Profitunity Trading Partner

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Every divided kingdom falls, so every mind divided between many studies confounds and saps itself

Leonardo da Vinci

GOALS:

1. TO INCORPORATE THE SKILLS LEARNED IN LEVELS ONE, TWO, AND THREE INTO AN EASY-TO-USE CHECKLIST THAT WILL IMPROVE TRADING EFFICIENCY.

2. TO BE ABLE TO COMPLETELY ANALYZE A MARKET IN 10 SECONDS OR LESS.

One of the perennial problems all traders face is how to condense the enormous amount of material the market is putting out each minute into an easy-to-understand decision-making format. A concurrent problem is how to put this material into a form that will automatically prioritize the information so that trading decisions are made in a responsible profit-making sequence.

Figure 10-1 is a sample worksheet of our Profitunity Trading Partner. This is the simplest, easiest-to-use, most profit-producing and time-saving method of keeping market analysis

PROFITUNITY Worksheet Date / /

Market-Mo. Settlement

2-Bar Reverse

Hump Signals

Thumb Signals

Rhythm

Current Trades

Proposed Trades

Open Equity

Open Close

$/point

twr

macd

EDLast:

BUY

6:20

$25

SELL

13:00

Last:

BUY

6:20

$1,000

SELL

Last:

BUY

6:20

$10

SELL

12:30

Last:

BUY

6:25 12:25

$5

SELL

Last:

BUY

7:25 12:00

$2.50

SELL

Last:

BUY

8:00

$11.20

SELL

11:43

Last:

BUY

7:45 13:10

$10

SELL

HOLast:

BUY

7:50

$4.20

SELL

13:10

Last:

BUY

8:30

$50

SELL

12:15

Last:

BUY

8:30

$6

SELL

12:15

Last:

BUY

8:30

$50

SELL

12:15

Last:

BUY

8:30

$50

SELL

12:15

Last:

BUY

8:30

$5

SELL

12:40

Last:

BUY

6:20

$12.50

SELL

13:00

Last:

BUY

6:20

$12.50

SELL

13:00

Last:

BUY

6:20

$12.50

SELL

13:00

Last:

BUY

7:15

$3.75

SELL

11:58

Last:

BUY

7:30

$10.00

SELL

12:15

Last:

BUY

6:20

$6.25

SELL

13:00

Figure 10-1 Profitunity trading partner worksheet on track that we have seen in 35+ years of trading. The circled numbers on the various columns in Figure 10-1 indicate the order in which the worksheet is filled out. Assume that you are doing your market analysis after a vacation and are coming in absolutely "clean" of any previous information. You are starting from scratch.

The first vertical column contains abbreviations for the commodities you are about to analyze. No month for trading is given. Using a pencil, you will note in the columns the months when the trading occurs. On each row, to the right of the commodity listings, are two rows marked "buy" and "sell." Buy and sell signals are to be entered on the appropriate lines.

THE TWO-BAR REVERSE

Let's start with the first column to the right of the commodity listings. This column is labeled at the top "2-Bar Reverse." It is important to fill in this column first.

As mentioned in Chapter 6, most traders who have left trading because they lost money have been blown out because of one or a very few large mistakes (losses) rather than because they were eaten up by the termite (small) losses. A trader's first and most important job is to protect the trading capital. Earlier, I used an analogy from driving. I have been driving for 45 years and have never caused a serious accident, but I have been in two accidents caused by drunken drivers. I never drink and drive. Should I then conclude that, because I am at least a decent driver, I need not spend money on extras like air bags?

I would never buy a new car without air bags—not to protect me from my own driving but as protection against drunk drivers. Guess what, trading fans: Sometimes the market overindulges and goes on a binge. The binge is usually caused by the market's ingesting too much surprising (intoxicating) information. Therefore, I will never buy or sell a new position without making sure that this profit potential vehicle has a good "air bag." In trading, the air bag is a two-bar reversal, but not just any two-bar reversal. It must be a two-bar reversal on a higher timeframe.

The market can be conveniently divided into somewhat equal time intervals. The largest chart most traders view is the monthly chart. With an average of 4.3 weeks in a month, we can say that the monthly chart is a significantly higher time frame than the weekly chart, which contains only the five trading days. The daily chart usually has 4-6 hours of trading, and the hourly chart can be divided into four 15-minute or six 10-minute time periods. Thus, the market gives us at least five different time layers where the time periods above and below are approximate factors of 5. A higher time frame refers to a time frame that contains approximately five times the span of the current trading time frame. For example:

Monthly charts contain 4.3 weeks

Weekly charts contain 5 days

Daily charts contain 4-6 trading hours

Hourly charts contain 4 (15-min.) or (10-min.) periods

The two-bar reversal is on one significant time frame higher than whatever time period you are trading (Figure 10-2). For a more complete explanation of how to determine where the air bag should be placed, refer back to Level One (Chapter 6). If your trading time frame is the daily chart, your two-bar reversal will be on the weekly chart. If you are trading the 10-minute intraday chart, your significantly higher time frame will be the hourly chart.

If you are in a long position on the daily chart, your two-bar reversal will be on the weekly chart. Locate this point by reading the weekly chart from right to left, starting with the current weekly bar. Continue to the left until you find the first weekly

Air Bag

Air Bag-

SHORT - Second Bar to the

LONG - Second Bar to the left must have lower Low and lower High than first bar left must have higher High and higher Low than first bar

Valid when taken from price action one significant time frame higher than actual trading time frame

Figure 10-2 Two-bar reversals.

bar that has both a lower high and a lower low than the current bar. Inside bars do not count. They do not have both a lower low and a lower high (higher low and higher high). Once this point is established (the bottom minus one tick or the top plus one tick on the two-bar reversal bar), immediately place an air bag stop. This is not necessarily a place to reverse (although it could be). The purpose of this column on the Profitunity Trading Partner is to make sure that you are not long if the price goes below the two-bar reverse low, or short if the price goes above the two-bar reverse high. The air bag protects you from getting killed by a weaving drunken market. That point is the first information entered on the Profitunity Trading Partner, and it is placed on the appropriate buy or sell row—on the buy row if it is a two-bar up, and on the sell row if it is a two-bar down.

The next column to work with on the Profitunity Trading Partner is the column labeled "Rhythm." We use this column to

RHYTHM

make sure that our beat or rhythm is in sync with the market. We already know that the best way to make money is to trade with the market rather than try to "buck" it. This column gives us an accurate look at the various market rhythms as we trade. It makes sure that our trading is not dancing to a fox trot while the market is playing boogie-woogie.

The science of chaos has given us overwhelming evidence that the markets are a natural process and do not follow the traditional laws of the Euclidean/Newtonian world. A natural rhythm that almost everyone has witnessed is the tides on a seashore. If you are on a beach and want to know which direction the tide is moving, you can simply stick a piece of shell or driftwood into the sand at the water's edge. After a while, the water will be either above the marker (incoming tide) or beyond the marker (outgoing tide).

If you observe the motion of the tide, you will notice that some waves are coming in with the tide and others are going out against the tide. Look even closer at the waves and you will notice that as the waves come in, some ripples on top of the waves are riding on an incoming wave and some are going out against the next incoming wave.

This is exactly how the longer-term, intermediate-term, and short-term rhythms of the markets interact. We call this the tide/wave/ripple or TWR rhythm. The best way to monitor this market rhythm is to use a 5/13/34 moving average filter (Figure 10-3).

The TWR information lets you know that you are in sync with the rhythms of the market. A simple formula is:

Be long any time the 5-bar average is higher than both the

13-bar and 34-bar averages.

A simple way to mark this in the Rhythm section is to place an up arrow (T) if the 5-bar average is above both the 13-bar and the 34-bar averages. Place a down arrow (i) if the 5-bar average

Profitunity Trading Partners
Figure 10-3 The TWR (5/13/34) moving average filter.

is below both the 13-bar and the 34-bar averages. Enter a zero as the rhythm if the 5-bar average is between the 13-bar and 34-bar averages.

We can monitor the immediate rhythm of the market even more closely by using our Elliott wave indicator, the 5/34/5 Profitunity MACD, discussed in Chapter 7. To display this MACD, I usually use a histogram to display the oscillator (which simply subtracts a 34-bar moving average from a 5-bar moving average) and a line to display the 5-bar moving average of the oscillator. (See Figure 10-4.) This gives an extremely good immediate momentum indicator. Whenever the histogram is higher (+1 is higher than -1, and -1 is higher than -3), the immediate momentum is up; whenever the histogram is lower, the immediate momentum is down. Your trade (long/short) should be on the histogram side of the signal line.

SPU4 DAILY BAR

45?60 " H= 4G000 l» 45£00 l- 45710V a= -270 '

48000

46000

5 SIN (MI) - 34 SIM (MI) 0 SIM (CD - 0 SIM (CD 5 SIM

¡13 |20 |27 ¡3 |10 ¡17 |24 ¡31 |7 ¡14 |21 IZB 17 114 121 |2S |4 |11 |18 |25 |g I? |16 |23 |30 |6 |13 jfo"

Figure 10-4 The 5/34/5 profitunity MACD.

1000 0

-1000 -2000

¡13 |20 |27 ¡3 |10 ¡17 |24 ¡31 |7 ¡14 |21 IZB 17 114 121 |2S |4 |11 |18 |25 |g I? |16 |23 |30 |6 |13 jfo"

Figure 10-4 The 5/34/5 profitunity MACD.

Now let's record our observations on the Profitunity Trading Partner worksheet (Figure 10-1). We want to record both the TWR and the MACD momentum on our current trading time frame and on one significantly higher time frame. In the Rhythm column, we will use the top row (the buy row) to record the higher time frame readings and the bottom row (the sell row) to record the current trading time frame readings.

Enter the TWR reading on the left portion of the buy and sell rows and the 5/34/5 Profitunity MACD reading on the right portion of the buy and sell rows (Figure 10-5). This creates a Rhythm box that has four pieces of momentum information. The left portion will have up arrows, down arrows, or zeros, and the right portion will only have up arrows or down arrows.

The Rhythm column will give you hours of profitable fun examining all the different permutations of the arrows and

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