covorod to bo prot|tab|o. lot's assumo that a day trador
|n tho torox markots gots |n and out ot ono trad|ng un|t ot
tho ouro and U.3. do||ar curroncy crossrato pa|r (oxprossod
as EUl/U30) t|vo t|mos dur|ng tho courso ot oach day
(w|th oach trad|ng un|t bo|ng 100,000 ouros). 1ho trador
wou|d bo ab|o to conduct th|s trad|ng w|th as ||tt|o as $2,000
|n marg|n monoy (th|s var|os accord|ng to tho doa|or or
brokor usod, tho s|zo ot an account, and ovor-chang|ng
rogu|atory ru|os).

Comm|ss|ons aro vory |ow or nonox|stont |n torox trad|ng,
but day tradors must manouvor a two- to tour-°p|p' b|d/ottor
sproad |n oach transact|on. 1ho banks and doa|ors mako
tho|r monoy |n th|s b|d/ottor sproad. |or oxamp|o, at tho
|nstant ot th|s wr|t|ng tho EUl/U30 |s b|d at $1.4bb0 and
ottorod at $1.4b01, tho d|ttoronco bo|ng two °p|ps.'

1ho sproad moans that banks and doa|ors aro buy|ng tho
ouro tor $1.4bb0 and so|||ng |t tor $1.4b01, a two-p|p
advantago. lnvorso|y, |t moans that tho spocu|at|vo pub||c |s
buy|ng tho ouro at $1.4b01 and so|||ng |t tor $1.4bb0, a two-
p|p d|sadvantago. vory |argo spocu|at|vo tradors, such as
protoss|ona| trad|ng oporators, qua||ty tor a narrowor
b|d/ottor sproad (porhaps a s|ng|o p|p) wh||o sma||or
spocu|ators us|ng hoav||y advort|sod torox wob p|attorms
m|ght pay a throo-p|p d|sadvantago on ovory transact|on.

3ut tor tho sako ot th|s d|scuss|on, l w||| uso tho two-p|p
sproad. Ovor tho courso ot t|vo round turns |n a trad|ng day,
a day trador wou|d nood to mako 10 p|ps just to broak ovon
(two p|ps |n and out ot oach trado t|mos t|vo round-turn
trados). 1on p|ps oqua| $100 (or moro dopond|ng on tho
torox pa|r tradod).

Ovor tho courso ot two wooks tho transact|on costs
wou|d amount to $1,000 (10 p|ps por day tor 10 days, or
100 p|ps at $10 oach on a trad|ng un|t ot 100,000 ouros).
1hus, tho $2,000 ot marg|n monoy usod to trado tho
EUl/U30 sproad wou|d bo w|pod out by transact|on toos
ovory tour wooks-moan|ng that tho day trador wou|d nood
to mako a 100 porcont roturn oach month just to avo|d tho
dop|ot|on ot marg|n tunds.

BaIanco Chockora

ln my oxpor|onco, tradors who aro obsossod w|th tho va|uo
ot tho|r accounts dur|ng tho courso ot a trad|ng day aro
dost|nod tor ta||uro |n tho commod|ty and torox markots.
1ho roason doa|s w|th tho naturo ot tho |ovoragod markots.
Unduo concorn w|th ono's account va|uo w||| ovorr|do
markot judgmont and |oad to dotons|vo trad|ng. 0otons|vo
trad|ng novor works.

1o bo succosstu| |n tho commod|ty markots a trador
noods to tocus on trad|ng tho markots (not h|s or hor oqu|ty
ba|anco) w|th|n a tramowork ot propor monoy and trado
managomont (thoso subjocts w||| to||ow). 1rad|ng
commod|ty and torox markots |s not tor you |t you wou|d
nood to chock your account ba|anco troquont|y.

1ho EmotionaIIy untit

1ho commod|ty markots tako no pr|sonors. lt a porson has
a major charactor or omot|ona| dotoct, tho commod|ty
markots w||| uncovor and oxp|o|t |t.

3uccosstu| trad|ng |s an upstroam sw|m or uph||| run
aga|nst human naturo. lt |s ta|r to say that cons|stont|y
prot|tab|o markot oporat|ons roqolro that a trador |oarn to
ovorcomo strong omot|ona| pu||s. ln tact, most protoss|ona|
tradors can ro|ato how many ot tho|r most succosstu| trados
roqu|rod act|on |n d|roct oppos|t|on to omot|ona| urgos.

lnd|v|dua|s whoso omot|ons havo |od thom |nto troub|od
t|nanc|a| doc|s|ons, porsona| hab|ts, or ro|at|onsh|ps shou|d
avo|d commod|ty trad|ng at a|| costs. 1rad|ng commod|ty
and torox markots aro hard onough w|thout carry|ng a |oad
ot omot|ona| baggago.

5ummary

1ho |actor 1rad|ng l|an-or any othor organ|zod and
|og|ca| approach to markot spocu|at|on-assumos that a
trador |s ab|o to manago h|s omot|ons. 1h|s doos not moan
that you w||| oot oxpor|onco strong omot|ona| tomptat|ons to
act countor to a gamo p|an. lt a|so doos oot moan that you
w||| bo 100 porcont succosstu| |n provont|ng omot|ons trom
|nt|uonc|ng por|od|c trados. And |t corta|n|y doos oot moan
that you w||| bocomo omot|on|oss |n markot oporat|ons. lt
ooos moan that you aro ab|o to rocogn|zo omot|ons (toar,
anx|oty, unroa||st|c hopos, grood, stross, or so|t-doubt) tor
what thoy aro, como to undorstand that omot|ons aro
norma| but not ro||ab|o, and dovo|op tochn|quos tor
ovorcom|ng tho pu|| ot omot|ons to d|ctato trad|ng
doc|s|ons.

lropor porsona||ty and tomporamont w|th|n tho |actor
1rad|ng l|an (or any othor succosstu| trad|ng oporat|on)
roqu|ros two th|ngs:

1. ||nanc|a| ab|||ty to oxpor|onco pro|ongod
por|ods ot unprot|tab|o trad|ng
2. Ab|||ty to manago omot|ons-at |oast most ot
tho t|mo-and not a||ow thom to ovorr|do trad|ng
ru|os and gu|do||nos.

Adoquato CaµitaIization

F|CuRE 2.2 long 3w|ss |ranc: 1ho |actor's ||rst 3|g
1rado.



ln 1080, l toundod |actor 1rad|ng Company and bogan
trad|ng w|th |oss than $10,000. 1o havo sor|ous|y bo||ovod l
cou|d bo succosstu| w|th such a ||m|tod amount ot cap|ta|
was abso|uto|y |nsano. lt was noth|ng short ot a m|rac|o that
l d|d not wash out. lt was throo stops torward, two stops
back unt|| l bot tho ont|ro wad on a 3w|ss |ranc trado |n
1082 (soo ||guro 2.2). lt was on|y attor th|s curroncy movo
that l had onough cap|ta| to cons|dor myso|t to bo |n tho
gamo. 3ut |t was at that po|nt my trad|ng pr|nc|p|os bogan
to torm. 1ust tor tun, l am |nc|ud|ng tho chart ot tho trado that
|aunchod my account to a |ovo| ot cap|ta||zat|on at wh|ch l
cou|d tako trad|ng sor|ous|y. lt scaros mo today to th|nk ot
how much |ovorago l omp|oyod |n that trado. l r|skod |n tho
magn|tudo ot 20 t|mos tho |ovorago l uso today.

l havo otton boon askod by tr|onds how much monoy ono
noods to trado tho commod|ty and torox markots. 1horo |s
no oasy answor to th|s quost|on bocauso thoro aro so many
var|ab|os. l can answor tho quost|on basod on|y on my own
trad|ng approach.

1ho |actor 1rad|ng l|an roqu|ros mu|t|p|os ot $100,000
to tako a|| ot tho s|gna|s. lt |s not that $100,000 |s noodod to
covor tho marg|n roqu|romonts ot tho s|gna|s gonoratod by
tho p|an. lathor, tho cap|ta||zat|on |ovo| |s basod on tho
|ntorp|ay botwoon oxpoctod (hopod tor!) prot|ts and ||ko|y
por|ods ot cap|ta| drawdown.

||stor|ca||y, my avorago annua| rato ot roturn has boon a
mu|t|p|o ot two to throo t|mos my worst annua| drawdown.
1horo aro sovora| accoptab|o mothods to oxpross tho
ro|at|onsh|p botwoon roturn and r|sk (|nc|ud|ng tho 3tor||ng
rat|o, tho Ca|mar rat|o, tho 3ort|no rat|o, and tho VAl
rat|o). |or any g|von yoar, my mod|t|od Ca|mar rat|o (tho
annua| roturn d|v|dod by worst month ond|ng drawdown)
has boon a|| ovor tho map, rang|ng trom a nogat|vo numbor
to as h|gh as 80 to 1.

1ho $100,000 assot |ncromont |s basod on my dos|ro to
||m|t my oxpoctod worst-caso drawdown oach yoar to 10
porcont ot trad|ng cap|ta|. 1h|s doos not moan that my
drawdowns w||| novor oxcood 10 porcont-or that l w||| ovon
bo prot|tab|o, tor that mattor. 1ho po|nt |s that my un|t ot
cap|ta||zat|on |s basod on r|sk paramotors, not on tactors
otton usod by nov|co tradors |n mak|ng doc|s|ons about
tho|r trad|ng oporat|ons. l havo actua||y hoard nov|co
tradors say somoth|ng ||ko tho to||ow|ng: °l havo a $2b,000
account and tho marg|n tor a soyboan contract |s $2,b00,
thorotoro l can attord to buy or so|| 10 contracts.' As a
gonora| ru|o, l w||| trado no moro than a s|ng|o contract ot
soyboans por $100,000 ot cap|ta|.

Vy guoss-and |t |s on|y a guoss-|s that many othor
protoss|ona| tradors cons|dor a cap|ta| un|t to bo at |oast
$100,000. 3omo ot tho bottor-known commod|ty trad|ng
adv|sors accopt accounts cap|ta||zod by no |oss than
$b00,000 or ovon $1 m||||on. 1hoso amounts obv|ous|y
roprosont tho|r standard trad|ng un|t.

OvoraII Riak Nanagomont

3uccosstu| trad|ng oporat|ons aro d|ctatod pr|mar||y by how
r|sk |s managod. Vany nov|co commod|ty tradors assumo
oach trado w||| bo a w|nnor. lrotoss|ona| tradors manago
tho|r trad|ng to assumo that oach trado may bo a |osor.
Obv|ous|y, thoro |s a major d|ttoronco botwoon tho two
porspoct|vos.

1ho |actor 1rad|ng l|an oporatos w|th sovora| g|oba|
assumpt|ons, |nc|ud|ng:



l havo no |doa whoro any g|von markot |s
hoadod. l may th|nk l know, but |n roa||ty l do not
know. ||story has shown that my dogroo ot
corta|nty about a g|von markot's d|roct|on |s
|nvorso|y corro|atod w|th what actua||y happons.
ln tact, l th|nk a trador w|th oxco||ont monoy
managomont pract|cos cou|d tako tho othor s|do
ot trados |n wh|ch l havo a strong bo||ot and
mako monoy cons|stont|y.

About 80 to 8b porcont ot my trados ovor an
oxtondod por|od ot t|mo w||| bo prot|tab|o.

1ho probab|||ty ot my vory noxt trado bo|ng
prot|tab|o |s |oss than 80 porcont.

As many as 80 porcont ot my trados ovor shortor
por|ods ot t|mo w||| bo unprot|tab|o.

1horo |s a h|gh probab|||ty oach yoar that l w|||
|ncur o|ght or moro |os|ng trados |n a row.

1horo w||| bo |os|ng wooks, |os|ng months, and
ovon |os|ng yoars |n my trad|ng oporat|ons.


lmportant r|sk managomont gu|do||nos havo boon
|ncorporatod |nto tho |actor 1rad|ng l|an to addross thoso
g|oba| assumpt|ons. 1ho pr|mary gu|do||no |s that tho r|sk
on any g|von trado |s ||m|tod to 1 porcont ot trad|ng assots,
and protorab|y c|osor to ha|t ot 1 porcont ot assots.

3ocauso l th|nk |n |ncromonta| un|ts ot $100,000, th|s
moans that my r|sk por trado por un|t ot $100,000 |s a
max|mum ot $1,000. Vy trad|ng assots comm|ttod to
marg|n roqu|romonts raro|y oxcood 1b porcont. l don't roca||
ovor roco|v|ng a marg|n ca|| tor tho account usod to trado
my tu|| program.

lt l r|sk 1 porcont ot assots por trado and am wrong o|ght
stra|ght trados at |oast onco oach yoar, |t moans that l w|||
oxpor|onco a drawdown ot at |oast 8 porcont w|th corta|nty,
at |oast on a c|osod trado bas|s.

A 1b porcont drawdown |s about as much as l can
omot|ona||y hand|o. l havo oncountorod a drawdown ot at
|oast 1b porcont |n 0 out ot ovory 10 yoars l havo oporatod
a tu||y |mp|omontod trad|ng program.

l t|nd myso|t moro r|sk |nto|orant as l grow o|dor. At tho
prosont t|mo, my r|sk managomont protoco| attompts to
||m|t tho max|mum annua| drawdown to 10 porcont
(moasurod trom wook-ond|ng poak to wook-ond|ng va||oy).
l attompt to |gnoro |ntraday oqu|ty sp|kos bocauso l havo no
dos|ro to catch tho bottom ot oach day's h|gh or |ow, and l
do not want to wasto onorgy |n ovon th|nk|ng about |t. ln
tact, as l w||| d|scuss |n th|s book, l th|nk |t |s unw|so to pay
attont|on to account oqu|ty |ovo|s on a day-to-day bas|s.

l cons|dor corro|at|on botwoon markots whon
dotorm|n|ng r|sk. |or oxamp|o, a boar|sh trond by tho U.3.
do||ar aga|nst tho ouro |s a|so ||ko|y to bo accompan|od by
U.3. do||ar |ossos aga|nst tho 3w|ss tranc and 3r|t|sh
pound. A bu|| markot |n soyboans |s ||ko|y to bo
accompan|od by advancos |n soyboan o|| or soyboan moa|.
ln compos|to pos|t|ons ot h|gh|y corro|atod markots (gra|ns,
|ntorost ratos, stock |ndoxos, curronc|os, proc|ous mota|s,
|ndustr|a| commod|t|os), l attompt to ||m|t my r|sk to 2
porcont ot assots. A|| succosstu| trad|ng oporat|ons must
bo bu||t on a toundat|on ot ovora|| r|sk managomont.

Pointa to Romombor



1ho commod|ty and torox markots aro h|gh|y
|ovoragod.

Un||ko stocks and bonds, trad|ng commod|t|os
and torox markots |s a zoro-sum gamo. |or you
to bo prot|tab|o, somoono o|so must |oso monoy.

0o you havo adoquato cap|ta| to trado
commod|t|os, and can you attord to |oso |t?

Can you undorstand and manago tho omot|ona|
sw|ngs ot markot spocu|at|on?

0o you havo tho omot|ona| or psycho|og|ca|
nood to bo r|ght on your trados? Can you accopt
an approach to trad|ng that |s wrong on tho
major|ty ot trad|ng doc|s|ons?

Wou|d your pr|mary tocus |n trad|ng bo to t|nd
w|nn|ng trados or to manago |os|ng trados? l|sk
managomont must bo g|von pr|or|ty ovor trado
|dont|t|cat|on to ach|ovo cons|stont|y succosstu|
portormanco.



Chapter 3

ldentI|yIng the 1rades and the
1radIng vocabulary

lw||| now movo to tho mochan|cs ot tho |actor 1rad|ng l|an.
1ho trad|ng p|an attompts to answor such quost|ons as:



What markots shou|d l trado?

3hou|d l bo |ong or short?

3hou|d l got |n now or wa|t-and |t l wa|t, what
oxact|y shou|d l wa|t tor?


1hoso pract|ca| and tact|ca| quost|ons, and moro, aro
answorod by tho compononts w|th|n tho trado |dont|t|cat|on
p|||ar ot tho |actor 1rad|ng l|an, as shown |n ||guro 8.1.

F|CuRE 8.1 1ho 1rado ldont|t|cat|on l|||ar.



1h|s |s an appropr|ato po|nt to roomphas|zo that l havo
no protont|on that my approach to trad|ng |s tho bost tor
ovorybody or that my trad|ng oporat|ons cannot bo
|mprovod. ln tact, as you road through th|s book you w||| no
doubt soo many warts on my trad|ng p|an.

1ho pr|mary po|nt l want to mako by doscr|b|ng |n dota||
tho |actor 1rad|ng l|an |s not that my trad|ng |s part|cu|ar|y
c|ovor, but that a comprohons|vo p|an covor|ng a|| ot tho
|mportant aspocts |s nocossary tor cons|stont|y succosstu|
trad|ng oporat|ons. 1ho procoss ot trad|ng |s an |mportant
part ot cons|stont succoss. A trador noods to ant|c|pato as
many cont|ngonc|os as poss|b|o |n h|s spocu|at|vo
manouvors.

1ho |actor 1rad|ng l|an |s basod upon tho to||ow|ng sot
ot assumpt|ons:




1ho ||ko|y d|roct|on ot any g|von markot cannot
bo dotorm|nod by study|ng charts.

Charts aro a trad|ng too|, not a prod|ct|vo too|.
Charts can prov|do tradors w|th a s||ght odgo,
but shou|d not bo usod to mako pr|co torocasts.

Charts shou|d not bo usod to ma|nta|n a constant
op|n|on or pos|t|on |n any g|von markot.

0o not assumo that tho noxt trado w||| bo
prot|tab|o.

Voro otton than not a markot w||| doty what |ts
chart structuro |mp||os.

Varkots mako onormous movos that can't bo
oxp|a|nod by c|ass|ca| chart|ng pr|nc|p|os.


W|th thoso assumpt|ons |n m|nd, Chaptors 8 through b
covor how tho |actor 1rad|ng l|an works, tocus|ng on tho
trad|ng compononts. 1h|s chaptor |ays down tho gonora|
concopt usod to |dont|ty trados and dot|nos tho torm|no|ogy
or °shop ta|k' usod by tho trad|ng p|an. Chaptor 4 shows
oxamp|os ot tho |doa| typos ot trados sought by tho p|an.
Chaptor b dota||s tho typos and troquoncy ot trados
ongagod by tho trad|ng p|an, d|scussos how trados aro
ontorod and ox|tod, and oxp|a|ns tho |og|st|cs ot how tho
ont|ro p|an |s managod.

1rado |dontitication

1horo aro numorous mothods usod by tradors to dot|no a
trado. 1ho |mportant po|nt |s that a trador must bo ab|o to
know what |s or |s not a trad|ng s|gna|, ovont, or momont.
1h|s |s truo whothor a trador usos a mochan|ca| or
d|scrot|onary tochn|ca| approach, a supp|y-and-domand
tundamonta| approach, or an oconom|c modo|. lack ot
corta|nty |t a markot |s or |s not sott|ng up a trado |s a
card|na| s|n. 1h|s |s why l rocommond that nov|co tradors
papor-trado or trado a sma|| tr|a| account tor a yoar or two
pr|or to p|ac|ng roa| sk|n |n tho gamo.

1ho |actor 1rad|ng l|an |s basod on a tochn|ca|
approach to markot ana|ys|s. 1ochn|ca| trad|ng approachos
study pr|co bohav|or |tso|t to |dont|ty cand|dato trados and
gonorato trad|ng s|gna|s. ln contrast, tundamonta| trad|ng
approachos aro basod on tho supp|y-and-domand tactors
ot a markot and gonora| ovora|| oconom|c cond|t|ons. lt |s
not w|th|n tho scopo ot th|s book to do|vo any doopor |nto
d|ttoront approachos to markot ana|ys|s or trad|ng.

1ho tochn|ca| approach usod by tho |actor 1rad|ng l|an
ta||s |nto a catogory known as olscrotlooory (as opposod to
tho mocboolco| approach usod by many tochn|ca| tradors).
A d|scrot|onary trad|ng p|an roqu|ros that tho trador makos
corta|n subjoct|vo judgmont ca||s trom ono trado to tho noxt,
whoroas a mochan|ca| (somo markot oporators uso tho
t or m b|ock box) systom |s programmod to gonorato
proc|so ontry and ox|t |nstruct|ons |n ordor to o||m|nato day-
to-day human doc|s|on mak|ng.

Us|ng a d|scrot|onary approach |s a porsona| protoronco,
not |n any way an |nd|ctmont aga|nst mochan|ca| systoms.
ln tact, somo ot tho moro trustrat|ng aspocts ot my own
trad|ng cou|d poss|b|y bo roso|vod |t l usod a mochan|ca|
systom. 3ut, |n gonora|, l bo||ovo that a d|scrot|onary
approach bottor t|ts my porsona||ty and undorstand|ng ot
pr|co bohav|or and dynam|cs.

Voro spoc|t|ca||y, tho |actor 1rad|ng l|an usos c|ass|ca|
chart pattorns as tho bas|s tor a|| trad|ng doc|s|ons. A
d|scuss|on ot c|ass|ca| chart|ng pr|nc|p|os can bo tound |n
Chaptor 1.

VocabuIary ot tho Factor
1rading PIan

A|| |ndustr|os and compan|os havo tho|r own shop ta|k to
doscr|bo concopts and pract|cos |nhoront |n tho|r bus|noss
oporat|ons. Wh||o dot|n|t|ons ot torms otton appoar |n tho
appond|x ot a book, l bo||ovo |t |s vory |mportant to |ay out
tho oporat|ng and tact|ca| torms ot tho |actor 1rad|ng l|an
at th|s po|nt ot tho book. Undorstand|ng corta|n torms w|||
onab|o you to to||ow my d|scuss|on ot charts and trados
dur|ng tho roma|ndor ot th|s manuscr|pt.


1ho torms and dot|n|t|ons aro not ||stod a|phabot|ca||y but
|n tho ordor l th|nk through th|ngs dur|ng actua| trad|ng
oporat|ons.

1rading unit

As a trador, l th|nk |n un|ts ot $100,000. Whon l ca|cu|ato
r|sk and |ovorago, |t |s a|ways |n ro|at|onsh|p to $100,000
b|ocks ot cap|ta|. 1hus, |t l am trad|ng a $b00,000 b|ock ot
monoy, l th|nk about |t as t|vo trad|ng un|ts.

Poaition unit

A pos|t|on un|t |s tho numbor ot contracts or s|zo ot a
pos|t|on takon por $100,000 and dotorm|nos tho r|sk
assumod on a trado. 1ho r|sk |s norma||y about s|x-tonths to
o|ght-tonths ot 1 porcont. l rotor to a pos|t|on w|th |oss r|sk
as an undor|ovoragod pos|t|on and pos|t|ons w|th moro r|sk
as oxtondod-|ovorago pos|t|ons.

Poaition Layoring

Otton, l attompt to bu||d a pos|t|on by ontor|ng |nto a trado
on mu|t|p|o datos and at d|ttoront pr|cos. |or oxamp|o, |t l
ostab||sh a pos|t|on |n ant|c|pat|on ot a tuturo broakout, l
cons|dor myso|t to havo ostab||shod tho t|rst |ayor. lt l
ostab||sh anothor pos|t|on at tho broakout ot a major
pattorn, l bocomo two |ayors doop. lorhaps a noar-zoro-
r|sk opportun|ty to oxtond |ovorago dovo|ops at a rotost,
thon l cou|d bocomo throo |ayors doop. low |t l can t|nd a
pyram|d opportun|ty, l w||| ond up w|th a tour-|ayor pos|t|on. l
do not add to a |os|ng pos|t|on, but put on |ayors on|y as
oar||or |ayors aro prot|tab|o. Evon |n a mu|t|p|o-|ayor
pos|t|on, my comb|nod r|sk |n a markot raro|y oxcoods 1
porcont.

Vu|t|p|o-|ayor trados aro not tho norm.

Broakouta

l am a broakout trador. 3ut l dot|no a broakout |n two ways.
||rst, a|| pattorns havo boundary ||nos that dot|no tho oxact
goomotry ot tho pattorns. 3omo tradors and markot
ana|ysts draw boundary ||nos proc|so|y w|th a t|no-po|nt
pon. l draw boundary ||nos rough|y, otton cutt|ng through
somo h|ghs and |ows |n ordor to prov|do tho bost t|t ot an
aroa ot pr|co act|v|ty to a goomotr|c pattorn. l a|so uso th|ck
||nos, not a t|no-po|nt pon, to ostab||sh tho boundary. Ot
courso, thoro aro |nstancos whon l ca|| a broakout too
c|oso|y-and l otton pay tho pr|co tor do|ng th|s.

lobort Edwards and 1ohn Vagoo cons|dorod a
broakout to bo a pr|co ponotrat|on oqua| to or groator than
8 porcont ot tho va|uo ot a stock. 1h|s |s tar too gonorous
whon trad|ng commod|t|os. |or oxamp|o, a 8 porcont
broakout |n $1,000 go|d wou|d bo $80 por ounco.

A broakout |s moro comp||catod than s|mp|y ponotrat|ng
a pattorn boundary. A|| pattorns aro compr|sod ot m|nor or
|ntormod|ato h|gh and |ow po|nts. 1hoso h|gh and |ow
po|nts dot|no tho paramotors ot tho boundary ||nos. 1o bo a
va||d broakout, l a|so want to soo a markot ponotrato tho
most rocont h|gh or |ow pr|co that dot|nod tho boundary.
And to bo most comtortab|o w|th a trado, l want to soo a
markot ponotrato tho h|ghost or |owost pr|co w|th|n tho
comp|otod boundary. ||guro 8.2 show thoso chart po|nts on
a wook|y graph ot tho 3r|t|sh pound/U.3. do||ar (G3l/U30).

F|CuRE 8.2 lattorn 3roakout |n tho 3r|t|sh lound.


|co Lino

l uso tho torms lco |loo and booooory |loo |ntorchangoab|y.
1ho concopt ot tho |co ||no |s that onco a markot movos
through tho boundary ot a pattorn, that boundary ||no |doa||y
shou|d soparato a|| tho pr|co act|on that procodod tho
broakout trom tho pr|co bohav|or to||ow|ng tho broakout.
1ho |co ||no |s ana|ogous to a shoot ot |co on a |ako |n tho
w|ntor. 1ho |co supports a porson or voh|c|o trom dropp|ng
|nto tho wator. 3ut onco tho porson broaks through tho |co,
tho |co shoot thon bocomos a barr|or to surv|va|. ||guro 8.8
shows tho |co ||no |n G3l/U30. ||guro 8.4 d|sp|ays tho
samo concopt |n p|at|num.

F|CuRE 8.8 lco l|no |n tho 3r|t|sh lound.


F|CuRE 8.4 lco l|no |n l|at|num.


Out-ot-Lino Novomont

0raw|ng boundary ||nos on chart pattorns |s not an oxact
sc|onco. 1ho roa||ty |s that a markot doos not caro whoro l
draw a boundary ||no. 1horo |s noth|ng mag|c about
goomotr|c boundar|os. lt |s groat whon tho m|nor or
|ntormod|ato |ows or h|ghs ot a markot prov|do a portoct
domarcat|on tor boundary ||nos, but th|s |s tho oxcopt|on
and not tho norm. A boundary ||no shou|d bo drawn to bost
t|t to an aroa ot pr|co congost|on ovon |t |t moans that tho
boundary ||no |s drawn through somo ot tho pr|co bars.

1horo aro occas|ons whon a da||y pr|co bar s|gn|t|cant|y
ponotratos a boundary ||no on an |ntraday bas|s, but thon
a|most |mmod|ato|y roturns back |nto tho goomotr|c pattorn.
3uch pr|co act|on was dot|nod by Edwards and Vagoo as
an out-ot-||no movomont. Wh||o out-ot-||no movomonts can
croato somo tact|ca| cha||ongos to trad|ng, h|story w|||
usua||y show tho out-ot-||no pr|co act|v|ty as just a ono- or
two-day troak |nc|dont. 3oundary ||nos do not nood to bo
rodrawn to accommodato out-ot-||no movomont. ||guros
8.b and 8.0 oxh|b|t out-ot-||no movomonts |n london sugar
and low York sugar, rospoct|vo|y.

Promaturo Broakout

A promaturo broakout |s d|ttoront trom an out-ot-||no
movomont |n tho sonso that a promaturo broakout can
c|oso outs|do ot a prodrawn boundary ||no and ovon spond
sovora| days |n broakout modo. lr|cos thon roturn back to
tho goomotr|c pattorn. |owovor, tho |n|t|a| broakout was
on|y a harb|ngor ot th|ngs to como, and w|th|n a tow wooks
a gonu|no broakout occurs. l ca|| thoso subsoquont
broakouts socoooory brookoots or pottoro rocomp|otloos.
||guro 8.7 shows th|s concopt |n cocoa.

F|CuRE 8.5 Out-ot-l|no Vovomont |n london 3ugar.



F|CuRE 8.0 Out-ot-l|no Vovomont |n Varch 3ugar.


F|CuRE 8.7 lromaturo 3roakout |n Cocoa.


FaIao Broakout

Un||ko tho promaturo broakout, wh|ch |s to||owod by a
gonu|no broakout |n tho samo d|roct|on, tho ta|so broakout
rosu|ts |n pr|cos o|thor dovo|op|ng a much |argor pattorn or
strong|y mov|ng |n tho oppos|to d|roct|on. 3omo tradors
rotor to ta|so broakouts to tho downs|do as a boor trop and
ta|so ups|do broakouts as a bo|| trop. 1h|s moans that
tradors who norma||y pos|t|on thomso|vos |n tho d|roct|on ot
tho |n|t|a| pr|co thrust got stuck on tho wrong s|do ot tho
markot. ||guro 8.8 shows a ta|so broakout |n tho Gorman
0outschor Akt|on lndox (0AX).

F|CuRE 8.8 |a|so 3roakout and End-Around |n tho 0AX.


ln 2000, a groat oxamp|o ot tho ta|so broakout occurrod
|n tho U.3. stock |ndox markots. As shown |n ||guro 8.0, tho
3tandard 8 loor's (38l) b00 tuturos comp|otod a n|no-
wook |83 pattorn |n 1u|y. lr|cos c|osod bo|ow tho nock||no
and roma|nod |n a broakout modo tor t|vo days botoro
turn|ng up sharp|y. 1ho tu|| pr|co act|on ot 1u|y 14 was
abovo tho nock||no and |nd|catod that a boar trap had boon
tr|ggorod. On 1u|y 10, tho markot ra|||od strong|y abovo tho
prov|ous r|ght shou|dor h|gh, gonorat|ng a vory ro||ab|o buy
s|gna|.

F|CuRE 8.0 A |a|so 3roakout and 3ubsoquont 3uy 3|gna|
|n tho 38ls.


3roakouts that aro not gonu|no croato a d|tt|cu|t trad|ng
d||omma. A trador who bocomos pos|t|onod at tho
broakout doos not know whothor tho subsoquont roturn |nto
tho pattorn roprosonts a ono-day out-ot-||no movomont, a
promaturo broakout or a ta|so broakout. |or th|s roason, l
gonora||y abandon any pos|t|on that has a s|gn|t|cant roturn
to tho pattorn.

EorizontaI voraua DiagonaI Pattorna

l groat|y protor to trado a pattorn that ottors a hor|zonta| or
t|at boundary, such as tho boundar|os ot a roctang|o,
ascond|ng tr|ang|o, |83, otc. l cons|dor such pattorns to bo
hor|zonta|. 1ho roason thoso aro supor|or pattorns tor
trad|ng |s that tho ponotrat|on ot a boundary ||no most otton
occurs s|mu|tanoous|y w|th tho v|o|at|on ot a major or m|nor
h|gh or |ow po|nt w|th|n tho pattorn. An oxamp|o can bo
soon |n ||guro 8.10, a roctang|o that dovo|opod |n go|d |n
2007. 1ho doc|s|vo ponotrat|on ot tho uppor boundary a|so
ponotratod tho |mportant Apr|| h|gh, s|gna||ng a bu|| movo.

F|CuRE 8.10 Go|d 0|sp|ays a |or|zonta| Chart lattorn.



0|agona| pattorns, by contrast, havo s|antod boundary
||nos. 1h|s croatos throo pract|ca| prob|oms. ||rst, my
oxpor|onco |s that thoro aro tar moro ta|so or promaturo
broakouts ot s|antod chart ||nos than |n tho caso ot
hor|zonta| boundar|os.

3ocond, tho ponotrat|on ot a d|agona| boundary may or
may not v|o|ato a m|nor or major procod|ng h|gh or |ow.
||guro 8.11 shows a trond||no |n tho EUl/U30, wh|ch was
prob|omat|c |n 2000.

F|CuRE 8.11 lrob|omat|c 0|agona| Chart lattorn |n tho
Euro/U.3. 0o||ar Crossrato.


1ho trond ||no was v|o|atod |n |ato Octobor. 1ho pract|ca|
prob|om thon bocomos whothor to rodraw tho trond ||no or
doa| w|th cont|nuod ta|so trond-||no v|o|at|ons, such as
occurrod |ator |n lovombor.

1h|rd, tho rotost ot tho boundary ot a d|agona| pattorn ||no
wou|d bo progross|vo|y advorso to tho pos|t|on as days or
wooks go on. ||guro 8.12 shows a broakout ot a ta|||ng
wodgo |n go|d to||owod by sovora| days ot rotost|ng that put
a broakout trado |nto a |oss.

F|CuRE 8.12 0|agona| lattorn |n Go|d.


1ho prob|oms w|th tho d|agona| boundary bocomo
part|cu|ar|y acuto whon doa||ng w|th a trond ||no or a
channo| ||no. ln tact, l norma||y do not cons|dor a trond ||no
to bo a tradab|o ovont un|oss tho markot has tostod tho
trond ||no numorous t|mos.

Laat Day RuIo

1ho last 0ay lu|o |s tho pr|nc|pa| mothod usod |n tho
|actor 1rad|ng l|an to dotorm|no tho |n|t|a| protoct|vo stop
ordor onco a pos|t|on |s ontorod.

lt a pattorn broakout |s va||d, thon |t |og|ca||y to||ows that
tho day ot tho broakout |s a s|gn|t|cant ovont. ldoa||y, l
ostab||sh a pos|t|on at tho po|nt ot a pr|co broakout and uso
tho |ow ot an ups|do broakout day or tho h|gh ot a downs|do
broakout day to sot my protoct|vo stop |ovo|s. 1h|s |s ca||od
tho last 0ay lu|o.

ln casos whon a markot gaps through a boundary ||no or
opons at or noar a boundary ||no just pr|or to broak|ng out, l
may o|oct tho h|gh or tho |ow ot tho procod|ng day to
dotorm|no tho last 0ay lu|o.

||guro 8.18 shows a last 0ay lu|o |n crudo o|| that
roma|nod uncha||ongod. ln tact, tho last 0ay lu|o noar|y
a|ways roma|ns uncha||ongod |n va||d chart pattorn
comp|ot|ons.

F|CuRE 8.18 last 0ay lu|o |n Crudo O||.


||guro 8.14 shows two last 0ay lu|os |n s||vor, tho t|rst
ot wh|ch was broachod, tho socond wont uncha||ongod.

F|CuRE 8.14 1wo last 0ay lu|os |n 3||vor-Ono |a||od
and Ono Workod.


1hroughout tho book, on as many charts as appropr|ato, l
havo notod tho last 0ay lu|o w|th tho dos|gnat|on l0l
and a th|n ||no and pr|co.

Laat Eour RuIo

1horo aro |nstancos whon a vory |argo trad|ng rango occurs
w|th|n a pattorn on tho day ot a broakout. As a rosu|t, tho
last 0ay lu|o may roprosont a r|sk tar oxcood|ng tho
|doa||zod tour-t|tths ot 1 porcont dotorm|nod by monoy
managomont gu|do||nos. ln such casos l may o|oct to uso
t|ghtor protoct|vo stop p|acomont. 3ut rathor than s|mp|y
us|ng somo do||ar amount l protor to sot a t|ghtor stop us|ng
a chart po|nt.

1h|s t|ghtor stop po|nt may bo dotorm|nod by tho h|gh or
|ow ot tho |ast hour spont w|th|n a pattorn pr|or to tho
broakout, or tho |ast 120 m|nutos, 240 m|nutos, or whatovor
t|mo tramo t|ts tho r|sk and roward paramotors l sook tor a
trado.

ldoa||y, |t us|ng tho last 0ay lu|o ottors an |nappropr|ato
r|sk |ovo|, l protor to t|nd a po|nt on an |ntraday chart that
roprosontod a m|nor ra||y or roact|on pr|or to tho broakout.
Ot courso, thoro aro occas|ona| trados whon a monoy
managomont stop |s tho bost l can do. l convon|ont|y uso
tho phraso Lost loor Ro|o whothor tho stop |s basod on an
hour|y chart, two-hour chart, throo-hour chart, or any othor
|ntraday t|mo |ncromont. ||guro 8.1b shows a v|o|at|on ot
tho last |our lu|o |n tho 38ls.

F|CuRE 8.15 last |our lu|o |n Varch 38ls.


1ho concopt ot tho last 0ay lu|o a|so app||os to wook|y
and ovon month|y charts. 1h|s r|sk managomont gu|do||no
w||| ho|d truo tor va||d broakouts on charts ot any t|mo
|ongth.

Rotoat

Vy oxpor|onco through tho yoars |s that tho bost trados
broak out c|oan|y, go a|most |mmod|ato|y, and novor |ook
back. ln tact, l bo||ovo that my not bottom ||no as a trador
wou|d havo |mprovod |t l had ox|tod ovory trado that c|osod
at a da||y |oss. l w|sh l had tho data to run such a s|mu|at|on.
3ut, otton, a trado w||| hos|tato to||ow|ng tho |n|t|a| broakout
and rotost tho boundary w|th|n a tow days to a wook or so.
3uch a rotost |s norma| and shou|d not groat|y concorn a
trador as |ong as tho rotost doos not sovoro|y cha||ongo tho
|co ||no. lotosts |n va||d pattorn broakouts norma||y do not
ponotrato tho |co ||nos. ||guro 8.10 d|sp|ays a rotost ot a
broakout |n tho Ch|cago 3oard ot 1rado (C3O1) rough r|co
markot. loto that tho rotost |tso|t took tho torm ot an 18-day
t|ag.

F|CuRE 8.10 lotost ot |83 1op |n lough l|co.


Eard Rotoat

A hard rotost occurs whon pr|cos actua||y s||co back |nto
tho comp|otod pattorn. Wh||o a hard rotost can tost tho
pat|onco ot a trador, |t doos not |n and ot |tso|t moan that
tho pattorn w||| ta||.

l havo boon askod ovor tho yoars |t |t wou|d bo w|so not
to tako a trado at tho broakouts, but |nstoad attompt to
ostab||sh a pos|t|on upon tho rotost ot tho comp|otod
pattorn. Vy answor to th|s quost|on |s an unqua||t|od °lO!'
1h|nk about th|s mattor |og|ca||y. 3y not tak|ng a trado at tho
po|nt ot a broakout, but |nstoad wa|t|ng tor somo typo ot
rotost, a trador |s o||m|nat|ng trados that work |mmod|ato|y
and do not |ook back, wh|ch aro oxact|y tho most dos|rab|o
trados. A markot that rotosts a pattorn |s |nhoront|y moro
||ko|y to ta|| than a markot that novor has a rotost. A hard
rotost |s shown |n tho U.3. do||ar/Canad|an do||ar
(U30/CA0) |n ||guro 8.17.

F|CuRE 8.17 |ard lotost |n U30/CA0.


Rotoat FaiIuro RuIo

A hard rotost ot a pattorn a||ows mo to adjust my stop us|ng
tho h|gh or |ow ot tho hard rotost as a now protoct|vo stop
po|nt. Assum|ng that tho |n|t|a| stop was basod on tho last
0ay lu|o and a hard rotost occurs, l can thon advanco a
stop to just abovo tho hard rotost h|gh |n tho caso ot a short
pos|t|on, or just bo|ow tho hard rotost |ow |n tho caso ot a
|ong pos|t|on. ||guro 8.18 d|sp|ays th|s concopt on a
wook|y chart ot lovombor 2010 soyboans. loto tho
broakout ot tho 12-wook wook tr|ang|o tho wook ot
lovombor 11 (|ottor A), tho hard rotost tho wook ot
0ocombor 2b (|ottor 3), and tho subsoquont rotost ta||uro
tho wook ot 1anuary 1b (|ottor C).

F|CuRE 8.18 lotost |a||uro lu|o on tho Wook|y 3oyboan
Chart.


1argot or Ob[octivo

Each chart pattorn carr|os tho |mp||cat|on tor tho magn|tudo
ot an onsu|ng trond. As a gonora| ru|o, tho m|n|mum movo
to||ow|ng tho comp|ot|on ot a chart pattorn shou|d bo oqua|
to tho ho|ght ot tho pattorn |tso|t, a|though tho oxcopt|ons to
th|s ru|o aro numorous and comp|ox. ln noar|y ovory caso, l
tako prot|ts (part|a| or comp|oto) whon a markot roachos |ts
targot. ||guro 8.10 d|sp|ays that tho targot |n sugar |s
basod on tho pr|nc|p|o that tho d|stanco trom C to 0 shou|d
bo oqua| to tho d|stanco trom A to 3, as shown. ||guro 8.20
oxh|b|ts tho samo concopt tor tho ascond|ng tr|ang|o |n tho
G3l/U30, whoro C to 0 shou|d oqua| A to 3.

F|CuRE 8.10 lr|co 1argot trom 1r|ang|o |n 3ugar.


F|CuRE 8.20 lr|co 1argot trom Ascond|ng 1r|ang|o |n
G3l/U30.


l uso two othor mothods to dotorm|no pr|co targot|ng. 1ho
t|rst |nvo|vos a tochn|quo known as swlog objoctlvos. 1ho
pr|nc|p|o ot a sw|ng objoct|vo |s that markots tond to
advanco or doc||no |n |ogs that aro ot approx|mato|y oqua|
d|stanco.

||na||y, l may por|od|ca||y uso po|nt and t|guro (l8|)
charts to ca|cu|ato a |ongor-torm targot. l8| charts
moasuro tho amount ot pr|co act|on ovor a por|od ot
conso||dat|on and aro not t|mo ro|atod. l uso l8| counts
sovora| t|mos oach yoar whon l bo||ovo that a por|od ot
conso||dat|on (usua||y a |argo bottom or baso) w||| produco
a trond much moro oxtondod than |nd|catod by tho pattorn
targot.

|mµortant noto: 1horo |s oo guarantoo that any markot
w||| roach |ts targot. 1radors nood to bo a|ort tor markots
that run out ot stoam pr|or to atta|n|ng a targot.

|ntorvoning Pattorna and Pyramiding

0ur|ng a susta|nod trond, a markot troquont|y w|||
oxpor|onco a pauso. 1hoso pausos otton torm sma||or
|ndopondont conso||dat|on pattorns. 1hoso pattorns can bo
a cont|nuat|on |n torm, moan|ng that anothor thrust |n tho
d|roct|on ot tho dom|nant trond w||| bo producod, or rovorsa|
|n torm, |mp|y|ng that tho prov|ous trond has como to a
tomporary or moro pormanont ond. Cont|nuat|on pattorns
ottor tho opportun|ty to both pyram|d an |n|t|a| pos|t|on and
to t|ghton up tho protoct|vo stops on tho |n|t|a| pos|t|on.
lovorsa| pattorns ottor tho opportun|ty to avo|d r|d|ng tho
|n|t|a| pos|t|on back to tho start|ng gatos (or what l ca|| a
popcoro or roooo-trlp movo).

As a trador, l havo m|xod too||ngs toward cont|nuat|on
pattorns-and my too||ngs d|ttor basod on tho durat|on ot
tho pausos w|th|n tho ma|n trond. long pausos (moro than
throo or tour wooks) can woar down my pat|onco. l much
protor shortor-durat|on pausos |n a ma|n trond, ospoc|a||y |t
tho movo com|ng |nto tho pauso was strong and tho pauso
takos tho torm ot a ponnant or t|ag. ||guros 8.21 and 8.22
d|sp|ay cont|nuat|on pattorns |n Austra||an do||ar/U.3. do||ar
(AU0/U30) dur|ng tho samo advanco on tho wook|y and
da||y charts, rospoct|vo|y.

F|CuRE 8.21 Cont|nuat|on lattorns on tho Wook|y
AU0/U30 Graph.


F|CuRE 8.22 Cont|nuat|on lattorns on tho 0a||y
AU0/U30 Graph.



A cont|nuat|on pattorn dur|ng tho courso ot a major trond
a||ows mo to advanco my |n|t|a| protoct|vo stop |n tho
d|roct|on ot a prot|tab|o trado. A broakout ot a cont|nuat|on
chart w||| bo accompan|od by |ts own last 0ay lu|o. l may
o|oct to movo tho protoct|vo stop trom tho |n|t|a| last 0ay
lu|o to tho now last 0ay lu|o croatod by tho cont|nuat|on
pattorn.

lt |s a|so poss|b|o that a pattorn |mp|y|ng a rovorsa| ot
trond cou|d dovo|op pr|or to tho atta|nmont ot an oxpoctod
targot. l may o|oct to movo my protoct|vo stop |n
ro|at|onsh|p to a pattorn that carr|os trond |mp||cat|ons
countor to my pos|t|on.

As prov|ous|y d|scussod |n th|s book, tak|ng a prot|t
botoro a targot |s roachod can bo vory cha||ong|ng to a
trador. 1h|s aroa ot my trad|ng |s most ||ko|y to bo mod|t|od
on an ongo|ng bas|s. A|| too otton, untortunato|y, my th|nk|ng
|s govornod by tho most rocont trados. 1h|s typo ot
opt|m|zat|on th|nk|ng |s ak|n to a dog chas|ng |ts short ta||-
tho short ta|| w||| a|ways bo mov|ng just away trom tho dog's
mouth.

1raiIing 5toµ RuIo

1horo was a t|mo |n my trad|ng whon l novor movod my
stops away trom tho last 0ay lu|o. A markot wou|d o|thor
roach |ts targot or stop mo out at tho last 0ay lu|o.

1horo was an |nhoront r|sk managomont prob|om w|th
th|s stratogy. Assumo, tor oxamp|o, that l ontorod a trado
w|th a r|sk ot $800 por $100,000 ot cap|ta| and a targot
oqua| to $8,200 por trad|ng un|t. 1ho |n|t|a| ro|at|onsh|p ot
roward to r|sk was tour to ono. loxt, assumo that tho
pos|t|on wont my way and roachod a po|nt whoro l had an
unroa||zod prot|t ot $2,400 por un|t. 1h|s moant that l had
$800 |ott to ga|n botoro tak|ng prot|ts. loav|ng my stop at
tho or|g|na| |ovo| moant that l was now r|sk|ng $8,200 to tho
or|g|na| last 0ay lu|o stop |n ordor to ga|n tho t|na| $800.

1h|s was |nsano monoy managomont, so l had to como
up w|th somo moans to roadjust my r|sk and roward
paramotors. |or tho sako ot brov|ty, l w||| not tako tho t|mo
or spaco to d|scuss tho popu|ar concopts ot a tra|||ng stop
basod on a do||ar amount or porcontago rotracomont.

l dovo|opod a concopt l ca|| tho 1ra|||ng 3top lu|o. 1h|s
trad|ng gu|do||no roqu|ros throo days ot pr|co act|on to bo
|mp|omontod: tho now h|gh or |ow day, tho sotup day, and
tho tr|ggor day.

||guro 8.28 shows tho 1ra|||ng 3top lu|o |n act|on on a
|ong pos|t|on |n tho 0ow 1onos. 1ho t|rst stop to tho ox|t
stratogy |s to |dont|ty tho h|ghost day ot tho movo. Ot
courso, |t w||| chango as now h|ghs aro mado. 1ho h|gh day
|n tho 0ow was August 28. 1ho sotup day occurs on any
day a markot c|osos bo|ow tho |ow ot tho h|gh day. 1h|s
occurrod on August 81. 1ho tr|ggor and ox|t thon takos
p|aco whon tho |ow ot tho sotup day |s ponotratod. 1h|s
occurrod on 3optombor 1.

F|CuRE 8.28 1ra|||ng 3top lu|o |n 01lA.


l want to omphas|zo that thoro |s noth|ng tochn|ca||y
s|gn|t|cant about tho 1ra|||ng 3top lu|o. lt |s s|mp|y a moans
to provont a popcorn or roundtr|p trado trom occurr|ng.
||guro 8.24 shows tho act|vat|on ot tho 1ra|||ng 3top lu|o
a|most |mmod|ato|y attor a pattorn comp|ot|on |n
G3l/U30.

F|CuRE 8.24 1ra|||ng 3top lu|o |n G3l/U30.


Wookond RuIo

1ho l|chard 0onch|an Wookond lu|o |s a tochn|quo l may
omp|oy to oxtond tho |ovorago |n a trado. 0onch|an |s
cons|dorod to bo tho croator ot tho managod tuturos
|ndustry and |s crod|tod w|th dovo|op|ng a systomat|c
approach to tuturos monoy managomont. ||s protoss|ona|
trad|ng caroor was dod|catod to advanc|ng a moro
consorvat|vo approach to tuturos trad|ng. 0onch|an passod
away |n tho oar|y 1000s.

1ho Wookond lu|o bas|ca||y statos that a markot that
doc|s|vo|y movos |nto now h|gh or |ow ground on a |r|day |s
vory ||ko|y to cont|nuo tho movo on Vonday and oar|y
1uosday ot tho noxt wook. 1ho roason|ng boh|nd tho
Wookond lu|o |s that a doc|s|vo now h|gh or |ow on |r|day
|nd|catos tho w||||ngnoss ot °strong hands' to tako a
pos|t|on homo tor a wookond.

1ho Wookond lu|o |s ovon moro va||d whon thoro |s a
|ong, throo-day wookond.

|or mo, tho Wookond lu|o bocomos most s|gn|t|cant
and usotu| whon a pattorn broakout (ospoc|a||y a wook|y
chart pattorn) takos p|aco on a |r|day. ln such casos, l may
oxtond my r|sk trom s|x-tonths to o|ght-tonths ot 1 porcont tooxtond my r|sk trom s|x-tonths to o|ght-tonths ot 1 porcont to
a tu|| 1 or 2 porcont.

||guros 8.2b and 8.20 show major broakout days (a|| on
|r|days) |n tho bu|| markot |n sugar |n 2000.

Narkot Runa

1ho typo ot trond l most approc|ato aro stra|ght-||no markot
runs. 3uch runs aro actua||y qu|to typ|ca| ot strong tronds.
1horo aro two typos ot stra|ght-||no movos, as shown by tho
accompany|ng oxamp|os.

||guro 8.27 ot Varch soyboan o|| d|sp|ays tho t|rst typo ot
markot run-a trond charactor|zod by a sor|os ot
cont|nuous |owor h|ghs (or h|ghor |ows |n tho caso ot an
advanco). ln th|s caso, tho markot had 18 stra|ght days ot
|owor h|ghs dur|ng a substant|a| drop. loar|y tour wooks ot
|owor |ows |s probab|y moro than a trador can oxpoct trom
a trond, but tho po|nt |s that strong tronds can bo v|c|ous|y
pors|stont.

F|CuRE 8.25 Wookond lu|o 3roakout |n 3ugar, Vay
2000.


F|CuRE 8.20 Wookond lu|o 3roakout |n 3ugar,
0ocombor 2000.


F|CuRE 8.27 A 3usta|nod Varkot lun |n 3oyboan O||.


1ho chart ot tho noarby contract ot go|d (||guro 8.28)
d|sp|ays tho socond typo ot markot run. ln th|s caso tho
trond conta|nod days w|th |ntraday |ows bonoath tho
prov|ous days' |ows, but |n no caso trom Octobor 20
through 0ocombor 4 d|d tho markot c|oso bo|ow tho
prov|ous day's |ow.

F|CuRE 8.28 A Varkot lun |n Go|d.



Pattorn RocomµIotion

l havo d|scussod tho concopt ot tho promaturo broakout. A
promaturo broakout assumos that thoro subsoquont|y w|||
bo a gonu|no broakout. l rotor to tho socondary broakouts
as pattorn rocomp|ot|ons. ||guro 8.20 |s an oxtromo
oxamp|o ot th|s |doa. ln 1u|y, tho U.3. do||ar/1apanoso yon
(U30/1lY) comp|otod an |83 top pattorn. Attor roontor|ng
tho pattorn |n oar|y August, tho pattorn was rocomp|otod on
August 27. 1ho markot thon trondod to tho targot at 80.20.
|or r|sk managomont, l usod tho last 0ay lu|o ot tho
socondary comp|ot|on at 04.b8 (tho August 20 h|gh) to
ostab||sh my protoct|vo stop |ovo|. As a gonora| ru|o, l w|||
attompt ono pattorn rocomp|ot|on por major pattorn. Attor
that, l w||| count my |ossos and go shopp|ng o|sowhoro.

F|CuRE 8.20 lattorn locomp|ot|on |n U30/1lY.



lt |s oasy tor a d|scrot|onary trador to bocomo obsossod
w|th a part|cu|ar markot that has do||vorod a tow stra|ght
|os|ng trados, th|nk|ng that tho markot owos h|m somoth|ng.
1h|s |s a bad monta| stato to ontor. 3o|ng compo||od to
rocoup |ossos trom a part|cu|ar markot |n tho samo markot
|s a dangorous pract|co. At |oast onco oach yoar l got
caught up |n th|s v|c|ous cyc|o. l must constant|y rom|nd
myso|t that thoro w||| a|ways bo anothor markot at anothor
t|mo.

Pointa to Romombor



lt |s nocossary to havo an organ|zod mothod to
mako tho |mportant doc|s|ons |nvo|vod |n trad|ng,
such as what markot to trado, whon to trado |t,
how to ontor, how to sot stops, how to ox|t, and
what |ovorago to uso.

A trad|ng p|an must bo basod on tho koy
assumpt|on that |t |s |mposs|b|o to know w|th
corta|nty tho d|roct|on ot any g|von markot at any
g|von t|mo.

C|ass|ca| chart|ng can sorvo as tho bas|s tor
croat|ng a trad|ng p|an.

3uccosstu| trad|ng p|ans must havo proc|so
dot|n|t|ons ot markot bohav|or and trad|ng
act|ons.



Chapter 4

ldeal Chart Patterns

1ho tochn|ca| approach l uso |s basod on a subsot w|th|n
tochn|ca| ana|ys|s known as c|ass|ca| chart|ng pr|nc|p|os
(soo Chaptor 1). 3poc|t|ca||y, l |ook tor rocogn|zab|o
goomotr|c pattorns tormod on h|gh/|ow/c|oso pr|co bar
charts to |dont|ty cand|dato trados. Voro spoc|t|ca||y, l
so|oct cand|dato trados that moot tho to||ow|ng cr|tor|a on
pr|co charts:



|or a major pr|co trond, a cont|nuat|on or
rovorsa| chart pattorn ot at |oast 10 to 12 wooks
|n durat|on v|s|b|o on both a wook|y and da||y
chart (a|though tho da||y and wook|y charts may
d|sp|ay s||ght|y d|ttoront goomotr|c prot||os).

|or a m|nor pr|co trond cont|nuat|on on a da||y
pr|co graph on|y, a chart pattorn ot at |oast tour to
o|ght wooks |n durat|on.

|or a m|nor pr|co trond rovorsa| on a da||y pr|co
graph on|y, a chart pattorn ot at |oast s|x to 10
wooks |n durat|on.

|or a pyram|d opportun|ty w|th|n tho contoxt ot a
trond |aunchod trom a wook|y chart, a vory br|ot
pr|co pauso (known as a t|ag or ponnant) ot ono
to tour wooks |n durat|on v|s|b|o on a da||y chart.


Chaptor b w||| d|scuss |n moro dota|| tho |mportanco ot
undorstand|ng tho who|o |doa ot how many wooks |t takos
tor a pattorn to dovo|op and why |t |s |mportant to tho |actor
1rad|ng l|an.

1ust as bank to||ors aro tra|nod to dotoct countorto|t
curroncy by study|ng roa| monoy, |t |s |mportant to oxh|b|t
oxamp|os ot tho gonu|no pattorns sought by tho |actor
1rad|ng l|an. |o||ow|ng aro oxamp|os ot °chorry-p|ckod'
chart pattorns trom 2008 and 2000. 1hoso charts oxh|b|t
tho |doa| typos ot trad|ng s|tuat|ons.

l must omphas|zo at th|s po|nt that |t |s oasy to spot thoso
pattorns attor tho tact. 1ho cha||ongo ot tho chart trador |s to
|dont|ty and roact to thoso typos ot chart cont|gurat|ons |n
roa| t|mo. lovortho|oss, |ay|ng down tho bost oxamp|os ot
chart tormat|ons |s a groat p|aco to start.

As l po|nt out o|sowhoro |n th|s book, tho typos ot
pattorns prosontod horo aro not typ|ca| ot tho trados l mako
on a rogu|ar bas|s-l on|y w|sh th|s woro truo! You w||| soo
p|onty ot my m|stakos and oxamp|os ot |ack ot pat|onco |n
lart lll ot th|s book. 3ut, tor now, |t |s good to t|x your m|nd
on tho |doa| chart s|tuat|on that l sook.

RovoraaI E&5 Pattorn in
Coµµor

||guro 4.1 shows that coppor comp|otod a s|x-month |83
top pattorn |n oar|y August 2008, to||owod |n |ato August by
a rotost ot tho nock||no. ln tho caso ot a va||d chart pattorn,
|t |s un||ko|y that a rotost, |t any, can mako much progross
past tho boundary ||no ot tho comp|otod pattorn. lorma||y,
tho boundary ||no acts as an °|co ||no' aga|nst any pr|co
movomont back |nto a comp|otod pattorn. lot|co that tho
rotost d|d not v|o|ato tho last 0ay lu|o ot tho August 4
pattorn comp|ot|on.

F|CuRE 4.1 |83 1op Ends a ||vo-Yoar 3u|| Varkot |n
Coppor.


3o|aborod pattorns such as th|s havo a way ot woar|ng
out tho chart trador, who jumps tho gun many t|mos botoro
tho roa| trond bog|ns. 1radors that attompt to ant|c|pato a
pattorn comp|ot|on can bocomo choppod up and bocomo
gun shy by tho t|mo tho roa| broakout occurs. l know th|s
trom oxpor|onco.

RovoraaI Riaing Wodgo in
AuD/u5D

ln oar|y August 2008, tho AU0/U30 (Austra||an do||ar and
U.3. do||ar crossrato) comp|otod a 12-month r|s|ng wodgo
rovorsa| pattorn (||guro 4.2). As a gonora| ru|o, pr|cos
doc||no sharp|y trom r|s|ng wodgos wh||o broakouts ot
ta|||ng wodgos back and t|||, tak|ng t|mo tor a now trond to
got undor way.

F|CuRE 4.2 Ono-Yoar l|s|ng Wodgo |n tho Auss|o 0o||ar
loads to a Watorta|| 0oc||no.



Continuation Wodgo and
RovoraaI FaiIuro 1oµ in
5oyboan OiI

1wo charts aro shown tor th|s markot. 3oyboan o|| toppod
|n Varch 2008. |o||ow|ng tho Varch doc||no, tho markot
stagod a ra||y, t|na||zod by a 1b-wook cont|nuat|on wodgo,
comp|otod on 1u|y 21 (||guro 4.8). lt you |ook carotu||y, you
w||| soo that tho t|na| o|ght wooks ot tho wodgo took tho
torm ot a symmotr|ca| tr|ang|o. lt |s not unusua| tor |argo
pattorns to bo |aunchod by sma||or pattorns. |or th|s
roason, ono ot tho trad|ng s|gna|s l |ook tor |s a sma||or
pattorn to bocomo pro-pos|t|onod tor a poss|b|o broakout
ot a |argor pattorn.

F|CuRE 4.8 E|ght-Wook 1r|ang|o Caps Ott a 1b-Wook
l|s|ng Wodgo |n 3oyboan O||.



1ho doc||no on 3optombor b |n soyboan o|| comp|otod a
mass|vo ta||uro (or doub|o) top rovorsa| pattorn by
ponotrat|ng tho oar|y Apr|| |ow (||guro 4.4). loto tho rotost
|n |ato 3optombor. 1h|s rotost ra||y cou|d not got back
abovo tho |co ||no. loca|| that whon tho broakout day has
vory ||tt|o pr|co act|v|ty w|th|n tho comp|otod pattorn l w||| uso
tho day prov|ous to tho broakout to ostab||sh tho last 0ay
lu|o. 1ho broakout day was 3optombor b, but tho last 0ay
lu|o was 3optombor 4. 1ho targot ot 82 conts was mot |n
|ato Octobor.

F|CuRE 4.4 3ovon-Vonth |a||uro 1op loads to ||stor|c
0rop |n 3oyboan O|| lr|cos.


RovoraaI 1riangIo Bottom in
5ugar
5ugar

||guro 4.b shows that tho ra||y |n |ato 0ocombor 2007
comp|otod a s|x-month symmotr|ca| tr|ang|o bottom |n
sugar.

F|CuRE 4.5 C|ass|c 3|x-Vonth 3ymmotr|ca| 1r|ang|o |n
3ugar.


Continuation and Pyramid
Pattorna in u5D/CAD

1ho chart ot th|s markot trom 2008 d|sp|ays two typos ot
pattorns (||guro 4.0). 1ho advanco |n oar|y August
comp|otod a cont|nuat|on sovon-month ascond|ng tr|ang|o.
1ho markot rotostod tho broakout |n |ato August. A
subsoquont rotost |n |ato 3optombor mado my ||to d|tt|cu|t
and, |n tact, torcod mo to ||ghton up my pos|t|on. |owovor,
ovon th|s socond rotost had ||tt|o ab|||ty to ponotrato tho
comp|otod tr|ang|o. 1ho advanco |n tho socond wook ot
Octobor comp|otod a n|no-wook cont|nuat|on broadon|ng
pattorn, prov|d|ng tho opportun|ty to pyram|d tho trado.

F|CuRE 4.0 Vajor Advanco |n U30/CA0 3ogan w|th a
3ovon-Vonth Ascond|ng 1r|ang|o.


RovoraaI 1oµ in 5iIvor

1ho s||vor markot |s not tor tho ta|nt ot hoart. 1h|s markot
can prov|do many tako-outs botoro roward|ng a pors|stont
trador. loto tho vory sma|| throo-wook doub|o top |n Varch.
l norma||y do not trado rovorsa| pattorns ot such short
durat|on. 1ho markot tound a ||no ot support |n Apr||, Vay,
and 1uno botoro start|ng a ra||y. 1h|s ra||y carr|od abovo tho
h|ghs trom Apr|| and Vay and roa||y throw mo a curvo ba||.

On 3optombor 11, l |ntorprotod tho pr|co bohav|or as a
throo-month-p|us round|ng pattorn and wont |ong. lt was a
bu|| trap. 1ho markot qu|ck|y rovorsod and |n oar|y August
comp|otod a s|x-month ta||uro top (||guro 4.7). Varkots that
gonorato a bu|| or boar trap pr|or to a roa| comp|ot|on
norma||y oxpor|onco strong tronds. 1ho roason |s that a trap
pr|or to tho roa| movo |ocks tradors |nto a |os|ng pos|t|on
that |t w||| not |ot thom out ot oas||y.

F|CuRE 4.7 3|x-Vonth |a||uro 1op |n 3||vor.



1horo |s an |mportant |osson |n th|s chart. |rom |ato
Varch through oar|y 1u|y tho markot pun|shod tradors who
bought strongth or so|d woaknoss w|th tho oxpoctat|on ot
ho|d|ng a pos|t|on tor |ongor than a tow days. 1h|s por|od ot
chopp|noss ||ko|y mado tradors vory gun shy. lt wou|d havo
boon vory d|tt|cu|t tor a chart trador to so|| tho August 7
broakout w|th tho |doa that s||vor was not bo|ng so|d |n tho
ho|o. Yot, so|||ng tho August 7 broakout, ovon though tho
markot was sovoro|y ovorso|d, was tho most prot|tab|o
trado on tho chart shown. 1rados that aro tho omot|ona||y
toughost to oxocuto aro otton tho most t|nanc|a||y
roward|ng.

F|CuRE 4.8 Cont|nuat|on |83 lattorn loads to 3tock
Varkot Co||apso ot lato 2008.


Continuation E&5 Pattorn in
tho RuaaoII 1000 |ndox

0ur|ng tho stock markot co||apso ot 2008, tho chart ot tho
lusso|| 1000 tormod an o|ght-month cont|nuat|on |83
pattorn (||guro 4.8). l havo soon somo chart|sts tako too
many ||bort|os |n |dont|ty|ng many pattorns. Ono ot tho ru|os
tor an |83 pattorn |s that tho r|ght and |ott shou|dors VU31
ovor|ap. 1ho broakout ot tho nock||no |n m|d 3optombor
was vory tr|cky bocauso pr|cos qu|ck|y tradod back abovo
tho nock||no. 1ho |n|t|a| broakout was promaturo. 1ho
broakout |n |ato 3optombor was tho roa| doa|, and tho
markot roachod tho targot |n lovombor, t|na||y bottom|ng
out |n Varch 2000. lot|co that tho hoad ot tho o|ght-month
|83 took tho torm ot a t|vo-wook |83 pattorn.

Whon |a an E&5 Pattorn Not RoaI?

l am otton amusod by tho |ntorprotat|on ot charts mado by
ta|k|ng hoads on Cl3C and othor t|nanc|a| mod|a out|ots. Ono
ot tho pattorns most bastard|zod by tho °oxports' |s tho
trad|t|ona| |83 pattorn. As a gonora| ru|o, gonu|no |83 tops
and bottoms must bo charactor|zod by throo toaturos:

1. lomombor|ng that an |83 pattorn |s most otton a
rovorsa| pattorn, thoro must bo a trond to bo rovorsod |n
ordor tor an |83 |ntorprotat|on to bo va||d.

2. 1ho r|ght and |ott shou|dors must ovor|ap-and tho
moro ovor|ap tho bottor. lt tho r|ght and |ott shou|dors do
not ovor|ap, thon thoro |s no |83 pattorn.

8. 1horo must bo somo symmotry to tho shou|dors |n
torms ot durat|on or ho|ght |n ordor to va||dato an |83
pattorn.

At|na| po|nt: l groat|y protor a t|at nock||no or ono that s|ants |n
tho d|roct|on ot tho ant|c|patod trond. l do not ||ko ups|ant|ng
nock||nos |n |83 tops or downs|ant|ng nock||nos |n |83
bottoms.

Continuation RoctangIo in
Kanaaa City Whoat

|o||ow|ng a strong boar trond trom Varch through Vay
2008, tho markot conso||datod |n tho torm ot a 14-wook
cont|nuat|on roctang|o. 1ho comp|ot|on ot th|s roctang|o |n
m|d-3optombor 2008 was to||owod by a woak rotost ot tho
|owor boundary |co ||no. 1ho markot roachod tho targot |n
oar|y 0ocombor. 1h|s roctang|o |s shown on tho wook|y and
da||y charts (||guro 4.0 and ||guro 4.10 rospocttu||y).

Continuation RoctangIo and
Pyramid 1riangIo in Crudo OiI

0ur|ng tho h|stor|c pr|co r|so |n crudo o|| ond|ng |n 2008,
tho markot croatod a numbor ot trad|ng opportun|t|os. 1ho
advanco |n |obruary comp|otod a tour-month cont|nuat|on
roctang|o. 1ho hard rotost |n oar|y Varch novor c|osod back
bo|ow tho uppor boundary |co ||no ot tho roctang|o. 1ho
rotost|ng procoss tormod a throo-wook tr|ang|o that ottorod
tho opportun|ty to pyram|d tho markot. 1ho t|na| targot was
ach|ovod |n oar|y Vay (||guro 4.11).

F|CuRE 4.0 Wook|y Chart 0|sp|ays a Cont|nuat|on
loctang|o |n Kansas C|ty Whoat.


F|CuRE 4.10 0a||y Chart Countorpart ot tho loctang|o ln
Kansas C|ty Whoat.



F|CuRE 4.11 A |our-Vonth loctang|o and 1hroo-Wook
lonnant |n Crudo O||.


1ho broakout ot tho roctang|o, wh||o c|oan whon v|owod
wo|| attor tho tact, was oxtromo|y tr|cky at tho t|mo bocauso
ot tho hard rotost |n |ato Varch.

Continuation E&5 1oµ in tho
Dow utiIitioa

||guro 4.12 oxh|b|ts tho cont|nuat|on throo-month |83 top
pattorn (w|th a doub|o hoad) that tormod on tho 0ow
Ut|||t|os chart |n 1u|y dur|ng tho groat boar markot ot 2008.

F|CuRE 4.12 A 1hroo-Vonth |83 1op |n tho 0ow Ut|||t|os
loads to tho 2008 Vo|tdown.



Continuation 1riangIo,
RovoraaI N 1oµ, and FIag in
tho EuR/u5D

1hroo charts aro d|sp|ayod tor tho ouro/U.3. do||ar
(EUl/U30).

lt |s not unusua| tor a tr|ang|o to torm |n tho |ato stagos ot
an oxtondod bu|| trond. Otton, thoso |ato-stago tr|ang|os
conta|n s|x contact po|nts contrastod w|th m|dtrond
tr|ang|os that norma||y conta|n on|y tour contact po|nts such
as tho tr|ang|o |n tho Kansas C|ty whoat (rotor back to
||guro 4.10). 1ho cont|nuat|on tr|ang|o on tho wook|y graph
|n tho EUl/U30 mot |ts targot qu|ck|y (||guro 4.18). loto
tho s|x contact po|nts ot th|s tr|ang|o on tho da||y chart
(||guro 4.14). 1ho markot thon tormod a t|vo-month
rovorsa| °V' top (||guro 4.1b). 1ho now boar trond |n
EUl/U30 tormod a 10-day t|ag |n 3optombor. 3r|ot
pattorns such as t|ags and ponnants ottor an oxco||ont
opportun|ty to pyram|d a trado.

F|CuRE 4.18 Wook|y Chart |n tho EUl/U30 Crossrato
0|sp|ays a Cont|nuat|on 1r|ang|o and a 0oub|o (or °V')
1op.



F|CuRE 4.14 0a||y Chart 3hows tho 1hroo-Vonth 1r|ang|o
|n Ear|y 2008 |n tho EUl/U30 Crossrato.


F|CuRE 4.15 A ||vo-Vonth 0oub|o 1op and 1wo-Wook
||ag |n tho EUl/U30.


E&5 RovoraaI 1oµ and 1hroo
Continuation Pattorna in tho
CBP/JPY

1ho wook|y chart ot tho 3r|t|sh pound/1apanoso yon
(G3l/1lY) dur|ng 2008 had |t a||-a major rovorsa| top and
a sor|os ot throo boar markot cont|nuat|on pattorns. ||guro
4.10 |s tho wook|y chart vors|on ot thoso chart tormat|ons. ln
oar|y 1anuary, tho markot comp|otod a 18-month |83 top.
0ur|ng 1anuary and |obruary tho markot tormod a t|vo-
wook tr|ang|o pattorn that was usotu| tor |ncroas|ng
|ovorago (|.o., pyram|d|ng). |rom tho Varch |ow through
oar|y 1u|y a cont|nuat|on r|s|ng wodgo tormod. As part ot
tho mass|vo drop trom tho 1u|y h|gh to tho oar|y 2000 |ow
tho markot tormod a tour-wook t|ag, a|so usotu| tor
pyram|d|ng a short trado. 1ho da||y chart show|ng thoso
throo cont|nuat|on pattorns |s d|sp|ayod |n ||guro 4.17.

F|CuRE 4.10 1oxtbook 3oar Varkot on tho G3l/1lY
Wook|y Chart.


F|CuRE 4.17 0a||y Chart ot G3l/1lY 3hows a 3or|os ot
3oar Varkot lattorns.



A RovoraaI 5ymmotricaI
1riangIo in tho AuD/JPY

||guro 4.18 oxh|b|ts tho 14-month symmotr|ca| tr|ang|o top
comp|otod |n 3optombor 2008 on tho wook|y graph ot tho
Austra||an do||ar/1apanoso yon (AU0/1lY). Aga|n noto tho
rotost that occurrod two wooks attor tho |n|t|a| pattorn
comp|ot|on. As |s a|most a|ways tho caso w|th va||d pattorn
broakouts, tho rotost was unab|o to mako |t back abovo tho
boundary |co ||no. 1h|s |s a vory common charactor|st|c ot
major pattorn comp|ot|ons. 3oo ||guro 4.10 tor a da||y
chart vors|on ot thoso chart ovonts.

F|CuRE 4.18 A 14-Vonth 3ymmotr|ca| 1r|ang|o on tho
AU0/1lY Wook|y Chart.


F|CuRE 4.10 0a||y Chart ot tho AU0/1lY 0|sp|ays tho
lotost.


An add|t|ona| po|nt |s worthy ot noto about tho doc||no |n
tho AU0/1lY. Attor bu||d|ng a top tor 18 months, broak|ng
out, and thon oxpor|onc|ng a m|nor rotost, tho ont|ro movo
down took on|y a coup|o ot wooks. ln tact, tho major|ty ot tho
doc||no attor tho |ato 3optombor rotost was roprosontod by
a handtu| ot days. lt |s a vory awkward trad|ng oxpor|onco to
wa|t 18 months tor a pattorn to bo comp|otod, on|y to havo
tho movo ovor |n a mattor ot wooks.

1wo Continuation Pattorna in
CBP/CEF

1ho boar markot ot 2008 |n tho G3l/C|| (3r|t|sh pound
aga|nst tho 3w|ss tranc) prov|dod two oxco||ont oxamp|os
ot cont|nuat|on pattorns ||guro 4.20). 1ho t|rst pattorn was
a sovon-month cont|nuat|on round|ng pattorn that
oxpor|oncod a promaturo broakout |n oar|y Octobor, a
roturn abovo tho |co ||no, and thon tho va||d broakout |n |ato
Octobor. lound|ng pattorns aro notor|ous tor not prov|d|ng
n|co, c|oan broakouts. An o|ght-wook ponnant or
doscond|ng tr|ang|o was comp|otod |n m|d-0ocombor.

F|CuRE 4.20 A 3ovon-Vonth lound|ng 1op |o||owod by
an E|ght-Wook 0oscond|ng 1r|ang|o |n tho G3l/C||.



A 1riangIo and Running
Wodgo in 5ugar

F|CuRE 4.21 Wook|y Chart 3ymmotr|ca| 1r|ang|o |n
3ugar.


1ho sugar markot gonoratod tho ovorwho|m|ng proport|on
ot prot|ts tor tho |actor 1rad|ng l|an |n 2000. ||guro 4.21
d|sp|ays a 14-month symmotr|ca| tr|ang|o on tho wook|y
chart at tho proc|so po|nt ot comp|ot|on on Vay 1. 1h|s
pattorn |aunchod tho |argost pr|co thrust |n sugar |n 28
yoars. ||guro 4.22 d|sp|ays tho da||y chart ot tho act|vo|y
tradod Octobor 2000 contract. 1h|s chart had a
s|mu|tanoous broakout on Vay 1 ot a s|x-month ascond|ng
or runn|ng wodgo.

C|ass|ca| chart|ng pr|nc|p|os app||od to tho stock markot
troat tho r|s|ng wodgo as a boar|sh pattorn. |owovor, many
substant|a| pr|co advancos |n torox and commod|t|os aro
|aunchod by an upward thrust trom a r|s|ng wodgo. l havo
|abo|od th|s typo ot chart dovo|opmont as a runn|ng-wodgo
pattorn.

F|CuRE 4.22 A 3|x-Vonth lunn|ng Wodgo |n Octobor
3ugar.


An E&5 Bottom in AµµIo
Comµutor

1ho on|y stock chart conta|nod |n th|s book, ||guro 4.28
shows that App|o Computor comp|otod a magn|t|cont |83
bottom on tho da||y chart on Varch 28. lot|co that tho
markot rotostod tho |co ||no on Varch 80, but tho rotost d|d
not v|o|ato tho last 0ay lu|o.

F|CuRE 4.28 A lortoct |83 3ottom |n App|o Computor.



A Na[or Continuation E&5 and
5ymmotricaI 1riangIo in CoId

1h|s markot |s an oxco||ont oxamp|o ot throo pattorns.
||guro 4.24 d|sp|ays an 18-month |nvortod cont|nuat|on
|83 pattorn on tho wook|y chart. As a s|do noto, tho
m|n|mum targot ot th|s pattorn at 1840 or so has not boon
roachod as ot th|s wr|t|ng. 1horo |s no ru|o that st|pu|atos
any targot must bo mot. Chart pattorns ta|| to do||vor tho|r
|mp||od pr|co movos a|| tho t|mo.

F|CuRE 4.24 Wook|y |83 3ottom |n Go|d.


1horo was qu|to a po|nt ot contont|on w|th|n tho tochn|ca|
commun|ty about th|s pattorn. A wo||-known E|||ott Wavo
rosoarch t|rm, tor wh|ch l havo groat rospoct, statod that
|abo||ng tho pattorn as an |nvortod cont|nuat|on |83
pattorns was a joko. Yot Edwards and Vagoo |n tho °b|b|o'
ot c|ass|ca| chart pr|nc|p|os, 7ocbolco| Aoo|ysls oí 5tock
7rooos, statod:

Occoslooo||y prlcos wl|| go tbroogb o sorlos oí
í|octootloos wblcb coostroct o sort oí lovortoo looo-
ooo-5boo|oors plctoro wblcb lo toro |ooos to
cootloootloo oí tbo provloos trooo. . Ooo oí tboso
pottoros wblcb oovo|op lo o rlslog morkot wl|| toko tbo
íorm oí o looo-ooo-5boo|oors Bottom.

||guro 4.2b shows that tho r|ght shou|dor ot tho wook|y
|83 pattorn took tho torm ot a mass|vo s|x-month
symmotr|ca| tr|ang|o on tho da||y graph. A|so noto that tho
br|ot pauso to||ow|ng tho oar|y 3optombor comp|ot|on ot tho
tr|ang|o tormod a t|vo-wook |83 ta||uro pattorn. 1hoso
typos ot sma|| pattorns aro vory usotu| |n pyram|d|ng a
pos|t|on. 1h|s sma|| pattorn a|so a||owod mo to movo tho
protoct|vo stop trom tho |n|t|a| last 0ay lu|o ot tho s|x-
month tr|ang|o to tho last 0ay lu|o ot tho t|vo-wook
cont|nuat|on pattorn.

F|CuRE 4.25 A largo 3ymmotr|ca| 1r|ang|o and 3ma||
|83 |a||uro on tho 0a||y Go|d Graph.


F|CuRE 4.20 A 3u|| Varkot |n Coppor loadod w|th
Cont|nuat|on lattorns.


A 5orioa ot BuIIiah Pattorna in
Coµµor

||guro 4.20 shows a wondortu| sor|os ot cont|nuat|on
tormat|ons dur|ng tho bu|| markot |n coppor trom Varch
through tho ond ot 0ocombor 2000. lot|co that tho last
0ay lu|o ot oach pattorn was novor cha||ongod, a|though
tho sta|r-stopp|ng naturo ot tho advanco was d|tt|cu|t on tho
norvos. As a gonora| ru|o, domand-dr|von bu|| markots
conta|n a |ot ot back|ng and t||||ng, whoroas bu|| movos
dr|von by sovoro supp|y shortagos aro much sharpor. Vost
boar markots aro a|so qu|to sharp, rotrac|ng |n ha|t tho t|mo
tho ground that was ga|nod dur|ng tho procod|ng bu|| trond.

A FaiIod Aaconding 1riangIo in
tho u5D/CAD Croaarato

l|ght-ang|od tr|ang|os havo tho strong tondoncy to broak
out through tho hor|zonta| boundary. ln tact, a broakout ot
tho hor|zonta| |co ||no can a|most bo oxpoctod. Yot, on
occas|on, a r|ght-ang|od tr|ang|o can broak out ot tho
d|agona| boundary, usua||y grudg|ng|y, as shown on tho
wook|y chart |n ||guro 4.27.

F|CuRE 4.27 Wook|y Chart Ascond|ng 1r|ang|o |n
U30/CA0.


1ho sovon-month ascond|ng tr|ang|o |n tho U30/CA0
had a bu|||sh b|as. As shown on tho da||y chart |n ||guro
4.28, tho |owor boundary ot tho ascond|ng tr|ang|o was
ca||od |nto quost|on |n m|d Apr||. |owovor, ovon at that
t|mo, my th|nk|ng was that tho |owor boundary was just
bo|ng rodot|nod w|th a |owor s|opo and that an ups|do
broakout was just bo|ng do|ayod. lovortho|oss, l wont w|th
a short sa|o on Apr|| 14 and was qu|ck|y stoppod out abovo
tho Apr|| 18 last 0ay lu|o.

F|CuRE 4.28 A 1r|cky 3roakout on tho 0a||y U30/CA0
Chart.


1ho downward thrust on Apr|| 20 and 80 cont|rmod tho
ta||uro ot tho ascond|ng tr|ang|o and ca||od tor a m|n|mum
movo to 1.00, a targot roachod |n oar|y 1uno. 1h|s markot |s
a good oxamp|o ot how pattorns |n|t|a||y b|asod |n ono
d|roct|on can prov|do a good s|gna| tor a movo |n tho
oppos|to d|roct|on.

A 12-Wook RoctangIo in tho
Dow Jonoa 1ranaµort |ndox

A 12-wook roctang|o was comp|otod |n |ato 1u|y. loto that
tho last 0ay lu|o trom 1u|y 28 was novor cha||ongod (soo
||guro 4.20).

F|CuRE 4.20 Cont|nuat|on loctang|o |n tho 0ow
1ransports.


A Raro Eorn in Bront 5oa OiI

A horn bottom occurs w|th a soquonco ot a major |ow and
two h|ghor |ows |ntorvonod by two h|ghor h|ghs, as showod
| n ||guro 4.80. 1ho pattorn takos tho shapo ot a v|k|ng
horn. A roqu|romont ot tho pattorn |s that ovor|ap ox|sts
botwoon tho two upward thrusts w|th|n tho pattorn. Edwards
and Vagoo d|d not covor tho horn pattorn. |owovor,
3chabackor |dont|t|od tho horn as a c|ass|ca| pattorn. l
otton rotor to tho horn bottom as a s|op|ng bottom.

F|CuRE 4.80 3|op|ng 3ottom |n 3ront 3oa Crudo O||.


1ho buy s|gna| was tr|ggorod |n oar|y Vay whon tho Apr||
h|gh was ponotratod. loto that tho last 0ay lu|o was
novor v|o|atod.

An E&5 Bottom Launchoa tho
2000 BuII Narkot in tho 5&Pa

l was omot|ona||y comm|ttod to tho boar caso |n stocks
com|ng ott tho Varch 2000 |ow. Wh||o l saw tho mass|vo
|83 bottom as shown |n ||guro 4.81, l d|d not bo||ovo |t. l
dabb|od on tho |ong s|do ot stocks trom t|mo to t|mo dur|ng
tho 2000 advanco, but l was unw||||ng to accopt tho tu||
|mp||cat|ons ot tho major |83 bottom. 1ho targot ot th|s
|83 bottom at 1,2b2 was noar|y mot |n Apr|| 2010.

F|CuRE 4.81 |83 3ottom |n 38ls.


5ummary

1ho procod|ng charts roprosont toxtbook oxamp|os ot
c|ass|ca| chart|ng pr|nc|p|os. 1hoso pattorns compr|so a
catogory ot chart pattorn that l ca|| tho °3ost 0rossod
l|st'-thoso chart tormat|ons (or sor|os ot chart tormat|ons
mak|ng up a |argo trond) that bost oxomp||ty pr|co chart
construct|on.

At tho ond ot oach yoar my not prot|tab|||ty |s, |n |argo
part, dopondont on corroct|y |dont|ty|ng and trad|ng a major
port|on ot thoso chart pattorns that |n h|nds|ght bocomo
mombors ot tho 3ost 0rossod l|st. ln tact, my |argost
prot|ts ovor tho yoars havo como trom markot s|tuat|ons
s|m||ar to and |nc|ud|ng thoso shown.

ln roa||ty, thoso typos ot grand chart tormat|ons aro moro
obv|ous attor tho tact than thoy aro |n roa| t|mo. ln my
droams, l |mag|no a trad|ng yoar |n wh|ch a|| ot my trados
aro ||m|tod to thoso typos ot markot s|tuat|ons. 3ut droams
aro droams, and roa| ||to |s roa| ||to. And |n roa| ||to, many ot
tho pattorns l trado do not turn out tho way thoso charts d|d.
3omo authors may produco mator|a| on c|ass|ca| chart
pattorns |mp|y|ng that thoso woro tho on|y s|tuat|ons thoy
tradod. 3ut l am t|rst and toromost a trador, not an author,
and l nood to adm|t that whon l catch thoso |doa| chart
pattorns |t makos up tor a |ot ot tho |ossos l r|ng up a|ong
tho way.

Pointa to Romombor



lt |s |mportant tor a trador to havo a c|oar
undorstand|ng what const|tutos an |doa| trado.

Exco||ont chart trados do not como around ovory
day but can tako wooks and months to dovo|op.

0ovo|op|ng tho pat|onco to wa|t, wa|t, and wa|t
somo moro tor a markot to doc|aro |tso|t |s a
goa|, not a dost|nat|on. As a trador, l sook
|mprovomont, not portoct|on.

Wh||o chart|sts otton attompt to jump tho gun on
a pattorn (|nc|ud|ng mo), markots usua||y mako |t
abundant|y c|oar whon |t |s t|mo to c||mb aboard.



Chapter 5

How the Factor 1radIng Plan
Works

lt |s t|mo to got |nto tho nuts and bo|ts ot tho |actor 1rad|ng
l|an. ||guro b.1 shows tho tour ma|n o|omonts ot tho p|an,
|nc|ud|ng trado |dont|t|cat|on, trado ontry, trado r|sk
managomont, and trado ordor managomont. 1h|s chaptor
w||| tack|o oach o|omont |nd|v|dua||y and |n dota||.

F|CuRE 5.1 1ho locossary E|omonts ot a 1rad|ng l|an.



1rado |dontitication

l know l wantod to bo a trador botoro l know l wou|d
bocomo a chart|st. 1rad|ng was tho °what' ot my caroor
oquat|on. 3o|ng a chart trador was tho °how.' Whon l
ontorod tho commod|ty bus|noss, my goa| was to mako
monoy as a trador. ln roa||ty, l d|d not havo a c|uo what that
moant.

Chart trad|ng mado an onormous amount ot sonso to mo
at tho po|nt |n my caroor whon l bogan t|nd|ng my way.
Chart trad|ng ottorod mo a un|quo comb|nat|on ot bonot|ts
not ava||ab|o w|th tho othor approachos l had attomptod or
cons|dorod, |nc|ud|ng:



A moans to undorstand markot trond

An |nd|cat|on ot markot d|roct|on

A mochan|sm tor t|m|ng

A moans to dotorm|no r|sk

A roa||st|c targot tor tak|ng prot|ts


|owovor, l qu|ck|y d|scovorod that thoro was a hugo
d|ttoronco botwoon soo|ng chart pattorns and actua||y
trad|ng thom. 1hanktu||y, tho book 7ocbolco| Aoo|ysls oí
5tock 7rooos by lobort Edwards and 1ohn Vagoo ottorod
somo suggost|ons to tho pract|ca| cha||ongos ot bo|ng a
chart trador. Yot, ono ot my major cha||ongos wasn't
addrossod |n tho book, namo|y, whon l bogan koop|ng
charts, l saw pattorns ovorywhoro l |ookod. l noodod to
bottor dot|no tor myso|t oxact|y what l was |ook|ng tor |n a
pattorn |n ordor to tako a trado. Woro a|| c|ass|ca| chart
pattorns croatod oqua|? Woro somo pattorns a bottor t|t to
my porsona||ty, r|sk to|oranco, and |ovo| ot cap|ta||zat|on?

1ho PracticaI ProbIom ot tho 1imo
Duration ot Chart Pattorna

W|th tho bonot|t ot h|nds|ght, l now roa||zo that tho d||omma l
was strugg||ng w|th cou|d bo dot|nod as tlmo íromlog.
1horo aro two roa||t|os ot c|ass|ca| chart|ng pr|nc|p|os that
a|| sor|ous chart|sts must contront.

||rst, |t |s patont|y oasy to soo chart pattorns |n h|nds|ght.
lromot|ona| mator|a|s trom var|ous trad|ng adv|sory
sorv|cos aro rop|oto w|th charts show|ng how thoy wou|d
havo tradod a corta|n markot |n h|nds|ght. 3ut l trado tho
markots |n roa| t|mo, and pattorns c|oar|y v|s|b|o |n h|nds|ght
m|ght havo not boon so c|oar |n roa| t|mo. Chart structuro
constant|y ovo|vos. A pattorn that ovontua||y prov|dos a
prot|tab|o trond m|ght bo compr|sod ot numorous sma||or
pattorns, many ot thom ta|||ng to do||vor an |mp||od movo.
|urthor, a b|g movo m|ght bo ushorod |n w|th sovora| ta|so
starts.

A socond and ro|atod roa||ty |s that many pattorns
soom|ng|y c|oar at tho momont ot a trado ta|| to do||vor and
bocomo swopt up |nto a much b|ggor chart structuro.

1ho 5tory ot tho °Big" 5oyboan
Novo

0ur|ng my t|rst yoar at tho Ch|cago 3oard ot 1rado (C3O1), a
trador |n tho soyboan p|t botr|ondod mo. 1h|s man ||vod |n a
mans|on |n Evanston, drovo a |uxury Gorman car, and showod
ovory |nd|cat|on ot succoss (wh|ch, |n tact, ho had ach|ovod).
|o to|d mo ono attornoon about how bu|||sh ho was |n
soyboans, at tho t|mo trad|ng around $b.40. |o sa|d ho had a
g|ant pos|t|on. 3o l watchod tho markot tor a tow days. lr|cos
cropt up to about $b.00. l jumpod |n w|th a contract, on|y to havo
pr|cos roturn to $b.40 tho to||ow|ng wook. 3uttor|ng trom th|s
|os|ng trado, and sook|ng words ot oncouragomont, l sought
out my p|t trador tr|ond and askod h|m what ho thought. ||s
statomont t|oorod mo. °l mado a sma|| tortuno. Wasn't that a
groat movo?'

As |t turnod out, my tr|ond was a sca|por who so|dom ho|d a
pos|t|on tor moro than 10 m|nutos. |o norma||y d|d not tako
pos|t|ons homo w|th h|m ovorn|ght. 1o h|m, a two- or throo-cont
movo was h|s goa|. Whon ho |n|t|a||y spoko to mo, ho had an
|nst|nct that soyboans cou|d ra||y 10 conts w|th|n a day or two,
and ho was w||||ng to ho|d a pos|t|on ovorn|ght to roa||zo that
ga|n. 3ut ho d|d not oxp|a|n th|s to mo unt|| attor tho tact.

3o, |n tho ond, l |oarnod a vory good |osson. 3o|ng a °bu||' or
°boar' moans noth|ng w|thout a t|mo tramo or pr|co hor|zon
attachod to tho words.

3ocauso tho structuro ot a chart bocomos rodot|nod ovor
a por|od ot t|mo (ospoc|a||y |n broad por|ods ot
conso||dat|on), |t |s cruc|a| tor a trador to undorstand tho
t|mo tramo that dotorm|nos cand|dato trados. lt a trador
to||s mo ho |s bu|||sh on a corta|n markot, l ask h|m |t ho |s
|ong, at what pr|co, what |s h|s targot, what |s h|s t|mo
tramo, and at what pr|co doos ho adm|t ho |s wrong. 1ho
concopt ot bo|ng bu|||sh or boar|sh moans noth|ng.

CBP/u5D aa an ExamµIo ot 1imo
Framing

|our charts ot tho 3r|t|sh pound/U.3. do||ar (G3l/U30)
|||ustrato tho |mportanco and comp||cat|ons ot t|mo tramo
cons|dorat|ons.

||guro b.2 |s a wook|y chart ot G3l/U30 trom 1anuary
2000 through Varch 2010. 1ho dom|nant stagos ot pr|co
bohav|or shown on th|s chart aro tho run-up |n pr|cos dur|ng
tho t|rst ha|t ot 2000, tho tormat|on ot tho doub|o top trom
|ato Vay 2000 through |obruary 2010, and tho boar trond
that dovo|opod trom tho doub|o top. 1wo socondary
pattorns can a|so bo soon, a 10-wook |83 top that was
comp|otod |n |ato 3optombor 2000, but ta||od, and a 17-
wook cont|nuat|on tr|ang|o that broko out |n oar|y |obruary
2010 to |aunch tho comp|ot|on ot tho doub|o top.

F|CuRE 5.2 0oub|o 1op on tho Wook|y Chart ot
G3l/U30, 1uno 2000-Varch 2010.


||guro b.8 d|sp|ays tho da||y pr|co bars ot G3l/U30 tor
an 11-month por|od ot t|mo trom Apr|| 2000 through Varch
2010. lt |s tho da||y bar chart compan|on vors|on ot tho
wook|y chart shown |n ||guro b.2.

F|CuRE 5.8 0oub|o 1op on tho 0a||y Chart ot G3l/U30,
1uno 2000-Varch 2010.


1h|s da||y graph |dont|t|os c|ass|ca| chart pattorns ot
o|ght wooks or moro |n durat|on to domonstrato how a
broador por|od ot conso||dat|on |s compr|sod ot numorous
sma|| pattorns-that at tho t|mo soomod to bo |mportant
|nd|cators ot oxpoctod markot bohav|or. 1ho chrono|ogy ot
th|s chart was as to||ows:

A two-month ascond|ng tr|ang|o (lattorn A) was
comp|otod |n |ato 1u|y. 1h|s pattorn ta||od to propo| pr|cos
tor moro than throo days. 1ho br|ot ra||y out ot tho top ot tho
tr|ang|o |od to what bocamo tho hoad ot a 10-wook |83
top (lattorn 3). 1h|s |83 top broko out |n |ato 3optombor
and a|so qu|ck|y ta||od.

1ho advanco trom tho oar|y Octobor |ow |od to an o|ght-
wook comp|ox |83 top (lattorn C). Wh||o tho comp|ot|on
ot th|s pattorn oxpor|oncod somo |n|t|a| downward
momontum, pr|cos stab|||zod at tho 0ocombor |ow and thon
choppod s|doways to h|ghor tor tho noxt tour wooks. ln tho
procoss, l was stoppod out ot tho shorts l ostab||shod
basod on tho o|ght-wook |83 top.

A|| ot thoso pattorns comb|nod to const|tuto tho broad
o|ght-month doub|o top comp|otod |n oar|y |obruary w|th a
targot ot 1.440 to 1.470.

|rom my porspoct|vo, a|| tour ot thoso pattorns (A
through 0) woro worth trad|ng-|n tact, l tradod thom a||.
|ad any ot tho t|rst throo pattorns workod, thoy cou|d havo
boon cons|dorod as toxtbook oxamp|os ot c|ass|ca| da||y
chart pattorns.

||guro b.4 oxam|nos tho por|od 3optombor 2000
through Varch 2010, or tho |ast sovon months ot tho por|od
covorod |n ||guro b.8, attompt|ng to |dont|ty shortor-torm
pattorns. ln tact, sovon pattorns (|abo|od A through G) cou|d
havo roprosontod s|gna|s tor tho shortor-torm c|ass|ca|
chart trador. ||guro b.4 turthor domonstratos how sma||or
pattorns bocomo part ot b|ggor pattorns that bocomo part
ot ovon b|ggor pattorns and so on.

F|CuRE 5.4 0a||y Chart ot G3l/U30, Octobor 2000-
Varch 2010.



|| na||y, ||guro b.b |s tho da||y G3l/U30 chart trom
1anuary through Varch 2010, tho t|na| throo months ot tho
or|g|na| 1b-month por|od ot t|mo trom ||guro b.2. |oro,
aga|n, |t |s poss|b|o to soo ovon shortor-torm pattorns that
mado up part tho chart |andscapo ot th|s torox pa|r. A vory
short-torm chart trador m|ght havo cons|dorod tak|ng trados
basod on thoso m|n|-pattorns.

F|CuRE 5.5 0a||y Chart ot G3l/U30, 1anuary 2010-
Varch 2010.


ln tho oxamp|o ot tho G3l/U30 |t wou|d havo boon
poss|b|o to baso a trad|ng porspoct|vo on tho quartor|y,
month|y, wook|y or da||y charts or to dr||| down on tho t|mo
tramo to tour-hour charts, two-hour charts, 00-m|nuto charts,
and so on.

l havo usod tho oxamp|o ot tho G3l/U30 to mako two
po|nts. ||rst, a trad|ng s|gna| |n ono t|mo tramo m|ght moan
noth|ng |n anothor t|mo tramo. 3ocond, chart pattorns ot
shortor durat|on otton ta||, on|y to bocomo rodot|nod as part
ot a |argor chart tormat|on.

Charts aro a rocord ot whoro pr|cos havo boon, but
trad|ng |s an oporat|on that noods to bo dono |n roa| t|mo
w|th an oyo on tho tuturo. 1o bo a succosstu| chart trador, a
porson must havo a t|rm t|x on tho t|mo tramo that w|||
gonorato tho trad|ng s|gna|s.

lot mo touch on ono moro po|nt doa||ng w|th t|mo
tram|ng. l bo||ovo |t |s |mportant tor a trador to uso s|m||ar
t|mo tramos to both ontor and manago a trado. What sonso
doos |t mako to ontor a trado basod on a wook|y chart, and
thon manago tho trado us|ng an hour|y chart? Or to ontor a
trado us|ng a da||y chart pattorn, but thon manago tho trado
us|ng a month|y chart? l porsona||y undorstand tho
|mportanco ot koop|ng t|mo tramos cons|stont bocauso
whon l ta|| |nto tho trap ot not do|ng so |t usua||y costs mo
monoy.

|rom my undorstand|ng, tho E|||ott Wavo lr|nc|p|o |s a|so
sons|t|vo to tho |ssuo ot t|mo tramo by attompt|ng to |dont|ty
cyc|os or wavos ot d|ttor|ng dogroos. 3y tho way, th|s |s tho
tota||ty ot my know|odgo ot tho E|||ott Wavo lr|nc|p|o.

l havo d|scussod th|s |doa ot t|mo tram|ng as a
nocossary procursor to |ntroduc|ng tho s|gna|s sought and
tradod by tho |actor 1rad|ng l|an.

1ho tormu|a tor tho |actor 1rad|ng l|an |n |ts most
d|gostod torm |s vory s|mp|o:



ldont|ty c|oar|y dot|nod wook|y chart pattorns
(w|th corrospond|ng or support|ng pattorns on
da||y charts), sook|ng trados |n what may
bocomo tho bost 10 oxamp|os oach yoar ot
c|ass|ca| chart|ng pr|nc|p|os as dot|nod |n
7ocbolco| Aoo|ysls oí 5tock 7rooos.

Onco a poss|b|o wook|y chart pattorn has boon
|dont|t|od, attompt to ostab||sh an ant|c|patory
pos|t|on at a stago |n tho pattorn whon tho t|na|
comp|ot|on cou|d bo |mm|nont.

lncroaso tho |ovorago ot a trado at that po|nt
whon tho pattorn |n quost|on bocomos comp|oto
by way ot a broakout.

W|th|n tho contoxt ot s|gn|t|cant tronds |aunchod
trom wook|y chart pattorns as c|tod abovo, sook
at |oast ono opportun|ty to oxtond or pyram|d tho
|ovorago |n tho trado us|ng cont|nuat|on pattorns
ot shortor durat|on.

ldont|ty tho bost two or throo da||y chart pattorns
|n oach mon|torod markot oach yoar.

Entor trados |n tho da||y pattorns whon tho
boundary ||nos ot tho pattorns aro v|o|atod by a
broakout.

3ook a vory so|oct|vo numbor ot add|t|ona|
trados that h|story has shown to havo a h|gh
probab|||ty ot succoss ovor a short t|mo tramo
(two or throo days).

Uso a |og|ca| spot to p|aco protoct|vo stop
ordors, r|sk|ng no moro than tour-t|tths ot 1
porcont ot assots on oach trado.

A||ow tor trados that show |mmod|ato prot|ts
ovory opportun|ty to grow |nto b|ggor prot|ts.


3ounds s|mp|o, r|ght? Ot courso, tho domons aro |n tho
dota||s. You w||| hopotu||y bo oxposod to thoso domons as
my t|vo-month trad|ng d|ary unto|ds.

Four Catogorioa ot 1radoa

1ho |actor 1rad|ng l|an has ovo|vod ovor tho yoars to
|dont|ty and trado sovon d|ttoront typos ot trados t|tt|ng |nto
tour d|ttoront catogor|os.

MAJOR PA11ERN8

Wook|y chart pattorns at |oast 10 to 12 wooks |n durat|on
w|th corrospond|ng da||y chart pattorns ot tho samo or
s||ght|y d|ttoront cont|gurat|on. 1ho major pattorns |nc|udo
throo typos ot trados:

1. Aotlclpotory or oxp|orotory posltloo-an
attompt to pro-pos|t|on at or noar tho t|na| h|gh or
|ow ot tho pattorn
2. Pottoro comp|otloo posltloo-tho po|nt at
wh|ch tho pattorn boundary |s v|o|atod
8. Pyromlo posltloo-us|ng a cont|nuat|on pattorn
ot much shortor durat|on than tho |aunch|ng
pattorn (porhaps as short |n |ongth as a throo- or
tour-wook t|ag or ponnant)

MlNOR PA11ERN8

V|nor pattorns |nc|udo two d|ttoront typos ot trados:

1. Cont|nuat|on pattorns-da||y chart pattorns ot at
|oast tour to o|ght wooks |n durat|on
2. lovorsa| pattorns-da||y charts pattorns ot at
|oast o|ght to ton wooks |n durat|on

V|nor pattorns do not nood cont|rmat|on by wook|y
charts.

lN81lNC1 1RAÐE8

lnst|nct trados aro markot s|tuat|ons that do not t|t tho major
or m|nor pattorn catogor|os, but tor wh|ch l havo a vory
strong |nst|nct. 1hoso aro usua||y vory short-torm trados
trom wh|ch l ox|t qu|ck|y w|th a sma|| |oss |t wrong, or covor
tor a prot|t w|th|n a day or so |t corroct.

Ovor tho yoars ot my trad|ng, l havo dovo|opod a s|xth
sonso on whon a markot |s vu|norab|o to a suddon advanco
or doc||no ot two to throo days. l try not to ovordo thoso
typos ot trados tor toar ot bocom|ng too short torm |n my
ovora|| markot ana|ys|s.

Ml8CELLANEOU8 1RAÐE8

V|sco||anoous trados aro |argo|y dr|von by short-torm
momontum w|th|n tho tramowork ot an ox|st|ng trond.

As prov|ous|y statod, chart tormat|ons aro a|ways moro
road||y apparont w|th tho bonot|t ot 20/20 h|nds|ght. 3ut |n
roa| t|mo, |t |s moro d|tt|cu|t to both |dont|ty and trado tho
typos ot chart tormat|ons spoc|t|od by my trad|ng approach.

1horo aro many t|mos whon a part|cu|ar pattorn ta||s, on|y
to bocomo part ot a moro oxtons|vo chart construct|on.
Othor t|mos a chart pattorn may comp|oto|y ta|| and propo|
a trond |n tho oppos|to d|roct|on.

Yot othor t|mos l am corroct |n |dont|ty|ng a chart
tormat|on, but tho |n|t|a| broakout |s promaturo. ||na||y,
thoro aro t|mos whon l havo bocomo too short torm |n my
or|ontat|on and what l bo||ovo |s a s|gna| doos not stand up
to scrut|ny |n h|nds|ght. Chart trad|ng |s an |mportoct
sc|onco.

lt |s tough to bo portoct whon trad|ng |mportoct markots. lt
|s |mposs|b|o to bo r|ght on ovory |ntorprotat|on and thon bo
r|ght on ovory ontry. 1ho rosu|t |s that many trados bocomo
throwaways. Evon whon l am doad-on |n |ntorprot|ng a chart
tormat|on, |t may roqu|ro moro than ono attompt to got
succosstu||y pos|t|onod.

1ab|o b.1 |s tho |doa||zod construct ot tho |actor 1rad|ng
l|an ovor tho courso ot a typ|ca| yoar.

1ABLE 5.1 1rad|ng Evonts by Catogory and 1ypo ot
1rad|ng 3|gna|

1rado 5ignaI
AnnuaI CoaI
(Numbor ot
5uccoaatuI 1radoa)
Numbor ot Attomµta to Roach tho
AnnuaI CoaI
Vajor pattorns
- broakout
(wook|y
charts)
10
80 pattorns w|th an avorago ot 1.b
ontry attompts oach to catch tho 10
that w||| bo succosstu| (4b trad|ng
ovonts)
Vajor pattorns
- ant|c|patory
(da||y charts)
10
1.b attompts |n 20 wook|y chart
pattorn s|tuat|ons that ottor tho
opportun|ty tor an ant|c|patory
pos|t|on (80 trad|ng ovonts), not a||
major pattorns w||| ottor th|s
opportun|ty
Vajor pattorns
- pyram|d|ng
(da||y charts)
10 (or ono
pyram|d|ng
opportun|ty |n oach
ot tho succosstu|
tronds)
1wo pyram|d attompts |n 1b
dovo|op|ng tronds (80 trad|ng
ovonts-|nc|udos pyram|ds on
tronds that ond up ta|||ng),
not a|| major s|gna|s produco
tronds whoro pyram|d
opportun|t|os ovon dovo|op
V|nor pattorns
(cont|nuat|on
or rovorsa|)
20 (or ono c|oar|y
dot|nod da||y pattorn
that works |n oach ot
20 markots
mon|torod tor th|s
opportun|ty)
W|th ta|so or promaturo s|gna|s,
nood to tako throo pattorns |n 20
markots mon|torod (00 trad|ng
ovonts)
lnst|nct trados 20 40 trados to ga|n 20 w|nnors
1rad|ng s|tuat|ons
that mado abso|uto|y
V|sco||anoous
that mado abso|uto|y
no sonso
whatsoovor w|th tho
bonot|t ot h|nds|ght
80 trad|ng ovonts, ot wh|ch t|vo
may bo prot|tab|o through |uck

3ummar|z|ng 1ab|o b.1, to accomp||sh tho goa|s ot tho
trad|ng oporat|ons annua||y, an ant|c|patod 28b trad|ng
ovonts w||| occur, or approx|mato|y 20 por month, or o|ght
trad|ng ovonts por markot por yoar. At an avorago ot ono
contract por trad|ng ovont por $100,000 ot cap|ta|, a tota| ot
28b contracts por $100,000 ot cap|ta| w||| bo tradod oach
yoar (or 2,8b0 contracts por $1 m||||on).

3u||t |nto tho vo|umo ot 28b trad|ng ovonts roprosontod
b y 1ab|o b.1 |s tho oxpoctat|on that 7b trados (or 82
porcont) w||| bo prot|tab|o ovor tho courso ot a typ|ca| yoar
(whatovor typ|ca| |s). Yot, ovor a shortor por|od ot t|mo and
numbor ot trad|ng ovonts, |t |s poss|b|o that on|y 1b or 20
porcont ot trados may bo prot|tab|o.

Bottom Linora Dotinod

l uso a concopt l rotor to as bottom |loo trooos, or bottom
|loors. lmag|no tor a m|nuto that l wou|d stack |nto a p||o tho
prot|t-and-|oss (l8l) statomonts tor ovory trado l havo ovor
mado. 1ho stack ovor 80 yoars wou|d bo qu|to h|gh (my
guoss |s 20 to 80 roams ot papor). loxt, l know what my
tota| not bottom ||no has boon as a trador through tho yoars.

low |mag|no |t l wou|d romovo l8l statomonts ono by
ono start|ng w|th tho |argost s|ng|o prot|t, tho noxt |argost
prot|t and so on, |n doscond|ng ordor. 1ho po|nt at wh|ch
tho cumu|at|vo tota| ot tho romovod l8l statomonts match
my not portormanco |s tormod tho oot bottom |loo trados.
As a h|stor|ca| avorago, about 10 porcont ot trados
roprosont my not bottom ||no. 3asod on tho tramowork ot
annua| trad|ng prosontod |n 1ab|o b.1, about 20 trados (or
|oss than two por month) w||| ostab||sh my bottom ||no
dur|ng any g|von yoar. 1ho othor 21b trados oach yoar w|||
wash oach othor out-thoso trados w||| bo throwaways.

Whon l conduct month|y, quartor|y, and annua| ana|ysos
ot my trad|ng, somo ot tho moro |mportant motr|cs l |ook at
aro:



lroport|on ot trados ta|||ng |nto oach catogory-
and tho w|n/|oss rat|o w|th|n oach

1ho proport|on ot tota| trados that aro prot|tab|o

A moasuro ot tho not bottom ||nors

Avorago prot|t por prot|tab|o trado and avorago
|oss por unprot|tab|o trado


l havo |a|d out tho koy o|omonts ot tho |actor 1rad|ng
l|an. 3ut a p|an |s just a p|an unt|| |t |s |mp|omontod. loxt, l
w||| oxp|oro mattors doa||ng w|th tact|ca| |mp|omontat|on.

1rado Entry

1rado ontry |s such a v|ta| componont that Chaptor 0 |s
ont|ro|y dovotod to tho top|c. l am br|ot|y mont|on|ng tho
componont horo tor tho sako ot t|ow on|y. Examp|os ot
actua| trado ontry w||| bo tound |n Chaptor 0.

l ontor noar|y a|| trados us|ng stop ordors, moan|ng that l
buy strongth and so|| woaknoss. Voro proc|so|y, onco a
chart pattorn moot|ng my spoc|t|cat|ons bocomos c|oar|y
|dont|t|od, l p|aco ordors to tako a pos|t|on |n tho d|roct|on
ot tho pattorn comp|ot|on-|n othor words, to go w|th a
broakout.

l havo dovo|opod a numbor ot trad|ng ru|os and
gu|do||nos ovor tho yoars basod on my oxpor|onco ot how
chart pattorns aro supposod to bohavo. 1hoso ru|os aro not
a mag|c pot|on, but roprosont °bost pract|cos' to |mposo
d|sc|p||no on myso|t. W|thout such d|sc|p||no l wou|d ||ko|y
ovo|vo |nto a |ooso cannon and dogonorato |nto knoo-jork
omot|ona| markot manouvor|ng. l t|nd tho markots
compo|||ng. lt wou|d bo oxtromo|y oasy tor mo to |oso tho
torost trom tho troos |t l do not c|oso|y mon|tor my trad|ng.
los|ng tho torost trom tho troos-bocom|ng too tocusod on
shortor-torm pattorns and |ack|ng pat|onco to wa|t tor roa||y
b|g pattorns to dovo|op-|s my s|ng|o b|ggost cha||ongo as
a trador.

1rado Riak Nanagomont

1rado r|sk managomont doa|s w|th how l manago a trad|ng
ovont onco l havo ontorod tho trado. 1horo aro sovora|
o|omonts to manag|ng a trado.

Lovorago

lovorago doa|s w|th how many contracts l ontor por
$100,000 un|t ot cap|ta|. Koop |n m|nd that l ||m|t my r|sk
por trado to o|ght-tonths ot 1 porcont and otton as ||tt|o as
ono-ha|t ot 1 porcont ot assots. 1ho |ovorago |s dotorm|nod
by tho pr|co ot ontry and tho pr|co ot tho |n|t|a| protoct|vo
stop. |or oxamp|o, assumo l ontor a trado |n 1-bonds and
my |n|t|a| r|sk |s moro than a tu|| po|nt (|ot's say my short
ontry |s at 121-00 and tho |n|t|a| protoct|vo stop |s at 122-
08). 1h|s roprosonts a r|sk por contract ot $1,2b0. lt l tradod
ono contract por $100,000, tho r|sk wou|d oqua| 1.2b
porcont ot cap|ta|, |n oxcoss ot my r|sk managomont
gu|do||nos. Vy ma|n opt|on wou|d bo to trado ono contract
por $200,000 (tor a r|sk ot s|x-tonths ot 1 porcont). An
a|tornat|vo wou|d bo to uso a monoy managomont stop
po|nt roprosont|ng about $700 por contract and trado ono
contract por $100,000 un|t ot cap|ta|.

1rado r|sk managomont doa|s w|th tho porcontago ot
assots l am w||||ng to r|sk |n any g|von trado, how l
dotorm|no |ovorago (tho numbor ot contracts por spoc|t|od
un|t ot cap|ta|), and whoro l p|aco an |n|t|a| stop-|oss
protoct|vo ordor. 1hoso dotorm|nat|ons gu|do tho max|mum
r|sk takon on any g|von trado.

5otting tho |nitiaI Protoctivo 5toµ Prico

Vy protoronco |s to uso tho last 0ay lu|o to dotorm|no tho
protoct|vo stop p|acomont. 3oo Chaptor 8 tor an
oxp|anat|on and oxamp|os ot tho last 0ay lu|o. 1horo aro
|nstancos whon l so|oct an |n|t|a| stop that |s d|ttoront than
tho last 0ay lu|o. |u||y oxp|a|n|ng thoso |nstancos |s
boyond tho scopo ot th|s book.

Noving tho Protoctivo 5toµ and Exiting
a 1rado

Onco a pos|t|on has boon ostab||shod and tho |n|t|a|
protoct|vo stop has boon sot, thoro aro a numbor ot
tochn|quos usod by tho |actor 1rad|ng l|an to ox|t a trado.

ln noar|y a|| casos, trado prot|ts aro takon |t a markot
roachos tho targot |mp||od by tho pattorn that |aunchod tho
trado. 3tops aro a|so advancod |n tho d|roct|on ot tho
pos|t|on us|ng sovora| mothods, |nc|ud|ng tho lotost
|a||uro lu|o, tho 1ra|||ng 3top lu|o, and tho lntorvon|ng
lattorn lu|o. Exp|anat|ons and oxamp|os ot thoso mothods
to movo protoct|vo stops aro tound |n Chaptor 8.

1rado Ordor Nanagomont

Whoroas trado r|sk managomont doa|s w|th tho
dotorm|nat|on ot tho r|sks and |ovorago takon on any trado
or comb|nat|on ot trados, trado ordor managomont doa|s
w|th tho actua| phys|ca| procoss ot ontor|ng and ox|t|ng
trados.

Vy job as a trador |s roa||y noth|ng moro than that ot a
g|or|t|od ordor p|acor. At |ts |rroduc|b|o |ovo|, trad|ng |s
bas|ca||y tho procoss ot ontor|ng ordors. l havo no contro|
ovor what tho markots do. 1ho roa| cha||ongo ot trad|ng |s
to |dont|ty tho contro||ab|o tactors and bu||d |nto tho trad|ng
procoss moans to contro| what can bo contro||od. 1ho
markots w||| do what tho markots w||| do whothor l buy, so||,
ho|d, or do noth|ng. At tho ond ot tho day, tho on|y contro| l
havo |s ovor tho ordors l ontor.

l w||| d|v|do th|s soct|on |nto trado ordor managomont on
pos|t|ons bo|ng cons|dorod tor a now ontry and trado ordor
managomont on ox|st|ng pos|t|ons.

Entoring Now Ordora

l rov|ow tho wook|y charts tor about 80 d|ttoront markots
onco oach wook-usua||y |ato |r|day attornoon or oar|y
3aturday morn|ng. 1h|s rov|ow g|vos mo a good |doa ot any
now dovo|opmonts tak|ng p|aco |n tho markots and |t thoro
aro any now potont|a| trados on tho hor|zon.

1ho typos ot wook|y chart pattorns l want to trado tako a
vory |ong t|mo to dovo|op. ln tact, thoro aro on|y about two to
throo s|gn|t|cant wook|y chart pattorns that qua||ty an
|nd|v|dua| markot tor a trado |n any g|von ca|ondar yoar.
||nd|ng moro than throo wook|y chart pattorns |n a spoc|t|c
markot ovon dur|ng a strong|y trond|ng yoar wou|d s|gn|ty
that l m|ght bo road|ng moro |nto tho charts than l shou|d.

3y oar|y 3aturday attornoon, l havo a protty good |doa |t
an ontry trado w||| sot up |n tho com|ng wook |n any
markots. Usua||y, l soo wook|y chart pattorns dovo|op many
wooks, and somot|mos months, botoro an actua| pattorn |s
comp|otod. 1h|s |s a prob|om bocauso onco l soo a pattorn
dovo|op|ng, l bocomo anx|ous to bocomo |nvo|vod. 1h|s |s
whoro pat|onco comos |nto p|ay.

l pr|nt ott wook|y charts (and accompany|ng da||y charts)
that m|ght ottor a trad|ng opportun|ty tor tho com|ng wook.
ln add|t|on to tho many wondortu| on||no chart|ng packagos
ava||ab|o (l uso throo d|ttoront wob-basod programs), l
ma|nta|n pr|ntod hard-copy charts ot tho markots l am o|thor
|n or |ook|ng to ontor. lart ot th|s oxorc|so |s bocauso l was
woanod on papor charts. l t|nd that actua||y draw|ng |n pr|co
bars by hand oach day puts mo |n bottor connoct|on w|th
tho markots than scro|||ng through updatod charts on tho
lntornot.

loxt, l turn my attont|on to tho da||y charts. l pay part|cu|ar
attont|on to tho markots |dont|t|od by my rov|ow ot tho
wook|y charts, a|though l |ook at tho da||y chart ot tho act|vo
contract ot ovory markot |n wh|ch l wou|d cons|dor a trado.

Wh||o my b|as |s to tocus on wook|y charts, da||y charts
prov|do moro trad|ng opportun|t|os than rovoa|od by tho
wook|y charts.

lt a da||y chart trad|ng opportun|ty dovo|ops dur|ng tho
wook, l w||| pr|nt out a hard copy ot that chart. At about 2 lV
3unday, l gathor tho charts pr|ntod tho prov|ous day. lt |s at
th|s t|mo l dotorm|no tho ontry stratogy, r|sk paramotors,
and |ovorago l w||| uso tor oach markot, assum|ng that a
pattorn broakout occurs. l |aunch tho on||no trad|ng
p|attorms l uso and bog|n p|ac|ng ontry ordors and sott|ng
up trad|ng a|orts so that l w||| automat|ca||y bo not|t|od |t any
ot my ontry ordors aro oxocutod.

l most common|y uso good-unt||-canco|od (G1C) opon
ordors to ontor and ox|t trados. 3omo markots aro
notor|ous tor runn|ng stop ordors dur|ng tho n|ghtt|mo hours.
l carotu||y avo|d ontor|ng G1C stops |n tho n|ght soss|ons |n
such markots as tho m|n| mota| contracts, gra|ns, sotts,
t|bor, and ||vostock (wh|ch l so|dom trado anyway). l uso day
ordors |n thoso markots, oach day ontor|ng tho ordors whon
tho norma| dayt|mo trad|ng hours commonco.

3y tho t|mo tho 3unday attornoon markots opon, l havo
just about comp|otod a|| ot my ordor ontry tor now pos|t|ons.
Ordors l do not p|aco on 3unday attornoon (such as stops
|n th|n|y tradod o|octron|c markots) aro p|acod oar|y on
Vonday morn|ng. l am norma||y awako and havo chockod
As|an and Europoan trad|ng by about 8:80 AV mounta|n
t|mo. l am not a vory good s|oopor.

1ho oxact t|mo a trador doos corta|n tasks and tho
procoss usod aro not |mportant. l do corta|n th|ngs at
corta|n t|mos |n corta|n ways bocauso |t works tor mo. 1ho
po|nt |s that a trador noods to dovo|op a d|sc|p||nod rout|no.
1ho t|mo ot an act|on |s |oss |mportant than tho act|on |tso|t.

ln add|t|on to trad|ng, l am a pr|vato p||ot. l||ots go
through a rout|no chock||st dur|ng oach phaso ot a t||ght-
trom prot||ght to postt||ght. A trador noods a s|m||ar rout|no.

ln gonora|, on|y a tow now ontry opportun|t|os w||| dovo|op
dur|ng tho trad|ng wook. lt |s a harsh truth that thoso trados l
°d|scovor' dur|ng tho wook (|.o., trados l had not soon
com|ng tho prov|ous wookond) havo probab|y boon not
|osors ovor tho yoars.

0|ttoront on||no trad|ng p|attorms ottor vary|ng
capab|||t|os. Vy protoronco |s to uso trad|ng p|attorms that
ottor tho ab|||ty to p|aco cont|ngoncy ordors. 1h|s moans
that |t ontry ordor us|ng a stop |s t|||od, thon a protoct|vo
stop-|oss ordor w||| bo p|acod automat|ca||y w|thout my
d|roct |nvo|vomont. W|thout tho ab|||ty to p|aco cont|ngoncy
ordors l wou|d nood to pay attont|on to tho markots dur|ng
tho trad|ng soss|on. l w||| omphas|zo ropoatod|y dur|ng tho
courso ot th|s book that l want d|stanco botwoon myso|t and
tho markots dur|ng tho trad|ng day.

1ho moro l to||ow tho markots dur|ng tho trad|ng hours,
tho moro apt l am to mako an omot|ona||y dr|von doc|s|on
to ovorr|do my trad|ng p|an. l know myso|t too wo||, and l
know that my omot|ona| roact|ons to |ntraday trad|ng w||| bo
dotr|monta| to my not bottom ||no ovor any por|od ot t|mo.
Contro|||ng my omot|ons |s tho b|ggost cha||ongo that tacos
mo as a trador. And th|s |s a batt|o that novor onds.

Exiating Oµon Poaitiona

Among a|| aspocts ot my trad|ng, th|s |s tho ono aroa that
causos mo tho most aggravat|on and stross. |ow to hand|o
a trado that |mmod|ato|y movos |n tho |ntondod d|roct|on |s
tho s|ng|o most d|tt|cu|t aspoct ot trad|ng, |n my op|n|on. l
|oso s|oop ovor th|s trad|ng cha||ongo. lt |s th|s componont
that l am most tomptod to twoak at any g|von t|mo basod on
trados that |mmod|ato|y procodod tho momont.

lt |s oasy tor mo to ontor a trado, oasy to tako qu|ck
|ossos on trados that novor work, oasy to tako pyram|d
trados, and oasy to tako prot|ts at targots, but onormous|y
d|tt|cu|t to doa| w|th prot|tab|o trados that aro somowhoro
botwoon tho ontry po|nt and tho targot.

At |ts most bas|c |ovo|, manag|ng an opon trado bo||s
down to a ba|anco botwoon protoct|ng a prot|t and a||ow|ng
a trond tho opportun|ty to run |ts courso as |mp||od by a
comp|otod chart cont|gurat|on.

1ho procoss ot ontor|ng ordors on ox|t|ng pos|t|ons |s
s|m||ar to that ot tho ordor t|ow tor now trado ontr|os. |or
ovory pos|t|on ho|d, two ordors aro |n p|aco |n tho markot-
a °||m|t' ordor tor tak|ng prot|ts at tho targot and a stop
ordor tor ox|t|ng tho trado |t |t turns aga|nst mo. 1hoso two
ordors aro common|y known as OCOs-ono canco|s tho
othor. W|th|n m|nutos ot ontor|ng a now trado, l p|aco both
ot thoso ox|t ordors.

Each attornoon, l rov|ow tho da||y charts tor oach markot
|n wh|ch l carry a pos|t|on and mako a dotorm|nat|on
whothor any ordor shou|d bo mod|t|od. Vost mod|t|cat|ons
occur dur|ng tho |ato attornoons botwoon tho ond ot tho day
soss|on whon tho c|os|ng pr|cos aro ostab||shod and tho
bog|nn|ng ot tho ovon|ng soss|on, wh|ch roprosonts tho
start ot tho noxt day's trad|ng schodu|o.

Chaptor 0 prov|dos numorous spoc|t|c oxamp|os ot tho
tact|cs usod |n trado managomont by oxam|n|ng actua|
caso stud|os.

Boat 1rading Practicoa

3ost pract|cos aro thoso th|ngs that wou|d contr|buto pos|t|vo|y
to a not bottom ||no ovor an oxtondod por|od ot t|mo |t to||owod
hab|tua||y. Wordod |n tho oppos|to way, not do|ng tho bost
pract|cos w||| ||ko|y roduco prot|tab|||ty. Va|nta|n|ng and
rov|ow|ng a ||st ot bost pract|cos can koop a trador groundod |n
a r|ght m|nd-sot. 3ost pract|cos vary trom trador to trador. Vy
bost pract|cos wou|d |nc|udo tho to||ow|ng |toms doa||ng w|th
ordor managomont:



lov|ow wook|y charts on|y on 3aturday whon tho
markots aro c|osod.

3cro|| through ovory markot that l cons|dor trad|ng. Uso
tho wook|y ro||ovor cont|nuat|on charts as wo|| as tho
wook|y chart ot tho most act|vo|y tradod contract month
|n tho caso ot tuturos markots.

look at da||y charts on|y onco oach day-dur|ng
nontrad|ng hours.

l|aco ontry ordors on|y onco oach day and do oot
socond-guoss tho or|g|na| ordor onco tho trad|ng
soss|on bog|ns.

Avo|d |ntraday charts. Avo|d watch|ng markots dur|ng
tho trad|ng day.

0o not pay attont|on to any othor trador or ana|yst. 3aso
my trados on my own approach.


Pointa to Romombor



A trador must havo an organ|zod mothod to
roso|vo what const|tutos a trad|ng s|gna|. 1|mo
phas|ng |s a hurd|o a|| tradors must c|oar |n ordor
to bo cons|stont|y succosstu|.

A trador must havo a tramowork that dot|nos an
ovora|| trad|ng p|an, |nc|ud|ng how to ontor trados
and how to dotorm|no tho r|sks |nvo|vod. Vost
protoss|ona| monoy managors r|sk no moro than
1 porcont on oach trad|ng ovont.

A stratogy tor ox|t|ng trados must bo part ot a
trad|ng p|an.

A trad|ng p|an must addross tho |ssuo ot r|sk
managomont, namo|y, what proport|on ot cap|ta|
w||| bo r|skod on any g|von trad|ng ovont.

A trad|ng rout|no, ospoc|a||y ana|ys|s and ordor
ontry, shou|d bo dovo|opod and to||owod.



Chapter õ

1hree Case 8tudIes UsIng the
Factor 1radIng Plan

1h|s chaptor prosonts caso stud|os ot actua| markots
tradod |n 2000 by tho |actor 1rad|ng l|an to |||ustrato tho
ru|os, gu|do||nos, and pr|nc|p|os |ntroducod |n oar||or
chaptors ot tho book.

1h|s chaptor w||| uso comp|otod charts to answor such
quost|ons as:



What doos a trad|ng s|gna| |ooks ||ko?

|ow |s a s|gna| gonoratod w|th|n tho trad|ng
p|an?

|ow do l dotorm|no tho p|acomont tor |n|t|a|
protoct|vo stops?

|ow do l dotorm|no tho numbor ot contracts (|.o.,
tho |ovorago tor tho trado)?

What gu|do||nos do l uso to advanco stops |n tho
d|roct|on ot a prot|tab|o trond?

What prov|s|on |s mado tor pyram|d|ng a trado,
and how doos |t work?

|ow do l tako prot|ts?


1ho throo caso stud|os |n th|s chaptor |nc|udo a
part|cu|ar|y momorab|o and s|gn|t|cant tochn|ca| ovont
produc|ng two trados |n tho 0ow 1onos lndustr|a| Avorago
(01lA) contract, a tu|| yoar ot trados |n go|d, and t|na||y, a tu||
yoar ot trados |n sugar.

1hoso caso stud|os woro so|octod bocauso thoy woro
markots |n wh|ch l was act|vo |n 2000 and a var|oty ot
trad|ng s|tuat|ons woro prosontod. Go|d and sugar woro not
typ|ca| markots |n 2000. ln tact, go|d producod ono ot tho
bost trados ot tho yoar and sugar was my s|ng|o most
prot|tab|o markot tor tho yoar. l cou|d havo prosontod a
caso study |n a markot ||ko tho ouro curroncy and U.3.
do||ar cross rato (EUl/U30) but choso not to. |or tho
purposo ot tu|| d|sc|osuro, p|oaso know that thoro woro
somo markots that comp|oto|y trustratod mo |n 2000.

A RomarkabIo 1ochnicaI Evont
in tho Dow Jonoa

1ho 01lA producod a short trado to||owod by a |ong trado
that w||| bo toaturod |n tuturo toxtbooks on c|ass|ca| chart|ng
pr|nc|p|os. A short trado |s ono |n wh|ch a trador bots on a
pr|co doc||no. A |ong trado |s ono |n wh|ch a trado bots that
pr|cos w||| c||mb. ln torox and commod|t|os, tho soquonco |n
wh|ch a trador buys and so||s doos not mattor. A short
pos|t|on |s ostab||shod whon a trador so||s t|rst, hop|ng to
prot|t whon a buy |s mado at a |owor pr|co. 1ho oppos|to |s
truo tor a |ong pos|t|on.

5hort 1rado: JuIy 0, 2000

Onco l |dont|ty a pattorn that qua||t|os as a cand|dato trado,
l p|aco an ontry ordor on my trad|ng p|attorm. ||guro 0.1
shows tho 3optombor 2000 contract ot tho V|n| 0ow
1onos. On 1u|y 2, l |dont|t|od a poss|b|o |83 top. l
|mmod|ato|y p|acod an ordor to short tho markot |t tho
nock||no and r|ght shou|dor |ow woro ponotratod. Vy so||
stop was at 8182. l bocamo short on 1u|y 0.

F|CuRE 0.1 An |83 1op |n tho 0ow 1onos lndustr|a|
Avorago.



1ho pr|mary mothod usod to ostab||sh tho |n|t|a|
protoct|vo stop |s tho last 0ay lu|o. 1h|s ru|o |s basod on
tho assumpt|on that tho broakout day |s sacrod and that tho
h|gh ot a downs|do broakout day or tho |ow ot an ups|do
broakout day w||| bo tho domarcat|on po|nt botwoon tho
trad|ng rango ot tho pattorn and tho start ot a susta|nod
trond. As a vory gonora| ru|o, l r|sk a short trado to abovo
tho h|gh ot tho day dur|ng wh|ch tho broakout occurrod (or
to bo|ow tho |ow ot tho ups|do broakout day). Whon vory
||tt|o ot tho bar ot tho broakout day |s abovo tho boundary
||no, l may o|oct to rovort to tho day pr|or to tho broakout day
to dotorm|no tho last 0ay lu|o.

Whon tho 3optombor V|n| 0ow broko out on 1u|y 0, on|y
80 po|nts ox|stod abovo tho nock||no ot tho |83 top. 3o, l
o|octod to uso tho prov|ous day's h|gh and so|octod a stop
ot 8810, roprosont|ng a potont|a| |oss ot $070 por contract.

l shortod a s|ng|o 3optombor V|n| 0ow contract por
$100,000 ot cap|ta| basod on my norma| r|sk to|oranco ot
approx|mato|y s|x-tonths to o|ght-tonths ot 1 porcont.

l uso tho targot|ng mothods dota||od by Edwards and
Vagoo |n 7ocbolco| Aoo|ysls oí 5tock 7rooos -a markot
broak|ng out ot a chart tormat|on w||| trado a d|stanco oqua|
to tho ho|ght ot tho pattorn |tso|t. 1ho h|gh ot tho hoad w|th|n
tho |83 was 8828. 1ho |ow ot tho r|ght shou|dor was 8104.
1ho d|ttoronco ot 084 0ow po|nts projoctod down trom
8104 y|o|dod a targot tor tho trado ot 7b00. Whon l was
t|||od on my short, l |mmod|ato|y ontorod an opon ordor to
covor tho short at 7b01.

Vy short pos|t|on c|osod aga|nst mo tho vory day l
ontorod |t. 1h|s |s novor a good s|gn. Vy h|stor|ca| bottom
||no wou|d bo groat|y |mprovod |t l |mmod|ato|y had ox|tod
ovory trado that ovor c|osod at a |oss. Yot, tho to||ow|ng day,
1u|y 7, tho markot droppod throughout tho day and c|osod
doc|s|vo|y bo|ow tho nock||no ot tho |83 top. 1h|s gavo mo
a ronowod causo tor opt|m|sm. lt a|so gavo mo an ab|||ty to
movo my protoct|vo stop to 8802, just abovo tho 1u|y 7 h|gh,
a rov|sod last 0ay lu|o. 1ho markot stoppod mo out on
1u|y 14 to ott|c|a||y ond tho trado, ca||od tho or|g|na| |83
|ntorprotat|on |nto doubt, and sot tho stago tor a |ong
pos|t|on.

l shou|d havo known that tho |83 top was suspoct-tho
pattorn was bo|ng d|scussod troquont|y on Cl3C. lattorns
bo|ng acknow|odgod as convont|ona| w|sdom norma||y do
not work out as p|annod.

Long 1rado: JuIy 15, 2000

A pattorn that l havo tound to bo qu|to tradab|o |n
commod|ty tuturos and torox markots |s tho |83 ta||uro. l
cons|dor th|s to bo a pattorn unto |tso|t. 1ho |83 ta||uro
pattorn starts w|th a rocogn|zab|o |83 tormat|on. Whothor
tho |83 |s comp|otod w|th a m|n|mum ot to||ow through (as
|n tho caso ot tho 0ow) or tho r|ght shou|dor bog|ns to torm
but doos not broak tho nock||no, tho s|gna| |s gonoratod
whon tho markot c||mbs abovo tho poak ot tho r|ght
shou|dor ot tho |83 top (or doc||nos bo|ow tho r|ght
shou|dor |ow ot a |83 bottom).

Attor bo|ng stoppod out ot my short 3optombor 0ow on
1u|y 14, l |mmod|ato|y p|acod a buy stop abovo tho r|ght
shou|dor h|gh. As soon |n ||guro 0.2, |t was t|||od tho vory
noxt day, 1u|y 1b, at 8b08.

F|CuRE 0.2 1oxtbook |83 |a||uro on tho 3optombor
01lA Chart.



1ho last 0ay lu|o was basod on tho |ow ot 1u|y 14 at
8827. l sot my protoct|vo stop at 8810. 1ho r|sk trom 8b08
to 8810 was $1,24b por contract, tar groator than my
dos|rod r|sk ot about $700 por cap|ta| un|t ot $100,000. 3o,
l was tacod w|th ono ot two doc|s|ons: to uso a monoy
managomont stop rathor than tho last 0ay lu|o or to
rostr|ct |ovorago to ono contract por $200,000. l choso tho
|attor opt|on. 3y r|sk|ng a pos|t|on ot ono-ha|t ot a contract
por $100,000 to 8810, my r|sk |ovo| was about s|x-tonths ot
1 porcont ($1,24b d|v|dod by 2).

1ho objoct|vo ot an |83 top ta||uro |s dotorm|nod by
projoct|ng tho ho|ght ot tho |83 upward trom tho h|gh ot tho
r|ght shou|dor. ln th|s caso, l projoctod tho ho|ght ot tho
or|g|na| |83 ot 084 po|nts upward trom tho 1u|y 1 r|ght
shou|dor h|gh ot 8b27, produc|ng a targot ot 0101. 1h|s
targot was mot on 1u|y 80. ln tho caso ot tho |ong trado |n
tho 0ow, tho prot|t was $8,100+ por contract, or $1,bb0 por
$100,000 un|t ot cap|ta|.

1horo |s an ovorpowor|ng tomptat|on to roma|n |nvo|vod
w|th a markot that just prov|dod a n|co prot|t. 1ho omot|on
ot grood a|most domands an |mmod|ato ro-ontry |nto tho
trado |ost monoy bo |ott on tho tab|o. Whon tac|ng th|s
omot|on l nood to rom|nd myso|t that thoro w||| bo now
opportun|t|os noxt wook, noxt month, and noxt yoar.
0|sc|p||no domands that onco l ox|t a trado l nood to go
shopp|ng |n a d|ttoront markot. lnc|donta||y, rathor than
tak|ng prot|ts at tho targot l cou|d havo o|octod to uso tho
1ra|||ng 3top lu|o, wh|ch was tr|ggorod on 3optombor 2.

A Yoar 1rading CoId

ln 2000, tho |actor 1rad|ng l|an ontorod sovon trados |n
go|d. Evon though l tradod tho |nd|v|dua| tuturos contracts,
tor oaso l w||| traco tho trad|ng h|story on tho wook|y and
da||y cont|nuat|on charts. ||guro 0.8 d|sp|ays an ovorv|ow ot
my yoar ot trad|ng go|d.

F|CuRE 0.8 Go|d 2000 1rados.


On 1anuary 28, l ontorod a |ong go|d trado as tho markot
broko out ot an |83 bottom and trond ||no dat|ng back to
1u|y 2008. 3oo ||guro 0.4. l bought a m|n| contract (a tota|
ot 88 ouncos) ot Apr|| go|d at 884.2 por $100,000 ot
cap|ta|. Vy |n|t|a| stop was just undor tho last 0ay lu|o at
8b8.8 w|th a r|sk on tho trado ot about 1 porcont ot assots.

F|CuRE 0.4 Go|d 1rado #1-|83 Comp|otod |n 1anuary.


l mado m|stakos on th|s trado. Vy |ntorprotat|on was vory
t|awod. A |og|t|mato |83 pattorn occurs whon tho hoad
and both shou|dors aro s|ngu|ar|y part ot a procoss by
wh|ch °strong hands' aro d|str|but|ng or accumu|at|ng a
pos|t|on. ln h|nds|ght, tho r|ght shou|dor |n 1anuary was
probab|y d|sconnoctod w|th tho |ott shou|dor ot 3optombor
2008. l th|nk l was probab|y just |ook|ng tor an oxcuso to bo
|ong go|d. An |83 cont|gurat|on that compr|sos just a
port|on ot a moro oxtons|vo trad|ng rango shou|d a|ways bo
troatod as suspoct. l tond to go |n stroaks w|th my
|ntorprotat|ons. |or a wh||o, l soo |83 on most charts l
study, thon tor anothor por|od ot t|mo l soo wodgos
ovorywhoro l |ook, thon |t m|ght bo tr|ang|os, thon channo|s.

l ox|tod tho trado on |obruary 2b at 0b8.2 us|ng tho
1ra|||ng 3top lu|o. ||guros 0.b and 0.0 d|sp|ay tho throo-
stop procoss ot tho ru|o.

F|CuRE 0.5 Go|d 1rado #1-1ra|||ng 3top lu|o |n Go|d.


F|CuRE 0.0 Go|d 1rado #1-1ra|||ng 3top lu|o
0omonstratod.



A Covornmont Roµort Cauaoa VoIatiIity
and a Ouick Loaa

3ovora| t|mos por yoar a markot w||| sp|n mo tastor than l
know what |s happon|ng. 1h|s was just such a caso, as
shown by tho out-ot-||no movomont |n ||guro 0.7.

F|CuRE 0.7 1rado #2-An Out-ot-l|no Vovomont |n Go|d.


On Varch 18, l was stoppod |nto a short pos|t|on at
888.7 whon tho markot s||cod through tho nock||no ot an
|83 top oar|y |n tho soss|on |n rosponso to a govornmont
roport.

1ho last 0ay lu|o at tho t|mo ot tho t||| was at 010.8, but l
usod a monoy managomont stop ot 000.7 |n ordor to
oxtond my |ovorago to two m|n| contracts por $100,000. l
was r|sk|ng about o|ght-tonths ot 1 porcont on tho trado. l
was ||tora||y stoppod out w|th|n m|nutos. 3ack |n tho °good
o|d days' ot p|t trad|ng, l romombor at t|mos gott|ng back a
t||| on my protoct|vo stop botoro gott|ng tho t||| on tho ontry
ordor. 1a|k about add|ng |nsu|t to |njury!

1rading a 5hort Poaition on a 5maII
Pattorn

Koop|ng w|th my obsoss|on ovor |83 pattorns, l shortod
ono contract ot August m|n| go|d on 1uno 12 at 042.4 (soo
||guro 0.8). 1h|s was way too sma|| a pattorn tor mo to bo
trad|ng and was a v|o|at|on ot my bas|c gu|do||nos.

F|CuRE 0.8 1rado #8-A 3ma|| |83 lattorn |n Go|d.


Know|ng that th|s was not a good trado, l jammod my
protoct|vo stop, ox|t|ng tho trado w|th a vory sma|| prot|t on
1uno 24. l cons|dorod myso|t |ucky tor choat|ng my ru|os on
tho roqu|rod durat|on ot an accoptab|o da||y chart rovorsa|
pattorn.

Anothor E&5 Pattorn FaiIa

Cont|nu|ng tho |83 thomo l wont |ong m|n| go|d on August
4 basod on tho comp|ot|on ot a sovon-wook |83 bottom
w|th an ups|ant|ng nock||no, as shown |n ||guro 0.0. On
August 0, tho markot had a hard |ntraday rotost ot tho |83
pattorn. l adjustod my stop to just bo|ow tho August 0 |ow
basod on tho lotost lu|o. l was stoppod out tor a s|x-tonths
ot 1 porcont |oss on August 7.

F|CuRE 0.0 1rado #4-Anothor |a||od |83 |n Go|d.


l hopo thoso caso stud|os aro commun|cat|ng a
mossago l want to sond c|oar|y-that trado ontry s|gna|s
aro ro|at|vo|y un|mportant to my ovora|| succoss. What l
trado-|ndood, what l ca|| an ontry s|gna|-|s socondary to
monoy and r|sk managomont. 1rado so|oct|on |s h|gh|y
ovorratod.

5µotting tho Big Novo

ln oar|y August, |t was bocom|ng apparont that somoth|ng
b|g was just around tho cornor |n go|d. 1ho wook|y chart
d|sp|ayod a mass|vo |nvortod cont|nuat|on |83 pattorn, as
shown |n ||guro 0.10. 1h|s raro pattorn was d|scussod
br|ot|y by Edwards and Vagoo |n 7ocbolco| Aoo|ysls oí
5tock 7rooos and oar||or by 3chabackor |n 7ocbolco|
Aoo|ysls ooo 5tock Vorkot Proílts. 7bo Roo| Blb|o oí
7ocbolco| Aoo|ysls.

F|CuRE 0.10 1rados #b and #0-|83 lattorn on Wook|y
Go|d Chart.



|urthor, tho r|ght shou|dor ot tho |83 was tak|ng tho torm
ot a s|x-month symmotr|ca| tr|ang|o. 1ho tr|ang|o had s|x
s|gn|t|cant contact po|nts (|abo|od A-| |n ||guro 0.11). l got
vory oxc|tod whon l soo markots sot up |n such a
magn|t|cont way.

F|CuRE 0.11 1rados #b and #0-A Vass|vo 3ymmotr|ca|
1r|ang|o 3orv|ng as tho l|ght 3hou|dor on tho Go|d Chart.


1ho advanco on 3optombor 2 ponotratod tho uppor
boundary ot tho tr|ang|o and thon roso abovo tho |ast
dot|n|ng h|gh w|th|n tho pattorn (po|nt E). l wont |ong
0ocombor go|d at 078. 1ho objoct|vo ot 1004 was
dotorm|nod by oxtond|ng tho d|stanco trom 3 to C upwards
trom E. Ca|cu|at|ng tho A to 3 d|stanco wou|d havo a|so
boon accoptab|o. Wh||o l took prot|ts at tho targot on
lovombor 4, tho 1ra|||ng 3top lu|o wou|d havo kopt mo |n
tho trado unt|| 0ocombor 7. l cou|d havo ga|nod anothor
$4b por ounco-thoro |s a|ways anothor caso ot cou|da,
wou|da, shou|da!

lt |s |mportant to noto that tho |ows ot tho broakout day ot
3optombor 2 and tho upthrust day ot 3optombor 8 woro
novor cha||ongod. 1h|s |s otton tho caso w|th a substant|a|
and va||d broakout. lmmod|ato|y to||ow|ng tho broakout, tho
markot dr|ttod s|doways tor a month. ln tho procoss, tho
markot appoarod to bo torm|ng a sma|| |83 top. l ovon
advancod tho protoct|vo stop on a port|on ot my |ong
pos|t|on to bo|ow tho nock||no ot th|s sma|| pattorn (soo
||guro 0.12). On Octobor b, tho markot advancod through
tho ox|st|ng r|ght shou|dor h|gh ot th|s sma|| |83 pattorn,
prov|d|ng a pyram|d s|gna| at 1014 w|th a targot ot 10b0
(mot qu|ck|y on Octobor 8). l choso not to tako prot|ts at tho
targot. Aga|n, noto that tho last 0ay lu|o, tho |ow ot
Octobor b, was a|so novor cha||ongod.

F|CuRE 0.12 1rado #0-A 3ma|| |83 |a||uro |n Go|d.


1ho CoId Narkot 1hrowa a Curvo BaII

3o|dom doos a trado go trom ontry to tho targot w|thout
d|tt|cu|ty and cha||ongo. 1ho bost |a|d p|ans ot m|co and
mon! 3uch was tho caso w|th tho pyram|d pos|t|on
ostab||shod at tho broakout ot tho tour-wook |83 ta||uro on
Octobor b (trado #0). l choso not to tako prot|ts on th|s
trado at 10b0. 1hon, tho doc||no on Octobor 20 comp|otod
a sma|| doub|o top and p|acod tho run tor tho g|ory |nto
quost|on. 1ho Octobor 20 doc||no was a|so a sotup day tor
my 1ra|||ng 3top lu|o. Octobor 27 was tho tr|ggor day tor
tho 1ra|||ng 3top lu|o, but l d|d not jam my stop unt|| tho
noxt day, whon l was stoppod out noar tho |ow ot tho bu||
markot corroct|on, as soon |n ||guro 0.18.

F|CuRE 0.18 1rado #7-|ako-Out |n Go|d.


1h|s s|tuat|on croatod ono ot tho most d|tt|cu|t cha||ongos
tac|ng a trador-what to do whon stoppod out ot a
succosstu| trado pr|or to tho atta|nmont ot a much |argor
targot. Untortunato|y, thoro aro no oasy answors to th|s
cha||ongo, but thoro aro somo |ossons.

W|th|n days ot comp|ot|ng tho throo-wook doub|o top, tho
markot roturnod to |ts dom|nant bu|| trond. 1h|s ra|sod tho
roa| poss|b|||ty that tho sma|| top was a boar trap. lt a|so
ostab||shod tho poss|b|||ty that tho markot was croat|ng a
t|shhook buy s|gna|. 1h|s |s not a Vagoo and Edwards
pattorn, but somoth|ng l havo obsorvod |n my yoars trad|ng
chart pattorns. A t|shhook s|gna| occurs whon a pattorn
qu|ck|y ta||s to||owod by an |mmod|ato trond back |nto tho
ta||od pattorn. 1ho dynam|c boh|nd a t|shhook buy s|gna| |s
that woak |ongs got stoppod out.

Varkots a|most a|ways torco so|d-out bu||s to chaso a
trond. 1ho t|rst roa| s|gn ot a t|shhook buy s|gna| was on
lovombor 2 whon tho ont|ro trad|ng rango was abovo tho
|owor boundary ot tho throo-wook doub|o top and tho
markot c|osod noar tho h|gh. l cou|d havo roontorod at th|s
po|nt, but l stubborn|y wa|tod tor a now h|gh on lovombor 8.

||shhooks most otton s|gna| ha|tway movos that can bo
projoctod us|ng sw|ng targot|ng (soo ||guro 0.14).

F|CuRE 0.14 A 3w|ng 1argot |n Go|d.


1ho advanco trom tho Octobor 2 |ow to tho Octobor 14
h|gh was approx|mato|y $8b. lrojoct|ng th|s amount
upward trom tho Octobor 20 |ow ot 1027 y|o|dod a targot ot
1112, mot on lovombor 12.

Loaaona trom 1rading CoId in 2000

l hato bo|ng jorkod around |n tho markots. l hato buy|ng at
tho top ond ot a trad|ng rango and so|||ng at tho bottom
ond. l hato ta|so broakouts. l droad bo|ng r|ght on tho
d|roct|on ot a markot but |os|ng monoy by gott|ng
wh|p|ashod |n tho procoss. 1h|s can happon |t l got stoppod
out ot a |ong on woaknoss, roontor on strongth, got stoppod
back out on woaknoss, and so on. lt |s poss|b|o to |oso $b0
por ounco |n a $20 trad|ng rango |n go|d and ond up corroct
on tho subsoquont d|roct|on.

A choppy markot doos damago t|nanc|a||y. Choppy
markots can |mposo omot|ona| and cont|donco
consoquoncos on a trador that aro tar worso. l can't
romombor a|| tho t|mos l havo m|ssod roa||y b|g movos
bocauso l was gun shy trom a por|od ot chopp|noss that
procodod tho b|g movos.

1ho b|ggost tomptat|on attor a promaturo stop-out |s to
got r|ght back |n botoro roco|v|ng anothor so||d s|gna|.
Gott|ng |nto th|s cyc|o throws d|sc|p||no and pat|onco r|ght
out tho w|ndow. l got |ucky on trado #7 |n go|d. |ad th|s
trado s|appod mo around, my hoad wou|d havo roa||y boon
scrowod on wrong.

1ho socond |osson |s that sma||or rovorsa| pattorns, such
as tho ||tt|o doub|o top, aro not ||ko|y to prov|do a sor|ous
throat to a trond that bogan w|th a strong thrust out ot a
substant|a| pattorn (tho tr|ang|o |n tho caso ot go|d),
ospoc|a||y whon tho markot has a groat d|stanco to go to
roach tho |mp||od targot.

1ab|o 0.1 summar|zos tho go|d trad|ng s|gna|s |n 2000.

1ABLE 0.1 locord ot Go|d 1rad|ng 3|gna|s |n 2000

1ho targot ot tho 1820 trom tho |nvortod 18-month |83
on tho wook|y chart has not boon mot as ot th|s wr|t|ng |n
1anuary 2010. 1h|s tact has |mposod a bu|||sh b|as on my
v|ow ot go|d.

l wasto a |ot ot ammun|t|on by tak|ng trad|ng doc|s|ons
w|th|n broador trad|ng rangos-by not wa|t|ng tor tho
doc|s|vo broakout. 1h|s was tho caso tor tho t|rst tour go|d
trados |n 2000. lt was not unt|| tho trados #b and #0 that tho
markot was roa||y broak|ng out ot a major pattorn. 1rado #b
was roa||y tho on|y trado worthy ot tho 3ost 0rossod l|st.

Exiting a 1rado

1horo aro s|x gonora| cond|t|ons l uso to ox|t a trado onco |t
has boon ostab||shod: two w|th tho trado at a |oss and tour
w|th tho trado at a prot|t.

At a Loaa

1. 1ho chart pattorn broakout l uso to ontor tho
trado |s o|thor a ta||uro or a promaturo broakout.
1ho markot rovorsos and ponotratos my last 0ay
lu|o stop (or monoy managomont stop |t usod
|nstoad ot tho last 0ay lu|o tor r|sk managomont
roasons. (3oo ||guro 0.7 tor an oxamp|o.)
2. 1ho broakout ta||s to prov|do |mmod|ato thrust
|n tho d|roct|on ot tho trado. W|th|n days (por
porhaps a wook or so) tho markot oxpor|oncos a
hard rotost ot tho pattorn, ponotrat|ng tho
boundary ||no usod to ontor tho trado. lt a hard
rotost occurs, l may o|oct to adjust my protoct|vo
stop |n ro|at|onsh|p to tho hard rotost. (3oo ||guro
0.8 tor an oxamp|o.)

At a Protit

1. At tho targot. l norma||y tako prot|ts at tho targot
|nd|catod by tho chart pattorn usod to |n|t|a||y
ostab||sh a trado. (3oo ||guros 0.11 and 0.14 tor
oxamp|os.)
2. 3uccosstu| trados otton dovo|op sma||or chart
pattorns dur|ng tho courso ot a trond. 0opond|ng
on tho naturo and durat|on ot thoso cont|nuat|on
pattorns, l may ovon pyram|d a trond. l w||| a|so
uso tho last 0ay lu|o ot a cont|nuat|on pattorn to
advanco tho protoct|vo stop on tho |n|t|a| pos|t|on
|n tho d|roct|on ot a succosstu| trond.
8. lr|or to tho atta|nmont ot a targot, a markot
may torm a pattorn w|th |mp||cat|ons countor to tho
pos|t|on. ln othor words, an |ntorvon|ng pattorn
|nd|catos that a rovorsa| ot trond |s poss|b|o. l may
o|oct to advanco my protoct|vo stop |n ro|at|onsh|p
to th|s |ntorvon|ng pattorn. (3oo ||guro 0.18 tor an
oxamp|o.)
4. At any t|mo dur|ng tho courso ot a trond, l may
chooso to o|oct tho 1ra|||ng 3top lu|o. (3oo
||guro 0.b tor an oxamp|o.)

A Yoar 1rading 5ugar

3ugar was tho markot ot my s|ng|o most concontratod
tocus |n 2000. Vy op|n|on ot sugar |n 2000 h|gh||ghts tho
tact that as a chart|st l am not a dotachod markot obsorvor.
Vy b|asos otton d|ctato my chart ana|ys|s.

3ugar was a|so my s|ng|o most prot|tab|o markot |n
2000. As part ot tu|| d|sc|osuro, l want to omphas|zo that my
trad|ng oxpor|onco |n sugar |n 2000 |s not typ|ca| ot my
oxpor|onco |n most markots |n most yoars. l on|y w|sh th|s
cou|d bo tho caso. ln tact, sugar prov|dod noar|y 40 porcont
ot tho not s|gna| prot|ts |n 2000.

Yot tho markot comp|oto|y trustratod my bu|||sh b|as
dur|ng tho t|rst tour months ot tho yoar as l |ost monoy on
trado attor trado. 1ust bocauso l am roady tor a markot to
mako a movo doos not moan that tho markot |s roady to do
so-or that |t w||| ovor bo. A markot cou|d caro |oss |t l am
bu|||sh or boar|sh. ln tact, |t l am a bu||, onco l do my buy|ng,
my on|y |nt|uonco |s as a boar bocauso l bocomo a sourco
ot so|||ng.

5tarting tho Yoar a BuII

l was a sugar bu|| on tho t|rst day ot 1anuary |n 2000. ||guro
0.1b d|sp|ays tho wook|y pattorn l thought was dom|nant at
tho t|mo, a poss|b|o n|no-month cont|nuat|on symmotr|ca|
tr|ang|o. ln oar|y 2000, tho markot was at tho |owor
boundary ot th|s tr|ang|o, so l was |ntorostod |n ostab||sh|ng
an ant|c|patory |ong pos|t|on.

F|CuRE 0.15 3ugar Wook|y Chart |n Ear|y 2000.


l|tt|o d|d l undorstand how trustrat|ng that procoss wou|d
bocomo. ||guro 0.10 shows a da||y cont|nuat|on chart
||st|ng a|| 11 ot tho |actor trad|ng s|gna|s |n 2000. Vy
obsoss|on w|th sugar rosu|tod |n tar too many trados. An
obsoss|on w|th a markot |oad|ng to ovortrad|ng has
happonod to mo botoro, and |t w||| happon aga|n.

F|CuRE 0.10 1rad|ng 3ugar 2000: 11 1rados.


1hroo Loaing 1radoa 5tartod tho Yoar

||guro 0.17 shows tho t|rst throo trados ot 2000 |n sugar.
A|| throo trados woro |osors dosp|to tho tact l was a major
bu|| and tho markot was r|s|ng. los|ng monoy trad|ng tho
|ong s|do ot a r|s|ng markot cha||ongos ono's durab|||ty and
san|ty as a trador.

1ho advanco on 1anuary b comp|otod a two-month
symmotr|ca| tr|ang|o. l choso to uso tho |ast tu|| day w|th|n
tho pattorn, 0ocombor 80, to dotorm|no tho last 0ay lu|o.
l was stoppod out on 1anuary 14 tor a 07 t|ck |oss.

F|CuRE 0.17 1rados #1-8-Ear|y |rustrat|on |n 3ugar
1rad|ng.


Buying Now Eigha

3ound and dotorm|nod to bo aboard a bu|| markot, l kopt
buy|ng now h|ghs. lorma||y, th|s |s not my sty|o. l protor to
wa|t tor rocogn|zab|o pattorns. l wont |ong on 1anuary 20
(trado #2) and pyram|dod tho trado whon tho markot mado
yot anothor now h|gh on |obruary 20 (trado #8). 1ho
nosod|vo on Varch 2 took mo out ot both trados, cost|ng a
tota| ot 04 t|cks. 1ho stop on trado #2 had boon movod
trom tho last 0ay lu|o ot 1anuary 28 to a lotost lu|o
bo|ow tho |ow ot |obruary 10.

Waiting tor a 5ubatantiaI Pattorn

Attor bo|ng burnod by buy|ng now h|ghs, l doc|dod to wa|t
tor a rocogn|zab|o pattorn. And l got ono |n spados |n |ato
Apr||.

|or docados l havo boon part ot an o-ma|| notwork ot a
dozon or so to||ow chart tradors. Wo sharo |doas and chart
ana|ysos. |o||ow|ng |s tho o-ma|| l sont tho group on Apr||
80:

Aprl| 80, 2000

A swoot troolog opportoolty

7bo |oogor-torm cborts loolcoto tbot sogor coo|o bo
tbo trooo íor 2000. 5ovoro| tocbolco| obsorvotloos
oro wortby oí ooto.

7bo wook|y cbort olsp|oys o toxtbook poríoct
symmotrlco| trloog|o ootlog bock to Vorcb 2008. 7bls
14-mootb trloog|o woo|o bo comp|otoo by o movo
obovo 14.72 lo tbo ooorby 1o|y cootroct.

7bls wook|y cbort most bo vlowoo lo tbo blstorlco|
cootoxt oí o posslb|o boso ootlog bock to 1081. A
ooclslvo c|oso obovo tbo 2000 blgb ot 10.75 woo|o
ostob|lsb o polot ooo ílgoro objoctlvo lo tbo 00s.

7bo 1o|y cootroct toooy poootrotoo tbo oppor lco |loo
oí o oloo-wook roctoog|o. lt ls oot oocommoo íor o
mosslvo movo to boglo wltb tbo comp|otloo oí o
ro|otlvo|y smo|| cbort pottoro socb os tbls. Lol|y
cborts oooo to bo comblooo wltb wook|y cborts,
mootb|y cborts, ooo ovoo qoortor|y cborts to oovo|op
o mosolc oo morkot opportooltlos.

An o-ma|| updato ono day |ator, on Vay 1, 2000:

7oooy, tbo olstoot Vorcb 2010 cootroct stroog|y
movoo obovo tbo oppor booooory oí o slx-mootb
rooolog woogo. 7bls pottoro ls |lko|y to sorvo os tbo
s|logsbot íor tbo bo|| movo lo sogor. 7bls cbort
íormotloo roprosoots o vory |ow-rlsk opportoolty íor o
ro|otlvo|y |orgo posltloo.

3o dur|ng a two-day por|od a|| tho contracts ot 3ugar
oxpor|oncod a doc|s|vo broak out (tho 1u|y, Octobor, Varch
and cont|nuat|on charts). 1ho da||y cont|nuat|on and
|nd|v|dua| contract months prov|dod s||ght|y d|ttoront
p|cturos. 1ho 1u|y contract comp|otod a two-month
roctang|o, wh||o tho Octobor contract comp|otod a sovon-
month runn|ng wodgo (soo ||guros 0.18 and 0.10). Octobor
sugar mot |ts |n|t|a| and most consorvat|vo targot on 1uno
24.

F|CuRE 0.18 1rado #4-A loctang|o |n 1u|y 3ugar.


F|CuRE 0.10 1rado #4-A lunn|ng Wodgo |n Octobor
3ugar.


1ho wook|y chart tr|ang|o |s shown |n ||guro 0.20. lt |s
a|ways a good s|gn whon tho wook|y and da||y charts
comp|oto major pattorns at about tho samo t|mo.

F|CuRE 0.20 3ymmotr|ca| 1r|ang|o launchos 3u|| Vovo |n
3ugar.



3ugar was ott to tho racos. lmportant|y, bocauso sugar
was |n tho oar|y stagos ot a bu|| trond, tho r|sk was sma||.
1ho last 0ay lu|o r|sk |n tho 1u|y contract was 81 po|nts,
and 88 po|nts |n tho Octobor contract. 1h|s a||owod mo to
assumo |argor |ovorago than |s norma|. 1ho wook|y chart
gavo mo oxtra courago. lt thoro was any doubt, tho |argo-
rango ups|do broakout on Vay 1 was a |r|day, a Wookond
lu|o. Varkots that comp|oto a wook|y pattorn on a |r|day
so|dom ta||.

1ho Narkot Pauaoa to Catch |ta Broath

Attor |ts |n|t|a| surgo |n Vay, tho markot dr|ttod s|doways tor
about t|vo wooks, as d|sp|ayod |n ||guro 0.21. 1hon, on
1uno 28, tho Octobor contract gonoratod a t|vo-wook
°t|shhook' buy s|gna| (trado #b), a||ow|ng mo to pyram|d my
pos|t|on, aga|n w|th ro|at|vo|y |ow r|sk to tho last 0ay lu|o.
1ho targot was roachod on 1u|y 80.

F|CuRE 0.21 1rados #b and #0-1wo Cont|nuat|on
lattorns dur|ng tho 3u|| lun.



1rado #0 |s a c|ass|c ponnant pattorn. On 1u|y 24 tho
markot mado a now h|gh tor tho bu|| trond and ponotratod a
throo-wook ponnant, anothor opportun|ty to |ncroaso
|ovorago. Onco aga|n, tho last 0ay lu|o was novor
cha||ongod. l had a t|gor by tho ta||.

1ho wook|y chart targot ot 21.22 was roachod by tho
Octobor contract on August 10. l ox|tod my pos|t|on. l
cannot roa||y art|cu|ato why l somot|mos uso da||y chart
targots, somot|mos wook|y chart targots, somot|mos sw|ng
targots and somot|mos tho 1ra|||ng 3top lu|o. 1horo |s no
tormu|a tor th|s doc|s|on. lt |s a mattor ot mak|ng a doc|s|on,
stopp|ng up to tho ||no and ||v|ng w|th tho consoquoncos.

Entoring a Choµµy Poriod

3y m|d-August l had ox|tod a|| tho pos|t|ons accumu|atod
s|nco Vay 1. l was |ook|ng tor an oxcuso to got back |nto
tho markot. l was bocom|ng concornod that sugar was
hoadod tor 00 conts w|thout mo aboard. 1ho markot d|d not
mako mo wa|t |ong.

3ut as trad|ng wou|d havo |t, l ontorod a tour-month
por|od ot trad|ng trustrat|on. lt |s not uncommon tor markots
that havo had a good run to ontor a por|od ot chopp|noss
and s|gna| ta||uro, as w|tnossod |n ||guro 0.22.

F|CuRE 0.22 1rados #7 and #8-1ho 3ugar Varkot
3og|ns a largo Conso||dat|on.


1ho markot comp|otod a throo-wook t|ag on August 28
tor trado #7 (soo dashod boundary). Vy th|nk|ng at tho t|mo
was that tho t|ag was a ha|t-mast pattorn and that tho
markot was hoadod stra|ght to 80 conts. lr|cos spurtod tor
two days and thon ro||od ovor, stopp|ng mo out on
3optombor 4 at tho last 0ay lu|o. l was aga|n out ot sugar
and to|t as though a good tr|ond had d|od.

On 3optombor 28, tho markot comp|otod what l
|ntorprotod to bo a s|x-wook cont|nuat|on d|amond
tormat|on. l roturnod tho |ong s|do (trado #8). 1ho last 0ay
lu|o stop was h|t on Octobor 7. l was onco aga|n t|at.

Focuaod on Boing Long 5ugar

At th|s po|nt, l bocamo obsossod w|th bo|ng |ong sugar.
Ovorattont|on to a markot most otton |oads to too||sh
trados. |oo||sh trados |oad to |ossos. 3oth trados #0 and
#10 woro ostab||shod w|thout tho bonot|t ot comp|otod
chart tormat|ons as shown |n ||guro 0.28. 1hoso trados
woro dr|von by tho toar ot m|ss|ng a movo. |oar and grood
aro two omot|ons that w||| cost a trador monoy.

F|CuRE 0.28 1rados #0 and #10-3ugar 1rados w|thout
C|oar lattorns.


3oth trados woro ostab||shod on days sugar ra|||od, on
Octobor 18 and Octobor 80. 3uy|ng strongth or so|||ng
woaknoss w|th|n a trad|ng rango |s not a vory good |doa.
1rado #0 was stoppod out at tho last 0ay lu|o on
lovombor 27. 1rado #10 was stoppod out oar||or, at |ts
last 0ay lu|o on lovombor 10. lot on|y d|d l |nvont a
roason tor thoso trados, l a|so got stubborn w|th my monoy
managomont, as h|gh||ghtod by trado #0.

1ho Narkot Finiahoa tho Yoar 5trong

1ho sugar markot t|n|shod tho yoar wo||, gott|ng back on
track on 0ocombor 11. 1ho advanco on th|s day
ponotratod tho uppor boundary ot a 1b-wook channo| and
comp|otod a tour-wook |83 bottom, tr|ggor|ng trado #11
(soo ||guro 0.24).

F|CuRE 0.24 1rado #11-A 3|gn|t|cant 3uy 3|gna| |n
3ugar.


As l havo po|ntod out a|roady |n th|s book, sma||or
pattorns otton s|mu|tanoous|y |aunch |argor pattorns. Onco
aga|n, tho broakout was on a |r|day, a s|gn|t|cant tact. 1ho
targot was roachod on 0ocombor 28, a|though tho 1ra|||ng
3top lu|o was not act|vatod unt|| 1anuary 11.

1ab|o 0.2 summar|zos tho trad|ng s|gna|s |n tho sugar
markot dur|ng 2000.

1ABLE 0.2 3ugar 3|gna|s and 1rados |n 2000


Loaaona trom 5ugar in 2000

Untortunato|y, l nood to ro|oarn somo ot tho samo |ossons
yoar attor yoar attor yoar. 3ugar |n 2000 was a rom|ndor
that markot bohav|or tonds to groat|y |ag a strong op|n|on l
may dovo|op. Otton, l soo somoth|ng b|g tak|ng shapo on
tho charts wo|| botoro a trond dovo|ops. Varkots havo no
ob||gat|on to |mmod|ato|y roward my op|n|on. Vy tondoncy
|s to torco an |ntorprotat|on ot tho da||y charts to comp|y
w|th an op|n|on l havo dovo|opod w|th tho wook|y charts.
1wo ot tho oar|y trados (#2 and #8) woro basod on markot
momontum absont rocogn|zab|o chart pattorns. 1wo ot tho
|ato trados (#0 and #10) woro a|so basod on momontum
w|thout support trom a pattorn. 1hus, tour ot tho 11 trados
woro quost|onab|o and shou|d not havo boon ontorod. l
ontor ovory low Yoar w|th a comm|tmont to groat|y
|ncroaso my pat|onco. lorhaps somo yoar l w||| ach|ovo
that comm|tmont.

Pointa to Romombor



3omo ot tho bost trados aro movos |n tho
oppos|to d|roct|on ot a trador's |n|t|a|
oxpoctat|ons (such as tho caso |n tho 0ow
1onos).

A trad|ng p|an must go through |os|ng por|ods |n
any g|von markot to t|nd tho goms. lors|stonco
pays ott.

1ak|ng trados that ant|c|pato a movo can otton
bo trustrat|ng. Attompt|ng to got pos|t|onod w|th|n
a trad|ng rango can rosu|t |n bocom|ng gun shy
whon tho roa| movo occurs.

Varkots most otton prov|do s|gna|s whon tho roa|
movos bog|n. Wa|t|ng tor substant|a| pattorns to
bocomo comp|oto |s whoro tho prot|ts aro to bo
tound.



Chapter 7

CharacterIstIcs o| a 8uccess|ul
1rader

||guro 7.1 |s tho roadmap tor Chaptor 7, prov|d|ng a
graph|c prosontat|on ot tho contont. ln add|t|on to tho
mochan|ca| and procodura| aspocts ot a comprohons|vo
trad|ng p|an, thoro aro a|so |ntang|b|o compononts that aro
|nd|sponsab|o to cons|stont|y succosstu| trad|ng oporat|ons.
l cons|dor thoso compononts to bo |ntang|b|o bocauso thoy
do not havo d|roct da||y connoct|on to tho phys|ca| procoss
ot trad|ng. Wh||o othor protoss|ona| tradors m|ght tormu|ato
a d|ttoront ||st or add to m|no, l cons|dor tho |ntang|b|os to
|nc|udo:

F|CuRE 7.1 Charactor|st|cs ot a 3uccosstu| 1rador.





lnt|mato know|odgo ot trad|ng s|gna|s

0|sc|p||no and pat|onco to oxocuto trado s|gna|s
cons|stont|y and corroct|y

An |ntormat|on toodback |oop to ana|yzo trad|ng
rosu|ts and dotorm|no noodod courso
corroct|ons

A |oap ot ta|th-tho cont|donco to omot|ona||y
and psycho|og|ca||y go °a|| |n' on a trad|ng p|an


l havo tound that corroct|y dovo|op|ng thoso |ntang|b|o
attr|butos and compononts |s tho |argost s|ng|o cha||ongo l
taco. lt |s a procoss that |s novor ond|ng. lt |s |n th|s aroa
whoro succosstu| trad|ng must ovorcomo tho pu|| ot human
omot|on. Onco a trador has dovo|opod sound monoy
managomont pr|nc|p|os tor a trad|ng p|an, tho war |s thon
tought on tho p|ay|ng t|o|d ot tho |ntang|b|os. Yot vory tow
authors on spocu|at|vo markot oporat|ons havo adoquato|y
addrossod th|s subjoct aroa.

|ntimato KnowIodgo ot 1rading
5ignaIa

l cannot |mag|no what |t wou|d bo ||ko to |ook at a chart and
wondor |t thoro was a trado sott|ng up. What an awtu|
oxpor|onco that wou|d bo! l havo tradod my approach |ong
onough that l nood on|y a br|ot, t|vo-socond g|anco at a
chart to know |t thoro |s a trado pond|ng tor mo.

ln anothor 10 soconds w|th tho samo chart, l havo a
spoc|t|c |doa ot what wou|d nood to happon to tr|ggor a
trad|ng s|gna|, what pos|t|on s|zo l wou|d bo ||ko|y to
assumo, and how much r|sk l wou|d tako |t l ontor.

Vy oxpor|onco |s that othor protoss|ona| tradors-both
thoso who uso d|scrot|onary approachos and thoso who
uso systomat|c approachos-havo tho samo |nt|mato
know|odgo ot tho|r trad|ng p|ans. 1hoy know what a s|gna|
|s tor thom. 1hoy know |t thoy aro to||ow|ng tho|r ru|os
corroct|y bocauso thoy know oxact|y what tho|r ru|os aro.

1ho |ongor l nood to oxam|no a chart, tho |oss ||ko|y tho
markot |n quost|on |s ottor|ng a trad|ng opportun|ty. |or mo,
s|gna|s aro patont|y obv|ous. Whothor thoy w||| bo prot|tab|o
|s anothor mattor.

l rocommond that nov|co tradors spond a yoar or two
papor-trad|ng botoro thoy comm|t tho|r t|rst roa| do||ar to
r|sk. lt takos th|s |ong to como to an undorstand|ng ot what
a trad|ng s|gna| |s, how a markot tr|ggors a s|gna|, and what
typo ot r|sk managomont shou|d bo usod.

1rad|ng p|ans ovo|vo ovor t|mo-somot|mos |n subt|o
ways, othor t|mos |n a moro s|gn|t|cant tash|on. What m|ght
bo a major chango |n my trad|ng p|an |n my m|nd cou|d
appoar |ns|gn|t|cant to somoono not |nt|mato|y acqua|ntod
w|th my p|an. 3ut tho po|nt |s th|s-tradors nood to
undorstand why thoy mako tho trados thoy mako, both ontry
and ox|t trados.

DiaciµIino and Pationco

0|sc|p||no and pat|onco aro oppos|to s|dos ot tho samo
co|n. lt |s |mposs|b|o to havo trad|ng d|sc|p||no and
pat|onco |t a trador doos not know oxact|y what doos or
doos not const|tuto a trad|ng s|gna|. Know|ng what
const|tutos a propor trad|ng s|gna| procodos tho pract|cos
ot d|sc|p||no and pat|onco.

Whothor a trado |s prot|tab|o |s oot tho moasuro ot
whothor a trado shou|d havo boon mado. l cannot a||ow
myso|t to bo strossod out whothor a corta|n trado was
prot|tab|o or not. lrot|t cannot bo tho d|roct tocus ot my
attont|on bocauso l havo no contro| ovor tho outcomo ot any
g|von trado. Ordor ontry |s tho on|y th|ng l can contro|.

l know oxact|y what a trado |s or |s not tor mo. Vy
cha||ongo |s to ma|nta|n tho pat|onco to wa|t tor my p|tch
and tho d|sc|p||no to sw|ng whon my p|tch |s ottorod.
3w|ng|ng at p|tchos outs|do ot my swoot spot |s tho s|ng|o
b|ggost sourco ot troub|o tor mo. Ot courso, sw|ng|ng at a
p|tch |n my swoot spot |s no guarantoo that l w||| got a h|t.
lnov|tab|y, trados |n wh|ch pat|onco and d|sc|p||no woro not
koy |ngrod|onts |n tho doc|s|on-mak|ng procoss havo a tar
groator propons|ty to bo |osors.

AnaIyaia ot 5oIt and ot tho
1rading PIan

l am constant|y study|ng and ana|yz|ng my trad|ng
portormanco tor two major roasons: to dotorm|no |t my
trad|ng p|an |s |n sync w|th tho markots and to dotorm|no |t l
am |n sync w|th my trad|ng p|an. 1ho two concopts aro vory
d|ttoront, and o|thor can roprosont a roa| prob|om.

A major d|st|nct|on must aga|n bo mado botwoon trad|ng
corroct|y and trad|ng prot|tab|y. lt |s poss|b|o to trado
corroct|y and not bo prot|tab|o, just as |t |s poss|b|o to mako
monoy dur|ng a por|od whon tho trad|ng p|an |s poor|y
|mp|omontod.

1horo havo boon t|mos (wooks or months) whon l havo
tradod vory poor|y, yot mado monoy. 1horo havo a|so boon
t|mos whon l havo oxocutod my trad|ng p|an t|aw|oss|y and
|ost monoy. Vy goa| |s corroct trad|ng w|th tho bo||ot that by
trad|ng corroct|y ovor a |argo numbor ot wooks, months,
and trad|ng ovonts, l w||| oxpor|onco not prot|tab|||ty w|th a
managoab|o amount ot assot vo|at|||ty. l ana|yzo my trad|ng
month|y, quartor|y, and annua||y.

1ho t|rst quost|on l ask |s whothor my ovora|| trad|ng p|an
was |n sync w|th tho markots. l havo no |ntorost |n oxp|or|ng
whothor mod|t|od ru|os wou|d havo producod moro prot|ts. l
am not a b|g tan ot th|s typo ot opt|m|zat|on. Opt|m|zat|on |s
a too|'s gamo. 1woak|ng trad|ng ru|os basod on tho por|od
ot t|mo just comp|otod cou|d como back to haunt a trador |n
tho noxt por|od ot t|mo.

l havo boon a pr|vato p||ot s|nco tho 1080s and havo
ownod sovora| a|rcratt ovor tho yoars. A|rp|anos havo an
|nstrumont ca||od tho vort|ca| spood |nd|cator. 1h|s
|nstrumont moasuros tho rato ot c||mb or doscont tho p|ano
has a|roady oxpor|oncod, and thus |s a tra|||ng |nd|cator.

||y|ng accord|ng to tho vort|ca| spood |nd|cator wou|d
rosu|t |n an a|rp|ano a|ways bo|ng boh|nd tho curvo. Whon l
th|nk ot opt|m|zat|on, l otton th|nk ot tho vort|ca| spood
|nd|cator on an a|rp|ano. 1ho past |s tho past. What was
opt|mum |n ono quartor may not bo opt|mum dur|ng tho noxt
quartor.

Yot l am |ntorostod |t tho markots rovoa| any chango ot
bohav|or that cou|d havo pormanonco. lo approach to
trad|ng can bo bu||t and thon |ott a|ono porpotua||y. A||
succosstu| trad|ng approachos aro tho rosu|t ot constant
ovo|ut|on basod on chang|ng trad|ng cond|t|ons.

Ovor tho yoars, my trad|ng p|an has ovo|vod to addross
corta|n aspocts ot markot bohav|or. |or oxamp|o, chart
pattorns aro |oss ro||ab|o today than thoy woro 20 or 80
yoars ago. lattorn broakouts-ovon whon va||d-tond to
bo s|opp|or than |n d|stant yoars. 1ho pr|co objoct|vos ot
pattorns aro tar |oss ro||ab|o today than whon l startod
trad|ng tho charts.

3o l havo mado mod|t|cat|ons to my trad|ng approach
basod on gonora| tronds doa||ng w|th markot bohav|or. 3ut l
havo no |ntorost |n mod|ty|ng my approach to opt|m|zo |ast
month's or |ast quartor's rosu|ts.

1ho socond and tar moro |mportant quost|on l ask |s
whothor my actua| trad|ng was |n sync w|th my trad|ng p|an.
Or, as |s a|ways tho caso to somo dogroo, whothor l
choatod tho trad|ng p|an. 1radors who uso a puro|y
mochan|ca| systom can answor th|s quost|on vory oas||y.
3ut l am a d|scrot|onary trador who adds comp|ox |ayors ot
judgmont to my trad|ng doc|s|ons. l havo dovo|opod
moasuros-or rathor a sot ot quost|ons-to gaugo whothor
my actua| trad|ng was out ot sync w|th my ovora|| stratogy.
1hoso n|no quost|ons |nc|udo:

1. |ow many trados d|d l mako dur|ng tho por|od?
lt l mako moro than 10 to 18 trados |n a month, l
know that l am road|ng too much |nto tho charts
and accopt|ng pattorns that aro too short |n
durat|on. lt l trado towor than 10 to 12 t|mos |n a
month, l know that l am bocom|ng gun shy and
nood to adopt a |oss dotons|vo posturo.
2. |ow d|d tho tota| numbor ot trados d|str|buto
ovor tho catogor|os ot trado typos?
8. W||| a|| ot tho trados mado, whothor prot|tab|o or
not, stand tho tost ot h|stor|ca| scrut|ny? W||| tho
trados, both tho ontr|os and ox|ts, stand out on a
chart a yoar trom now as |og|ca| and roasonab|o?
4. Was oach pattorn l tradod ono ot tho tour or t|vo
bost oxamp|os ot c|ass|ca| chart|ng pr|nc|p|os |n
tho markots tradod dur|ng tho prov|ous 12
months? Or d|d l accopt a |ossor chart pattorn?
5. 0|d l ontor any ordors |ntrasoss|on, or woro tho
vast major|ty ot my trad|ng doc|s|ons mado and
ordors ontorod dur|ng nontrad|ng hours (|ato
attornoon)?
0. Was l too qu|ck to movo protoct|vo stop ordors
w|th tho goa| ot protoct|ng opon prot|ts? l havo
tound that trad|ng doc|s|ons shou|d bo ru|od by
markot bohav|or, not by oqu|ty t|uctuat|ons.
7. What porcontago ot my trados was prot|tab|o?
What proport|on woro °bottom ||nors?'
8. What was my avorago r|sk por trado? lt tho
avorago r|sk was outs|do ot tho band ot s|x-tonths
ot 1 porcont on tho |ow ond and 1 porcont on tho
h|gh ond, what wou|d havo boon my trado rosu|t |t
tho |ovorago ot a|| trados had boon norma||zod at
tour-t|tths ot 1 porcont?
0. Aro thoro any broad monoy or trado
managomont ru|o ru|os that l nood to watch |n tho
tuturo tor poss|b|o mod|t|cat|on?

Evory succosstu| trador l know has dovo|opod cr|tor|a tor
appra|s|ng trad|ng portormanco. Vy own cr|tor|a cannot bo
and shou|d not bo tho cr|tor|a usod by othor tradors. 1ho
po|nt l am mak|ng |s that ovory succosstu| trador must havo
mochan|sms |n p|aco tor accountab|||ty and |mprovomont.

l am a c|ass|ca| chart|st. l havo dot|nod my trad|ng
s|gna|s |n ta|r|y proc|so torms (|ongth and naturo ot spoc|t|c
pattorn |n quost|on). l can oas||y |ook back |n h|nds|ght and
|dont|ty tho act|ons l shou|d havo takon. 1ho major quost|on
tor mo |s how c|oso|y my roa|-t|mo trad|ng was to what tho
markots ottorod. l can novor portoct|y mako th|s subjoct|vo
appra|sa|, but l havo dovo|opod somo motr|cs tor ana|yz|ng
my trad|ng on th|s bas|s.

l a|so study my trad|ng on a quartor|y and annua| bas|s |n
torms ot how wo|| l |mp|omontod my trad|ng r|sk
managomont and trado managomont compononts. l
conduct somo stat|st|ca| ana|ys|s on thoso tactors.

1horo |s ono moro aspoct to tho so|t-appra|sa| ot trad|ng
that |s worthy ot a spoc|a| noto. Vak|ng too||sh m|stakos
can bocomo a so|t-porpotuat|ng cyc|o. Ono too||sh trad|ng
m|stako can produco tho noxt m|stako, and on and on |t can
go. A trador noods to |oarn tho pract|co ot so|t-torg|vonoss
tor stup|d markot manouvors. 1h|s |s ospoc|a||y truo tor
d|scrot|onary tradors as opposod to systomat|c tradors
bocauso a d|scrot|onary trad|ng p|an has moro room tor
omot|ona| doc|s|on mak|ng. A t|mo may como whon a
d|scrot|onary trador too|s ||ko ho |s bo|ng pu||od |nto a cyc|o
ot poor judgmont ca||s. Whon th|s happons (not |t |t
happons), a trador noods to tako a h|atus trom tho markots.
lomombor, thoro w||| bo trados noxt month and noxt
quartor and noxt yoar.

|t 1akoa a Loaµ ot Faith

1ho t|na| componont |s tho most d|tt|cu|t tor nov|co tradors,
as wo|| as tor protoss|ona| tradors. 1h|s componont doa|s
w|th tho cont|donco to tako a |oap ot ta|th and bocomo
comm|ttod to prodotorm|nod trad|ng oporat|ons.

l havo hoard many tradors doscr|bo trad|ng |n tho
|anguago ot war, oxpross|ng var|ous trad|ng concopts |n
combat|vo torms. Vy own oxpor|onco |s that trad|ng |s
much moro ana|ogous to protoss|ona| sports. lrotoss|ona|
ath|otos spoak opon|y and honost|y about tho|r nood to
mako a comm|tmont to tho|r ondoavors. |ow otton havo
you hoard an announcor mako a statomont such as, °1ho
ath|oto was |n h|s or hor zono,' °tho ath|oto was p|ay|ng w|th
cont|donco, or °tho ath|oto was too t|m|d on that p|tch (that
jump, that raco, otc.)'?

lorhaps you aro a trador who has carotu||y thought
through a|| ot tho trad|ng compononts and cont|ngonc|os tor
a trad|ng p|an, but havo a sonso ot so|t-doubt or |ack ot
cont|donco that provonts you trom mak|ng a tu||
comm|tmont to your trad|ng oporat|ons. 1ust as cancor and
hoart d|soaso aro tho two major k|||ors |n Amor|ca (togothor
account|ng tor ha|t ot a|| doaths), doubt and socond-
guoss|ng aro tho two major k|||ors ot a sound trad|ng p|an.

1h|s |ast componont, tho |oap ot ta|th, |s porhaps tho
componont that |s tho b|ggost ongo|ng strugg|o tor nov|co
and protoss|ona| tradors a||ko. l wou|d bo |y|ng |t l
suggostod that l havo |t a|| togothor |n th|s aroa. 1ho |oap ot
ta|th has boon dot|nod by othor tradors as tho upstroam
sw|m aga|nst human naturo. And |ndood |t |s!

Evory oxpor|oncod trador knows whon ho or sho
comm|ts a trad|ng s|n. l know |nst|nct|vo|y whon l sw|ng at a
p|tch outs|do ot my str|ko zono. Yot tho ab|||ty to contro|
ono's omot|ons |s tho t|na| hurd|o a trador must c|oar.

1radors must da||y onduro tho human omot|ons ot toar,
socond-guoss|ng, grood, ta|so hopos, so|t-doubt, otc. l
must tocus and koop myso|t |n a tramo ot m|nd whoro
|mp|omont|ng my gamo p|an |s a|| that roa||y mattors tho
rosu|t-ot tho |ast trado or br|ot sor|os ot trados |s
|rro|ovant. lt |s oasy to trust a trad|ng p|an whon tho |ast 10
trados havo boon prot|tab|o. 3ut bo|ng comm|ttod to a
trad|ng p|an whon tho past 10 trados woro |ossos |s a
horso ot an ont|ro|y d|ttoront co|or.

Whon l havo boon wh|ppod around ovor a sor|os ot
trados, ovory t|bor ot my bo|ng wants to bypass tho noxt
s|gna|. Whon l havo had a sor|os ot trados turn trom a prot|t
to a |oss, l havo an ovorwho|m|ng urgo to subsoquont|y t|nd
an oxcuso tor tak|ng tho t|rst sma|| prot|t tho markots ottor
up.

1ho omot|ona| dr|vo ot toar and grood attompt to
constant|y movo mo away trom my °bost pract|cos.' lt you
strugg|o w|th th|s aspoct ot your trad|ng, you aro not a|ono.

Pointa to Romombor

1ho |actor 1rad|ng l|an cons|sts ot throo major
compononts, oach w|th |mportant subcompononts:

ProIiminary Comµononta



A porsona||ty and tomporamont cons|stont w|th
spocu|at|vo markots

Adoquato cap|ta||zat|on

Ovora|| r|sk managomont ph||osophy and
pr|nc|p|os


1rading Comµononta



A mothod to |dont|ty cand|dato trados

Gu|do||nos and ru|os tor ontor|ng trados

A tramowork tor manag|ng tho r|sk |n oach trado

lrocoduros tor dotorm|n|ng how to tako |ossos
or prot|ts


PoraonaI and Charactor Comµononta



1ho |ntang|b|os ot |nt|macy w|th tho trad|ng p|an,
d|sc|p||no and pat|onco

An |ntormat|on toodback procoss tor ana|yz|ng
rosu|ts and mak|ng courso corroct|ons

1ho |oap ot ta|th



Part lll

A FIve-month 1radIng ÐIary: Let
the Journey BegIn

lart lll |s a day-by-day, wook-by-wook, trado-by trado,
omot|on-by-omot|on, v|ctory-by-v|ctory, and |oss-by-|oss
account ot my trad|ng trom 0ocombor 2000 through Apr||
2010. 1ho t|mo tramo and datos aro arb|trary and choson
to roprosont a typ|ca| trad|ng por|od. l bog|n tho trad|ng
por|od w|thout hav|ng any |doa whothor l w||| bo prot|tab|o.

Chaptors 8 through 12 aro tho °month chaptors', oach
roprosonts a d|ttoront month ot trad|ng. l commont on
trados |n tho ordor thoy aro ontorod, on tho t|y, |n roa| t|mo.
And whon l trado a spoc|t|c markot moro than onco, l
comparo tho ontr|os and ox|ts.

l attompt to oxp|a|n why l ontor trados, how l manago
trados, and what l th|nk about trados attor tho tact. l sk|p
doscr|b|ng somo trados |t tho commonts and |ossons tor
tho trados aro rodundant. |owovor, a rocord ot a|| s|gna|s
|s shown |n Appond|x A.

l th|nk by journa||ng. l havo ma|nta|nod a journa| ot my
trad|ng ondoavors s|nco 1081. Wr|t|ng ho|ps my m|nd
bocomo ongagod |n tho trad|ng procoss. l w||| add journa|
ontr|os, as thoy aro |ntorost|ng, rovoa||ng, or oducat|ona|.
Vy journa| ontr|os may doa| w|th trad|ng tochn|quos,
poss|b|o trados, cha||ongos w|th my trad|ng p|an, tho uph|||
c||mb aga|nst my omot|ons, or othor |ntorost|ng t|db|ts. l
ana|yzo my trad|ng at tho ond ot oach month and quartor
and l w||| |nc|udo oxcorpts trom oach ana|ys|s.

Vy major cha||ongo as a trador |s to trans|ato tho
compononts ot tho |actor 1rad|ng l|an |nto roa|-t|mo
trad|ng oporat|ons. l bo||ovo that ovory protoss|ona| trador
knows oxact|y what |t |s that ho must do to max|m|zo
succoss. 0o|ng |t bocomos tho hurd|o.

1ho cr|tor|on tor a va||d trad|ng s|gna| (as d|ttoront|atod
trom a prot|tab|o trado) |s whothor oach ontry and ox|t,
whon p|ottod on a graph, can w|thstand scrut|ny attor tho
tact. locogn|z|ng chart cont|gurat|ons on comp|otod charts
attor tho tact |s a |ot d|ttoront than trad|ng charts |n roa|
t|mo.

3r|ng|ng thoso two t|mo d|mons|ons-c|oar|y soo|ng tho
pattorns attor tho tact and rospond|ng |n tho prosont-|nto
sync |s tho cha||ongo. l cannot a||ow myso|t to road too
much |nto any g|von chart at any g|von t|mo. l nood to a||ow
charts t|mo to tu||y maturo.

Vy moasuro ot succoss, or |ack ot tho samo, w||| bo duo
|n |argo part to whothor my trad|ng ru|os and gu|do||nos aro
|n sync w|th tho markots. lo trad|ng approach |s portoct,
and markots and trad|ng approachos got out ot sync. What
counts |s whothor l oxocuto my trad|ng ru|os and gu|do||nos
corroct|y.

|or oach trado, l w||| c|to tho to||ow|ng |toms:



1ho markot bo|ng tradod

1ho catogory ot trado (trom Chaptor )


Vajor pattorn (broakout s|gna|)

Vajor pattorn (ant|c|patory s|gna| or
oar|y ontry)

Vajor pattorn (pyram|d s|gna|, a
cont|nuat|on pattorn |n an ongo|ng
movo)

V|nor rovorsa| or cont|nuat|on s|gna|-
pattorns on da||y charts w|thout
cont|rmat|on trom wook|y graphs

lnst|nct trado

V|sco||anoous trado (dr|von |argo|y by
short-torm momontum or othor
tactors). 1hoso trados |argo|y rospond
to what chart pattorn m|ght dovo|op as
opposod to chart pattorns that havo
a|roady boon comp|otod.

1ho pattorn |dont|t|od

1ho ox|t ru|o usod (trom Chaptors and)


last 0ay lu|o (or last |our lu|o)

lotost |a||uro lu|o

1ra|||ng 3top lu|o

1argot

lntorvon|ng pattorn-ono that rosots
tho last 0ay lu|o or |nd|catos a
rovorsa| ot trond

Othor


l w||| a|so |nc|udo a chart or two ot oach comp|otod trado
w|th notat|ons as appropr|ato.

0o l havo any oxpoctat|ons as l bog|n th|s procoss? Wo||,
yos! lomombor, l am a consorvat|vo trador-tho |ovorago l
uso today |s ono-th|rd tho |ovorago l usod dur|ng most ot my
trad|ng caroor. l am tar moro r|sk avorso than l was |n
docados past. 1ho oxact |ovorago l uso on any g|von trado
w||| dopond on tho dogroo ot cont|donco l havo w|th a
spoc|t|c s|gna| and on tho r|sk |nhoront |n how tho broakout
occurs.

lomombor, tho |actor 1rad|ng l|an |s not dos|gnod to
turn $10,000 |nto a m||||on. Vy goa| |s a cons|stont doub|o-
d|g|t annua| rato ot roturn w|th ||m|tod cap|ta| vo|at|||ty.
0ur|ng tough por|ods, l sca|o my |ovorago back ovon
turthor. l |ncroaso my |ovorago (or °goar|ng,' as somo
toro|gn tradors ca|| |t) whon tho markots start to c||ck. l am
suro that oxpor|oncod las vogas gamb|ors wou|d to|| mo l
do |t tho wrong way around-that l shou|d |ovorago up
through a str|ng ot bad trados and |ovorago down dur|ng a
prot|tab|o por|od.

1ho trad|ng |ovorago usod by tho |actor 1rad|ng l|an |s
vory consorvat|vo. Vany roadors may bo shockod at tho
||m|tod |ovorago l omp|oy. As a trador, l th|nk |n torms ot
un|ts ot $100,000. l rotor to oach un|t ot $100,000
throughout tho journa| as a troolog oolt. lovorago, or
numbor ot contracts, |s oxprossod |n ro|at|onsh|p to tho
$100,000 trad|ng un|t.

|or oxamp|o, l may stato that l bought or so|d ono-ha|t ot
a contract por trad|ng un|t. 1h|s wou|d oquato to ono
contract tor oach $200,000. ln tho torox markots, tho
rotoronco w||| bo to tho |ovorago takon |n tho trado. lt l stato
that l shortod 8b,000 G3l/U30 por trad|ng un|t, th|s moans
that l wont short 8b,000 pounds por $100,000 ot trad|ng
cap|ta|.

l w||| bo |n hog hoavon |t l ach|ovo a rato ot roturn ot 10 to
1b porcont dur|ng tho noxt t|vo months. lt tho markots do not
cooporato, or |t l poor|y |mp|omont my gamo p|an, thon
koop|ng my cap|ta| |ntact may bo tho bost l can oxpoct.

A s|gn|t|cant concorn as l start th|s roa|-t|mo trad|ng d|ary
oxpor|onco |s that l trado bost whon l roma|n dotachod trom
tho markots. l havo tho tondoncy to ovorroad tho charts |t l
am too c|oso to |ntraday pr|co bohav|or.

Wr|t|ng th|s book may torco mo |nto much c|osor contact
w|th tho markots than l wou|d protor. l wondor how th|s cou|d
attoct my ab|||ty to oxorc|so my cratt, but |t w||| g|vo mo an
opportun|ty to sharo my omot|ona| journoy as wo|| as my
trad|ng oxpor|oncos.

W|th a p|an |n p|aco and my worr|os |a|d baro, |ot tho
gamos bog|n!


Chapter 8

Month One

Docombor 2000

lontorod 0ocombor 2000 qu|to trustratod by my trad|ng
portormanco dur|ng tho prov|ous two months. Octobor and
ospoc|a||y lovombor woro boast|y months tor mo. 1horo
aro just corta|n t|mos dur|ng a yoar whon l cannot buy a
good trado.

Cons|dor th|s awtu| tact: Ot a sor|os ot 27 trados dur|ng
Octobor and lovombor, 24 woro ||qu|datod at a |oss and
on|y throo at a prot|t. (|owovor, l d|d carry a numbor ot
prot|tab|o opon trados |nto 0ocombor.) 3o|ng prot|tab|o on
on|y 0 porcont ot trad|ng ovonts |s wo|| boyond a stat|st|ca|
aborrat|on. Yot, bo|ng wrong on 00 porcont ot my c|osod
trados rosu|tod |n a trad|ng |oss ot on|y a tow porcont ot my
cap|ta|. Ovor tho h|story ot my trad|ng, l havo boon
prot|tab|o |n approx|mato|y ono-th|rd ot trad|ng ovonts.

lt you aro unacqua|ntod w|th tuturos trad|ng, you may bo
shockod that l oxpoct to bo r|ght on|y ono-th|rd ot tho t|mo.
Attor a||, shou|dn't a trado havo at |oast a b0/b0 chanco ot
mak|ng monoy? lomombor, l uso ro|at|vo|y t|ght protoct|vo
stops. l gonora||y ontor trados that ottor $8 tor ovory $1 r|sk.
W|th a $8 to $1 r|sk/roward rat|o, tho b0/b0 probab|||ty
doos not app|y.

Add|t|ona||y, ovor any sma||or sor|os ot trad|ng ovonts, l
cou|d bo prot|tab|o |n as tow as 10 to 20 porcont ot trados.
A stat|st|ca| tormu|a doa||ng w|th a random d|str|but|on ot
soquont|a| prot|ts or |ossos tor a trad|ng approach w|th a
88/00 porcont |ong-torm w|n/|oss rat|o can dotorm|no tho
odds ot oncountor|ng an oxtondod |os|ng or w|nn|ng stroak.
1ho probab|||ty data can bo p|ottod on a bo|| curvo or
d|str|but|on tab|o.

3o|ng wrong on 01 porcont ot trados ovor a sor|os ot 27
trad|ng ovonts roachos tho outor oxtromo ot a bo|| curvo
d|str|but|on. 1ho standard dov|at|on ot th|s occurronco |s
qu|to oxtraord|nary. 3ut |t |s oxp|a|nab|o. 1ho roason |s that
tho d|str|but|on ot prot|tab|o and unprot|tab|o commod|ty
and torox trados |n a data sot |s not random |n tho way co|n
tossos or d|co ro||s aro random. 0|co and co|ns do not
havo omot|ons. 1radors do!

Vy rocont |os|ng stroak |nc|udod somo so|t-dotoat|ng
trad|ng pract|cos, wh|ch skowod tho stat|st|ca| probab|||ty ot
random|zod rosu|ts. Gott|ng spookod by markots can |oad
to dotons|vo trad|ng pract|cos that can pro|ong a trad|ng
drawdown. 3o, how oxact|y doos th|s work?

1ho hardost trados to omot|ona||y oxocuto tor a
d|scrot|onary trador-trados tor wh|ch ovory co|| |n a
trador's body scroams to avo|d-aro otton tho bost trados.
ln contrast, trados that aro omot|ona||y oasy to oxocuto aro
otton trados cons|stont w|th tho convont|ona| w|sdom ot tho
markotp|aco. Convont|ona| w|sdom |s usua||y wrong. 0ur|ng
a |os|ng stroak, a d|scrot|onary trador (as opposod to a
systomat|c trador) can rovort, at |oast subconsc|ous|y, to
thoso trados that soom sato. loar|y ovory |os|ng trado
dur|ng tho rocont str|ng dovo|opod an |mmod|ato prot|t.
|rom t|mo to t|mo ovor tho yoars, l havo toyod w|th tho |doa
ot grabb|ng a qu|ck $b00 to $1,000 por contract prot|t and
wa|k|ng away trom trados.

1ho ana|ys|s ot my trad|ng |n Octobor and lovombor (not
shown |n th|s book) rovoa|od too many trad|ng ovonts. l had
bocomo too short torm |n my markot ana|ys|s and was
ovorroach|ng tor trados that l shou|d not havo takon.

Excoss|vo markot act|v|ty on my part |s norma||y ||nkod to
throo typos ot trad|ng ovonts:

1. 1oo many major pattorn ant|c|patory s|gna|s |n
an attompt to pro-pos|t|on tor a major broakout
that may novor occur. Wook|y chart pattorns can
tako a |ong t|mo to como to tru|t|on. l tond to
oxorc|so an |tchy tr|ggor t|ngor to got |nvo|vod
whon l soo a wook|y pattorn dovo|op|ng.
2. 1oo many m|nor pattorn s|gna|s-accopt|ng
pattorns ot |ossor qua||ty. 1ho quost|on l shou|d
a|ways ask whon |ook|ng at a m|nor pattorn |s: °ls
tho da||y pattorn l am cons|dor|ng ono ot tho bost
two or throo m|nor da||y chart pattorns |n th|s
markot |n tho past yoar?' lt tho answor |s no, thon l
shou|d sk|p tho trado. As a rom|ndor, a m|nor
s|gna| |n my approach |s a chart cont|gurat|on
v|s|b|o on|y on tho da||y graph w|thout cont|rmat|on
ot any sort trom wook|y chart dovo|opmonts. As a
gonora| ru|o, a m|nor s|gna| shou|d bo a m|n|mum
ot tour to o|ght wooks |n durat|on tor a
cont|nuat|on chart pattorn and o|ght to 10 wooks
|n durat|on tor a rovorsa| chart pattorn.
8. lossor standards on major pattorn pyram|d
s|gna|s w|th|n an ongo|ng major trond. l bocomo
too oagor to pyram|d a prot|tab|o trado.

1hoso throo typos ot trad|ng ovonts can synorg|st|ca||y
|oad to a tomporary |ack ot cont|donco |n my trad|ng p|an.

Vy att|tudo com|ng |nto 0ocombor was that l noodod to
bo choos|or about tho pattorns l wou|d trado. lnstoad ot
|dont|ty|ng 18 to 20 or so trados month|y, l noodod to
roduco tho numbor ot now trad|ng ovonts to around 18 to
1b.

1horo |s ono othor cons|dorat|on l was tak|ng |nto
account. 0ocombor |s otton a tough month tor trad|ng.
largo tradors aro ro|uctant to pross tho|r advantago on
pos|t|ons as thoy taco tho ho||day por|od. vo|umo bog|ns to
dry up |n m|d-0ocombor. |o||day markots aro notor|ous tor
runn|ng stops on both s|dos ot tho markot |n th|n trad|ng
cond|t|ons. 1h|s |s an |mportant tact bocauso l norma||y
ontor and ox|t trados us|ng stop ordors.

1h|s was tho backdrop tor tho bog|nn|ng ot th|s book. l
was th|nk|ng to myso|t: °Oh groat, l am start|ng tho trad|ng
d|ary r|ght |n tho m|dd|o ot my worst trad|ng spo|| |n qu|to
somo t|mo. And l am start|ng tho d|ary |n a month that has
g|von mo t|ts ovor tho yoars. Wondortu|!'

1rading Rocord

0ur|ng 0ocombor, l ontorod 18 now trad|ng ovonts |n 12
d|ttoront markots. 1wo trados woro carr|od as opon
pos|t|ons |nto 1anuary.

EuR/u5D: 1ho Firat 1rado ot tho Diary
Poriod

8Ignal 1ype: Na[or ComµIotion 5ignaI

1hroughout lovombor and 0ocombor l had watchod tho
ouro/U.3. do||ar (EUl/U30) w|th an |ntorost toward tho
short s|do. ln tact, l had boon wh|ppod around |n two
attompts to got short, ono |n oar|y lovombor and thon
aga|n |n m|d-lovombor. ||guro 8.1 shows that tho markot
had dovo|opod a trond ||no trom tho Varch 2000 |ow.
lorma||y, l do not trado trond-||no v|o|at|ons. 1rond ||nos ta||
|nto a catogory ot chart dovo|opmont l ca||od ologooo|
pottoros. Yot, tho moro a markot tosts a trond ||no, tho moro
va||d-and tradab|o-an ovontua| v|o|at|on bocomos,
ospoc|a||y |t a rocogn|zab|o pattorn occurs pr|or to tho
trond-||no v|o|at|on.

F|CuRE 8.1 A Vajor 1rond l|no w|th |a|so 3roakouts |n
EUl/U30.


||na||y, a tradab|o top bogan to torm. 1ho advanco on
lovombor 2b and 20 |nto now h|ghs qu|ck|y ta||od and had
tho oarmarks ot a bu|| trap. 1ho markot broko hard on
lovombor 27 and thon rotostod tho boar-trap h|ghs. low l
had tour chart dovo|opmonts that supportod a trado, as
soon |n ||guro 8.2:

1. A bu||-trap.
2. 1ho potont|a| tor a doc|s|vo ponotrat|on ot tho
dom|nant trond ||no.
8. A trad|ng channo| trom 1u|y to prov|do a pr|co
targot. A markot comp|ot|ng a channo| can bo
roasonab|y oxpoctod to movo tho w|dth ot tho
channo| |n tho oppos|to d|roct|on.
4. A socondary and |owor channo| trom tho
lovombor |ow.

F|CuRE 8.2 A 3oar Varkot 3og|ns |n EUl/U30.


1ho major s|gna| broakout camo on 0ocombor 7 w|th tho
ponotrat|on ot tho lovombor 27 |ow. 1h|s markod tho t|rst
trado mado tor tho d|ary. 1ho h|gh ot 0ocombor 7 bocamo
tho last 0ay lu|o, but l choso to r|sk tho trado to abovo tho
0ocombor 4 h|gh. Vy pos|t|on was short 8b,000 EUl/U30
por trad|ng un|t ot $100,000 tor a r|sk ot about 1 porcont ot
assots. l cou|d havo takon tw|co tho |ovorago |t l had
choson to uso tho actua| last 0ay lu|o stop trom
0ocombor 7.

1ho targot was roachod at 1.4440 on 0ocombor 17.

Looking Back

ln h|nds|ght, l roa||zo that th|s was just tho t|rst |og down |n a
mass|vo boar trond. l |oavo monoy on tho tab|o by tak|ng prot|ts
at targots. l am not out to p|ck tops and bottoms. ln a sonso, l
p|ay my gamo botwoon tho 80-yard ||nos, not trom goa| ||no to
goa| ||no.

CBP/u5D: An E&5 1oµ 5tuttora, 1hon |a
ComµIotod

8Ignal 1ypes: 1wo Ninor RovoraaI 5ignaIa

3y |ato lovombor, l was cons|dor|ng tho poss|b|||ty that
tho G3l/U30 was torm|ng a mass|vo doub|o top dat|ng
back to m|d-Vay 2000. l otton rotor to a doub|o top as an V
top. 1ho Octobor |ow was tho m|dpo|nt |ow. 1horo was a
roa| potont|a| tor a 3ost 0rossod l|st trado |n tho G3l. 1ho
doc||no on 0ocombor 0 comp|otod a sovon-wook |83 top
pattorn. l thought tho pattorn cou|d |aunch tho movo to
comp|oto tho doub|o top.

l shortod b0,000 G3l/U30 por trad|ng un|t on
0ocombor 0, us|ng that day's h|gh as tho last 0ay lu|o.
Untortunato|y, th|s protoct|vo stop was h|t on 0ocombor 10
noar tho h|gh ot tho day (soo ||guro 8.8).

F|CuRE 8.8 A lotont|a| 0oub|o 1op |n G3l/U30.


1ho 0ocombor 10 h|gh provod to bo tho h|gh ot tho ra||y.
1ho markot |mmod|ato|y turnod |owor w|thout mo. 3uch |s
||to! lt happons! 3omot|mos tho markot g|vos mo anothor
opportun|ty to got back |n, somot|mos |t doosn't. ln th|s
caso, |t d|d, and thoro |s a |osson |n |t.

l know just onough about cand|ost|ck charts to bo
dangorous. Wh||o l bo||ovo know|odgo ot wook|y
cand|ost|cks cou|d ho|p my trad|ng, l am a h|gh/|ow/c|oso
bar chart|st and havo not takon tho t|mo to adoquato|y do|vo
|nto tho study ot cand|ost|ck pattorns.

1horo |s ono cand|ost|ck pattorn l do to||ow, tho h|kkako,
thanks to a good tr|ond and to||ow chart trador, 0an
Chos|or (an |ndopondont markot stratog|st basod |n south
||or|da, Chos|or Ana|yt|cs, www.chos|or.us). 0an a|orts mo
to h|kkako pattorns |n markots ho knows l am trad|ng. l
havo no |ntorost |n a h|kkako |n any markot l am not trad|ng
or |ook|ng to trado.

1ho h|kkako |s a ta||od |ns|do-bar pattorn. 1ho |ns|do bar
|s a cand|ost|ck tormat|on that occurs whon a day's cand|o
rango |s |ns|do tho rango ot tho prov|ous day. ln tho caso ot
a h|kkako so|| s|gna|, tho |ns|do day |s to||owod by ono to
two days ot advancos abovo tho h|gh ot tho |ns|do day,
to||owod by a doc||no back bo|ow tho |ow ot tho |ns|do day.
3oo ||guros 8.4 and 8.b tor oxamp|os ot tho boar and bu||
h|kkako pattorns.

F|CuRE 8.4 A 3oar ||kkako lattorn.



F|CuRE 8.5 A 3u|| ||kkako lattorn.



l am most |ntorostod whon a h|kkako occurs cons|stont
w|th my ovora|| v|owpo|nt and trad|ng stratogy |n a part|cu|ar
markot. 3o, as l was gott|ng stoppod out ot G3l on
0ocombor 10, l know that a h|kkako so|| s|gna| was
poss|b|o.

1ho doc||no on 0ocombor 17 sprung tho h|kkako and
rocomp|otod tho |83 pattorn, cont|rm|ng oach othor. l
roontorod tho short s|do ot tho markot (40,000 G3l por
trad|ng un|t), us|ng tho 0ocombor 17 h|gh as tho now last
0ay lu|o (soo ||guro 8.0).

F|CuRE 8.0 A 3oar ||kkako |n G3l/U30 Cont|rms tho
|83 1op.


1h|s stop-out and roontry br|ngs up an |ntorost|ng po|nt.
Was |t pa|ntu| to roso|| tho markot 100 po|nts |owor than
whoro l covorod shorts just ono trad|ng day oar||or? ln somo
ways, tho answor |s °yos', |n othor ways, tho answor |s
°no'--°yos' |n that |t |s novor tun to |oso a 100-po|nt
opportun|ty prot|t |n a markot, °no' |n that tho last 0ay lu|o
has boon my most dopondab|o chart-basod monoy
managomont tochn|quo ovor tho yoars.

ln h|nds|ght, wo can soo that tho h|kkako d|d |ts th|ng. 3ut
what |t tho markot had not comp|otod tho h|kkako, but
|nstoad tradod strong|y h|ghor? l wou|d havo to|t ||ko a too| |t
l had ovorr|ddon tho last 0ay lu|o and y|o|dod |nstoad to
tho poss|b|||ty ot a h|kkako. lomombor, tho h|kkako |s not
too|proot. A study ot any chart can y|o|d mu|t|p|o oxamp|os
ot h|kkako pattorns that ta||od.

1horo |s anothor d|mons|on to th|s d|scuss|on. l v|owod
tho two trados |n G3l/U30 as soparato trados, oach
subjoct to |ts own ru|os and gu|do||nos, yot part ot a
cont|nuous campa|gn to bo short G3l/U30. |rom tho
standpo|nt ot my trad|ng ru|os and gu|do||nos, |t was
|rro|ovant that tho two trados woro on|y a day apart.

1ho targot ot tho socond G3l trado was 1.b008. l
covorod tho short pos|t|on on 0ocombor 80, w|thout a good
roason othor than omot|ona| norvousnoss (soo ||guro 8.7).

F|CuRE 8.7 1ak|ng a 3ma|| lrot|t |n tho G3l/U30.



ln tho ond, my 1ra|||ng 3top lu|o wou|d havo boon
tr|ggorod on 0ocombor 81, tho last 0ay lu|o on 1anuary
14. lt |s an oxcopt|on whon l ond up tor tho bottor by
ovorru||ng my trad|ng gu|do||nos and ru|os as happonod
w|th th|s trado.

1rading 5µot Forox Narkota

l startod out my caroor trad|ng toro|gn curroncy markots
through tuturos contracts at tho lntornat|ona| Vonotary Varkot
(lVV, part ot tho Ch|cago Vorcant||o Exchango). 3y tho m|d-
1080s, l bogan trad|ng tho spot |ntorbank or doa|or markot
rathor than tuturos contracts. l protor tho spot markot tor many
ot tho roasons |dont|t|od |n tho tab|o on tho pros and cons ot
oach trad|ng voh|c|o shown bo|ow. 1hough |t |s not w|th|n tho
scopo ot th|s book to prov|do oducat|ona| background on
curroncy trad|ng, thoro aro pros and cons to both markots (soo
to||ow|ng ||st). Undorstand|ng thom can shod ||ght on tho
trados doscr|bod |n th|s chaptor.

1ho lVV quotos and trados curroncy pa|rs |n a cons|stont
mannor. A|| tho major pa|rs at tho lVV aro oxprossod as tho
pr|co ot tho toro|gn curroncy |n U.3. do||ars. |or oxamp|o, at tho
prosont t|mo tho pound |s at $1.b08b, tho 3w|ss tranc at
$0.0081, tho yon at $0.010000 (s||ght|y moro than a ponny), tho
ouro at $1.48b0, and tho Canad|an do||ar at $0.002b. ln oach
caso, tho symbo| wou|d bo oxprossod as tho toro|gn curroncy
un|t d|v|dod by U30-G3l/U30, EUl/U30, C|| (3w|ss)/U30,
CA0/U30, 1lY/U30.

Ouot|ng and trad|ng curroncy pa|rs |n tho spot markot can bo
moro comp||catod. ln somo casos, tho pa|rs aro tradod s|m||ar
to tho lVV, such as tho G3l/U30 and EUl/U30. |owovor, |n
othor casos, tho spot markot trados tho |nvorso (or roc|proca|)
oxpross|on ot tho lVV pr|co.

|or oxamp|o, |n tho spot markot, tho Canad|an do||ar |s
oxprossod as tho numbor ot Canad|an do||ars por U30, or
U30/CA0. U30/CA0 |s tho roc|proca| ot CA0/U30. 3ay|ng that
tho CA0 |s worth $0.002b (symbo| |s CA0/U30) |s tho samo
th|ng as say|ng thoro aro 1.0800 CA0s por U30 (symbo| |s
U30/CA0).

1abIo 8.1 0oa|or 3pot vs. lVV |uturos

|tom DoaIor/|ntorbank 5µot |NN Futuroa
var|oty ot
torox pa|rs
Advantago spot, major and
m|nor curroncy un|ts |n a||
comb|nat|ons
On|y major
curroncy un|ts,
most|y |n
comb|nat|on w|th
tho U30
|unds
protoctod
On|y by ta|th and crod|t ot
|nd|v|dua| doa|or
3y tho lVV's
c|oar|ng t|rm
Ouotos and
trad|ng
Each doa|or and trad|ng
p|attorm can havo s||ght|y
d|ttoront b|ds and ottors
3tandard|zod, a
s|ng|o markot
3|zo ot
trad|ng un|ts
||ox|b|o 3tandard|zod
vo|umo,
||qu|d|ty,
hours ot
trad|ng
Advantago spot
logu|atory
ovors|ght
Commod|ty |uturos 1rad|ng
Comm|ss|on (C|1C)/lat|ona|
|uturos Assoc|at|on (l|A) has
bocomo |nvo|vod
l|A/C|1C
Varg|n
roqu|romonts
(or |ovorago)
Approx|mato|y oqu|va|ont
Approx|mato|y
oqu|va|ont
1rado
sott|omont
3ovora| days tor |ntorost and ro||
chargos to catch up to trado
3amo day

1ho tormu|a tor convors|on trom U30/CA0 to CA0/U30 and
back |s s|mp|o (1 d|v|dod by 0.002b oqua|s 1.0800, or 1 d|v|dod
by 1.0800 oqua|s 0.002b). As tho pr|co ot U30/CA0 goos up,
tho pr|co ot CA0/U30 goos down by tho roc|proca| va|uo. lt l
thought tho U30 was go|ng to ga|n |n va|uo on tho CA0, l cou|d
o|thor go |ong tho spot U30/CA0 or go short CA0/U30 at tho
lVV.

|uturos tradors |ntorostod |n trad|ng tho spot torox markot
shou|d bo awaro ot ono |mportant th|ng. lot a|| spot torox
doa|ors and brokors aro oqua|. 1horo |s ono hugo d|ttoronco,
and tuturos tradors know tho d|ttoronco by tho words sklo and
s|lppogo. 3k|d occurs whon a stop ordor |s t|||od at a worso
pr|co.

1horo aro somo torox brokors who noar|y a|ways t||| stops on
tho noso w|th ||tt|o or no s||ppago. |ugo sk|d can occur w|th
othor torox brokors. l bo||ovo that tho brokors and doa|ors who
|mposo sk|d on tradors aro r|pp|ng thom ott. 1ho torox markots
aro tho most ||qu|d markots |n tho wor|d. 1horo shou|d novor
bo much sk|d. 3k|d occurs as a prot|t contor tor tho torox
brokors |n quost|on. |orox doa|ors who r|p ott tho|r spocu|at|vo
c||onts know who thoy aro. l know who you aro. l am not
nam|ng namos, a|though l cou|d. You aro abus|ng sma||
spocu|ators. 3hamo on you! 3top |t! You aro a|roady |mpos|ng
hugo b|d/ottor sproads on spocu|at|vo c||onts-|oarn to bo
sat|st|od oarn|ng tho b|d/ottor sproad!

Narch 5ugar: A Four-Nonth ChannoI |a
RoaoIvod

8Ignal 1ype: Na[or Broakout 5ignaI

loxt up was my bost trado ot tho month, and ono ot my
bottor trados |n a|| ot 2000-|n tact, a mombor ot 2000's
3ost 0rossod l|st.

l had boon trustratod trom August through oar|y
0ocombor, oxpoct|ng anothor thrust h|ghor |n sugar basod
on tho month|y chart. ln tact, l oxpor|oncod tour |os|ng trados
dur|ng th|s t|mo por|od as l attomptod to got pro-pos|t|onod
tor a run to tho stars.

1ho markot t|na||y comp|otod a throo-month-p|us major
s|gna| broakout ot a cont|nuat|on channo| on 0ocombor 11.
lt you |ook at ||guro 8.8 carotu||y, you w||| soo that tho t|na|
tour wooks ot th|s channo| dovo|opod an |83 bottom
pattorn.

F|CuRE 8.8 3ugar 3roaks Out ot a |our-Vonth Channo|
and Ono-Vonth |83 3ottom.


As usua| w|th va||d broakouts, tho last 0ay lu|o was
novor throatonod. l took a pos|t|on ot ono contract por
trad|ng un|t ot $100,000 tor a r|sk ot about o|ght-tonths ot 1
porcont (0.8 porcont). l shou|d havo had moro guts to
assumo moro |ovorago-and l know |t at tho t|mo.

l got bumpod out ot ha|t my pos|t|on (ono-ha|t contract
por trad|ng un|t) on 0ocombor 22 basod on tho 1ra|||ng
3top lu|o, and covorod tho roma|ndor ot tho pos|t|on on
0ocombor 28 at tho pattorn targot ot 2780.

Looking Back

l took a coup|o moro shots at th|s markot dur|ng 1anuary 2010
botoro tho markot ovontua||y toppod. ln 2000, sugar was my
s|ng|o most prot|tab|o markot. lt |s not unusua| tor a markot that
causos mo t|ts tor a yoar or two to bocomo h|gh|y prot|tab|o at
somo po|nt, just as |t not unusua| tor a markot that |s h|gh|y
prot|tab|o ono yoar to bocomo a sourco ot trad|ng |ossos tho
noxt. lt |s |mportant tor chart tradors to romombor that wo do not
trado markots-wo trado chart pattorns. 1ho |abo||ng on tho
chart |s un|mportant.

Narch Cotton: A Pattorn to 1rado 1oo
5maII to 1rado

8Ignal 1ype: NiacoIIanooua 1rado

1h|s noxt trado was a groat oxamp|o ot a||ow|ng my
omot|ons to d|ctato doc|s|ons whon l am m|ss|ng a b|g
trond. Cotton was |n a strong trond, and ovory day l saw |t
go|ng h|ghor.

l usod tho oxcuso ot a throo-wook ponnant to go |ong on
0ocombor 14. l movod my stop |n ro|at|onsh|p to tho rotost
on 0ocombor 18 and was stoppod out on 0ocombor 22
w|th tho lotost |a||uro lu|o (soo ||guro 8.0).

F|CuRE 8.0 An Emot|ona| 1rado |n Cotton.



1ho rosu|ts aro so|dom good whon l t|nd an oxcuso to got
aboard a markot l havo m|ssod trom an oar||or trad|ng
s|gna|.

Narch 5oyboan OiI: A Caao ot Cotting
Whiµµod in Both Diroctiona

8Ignal 1ypes: Na[or Broakout 5ignaI and
|natinct 1rado

1ho gap up on lovombor 10 comp|otod a tr|ang|o
bottom |n Varch 3oyboan O||. l shou|d havo gono |ong on
lovombor 10, or on lovombor 24 or lovombor 27 whon
tho tr|ang|o was rotostod. l just d|d not stop up to tho p|ato.
|ad tho markot gono stra|ght up, l wou|d havo k|ckod
myso|t tor m|ss|ng a groat trado. 3ut, t|na||y, l wont |ong at
tho 0ocombor 1b rotost ot th|s tr|ang|o, bo||ov|ng that tho
markot wou|d not c|oso tho lovombor 10 gap (soo ||guro
8.10).

F|CuRE 8.10 A 3roakout ot a 3ymmotr|ca| 1r|ang|o |n
3oyboan O|| lacks |o||ow-1hrough.



As shown |n ||guro 8.11, on 0ocombor 17 l was stoppod
out whon tho markot comp|otod a tour-wook |83 top
pattorn. l a|so wont short. 1h|s short was an |nst|nct trado. A
tour-wook pattorn |s not onough ot a chart structuro tor mo
to trado. l ox|tod tho short pos|t|on whon tho markot c|osod
back abovo tho nock||no on 0ocombor 28. Zoro tor two |n
soyboan o|| trados |n a mattor ot two wooks.

F|CuRE 8.11 A 3ma|| |83 1op lovorsos tho 3ottom |n
3oyboan O||.


Vy |ovorago on both trados was sovon-tonths ot a
contract por trad|ng un|t.

AuD/u5D: 5oIIing tho Broakout and
1hon 5oIIing tho Rotoat ot an E&5 1oµ

8Ignal 1ype: 1wo Na[or Broakout 5ignaIa

1ho 10-wook |83 top |n tho AU0/U30 was a poss|b|o
cand|dato tor tho 3ost 0rossod l|st. 1ho on|y prob|om l had
w|th tho trado was that tho r|ght shou|dor |ow cons|stod ot a
ono-day sp|ko. Yot l go by tho gonora| ru|o that °tunct|on
shou|d to||ow torm.'

l shortod tho markot on 0ocombor 10, actua||y |oad|ng
tho broakout by a day. Vy |ovorago was 4b,000 AU0 por
trad|ng un|t. l ox|tod tho markot on 0ocombor 28 tor a sma||
prot|t basod on tho 1ra|||ng 3top lu|o. 3oo ||guro 8.12.

F|CuRE 8.12 A |a||od |83 1op |n AU0/U30.


1hon l roostab||shod my short at tho rotost on 0ocombor
81, on|y to bo stoppod out on 1anuary 4 us|ng tho or|g|na|
last 0ay lu|o.

Narch DAX: Riding a Winnor into a
Loaor

8Ignal 1ype: Na[or Broakout 5ignaI

On 0ocombor 10 tho Varch 0outschor Akt|on lndox
(0AX) comp|otod a toxtbook ascond|ng tr|ang|o. 1ho
markot ta|torod tor tho noxt two days but d|d not v|o|ato tho
last 0ay lu|o at b810. 1hon, on 0ocombor 21, |t
appoarod as |t tho 0AX wou|d tako a run tor tho rosos. Vy
|ovorago was ono-ha|t contract por trad|ng un|t.

As shown |n ||guro 8.18, tho broakout provod to bo an
ond-around. l was stoppod out at tho last 0ay lu|o on
1anuary 21. 1ho 1ra|||ng 3top lu|o wou|d havo |ot mo out ot
tho trado on 1anuary 1b, but l got stubborn.
tho trado on 1anuary 1b, but l got stubborn.

F|CuRE 8.18 An Ascond|ng 1r|ang|o |n 0AX w|th an End-
Around Vovo.


A trado ||ko tho 0AX croatos agony and makos mo
quost|on my trad|ng p|an and doc|s|on mak|ng. 1ho 0AX |s
a b|g contract, l had an opon trado prot|t |n tho trado ot
noar|y $2,800 por contract. 1hon tho markot d|d a s|ow and
agon|z|ng turn. l gavo |t a|| back, and moro. Watch|ng a
markot day by day do a round tr|p |s not tun. l ca|| thoso
popcoro trados.

Narch 5oyboana: 1aking a Loaa on a
1rado, but Not 5taying with tho |doa

8Ignal 1ype: NiacoIIanooua 1rado

l|ko tho trado |n soyboan o|| c|tod oar||or, a tour-wook
rovorsa| |83 top |s not a p|tch l shou|d sw|ng at. l wont
short on 0ocombor 17, tho day botoro tho actua| broakout.
1ho markot doc||nod tor throo days, thon rovorsod. l got
stoppod out on 0ocombor 28 us|ng tho last 0ay lu|o (soo
||guro 8.14).

F|CuRE 8.14 A 3ma|| |83 1op |n 3oyboans 1urns |nto a
largor |83 |ormat|on.


l want to uso tho soyboan chart to mako ono moro po|nt
about tho |83 tormat|on. lt wou|d havo boon tompt|ng to
havo rodrawn a |argor |83 w|th tho |ott shou|dor |n Octobor
and tho r|ght shou|dor |n oar|y 1anuary. And, |n tact, th|s
pattorn wou|d havo producod a prot|t w|thout ovor
cha||ong|ng tho broakout ontry. Yot l d|d not ca|| th|s |argor
pattorn an |83 top tor two roasons, ovon though a
prot|tab|o surgo was tho outcomo.

||rst, an |83 rovorsa| noods to rovorso somoth|ng. 1h|s
|argor pattorn was just part ot a broad trad|ng rango.
3ocond, l protor to havo a moro hor|zonta| nock||no and
moro symmotry botwoon tho ho|ght and durat|on ot tho |ott
and r|ght shou|dors. lovortho|oss, l countod th|s sharp
doc||no as a m|ssod trado.

Narch Nini Naadaq: An Aaconding
1riangIo Producoa a ProtitabIo 1rado

8Ignal 1ype: Ninor Continuation 5ignaI

1ho advanco on 0ocombor 21 comp|otod a throo-wook-
p|us cont|nuat|on ascond|ng tr|ang|o, putt|ng mo |ong ono
m|n| contract por trad|ng un|t. lt was a|so poss|b|o to
|ntorprot th|s pattorn as a s|x-wook cont|nuat|on |nvortod
|83 pattorn, but tho |ott shou|dor was poor|y tormod (soo
||guro 8.1b).

F|CuRE 8.15 An Ascond|ng 1r|ang|o |n tho V|n| lasdaq.



l choso tho t|rst |ntorprotat|on bocauso |t had tho |ossor
targot. 1ho uptrond |n tho stock markot was |ong ovorduo a
corroct|on at tho t|mo, |n my op|n|on, so l d|d not want to
uso tho moro aggross|vo objoct|vo. 1ho markot roachod |ts
|owor targot on 0ocombor 28.

u5D/CAD: A Ono-Day-Out-ot-Lino
Novomont

8Ignal 1ype: Ninor RovoraaI 5ignaI

l shortod tho markot on 0ocombor 20, wh|ch provod to
bo a ono-day-out-ot-||no movomont. l was stoppod out at
tho last 0ay lu|o on 0ocombor 80 (soo ||guro 8.10).

F|CuRE 8.10 A 0oscond|ng 1r|ang|o |n U30/CA0 ln|t|a||y
3tuttors, 1hon |a||s.


lt |s not a vory good s|gn whon a markot c|osos aga|nst
mo tho samo day l put |t on. Vy not bottom ||no ovor tho
yoars wou|d havo |mprovod |t l had ox|tod a|| trados that
c|osod aga|nst mo.

5ummary

1horo aro |os|ng trados, |os|ng days, |os|ng wooks, |os|ng
months, |os|ng quartors, and, untortunato|y, thoro can ovon
bo |os|ng yoars. l havo oxpor|onco w|th a|| ot thoso.
0ocombor was a tough month whon l cons|dor opon trado
prot|ts trom tho ond ot lovombor that d|sappoarod botoro
bo|ng c|osod |n 0ocombor. 3ut th|s book |s covor|ng tho
por|od trom oar|y 0ocombor torward, so l w||| ||m|t my
spoc|t|c commonts to trados trom th|s por|od.

Comparod to tho bonchmarks ot tho |actor 1rad|ng
l|an, tho prot||o ot trados oponod |n 0ocombor |s shown |n
1ab|o 8.2.

1ABLE 8.2 0ocombor 2000 1rad|ng 3|gna|s by Catogory

5ignaI Catogory
Docombor Entrioa (numbor and ¼
ot totaI)
Eiatoric
Bonchmark
Na[or µattorna
Comp|ot|ons 0 (40%) 4 (10%)
Ant|c|patory 0 2.b (18%)
lyram|d 0 2.b (18%)
Ninor µattorna 4 (81%) b (20%)
|natinct tradoa 1 (8%) 8 (17%)
NiacoIIanooua
tradoa
2 (1b%) 2.b (18%)
1otaI 18 (100%) 10.b (100%)

l do not got too concornod whon tho prot||o ot trados tor a
s|ng|o month |s askow trom tho h|stor|ca| bonchmark
norms. l am moro |ntorostod |n quartor|y and annua| tronds
away trom tho norm.

Ot tho 18 trados that woro oponod dur|ng 0ocombor, 11
woro c|osod by tho ond ot tho yoar: t|vo as prot|ts and s|x
as |ossos. 1h|s rat|o oxcoods tho h|stor|ca| bonchmark ot
on|y 80 to 8b porcont ot trados bo|ng prot|tab|o.

1ho tourth quartor was a tough trad|ng onv|ronmont tor
mo. Vany trados startod out wo||, on|y to rovorso d|roct|on
and rosu|t |n |ossos. Othor t|mos, l was too qu|ck to
advanco a protoct|vo stop, on|y to bo stoppod out and havo
a markot thon go |n |ts oxpoctod d|roct|on. lt was not a
groat quartor tor commod|ty trad|ng adv|sors (C1As) |n
gonora|. ||guro 8.17 |s a graph show|ng tho w|do|y to||owod
lyxor 3hort-1orm C1A lndox.

F|CuRE 8.17 lyxor 3hort-1orm C1A lndox.

5oorco. Lyxor Assot Vooogomoot
(www.|yxorboogoloolcos.com/looox.pbp).


1ho |ndox was down (0.2 porcont) |n tho tourth quartor.
3ut trom my po|nt ot v|ow, m|sory doos oot ||ko company. l
must comparo my portormanco to my own approach and
not to othors. lt |s oasy attor tho tact to |dont|ty
mod|t|cat|ons to ono's trad|ng p|an that wou|d havo dono
wo|| |n rotrospoct.

Whon ana|yz|ng a conc|udod trad|ng por|od, l draw a
d|st|nct|on botwoon throo aspocts ot tho trad|ng oquat|on:

1. What typo ot markots d|d wo havo (trond|ng or
choppy)?
2. |ow wo|| d|d my trad|ng p|an and |ts ru|os synch
w|th what tho markots ottorod?
8. |ow wo|| d|d l oxocuto tho p|an?

1ho typo ot markots oxpor|oncod |s an uncontro||ab|o
var|ab|o. 1horo |s noth|ng l can do to chango markot
bohav|or. |owovor, l do havo somo gonora| contro| ovor my
trad|ng p|an, a|though |t |s |mposs|b|o to a|tor trad|ng ru|os
to opt|m|zo tho rosu|ts ot any g|von trado or sor|os ot
trados. l havo ovon groator contro| ovor tho dogroo to wh|ch
l corroct|y oxocuto my trad|ng p|an-or, statod |n tho
nogat|vo, tho dogroo to wh|ch l v|o|ato my own ru|os.

lt |s ont|ro|y conco|vab|o that l cou|d bo moro p|oasod
w|th my trad|ng dur|ng an unprot|tab|o por|od |n wh|ch l
ta|thtu||y |mp|omont a prodotorm|nod gamo p|an than w|th
my trad|ng dur|ng a prot|tab|o por|od |n wh|ch l m|smanago
somo trados and do not tu||y oxp|o|t othor s|gna|s.

1rados ostab||shod |n 0ocombor, whon c|osod,
producod a prot|t ot 1.b porcont. 3omo ot thoso prot|ts
woro c|osod |n 1anuary. On a va|uo Addod Vonth|y lndox
(vAVl) markod-to-tho markot bas|s, my trad|ng
portormanco tor 0ocombor was up .04 porcont.

A comp|oto trado-by-trado rocord tor th|s book can bo
tound |n Appond|x A.


Chapter 9

Month 1wo

January 2010

lam roa||y g|ad tho tourth quartor ot 2000 |s now h|story. l
can start a now yoar. l tradod on|y propr|otary cap|ta| dur|ng
tho t|rst n|no months ot 2000. Vy propr|otary account was
prot|tab|o |n 2000 duo pr|mar||y to trados |n 3ugar and
Go|d. l d|scont|nuod |mp|omont|ng tho tu|| |actor 1rad|ng
l|an tor propr|otary cap|ta| to mako roady tor trad|ng a
commod|ty poo| account, ot wh|ch l wou|d bo a major
stakoho|dor. 1ho poo| took a |ong t|mo to got go|ng but was
t|na||y tunct|on|ng |n Octobor 2000, just |n t|mo tor a
drawdown. 1ho tourth quartor sorvod up an amp|o port|on
ot humb|o p|o. l havo novor dovo|opod a tasto tor humb|o
p|o and sor|ous|y doubt l ovor w|||. 1ho tasto |s b|ttor.

0rawdowns aro a way ot ||to tor a trador. lor|ods ot
cap|ta| drawdown br|ng about tromondous |ntrospoct|on.
Whon trad|ng |s go|ng wo||, |t |s oasy to th|nk trad|ng w|||
novor got bad aga|n. Whon trad|ng goos sour, |t |s d|tt|cu|t
to romombor tho prot|tab|o t|mos.

l havo oxpor|oncod s|gn|t|cant drawdowns dur|ng oach ot
tho 17 yoars l tradod propr|otary tunds as my tu||-t|mo
occupat|on. (l qu|t trad|ng tor a tow yoars to pursuo somo
non-prot|t ondoavors). 1ab|o 0.1 |s a rank ordor ot my worst
drawdowns through tho yoars.

1ABLE 0.1 |actor llC's Worst 0rawdowns

Poak-to-VaIIoy Duration in
Drawdown, Nonth Nontha trom
Poriod
Ending
¯
Poak to VaIIoy
0oc. 1081-Var. 1082 (88.7%) 4
Apr. 1080-1u|y 1080 (82.2%) 4
3opt. 1087-Apr. 1088 (27.2%) 8
1u|y 1082 (20.8%) 1
Var. 108b-1uno 108b (21.1%) 4
Var. 2008-Vay 2008 (10.7%) 8
1an. 2007-Var. 2007 (10.b%) 8
0oc. 1088-|ob. 1084 (18.2%) 8
1u|y 1088-0oc. 1088 (1b.4%) 0
1u|y. 1084-Oct. 1084 (12.0%) 2
Aug. 108b (11.8%) 1
Apr. 1080 (11.0%) 1
¯
1ho data abovo roprosont actua| propr|otary trad|ng portormanco. 1ho
|ovorago curront|y bo|ng omp|oyod by tho |actor 1rad|ng l|an |s ono-th|rd
ot that usod pr|or to Octobor 2000. 1ho Author's loto at tho ond ot th|s
book conta|ns tho d|sc|osuro statomonts ro|atod to tho past portormanco
ot |actor llC.

Vy po|nt |s that trad|ng |s not an oasy ondoavor or
ovoryono wou|d bo do|ng |t. 1rad|ng |s tough work. A|| ot tho
drawdowns ||stod woro trom yoars whon l was much moro
r|sk to|orant and tradod s|gn|t|cant|y groator |ovorago. 1ho
curront |actor 1rad|ng l|an |s a carbon copy ot prov|ous
yoars |n torms ot ontry s|gna|s and ox|t stratog|os, but
|ovorago that has boon roducod by two-th|rds. Cutt|ng
|ovorago by th|s magn|tudo roducos tho r|sk ot |argo
drawdowns, but |t a|so m|n|m|zos ups|do potont|a|. l havo
||vod through drawdowns botoro, and l w||| ||vo through thom
aga|n |n tho tuturo.

|dontitying 1rading
Oµµortunitioa

l ||ko to start tho now ca|ondar yoar by |dont|ty|ng trados l
bo||ovo ottor tromondous opportun|ty tor prot|ts |n tho
upcom|ng months. |or 2010, l choso s|x: short 3r|t|sh
pound/U.3. do||ar (G3l/U30), short 3tandard 8 loor's
(38ls), short 1-bonds, |ong go|d, and |ong sugar. Wo may
soo how r|ght l am by tho ond ot tho book.

CBP/u5D: 5tiII BuiIding a Na[or DoubIo
1oµ

1ho dom|nant pattorn |n th|s markot roma|ns tho sovon-
month doub|o top on tho wook|y graph (soo ||guro 0.1). A
doc|s|vo c|oso bo|ow 1.b000 wou|d comp|oto th|s tormat|on
and ostab||sh an objoct|vo ot 1.440, w|th a turthor poss|b|||ty
ot roach|ng tho 2000 |ow at 1.8b00. l too| corta|n that th|s
w||| bo a 3ost 0rossod movo |n 2010-tho quost|on |s
whothor my trad|ng ru|os w||| bo |n sync w|th tho doc||no.

F|CuRE 0.1 loss|b|o E|ght-Vonth 0oub|o 1op |n
G3l/U30.


5&P 500: A Broakout ot tho ChannoI |a
Coming 5oon

1ho U.3. stock markot has oxpor|oncod a noar-h|stor|c bu||
run trom tho Varch 2000 |ow. 1horo aro somo s|gns that tho
markot ra||y |s gott|ng short ot broath. As shown |n ||guro
0.2, tho markot oxh|b|ts a s|x-month channo|. lr|cos havo
boon unab|o to tost tho uppor rango ot th|s channo|, a s|gn
that momontum |s bo|ng |ost.

F|CuRE 0.2 3|x-Vonth Channo| and 1hroo-Vonth Wodgo
|n 38ls.



Vost rocont|y, tho markot |s co|||ng |nto a two-month
r|s|ng wodgo, a boar|sh pattorn. 1ho r|s|ng wodgo |s
charactor|st|c ot a countortrond ra||y. 1ho targots tor th|s
markot, pond|ng a downs|do broakout, aro 1080, thon 080.

80-Yoar 1-Bonda: A Boar Narkot in tho
Naking in Evory 1imo Framo

|ow do you spo|| sovorolgo ooíoo|tº 1ho |ongor-torm
charts |n tho U.3. 1-bond markot |ook ||ko a catastropho
wa|t|ng to happon. 1hroo charts aro prosontod. ||rst, |n
||guro 0.8, tho quartor|y chart dat|ng back to tho oar|y
1080s d|sp|ays a trad|ng channo|. At somo po|nt, th|s
channo| w||| bo v|o|atod and pr|cos shou|d thon movo
downward an amount oqua| to tho w|dth ot tho channo|. 1ho
probab|o targot wou|d bo a tost ot tho 1004 |ows at around
80.

F|CuRE 0.8 Vu|t|docado Channo| |n 1-3onds.



||guro 0.4 |s a wook|y cont|nuat|on chart ot tho bonds.
1h|s chart d|sp|ays a 20-month |83 pattorn. As th|s pattorn
unto|ds, pr|cos movo c|osor and c|osor to tho |owor
boundary ot tho dom|nant quartor|y chart channo|. At th|s
t|mo, tho r|ght shou|dor appoars to |ack symmotry w|th tho
|ott shou|dor. 1ho r|ght shou|dor wou|d bo ot oqua| |ongth to
tho |ott shou|dor |n Varch or Apr|| 2010. l ant|c|pato a top |n
|ato Varch.

F|CuRE 0.4 1wo-Yoar |83 1op on tho Wook|y 1-3ond
Chart.


||na||y, ||guro 0.b shows that tho r|ght shou|dor ot tho
wook|y |83 top cou|d |tso|t bo a poss|b|o comp|ox |83
pattorn on tho da||y chart. A|| that |s noodod |s a r|ght
shou|dor ra||y not to oxcood 121 to||owod by tho ponotrat|on
ot tho nock||no.

F|CuRE 0.5 loss|b|o 3|x-Vonth |83 1op on tho 0a||y 1-
3ond Chart.


1h|s markot |s sot up tor cascad|ng chart ovonts. 1ho
|83 on tho da||y chart cou|d |aunch tho |83 on tho wook|y
chart, wh|ch cou|d |aunch tho comp|ot|on ot tho channo| on
tho quartor|y chart. 1-bonds, |n my op|n|on, ottor tho bost
opportun|ty to mako $2b,000 to $80,000 por contract
dur|ng tho noxt two yoars. 3ut t|m|ng |s ovoryth|ng. lt a
trador |s r|ght on d|roct|on, but wrong on t|m|ng, thon tho
trador |s wrong por|od.

CoId: 1ho BuII Narkot Eaa Room to Co

A vors|on ot ||guro 0.0 |s d|sp|ayod |n t|guro 0.10 |n
chaptor s|x. 1ho advanco |n Octobor 2000 comp|otod an
|nvortod |83 bottom pattorn on tho wook|y and month|y
go|d charts. 1h|s pattorn has an unmot objoct|vo ot 18b0.

F|CuRE 0.0 lnvortod Cont|nuat|on |83 3ottom lattorn |n
Go|d.



5ugar: OuartorIy Chart |ndicatoa 00
Conta

3ugar |s a w||d markot that can and w||| surpr|so tho
smartost ot tradors. 1h|s boom-to-bust markot op|tom|zos
tho torm popcoro ro||y. Wh||o tho bu|| markot |n sugar as ot
th|s wr|t|ng (1anuary b, 2010) cou|d ond whon |oast
oxpoctod, tho |ongost-torm charts |nd|cato that 3ugar has
tho potont|a| tor 00 conts. 1ho month|y graph |n ||guro 0.7
shows tho ont|ro por|od trom 1081 through 2000 as a baso
aroa. lt th|s |s tho caso, sugar cou|d oas||y mako now a||-
t|mo rocord h|gh pr|cos.

F|CuRE 0.7 28-Yoar 3aso on tho Vonth|y 3ugar Chart.


Dow Jonoa |nduatriaIa: A
NuItigonorationaI 1oµ in tho Naking?

1h|s |s my °p|o-|n-tho-sky' chart. Wh||o quartor|y and annua|
charts aro not pract|ca| tor tact|ca| trad|ng doc|s|ons, thoy
do mako good tun |n croat|ng crazy pr|co prod|ct|ons.
||guro 0.8 |s a som||og quartor|y chart ot tho 0ow

F|CuRE 0.8 A loss|b|o 12-Yoar 1op |n tho 01lA.


go|ng back docados. l can't ho|p but not|co tho poss|b|o
|83 top. lt th|s |ntorprotat|on |s corroct, tho markot |s
prosont|y |n tho r|ght shou|dor ra||y. 3ymmotry wou|d bo
ach|ovod by a ra||y |n tho 0ow 1onos lndustr|a| Avorago
(01lA) to around 11,7b0 w|th a r|ght shou|dor h|gh
somot|mo |n 2018, p|us or m|nus a yoar. At 0ow 11,b00, l
wou|d not want to own a s|ng|o stock. 1h|s chart |s bo|ng
prosontod just tor tun-tor now.

Amonding tho PIan

Attor somo sor|ous sou| soarch|ng ovor tourth quartor 2000
trad|ng act|v|ty and portormanco, l am mak|ng a stratog|c
twoak |n tho |actor 1rad|ng l|an. 1ho chango doa|s w|th
tho numbor ot trad|ng ovonts l w||| ontor oach month.

Vy goa| |s to ra|so tho bar on tho cr|tor|a a chart pattorn
must moot |n ordor to bo cons|dorod tor a trad|ng s|gna|,
thoroby |mpos|ng upon myso|t tho nood tor |ncroasod
d|sc|p||no and pat|onco.

l havo prov|ous|y d|scussod |n th|s book a woaknoss l
roa||zo |n my own trad|ng-tho tondoncy to jump tho gun on
pattorns rathor than a||ow|ng charts to bocomo tu||y maturo
botoro assum|ng a trado. 1ab|o 0.2 prosonts tho prot||o ot
tho amondod |actor 1rad|ng l|an.

1ABLE 0.2 Amondod |actor 1rad|ng l|an

Prooxiating Amondod
5ignaI Catogory Bonchmarka Bonchmarka
Na[or µattorna
Comp|ot|ons 4.0 4.0 (20%)
Ant|c|patory 2.b 1.b (11%)
lyram|d 2.b 1.b (11%)
Ninor µattorna b.0 4.0 (28%)
|natinct tradoa 8.0 2.0 (14%)
NiacoIIanooua tradoa 2.b 1.0 (7%)
1otaI 10.b 14.0 (100%)

As mont|onod, l havo abso|uto|y no contro| ovor whothor
a part|cu|ar trado or sor|os ot trados w||| produco a prot|t.
1rado prot|tab|||ty |s not a contro||ab|o tactor. l havo contro|
on|y ovor my ordor t|ow and r|sk paramotors. 1horo |s no
way l can w||| myso|t to bo moro prot|tab|o. l can contro| on|y
thoso o|omonts that aro contro||ab|o. 1ho mod|t|cat|ons l am
mak|ng to my trad|ng p|an doa| w|th tho troquoncy and
cr|tor|a ot s|gna|s.

1horo |s ono othor tactor ot my trad|ng |n rocont months
that l nood to addross bos|dos s|gna| cr|tor|a. Vy avorago
r|sk por trado s|nco Octobor has boon ono-ha|t ot 1 porcont
ot trad|ng cap|ta|. 1h|s |s |owor than l wou|d ||ko and |owor
than what |s ca||od tor by tho r|sk managomont tramowork
ot my trad|ng p|an.

l cou|d |ncroaso my r|sk por trad|ng ovont |n ono ot two
ways: (1) l cou|d w|don my |n|t|a| protoct|vo stop and
ma|nta|n my |ovorago, or (2) l cou|d |ncroaso my |ovorago
or goar|ng (numbor ot contracts por un|t ot cap|ta|) and
ma|nta|n tho ox|st|ng mothods to dotorm|no tho |n|t|a|
protoct|vo stop.

l havo a|ways boon sat|st|od w|th tho last 0ay lu|o as a
r|sk managomont too|. 3o tho so|ut|on, |n my op|n|on, |s to
|ncroaso |ovorago or numbor ot contracts por un|t ot cap|ta|.
|owovor, l w||| not do th|s unt|| l can put togothor a month or
two ot so||d portormanco. l want to |ncroaso |ovorago w|th
tho markot's monoy, not w|th my own. l am a bo||ovor |n
pross|ng an advantago w|th prot|ts, not w|th baso cap|ta|.

lt was w|th th|s amondod p|an that l bogan trad|ng |n
1anuary.

1rading Rocord

JuIy 5ugar: A Running Wodgo OuickIy
FaItora

8Ignal 8tyle: Na[or Broakout 5ignaI

l had succosstu||y tradod tho bu|| markot |n sugar s|nco
Apr|| 2000 (a|though l had |os|ng trados a|ong tho way). l
bo||ovod sugar had a |ong way to go. ln tact, |n tho back ot
my m|nd, l thought sugar cou|d cha||ongo |ts a||-t|mo h|ghs |n
tho 00-cont rango. 1hus, l was mon|tor|ng sugar tor buy|ng
opportun|t|os.

On 1anuary 4, 1u|y sugar advancod to comp|oto a two-
wook-p|u|s runn|ng wodgo pattorn. 1h|s advanco a|so
cont|rmod tho tour-month roctang|o that had boon
dovo|op|ng s|nco oar|y 3optombor. l bought ono contract
por trad|ng un|t, r|sk|ng s|x-tonths ot 1 porcont.

1ho sma|| runn|ng wodgo had tormod at tho uppor |co
||no ot tho roctang|o. Otton, thoso sma||or pattorns propo|
pr|cos out ot |argor pattorns. |owovor, as shown |n ||guro
0.0, tho advanco qu|ck|y sta||od, and on 1anuary 11 tho
doc||no tr|ggorod tho last 0ay lu|o stop.

F|CuRE 0.0 lunn|ng Wodgo Cont|rms a loctang|o |n
3ugar.


Narch Corn: Jumµing tho Cun on a
Pattorn

8Ignal 1ype: Ninor Continuation 5ignaI

1h|s trado |s a wondortu| oxamp|o ot p|ay|ng broakouts
too t|ght|y. 3roakouts shou|d bo doc|s|vo |n ordor to bo
va||d. 0raw|ng t|ght pattorn boundary ||nos |s an |nv|tat|on to
got suckod |nto a ta|so or promaturo broakout. l comm|ttod
th|s trad|ng s|n |n th|s corn trado. Vy r|sk on tho trado was
s|x-tonths ot 1 porcont.

Whoro a boundary ||no |s drawn can mako tho d|ttoronco
botwoon no trado and a |os|ng trado. ||guro 0.10 shows
that l had tho boundary ||no drawn w|th a s||ght downward
ang|o to dot|no tho 10-wook tr|ang|o |n corn. l wont |ong on
a marg|na| broakout ot tho tr|ang|o on|y to bo stoppod out
w|th|n a coup|o ot hours. Vy ontry buy stop was on|y ono
ponny abovo tho Octobor and lovombor h|ghs. l noodod to
mako tho markot do a bottor job ot prov|ng |tso|t.

F|CuRE 0.10 Ono-0ay |ako-Out |n Corn.



||guro 0.11 shows tho boundary ||no drawn hor|zonta||y.
A broakout noods to bo doc|s|vo, ovon |t |t moans that a
|argor r|sk por contract must bo takon trom tho po|nt ot
ontry. lo broakout took p|aco w|th a hor|zonta| boundary.

F|CuRE 0.11 A 3||ght|y 0|ttoront look at tho 3amo Corn
Chart.


Looking Back

ln h|nds|ght, l a||owod my b|as |n tavor ot a bu|| markot |n corn
to d|ctato my trado. l was too oagor to bo |ong corn. As a trador,
l nood to constant|y rom|nd myso|t that l cannot attord tho |uxury
ot bo|ng bu|||sh or boar|sh. 3u|||shnoss and boar|shnoss
roprosont an omot|ona| comm|tmont. l nood to ||m|t myso|t to
pos|t|ons. Op|n|ons don't mattor. los|t|ons spoak tor
thomso|vos.

l comm|ttod anothor trad|ng s|n |n th|s trado. As a gonora|
ru|o, pattorn broakouts |n markots such as tho gra|ns, sotts,
and ||vostock shou|d not bo trustod |t thoy occur dur|ng tho
n|ghtt|mo o|octron|c soss|on. l d|scussod th|s subjoct |n
Chaptor b |n tho soct|on on trado ordor managomont. 1ho
marg|na| broakout |n corn was dr|von a pr|co sp|ko |n tho
ovorn|ght o|octron|c markot. Evon though my ontry buy stop
was too t|ght to tho markot, |t wou|d not havo boon t|||od had
l ontorod |t on|y |n tho day soss|on hours.

u5D/JPY: A Riaing Wodgo Woara No
Out

8Ignal 1ype: Ninor RovoraaI 5ignaI

|or sovora| yoars l had boon mon|tor|ng tho yon,
bo||ov|ng that tho U.3. do||ar was dost|nod tor a hugo boar
movo. 1h|s b|as or|g|natos trom tho mass|vo doscond|ng
tr|ang|o on tho month|y graph, cont|rmod |n Octobor 2008
(soo ||guro 0.12). 1h|s pattorn, |t va||d, has an ovontua|
targot ot 00 to 0b yon por U.3. do||ar. 1hus, l havo boon
prod|sposod toward so|| s|gna|s |n tho curroncy pa|r. 1h|s
prod|spos|t|on was basod on a sound tochn|ca| ovorv|ow,
not on a |ovo atta|r w|th tho yon.

F|CuRE 0.12 12-Yoar 0oscond|ng 1r|ang|o |n U30/1lY.


1ho doc||no on 1anuary 12, as shown |n ||guro 0.18,
comp|otod a t|vo-wook rovorsa| r|s|ng wodgo on tho da||y
chart. l ostab||shod a pos|t|on ot short $80,000 por trad|ng
un|t. l was stoppod out ot tho pos|t|on on |obruary 8 basod
on tho 1ra|||ng 3top lu|o.


F|CuRE 0.18 ||vo-Wook l|s|ng Wodgo |n U30/1lY.


Narch Nini Naadaq: 5hort-1orm Pattorn
Loada to |mmodiato Loaa

8Ignal 8tyle: NiacoIIanooua 1rado

l had a succosstu| |ong trado tho Varch V|n| lasdaq |n
0ocombor. Yot my b|as was that stocks woro gross|y
ovorva|uod and that a boar markot was just a mattor ot
t|mo. |orc|ng my b|as, on 1anuary 12, l ostab||shod a short
pos|t|on (ono contract por trad|ng un|t) basod on an
|ntorprotat|on ot a two-wook broadon|ng top (soo ||guro
0.14). Vy trad|ng p|an doos not a||ow tor trad|ng m|nor
rovorsa| pattorns |oss than 8 to 10 wooks |n durat|on. l was
stoppod out ot tho pos|t|on tho noxt day basod on tho last
0ay lu|o.

F|CuRE 0.14 3ma|| 1wo-Wook 3roadon|ng lattorn |n
lasdaq.



Looking Back

1h|s was an oxamp|o ot a s|gna| that d|d not roa||y mako sonso
at tho t|mo ot tho trado, much |oss |n rotrospoct. l to|t at tho t|mo
that tho stock markot noodod to go down. lt |s poss|b|o to a||ow
a b|as to d|ctato tho ana|ys|s ot a chart. 1horo |s a t|no ||no
botwoon |dont|ty|ng |og|t|mato pattorns |n a||gnmont w|th a b|as
and mak|ng up pattorns to support a b|as.

1ho |mµortanco ot Pattorn
|ntorµrotation

At th|s po|nt |n tho book, you aro probab|y ask|ng yourso|t such
quost|ons as:



Whon doos a pattorn bocomo a pattorn?

lsn't pattorn |dont|t|cat|on puro|y subjoct|vo?

What happons |t chart|sts soo tho samo chart
d|ttoront|y?


ln my op|n|on, thoso quost|ons just do not mattor. 1rado
|dont|t|cat|on |s tho |oast |mportant ot a|| trad|ng compononts.
1ho trad|ng procoss |tso|t and r|sk managomont aro much
moro cruc|a| compononts to ovora|| succoss |n trad|ng
oporat|ons. lo two succosstu| tradors so|oct trados |n oxact|y
tho samo way. 1horo |s a w|do rango ot mothods usod by
protoss|ona| tradors to |dont|ty what |s and |s not a trad|ng
s|gna| |n tho|r trad|ng oporat|ons. 3o l am not torr|b|y
concornod |t somo ot my |ntorprotat|ons aro not r|ght on. Vy
trad|ng succoss, |n tho |ong run, doos not dopond on my ab|||ty
to road tho charts portoct|y.

Narch 1-Bonda: A Rotoat ot a DoubIo
1oµ |gnoroa tho |co Lino

8Ignal 1ypes: Na[or Broakout 5ignaI, Rotoat

On 0ocombor 12, tho 1-bond markot comp|otod a tour-
month doub|o top. l m|ssod tho s|gna| and shortod tho
rotost on 1anuary 18, stopp|ng myso|t out on 1anuary 1b
us|ng tho lotost |a||uro lu|o (soo ||guro 0.1b).

F|CuRE 0.15 1-3onds Unsuccosstu||y lotost a |our-
Vonth 0oub|o 1op.


As a gonora| ru|o, |t |s not tho most prot|tab|o pract|co to
buy or so|| pattorn rotosts sovora| wooks attor tho tact. 1ho
most prot|tab|o trados aro thoso that broakout and novor
|ook back.

Narch Corn: A CIaaaic Broakaway Caµ

8Ignal 1ype: Na[or Broakout 5ignaI

1ho vast major|ty ot pr|co gaps aro pattorn gaps-gaps
that occur w|th|n a trad|ng rango that aro covorod or t|||od |n
a mattor ot days or wooks. 3ut, tradors shou|d a|ways
cons|dor gaps through major boundary ||nos to bo potont|a|
broakaway gaps. log|t|mato broakaway gaps do not got
t|||od, at |oast not unt|| a moan|ngtu| trond has boon
comp|otod. lmportant|y, tho gap comp|ot|on ot a pattorn |s a
s|gn|t|cant dovo|opmont trom a c|ass|ca| chart|ng
porspoct|vo. lattorns that aro comp|otod w|th unt|||od gaps
otton tar oxcood tho |mp||od pr|co objoct|vos.

On 1anuary 18, tho corn markot oxpor|oncod a vory |argo
gap (8 conts) to comp|oto a 12-wook tr|ang|o. l d|d not havo
an ontry stop |n p|aco at tho t|mo bocauso l d|d |mag|no th|s
dovo|opmont. l shortod tho markot on 1anuary 14 whon tho
markot rotostod tho |co ||no.

ln tho caso ot such gaps, tho last 0ay lu|o bocomos tho
c|os|ng pr|co procod|ng tho gap, as shown |n ||guro 0.10.

F|CuRE 0.10 A 3roakaway Gap Comp|otos a 1op |n
Corn.


l was stoppod out ot tho trado on |obruary 10 basod on
tho 1ra|||ng 3top lu|o.

Looking Back

l shou|d havo ma|nta|nod tho last 0ay lu|o 3top on tho corn
trado. Comp|ot|ons ot |argo pattorns aro not soon v|o|atod. 1ho
1ra|||ng 3top lu|o doos not a||ow an |mportant pattorn
broakout to work |tso|t out. (Corn ovontua||y roachod tho
downs|do targot ot tho 12-wook tr|ang|o.)

Narch Whoat: A 5ymmotricaI E&5
Pattorn

8Ignal type: Na[or Broakout 5ignaI

Ono day attor corn broko out, tho Varch whoat
comp|otod a c|ass|c 18-wook |83 top (soo ||guro 0.17).
1ho pr|mary toaturos ot th|s top aro that tho r|ght and |ott
shou|dors aro vory ba|ancod or symmotr|ca| |n durat|on and
|n ho|ght. 3|m||ar to corn, l was too qu|ck to jam my stops
basod on tho 1ra|||ng 3top lu|o. (1ho |83 targot was
roachod and groat|y oxcoodod |n 1uno 2010.)

F|CuRE 0.17 A C|ass|c |83 1op lattorn |n Ch|cago
Whoat.


1ho 1ra|||ng 3top lu|o h|stor|ca||y has boon an oxco||ont
monoy managomont too|, but |n tho past yoar tho ru|o has
takon mo out ot trados too

F|CuRE 0.18 lound|ng 1op on tho Wook|y EUl/1lY
Chart.


oar|y. l am cons|dor|ng a mod|t|cat|on ot tho ru|o to
d|songago |t unt|| a markot has movod turthor toward |ts
|mp||od targot. l may havo moro to say on th|s subjoct as
tho book cont|nuos.

EuR/JPY: A 5maII E&5 1oµ Launchoa a
Na[or 1oµ

8Ignal 1ype: Na[or Anticiµatory 5ignaI and
Na[or Broakout 5ignaI

ln rocont months, l had mon|torod tho ongo|ng
dovo|opmont ot a |argo round|ng top on tho wook|y
EUl/1lY chart, as shown |n ||guro 0.18. l had boon hop|ng
that tho markot wou|d torm a sma|| pattorn to a||ow an oar|y
ontry.

||guro 0.10 shows that tho doc||no on 1anuary 1b
comp|otod a sma|| |83 top on tho da||y chart. l havo statod
that l shou|d not tako sma|| pattorns. 1h|s |s truo tor stand-
a|ono m|nor s|gna|s, but not tor opportun|t|os |ato |n tho
dovo|opmont ot wook|y pattorns. 1ho |actor 1rad|ng l|an
a||ows tor tho uso ot shortor pattorns to ostab||sh an
ant|c|patory pos|t|on. Vy pos|t|on was 80,000 ouros por
trad|ng un|t.

F|CuRE 0.10 1ho lato 3tagos ot tho lound|ng 1op |n
EUl/1lY.


1ho targot ot th|s trado was a tost ot tho nock||no on tho
wook|y chart. 1ho targot was roachod on 1anuary 21. l took
prot|ts. ln s|tuat|ons ||ko th|s, l w||| occas|ona||y stay w|th an
ant|c|patory pos|t|on to dotorm|no |t a major broakout s|gna|
occurs. l o|octod not to wa|t |n th|s caso.

On 1anuary 20, tho |co ||no ot tho 10-month round|ng top
or comp|ox |83 gavo way, and l onco aga|n shortod tho
markot.

Vy |ovorago was ||ght (20,000 ouros por trad|ng un|t)
bocauso tho last 0ay lu|o was moro than 200 p|ps away
trom tho ontry. l ox|tod tho trado on Varch b basod on tho
1ra|||ng 3top lu|o.

l hopo you aro p|ck|ng up a pattorn trom my 1anuary
trados |n corn, whoat, EUl/1lY, and othors, namo|y, l havo
gotton |nto tho bad trad|ng hab|t ot jamm|ng my protoct|vo
stops too qu|ck|y. 3ad trad|ng pract|cos can omorgo subt|y
and w|th soom|ng|y good roason (to protoct prot|ts |n th|s
caso). l nood to doa| w|th th|s go|ng torward.

Looking Back

1rad|ng d||ommas novor ond. A trador novor so|vos a|| tho
|ssuos stand|ng |n tho way ot groator succoss. lt sooms as
though whon ono d||omna |s roso|vod, anothor d||omma takos
|ts p|aco.

Narch Nini 5&Pa: Niamanaging a 5hort
Poaition

8Ignal 1ypes: 1wo Na[or Broakout 5ignaIa

l tradod tho Varch V|n| 38ls tw|co dur|ng tho roma|ndor
ot 1anuary.

l had boon mon|tor|ng a poss|b|o throo-month r|s|ng
wodgo. As |s somot|mos tho caso, tho |owor boundary ot
th|s wodgo oxtondod backward connoctod portoct|y w|th an
|mportant |ow (tho Varch 2000 |ow).

On 1anuary 10, l shortod tho markot whon pr|cos s||cod
through tho |owor |ntraday boundary. |owovor, th|s t|rst
thrust out ot tho pattorn was promaturo, and l was stoppod
out ot tho trado tho samo day (soo ||guro 0.20).

F|CuRE 0.20 1hroo-Vonth l|s|ng Wodgo |n 38ls
lroducos 3o|| 3|gna|s.



1ho markot cont|rmod a downs|do broakout on 1anuary
21, and l took a moro |ovoragod than norma| pos|t|on (1.b
contracts por trad|ng un|t). Vy r|sk was 1.2 porcont ot
cap|ta|, |n oxcoss ot my trad|ng gu|do||nos. Vy th|nk|ng at
tho t|mo was that th|s trado wou|d start 2010 |n grand
tash|on. ln tact, l thought tho trado had tho potont|a| to bo a
°sovon porcontor' (7 porcont rato ot roturn on oqu|ty). At
|ast, tho groat bu|| markot ot 2000 was ovor-or so l
thought.

l took a ono-th|rd prot|t on 1anuary 20 at tho |n|t|a| targot
ot 1080. Vy noxt targot was 1010 and l thought tho markot
wou|d roach |t qu|ck|y. l was stoppod out ot tho noxt ono-
th|rd on |obruary 10 basod on tho 1ra|||ng 3top lu|o. lt |s
ombarrass|ng to adm|t that l rodo tho t|na| ono-th|rd a|| tho
way back to tho start|ng gato and was stoppod out on
Varch b. 1h|s port|on ot tho pos|t|on roprosontod a popcorn
trado-a round tr|ppor.

Looking Back

1ho 1anuary 10 trado |n tho 38ls was a |og|t|mato attompt to
short tho markot, a|though unt|mo|y. 1ho ontry wou|d havo
stood tho tost ot h|stor|ca| scrut|ny |t tho markot had cont|nuod
to ta|| to||ow|ng tho 1anuary 10 broakout. 1ho moasuro ot a
good trado (as opposod to a prot|tab|o trado) |s |t tho chart
supports |t attor tho tact.

Nay 5ugar: CorroctIy Nanaging a
Pyramid 1rado


8Ignal 1ype: Na[or Pyramid 5ignaI

l was not qu|to dono w|th tho op|n|on that sugar was
dost|nod tor 00 conts. On 1anuary 10, tho Vay contract
comp|otod a sma|| ponnant. l wont |ong. 3ma|| cont|nuat|on
pattorns w|th|n a major trond can bo vory prot|tab|o to trado.
l ox|tod tho trado on |obruary 8 whon tho markot c|osod
bo|ow |ts dom|nant bu|| trond ||no. |obruary 8 a|so tu|t|||od
tho 1ra|||ng 3top lu|o (soo ||guro 0.21).

F|CuRE 0.21 An E|ght-0ay lonnant |n 3ugar.


1ho |mµortanco ot VoIumo

Edwards and Vagoo mako a vory b|g doa| about vo|umo. ln
tact, thoy |ns|st that corta|n vo|umo charactor|st|cs aro
nocossary to cont|rm tho comp|ot|on ot a chart pattorn.

1horo aro a coup|o ot roasons why l havo bas|ca||y |gnorod tho
subjoct ot vo|umo up to th|s po|nt |n tho book.

||rst, vo|umo t|guros aro not ovon ava||ab|o |n tho torox
markots. l trado moro torox than anyth|ng o|so.

3ocond, l do not bo||ovo that vo|umo |s as |mportant |n
commod|ty tuturos as |t |s |n tho stock markot. vo|umo |n
stocks |s a|ways ro|at|vo to tho tota| numbor ot sharos
outstand|ng. 3o vo|umo |n stocks |s a s|gn|t|cant moasuro
ro|at|vo to tho tota| ownorsh|p baso or t|oat.

|uturos contracts do not havo a t|xod numbor ot sharos or
contracts outstand|ng aga|nst wh|ch tho vo|umo on any g|von
day or wook can bo comparod. Opon |ntorost (tho numbor ot
contracts opon roprosont|ng an oqua| numbor ot |ong and
short ho|dors) has no ||m|tat|on. 1ho opon |ntorost tor oach
tuturos contract croatod (o.g., 1u|y 2011 corn) starts at zoro and
onds at zoro whon tho contract oxp|ros.

Othor commod|ty tradors havo stud|od tho |mp||cat|ons ot
vo|umo and opon |ntorost. l havo choson to |gnoro thoso
tactors |n my trad|ng.

AµriI and Juno CoId: 1hroo Nontha ot
Chart Rodotinition

8Ignal 1ypes: |natinct 1rado, Ninor RovoraaI
5ignaI, Ninor Continuation 5ignaI, and 1wo
Ninor RovoraaI 5ignaIa, a Na[or Anticiµatory
5ignaI, and a Na[or Broakout 5ignaI

Looking Back

1h|s ontry was wr|tton |n oar|y Apr||, w|th tho h|nds|ght ot a
sor|os ot t|vo trustrat|ng trados that bogan |n 1anuary. l am
broak|ng tho mo|d on tho month-by-month tormat |n ordor to
track go|d through a sor|os ot trad|ng s|gna|s. 1ho go|d markot
trom 1anuary through oar|y Apr|| was a groat oxamp|o ot a
concopt l ca|| morkot roooíloltloo-a procoss whoro ono
pattorn ta||s and bocomos part ot a |argor pattorn and so on,
unt|| t|na||y tho markot doc|aros |tso|t.

|o||ow|ng a strong and prot|tab|o trond, a markot w|||
otton ontor a por|od whoro ta|so s|gna|s bocomo tho ru|o.
Go|d had a br||||ant movo trom |ato Octobor through oar|y
0ocombor 2000. l toaturod th|s trond |n ono ot tho caso
stud|os |n Chaptor 0.

3og|nn|ng on 1anuary 20, 2010, l bogan a sor|os ot
trustrat|ng trados |n go|d that cont|nuo to th|s wr|t|ng (Apr||
2010). Whon w||| |t ovor ond! l am now |nto what probab|y
w||| bo my t|tth stra|ght trustrat|ng trado |n go|d, and tho yoar
|s on|y a tow months o|d.

||guro 0.22 shows my t|rst go|d trado ot 2010. 1h|s was
an |nst|nct trado. 1ho chart d|sp|ayod a throo-wook |83
rovorsa| pattorn. l ||kod tho compactnoss ot tho pattorn,
ovon though |t was sma||. l |oggod out ot tho trado at throo
d|ttoront pr|cos, ga|n|ng about $1,000 por trad|ng un|t. l
cons|dorod myso|t |ucky! l typ|ca||y ox|t |nst|nct trados w|th|n
two to t|vo days attor ontry.

F|CuRE 0.22 A 1hroo-Wook |83 1op |n Go|d.



F|CuRE 0.28 A l|no-Wook 0oscond|ng 1r|ang|o |n Go|d
|a||s.


1ho noxt trado, as d|sp|ayod |n ||guro 0.28, was tho
m|nor rovorsa| comp|ot|on ot a n|no-wook doscond|ng
tr|ang|o on |obruary 4. l roa||y thought th|s was go|ng to bo
a b|g w|nnor. 1ho markot rovorsod tho noxt day, and l was
stoppod out w|th tho lotost |a||uro lu|o on |obruary 11.
1h|s pattorn was |argo onough to bo a major broakout
trado, but a corrospond|ng pattorn was not v|s|b|o on tho
wook|y graph.

loxt, as shown |n ||guro 0.24, tho advanco on |obruary
10 comp|otod an 11-wook ta|||ng wodgo on tho da||y chart.
1h|s was a m|nor cont|nuat|on s|gna|. Vy pos|t|on was ono
m|n| contract por trad|ng un|t ot $100,000. l was r|sk|ng a
moagor .4 porcont. l d|d not havo an ontry stop ordor |n
p|aco at tho broakout, so l wont |ong on |obruary 18.
3k|tt|sh about go|d, l took qu|ck prot|ts on ha|t my pos|t|on
tho noxt day, |obruary 10, and was stoppod out ot tho othor
ha|t on |obruary 24 basod on tho lotost |a||uro lu|o (soo
||guro 0.24).

F|CuRE 0.24 An 11-Wook |a|||ng Wodgo on tho 0a||y
Go|d Chart.


1ho adago shou|d bo, °lt at t|rst you don't succood, bo
roady to |oso and |oso aga|n.' l got back |nto tho |ong s|do
ot go|d (ono m|n| contract por trad|ng un|t) on Varch 2 whon
tho da||y chart comp|otod a n|no-wook |nvortod |83 pattorn
(soo ||guro 0.2b). 1h|s m|nor rovorsa| trado was short-
||vod. l was stoppod out Varch 8 w|th tho lotost |a||uro
lu|o.

F|CuRE 0.25 An |83 3ottom lattorn |n Go|d.


On Varch 18, l ontorod |nto my journa| a d||omma tho
go|d markot was prosont|ng, as shown |n ||guro 0.20.
Cont||ct|ng s|gna|s woro bo|ng prosontod. 1ho chart
d|sp|ayod a poss|b|o throo-month |83 bottom dat|ng back
to m|d-0ocombor, w|th a |ott shou|dor |ow on 0ocombor 22
and a r|ght shou|dor |ow on Varch 12.

F|CuRE 0.20 1ho Go|d Chart ls 3ot Up tor a 3uy or a 3o||.


A boar|sh pattorn was a|so omorg|ng, |n tho torm ot a
t|vo-wook |83 top. 1ho pattorns woro |ntor|ock|ng |n tho
sonso that tho hoad ot tho sma||or |83 top pattorn was tho
r|ght shou|dor h|gh ot tho |argor bottom pattorn. lntor|ock|ng
|83 pattorns otton produco powortu| movos.

Vy pract|co |s to go w|th whatovor pattorns bocomo
comp|oto, and not to socond-guoss ono pattorn ovor tho
othor. 1ho m|nor |83 rovorsa| top was comp|otod on
Varch 22. l wont short (ono m|n| contract por trad|ng un|t)
w|th a r|sk ot .1 porcont ot cap|ta|. l was stoppod out on
Varch 2b basod on tho last 0ay lu|o.

1ho bost and |argost pattorns aro common|y compr|sod
ot many sma||or pattorns, most|y ta||uros. 1h|s |s oxact|y
what happonod |n 2000 whon go|d wont up, wont down, and
wont nowhoro, on|y to prov|do a tantast|c movo |n tho tourth
quartor. 1h|s |s whoro wo aro r|ght now |n go|d (Apr|| 2010).
Vany ot thoso sma||or pattorns appoar to bo moro
s|gn|t|cant at tho t|mo thoy dovo|op than |ator whon thoy
bocomo part ot somoth|ng much b|ggor. l havo th|s roa||ty
bu||t |nto tho |actor 1rad|ng l|an by ant|c|pat|ng tho nood to
trado 4b major broakout s|gna|s |n ordor to catch 10 that
roa||y work.

At |ast l th|nk l havo a hand|o on tho markot. ||guro 0.27
d|sp|ays a 1b-wook |nvortod |83 bottom tormat|on. On
Apr|| 1, tho advanco s||cod through a poss|b|o tour-wook
channo| sorv|ng as tho r|ght shou|dor ot a tour-month
|nvortod |83 bottom pattorn. l ostab||shod a |ong on Apr|| 1
ot ono m|n| contract por trad|ng un|t.

1ho |83 bottom was comp|otod on Apr|| 7. l addod to
my pos|t|on us|ng tho last 0ay lu|o at 1188.1 as tho bas|s
tor tho stop on my ont|ro pos|t|on. 1h|s tour-month |83 has
a targot ot 1280, a tost ot tho 0ocombor h|gh.

F|CuRE 0.27 An |83 3ottom |n Go|d loso|vos lrov|ous
Uncorta|nty.


1ho objoct|vo ot 18b0 roma|ns trom tho Octobor 2000
comp|ot|on ot tho |nvortod wook|y chart |83 (prosontod |n
tho Caso 3tudy soct|on). 1|mo w||| to|| |t th|s w||| t|na||y bo
tho pattorn that works, or |t th|s pattorn, too, w||| bocomo
part ot somoth|ng b|ggor. l w||| roport on tho outcomo ot th|s
trado |n Chaptor 12.

CBP/JPY: A 5maII 1riangIo EatabIiahod
tho FinaI Eigh ot a Largor 1riangIo

8Ignal 1ype: Na[or Anticiµatory 5ignaI

||guro 0.28 d|sp|ays a toxtbook oxamp|o ot tho typo ot
s|gna| tor wh|ch l sook to bocomo pro-pos|t|onod dur|ng tho
|ato stagos ot a major chart

F|CuRE 0.28 A loss|b|o 0oscond|ng 1r|ang|o |orms |n
G3l/1lY.



pattorn. 0at|ng back to |ato 3optombor, tho G3l/1lY
had tormod a poss|b|o r|ght-ang|od doscond|ng tr|ang|o.

On 1anuary 21, tho markot comp|otod a throo-wook
symmotr|ca| tr|ang|o. As |s otton tho caso, a sma|| da||y
chart pattorn tormod at tho ta|| ond ot a major wook|y chart
pattorn. 1ho targot ot tho trado was tho |owor boundary ot
tho major doscond|ng tr|ang|o. l took prot|ts at tho targot on
|obruary 4.

Narch Coµµor: A 5maII Eorn and 1rond-
Lino VioIation Aro OuickIy Rovoraod

8Ignal 1ypes: Na[or Broakout 5ignaI,
NiacoIIanooua 1rado

1ho doc||no on 1anuary 27, as soon |n ||guro 0.20,
comp|otod a throo-wook horn or s|op|ng top. Wh||o th|s was
a ro|at|vo|y short pattorn, tho doc||no a|so s||cod through a
10-month channo| boundary. 1h|s qua||t|od tho s|gna| tor
cons|dorat|on to tho 2010 3ost 0rossod l|st. 1ho r|sk was
substant|a|, so l tradod on|y ono contract por $400,000 ot
cap|ta|.

F|CuRE 0.20 1hroo-Vonth |orn |n Coppor.



1h|s was a torr|b|y m|smanagod trado |n a numbor ot
rospocts. ||rst, l had a strong |nst|nct that th|s markot wou|d
thrust hard to tho downs|do w|th vory ||tt|o ab|||ty to bounco.

l shou|d havo usod moro |ovorago and a t|ghtor monoy
managomont stop po|nt. 3ocond, tho |n|t|a| targot ot 200
was roachod on |obruary 4. l d|d not r|ng tho cash rog|stor!
1h|rd, tho 1ra|||ng 3top lu|o was tr|ggorod oar|y |n tho day
on |obruary 11 at around 802.20. l wa|tod unt|| |ato |n tho
day and covorod at 811.00.

l havo omphas|zod |n th|s book that tho prot|t or |oss ot a
trado to||s on|y a sma|| part ot tho story. lt |s poss|b|o to
oxocuto a trado poor|y and mako monoy. 3|m||ar|y, |t |s
poss|b|o to oxocuto a trado wo|| and |oso monoy. 1ho
coppor trado was an oxamp|o ot tho tormor. l mado 12
conts on tho t|rst trado, but wa|kod away |n dotoat.

1h|s markot s|tuat|on |s a|so an oxamp|o ot how ono
m|sstop can oas||y |oad to tho noxt m|sstop. Errors havo a
way ot bocom|ng compoundod. lt |s oasy tor a trador to
th|nk that a part|cu|ar markot owos h|m or hor somoth|ng.
Varkots owo us noth|ng!

Vy m|smanagomont ot tho |n|t|a| coppor trado |od to tho
noxt m|sstop |n tho markot. Attor bo|ng stoppod out, l
watchod tho markot cont|nuo to ra||y. On |obruary 10, tho
markot rotostod tho boundary ot tho major trond ||no that
had boon c|oar|y v|o|atod on 1anuary 28.

On |obruary 22 and 28, tho markot turnod back down. l
so|d tho c|oso on |obruary 28 (trado #2). 1h|s was an
omot|ona| trado. l was st||| th|nk|ng that tho coppor markot
owod mo monoy bocauso l had |ott so much on tho tab|o
trom tho oar||or trado.

3an|ty roturnod, and w|th|n a day or two l roa||zod that tho
|obruary 28 short was not tho smartost trado. l havo tound
that m|stakos shou|d bo covorod |mmod|ato|y. lo
quost|ons askod! l ox|tod tho trado on |obruary 20.

CBP/u5D: uaing a CandIoatick Pattorn
to Nako a 1rado

8Ignal 1ype: Ninor Continuation 5ignaI

l was boar|sh on G3l/U30 throughout 1anuary basod on
tho potont|a| doub|o top on tho wook|y chart. l wantod to bo
short. On 1anuary 20, l shortod 80,000 3r|t|sh pounds por
trad|ng un|t. l ontorod tho trado basod on tho h|kkako sotup
on 1anuary 27 and 28 (soo ||guro 0.80).

F|CuRE 0.80 Anothor ||kkako lattorn |n G3l/U30.


||kkako pattorns do not prov|do spoc|t|c pr|co targots. l
took prot|ts on |obruary 4, bo||ov|ng that tho |co ||no ot tho
doub|o top wou|d prov|do support. l a|so know that |t tho |co
||no gavo way, l cou|d |mmod|ato|y roturn to a short pos|t|on.

Chaptor 10 w||| p|ck back up tho saga ot tho G3l/U30.

5ummary

||nanc|a||y, l had a protty docont 1anuary, tho bost month |n
a wh||o. l ontorod 10 trados |n 11 d|ttoront markots. Whon
c|osod (not a|| |n 1anuary), 10 ot tho trados woro prot|tab|o,
produc|ng a prot|t ot 0.8 porcont. Actua| portormanco |n
1anuary, roportod |n comp||anco w|th markod-to-tho-markot
va|uo Addod Vonth|y lndox (vAVl) gu|do||nos, was a
pos|t|vo 0.8 porcont.

1ab|o 0.8 comparos tho 10 ontry s|gna|s aga|nst tho
amondod bonchmark goa|s ot tho |actor 1rad|ng l|an.

1ABLE 0.8 1anuary 1rad|ng 3|gna|s by Catogory

Amondod January 1rado Entrioa
5ignaI Catogory Bonchmarka (# and ¼ot totaI)
Na[or µattorna
Comp|ot|ons 4.0 (20%) 8.0 (b0%)
Ant|c|patory 1.b (11%) 2.0 (10%)
lyram|d 1.b (11%) 1.0 (0%)
Ninor µattorna 4.0 (28%) 8.0 (10%)
|natinct tradoa 2.0 (14%) 1.0 (0%)
NiacoIIanooua tradoa 1.0 (7%) 1.0 (0%)
1otaI 14.0 (100%) 10.0 (100%)

l to|t l had mado a |ot ot rook|o m|stakos |n 1anuary. lt
cou|d havo boon a much bottor month than |t was.
3poc|t|ca||y, l took somo s|gna|s that woro too short torm
and was too qu|ck |n mov|ng my protoct|vo stops on trados
|aunchod trom substant|a| pattorns, such as was tho caso
w|th corn and whoat.


Chapter 10

Month 1hree

Fobruary 2010

lontor |obruary attor hav|ng a good month |n 1anuary. lot a
groat month, but qu|to accoptab|o. l w||| tako a 0 porcont-
p|us month any t|mo, 3ut l shou|d omphas|zo that my
h|stor|ca| trad|ng portormanco has boon compr|sod moro
ot qu|ck bursts to||owod by |ong pausos than by annu|ty-typo
roturns.

1ho d|str|but|on ot tho |actor 1rad|ng l|an's month|y
roturns dat|ng back to 1081 |s shown |n ||guro 10.1. 1ho
|ovorago l curront|y omp|oy |s about ono-th|rd ot tho
|ovorago l tradod pr|or to 2000, so tho month|y roturns havo
boon adjustod on a pro torma bas|s. Ono wou|d |og|ca||y
oxpoct a d|str|but|on ot a |argo numbor ot month|y roturns to
rosomb|o a trad|t|ona| bo|| curvo, h|ghor |n tho m|dd|o w|th
down-s|op|ng ta||s on oach ond.

Vy guoss |s that most protoss|ona| managors |n tho
commod|ty and torox markots havo tho|r poak numbor ot
months |n tho 0 to p|us 4 porcont co|umns and do not havo
an oxtondod ta|| |nto tho 20 porcont-p|us zono. ln contrast,
tho |actor 1rad|ng l|an has |ts poak |n tho 0 to m|nus 2
porcont co|umn, w|th a|most 80 porcont ot tho months
roprosontod. 1ho |mportant |mp||cat|on ot my month|y
portormanco d|str|but|on |s tho nood tor a |ong dragon ta||
to tho r|ght. l nood tho 8 porcont-p|us months to ach|ovo
|ong-torm prot|tab|||ty. ln tact, 12 porcont ot tho trad|ng
months havo producod a rato ot roturn (lOl) ot 8 porcont-
p|us.

F|CuRE 10.1 |actor 1rad|ng l|an lropr|otary
portormanco: 3o|| Curvo ot Vonth|y losu|ts.



5ticking to tho PIan in Choµµy
Narkota

1ho opt|mum succoss ot tho |actor 1rad|ng l|an doponds
on throo cond|t|ons:

1. 1hat tho major|ty ot commod|ty and torox
markots do oot ontor pro|ongod por|ods ot
chopp|noss. l dot|no chopp|noss as o|thor
congost|on or an advanc|ng or doc||n|ng trond
whoro tho wavos oxpor|onco ovor|ap w|th tho
prov|ous wavos.
2. 1hat a corta|n proport|on ot trados (porhaps 2b
to 80 porcont) w||| oxpor|onco pattorn broakouts
that w||| not roach an |mp||od pr|co targot, but w|||
at |oast havo somo |mmod|ato to||ow through.
8. 1hat a corta|n proport|on ot trados (porhaps 1b
porcont) w||| trond un|ntorruptod|y to an |mp||od
targot.

1ho commod|ty and torox markots (w|th a tow
oxcopt|ons) havo boon |n broad and choppy trad|ng rangos
tor tho past n|no months. l hato buy|ng h|gh and so|||ng |ow
ropoatod|y w|th|n broad trad|ng rangos. 1h|s |s porhaps my
worst toar as a trador. l droad gott|ng wh|ppod around |n an
aroa ot congost|on. l covorod th|s mattor |n Chaptor 0 |n tho
soct|on doa||ng w|th go|d.

Whonovor l ontor a trado, l havo tho oxpoctat|on that tho
markot w||| trond and not roturn to |ts prov|ous por|od ot
chopp|noss. 3o l havo tho constant tons|on ot whothor a
markot broak|ng out ot a chart pattorn w||| trond to a targot
or s|mp|y rodot|no an aroa ot pr|co congost|on.

1horo |s a t|no ||no botwoon a||ow|ng a markot room to
run and protoct|ng prot|ts. lt |s my dos|ro to g|vo a markot
ovory opportun|ty to roach a targot. lt |s a|so my dos|ro to
avo|d popcorn trados. ls thoro any oasy way to

1ho RoadbIock to 5uccoaatuI
1rading |a Not tho NarkotaI

Vany nov|co tradors ta|so|y bo||ovo that tho batt|o to prot|tab|||ty
|s w|th tho markots. Or w|th othor tradors! l hato to bo tho
boaror ot bad nows, but tho batt|o to cons|stont prot|tab|||ty |s
won or |ost |n a trador's hoad and gut. 1ho batt|o to prot|tab|||ty
|s w|th ono's so|t. 3uccosstu| trad|ng |s |oarn|ng what to do and
how to do |t and thon ovorcom|ng ono's omot|ons to got °|t'
dono (d|scovor|ng tho °|t' |s tho cha||ongo tor tradors, and tho
°|t' |s d|ttoront tor ovoryono).

1horo |s a vory t|no odgo botwoon cons|stont prot|tab|||ty and
unprot|tab|||ty. 1o bo cons|stont|y prot|tab|o, l must ovorcomo
tho markots' dr|vo to throw mo ott my gamo p|an. 1ho markots
cha||ongo ovory t|bor ot a trador's |nto||octua|, omot|ona|,
psycho|og|ca|, phys|ca|, and sp|r|tua| bo|ng. ln tho ond, though,
|t |s not a trador's batt|o w|th tho markots that dotorm|nos
outcomo. lt |s ono's batt|o to ovorcomo thoso human charactor
tra|ts that |ntortoro w|th cons|stont pat|onco and d|sc|p||no.

ba|anco thoso two sconar|os? Untortunato|y, l havo not
tound tho so|ut|on. 3ut l koop work|ng at |t-84 yoars attor
start|ng my tuturos markot caroor. lorhaps poop|o a |ot
smartor than l havo t|gurod out a way to hand|o tho
d||omma.

1rading Rocord

0ur|ng |obruary, tho |actor 1rad|ng l|an tr|ggorod 10
trad|ng s|gna|s |n 12 d|ttoront markots. 1hroo ot thoso
s|gna|s woro covorod as part ot Chaptor 8, two trados |n
go|d (ontry datos |obruary 4 and |obruary 18) and ono
trado |n coppor (ontry dato |obruary 28).

CBP/u5D: 1ho DoubIo 1oµ |a FinaIIy
ComµIotod

8Ignal 1ypes: Na[or Broakout 5ignaI, Na[or
Broakout 5ignaI (5ocondary ComµIotion),
and Na[or Pyramid 5ignaI

1ho n|no-month doub|o top was t|na||y comp|otod |n
3r|t|sh pound/U.3. do||ar (G3l/U30) on |obruary 4, as
shown |n ||guro 10.2. 1horo was ||tt|o doubt |n my m|nd that
th|s s|gna| wou|d bocomo a toaturod mombor ot tho 2010
3ost 0rossod l|st. lt roma|nod qu|to anothor mattor |t my
trad|ng gu|do||nos and ru|os wou|d tu||y oxp|o|t tho movo.

F|CuRE 10.2 1ho 0oub|o 1op |n G3l/U30 l|cks Up
3toam.


1ruo doub|o bottoms and tops aro actua||y qu|to raro,
accord|ng to 3cha-bachor, Edwards, and Vagoo (tho
tathors ot c|ass|ca| chart|ng pr|nc|p|os), a|though pund|ts |n
tho t|nanc|a| pross constant|y rotor to tho pattorn. 1ho two
major cr|tor|a ot a doub|o top (or bottom) aro:

1. 1ho poaks ot tho tops must bo at |oast two
months apart. ln tho caso ot tho G3l/U30, tho
poaks woro s||ght|y moro than throo months apart.
1ho two tops a|so must bo at approx|mato|y tho
samo ho|ght. Aga|n, G3l/U30 qua||t|od.
2. 1ho ho|ght botwoon tho poaks and tho m|dpo|nt
|ow must bo at |oast 1b porcont ot tho va|uo ot tho
commod|ty/torox pa|r or stock. ln tho caso ot tho
G3l/U30, tho ho|ght was 11 porcont-a ||tt|o shy
ot tho cr|tor|a. Yot l thought |t was c|oso onough to
count.

l ontorod a short pos|t|on on |obruary 4, a|though tho
actua| broakout dato was |obruary b. l took a pos|t|on ot
80,000 short G3l por trad|ng un|t. 1ho last 0ay lu|o tor
|obruary b was 1.b770. l usod a protoct|vo stop that was
s||ght|y h|ghor, at 1.b800. Vy stop was h|t on |obruary 17, a
trad|ng day that onco aga|n knockod mo out |n tho procoss
ot dovo|op|ng a boar|sh h|kkako pattorn.

0oub|o tops aro actua||y a||owod to travo| ha|tway back
|nto a doub|o top aroa. 3o, |n a sonso, my str|ct uso ot tho
|co ||no and last 0ay lu|o |n tho G3l/U30 was w|shtu|
th|nk|ng.

l havo d|scussod tho concopt ot tho |co ||no as an
|doa||zod hard-and-tast |ovo| that turns back a|| rotost
attompts. 1h|s |s not truo tor tho doub|o top and bottom
pattorns.

Looking Back

At a m|n|mum l shou|d havo usod tho |obruary 4 h|gh as my
last 0ay lu|o. ln tact, my trad|ng ru|os spoc|ty that whon vory
||tt|o ot tho trad|ng rango occurs w|th|n tho pattorn on tho day ot
tho broakout, l shou|d rovort to tho prov|ous day to dotorm|no
tho last 0ay lu|o.

1ho h|kkako pattorn p|aguod tho G3l/U30 throughout
tho doc||no trom tho lovombor h|gh. l uso tho word
p|ogooo bocauso my trad|ng ru|os do not adjust vory wo|| to
tho chart soquonco conta|nod |n tho h|kkako pattorn. 1ho
h|kkako |s just a vory short-torm vors|on ot my t|shhook
tormat| on. ||guro 10.8 d|sp|ays tho numorous h|kkako
pattorns that occurrod dur|ng tho pr|co drop |n oar|y 2010.

F|CuRE 10.8 A 3or|os ot ||kkako lattorns |n G3l/U30.


Wh||o tho h|kkako ra||y ot |obruary 17 stoppod mo out,
tho h|kkako so|| s|gna| on |obruary 18 a||owod mo to
roostab||sh a short pos|t|on ot 40,000 3r|t|sh pounds por
trad|ng un|t, a|bo|t 220 p|ps |owor than my stop-out ono day
oar||or.

||na||y, on Varch 24, tho chart comp|otod a throo-wook
t|ag as shown |n ||guro 10.4. 1h|s roprosontod a major
pyram|d s|gna|. l |ncroasod my short pos|t|on by 80,000
3r|t|sh pounds por trad|ng un|t w|th tho last 0ay lu|o at
1.b040.

Cont|nuat|on pattorns w|th|n a major trond a||ow mo to
|ncroaso my |ovorago. 1hoso pattorns a|so a||ow mo to
advanco tho protoct|vo stop on a coro or |n|t|a| pos|t|on. l
movod tho protoct|vo stop ot tho short pos|t|on ontorod on
|obruary 18 |n ro|at|onsh|p to tho last 0ay lu|o ot tho short
pos|t|on ontorod on Varch 24. 1hus, tho protoct|vo stop on
my ont|ro short G3l/U30 pos|t|on was sot at 1.b001. 1h|s
stop was h|t on Varch 80, and l was onco aga|n t|at |n a
markot that l bo||ovo wou|d ovontua||y h|t a much |owor
targot.

||guro 10.4 d|sp|ays tho soquonco ot trad|ng ovonts |n
tho G3l/U30 dur|ng |obruary and Varch aga|n broak|ng
tho mo|d ot tho month-by-month tormat. 3how|ng sovora|
months togothor ho|ps show trados as part ot a campa|gn.

F|CuRE 10.4 Comp|otod 0oub|o 1op and 1hroo-Wook
||ag |n G3l/U30.



1h|s markot has boon trustrat|ng tor mo as a trador. l
havo boon a boar s|nco oar|y lovombor and havo vory ||tt|o
to show tor |t ro|at|vo to tho s|zo ot tho movo wo havo
oxpor|oncod. 1horo |s a|ways ono markot oach yoar that
gots |nto my hoad. 1h|s yoar, so tar, |t |s tho G3l.

1h|s markot a|ono shou|d havo boon a t|vo-porcontor
(roturn on trad|ng cap|ta|). l was gonora||y undor|ovoragod
|n tho markot, and my pat|onco was too short |n g|v|ng tho
markot tho opportun|ty to b|oom.

AµriI Nini Crudo OiI: 1ho ProbIom in
1rading Fan Linoa

8Ignal 1ype: Na[or Broakout 5ignaI

1ho tan pr|nc|p|o was |dont|t|od by Edwards and Vagoo
as a c|ass|ca| chart|ng structuro. ||guro 10.b shows tho tan
pr|nc|p|o |n act|on on tho crudo o|| wook|y chart. 3y tho way,
noto tho |83 bottom tormat|on at tho Varch |ow.

F|CuRE 10.5 |an lr|nc|p|o on tho Wook|y Crudo O||
Chart.



1ho advanco trom tho Varch |ow had not acco|oratod,
but |n tact had cont|nuod to v|o|ato a sor|os ot trond ||nos
w|th docroas|ng ang|os ot attack. 1h|s |s tho ha||mark ot tho
tan pr|nc|p|o. 1h|s |nd|catod that crudo o|| was |os|ng
momontum on a grand sca|o. ln s|mp|o torms, crudo o||
pr|cos woro t||rt|ng w|th d|sastor.

1ho targot ot tho tan pr|nc|p|o assumos a comp|oto
rotracomont ot tho tan |tso|t-|n othor words, crudo o||
wou|d roturn to tho Varch 2000 |ow. 1ho tan pr|nc|p|o |s
d|tt|cu|t to trado bocauso |t roprosonts a|| tho pract|ca|
prob|oms ot trad|ng d|agona| chart boundar|os.

||guro 10.0 showod ono poss|b|o roso|ut|on to a pond|ng
pr|co doc||no. 3|nco Octobor 2000, tho da||y cont|nuat|on
graph d|sp|ayod a poss|b|o doub|o top pattorn w|th a
broakout po|nt ot 00.b0.

F|CuRE 10.0 A loss|b|o 0oub|o 1op |n Crudo O||.



1hus, my trad|ng b|as, basod on tho tan pr|nc|p|o and tho
poss|b|||ty ot an doub|o top, |od mo to |ook tor short|ng
opportun|t|os. As shown |n ||guro 10.7, tho doc||no on
|obruary b ponotratod tho |owor tan ||no, but pr|cos
|mmod|ato|y tradod back abovo tho tan boundary. On
|obruary 12, l took a shot at tho short s|do, th|nk|ng that tho
rotost ot tho tan ||no was ta|||ng and pr|cos woro roady to
doc||no. l was stoppod out on |obruary 10 basod on tho
last 0ay lu|o.

F|CuRE 10.7 |a|so 3roakout ot a |an l|no |n Crudo O||.


1ho 5imiIaritioa ot 1rading to
ProtoaaionaI AthIotica

Ovor tho yoars, l havo boon amazod at how commonts by
wor|d-c|ass portormors |n a|| aroas ot human ondoavor (trom
sports to bus|noss to tho arts) aro app||cab|o to trad|ng.

ln 2000, l was watch|ng tho W|mb|odon tonn|s match whoro
vonus W||||ams s|aughtorod tho wor|d's numbor ono soodod
woman p|ayor at tho t|mo, 0|nara 3at|na, by stra|ght-sot scoros
ot 0-1 and 0-0. Ono ot tho announcors mado a commont
dur|ng tho match that app||os portoct|y to tho ondoavor ot
commod|ty trad|ng. 1ho l3C announcor bas|ca||y sa|d, °lt |s
hard onough tor 3at|na to boat W||||ams whon sho |s not ovon
w|nn|ng tho t|ght w|th horso|t |n th|s match.'

3uccosstu| markot spocu|at|on |s an upstroam sw|m aga|nst
human naturo. 1ho human aspoct ot trad|ng |s tar moro
|mportant than trado |dont|t|cat|on, tho subjoct that gots most ot
tho attont|on ot books, som|nars, and wob s|to trad|ng
sorv|cos.

|or a trador or any protoss|ona|, tho ma|n batt|o takos p|aco |n
tho omot|ona|, monta|, and psycho|og|ca| roa|m.

A tonn|s protoss|ona| knows what ho or sho must do to oxco| |n
a part|cu|ar match (|ncroaso tho spood ot a socond sorvo, or
stay on tho baso||no moro, or |ncroaso onduranco tor a |ong
match). 1ho cha||ongo tor protoss|ona| tradors and ath|otos |s
to proparo tor and oxocuto what noods to bo dono wo||. 1ho
batt|o |s w|th|n.

Juno 1-Bonda: unauccoaatuI Attomµt to
ParIay 5maII Pattorna into a Big Novo

8Ignal 1ype: Na[or Anticiµatory 5ignaI

1ho quartor|y, month|y, and wook|y charts ot tho 80-yoar
1-bond markots scroam sovoro|gn crod|t dotau|t. 1ho
|ongor-torm charts ot 1-bonds aro tound |n Chaptor 0,
||guros 0.8A-C. Vy |ong-torm out|ook |od mo to |ook tor
short|ng opportun|t|os |n tho 1-bonds. At tho t|mo, l v|owod
any short|ng opportun|ty as a major ant|c|patory s|gna|. l
had an |ntorost |n catch|ng tho r|ght shou|dor ot tho |83 top
on tho wook|y chart.

||guro 10.8 d|sp|ays two sma|| tochn|ca| dovo|opmonts
that |od mo to short tho 1-bonds. 1ho markot tormod a
broadon|ng top pattorn |n |ato 1anuary and oar|y |obruary.
3roadon|ng pattorns aro norma||y rovorsa| |n naturo. 1ho
doc||no on |obruary 17 comp|otod a sma|| t|ag. l shortod
tho markot at tho rotost ot tho t|ag on |obruary 18. l was
stoppod out on |obruary 22. Vy |ovorago was 0.b contracts
por trad|ng un|t.

F|CuRE 10.8 Attompt|ng to Catch tho l|ght 3hou|dor 1op
w|th 1wo 3ma|| 3oar lattorns |n 1-3onds.


Looking Back

1h|s |s ono ot many oxamp|os |n tho book show|ng that my
|ntorprotat|on ot da||y charts |s |nt|uoncod by my porspoct|vo ot
|ongor-torm wook|y and month|y chart pattorns. G|von tho
|ongor-torm chart structuro |n 1-bonds, l v|owod thoso trados
as vory |ow-r|sk and h|gh-roward opportun|t|os. l wou|d tako
trados ||ko th|s ovory day ot tho wook.

Juno 10-Yoar 1-Notoa: An Attomµt to
Extond tho Lovorago ot Ny 1-Bond
1rado

8Ignal 1ype: NiacoIIanooua 1rado

At tho samo t|mo tho 1-bonds woro show|ng a tradab|o
chart sotup, tho 1uno 10-yoar 1-notos tormod a t|ny throo-
wook |83 top. l v|owod th|s sma|| pattorn as a moans to
ga|n turthor |ovorago |n a p|ay toward h|ghor |ntorost ratos
(|owor pr|cos). l shortod tho 1uno 1-notos on |obruary 18
and was stoppod out on |obruary 28 basod on tho last
0ay lu|o. 1ho pattorn, as shown |n ||guro 10.0, was much
too short.

F|CuRE 10.0 A 3ma|| |83 1op |n 1-lotos.


CBP/JPY: A Na[or Doaconding 1riangIo
|a ComµIotod

8Ignal 1ype: Na[or Broakout 5ignaI

|or background and rotoronco |n th|s torox pa|r, soo
||guro 0.20 and tho corrospond|ng commonts |n Chaptor 0.

1ho doc||no on |obruary 28 ponotratod tho |owor
boundary ot tho t|vo-month doscond|ng tr|ang|o |n th|s
markot. loto |n ||guro 10.10 that tho thrust down was
|aunchod trom a 12-day t|ag |n m|d-|obruary. 1h|s was a
poss|b|o ha|t-mast pattorn. As such, th|s t|ag prov|dod a
targot ot 181.87. 1ho targot ot tho doscond|ng tr|ang|o was
128.10.

F|CuRE 10.10 ||vo-Vonth 0oscond|ng 1r|ang|o |n
G3l/1lY.


|o||ow|ng tho sharp doc||no |nto tho Varch 1 |ow, tho
markot choppod h|ghor. 1h|s |ack ot to||ow-through
charactor|zos tho chopp|noss ot many torox pa|rs and
commod|ty tuturos contracts at tho t|mo. Us|ng tho 1ra|||ng
3top lu|o, my pos|t|on was ||qu|datod on Varch 12.

Octobor 5ugar: 1ho 5urµriao Novo |a
Down

8Ignal 1ype: Ninor RovoraaI 5ignaI

lt |s d|tt|cu|t tor mo to turn on a d|mo. l know othor tradors
who troquont|y uso a °stop and rovorso' stratogy |n tho|r
trad|ng. 1h|s may bo oasy to do tor mochan|ca| systoms
tradors, but tor d|scrot|onary tradors |t |s moro ot a
cha||ongo. At |oast |t |s tor mo.

l had boon a sugar bu|| s|nco oar|y 2000. 3o |t was w|th
groat ro|uctanco (and oxtromo|y ||ght |ovorago) that l
ostab||shod a m|nor s|gna| short pos|t|on |n Octobor sugar
on |obruary 28, basod on an o|ght-wook rovorsa| roctang|o
as shown |n ||guro 10.11.

F|CuRE 10.11 loctangu|ar 1op |n Octobor 3ugar.


1ho last 0ay lu|o trom |obruary 28 was a|most n|ppod
on |obruary 24, but ho|d tast. 1ho markot roachod |ts
m|n|mum targot on Varch 2. As bu|||sh as l was on sugar tor
such a |ong t|mo, |t was |ron|c that tbo hugo movo wou|d bo
tho Varch 2010 pr|co co||apso.

Looking Back

1horo havo boon many t|mos |n my trad|ng caroor whon tho
roa||y b|g movo |s |n tho oppos|to d|roct|on ot my b|as and
oxpoctat|on. 3ugar was just such a caso |n 2010. l was |ook|ng
tor 00-cont sugar and tho surpr|so movo was down. ||guro
10.12 shows tho co||apso |n sugar. 1horo woro numorous
sma|| pyram|d opportun|t|os |n th|s doc||no. l m|ssod thom a||
duo to my prod|spos|t|on toward h|ghor pr|cos.

F|CuRE 10.12 3ugar lr|cos Co||apso.



5oyboan OiI~A 5orioa ot Long 1radoa

8Ignal 1ypes: |natinct 1rado, 1wo Ninor
Continuation 5ignaIa

l ontorod throo soyboan o|| trados |n |obruary. As ot
|obruary, tho wook|y soyboan o|| chart had d|sp|ayod a
poss|b|o 14-month ascond|ng tr|ang|o, as shown by tho
wook|y 1u|y contract chart |n ||guro 10.18. l ontorod
|obruary prod|sposod to bo |ong soyboan o||.

F|CuRE 10.18 Wook|y 3oyboan O|| Chart 0|sp|ays
Vass|vo 1r|ang|o.



3oyboan o|| pr|cos woro dr|von unmorc|tu||y |owor |n
1anuary. As shown |n ||guro 10.14, tho Varch contract had
a sor|os ot |owor h|ghs tor 10 stra|ght days, tak|ng pr|cos
|nto an aroa ot support on tho wook|y graph. Otton such
ro|ont|oss doc||nos |nto an aroa ot major support w||| rosu|t
|n °v'-typo bottoms. l had an |nst|nct that tho markot was
roady tor a strong ono- to two-wook ra||y, to bo s|gna|od by
tho t|rst day w|th a h|ghor h|gh. l wont |ong on |obruary 2.
As w|th most |nst|nct trados, l |ook tor qu|ck prot|ts. l ox|tod
tho trado on |obruary 10.

F|CuRE 10.14 °v' 3ottom |n Varch 3oyboan O||.


1hon tho markot tormod a sma|| ponnant |n |ato |obruary.
l ontorod a |ong pos|t|on (two contracts por trad|ng un|t) on
|obruary 2b. 1h|s trado and tho ono to to||ow woro m|nor
cont|nuat|on s|gna|s. 1ho broakout on |obruary 2b provod
to bo a ono-day-out-ot-||no movomont. 1ho markot rovorsod
and stoppod mo out tho samo day (soo ||guro 10.1b).

F|CuRE 10.15 lonnant |n Vay 3oyboan O||: ||rst
3roakout |a||s.



|ow many t|mos do l nood to mako tho samo m|stako?
1ho m|stako l am rotorr|ng to |s ontor|ng stops tor tho gra|n
markots |n tho ovorn|ght o|octron|c soss|on. 1ho ontry stop
tor tho |obruary 2b trado was tr|ggorod |n tho ovorn|ght
soss|on but wou|d havo novor boon tr|ggorod |n tho day
soss|on.

l roontorod tho trado on |obruary 20-dur|ng tho day
soss|on-whon tho ponnant was onco aga|n comp|otod.
||guro 10.10 |s an hour|y chart show|ng that tho day
soss|on broakout d|d not occur unt|| |obruary 20. l was
|ook|ng on|y tor a sma|| prot|t. l took prot|ts at tho targot ot
4000 on Varch 10.

F|CuRE 10.10 lonnant |n Vay 3oyboan O||: 3ocond
Attompt Works.


Juno Nini 5&Pa and Juno Nini Dow: 1wo
OuoationabIo 1radoa

8Ignal 1ypes: Ninor RovoraaI 5ignaI and
NiacoIIanooua 1rado

Vy noxt two trados to|| |nto tho samo catogory-trados
dr|von moro by my omot|ona| comm|tmont to tho short s|do
ot tho stock markot than by sound chart|ng pr|nc|p|os. l th|nk
that any d|scrot|onary tochn|ca| trador who says ho or sho |s
unb|asod |s a ||ar. 0|scrot|onary tochn|ca| tradors havo a
prod|spos|t|on toward corta|n op|n|ons and pos|t|ons.

l v|owod tho doc||no trom 1anuary 10 to |obruary b as
just tho warm-up to a much |argor boar trond. l a|so thought
tho ra||y to tho |obruary 22 h|gh was s|mp|y a rotost that
took tho torm ot a sma|| |83 pattorn. l had boon stoppod
out ot two-th|rds ot my short 3tandard 8 loor's (38l)
pos|t|on dur|ng tho |ato |obruary advanco. l st||| ho|d a ono-
th|rd short pos|t|on.

As shown |n ||guros 10.17 and 10.18, l |ntorprotod tho
doc||no on |obruary 2b as a broakout comp|ot|on ot sma||
|83 top pattorns |n tho 1uno V|n| 38l and 1uno V|n| 0ow.
1ho 38l pattorn had bottor dot|n|t|on than tho pattorn |n tho
0ow. l shortod both markots (ono contract ot oach por
trad|ng un|t).

F|CuRE 10.17 3ma|| |83 1op |n 38ls lotosts largor
lotont|a| 1op.


F|CuRE 10.18 0ow 1onos 1osts V|d-1anuary 3roakdown.



Ot courso, tho ra||y trom tho |obruary b |ow provod to bo
much moro than a rotost, but rathor anothor |og |n a h|stor|c
bu|| movo. 1ho hoad and shou|dors broakout was a
t|shhook. l shou|d havo rocogn|zod |t as a buy|ng
opportun|ty. l was stoppod out ot both pos|t|ons at tho|r
rospoct|vo last 0ay lu|os, tho 38ls on |obruary 20 and
tho 0ow on Varch 1. Vy comb|nod |oss tor both pos|t|ons
was 1.8 porcont ot assots. On Varch b, l was stoppod out
ot tho t|na| ono-th|rd short pos|t|on (trom 1anuary 21) |n tho
38ls.

EuR/CBP: Caahing |n OuickIy on a
ChannoI Broakout

8Ignal 1ype: Na[or Anticiµatory 5ignaI

Ono ot tho advantagos ot tho spot torox markot |s that l
can tako trados that aro U.3. do||ar noutra|.

ln m|d-|obruary, l notod that tho ouro/3r|t|sh pound
(EUl/G3l) chart oxh|b|tod a poss|b|o 18-month |nvortod
|83 bottom tormat|on on tho wook|y chart, as shown |n
||guro 10.10. 1ho chart |nd|catod that tho ouro cou|d trado
at an 8 to 10 porcont prom|um to tho pound.

F|CuRE 10.10 loss|b|o 18-Vonth |83 3ottom lattorn |n
EUl/G3l.



1ho r|ght shou|dor ot th|s pattorn had takon tho torm ot a
tour-month-p|us channo| pattorn. lot mo say a word about
support and ros|stanco ||nos, wh|ch l havo comp|oto|y
|gnorod |n tho book unt|| now. l do not trado support and
ros|stanco pr|nc|p|os, and l th|nk l am probab|y worso ott tor
|t. l know somo oxco||ont tradors who pay much attont|on to
support and ros|stanco |ovo|s |n tho|r trad|ng.

||guro 10.20 d|sp|ays tho channo| on tho da||y chart, and
a|so shows how a |ovo| ot support, onco brokon, can
bocomo a |ovo| ot ros|stanco. 1hrough lovombor,
0ocombor, and oar|y 1anuary, tho 0.8800 |ovo| prov|dod
support |n th|s curroncy pa|r. 1ho markot ponotratod tho
support on 1anuary 1b. 1hon, |n |ato 1anuary and through
most ot |obruary, tho prov|ous |ovo| ot support bocamo a
|ovo| ot ros|stanco.

F|CuRE 10.20 |our-Vonth Channo| |n EUl/G3l.


Vu|t|p|o cont|rmat|ons ot a trad|ng s|gna| can bo vory
s|gn|t|cant. 1ho ups|do comp|ot|on ot tho channo| on
|obruary 2b a|so c||mbod back abovo tho
support/ros|stanco ||no. 1ho pattorn targot ot tho channo|
was 0002, qu|ck|y roachod on Varch 1.

5ummary

|obruary was a nonovont. 3|xtoon s|gna|s woro ontorod
dur|ng tho month |n 11 d|ttoront markots. Ot tho 10 trados
ontorod, sovon woro c|osod at a prot|t and 10 at a |oss
(a|though not a|| |n |obruary)-a prot|t rat|o ot 48 porcont.
1ho d|str|but|on ot trados by catogory was c|oso to tho
amondod bonchmarks. 1ho trados ontorod |n |obruary
woro c|osod at a ga|n ot 0.0 porcont. On a markod-to-tho-
markot va|uo Addod Vonth|y lndox (vAVl) bas|s, |obruary
oxpor|oncod an actua| |oss ot 1.28 porcont. 1ho d|ttoronco
rot|octs tho tact that tho vAVl ca|cu|at|on marks a||
pos|t|ons to tho markot at tho ond ot a month whothor tho
trados woro carr|od |n trom prov|ous months or not c|osod
unt|| |ator months. 1ab|o 10.1 shows tho d|str|but|on ot
trados ontorod |n |obruary by s|gna| catogory.

1ABLE 10.1 |obruary 1rad|ng 3|gna|s by Catogory

Amondod Fobruary 1rado Entrioa
5ignaI Catogory Bonchmarka (# and ¼ot totaI)
Na[or µattorna
Comp|ot|ons 4.0 (20%) 4.0 (2b%)
Ant|c|patory 1.b (11%) 2.0 (18%)
lyram|d 1.b (11%) 0 (0%)
Ninor µattorna 4.0 (28%) 0.0 (88%)
|natinct tradoa 2.0 (14%) 1.0 (0%)
NiacoIIanooua tradoa 1.0 (7%) 8.0 (10%)
1otaI 14.0 (100%) 10.0 (100%)

|obruary and sovora| prov|ous months |ackod tho
°bottom ||nors' d|scussod |n Chaptor b. About 10 porcont ot
my trados h|stor|ca||y havo producod my not bottom ||no.
1hoso aro tho roa||y prot|tab|o trados, oach roturn|ng at
|oast 2 porcont roturn on cap|ta|. 1ho roma|n|ng 00 porcont
ot trados h|stor|ca||y havo boon washos. W|thout tho bottom
||nors my trad|ng |s roducod to just trados that wash oach
othor out. Each month, tho |actor 1rad|ng l|an noods a
coup|o ot roa||y prot|tab|o trados, propor|y |ovoragod, to
produco tho dos|rod rosu|ts.


Chapter 11

Month Four

Narch 2010

1ho markot |s a groat toachor! lt a|so do||vors chast|somont
|n |argo dosos. l havo a|ways known that thoro woro t|aws |n
tho |actor 1rad|ng l|an, trad|ng |s a procoss ot uncovor|ng
t|aws and attompt|ng to t|x thom . . . on|y to t|nd moro t|aws.
1ho |actor 1rad|ng l|an |s no d|ttoront than any othor
approach. Evory cons|stont|y succosstu| trador sponds t|mo
d|agnos|ng and app|y|ng t|xos to t|aws. 1wo stops torward,
ono stop back! On and on |t goos!

1ho |ntorost|ng th|ng about tho markots |s that tho t|aws
aro novor v|s|b|o dur|ng tho good months and good yoars.
Good t|mos prov|do covor tor tho dot|c|onc|os ot a trad|ng
p|an.

0ur|ng tough t|mos (|.o., drawdown por|ods), markots
havo a way ot oxp|o|t|ng t|aws |n a trad|ng p|an. l know
many tradors who bocomo vory |ntrospoct|vo dur|ng tho
drawdown por|ods as thoy attompt to t|guro out ways to
|mprovo tho|r approach. 1ho t|rst stop to |mprovo an
approach |s to |dont|ty tho t|aws.

1ho cha||ongo |s to t|nd tho tundamonta| t|aws, not just to
mako changos that wou|d havo opt|m|zod trad|ng dur|ng tho
drawdown phaso. 3|mu|at|on and opt|m|zat|on ot
comb|nat|ons ot tochn|ca| |nd|cators |s somoth|ng anybody
can portorm w|th any numbor ot trad|ng and ana|ys|s
p|attorms. l contond that th|s typo ot opt|m|zat|on producos
vory ||tt|o |ast|ng tru|t. 1rado |dont|t|cat|on, at tho ond ot tho
day, |s |oss |mportant than r|sk managomont and tho human
o|omont.

l am |n a drawdown por|od at th|s po|nt |n my trad|ng
journa|. lot sovoro, but dot|n|to|y a h|ndranco. l don't ||ko
|os|ng. l a|so don't ||ko oot w|nn|ng. Vy trad|ng p|an has
a|ways omorgod trom pro|ongod por|ods ot troad|ng wator
w|th changos, somot|mos subt|o, somot|mos moro
s|gn|t|cant. A|most a|ways tho changos havo doa|t w|th
trado and r|sk managomont, not w|th trado |dont|t|cat|on.

l am on tho scont ot somo tundamonta| t|aws |n my
trad|ng approach, wh|ch w||| bo d|scussod |n moro dota|| |n
tho conc|ud|ng chaptors ot th|s book.

1rading Rocord

l ontorod 10 trad|ng ovonts |n 12 d|ttoront markots dur|ng
Varch. 1hroo ot thoso trados woro d|scussod |n prov|ous
chaptors (two go|d trados |n Chaptor 0 and a G3l/U30
trado |n Chaptor 10). 1hoso trados d|scussod oar||or w|||
not bo covorod |n Chaptor 11.

u5D/CAD: Romaining Poraiatont with a
Pattorn

8Ignal 1ypes: Na[or Anticiµatory 5ignaI,
Na[or Broakout 5ignaI, Na[or Broakout 5ignaI
(5ocondary ComµIotion)

l ontorod throo trados |n Varch |n tho U.3.
do||ar/Canad|an do||ar (U30/ CA0). Wh||o oach trado had
|ts own spoc|t|c ru|os and r|sk managomont stratogy, l
cons|dorod a|| throo to bo part ot tho samo trad|ng
campa|gn.

||guro 11.1 d|sp|ays what l saw as tho dom|nant chart
dovo|opmont |n tho torox pa|r, a t|vo-month doscond|ng
tr|ang|o. 1h|s pattorn |s a pr|mo cand|dato tor tho 2010
3ost 0rossod l|st.

F|CuRE 11.1 ||vo-Vonth 0oscond|ng 1r|ang|o on tho
Wook|y U30/CA0 Graph.



||guro 11.2 shows tho trados |n th|s markot on a da||y
chart. l shortod tho markot on Varch 8 basod on what l
porco|vod to bo a tr|ang|o dat|ng to tho 1anuary |ow. 1h|s
was a major ant|c|patory s|gna|. l so|d b0,000 U30/CA0
por trad|ng un|t.

F|CuRE 11.2 0oscond|ng 1r|ang|o on tho 0a||y U30/CA0
Chart.


1ho doc||no on Varch 12 ponotratod tho |owor boundary
ot tho dom|nant t|vo-month doscond|ng tr|ang|o. l shortod
anothor b0,000 U30/CA0, |ncroas|ng my tota| pos|t|on to
short 100,000 U30/CA0 por trad|ng un|t. l usod tho last
0ay lu|o trom Varch 11 to sot a protoct|vo stop and
subsoquont|y |oworod tho stop on Varch 22 to 1.02b0. On
Varch 24, tho markot ra|||od back |nto tho doscond|ng
tr|ang|o, stopp|ng mo out ot ha|t ot my pos|t|on. l movod tho
protoct|vo stop on my roma|n|ng pos|t|on basod on tho
lotost |a||uro lu|o. l was stoppod out on Varch 20.

l havo a prov|s|on |n my trad|ng ru|os tor roontor|ng a
pos|t|on |n markots that d|sp|ay a s|gn|t|cant wook|y chart
pattorn. 1ho roontry gu|do||nos d|ctato that ono ot two th|ngs
must occur to roostab||sh a pos|t|on:

1. 1ho markot must rocomp|oto tho pattorn and
ponotrato tho pr|co oxtromo h|gh or |ow
ostab||shod dur|ng tho |n|t|a| broakout. Undor th|s
cr|tor|on, tho U30/CA0 noodod to trado bo|ow
tho Varch 10 |ow at 1.0002.
2. Undor tho socond cr|tor|on, tho markot must
rocomp|oto tho pattorn on a c|os|ng pr|co bas|s.

On Varch 20, tho markot c|osod back bo|ow tho |owor
boundary ot tho dom|nant doscond|ng tr|ang|o. l
roostab||shod a short pos|t|on ot 80,000 U30/CA0 w|th a
r|sk ot ono-ha|t ot 1 porcont. 1ho Varch 20 h|gh at 1.0278
bocamo tho now last 0ay lu|o. (1h|s pos|t|on roma|nod
opon on Apr|| 20 whon tho d|ary tor th|s book c|osod.)

Nay 5oyboana: 5maII Pattorna Continuo
to Eaunt No

8Ignal 1ype: NiacoIIanooua 1rado

On Varch 4, l shortod soyboans basod on tho comp|ot|on
ot a throo-wook cont|nuat|on |83 pattorn. 1h|s trado t|t |nto
tho m|sco||anoous catogory. l qu|ck|y ox|tod tho trado (on
Varch 8), tak|ng a |oss ot throo-tonths ot 1 porcont (soo
||guro 11.8). (l am ombarrassod to adm|t to trados such as
th|s, but l want th|s book to prov|do tu|| d|sc|osuro-warts
and a||.)

F|CuRE 11.8 1hroo-Wook |83 top |n Vay 3oyboans
Ou|ck|y |a||s.



Nay Nini Crudo OiI: Riaing Wodgo
|IIuatratoa DitticuIty with DiagonaI
Pattorna

8Ignal 1ype: Na[or Anticiµatory 5ignaI

l havo a|roady d|scussod my ovora|| boar|sh porspoct|vo
tor crudo o||. 1ho doc||no on Varch 12 comp|otod a major
pattorn ant|c|patory so|| s|gna| |n tho way ot a s|x-wook
r|s|ng wodgo. 1h|s trado was mado on a |r|day, and l wont
homo too||ng ||ko l had a roa| w|nnor. On Vonday, tho
markot to||owod through. Voro cont|donco (soo ||guro
11.4)!

F|CuRE 11.4 3|x-Wook l|s|ng Wodgo on Crudo O|| Chart.


1ho toxtbook undorstand|ng ot tho r|s|ng wodgo ca||s tor
a sw|tt and un|ntorruptod pr|co doc||no. Yot on Varch 10,
tho markot rovorsod strong|y to tho ups|do. l jammod my
stop bocauso such a strong ra||y |s uncharactor|st|c ot tho
r|s|ng wodgo pattorn. l was stoppod out on Varch 17.

AuD/CAD: A 1riangIo Cauaoa NuItiµIo
Loaaoa

8Ignal 1ypes: |natinct 1rado, Na[or
Anticiµatory 5ignaI, Na[or Broakout 5ignaI,
Ninor Broakout 5ignaI.

1hoso woro trados spann|ng two months, prosontod |n
th|s chaptor to prov|do a contoxt tor ropoatod attompts to
oxp|o|t a chart dovo|opmont.

1ho Austra||an do||ar/Canad|an do||ar (AU0/CA0) |s a
toxtbook oxamp|o ot tho comody ot orrors that can occur
whon a symmotr|ca| tr|ang|o works |ts way too tar toward
tho apox. 3ocauso pr|cos had travo|od boyond two-th|rds to
throo-tourths ot tho way to tho apox, l shou|d havo |gnorod
th|s pattorn. lnstoad, l got wh|p|ashod by a sor|os ot s|gna|s.
1h|s markot spun mo ||ko a top.

As shown |n ||guro 11.b, tho dom|nant pattorn was a
poss|b|o throo-month symmotr|ca| tr|ang|o. 1ho uppor
boundary, whon oxtondod back |n t|mo, connoctod w|th tho
lovombor h|gh.

F|CuRE 11.5 3|oppy 3roakouts Occur w|th 1hroo-Vonth
1r|ang|o |n AU0/CA0.


W|th|n tho |argor throo-month tr|ang|o, a throo-wook
tr|ang|o tormod |n m|d-Varch (soo ||guro 11.0). l usod th|s
sma||or throo-wook tr|ang|o to got a hoad start on tho trado
and shortod tho broakout on Varch 10. 1h|s was an |nst|nct
trado. 1h|s thrust was short ||vod and tho markot qu|ck|y
rovorsod, stopp|ng mo out tor a day-trado |oss ot 0.007
porcont.

F|CuRE 11.0 0a||y Chart ot AU0/CA0 0|sp|ays
1roachorous 1rad|ng Cond|t|ons.


1ho markot thon ra|||od, and on Varch 80 actua||y
ponotratod tho uppor boundary ot tho tr|ang|o. l v|owod th|s
as a poss|b|o bu|| trap. l shortod tho markot on Varch 81
whon pr|cos tradod bo|ow tho Varch 80 |ow. Vy hopo was
that l was gott|ng short noar tho uppor boundary. 1h|s was a
major broakout ant|c|patory s|gna|.

On Apr|| b, tho markot surgod through tho |owor boundary
ot tho tr|ang|o, c|os|ng bo|ow tho Varch |ow. 1h|s was a
major comp|ot|on s|gna|. l addod to tho pos|t|on and
thought l had a groat trado pond|ng. |owovor, tho markot
rovorsod tho noxt day and stoppod mo out ot my ont|ro
short pos|t|on on Apr|| 7.

1hon, on Apr|| 0, tho markot ra|||od through tho uppor
boundary ot tho tr|ang|o and ponotratod tho Varch 80 h|gh. l
thought that th|s was a c|ass|c °ond-around' m|nor
comp|ot|on buy s|gna|. l wont |ong. 1ho markot rovorsod tho
vory noxt day, Apr|| 12, and onco aga|n l was wh|p|ashod by
th|s torox pa|r. |our trustrat|ng trados basod on tho samo
chart construct|on!


Looking Back

1ho major |osson to bo |oarnod |s that tr|ang|os aro not va||d
whon pr|cos work too tar toward tho apox. 1h|s doos not moan
that l shou|d not attompt tho t|rst broakout, but that |t tho t|rst
broakout ta||s l nood to cross tho markot ott my pond|ng trado
||st.

EuR/u5D: A CIaaaic E&5 FaiIuro Pattorn

8Ignal 1ype: Ninor Pattorn Continuation

1ho EUl/U30 oxpor|oncod a substant|a| boar trond trom
tho lovombor h|gh |nto tho |obruary |ow as shown |n
||guro 11.7.

F|CuRE 11.7 A 3ma|| |83 3ottom |a||uro ls 1r|ggorod |n
EUl/U30.


||guro 11.8 |s a b|ow up ot ||guro 11.7. |rom |obruary b
to m|d-Varch, tho markot appoarod to torm|ng a comp|ox
|83 bottom or round|ng pattorn. On Varch 12, tho markot
n|ckod a 1b-wook trond ||no. l suspoctod a bu|| trap.

F|CuRE 11.8 3u|| 1rap lrocodos |83 |a||uro |n
EUl/U30.



l shortod tho markot on Varch 10 whon tho |83 ta||uro
was cont|rmod. l cou|d havo takon tho short a day oar||or on
Varch 18. 1ho targot ot tho pattorn was 1.8228. 1ho markot
ta||od to roach |ts targot and turnod up on Varch 20, c|os|ng
abovo tho Varch 2b |ow. 1h|s was a sotup tor tho 1ra|||ng
3top lu|o. 1h|s ru|o was tr|ggorod on tho opon ot Varch 20.
l ox|tod tho short trado tor a sma|| prot|t.

Juno 1-Bonda: Yot Anothor E&5 FaiIuro

8Ignal 1ype: Na[or Anticiµatory 5ignaI

As c|tod |n prov|ous chaptors, l was |ook|ng tor an
opportun|ty to short th|s markot at tho |ato stago ot tho r|ght
shou|dor ot a poss|b|o 12-month |83 top (soo ||guro
0.8A-C |n Chaptor 8). l was |ntorprot|ng tho wook|y chart
trom a boar|sh porspoct|vo.

loto |n ||guro 11.0, tho da||y 1uno 1-bond chart was
torm|ng a poss|b|o n|no-wook |nvortod |83 bottom
tormat|on. 1ho markot attomptod to c||mb abovo tho |co ||no
on Varch 18, but cou|d not ho|d tho ra||y. 3uspoct|ng a |83
ta||uro |n tho mak|ng, l ontorod a so|| stop bo|ow tho Varch
10 |ow and was stoppod |nto a short pos|t|on on Varch 24
at 117.02. Vy pos|t|on was short ono-ha|t a contract por
trad|ng un|t.

F|CuRE 11.0 1-3onds 1urn 0own at tho lock||no.



l was stoppod out ot tho trado on Apr|| 12 basod on tho
1ra|||ng 3top lu|o.

Nay Whoat: A 5uatainod DocIino in
Whoat Continuoa to Fruatrato No

8Ignal 1ype: Ninor Continuation 5ignaI

1ho |83 top comp|otod |n m|d-1anuary had an unmot
targot ot 420. Attor chopp|ng s|doways trom oar|y |obruary
through m|d-Varch, tho markot thrust |nto now |ows on
Varch 2b, as soon |n ||guro 11.10. l wont short at 470.b0
w|th a last 0ay lu|o ot 478.2b and a targot ot 420. l
ostab||shod an undor|ovoragod pos|t|on ot 0.b contracts
por trad|ng un|t. l was stoppod out on Apr|| 7 basod on tho
last 0ay lu|o.

F|CuRE 11.10 low lows |n Whoat.


|a 1horo a Boat 1imo ot Day to
EatabIiah a 1rado?

1ho answor to th|s quost|on |s °yos!' lntraday trad|ng |s vory
docopt|vo. A trador can bo m|s|od by pr|co |oaps and d|vos
dur|ng tho trad|ng soss|on. lt |s qu|to oasy to bo||ovo a chart
pattorn |s dost|nod to bo comp|otod basod on |ntraday act|on,
on|y to bo d|sappo|ntod by tho ond ot tho day. 1ust as l cannot
prod|ct tho noxt short-, |ntormod|ato-, or |ong-torm pr|co trond |n
a markot, l ospoc|a||y cannot prod|ct how a markot w||| c|oso
basod on |ts |ntraday pr|co bohav|or.

1ho s|ng|o most |mportant pr|co ot tho day |s tho c|os|ng pr|co,
postod m|dattornoon oach day. 1h|s |s tho pr|co at wh|ch
pos|t|on tradors, as opposod to day tradors, aro w||||ng to ho|d
a pos|t|on ovorn|ght. Evon though l otton ontor and ox|t a
pos|t|on |ntraday, tho c|os|ng pr|co |s tho on|y ono that roa||y
mattors. Evoryth|ng o|so |s no|so.

Nay Corn: A 5tair-5toµµing DocIino

8Ignal 1ype: Ninor Continuation 5ignaI

1ho Vay corn trado m|rrors tho Vay whoat trado. 1ho
da||y chart had a targot ot 844 trom tho throo-month tr|ang|o
comp|otod on 1anuary 18. Attor dr|tt|ng s|doways through
most ot |obruary and Varch, tho markot mado a now |ow
on Varch 2b, as shown |n ||guro 11.11. 1h|s now |ow
comp|otod a doscond|ng tr|ang|o dat|ng back to tho oar|y
Varch h|gh.

F|CuRE 11.11 Corn |a||s to |o||ow 1hrough Attor low
lows.



l ostab||shod a short pos|t|on. 1ho pattorn targot trom tho
throo-month tr|ang|o was mot on Varch 81. |owovor, l
o|octod to go w|th a sw|ng targot, assum|ng that tho drop
trom tho Varch 1 h|gh wou|d oqua| tho 1anuary doc||no.
1h|s sw|ng targot was a|so |n tho aroa ot tho 3optombor
2000 |ow.

1ho markot oxpor|oncod a rotost ra||y on Apr|| 7. l was
stoppod out ot tho trado on Apr|| 14 basod on tho lotost
|a||uro lu|o.

Novombor 5oyboana: A Boar 1raµ

8Ignal 1ype: Ninor Continuation 5ignaI

1ho doc||no (|n tho t|rst 1b m|nutos ot p|t trad|ng) on
Varch 81 ponotratod tho |owor boundary ot an o|ght-wook
cont|nuat|on symmotr|ca| tr|ang|o. 1h|s broakout provod
qu|ck|y to bo a ono-day-out-ot-||no movomont. l rocogn|zod
|t as such and ox|tod tho trado qu|ck|y (soo ||guro 11.12).

F|CuRE 11.12 3ymmotr|ca| 1r|ang|o |n lovombor
3oyboans.


1h|s pattorn h|gh||ghts tho tundamonta| prob|om w|th
d|agona| pattorns, to wh|ch symmotr|ca| tr|ang|os bo|ong. lt
|s poss|b|o tor pr|cos to ponotrato a d|agona| boundary ||no
w|thout c|oar|ng tho prov|ous h|gh or |ow w|th|n tho pattorn.
1h|s |s part ot tho roason l protor to trado broakouts trom
hor|zonta| boundary ||nos.

Nay Coµµor: An Eaay 1rado | Niaaod

8Ignal 1ype: Niaaod 1rado

l koop a rocord ot pattorns that l m|ss. 1horo aro usua||y
two such pattorns por month. l usua||y m|ss thom bocauso l
am b|asod |n tho othor d|roct|on, not bocauso l do not soo
thom. 3omot|mos l m|ss a trado on|y to soo |t a day or two
|ator. ln |ato Varch, l had a b|as toward tho short s|do ot
coppor. l thought tho |obruary to Varch ra||y was a tost ot
tho 1anuary h|gh. l a|so saw a poss|b|o tour-wook
doscond|ng tr|ang|o torm|ng. l|ght-ang|o tr|ang|os aro
usua||y roso|vod by a broakout through tho hor|zonta|
boundary.

As shown |n ||guro 11.18, a sma|| n|no-day symmotr|ca|
tr|ang|o tormod at tho ond ot tho doscond|ng tr|ang|o. 1ho
advanco on Varch 20 comp|otod tho symmotr|ca| tr|ang|o
and sot up tho v|o|at|on ot tho doscond|ng tr|ang|o on Varch
20. l cou|d havo ostab||shod a |ong pos|t|on on o|thor Varch
20 or Varch 20. 1h|s was a n|co tour-wook cont|nuat|on
pattorn.

F|CuRE 11.18 1r|ang|o lropo|s Coppor lr|cos ||ghor.


Looking Back

V|ssod trados br|ng torth a vory |mportant po|nt. lattorns that
aro tu||y maturo and roady to |aunch a trond moro otton than not
prov|do an opportun|ty tor broakout tradors to go |n o|thor
d|roct|on. ln tact, a cond|t|on ot a maturo pattorn |s that |og|ca|
broakout stops aro so|t-ov|dont on both s|dos ot tho pattorn. 1o
tako th|s a stop turthor, un|oss a markot can bo °brackotod'
w|th broakout ordors to go o|thor |ong or short, thon ono m|ght
w|th broakout ordors to go o|thor |ong or short, thon ono m|ght
quost|on tho |og|t|macy ot o|thor ordor.

Nay Orango Juico: An °End-Around"
1riangIo FaiIuro

8Ignal 1ype: Ninor Continuation

||na||y, l w||| po|nt out a trado l took tor my propr|otary
account but not tor tho poo| bocauso ot tho oxtromo
||||qu|d|ty ot tho markot. 1ho doc|s|vo broakout on Varch 1
comp|otod an o|ght-wook symmotr|ca| tr|ang|o. 1h|s pattorn
shou|d havo propo||od tho markot to at |oast 170. loto that
pr|cos movod to tho apox ot tho tr|ang|o botoro broak|ng
out. 3ymmotr|ca| tr|ang|os that movo throo-quartors or moro
toward tho apox cannot bo trustod. As shown |n ||guro
11.14, th|s tr|ang|o d|d not ovon roach tho 1anuary h|gh
botoro portorm|ng an ond-around.

F|CuRE 11.14 A C|ass|c End-Around |n Orango 1u|co.


5ummary

Varch was tho toughost month s|nco lovombor w|th a
nogat|vo portormanco ot 8.7 porcont, markod-to-markot
va|uo Addod Vonth|y lndox (vAVl) mothod. Ot tho 10
trados ontorod |n tho month, on|y tour, or 2b porcont, woro
prot|tab|o, tor a not |oss (c|osod trado bas|s) ot 2.b porcont.
Ono trado (U30/CA0) roma|nod opon. lono ot tho c|osod
prot|ts was |n tho °bottom ||nors' catogory.

1ab|o 11.1 ||sts tho catogory ot ontry s|gna|s tor Varch.

1ABLE 11.1 Varch Entry 3|gna|s by Catogory

Amondod Narch 1rado Entrioa
5ignaI Catogory Bonchmarka (# and ¼ot totaI)
Na[or µattorna
Comp|ot|ons 4.0 (20%) 2.0 (12%)
Ant|c|patory 1.b (11%) 4.0 (20%)
lyram|d 1.b (11%) 1.0 (0%)
Ninor µattorna 4.0 (28%) 7.0 (41%)
|natinct tradoa 2.0 (14%) 1.0 (0%)
NiacoIIanooua tradoa 1.0 (7%) 1.0 (0%)
1otaI 14.0 (100%) 10.0 (100%)


Chapter 12

Month FIve

AµriI 2010

1h|s |s tho t|na| d|ary chaptor |n lart lll ot Llory oí o
Proíosslooo| Commoolty 7rooor. 1ho portormanco dur|ng
tho t|rst 18 wooks was not as stout as l wou|d havo ||kod,
but that |s part ot trad|ng. 1horo aro |os|ng trados, |os|ng
wooks, |os|ng months, and ovon |os|ng yoars.

Ot tho top 20 protoss|ona| trad|ng t|rms dur|ng tho past
t|vo yoars (basod on my ana|ys|s ot r|sk-adjustod
portormanco), thoro woro a tota| ot 17 |os|ng yoars among
thom, or 17 porcont ot tho tota| comb|nod yoars (20 trad|ng
t|rms t|mos b yoars oqua|s 100 yoars ot trad|ng). 1h|s
moans that noar|y ono |n t|vo yoars was a not |osor tor tho
group. Evon though tho avorago |os|ng yoar was sma|| (a
tow porcontago po|nts), a |os|ng yoar |s a |os|ng yoar.

ln tho opon|ng paragraphs ot lart lll ot th|s book, l statod
that, °l w||| bo |n hog hoavon |t l ach|ovo an actua| rato ot
roturn ot 10 to 1b porcont dur|ng tho noxt t|vo months.'
Entor|ng Apr||, my portormanco s|nco 0ocombor 7, 2000
(tho start ot tho d|ary) was a ga|n ot b porcont-p|us (c|osod
trados on|y). 1h|s oquatod to 12 porcont-p|us annua||zod.
W|th ono month to go, my or|g|na| goa| was boyond roach
un|oss oar|y Apr|| ottorod somo groat surpr|sos. 3ut l was
not shockod by tho portormanco s|nco 0ocombor, s|nco l
had but a sma|| handtu| ot °bottom ||nors.' 1hoso trados aro
an abso|uto nocoss|ty to roach prot|t my goa|s.

3omo nov|co tradors who ta|| boh|nd tho|r oxpoctat|ons
adopt tho att|tudo ot °doub||ng up to catch up.' l am not
tomptod to do th|s. 1horo aro ups and downs |n tho not
assot va|uo ot a|| trad|ng oporat|ons. 1ak|ng add|t|ona| r|sk
|s tho way to ru|n, not rocovory.

|ad th|s book boon wr|tton |n any othor t|vo-month por|od
ot t|mo, tho rosu|ts cou|d havo boon drast|ca||y d|ttoront-
porhaps bottor, porhaps worso. 1horo |s no mag|c crysta|
ba|| |n commod|ty and torox trad|ng. 1ho bost a trador can
do |s to dovo|op trad|ng pr|nc|p|os and gu|do||nos that
prov|do a s||ght odgo-and thon attompt to oxp|o|t th|s
odgo ovor t|mo. 1h|s concopt ot °odgo' cannot bo
ovoromphas|zod.

Vost las vogas gam|ng tac|||t|os pay around 0b to 07
conts on tho do||ar |n tho|r s|ot mach|no oporat|ons. 1h|s
moans that tho °houso' has a vory s||ght odgo on any g|von
pu|| ot tho s|ot mach|no arm. lt |s just as ||ko|y tor a gamb|or
to w|n as to |oso |n a s|ng|o-pu|| s|ot mach|no ovont. 1ho
°houso' |s bott|ng that tho s||ght odgo, omp|oyod ovor
thousands and thousands ot pu||s, w||| produco a not prot|t.
3ut tor any g|von pu||, tho odgo |s a|most moan|ng|oss.

1rad|ng oporatos on tho samo pr|nc|p|o. l havo
dovo|opod a mothod ot so|oct|ng trados, ontor|ng trados,
and manag|ng trados-a|| w|th|n an ovora|| r|sk
managomont construct-that l bo||ovo prov|dos mo an
odgo. lt |s th|s odgo that l attompt to oxp|o|t. Ovor any g|von
trad|ng ovont or sma|| sor|os ot trad|ng ovonts, and dur|ng
any g|von wook or month, tho odgo may not prov|do a not
prot|tab|o rosu|t.

lt has boon a tough 12- to 1b-month por|od tor tho w|dor
commun|ty ot commod|ty and torox trad|ng oporat|ons.
Us|ng somo ot tho most w|do|y to||owod Commod|ty
1rad|ng Adv|sor |nd|cos (3tark, VAl, 3arc|ays, lyxor) as
prox|os, trad|ng oporat|ons havo |ost monoy not |n tho past
yoar. ln tact, accord|ng to tho 3arc|ays C1A lndox, 2000
was tho t|rst |os|ng yoar tor commod|ty and torox trad|ng
oporat|ons |n tho past 10 yoars, and on|y tho tourth |os|ng
yoar s|nco 1080.

ln ||ght ot tho h|stor|ca| ga|ns |n tho g|oba| stock markots
|n 2000, commod|ty and torox |nvostmonts soom qu|to
unattract|vo. Yot go back to tho book's |ntroduct|on and
|ook at tho chart |n ||guro l.4 to ga|n a h|stor|ca|
porspoct|vo on commod|t|os/torox as an assot c|ass
comparod to tho U.3. stock markot.

As a trador who undorstands spocu|at|vo ondoavors, l
wou|d p|aco my own porsona| assots w|th a so||d
commod|ty managor ovor a stock mutua| tund managor any
day ot tho wook. On a r|sk-adjustod bas|s, my sadd|o w|||
go on tho commod|ty horso.

RoIying on CIaaaicaI Charting
PrinciµIoa

Chart pattorns ot any t|mo durat|on (yoar|y, quartor|y,
month|y, wook|y, da||y, hour|y) aro compr|sod ot numorous
pattorns ot shortor durat|on that ta|| to gonorato tho |mp||od
movo. |or oxamp|o, a tour-month wook|y chart pattorn w|||
cons|st ot numorous da||y pattorns that appoarod to bo
|og|t|mato at tho t|mo ot tho|r tormat|on but ta||od to do||vor.
ln turn, tho da||y tormat|ons aro compr|sod ot numorous
hour|y chart tormat|ons, somo ot wh|ch producod a movo to
tho|r |mp||od targots, many moro ot wh|ch ta||od.

lattorns that produco s|gn|t|cant tronds aro oasy to soo
attor tho tact. 3|m||ar pattorns that ta|| and b|ond |nto |ongor
pattorns aro much moro d|tt|cu|t to |so|ato attor tho tact.
C|ass|ca| chart|ng pr|nc|p|os aro t|u|d. lattorns aro
constant|y ovo|v|ng and bocom|ng rodot|nod.

Chart tradors aro tacod w|th two opt|ons:

1. 0ovo|op an uncanny sonso tor whon a chart
tormat|on w||| maturo and bocomo tru|ttu|-and
attompt to postpono trad|ng act|v|ty unt|| a pattorn
|s roady to work, somohow o||m|nat|ng or groat|y
roduc|ng trad|ng act|v|ty on tho pattorns that w|||
ta||. 1h|s cha||ongo |s pr|mar||y ono ot
oxtraord|nary pat|onco.
2. 1rado a|| c|oar|y dot|nod pattorns, us|ng sound
monoy managomont, know|ng that tho vast
major|ty ot thoso pattorns w||| ta|| and bocomo
compononts ot a |argor chart structuro or bocomo
part ot a chart that cannot bo dot|nod by c|ass|ca|
chart|ng pr|nc|p|os.

3omo tochn|c|ans bo||ovo that thoy can uso tho|r
tochn|ca| tochn|quos to cont|nua||y got a hand|o on tho
markots. l th|nk th|s |s too||sh th|nk|ng that sorvos bottor as
promot|ona| sound b|tos than as tho bas|s tor roa|-t|mo
trad|ng oporat|ons.

l want to rom|nd chart|sts that many pr|co charts cannot
bo undorstood basod on c|ass|ca| pr|nc|p|os or othor
tochn|ca| too|s. Vany substant|a| tronds occur w|thout bo|ng
|aunchod by chart pattorns that aro dot|nab|o.

Obv|ous|y, tho t|rst opt|on-that ot trad|ng on|y markots
that aro roady to trond |mmod|ato|y-wou|d bo tho most
prot|tab|o and |oast trustrat|ng. 1ho quost|on |s whothor tho
opt|on |s roa||st|c tor a|| chart tradors. |or somo tradors w|th
an oxtromo ab|||ty tor pat|onco, tho t|rst opt|on may bo
part|a||y ach|ovab|o. |or most chart|sts, tho socond opt|on
|s probab|y tho most roa||st|c.

1rading Rocord

Juno CoId: 5ovoraI Nontha ot
Contuaion Aro RoaoIvod with an E&5
Bottom

8Ignal 1ype: Na[or Anticiµatory 5ignaI, Na[or
Broakout 5ignaI

l |ast covorod go|d |n Chaptor 0, whoro l |oapt ahoad to
track my go|d trados covor|ng sovora| months. l d|scussod
|n that chaptor tho trustrat|ons whon a chart goos through a
por|od ot rodot|n|t|on.

1ho advanco |n oar|y Octobor 2000 comp|otod an 18-
month |nvortod cont|nuat|on |83 bottom pattorn. 3oo tho
wook|y go|d graph |n ||guro 12.1. 1horo woro sovora| ways
to draw tho nock||no on th|s chart. l a|ways protor to draw a
hor|zonta| boundary that bost t|ts tho h|ghs or |ows |n
quost|on. 1h|s pattorn has an unmot targot ot 18b0. Vy b|as
|s to trado a markot |n tho d|roct|on ot an unmot targot on
tho wook|y and month|y charts. 3ut, romombor, targots aro
oot sacrod. l havo soon somo chart tradors bocomo w|pod
out wa|t|ng tor a targot to bo roachod.

F|CuRE 12.1 Anothor look at tho lnvortod |83 on tho
Wook|y Go|d Graph.



last month (Varch), tho dom|nant pattorn |n go|d was tho
poss|b|o tour-month |nvortod |83 pattorn on tho da||y 1uno
go|d contract, as shown |n ||guro 12.2. 1h|s samo chart
was a|so toaturod as ||guro 0.2b |n Chaptor 0. 1ho
advanco on Apr|| 1 ponotratod tho uppor boundary ot a
channo| that const|tutod tho r|ght shou|dor ot th|s da||y |83
tormat|on. l wont |ong ono m|n| contract por trad|ng un|t at
th|s broakout.

F|CuRE 12.2 |our-Vonth |83 3ottom on tho 0a||y Go|d
Chart.


1ho advanco on Apr|| 7 comp|otod tho tour-month |83
bottom. 1h|s pattorn had an |n|t|a| targot ot a rotost ot tho
0ocombor 2000 h|gh at 1280. Vy th|nk|ng was that th|s
|83 pattorn cou|d propo| tho markot to tho 18b0 targot
|n|t|a||y sot by tho wook|y |83 pattorn comp|otod as shown
|n ||guro 12.1. l |ncroasod my |ovorago. l roa||y thought l
had a good trado on tho books.

1ho markot rotostod tho nock||no on Apr|| 18. 1hon, on
Apr|| 10, go|d pr|cos cascadod, stopp|ng mo out ot my
pos|t|on w|th tho last 0ay lu|o. Wh||o as ot th|s wr|t|ng l am
t|at, l bo||ovo tho |83 bottom w||| propo| pr|cos much
h|ghor.

EuR/CBP: A OuoationabIo Buy

8Ignal 1ype: NiacoIIanooua 1rado

1h|s and tho to||ow|ng trado |n ouro/1apanoso yon
(EUl/1lY) roprosont oppos|to s|dos ot tho samo co|n.
3oth trados doa| w|th tho concopt ot pattorn rotosts and
how s|gna|s aro gonoratod ro|at|vo to such rotosts.

On Apr|| b, tho ouro/3r|t|sh pound (EUl/G3l) doc||nod
to a pr|co that had boon sorv|ng a|tornat|vo|y as a support
and ros|stanco zono (||guro 12.8). l d|scussod th|s support
and ros|stanco ||no |n Chaptor 10, soo ||guro 10.18. As an
|nst|nct trado, l ostab||shod a |ong pos|t|on. l to|t that tho
trado was oxtromo|y |ow r|sk, that l cou|d uso tho |ow ot
Apr|| b as a protoct|vo stop basod on tho lotost |a||uro
lu|o. l was stoppod out tho noxt day.

F|CuRE 12.8 A|tornat|ng 3upport and los|stanco l|no |n
EUl/G3l.


Looking Back

1rados such as th|s rom|nd mo ot catch|ng a ta|||ng kn|to. 1h|s
was not a broakout trado. 1ho markot had boon |n a troo ta||
pr|or to my purchaso. ln tact, |n h|nds|ght l can soo that a
boar|sh horn (or s|op|ng) top was comp|otod on tho samo day
ot my |ong ontry. At a m|n|mum, l shou|d havo wa|tod tor at
|oast a ono-day rovorsa| botoro attompt|ng a |ong-s|do trado.

EuR/JPY: Narkot Bocomoa 1ricky
around |mµortant |co Lino

8Ignal 1ype: Na[or Broakout 5ignaI~
RocomµIotion

1ust as l bought tho EUl/G3l at tho rotost ot a support
zono, l shortod tho EUl/1lY ro|at|vo to |ts ||no ot
support/ros|stanco. As shown |n ||guro 12.4, tho ra||y |n
oar|y Apr|| rotostod a major round|ng top on tho wook|y
graph. l v|owod th|s as a short|ng opportun|ty.

F|CuRE 12.4 lotost ot lound|ng 1op on tho Wook|y
EUl/1lY Chart.


1ho da||y chart (||guro 12.b) shows that tho rotost
actua||y c||mbod abovo tho |co ||no ot tho wook|y chart top
tor throo days |n oar|y Apr||. 1hon, on Apr|| 0, tho markot
oxpor|oncod a sharp doc||no bo|ow tho |co ||no. 1h|s
roprosontod a so|| s|gna| bocauso tho or|g|na| pattorn was
rocomp|otod on a c|os|ng bas|s. l shou|d havo shortod tho
c|oso on Apr|| 0, but l d|d not havo an ordor |n p|aco.

F|CuRE 12.5 lotost ot 1op on tho 0a||y EUl/1lY Graph.



l shortod tho markot on Apr|| 7. l was norvous w|th th|s
trado trom tho onsot. Wh||o tho major wook|y chart top was
st||| tho dom|nant c|ass|ca| chart structuro, tho da||y chart
had comp|otod a sovon-wook |83 bottom on Varch 81.
1ho markot was caught botwoon a bou|dor (tho wook|y
chart top) and a hard p|aco (tho m|nor hoad and shou|dors
bottom). Apr|| 8 was a ono-day rovorsa|. l jammod my stop
and ox|tod tho trado on Apr|| 0 tor a |oss ot two-tonths ot 1
porcont.

Looking Back

1h|s markot had a mass|vo ovorhoad round|ng top on tho
wook|y chart and an undor|y|ng hoad and shou|dors bottom on
tho da||y chart. As a gonora| ru|o l ro|y on tho most rocont
pattorn. 1horo aro t|mos ot cont||ct on a chart. 0ur|ng thoso
t|mos, |t |s otton bost to wa|t tor a c|oar roso|ut|on.

Novombor 5oyboana: 1oxtbook
Aaconding 1riangIo ia ComµIotod

8Ignal 1ype: Ninor RovoraaI 5ignaI

Ono good s|gn ot a boar trap |s whon a markot sp|kos
through a boundary ||no, c|osos back abovo tho boundary
||no tho samo day and thon sponds tho ont|ro noxt day
abovo tho boundary ||no, c|os|ng h|ghor. 1h|s sconar|o |s
oxact|y what happonod |n lovombor soyboans on Varch
81 and Apr|| 1. l cou|d havo tu||y just|t|od a |ong purchaso on
tho Apr|| 1 c|oso.

1ho subsoquont advanco on Apr|| 1b comp|otod a 10-
wook ascond|ng tr|ang|o, as shown |n ||guro 12.0. l
ostab||shod a |ong pos|t|on ot 2,b00 busho|s por trad|ng
un|t ot $100,000.

F|CuRE 12.0 3ymmotr|ca| 1r|ang|o Comp|otod |n
lovombor 3oyboans.


||guro 12.7 shows that as ot tho dato ot th|s wr|t|ng tho
lovombor soyboan chart |s bu||d|ng a 17-month ascond|ng
tr|ang|o on tho wook|y chart. 1h|s |s tho typo ot pattorn that
shou|d |oad to a magn|t|cont trond and w||| bo a chart to
watch as 2010 progrossos.

F|CuRE 12.7 Vass|vo 3ymmotr|ca| 1r|ang|o 3aso 3hown
on tho Wook|y lovombor 3oyboan Chart.


OutIook tor tho Futuro

3ovora| markots stand out to mo as °markots to watch' as
t|mo ro||s torward. 1hoso aro markots w|th oxtromo|y
s|gn|t|cant b|g-p|cturo wook|y chart structuros undor
dovo|opmont. l havo mont|onod sovora| ot thoso markots
throughout tho book as part ot trad|ng ovonts.

Dow Jonoa |nduatriaIa: A Eiatoric Eoad
and 5houIdora in tho Naking?

3omoth|ng tru|y amaz|ng |s tak|ng p|aco |n th|s markot-
and |t |t comos to tru|t|on, |t w||| go down as ono ot h|story's
most s|gn|t|cant chart dovo|opmonts. 1ho month|y and
quartor|y charts ot tho 0ow 1onos lndustr|a| Avorago (01lA)
d|sp|ay a poss|b|o |83 top w|th a down-s|ant|ng nock||no
(soo ||guro 12.8). 0own-s|op|ng nock||nos aro norma||y a
s|gn ot groator potont|a| woaknoss than t|at or up-s|ant|ng
nock||nos.

F|CuRE 12.8 100-Yoar 0ow Chart 3hows lotont|a| 1op ot
||stor|c Vagn|tudo.


lt |s otton tho caso that a ||no drawn ott tho h|ghs ot tho
r|ght and |ott shou|dors w||| bo para||o| to tho nock||no.
||guro 12.0 |s a b|ow-up ot tho |83 top. 1ho curront ra||y
trom tho Varch 2000 |ow has roachod th|s para||o| ||no. lt |s
poss|b|o tor tho ra||y to ponotrato tho para||o| ||no and
oxtond to tho ho|ght ot tho |ott shou|dor (0ow 11,7b0).

F|CuRE 12.0 14-Yoar 0ow Vonth|y Graph Cont|rms
loss|b|o |83 1op.


1horo |s a tondoncy toward symmotry |n |83 pattorns,
a|though symmotry |s not a roqu|romont. 1ho r|ght shou|dor
cou|d oxtond sovora| moro yoars to roach symmotry w|th
tho |ott shou|dor |n durat|on. |owovor, tho most powortu|
|83 pattorns or|g|nato trom abbrov|atod r|ght shou|dors.

80-Yoar 1-Bonda: 5ovoroign DotauIt tor
tho unitod 5tatoa?

As l havo notod prov|ous|y |n th|s book, tho U.3. 80-yoar 1-
bond chart prod|cts somo torm ot sovoro|gn dotau|t. 1ho
prob|om |s that h|ghor ratos aro convont|ona| w|sdom. As
shown |n ||guro 12.10, tho quartor|y 1-bond chart has
tormod a channo| trom tho oar|y 1080s |ow.

F|CuRE 12.10 20-Yoar Channo| on tho Ouartor|y 1-3ond
Graph.



|| guro 12.11 d|sp|ays an |83 pattorn on tho wook|y
chart dat|ng back to |ato 2007. |urthor, tho r|ght shou|dor ot
th|s |argor |83 pattorn |s an |83 tormat|on |tso|t. 1h|s
sma||or |83 pattorn dat|ng back to 1uno 2000 appoars to
bo qu|to maturo. 1h|s moans that tho markot noods to start
down soon, or tho ont|ro wook|y chart w||| bo subjoct to
rodot|n|t|on.

F|CuRE 12.11 Wook|y 1-3ond Chart 0|sp|ays loss|b|o
|83 1op.


Looking Back

ln m|d-Vay 2010, tho 1-bond markot oxp|odod to tho ups|do,
doc|s|vo|y ponotrat|ng both tho |ott and r|ght shou|dor h|ghs ot
what had boon a poss|b|o |83 top on tho wook|y chart (soo
||guro 12.12). 1h|s |s oxact|y tho typo ot rodot|n|t|on a||udod to
throughout tho book. 1ho pr|co targot now bocomos a tost ot
tho oar|y 2000 h|gh around 141-00.


F|CuRE 12.12 |83 |a||uro on tho Wook|y 1-3ond
Chart.



5ugar: 5tiII Eoµo tor tho BuIIa?

1h|s |s tho t|na| markot l w||| toaturo as l |ook toward tho
tuturo. As shown |n ||guro 12.18, tho ra||y |n |ato 2000
comp|otod a mu|t|docado baso. 1ho rocont sharp doc||no |n
sugar has dug doop|y |nto th|s baso. Yot no |ong-torm
damago has boon dono to tho bu|| story-yot.

F|CuRE 12.18 80-Yoar 3aso on tho Ouartor|y 3ugar
Graph.


1ho markot has a good chanco ot ho|d|ng tho 1000-
1700 aroa and |aunch|ng a g|ant bu|| advanco |nto tho 00-
cont rango.

Looking Back

3ugar pr|cos subsoquont|y s||cod oas||y through tho 1000-
1700 zono, doc||n|ng a|| tho way to 18 conts. Wh||o tho |ong-
torm bu|| markot |n sugar may not bo doad, |t was sor|ous|y
|njurod.

5ummary

l conc|udod journa||ng my trados tor tho purposo ot wr|t|ng
th|s book on Apr|| 20, mark|ng-to-tho-markot tho two opon
trados as ot that dato (lovombor soyboans and
U30/CA0). 3ovon trad|ng ovonts woro ontorod dur|ng
Apr||, ot wh|ch t|vo c|osod at a |oss and two at a prot|t (soo
1ab|o 12.1).

1ABLE 12.1 Apr|| Entry 3|gna|s by Catogory

Amondod AµriI 1rado Entrioa
5ignaI Catogory Bonchmarka (# and ¼ot totaI)
Na[or µattorna
Comp|ot|ons 4.0 (20%) 8
Ant|c|patory 1.b (11%) 1
lyram|d 1.b (11%) 0
Ninor µattorna 4.0 (28%) 2
|natinct tradoa 2.0 (14%) 0
NiacoIIanooua tradoa 1.0 (7%) 1
1otaI 14.0 (100%) 7

1h|s onds tho trado-by-trado d|ary port|on ot tho book.
lart lv w||| bo a wrap-up ot tho por|od conc|udod, prov|d|ng
a stat|st|ca| summary and ana|ys|s ot tho portormanco and
a |ook-ahoad basod on |ossons |oarnod.


Part lv

1he Wrap-Up

lart lv |s a d|scuss|on and stat|st|ca| ana|ys|s ot tho trad|ng
trom 0ocombor 7, 2000 through Apr|| 1b, 2010 to||owod up
by a 3ost 0rossod l|st. 1ho 3ost 0rossod ||st roprosonts
tho bost oxamp|os ot c|ass|ca| chart|ng pr|nc|p|os dur|ng
tho trad|ng por|od.

lt |s my s|ncoro hopo that tho d|scuss|on ot tho 21-wook
por|od ot trad|ng and tho oxamp|os ot tho bost tho charts
had to ottor can a|d you as a trador |n tho tuturo.


Chapter 13

AnalysIs o| 1radIng
Per|ormance

lhad two hopos whon l bogan wr|t|ng th|s book. 1ho t|rst
was that tho commod|ty and torox markots wou|d trond |n a
way cons|stont w|th my trad|ng p|an. 3omo ot tho markots l
trado havo trondod, but tho tronds havo boon w|th tho typo
ot back|ng and t||||ng |ncons|stont w|th my trad|ng ru|os.

1ho charts ot t|vo d|ttoront markots aro shown, |nd|cat|ng
tho pr|co bohav|or trom 0ocombor 7 (dato ot tho t|rst trado
|n th|s book) through Apr|| 1b (dato ot tho |ast trado). 1hoso
charts aro go|d (||guro 18.1), tho V|n| lasdaq (||guro
18.2), sugar (||guro 18.8), tho Commod|ty losoarch
3uroau (Cl3) lndox (||guro 18.4), and tho 3r|t|sh pound
(||guro 18.b).

1hoso markots woro so|octod to roprosont proc|ous
mota|s, U.3. stocks, sotts, raw mator|a| commod|t|os, and
torox. Ono |ook at thoso charts cont|rms tho d|tt|cu|ty most
commod|ty tradors (|nc|ud|ng myso|t) havo oncountorod |n
rocont months. Varkots havo gonora||y tradod on both
s|dos ot tho ||no connoct|ng tho oar|y 0ocombor to m|d-
Apr|| pr|co trond.

1ho socond hopo was that tho g|oba| stock markots
(ospoc|a||y tho U.3. stock markot) wou|d run out ot gas and
stop go|ng up. l am a vory consorvat|vo trador at th|s stago
|n my caroor. Vy goa| |s to portorm cons|stont|y at about 18
porcont annua| rato ot roturn w|th ||m|tod cap|ta| vo|at|||ty
(soo portormanco d|sc|a|mors |n tho Author's loto).

1ho |doa ot an 18 porcont annua| roturn |s protty du||
whon tho U.3. stock markot trom Varch 2000 through Apr||
2010 put |n ono ot |ts bost portormancos |n h|story. As
shown |n ||guro 18.0, tho 3tandard 8 loor's (38l) b00
lndox a|most doub|od trom Varch 2000 through Apr|| 2010.
lumorous |nd|v|dua| stocks havo doub|od and ovon tr|p|od.
lt's worth not|ng that stocks oxpor|oncod a sovoro
corroct|on attor th|s soct|on |n Vay.

3ook|ng a |ow doub|o-d|g|t roturn |n tuturos and torox
sooms bor|ng by compar|son. ln h|nds|ght, l wou|d havo
boon bottor ott app|y|ng tho

F|CuRE 18.1 Go|d Chart, 0ocombor 2000-Apr|| 2010.


F|CuRE 18.2 lasdaq Chart, 0ocombor 2000-Apr|| 2010.


F|CuRE 18.8 3ugar Chart, 0ocombor 2000-Apr|| 2010.



F|CuRE 18.4 Cl3 lndox, 0ocombor 2000-Apr|| 2010.


F|CuRE 18.5 G3l/U30 Chart, 0ocombor 2000-Apr||
2010.



F|CuRE 18.0 38ls trom Varch 2000 to Apr|| 2010.


|actor 1rad|ng l|an to sharos ot |nd|v|dua| stocks dur|ng
tho t|vo months ot th|s d|ary. Yot l trado commod|t|os and
torox, not stocks.

1ho bas|c prom|sos ot th|s book roma|n stoadtast.



Commod|ty tuturos and torox markots can bo
tradod |n a consorvat|vo mannor that prov|dos a
cons|stont rato ot roturn w|th a m|n|mum ot
cap|ta| vo|at|||ty.

1ho pr|nc|p|os ot c|ass|ca| chart|ng aro t|mo|oss
and can prov|do a mochan|sm tor dr|v|ng a||
trad|ng doc|s|ons. Yot c|ass|ca| chart|ng
roprosonts a trad|ng too|, not a moans to
torocast pr|cos.

Chart|ng prov|dos a s||ght odgo to a trador. 1ho
cons|stont and pro|ongod oxocut|on ot a trad|ng
p|an to oxp|o|t tho advantago ot that odgo |s tho
bost a trador can oxpoct to ach|ovo.

1ho rosu|t ot any g|von trado or short sor|os ot
trados |s |rro|ovant to cons|stont|y prot|tab|o
trad|ng oporat|ons.

3uccosstu| markot spocu|at|on |nvo|vos many
tacots and compononts. l|sk and trado
managomont aro tar moro |mportant than trado
so|oct|on.

Vanag|ng tho human omot|ons ot toar, grood,
hopo, and cont|donco (too much or too ||tt|o) aro
contra| to cons|stont spocu|at|vo succoss.


Undortak|ng th|s book projoct has boon tho most
oducat|ona| and on||ghton|ng oxpor|onco ot my trad|ng ||to. l
thought that l know myso|t as a trador and, ro|at|vo to most
markot part|c|pants, l d|d havo a |ot ot so|t-know|odgo.

Koop|ng a journa| ot trados and wr|t|ng about thom
torcod mo to dot|no, oxam|no, and ana|yzo my trad|ng
parad|gm and a|gor|thm ||ko novor botoro. l had to
systomat|ca||y th|nk through what |t |s l do |n my trad|ng
oporat|ons and why. l had to carotu||y roca|| tho stops l took
to roach my curront approach to trad|ng. l roatt|rmod myso|t
|n many ot my trad|ng pract|cos. ln somo aroas, howovor, l
now bo||ovo l havo tho opportun|ty to mako my trad|ng p|an
moro ott|c|ont and ottoct|vo.

l am moro corta|n than ovor that no two cons|stont|y
prot|tab|o tradors can or shou|d oporato oxact|y tho samo
way. lo two tradors th|nk tho samo way. 3uccosstu| trad|ng
|s about bu||d|ng upon ono's porsona||ty and charactor
strongths, and ovorcom|ng or manag|ng ono's porsona||ty
and charactor dot|c|onc|os. What works tor mo w||| not work
tor anothor trador, and v|co vorsa.

l cannot to|| othor tradors what thoy nood to do to |mprovo
tho|r trad|ng ottoct|vonoss. 1hoso |ssuos must bo doa|t
|nd|v|dua||y by oach trador. A cons|stont|y succosstu|
trad|ng p|an |s a rot|oct|on ot tho porson who dovo|ops and
oxocutos |t.

Wo'|| now ana|yzo tho portormanco ot my trados trom
0ocombor 2000-Apr|| 2010 |n throo parts:

1. |ow tho |actor 1rad|ng l|an portormod |n tho
t|vo-month por|od covorod by tho book-a
stat|st|ca| ana|ys|s and d|scuss|on.
2. What l |oarnod about tho |actor 1rad|ng l|an
(and myso|t) by cr|t|ca||y |mp|omont|ng and
ana|yz|ng tho p|an on a trado-by-trado and ordor-
by-ordor bas|s dur|ng tho past t|vo months, and,
8. What my bost pract|cos shou|d bo go|ng
torward.

Eow tho 1rading PIan
Portormod

1ho |actor 1rad|ng l|an had 08 ontry s|gna|s dur|ng tho 21
wooks covorod by th|s book. A numbor ot thoso ontry
s|gna|s woro part ot tho samo trad|ng campa|gn (o.g., short
G3l/U30 or short 1-bonds.)

1ab|o 18.1 comparos tho s|gna|s trom tho |actor 1rad|ng
l|an dur|ng tho por|od 0ocombor 7, 2000 through Apr|| 1b,
2010 to tho goa|s ot tho p|an.

1ABLE 18.1 0ocombor 2000-Apr|| 2010 1rad|ng 3|gna|s
by Catogory

As shown |n 1ab|o 18.1, tho |actor 1rad|ng l|an
comparod tavorab|y w|th tho goa|s ot tho p|an |n torms ot
s|gna| gonorat|on. ||guro 18.7 prov|dos tho month-by-
month dota||s ot tho data shown |n 1ab|o 18.1.

F|CuRE 18.7 Vonth-by-Vonth 3roakdown ot 1rados.


|owovor, |t was |n tho aroa ot actua| portormanco that
tho trad|ng oporat|ons ot tho p|an var|od moro s|gn|t|cant|y
trom oxpoctat|ons, as shown |n 1ab|o 18.2.

1ABLE 18.2 |actor 3|gna|s-lortormanco 0ata
(0ocombor 2000-Apr|| 2010)

C|oar|y, tho |actor 1rad|ng l|an portormod |n a subpar
mannor dur|ng tho past t|vo months, undorportorm|ng tho
goa| by noar|y b porcontago po|nts tor tho por|od.

1h|s undorportormanco, on |ts surtaco, |s not a|arm|ng
bocauso commod|ty and torox trad|ng |s not an annu|ty or
1-b||| w|th amort|zod |ncomo. As l havo statod |n th|s book,
thoro aro |os|ng trados, wooks, months, and ovon yoars |n
tho ||to ot a commod|ty trador.

1ho major tactor contr|but|ng to tho |oss-than-goa|
portormanco |s tho absonco ot tho °not bottom ||nors,'
thoso trados that havo h|stor|ca||y ostab||shod my not
trad|ng prot|tab|||ty. As a gonora| ru|o, about 10 porcont ot
my trad|ng ovonts havo boon not bottom ||nors, trados that:



3roak out ot a c|oar|y dot|nod pattorn w|thout
hos|tat|on w|th ||tt|o or no rotost|ng ot tho
boundary or |co ||no

1rond stoad||y to tho |mp||od targot

lrov|do a rato-ot-roturn ot about 2 porcont ot
assots


On avorago, l havo had ono or two bottom ||nors por
month ovor tho yoars. ln tact, l nood ono to two bottom
||nors to mako tho |actor 1rad|ng l|an work.

0ur|ng tho courso ot th|s book, trom 0ocombor 2000
through Apr|| 2010, tho |actor 1rad|ng l|an producod a
tota| ot two not bottom ||nors. lot hav|ng bottom ||nors |s an
|mportant tactor, but l am oqua||y |ntorostod |n othor tactors
that may havo nogat|vo|y |mpactod portormanco. Groator
undorstand|ng producos groator |ns|ght.

1ab|o 18.8 shows tho portormanco ot tho |actor 1rad|ng
l|an dur|ng tho past t|vo months basod on tho typo ot ontry
s|gna|.

1ABLE 18.8 |actor 1rad|ng l|an lortormanco by 3|gna|
Catogory (0ocombor 2000-Apr|| 2010)

5ignaI Catogory # 1radoa
1otaI P/L
¯
Na[or µattorna
Comp|ot|ons 28 $0,080
Ant|c|patory 0 $4,008
lyram|d 2 ($880)
Ninor µattorna
Cont|nuat|on 10 $884
lovorsa| 12 ($1,0b8)
|natinct tradoa 4 $471
NiacoIIanooua tradoa 8 ($8,000)
1otaI 08 $b,478
¯
lor $100,000 trad|ng un|t.

C|oar|y, major pattorns prov|dod tho most prot|tab|o
trad|ng rosu|ts dur|ng tho por|od. V|nor rovorsa| pattorns
and tho catogory ot m|sco||anoous trados woro s|gn|t|cant
nogat|vo contr|butors to tho not bottom ||no. A numbor ot
thoso m|nor rovorsa|s woro ot shortor durat|on than my
gu|do||nos and woro, thorotoro, °outs|do' tho orthodoxy ot
tho |actor 1rad|ng l|an. 3ottor managomont ot thoso
trados |n tho tuturo roprosonts a cha||ongo and opportun|ty.

l a|so wantod to tako a |ook at trad|ng portormanco
through sovora| othor t||tors. 1ab|o 18.4 d|sp|ays tho
portormanco basod on tho durat|on or |ongth ot tho
dom|nant chart pattorn.

1ABLE 18.4 |actor 1rad|ng l|an lortormanco by 0urat|on
ot lattorns (0ocombor 2000-Apr|| 2010)

DaiIy Pattorn Longth
1otaI P/L
¯
1-4 wooks-not connoctod to a major pattorn ($2,1b7)
1-4 wooks-connoctod to a major pattorn $4,044
b-8 wooks $1,274
0-18 wooks ($1,2b4)
14-18 wooks $1,000
Voro than 18 wooks $001
¯
lor $100,000 trad|ng un|t.

As shown, tho catogory ot ono- to tour-wook pattorns,
ro|atod to major pattorn, contr|butod moro than $4,044 to
tho tota| not, just as shortor pattorns not connoctod w|th
major pattorns woro tho |argost contr|butors to nogat|vo
portormanco. 1h|s spoaks vo|umos |n undorstand|ng
shortor-torm pattorns w|th|n tho contoxt ot |ongor-torm chart
construct|on. Vajor pattorn broakouts ot 14 to 18 wooks |n
durat|on woro tho noxt groatost contr|butor to not prot|ts.

loxt, 1ab|o 18.b ana|yzos portormanco basod on tho ox|t
stratogy omp|oyod.

1ABLE 18.5 |actor 1rad|ng l|an-lortormanco by Ex|t
3tratogy (0ocombor 2000-Apr|| 2010)

# ot totaI
Exit 5tratogy
tradoa
¯
1otaI P/L
lntorvon|ng pattorn 8 $1b0
last 0ay lu|o 2b ($10,411)
last |our lu|o 2 ($08b)
Ou|ck lrot|t 4 $4,701
lotost |a||uro 17 ($8,22b)
1argot 0 $10,0b0
1ra|||ng stop 10 $0,448
¯
3omo trados countod moro than onco bocauso ot sp||t ox|t stratog|os.
3tat|st|cs aro por $100,000 trad|ng un|t.

On tho surtaco, thoso rosu|ts aro so|t-ov|dont. 1horo |s
noth|ng surpr|s|ng |n any ot thoso ||no |toms. 1rados that
ondod by bo|ng stoppod out at tho last 0ay lu|o by
dot|n|t|on w||| bo |osors just as trados roach|ng tho|r targots
by dot|n|t|on w||| bo prot|tab|o. A turthor ana|ys|s ot mod|t|od
ox|t stratog|os ro|at|vo to tho s|gna| catogory y|o|ds somo
vory usotu| tru|t.

l havo strong|y oxprossod my d|sda|n tor opt|m|z|ng
short-torm trado ontry s|gna|s basod on tochn|ca|
|nd|cators. l am tar moro |ntorostod |n undor|y|ng thomos
and |ossons on trado and r|sk managomont than |n trado
|dont|t|cat|on.

On tho thoory that aggross|vo monoy managomont |n
tak|ng prot|ts wou|d |mprovo bottom-||no rosu|ts and
docroaso assot vo|at|||ty, l back-tostod tho to||ow|ng
sconar|o aga|nst tho actua| trad|ng s|gna|s trom tho por|od
covorod by tho book.



V|sco||anoous trados wou|d havo boon
o||m|natod.

A|| othor trados wou|d havo usod tho protoct|vo
stop p|acomont as actua||y omp|oyod.

A prodotorm|nod do||ar prot|t wou|d havo boon
takon tor a|| trados (d|ttoront tor major broakout
s|gna|s vorsus othor s|gna|s).


1h|s r|sk and trado managomont modo||ng wou|d havo
|ncroasod prot|tab|||ty trom approx|mato|y b.b porcont (as
rot|octod by tho d|ary) to 21.8 porcont. 1h|s |s a hypothot|ca|
portormanco rosu|t and subjoct to a|| ot tho ||m|tat|ons ot
hypothot|ca| rosu|ts. 1horo |s no guarantoo that thoso
mod|t|cat|ons go|ng torward wou|d produco a s|m||ar
chango |n portormanco.

Ot courso, tak|ng ro|at|vo|y qu|ck prot|ts wou|d havo
workod wo|| |n tho past t|vo months, but wou|d havo |ott
major chunks ot monoy on tho tab|o |n 2007 and 2008.

G|von moro t|mo to comp|oto th|s manuscr|pt, l wou|d
havo |ookod at sovora| othor opt|ona| trado and r|sk
managomont stratog|os-and w||| do so |n tho tuturo. 1hoso
|nc|udo:



What wou|d bo tho |ongor-torm rosu|t ot
o||m|nat|ng a|| m|nor s|gna|s (part|cu|ar|y rovorsa|
s|gna|s) |oss than s|x to o|ght wooks |n durat|on?

What wou|d bo tho rosu|t ot roostab||sh|ng
pos|t|ons prov|ous|y ox|tod at tho prodotorm|nod
qu|ck prot|t po|nts |t rotosts ot tho |n|t|a| pr|co
ontry po|nts woro subsoquont|y oxpor|oncod?

What wou|d bo tho rosu|t ot ho|d|ng a part|a|
pos|t|on (porhaps b0 porcont) ot major broakout
s|gna|s us|ng a °last 0ay lu|o OCO 1argot'
stratogy?

What wou|d bo tho |ong-torm |mpact on
portormanco ot standard|z|ng |ovorago on a||
trados? lrosont|y, l vary |ovorago basod on a
numbor ot tactors.


On tho |ast po|nt abovo, l back-tostod a|| trad|ng s|gna|s
trom tho por|od covorod by tho book, compar|ng tho w|do
rango ot r|sks l actua||y assumod (trom 0.8 porcont to 1.2
porcont ot assots) aga|nst a constant r|sk por trado ot 0.7
porcont (basod on tho |n|t|a| protoct|vo stop usod).

A constant r|sk ot 0.7 porcont on oach and ovory trado
wou|d havo |mprovod tho not portormanco tor tho por|od
trom +b.b porcont to +8.2 porcont. 1ho mossago |n th|s
compar|son |s that l am not a good subjoct|vo judgo ot
whothor a trado w||| bo prot|tab|o, or at |oast l was not a
good judgo dur|ng tho por|od covorod by tho book.

Eow tho PIan (and tho 1rador)
EvoIvod

l not suro how many comp|oto|y now |ossons l |oarn |n tho
markots oach yoar. l th|nk |t |s moro a mattor ot |oarn|ng
now |ayors, nuancos, and d|mons|ons ot |ossons prov|ous|y
|oarnod (and, |n many casos, ro|oarnod aga|n and aga|n).

lossons |oarnod about ono's trad|ng oporat|ons aro
oqua| to |ossons |oarnod about ono's so|t. 1ho pract|cos ot
a trador rot|oct tho trador's porsona||ty and charactor-tho
good, tho bad, and tho ug|y. 1o contront dot|c|onc|os |n a
trad|ng p|an, a trador must contront dot|c|onc|os |n h|s or
hor charactor. 1o bu||d on tho strong po|nts ot a trad|ng
p|an, a trador must rocogn|zo and bu||d on tho strong po|nts
ot h|s or hor charactor. 1horo |s a vory truo adago that |t a
porson wants to roa||y know thomso|vos thoy just nood to
bocomo spocu|ators.

lmportant|y, a trador a|so must bo carotu| not to mod|ty a
trad|ng p|an basod on what ru|os or gu|do||nos wou|d havo
|ncroasod tho bottom ||no |n tho |ast trado, short sor|os ot
trados, or prov|ous month or two. l am not a bo||ovor |n
opt|m|zat|on, ospoc|a||y |n tho aroa ot us|ng pr|co dor|vat|vo
|nd|cators tor tho purposo ot trado |dont|t|cat|on.

1ho toundat|ona| concopts or bu||d|ng b|ocks ot a trad|ng
approach can havo t|aws that roqu|ro cont|nua| updat|ng
and |mprovomont. lt |s my oxpor|onco that thoso concopts
doa| w|th monoy managomont |ssuos or w|th tho actua|
|mp|omontat|on ot a trad|ng p|an.

As tradors, wo must sook to undorstand tho past, ovon |t
wo cannot chango |t. 3o tho quost|ons wo ask ourso|vos
aro:



What tactors attr|butod to portormanco?

What mod|t|cat|ons to a trad|ng p|an, ru|os and
gu|do||nos wou|d havo |mprovod tho
portormanco?

0o thoso mod|t|cat|ons s|mp|y rot|oct an
opt|m|zat|on ot rocont months, or do thoy havo
tho potont|a| to |mprovo tuturo portormanco?


l bo||ovo that throo tactors nogat|vo|y attoctod ovora||
portormanco trom 0ocombor 2000 through Apr|| 2010, ono
ot wh|ch |s outs|do ot my contro|.

1. Lock oí ºBost Lrossoo Llst' cbort pottoros. 1h|s
|s tho uncontro||ab|o tactor. As to bo d|scussod |n
Chaptor 14, thoro woro on|y throo 3ost 0rossod
l|st chart pattorns dur|ng tho trad|ng por|od
covorod by th|s book (0ocombor 2000 through
Apr|| 2010). l comp|oto|y m|ssod ono ot thoso.
||stor|ca||y, botwoon t|vo and sovon 3ost
0rossod l|st trados occur dur|ng an avorago t|vo-
month por|od.
2. Vlso||ocotloo oí trooos by cotogory. l had too
many trados |n s|gna| catogor|os that woro too
short torm |n durat|on. l a|so pursuod too many
trados that woro basod on d|agona| s|gna|s.
8. loo|ty trooo mooogomoot tocbolqoos. 1ho
pr|mary trado managomont tochn|quos l uso-tho
last 0ay lu|o, tho 1ra|||ng 3top lu|o, tho lotost
|a||uro lu|o, tho lntorvon|ng lattorn lu|o-woro
dovo|opod and rot|nod ovor yoars ot trad|ng. 1ho
pr|mary purposo ot thoso tochn|quos has boon to
provont w|nn|ng trados trom bocom|ng |os|ng
trados. And thoso tochn|quos havo gonora||y
sorvod mo wo||. 1horo havo boon t|mos whon
thoso tochn|quos woro r|ght on, and t|mos whon
thoy stunk up my trad|ng room.

0ur|ng tho past t|vo months, l havo had tho wondortu|
opportun|ty to oxam|no thoso trado managomont
tochn|quos undor a m|croscopo-and havo como to a
much doopor undorstand|ng ot oach tochn|quo ro|at|vo to
markot bohav|or. l havo como to somo conc|us|ons about
thoso ru|os. 3poc|t|ca||y, l conc|udo that thoso tochn|quos
aro not oqua||y appropr|ato tor a|| s|gna| catogor|os.

ln tho |ntroduct|on to lart lll, l oxprossod tho concorn that
wr|t|ng th|s book cou|d br|ng mo |nto much c|osor contact
w|th tho markots than l wou|d protor, romov|ng a
dotachmont trom day-to-day and ospoc|a||y |ntraday pr|co
t|uctuat|ons that cou|d nogat|vo|y |mpact my portormanco.

look|ng back at tho procoss, l bo||ovo tho concorn was
|og|t|mato. ln tact, l bo||ovo tho contact w|th tho markots
nocossary tor tho book m|ght havo cut |n ha|t my
prot|tab|||ty. l havo roga|nod an acuto approc|at|on tor my
nood to ||m|t myso|t to a vory br|ot oxposuro to markot
act|v|ty. As a trador, l nood to ontor my ordors and shut ott
a|| turthor unnocossary contact w|th pr|co bohav|or.

5ummary: Boat Practicoa
Coing Forward

1horo |s a dangor |n mod|ty|ng tuturo trad|ng oporat|ons
basod on what wou|d havo workod bost |n rocont months.
Vod|t|cat|ons that wou|d havo |mprovod past portormanco
cou|d bo qu|to countorproduct|vo |n tho tuturo.

G|von th|s cavoat, tho |actor 1rad|ng l|an w|||
|ncorporato tour |ossons |oarnod |n rocont months.

1. E||m|nato a|| pattorns |oss than s|x wooks |n
durat|on un|oss tho pattorns havo a d|roct boar|ng
on |argor chart dovo|opmonts, part|cu|ar|y tho
construct|on or comp|ot|on ot wook|y
cont|gurat|ons.
2. Voro cr|t|ca||y appra|so d|agona| pattorns,
ospoc|a||y trond ||nos and channo| pattorns.
8. G|vo broakouts ot wook|y chart cont|gurat|ons
much moro |ooway to dovo|op a succosstu| trond.
ln tact, potont|a| 3ost 0rossod l|st trados shou|d
rota|n tho last 0ay lu|o as |ts on|y r|sk
managomont tochn|quo.
4. 1ako qu|ck prot|ts w|th|n sovora| days ot ontry
on a|| trados othor than thoso basod on major
broakout s|gna|s. (1h|s |s tho most rad|ca| chango
ro|at|vo to my trad|ng h|story.)

0ur|ng tho past t|vo months, l havo had too many |n|t|a||y
prot|tab|o trados turn |nto |ossos. Wh||o |t |s not poss|b|o to
grab tho opt|mum prot|t a markot ottors, |t |s poss|b|o to
adjust trad|ng oporat|ons to tako prot|ts much moro qu|ck|y
on trados othor than major broakout s|gna|s.

1hoso mod|t|cat|ons may comp||cato tho oxocut|on ot tho
trad|ng p|an bocauso d|ttoront s|gna| catogor|os w||| bo
managod w|th d|ttoront trado managomont tochn|quos. 3ut,
|n tho t|na| ana|ys|s, th|s |s a tact|ca| cons|dorat|on and |s
on|y a mattor ot trado managomont. l bo||ovo that thoso
mod|t|cat|ons w||| |mprovo |ong-torm prot|tab|||ty wh||o
roduc|ng assot vo|at|||ty.

1rading to tho Right 5ido ot Chart

Aw|so o|d sago at tho Ch|cago 3oard ot 1rado ottorod mo tho
bost adv|co l havo ovor boon g|von. 1h|s h|gh|y succosstu| chart
trador sa|d, °1rado to tho tar r|ght ot tho chart pago.'

ln othor words, tho bost doc|s|ons |n chart trad|ng aro thoso
that aro do|ayod .do|ayod .do|ayod .do|ayod! 0o not
ant|c|pato what a chart m|ght bocomo. Vako a chart provo |tso|t.
0o not |oad a broakout. 0o not dotorm|no what a chart w||| do,
|nstoad, mako tho chart do |t.

Whothor a trado w||| bo a prot|t or |oss shou|d not bo a
chart|st's concorn. lathor, wa|t|ng tor a chart's °appo|ntod
t|mo' shou|d bo tho tocus ot a chart trador.

3ago adv|co, |ndood!

l'vo croatod a ||st ot bost pract|cos basod on my rocont
trad|ng portormanco, but l suspoct |t wou|d app|y to many
othor chart tradors out thoro, whothor thoy'ro just start|ng
out, strugg||ng w|th bad portormanco, or just |ook|ng tor
ways to |mprovo an a|roady succosstu| trad|ng oporat|on.

lract|cos that l-and othor chart|sts-cou|d tocus on |n
tho tuturo aro:



look at tho wook|y chart ot a spoc|t|c markot no
moro than onco oach wook. look at tho da||y
chart ot oach markot no moro than onco oach
day. 0o not pay any attont|on to |ntraday charts
un|oss |t |s to sot monoy managomont protoct|vo
stops on ontry ordors that woro oxocutod.

lrodotorm|no ordors pr|or to tho |ato attornoon
opon|ng. Uso good-t||-canco|od (G1C) opon
ordors whorovor toas|b|o. Avo|d rost|ng ordors |n
th|n|y tradod ovorn|ght o|octron|c trad|ng
soss|ons, such as tho gra|ns, moats, or t|bors.

0o not mod|ty tho protoct|vo stop |ovo| on trados
basod on major broakout s|gna|s moro than
onco oach wook.

0 o oot chaso a m|ssod s|gna|. 1horo w||| bo
trad|ng opportun|t|os noxt wook, noxt month, and
noxt yoar. Chas|ng s|gna|s can |oad to othor
sor|ous broachos ot trad|ng pract|cos.

|avo ||m|tod oxposuro to |ntraday markot
vo|at|||ty.

3o moro aggross|vo |n tak|ng prot|ts on trados
othor than major broakout s|gna|s.

Entor prot|t-tak|ng ordors |n advanco. Onco a
prot|t |s takon |n a markot, avo|d that markot tor
sovora| days.

lovor tako a |os|ng trado homo ovor a wookond.
lt a trado |s a |osor on a |r|day, got out.

0o not bocomo too attachod to trad|ng a g|von
markot or obsoss ovor m|ssod opportun|t|os.
1horo |s a|ways anothor day and anothor chart
pattorn |n a d|ttoront markot.

0o not pay attont|on to what othor
tradors/ana|ysts aro say|ng or do|ng. Work your
own program.

1rado to tho r|ght-hand s|do ot tho chart (soo tho
s|dobar oar||or |n th|s chaptor).

Va|nta|n and rov|ow a ono-yoar da||y
cont|nuat|on chart tor a|| markots tradod. Any
pattorn cons|dorod tor trad|ng shou|d bo among
tho t|vo bost oxamp|os ot c|ass|ca| chart|ng
pr|nc|p|os dur|ng tho past yoar.

Avo|d a|| pattorns ot |oss than s|x to o|ght wooks
|n durat|on.


l oagor|y |ook torward to many yoars ot trad|ng basod on
tho oxpor|oncos and |ossons l ga|nod propar|ng and wr|t|ng
th|s book. Wh||o th|s book roqu|rod tar groator t|mo and
dovot|on than l wou|d havo ovor ant|c|patod, l bo||ovo l w|||
bo a bottor trador |n tho tuturo as a rosu|t.

l hopo that you-tho roador-ga|nod ovon a sma||
proport|on ot oducat|on trom road|ng th|s book that l ga|nod
trom wr|t|ng |t.


Chapter 14

1he Best Ðressed LIst

1h|s chaptor prosonts tho 3ost 0rossod l|st tor tho por|od
1anuary 2000 through Apr|| 2010. 1ho 3ost 0rossod l|st
roprosonts tho bost oxamp|os ot c|ass|ca| chart|ng
pr|nc|p|os. 1ho cr|tor|a tor |nc|us|on on tho |actor 3ost
0rossod l|st |nc|udo tho to||ow|ng:



°lo quost|on about |t' c|ass|ca| chart pattorn on
tho wook|y chart ot at |oast 10 to 14 wooks |n
durat|on.

Corrospond|ng and support|ng chart structuro on
tho da||y charts tor tho samo markot.

A doc|s|vo broakout ot tho pattorn boundary or
|co ||no w|th ||tt|o or no pattorn roontry.

A susta|nod trond to tho pr|co targot |mp||od by
tho c|ass|ca| chart cont|gurat|ons.


Whothor tho |actor 1rad|ng l|an part|c|patod |n who|o or
|n part ot tho tronds roprosontod by tho 3ost 0rossod l|st
|s not a consc|ous cr|tor|on. |owovor, tho |actor 1rad|ng
l|an and |ts |ong-torm prot|tab|||ty aro prod|catod on a
corta|n |ovo| ot actua| part|c|pat|on |n tho tronds
roprosontod by tho 3ost 0rossod markots.

Varkots |nc|udod |n tho 3ost 0rossod l|st tor tho por|od
1anuary 2000 through Apr|| 2010 aro shown |n 1ab|o 14.1.

1ABLE 14.1 3ost 0rossod l|st, 1anuary 2000-Apr|| 2010


A 5ovon-Nonth DoubIo Bottom
in AuD/u5D

1ho advanco |n |ato Apr|| comp|otod a doub|o bottom on
tho wook|y and da||y charts (||guros 14.1 and 14.2). 1ho
da||y chart |s bost doscr|bod as a compound tu|crum, a
phraso borrowod trom po|nt and t|guro chart|ng. ln c|ass|ca|
chart|ng pr|nc|p|os, a compound tu|crum bottom rosomb|os
a comp|ox |83 top pattorn that broaks out to tho ups|do.
1ho markot had a promaturo broakout |n m|d-Apr||, but was
t|na||y roso|vod by tho advanco on Apr|| 80 and tho c|oso on
Vay 1. 1ho targot ot 8280 was mot on 1u|y 28. 1ho
conso||dat|on |n 1uno and oar|y 1u|y was tr|cky, but was
roso|vod w|th a t|shhook pyram|d buy s|gna| on 1u|y 14.

F|CuRE 14.1 0oub|o 3ottom on tho Wook|y AU0/U30
Graph.


F|CuRE 14.2 0oub|o 3ottom on tho 0a||y AU0/U30
Graph.


A 14-Nonth CoiI and Nino-
Nonth Doaconding 1riangIo in
EuR/CEF

ln 0ocombor 2000 tho EUl/C|| chart s|mu|tanoous|y
comp|otod two c|ass|ca| chart dovo|opmonts-a 14-month
s|x-po|nt tr|angu|at|on or co|| (|abo|od A-|) and a n|no-
month doscond|ng tr|ang|o. 1ho |n|t|a| targot was roachod
|n |ato Varch. ||guro 14.8 shows tho wook|y graph, and
||guro 14.4 |s tho da||y chart. l comp|oto|y m|ssod th|s
trado, soo|ng tho chart attor tho movo had bogun.

F|CuRE 14.8 0oscond|ng 1r|ang|o and 3ymmotr|ca|
1r|ang|o on tho Wook|y EUl/C|| Chart.


F|CuRE 14.4 1ho 3roakout and lun to tho 1argot on tho
0a||y EUl/C|| Chart.


A 5ix-Nonth Wodgo in
EuR/u5D

1ho doc||no |n oar|y 0ocombor s|mu|tanoous|y v|o|atod a
n|no-month trond ||no and comp|otod a s|x-month wodgo on
tho wook|y chart (||guro 14.b) and comp|otod a t|vo-wook
channo| on tho da||y graph (||guro 14.0). 1ho targot was
mot on |obruary 4, 2010. 1ho Varch through 0ocombor
advanco was tr|cky, and sovora| ta|so and promaturo
broakouts occurrod botoro th|s doc||no camo to tru|t|on. |or
tu|| d|sc|osuro, l porsona||y took prot|ts way too oar|y |n th|s
trond, us|ng tho targot ot tho t|vo-wook channo| rathor than
tho s|x-month wodgo.

F|CuRE 14.5 Wook|y EUl/U30 Graph 0|sp|ays Vajor
1rond l|no and l|s|ng Wodgo.


F|CuRE 14.0 1ho 3roakout and lun to tho ln|t|a| 1argot on
tho 0a||y EUl/U30 Graph.


A 10-Wook Eorn in CBP/u5D

|o||ow|ng tho pro|ongod doc||no |n tho G3l/U30 |n 2008,
tho markot tormod a raro 10-wook horn bottom that was
comp|otod on Vay 8. 3oo tho wook|y chart |n ||guro 14.7.

F|CuRE 14.7 A 10-Wook |orn on tho Wook|y G3l/U30
Graph.



1ho da||y chart (||guro 14.8) shows that tho broakout
hovorod at tho |co ||no ot tho pattorn tor sovora| days
w|thout cha||ong|ng tho last 0ay lu|o botoro trond|ng
stoad||y to tho targot, roachod on 1uno 8.

F|CuRE 14.8 1ho 3roakout and lun to tho 1argot on tho
0a||y G3l/U30 Graph.


A Four-Nonth E&5 in Bottom
NZD/u5D

1ho advanco on Vay 10 |n th|s torox pa|r comp|otod a tour-
month-p|us |83 bottom on tho wook|y graph, as shown |n
||guro 14.0. lot|co that tho r|ght shou|dor was qu|to
abbrov|atod ro|at|vo to tho |ott shou|dor. Wh||o symmotry |s
dos|rab|o, abbrov|atod r|ght shou|dors aro gonora||y much
moro trustworthy than aro oxtondod r|ght shou|dors.

F|CuRE 14.0 |83 3ottom and Cont|nuat|on 1r|ang|o on
tho Wook|y Chart ot lZ0/U30.


lot|co on tho da||y chart (||guro 14.10) that tho t|rst
broakout attompt on Vay 8 and 11 pu||od back br|ot|y
bo|ow tho nock||no. |owovor, tho c|oso on Vay 10
cont|rmod tho doa|, and tho targot was roachod on
3optombor 7.

F|CuRE 14.10 0a||y Chart ot tho |83 3ottom |n
lZ0/U30 0|sp|ays a 3tuttor at tho 3roakout.


Attor tho |n|t|a| thrust |n |ato Vay, tho markot pausod to
torm a s|x-wook cont|nuat|on tr|ang|o. 1h|s ottorod an
opportun|ty to pyram|d tho |n|t|a| pos|t|on.

A 5ix-Nonth Aaconding
1riangIo FaiIuro in u5D/CAD

1h|s markot s|tuat|on was shown oar||or |n tho book |n
Chaptor 4. ln Apr||, tho torox pa|r comp|otod an ascond|ng
tr|ang|o ta||uro on tho wook|y graph, as shown aga|n |n
||guro 14.11.

F|CuRE 14.11 0owns|do 3roakout ot Ascond|ng 1r|ang|o
on tho Wook|y U30/CA0 Chart.


l torm th|s as a íol|oro pattorn bocauso tho natura| b|as ot
a r|ght-ang|od tr|ang|o |s to broak out through tho hor|zonta|
boundary. 1ho da||y chart, as shown |n ||guro 14.12,
oxpor|oncod a promaturo broakout on Apr|| 14, to||owod by
a movo back |nto tho pattorn. On Apr|| 24, tho markot
oxpor|oncod tho socond and t|na| pattorn comp|ot|on. 1ho
targot was roachod on Vay 20.

F|CuRE 14.12 0a||y U30/CA0 Graph 3hows ln|t|a|
3roakout |a||uro |o||owod by lattorn locomp|ot|on.


An Eight-Nonth E&5 Bottom in
tho 5&Pa

1horo |s a|ways at |oast ono chart oach yoar that l rotuso to
bo||ovo. l usua||y |oso monoy attompt|ng to tado tho trond
producod by thoso pattorns. ln 2000 (and 2010 to dato), |t
has boon tho 3tandard 8 loor's (38ls). ln roa| t|mo, l saw
tho o|ght-month wook|y chart |83 bottom |n tho V|n| 38ls,
as shown |n tho wook|y chart |n ||guro 14.18.

F|CuRE 14.18 |83 3ottom on tho Wook|y Graph
lovorsos tho 2008 Vo|tdown |n tho 38ls.


1ho last 0ay lu|o ot tho 1u|y 28 broakout was novor
romoto|y cha||ongod (soo ||guro 14.14). 1ho targot ot th|s
pattorn has not yot boon mot, and |t |s anyono's guoss |t |t
w||| bo mot.

F|CuRE 14.14 0a||y 38l Chart 3hows C|oan 3roakout ot
|83 3ottom.


A 14-Nonth 5ymmotricaI
1riangIo in 5ugar

1ho dom|nant pattorn |n th|s markot was tho 14-month
symmotr|ca| tr|ang|o on tho wook|y graph, comp|otod on
Vay 1, 2000 (soo ||guro 14.1b).

F|CuRE 14.15 2007-2000 3u|| Varkot on tho Wook|y
3ugar Chart: A 3tudy |n C|ass|ca| Chart lattorns.



1ho pattorn objoct|vo was mot on August 0. 1horo woro
sovora| sma||or pyram|d opportun|t|os dur|ng th|s trond (not
shown). 1ho countorpart pattorn on tho da||y graph was a
runn|ng channo| or wodgo, as shown |n tho wook|y chart
vors|on ot tho Vay 2010 contract |n ||guro 14.10.

F|CuRE 14.10 lunn|ng Wodgo and 3ymmotr|ca| 1r|ang|o
lropo| 2000 3u|| lun |n Vay 3ugar.


3oth tho wook|y and da||y charts dovo|opod a wo||-
dot|nod cont|nuat|on pattorn, comp|otod |n m|d-0ocombor
2000. 1ho targot was qu|ck|y mot on 1anuary 0.

A 5ovon-Nonth 1riangIo in
CoId

1ho go|d markot tor most ot tho yoar op|tom|zod tho
concopt ot pattorn rodot|n|t|on, as da||y chart pattorns
tormod, ta||od, and thon bocamo part ot |argor chart
construct|on. 1h|s happonod trom |obruary through oar|y
3optombor. ||guro 14.17 shows th|s por|od ot congost|on
on tho wook|y graph. l dota||od tho constant rodot|n|t|on ot
tho da||y go|d charts |n 2000 as a caso study |n Chaptor 0.

F|CuRE 14.17 3ovon-Vonth 3ymmotr|ca| 1r|ang|o on tho
Wook|y Go|d Chart.



1h|s congost|on took tho torm ot a sovon-month
symmotr|ca| tr|ang|o. On 3optombor 2, tho markot
comp|otod tho symmotr|ca| tr|ang|o w|th a da||y advanco ot
$22 por ounco (soo ||guro 14.18). Attor sovon months ot
bo|ng burnod by buy|ng strongth and so|||ng woaknoss, |t
was d|tt|cu|t to go |ong on top ot a ono-day ra||y ot $22. Yot
purchasos mado at tho c|oso ot tho broakout day woro
novor put |nto harm's way.

F|CuRE 14.18 3ymmotr|ca| 1r|ang|o 3roakout on tho 0a||y
Go|d Chart.


1ho markots havo a way ot broak|ng down a trador's
pat|onco dur|ng tho courso ot a pro|ongod congost|on to
tho po|nt that |t |s oasy to doubt tho roa| movo whon |t
comos. 1horo aro numorous oxamp|os ovor tho yoars ot
markots that p|ckod my pockot w|th promaturo broakouts,
and l novor bocamo tu||y comm|ttod to tho roa| broakout
and l novor bocamo tu||y comm|ttod to tho roa| broakout
whon |t camo.

F|CuRE 14.10 Vu|t|p|o Cont|nuat|on lattorns on tho 0a||y
Coppor Graph.


1ho CoaI ot tho Narkota |a to
5oµarato You trom Your NonoyI

Atrador much w|sor and moro prot|tab|o than l onco sa|d that
tho roa| purposo ot cap|ta| and spocu|at|vo markots |s to
transtor woa|th trom tho many to tho tow, and that tho
spocu|at|vo markots wou|d coaso to ox|st |t ovor tho |ong torm
thoy ta||od to do||vor on th|s purposo. 1ho pract|ca| |mp||cat|on
ot th|s, |t truo, |s that tho goa| ot tho markots |s to soparato mo
trom my monoy. Ot courso, tho markots aro not sott|ng out |n
somo coord|natod and consc|ous way to do th|s. 1ho markots
do not roprosont a s|ng|o cogont ont|ty. Yot l bo||ovo that
markots bohavo |n an organ|c mannor that can accomp||sh tho
samo ond.

A 5orioa ot Continuation
Pattorna in Coµµor

||guro 14.10 |s prosontod onco aga|n as a wondortu|
oxamp|o ot how a major trond can occur through a sor|os ot
sma|| cont|nuat|on pattorns on tho da||y chart. ln tho caso ot
coppor, t|vo |nd|v|dua| pattorns avorag|ng sovon wooks |n
|ongth a|| tormod abovo tho dom|nant 10-month trond ||no.
1o bo portoct|y honost, l bo||ovo that a soquonco ot pattorns
such as d|sp|ayod on th|s chart |s much moro oas||y soon
attor tho tact. Wh||o l adm|ro tho boauty ot th|s trond attor
tho tact, tho trond |tso|t was a vory d|tt|cu|t ono tor mo to
trado.

An E&5 Bottom in Crudo OiI

As a gonora| ru|o, tho bost wook|y charts to uso aro thoso
that track tho noarby contract month (a|so rotorrod to as tho
act|vo month) o|thor through tho t|rst do||vory not|co dato or
through tho oxp|rat|on ot tho contract. l mon|tor both wook|y
charts.

l a|so |ook at tho ||to-ot-contract wook|y chart ot tho most
act|vo|y tradod contract month. 1h|s can somot|mos prov|do
va|uab|o |ntormat|on. ||na||y, thoro aro t|mos whon tho
wook|y chart ot a spoc|t|c dotorrod contract w||| show tho
c|oarost pattorn. 1h|s was tho caso |n crudo o|| |n 2000.
||guro 14.20 |s tho wook|y chart ot tho Octobor 2000
contract. 1ho advanco |n oar|y Vay comp|otod a 28-wook
|83 bottom pattorn.

F|CuRE 14.20 |83 3ottom on tho Wook|y Chart ot
Octobor 2000 Crudo O||.


1ho da||y chart ot tho Octobor contract, as shown |n
||guro 14.21, d|sp|ays tho c|os|ng pr|co ||no. Otton, a
c|os|ng pr|co chart can prov|do

F|CuRE 14.21 0a||y C|oso-On|y Chart 0ot|nos |83
3ottom |n Octobor 2000 Crudo O||.



|ns|ght |nto tho t|m|ng ot a broakout bocauso |t o||m|natos
tho |ntraday no|so. 1ho markot comp|otod |ts |83 bottom
on Vay 0, hos|tatod tor a wook, thon trondod d|roct|y to
roach tho targot on 1uno 10. lomombor, tho c|os|ng pr|co
|s tho most s|gn|t|cant pr|co ot tho day. Evoryth|ng o|so |s
no|so. l a|| too otton |ot tho no|so contuso mo.

5ummary

3omo yoars havo moro qua||t|od cand|datos tor tho 3ost
0rossod l|st than do othor yoars. |or oxamp|o, tho charts
|n 2008 woro |oadod w|th groat wook|y chart pattorns
ottor|ng strong broakouts and tronds, ospoc|a||y |n tho
trad|t|ona| raw mator|a| commod|t|os. 1ho |actor 1rad|ng
l|an doponds on thoso typos ot c|ass|ca| chart|ng
s|tuat|ons to produco prot|tab|||ty. W|thout catch|ng somo ot
thoso chart s|tuat|ons, my trad|ng tonds to troad wator.

1horo havo boon ro|at|vo|y tow 3ost 0rossod l|st markot
s|tuat|ons |n tho t|vo months covorod by th|s book. ln tact,
tho on|y 3ost 0rossod trad|ng ovonts s|nco 0ocombor that
havo mot tho|r |mp||od pr|co targots havo boon tho
EUl/U30, EUl/C||, and tho t|na| thrust |n tho sugar bu||
markot. l d|d not tu||y oxp|o|t EUl/U30, caught sugar, and
comp|oto|y m|ssod EUl/C||.

3omo yoars aro bottor yoars tor tho charts and tor chart
tradors, but thoro |s ono roa||ty that a|| chart|sts must
ombraco. 1horo havo boon wondortu| chart s|tuat|ons |n tho
past and thoro w||| bo wondortu| chart s|tuat|ons |n tho
tuturo. 1ho most |mportant assot that a trador has |s h|s or
hor trad|ng oqu|ty. lt |s v|ta| that trad|ng oqu|ty bo protoctod
dur|ng thoso t|mos whon tho charts aro not prov|d|ng
oxco||ont opportun|t|os, or whon a trador just can't got |n
stop w|th tho rhythm ot tho markots.

lomombor, |t |s oasy to mako monoy |n tho commod|ty
and torox markots whon tho charts aro work|ng and tronds
aro susta|nod, but tho cha||ongo |s to koop tho prot|ts
dur|ng tho tough t|mos.


PostscrIpt

1ho |ast rogu|ar ontry |nto tho trad|ng journa| was mado on
Apr|| 20, 2010. lt |s now vory oar|y 1uno 2010, my |ast
chanco to add contont to tho book, and l'd ||ko to tako th|s
opportun|ty br|ng you up to dato on tho |actor 1rad|ng l|an.

FinaI Portormanco

Vay was my bost month by tar |n 2010. l c|osod out tho
Llory oí o Proíosslooo| Commoolty 7rooor on Apr|| 20
w|th a cumu|at|vo ga|n ot b.4 porcont. You w||| roca|| that my
opt|m|st|c goa| tor tho por|od covorod by tho book was a
ga|n ot 10 to 1b porcont.

|rom Apr|| 20, tho ond ot tho d|ary, through Vay 81, tho
|actor 1rad|ng l|an oxpor|oncod somo oxco||ont trados,
and tho s|x-month ga|n trom 0ocombor 7, 2000 (tho t|rst
trado ot tho d|ary), through tho ond ot Vay stands at 0.0
porcont. 1h|s |s tho actua| ga|n by tho tund tradod by |actor
llC. Ot courso, who knows what tho tuturo w||| br|ng.
3poc|t|ca||y, tho prot|ts |n tho past t|vo wooks havo como
trom two markots.

1ho 5tock Narkot 1urna Down

As shown |n ||guro l3.1, tho 1uno 0ow 1onos lndustr|a|
Avorago comp|otod a sma|| |83 top on Vay 4. l shortod
tho comp|ot|on ot th|s top. 1ho targot ot 10080 was qu|ck|y
mot and tar oxcoodod. 1ho rotost ra||y through Vay 18 took
tho torm ot a r|s|ng wodgo and ottorod tho opportun|ty to
aga|n trado tho stock |ndoxos trom tho short s|do.

F|CuRE P5.1 A 3ma|| |83 lattorn Croatod a 1op |n
01lA.



As ot th|s wr|t|ng, a mu|t|-month |83 top |ooms |argo and
tho boars appoar to bo |n contro|.

1ho 1rading Rango in AuD/CAD ia
RoaoIvod

You may roca|| trom Chaptor , ||guros 11.b and 11.0, tho
sovoro wh|p|ash|ng l ondurod whon tho da||y AU0/CA0
chart workod |ts way too tar toward tho apox ot a tr|ang|o. l
wont trom short to |ong to short, oach trado bo|ng a |oss.

||guro l3.2 shows that tho trad|ng rango |n th|s torox
pa|r was t|na||y roso|vod. 1ho doc||no on Vay 11 cont|rmod
a 14-wook roctang|o and a poss|b|o s|x-month doscond|ng
tr|ang|o. 1h|s chart has a|roady qua||t|od tor tho 2010 3ost
0rossod l|st. 1ho downs|do targot has boon mot.

F|CuRE P5.2 Vajor 3o|| 3|gna| |n AU0/CA0.



Portormanco Comµarod to
Othor Bonchmarka

lt has boon a tough s|x months tor commod|ty tradors.
1ab|o l3.1 comparos tho portormanco ot tho actua|
commod|ty/torox poo| tradod by |actor llC |n accordanco
w|th tho d|ary |n th|s book aga|nst somo bonchmarks
common|y usod by tho tuturos and torox |ndustry. 1ho
bonchmarks aro tho lyxor C1A lndox, tho 3arc|ay |odgo
lowEdgo C1A lndox, and tho 38l b00. lyxor and 3arc|ay
track tho commod|ty trad|ng adv|sors (C1As) manag|ng
|argo assots |n tho torward commod|ty and torox markots.

1ABLE P5.1 |actor 1rad|ng l|an (Actua|) vorsus lndustry
3onchmark Compar|sons, 0ocombor 2000-Vay 2010

Noto. Proxy íor loctor 7roolog P|oo ls tbo loctor C|osslc looo, o|| íoos
loc|oooo.
5oorcos. 5PX c|oslog prlco, loctor lotoroo| ooolt, www.Borc|oyloogo.com,
www.Lyxorloogoloolclos.com.
Aaaot
Paat Nonth
(Nay 2010)
Paat 5ix Nontha (Docombor
2000~Nay 2010)
Factor 1rading PIan +7.8¼ +0.2¼
|actor Goa| ot 18%
annua| rato ot roturn
+1.b% +0.0%
38l b00 (0.2%) (0.b%)
3arc|ay|odgo lowEdgo
C1A
(1.4%) (1.8%)
lyxor 31 8 l1 C1A lndox
(oqua| wo|ght)
(0.2%) (2.88%)

lo roprosontat|on |s mado that th|s ro|at|vo portormanco
wou|d ho|d truo tor any por|od ot t|mo othor than tho t|mo
covorod by tho d|ary ot tho book. 1ho |actor 1rad|ng l|an
cou|d undorportorm or outportorm |ndustry bonchmarks
dur|ng any othor t|oat|ng por|ods ot t|mo.

Putting it in Poraµoctivo

||vo or s|x months |s a m|crocosm |n tho ||to ot a trador.
|rank|y, s|x months, or ovon a yoar, roa||y do not mattor vory
much. l want to ond th|s book by p|ac|ng tho past s|x months
|nto tho porspoct|vo ot my caroor as a trador.

||guro l3.8 shows tho trad|ng portormanco ot tho por|od
covorod by th|s book |nto tho contoxt ot my trad|ng trom
1081 through Vay 2010. 1h|s |s a graph ot tho va|uo
Addod Vonth|y lndox (vAVl) roprosont|ng tho growth ot
$1,000 w|thout tactor|ng |n add|t|ons or w|thdrawa|s. loto
that tho por|od ot tho book |s markod on tho graph.

F|CuRE P5.8 |actor 1rad|ng llC lortormanco, 1081
through Apr|| 2010.


1h|s graph makos a pro-torma adjustmont to rot|oct tho
tact that l am curront|y trad|ng w|th about ono-th|rd ot tho
|ovorago l usod trom 1081 through 2008. 3o, tho vAVl |s
constructod us|ng month|y ratos-ot-roturn that aro on|y ono-
th|rd ot tho actua| month|y roturns |n my propr|otary
accounts trom 1081 through |ato 2008. 1ho vAVl
bog|nn|ng |n 2000 |s basod on actua| portormanco,
rot|oct|ng tho |owor |ovorago curront|y bo|ng usod.


AppendIx A

Factor 1radIng Plan 8Ignals

1ab|o A.1 conta|ns tho s|gna|s and trados ot tho |actor
1rad|ng l|an trom 0ocombor 7, 2000, through Apr|| 20,
2010. 1ho rosu|ts ot tho trados opon as ot Apr|| 20 aro
markod-to-markot. l|oaso road tho d|sc|a|mors |n tho
Author's loto tor a comp|oto oxp|anat|on ot tho
portormanco roport|ng.

1ABLE A.1

AppendIx B

OuIck Re|erence to Charts

1ho to||ow|ng tab|os aro |ntondod to bo a qu|ck rotoronco
gu|do to tho charts |n th|s book. 1ho tab|os ||st var|ous
o|omonts ot c|ass|ca| chart|ng pr|nc|p|os, trad|ng s|gna|s,
and trado managomont tochn|quos usod by tho |actor
1rad|ng l|an and whoro thoy can bo tound |n tho book.

1ab|o 3.1 ||sts tho charts |n tho book accord|ng to wh|ch
c|ass|ca| chart pattorn thoy |||ustrato.

1ABLE B.1 Charts by lattorn


1ab|o 3.2 ||sts tho charts |n tho book basod on tho typo
ot s|gna| gonoratod and tho appropr|ato trado managomont
stratogy.

1ABLE B.2 Charts by 3|gna| Catogory and 1rado
Vanagomont 1ochn|quo


AppendIx C

Recommended Resources

3arr|o, 3cott, 7bo Comp|oto lolot`s Ooloo to Optloos ooo
lotoros, 2nd od. low York: A|pha 3ooks, longu|n Group
(U3A), 2000.

3randt, lotor l. (w|th 3ruco 3abcock), 7roolog
Commoolty lotoros wltb C|osslco| Cbort Pottoros.
3acramonto, CA: Commod|ty 1radors Consumor loports,
1000.

Ch|cago 3oard ot 1rado, Commoolty 7roolog Voooo| .
low York: AVACOV, 1000.

Edwards, lobort 0., and 1ohn Vagoo, 7ocbolco| Aoo|ysls
oí 5tock 7rooos, 8th od. 3oca laton, |l: ClC lross,
2001. [Noto. 1ho author usos tho t|tth od|t|on ot th|s book
tor porsona| uso.|

E|dor, A|oxandor. 7roolog íor o Llvlog. Psycbo|ogy,
7roolog 7octlcs, Voooy Vooogomoot. low York: 1ohn
W||oy 8 3ons, 1008.

K|ov, Ar|, 7bo Vooto| 5trotoglos oí 7op 7rooors. 7bo
Psycbo|oglco| Lotormlooots oí 7roolog 5occoss.
|obokon, l1: 1ohn W||oy 8 3ons, 2000.

K|ov, Ar|, loogo looo Vostors. low 7op loogo looo
7rooors 5ot Ooo|s, Ovorcomo Borrlors, ooo Acblovo
Pook Poríormooco. |obokon, l1: 1ohn W||oy 8 3ons,
200b.

low|s, V|chao|. Llor`s Pokor. Rlslog 7broogb tbo
¼rockogo oo ¼o|| 5troot. low York: W.W. lorton 8
Company, 1080.

low|s, V|chao|. 7bo Blg 5bort. losloo tbo Loomsooy
Vocbloo. low York: W.W. lorton 8 Company, 2010.

Vurphy, 1ohn, 7ocbolco| Aoo|ysls oí tbo lloooclo|
Vorkots. low York lnst|tuto ot ||nanco, lront|co |a||
0|roct, 1000.

lat|ona| |uturos Assoc|at|on, Opportoolty ooo Rlsk, Ao
Eoocotlooo| Ooloo to 7roolog lotoros, 2000, l0|
down|oad at www.nta.tuturos.org/l|A-|nvostor-
|ntormat|on/pub||cat|on-||brary/opportun|ty-and-r|sk-
ont|ro.pdt.

3chabackor, l|chard W., 7ocbolco| Aoo|ysls ooo 5tock
Vorkot Proílts. 7bo Roo| Blb|o oí 7ocbolco| Aoo|ysls.
|ampsh|ro, UK: |arr|man |ouso, 1008.

3chwagor, 1ack 0., Vorkot ¼lzoros. lotorvlows wltb 7op
7rooors. Co|umb|a, V0: Varkotp|aco 3ooks, 2000.

3chwagor, 1ack 0., Now Vorkot ¼lzoros. Coovorsotloos
wltb Amorlco`s 7op 7rooors. low York: 1ohn W||oy 8 3ons,
1002.

3chwagor, 1ack 0., Vorkot ¼lzoros. low York:
|arpor3us|noss, 1008.

1owo|os, l|chard 1., and |rank 1. 1onos, 7bo lotoros
Oomo. ¼bo ¼los, ¼bo Losos, & ¼by. low York:
VcGraw-||||, 1000.

ln add|t|on to tho oxtromo|y |ns|ghttu| and |ntormat|ona|
books c|tod prov|ous|y, l rocommond a tow sorv|cos that
prov|do wob-basod trad|ng p|attorms, pr|co quotos,
chart|ng capab|||t|os, and othor rosoarch.

Factor1rading.com: 1h|s |s tho ott|c|a| wob s|to
ot |actor llC. 1ho wob s|to attompts to |dont|ty
and roport on tho bost oxamp|os ot c|ass|ca| chart
pattorns |n tho commod|ty and torox markots.
lor|od|c chart stocks aro a|so toaturod.

Norconarytrador.com: 1h|s qu|rky and br||||ant
wob s|to |s wr|tton tor protoss|ona| tradors by a
coup|o ot sk|||od protoss|ona| spocu|ators (us|ng
psoudonyms). Vorconarytrador prov|dos unusua|
macro ana|ysos ot markots and g|oba| oconom|cs
that broak tho mo|d ot convont|ona| w|sdom. 1ho
authors/tradors troquont|y b|ow ho|os through tho
sacrod cows ot Wa|| 3troot. loadod w|th groat
|ns|ght on tho th|ngs that roa||y mattor to bo
prot|tab|o.

1rado Navigator: 3y Gonos|s ||nanc|a|
1ochno|og|os, Co|orado 3pr|ngs, CO (800) 800-
8282. |or tho monoy th|s |s tho bost and most
usor-tr|ond|y quoto and chart|ng p|attorm
ava||ab|o. Actua| trad|ng can bo oxocutod trom tho
p|attorm through so|octod tuturos comm|ss|on
morchants (|CVs). l|vo customor support |s
road||y ava||ab|o and oxtromo|y know|odgoab|o.

Commodity Roaoarch Buroau: l grow up as a
trador w|th Cl3 products and sorv|cos. Cl3 has
boon sorv|ng tho commod|ty |ndustry w|th
oxco||ont rosourcos tor moro than 70 yoars.
Cl3trador.com prov|dos a mu|t|tudo ot va|uab|o
markot rosoarch and quoto and chart|ng tunct|ons.

Barchart.com: 1h|s |s a troo wob s|to w|th quoto
and chart|ng capab|||ty. Whon l am on tho road
w|thout my own computor l stay |n contact w|th tho
charts through 3archart.com. l wook|y pr|nt ott tho
charts tor tho markots l w||| bo c|oso|y mon|tor|ng
trom 3archart.com, us|ng tho °C|ass|c 3ty|o Chart'
sott|ng. l thon koop thoso charts up to dato
throughout tho wook by hand.


Author's Note

1h|s book |s oducat|ona| and not |ntondod to promoto any
product or sorv|co ot |actor llC now or |n tho tuturo.

Vonth|y portormanco data tor tho por|od covorod by tho
book roprosonts a comb|nat|on ot data and not tho trad|ng
act|v|ty ot any spoc|t|c account. 1ho comb|nat|on ot data
|nc|udos:



An oxompt commod|ty poo| managod by |actor
llC

lor|od|c trados |n a propr|otary account

Vanagomont ot trad|ng s|gna|s accord|ng to tho
ru|os and gu|do||nos spoc|t|od by tho |actor
1rad|ng l|an


3ocauso no spoc|t|c account has tu||y rot|octod tho
s|gna|s and trados roportod |n lart lll ot th|s book, tho
portormanco data roportod horo|n shou|d bo cons|dorod as
hypothot|ca|. |owovor, tho portormanco roportod |n tho
d|ary port|on ot th|s book |n lart lll c|oso|y m|rrors tho
trad|ng portormanco ot tho actua| oxompt commod|ty poo|
managod by |actor llC. last portormanco |s not
nocossar||y |nd|cat|vo ot tuturo rosu|ts.

|actor llC tradod propr|otary accounts trom Octobor
1081 through Apr|| 100b. |rom Octobor 1081 through
Varch 1001 tho propr|otary accounts woro contro||od so|o|y
by |actor llC undor tho trad|ng program or oar|y vors|ons
ot tho trad|ng program roprosontod by th|s book (soo tho
portormanco capsu|o ot |actor llC |n ||guro Al.1).

F|CuRE AN.1 |actor llC lortormanco, Octobor 1081-
3optombor 2008.


|rom t|mo to t|mo throughout th|s por|od, tho accounts
woro cap|ta||zod |n part by not|ona| tunds. 1ho not|ona|
tunds woro |nc|udod |n tho ca|cu|at|on ot portormanco.
lortormanco data |s roportod |n accordanco to tormat and
va|uo Addod Vonth|y lndox (vAVl) spoc|t|od by tho
Commod|ty |uturos 1rad|ng Comm|ss|on (C|1C). lo|thor
tho C|1C nor tho lat|ona| |uturos Assoc|at|on (l|A) has
rov|owod th|s mator|a|.

|rom Apr|| 1001 through Apr|| 100b, l grantod a powor ot
attornoy ovor my propr|otary accounts to anothor trador.
|owovor, bocauso l mado por|od|c trad|ng doc|s|ons
dur|ng th|s t|mo, tho portormanco ot th|s trad|ng por|od |s
|nc|udod horo|n. 1ho drawdowns ot th|s por|od aro not
|nc|udod |n a tab|o roport|ng tho s|zo and durat|on ot
drawdowns |n |actor llC's propr|otary trad|ng |n 1ab|o
0.1. l rot|rod trom tho trad|ng bus|noss trom Apr|| 100b
through tho ond ot 2000. 0ur|ng th|s por|od l pursuod somo
non-prot|t po||t|ca| and soc|a| ondoavors. ln 1anuary 2007, l
onco aga|n bogan trad|ng a propr|otary account us|ng tho
program roprosontod by th|s book. ln 3optombor 2008, l
w|thdrow tunds trom tho propr|otary account to bo|ow tho
|ovo| roqu|rod to |mp|omont tho trad|ng program doscr|bod
|n th|s book. |owovor, l took vory so|octod trad|ng s|gna|s
tor my propr|otary account |n 2000 and oxpor|oncod a
prot|tab|o yoar.

1ho portormanco ot tho propr|otary trad|ng rocord trom
1081 through 2008 was at a |ovorago ot throo t|mos that
curront|y omp|oyod by |actor llC.


lndex

Ant|c|patory s|gna|. 5oo Vajor ant|c|patory s|gna|

App|o Computor, |83 bottom |n

Ascond|ng tr|ang|o:

coppor ta||od

0AX

lasdaq

U30/CA0 ta||od

Assots. 5oo Equ|ty ba|anco

AU0/CA0, tr|ang|o and |ossos

AU0/1lY, rovorsa| symmotr|ca| tr|ang|o

AU0/U30:

cont|nuat|on pattorns

major broakout s|gna| trado

rovorsa| r|s|ng wodgo

sovon-month doub|o bottom

Avorago |nvostors, adv|co tor


3abcock, 3ruco

3arc|ay C1A lndox, vorsus 38l b00 lndox

3oar h|kkako pattorn

3oar markot, |n EUl/U30

3oar trap

go|d

soyboans

°3ost 0rossod l|st'

cont|nuous pattorns |n coppor

o|ght-month |83 bottom |n 38l

ovo|ut|on ot p|an and |ack ot

tour-month |83 bottom |n lZ0/U30

tourtoon-month co|| and n|no-month doscond|ng
tr|ang|o |n EUl/C||

tourtoon-month symmotr|ca| tr|ang|o |n sugar

|83 bottom |n crudo o||

sovon-month doub|o bottom |n AU0/U30

sovon-month tr|ang|o |n go|d

s|x-month ascond|ng tr|ang|o ta||uro |n U30/CA0

s|x-month wodgo |n EUl/U30

s|xtoon-wook horn |n G3l/U30

summary

3ost pract|cos, |n |actor 1rad|ng l|an

Blg 5bort. losloo tbo Loomsooy Vocbloo, 7bo (low|s)

3|ack box systoms

3ottom ||no trados/bottom ||nors

3oundary ||nos:

broakouts

|co ||no

last 0ay lu|o

3roak-away gap, |n corn

3roakouts. 5oo o|so Vajor broakout s|gna|, V|nor broakout
s|gna|

channo|, EUl/G3l

ox|t|ng at |oss

ta|so

go|d

promaturo

rotost ot

socondary

1-bonds

3ront 3oa o||. 5oo Crudo o||

3r|t|sh pound. 5oo G3l ontr|os

3u|| h|kkako pattorn

3u|| markot:

coppor

ot 2000, |83 bottom and

3u|| trap

EUl/U30


Campbo||'s 3oup

Cand|ost|ck charts

Cap|ta||zat|on, noodod tor trad|ng p|an. 5oo o|so Equ|ty
ba|anco

Caso stud|os

01lA |ong and short trados

yoar ot trad|ng go|d

yoar ot trad|ng sugar

Chart book oconom|sts

Chart rodot|n|t|on, go|d trado and

Charts. 5oo C|ass|ca| chart|ng pr|nc|p|os

Chos|or, 0an

C||

Ch|cago 3oard ot 1rado (C3O1)

Choppy markots:

go|d

st|ck|ng to p|an |n

sugar

C|ass|ca| chart|ng pr|nc|p|os

bonot|ts ot chart trad|ng

h|story ot

|doa| chart pattorns

||m|tat|ons ot

C|os|ng pr|co, |mportanco ot

Cocoa, promaturo broakout |n

Commod|t|os, as porcontago ot ||qu|d |nvostmont assots

Commod|t|os Corp.

Commod|ty/torox tradors:

tavor|ng 80 porcont r|ght approach ovor 70 porcont
r|ght approach

portormanco ot

roasons tor prot|tab|||ty ot

Commod|ty poo| account

Congost|on

Conso||dat|on

Cont|

Cont|nonta| Gra|n Company

Cont|ngoncy ordors

Cont|nuat|on |83 pattorns:

0ow ut|||t|os

go|d

lusso|| 1000

Cont|nuat|on pattorns. 5oo o|so V|nor cont|nuat|on s|gna|

coppor

crudo o||

EUl/U30

ox|t|ng at prot|t

G3l/C||

G3l/1lY

G3l/U30

go|d

soyboan o||

sugar

U30/CA0

whoat

Coppor:

bu|||sh pattorn sor|os

cont|nuat|on pattorn

major broakout s|gna| trado

m|ssod trado

rovorsa| |83 pattorn

Corn:

broak away gap

major broakout s|gna| trado

m|nor cont|nuat|on s|gna| trado

Corro|at|on, botwoon markots

Cotton, m|sco||anoous trados ot

Cl3 lndox, 0ocombor 2000-Apr|| 2010 chart

Crudo o||:

cont|nuat|on roctang|o and pyram|d tr|ang|o

|83 bottom

horn

last 0ay lu|o

major ant|c|patory s|gna| trado

major broakout s|gna| trado


0a||y charts, uso ot

0AX:

ta|so broakout

major broakout s|gna| trado

0ay tradors, adv|sod to avo|d commod|ty trad|ng

0oscond|ng tr|ang|o:

G3l/1lY

go|d

U30/CA0

U30/1lY

0|agona| vorsus hor|zonta| pattorns

0|ary ot trados

Vonth Ono, 0ocombor 2000

Vonth 1wo, 1anuary 2010

Vonth 1hroo, |obruary 2010

Vonth |our, Varch 2010

Vonth ||vo, Apr|| 2010

portormanco ova|uat|on

0|sc|p||no, succosstu| trad|ng and

0|scrot|onary trad|ng p|ans

0o||ar, Austra||an. 5oo AU0 ontr|os

0o||ar, Canad|an. 5oo CA0 ontr|os

0o||ar, low Zoa|and. 5oo lZ0 ontry

0o||ar, U.3. 5oo U30 ontr|os

0onch|an, l|chard

0oub|o bottom, sovon-month doub|o bottom |n AU0/U30

0oub|o top:


crudo o||

G3l/U30

go|d

poss|b|o |n G3l/U30 |n 2010

1-bond trados

0ow, Char|os

0ow 1onos lndustr|a| Avorago (01lA):

caso study ot short and |ong trados

cont|nuat|on |83 top |n ut|||t|os

m|nor rovorsa| s|gna| and m|sco||anoous trados ot

100-yoar chart

out|ook tor tuturo

tra|||ng stop ru|o

as 2010 opportun|ty

0ow 1onos 1ransport lndox, two|vo-wook roctang|o |n

0rawdowns:

d|scovor|ng tundamonta| trad|ng t|aws dur|ng

||m|t|ng oxpoctod worst-caso

as unavo|dab|o


Edwards, lobort

E|dor, A|oxandor

E|||ot Wavo lr|nc|p|o

Emot|ons. 5oo o|so lorsona||ty and tomporamont

good and bad trados and

not romovab|o trom trad|ng

prot|tab|||ty and

Entry, to trados. 5oo o|so ldont|t|cat|on, ot trados

Equ|ty ba|anco:

avo|d|ng da||y chock|ng ot

commod|t|os as porcontago ot ||qu|d

EUl/C||, tourtoon-month co|| and n|no-month doscond|ng
tr|ang|o

EUl/G3l:

major ant|c|patory s|gna| trado

m|sco||anoous trado

EUl/1lY:

major ant|c|patory and major broakout s|gna| trado

major broakout s|gna| trado

EUl/U30:

cont|nuat|on tr|ang|o, rovorsa| V top and t|ag

major comp|ot|on s|gna| trado

m|nor pattorn cont|nuat|on trado

prob|omat|c d|agona| chart pattorn

s|x-month wodgo

Euro. 5oo EUl ontr|os

Ex|st|ng opon pos|t|ons

Ex|t, trom trados:

at |oss

portormanco ova|uat|on

at prot|t

r|sk managomont


|actor llC:

t|rst b|g trado

propr|otary trad|ng rocord

|actor 1rad|ng l|an. 5oo o|so Caso stud|os

assumpt|ons ot

bas|cs ot

bost trad|ng pract|cos

compononts ot

ovo|ut|on ot

g|oba| assumpt|ons ot

|doa||zod construct ot ont|ro yoar

month|y roturns trom 1081

portormanco ova|uat|on

trado ontry

trado |dont|t|cat|on

trado |dont|t|cat|on p|||ar

trado ordor managomont

trado r|sk managomont

vocabu|ary ot

|a|th |n ab|||ty, |mportanco ot

|ako out:

corn

go|d

|a|so broakouts:

EUl/U30

|an pr|nc|p|o, crudo o||

||shhook buy s|gna|:

go|d

sugar

|undamonta| trad|ng


G3l, |co ||no and pattorn broakout |n

G3l/C||, cont|nuat|on pattorns |n

G3l/1lY:

|83 rovorsa| top and throo cont|nuat|on pattorns

major ant|c|patory s|gna|

major broakout s|gna|

G3l/U30:

0ocombor 2000-Apr|| 2010 chart

doub|o top roachod

m|nor cont|nuat|on s|gna| trado

m|nor rovorsa| s|gna|s trado

pr|co targot

s|xtoon-wook horn

t|mo tram|ng oxamp|o

tra|||ng stop ru|o

as 2010 opportun|ty

Go|d:

caso study ot yoar ot trad|ng ot

cont|nuat|on |83 and symmotr|ca| tr|ang|o

0ocombor 2000-Apr|| 2010 chart

d|agona| pattorn

hor|zonta| pattorn

major ant|c|patory s|gna| and major broakout s|gna|

markot rodot|n|t|on

markot run

sovon-month tr|ang|o

spot pr|cos 1880-2000

as 2010 opportun|ty

Good-unt||-canco|od (G1C) opon ordors


|ard rotost

|oad and shou|dors (|83) bottom pattorn:

App|o Computor

bu|| markot ot 2000 and

crudo o||

o|ght-month |83 bottom |n 38l

EUl/U30

tour-month |83 bottom |n lZ0/U30

go|d

sugar

|oad and shou|dors (|83) pattorn:

charactor|st|c toaturos ot

01lA ta||uro

go|d

go|d ta||uro

|oad and shou|dors (|83) top pattorn:

AU0/U30 ta||uro

01lA

G3l/1lY rovorsa|

go|d

soyboans

1-bonds

1-notos

whoat

||kkako pattorn

G3l/U30

|or|zonta| vorsus d|agona| pattorns

|orn:

coppor

crudo o||

G3l/U30

|orn bottom


lco ||nos

ldont|t|cat|on, ot trados

bottom ||nors

catogor|os ot trados

tundamonta| vorsus tochn|ca| approachos to

t|mo tram|ng

lnst|nct trados

AU0/CA0

go|d

portormanco ova|uat|on

soyboan o||

lntorvon|ng pattorns

lnvostors, adv|co tor avorago


Kansas C|ty whoat. 5oo Whoat


last 0ay lu|o

corn

01lA

EUl/1lY

EUl/U30

ox|t|ng at |oss

ox|t|ng at prot|t

G3l/U30

go|d

|n|t|a| protoct|vo stop and

lasdaq

sugar

U30/CA0

whoat

last |our lu|o

lovorago

low|s, V|chao|

Llor`s Pokor (low|s)

long trado:

01lA

go|d

soyboan o||

sugar

look-back modo

lyxor 3hort-1orm C1A lndox


Vagoo, 1ohn

Vajor ant|c|patory s|gna|:

AU0/CA0

crudo o||

EUl/G3l

EUl/1lY

G3l/1lY

go|d

portormanco ova|uat|on

1-bonds

U30/CA0

Vajor broakout s|gna|:

AU0/CA0

AU0/U30

coppor

corn

crudo o||

0AX

EUl/1lY

G3l/1lY

G3l/U30

go|d

38l

soyboan o||

sugar

U30/CA0

whoat

Vajor comp|ot|on s|gna|:

EUl/U30

portormanco ova|uat|on

Vajor pattorn trados

Vajor pyram|d s|gna|:

G3l/U30

portormanco ova|uat|on

Varkot runs

Varkots:

corro|at|on botwoon

goa| ot

koop|ng trad|ng p|an |n sync w|th

Vorkot ¼lzoros (3chwagor)

Varkup/markdown

Vochan|ca| trad|ng p|ans

V|nor broakout s|gna|, AU0/CA0

V|nor cont|nuat|on s|gna|:

corn

G3l/U30

go|d

lasdaq

orango ju|co

portormanco ova|uat|on

soyboan o||

soyboans

whoat

V|nor pattorn trados:

EUl/U30

V|nor rovorsa| s|gna|:

G3l/U30

go|d

portormanco ova|uat|on

38l and 01lA

soyboans

sugar

U30/CA0

U30/1lY

V|sco||anoous trados

coppor

cotton

EUl/G3l

portormanco ova|uat|on

38l and 01lA

soyboans

1-notos

V|stakos, avo|d|ng so|t-porpotuat|ng cyc|o ot

Vonth Ono, 0ocombor 2000

background

summary

trad|ng rocord

Vonth 1wo, 1anuary 2010

background

summary

trad|ng opportun|ty |dont|t|cat|on

trad|ng p|an amondmont

trad|ng rocord

Vonth 1hroo, |obruary 2010

background

choppy markots and

summary

trad|ng rocord

Vonth |our, Varch 2010

background

summary

trad|ng rocord

Vonth ||vo, Apr|| 2010

background

c|ass|ca| chart|ng pr|nc|p|os

out|ook tor tuturo

summary

trad|ng rocord

Vunoh|sa, |omma


lasdaq:

0ocombor 2000-Apr|| 2010 chart

m|nor cont|nuat|on s|gna| trado

m|sco||anoous trado

lov|co tradors:

adv|co tor

books rocommondod tor

lZ0/U30, tour-month |83 bottom |n


OCOs (ono canco|s tho othor)

O||. 5oo Crudo o||

Opon pos|t|ons, ox|st|ng

Orango ju|co, m|nor cont|nuat|on s|gna| trado

Ordor managomont

Out-ot-||no movomont

go|d trado

Ovorn|ght pos|t|ons

corn

soyboans


lat|onco, succosstu| trad|ng and

lattorn broakout. 5oo 3roakouts

lattorn rocomp|ot|ons

lattorns, |ntorprotat|on ot

lonnants:

soyboan o||

sugar

lorsona||ty and tomporamont. 5oo o|so Emot|ons

l|at|num, |co ||no |n

lo|nt and t|guro (l8|) charts

lopcorn movo

lopcorn ra||y

lopcorn trados

los|t|on |ayor|ng

los|t|on un|t

lromaturo broakout

lr|co torocast|ng

lrot|t:

ox|t|ng at

rat|os to oxpross ro|at|onsh|p ot r|sk to roturn

|n typ|ca| porcontago ot trados

lrotoct|vo stops

lyram|d pattorns

crudo o||

go|d

sugar

U30/CA0


loctangu|ar top, |n sugar

lotost |a||uro lu|o

cotton

EUl/G3l

go|d

U30/CA0

lotosts

EUl/1lY

hard rotost

sugar trados and

1-bond trados

loturns. 5oo lrot|t, l|sk managomont

lovorsa| ta||uro top, |n soyboan o||

lovorsa| |83 pattorn, |n coppor

lovorsa| V 1op, |n EUl/U30

lovorsa| r|s|ng wodgo, |n AU0/U30

lovorsa| symmotr|ca| tr|ang|o, |n AU0/1lY

lovorsa| top, |n s||vor

lovorsa| tr|ang|o bottom, |n sugar

l|co, rotost ot

l|ght shou|dor top, |n 1-bonds

l|s|ng wodgo:

crudo o||

38l

U30/1lY

l|sk managomont:

|n |actor 1rad|ng l|an

rat|os to oxpross ro|at|onsh|p ot roturn to r|sk

lound|ng top, |n EUl/1lY

lound-tr|p (popcorn) movo

lunn|ng wodgo:

corn trado

sugar

lusso|| 1000 lndox, cont|nuat|on |83 pattorn |n


38l b00 lndox:

3arc|ay C1A lndox vorsus

0ocombor 2000-Apr|| 2010 chart

o|ght-month |83 bottom |n

ta|so broakout

last |our lu|o

major broakout s|gna| trado

m|nor rovorsa| s|gna| and m|sco||anoous trados

as 2010 opportun|ty

3chabackor, l|chard W.

3chwagor, 1ack

3ocondary broakouts

3o|t ana|ys|s, succosstu| trad|ng and

3o|t-torg|vonoss, tor trad|ng m|stakos

3hort so||ors, prosont |n a|| trados

3hort trados:

01lA

go|d

lasdaq

3||vor:

last 0ay lu|o

rovorsa| top |n

3k|d, |n torox markots

3||ppago, |n torox markots

3ovoro|gn dotau|t, 1-bonds and

3oyboan o||:

cont|nuat|on wodgo and rovorsa| ta||uro top

|ong trados

major broakout s|gna| and |nst|nct trado

markot run

3oyboans

m|nor cont|nuat|on s|gna| trado

m|nor rovorsa| s|gna|s trado

m|sco||anoous trado

rotost ta||uro ru|o

3pot torox markot

3tops:

ontry and protoct|vo

r|sk managomont and

3tra|ght-||no markot runs

3ugar:

caso study ot yoar ot trad|ng

0ocombor 2000-Apr|| 2010 chart

tourtoon-month symmotr|ca| tr|ang|o |n

major broakout s|gna| trado

major pyram|d s|gna| trado

m|nor rovorsa| s|gna| trado

out|ook tor tuturo

out-ot-||no movomont

pr|co targot

rovorsa| tr|ang|o bottom

as 2010 opportun|ty

tr|ang|o and runn|ng wodgo

wookond broakout ru|o

3usta|nod tronds

3w|ng objoct|vos

go|d

3w|ss tranc. 5oo C||

3ymmotr|ca| tr|ang|o:

EUl/C||

go|d

soyboan o||

soyboans

sugar


1argot/objoct|vo

01lA trados

1-bonds:

broakout s|gna|/rotost trados

major ant|c|patory s|gna| trado

out|ook tor tuturo

as 2010 opportun|ty

7ocbolco| Aoo|ysls ooo 5tock Vorkot Proílts
(3chabackor)

7ocbolco| Aoo|ysls oí 5tock Vorkot 7rooos (Vagoo and
Edwards)

1ochn|ca| trad|ng

1|mo tram|ng

G3l/U30 as oxamp|o ot

1-notos

1radors, charactor|st|cs ot succosstu|

ana|ys|s ot so|t and trad|ng p|an

d|sc|p||no and pat|onco

know|odgo ot trad|ng s|gna|s

|oap ot ta|th

1rados, catogor|os ot

7roolog Commoolty lotoros Uslog C|osslco| Cbortlog
Prloclp|os (3abcock and 3randt)

7roolog íor o Llvlog (E|dor)

1rad|ng p|an

cap|ta||zat|on and

koop|ng trados |n sync w|th

nocossary o|omonts

porsona||ty and tomporamont and

r|sk managomont and

succoss and ana|ys|s ot

1rad|ng p|attorms

1rad|ng s|gna|s:

cr|tor|on tor va||d

succosstu| trad|ng and

1rad|ng un|t

1ra|||ng stop ru|o

EUl/1lY

ox|t|ng at prot|t

G3l/U30

go|d

38l

sugar

1-bonds

U30/1lY

whoat

1ransact|on costs, ot day trad|ng

1r| ang|o. 5oo o|so Ascond|ng tr|ang|o, 0oscond|ng
tr|ang|o, 3ymmotr|ca| tr|ang|o

AU0/CA0 |ossos

coppor

o ju|co

soyboan o||

sugar

1wo|vo-wook roctang|o |n 0ow 1onos 1ransport lndox


U30/CA0:

cont|nuat|on and pyram|d pattorns

ta||od ascond|ng tr|ang|o

hard rotost

m|nor rovorsa| s|gna| trado

pors|stont pattorns

s|x-month ascond|ng tr|ang|o ta||uro

U30/1lY:

m|nor rovorsa| s|gna|s trado

pattorn rocomp|ot|on


va|uo Addod Vonth|y lndox (vAVl)

°v' bottom, |n soyboan o||

v|k|ng horn

vocabu|ary, ot |actor 1rad|ng l|an

vo|umo, |mportanco ot


Wodgo. 5oo o|so l|s|ng wodgo, lunn|ng wodgo

cont|nuat|on wodgo |n soyboan o||

go|d ta||od

s|x-month wodgo |n EUl/U30

Wookond ru|o

Wook|y charts, uso ot

Whoat:

cont|nuat|on roctang|o

major broakout s|gna| trado

m|nor cont|nuat|on s|gna| trado

sott pr|cos


Yon. 5oo 1lY ontr|os


Zoro-sum gamo, commod|ty trad|ng as