10.8.1.- Resumido
G: Sólo gravitatorias GV: Gravitatorias + viento
Throughout history, man has searched for the ability to see into the future. Wise men who seemed to possess certain gifts of clairvoyance were called seers or prophets. In ancient Greece, at the temple at Delphi, priests attained almost god-like status by teaching seekers to look within to see what lay beyond. Centuries later, the priests at the Oracle of Delphi are remembered as some of the most reliable seers and prophets of all time.
The basic trading system described in this book focuses on a series of events that occur to create a rare formation. No system that predicts the future is 100 percent accurate, but this particular formation not only indicates which direction a market is headed, it gives the investor a margin of safety as he or she enters the market. It is a system of superb reliability. It is for that reason we borrow from the past and name this occurrence the Delphic Phenomenon.
20
Before we start into the trading aspects, I want to explain which moving averages I use and why. This system employs the use of three moving averages, the four day, the eighteen day, and the forty day. These work out the best and have the most consistency. Certain markets have different moving averages that are used by the traders of those markets, but the vast majority use these three and it is with these that I have found the most success.
The first example we will use is the 1997 July Soybean chart (page 23). I have chosen this chart because it contains virtually all aspects of criteria needed when capturing the beginning movement of the Delphic Phenomenon. Refer back to this chart as you continue reading. There will be other charts shown later which reveal the same patterns, but some will not be as "textbook" as this one.
The way I use these averages is quite simple.
The first step is to wait for the eighteen day moving average to cross over the forty day moving average (in either direction). For clarity, let's say the eighteen day moving average crosses from below the forty day moving average to above the forty day moving average. At this point, the only thought you should have is to start looking for a buy signal.
Whenever the eighteen day moving average is above the forty day moving average we are looking
21
moving average is above the forty day moving average we will wait for the actual price of the market to go above the eighteen day moving average, and then drop below it, for the first time.
This is our buy signal! This is what we are looking for. This is the stage in the Delphic Phenomenon that tells you what lies beyond. It is at this point that we call our broker and place a buy order just above
the eighteen day moving average. If you get filled on your buy order, you will have your broker place a protective sell stop just below the forty day moving average. The difference in price between your entry point in the trade and the forty day moving average will be your initial risk in the trade. As the market moves up you will be able to move your protective stop up accordingly. You will continue to do this until such time that the market reverses direction, trades .at your sell stop price and exits you from the trade.
The reverse of the above example would be for a selling opportunity. In which case you will watch for the,eighteen day moving average to cross from above the forty day moving average to belQw
the forty day moving average. As soon as this happens you will be looking for your sell signal.
That sell signal will come when the actual market price moves from below the eighteen day moving average to above the eighteen day moving average, for the first time. At this point you again call your
broker, but this time you will be placing a sell order
22
08/28/97 19:5S CDT CHARTS - Techn - SOYBEANS Jul 97 CBOT Pg ALARM
N ecoudtiine mark dip
• • market price rises above 18,
• for the first time
place protective sell stop below 40
market price dips below 18, for the first time
„
23
market drops and fills your order, you will then call your broker and place a protective buy stop just above the forty day moving average. Once again your initial risk for the trade will be the difference in price between your entry point and the forty day moving average. As the market price drops you will move your protective buy stop down to lock in more profits until the price changes direction and trades at your stop price.
These last paragraphs are the essence of the Delphic Phenomenon trading system. Remember, you only place your trade the first time the market price goes inside the eighteen day moving average
after the eighteen day moving average crosses the forty day moving average. There will be other times the market price dips inside the eighteen day moving average, but I will rarely place a buy or sell order on the other side of the eighteen day moving average in those cases. The reason is that too many times the market run from that point is short lived.
A good case in point is the area on the July 1997 Soybean chart ( page 23) at the upper left center.
Around April 1st the market came out of the eighteen day moving average to the upside. It was the second time the market price had dipped inside the eighteen day moving average since the eighteen day moving average first crossed the forty day back in December. As you can see, the brief spurt was short-lived. Had your protective stop been of ample distance to give the market opportunity to move,
24
your profits may not have been very high, if you realized any profits at all.
When I say that your protective stop was of ample distance to give the market room to move, almost everyone wants to know what "ample distance" is. Welcome to the hardest and most difficult question that ever existed in the commodities markets. I sometimes wonder if there is an accurate measure of ample distance. Certainly it is different in every market and it is different from day to day. I typically will place a protective stop half-way between the eighteen day and forty day moving averages. This is what I use as "ample distance". Had that been done on the July Soybean chart (page, 23), the second time the market dipped inside the eighteen day moving average and rose above it, as described in the previous example, the trade would have produced small profits. The point being, I don't think there is a perfectly safe place to have your protective stops. No market proceeds along like clockwork.
The best place I've discovered to place my protective stop is below the forty day moving average on initial entry into the market in a buying situation, and just above the forty day moving average in selling situations. I then like to give the market about one week to make up it's mind on it's
25
after that approximate one week, I move my protective stop to about half the distance between the eighteen day and forty day moving averages. I continue to move it, on a daily basis, until I am eventually stopped out of the trade. In some cases that turned out to be a good time to get out of the market, and in others, staying in longer would have been better. This method of trailing a stop has had the greatest amount of success for me so far. You may want to play with that and see if you can arrive at a better means of gaining more ground. If you do, I would love to hear about it.
You may wonder why I have chosen to wait for the market to go inside the eighteen day moving average before I place my buy order on the outside of it. You might say "Why not buy into the market as soon as the eighteen day moving average crosses the forty day moving average, or why not just buy as soon as the market crosses the forty day moving average?" The answer is that quite often the market price will jump across the forty day moving average, run up high enough to cause the eighteen day moving average to cross the forty day moving 'average, and then just go right down again without ever coming back up. Sometimes the market price will jump up above the forty day moving average and go right back down without ever having enough strength to stay long enough to pull the eighteen day moving average across it. Remember, it is not a buying situation until the eighteen day moving
26
average is on top of the forty day moving average,
•and it is not a selling situation until the eighteen day moving average is below the forty day moving average. So the reason for waiting for the market price to go above the eighteen day moving average and dropping below it before we place a buy order is this: if the market continues down - we never got in the market at all. You will find that, in most cases, the first time the market crosges the eighteen day moving average after the eighteen day moving average crosses over the forty day moving average, there will be enough buying pressure to send the market for a nice run. Your protective stop will be placed on the side of the forty day moving average opposite the eighteen day moving average. If the market fails in its attempt to continue upward after crossing the eighteen day moving average, you will know what your losses will be and your stop order is set below another crucial line of support. It is, in other words, where it should be - below the line of support of 'a market. Market support is a term used to identify where supposed buy orders are already in place, giving enough buying pressure to keep the market price from going lower. Market resistance is a term given to an area where supposed sell orders already exist, giving the market price a cap (or top) that price should not breach.
Therefore; it is the very essence of this trading system that you will be in on a market move going in your favor or you never got in the market at all. The only other scenario is that you got in the
27
you were willing to risk before you started.
Another point I'd like to make is that you must keep up with reports that will come out on different markets. For instance, there are crop reports, cattle on feed reports, unemployment reports, etc. I make it a point to be out of any markets the day before a report is issued regarding that market. The only exception to this rule is if I already have high profits on the trade and my protective stop order is well above my original entry level, I may then consider maintaining my position.
The reason for this is that no matter how good things may look, a report can totally alter the course of any market if there is unexpected news.
I will mention options only once in this book. I do not trade them except on two occasions. The first is the day before a market news report. At that time I will place a trade only if the futures chart shows me I should be placing a buy or sell order based on the Delphic Phenomenon. If, for example, the corn chart shows me that I should be placing a buy order above the eighteen day moving average tomorrow, and tomorrow is the day of the crop report, I will buy a corn call option today.
This, too, involves risk but the risk in options is usually much less than the risk in futures.
28
The second occasion in which I use an option is if the futures market I plan to trade requires a large risk, based on how far away the forty day moving average (where my protective stop will be) is to my entry into the market. In that case I will decide at what price, I would have placed my buy (or sell) order on the futures chart. I will then call my broker and tell him that when the futures market trades at that price, to buy a call (or put) option at the market price. The strike price of the option will have been predetermined between my broker and me. I won't waste time explaining how options work, if you choose to use them your broker can explain them to you.
I try to avoid the use of options because you have two enemies in that game - price and time.
The only real enemies in the commodities and futures trading system you have been reading about are price and impatience - the greater of the two enemies is impatience. These opportunities to buy and sell based on the Delphic Phenomenon do not happen every day. You must wait for them to develop. The old adage about patience being a virtue has tremendous application here.
Overzealousness will destroy an account in a very rapid fashion.
Now that you have a basic understanding of when you should place your buy and sell orders and what to look for in a chart we need to move on to
29
eighteen day moving average crosses the forty day, and the market drops inside of it do you place your buy or sell order. There are certain times to do this and certain things to look for. The following will be critical information needed to trade this system successfully. There will also be more charts to emphasize these criteria. Before you go to the next charts I want you to return to the 1997 July Soybean chart (page 23). Near June 1st, you would have been filled on a sell order had you followed this trading system. Your protective stop would have been placed above the forty day moving average. Note the proximity of the forty day moving average to the eighteen day moving average. They are not very far apart (compared to other charts you will see). Also, notice how quickly (eight days) the market price took to come back above the eighteen day moving average after the eighteen day moving average crossed below the forty day moving average. Critical!! These are the relationships you want to find. These are the ones with the best opportunities for successful sell trades:
the eighteen day and forty day moving averages are close to each other, and a quick move of the market price down and then back up again, above the eighteen day moving average. The opposite would apply for a buying situation. On the same chart, go back to the first week of February. Had you been trading this system at that time you would have placed your buy order above the eighteen day moving average. Your protective stop would have been placed below the forty day moving average.
30
It seems easy, and it is, when a chart shows such a clear pattern. Sometimes the charts will not be as specific.
The next chart shown is the 1997 October Live Cattle (page 32). In this chart you will see near the end of December the eighteen day moving average crosses above the forty day moving average. On this occasion the market did not make a quick drop inside the eighteen day moving average. The market price did not drop inside the eighteen day moving average until the first week of February, twenty-five trading days later. That is usually too much elapsed time for me to place an order on the other side of the eighteen day moving average. Granted, you could have made profits on the trade in this case, but too often the following breakout from the eighteen day moving average at this point is short lived. This is a situation that requires close attention. As stated before, the best time to get in on a sizable move is when there is fairly little time between the eighteen day moving average crossing the forty and the market going inside it. The opportunity still exists, but this is a decision I would give serious thought to first.
Following this upward move the market again drops, this time pulling the eighteen day moving average below the forty day moving average. When the market price went above the eighteen day moving average, we would have placed sell orders below the eighteen day moving average (around the middle of March). This trade resulted in a small
31
•.? , 4g.
\,,W%,ttk• f%,.:,'VW'NrS,\4 On'tMn'AMW-4.YtrAWN''., VA*44NPs*
A '')V\ \*I.A
\‘. \V‘`'.
-32
loss. The protective stop just above the forty day moving average was elected and that took us out of the trade in late March. The large move upward after this pulled the eighteen day moving average above the forty day moving average. Once again our opportunity arrives to place a buy order above the eighteen day moving average after the market price drops below the eighteen day moving average.
About the middle of April we are in the market again, after our buy order is filled. This resulted in a very profitable trade.
Going along the same chart we have a sell off in Live Cattle starting about the first of May, and the eighteen day moving average is pulled below the forty. The waiting begins. We are waiting for the market price to go above the eighteen day moving average before placing a sell order. This does not arrive for a long period of time, over twenty days since the market price first crossed below the forty day moving average. Too long in this case. This presents an opportunity to place a buy order at or below the eighteen day moving average. This will be explained in a later chapter. This is one of the dangerous trades for experienced traders. The point is, if there is too much space between the eighteen day moving average crossing the forty day moving average, and the market price dropping and then going in between the two, it is not the time to be placing the traditional order that you have learned thus far. What we are looking for is a rapid drop (or rise) in the market price right after the eighteen day
33