AbleTrend E-Book

John Wang

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch

Seitenzahl: 462

Veröffentlichungsjahr: 2010

Beschreibung

A worldwide leader in financial trading software shares one of its most successful systems In AbleTrend, Dr. John Wang discloses for the first time, the fundamental principles behind his bestselling and award-winning trading system, AbleTrend signals. Sophisticated in scope, yet written in a way that any trader can understand, this book skillfully presents the theory behind this award-winning system. This reliable resource presents the logic of a proven system that reveals the direction of a trend at its early stage in all markets-stocks, commodities, foreign currencies, ETFs, e-Minis, and mutual funds. It also identifies objective, automatic buy/sell/stop signals, helping you manage risk, make rational trading decisions, and eliminate the guesswork. * Pinpoint when market trends start and end, and where the key support and resistance are * It's universal-applied to any market and any time chart * Applications are offered with over 20 real-market case studies * AbleTrend confidential seminar costs $2,000, now you may get the secrets from this book * AbleTrend was developed by a recognized authority and expert trading system developer AbleTrend presents innovative decision-making trading concepts that will allow ordinary traders to identify market trends and seek profits from them.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Foreword

Preface

WHAT YOU WILL FIND IN THE BOOK

WHAT YOU WILL FIND ON THE WEB SITE

DISCLAIMER

AS YOU BEGIN

Acknowledgements

CHAPTER 1 - The Search for a Universal Market Law

COMPLETE CHAOS OR HIDDEN ORDER?

WHEN MY INTEREST IN TRADING BEGAN

A SCIENTIFIC ANTIDOTE TO ARBITRARY MARKET PREDICTIONS

FIRST STEPS: BECOMING AN EASYLANGUAGE SYSTEM DEVELOPER

THE TREND: FOE OR FRIEND?

THE FUNDAMENTAL APPROACH

THE DREAM OF A UNIVERSAL EARLY-TREND INDICATOR

COULD THE LAWS OF NATURAL SCIENCES ALSO GOVERN THE FINANCIAL MARKETS?

THE BIRTH OF ABLETREND

CHAPTER 2 - Advances in Market Trend Analysis

WHAT IS A TREND?

THE SETUP OF A TREND

MATURITY OF A TREND

DRAWING TRENDLINES

SUPPORT AND RESISTANCE

THE MARKET DEFINES SUPPORT AND RESISTANCE

HOW COMMON METHODS DEFINE SUPPORT/RESI STANCE LEVELS

HOW ABLETREND DEFINES SUPPORT AND RESISTANCE LEVELS

ABLETREND INDICATORS

OTHER TREND-FOLLOWING INDICATORS

MARKET INDICATIONS

THREE RULES FOR FOLLOWING TRENDS

THE GOLDEN REGION OF ENTRY: THE SWEET SPOT

TIME, PRICE, FORECASTS, PREDICTIONS, AND TARGETS

CYCLES AND WAVES

SUMMARY

CHAPTER 3 - Four Elements of Trading Success

PROFITABLE TRADING SYSTEMS AND METHODS

ADEQUATE CAPITALIZATION

MONEY MANAGEMENT STRATEGY

DISCIPLINE OR A WINNING TRADING PSYCHOLOGY

CONCLUSION

CHAPTER 4 - Essential Philosophy of Trend Trading

WISDOM OF THE TAO

TRADING IS A BUSINESS

ONLY TREND FOLLOWING WORKS

DON’T TRADE AGAINST THE MARKET

WHICH MARKET IS THE MOST TRADABLE AND WHY?

WHY VOTING SYSTEMS DO NOT WORK

WHY $500 OR 5 PERCENT STOPS DO NOT WORK

WHY THE WINNING RATE IS NOT IMPORTANT

WHY YOU CANNOT PICK A TOP OR BOTTOM

HOW TO LET PROFITS RUN

HOW TO CUT LOSSES SHORT

GO THE OPPOSITE WAY OF THE MAJORITY

TRADE ONLY THE RISK CAPITAL THAT YOU CAN AFFORD TO LOSE

IF YOU WANT TO WIN, THINK ABOUT LOSS

PLACE YOURSELF BEYOND THE POSSIBILITY OF DEFEAT

TRADING IS THE MOST DIFFICULT THING IN THE WORLD

CONCLUSION

CHAPTER 5 - The Applications

WHAT IS THE “WINNING FRAMEWORK” FOR A TRADING SYSTEM?

STM METHOD—BUY ON BLUE AND SELL ON RED

EVALUATE A TRADING SYSTEM: BACK-TESTING

FOUR IMPORTANT ISSUES FOR PARAMETER SETTINGS

ABLETREND2 STOPS

THE SWEET SPOT—GOLDEN REGION OF ENTRY

FINDING THE CHARACTER OF A PARTICULAR MARKET

TREND TIME FRAMES

AVOID CHOPPY MARKETS

BREAKOUT OR RETRACEMENT

DAY TRADING VERSUS SWING TRADING

IN CONCLUSION: THE FIVE F’S OF DESIGNING A TRADING SYSTEM

CHAPTER 6 - Examples of Trend Analysis

STOCKS

COMMODITIES

THE E-MINIS

FOREX

BONDS

CONCLUSION

CHAPTER 7 - Advanced Abletrend Tools

VIRTUAL PAPER TRADING (VPT)

HISTORICAL FORWARD TESTING

AUTOSCAN

THE PERCENT CHARTS

THE GUIDANCE CHARTS

STOCK SEARCH ENGINE—STOCK PICKS

VISUAL OR CHART TRADING

AUTOMATED TRADING ORDERS

OPTIONS TRADING

SPREAD TRADING

PORTFOLIO TRADING

SUMMARY

APPENDIX A - Interviews with Abletrend Users

APPENDIX B - Quick Reference for STM

References

About the Authors

Index

Founded in 1807, John Wiley & Sons is the 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 print 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, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future.

For a list of available titles, please visit our Web site at www.WileyFinance.com.

Copyright © 2010 by John Wang and Grace Wang. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data:

Wang, John, 1945-

Abletrend : identifying and analyzing market trends for trading success / John Wang, Grace Wang.

p. cm.—(Wiley trading series)

Includes bibliographical references and index.

eISBN : 978-0-470-61591-1

1. Investment analysis. 2. Portfolio management. I. Wang, Grace, 1954- II. Title.

HG4529.W355 2010

332.63′ 2042—dc22 2009044661

To all clients supporting AbleSys in the last 15 years.

Foreword

Books are like children, they say; they don’t happen in a day. As someone who has written 10 books, I assure you it is a process of more than writing. It is a process of distilling information you have learned over the years into what you hope will be passed on through the ages. Like children, books are nurtured, eventually taking on a life of their own.

I have seen that take place with this book. John and Grace Wang became friends and students of mine almost 20 years ago. Like all searchers of truth, they have had more than one teacher; they have learned from others, then took off on their own flight. I would like to think that in some small way I set them on the path that has led them to this book. I have seen them exceed my expectations, but also become an even bigger market influence than anything I had hoped for myself. What could be better? To see someone outperform one of their teachers is, to me, an exhilarating experience.

It has been my good fortune to see them become a driving force within this industry, to see them help many traders throughout the world with their trading strategies and systematic approaches. Their software has become one of the most popular ones of all time for traders to use. What an accomplishment; what an honor on their part! And now they’re going to open the door to their market systems.

While many people will be reading this book to learn about their approach to the market—how to trade, how to manage money, and what really works in the art of trading—I find there is an equal lesson here, which is about accomplishing greatness within your business or profession. They have certainly done that.

The lesson is that there are monetary rewards from trading, but the greatest reward in this business is to see people excel. Money is so ephemeral; other people’s success in life lasts generations.

Most anyone can write a book... it is not writing... it is the content of your writing that matters. In this book you are going to learn the distillation of their research and work spanning several decades.

The authors were critically educated at the University of California, Santa Cruz, in the sciences; that’s why I think you’ll find their work to be so invaluable—because it is written not only from the heart and experience of trading but because everything they do is based on the scientific method.

In this day and age of trading, books have been written about everything from supposed fractals of chaos to imaginary cycles and waves, all things that cannot be proven. In this book you are going to learn what has been proven in many markets for many years. This is a practical book; no pie-in-the-sky abstract concepts here.

I found their writing style easy to follow, easy to comprehend, and chock-full of practical trading strategies. What more could a person want?

Read it and prosper!

LARRY WILLIAMS

Preface

Spring waters surged up the riverbank last night, Like weightlessfeathers the heavy vessels float.

Rigorous labor pushed ships forward in the past, Down midstreamon strong waves I ride effortlessly today.

—Zhu Xi (1130 to 1202)

FIGURE P.1 Trend Following—Effortlessly Riding the Strong Waves Down the Middle of the Stream. Pen sketch by Victor K. Wang (1958) with permission.

The poem by Zhu Xi and the boats illustrated in Figure P.1 describe the enjoyment of trend following in trading, as well as my feeling at the moment of finishing this book. Zhu was a Song Dynasty (960 to 1279) Confucian scholar who became the renowned leading figure of the School of Principle, and the most influential rationalist Neo-Confucian in China. His poem expresses the power of using natural law to fulfill one’s aims—a truth that has been the abiding principle underlying all my work.

I never dreamed that I would one day write a book about trading. Nor did I realize how important my discovery of AbleTrend would be for others. Rather, at first I succumbed to the secrecy of the trading business and only shared my findings with a limited group of my seminar attendees. Now, however, I recognize that it is time to introduce AbleTrend and its advantages to a wider audience.

Natural law is the guiding principle behind everything we see, even though we may not be aware of it. For example, gravity has always existed from the earliest creation of the world; but it seemed people were not aware of its existence until one day when Newton’s “Universal Law of Gravitation” was published. Similarly, the market trend has always existed; but I could not identify it—or take advantage of it—until one day in 1994 when I discovered a simple way—the “AbleTrend” way—to observe the trend.

Tens of thousands of AbleTrend users have helped us at AbleSys to grow over the last 15 years. We owe them a great deal because of their persistent support through all that time. I want to dedicate this book and issue a special “thank you” to every AbleSys client who has practiced our trend-following methods, and helped validate the trading system that can be applied to any market, any time chart, and anywhere in the world.

Most AbleTrend users are familiar with the way the software presents its trend findings on price charts in the form of blue bars, red bars, blue dots, red dots, and so forth. Here, in this book, I want to share with them more about the principles and philosophy underlying AbleTrend so that users may feel and get inside its soul and life.

But the purpose for this book goes beyond that. I believe that every trader—whether an AbleTrend user or not—can develop a deeper comprehension of how to trade the markets by understanding the universal principles that were used to develop the AbleTrend software. My intention in writing this book is to introduce these individuals to new concepts of trend following that they can use in their trading and benefit from for years to come.

In preparation for writing this book, we began to review hundreds of testimonials from AbleTrend users that we have received over the past 15 years. I would like to quote a few of these testimonials here to show what others think about the AbleTrend:

About 2 weeks ago, I got your brochure in the mail. I’ll admit, I threw it away!But after pulling it back out of my waste basket (3 times), I finally contacted yourcompany for a trial. Am I ever glad I did! I have made 12 trades with AbleTrendand only lost on one trade so far (which was my fault). I feel great, because nowI’m in control. Thank you for your excellent system, online training classes, andgetting me started on the right foot.

—Tom Kewan, WI

Among all the trading software I bought, AbleTrend 7.0 is the most simple and easyto use, and it makes money. I’ve bought many trading software during the years.I’ve been using AbleSys software since June 2006, trading E-mini S&P500 between2 to 4 Eastern Time and I am trading 9 contracts. One of the helpful services thatAbleSys offers is its Tuesday and Thursday free Webinars. Just picked up onegreat idea last week, the Guidance Chart, which helps me to scalp the market whilestaying on top of the bigger picture of the market direction.

—Dr. Edward Christy, MI

Dear AbleSys, I have never had such a good system-strategy as the AbleTrend 7.0 and I have been in this business for more than 20 years.

—Martin Schakowski, Switzerland

I have spent over $30,000 on trading software over the years. eASCTrend is the first piece of trading software that I’ve come across, which is simple to use and has a built-in algorithm that actually works and can consistently make money. eASCTrend T2 stops provide the best support and resistance indicators; they are reliable and dynamic. The friendly and concerned support from AbleSys is second to none.

—Greg Clements, Australia

We could easily go on. It is so gratifying to us to read such feedback from our clients, and to learn that they are doing so well and continuing to progress in their trading success. These facts ignite my spirits and make me want to bring more inside knowledge to them concerning the universal trading principles that underlie the functioning of our software. And I believe that all traders, not just AbleTrend users, will benefit from learning these fundamental concepts.

These principles are basic to all aspects of life, and not just trading. Understanding them will perhaps bring readers more in harmony with their body and mind, with their family and acquaintances, and eventually with the markets.

It is my hope that you will truly learn something valuable from this book. The concepts are laid out in straightforward language, in textbook style, with several examples to explain each concept. Educators say that people cannot learn a concept until it is repeated seven times with different applications. That is the way this book has been structured. When you complete this book, I suggest you come back to Chapter 2 to review the topic “What Is a Trend?” By that time, you will truly understand the contents of this book.

WHAT YOU WILL FIND IN THE BOOK

AbleTrend users in more than 60 countries and regions, trading different financial markets—some of which I am not even familiar with!—have put the concepts of this book to a practical test. This book was written in response to their wish that the concepts and philosophy behind our software be placed within the reach of all who are interested.

This book includes seven chapters and two appendixes:

• Chapter 1 is about the birth of AbleTrend. Is the market completely chaotic or is there a hidden order? How did I discover AbleTrend with scientific methods?

• Chapter 2 is the most important chapter, where the foundation of this book is laid out. There we introduce new concepts about the trend: What is the scientific definition of a trend? How do we pinpoint the very beginning and ending point of a trend? How do we define a market’s own protective stops? With an immense number of charts, we explain step by step our points of view of support and resistance. And we provide a few real examples (or homework) to explain trends, stops, entry points, and so forth.

• Chapter 3 discusses the four elements on which you build success in trading. Chapter 4 presents essential trading philosophy in terms of trend-following methods, especially drawing on the wisdom of the Tao.

• Chapter 5 covers issues of applying AbleTrend to trading, based on our concepts of trends. This chapter lays out from theory to application specifically how to trade the markets.

• Chapter 6 presents 13 examples of trend analysis, with charts, to show how the trend-following method works in some common markets.

• Chapter 7 introduces the design concepts behind some special trading tools provided by the trading software, along with their applications.

• Appendix A presents 10 interviews with AbleTrend users who share their points of

• view, experiences, and trading methods.

• Appendix B provides a quick reference guide for Simplified Trading Method (STM).

WHAT YOU WILL FIND ON THE WEB SITE

AbleTrend is an award-winning trading system software by AbleSys Corporation. From 1997 to 2009, it was honored with the Readers’ Choice Awards of Stocks & Commodities magazine in Stock Trading Systems, Futures Trading Systems, and Options Trading Systems. The AbleTrend trading system has recently made the Stocks & Commodities magazine “Top 10” list from 2001 to 2009.

AbleSys Corporation (ASC) is a worldwide leader in universal financial trading software and Web application. As the creator of the benchmark ASCTrend indicator, AbleSys has long been synonymous with cutting-edge financial trading technology. AbleSys strives to develop innovative products and services that meet users’ evolving needs in the Internet age. Founded in 1994, AbleSys is a Commodity Trading Advisor (CTA) registered with the Commodity Futures Trading Commission (CFTC), specializing in trading software and Internet applications. Products include AbleTrend, ASCTrend, and WinTick.

As this book purchaser, you may go to a special web site, www.wiley.com/go/abletrend (password: wang), for a FREE 80-minute video course about Simplified Trading Method (STM). The value of the training course is $99. For more information about AbleTrend trading software, please visit www.ablesys.com or send an e-mail to [email protected].

DISCLAIMER

As CTAs, by request of the CFTC, we must give the following important disclaimer to our readers:

Futures, forex, options, and securities trading has risk of loss and may not be suitable for all persons. No system can guarantee profits or freedom from loss. Past results are not necessarily indicative of future results. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or overcompensated for the impact, if any, of certain market factors such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. This disclaimer should be applied to the whole book.

AS YOU BEGIN

You don’t become great at trading in a day. You become great at trading day by day. This book opens a gate to the inside of the markets, providing readers with a better understanding of the market’s behaviors, actions, and trends. I hope that some day you may come into harmony with the markets, because it is only then that consistent profits can be achieved.

Acknowledgments

Many people deserve to be acknowledged at this time. Unfortunately, I am unable to thank everyone who has in some way contributed to this work. I would, however, like to single out the following people for particular appreciation.

I want to thank my family: My affectionate father and mother who have passed away, but whose eternal love is the source of all my endeavors; my wife Grace, for her unconditional love, understanding, and assistance; without her, there would be no AbleSys, no AbleTrend, nor this book; and my brother Victor, a fine artist, who financially supported me from age 11 to the completion of my undergraduate education.

I also want to show gratitude to all my teachers, both in China and in the United States. To those who helped me learn in school, I owe much of the technical skills and knowledge that became the foundation of this work: to the University of California (UC) Santa Cruz for the UC Regency Fellowship and other scholarships over six years that enabled me to start my new chapter of life in the United States; to Vic Schmidtmann, my first supervisor at work, who gave “Able” to this company’s name; to Patricia Sullivan, who helped Grace to study abroad in the United States in the early 1980s; to all the great people who worked and are working at AbleSys, especially the software development team—Yi Fan, Wilson Yang, Chris Szybalski, Kevin Copley, George Woodley et al.; because of them the AbleTrend software is made possible; to all those people who have helped me, I owe a great deal.

I wish to express my special appreciation to those who have participated in the creation of this book—to legendary trader and my teacher Larry Williams for his courage, guidance, and support; to Ellen Dickstein, for her careful and time-consuming editing and proofreading; to my son Jesse, for his input on the construction of this book and partial writing of it, and for his producing a CD of the STM course for this book; to Victor, my brother, for his deep understanding of Tao and for teaching me the Tao philosophy, and for his paintings and calligraphy that illustrate this book; again, to my wife, Grace, for her first proposal, structured ideas and outlines, and a great amount of writing, because of which we have this book; and to the great people at John Wiley & Sons, who made this book become a reality.

JOHN Z. WANG March 2010

CHAPTER 1

The Search for a Universal Market Law

The Rise of AbleTrend

I don’t know its name. If we must give it a name, let’s call it “Tao.”

—Tao by Lao-tzu

The AbleTrend trading system software was first developed in 1994 and was released to the market in 1995. It is now used by tens of thousands of traders in more than 60 countries. Many of these users have been trading market symbols that we in the United States have never even heard of, and yet it still works.

People have asked us “how often” we have to change our formula in order to keep it working properly in today’s fast-changing global markets. Our answer is: not at all. The formula has remained the same as when it was first created. It worked in any market then, and it works now. It is timeless.

As a developer of AbleTrend, I am asked very often how AbleTrend was developed. What are the principles behind it? What is the underlying philosophy? This chapter addresses these most-asked questions.

COMPLETE CHAOS OR HIDDEN ORDER?

These are common questions that I am most often asked by traders:

• Is market behavior random or does it follow certain rules?

• Is the market completely chaotic or is there a hidden order?

• Can markets be quantified or predicted using scientific methods?

Most economists believe that markets are random, chaotic, and cannot be predicted. A very smart man once told me, if you could know just a little bit of the market law, the world would be yours. But most people just don’t believe there is such a thing as market law.

I believe my work has proven them wrong. Because of AbleTrend, the order that underlies market movement can now be easily plotted on charts. Figures 1.1 through 1.5 show the buy/sell signals and support resistance levels provided by AbleTrend in several different times of financial crisis. As you can see, AbleTrend never missed any big moves. Looking at these charts, what do you now think? Is the market completely chaotic, or could it be possible that there is a hidden order?

• During the economic crisis of 2008 to 2009, an AbleTrend sell signal was given on 9/4/2008, before the big market drop, and a buy signal was given on 3/13/2009 before the market soared in 2009 (see Figure 1.1).

• Figure 1.2 shows the AIG stock chart from 2005 to 2009. A sell signal for AIG stock was given on 7/22/2007, and the stock lost 99 percent of its value from there.

• The crude oil futures weekly chart from 2004 to 2009 is depicted in Figure 1.3. The buy and sell signals of AbleTrend caught the big moves for all major up and down trends.

• Figure 1.4 shows the S&P 500 index chart in 2001. The AbleTrend sell signal was one month ahead of “9/11” of 2001 and the big market drop.

• Figure 1.5 depicts the S&P 500 index chart in 1987. The AbleTrend Sell signal was 10 days ahead of “Black Monday” (10/19/1987), the 1987 stock market crash.

FIGURE 1.1 S&P 500 index chart 2008 to 2009. AbleTrend gave a sell signal on 9/4/2008, before the economic crisis hit.

FIGURE 1.2 AIG stock chart 2005 to 2009. A sell signal for AIG stock was given on 7/22/2007. AIG lost 99 percent of its value after that.

FIGURE 1.3 Crude oil futures weekly chart. Last five years, updated 11/15/2009, showing buy and sell signals given by AbleTrend.

FIGURE 1.4 S&P 500 index chart in 2001. A sell signal was given one month ahead of 9/11/2001.

FIGURE 1.5 S&P 500 index chart in 1987. The AbleTrend sell signal came 10 days ahead of “Black Monday” (10/19/1987), the 1987 stock market crash in the United States.

From these five examples, we can see the signal accuracy of AbleTrend. This indicates that there must be a sound principle, or hidden order, behind the markets—and that AbleTrend is able to tap into it. Chapters 2 and 4 discuss this in more detail.

It’s important to note the advantage of AbleTrend over arbitrary wave analysis, which is a popular method of analyzing charts. Wave analysis draws areas on a chart (1, 2, 3, 4, 5, ...) that change position as market conditions change. For example, one popular wave analysis software initially marks wave “3” as a bottom. However, when the market keeps down in the next 10 bars, it removes the previous mark “3” and reassigns all the previous waves. It changes all marks on the chart to fit the facts, after the fact. How can you rely on that kind of market analysis?

By contrast, AbleTrend signals are dynamic during the formation of the bars. But once the bar closes, the signals generated by AbleTrend do not change. They remain the same as they were when they were first generated because the formula that created them is accurate. This means that AbleTrend signals are valuable and have practical power in real-world trading.

WHEN MY INTEREST IN TRADING BEGAN

To fully appreciate the revolutionary nature of the AbleTrend approach to trading, it would be helpful for you to understand why and how I developed it. AbleTrend did not just appear one day. It naturally evolved when a lifetime of training allowed me to take a unique perspective on a newfound interest in trading the markets.

The fact is, I have been a scientist all my life. I have tried to treat every project with scientific approaches.

I earned a B.S. from the University of Science and Technologies of China, where I studied under some of the finest scientific minds in the country. I then went on to earn my master’s degree in quantum chemistry from Zhongshan University, China. Having been awarded a Regency Fellowship of the University of California (UC), I came to the United States in 1982 and earned a Ph.D. in chemistry from UC Santa Cruz in 1988.

With all my studies, my greatest interest has always been to discover the hidden structure underlying life’s apparently “random” events. So perhaps it was not really an accident that led me to turn my analytical eye to one of the world’s most seemingly chaotic phenomena—the financial markets.

It all started when I was working at a leading gas analyzer company in Silicon Valley, California. It was 1989, and a friend induced me to invest $10,000 in an S&P 500 futures trading pool. My friend told me that it returned 10 percent a month. He had received returns of $3,000 in the last three months and planned to invest even more. At that time, I knew nothing about trading. That’s why a 10 percent return per month didn’t set off any alarm bells within me that it might be too good to be true. Two months later, the Commodity Futures Trading Commission (CFTC) shut down the investment company, which was revealed to be a multimillion-dollar Ponzi scheme. I lost $7,000 of the $10,000.

This incident actually turned out to be a good thing for me. It introduced me to a whole new world—the futures and commodity trading industry. And rather than scaring me off, it triggered my scientific curiosity about trading.

A SCIENTIFIC ANTIDOTE TO ARBITRARY MARKET PREDICTIONS

For all my life I had been steeped in the world of physics. But now, thanks to my friend who had introduced me to the world of investing, my interests broadened to include financial matters. But I was still a scientist, and the more I became interested in trading the markets, the more my scientific sensibilities were offended by the arbitrary statements and predictions of the market gurus.

From TV to radio, from magazines to newspapers, from web sites to books, investment experts talk about “what the market should be doing.” They say things like, “The Dow Jones index should go up 10 percent by the end of this year.” Or “The target price for this stock should be $78 per share in 12 months.” Or “AIG is the blue chip of blue chips; it should come back to $50 per share.” Or “...with such bad news the market should sell down.” The opinions never stop.

One recent example is the market response to the news that the Royal Bank of Scotland (RBS) had announced the largest annual loss in UK corporate history on February 26, 2009, with a total loss in 2008 amounting to 24.1 billion British pounds. According to the report, RBS was planning to put 325 billion pounds worth of toxic assets into a scheme that offers insurance for any future losses. When this terrible news hit, many experts thought RBS prices should plunge as traders would sell their stock. But RBS’s stock price soared 30 percent on that day! Sellers were deeply astonished by the market behavior. In fact, there is no such thing as “should,” or “would,” or “could” in the trading world. What people tell you has no value. If you want to win, there is only one way to go: Act on what the market is telling you. Go in the direction that the market is going now.

Even the most celebrated gurus are not immune to arbitrary predictions. Warren Buffett bought stocks of General Electric (GE), Goldman Sachs (GS), and other stocks in October 2008. He thought it was a good time to buy. However, in March 2009, GE dropped from $22 to $7, and GS from $115 to $75. His Berkshire Hathaway stock price dropped nearly 50 percent from the top within five months. Steve Forbes predicted crude oil would come back to $30 per barrel in February of 2008. At that time oil was priced at $70 per barrel. However, in fact, oil reached $146 per barrel in July 2008. Most airlines experienced huge losses in 2008 by “hedging” (buying) crude oil futures in the second half of that year. They were not expecting what happened next: Oil prices dropped from $146 to about $35 per barrel at the end of 2008. And of course, not knowing where to turn or who to listen to, thousands and thousands of retirement plan investors lost 40 to 50 percent of their account value in 2008 as the stock market plunged.

All these facts made us see the urgency to write this book and introduce the public to a different approach to investment and trading. You see, at every key turning point of the markets, AbleTrend provided clear market directions, buy or sell signals, and specific support and resistance levels. If more and more people knew the concepts of AbleTrend, or perhaps had access to the AbleTrend software, losses like those mentioned here could be avoided. I believe that public awareness of AbleTrend could be of benefit to many people.

FIRST STEPS: BECOMING AN EASYLANGUAGE SYSTEM DEVELOPER

The S&P 500 index futures contract was launched in 1986. Trading futures was still relatively unknown to many people in 1989, the year I first discovered the markets. But by the following year, System Writer (later called TradeStation) EasyLanguage was introduced. It was a computer program that allowed people to develop technical analysis tools such as market indicators and trading systems.

The idea of using computer technology to approach the markets appealed to me, and I decided to look into it further. With my strong background in software programming, I quickly became a certified EasyLanguage expert. At the same time, I studied many of the reputable trading books that were available, and I tested their trading ideas.

In 1990, I began reading many books about trading and took trading workshops from Larry Williams, George Angell, Larry McMillan, et al. Among those master courses, the way Larry Williams used TradeStation’s EasyLanguage to write indicators and trading systems significantly impacted my approach to trading. His introduction to Money Management (MM) piqued my initial interest in this topic and was the reason why I later built MM into AbleTrend.

In 1992, I created the Spyglass trading system, which was sold through George Angell. The system was discussed in his book Inside the Day Trading Game: Putting a Spyglass on Profits (1994). I joined George to give workshops on the “Spyglass trading system” around the country.

During the five years from 1989 to 1994, I tested the validity of over 500 market indicators that purported to describe and predict price activity. I also created over 100 indicators of my own. Among the indicators I developed, one of them—which I now call the “AbleTrend” indicator—was, and continues to be, the most fundamental and robust. The purpose of this book is to explain and demonstrate what AbleTrend is all about.

By the early 1990s, trading the markets had become serious business to me. In 1995, my wife, Grace, and I became commodity trading advisors (CTAs) registered with the Commodities Futures Trading Commission (CFTC).

THE TREND: FOE OR FRIEND?

In the 1990s, a well-known market analyst published an article titled “The Trend Is Your Enemy: Avoiding Trading Trends.” He stated that trading trends may be avoided by means of using the two moving average methods.

After my own 20 years of studying the markets, I couldn’t disagree more.

It is my experience that in trading, there is nothing more important than the trend. AbleTrend is designed to mathematically identify and then follow market trends.

A human being’s opinions or assumptions mean nothing to the market. The major goal of AbleTrend is to listen to the market’s voice, understand its language, and make trading decisions based on actual market moves. The more arrogant we are in our opinions of what the market should do, the more disastrous it can be to our trading. The fact is, being humble and willing to follow the market should be a trader’s first rule. Don’t fight the market. It is not your enemy. If you follow it, you will find it to be your best friend. Always remember: The trend is a trader’s best friend. No one is above the market trend. Not even the Fed, governments, international central banks, mega funds, or supertraders.

I remember in 1992 when I started to trade currency futures, the British pound was dropping like a rock. The UK central bank with many other central banks together tried to stop the trend. But they could not. One report said that the UK central bank lost one to two billion pounds per day.

From late 2008 to early 2009, the U.S. government injected over one trillion dollars into big banks and insurance companies. The U.S. Dow Jones industrial average (DJIA) index still dropped from 11,500 to 6,500 in six months, down 43 percent. Even the U.S. government couldn’t stop the market trend. The market is like a wide river. Market trends are like powerful currents. The market follows its own way. No one can control it.

It’s a natural law: Water always flows down from high to low. The lesson is clear: Don’t go upstream. In fact, the river is not your enemy. It doesn’t even know who you are. Water in the stream follows its own way and is guided by the natural laws that underlie its movement. You cannot change it and will likely pay the price for trying. But you may attune yourself with it. Go the way it’s going. First understand the trend; you will then understand how to trade it.

THE FUNDAMENTAL APPROACH

One common way to trade the markets is what is called the fundamental approach. Fundamental traders make their trading decisions by analyzing “supply” and “demand” based on principles of economics. In order to trade, these individuals attempt to learn all the facts about current demand and available supply. To analyze a stock price, these traders seek to find out what are the P/E ratio, dividend, rate of growth in revenue and profits, company-related news, mergers and acquisitions, management changes, new products ...even what’s happening with other companies in the sector that could affect the stock’s prices. Overall economics news—such as unemployment reports, GDP reports, and housing start reports—all can affect the stock’s price.

However, after all these endless studies, you might still not know the “fair” price for the stock. Will the market move up or down today? What’s the fair price to buy or sell? When is the right time to buy or sell? These questions still remain. And often traders feel powerless when the market ends up moving contrary to expectations: The stock plunges even though good news has been released, or it soars even though bad news has hit the street. This is the problem with the so-called fundamental approach.

One Friday morning in 2009, the unemployment report was released at 8:30 A.M. New York time, reporting that over 500,000 jobs had been lost in the United States the previous month. It was very bad news. A trader in a big trading room was going to sell the news. Before making the trade, he asked his friend, who is a supersmart trader, “Are you selling?” His friend replied: “It seems the market is going up right now. I have to buy now.” But our trader didn’t listen to his friend. He was swayed by the news and sold 50 contracts of the E-mini Dow futures. Unfortunately for him, the DJIA index soared 625 points that day.

This is a true-life example of why the fundamental approach is not desirable in the real trading world.

THE DREAM OF A UNIVERSAL EARLY-TREND INDICATOR

Many of the published indicators used for predicting price movement are derivatives of a mathematical formula called the moving average. The moving average is always delayed due to the nature of averaging of values. Many traders, including myself, have concluded that these indicators cannot sustain their utility in different markets or across time. Some of these indicators may work for a limited period of time, but then they lose their effectiveness. Some of them apply only to bull markets and fail in bear markets. Some of them work only for specific futures markets, or only work for specific stock symbols, but they fail in other markets.

When I became involved in the world of trading, my work was driven by the dream that something better was possible. I was looking for something fundamentally sound. It should work under any and all market conditions. It should be universal, working in any market and for charts in any time frame: hourly, daily, weekly. In another words: If there was hidden order behind all markets—and I strongly believed it must be so—I wanted to find it.

I wanted to find a way that would let me hear the market telling me which direction it was going to take. I wanted to know how to pin down the formation of a trend at its earliest possible stage. I wanted to know the key support and resistance levels, and be able to recognize whether a market trend had reversed or if it was going to continue in the prevailing direction. I wanted to be able to figure out how big the risk might be before taking a trade, so that I could calculate an accurate risk/reward ratio. Emboldened by my dreams, I started my journey toward developing a better approach to market analysis.

COULD THE LAWS OF NATURAL SCIENCES ALSO GOVERN THE FINANCIAL MARKETS?

There are natural laws behind everything we observe. You may or may not understand them, but you already know these laws exist from your daily experiences. You also know that it is useless to ignore them. Why does an apple naturally drop from a tree to the ground? Why does water in a stream always flow from a high position to a low one? Why do some chemical reactions happen spontaneously, while others cannot? Why does salt dissolve in water effortlessly, but the reverse process requires the input of extra energy? All of these phenomena are so different in format that people may not recognize that they are all governed by one law—the second law of thermodynamics—called entropy.

As a scientist, I firmly believed that a similar law must underlie all movements of markets. And so I tested idea after idea, formula after formula. A few years passed by, and I was still testing. Then one day an idea came to my mind. Could it be that the nonlinear regression equation, which covers so many phenomena in natural science, could also apply to the stock market? As it turned out, that was the breakthrough idea I had been looking for.

THE BIRTH OF ABLETREND

One aspect of my Ph.D. studies in physical chemistry at UC Santa Cruz involved “spectral simulation,” using big mainframe IBM computers. Back then, in 1986, one run of such a program on the big computers could last a few days. Over a 20-year period from the 1960s to the 1980s, the U.S. National Science Foundations funded and supported thousands of scientists to finish a huge project: numerically working through most standard mathematical computations.

On the shoulders of those scientists, I had developed a simulation program by using the huge libraries of LINPACK and EISPACK. The LINPACK, used for linear algebra computations, was developed at Argonne National Laboratories. EISPACK is another huge software library for eigensystem solutions.

The software program I developed from 1982 to 1988 during my graduate study at UC Santa Cruz, can be applied not only to molecular spectral simulations, but also to any kind of mathematical simulation. That is why I decided to use this approach as the starting point of my investigation into the financial markets. However, applying it to the stock market proved to be very complicated. I needed to simplify the process and find mathematical models to simulate the DJIA index waves.

Then, in 1994, after countless tests of different models and formulas, I hit upon one proprietary mathematical model that worked very well with the DJIA index waves. I then applied the model to other markets such as gold, wheat, T-bonds, and so on. They all showed very positive results.

The markets I studied were far different from one another, but it seemed there was a common natural law behind the movement of all the markets. Unlike any of the previous models I had tested, this approach did not have any curve-fitting setbacks. It showed the market direction as IT IS, and at an early stage. It provided the support and resistance levels that could be used for setting targets. It was also updated with every incoming tick in real time. I realized that I had just created an accurate measurement of the market—one that works for any market and any time chart. I was thrilled. I called it ASCTrend (later changing the name to AbleTrend in 2007).

Before that discovery, I had only dreamed that trading could actually become my career. But now my belief was justified that the more fundamental a natural law is, the more widely it can be applied. Applications of the fundamental laws of geometry, or Newton’s laws, or the second law of thermodynamics, or quantum theory, and so on—can be seen almost everywhere in our life. I recognized that many of the natural laws that I was familiar with could be applied not only in the areas of physics and chemistry, but also to financial market trend analysis. It was so encouraging to see market behavior following the basic laws again and again.

The up-and-down price moves of gold, oil, corn, commodities, and index futures; the soaring and plunging of stock markets around the world; the exchange rates of hundreds of foreign currencies—they all appear to behave so differently that people think they must be treated specially, or differently, or individually.

However, when we ask “what is the basic law behind each market move?” we find that it is the market trend itself. But no one had ever described it before. There was no name for it yet. But now, let’s call this internal market force “AbleTrend.”

After creating the AbleTrend concept, I put the scientific formula to work to develop a set of indicators. As a result of these efforts, market direction and key support and resistance levels are now easily plotted out and can be presented on paper or on a computer screen for any market and any time charts. Examples presented in Figures 1.1 through 1.5 illustrate the power of AbleTrend.

AbleTrend is the result of a natural scientist applying standard methodology to develop a science of trading. Basically, what’s really a trend? How do we define the trend scientifically? How do we follow the market trend in trading? Also, what’s real support and resistance? How do we control risks and trade the support and resistance? The success of this approach in actual trading proves that fundamental natural laws can be applied not only to the natural sciences, but also can work in financial markets. As we shall see again and again throughout this book using real-life examples, applying AbleTrend to the chart of any market helps traders make buy and sell decisions that are more in line with actual (although not always obvious to the naked eye) price movement.

CHAPTER 2

Advances in Market Trend Analysis

None gave birth to one; one gave birth to two; two gave birth to three; three gave birth to the multitude of things, which attain the state of harmony when the opposite elements of Yin and Yang are mingled in a well-balanced manner.

—Tao by Lao-tzu

Countless books have been written on the application of classical technical analysis in the stock and futures markets. This chapter does not offer another recap of traditional technical analysis. Instead it offers a new, more effective way of identifying trends and future price movement based on universal principles. In the following pages we will examine together a number of critical issues related to trend analysis that I will approach from a unique perspective. By understanding and using this new perspective in actual trading, individuals can be better positioned to make wise trading decisions. Specifically, in this chapter we will look at:

• A new definition of “trend” along with directions for pinpointing the starting and ending points of a trend, and seven steps for confirming a trend.

• An explanation of objectivity, how to know one is acting on facts, and not on predictions or any other arbitrary idea.

• How to draw a more objective trendline. A presentation of various meanings of support and resistance (S&R), and an explanation of how AbleTrend’s use of S&R differs from the traditional use of S&R.

• An exploration of the concepts of Natural S&R and Key Levels.

• How AbleTrend indicators have been developed based on new concepts.

• The four most useful indicators for trend trading selected from over 1,000 indicators that are available (less means more!).

• An introduction to a new concept: The Golden Region of Entry.

This is the most important chapter of this book. It teaches how to identify a trend and the beginning and ending points of a trend. When you are holding a position, it tells you how to confirm a trend and determine if the trend is still there or already reversed. It helps you determine where is the protection stop level, and much more. We tell you how to see all of those. Without this information, many traders cannot see or use the trend.

WHAT IS A TREND?

Before a trader can begin to understand the advantages of the AbleTrend and how to use it, it is important to understand the basics of trends and trendlines.

Among all the basic concepts of technical trading, the trend is the most important. Many traders have said: “The trend is your best friend,” and they are correct. Experience proves that one of the common practices of traders who are profitable in the markets is that they follow the market trend, rather than trading against it. To trade successfully, traders must have a way of clearly defining and recognizing trends, especially when and where a trend begins and ends.

Practitioners of technical analysis assume that prices move in trends, and that once begun, a trend will continue for some period of time. They are concerned with identifying a price reversal at an early stage and riding it until the evidence proves that the trend has once again turned. For them, identifying the direction of the trend is the prime directive of trading; and identifying trends at their early stages, is seen as the foundation of success.

Let us begin our analysis of trends by first defining what a trend is. “Trend” refers to the general direction in which market prices are moving. It refers to something that is repeated—a continuation of events. If we know the general direction in which prices are heading, we can achieve a profit by simply “riding” the natural course of the market.

In trading, an uptrend is defined by a succession of prices that exhibit higher highs and higher lows. Figure 2.1 shows an uptrend that started with higher highs and higher lows. A downtrend is defined by a succession of prices that exhibit lower highs and lower lows. Using these definitions, we can identify a trend on any chart. In a very good trend, the majority of price bars adhere to the definition of the prevailing trend.

FIGURE 2.1 Example of an uptrend.

This definition of a trend may seem very straightforward; however, there is more to it than is evident at first. Theoretical mathematicians may not be satisfied with these empirical definitions. They want to know the underlying “whys”:

Why is it that higher highs and higher lows define an uptrend?

Why is it that lower lows and lower highs define a downtrend?

Why do these definitions of a trend work?

The theory behind this definition is actually quite complicated. From the many mathematical models I have used in my own computer simulation process, I have concluded that this definition of the trend is the best approach we have discovered so far—even though it is not actually proved as yet, and it may not ever be proved. But, for the past 15 years, applying trend concept to real-world trading and using it as the foundation for building the AbleTrend software, I have found that it works! It yields results that are easy, simple, and visual. It can be applied to any market and charts in any time frame. It works whether applied to stocks, commodities, futures, Forex, bonds, mutual funds, real estate, economic indices, or any freely traded markets around the world. It works whether it is applied to 1-minute, 5-minute, 15-minute, 30-minute, daily, or weekly charts.

THE SETUP OF A TREND

Here are some basic questions we need to ask if we are to get full value from our use of trends in trading: When does a trend start and end?

• How do we pinpoint the starting point of a trend?

• How do we pinpoint the ending point of a trend?

We will examine each of them in turn here, and Chapter 6 presents 13 case examples that support these conclusions and illustrate other aspects of trend analysis, such as trendlines and support and resistance levels.

Starting Point of a Trend