Chapter Sixteen – How to know when you are right
I cannot stress to you enough how
I cannot stress to you enough how
important it is to wait for your
important it is to wait for your
trading signals to provide you with
trading signals to provide you with
confirmation that your forecast
confirmation that your forecast
top or bottom is in and that the
top or bottom is in and that the
trend has changed.
trend has changed.
Important note:
Important note:
Indicator one – reversal signal
Indicator one – reversal signal Illustration 16.01Illustration 16.01
SEP SEP 1675 1675 1700 1700 1725 1725 1750 1750 1775 1775 1800 1800 O OCCTT NNOOVV
trading to Time date
trading to Time date
= reverse signal
= reverse signal Reversal indicators (short trade)Reversal indicators (short trade)
1) Market has made a new high compared
1) Market has made a new high compared
the previous day.
the previous day.
2) Market close is lower than the open
2) Market close is lower than the open
Reverse the above for a long trade signal
As we discussed in the earlier chapter, your As we discussed in the earlier chapter, your ‘trading to Time’ dates should give you a reliable ‘trading to Time’ dates should give you a reliable indicator to forecast a significant change in trend indicator to forecast a significant change in trend within a trading
within a trading day or two. day or two. On some occasions,On some occasions, you may experience the market provides you you may experience the market provides you with a reversal signal on one day, and then a with a reversal signal on one day, and then a further reversal signal on the
further reversal signal on the next day. next day. In theseIn these situations, you will be stopped out of the trade situations, you will be stopped out of the trade on the first date, and you should look to re-enter on the first date, and you should look to re-enter again on the second reversal day.
again on the second reversal day. Sometimes, it is just the market’s way of
Sometimes, it is just the market’s way of
trying to throw you off the platform before
trying to throw you off the platform before
the train departs the station.
the train departs the station.
Indicator two – confirmation day
Indicator two – confirmation day The second indicator is to determine whether The second indicator is to determine whether the market trades lower (or higher) on the the market trades lower (or higher) on the following day after a potential reversal pattern following day after a potential reversal pattern top (or bottom) has been made on our forecast top (or bottom) has been made on our forecast date.
date. The confirmation day indicator The confirmation day indicator can be usedcan be used whether or not a reversal signal was generated whether or not a reversal signal was generated on your forecast date.
on your forecast date. In a number of In a number of instances,instances, market tops or bottoms will be formed without market tops or bottoms will be formed without providing a reversal signal – the confirmation day providing a reversal signal – the confirmation day allows you to initiate a trade when no reversal allows you to initiate a trade when no reversal signal is made.
signal is made.
In the next example, after the reversal signal In the next example, after the reversal signal occurred on our ‘trading to Time’ date, the next occurred on our ‘trading to Time’ date, the next day’s price action further confirmed the trade day’s price action further confirmed the trade by moving lower and
by moving lower and creating a down bar. creating a down bar. TheThe break of the previous day’s low is where the break of the previous day’s low is where the confirmation day signal is created.
confirmation day signal is created. If you have notIf you have not already initiated a trade position, the confirmation already initiated a trade position, the confirmation day provides you with another opportunity to do day provides you with another opportunity to do so.
so. You may also use the You may also use the confirmation day to addconfirmation day to add to your position on the trade. Stops should be to your position on the trade. Stops should be placed above (or below) the top (or bottom) you placed above (or below) the top (or bottom) you are trading, and not above the high (or low) of the are trading, and not above the high (or low) of the confirmation day.
confirmation day. In other words, your stIn other words, your stops areops are the same here as they are with indicator one. the same here as they are with indicator one.
Indicator two – confirmation day
Indicator two – confirmation day Illustration 16.02Illustration 16.02
SEP SEP 1675 1675 1700 1700 1725 1725 1750 1750 1775 1775 1800 1800 O OCCTT NNOOVV
trading to Time date
trading to Time date
= reverse signal
= reverse signal
Keep stops here. Keep stops here.
confirmation indicator two
confirmation indicator two
= previous day’s low broken
Indicator three – lower swing top
Indicator three – lower swing top
(or bottom)
(or bottom)
The third indicator is to refer to your swing charts The third indicator is to refer to your swing charts and wait for a confirmation that the swing charts and wait for a confirmation that the swing charts turn in favour of
turn in favour of the changing trend. the changing trend. In the caseIn the case of a market top, this is confirmed when the of a market top, this is confirmed when the swing charts create a first lower top, and in the swing charts create a first lower top, and in the case of a market bottom when the swing charts case of a market bottom when the swing charts creates a higher swing low.
creates a higher swing low.
The next chart shows the point where the first The next chart shows the point where the first lower sign top is created using a daily swing lower sign top is created using a daily swing chart.
chart. The swing is created by The swing is created by the down daythe down day when the low of the previous day’s bar chart is when the low of the previous day’s bar chart is broken.
broken. This allows you a This allows you a further point of entryfurther point of entry to initiate a trade (or add to your position) once to initiate a trade (or add to your position) once the swing confirms lower.
the swing confirms lower.
The first lower swing top (or bottom) also gives The first lower swing top (or bottom) also gives you an opportunity to assess your risk and you an opportunity to assess your risk and manage your stops.
manage your stops. Depending on your Depending on your riskrisk appetite, you may wish to move your stops appetite, you may wish to move your stops down to just above the lower swing high (in the down to just above the lower swing high (in the case of a market top), or just below the swing case of a market top), or just below the swing low (in the case of
low (in the case of a market bottom). a market bottom). Using theUsing the third indicator to adjust your stop loss position third indicator to adjust your stop loss position is a personal decision and will depend largely on is a personal decision and will depend largely on each individual’s own risk appetite.
each individual’s own risk appetite. I thereforeI therefore suggest it is something you can experiment suggest it is something you can experiment with to identify whether the stop adjustments with to identify whether the stop adjustments work for.
work for. Where possible, I like to keep myWhere possible, I like to keep my stops above (or below) the actual forecast top stops above (or below) the actual forecast top (or bottom) I am trading, and will try to only (or bottom) I am trading, and will try to only use a swing chart stop in instances where I am use a swing chart stop in instances where I am conscious of risk conscious of risk 1675 1675 1700 1700 1725 1725 1750 1750 1775 1775 1800 1800
trading to Time date
trading to Time date
trading to Time swing top trading to Time swing top
lower swing bottoms
lower swing bottoms
first lower swing top first lower swing top
Indicator
Indicator four – lower swing top and bot-
Indicator four – lower swing top and bot-
tom (or bottom and top)
tom (or bottom and top)
The fourth indicator is to wait for the swing charts The fourth indicator is to wait for the swing charts to make both a lower swing top and bottom to make both a lower swing top and bottom (when you are looking to trade a market top) or a (when you are looking to trade a market top) or a higher swing bottom and top (if you are trading a higher swing bottom and top (if you are trading a market low).
market low). If you refer back to our earlier lessonIf you refer back to our earlier lesson on trading with the trend, it is when the market on trading with the trend, it is when the market is making higher tops and bottom that confirms is making higher tops and bottom that confirms we are in an uptrend (or lower tops and bottoms we are in an uptrend (or lower tops and bottoms to confirm we are
to confirm we are in a down trend). in a down trend). Indicator fourIndicator four therefore uses our swing charts to confirm that therefore uses our swing charts to confirm that the trend has finally changed, providing you with a the trend has finally changed, providing you with a higher probability that your forecast top or bottom higher probability that your forecast top or bottom has in fact, worked.
has in fact, worked.
How to determine the strength of each
How to determine the strength of each
indicator
indicator
Each of the signal indicators should be used to Each of the signal indicators should be used to build upon each other
build upon each other. . When all four indicatorsWhen all four indicators are present, then there is a higher probability of a are present, then there is a higher probability of a forecast top or bottom producing a decent move. forecast top or bottom producing a decent move. The strength of each indicator increases The strength of each indicator increases sequentially – confirmation of indicator four will sequentially – confirmation of indicator four will give you the highest probability results that a give you the highest probability results that a change in trend has
change in trend has taken place. taken place. Next is indicatorNext is indicator three, then indicator two and finally indicator three, then indicator two and finally indicator one.
one. For this reason, I place varying degrees oFor this reason, I place varying degrees off confidence in the trade decision depending on confidence in the trade decision depending on which indicators have confirmed.
which indicators have confirmed.
The highest probability set-ups occur when
The highest probability set-ups occur when
all four indicators are present to confirm your
all four indicators are present to confirm your
forecast top or bottom.
Earlier I mentioned, that in my view, making Earlier I mentioned, that in my view, making fewer but longer term trades is the easiest and fewer but longer term trades is the easiest and most profitable way to trade the
most profitable way to trade the markets. markets. II simply cannot emphasise the relevance of that simply cannot emphasise the relevance of that statement, and this is certainly what Gann meant statement, and this is certainly what Gann meant when he described trading the “long swings” when he described trading the “long swings” as the most profitable way to trade.
as the most profitable way to trade.
In an earlier section of this course, we discussed In an earlier section of this course, we discussed how to identify the definable waves or sections how to identify the definable waves or sections of a market that all major bull or bear market of a market that all major bull or bear market campaigns move to.
campaigns move to. Whilst it may Whilst it may havehave appeared unassuming at the time, that chapter of appeared unassuming at the time, that chapter of the course is actually one of the most important. the course is actually one of the most important. When trading, your primary objective should When trading, your primary objective should be to ensure you are trading with the trend and be to ensure you are trading with the trend and capturing as much of the move in each of those capturing as much of the move in each of those sections as possible.
sections as possible. Put simply, if Put simply, if the market isthe market is in a major bull campaign, you should be looking in a major bull campaign, you should be looking for one or two buying opportunities to trade each for one or two buying opportunities to trade each section using your Trading Tools – this is section using your Trading Tools – this is wherewhere you will make the most profit with fewer trades you will make the most profit with fewer trades and the least amount of work.
and the least amount of work.
The Trading Tools however are also useful The Trading Tools however are also useful indicators to identify counter-trend trades within indicators to identify counter-trend trades within a major bull or
a major bull or bear market. bear market. As highlighted inAs highlighted in earlier chapters, you can also use your Trading earlier chapters, you can also use your Trading Tools to determine points in price and time where Tools to determine points in price and time where you can either hedge your longer term position you can either hedge your longer term position with the trend, or for the more aggressive trader, with the trend, or for the more aggressive trader, to actually take an against the trend position. In to actually take an against the trend position. In this chapter of the course, we describe how to this chapter of the course, we describe how to do both.
do both.