Wiley Trading
TRI
VISITS TO SIXTEEN TRADING ROOMS
Y
,
i1
-
II1
Dr. Alexander Elder ]
AUTHOR OF THE INTERNATIONAL BESTSELLERS
TRADING FORA LIVING
COME INTO MY TRADING ROOM

$95.00 USA
$123.99 CAN
£50.00 UK
You arc about to visit the trading rooms of
sixteen men and women,These traders live
in different countries. Follow different
.fid OSe different methods, but aU .share
trails—most Importantly, tfieir dedication
to trading.They are utterly serious abouf Hicir work,
while most of the amateurs who supply the bulk
of their winnings are chasing the excitement of an
adrenaline rush.
Why would a person who is trading for a living talk
about his or her meiUod instead of grinding
out profits In silence? Winners know full well
tbflt Success in trading docs not depend on
knowing h the secret."' There is no secret—only hard
work, focus, attention to detail, being careful
;md long-term oriented with money, and having
a bit of flair.
Trading is a vast field, and like a doctor, you must
.specialize. Many beginners spread themselves
painfully thin by investing in and d:iy-rnuiiny stocks,
futures, and options, fricli trader in this hook con-
ceriir.ues on an area that appeals to him or her,he il
buying breakouts, writing puts, or trolling for dull
stneks ready to explode from consolidation zones.
People hceome successful when they focus on
what they love Lodu. In reading this Imok, you will
probably come across a trading vehicle you like or
a concept thai appeals to you. Once you find it, sEay
with it and mini: that area for its rich deposits.
There arc massive differences between traders at
various stages of development, Ueginner.s look for
tips, while intermediate traders keep asking about
indicator sctiin^s. Experienced traders love to watch
Others make decisions and explain I hem. Traders
hi this book will share a wealth ofinfcumilion with
you; what yoo take home is entirely up to you,
Ti udin^ ran give you money, which can buy many
good tilings —freedom from a boss, the ability
To travel wherever and whenever you like, and
much more. Still, when the chips arc down, it ia not
money that determines the quality of your life.

Entries & Exits

Founded in 1K07, John Wiley & Sons is Lhe oldest independent publishing company in the
United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally
committed to developing and marketing prim and electronic products and services for our
customers' professional and personal knowledge and understanding,
The Wiley Trading series features books by traders who have survived the market's
ever-changing temperament and have prospered—some by reinventing systems, other?; by
getting back to basics. Whether a novice trader, professional, or somewhere in-between*
these books will provide the advice and strategies needed Lo prosper today and well Into
the future.
list of available Lilies, please visit our Web site at vnvw.WUeyFiiiance.com.

Entries & Exits
VISITS TO SIXTEEN TRADING ROOMS
■ J.I.
Dr. Alexander Elder
WILEY
John Wiley & Sons, Inc.

Copyright © 2006 by Dr. Alexander Elder, All rights reserved.
Published by John Wiley & Son*. Inc. Hobofeen, New fereey,
simultaneously in Cflnnaa-
No purr of ihis publiuuiuu uuiy be reproduced, stored in ;l retrieval system, or transmitted in any
[orm or by any means, electronic, mechanical, photocopying, recordingi scannings ot otherwise, except
:is permitted under Seclkm 107 or 108 uf the 197fi United Stales Copyrlghl Acc,withon1 either ihe
prior written permJssion of the PubEsheri oi authorization through paymeni of the appropriate
ppr-copy fee to the Copyright Clearance Center, Joe, 222 RflSCWDdd Drive, DanWTSi MA 01923,
(978] 7S0-B4W), fax (9781730-4470, or on ihe Web m winv.cnpyrigliL.cuui. Requests to the
Publisher for permission ihuuld be addressed to the Permissions Department, lohn Wiley & Sons
Into l JI River Street, Hoboken, N] t)703flP (201J 748-6011. fax UOi) 74H-ft00ft, or online ji
h 11 p;// WWW.^l Ley.CO n V p,o/ pc rrnis SJOH 3.
Limit of [JiabUIty/DisclaJmer of Warranty: While ihe publisher and author have used their best
in preparing this book, they mate no rapreseotationfl ur warranties with respect io tlic accuracy or
completeness of the contents of this buuk und specifically disdaitn any implied warranties of m<?r-
nkiniabilhy or fitness for a particular purpose. Ho warranty may be created nr cxi^nded by s,itci r-ep-
resentanves or wiiiicn sales materials.The advice and strategies contained herein may nut be suitable
for your situation. You should consult with a professional where appropriate. Neither the publisher
nor author shtdl he liable Tor any loss oi profit or any other commercial damages, inducing bul not
limned io spedal, mcidenlal, confiequennflli or other
Dosignatione used by companies to distinguish theb products iirij often claimed (K iradLMii.nks. In nil
initances where Jotvn Wiley & Sonsilnc-ifi swareafD claim, the product niimcs appear in biital c
or capital letters- ReaderSj however, should confad the af^ropriale companies for more complete
information tegarding ir&demarks and
Foi general JnEorm^Lion on our other products and services or fur technical support, please mntaci
our Customer Care Department wSdlSn the C&iitad States nt faou) 7(.2-297-ih outside the United Slates
at (317) 572-3993 or fax- (317) 571-4002.
Wiley akQ publishes its books in a rarlety of dectronic formats- Sumo content thai appears Sn prim
Clay not be avaiLible En electronic book?. Tor more information aboui Wil^y produtth, visii our Web
Slit aL ik
Libr.iry of Congress Calaioging-in-Publication Daia
, Alexander, 1950-
Eniries fk exits: visits iu sixteen trading rooms / Alexander Elder.
p. cm, — (Wiley trading series)
Endades bibliographical
ISBN-! 3: 97R-D-47] -67805-2
ISBN-IO: n-47l-67B05-S (dolh)
1. Invesimeni aiiLilyiii. 2. Slocks. 3-
I. TiilcL Hntries and exits, U. Title. HE. Series.
HG4529.E46 2006
332,M'2O922—dt22
2U05029249
Printed in tbe United States of America
IU 987654 3 2]

In memory of Eddie Ching,
my best friend Patricia's kid brother,
who on September 11, 2001,
went to a business meeting at the World Trade Center
and vanished from our lives.

Contents
Introduction 3
Chapter 1
Sherri Haskeli A Logical Way of Looking al Things 12
Chapter 2
Fred Schul/man My Computer Can Do the Trading lor Me 30
Chapter 3
Andrea Perolo Simple Charts, Clear and Uncluttered 48
Chapter 4
Sohail Rabbani The Discipline of Loss Control 66
Chaptcr5
Ray Testa Jr Developing a Consistent Approach 84
Chapter ft
James (Mike) McMahon A Successful Engineer Has a Disadvantage 1UU
Chapter 7
GeraldAppel Looking for Favorable Probabilities 118
Chapter 8
Michael Brenke To Keep Repeating What 1 Did Right 136
Chapter 9
Kerry Loworn A Squeeze Play 158
vll

mi Contents
Chapter 10
Dr. Diane Buffalin Dancing Like Fred Aspire, Only Going Backwards
and in High Heeb 176
Chapter 11
David Weis Price-Volume Behavior [s Steeped in Reality 192
Chapter 12
William Doane The Rigger the Foundation, the Taller the Building 208
Chapter 13
Peter Tatarnikov We Analyze People Who Analyze Markets 224
Chapter 14
Damir Makhmudov Technical Signals in the Fundamental Context 240
Chapter 15
Pascal Willam Effective Volume 258
Chapter 16
Martin Knapp Do Is Right the Next Time Around 276
Conclusion
Your Trading Room 307
Bibliography
Reading Lists
Acknowledgments 329
About the Author 33]
Index 333

Entries & Exits

;

Introduction
ou are about lu meet 16 private traders. Seme trade for a living, while others arc still
at a semi pro fession al level, clawing their way to the upper rung. These men and
women live in different countries, trade different markets, ;ind use different methods, hut
nil share several trails—most importantly their dedication to trading. They are utterly
serious about their work, while most amateurs, who supply the bulk of their winnings, arc
chasing the excitement of an adrenaline rusk
The people ynu are about to meet have generously agreed to describe their methods
and show their actual trades. Why would they do that? Why would a person who knows
bow to trade talk to anyone instead of keeping bis or her mouth shut and grinding out
profits in silence?
The secret of trading Is that (here is no secret There, is no magic formula you can bu^
or steal and plug into your computer to automatically make money. Success is based on
discipline, hard work, and a hit of flair. These traders know that their success will not be
diminished by the success of others, which Is why they are willing to show you what they
do. Also, many have traveled a hard road and feel kind toward beginners.
Trading is an immensely rich field, and no one can become an expert in all aspects of
it, just like a doctor cannot bean expert in every field of medicine. Many beginners spread
themselves painfully thin between investing and chiy-innliug, between stocks, futures, and
options. You're about to see thai almost all successful people find one area that appeals to
ihem and specialize in it.
People become successful when they focus on what they love to do. In reading this
book you will probably come across a trading vehicle you [ike or a concept thai appeals fo
you. Once you find it, .slay with it and mine that urea for its rich deposits. I wrote this book
to help you break out of isolation, learn from others, pick up ideas that suit your style, and
return to your trading room a better, more confident trader.
HOW 1 MET THESE TRADERS
Eight years prior to writing this book, I went on a Caribbean vacation and by the end of
the Week Ml thoroughly bored, The blue: sky, lite WEinn beach, and ihe rich food became a
little repetitive ;ifl<fr u few days. I realized thai my favorite vacation was a working trip
during which I could alternate work with sightseeing. I thought there must be others with

Entries & Exits
similar (astcs, and the following winter scheduled my first Traders' Camp. Eighteen traders
signed on, and we went to the Dominican Republic for j week We ran on tlie beach every
morning, had classes from *■) am Ln 1 PM and again from 5 to 6:30 t'M> spent several hours
around the pool alter lunch, and partied every night The group loved the dosses, the
resort, and the company. They told their friends abouE our Camp, and people started
calling and asking to join. From ihen nn we ran Traders' Camps several limes a year on islands
in the Caribbean, Pacific, and Mediterranean,
After working and playing together for a week, many Campers became friends and
kepi in touch, I started having monthly campers* meetings in my apartment in New York.
Many campers relumed to subsequent Camps tor refresher courses. After watching their
progress over the years, I knew who I wanted to interview for this book. They included
Shcrri HaskclJ, Sohail Rabbanl, Ray Testa, Mike McMnhon, Michael Brcnki1, Kerry
Loworn, and Diane Buftalin. 1 would have interviewed Several more, but we u>ultl not
mesh our schedules,
1 always invited at least one gUCSt instructor to every Camp lo offer a greater diversity
of views. I taught in the momtngfl, and they taught in the afternoons. Four people in this
book—Fred Schutznun, Gerald Appel, David Weis, and Martin Kriflpp —taught in iwo or
more Camps. 1 kept inviting them back because traders loved their lessons. As soon as 1
began working on this book, I knew I wanted to interview them.
I had been hearing of Kill Doane for several years and invited him for an interview
lo expand outside the tamper circle- 1 ran into Peter Turarnikov in Moscow and was
impressed by the maturity and depth of this very young man; we conducted an interview
in his securely lacked office a few d-Ays before I flew back to New York.
MALE OR FEMALE?
Male traders outnumber women, although the ratio is rapidly becoming more balanced, as
m tire and more women come i"to (hciiiiirkt'is. f EiniJ thai the percentage ol sneeessfe] tcaderaifi
Wgfacr among women. They tend to lie less arrogant, flDdJnrogance Is a deadly stn in trading. The
male ^i—Mini mmaetfoJ tr;iit thaf lias been bringing us wais, riots, and bloodshed since time
immemorial—lends In gel heavily anight up in Eradblfr A guj atuflles his chnrls, deddra to huy,
and oowldsself-estKnilsinvtjlvwl heh;islnhc rlgiitl IE tlieiLKukcijftjtsliL^ weiv, tit1 wiiits to ht1
prcvni vvvi] more tight blfigei is bfilteX. If ilic iiuirkt'l jjocs ,i5i;]iii^[ him, hi1 is Huijili ['iioii^h In
stand the ji-iin, and waits lor (he irurkcl to reverse and prove EiEm rijjiii—while il grinds down
hb account.
Women trades, oil the other hand, are much more likely iu nsk astmple l|ijcseioei: Where's
tiw tiii'iit'y?TUry like lo [nk<* profits and avoid losifs instead of trying to prove fliemselves right
Womcu am maw likely lo finiJ with tlic wtnd and go with [fn.1 lluw, catch trends- and bop oil a
littk1 earlier, bookmfi profltSi Whs t icii trades that keeping records is a hugely important aspect
of success, women arc more likily i" fcfi^ mem than men. II you axe looking to iiire a trader; aU
other fectors beti^ equal Vft recomnicnd looking for ;i woman*
Slill, then.1 .ire many more niiilc than female traders. The Bngllsb Language iJL'iny u]ui it is.
"he" flows heUer tlinn "heorsln.1" or even [limping between the two pronouns- Ta make ffiacttng
caster. I'll use flic masculine pronoun throughout this hook. I tnis! you understand that no cMs
resped Is intended towards women traders. 1 want in main this Book easier to read fbreverjbody;
nf my gfendei; anywllere in the world.
from Come into My JhtiUngSam

Introduction 5
After reading my books, several traders approached me with very thoughtful
questions and showed me their work, which was extremely serious and instructive. I enjoyed
swapping ideas with them, and in the pxoosss of writing ihis booki invited them to be
interviewed—Andrea PcroEo from Ii;ily, Damlr Makhmudov horn Latvia (he signed up for
our Gimp later), and Pascal Willain from Belgium,
Finally* there were several traders with whom [ explored the possibility of an
interview, but it never materialized, There were lwo campers who made massive amounts of
money, moved offshore tn tax havens, and did not want the visibility of an interview. There
were also a few people with whom I discussed a possible interview—they talked a good talk
but could not provide documentation of their trades.
I visited some of these traders, while others Hew lo New York to meet with me, and a
few came to sec me in Sicily mid Amsterdam when I traveled in Europe. These days, with
readily available Internet access, a trader's office is wherever he can put down a laptop,
HOW THIS BOOK IS ORGANIZED
At the start of each chapter TIL introduce you Lo a trader and tell you about his or her
background and method. Hachpci son will show you two trades, and I will comment on both entries
and exits, I will conclude each chapter by discussing an important theme or topic arising from
ihat interview, hi addition, I invited cadi trader to write a persona! statement after our
interview- Some described then* personal development* while others .sent more technical e-maOSh
The entry iniu each trade will be shown on the right-hand page, with charts looking
exactly how they did when lh<il trader made his or her decision to go long or short. Do not
rush (0 turn over thai page—study the charts to decide whether that trade is likely lo he j
winner or a loser. Review the trader's comment on his or her chans. Ask your^df whether
you Li^ree or disagree with that trader's reasoning. Once you've made your decision, turn
the page to see how the trade tame auL Review the exit charts and rend my comments on
both the entry and exit Proceed Lo the second trade and repeat the process.
Several traders wanted to show how (heir trades looked a month or two after the exit
J let them do it, but did not encourage such "hindsight charts." All of us ,ue smart after the
feet, with buy nnd sell .signals plainly visible in the middle of the chart. The closer we get to
the right edge, however, the murkier it becomes. Since we have to make our decisions there,
1 wanted the charts in this book to look as dose as possible in the real thing. The middle of
every chart looks easy, but we have to do our job lil the right edge.
I want you to focus on die work of traders I visited, but since 1 comment [in every
single trade, I want to make my approach clear to you. 1 will begin this book by offering a
very brief outline of my method.
It always shocks me Co pick up ;i technical book without a bibliography. Any author of
such a book must bt a genius who doesn't owe thanks lo anybody. You will see not one but
two bibliographies in this book. First, there is a list of hooks mentioned during the
interviews- Second, I asked every trader to give me llieir recommended reading list—they all
did, and some added comments to their picks.
While 1 was working on this project, a steady stream of questions came in from
campers and webinar participants, I saved some ol [heir c-miiiK and Included them, along
with my answers, in the Q&A boxes tbroilghoul this book.1
rbo might be iln1 right pbu (o mention ih:ii f bavc no "technrca! support person" 'or m) books* I mm tlw
only trader in my ofljSce, My manager rctfauflS ■' stead? stream m qtuBikms Tor rna, bui unfomm;ndv, I cannot
moil odi^m for shea* Jackal; ihnx. 1 nnawei questions from tajJipas or piirtidpania in my private msbS
and also reply lo e-mails From serious iradere—which is how I m<?i Andrea, Dammand Poscal

6 Entries & Exits
We are embarking on a journey together. It took me more than a year to create this
book, and the people interviewed spent VCflTs rising to their current level. Slow down and
do nor rush—rake your time, keep notes while you read, and study the charts. The more
you put into this project, the more you'll ^ct out of it.
WARNING: OBJECTS IN THE MTRROR
ARE FARTHER AWAY THAN
THEY APPEAR
of US like to brag aboul our .succtssts and hide cmr failures. Traders in this bonk
have broken the mold—they will show you losing as well as winning trades- Yon are about
Lo see rail trades, made with real money. Still, there are several caveats you should keep
in mind.
It is human nature (u select especially attractive winners and relatively innocent
losers when showing one's trades. I would think that most winning trades are not quite as
great as what you see here, and many losing trades :ire li lo! worst. Success is always a little
farther away than it seems, while the risk of failure is a little closer than we imagine. To
paraphrase the warning car companies engrave on side-view mirrors—object in Lite
mirror are farther away than they appear.
You'll meet several traders who are already famous, but most are unknown to the
public. I have known almost everyone interviewed here for several years and reel sure thai
some of them will rise to prominence as money managers or analysts. At ihe same lime, it
would he unlikely for all 16 to remain successful. Markets are harsh, and some people
inevitably fail. Please keep in mind that this book does not offer an unlimited lifetime
endorsement of any interviewee.
Yet another word of caution is about my uwn comments. They express my opinion
about each trade, its pluses and minuses, its strengths and weaknesses. At the same time
you have to keep in mind that all of these comments were written after the fact -after each
trade was already closed. All of us are smart after the fact- Being smart jboul the future is
much harder. Hindsight offers it lerrifie advantage.
It is e:isy to see gtiod trades in the middle of the chart, but the closer you get to the
light edge, the more confusing the markets are. There is a big difference between
exploring a battlefield after a fight and milking decisions amidst whai the great military historian
John Keegan calls "(he fug of war," This is why the level of clarity you see in these
comments would be difficult lo achieve in the middle of a trade.
To achieve clarity in your own thinking* you must keep good trading records. Make
an entry in your diary after putting on each ir;ide, paste up the charts, mark up their
signals, and write down your reasons for going long or short. After exiting a trade paste up
an updated chart, mark up its signals, write down your reasons for exiting, and analyze the
pluses and minuses of that trade. When your own diary j-ets lu be as thick as this book,
you'll be well on your way towards becoming a Successful trader.
ON THE MENU
In recent years I've developed a friendly working relationship with The people who own
and run Intcrshow, the largest conference company for traders and investors in the United

Introduction 7
States. They often invite me to Traders' Expos and Money Shows to conduct day-long
intensive workshops.
Speaking at their conferences allows me to meet hundreds of traders, many of whom
havctflken my classes repeatedly. 1 notice massive differences in what traders at vaiions
levels of development try to take home from flie workshops. Several dozen people sit
shoulder to shoulder and listen to the same talk, but each tries to capture something different
Beginners scramble for hot tips, writing down any symbol that comes up. We often
Find a few good tips; [lie problem is that after a while these tips will play themselves out,
and then what? Intermediate traders ask about indicator parameters and crane itieir necks
to copy my numbers from the screen. They appear suspirious when 1 tell them there are
no magic numbers and that the exact settings are not that important. Experienced trader*
sit back and watch, taking ;t few notes. They keep telling me the best part of the class is
seeing a professional irudci make decisions En real time in front of a live screen and explain
how he makes diem.
After hearing those comments 1 restructured my presentations—less Lecturing* mure
sharing. This approach has carried over into my writing, instead of lecturing you, I want
to show you how professionals go about making decisions. Traders in this book share a
wealrh of information; what yon take home is entirely up to you,
MY METHOD
Since you will be seeing my comments on every trade hi this book, I need rn outline my
own approach to die markets. This is an extreme])1 brief overview because 3 do not want
to repeat my previous books. To lenrn more about my views on trading psychology and
technical analysis, please read Trading fur a Living. For an in-depth review of my trading
techniques, money management rules, and record-keeping practices, please lead Came
into My Trading Room. There is very little overlap between the two hooks; if you1 re going
[o read both, start with the first, hut if youYe yoiug Lo lead only one, read [he second,
I believe thai MU-tiessful trading is based on three M's—Mind, Method, and Money.
Mind is your trading psychology; Method is how you analyze markets and make trading
decisions; Money is risk control. An ironworker client told me he renamed this formula the
three Dhs—Balls, Braint and Bankroll. The 3 M's are like the legs of a tEiree-legged stool: If
any one is missing, ;i person will end up on the floor.
Beginning traders, especially those with scientific or engineering backgrounds, tend to
underestimate the importance of psychology. It always surprises diem that the methods
they tested so well on paper fail when they start trading real money (see Chapter 8). Those
who survive come lo realize that when the level of emotion goes up, the level of intelligence
goes down—and this doesn't apply only So trading. I could lecture you for hours on the
need to be cool, calm, and collected, bill you are likely to forget everything within five
minutes of silling in front of a live screen, with prices ticking up and down in front of your
Byes, The best way lo remain calm and preserve discipline is la beep good records. Write
down your plan foi the day ahead, put it next to the keyboard. ;md follow it. Do not change
your plan during trading hours.
THE 2% RULE
Beginners are easily seduced by technical indicators, but successful traders know that
money management is equally important The two pillars of risk control are the 2% and
the6% Rules. Tlie 2% Rule states that you may never risk more than 2% aF your account

8 Entries & Exits
Tradinj
spec hi J
painfull
futures
centra^
buying
stocks r
People
prob;ib
a con cc
with it;
There i
various
tips, wl
indicate
others
in this I.
you;
good rJ
to crave
much n
money
equity on any single trade. People often misunderstand this rule and wonder why a person
with a % 100,000 account may only buy $2,000 worth of a stock. You may buy a lot more,
bur you are noL allowed Lo risk more than $2,000, If you know your entry price, slop level,
and permitted risk, it is easy to calculate the maximum number of shares you may buy or
sell short. Let's say you're buying a $12 stock with a $10 stop. Since you're risking $2 per
shnre and your maximum permitted risk is 12,000, you may buy up to J ,000 shares. You
can buy a smaller position ir you wish, hut never go over the 1% limit.
THE 6% RULE
The 6^ Rule limits [lie risk in your account as s whole hy staling you may never expose
over 6% of your account equity io the risk uf loss. For example, if you trade a $100,00(1
account and risk SlfUQG on every tradt\ you may not have more than fi open trades at any
given time. Suppose you lose money on two trades—now you are not permitted to have
more than four open trades. You've already losi 2% and have only 1% open risk available
for the rrsi tif the month. This rule allows you it> have more trades when you're on a roll,
but slows you down when you are starling to lose money.
A good trade begins with a money management question; Does the 6% Rule nUow me
In truth:? Dn I havu enough available risk \n my account? If [he answer is yes, you can
analyze the stock using your method. Then, if you find an attractive trade, just before putting
it on, return !o money management and ask; Based on the 2% Rule, htm' tutuiy shares may
I buy or sell short?
TRIPLE SCREEN
Between the.se Lwo money management questions lies the vast field of market analysis.
These interviews will expose you lo li variety of analytic methods. My own approach is
based on rhe Triple Screen trading system that I developed in the l9SUb and continue to
improve to this day. Since every market con be analyzed in several timerrame^ Triple
Screen insists that you begin by defining your favorite tinieframe. Once you know what
it is, do not look al iff Yon must first go to the timeframe one order of magnitude higher,
make your strategic dedslon there* and return to your favorite timeframe only to make a
tactical decision—where to buy or sell, going in [he direction given by the longer time-
frame. Since my favorite timeframe tends lo be the daily, I use weekly charts to make my
strategic decisions, nnd return to dailies to implement them. The weekly and daily charts
are my first two screens. The third screen is the entry method, for which you can use either
an intraday chart or simply place a standing order using a daily chart.
Fundamentals drive long-term economic trends, and I like to know something about
them, but the bulk of my work is in technical analysis. 1 tend U> May away from classical
charting because ir K tofl subjective; I prefer lo use computerized indicators.
In choosing technical Cools I believe that less is more, just as in many other arc-is tif
life. Many programs tor technical analysis have 200 or more indicators. All of I hem juggle
the same few bfts of data—open, high, low, close, volume, and, for futures u\)^n interest.
My rule of "five bullets tu a clip" limits the numher of indicators to the numbei of builds
in a century-old army rifle. You will sec my favorite five on the charts—two moving
averages, an envelope, MACD Lines with MACD-Histogram, and fhe Force Index. Let us take
a quick look at each of these indicators, as well as a system rhat combines two of them—
ihe Impulse system.

Introduction 9
MOVING AVERAGES
price is n Lonsensus of value atlhe moment of a trade. A moving average (MA) reflects
an average consensus of value in its tinii; window. If price is a snapshot, a moving average
is a composite photograph. It provides two important messages lu twders. Hirst, its slope
identifies the direction of change in the public's mood. A rising moving average reflects
optimism [bullish), while .1 falling MA reflects growing pessimism (bearish).
Another import am role of the MA is differentiating between what 1 call "Value trades'1
and "greater fool theory* tiades. If you buy near the moving average, you're buying value.
A person who buys well above the moving average is in effect saying—"I'm a fooli ''m
overpaying but 1 hope to meet a greater fool down the road." There are very few fools
in the financial markets, and a person who keeps buying above value is not likely to win in
the long run. He may get lucky once in a while, but buying near value is a much more
sensible strategy. 1 like using two exponential moving averages (EMAsJ on my charts!
one showing a longer-, another a shorter-term, consensus of v;ikie, I call the ;ire;i between
them "the value zone'
There art several types of moving averages, but I always use exponential ones. EMAs
jre more sensitive to incoming piices and less sensitive to ofd prices. I only use EMAs on
my charts, although several people interviewed for this book were perfectly cumfortablc
with simple MAs.
K'M
111*
S ill
ll.Ll
LI ill
■ Hit
cr, *i
He
1 tor
IWll
and
put-
■ an
ENVELOPES OR CHANNELS
One of the very tew scientifically proven facts about the markets is thai prices oscillate
above and helow value. You could say that markets are manic-depressive -rising too high
and falling ton low, only to swing back.
There aic several types of channels, and my favorite is a straight envelope—the lines
above and below the KMA, both parallel Lo it. A well-drawn channel firs like a good shirt,
covering ihe body of prices, with only the most extreme price*—[lie neck and the wrists—
sticking out. Amateurs love to buy breakout.1;, but professionals tend lo look for buying
opportunities near the lower channel line and shorting opportunities near the upper
channel line,
Some trader* like to use standard deviation channels, often called ftuilinger bands,
which expand and contract in response to market volatility. They are only useful for options
traders because volatility is a key factor In option pricing. If you trade stocks, futures, or
forcx, you are baiter off with straight envelopes.
MACD LINES AND MACD-HISTOGRAM
Moving Average Con verge nee-Divergence {MACD) is an indicator invented by Gerald
Appe) (Chapter 7). Its East line represents the short-term consensus of value, and the slow
line the long-term consensus- When the fast line rises above the slow line, it shows that
bulls are dominant, and when the fast line is below the slow line, the bears are in charge.
MACD-Histogram measures the power of bulls and bears by tracking 'he difference
between the two MACD lines. When their spread increases it showfl tlial the dominant
market group is becoming stronger—ii is a good time to trade in that direction.
Divergences between peaks and bottoms of MACD-Histogram and price may be the strongest
Signals in technical analysis.

10 Eniries& Exits
MACD-Lines and MACD-Histogram arc derived from three exponential moving
averages oi dosing prices. Gerald Appcl used 12-day, 26-day, and 9-day MAs, Those
settings -12, 26, and y—have migrated into trading software and have become delaiili sellings
in many packages. In writing my books, I used those settings to illustrate ihis indicator.
What settings should you use? Well, if you want to use the same unes as everyone else,
use 12, 26, and y, because the crowd is basically lazy and uses tlic default values, You can
also choose settings that arc a little fester or a little slower. Il depends on whether you want
to receive your signals a little ahead or a little behind the crowd. Think about it and
experiment with the values, or use the defaults.
FORCE INDEX
Everybody watches prices, but il Is volume that moves them. Volume reflects the intensity
of traders' commitment, (he lieat of their exuberance, and iht- depth of their fenr. Instead
of looking at a plain ploi of volume, [ use Force Inde\f which links volume with price
changes. On one hand, divergences between Force Index and prices tell me when a trend
is becoming weak and ready Ed reverse. On the other hand, new highs or lows of Force
Index tell me that the [rend in force is strong and likely Lu cominue,
Priur Lo Lhe computer age I used lo calculate Force Intles by hand and si HI remember
how excited I felt by its sign.il.s, which no oEher trader had, I also remember my inner
struggle whether to reveal this indicator in my first hook. My friend Lou Taylor, to whom
tending for ti Living is dedicated, encouraged me to write about it, and I am grateful for his
advice. The indicator continues to work just fine since I published that book.
THE IMPULSE SYSTEM
This system identifies bullish and bearish phases in any market and timeframc by
combining hvo indicators. The slope of the moving- average identifies the inertia of the market
while the slope of MACD-IIistogrJim identities the push of the bulls or be;irs. The Impulse
system gives a buy signal when both the EMA and MACD-Histogram rise, and a sell
signal when both decline. The two indicators get in gear during especially bullish or bearish
periods, fust as importantly, the Impulse .shows when bulls or bears start slipping, and a
irend starts growing weaker.
One of my campers, a briflianC programmer named John Bruns, programmed the
Impulse sysiem for several popular software packages, coloring each bar in accordance
with the Impulse system. When the EMA and MACD-Histogram rise at the same Ernie, the
market is in gear to the upside and the bar is green. When both fall, b^ars arc in contiol
and the bar is red. When the two indicators poinl in opposite directions, the bar is blue.
Impulse
system
Slope
of EMA
Slope of
MACD-Histogram
Trading
message
Green
Red
Blue
Blue
Up
Up
Down
Up
Down
Down
UP
I r>ng nr stand aside: no shorting
Short or stand aside; no buying
Litlier long or sliort
Etcher long or short

Introduction 11
A1 first I tried using the Impulse system as an automatic trading method, but
discovered lhat "L Worked best as a censorship system. When the Impulse is green, you may buy
or stand aftide but absolutely no shorting is permitted. When the Impulse is red, you may
no short or stand aMda but buying is prohibited. I wait for the Impulse system to go "off
Green" before shorLing and "off red" before buying.
Some programs do noi allow users Lo change the color of their bars on the basis of
conditional formatting, but you tan still identify green or red Impulse by noticing the
of the EMA and MACD-Hisiogram. Coloring the bars is a convenience, and I am so
to it mat I apply the Impulse ui -Ml my charts.

1
HES
:
Name: Sherri Haskell
Lives: Sausalito, CA
Previous profession: Fundraiser for technology companies
Trades: Stocks and futures
How long: Since 1985, full time as of 1999
Trading account: Medium ($250k-$lm)
Software; www.stockcharts.com, TC2005, eSignal
Traders' Camp: St. Maarten, January 2003

Sherri Haskell
A Logical Way of Looking at Things
I met with Sherri twice while writing this chapter—first in 2003 when I was just
planning to write lliis book, -nid again a year later. Sherri kept excellent records—in 2004
she cnuLd pull Out the trades we had discussed a year earlier as easily as the trades from the
previous week. These two interviews, held 12 months apart offer a glimpse into how a
serious trader's approach can change within a year.
In October 2003 3 Hew En a conference in San Francisco one day early in order to visit
Sherri, who lives in SausahEo, I took a shuttle from the airport, crossed the Golden Gate
bridge, Jnd ^ot oh1on the other side of ihc liny. The air -smellecl of eucalyptus Irt-es, Sherri
Wiis waiting forme in her Sporty Lexus two-seater. When we arrived at her hillside house, a
Mercedes convertible was parked in the driveway—Sherri Liked her cars small and nimble,
much like herself!
We had a campers' mealing thflt night, and ihe following morning Sherri picked me
up ut [he hotel and brought me back to her trading room. Wall-to-wall windows
overlooked the expanse of the bay and the hills on the other bide. A table underneath the
windows that ran the length ol the room was crammed with computers, screens, and other
gear. An exercise bike and a weight-lifting rack stood against the hack walk Sherrfs fal cal.
whom she did not have the heart Lo put on a did, kept wandering in and uut through the
open windows, onto her trading desk* and back into the garden-
Sherd complained to me about what she called her poor performance. 1<I am up 90%
this year," she said, "But the year is not over yet- I'll push to do better.'1 I laughed and said,
"Lay off :■ bit, relax—your results are fantastic, way outside of the envelope. You're at the
upper edge of the Lop one percent of traders "Sherri (fid not think so. "I'm not good enough
because 1 sec stocks that »o up-100% and I only make 90%,™ she said. "At the end of this year
I want to l)t up 200%."
She told me that pushing for more had different meanings for men and women. Sherri
always fdt compelled to push extra hard io succeed in a male world. She had done very
Well in two traditionally male areas of business—medical equipmenl sales and fund
raising for start-ups. Now she was just as determined to do well in trading.
I asked Sherri Co tell me about her trading and show me two recent trades—one
winning and another losing. .She opened a hard-bound notebook, its pages hill of scribbles. "I
trade a coupk* of different ways—une way is following breakouts. I troll at night, looking
for consolidating srncks with unusual volume. Something that hadn't moved very much
but has bijj volume—thai tells me momentum is building and it may bust out."
13

14 Entries
Sherris notebook had tour columns, :nid I read several lines. Some symbols, such as
EWT and SNIC were highlighted in yellow
Symbol
ABAX
ATYT
EWl
SNIC
Comment
Looks OK but ADX turned down
Really light—clear Id 16.5
RSI < 7Or MACD-lines Retting ready
Nice tight range
SafeZone
15.23
14.94
11,09
14.62
Stop
15.69
14.87
11.32
17.74
I jot down [deas every evening—the yellow markings mean die .slock looks
wonderful and 1 put those into my eSignaJ ;il(frl syMem, When ;i slock is vcl-
low, ii usually hils my mark within a day. I have no problem finding stocks or
Understanding technicals* My problem is deriding where to add to positions
and where to set stops. 1 am still refining that
Every night I go over all my positions—this morning 1 have 13, on most
dayh I have about S, but even that is too many, I write a note on each position
every night and then the chart image stays in my mind, so 1 do not need to
look fit charts intrnday, but simply watch price levels.
! do my initial review in Slockiharts or TC2000, then Lrack my list using
eSignal in real time. End-ot-day Stockcharts are the easiest to read- 1 do
not want to pay extra for intrnday real time, and 20-minute delayed quotes
are useless. 1 pur the symbols of the slocks that i selected in Stockcharta into
eSignal, which lets me know when a symbol hits my price. It sends me an alert
by phone, an e-mail, or ,1 pop-up window, which is what T prefer because I am
in the office most of the rime.
Sheiri writes herself notes ui cSignal, attaching rhem to each ticker. All nores are dated
and she cleans out old notes once a week- When Sherri likes a slock a lot, she marks it with
a star, Ottd when she does not like il. she writes Watch! next to it. "When the pa(;e is mostly
sLirs, llie m.irkel is bullish, When it's mostly 'Watches1, it is more bearish, Before I enter a
trade, I check thai stock's volume—iiit is strong, I go. If it is 50% above the normal daily
level, it is a sure buy; otherwise I think the move has no staying power"

Chapter 1 Shcrri Haskell 15
SHERRI'S ENTRY
1 H
16
15
11
13
1?
00
00
00
00
on
LO.OO
1 0
I 1
Upper pane: Candlestick Chffli {daily) and Iliree exponential moving jvcrdgci—10, 28r dnd 50
Middle pane: Bar chart of volume (green ■ rising price day, purpJp - dropping price day); grey line—
14-rlay TSV (Mma-segmented unlumfi); hluft line—a 10-dav simple moving auersge of
volume
Lower pane: MACD Lines and MACD-Mistogram
ASKJ
My initial buy w;ii on 8/12/03 ai $16,21. At thai time several indicators were giving
similar signals, confirming each other. The liSl had juM crossed above 50, ihe price was
moving up on strong volume, MACD-Histogram and both MACD Linos were rising, crossing
above the zero. Stochastic was turning np from below 20. flow nice! The indicators were
screaming to buy, and I happened to he

16 Entries & Exits
SHERRI'S EXIT
UT-f-T,
Added
BDughl
.
'I
n
*
i-*
I Hi- _ ...ii'lin.......
22 uu
Jfi 00
lll 00
1/00
1fiOO
15.00
II 00
13 00
1 0
Long ASKJ 8/12/03 @ $1B.21
Added 9/2/03 @ $19.30
Solil all 9/27/(13 ©520.74
Profit = $4.53 per share on the first position,
$1.44 per share on the second position
I added to my long position on 9/2/03. The stock had been moving up nicely, then
developed a lateral consolidation. After four trading days, \i broke out of its consolidation on
extremely strong volume, RSI was advancing, MACD was strong, and Stochastic was con-
i inn ing ui climb. The mnsi important factor was the breakout from the consolidation pat
tern on such sLroiiR volume, while all [he indicators supported my action.
1 sold on 9/22/03 at $20.74. The stock had been moving up fora couple of weeks, buL
the volume was gradually diminishing, and that got my attention-On 9/19 the price traced
j ihii, ;i bearish cLindksikk pattern. Thai set oft an alarm, especially since the doji was nn
a much higher volume. I ihoughi the price was topping out While the price was going up,
MACD -1 Iistog ram started railing off. The cnmliiiiaiion of all these factors was my cue to
getoutjSiivingmy profit. I exited the next day at $20.74, Just
as MACD lines erosseel on their way down and MACD-
Histogram crossed below itvo. IL was lime to bail mil. My
timing of the e\il was furLunate, as the stuck has continued
iu tumble since that day.

TRADE 1—ENTRY COMMENT
Chapter] Sherri Haskell 17
-fi
lo&d up ike fife
of tt itockl have not seen
for g \ov\q f/affij I begtv\ by
Compressing (t& Wttkly
Chart ffltl\ the entire
history fits totoamgtc
Mrcctf. Thli allows toe to
tdt wticther that stock ii
cheap or cypotti
to tft h'fctifoc History.
The history of ASK] reveals that the stock had been sold to die grateful public in an
IPO at approximately 70 (split-adjusted) and ran up above 190 in ;i final dizzying vertical
rally in 1999. From there it crashed and then ground down Co n low of 75 cents in 2001.
Any stock thai falls more than 99% from its peak, [ike ASK], has every right to tlit?. Bui ihLs
puppy decided to live. ASKJ lay qui^lly on rlie bottom in 2001 and 2002, just trying lr>
breathe, and in 2003 il lifted its head and started getting up, climbing into double digits.
Al the right edge of the weekly charti both moving averages arc trending higher,
confirming the bullish trend and allowing us to buy.
I told Sherri eiIiduI n cliuUu'lm had consulted with me a fewjcaiEeaiUer, Hcfcidbccji trading
stock index futures and aficra long stretch of voy poor performance started making money. At
Hint point hesellliegiiril of sl.000 profit ptr dsiy. One day licentcj'tJalDU^iPiLsiLinn jusl tight
and soon ffaaiipSl,5S0.Hccleddetl to Jiohl until that trade netted him a round 52,000 mid
louk u overnight, overriding hte technical rules. That day happened to have been the top ol fhe
199U Tmii marketl Soon to gain Blimak lo £1,000, then down to zero. He continued lohold.
di((Tininnl to readl IiIbdcw s2,OOO^oalh while Iiis trnde went native. ftfin% li> reroup it, Ire
doubled bJs posltton and then dimhk-d again, Hy the time he tew fn the towel and closed onl
Hiai trade, his account lud been rcdoori fmm almosf S100.000 to sHt000. He then
bad mgt} io his father and ;isU for money, opening a whole new ran of worms. —AE
THE MOST
EXPENSIVE $50

18 Entries &E\'its
ihe weekly charts give
fgl, / turn to flic
rfsrffej. nrere f decide to
on
cfitf/y fl*wr& One
i will vtff/cr do U 90
tf 1hc weekly charts
Teft me to bay. I wit mt
Irtrrfc tiQttftiSt fte
of 1^c weekly
system.
The extreme b,ir al llit? ri^liL edge of the daily chart is green—the Impulse System is
giving a bullish signal. This occurs when both MACD-Histogram and the EMA arc trend-
Ing higher. This means chat market incrtiii, reflected in the slope of EMA, is on the side of
the bulls* and those bulls ore becoming even stronger, as reflected in the rising .slope uf
MACtt-Histogram. An even beKer buy signal occurred b day earlier, when the color of the
daily bar had changed from red to blue. When lhc bars slop being red, they indicate thai
the bears arc Starting to lose their powar and the bulls arc about to take control.
This chart is bullish, but it is not the best-looking daily chert. There -ire a few
troublesome signs, Including the bearish divergence of MACD-Histogram ihat occurred just
beforfl the decline neai the end of the chart, which gave an extra powerful sell signal.
Declines that follow bearish divergences Lend to persist A fresh multi-month record low
of MACD-HistQgram also points to the strength of bears.
TVading for my own account, I probably would hove skipped itii?; trade; at the same
time I would noL have argued with Sherd had she told me she was going to take it. Still, n
serious trader like Shcrri never asks anybody before making a trade. 1 am mentioning
this only to show that different people trade differently. This is certainly a "legal" trade
from (he point of view of the Impulse system.

TRADE 1—EXIT COMMENT
Chapter 1 SherrfHaakeU 19
Overbought
h \
1
x =1
111 v
1
V
am
103
'■it1.'.'. I'
fffc first pu!!-
back of ft\c ev\d of $u$us.t
bad returned prices to their
value zovic, md a few
Itrrcr P\ey returned To
th<rt red line. Tti
towing average
the upper border of value,
ft £S a Measure &f Sherri'i
Sftflt tk#r$hc wdl able to
add to Her tongs OYi that
Sherri caught a beautiful impulse trade, capturing an eruption from the bottom of a sharp
decline, added on a slight pullback, and jumped off as the trend began to weaken. This
trade fdt iffy for the Brat two weeks, as prices remained stuck below S2G and the daily bars
alternated between green and blue. Then a breakout, confirmed by new peaks of MACP-
Histogram and Force Index, confirmed thai the bulls were becoming stronger.
In early .September, 11 if bulls btt;imc especially strong. On September 4,5, and 9, they
drove prices to the upper channel line. Those contacts with the upper channel line
confirmed the strength or the bulls, but afterwards, even as the rally continued, prices could
nor come up in that line. Thai was a sign that the bulls were starting to run am of steam,
MACD-HlBCOgram started sloping down and Porce Index drew a broad and ominous
bearish divergence, illustrating the weakness of the bulls. At thai point, prices continued to rise
simply GUI at inertia.
It is a reflection of Sherri's experience as a trader that when prices started pulling back
into the sweet zone between the moving averages she sold instead of buying. Same signal,
different action! Shei'ri did not catch the bottom of the muvt, nor did she nail its top.
Tnstend, she accomplished the goal or every serious trader—she took a massive chunk out
of the middle of a bifl

20 EnLries ik Exits
ACCOUNTABILITY
as the Daft trader! interviewed tsriee for this book* When Mil: l
mi1 lo sneak in San l-'ranrist'o. I Look the opportunity lo sclictluK1 nn inlcrvk-w with
SfterrJ who lived fust across the bay. When they Invited me to rdnrn -i year later, I colled and
asked Slum m schedule ;i monthly traders' meeting in coincide with my visit H felt only
natural to schedule another interview mnl nit what had dianged during tli.ii year
Tlic 011c thing tint absolutely ilid not Change was Shcni's shiirp Tutus on performance
and rcsttUa. Slit- isdeterBtined to succeed in evLTvihinji slit- does, and extremely serious about
her trailing One «f the Iilsl reflections »f her focus on results is tiu ciu,iltty of her records.
Sherri Ciin l-cll you ulEli lOtBJ predsiOD ffhftfl slit tra&ld ;iny stodt or [utuic a:id U'liy she
traded It, how ft looked an entry how it looked ai the exit, ftie result of the irade,and Eheks-
SOUS She kh;minl.
Kcqiin^ jidolI notes Introduces an eswntiaJ teaming [nnp into a traders perfennance-
WhEncvcryOD put on <i lr;nlc, you liavc two ^0!fl^, The firsl ir; lo niiiki' imnu'v; the second ^ to
hi'conu1 ;i better trader You m-iy ur may not r'jieIi yuur liisi ^uijI iii any 0.\zn trade, Emi you
musl always reach Mic secontL Ynn can learn tan your vviuiihiy txodes as weD -is irom your
losing oul's. 11'you fifil to reach thai goal, the ir,Kk hasheeii wasted.
Markets change, and good terlej^diangewlfli ilinn. ALihr Qmeofoorflrstlntervievlii
0flDbcr200 1 iliL'stoL'knhirketlKHltH'cn ristnglnaprettyHtreJghtlliieformiidi oflheyeat
siiLTri'siimumi was fully committed tosfoEfts, often ^oing on margin.The Ibnowtngjcarwas
very hnrd forstodt HadETS, us Ihn m.irM w^ts.sTnti^Ny fliii. wiLli no sustainable trades, EaJt-
iii(J giii hniii hulls imd bans. Wluii I saw Slinri fn Octoher, I fearncd that she did noi si]t:k
around in take Che punishment the waj moat people did. She did Independeni research,
discovered thainiBnyftituras were starting torafly From multi-year hares, and shifted berattoi-
Bon io those nwrlcefa ^l"^ studied ant! traded ihcm so seriously chat by Uic thnewc md a^ar
later, she was sending her (hsilv spreadsheet to several irjtMirts.
ThcrcinisanoOiernotahtechBn^duiingAcyeflrhct^venDD^
Shcrri'j; dmrts bad beconiE cleanei and Less cluttered. iSi^iimiMjf and bitEnnedlate traders
afniosl Hlwiiys \w Inn many tools—partly bi'iiiusc they -ire: just [Gaming and partly because of
a common fantasy Ehflt more tools lead to better analysis. Accomplished traders Lend lo use
just a mtiW number of analytic tcdmiquaff, CUstQlcd tnr expetlence.
I loot fonv-inl tinny nest visit td Siin Fnintisto, anothci lonkiii Sh^rri'sliUcst trades, ami
another visH with l»'> Lraders1 fironp. Perhaps iifflrt lime I "ri[l tfpt ennu^h courage in go on a
horsL-back ride with her! —AE

Chapter l Sherd Haskcll 21
SHERRI'S ENTRY
l.lllli.llf IiIi&|d
QRIkflN
I bought GRMN on 6/19/03 at $44.49 and it turned inio one of those lessons I get for
being a Jiule Loo confident \ bad been talking to another camper about GRMN—we both
liked the stock and had mode deceni money on it. Tony persuaded me that this was a
good lime to buy back in—the stock was in :i lateral consolidation but it would surely
breakout [o ihi? upside.
The stock gen hit earlier in the week but looked like il was geLLiny. ready to rebound;
MACD-Histogram was turning up. It looked like we'd get a jump on the rally and
opled to do that instead of being patienl and waiting for a confirmation. This went
against my better judgment; had I been more prudenL, I would have seen RSI below
its centerline and aol moving up, MACD lines headed down, and Stochastic below
50 and falling.
Those were dear signals Lo sit on my hands. The day 1 bought that stock il closed
below its 50-day moving average for the first time in over .six months.

22 Entries & Exits
TRADE 2
SHERRI'S EXIT
tT-
Bought
:>n no
M H (HI
-ifi DO
'i'i on
17 on
.id 00
- | , r-,
i o a u, a IU. u q e 11B B B b S 9 b B. u L n D111 n B i D s. b e h B n D n.
D D U '
ll I 11
M"'ll
1 sold on 6/23/03, two trading days lulcr, at $43.36. Thnt day tlie price dropped on ver>
high volume. RSI fell below 30, MACD-Histogram dropped, confirming a growing bear
ish momentum, and Stochastic was felling as welt I got out as fast as I could, kicking
myself for a sloppy trade.
Tony sucked me in, but 1 run and he stayed and got really burned, I kept saying ro him
"Don'[ try To be erne, don't Lry to be in front of the trade."

TRADE 2—ENTRY COMMENT
Chapter 1 Sherri Haskell 23
At the right ed^c of the
&nb&tiN had
i^to in Value zimcf a
potential buying urea. SrH(t
I would not trade \t from
the (on$ $tdc twtil its
, its upticK would
f thtrt the decline
weri over aind it would t>e
scrfe to qo \ow%. The fact
that it is sti!t above zero
/"i plenty of roow
1he downside.
GRMN liiitl spent 2001 and much oJ 2002 En & fliit liadinp. ran^e, beUveen a
$16 and $24, before breaking t>ut. For severe] months fbllowing Lhe brtakouL, ii hnd .i
beautiful steady uptrend.
The flock's character began to change in May 2(K)3, and Lhut change provided an
important warning for the bulls. Prior to th.it month, the wetkly bars were neat and
orderly* averaging uibout $3 in hcighi. In May 2003 speculators started p^urin^ in hor and
heavy, ^ reflected by extraordinarily tall weekly barSi 'vhich reached up to S7 per week,
bnrh on the way up and on the way down. This sharp increase in the height of rho weekly
bars nften marks the final liysicrrc-il slages of an upmovi;. Such tall bars often precede
reversals, and I prefer to use them for Liking profits rather than entering fresh positions.
Oncol llK'kcydifferencesMwmiwiniutsami Inscrsishow (luTliaudlt
fliera. Nobody wins tn even' tradi:—evtajhody has in Juki1 a Loss every once in a while. Winners
rnki1 their losse reryqultkl^wbllelosiirBieep hoping and walfin^Ibra trend to turn and Jjnil
them mil. They kirp lincling CXCUSH nncl (!xpUinntion<j; for why a slock slirmliJ Inm jnsf HbOUl
now, U'hili1 ii cgiiUihil's tn ^n ii^iinsf them, grfndlag down their cqullv .md sapping their
1. JJiLTr h a savinjf on the flour—"If ymi Iiopo. von'rt- ;i dope." Uolh Sherri sincl lif-'i"fritud
fishing tor a botlom" ;iml failed. They BHdfl thesamc mistake, fml there was a liu^c dif-
forence in how they handled a hm\ trade, Sherd nm quickly niul gut aw.iy\vi(!i a amaQ Idsk hex
friend kepi holciinjjaiid hoping until be luuk ihf full measure of the decitne, —AE
HDWTD HANDLE
A LOSING TRADE

■
24 Entries & Erits
The daily chart &f
shows a strong bearish
divergence between the
May av\d June peaks, Jfl
3unc prices rose to a he
Hf$k wHIie /■
rose to a twitch lower peaK
sHowing that below the
surface the bulls were
becoming weaker". Markets
run on a two-\
tmrf intkcn-ftc bulk
weak, the other party is
ready to take control.
Al liit right edge of the daily chart MACD-Hiatogram is falling lo a new low. Tin
deep bottom shows that the bears are exceptionally sirong and the corresponding
bottom in pike is likely ro bfl rtlebted or exceeded. Forte Index Is jIso giving a bcarisr
mesa^gc. Its new reuird low, lacking any sign of ;i bullish divergence, lully confirms iln
short-ierm downtrend.
Prices at the ri^hc edge arc near the lowet channel lint. This means it is too Lite to sel
short, even though ,i new Jaw In MACD-Hifitogram shows iIilii further bearish action i
likely ahead* I would much rather be shorting near the upper channel line than at this Lot
level, GRMN looks dangerous to me at this siage, and T would stand ii.side at this lime.
TRADE 2—EXIT COMMENT
The message of the ddilv indicators, which were making fresh new lows and calling foitowe
prices ahead, mrned out Lo be Light, Prices tumbled to a new low. Al the right edg« of th
diatl they fell below their lower channel line, proving once again that channel boundwie
do not serve as hard limits. Channels indicate where a reversal is likely to occur but do no
guarantee it will in fact nccur there.
With prices SO weak and the bears so strong, should we look into shorting GRMN? M
lategreaJ friend Lou Taylor taught me a useful technique—instead of trying rn solve every sin
gle puzzle thai lifc presents to you, go buck Lo the genera] principle and decide un that basis.
In principle, mosi trades can be divided into two bnwd groups—value trades and grealc
fool theory trades. In ;i v;iluc trade we short a stock ne:ir ils upper channel line and cover nea
the moving average or near its lower channel line. Shorting below the lower channel line is
greater fool theory trade—you know you're shotting at a low pries? but hope in meet a greate
Fool who w[]l take this trade off your hands at an even loner price, giving you a profit. Thei
nre very few fools in the financial markets—which is why this Lactic usually fails.

I,,.;1"!1-
.(Nit -*lrti
.1 1?
BiiwJ
■ ■- ,»■»—
x
■A./1
A.
Chapter I Sherri HusEcdl 25
^ 3
ITM . 1
anal
The new record tows of
-tttitvqratw and Force
iff the right &f$C of
the chart indicate yet
again that the
corresponding price low is unlikely to
be ftfld/. They show that tfte
bears are extrctocly strong,
and eVct\ if there ft 4 fftw-
porary rally, they arc likely
to push prices down to 3
lower Sow or /it fc&st rcteit
tMc current one. (tow far
back do we look before
calling a low a record low
or a kiqh a record ftyW
Abottt half tfie
screen.
Livermore^ a great market speculator of the early twentieth century, once said,
"There is u liiuo lo go longi a time to go short, and a time to go fishing" Looking iit the
right edge ot GRMN, 1 would have reached for my Fishing rod if I owned one.
RETURN INTERVIEW
In September 2004 I returned to Sim Francisco and k»ik a ferry to Sausalito. Sherri met me
at the dock and we zoomed up the hill in her sports ear. Not much had changed in the
house with its Intoxicating water view, Sheni's favorite cat had gotten thinner—Sherri had
finally put her on a diet. Tha traders1 group Sherri had been running since the previous
year was still gning strong. Just like the year before, Sherri was gerting ready for another
horseback trek In Europe
I was bored to tears in stocks and during this year have largely swiiched to
trading futures, I had to change my style quite a hit in order to look for
opportunities and con turn them, I am my own teacher and Student; there iire
not mnny mentors in this department
The first month I iraded futures 1 thought I was a genius. I hud opened a
$10,000 account and in three weeks it grew Lo £25,000, After that I no longer
put stops on my positions because they could cau.se me to miss something,
Then, one day, something happened to the U.S. dollar overnight, while I was
holding metals futures. That's when 1 learned the hard way to use stops.
Now my activity level is lower, my approach more deliberate and refined.
I allow myself to hold only two natures positions—when I started I would be
dealing with 10 positions .it once. In futures thai would be too treacherous
because in some way all positions are related—you can have an avalanche
come down on your head.

26 Entries & Exits
1 used Lu want to trade :is if thai were my job. ) wanted to be active, hut
now I Want trades to com* Eo me, I still do not have as much patience as is
required. There arc setups that are perfect, hut you have Lu wall for them to
tome together. You must observe eveiy day but not trade every day. Such
deliberate trading makes more money. The more active you are. End more
things cin go wrong.
I love LLindlestick charts because they really tell you a story. I use fewer
indicators and keep each Dn a separate tab so that my screen is not clui tered. 1
prefer MAt]D to everything else and have it nn my screen Lit all limes, bur
1 occasionally check other Indicators. I draw liendlines nil the time—1 am a
very visual person and see patterns bettci than most traders. Before making a
move, 1 always draw the trcndlines.
Every evening I do my commodities homework—I am constantly
changing and refining my methods. I recently started sending B nightly e-mail to a
few friends— it helps keep me on my roes. I only review those markets that
offer possible trades lor the next day, plus the U.S. dollar—] think it is central
to all futures. To review each and every market would be too distracting. I con
do my entire list in an hour, sometimes even half an hour, depending on my
schedule.
I prefer commodities but will irzide u slock if 1 see what looks like a
perfect setup. In recent months 1 have traded just a handful of stocks. My Stock
account is now only 5U% invested, while a year ago it would have been 100%
t>r even mi margin. To trust this market again 1 would need to see a sustained
rally on high volume.
DN SHERRI'S
MONITOR
i took a picture of Stall's monitor, festooned with dozens of cards ami notes. She waved me
caff—"l do no! wmi people iu sit my account numbers miu" passwords!" bm lei me oanj one of
the notes she has taped taller monitor, Jt listed qotstionsSIifinlaskshersetl before every trade:
Does a trade meet ATX of these criteria?
Track1 less
Hold longer
Be committed deliberate
Move fast in/out (don't hesitate)
Cut losses at the caiUesI possible moment —AE
After working for several hours* Sherri announced she wras hungry and we drove to
sushi restaurant on a quiel Sausalito Street. 1 asked about a photo I had seen pinned t
a bulletin board in her trading room—a slender man with a strong angular face in ai
open-cockpit airplane, ft was of Sherd's lather:
He was a successful doctor but made much more investing and trading. He
started charting by hand when he wus5U> J was 20 then. He was very academic,
always studying, rejjdinj>, j^uin^ to Seminars, and he look me along, Ai
seminars he had thifl very humble persona. Bui he was brilliant, always exploring;
he developed systems, had software written for him.

Chapter 1 Shcn i Haskell 27
He was an [nteftectuaJ but he was also a wheeler-dealer who took risks
and lived big. He invested in other things—diamonds. Inventions, He made a
couple million investing in this electrical invention that made light bulbs last
longer. He took chances, took risks. When he nought himself fl big boar 10 or
15 years before he died, he named it The Speculator. 1 like people like him—
people who can step out nf [he box.
He passed away leaving a substantial esiaie even though he'd grown up poor.
His own father had been killed in an accident when my father was an cight-
year-old boy and there was no insurance. His mother did not speak English,
He used to be very tuned intn world evenrs—[his or that happening is
going to end up [his way or that. He had a feel for macroeconomics—I would
like u> be more like th.it-1 used to sit with him in his office—he tried lo teach
me and wanted me tn trade with him full rime. But 1 needed a steady income
and he never offered to support me for, say, six months while 1 was yetting the
hang of trading.
I wish he were around now and ! could show him what I do. When I look
at markets, J often ask myself, "What would he s;iy?h' He bad a very Logical way
of looking at things, not making wild choices.
We sat on the restaurant terrace in the ioft light of an eari)' evening. Everyone knew
Sherri; the owner came up tn say hello and several p;isserihy waved to her. She talked about
her tango lessons and mentioned she was buying a truck lu low her horse trailer.
"Wait a second" I said,"Isn't the horse supposed to tow you around?" Sherri laughed—
"Not anymore. You should see some of tho.se nfw trailers. They have padding, windows,
mirrors, running lights, and air conditioning."
We drove back, and just as we finished our work, Sherri said chat T was running late
for the lasi ferry. We hopped into her Lexus. She backed out of the driveway and sped
down the narrow mountainside street, going backwards faster than most people go
forward. "Neighbors hate when I do that" she grinned.
ONE YEAR LATER
COFFEE
?J 1 r II 21 li fc XI H 7B I

28 Entries & Exits
Sheni showed me two recent trades, one which she had closed thai morning and another
that was sEill running. "1 boughi coffee on a pullback on September 8 and I jiesI g«l uui
today [September 23] because 1 saw this bearish engulfing pattern on candlestick charts,"
Shcrri also showed me a sLJl] open trade in TZOO, one of the hottest stocks of the
year. "1 see pictures more clearly than most people—support and resistance, trendlines,
channels. As long as the downtrend lines stay broken and the uptrend lines keep going up,
it ii okay to stay in. Also, this stock is still within iis channel, making it okay to hold."
Sherri showed me a spr^itl-
sheei with a summary of her
analysis of commodities, which
she sends (o a few friends every
night 1 noticed a Weekly trend
column nt\l let the Daily. While
kisi year she looked only aE the
daily charts, this year she also
analyzed the weeklies, 1
wondered whflher in another year's
time Sherri would put weekly
analysis ahead of the daily,
focusing on longer-U'im Irtmk.
1 noticed three important
dunge:, in Sherri's work during
the year that had elapsed
between our interviews: Her charts
grew simpler and lei.s cluttered;
she became much more
selective in her trading, not running
so many trades at once; and she
sUirtcfd paying attention to weekly
charts and not just daily ones.
ckv.-n drtji. runrje Iryinglo butlu
asclri. dppruatPnngras^t "|J

Chapter 1 Sherd Haskell 29
-mail frotM SHcrti;
The Best Trading
System for Me
Have you ever walked up to u crowded craps table when people were
screaming, the dice flying, and every imaginable expression seen
around the (able? If you didn't know the game, ii probably looked
like utter chaos, I've always thought of the stock market as a kind of global Craps table.
Instead of dozens of sin ml Linen us games, there sire thousands, with every conceivable
kind of p]ayijrf many different systems odds and odd*-JHaken (pundiLs). In addition,
you must factor into the game potential influences: economic, political, and psychological
It's so daunting—uniil you determine yourgatn&.
In my early years I read every tiling went lo innumerable seminars and workshops,
tried every guru's system. 1 started out like most people, looking for the Holy Grail. We
think there must exist the bftfit system and the best guru, and so we jump from game to
game and end up frustrated.
Somewhere along the way I understood that I needed to determine my game and thai
the right system had to be my own system.
I spent some time thinking ahnut my persona] strengths, the way my mind and
emotions operate) and the aspects of trading ! enjoy the most. Where did I SCCO) to do well
(.(insistently? 1 extracted bits and pieces from everything I had studied; [lie things ih:it
worked for me, made sense to me, and fit my own personal style. 1 customized that
Information along with persona] Formulations and discoveries, and created my own system.
Thai was my epiphany.
The difficult part for me is the discipline. Not just the discipline of maintaining
vigilance and not deviating from my system, bui the discipline of not being influenced by
others. I learned over lime not to listen EO financial programs on TV, to reduce me number
Of publications 1 receive, and to be very careful conversing with others about the market.
The market requires you to check some of your instincts while exploiting others. It's
a psychological balancing net that 1 keep perfecting, but that cakes time and conviction.
The right emotional temperament helps, and so does a strong constitution. If you can shirt
from a reasonable capital base, just like in any other business^ as well as endure expensive
early mistakes, ihe rewards can be fantastic!
A few suggestions
• Learn candlestick interpretations. They bring the charts story lo lift,
• Keep a diary and review It periodically. Wdtc down the thoughts, emotions, and
incidents at Lhe lime of each trade. You'll be surprised at the valuable information you'll
find, particularly aboul your own behavior patlerns.
■ Be patient Be deliberate. Wait for the perfect seiup. When you set1 it, don't hesitate. If
it's not happening, don't take action.
• Try not to make ino m-iny decisions during the trading day. Have your strategies
mostly thought out during nun-trading hours.
• Read ReminiscQtjces oj a Stock Operator about Jesse UvermorE,
• Listen to die chart. What is it telling you? if you're not sure at once, step back. View
the longer-ierm picture. What is it saying to you? If you're not certain, do nothing. I
always let the chart speak to me, and I listen to the chart!
• Don't ignore youi instincts. If you arc successful at trading, ynur instincts have played
a role!

Name:
Lives:
Previous profession:
Trades:
How long:
Trading account:
Fred Schutzman
New City, NY
Technical analyst
Futures
Since 1986
Large (>$lm)
Software: TradeStation and Microsoft Excel
Traders' Camps: Taught in the January 1999 and
January 2005 Caribbean Camps

CHAPTER 2
Fred Schutzman
My Computer Can Do
the Trading for Me
Imel with Pied in an office above the trading floor oJ h commodity exchange* just a
few blocks away from Ground Zero. The room in which we talked was named after
DennfsFoo, a floor trader killed on 9/11. Butky* Fred's partner in their hedye fund joined
us, listening, monitoring quotes on the terminal, and throwing in an occasional remark.
Fred used to work for me Dart-time in ihe lati 19305, helping produce a daily advisory
service for currency traders. He left to become a partner in u money munagcmenl firm,
but only after he [rained his own replacement. We have remained friends, and I have asked
Fred to review thf manuscripts of all my previous trading books, ferreting out technical
errors. Fred Lias taught In two of my Camps; his dedication and friendliness made him very
popular with campers.
In Che early 1980s E was Studying to bean actuary, a statistician who measures
risks for insurance companies. While in school, I became fascinated by the
markets, discovered technical analysis, and subscribed to a Zwcig newsletter.
One of my college professor* suggested I look for an internship on Wall Street.
I could never get through to Zweig, so I got the membership lial of the MIA
(Market Technicians' Association) and started calling. An analyst named Gail
Dudak look me in as an intern and 1 worked for her every Thursday.
Six months later she sen! nit In John Murphy who was working at Ehc
CRB (Commodity Research Bureau). Few people knew of John ihrn, before
his first book had come out.1 John was teaching a course on technical analysis
at the New York Institute of Finance, and after a while he asked me to assist
him. Then he became an nn-:iir :in;ilyst for CNBC, The TV studio was in New
Jersey and for the following semester he was unable to come back Into
Manhattan in lime for his class. He lold me lo teach the (IrbL lialf of eadi class,
and ht1 would arrive for the second half. At the end of the semester he told me
Co take over his class.
RtfiiroMi7*ete lyttfe. at that timeronadercd flic definitive booh on technical analysis.

32 Bntries &
In 1990 I taught my firsi course and there were two floor traders from the
Coffee, Sugar and Cocoa Exchange—Freddy and Bucky, They wen; successful
on the floor, but wanted Co prepare ilitnistlves for elecIronic trading. At the
end of LhaL semeskT they said, "We want to hire you as our private
Wo set up a money management partnership, with I-Yedity mid Budcy on
the floor and me working in j£Q upstairs office with the charts and doing
compliance. Then two Lhings happened at once—coffee got very busy and nur
biggest client had personal problems and pulled out his j.ssdis. I went to work
for various firms as a Lxhnicul analyst and learned programming. In 19%
Bucky and I got funded and reopened the business. Today we're (ratling
the methods we first applied in the early '90s, only then we did il subjectively.
Now we're fully computerized and have improved our e.\il strategies and
money management Briarwood Capital has had a positive performance every
year, and in 2001 we started to attract client money. Today we are managing
&19 million.
System trading works for us because il takes the emotion oui of trading, I
am not good at making live decisions. ! am more or a researcher, a scientist
I can talk to the computer and it can do the Iradins- for me. Before we had
computers, 1 was a researcher and Lould nuL Lrude wilhout Bucky or Freddy
tin the floor. Now, if we can program concepts, I can continue as an analyst
and the computer will trade unemotionally. I am doing the analysis, and the
computer trades off my inputs. It pulls the trigger if the conditions e.visi.
System trading is not for everyone—a lot of people do not like handing
ihe power over to a computer. They want to relain responsibility for the
decisions. Sometimes the system gives you a trade 1 would not lake as a
discretionary trader—and thai is usually u winner. If 1 am writing code, 1 see a lot
of trades that look [ike Stupid trades and I wish I could override 1 hem, but Ihen
my real performance would not equal the system performance.
To test a system, we apply it EQ SO markets across 20 years of data and
come up with roughly 4,00(1 trades using the same parameters in all markets.
Pork bellies, coffee, currencies—the same in all markets. The beauty of back-
WE COME UP WITH Fred amimentotk Mu.sl jimplc tesl a lot of systems, much like ilirmvinjf 100 tots at a iHHlfl",
CONCEPTS FIRST They find a system Brat lias worked in ifiep;isl and optimize il.Tliey vm\ up willi a system that
louks good an papa but never rlHivits (hi! same performance jjoing into the future—what they
have is a pasl statistical flake.
f would say 99% nt people who badttest systems gel it wrong and Lome up with results
that cannot beTepllrated in real life. We come up with concepts firs!, [foul system works, il is
because II is well grounded in markd behavior. Our systems are doing what fcbej are supposed
tndo—replicating their tesl rcsnlts In live tradtag-'DierehaveQ't been any snrprfBeBBOft!r.T3iat
Is am greatest strength—weffl the backtes ting and knowwhal toexped in ihc future. Wcare
not going lo ull people we will bave 12^6 drawdowns and ltave4O% thencit

Chapter2 Fred Schuizman 33
testing on thousands of trades is thai we know when we are likely to make
money. Yon can nevet be loialty certain but with our methods we are as CCT-
inin as anyone can be, Our aysteins are often based on systems lhal we*ve been
tradins?, .successfully on ;i discretionary basis fur years.
] cannot repeal it enough—my job as a system trader is to follow ih<?
system. The only way I can realize hypothetical results on a go-forward bafiis is hy
following the system. I am a clerk, I am :i monkey. My job is to ill ink after hours
but not when the markets art npen.
Discipline and consistency are the two keys io success. The computer is
consistent—it never misses a clay or overrides ;i signal A compute] applies our
methods objectively; it has no bullish or bearish bias. When 1 get pigheaded
and get a bias, I think 1 can outperform the computer. While I mi^ht do lh<il
on one or rwo irades, T cannot outperform ihf computer tin consistency and
discipline. There is nothing like diversification; Hi succeed in the long run you
need to lake many trades^ mid the law of probability is in the computer's
favor. If vft want the best outcome possible trading mechanically cannot be
beaten. We operate like a casino, and the law of large numbers works for us.
We look for trades wilh a good risk/reward ratio and a decent payoff. We
aren't looking for a runaway bull market with no place for close stops. We
evaluate every trade, and our system attempts Lo get the? best payofl per dulktr of
ride Risking $5 to make $7 [s noi ^ood for us. The trades I like best on the
chart often have too large a risk and you are not being compensated
appropriately for it.
Fwt said: A itw of our ita came from the bnokkM Speculation us a Fine An hy Dlcksom (J. SOME GOOD TRADING
Watts- Hewasthcprcsidcnt of the New ^brit Cotton Exchange more than one iinndred years ago, IDEAS ARE AS OLD
from J 0?a tu iQOO. Be wrote aboiil psycholofiE discipline, and risk mnmigeniHit AS THE HILLS
T;ikf ;i luuk ;it li'm "Uwa Abisolwlc/1 just as rek'v;ini mday as tJicy were 100 years ago:
1. Never overtrade. Tfetafcean inieteetlai^Q \hsn |usUficd^> Mil capita] is lo Invite disaster.
2. Never double ap. Never completely jnd j< once reverse a position,
j. iiuw quickly arnol stall. Bun promptly ai thc totslgn of danger, but If yon f^il (udo
lhlsF Imld ot3 {irtlosu out pflii offl position.
4. When doubtful, rcitmv the amount of'interest* SeU dinvn ton sl
Without risk miiiu^omcut, you cannot h;ing on to the money. We do not
can.- about being light on every lrnile. Money management Is even more
important to us ihan the trading system, Saraeone could give us the best
system in the world but il ith risk/n_'ward ratio wasn't good, we wouldn't t.ike It
Our percentage of Winning trades ii about 40%»nnd so we shoot for ci( \e-.vii u
2:1 retard] but ideally we'd Like 3:1. We are trying to get ihe Liesl risk-adjusted
returns-- it is more game theory dun technical analysis. We want to beat our
competitors on j risk-adjusted basis.
Being 3 CTA (commodity trading advisor—a hedge fund manager)
makes you trade differently than .3 private trader. We need to make our (rack
as attractive as possible, better tban our competitors'. In recent years

we have improved our exit strategies and risk management, reduced our
drawdowns. Less risk means more rcLurn. As a subjective technical analyst I
may like a market* L>uL as a CTA 1 may pass it up because you risk giving back
too much and a drawdown would be bad for our track record.
The attraction ol being li CTA is the money. Typica] compensation lor
CTAs is 2/20, If someone gives us a million, we'll get 2% oi thai money as a
management fee, plus an incentive fee of 20% of the profit. Most people, if
they had K) million of their own money, would not want the headache ol
being a CTA—dealing with a loi of administration, LumplhinLt, and
accounting. The way we trade, I would not be comfortable with an account smaller
than 10 millinn.
When 1 first invited Fred to participate in this project, he wondered whether I woul
fad comfortahie publishing an interview with a .system trader, since he knew 1 was a di5
eretionary trader, I told him ihiu was precisely my point—1 wanted in introduce my read
ers to all types of traders. Fred warned me that he wouldn't be able to show me the mai
system he was trading. It took him and his partner Rncky over 10 years to develop that sys
[cm, ii was their bread and butter, and they would not disclose ir. What Fred could shoi
me was one of several systems he had recently developed, tested, and traded. 1 told him thfi
was a fair solution.
We keep Looking for long-term trend-following systems based on our
ideas. When we develop a system, we first backtest it using a computer, then
rest it with our own money in one R&D (research and development) account;
only Mien will wt use ii in imde clients money. Once -i system is m [>l;iLe, we
absolutely follow Its signals, but while we test it, we alFow ourselves to override
its signals and experiment with its parameters.
TRADE 1
FRED'S ENTRY
These arc the three entry rules in this system:
Define the major trend and trade only in its direction. I Jere we use an 89-day SMA
(simple moving average). We also like exponential MAs hui initially simpler is better.
Place Bellinger bands ane standard deviation above and one standard deviation below
the MA; watch for a breakout in the direction of the MA (a green line on the chart).
Place lines extending forward from each 34-day high find a 34-day low; watch for
breakout in the direction of the ,V1A (a red line on [he chart).
lo enter a trade, all Lhrec signals have to occur, but not necessarily aL the
same time: The moving average has to turn in the direction of the trade and
prices have to penetrate both the Bollinger band and the 34-day Line* in the same
direction. For #2 and f?3 the latest signal simply has lo be in our favor and not
against us.
This chart uses cash data because the trade spans several contract
rollovers. At the right edge of the chart we see all three sign.ifs in place: The MA
has turned up and prices broke out uf both channels—we t>n long.

2 Fred Schulzman B5
-DD15Q0
- 0.00G0O
-0.00500
Upper pane: Daity bar chart. Blue line—89-day SMA, Graen Imefi—BdIlinger bands, one standard
deviation above and bebw the MA. Red lines extend forward from each 34 day high
and 34-day low.
MACD Lines and MACD-Histogram. hoth 12-26-9.
EURO
Tlias \s ;\ channel breakout system—it identifies a trend and enters a trade when the
volatility increases in the direction of that trend. Most penpfe do nol like liiis type of system
because drawdowns tend to be large. We found that by using two channels we can tighten the
parameters for both, By using boEh a Rollingcibaud and a Donchian channel, we try lo \.\nm
the volatility beafltA Donchian channel is built by pushing horizontal lines forward from die
highest high and the lowest low of a scr number of days. Here we use a 34-day DonchEan
channel Nute that the upper and the lower boundaries of this channel can change
independently from each other.

Entries & Exits
FRED'S EXIT
This .system has two e*"1 rules—sillier ;m MACD divergence (we prefer to identity thei
visually even though we have wi"iticn code Lo recognize I hem) or when prices moveagalni
the trend and close on the opposite side of their By-dny MA,
This system backtCSttd wdl; it was profitable but the drawdowns were Loo high. W
rejected it because we could not reduce the risk. If we could have cut the risk, I would not b
shewing you this system today.
1 0800
1.0400
'D '02
N D 03 F M
In July 2UU2 MACD-Histogram showed a divergence, bui MACD lines did no
diverge.
In September prices did noi dose below their MA. They did violate the MA ii
October, and much as we huLe lo override signals, we were taring the system. Ali of on
Other systems said hold- We said the market was closing below ibt MA not because it iva
going down, but because it was going Rat. We put our stop below [he Sep [em her low—am
ft ended up holding.
January to March BhowB a great divergence. Until MACD Lines am
MACD-Histogram divergences took longer to develop, whicri mukc
ihem more meaningful.
When the euro closed helow its MA We sold it.
4/1S/20Q2 buy Euro @ $B9.1 Z
3/13/2DD3 sell Euro@S10y.RH
Profit per contract $18.76

TRADE 1—ENTRY COMMENT
Chapter 2 Fred Schutzman 37
i. l Ji:
arc
-tricky because people cav\
draw them a litfie higher or
a tittle fowcr on 1Mc same
chart, dtpctiditoQ ov\ fticir
bias, Still, at the riqkt edge
of the chart, prices are
up aqaiv&t rtfe
fftfe at a time
both Sftfc are turn-
tog up-a sign that an
ttpiide brtakDatii likely.
Buy low, sell high. The euro Was definitely low in April 2002. The new European currency,
recently launched on par with the IIS. dollar, promptly sank below 85 cents. This weekly
chiin shows that amidst mas;, pessimism the euro found support in the mid-SO tent range.
The 2003 bottom of MACD-Histogram was shallower Lhan in 2002, indicating chat bears
were becoming weaker. At the right edge of the weekly chart both the 26-weck and the 13-
week EMAs arc turning up, along with MACD-Histogram, showing that bulls an in
control—the Impulse system h fhishingabuy signal The red line {[3-week EMA) is Still below
the yellow line (26-vvtek EMA) and ready to cross above it; such crossovers tend to occur
during the most dynamic stages of rallies.
We make some of tlic mostlmportiml choices In our lives tor partly rational and partly Irrational
reasons. Few uf us Jmile [otanincasystcjiiBticora d>scrctio]iiir>r trader purely on thu ImsIs of
numbers. We dioose what allows us Eo avuiil what we fear most A systematic trader, such ns Fred,
labaCbered by tlic inctls^ynt noise of lln-myrk[?ls: \k iisvs a rnmymicr ta \}crU)nn Analysis and tu
ExeralE trades without Jiiiviii^inhciilicrwitlinnisiuiit aUciition to tlit: markets and endless ded-
slan-maldng. AdlscFCBonarj tradersudi asmjsclf, UKesMnglndiiir^ iinililri-iids^oiujjintoa
trade Dial he dislike.1: merely <m tiic coiuiiuinJ of the system, Bath iippm^rhrs have their merits
and dcrncTits; you have to choose your pleasure inid youi poison. —-AE
YOUR TRADING STYLE

B8 Entries 8; Exits
rr [-
Prices "breathe" on the way up, inhaling and exhaling. Since the uptrend begun h
February powerful peaks A, C, and E (not yet completed) show that healthy bulls are get
ting a full chest of air. Weak bottoms B and D show that when the market "exhales" bear
hjve hardly any power. Vigorous peaks and shallow bottoms nf MACD-1 listogram con
firm the health of the uptrend.
A system trader often finds himself on the opposite side of the market from the d\&
cretinnsiry trader. At the right edge nf the daily chart, all the key indicators are Up—bnrl
EMAs, MACD-Line.s, and MACD-Histogram. Still, while 1-rtd was buying bis upsid
breakout, I would have siood aside. Buying so high above value—SO far from the EMA—
would not sit well with me. After seeing Q buy signal, I would be inclined to place a buy ordc
in the vicinity of the EMA, adjust il every d-iy, and Iry tu £e| long on i\ pullback to VbIuc.
The risk with ibis tactic ts that you may miss a runaway uptrend which beeps rising
with no meaningful pullbacks. That is a lisk [ am willing to take, I am in no hurry co £e
into any individual trade. I feel that trades are like city buses—there is always another on'
jusi a Tew blockfi away.
Futures
When change of contract occurs, in many cases the new
contract will gap up or down from the previous one. How do you
use technical analysis En such cases? —Trader
In analyzing futures, I always look at two data series—weekly
and daily. For my weekly charts, I use continuous contracts,
which take the kinks out of contract rollover. For my daily
studies I use the front month. When that month changes, I
switch to the new month, but go back several months in rny
analysts to get the proper indicator flow. —AE

Chapter 2 Fred SdiuUuian 39
TRADE 1—EXIT COMMENT
At-ife riqhr cdqc of fte
chart, Mif£M/tKJ; arc
a double top. Tk
tl seriously over-
bought md kwtu you to
profits
Trices are connected lo valuer with a mile-Inn^ rubber bund," one ot my clients once
said. If v\re agree that a long-term MA is a reflection of value, we can measure the normal
length of that rubber band by calculating the distance from the high of the highest bar to
thcEMA. On this weekly chart ol the euro the "rubber band" could stretch lu nine cents—
llinl is how far pikes got away from the 2G-week EMA in July 2002. In March 2003 prices
iosc seven cents above value, almost the full length of the rubber hand, before snapping
back and inking out the previous week's low. Such sharp snajibacks rarely end before hit-
ling ilic value /.one.
Currencies arc among the most trending m;irkeis. A well-designed System, while
subject in whipSBWS in trading ranges, should lock onto the long-term trends in currencies.
Fred'5 system, which caught a breakout from B b&BC and slnyed Imig Tor almost a year,
riding a major bull move, illustrates this point.
A factor that kills many amateurs in currencies, besides poor money management,
is the fact ih<tt currencies trade almost 24 bouis ii day. They can move violently against
yon while you sleep. If you trade currency futures, you need lo sei up your account in
such a way that a stop from futures is automatically executed in the cash markets if
currencies move while futures are dosed. A trader who gets into currency futures without
this setup i,s like a man who decides to protect his property by putting up a fence on only
out .side.

10 Entries & Exits
SUPERIOR RISK-
ADJUSTED RETURNS
remarked: Some CIAs bam Ji;ul laifie drawdowns—30. 40. or even 50%, Our [aqjest
drawdown thus far is 10.47%. We differentiate ourselves by superior rfsK-Qdjnsted returns,
compared in oilier systematic tratfeis. If an advisor achieves 30% return wilh ,i 30K
drawdown, then our 15% return with [i 10% drawdown is 50% better.
ffhen die markets ait food, pimple sjy, "look af sn and sa returning 30%." but tiify forget
tlia( he just lost !i()"iil A CTA m;iy luve;« higher return tlnm we iln annually bu\ whaJ rfskBreyoo
taking to gc( that rduniV When everyone Is earning 10 in £0% we may fie* only L5%-Thcn in
a drjudown. our competitors have 40 to 50% drawdowns;, we get 10%. Yon have to give
S40 to make S40. You give tts SID (o make SIS,
Moving Average Turns
Is it better to pick a stock whose weekly moving average has
just ticked up or a stock whose weekly MA has been
consistently moving higher for the past tew months? —Trader
The answer depends on your trading style. If you like to pick
reversals, look for stocks whose EMA has just changed
direction. If you like to trade swings within an established channel,
look far stacks with an established trend, —AE
IT IS A PASSION
FOR US
tturky (PsuWpMbtco, /cj ts n floor tnitlrr an QiJJtr. Sugar, ami Cocoa Exchange fCSCE} and Fred's
partner in Bnsrmotl Capital Miimigamm: he joined us during the Interview stid threw in ajhv
nl system with good roles and prpperrisk management allows us la remain crno-
tfonafly stable when plarfn^bet after bet after bet How many Individuals ranbe wrong at times
iii a raw juid siill plan.1 IJti! next bet? Vlt.v, very thv.
XhPiQo^satisffiii^feeliQglliaveJsIoslDgmojieyfi^
rriFtlicri^litn.'as£ii]s.vou willIicji virysJUirsifuI [niclLTiiiLlic1 Icm^ntJibeciuftTVou wilHiciJikinji
smaller inssus wlilch will cnabic you lo be around for the big trends. When tbcgrfltems^yB to gel
out—^touuniawncTerlicflidBiiyiiM
piuin.1! liykiiuiiJiiyniK'iK, wv know ivc will mnkc moiiLy in fh<llon^nrn.
I liavc spent billions of hours on (licplmne. K ts a passion FDrns—we cvanl our
equity nirvi- fu be an smoulli .is poasfijle. You have U\ Iraro ;\ passion for tliis to be successftil,
Mid]fleljordandocsnotga to the gfrn to bang out and have a good lime. No matter what Etcddj
.iikI I arc doing, ;il some point ilirrin^ die ihy nre Think of tMs—on Llic bedch, in a store, ;my
ffhQr, You have [o do what yon lore because only then canyon Call and get up and ^i Im-ward
again. Thne are people more tfllented than ZWclmcJ lordan, bul they never mnrie it. We make
ihousiiiid^i of trades to improve hem-ikes fimusancb of shote. I have inei m-my talented people
who could run circles around me—and I make more money trading than Lliuy (in.

Chapter 2 Fred Schutzman 41
TRADE 2
FRED'S ENTRY
■G6.0Q
SJ.00
62.00
60 00
58.00
■56.00
■54.0D
1.50
0.50
Apr
Jun
Jul
Aug
Sep
COTTON
II is hard to show a colorful losing trade when yon are a .system trader. With most losing
trada we iire out very quickly. We gel in, Itisc 0.2%, and we Ye gone. Such trades do not
damage our (rack record. I wan! ta show you a loss [hat was one of the worst—prices
moved so fast that our stop did not have time to catch up wilh rhem.
Our entry into this trade wag delayed because first we gcu ;i signal lYmn the BoHfrlger
hands and the Donehian ehannel, but had to wail for die MA to turn up. When it finally
did, we went long much higher above the MA than we normally like aud bought fewer
contracts.
A discretionary trader looking at this chart could any this is -\ sucky entry—the price
is hitting overhead resistance and oscillators arc overbought Hl' could say chat the odds
are against this trade because we got in so late. In our experience, those are the kinds of
trades that really get going!

42 Entries & Exits
FRED'S EXIT
3/11/2003 buy Dec G3 Cotton @ G4.75 c/lb
11/25/2003 sell Dec 03 Cotton @ G3.87 c/lb
We have a long-term system designed lo capture big profit. A trailing sicip moves slowl
:ind sieadily, but this market moved so rapidly up and down that the stop did not have th
time tu lhl.Ii up. A trade Like this does nt>L hurl our pocketbook—we lost little rnoney-
but it hurts our track record.
This trade Sfia System trader's worst nightmare. It included the end of the month: W
booked paper profits in October, then showed n loss In November—it hurts to start
month with a drawdown. A small loss fs okay, but a big run-up nnd a big run-down \vi
hurt your track record by making it more volatile.
Our rule is to exit if the price closes across the MA against our position. We iry to exi
tin dose rather than wait until the next day's open, Yon have to be careful when you giv
an MGC (market on dose} order. Some markets have 30-SCCOnd closing periods, other
even longer. A closing period in coffee is two minutes—place an MOC (market on close
order to get out early and the market will have another minute and 59 seconds lo rui
againsi you. We try to finesse our exits. We have a computer algorithm Co decide where th
close has lo be lo give us :i Signal.
It is a good system, producing nice profits; it is a tradabl
system, but taming the drawdown is hard. We want to produc
not just profits but I he best risk-adjusted returns. We easily hav
20 Li 25 systems that do well on the profit line, but wo look fo
systems to minimize risk and those we the ones we keep [fading

Chapter 2 Ired SchuLzmim 13
TRADE 2—ENTRY COMMENT
t'Ul
'-HH
Km
■1111
KB
-3«l
J I
4GO>
is the rubber
COttC^l In
2.GOX ftlri&l
the Hfyh to the
ftl April wrf July ZQQ5 it
WJ5 tseenn. Attftc right
cdqc of the chart it is
ccv\Ti-tkc
rubber bmd
mc wmt to
At the right edge ot the screen [lit Imy signals are in. Both EMAs arc rising, MACD-
Histogram points up—but [he excitement is way too much tor me. I do not chase iimaway
[rains jnd I do not chase runaway trends cither. It is too late for me to jump in. I
understand that a system trader does not have such latitude* When he jjeis n sij>n;il» he h:ts to l>uy
to reniiiin faithful to his system.
Overbought
A.- .
11 §
Ml
\
[&E0
■ in
VII
I like to buy near value,
way above value, if tE f/y-
lite ffe fftf*i
fjH tJ famous
photo of Marilyn Monroe. I
way wt short cotton fare
because atit^e i
p&tnt up, btrt I
buy it cither because there
is no place for a
Close STPp, I appreciate
Fred's discipline In
all hii systciw'i signals av\d
his fortitude in showing
this trade-but Tito type
of trade wakes me %lad to
be a discretionary trader.

44 Entries &
TRADE 2—EXIT COMMENT
gap diwe rte high
of the previous bar, reach
a mw HiqH, tftfffl torn tffrvn
*Hrf ctoc sharply below life
low of tUe previous bar
rf tJ frrctffc ft] ftftf
/i fHc last
bulls, after
itiC bears fake OVcr
lower.
Key
reversal -
Trades that are difficult from the Start tend to remain diffiLLili tn iht finish. A( first, cottc
vindicated Fred's Irend-following system. After he went long, cotEon kept going higher ai
higher, with occasional shallow pullbackfl to the red line, the 13-day EMA.
This looks like :i furn]linitrnL;il]y driven market. A sudden disruption in supply mn
have Roosed up cotton. Some disruptions develop slowly, allowing a technical trader to re
ognize emerging bullish patterns. Other disruptions strike suddenly, and the market ga|
up and keeps on running. A mirror image of this occurs in downtrends. New supplies m,
eonie in slow waves, crtaling n distribution pattern, ho LhuL a technician can recognize bea
i&b divergences and prepare for a downtrend ahead. AC other times there is a sudden snrj
of supply ora collapse of demand The market appears to hit its head on the ceiling, revere
and go inln 0 freetull 1 hat is exactly what happened Ln cntlon during tin is trade.
It is a credit to Fred's system that it handles such a difficult market with SO lit!
damage to the account. After being forced to get long high above value and getting caug
in a major downside reversal, his system escaped with minimal financial damage. If
system loses so linle In such a difficult, highly volatile market, its owner should survive .u
succeed m the long run.

Chapter2 FredSchutnnan
SYSTEMATIC OR DISCRETIONARY
HlS n vast field, There am so many markets and methods that its impossible to know
everything- fcist like a doctor cannot be an expert in surgery, psychiatry, and obstetrics at
the sume time, a trader cannot be an experl in fundamental analysis, technical analysis,
insiders' reports, and day-trading. Successful people In any Held usually specialize in a
fairly narrow area, while having a good general grasp of the rest of the field. You must
know where your knowledge is weak and be humble enough ui stay Dill of those areas.
How people choose iheir fields is often a mystery. We had a trader in one of our
Camps who was a proaologist by training. Before carly-onact arthritis put an end to his
surgical career and drove him to the markets, he spent hii working days with his hands in
you know what. Go figure.
System trader.1; like Fred and discretionary traders like myself often seem to be at
opposite ends of Lhe field- Ficd spends hours each day testing systems. He trades over 20
futures miirkeEs using bis favorite mechanica] system, bm has linle interesl in the outcome
of any individti.il trade. He keeps meliLuluus records on system testing but no trader's
diary- A discretionary trader pores ©ver Ills charts* then makes his decision and watches the
screen in order to squeeze [he trigger for an entry or exit.
When you look closer, you sec that the two fields overlap in some important ways.
A .sophisticated system trader begins his research with ideas that come horn discretionary
trading. As Pred pointed out, it is sil]y to use a computer to massage the data, looking for
repeating patterns; that would mean trading the past. Fred's .systems are derived from
what works on the floor. Bucky, a second-generation fluur (fader with vast experience hi
intuitive trading, serves as [he main idea generator. However, good discretionary trading is
more systematic than i! seems upon first glance. 1 have a visual set of well-established
patterns; in scanning charts and Indicators E filter market data ihmuj>h those systematic snippets.
The decision to get into systematic or discretionary trading depends more on an
Individual^ temperament than on any objective numbers.- My impression is that system
traders do better as a group, while the best traders overall tend in be discretionary.
WhateVH palh you choose, you must learn as much as possible and grow into an expert in
thai area. At the same time you need tn have a reasonably good working knowledge of the
other side of the field. Much of this book deals with discretionary trading that should ntso
he useful for system traders.
CAPITAL MANAGEMENT
Fred's interview raises the issue of managing money for other people, The rewards or even
n moderately successful capital management business can be staggeringly high. Tor
example, ifa hedge fund manager raises jlOD million, he will earn £2 million a year fusL fur
"A discrtfDHiiuy trader may anticipate iht1 signals ofhis trading system. Occasionally I hair comments from
rcnoers ot Came mm My Trading iiapm thai wmc pfihe trading examples m the 1-i.s.i chapter do nnr girted?
lllf the Triple fiCTCCIl system. I should flflVB pul more hogtmHT-type HfUnpliRI inUr lhal hintk, SOtOC
iTnidu-h were odranoed ones, ij) which 1 slightly antitfppied the si^im!:,, someltllnfl lhaL
iradets lend tc ih..

46 Entries & Exits
being a nice guy and putting someone else's money into play- Then, it he manages to
generate, say, 15%annua) profit or $15 million, he will get 20% of that as his incentive fee,
earning another S3 million. J10Q million is a middling stze for a fund; at the time of our
interview Fred and Bucky hud about S20 million En their fund and growing. Fred and I
have a mutual friend with $2 billion under management, earning more in a ycrar Eton most
successful people earn in a lifetime.
At the same lime, the headache quotient in this field is pretty high, as Fred pointed
out. Dealing with clients and regulators is E) major job. Very early in my trading career I
slum bled onto b lesson that ruined me off money management I had a very close friend—
Phil who is mentioned on the first page of Trtiding for a Living. Impressed by my early
trades and being a hit Qfagambler* he opened a small account and gave me power of
attorney; Within a few months 1 generated B high drmble-digii return for him (1 did not keep
good records in those days so I can't say for sure how much it was). At the end ol that
exercise 1 was no longeron speaking terms with Phil; it rook us a year to reestablish our
friendship. What happened was that Phil, excited about that venture, rook tci calling me almost
daily, second-L;u(!ssiny my trades and occasionally putting on a trade himself. 1 Eelt stressed
enough without his meddling and got angry al him. II successful trading led lo such
results, 1 wondered what losses would have done. 1 learned to keep my trading strictly
private; the only accounts 1 run today -ire my own plus small accounts for my kids who know
better th;in to stress Daddy.
If you lovernarfceta and are committed to research and trading, how can you trade for
a living with only a tiny account? Profits from a 520,000 or 150,000 bankroll arc not
enough to live on. People with small accounts Lire tempted to lake wild risks, and it eg only
a question of time before an undercapitalized trader who takes big risks blows himself out.
Relax, shift gears. Like a deep breath. Instead of shooting lor the stars, choose a differeni
target—Start trading lor a track record. Yon will need ii lo gel into capita] management
Qnd make money thai way.
There are huge pools of capital sloshing through the rinancial system, looking lor
competent managers,. Start growing your small capital and keep meticulous records. It may
take you two years to start getring money to manage, but you are in this race for the long
run, aren't you? What most capital owners want is steady returns with shallow drawdowns.
If you follow [his paifi, in a few years you may be joining the likes ol Fred, Bucky, and their
peers in the trading community.

Chapter 2 Fred Schutzmtin 47
from Hcd-
I Do the R&D, the Computer
Pulls the Trigger
iVe never been a very £ood discretionary trader. I'd usually storl off
by making money, but then make w,iy loo many mistakes and end
up with mediocre results. My personality is much better suited for
mechanical trading systems where I do the R&D, but Ehe computer pulls ihe trigger.
Mechanical means objective: Ef JO people follow the same rules, they should achieve the
same results. A 100% mechanical approach increases the odds that past performance can
bn replicated in the future, li offers us three main benefits
* \Vc c,\i-\ backtest ideas before trading them. A computer allows us to lest ideas on
historical daEa rather than on real cash. Seeing how a system would have performed
in the past allows us Lo make beller decisions when it really counts in the present.
■ We Can be mure objective and less emotional Analysis, where we have no money at
risk, is easy; trading is stressful. Why not lei the computer pull the trigger for us? It
is free of human emotion and will do exactly whaL we instructed it to do when we
developed uur system.
» We can cover more markets, trade more systems, and analyze more timeframes each
day-A computer can work taster and longer without losing its concentration.
Whenever I develop a system, 1 have a five-step plan:
1. Start with a concept,
2. Turn ir into a set of objective rules.
3. Visually check out the signals on the charts.
4. Formally test the system with a computer
5. Evaluate the results.
Developing a trading system is pun art,pari science, and part common sense, MygooJ
is not to develop a system lhaL achieves the highest returns using historical data, but to
formulate -i sound concept that has performed reasonably well ]n the past and can be
expected to continue reasonably wdJ in the future.
Our money management firm follows must futures markets worldwide and we
currently trade 19 of them: foreign currencies, interest rates, raiergies, precious metals,
grains, oilseeds, softs, industrials, and equities. We simultaneously use between two and
eight trend-following trading systems, designed to catch intermediate find long-term
moves. Each is based un a logical concept and tested in real time with our own money. In
determining the suitability of a system we look fust at its impact on our overall equity
curve and its mk-adjusted returns.
Trading systems have helped me improve my performance and made me a successful
trader. They forced me to do my homework before making a trade, provided a disciplined
jrnmework, and enabled me to increase my level of divcrsification-
Witc lots of hard work and dedication, anyone can build a successful trading system,
11 is not easy, but it is Certainly within reach. As wilh most things in life, what you get out
of this effort will be directly related to who* you put into it.

V>
Name; Andrea Perolo
Lives: Zeminiana di Massanzago, Italy
Previous profession: Asia manager for a tour operator
Trades: U.S. futures
How long: Since 2001
Trading account: Small (< $250k)
Software: www.tfc-charts.w2d.com and
www.futuresource.com

CHAPTER
Andrea Perolo
Simple Charts,
Clear and Uncluttered
In October 1UU4 I flew to Sidly, about as far south as one could go in Europe, to extend
my summer by an extra week. I was based in Central Europe that month; it was gray,
cold, and rainy, with people already bundled up against the coming winter Under the
sunny Sicilian sky, you could still swim and drive to the vineyards in a convertible, and buy
ilie freshest local produce and che&3£ from friendly ItJCsdSi
We stayed in a place with a reasonably fast phone line, and my friend, a computer
expert, rigged <i wireless network for our computers. The U.S. Htock market was Starting
!<> reverse its almosl two-year^old uptrend, and we were busy closing out long positions
and putting out shorts- We worked all day, and at night across the valley, we could s^e
an angry red gash on the slope of Mt, Etna, where an eruption was going on and the lava
Was flowing.
Andrea—a man's name in Italy—was a I racier who lived near Venice. Several months
earlier he had e-mailed some very sensible questions to me about commodities. I hid replied
and asked him to send me a few screens hots of his recent trades and explain why he hud
decided to buy and .sell. I liked his approach and, knowing I would be In Sicily, invited
Andrea to fly down for a couple of days to talk about trading and be interviewed for this
hook, Andrea wrote back;
Are you really sure ro include me in your book? Please, consider LliaL 1 am
a full time trader for jual three and half years, that I have discovered
absolutely nothing, that T just studied many books anil look what 1 considered
the best of ninny well known techniques. As you have seen, my method is
very simple: Check the weekly, discover a trend, analyze the daily to
discover a good risk/reward r;iiiu. manage it with solid money management.
Nothing else!
Last but not least, it you saw my "trading room" you would laugh, 1 have
just one computer and one monitor, with no real-time quotes (1 don't need
them for my trading, i use only internet-bused charts, totally free. If you still
think I am worthy to be included in yaur book after you rwd this last reply, I
will be honoured to reach you in Sicily and to Lalk with yi>u about trading, and
about my trader's life. But if you change your idea, certainty 1 will understand.
49

SO Entries & Exits
We had to schedule our meeting so that Andrea, who is divorced, would nol miss a
Tuesday, which he always spends with his sL\-year-old son. On Wednesday evening I met.
him on a street coiner in the village where we were staying, Andrea was tall and dclihei--
iUe; he spokr very gnod English but apalogi/.ed for not being perfect. We zoomed through
hairpin Lunis up to Taormin.i, walked ihrough the medieval fortified town, and settled on
the terrace of a restaurant ftir dinner.
At university I got a degree in economics, then did my civil service. In
Ualy back then, you hud to serve a year in the army or give <i year to the civil
service. I preferred that to the army and worked wilh retarded children.
Afterwards, because 1 loved to !nwd, I went to work for a large navel firm and
in lesi than lour years became their Asia manager. I got married, had a child,
bought a big house, and worked hard to make paymenK.
There was a huge bull m-irkel in Italy in the 1990s, and everyone £OL
involved. My father talked to me about slocks, and even my grandfather, who
always bought bonds, invested in a slock fund for the llrsi time in his life.
There was a stock called Tiscali; It went from 6 to 120. There was a trading
champiunship En Italy, and ihe eventual winner Cook a 15,000 euro account
up above €-100,000 in Just a few months. 1 bought a eall-tovered warrant far
Telecom Italia, held it to the expiration without a slop, and it went nul
worthless—1 ended up losing €4,000 on my first trade. That's wht-n ! began
to study.
1 trade commodities in [he United States because the liquidity is so much
better There is one bank in Italy th<ii takes U. S. futures orders. 1 do nui want
to have an electronic order entry—the mouse is too fasl; it is easy in become
impulsive. If you trade daily charts, you do not need live data; having it is
dangerous because it can easily prompt you lo jump.
When ihe futures markets start opening after 8 am Eastern time in Lhe
UniLed States, it is alrendy 2 PM in Italy. I analyze the markets from 9:30 to
noon, then call my broker at lunchtime lo ptnne orders for the day iihead. m
the afternoons 1 read, swim, do other sports—1 do not look at the markets
while they are open. My six-year-old son comes to stay with me on Tuesdays
and Thursdays after school ends at 3:30 pm. We have dinner together and then
I take him back to his mother at nine.
Tailing for me is not an option—I must succeed in trading or die. I do not
nt^ed very much money—life in Europe is cheaper than in the United States.
€2,50U a month is enough for me. I have an €80,000 account, so I have to
generate ^30,000 a year return. I want lo be free; 1 can never go back to
hjjvinsr ji job, and I want to travel around the world. E try to go lo Amu twice
a year. Also, trading for me is about more than money. There is no other task
that is so difficult—it is a challenge 1 have within myself.
3 start my analysis with the weekly charts, drawing Lendlines, support and
resishinLc, looking for major trends and consolidation patterns. 1 also cheek
the COT—Commitments ol Traders Index (see bnx, page 56}. I will noL trade
against an extremely bullish or bearish position of commercial hcdgciS) and 1
especially like ihose trades where 1 go in the same direction as the
commercials. I gel these numbers from Steve Uriese at www.btttHshrcviciv.iict and I tike
how he idways explains Ihe COT concepts.

Chapter 3 Andrea Perolo 51
I start reading the Bullish RsvieW from the East paj>c, where he gives the
positions of Ehc commercials—in my opinion lie should have called that index
n COT oscillator, li .shows the bullishness or bcarishness of Lhe commercials
relative to their historical norm. Ai 1Q0 percent, the commercials art totally
bullish, they have huge net long positions, and a strong Upside reversal can
happen quite quickly. When COT is below 1U, or, even belter, 5, hedgers are
totally short. In searching for a short entry 1 become more aggressive if COT
is below 5. 1 like trading with the commercials and will not take a position or
will be especially careful trading against an extreme net position of the
commercials. Wheat is currently at 1G0—please do not try to short iU look for an
entry io buy. Corn is now H7, very near a major buy signal.
I also rely on seasonal which I gel from Moore Research CenEer,
wivw.inrci.coiii- They an;ily7e the hist 13 years or more of every single contract
of every commodity and come up with the roadmap of whai it is likely to do
in the month ahead based on historical seasonal patterns. For example, f am
lung sugar now and 1 can see, looking at their charts, what sugar is likely ro do
this month, based on its 15- and 5-yeai pattern history, I See [he COT index
ami seasonals as a kind of Euadomsnta] mthflT than technical analysis—they
provide a completely different perspective on commodities.
Each of my trades starts with a weekly analysis, then I check the COT
index and the net positions of the commercials, and then seasonal. When the
weekly trend and the seasonal trend paint in the same direction, you have
wonderfully Strong uptrends or downttends will] very shallow rerracements.
To have weeklies, COX and seasonal^ all pointing in the same direction,
which happens perhaps two or three times per market p*r year, means you
have bingo.
1 track grains, the soy complex, tropicals, and several meats, sudl flB live
cuttle and especially lean hogs, flogs have perfect patterns, their retrace-
ments always end at Che previous rally his^lis-—their charts belong in a chart
book. I also always analyze Che U.S. dollar; when it goes down, it ha* a
bullish Impact on all commodities, but especially gold and silver.
You know, these are very simple charts, clear and uncluttered My best
luols are trendlincs, a very simple concept. I draw diagonal trcndlincs and
also horizontal support and resistance lines. And I use Fibonacci numbers
for measuring retracemems of price and time. When there is a trend, I antici
pate whore the letracements could Stop by using the three main numbers—
38.2%, 50% and hi.S% of the previous rally or decline. My two additional
numbers are 23.6% for shallow lctiacements in very strong trends and
78.6%—that is f tie last tine of defense, and if the market violates it I begin to
think it is no longer a retracement, but a reversal.
Another way I use Fibonacci is to validate breakouts from trading ranges.
To filter nut false breakouts you can use 23.6% of the height of the ranse* If the
market goes beyond that level, you have a real breakout.
1 asked Andrea why he thought Fibonacci numbers worked, and his only answer was
he could see those levels on the charts all the time. We met to loot at his trades the next
and in the evening had our last dinner in alittleBosteria"a local tavern Andrea had
chosen. The owner sent i^lass after glass of grappa to our table; 1 smoked a cigar and Andrea
rolled his own cigarettes, tamping their ends with ilie aatplece of his glasses- After we finished
°"r grappa, he drove me back to the villa on the back of Im scooter. We stood at the front
S^e talking about travel books, then shook hands, and Andrea left.

52 Entries & Exits
TRADE 1
ANDREA'S ENTRY
CORN
■i.hii \" '■ in-illHiliiiH
Drt HI | Jjnfl?
Upper pane: Bdr chart (weekly]
Lower pare: Volume
CORN
I do not look aL the inonLhlics often, hut I do keep them ha mind, especially when I see a
chart like Ehis one, with a (bur-year uptrend. The uptrend started in the middle of 2OGQ
and corn had touched it five time*, quite a good number.
This weekly chari ends in Lhc second week of August 2004. After [lie great rally o(
2003, corn came down Lu a major support, both at its trendline and at the horizontal
support line. You can also see the double bottom of October 2003-August 2004. 1 use bar
charts on the weekly and candlesticks on the daily charts.

Chapter3 Andrea Perulu S3
Andrea asked mi1 a bom sumt1 Eamous U,S, nidrkcl personalities whose books Ire hud read, In (jilk-
ing tu foreign traders, it nevenrases to amaze me how slowly hm\ news trawls overseas. Markei
characters generally known io be frauds En thr UniLnl Slates still maintain Elieir Ugh status
h] iiioj]jS foreigners. Tin.1 hviwy duty marketers .ind the SlKHflcd winners of rijjj^i CDnterts wiio
p^fdihcirpenflltleslan^agtttosettlGupwifli the U,S, authorities ttrpstfll viewed with awe from
across the ocean. Andrea appeared pained ffhenErarhc asked me about yet another of Ills US.
heroes, a»d I gave liim "iht true skinnj'" on him nr her. I fell smTv and apologized for
hi^ Icons off the walls. —AJJ
GURUS
Illllllllllllllllllllllllllllllllllil
Upper pane: CsndtfiiTirk ch^rt fdafl
Middle pane: MACD-OsciKator [12,25)
Lower pane: Volume
On the daily diarrs, rhcrc had been a major MACD diveri^enct building up for
months. RSI, which is not shown here, had an even greater divergence. 1 used a
simple technique thai Victor Sperandco taught in his Trader Vic—a simple trend-
line, then a break, followed by a pullbutk into a double bottom- After a double
bottom was established, I went long at the swing high of 224.25.

54 Entries fie Exits
TRADE 1
ANDREA'S EXIT
Even though there was ii breakout, my target of 50% distance to the stop was never
reached. I was stopped out of the whole posiLiun, on a gap down. After a long trading
range, breakouts often come with a gap.
iliilliili.iliiiliiliiilllililliiliiiiiltllllii
Citp'Oi \6}ht,,tj* [Ol Juil
BT F1I1QI |Dif*'ti-
December 2DD4 Corn
Long 8/17/04 $2.4025
Stopped out 9/10/04 $2.2375
Loss -1G.50 per contract
An Entry Technique for Reducing Risk
I search hir ii position that I can bold, -inJ may have to attempt entry many limes before
finding the right one. One bad consequence is that you can have two or Lhree slop-losses in
a row. How can you minimize that? My solution is to lake profits on half of rny position
at a point between half and two-thirds of the distance to the stop-loss. Ideally it would have
been equal to Stop-loss* buL even at a half yon cut risk by 75%. i found
this technique at ihe end of Trading in the /.one by Mark Douglas.
Say you enter four controls, ;md youi stop-loss is SG00 each, so
that the total risk is £2,400. Once you have $300 gain, if you take that
profit on tWO of your conlructs> you'll have only 5600 of risk left on
the remaining two. You cut 30% of your position, but your risk is
now only 25%—this is fantastic. And [he best result for me is tlw
improvement m The state of mind—-3 fed (wuquillo.

Chapter 3 Andrea Perolo SS
1 think 1 have found a wonderful technique to enter positions because you may
need several attempts to get them right and your stops will be hit several times. If you
usr breakout techniques,9 times out of it) you'll have this work for you, bul noi always.
The secret is thai afterwards you do not have to trail the remaining position to break
even too soon. You have more discretion. You can leave the remaining positron in place
andnottralj the stop very fast.
TRADE 1—ENTRY COMMENT
The most striking feature of this chart k the severe bear market near its right edge. Corn
hits crashed by more than a third from its March 2004 peak. The decline was so vicious
that it left several gaps between weekly bars—an unusual occurrence. Corn prices slid
in response lo perfect growing weather in ihc Midwest and one of the best CXops in U.S.
history. Markets arc driven by supply and demand—and here the supply dearly
overwhelmed the demand.
Illlllllltl
The Impulse system had locked onto the trend and traced out the bulk of the hear
in a series of red bars. Three weeks ago the Impulse had turned from red to blue,
permitting traders to sp long- Still, I do not feel any hurry [<i lump into corn. When prices
ll by such ,i huge percentage from their peak, they act like :t man who fa Us from a great
ht. He is not likely to get up and run anytime soon; he is going lo lie on the ground
Tory while, jusi trying to breaf he. At the right edge of the chart, com is historically cheap,
and it js not going to stay that cheap forever. Still, it is likfly to take a while before it gets
ready to rally again,
PrtCe ban reffcer crowd
NQtiCe tHe very
eekly bar, iHc
fourth fr&Wi ffrc ri$ff
crfffc, ft 0 J&ftl red,
thttf bean arc m
compared to file previous
bars iftdiGcrtci thattHt
doiuiftaftt graup Has rm
out of steato. ftflfWWtfsryp
sec a mafor market wove
foiled by a iHort bar,
it fs a pretty qood a^
that the
ii

56 Entries & Exits
dally chiui confirms that ii is a bit early ta he a buyer of corn- On the one hand
it docs look like a bottom is being rornied, with the rate of she decline tapering off. Thi
fact thot in August corn fell lower flian in July, then reversed and dosed above [he break
oui level is bullish. The 2-day Force Index is tracing a bullish divergence ,ind making a new
multi-month high ;ii [he right edge of the chart Still, those features alone are pretty thii
reeds on which to lianp a long [rade after a vicious beflT market
serious mtrWiig to
av\d wait comes from
traced a broad bottom
from Juke to August and
ffffl rallied above zero. To
give a strong buy signal, tt
needs to return below zero
md bottom our at a t^orc
shallow level, creating a
fttli-flerigcd bullish divtr-
qmcc. Its height at the
right edge of Hits chart is
wore wdtG&trtc of a top
of a bottom.
COMMITMENTS
OF TRADERS
The Commoiiily Fuluics Trailing Commission cnllccls reports from brokers DH the iiosittonsof
traders and releases thctr smnmailes in the public, peroallng tlui posifloits of Liircc ^roiips—
, lii^ initlcrs, and small finders- Hedges idcmily themsclvs ui brokers bemuse Ihai
Qjcrn to sevend advantages, siidi as lower ma^n rai^s. nig tradera arc iilniiiiicd hy
ni nurnbuf ol <i]iiir;jcli Eibovc "r^ortilH! requirements" set by the tfovLTiimuil. WB06VCT
iMiol ;i licjtljfer eji";i bijj tr-iclcr isasmull Erato
in [Iil1 olil cliiys, bij,1 traders used tn he th<: auwwi money. Tbday, the markutK are higher, (he
reporting requiFfTneiUsniiHti higher, and bi^ indiTS lilt likely In lie commoilily funds, most of
[hem nut much smarter than Uw nin-of-thfrntiU trader. The smart money today is in hedges
such as agrlbnstnessis, iiiiniii^^ini i>ii cninpjnics. and fuui] pruducets,
Urtdftatandlngtheposliioiisofhedgersisii'taseasyasltwcms. Pnr example, a rm'report
iiuiy show thai in fi Cfirtrir marfecl hedgcrs liotij 70% of shorts. A beginner whn thinks tliis ii
bc:irish miiy In* rmrmlelelj1 off [be mark uidiout knowing thai norniirlly Iffid^cra bold 90% of
shoila i«i Ib-it market, making tin.- 70% Stance wildly bullish. Savvy COT analysts compare nn-
reni positions ta historical norms ancE look far sltnattons where liedgcrs, ur the smari monej and
smqll traders, many of whom arc gajnblera and Insirrs, ^rc dtad set against cadi other. If out1
group is heiivih1 sllEtti wliik flic ollifr hfjivily lonfi, which one would you like to join? If you
find thai in ;} certain market tin1 smart money is overwhelmingly on one skk\ while Oic smjill
specs arc raoblitogthe other, 11 isdme louse Icdmlcal analysis t<i look for entries an lIio side of
flic hedge rs.
Abridged from Cumc into My Trailing Rtum

Chapters Andrea E^rolo 57
TRADE 1—EXIT COMMENT
The decline that triggered Andrea's slop took corn to ;i new low. A new \ow> of (he Force
Index shows That bears are Strong and prices are likely U) dip even lower. At the Same time,
severi]l potentially bullish signs are developing, MACD-Histogram, though dedininj', is
now at a much more shallow l^vd ih;m in June—an uptick from here would complate
a bullish divergence. MACD Lines are dedinrng, but their upturn is even more likely to
create a bullish divergence. Corn seems to be engaged in what I used hi call the "Austrian
national .sport" (in reference to Arnold the Terminator's canipaign for governor of
California)—it is gruping for n bottom.
Aiulrujs use of stops puts him into the comfortable jKKsiiion of watching corn from
the sidelines. Earlier he had mentioned that he often attempts sevrnil entries Lxfore
establishing a position in j major trend. This is & much better stance than that uf many
amateurs who continue to sit on their losses. As ilir bsscs grow, their confidence diminishes
until they eventually sell j( the low.s. Andiea, on ihe contrary admitted his mistake early
and preserved both his capital and his peace of mind, ready tu trade again when a better
signal tomes in.

5fJ Entries & Exits
TRADE 2
ANDREA'S ENTRY
■Illlltl
1 O.i A1
1 1
.hii.lllilllil
\jmQl
L.rillllillll
-:
iilinJi.iEi,
|JJO]
-inllm.
Ion QJ
hillllli.ta
jnu
i.llmnlilili
liiiliiiili.i
|ftn
Illlllllllllllll,
iilLuJhiiii
jllllJI
-■
SILVER
Looking at the weekly diart, 1 think thai the downmove in April indicated a trend
reversal. A new (rend ii beginning! and 1 want to trad* the downmovE in the direction nf
the new major trend. Oscillators confirmed my view as MACD showed a new multi-
year low. Al the light cdyc, thr reiraeement Lip is typical—it is exactly 50% of the
preceding downmove. I think silver is in a bear market, and only if it goes above 8.31 will
1 be proven wrong.

Chapter 3 Andrei! Perolo 59
Andrea commented People say fflvergencfl are among the bcsl trading tools. I tfeflnilety Jo no!
accept ilia' as ;i gcneml ruii-; One needs <u hv mare spedfic f found thai if tlic imin\ Etentl is iiu
and you lonktoriitcroiiaTctiaccnicnL, bullish dlTCfgences are good. But clivLT^enciL's a^inst tlnf
main trend do not work
Every day I sec siryiig trends with major divergences Qmt lost formontlis, but Uic Kend
continues iind runs awajc I IdenUft major revenads using double or triple topi jintl bottoms. Hierc is
a kind of mylh about divergences- They work in rBngea and in rclraceniEntfi, hut not against tin'
trend.
DIVERGENCES
..mil uii ■■■■■in..:..
The daily chart confirmed the weekly downtrend, with a sharp break and a slow pullback
We can ice a triangle on Ehls chart, bordered by nn uptrend and a downtrend. I shorted
silver after it broke its uptrend and then pulled back up io Ihe downtrend that defined its
long-term Lriangle,

60 Entries & Exits
ANDREA'S EXIT
(13 Mi* DJ
; Bl .V C'
—«
.11
11J Aq H
As soon us I iim in a ir^de, I statl using trailing stops, based on the weekly highs, I place
my slop at the high of the previous week. Even if I like the trend, I'll cover my short at the
previous week's high. This is why 1 got out of this trade. Looking forward, if silver had
broken the low of its congestion al the right edge, I would have aborted ii again.

Chapter 3 Andrea Paolo 61
TRADE 2—ENTRY COMMENT
This weekly chart of silver shows a parabolic rise into the April 2004 lop. Thai
unsustainable rise was followed by a crash. Observe ihe sequence u[ live red weekly bans, the
last ot <hem quite short; It is similar to vvhai we discussed when we looked at Andrea's
corn trade. A very ihurt bar following a massive move often indicates that a reversal is
coming-1 have not tried to quantify rht exacl ratio of tall to short bars—this is something
I have learned to recognize alter years of looking at churls and trading.
I1TD
When the Impulse bad changed from red tu blue, ;ifter (he crash, it removed the
prohibition against buying. An uptrend began and went on for beveral months, picking
up enough steam to turn the Impulse green. That uptrend ran ouL of ^reen paint in
ihe two rightmosl burs. When ibe Impulse stops being green, it removes a prohibition
against shorting. AL tht right ed^e of" the chart the weekly MACD-I lisrogram is
declining] the fa&\ EM A is visibly slowing down its rise—bulls Lire becoming weaker, bears are
coming in. Silver has been rising without ,\ reaction for several months and is overdue
For ii spili—this chart suggests shorting.

62 Entries ft Exils
The daily chart shows Mint the rally that emerged horn the May bottom was ver
Strong, As silver rallied, its MACD-Histogram reached a new record peak in May am
remained above zero through |uly, -i sign of strength. The reaction in mid-July took thi
indicator below zero. When silver rallied to a new recovery high in Augusti MACD
Histogram peienfd nuL at a much lower level than in July, completing a bearish divergence
The weekly Impulse was still green nr chat timn, allowing no shorting,
There was a second rally m August, reaching a new recovery high, bui MACD
Histogram rose to a puny high. It completed a triple bearish divergence, showing thfl
there was very little power behind the rally. That second rally in August took silver abov
the psychologically Important "round number11 ol S7/oz. It could stay in thai elevatd
territory for only nne day. Silver's decline below the level or the first August rally hai
exposed the second August rally as a false breakout to a new high. Remember—bu
new lows and sell new highs, A new high of MACD-Histogram in May helped idenlif
a strong breakout that started a new uptrend; a divergence in August helped identify
false breakout and a readiness for a reversal.
TRADE 2—EXIT COMMENT
It is emotionally hard to Lake profits when prices are flying in your favor. "Mort
more, more11 seems to be the cry of the day. Il is 10 Andrea's eredit lhat he had the di^
eiplinc to follow his plnn and take profits an half of his position ju&E one trading da
after shorting silver.

Chapter 3 Andrei Heroin
Covering one-half of the position one day after shorting had worked out better than
exiting on a slop- Planned esilS almost always work out heUer than exils on BtQpfl. The new
low in MACD-Histogram in September shows that bears Lire becoming Stronger and
suggests that silver is likely to fall even lower. But Andrea is disciplined: He would not allow a
short to take out the previous week's high and gets oui nn dial .slop. This strict discipline—
the setting of an absolute level hcyond which one will not hold a iradt:—is the hallmark of
a professional trader.
This daily chart shows a nice progression of the Impulse system. As Andrea went
short, there were two wide red bars, confirming the ease of the doivnmove, followed by
("reL' narrow red burs, showing that the downmove hit support The red Impulse changed
to blue and finally, at the right edge> to green, which is where Andrea covered his short.

64 Entries & Exits
CLASSICAL CHARTING VERSUS
COMPUTERIZED ANALYSIS
Charts reflect crowd bfthavior. The high of each bar marks the point of the bulls1 maxi
mum power while the low reflects the bars3 maximum power. Scries of bars coalesce Entc
patterns whose highs and lows look lite ;i starred battlefield in the never-en ding struggh
between buyers and sellers.
Human beings change very slowly, if at all, which U why similar behavior patterns
recur year after year. Crowds are more crude and primitive than the individuals who
comprise them, and their behavior patterns urc easier to identify. Whenever a chart patterr
appears confusing, ask yourself what it tells you about the crowd of traders whose
behavior it reflects.
Andron relies mostly nn classical charting for his trading. He is not a pure chartist—
he also uses Commitments of Traders and seasonals, and an occasional Indicator—bul th<
bulk of his technical research can be done with a pencil ;mtl :i ruler. This works for him ir
part because of his personality. Andrea LKveryco^>calm,endddiberateasHe3ayBhlsrulei
on a chart.
There are so many ways to fudge a chart. Do you draw a trend tint- ihrmi^h [lie extrenu
points or through the edges of congestion areas? Du yuu eunsidcr intraday penetrations 01
only the breaks on a dosing basis? If the [wo bottoms arc at somewhat different lewis, dc
yi.ni draw your support line across the lower or the higher bottom? I occasionally joke witr
friends, suyiuy lliat classical charting does not work for me because 1 have a terrible ttemoi
in my Mngeis. When 1 put a ruler on u chart, my fingers tremble up when I feel bullish anc
down when I am bearish.
This is why I prefer Lo put the ruler and pencil aside and turn to computerized indi-
uilurs. The Impulse system on the weekly and daily charts helps me identify' the dominarr
market group; new peaks and bottoms of MACD-Histogram identify strengths or weak
nesses; their divergences call attention to likely reversal points; envelopes pmvide objective
profit targets.
There is no right way or wrong way—both classical charting and computerized analy-
sis are valid methods of market analysts. You need to choose what makes sense and work
for ycm. This decision is gomg lu be based on your temperament. Andrea feds drawn it
the simplicity and clarity of bar charts and trendlines; 1 prefer ii> operate within the benigr
censorship of the Impulse system and the objectivity of the indicators. You have to choosi
what appeals to you.
Successful traders maintain an open mind, without becoming fanatics or e,\lmnisti
about their methods. Andrea is primarily a chartist, bul he values such data as COI
indexes and has no problem throwing a MACD-QsdJIator un his chart. 1 am a computer
feed analyst bul use such classical methods as drawing support and resistance lines in m]
search for Ealse breakouts.
Your churls reflect the behavior of bulls and bears. You can profit by catching even i
portion of their moves—or you c;in get trampled by them. It matters little what specifi<
methods you use to detect iheir approach. You need to identify the beast, place ynur bet
and lake il off in lime.

Chapter 3 Andrea Pcrolo 65
; :^tef# The Promise of Independent Living
My Story is similar to that of many others. I had chosen a job
because of my interest in travel and was totally committed to the
firm. I worked hard and learned a ]«i, and teli that the firm's
Interests were my nwii, but as lime went on it started to feel like jail. After
four years I gave up and decided to start something by myself.
Trading attracted me with its promise oi independent living and complete personal
freedom.! started with a small sum of money and underestimated or did not seriously
consider three aspects of this business: learning takes a long lime, experience p]ays a large
role, and both cost ions of money.
At first 1 became interested in covered warrants bul soon dropped them after
realising they were manipulated by market makers. Then 1 tried futures an the Italian stock
index, but realized the)' were too heavy both for my bank account and my level of
experience; in addition, their volume was very thin.
My gains kept turning into losses, while at (he same time my family life was coming
apart] was getting divorced and had to provide foi myself, my wife,and my son. I was
feeling insecure about my trading and kept searching for advisors, trading systems, Elliott
waves, and so on, I kept looking for a system, hut ihe results were always the same--kisses
larger man profits.
Finally, 1 learned my lesson: I had to become autonomous and independent and rely
on myself and my own analysis. The high cost oF experience was my "entry fee" into the
minority that succeeds in earning a living from trading. I realized thai one of my mistakes
was trading Stock futures with five-minute charts. I used to think that the stop-loss could
be minimal and that high volatility would offer hundreds of entry points. I came to sec that
this might work for someone else but not for me. Few activities are as electrifying and
emotionally demanding ;is day-trading* This realization was another turning point on the
road to iny own way of trading.
I trade commodities using weekly and daily charts. 1 go over my charts in the
morning, examining them over and over. It hdps a lot lo close the churls and take n break,
reopening them later- I always look lor opportunitiefli bui sometimes they seem to jump at
me from Che screen. 1 du not Uy to catch turning points; I let the trend establish itsell and
fed satisfied with a piece of it.
Simple tools work best for me, and trade management and money management nre
essential. A plain technical .system brings good results if combined with strict rules of trade
and money management. If you like using oscillators, choose one or two after studying and
testing them on paper for a rather long time. Keep your eyes first on the bar and then on
the oscillator because its movement gets fuel from the price. Draw a few trendlincs to
define the trend and ils strength and longevity. IT I were allowed Eo choose only one tool
uf technical analysis, 1 would choose the trcndline. Price patterns and trcndlincs are
enough lu grasp the exact points where one should enter and exit a trade.
When your account starts to increase, keep humble and fighl the feeling of arrogance.
Whenever you ee[ a strong opinion about the market shut down the computer and take a
long walk. Your opinion is not helpful; it can Influence your judgment when you look at
'he chart Trade your chart, never your opinion.
Tti sum up my experience:
* Trade using j minima! part nfyour capital (money management).
* Follow your plan—you must have one, without any exceptions (trade management),
* Take only the trades that arc in compliance with your technical signals.

Name: Sohail Rabbani
Lives: Derbyshire, United Kingdom
Previous profession: Medical researcher and business owner
Trades: Mostly futures, some options and stocks
How long: Since 1986
Trading account: Medium ($250k-$lm)
Software: QCharts
Traders' Camps: Costa Rica 2001,
Advanced Camp in New York 2001
:

CHAPTER
SOHA1L RABBANI
The Discipline of Loss Control
i
like receiving e-mails from my campers telling me of their comings and goings.
This message came in early 2004 tram a repeat camper:
...I have pui an end to short-term trading. At for longer-term investments*
[*ve completely cashed out of my equity holdings and invested in tangibles,
Including gold and land. Moreover; it la an old pattern repeated In September
3987, a month before Blade Monday, through pure good luck, I cashed out of
stocks find bought a retail business. After that I didn't place a single trade until
1991. Then In func 1998 I again cashed oiil, fully convinced that the market
would crash. The next 18 months were sheer agony OS 1 faded the market and
kept getting knocked in ihe head. Fortunately the discipline of loss control has
prevented nay complete wipeout Then 2000 to 2002 were quite rewarding as
1 was in sync with the trend. In tact, 2002 wns my best year ever. My short-term
trading accounts returned an unbelievable 163%, ..Then disaster struck.
In early 2003 I had a heart attadc and bypass surgery. Following that I went
mad and proceeded lo give back my winnings from the previous year before
purring a moratorium on short-term trading.
The e-mail went on to describe in colorful detail all the things men do in a hilly blown
mid-life crisis and continued:
I Stopped keeping my trading journal. Stopped doing meticulous research,
Stopped reviewing records, and started playing options like a drunk plays darts
in a bar I was simply insane. I started doing ultra-short-term shoot-froni-the-
hip style trading and generated lots of commissions for my broker hut my
iiccount equity curve steadily declined. By early fall I hjd exceeded my
maximum loss limit, bo 1 stopped cold turkey. By then my insanity was also getting
tamed,
I think a one-year sabbatical torn stock trading is Che minimum penance.
Interestingly, 1 only messed up in my stock trading. En ray futures trading
1 didn't do anything Crazy. 1 do noE trade futures short-term, but hold
positions fur lung periods and loll over at expiration. All I had were some
positions in gold and euro futures. Those were the life savers that prevented
67

68 Entries & H\its
my performance from looking like an absolute disaster, I've decided ui stay
away from the stock market and particularly from shorl-tenn trading for at
least one year, Nonetheless, my study of the market continuesi as do my
subscriptions Eu various publications and dntn services.
t have rend this e-mait in several groups of campers, and it has always generated lI livel}
discussion on whether this tinder was likely to SUCCCCd nr fail in Lhc long run- We kept ir
Touch, and when SohaiJ heard ih.it I would be spending a week in Sicily, he volunteers
to fly down from London for a couple of days and bring his trading records, Severn
weeks later he arrived in a village in the foothills of Mr. Etna. We had dinner together am
the following morning he came to the villa for an inlcrview.
has a master's degree in epidemiology, and with his background in science h<
doing quadratic equations (he way othei people do playing solitaire.
In 19B6 I was doing statistical research at the University of Alabama but
started becoming fascinated with financial markets, l had two friend* iii
Drexd Burnham (it major brokerage house Inn! went out of business in the
1980s following Snancla] scandals), and one of them invited me to join their
training course.
1 quickly realized that being a broker was lh<3 worst way to learn to be a
trader it was all about sales- My friend pui me Into the back office where 1
could truck the flow of orders, I felt things were morally questionable—we
were doing front running, even though at the time I did not know that term.
We were placing our own orders ahead of discretionary account? and
tunneling part of the profits into dummy accounts. I bowed out, made a few good
irades, and on October 5, 1987, by pure chance completely cashed out and
returned frum l.os Angeles to Alabama. On October 19 ihtr market crashed, all
hell broke Umse, and my knees trembled when I realized that 1 h;id escaped. I
got so scared that I did not do a single trade until 1991,1 invented with a friend
in a business and generated a small stream of income.
In 1991 I started dabbling a little, in [994 I became a little more active,
and from 1995 to 1998, as the market weni rip-roaring! I mode moneys The
more 1 lead and understood Economics, ilie more it seemed to me [hat it was
an absolute bubble which could not go on. Cash burn rate was an insanity
which I could not buy. 1 could not understand bow companies that were
making no money were worth more than industrial giants. In 1998 I started
shorting, fading the uptrend, and getting burned, but I took small lasses and
survived. Occasionally I would catch ;i downleg and make some money, but
most u( the Lime I sat out
In 200U things started turning ,nound, and 1 made money through 2002.
The only way to stay in this game is not to lake big losses. I have two articles
of faith. One—no one can know ibe future, and so I am very skeptical or every
tool. Technicals or fundamentals j»ive US convictions ur courage about making
a move, but ultimately it may not work and we must be ready to y^\ out of the
way. Ultimately, llie market is aboul 'he mind of the masses—-and who can
predict them? Two—most people in the market are wrong most of the time.
The theory that the market knows everything and discounts everything
is nonstiue. The only time we make money is when we are ri»hl ahead of
(he market, and if the market was efficient, we would never make money.
If the market was always right, was Amazon really worth $j*GG,and how did
Micro Strategy (MSTR) £i> from $16 to $333 and then backdown to 42 cents?

Chapter 4 Sohail Rabbani 69
I am really disillusioned with the Stock market—it's a fool's game. The
current values [in 2004] are unsustainable, Those who think they can retire on
their buy-and-hold investments have <i foolish dream. The retirement
legislation .sends a constant UBW of Fimds into the markets, prices go up, but the
value of money is deteriorating. That is why I got out of the U*5« dollar and
moved to Europe, The reserve status of the U.S. dollar gives the economy a
ridiculous edge, but it is no! sustainable, and eventually the bottom will fall
oi.ii. It may happen ill a week, in a year, or more. The unfunded pension
liabilities will come home to roost. The stock miirkei stmvly swings between
high and low valuations, and today we are still near the high edge. In 1974
priee/earnin^s raLios went down to single digits* dividend yields C8JHC up to
4-5%. The recession to the mean tells me that in the foreseeable future the
trend will be down. Eventually there will be great values to benefit future
generations, but now is nut ibt lime lo put money into the stock market.
I have become much more interested in commodities, They ofler ;i better
arena because they are baGed on something tangible. Wheat can never go down
to zero or run up to a thousand—there is a natural range and you can trade
in it if you are noi too leveraged. The thing about commodities, such as gold,
cuirencieSi and crude oil> is that big world trends impact ihem, maybe nai
day to day, but over .several months Commodities are more transparent over
[lie long term—just lake tang-term positions and don't overteveiage. My best
trades in recent years were In the euro and gold* as the Fed keeps pumping
liquidity into the system as if we were a Weimar republic.
That's how I got involved in the markets—by accident—and I love it, I've
done high-pres.sure minute-by-minute trading, but realized that this activity
is for a very robust person in his twenties who has someone guiding him. Now
] Want to .spend 90% of my time thinking and studying and 10% in front of
the monitor.
Rather than show his current commodity triuies, Sohail presented several trades he hud
completed prior to his self-imposed moratorium on SEOCU trading. Both trades had been
done using options rather than underlying stocks, perhaps reflecting SohaiTs increasingly
hectic attitude {use prior iu his self-imposed moratorium, tie arrived in Sicily with his
brokerage statements but without a computer, and we used totally available MetaStock to
reproduce the charts that he would have normally plotted in QCharts,
SehAitwasbom it} Lahore, Pakistan, I'm Ithfiwiily nwivtJ tt* tin' Uiriu-i! Khifithwi wlictt hi- was;i LONG WAY
v(^yom^mmjtmdheessncdhlsdBgmfiummATmrU^n}m\verslty, He reminisces: My larhn- FROM HOME
was a very educated man^ajinrfessorD] medicine, an Anglophile-Where I yrcw up. [j^oplc like
him wen; called ban or s&lith—their roots wen local hut (heir living mas Western, tlir
mentality was Western. I Iiad no religlmts schooling, 00 nulnLlrmaliim. I da nut uinkTslaiiif how
the hindamentalistfl could tahc over Uv,u raglojL i remember being taken <<> Kabul in tlic
L970s, and there were Dars< atgttfclubs.gliisTmmraMslctrts. Ourftmily lefttBrnovcawaj [ram
ftmdamentflllsm.

70 Entries & Exits
TRADE 1
SOHAIL'S ENTRY
SPXET
No one tan know the future, but a sharp decline gives a good indication that 3 bounce is
coming—you push the spring and it is likely to recoil. On March 10,2003, a very
significant thing happened—the market went down, S&P lost 21 points Dow 172 points, bur
the volume on the NYSE was relatively low, and fully W/u of that was downside volume*
At the same time, there was a spike in New Lows—iherc were 248 of [hem against only
70 New Highs. Also on that day the Nikkei reached its 23-year low, the European mat keta
were down. When markets reach extremes, they tend to snap back. 1 had been waiting tor
a TLLii-np and was ready io Catch if.
The thing that prompted me to enter was thai though it was a significant downside
, there was no energy in the downmove. It was a warning that there was to be
a snap-back rally, a temporary bottom. I made the decision lo go long
after market hours. I usually j-et up ji 4 am to du my market
and plan trades for the day ahead.
- 7M
Upper pane: Daily b2r chart with three exponential inuving averages—20, 50, and 200 days
Lower pane: MACD Lines and MACD-Histcgram (12-26-9)
THREE TRADIrJG Sofmi! says; I am surcyou've henrrt dicthm main rales far trying real estate Iocaaon,loi3-
RULES tion. Jiuf lncaEion. Well, thCTE BIC bIKO tlW fllFCC main ndes Of trading. They Hfi—t
iintl uiii topi. Yum have In prniect jDBlSelf tfyou VHUlt lo survive In the DiBlketB.

Chapter A Sobail Rabbani 71
Financial Entropy
f have noticed an interesting phenomenon which deserves the
name "Financial Entropy," After twenty or thirty trades the cash
I had available for trading was sJowly diminishing because 1
ended up with an increasing number of trade positions which
were neither bad enough nor good enough to sell. They hadn't
reached iny stop loss or my sell point for a modest 2 to 5%
profit. They were just going sideways- It is clear that after a
reasonable amount at time I will just have to get rid of this
dead wood to allow me to continue to purchase shares which
offer greater potential. A small group of friends who also use
ynur techniques have also noticed the same problem. If you
have any criteria to deal with this frustrating problem, we
would be interested in hearing your views, —Trades
Seems to me thai it makes sense to put a time stop on your
trades and shoot lazy puppies after a reasonable Interval Set
a date in advance when you're going to get rid of those which
do not perform! —AE
I decided tu da this trade with options rather than S&P futures, For me, the biggest
pju* waa iIilil there was a fixed amount of money that could go in zero. The biggest
negative with calls is that time runs against you. Also, spreads arepeaterinoptions,but thaft
the cost of doing business, I can afford Co lose the option premium, but with futures I am
afraid of another October'87» especially if I am nol watching the market intrndny.
The options should have two or three months of life left In them, afterwards ihe lime
decay bccoEiics very severe. At the t<iil end of an option's life I want to sell it. 1 like to buy
options that are in the money. The deeper in the money, the more movement you ore likely
In see in die option relative to the underlying—it will have a higher delta. Still, the S&P
premiums are so high Chat I would have to allocate much more funds to get deeper into
the money.
March 11 was another down diiy—LUid Lhat's when 1 entered, buying slightly in-the-
money calls with two months to go. I put in a limit order and it was filled—I almost always
enter with limit orders. I also placed a stop-loss five points below my entry. You have to use
stops beLau.se you could he wrong nnd it could be the Start of a new downlcg.

72 Enrrics & Exits
SOHAIL'S EXIT
Bough!
- 1C5D
- 1UJ
- If01
- uuj
- iu
LlTniili.
illllHl,
i-' i '■
6.1 BT
m
.j::
QU
stock market had j pood rtin, more tbsn a month hud paused* and I lit? option WQS
entering ji rapid deterioration phase. 1 knew I would have to gel out soon. Anulher ihiiiy
was l>eginning to happen—the dollar was showing weakness find I thought that would
drag the stock market dciwn.
On Friday, April 11, the stock market was down slightly—the S&P was down three
pofrita, the Dow 18 points- In doing my homework on the weekend, I noticed that the
advance/decline linch was negative, rind the VIX was confusing; it was slightly down. With
the option well inlu its deterioration ph;kse, I could no! afford to wait i"1 futures E would
have rolled over, I decided to pull the trigger and J got out on Monday.
Long S&P May 800 calls (SPXET) 3/11/2DD3 @ $41
Sold 4/14/2003® $83.50
Profit=$42.50 - $4,250 per contract

Chapter 4 Sohail Rabbani 71
TRADE 1—ENTRY COMMENT
stock market peaked out in 1999-2000 and entered a tfieiGUE bear market! liis weekly
shows S&P losing nearly half nf its value within two years. The decline was
by several sharp rallies. Bear market rallies tend to be explosive, fueled by
short-covering rather than by slower and more deliberate buying in the bull mnrkeh.
M,
A B
'V A'KJS
C D
i
1 "Mil1
A
j ■
ITT
"'■-I
TT
The Christmas rally in Nuvembci and December 2003 was accompanied by a
peak in MACD-Histagram—a sign of bullish strength. Compare the height of the weekly
bars in Inly and October 2002 with the bars near the right edge. The recent bars are much
shorter, which indicates that a decline no longer evokes such strong emotions; Weak
holders have already been flushed OUE and Strong holders are silling liglii* This behavior is
indicative of a bottom, but unfortunately the Impulse system does nol allow me to put on
a long trade at the tight edge, A red bar acts like a censor that says: "Go short or stand
aside.'1 It forbids buying, but it cannot forbid me from looking at this char! and waiting
for the bars to turn from red to blue, allowing me to buy.
The dally chart (on the following page) confirms the message of the weekly. Al thr
right edge prices are declining, hugging the lower channel. They seem unable tu break
oiil ol it the way they did in February. Also notice the depth of the February MACD-
HistogrflTfl bottom and compare it to (he current indicator depth. There is no divergence
J'ci because MACD is still declining, bul should the histogram tick up from this level, it will
compktea powerful bullish divergence.
pnecs
perhaps the
September AQQ1-ftc Skp
tried to turn up after pcv\-
$ tHc 1,000 kvd md
rallying. Compare the
fit
$y\d
a char \v\d\ca-
that the bulls were
rawing out of tfWH md
tHc dDmtrtftd was about
to rcwwiG. Now compart
the depths of fte bottom
of j!M^P-ft£sf5PgriBH '"m Jw/y
mti October zoo&~itidt
bullish dfvcrqGMG dearly
tH?t the bean were
weaker aM a
rally wfii GtMtftQ. T^c fact
that the October low was
a few pomts lower pat
tte i£iv\$ on the cake. 3uy
new lows, and short new
divergences
are

74 Entries & Exits
Still* at the right edge of the chart, both the EMA and MACD-Histogram are
declining, and the Impulse &ysLem is red. It prohibits buying just now, but Ehc picture Is rapid]}'
becoming more and more attractive for the bulLs ;ind demands dose attention. While
waiting, can yon identify an earlier massive bearish divergence on this chart, topped off by a
small kangaroo tail?
S&hafl had mailed iHs
bottom of m explosive rally,
with the Itupulic
TRADE 1—EXIT COMMENT
dv\c d#y 1/rS'cr.
Thtff rW/y swtM$ up frouA
the battDUA, penetrating
H\c upper cHemcl tfa foi
lowwq week, (herald Appel
(Chapter f) fistfrfto that
when a rally is strong
to blow out of a
a iccond chance to buy,
wflcH prtSci pull back to
tfte MCVit)0 average after
the breakout- Thafi wHat
happened here in March,
with the icczwd rally to
p\c upper tftotwet liv\c
rn Aprif.
■-
-1
*" i

Chapter 4 Sohail Rabbani 75
In April the picture became considerably more ragged. While the breakout in March was
iH convincing, with prices staying above the channel ftir several days, in April there
was just a lone spike above the channel, looking suspiciously like a kangaroo tail. It was
iicaimpanied by a divergence of MACD-Histogram, warning of the weakness of the bulls.
Ai the right edge of the chart, the market is rallying again, but il feels very weak:
MACD-1 fistograin is feeble and Force Index is tracing a massive bearish divergence. The
Impulse system in green, prohibiting shorting, but it certainly does not forbid selling. It is
a high time to sell taking profits on long positions.
SOHAIL'S ENTRY
KLAC
This trade violates every trading principle known to man. No Bane person would do this.
I made this trade a! the height nf my personal crisis* and it shows what happens when b
trader goes mad When I sat at home doing homework, consulting a chart or two, I
was menially somewhere else. I had become sloppy, shooting from the hip lo
regain youth* rigor, and power, not being a professional anymore- It is
noi the money loss that rankles, ii is the loss of discipline.
Normally, musl of my options trades ate multilaycrcd. I buy culls and then sell puts
To cover part of [he premium paid tor the call. Here 1 weni in outright, (idling a naked
call because the premium seemed so hefty—1 thought the stock was overpriced. Call
prices were high, out of whack with puts, with high implied volatility. I thought there was
a premium to he taken because some fool Wanted to buy a mil-1 compounded my
mistake by selling an in-thc-nioney call—those nre good for buying but when you sell, you
are better off going out of the money—selling more lime value and less intrinsic value.
Will Hus

76 Entries & Exits
II-
43-
«-
*t -
«-
»-
1B-
11-
JB-
»-
H-
H'
3J-
H"
10
As KLAC skyrocketed and my position lust mure and more money, I froze tike a deer in
headlights. It was not professional behavior, Normally when 1 trade, I keep daily notes of
what is happening—stock indexes, New High-New Low readings, my feelings. I Stopped
doing that and was just sitting there, wishing and hoping, and not getting the hell out:
"I can nor he wrung; the market is wron^." Meanwhile the freight train was coming.
Every time there was a slight pullback, Vd go on a power trip: "I am not filing to lake
a loss; I am going to get out at a plus." And then there was ll moment of
dtMrmg, The real trader deep inside of me told me il was a total
disaster und I exited.
September 3 was an upday and the volume
increased; the Nasdaq was up on heavy
volume. The market siarLed surging ugain
and I realized [hat if I did not get
out, I could get hurt.
?□-
IS"
OS-
as
lili...""^:...i
JlT. \l'"\ll I; I'J |> I.'i !■
n Iji \d \\i |n jw Ul If...!-
Monetarily it was not such a huge loss, but psychologically and professionally it was
a very bad trade. It was a very humbling experience—something has taken you over, you
violate your own guidelines, something you promised yom self you'd never do. A lesson
in humility needs to be reinforced.
Later that year I decided ! needed to take ;iye;tmlT andiu.si clean oul my system.be
stress-free. Maybe do some charity work, hold a children's <.amp, whatever My family
and 1 lefi the United SiEiies and went to live in England,
Short KLAC January 30 calls (KCKAF) 7/28/2DD3 @ $24.1
Covered 9/4/2003 @$2B.1D

Chapter4 Sohai]Babbarf 77
TRADE 2—ENTRY COMMENT
Sohail >s shorting KLA.C, or rather, Its calls—doing whui the Impulse system wuuld
prohibit os from doing. TTiere is great emotional pleasure in drawing a line in the sand and
gayinjL "This is iu [lie market will not rise any higher, I'll short right here/' It is a very
expensive pleasure that very few, if any, traders tan afford,
M J J A
Mature traders havt: long ago learned not to forecast but to follow signals from
the markets. This churl shows an Uptrend—both moving averages arc rising, MACD-
Histogratn is rising, the uptrend is in gear. The facts are right here, on this chart—the stock
is going up, and no matter haw bearish you tee!, the Impulse system idls yuu thai
shorting is forbidden.
The daily Impulse on the chart on the following page is also green—no shorting is
allowed. The chart shows a slow and steady uptrend. Prices touch their value /.ant
between the two EMAs, rally io the upper channel line, decline into the value zone* rally
to Lhe upper chiinntl line, decline En the value zone again Trading this pattern is like
going to a cash machine where a bullish trader (you're allowed only to buy in an uptrend)
can keep buying at the EMA and selling at the upper chiinnel again and again.

70 Entries & Exits
Motlce how Force Index rises to approximately Che same peak level during each rally—
the bulls are maintaining their level of power In each rally without any divergence. Overall,
this looks like 0 healdiy uptrend. Only a trader Looking for :m adventure would try to pick
a top here.
TRADE 2—EXIT COMMENT
uptrend,
strength
Notice iJ.
August-1
great inf
the dip in iti
&\?\d raiiicrf higher
to*i peak /■«
\toqrcWA ivi (Hfrf-
\dvj of batfi, call-
it<\g for higher prices ahead

Chapier4 Sohail Rabbani 79
KLAC sank •* little below value following Sohafl^ short—he had a chance to take a small
profit but missed it. He is an experienced trader who correctly picked a short-term top—
hul then made the mistake of allowing his profit to turn into a loss. It is very important
to move your .stop to a break-even level once a trade starts moving in your favor. This is
essential for capital preservation. Without it, you're not likely to become a long-term
pinner.
At the right ed^e of the chart KLAC Ls becoming a little ragged—Force Index is
tracing a bearish divergence and MACD-Histogram is trending lower despite the fact that
prices had made a new high only three days earlier. The painful result of nnt covering
ynurshuits when the covering was good is that you end up throwing in the towel and
covering at a lew] where you should be thinking of shorting! The mirror image of this occurs
when early bulls do not sell in time—and then end up dumping their position nut of
sheer frustration and pain precisely when and where they should be Chinking of buying!
SETTING LIMITS
Markets are the least restrictive areas of society; no other area is as free- There nre no
dividers on the market highway: You can drive in any direction you like, buQip others,
observe no speed limits, and stop and go when you please. With more markets going both
electronic and global, even time limits arc removed. You may trade at any time, in any
place, for any reason or lack thereof, few people ;ir<3 consciously aware of this, but lhe
feeling of freedom helps pull them Into trading. If this freedom has a flip side, it is impul-
sivityand irresponsibility.
We all enter the markets with a practical goal—to make more money than we can get
from bank deposits. Caught in the excitemenl of trading, most of us quickly lose track of
this gnnd goal and start looking for ionic private \eriiou uf fun. The trouble is that you
cannot "have fun" and make money at the same time. Good trading includes many boring
aspects, You know what has to be done, you do it, and rate yourself on how faithfully
yuuVe done what had U> be done—Michael Brenke in Chapter B offers jn eloquent
description of (his algorithm.
The average private trader in the United States is a 50-year-old, married, college-
tducated male. In a gTCflt many cases he is not a happy man. I le gets up in the morning,
looks in the mirror, and flunks unhappy thoughts. He looks back at his youth and realizes
that professionally he is not anywhere near what he dreamed about En college. The kids are
grown nnd have their own lives; they talk to him only when they need money. He is tired
ol his wife luil cannot afford a divorce. He knows ihjil those beautiful models in Playboy
will never he his. The m;in sighs, gets into his car, and drives to the office. There is not
much joy 01 excitement there—until he logs into his brokerage account and gives an order
to buy or sell. Suddenly the world is in living color.
The markets go up and down, flooding traders with adrenaline, 01 course they would
prefer winning to losing, hut even losing provides plenty of kicks, making them feel
"cited, connected, and alive. We have to be grateful to Sohail for describing how, after
establishing a track record as a serious successful trader* he threw caution to the wind and
Started shouting from the hip, trying to regain the sense of virility and vigor Lost after
having a heart attack. He shows us wbal happens to a good trader when be staris having a
crisis in the market.

811 Entries &E.\ils
The time to prepare a lifeboat Is before: you need it. II you arc reading this book on ;j
relatively nun-slre^Ful day, now is the time to draw up :i list of rules. Make it short and pin
it to Iht? wall near your trading desk so th;ii you can always sec it. Let me ofter you a lew
lines as a template, which you may edit and expand to fit your own circumstances- The
purpose oi this li^c is to draw danger linest to keep pan from scumbling into fire zones in
a field thai has no safety barriers*
Limits:
• ! will strictly observe the 1% and the 6% money management rules,
• I will not add to losing positions (unless planned in advance as pan of building
a large position),
• 1 will no! piii mi trades against my censorship rules, auch as the Impulse system.
• I will not allow a profit of greater flian (fill in the blank) to turn into a loss—use
a hard stop to protect gains!
• 1 Will LI
This last point [s the hardest, since iht^rc are several types of stops:
A beginning trader must use what 1 call "hard slops"—planing actual orders with his
or her broker. The trouble with hard stops is that most people put them in obvious
places—below the latest low ur above the latest high, where professionals keep
hitting them before the markel reverses. If you use hard stops, do noi place them at
obvkius levels hut either rioser to or larther away from the market.
A more ipophiilkiited trader may me SafeZone slops. This will allow you to plate jtmr
stops outside the general level nf market noise and at prices that are noi commonly
known.
"Soft stops" —my favorite method—involves getting out or any trade whose weekly
Impulse System goes against me 1 5 minutes before that markes closes on Friday.
HARD AND
SOFT SIGNS
StiR signs'uviMily w.inimysul ";i trend chnngi.1, Hard signs fell that a trend \s definitely in force.
Suft signs include divergences olMACIJ [lisu^raEii orljreaifanitH to a new iDWOra new liijjh
with [lofolluu'-ilirmigh. I Lint signs include the trend pfamoviiigflVEniiSCDiia weekly chaitand
;i fallow through ul;rUn.;fkmi[,;]K pitas academic i" Its diriTtion.
Esperiepffid traders look lor soft stjjns for entering truth's, buying Imllisli divergences of
MACD Ujsloyram or short ing •ippitrnilly ffllse upsitk breakouts, JJy the time thcliarf S^fOSflTfi
in, II is often toe talc to enter a bade. Da one Imiri. hard signs give ;i strong message to exit B
trade. Tor example, if 1 $\ long after;] soft slfin, I may continue iu tioU evco if that siyn Ji^ip
peara, ptovlcdng other slgi^rcnialfl^ On the otliernand, it a bard sign, such as a weekly moving
average, 1s flown Iw ilieeml of the week, 1 win get cratof along tiade before the weekend. —AB
is a psydiological game, as Sohail makes nbundantly clear. He is an active
trader who m his peak mote that doubled Iiis account in a year—not with a single lucky
hii bui by steady short-term lidding. The following year he was in a drawdown. The
market had not changed—he had! It is to SolEail's credit that he cm say, "Fortunately the
discipline ot loss control had prevented my complete wipcoLit."
Discipline is essential it you want to survive and win in the markets. Setting some
r^LilisiiL limits on your trading is S key aspect of discipline; you must decide end spell out
the basic rules of risk control before you plunge into trading. Most Importantly, you need
to define your maximum risk level for any single trade and your acccranl as a whole.

Chapter^ Sohaii Rabbani 81
/ from Sohaii:
1 Small Candle in a Dark Cellar
- r - 'i
I Trading is completely different from investing. In the short term the
; markets can do anything—absolutely anything whatsoever, without
^ any visible rhyme or reason. Shorl-tcrm price action, for all Intents
and purposes, is arbitrary and capricious. Long-term investments
must only be made on the basis of valuation, fundamental
analysis, and due diligence. A long-term investor has to fucus on economic facts. Such
considerations have no place in the short-term trader's lexicon. Only by harmoniously
synchronizing one's inner being to the mood of the market can one hope to trade well.
Self-know I edge is critical to trading success.
To follow up on (he three M's of successful trading, 1 thought of three psychological
factors that can make or break a trader. I call them the three C's—concentration, clarity;
and confidence. You must keep yimr head clear of emotional and intellectual cIuttCT in
order lo trade at a sustainable pace. Most successful traders agree that Enfs fc nut easy Li
do, even with years nf" experience. All of us face the challenge of controlling emotions
and overcoming personal biases. It is difficult la prevent one area of life from
Influencing another ^n Upheaval in your personal life can create emotional clutter thai plays
havoc with your decision making and turns perfectly good market opportunities into
trading fiascos.
You need lo be rational and well Informed, l>ul paradosically, being rational find
knowledgeable can also be a trader's downfall. If you become dogmatic aboul your
rationality and knowledge and oblivious to the prevailing mass sentiments, the outcome can be
disastrous, John Maynnrd Keynrs warned ih-il the markets can aflord to remain irrational
lunger than any rational investor can remain solveni while fighting irrational markets. A
cursory scan of the historical charts shows that the madness of crowds often trumps bound
fundament;]I judgment.
Chans filler nui a loi nf duller and prevenl information overload* I like to study them
To get a general fed for the mood of the crowds in the immediate past. Charts can help a
trader concentrate, provide clarity of vision, and give him confidence in his action. Yet,
unffirtuniiidy, charts alone have never worked for me.
The problem I have with my chartist friends is that many of them take chart reading
way loo seriously. They think it enables them to predict the future, hut that goes against
one of ihe two axioms 1 hold supreme.
The first is thai no one can know the future. I believe that Eiot only no one knows the
future but no Qneoafl know the future and reliably prtdici tomorrow's market action- This
excludes illegal, insider, or privileged information. An unscrupulous Fed governor^
mistress, for instance, could make a killing trading interest rate futures.
My second axiom is that most people are wrong most of the time. To learn from the
multitudes, you have to see through their follies and position wjurseU on the other side oi
'he trade. Someone asked Socrates where he got his wisdom, liluI he replied that he learned
from the fodi. This is the basis of the contrarian view. Going wlfil the crowd, as one does
in momentum day-trading, leads Co mediocre results at best and more often to losses, Yet,
there is n serious downside to the Contrarian approach. Taking a contrary position tnn
early, even against the most absurd folly—such as shorting a dot-com at a thousand times
earnings—can get you trampled by the stampeding herd. It is said that the graveyards of
Street are filled with traders who were correct, hut too early. The proverbial early bird
and the worm, buL ihc late worm will i^cE away from that bird.

Entries & Exits
The charts show us past market action- The chart reader takes a leap of faith and
assumes tiifli the recent action will continue into the near future. No matter how
sophisticated your anafyala, the fact remains that this is not a science, li is ultimately a leap of faith.
No quantitative technique, mathematical model, wave theory, or technical analysis can
reliably predict tomorrow's market action. Nor can one trade on fundamentals. Valuations
and fundamentals do not have any bearing on the near-term price fluctuations of a stock
or a commodity1. With every price prediction technique comes (ho warning: caveat emptot
Near-term pike fluctuations refleu Hie cacophony of collective perceptions and
emotions, such ;is greed, fear, hope, and faith. It is a live auction where the adrenaline rush is
die currency of the moment Each transaction represents a momentary consensus between
a buyer and a seller, If one could know what all the other participant wanted, nut could
reliably predict price action. The market is .1 price discovery mechanism. A short-term
trader is essentially playing a guessing game, trying to decipher what all the other gurasen
are guessing,
b there any point in fundamental, technical] or sentiment analysis* or is trading like n
random roll ol the dice? A new trader is like someone who enters a dark cellar for the firs!
rime. Without any guidances he will grope ;iround in the dark and may stumble inio ivhal
he is looking for. On the other hand, the trader who is armed wilh a good analytical Cool
enters thai cellar with a small candle. He can discern die general layout ol the room, ever
though the dim light does not reveal all the details. Some of what he sees may actually bi
illusions caused by the Bickering candle and the long shadows. Despite these limitations, 1
trader is more likely lu find his way through the cellar with a small candle than with
nothing, l lowevet if he places too much faith in the candlelight, the distortions caused by the
flickering flamo may lead him to misinterpret what he sees and lead Lo financial disaster.
A game of ehance, such 33 roulette, is quite dlfemit from a game of blackjack, ii
which skill makes a difference. The outcome of the former is determined entirely by fate
while the outcome of the latter involves an element of choke. The essential different
between them is that the player can manage risk when skill ts involved. Chance is Inheren
in trading the markets, but traders1 dioices make the difference.
Trading is perhaps the moat difficult way to make a living. A trader's life is the life n
arefrfmthe independent warrior of feudal Japan who did not have the protection ofaifegi
!uk1. Under a lord's protection, his comrade the saaiuroi could practice his art carefree Thi
roniij had \w such luxury and had '<i rely on his own resources. To be a successful tradei
one needs a sulficienT financial cushion to see one through the lean times,Without such i
cushion, the individual whose sole livelihood is trading lives a very precarious life, like \
barracuda in shark-Infested waters. Eadi day the barracuda sets out not knowing whethe
il will get dinner or become dinner.
Most people who make a consistent living from the markets do so eiihcr under ih
umbrella of an institution or on the backs of Other peopled money, frjnd manors, alia
lysrs, market yurus, and broker-dealers all fall into one of these two categories. They eithe
sell something or charge commissions or fees fur services to other markei participant*
Many of them m? also traders in their own right, but their bread and bmicr does no
depend exclusively i>n their trading.
Hading is not a science, and not a craft either. If anything, it is an art, and like BH
other art, trying to capture its essence will defy all attempts el programming or system
arizing. There are people wilh an intuitive yift for the subtle art of trading, so nimble Ehu
Lhey can gracefully dance their way through the snake pits of the market without Bettin
bitten. Sadly, most mortals are not so gifted. Winning or losing ovei time, therefore, strictl
depends an a disciplined approach to money management Lmcl 'oss control. Without i
if one lives by die sword, tine dies by the sword.

Chapter d Sohail Rabbanl
An individual trader has one great advantage over the institutional one—he may ait
back -ind do nothing. The ubiliLy Lo wait and lake no action until market conditions are
suitable tor youx trading style is perhaps the most important risk control measure. There
life market conditions you mn, and others you cannot, trade wiEh confidence. You need
io know your weaknesses as well as your strengths. Holding your fire and keeping your
powder dry are critical disciplines that can make 13 life or death difference in a trader's
career. This discipline, more than any other, has kept me alive in dangerous limes. Dr.
Elder quotes a mentor of his who used lo say thai the best trades went right from the very
beginning. The trades that ^o underwater should be quickly abandoned. One should
expect about half [lit trades taken lo end up as losses, but as long as these losses remain
small, they arc tolerable.
In real estate they say that only three factors determine success: location, location, and
location. Likewise, in trading there are also three factors that determine success: loss con-
trait loss control, and Suss control. To prevent a major loss, you must be willing to embrace
minnr losses and lots of them.
What is a little loss and how often can one take it? Old Nick, a manager at Drexd
Bumham buck in the L980s, u.std ro describe his traders as either elephant hunienuir
rabbit hunters. The elephant hunter, old Nick u^d to say, mostly returns empty-handed and
his children often yo hungry, The rabbit hunter, he said, feeds his family three square meals
regularly. Occasionally when the elephant hunter makes a kill it is a feast ftir the emire
village, liui in the long run, iCs the rabbit hunter who stands a better chance oi success,

H
Name; Ray Testa Jr.
Lives: Pittsburgh, PA
Previous profession: Business owner
Trades: Stocks
How long: Since 2002
Trading account: Medium ($250k-$lm)
Software: Charles Schwab, TC2005
Traders'Camp: St. Maarten 2004

Ray Testa Jr.
Developing a Consistent Approach
here were two brothers in our Caribbean Traders' Camp in February 2004, li,iy
_M_ and Bryan were in their eudy 30s, but both looked so much younger than their
ages that 1 teased them and called them juvenile delinquent. Jn fact, both were mature
beyond their yenrs. They traded and worked in the family business; both were raising
young kids.
Their wives wanted to come to St. Maarten with itiem—a Caribbean beach feels a lut
more appealing in February than a suburb of Pittsburgh—but bolh brothers left their
young wives ai home. This was not a vacation, they said. They came Lo the Camp to study,
and wanted no distractions. They called home several Limes each day, bul spent all their
free time with other traders. That set them apart from many older traders who were chauf-
feiiring their wives while Ray and Rryan were doing their Camp homework.
Campers often bring up their favtirile Mocks in class, and Ray wanted us to evaluate
GT. 1 declared it the most interesting slock pick of the Camp, and traded it after returning
home, H became one of my most profitable trades of 2004, When 1 began to offer remote
access to our monthly camped meetings in Manhattan, Ray immediately signed up and
I always paid attention to any stocks he brought up.
Ray flew to New York with his laptop and a .stack of brokerage statements. I put him
up in my guesl bedroom, and he went out for a bit of sightseeing—he had never been in
the city before. He made full use of my wireless Internet, repeatedly checking his stocks
and sending e-mails regarding bis business.
I am the youngest of four children; I have ;l sister and two brothers. We
all work together; we have a family business that does contracting work for
utility companies. We read, install, ;ind maintain gas and electric meters. My
father, who is now retiredi began with n local utility company and left Lo atari
the business in 1984. Working closely with him was a wonderful experience; he
was tJit ultimate mentor. We are all active in the markets, bill I ;jtti the mo^t
Interested in trading,
I graduated from Ohio University in 1995, went to work, and shortly
afterwards opened a brokerage account. Making money In the market from
1995 to 2000 was pretty easy. We read Vdhie Utw and did some momentum
investing—"the Dogs of the Dow"Bthe Foolish Four"—thai sort of thing. We
were buying names, never looked at charts, -ind didn't know anything about
technical analysis, Value Line was giving us pretty good stocks—Quakomm,
85

86 Entries & Exits
Tfx.is Instruments. It was great until the mirke! peaked and crashed. We
gat hurt like everyone else; after suffering through the bear market, I decided
1 was not going to give up. I was flOtng Lo learn from my mLsUikcs. Had I
known then a fraction of wluii I know now, 1 could have done something \.ir
simple as selling my positions when the 50-day moving average crossed below
the 200-day average and I would have been hugely better off.
We thought of using a full-service broker and spoke Lo a few of them. Most
used muLLKil Rinds, Well, I can feadAtor/iingstarjustas well as they and find the
best performing funds without paying DUE percent of equity. The mote I
learned about the markets ll'c more 1 liked the idea of trading tor mysel£
That's why! attended the Tniders1 Camp,
When you start studying, you see thai it is not out of the realm of
possibilities that the market could go sideways for the next 20 years. If I were a
strictly buy-and-hold investor, that means by the Lime I reached my early
fifties my savings would not have appreciated very much—unless 1 learned to
trade and rake advantage of swings.
My grtnlesl advantages are my age and the fad that I continue In learn.
Like that Lrader you quoted in Trading for a Living—"If 1 get ha]f a percent
smartci every year, I will be a genius by the time I die." The slock market
fascinates me; 1 wilt never lose intere*,! in trading. 1 love the? opportunity to trade for
a living, to set my own schedule, and take control of my future. Did you read
Rich Dad, Poor Di\d* There are a few ways to really gel ahead-—real estate, busi-
ncss, or paper <is.se[s.Kiyosaki says ihai in addition to your regular job, you need
to educate yourself and pursue Opportunities in one Df those asset classes. 1
chose papei assets, I am not afraid of the extra work, 1 probably work harder at
trading in my ^are time than some people do at their regular full-time jobs.
1 do it so my family will be financially secure and I will he able lo retire early.
The bull market crash left me with a bitter ijsle. When the market started
to rise again last year, ii was difficult to pull the trigger—basically imi of
inexperience. The most frustrating thing was that last year, in 2003, everyone made
money. Still, people who haven't learned their lessons from the bear market
will not hold onto their gains.
Hie hardest thing this past year was to develop a consistent approach. There
are many different ways lo trade—you tan buy pullbocks or you can buy
breakout, when a stock takes out iis previous high. Both methods make a lot of sense,
but they arc completely different You have to settle on the one that works for you.
The most success 1 had this year was buying down and selling up. When 1
look at stocks that are making new highs, I do not know where to get into
them. Mislead 1 wait lor prices to pull badt lo value on the weeklies*—wait for
llic industry group In go blue on the Impulse System, then pick the stock with
the most convincing bottom on the daily chart—a triple bottom or a diver
genc&i The yaa 2004 was a very Iwd year to trade, with no sustainable trends
and many false starts. Ef you did not enter in time, it was hard to get in Later,
bul If you got in too early, you got whtpsuwed.
You have to choose not only the rneihtid, but also what stocks you're going
to monitor. After the Camp, I started doing regular homework—-1 took stocks
in Nasdaq 100 and began lo track only those industry groups that contained
at least one Nasdaq 100 stock,
The list came to 51 groups nut of 239 in TC2005. Most of them are high-
Ecch, tind I sometimes wonder whether that is diverse enough. The goal if. to
trade enough without tracking too many. The udded advantage of my choice
is that if you track Nasdaq LQOi you can trade

Chapters Ray Testa fc 87
RAY'S ENTRY
Upper fiane- Weekly bar chart with too exponential moving
Middle pans: MACD Lines and MACD-Histogram (12-26-9)
Lower pane: TSV:13 {a near-equivalent of 13-day FMA of Force Index}
—26 and 13
^fV-vW
—...,-.
v^1
BSX
At the right edge of the weekly
chart, MACD-Hislogram Is falHng
while prices art? starting tn pull back
a little bil. I found this trade tin a
chart and confirmed it on the
kJitf- 1 shorted it. J would not
go against the weekly Impulse
system, but it was the daily that
had me mnre intrigued. Here on
the weekly. MACD lines art turning
down, TSV has been making lower
peaks dD the way up, creating a
bearish divergence.
On the daily chart I sec a hcad-und-
shouldeis top with <i massive bcai-
ish divergence a few days earlier
Prices are swinging up and down,
unlike the steady uptrend that had
lasted from October through early
March That was a uke uptrend,
but now there is a loL of action in
ilie slin-k—wider swings, but no
progress- There is a tail at a pflak
in early March—another sign of a
reversal. TSV is lower at the last
peak dun it had been at the
previous one. Everything is geared to The
downside.

HH Entries & Exits
TRADE 1
RAY'S EXIT
SZil
■
■■
. Ll
■■W
rJi
■ '
i.l
Shorted
Uili
]
■
3
' ■. r
'li.
■B
43.37
IP
This was une Qf those gicnt ti.ides where it did nol Lake toci long to feel the pain—jusl om
or two trading days. Two dciy.s after the entry, it was clear lh;il ihe market did nol conrtrn
my opinion.
When 1 entered short* the weekly chart wasn't greats but the daity looked interesting
The main reason I Look the trade waa the divergence in March. 1 expected further weak
ness in the stock. 1 read things into the chart because of die divergence and the heed-and
shoulders top, l had missed the opportunity m short in early March and then decided u
create sin opportunity when it was not really there.

Chapter 5 Raylfesta )r. 89
rir[
_^
"1
JAS
one
J
II
BBB
Ti,-f^||T-
03
III.
V V
lllL=JlB
I
■t1
H
1
MS
IE
INK'1
M
Illllllll
As 1 do ii pos[-jnui-[em un this Lratk, 1 see that my problem was that 1 did not hade in
the direction of [he industry group. 1 realize in hindsight thai 1 did nol dirdt how the
group had ticked up even though its Impulse system was still blue.
This is where We h;id much success lately—watching Industry groups and iiol
individual stocks. I should not have traded aaainsi ilic graup^s momentum.
TRADE 1—ENTRY COMMENT
The weekly charl fihaws a [one and steady bull market that look BSX fVoni below $10 So
above S40, Both EMAs keep rising; prices keep recumii^; lo ihe value zone between the
two lines every few months, then pull up again The trend ia up. and iL is easier to irnde
m the diieciion of the rising tide, Stili, the Impulse system hud turned blue several weeks
earlier, as weekly MACD-Histogram began to decline; this signal means that we arc
allowed to short.

90 Entries & Exits
1
of
like fhtiwct spat
to iHon BSX os.W[c four
weeks aqo, whcv\ the
to a new to'tfff failed
fife stock Turned from
to blue, rhat *>Ht
was fbll&md by a
puliback mtd Tfc
¥#JU . BSX Had &tWfG
rgrffied above fU value
zone, rttc stock a hard To
read irt the right edge-, ff
could be a'Tiicr a broad top
fortufftiot] or a rc&uMpTtot\
uf m uptrend.
Failed breakaui
The daily chart shows a persistent rally that liad come Co an end In March. You
can sec a bearish divergence between the February and March tops in prices and
MACD Histogram—in early Match RSX shul up to a new record high above S44, while
MACD-Histogram hud traced a nuich more shallow top than it did in February. The
resulting decline drove liSX towards $39, over 10% below its peak. A new rally had emerged
from there, taking the stock Up toward $44 before it ran out olr steam, with die Impulse
system turning blue.
UjjUfl
■MID

Chapters RayTfesta jr. 91
At the nghi edge of the chart we see a legitimate shorl trade -but not an especially
attractive one. The Impulse system is blue, permitting shorting* hue there is no current
bearish lifvcrgence ofMACD-Histogram and prices ore pretty far from ihe upper channel
line where ihe Liesi shorting is done. The trade feels like ;i bit of a stretch. The besi
trades jump at you from the chart* grab you by the face, and scream: "Here 1 am, rake me!11
That's certainly nol the case with BSX. The markcl presents such a wealth of
opportunities that you are better off waiting for the best ones rather than stretching for the quea*
tionable ones.
TRADE 1—EXIT COMMENT
Rjy deserves praise for his exit from this trade. The entry looked fairly lypical for an e^iger
young trader who reaches a bit too far to find a trade. Ai the exit, however, Ray acted with
the speed and resolve of [he pro he hopes to become—he did not waste any time before
admitting his error and getting out He reminded me of what Bucky had said during my
interview with Fred Schuteman (Chapter 2): "The most satisfying feellbgl have in trading
IS losing money for the right reasons. When you lose money for the right reasons, you will
he a very successful trader in the long run. because you vvill be taking smaller losses which
will enable you to be around tor the big I rrndi."
At {he right edge of the chart, the Impulse system has turned green again, MACD-
"istogcain is rising to a new high for the move, imd the rally in Force Index is canceling ;■
bearish divergence. Everything ii in s-eair to the up.side, and there is no reason to hang
in a short position. Ray is correct in cutting his loss and preserving capital for
trade.

92 Entries & Exits
I RAY'S ENTRY
1
-
if
.
J
, n-. -if
'Til"
rl
.
,,,1111111
,^
llllhlllll
rl' r I '
□Kb
i
ii
I'l
1
"IB
It 31
1
IF.LI
AMZN
The weekly bars are coming down into an area of support. AMZN had pierced the
support line earlier in 2001, then rallied, but now is coming back down. MACD is making -i
smaller bottom on the curreni decline, the last wtrkly bar has turned blue.
MG853~lnternet
Software & Services
i
i
ii
■--
-^
II
II', I!1
...
as
1 il'iri
.11
1
,.lll
Hill
ll
h
y
1 lh ii'i
03
llllin.j!
ml
II
i!
H|i| |^f'
In. „
1 I UfUi
™
Him
ni|l
Jit.. H
in
Qlttu WR2
m*
ua
■■' in-"
Ml
■';
..■
■ i

Chapters Ray Testa Jr. 93
The industry group is in the same situation as AMZN. It is in an uptrend? prices on
(rLe weekly charts had pulled bach into the sweet zone and ticked up. The Impulse System
is the b^t loo! for any beginner, for any trader—it keeps you out of so much trouble,
especially if you're buying rebounds. Here it is go time!
AMZN 1
11 IE
h
El IK
i|i i
i
1
llJl
.|H' -
j
lill
1
1 .
1
I'll! 1
rill V
1
r,
r-, ,r
50.01
M
4537
A22s
.iiiil...,nii..,ilillrru..^
w-
/X//V
The d;uly chart iti the most interesting lu mi?, cvt-n though 1 follow Triple Screen and
always still t witJi Llie weekly. You have a hi mure bLin_csh if you do thai. Back Jt the end ol
March I watched AMZN at support but did not trade [1. This stack vvus nut on my radar
then—I just s;iwit flipping through charts. The market jumped in late March, and I mtssed
the trade but continued to watch the stock. It came down in May and hit almost the
same <ir\-]> around frit). There was a big fal bottom of MACD, and because of ihar, I was
not too interested. I kept it on my radar, and nine days later it came down to the same
ar^a and bounced nfr that support again. The dailies turned Nul*, the weeklies were blue,
iind the industry jjroup was blue. The TSV had a little nnreh. I took this trade at the level
of support—it did not want to go below 40.

94: Entries & Exi
TRADE
RAY'S EXIT
I set my original target at 47.50—it was the area of the top of the previous rally, I sold it a]
47.6-1, near the high of tKt! d;iy because ii had reached my targfl. In hindsight, it was nul a
great target—bul a reasonable one.
TRADE SUM
Lang AMZN 5/24/2004 @ $41.70
Sold 5/27/20D4® $47.64
Profit = $5.94 per share

Chapter 5 Ray Test a Ji. 9S
It is nor often Hmi I pick ;i stock thai makes 5.5 points in three trading days. If 1 were
dtrintf this trade today, f would not have sold while the daily MACD-Histogram was rising,
1 would have waited until it ticked down—simply following the daily Impulse System.
Lately* I have been looking for I he- churls [har have sold clown ;ind have I he
most convincing bottoms In the area of support—a double bottom, a triple bottom, or a
liny bottom with MACD-Hislogram making a bullish divergence.
Thitf system was first described in Timlingfarii Ltvfiig, Ms key principle is tn analyze any
market or any stock in more than one finielr.iitu?. Whatever charts you like to trncle. you may not
look iii tlinn until you Ihvc firei analyzed b diarl chic order of magnitude longer and nude your
strategic decision there. i(. for example,you like to trade duily charts.you may imi lonkal them
until you liavc studied th£ weekly clwrts rind used ihem to ui^kcii decision to go long or short
Omr irou havc made h slrattgflc decision tiii the weeklies, return lu (Jie ilailv cimrts to make ;i
dedsioo—wliera t« enter and where to Ed a stop-loss and ;i [waRl Mr^ei. —AF.
TRIPLE SCREEN
TRADING SYSTEM
E 2—ENTRY COMMENT
edge of f%
, fitc bars H
The chart shows the long slow recovery of Amazon, one of the Leaders of the 1990s bull
rciarkci, from its bear market low. After crawling out ol Lhe doghouse bdow$10t it climbed
up iiLJ [Iilh way ia S60 l>efbre serious profit-takiTig drove if ddivn in S'10. Notice a kangaioo
tail pokbg below S40 in March 2004; it was followed by a sharp short-covering rally and
slow grinding decline towards $40. Compare the speed of the rally with [he slow-
of ihe decline—Eh is stock clearly does not want to £u down.
es arc vt&r
public
is botfomlnq out
much higfcr level iMw
m March. This, is nor
divcrqewe became the
indicator never crowed
the two
r divergences arc
rarely sccv\ on the weekly
charts. Still, the current
pattern fclli us tfW bean
arc weaker r&day fhetvt they
were fir March ZQirt-iM
important factor to keep m
tviind *vfttf*i decide
to go fovtg or short.
rf$hf edge of the weekly
chart, Impulse had turned
from red to him,
a prohibition again

96 Entries & Exits
The pattern of MACD-I listogram on the daily chart is similar to thai on the weekly.
There is no dear divergencCi as MACD nevrr crossed into positive territory between its
bottoms in early and Eate May, At the same time, the second MACD bottom is more
shallow, telling us that the bears are becoming weaker. The bars have turned from red to blue,
no longer prohibiting buying.
is a Very
bullish factor. The low ov\
May 10 was at fQ.tt, whifa
the few on Mayzi reached
down -to fosr-two ticks
lower. You do wrHavc to
bt an insider to Know that
alt amatcun who went l&y\q
between those two ritttcS
put-their it&ps *artck or
two below ffte previous
low." M so often
-they were Taken
second bortOM-such fdfsc
transfer stocks
weak holders mto
hands and clear the
w&{ for a rally.
Nulkca beautiliil bullisli divergence of Force ]m\t?\. Ji shows that the bears are
completely out of breath, and AMZN i£ fjl][ng only <mi of inertia. At [he right edge this stock
has a preponderance ol bullish signals; the only fly in [he ointment is the lack of a dear
divergence of MACD-HIstogram. Many trades look imperfect during an entry; die siyn;il&
become aysta] clear only in retrospect. An analyst can afford in wait for perfection; a
trader must put his money un the line in an atmosphere ol uncertainty, proteciin^ himself
With good money m

Chapters Ray Testa Jr. 97
TRADE 2—EXIT COMMENT
AL the light edge of the chair AMZN closed above its upper channel line. I believe that
envelopes provide the best short-term targets for profit taking. As Ray looks at his trade in
retrospect, he regrets having left so much on the table—Ihc stock went up several dollars
after he sold. He is both right find wrong.
Hindsight is a 20/20 vision: If we could buy tomorrow's newspaper, we'd all get in at
the absolute tow and sell at the extreme high. Looking out into [he uncertain future, it is
impossible to tell for sure whether a stock will rise or f.iN the following day. This is why
taking profits above a channel line is a perfectly reasonable thing,
Ray says he should have held until ih<? d;iily MACD Histogram hud licked down.
Here it ticked down softly, bui it also could have licked down hard. A stock can reverse
wry sharply wiping out the bulk of profit. If Ray wants to try a different exit technique,
I would suggeat exiting the bulk of the trade with n more conservative technique -ii ihe
channel line and holding a small fraction of his ptisilinn ki lest ttmielhing mum ndvtrn-
turous, [f lie traded 1,01)0 shares, lie could take profit on 900 shares and hold 100 for a
different type of exit.
All nf [his has to be properly documented in a Trader's Diary. Trying something new
once or twice and then forgetting jbout those Lrits is not much different from gambling,
frying repeatedly, while keeping good records and comparing two methods side by side—
now that will make voli a better trader.

1
98 Entries & Exits
TRADING CHANNELS
The two main types of channels are straight envelopes and standard deviation channels,
often called Hullm^er bands. A straight envelope runs parallel lo a moving Liverage, while
Standard deviation bands expand and contract in response Co market volatility. They are
useful primarily for options iraders since volatility is a prime factor En option pricing.
When the bands expand, it is a good time Ed write options, and when they contract, it is
belter to buy [hem. Traders or stocks ami futures are better nff with straight envelopes,
which help identify overbought and oversold conditions.
A well-drawn envelope contains approximately l)5% of prices on the screen. We want
the envelope ki contain the last four or five months of prices on the daily duirLs, so that
only the most extreme prices penetrate above or below. The market is a manic-depressive
beast; Normalcy is within the channel, mania is abovti the upper channel line, and
depression below the lower line. Channels help us gauge the mood of the market crowd and inide
against it.
The public tends to follow trends, becoming increasingly bullish as prices rise.
Beginners love to buy upside breakouts, hoping for a runaway move. Occasionally they
turn (nil Lo be right, but in (he long run, most breakouts art false, which is why
professionals lend to bet against than. When prices slide, the crowd becomes increasingly
bearish. When people see ;i downside breakout, they lend to dump their holdings, and
professionals buy from them at a discount, knuwing thai most downside breakouts art
f.ilse. Envelopes help us identify the areas where the crowd becomes depressed or manic—
and bet against it.
Neither envelopes nur any other single indicator can be used as an automatic trading
tooL In a powerful uptrend, prices can cling to the upper channel lint ftir a long time, and
in a powerful downtrend, they can stay below the lower channel line. We need to combine
envelopes with other tools to recognize the best trading signals—for example, an envelope
breakoul accompanied by an MACD divergence (sec a bearish divergence in AMZN tn
mid-April 2004). These words of caution apply first and foremost lo entries; taking
profits at the channel line is almost always a good idea. Ray's odt from AMZN shows thai he k
on his way to becoming a pro, as he sells the upside breakout.
Channels ;ire belter tools for setting profit targets than support and resistance lines.
Professional traders look for uncommon tools. Everyone knows about support and
resistance, since marking thtm requires nothing more than u pencil and a ruler, Channels, on
the other hand, require a degree of computer sophistication and an investment in lime.
They are leas obvious on the charts.
Envelopes, like many other indicators, provide both positive and negative signals.
When you buy inside .in envelope and sell when prices hit the upper channel line, you
know that you're ahead of ihc market crowd. You bought while the crowd was asleep and
sold when ii woke up—that is a positive signal. A negative signal is a warning not to buy
■thovc the upper channel line or lo &o .short below the lower diunnel line. These messages
help prevent the worst of the "greater fool theory1' trades. Envelopes provide the best short-
term targers for profit taking und very useful warnings—Ray would be well advi.sed to add
tht-m it> his charts.

Chapters Ray Testa Jr. 99
Kay--
My Trading Plan Continues to Evolve
At the time of the interview [ was focusing on short-tarn trading.
This year, other business commitments and increased personal
demands on my time started putting pressure on this approach.
I decided to divide my capita] into three baskets and add two hbw
strategies—one that 1 eould manage mechanically, and another that
1 could approach using a longer time frame.
My long-term strategy is simple: to f-et exposure to the strongest stocks in the
strongest groups. As f write this in the middle of 2005, the stock market is basically (kit for
the year. Al [he same lime, many industry groups are Up 25 to 40 percent. As long as we arc
not in a bear market, I'm content to hold stocks in leading Industries, using trailing stops
Io prolect profits. Additionally, J use options or diret-L index bhurls lo hedge my portfolio
when necessary. Industry groups perform well because their underlying fundamentals are
glow to change. It is easy to identify Che strongest groups. The key is to monitor them and
wait tor a proper buying opportunity: a pullhack to value on a weekly chart-
Alex said during one of our monthly tampers' meetings that if you woke up every
morning and your account was positioned in the same direction as the 2G-\veek moving
average, you wouldn't do too badly. 1 decided to add a trend-following component to my
tradingi after studying several charrs similar tn this one of rhe 5&P.
1 b Lick tested trend-
following systems using
different moving
averages. The results varied,
but the returns were far
superior to the buy-and-
hold appnjadi touted by
Wall Street My system is
simple. 1 use a crossover
of fairly short-term
exponential moving averages
to generate trading
signals, both long and short.
Although this strategy
does not catch tops or
b[>ttonis, it has you slaying with ihe trend. Entering and exiting trades results in constant
errors in judgment you always think that you could have done better. It is nice to have a
portion of your capital managed mechanically. When the EMA changes direction, it keeps
you out of (rouble and ahead of the market averages,
1 still devote a substantial percentage of my capital Co short-term trading. 1 have
modified ihe methods 1 learned al the Trader's Camp and added a tew of my own. Applying a
top-down approach, I first study the markets, then industry groups, and finally individual
stocks. Mont of my trading picks come from completing my weekly Impulse system
homework. 1 try to run my basket of stocks like a hedge fund, keeping a balance of long and
short positions. My short-term trading performance lias improved since 1 have expanded
my trading plan. By utilizing these additional strategies, 1 have become a more patient
trader. With plenty of capital already at risk, I find it much easier to wait for a perfect setup
lo enter a trade than ro rry lo force things.

Name:
Lives:
Previous profession;
Trades:
How long:
Trading account:
Software:
Traders' Camps:
James (Mike) McMahon
Phoenix, AZ
Engineering manager
Stocks
Since 2000
Small (<$250k)
TC2005, TradeStation, Trader's Governor
New Zealand 2002,
Dominican Republic 2003;
Spike group member

CHAPTER 6
James (Mike) McMahon
A Successful Engineer Has a Disadvantage
I met Mike in 2002 at our Traders1 Camp in New Zealand, [[e sal neur ihe back of the
room, tnking nates on li laptop. I was waving my fingera in ibc airf explaining the 2%
and 6% Rules af money management- tie amie up to me during a breaks "You know* those
concept lend themselves very well to pro^rLii inning."
The next morning he hrought a suck or Qoppies it> our class—that was before USB
devices became popular Mike announced he had created an Excel spreadsheet to implc-
ment the 2% Lind6% Rules for controlling risks and offered anyone in rhe class a free copy.
The next duy he stood up in class and asked for the floppies bade. Hd had been working on
the program the night before, upgraded It, and was offering the new file to al! campers, but
was running uuL of floppies. The group loved him.
At the end of out Camp 1 suggested to Mike that he write a commercial quality
program, complete with a manual. He wanted to do it in partnership with me and we shook
hands on our deal. For ilie past three years he has been producing better and better
versions of risk management software, moving forward in his quiet and do^cd w<i)\ Our
current Trader's Governor has over20>ono lines of computer code and delivers an unheard-of
level of control [nio the handi of private traders,
[ enjoy working iviih Mike and appreciate his thoroughness, focus> and unflappable
good humor. We tun Into each other several times each year and always sh;ire a meal,
even though I like a jjlass or hvn of wine with dinner, while Mike, a devout Baptist, never
touches the Stuff, We usually lalk abuuL money manai-enieni, hut 1 became interested in his
views on trading and sent him an invitation Lo participate in this project, Mike wrote back:
I'm extremely honored to he considered for the book—although I'm not sure
I qualify to be a member of the group,! do not consider myself tn be trading
professionally peE, uli.hou.gLi I am trading seriously
I think the benefits of my experience are not so much in the area of
trading tips, tricks, and methods hut rather En overcoming some of the obstacles
to successful trading- l am convinced that having b^en a highly successful
computer engineer has been a disadvantage to my trading rather than an
advantage. It is a difficult task lo quit thinking like an engineer after bo many
years of positive reinforccmtiu.
101

102 Entries & Exits
We met at a Traders1 Expo in. Lus Vega* where 1 taught a day-long class and Mike stepped
into my room as a guost speaker to deliver j crisp PowerPoint presentation on risk control.
Generous as ever, he offered to e-mail his entire presentation to the members of the class.
Later thai night we shared ll meal, and continued our conversation the following clay.
In my previous career as n computer engineer and manager for an oil company
in the Middle East,! had butitgreat confidence in my ability to da analysis and
derive solutions that work. Then I approached the markets, did great analysis,
but the solution often did not work. One cannot tix the chaos of ihe markeii,
Ueing right is everything in an engineering job, hut in the market you need a
method that works more often than not in producing winning trades.
In trading it is possible lo have 8 process or a method tha! works maybe
3 nut of in times, and willi ^ood money management you can make il
profitable, lust Ice your winners run and cut your losers short. In almost every
other endeavor in life, that would be an unthinkable proposition. One thing 1
did in my previous career was process control—computers take measurements
from the Held and send out signals lo control temperature, flow, and pressure
aE an oil refinery. If 1 approached my boss and said, "We'll control the plant so
that three times out often it will work very well, bur seven times it won't work"
he would not have been happy. But in trading lhal might work very well.
A beginner Crying to find the right method goes to seminars, starts
trading, but when you look at his trades, is he winning or losing as a resulr of the
method? He may apply Lhe rules and trade correctly sometimes, but not at
Other times. If that is the cose, looking aE the results of a trade is inconclusive.
The results are meaningful only if you apply your methods rigorously. ] £ you
stretch because you're hoi lo trade, you taint the quality ol your refills. The
less experienced a trader, the less defined his method.
To define 3 method takes ,1 go mi number oi trades—1U h not
meaningful, 100 is yood, A trader often jumps to another method before he gets
numbers where they should lie. A private trader without good education or
discipline and poor record-keeping does not know whether his method is
good. "I am making money, so I know what's right." In the nineties people
were making profitable trades far the wrong reasons. All stocks went up, but if
a stock went down, they did not worry about stops because die stocks always
returned and roared up. They were winning even [hough the quality of their
trading was poor. Then the year 2000 railed along.
AJ1 my life I've been confident I could do complex analysis and develop
working solutions. If a solution worked, it was correct. In lhe market It is
different Some trades are winners but not because analysis is correct. Other
nades fit the entry criteria very well bul turn out to be losers. Winning or
losing in any single trade has nothing to do with the quality or viability of the
strategy. Looking at my diary entries reinforced thJfi for me- There were some
winning trades where I deviated from my criteria and which did not deserve
to be winners. There were losing trades where I did everything right, but the
market moved against me. Trading is not about "Am I right or am 1 wrong?"
but about "Did I apply my methods correctly?™
I have met a lot of people who are In a similar situation—very strong
technical people, programmers, greal analytical persons who enter the chaos
of Che markets and are unable to produce answers. Casual investors got badly
burned in 2001-21)02. You've got to have some kind of strategy for the down-

Chapter 6 Janice (Mike) McMahon 103
side; you cannot be holding in the midst of a bear market. If you followed the
ample strategy of getting out when a complete bar moved below its 200-day
moving average* then mound September 10QO you would have sold out and
stayed in cash until April 2003.
When 1 left Saudi Arabia in My 2000, I had my 401k and an IRA; I hud
invested only in mutual funds before. People kept saying that the stock market
was going crazy and it was the linit to get involved. The idea of not having to
work 'J to 5 felt attractive; 1 thought 1 could trade part-time and make a lot ol
money—sounds familiar, right? A friend was involved with Wade Cook, and I
went io bis conference but scried getting disillusioned with his thing right
away. There was that feeling of forced joy and the purpose was to show you
how little you knew. They'd teach you 30 strategies in three days until you said,
"Wow, tflis is really complex, I need to sign up foi-three more workshops "One
Of the Instructors bunded out a reading list, and I picked up Trading for o
Living. 1 said, this guy makes a lot of sense and he is opposed to everything
Wade Cook says.
And that's how 1 aime to my first Traders' Camp. Ln my first career 1
developed the mindset thai I was going to be riglii always or almost always, but
when I fiot into trading, I knew I had to change that 1 still have not completely
made the breakthrough (o reach that way Of thinking, but I am applying ^ood
money management until 1 get there. That fellow In your class yesterday
brought up a question about being Confident and you said you could never be
confident. This Is a psychological change that is hard to achieve far most
people who come from other fields.
When you propose to people ji a conference or on ;i message board,"Lets
talk about our "trading demons," not one person responds, no one wants to
handle that. They'd rather talk of gold prices, or divergences, or broWfl. 1 have
often thought that I could be u more Successful trader if I had a robot
entering and executing tor me. You know, like in Isaac Asimuv's book /, Robot t The
first law is that a robot cannot harm a human by its action or inaction-1 could
see myself getting emotional during the trading day and gfving the robot
instructions to place or cancel an order and he'd iny, "No, I cannot allow you
to come to harm; I have to execute the plan,"
A fellow raised his Emnd In my class where Mike bad appeared as a gud speaker, \\c wanted to CONFIDENCE AND
foiow bow to reach the di^rffiof^wrGseatTriilchlieEOHld^proaEb trading with a grait feet UNCERTAINTY
IngofmnrMHKE.'TTjatisnotl
lainty in working (in [he edge, ir you ke\ ccrdin about a project or a trade thai you're getting
Info, it is probably going (o be a laser" —AT
It is a very different thing looking at the game from the outside or with
the experience of having been in it. Like thai joke—two fellows go fishing in a
canoe and one of them thrown a stick of dynamite overboard—boom!—all
kinds of stunned fish float to ihe surface. His friend says, "Are you crazy? This
is so illegal" And the Hist guy takes another stick oi dynamite, lights it up,
hands it to his friend, and says, "You gonna talk or you gonna fish?"

104 Humes & Ezifcs
In trolling for Irades, E shirt with TC20O5 where I have [wo EasyScans.
First, 1 look for stocks thai have readied ;i pew 52-week high during the past
30 irading days. They have to be priced over $10 and have volume in the top
25% of all stocks. Jbdny, for rumple, we have G13 stocks on this new high lisi,
and 1 sort them from the highest price down. I Lake a quick look at every
weekly chart and, if they're interesting, glance at the daily. Most of them
arc up, stretching the rubber band. 1 am looking for shorting opportunities—
for ihosc that arc overstretched and storting to roll over—and flag the ones 1
like for deeper study.
I tend to find more- candidates mid-listj cathcr than at the top or the
bottom ol the list. I create and date a new lexi file and copy flagged symbols into
it. [lien 1 do the same For new lows—looking For buys, looking at The lowest
prices. I export [heir symbols to a text file, such as "shorts for I l/22"and put ii
into my TradeStalinn folder. Once J gel the GtOcitS into TradcStation, I go
through my regular screens—weekly, daily, and intraday. Here I start seriously
looking for trades. Sometimes 1 find crossovers—potential longs on shorts
lists and vice versa, 1 work with each list for a week or two, and after that, I start
throwing old files out.
MIKE'S ENTRY
At the right edge of the
chart, the Impulse system
has stopped being red and
turned blue, permitting
buying. Siochasticsarc
oversold and crossing upr
M AC D-Histogram has
stopped declining and
ticked up.
Upper pane: Weekly ba,r chart with twu exponential moving averages—2b and 11 weeks and
Impulse system
Middle pane: MACD Lines Finn1 MACD-Histogram Ul-25-5)
Lower pane: Stocftastfe (10-3-3 and W-d-3)- overbuuylit and oversold lines at HU and 20

Chapter 6 James (Mike) McMahon 105
Same jjarameters in the first Three panes as weekly, only referring to the numbei of dsys. Fourth pane 11-day RSI
BNCMA
The Impulse system has changed from red io blue to green. MACD-Hfetogram is ruing and has just
crossed jbuve zero. Stochastic^ arc rising and have iu&l crossed above their oversold line, Tlio Stock
fell to ils 5^-woek low, but instead ol ftillowing through on thai decline, Jl reversed and started to
ri&c. Prices nre in the sweet /.one between the two moving averages.
The second day ol a bullish
Irend in prices confirms the
buy signal of the weekly
and daily charts.
Upper pane: 15-minute candlestick chart
Lower pane: MACD Lines and MACD-Histogram (12-26-9 bars]

106 Entries Be Eadts
MIKE'S EXIT
Hit, Cr. 3- FA Vim H\
Jt f*.*.
AftfflT 11 trading days, it didn't look like this slock was going anywhere MACD began to
fid] unrl Stochastic crossed below Us oversold line.
THE BOSS WANTS
TO SEE THE NUMBERS
Mike says: Yfestenlflyfl fdluw askrrj you in cto what was ;i common psychological trait among
winning traders, ;jinlymi;itiswercd: "recent riritj'.1' 1 figure I've got all the head knowledge 1 need
toIiaTC—nawl need to make a psychologic^ L-lyngc from a canEtrvatlvE,slratghtforwaTd
engineer (o an ecceiuric logical Eradct I have a passion fur Leading, In every endeavor of my taioer
Vvn been successful in DverromiJQE obstacles and ineriiu^dijlleii^es—tlicrc is yre;ii satisfaction
In Ihis, 1 tike flic flexibility of the lifestyle.9, being nhlc U: trade from anywhere in tin- world, any
liuur, fiui ;it tini^s I miss Uu: siicijbzliiy of (he office, Ttfldlng tyyomsclf—there tesome fonelt
sk lliere.
LongGNCMAB/8/2D04@
Sold 6/23/2004® $8.04
Loss=${0.06} per share
Channel 9,38-7,01
Lost 8.7% of the channel for a D trade
Working on Traders Goveinor bos given me a toPmeodotis sppreda-
Lion for tlie VhIue of rcninl-keciilng. PrivaEc cracl^rs cos ftel thi'y are aoln(
OK and not face up in their real performance. Uavifl^tliE GoranKff itaKj
mv [o <lu thai im matler how painful. I started =i pracoB til brtiNilI;1 pun-
i.sliiuj,' my ej;o by rcponin^ to my wife. Now il is like work—jjooil i>r bad,
tlie boss WBirtfi to see Li

(":li;i|jLtfr 6 James (Mike) McMahon 107
I'ui sending you a booklet called Tiw. Unwritten Law of Engineering, When [ f irsi
to read It I ihim^htiliisujsruiIIv^ruiE stuff tJinLcvciy cutry-icvd cn^iiiCLTSliouEtl know.
I ffgs iisdiundet] to learn II h.ul been published in 134411 set? a dose correlation between flu*
mentality of young engineers and that of beginning traders who are fixated mi getting all ilic
technical tools, charts, indicnlnrs, system backtesling. slock-iiickiii^ software, and so un. They
do not seem at all concerned with the unwritten laws erf trading ami bow pqycholq^rally and
emotionally Lini]rc|];ired tliey art1 for the markets.
PSYCHOLOGY
TRADE 1—ENTRY COMMENT
rsn
I he weekly chart reveals three distinct stages in the bull move [hat took GNCMA from
utiderS3 io above $10, The first upleg, in 2002, was powerfully vertical,The second upleg,
in 2003) wtnt up ^t a much more shaDow angle and ended with a bearish divergence of
MACD-Histogram. The third upleg, in 2004, was nearly flat, did not reach a new high, and
ended with both moving averages rolling over to the downside. Clearly, the early bird
caught this worm in the srock market.
At the righi edge of ihe chart the decline had reached deep below the EMA, over-
blending the rubber band. MACD-Histogram had ticked up, turning the Impulse system
blue nnd removing a prohibition against buying.

108 RnLries & Exits
DO NOT SQUINT
AT A CHART
[fraders looking for bullish and bearish signals tend '" squint at liie charts. Squint long
enough, and you'll tccojfnlZE bullish or bearish signals—whichever you prefer. A much
better thing to do. vvIiiti in dmibi, is to posh back and look ;ii the chads o[ a greater fimeframe,
If you fed urn (used by tlic chiili^s. luuk hL tlic weeklies Lei make a strategic felslon. Use them
to cltftidL- whether you*ic a liull or a bearbefun1 returning lo the daily chart ;md dL'clEliugwIul
to Jit with your traife, —AE
In" I li n-llil
"■■""'■--■.ijllilrf
,
■ ^
The decline on the daily chart appears ;i link? stc^p for buying just now. There was n
bearish divergence in April, find from there the stock lost nearly 25% in less than two
months,going down [n a aeBiiy straight line. At ther^htedgeofthcdiarl the Impulse has
turned green, permitting buying, but there is nn bullish divergence of MACD-Histogranii
of MACD Lines> or even of Force Indev. There is only an nptick of the histogram and a
crossing of prices above ihc fast EM A. That would no! be enough to get me from the
sidelines anil ulto a long position.
Furthermore, ii seems j lit Lie laic to he entering this long trade. Mtke^s purchase prwS
uf $8-10 is near the top Lick of the day and closer to the center uf [he channel than Lo its
bottom. If I whs going bottom-fish ing, I would try to buy below value, in the vicinity of
the Lower channel line. As this point I would give a puss iu this trade.

Chapter 6 James [Mike) McMahon 1 09
TRADE 1—EXIT COMMENT
Thi? rally had sidled, and Mike was quite right to exit his trade. 1 think it is important to
haveastop for your trades not only in terms of price but also i" terms of time. It can be a
mental stop, but you should know thai if :\ stock does not do what you expected it to do
within a reasonable lime, you'll be oui of II
You buy ii stock expecting ii lo ro up. If you thought you could get it cheaper
tomorrow, you would not have bought it today. A day goes by, then two and three, bul ihe rally
you expected does not materialize, Evk'n if thai stock does mil fall and go Dguinst you, it is
giving you ii bubLltf message thai your analysis was wrong. This is like trying to pull your car
into a tight parking spot: If you realize that you're not making it, get out of that spot and
decide whether to gel in again al a better angle or drive around and look For another spot
This trade also brings up the importance of measuring where in the daily range you
bought or sold a stock. The idea is to try to buy in the lower 50% of the daily bar and sell
within the top 50% of that day's bar. This is harder than it seems because we do not know
until the cinse what the day's range is going to be. Buying in the hot torn half and selling in
Ihc lop half is n skill thai comes with experience, and even then, it is never flawkss. In this
trade Mike bough: near (he top lick of the daily bar and sold near the bottom tick oi the
cut bar, 1 lad he been able Lo reverse this pattern, the trade would have been <i big winner,
instead of a ^mall loser. Mike has access lo live inlmd-iy cLihi. I ]js skills in analyzing weekly
and daily charts ean be transferred lo inCfflday charts—not lo daylrade, hui EG finesse his
entries and

MIKE'S ENTRY
i -I MIIH «i i. .pU 1111 ru.Ua
The Impulse system Is blue, allowing us i<j buy. Both StochaMics are starting tn turn up
bullish. MACD h;u> mil yet licked up.
Non-Impulse Exit
In a webmar yesterday you said that due to the lack of follow-
through in corn, now would be a good time to sell. Did you
actually mean selling even though the Impulse System is
green? —Trader
The Impulse system is a censorship system that gives me
permission to enter. When a market blows out of its channel,
it shows an overheated condition and signals me to exit,
without any input from the Impulse system. In other words, I may
enter only when this system allows me to enter, but I may exit
belore it tells me to do so. — AE

6 James (Mike) McMahon 111
!
IK f(.
MACD-HistQgnan i.1; rising, trussing iis /cm Jinc MACD Lint's arc giving ^ buy signal. The
ict Is in the "sweet zone" between two EMAa. RSI and both Stochastics -i
J
PUrU
ma
HjO 53T MB ill* 'SiTJ UfO 1)1^ 'fiflf |JB U«
The fact that prfffis have
closed up for the day is
s positive sign.

112 Entries & Exits
TRADE 2
MIKE'S EXIT
I he price looks like it is
moving, but momentum
anU MACD arc starting to
civuige Irom the price a bit.
Both Stochastic and RSI
are starting to turn dnwn.
It looks like prices dre
going nowhere. There
is a possible triangle
formation.
Long GKR 06/01/2004 @ $10.38
Sold 06/04/2004® $10,717
Profit =: $0,337 per share
Channel 10.85-9.51
Gained 25% of the channel for a B trade
J

Chapter & fames (Mike) McMahon 11.1
TRADE 2—ENTRY COMMENT
CKR is becoming stronger and stronger, b contrail to GNCMA whose ri^c on the weekly
chart kept getting weaker and weaker. CKR's first upleg, from S3 to £fi in 2003* lasted over
30 weeks; the second upleg, in 2004, from under $6 to nearly SI 2t took unly half of that
time, as the stock weni up fester. When bulls become stronger as the stock rallie:,, H is Q sign
ihat the stock wants to gd higher.
The hull move is being ncLHly traced by rising moving Liverj^s; every few months a
bout of profit-taking drives prices down into the value zone between llit two EMAs or
cvL'n lower. These episodes af panic among the weakest holders allow patient, conservative
traders tn add to their loiigi nu;]r value. The latest decline had just run its course a week
ago,with MACD-Hifltogramdedinmgbduwzero. Itbuversuld reading provides evtm
support to the bullish cnuse. The char! looked better the week before, but even hcic prices am
not yet too rar from value

114 Entries & Exits
A bullish divergence of Force Index lends support to the bullish causL\ Notice a
relatively deep FI bottom during the first slab to the lower diaiuid and a nearly flat Force
Index during ihe second bottom. This showed us that the bears \wc out of steam. The
markets run on a two-party sysLem—bulls and bears- When the bears beenme weak, you
know which party is likely to win the next dection.
The daily churl confirms die message or the weekly—the stock is in gear to the upside
Notice the bearish divergence that bad pushed the stock down in April, iollowed by rwo
stabs to the lovvei channel line in May. The second bottom was below the first, but prices
stayed below thai level for only two day&j when they rallied above it six days ago, the Imp
was shut on the bears, That sixth bar from Ihe right edge, with the daily Impulse turning
green and the weekly still blue, would have made i\ perfect entry into this lun^ Iradc; Mike
is on top of the game with trend direction but a bit behind on his timing.
Targets in Flat Markets
It seems to me that stocks In choppy markets, like the one we
are in, often do not move to the percentage? envelope like they
have in the past. Do you use another price objective?
—Trader
\ still try to take profits at the channel lines, but they have to be
recalibrated to track the last two or three months of trading.

Chapter 6 )amcs (Mike) McMahon 11 5
TRADE 2—EXIT COMMENT
~-— n
This is a very cautious t\ii—-but then Mike is a very cautious num; and nobody has ever
gone broke taking profits. There ;ire Wh bullish and bearish signs at the right edge. The
biggest negative is that prices had not advanced for the past two days, drawing a shorter
bar each day. This could mean running into resistance and [he end of n sUnn-Term
uptrend. Of course il cnukl iilso meim li tight triangle—a continuation pattern within
an uptrend. Another warning to Lhe bulls comes from the fact that prices arc approaching
their upper channel line* They arc also starting lo plough into the area of resistance,
established during the April top.
At the same lime> several indicators give bullish signals. A recent peak of MACD-
rlistogram marks the bulls' return io the market A new peak of Force Index, higher than
lhe previous one, shows that the bulls are becoming .stronger.
Mike is cautiously moving forward through treacherous terrain. As hi3 perceptively
noted in his interview! his career as nn engineer had trained him to look fur certainly.
While learning to function in tins new field, he is culling his fosses short and nailing
profits before they get away from him.

116 Entries & Exits
RISK CONTROL
There are few if any young geniuses in trading. If you stay in this game long enough,
acquiring experience and maturity, you will develop an edge. It is perfectly okay to make
mistakes, but not okay to repent them. If you follow this rule* you'll keep Ending new mis*
takes to make, but eventually you're going to suiri running out of mistakes and making
money.
Experience confers a big advantage in trading, but to benefit from it you need io
survive Lht period ol early inexperience. There is only one way to survive—by using strict
money management Many traders in this book speak about the vital importance of risk
control, Mike MciVkihon's unique achievement is his creation of a money management
root-—a Trader's Governor-1
Every trader laces two primary dangers in the market. First, tm account could be
ruined by a single disastrous loss; a massive loss can push a trader so deep into the hulc
that he. can never crawl out I call such a single ruinous loss a shark bite. Second, an
account can be irreparably damaged by a series nf piranha bites—a long string ol lushes,
none of which is disastrous but which together bleed the account dry,
I have developed two money management rules to prevent such disasters. The 2%
Rule limits the risk on any given trade to the minimum of 2% of the account value. For
example, if a trader with a $1UO,000 account buys ii $10 stock and puts a slop at $9, he is
risking SI ;i share. Since the 2% Rule limits his maximum risk lo $2,000, he is allowed to
buy no more than 2,000 shares of that stock, and preferably fewer.
The 6% Rule limits the total risk for the account as a whole. It stares that liitr total risk
On all open positions, plus any losses takfin during the current munth, may not exceed G%
of your account equity. Say you pui On three trades ideniicul to die one above. Your risk on
each d£ them may be limited lo 2%, but if all your trades [urn against you at once, you
cat? lose 6% of your equity. If )rou wanted to put on a fourth trade, the 6% Rule would
have said "no11 because you'd already reached the maximum risk limit for your account as
a whole,
The intricacies of both rules arc spelled out in Come into My Trading Room. If you
trade a single accounl with just a few trades, you can probably do risk management in a
simple spreadsheet. Mike McMahon's achievement Is that his Trader's Governor allows
you lo track and control risks for multiple accounts, multiple positions, and different risk
levels. He links all accounts to a single control panel, allowing ynu to monitor risks, play
various "what if" scenarios, and even measure your risk in nearly raal-tlme, using free
20-minuie delayed data. By programming his Trader's Governor, Mike has performed i
massive favor for the trading community.
'hi the Interest of full disclosure* I hove io say thai i am partners with Mike in Ebts software. You
Governor manual un in}' \\v\i site1 i^wwMl

Chapter 6 lames (Mike] McMahon 117
c-widi! from Mike:
Like Balancing Your Checkbook
1 developed a passion for trading soon after I started. Initially there
was Llie attraction of quick and easy profits, although 1 knew from
experience that it something sounded Loo good to be true, it usually
wasn't that gnod. Still, 1 was confident that, based on my successful
career in engineering and with sufficient effort an my part, 1 could
master trading.
The markets quickly Caught me that they were not bound by clear-cut laws and
mathematical certainties—uui only did [hey nnr follow the rules, but ihey constantly changed
thenv After completing two Traders1 Camps, I became convinced that the key to success
was leaching myself the three M's of trading—Mindh Method, and Money. I set a goal for
myself to learn as much as possible in rhe shortest amount of liiiitr> balancing my undcr-
sinndmg of all three. Like the legs of a camera tripod, I wanted each to be the same length
rather than a combination of long and short legs thai wouldn't stand up.
Since Dr. Elder placed great emphasis on record-keeping, I became deepfy involved in
developing the Trader's Organizer and Traders Governor programs. Record-keeping fell
like the least exciting part of trading for me. Ii did not begin to compare to the thrill of
watching a live Lrade or playing with sonic new indicator that would unlock the secrets
of technical analysis. It was like comparing [he excitement of shopping with balancing
your checkbook.
My greatest breakthrough in trading came when I reaped that record-keeping added
10 the three M's, completed ihe formula for successful trading. If ilu1 three M's defined
what I needed to learn, then rt-cord-keeping defined how I could da it, ll was the key to
fully extending alf three legs of Llie Iripod.
The last thing i wanted to do ai the end of the trading day was to create u diary eniry
for each of my trades. Bui when I reviewed my Trader's Diary, 1 was amazed at how clearly
it portrayed "ihe good, the bud, and the ugly1' of my psychology. Impulsive trades during
market hours stuck out next to other trades that were well planned after ihe marker close-
It became easy to determine how closely 1 was following my trading method. With the
alary I could spot those limes when I nervously and prematurely exiled a trade without an
exil signal or received a poor fill out of impatience instead of waiting for my planned entry
price.
My advice tu new Iraders is to learn all you can about the three M's and do it by
diligently keeping good records. Thanks lo th,il I am a better trader today than I was last year,
and next year I will be a better trader than I am today!

Name:
Lives:
Previous profession:
Trades:
How long: . ..
Gerald Appel
Great Neck, NY
Psychoanalyst, group therapist
Mutual funds, ETFs, and index options
Since 1974
Trading account: Large (> $lm)
Software:
MetastockrCQG,Tradestation,
Rugg & Steele mutual fund data
Traders' Camps: Taught in two Caribbean
Camps in 2003 and Fiji in 2004

CHAPTER 7
ERALD APPEL
Looking for Favorable Probabilities
W!icn I entered the markets more than two decades ago, Gerald Appd was
already an iconic figure in the field. An important money manager, the editor and
publisher of Systems taut Forecast* newsletter, and the author of Several books, he became
famous in the era uf computerized technical analysts as the inventor of MACD, His Moving
Average Convergence-Divergence indicator is now included in most software packages.
In 1989, when my company began producing .some of ilie first videotapes for traders,
I invited Appd Lu create a viden on day-trading. We met in his private office, dominated
by a partners desk behind which he and his head trader, a very decisive woman, were
trading slock indexes throughout our meeting, I returned with 9 video crew on a weekend, and
What I learned on that day had a lasting impact on my own trading.
In 2002 J invited Appel to our Caribbean Camp as a guest bstmctor. He prepared for
it obsessively, produced a handout the size of a book, but stilf appeared tense during his
first session. |udy, his wife of Over 40 years, his greatest cheerleader and an in-house critic
satin the back of the ronm at every presentation and gave him feedback oil audience
reactions. As the week went on and Jerry realized how well he was being received, he began
lu enjoy himself more. He returned to another Caribbean Camp and in 2004 flew to our
Pacific Camp in Fiji where he received star treatment from the group of Australians, New
Zealanders, and Americans,
After Jerry agreed to lit interviewed for this book, I look a train from Manhattan to
Great Neck, tin upscale suburb at the edge of the dty where Jerry hfis his money management
office. aIiolji 2(1 staff members worked in a large comfortable space- There were framed
articles by and abotii Appel as well as photos taken by him—ferry la an internationally
recognized photographer. His private office had live screens on the desk, but Lhtr ruum was filled
with African art, autographs of prominent people, and artifacts from his many trawls.
My father was a card player nnd he was addicted to the racetrack —he died
broke, with me paying his rent I Ic worked as a cab driver until he was 78, but
blew everything on horses. J will have no \k\t\ in gambling, casinos, horses—
the odds are against yon. In the stock market I find probabilities that are
favorable, but the casino and the racetrack have the odds stacked against you.
My mother put four kids through college—and after the youngesi of us
, she went to college herself, at the aye of 65. She was an expert typ-
119

120 Entries & Exits
ist, ,i Iq^il secretary, but she loved studying. After getting her college degree,
she went to graduate school and kept going until the day she died at 73, She
would come home from work, get on a bus. and <jo to college; slit never
complained She was a terrific dancer, Judy and I take dandng lessons, but there is
:i big difference between taking lessons ond being a dunccr.
1 iim the- oldest boy in the family, and I have an older sister. Both my
brothers now work for me—one used to be a programmer for IBM, the other
,i middle manager for Lsver Bros* 1 weni to Brooklyn College, a free city
school-To this dflV I very much appreciate that this country lets a poor kid like
me become what he can be. I earned ;i slate scholarship to graduate school,
earned a degira in social work, trained in psychoanalysis, practiced for around
36 years. I taught, wrote articles published and supervised. All the while 1
operated this business, but kepi the two pretty separate. Aboul eight years a^o,
I phased oul my practice completely.
In the mid-196ns I became interested in slock trading and gol into ihu
usual course uf eventfi. First you trust your stockbroker, [hen you realize he
doesn't know what's up, then you look Tor advisory services, iheu you find they
don't know what's up, and all die while you do ,i lot of reading and educate
yourself in technical analysis. There was a magazine back in those days called
The Capitalist Reports*1-—a tabloid, very schlocky, but with hiy circulation. One
day they hud an article on Malcolm Forbes, and I thought it was a character
assassination. I wrote them that their article was the financial equiv,iWn1 of
Screw magazine, and if they wanted to .see how to write articles, lo kjll nit how
much they wcru paying. They wrote back and asked rne to write For them.
Later I asked them, "How would you like to gel a financial editor?" and they
appointed me. For a while I was writing five articles under five names for every
issue. They paid me and published my lirsi book, f also wrote for other
publications, huL really enjoyed writing for those guys—(hey nevei changed a word.
They did not mind me plugging a newsletter—so 1 Started one—and then
someone asked whether I would manage money. 1 started writing En n7l and
got my fir,sl client in 73, He WHS with me until he passed away last year, and
his daughter is still with me.
We started Bt the worst time, in the midst of the '73-74 bear market, but
we made [Honey. I used to do a lot of convertible arbitrage in those years, 1
would go long a convcrtfbk bond and sell short shares in proportion to it, and
whichever way they moved, we made money. We would pick up the interest
and play the swings. Nowadays you do not see too many stock market
derivatives getting out of uhack. Before computers became available, there were more
imbalances in Lhe marker. The game now is not what It used lo be.
When options came oul in 1973, premiums were much higher than today.
and you could sell very safe option.1; positions. Gradually the advantage
disappeared as the market became much more efficient Ehan it was in those days. In
[he beginning you could have 70- BOW return it the stock stood still* but now
you are lucky i! you get 14—18%. Historically, whrn options are first
introduced, they're overpriced.
Right now there is no special advantage to buyers or sellers of options, and
there ;ire two opposing views. One—let's buy them because they Jire cheap and the
risk is small. The other- most options aren't exercised, su let's sell them and
lecL the income. J think neither side is right or wrong. Buyers will make a lot ol
money 3 few limes, sellers a little money many times, but in the end Imth will

Chapter? GeraldAppel 121
lose money to brulterage houses because of expenses. The markets ;3re very
efficient these days, and if there is OH advantage, all the big houses have uim-
puters to look for if. Fverybody deals against Che handicap of the expense. ]n a
rising niurkei you c;m nuke a consistent profit by Belling options but ait A cost
of lost opportunity. Options are good fur Bat or slowly felting markets.
1 was one of the earliest people to begin timing mutual funds, starting In
1975. I had dune a lot of research into timing models and concluded it was not
difficult lo create a system to outperform the market and keep risks low—if you
could avoid getting hi! by trading expenses. Trading costs and bld-8sk spreads
were higher in 1975. .Say yon did 20 Iradcs a year wilJi 1% average profit—this
wuuld compound to over 20% per year, bul trading expenses would outweigh
lhe advantages. If the costs were 0,5% per trade, they would eat up lD%peryear.
mentioned dial lieai^3sicmaDyfliid3ilsefUlido^!notlimiBe^lG*lK»ota,ftnd lasted what VVHY WRITE A BOOK?
edliiiii lOWTtfe. "I tiijciysiffiriiimyiiitinrL'oiibookjEicktl's/'ht'hHijfln.'ci. If £ a gOOtl Way
to enhance jour repnlation. Sometimes you moke money on a book. Get your ideas mil tutu the
fforldi leave a lid It1 of your imprint BjEQIHUL I have never losi unyifiing by giving Uka.s aujry. II
people find ii useful. U makes roc fed gaod* —AM
In lhe mid-'70s tht^ funds introduced free telephone switching. They
wanted to keep client money in-house when they went from Stocfcs Lo cash, hut
they crealed a vehicle for my maikct timing models. RmdPflckwaa the first Lo
allow phone switching—and f was one of their early investors, applying my
timing models with no expense.
The n.inds had expenses, of course, hul you JLrsl yot a small share. I found
thai the instruments thai reflected the entire market were more predictable
than a single stock, 1 was liming market funds* basically trading without
expraaeSi Gradually this became more popular, and by the mid-'90s fundi
became burdened by the amount of at liviiy ;md started putting up restricrions.
The key strategy of my firm today is Lhe selection of mutual funds, invest-
\a$ in the best, and timing our investments using models Lhat are not as active
;is in earlier years but still active. An investor who only wants tn buy and
bolt! could do well with any number of mutual fund newsletters, such as
Mormngstar, What we add when lie comes ro us is the active management part
in order to prated his capital when the market declines.
In developing systems I begin with a mental picture o[ how the market
moves, based on my trading experience of almost 40 years. Most of the lime
lhe market moves sideways, bul occasionally ii breaks out and you can make
money on such events once or twice a year. The idea is u> create a ttming
model that automatically shifts from operating in a flat market to operating in
j trending market
We use a database of about 35 years—.i is important to useflfi longs data
Stream as you can. Many beginners look at three years, but ihat is noi enough.
Ideally, you create a mode! on the Erst 10 years and go forward for the ne\l 10
years to test it> then make adjustments Lind tesl on the next 10 years. You
inevitably begin by making rules to lit the past—now you've got to test them
going forward. You do it in segments! you play mound with ii.

122 Entries & Eadts
NineLy-five percent of my own money ii with [he clients—what they gel
is whuL I get. I trade relatively little for my own accounl because I do nut want
K> conflict with them, to be in a position where \ am trading against my clients'
holdings. By and large we do the same thing for all dlente at the same time, My
own accounts simply go where ihe clients go. We trade mutual funds on i\m
dose, CTFs and options usually inwards the dose.
It is one thing to create a timing model, another lo live with Lt Traders
nave Lu think ol what 18 propelling ihem. The closer you sit to Che screen, ihe
more the issues of emotion and psychology come into the game. Watching the
screen cr<?;iies an urge tn do something ami a sense of constantly missed
Opportunities. Actually; you want to be much more selective—-find a way to
back off until the conditions you look for are there.
What is the direction Of the Significant trend? Is the minor trend in gear
with ii or are you Eroding against the lide? What are the triggers forentty? Are
they in place? Are they confirmed by other signals?
A person should have a trading plan—almost any plan would be better
than none. One should not (rude because he feels scared todays or feels brave
today, or missed a move yesterday. Take small losses. People hate to he wrung
and want to be right, so they cash out too quickly. You need a plan of
operation: This is what an entry isT fliis is wfaal an exit is, this is what tells me 1 am
wrong and need to yd out quickly. You're not going to be right much more
than Si)% ot the time, hut if you keep your losses smaller than your wins, you'll
come out ahead of the game.
After Jerry showed me uvo recent trades, 1 started getting ready to Leave His wife was
not in the office that day. Jerry told me she normally dealt with all tht personnel business,
lawyers, and oampany finances. "She inns my life," he grinned. "Bui on Wednesdays she
goes by train into the city to take a foreign policy course at New York University. She1!! have
luncfa with our daughter, then go so a museum, 1 will mine out later for dinner and
theater and well come home together. Judy is a fantastic wife, I have been very fortunate.1' lit
walked me over to his son's office to say hello. Marvin hud earned an MD and a PhD,
becoming boaid-cci titled in ancsihesiology, but lit left medicine to work with his lather.
I te hay become one of ilie leading cxperis on exdiange-traded funds and is writing a book
on ETFs.
It began Lu rain, and Jerry insisted on giving me a ride to the station. We got into
his hi^h-pei lo nuance BMW, and I was surprised that it had an automatic transmission."!
have a Porsche jt home and ii's also automatic-—1 always had stickshift cars bul can't be
bothered with them anymore. Also, 3 feel that a sllckshift would be a liability in an
emergency—it would slow down my response." He invited me to join him on an outing lo a
club, we shook hands, and 1 ran in the rnin from the car to ihe sialion-

Chapter? CcriiJd Appcl 123
TRADE 1
JERRY'S ENTRY
22CD
6 |13 |J0 |27 |3 JiQ_
|24
OJAi
[iflcemhnr
15 |22~|39'||B
23
L'cr ■
| February
1 IS |15 |22
Muich
Upper pane: Daily bar chart with a 21-day simple moving average and ± &% trading bands
Lower pane: 12/25 MACD Lines
In March 2004 there was a good confluence nf entry signals. The NASDAQ had moved
below its 4% band—that was an exlrcmely oversold condition- Brtffl in n downtrend, you
can make money buying below this band, but here we had several additional signals. Prices
stopped accelerating down and entered buck into the band. MACD had been oversold and
lurried up. A nice clean downtrend line across IvIACD peaks was being broken. Prices were
'racing a downward wedge, with lines converging, which was a bullish sign, 1 bought the
day MACD turned up and the wedge was being broken to the upside—everyihing was
coming together lo support the buy signal.

124 Entries & Exits
JERRY'S EXIT
The rally was strong enough to carry to the upper channel. Since my vfew of ihc cnarkct .ii (lie
time was basically neutral I was nut playing this fora major move but foraswing from the
bottom band to the lop band. I put in my sdl order as the rmrkct approached the top band
Long Jan 2005 strike 3G QQQ.Q LEAP calls
Bought 3/25/04 @ $3.1 B
Sold half 4/2/04 O $3.95
Sold second half 4/12/04 @ $4.00
Profit=$0,815 per contract (+25.8%
on the whole position)

Chapter? GeraldAppd
I sold one half on the first move above the band and held the other half in case the
rjjlv kept going. This market turned up again but MACD begun to weaken, its kmi line
turned down, and that's when I sold the second half. As if turned out, 1 got the bi?st entry
ind the '-"'esl CJtft for UiliL lilllt cycle.
There was an interesting Signal for a short sale in April as MACD vvns Turning down,
but I did not take it. Generally, (he odds ate not in favor of short sellers because ihe
market has a long-term upward bins, except in a bear market. Being neutral overall made me
less enthusiastic about .shorting at this lime.
Study Time
1 am an ophthalmologist, head of the department, and I have
a question—what Is the length of time J would need tn
master your knowledge? —Trader
Some people catch an in a couple of years, other people never
do. It takes more time, dedication, or humility than some
possess. Your tuition, mostly in terms of losses, is likely to be as
high as a medical school education. In the beginning, trading
is a tremendous time-eater. Today you may be able to come to
your office for a few hours and do competent work. Remember
when you were a resident and the crazy hours you kept? How
much you needed to learn then? That's what you'll need to
replicate in your quest to become a competent trader. — AE

126 Entries & Erics
TRADE 1—ENTRY COMMENT
liji.-f ^ *7i
Stocks bad a great year in 2003. The vicious beat market thai drove prices down from their
1999-2000 peaks had overshot all reasonable targets and drove many stocks to ridiculously
low levels. In 2003 they started poppfng up, like so many empty bottles pushed under
water nnd released. The NASDAQ kept trending higher, with each shallow dip to its 13-
wcek KM A presenting a buying opportunity.
The first deep reaction against this uptrend began in January 2004, driving prices
below value, below their 26-week EMA. At the right edge of the chart there are signs that
the decline is coming to an end: The latest weekly bar |™d dosed near the top, leaving what
looks like a tail pointing downs the decline of MACD-Histogram is flattening out. Still, the
rightmost bar is red, meaning the Impulse system docs not allow us ro buy—ntit yet. Just
as Jerry said, each trader needs a plan. He has his and 1 have mine; some days he is going
to be ahead, and olhrr days 1 will. You can work on improving your plan, but yon should
never change it in ihe middle of the game.
We can see on the daily churl that the decline from the January peak is losing steam; the
bears are becoming weaker. Look at the deep hottom of MACD- Histogram in February
and compare it with the much more shallow hottom in March. The rally in early MarcS
had lifted this indicator above its cmfcerline, breaking Che back of the bear; the latest
decline is going on out of inerLia, with no power behind it. Prices have been bugyinji the
lower channel line, an undervalued area.

Chapter? Gerald Appd 127
rd/fy on tfrc fast
My of -ftc chart shews
that ttic character of the
WdTWftfi Gtftmgert We
sec the tallest bar fa
several weeks, which thaws a
qrc&T lo/cl Of CDWiCt\QYi to
this rally. The Force \pufcx
has shot up to iti highest
level for tfftf year,
that the bulls arc
strong. \tis very tetuptiii$
to (UMp rfgttt in and buy,
but toy SyStcto Tctls me
to wait until tile weekly
impulse Ltopi being red
before I way go long.
TRADE 1—EXIT COMMENT
followed a very good entry with -i brillinnl exit, nailing profits on long positions at
the upper channel line. His perform ance is a pleasure i<> watch, and reminds me once again
pf the impact his methods had on me a decade and a half ago.
At the fight edge of the chart, MACD-Histogram Sfi about as high as it ever gets In this
market, with liit Force Inde* also at its peak level. When prices penetrate the upper chan-
llcl linet everything looks pcrfeLi lo amateurs: "We have an upside breakout; lefs buy!"
is precisely where a professional goes the other way and sells his longs in s
: I ate-comer.

128 Entries & Exits
NASDAQ had risen to a new high the day after ferry sold the first half of his position.
There it stalled, unable to rise above the channel again, going nowhere fast. The Impulse
system has turned from green to blue, idling us ilmi the most dynamic pan of the rally is
over. At the right edge of the chart, the Force Index k tracing out a bearish divergence]
warning us that the bulls are losing strength.
When Jerry sold the first half of his position, both prices and indicators seemed
perfectly aligned to the upside; as a true professional) he saw trouble while prices were still nn
the way tip. i [esold the second half of his position after the market acted sloppy tor a few
days. This is where a sennprofefiBianal trader should have recognized the rally was in
[rouble. The beginners are probably still asleep—they will sell their positions which ivere
bought near the top only after prices fall to the bottom.
One of the key differences between professionals and amateurs is the speed wiffl
which they recognize market signals and react lo them, A beginner usually waits fora
dear signal to emerge, tor a breakout to fail, for an indicator to turn around. By the
time a turnaround is dearly confirmed, the new trend is already underway. A
professional strs his patterns and indicators starting to come together and acts without wailing
for toLal clarity. This ability to act in an atmosphere of uncertainty is a hallmark of a
professional trader.

Chaptci-7 Gerald Appel 129
Ilu1
t
'(
In
lmhIclI in 1 9H9, -nul [fie rrmnliy jusl started to climh nut limn under (lie nibble bl
"ll? ^nitc[' States two dGEHtfes after the 1929 bubble. Gold had Its bubble in Uic
i still h;is not recovered. Whni (aids to happen after a inibbii1 is that you get a decide
ipjicl, below-average performance. f!ui kt'ep in mind thai five years haw already
passed since the peafc of 2000, during wWdi tbeBtodcmarlaithfldttnctdcnllnE.
KL'i iiits a bottom, it will have an upward slant, like liic one dint followed Che bottom in 19
Wfe have already paid <i loi of dues Sff the eseesses of iiic 1990a. l sec sincks being abonl Ofrly
valued loday, neltlicr overvalued nDnmdcrvBJDed, The S&P prlce/earalngs ratio was 40 *it ilic
lop; L6 Is flic historical iionn. and flow It is 15. There is room for Hie market ta j*o up somnvJiiii
and down somewhat, nothing dramatic, bui \\ can finish Uiis decade much better than ii
started, l do not see a runaway market, nor do l sec a collapse. The Hush administration is doing
everything to support the market—;>ll Lfiose clajn^cs in tlic t^ix colIc, rediiction oftoCSOn
dividends, anil other business Incentives* from chopping down forests to everything dse—H is 0
ven pro-Duslncss admiuistratloiL Bwn Mir movemeni iii pflrattze Social Security—you can
Imagine iln1 extra demand for slocks built inlo Hurt, a predictable ;iud Forced demand.
ii'ill hnvc lu put money into halanctdmutiiiil funds.
WHERE ARE
WE TODAY?
TRADE 2
JERRY'S ENTRY
II W 29 5 17 19 &B 1 1C !7
is a bleak trade; lam no! proud of it. 1 decided to shori the market l^dLiuj.st it IiliJ
jlbroken below ks support leveL It had rallied from below the bottom band* above
pie moving average, and into the area that used to offer support but has now turned into
. At the first sign that the market was turning clown from iii resistance, I bought
—partly lo hedge the fund portfolio and partly ai n trade in its own right
Will Hus
or lose

130 Entries & \ixitv.
I JERRY'S EXIT
Al ckc Opening ilie next day, my trade showed profit and I closed out half of my position
1 often do that, since it takes the pressure off the rest t>l iht position (stt also Chapter 3),
|7 |f-i \n w* !■■ ■'■ l|" \'A- \' I11" 1^ I" \~-b '-' 1|] ~-ia l?'

Chapter 7 Gerald Appei 131
I had a big problem—no exit plan in CHSC the trade wtui wrong- This position would
be Stopped OUl as soon as prices made a new recovery high. Lots of things were
not iii £e;jr' UBlfe lnc trthw trade, MACD was actually rising—by shorting I was fighting
rising MACD even though it looked -is though it was weakening—the lines were
narrowing—at the moment of the trade. The other trade had several factors in its favor, this
one only two—its chart pattern and the resistance, As soon as th.it resistance was
penetrated, this short should have been immediately covered. Why didn't I do it? I was still
-omfitted to a bearish outlook and instead of seeing what was happening, 1 was thinking
about what should happen. The most you can ever say about the future is the probability
of what maY happen. The best timing aiodck rarely e\ceed a 55% success rale. You have to
d quickly to contain your losses. You have to ask yourself: "What's going to prove me
and how will I respond?"
|beplomb»r ~|oclabi> "" iNDMniTJsr
I had another chance la cover, missed thai, sat through another rally, and finally called
tl ;i day—not at the worst place but hardly the best. What I had here was a trade
primarily on a support/resistance line- Once that line was broken
and stopped being an operative factor, 1 should luve responded
nmcli faster.
Long January ZD06 strike 32 QQQQ LEAP puts
Bought 8/30/04 @ $2.90
Sold half 8/31/04 @ $3,05
Sold second half 10/22/04 @ $1.70
Loss = $0,525 per contract

Entcies&ExUs
TRADE 2—ENTRY COMMENT
fit The right edge of the
weekly chart, bath moving
averages arc
f the wwwrf
Hang*.
Heavily below its Ccnterline
but ti attemptwg to rally,
tWWftjg the \mpullc system
blue. This color does wt
prohibit us frotw
or selling.
The daily cMart of tetftty
IS 5ctidift$ mixed tv\c±la$ci.
There is a strong bullish
rfiverqcftcc between the
August mdSeptember
. Vuring the Auquit
, the Histogram rose to
rts highest level ft months,
siqnalinq strength. On the
other hand, the August
rally was accompanied by a
broad bearish divergence
of the Force Mcx, &
definite sign of weakness.
The impulse system has,
switched from green to
bfoc &t the right edge and
therefore no lonqer
prohibits shorting. Still, with
the weekly Chart neutral, I
find myScif squinting at
the daily chart- aOK The one
Hand, on the other Hand,, *
With 1Me weekly chart
unhelpful to making a strategic
decision, I would be
inclined to stand aside.
IE 2003 was a sweet year for stock traders 2004 was a bitter ant There were many .sharp
reversals throughout the year, with few sustainable Trends. The stock market fell to a new
low prior to the presidejiii.il election, making ii reasonable to expect thai ihr L]rid bull
market of 200J was over and a beat market had begun. When prites rallied hack towards
May lows in September, we could interpret that as the first pullback within a bear market
prior [n the jickI downleg.

TRADE 2—EXIT COMMENT
Chapter? GeraldAppel 133
-■: '■
■.m
. ■■'!
Here, as in the previous trade, [ciry lakes advantage of a price spurt in his favor and grabs
a quick proIIl on one-half of his position. Much of what professionals do deals with
limiting risks—and taking a chunk of profit early in the game certainly helps set a trade on
the right track.
i?,iu a.
r .Li ij
I IL
am
i ijH..7
Traders often heat themsefreB over the head for their nifsLake.s. They may find it
reasoning to know that even a top prn occasionally makes fairly basic errors. Jet ry's bearish
prejudice led him to Stay witb his short trade way too long before he cut his lasses.
This,
closed out after the
market rallied above its July
low, kfr/inq bchiM s false
dowtttidc breakout. The
iwpttllc lyittM told KS t&
COVcr after tHe weekly
turned $rcm soon after
the itort entry, on Friday,
September 10, zocrt. Jerry
fitted (ffl opportunity to
cover with d Minimal fan fv\
September, btttwton fc
fftoilyhfrtHe butter, He
did it tw&tcfty, covert^
during a decline ratUer
fftffl tHrOwtnq in the towef
near the

134 Entries
ACT EARLY OR LATE?
The market does noi try to ambush or surprise you —it usually gives plenty of warning
before it moves, but its signals tend to be quiet and .subtle. Think ol the signal a baseball
catcher makes to his pitcher. He does not wave his fingers in the air u? gel attention, but
makes siyns visible only to a trained eye. The signals are definitely there amidst [he noise
and the shouting In die grandstands, and you have to learn to recognize them.
Jerry follows chart patterns and indicator signals but also lias a tremendous intuitive feel
for the markets- Before you rush to imitate him, keep in mind that he started out like most
of U% listening to brokers and advisors, taking bad advice and losing money. lerry survived
the stage of initial ignorance by quickly cutting his losses. One of the key lessons he Leaches
us is that von must survive in order to succeed. Paradoxically, Jerry's abhorrence of losses
stems from the s:id example of his father. Rejecting that path was at the rant nf his success.
ferry has acquired one of the hest track records IE the money management business
but still occasionally makes mistakes and finds himself In losing trades- Whenever he has an
open loss on his hands, he knows how to dance his w;iy out of trouble with minimal
damage. If you have no plan for getting out nf Lroubte, you have no business being in a trade.
The simplest way to keep oui of major trouble is to use si tips. You may place a "luird
stop" order at a specific level with your broker. Alternatively, you may use a "sol t stop*
and rely un Indicator signals or personal judgment of the market. A beginner needs hard
stops—only remember not to place them at the obvious levels. An experienced trader like
jerry is more likely to use sofl skips. He knows that his trade is in trouble, and it is time to
cut <md run without setting a specific escape level
What both hard and soft stops have in common is a cold determination to cut mid run
If a trade goes against you. You must be absolutely ready to cut your losses before they cut
your account—shove a pistol intu the car of B bad trade and pull the tripfiCr.
While Jerry and other highly experienced traders function on a somewhat intuitive
level, a beginning trader has no eight to intuition. When a beginner yets the feeling that a
market is going to move a certain way, it is usually noi an intuition but merely an itch, an
attack of gas, or an urge to act. The best thing thai a heginne: with "an intuition" can do is
lie down and wait until the feeling passes. A begintiei needs to have a list of clearly defined
signals and a matching list of strictly defined actions. 1 sometimes toy to my students; A
beginner has no righr to intuition until he or she has iMtfcd successfully for 18 months.
l frowi Jerry-,
Calm, Relaxed, and
Reasonably Confident
I've just finished reading—maybe for the fifth or sixth time
summary of our meeting. It was a little strange actually, to see
myself described in print that way. He certainly did get it right. By
ihtn, my thoughts began to wander to what makes me trade well wken 1 am trading wcH-
and to what makes me trade hadly when I'm trading badly—which does, unfortunately,
happen from lime in time.
It is similar to playing golf or tennis. When f play well and trade well, I'm playing ana
trading with a certain confidence—dot grandiosity—just quiet confidence. It is nice

Chapter7 Gerald Appel 135
, sUcteed, but OK if I don't, 1 think I'm going to be right, but the slock market is often not
\\r,ii predictable) and f could be right in my technique and planning and still have a losing
tj.;ido. The same way I can sometimes hit a tennis or gulf ball Juki a Mule [ong, with just a
little slice- The [rick is to stay calm, relaxed—being relaxed is very big in tennis and golf—
and reasonably confident, while maintaining realistic goals (1 definitely do not drive 300
yards, and the harder 1 try, the worse it gets).
My aililctic ability, such as it is, sometimes drops rapidly—-usuailywhen I become too
confident* or try too hard, or set unrealistic £oals> losing my relaxed rhythm. If ,is ,i result
of this Jiop I lose my confidence and try a scries of corrections to fa things, they further
interfere with my swing, and 1 end up becoming lense mid pessimistic. Matters do not gel
[feed tmiil I find the sense and Lime to buck off, go buck to basics, and concentrate more
on my attitude and feelings Chan anything else.
Trading is similar to that. A number of winners in a row, which usually takes place in
anicely trending or cyclical market, can feed greed* and perhaps even worse, those illusions
of control, omniscience, and magic thai often drive traders as much as the wish to support
themselves financially through trading. Trying to trade every minor swing is like Crying to
serve an nee in tennis every time, often with the same poor result.
Similarly, a lew losses, whatever caused them, Can lead to self-doubt, fear of further
loss, sUfmevi, and, at times, almost paralysis. At such times I can feel mysell entering into
trading positions late and too ready to c\nw them prematurely. Sometimes on u bad
Hiding day, I may duck out of making any decisions at all
The solution is the same :is in sports. I have to back off, return to the basics, think
more alxmi myself and less about the market, ley to gel hack into a relaxed Irame of mi ml
mid back into the game. This is easier said than done bui definitely possible.
As I write this in early May 2005,the Stock market has just completed a string of about
ten days in which [lie direction of prices reversed each and every day -up, dinvn. up.
down, sometimes by a lot, sometimes by a little. The bull marker dial started in the fall of
20U2 seems barely alive.
Patterns of price movement in the slock market have clearly changed since the onset
of the great bear market in March 2000, For example, day-To-day trendiness- the
tendency of the stock market to do tomorrow what it does today—has vanished. The Nasdaq
Composite, the most trendy oi market Indices,has become mote likely to reverse direction
from day to day than to continue in the HHme direction.
These changes have had a significant impact on many stock market liming mndels.
Time horizons for active stock traders have shortened. Wiih price trends vacillating daily,
online short-term trading has come to dominate price movement on many days. With so
many traders watching the same screens, often the same indicators* and using computers
to enter orders, iht pace of (he stock market has quickened. The short-term trading game
has become both more crowded nnd more difficult.
Contrary to that, lons-er-lerrn technical patterns appear to have retained their
Significance. Time cycles, measures of market momentum, moving average trading channels.
MACD, RSJ, interest rates, earnings, and other influences and reflections oi' the stock market
remain influential I have learned to place greater emphasis on the relative strength of
market sectors, portfolio diversification and balance] mutual fund and RTF selection—which is,
I trust, g mare sophisticated approach to what to buy as well as when to buy and sell.
The times change, the slock market changes, and investment strategies are likely to
have it? change as a result. Traders should remain relaxed, balanced, and as objective as
possible. They should also remain flexible, able to tecugnize changes in the investment
markets, and rn respond to them. This con be quite demanding, bui it is also very
stimulating, 1 [hink this keeps me young.
My best wishes to all for good trading.

Name:
Lives:
Previous profession:
Trades:
How long:
Michael Brenke
Charlotte, NC
Business owner
Stocks
Since 1995
Trading account: Small (< $250k)
Software:
Traders' Camp:
MetaStock, eSignal, Quicken
Caribbean Camp in 1998

Michael Brenke
To Keep Repeating What I Did Right
I met Michael in one of our first Caribbean Camps, in 1998 in the Dominican
Republic. We lasl contact for several years, but in early 2004 a recent camper looking
for help with trading software connected with him, and a lew months later both men flew
to S campera' meeting in New York- 3 was pleased Co hear that Michael had become ;■ full-
lime trader and invited him for an interview. He Limed his return to New York to attend
another camperrf meeting, and the next morning we sat down to talk about trading.
I was born in Greenville, Tennessee, but had my parents waited a few months I
would have been bom in Germany. I visit there often and like it there, but
moving is out of the question—Kimbcrly wauls us Lo live close to her parents.
My original career choice was photography—1 took pictures for the
yearbooks in high school, but then decided to do something else. 1 thought moat
photographers were starving artists; i wanted t« get rich quicker and enjoy
photography as a hobby. That and travel art1 ihe must fun things for me.
I never went fo college— that was my choice. I read about the Hunts of
Texas, how they had minimal education but were great in business, I had all
these ideas mi how to make money, My Srst plan was tti gel into high-end
house painting—E could see myself hiring a bigger crew, getting into real
estate—but painting was too hard. I moved from Ashcvillc, a small sleepy
town, to Charlotte—it had a big skyline, big clubt* I bartended—it's ;i grc:il fob
when you're 21, they play music yon like, and everyone is happy.
Then I tried to import car polishing cloth from Germany, It is very
popular there, you see it at every gas station, but here it was a tough sell. 1 enjoyed
the creative part of business—-taking pictures, designing the label1—but did
not know marketing. I was doing business with a few mom-and-pop stores,
but did not have connections to get into big stores. To get a product out you
have to go to the major retailers, such as Sears, but big buyers do not buy just
one item from a supplier I recently calculated that lsiill have a 1,200-year
supply lor my air in a mini-warehouse.
137

I 3ft Entries & Exits
I learned a valuable lesson—don't get into a business unless you know Che
industry. In house painting I did my research and was profitable from day one,
but here I broke ill 1 the rules. Then, after hearing about the damage to new cars
from ;icid rain and a new paint sealant to protect them, I started EuroShine, f
thought il WOS a big million-dollar idea nnd committed every last penny to it,
I ran the company for J1 years and graduated from distributing others'
products to making my own, having my own line of chemicals.
I firsl heard about trading from a former girlfriend. She WflS Studying
accounting and askeA "Why dorft you do something with your saving" I
bought LTV at 10, a few weeks later sold it for 12, and was hooked. In the mid-
90s I wli.s running my business but wanted to be in control of my financial
future. You do not get thai Eram business because you have 30 lu ji0 bosses at
once—your big customers, suppliers, employees—they all have SngCTfl in your
future, you depend on them. 1 wanted to beeome my sole boss and get paid
exactly what I was worth, t )ne day f spoke about trading with Kimbei ly, theo
went to take out the trash, and on the w;iy buck checked the mailbox—there
was a postcard for Trudmsfor a Uv'tng, It all came together within thesame in
minutes—J realized the business was not going to give me what 1 wanted, and
suddenly there was liiis postcard. A couple of days later I ordered the book,
and when it arrived, it was signed, I never hud \\ signed book before and called
a couple of friends.
E made the samfl mistakes as everybody else who gets into trading with
big dollar signs in front of my eyes. 1 had about 320,000 saved and though! I
would turn that into a million in two yearn—lake 20 good stocks and wail
for the righl patterns, Like printing money with my computer. And I fell into
-mother beginner trap—thinking the more information I had, the belter
trader I'd become. 1 subscribed Lo several expensive fundamental data services,
a chut room. And was running around with a Quotrck FM receiver with a
little antenna. 1 ipenl Coo much on the information—almost $3»500 a ye;ir, as if
more tools would make me a belter trader.
The market has a very quick way of letting you know how good or bad
you are. J had this big realization that look a long tfanetogej—ifl got paid for
paper-trading, I'd be a multimillionaire, Hut with real money, il was a differ
ent story. Il was easy on paper, but In the markets [here was this fear of losing
money, pulling the trigger, and greed. My big fear was losing money- Money I
saved from my chemical business created a window of opportunity- I lured
that business by then, !>ui with every loss my window closed a little.
This fear of losing money held me back fora long time. You paper-trade
five or six times, have good tiades, then stretch Uie rules and get in—and that
trade turns out a LaseTi You go back to paper-trading and have five or sk
winners, then back to trading real money and losing. It was an emotional roller-
coaster—you feel brilliants then make a bad trade and fed like such an idiot.
Your mind plays tricky and you do not see the warning signs.
Had 1 stuck to my own trading rules, I would have made money, bul
instead f struggled forseveral years, unable to break out of the rut 1 was in. like
in that movie Groundhog Day. J was slowly becoming more organized, Started
keeping a log. What saved me during that time was sticking to the 2% Rule—
I actually reduced it to 1%, and afteTD few losses to 0-5%. 1 was losing less than
10% a year. I would not have survived without that rule.

Chapters Michael Brcnkc 139
T did not think much about psychology, did not believe it mattered. I
thought that you see a good chart pattern and go. Trading did Dot begin
making sense to me until 1 started noticing my own patterns. You can know what
to do—be an export on patterns, on designing systems—but be unable to do
what needs to he done when it cumes to real money. I would never have
believed il. Take chemicals—there is a way lo blend them, and that's how you
do it—day In, day out. Or carpentry—you would not say/'I know how to build
it, but lei me build it differently." If you do the Same with trading, the rcsillft
nre automatic Some of the guys who write books cannol tki Li> cannot handle
risks with their own money. If you do not have the psychological strength lo
stand the risk, yon cannot trade.
I was likp ei hamster tn a wheel and did not begin to change until I skirted
printing every chart and marking it- At the end o( die month I'd go hack and
make notes on my mistakes. After a while, I'd sec a pattern—the same mistake
over and over. I iiEiiied a big piece of foam matting to the wall and pul itie
examples of perfect trades there. I would see a pattern on the screen, then look
at my board—is it a dean pal tern, not too many long tails? I made a list of the
most common mist-ikes and put that checklist next to the monitor, all these
little rules based on past mistakes. If everything Lined up visually ;is well aaon
the checklist, 1 would place my trade and that started to help.
Your advice on the 2% s.ived me. You also talked of creating a journal. I
started looking at trading more like a business—wrote a mission statement
and a business plan. In the beginning, if I could not find a pattern for u while,
Td look for another pattern, very disorganized. I started writing notes at the
end of each day on the tmdts I made or missed. At the end of each week, 1
would write "What 1 learned this week." It was a huge help lo see patterns
in my trading—what 1 was doing right and wrung especially after losing on
a day when I should have been making money. I started looking at past trades,
putting afl the charts together to see what trades 1 had made and which ones
1 should have made. I always print charts of the S&IJ in all lime frames. I really
credit my turnaround lo looking at past irades, making notes, and reviewing
ihcm to come up with rules for future trades. Before that, I could be going
long on me dailies without knowing that a weekly was havjny ,i hugr bearish
divergence.
Everything just slowly evolved. Last year 1 created my own trading
manual. I got the idea after hearing Kimhcrly talk about hei joh. In bur bank they
nave documents outlining different procedures for her department- Fred, with
whom 1 came tf> the campers1 meeting, is an airline pilot; he told me they use
printed checklists in the cockpit.
I condensed my manuiil lo 10 pages. 1 start the day by looking at the $!kP.
If the market is at a turning point, which is where 1 like to trade. I start
Scanning stocks—first weekly, then daily charts- I have 200 stocks to review and I
look to see whether they arc in sync, turning In the same direction. 11 I find
something, I go to the page where 1 have my rules for swing trading. I have
four or five patterns and several rules, such ,1S "Do not hold a swim; trade over
an earnings announcement.'11 go to Yahoo to check earnings datest and if it is
within one week, 1 stay away. Occasionally this rule bites me and I miss a good
trade, but the risk of a huge downward gap is not worth it. If everything
my .second sheet, 1 gn In the third.

140 Entries & Kxits
At the next page I sec up money management The better I'm doing, ihc
closer to the 2% risk I raise my size. If I am on a roll, I'll raise it to L or ] .5%,
hut after three losing trades in a row, I go bflclt to 0.5%. I never hit the G%
monthly limit At the nest page I set up my alerts in MeLa.Stock. I prefer to
enier orders after the open to avoid gaps. Also, if the hourly charts show a hug*
divergence against my planned trade, chat's a no-go.
The other part of niy manual Is for day-trading. I always slay in sync with
the SfltP. Everything is written out step by step—how to track hourly, 25-
minute, and 5-niinufe chartSi All ihc1 rules <ire spelled out—-what patterns to
look for when [he hourly is Oversold or overbought, Same I or ihc 25-minute
and even the 5-mmute chart.
MONEY NEVER SLEEPS Mkliacissys; During the ihiy, the boose feds quiet and tooted, EliseftSj1 to become distracts
Or bored, especially wJieri QkFE hasn't been a (m<ki for two ur Iliree ikivs. You can start Watchiiw
TV or go grab a Site toatMdSU^enlyyilU'veinlfisedapcrfccLimUeni—yttursandwich costmjfl
s] 00.1 fin[l all tlusu little vvcakiicsscs. n(luiUi(jii dcficil innybt', so I plug them up to avoid ml3
ing ;i perfecDj good trade, to deal with tlic abstractions on slow days, J created iin alert In
MetaStoek in remind me when it Is thne u* scan far setups.
I $joi tills audio.wav ilk' from lIic movie Wsili Street: The phone rings and Gordon
siiys, "Money huvlt sluqis, pal: tliis Is your Hofceup cbU, £$ to work," 1 attached it to ray G
EiiiuuEe S&P chart, and ii goes off ai thestaii afcveiybar. [f£beS&Fisaf ;i turning paint, I
l» work, otiierwise I tj/nore it until it jjoesoll".i^iiu five minutes I;iUt.
Even with day-fjadingi I quickly go through the sheets in my manual—
rstj the list of patiemsi then the second page with the rules, such as "Always
use limit orders to get in and market orders to get out." These arc all based on
past trades that went wrong. My goal is to continuously repent what I did
right, and follow my manual leads iu mure consistent Erading,
No rule can make you place the trade; you've got to have the nerve to pull
the trigger, [fa stock looks almost perfect but something is missing, walk away
and do [Hit heat yourself up if it turns out to have been :i good tmde.
The last sheet in my manual is on how to close the day: Enter the trade
into Quickeni put it in a notebook, and write a little note to finish the process.
Once you get into the habit it is not much work, taking five minutes a day. I
kick myself that 1 did not sun doing this five or six yeans earlien I woulct have
done much better, discovered mistakes earlier.
Right now the big thing for me is to be consistent. My manual is now
complete lifter n yean The goal is to be <rs robotic as possible, follow the
manual day by day, manage the risk, and be very consistent Not miisiny anything
rs hard—when the market s\ny$ choppy tor a lew days, your attention lapses.
Then (he market traces a clear pattern, but if you miss one day in swing tradingi

Chapter K Michael Brenfce Ml
flic entire month can be shot The market turns and now you have to chase the
!rcnd—i never do that, it is too risky.
In ilic morning I get my coffee, turn on my monitors get the manual, and
go through il^ steps. 1 treat it like a business—arrive in the morning turn on
[he lights, call the customers. It can be a very hurins?, routine. ^specialty when
volatility h very low, and I can spend days without finding any setups Lo trade,
poing both swinj>-trading and day-trading keeps me more alefti even though
ihal wav file sometimes drives me crazy.
In day-tmdtng you have tn stay on your Lues; if you're not there within
sounds, you'll mis.1; it. I'm trading for 20-ceni moves and risking 10 cents. If'
I am 5 cents late, that trade is not worth taking; Iris not worth risking 15 cents
tc make 15, Some days are very boring, others exciting. When it gets too
exciting, when the he;ir[ starts pumping, something is wrong; do not lake that
tr;ide> sU'p outside for a bit or fresh ,iir. 1 only trade weD when I do not feel
excited, elated, or fearful—Mark Douglas calls it heinj- "in rhe zone."
Becoming excited is usually ;i hud .sign.
YouVf ,sten Star Trek and know how VulcanS arc—logical, no fear, no
excitement, stay very cooi, very calm. I once joined a day-trading room at a
brokerage firm. The manager pointed out ;i guy and said, "He is OUT best
trader and the dullest personality." Of course you want to make money, but
you have to treal it like playing a video game for points. 'Yo be successful in
trading, you have to rcprogram yourself—gel rid of greed and ("tar, become
us close to a robot as possible, hir me ibis has been the hardest part of
trading; it's very hard to deLadi yuurself from the money and think or it as points
in a game.
There is a non-glamorous side Lo trading—isolation, no coworkers, being
cut off from people. You do not meet new people like everybody else, through
school or work. People who go to work, pay for dry cleaning their business
clothes, and sit in traffic may envy you, but you have to make li much higgtr
effort to gel our and abour. The way you look at money really changes. You
think of spending £25,000 to buy a car, but then ask, "How much income will
1 lose? Is that car worth the loss of income?"
I am in the house all week; nil I do is trade, sleep, and exercise. I need lo
get QUt I want lo gel into feiici^—meeE people and do a sport that's fast and
aggressive and may help with trading to some degree. I may take photography
classes. My next step is to get my lift1 back on track, to have a life otherwise
yiw burn our no matter how much you enjoy [nitling. On Fridays [ wonder,
"Bummer, what am 1 [loiny In do for the next two days?" But on Sunday
nijjhts 1 led exuled. If I start dreading Mondays, I'm in trouble.
Kimberly is waiting quietly but nervously; she h not comfortable with the
risk bur trusts me and i^; very supportive, ff your wife is not supportive, forget
it Yuu have your own demons, and if your wife adds to that, you definitely
need to make some adjustments—stop trading or the other way. The pressure
a^iinst you sabotages trading. Having another source of income hdp.s while
you're learning to trade. The less pres.^ur^ you have, the mare likely volt are to
do well.

142 Bntrtefl&Bxits
TRADE 1
MICHAEL'S ENTRY
lllllllll
Illlh
■'HIM1
X ^
ll.llllll.
r
''IN
1101.33
109Z.5B
ioaa.79
-1.11
1G.35
-10.01
Upper pane: Hnurly candlestick chart witn two seta uf Srjlllnger bands usmg dflfaull settings
C2O-MA with 2 0 standard deviation). Light grey hourly, dark grey daily bands-
Red line—20-bar simple moving average. All my MAs are sirnplp—altar missing
several trades with LMAs, I experimented with simple MAs and stayed with
Second pane: MACD-Histogram, 12-25-9
Third flane: Stochastic, 8-3-3
Fourth pane: Momentum, 20 bars
YHOO
I look for day-trades by tracking the 5&P—firs! the hourly, then the five-minute chart. II
they give me a signal, I toggle through my list of 2fi day-trading stocks to find the one
whose pattern is the closest to the S&F to put on a trade.
The hourly S&P looks like it is at a turning point. Tt is oversold, with a double bottom
,it the lower Bollingcr band. Stochastic is oversold, MACD-Histogram does not have a
perfect positive divergence bul is still diverging a bit. Conclusion—S&P may be at a
turning paint.
The five-minute chart shows a double botlom into the lower Bellinger band. It is not
a perfect bottom—the closings on the two lows .ire not exactly the same. IF the second low
is ihe same or lower than the firsi, that divergence is good. If it is higher, that could be
bad—ihe win/loss ratio ta not so pood on those trades. I am overlooking that and letting
it slide because the hourly looks so good.

ChaptcrS Michael Brenke 143
' 1000,75
Tiii'iT
'\\
9.C)
■III"1
.llh
A
.JIIIUUuijuul
0.06
'.' i.ii .■ i i
-LED
Stochastic is also oversold
and making a higher low
than -a\ lhe previous Inw.
MACD-Hl^tngram looks like
what I want to see in a
clfvergence. When Hie
amount by which it drops
below Wii2 j£cm line is le^5
than .he amount by which
it went above Chat line, I
consider that a strong
divergence. Momentum confirms
this diunrgpnrp—you rin
not have to squint to see
It. After seeing these two
Charts, I decided that the
market was at a turning
point.
■ illlll ■■ill
That day Lhe last slock on the iisL was YHOO, and it almost Identically matched the
l, har by bar. On the five-minute chart prices were hitting the lower Boflinger
band, Stochastic was oversold, MACD had ii nice divergence. El ciime up high and did
not even drop below it^ zero line. The mumeniam confirmed Lhe bottom, and I eniered
a limit order one cent above llit: hifth of the last bar, at 34,70. My stop was at 34.5B.
My day-trading list has
26 stocks, arranged alpha-
betically. I toggle Ehrough
them to find the one whose
pattern is the same as the
5&P. I trade stccks rather
than ETFspSPY. or DIA
because they are too expen
sive and do not run as tar
as stocks with the same
patterns.

144 Entries & Exits
MICHAEL'S EXIT
My targei was at 35.20,
ntar the old high: the
hourly MA was just above
that level, a pntanliaf
resistance area. The stock
fluctuated after I entered and my
heart started beating, but
the stork took off. After it
made my normal 20-cent
run, I deviated from the
plan find sold half. I did
this even thnugh double
bottoms on hourly charts
tend to produce better runs
than just five-minute
double
I wanted to hold the other
half until it hit rny target of
35.20, At 35.10 it started
starling, the next bar coufd
not go above the previous
bar, and that's where my
emotions got in.
YHOO
35.122-1
i ■■ i ..,,,.■ IIIII IHuljuulJLJULIj ..
ST.>fli.T;iirfftj:».3i .
mil.
0.04
YHOO
Bought
lil II UN I

Chapter 8 Michael Brenke 145
ini'l explains: I bave two accounts—;ibuu! llim.1 -qiiEirlLTsufmy money is in swln^ -(ratling,
rrsi in a day-trading account i keep compaUcfi their jHonuiijiliiy—wirkly P/L, fees, iirt P/I, ]
grade both accflunls-Saj then: wen? five doable topsin my universe or trades, bun s;iw ;md
only throe—I corajiare [he number of setups thai tin- market presented and (In? number
l traded- MaybE J didn't trade because I yoi in Llic computer late or was j little ntmras, <i little
fflitintfly- Eadi pattern hflB a nmnc and I wantto see wiicllierrni doing iJie best job by Gitdilng
c^oy pattern. Some months are terdbl^Icatcb only a half or a third of patterns. If there are vi
jettons |)t:r muntli, Lhcn my trnded score should Ijl1 12. with Ilit^ same winfloss ralio. Some
couhl nu[ Jjl- bdped—j dental appotDtraent or the DSL was doun, liui ihn£\ whai \'d
:] perfecl montluTlic fad Lhaf 1 mada a decent profUisnoteaouiJlj—rvegot tobivea
GRADING MYSELF
YHOO
i i hi; in 11 m fZU. Cl_
™ Illl
^iL-icli.y^ti.jfHjjtj ^
\\ Illl
1
Bought
V
.....iiiHJUj
ii.
Ib.l1
I was lucking myself for not holding the entire
position which would have made it my hast trade in
montliy [ fell nervous about a reversal, chickened onu
andgoiuut of the trade early at 35.05. ll fell almost like
^ conspiracy of other traders who waited for me to £ei
out—as soun as I sold, they hit my target. Had 1 held,
it would have been a $1,000 Asy in [essthana
was a bittersweet trade.
^L 1 LJ /V I 1C 1
Long YHOO
SUMMARY
Bought 10/25/2004 @ $34.72
Sold first half @ $34.92—profit $0.20 per share
Sold second half @ $35.05—profit $0.33 per share
Position profit=$0.2G5 per share

—^
146 Entries
TRADE 1—ENTRY COMMENT
Michael makes his decisions to Enter trades on the index charts and implements Them in
individual blocks. I prefer to take each instrument individually—if the indexes give me a
signal, I'll trade index futures, and if a stock gives me a signal, I Will Lrade that slock.
Clearly, the markets arc interrelated, and I have to keep an eye nn one while trading tliL
other, bui ultimately Each decision is separate. I am not suggesting that my approach is
right and Michael's is wrong—far be il from me to criticize the method of a successful
trader! Markets arc huge and complex, and serious people can approach them from
different angles.
I will fallow in Michael's footsteps as 1 review this trade, looking ai the indexes befog
turning to individual stocks,] will use the25-mifluteand 5-mjnute charts because the Rule
of Five, first articulated in Uttdingfor u Living, states that charts in multiple timefraroes
should be related Lo each other by a factor of five. I think that 60-minute and 5-minute
charts art a little too far apart
On the 25-mmuLe chart the Impulse system is blue, allowing us to go either long or
short. On the plus side, prices are in the undervalued zone below (ht lower channel line.
They have broken below the low that occurred three days earlier, and their decline appears
to have skilled, reminding us tu "buy new Iowa and sell new highs/1 There is a bit of a
bullish divergence in die Force Index. On the minus side, both moving averages are still
trending down. Overall this 25-minute chart of the S&1} docs nor look terribly exciting, but jl
is more of a buy than fl sell.
The 5-minutc of the S&P shows thai the previous day was a "trend day" with prices
declining all day long in an orderly step-Hke pattern. Today prices opened sharply below the
previous day's low, shaking onl weak holders. Hears ctjuld not follow through on their g^insf
and prices had stalled. There is a dear bullish divergence not only of MACD-Histogram but
also of MACD lines> which we see less oftei. The 5-minute chart confirms the message at

Chapters Michael Brenke 147
Ehe 25-minute chart—the bears arc exhausted, and in ;i two-party system this menus that
the bulls are ready to grab control. The likelihood of a rally h much greater than Hie risk of
j downside move. Ef one is in trade this market] one has to look ai die lung side.
YHOO
is quite right in saying that the pattern of ihls 5-minute chart of YIIOO
perfectly Cracks the pattern of the S&R The stalled decline and the bullish diver-
point out that a rally is much more likely than a decline. At Lhe right edjje, the
'■"pulse systtm has just shifted from red io blue, removing its prohibition against buying
allowing us tr> go Jong. This final signal tells us there is nothing else tn wait for—if
yuu re bullish, now is the lime to put on e trade!

148 Entries Be Exits
TRADE 1—EXIT COMMENT
YHDO
;
if
!
i lUl
j«
-rl43
nan
□ I'M
ijiur
'~zz
-u rcm
cum
nan
Michael is a very cautious trader, Steadily grinding out .small profits from his day-trades.
Someone who likes to trade larger swings might have wanted to hold his position a little
longer. At the right edge of the chart prices arc starting io accelerate to the upside, with
bars becoming longer and rising at a .steeper angle. MACD-Histogram is also rising>
confirming the rally, withoul a single downtick, and il has not yet become extreme. MACD
lines hnve just crossed abuvc zero, Still at a relatively low level, indicating plenty of room
overhead Prices are nowhere near the overvalued zone al ihe upper channel line. There is
nothing wrong with taking profits on half the position, just as Michael did, nor would
there have been anything wrong with holding a little longer.
Km
■an
flCO
CI3J1
ilfltll Mill.., MJfljE
1=-. 1L/J? IBH IBS <t« he IT* l-'i -iCS -.3^ »K
DUX

Chapters Michael Brenke 149
takes profits on the second half of his position in anticipation of future
, rather than any current signs. The rally is clearly accelerating, supported by the
s' In the longer run, this niie of aECent cannot be sustained, bill <is Iohl; as each
ew bar is making n new high, MACD-HlfiEogrom rising, and the upper channel line still
distance away, it is tempting to hold.
YHOO
..,,.. 11 » I-1 ll
Mkhae] did what every professional likes ic> do—he took a biy chunk out of ihe mid-
die of an uptrend He did not try io nail its boLiom or its top. This chart confirms fhe value
of channels for setting targets—prices almost reached the upper channel line during ihe
rally. Ni?^r the right edge of the chart, the Impufse system has gone red again^ following a
hroad [op in MACH-Lincs. Wlicti the market closes, Michael will do bis homework and
prepare his shopping lisl for the next day.
s: In eSl^wlyoD t;rn build a quoIc window, |]u( ililTtTfiit stocks iJicrc, iind Just tng
jjk1 Mirnu^h tlicm, I hi! lliif down arrow key and flic chart romes up inslantly—f tan review 20
jtacks in less than a minute, great for ±\y iradlnf. MetaStotS is much better for fining ti\'iilo-
rations, looking for stocks following your OWD crileria, and iht:y have jjreni technical support
Tin' explorations feature in ['Signal cos£s iin extra S50 per monllL In my opinion, a posttion
(radcr is liL'ttcr off with UctaStocktQid a flay-ir^iJcrwilljcSjgiial. I use both programs.
CHOOSING SOFTWARE

150 Entries & Exits
MICHAEL'S ENTRY
This daily chart of the
has an additional blue
line—a 100-period
average. It is a 20-period
moving average for the next
higher timuframe multiplied
by five—a ?0-week MA
brought over to the daily
chart. The 5&P is oversold
and pulling down. The
weekly trend is up, and
daily prices arc at the lower
Bollmger band, which is
good. Olher gaod signs are
that there arn no bearish
divergences and Stochaslic
is oversold.
RSH
1 look fur I liming points in position trading as well as in day-trading. I like going long after
the market had a pretty nasty dedine. When the weekly and daily charts farm a base, you
get longer runs.
I prefer catching the market at extremes. These Lurns tend to produce good runs
which are nol too choppy. There are fewer puHbadcs because the market has just
complied a large pullback and stops are easier to manage. That's the only time 1 use tlie
Fibonacci retraeenienls. Once the market runs a little way, Til ste where the 50% rdra«-
ment is going to be and hold until there or until the daily starts becoming a litile toppy-
The daily chart of KSH seem* perfect, looks like it bottomed out- It has a double bottom
into the lower Bulliiiger band and Stochastic is oversold, making a slightly higher lou1 thin
at the previous bottom. MACO-Histogram has a very nice divergence. II shows a higher high
at the latest top and a higher low at the latest bottom. Another sign of strength is that MACD-
Histogram rallied higher above zero than it went below the zero line on the latest dedine.

ChoptciS Michael Brenke 151
. ■■■■■
■■■__■■«
II I" I
Mod
■0,69
The weekly chart of RSH
shows an uptrend, the
decline has slopped a! the
50-penod MA (orange).
Stochastic as uversold. Both
S&Pand RSH show v/eekly
uptrends, with RSH being
oversold. Price had touched
the lower Bollinge: band
that week, but the reaction
ended and (he bar closed
shove its 50-penod MA.
I here are two slight
negatives— trie latest price top
is net accompanied by a
higher MACD lop—mis is
slightly bearish. AteD, it is
not a vejy go.icJ signal when
MACD-Histogram 15 so far
below
31.10
J 30.42J2
■MHUUfl
''Illll'
,,, III
III"
ill,
'MM
S
( -Hill
Ml
^13,97
Momentum does not confimi
a diuer^ence but Stochastic
does. Normally, I like MACD
and Momentum to be in
gear; Stochastic is my
second choke. When neither
confirms, that means no
trade. I do not pay attention
to fundamentals in swing-
trading because my trme
trame is too short. I only
stay away it the stock was
very recently downgraded
or the earnings report is
due. I placed an order Eo
enter one tick above the
high of the last daily bar.
My stop was just below the
law made one day earlier.

Entries & Exit*
MICHAEL'S EXIT
I exited the day after I enlered. The S&P pipped down dial day, and even though RSI-S did
not gap, it got dragged down—]l opened lower and kept going. I was extremely
disappointed because it had a weekly and adailypullbackon Bellinger bands, which is normally
a pretty gnnd setup. 1 had no apprehensions and was almost K)0% sure it would turn out
to be n good trade.
What I learned was that the broad market definitely has to be behind you. No matuj
how £ood the stodc looks on weekly and daily charts, when tht- mnrket turns it will taki1
your stock with it most of the lime. That's why you always have to make sure thai the S&P
has the same basic pattern and is at B turning point.
LongRSH
Bought 5/5/20U4© $31.28
Sold 5/6/2004® $30.51
Loss = $0.77 per shar

TRADE 2—ENTRY COMMENT
Chapters Michaelfircoke X53
it feels awkward to look at the daily chart of the 5&P without having Studied the weekly.
The rightmost bar is blue, permitting us to go cither lung or short. Prices had shot up a
day before, but the bulk of signals kans to the bearish side- There was a double top in April
Sib ;i bearish diver^nce of MACD-HIstOgram; (his indicator fell ki u new low a few days
rarlier, confirming the strength of bears and warning of further trouble ahead. BotFi
moving averages are pointing down, confirm ins- a sheit-Lenn downtrend. Force Index has bean
towing lower bottoms at every minor decline in recent weeks, showing rhiit bears ai
editing stronger.

151 Enlrits& Exits
The Impulse system gives an unequivocal "no" lo buying R£H, The rightmost
bar is red, meaning that both the feat EMA and ihe MACD-Histogram are declining- le
dnwnlrend is in gear. This censorship system docs not allow us To trade long against the
downtrend—only to yo shun or stand aside.
With thta weekly Impulse being red, there is not much point in Studying the daily
charts. If 1 wiuit Lo buy a stock, but its Impulse turns red on the weekly chari, I usunlly do
not even bother Looking at the daily. When the weekly says ni> Li going long, it is tinie i0
look at some other stock.
The daily chart of RSH shows several bullish signs: The downthrusts have become
weaker since March, MACD-Histogram shows a bullish divergence, and the last bar has
turned blue. Still, with the weekly Impulse being red, these arc no more Chan early
warning signs; 1 am mil allowed to buy until the weekly goes oft red.
TRADE 2—EXIT COMMENT
Michael deserves high praise for running very fast from a losing trade. As a professional
he docs not stick arovind waiting to see what happens next; he cuts the loss and moves on.
A beginner concocts a bullish scenario and winds up believing in it as if it were a feck An
experienced trader lesis every scenario against rtaliiy, and when the two diverge, he d
the scenario and £oes with reality

Chapters Michael Brenke J5S
"THE 2% RULE SAVED ME"
Ytm can come to trading as a wide-eyed amateur and grow into a serious professional. This
game can be won—but you must survive the inevitable setbacks. You can learn several
valuable lessons from Michael's journey.
Trading education is expensive. The S3,500 per year Michael us^d in spend on
services, including useless subscriptions, was small change compared with the tuition he paid
fn terms of rinding losses. He realized early on that his capital was his window of escape
and that every losfl pushed on that window, dosing It a little tighter.
Michael says iluM what saved him during his period of groping in the dark was the
discipline of the 2% Rule. This Rule, first described in 'trading for a Living and elaborated in
Come into My Trading Room, states that a trader may noi risk more than 2% of hlB capital
on any given trade. Of course, you do not have to risk 2% on every trade—you're welcome
to risk less. Michael cautious and conservative, risks no more than 0.5% of his capital for
many of his trades-
Suppose you have a $100,000 account. Two [jerceni of thai comes to $2f000. Say you
uanl in buy a slock for $15, with a target at $20 and a stop at £13.50. This stop puts $1.50 at
risk for every stock that you buy- Since your maximum permitted risk is $2,000, it is easy to
calculate what maximum number of shores you may buy. Your actual size should he less than
the theoretical maximum, since you'll have to cover commissions find perhaps even slippage.
Following the 2% Rule protects you from disastrous losses, the shark bites that destroy
most trading accounts. Greedy traders want to buy a largo position and make ;i killing. The
2% Rule saves the trader from getting killed.
Another valuable lesson we can learn from Michael is that he started becoming a suc-
adcronly after he began keeping good records and rigorously analyzing them. The
*% Rule ensured his survival, but his equity continued bouncing up and down until he
started keeping a Trader's Diary and learning from his mistakes.

156 Entries Sr Exits
Back in the days when 1 was actively practicing psychiatry, a new patient would
come in with a serious drinking problem. If the patient disagreed with that djagno
sis, I would not argue hut make a simple suggestion—keep drinking as you did before but
write down every drink that you take and come back a week later. No active alcoholic cqliIH
ever keep notes because it look too much fen out of drinking. A few people came back a week
later with notes, saying that I was right and ihcy wore ready to wurk on their problem. Gnod
notes allow people to learn from their experiences and start turning their lives aroiuut
In trading, niost people rush forward without reviewing whnI they've done, not
learning from their experiences and repeating their mistakes, i always say to my students, *itU
perfectly fine io make mistakes; it Is part and parcel of trying new things: It is definitely
nol okay to repeat them.11 Michflel'fl trading diary and other records allowed him to break
out of the vicious cycle in which many traders are trapped.
When 1 first called Michael to schedule our Interview, he told me he doubted we
would gee enough material—he was a man of few words who spent most of his lime ahine
in front of the screen. 1 chuckled while editing Ilk chapter, one of (he longest in the hook—-
during his years of soliLude he had accumulated a torrent of ideas. And of course, Michael's
level of sheer mental toughness makes him stand out When 1 think of that ,wav file going
off tvery five minutes, I'd probably put B hammer through my computer. You have to find
,i style that works for you—;is Michael has.
l frowi
The Toughest Challenge
I've Ever Taken
The journey from making your first irade, knowing nothing about
the markets, uj the point where you're finally making consistent
profits is Lotxg and hard. You go from feeling like a yen ins one day to
a complete moron the next. Each time you think you've finally got it and the money is
abuLjt to roll in* the market lets you know you still have a long way to go.
To imagine iliat you can start oul knowing little or nothing, buy a few books, aifemJ
a seminar, and then a year or two later trade for a living is like thinking you can buy a sel
of golf dubs (whenyouVe never played in your life), take a few lessons, and compete with
Tiger Woods in a year.
Looking back OVef the last 1H years, 1 wish I had kept detailed records from the beginj
ning and taken the concept of trading psychology more seriously; Then I probably wnulo
not have experienced so many aggravating and difficult years. Herts what I found to be
most helpful:
Firsr, don't quit your day job unless you have another means of support. However long
you trunk it is going to take until trading lor a living, triple that time. If you Lire
underpressure to turn a profit tn pay the bills, you can kiss that trading account good-bye.
Keep good records; don't wail for five years like 1 did. Prfnl a chart of each trade;
the entry and exit points. Also prinl ;i chart of what the SAP did while you held that stock.
It coat me dearly to learn that musl .stocks follow the market, and going long in a down
market is a hard and risky way to make money. At the end of each week or month, tsu*"8
close look at nil tout trades. Search for any recurrent mistakes—arc your trades [n sync
with the market? Were there any divergences working against you?

Chapters Michael Brenke 157
You need a coherent trading .system with rules on when to enter, where 10 place stops,
,^n to move them to protect profits, and when lu exit. Buying XYZ because it bounced
off this level last month, and ZYX because someone on TV said it was a buy, is not a sys-
Eg). When you make different trades for different reasons, it is hard to figure uut what
[oifrfi doing wrong with your losers.
A bE or people think [hat paper trading IS a waste uf time, but they're missing its most
important point. Paper trading helps you learn to spot the pattern you plan to trade as it
jptfelops, 'l helps you gain confidence in your system so that you can pull the trigger on
Bur setup. Finally, it helps you see how youisystem will perform in different market con-
js. If your win/loss ratio for paper trades is 70%t and real trades only 40%, then the
p is not your system, it is your execution.
With no emotions getting in the way, paper (rading is a great way to monitor a syfi-
ftfll, Once you know how it works, you can start will: real mnney, which will make yon
learn about the psychology oFtrading* You need a system that produces more profits than
fosses and the psychological control lo implement it. You need both—there i£ no way to
consistently make money with one and not the other.
Start trading small positions. When } was in a rush to moke money and traded too
|J]rge, I could make or lose in three hours what look me two weeks of working to save. That
was ^T intimidating. Smaller positions will reduce the inevitable bum rate nn your
account while you're learning. It is :i Int easier to hang onto a position and watch il play
itself out when your stop limits the potential loss to only $150 ami not SI,000. After win-
trade or two, increase the size by a small amount.
Market volatility is constantly increasing or decreasing, Different trading .systems
k better under different market conditions. If your system no longer gives you Rood
] don't throw it out; wait for condiliuns to change back. I've never found a pattern
or method that gave me ihf same number of setups every month—some months are
always busier than others.
Learning to trade for ii living is preity similar to starting your own business. If you
know enough about a business and have enough Capitol to get through the first years when
jidii'm not making n profit, yuu stand n chance of making it. There arc only two big
differences. The first i.s that in a business your emotions do not play such a big part because ihe
money is not made or lost so quickly. The other is that when business lakes a turn for the
worse, you have to £et in there and work harder, more hours, make more sales calls to
bring Che revenue back up. In trading, there arc times when the best thing you can do is
sit on your hands and do nothing. This was hard for me to accepi ijt first. What seems like
Doing nothing is actually doing something—preserving capital.
Learning how Lo trade was by tar the toughest challenge I've ever taken on, but 1
couldn't imagine being happy doing anything else.

Name: Kerry Lovvorn
Lives: Scottsboro, AL
Previous profession: CEO/business owner
Trades: Stocks and futures
How long; Since 1995
Trading account: Medium ($250k-$lm)
Software: TradeStation for trading,
TC2005 for scanning stocks
Traders' Camps: Caribbean Camp in 2004; Advanced
Camp in 2005; Spike group member

Kerry Loworn
A Squeeze Play
I mot Kerry in the diatroom for traders that my firm maintains on the Internet, I liked
several of his comments, e-m-iiied him, and the following y<?;ir we met face to face
when he came to our Traders1 Camp in [he Caribbean, Kerry seemed attentive but shy—
until one night, during a piirLy at a It^iil nf.stuuriinl, he lei it slip that he [iked singing. We
took the microphone away from the hand leader and gave il In him. the musicians hit the
chords—and Kerry forgot his lyrics. I teased him afterwards that since there set1 med to be
no future for him in profess limul .sinking, he bad no alternative but to learn how to triide.
We continued to e-mail each other after the Oirnp, and when I started working on this
book, I invited Kerry to New York for an interview. He Lame with his wife and stayed for
several days in <i nice hotel near Central Park. Manhattan is a great city for walking, but
many oui-of-[owners feel intimidated by its size and pace. Kerry and Karen, coming for
the first time from a small lown in Alabama walked everywhere. On the firsr evening Kerry
took the subway to my apartment for a campers' meeting and returned the following
morning for an interview.
Ever since I was a kid I was fascinated with numbers, business, big uties, VV,ill
Street. 1 was born in Gary, Indiana; my dad worked in the steel plants. When J
wassL\,anewplantstartedupback home in Ahibarna,and the family returned
south. After working at that plant for j while, my dad started his own steel
fabrication business. We all grew up around the steel industry :incl worked for
my dad.
In lyHfi my dad sold his business. My ambition was to be a business
owner—I wanted to be independent and so in 19R8 1 started TELKO. We
fabricate structural .steel for buildings, primarily restaurants and retail chains. We
huve grown over the years and have 35 employees—working with them is
probably ihd besl p;iri of the business.
All I knew was Lhc steel business, but 1 had always dreamed that one of
these years I'd figure out how to invest. I LhougliS you bought a stnek, held it
for 50 years, and accumulated massive wealth—buy-and-hold was all I knew
about. My dreams were big, my expectations fnirly extreme. In the l'J[.X)s I
started a retirement Lu_Luum and turned m advisnrs and brokers who had me

160 Entiies&Ealte
buy mutual hinds, Hie first two funds I bought no longci exist—and they
beep lelling you mutual funds are safe. I put a little money in but gol even less
back—and that was in the early '9(h hull market!
When 401k came nur, we created a factory plan, and in 1997 1 bought my
lir^i individual stock, in a company that was our largest client ai the time. The
slock had already quadrupled, and I bought near the [op, then waLched ii slide
from 43 to 9. When it fell to 9. I .said, "ll\ cheap, let's double up." I actually
iriplfd ii[i jincl watched ii go from 9 to 25.1 had no clue what 1 was doing* Even
though 1 eventually made a liftle money on iL I wailed from 1997 lo 200Q (o
make about 31% on this investment. After selling at 25,1 watched it go up ro
40, and m<ide a commitment to learn this market game.
During this Lime, in 1999, the market was going sky-high, and everyone
you came in contact with WHS buying stocks. Luckily 1 did not start in 1999—
I was Still too strapped to the daily business, working 15 to 16 hours a day, Tht?
year 1999 was probably my most stressful year- we wenl through a total
management changb a Large client went bankrupt, I was going through ii massive
burnout. If at that time anyone had offered me one dollar for that business, 3
would hav« taken it—-but I would not just get up and walk away. 1 have a
plaque En my office about quilting—I woutd not quit, would nut stopt unless
il was on my own terms.
It was the worst lime in my business life. I wanted out .ind started
questioning what 1 really wanted to do. That led me rn rhe markets, reading books,
and one of the first was Trading far a living, in 2000. As 1 kepi leading, my
passion grew—I felt as if the markets were made for me. I loved the iden that the
markets were what you made of them; there was no one else nn whom ro
depend. I decided to rebuild the business, erriile a management learn, and
manage that team and company finances, while diversifying into other ventures.
As the markets started selling off hi 2000. I started monitoring stocks,
expecting to find some good buys, In August 2000, 1 opened my firsi online
brokerage account without realizing thai the educational journey was just
about to begin. The markets will Leach you many tilings about yourself. 1 had
read a few book.s bui did not know anything- I started with a small account,
125,000, which hi the first nine months simply bobbed up and down between
slightly negative and breakeven. I started feeling more comfortable with
trades—but ail I knew was trading long. There we were in one of the fiercest
bear markets ever, and I was trying to learn trading on the long side! Shorting
seemed mean and evil, as if you were against something. Alter y/i], my
account was down to about $7,000. I did not turn on the screen anymore—
fust waited it out. The market bounced back after 9/1 lk and as 2001 came lo
an end, I closed all my positions and wiped the slate dean, to start anew. I
thought a fresh start would be good for the mind.
In 2002 the bear market continued, and I was still trying to make long
trades, struggling to break even, running my account down 15 to 30% and
[hen trying to make it back. 1 Matted going to some or the trade shows, got into
your class in Vegas. 1 was starting to establish a method for myself—using
Force Index, moving averages. I tried everything, ready bit of everything, gave
my share of money rn Mr. Market. E would read about a new indicator, apply
it, mess wiih the settings, look for the golden secret. Now I laugh when I think
1 used to bet ie ve there was a secret to this. You look at a chart, think of a dozen
different strategies, and theyall contradict one another; you do not know what

Chapter9 Kerry Loworn 161
to do. Uy that time I was learning to short a little bit—a good time to do it, just
as the bear markel was coming to an end!
In 2002 I came closer to break-even, lliilL in Lhe latter purl of thaL year,
started formulating a regular method. At that time I felt I was coming along
with my own ideas on what to do, not just copying someone else. You are not
going to read a book, open an account and be successful. Thai's what
everyone wants—pay $50 for a book, program it into a computer, and have it spit
out dollar bills while you sleepy in 2003 I started concentrating 00 my own sys-
tt?m> and that's when my trading turned around. I still enjoy reading other
people's ideas, going to trade shows and conferences, and listening to what
Others have to say- Now if 1 hear someone and it does nol make logical sense
in the lirsr few mioutes, I am not Interested.
1 read and heard a lot—from fakes to legitimate people, then put together
what made sense to me. One of my favorite trades rs when a stock is acting very
quiet, boring, in a tight range, with little activity—1 try to position myself in it
because it will often explode. The trick is to figure out which way it will go.
Riding it fora few days is very gratifying—you take what the market offers and
then go elsewhere ro look for a similar setup. The question is not whai
indicator to use, what lines to draw. The question is within myself: "What do I want
to do?" It is like going to college: "What do I want to do when 1 grow up?"
What kinds of trades are you going to make? When you look at the charts
and do nni know whai you like, how will you recognize the trade when it is
there-1 And WGrflt of all—when there is no trade, you'll find one. People want
to make money but do not know what they want from [he markets. If I am
making a trade, what am J expecting of it? You lake a iob—^ou know wlmi
yinir wages and benefits are goSflg to be, what you're going to be paid for that
job. Having a profit target works better for me, although sometimes it leads to
selling too soon.
1 now put a signature on the bnllnrn ol my e-mails: "1L is hard enough to
figure what the market is going lo do. IF you do not know what you arc going
to do, the game is lost." How many times do you put on a position trade, then
an inciaday signal comes in, and you sell? 1 bad to figure QUl whai I wanted to
do, what my personality was. Matching your trading lo your personality is the
critical part of success. I like quick trades, and find it difficult to tide trades for
a long period of time; I do not have the patience. It I get in at 10 and the stack
runs to 15,1 do not like to ride it down to 3 2r even though the bit; trend might
still be up.
People talk of being unemotional, but the market is a sea of emotion—It
is all about how you control those emotions, [ thought successful traders had
good trades all the time—bul in Irulli the main feature of a good trader is how
he bounces back fioni his mistakes. Just look at a great athlete like Michael
lordan—how many shots did he miss? How did he bounce back from his
errors, failures, and mistakes?
Karen is very supportive ol my hading ;ls well as my business. Slit? h;is
always shown 100 percent faith in what 1 do. She is also my biggest critic—she
dues not go along just to be supportive. When you're fixing lo do something;
thai is not good for you, a true friend will tell you. When 1 am at my worst,
she is at her best. She has never complained about my trading. She has always
laid me, "Set your mind and go for it, you can do iL"

162 Entries St Exits
TRADE 1
KERRY'S ENTRY
LAYN
Upper pane;
Second and third
Impulse system (11-25-8 With 12-EMAh Dotted line—12-vreek EMA,
solid line—25-week t-IMA.
Hsg dual MACD on weekly charts-- two panes wiLli different settings
mid-pane 11-25-8. bottom 19-39-8. Green if MACD ticks up, red jf it
ticks down.
LAYN
I call this a"squeeze play." We've goi :i atock En an uptrend, I lonkfora pulibackto the fast
EMAx accompanied by shrinkage—smaller nnd smaller ranges during the pullback, while
the Impulse system does not turn red, slays blue during the pullback. I look for an entry
when the ranges arc the smallest since the pullback began. If the ranges expand, I become
leas interested because the risk becomes higher. This is B very low-risk entry—you have to
get in before the stock moves—you must anticipate bui tlie risk is minimal.
The setup involves a redaction in range and price resting on support—1 learned this
from David Weis in your Camp. What is Lhe support levet during this pullback? The lowest
low was 13,53—if that gets bmken, I definitely want to be out of (his trade. A break would
toll me that this puDback could develop into a turn, and 1 do not want those lows violated.
The pattern at the right edge is like .1 cniled spring—the stock is in a tight coil ready
to explode and strike. I check to see- tfiat ihere are no major divergences of MACD and then
go to the daily charts to took for an entry. What I want out of this setup is a very low-Ciss
trade with Iks than a dollar stop. It does not always work; hulfuf breakouts tail.

Chapter9 Kerry Lowoin 163
-■"JJ
||l ■ ->i.t|||T|| |
||.r lull !lU..|r<|.lllll.
12 B
Upper pane: Impure system til 25-8 with 11-ddy EMA), Dotted line—9-riay EMA, solid line—
22-dav EMA. Grey envelope is a 2 7 standard deviation channel baseri nn a 22-day
EMA. I lurn Bollinger bands on and off tn see hnw light the coiling is—how wide are
Bellinger bands in comparison to puce bars.
Middle pane: MACD Lines and Histogram 11-25-B
Lower pane: Volume bars and Force Inde*. Volume bars arc green if the stock closed up for the
day. red if closed down, blue if unchanged. Force Index with 11 day EMA and a zero
line Purple line -63-day EMA of volume because there are 63 trading days in a
quarter, and big funds and bj-nkerages deal on a quarterly basis.
I have been waiting for an entry, and ihe pickup in volume alerts me. At the right edge
volume is above its G3-diiy average—it has started picking up in the past few days. The prke
barely moves oui of the BoLlinger bund range. With all this volume, pikes do hoe move, and
so even with the day dosing down, it appeals it was not sellers who were in charge, but
buyers, who were accumulating. The next day 1 puLin my buy order. I like to buy at the bottom nf
the range—1 do not like buying breakouts, when the move is already on, 13.R5 and 13.83
were the laieM daily lows. 1 want to buy close to that range, but you never know whether you
will ger thai entry. It is important to get on the train before iL leaves the station,
I enter on May 20 at 14.06, placing a slop using the daily chart The lowest low during
Lhis consolidation period was 13,53—and I like to put my stop about 11 cente lower. 1 use
this number to keep me out of the noise range. 1 dn not like even numbers—doliar> 50
cenlSi 10 cents. I like Lo put my stop a dime below [.lie low, and so I add a penny, make
"t 11 cents. If that low breaks, it will be ;i sign of trouble. I try to avoid placing a stop
where everyone else's stops are going to be,
I look for a Squeeze on Bullinger bands, and then take them oui and go to a
regular channel. The target for Lhis trade is at the top of the channel. When the bands
squeeze, this baby is ready to explode. Whkh way? We established that on the weekly
chart where we saw nn orderly pullback within an uptrend. Meanwhile musi traders lost
interest in ihia Mock—il is lying flat.

164 Entries & Exits
KERRY'S EXIT
-I'M
—['llm^.l-li-j+Hiijir!^
MS - J '
Bough!
TRADE SUMMARY
Lons LAYN
Bought 5/20/2004® $14.06
Sold 5/2G/2004© $16.29
Profit=$2.23 per share
We're in—an explosive volume comes in the next day, on May 21. I decide to hold it over
the weekend. The next trading day. May 2<l, we sec a continuation of enormous volume,
prices close near the high of the day, hilling the top of their channel. Thai is my target,bui
I do not want lo automatically sell, only raise my stop at this point at least to break even.
With such an explosive move, a stop below this day's low would protect a small profit The
trade is a free ridfi from here. This type of move can last tor several days.
The next day. May 25, we exceed the top of the channel, and on the 26th the entire bar
[s out or the channel, bui prices stall on lower volume—and that's when I sell, A narrow
range out of a channel is a typical sign of weakness. There is a saying: "Sell when you can,
not when you have Co," I dccldf lo close and see how the pullback arts. And that's the
beauty of the EMAs—often you see a breakout, then & pullback lo (lie EMA, and then the
move continues.
1 had a setup, managed the trade, aimed at the top of the channel
and got a little extra. [ risked 50 cents and got two dollars out of it. That
was a 4:1 rcward-lo-risk ratio. 1 can be wrong three Limes with a trade
like this, win once, and still maintain a small profit. This was not the
home run that many beginners look foi—but you can hit a kit more
singles and doubles. 1 used to fall into the trap of thinking, ''Let me see ho|
far this can go." Thai's where you star! turning winners into losers. A felV
days later this stock was back down ;it 13 dollars.

9 Kerry Luvvorn 165
TRADE 1—ENTRY COMMENT
-CO
■■
LlLl.l
HID
J UI
-_
There are many ways to analyze the markets and to trade them. Only a beginner can be
arrogiini enough to say that hie method is good and others' methods are had, A seasoned
pro surfily has lived through enough times when his opinion was proven wrong. This is
why experienced tinders are broad-minded and respectful nf others* opinions.
I would liill asleep watching ii tight trading range hut have no arguments against
Kerry's approach. His logic is elegant and consistent, and his method works for him. On
my weekly chart, the Impulse system offers no objections to buying here. The weekly bars
arc blue, allowing us to go long or short. Prices are in -in uplrcnd bill had pulled back EO
value in recent weeks. MACD-HrsUij-r:im is at li low level, consistent with price bottoms.
What Is a "Tick"?
You suggested placing an order one tick above or below the
recent extreme price. What does "one lick" mean? —Trader
A Lick is the smallest price change allowed in any given
market. When you trade U,S. stocks, a tick is usually 1 cent. When
you trade grains, it is ^ of a cent because those markets still
trade in eighths, and so on for any market. —AE

166 Entries & Exits
"Lita watching paint dry"—tor almost two mouths the average height of j daily bar
remained under 20 cents, with ihe total range for the entire period under a dollar. Ii take,
3 highly disciplined and focused individual lo follow tliis pattern day in and day out,
scanning for signs of an upcoming reversal.
The Impulse system is fairly non-contributory during such tight ranges—up one day,
down lilt? nc\l. MACD-Histogram is snaking around its zero line and Is not really useful
here because it lends to give better messages when it is far away from its centerline, Only
Force Index has started to show some signs of lite in recent days. Ai the right edge at the
chart the Impulse system is green, permitting us to buy.
TRADE 1—EXIT COMMENT

Chapter 9 Kerry Lowern 16/
Kerry's patience has paid off. The stock has exploded from its channel, covering j
listanee 'n '^rct ^ays t'lan 'c '™^ 'n ^c previous three months. Kerry's system obviously
■rtrks fa[ him. ^E r^c r'Kn( edge of the churl, all indicators are in gear, the Impulse is green,
I fibber-band overextended to the upside. You could wait to see how Jar th^ move will
■iirry before taking profits or you could say that the picture looks just perfect. If iL cannot
he improved, the stock should be sold, which Is what Kerry did.
jstotice KerryYs calm toneashegets out of this trade. There is no gloating or beating his
chest- Nor is there any complaining about the money left on the table because of selling too
soon. The man has his system, follows it, and calmly accepts the consequences of his actions.
Part-time
I lost about $25K out of $50K capital in day-trading back in
1999, The trading house insisted we all actively trade, and I
think I wasa victim of overtrading without having a plan or
system. I now earn a good living, but eventually want to get back
into trading. Do you feel there is any case for part-time trading
smaller amounts while having a flexible career? —Trader
I think part-time trading is a very viable option—if you swing-
Lrade rather than day-trade. Choose a few stocks that swing
well and track them day In and day out, trying to profit from
moves that last several days. You can do that without sitting
in front of the screen all day. —AE
A Tiny Account
I am a college student, planning to invest my saved money in
the stock market. At this point I have saved $S,Q0Q. Could
you tell me what is an adequate amount of money with which
to start trading? —Trader
First of all, congratulations on being a very frugal student!
$8,000 is a good amount to invest, but not enough to trade.
The reason is transaction costs. Lei's say you pay $20
commission to buy or selL A single roundtrip will cost you $40r or
Vz% of your account. If you trade once a week, by the end of the
year commissions will eat up 25% of your account, creating an
insurmountable barrier to winning. Invest your money for the
longer term and continue to accumulate capital and study the
markets. Also, at your age, you may want to look for a trader
trainee position and learn on someone else's dime. —AE

Entries Jk Exits
TRADE 2
KERRY'S ENTRY
KMRT
, | , i I,I
Bern
30 QQ
10 00
Aig
TeU r^ir tpr V&*J* -Uf ^UQ
KMRT
Too many peupie look uL j divergence and think automatically that it will reverse the
trend—but it often does not. Here on the weekly chati you std thai ihe back of the bull was
broken in August. KMRT has been in a strong uptrend, and after that break, during the
week of" September 17, it reached a new high, with very little strength in MACD, It was B
massive bearish div^rj-ence. The Impulse system remained green, so no shorting was
allowed the following week, but Che stock caught my attention. During the week of
September 24 tho Impulse turned blue is MACD-Histogram licked down, Even MACD
Lines showed a little negative divergence—1 felt this stock was getting ready to roll over.
Give me this setup a hundred times, and 1 will take it 3 hundred times. Ttiat is one
major difference between mature traders nnd beginners— we take (iur setups every time.
As I've heard Alex say, "If you do not take this trade, what jre you going to take?"

Chapter 9 Kerry Lovvorn 1
III
-r-_—.
7101
G2W
sen
54 M
Not only is there a weekly divergence, there is also a daily divergence, and not only
MACD-Hisrogram hut also MACD Lines! Look .it the Force lndo: divergence—ail that
volume in Au^usi could noi make KMIiT go up—it just went fl-ii after ifiiit, A slock that
cannot go up is jus! waiting to jump off a tall building. I had steam coining out i>f my
on this trade, and am glad I did not bet the farm on this one.
'says: I use the samcparjineiLTs on my weekly and daily charts. Vw Stopped dying
to change [hem—every time I try to do it, I get myself in troutrle. Everybody is so inlo
sellings, nskirijr you whrtl yours are. The question is nut \v\u\l they are biU what they are Idling
you. EMA-13 and rc M A -ii ;m- uui going to tell you very differed things, l ose parametas I've
become comfortable wiLli, nnd chaDgtn| llicm has never done me any good. Alt those changes iji
parameters simply give you faster or slower Sfjjnafs. Faster settings gfac you more false signals.
Slower settings make JFOU give up more time because of slower signals.
INDICATOR
PARAMETERS

170 Entries & Exits
KERRY'S EXIT
Shorted
5Snj
5-HI
HUMS
Short KMRT
Short 10/22/2004® $89.79
Even the best setups sometimes fail. 1 waul lo protect myself if my short breaks above its
highs. On the day 1 entered, KMRT reached a new high of 92.SO. I shorted because it closed
down and failed to hold its new high. The next day it closed up a bit—it made a new daily
low taut closed near the tup ul its range, MAfJD ticked back up, turning the daily Impulse
system back lo green. It had Dot violated the htop, md I was still in the trade, taut I did not
like that action. That stock should have gone down! The next day it closed up again—two
days of higher closes, and the Impulse system stayed green. The next day, October 27, it hit
the high of 93.18. I covered intr.iday, sonner than planned because of the price action.
My point is: You have a setup, and if a trade is not acting AS you had e\jjecLedr you're
better off on the sidelines. It's like driving—someone gives you directions to get
somewhere, and as you drive, you realize something seems wrong; the signposts in the
directions are not there. Then it is lime to stop and ask directions again, rather than just blindly
follow something Ehatfa not working. Tins trade might have taeen my
best trade of the year in terms of risk management. 1 lost money, but 1
avoided being impaled on a ipikc which ran all the way up to 117.
J printed DUt these charts—Ehey went into my record book as a
reminder why it is .so important to follow your plan and know whal you
are going lo do.
ARY

Chapter 9 Kerry Luvvorn 171
TRADE 2—ENTRY COMMENT
months had elapsed after my interview with Kerry before I wrote this icview of his
trade. When I tried to plot KMRT in my TradcStation, I got nothing, and TC2005 also gave
me a blank. In the months since our interview, Kmart had been taken over by Sears,
Fortunately a friend had downloaded a database from MebaStock before the takeover, and
he plotted these charts Tor me in his program. This is why they look slightly different from
my other charts. This slight visual difference confirms the point I've already made—the
specific brand of software makes little difference for traders, i\s long as yon use a sedoiiS
ioolbos.
The weekly chart shows a major bearish divergence between prices and MACD-
Hhtuyram. The October top is higher than the one in July, but the indicator is tracing a
bwersecond top. Even more ominously, MACD Lines Lire tracing a rarely seen double Cop
with a bearish divergence. The rightmost bar tried breaking out tu a new high buL failed.
The Impulse system is blue, allowing us to short.
Trades based on bearish divergences tend to offer good reward-to-risk ratios. Set the
profit [jrget on the weekly chart—it is reasonable to expect that prices will fall back into
their value zone on the weeklies. Set the stop on the daily chart—prices are not supposed
to rise to a new high after a bearish divergence. With KMRT trading ncai [J0, a profit
target near SO, and a stop near 93, we have a better than 3:J reward-to-risk ratio.

172 Entries &
The daily chart hilly confirms the message of the weekly. The uptrend is becoming less
and less acute, while MACD-Histogram exhibit great weakness; its latest rally, peaking
just nne day before the light-most bar, barely poked its head above zero. MACD Lines arc
dearly diverging from the uptrend and headed lower. The Force Index has not shown any
serious bullish action in mure than a month. The uptrend appears weak, rising only om of
inertia. Ihe right-most bar has turned blue; the Impulse System permits shorting.
TRADE 2—EXIT COMMENT
mil ,
■"■"
.r'M1
tfli
«'-

Chapter9 KerryLoworn 173
fold discipline Is a hallmark of a successful pro. Kerry had shorted what looked like an
■Heal SftuP—^ut ns soon as ^ trade starred gning against him, he hanged out with no
rcErelS- Ab he points Out, the .Mock eventually went up Eu $117, and had lit hung aruuiid
like nit amateur, he would have- ended up in heaps of trouble. Kerry is quick to say that he
CO like this setup and will trade it again when he sees it in the future.
A highly Important quality of the stock market is thai most pruccsses to il are
probabilistic rather than deterministic. In a deterministic process, a specific acEion leads to a
specific consequence: Push on the door, it will open. In a probabilistic process, an outcome
that you seek is likely bur not guaranteed: Stick your hand in a drawer with Eliree white
tncks and seven hlack socks—you are more likely to pull out a black sock, but this outcome
is by no means certain.
At the right edge of the chart, the daily Impulse has turned ftreen. It looks like we're
dealing with 'The Hound uf the Baskervilles" signal described in Trading for a Uving:
When 11 powerful divergence refuses to work, it tells you that something is fundamentally
changing below the surface of the market in thefamous story by Sir Arthur Gonan Doyle,
the clue to solving ;i murder Came from Lhe fact that the family dog did not bark white the
crime was being committed. That was a sign that the criminal was a family member,
known to tlic dog—the absence of a signal gave the detective his signal. When the market
does not do what strong technical signals say it Is going to do, it h a warning that there is
likelv to be a Strong move in the contiary direction.
SELF-IMPOSED LIMITATIONS
Many serious traders have a handful of patterns they like lo trade. The market is too huge
and flashes too many signals to irade every move. Success is a matter of accepting
discipline and limitations. You may not feel like running in the morning, but still put on your
jogging shoes and head out into the drizzle. You may see a nice piece of cake bul decide <o
pass if up because of your earlier decision regarding weight Lonlrul. A [.ruder looks at a
market where thousands of stocks rise and foil, sucking amateurs into their trcndlcss chop
and false breakouts. Amateurs jump in, dreaming of fat profits, A professional does not
chase every piece of cake! he knows that only a few patterns offer him an edge, and he does
not trade unless hr ite:* I hem.
What patterns to trade is the personal choice of every trader. You may buy and sell on
[he basis of fundamental developments, technical signals, or news, but in any situation you
need to stidc to your method. Amateurs are easily influenced by other people—they hear
good stories and jump into trades for which ihey are totally unprepared. Professionals, even
if they hear uninteresting tip, LcsL itflJld use their own system to make a "go/no-go" decision.
Kerry showed us two ot his favorite patterns—a squeeze play and a divergence. He
probably has a few more, but the total number of patterns used by serious traders tends to
be small. There are thousands of Stocks and dozens uf futures—Lhis huge number of mar-
tat instruments provides plenty of opportunities even if you trade only a few patterns.
Notice that each pattern reflects Kerry's understanding of the market. He did not
come by his ideas Through computerized testing of past market behavior, instead, he hits
concepts of how the market moves and how Lo Lake advantage of that
Kerry readily acknowledges that he got his idea for trading a squeeze play from David
iSi his instructor in several Traders1 Camps, What goes without saving is that Kerry used
David's idea only as a starling point. For example, David rarely uses computerized
indicators (see Chapter 11), while Kerry relies heavily on them. He starts with another person's
concept, but develops it and implements his favorite tools to make it his own.

174 Entries & Exits
Kerry said in his interview, "I started concentrating on my own system, nnd
when my trading turned around, I still enjoy reading other people's ideas, going to
shows and conferences, and listening to what others have to say. Now if 1 hear S
and it does not make logical sense in the first few minutes, I am not interested.11
Tn develop your own method, it helps to keep good working notes. Write down what
you're trying to do. Write down how you plan to reach those goals. Write down what
behaviors of the market you'll be trying to catch. Write down what tools you'll use and how
you'll interpret their signals. Seriousness, accountability, and selr-impnsed limitations will
get you far ahead nf the herd of disorganized, greedy, and fearful traders.
e-mail frotm Kerry-.
Adapt Your Trading Style
to Your Personality
When I set uut lu pursue the profession of trading, 1 read a few
market books, studied a few indicators, and it looked simple enough to
me. Little did I know 1 was embarking on a journey of self-discovery.
In reviewing my trades I find that the more profitable ones Lire those in which I knew what
I was pursuing. Even when such trades do not work out, the losses are held Eo a minimum
because I quickly realize that what 1 was looking tor is noi there and exit to preserve
precious capital. On the flip side, nil trades in which losses are far greater than they should
have been have one thing in common. They all have the ingredient of confusion and uni
knowing exactly what I was looking for in that trade.
When you do not know what you're doing, you !er small losses turn into larger losses
and ihcn capitulate into selling just to i^t?i nd of the pain, f believe thai ;ii .sonic point ulL
traders have hud sulIi experiences; what you learn about yourself from them can propel
you forward in the trading profession, Finding a trading style that matches your
personality is the most important factor in your success or failure, 1 remind myself every day to
continue in observe myself.
1 have been fortunate lo learn from several successful traders, and the most Important
lesson I've learned is the importance ot finding exactly what game I want to play. Saying
you want to trade [he markets is like saying you want to be an athlete and play spurts <ind
then running out and playing the firsL gume into which yuu happen lo stumble. There arc
many games, and I do not think it would be advisable for a horse jockey to take up
competitive weigh (-lifting, but then again, it is not the job of a power lifter to race &
thoroughbred horse.

Chapter9 Kerry Loworn 175
1 have found ilr.ii knowing and understanding your personal tendencies will do more
for your success than any indicator or trading mdhud. You must discover what works and
iocs not work for you. For example, Michael Jordan is one of the grcatesl basketball play-
lfS in the history of the gamsj but he underperfbrmed as a baseball player and was jusl
jbove par as a golfer Diet that make him a poor athlete? Absolutely noli His t>ame is bas-
ketbflUi '"id thai docs not translate into success in baseball. There are many games in the
marketplace, 'fTU' )'(>u ndt^ lo ^d ihtr one you can play well You also need the dedication
pnd perseverance to perform to the best uf your abffitjt
for example, f round that 1 do not have the patience for riding long-term trends. They
simply wear nid t>u's Jn(' I ^ ri^d ;md restless, I cannot stand to watch a position go
flcainsf me and give profits back, waiting for [he long-term Lrend to move in my hivor. By
understanding that, I can look for other methods and use other tools, I came to use vvh.it
I call 'iin inventory method"—building ,i position up and reducing it, trading in and out,
jigiiin and again, as I attempt to ride the trend. There is no gre-it revelation in this but a
simple understanding of what makes the difference between winning and losing for me-1
ajn a perfectionist by nature, which is very stressful if you want to make a single entry and
giQt—i always feel I should have done better. Once ! understood this* scaling in and out of
pnsilions started working better for me. Perfection does nor evisr in rhe markets, but with
the "inventory method" some of my entries and exits arc likely to he nearly perfect
f could BO on jnd on about my deficiencies as a trader, but the most important thing
is to understand how your personality works and adapt your trading style to it. In the
beginning) most ol us follow the crowd and doubt ourselves, looking for someone else to
guide us, Tt is hard enough lo figure out what the markets will do; if you don1! know \vh-.\\
you are going Lo do, the ^ame is lost 'fo succeed you must know your unique abilities,
! and weaknesses.

Name: Diane Buffalin, PhD
Lives: Lathrup Village, Ml
Previous profession: Clinical psychologist
Trades: Stocks and options
How long: Since 1996
Trading account: Small {< $250k)
Software: QCharts
Traders' Camp: Florida in 1999

Dr. Diane Buffalin
Dancing Like Fred Astatre, Only
Going Backwards and in High Heels
I met Diane on Sanlbd Island in Florida in 1999, at theonlyTradera'Camp we have held
in the United States. Back in those days it telt a little unusual to see a woman in cI.iks
while her husband played golf, although mure such couples came later. Diane had made enough
money writing options lo pay tor George's early retirement. Some mc-n tried to tease bim,
but he brushed them aft- after almost 30 years of marriage, he and Diane stiB hdd hands*
Dinne had a PhD in psychology, and in talking we discovered that she did her
internship iii the same time and in the same hospital where I had done my residency training
in psychiatry. We must have eaten in the same dining hall a hundred times but never met
until this Camp, Diane and I hit iL offi and whenever she visited New York, we had dinner
togetheri One summer she came with George, and I suggested an outdoor restaurant, but
he told me tiial after returning home from Vietnam he had mode two resolutions—never
again to fly in a helicopter or eat under an open sky.
When I invited Diane for ^ Interview, it look quite a bit of juggling Lo coordinate nur
schedules-1 was spending much of the winter fll ;i villa in the Caribbean, while Diane kepi
going on cruises with George. She eventually flew Lo New York, timing her visit to attend
ii campers' meeting.
There was this one week jn iy% during which three different people told me
I should be trading options on the slocks I own^d. I had no idea what they
Were talking about, but when two brokers and a girlfriend who was :in
engineer all suggested the same thing, i thought I should listen. My girlfriend, a
real-life rocket scientist, wanted lo subscrihe in a .service that for 35,000 would
tell you exactly what to do. I was not going to do whai -some man told me to
do; I do no! even do everything George tells me to do. [ said to hrr, "Let's each
get a book and Figure ii out for ourselves." I bought (lie thinnc-sL book I LouEd
find (lames Bittman's Optionsjbr the Stock Investor, 1996), and at firs: could not
understand hnw you could sell something you don't own. The language and
technical concepts continued to baffle me no matter how much chocolate I
ate^and after struggling for hours, I gave up by page 12 f later, I found the bonk
to be lucid, helpful, nnd easy).
Tinally, ] drew a square nnd divided it in four quarters- -buy/sell, call/put.
In Filling out the passible Scenarios of what the stock would have to do lo make
177

178 Entries & Exits
.1 profit, I realized that for the money to come in, you h;td lo sell options, t
called my broker: "Let me explain options to you because if I cannot explain
them I should noi trade [hem." He tried to Lalk me oui of iubut I Bflld»"ifmosi
options buyers lose money, who gels it?" Sellers' If all the boys arc buying
oplkms, I'm going to dn [he opposite. You know how Ginger Rogers danced?
hist as well as [red Astuire, only going backwards *md in high heelal
The day 1 made my firsi trade, George came home al night—I was in a
purple Sound nightgown, had noL taken a shower, and dinner, certainly not
made. I le saidt "Ynn didn't do much today* And I said, "I made £475, let me
take you out Tor dinner!" After a few weeks of this, Geoii^ said, "Why don't ynu
trade more than one contract?" 1 had to admit I was trading five contracts and
the profits were £1,5110 a week, but I thought it was unbelievable. T had an old
computer, dial-up AOL, it took two minutes to load a five minute chart—and
the data was delayed 20 minutes. The bull market was going on* and I was
writing stock symbols and option prices, on yellow lined paper and looking to
see which moved the most, gathering data for my financial experiments. My
god was to earn enough for my husband to retire.
LOOKING FOR TRADES Diane laughs: Md^ traders are men, aiidfli^a|rpiOiidimflrk£tstlie way merj too*
tfu inio a har, scan fur characteristics like caivtness or lialr color, then hit on a wnmnn, and if
tliLy liavenoliirl;, liilonunotlu.1! 'one, MniiiEwiij'sask. "Wliciriluym] $yt your picks?" All Illoa
scans— llu" right lorm, (Iil1 rijjlil shape, thej think il Is *JuinjS to work, liy contrast, when rnii
inlruilurp a man tn B \vom;in, her first question is HfQlDfl lo UE, "Wluit Joes lie do for ;i living?"
jlk'ii rare more ,ibom looks, woiiicm about fioidiiinentals.
Men flic lookinjilnra tip and B score, and I tell (hem thatyoa can score with any slock, as
long as yon have the right mores* Ddts sliclikc wint1, rianrinjf.nrrimvcrs? If shells ^ilun;i,{lo
nut stuiJ flowQBp Get to knuw your blocks and nnto what circumstances they are likely tn £n
up or down. 1 IuvlhiIisI orstodcsQiat move with [h^mnrl^laiid anoflKrUstoftiiosethatofta
raoreagalnsl iL
1 nhv;ivs du'ek lltL' earnings calendar. NorraaHj aioda go up before earning ;mil down after-
wiinls, no matter liow good the earning because flie good news is already nut. T keep ;m earning
calendar for Jill my stocks On: way younger women keep menstrual calendars. Women arc mciTe
a[li]m.irlin]}ljnini]iii;ir[]UiKla'r(alnd;ii^1hLi[;Lieii;iaiiLis[liut—Twantitnow^let'sdoUrDoyan
pay Liiitiiiion £0yourstodtfi1 signalsordoyoutoe a singlfi model and hope to score with it?
it is nut picking iht stodc ii i^ manflgTng £hc posiHoB. I look at the new?; and the date Uic
Ciiniin^ arc itJeasxd. then dance to tfie majdc that's on, not to Ore music I wish were mil Wh;ii
I like aboul opflonE is (he game is never ovcl There is always Hip fifth quarter—ytm ean mil
and mil.
Nothing in my life prepared me for trading options* I knew nothing mid
liad no aspirations. 1 never took a class in economics. My father had tokl mo to
"buy low, sell high" bui he never sold because stocks meant securily to him.
Then I realized everything in my life h;tti in fact prepared me to be an options
trader. 1 beach stress managomeni for ;i living, I love to think, to have fun, to be
right, and to test hypotheses. I did noi know [ was ;i risk taker, but found out that
I was. I am a chess player, and my fethcr taughl me that in chess, when under
attack, you have three options—mnve, attack the threatening piece, or attack
another piece. Options allow you to play against the market, covering your

Chapter 10 Dr. Diane Buffalin 179
and cashing In when the market muve.s. When the markeL moves
against your position, you can sell a call, short the stock, or buy a put to offset
your potential lass,
I was selling puts in the bull market and making money* Bui when the
market turned, 1 was able Co use opiions to make profits from rapidly felling
stocks. For example, by aggressively selling at-the-money calls, 1 was able to
earn $120,GOU when Ifahoo! dropped from ittO to yf), even though I no longer
owned me stock.
planemimben; My Mid■wasLIit.snisirlcsHiiinilcvcrintLaJullu'kiiewJimvlolJvtwcll. He MY FATHER'S LESSONS
jjn-ci 21 patents in* taughi me in (liink, to malffi (tensions. The moffi opflans ynn Eufc, tlic
iin;ir»''L cholera you'D nvAkc- If you ihfnk you hmrc only two options, yon will not make a snaari
pctisfrHl' Yoiif job is to crcillc more Etplinns, Iff k'fimcil curly the impnrUiiice of having yaUTQWH
business- urn working for someone else. He mucie* money selling Ins Itos- He tanghi me the
Jalueoneflrnlng—uny[hinj{ you Team runuoi be taken away frum you. Thnt was the lesson from
Europe—possessions can betanflsated,butsfeUlafHmiot He taught meto play chess, lie bad ;i
successful business Hind used ti> say, "i am responsible fur 62 mortgage payments*" tjccause he
]i;]cf (!i;if nEnniri'i]i|>kjyt'i's, Ht? i-c'uiNiiiicd piivsic.jll^v iiiTd MiciHiilly ;fc(ivc niitiT his Jt^Ch .11 S
lie\vtitilc1 hi3Vn^ tiijoycri w.Hdiini;me nuike.' 5c|ihu m»nt.li sellingiipijoiisf on iiis beloved Be
Mnsi option pliiycrs ar^ like mulerte players on cruise ships— they wear
gold jewelry and drop cash. They are flashy, bm do not have the money to buy
1,000 shares of Microsoft only a lew dollars for calls. The croupier spins the
whedL none of thrir numbers comes up, end the dealer scoops off the money.
I was selling time and keeping the cash. Kvery 'mie I [old anyone I was selling
ptus, they'd say il was too risky. But if a stock is m 50, and I sell a 45 put for 5>
how is it more risky than buying d stock—as long us I do not freeze if il goea
against me? And il it docs, 1 have three choices sell the call, short ihr itock, or
buy the put and get out of the position.
One Saiurday night ar 2 AM, while sejrehing CBOE data for the put with
the biggest open interest, [ me! this guy Vinny in j chatnaofll on America
Online. He knew everything aboui options but had a tiny account I'd been
iniding options for more than a year, hud made between $40,001) and $50,000,
but never heard of support or resistance. When Vinny hnd me click on the
screen and Rollingei h;nuls tame up, 1 gasped on the phone, I had been blind;
now 1 had vision. He taught me to use StodiaStiC MACD, and introduced me
to your book. He taught me to use long-term charts and daily duns for
screening, and 5-minute charts for entries and exits. 1 was still using a free data
service with a 20-minute delay; he had reaJ-Eime> and il was as ir he bad a
periscope. Vinny certainly brought me up lo a professional level of trading.
We were trading my account, and splitting iht- profits from the trades we
did together. We h;td different styles, but ai fir^t worked remarkably well
together. One night> at 2 am, Vinny saw on Reuters thai someone had died in
a clinical irinl of a stou'k we were trading. He said* "The bottom will in 11 out."
And 1 said, "The worst thing thai could happen has already happened, so
when it gaps down at ihe open, let's sell puts. And when The stock rebounds,
lets sell calls—because the volatility is high, but the stock can1! rebound
much/' We made $9,000 on each of those positions. We were very successful

180 Entries & Exits
lor ji year, but eventually split because of a divergence in .styles. I was very happy
selling three-month options and holding on to a 100% profit. He was more of
a short-term trader. We remained friendss and I am forever grateful to him.
I found a class at CBOfi— they talked of collars and butterflies, but how
do you make money with that? I was keeping score—testing the hypotheses
and keeping good nutes. On DEM. alone I used to make $4,000 per month.
Without owning the stock. 1 bought the Yahoo! IPO—both brokers said it wag
junk, sell it quick, but 1 have a thing of nut always listening to male voices. I
held, made $400,0fi[)h and bought a condo in the Virgin Islands, so George
could play golf year round.
My spreadsheet for ihe year 2000 shows 80 trades, 8 of them losses. My
profit for the year was $286*000, and 1 thought 1 had figured out bow the world
worked. My system was to SfcD put;; when the stock was low, calls when it sv.is
high. The only thing better than making money is making the same money
twice. Sell the puts, take profits, then sell puts again. A stock does not have to
soar—you can do Llic same trade over and over again. When Vinny Erst
Showed me [he charts, I said to him, "I have seen this before. This is like my
weight chart—-it goes up and down, with B, slight upward bias." If I can see the
tops, I can sell calls, and if 1 can recogni/.e bottoms, I can sell puts.
The market started getting mote ragged in 2001. I was selling puts on
XTND—and one day lost S35.OGU on the way to the airport, 20 minutes after
the market closed. We were going to fly Spirit Lo save 5100, and I bad lost
$35,000! There was another loss in 1NTC when I held inio the earnings
announcement. I decided never lo be in that position again. The 14 days prior
to earnings can be very volatile.
In 2001,1 had 31 wins and S los^s, made $120,000 and loss $64,000. That
was mo good—I was losing 50?j of the money 1 was making. I began
analyzing my losses and experimenting with stops. J set up a paper account wish an
electrunic broker who religiously used slops—and I automatically bought
everything he got slopped out of. I made money on all those trades—he lost
50% of his account I made 20%. My dala. says that stop* create a guaranteed
Inss. I do not have an answer to that. That's whal 1 am working on now.
In 2003 I had 29 wins and 3 losses, made 378,U0U and lost St 5.000, That
showed me that 1 was improving as a trader, but my losses were still Loo large.
In 2004 I turned 60 and changed my money management strategy. At 40 you
have 20 years to build a retirement account, al £0—this is your retirement
account I had reached my goal jn !99S and paid for my husband's early
retirement. 1 put the bulk of money into safe paper earning 7,5%, and .started
trading a small $100,000 account. That year I produced an d\|in for my women's
group, and the second half of 2004 turned out to be the least active since the
slartol my trading life. Then I got a call from you for lhc interview, and started
becoming more active. By the end of 2004 I had 35 wins and 9 losses, made
S35,OO0 and lost $19,000. A yield ufl6% was definitely noL u pro level of
trading, bul at lhc same time 1 am not addicted lo this thing.
Today options premiums are not anywhere near as high .is they were
during the bull market That's why, more and more often, I trade stocks. The must
you can make on writing a call or a put is its price, if il goes down to zero. If a
put is selling for 50 cents, while the stock looks good for a S2 move, 1 am
better off doing that trade in a stock. That's why both recent trades I'll show you
arc stock trades.

TRADE 1
Chapter 10 Dr. Diane Buffalin 181
DIANE'S ENTRY
17 JJ IB IS 22 H 5 13 19 2B 3 ID » 2* I T 1* H 3 fi 13 19 33 2 5 15 23 20 7 12 31 ?7 J 11 IB 25 I
Knr bjm Ub7 Jji -M Hjj
tlppEr pane: 1O-F 2O-, and 50-day SMA; Bolhnger bands
Mid-pane: Stochastic 14-1-3 (defaults in QCharls)
Bolloin |iailfi: MAGC 12-^6-9
WEN
This irndc was triggered by the news—that is nne thing I haven't seen in any system in
trading literature. News is like gravity out there, pulling or pushing stocks. I read in the
news that Wendy's wa* having a meeting where they e.vpetied to announce that llieir new
SoljiIhvcsl menu was going to be tremendously profitable. The stock soared on 12/1, but
tiie J2/2 meeting delivered bad news— that the menu w<is a disaster, [hey were going to
discontinue it, sell some of the restaurants, and lake a one-time huge loss.
I pulled up the chart, and it showed that the day before there had been a ^p to the
upside, piercing the Bollingei band in ihe expectation o( this fabulous profit. Then on
12/2, Wendy's failed to reach its previous day't high and slid back down to its upper
Mlinger band. The Stochastic turned down and MACH-Histogram, while continuing
to climb! was not making n new high. The chart confirmed the high expectations of
l> but on 12/2 at the right tidge, ii showed that investors were not getting what [hey
they were gning to get—and \ shorted heforc the close.

182 Entries & Exits
I covered for the simplest
reason^this stock stopped
going down. The bar at The
righl edge of the chart
had jumped up; Stochastic
stopped goin£ down. The
trade did what I expected it
iado, and then it stopped.
That was a nice trade—
clean, not a lot of emulion,
no gut -wrenching.
A I- ... i iir L
Sharled
BIS II II JI
Shorted
F-,
Covered
rI\ f TT
, ii .i.fjir '
hi'i'li'.i
=
»b is 7i n in ii a j iii " ^ r i ii
a t
6a
The action of WEN since I covered confirms that my decision
correct—Lite price went up from where I got out. The lesson o
trade is [hat when li stock gaps up Outside the envelope on good
and then stalls a.s the bud news tomes out ft is crying out to
shorted.

Chapter 10 Dr. Diane Buffalin 1 tt'l
TRADE 1—ENTRY COMMENT
At the riqHr ed$c of the
chart i^B^f is rising from its
latest bullish divergence.
The last five weekly bars
have been green, cowfirw-
ity$ iMc upfrci^rf md pcr-
MltUng Wi Oh!y To buy or
ztav\d aside, nor to short.
The latest bar is appr&aGh-
in$ the upper ckctwcl line,
that the stock is
the upside. Prices arc
above the sweet zom
between tkc EMAs} it is too
late to bay, bat my system
does net permit me to
short.
The weekly chart shows that WHN has been in a trading range between $42 and $26 for
[he past two years. The Lops and botUirrLs of MAC]? lines belp trace [he lops and bottoms
ofthelnulins?, range, while the bullish and bearish divergences of weekly MACD- Histogram
keep nailing slock reversals. The bearish divergences of April-June 2002 and November
2003-Mardi 2004 huve signaled important taps, The bullish divergences ol November 2002-
Mardi 2003 and May-October 20U4 identified significant bottoms.
The daily chamd has
contained the highs and
lows very ftt'edy in rcccv\t
months. Whenever prices
flirted wttH Pic lower
channel like, it was a goad
time to bt/y, md whenever
they scratched the upper
chawe! Ufa, it was a good
time

184: Entries
The last two daily liars kink very tempting to short. Prices have rocketed above the
channel—and stalled there. A rocket thai stalls is slated to fall- MACD-Histogram is still
rising out or inertia, but the slightest downtick will turn It down, creating a massive hear
ish divergence and confirming [he shorting signal
I can sec how a chart-reading trader, looking at a failing upside breakout, could ffl
tempted to fade it and go short. I wnnld not argue with Diane's logic, but it I am to fa|JOw
the discipline of my system, I must pass up this short. When [lie Impulse system is green
on the weekly and the daily charts, I am not allowed to short The system allows me i0
buy—but I certainly have zero interest in buying ;lL [his level and will stand aside.
TRADE I—EXIT COMMENT
"I*1
A
Diane has completed a very professional trade. She shotted a false breakout above the
channel and covered when an overvalued stock fdl below value, under its moving average.
The bearish divergence on the daily chart says that prices may go even lower, but
Diane had accomplished what she wanted and is off looking lor her next trade. A
divergence may well push prices lower; however, a spike below the EMA indicates a rejection of
Lower prices und a possible end of this downmove.
If we squint at a chart long enough, we may fiud [hi.1 signs telling us to jjo both lonj
and short. A professional does not .squinL—slit sees a pattern she likes, trades it, and closes
her trade as soon as lh:u pattern, In this case a false upside breakout, plays Itself out and
disappears. This is mil a trade I would have taken—but I appreciate the quality
entry and exit.

Chapter 10 Dr.DianeBufliilin 18S
TRADE 2
DIANE'S ENTRY
CECO
CECO
This is one of my must vejong recent trades, [ bought CECO following the news—not
about die company, but about the administration in Washington* President Bush was
talking about the importance of education; the unemployment figures came out on the high
side, iind he was saying, "We need to retrain these workers,"
Retraining—thatfs what this company does. I heard the news, put up my chart, and
safd (hi*, looks like a good entry point The mock is moving up from its Bellinger band, the
Stochastic is moving up, ihe MACD is moving up. The stock \s below its 50-day moving
average—1 think of Chat line its ihe spine ot the stock, and if the price is below that line, it
has so much more space to go up. So f bough! and wt back happily.

186 Entries & Exils
DIANE'S EXIT
\.
r
B rough I
/- fc fJ ^"
-n-^ bbi^uj:' J|Jaj« ■? B ^
1 always try to limit my Losses in stocks to one point. CECO was no longer doing what
it was supposed to do. The uptrend of the previous few days was broken, Stochastic turned
down, 1 do not like watching Losses—I lose a point, ;md I am out,
Sold
TRADE SUMMARY
long HECU
Bought 3/1G/2004® $47.99
Sold 3/19/2904 @ $46.86
This stock went to 67—tmfcseda$20 move whidi lasted 21 da)
nm still asking myse!t;"Whal wa3 my mistaki:? \Vlint did I not see

Chapter [0 Dr. Diane Buffalo 187
ENTRY COMMENT
} stay away frO
filar hwe suffered large
violent mdvcl. They badly
hurt investors md traders,
who fctirf to rciwaiv} j/crr-
fBft fl^Wf ThuTifcck for
icVcfal years to come. Their
prices tend to become vcr<{
, hke a fttqhly tr&u-
person is likely t&
crvaui for $ iov\%
after tfb acctdcv\t.
stocks tcM to have
b trtvuii,
to trade.
The weekly chart, covering llie past three years of trading, shows a rise from below $10 to
nearly $60, Thai rise culminated in a double top. The severe drop in 2003, precipitated by
rumors of a scandal, left a huge tail bar that swung from above the upper channel line to
below the lower line in one week.
At the right edge ot Llic chart, the red line ot the fast EMA is declining, along with
MACD-Histogram. The Impulse system is red, prohibiting buying. IT f had Co trade this
stack, I'd feel tempLed to liny because the long bull market bad not been cancelled; prices
hud jjsi stabbed below value and recoiled. In any event» squint at any chart long tnough
and you1]I find some trade—not necefflarily the correct one. Here, a rcLtnt traumatic move
turns me off from this stockj and the Impulst- system only permits shorting, which does
not look especially attractive for the same reason—the trauma is too fresh.
The daiiy chart shows thai I he move that cut the stock price from S55 to i30—nearly
in hnU-—Look only two days. Think of the crowd of hurt and angry investors and traders
n left behind. Following that drop, prices slowly and grudgingly pulled back up towards
555, creating a massive bearish divergence, and then turned down again. The bottom of
MACD-Histogram in February is deeper than the one m January indicating that the
are becoming stronger and lower prices are likely ahead.

188 Entries & Exits
At the right edge of thr daily chart the Impulse system is blue. Bulk are trying to find
traction at the $45 level and ihc indicators ;irc bottoming out Still, wish the weekly Impulse
red signal, no buying is permitted.
TRADE 2—EXIT COMMENT
I am MX fftrf/fed with
's entry mfo th&
trade, I like Her exit. She
ntfi out vrffh a r/fly loss as
soon m the stock started
- Shc did
her stock did not
as expected, she
Gut ft Without delay. Some
pros uscst&ps baled on
time £4 we// as price-,
price cushion to
but afsf> a tftoc cushion. If
their way, r*lcy Cut i

Chapter it) Dr. Diane Bufialin 189
When Diane asks how to identity major moves, I lurn to the Impulse system. It
measures the inertia of the market with a moving average as well as the push of the bulk or
bears with MACU-J Jistognim. The Impulse turns green for every major rally and red fur
every major decline. This change of color identifies every major price move.
The system is not magic—no system is—but as long vis die weekly Impulse stays green,
the uptrend is on; as lone as it Stays red, it confirms the downtrend. Here we see that the
weekly Impulse turned green a few days after Diane got oul of her trade; it remained green
until weekly prices blew out of their channel to the upside. Had she wanted to reposition
long in CtCO, the Impulse system would have encouraged her to do SO.
OPTIONS: GET POOR QUICK
Even though Diane showed us two recent stock trades, she had earned the bulk of her
profits writing options. In comparing options buyers to gamblers on a cruise ship, the
highlighted an important point—buyers as a Rroup lose money, while sellers as a group make
money. In my experience, the Munition is even harsher. In talking to hundreds or options
buyers over the years, I have never met one who made money in the long run. Of course,
each one had some successful lr;idcs or even series of trades—but 1 have nut met a single
person who huili up equity buying options. A few told me they managed to do it, but none
showed any evidence, leaving me to conclude that buying options is the deadliest game in
toe financial markets.
Poor beginners keep telling me they trade options because their capital is smalls they
cannoi make enough money trading stocks. They think of options as a proxy for stocks—
a"d I keep telling [hem that thai is a dangerous delusion. Options move differently from
Stocks; a Successful stock trader would lose money in the [ong run if Un bought calls and
P"is instead of buying and shorting stocks.

190 Entries & Exits
The main reason that optinns are so deadly is thai they are wasting assets. You can buy
:i slock, and if il rises slower tlun expected, you can hold it a little longer, giving ii ii
0
work out. You have no such luxury in options. As the expiration date approaches] their
value drops towards zero. Yon can be right on the market, right on the sector, right on the
stock—-and .■still lose money on the option.
Trading is extremely competitive, with most winners bunched up in a tight pacb
Winners are just a tiny bit better than tliL- Losers—their margin of victory is very narrow
The slightest deterioration of performance can push a winner down into the pack of
losers. The fact that options arc wasting assets is a powerful negative factor that cannot
be overcome in the long run, only in a rare trade.
Yon may Imve heard ilie saying,"There is money in poverty." There ifi money in being
a slumlord or selling overpriced goods in a depressed part of town. Similarly, there is
money to be made in promoting options tn small customers. Commissions add up rapidly,
and even (hough most turkeys have their throats cut, enough new birds come in lo keep
ihe game going. As long as the poor dream of getting rich quickly, sales of lottery tickets
will continue.
While buying options nil bui guarantees losses in the long run, writing Options is not
sacb ;m e:\sy g;imd either. Not all the money lost by options buyers goes to options writers.
There arc two brokers between them, one for the buyer and another for [he seller, each
taking his cut Options writers tend to be more profitable when there are lots of beginners in
the market. When new options are introduced, they tend to be misprieed in the sellers'
favor, wilh options selling for more than they should according to theoretical valuation
models. When listed stock.options were introduced En the United States in the 1970s, most
were overpriced and writers made eflCT money (sec Chapter 7). It is no surprise that Diane
made the bulk of her money writing options in a crazy bull market with its irrational
exuberance. Remember this if you live in a country whose financial markets are jus! starting
to add options—early options sellers do the bestl
A beginner has no business trading options. For those who insist on buying calls* 1
have one bit of advice—take yuur money to Las Vegas or Atlantic City instead. The
outcome will be the same, bat at least you'll have free drinks while achieving it.
-f\v\ c-wiail from $i
Options and Chess
I love options. They arc flexible, exciting, and enahle me to be
creative in anticipating and reacting to the market. Strategies and
positions enn he as varied as your thinking and creativity. Tin?
intricacies of complicated spreads stand in stark contrast to the dramatic
beauty of the naked put, boldly daring the market to "put it to me
to make me buy a stock.
When 1 first struggled to understand ilie com pltixl tics of options, I developed a simple
chart to help me keep the moves straight It very quickly became evident that buying options
was a risky proposition. To begin with, my money would be Leaving the account, which was
the opposite of my goal. ] could profit only if the stuck moved by more than me price of the
option in less than the time allowed. No wonder mast buyers wash out—buying options js a

Chapter It) Dr. Diane liuffalin 191
Money comes in
Gain money if1
Money goei out
Lose money jf1
Gain money if
■ =kitk goes up more
|Jiiin cnr.l al hr II
Lose money ii.
- alOLh yuu;. up niUru
Money goes out
Lose jJinney ri:
n slock gdP*. Up
Gam money if"
■ sloth goes down more
Ihnn flo.qi ol pnl
Lose money \i:
Lk ifQCS
man co^i or pur
very efficient way to lose money. "Who do
they lose ii to?" 1 wondered. "They mighi
as well lose it to me!'1 And so 1 started
taking the nppaiiie side of the trade.
When 1 sell options, money amies mlO my
account, a much more comfortable
proposition. And I always have a choice—I can
dose (he position, hedi-e it, or Id il expire
at 100 percent profit.
J developed a very simple strategy:
Sell at the money puts when the slock is
low and sell at-the-money culls when die
stock is high. The odds were in my favor
because I was selling time. Even if the
stock remained at the same price, the* lime
decay gave me ;' profit, Thus 1 begun
naively taking money from the market,
before eV€T learning about Bollinger hands, StGehfiStics, MACD, ei<-.
I was often asked, "If this is so simple, why don't more people do it?" My response:
Options arc like chess. Why don't more people play chess? Beginning players are interested
In the "pieces11—puts and calls—and ihe "moves11—buying and selling, lew have the
concentration and fascination to Lean) strategy: When lo make an offensive move (open a
position) or a defensive move {close a position). Few understand that their opponent is
(he market, and to win we must antkip;ile the opponents move up or its move down. It
is heller to anticipate and close a profitable position afler the market has moved lhan to be
reactive and open a position alter a move has taken place. Successful chess players often use
the tactic ol sacrifice, oflering a major piece lo gain a tactical advantage on the board. Selling
a nuked pul is like a thirinjj queen sacrifice fin chess), when a trader offers to be forced to buy
stock on a downturn, but also al a prepaid discount, in both diess and options, success
depends on a combination of strategy, courage, and discipline; the idea is to anlicipatc the
next move and not to fold a position at a loss.
Moat new traders invest too much lime in searching and screening for the "right"
stock, and too little time Chinking out a successful strategy for managing ihe position.
With options, a trader can profit from more ambiguous positrons, and use the fourth
dimension—time—to eiih.iiiLC profits.

Name:
Lives:
Previous profession:
Trades:
How long:
Trading account:
Software:
Traders' Camps:
David Weis
Boston, MA
English teacher
Futures
Since 1971
Large (>$lm)
QCharts
Taught in New Zealand,
Caribbean, and Cyprus Camps

CHAPTER
David Weis
Price-Volume Behavior
Is Steeped in Reality
Tn the early '90s I read David's book on the BtlioQ Wavs and called to congratulate
him, I was not a Ian of the Elliott theory, but felt that his boot explained it better than
any other. He came to teach a seminar for my firm, and we enjoyed each other's company.
I invited David to teach ji my TVaders1 Camps, bul he did not want to be asvay from Che
screen, and I Stopped calling. Years later he called me ntn of the bliie:ftI see you have a Camp
coming up in New Zealand; Karen WOntfl to go to New Zealand; who will be teaching there
with you?" You, 1 said immediately Once David taught at that Camp, he wanted to come
to more, and in recent years he has become one of our most popular instructors.
David pulled away from Elliott, calling i: "an attempt to impose a static form on the
dynamic structure of the market,™ and focused instead on the price-volume relationship,
Every intelligent person who takes :i class with David eg influenced by his superb churi-
reading techniques. When I look at choits with my friends, we often say Eo each other,
"David would draw a line here!" David is writing a new bonk, moving forward ar a glacial
pace. All my attempts to Speed him up, including an offer of a free tickei to Europe if he
finished in time Tor Christmas, have proven fruitless. Still, when I invited David for an
interview, lie hopped on a train frum BuMon ;ind came to New York io talk and have lunch.
lit the 1960s, while studying for a graduate degree in English literature, 1 got a
touching job and received my first lesson in supply ;ind demand—that English
teachers were a dime a dozen. I left and joined a friend working in the research
department nt ;i commodities firm in Memphis, my hometown, I spent days
doing charts hy hand for technical analysts, while reading Edwards and Magee
and RN. Elliott In 1971 the markets were heating up, the firm made me a
technical analyst, and I also qualified us a broker One of my accounts was
making a fortune trading large positions, going up lu the size limit in some
marked The man whose account il was told us about the Wycknff course
offered hy the Slock Market Institute, which was then in Chicago. Wyckoff was
one of the early giants of technical analysis and the course he wrote is still
being taught today. It led to a great improvement in our ability to forecast tor

L94 Entries & Exits
ihc company—nnd ultimately this man hired us away. He traveled the world,
iind he would contact us regarding his positions, calling from the Great Wall
of China or Madiu Picclm, knowing we spoke the same language. Deficit
spending was coming home to roost, and the inflationary spiral was lifting
commodities from their long bases and creating long-term capital "aim,
I worked for this client for three years. Then tie got involved in other
things, and f went back to Lhe commodity brokerage house and became their
director of technical research. After the Him was bought out, I worked foi
Bob PrcchtcE, writing The Elliott Wave Commodity Letter, and shortly alter the
crash olr 1937, started Technical Foiccs—my own newsletter, much more
oriented to Wycknff. 1 contributed several articles to Jbdmiatl Analysis of Stocks
and Commodities, which were later Incorporated into a book. 1 also wrote a
handbook, Trading with the Elliott Wsve Principle: A Praciictil Gunk, but it is
our of print now. \ stupped my newsletter in \WL Now I just run a few
accounts on a discretionary basis without holding myself out as any kind of
advisor. I consult, occasionally write reports, and speak al con fere nets. I keep
Trying to write my hook on Wyekoff which has been brewing inside of me for
many years.
My approach to trading has evolved over the years. Like everyone else, 1
went from pillar to post, looking tor a secrel automatic method for making
money. I pkyed wilb indicators—they did not work for me, although (hey
work ftir nther people. 1 thought they provided intermittent reinforcement,
JLisL enough tor you to come back—"Will the real divergence plea.se stand
up?" You have to concentrate on what's right for you, and for me it was price-
volume behavior. I focus on thai and imi trying to rid myself of the Efliott
Wave. As elegant as the Ellioit Wave is, with all its mathematical qualities, ii is
trying to impose h static pattern on the dynamic entity lh:il is price movement.
Price-volume behavior is steeped in reality, and appeals Lo me more than the
mathematical approach.
In his famous book Studies in Tapt Reading, Wytkoff wrote "Successful
tape reading is a study of force. It requires an ability to judge which .side has
the greatest pulling power and one must have the course la go with thai side.
There are critical points which occur in each awing just as in the life or a
business or an individual. At these junctures it seems as though a feather's weight
on either side would determine the inimediare trend. Anyone who can spot
these points has much to win and little to lose.11
1 apply the principles of tape reading to daily charts, bur 1 do nut like
cookie-cutter rules. 1 accept only grayness in the world, and rarely see black or
white. The only certainty is uncertainty, and I love living with it. I study price
and volume, pay a great deal of attention to the height of every price bar,
whether daily or intraday, and the position or the close. You have to be aware
of the case of movement either up or down.
Finding a trade is like finding fish in a lake. Ynu do not yo to the middle
of the lake and drop anchor. Yon work where the fish Jccd and build nests—-
around the edges. You look for trading ranges, whether on weekly, daily, or
intraday charts. If there is ;i breakout and no tallow-through, you wail to see
how ii acts on a pullbuik.

Chapter 11 David Weis 195
If you get ii legitimate breakout, and lalcr the market pulls back into that
area and the ranges become narrow while thedoses gravitate to the high of die
bar, il is a sign of Strength, Conversely, if after a breakdown the market pulls
up in narrow ranges and doses low, it is a sign of weakness. When the
market breaks out on high volume bul there Ifi no follow-through, it shows ih.ii
a strong effort brings no reward, and ii may be gearing up for an npthrust—a
false upside breakout Or it can do that on the way down, setting up a
potential spring, a false downside breakout
I try to buy where the reward is high and the risk is low, 1 do not like
chasing breakouts. I like fading them after they stari lo fail. Another thing 1 watch
for is what Wyckoff called absorption. The market is coming up to
resistance—old longs sell, new shoris come in U> establish positions. You can often
tell when the market undergoes absorption—[here is a great den] of volume*
but not enough reward :is the market s-ets ready to reverse.
Inconsistent Trading
What book or author would you recommend for working
through trading problems? I'm too optimistic about losing
trades, and hoping for them to come back. Initially, I set stop-
losses, then loosened them during the trade. By my
calculations, J'd be making al ieast twice as much if f didn't do this.
] continue my behavior, possibly because it works sometimes.
About one-third of the time, when I give a trade more room,
it comes back and becomes a break-even or winning trade.
When it fails, it wipes out the profits from several winning
trades. Of course, I've read the complete works of Dr, Alex
Elder already. And Mark Douglas. And several others. Are
there other books that might benefit me? —Trader
Instead of recommending a book, I suggest a little
competition. Open a small account in addition to your main one.
Continue to play games in your main account (selective rein-
forcement is a great motivator), but do trades according to
your rules in the little account—again, an account so small
that it almost does not matter See which account outperforms
the other. Give free enterprise and competition a chance on
the home front- —AE

196 Entries & Exits
TRADE 1
DAVID'S ENTRY
CASH SUGAR YEARLY
■
emi-Log Sc
f
t
X -Avg 1 ? 5-yerti cycle
[1930 1340 195D
t
13E0
r'
\
\
1
\\
1-
\/
Jr
held insirip nte Jinqe aHlie
yeiar 2000 Tins hirnl or |inie Iiyhtness
one ii pieceUes a piclonried hull mwe
rafonwla pioietia minimum of 16 ceniB
im\\\ faiBeffargeis in the 20-26 rtol/atifle
i g7G
mo l?ooo Iibib
" 6D
50
Sugar
In 2004 I had 0 long-term baHish perspective on sugaij based on the yearly cash chart going
buck to 1932. It showed an enormous multiyenr apes, and on long-Lerm charts I especially
look For priLtf tightness. It means thar forces of supply and demand arc coming in the point
of equilibrium] which eventually is going to be shattered. The long term study is really
mouth-watering, but it requires enormous paiionce.
Sugar made a low in 1999* rallied briskly in 1000, and then for four years held within
the range of 2000, TobyCtabel madea study of narrow bar ranges—ifyou see three or four
bars in a row that arc the narrowest of tile last2U bars, it shows a tightening ul forces, and
there is going to be nn eruption one way or the other. I le did not apply this lo yearly charts,
but 1 think it is appropriate to do so.
There was also some cyclical evidence of a IxuLom. There is a !7.5-year cycle in sugar,
as well as in many other markets. Sugar hud major lows En 1932,1949,1967,1985, and either
2003 oi 2004. So I've got cyclical evidence in addition to thf tightening of the ranges. Sugaf
is a cheap market—:■ penny here, a penny there, but if you pile up contracts, it adds up.
Sugar was In an uptrend Coming into June 2004- On fane 18 there was a sharp seiloJj
which threatened Lo derail the trend, but the market rallied immediately- It became lightly
congested in area ft 1 thoughl ii represented absorption because the closes in urea B were
near the highs. The buyers kept coming in intraday, and by the end of the day the bears

Chapter M DavidWeis 197
in July and August of 2004
I was trading Mp.rch 2005
sugat to gain more time. You
need that when you trade
lonE-term. I am not worried
about the rollover Lost- I
want to give the market
more time to develop. I may
reduce or expand my
position, but I like to sit with the
basic core position—gut in
at a good level and be ready
to giue back some profit. I
learned this from my
mentor, who look large king
positions and traveled the
world—J guess his training
left an imprint on me. This
is not how I conduct the
bulk of my trading, but
when it happens, it provides
the greatest potentfal for
profit as long as you have
the discipline fc leave the
market alnrw> it is difficult
to hold long-term when you
sit in front of the screen.
Upper pane: Daily bi\f chart
tower pane: Volume
would capitulate. At point Cr demand overcame supply, and Sugar continued upward to
poini D. There on July 15, we had only a slight new high above the previous high—it
represented the shortening of the upthrust. On that day sugar dosed well off its high, making
ii logical to expect a pullback and then a re test of the breakout.
Ai poini El Ehere was a test of the previous highs on heavy volume—that.support held,
and a trading range formed between levels D and F. Sugar went back to the top of the
range ai F, but on August 3, you can sec that the daily range narrowed, There was no ease
of upward movement, which raised the possibility that the breakout was going to Fail.
Sugar broke down on a pap and started to decline,
Al point G on August 16, wo had the heavies! volume since the high of July ! 5, and the
market went through the low it had established at point E. The neffl day at point H, sugar
moved lower but wrath ;i smaller range, while the volume was still heavy—ihere* was not mueb
reward for all that effort. In that area, demand overcame supply, and the ue.\l day the
market jumped back into its range. That's when I was watching dosely where to reenier the
market- At point /, the day's range was very narrow, the volume low, the bar closed
near iht top Dfthatday*s range. This retest of point H told me Eg go long. I got
nt 8.19 and put 3 stop at S.,10, els If telling the market "Prove nic wrong, sucker!11

J.98 Entries & Exits
DAVID'S EXIT
Long March ;«[I15Sl_
Bought 8/25/04® 8.19^
Sold 10/13/O4@9.150
Profit - Q.HB0 per pound
I wt-nl long an August 25 at 8.19, al poini /.There was no instant gratification the next day,
but I kepi Lhe pubkion and the stop, and then the uptrend resumed. It unfolded in a sciics
of higher highs and higher supports. On September 27 M point /, sugar broke through its
July high on very heavy volume—a wide price move wiih ;l strong (lose, as demand
overcame supply. This was followed by nine days of lateral movement as the market absorbed
profit-taking, long liquidation, and new short selling. On October M at point K, the
uptrend resumed, but the volume was quite a bit lower than at point /. The nest day,
October II, the market moved up with a very short high-low range, dosing lU midrange.
The volume was almosi -is heavy as the day before-Thatwas troubling behavior which war-
ran ted raising stops, but not getting out. I raised my stop to just below the low of bar if.
The next day, October 13, the last day on this chart, the market gapped lower, and I got out,
closed on! my position,
The reason Igol out of this tradewasthatin his tape-reading course Wyckoft said you
can identity turning points. You can tell when the trend is ending by watching she length
ot the bars and the volume during buying and selling waves. The day
before I exited the prke narrowed, hut on the last day it jumped io the
widest kvel in months. As sugar went up, its daily ranges narrowed,
and then it went down on the biggest downday since June ltt. ThaU
what told me to get out of my long position. This was one of several
trades 1 made in sugar in 2004, applying lape-reading methods to
leading bar chans.
ARY

Chapter IJ David Weis
TRADE 1—ENTRY COMMENT
system prohibits buying. As long as ir stays red,
ir hands nnd wait.
The left side of rhe weekly chart shows
the start of a bull move in sugar. Look at
[he bottom ofMAGD-Hisiognim in July
2003, when bears still had some power,
A few months hiier, in the early part of
2004, they drove .supar to a new low, hut
this indicator registered a much more
shallow bottom. David would probably
nail ihe chart paltern a [nhe bearish
breakout and a spring, A bullish
divergence ol 3 technical indicator gives the
same message—ht^irs are exhausted,
bulls-are ready to lake control. When
different analytic methods g[vc the same
message, they reinforce one another.
The new high of MACD-HisLogrum
in July 2004 indicated thai: bulls were
extremely slrong. The new peak of the
indicator suggested that sugar was likely
to rise even higher after ite current pause.
While we can expect higher prices ahead,
at the right edge of the chart the Impulse
bears are in charge, and buyers must sit on
■■ ll
fif.r,
I-1 ■.'■
.III
•"—■
Still, daily tofiGO-
Si pretty heavy, wttii a
to
of the bears, anrfwiiqti of
a bullish divcrqwcc. The
system rt blue,
us to qo other
or short Sugar has
the look m& feel of a hull
market Pictirinq the tail-
end of its corrccti0¥\-but
still w clear sign thatfhe
correction Has enderi. The
weekly Iwpiilse tells buyen
t& wait uirtil it $oc± off red.
;iily chart suggests that sugar is getting close to the bottom of its pullbatk. The Force
'ride* shows bullish divergence, and MACD lines that have been declining tor several
s are starting to turn in the area previously associated with bottoms.

200 Entries & Exits
TRADE 1—EXIT COMMENT
At -file n'ghr edge of Tfc
chart, sugar is above its
Severely wcrbQaqhr area,
while WCV-Wistoqrm is
w\ucl\ lower tHav\
September:
domtick would create a
bearish MiVerqev\Gc. The
next My pncci opened
lower, and David sold
hti position.
The rally thai began after David bought sugar quickly ran into resistance near the
channel line. Prices turned down again and kepi grinding mil buyers fur two mure weeks.
In mid-September sugar futures stabbed below value, towards the lower channel lint1- The
nexL duy prices rallied, leaving behind a beaulirul bullish divergence. From there on, sugar
Brent Straight up, hitting the Upper channel line on convincing new peaks ot MACD-
Hifltogram and the Force Index. These new highs indicated strength and called far even
higher prices ahead.
In looking at David's sugar trade, it louks like he entered a little ico early. I would bare
waited until the weekly Impulse released me to yo long, David's e\it, though, is .3 thing of
beauty—he soJd into an upside breakout when the market was boiling, and latecomers
were felling over each other trying Ui buy sugar from him.'1 Buy luw and seEl high" is much
harder to implement than it may sound!
AVOID THINGS THAT
GIVE YOU COMFORT
David noted: If I could recommend ojil1 specific piece of wilting lu struggling <>r rcould-bjj
s, it is lack Sdnfflger's Interview with William Edthaidl in ThcNmMarket Wizards. His
s apnrnarh is ronlrnry Irj my inlnilivT style. Yet, one linds SO iiiulIi milily uiid COnUTlon
sens*.' in KtkliurdL's wortfs. Ihri' an; SOD1Esamples:
"I'm not suit ili^l 1 made nny money from my itas nbotu the market"
"Tbo Tine an cyt for pattern will find it unyvvlifn.1"
"Wl1 Jon'1 took ill data neutrally.11
On buying reEraczruenls; "Avoid those Iliin^s Ui,iE give you comfort; il's usually ^Isc
comforl."
"If you bring normal human habits and tendencies lu tading, youTl ^niviLik' inward Uit1
and inevitably lose."
i

Chapter LI David Weis 201
TRADE 2
DAVID'S ENTRY
TBONDS 1
f- 1160
H 11"
A
"""11
ll h
|
1
1
-
' L
Iti
I
1
I,1 i
ll 1
f
1
1 L
C E F
1 i
1 , '
I'll \)
I
ii
l1
|l M
-
B
II
G - 115.0
■ 1130
■ 1125
■ 1110
' 111.5
- inn
- nnfi
- noo
- 103 5
-109D
- 1OB5
- &OOD
- 55QD
- 5Q0D
I - flonn
- 2QO0
- 7D0G
- 15D0
- 1B00
■ 5QQ
In approaching a market,
t always begin by framing
its trading range. I take the
ruter lu Ihe paper, trying to
sea nvhsre tfta fish feed,
sn to speak. March 3005
bonds were in a volatile
3.5-poinE trading range
FrniTi Septernbej 2004- hi
January ?G05. At point A
they hit resistance, went
down, and in December
washed oul Ihe boltom a)
point H before rallying bai k
An upthrust occurred on
December 16 a! point C,
and Lhen (he rnarkel camt;
down to ei low at point /J
on December 2%.
T Bonds
I tried to figure oift whrch way the bond market Wafl going to go based on its trading range.
1 was leaning mote towards the bearish side, as ilie reversal in -irc-i c weighed heavily on
my mind. Komls ran up Id ;i tmlvj high on ilie Employment Report on fanuary 7 and then
fell sharply. 1 thought the evidence was mounting in areas Cand E that seDerawere becom-
ing dominant. The market Stabilized from its January 7 low and slowly began to rise.
I'vt" been watching bonds very intensely since 19SJ, and such a creeping risi? usually
means UiuL buyers are strong. B»nds broke oul abuve Lhc Lntding rj[iget bul l\w\\ on January 34
at point Ft reversed duwn. Thai made me tliink LliaL sellers were flexing their muscles and
were aboul to gain the upper hand. On January 19 at point C, there was ,i big effort to push
tnematket up on big volume—bonds moved higher, but closed well off the high. The very next
d-iy, the market held like a rnck, bul I was still suspicious following the downside reversals
C, E, and F. The rally looked like it was .struggling—bonds were at a new high ground,
Hut not moving with alacrity; it could be their Easr gasp. On the last day or this chart, Eft
point H, bonds broke on big volume, and I rhnughi it was a downside reversal on big
supply. Bands tlul nni fall b;uk into their trading range, but I thought they were going io.
I decided thai even if I was a little early, I would short a minimal amount of June bonds.
] have been charting the March 2005 future but sold June at 113.01. I also sold B
minimal amount of the 10-year note, I used no stop—1 felt certain we were very near
a major extremity. With every fiber in my body I knew I was right

202 Entries & Exits
DAVID'S EXIT
HBO
-1160
- 1155
10
□lIoDqi
ts
ZD 127
DacembBt
IS 24
3QD5
1U5
11T.B
11D5
11 DO
1015
I0BO
6000
5500
5000
i- D5O3
- 3QDG
r J^LHJ
2cm
" 150J
- IOCO
1 500
Fefouar
I went short ;il poinl H, thinking I was going to get eight points on the way down. The
bonds Started going up, and at point I, they accelerated to the upside. They moved even
higher and with great force at point/.The volume at /was highHibut the range Was lower
and the close off the high—su I figured they were selling again.
At the right edge j a! puini A"> I decided to mnke my position bigger. 1 knew we were at
the lop because, for all their high volume, bonds were making liitle progress. This time I
put in j stop because, by now bonds had become a burr in my side—every day I thought
of my open loss. So [ figured I'll put in a stop because bonds could not go any higher, f put
in a stop at 116-20 basis )vme and was stopped out oni? tide below ihe high.
By then what had started as a very minor position had gotten to me. Intellectually t
we were at a top, but because I had dragged k out lor so long now, I felt forced lo put
in e slop. And then, after I goi stopped out, I did not have the
emotional flexibility to go back and short again. This was ;i guod lesson to
be patient and limit your risk from the outset—because if you don ti it
becomes big and messes with your mind.
Shorted 1/25/05© $113.01
Covered 2/9/2005® $116.20
Loss -3 19/32 p Dints

Chapter II DavidWeis 203
ENTRY COMMENT
This chart reminds nie that the main value of the
Impulse system is its censorship role, Bashing a "^o" or
"no gti" signal for every trade. Wheiher you base your
trade on technical nr fundamental factors, it pays to
glance at the weekly Impulse system before you put on
your trade.
The lasi bar on this weekly chart is green, telling us
(hat both the EMA and MACD-Histograui Lire rising.
The inertia and push of the market are in tune with each
other, lifting prices. 'The green bar on the weekly chart
tells even rabid bears to stand aside and wail to .short,
Ai some point in Che future, the bulls will stumble and
MACD-Hlstogram will tick down, kirn the Impulse blue,
and permit us to short. This system will not catch the rop
tick of the upmovc, but then no system would do i\\,\\
with any degree of consistency.
Near the righi edge of the chart] MACD I KstoHram
is rising from below zero. This tends to indicate the most
dynamic part of an upmove. Once MACD-Hiatogram
crosses its zero line and starts rising above ir, the ralJy is
likely to become more ragged While this sign is bullish,
there is ii very important bearish sign at a very early stu^e
uf development: Considering the jge of (he rally and the level of MACD-Histogram, there
is little chance ii wifl reach its 2004 peak. Prices :ire already at a new high, which means that
when MACD does mm down, ii will create a massive bearish divergence, giving a strong
ihorting signal Bonds appear to he building a major top, but il is not completed and Lhe
uptrend is no) ready to reverse.
The bonds are moving up
fticEiy within an orderly channel.
Near the right edge of the daily
chart, they have rallied above
their December peak. A
immediately arises: Is this a
rally within a healthy uptrend
or -i false upside breakout horn
whit-h prices are liktrly to
collapse? Let us review the evidence.
The Farce Index keeps
reaching a new high on every upleg of
the rally since December, It
confirms that bulb in bonds are
becoming more forceful as the rally
Progresses. With everything in gear
to the upside, Kleins too early to
sell bonds short.
rallied to $
hew High ft January, abwe
the ttftel of tkeir December
peak, fa-fiC
aho traced a pcffk,
massive Pia^ ttic ffHff it hit
ftj t>GGctMher The January
peak a wt Htqhcr, but
it (X broad av\d reas&tMbly
fa'gh-it± total #rca is
probably qrester thm
the peak m December, it
appears that baits were
m
m tfrtry were
m VeGeivtbcr-tiicrc is. w

2O'l Entries &
TRADE 2—EXIT COMMENT
- -. -
-"^^■^-
III],., ...,,,
■■■
■\
"J -.
=— v ■
UlI
.
■■ti('J
"■■■■
,1'
titlllr,
■ v
B
i
JH'
]
1 1
II Ill
{
A J
V
.. --J
,..
1
■
ill
nn
an
SCDLH
David, along with others in this book, has done readers a favor by allowing them into his
trndint: room on a bad day as well as on j good one, His bond trade reveals that even :in
of his caliber occasionally makes mistakes. Beginners who make errors beat
themselves over the head nnd become even more anxious
which discs nol help their trading, David calmly
accepts his oversight, makes a mental note of it, and
moves on to the next trade.
A trading losji is seldom caused by a single
error, A trader usually makes :i seri&s o\ niistakes,
which ndd up to create a loss, and thafawhatwesee
here. David shorted an uptrend, did not use <i stop;
then remained short even after prices broke out to
D new high. He Iried to explain away cadi new
upside breakout, rationalizing his trade.
There is nn old market saying: "Run quickly or
not nt all." A trader who does no! run fust enough
bangs on to a loss and finally runs in disgust at the
worst possible time. Ask yourself whether you
would buy bonds at the right edge of the chart. Of
course nol—they are completely overbought, way
above ihrir upper thunnel line. But that's what a
person with a losing trade usually does—buys to
cover his shorts and stop the pain. II pays to
remember: "Run quickly or not at all!"
I normally avoid second-guessing Er.iders3 hut
could not resist showing this weekly chart ol bonds.

Chapter 11 David Weis 205
It turned out David was right about the coming top and downside reversal in bonds. His
liming waS a bit off—he was too early, a typical error ot smart people. Right alter David
was stopped oui, bonds ticked down, creating -,\ massive bearish divergence. The Impulse
system tamed blue, permitting shorting—and it was all the way downhill from there for
bonds, with bears Faking in profits. Had David waited to short or exited a losing trade
early, he'd have been fresh enough to jump back into j short trade.
A Money Test
I've kept meticulous records of my trades over the past 3
years and have earned a return of just over 30% per year.
Recentfy, I subscribed to TradeStation for one month to see
what would happen if 1 was able to trade in shorter time-
frames. What would be the result if \ watched 13-day EMA for
the trend and used hourly MACD-Histogram (my modification
of your sysLem) to find good entry and exit points?
My backtesting seemed too good to be true. I wonder If, in
your experience, these results show a fatal flaw somewhere
in the strategy? Trading 10 stocks, Lhere were 36 positions that
I could have taken. Following the 2% and 6% Rules, it would
not have been possible to trade alf 36, My system generated
winners 72.22% of the time, and losers 27.78% of the time.
My average win was 1.71% of a hypothetical trading account.
My average loss was 1.33%. My trades lasted an average 5.25
days, and the potential results seem astronomical... a return
of at least 0,5% per trading day!
In your experience, is this too good to be true? I am
intensely interested because I would love to find a way to
trade full-time for a living, But with limited means I must
seek out trading capital to work with. —Trader
This is a fairly typical example of a letter that comes in about
once a month. It differs from others only in that the author
says he has been trading real money for three years. A typical
Eetter presents great results from paper-trading. I usually write
back—"The only test worth doing is a test with real money. I
wonder why you do not trust your data enough to lay even a
bit of your own money on it?" My advice is to start trading a
small account and see whether you can generate your 0.5%
per day with real money. —AE

206 Entries ScExite
THE TRACKS OF BULLS AND BEARS
There are three groups of traders in every financial murkei. Bulls want to buy os cy^
possible and profit when prices rise. Bears want to sell as expensively us possible and profit
whim prices fall. Undecided traders may join either group> strengthening it and pushing
prices in its favor. Bach tick reflects a iransiiciiun between <i bull and <n bear, surrounded bv
a crowd of undecided traders A tick is a momentary consensus of value, and as Licks
coalesce into bars, they create chart patterns. David interprets those patterns in order to make
trading decisions.
For example, David pays a great deal of attention to the heighl of every bar A tall {j^r
indicates a relative ease of movement, but if it is followed by a short and stunted bar it
means that [he irend is running into resistance He is wry attentive to the placement of the
closing tick within each bar, reflecting the outcome of the battle between bulls and bears
] le relies on these and other observations, trying to decide whether the current trend is
likely to continue ur lo reverse-
David also pays a tjreai dt:il of attention to volume, which he links with price changes,
Kor example, he may refer to a narrow-range day with high volume as "a lot of effort for a
minimal gain." He sees that as a sign of resistance and expects a reversal of the preceding
trend. While I value Davids approach to charts and have learned a lot from him, I think
that the Force Index provides a dealer view of market activity than volume bars,
1 eagerly await David's new book, in which he may [ay out his entire approach to the
market I am especially interested in what he calls "springs and upthrusts"—false
downside and upside breakouli. One of l\w key differences between pros and amateurs is their
handling of breakouts. Amateurs tend to buy upside breakouts and short downside
breakouts, "petting a new trend to make them a lot of money in a hurry. Professionals tend to
take Che opposite view—they expect mnst breakouts to fizzle out. Pros arc mote likely
to fade breakouts—trade against them.
1 often say to my students, only partly tongue-in-cheek: "Buy new lows and short new
highs* Yuu cannot do this automatically without thinking, but when you sec an upside
breakout iE pays to took for evidence of weakness and a shurting opportunity When you
see a downside breakout, it is important not to overlook the evidence of Strength, ;i
buying opportunity.
Most trading books repeat the same advice—when long» put a stop below an
important low, and when short, above an Important high. When David draws support liner;
below the tows and resistance lines above the highs, it is nothing short of amazing how
often the market will violate those lines by a tiny margin, only to reverse and come
roaring back. One of ihe lessons I've learned from David after sitting in his classes in several
Traders' Camps is to watch support and resistance tines. If a support line is violated and
then prices come back and close above it, they give one of the strongest buy signals, with
limited risk. If prices break above resistance by a small margin and then return to dosfi
below chat line, they offer a low-risk shorting opportunity, f nlso rely on my indicators, but
David's method lies a! the mot i^ my approach to iradinj; reversals. In reading this book
you should take from it what makes sense to you and blend it with your other method;;.

Chapter II David Weis 207
A Battle Map, a Treasure Map
It's odd how things evolve. When I landed a job with the technics]
research department of a commodity brokerage house, 1 plotted
[and updated) charts manually They became works of art: smooth
paper covered with straight black lines drawn with a fine-point pen.
You could close your eyes, rub your hand aCTOSS 3 newly made chftrl,
and fed fhe imprint of the trend. It became li balllc mapj ii treasure map, a pitlugraph
telling (i story from the past.
First, 1 studied Elliott Wave and wM thrilled by its mystical implications Anyone who
would listen heard my discourse on [he predictive powers of Fibonacci numbers, ratios,
and reciprocals. Then through the beneficence of a client J enrolled in the Wyckuff course.
The idea of large interests manipulating the markets from behind die scenes added to the
mystery of Ihe charts. Supposedly, ,i]l one had to do was read the footprints of these large
operators and follow along like: a remura attached to a shark. These footprints told a story
of accumulation and distribution which unfolded according to specific forms of behavior.
For about 20 years, I used The F.lliolt Wave to identity markets that were at or near
extremities of varying degrees, and 1 studied price/volume behavior for si^ns of ending
action that confirmed the wave count. Yet, I saw more and more that many trading
opportunities arose without fitting into a neatly constructed wave count. So I drifted ftirtherand
further away from the Wave Principle, Similarly ending action rarely had rhe classic
characteristics of accumulation and distribution. Instead, it was a matter of subtle changes of
behavior thai Lipped the scale tu favor of one side or the other.
I have distilled the study of price/volume behavior into the simple elements of price
range, position of the close, effort versus reward, ease of movement, foil tuv-ih rough or
lack of follow-through! and the interaction of various lines. The market is a kaleidoscope,
a wheel of appearances, in which the only certainty is uncertainty. Nothing is black or
white; it is gray. Every situation can be interpreted in two ways, creating a constant duality
between bullishness and bearishness. It is my job In make a awe for ihe mure Logical story.
Mine is an approach—an art—without rules, without indicators, without cookie cutters,
ft can be summed up by the words of D.T, Suzuki: "If one really wishes to be a master of
jn art, technical knowledge of it is not enough. One has to transcend technique so that the
art becomes an "artless art1 growing out of the unconscious.'1
In the beginnings an unmarked chart...

Name: William Doane
Lives:
Previous profession;
Trades:
How long;
Trading account:
Software;
Lexington, MA
Technical analyst
Stocks
Since 1999
Large (>$lm)
TC2005

CHAPTER 12
William Doane
The Bigger the Foundation,
the Taller the Building
I drove to Boston lei see Bill at his home. He met me ui a highway exit, and as he pulled
his Lincoln into a Iwo-ar garage, I saw that the second space was filled with neat
rows of carefully labeled boxes with market materials, long shelves held stacks of charts,
ai ranged by yenr.
Several rooms upstairs held more materials; large, well-oiled filing cabinets opened to
reveal rows of alphabetized and color-coded folder*. "Aluminum "followed by "Astrology,11
was next lu "Bermuda Triangle" in one drawer. Anniher began with "New Highs—New
Lows"and proceeded llirongh"MexicoJ'1H'MunLcipalsp1'"Nu]niimaticd,'\inddown lo"Oats.11
Still another filing cabinet held folders of newsletter dippings, some by current writers,
others by long-dead analysts.
"] ;im a collector, a junk collector*" joked Bill, bui his collection was neatly organized,
and he could easily find anything he wanted. He bad been the head technician of the
Fidelity organization in Boston, where he created a massive chart room, covering i 2-foot-
hiyh walls with graphs of every technical mu] fundamental indicator under Ehc sun. Hill
seemed a Mule wistful when I pointed oui there was no longer the need for such a room.
A slender laptop In my travel bag held a complete database, and a trader could produce any
chart by pushing a few keys.
Rill i\s?s computers, with four sleek screens on his desk, but he still sukstzrihes to a
diarl service. While we were talking on a Saturday morning, a fat package or churls airived
by priority mail, and Bj|] grinned: "An old habit; I like to have a hard copy in front of me."
After earning his master^ degree in finance from the University of Denver, Bill yol a
part-time job with an accounting firm. The firm was underwriting u Muck issue, and paid
him with shares instead of cash. Those shares were Boated ai 51.50, Bill quickly sold ;it %~$,
and never looked back. In the days when technical analysis worked with India ink and
pens. Bill, the sun of a draftsman, felt right DC home in a chart ruum.
The average guy looks at a daily chart, scarcely at a weekly, I look et
monthlies—and I remember those pictures, When stocks come out of their bases,
they sprint. I look for long bases and trade breakouts. I am not smart enough
to buy bottoms; 1 buy strength. This approach is dull and uninteresting, bul
there ts potential there.
204

7,10 Bntrles& Bats
Lonk at this stock—it has just cleared its 1984 top. No one looks lhai far
back, but if k\ cleared iis 19S4 top, it means business. 1 use monthly, weekly, and
daily charts, f tried different ]n<!ic:Uors ;md volume, but in the end it all aime
down to price. 1 was conditioned by Fidelity: They do not went 0 stock thafll
break out tomorrow; they need several months to accumulate a full position.
Alter I left Fidelity; 1 started an advisory service and sent my top 15 picks
each month lo a handful of clients and friends. 1 would watch price levels and
wait for breakouts- My best pick was WorldCom; il had a differenl name then,
when it started Lip from (hat beautiful base. It was called LDDS Communica-
tEonfii Inc., and its Stdewiffi movement extended from 1980 to mid-1990!
By I99H and 1999 I ran out of bases and could not generate a lisl of 15 buys
per month. So the service ended in 1999. Unbeknownsl Eo me, we were :it the
top of the bull market. Now, in 2UO5, I see plenty of bases, as the cycle repeats.
1 think that there is order to the market, and you can make money buying
stocks that peaked at a certain lime. We had major peaks in the market, and
afterwards ir just take*; so many years to recycle those slocks. Allcr the reaccu-
mutation process, they are ready to run again. Some stocks peaked in 1996 or
199Hj others in 1999. then of course, many peaked in 2000—and lhats the
order in which they -ire tikely to come uul of iheir bases uuce they've been
reaccumulated and are ready eo go. There will be some kite starters ^nd
overlapping moves to confuse (he picture, but the tendency does exisL
A stock erupting from a long base is like a rocket getting off a launch
pad—il needs ,3 powerful initial Lhnist lo get going. Some people say it is
overbought, but I s:iy il is just the beginning. If a stock pulls back into its base.
however, 9 limes out of 10 it will not be a winner—something is wrong with
it. If a stock dies on me, I won't look at it again.
Whenever they build :i skyscraper in a city, they dig a deep hole in the
ground and then put pilings zven further down in order to build a snlid
foundation upon which this skyscraper is going to sit The deeper ihe foundation,
the more floors they can put up* IL ES ihe same way in the stock market—If a
slock is going to lake oil, ihe bigger the base, the higher it can go. My game is
big bases—that's what i would like to be known for.
1 prefer lower priced stocks, though this principle of bases applies to all
price levels and .supply/demand situations, A small price move in a low-priced
slock translates inlo a large percentage gain. A $2 stock going to £4 has a LOW
gain. You have more stocks, more choices at the cheaper end oi ihe bell curve.
Many analysts say it is difficult to make money in stocks below $5 a share; lliey
abort more often, decline, and disappear. This is true lo an extent, but when
they cross above $5, they get discovered by institutions which have the buying
power to push them np substantially higher.
Commodities—-copper, sugar, silver- —often build long bases. Take a look as
sugar in '65-71, copper in '75-79, and, ofcourse, look what emerged from the
bases of silver and gold in 19S& There is always a profit opportunity somewhere
if you're smart enough to recognize it. Here we sit day after day worrying about
a flat stock market while commodities :>rt taking nff. The problem with most
commodity traders is that money hums holes in their pockets; they feel they've

(■V
Bill left his trading room, wait out Inw the
li;ifhvHiy. and returned with Oil- latest issue
Of U.S. News Hiid World Report. "Ihr
Incredible Shrinking Dollar" screamed the
cover tif tin' magazine. "We've gm to he
pretly close to tiic bottom," im grinned.
"The only limr: the}1 ruj] such stories is
when Hie iiLirkrl is ;i( an extreme point.'1
Tlie euni siaad at 1,30 on the day nf
mir imiTvk'w in April 2005, and i! has been
going down ever since, while the U.S. dollar
h& gained strength. El takes an unmmnmjiiy
longiuid study trend fur a cliiefediinrul ;i
major magazine 10 overcome his usual can-
Don and put a QnancLl] opTnuiri on tliu cover. By the time he slaps his sl;ijii]jol upiimval on ;i [rend, it is ready [0 reverse.
Top in Hurt) = Bottom in US $
Chapter 12 William Doane 211
A CONTRARY OPINION CALL
Such striking eovers crime ou( only tmce every few years. \tlakes a person offireflt experienceandSdf-BSmancc to rei og
nize such signs. —AR
got Eo be in Lsojnifihing. Another gioup with the same problem is day-traders* I
do not see what they see. it take a certain personality to do what they do.
When shorting stocks, I look for sideways configurations and breakdowns-
Currently my shorts nre concentrated in real estate. 1 know people have been
calling for the tap in real wtnte for [he past year or two, but I think the Stocks arc
extended and vulnerable and f;isl approaching the pnint ui which they should be
shurted. Their decline will precede the decline in the actual properties,
After 1 stopped sending out my advisory service, the Brimberg brokerage
firm in New York iel up a hedge fund for me. [ have been running Brimberg
Trend Fund since 1999. In 2000 and 2001 many funds §QI clobbered. Typically,
to collect a performance tec, a fund manager has to exceed his previous equity
peak. Many advisors incurred substantial losses, dosed their funds, and started
new one5 in order to collect new fees without having to recoup the losses. We
got hurt> but never closed. I just couldn't do that to the limited partners.
Bill led me on \t guided tour of his office. The windowsitls and topi of filing cabinets
supported his collection of bull %urines—the substantial herd, with just a few bears
^mung bulls, has spread into several rooms. He pulled uuta folder of charts showing long
periods of flat prices abruptly coming to life with huge volume surges. "1 am going to go
back and evaluate ihem to see whether or not those spikes have meaning.11 He opened more

212 Entries & Exits
folders. "This is the Stuff I WHS working on over the winter in Florida. 1 am thinking of
writing a book, something *ilnni; the lines of Skyscraper Profits hi {he Stock Market, ll will
describe big bases in detail and contain numerous betbre-and -after examples lu illustrate
market moves." He then showed me some til" his hedge fund data. "1 can £G uul of i]le
country with my laptop and run the fund while the New York people do my back-office
paperwork. My wife and 1 love going to the Greek islands. Also, two of our
granddaughters arc on a world-class syiiehroni7ed iee skating LeamT and you could say we're (heir
groupies, following [hem (o European competitions.1'
SINA
Here's a stock Ehafs down from a very high level, over $55 a share, trading in luvv single
digits. Jt is ouL of favor and its price is depressed, but rwn years have passed since ils
runup in the year 2000, I like stocks thai iire depressed, especially when they have a long
sideways movement, building a base. SINA is trading in the lower part of its base, Olid the risk
at this level is limited.

Chapter 12 William Doana 213
Risk/Reward
What is widely regarded as the minimum risk/reward ratio tor
entering a trade? How do you establish this ratio for stocks
whose prices have broken into historically new price levels?
■ - Trader
There is no set number—it depends on your level of
conviction about the outcome of the trade. Measuring risk/reward is
not as simple as comparing the distances from the enlry price
to the profit target and the stop-foss level. You need to
multiply each of those figures by the likelihood of that event—and
hopefully your system gives you more than a 50/50 chance of
winning. Still, if the expected profit is fess than double the
potential loss, f would pass up the trade. —/IE"
V'.
i
" M oi M "
02
55.00
50.00
AC rtfl
4 3. Ml
40.00
35,00
30.00
20.00
15,00
10.00
j 5.0Q
[ drew a horizontal line on
my chart at 10.60, and
once tliat level was broken
on Ehe upside, I assumed
another irpleg would begin
I would normally lake a partial position In ;i stock like this and add to it as prices
begin to improve, SINA, however, came 10 fifc rather abruptly.
In Ociober-November of thai rear, SINA moved up to five dollars per share, I
Jraitated to add on such strength, which in hindsight was a mistake. The stock
continued its rise to 10.50 in January of the following year. They say lh.it the fust
correction is the most importaot>and if you can ride ii out, then you're probably home free.

Entries&Exits
BILL'S EXIT
I found oul later it was a
Chinese internet stuck.
Being a technician, I pay
no attention to what the
company does, and 1 was
not aware it was Chinese
until, all of a sudden,
everyone warded Chinese blocks.
It was a perfect example
of a tew-piicad stock being
discovered, and I went along
Eor the ride. It turned out
to be one of the best per
centage gameis I have ever
experienced.
I am alsa a great believer
in trendlines and like to do
some selling when
important trend lines are broken.
Here wg see another beau-
tirul technical situation—
an outside key reversal to
downside, a throwback rally
into the top pattern, and
the breaking of a very well
defined uptrendline. I had
to take action based on
that evidence and sold the
balance of my position.
I did some selling in September 2003. I did nol know whether the recent peak was the
end Of the npmove, but I tould see an^uuisidc reversal" on tlw bar chart, and it scared me
enough to sell 1 am a great believer in outside reversal bars. They can occur on daily,
weekly, ur monthly charts, taking out both the high and the tow of the previous bar and
closing in the direction opposite to the preceding trend. This pattern works at bottoms mid
at tops, often marking die extreme points of the moves.
Long SINA
Bought 10/25/2002® $2.45
Sold first half 9/26/03 @ $36.92—profit.
$34.47 per share
Sold second half 11/14/2003 @ $34.70—profit
$32.2.5 per share
Average profit=$33.36 per share

Chapter 1? William Doane 215
TRADE 1—ENTRY COMMENT
This compaity^s stock was sold to the U.S. public in the lust heady months of the
historic bull market It went up from the sljrt, more than tripling within six months.
Back in May 2000> some poor soul paid more than$5Bs share; he must have really
needed the stock! From thai lofty perch, SINA crashed and burned, touching ihc
low of i.Q2 a yen later. Any stock ihut loses over 98% ofils value earns the fighl
lo a quiet death, bul SINA refused to die. ![ lay quietly on the bottom for
ahnOSt two years, forming one of the big bases bv favored by Bill.
I call any stock that falls more than 90% off its top and refuses
Eo die";i fallen angel." Some of I he most attractive long-term buys
come from thus group.
41(11
At the right side of the weekly chart, S(WA is coming hack to lift1, and its Impulse
system is ^reen. I take the readings ofMAGD-Hlfitograrn at a big discount when prices arc so
[tat. This indicatof shines by reflecting market psychology during price swings; when prices
arc flat, its messages are not that important. What is much more important to me here is
thai ihc weekly closing price is above both the 13-weck and 26-week moving averages.
Compare the height of the bars at the left and right edges of the charf. They arc
becoming much taller, telling us thai the public is rediscovering SINA after it lay half-dead
°i the floor for the hetter part of two years.
Brflprefers to
p#Y-$ I'tth
to fte Mtics. L&oktng err
this ddtfy chart, itti
for a
tcrm trade
\0Qktv® &t the
miqhrfcd tempted
prematurely fli response
toshort-tcruA signals. That
would he perfectly fiftfl for
atr\ active trader, but thafs
piotBttl'i %awe. He te look-
m for a major breakout
from a lonq-tcrw\ bale
!eddiv\g to a sustainable
uptrend, it> a daily cH&rt
is of little \wtcrcst to
him. Still, this charfis in
gear wfll Pic weekly; its
Impulse is $recn{ et\coura$-
tog us to buy.
, md tkc Force
Me* keep reaching higher
icveiL; everything IS ft tfW
upswing.

216 Entries & Exits
TRADE 1
EXIT COMMENT
bill sat through the first
top m July-a kangaroo tat!
that leflf pnccL dom for a
sizable break. At tfw fight"
cdqc Of f*Tr ctfetrt, tffcTt ft d
bit of a bearish divergence
ft ftrt^WafflJrWm. If te
3 3ubj ttv\d
October peaks,
arc
cltJSS.ic chartist, identifi
fJrcr ^cy reversal pattern
the lair bar &M
half of his
above value.
Ai ilit right odge of the wreekly chart we sec thai tha uptrend in SlNA is scarting to run into
resistance. This is not surprisinji jRer its astronomic rise from $1.02 to over $45. Many
bulls arc silting on massive profits and are prone to cash out at any sign of weakness,
accelerating dovvndrafts.
At the ri$ht cdqc of the
chart, prices have fatten
below t^lctr fait GMiJj the
Impulse syltcun is red. This
is tHz first red bar m
year-. $ massive
T^c Impulse
us to sell short or stand
aside, but vi&r to $o lov\%.
Biflf usf&Q dame chamm
tj reaches iMc
verdict and exits his
position. It is mt
for serious
m, using
different methods, to arrive st
similar
■ --..miui■ 111!■!IMi ni,
had stopped rising, traced out a top formatioiij and storied to break down. The
third bar from tht1 right took prices to a now record high, and i!i-n false breakout a
to have marked the top oi the uptrend.

Chapter 12 William Doanc 217
BILL'S ENTRY
90 91 92 93 94 95 96 97 98 99 00 01 02 03 M
DRAX
f love big bases and this looked like a classic—DOt a two- or thrcc-ycar base but a 10-year
base. I felt convinced [his was going to he good und notified severed ot my clients when tJic
stock was around $3,50.
January 2004, I fell ihe stock was acting well and was about to begin an
end of some importance. It broke above jis first duwntrcndline and was well on
[fe way Cowards breaking its second.

218 Entries&Exits
This stock may Btill wnrk
oijI well at some point in
the future. Still, it was a
disappointment to mR thai
iLs impressive breakout
did not result in an above-
avsrage advance. This trade
in DRAX is 3 reminder Uial
a big base is not a
guaranteed road to riches and
that one rnusl constantly
be aware of exceptions, A
perfectly clean breakout
will, or occasion, fail and
pull back into the base from
which it emereed. I had
not anticipated such a
Inss of momentum.
BOLQhL
7.00
e,oo
5,00
4,01
3.00
ZJO
LOO
,00
■1.00
01
03
ui> Ui OC
DRAX accelerated after it rallied above its $3,50-^3,60 breakout IcycL ! entered in
-Iamiar^ and by late March* had a decent profit us it goT Up tn nearly six dollars a
share, liut I expected much, much more. 1 looked al this Stock's lU-ycar base and, k
ing tbat the larger the base, the greater the potential, I stayed with the stock.
-LI
01
03
The sti>ck suddenly aborted and kind of died on me. It sunk back
Coward \is breakout level and ll^"> went .sideways, with a downward
drift. 1 did not like its action during the break, as it pulled back* and so
I cut my loss and gol out.

Chapter 12 William Doaim 219
TRADE 2—ENTRY COMMENT
am
L'.'l
DRAX shows j beautiful base, capable of supporting <1 major upmove. Still h I would like ui
play devil's advocate nnd present a bearish cnse. First of all, stocks have incrlia> and thai
inertia in DRAX is definitely sideways. Secondly whenever it ro^c towards five dollars in
recent years, it got clobbered nnd fell back into the range. Now there is a danger ot that
happening again,
If} were to
stockt i'st be i»orc i
to fry and grab it below
two do\\&a, wtere it
dcClfncs once every few
yean. Then: it becomes ss
over 30% from ho. Still, S
would not try to talk Bill
oat of ha trade Each W
oui trader Has His
and dill's approach U
works-for nm.
llirmi\
i

120 Entries & Exits
DRAX is accelerating on the weekly chart, rising at an ever steeper angle, high above h*
value zone at the right edge of the chart. Notice the angle of the uptrend during ihe first
naif of 2003 and compare ie with the angle of the second half of the year. To me, such
acceleration lends to murk unsustainable moves. Still, this is exactly whal Bill spoke about in hjs
interview: lIA stock erupting from a long base Deeds a charge to go up. Some people say k
is overbought, hut I say ir is ju.st a beginning"
The Impulse system is green at the right edge of the daily chart, allowing us lo hm-
or stand aside but not to go short. The moving averages tell me that the value of DRAX is
somewhere between $2*74 and $3.19, while the stock is trading near four dollars. Ifl wanted
to buy DRAX, I'd he waiting for it with my buy orders within the value Mine. Again, Bill bas
his own methods that work for him, and his entry is fully consistent with his approach.
TRADE 2—EXIT COMMENT
All serious traders hove several features in common. One of them is Ehat they p<\y just
as much attention to exits as they do CD entries Jnd sell when they see an exit signal Once
a trade gives them a dear Indication that it is not working out, they do not lung around
waiting for an improvement
Bill likes to buy breakouts from lony bases, and when a breakout fizzles oui, he dumps
his stock without giving it a second chance. The Impulse system turned red some time
ago, allowing us to sell short or stand aside but not Lie long. Bill yets out of this trade with
a minimal loss and is free lo go looking for better opportunities-

Chapter 12 William Donne 221
Application Rejected
My goal is to build my skill in trading using advanced options techniques to enable me
to be successful under any market conditions, whether bear, bull, or sideways. An
additional goal is to generate $250,000 per year minimum. I also seek to meet a minimum
of 10-15%/month ROI trading options. My current capital is $50,000, and I am using
Interactive Brokers as my trading desk. I also signed up for Worden to allow myself to
carefully search trades and to write algorithms For searches—I'm still in learning mode
with this software. I also need software to help track individual trades allowing fug lo
optimize the progress of a trade and fine-tune my exits while simultaneously balancing risk,
—Trsder
Your goal is totally unrealistic, and looks like a recipe for disaster. No Camp can save you
from that. Please be very careful and try not to lose mortgage or rent money. Reaching for
such extreme performance is sure to expose you to risks that are guaranteed to prove
suicidal—if not on the first trade, then on the second, or third, or fifth. The fact that you
have not been aware of that shows a dangerous level of naivete,
I am being absolutely straight with you, to the level of being blunt, because when I
see a man about to jump off a cliff, I yell. But I do not like yelling, which takes a lot of
energy, and I have no intention of yelling in the Camp, f wish you well, and please stay
in touch. —AE
Application Accepted
I am a short-term trader (average holding period of half a day) trading futures for myself
and for a fund on behalf of my company. I am basically trading 2 patterns:
a) a continuation pattern aimed at buying/selling in the direction of the daily trend
based on momentum indicators and envelopes within intraday charts; and
b) a reversal pattern based on buying/selling bullish/bearish divergences in daily charts
and supported by intraday screens.
I have done over 200 trades in the past eight months, achieving around 65% winning
trades, average win/loss ratio of L4, and no negative months. I have improved my
consistency a lot but still have discipline issues, especially in terms of taking losses. My
objective for the Camp is to be able to live for a week with other traders and have the opportunity
to observe how you deaf with your trading and emotions on a daily basis. J am willing to
improve my bookkeeping discipline (diary, etc... .), which I don't follow as religiously as I
should. I am looking forward to spending some good time with interesting people!!
Sallldos, as we say in Spain. —Trader
It is a pleasure hearing from you, and I will be delighted to see you and work with you in
Cyprus. Your results are very attractive, and both of us will need to work hard and be
inventive to improve them!
Hasta pronto! —AE

222 Entries & Exits
THE ROADS NOT TAKEN
Technical analysts study charts in order to recognize price patterns and profit from them,
Each tick reflects a transaction between a buyer and a seller, but it shows more than an
agreement between two individuals. The buyer and the seller are surrounded by ;i crowd
of other traders who exert a powerful emotional pressure, making aach tr:ide
representative of the entire market crowd. Price charts reflect the behavior of all market participants.
Academic economists used to view market participants as rational individuals Trying
to maximize gains and minimize losses, but that theory is now losing favor. Modern
scholars acknowledge the importance of emoLiuns in trading, This view has percolated into the
economic mainstream to a surprisingly high degree; recently a Nobel Prize in economics
was awarded for work on the emotional basis of making economic decisions*
I've been writing about the emotionalism ol the markets for many years, doiny my bit
to clip The wings of The efficient market theory. While the emotional basis of trading is
increasingly recognized, we must focus our attention on the market^ emotional pull on us
as analysts and traders.
We tend to feel callD when other people tell Ufi abuul Lheir problems and offer them
rational Solutions, When we deal with our own problems, we often become more
emotional. It is easier to give advice to others Than to solve our own problems. As the level of
emotion rises, (he level of intelligence declines. This is why so many traders make
harebrained decisions, buying tops and shorting bottoms.
Hill provides :m example of how a mature money manager gnes about his work. He
dearly knows his likes and dislikes and looks to trade only in situations where he feels
comfortable. He can analyze a 10-minUte chart iust as well as any day-trader, but this type
of trading leaves him cold, and he consciously avoids short-term charts. T le loves
catching breakouts from multi-year bases and scans monthly and weekly charts for such
opportunities.
There are hundreds of games in (he stock market, and no trader can be comfortable
With all of them. No! every girl you see at the club wants ro dance with you*and not every
trade will work for you either, In a perfect world, every ^irl in the club would be wild
about you, and every trade would be profitable* but iliac is not how the world works. The
sooner you develop a sense of clarity iibouL your likes and dislikes, the happier you'll be.
You do not have to imitate Bill's approach to trading, although you'd be fortunate to
develop his self-knowledge and discipline. Out of all ihe games in ihe financial markets,
yon need In find one or a few that appeal Lu you aiid concentrate on them. If yOU*re a day-
inuler, leave breakouts from long bases alone. If you love riding long-term trends, stay deer
from catching daily reversals. If you like buying breakouts, forget about bargains Each and
every choice in the markets involves a trade-off, a mad not taken. A winner is a mature
individual who can choose his mud and, just as importantly, calmly and without regret
Turn away from llie muds he passes up. There are many games in the financial markets, and
to become a success, you must clioosc the one that fits your unique personality.

Chapter 12 William Doane 223
-mail froM Bill-.
Big Base Patterns
I continue ii> he fascinated by thr multitude of indicators that arc
a supposed to identity buying and selling points. Mill, after studying
\^ ,"\ . them, 1 prefer a simple, clean chart with nothing bul the price avail-
\V able (or analysis, if is very Important to mo that the fang-term
picture looks like what I have in the back of my mind. For this reason
I like to have rt software package that allows me to flick from a monthly chart (long-term).
10 a weekly picture (intermrHmte-lerm), to the daily outlook (short-term).
Anyone am spot a breakout, but the trick is to adjusi your lead time. For example, I
worked for several decades with mutual hind portfolio managers. Because of Lhe size of
th^ir funds, they cannot buy breakouts, If they need two to three months to build a
position, then the advisor jihisI adjusl his 1 houghi process to this reality.
In managing a hedge fund, I tan shorten my Lime horizon. It does my heart good tn
see \\ stock begin an upmove within a week to 10 days after 1 buy it. The rush is similar to
pfcrdylng a hole in golf or sinking a three-pointer in basketball.
Not all buys result in winning trades. 1 closely watch the percentage gain or loss far
individual issues in my portfolio. I like to cat my losses short and let my profits
accumulate, ltTS mil unusual to see some gains in the portfolio to the tune of 100%, 200%, or
3(Wo—-or higher. At the same lime, I am quick and mechanical about ditching stocks with
losses of 4,5, or 6%, For this reason, my turnover is pretty high. I have found that if a stnek
isgoiny to be good,itWiD move out shortly after I purchase it. IF it hangs around and
cannot get guing, then something is wrong. Either my riming is off, or there is a fundamental
negative on the horizon.
Stocks or even groups of stocks will often sit out one bull cycle and be ready to go in
lhe next one. f cill this "recycling,™ and it may take six to seven years from the previous
price peak to the next breakout of importance, Prior tn buying, I want to sec a decline or
ft year or two to a depressed, down-and out level. Then f want to see four to six years of
sideways movement, of base development. I enter after the Btock breaks above a significant
resistance Level* creates outside reversal bars on the weekly or even monthly chart, or when
its relative price performance improves, especially during late-stage declines of your
traditional once-cvery-four-years bear markets.
Rmrom line? After studying everything under the sun, I settled in and became a
specialist in simply "Hig Base Patterns"

Name:
Lives:
Previous profession:
Trades:
How long:
Trading account:
Peter Tatarnikov
Moscow, Russia
Computer tech support
Forex
Since 1999
Medium ($250k-$lm)
Software: Rumus

Peter Tatarnikov
We Analyze People
Who Analyze Markets
In April 20051 flew io Moscow iu conduct master classes in three Russian cities for the
country's largest Forex firm. I hoped that my emphasis on the need for discipline and
money management would help their clients. J enjoyed touring remote <_iiies and visiting
hisLGrkaUiks I'd never seen before. At the company's MOSCOW headquarters, I mcL its chief
dealer.! Peter was involved in day-to-day trading and Imtl the brisk air of a man who lives
by practical decisions rather than marketing. I came to his trading mum behind a locked
door which he shared with two other dealers and a secretary.
[ was born in Vladivostok, in the Russian Far Kasi, cm September 1, 1980—we
call it "The Day of Knowledge" Id our country, the first day of school I started
working for lliis Fares firm al 17, helping with computers, doing the night
shift. Our clients trade around the dock, and our software was just being
developed (Riimus, which I found very versatile and robust}. In 1998 the
company moved to Moscow, and they invited me to come and try out to he a
dealer, 1 flew to Moscow, but after testing me, they said 1 wasn't ready;and puE
me into tech support. SL\ months later, in t999, one of our dealers left ^nd
they promoted me, with a one-month trial period. My job was to Take orders
from clients and manage our firm's position.
I remember my first shifts as D dealer very well. 1 ivflfi working nights,
Japanese yen was going crazy, the Bank ol Japan was intervening. So much was
happening that sometimes I'd call my colleagues with questions, waking ihcm
up in the middle of the night. Everything I know today I learned from Sergey
Kovzharov, who was our second denier at lhat time. By 2003 he became uur
chief dealer, and after he left, the firm promoted me (o this job. Sergey and
I remain in touch, and 1 cm still call him with any questions.
As a dealer, I take orders from clients—they place orders through our
software or by calling us. Then we turn around and place a cumulative order
In the Interbank markets Cur a large client we may t;o there immediately. If
the order is small, say under $100,000, we take it ourselves, but we monitor the
225

226 Entries ik Exits
company's total exposure. We have a limit, and when we teach it, wo go to the
interbank markei in lay off ihc excess.
We track not only [he size but also the volatility, things like [he Average
True Range of currency pairs. We <ire [fie largest Forex firm in the conn try, and
as leaders, we usually do things first. Oui competitors keep copying us; they
lag behind, but pet the benefit of learning from OU1 mistakes. As the leaders in
rlie field, wcVc made om share of errors. During the 1998 Asian crisis, our
system allowed clients lo deal iii prices ilui were mure than a minute t>W, and the
firm lost money. Our system has been improved, and now it combines quotes
from about 70 different banks and dealers, Some brinks arc better tor sume
currencies, and Che system knows that, looking for certain banks. If we get a
bad quote—-we call such om-of-the-ran^e quotes "boogerS31 in kLis_sisin—our
system queries the dealer who provided it.
Clients' orders yo through the Intemel Dealing System. We were the fust
company in Russia Eo show clients how our dealing software works. We also
developed an artificial intelligence system to handle routine orders, The
maximum margin we offer traders is 100:1, but we recommend limiting it to J 0:1.
We issue margin calls but allow clients tp trade until their equity falls to zero.
Sitting at the dealing desk for months and years, you begin to notice that
almost everybody does pretty much die same thing, repeats the same mistakes
over and over again. There ,\rn wdt-known rules thaL traders keep breaking.
First of all, they cling to losing positions and keep adding to ihtim until they
gel hit with a margin call. When people have a loss, they tend to hold, bui
when they have a profit, they cut quickly. In oirr trading, we do the opposite.
Other traders lake a position, and if the market goes against them, they
not only take a loss but also reverie. Then the market turns again,.and they lost
for the second time. They were right the first rime, bui instead of winning,
took two losses. This happens in every center—in Moscow, Vladivostok, or
Yerevan. People are the same eveiywhere. Traders work in different cities, bui
they all move at once, like an avalanche.
The market reverses when the mass of traders starts giving up. People
place skips iii obvious support and resistance levels. The market keeps
violating those levek, triggering their stops and reversing, jusi as you showed in your
master e Ja 55. T lie market approaches a resistance level and the re■ It) licks above
the previous high! is a mass o£ buy orders. The market triggers them and then
goes down, El Jots the sume ;il the lows, penetrating I hem by a lew licks before
tuning up, 1 used to wonder why il does thai. The market doesn't know where
our clients have their stops. This means the same 5tops are placed all over the
world. It is some kind of universal human trait.
When psychology kick,1! in. the amount al money a trader has in his
account dues not mailer—they fed they must act now, this moment! Belter
capitalized traders simply put on bigger positions. They may use MACD, or
Elliott, nr RSI, or astrology, bui under stress, when support or resistance levels
are being tested, [hey all trade the same way, regardless nf their method. People
in the crowd use different analyses, but all behave the same way. Their
problem is not analysis, but psychology. The majority of market participants aet
with the crowd, not just in Fotexbut in any market. A sudden event
occasionally allows a crowd lo win, bui in iht? long run, the crowd always loses. When

Chapter 13 Peler TiiLarnikov 227
I tall my friends at other trading desks or banks, find they nil tell me their
clients art? long lire euro, I know the eurti iiiLisi fall.
One of OUT clients is a famous surgeon. He has been losing money for
years, trading a small account without a due. Once he doubled his money and
was very surprised, hut then losi it a)] again. He doesn't have the Internet,
doesn't look at charts. Once he called me and saM, "Peter, I waul to do
something, what should I buy or sell? Quick, I need to run to the operating room,
will k-ill you fora fill after surgery," I asked him abnuL it, and he said, "My work
is to cut people, but in the markets I relax.11 A trader without a system will lose*
and it you trade against him, you'll win.
Successful traders always act differently from the crowd. We had a trada
who started with a small account and in less than two years made more than
a million dollars, I showed him the indicator I developed for measuring group
behavior (see box). He found thai most of his losing trades occurred when
he Irnded in the same direction as [he mass of liaders. He found that when he
occasionally traded with the crowd, he lost money.
Peter says: leaders all ova tlic world look for LndiCBtoft ur the mood of the market crowd, FOREX CLUB
Those indicators R'fkU the fad Midi most trowel membCRl think nY\kv find an? wrong Hindi of SENTIMENT INDEX
ilit' itrnpr Our goal is iu ir.uk the crowd and do ihv opposite ofwhal i( doGs,Thls Is wliy we
developed our Indicator loi measuring Hie mood ol Jbrex tnicicrs—Fortx Chib Sentiment Into, or
I'CSL We calculate it un the basis of opi'ii trades try tin.1 thousands of clients of ourFurrx Club.
Tlie indii;ikir's formula is very simple:
= (L/T)xiDO
I, = tin.1 nmiifrfir of long positions in any
T- Mi'1 ii'iiiii "i dj .1 jKFsiiiniis in .my currency
FCSl reflects Iht; percmtflge ofloiiij positions in ttflj riurrtncy ;Hnim^ flie clleOiG of our firm,
iTj between f) and l nt}. When l\ rlsts above 70, ii becomes overboDgbt When It fulls
hrfow J(J, it tjcmmcs oversold. Values betwe^ 30 .md 70 arc nentnl. Our next slup whs to
develop a mechaiiiGa] tn»ll ug system bnsed on FCSL
We arc a retail company—we can analyze a large number or trades by real
peopld On the hnsis ot our data, we created an indicator of mass behavior and
called it FCSI—Forex Club Senibnent tndex. It reflents traders1 behavior
worldwide, even though it is bused on our dealers' data. FCSl is somewhat
similar to what the Commodity Futures Trading Commission docs in the
United States, publishing summaries of traders' positions in dlffereni rnatkels.
Thi? difference is that CFTC publishes ii.s data weekly—we do it online and En
real-time.
We have built a trading system based on FCSI. Trading against the crowd
is not new, but we invented our own system. In developing it, we hjd no prc-
conceived idea*—we did not know in advance how it would work. IE turned
out to be an automatic system—we go short, entering the market on close if

22fl Entries Sc
Screening Software
I am writing my own software for daily preliminary stock
selection. I am looking for an inexpensive Internet data feed for
daily stock updates. —Trader
Do not waste your time trying to reinvent the wheel. For
sorting and filtering, look at the inexpensive, but very effective,
TC2005. Spend your time analyzing data, making decisions,
and documenting them. —AE
FGS1 rises above 70. We go longt market on dose, if FCSI falls below 30. We
cover shorts when it drops below 60 and sell longs when it rises above '10. Our
analysis takes 10 minutes per day, we trade ow close only and do not look al
i he computer intraday* We have been testing this system for two years and now
we trade iL with real money. We are up 12% Tor the first quarter of 201)5. We
have diefitS who use this data, and they trade differently, but this approach
Works well for us.
We dn not analyze money; we analyze the number of trading decisions.
We do not look at any individual account while calculating our indicator, only
the number of all positions. For us, a Si0,000 order to buy the euro and a
$100,000 order are the .same—together they represent two orders to buy the
euro. Yesterday, for example, we had 2,UQ0 open positions in the euro—and
most clients were long. The euro went out at 1.2917 last night, but now as we
speak, it Trades at 1,2875—it tell, and that's how it should be. In trading this
system, I Mm not inlerealetl In iht? price of the euro or (lie yen. We do not
analyze markets; we analyze people who analyze markets.
I lulcl Peter flboui Johu Maynard Keynes—the famous English economist was a canny
Stock pickttTj successfully managing lh<? eadowraeni of ihe University of Cambridge,
Writing in Che days before political correctness* he compared profitable slock-pit king to
forecasting the results of a beaut}' contest. To win yon did not have to pick the prettiest girl;
you had lu determine which girl was most likely to be picked by the jury.
PetK spoke about his all-consuming passion for Lhc market: His only other interest is
his family. LlI married eariyi over three years agOj and T have no regrets. My wife is a big help,
1 am always here, in the trading room, away from home. She totally took over our
Jay-today lives, our child. She h totally LoyaL 1 can work nights and she does not get angry. I
always look forward to going home after work.1 With two assistant dealers pulling up trade
records and charts, Pater selected two trades he wanted to show me and printed them out-

Chapter 13 PeterTat&tukov 229
TRADE 1
PETER'S ENTRY
EURO
h.d...,....
!■ JC J| , ,
1.2IJGC
UTH
1.2 GOD
T
J-
1.2JBD
i .3 3 fro
i'iTii
ma oo
10.00
OJl
4100
10,90
JVM
V
MOI
n-.i :
I' tij y-ti
54.10
Upper pane: Daily bar chart
Lower pane: Daily FCSI with s five-Jdy simple moving average
Euro
At the right edge the euro is rising, and we can see in the lower pane of the chart that the
crowd likes it. The rising FCSI shows that the crowd is buying into this rally. A few min-
ures before tht clo.se, FCSI rose above BO. My system calls for shorting when FCSI closes
above 70, and I followed my system—shorted the euro market on close.

230 Entries & Exits
ETER'S EXT
KJ....
.^.i-J....L.
Z* z:
j
....r..l
I t
■ i
n ip
■-.ll-i,. Hi
L...l..r
-J
£o7=
. .r..-1-l..
...ti . .. .
■..: ...I..-, j....
ill.
L
i? -i
"^1 i i
^.Xi:
'J'.'i'.1 |. : j
1 Ti
—...
--i
1-
"Jhl
1JJH
1JIH
Gover
The euro went up for a few days after I shorted. It kept making marginal new highs, but f
never covered. According lo my system, I have to hold shorts until FCSl rails below GO
percent. It never went bflow thai level; on the contrary, It kept rallying, even rising above SO
on several occasions.
As the euro begun to slide, the crowd of traders became less and less bullish. At the
nghl edge tif iht" chart FCSI fell below 60%> ntanDg 50% jusl before llie close, My sys-
tern teHa me to cover when 1-CSI penetrates 60%, and 1 exited market on close—purely
mechanical.

Chapter 13 Peter Tbtarnikov 7/J1
1 keep watching my system, measuring its performance, and analyzing its parameters,
myself to think about my system, but not violate it. Or course 1 teel a little more
certain if it similar signal emerges at the Same time in Several currencies and crosses, bul I
take every signal with the same level of determination. The only thing that can keep me
oul of a trade is a low number ot market participants. II [here are fewer than 10 positions
in s currency, that signal becomes suspect.
TRADE 1—ENTRY COMMENT
The weekly chart reflects an ongoing bull market in ihe euro- This charl goes from (he
lower led mrner [o I lit1 upper ni^hl—you do no! have Id he :i technician tQ recognize liii
uptrend. LiUle wonder that public sentiment, measured by Peter's index, is
overwhelmingly bullish,
A healthy bull market usually includes several corrections. Some of them are quite
deep, knocking out weak holders and allowing the prus to add lu long positions al lower
levels. The two moving averages reflect the average consensus of value. Occasionally prices
rise far above value, but then snap back into the value zone between the two MAs or even
Eovrar before resuming their advance, I bis happened in July 2002, January 2003, May 2003,
and October 2003.
Another snapback began in December 2003, and the question now is whether it has
run its course and a new rally is under way, or whether rhe snapbadc is still continuing. If
the first is true, we should btf going long, bul if [be seucmil, shorl—this is -i major choice.
Tlit? right-most bar on the chart is aboro both MAs, in ihe uvervalued /-une. The
MACD Lines are high and turning Hal in the zone associated with tops, while MACD-
HiiUagram is declining from above zero. The Impulse system is blue, permitting both
buying ;ind shortinj". Shorting appears much more attractive than buying, considering prices
are above value and the MAC'D behavior

232 Entries & Exits
daily toAffl-
bcarisH div
its to&vciubcr md
January peaks. Ti\c mdh
ctrfar returned above zero
in fHs p&t two days md
is t\ow j*t rtc #rea stiff able
reversal. The daily Imputlc
is $rcev\ cxT T*ic right edge,
hold ftjy fwqcr ow
friqqcr here, ready
look as the
Impulse %oa tiff qrztvi.
The daily cbarl shows that the euro has remained essentially Hat after bumping iU
against the ceiling in the first days of 2004. All that volatility, ull that volume for a
month—and no progress! When prkes jjo flat ai a high level, it is usually a si^n that they
run into resistance and a downturn is coming sooner rather than later,
TRADE 1—EXIT COMMENT

Chapter 13 Peter Tatnmikov
After Peter shoried the euro, JE struggled to go higher ror ;i lew <hiys, like a hull in a
bullfight with a sword through its heart, still trying to rim, not yet knowing it is dead. Prices
poked briefly above their upper channel lint and took out their January peak by a few
rietei cleaning out stops on short positions and sucking in amateurs who placed buy stops
above (he January peak. Prices stalled there, ihe MAC I J-Histogram turned down, turning
the Impulse blue, and The euro plunged tQ a new low lor the year.
At the right edge of the chart, the euro is below its lower chiinnd line, deeply oversold.
It is trading near the lows of the year, bears are in control, but a few Taint bullish signs are
starting to emerge. MACD-Ilistogram. MACD Lines, and Force Index arc at levels nnr-
ma]ly associated with bottoms. Prices are below the lower channel lint ;ind go vastly
oversold thai it would Cake a disaster to carry them lower. That would he an extraordinary
event—something that amateurs look far, while pro less ion a Is bet on probabilities. When
prices are overbought and near the upper channel line, the pros look to short; wilh prices
near or below the lower channel line, they look to cover, just ;is Peter did.
TRADE 2
PETER'S ENTRY
B POUND
r
:
1
1
;
Hit
■Ml
nt.
Ml
Ml
■ !■■
Ufl
Ml
— _
F
|
{
|_ _
-.-
r
- ^
1 J ..„
t -
rti run Oc,ni iv.nc ii/iie nrhtii nlii llfll tim l'«' "m inn i'jui "irn ->i i i ij ni j=m .h
-■"'
~ 1
—~!
■Jin 11 i? nifi ni"
"■ .
... *-,
X
,,
/
—-
—
■
.-,r-<i
>
/
A—
\
\~
\
—
i ■'.'■■ 'I'm i -i iirti i-i'n u'ni 1 1-jiii ■■ Vir mi Tn T.fn fix
&z*& _ ~ —i
nap*
JBJP
4V4P
J«BP
B Pound
The British pound has been in a trading range. At the right edge bullishness suddenly
dropped to almost 20 percent. Since Lhe system idls me to buy when FCSI falls below
30 percent, 1 went lung GUP market on dose.

234 Entries & Exits
PETER'S EXIT
::::.i...
|_
_ _i
V-
1 —-,—i
mm
mm
HH
nm
run
.-i.
nm
-
l^i i ■-' -r.
.i
t
1
Rn
Ight
- -
mm nm
"■■='!
1 ll ■■ 11
/
iid m
I'm ir
»1H "I
/
f
\
—
—
t
--
i, ,*._-
jl i ■-
—
■
■
Ll
ri
-» —■.
i ?rn -n / - ni nt> tr'ir nn>
Mm
■■nh
lu
The rally had no fiillow-lhniLigh, bui as prices liung flat, beanshneffl began lo decrease.
When FCSf rose above 40 percent, T sold, taking a loss. My buy signal turned out Co be false
in this case. Other traders made money here; 1 lost money.
IHMI
-f -
■.'.-II "III LJ[ »
:S::::;::t:
-*
...Ll
--* I-*-,
ZXV-
Jj.■.■.., j
T___M
..
1 "
J .
i
.*..
.111., .r
r r
■UI
Bought 1/Z7/ZDQ5® 1.8880
Sold 2/3/2UU5 @ 1.8BZU
Loss = 60 points
IJJH
IJIH
ttff*
,.r.r. 4_ :
1
—,
•y;/-
i- ^nr n
Y1 rni !■■"
[i is impossible to make money on every trade. I k
putting on trades and watching the markets, always trying
to develop something new. I practically live here, in this
office.

Chapter 13 Peter Tatarnlkov 235
TRADE 2—ENTRY COMMENT
.bill
lllilli
i fV^
H
'iillKIP'
u \ \
1
■; ■ .'
■ ■ i,/11
r'
,^
/
/
Illlllll
^ \
\
iinii
111 |||i|i <m
/
%
'ill'"
LUXi
SB
IMC
mtr
IDTD
ro.iw
jobs
The weekly chart shows an tiptrcndf with prices marching from [lit lower It-ft to the upper
right corner This bull market is less orderly than the one in the euro, bul the general pal-
tern is the same, The level of value, tracked by the EMAfi, keeps rising. Prices occasionally
spring above value but then return, :is if pulled bade by nin invisible rubber band.
Near the right edge of [he chart, tlic pound had rallied above value, then pulled hack
and spenl three weeks in its value zone. The rightmost bar is rallying oui of the value zone.
MACD-HIstOgram isslill declining, bul if thtr rally conlinues tor another week, it will turn
up, creating a shallow bottom. Notice that its past three bottoms—May nnd September
2fiO4 and the current one—are becoming more and more shallow. This is not a divergence
becauuf prices are also getting higher, but it is a sign that bears are growing weaker. The
Impulse system has turned blue at the right -most bar—hy going off red, it removed a
prohibition against buying.
The daily chart shows a nice rally that began two weeks iigo. Prices fell from ilicir
December penk nnly to find support in the 1,86 area. MACD-Histogram docs not show a
divergence, which would have been perfect, but nther buy signals are present. MACD Lines
are (timing up, and the Force Index has traced out a bullish divergence, Each downward
stab uf prices since lanitary was accompanied by a more shallow bottom of (lie Hjrce index,
showing that bears were running out of steam.

236 Entries & ttxirs
Ai the right edge of the chart, the Impulse system is green. Buying at this point means
chasing prices a bit, but they are not too tar mvay from value.
Over-optimizing a System
I recently started using TradeStation to rigorously backtest
and optimize the various parameters of a system I believe to
have a sound basis. I am concerned that, going forward, the
results may not be as good as the tests because of the "curve
fitting" issue. How do you backtest properly without curve
fitting? —Trader
The only testing that seems to work for me is manual testing,
I open my analytic software and Excel, scroll my stock data to
the extreme left, and then look at Lhe right edge, clicking
forward one day at a time. When I notice a signal, I write down
my orders for the next day and click again, keeping good notes
in Excel all along. This is a slow process, but the only one that
imitates the surprises and uncertainties o\ trading. — AE

Chapter 13 PeterTataraikov 237
TRADE 2—EXIT COMMENT
Ill^1
I—- Ml, ..W
li
mi.
<^UU
^v-v
A
A -
The Briliili pound has not moved much since the day Peter bought iL. It made a marginal
new high, then a marginal new low, but basically remained within range. Prices are
essentially flit
r~~ ~~i
The upraove In the British pound has worked out beautifully. Prices declined intu a
double bottom, where MACD-Histogram had traced a bullish divergence. The pound
rocketed towards its upper channel line. The Initial buy signal turned out lo be quite good,
Still, .1 professional trader has nu regret He knows that every individual trade is a bit of a
toss-up, and pnts his trust in the long-term performance of his system.
The daily Impulse Has q&nc
red on file right-Most bar \
against Me daily Impulse,
but I muld hold ov\c
tf the daily impulse
agat'yistit-f Iw&uldget&uf
only if f*rc weekly I to pulse
turned ^tJi'ytif my trade.
Bach serious trader Hal
his Method, and Peter is
when lf£S lyitcto fells Him
to Sell, He $ct$ QtftwtkDUt

238 Entries & l-xits
Shaken Out
I often exit trades before they reach my targets because there
may have been negative news or the stock seemed to act weak
during an up market. Often I notice a trade would have worked
out IIJ had stayed in it and rode it out, but then again,
sometimes I've been correct to get out early... —Trader
You need to write down your rules and foflow them. At an early
stage of development as a trader, you have no right to use
discretion. You will acquire the right to use it only after a year of
profitable trading experience. —AE
TOUGHNESS AND PERSEVERANCE
Al the end of the conference, a group of IIS rented a sauna and went there for a few hours
of relaxation, drinking, and singing. There was a .steam room, a small swimming pool, and
a complex karaoke machine; 1 look hold of the song list and appointed Peter our thief
engineer in charge of karaoke. Even in that boozy, happy group, he looked like Q man who
would apply himself to a piece of machinery and work its niiiny buttons TUSt light
Arc good traders horn or made? Peter was lucky to stumble Into a trading Grin a( 17,
bur his energy, focus, and perseverance would have served him well in any field. Hi' would
have been a sutxeHi even if he never heard of trading. Markets seem like a natural sphere
for hinii but it is his toughness and drive Lhat propelled Pater to the position of a chief
dealer of the largest Fores firm in the country while still in his mid-twenties.
A casual trader, rising from his coucb to glance at the screen* might have a frightening
thought Wnal if the person on the other side of his trade is someone like Peter? 1 le
practically lives in his trading room, Studying markets, studying Other traders, always looking for
an edge, for every bit of an advantage What chance docs a casual trader have against him?
Many amateurs crowd into the market, dreaming of a lite of ease, an escape from the
corporate grind. Lulled by brokerage house propaganda, few newcomers realize how Liugli
the Hading game really is. Leaving the eurporate cubicle with its moronic boss and nasty
coworkers may seem very appealing, but few newcomers anticipate the work that goes into
becoming a successful trader Von may chafe under a dumb boss, but in trading you
become your own boss—the toughest you've ever had. You musr drive yourself harder than
any supervisor ever did, and if you cannot do i!, don't even dream of trading, I.uok instead
for a larger cubicle and a more reasonable boss.
Peter enjoys working hard. Competence and performance are at the core of bis way of
life, wbcthei in front w\ the sLRffn or a karaoke machine. He us a lough professional i t ii d er,
and when you think of pulling on a trade, you have to ask yourself: Wh:ii have you got thai
Peter does not have? What will be your edge, your advantage over him in this trade? If you
h;ive no answer to this question, do not even start.
By Opening his trading room and showing US how he operates, Peter did Iridcrs a
favor—another example of Lhc openness and generosity of some of the field's best people.
The bar over which you have to jump is very high* but Peter shows you where it is.

Chapter 13 PeterTatornikov 239
m e-mail from Peter.
Playing Against the Mass Mood
People say thai the market is 75% psychology and 25% economics.
If [his is tTUC) Chen a trader who turns the psychological component
in his favor tnust win in the long run. There are two key reasons why
playing against the mass mood can be the cornerstone of a winning
trading system.
First, after people have been watching prices for some time they tend to develop a
strong subconscious idea of what is expensive or cheap. This is especially pronounced
within short timefraniee. For example, if the euro was trading al 1.2Q half an hour ago and
now its trading al 1.2050, the subconscious says,"It's expensive—sell."The recent range is
imprinted on us, and any swing outside of those limits becomes n stimulus to act. Contrary
to this, ihtf vtry conctpl of ;i Irtnd, however brief, mvuives an ongoing price change
Because of this, when we play against the crowd, we position ourselves in like direction
of the emerging trend.
Second, the majority of traders have an asymmetrical tolerance for profits and lueses.
The majority can tolerate much higher losses than profits, which make ihtin anxious to
act If a trader is willing Lo lose 40 ticks on a trade, he is likely to take profits at a much
closer level. If we go opposite to this, we'll be cutting losses short and letting profits run—
which b essential lor a trend-follower.
Traders all over the world look for indicators of the market crowd's mood. Those
indicators reflect the fact thai most crowd members think alike and are wrong much of the
time. Our goal is to track the crowd and do the opposite of what it does.

til
Name:
Lives:
Previous profession:
Trades:
How long:
Trading account:
Software:
DamirMakhmudov
Riga, Latvia
Cotton purchasing manager
U.S. futures
Since 2002
Small (<$250k)
MetaStock with Elder-disk

Damir Makhmudov
Technical Signals in the
Fundamental Context
In November 2001! 1 began receiving e-mails from a trader in Latvia who worked for
a cotton company. He was hedging his firm's sizable cotton holdings In the futures
markets and becoming increasingly drawn towards technical analysis. Cotton had jusi
made Ei major bottom at that time. I enjoyed Damir's e-mails in which he outlined some
early signs of tightening supply in a markei see mingly glutted with cotton. Impressed with
Pamir's focus tin combining ftmdamental and technical analysis J invited him for an
interview. In June 2005, [>amir met me in Amsterdam, where I was spending a few weeks
trading from an apartment above s canal
I grew up in Latvia when it was still a part of the Soviet Union. I was very
involved En Sports, especially ice hockey. Today some of my childhood friends
piny on the national team, but 1 was a bit too small to play at that level. 1 was
drafted into the army and served in special communications. They trained ils for
18 months, but probably the most useful skill turned mil to be touch-typing.
After the fall of theSovfct Union, i know 1 needed lu gel a Western
eduction. In the early '90s. Concordk University opened a satellite campus in nearby
Tallinn, Estonia, and that's where I spent the next eight years, first earning a
BA in international business and then an MBA. 1 needed to .support myself
while going to school and fmind ;i job with a Singapore company that came to
Estonia to invest in textile and paper businesses- They put me into the
commercial department dealing with cotton, and after .six months, sent me to the
International Cation Institute Ifi Memphis, Tennessee. I studied there for two
months, and afterwards beCBIlie involved in buying cotton for the company
Our factory made fabric, su the price of cotton WSS one of the key factors
in our profitability; While buying physical cotton, I had to deal with price risks.
Like everybody, ! started with fundamental analysis and .studied supply and
demand, I developed my own model of price forecasting based tin ending
Stocks worldwide. The cotton business is a small, tight world, and I've heen in
it since 1997, I wrote my MBA thesis on managing cotton inventory price risk
and Lib impact on a company's market value.
In 2002 1 was invited to join a cotton company in Latvia. Some investors
bought two cotton factories in Kazakhstan, opened an office in Riga, and asked
241

242 Entries & Exits
me to be their senior trader. Nuw I have Eo manage price risk from a different
perspective!. We buy seed cotton from formers and end up holding physical raw
cotton, having to hedge the downside rkk. At first I tried using options, but
did not like dealing with the delta. So in 2003,1 turned to futures. I began by
using fundamentals and monitoring the basis—the price difference between
physical cotton and New York futures, By holding physical cotton, we make
money if prices go up, hut lose if they decline. We hedge our long position b
physical cotton by shotting cotton futures.
At first I was being [airly intuitive—when to short, when to cover, Then [
decided to look into technical anulysis and found the Australian Technical
Analysts Association site. I read your books and started using MetoStock,
bought your Elder-disk. lam a discretionary rather than a systematic trader. A
system may give me Q signal, but I analyze the fundamental context and may
decide to stand aside. 1 am currently taking two courses nl ihe Australian
Securities Institute—one on technical analysis and another on specialized
techniques. Afterwards, I want to focus an position sizing and money
management and create a .speculative fund. Right now, 1 am involved with both
Speculating and hedging, Our hedging is pretty large, refletiin^ our long
position in physical cotton. Our firm opened a small £100,000 account to work on
our speculative technique.
TRADE 1
DAMIR'S ENTRY
COTTON
[jUn
Upper panE: Brir chart wilh 26-week (green) and 13-weelt Crcd> EMAs
Second pane: MACO Lines and MACD-Histogram 12-26-9. Green If MACD-Histogram
if it ticks down.
Third pane: 13-w^jk Force
up,
...

Chapter 14 Damir Makhmudov 243
Cotton
j could sec weekly MACD-Hisiogram rising from a buflish divergence; furthermore,
UACD Lines had traced a bullish divergence, and both wt-re risings getting ready to cross
over. Prices were wcli below their EM As, indicating <t generally oversold market. There was
also a bullish divergence of ihc Force Index between its July and November bottoms. The
combined message uf all these signals OH the weekly charl was to only luok (or long trades
on ihc daily chflrlfi.
n? ng na [j JT no iaa no rr In I?d
Upper pace: Rar chart with 22-day (blua) and 13-day (red) EMAs.
devotiors around the slow EMA.
Second pane: MACD LJfiafl and MACD-Histogram 12-26-9
Third pane: ? day Force Jnde*
.7 stanrtard
MAGD-Hfstogram was declining after tracing oui a large bullish divergence. There
was a massive divergence ofMACD Lines between ihc July and December bottoms in cot"
ton. To mt, this indicated that prices were going io rise above the recenl price peak. The
two-day EMA of Force Index was below zero, in its buy zone.
The 13-day EMA of pricc& was flat to down> buL that signal conic] be ignored a.s toi-
lon seemed to have antered a trading range between >\2 and 45 cents. This relatively
narrow range called for a strategy of buying weakness and selling .strength. 1 decided to place
•i limit order for December 5, 2004, [o buy five March '05 cotton contracts at 42.85/Jb. I
expected to buy on a break to minor support near '12.70-42,SO, with a stop-loss aL 41.76,
slightly below the contract low of 4lH8O/lk 1 had a price target of 44.-15, vvliith would
capture about 309* of the channel width.

244 Entries&Exits
DAMIR'S EX T
A
r\
)«
1
May
ID
17 |2- 1
7
Jjurin
21 7ri
L
IV
1 f
Ml
|A'J4J1
■'
ib
J3 |30 17
!J
lbar
11]
|d |11 M
u
Of Labci
i
B \\b
NavemQer
|G [13 Q
December
Ae Ehe time of this trade I was srfll studying the method. We were just starting to tot our
discretionary fund, and did not have money managHnenC rules in place I think my weekly
analysia was correct, and ihe entry was basically right
My mistake was in the poor choice of the stop-loss at thr very obvious level just a few
tlckfl below the contract low. ] fell into a common trap, antl lliii made my trnde the victim
of a "fishing expedition'1 by floor traders.
Lang March 2005 cotton futures
Bought 12/3/2004® 42.850
Sold 12/B/2Q04 © 41.780
Loss = 107 points per contract plus six points round-trip commission,
Entry grade = 63% (relatively poor)
Exit grade = B%(verv poor)

Chapter I! Damir Mukhmudov 245
DAMIR'S FOLLOW-UP ENTRY
■I Illlu.
. - A
V
T' V "
|SiT pjnj bur,
In Ijj Iji in n
l
I denided to place a stop
order Co buy Mdrnh h05 cot-
ton futures on December 7
at 42.67, slightly above thu
42.65 hi£h of tlie previous
day, to capture a pD.isible
upside breakout. My stop-
lass would he at 4I.67/lbr
slightly below the contract
lownf 41.72/lb, and Ihe
price target of 44.45r trying
to capture about 3n% o*
the channel width.
On the d;iy I got stopped out from my cotton position, J realized ili-ii the charts were still
bullish and only pnor stop placement caused me to get stopped out. TEw message of the
weekly chart wa^ completely unchanged* ;md this daily chart showed .strength. The
MACJH -Histogram held above zero during th*? stab to a new low in cotton, and the Force
Index was rising.
■i. ;,-■
\
-J V *^X
Ji. |in ' in I]JI V <n |io_
H hi hi
i "|fl h^ \t~
Taking a looK dL other
indicators, we can see bullish
dj^/ergencn of the 14-day
RSI and 5-day 5!Dcha£tu:,
confirming trie weakness of
the bear ramp. The price
action on December 6 could
bo called a closing pricze
reversal; it Indicates that an
upward rather than a
downward move is likely in the
near term.

246 Entries & Exils
DAMIR'S FOLLOW-UP EXIT
My colleagues questioned my reentry into a long trade just one day after I got stopped out,
burl had enough courage to do ii.As usual, 1 bad a written plan for this trade becausehav-
ing ii helps avoid impulsive trades,
K was a profitable trade, but in retrospect 1 can sec how it could have been better 3 got
out too early. Now we no longer use the 30% target, but monitor the situntiim, Irying to gel
more, Abo, my mimey management rules were not yet in place, and my trade .size
fluctuated. Even though [he second Irnde gained more per contract than the first had lost, I traded
live contracts the first time, losing $2,K25, and only l\vo contracts the second time, gaining
S 1,640. Still, such small trades build on cadi other and train you to trust your system.
Long March 2005 cotton futures
Bought 12/7/2DD4® 42.750
Snld 12/20/2004 ©44.450
Gain = 170 points per contract minus six points round-trip commission,
for a total gain of 164 points per contract
Entry grade=40% (relatively good)
Exit grade = 92% (good)

Chapter 14 DamirMakhmudov 217
TRADE 1—ENTRY COMMENT
If my charts look similar to Damir's, it is because we use similar software. His workhorse
is MetaStock while I use TradeStatian, but both of us have added Elder-disks to out
packages, These are collections of tools from Come into My Trading Room, expertly
programmed by my friend John Bruns.1
PrlCM usually begin to move before the fundamental data becomes available—Irchni-
cals precede fimdamentals. Approaching events cast shadows ahead of themselves—which
is why traders [ike Damir, surrounded by reams of fundamental data* turn Eo technical
analysis,
1 quoted Damir's e-mail in my November 20U4 newsletter
A combination ol expanded area devoted to cotton and fevorable weather
conditions in the major producing countries resulted in expected world fiber prn-
duaion reaching a record figure in the Industry's history. Surprisingly, each
higher production figure and higher carryover estimate was first accompanied
by prinic selling driving prices close to limit down an Lhe day of the news
release, with the market rebounding [Jitr next day and posting strong rallies.
1 have been in the cotton industry for eight years, first as a raw notion
buyer for a textile mill and now as a cotton trader, bul 1 am a newcomer to
[ethnical analysis. Learning [he main concepts from your books and applying
c, cotton
fl the lowcitiftia*, been in
several years.
twit fa stocks.
floors tmd
rfptyt\ to zero
disappear. There wfi
always be deund^M {or ci)t-
tew, wheat, copper, sugar,
and other has ic buiirft'nq
blocks of ktttodH society.
Price floors in cototwodifics
depend 0v\ Hie CPSt Of
productioh-tf prices fall
bt!t?w that level, the farm-
crs stop qrowiwq and the
Mixers stop HtfuftoQi rsduc-
ine the supply met arrest-
iw$ the declme. fw extreme
coMttioty, a couAwodiTy
way briefly dip below its
cost of production, but ft
cannot stay there for a
\0V{% tituc. This is why when
I first saw this weekly
chart of cotton trading or
multi-year lows, it stopped
we ft\ my tracks. I no
recall who drew suy
to it-it way
have been Vatotr. I had not
traded cotton for Several
years, but the twotoctrf I
saw this screen / Knew S had
to be ft ft if you eversec
a chart 'that looks like tUts,
be sure to trade It!
An Eldcr-dlsfc contains no secrets—only flawlessly pTngr-imjiK-d indicqiori antl systems Tnr ,i spectfk iradEng
plddurni. You couM prograraaJ3GludJcsj^iur«lf since the EormuLas arc in the book, but the question Is how long
n would take you ing how Kcurate ii would tie. As ■* rn^ctur o! toa, Lhc:rc: are CDramerdaJ operalon
y Studies^ wliidl tlu'y luvc jjiiurly and ''rrnncoiiBEy prog rammed.

24:8 Entries & Exits
them to this market helped me see what I did not even think of before. The
market rallied after the mosl bearish report in cotton^ history. Today, the
technical picture help1; me see the light at Lhc end of the tunnel lor couon despite
the majority of industry folks heing very bearish* there Is definitely something
underneath this market that provides support
In hedging, we are doing relatively large trades that are based on our
physical stock position. We sold a fair portion of the sltick we accumulated since
(hi3 beginning of November 20CM lo Internationa] merchants who had been
caught short of physical cotton. We are now replenishing that slock at even
lower levels.
The weekly chart is flashing several powerful signs. Cotton reached its peak in
2003 and remained at thai high level until April 2004, making two serious rally attempts
but ending up with a major bearish divergence. From [here it si id into the low of August
20043 bounced back into its value zone, and then painfully ground jrs way lo a new low in
November. There MACD Histogram and MACD Lines produced massive bullish
divergences. Much lower prices were accompanied by much higher indicator bottofns, showing
thai bears were exhausted and bulb were ready to lake cuntrol. At the right edge of the
chart the Impulse is blue—it sLupped bcin^, red three weeks ago, allowing us to buy.
In Novel iibci 'cotton broke its August low of43ccnts/lb. It is always instructive to
what the market does after be caking support—whether ihe decline accelerates or fizzles out
Here prices chugged down two more cents before completing u bullish divergence in
MACJl) Histogranti turning MACD Lines up, and crossing above both moving averages.
The downtrend in cotton tmd started to reverse, and the only sign thai would hold me
buck from buying at this very moment is the red Impulse on ihe daily chart. The bullish
case Is very strong, but red Impulse suggests that now is noi the best day for buying
cotton. It is heller lo wait until daily cotton goes off red—until the Impulse turrus blue, cither
from an uptick of MACD-Histogram or from prke crossing above the fast EM A.

Chapter 14 Dflmir Makhmudov 249
TRADE 1—EXIT COMMENT
in ov\ Friday, oaf oh
Technically, little has changed since [he day Damir tnlered his trade. The weekly clmrl
has nor changed, and the daily is more attractive than ever. Prices tested a new low, bnl
rejected ii and closed higher—a bullish sign. The only bearish sign is the red Impulse at
the right ed#e. As soon as it goes off red, the buy signal will be complete.
out of his trade
after making the typical
begimer mistake of put-
rmg fta stop
below the late
Stop orders are always.
bunched up attHose levels,
presenting an attracts
target for the pros. Their
tactic ti not necessarily
devious.: y?^ prices
approach support, ihey
smp\y withhold tbeir buy
orders, allenting Ute slide
fp continue, theft step in
buy when the stops get
. They actually
provide a public service
by buying from frightened
holders who want to get
out, Ift effect, they buy at
a prcseasoft sale, theft sell
at the height of the sea-
son-not a bad model for
a business!
what very few
traders have -the emotional
strength to do-hc re-
mtcrcd a trade the day
after bcfHQ stopped out.
He did if without rancor
or some emotional desire
to gel'even.
ttts technical signals
told him ffta was a quod
trade and he %ot back ih,
lifc a boxer who gets up
after a knockdown. Vafoif
used to be a competitive
ice hockey player ift his
youth; the
competitiveness, toughness, and focus
continue to Serve him well
in His trading career.

250 Entries & Exits
Uuinir soL himself ai attainable goal—to capture 30% of the height of the daily
channel, earning an "A'1 ruling for die tfltdt That is another sign of discipline, but in ihis ease
bis target seems ton mudest. In setting up a target, you need to look at both what yon wa&t
to accomplish and the stage of the market. The early stage of a major reversal can lead in
an explosive move, producing much more profit than 30% of lh^ channel.
Damir gave me his statements, pointing out chat at the rime of these two trades, he did
nai yei have a good handle on money management. In his first trade, losing $565 per
contract, he traded five contracts for a total loss of $2,825. When he boughl cotton Jigain, he
traded only two contracts, and even though his $820 profit per contract was bigger than
the precedhi£ loss, his profit from that trade was only 41,640. This is a typical outcome for
a beginner When people fcel confident, they pul on bigger trades, and after jjetiin^ slapped,
they become fearful and pin on smaller trades. A more experienced trader would not allow
thi; uuLcomc ufhib latest trade to influence the size of his next one.
DAMIR'S ENTRY
I i ' i I I I i ■ y |-|"i I I M I I I I I I I I I I L I I' I I I I I i .. I M I I—i-f-r ■ M J i i i I i i t T-1 I I I I I I 1 I I I I I I i i I I i i I I i ' I I I i ' M ■ ' I I I ' i i I i I l I ■
12003 [May jjun [Jul |ftirg [Gep OH Hov [Dec 3004 FoC [Hjr (Apr May |Jun pul fflug |Sep Gel Not Dec |?(fi]5 FeO \Mi
- ^500
TimfeCO
Cotton
MACD-His[ogram was rising from a bullish divergence, with both lines trending higher
and the Fast line above the Slow. Prices were still well below their 13-week and 26-wcek
EMAfij signaling j generally oversold market The 13-week HMA of the Force Index was
rising from a bullish divergence but still below ilie zero line, another bullish sign The

Chapter 14 DamirMakhmudov 2S1
- 'V
no m
(ay
- — -
11 I'll"'
1 I'
Juno
' '
^^^^
A
i-i 2i I3f t5 117
July
J
3 1^
V v
M5 Q3
ill.,- -. _
■l|| HJtHIHi-^LUiM^^'
:j I7 r: i.'u If/
|J |ei lie |?g
1
|. -Jiii-jfuiT Odobci No'
q us m 1
mQBr |
Ili |13 |2D ]^7
- 70
- eo
55
- 5D
- 40
2
1
0
-1
0
3
3HERffll)«r \2Q{
weekly chart suggested looking for a long trade only on a daily chart and trying to
cotton below ihtf marker.
Daily MACD-Histoprimi has ticked down, but both MACD Lines are rising, with the
Fust line above the Slow. The 13-day EMA is flat to rising, su^gesiing that the market
remains in trading range, calling for buying weakness nnd selling strength. I decided EC
place a buy order at the 42,70*/lb minor uptrend support level and a stop-loss lU I1.674/lb
(still slightly below the contract knv of 4L72<r/lb)> with a pike target of 44<35$/Ib, aiming
to capture about 30% of the channel width.
I used money management rulaa to decide how many contracts to purchase. My
risk per tiade was $545 per contract, and the 2% Rule allowed me to risk the maximum of
$2,000, J placed a limit buy order for ihree March '05 cotton contracts.

252 Entries &Erita
TRADE 2
DAMIR'S EXIT
iA
"U
U |l?
ju |2i
uly
|27 H< In Mo l?
\ la
■■Jf^v ■■■ 'Ti bar
127 p
Monty management rules have now been established and are being followed. Reentry
has been nicely effected even though the original trade with the same strategy resulted
in u loss.
TRADE SUMMARY
Long March 2005 cotton futures
Bought 12/22/2004 @ $0.4270
Sold 12/30/2D04® $0.4435
Gain - 1G5 points per contract minus six points round-trip commission,
for a total gain of 159 points per contract
Entry grade = 33% (relatively good)
Exit grade = 69% {good)
Trade Grade = "A" (captured 30% of the 546-point channel)

Chapter 14 Domir Makhmudov 253
TRADE 2—ENTRY COMMENT
i'.ii 'T1
When a major trend changes direction, it rarely turns on a dime, A little boat ean turn
quickly, bui a big ocean liner turns slowly, creating turbulence. Take a look at [he previous
bottom in cotton, in August 2004—there had been a ,shnrp rally that fizzled out within
three weeks. Such sharp rallies are indicative of short-covering: Lite-coming amateurs'
shorts get squeezed and they cover in G panic, running prices up and triggering more
short-covering. Once the panic is over, there is no follow-through to the buying and rhe
downtrend resumes, taking prices down to new lows, much to the consternation of poor
shorts who got squeezed out prematurely.
The situation is very different fit ihc bottom chat is slowly forming near the right edge
of the chart. There is no great volatility, and prices are turning slowly, creating a base that
can support a major, lasting upmove. Powerful bullish divergences of the MACD-
Histogram and MACD Lines holdout the promise of a major new uptrend. The main
difference between uiis weekly chart and the one we saw at the time of Dandies first trade is
u bullish divergence of the Force Index. As it rails in line with MACD, it signals ki go long
cotton and he prepared to tide u major upmove.

254 Entries & Exits
The dnily chart confirms that the downtrend in Cotton has ended; prices have
stabilized and ate getting ready to trend higher, MACD-Histogram and MACD lines have
completed their bullish divergences. Notice that while the latest bottom was being formed
in December, bear? could not even push MACD-HfetOgram below /era. Markets run on a
two-party system: If the bear party is weak, bulls are about to Lake control.
Notice the downspikc of the Force Index in early December—that was the last hurrah
for the bears. Every bottom of [he Force Index since then has been more shallow and every
top higher—another signal of bullish strength. At the right edge of Ehe screen, prices closed
above both EMAs, above value, for three days in a raw. The last bar is blue, allowing us in
buy; the dip towards value creates a good buying opportunity.
TRADE 2—EXIT COMMENT
At the right edge, cotton is accelerating io the upside, with all indicators bullish and In
gear. My only critique of Pamir's exit here is that he seems to be gelling ou! loo early. He
is a highly disciplined man who set himself a targei of 30% of the channel-This is a very
good target for an ongoing move, bul when you're trying to catch a major revcrsal.it is
reasonable to reach lor more. In other words, the setting ot stops and the placement of price
targets depend on the stage of the market you're trading, and your opinion of Ehflt stage
should be a part of your decision-making proofs.

Chapter H Damir Makhmudov 255
This commenl i>n Damir's exit is a friendly criticism. He is extremely serious and
focused on his work, rapidly developing his analytic ^nd trading skills. Having started
from ;i blank slate, he is generating trading profits, keeping terrific notes, and (earning
from bis experience, Damir is scheduled to come to a Traders1 Camp three months from
this interview* end 1 look forward to working with him there. My Eavorite students ore
serious amateurs and Seiuiprofessloiial traders coming to improve their perform ante1 and
react the next level in their development towards trading for a living.
GRADING YOUR TRADES
Imagine taking a college dass wilh a friend: Both of yon Study equally hard and do your
homework, but in addition, your friend lakes a couple of tests each week. Which of you is
likely to gei 21 higher grade on the final exam? Damir buys and sctte, makes money on some
trades, loses it on others, but after each trade, he grades his performance on three scales—
the quality of entry, the quality of exit, and the trade as a whole.
All three measurement have been described in Come into My Trading Rooitt. The
quality of each entry and exit is reflected in the placement of your trade within that day's
ban Let's say the high of the day was 52, the low 50, and you bought ;ii 51.50. This places
your purchase within the nip 25% of that day's rnnge—not a good entry, since iL shows
thai you bought near the high of that day's bar. Suppose a few days later you sell at 51*
while the high of the day was 33 and the low 51. Now yt>itr rating is 50% since you sold
fight in the middle nf the day's bar. Your exit is belter than your entry, but still no! good

256 Entries
enough—the goal is to buy in the bottom one-third n! the day's bar and sdl in the top
one-third. This may sound easy, but is actually very hard to accomplish with any degree
of consistency*
Emotionally, the easiest thing to do is to buy high and sell low. Most people buy on
me way up and sell on Lhe way down—only the pros do the opposite, as they trade for a
living, buying low and selling high. To kuch yourself (o do the counterintuitive thing, you
need ro measure lhe quality of ^very entry and exit. You need to monitor your [rend to
make SBTB you're becoming a sharper trader, and your entries and exits are becoming
belter. This is why you need to grade every entry and every exit.
There are several ways to grade the quality of ESCli Completed trade, but my favorite
measure \i to do what Damir docs—compare the points gained in the trade wirh the
height of the channel on the daily chart. One uf the very few scientifically proven Facts
about the market is that prices fluctuate above and below value. A well-drawn channel
Contains ihe bulk of price swings. Comparing the outcome of ymir trade to the height of
the channel allows you to see what percentage of a normal range you were able to Capture
To rate a trade, J divide the points gained in that trade by the height ol the channel
and express the result as a percentage, with no decimals. Damir, tike a trne athlete, used lu
calculate bis performance numbers lo Ihe second decimal. 1 [old him he was overdoing
it—trading is not an e*aci science, and those decimals only create an illusion of precision.
If you capture 30% or more of the distance from the upper to the lower channel line
measured on the day you entered that trade, your gtadc is an "A". If you capture between 20
and 30%, your grade is a "B," Ten ro 20% of the channel heighl »ives you a "C" and
anything less than that is a "D"—a failed trade.
Years ago, when I developed this grading system, one of my problems used to be that
I hdtl profitable trades for too long, waiting for greater gains, but ultimately giving back a
major chunk uf paper profit when prices reversed. Once I started grading my trades, I
began taking profits more quickly, just as Damir is now doing, trying to grab a "B and
later an UA," to raise my grade point average. Trading lo get a higher grade taughl me
useful lessons from which I benefit to this day. Even when I try to caEdi longer swings* I am
quick Lo grab profits al the first signs of a stall. The habit of grading your trades makes you
Concentrate on your performance,
fr this method is so useful why do so tew people grade their performance? Some may
not know [his method easts, while others cannot be bothered. Record-keeping is to
trading what changing oil is to driving, ft is fun to drive but no fun for most people to get
under the hood to maintain their car. Trading is a lot of Tiin, but only good maintenance
makes racing possible.
Damlr'a thorough record-keeping contributes to Ids rising performance feveL
He used to be a competitive athlete—and all serious athlete keep score. People who
succeed in one field are likely to be successful in another, as long as they bundle ii with
the aame level of determination. Failure leads to more failure] and success leads to mow
success. This is why Damn's long-term plan lo get into fund management has a very
realistic ring lo it.

Chapter H Damir Makhmudov 257
The More Experience I Have,
the More Flexible I Become
Being Invited In lliis interview was a great encouragement for me mi
this tricky road. Preparing for it became an educational experience,
and (he meeting in Amsterdam turned out to be a lor of nm.
I am currently applying the Triple Screen trading system to our market (cotum), after
learning about it from Dr, Elder's books, 1 keep modifying the system and techniques to fit
my personal trading Style, while staying within the framework of ihe method The
techniques change with [he p;iss;igr of time, for e.\nmp]e> having specific Ear^els, su<_li ;is
taking a defined percentage from the channel, was very helpful to mt? at an earlier stage of
development. Many small successful trades gave me much needed confidence in my
ability to profit from my ana!ysist trading system, and plan. Later, the need to grow equity
made me realize 1 had to adjust Lhe ;,yslem to let my profits run. The more experience ]
ruive, ihe more flexible I become, even ihuugh at an early stage, limiting my pioflt poten-
iid wiih specific: targets was essential.
Taking courses in technical analysis at the Securities Institute of Australia has gotten
me interested in poijil-imd-flgurt (P&F) charting. [ ain trying to use it lo supplement the
Triple Screen. P&F seems to be very good for detectim; congesiion areas, support and
resistance, while Lhe Triple Screen indicators help determine whether that congestion is
predominantly distribution or accumulation. This is a very rough idea at the moment,
which 1 am just starling to test. I also keep in mint] thai good trading systems tend to be
.simple. I may end up rejecting P&F, but it feels good to experiment.
I see personal psychology as the key to acquiring an edge in Ihe market. We are alt dif-
lerent, with no two identical individuals in ihr whole world. Since we're all unique, your
trading psychology must be firmly looted in ynur philosophy of life. For me, positive
[[linking helps center myself during unprofitable trades. It euable.s me to calmly face and
accept bad trades, uimly/e the reasons tor losses, and avoid repeating mistakes. Hati [nHle*
tend to come in strings, oneafier;mo|hei\;isif the market is throwing you a challenge,
testing your emotions, trying to break you. Positive thinking allows me to withstand such
difficult periods and move forward by further sharpening my trading skills.
Our life moves forward in cycles, with i^ood and bad periods, ups and downs. The way
you manage your bad periods has an impact on hnw your good periods will turn out In
the future. Rising to the stage where trading can support my fumily, providing a
tremendous decree of freedom, is my ultimate goal.

Name:
Lives:
Previous profession:
Trades:
How long:
Trading account:
Software:
k
Pascal Willain
Waterloo, Belgium
Entrepreneur
U.S. stocks
Since 1998
Medium ($250k-$lm)
Excel, Effective Volume
(an Excel add-on),
Historical Quotes Downloader
from Quotelinks.com

CHAPTER
Ki
Pascal Willain
Effective Volume
TC
r^ ady in 2005 I received an e-mail from a trader in Belgium. He described his
JL_j volume-based trading method and wrote: "I believe you will find my work
interesting because ii is a continuation of what you wrote. It goes In 'he same line, but With □
different SCI of data, allowing you to get a different view of the market.1'
The paper attached to the e-mail was written in flawless English but in .1 style of an
engineering report, and I found it heavy going-1 asked Pascal whether he traded his
system. After receiving a positive reply, 1 invited him to slop by ihe apartment I'd rented in
Amsterdam lhat June if he wanted rn show nit his nieihod. He came to ihe day-long
master class ] taught on my first Saturday in Holland, and on Sunday morning walked over to
my apartment to show me his work.
I Ms approach was logical and showed gnod trading results; 1 also liked Pascal's
personal style. We continued our conversation over lunch on a terrace by the canal, and I
invited him to be interviewed for [his book, A week Inter he relumed to AmMerdam> and
we sat down to talk. The mkru-computcE he brought along belonged to his wife, and in
showing me his charts, Pascal Hew through Japanese dialog boxes just as easily as if they
were in English or his native French.
[ grew up in a conservative middle-class family, the second of five children, but
bt\;im<? a had boy at about 12,1 bad conflicts with my parents failed two
consecutive years in school, started smoking (fortunately, there were no drugs in
those days), and shoplifted. Aftei about three years of that, 1 snid to myself,
"That's nor ihe way to be, my life is for me, I hffVE Co make something of
myself." I began to Study and haven't stopped since. I love math and studied
software engineering, but after graduating did not feel like goiny to work in a
big company. I traveled EO Japan, and decided to apply for a scholarship eo earn
my master's dej-rec there. I had six months of intensive Japanese instruction,
then studied for lwo years for my master1! in applied mathematics, while also
taking finance and business classes at another Tokyo university. My
dissertation dealt with portfolio risk analysis.
I owed a year of military service in Belgium and tried [0 escape by
writing to government ministers who had ihe right to offer an assistant's position
instead of serving in the army. I was looking for something to dn with finance
and Japan, bin nn one replied lo me- Alter 1 completed my service! Philips
259

260 Entries & Exits
Electronics in Amsterdam offered me n job, and there was ii bank that invited
me to be a trader in Tokyo, but I knew several traders and they were all stressed
DU&Then one of the politicians to whom T had written a year earlier called and
offered m<? a job, I went io work as :i consuliam for the minister of technology
.Hid traveled between Belgium and Japan for several years.
I was advising Belgian high-tech companies on exporting Lo Japan, and
after a while realized that J could do thai as a private consultant. T wrote a
business plan, got funding front Japanese friends and created a company lhal still
exists today. In consulting you can only sell your time, which is limited—and
[hill's why wt1 moved into real business, importing electronic components
from Korea and selling Belgian beer to Japan, That's when I mot my wife,
Michiko, We decided Lo gee married three days after we met—we knew we
wf re right for each other. We got married two years later, bul the decision was
totally dear on ihe third day- I recognize things wru'n they're right—I feel
when something Is happening that the time is now, and I haw La take a chance
because it will not happen again-1 did that when I went to Japan and when I
wenj lo work for that minister- when the dunce is there, you have to grab it.
1 created my second company in Paris where we imported access control
components from Korea for a French customer. We developed our own access
control systems, subcontracting manufacturing but doing the assembly In-
house—iL la j high-margin business. I have partners in all my companies
because I like to share responsibility and work with people. You have lo trusi
people, and while sometimes U does not work, it usually does bccau.se the
Trust comes hack
In iyy7, during the Internet boom, I created a software company to offer
database BCCefiS through a Web interface. Alter the Internet bubble blew up, we
shifted to offering automatic customer care by phono—a dialog between a user
and a machine ihM tall centers started fa use. There are my few such
companies in Europe, and we :nje becoming recognized. We are srmll Imi respected, and
h\v, companies buy horn us, I used to be the CEO but looked ior a replacement
because daily business was interfering with my overall focus. Also, I was
becoming involved in the nwrkets at thai time. J ;im still :\ director, working part-time.
I started olh as an investor and not a trader. 1 hud some extra money,
and in 1998 threw 525,000 into the market on lips from friends. I Iosl 50% in
two months, but was told to have faith and Stay long. After ,i while, my position
recoveredi but I knew I has been lucky and had to do my own research. During
the Internet boom, 1 picked up a few high-techs that went flying, bui after a
while [ fell I had lo sell. A few months later the Interne! stocks crashed—and I
knew I bjd been lucky again. As a mathematician, I knew you could nol always
be lucky and dedded to get a profess ion a I manager tor my portfolio. I asked a
Iriertd in the U.S. to manage my money, but he said that would be a bad idea—
if you have the ability to make your own decisions, better use it. It'll take longer,
bui you'll be a bigger winner In 2001 or 2002 he told me lo gel two or three books,
the first of which was Trading fora Living, I worked on ii until I "graduated" from
its Study Guide and then bought Come into My Trading RoottL 3 programmed
everything from that book into Excel and started trading. I made 60% in six
months, but then had a bad month, lost 6% and stopped, following thcG% Rule.
Whal I did not like aboul trading was thai it look a lot of lime. Making
many small trades and keeping records was taHng lime out of my family lift.
Also, with that method I could not predict big drops, could not see accidents
coming, J slopped trading and did research for a year and a half. Luckily,

Chapter is pascalWillafn 26 L
I a>uld think in a programming language, which t>ot me to the point where ]
developed my own Trading system.
My first objective was to find the trendsetters—people who knew what
was likely to happen and who traded ahead oJ the news. I developed the am-
ccpt of Effective Volume that tells me when large holders are doing something
sfrange and also when Ml players ;ire changing their direction, meaning that
ilit price is about Eo to I low.
1 divide ,1 stock's daily action inio one-minute segments to ibuluit volume
that leads to price changes, [fdie price has changed from one minute to the next,
it intfiiiis ihai buying or soiling has come in, and 1 trad; that volume. IJ [he price
has not changed, Lhe volume of that minute is irrelevant This indicator does tioi
work for stocks priced under a dollar. I also filter olli block trades—large trades
assembled by specialists for their dients. They buy up stocks* then sell them as a
single block, so thai in effect they appear on lhe tape twice. Ifl see a one-minute
bar chat has more than 10% of dial day's volume, I eliminate ii.
Pascal says: To calculate Effective Volume fur lIil1 one-minute bar, i use only a portion ot flat EFFECTIVE VOLUME
minute's volume.! miiHtpJj Che total hv a formula adapted from Lany Williams uhu divided
(rinse minus upm) hv lliigh minus low). I also iitltl a Lick Eobulh sides of Mir Hiiuiliun in oiiIit In
adjnst
Absolute value of (Close—Qosc-,^ haf}+ i tick
EV= ji-: ■" l1"l1f x Volume
where
litiMi I,, is the !ii^EiL's[ of tlit1 iwn- ihc currt'iii hart high orpreviouB bar's close.
Low w|Lsih[: lowest of the Iwd- ihcnimMiIbjir'slow ur jirevious l][]i's dose.
A tick is the smallest penoltied price change, hoi iiuiNa1 one cmi lor U.S. stocks.
My fonmila Is based en the doses because the dose of one minute can be different from tbe
DpcuoftJic nest iniiiufL1. Tills happens If the Iasl lr;iclc []I Ifit." prL'viuLis ininuLr Lunk out Lill (he
Hblcvohmicul liiLit price, imc[ Ilii'iii'Jii |»*rsni] huv.s ;ii ni hi^lirror Icnwrpncc. If 1 \vtirci to ukli tliu
price instead of die pFevtaus dose I'd Iosp fltf toflnence of ilin) trade and ili<> fiffecfive Vblmne
ivuEiUMiccniiu.'i.hc vuUunc rtrspoiisihlc for *i pike change within one iradlngndnutp.giTljigdiffer
cut results. This is wliy I use Qiepreviousminufe^doseinslfad ui tociiJTfintiiilaiUe'Eoifcn.
Also, ifyjuiribrmuhi ube fliecluse ofthcpre?lons ininutt, you must modify tic Mgh and
the low, ii lhe previous close wasUghcrtban iheUi^h dIUm cantnt minute and your fannnJa
does not jiltouin for that, if]j be wrong, SimUiirly, if lhe previous close Is lower than the low of
IJil? curivnl miniitL\ you then aeed to adapt the IowqFHm formub. This is why f use
mid Low iJh, iJisti'iNE nl Nimpk Ili^li ,jikJ Low.
ke, I want to find the fraction of Effective Volume thai belongs to large
traders. Low volume tends in he noise—small retail players who do not have a
due. Large traders fend to be Institutions with superior information! and they
trade size. I truck lurge players by focusing on bars whose volume is in the lop
hulf of aU one-minute Effective Volume*; for that slock on Lhji. djy. 1 find the
midpoint for each day—lhe HV uf half the bars is higher, and the other half is
lower It is important to recalibrate this number at the end of each day because
the daily volume keeps changing, By adding up the iolal EV and then the EV

262 Entrfea&Exjts
OPWV
jt Hum, ai djf i
i
J
:.TlJ 'VC Self
E ■
1 ill
S 3 3 S
The slock declined in February and went flat in March but Large
Effective Volume started picking up, indicating which way the breakout was
likely Lu ga. The stock embarked on a healthy rally, with Large EV fully
confirming (he upmove. The pros had loaded up early and kept adding
during the uptrend. The smaller traders Fully lived up to Pascal's label
of "not having a clue." Their group remained negative through May and
went only slightly positive in June, missing the bulk of Jhe upmove.
for only the lop 50% of bars at the end of the day, I gat two highly filtered
lines—Total Effective Volume and Large Effective Volume. The Large EV
shows me whether big guys are buying or selling, which is usciul for detecting
possible irtfntl changes.
Whenever I lookatatracUngrangetryingtodKldev^iether prices are likely
to break out to the upside or ro (he downside, I know they usually move in [he
direction of the Large EV, I also know it'll take time to prepare for a breakout—
days rather than minutes or hours. This is because it takes time For institutions
to accumulate or distribute doling the trading range. (Compare this with Bill
Donne's comment about his experiences at Fidelity in Chapter 12J
There Is a dam, and a reservoir is filling with water. Insiders u?nd to he big
money, and while big money is not necessarily smart't is better lu be on the
side of large players than retail- The Securities and Exchange Commission
should use my software to detect insider trading—I'm joking, they probably
have other methods, but my software gives an individual trader more power
against bit; guys.
I use my software to monitor what
[Eiders are doing, looking at both the'lbral
EV and the Large EV to see how the crowd
and bis traders are moving. With the Total
EV, I measure the quality of upswings and
see whether they are becoming stronger or
weaker. 1 also look for divergences between
the Total EV and the price because in an
upswing the EV will usually weaken before
the price- When the EV becomes weak, the
stuck is ready to gn down fast and may
even crash—you have days to buy, but only
hours In sell, When the first cmck appears
in Lhe dam, it is time to rim. After
developing die EV, 1 looked al my old trades and
said, "Now I have a tool lu sidestep
catastrophic situations.*'
This Is not li miracle system. It is a
tool, but not a complete method.
Sometimes it docs not work. Life is like that, 1 do
nut want to give the impression thai this is
the uhiimie. Ji works most of the time, hut
with some stocks it does nor, and then 1
understand [his is not a fiood skid; for this
method, but there are many other stocks in
the market. These days 1 am working Lo
refine my method, to trade less and take
advantage of longer tTflflds, 1 keep buying
uptrends and selling reactions, bul need to
find whether n reaction is just a pullbLick
within an upLrend, allowing me to hold,
and when it is a
[dynamic MUde. 9H Days. In .000 sfifl
s a s s
[f the Total EV is [rending do Wn, I will not buy that stock, whatever the price
is doing, 1 short rarely, and only on the stronges! signals—I'd rather pass and
look for longs elsewhere, I also do standard technical analysis on the Internet to
sec what other traders are i

Chapter 15 Pascal Willain 263
II | PASCAL'S ENTRY
Puce, 20
Dynegy Efledne Volume by Size
(Dynamic Mode, 20 days, in .DCO shares)
■11)1-
Upper pane; Bar charv (one-minute bars)
Lower panei Effective Volume [blue Small, green—Large)
DYN
Inn* k an energy company. This churl sliovvs !?0 days of trading, frum 3/3]/200!> to
4/27/2005—this is the time window al which I like !u look. You can see a downtrend, ltui
then the decline slows down., and near the righi edge there is a trading range between
approximately 3,in and 3-40.
The holLom pane shows two lines uf ElTectivi: Volume—one far large traders, the
other for small. At first, both EV lines move together with \he same tempo and direction,
and no clear signal between March 31 and April 14, On April 15 the Large EV went into
sell mode, and Lhe price went down—that's normal behavior- On April 22 ihe Large EV
reversed and started trending higher even as prices continued Hal and lell to a new low-
After several days of this, 1 said, "Something is happening; I do not know what it is, but
big traders are buying, and 1 aliu bought/'

264 Entries & Exits
PASCAL'S EXIT
Dynegy Shara Price
Dynegy Convmimenr of batters,
days
\
10 0*
on
9 C © O e? U? C ^* C^
B r. c z; i; iz i:. *r tz
ODQOOQLII-lciaoCIO
Upper pane: Bar chart (ore-minute bars)
Lower pane: Effective Ratio (Commitrrient of
I look at [he Large Effective Volume for entering trades, but not fur my exits. It is not
useful for exils because it tends eo move with Che Irend* not providing any special si
What helps me decide when to exit is the Effective Ratio—it is the Total EV divided by the
[iii-il volume. Since my work is b^sed on one-minute charts, 1 use a 250-miflUte EMA of
Totaf Effective Ratio, which covers about one trading day.
When Ehe mass of traders is very committed to a slock, the ratio of Effective Volume
to total volume becomes high. When buyers become weaker, the Effective Ratio declines,
and it becomes negative when sellers outnumber buyers.
The Effective Ratio confirmed every Upleg of the mlly, except tor
the lii.s! one. When DYN shol up above 4.30, the Effective Ratio began
to decline instead nf going up. When it fell below 5% J could no longer
hold. The Effective Ratio was still positive, above zero* but weak—and
when I sit on a large profit and the situation is nm dear-ait, I'd rather
t;ike my profit.

Chapter 15 Pasta! Willai
TRADE 1—ENTRY COMMENT
iiU%
11] I
;|T-i ,-|
K
: ..
Q 1BD
'JL'-JJ
Ueu
r ' - *-' ■'
in nil
Some
Since no merhod for finding trends is perfect, different methods will deliver profits and
losses at different times. On this weekly chart (if l)YN, my system prohibits me from going
long. Both the EMA and MACD-Histogram Lire declining and iVitr Impulse system is red,
allowing me to short or stand aside.
arc
to appear. There
10 weeks of red
to fmd support.
Weekly Force Mac iHow*. a
tvtaiiivc bullish divcryevict.
A week aqo prices fell to a
v\cw low, Ukiftq otfttHcir
bottom, butthii week
is ho follow-through
could be a falie
breakout, a terrific buying
opportunity. Still, tHc
Menage t get ffow the
impulse system is to go
short or stand aside I
certainly ha'/c v\0 interest
fit shorting beret with aft
most bullish sfffls, and so
will Stand
The daily chart shows ;i slowj pahiful grind down in this stock, ii. broke down on n gnp
in December, fell 20 cents lower in January, a Few more In February, it) cents in March and

26G Entries & Exits
20 cents in April. Near the right edge of the chart, most signs are h\ gear lo the downside,
with a few bullish exceptions, MACD-Lines have declined to ,1 level where bottoms [end to
occur. Prices are below the lower channel line, an oversold area, Force Index is tracing a
bullish divergence. Still, the daily Impulse system is red, prohibiting me from buying.
At the same time, had Pascal told me he was planning to buy DYN, I would nm have
tried io Mflk him out of it. Different systems have different parameters, and it is impossible
to find the one [hat will satisfy all traders. You have to find the system thai appeals to you,
test it, and go forward with it.
TRADE 1—EXIT COMMENT
At the right edge of the
chart, # powerful upswing
is mdcrway. The rtWft shot
up above its upper channel
fine, with Indicators rising
to rcc&rd levds. The ftflcf*-
to-last bar is extremely
long, iftdic/ttinq a baying
panic. Such panic mdycs arc
caused by short--idlers
caught" &n the wr&to$ lide
of the Market (regular
buyers tend not to fed so
urgent). Once tile weakest
players, the trapped
sHort-idlcrs are shaken
out, the stock is ready to
pause Or a/ctt reverse.
Hi
IJJUU
ivob
A few days alter Pascal went long., prices stabilized at a slightly lower lcvdh and Lhe
uidicators began to turn up. The dally Impulse system turned blue and then green,
as prices dosed above the EMA. At the same time, the weekly Impulse f not shown)
stopped being red and turned blue, permitting buying*
The last bat is much shorter than [he previous one, showing that the buying
panic is dying down. The last bar has dosed roar Its luiv! a sign that bears dominated
the endgame for Ihat day. Pascal is totally justified in Liking profits. 1 Fe got in when
prices were undervalued, aod now they are overvalued—his trade had a logical
beginning, a dynamic middle and now its end. A sensible person recognizes when
the party is over and goes liojnt feeling confident there will be more parties in the
future.

Chapter 15 PascalWilkin 267
PASCALS ENTRY
KCS Share Pnee. 20 days
r\
M
EI7D
jiao
(155
lisa
SI 4.5
KCS Efbctiw Volume by Sill?
(Dynamic Mode, 20 days, in ,000 shares)
■10Q
S ft ft
KCS
Energy, lnc.» is in the natural gas business. Whenever! Lnuk a stock, I want lo know
wlidi llie aimpsiny does, iis bask fundamentals. This way, if I make a mistake in technical
analysis, good fundamentals may provide an additional safety net.
Near the right edge of the chart, KCS is in <i rrnding range, hut Large Effective Volume
is rising, li teJh me that big uivcstors art buying, and the probabUily of an upside
breakout is grt:tler than Li Ijrtiik la [lit downside. I went long and placed a scop at 14.25, just
underneath the trading range—-ifTm wrong, I'm out,
I did not sci a price target—I do not like to have them. The market will tell me when
ii is ready to turn—when Large Effective Volume sturts crashing Qt die h'ffeclivtf Ratio
be Lames weak.

268 Entries & Exits
TRADE
PASCAL'S EXIT
KCS Commilmenr of rrEiders, (Sffl B) days
\
15 a*
50%
DJHL
□ □ □
mm
in in
' TRADE SUMMARY
Long KCS
Bought 5/10/2005 @ $14.75
Sold 5/12/2QD5® $14.25
Loss - $0.50 per share
KCS k'll two d;tyi after 1 i:ntt:r^clh stopping mt out. Effective Ratio is trending down,
showing that sellers arc getting strong. 1 had bought the top when they were luiying—and then
they changed (heir mind, but that did not fed normal to me. f had to analyze why this
trade failed.
After taking thi.s loss, I found tlmE KC~!S would not trade well with my tools because its
price is linked to that of natural £as; they arc about 9094 correlated. My mditirnl is based
on following the big guys, but it came out that there arc much bigger guyb who trade this
commodity, and they impact this stock more than big slock traders.
And SO I dropped this Stock from my list. Stopped trading it b
have no advantage over the competition here.

Chapter 15 Pascal Willain 269
TRADE 2—ENTRY COMMENT
The moving averages are flat, MACD-Histogram is rising, but Force Index has Lni<.ed
a bearish divergence. The Impulse system Es blue, allowing us Ln gti either lung ur short.
Squint at this chart long enough, and you1!] find cithei a buy or a sd] signal, 1 do not allow
myself to squint, believing ihat a good trade jumps at you from the screen—you can't miss
it If you catch yourself squinting at a chart, move on to the nexr stock.
KCS had a slow and steady
uptrend for the better
part of two years, but
became wore volatile d\
rcGcbf MDHtHs. \¥i March
it dccdcr/ifcd and rat\ up
to aww
collapse
week ayifjf onetime to
decline mo April, vMtn it
staged a sharp -fwa-ttcek
rcvcrial. At the right edge
of the chart, KCS ts
essentially flat, witH Very lifth
useful WpUf frOto toy
technical indicators.
The daily chart &f K.CS pro-
Yides foorc contradictory
signals. The last strikingly
clear signal was a sell in
early March Prices shot up
collapsed, having a
tail or a finger
pointing skyward. OWc the
market tested rfftrf rejected
a higher price, the next
test was lifcly to be to the
downside, fit the same
fttuc M4£P- Ihstograwi
completed a MdSlNt
bearish divergcHGe. ttffWH two
powerful SiQtttJfc con\e
together, you have to ptrf
on a trade-it docs not
really get much better
that.

270 Entries & foots
KCS slid from above $17, where the .sell signal was given, to below $14. There,
:i similar combination of signals gave a message to buy—a spike below S13 and a bullish
divergence of MACD-Histogram. The April buy signals were less clear-cut lhan the short*
ing signals that month, and they did not produce such a powerful move either—prict^
bounced, hut then weni essentially flat. At the right edge of the chart, the daily Impulse i$
green, allowing us to buy or stand aside, but not to short. There is no argument against
Pascal's decision to go long. The Lnrge Infective Volume is up, his logic is valid, and his stop
is m place.
TRADE 2—EXIT COMMENT
At the right edge, prices collapse, and the trade comes to a quick end as Pascal's stop
bdow the recent trading range gets hit, Characteristically fur a serious trader, his research
does not end when th.tr trade ends. Where most trades would shrug off it loss and move on
io the nevt trade, Pascal continues to dig, trying to find out why his method felled this
time. He comes up with an important discovery—the price of KCS is 90% correlated with
the price of natural gas.
Having made this discovery, a trader has several choices. He may start using buy and
sell signals in natural gji lu trade this stock. He may look for arbitrage possibilities
between the slock mid natural gas. Finally, he may da what Pascal did—decide he was run
interested in futures and cross this stock off hit lisi. A serious trader neither gloats about
his wins nor buries his losses. 1 Je treats both as the grist tor his analytic miil, helping him
learn and become a better trader tomorrow than he is today.

ChapterlS Pascal Willam 271
THE TRENDSETTERS
When Pascal lirst showed me his Effective Volume, I asked what he warned to do with his
concept. He was already trading it and had no interest in managing money, but wanted
public recognition. In talking over bis desire ro share his ideas with the trading public, J
thought ol those petty individuals wlu> pop up saying, ''Why would anyone who knows
how Lu trade disclose his methods?" Hcie's a good example of how generous a successful
person can be. He is a partner in several businesses and makes money in the market, but
his main interest today is supporting the foundation he created with his wife for taking
c;ire of severely disabled children.
Pascal's method has several more features than described in [his chapter. Me gave Die
a thick manual and urged me to include ;i lunyer description of several tools that he Lists,
but I had tn draw the line and focus on the essentials fbl the sake of clarity tind brevity.
Pascal is planning to write a series or iirtidcsoi a book detailing his method. ] leand David
Weis are the Ewo traders I Interviewed fur this project whose Future books I look forward
to reading; the book by Gerald Appel has already come out to an enthusiastic reception.
With all my respect for Pascal's wo rk, 1 want to offer a few words of caution regarding
his key concept, which could be misinterpreted by some readers. Pascal speaks of
trendsetters who act before the crowd and who.se buying or selling can send the market into a
new trend. Undoubtedly, some market participants are more knowledgeable than others
and arc more (.apwbk* of making decisions early. lalsoagiee riul more insider trading lakes
place \n the markets than we hear about—chat the insiders who get caught violating the
law tend to be the greediest ones. The quieter and more cautious ones get away, leaving
only their footprints on the charts. Technical analysts look for those footprints in order to
recognize trends ;incf reversals early.
At the same time, it is important to reatire that no group has a direct pipeline to the
tnilh. Big money is sometimes smart, but not always—jusl visit money management firms
and look ;it the corporate cypes managing your investments. When you look tor the elusive
trendsetters, you must keep in mind that sometimes they arc there, but more often they are
not. Sometimes people in the know accumulate shares before a rise, bul other limes
insiders iire no more present than the Loch Ness monster or the Abominable Snowman. This is
why an essential trait of every success fill trader is humility—knowing thai he does not have
a corner on the truth and ih<U his methods do not always work. This is also why serious
traders pay a great deal of attention to risk control and money management.
Going ii step further, the search for Lreudsetters, while useful at times, can push
impressionable people over the edge and into tilt conspiracy theory—a view that a vast
faceless conspiracy rules not only the markets but the entire world. Such primitive belief
is characteristic of emotionally troubled and intellectually challenged persona who :ire
unlikely to succeed in trading.
After I asked Pascal to review (his chapter, he added this commeflfc "1 believe that insider trad- a TIGER DOES NOT
inj; is linked to (lie way the cunipany is managed audilsLyiicol business. Large contracts Involve CHANGE ITS STRIPES
multiple pa rtiripntlts rind take weeks tu negotiate, creating in on chances for infnrin-iiiui] leaks.
A company cannot change Hie way if does business or ils management method—if \i leaked
information in the past, it will leaft Ed ihn future Beamse of this, 1 like to look at a company's
iu'U'k for llirpastycar to sec whether there was a prior signal from I.iirjji-Effective Volume. If the
answer is yes. then the stock is probably a fiood candidate tnr my method," —AE

2/2 Entries & Exil.s
s l iry to visualize ihe trendsetters, [ can see an occasional insider trader, a large fund
r with an unusually keen grasp of a certain stock, and further afield, a person like
Pascal who, by his keen attention to a Stack, recognizes its potential and yets in early,
becoming ei irend.sellcr himself. Oilier Limes, there are no trendsetters at all, just a mass of
traders stumbling In [he dark, buying at the ask and selling at the bid, enriching llic
dealers. Still, sometimes the trendsetters are present, and now we have Pascal's tools In help us
track lli rir iic
e-mail from
Active Boundaries
Why didn't anybody else think of these cunceph before? This is j
question 1 have been asking myself for some time. My answer is
probably similar io whal Dr. Elder might say if someone asked how lit1
wrote a book on trading. I think he combined experiences from dif-
fertni fields: psychology, tradings ii|J|d writing, i came up with these
new concepts because <>f my experience in applied mathematics and writing software, hut
most importantly 1 came lip with them because I needed them far my own trading.
Suppose this need was recognized by a big financial institution. They would have had
to gel researchers with diftereni experience: software, math, and trading. Those guys would
have had to work together, exchange ideas, write papers, test them, etc—all the while
reporting to their bosses- This would have been quite n tasfc fbrcel
In addition to Effective Volume and Effective Ratio, E would like to describe my
second-tier indicator. Active Boundaries show when a stock is overbought or oversold. It
differs from all previous measurements of overbought and oversold because it includes
volume along with price. Other toolst such as Relative Strength hule\ (RSI) and Support^
Resistance, are based nn stock prices alone and ignore volume, even though it is an
essential paxi of markei activity.
Support and resistance mark the areas where a trend is likely to reverse. Keep in mind
a subtle distinction: Investors buy nnt because a stock is cheap or sdl because it is
expensive; they buy because they expect the price to go up and Bell because they expect it to yo
down. Similarly, a stock falls not because the RSI is overbought, but because
traders*expectations of that stock become low. These rvvo (actors nre related; the higher the price, the
lower the expectation of a further increase.
] developed Adive Boundaries to track the expectations of the pool of traders active
In a given stock. An individual's expectation of profit is linked to two factors: where he
expects [he price to go and the price he has paid, You would expect a trader tn make tus
decision on the basis or fundamental and (ethnical data, niii lii.s own purchase price. Truit
price has no influence whatsoever on where the stock is going to go. Still, most people
make buy and bell decisions oh the basis of their open profits or losses.
Suppose two traders hold a stock currently quoted at $10. Trader A boughl it at $8,
while trader B bought at $9,95. Both may believe Che company has ;< greaJ fuLurc, but
trader A is already 15% ahead and more inclined to lake his profit. At this point Ah£
expectation for the price increase is lower than B's. This is mainly because A's profit expectation
has already been at least partially fulfilled by his 25% paper gain. As a rule, the expectation
of nny trader it any moment is inversely proportional to his ROI (Return on Investment).

Chapter 13 Pascal Willaiii 273
If we knew ni what price each share had been boughu we could calculate the ROI for
cacb share at any time. Calculating an average RO] minute by minute is a close enough
approximation, allowing us to track the average RO1 of the mass "f traders. The crowd
active fn any given stock develops certain behQvior patterns and an expectation of returns;
when ihul stock's average ROl reaches thai level, the trend is prone to reverse.
Active Boundaries iire we\ I -established zones of maximum ami minimum average
ROls for the pool of active shares, nr what I call Active Float. Estimating ilic- size or that
pool is J visual procesSj somewhat similar Lu finding the best width of an envelope. When
you want Co draw a channel around a moving average, you try diflVren! coefficients,
looking tor Ihe best fit to creaie ;m envelope lhat contains the most prices, with only the
extreme points Sticking out. Some Siocfcfi require a 5% channel, others 3-5%, and so on. To
determine the Active Boundaries, you have to keep adjusting Lite Active Float number until
you find the one whose averajp ROI produced the most regular reversal patterns for the
past six months or so.
TMK (The Meridian Resources Curp)
is a natural gas exploration and production
company. The than on this page shows its
average ROl for every trading minute. The
plot largely follows 'he price trend, but is
inverse to the average expectation of the
m;iss of traders: the higher the average
ROl, llie lower the expectation of further
increase. Active Boundaries are horizontal
on the plol of the average ROl. The
level £if those lines differs from stock EC
Stock because different groups of investors
and traders have different expectations for
profits and tolerance for losses.
In TMR the average ROI for 50 million
shares produces a much more regular
pattern than the price. We find 50 million by
trial and error—trying 3Ut 50, 70. and so on in search of the most regular pattern. The
aveiage ROI line oscillates between the upper and lower Active Boundaries fUBI iind
LB[). When the company announced bad news in November (point A), il changed
shareholders' expectations, creating a new set of boundaries (UB2 and LB2) to match the
lowered expectations.
As we fallow the chart from left to right, we observe the following:
• Between April and November 2004, Active Boundaries were luLjted between the ROI of
0% and 20%- Whenever the average ROI fell to zero, the stock was a buy, and whenever
il rallied to 20%, the stock was a sell. Near the upper boundary, the collective
expectation for the price increase became very low. The mass of traders considered the stock
relatively expensive eii thai level, reduced their buying, and the stock turned down.
■ At point A, in November 2004, the price broke its uptrendlinc, and the average ROl
fell to the lower active boundary (Lbl). Taken in isolation, this could have been
seen as a buy zone, but a breakdown in Effective Ratio (see char! on page 274} showed
thai the company was facing momentous difficulties and pointed towards taking a
shoft position.
• Ai'ier the crash, triggered by \i downward revision of the company's reserves of
natural gas, ilie stock developed a very negative seL of active boundaries fUB2 and LB2).

274 Entries Be Exit*
An upper boundary below [)% is typical of a strong downtrend, while a lower
boundary above U% indicates a strong uptrend.
At point li, the stock attempted to rally, with the average ROI of the Active Float
rising above the upper boundary, into overbought territory. In the absence of positive
news, the stock was ready for s downside reversal.
At point C, the average ROI touched its lower boundary, while the Effective Volume
showed Li very strong Upside reversal. Together, they signalled an excellent buying
opportunity.
At point A the price is siill very cheap, while the Active Boundaries show that ROI
esceedfld I.H2 and has regained its UBi level. It tells us that in [he short run the stock
is overbought what happens in (he long run will depend either on the new.1; being
released or on the message of the Effective Volume,
At point A in Nnvemher 20G*!—
the A mark is on the same dare on
both charts (pages 273 and 274)—the
average ROI fell to the lower Active
Uoimdary (LBJ in chart on page 273),
At that point the mass of traders was
viewing the stock as cheap. Their
collective expectation was high, and the
price should have rebounded. Il did
not because the bad news was already
leaking out. Between November 2 and 4>
while the share price was iiiiirejisint?;,
ilie Hffectjve Ratio turned negative,
as shown In this chart This Indicated
that sellers were the dominant force
even during the price surge, meaning
the rally vvah a fake and tailing tor
price weakness ahead. The combination of the Large Effective Volume, Effective Ratio, and
Active Boundaries allows for the best trading decisions, especially tor swing trading. This
method is not suitable for day-trading or long-term investment. Each of these indicators
taken alone could lead to major misinterpretations, and it pays io wait until their signals
point in the same direction.
1. H&w do you select the pool of active shares?
This is done by trial and error: I will use different numbers until I find the size that
produced the most reliable reversal pAttHfflG in the past.
2. Why docs the Active Boundaries indicator produce repetitive: top mid bottom patterns?
The honest reply is that 1 do not know. I think Chat the pool of traders in any stock tends
rn he relatively stable. Professional traders do not usually invest in a stock without Thorough
research, which takes time. Investors prefer to follow the same company foe a long time,
trading it on different occasions. The Active Boundaries lell us Ehfll tin? average strategy of
the pool of active traders remains .stable. The study of the ROI of this poo! of traders gives
us a good picture of how they wfll react in the future under similar circumstances.
i— -
9(111
DDCB
V
. A \
In Ili9i 1lllJlJ<|l
W i
J
>-

Chapter!? PascalWiHafn 275
3. i)n Active Boundaries work for any stock?
Definitely not! They du not work well in the following cases:
■ Dor slow-moving stocks whose float turnover is longer than *i\ months.
■ For hyperactive stocks whose flnnt can bo turned within a few weeks, because day
traders overshadow investors mid swing tradera.
■ For thinly traded stocks, since the trade decisions uf a few can hove large consequences
Lin the indicator.
I believe thai the study of the price/volume rtlaiinnshipis the key to measuring stocks'
supply/demand balance. Dr. Elder pointed this out with his Horce Index, but to take fill I
advantage of this approachJ had to work on fl different set of data—the minute-by-minute
information. No method is perfect, and [ si ill make mistakes, usually when 3 try to
anticipate my indicators.
No single marker tool works perfectly, hut a combination of tools makessuccess
possible. If you urc a beginner dissatisfied with your own mctbod, jumping into a more
complex method is probably not a good idea. If you ore already successful in trading, studying
thifi method am help you improve your results.

-'
■
m
Name: Martin Knapp
Lives: Vienna, Austria
Previous profession: Personal IT coach
Trades: U.S. stocks, futures, and Forex
How long: Since 1998
Trading account: Medium ($250k-$lm)
Software: TC2005, TradeStation, Trader's Governor
Traders' Camp: Has taken every Camp since March 2003
and taught in the September 2004 and
March 2005 Camps
_

CHAPTER
Martin Knapp
Do It Right the Next Time Around
,n tin rolled into our Camp !fi the Dominican Republic laughing and smiling,
sporting the heal computer equipment in the dflSSj and generously helping
anyone who needed help with their machines. lie ordered good wine tor his table at
dinners, kissed .ill the girls, and pailied late. He carefully avoided early morning runs on the
beach, but was always the first in classi soaking up information, asking questions, and slur-
ing ideas with other campers.
I have a monthly tampers' meeting in my apartment in New York- we review mar-
fcetSt share tips, and yoout for dinner. Most participants are locals, with the occasional out-
of-town camper timing a business trip to coincide with tf meeting; it h very unusual to
havr a camper fly in [torn abroad. Martin keeps Hyinfi in from Vienna, takes part in our
meetings, goes shopping far electronic equipment, and hits cvtvy parry in town
Martin loves In party, but he likes workfrlgjltsi jij> much. After leaving a party well past
midnight one Friday in St. Maarren, ] crashed and slept] but Martin went on lo u local bar,
where he spent hours talking girls into jumping into a pool wearing only a T-shirt Still,
when 1 woke up before eight, I .saw Mariin Jilrcady up on the terrace with his computer,
doing his homework.
During my last ycai of high school in 19SS, the manager [if" my hometown
bank created a fictitious account for our class to trade in the Austrian stock
market. Stocks are not popular En my country—people put their money into
savings accounts, and only about 4% of Austrian* ;ire shareholders. Nobody
in my family owned Stocks, and I had only vaguely heard of the stock market.
Our class started "trading" our "account" of 200,000 schillings fubuut J2t),f)IKl)
by selecting names that sounded good, buying and never shorting. By [he cud
of the year, we made about a S50 "profit," and the manager gave it to us in cash
for our graduation party.
Ever since then, I knew there vtfas a way to get money out of the
market. For the next 10 years I did a bit of buying, usually after hearing a tip or
reading something in the newspaper. Back then, many Austrian stocks had
one fixed price per day, and In buy or sell T would go to the bank, where a clerk
would pull ouf a typewriter to take my order. Then a few days later, you'd
know what
277

278 Entries & Exits
I never made or lost much money and never thought of making trading
my top priority in life, [ was busy at university and with my student fobs, and
afterwards co-founded a management eonBulting company in which I was
responsible For the IT department. 1 consider myself a personal IT coach and
work for several (op Austrian executives and firm owner*, helping them solve
their business and personal computer problems. I continue to consult for two
clients because I like- dealing with them.
In 1998 it became possible to trade stocks on the Internet, and thai was a
crucial turning poinl for me. I opened my first Internet account in February
1999 and started becoming interested in technical analysis. I was friendly with
an American from Seattle who lived in Vienna, and we started Looking at
charts on Web sites, very basic. He kept reading TechnicalAnalysis of Stocks and
Commodities and one day bought a copy of MetaStock to implement
something from chat magazine. My first software was a pirated copy oi his.
Now f realize thai what we were doing wasn't real technical analysis, [ was
painting color lines, Itlji they made me feel good. 1 was working full-time ill my
business and look&d at charts when the market was going my way, ignoring
them when they weren't. In a litile over a yenr, at the top of the bubble in March
of 2000, my $3,000 eTrade account bed grown to $40,(100.1 was teaching
business management seminars hi Eastern Europe* and sometimes showed Eastern
Europeans what 1 was doing with slocks, which they loved because they knew
that's where free money came from. I was in Bucharest when Rroadvision went
from $275 to S2H5—it was one ot the companies that eventually helped return
my account from its 340,000 peak bad; lo its $3,000 starting value.
Why did I give back thai money? After the loss J Felt, as you say, like a dog
with a can of food. The dog knows there is good stuff inside, but doesn't know
how lo Open it. I realized I had spent 11 ye«irs just messing around.
I always had a life plan—to sit on an island by 35 and not have a job. 1 was
already one of the most successful IT consultants in Austria, bur realized thai
retiring ai 35 on fees alone Was not feasible, I was a partner in the firm, but fill
from my goaL Not that I wanted to stop working—1 consider myself a
workaholic—but I did not want to work for clients; 1 wanted more freedom. Taking
an account from $3,000 CO $40,000 in a year seemed better suited Lo reaching
my goal I decided io give it one more try, and do it right ihis time around.
At the end of ZOUtX my then-girlfriend and 1 went on our first trip to
Australia, I love summers in Austria but always wanted to find a place to spend
the cold season. We wenl lo check out whether Australia would be a suitable
winter destination if and when my goal of sitting on an island was achieved.
We wenl fur two weeks—Melbourne, Adelaide, a little wine shopping in the
Barossa Valley, then Sydney, and five days on the beach in Port Douglas.
I went on that trip preoccupied with my next step in trading. In
Melbourne I stepped into The Investment Bookstore and discovered a copy of
Trading for a Living. That title rang a!) my bflfla. i could see not being tied to
my clients in Vienna but making a living from the market, which would allow
me to spend six months in Australia if I wanted and not two weeks, like most
people on vacation.
I started marking up pages, designing spread sheets, hud great fun piogram-
ming Indicators, and then bought an Elder-disk just to compare my
programming with yours, I was happy to see that 1 had programmed everything super"
correctly. Technical analysis, psychology, and money management stalled
coming together for me.

Chapter 16 Martin KBflpp 279
BEFORE
and AFTER D.R. 2003
rs™l*
'■
There is less to trading than meets the eye: g
computer iinim'di.iifly before: ■ t ■ r I after liii lirsl Tr;i[liTs' C;imp. Putting more lines on n clinrl
can only obfuscate the message of pricts. Aliiindful of siiuiik1 tfichnlcfll tools Is more us
lEirin (isLTL'trn full of indicators

Entries & Exits
I was busy implementing Ehe techniques in 7hidingf&ra Living^! of 2001
and was one of the firsl tn buy Come into My Tfotaiftg Room in 2002,1 had mil
met you thst, brut still have a copy with an autograph—" Thank you for being
une of Ehe Brat readers of my booL'1 Still, my clients had first priority, with no
more than 20% of my lime dedicated to trading, mostly laic [■veiim^s and
weekends, After raiding Ctvne into My Trading Room in 2002,aboul 30% of my
time went into trading. 1 heard nf Traders* Camps and knew that one day I'd
attend one, but did not fed ready in 2U02. 1 thought campers were highly
educated people, and [ did not want to come as a complete idiot, i wanted to be
abk eg benefit and even participate in discussion^ and switch my locus to
trading after that. The day before Christmas in 2002 I was cleaning my e-mails
when an announcement came in that an additional Camp had been scheduled
for March 2003 because traders who got left out of the January Camp were
banging on the door.
The second I read "1 I knew it was for me. It took Iwo days in coordinate
whether my girlfriend luuIU get time off to come with me jnd Lh^n I signed
up. I'd read the books, but being in class was no comparison—I had several
"ahaa™ and "wowrt moments, prepared a lofigllst ol things f had to do, changes
to implement, rules in add, additional software In buy. One of my screen savers
is a shot of my Standard chart before and after the Camp. It nude a huge
difference for me, helped me focus on what was important and cut out the crap.
1 was implementing what I'd learned, and as soon as my work took the
righ: direction, Hew u> New York to one of your monthly campers1 meetings,
I've always been a fan o\ America, ae a student spem a semester at University
of Illinois at Urbane-Champaign and had been to one or two computer shows.
! worked to improve my trading to be able to fly to New York and say, "Look,
I'm no! doing too badly." I came in June 2003, ;md when we met on Saturday
meriting for breakfast, you mentioned several computer problems which I
could easily solve. We spent a couple ol hours working on your computer and
then I asked you to take a few minutes to look at my tracks and charts,
receiving wonderful feedback on how to Improve. I'd hate to always be on the
Caking end and was glad to j-ive something buck. You told me of your plan to fly
to Amsterdam in August to visit friends, then renl a BMW convertible and
drive through Germany and Switzerland, returning the car in Milan where
your friend would be coaching at an international towing competition. 1
volunteered to help but found it w-is impossible to rent a nice ear, let alone a
BMW for ,\ one-way rental in Europe. So 1 said, Lonk, I have an Audi convert-
ihle, lei me drive yuu.
When you came to Vienna, 1 was trying to organize a network or local
trading buddies. Ten people came to our meeting, some even Hew in Jrom
other countries* but the"netwurk'wasa failure. Almost everybody came to
listen tci Dr. l-tdtr without contributing anything. There were a few exceptions,
such as Nit, an Australian camper who came from France. Then a [-real thing
happened—on Saturday morning you, Nk, and 1 were looking at market
industry groups and indices, and you said* "We have to build & shopping list;
this is ilit linit! to qet long in the market." Whal followed became the core of
our standard weekly homework—review Indices and groups, find the most
interesting ones, then look for stocks within those groups |sce Seven Days hi
Dr. Alcxtttidcr Elder's Trading Room on page 291 ],

Chapter 16 Martin Knapp 281
The three of us worked all weekend and in the end applied risk/reward
ratios to seleci the five moat attractive stocks for the wgelt ahead. J remember
asking whether you would trade on Monday, and you said, llOf course.
Olherwisei why work on a weekend?11 I started doing this homework every
weekend to establish a better degree of control over my trading.
Today 1 am striving to become a better trader Even if I had enough money
for the rest or my lift, l would not stop [fading; ]i has become j passion. I
would not Want to SIT on the terrace of a villa noi knowing what to do wilh
myself all day* Trading is a part of my life, i have not missed a single day in
recent years; wherever I am in the world, I always yo online every dny [o study
the markets,
My weekend homework is ai the core of my trading.! rate about 121} U.S-
aod intcrnatjona] market indices and aboui 250 U.S. stock industry groups to
decide how bullish or bearish f am an the rnarfet, I look for any Eradeabitf
changes, something that euuld work Tor me that has not yet been discovered
by other traders. After Ending bullish or bearish groups. I look tor their mosC
interesting long or short candidates, then jml my top choice.1; into Trader's
Governor [sec ChapLer 6] to select the ones I'll trade. I also use a couple
of scans—iVe programmed a search far bullish and bearish divergences of
MACD-Histogram in MetaStock, a scan for Impulse flip-to-green <ind flip-to-
red in TC2005i thill sort of thing, 1 use the "traffic lights11 in Trader^ Governor
lo express my degree ofbullishness and hearishne.ss.1 IVe developed a weekly
roufine—the weekend is for analysis f enter positions on Monday and
Tuesday] and sluri getting out towards the weekend. I do not have to be fully
invested and carrying heavy bags—If there ait: no good candidates] I'd rather
stand aside and chase girts that Weak.
Sometimes being in front of the screen is counterproductive, *s 1 find
my^lf becoming anxioas and emotional. I may develop a £t>od plan on the
weekend, put on my trades Monday morning, and right ihen the market start*.
going against me, making me uneasy and thinking what 1 did on the weekend
was stupid. If 1 exii, the market usually turns again and dues what I expected
in the first placc, when ] was calm and relaxed <J|1 the weekend.
1 have developed a technique of "doing a martin"—staying away from ihe
screen. After ihe U.S. Mock market Opens at 3:30 I'M Vienna lime, I put on my
trades and get into my two-seater convertible and yo tor a drive with a cigar.
Doing a martin works inLraday, but nlso on a longer-term basis. If 1 feel [ have
no edge, I'd rather do nothing than trade just lo be active and get beaten. In
April 2005 I CDllld not decide whether i wanted to be a hull or a bear, and
drove to Cote d'Azur with s jjirl. Had I stayed in Vienna and traded, everything
that week would have gone against rne. Still? even if Tm doing a martin, 1
always look at the charts at the end of the day. All 1 need is my notebook com
putcr, and finding Internet access has become easy in irtOAt placet in the world.
I want to know what's happening, but do not have to be trigger-happy:
'Martin participated in ihe development of ihus software as a very thorough

282 Entries & E*ils
TRADE 1
MARTIN'S ENTRY
QQQQ
Jpper panes Bar chart with 25-week {yellow) and 12-week (red) EMAs and the Impulse system
[11-25-S MACD and 12-weck EMA). The green horizontal line i1? drawn In represent
the profit target.
Second pane: MACD Lines and MACD-Histogram 11-25-8
Third pane: 2-wcek Force Index
QQQQ
Both trades I am showing today come from my membership3 in ih<? Spike group [sec Con-
dusion: Sharing Homework—The Spike Group, page 314]H ryemedeacommitmentto find
at least one Spike pick each weekend that 1 like best and trade ic in my account. I will trade a
bigger or smaller size, depending on how I fed, but I'll trade ill least one pick ;i week. The
group always has longs and iliorts, and if I am a bull, I'll choose a long pick, or If a bear, a
short one. Here, my own sentiment for iht- week ahead was bearish] and so 1 looked for a
bearish pick. I found shorts I liketf, pni them into the Governor, and used the risk/reward
ratio to choose this one.
At the right edftt.1 of the chart, both EMAs and MACD-Histogram are declining*lnt
Impulse System is red. The last bar has closed almosl at the low of the week, a sign of
weakness. MACD-Histogram Topped out below zero four weeks ago, unable to cross above
the zero reference line—also weak. The peaks of Force Index ihow a downtrend, and if the
Forae Index licks down, it will form a top below zero. On ihe nilier hand, the bottoms m
ihe Force Index arc becoming more shallow, showing a bullish uptrend. This is not the
-No longer active.

Chapter 16 Martin Knapp
•-- f.fl.
Jpper pane: Bar chart with 22-day (yellow) anrt 13-day fr*?J> EMAs and The Impulse system
(11-25-6 MACD and 12-day EM A). Auloerivelnpe 2.7 standard deviations uvcr a
100-day Jnokback period The red horizontal line is drawn Lo represent the stop level
Second pane: MACD Lines and MACD-Histogram 11-25-8
Third pane: 2-day Foiu<? Index
greatest chad pattern, and I vvuuld nnt have come up with QQQQ as a short on my own,
but traded it because of my commitment la trade ihe picks of our Spike group.
On the dailies, the Friday bar was red and closed at the lows, halfway down from the
EM A iu the lower channel line. This was a little too fur down for my liking, but, as I said,
this w:ls ihe best risk/reward ttfade from that week's Spike picks. Looking at MACD-
Histograni, Lhe peaks nre becoming smaller and smaller. The latest aiiempt at □ peak on
Wednesday hud fizzled our at the zcjg lint:, -a Mgn of weakness. The Force Index is no!
really contributory here. At iht- same time, there is a bullish divergence of both MAGD-
Histo^rjm Eind MACD Lines, hui f was bearish for Che week ahead ;ind prepared to lean a
bit more un ihe bearish side in my Interpretation of the charts.
My risk/reward ratio, as calculated by the Governor, is based on my entry, profit
target, and stop. I took at the weekly chart to set my pro fi l t;irgi?t.! expected last August's
low to he taken out and had a target of 32JS9.1 define mysLopon the daily chart,
drawing what I call "a David VVcis line"since 1 [earned it in bis class [see Chapter 11]. I drew
tl across the receni bottoms, where it served as support until about 10 days agOi when it
suddenly changed Into resistance. My slop was just a liule below Friday's high ai 36*83,
With my intended entry at 36.3ft, the risWrewafd ratio was 8*42. Usually 1 like to trade
when this ratio is above five, and 3.42 fel[ very

284 Entries
TRADE 1
MARTIN'S EXIT
Shorted Liu
HOMO
.'■><.. -J.
ADE SUMMARY
Short QQQQ
Sold 4/4/2005® $36.34
Covered 4/G/2005® $36.88
Loss = 0.54 points
My stop was hit, and 1 lost money on this liadc, I wrote in my diary: "Got scared Jnd
covered above my slop, just two cents below the high lor (he day before ii reversed down. It
looks weak—a reentry candidate," I do noi like using hard stops* I'd much rather use the
"Friday Impulse color" rule, meaning that if the Qs would have been green just before the
close on KriJuy, 1 would li.ivt covered just before the close, f [aving a hard slop exposes you
u> frtfiik moves. I like 10 have a real safety net stop in place, bul m> for my planned stops, Vd
rather not give them to my broker, since stops tend lo gel lilt jllsl before Ihe trend reverses.
I exited on Wednesday during a strong rally. I had been calm and thorough In my
weekend analysis but was becoming emotional sitting in front of the screen, 1 covered my
short Qsjubt ivvu cents below that day's high.
My exit was a ck\ir case of not doing ft martin. Had I stuck to my
rules, I would h;ivtf been profitable by the end of the week. This was a
rich learning experience, but a poor financial experience. Every iradc
jdd.s to my learning curve, and 1 am working each day to become a
better Lrader,

Chapter 16 Martin Knapp 285
TRADE 1 — ENTRY COMMENT
Martin's cluiris look very similar to mine, and 1 will use them for my comments. Also, this
interview illustrates an important pninr—traders often take different trader even if they
look at the same charts.
Weekly
The Qs had been heading lower ever since Lopping out in December, Both weekly HMAi
are declining, a* arc MACD Lines and MACD-Histogiam. I'vcryihiny ii in year to the
downside* and ihc weekly irend is definitely down. At the fight ed^tr (if ilit- chart, a new low
of MACD-Histogiam indicates thaL hears are growing Stronger, while a bullish divergence
of Force [ndes Hashes a contrary signal. Still, the sum of the evidence is bearish, and the
red weekly Impulse allows us to short or stand aside, but not go Long*
Still, (he trade does; not look terribly attractive to me because of the position of the
price relative to the EMAs. I like to buy low and sefl nigh, and with the Qs dosing below
their weekly EMAs, below value, they arc no longer high. They ore low, and that's not
where I like lo short. 1 appreciate th.it Martin made a commitment Lo trade at least one
Spike pick each week. Also, he is not looking for a long-term trade, but a quick entry on
Monday, followed by an exit a few days later.
Daily
Once you identify a downtrend on the weekly chart, the besl lime to short is dining a rally
towards valuta mi ihe daily chart. Thai's exactly wh.it happened during the second half of last
week. The Qs [allied above vaJufr -above their 13-day EMA on Wednesday and Thursday
;ind even above the 22-day EMA Last Friday.'Hint's where the Qs were an attractive short, and
the Friday action confirmed that, as they slid from above ihe FMA to close sharply lower. The
shorting opportunity was definitely there—but it had come and ^onc. Trying to short alter
Fridays drop is a bit like running after li tniin ihnt't. already pulled out of the;station, ft would
fei?l great to hop aboard, but there is a definite risk of slipping on (he rails.
The downtrend of the EMAs, the weakness of MACD-Histogram, and the red of the
daiEy Impulse System Eire bearish. Still, before we enter a trade, we need to ask: Is this ir.id-
ing vehicle cheap or expensive? Ai ihf righi edge of the chart, the Qs, below value, areaiart-
iny to took cheap, and that's a dangerous zone for Belling short*
TRADE 1—EXIT COMMENT
On Monday QQQQs fe]( slightly below Friday's low, then started trending up, MACD-
Mistogram turned up, completing -i bullish divergence. The Force Index failed to penetrate
iis mid March low, indicatin]" that bears iire growing weaker It shot up to a new mulli-
Dionth hiyh by the end of March, showing that hulk were coming lel.
One can spend a long time looking at this orthac indicator, bulJc is better to keep things
simple. The most important question—is this stoek cheap or expensive?—can be answered
in several ways. Martin answers it by rating the stock's position within a channel Whatever
your approach, it is better not to buy a stock that is expensive or.shori the one that is cheap.
Martin* feeling bearish about the market Bfi a whole and given a limited choice, reached out
a hit and shorted a relatively cheap stock. He got away with a small loss, and even had a
chance to get out at a profit. We all make mistakes, but recording them and learning from
them is a hallmark of a serious trader.

Entries 6e Exits
MARTIN'S ENTRY
IIP!. II' "^nnm-
GEF
GEI7 was my f-ivorii^ Spike pick that week, once again in line with my bearish view of the
market The impulse system was blue, allowing me to .short. BoLh EMAs were still rising,
but 1 wag crying to catch a reversal. The Fast MACD line cut below the Slow line at a very
high level, with MACD-HisEogram going negative—a sign of the bears taking over from
the bulls. The latest peak o( ilie Force Index was below zero—the bulls were losing their
i-rip on this .slock.

Chapter 16 Martin&app 287
.,.
A very bearish iign an the daily chart is the trend of MACD-Histogram peaks since
February, In February the hulls were strong, in March weaker, and in April nonexistent
while beans were getting stronger* li Wfta :■ marc powerful sign that] tflfi buDish divergence
oflhe Force [ndexat the rfeht edge. The Friday bar was blue, allowing me toga short. "That
bar had dipped duwn to a new low, but dosed al a high, which I did not like. SliJl, when a
simihir pattern occurred six days before, it was resolved to the downside*
My plan Was to short GEF at 70.49 with a stop at 72.50, The red line marking the stop
served as resistance during some of the recent peaks and as support when the market was
above it My target of 62.07 came from the weekly chart: The green horizontal line was
drawn from the top of the fast hill bar and it beautifully coincided with the level of die
weekly EM A. These numbers gave me a risk/reward ratio of 4, iy, II was less than five but
the best of thai weeks Spike picks and acceptable; the world is not perfect

288 Entries & Exits
MARTIN'S EXIT
Shorted
L'il
at!
L
■|.IH
,,-;,.
\Lf
EEEOl
TRADE SUMMARY
Short GEF
Sold 5/2/2005 @ $70.49
Covered 6/3/2005 @$G4.70
Gain = 5.79 points
Jn tin? course of this trade, 1 suffered through a major headache, when the stock climbed
above my slop level liven though i was losing money on paper, the charts luuked weak. My
rule is to hold shorts as long as the weekly Impulse does not go green on Friday. It actually
wenl green on the previous Friday, May 27, but the earnings were coming out the ne\.i week,
and thai gave me an excuse to hold for one more week, I had suffered nil this lime and BflW
the chance for this trade lo go my way.
The earnings came out on Thursday evening, June 2, and [hey were bad. The stock
opened sharply lower nn Friday, June 3. During the previous drop, I failed tn take profits at
the lower channel line. I wauled lo learn from my experience and noi 1ft a nice protit slip
away. The stock seemed lo hold near 68 in Lht? middle of the day on Friday, and I felt
tempted to cover, 1 knew that if 1 stayed in front of the screen, I'd gel excited, so 1 took out
my hike and went, for a ride around the island on the Danulie, leaving a
limit mdei to eovcr at 64,99, just below the previous biiiumi. Thai was a
perfect example of "dning a martin." By the time I returned] my order
had been filled at 64,70, with u positive slippage.
Much more than a financial win, this trade was a psychologicd win
fur cue. I held on to a losing position—the stock kept climhin^ hut its
charts looked weak. I was feeling more and more stressed, but gave GEF
time until after the earnings, ready to cover if it rallied or maintained ;i
weekly green Impulse.

Chapter 36 Mnrlin Knapp 289
TRADE 2—ENTRY
Weekly
"Prices are couriered to values byamfle-long rubber band>™ a dJent once said to me. I believe
that a weekly EMA provider a good approximation of value, and that prices In an uptrend
keep rallying away Irnm it and then snapping back. That's how GEF behaved lor much of
2003 and 2004,but at ihe end of20D4, it changed its behavior and fidlied sharply away frotn
its EMA in 2005. There might have been apiece of fundamental new&ora rumor, or a
combination of both—the stock got far away from value and hovered for several months.
Professionals and amateurs often take opposite sides in such situations, Amateurs like
to buy upside breakouts. Expecting a runaway uptrend) while professionals Lend lo short,
expcLliny prices to return En value. At the righi edge of Ihc chart, MACD-Histogram is
dedioingi showing that bulls are running out of steam. The Impulse has turned blue,
allowing us to sell short MACD Lines have turned down from a very high level and the
Force Index is tracing o bearish divergence—both Indicators flash important bearish
signals- Most importantly, CA.V is still above its weekly BMAs, above value. If we want to buy
low and sell high) this is a place to sell, or go short, us Martin dedddd ii> do.
Daily
There are Iwu key patterns that tend to occur at the (ops of rallies. Sometimes there is a
final spike, as weak shorts break and run for cover Thai short squeeze leaves a ban-
Uiil pointing skywards* as prices1' reverse and head down- A more common pattern is
li siep-by-step rise, whnse upmoves keep getting shorter and flatter, telling us that bulls are
running out o£ breath.
Date High Increase
11/11/04
11/26/04
12/02/04
02/15/05
03/08/05
03/24/05
04/13/05
43,64
45.99
49.05
56.92
65.65
72.79
75.65
76.89
2.35
3.10
7.83
8.73
7.14
2,86
1.24
Until November 2004, each new peak gained two Or three poults above tin* previous
peak. Alter the slock heated up in December its peak-to-peak gains expanded to saven or
eight points. Then the stock began lo cool off, with a gain of less than three points in laic
March 21)04 and only a point in April. Those two rallies shoved that the rise had become
laborious—the stock was breathing heavily, like a runner near ihe end of a race. The puny
rise En mid-April was accompanied by a bearish divergence uf MACD-Histogram—a t^r-
ii lie shorting opportunity right near the top.
By the time One til* our Spike group members picked GEF as a short and Martin decided
to piggy-back that trade, the decline was already well underway, in terms of market seasons,
this was no longer autumn with an Early morning frost the bes1 season far shorting; this was
a full-blown winter. Both daily EMAfl are declining al the right odgct confirming the
downtrend The frapulse System is blue, allowing us to short. The heavy bottoms of MACD-
Histogram indicate that beam Lire very strung and Further weakness i1; likely

Entries Sc Exits
TRADE 2—EXIT COMME
If you shott when prices are already low, you face a greater risk of ,1 rally back towards
vaJlIE. Such :■ mlly t>Cg9n the day Martin entered his sluirl. The following chiy, prices
rocketed above boih EMAs, with ;i tall bar Indicating il was probably a short-covering rally.
Sustainable rallies tend to move more slowly and steadily, while short-covering Tallies tend
to be sharp and panicky. Martin, unlike mnny others who had been short, was nor shaken
out and held as GEF waffled for over a week before resuming its decline. Il penetrated ihe
lower channel line, presenting a fantastic short-covering opportunity] which Martin
missed.
There was another fthorthcoveriflg signal when the daily Impulse wen I from red to
blue in early May, indicating that the best time tor holding shorts was over, but Martin
continued to hold. A good rule is lo run quickly or not ,il all. Having missed two chances
to run quickly, Martin continued tu bold his short,
Martin commented on his own trade: "My rule is to hold shorts as long as the weekly
Impulse does not. go green on Friday, ll actually went green the previous Friday> May 27,
but tht earnings were coming out the next week, and that gave me an excuse to hold for
one more week." Violating one's own rules, whatever ihe excuae, is a dangerous business.
One can get away with a violation now and then, but in the end, breaking the rules will
always catch up with a trader who does nol stop in time.
The earnings report shoved the stock down again, below its lower channel line. Il is okay
to make mistakes but not okay to repeat them. Martin missed bis Brat bui nol ihe second
short-covering Opportunity, and got out at a very good fevel near the lower channel line.
Working Together
traders foe! isolated, and it you can find someone to share the work, so much the
belter. Kor a collaborative profCCl to succeed, btiih persons have lo be equally niodvaled,
and il has to be a joim effort. If tine trader needs to pull the other, iL won't work.
For example, several months ago Fred (Chapter 2} came to leach in our Caribbean
Camp with Bucky, his partner En .1 money management firm. Fred is an expert
programmer, UulLj' ;i second-generation flour trader with ;i tremendous fee! for ihe markets. After
dinner, the two men returned lo ihe classroom, which had fast Internet, and stayed Ihere
past midnight, doing their homework together, preparing for the day ahead. Having two
pairs of eyes on their homework helped them locus and avoid mistakes.
While 1 was writing (his chapler my phone rang—Martin was calling from Vienna. !
shared with him my concern that fur ihe past Several weeks the New Hi^h-New Low index
that he updates daily and sends to me has been acting strangely, more like a irend-loUowmii,
ralher than a leading, indicator f explained to him that in the past }ne Granville used lo
calculate the number of stocks within a poini or two (if their highs and lows to find how
much potential fuel existed for ibis indicator. Martin suggested it would be better to count
percentages rather than points, and we agreed that he would irack stocks within 3%, 5%,
and 7% of their highs and lows. He would have to spend several hours setting up the system
and then several minutes per day tracking ii for at leasi two months before we could iell
whether the indicator was useful or not. He enthusiastically implemenied my suggestion/
-'Jtisr ,is this book wen] ro prjru, MjrTia tnld me ilui he had suffered j series r>f crippling losses, 11- ieni nit (hu
records fur one of his accounts, and [hi? reasons fitr his severe drawdown leaped ;ii nn.1 fmm ihe ^reidshcrt—
not ndng stops and iHoIulmg (In.- 2^> and &"'* Rules. Tale sad development confirmed on« again tbai no
Hiatlei haw good inm\ analytic skills, without discipline jnd money mojiogement o trader connai succeed* TIil
absolute necessilj ft" foJlawiog monev ivjiiij^mtiU rules h j [esson for all

Chapter 16 MartinKnapp 291
What follows is a diary of top-to-bottom market analysis, complete with money
management and trade executions, Martio seni me this file, describing n Joint project I did
in 2003 with him ;inri Nic Grove, a camper who was visiting from Australia. We reviewed
[lie market, selected stocks, and traded thorn.
The project described in this diary grew ni_u n( my visit to Vienna in August 2003.
Martin had organised ;i meeting of traders, and afterwards we returned to his penthouse
together vvilli Nic, who was living in Paris and had flown in to join us, I had Just spent a
week on the road, with poor Internet connections* Looking at ihe screen in Martin's
apartment—he had East wireless [nternet, a novelty in those days—I became excited about
[he stale of the market and eager to do some serious work. Martin and Nic jumped at the
chance to join me in sitting through the date together, looking for stocks to buy.
Having three pairs of eyes and three computer screens in the same room allowed
us to cast [he nel wider and di£ deeper than in the past. We spent the next three days
looking for the best stocks and placing trades- Afterwards, Nii_ flew back to lJjris5 while
Martin and I got into his convertible Tor a long, meandering drive through Austria and
Switzerland.
All three of us made money from our exercise. I chuckle ai } look back at what we
accomplished; today* with the homework process well esiahlisEied, any one of ua can
knock out in less than a day what Imd taken Ihe three of us three full days, We enjoyed
working together. Grinding through reams of data can be a little dull; we kept catching
each other's mistaken no one had an ego problem] nobody cored who found this or thai
stock—we only wanted ro make money. The three of us got together again for shared
work sessions in October of that year in New York and in November in Cyprus. Nic came
to the Camp in October 2004, where Martin was my assistant instructor, and ihe two of
them shared several work sessions on the Cote d'Azur where Nic lived in the apartment
of another camper, Angela. Nic had moved back to Australia by the time I started
interviewing for this hook, but he is a valued member of ihe Spike group, a winner of multi
pic contests.
e-mail from MarTift-.
Seven Days in Dr. Alexander Elders
Trading Room
Since Martin's e-mail that follows was written in a very brief, telegraphic
style, I added some of my own comment!: along the margins. My rEasons for
commenting on Martin's diary can tie clarified by a phrase from my book
Straying from the Floch Travels in New Zealand: "Many professional guilds—lawyers, criminals,
physicians, and others—each have Iheir own lirijjo, allowing Ihem to communicate with insiders at great
speed, while being poorty understood by outsiders." Martin wrote his diary in such a lingo—very clear
for the three of us whn were there, hut probably a little cryptic fur others. I wrote my comments an
the margins of the following pages to help you better understand his text. —AE

2.92 Entries & Exits
Saturday, August 16, 2QQ3
1.1 First Assessment: Dow Jones, Nasdaq, S&P 500 on a Monthly, Weekly, and Daily Chart.
Bullish or Bearish?
i.i
I like to begin tuy Homework by
approaching the markets from a rffj-
tance and takfttg fa a broad view, is
the monthly trend rising, fulling, or
flat? tihat about the weekly? \ rely
on fte Impulse system to define
bullish, bearish, or neutral stages fif
anytim&frame. This section of the
Homework &htme4 either nm$ or
ftettTraf trends of P^M, SLP, and
in iMonthiy, weekly, &nd daily
-AE
DJIA weekly
1. EMA bnlLisli n bearish?
2. MACD-Histogram bullish o bearish?
3. Impulse system red, bluer, or green?
1.2
The second-tier indexes
that message? A broad uptrend or
ddwntfcVid, involve the majority of
smaller indexes, is Much wore likely
to persist This is why it pays to
analyze more than a hundred
indexes, both biy and small
contained in many software programs,
such as tcxooo.
Millions of pc&ptc glance
ally at the bi$ indexes, bat how
analyze the lesser ones ? Having your
hmd on the pulse of marker
components gives you an advantage over
the crowd of casual players.
Analyze NASDAQ and 5&P—first monthly, then weekly, finally daily.
NASDAQ monthly
,1"
--■■->■-
.n
i.
V- .;
NAfinAQ weekly
,1
f
-
—
SGP5OO monthly
,,:/■
SSP500 wEskly
.Hi!. ,11 (I ,
''ij' "
_

Martin Knapp 293
NASDAQ dally ■
,■■■■■■,-■"
L,_--_-_.^-.... __. . ,._
i ■
i:
1,2 Scrolling through 126TC2000A1I Indexes (Weekly Charts),
ADR-X Int'l Mkt.
Index weekly
EUR-X Euro Top
100 Index wk.
\
Bullish or Eearisli?
C:.n We Find a l1iiiii.hu Trend?
1.3 Scrolling through 239 TC2000 All Media General Industry
Groups (Weekly Charts). Bullish or Bearish?
* Bullish 'i Bearish?
* Can We Find a Qatiainant Trend?
-
-'
Indspendent Oil fi Gas [vi\
—i- <—
_:_
Medical Equip. Wholesale (w]
NetwDrkinn & Comm Dbu [
Conclusion: Tlie stoch market wants [q ga up. We should prepare a shopping list.
1.3
Each stock belongs to
and it, in turn, belongs to a group.
if you begin your analysis on the
leVel and 1H&\ proceed to file
s, you'll gain deeper insight
into the hcal-fh of the toarkefs
i. There are several group cfas-
s, including a popular one
by Weston' dullness Vaily. t aw in
the habit of analyzing Media general
groups m tCzggo because that
software makes if easy to chcK Through
well-organized Ticken and jump
from subgroups To
There arc two reasons to
analyze market groups. TO qauqe The
HitrltH of ?te Market and To begin
marking The wcakcsT and the
Strongest groups-a good place To
look for stocfa to buy or self storT.
Two of the four qroupi shown in
Martini diary^M&izz independent
Oil k &as and M&ys?- Medica!
went Mholcsale-arc in
uptrends, Mft373 fiousewarcs is in d
downtrend, while Mfrsir Networking
is in an especially sweet spot. This
group had -fallen from a height of
above ?,ooo atthc peak of The bull
market in zoqq to below 1QQ~an over
so percent decline. Wi ts uncommon
even for a single stock, but almost
unheard of for a group. The decline
ground to a half in i-ooz* and for the
past year, this group has been
tracing a saucer borrow, slouly reversing
itl downtrend and starting to turn up.
-AE

294 Entries & Exits
Sunday, August 17
2.1 The Script: We Want to Build Our Shopping List of "Fallen Angels"
We search for groups and, consequently, individual stocks that have given up
most of their previous enormous price and have now started to look up again.
In ,i first run, we flag all groups [hat come close to lIii? follnwing chart pic-
Lure. Doing this exercise with rwn friends greatly helps ro slay focused.
It is interesting to point out that this job ta definitely done best by hand and
eye. Nn mechanical scanner could complete this task equally well
2.1
If the Marker n fift&HGt&i
Hi which event will you compete? You
cannot enter waqhtliftmg, track,
and diving and atpcci to do well in
ail of them. All competitive athletes
specialize, and you need to decide
what Market game appeals to you at
this time, rfading the IPOs., ftuftfc
the ckamcts, breakouts, and fading
breakouts are all legitimate
l as Iwy as you do mt
all f&$cthcr.
tiic tit*\e covered tt\ ittls
diary, tHe market ms t'usr iT&rnm
to come off its pat\icfc{ bottom,
df-fcr crashing ftww its 1333-zoqo
peak. Many stocks, drtvett above
value in the issoi, crashed below any
value m $.001 md zooz. My
d ms. to look for stocks
thattraced a fish-hook pattern-^
Song declme from a great height,
followed by a rounded saucer
bottom md d sofr upturn.
-ft
* lost approximately 7/8 or mare T
now starting to look uu
The first run yielded \ 5 groups. In a second run, we limit the findings to the
best-looking 5 out of these 15. After intense discussions aboul which churls
were giving us picture-perfect shapes, we agreed on the following groups:
' 1
v r -
in
_fc
Heavy Construction (wj
MctuvDrking and Camm. Deu. [uu]

Chapter Itf Martin Knapp 295
1
-
. . - .urn
ProcBFPing Systems £ Prod, [w}
DivarGifiBd Cam muni cation Ssru. [wi
In ten neb SaFtinjare S Service* [w)
2.2 From Stock Groups to Individual Stocks
The next item on our agenda \s tti split up the stock groups into their
individual member stocks and once again pick out those stocks thai beat match Lhc
"fallen angel" picture.
To help us narrow down the results to really Eradeable securities, we apply
a volume tiller that requires a minimum 50-day average volume of 150,000
sruire.s per day.
Again, we do this process in two runs, always referring lo weekly charts.
During the first run, we fliig -ill ilie stocks that appear to be ''fallen angels"
During the seconds we iimil the initial findings to the cream of the crop.
This process yields a list of 27 stocks at which we want to luok mure closely.
We collect them in a spreadsheet for detailed evaluation.
AKAM [w]
\
IE El 1
J
AKAM
AMT
ARTG
CAIJA
CMVT
CSCO
DTHK
EVS
EXTR
FFIV
FNSR
HAXSD
HPOL
IAO
INTR
LU
MTZ
NT
OPWV
RHAT
SPE
SFLK
SNWL
TERN
TMWD
V1GM
VRSN
2.2
if you look for fatten mqcte
groups twd subgroups,
to look for them atio
coiwpomnt stocks. Stay away
front ttoWy tradtd stQcks-tHcy arc
cttsy to byy, bat fard to sett, oftcto
resulting fn vicious, slippage. Trust
your eye more than a COMputcr-viP
scm will deliver as good results as
an experienced cyc.l chuckl
at how it took us a day to
tMis hst-toddy it would take m
wore ftoi a couple of hours.
Fortunately, our workday WOS shortened
by a trip to a Nearby vineyard, where
we did zoiv\c sertvus
S centuries-old cellar.

296 Entries & Exits
DTHK (wj
,1
-
B|
urn
A
Monday, August 18
3.1 Finding the Most Attractive Stocks: 5 out of 27
On Monday we slarl with j dose look at each of the 11 stocks on our lisi. We
use TradeSLaLJon (or Metastocfc)i which also allow?; us 10 look at the Impulse
system- We add the columns "W" (for weekly)* "EJ" (for dailyj, and ''Comment"
to the spreadsheet
The Impulse System hy Dr. Alexander Elder
Each bar in n monthly, weekly, and daily chart is painted green, hhie, or red. The
colors have ilit- following meanings:
Green: Fast EMA (13 bars) and WACD-Histogram -ire boih in an uptrend.
Catiscquatcesjortfflding: We are allowed to ga long or Stand asides no
permission to short
Red; Fasi EMA (13 bars) and MACD-1 Nstogram are both in a downtrend,
Consequences for trading: We are allowed to SO short or stand aside; n(i
permission to go long.
Bine: EMA and MACD-HlStDgram are trending In different directions.
Consequences far trading; We itre allowed lo go long, short, or stand aside.

Chapter 16 Martin Knapp 297
3.2 What Precisely Are We Looking At?
This u how our spreadsheet looks after checking each stock's weekly and daily
chari in TradeStation.
AKAM
AMI
AHTCi
GARA
cmvt
C5CO
DTHK
CIS
SXTH
"FIV
FNSH
HAXSD
HFni
AC
JNPR
LU
UTZ
NT
UPWV
&FE
SFLK
5NWL
TEHH
TMWU
VIGN
W
rod
pT«n
due
green
RTfiflTl
Ml IB
Muc
blua
green
rirp4?n
blue
rod
tfa
blue
grsra
blue
green
flrs^n
flieen
rvp.p.p
blue
rej
blue
green
■l
qraan
D
nta lupol c'lanr'el
gram
green
flfflOfl
TffHT
green
IAS
grsan
qrppn
Q-een
nstn
r=d
green
Green
.■!■■■■■
QrCCn
green
nrBBn
qri-nn
green
green
green
green
CorarMrn
rt rhe nvnl iann
due for a con. EMA rear! n
raady lo buy
: • \ .• n nrt. tMA near - 50
re^riy ffl buv
rejd^ ro buy
fc.'Jy lo buy—ilep nr- ^r 7 rfi
due 'or r rare. [MA n&ar J.50
Irade r^nge—^lann qqinp
!ou expensive - 516
roaLfv lo buy
n 'he B*bHl ?onp
slarlinij 10 roll over1
Irnm IOC Is 1^0. Liick ic -!0
r^fldy To hny
ready lo buy—very £;Ufl(|[
niLe ehar! -up 5i lai& In iKe oame
rial. npR<
due tzr n cot EMA r.b-nr JbU
raotft (obuy
ieod^ Id buy
balm GMft—Mrtricft]
ready lo buy
dud Iqi a can, EMA near 5
due inr a ecu. EMA near 2.7s
teady lo buy—5lo& near 2
ready lo buy
to
3.2
Svcv\ considering the recovery fr&iw
, ittook us d \ow% tfuts
dom our !tst. Tkt ctfgrtl
tlfttftmrfe what uc were
for at -ftat tiunc. ttfeckty-a
divergence of both jWD-
^rffti and &ACQ Lmcs, and a
stow sfe&rfY uptrend *t«ff" file ri$kt
erfgc of fHc charr. ^iiy-both M$£$-
and £M% arc rflfWJj tf\e
Mac showed that bean had
W power dunnq tHc previous week's
price dip.
Evaluation spreadsheet with weekly Impulse, daily Impulse, and commeni
• We only follow stocks with a blue or green weekly Impulse system.
■ E Tow doe.1; MACD-Histogram look?
• How hi away from the EMAs is the current price? Is the "rubber band"
Stretched out too far? h Lhu price in the "aweet zone" between slow (26- or
22^bar) and &st (13-barJ EMA?
• Are there any divergences in MACD-HistQgram or Toice FndeXj signaling
bearish
moves?
We reduce our list of 27 stocks down lo 12 that we consider "ready to buy."
Below iirr ihe weekly and daily charts of FNSR reflecting what we are
looking fur.
FMSR [w]—ready to buy
i [ 11 i 1111111.
]■■:■!_j-_i!!_LfiLT7=i"nj -1 ■ ■■■ "r- .-:: | -t / ■;~rT1 -"■ J | -^ ■■* ■ Jir '■ ■ ^ ■■■" •" -'^ '• .■;> ij Jl ■ i r| fr"j ^h •

298 Entries & Exits
FNBR [daily]—ready to buy
Tuesday, August 19
4.1 Entry Target, Stop, and Price Target
4.1
flfe diary shows nicely how a
spreadsheet expanded while
titoaewffrk fcfc teed idtbf charts for
setting entry levels tf^ stops,
weekly Steffi for letting profit
Targets- ^e tfdttf&d f0 go long near
value, represented by the moving
averages, place stops near recent
lows, and set targets iwmtrnefh
established resistance
aSwcct zone" refers to tile
between two Moving
For every "ready to buy" stock, we specify an entry target ((mm the daily chart)-
a stop (from Lhe daily chart), iind a price target (from the weekly chart).
AKAM
AMT
flPTG
CAPA
ChAV\
CSCO
DTHK
:lb
CXTH
FFIV
FNSn
iiAx^n
HPOL
AO
JNPR
LU
MTZ
NT
OPWV
fiKAT
KFF
SFLK
SNWL
TERN
TMli\rn
VIGN
VR3N
W
rsd
dnen
blue
■ 1" :i
ijreen
blue
biua
DZiip
fireen
g'i?eii
\jtOB
rCD
blue
- ■. -
fjm*T\
blue
qiUtn
urecn
blue
red
i i ■
rirepn
iireen
g'F-pri
D
near lop ol : i :i i ■
g;esn
green
green
atom
hlue
groan
HTHHH
qreen
gr&eni
rpr)
QFPDn
i|re?n
green
Vfreen
giaen
g'eer.
qiflpn
rjreen
greeji
nrpen
green
CuiiniHiiJ
m ihc sweel iifti
duf lor a corr, EMA naar |O
raad/ Id buy
rlne Jnr g doit EMA naflf 4-5Q
Ec^dy [d buy
FEEdy Id buy
rcnoV lo buy—5lop ncjr ?,60
■Jtio to a i^rr, EMA near J.50
ijaCt rarrje—sln.riDi ,i? dp
loo ?'39n?iire—S'fl
reedy Id buy
■i M" : '-l''.. . i -
StathK to tty\\ e,vwi
mm ioc to tZO.badiiG jo
rEiiidy lo buy
mdv I" btiy—very ^vcm
nFCo cl:ar(—ut> 5*. Ijit m img ganiB
J dl. up Be
dliB lor js czir. EMA .np^if 3 feO
ready Eo buy
riiady [a buy
jfttoifr f:^^—■■■-nici-i'
nurJv'- "iv
:ii f_i 1 i COITi ;'.'A -, •< 5
dua lar j ccr: LMA rfflflf 5 ^^
ready io buy— slop near 2
ready Id buy
Bu/
2.1
loo hlflfti "oo cporsune
3.01
■rl HB
13.95
£.75
13,51
5 0D
m r.nr 22'?'l
6+
- .in.
201
4^0+
10.
4-H
^5.00
Stop
[.65
17.??
2.S6
iM
T2.94
L BJ
6 10
169
1 07
21,10
Evaluation Spreadsheet with entry target ("Buy"), profit target ("Tgl"). and stop ("Stop").
Again, we taJ&e FNSR as an example of how we specify Buy, Target, and Stop.

Chapter 16 Martin Knapp 299
Entry target
Price bar from Monday, August 1H
2.3
12
11
30
1 9
1 B
\ 7
1.6
1 S
1.4
1.3
1,2
1.1
1.0
Open:
High:
LOW:
1.33
1,90
1.80
1.38
Slnw EMA {grppn Imp): L?g
Fast EMA (reel
-i Entry target:
line); 3 80
<1.B8
_ ii n
FNSR (daily) as of ctose an Monday, AuyusL 13
Stop
We set our stop below the lows of June IS and June 30 (black arrows in the
picture).
FNSR (darly) as of close on Monday, August 18
Price target
FNSR (weekly)
We look for previous support, resistance, and coneestion areas in order to sc\ a
price target.

300 Entries & L-xiis
4.2 Risk/Return Ratio: Fat or Skinny Rabbit?
Using the numbers from the previous spreadsheet, we add another column to
calculate Lho risk/return ratio ("R/R") for every "ready la buy" slock.
R/R =
1'gt- Buy
Buy- Stop
AKAM
Hfr
ARTG
CAPA
CMUT
DBCO
UTHK
ETS
EKTR
FFIV
FNSR
HAXSD
HPQL
IAO
JNPP
LU
MTZ
nt
OPWV
RHAT
SFE
BFLK
StiVJL
TEPN
TMijVn
VIGN
VRSW
VI
red
flfeen
Dlun
ijrccn
blue
(](HHM
red
nlup
bta
yre&n
blue
!■ ■
groor
0ICCP
blue
idd
blue
qn?c-n
green
qraan
green
D
near lop at ctunnai
[PHTI
graon
jjreen
gjeen
blue
green
mm
green
rprt
pin
gieen
green
qrpen
prfmn
green
green
grefn
green
Commonl
in i ■ ■■.!■- zone
due lot a con, EMA nUJr IU
ready Id buy
djip Inr a corr. EMfl near 4 50
reedy Id buy
ready Id buy
n?flily if. buy—Mop near 2-60
dun Inrii rnrr. FMA npiinl !jO
LidiJt i :— . i ■ di:de
loo p"pen^ive—;13
iwdv i° h j"
<n ilie r.'-' zone
.'. 'i i . lu il uwei?
Iiofti lucio 120. Uiick loflU
ratfv i° buy
resdy Ed buy—very Bi-jnot
nice clurl up &■;, UL n "h-j ujainu
Hal. upfo
due Jcr □ cot. EMA near SCO
ready to buy
ready to buy
below EMA—rtiUclr!
rpFidy in buy
due lor . corr. CM A .n^ar 5
due lor a cot. EMA nsar 2.75
ready lo buy—slop near 2
rendy la buy
Buy
las hiQh. Idq e.p?n^lue
■:ie.35
■ci as
13.95
6.60
5.10
<2 3U
1331
Tqt
minor ??-?ii
&+■
2S+
2 5Q++
4 ^0.
10+
4*
25 DO
Slou
1 65
1727
3 56
\AA
1.84
B.1D
2.3Q
1 97
21.10
13
11.ft
13.3
D I
20.3
5.0
\* I
53
B.I
4.2
Our expected return is
from the entry to The target, and
The risk is the rffsTmct front -foe
target to the stop. £Vcn though
we may adjust these levels litter,
they provide a useful comparison
i various stocks, t call stocks
good ratios ''fat rabbits,
with skimpy ratios \
rabbits' If you %o kmtinq, yoi
W^fttfJ well invest yourrftoc,
fat rabbits rather Own skimy
-AE
Evaluation spreadsheet wi!h column "R/R".

Chapter 1G Martin Knapp
4.3 The Final Ranking: A Last Look at Weekly and Daily Charts
During our final look at [lit weekly and daily charts, we grade them "I" (eicel-
bnO,"2" (second-best), and l',V' (something is not right).
AKAU
AN'1
ARTG
CAPA
CMVT
C5CO
DTHK
ETS
EHTR
FFIV
FNSFi
HAKSD
HPOL
JNPR
LU
WTZ
NT
QPVJV
RHAT
SFE
SFLK
SNWL
TERN
TMWD
VRSN
VI
red
ijrp=ri
Uue-
green
oreon
blue
blufl
blue
green
grean
blue
red
bluH
groen
blue
lyppn
cgr4d >d 11
giocn
green
blue
red
blue
grcrn
f I1
gnm
D
neaMop "I Hiiannei
on on
Evean
mm
OTBBll
graon
bljc
green
green
green
nen
green
rjreen
r^rpen
qrttn
Sroon
i7r°pn
green
^rrcn
nrean
yreen
CofnmftH
in Hie ■..■■■! zano
Ouq Tor a ccui, EM A near 10
ready [o buy
due tor a co^r, fma near .1 hu
rpurty fo buy
ready to buy
ready to buy—slop near 2 GO
illir* fur a rair, EM A naar 4.50
irndn f9imi> oiand ..^■jj
ku anpensive—Sl8
ready tc buy
m i1 ■ ■ .r' ■■! :.--
^larluig to io\i overT
ready to buy
ready Ed buy—vary sweel
men cnml—up 5*, iilt in Hit game
flu up Si
due lor a co-rr. fma near 3 GO
rendyEd buy
ready Id buy
below EM A— tfalclr!
ready Id buy
due lor n nm, FMA n^ir S
i.i lor ei corr. EMA n 2.75
ready lo buy
Buy
0 11
Inn liin.li. Inn SXperslH
3 01
(tS0
Li .75
5 in
13 51
minor 2? 24
fit
E»
304.
450*
10*
SlOD
1 fiS
17 27
2 56
I 44
12 54
1.G4
ft 10
4G9
?l 10
aa
11.6
139
a. j
203
5.0
M'l
'■ 1
W-r
2
1
2
1
1
2
1
2
1
2
D-r
1
3
1
1
1
2
2
2
2
Evaluation
with weekly and daily ratings.
Four stocks (CSCO, FNSRJNPR* and VIGN) pass the k&t exam with a
double"!". RHAT Is added lo our topping Jisi due to iLs wy high R/R of 203.
4,3
\oDked for stvioo-fy
i^iff war i1
we
tf/ify &f 1hcir weekly mi
fn order to focus o*\
(*i«r trttracftVe

302 HniriesSt Exits
4.4 Money Management Rules
AKAV
AMT
ARTG
CAPA
CMVT
CSCO
DTHK
zTS
EXTfl
:FIV
FNSR
HAXSD
HPOL
IAO
IN PR
.U
dTZ
NT
OP'.W
RHAT
SFE
5FLK
3MWL
TERN
TMWD
VIGN
UR5N
W
i
a\wp.
green
green
IiIljei
tlllJFf
blue
green
t'ue
red
CUD
bfufl
rjr&en
blue
[|rpiJh
green
green
gideii
!. -■■
red
b u
qreen
rj-SCn
greon
0
■iHiir lap di channel
mill
creen
qreort
hiuji
ijreen
blue
groan
-I'" 1
qreen
qjssn
qieen
qiopn
rgrmrn
qrecn
qreen
[-reen
dTBW
preen
qreen
g'een
qrFFn
CDrrrr'pnl
in Hie sttesl zone
■zlLiH r^r a coir. CMA nr?flr ID
r^rtriy to hiiy
due Far j cot. 6Mfl rietir J.5D
rLiddy lo buy
rflHdy 1a buy
'CDdy lo buy—slop m?ar 2.&0
due lar a tui'. EMA jiear 4.53
IradE range—Eland asine
lor pyn^n",^!*—518
rc-.i:!y Id buy
in ma awssl zuny
■ ■■ i is mil ovari
Irom mcro 120. back lo jc
ready lo buy
ready In buy—usry awpfll
m^e crv.ri—up Si. laic En ihe qaniE
lla|. up 6'
due lai a con, -'-'" i-.- r J.CD
vflciv In b i'j
re.idy ro buy
belaw E^i—waiclil
ready Id buy
m.p f;r i torr EMAnBBTB
aue fcr a con. EMA neii 2.75
ready to buy—slop naar 2
ronrly io buy
Buy
2.11
100 1-■ -j~- 100 J'-v'i.i .
J.Ul
ii. 90
sac
?75
5.10
<?.3O
1J 51
rgi
niinor ^(i-^4
a.sot+
a+
10+
J+
25 OD
Slrn
l EG
W.2.1
1 J.J
■
12.94
1.64
6.10
2 30
J.£S
1 M7
21. in
S3
A 1
t. "
I1J
13?
t 1
W-F
2
1
2
i
a
i
1
13
£0.3
14.4
s
I
Et 1
E
:
1
buy
buy
Li_y
buy
buy
Pitta; b
S U.At
E 1 01
^0 70
a% oi...
106.00;;
1900
4.B0Q
2. COO
3,(1DD
e.-ioLi
^ 3J,flGS
~—
* 9,08.1
S 20,4(10
£ 14.731
5ICG.5fja
Evaluation spreadsheet complete with money managpment rulw-
4.4
til
applied file z% Rule to H\z
rti vMi<M he plamcd tn take
trades. Thar aHmcd Hm to
fizo of fftc accomfs dostooo
oft c/cry trade. K^Om'^0 his
rftft per Trade ahd rtik
wads itca^to calculate
number of shares he
buy.
for example, if he wai qo'm$ to
buy CSCO at t1S.$r or better, with a
itop at $1?JJ, he was #W# to riik
t1.es per iharc. SH\cc his total per-
UAiTttd risk per trade wai tefao, he
was ailvwcrf to trade 1,300 shares
of CSCQ. -AE
Assuming a ilO6h0OU trading account, we apply the 2% Rule lo the five
final slocks on our shopping list and calculate the order si/e (c,g., 1,900 shares
ofCSCO, 4,800 shares or FNSR, etc.).

Chapter 16 Martin Knnpp 303
DiMK fw) as 0\ close on Tuesday, Aug. 19 OTHK {d) as of close on Tuesday, Aug.
.r ... -i:—v:"-■
D1HK (w) as of close on Wednesday, Ajr. 20 DTHMd} as of dose on Thursday, Aufi 21
4.5 Putting in Orders
Tuesday, August 19, the following orders were in before market opening;
buy 1,90UCSCO# 18.35
buy 4,800 FNSR @ I,8B
buy 2,000 JNPR @ 13,90
buy 3,001) RHAT<®6.H0
buy 6,400 VIGN# 2.30
Tho orders on CSCO, FNSR, and VIGN were rilled. RHAT and JNPR went
up too fast and never kinked hutk Lo fill these orders.

304 Entries & Exits
aithti diary ft retrospect,
if was a Mistake to put on this
trade. The three existing position
already uied up nearly 6% of
available riik capital by riikivtq pearly z%
each. Puffing en thti trade violafed
the &% rule.
-AE
Wednesday, August 20f and Thursday, August 21
What to Do If a Trade Goes Against You.
My Private Learning Curve.
On Wednesday, AngUHE 20 (before the markets opened), we reviewed our entire
list of 27 stocks (looking ai their weekly and daily charts) and found that
DTI IK was looking much bettor ihan it had the previous day. The weekly chart
looked stronger (htue) and the daily dosed above the EM A (green), commem-
ing a fresh uptrend. Following money management rules, we put on a trade to
buy 6,800 shares of DTHK t? 3.01. The order was filled.
On Thursday, August 21 (before the markets opened), we ntriewad our
Stack positions. We were not looking for another entry—only managing our
tour existing portions inGSCO, FNSR, VIGN, and DTHK.
It turned out thai DTHK fell back to red on the weekly as well as on (he
daily chart which was our .signal to get our nf [his position with a market
order ,it the open that day, Editing a small loss before ii gol bigger.
Not wanting to take a loss (sound familiar?), I tried hard to :tsk (convince?)
Dr. Eider, "Wouldn't it be fine to wall one more day? Maybe the red will go
away. What if we wall to exit and maybe &ei ii better price intraday than just
putting in a market order at the opcni' What if the red on the weekly chart uoes
away until Friday? Do we have to decide intraweck?"
There were probably *■ few more ideas that would have allowed me to stay
En that losing position. In fact, \ knew every answer to my questions before I
even asked them,
"¥{113 stay with your position and do as you please. I'm going to put in my
sell order before we leave OUT hotel this morning."
I argued witb myself lor another hour and aver breakfast, finally deciding
lo punch in my sell order. And once I was through with it, I really felt relieved
and ready for the day's program (which was a three-hour hike up an Austrian
mountain path): peace of mind from taking a very small loss in one position
and enjoying a bullish performance in the remaining three.
Friday, August 22, and Going
• Daily review of Dow Jones, Nasdaq, and S&P 500 (weekly and daily
charts). Does the bullish trend continue?
• Review nf individual slock positions. Weekly Impulse system? Dally
Impulse system?
• Is a stock breathing or violating a trend?
■ Time to take profits or exit a position?

Chapter 16 Martin Knapp 305
"Hi Alex,
This mornings market,1; are beautiful!! The sell oft was not really strong,
volume fur from dramatic {ai least in the clucks I fallow)* and I think reentry
opportunities are ahead.
From our work, C5CQ, FNSR, nnd V1GN netted well over J5,OD0 :-))
Did you sell your positions today? I Look prolils on light skip.1, on many of
my positions, waiting to realign my chickens."

Q***
R^H

Conclusion
Your Trading Room
A
yourself after visiting these Lti trading rooms: "What have 1 learned^
What will you do with this information? How will it help you? The answers will
depend on your level of development as a trader iind your altitude.
1 can see three groups of traders reading this book—professionals and s^miprofe.s-
sionals; beginners and amateurs; and Ehosc who got hurt in the markets and are trying to
come back. Let me address the first two groups and then spend a little extra time talking
lo the third.
If you1 re already trading for a living, you have your own style and a method that works
for you. You probably picked up this book out of natural curiosity and because you're open
to learning, 1 am sure that some of the ideas tVnm these lfi interviews struck you as worth
testing on your own. 1 do not have to worry about you jumping in with both feeL You will
test whatever attracted you—first on your computer and then in your account, starting
with a small size and keeping good notes, Several months from now, after researching,
testing, and implementing some of these methods, you'll look buck and see how your Trading
has impmved us :t result of reading this hook. When thai happens, I'd like to hear from
you. If I ever write a follow-up to this book, perhaps you should be in it.
If you're a beginner* this book must have opened some exciting vistas foiyou. Wouldn't
it be gre;it to follow in the footsteps of some of the t Hitlers you've met—SUCCCSSfill, wealthy,
and independent? licfore you jump in lo imitate them, please stop for a moment and think
about one of the headlines in the Introduction lo this book—Objects in the Minor Arc
Farther Away Than They Appear,
Every trader in this book, including its author, Look some serious lumps on his
journey to becoming u professional [ruder. If the methods appear fd^y and logical, it is because
the traders who use them survived their collisions with the markets These winners
emerged with skills—some of which they can verbalize, and others that operate on an
unspoken level.
How .should you go about implementing these new methods? The only way to mastei
them is through research, testing, and keeping good records. Choose the methods you like
and back-test them on your computer. If a method does well on paper, test it with real
money. Begin by pulling on tiny LesJ-si/e trades, keep good records, and give yourself
plenty of lime. Three, five, or even ten trades are not statistically valid. IJlease reread Mike
McMahon's comments on system testing (Chapter 0). Tf this sounds like a lot of work,
that s because it is.
307

308 Entries & Exits
I recently received an e-mail from a beginner—we met at a trade show, and 1 gave him
a ride to the airport- In bis e-mail, he asked me about trading the Impulse System without
testing because he did not want to .spend the lime. He went on about his intense desire lo
be a successful trader, but it sounded lu me like he wanted the rewards of trading—the
income and the freedom—without the work, Each person in iliis hook is absolutely
committed [[> trading. They love doing research. None of them took a ready-made system,
dosed their eyes, and ran with k.They test everything. Please follow theii example if you' re
really serious flboill becoming a successful trader
TRADER'S REHAB
The dictionary provides a definition of rehabilitation—"The act o! restoring to guod
condition, operation, or capacity," A irader with a damaged account often becomes too
fearful to trade; he needs rehabilitation to regain his ability. Most of US need rehab at some
point in our trading careers.
Almost nil the traders in this book went through at least one severe drawdown. Many,
including the author, went through more than one. It is not just the loss of money thai
rankles. Even worse is the foul mood thai goes with iL. A person mines into the market,
makes \i few cautious trades, picks up a few dollars, feels invincible, and tosses a major
portion of his capital at a seemingly easy trade. The market turns against him, he fails to take
a small loss, and soon finds himself in a deep drawdown. Despairingly, he lakes a huge loss,
then makes several spastic trades in a desperate push to make back the money, but the
more he tradftSj the deeper the hole he difia,
When people Inse a large perLenLiye of their account, they Inse something mure
valuable than money—(hey lose confidence. Some star! acting like a beaten dog: fearful, tail
between its le^s, jumping back at the slightest movement in the shadows. Many start heat-
Ing themselves Ltp emotionally, calling themselves names, punishing themselves.
An account is considered damaged if it has lost a third or more of Its Starling equity.
If you hike ;i 5100,000 account down to $66,000, there's no doubt your account is badly
hurt. I have seen accounts get hurt even worse—down til) or even 90 percent from their
peak equity. People with damaged accounts tend to become gun-shy. They wimi lo put on
a trade, but cannot shake uft the fear. Pain from recent losses makes people insecure- Most
traders who have hetn hurt wash our of the markets. If yuu ivanl to trade again, you're
more resilient and determined than most people.
The most common complain! of traders who tool; a beating is "1 cannoi pull the
trigger." A trader does his homework, finds a stock to buy, hut cannot bring himself lo place
the order. He starts tracking il as a paper-trade, and the slock goes his way. The next time
he trades it with real money—and loses. He paper-trades again and makes money again,
in theory, but as soon as he buys with real money, the stock gnes against him. As soon as
he dumps it", the stock reverses, as If laughing at him, and moves m the direction he
expected. Why do paper trades often turn out "well" while real trades lose money?
Good trades lend to emerge from more unsettled market conditions, with less
obvious signals. A fearful trader is too afraid to take such signals. He feels more secure with
obvious-looking trades, while in fact, this feeling of clarity i& probably a sign that he is
late—lhe trend started without him, and he is running after a train that's already pulling
out of the Station. The trader's fear prevents him from entering good trades and prompts
him lo jump into bad ones. He is [ripping on his own shoelaces.
My first advice lo ;i ftnrful trader who got beaten up in the market is to stop trading
for a while.

Conclusion
Many fradcrs test indirafois and systems hy dumping historical data Into testing software to
obtain the profit-loss ratio, Che biggest and tin? smaBBst profit or loss, :md [he uvEiage N"iii and
loss. Tiiti Iangeaf winning ami losing streaks nntf the maximum drawdowns gtve Hit1 a
lpJ olijiTlivity and solnlity.
Those printouts provide .i talsi: sense nf sccnrtly:
You may have a very nice printout, but ffltatJJfiicajsteni delivers live losses in a
yon arc trading na] money? Nothing tn your testing has preparal yon far that, bin ii happens all
Hie time. You grit ynur teeth mid put on jmioMil'i trade- Another Loss- Vow drawdown is getting
deepen; Siicldi'iih^in improve printout looks Ufcea VflfJ ihin reed OH u'iiJdi to EfflOgyour BrtKTE,
while your flcconni Is beingwldttled ;iwny.
The attraction ol electronic (rating is so si mug tliui ,1 small collage industiy of
iiist sysaims fur *i to, Eonie tradeis spend montbs, If notyear^, handngtoBsc
c. a loser who cannot admli he's afraid to trade fi?is Qffiwonderfu] excuse that he is learning
softwarc, lies like n swimmer^fho is afraid al water and keeps fiiiuself busy Ironing liJi
BACK-TESTING AND
FORWARD-TESTING
method thai prtparra j<w fur trading II ronsists of^oiuy [limuj?]i liisiurit,il data onL1 floj at ji
linn1, writing duwu yoni tradbig signals fur the day ahead, then eliciting your diarl fonrard and
nE tradra and signals for the ticxI day.
by [ItJU'iilaidin^ your slock ur ftittucs dalsi forn mininuim of two ywri>. Swing to the
ii'ii side of the QJe withowl [ooMn^al whal happened next OpenyonrtechnlcaJ analysis program
and a spicadslici't. The two most bnpotianf keys for dadejs on a computet are "Alt" and T;!lj"
becattse Jfi^y lei you switch between two pro^mm.s. Open two windows in youi analytic pro-
gr.i\\\—one for your long term diari and Indicators, tin.1 oi!h.t for Ehe short-term chart Open :i
spreadsheet, write down your system's rules nt Hit iojj of tiji* page, and create columns for the
cmry date and pilce iiml the exit dale Dud prtE&
Turn tu tfiLMvt'L'kly chart and note its signal, If any If it gives you a buy or sell sigmLgo [o
tilt daily fhsii ending »n tin1 same dale to see whether it confirms iEi;ir signaL il if does, record
Qic order von have ti« place tayonrspreadsheet- Now return ui Hie daily chart and clidt one day
forwvircl. Ecl1 whether ynur buy wseB nrder \v;is trlfflertd. Hsu, Mum to die Spreadsheet nud
record flre result, TEadtjour tradE day by tiny, mkuiatfng stops tod deciding where to lake profits.
Follow this process throughout your entire data flle, advancing a ttcefc al i time on flic
WEcMy chart, n day -iL-i tune on ilir dally chart- Al every click, write down your system's s^tals
ifnd your ;ictl«ns.
As yon click forward, one day at a time, £h£ nurkcl^ liislon,' ivfl] slowly mifnltl and CJKUJcnge
you. You rlk'k—and n buy sijjnal mines into view. Will 3011 [<iki" il? lleiurd yuur ttecMou In *i
spmadsliect Wifi you take profits al :f tarjpl, on ;i st-11 signal^ of because of price action? Now
you're doing ninth more than testitng -i act of rules. Moving abend tl;jy by day, you develop youi
ilL'risiou-iiNjLjEtfskilf.s. This one-bar-at-a-tinie Ebrwaid-tesdng is v;isilv superior to wh;it ynu can
gct froin bock'tesrJn^ software.
How willyojiEf.il svllh^ap openings, when prices open above your/boy level or below yuui
stop? Should thesysiem bt: adjusted, diaiigEd, orsorapped? Clicking torffond ohl- d;iy .11 a time
gets you as dose to the real ExperienEe of trading asyou aiaerergetiflthoutpiiKiofiOEB ttude.
ji puts you in (ouch with the hard right edge of Hw market, which yon can never experience
tbflrojjTi an onlerly prbitont Manual testing will bnproreynu] ability co think, recognize turns,
nml -id in tlit! Uiggv env&nnment nt the madst
Ahridgcd from Come Into My lading Room

310 Entries & Erits
Give yourself ;l reasonable break, stay away Irom she market for at least two or three
months. You cannot make money while feeling hurl and panicky. You need to pat some
distance between yourself and your loss. It is hard Lo look.il the markets objectively when
B loss hurts like an open wound, Taking lime oft will Lows the emotional heat m£ allow
ihe healing ro begin-
Back in the days when I actively practiced psychiatry, I occasionally saw patients who
had problems with sexual performance. By the time they got to me, they had been
medially cleared, bui could no! function and dreaded each night They felt compelled to try
Lo perform, knowing (hey would foil, I accepted such patients into therapy upon a
condition; They had lo agree not to have sex until we figured out their problem. They'd always
argue with me at first, but then fell relieved. With the pressure off, we could usually solve
their problem in therapy.
People under stress lend to m.ike poor decisions A break from trading allows you
to hcil your wounds. Your reh;ih begins with getting out of all positions—go rial, take a
total break
Be prepared far your trading rehab rn take at least twite as long as ii ii»>k to lose iill
that money. Only gamblers hope fora quick comebackln asHorl series of brilliant trades.
In reality, you'll have to daw your way back, dollar by dollar. Stop beating yourself up. Be
kinder to yourself, since you're the one who'll take yuur account 5/01(1 failure lo success, If
you yo through rehatfj you can become a successful trader.
Allow several months lo puss during whieh your equity no lunger goes down. As ihe
urgency to make bad* losses slowly fades away, srnrt gelling used lo the new, lower level of
your account Once yimVe become calmer, ytiu'll need to make several important choices.
First of nil, you'll have to decide whether you want to Continue trading.
Trading attracts us with its promise of freedom, bui some people find the process too
hard. They may not have a natural knack or cannot put En enough energy or time. This is
similar to being unable lo play a musical instrument or fix a leaky fenced There is no
shame in Lhul. A good friend of mine, after coming to several Camps and losing money on
a variety of trading ideas, finally said, "I am not cut out for trading." We are still good
friends, since there [g munli more to life than buying and selling financial instruments.
If you decide that you love trading and want to do it right, your rehab tan continue,
You notice I said "love trading,11 Everyone loves the rewards, but do you love research,
studying the markets testing ideas, placing orders? A .successful trader loves the process of
trading, and the rewards Qovv in pretty much as an afterthought.
This is no differenL from any other Held, such as medicine, engineering, or law, where
the moat successful people are ihost who love their profession. They may live in nice
hnusesand drive good cars, hul their goal is competence and accomplishment In theii
chosen Geld, not the house or the car. They do noi cut corners, take unprofessional shortcuts,
or dwell on ilie rewards. A dedicated professional constantly works itj improve himself,
respects and follows the rules of his field, and expects rewards to materialise in ihe long
run without focusing on them.
If your sole focus !s the rewards, then *get-rich-quick" must appeal lo you, with
predictably disastrous results. You wouldn't try to ^el rich quick In medicine or law, would you?
If you love tradings you have a tremendously iniertsiing journey ahead of you. You
damaged your account, bui now you can turn ihtiat losses to your advantage, use V0lir
experience to become a more focused, disciplined, and success till trader. In order to conic
back, youil need Lo establish and follow several strict rules. Use your past weakness as a
source of future strength, a foundation of trading discipline.
There are few, ii any, young geniuses in trading—Lhis is an older person's game.
Memory, maturity, and experience matter a greflt deal. My late greal friend Lou Taylor, to
whom my first book was dedicated, used to say, "If 1 get half a percent smarter each year*
I'll he it genius by the time I die." You should get better as you grow older.

Conclusion 311
If ynu agree with whal we've discussed so far, if we're on the same page, I'll
recommend several steps for your rehab:
]. Sit up and keep good records. The two main values of record-keeping arc accountability
and self-education. On!y by looking buck and learning from your experience can you go
forward.
Before you even think of placing your next trade, set up a record-keeping System.
Gamblers, curiosity seekers, and get-rida-qiliek schemers run on adrenaline; they have no
use for records. All serious pros keep good records. At a minimum, you'll nt^d a
spreadsheet for tracking your homework: ont' or two lines tor each index or stock, a column for
each day. You will need another spreadsheet far measuring available risk in your trading
account. You will need to Set up a diary for your trades. Some of th^si? templates are
available from my firm at no charge, others for ;i fee, and or course, you may very well develop
them on your own.
2* StU up it ml follow money management rules. It was poor money rtianagemeni llml landed
you in rehab. Most trading accounts gci damaged cither by a shark bile-—a single
disastrous loss—or by piranha biles—a serifs of losses thai together strip the account to the
bone even though none is deadly by Itself, You are in rehab because you've already had an
encounter with either a shark or a pack ol piranhas, 01 both- ft was a painful experience,
and unless you sel up good money management rules, you're guaranteed to have another
one, which will feel even worst.
The 2% and the 6% Rules, repeatedly described in this book and Gome into My
Twitting Room, arc designed to protect you from the sharks and piranhas. You must apply
them to every trade.
3. F'njtl f) method oi methods mat appeal to yon. You saw a variety ul methods in these
16 trading rooms. Many traders in this book have been to out Traders' Campa and studied
with me; had you approached 16 professionals at random, the differences between them
would have been even greater. You must he humble enouah CO realize that yon cannot
master every single method,
Selecting <i method that appeals to you is a personal choice) similar to the choice ofa
medical student who has to decide whether to train ^^ a surgeon or a psychiatrist, a
pediatrician or an aneatheffiQlogi&L People are happiest and most successful when they do what
they love. Just like a medical Student chooses a specially thai appeals to him, you need m
choose a trading method that engages you. You can look at many methods, but select the
one that makes emotional and intellectual sense to you.
4. Make a tititg commitment. Decide how many hours o week you can invest in trading. Do
your homework every day. Including weekends, A specific commitment confirms thai
trading is important to you. It shows that research and trading are your priorities uthei
than just a filler activity when there is nothing better on TV.
5. Start trading n very small size. You are likely to feel a little shaky corning out of your
abstinence period. The pain of you? losses is still fresh* your self-confidence a little
uncertain. You may sel up a record-keeping system and money management rules* find a
method that appeals la you, and do your homework. Still, when it comes to putting on
a trade, you may be afraid lo pull ihe Lrigger.
My advice is to begin by trading a tiny size.
Star! by putting on trades so small that they are of no financial consequence. Let's say
you have only J12.00C left in your trading account. On the day 1 write lhis> Google,
trading near S300, appears loppy and is Clashing sell signals. If f was shorting GOOG in this
account during the rehab process I would short a single share. Another stock, Cl-ITR, k in
a buy mode, currently trading at Si,26-Trading it in this account, 1 would buy [00 shares.
The bizc of these trades is too small to make an impact—a $50 profit or a $50 loss is not

312 Entriesft
goiny Lo mailer. These trades will not make yon tensr. The idea is to trade for ihc
experience, not for [lie money.
You can set up a rule—sifter five or ten successful trades, depending on the frequency
with which yon trade, you will double your size. Keep doing that until you increase your
average trading si^c in the point where yon siart bumping into the 2% and 6% Rules.
Ik member, you arc in rehab, If you had broken a limb, you'd exercise frslowfy and
gradually before recovering to 'i full working level.
HOMEWORK
Several y<?;irs ago, when I was less aware of my own likes and dislikes, I met a young woman
in Europe, and we made B dnte to mecL on u Caribbean island. We srtllnl inlo one of the
niccs! hotels on lhai Island, rented a sports car, and went to beaches and restaurants.
5tvtr.nl days later, we started bickering, with me taking the lead. It made no sense—we liked
each other, and both came to have a good time- Then I figured out my problem—we spem
ail our time together, and I did noi do any work. The more days weni by withoul working,
the harder I became on her.
Thai was an easy problem (o remedy—I explained it to my date, and we agreed that
every morning after breakfast she would go to the beach alone- She was a very strong
swimmer who could swim for 5U minutes straight away from the shore, turn around, and
swim hack. By the time she returned from the beach, it was lime for lunch with perhaps a
little ioII before it; having worked for several hours, I was in die best of spirits* and we'd
have a fabulous rest of the d;iy.
One morning I was sitting in a wicker armchair m the lobby, working on my laptop,
when ei group of tourists in loud polyester shores came in from a bus to gawk at our resort.
One of them stopped in front of me—"Poor you, have to continue working on your
vacation," Vacation?: I hadn't had a vacation since I'd quit myjobyearsago-Thatspadgtialobbyi
overlooking gardens and the sea, was my office for Lhc nett two weeks.
The point of trading is not to escape work. I love working. By the end or each week, 1
look forward to reviewing flic markets on [he weekend. By ihe end of a weekend,I look
forward to Monday morning when the markets will reopen and I tan start placing new trades.
In recifiiL years, after 1 began sharing some research projects with a friend, it wouJd have been
eusy to copy his homework—but it wonld have been like asking him to go out and eat my
dinner or take a woman I've mel out on a dale. Thank you very much, I'd rather do itmysfllfl
My weekend litmitrwork consists of five sections. 1 rarely do more than two at a Lime
and often tukc long breaks between them—it is a weekend after all, I often think about the
completed sections during the bre-ik, uiid return to rny laptop caycr to dee whether the next
section will confirm or conmidieL what I've already seen, I rn;iy begin my homework as
early as Friday evening after lhc markets close if I do not have any social plans that night.
I do the bulk of my homework on Saturday and Sunday, but if pinched fur time, I may
do the last session as late as Monday morning before the markets open-The order or these
sections is always the same:
1. Indexes
2. Groups
3. Futures
4. Current positions
5. Prospective positions
In recent years I've been using TC2005 For the first iwti sections of my homework.
Their database contains over 100 market indexes, which I atported into a spreadsheet, one

Conclusion 313
index per lint1- I use three columns per week—one for the weekly Impulse, a flag column
whose cells change color if ihtr Impulse stops being red or green, ;sncL g comments column
for joiting down my remarks,
liven though TG2005 does not allow me lo color price bars depending on the Impulse,
it is handy for a quick review uf multiple tickers. My weekly template includes moving
averages and MACD-Histogram, allowing me to see what color the Impulse would have
been if 1 amid color the bars. I sort indexes alphabetically and tap on the space bar, going
down (he List and recording my findings in (lit? spreadsheet
International Market Index and SBcP Bank Index, CLiOE Gold Index and PHLX
Housing Index, all the way down to World Platinum Index and North American Telecom—
I record their wseUy Impulse, while Excel keeps a running tab of green, red, and blue
groups. A few years a&o, Lhis section of my homework used to take a long time and did
nol seem very useful. What did it mean that 39 indexes were green, 31 blue, and J1 red?
1 found thai by rating the&e indexes each week I picked up speed; 1 also discovered several
Important patterns, sudi ;is what levels of green and red lend to indicate market tops
and bottoms.
[ like doing this homework by hand. Several programmer friends have offered to
automate JL for me so that (he numbers for all indexes could pop up at the push nf a button,
but I have declined. Seeing each index once a week and recording its changes gives me an
almosl physical feel for the market. No amount of programming can deliver thai.
hi Llie heumd section of my luimtwork. I go thimigh 239 Media General industry
groups and subgroups in TC2005, They include chemicals, durable goods, aerospace,
Internet, and many others. Bach group has Several subgroups, and each of those has a
number of Stocks. The work is similar to rating Indexes—mark the Impulse for every
subgroup,, pay special attention to color changes, jot down notes on the most promising
groups. The first section of my homework helps me decide how bullish or bearish I am on
the market overall. The second section helps me find groups in which to look for buy and
sell candidates.
In looking for the strongest subgroups, I am hoe Interested in those making new highs,
I look for groups that got beat up but stopped declining and started to mm up, tracing ;i
sort of fish book, 1 took for the opposite pattern in shorting candidates, keeping in mind
thai tops are slower than bottoms. Fear, the dominant emotion of bottoms, is sharper and
stronger than prced, which is why prices Lend to Ltim fester :ii bottoms.
For the third section of my homework, the review of futures, I turn lo TradeStfition
and another Excel spreadsheet Futures have their own groupfij For example, the Energy
group includes crude oil, healing oil, unleaded gasoIinCj and natural gas. There are two
reasons to review futures: lo look fur trading opportunities as well as for connections with
the stock market- If you become interested in gold stocks, it is only logical to analyze
»old futures, and if oil drillers look overvalued, it is useful to know the current trend ot
crude oil.
Much of market research involves a search for connections, some foJrly ohviaus, others
more obscure. You may sec thai interest rates are rising while housing stocks are going
through the roof. Knowing that rising interest rates should be bearish for real estate, you
can start watching ih,il group for .signs of slowing down, preparing to short as 5OOI1 as
those signals appear. Good trades usually take time to come together, and pour homework
prepares you to look for signals in advance, ready to act as soon as they flash on thesereen.
This puts you well ahead of amateurs who casually "follow trends'' and hop aboard Loo late.
The fourth and fifih sections of my homework, analyzing open ,md potential trades,
follow well-established steps that must be familiar to you from reading my comments on
many trades in this book (see also Seven Days in Dr. Atexmiitev Eider's Trading Room in
Chapter 16). I am interested in buying the strongest stocks in the strongest groups and

"-U4 Entries & Exits
shorting the weakest stocks in the weakest groups (strong means starting to turn up and
weak means starting Lu top out). Put up a weekly chart, compress it until the entire history
Bis into a single screen in order to sec whether ii is cheap or expensive, then uncompress
iuosco approximately two years of history. What is the price trend, what arc the messages
of the fust and slow-moving averages, MACD-HlstograiW and MACD Lines? Are there
any divergences? What is your conclusion? Are you :■ bull or a bear on this stock, or do you
s<?e no advantage either way?
Drop down to the daily char! and look for entries and exits in the direction of the
weekly trend. Do you see an attractive entry poini, a realistic profit target, a close enough
.stop? Put those numbers Into a spreadsheet, calculate your risk/reward ratio, and decide
whether the trade is worth taking. M;ike sure that the 6% Rule allows you to trade and
verify the maximum size permitted by the 1% Rule.
All this homework makes for a busy weekend, but doing it gives ntft an advantage in
the battle for market profits, Doing jour homework week after week and month after
moiuh, keeping good recordst and documenting each step can lift you above the crowd of
amateurs and gamblers. The job of losers is to provide money to winners, bul they're no(
in a hurry to mail us their cheeks. You need to find those turning points in the markets
where loser* fold and run, leaving ihtir money on the table for us.
WhaL arc die alternatives u> doing homework? You could beg lor rips, listen to
financial news, perhaps subscribe tu an advisory service. Do you think they will give you much
of a chance of winning the trading battle? The only viable alternative would be to give your
money to professional managers, bul even that choice is far from work-free. Most money
managers undci perform market averages, and you need to split your money between
.several of them, closely monitoring their performance and moving your assets. The
discussion of how to choose, rate, and use money managers is outside the scope of this honk.
Just keep in mind that there is no free money in the financial markets.
An amateur who has ;i few dollars burning a hole in his pocket boys himself a couple
of market books and dreams that if he sets Stochastic just right, the money spigots wlfl
open. Soon he'll be able io move to Euiy Street, never work, and sip pina coladaa on the
beach, while that Stochastic or some other indicator continues Eo bulk up his account. Let
him dream. You have beller Lliings to do with your time. You have homework.
SHARING HOMEWORK—
THE SPIKE GROUP
In 21KM 1 began sharing some homework with a group of traders. We hiivc found ;i way
for our group to pool resources, while each member remains responsible for his or her
own workload and performance* We luok for new trades and compete on the quality of
our picks.
The roots of the story go back to ]993 when I vviotc in Trading Jor a living that the
New High-New Low Index was unt of the best leading indicators of the stock market The New
Highs are the leaders in strength* and the New Lows art the leaders in weakness; their shifts
of balance provide useful dues to the future piith of the stock market. Oddly enougtii while
NH-NL data is easily available from the Wall Street Journal and other newspapers, must
financial databases present It in a user-unfriendly way; making the index difficult to track.
A couple of years agu, I asked Martin (Chapter 16) to set up a system for tracking
NH-NL, He began sending a nightly e-mail to me and >idveral other friends with the
weekly and daily charts of NH-NL. That index tad recently spiked down, clearing the air
for a fresh upmovc, and we started referring to his nightly chart as ilie spike chart. During

Conclusion 315
[he 2QO4 Ti ddtiV Camp in Cyprus, Martin showed an updated spike chart to the class each
day. When campers asked to be ;iddr<] in his Spike mailing list, Martin readily a^rend, bui
said he was not interested in feeding passive users; anyone who did not respond to his
e-nuils with comments would be oft the list after two weeks.
The group quickly shrank us mmuiniributint; members were elmiinLited. At ihe .same
time, members' feedback started to produce useful stock tips and insights. Around tbar time,
1 read a book billed The Wisdom of Crowds by James Surowiecki, who argued that groups
were smarter than individuals. That went against the common view that crowds were busi-
cally dumb, Surowiecki showed Lhut groups were slupid when members led off each others*
and their guru's emotions, parroting the .same line and creating financial hubbies. Smart
groups had a difftnfnl structure—independent input from all members, UEicmUiiniimUed
by orhers1 opinions, with tbe leader simply maintaining the group structure.
My renenl experience q| tunning webiuars fur small groups of traders led me [o agree
wilh this novel view. I was struck by the high quality oE tips coming out of those dosses,
Wehiiw participants, usiny different methods jnd acting independently of each Mth<?r,
generated a cascade of tips from which we could pick favorites. The Surowiecki model
seemed to work well.
That is how iL all came together: Martini daily NH-NL mailings; [he high quality of
^njiip feedback; the Surowitcki model; and the cascade of good tips from my webinurs, I
e-mailed the NH-NL group suggesting we set up a system: Each member should e-mail
me [heir best pick for tile week ahead, and I'd collate nil the tips Into ;i spreadsheet and
send that file to every group member. Most people agreed, and we went ahead, naming our
project ihe Spike group.
Each member is obligated ro send his or her best pick accompanied by a brief text
explaining his choke by no later than 3 I'M mi Sunday every week- In return, he receives a
spreadsheet and a text file on Sunday afternoon containing the picks and comments of all
group mem hers. All tips arc rated at the end of the week, wilh (hree points awarded for the
#] pick, Ewe points fbr#2, and one point for #3. At Che end of each quarter, group
members are rated by their lota) number of points and equity gain. The gold, silver, and bronze
medal winners in both categories receive prizes, iviib grand prizes at the end of the year.
The members of Spike receive access to research by a group of serious traders, but
accept certain uhli^iiiinni; failure to abide results in expulsion ov fines. Members am
expected to contribute each ivedk, with four absences permitted per quarter. Members are
free to share their own work with anyone they like, but sharing group files with outsiders
resulte in immediate expuIsioiL
Looking ai die results of the Spike group competition, it is easy to be dazzled by [he
winners' performance—22% gain for Lhe first quarter of 2005, 55% for the second
quarter, 16% lor the third- Those are results for betting tbe entire account on paper, starling
with Llitr initial $1,000, on each week's pick. Trading real money, you wouldn'l bet your
entiic account on a Single pick, and the results would be less spcclacuhr, but more real
rVlosI group members report an improvement in theft real-money performance. They
become sharper and more focused on theii homework, knowing that their best picks will
competewfth Lhe picks of their friends. I asked group members to aeif-report whether they
Iraded their own and other members3 picks. Tile rate of trading their own picks run.1; at
about 60% each week and the rate of trading other picks is about 30%, with some
members trading both and some none.
There are abciui 20 traders in our group, with a small turnover each quartet; Most of
those who left could not keep irp with the workload. Membership in the group is by
invitation only, and we usually have a pool of Liindidates waiting for openings. The system
Continues to function as a strong generator of trading ideas. One of the key lessons of our
group is LhiiL tr;id<?rs urn work together as long as each docs his own research and shares

316 Entries ft Exits
only the result. Also, these results have Co be subrnilted simultaneously, Lo avoid
influencing one another.
GEOGRAPHY AND TIME
If you know how to trade, you can do it anywhere in the wurlil—butonce you begin
traveling, you quickly discover thai some locales are better suited to trading thaji others. Fast
Internet is of paramount importance,but the next most important factor is the time zone
from which you trade.
The U,S, financial markets Eire located mostly in New York and Chicago, their trading
hours set for the benefit of floor traders. The New York Stock Exchange is open from
9:30 AM to 4 I'M EST, the NASDAQ keeps the same hours; bond futures trade in Chicago
from 7:20 am tu 2 PM (8:20 AM to 3 E'M IJST), and so forth. The farther west you go, the
earlier you have ED gel up ED watch the markets in red-time. For example, i£ you want in trade
the opening in bonds from California, you'll have to be up by 5:2(1 am, and three hours
earlier if you trade from Hawaii.
A couple of years ago, T spenl two weeks in Sydney, Australia, when the U»S. Slock
market was very active, 1 needed to manage my positions and traded almost every day. The U.S.
market opened at 1:30 am local time. I'd go in sleep before midnight wake up for the
opening, then go back to sleep, get up in the middle of the night, go back to sleep Li^Liin, then
wake up for Lht dosing al 8 AM and afterwards catch another hour of sleep before getting
up Tor a run around Darling Harbor; breakfast, and homework. J had bugs under my eyes
md hated that schedule,
Going east, on the other hand, is an entirely different story. The local time in much of
Europe la six hour* later than in New York. When 1 trade, say, from Vienna, the U.S. stock
market opens at 3:30 PM and closes at 10 I'M. 1 can sleep late, j-o lor a long bike ride, have
a leisurely lunch, rlien return to the computer and do homework lu ^el ready for the
opening. After the market closes, Lh^e is enough time for dinner because you can sleep late the
next day.
What about the markets (hat trade arnund the clock, .such as stock index futures? Do
not Imagine you'll be able to trade rhem actively whenever you want. Their volumes dry
up after the main markets, in New York and Chicago, dose for the day. You may be able to
hangout of a bad position or even open a new trade, but expect ro face heavy slippage due
to thin after-honis vokimc.
Currencies, which actively trade almost around the clock, have their own problems. In
trading, youVe iryinj- to pick oilier people's pockets while they're picking yours, It is hard
enough to prolccL your pockets while you're awake, but how about Having your pockets
picked while you sleep? Stops alone will not solve iIijn problem. Thiding 24 hour markeifi
sounds good in theory, bul presents jual as many problems as opportunities lor active
traders.
A beginning or intermediate trader is unlikely to have much choice where to trade,
but he can certainly decide which markets to trade. It p;iys to concentrate mi stocks and
futures that are actively traded in your own lime zone. Trading is ;i hard game, and you
arc belter off working when you are fresh and alert. The grass may seem greener on the
other side of the septic tank, but believe me, it is not. 1 hove Australian friends who keep
trying to hit U.S. stocks, and Americans whn try to trade in Europe, li is one thing to lake
on -i long-term position Lhctt you do not have to monitor intraday. Tt is quite another to
actively trade a markel while trying to stay awake. A comfortable and well-rested trader
is more likely to win.

Conclusion -Si /
TRADERS' SPOUSES
As I begun interviewing traders for this bouk, J was surprised liuw many of them wanted
to talk about their love for iheir wives. One after another talked with great feeling and
without any prompting from me about Ehe trust, support and encouragement he felt
at home.
The intellectual demands of Ehe markets are not very high. In this game we only have
In deal with five rhetors; open, high, low, closing price.1;, and volume. Why then do so many
people who are successful in their professional lives fiiil in trading? This is because trading
places immense emotional demands on all of us- It evokes powerful feelings—fear, greed,
and sii on, making it very easy to make bad decisions. A person with -i happy personal life
\\i\b an advantage* while the one with a stormy personal life finds himself doubly stressed.
This is not to say that every trader in this book lives in maritill heaven. Some are
single, and at [cast one is currently going through an unpleasant divorce. Curiously enough,
he is also in a drawdown rhis year, although as a professional trader, his losses are minimal,
and I am sure he will pull nut of his slump. 1 still remember the deep slump 1 had at the
time ol my divorce many years agO-
A person who goes home to a smiling, loving spouse and does nor need to spend an
ounce of mental energy on figuring out the angles of a tense personal relationship is in ;i
much better position when he sits in front of the computer to analyze charts and make
decisions, While most traders in this book conformed to this pattern, it Ls difficult
©translate ii iiiio ii specific recommendation. Whal yim do with ibis insight is entirely up lo you.
I can only share with you my surprise al discovering this factor in the lives nf many
successful traders.
TRADING-MORE THAN MONEY
I enjoyed writing this book. Towards the end, racing to meet the deadline, 1 stopped
trading for two months during which .slocks. emrenricsh and several lulures Staged fantastic
reversals. 1 saw those moves coming; the money looked us available as it ever getst but I
stayed away, knowing I could not fully focus on both tasks at the same time.
Why write if yon can trade? Probably for rhe same reason Iti traders in this book gave
their interviews and opened their trading rooms to you. There is more Eo life than money,
even to a trader's life. This is what tight-fisted and narrow-minded folks cannot
understand. They have asked before and undoubtedly will ask again: Why would anyone who
knows how to trade talk about it? Why not close the door, null down the shades, and grind
out profits? When llm.se folks were kids in summer Lamp, lliey probably ale [heir fniH.1
packages from home at night under a blanket. Some people are a little more tigliL, others
a little more generous.
Success in trading does not stem from knowing "the secrel" because, as I said before,
there is no secret. There is hard work, focus, attention lo detail, being careful willi money.
being oriented toward the long term, and having a bii of flair. Why do prominent
physicians, actors, and engineers teach classes, bringing up the level of the competition? Because
they reel comfortable in their success, love their er.irt, and enjoy sharing with like-minded
people. Why does someone like Steven Spielberg give master classes on filmmaking? What
it someone learns his method, improves upon it, and makes a better movie? 1 am sure he'd
feel energized if that happened, sec that movie, and then move on to make an even better
one himself.

318 Entries & Exits
Clayton Seitz, a camper and trader at whose Iiouse 1 like lo slay when visiting Boston
recently said to me: "I used to race, cars when I was younger. If after a race you came up to
the winner and said, 'Wow, today ynu blew the doors ulf my car—what did you do?* lie
would say: 'Well, last lime I was racing I had a little problem with this ur that, so I made
this adjustment and that adjustment' If you came op to the last man in thai race and asked
the same question: lWow, towards (he end you were really gaining on me, what did you do?'
he unuld say,'J cannot lell you, thai is a secret.11'Trading is not the only field in which
winners and losers behave differently.
This is not to say that successriiJ traders walk around freely dispensing ivisdom and
good trading tips. They seldom do. All have had tou many experiences with penplc trying
to sponge off of them. When someone asks them for advice, their first reaction is similar
to how many people read to heggatS—make n(^ eye contact and quickly walk away. You
have to know how Tn approach them, and the best way is by sharing your work. Have
nothing lo share? Well, that's a problem. How can you put yourself into a position in which you
will have something to share? Work, perhaps?
For me, one of the nicest aspens nf Trading, in addition to the freedom it provides, is
thai it puts me In contael with so many interesting people. Serious traders develop
independent minds, and 1 find being with them very stimulating iind a great deal nl tun.
Looking at the faces on the cover of this hook reminds me thai during the past two
months, I discussed life choices with Pascal, went bicycling with Damir, toured Dutch
canals nn a motorboat with Martin, went lo a museum with Andrea, and had a long talk
about terrorism with Sohail, who stopped by my apartment for E cold beer on his visit
from the United Kingdom. Lasl weekend I went canoeing at Jerry's summer home, and
nexl wsek I am going to Washington, D.C, where I want to take Peter, visiting from
Moscow, to the Smithsonian Air and Space Museum.
All of us arc busy studying the markets and trading for ounselvea or managing other
peoples money. Still, there is more lo life lh;in money and what it can buy. 1 lliink n\ this
book's dedication to Eddie, who, stack on a high floor in a burning building, called his
family members and his fiancee, telling them he loved them. He did not call his bank on
that day.
Trading can give ynu money, which ljii buy many good things—freedom from
having a boss, (he ability to travel wherevei and whenever you like, and much more. Still when
the chips arc down, it is not money that determines the quality of your life. Your goal in
trading should be to become Ihe best professional you can be. Your success will be
measured largely by money, hut not by money alone. This is why, once again, I want Lo thank
the 16 traders who opened theft trading rooms—helping all of us become better traders,
and serving as examples of kindness, generosity, and drive.

Bibliography
Those arc the books mentioned by the author or 16 traders in the course of their interviews;
American Society of Mechanical Engineering, Unwritten Laws of Engineering. American
Society of Mechanical Engineers, 1944.
, Gerald. Day trading with Gerald Appel (video). Financial Trading Seminars,
1989.
. Technical Analysts; Power Tools for Active Investors, Financial Times-Upper
Saddle Rhrcr, N): Prentice Hall, 2005.
Crabel, Toby. Day Trading with Short-Tain Price Patterns grid Opening Range Breakouts.
Greenville, SG Traders Press, 1990,
Zi Joe, and Vicki Robin. Your Money or Your Life: TfansfoTinh\g Your
Relationship with MoneyandAchieving Financial Independence, New York: Penguin
Books>l999.
Douglas, Mark. Trading in the Zone: Master the Market with Confidence, Discipline, and
a Winning Altitude. Upper Saddle River, NJ: Prentice Hall Press, 2000,
Elder, Dr, Alexander. Come info My Trading Room: A Complete Guide to Trading,
New York: Wiley. 2002.
—. Straying from the Plonk: Travels in New Zealand Hoboken, NJ: Wiley, 2005,
-. Trading for o Living: Psychology, Trading Taffies, Money Management New Ynrk:
Wiley, 1993.
Hutson, Jack K., Car! R Schrocdcr, and Dnvid Weis. Charting the Stock Market: The
Wyckoff Method. Technical Analysis, 1991.
Kiyosaki, Robert T-, end Shanm L Itchter. liich Dud, Poor Dad; What the Rich Teach
Their Kids about Money—Thai the Poor and Middle Class Do Not! Warner Business
Books, 2000.
Lefevre, Edwin. Reminiscences of a Stock Operator. New York: Wik'Vx 1994,
MacPherson, Malcolm, The Black Box: All-New Cockpit Voice Recorder Accounts of
In-Flight Accidents. New York: William Morrow, 19%.
"319

320 Bibliography
Murphy, John J. Tkcftttical Analysis of tin Financial Markets: A Comprehensive Guide iv
Ttading Methods and Applications. Upper Saddle River, NT: Prcflticc Hall Press, 1999.
Sperandeo, Victor, and T. Sullivan Brown, Trader Vic—Methods of a Wall Sited Master.
New York: Wiley, 1993.
Surowiecfci, J-imes. The Wisdom of Crowds: Why the Many Arc Smarter Than the Few
ami How Collective Wisdom Shapes Business, Economies, Societies, tnttl Nations. New
York, NY: Doublcday, 2004,
Watls, Dtckson G. Spccuhitims us ti Fine Art tnul Thoughts on Life. New York: Frasct
Publishing Compaii)\ 1965.
Weis, David- Trading with the Elliott Wave Principle. Chicago, II.: Prohns Publishing [Jo,,
1989,
WyckorT, (tidiard Dcmillc. Studies in Tape Rending. Traders Press, 1964. (Also known ^
Studies in Thpe Reading by Rolio Tape, Richard WyckofFs pseudonym.)

Reading Lists
After these interviews were completed, I asked each trader for a list of books they
recommend.
Chapter 1 Sherri Ha&kell
1, Reminiscences of a Stock Operator, Edwin Lefevrc.
My favorite This book brings trading down io carlh, lis niirniU'tl by a real e ruder.
Its timeless lessons should be revisiletl every few years.
2, The Visual Investor: Hoiv to Spot Market Trends, John J. Murphy.
A great book on technical jniilysis—uimprehenMve ,intl Ilj llic point.
3, Market Wizards: Interviews wifh Tup Traders and The New Market Wizards:
Conversations with Aiuvriai's Top Traders, lack D. Scbwager.
These books have interviews with several different traders. You learn about Individual
approaches ;inci the value of tenacity.
4, (j)isie into My Trading Roaifl; A Complete Guide to Trading and Trading for a hiving.
Psychology, Twdhig Tactics, Money Management, Dr. Alexander lilder.
Loaded with grcai information] innovative trading concepts, and wit
5, The Candlestick Course, Steve Nison.
A text- and workbook by the man who introduced candlestick charting to western
traders.
Chapter 2 Fred Schutzinaii
1. T\ tiding for a Living: Psychology, Trnding Tnctirs, Money Mtinnge}nent, Dr. Alexander Elder.
2. Technical Analysis of die Fhtandat Markets: A Comprehensive Guide to Trading
Methods and Applications, ]uhn [. Murphy.
3. Remitli5G£tKe$ of a Stock Operator, Edwin LeFevre,
4. EfetfietftS of Successful Trading; Developing Ybttt Comprehensive Strategy through
Psychology, Money Management, ant! Trading Methods, Robert Rotella,
5. Market Wizards: interviews with Top Traders, lack D. Schwager.
6. The New Market Wizards: Conversations with America'* Tup Traders, luck D.
Schwager.
321

322 Reading lists
Chapter 3 Andrea Perolo
Lf Trading for a Living: Psychology, Trading Tactics, Money Management, Dl Alexander
Eider.
Along with the (wo classics—Technical Analysis of the Futures Markets by |olin
Murphy and Tcchniml Analysis Explained by Mat tin Fring—this book Is clear and
complete with the two golden rules of money management (the 2% and ihe 6%)d
2. Martin Pring on Market Momentum, Martin J. Pring.
This is the book lor a deep understanding of how and why oscillators and
indicators work,
3. Pring an Price Patterns: The Definitive Guide to PrtC6 Pattern Analysis and
Interpretation, Martin J. Pring.
How To trade different price patterns and where to put stops and take profits for
each.
4. Schwngeroii Futures, lack Schwager*
A good hook on technical analysis, hut! especially appreciate "Real World Chart
Analysis" in Part 2—a trading practice with 2 LO pages of charts. You read about a
trade based on a particular pattern, then turn the page to see how il would have
worked-
5. Technical Tinder's Guide to Compute/ Analysis of the Futures Markets, Charles
LeBeaU and David Lucas.
Another complete hook on technical analysis. The "Set-Up Pattern,11 p. 75 and
pp. 13tt-139t works well in real trading. The authors describe this pattern far
Slow StodiastiGfii but ] found it works even belter for RSI.
fi. Japanese Candlestick Charting Techniques^ Steve NLson,
The main book on candlesticks.
7. Charting Commodity Market Price Behavior, L. Dee Belveal.
This 35-year-old book proves that quality has no OgeJ Still the besi lor volume and
open interest in the futures markets, with a very Interesting chapter on COT reports.
8. Precision Trading with Stevenson Price and Time Targets, J.R. Stevenson.
A very smart tactic for confirming valid trendfine breaks.
0, Technical Analysis for the Trading Professional, Constance Brown.
I recommend it far the chapter on RSL
in. Trttding in the Zone: Master the Mtivkui with Confidence, DhciplinCj and fl Winning
Altitude, Mark Douglas.
Last but not least—much easier to study than his first famous book, The
Disciplined Trader: Developing Winning Attitudes, Chapter 11, on taking profits, has
a valuable trade-management concept*
Chapter 4 Sohail Rabbani
I have tried hard to iist as few books as possible nnd still cover the trading spectrum.
The list for traders:
L Trading for a Living: Psychology, Trading Tactics, Money Management, Dr. Alexander Elder.
A must-rend do-it-yourself guide for new traders.

Reading Lists 323
2. Sterling Out in Futures Trailing* Mflric ]. Powers.
A Logical introduction to financial futures,
3. The Investor's Quotient; Thv Psychology of Successful Investing in Commodities and
|ake
Trader styles and psychology,
4. The Disciplined Trader Developing Winning Attitudes, Murk Douglas.
Trader's case history iind psychological Introspection.
5. The Visual Investor: How id Spot Market Trends, John J. Murphy
An introduction to technical analysis.
6. Winner liih All: A Top Commodity Trader Tells It Like It Is, William R, GafiadWT.
Criticism of market gurus and technical analysis.
7. Options as a Strategic Investment, Lawrence G. McMillan.
An encyclopedic review of options.
8. The Bent Book: Survive and Profit hi Ferocious Markets, John Rothchild.
Defensive advice for turbulent markets.
Second list, for big-pic tine perspective:
1. Agmnst the Gods: The Remarkable Story of Risk, Peter L Bernstein,
2. The Dollar Crisis: Causes, Consequents, Cures, Richard Duncan-
3. Running on Empty: How the Democratic tmd Republican I'tuties Are Bank} upting
Our Future and What Americans Can Do about It, Peter G. Peterson.
4. Bull's Eye Investing: Burring Real Returns \n a Smoke and Mirrors Market, John
Maudlin,
5. Unancial Reckoning Dtiy: Surviving the Soft Depiessioii of the Twenty-first Century,
William Bonner and Addison Wiggin.
6- Tomarrnw's Gold: Asia's Age of Discovery, Nlarc Pnber.
7. The W&rid Is i:int: A Brief History of the Twenty-first Century, Thomas L Friedraao.
S, Wealth and Democracy: A Political History oj the American Rich, Kevin Phillips.
9. The Case Against the Fed^ Murray N. Ftolhbatd,
10. The Creature from jekyll Island: A Second look at the Federal Reserve, G, Edwatd Griffin,
LI. Crossing the Rubicon: The Decline oj the Aweriaut Empire a' the End oj the Age oj
Oil, Michael C Ruppert
Chapter 5 RayTestn Jr.
1. Come info My Trading Room: A Complete Guide to Trading, Dr. Alexander Elder.
2. Reminiscences of a Stack Operator* Edwin Lfiffivre.
3. How to Trade in Stocks, feise Livermore ,ind Richard Smitten.

324 Reading Lists
4. Stock Market Wizards: hit&tviews with America's Top Stock Trailers, Jack IX
Schwager.
5. Trend Following—How Great Traders Make Millions in Up or Down Markets,
Michael W. CaveL
6. Seven Habits of Highly Effective People: Powerful Lessons in Personal Change, Steven
R. Cnvey.
Chapter 6 Mike McMahon
I hese bonks had ihc most impact on coy tradingi in the order tlut 1 read ihem:
L TradingJbr it Living: Psychology, Trading Tactics, Money Management, Dr. Alexander
Elder. ^
My first awakening from "online/short-term investing*1 to rea] trading,
2, Come into My Trading Room: A Complete Guide to Trading, Df, Alexander Elder,
Greatly expanded my record-keeping and money management,
3, Tktding in the Zone: Master the Market with Confidence, Discipline, and ti Winning
Attitude* Miirk IXni^his.
Improved my trading psychology and confidence,
4, Trading Rules? Strategies for Sntress, William F. Eng.
50 common sense rules—I focus on one of them each week ,is a reminder during
the trading year. (This week is ~32: Never permit speculative ventures to turn into
investments.)
5, Riding the Hear: Haw to Prosper in the Cowing Ban Market, Sy Harding,
An uuLhor who believes in bear markets and sees ihe rallades of nbuy and hold.™
6, Trading Classic Churl Patterns, Thomas RulkowskL
f don1! use patterns u lot, but this works well as a "pattern encyclopedia" and I
especially like his method of scoring patterns.
7, Technical Analysis: Power TaoU for Active Investors,. Gerald AppeL
A greal bonk from flic creator of one ol my favorite indicntois, MACD.
Cha p ter 7 G e raid Ap pel
1. Tkchnical Analysis of t!ia Financial Markets: A Comprehensive Guide to Trading
Methods and Applications* Fohn J, Murphy.
Finej brojd coverage of technical indicators; ii good Jound;iLion lliiJ reference
source,
1, Stock Trader's AltnuniK, published nnnuLilty, Y;ilo Hirsch and kllrfy A, Hirsdi-
The 58th edition was published in 2005. Probably the best source of information
on seasonal factors in the stock market.
3. Profit Magk of Stock Transaction Timing, J.M. Hurst, 25ih anniversary edition.
A classic discussion of stock market liming cycles and ways U> profit from [hem.

Reading Lists 325
Chapter S Michael Brcnkc
Books in order of Importance
1. Tfradhtgjbrci Living: Psychology, Tra&tig Tactia, Monty Managetmnu Dr. Alexander rider
Useful information that helped me pet started, with rules that limited my tosses
during the early years. Without this book I would probably stilt be struggling and
more than likely would have hod to consider another line of work,
2. HowTveAdtievcd THple-Digti Returns Day-trading; 4 Hours a Day, David Floyd.
] learned a very valuable fesson aboni staying in tune with the market.
3. The Master Switlg Trader: Tants and Techniques to Profit from Outstanding Shurl-
Tenn Trading Opportunities, Alan S. Farley.
] learned 10 watch daily and intraday charts together, and thiSi combined with I he
Impulse system from Come into My Trading Room, had a serious impact on my
results.
4. Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading
Methods and Applications, Jtihn ]. Murphy.
A good hook fur learning the basics of chart
Chapter 9 Kerry Loworn
1. Trading for a Living: Psychology, Trading Tactics, Money Management and Come into
My Trading Room: A Compkte Guide w Trading. Dr. Alexander Elder.
These are must-reads for any trader lonkEny, to pursue the trading profession, They
cover the entire game in a very enjoyable way. Trading for a Living gave me a jump
Start on my path to 1r;iding.
2. 12 Habitudes of Highly Successful Traders, Ruth Roosevelt,
Preparedness is essential in any profession. Successful traders have a habit ofbeing
prepared.
3. Exceptional Trading, Ruth Roosevelt.
1 believe knowing yourself has the biggest impact on your trading,
4. Investor Therapy: A Psychologist and Investing Grtnt Tells You How to Out-Psych
Wall Sirwi, Dr. Richai d GcisL.
5. Trading in the Zone: Master the. Market with Confidence, Discipline, and a Winning
Attitude, Mark Douglas.
6. Tin; trading Game: Playing by the Numbers to Make Millions, Ryan (ones.
Money management is exceptionally important, second only to the understanding
of one's self.
7. Market Wizards: Interviews with Top Traders and The New Market Wizards:
Conversations with America's Top traders. Jack D. Sdiwuger.
Schwager writes: "I am frequently asked whether writing this volume ,,, helped
me become a belter trader. The answer is yes, but not in the way people rctpect
No trader revealed to me any great secrets---The single most Important lesson
provided by the interviews is that it is absolutely necessary to adopt a trading
approach precisely suited to one's personality"

326 Reading Lists
3. Studies in Tape Reading, Rollo Tape.
I keep this dassic in my briefcase fur regular rereads.
9, Technical Analysis; Power Toots for Active Investors, Gerald AppeL
10- [Title Yd Unknown], David Weis.
David, you must complete your book; I am convinced it will be a classic.
Chapter 10 Dr. Diane Buffalin
I. Trading for a Living: Psychology, Trading Tactics, A-kmey Management, Dr. Alexander
Rider.
Chapter 11 David Weis
Influential books directly or tjngenLially related Lo trading (in no particular older):
1. Technical Analysis of Stock Trend*, Robert D. Edwards and John Maget
2. Studies hi Tape Reading, Rollo Tapa [Richard WyckofFs pseudonym).
3. Tape Reading and Market Tactics, Humphrey B, NeilL
4. Prices, George K Wnrren and Frank A. Pearson.
5. A HtSto/y of Interest Rates, Sidney Homer and Richard Eugene Sylla.
6. Market Wizards: interviews with lop Traders, Utk 5. Sdwager,
7. Profits in the Stock Market, H.M. Gartlcy.
8. Freedom from the Known, Jiddu Kridinamnrli,
y. Vic Wisdom of Insecurity, Alan W, Walts.
10. SkirfhartJia, Hermann I
Chapter 12 Bill Doane
1, How Charts Can Help You hi Iks Stock Market, William L ]iltr.
A much easier read than T&chitfcal Analysis of Slock Tiends by Edwards and
which is the bible of technical analysis,
2, Jesse Livennore Speculafoi King, Paul Sarnoffi and Reminiscences of a Stock
Edward
Anyone wishing to become a successful trader must read about the lifr of F
Li verm ore.
3. Trading for a Living: Psychology, TYadirtg Tactics, Money Management, Dy. Alexander
Elder
On the top-10 list of any experienced investor or trader.
4, The Crowd, GilGtavc LeBon and Extraordinary Popular Delusions and tJic Madness
of Crowds, Charles Mackay.
These iwo clasfiie bonks on erowd psychology can help one understand the manias
of the Japanese market in the 'SOSx the run-up of gold to SftHO/ounce, and the buLt-
of Internet stocks and house prices.

Reading Lists 327
5. The Battle for Investment Survtvah Gerald M, Loeb.
An investment primer thai h.ns wiiliMond the test of time; chock-full ol helpful
observations gathered from hands-on expeiience.
Chapter 13 Peter Tsiliirnikov
1. Inimduy Trading System; Five F&ints for Success, V.I, Safin.
A manual by the chief trading Instructor of our firm, rating cadi trade un a five
scale; the hook is being translated into English.
Chapter 14 Damir Makhmudov
1. Trading fot a Living: Psychology, Trading Tatties, Money JVfoHflgertiettf Mid Game into
My Trading Room: A Complete Guide to Trading, Dr. Alexander Elder.
These books cover ul! the major aspects nf trading the markets. Their study guides
test you and provide feedback »■* your understanding of the material.
Recommended courses
Technical Analysis and Specialized Techniques in Technical Analysis, Securities
Institute of Australia, www*$eeurities<edtLQu
Technical analysis is covered in a very organized way, with lectures, assignments*
examinations, Q&A, etc. Optional certification in Technical Analysis from the
Australian Technical Analysis Association is possible after completing these courses.
Chapter ! 5 Pascal WiJlain
I suggest reading iht fallowing books in the proposed orden
L The Four Pillars ofInvesting? lessons for Building a Winning Portfolio, William }.
Bernstein.
Firstj you naed to understand the very large picture: asset allocation. This book is a
grflal help in deciding what percentage of your assets to put in cash, stocks, real
estate, etc. It advocates diversified index lunds instead of specialized, managed
funds, particularly addressing the bad returns of ttu1 former compared to the latter.
2. Haw io Mtikv Money in Stocks: A Winning System in Good Times or Bad-, William }-
G'Ndl.
You need a good stodt-picking strategy lor the money you decide to put in the
stock market
3. Fire Yow Stock Analyst: Analyzing Stacks On Your Own, Harry Domash
The third step is lo analyze stocks you select for investing. This is a musl-rcad for
those who are not accustomed to reading balance, sheets; enables you to perform
your own fundamental stock analysis
4. Trading for fl Living and Come into My Trading Room, Dr. Alexander Hder-
Then come Dr. Elder's technical analysis books that show how to build your
entry/exit strategy and money management policy.
5. Portfolio Mniiflgemcnt Formulas; Mathematical Trading Methods for the Futures,
Options, Mid Stock Markets, Ralph Vince.
Finallyi f<ir nialh lovers and those who have already developed a winning strategy,
this book on Eiioney managemenl will help you optimize your method and ma\i-
mize your capital growth while reducing yout risk.

328 ReadingLists
Chapter 16 Martin Knapp
1. 'fruiting for a Living: Psychology, Trading Tactics, MoneyManagement, Dr. Alexander
Elder,
My all-time favorite, without which 1 would not be where I am today.
2. Come into My Trading Room: A Complete Guide to Trading, Dr. Alexander Elder.
No book in my library has more mark-ups.
3. How I Found freedom in an Unfiee World; A Handbook for Personal Liberty, I larry
Browne.
Groat views on living a life of freedom.
4. Jesse Liverwort': The World's Greatest Stock Trodcr, Kiclwd Smitten.
[ prefer i[ to the more famous Reutiirisa-na-i vfa Slock Operator.
5. Th& hnter Gtunc of Tennis, VV. Timothy Galhvey.
A different appruncEi tn "duinir a martin."

Acknowledgments
] feel grateful lo the 16 mtn and women who opened their trading rooms lo nu\ Thank
you for being open and generous, showing me your trades, and reviewing your chapters,
I Innk forward Iu staying in touch wiih you in the years ahead.
My initial plan was to approach three dozen traders and ask each to snow me one
trade- My iriend and a repejt camper Peter Cameron pointed iml 3 flaw: "Everyone is
going CD show you a successful trade, and some poor guy who reads your book will strt
three dozen profitable trades and not a single tossj he may think that trading is eas^™ Peter
declined to be interviewed for this book because he makes n loi ofmoney, lives in a lax
haven, and keep?; a very low profile, but his commeni changed my project 1 started asking
people tQ sliow me two trades—a winner and a loser, knowing from my own experience
lh;il I learned more from losing trades Lhan from winning ones.
Thanks to dozens nf traders whu came to my Camps each pear and kept me on my
toes with their questions. I feel grateful to Kim and Charles Cithlet and their capable staffi
whose invitations to Traders' Expos and Money Shows gave me valuable opportunities lo
meet hundreds of traders, Thanks to Ja<_k Schwager, whose Market Wizards created a new
genie of market literature- In writing this book, I siarted on! on a trail laid out by Jack.
Thanks to Joan O'Neil at John Wiley & Sons, who leaned on me to initiate this
project and move it forward. She took the risk of publishing Entries & Exits in full color and
encouraged me Co create a Study Guide. My old friend Ted Bonanno served as an agent lor
this book, Ted and 1 work nut together several times n week, and uur gym sessions were
punctuated by his practical and innovative advice. Paul diNovo was my top choice for an
<iri dirccton I have tremendous resprcl For his artistic judgment and taste. )oann:i i'omctanz
and her staff for converting a plain text file and a folder of charts into the book you hold
in your hands, Carol Keegan Kayne made sure thai [he final version met her purisl English
standards-
All three of my children, Miriam, Nika, and Danny* pitched in with editing Lhe
manuscript. In addition, Nika helped oversee many issues of design. Inna Fddman, my
manage! of more than 10 years, ran the office alone for weeks at a time, while 1 had
my face in (he word processor. She relied on Oleg Audiyyets and Konrad Krupinski,
two Lrualed associates, to keep the office humming. Last but not teast, many thanks lo
Patricia Liu, who helped create a happy emotional background against which this book
was written.
Dr. Alexander Elder
329

About the Author
Alexander Elder, M.D., is a professional trader, based in New York City. He is the author of
TYaditig for a Living and the Study Guide tor Trading fai a living, considered modem chs-
sics among traders. First published in E993, these international best-sellers have been
translated into Cliine.se, Dutch, Frenchj German, Greek, Japanese, Korean, Portuguese,
PolisK Ru&ian, and Spanish. His Come into My Dwding Room waa named a 2003 Barren's
buuk of the Year. He also wrote Rubles to Dollars: AJnkiJtg Money on Russia's Exploding
Financial Frontier and Straying from the Flock: Travels in New Zealand,
Dr. Elder was horn in Leningrad and grew up b Cstunin3 where lie entered medical
School ai the age of 16, At 23, while working as a ship's duUur, lit jumped a Soviet ship in
Africa and icccivcd poEtical nsylnm in the United States. He worked as a psychiatrist in
New York City and taughl :ii Columbia University, His experience a^ y piytlii;itmi
provided him with unique insight into the psychology af trading. Dr. Eld^r'i books> articles,
and suftwart reviews have established him as one of today's leading experts on trading.
Dr. Elder is the originator tif Traders1 Camps—week-long classes tor traders. He is ako
the founder of the: .Spike group, whose members are professional and semi-professional
traders. They share their best stock picks each week in cninptLiiion for prizes among
themselves. Dr. Elder continues to trade, conduits webinars fot traders, and is a sought after
speaker aL conferences in the US and abroad. Readers of this book are welcome to request
a free suhscripiirm to his electronic newsletter, as weD as ii tempkitt ofTVadert Diary by
contacting his office:
elder.eom
PO Box20555, Columbus Circle Station
New York, NY 10023, USA
Tel. 718.507.1033; fax 71S.639.S8S9
e-mail: info Welder, com
website: www.elder.com

Index

A
advisory services, 120, 133> 210
age, 116,238,310
Appel, Gerald, 9, LI8-I35
arbitrage, 120
asymmetrical tolerance for profits
and losses, 239
Australian Technical Analysts
Association, 242, 257
Autoenvdope. See envelopes
B
back-testing, 32, 47, 99, 102,236, 309
bar height, 126
BolHnger bands (standard deviation
channels). See envelopes
bottom fishing, 23
breakout, 9, I3> 16,51,54,86, 127,
195,206,209
fake breakout, 96, 1S4
Breiike, Michael, 136-157
Briese, Steve, 50
brokers* 645, 86,120> 159-160
Brims, John, 10,247
bubble, financial, 6S, 129
Buffidin, Dr. Diane, 176-19]
bulls and bears, 206
bear market, 17,55,73,86,103,
120, 135
bull market, 17, 20, 73, 86, 89, 210,
231,235
buy-and-hdd, 69, %
Cameron, Peler,329
campers1 Tneelings,4T 13, 85, 99, 137,
277,2R0
candlestick charts, 15, 16,26,52, 105,
142
casino, 29
335

336 Index
channels. Sec envelopes
charting, Bl-82, 129, 193, 207, 209,
223
base, 209-210
chart patterns, 173
classical charting, 64
double buttom, 53, 95, 150
double top, 153
fish-hook pattern, 294-295
head-and-shoulders top, 87, 88
reversals, 226
triangle, 59
wedge, 123
Gome into My Trading Room, 7, '15,
56,116, 155,255,280
Commitments of Traders (COT), 50,
56,227
Commodities, See futures
computerized analysis, 64
conspiracy theory, 271
contrary opinion, 211
Cook, Wade, 103
crowd, behavior, fi4, Bl, 98
currencies, 39,316
cycles, 223
damaged account, 308- See &l$0
trader's rehab
dealing, 225-226
DeMarco, Jr., Paul (ftutky), 32,40,
l) 1,290
developing a system, 29,121, 157
discipline, 29, 32, 4(J, 65, 75, SO, 83,
173, 195
discretionary trading, 37, 3S, 41, 43,
45, 82, 98,242, See also system
trading
divergences, 9, 10, 18, 24, 36, S3, 56,
59,73,95, 126, 132
Ekvine, William, 208-223
Douglas, Mark, 5-1
drawdown, 40, 30S
earnings announcement, 139, 178
eccentricity \06
Eckhardt, William, 200
education, 125, 155
Efficient Market theory, 222
Elliott Wave theory, 194, 207
emotions in trading, 47, 107, 122,
135, 157,202,222,317
emotional maturity, 222, 310
fear of pulling the trigger, 13S,
308
hope, 23
engineers, 101, 102, 106, 107
envelopes (or channels), 9, 98,
123-125
Auto envelope, 243, 283
Bellinger bands (standard
deviation channels)* 9,34,35,
41,98, 142, 163
Donchiail channel, 35, ■!!
price targets, 97,98,114,149,
25-1
expenses of trading) 121
commissions and lees, S2
"Fallen Angels", 215,219, 294
Fibonacci numbers, 51, 207
Force Index (1-1), 10.
(Almost every daily chart by
Dr. Elder includes FL)
forecasting, 77, 81
freedom. See also impulsivity, 65,79
front running, 68
fun, 79

tndes 337
fundamental and technical analysis,
^44,51,52,241,247,2^7
futures, 20, 25-26, 50-51, 09, 210
commercial traders, 51
futures featured in trading
examples
British pound, 233—237
coffee, 27-2S
corn, 52-57
cotton, 41-44,243-255
euro, 35-38, 211,229-233
gold, 129
silver, 53-63
sugar, 196-200
Treasury bonds, 201-205
G
gamblers, 179
games of chance or skill, 82
Granvilic, Joseph, 290
Greater Fool theory trades, 9, 2\, 98
Grove, Nic, 280> 29\
gurus, 53, S2
II
Haskfill.SherrL 12-29
hedge fund, 32,45-46,211
hedging 241, 242, 248
homework, 11, 280-281, 2911
312-31 I
Hound ofthc Baskcrvillcs signal, 173
I
Impulse system, 10, 11, 110,296
{All charts by Dr. Elder include
the Impulse system.)
impnLsivity, 79
independence, 65, 79
indicators,
confirmation, 128
hard and soft signs, 80
MACD (MovingAverage
Converge nee-Diverge nee), 9,
16,119
MACD-HIstogram, 9, 15, 21, 22,
35,53,58, 104-106, 110-112,
] 42. {Almost every chart
by Dr. Elder includes
MACD-HkWgram.)
MACD Lines, 9, 35. {Almost
every chart by Dr. Eider
includes MACD Lines.)
Momentum, 142
moving averages (MA), 9, 40,86
exponential moving average
(EMAX9, 10, 104-106,
110-112. {Almost every chart
by Dr. Elder includes nn EMA.)
simple moving average (SMA),
34,41
parameters] 169
RSI (RelaLive Strength Index), 15,
16,21,22, [05
Stochastic, 15, 16, 21> 22,104-106>
110-112, 142
indicators In trading examples
(pngc numbers refer to the first
chart w the diopter when' the
examph appears,)
Active Boundaries, 273
Air[uenvelopcT 243, 283
{nka included oh most
daily ami intraday charts
by Dr. Elder)
Bollinger bands, 35* 142, 163, 181
Candlesticks, 15,53, 105, 142
Donchinn channels, 35
envelope, 104, 123, i&
Effective Ratio, 264
Effective Volume, 263

338 Index
indicators in trading examples,
continued
Force Index, 163,242,282
[aba included an daily and
in! via lay charts by Dr. Elder)
Forex Club Sentiment Index
(FCS1), 229
Impulse system, 104,162,282
(fl&o included on all charts
by Dr. Elder)
Momentum, 142
moving averages, exponential, 15,
70,87, 104, 162, 242, 2R2
(also Included on all charts
by Dr, Elder)
moving averages, simple, 35,142,
181,229
MACD-Histogram, 15,35,70,87,
104, 142, 162, 181,242,282
{also included011 all charts
by Dr, Elder)
MACD Lines, 15,35,70,87, 104,
123, 162, 181,242,282
(abo included on all charts
by Dr. Eider)
MACD-Oscillator, 53
RSI, 105
Stochastic, 10 1. 142, 181
TSV, 15,87
volume, 15,52, 163, 197
industry groups, 86, 99, 293
Internet Software & Services, 92
Medical Instruments and
Supplies, 89
insider trading, 271
Intershow (Traders' Expos and
Money Shows), 6-7, 20,
102,329
intuition, 134
counterintuitive trading, 256
IPO (initial public offering), 17
K
key reversal, 44, 21'1
Keynea, [ohn Maynaid3 81,228
Knapp, Martin, 276-305
KiyosaH Robert, 86
limit orders, 71
Livermorc, Jcsse> 25, 29
losses, cutting, 23, 40, 67, 83, 91, 102,
116, 123, 154, 186, 188
l.ovvorn, Keri'y, 158-175
low-priced slocks, 210
M
Makhniudov, Damir, 240-257
managing other peoples money, 33,
34,45-46, 120, 122
Market Wizards, 200
m^SS psyLholo^y. See psychology
McM;ihon, fames (Mike)!
100-117
money management, 39, 65, 80, 140,
167,246,251,311
the 2% Rule, 7-8, SO, 1015 llfi,
138-139, 140, 155,290,302
the 6% Rule, 8, B0, 101, 116, 2903
304
6,121
Murphy, John J., 3!
mutual funds, 86, 103> 121
N
Nasdaq, 86, 123-133
New High—New Low Inde\> 70, 76,
290,314
news, trading, 179, 131, 185,238

Index 339
O
options* % 6A 75, 120-121, 177-180,
1K9-191
In/out-of-the-money, 71, 75
on the S&P. 70-72
versus stocks, 189
writing options, 191
options in the trading examples
on the Nasdaq, 123-125,
129-131
on KI.AQ 75
on the S&P, 70
overbought, 43
oversold, 123
paper trading,.?, 13S, 157,205,30a
Perolo, Andrea, 48-63
price
extremes, 150
meaning of, 9
price/earnings ratio, 129
probabilistic versus deterministic
processes, 173
profit, 102. 115, 145, 156,180
taking, 54^55, 266
target, 18,94, I 14, 287
psychology, 239
individual, 81, 139,257
mass, 68, 226
pnllbacka, 86,126,162
R
Rabbani, Sohail, 66-83
range, 162, 1%
rating trades, 250, 255-256
entries and exits, 109, 255-256
rea] estate, 70, 83, 211
record-keeping 20, 102, 116,311
re-entry into a trade, 245-246
risk
limiting, 53, 133,162
risk/reward, 53,213, 2S3, 287, 300
round numbers, 62
Rule of Tivc, 116
rules for traders, 26, 29, 47, 65, 70,
80,140, 157,238,290,312
Schutzman, Fred, 30-47, 290
Schwager, Jack, 239, 329
seasonal:*, 51
secrets, 3, 160,317
Seitz, Clayton, 31tf
Scntimeni lndtx.227
short-selling 125
sideways movement 70
size of trades, 242,311
large positions, 197, 223
small positions, 157
software used by interviewees
Charles Schwab, 84
CQG, US
Effective Volume, 258
Elder-disk, 240, 278
eSignal, 12, 136, 149
Excel, 25, 30, 258
Tutu resource, 49
MetaStock, US, 136, 149,278,240
Qcharb566, 176, 192
Quicken, 136
Quotelinks> 258
Rugg&Steek, us
Rumus, 224
StodschartSj 12
TC2005, 12,84, 100,153,208,276
TPC-diai ts, 49
Traders Governor, 100,276
TradeStation?30, 100, US, 158,276
[almost nit charts by Dr. Elder)

340 Index
SStP, 139,142-143, 150, 152,153
SperandeOi Victor, 53
Spike group, 282, 314-316
sports, 134-135, 141, 223, 2dl, 256,
294, 3flO
sports, continued
fishing, 194, 201
squeeze play, 162
squinting at a chart ios, 132,184,187
slocks in trading examples
AMZN, 92-97
ASK), 15-19
BSX, 87-91
CECO, 185-189
CKR, 110-115
DRAX, 217-220
DYN, 263-266
GEF, 286-290
GNCMA, 104-109
GRMN, 21-25
KCS, 267-270
KLAC, 75-79
KMRT, 168-173
LAYN, 162-167
OPWV, 262
QQQQ, 282-285
RSH, 150-155
SINA, 212-216
TMR> 273-274
TZOO, 2S
WEN, 181-184
YHOO, 143-145, 147-149
stops, 25, 39, 57. 70, 71,163, 170, 226,
244
break-even, 79
hardand soft, 80, 134,284
SafeZone, RO
trailing] 60
support and resistance, 98, 129-130,
206,248
Surowiccki, lames, 315
sweet zone, 111
system I ratting, {.wealso
Discretionary trading) 32, 375
38,41,42,43,45,47,99,
227-22S
5 and Forecasts, 119
Tatarnikov, P^ttr, 224-239
taxes, 129
Taylor, Lou, 10,24,310
Technical Amtlysis oj Stocks and
Commodities, 27S
Testa, |i\JRayiy4-99
three M's of trading (Mind, Method,
Money),7, 116
tick, 165
time, 109, 129, 191,210,310,31^
timeframes, 8> 95
Trader's Governor, 101, 106, 1 16
trader's rehab, 308,310-312
traders
an average private trader, 79
beginners and amateurs versus
experienced, 3, 7,102,116,
128, 16ti, 173, 202, 227, 235,
238, 307
female and male, 4, 13, 178
individual and institutional,
S3
Traders1 Camps, 4,101,103,119,
159, 162,177,193, 206, 221,
255, 280
traders* families, 120, 122
parents, 17,26 27,S5, 119-120,
134, 137, 159, 179
ses, 85, 106, 122, 137,
141> 161, 177,22b,
260,317

Index 341
trading, 167
day-trading, 145
swing trading, 145
trading versus investing, SI
trading diary, 6, 29, 67, 76, 97,
138-139, 155-156
trading manual, 139, 140
trading (or a living, 65, 82
Trading for a living,?* 10, 46, 95,103>
138,146,155,160, 27K
trendiness, 135
irendlines, 37,51,52,53*59,107,123,
172,214
trendsetters, 261, 271-272
Triple Screen trading system, 8, 95,
257
U
uncertainty, 103,128,194, 308
V
Value line, R5
value trades, 9, 24, 43, 12ft.
{Compare with Greater Fool
Theory trades)
cheap or expensive, 285
rubber band effect, 43, 104, 107,
289
value zone (identified by moving
averages}* % 19, 24,39,43,90.
220
VK, 72
volatility, 226
Volume, 10,13, 16, 162, 164,206
Active Boundaries, 272
Effective Ratio, 264
Effective Volume formula, 261
Large Effective Volume, 262
W
webinars, 5,110,315
Wcis, David, 162, 173,192-207, 283
whipsaws, 39
Willain, Pascal, 258-275
Wyckoff, Richard, 193-194, 198

ivim front flup)
Your goal in trading should be to become the beet
professional you can be.
Wl- owe a debt of gratitude to the sixteen traders
who opened their Trading rooms—helping all of us
become better traders and serving as examples of
kindness, generosity, and drive. They show us that
there is more to life th;«n money, even in a trader's
life. This book is designed to help you breakout of
isolation, learn from others, pick up idea* that suit
your style, and return to your trading room a
better, more confident trader.
DR.ALEXANDER ELDi-R is a professional trader, a
teacher of traders, :ind a practicing psychiatrist. He
is the founder of dder.com, an educational firm for
traders worldwide. Dr. Elder is the author tif two
international bestsellers, TradingJbr ci Living and
Come Into My Trading Room (and iheir
companion study guides), both published by Wiley. He laan
avid traveler, as chronicled in his book Straying
from the Flock: Travels in New Zealand (Wiley).
iTHDT CUIUL ttt
Trading
T hor a
Living
Trading
,FORA
Living
Qlilr HiNfl,.r nfhi
Come Into
Trading
Room
Jacket Design-
Subscribe Id our Free Finance and Inviting ENftwIettar al
vtujw wi ley do T\/
Visit wwvj.v^iItylinarite.com
WILEY
wilcy.com

Entries
&Exits
Entries & Exits takes you behind closed doors, into the trading
rooms of sixteen private traders. They live in different countries,
trade different markets, and use different methods, but all
share a dedication to trading. Your guide on this journey is
Dr. Alexander Elder, a bestselling author, professional trader, and
practicing psychiatrist.
Each visit begins with a description of each trader's background
and methods. He or .she walks you through a winning and a
losing trade, showing his or her signals on the charts, and explaining
the reasoning behind them. After studying the entry, you ;ire
invited to decide whether that trade Is likely to make or lose
money. After you turn the page and see the exit, you learn how
that trade worked out. Dr. Elder then shows you his charts for
every trade and explains his analysis and decisions. At the end
of each interview, he tILscu.s.ses .1 key aspect of trading, relevant
to the trades you have jusi .studied.
Entries & Exits provides an up-close ;ind personal look at how
re;U traders select trades and make decisions. You 11 benefit
from their hard-earned insights into trading psychology, analytic
techniques, money management, record-keeping, and other
essential aspects of successful trading. The book delivers a
variety of concepts and techniques thai will help you become
n better trader tomorrow than you ure^oday.
Study Guide for Entries & Exits
Be sure to work through the companion volume CO Entries & Exits before you risk a
dollar in the markets,The Study Guide contains 101 questions and answers,
including nventy-five case suidics. Each of diem challenges you to focus on some essential
aspect of successful trading.
There are seven chapters in this Study Guide— Organization, Psychology, Markets,
Trading Tactics, Money Management and Record-Keeping, Case Studies, andTraders
Speak. Bacb covers n major area of trading and offers you a rating scale, allowing you
to measure your competence level. Now you can discover and fill any gaps in your
knowledge without risking any money.
The answers in the back of the book provide detailed explanations of the right and
wrong answers to the multiple-choice questions. A Urge number of those questions
and the case histories In this Study Guide were contributed by traders interviewed
in Entries & Evils, linking buili books into a single, powerful tool for developing
trading skills.
Use Dr Elder's Study Guide together with Entries & Exits to make the most of your
time as you Learn to lake advantage of market opportunities.
Entries &Exits
VISJTS TO SIXTEEN TRADING H0DM5
' i ■lllhl "%
Dr. Alexander Elder > ■
1HTIU>I1OF Till IsmiLN-TIUNiU HE^ULLJlli ■
LLJMt INJtl MY iHAUlNO UiJO".
ISBN n-M71-k?£rJ5-fi
9 730471 67BD5Z