Tramline Trading_ A practical guide to swing trading with tramlines, Elliott Waves and Fibonnaci

TableofContents

Cover

Publishingdetails

Followus,addus,likeus

TheTramlineTradingAlertService

Abouttheauthor

Acknowledgements

Preface

Introduction

Part1:TheTramlineTradingMethod

Chapter1:MyChartingMethods

1.1Supportandresistance

1.2Trendlines

1.3Myfavouritechartpatterns

1.4Momentum

Chapter2:ChartingWithTramlines

2.1DrawingtramlinesandtheTramlineTradingRule

2.2Howtofindthebesttramlines

2.3ThePriorPivotPoint(PPP)

2.4Willthemarketchangetrendatatramline?

2.5Tramlinetrios

2.6Settingprotectivestopswithtramlines

2.7Whentramlinescrossover–theChinesehat

2.8Usingthethirdtramlinetosetapricetarget

Summary

Part2:HowToTradeTheTramlineMethod

Chapter3:TradingWithTramlines,FibonacciandElliottWaves

3.1TheTramlineTradingRules

3.2Tradingthetramlinebreak

3.3Tradingtheheadfake

3.4Tradingthewedge

3.5Tradingthe“V”

3.6Tradingthekissandscaldedcatbounce

3.7HowtouseFibonaccilevels

3.8UsingbasicElliottWaveTheoryconcepts

3.9Contextiskey

Summary

Chapter4:MyFiveBestTradeSetups

4.1TheA-B-Csetup

4.2Thetramlinebreakandkiss

4.3TheFibonacci62%retrace

4.4Thetramlinebounce

4.5Thethirdwave

Summary

Part3:MyTradingDiary

IntroductiontomytradingcampaignsingoldandtheDow

TheGoldCampaign

TheDowCampaign

MyElevenCommandments

Resources

AddtoyourHarrimanHousetradinglibrary

DiaryofaCurrencyTrader

Supertiming:TheUniqueElliottWaveSystem

PublishingdetailsHARRIMANHOUSELTD3APennsRoadPetersfieldHampshireGU322EWGREATBRITAINTel:+44(0)1730233870Email:enquiries@harriman-house.comWebsite:www.harriman-house.com

FirstpublishedinGreatBritainin2014byHarrimanHouse.Copyright©HarrimanHouseLtd

TherightofJohnBurfordtobeidentifiedasAuthorhasbeenassertedinaccordancewiththeCopyright,DesignsandPatentsAct1988.

ISBN:978-0857193-95-7

BritishLibraryCataloguinginPublicationDataACIPcataloguerecordforthisbookcanbeobtainedfromtheBritishLibrary.All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, ortransmittedinanyformorbyanymeans,electronic,mechanical,photocopying,recording,orotherwisewithout the priorwritten permission of thePublisher.This bookmay not be lent, resold, hired out orotherwise disposed of byway of trade in any form of binding or cover other than that inwhich it ispublishedwithoutthepriorwrittenconsentofthePublisher.No responsibility for loss occasioned to any person or corporate body acting or refraining to act as aresultofreadingmaterialinthisbookcanbeacceptedbythePublisherorbytheAuthor.

Followus,addus,likeus

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www.facebook.com/harrimanhouse

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TheTramlineTradingAlertService

Manybookson trading thefinancialmarkets leaveyouhighanddryafteryouhavefinishedreading.Idecidedtochangeallofthat.WithmyTramlineTradingAlert service, you can follow what I am doing as I analyse promising tradesetups.

My plan is to issue from three to five email Alerts amonth, with eachAlertcontaining several trade setups. Iwill cover allmajor currency crosses,majorstockindexes,gold,interestratefutures,andanoccasionalindividualshare.

AsyoureceivemyAlerts,youwillseemytoptradesetupscometolife.Thisislikehavingmelookoveryourshoulderasyoustudythemarkets!

Visit tramlinetradingalerts.com for more information and to sign up for theAlerts.

Abouttheauthor

John trainedasaphysicist andholdsaPhD inPhysics from theUniversityofToronto.Heworked for a time forNASA inWashingtonD.C. in theMannedMarsExplorationTeam.Afterleaving,hediscoveredthefinancialmarketsandhas been involved with them on and off for over thirty years. John was aCommodityTradingAdvisorforaperiodataLosAngelescommoditiestradingfirm.

He has started and sold several real businesses, and now devotes full time totraining,writing,tradingandconsultingonthemarkets.

John is Editor ofMoneyWeek Trader, an email service aimed largely at UK-basedspread-betters.Healsooperateshispersonalblogattramlinetraders.com.

Acknowledgements

Iwishtogratefullythankallofmyearly-yearschoolteacherswhohelpedshapemy life, all the while suffering my in-born contrarian nature. My very firstschoolreportatthetenderageoffivedefinitivelystated:“Johnisveryerratic.”Ihavebeenstriving to rein in themostextrememanifestationsof this trait eversince.

In thesamespirit, Iwish to thankallof thosemany traderswhoextractedmytradingtuitionfeesfrommyearlyaccounts.I’msuretheydidnotrealiseit,butthey were performing a great service tome. Perhaps those very same traderswent throughanidenticalprocess themselvesandconsideredtheirsuccessalsowasbasedontheirownearlyexpensivelessons.Isthereanythingnewunderthesun?

But my most vivid trading lesson was given to me by Mark – a fellowcommodity broker –whomanaged to short the S&P on the Friday before 19October 1987. When the market opened on Black Monday with a huge gapdown, he added to his shorts. By the close of trading, his $30k account hadswelled tooverhalf amilliondollars. In1987 thatwas realmoney!However,whenthemarketstarteduponTuesdayhekeptshortingonthewayup.Thiswasafatalmistake,becausethemarketrecoveredsofarthathewaswipedout.

So, thanksMark, for having taught me that when I have a massive windfallprofit,itisbesttotakeatleastsomeofthoseprofitsoffthetable.Also,Ilearnedthenthatitisfataltofightthemarket,nomatterhowstrongyourbelief.

A further early lesson was provided by another former colleague, Peter, whotaughtmethattheartofmarketforecastingisavastlydifferentskillfromthatoftrading. Peter was an excellent predictor of trends, but constantly lost moneywhenhetraded.Thiswasbecausehedidnothavethecourageofhisconvictionsattherighttimeandwasalwaysgettingintoolatejustbeforeabigcounter-trendmove.

BothMarkandPeterwerefuturesbrokersatthesamecommissionhouseinLosAngeleswhereIcutmytradingteeth.Thisgavemetheinvaluableopportunity

of observing at first hand themany destructive habits that some of the firm’scustomerswereproneto.

That was yet another lesson I learned – that trading is unlike a moreconventionalactivity, suchasbeingadoctoror lawyer.Somy thanks toallofthesecustomerswhoshowedmethatIhadbettergetaproperunderstandingofhowthemarketsreallywork,whichisstilltodayappreciatedbyonlyafractionofpeople.

Finally, while writing this book I had the loyal companionship of my JackRussellDixie,who provided critical approval of all Iwrote.All she asked inreturnwasadailywalkat9:30am,prompt.

Preface

WhatthisbookcoversI am reading a book on day trading at the moment. It is full of complexindicatorsthatmaybesuitableforsometraders.Butitisnotforme.Followingallof those indicatorswouldbe tooconfusing; Iwould tiemyselfup inknotskeepingtrackofwhatalloftheindicatorsaredoing!

Mymethod,ontheotherhand,allowsyoutohavealifeoutsideoftrading.Iusestopor limitorders fornearlyallmy trades.Thesecanbeentered inadvance.Andwhenadjustmentsareindicated,thesecanbemadewhenyoureturntoyourscreen.Themarketorderbecomesararityifyouwishtotradeinthisway.

This approach has the added benefit of keeping you away from your screenwhereyoumaybe tempted tochangeyourmind(in technical jargon: tofiddlewiththeplan).Howeasyitistowatchthemarketmovedowntowardsyourstopandexitprematurelytoavoidfurtherloss,or(anevenworsesin)towidenyourstoptogiveitalittlemoreroom.Stayingawayfromyourscreenforcesyoutokeepdisciplined–anessentialtraitinalltraders.

My tramline method should appeal to the more conservative part-time (yetserious) trader,wherewinning swing trades typically last for some hours to afewdaysataminimum.Inmycase, theaverageholding timeforasuccessfultrade ismeasured in a fewweeks. I havehad trades that turned intomonsterslastingseveralmonths.Buttheyarequiterareandtheyarenotmymainfocus;Ilookupon theseas the icingon thecake.Thebulkofmyprofitscomefromasteadyaccumulationofdecentswingslastingafewdaysorweeks.

The tramline method is a simple and complete system which combines myoriginaltramlineconcepts,theFibonaccilevelsandbasicElliottWaveTheory.Itwillappealtotradersofalltypes,fromtheverybeginnertothemoreadvanced.It can apply to many markets, but I personally only trade the large currencycrosses, the large stock indexes, gold and Treasury Bonds. I generally avoidindividual equitymarkets because they can offer up sudden shocks, such as akeymanagerdeparture,oranovernightprofitwarning.ThemarketsI tradedonothavethesedisadvantages.

In the book I indicatewhere precise trade entry levels and stop losses can beplaced.Akeypartofmymethodistousestrictmoneymanagementruleswhichallowsforlow-risktradesonceyouhavethetradesetup.

WhothisbookisforIhavewrittenthisbookfortheserioustraderwhotreatshistradingasaproperbusiness. Iamassumingyouknowthebasicmechanicsof trading, thevarioustypesoforders,themarketsthemselves,whatlongandshortmean,andhowtoread the COT (Commitments of Traders) report, which is a source of muchusefulinformationconcerningthesentimentandpositioningoftraders.

Thisisnotabookforthedaytrader.Therearegoodmethodsavailableforsuchactivities,buttheyrequireyoutobealerttoyourscreenthroughoutthetradingday. This book is aimed at the time-poor trader who can (or wishes to) onlydevotelimitedtimeinthedaytothescreen.

Thebasisofmymethodischart-reading.Thatis,findingrecognisablepatternsin charts that are reliable indicators of the nextmarket direction. I have spentyears simplifyingmymethods to the point where I believe that almost everywillingpersoncanquicklylearnthem.

I am assuming you have a basic knowledge of the principles of technicalanalysis(includingtramlines,ElliottWavesandFibonacciretracements).

And if you are among the group of traders who is using standard technicalanalysis and not achieving the results you wish for, you may be over-complicatingyourapproach–somethingIstudiouslyavoid. If thissounds likeyouthenIsuggestyougobacktobasicsandstartwithmymethod,whichusesonlythesimplestofelements.Youcanthenbuildfromthere.

ThestructureofthebookThisisapracticalbookwhichyoucanusetoapplytheprinciplesandrulesofmy method. I will not devote much space to an exposition of the theoriesunderlying my method. Since I believe a chart is worth at least a thousandwords,muchofthebookcontainschartswhichillustratethevariousaspectsof

mymethodinreal-lifesituations.AndIincludemanytipsandshort-cutsthatIhavefoundusefulinmyowntrading.

ThevastmajorityofthechartsaretakeninrealtimeasIwrotefromNovember2013 to March 2014, so I hope I cannot be accused of cherry-picking myexamples.Ibelievethisgivesthemapowerfulimmediacy.Italsohighlightsthewealthofgreat trade setups that themarkets are constantlyoffering the swingtrader over just a fewmonths. If you are following a handful ofmarkets, youshouldbeabletospotmanypossiblesetupsinaweek.

Thebookisdividedintothreeparts:

InPartI,Idevelopthetramlinetradingmethodinthefirstchapterwithsectionson support and resistance and how to find them on any chart. And there is asection on trendlines, which is the basis of my method. Then I describe myfavouritechartpatternsthathelpmefixmytrades.

Inthesecondchapter,IexplainhowIusemytramlinetechniquestofindhigh-probability/low-risktradesandhowtomanagethetradeswithcorrectstop-lossplacement.

InPartII,Iexplainhowyoucanapplymymethodwithpracticaltipsandideasincorporating basic elements from Fibonacci and Elliott Wave Theory. Iappreciate many traders find Elliott Wave Theory difficult to understand –identificationofthewavesandsub-wavescanseemarbitrary.ThatiswhyIonlyuse the very basic concepts of EW theory in my work. I believe that just amasteryofthesebasicswillpayhandsomedividends.

This part also contains practical ideas for overcoming problems we typicallyencounterinreal-lifetrading.OneofthemostimportantchaptersinthebookisChapterFour,whereIoutlinemyfivebesttradingsetups.

Finally, in Part III, I relate my day-by-day diary of two trading campaignswhereIoutlinemyanalysisinrealtimeandgivetheresults;win,loseordraw.IhopethissectionwillbeparticularlyusefulinshowinghowIsetuprealtradesand how Imanage them in the heat of the battle. I find that formost traders,trademanagementisthemostdifficultdisciplinetomaster.Itissaidthatgetting

intoatradeiseasy,itisthegettingoutthatismoredifficult–thatiswheremytramlinemethodpaysdividends.

To conclude the book I offer my Eleven Commandments which, if observed,should keep you out of trouble and put you on the correct path to tradingsuccess.

IntroductionTworoadsdivergedinawood,andI—Itooktheonelesstravelledby,

Andthathasmadeallthedifference.

RobertFrost

Therearecertainuniversalchartpatternsthatmarketscontinuetotraceoutthathave stood the test of time and that can be instantly recognised by a skilledtrader.Andwhenyoulearnhowtospotthesepatternsandunderstandwhattheymean,thenyouhavethebasisofasolidtradingmethod.

InthisbookIwillshowyouthepatternswhichIhavefoundextremelyreliablethat have helped me develop a complete trading system using only the mostbasicofelements.Icallitthetramlinetradingmethod.Itisprobablyoneoftheeasiestmethodstomaster.

Ifirstbecameastudentofchartingintheearly1970s,wellbeforetheadventofpersonal computers and electronic trading. To get amarket quote I needed toringmyfuturesbroker,therewasnowaytokeepanhourlybarchartupdatedinreal time and I kept my paper charts updated using a pencil. Yes, it wasprimitive.

But what fascinatedme was the fact that by examining patterns on the dailychart,Ibelieveditpossibleforareasonablyskilledanalysttomakeaforecastoffuturepriceaction.Andwith littleornoknowledgeof thefundamentalsupplyanddemandfactorsofthemarket.

ThebibleofchartingthenwasEdwardsandMagee(TechnicalAnalysisofStockTrends,byRobertD.EdwardsandJohnMagee(CRCPress).)–adoorstopofabook that coveredmost of the classic patterns. There is a large section in thebookdevotedtoreversalpatternsandthatwasthepartthatgrabbedmyattentionthemost.Infact,becauseofmyinterestinreversalpatterns,thetramlinetradingmethod I developed enablesme to focus on trend changes and turning points,althoughnotexclusively.

EarlyonmyimaginationwasgrippedwiththepossibilitythatifIcouldidentifyapatterncorrectly,IcouldforecastthenextlikelymoveandImightalsobeableto set a price target.Thatwas an exciting prospect. Itwas exciting because itwouldenablemetogetonboardamajortrendearlyinitsdevelopmentbeforethemajorityhadcottonedon.

But a glance at Edwards and Magee told me that charting could be a verycomplex areaof study.Thebook lists a vast arrayof basic patternswith theirmanyvariations.

For some years I then retreated from the markets to pursue other businessinterests.But the sirencallof themarketwasalways there in thebackground.AndwhenIfeltIhadachievedenoughwiththoseotherbusinesses,Isettoworkondevisingasimplemethodofanalysingpricecharts.

Thesimpleconceptofsupportandresistancelinesissomethingmoststudentsoftechnical analysis learn early on; I believed there could be a method thatembodiedthisconceptinanewway.Idecidedtobaseatradingmethodonthesesupportandresistancelines.

That iswhen the tramlinemethodwasborn.Andsinceworkingwith it Ihaveincorporated the basic ideas from Fibonacci retracements and Elliott WaveTheorytoproducemycompletetramlinetradingmethod.

My guiding light was to keep the method as simple as possible with nocomplicatedmaths, and to employ aminimumof tramlines on any chart. Toomanylinesanditgetsveryconfusing,whichissomethingtobeavoided.

Themethodpresentedhereisacomplete,objectivesysteminitselfandischart-based.Chartingbeingavisualmethodwherewelookforrecognisablepatternsthat have repeated time and time again and which help us forecast pricemovementswithhighreliability.

Ibelievethatalthoughmymethodsaresimpletolearnitisintheapplicationthatmakestradingthemchallenging.

Whychallenging?

Itisthehumanfactorthatcanmakeatraderoverridewhatthemethodistelling

them.InthisbookIdonotgointothepersonalityhurdlesthateachtraderfaces– there are many useful volumes that already address that aspect and I dorecommend you to read further on this subject. In fact, as part of my ownongoingdevelopment,Istillreadandstudybooksandarticlesonpersonalityandhowitaffectstrading.

Asyouknow,tradingthefinancialmarketsisnotforthedabbleroramateur.Nosuccessfultraderevertakesapunt–thatisfortheracecourse.Weareupagainstthesmartestmindsontheplanetwhosesingle-mindedaimistotakeourmoneyawayfromus.But,withmymethods,Ibelieveyoucanhaveanedgeoveryouropponents.

If,likeme,youbelievethatsimplicityisameanstounderstanding,thenIhopeyoufindsomeusefulideaswithinthisbook.

Ihaveonlyonegoldenrule:keeplossessmall.

Ifyouaresuccessfulinthatallelsefollows,becauseyourtradinglifewilllikelybealongone.

Part1:TheTramlineTradingMethod

Chapter1:MyChartingMethods

InthischapterIwillreviewsomeofthebasicconceptsinchartingandexplainhowIuse themwithmyfavouritechartpatterns touncovergreat tradesetups.Thechapterhasfoursections:

Supportandresistance

Trendlines

Myfavouritechartpatterns

Momentum

1.1Supportandresistance

Supportandresistancelevelscanhelpyouidentifygoodentryandexitpoints.Ifamarketisdecliningintoasolidsupportzone,theoddsaregoodforabounceofsomesort;orifamarketisrallyingintooverheadresistance,oddsforaturnarehigh.And notingwhere the support/resistance levels are located can give youaddedconfidenceinatradethatyouhaveidentifiedbyothermethods.

Becausesupportandresistancezonesarederivedfrompreviouspriceaction,itisclearthatmarketshavememories.Marketsrememberthepricelevelswheretradershavepreviouslyestablishedtheirpositionsandcurrentpricepatternsareinfluencedbythem.Iwillexplainhowthisworksinthischapter.

Iusefourdifferenttypesofsupport/resistancelevels:

horizontalsupport/resistancelevelsincongestionzones

trendlines(slopinglinesofsupport/resistance)

Fibonacciretraces

chartsupport/resistance

Wewillnowlookattheseindetail.

1.Horizontalsupport/resistancelevelsThe horizontal support/resistance zone is one of the most basic of chartingpatterns.Onemajorfeatureoftheselevelsisthatasupportlinetransformsintoaline of resistance after themarket has penetrated the support (andvice versa).Figure1.1.1isagreatexampleofsupport/resistanceareasingold.

Figure1.1.1

Thisisthe15-mingoldchartandtheresistancelevelof$1238isclearlyvisiblewithseveralhightouchpointsbetween14and16December.Then,theattempttobreakup through the resistanceon16Decemberwas successfulwithmanybuy-stopordersbeingtriggered.Manychartistsnotetheseresistancelevelsandplacetheirprotectivebuystopsjustabovethislevel.Thesearethebuy-stopsoftheshortsthatarehitwhentheresistanceisovercome.Therearealsoentrybuy-stopsplacedtherebythosetraderslookingtobelongonsuchanupwardbreak.Afterthosebuyorderswerefilledthemarketfellbackinanormalre-testandtheresistancezonethenbecameasupportzone.

On17December, themarket fellback to test thenewsupportzone.Thisheldandthemarketproceededtotesttheresistancezone.Thiszonewascreatedbythelowsatthe$1240level.Whenthoselowswerebroken,sellstop-lossesweretouched. So now, the market is trading between a narrow support and aresistancezoneandwillbreakoutofitinduecourse.

Sowhatweretheinternaldynamicsofthemarketinthisperiodandwhydoesaresistancelineturnintoalineofsupport?

Iwill startwith the idea that thecurrentmarketprice isdeterminedbyonlyasmallnumberoftraders.Ittakesonlyonebuyerandonesellertomakeaprice.

Whenyouhavetakenapositioneitherlongorshort,youhavenomoreinfluenceonthepriceuntilyoudecidetotradeagain.

So, because short-term players will be trading much more frequently thanpositiontraders,theseshort-termtradersdeterminetheshort-termpricepatterns.Manywillbetradingseveraltimesaday.Becausethesetradersareshootingforrelativelymodestgainspertrade,theyalsolimitlossesonlosingtrades.

Let’stakeatraderwhonotedtheinitialresistanceat$1238anddecidedtoshortthemarketwhenitreachedthatlevelagain.Withthebreakingofthisresistanceon16December,thattradeisaloser.Whenthetraderseesthemarketgetawayfromhimasitralliesto$1250,heknowshehasalosingtradeandwillnaturallyseek toexithis trade if themarketgetsback tonearhisentry, thusenablingasmallerloss.

Inaddition,therewillbetraderswholooktogolongonadeclinetothe$1240supportandthiswillcompoundthebuyingpressure.

That is why, when the market retreated to the $1240 level, many shorts arecovered and new longs initiated, thereby providing buying support. Similarly,when themarket broke the $1240 support, it got back to the $1238 area andmore buying emergedby the shortswhohad a losing trade previously. Figure1.1.2showshowthatplayedout.

Figure1.1.2

The resistance at the $1240 levelwas strong enough to turn the budding rallyback on 17 December. And then the $1238 support level was breached. Themarketthenfellundersustainedsellingbythedisappointedbulls.Thebearshadwon.

Ashorttradecouldbemadeonthebreakofthesupportlowinthe$1236areabecausewiththebreak,theprevioussupportlinenowbecomesresistance.Anyralliesshouldbecontainedby thisresistance in the$1238area.Thisenablesaprotectivestoptobeenteredjustabovethislevelforalow-risktrade.

Ihave justdescribeda short-termsupport and resistance setupwithhorizontalzones.Wecanalsofindhorizontalsupportandresistancezones in longer-termcharts.

Figure1.1.3showstheweeklyFTSE100.Thetopbar in thischart isaseven-year resistance zone, and the bottom zone is both resistance and support (atvarious times). The most recent decline in June 2013 was contained by theseven-yearsupportzone,and themost recenthighsarebeingcontainedby theseven-yearresistancezone.

I hope you find this an impressive demonstration that markets have longmemories.ItisathemeIwillkeepcomingbackto.The6,000and6,800areasareveryimportantfortheFTSE100,whichmeansthatifthemarketgetsbackto

eitheroftheselevels,itwillbewellworthnotingforapossiblelong-termtradesetup.

Figure1.1.3

2.Trendlines(slopingsupport/resistance)The trendline is another very basic element of charting. It is the basis ofmytramlinemethod,whichIcoverindetailinSection2.1.

Ifweconsiderabullmarket,thepricepatternisaseriesofmovesupanddownbut travelling generally in an upwards directionwith higher highs and higherlows.

It is a curious fact that often the lows of these waves can be connected bydrawingastraightlinebetweenthem.Whythisphenomenonexistsisamysteryandmostofustakeitforgranted.

AnexampleisshowninFigure1.1.4.

Figure1.1.4

Therewerethetwomajorlowsin2012andIhavedrawnastraightlinebetweenthemandextendedit.Thisisalineofsupportinabullmarket.MonthslaterinJune the market made a major low right on the line and then resumed itsuptrend. Themarket had remembered the previous lows and bounced off thislineofmajorsupport,whichwassetonthechartmonthspreviously.

Butnotalltrendlineshavesuchaccuratetouchpoints.

HowdoIfindthebestfitforatrendline?

Tohelpanswerthis,IwillbrieflyexplainwhyIprefercandlestickchartstobarcharts.

The reason for this relates to candlesticks containingwhat I callpigtails – thethinlinesaboveandbeneaththesolidbodyofthecandlestick.

Figure1.1.5willhelpmetodescribewhatImean.

Figure1.1.5

Onthe10:00amcandlestick,thebottomofthebodyistheopeningpriceforthathourand the topof thebody is theclosingprice for thathour.The lowof thepigtailisthelowestpriceinthathour.Thispigtailmayhavebeenaspikymove–aquickdownandthenupasstopsarehitandthedipissupported.Forme,themostimportantsectionoftradingisbetweentheopeningandclosingprices–inotherwords,thethickbodyofthecandle.Andthissectionismostreadilyvisibleonacandlestick.

For thisreason,Isometimes(butnotalways)cropoff thepigtailswhenI lookfortrendlines.

AgreatexampleisshowninFigure1.1.6.Here,IcroptheupperpigtailwheremarkedbecausemylinemakesabetterfitonthelowertouchpointandInowhave three touchpoints (themore touchpoints thebetter).My job in trendlineplacementistomakethebestfitfortheavailablehighsorlows.

Doesitmatterhowpreciselyyoudrawthetrendline?

The answer is: it all depends. If you are looking for a reversal from a down-sloping trendline, you would be placing your entry buy stop just above thetrendline,hopingtocatchasharprallytakingthemarket throughyourstop.Intheaboveexample,beingtooaccuratewasnotnecessarybecausetherallywassharp.

However, ifyouare looking to tradewith the trendandenter themarketatorvery close to the trendline, being accurate in trendline placement is necessarywhenseekingalow-risktrade.Ishallshowsomeexamplesinthenextsection.

Figure1.1.6

Now,backtolookingfortrendlines.

WhenstartingtolookforatrendlineIalwaysstartwiththetop(orbottom)tickandswivelmylineuntilIcanvisuallylineupatleastoneotheraccuratetouchpoint.IfIhavemorethanoneaccuratetouchpoint,thenIcanusuallysaythatIhavemybestfit.

But,ifnot,thenImustcompromiseevenifitmeanscuttingoffpigtails.

IntheexampleshowninFigure1.1.7Ihavetwoalternativetrendlines.Thelinestartingat theextremehighon30Novembercutsoffpigtailson10Decemberbutincludesthelatesthighasanaccuratetouchpoint.Thatisgood.

The other line cuts off the pigtail on the 30November high and includes theaccurate touch point on 10December, butmisses by awidemargin the latesthighs. Ifyouwere trying to lineupa short tradenear this line,youmayhavemissedanopportunity.

Figure1.1.7

Sadly, there isnoeasyanswer to thequestionof trendlineplacementwhentheabsolute highs (or lows) do not exactly line up. But when we examine theequivalenttramlineplacement,itoftenclearsupthisquestion.Whichtrendlineought to be drawn on the chart in Figure 1.1.7 is cleared up using tramlineplacementinSection2.2.

Figure1.1.8providesagreatexampleingold(whichisamarketnotoriousforpigtails).

ThereareseveraloptionsfortheuppertramlineplacementinFigure1.1.8.SoIstart with the lower tramline instead. And here, I have an accurate tramlinecomplete with a pigtail cut-off. There really is no other way to place thistramline.Ithastwoaccuratetouchpointsandapigtailcut-off.

With this tramlinenowfixed, Ican thendrawin theupperparallel tramlineasshown.Previously,theuppertramlinehadoptions,butwiththelowertramlineinplace,theupperlineisnowset.Itstartsfromtheabsolutehighatthetop,left-

handarrow(infact, it isadoubletouchpoint)andtherearetwootherwidely-spacedaccuratetouchpoints.

Thesecondupperarrowpoints toanovershoot.Overshootsdonotnecessarilyinvalidatea trendline,but if therearemorethantwobigones,Iwouldnotusethattrendline.Thelinehasfourtouchpoints,makingthistramlineasecurelineofresistance.

Itisquiterare–andreassuringwhenitdoeshappen–tofindmorethanthreeorfour touch points lining up accurately on a trendline. You must allow someleeway.

Figure1.1.8

Using a pair of parallel tramlines in this way enables me to place both linesaccurately.IwilldiscussthisinmoredetailinSection2.2.

Trendlinefitting

TheruleIadheretoisthis:themoreaccuratethefit,themoreconfidenceI can have in the tramline (or tramlines) as a reliable line ofsupport/resistance.

3.Fibonaccilevelsaspotentialsupport/resistanceThe Fibonacci tool on your charting package is one of themost important inyourtoolbox.IusetheFibonaccilevelstoanticipatemarketturns.Theycanberemarkablyaccurate,enablingyoutoenter tightprotectivestopsfora low-risktrade,providedthisisindicatedfromadditionalanalysis.

The only decision you have to make is from which pivot points to draw theFibonaccilevels.Bypivotpoint,ImeanthehighandthelowthatarechosentodivideintothevariousFibonaccilevels.

HowcanIfindthebestpivotpoints?

Ihavefoundthatthepivotpointsthatusuallyworkbestarethemostrecentsignificanthigh and low.But thesemay not always get the best results.Yousee,wearelookingforthebestfitofthelinestothehighsandlowsbetweenthepivotpoints.Sometimesthisisobtainedwhenthesecondsignificanthigh/lowisused.

Tostartthesearchforthebestfit,IalwaysgoforthemostrecenthighandlowasmypivotpointstotestmyFibonaccilevels.Figure1.1.9helpstoshowwhatImean.

Figure1.1.9

Here, Ihaveused themajorhighand lowaspivotpointsandrightawayIseethat the twomajor interveninghighs aremade at theFibonacci 62%and50%levels(indicatedwiththefirsttwoarrowsasyoureadfromtheleft).Thisoccursbeforethelowpivotpointisputin.Then,ontherally,themarketwasturnedattheFibonacci62%level(mostright-handarrow).Thefactthatthemarketmadethose accurate hits (left-hand arrows) previously increasedmy confidence thatthesubsequentrallywouldlikelyturnataFibonaccilevel.

Doesusingtheextremehigh/lowalwaysgivethebestfit?

Sometimes,usingtheextremehighorlowforpivotpointsdoesnotgiveyouthebest fit.By this Imeannoneof the intermediatehighs/lows lyingbetween thepivotpointsdonotlieeasilyonthevariousFibonaccilevels.Tomakeabestfit,Ineedtoseeatleastonemajorhigh/lowaccuratelytouchaFibonaccilevel.AnexampleisshowninFigure1.1.10.

Figure1.1.10

Here,Ihaveusedthesecondmajorlowaspivotpoint(pp)andnotetheaccuratehitsontheFibonacci62%,50%and38%levelsonthewayuptothehighpivotpoint(thesehitsaremarkedwiththefirstfourarrowsasyoureadfromtheleft).Andtoconfirmthischoice,followingthehighthemarketdeclinedtoanexacthitontheFibonacci38%supportlevel(markedbythemostright-handarrow).Thatwasalow-risktradeentrylevel.

NotethatIhadfourearlierarrowsandfouraccuratehits.HavingfourhitsgivesmegreatconfidenceIhaveselectedthecorrectpivotpoints.

Myruleofcheckingthesecondpivotpointaswellasthemajorhigh/lowonlyappliestotheearliestpivotpoint,notthelatestone.Infact,thissecondhigh/lowisoftenawave2(w2)inafive-wavesequence(seeSection3.8forElliottWaveanalysis).Asithappens,intheaboveexampletherallyisnotaclearfive-waveimpulsepattern.

Iwillalwayscheckthesealternativepivotpointsinthiswayformybestfit.Ingeneral,themoreaccuratethehitsarebytheintermediatehighs/lows,themoreconfidenceIwillhavethatIhavemybestfit.Ofcourse,ifthemarkethasmadeanaccuratehitonashallowFibonaccilevelafterthemostrecentpivotpointhasbeen made, and the market then digs deeper into the retracement, theapproaching Fibonacci levels will give me high confidence that turns will bemadeatoneofthem.

4.Chartsupport/resistanceIntraditionalcharting,acongestionzoneisanextendedperiodoftradingwhichtakes place in a relatively narrow range of prices. Themarket swings up intoresistanceandthendownintosupportandthenupagainwithnocleardirection.Thiscandriveyoumadifyouaretradingbreakoutsandyoucanbewhipsawedtodeathonthefalsebreakouts.

Congestionszonesareverycommoninchartsinalltimescales.Theyrepresentakindofequilibriumbetweenthebullsandthebearswithneitherhavinganupperhandinthatperiod.

Whattypicallyoccurswhenthemarketbreaksoutofacongestionzone?

When the market does manage to break away from a congestion zone andapproachesitagain,themarketisoftenturnedawayfromtheedgeofthezone.Inotherwords,theouterlimitsofthecongestionzoneactassupport/resistance,whereasbeforeitwasresistance/support.

AnexampleisshowninFigure1.1.11.

Figure1.1.11

The congestion zone is highlighted. Within the zone, every time the marketapproachedthelowerandhigherlimit,itwasturnedback.Theselimitsactedassupportandresistance.Thenthemarketbrokeupoutofthezone.Whenittriedto fall back into it, it hit support at the upper limit. Themarket then climbedaway,butwhen it declinedoff the1.38 level, it hit support againat theuppercongestionzonelevel.

Thissupportlevelwaspreviouslyresistancewhenthemarketwastradinginsidethezone.Icallthischartsupportanditisanotherresultofthemarkethavingamemory.

Figure1.1.12showsanotherexamplewherethereisasmallfalsebreakoutofthecongestionzone,whichhasbrokentothedownside.Now,themarketistryingtorally back and has hit the underside of the zone. This level is now resistancewherepreviouslyitwassupport.

Figure1.1.12

With no other knowledge, a short trade heremight seem a good trade as themarkethadralliedintoresistanceandthenextmoveshouldbedown.

So,wasthisanadvisabletrade?

To answer that question we must always consider the contextof the trade inquestion(seeSection3.9).AnalysingtheElliottWaves(EW)fromthetop,mywavelabelsareshowninFigure1.1.13.

Before thebreakofchartsupport, Icancountwaves1,2,3,and4.Wave3 isstrongtothedownside(thestrongest(lowest)momentumreadingoccurswithinthiswave,whichisaguidelineofElliottWaveTheory)andthereisabuddingpositivemomentumdivergenceatmywave5 low,confirmingthata turnupisverylikely.

Figure1.1.13

Withthisknowledge,youshouldbeexpectingatleastsomeupwardretracementofthedeclineoff thew5low;thusthesuggestedshort tradewasnotadvisablebecausefifthwavesareendingwaves.Ofcourse,beforethew5lowwasmade,Ihadnoevidencetherewouldbeamomentumdivergence,butsinceIcouldcountfourwavesandinferthefifthlayjustahead,Icouldgivethistradeapass.

AnothergreatexampleofwhatImeanbyunderstandingcontextisshownintheTescochartinFigure1.1.14.

Tescohasralliedandhasenteredadefinitecongestionzoneoftradingwiththepriceconfinedbetween the twosupportandresistancebarson thisdailychart.Andnowithasbrokenupoutofcongestion.

Isthisagoodlongtradesignal?

Onceagain,IalwayslookforcontextatanypossibleElliottWavecountwithinthecurrentwave.Mynormalroutineistostartatthelowandworkupwardsinabulltrend(oppositeforabeartrend).Icancountperhapswaves1and2andthelongandstrongwavehasallthehallmarksofathirdwave(seeFigure1.1.15).Infact, whenever I see a long and strongmove, I always suspect I have a thirdwave.Thatismystartingpointonmanycharts.

Figure1.1.14

IfIhavethefirstthreewaveslabelledcorrectlyandthelasttouchonthesupportlineismywave4,thenthebreakoutcouldwellbeafifth(andending)wave.I

donotwanttobetradinglongintoafifthandfinalwaveup!Andsureenough,mysuspicionswereconfirmedthatthewave5breakoutwasafalsebuysignal,asyoucanseeinFigure1.1.15.

So, I have a complete fivewaves up and the nextmove is down.ThisElliottWave interpretationwasaidedby the largenegativemomentumdivergenceonthebreakout.Infact,thewave5breakoutwasasellsignal,sincefifthwavesarebesttradedbyfadingthem.

IfIhadgonelongontheupsidebreakoutinwave5,Iwouldbenursingaheavylossonthegapdown.

Thisisanexcellentexampleofhow,byreadingtherelevantElliottWaves,youcanavoidcommonpitfalls.

Figure1.1.15

AnothergreatexampleofreadingElliottWavestoinformyourtradingdecisionscanbeseenintheverylong-termchartofAUD/JPYinFigure1.1.16.

Figure1.1.16

Fromthe2008low,themarketralliedandenteredamulti-yearcongestionzonewhichhasveryprecisesupportand resistance levels.Thecongestionzone isawideoneofover1000pipsandofferedmultipleopportunitiesforswingtraders.Thezonewasformedfromtheresistancelevelprovidedbythelowinearly2008andthesupportjustabovethe70area.

Butinearly2013,themarketmanagedtomakeabreakupfromthezone.

Wemustalwaysaskthequestion:isthisagenuinebreakorafalsemove?

Agenuinebreakwouldinvolveamajornewbullrun–preferablyinathirdwave–toabovethehighsof2007/8.Afalsebreakoutwouldinferadeclinebacktosupportandperhapsthestartofanewbearrun.

Atthisupwardbreak,theElliottWavelabelsareclearandthebreakoutisafifthwave into2013.That isnot tosaya long tradewas inadvisable.Onthisscale,therallycarriedbyover1000pipsinafewmonths–averysubstantialmoveforaswingtrade.

Then the market topped out in the 105 area and dropped back towards thecongestion zone, but found good support when it hit the extension of thepreviousresistancelevelfromthecongestionzone.This isa textbookexampleof a long-term resistance level transforming into support after its upwardpenetration.Thatwasagoodarea to look foranew long trade.Thedownsideriskwaslowbecauseofthestrongsupport.

Finally,Figure1.1.17isachartshowingthecongestionzoneasacontinuationpattern.

Figure1.1.17

Hereisthecontext:IamunabletoplaceElliottWavelabelsonthedeclineandtome,it isclearthiszoneisnotawave3/wave4combinationasintheaboveexamples.Thisallowsthepossibilitytotakeashorttradeonabreakofsupportwithconfidence,sincethetradewouldbetradingwiththetrend(down).

Summary1.Ilookforfourtypesofsupport/resistance:

Horizontal

Sloping(trendlinesandtramlines)

Fibonaccilevels

Chartsupport/resistanceincongestionzones

2.Marketshavememories– that iswhy thenotionofsupportand resistanceoccurs. Be watchful when the market is entering an old area ofsupport/resistance.

3. Always judge the context of the pattern within waves, especially if theElliottWavescanbereadilydiscerned.

4.Watchfor falsebreakouts, especially if in the fifthwaveposition.Youcanlook to fade these.This applies especiallywhendealingwith chart congestionzones.

5.Ingeneral,whenthemarketisdescendingintoasupportzone,looktotradelong.Andwhenitisascendingintoaresistancezone,looktotradeshort.ButtrytofindotherreasonsforthetradefromtramlinesorElliottWaveanalysis.

6.AlwaysapplytheFibonaccilevelswhenyouhaveamajorhighandlowinplace.Thesewillgiveyou themost likely turningpoints foranycounter-trendmove,andthe50%and62%levelsarethemostcommon.Tryforabestfitwiththe second major high/low as the earliest pivot point. This may make theintervening highs/lows lie more accurately on the various Fibonacci levels.Whenseveralminorinterveninghighs/lowslieontheFibonaccilevels,youcanhavehighconfidenceinthemasfuturesupport/resistancelevels.

1.2Trendlines

Trendlines are thebackboneofmymethod.Theyare the straight lines joiningeitherthelowsorthehighsinachosenperiodoftradingwithnomarketmoveseitherabovetheline(inthecaseofjoiningthehighs),orbelowtheline(inthecaseofjoiningthelows).Thehighsandlowsinachartdefinethevariouswaveswhichmaybesuitableforswingtrading.

Becausemarkets havememories, trendlines appear very often on charts of alltimeframes.However,inmyexperienceitisrareforallofthehighs/lowsinanycharttolineupperfectlyaccuratelyandthegreaterthenumberofhighs/lowsthemoreoftenwemustresorttotweakingthelineforabestfit.

Figure1.2.1showsanexampleinEUR/USD.

Figure1.2.1

Here isa textbook trendline. Ihave threehighlyaccurate touchpoints thatarereasonablyevenlyspacedandacoupleofnear-missesalongtheway.Thismakesitahighlyreliablelineofsupport/resistance.NotethatintheperiodtothelateDecember break, this line acted as solid support with no trading taking placeundertheline.

Andwhenthetrendlinewasbrokentothedownside,themovewasquitesharpasthelinethenbecamealineofresistance,forcingpriceslower.

Whenyouhaveaveryreliabletrendlinesuchasthis,andwhenthemarketdoeseventuallybreak through it, this isusuallyagenuinebreakgivingyouahigh-confidencetrade.Thetradecouldhavebeenplacedwitharestingshortsellorderplacedjustunderthetrendline.

Nowhereisanot-so-goodtrendline,showninFigure1.2.2.

Ihaveonlytwotouchpoints(thearrows)andapigtailtouch(thebar).Therearenotenoughaccuratetouchpointstocallthisahighlyreliabletrendline.Andtheperformancebeyondthebreakisalloverthemap!Themarketswervesupandthen down around the line, confirming the line as unreliable as a line ofsupport/resistancefollowingthebreak.

Figure1.2.2

HowmanyaccuratetouchpointsdoIneedforareliabletrendline?

Iliketoseeatleastthreeaccuratetouchpoints(ornearlyso)toconfirmIhaveasolid trendline that I can use as a basis for trading. Sometimes, this involveschoppingoffapigtailtogetthebestfit(aswebegantolookatearlier).

Figure1.2.3showsagoodexampleinGBP/USD.

Usingthelows,Ihavefiveaccurate touchpoints(withonesmallpigtail), thusmaking thisa reliable lineof support/resistance.Thiswasconfirmedwhen themarketralliedbacktothelineafterthebreaktoplantnotonebuttwokissesontheundersideofthelinebeforepeelingaway.

Figure1.2.3

But was that the only trendline joining the lows I could have drawn on thischart?

Let’sexplorethis,usingFigure1.2.4.

Figure1.2.4

I do have another trendline candidate for this chart (shown using the thicker,purple line),anditalsohasfiveaccurate touchpoints.Thismakes itareliabletrendline.Butinthisone,thereisnokissafterthetrendlinehasbeenbroken.

Wecanthereforeuseeitheroneofthesetrendlineswithconfidenceandabreakofeitherwouldgiveusashortsellsignal.

Butwhichwill beour primary linewill bediscoveredwhenwe search for itspartnerinthetramlinepair.WeshalllookatthisinSection2.2.

ThepointIwanttomakeisthis:itisquitecommontofindalternativetrendlinesofequalmeritonthesamechart.Andeachonecanbeusedfortrading.

1.3Myfavouritechartpatterns

TherearefourclassicchartpatternsthatIsearchforandtrust.Theyareallquiteeasytospotwhentheyareinprogressintheircompletionphase.Thesepatternsare:

Head&Shoulders

TrianglesandWedges

TheFive-WaveContinuation

TheKeyReversal

1.Head&Shoulders(H&S)This is a classicreversalpattern that is sometimes seen at the end of a longtrend,thoughnotalltrendsterminateinanH&S.Manytechnicianserroneouslyassignthispatterninthemiddleofaswingmove,ornotat theendofamajorrun.Inmyexperience,thetrueHead&Shouldersoccursinfrequently.Ilookforitespeciallyonthedailyandhourlychartsanditcanbeseeninbothafteralongrallyoralongdecline.

AgoodexampleisshowninFigure1.3.1onthehourlychartoftheT-Bonds.

Afterasoliddown-trendingphase,themarketmadealowintheLeftShoulder(LS), then ralliedbut couldn’t hold it anddropped to anew low to theHead,ralliedagainbutcouldn’tholdthatandthendeclined–butnottoanewlow–in the Right Shoulder (RS). From there, it rallied and broke through theNeckline (the line joining the minor highs between the Head and the twoShoulders).

Figure1.3.1

HowdoItradetheH&S?

TheNecklinebreakhasconfirmedthereversalpatternandnowthemarketwilllikelycomebackdowntotesttheNecklineinakiss.Therearetwocandidatesforalongtradeentry:attheNecklinebreakandatthetestingoftheNecklineatthekiss.Placingabuy-stopentryjustabovetheNecklineismypreferredtradeentrymethod.ProvidedthemarketbreaksabovetheNeckline,thatguaranteesaposition.Themarketoftenmovesverysharplyfromthesepatternsandyouwillhaveagoodentryusingthismethod.

TheothertechniqueistowaitforthemarkettotesttheNecklineafterthebreakhas occurred.What I am looking for is a kiss on the line and a Scalded CatBounce(seeSection3.6)upandaway.Theproblemhereisthis:thekissmaynothappen!Themarketcouldsimplytakeoffontheupsidewithoutyou.Butifyoumissit,youmissit–moveon.Youmaygetanotherlow-riskopportunitylater.AtleastyouhaveidentifiedanH&Sreversalandthetrendshouldnowbefirmlyestablishedandyoucanuseyourusualmethodsfromthere.

IfwetookthelongtradeontheNecklinebreak,wecouldplaceourprotectivestopjustbelowtheRS.Thisisaverysensibleplace,sinceabreakofthislevelwould very likely cancel out the H&S pattern and the market would likelycontinuelower,wherewewouldnotwanttobelong.

Howdidthistradedevelop?

Figure1.3.2showsthechartafewdayslater,wherewecanseethemoveupandawayfromtheH&Spattern.

Figure1.3.2

ThemarketdidretreattotesttheNecklineinakiss(withaslightovershoot),butstagedavigorousrallyinaScaldedCatBounce.ThatwasaniceconfirmationoftheH&Sbottom.

Figure 1.3.3 provides another example in the hourly chart of the HongKongStockIndex.

Figure1.3.3

Themarkethadbeeninastrongrallyphaseandinmid-Novemberhadmadeanewhighfor themove. It then tracedouta lovelycomplexHead&Shoulderswiththehorizontalnecklinealsolyingonchartsupportfromthepreviousminorhighof21October.ButinearlyDecember,themarketmadeaboldbreakoftheNeckline,thusconfirmingtheH&Spattern.TheNecklinethenbecamealineofresistance.Notethattheralliesbacktothelinefailedtokissit,whichindicatedanunderlyingweakness.

Whyisakissfailureimportant?

Wheneverthemarketsuffersakissfailuretoareliablelineofresistance/support,that is a sign the market likely wants to move sharply away. I use thisobservationasamajorsignalofmarketweakness.Kissfailuresarewellworthnoting.IcoverthispointinSection3.6.

Inthiscase,waitingforthatkisstogiveyouanentrywouldhaveprovedfutileand the best entry method was to place a resting sell-stop just under theNeckline.Most of the time, this will be the favoured entry method. Its greatbenefit is that youdonot need to bewatching themarket andwaiting for thebreak.WhentheH&Spatterniswelldeveloped,youcananticipatetheNecklinebreakandplaceyourordersaheadoftime.

CanItradethissetupusingrestingstoporders?

Whentradingnecklinebreaks,youcanplaceyourrestingstoporderquiteclosetotheneckline.Ifitisagenuinenecklinebreak,themarketshouldmoveawayinyourdirectionpromptly.Thismeansyoucanplaceyourprotectivestop juston theother sideof theneckline in case themarket reverses.Thiswouldgiveyouyourlow-risktrade.Butcheckthepipdifferentialfirsttoensureitiswithinyourrisktolerance.

Onepointtobearinmindwithrestingorders:keeptrackofthembecauseiftheygo unfilled, they are forever lurking on your trading platform and may beunexpectedlyactivatedataninconvenienttimemuchlater.Mypracticeisthis:iftheyarenottouchedinthetimeframeforthetradeIhaveinmind,thenIcanceltheorder.

Andhowdidthistradedevelop?

Figure1.3.4showsthedailychart,wherewecanseeanewlargerH&Spatternworking.

TheH&Spattern in thehourlychart isnowtheheadofa largerH&Spattern,whichwasconfirmedonthenecklinebreak.Isn’tthatpretty?TwoH&Spatternsforthepriceofone!

Trading the first H&S and a short in the 23,500 area would now be inconsiderableprofitwithlastquoteat21,480foragainofover2,000pips.

Figure1.3.4

Pricetargetrule

In anH&S, theminimum price target is given by the equality of the verticalpricedistanceoftheHeadfromthenecklineandthetargetfromtheNeckline.

Inourcurrentexample,thisgivesatargetof21,480andaswecanseeinFigure1.3.5 themarketmadeadirecthiton theH&S targetbeforestagingabounce.Thisconfirmstheideaoftakingaprofitatthe21,480level.

Figure1.3.5

ThisfollowingexampleintheFranceCACIndex(Figure1.3.6)illustrateswhysearchingforH&Sreversalpatternscanreapbigrewards.Again,itallowsyoutoprojectaminimumpricetargetwellinadvance.

After a long decline, the market made its low in the Head with a positivemomentumdivergence,suggesting thedowntrendwasabout toend.TheRightShoulder which, although it is much smaller in size than the complex LeftShoulder, is roughly of the same scale and is usable.When theNecklinewasbroken,thatconfirmedtheH&Spattern.

Icannowdrawsometramlinesonthechart(IwillproperlyexplainthedrawingoftramlinesinSections2.1and2.2).GiventheHeadisthesoletouchpointforthelowesttramline,Idrawanequidistantuppertramline–andthatgivesmetheminimumpricetargetfortherally.Themarketdidinfactrallytothatlineandthenbackedoffafterhittingthetarget.Themarketrespectedthatpricelevelasresistance.

Sonot onlydid I have aminimum target frommy tramlinemeasure, but alsofromtheH&Smeasure.Thatdoubledmyconfidenceinthistarget.WheneverIidentify a reliableH&S pattern, I always evaluate theminimum target,whichbecomesmyfirsttarget.

Thedifficultyindetectingthispatternisdecidingwherethenecklineshouldbeplacedinrealtime.LookingattheabovechartandtherallyupofftheHead,itisunclear if this is to become a true H&S pattern; there simply is not enoughinformation yet. Then, as the rally builds, the market makes a succession ofminorhighsandlows.WhichminorhighshouldbeusedfortheNecklinetouchpoint?

Figure1.3.6

HowcanIfindthetruenecklineinrealtime?

Atthis juncture,you justhave tokeepadjustingyourNecklineuntilyouseeadip that is large enough to be called a Shoulder. Minor dips usually do notqualify.The scaleof the two shoulders shouldbe roughlyequal.Buthere, thedip in early July is the largest since theHeadwas put in (and had anA-B-CElliottWaveform)andthusqualifiesasapotentialRS.Justgoaheadandapplythe Neckline across the minor highs as shown. Then, when the Neckline isbroken,thatisyoursignalthatyouhaveahigh-probabilitycandidateforaH&S,thusgivingyouyourtradeentrypointandfirsttarget.

Onefurtherpoint:findingaHead&Shoulderspatternontheweeklyanddailychartsisgood,andevenonthehourlychart,butIwouldnottrusttheH&Son

anychartoftimescalelessthanhourly.

Iliketoseeamomentumdivergence(seeSection1.4)betweentheHeadandLS.ThereisoneintheHongKongIndexandtheFranceCACexamplesabove.

2.TrianglesandWedgesThesepatternsarecommoninalltimeframesandusuallyprecedesharpmoves.

Tradingtriangles

Thetriangleisapatternwherethelinesjoiningthehighsandthelowsconverge.Also, the upper linemust slope down and the lower linemust slope up or behorizontal. Triangles and wedges are in reality zones of congestion. You willfindmanytradabletrianglesinatypicalweek.Figure1.3.7showsanexampleinIBM.

Figure1.3.7

Themarkethasmadeastrongrally,butnowindecisionhascrept inaftersuchstrong gains. The market is not making new highs and the lows are being

containedbythelowerlineofsupport.Atsomepoint,themarketwillbreakoutofthisperiodofconsolidation/congestionandmaybetradedaccordingly.

This is a fine example of a triangle – which could morph into a Head &Shouldersifthemarketbreaksbelowthelowertrianglesupportline.Thatwouldgiveadditionalsupporttoachangeoftrendforecast.Butdon’tjumpthegun.Itisbettertoletthemarketspeak,whichitwillwhenoneofthelinesisbroken.

AlargetriangleintheNikkeiisshowninFigure1.3.8.

Figure1.3.8

This triangle was formed over a month during which the pressure had beenbuilding for an explosive move.When the market broke the upper resistancetriangleline,ittookoff.

Lookonatriangleasatightly-coiledspringreadytounwind.

Ilikenthiscongestionzonewithinatriangletoanever-tighteningcoiledspringuntiltheenergyissuddenlyreleasedandthemarketbreaksoutoftheformationwithstrongandoftenviolentmoves.

Iliketosearchoutthosetrianglesthatarealongtimeinformingbecausetheynormallycanbereliedupontogivemeatradethatisnotonlyquicklyinprofitfromtheoutset,butusuallyresultsinaverylargemove.Itisnearthetopofmylistfortradingsetups.

Figure1.3.9showstwotrianglesinthehourlyApplechart.

ThefirsttrianglehereislonginitsformationandcompletesinaroundsixweeksandsoIcouldforecastthatthemoveoutwaslikelytobeexplosive.Itcertainlywas! Apple gained $50 – or around 10% – in just a few days. The secondtriangleisshorterbutthemovedownoutofitwassostrong,itcreatedalargegap.Thatwasasignalthatastrongdownmovelayahead.

Figure1.3.9

Agoodvisualsenseishelpful.Ifyouhaveagoodvisualsense,youshouldhavelittledifficultypickinguptrianglesthatareabouttocomplete.Ofcourse,whenin their early stages of development, they are indistinguishable from normalmarket noise. It is only in their latter stages of formation that they becomerecognisable,when there are several touchpoints on each line.But the earlieryoucanplaceyourlines,themorepreparedyouwillbeforcorrectlytradingthispattern.

Figure 1.3.10 shows a small triangle working in the hourly USD/JPY. I haveannotatedthecharttoshowhowIwouldtradethispattern.

ThemarkethadbeenmovingupinalongruntoearlyJanuaryandhadenteredaperiodofconsolidation.Recentactionshowsacleartriangleandalikelyupsidebreakout where I went long. Incidentally, I could possibly have waited for abreakabove thehighpointof the triangle.Thatwouldbeamoreconservativepolicy.Ienteredmyprotectivestopjustundertherecentlowsofthetriangleforaverymanageable25piprisk.

Howmanytouchpointsareneededtovalidateatriangle?

I like to see at least three touch points on both the lower and higher lines tovalidatethetriangle.Fewertouchpointswouldcausemetoquestionthepattern.

Figure1.3.10

Tradingthewedge

Thisisoneofmyfavouritepatterns.It’saslightvariationonthetriangleandismost often a reversal pattern. It consists of converging lines of support and

resistance,but both in the same direction, either both sloping up or slopingdown.Whenyou spot one on the daily orweekly chart, themoveout of it isusuallyspectacular.Theyalmostalwaysresolveinthedirectionoppositetotheirslope.

AgreatexampleintheDowisshowninFigure1.3.11.

On this hourly chart, the market was in rally mode with the lines of support(lower) and resistance (upper) converging.Somethinghad to give!Andon29November, the lower line suffereda smallbreak.Thiswas the time to enter ashortorderjustbelowthelowerline,lookingforamoresubstantialbreak.

Figure1.3.11

Howdidthattradedevelop?Let’slookatFigure1.3.12.

Figure1.3.12

The market broke sharply lower and a low-risk short trade was on. Theprotective stop was placed just above the late November high for a low-risktrade.Apossiblegainof300to400pipswasavailable.

IexplainhowItradethewedgeinSection3.4.

3.TheFive-WaveContinuationThis is a pattern that I first discovered a fewyears ago. It can occur during amajor trendand signifies acontinuation of the trend.Figure 1.3.13 shows anexampleinGBP/USD.

Figure1.3.13

The trend has started down and I have four complete waves with themarketstarting the fifthwave down.Confirmation of the patternwill occurwhen themarketbreaks thew3 low.Until then,wedonot have a confirmedpattern. Infact,wemayhaveanA-B-Cdowntothemarkedw3,leadingtoarallyphase.

HowcanIidentifythispattern?

Therearetworulesforthispattern:

Rule1:Thew4mustoverlapw1andw3mustgobeyondw1.

ThismakesitadifferentanimaltotheimpulsiveElliottWavefive-wavepattern,whichrequiresnon-overlapofwaves4and1.Ifw4doesnotoverlapw1,thenyoudonothaveagenuinecontinuationpattern.

Rule 2: The big difference to keep in mind is the fifth wave of a five-waveimpulseElliottWavepatternisaterminatingwavetobefollowedbyacounter-trend move. The fifth wave of my five-wave continuation pattern is acontinuationwave. In the latter, you are looking forw5 to continue themaintrend.

Also,thewaves2,3and4shouldbeofroughlythesametimeduration.

Figure1.3.14showsaconfirmedpatterninUSD/CAD.

Figure1.3.14

Fromthe lateOctober low, themarketstartedupandmadea lovelyfive-wavepatternwiththefifthwaveconfirmedwhenthemarketbrokeabovethew3highinlateNovember.Thatwasasignaltotradefromthelongside.

HowcanItradethispattern?

Probablythemostreliablewaytotradethesepatternsistowaitforthew4tobeputin,ensureitoverlapsw1,andthenenterastopentryorderbeyondtheextentofw3.

Withexperience,itbecomespossibletoanticipatethew5moveasw4isbeingputin.

4.TheKeyReversalThisisaquiterarepatternthatIuseonlywhenitappearsonthedaily,weeklyormonthlychartsandwhenitoccursattheendofastrongtrendingmarket.When

itdoesoccur, itcan lead toaviolent trendreversal that takesmostbysurpriseandiswellworthtrading.

Itconsistsofamovefirstinthedirectionoftheestablishedtrendtomakeanewhigh/low.Then,duringtheday/week/month,themarketmovesagainstthattrendandcloseshigher/lowerthanthepreviousperiod.Inabearmarketonthedaily,itmakesanewlowduringthedaybutrecoversandcloseshigherthanthepreviousday’sclose.

AterrificexampleintheUSDollarIndexisshowninFigure1.3.15,whichisonthehourlychartforclarity.

Figure1.3.15

Themarkethadbeenfallingforsometimeandon18December,itmovedwellbelow the 80 levelwheremany sell-stops had been placed.When theseweresatisfied, the buying took over and themarket zoomed upwards as therewerefew sellers remaining after the wash-out earlier. This is a sign of sellingexhaustionandisveryoftenthepreludetoavigorousnewtrend,ashere.

Ifyouwerenotawarethatthisisakeyreversal,youcouldbewhipsawed;firstbygoinglongonthe12to14Decemberrally(“isthelowfinallyinhere?”)andbeing stopped out on the break of the 80 level for a loss.Youmight then betempted to go short on this break as it appeared the down trend had been re-established.Thisshort tradewouldagainproducea losson the rally.That isaclassicwhipsaw!

We all have been victims, but if you can put your annoyance to one side andview themarketobjectively,youwould immediatelygo long,havingcorrectlyappraisedthetrendhadlikelychangedtoup.

Howdidthistradedevelop?Let’slookatFigure1.3.16.

Figure1.3.16

Therewasatypicalre-testofthelow,butwhenitheld, itwasupandaway.Ifyouhada long tradestoppedouton this re-test, therewasanother longsignalgivenwhenthemarketgappedupon2January.

AnotherexampleintheweeklychartoftheNikkeiisshowninFigure1.3.17.

TheNikkeihadbeeninasolid,strongrallysinceOctoberwithonlytwolowerweeklycloses!Thatwassomeone-wayrally.Butnomarketclimbsforeverandtherallyendedwithanexplosiveblow-offexhaustionclimaxandtheweeklybarshowsanewhighnearthe16,000levelandthendroppingsharplytoclosemuchlower than thepreviousweek.That changed the trend for a fewweeksbeforebuyingemergedtore-establishtheuptrend.

Therewasampleopportunitytotakelargeprofitsfromthedownmove(aswellasfromtherallyphase).

Figure1.3.17

Naturally, a key reversal signal on the weekly chart is too coarse a scale fortimingpreciseentries for swing trading,butwithin thekey reversalweek it isusually possible to identify the trend change on the daily or even the hourlychart.ByThursdayorFridayof theweek inquestion, it isusuallypossible toanticipateaweeklykeyreversal.

Figure1.3.18showsthefamoustopingoldin2011onthedailychart.

Goldhadbeeninanhistoricmulti-yearbullmarketbutitfinallycametoanendatthedoubletopsinlate2011wheretherearetwodailykeyreversals.Oneachday,themarkethadmadeanewhighbutclosedlowerontheday.Thesecondtopwasthefinalbuyingclimaxanditwasdownhillfromthenon.

Thekeyreversalisamoreaccurateindicationofatrendchangewhenitcomesafteranextendedrun.Irarelyfinditausefultradesignalonacharttimeframeof less than daily.With candlesticks they stand out as either a red bar (for abuyingclimax)oragreenbar(forasellingclimax).

Figure1.3.18

SummaryIhavefourfavouritechartpatterns:

Head&Shoulders(reversal)

TrianglesandWedges(continuationorreversal,dependingoncontext)

TheFive-WaveContinuation

TheKeyReversal(reversal)

The true H&S is quite rare, but Triangles are very common. The Five-WaveContinuation is fairlycommon,but theKeyReversal is rare, especiallyon theweeklyandmonthlycharts.

ItistheTriangle(andWedge)thatofferthemosttradingopportunities.

1.4Momentum

ThemomentumindicatorisoneofthefirsttechnicaltoolseverdevelopedanditistheonlyoneIuse.Itsimplyaddsupaseriesoftheclosingpricesinagiventime frame for themost recentnumberofperiodsand thenaverages that sum.Forinstance,the12-hourmomentumreadingistheaverageclosingpricefortheprevious 12 one-hour periods. The 12-day momentum is the average closingpricefortheprevious12days.

The 12-periodmomentum is the standard given in your trading platform.Youcan change that period atwill if youwish.But using a shorter span (say fiveperiods) would produce a wildly swinging pattern which would be unusable.Usingamuchlongerspan(say50periods)wouldgiveyouaveryflatread-outwhichisalsounusable.Ihavefoundthe12-periodisasatisfactorycompromise.

Asmarketsrally,themomentumgenerallyrisesandviceversa.Thus ina rallyphaseIdonotneedthemomentumtotellmethemarketisgoingup–Icanseethatfromthepriceactionalone!

TheonlytimeIwatchmomentumcloselyiswhenIexpectamarketturn,whereIamlookingforadivergencewithprice.

Whyisamomentumdivergenceeventimportant?

A divergence is simply when the momentum fails to match the price. AnexampleonthehourlychartofgoldisprovidedinFigure1.4.1.

Figure1.4.1

ThemarketwasinasoliddowntrendsinceOctoberbutinDecember,themarketmadeanother lowonthe31st,but themomentumdidnotas it failed to followthe price to a new low.This usually is an indication that the selling power isgettingweaker and to get ready for a counter-trend rally, at least.And that iswhatthemarketgaveus–arallyoutofapositivemomentumdivergence.

ThesearetheonlymomentumsignalsItakenoticeof.

CanIusemomentumdivergencesalonewhenlookingforachangeintrend?

It isnotagood idea to focuson justmomentumdivergences. Ialways requireotherevidence,suchasacompletefifthElliottWave,oraFibonacciretrace,oratramline target (or all three, ideally). Markets are littered with many falsedivergenceswhere,afterareliefcounter-trendmove,themarketcontinuesalongitsmaintrend.Therefore,momentumdivergenceissupplementaryevidence,notfullevidenceonitsown.

I consider a momentum divergence as additional evidence for a trendchange.

Figure1.4.2showsanexampleinthedailychartofEUR/USD.

Figure1.4.2

Amajor highwasmade in September and after a period of consolidation themarket went on to make a new high well above the previous one, but themomentum failed to do the same. This set up the negative momentumdivergenceandproducedthesharpdeclines.Theentirerallywas in theclassicA-B-Cform,whichiscounter-trend.Thisindicatesashorttradewasthecorrectstance.

TheMomentumRule

Thelargerthemomentumdivergence,thesharpertheeventualreversal.

Ipaynoattentiontomomentumdivergencesinchartsoftimescalesoflessthanonehour.Whentheyappearonweekly,dailyorhourlycharts,thatisthetimetostarttakingnotice.

Chapter2:ChartingWithTramlines

Viewing themarkets through tramlines is a very simple but powerful way toanalyse market action and provides you with high-confidence trade entries atlowrisk.Notonlythat,buttramlinesofferaccuratepricetargets.Thisplacesyouinthestrongpositionofbeingabletoplanatradewellaheadoftime,toassessyourmaximumriskandalsoprojectyourlikelyprofit.Manyofmybesttradesaremadewiththistechniqueasthestartingpoint.

In thischapter Iwill explainhowIdraw tramlinesand theTramlineTradingRule. I then explain what is aPrior Pivot Point (PPP) and how it helps tovalidate a tramline. After finding a tramline pair, I explain how useful thirdtramlinesareforfixingtheimportantpricetargetsfollowingatramlinebreak.ThenIshowwhyyoushouldlookoutfortheChinesehatandIalsoshowhowtodeterminesensibleprotectivestopsusingtramlines.

So,thesearethesectionsinthischapter:

DrawingtramlinesandtheTramlineTradingRule

Howtofindthebesttramlines

ThePriorPivotPoint(PPP)

Willthemarketchangetrendatatramline?

Tramlinetrios

Settingprotectivestopswithtramlines

Whentramlinescrossover–theChinesehat

Usingthethirdtramlinetosetapricetarget

2.1DrawingtramlinesandtheTramlineTradingRule

InthefirstchapterIintroducedtheideaoftrendlines(Section1.2).NowIwillshowhowtheyaretheverybasisofmytramlinemethod.

Iamdrawingadistinctionbetweenatrendlineandatramline:

Atrendlineisalinejoiningthelowsinabullmarketandthehighsinabearmarket.

Atramlineisaparallellinetothetrendlinewhichjoinsthehighsinabullmarketandthelowsinabearmarket.

Thisgivesusatradingchannelbetweenthetramlines.Mosttradingplatformshave theparallel line tooland it shouldbea simple task toplace tramlinesonanychartonceyoufixyourtrendline.

A genuine trendline joins the highs/lowswith accurate touch points, but sincenaturedoesnotalwaysgiveusperfection,wemustoftenmakesomeallowanceforwhensomeof the touchpointsdonotaccuratelymeetyour line.Youmustthenmakeanattemptatabestfitandthisofteninvolvescuttingoffpigtails(asIhavedescribedearlier).

A tramline drawn parallel to your trendline will contain all of the tradingactivity between the lines – the trading channel. The upper tramline willrepresentresistancetotheralliesandthelowertramlinewillrepresentsupporttothedips.

Whatwearelookingforinatramline(oncewehaveagoodtrendline)isabestfitforthehighs/lowsinagiventimeperiod.

Asanexample,Figure2.1.1showsonceagainachartIusedinChapter1.

Figure2.1.1

My upper line is the original trendline with four accurate touch points and apigtailcut-off.Theparallellinebeneathitismylowertramlineandcontainstwoaccurate touchpointsandapigtailcut-off.Exceptfor thesmallovershootnearthetop,alltradinginthisperiodtakesplacebetweenthetramlinesinthetradingchannel.

Withnootherchartinformation,weshouldexpecttradingtocontinuewithinthischannel.Thisgivesuscluesastohowtotradethismarket.

TheTramlineTradingRule

Goshort/selllongswhenthemarketisatorneartheuppertramline.Thisappliesespeciallywithup-slopingtramlines(bullmarket).

Go long/cover shortswhen themarket is at or near the lower tramline.Thisappliesespeciallywithdown-slopingtramlines(bearmarket).

Thisrulealignsyourtradewiththemaintrendinsidethetradingchannel.Thisistradingwiththetrend–theusualwaytotradeforthebestresults.Ihaveanother

rulefordealingwithtramlinebreaks(whenthemarketbreaksoutsidethetradingchannel)andIwilldiscussthislater.

2.2Howtofindthebesttramlines

Sometimes, thehighs and lowsdonot lie accuratelyon straight lines andyoumust resort to finding a best fit. In Section 1.1, I showed the following chart(Figure 2.2.1) to illustrate one problemwith fixing a good trendlinewhen thetouchpointsdonotaccuratelylineup.

Figure2.2.1

Eitherofthetwolinesdrawnherecouldworkasatrendline,butsofartheoneIpreferistheonewiththesteeperslopesinceittakesintheexacttipofthehighand the most recent high. But the matter could be settled by finding theirrespective tramlines. Figure 2.2.2 shows the tramline pair using the steepertrendline.

Here on the lower tramline I have highly accurate touch points on the recentspikelows,apigtailcut-offontheearlyDecemberspikelow,asmalltouchpoint

near the start of the trading channel and two lovely PPPs (Prior Pivot Points,whichIwillcoverinthenextsection).

Inthisway,Icansaythatthelowertramlineisreliableasalineofsupportandmyuppertramlineisareliablelineofresistance.

Thatfactvalidatestheupper(parallel)tramline.

If the lower tramlinewasnot so reliable becauseof fewer touchpoints, or noPPPs,thenthatwouldinvalidatethecorrespondinguppertramline.

Figure2.2.2

Doesthealternatetrendlinegiveusasreliablealowertramline?

Figure2.2.3showsthechartagainbutwiththealternative,shallowertrendline.

My corresponding lower tramline for this trendline has three accurate touchpoints, but there is no PPP. The line just slices through the trading beforeentering the trading channelwith no accurate touch points. Because of this, I

wouldput thispair in a lesser light than the first andprefer that trendlineandtramlinepairfortrading.

Thegeneralruleisthis:themoreaccuratetouchpointsonbothtramlinesandagoodPPPononeofthemmeansyouhaveareliabletramlinepair.Missing any one of these and you can place less confidence in thetramlines.

There are two setups with tramlines where you have a tradable event:continuationof the trendata tramlineand trendreversalata tramlinebreak. IwillcoverthisinSection2.4,butfirst,ImustexplainwhatisaPriorPivotPointandwhyitisanimportantfeatureoftramlines.

Figure2.2.3

2.3ThePriorPivotPoint(PPP)

Whenthemarkethasenteredintothetradingchannelbetweenthetramlinepair,thetwolinesaretheboundariesthatthemarketrespects(untilwegetatramlinebreak,ofcourse).Ihavefoundacuriousphenomenoninmanytramlinesetups.Just before themarket enters into this channel, itmakes a kiss on one of thetramlinesasiftorecogniseitasavalidlineofsupport/resistance.

Figure2.3.1–aDowhourlychart–illustrateswhatImean.

My lower tramline on theDow hourly chart hasmultiple touch points and isreliable. Idrawmyupper tramline through theonemajorhigh.Justbefore thetradingchannelwasenteredonthesharpdecline,themarketranacrossthetopof this line because itwas then acting as support.But after the break into thechannel,itreversedroleandactedasresistance.

The line was transformed from a support line to a resistance line at thebreak.

Thisisakeyconcept.

Figure2.3.1

IcallthetouchesonthesupportpartofthelinePriorPivotPoints(PPP).Theycan be close to the break or distant. If they appear far away, they gain inimportance.

MyPPPRule

When I have a good accurate PPP, my confidence in that tramlineincreasesgreatly.

If I do not have a PPP on either tramline, then I generally look for anothertramlinepair.Sometimes,Ijusthavetogiveuponfindingagoodtramlinepairuntilthereismorechartdevelopment.Inthiscase,Isimplygotothechartsonother markets that do give me tramlines rich in PPPs. These will most oftenprovidebettertradingsetupsanyway.Concentrateonthebestsetupsandignorethequestionableones.

Incidentally,IhavecoinedthetermPriorPivotPointinrecognitionthatthereisawell-establishedmeaningforthetermpivotpointintechnicalanalysis(aswell

asmyuseofthetermfordrawingFibonaccilevels–seeSection3.7).Thisisatotallydifferentconceptandthetwoshouldnotbeconfused.

2.4Willthemarketchangetrendatatramline?

When themarket is in the tradingchannel andcloselyapproachingoneof thetramlines, it has two options: either it will bounce off the tramline in acontinuationofthemaintrend,oritwillbreakthetramlineinatrendreversal.Obviously,theimplicationsforanytradeyoumakeherearepolaropposites.Forexample,ifyouaretradingforabounceoffthetramlineandthemarketbreaksthroughit,youwillbeinalosingtrade.

ContinuationofthetrendatatramlineIfyouhavenoreasontosuspectthetrendisabouttochange(fromElliottWavesorFibonacciretraces),thenyouwillbelookingtogolongonalowertramlineinabullmarket.Thecloserthemarketapproachesyourtramline,thelowertheriskof the tradeyouareplanning.This isbecauseyourprotective stop is typicallyplaced just underneath the tramline, close to your entry. This is the idealsituation.

But,inpractice,themarketoftenhoversjustabovethetramlineseveraltensofpipsaway.

Doyoujusttakethetradeinanticipationthatthemarketmaynottouchthelineaccuratelybeforemovinghigherwiththetrend?

Thatisoneofthetoughestproblemsassociatedwithtramlinetrading!Andthereisnoeasyanswer.Ifyouwaitforanexacthitandit fails tomakeit,youmaymissagreattrade.Ifso,thentakecomfortfromnotlosinganymoneyandmoveon.Decisionslikethismustbeindividualtoyouandfitinwithyourriskprofile.

Ishouldmentiononeotherproblem–whenyougetaheadfake.Thisiswhenthe tramline is broken momentarily, and then shoots back into the tradingchannel.Ifyouhaveyourprotectivestophit,youwillhavetotakethelossandseethemarketvalidateyouranalysis–adoublewhammy.Thiscouldmakeyoufeelannoyedanddeterminedtogetevenwiththemarket.Butthisattitudecouldbeabigmistake.Itisanexampleofemotionaltrading,whichshouldbeavoided(seemyElevenCommandmentsattheendofthetext).

Probablythebestpolicythenistojustkeepmonitoringthatsetupbecausethathead fakemaybe a sign that themarket reallydoeswant to turn and it couldgiveyouagoodtradesignallater.

TrendchangeatatramlinebreakWhen a tramline is broken decisively, that means the near-term trend haschanged(andpossiblythelonger-termtrendlikewise).Butthismayormaynotdevelopintoamajornewtrend–thefuturepriceactionwilldeterminethat.Atleastifyoucangetonboardanewtrendearlyatatramlinebreakthatwillgiveyouaheadstartovermostothertraderswhoremainwiththeoldtrendandareseeingtheirprofitsvanish.

I love to trade tramline breaks because if the new trend does develop intosomething substantial I am on board early and can afford to ride the smallcounter-trendmoves.Atradergettinginlaterhasamuchhigherriskandmaybestoppedoutononeofthesereversals.

AgreatexampleingoldisshowninFigure2.4.1.

Figure2.4.1

Myuppertramlinehasmultipletouchpointsandsocanbeconsideredreliable.Alongtradewassignalledonthebreak.Atthecurrentmarket,thereisa$40gaininthistradeandwecouldbeatthestartofamajormove–timewilltell.Butthetramline break signal has enabledme to get onboard this potential bullmoveearly.Andbecausemost traderswere expecting themarket to continue fallinginto January,manywill be suspicious of the rally andwill want to see if themarketcanmaintainitbeforemakingalongtradecommitment.

It is theseJohnnies-come-lately thatdrive themarket into its finalpushbeforereversing.Ifyouunderstandthisishowthemarketswork,youcantakemoneyoff these latecomers by trading against them.Youwill be taking profitswhiletheywillbeenteringariskytrade.

2.5Tramlinetrios

Onceyouhaveareliabletramlinepair,youcandrawatoncethethirdtramlinewhenoneof theoriginal tramlines isbroken.Youwillneed toplace itbyeyeandsoabsoluteaccuracyisnotpossible.Butyoushouldbeabletodoagoodjobbyholdingaruleruptothechartonyourscreen(whichyoucanmaximise).Thisway,youcanmeasureyourlineseparationsquiteaccurately.

HereisthehourlygoldchartagaininFigure2.5.1.

Figure2.5.1

Fromtheinitial tramlinebreak, themarkethasmovedupto the third tramline,backedawayas it respected the resistance,and thenpushedonup through theline. It then backed down to the line,which is now support because of theearlierbreak.Whenyoutookthelongtradeonthetramlinebreakinthe$1,220area, you could immediately set your target at the third tramline. Naturally,becauseatthisstageyoudonotknowtheprecisepricelevelwhereonthethird

tramline the market will hopefully hit, you will need to monitor the rally’sprogress.

Youcanthenenteralimitorderatyourtarget incaseyouareawayfromyourscreenwhentheeventoccurs.Remember,weseealotofrapidspikemovesingoldandalimitorderwillguaranteeyouafillifthemarketmovesthroughyourprice. Of course, you will need to enter your protective stop as quickly aspossible,orbetteryet,dothatatthesametimeasyouplaceyourinitialorder.

Naturally,becausethetramlineslopesdown,youarehopingforarapidascenttothe line since thatwouldgiveyou themaximumprofit.Amore leisurely rallywouldproducealowervalueforthehit.Themarketdidhitthethirdtramlineinthe$1254areaforanice$34profitinalittlelessthantwoweeks,makingitatypicalswingtradeforprofitandduration.

Sometimes, it is possible to draw fourth and even fifth tramlines, which areusefulinaverytrendingmarket.Thesewilloftengiveyouintermediatetargetsandareaswherethemarketmayatleastconsolidateforawhile.

2.6Settingprotectivestopswithtramlines

Once you have a reliable tramline pair in place, setting stops can bestraightforward,especiallyiftherearesomerecentminorhighs/lowsnearby.

IwillillustratethisintheDowchartshowninFigure2.6.1.

Figure2.6.1

Ihavetakenalongtradeonthelowertramlineatthe16,400levelinaccordancetomyTramlineTradingRule.

Wheretoplacetheprotectivestop?

Thetouchpointspriortomyentryformaminorlowonthemovedownofftheuppertramlinetouchpointinakindof“V”pattern.Ibelieveamovedownundertheapexofthe“V”wouldindicateadecisivetramlinebreakandmyprotectivestopplacedherewouldbesensible.Thatindicatesamaximumpotentialriskofaround40pips.ThisisatypicalriskwhenItradetheDow.

Ideally,themarketwouldadvancetotheuppertramline–perhapstothe16,700levelorabove.Thatwouldgiveapotentialreward/riskratioofaveryacceptableseven-to-one.

Here, I am tradingwith the trend (up), taking a long position near the lowertramlineandsettingaprotectivestopfarenoughawayfromthetramlinetoavoidmost head fakes. My maximum risk is 40 pips, which is within my risktolerance.AndIhaveatargetattheuppertramline.

Insummary,thisisalogicaltradecompletewithriskmanagementandatargetformyexit.Ifyoufollowthisprocedureoneverytrade,youhaveatotaltradingmethod.

Whatdoyoudowhenthereisnominorhigh/lownearby?

Thatisagreatquestion.Figure2.6.2isanexampleinabearmarketinthedailyEUR/GBP.

Figure2.6.2

IhaveaterrificlowertramlineanchoredbythreePPPs(withtwoexcellentearlyonesfarawayfromthetradingchannel),andmyuppertramlinetakesinthetwomajorhighs to lateOctober. In earlyNovember, themarketmade ahit on thetramlineandahigh-probabilityshorttradecouldbeenteredthere.Butwheretoplaceyourprotectivestop,sincetherearenominorhighsinthevicinity?

Theonlyrecourseistouseamoneystop,whichistoassignyourusualrisk(say50pips).That’saboutallyoucandoanditisusuallysatisfactory.Ifthemarketralliesby50pipsaboveyourentry, thatwould likely indicatea tramlinebreakandachangeoftrend.Youdonotwanttobeshortinabullmarket!

2.7Whentramlinescrossover–theChinesehat

Weoftenmeetasituationwherewehavealong-termtramlinepairworkinginthe direction of themajor trend and also a shorter-term tramline pair along acounter-trendmove.Wheretheymeetandcrossover,IcallthataChinesehatbecauseofthesimilarityofshapes.

Figure2.7.1isthehourlyDowchartwherethelonger-termupperdown-slopingtramlinepair intersects the short-termup-sloping tramlinepair.Atpointa twouppertramlinesmeetandbecauseuppertramlinesarealwayslinesofresistance,thecross-overisanareaofextra-strongresistance.Thatiswhythemarketwassentbackdownhardwhenitreachedthatpoint.

Buttheinterestinghatisthepointbwherebothtramlinesrepresentextra-strongsupport. The long-term upper tramline was broken and now the market isattemptingakissontowhatisnowsupport.Ifthisdoublesupportgivesway,wewillhavebothakissfailureandalowertramlinebreak,whichispotentiallyverybearish.

Figure2.7.1

Onewaytotradethesehatsisasiftheywillholdthemarketandcanthusplaceaclosestopforalow-risktrade.ButifIamstoppedouttradingthe‘b’hat(whereintheexampleinFigure2.7.1Iwouldbelong),Iwouldreversemypositionandendupnetshort.

Breakingthroughahattakesalotofbuying/sellingpower,soabreakisaverysignificant event.Usually, themarketmoves swiftly after ahatbreakasmanysellstopsarehit.Figure2.7.2showsthechartjustafewmomentslater.

Figure2.7.2

That is one sharpmove following the hat break!Do you see the potential fortradingthehatsinyourcharts?AgreatwaytoplaytheChinesehatistoassumeitwillbreakandplaceanentrystoporderjustalittleawayfromthehat.Ifyougetthebreak,youwillbeinatagreatprice.Ifnot,thennoharmisdone.

2.8Usingthethirdtramlinetosetapricetarget

The third tramline often gives you a very accurate price target following atramlinebreak.Irecommendalwaysdrawinginthethirdtramlinewheneveryouhaveatramlinebreak.

Using theexample in theDowfromSection2.7,Figure2.8.1 shows the samechartjustafewmomentslater.

Despitethemarketbeinginfreefall,itknewwhentostopfalling–rightonthethirdtramline.Andthemarkethasmadealargebouncefromthislevel.Isn’tthatimpressive?Animbletradercouldhavegainedaround150pipsinanhourorsoonthistrade,whichwasmadepossiblefromabasicknowledgeoftramlinesandtheirtargets.

Naturally,withslopingtramlines,athirdtramlinetargetisamoveablefeast.Butyou should be able to make a sensible estimate of your likely target in mostcases.Thealternativeistowatchthemarketthroughoutthedayandbereadytoexitthetradeasthethirdtramlineisapproached.

Figure2.8.1

Summary

Ihaveshownhowtodrawtramlinestogetthebestfit,howtolookforPPPsandhowtheTramlineTradingRuleworks,alongwithstopplacementrules.

Then,Ihaveusedreliabletramlinestogivemehigh-confidence,low-risktradeentriesandhowtosetpricetargetsusingthethirdtramline.

IhavealsodescribedtheChinesehatandshownhowsuchapowerfulpatterncanberecognisedandexploited.

Finally,Iwouldjustsaythatusingmysystemyoudonotneedtolookinexoticmarketsforgreattrades.Thereareusuallyplentyofsetupsinaweekinjustafewmajormarkets.Ifyouhavelimitedtimetodevotetotrading,thefewermarketsyoufollow,thebetteryourresultswillbe.Honeyourskillsonjustafewmarkets–IsuggesttheDow,EUR/USDandgoldasyourcoremarkets.

Part2:HowToTradeTheTramlineMethod

Chapter3:TradingWithTramlines,FibonacciandElliottWaves

In this chapter, I showhowIgoabout trading thevariouspatterns that Ihavedescribed.Whenresearchingapossibletrade,Igothroughthesefivesteps:

MyFive-StepTradingRoutineRecognisethepatternandputitincontext.

Workoutatradingplanwithentryprice,riskleveltostopandprofittargets.

Waitforconfirmationofthepattern.

Thenplacethetradeandprotectivestop.

Finally,managethetradetocompletion.

I recommend you to implement this routine on every trade youmake. It willhopefullypreventyoufrommakingthatrashtradeeveragain!

InthischapterIwillcover:

TheTramlineTradingRules

Tradingthetramlinebreak

Tradingtheheadfake

Tradingthewedge

Tradingthe“V”

Tradingthekissandscaldedcatbounce

HowtouseFibonaccilevels

UsingbasicElliottWaveTheoryconcepts

Contextiskey

3.1TheTramlineTradingRules

InChapter2, Ishowedhowtofindgoodtramlinesonalmostanychartand toexpect tofindmore thanonevalidset tobeoperatingatany time.Remember,thelowertramlineofapairisalineofsupport.Theuppertramlineofapairisalineofresistance.HerearetheguidelinesIusetofixonavalidtramlinepair.

Myguidelinesforfindinggoodtramlines

AtleastoneofthepairshouldhaveaPPP(PriorPivotPoint).

Atleastoneofthelinesshouldhaveatleastthreeaccuratetouchpoints.

Pigtailcut-offsareallowed(butnottoomany).

Alltradingintheperiodinquestionmustbecontainedwithinthetradingchannelbetweenthetramlines.

When the market breaks through one of the tramlines, you canimmediatelydrawinthethirdtramlineequidistant.

OnceIhaveconfidenceinmytramlines,IcanapplymyTradingRules.

TheTramlineTradingRules

In a bull market (rising tramlines) the general rule is to go long/covershortsatornearthelowertramline.

In a bull market with a tramline trio, the centre tramline (which wassupport)nowbecomesresistancewhenitisbroken.Ifthemarketralliestothislineinakiss,thatkissoffersanewshort-sellingopportunity.

In a bearmarket (falling tramlines) the general rule is to sell longs/goshortatorneartheuppertramline.

In a bear market with a tramline trio, the centre tramline (which wasresistance)nowbecomessupportwhenitisbroken.Ifthemarketdeclinestothislineinakiss,thatkissoffersanewlongopportunity.

AgoodexampleinAUD/NZDisshowninFigure3.1.1.

Figure3.1.1

Themarket is in a solid downtrend and has just rallied to the upper tramline.Thisiswhereashorttradeisindicatedwithaprotectivestopjustabovethelineforalow-risktrade.

Thetargetisnowthelowertramlineandifitreachesit,theprofitcanbetaken.Butwhatifthetramlineisbrokentotheupside?

Let’smoveontotradingthetramlinebreak.

3.2Tradingthetramlinebreak

Tramlinesdonotworkforever.Atsomepointthemarketwillbreakthroughoneof them andwhen I see a tramline break I get excited by the potentialwhaletradethatliesahead.Thatisbecauseagenuinebreaksignalstomethatthetrendhasvery likelychangedand I standagoodchanceofbeingonboard thenewtrendrightfromtheverystart,wellbeforemost tradershaverealisedwhathashappened.Mostofmybesttradeshavestartedfromatramlinebreak.

Theotheradvantageisthis:whenIhaveagoodpositionearlyinthenewtrend,Icanaffordtoletminorset-backsruntheircoursewithlittleeffectonmystresslevels.Ifyoujumponboardawell-developedtrend,thereiseverychanceyouwillbecaughtupinabigcounter-trendmove,puttingyourpositionunderwater–andyourselfunderstress.

Obviously,thereisasafelimitastohowearlyyoucandetermineatrendchangeandtakeaposition.Get in tooearlyandyourun theconsiderablerisk that thetrendreallyhasnotchangedatall.Getintoolateandyoumaybeinatneartheend.

That iswhymy tramlinemethod is anexcellent compromiseandbalances theriskswell.

Let’slookattheNikkeichartinFigure3.2.1.

Thisis thedailyNikkeiandIhaveagoodtramlinepairworking,especiallyinthemostrecentperiod,withgoodtouchpointsonmylowertramline.On23/24January, the market broke below the lower tramline and the sell signal wasgenerated on the tramline break, as well as the break of themost recent lowtouchpoint.

Inaddition,therewasanegativemomentumdivergenceattherecenthighontheuppertramline,indicatinglikelybuyingexhaustion.

Thebreakhassignalledachangeintrendanduntilotherwisedisproved,tradingfromtheshortsideisindicated.

Figure3.2.1

Let’snowlookatFigure3.2.2,whichshowsthesituationdeveloping.

Figure3.2.2

IfIdrawinthethird(lower)tramline,themarketiscurrentlytestingthislineofsupport and a short-term profit can be taken. Only a move above the centretramlinewouldindicatethenewdowntrendwasnotestablishedyet.Providedthecentretramlineoperatesasasolidlineofresistance,thetrendisnowdown.

Figure3.2.3showsaterrificexampleofacleantramlinebreakinUSD/CAD.

Figure3.2.3

Thebuysignalwasgivenwhenthemarketmovedupoutofthetradingchannelandabove theprevioushighs.Using the simple strategyofplacingabuy-stopentryjustabovetheuppertramlinewouldhavegotyouintoaterrifictrade.

HowcanIplayapossibletramlinebreakwhenIalreadyhaveaposition?

Thisiswhereaveryusefulstrategycanbedeployed.ReferringtoFigure3.2.4,let’ssayyouareshortAUD/NZDfromNovember.

At the end of January you see the market is testing the centre tramline anddecide to exit your trade if it breaks above it. A few days later, the tramlinesufferedanupsidebreak.Ifyouhadenteredyourprotect-profitstopjustabove

thenowcentreline,thatordercouldhavebeenastop-and-reverseorderwhereyouwouldbetakenoutofyourshorttradeandimmediatelygolongatthesameprice. It simply involves entering a buy-stop order for twice the size of youroriginalshorttrade.

Figure3.2.4

Whereisthefirsttargetforthenewlongtrade?

Thefirsttargetforthenewlongtradeisatthethirdtramline–whichyouhaveimmediately drawn in, of course. And the market is currently testing theresistanceatthisnewline.

Becausethedowntrendwasgettinglonginthetoothinthefirstchart,youwouldnaturally suspect that the inevitable tramline breakwould occur sooner ratherthanlater.Thisobservationwouldencourageyoutoemploythestop-and-reversestrategy.

Itispossiblethatthemarketwillnowdeclinetokissthecentretramline.Timewilltell.

3.3Tradingtheheadfake

Aheadfakeisanannoyingfactoflife.Justwhenwebelievewehaveidentifieda great tramline break and the market is going in our direction, it suddenlydecidesitwantstoturnbackonyouandtradeagaininsidethetradingchannel.Meanwhile,your tradewhichwasnicely inprofit isnowunderwaterandyouareindangerofbeingstoppedout.

Whattodo?

Naturally,thedisciplinedcourseofactionis–inaction.Letthemarkettakeyouout if that is what it wants to do. You determined your stop level rationallybeforeyouplacedthetradeandyouarewrong.Butyourlossiswithintherisklimitsyouhaveset,sobegladthelossissmall!

Putthattradebehindyouandkeeplookingatthismarketbecausetheheadfakemaybetryingtotellyousomethingtoyouradvantage.Don’tmakethecommonmistake of walking away from that market in disgust muttering “the systemdoesn’twork.”

AparticularlynastyexampleofaheadfakeisshowninFigure3.3.1.

Figure3.3.1

Ihaveasuperbtramlinepairworkingandon15JanuaryIhadthetramlinebreakIwaslookingfor.Thatgavemeafillonmyshorttradeatthe1.6345levelandmyprotectivestopwasplacedat1.6400,justinsidethetradingchannel.

Themarketrandowntothe1.6320level,givingmeasmallgain,butthenturnedtailandquicklyranupbackabovethetramlineandIwasstoppedoutfora55piploss.

ShouldIabandontradingthismarketorkeepsearching?

I noted that the rally back inside the trading channelwas very sharp and thatgavemetheideathatwehadafalsetramlinebreakandthemarketreallywantedtomovehigher.IthendecidedtolookforalongtradeandtheresultisshowninFigure3.3.2.

Thereversalbackupwassharpandthemarketenteredthetradingchannelandthenbackedandfilledbeforemakingadecisivemoveabovethatconsolidationarea–andthatgavemeabuysignalwhereIhadplacedabuystoporder.Ifthemarket hadmoved down instead of up here, thatwould have givenme a sellsignal.Inthatcase,wewouldhavehadanothertramlinebreakandIcouldtradeitasusual.

Figure3.3.2

Thesubsequent rally towards theupper tramlinewasalso sharpanda200-pipprofitwasavailableonthattrade,whichmorethanmadeupfortheoriginalloss.

Justreadingwhat themarketwastellingmewas thekeyfactor. Ididnothaveanypre-conceptionsofwhat themarket ought to do. I simply let it speak andactedinaccordancewithitsmessages.

Sotheheadfakewasnotsodisastrousafterall!

3.4Tradingthewedge

I like thewedge! It isavery reliablechartpattern thatwarnsofan impendingtrend change if it occurs near the end of a long trend. Some traders call it anascending/descendingtriangleoranendingdiagonal.Itisformedfromapatternwherethesupportandresistancelinesconvergeandtravelinthesamedirection.Theseend-of-trendpatternsdonotcomealongeveryday,though.Butwhentheydo,Iliketotakethetradesveryseriously.

Let’slookatafabulouslong-termexampleinAlcoa,whichIhadbeentrackingsincemakingitslowin2012.Myinterestwassparkedbythedivergenceofthemain US stock averages, which were in strong rally mode, to that of Alcoa,whichhadfallenfromahighnear$50in2007tothe$6areainthesameperiod.Intriguingly,Alcoawasoneofthe30componentsoftheDowJonesIndustrials(untildemotedin2013)andistradedonhighvolumes.

Naturally, there were good reasons for the decline: aluminium was in over-supplyanditspricewasdroppingalongwithageneraldeclineinthecommoditysector.AtonepointInotedthatAlcoawasthemostheavilyshortedstockintheDJIA.Ifthemarketcouldrallyoffabase,agoodshortsqueezecoulddevelop.Andsincelate2011,itlookedtomeasifitwasformingsuchabase.

Figure3.4.1showsthepictureinOctober2013onthedailychart.

Figure3.4.1

Themarket had been trading between the support and resistance lines of mylarge,multi-monthwedge.Remember,thiscameafterthemarkethadsufferedalargetrendingdeclineoffthe$50area,whichmadethewedgenoteworthyasapossible signal to get ready to cover shorts and go long if thewedgewas anendingpattern,asseemedhighlylikely.

Naturally, the touch points are not all perfectly accurate, but there are enoughhitsandnear-misses togivemehighconfidencethat if themarketcouldbreakupfromthisformation,themoveshouldbesharpandstrong.

TheupdatedchartfromthreemonthslaterisshowninFigure3.4.2.

As expected, the upward breakwas sharp and now the uptrend slope ismuchsharperthanthedownsidemoveswithinthewedge.Thishasallthehallmarksofamajortrendchange.

Figure3.4.2

Whenyouhave identifiedawedgeat theendofa longdowntrend,what is thebestwaytoplayit?

Iliketoplaceentrybuystopsjustabovethemostrecentsignificanthighandjustabovethedown-slopingline.Onthetopchart(Figure3.4.1),therewasjustsuchahighinthe8.60area.

AnotherexampleintheDowonthehourlychartisshowninFigure3.4.3.

I was looking for a top sincemomentumwas waning and I could count fivewavesinthelatestrallyleg.Also,thewedgepatternappearedafteralongbullrun.Mylowerwedgelinehasseveralaccuratetouchpoints,whichmeantthatIcouldrelyonitasasolidlineofsupportandabreakofitwouldlikelysignalatrendchange–at leastonthehourlychart. I reckonedthatabreakof this lineshouldsignalatleastatemporarychangeoftrend.Thereshouldbeatleast200-300 pips in a short trade since thatwould be a 50% retrace of the leg up – acommonretracelevel.

Figure3.4.3

Figure3.4.4showshowthetradedeveloped.

Figure3.4.4

As I suspected, the break of the wedge produced a sharp decline to give anapproximate 300 pip gainwhich could have been taken since themarket hadfallenintochartsupportandaFibonacci50%correction.

Ofcourse,atradermayhavebeenlookingforamajortrendchangehere,butIamarelativelyconservativetraderandwilltakethatprofitonatleastpartofmyposition. For short-term trading, the most advantageous attitude is to enter ashorttradeonhighbullishnessandexititonhighbearishness.

Figure3.4.5showsanotherexampleonthe15-minchartofEUR/USD.

Figure3.4.5

Ihavethreeveryaccuratetouchpointsonmyupperwedgeline(resistance)andthree touchpointsonmylowerwedgeline.Butwithonly threewidely-spacedtouchpointsonthislowerline,IamunabletoplacehighconfidencethatIhaveawedgeworking.Inanycase,thepatterndoesnotappearafteralongtrendingmove.

Iwillpassonthisasitdoesnotqualifyasapotentialwedgetrade.

ButagreatworkableexampleinUSD/JPYisshowninFigure3.4.6.

Themarkethadbeenrallyingpersistentlyfromthe98areaandthiswedgecameat the end of a long run. I am able to draw some excellent wedge lines thatcontain multiple accurate touch points. The lower wedge line break wasfollowed by a rally to kiss the underside of the line and then a scalded catbounceawayinasharpmovedown(seeSections3.2and36).

Figure3.4.6

This was a textbook pattern; the tramline break, the kiss and then the rapidscalded cat move down. The kiss afforded an excellent opportunity to takeprofits on longpositions and to reverse andposition short using thehigh as aguidefortheprotectivestop.

NowwhywasIlookingforatoparoundhere?

This was because I had seen a potentially complete five-wave pattern on thedaily.AndwhenIseeafive-waveimpulsepattern,Istartlookingfortheturn.

Nowlet’slookatFigure3.4.7.

Again,thisisanabsolutetextbookimpulsewavepatternwithalongandstrongw3, a complex correctivew4andanewhigh inw5on anegativemomentumdivergencewiththatatthew3high.

Not only that, but the long tradehas becomemanically crowdedwithhedgiesholding 158,000 short contracts and a measly 14,000 long contracts (this isinformationprovidedbytheCOTdataatcftc.gov–seetheResourcessectionattheendofthebook).Thisisaratioof11/1–amammothimbalancetotheshortside.Naturally, the smartmoney (the commercials) is on the other side of thetrade. The potential for amassive collapse is high, once sentiment shifts. Theprofitpotentialtradingagainsttheotherspecsishuge.

Figure3.4.7

Attheveryleast,whenthemarketturns,itshoulddeclinetothew4lowinthe98area.Ashorttradeinthe105areawitha60pipstopandapossible7000pipgaingivesapotentialreward/riskratioofalmost12/1–amostjuicyprospect.

Figure 3.4.8 shows the daily GBP/USD chart with the terrific multi-monthwedgeforming.

Myupperwedge linehasat least fiveaccurate touchpointsand the lower linehas three.These are very reliable lines of resistance and support.Becauseup-slopingwedgesalmostalwaysresolveinadownwardbreak,Iexpectthelowerline togivewayandmystancewillbe toentersell-stoporders justunder thisline.

Withthemomentumlosingstrengthinthelattersectionoftherally,oddsfavourabreakverysoon.

Thisisaninterestingforecast,sinceitfliesinthefaceofconventionalanalysis.This is a common position for me to be in. In recent days, we have seen abarrageofexcellenteconomicnewsfortheUKfromrecordcarproductiontoanIMF forecast for GDP to grow from 1.9% to 2.4% (a whopping increase),placing theUKas thefastest-growingeconomyinWesternEurope.Also,withinflationhavingrunwellabovethedesired2%target that thebankofEnglandhadset,thelatestdatashowafallingrateofinflationclosetothetarget.

Onpaper,GBPshouldbepreparingforarallycontinuation.Butmyreadingofthechartssaysotherwise.

Figure3.4.8

Theminimumtargetforabreakofawedgeisthestartofit:inthiscasetheJulylowatthe1.50level.

MyWedgeTradingRule

Anup-slopingwedgeinabullmarketisaterminatingpatternandshouldbetradedfromtheshortside,lookingforamoveatleasttothestartofthewedgepattern.Theoppositeappliesforadown-slopingwedgeinabearmarket.

3.5Tradingthe“V”

The“V”isasmallpatternthatappearsoftenattheendofalongtrendingrun,inboththebullandbeardirections.Iuseittoguidemyentrystoporders.Whentheapexof the“V” isbreached, that isa signal I look for to indicateachangeoftrend,butonlywhenIhavecluesfromotherindicators.

The “V” starts from the high/low, then retraces to aminor low/high and thenmovesbacktotheareaofthehigh/lowwhereitturnsagainandmovesbackinthedirectionoftheapexandbreaksit.

As a trend progresses, I am always on the lookout for a turn to exit trendingpositionsandtopossiblyreverse.Myverysimpleruleistoplaceentrybuy-stops(if looking for a rally) or sell-stops (if looking for a decline) just beyond theapex.

ItisatechniqueIusefrequentlyanditsmajorbenefitisthatitenablesmetoexita trending position very near the end and extract maximum profit. And if Ireversemystance,itcangetmeintoahighreward/lowrisktradenearthestartof the new trend. It is about as perfect and elegantly simple a trade entry/exitmethodasIcanthinkof.

Figure3.5.1showsagreatexampleinUSD/JPY.ThismarkethadbeeninasolidrallyphaseforsomeweeksandIwaslookingforatop.

Figure3.5.1

Thetoppatternisa“V”whichIhavemarkedout.Asellstopplacedundertheapex of the “V” would catch the break that was indicated by the wedge linebreak.SoIhadtwosolidreasonstotradeitfromtheshortside.

This is anexcellent technique for judging tradeentriesaheadof timeandalsosettingyourprotectivestop.While themarketwaskissing thewedge line,youhaveplentyoftimetoanticipatethebreakofthe“V”,setyourentrystopsandwhen filled, enter your protective stop. If themarket breaks above thewedgelineandresumesitsrally,nothingislostandyouwouldcancelyourorders.

Figure3.5.2 shows theDowas itwasmaking a second attempt at its all-timehighon31December2013atthehistoric15,600level(seeMyTradingDiaryinPart3).

Figure3.5.2

Thefinalspurtjustbeforethebreakofthelowertramlinewasintheshapeofa“V”.Ihavefoundthatveryoften,bigtrendsdoendwithaverysmall-scale“V”whereanentrystopcanbeplacedjustunderthe“V”apex.

Additional encouragement for a short trade here was the breaking of thetramline,givingustwocluesthatthenextmovewaslikelydown.Asit turnedout, themarketenteredfreefallwithagainof600pipsinjust threedays.Thiswasatradewellworthstalking!

IfavourthismethodofentrybecauseIcanplacemysell-stopwhenevera“V”isformingandthemarketistradingclosetothetramline.Icandothisbeforethedownsidemove begins. Naturally, if I do not get a fill because themarket ismovingup,IcanadjustmyentrywhenIseeanew“V”forming.

Ingeneral, Iuse themost recenthighasmyguideforstop-lossplacement.Asyoucanseefromthesetwoexamples,therisktothetopofthe“V”isverysmallcompared with the potential gain, making it a superb low-risk trade entrymethod.

3.6Tradingthekissandscaldedcatbounce

Whenatramlinehasbeenbrokenandthemarkethasmovedoutsidethetradingchannel,themarketwillveryoftencomebacktoapproachthelineandmakeakisson itbefore saying farewell and resuming thenew trend.Thesepullbackscangiveyouagreatopportunitytojumponboardthenewtrendifyoumissedtheoriginaltradesignalatthelinebreak.

AdramaticexampleincrudeoilisshowninFigure3.6.1.

Figure3.6.1

Ihaveasuperbtrendlinewithatleastnineaccuratetouchpoints.Thismakesitaverysolidlineofresistancewithsomanytouchpoints.Theupsidebreakcameon21Novemberandthemarketralliedstrongly.Notethattheuppertramlineislengthy with many accurate touch points, which means that we can expect amass of protective buy-stops placed above the line by those traderswho haveflockedtotheshortsidealongtheway.Theseshortshavenotedthestrengthof

theresistanceeverytimethemarkethasralliedtoitandfeelconfidentthatnexttimeitgetsnearthelinehistorywillrepeat.

Normally,thatisthecorrecttradingstanceasthemarketisinadowntrendandsellingatornear the trendline isa low-riskstrategy.But linesofresistancedonot continue forever and this large accumulation of buy-stops above the lineprovides the fuel for thevigorous rally following thebreak.Evidently, historydoesnotrepeatindefinitely.

Butthemarketdidnotcontinueupwardsimmediately;insteaditfellbackforakissontheline.

Ifindthatthiskissingbehaviourisverycommonandallowsforasecondchancetopositionforthechangeoftrend.Notethatthekisswasanaccuratetouchontheuppersideofthelinewhichwasresistancebeforethebreakbutisnowactingasmajorsupport.

That was a second bite of the cherry to position long. Now, at the kiss, themarket could have broken back underneath the line. Thatwould have given amajorfailuresignal–andanexcellentplacetoenteraprotectivestopincasethekisswasreallyabrush-off!Itisalsoanexcellentplacetolooktopositionshortfollowingthefailureofthelinetoactassupport.Astop-and-reverseordercouldalsobeused(fromnetlongtonetshort).

TherapidmoveupafterthekissIcallaScaldedCatBounce,inhonourofthewell-knowntermDeadCatBounce.Itisasifthelineisactingasanirresistiblemagneticforce,drawingthemarketbacktothelineafterthebreakandnowatthe kiss, in a reversal of polarity, providing an opposite force propelling themarketawayfromthenewlineofsupport.

Whenyouseeatrendlineortramlinewithmanyaccuratetouchpoints,youcanusuallyexpectalargeaccumulationofstoplossordersstartingattheothersideofthelineandaconsequentsharpmovecoveringmanypips.Foraquickscalptrade,thesesituationsgiveexcellentreturns.

Whenyouareonboardsuchasharpmove,thequestionisalways:wheretotakeprofits?

Thatiswhenyouneedtolookatthelargerpicture;inparticular,wherearethechartresistance/supportareasandwhataretheEWstellingyou?

3.7HowtouseFibonaccilevels

Onevery chart I open I amquick to apply theFibonacci retrace levels and tokeepthemthere.Thisistogivemeahandyreferenceforlikelyreversalsfromcounter-trendmovesandtoplaneithermyexitortosetupanewlow-risktradeascloseaspossibletotheappropriatelevel.

I always startwith themost recent significant high and low.Retracements aredividedintotwokinds;ashallowretraceof23%oreven38%,andadeepretraceof62%oreven78%.The50%level ismyfavourite target toaimfor inmostcases.

AgreatexampleintheNasdaqisshowninFigure3.7.1.

There isaclearmoveoffivewavesdownoff the3640highandthemarket ismaking a relief rally, as expected fromElliottWaveTheory, and the rally hascarried to the38% levelwhere short-termprofitson long trades canbe taken.Hourlymomentumishighandbecauseofthisoddsfavouratleastapauseintherally.

Figure3.7.1

AnotherexampleinEUR/USDisshowninFigure3.7.2.

Figure3.7.2

Here,themarketroseverysharplytomakeaprecisehitatthe50%levelandisbackingaway.IamalwaysamazedthatFibonaccilevelsareoftenasaccurateasthisonewasatpointingoutreversalareas,eveninaviolentmarket.

DotheFibonaccilevelsworkonthedailycharts?

I apply the Fibonacci levels to the daily charts to give me likely areas for apossibletradesetup.IfIfindthemarkethasmovedtoaFibonaccilevel,Ithengotothehourlychart todetermineatradeentry.Figure3.7.3isanexampleinAUD/USD.

Figure3.7.3

ThemarketmadeahugeslidefromApril2013 to the lowinAugust,but thenstaged a strong rally, which carried to an accurate hit on the Fibonacci 50%retrace. Once that level was reached, the market felt free to resume itsdowntrend. Thatwas a superb place to enter short trades, or to exit any longtradesontherally.Ofcourse,onceIhadthisinformationonthedaily,Iwouldgotothehourlycharttoidentifyagoodentrypoint.

Inallof theaboveexamples, takingatradeatorverynear theFibonacci levelenablesalow-riskentrybecauseyourprotectivestopcanbeenteredjustalittleawayfromthelevel.Andyouwouldbetradingwiththemaintrend,whichisthepreferredstanceinmostcases.

3.8UsingbasicElliottWaveTheoryconcepts

AcompletestudyoftheElliottWave(EW)Theoryanditsapplicationcouldtakealifetime.Luckily,withonlyaknowledgeofthemostbasicofitselementsyoucan be a very competent EW trader in a fraction of this time. And with thisknowledge,youcanhaveinsightsthatveryfewtraderspossess,givingyouthatvitaledge.

Basically,ifyoucancounttofive,youhavethatedge!

ElliottWave–theprimaryconcept

Theprimaryconcept,whichhasbeendemonstratedtimeaftertime,isthatin amajor impulsive bull or bearmarket, the extent of themove takesplace in five clearwaves. Threewaves (labelled 1, 3 and 5) are in thedirectionofthemaintrendandtwoarecounter-trend(labelled2and4).Byimpulsive,Imeanthedirectionofthepatternisthesameastheoneofthelarger-scaletrend.

Thebigtake-awayisthatifyouareinasuspectedfifthwave,getreadytotakeprofitsandprepareforacounter-trendmove.

TradingthethirdandfifthwavesFigure3.8.1showsagreatexampleintheweeklyUSD/JPY.

Themarkethadbeeninamajorbearrunformanyyearsandmadeamajorlowin late 2011, themarketmoved up, then back down, and then in late 2012 itentered intoa longandstrongbull run taking itabove theprevioushigh.Thatenabledmetolabelthewaves1,2andanongoingwave3(clue:itwasastrongmove).When wave 3 really took off, that was confirmation I had my labelscorrect.

Thenthemarketenteredadeepconsolidationperiodinacomplexwave4(notethebeautifultrianglepattern)beforemovinguptonewhighsinthefinalwave5.Andnotethenegativemomentumdivergencebetweenthewaves3and5.

Oneotherconfirmingclueisthatwaves2and4(thecounter-trendwaves)areofroughlyequalsizeandduration.This is importantbecause if, say,wave4wassmallandofonlyafewdaysinlength,youwouldverylikelynothaveawave4!Inotherwords,thewavesmustlookrightandinproportion.

Figure3.8.1

Thereareseveralveryusefultradingtipspresentedbythischart:

Whenthemarketralliedabovemywave1high,youcouldhaveenteredalongtradeinthe84area,suspectingathirdwavewasinprogress.Remember,youcouldanticipateahugerunwheninathirdwave,sotherewardsforgettingitrightareimmense–solongasyoucanstaywiththetrade!Thatwasagreattradeentrybecauseyouwouldbetradingwiththemaintrend,whichisalwaysadvisable.

Whenthemarketenteredwave4andthedowntrendlineoftheverycleartrianglewasbrokentotheupside,thatwasaterrificbuysignal(Figure3.8.2).

Therewasapotentialprofitofover4centsavailableonthattrade.Theweakeningmomentumpictureinwave5gaveacluethattheentirebull

runwasindangeroftoppingoutandawarningtoexitthetradesoon.

Andbecausewehadacompletedfive-wavepattern,youcouldthenstarttolooktotradefromtheshortside,anticipatinganewbeartrend.

Manytraderswouldbelookingforthemarkettocontinueitsuptrendatwave5becauseithasbeeninabullmarketformanymonthsandthefundamentalshadn’tchanged(alwaysadangerousthought).Remember,marketsmakeopinions.Butwithyourknowledgethatfifthwavesareendingwaves,youwouldhaveahead-startonmosttradersifthetrendhasindeedchanged.Anditisthesellingbythedisappointedbullsthatwillfuelthenewbearmarket.Then,theentireprocessrepeatsitself,butintheoppositedirection.

Figure3.8.2

Sowe had two excellent long-term trades available: the first tradingwith thethirdwaveandthesecondtradingwiththefifthwave–bothinthedirectionofthemaintrend.Thecombinedpotentialgainwasatleast25cents,or£25,000fora£1bet.

ThebeautyofthisexampleisthatIdidnotneedanintimateknowledgeofwhatAbenomics is and how it works. This is part of a fundamental analysis andoccupiesmanybrightmindscurrently.Forme, it isnice toknowthat itexists,but tomakemoneyall Ineedare thecharts andmymethods. In fact, the lessdetailofthefundamentalsthatIknow,thebettertraderIam.

Thatisoneofthemanyparadoxesoftradingthefinancialmarkets–andiswhyitisinatotallydifferentcategoryfromjustaboutanyotheractivityintherealworld.Wouldyouputyour trust inyourbrainsurgeon ifhesaid thatheknewlittleofthedetailsofhisworkandallheknewwasthatlobotomiesexist?

KnowyourA-B-CsThisisawonderfulpatternthatIusetimeaftertime,evenontheveryshort-termchartsaswellasthedailiesandweeklies.Itenablesmetotimealow-riskentrytoalignwiththemaintrend.

Many (but not all) wave 2 and 4 corrections in a major trend occur in threewaves,whichIcallA-B-C.MytaskistoidentifytheendoftheCwaveandthenenterthemarketfadingtheCwave,jumpingonthemaintrend.

Ihaveseveralexamplesofthisinthenextchapter.

ThewavesarefractalsYoucansubdivideanywaveandfindwaveswithinwaveswithinwaves–andtheyallhavearoughlysimilarappearance.Infact,unlessyouknewthescaleofthechart,itwouldprovedifficultidentifyingit!

But the main fractal I look for is in third waves of a five-wave impulsivesequence.WithinmythirdwaveIshouldbeabletocountfiveclearsub-waves.Andwithin that third sub-wave, I shouldbeable to count five sub-sub-waves,andsoon.

Infact,Iusethisexercisetovalidatemyfirstthirdwavecount.ButIcanonlydoit near the end of the wave. In the meantime, I have to use incompleteinformation(whichisanongoinglimitationforallofus,sadly).

Figure3.8.3isanexampleintheDow.

Figure3.8.3

Thevigorousdeclineoffmywave2highputsitinthethirdwavecategoryandasthemarketmoveddowntotherecentlow,Iwasthenabletoputthewave3underamicroscopeandfoundwhatyoucanseeinFigure3.8.4.

Figure3.8.4

Myoriginalwave3containsa clear five sub-wavescompletewitha longandstrongsub-wave3.Butthat’snotall–thisthirdsub-wavecontainsfivesub-sub-waves(seeFigure3.8.5)!

Andevenmoreastonishing,thisthirdsub-sub-wavecontainsitsownfive-wavepattern.

Marketstrulyarefractals!

Figure3.8.5

Fortheall-importanttradingstrategies,havingallofthesefifthwavesendingatthe end ofmy original wave 3 labelmeant only one thing – the decline waslikely over (for now) and a counter-trend rally in a large wave 4 should beexpected.

Thatwasthetimetocoverallshortsandevenprobeforalongtrade.

Can you see that just an understanding of some of the basic tenets of ElliottWave Theory can give you a tremendous edge? It is a study I heartilyrecommend.

3.9Contextiskey

I ampresentingmany ideasandconcepts that canproducewonderful low-risktrades,butyoumaybeforgivenforbelievingthevariousmethodscanoftengiveconflictingsignals.Forinstance,atramlinebreakmayindicateashorttrade,butthemarketisat theendofaCwavecorrection,forexample, indicatingalongtrade.

I realise this is a problem and it highlights why we must always weigh thebalanceofprobabilitieswhentradingwithanysystem,includingmine.Thechartis always tracing out an incomplete pattern. Patterns are only complete inhindsight–whenitistoolatetoprofitfromit,ofcourse.

We are constantlymaking projections using incomplete knowledge and that iswhy trading is part science, part art. And to get a feel for the method muchpracticeisrequired.Butthereisnodoubtthattheactofselectingwhichsignaltousegetseasierwithpractice.Whenyoubecomefamiliarwithyourmarketsandtheirpersonalities,youshouldgetmuchmoreexpertattradingthem.

Noone guesses correctly every single time – and that iswhyprotective stopsmustbeusedatalltimes.

Idonotrecommendyoufollowmorethanahandfulofthebiggestmarkets,suchastheUS,UK,JapaneseandGermanstockindices,themajorcurrencycrossessuchasEUR/USD,GBP/USD,USD/JPY,AUD/USD,andgold,30-yrTreasuryBonds and perhaps one or two large cap stocks. I would definitely steer youaway from theminorcurrencycrosses (unlessyouhave inside information,ofcourse)andmostsingleequities.

Whenyouarepresentedwithconflictingsignals,itisalwaysbesttogobackandreviewthebiggerpicture.Thatshouldclearupmostconflicts.

Figure3.9.1isagoodexampleingold.

Figure3.9.1

The centre line is a long-term trendline from October 2012 and has severalaccurate touch points before theSeptember 2013 touch point. Thismakes it ahighlysignificantandreliabletramline.

In the past few days, there has been an upside break of this tramline, whichwouldnormallybeconsideredindicativeoffurthergains–perhapstotheupperthirdtramlinetarget.ButthemarkethasbeenstoppedbytheresistanceofferedbytheFibonacci38%retracearea.ThissetsupaconflictbetweentheupwardsforceofthetramlinebreakandthedownwardforceoftheFibonacciretrace.

Isthereatradeon?HowcanIdecide?

To determine if there is a sensible trade on, wemust weigh up the opposingforces.

In the bullish camp, we have the tramline break and the positive momentumdivergenceat the low.On thebearishside,wehave theestablisheddowntrendand the Fibonacci resistancewhich, if strong enough,will send themarket tonew lows. Because many traders will be monitoring the long-term tramline,short sellers will have many protective buy-stops above this line at variouslevels.Ifthemarketcangettothese,therewilllikelybearushofshortcoveringandthemarketshouldrunupveryquickly.

Thisputstheoddsforarallycontinuationsomewhathigherthanthealternative.And if the Fibonacci 38% level can be overcome, the next target is the 50%level.Reachingthatlevelwouldconfirmthetramlinebreakmostdefinitely.

You see, I use lots of “what if” scenarios tomake projections and this is thecorrectmindsetforswingtrading.Thisdescribestheprocessinanutshell.And,ofcourse,Ialwaysuseprotectivestopsincasemyguessiswrong.

Figure3.9.2isanotherexampleinEUR/JPY.

Figure3.9.2

Ihaveanexcellenttramlinetriofullofaccuratetouchpointsandthemarkethasrecentlytouchedthecentretramlinefromabove.Thatmakesthisanopportunityforalongtrade,accordingtotheTramlineTradingRule.

Butthebigmoveupisaclearfive-wavesequenceandthefinalfifthwavehasbeenputin,whichmeansthemaintrendisnowdown.

SothereisaclearconflictbetweenthebearishimplicationsoftheEWcountandthebullishscenarioofthetramlinesupport.

InlightofthisbearishEWpicture,isthelongtradeadvisable?

Yes,itis.ThatisbecauseweareusingtheTramlineTradingRulecorrectlyandhavealow-riskentrywithourprotectivestopjustunderthecentreline.Also,wedon’tknowforcertainthatthefifthwavehasactuallyendedyet.Itmayextendandgoontomakenewhighsbefore toppingout.Wemustgive the longtradethebenefitofthedoubt.

Ifwearewrong,theworstcasescenarioisthatourtradeisstoppedoutandweaddonemore small loss toour loseraccount.And if thisoccurs, itmeans thecentre tramline isbroken.Thiswouldconfirm thenewdowntrendandwecanfeelfreetoreverseourpositionandgoshortonthebreak.

Summary

InthischapterIhaveoutlinedthevarioustechniquesIuseforuncoveringtradesetupsandhowIenterandexitthosetrades.Ofcourse,ifapatternispotentiallyunfoldingthatyoubelieveyourecognise,itmayormaynotturnouttobethatpattern in the fullness of time!We are always dealingwith uncertainties. Themainconceptisthatcontextiskey.Ifyouareinawell-definedfifthwavethenyou shouldbe looking to trade against the former trend and/or takeprofits onexistingpositions.

Inthenextchapter,Irevealmyfivefavouritetradesetups,allofwhichallowforlow-risktradestobemade.

Chapter4:MyFiveBestTradeSetups

In this chapter I give my Top Five Trade Setups. If you do nothing else butspecialiseinthese,youshouldhaveaverysuccessfultradingbusiness.

The first foursetups takeadvantageofcounter-trendmoves toposition for theonelargertrend.Theideaistoidentifythemaximumextentofthecounter-trendwavesandthentakealow-risk/high-probabilitypositionagainstitandthenridewiththemaintrend,sincethatis(usually)yourfriend.

Thethirdwavesetupisdifferent.HereIamtradingabreakoutandassuchtheriskishigher.Butwhenyoucatchagoodstrongone,itislikeholdingatigerbyitstail;therewardscanbespectacularasyouwillberidingthenewstrongtrend.

Thefivesetupsare:

TheA-B-Csetup

Thetramlinebreakandkiss

TheFibonacci62%retrace

Thetramlinebounce

Thethirdwave

4.1TheA-B-Csetup

This is averypowerfulyet simple setup thatoccurs timeafter timeoncharts.Not only does it giveme highly accurate entries, but it allows for very closestops,thusgivingmethosehighprobability/lowrisktradesIjustcrave.

Many of them work like clockwork and when you get proficient at spottingthem, itmakes trading seem so easy (butwe know it’s not!).After becomingproficientyoumaybeabletoanticipatetheturnjustbeforeitoccursandwatchit develop as if youhad directed themarket yourself.That is a very powerfulincentivetolearnyourA-B-Cs.

When awell-developed trend is in place,we normally get several three-wavecounter-trendreliefmovesalongtheway.ThemostcommonformofthisistheA-B-Cpattern.TheruleIuseisthis:whenIseeaclearthree-waveA-B-Cinatrendingmarket, Ihaveconfidencethat the trendis intactandIwill lookforatradewiththattrend.

WhyistheCwaveimportant?

TheCwaveisimportantsimplybecausethiswavesignalstheendoftheentirecounter-trendmoveandatradetakenherewillgetyouonboardthemaintrendat low risk.Remember,whenwecan identify a complete impulsive five-wavemove,theendingfifthwavesetsupthecounter-trendmove.Whenyoubelievethefifthwaveisending,thenyoucanbepreparedforthereliefmove.Andwhenyouspotagenuine three-wavemove, it is always runningcounter to themaintrend.Tradingwiththemaintrendisalwaysthepreferredrouteandthiswillbeaccomplishedwhen fading theCwave.By fading Imean to trade against thedirectionoftheCwave.

AgreatexampleinGBP/USDisshowninFigure4.1.1.

Figure4.1.1

Themoveoffthe1.66highinearlyJanuaryisinfivewavesandthefifthwavesports a large positive momentum divergence. That was the clue that thedowntrendwasabouttobeinterrupted.Themarketthenmadeanervousrallyoffthe1.6340 lowuntil thedayof thevolatility-inducingmonthlyUS jobs report(thenon-farms),where itunderwentwildswings, firstdownand thenup.Thisdown-upsequencetracedoutaniceA-B-Conthehourlychart.

AndnowwecanbringintheFibonaccilevelsusingthemostrecentmajorhighandlowaspivotpoints.

Wherearethemostcommonturningpointsforthecorrectiverally?

InanA-B-Ccorrectivepatternfollowinganimpulsivefive-wavemove,themostcommonpointwhere theCwave turns isat theFibonacci50%or62%level.

I sometimes see the 78% levels as turning points, but they are less common(thereisoneinthenextexample,though).

Here,theAwaveterminatedatthe62%levelwithafairlyaccuratehitandtheCwavehasjustexceededthatlevel.ThisisimportantbecauseitillustratesaruleIhaveobservedovertheyears:whenweseeadeepAwavetothe62%level,theCwavewillusuallypokejustabovethatlevelandturnatthe67%level.ThisisaFibonacci2/3ratio,andliesbetweenthe62%andthe78%levels.

MyadvicewhenusingFibonacci levels is to keep your eye on the 67%level(youwillhavetoworkitoutmanuallyusingyourcalculator).

Ashorttradeatthe62%level–at1.6490–couldbeprotectedbya60pipstopat1.6550,whichliesjustabovetheFibonacci78%level.ThiswouldallowforanextensionoftheCwavetothenextFiblevel.Butnowthemarkethasheadeddownagain, thisstopcannowbemoved to the1.6500 level,which liesat theovernightminorhigh.

So now I have a tradewith a 10 pip risk and a profit target of at least the 6January1.6340low,whichisaminimumprofitof150pips,givingareward/riskratioof15:1.That isonesuperbsetup.Ofcourse,oncemytarget isreached,Iwillbelookingoverthemarketactiontosetanewtarget,ifappropriate.

ThekeyhereisthatyoumustwaitfortheCwavetobeclearlyidentified.Thetemptationistoeitherjumpthegun(ifyouareanimpulsivetrader),orwaittoolongaftertheturnhasbeenmadetomakesure(ifyouareacautioustrader).YoumuststrikeascloseaspossibletotheFibonaccileveltoensurealow-risktrade.

Afewhourslaterandthemarkethasdroppedsharplyandiswithinpipsofmyfirsttargetat1.6350(seeFigure4.1.2).

Figure4.1.2

I have expanded the chart so that I can show the big rally in November andDecember.Nowthepicturelooksdecidedlydifferent.IhaveapotentialHead&Shoulderstop(seeSection1.3)andthemarketiscurrentlytestingtheneckline.

Thatisadropofalmost150pipsintwohoursandsothequestionarises:isthispartofathirdElliottwave?

Third waves are long and strong and this one qualifies with the momentumreadinginthebasement.Ifso,therallytomyRSiswave2andwearecurrentlyinwave3,whichshouldtakethemarketwellbelowmyneckline.

With this in prospect, Iwill take partial profits and leave open the remainder,moving my stop on to breakeven point and waiting to see how the marketdevelops.Butthishasallthesignsofaverygooddownwardbreakupahead.Ifnot, thenmyremainingtradewillbeawash.Ialreadyhavesomeprofit in thebank,sonoproblem.

Figure4.1.3showsanothergreatexampleinthedailychartofEUR/GBP.

From the 1August high, themarket has fallen in a five-wave impulse patternwiththethirdwavestrongandapositivemomentumdivergenceatthefifthwavelow.This ispure textbookbehaviour,as is the three-waveA-B-Cfollowing it.

Notonlythat,buttheCwaveterminatespreciselyattheFibonacci62%levelonanegativemomentumdivergence(shownwiththedownwardslopingbaronthemomentumchart).

Figure4.1.3

Whereistheidealtrade?

ThiswasaterrificsetupforashorttradeattheCwavehigh.Theprotectivestopcould be placed only 20 to 30 pips away very safely. As the Cwave was inprogress, all you needed to do was watch the momentum (to ensure it wasstaying lower than the value at waveA). As themarket approached the 62%levelyoucouldenteryourlimitsellorderand,whenfilled,enteryourprotectivestop.

Whatismytarget?

Inthesesetups,myminimumtargetisalwaysthestartoftheA-B-C(hereat0.8340). For a short trade entered at 0.8560 (stop at 0.8590), the minimumreward/riskratioisaverysatisfactory8:1.Thetargetwasreachedinjustoveraweekforagainof220pips.

Sothisistheplan:

Everyday,lookforatrendingmarket,thenseeifthereisanA-B-Cpatternthatisclosetocompletion(intheCwave).

ApplyyourFibonaccilevelsandseeifthemarketisgettingclosetothe62%level(orperhapsthe50%level).

Lookforbuddingmomentumdivergences.

Thisshouldgiveyouagreatsetuptotradewiththemaintrend.Youcandothisonthedailyandhourlycharts.Makethisadailyroutine.

Icall thissetupaFivedown,threeup forabearmarket,andviceversa forabullmarket.

Figure 4.1.4 shows an example that is a variation on this theme in Eli Lilly(NYSE:LLY).

Figure4.1.4

I have a fivedownoff theApril high and the customaryA-B-Ccounter-trendrally,onlythis time, theCwavehascarrieddeepertotheFibonacci78%levelandwithnomomentumdivergence.Thisisunusual,butnotrare,andyoucangoaheadandtradeitasusual.

Butifyouhadshortedatthe62%level,youwouldhavebeenstoppedoutonthecontinuation of the C wave.When it headed for the 78% level, that was theopportunity to re-enter. Incidentally, themomentumas themarketwasrallyingintothe62%levelwasalreadyhigherthanthatattheAwavehigh,sothatwasacluethatthemarketlikelyhadfurthertoruninwaveC.

WhenwaveCwasin,themarketdeclinedinthreewavesdowntomytargetatthestartoftheA-B-Catthe$49level.Thatwasagreatmoveof$7,or700pipsintwomonths.

YoucantakeadvantageoffurtherpotentialgainsusingtheSplitBetStrategy.

SplitBetStrategy

Whenthesesetupsoccurnearthestartofanewtrend,astheytendtodo,usingtheSplitBetStrategypaysbigdividends.By this Imeanyoubankaprofitonpartofyourtotalbetwhenthetargetismet(atthestartoftheA-B-C)andleavetheotherpartopenwithaprotectivestopmovedtobreakeven.Thiswillaffordyoutheopportunityofstayingwith the trend if itdecides tomakeareallybigmoveinyourdirection.Thenyoucancalculateanewtarget.

Imagineyourpeaceofmindwhenyouhaveaprofitinthebankandatradethat,atworst,willbreakeven.Themostanxiety-fuelledperiodforanytraderisjustafteryouhaveplacedyourtradebeforeeitheryourstoporyourtargethasbeenhit.Thisanxietycanonlyincreaseifyoufail totakeprofitatyourtarget,orifyoutaketheprofitonyourfullpositionatthetarget,andthenseethemarketsailawayinyourdirectionwithoutyou.Anxietywillbemetwithfrustration–andthatisnostateforatradertobein,believeme.

IhighlyrecommendyouimplementtheSplitBetStrategyinallofyourtrades.Getsomeprofitinthebankandletthemarketworkonyourremainingpositionwhere you will feel much less tempted to grab a profit on it too soon. This

secondpositionmayturnouttobealong-termholdandgiveyouamajorprofit.Someofmylong-termwhaletradeshavebeenmadeusingSplitBets.

Figure4.1.5isagreatexampleinBP(NYSE:BP).

Figure4.1.5

From the 1October low, I have a clear fivewaves upwith the thirdwave sostrongthereisalargegapatthemid-point.

Thisgapissignificant.

Mostgapsgetfilledinduecourse,butnotalldo.Thosethatdon’tfillveryoftengiveacluethatthetrendwillcontinue.Lookuponanunclosedgapasasignofstrengthinthetrend.Inotherwords,mindthegap!

Afterthefifthwavewasputinonaverylargenegativemomentumdivergence,themarketenteredatextbookA-B-CcorrectivephasewiththeCwavereachingtheFibonacci38% level.Themarket thenhad theoptionofdescending to theusual50%level,butthatwouldhaveclosedthegap.Thevitalcluethatthegap

wasrepellingthemarketupwardsoccurredwhenthemarketralliedabovetheBwavehighwithforce.Thatwasasigntogetlongifyouhadmissedtheearlierentry.

ThemarkethasralliedbacktothestartoftheA-B-C(atthewave5high),whereashort-termprofitcanbetaken.Butthischartisshowingthemaintrendremainsupandthemostcomfortablestanceistradingfromthelongside.

4.2Thetramlinebreakandkiss

Notalltramlinebreaksarecreatedequal!Remember,thebreaktellsyouthatthetrend has changed and it is better to be trading with this new trend. Sometramlinebreaksturnouttobeheadfakes,butwhenwedogetagenuinebreak,youalwayshavetwooptionsforatrade.

Thetwotradeoptionsaretoeither:

setanentrystoporderjustoutsideofthelinetocatchthebreak,or

waitforakissbackontheline.

Figure4.2.1showsagreatexampleinEUR/USD.

IhaveasuperbuppertramlineonthedailychartwithaPPPtwomonthsbeforethetradingchannel,makingitaveryreliablelineofresistancefromNovemberonwards.NotethemostrecentassaultonthislineinlateDecemberwasrepelledvigorouslyasthemarketspikedupandthendown.Mylowertramlinehasthreeaccuratetouchpointsandwhenthebreakoccurreditwascleanandsharp.Thatiswhereasell-stopordercouldhavebeenplaced.

Let’s assume you have entered a short trade on the tramline break. Now themarket is trying to get back to kiss the line and is trading above the entry. Inthesesituations,therearethreeoptions:

Themarketmayfailtokissthelineandresumeitsdescent.Thatwouldindicateextremeweakness.

Themarketmaygoontokissthelineandthenturnbackdown,wherealow-riskshortentrycouldbemade(ifyouhadnoexistingposition)–thisistheclassicFarewellKiss.

Themarketmaybrushoffthekissandsailonupwards.

Figure4.2.1

Thebestlow-riskoptionforatradeisthesecond,whereyouwaitforakissonyourreliabletramline,setyourlimitordertoshortatornearit,andplaceaclosestop just inside thechannel incase themarketdecides it likesoption three. InEUR/USDmarket,youcanusuallyseta30to40pipstopmaximum.Andwhenyour target is at least 150pips away, that gives you an acceptable reward/riskratioofatleast4:1.

Figure4.2.2showshowthisdevelopedoverthecourseofthenextfewdays.

ThemarketdidcomebackforakissbutinsteadofmovingdowninaScaldedCatBounce, ithadanothernear-misskissbeforemovingsharply lower. Ifyouwereshortingonthefirstkiss,youwereindangerofbeingstoppedoutonthesecond rally. But that was a second opportunity to position short, since thetramlinebreakwasconfirmingahighprobabilitytrendchangetodown.

Figure4.2.2

AfascinatingandinstructiveexampleofthisincrudeoilispresentedinFigure4.2.3.

Figure4.2.3

I have a superb lower tramline with at least five touch points and my uppertramlinehasthatlovelyPPPandtakesinthemultiplehighsinearlyDecember.ThetramlinebreakcameneartheendofDecember,andwhatabreak!Itwassopowerfulthatitcouldn’tevenstopforagoodbyekiss.

Werethereothercluesthatashorttradewaswellworthpursuing?

Wehad a few clues that the breakwould be sharp before the event. First, thefinal rally topped out a considerable distance away from the upper tramline,which indicatedanunderlyingweakness in theCwave.This indicates that thebuyingpowerwasnot enough toget themarket to theupper tramline.This isbearishaction.

Second, the entire rally is in three waves and the final wave sported a hugenegativemomentumdivergence,indicatingthebuyingpowerwasbeingusedupingettingtothetop.

Remember, the greater the momentum divergence, the stronger thecounter-move.

Asthemarketdeclined,itwasclearthat therallywasanA-B-C,soyoucouldset your target at the start of the A-B-C at the 92 area. A short trade on thetramlinebreakwouldhavemadeacool700pipsprofitinabouttwoweeks.Nicework.Andyoucouldhaveenteredaveryclosestopforaveryhighreward/riskratiotrade.

Incidentally,theBwaveisalsoinaclearA-B-C,whichistextbookEW.Iliketoseethreesub-wavesinthemainBwave.

One other point: in sub-waves, themaximummomentum reading rarelyappearsattheextremeofthewave.

Ifyoulookcarefully,youwillseetheAwavecontainsaprettyfive-wavepatternof sub-waves. The third sub-wave is the very strong thrustmoving above theprevioushighs fromNovember.Thehighestmomentum readingoccursduring

this third wave and not at the end. That is entirely typical. Look for themaximummomentum readings somewhere inside the third wave, not in fifth(whicharegenerallyweaker).Ofcourse,indowntrends,themomentuminthirdwaveswillbelowerthaninthefifthwave.

Figure4.2.4showsanotherexampleinEUR/JPY.

Figure4.2.4

Thisisaterrifictramlinepairwiththelowerlinehavingfivewell-spacedtouchpoints and the upper tramline with the excellent PPP and at least four touchpoints. For twomonths from early November until early January, the marketkept tradingstrictlywithin the tradingchannel.But tradingchannelsdonotgoonforeverandthebreakoccurred.Itwasasharpone,whichistypicalfollowingalengthytrend.

Ifyouwerewithoutapositionduringtherally,asensiblecoursewastolookfora trend change and to trade the tramline break. This could be achieved byplacing a sell stop just under the tramline and adjusting it as the marketcontinuedup.

Aclose-upisshowninFigure4.2.5.

I havemarkedwhere the sell stop can be raised until it is hit. This is a goodtechniquewhichcanbedoneeverycoupleofhoursorso.Andtheadvantageisthatyoucansetyourstopbeforeretiringforthenight.Inthemorning,iftherehas been a big down move, you will have a position at a good entry. Howdisheartening to switch on your computer and see the market you have beenstalkingfordaysonendmadeabigmoveintheovernightmarketwithoutyoubeingonboard.

Ofcourse,youcanusethis techniqueasa trailingstopmethodifyouarelongandwishtoprotectasmuchofyourprofitasyoucanbeforethetrendchange.

The market made a strong move down after entry and a 200 pip profit wasavailableonthefirstlegdown.Atnotimewasthetradeinloss.

Figure4.2.5

YetanotherterrificexampleofatramlinebreakandkissinUSD/JPYisshowninFigure4.2.6.

Themarkethasbrokenthelowertramlineandhasmovedbackupforakissonthe underside of the line and is currently backing off. Now I can place theFibonaccilevelsonthelastwavedownandobservethatthemarkethascarriedto the precise 78% level (see Figure 4.2.7). This is a textbook place to startlookingtoenterashorttradewithaprotectivestopjustabovethetramlineinthe104.70areafora30to40piprisk.

Figure4.2.6

Figure4.2.7

Figure 4.2.7 is a close-up showing not only that the market has kissed thetramline, but also that it has rallied for a highly accurate hit on theFibonacci78%level.Remember,whenakissmeetsaFibonacci50%,62%or78%level,that represents extra powerful resistance (or support in the case of a down-slopingtramline).

Ashorttradeherewassuper-lowriskandaprotectivestopofonly20to30pipscouldsafelybeemployed.

Figure4.2.8showsanothergoodexampleinAUD/USD.

Figure4.2.8

The market was in a steady downtrend until the upper tramline break on 10January.Thiswasthefirstsignal that the trendwaslikely tochange.Therallycould not hold and the market retreated right back to the upper side of thetramlineinakiss.

This is presenting a low-risk long entry since your protective stop could beplacedonly20to30pipsaway.Figure4.2.9showsaclose-upofthesituation.

Notethemarketalsohasretraced78%ofthelargewaveupfromthe0.8850low.ThismeetingofthetramlineandFiblevelrepresentsextra-strongsupport.

Figure4.2.9

Whenyouseeameetingofa tramlinewithaFibonacci level, this isanareaofextra-strongsupport/resistance.

Makinganentryintheseareasisaveryhighprobabilitytrade.MakesureyouhaveyourFibsandtramlinesworkingatalltimes.

Figure4.2.10showsabuddingexampleinApple.

The market has been in a solid uptrend since July with an excellent lowertramline,whichhasrecentlybeenbroken.Themarkethasnowmadeakissandbouncedoffit.Momentumisweakeningastherallyextends,whichaddstotheevidencethatamajorturnislikely.

Ashort tradeon thekisscouldbeprotectedbyaclosestop togivea low-risktrade.

Figure4.2.10

But Ihaveawarning for this setup: ifyouhavea steep tramlinepairworkingand you decide to enter on a tramline break, if the market then reverses andmakesakissbackontheline,therallytothekissmaybemanypipsawayfromtheoriginaltramlinebreakandyourentry.Youmaythenhavetosufferalargeadversemovebeforethekissiscompleteandyoumaybestoppedout.YoucanseewhatImeanbyreferringtoFigure4.2.11.

Figure4.2.11is thehourlyEUR/JPYchartandthetramlinebreak.Shortingonthe break at the 143.80 level would make sense, but where to place yourprotectivestop?Becauseofthesteepslopeofthetramline,itwouldhavetogoinsidethetradingchannel,perhapstothe145.40level,givingariskof160pips;which,forswingtrading,isfartoowide.

Youwouldthereforepassonthistradeandhopethemarketralliesforakisstogive you amuch lower-risk entry. So far, themarket shows no inclination ofkissing the tramline and youmay havemissed a trade in thismarket.OK, somoveon!

Ihaveshownmanyexamplesoftramlinebreaksandkissesinthissection;thatisbecausetheyareamongmyfavouritetradesetups.Intheseexamples,therearemanyvery sharpmoves, allowing for a rapidbuild-upofprofit right from the

get-go. I like toseea trade inprofit rightawayanddislike itwhen themarketvacillatesaroundmyentry.

I have gained a fair bit of experience of dealingwith adversemoves over theyears.Butfornovicetradersthestresslevelscouldaffectjudgment.ThisiswhyIrecommendsearchingoutthesetramlinebreak-and-kisstrades.

Figure4.2.11

4.3TheFibonacci62%retrace

Wehavemet theA-B-C setupwhere very often theCwave terminates at the62%retraceofthepriorfive-wavepattern.ButwedofindsituationswherethereisnoclearpriorEWpatternandwhereacounter-trendmovemakesaFibonacciretraceofthepreviouswavedown.

RefertothehourlyMicrosoftchartinFigure4.3.1.

FromtheearlyDecemberhighsthemarkethasdippeddowntothe35.50levelandthenstagedarally.Thereisapossiblefive-wavepatterntothisdeclinebut,to me, it is not clear. Also, the rally does not have a definite A-B-C form. IabandonlookingforEWshere.

When looking for the correct EW labels, if it does not stand out rightaway,thenitisprobablybesttostoplooking.

But the rally did carry to the preciseFibonacci 62% level evenwithout beingabletoidentifytheEWlabels.Thiswasasuperbplacetoshortthemarket.Thefirsttargetis,asinthecaseoftheA-B-Csetup,thestartofthereliefrallyatthe35.50level,whichwasdulyhitforapotentialprofitof$2ashareinalittleoveraweek.

Thismethodworks particularlywell on long-range chartswhere the EWs arehard,ifnotimpossible,tolabel.

Figure4.3.1

Figure4.3.2showsEUR/USDspanningthreeyears.

Fromthe2011highsandthe2012low, themarkethasralliedto theFibonacci62%leveltwice.Thefirstrallyleadtoadecentandtradable500-pippullback.The latesthit in the62%levelhasproducedapigtail spike,which iscommonafteraprevioushithasbeenmadeonthatlevel.

Whywasthereaspikehighonthesecondhit?

Therearealwaysmanyprotectivebuy-stopsplacedjustaboveamajorhighandthemarket just loves togohunting for them!Andhere theywere located justabove the first hit on the Fibonacci 62% level. This was an excellent area tobeginashort-sellingcampaign.

Figure4.3.2

4.4Thetramlinebounce

The tramline trading rule states that in a rising market with the tramlinespointingupwards,thecorrecttradeistogolongwhenthemarketistradingatornearthelowertramline.Theoppositeappliestoafallingmarket,ofcourse,withashorttradeindicatedattheuppertramline.Thisrulepresumesthetrendwillbemaintainedandthemarketwillbounceoffthesupportorresistanceprovidedbythetramline.

InSection4.2,Ishowedhowtohandlethesituationwherethetramlinebreaks,buthereIwillexplainhowItradewiththetramlinetradingrule.

Figure4.4.1isanexampleinUSD/JPYmarket.

I have a reasonable tramline pair working. There are no Prior Pivot Points,whichmakesitpossibletoadjusttheslopeofthelineswithoutinvalidatingthemaslinesofsupportandresistance.

Withthiscaveatinmind,ashorttradehereisindicatedwiththemarketclosetotheuppertramline.Iamlookingforabouncedownofftheuppertramline.

But if themarketdoesbreakabove theupper line, thatwould indicatea likelychange in trendandsoacloseprotective stopcanbeentered.The ideal lowertarget is on the lower tramline, giving this trade a veryhigh reward/risk ratio,makingitaveryattractivetrade.

Figure4.4.1

Figure4.4.2 is another example inAlcoa (NYSE:AA),whichhasbeenoneofmyfavouritetradessince2013.IpreviouslyshowedthelargewedgethatformedonthedailychartinFigure3.4.1.

Here there is a very good tramline pair with the upper line sporting the twoexcellent touch points (red arrows). The lower tramline has several accuratetouchpointswithonesmallovershootinJanuary.

Thecorrecttradewastogolongatthetwomostrecenttouchpoints.

Whygolonghereandnotpreviously?

ThereasonisthatIcouldnotdrawinthesetramlinesuntilthemostrecenttouchpointsweremade.Butwith the added touchpoints, I nowhave confidence inthesetramlines.

Going long at either of these touch points allows for a protective stop to beenteredjustbelowthelineforlow-risktrades.

Andmyuppertargetliessomewhereontheuppertramline,whichgivesanothertradewithahighreward/riskratio.

Figure4.4.2

4.5Thethirdwave

InElliottWaveTheory it is usually the thirdwave of an impulsive five-wavesequence that is the longest and strongest.Thatmakes the taskof findingoneveryworthwhilefromaprofitperspective.Andbecausethirdwavesarestrong,they often do not suffer large setbacks which can take you out of the tradeprematurely. One drawback is that your initial risk can be high:much higherthanfortheotherfoursetupsIhavediscussedinthischapter.

Sohowdoweidentifywhenthemarketisinathirdwave?

TohelpanswerthatIneedtoexaminethecontextthemarketisin.Toidentifyathirdwave,Imustfirstlocatewaves1and2.Thisisaloteasiersaidthandoneinrealtime.

Let’sturntoanexample,EUR/USD,inFigure4.5.1.

ThemarkethasbeeninrallymodeandhasmadeagoodA-B-C(counter-trend)rally off the 10 November low. If this is correct, then the one larger trendremainsdown.TheA-B-ChasgivenmethecontextforthenextwaveandtellsmetoexpectadownmovestartingfromtheCwavehigh.

Figure4.5.1

Ihaveshownmylowerlong-termtramlineandwhenthemarketbrokebelowitand throughmypink bar, thatmade themove off theCwave top as possiblewaves1and2ofasuspectedfive-wave impulsepattern.Andbreaking thew1lowgavemeconfirmationthatweareverylikelyinw3downfollowingtheA-B-Cup.

But aswith all developingEWpatterns, there is an alternative labelling that Ineed to keep in mind: three waves down so far could be an A-B-C pattern,leadingtoarenewedrally.

I havemy short entry and now I can placemy protective stop just above thetramlinefora40to50piprisk.

One of the great attributes of third waves is that once they start, they moverapidly in the direction of the main trend. They are usually very easy torecognise,evenwhen inprogress. Inowhaveanexpectationfora rapidmovelower.

Incidentally,theformofthew1isalsofivesub-waves,whichgivesmethefirstcluethatthedowntrendhadstartedoffmyCwavehigh.

Summary

In thischapter, IhaveshownhowI trademy fivebest tradesetupsandhowImanagethetrades.Thekeyatalltimesistoonlytradewhenyoucanfindalow-risksetupandtorejecta trade if itcannotoffer this,nomatterhowconvincedyou are it ‘should’ be a winner. There are plenty of excellent low-riskopportunitiespresentedintheaverageweekanditisnotnecessarytotakelow-qualitytrades.

Part3:MyTradingDiary

IntroductiontomytradingcampaignsingoldandtheDow

ThisismydiaryoftradesandanalysisfromNovember2013toMarch2014inmygoldandDowcampaigns.IchosethesetwomarketsbecauseIbelievedtheywould offer excellent studies in how I usemymethods to extract profits andavoidmajorlosses.

In theDow, itappearedhighly likely that the longbull trend fromthe lowsofMarch2009wasending.Bullishsentimentwasoffthescale.IfIcouldcapturewhatIthoughtwastobeamajortop,thenthishistoriceventwouldserveasthebackdropforsomegiantmoves.

Similarly,ingold,bullishsentimenthadreachedhistoriclowlevelsinlate2013withdireforecastscommon.Heretoo,IbelievedthatacampaigncouldillustratehowItradeamarketfromacontrarianperspective.

Iwrotemydiaryinreal-timewithnoafter-the-factediting;Ihopeitconveysthecross-currentsflowingthroughmymindwhenintheheatofbattle.

TheGoldCampaign

Goldwasinamajorbullmarketformanyyearsuntilitmadeitstopinlate2011.Since then, it has been in decline with an accompanying reversal in tradersentiment. From bullishness reachingmanic levels near its 2011 high, bullishsentiment reached an unprecedented low– into single-digits – inmid-2013 asmeasuredbytheDailySentimentIndex(DSI).Thisaccompaniedtheplungeto$1180,whichremainsthelow(sofar).

Thissellingofgoldwastheflipsideoftherushintoequitiesinalowinterest-rate(QE/ZIRP)environment.

Mycampaign isattempting to takeadvantageof thiscurrentbearishsentimentby looking for a relief rally, which could develop into a move of severalhundreds of dollars in a huge short squeeze. If stocks do begin their long-anticipatedturndownsometimeinthenextfewmonths,thisshouldpropelgoldasfundsmovetoitssafehaven.

Wednesday3December2013Gold has been hit very hard in recent months and sentiment is extremelynegative. The pundits are falling over themselves projecting lower and lowertargets –many below $1,000. This is an ideal setup for a large counter-trendrally.

Thebigproblemisthatthemaintrendisdownanditwouldbeveryeasytobecaughtholdingalongpositionwhenthemaintrendresumes.Thatisthedangerin trying to trade against the main trend. But when conditions are right, as Ibelieve they are here, a significant relief rally of at least $100 is well worthaimingfor.

Figure5.1.1displaysthemonthlychart.

The 2011 top at $1920 was the final fifth wave of the entire multi-year bullmarket. Since then, the market has declined in three waves, which I havelabelled1,2,and3.Ifweareattheterminationofw3,Iexpectarallyinw4.

Themomentum reading is currently very oversold,which tellsme themarketmaybedueforabouncefromnearcurrentlevels.

Figure5.1.1

There is a slight possibility that this entire move is an A-B-C, but thisinterpretationislesslikely.Undereitherscenario,arallyislikely.

Thequestionis:hasthedownwavealreadycompleted?

Ineedtolookalittlecloseratthewavestructure.IfIcanspotacompletefivewavesdownwithinwave3,Iwillhavealikelyterminationpoint.

Andhereitis,inFigure5.1.2,satisfyingallofElliott’sruleswithanespeciallystrongw3 (which itselfhas fivesub-waves).There isalsopositivemomentumdivergencebuilding,soIfeelIamclosetomylow.

Figure5.1.2

ButIneedtoseethestartofarallyandapushaboveaminorresistance.MovingontoFigure5.1.3wecanseethew5fromFigure5.1.2ona15-minchartandIcanidentifyasmall-scale,five-wavemotivepattern(withlongandstrongw3).Thisisreallyshapingupnow.

Idecidetoplaceabuy-stopatthe$1224levelwithaprotectivestopjustunderthe w5 low at $1210. If the market does decline under my w5 low, I haveobviouslymislabelled the short-termwaves and I want to be out. I will onlyretainthetradeifthemarketprovesmycountisright.

Mytradeisstoppedinat$1224andIentermystoplossat$1210.

Figure5.1.3

Friday6DecemberMarketisrallyingnicely;haveIfoundthelowatw5?

TodayseesthereleaseoftheimportantUSjobspicture(Fedtaperquestions)andsureenough,aftertherelease,themarketgoeshaywirewithhugeswingsdownandthenarecovery.Butcrucially,myprotectivestophasnotbeenhit–myw5hasnotbeenviolated(seeFigure5.1.4).

Figure5.1.4

Tuesday10DecemberYesterday and today themarket is edging upwards again and I can now drawnewtramlines,asshowninFigure5.1.5.

I have superb PPPs and touch points going back some way. That is alwaysreassuringwhenpositioningnewtramlines.Andsince24November,Ihavesixgreattouchpointsonmycentretramlinewiththemarketknockingonthedoorthismorning.

Ifthisresistancegivesway,weshouldbeoffandrunningtotheupsideasthereisboundtobeplentyofbuystopsinthezoneabovethetramline–aswiftmoveuptotheuppertramlineinthe$1270to$1280areaisonthecards.

But ifnot,noworries–Ihavemovedmystoptobreakevenat$1224foranorisktrade.Nice.

NowIhaveagoodlow,IcanapplyFiblevelstothewavedownoffthe$1360high,asshowninFigure5.1.6.

Figure5.1.5

Figure5.1.6

Wecansee therallyhascarried to theFibonacci38%level,whereIexpectatleast a pause (and there is some overhead resistance here from the mid-Novembertrading).Sofarsogood.ButImustbeawarethattherallyisinthreewavessofarandcouldbeacorrectiveA-B-C,whichwouldleadtoamovetoafreshlow.

Thursday12DecemberThe rally is not holding and the market has crashed back to underneath mycentretramline.Ihavebeenstoppedoutatmybreakevenstop.

Result:nolossorgain.

Friday13DecemberButIamnotgivinguponalongtradeingold.Mylong-termanalysisremainsvalidandIstill feela$100 to$150rally is likely. Ifanything, thehedgiesareevenmorebearish(COTshowsthis).

Themarkethascomebacktochallengethe4December$1211low,butsofar,the low is $1220 – only $10 shy. This sets up the possibility of a new EWlabelling,asinFigure5.1.7.

Figure5.1.7

NotonlydoIhaveapossiblew1,w2andthestartofw3up,butIhaveaverytasty tramline pair. The lower tramline takes in the important $1211 low andtoday’slow(w2).Italsotakesintheprecisehitonthespikelowon6December.Thatmakesthreeaccuratetouchpoints.

Also,Inotew2hasfivewaves,justasthepreviousw5hadearlierthismonth.

Couldthisbethestartofthebigreliefrally?

Figure5.1.8showsthedevelopingsituation.

Figure5.1.8

Themovedownoff the10Decemberhighhas fiveclearwavesand there isamassive positivemomentum divergence at the fifthwave. I setmy entry buystopjustabovetheminorresistanceat$1230andsetmyprotectivestopat the62%retraceofthemoveupfromthe$1220low.

Mytradeisstoppedinat$1230andIentermyprotectivestopat$1224.

Wednesday18DecemberThemarkethaslurcheddownandhastakenmeoutonmystop.

Iamstoppedoutat$1224fora600piploss.

Friday20DecemberI’mafraidit’sbacktothedrawingboardforme.Beingapersistentone,Iamstillmonitoringgoldbecausewiththesentimentatrock-bottom,alowwillbemadesoon–of that I amcertain.Now that it is tradingunder$1200, this is agoodplacetolook.

Why?

Remember the infamous plunge low in late June to $1180? The talk was ofmanipulationbyhedgefunds(andcentralbanks)drivingallthegoldbugsoutofthegame.AndwehadastrongrallyinJulyandAugustoutofthatlow.

ThenextchartinthesequenceisFigure5.1.9.

Figure5.1.9

The low yesterdaywas $1186, so if we can get a rally going from here, thatwould set up the possibility of a double bottom. That will get the chartistsexcited!

ThisismybestguessfortheEWlabels.Also,IbelieveIcanspotfivewavesintheCwave.Ihavealsodrawnanewlowertrendline.Itistimetotestthewatersagainwitha long trade.Yousee, Iamprobing themarket for thiselusive lowbecausewhenIgetitright,Iamexpectingtherewardswillbespectacularintheshortsqueeze.

Ihavegonelonggoldat$1197withaprotectivestopat$1187.

Ihavesetmystopjustundertherecentminorlows.

Thursday26DecemberWeoftenseesomegoodvolatilityovertheChristmasandNewYearbreakandthis shouldapplyespecially togold.Bullish sentimentat themoment is in thebasement(recentDSIat4%bullswasaboutasextremeasIhaveeverseenit).

Nowwithanewlowinplacefromlastweek,itistimetoredomyEWlabels.Inote that the low so far is $8 shyof the June$1180plunge low, so there is apossibilitythatthiscouldbeararetruncatedfifthwave.ThepositionwithgoldpricedindollarsandalsopricedineurosisshowninFigure5.1.10.

Figure5.1.10

ThisgivesabetterfitsincetheeuropriceofgoldhasmadealowunderneaththeJune low, therebymaking a fifth (and final)wavedown.Thismeans theoddsincreasesubstantiallythatweshouldbeatthestartofthemassiveshortsqueeze.

That would set the cat amongst the pigeons and send the hedge fundsscamperingtocover.

ButanotherpossibleEWinterpretationisshowninFigure5.1.11.

The summer rally could bewaveA of anA-B-C counter-trend rallywith therecentdipbeingwaveBandwithwaveCuptocome,whichcouldconceivablycarrytothe$1500area–about$300upfromhere.

Figure5.1.11

NowdoyouseewhyIsaidthistradehaspotentialandiswellworththeeffortincatching?

The huge positivemomentumdivergence really stands out at theBwave lowandwillallowforaverysharprally,once itcangetstarted.Whether it isaBwave low or a truncated fifth – either interpretation is consistent with a rallyfromhereorthereabouts.

Ihavealongtradeworkingat$1197andnowIcanmovemystoptobreakeven.Myplanisnowtoaddtolongsonsetbacks.

ThelatestCOTdatabacksupmycontentionthatashortsqueezecouldlightafireundergold.The small speculators added to their short positions lastweek

and now have an almost equal number of short and long futures positions.Rememberwhen theyweremassively longnotso longago?This isamassiveshiftinsentimentbythesmalltraderswhonowshowastrongbiastotheshortside.

NowIcanlookfornewtramlines.SeeFigure5.1.12.

My next major resistance is at the Chinese hat. This is where the long-termdown-sloping tramline meets the short-term up-sloping tramline. Now if themarketcanrallyswiftlytothisarea,themoveupwilllooklikeathirdwaveofflastMonday’sw2$1192low.Butafailureherewouldlikelysenditbacktotestthe$1180low.

Figure5.1.12

Tuesday31DecemberThemarketisnotholdinggainsandisedginglower.

Mytradeisstoppedatbreakevenat$1197asthemarketedgeslower.

I am watching as the market is heading down towards the $1180 level (thecritical June low) to see if itwill suffermore selling and go on to tradewellunder this level, or to encounter good buying ahead of tomorrow’sNewYearholiday. I would be surprised if losses were extended much beyond $1180becauseoftheverycrowdedshorttrade.

AndIdidnothavetowaitlongtofindout!

Afterspendingafewmomentsaround$1190,themarkettookofflikeascaldedcat.Thatwasmyanswer.Idecidedtogetlongagainasitappearedthelowwasin.SeeFigure5.1.13.

SonowIwaslonggoldagain.

Iamlonggoldat$1202withaprotectivestopat$1188.

If this lowholds, Iexpecta solid rally in theNewYear in theshort squeeze Ihavebeenanticipating.Sometimes,Ihavetomakeseveralattemptsat latchingon to a trade that I have been researching and consequently take a few smalllossesorbreakevensbeforegettingthatsolidentrypriortoabigmove.Ibelievethisonehasgoodpotentialforthat.

Figure5.1.13

Friday3JanuaryThe rally recovery is continuingwith a gapopening just abovemy short-termtramline(seeFigure5.1.12)andalsoabovemylonger-termtramline,whichnowbecomesmycentretramline(seeFigure5.1.14).

OK,Inowhavemuchgreaterconfidencethatthelowoflastweekat$1182willholdforaslongasaperiodofweeksandthatthetrendisnowup.Mybestguesshere is thatwewill see aminor top at any time for the firstwave up, then apullbacktowardsthecentretramlineandthenanewrallyintoanewhighforthemove.

Meanwhile,Iamadjustingmyprotectivestoptobreakevenat$1202.

Figure5.1.14

Friday10JanuaryThemarkethasedgedupallweek,exceptforanastyspikedownmid-week.ButthemarketrecoverednicelyandismakingeitheranA-B-Cuporthestartofafive-wavepattern,ascanbeseeninFigure5.1.15.

Provided themarketcanriseabove theFibonacci38%level,mynext target isthe 50% level at $1270.But thatwould set up the possibilitywe have a thirdwave up on our hands. Either that, or an A-B-C, which implies an eventualresumptionofthedowntrend.Butsofarsogoodforthecontinuationoftherally.

Figure5.1.15

Monday20JanuaryThemarkethasbeentradingaccordingtoplanwithagentlebiastotheupside.SeeFigure5.1.16.

Butnowthemarketistestingtheuppertramline.Itmaypushthroughoritmaybounce down off the resistance. Discretion being the better part of valour, Idecidetotakepartialprofitshereonthetramline.

Also, Ihavebeen readingmoreandmorebullishcommentary lately.GolddidnothaveafriendaslongagoasDecember!Nodoubtthegoldbugsarelookingatgoldzoomingoff intospaceagainaftereyeing this$70moveoff the$1180low;theycouldberaisingtheirhopesonceagain.

Allinall,Idecidethebestcourseofactionistotakepartialprofits,sinceIhaveover$50inprofits:

Isellonehalfofmypositionat$1256fora5400pipprofit

Mynetgoldpositionisaprofitof4800pipsandanopentradeworkingfromthe$1202level.

Figure5.1.16

Ishallcontinuetoholdtheotherhalfandmovemyprotectivestopuptoprotectsomeofthegaintodate:

Iwillthereforemovemyprotectivestoptojustundertherecentlowat$1235.

Friday24JanuaryMybestguessfrom10Januaryturnsouttobecorrectwiththismorning’srallyto$1270(seeFigure5.1.17).

Myuppertramlinehasbeenwellbrokenandthe$1270levelisattheFibonacci38% level. Stocks have taken a beating in the last week and gold shouldmaintainitsrallynextweek.Ifnot,thensomethingiswrongandIwillreassess.

Figure5.1.17

Thursday30JanuaryGoldcontinueditsrallytowardsmysecondtargetattheFibonacci50%retraceofthewavedownofftheAugust$1430high.SeeFigure5.1.18.

ThisrallyhasbrokenmyuppertramlinebutIamsuspiciousofabigrallyheresincetheentiremoveoffthe$1182lowhasoverlappingwaves,whichisthesignofacounter-trendmove,notthestartofanimpulsivemoveup.

I really likemy tramlineswith themultitude of accurate touch points and, atpresent,themarketistestingtheupperline’ssupport.

Willweseeakiss?

Figure5.1.18

Today,themarkethasfallenhardandIdecidetomovemyprotect-profitstoptotherecentlowat$1235,whereIamtakenout.SeeFigure5.1.19.

Figure5.1.19

Iexitthelastpartofmytradeat$1245foraprofitof430pips.

Mycombinedprofitonthetwopositionsis970pips.

Iamnowflatgoldandlookingforthenexttrade.

Monday3FebruaryThemarkethasclearlymadeatramlinebreakandisnowtestingsupportatthislineinapossiblekiss.This isoneof thebest low-risksetups(seeSection4.2)and I amwilling to re-enter the long side of themarket, expecting the kiss tohold.SeeFigure5.1.20.

Figure5.1.20

The tramline break could be very significant because if it holds, the oddsincrease forabigmoveup–perhaps inmyspeculativewaveC–andacarrytowardstheAwavehighataroundthe$1400area.Thatwouldmakethisaveryprofitabletrade.

Ire-enteralonggoldpositionat$1245withaprotectivestopat$1235.

Wednesday12FebruaryFigure5.1.21shows themarketedgingupwards,but slowly,as it eats into theoverheadresistance.

Figure5.1.21

Now the tramline break is looking more genuine, but I will still move myprotectivestopupto$1250.Themarkethadedgeduptoahighof$1296today–only $4 away from the round number $1300. Since this is a Fibonacci 62%retraceofthelastmajorwavedown,Idecidetotakeprofitsononehalfofmyposition.

Iexitonehalfofmypositionat$1290foragainof$45andleavetheotherhalfpositionopenwithmyprotectivestopmovedupto$1282.

Monday24FebruaryThemarketcontinuesupwardsandhasmade theFibonacci23%retraceof thebigwavedownoffthe$1800high.SeeFigure5.1.22.

ThetestoftheFib23%levelwasaclearA-B-C,sothemaintrendisintact.Butnow the rally off the C wave low has a lovely little five-wave continuationpattern.ThisisoneofthepatternsIdiscussedinSection1.3.

Nowwithmywave5 risingabovewave3, Ihaveconfirmation theuptrend isintact.

Figure5.1.22

ThatmeansIcanreinstatetoafullposition:

Igolongonehalfpositionat$1328withaprotectivestopat$1318.

AndIwillmovemyprotect-profitstopontheotherhalfpositionto$1305inanycase(justunderthe20Februarylow).

Wednesday26FebruaryHowdoesthebigpicturelooknow?Let’stakealookatFigure5.1.23.

Themarket has clearly broken above the centre tramline and heading for theupper tramline, putting my major target in the $1400 region, just where the

majorhighfromAugust2013wasmade.

ButthemarkethaszoomedupwithnorealsetbackssinceitmadetheDecemberdoublebottom,whichiswhyIsuspectthemoveawayfromtheFibonacci23%levelmaynotbeclear-cut.Ibelieveadecentdipawaitsus.

Figure5.1.23

Friday28FebruaryThemarkethasbeenziggingandzaggingoverthepasttwodays;thelatestDSIsentimentreadingsareoutanditisnotaprettypictureforthebulls,asseeninFigure5.1.24.

TheDSIisthedailysurveyofprofessionalfuturesadvisorsintheUSAandhasreacheddangerouslevelswheremajorhighshavebeenputinpreviously.Thisisagoodproxyforthepublicsentimentongold.

Idecidetomovemyprotect-profitstoponallpositionsto$1325andIamthenstoppedout.

Myprofitononehalffrom$1225isexactly$100.

Mylossontherecenthalffrom$1328is-$3.

Mynetprofitoverallis$97.

Totalprofitduringthecampaignis1940pips.

Themarketmayrallyalittlefurtherintheshortterm,butIwillwaitforagood-sized dip before looking again at a trade.With sentiment so bullish (and thelatestCOTconfirmsthis),Ibelievea$40to$50dipshouldburnoffthefroth.

Figure5.1.24

Monday3MarchThere are many bullish noises in the media about increased global tensions(China/Japan and Russia/West) and huge physical demand, such that DSI hasclimbedevenmoretothe80area.Thisismakingmenervous,butIbelievethereismoreupside.

TherewasanicestrongupsidebreakoutovertheweekendandadiponanA-B-C.Themarkethascorrected62%of the recent rallyandhourlymomentum isoversold.SeeFigure5.1.25.

ThereisalargegapcreatedbythestrongSundaynighttradeandthemarketistestingitcurrently.Evenifitclosesthegap,theoddsfavouraresumptionoftherally.ThatiswhyIdecidetoreinstatemylongpositionhere.

Ienterafulllongpositionat$1335withaprotectivestopat$1325.

Idecideona$10stopsinceevenagapclosingwouldkeepmeintactandifthemarketdidtradedownto$1325,myrallyforecastwouldnotbeassecureandIwouldwanttobeoutofthemarketinthiscase.

ThistradedependsontheCwaveholding.

Figure5.1.25

Friday14MarchUkrainehas dominated thenews in the lastweek. Iwas awayonholiday andgoldhasgainedover$50inthistime.Ishouldgoawaymoreoften!ButtodayI

amfeelingverynervous.DSIhasedgedup toanewhighata littleover80%bullsandCOTdatashowspecshavefilledtheirbootswithlongpositions.

On the daily chart in Figure 5.1.26, I havemy EW labelswith the current CwaveedginguptotesttheFibonacci78%retraceoftheBwave.ButInotetheloomingpotentialnegativemomentumdivergenceasawarningsign.

Forthisreason,Idecidetoexitonehalfofmypositionat$1385foratidy$50profitinonlytwoweeksforatextbookswingtrade.

Iexitonehalfofmylongpositionat$1385,retainingtheotherhalfandmovingmyprotect-profitstopto$1365.

Profitonthishalfis$50.

ThereisnodoubtglobaltensionsarerampingupoverUkraine(thereferendumforCrimea to secede is held today, Sunday 16March). TheUS has promisedheavysanctionsonRussianinterests,whichseemassured.Fear(andmadnessofpoliticians) ison the increase,whichshouldbenefitgold,but Iwell rememberthe armed Russian invasion of Afghanistan in 1980 whichmarked the top ingoldatthe$850area.Itwasdownhillfromthenon.

Figure5.1.26

Willhistoryrepeat?

I decide to play it safe by reducing the size ofmy longs.When the bulls arefallingoverthemselvestobuy,itisusuallybesttosellittothem!

InthebackgroundthereisalsotheChina/Japantensionoverthedisputedislandswhichhasgonequietoflate.Bearmarketsaremarkedbyincreasedtensionsandareductionincooperationbetweennations.

Monday17MarchMyfearsofanover-lovedmarkethaveprovedcorrect–themarkethasdroppedthroughmy$1365stopandtakenoutthelasthalflongpositionforaverytastyprofit(seeFigure5.1.27).

Iexitmyfinalhalfpositionat$1365fora$30profit.

Combinedprofitonbothhalvesis$85.

Withtoday’snegativeaction,itappearsmyCwave(alsowave4)hasendedandI should be looking for a new short trade taking themarket down in the fifthwavetobelowthe$1180lows.

IshallawaitarallybecausethemarketistestingtheFibonacci38%retracenowandifthemarketbouncesfromhere,Iwillhavemywave1downinplaceandwilllooktoshortnearthetopofawave2tocome.

Figure5.1.27

Overall, I amhappywith tradingso farand Iamencouraged that Ihavebeenabletokeepontopofthemajorswings–thankstoMessrsElliottandFibonacci.TheyreallyweregeniusesandIammostthankfulfortheirwork!

SummaryThishasbeenamostsuccessfulcampaignoverfourteenweeksfromDecember2013toMarch2014.Ihavemadeseveralswingtradesinthiscampaignwhichresultedin2790pipsofprofit.IhaveusedmanyofthepatternsIdescribeinthebookandhaveusedsolidmoneymanagementrulestoprotectmeagainstmajorlosses.

TheDowCampaign

BeforebeginningthiscampaignIhadbeenbearishonstocksforsometime.Thebullshavebeenrelyingonthemountainsofcentralbankstimulusproppingupassetmarkets(whichonedaywillbewithdrawn).

TheDowwasinastrongbullphasein2013,gainingalmost30%.IbeganmycampaigninlateNovemberbytakingabearishstance.

But doesn’t that fly in the face ofmy recommendation to tradewith themaintrend?

It does, but I have good reasons for this, as I will show. I have developed aspecialtyinfindingtrendchangesearlyanditsohappensthatinlateNovember2013,bothgoldand theDowwereabout tochange theirmedium-term trends.Thatsuitedmewell!

Tuesday3December2013IhavebeentrackingtheDowforsometime,lookingforatop.USstockshavebeenonatearsincethe2009lowsbuttherallyisgettinglonginthetoothandtheonestarkfeatureisthatthisisaverycrowdedtradewithbullishsentimentatornearrecordlevels.

AndIknowthattopsaremadewhenbullishsentimentisveryhigh.Withatradethiscrowded,whenthesellingstartsIhaveconfidencethatthefallswillbeverysharp. So a short position, if entered with good timing, could work outspectacularly.Thissoundsveryattractive!

ButtheproblemIfaceisintimingmyentry.

HowcanIpinpointashorttradeinthefaceofastrongbullmarket?

OnFriday29November,InotetheS&PhasmadeaFibonaccitargetat1815andappearstohavecompletedasmall-scale,five-wavepattern.OnthesamedaytheDowhasjustbrokenmylowerwedgeline(seeFigure5.2.1).Thatispotentiallybearish.

I know that wedges (or ascending triangles) are often found in the final fifthwavepositionandareoftenaccompaniedbyanegativemomentumdivergenceandthisispreciselywhatwehavehere.

I cancount fivewavesup in theDowfrom theOctober2011 low (seeFigure5.2.1).

Figure5.2.1

TimetogetseriousasIhaveanegativemomentumdivergencestaringatme.

Monday2DecemberOnSundayandintotoday’searlytrading,themarkethasattemptedakissbacktothelinebuttherallyappearsveryweak.ThisisshowninFigure5.2.2,alongwiththefivewavesupImentioned.

Themovedownlookslikeitcouldbeaw1down,w2up.Ifthemarketcandropfromhereitwouldbeinaw3downandthatcouldbelongandstrong.

Ihavealow-risktradeherebecausemyprotectivestopcanbeenteredjustabovetheline.

IshortedtheDowat16,095withaprotectivestopat15,160.

SonowIamlookingforasharpmovedowninaw3.

Figure5.2.2

Wednesday4DecemberAndyes,asyoucanseeinFigure5.2.3,Ihaveasharpdownmoveasthedoctorordered.Sofarsogood.ThemarkethasdroppedtotheFibonacci50%supportlevel,where I expect somekindof bounce.Perhapsmy thirdwavehas endedhereandabouncewouldbew4,leadingtoanewlowinw5.Thatismyoutlinescenario.

NowIcanmovemystoptobreakeven,sincethegainisabout200pipsandmyoriginalstopisonly65pips,makingthegainalmostthreetimestheinitialrisk.Inowhaveano-losstradeworking.

Figure5.2.3

Thursday4DecemberInowhavewhatIwaslookingfor–afivedown,justcompleted–asshowninFigure5.2.4.

Onthe15-minchartIhavemyfivedownanditobeysallEWrulesasamotivewave (a small-scale fivewaver that is in the same direction as the one largertrend):

w3islongandstrongandhasfivesub-waveswithinit.

w3isnottheshortestwave.

w4doesnotoverlapthepriceareaofw1.

Inaddition:

Thereisapositivemomentumdivergenceatthew5low(whichshowsupbeautifullyonthehourly,asIswitchbackandforthbetweenthetwocharts).

Thus,areliefrallyisodds-on.Sofarithascarriedtomyuppertramlineinonelegup.IwouldprefertoseeanA-B-CrallyandthismaybetheAwave,leadingtoaBwavedownandthenanewrecoveryhighinaCwave.

Figure5.2.4

Butifthisisaverypowerfulw3,itcouldextendfurthertothedownside.Also,Idonothavetotalconfidenceinmytramlinesastheyhavesofewtouchpoints,butuntilIcanseeabettersetIwillstickwiththese.

However, thecompletefivewavesdownplusthestartofareliefrallymeansIshalltakeprofitshereandlooktogetbackonboardatahigherspot.

Itookprofitonmyshortat15,940foragainof155pips.

Tuesday10DecemberAsIforecast,themarkethasstagedarallyoffmyw5lowinspiteofanegativeUSjobsreport.Iguessbadnewsisstillgoodfor themarket.Whatperversity!Still, so long as the market believes what the Fed will do to tapering is

paramount,Imustgoalongwiththatparadigm.Butonedaythewholehouseofcardswillcomecrashingdownandthenbadnewswillbereallybad.

Today,badnewsisstillgood,butforhowmuchlonger?

I am looking for an A-B-C off the five down with the C wave ending at aFibonacci50%or62%retraceofthefivedown.Thatisthemostlikelyscenario.

IalsoplottheS&P(seeFigure5.2.5)becauseitcangiveacleaner-lookingEWchart.

Figure5.2.5

IhadaFibonacci targeton theS&Pat1815,whichwashiton30November;afterthatthemarketmadeafivedownandthreeup(inanA-B-C).Therallyhasstopped short of the 1815 level and with the negative momentum divergence(andfivewavesupinWC).Thisismymoment:

IenteredashorttradeintheDowat16,030withaprotectivestopat16,060.

IenteredmystopjustabovethehighoftherallyintheDow.Thatgivesmeanultralow-risktrade,riskingonly30pips.Thatisagift!TobeabletotradetheDowandenterastoponly30pipsawayandhaveanexcellentchanceofstayinginthetradeisveryrare,tosaytheleast.

Friday13DecemberThemarkethas tumbledandIcaught theCwavetop.TheDowas itstands isshowninFigure5.2.6.

Figure5.2.6

Withagainof250pipsorso,Ihavemovedmystoptobreakeven.

NowIwant to seeanew low in the trading fromMonday toWednesdaynextweek because the will-they-won’t-they-taper Fed minutes to be released nextWednesdayshouldshakeupthemarkets.IfIseethat,Iwilltakeprofitsonmynewshorttradeandlookforasharprallytopositionshortagain.

Themarketdoes expect somedegreeof tightening from theFed,which couldcomeinseveralforms,notjustreducingtheirbondpurchases.Weshallsee.

Monday16DecemberYes,Ihavemynewlowearlythismorningtomakethew5tocompletethewavedown.SeeFigure5.2.7.

The five-downwave ismarked on the chart. It is a classicwithw3 long andstrongandapositivemomentumdivergenceatthew5low.

Figure5.2.7

Timetotakeaprofitbeforetherallygetsgoing.

Itookprofitonmyshortat15,730foragainof300pips.

Thatmakesacombinedprofitonthetwotradesof455pips,whichwasmadeonshorttradingintoabullmarket.Manywouldconsiderthatadangerousgameto

play,butwithlowriskentries,mymaximumlosswouldhavebeenmanageableevenifthetradeshadnotworkedout.

NowIamflattheDow,butstillmonitoringitclosely,asIsuspectamajortopiscloseby.

Thursday19DecemberTheFedhasspoken!Theeagerly-awaitedannouncementoftheirintentionswithQEisnowpublic–andtheUSstockmarketshavetakenofflikearocket.IamsogladItookprofitsonmyshortswhenoffered.

Backtothedaily(showninFigure5.2.8)andtherecentdeclineisaclearA-B-C–meaninganewhighliesahead.

Figure5.2.8

MytopcouldcomeatanytimenowIhaveanewhighprint.Andthemomentumcouldtraceoutanegativemomentumdivergenceatanytime.Weareinalarge

w5up (from the June 2012 low starting from thew4 low thisOctober). I amlookingforthisw5totop.

Thursday2JanuarySinceIexpected(andgot)aSantaRally,Idecidedtosititout,unsureasIwashowhighthebullishmaniawouldcarrythemarket.Asithappened, themanicenthusiasmtoownsharesgoing into2014swept theDowtoclose2013at theall-time high nosebleed level of 16,600! This placed the Dow smack on myuppertramline,asshowninFigure5.2.9.

I have great confidence in my tramlines; the upper one has a great PPP andcatchesallof themajor topssinceearly2012. Itwould takeamassivebuyingefforttopushthroughmyupperlineandifthebuyingisexhaustedhereitwillnottakemuchtoseeheavysellingdropitbacktothelowerlineagain.

Itistimetostartlookingforatop–andashorttrade.TodaybeingthedayafterNewYear’sDay, theDow isnotyetopenbutalready theGermanandFrenchindicesaretradingwithlargelossesfollowingtheweakmanufacturingdataoutoftheeurozoneandChinaovertheholidays.

Figure5.2.9

Actually, I often find that dramatic trend-changing news emerges during longmarket holidays, such as this one. And with complacency against hazards atrecordlows(theVIXisbacktothe12to13zoneagain),wehavetheingredientsforthestartofamassivedeclinestartingtoday.

ThechartinFigure5.2.10showsaniceshort-termtramlinepair;thelowerlinehasbeenbrokenthismorningontheopening.

This ismy first signal the top is likely in.Myplan is then towait fora smallrally and then takea short tradeusing thehighas theguide formyprotectivestop.

Figure5.2.10

Itnowappearsthetopisin,soaslightchangeofplan:

IshortedDowat16,520withaprotectivestopat16.620.

Friday10JanuaryThisweekthemarkethasbeeninconsolidationmodebuttodaybeingthenon-farmspayrolldayIexpectsomefireworks.

AndIamnotdisappointed,withstocksbeinghithard.SeeFigure5.2.11.

Figure5.2.11

The Fibonacci 23% retrace has been solid support all this week but is beingtestedagain today.When itgivesway thatwillbemysignalweare ina thirdwavedown.MyfirstmajortargetistheFibonacci50%levelataround16,150.

Tuesday14JanuaryThemarkethasbrokensupportandhasretreatedtotheFibonacci38%level.SeeFigure5.2.12.

This isagood time to review theEWs. Ihavea fiveup, that isclear,but thiscouldalwaysbepartofalargerpattern.ThemovedownisonlyinthreewavessofarandthiscouldbeanA-B-C,leadingtohigherprices.ImustkeepinmindthatalthoughIhavefoundafifthwaveup,thatmaynotbetheabsolutetop.

Figure5.2.12

Inlightofmyuncertainty,Idecidetotakeprofitshereandsitbackandobserve.Ifthemarketdoesbreakdownhere,Icanalwaysfindanothergoodentry.

ItakeprofitsonmyshortDowat16,305fora215pipgain.

Thursday16JanuaryThemarkethasrallied,asIsuspected,buthashitavery interestingpoint.SeeFigure5.2.13.

Ihaveaterrifictramlinepairworkinghere.Ihavetheupperlinewiththerallytoit and my lower line takes in the significant gap that was created late inDecember. Gaps occur very infrequently and when they do it is usually onMondays after theweekend break, as here. During theweek, themarkets areopenvirtually24-hours.

IfthisisabreakawaygapthemovedownshouldbeverylargeandIdonotwanttomissit.ThatiswhyIamprobingforagoodentryandwillingtotakeafewsmalllossesbeforelatchingontoatradethatcouldnetmeaverylargereward.

Also, I can count aminor five-wavemove up from the lower tramline to theupperone.Therallyshouldbedone.

Figure5.2.13

Now,thisisanexcellentplacetore-enterashorttrade,so:

IamagainshortDowat16,480withaprotectivestopat16,520fora40piprisk.

Friday24JanuaryTheresistanceofmyuppertramlineholds.Andwhatafabulousmovedownoffit!Thishasall thehallmarksofa thirdwave.Thechartas Iwrite isshowninFigure5.2.14.

Nowthegapcreatedonthefirsttradingdayof2014isveryrelevant.Ithasnotbeenfilled,despite threeattempts,makingitabreakawaygap.This isasignalthatthemarketwantstofollowthegapdownveryquickly.Itsignifiesachangeoftrendfromthefive-yearbullmarket.Iamtakingitasmysignpostforthestartofagreatbeartrendwhichshouldlastmanymonths.

Weare in a clear thirdwavedownnowand I am short fromnear thewave2high.Iamhappywiththisposition.Mypolicynowwillbetoaddtopositionsonrallies. In the meantime, I expect the Fib 62% level to be support, at leasttemporarily.

Figure5.2.14

Monday27JanuaryWearedefinitely ina thirdwavedown– themarket touched the15,850 levelovernight and is short-term oversold and it appears we should see a wave 4bouncesoon.

Itakeprofitonhalfofmypositionat15,890fora590pipprofitandmovemyprotectivestopontheopenhalftobreakeven.

Friday31JanuaryMarketistestingsupportatthe15,650level,asshowninFigure5.2.15.

Thisshouldbeverystiffsupportandsincethereisacompletefivewavesdownonthehourlychart,oddsaregoodthatadecentbounceisupahead.

Andthisjustin–theAAIIinvestorsentimentreport(seetheResourcessectionformore information) showsmorebears thanbulls.This is a complete switchfromtheuber-bullishstanceinDecember.Thelasttimebearsoutnumberedbullswas inAugust2012when theDowhadmadea steepdecline, justas ithas inJanuary.Somethingsneverchange!

Figure5.2.15

Thatmakesmehappywithtakingpart-profitandholdingtheotherhalf.MyplanistoreinstatethehalfpositionwhenIsensetherallyisrunningoutofsteam.

Wednesday5FebruaryThecollapse isrelentless– ithasmoveddownandhasbrokenthebigsupportzone.Today I can see a complete fivewavesdownand apositivemomentumdivergence,asshowninFigure5.2.16.Itistimetotightenmyprotect-profitstopto15,420.

Thatwasagreattrade:

Icoveredmyshortfrom16,480at15,420fora1,060pipgain.

Cumulativeprofitfromthecampaignis2320pipswithnolosingtrades.

NowitistimetolooktogolongasIexpectabigreliefrallyupaheadfollowinga complete five waves down (it looks better in the Nasdaq hourly chart). Ithereforeemployastop-and-reversestrategyhere:

IreversepositionsandgolongtheDowat15,420withastopjustbelowlowat15,340foran80piprisk.

This morning, the market has moved up to test the upper tramline. Breakingabovethatwouldbeinteresting!

Figure5.2.16

Monday10FebruaryJust when theAAII sentiment survey of US retail investors has registered itslowestbullishreadingformanymonths,themarkethasstagedavigorousrally

(asIsuspected),andhashit theFibonacci38%retrace inSundaytrading.YoucanseethisinFigure5.2.17.

TherallyhasbeenvirtuallystraightupandmybestguessisthatthisiswaveAofanA-B-C.ThenextmoveshouldbedowninwaveBbeforearallyinwaveC.

Idecidetotaketheprofitononehalfofmylongtrade:

Iexitonehalfofthelongtradefrom15,420atthe15,760levelfora340pipgain.Iamleavingtheotherhalftorunwithaprotectivestopatbreakeven.

IamusingmySplitBetStrategy(seeSection4.1)hereandevenifthemarketdecidestoextendtherally,Iamstilllongononehalfofmyposition.Ifeelverycomfortablewiththat.

Figure5.2.17

Wednesday12February

Rather surprisingly, the market has rallied strongly up and away from theFibonacci38%levelandreachedthe50%level–andhasevenexceededit.Therallyhasbeenvirtually straightupwithnoobviousA-B-Cpattern,asyoucanseeinFigure5.2.18.

CanitbethatthisistheAwavehigh?

I have seen deep upward retracements many times before, so this is not toounusual. My problem is where to take profits on my long position – a niceproblemtohave.

Wearestillinwave4up,butwherewillitend?

Iampushingmyluckhereforfurthergains.Afterall,ithasbeenstraightuptotheFibonacci50%level,soIdecidetoexittheotherhalfofmylongtrade.

Iexitthelasthalfofmylongtradeat15,955foraprofitof535pips.

CumulativeprofitonallDowtradesis3195pipswithnolosingtrades.

Figure5.2.18

Iamnowflatandlookingforthemarkettoturnaroundhere.Andgazingatthehourly chart of the rally, as shown in Figure 5.2.19, I believe I can see fivecompletewaves.

My lower tramlinesportsat least six touchpoints (excellent)andabreakhereshouldmeantheAwavetopisinandthemarketshouldbeheadingdowninaBwave.Ifthetramlineholds,themarketwillrallyfurtheruptothe62%level.Butthenegativemomentumdivergenceatthetoplooksominous.

I decide toprobe thedownside and enter a sell-stoporder to catch apotentialtramlinebreak:

Ientersell-stopatthe15,925levelwithaprotectivestopat15,990ifIamfilled.

Figure5.2.19

Thatwillpositionmeshortonceagain–astanceIammuchmorecomfortablewith.IamnottotallyateasetradingfromthelongsidebecausethisisacrowdedtradeandIhavelearnednevertooverstaymywelcomeinthiskindofsituation.

Themarketmovesdownafter Iamstopped inat15,925and reachesa lowof15,850–againof75pips.Sofar,sogood.

IsthisthestartofthebigbearmarketIhavebeenexpectingforalongtime?

ThismarkethassurprisedmetimeaftertimewithitsdeepupwardretracementsandIamdoingtheprudentthingofmovingmystopstobreakeven.

Later today, themarket reverses and I am taken out at breakeven. See Figure5.2.20.

So thatwasawash tradeand Ihavedecided to sit thisoutuntil Iget abettersignal.

Figure5.2.20

Friday28FebruaryThe rally has been relentless and today, following JanetYellen’s testimony, itmovedupstronglyandthenthebottomdroppedout,fallingnearly200pipsinlessthantwohoursbeforerecoveringintotheclose.

NowIhaveaverynicewedge(Figure5.2.21),whichwasthepatternIidentifiedatthestartofmycampaign(seeFigures1.2.1and1.2.2).

Ilikewedges!

My wedge lines possess many accurate touch points. Also I have a pair ofnegativemomentumdivergences,pointingtoaweakeningoftherallyforce.

The standout feature though is the overshoot yesterday (marked with “!”).Overshootsareusuallyaclearsignthat thebuyingpowerisexhaustedandthenextbigmoveisdown.

If the market can retreat to the zone I have marked “Danger for the bulls”,breakingthelowerwedgeline,thentherallyshouldbeover.

Figure5.2.21

Interestingly,Ihavenotedacurioussymmetryonthedailychart(Figure5.2.22).TheCreditCrunchlowwasmadeon6March2009andnextThursdaywillbethefifthanniversaryofthatevent.Thecuriousthingisthatthesinglemajorlowalongthewayoccurredaroundthetimewhenthisperiodisbisected.Ittook30monthstoreachmyBwavelowandwearenow30monthsthissideofthatlow.

Figure5.2.22

Thismeansthatifthiscycleisvalid,atopisathand.

Sadly, I shall be away next week and will have the pleasure of discoveringwhethermytheoryiscorrectonmyreturn.

Friday14MarchYes indeed,while I was away themarketmade its top on Friday 7March at16,614andnowistradingover400pointslower.

IfeellikethesoothsayertoJuliusCaesarin44BC,whowarnedhimtobewarethe IdesofMarch (15March).Caesarwasassassinatedon thatverydate, thusfulfillingtheprediction.Hasthemarketlikewisebeentopped?

However,myaccuratesoothsayinghasdonemenogoodwhatsoeversinceIwasawayfrommytradingdeskwithnoposition.Buttradingisalong-termbusinessandIamconfidentthemarketwillpresentmewithmoreexcellententries.Itiscuriousthatthistopoccurredexactlyfiveyearsandonedayfromthe6March2009plungelow.Thisissignificant.Itpointstotheideathatcycles,whichhavefallenofftheradar,areback.

AllsentimentindicatorsIhaveseenareflashingbearmarketahead.

Over theweekend I readMSMpundits saying there is nothing to getworriedabout–thebullmarketisintactandjustholdtight.Wereadthesameopinionsatevery top. But gradually, as the markets work lower, some of them becomeconvertedbears,butmostdonot.Thebullshavebeen right for fiveyearsandtheyarenotgoingtochangetheirtuneeasily.ItwilltakeseveralthousandpointsknockedofftheDowtocausethemtoquestiontheirstance.

One data point caughtmy eyewhile Iwas away.China’s exports in Februaryweredown18%,whileeconomistswereforecastingan8%rise.That isa25%miss for the economists. I wonder howmany of these experts will lose theirjobs?

Figure 5.2.23 is an update on the previous chart, showing the danger zone Iindentifiedearlieratthe16,200levelhavingbeendecisivelybreached.

Figure5.2.23

AndnowIhavegoodEWlabelsonthedaily,asshowninFigure5.2.24.

Figure5.2.24

Crucially, the 7Marchhighdid not exceed the all-timehighof 31December.ThatmakestheFebruaryrallyawave2andithascompletedonalargenegativemomentumdivergence.

Wearenowintheearlystagesofalargethirdwave–theseareusuallylongandstrong.Gettingonboardshortherewillbeliketryingtocatchatigerbyitstail–but ithas tobedone,since therewardswillbespectacular. Iamlookingforabreakofthe14,800lowsfromlastyearasapossibletargetforthisw3.

Monday17MarchTherehasbeenanicerallythismorninginthehopethattheUkrainecrisiswillbeoversoon–abuy therumour,sell thenewsevent.But inFigure5.2.25wecanseetheDowhasmadeittotheFibonacci50%levelandthisisagreatplacetoenterashort.

Figure5.2.25

IshorttheDowat16,255withaprotectivestopat16,330.

Andtherewewillhavetoleaveit.

SummaryThiswasalsoanexcellent campaign stretchingover14weeks.Netprofitwas3195 points. As in the gold campaign, I used several trade setups for swingtradesasdescribedearlierinthebookandemployedgoodmoneymanagementdisciplinethroughout.

InmycampaignImadeonlyonelongtrade–alltheotherswereshorts.Andthemaintrendwasupinastrongbullmarket–provingthatyoucanmakemoneytradingagainstthemaintrend.IhadanoverallbearishoutlookforstocksandtheDowadvancedby260pipsfrommystartdateof29Novembertothecut-offon17March.

So even if I hadbought-and-held from the start, Iwouldhavemadeonly260pips–afarcryfrommy3195pipgain.

Ihopethislittlecampaignconvincesyouthattradingtheswingsisworthwhile.

MyElevenCommandments

I hope I have shown in my book how anyone, whether new to trading orexperienced, can quickly gain an expertise that very few traders possess.Mysimple,visual,chart-basedmethodscanalertyoutopotentiallyprofitabletradesinseconds.Butitisonethingtohaveagreattradingsystemandanothertobeabletoimplementitwithdiscipline.

I have seen somany tradersblow themselvesupbymaking elementary errorsthatIofferthese,mytradingguidelines,whichIhopeyouwillfinduseful.

1.PreserveyourcapitalThereisnodishonourinbeingwrongonatrade.Takeonlysmalllossesonyourlosersandbeglad(yes!)becausetheyaresmall.Thewinnerswill takecareofthemselves.Andnever,neverevertradewithoutprotectivestops–theykeepyouhonest.Ifstoppedout,keepanalysingthechartforanotherpossibleentry.

2.TradesmallsizemostofthetimeKeeplotsofpowderdryatalltimesforthosegreatsetupsthatdooccasionallycomealong.Keepbuildingyouraccountstepbystep.Donotlookforhomerunsoneverytrade–theycomealongonlyrarely.Theywillnotmakeyouasatrader.Itisthequietaccumulationofmodestprofitsonyourwinnersthatwilldothat.Thatishowmostprofessionalsoperate.Anddonotfollowtoomanymarketsatthesametime.Itendtoactivelyfollowthreecurrencies,threestockindices,goldandT-Bonds.

3.DonotgettooemotionalwhenyouhaveabigwinIfyoufeeloverlyeuphoric,thenitistimetoeithercutbackorstoptradingforafewdays.Euphoria can seduceyou intobeingboldandmaking sillymistakessuchasovertrading,ortradingamarketyouhavelittleornoexperienceinanddonotreallyunderstandbut fancyhavingagoat.Thisalmostalways leads tolosses.Highemotion isgood inwatching sportor amovie,but it is adisasterzoneintrading.Controlyourself.

4.TradingisagamewhereyouaretryingtofindthepathofleastresistanceforthemarketandflowwiththatpathYour attitude needs to be one of an interested observer, not a committedopinionated partisanwith either a long or a short bias. Themarket is not themarrying type andyou shouldnever bewedded till deathdoyoupart to yourposition–unlessitismakingmoneyforyou,ofcourse.Buteventhen,youwillneedtoknowwhentodemandadivorce.

5.Ifyouhaveashortrunoflosers,feelfreetostandasideforafewdaysandcomposeyourselfIfyouhavebeenusingstrictmoneymanagement rules,youwillhavemostofyourcapitalintactreadytofightanotherday.Butifyouhaveletyourdisciplineslipandhavetakenabeatingonjustonebadtrade,itwillbehardtogetbacktoevens,letaloneintoprofit.Donotletthathappentoyou,asitdoestosomanytraders.Remember:justonebiglosscandevastateyouraccount.

6.ThemethodsIpresentherearesimple–andIhavedeliberatelydesigneditthatwayI subscribe to the command: Keep It Simple, Stupid (KISS). Much of thedifficulties traders experience come from making their system far toocomplicated. It is tempting to believe that there is an indicator out there –somewhere – that holds the key to fabulous riches if only you can locate it.Thesetradersspendyearsandfortunesgettingholdofonesystemafteranother.These are the Holy Grail traders. Incidentally, has anyone found it yet? Allsystemsareimperfect,butmostoftheimperfectioniswithinthetrader,notthesystem.

7.Iflong,becomemorebearishasthemarketrisesAlso, when you have an excellent profit on a trade, the correct attitude is tobecome more sceptical of further gains. Most traders do the opposite andbecome more euphoric and push their targets further and further in theirdirection.Youmustlearntocontrolthisbasicemotionandoverrideit.Youneed

tobetakingprofitswhentheothertradersareeuphoric.Donotfallintothetrapof seeing a great profit vanish as themarketmoves against you, as itwill. Iflong,becomemorebearishasthemarketralliesandalwayslookforgoodreasontoexitjustwhenthemajorityarechasingthemarketup.

Targets should not be set in stone forever. They are guidelines that help planyour eventual exit and can be adjusted in the light of future market action.Sometimes, you will be moving your targets in your direction as moreinformationaccrues.Youwillrarelyneedtomoveyourtargetscloserifyouhaveperformedagoodanalysis.

8.ItisaprovenscientificfactthatstaringatyourscreenalldaycannotchangethemarketSadly,weareunabletowillthemarketourwaynomatterhowlongwestare.IhavefoundthatthelesstimeIwatchthemarketafterIhavedonemyanalysis,thebetterItrade.Youmayhaveasimilarresult.

9.Nevertradetogeteven–thatisemotionaltradingandalmostalwaysendsintearsOnlyenteratradeafteryouhaveperformedyouranalysisusingyourmethods.Donot just jump inonahunch,either. Ifyouhave takena lossas themarketwent in thewrong direction,keepwatching it for a timeafterwards, as itmaygiveyouanotherentrysignal.Treatthissignalasyouwouldanyother,erasingthememoryofthepreviousloss.Themarketdoesn’tcarewhetheryoumadeaprofitoralossonanytrade.Anditwillalwaysbethereforyou,sodon’trushit.

10.PatienceistrulyavirtueintradingWaitfor that idealmomentwhenthetradesetupmakessense.Trynot tojumptheguninyoureagernesstoputonatrade.Andifyoumissagreatmove,youmiss it. Do not kick yourself for missing these, as there will be plenty morecoming along the pike. However, when the market hits your target, do nothesitatetotakeyourprofitpromptly.Donotseeifthereismoreafterthetargethas been hit. That way lies indecision and indiscipline, which is quicklyfollowedbyruin.

11.Andlastly,tradeasifyournexttradeislikelytobealoserIknowthatsoundscrazybecauseweareallencouragedinourreallivestothinkpositive and the good resultswill follow. It is exactly the opposite in trading!Yes,doyouranalysisandmakeyourtradebasedontheobjectiveoutcome,butwhen you believe it may become a loser, you will take very seriously thebusiness of placing an appropriate stop to limit your risk. If you believe yournext three trades are likely to be losers, thatwill concentrate yourmind evenmoreonriskmanagement!

Finally,Iwanttowishyoualltheluckintheworldinyourtradingcareer.

Toeverythingthereisaseason,andatimetoeverypurposeundertheheaven:

Atimetobelong,andatimetobeshort;atimetostandaside,andatimetoaggressivelytrade.

ApologiestoEcclesiastes

Resources

IincludehereafewresourcesthatIhopeyouwillfinduseful.

TramlinesThismethodisofmyowndevising.IhavebeenwritingasMoneyWeekTraderfor a few years and have produced several video tutorials on my tramlinemethod,aswellasontheElliottWaveTheoryandFibonacci levels.Theseareaimedatthenovicetointermediatetraderandcoverthebasics.

In collaborationwithMoneyWeek, I am also preparing amajor online tradingcourseforrelativebeginnerswhichisscheduledtolaunchin2014.

www.moneyweek.com

ElliottWavesThegranddaddyandstillthemostcompletesourceofElliottWaveanalysisandteachingisRobertPrechter’sElliottWaveInternational.IhavebeenfollowingRobert’sworkforafewdecadesandhisorganisationoffersacompleterangeofexcellent services, from EW analysis of current markets to a full array oflearningresources.IcannotpraiseRobert’sowncreativeanddeeplyresearchedworkhighlyenough.

IrecommendfortheseriousElliottWavestudenthisbooks:

ElliottWavePrinciple,byFrostandPrechter(NewClassicsLibrary).ThisistheclassictextonElliottWaveTheory.

The Wave Principle of Human Social Behavior , by Robert Prechter (NewClassicsLibrary).

www.elliottwave.com

Fibonaccilevels

TheElliottWaveInternationalgroupoffersagoodcoverageofhowFibonaccilevelsoperate.

GeneraltradingideasWhat ILearnedLosingaMillionDollarsbyJimPaulandBrendanMoynihan(Infrared Press) is a little off-the-wall, but it contains many great cautionarytales. This man lost a million dollars and went through all of the emotionalturmoil that losing often produces. His big mistake was to believe andtenaciously hold on to a story, such as: “gold has to go up – the dollar isdoomed.”

I have been following the career of Alexander Elder for decades and was anearlypurchaserofhisfirstbook–TradingforaLiving(JohnWiley&Sons)–in1993. It contains someexcellent insights into thepsychologyof trading.ElderwasanearlyintroduceroftheMACDindicator.Icanalsorecommendhisotherbooks,includingComeintomyTradingRoom(JohnWiley&Sons).

Naturally, almost everyone recommends the classicReminiscences of a StockMarketOperatorbyEdwinLefèvre (TradersPress). It is theautobiographyofJesse Livermore, a colourful speculator who was operating in an era whenmanipulation of markets was relatively easy and commonly done – in theRoaring1920swhenanythingwent!Hasanythingreallychangedinacentury?Onetimelesspassagestillstandsoutasgreatadvicetoday:

“ThisdescribeswhatImaycallmysystemforplacingmybets.Itissimplearithmetictoprovethatitisawisethingtohavethebigbet downonlywhenyouwin, andwhenyou lose to loseonlyasmallexploratorybet,asitwere.Ifamantradesinthisway I have described, he will always be in the profitablepositionofbeingabletocashinonthebigbet.”

Every trader shouldhaveacopyof thisbookonhisorherbookshelf– todipintoatfrequentintervals.

Currentreading

I follow several authors on Seeking Alpha – this is a great way to judgesentiment towards a particularmarket as a contrary indicator. For instance, ifmostofthearticleheadingsarebullishonamarket,atopisprobablynearby.

www.seekingalpha.com

I also followarticles in theMSMand findAmbroseEvans-Pritchard,LiamHalliganandJeremyWarnerintheDailyTelegraphtobeexcellentwritersontheeconomicpicture.

SentimentindicatorsImonitorsentimentforsignsofextremesandusethemascontraryindicators.

AAIIIndex

This is a weekly survey of retail US stock investors asking if they arebullish/bearish/neutraltowardsstocksoverthenextsixmonths.

www.AAII.com

DailySentimentIndex(DSI)

Thissite is runbyanold futureshandJakeBernsteinand isadailysurveyofprofessionalcommodityfuturesadvisors(CTAs).TheDSIcoversawholerangeof markets from Lumber to the S&P. This is an often accurate barometer ofoverallsentimentandIrefertoitfrequently.

www.trade-futures.com

IISentiment

Investors Intelligence is also a well-established firm that analyses manyindependentmarketnewsletteradvisoriesandassessesabullishorbearishscorebased on this work. As with all similar sentiment indicators, it is only atextremes of the II Sentiment readings that it becomes useful as a contraryindicator.

www.InvestorsIntelligence.com

CommitmentsofTradersreport(COT)

TheUSCommodity FuturesTradingCommission (CFTC) release data on thelongandshortholdingsofparticipants in theUSfuturesmarketsbrokendownintothreecategories:

non-commercials(largespeculators),

non-reportables(thesmallspeculators),and

commercials(thetrade).

Itiseasytobreakdownthedataintothespecsversusthetrade.

TheCOTisreleasedeveryFridayandisasnapshotasofthepreviousTuesday.It covers all of the markets that I trade, except the FTSE 100. At times ofextremes, it isavaluablecontrary indicator.Oneof themostuseful features isthechangesduringthepreviousweek.

Itrustthisdatabecauseitisarecordofwheretradersareactuallyputtingtheirmoney,which isamuchhigher levelofcommitment thanansweringa survey,wherenomoneyisatstake.

Many traders follow the commercials and will look to go long when thecommercials hold a large long/short ratio (and vice versa). Because thecommercials (those in the trade)are rightlyconsidered thesmartmoney, thosetradersbelievetheyknowmoreabout theirmarket thananyoneelseandhencearetobecopied.

But many of the commercials take positions because they have to – they arehedgingtheircommercialactivities.Theyarethereforeprice-insensitive.Ontheotherhand,thesmallspecsarethemostprice-sensitivewiththehedgefundsinthemiddleoftheprice-sensitivityscale.

Thisdataisonlyusefultomeatextremesoflong/shortratiosandisnotatradetiming indicator forswing trades. Itmerelyadds to theevidence Igather frommymaintradetimingtools.

www.cftc.gov

USeconomicreports

TheUSgovernment issuesahugenumberofbasiceconomicdata,suchas theUSUnemploymentRate,HousingStarts,GDPfigures,non-farmpayrollsandsoon.Itisusefultokeepacalendarhandytowarnofupcomingimportantreportswhichcouldaffectmarketsinthenear-term.IuseBloombergforthis.

www.bloomberg.com

VIX

TheVIXistheChicagoBoardOptionsExchangeVolatilityIndexandisreferredto as theFear Index.A high reading indicates increased expectation of highermarketvolatilityandviceversa.

www.cboe.com/vix

OnthelightersideTradingisn’tallseriouswork–Ihope.Forahilariousreadhereisanaccountofayoungladywhostumbledintospreadbettingandsomehowsurvived.

BetsandtheCity,bySallyNicoll(HarrimanHouse).

AddtoyourHarrimanHousetradinglibrary

If you enjoyed Tramline Trading then you will also like these trading andtechnicalanalysisbooksfromHarrimanHouse.

DiaryofaCurrencyTrader

Asimplestrategyforforeignexchangetradingandhowitisusedinpractice

BySamuelJ.Rae

www.harriman-house.com/diaryofacurrencytrader

AvailableaspaperbackandeBook

Supertiming:TheUniqueElliottWaveSystem

Keystoanticipatingimpendingstockmarketaction

ByRobertC.Beckman

www.harriman-house.com/supertiming

Availableashardback,paperbackandeBook