STREET SMART 2

Another friend trades only "Three Little Indians" on tick charts. Traders can earn their living by trading any one of the patterns that we present in this book. • Your biggest enemy in trading is going to be a directional bias, an opinion about market direction ... whether yours, a broker's or a friend's. Shut it out! Learn to concentrate on the "right-hand side" of the chart-in other words, on the pattern at hand. • One of the things you will get out of this book is an increased ability to listen to the market." Even if a chapter does not seem to suit your personal trading style, it should at least heighten your awareness of market action and price behavior at critical points. • None of these strategies is designed to be a mechanical system. Be grateful that they are not! If they were, a large fund would come into the marketplace and exploit the edge. It is estimated that over 90 percent of the large pools in the commodity markets are run on a mechanical basis, systematically attempting to exploit trends. It is very difficult for these funds to move large amounts of money on a short-term time frame. They do not have the luxury of using resting stop-loss orders without risking adverse slippage. They cannot be as nimble as the small speculator can-and herein lies your edge. • This brings us to the most important point. Initial stop loss orders are essential! Each strategy in this book will have you entering a protective stop upon being filled. Stops are necessary for your protection against worst-case scenarios. (Remember, we are trading on probabilities only.) All it takes is getting sloppy once, or experiencing the "frozen rabbit syndrome" in a bad trade, to undo the efforts of the previous 20 trades. Placing initial protective stops must become a habit that is never broken. As you will see, in most, if not all of the examples, your stops will risk only a small amount of money. The patterns in this manual are organized around three distinct swing trading concepts by which support and resistance levels are formed. They are: tests, retracements, and climax reversals. We will elaborate on these ideas in the introductory chapter on swing trading. This will be followed by a chapter on money management. Chapters included under "test" setups include Turtle Soup, Turtle Soup Plus One, 80-20's, and Momentum Pinball. Retracement patterns include sections on the Anti and two ADX trades. Lastly, different types of climax reversals are discussed. Our favorites range from news-reversal patterns to distinct bar chart setups. We have also included a chapter by a friend who is a finance professor at Syracuse University We thought you would be fascinated-as we were by the summary of his research and findings on the secrets of longevity and profitability of top CTAs. The appendix includes all applicable back-testing results independently conducted by the Moore Research Center in Eugene, Oregon. These tests are included to illustrate a market's tendency; that an edge does indeed exist. They are not meant to be mechanical systems. Before we move on to the strategies, let's first discuss the mechanics of swing trading. STREET SMARTS - 3 - CHAPTER 2 SWING TRADING "Speculation, in its truest sense, calls -for anticipation. Richard D. Wyckoff It is important to understand the basics of swing trading to understand how our strategies work. Since the days of Charles Dow, traders have written about two distinct methods of trading. The first is playing for the long pull. This involves trying to determine the underlying value of a market or security through fundamentals. A trade is then held until a revaluation takes place. This is analogous to trend-following strategies which ultimately depend on long term economic policies or fundamental shifts in supply and demand. The second method of trading, as described by Dow back in 1908, was to "deal in active markets making many trades, and relying on stop loss orders for protection." This came to be called "swing trading." Trading opportunities presented themselves on both the long and short side, regardless of what the underlying long-term trend was. Swing trading is anticipating the market's next move, and asking what is the most probable outcome. For example, if a market broke support and had a sharp move down, the strongest trade to make would be to sell the first rally. This is because the most probable event would be for the market to at least make a retest of the new low before it could, with any high degree of probability be expected to reverse direction again. The main goal of each trade is to minimize risk rather than maximize profit. Positions are managed according to the market's behavior after we've made our trade. We can't really predict the outcome. For example, if we are trading on a test, we don't know if it will lead to a true reversal or just a consolidation pattern before further continuation of the preceding move. We are trying to achieve a "headstart" in the right direction together with a chance to put in a tight stop. Trend following gives a trade room to breathe and allows for drawdowns. Swing trading depends on NOT riding out reactions or giving up profits already won. Trades should be exited either in the direction of price movement or just as the price reverses. Trailing stops will lock in any profits gained. Trading should take advantage of extremes in price action, high volume, and liquidity. All the patterns in this book are designed to capture profits in active market conditions. We will teach you to seek out emotional extremes in the marketplace, and then show how to identify the difference between smart money and late-public buying/selling. STREET SMARTS - 4 - The second type of trade is made by entering on a reaction or retracement. This is "buying a higher low" in a sequence of higher lows and higher highs (or selling a lower high in a series of lower lows and lower highs). In this case there will only be a single stop point, but since the trade is entered in the direction of the prevailing trend, no test should be required. go long can make either a slightly higher or lower low, but support cannot be established until there has been a test! It is after a successful test (that is, the market has tested a previous high or low and stopped there again), that many of our setup patterns occur. The strongest pattern in swing trading is trading on tests of previous highs or lows. These tests form a "double stop point," and offer ail excellent trade entry location with the least risk of loss. A low test at which to