High Probability Trading Strategies E-Book

Robert C. Miner

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

Seitenzahl: 393

Veröffentlichungsjahr: 2008

Beschreibung

In High Probability Trading Strategies, author and well-known trading educator Robert Miner skillfully outlines every aspect of a practical trading plan–from entry to exit–that he has developed over the course of his distinguished twenty-plus-year career. The result is a complete approach to trading that will allow you to trade confidently in a variety of markets and time frames. Written with the serious trader in mind, this reliable resource details a proven approach to analyzing market behavior, identifying profitable trade setups, and executing and managing trades–from entry to exit.

Leseprobe

Table of Contents

Title Page

Copyright Page

Foreword

Preface

PART ONE - High Probability Trading Strategies for Any Market and Any Time Frame

CHAPTER 1 - High Probability Trade Strategies for Any Market and Any Time Frame

ANY MARKET, ANY TIME FRAME

CONDITIONS WITH A HIGH PROBABILITY OUTCOME

LEADING AND LAGGING INDICATORS

WHAT YOU WILL LEARN IN THIS BOOK AND VIDEO CD

LET’S GET STARTED

CHAPTER 2 - Multiple Time Frame Momentum Strategy

WHAT IS MOMENTUM?

MULTIPLE TIME FRAME MOMENTUM STRATEGIES

THE BASIC DUAL TIME FRAME MOMENTUM STRATEGY

MOMENTUM REVERSALS

MOST PRICE INDICATORS REPRESENT RATE-OF-CHANGE

MOMENTUM AND PRICE TRENDS OFTEN DIVERGE

HOW DUAL TIME FRAME MOMENTUM STRATEGIES WORK

WHICH INDICATORS TO USE FOR MULTIPLE TIME FRAME MOMENTUM STRATEGIES

WHAT ARE THE BEST INDICATOR SETTINGS TO USE?

DUAL TIME FRAME MOMENTUM STRATEGY RULES

DUAL TIME FRAME MOMENTUM STRATEGY TRADE FILTER

CHAPTER 3 - Practical Pattern Recognition for Trends and Corrections

WHY IS IT IMPORTANT TO IDENTIFY A TREND OR CORRECTION?

SIMPLE PATTERN RECOGNITION BASED ON ELLIOTT WAVE

TREND OR CORRECTION: THE OVERLAP GUIDELINE

ABC AND AWAY WE GO

COMPLEX CORRECTIONS

OVERLAP IS THE KEY TO IDENTIFY A CORRECTION

TRENDS AND FIVE-WAVE PATTERNS

GREATER IN TIME AND PRICE

FIFTH WAVES ARE THE KEY

MOMENTUM AND PATTERN POSITION

MOMENTUM AND PATTERN NOT ENOUGH

CHAPTER 4 - Beyond Fib Retracements

INTERNAL RETRACEMENTS AND CORRECTIONS

ALTERNATE PRICE PROJECTIONS QUALIFY INTERNAL RETRACEMENTS

MORE ALTERNATE PRICE PROJECTIONS

EXTERNAL RETRACEMENTS HELP IDENTIFY THE FINAL SECTION OF A TREND OR CORRECTION

PATTERN PRICE TARGETS

PRICE, PATTERN, AND MOMENTUM

NO EXCUSE

CHAPTER 5 - Beyond Traditional Cycles

TIME RETRACEMENTS AND CORRECTIONS

ALTERNATE TIME PROJECTIONS NARROW THE TIME RETRACEMENT RANGE

MORE TIME FACTORS

THE TIME TARGET ZONE

TIME BANDS

MORE TIME FACTORS

CONCLUSION

CHAPTER 6 - Entry Strategies and Position Size

ENTRY STRATEGY 1: TRAILING ONE-BAR ENTRY AND STOP

ENTRY STRATEGY 2: SWING ENTRY AND STOP

POSITION SIZE

CONCLUSION

CHAPTER 7 - Exit Strategies and Trade Management

MULTIPLE-UNIT TRADING

RISK/REWARD RATIOS

EXIT STRATEGIES

TRADE MANAGEMENT

TRADE ONLY THE HIGH PROBABILITY, OPTIMUM SETUPS

PART TWO - Trading the Plan

CHAPTER 8 - Real Traders, Real Time

ADAM SOWINSKI (SLORZEWO, POLAND)

JAGIR SINGH (LONDON, UNITED KINGDOM)

CEES VAN HASSELT (BREDA, THE NETHERLANDS)

KERRY SZYMANSKI (TUCSON, ARIZONA)

DERRIK HOBBS (WARSAW, INDIANA)

CAROLYN BORODEN (SCOTTSDALE, ARIZONA)

JAIME JOHNSON (ENCINITAS, CALIFORNIA, AND BOGATA, COLUMBIA)

CHAPTER SUMMARY

CHAPTER 9 - The Business of Trading and Other Matters

ROUTINES AND TRADING RECORDS

WHY TRADERS WIN OR LOSE

TECHNOLOGY, TRADING TIME FRAMES, MARKETS TO TRADE, AND LEVERAGE

TRADE FOR POINTS, NOT FOR TICKS

YOU CAN’T BUY SUCCESS

YOU CAN BE A SUCCESSFUL TRADER

More Bar-by-Bar Entry to Exit Trade Examples

Glossary

Bibliography

About the Author

Index

About the CD-ROM

CUSTOMER NOTE: IF THIS BOOK IS ACCOMPANIED BY SOFTWARE, PLEASE READ THE ...

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 © 2009 by Robert Miner. All rights reserved.

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

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Library of Congress Cataloging-in-Publication Data:

Miner, Robert C. High probability trading strategies : entry to exit tactics for the Forex, futures, and stock markets / Robert Miner. p. cm. - (Wiley trading series) Includes bibliographical references and index.

eISBN : 978-0-470-44729-1

1. Speculation. 2. Futures. 3. Stocks. 4. Foreign exchange market. 5. Investment analysis. I. Title. HG6015.M56 2009 332.64-dc22 2008017697

Foreword

I met Robert Miner not long after the market crash of October 1987. I reluctantly went to a trading conference in downtown Chicago where he was one of many speakers. I was reluctant to attend the conference because I had recently lost my cushy job at the Chicago Mercantile Exchange where I had been managing a floor trading operation, working with institutional clients in the financial futures markets. Fortunately, I decided to attend the conference, which ended up opening the door to whole new career in the trading industry.

I had heard about Fibonacci retracements before, but only as they were applied to the price axis of the market. I remember the exact area of the room where I sat when Bob gave his presentation and illustrated, among other things, a very simple example of Fibonacci applied to the time axis of the market. I swear it was just like the proverbial light bulb went on above my head, and part of me knew that this was the key to my future. It was an “aha” moment.

I was so fascinated by Bob’s presentation, I made my way over to his booth in the expo hall and told him how much I enjoyed his presentation. This led to shooting a couple of games of pool over cocktails, and that was the beginning of our friendship that has lasted over the years.

When I started studying Bob’s work, I was so fascinated that I would work on my paper charts with a pencil, calculator, and proportional divider every chance I got. I did not own a computer at the time. Through this almost daily ritual with my hand updated paper charts, I would prove to myself how powerful were the strategies he taught. I started sharing some of my results with some friends and clients. It worked so well, some of them started offering to pay me for my analysis. I studied everything Bob had to teach over the years and perfected my trade strategies. All this eventually led to opening my own market analysis and trade recommendation business, Synchronicity Market Timing.

Without Bob Miner, I would not be enjoying the very successful career I have today. Most of what I’ve learned about technical analysis and trade strategies, I learned from Bob. I am forever grateful for what he has taught me over the years as I can truly say I love my work, and they even pay me for doing it!

Thanks Bob!! Carolyn Boroden aka FibonacciQueen, www.fibonacciqueen.com

Preface

High Probability Trading Strategies is one of the few trading books from which you can learn a complete trade management plan from entry to exit.

If you are a new trader or one who has not yet found consistent success in the business of trading futures, stocks, or forex, you will learn specific trade strategies, from how to identify high probability trade conditions, to the specific entry and stop price, through exit strategies that are designed to maximize the gain from any trend. If you are an experienced and successful trader, I know that you will recognize several key strategies to incorporate into your existing trade plan that should immediately increase your success.

I’ve been teaching these strategies for over 20 years to traders around the world. I’ve refined and simplified the strategies over the years to get to the core of the most important information a trader needs to make a trading decision and manage the trade. The combination of book and CD will provide more information in a better learning environment than I can offer in an expensive weekend workshop.

You will learn my unique approach to the four main factors of technical analysis, including Multiple Time Frame Momentum setups and the one main guideline to recognize the pattern structure of trends and corrections. Plus you will learn my Dynamic Price and Time Strategies to identify in advance the probable price and time targets for trends and corrections. You will learn two powerful and logical objective entry techniques and how to manage a trade for short- and intermediate-term gains through the trade exit in any market and any time frame. I’ve also devoted an entire chapter called “Real Traders, Real Time” (Chapter 8) with trade examples submitted by my past students, who show how they apply every day the strategies you learn in this book to markets from around the world.

The video CD takes the learning experience to a much higher level than any book is able to do on its own. In the video CD, you will see more examples of how to apply the High Probability Trading Strategies for many markets and time frames in bar-by-bar and step-by-step recordings. Be sure to read the book first, cover to cover, before watching the video CD. The CD material assumes you have learned the techniques and strategies taught in the book.

I’m sure High Probability Trading Strategies and the accompanying video CD will become one of your most important trading reference materials. It may even become the complete trading plan you have been looking for to manage trades from entry to exit for any market and any time frame.

PART ONE

High Probability Trading Strategies for Any Market and Any Time Frame

CHAPTER 1

High Probability Trade Strategies for Any Market and Any Time Frame

This book is unique. Unlike most trading books, it will teach you a complete trading plan from entry to exit. Not a few well-chosen examples of isolated trade setups and strategies, but exactly how to recognize optimal trade conditions, objective entry strategies with the exact entry and exit price, and how to manage the trade with stop-loss adjustments to the trade exit.

The majority of trading books focus on a few techniques and show a plethora of carefully chosen examples to support whatever is being taught. Some of the phrases often used are “You could have bought around here or taken profit around here”; “depending on whether you are a conservative or aggressive trader, you could do ... (this or that)”; “markets usually fluctuate around the volatility band, which is a good place to buy or sell”; and lots more nonspecific statements.

Brokers don’t take orders “around this or that price level.” They only take specific price orders. There is no such thing as a conservative or aggressive trader. There are only traders who either follow a trading plan or don’t. To maybe do this or that “around” a volatility band or any other indicator or chart position is not a trade strategy. A trade strategy is a specific action to take, including the specific buy and sell price. In other words, worthwhile instruction will teach you exactly what to do and how and when to do it.

While many trading books do teach some useful specific trading techniques or at least provide some ideas to explore, it is very unusual for a book or any other type of trading course to teach exactly what to do, from how to recognize a trading opportunity, to the exact entry and stop price, and how to manage the trade until it is closed out. That is what this book does. It will teach you a high probability trade plan with specific strategies from entry to exit. Most important, it will teach you how to think about the four key factors of momentum, pattern, price, and time; how to recognize what is useful and relevant market information that can be used to make a specific trade decision; and then how to execute the trade decisions from entry to exit.

A book is a static medium. It takes a lot of screen captures of charts to illustrate a trade campaign from entry to exit, no matter what market or time frame is used. Thus, this book has a lot of charts. I’ve taken care that the information on each chart should be quickly and easily understood. Most charts include text comments pointing out the most relevant information based on what I teach you throughout the book.

When John Wiley & Sons approached me regarding this book, I insisted I would do it only if it included an instructional CD where I could record additional examples, bar by bar, using trading software training mode. They agreed, and the addition of the CD trade examples makes this package a complete learning experience.

Don’t rush to watch the CD. The book provides all the background for what is shown in the CD. In the CD recordings, I assume you have read the book, cover to cover. I assume you are familiar with all the terminology, trade strategies, and book examples. You will be lost watching the CD if you haven’t first read the book. The CD is not a review or regurgitation of the material in the book. Rather, it provides the medium to be able to show more examples but in a bar-by-bar recording, so you can better see how the strategies taught in the book are put into practice day by day and bar by bar for many different markets and many different time frames.

I believe this book and CD combination provides a better learning experience than even most live workshops, because you can study all the material at your own pace and replay the recorded CD examples over and over.

ANY MARKET, ANY TIME FRAME

The trade strategies you will learn in this book may be used for any actively traded market and any time frame. Stocks, exchange-traded funds (ETFs), futures, and Forex examples are used. The same market structure is made day in and day out in all of these markets and in all time frames, from monthly to intraday data. If an example is not a market or time frame you typically trade, ignore the symbol and focus on what is to be learned. The strategy taught will apply to all markets and time frames.

CONDITIONS WITH A HIGH PROBABILITY OUTCOME

The objective of any trade strategy is to identify conditions with a high probability outcome and acceptable capital exposure. You will learn the four main factors of any market position and how to identify if each is in a position for a high probability outcome. When a market is set up for change from four different perspectives, the trader has an enormous edge, much more so than if only one or two of the factors are in the same position. To win in the business of trading, just as in any other business, you must have an edge. The edge you learn in this book is to recognize when a market is in a position to complete a correction or a trend so you can enter a trade at the end of a correction in the direction of the trend or in the very early stages of the new trend and sell in the very late stages (often within one or two bars of the low or high).

Just as a farmer must know the optimal time to plant and harvest a crop, the trader must know the optimal time to buy and sell a position. Buying or selling too early or too late can result in, at worst, unacceptable losses or, at best, not maximizing the return from a position. The trader must clearly understand the relevant information about the market position to recognize the optimal conditions to buy or sell.

Markets can seem very complex. The plethora of relatively inexpensive trading software available with hundreds of studies and indicators can overwhelm a trader with often conflicting information, making it difficult to focus on the relevant information needed to make a confident trade decision.

The high probability approach taught in this book recognizes four market perspectives: multiple time frame momentum, simple pattern recognition, price reversal targets, and time reversal targets. The information from any one of these four perspectives could be overwhelming. But in this book, you will learn how to focus on just those few bits of relevant information from each perspective that should quickly identify both the market position and whether a market is in a high probability position for a trade.

I rarely do live workshops, but when I do I present a special exercise at the end of the session. I tell the students that I can apply what I have taught them to any symbol, including stocks, ETFs, futures, or Forex, and it will take three minutes or less to process all of the information needed to identify whether the symbol is in a high probability position for a trade setup or what that particular market must do to become a high probability trade setup. I have the students write any symbol on a piece of note paper. We collect them in a hat and I draw them out one by one. In less than three minutes, I apply everything I have taught them and arrive at a conclusion what is the probable market position of the symbol and the specific trade strategies. You, too, will be able to do this after you have studied this book and viewed the CD examples.

If a trader focuses on just the limited, relevant information needed to make a high probability trade decision, the chance of success is great.

LEADING AND LAGGING INDICATORS

The vast majority of traders use only lagging indicators for their trade strategies. Every indicator or oscillator in every trading platform and charting program is a lagging indicator. A lagging indicator will show you how the current market position relates to past data for the lookback period, but has little predictive capabilities. A momentum indicator can be useful to help identify trend direction and trade execution if used with the unique multiple time frame momentum strategy you will learn in this book. But the momentum strategy is still only useful when it is part of a trading plan that includes leading indicators.

A leading indicator will prepare you in advance for probable trade conditions. Using my unique approach to dynamic time and price strategies, developed over the past 20 years, you will learn how to identify in advance the probable price and time target zones not just for support and resistance, but, more importantly, for trend reversal. We call these price and time strategies leading indicators because they identify in advance conditions with a high probability outcome. If a market fulfills those conditions, a trade setup is made. I know they will become a very important part of your trading plan when you learn the power of being prepared in advance for specific price and time targets for trend reversal.

WHAT YOU WILL LEARN IN THIS BOOK AND VIDEO CD

In this book, you will first learn the four dimensions of market position: multiple time frame momentum, pattern, price, and time. Each factor provides an important piece of information you will use to make a trading decision. A trading plan that does not include these four market dimensions is missing a big piece of the market puzzle and is much less effective than one that includes all four dimensions.

Most readers are familiar with momentum studies, also called indicators or oscillators . A momentum indicator by itself is not of much practical use to the trader. All momentum studies are lagging indicators. They are great for showing you the current market position relative to the past, but are not of much help in pointing to the probable trend position in the future—unless you use them in the unique way you will learn in Chapter 2. Chapter 2 presents a momentum strategy used by few traders that will teach you how to use the lagging momentum indicators as a powerful technique as a filter for trade direction and execution setups. This multiple time frame momentum strategy will become the most useful and practical momentum application you can add to your trading plan.

Elliott wave pattern analysis has been so overcomplicated and misinterpreted over the years that many traders avoid it like the plague. I don’t blame them. In Chapter 3, you will learn the simple guidelines based on Elliott wave structures to identify three frequent patterns for all markets and all time frames. One simple guideline will instantly reveal if a market should be in a trend or countertrend. This simple guideline itself should make a big difference in your trading results. It is critical for the trader to recognize whether the current market condition is part of a correction or trend, and, more important, if the correction or trend is in a position to be complete. This information can be a very important part of your trading plan and help prepare you for market reversals of any time frame. After you have learned the pattern guidelines in Chapter 3, you will be able to quickly recognize the probable structure position of any market and any time frame.

Most traders are familiar with Fibonacci (Fib) price retracements. Like a single time frame momentum study, they are not of much practical use by themselves to make a trade decision. Chapter 4 teaches you how to identify in advance which retracement level is likely to complete a correction of any time frame. It also teaches you how to project the probable trend targets in advance to be prepared for the price level at which a trend should be complete. You will also learn some new ratios that are not a part of the Fib ratio series that are a key to correction and trend price targets. Once you learn my Dynamic Price Strategies in Chapter 4, you should be prepared not just for temporary support and resistance levels, but for the specific price levels for trend and countertrend reversals.

Market timing in its true sense—identifying specific time target zones for trend change in any time frame—is rarely used by most traders. W. D. Gann taught many years ago, “When time is up, change is inevitable.” Chapter 5 teaches you my unique Dynamic Time Strategies I’ve developed over the past 20 years, which will allow you to project the probable minimum and maximum time targets for trend reversal. You will also learn how to project time bands in any time frame to target a relatively narrow time range with a high probability for trend change. Practical market timing should be an important part of every trader’s plan.

After you have learned these four key factors of market position that will prepare you to recognize optimal trade conditions, Chapter 6 teaches you two completely objective entry strategies and how to quickly determine the maximum position size for any trade. The strategies you learn in Chapter 6 will completely eliminate any guesswork on what price you should enter a market and what should be the stop-loss price. Most important, you will learn what all successful traders know: The proper position size for any trade setup on any time frame is one of the most important keys to long-term success for the business of trading.

Earlier I promised that you would learn how to manage a trade from entry to exit. Chapter 7 is the heart of this book, as far as I’m concerned. This is where you learn to apply all of the practical strategies, from recognizing high probability trade setups, to the specific entry strategy, stop-loss adjustment, and exit strategy. In other words, Chapter 7 teaches you how to manage a trade from entry to exit. You will learn how to make confident and logical decisions throughout the trade process.

Chapter 8 gives trade examples from students of my live and online workshops, educational CD programs, and other educational trading material I’ve produced over the past 20 years. These examples by other real-world traders show you how what you learn in this book has been put into practice every day in many different markets and many different time frames.

Chapter 9 offers more insight into the business of trading, what it takes to be successful, and a whole lot more. A lot of misleading information and sometimes just plain misinformation has been published about the business of trading. You’ll find in this chapter that I don’t pull any punches. If you thought I was a bit opinionated as you read through the earlier chapters, wait until you get to Chapter 9. I want you to be successful, and Chapter 9 will help keep you on track on the road to a successful trading business.

The video CD included with this book is an important part of the learning experience. Again, do not play the CD until you have read the book cover to cover. It will be a valuable resource, but you will only get the full benefit if you have first familiarized yourself with all the background material in the book.

LET’S GET STARTED

It’s time to get started and learn High Probability Trading Strategies: From Entry to Exit for the Futures, Forex, and Stock Markets. We begin with a unique approach to momentum strategies, the multiple time frame momentum strategy in Chapter 2.

CHAPTER 2

Multiple Time Frame Momentum Strategy

An Objective Filter to Identify High Probability Trade Setups

The Multiple Time Frame (MTF) Momentum Strategy is the most powerful approach I’ve discovered in over 20 years to filter any market and any time frame for trade direction and execution. The MTF Momentum Strategy is a key factor to the trade plan that identifies high probability trade setups with minimal capital exposure.

Just about every trading book or course will emphasize that you always want to “trade with the trend.” It’s great advice. If you are always trading with the trend, you should mount up some very impressive gains.

Two big questions are usually not clearly answered: “How do you objectively identify trend direction?” and “Is the trend in the early or late stages?”

In almost every trading book and course I’ve seen over the past 20 or more years, the trading educators show many after-the-fact examples of how their trend indicator identified the trend direction long after the trend was established. It is easy to show a trend on any chart long after the trend is established. But how do we identify trend direction in the early stages? How do we identify when an established trend is in the later stages and in a position to make a trend reversal? Without some approach to help identify where within the trend the market likely is, typical trend analysis will usually be too early or too late to be useful over time.

It is easy to fill a book with after-the-fact examples of trends. Trendlines, moving averages, channels, momentum indicators, and many other techniques can show the trend on historic data. Unfortunately, none of these techniques can reliably alert you to the beginning stages of a new trend or whether a trend is in its final stages. They can only identify an established trend, usually long after the trend is established and the optimum entry is long over.

I know, we could say that a trendline break indicates a trend is complete and a reversal has been made. For every trendline break that follows a trend reversal, I can show you a trendline break fake-out that is followed by a continuation of the prior trend. Moving average crossovers are notorious for false trend reversal signals.

In fact, most methods of identifying a price trend are doomed to failure for practical trade strategies with as many false reversal signals as confirmed ones. This is a bold statement, but I believe it is true. It’s time to stop the madness and and deal with the reality of trend position. I defy any trading educator to provide evidence that his so-called trend indicator consistently provides an accurate signal of trend position and trend reversal in a timely manner that a trader can take advantage of.

How can I make this statement? Let’s defy the crowd and think for ourselves in a logical manner. What does a trendline, channel lines, moving average, or other indicator represent? Every moving average, channel, or indicator is based on historic price data. It can only represent what has happened or what is the current market position relative to the lookback period. It has little predictive value in and of itself. It will always be a lagging indicator of the trend position, never a leading indicator of what is likely to happen in the future.

Why are some of these techniques promoted over and over again as “trend indicators” with value for making practical trade decisions? Because it is easy to find lots of chart examples that seem to illustrate how valuable are each of the author’s price trend indicators. However, let me make you this promise and this challenge. Name a trend indicator and for any market or any time frame that you are given an example of how it defines the trend, I will show you two examples where it quickly failed.

Every one of these techniques, whether a trendline, volatility channel, moving average crossover, or momentum indicator, can be a useful part of a comprehensive trading plan, but none of them alone will be of much use in and of itself to identify the probable trend direction for a future period. Over and over again, you will find that price reversals do not coincide with the trend indicator reversals. As I mentioned earlier, for every after-the-fact, well-chosen example given, I will quickly find at least two where the trend indicator did not work to identify a trend reversal in a timely manner.

However, there is a way to use some of these indicators to identify high probability trade setups.

In this chapter, you will learn how to use just about any momentum indicator as a trend indicator for trade direction in a unique but very logical way that you have probably not been taught before. We are not concerned with identifying the exact price-swing high or low of a trend. Rather, we are concerned with identifying trades in the direction of the trend, including near the early stages of the trend and avoiding the later stages. The Multiple Time Frame Momentum Strategy that you are about to learn is the most powerful strategy to filter any market for trade direction and trade execution setups. Not only do I believe the Multiple Time Frame Momentum Strategy is the best use of an indicator for trading strategies, I believe it is the only practical indicator strategy for real-world trading.

The Multiple Time Frame Momentum Strategy is not a stand-alone trade system (although it is probably much better than most “systems” that sell for thousands of dollars), but when it is included as part of a trade plan with the time, price, and pattern strategies you will also learn in this book, you will have a powerful trade plan that will not only identify high probability trade setups with minimal capital exposure, but warn you when a trend is near the end and a major trend reversal is likely.

I use the term capital exposure to describe what many trade educators call risk. Risk is the probability of an event happening. Capital exposure is the amount of money (capital) that may be lost if a market moves against you. I have much more to say about capital exposure later in the book.

Let’s begin with the concepts of trend and momentum before we even look at a chart or the dual time frame momentum strategy rules.

WHAT IS MOMENTUM?

In the world of trading, there are hundreds of momentum indicators (also called oscillators). Most of these indicators use the same information, the open-high-low-close of a price bar, and represent about the same thing, the rate-of-change of price. There is nothing mysterious, magical, or unique about this. All price indicators look back over a given period, called the lookback period, crunch the price data, and compare the recent price position with the price position of the lookback period. Different indicators manipulate and display the output differently, but all price-based indicators represent about the same thing: the rate-of-change or how fast the price trend is moving. The indicator reversals represent the change in momentum—the increase or decrease in the rate-of-change of the price trend. That is why you can use almost any price based indicator for the Multiple Time Frame Momentum Strategy you will learn in this chapter.

The first and most basic concept is this: Momentum indicators do not represent price trends. Momentum indicators represent momentum trends. This should be obvious, but I can’t tell you how many new traders over the years expect a price reversal every time a momentum indicator reverses. It just doesn’t work this way, because the indicator does not represent the price trend. If it did, this book would be about three pages long because all we would have to do is reverse our trade position each time a momentum indicator makes a reversal, and we would compound money faster than rabbits on Viagra can reproduce.

Unfortunately, it is not that easy. Price and momentum do not always trend together. For example, a momentum indicator may make a bearish reversal and decline while the price trend continues to advance. How can it do this? The rate-of-change of the price trend is decreasing even though price continues to advance. The bullish trend is just slowing down, so the momentum indicator is bearish even though the price trend continues to be bullish. The outcome: The price trend and momentum trend run opposite of each other.

Let me repeat this basic and very important concept about momentum indicators: Momentum indicators represent momentum trends, not price trends. Never expect price to reverse when the indicator makes a reversal. Often both price and momentum reverse together, but sometimes they will diverge because the price trend is only slowing down, forcing the indicator to reverse.

This point is important to clearly understand, and the vast majority of traders just don’t get it. So let me repeat it one more time: Momentum indicators represent momentum trends, not price trends. Price and momentum may not trend in the same direction. Not every momentum reversal will coincide with a price reversal.

We can only make money on price trends, at least until someone comes up with a momentum contract to trade! Even though momentum and price trends often do not move in the same direction, you will soon learn how we can use momentum trends in a simple and practical way as the primary indicator of trade direction and trade execution setups. You will also learn how, by incorporating dual time frame momentum trends in a comprehensive trading plan that also includes the time, price, and pattern position of a market, you can identify whether the market is at or very near a price trend reversal.

MULTIPLE TIME FRAME MOMENTUM STRATEGIES

In over 20 years of trading and educating traders beginning in the mid-1980s, Multiple Time Frame Momentum Strategies have become the most powerful trade direction and execution approach I’ve added to my trading plan and taught my students.

For at least the first 10 years I traded, I never used an indicator. I was basically a pure chartist using time, price and pattern position to identify trade setups and targets. My strategy was based on Gann, Elliott, and Fibonacci. In 1989, I released what I believe was the first futures trading home study course, called the W.D. Gann Home Study Trading Course, based on Gann, Elliott, and Fibonacci trade strategies. This course is no longer available.

It wasn’t until the late 1980s that I even had a computer with a charting program. I studied a lot about indicators and discovered I could always find an indicator or make a change in a lookback period or other setting for the indicator to confirm whatever price trend bias I had. There was never an indicator on my charts, simply because everything I read and tested on indicator strategies didn’t seem to work out, and I just could not find a logical and practical application for indicators.

Around the mid-1990s, at the prompting of one of my students, I began to look at how a momentum indicator could help confirm the pattern and price position. It took a couple of years to work out practical strategies for a momentum indicator to be a part of a real-world trading plan. Then, several years ago, I started working with momentum strategies using multiple time frames and was blown away with how valuable they could be as part of the trading plan, to identify trade direction and trade execution and to confirm a potential price reversal at price or time targets. Like everything I teach in this book, these strategies can be used for any time frame and any market, from day to position trading.

THE BASIC DUAL TIME FRAME MOMENTUM STRATEGY

I first teach the concept and application of a momentum strategy using two time frames. Later I give examples of how to use more than two time frames, but two are all you need. You will learn how to integrate this strategy into your trade plan.

Let’s get down to the basic strategy for the Dual Time Frame Momentum Reversal Strategy. It is so simple and logical, you’re going to wonder why you haven’t been using this strategy since your first trade!

DUAL TIME FRAME MOMENTUM STRATEGY

• Trade in the direction of the larger time frame momentum.

• Execute the trade following the smaller time frame momentum reversals.

It is that simple and logical. It doesn’t matter what time frames you use. If you are a position trader looking for trades that last from several weeks to months, you will use weekly and daily momentum trends. If you are a swing trader looking for trades that last a few days, you will use daily and hourly data. Day traders will probably use 60-minute and 15-minute data or even smaller time frames.

Let’s break down the Dual Time Frame Momentum Strategy into its parts to identify trade direction and trade execution setups.

Larger Time Frame Momentum Trend Identifies Trade Direction

We know the momentum trend will not always be in the direction of the price trend. But a good indicator with the right lookback period will usually trend in the direction of price and reverse within a very few bars of the price reversal. When price and momentum diverge, as in the case of a bullish price trend and bearish momentum trend, the larger time frame bearish momentum will keep us out of trades when the price trend is slowing down. The specific trade strategies you will learn in a later chapter will usually keep you out of a trade when the momentum trend is diverging with the price trend, which, at the least, will limit losses on losing trades. And remember, you will have losses, so a trade strategy that minimizes losses on losing trades is essential for trading success.

Dual Time Frame (DTF) Momentum Rule 1: Only trade in the direction of the larger time frame momentum trend unless the momentum position is overbought or oversold.

I’ll define the overbought and oversold exceptions soon.

The larger time frame momentum position identifies the trade direction. It does not signal that a trade should be executed; it only signals the direction of a possible trade, long or short. The smaller time frame momentum reversals are the specific signal that must be made before the trade is even considered. The smaller time frame momentum reversal does not execute the trade, but completes the conditions that must be in place before a trade execution may be considered.

Execute the Trade Following Smaller Time Frame Momentum Reversals

The key to momentum strategies is to use at least two time frames—a larger time frame to identify trade direction, and a smaller time frame for trade execution setups. We only want to take a trade if at least two time frames of momentum are moving in the same direction. That ups the odds big-time for the trade to be successful. This is such a simple and logical strategy that it should be a part of everyone’s trade plan.

If a trader only considers the momentum position of one time frame, he is at a great disadvantage. Momentum may trend consistently without making any reversals, but during that momentum trend, price will usually make corrections, sometimes sizable ones, without the momentum making a reversal. Or the speed of the price trend will ebb and flow without causing a momentum reversal. Wouldn’t it be best to be able to identify during the price trend when either a minor correction is likely to be complete or the speed of the trend might increase? That is what is accomplished by using the Dual Time Frame Momentum Strategy.

DTF Momentum Rule 2: A trade execution may be made following a smaller time frame momentum reversal in the direction of the larger time frame momentum trend.

The initial conditions for trade entry are met when the smaller time frame momentum makes a reversal in the direction of the larger time frame momentum trend. That gives us the best shot for the price trend making the biggest moves with minimal capital exposure.

MOMENTUM REVERSALS

A momentum reversal is when the momentum indicator reverses from bullish to bearish or from bearish to bullish. A momentum indicator that has two lines, like a stochastic or a relative strength index, makes a momentum reversal when the fast line crosses above or below the slow line. The fast line in most two-line indicators is usually the raw data; the slow line is usually a moving average of the fast line. When the fast line crosses the slow line the momentum trend is likely reversing. A momentum crossover is similar to a moving average crossover except the momentum crossover is of the indicator values and not the price data itself. A momentum reversal for some indicators may be signaled by the momentum lines crossing above or below the oversold (OS) or overbought (OB) zones, if the indicator is the type with OS and OB zones.

Other indicators will have other conditions that reflect a reversal in momentum. With a moving average convergence divergence (MACD) indicator, when the bars become taller or shorter or cross the signal line, the momentum speed is changing. Each indicator will have different conditions that signal a momentum reversal but they all represent about the same thing: The price trend is either reversing, slowing, or speeding up. Later we’ll see chart examples that show momentum reversals, but for now, you must thoroughly understand the concepts before looking at a single chart with indicators. Understanding the concepts first is the key to developing a specific trade strategy for any market and any time frame, under any market condition.

A smaller time frame momentum reversal into the direction of the larger time frame momentum is the Dual Time Frame Momentum setup for a trade. It is a precondition that must be met before a trade is even considered. A Dual Time Frame Momentum Strategy will be the best filter you have to identify optimum trades. It can be a stand-alone trade strategy, but we use it as part of a trading plan that also considers the price, pattern, and time position for high probability trade setups with acceptable capital exposure.

Trade in the direction of the larger time frame momentum. Execute following a smaller time frame momentum reversal. These are the setup conditions that must be met before a trade is considered.

Okay, it’s time to look at some charts and illustrate what you’ve learned so far, so at any time you can bring up a chart of any market and any time frame and almost instantly identify if the market is in a high probability position to consider a trade.

MOST PRICE INDICATORS REPRESENT RATE-OF-CHANGE

Figure 2.1 shows three different indicators with the bar chart plus a simple rate-of-change (ROC). The three indicators are a stochastic (Stoch), relative strength index (RSI), and DT Oscillator (DTosc), which is a combination of RSI and Stoch. All four studies have an eight-period lookback.

The momentum trends are about the same in all three indicators. While it is a little difficult to see this in the black-and-white screen shots, the momentum reversals for each indicator where the fast line crosses the slow line are all within a bar or two of each other.

What’s the point of this comparison? Most price-based indicators represent about the same thing, that momentum cycles act and react about the same time. The settings for any indicator, including the lookback period can be tweaked for different markets and different time frames for the most reliable signals. But, as you can see from Figure 2.1, even without tweaking the settings for each indicator they each still represented the momentum cycles about equally well. Later in this chapter you will learn how to choose the best settings for any indicator for any market and time frame.

Figure 2.2 is another screen shot with just two indicators, Stoch and DTosc, with less data so you can see the momentum cycles more clearly. I’ve drawn thick vertical lines in the indicator window at each bullish and bearish momentum reversal where the fast line crosses the slow line.