After Profits Now What

From mid-August to mid-November, you've participated in the American dream - buy low and sell high. Quite a substantial profit has been realized. If, by some means (there's a suggestion in Part VII), a position was taken around 5300 and liquidated at about 5900, even with several trading "ins-and-outs" along the way, your net profit, per contract, would have been about $6600.

What to do now? Sell high and buy back low. This is taking a "short" position in the market.

As a new trader, you may be skeptical of "shorting the market." Selling short involves "borrowing" a contract, selling that contract at a high price in anticipation of prices falling, and then buying it back later at a lower price. The difference is your profit.

Selling something you don't own may not sound right, but it's done legally many times a day. Short selling can be compared to a promise to pay for something in the future for its use today. In commodities, an amount of margin must be committed, even though you don't "own" the contract.

Again referring to Chart 18, to short the 3/89 Deutschemark contract, you again have two choices.

The first choice is to short the market on a "stop-and-reverse" trading strategy. A stop-loss order for 5845 (the S5 price for 11/25) is in place for the market on November 28. A "day-only," "stop-and-reverse" order is placed with your broker. These instructions tell your broker that, for 11/28 ONLY and IF your stop-loss order is filled, you want to automatically short the market. The "day only" part of the order will prevent an incorrect stop from being in place for the following day.

On 11/28, your stop loss order of 5845 is filled and you are automatically short one March Deutschemark contract.

A stop-loss order will also have to be placed to protect your new position from a sudden reversal. The stop is placed at 5942, the price at which S4 intersects the PREVIOUS trading day of 11/25.

REMEMBER: PLACE ANOTHER "STOP-LOSS" ORDER FOR THE FOLLOWING DAY. NEVER TRADE WITHOUT STOPS!

The "stop-and-reverse" method works well in trending markets but involves increased risks of being "whipsawed" in congestion areas. By using it, though, you would have caught the bear move at a very high point.

The second way is to wait for a confirmed RZ exit point. This way of shorting the market may be a little safer. While prices are in the Retracement Zone, they could "bounce around" between the RZH and RZL, causing headaches and sleepless nights.

Wait until prices CLOSE below the RZL of 5771. There is increased confidence of a bear market evolving when this happens. Prices may still reenter the Retracement Zone from the downside, but the bear trend should resume after this minor reaction. In any event, S4, from P3 of 6247, would prevent any excessive losses should prices "whipsaw" in a bull reversal.

The example of the March 89 Deutschemark contract uses the extreme high and low for a four-month period. The resulting Retracement Zone is unusually wide. Most markets may not trend for such an extended period of time, over such a broad price range.

A narrower high-low range, over a shorter period of time, should result in a smaller, more-specific Retracement Zone. A smaller trading range, though, may not have such a well-defined reaction as the wide Retracement Zone illustrated in Chart 16.

This is another Gann rule: the wider the price spread and the longer the time, the more definite the reaction.

By the way, consider this:

High of 4/18 Low of 8/10 Difference

6247 -5292 955

478 + 5292 5770

50% Retracement Target

63% Retracement Target

601 + 5292 5893

Close of 11/22

5894!

Maybe Gann WAS right!

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