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1. yi lll all PG ce eng A men ania Canna Cie Coles meal eaee Ns SOME CRS marge 56 Day 8 11 9 05 Illustration 6 10 At the end of Day 8 we are still following stop loss rule 3 and are currently trailing the Wall However although the ACC remains above zero it has now shown us a second consecutive red bar This is an indication that the speed at which price is traveling is slowing down We will still use the Wall s value of 52 41 as our trailing stop loss red x but we ll watch the indicators closely Illustration 6 10 Long trade with Fractal entry Day 8 ANF 8 29 2005 11 9 2005 100 fA Stop loss at 52 41 SOS NOS HHTe ool Se Baers Aaa Mellal a alll EET THY M Sep 2005 C Det200g 7 o Day 9 11 10 05 Illustration 6 11 At the end of Day 9 in addition to a third consecutive red bar the ACC crossed the zero line from positive to negative This is a signal to follow rule 6 which has us move our stop loss point immediately to the Safety Line We will use the Safety Line s value of 58 73 as our trailing stop loss red x and follow the Safety Line until we are stopped out Illustration 6 11 Long trade with EAE dis MAA 9 GAl 8 29 2005 11 10 2005 Stop loss at 58 73 SOS HOS ARTs oon GSR Momentum Oscillator ELLE CA a paiia TV llh mem E H ror a CU AC ES Sy ocean A E anne 58 Day 10 11 11 05 Illustration 6 12 On Day
2. In addition since money management is one of the most important and often neglected aspect of trading we have included a section that addresses money management strategies with a section for stocks and a section for futures It answers the questions e What should my portfolio look like in terms of risk management e How much can safely risk on this trade e What should my position size be The Fractal s Edge is one of the finest trading tools anywhere If you carefully study the course follow the trading rules and apply sound money management strategies you will do well wish you every success with your trading Ken Herbert Sr www fractalsedge com Module 1 Introduction to a Radically New Stock and Futures Trading Approach The Perfect Business You are about to get into a business that gives you everything you ve ever wanted from a business of your own It offers the potential for unlimited earnings and in the course of time real wealth What s more you can run it working your own hours while continuing to do whatever you re doing now You operate this business entirely on your own and can start with very little capital You won t have any employees so you don t need attorneys accountants or bookkeepers In fact you ll never have collection problems because you won t have any customers and since there is no competition you won t have to pay the high cost of advertising You also won t need office space warehousing
3. 911 Total reserves 2 500 911 1 589 For the 10 000 portfolio it would go something like this 1 Compute Max Available Trade Equity Max Available Trade Equity 10 000 4 4 000 154 2 Select Secure Growth contracts whose margin requirement falls within the 4 000 Max Available Trade Equity a Allocate about 50 of the 4 000 2 500 to Lower risk markets In this case we could go with any combination of these that comes to about 2 000 As an example One Oats 338 one Two yr Notes 540 one LIBOR 405 one Sugar 700 TOTAL MARGIN 1 983 b Allocate the remaining 2 000 to the Moderate risk markets In this case you could go with one of the currencies or you could select one Live Cattle 945 and one Cocoa 980 TOTAL MARGIN 1 925 At this point your trading would be spread across Grains Financials Indices Softs and Livestock as follows Total Contracts 6 Total equity committed 3 908 Total reserves 10 000 3 908 6 092 Determining Trading Mix from the Secure Growth Mode Level 2 Portfolio 12 500 to 29 000 Illustration 8 4 below contains the sixteen commodities that can be traded within the parameters of Level 1 plus an additional set in bold Illustration 8 4 Secure Growth Mode Level 2 Portfolio 12 500 to 29 500 Lower Risk Moderate Risk Higher Risk Speculative 50 35 15 0 Oats Wheat Soybeans Soybean Oil Euro Dollars Municipal Bond ne Two year Notes Index Five year Note
4. Momenturn Oscillator Kaun ee eer l Hovy 2005 Accelerometer Md greatly e reasow te Dae i LA cece bette aki cent i F 72 Day 12 11 18 05 Illustration 6 25 At the end of Day 12 we find that the ACC Is above zero but has again turned red However since the MO is above zero and green and the value of the MO signal line is lower than the value of the histogram bars a change in overall direction is not yet indicated We ll continue to observe stop loss rule 5 and follow the Fence using its value of 27 62 as our trailing stop loss red x We will follow the Fence until the ACC either shows us another three consecutive red bars or crosses the Zero line into negative territory illustration 6 25 Long trade with MOXO entry Day 1 2 PLL Pall CP 8 31 05 11 18 05 tad a aLL LLL CF yi Stop loss Te at 27 62 My nA Accelerometer Eal sadar al eaa i meres Pore erill ep 2005 Oct 2005 13 Day 13 11 21 05 Illustration 6 26 At the end of Day 13 we find that the ACC is above zero but is now showing two consecutive red bars again warning us of a slow down in price movement In addition although the MO is above zero and the value of the MO signal line is lower than the value of the histogram bars the current MO bar is red This is a warning that a change in overall direction may occur We ll continue to observe stop loss rule 5 and follow the Fence using its value of 27 76 as our trailing stop los
5. Telecom ITL New 8 16 2005 1 1 14 2005 Prices 33 00 B 32 50 WA ka iy 32 00 GI 31 50 31 00 30 50 30 00 29 50 29 00 28 50 28 00 27 50 27 00 Momen Msgllato 0 50 FD a 5 FH A F HA SSA rT f 1 00 1 50 0 2500 0 1250 0 0000 0 1250 0 2500 saae Oct 2005 Steet tae a tee Sep 2005 B If there is a potential trade where is my entry point Basic entry signals come from two sources fractals and Momentum Crossovers MOXO In this section we ll cover entering a trade with each type of signal At this point we re only interested in what the indicators tell us for entry We ll get to stop loss and exit points later FRACTALS Fractal formations in the price charts Williams 1998 http www wiley com was the first to identify define and develop the concept of fractals as they appear on price charts and as they apply to the analysis of market action He observed that it is precisely those fractals that are the key to how the markets organize themselves And it is those fractals that we will examine now because we will work with them every day This type of fractal is composed of at least five consecutive bars the center bar of which has a higher high or lower low than the two or more bars preceding it and the two or more bars following it 34 lllustration 5 5 illustrates this ideal fractal pattern the two on the far left labeled A and depicts several variations as well Notice that in
6. Stop loss at 32 05 Entry at 30 85 Deads 144 Day 4 10 14 05 Illustration 7 12 At the end of Day 4 we find that the ACC is negative but green The MO also remains below zero but is now green and the value of the MO signal line is still greater than the value of the current histogram bar This is an early warning of a possible change in overall direction We continue to observe stop loss rule 3 using the Wall at 31 99 as our stop loss point red x lllustration 7 12 Short trade with Fractal entry Day 4 LVS 7 26 05 10 14 05 aca Stop loss at 31 99 145 Day 5 10 17 05 Illustration 7 13 At the end of Day 5 we find that the ACC crossed the zero line from negative to positive The MO also remains below zero but is now showing two consecutive green bars Since the value of the MO signal line is now less than the value of the current histogram bar we have a strong warning of a possible change in overall direction With the ACC crossing the zero line it is time to observe stop loss rule 6 which requires us to immediately move to and follow the Safety Line The value of the Safety Line is 30 74 so we will set that value as our stop loss point red x 146 Day 6 10 18 05 Illustration 7 14 Our stop loss was filled at the open and we are out of the trade at 30 98 for a small loss of 0 13 per share illustration 7 14 Short trade with Fractal entry Day 6 LVS 7 26 05 10 18 05
7. These graphs work together to give us a picture of the how the mass mina has affected the day s trading Illustration 9 3b is an example of what they look like Illustration 9 3b The Psychometric Evaluators Volume VAR epi ei ee ee ae onion ee Combining Volume and VRR Like the MO and ACC the bars in the Volume and VRR graphs are either green or red A green bar means that the value of that particular bar is higher than the value of the bar to its immediate left A red bar means that the value of that particular bar is lower than the value of the bar to its immediate left There are four possible color combinations when the Volume and VRR are integrated Reading from Volume down to VRR they are Green Green Red Red Red Green and Green Red The white arrows in Illustration 9 3b indicate that the most recent combination is Green Green and the combination to the left of that is Green Red An increase Green or decrease Red in volume tells us whether more of fewer traders are entering the market and an increase Green or decrease Red in VRR tells us how the market is reacting to the changes When we combine the Volume and the VRR we have a tool that gives us powerful insight into the mass mind 163 Think of the market as a river that you re planning on rafting down It s a river that is perfectly safe if you understand the structure of the riverbed and know what to look
8. at 21 54 has the lowest value so we will set that as our stop loss point red x We note that the ACC is positive and green In addition since the MO is above zero and green and the value of the MO signal line is lower than the value of the histogram bars a change in overall direction is not yet indicated Illustration 7 2 Long trade with MOXO entry Day 1 BMY 9 1 05 11 18 05 Prices Entry at 22 16 g stop loss x at 1 54 Momentum Oscillator Accelerometer gaie A ec een Sc ESE ee at 135 Day 2 11 21 05 Illustration 7 3 At the end of Day 2 we find that the ACC is positive and green In addition since the MO is above zero and green and the value of the MO signal line is lower than the value of the histogram bars a change in overall direction is not yet indicated We will continue to observe stop loss rule 3 using the Wall at 21 61 as our stop loss point red x Illustration 7 3 Long trade with MOXO entry Day 2 d BMY 9 1 05 11 21 05 i00 WYERS SOIBE Prices Entry at 22 16 He lf ee stop loss mos i x at 1 61 Lea Momentum Oscillator a q Accelerometer I Det 2005 New 2005 Dec 200 136 Day 3 11 22 05 Illustration 7 4 At the end of Day 3 we find that the ACC is positive but showing one red bar This is an early indication that the speed at which price is moving may be slowing down However since the MO is ab
9. liso A coeleronmeter oor I lle al Lili lI i al i T ir mey li F Jaap0a Re SSO NGS Ro eg ee Rta Sota Reais eG 116 Day 7 9 16 05 Illustration 6 66 At the end of Day 7 we find that the ACC is positive and green In addition the MO is above zero and green Moreover the value of the MO signal line is still lower than the value of the histogram bars Given the foregoing information it appears that the upward momentum is strengthening We continue to observe stop loss rule 5 and are using the Safety Line at 462 00 as our trailing stop loss red x We will follow the Safety Line until we are stopped out Illustration 6 66 Long futures trade with Fractal entry GCG6 Feb 06 Gold 6 28 05 9 16 05 Prices Entered market 4 A Stop loss Aat 462 00 Monerium Orellana TiN I Lb Min A coelernoneter wo te al 1 pre 1 bonds al 117 Day 8 9 19 05 Illustration 6 67 At the end of Day 8 we find that the ACC is positive and green In addition the MO is above zero and green Moreover the value of the MO signal line is still lower than the value of the histogram bars Given the foregoing information it appears that the upward momentum remains strong We continue to observe stop loss rule 5 and are using the Safety Line at 467 60 as our trailing stop loss red x We will follow the Safety Line until we are stopped out e 6 67 Long futures trade with ASM Aci Feb 06 Gol
10. or a distribution system All you need is a personal computer and you can conduct business from anywhere in the world How Do YOU Fit In If you are in the business of trading stocks you become a silent financial partner in companies not because you know anything about say auto parts pharmaceuticals aircraft or biotechnology but because you expect to make a profit If you are in the business of trading commodities you become a silent contractor in the exchange of the basic staples of life not because you know anything about lumber fuel meats coffee metals or currencies but because you also expect to make a profit on the deal In fact most stock and futures traders have no use for the actual products services or commodities they are dealing with they never even see them They are just people like you and me people with a certain amount of capital to invest getting started in their own business There are millions of them and they come from almost every profession from clerks to executives from janitors to doctors from students to university presidents It is the millions of traders controlling the millions and millions of shares and futures contracts that allow the exchanges to exist But more than that we provide farmers suppliers manufacturers and dealers with the capital they need to reduce their own risk and expand their operations For performing this service we expect to make a profit The great thing about a
11. s value of 21 73 as our trailing stop loss red x We will follow the Tripwire until the ACC either shows us another three consecutive green bars or crosses the Zero line into positive territory illustration 6 34 Short trade with Fractal entry Day 4 ORA 7 26 2005 10 10 2005 Stop loss at 21 73 Accelerometer stii lll opps tit lisa E tL 4 F I a i i a F i i Oct 2005 i E i a ii i a i i ii i F 4 a i a a i i i Aug 2005 Sep 2005 84 Day 5 10 11 05 Illustration 6 35 At the end of Day 5 we find that the ACC is below zero with two consecutive green bars showing This is an early warning of a slow down in the speed at which price is changing However since the MO is below zero and red and the value of the MO signal line is greater than the value of the histogram bars a change in overall direction is not yet indicated We ll continue to observe stop loss rule 5 and follow the Tripwire Thus we will use the Tripwire s value of 21 44 as our trailing stop loss red x We will follow the Tripwire until the ACC either shows us another three consecutive green bars or crosses the zero line into positive territory Illustration 6 35 Short trade with vee ues ae ames ee 10 11 2005 Stop loss at 21 44 Mopy ahtimen ane T Accelerometer 3 l EEE E E ii Hi i E i a ii i a i i ii P i 4 F a F i a i a i i F 4 a i 4 c i i i i a i amp i a i a Aug 2
12. so we ll use the lowest Stability Line until the Wall becomes the lowest In this case the Tripwire at 25 78 has the lowest value so we will set that as our stop loss point red x We also note that the ACC is showing a red bar illustration 6 14 Long trade with MOXO entry Day 1 PLL Pall CP 8 31 05 11 3 05 Ja i k Sn a i E 7 7 litt Stop loss at 25 78 i oon peed aires where motihick eth ten melee ieee wea ep 2005 Oct 3005 Noy 2005 Dec z 62 Day 2 11 4 05 Illustration 6 15 As the trade continues we are still following stop loss rule 3 The Wall at 25 84 is now the Stability Line with the lowest value We will use 25 84 as our trailing stop loss red x However while the ACC is above zero it is showing its second consecutive red bar This is an early warning of a slowdown in the speed at which price is moving The MO is above zero green and the value of the MO signal line is lower than the value of the histogram bars Thus a change in overall direction is not indicated llustration 6 15 Long trade with MOXO entry ok 2 GO Pall CP 8 31 05 11 4 05 Prices Stop loss at 25 84 Momentum Oscillator i Vii cos wo E on aoi Teoma ieee a a e ee na a boc ep 2005 Dg 2005 Nov 2005 Dec z 63 Day 3 11 7 05 Illustration 6 16 At the end of Day 3 we find that while the ACC is above zero it is showing its third consecutive red bar This is an early warning of a slowdown in the speed at
13. these questions A After make my selection is there a potential trade If so where is my entry point What should my initial stop loss be How do determine my daily stop loss value How do know when to exit lf the market moves against my position where do exit MG CEG A Is there a potential trade Set up for possible long trade Now that you have screened candidates for possible trades let s get started The upward or downward trends in many of the stocks and futures on the Watch Lists and many of those you screened yourself may be maturing Ideally we want to get aboard a trend a major wave as early as possible The question is how do we know a new trend is beginning To get a better feel for the answer we ll examine Illustration 5 1 where we ll be looking at how to identify a potential long trade using these three early warning criteria e The first sign of change in a trend s direction from down to up comes from the ACC We re looking for the ACC s histogram bars to turn green The value of each successive bar will be greater than the last as they move toward or cross the zero line from negative to positive Area 1 in Illustration 5 1 e The second indication of trend change occurs when the MO is below zero and the MO s histogram bars turn green Also the value of each successive green bar is greater than the last as the MO moves toward the zero line from negative to positive And most importantly the valu
14. 45 31 50 31 25 31 00 30 75 30 50 30 25 30 00 29 75 29 50 od 25 29 00 20 ro 20 50 20 25 20 00 wa 2r o0 EA 2r 00 26 75 Momen 0 50 0 00 0 50 1 00 1 50 2 0 Accel t ccelerometer 0 2500 0 1250 0 0000 0 1250 0 2500 Daas on o a oO Aug 2005 98 Day 9 10 4 05 Illustration 6 48 At the end of Day 9 we find that the ACC is below zero and red In addition since the MO remains below zero and red and the value of the MO signal line is greater than the value of the histogram bars no change in overall direction is indicated We continue to observe rule 5 using the Tripwire at 29 72 as our trailing stop loss red x We ll follow the Tripwire until the ACC either shows three more consecutive green bars or crosses the zero line from negative to positive illustration 6 48 Short trade with MOXO entry Day 9 IP 7 27 05 10 4 05 32 00 3l r5 31 50 al 25 31 00 30 75 30 50 30 25 30 00 2A 29 50 29 25 29 00 20 ro 20 50 20 25 20 00 offal fal ofan 2r 00 26 75 Momen 0 50 0 00 0 50 1 00 1 50 2 0 Accel t ccelerometer 0 2500 0 1250 0 0000 0 1250 0 2500 pet 2005 por tf J hf i Aug 2005 99 Day 10 10 5 05 Illustration 6 49 At the end of Day 10 we find that the ACC is below zero and red In addition since the MO remains below zero and red and the value of the MO signal line is greater than the value of the histogram bars no cha
15. 50 000 illustration 8 5 below contains the twenty nine commodities that can be traded within the parameters of Level 2 plus an additional set in bold Illustration 8 5 Secure Growth Mode Level 3 Portfolio 30 000 to 50 000 Lower Risk Moderate Risk Speculative 50 35 15 0 Corn Rough Rice Soybean Meal Oats Wheat Soybeans Soybean Oil Euro Dollars Municipal Bond 30 year Bonds Five year Notes Ten year Notes Cocoa Live Cattle meee Sve aterm Silver Platinum Currencies Canadian Dollar US Dollar Index British Pound Australian Dollar Swiss Franc Japanese Yen New Zealand Dollar 156 For an example of Level 3 diversification we ll assume an account size of 40 000 1 Compute Max Available Trade Equity Max Available Trade Equity 40 000 4 16 000 2 Select contracts whose margin requirement falls within the 16 000 Max Available Trade Equity a Allocate about 50 of the 16 000 8 000 to Lower risk markets In this case we could go with any combination of these that comes to about 8 000 For example One contract of each Lower risk commodity excepting New Zealand Dollar Total Lower risk equity committed 7 342 Total Lower risk contracts 10 b Allocate 35 of the 16 000 trade equity 5 600 to contracts in the Moderate risk markets One Wheat one CRB Index one Gold Total Moderate risk equity committed 5 355 Total Moderate risk contracts 3 c Allocate 15 of the 16 000 available tra
16. AL PALL CE Stop loss at 26 04 Accelerometer Pinal forme bee aaaea ae a Get ee Weme cra ep 2005 Oct2005 65 Day 5 11 9 05 Illustration 6 18 At the end of Day 5 we find that the ACC is above zero and still green Also since the MO is above zero green and the value of the MO signal line is lower than the value of the histogram bars a change in overall direction is not yet indicated We ll continue to observe stop loss rule 5 and follow the Tripwire Thus we will use the Tripwire s value of 26 16 as our trailing stop loss red x We will follow the Tripwire until the ACC either shows us another three consecutive red bars or crosses the zero line into negative territory illustration 6 18 Long trade with MOXO entry Day 5 PLL Pall CP 8 31 05 11 9 05 uz aLL PALL CF Stop loss at 26 16 Momentum Oscillator TUE Le Accelerometer ep d0 t S eao 66 Day 6 11 10 05 Illustration 6 19 At the end of Day 6 we find that the ACC is above zero but is now showing a red bar However since the MO is above zero green and the value of the MO signal line is lower than the value of the histogram bars a change in overall direction is not yet indicated We ll continue to observe stop loss rule 5 and follow the Tripwire Thus we will use the Tripwire s value of 26 34 as our trailing stop loss red x We will follow the Tripwire until the ACC either shows us another three consecutiv
17. FuturesWatchList or any other portfolio of interest and click OK The portfolio will be imported into TRE 13 Illustration 4 1 Locating Pre built Portfolios icon Illustration 4 2 Pre Built Portfolios dialog box Pre Built Portfolios 2 The Fractal s Edge Advanced Jrading Tool File Data Help Source Quantum Futures ae hi ala wy xY FORE TFE Quarterly Low Risk Stocks As OF 1245 5 Ai t t Futures atchList 20705 100 SP500 SpecialMlessagel 2 05 05 cor c After TFE is finished downloading the portfolio the choice box shown below will pop up Illustration 4 3 If you want to import additional portfolios click No If you click Yes TFE will update all portfolios including the one you just added You will save time if you wait until you are finished importing portfolios illustration 4 3 Choice box for downloading data Contirm After clicking on the Yes button TFE will automatically download and update data for all of your portfolios You can also update your portfolios daily by clicking on the download icon located in the upper left corner of the screen Illustration 4 4 or by pressing the F9 key on your keyboard Illustration 4 4 Locating the download button The Fractal s Edge Advanced Trading Too Fie Data Help T S PTS i as 2 Option 2 Or Map Your Own Stocks Futures to TFE The methodology we will be discussing below is called mapping It is a technique that effectiv
18. Illustration 6 80 Possible short trade with MOXO entry BPZ5 7 15 05 10 3 05 100 1 545000 1 840000 1 835000 1 830000 1 825000 1 820000 1 515000 1 810000 1 505000 1 800000 Entered trade 1 795000 1 790000 at 1 7989 1 785000 1 780000 1 775000 1 70000 Stop loss 1 765000 at 1 7575 1 760000 1 755000 1 750000 1 745000 1 740000 1 735000 1 730000 1 725000 Momentum Oscillator 0 037250 0 015625 0 000000 0 015625 0 031250 Acceleromete 0 0100 0 0050 0 0000 0 0050 oa ba soa aa na adbo oea ao o l o o no aba e ak boa ao k k wa r l l Pon ue I ee are te ne ne Aug 2005 sep 2005 Oct 2005 132 Day 12 10 4 05 Illustration 6 81 Our stop loss was hit today and we are out at 1 7575 Each 0001 of gain or loss in British Pound is worth 6 25 We entered the market at 1 7989 and exited at 1 7575 for a gain of 414 points 414 points times 6 25 comes to about 2 587 in gains for this trade Illustration 6 81 Possible short trade with MOXO entry BPZ5 7 15 05 10 4 05 100 1 545000 1 840000 1 835000 1 830000 1 825000 1 820000 1 875000 1 870000 1 805000 1 800000 Entered trade 1 795000 1 790000 at 1 7989 7 1 785000 1 780000 1 775000 1 770000 1 765000 tm 1 760000 Stopped out 4 1 755000 at 1 7575 5 1 30000 1 745000 1 740000 1 735000 1 730000 1 725000 Momentum Oscillator 0 037250 0 015625 0 000000 0 015625
19. Prices A cmeleronmeter cong TE TL seep li 111 Day 2 9 9 05 Illustration 6 61 At the end of Day 2 we find that the ACC is now above zero and green Moreover the MO is above zero green and the value of the MO signal line is lower than the value of the histogram bars Thus a change in overall direction is not indicated We are still observing stop loss rule 3 and are trailing the Wall whose current value is 447 80 Therefore we will use 447 80 as our trailing stop loss red x Illustration 6 61 Long futures trade with Fractal entry GCG6 Feb 06 Gold 6 28 05 9 9 05 Prices Entered market ths s E li zi FT al Bom pe I x Stop loss at 447 80 Monentunm Oscillater LL i cae E A coeheronmeter pete tt al marr Il 112 Day 3 9 12 05 Illustration 6 62 At the end of Day 3 we find that the ACC is above zero and still green Moreover the MO remains above zero green and the value of the MO signal line is lower than the value of the histogram bars Thus a change in overall direction is not indicated We are still observing stop loss rule 3 and are trailing the Wall whose current value is 448 30 Therefore we will use 448 30 as our trailing stop loss red x 100 aL llustration 6 62 Long futures trade with Fractal entry GCG6 Feb 06 Gold 6 28 05 9 12 05 Prices Entered market g 453 90 at ns b E ET H i Stop loss at
20. Select contracts whose margin requirement falls within the 32 000 Max Available Trade Equity a Allocate about 40 of the 32 000 12 800 to Lower risk markets In this case we could go with any combination of these that comes to about 12 800 For example Two contracts each of Corn Oats Euro Dollars 2 yr Notes 5 yr Notes and Sugar and one contract of each of the rest Total Lower risk equity committed 12 556 Total Lower risk contracts 17 b Allocate 35 of the 32 000 trade equity 11 200 to contracts in the Moderate risk markets One each of Soybean Oil CRB Index Cotton Lean Hogs Live Cattle Gold and Silver Total Moderate risk equity committed 11 215 Total Moderate risk contracts 7 c Allocate 15 of the 32 000 available trade equity 4 800 to Higher risk contracts One each of Soybeans Municipal Bonds Orange Juice and Feeder Cattle Total Higher risk equity committed 4 893 158 Total Higher risk contracts 4 d Allocate 10 of the 32 000 available trade equity 3 200 to Speculative contracts One Coffee Total Speculative equity committed 3 080 Total Speculative contracts 1 Total Contracts 29 Total equity committed 31 654 Total reserves 80 000 31 744 48 256 Market sectors represented in portfolio Grains Financials Indices Softs Livestock Metals Currencies and Energies Determining Trading Mix from the Aggressive Growth Mode Level 5 Portfolio 101 000 and above Illus
21. Stability Lines 16 illustration 4 8a Example of poor candidate for trading with TFE TNH 9 8 05 12 7 05 Inconsistent bar length Bars cutting thro ugh Stability Lines Illustration 4 8b Example of poor candidate for trading with TFE KEY 7 28 05 10 25 05 100 t A Inconsistent bar length Bars cutting through Stability Lines 17 illustration 4 9 Example of poor trading candidate March 06 Cocoa CCH6 9 20 05 12 20 05 Price Inconsistent bar length Bars consistently cutting through Stability Lines Prices Note that the bars in this chart are inconsistent in length Also quite a few bars cross all of the Stability Lines As you go through Illustrations 4 7a 4 10 above you will notice that in every case bar length which translates into volatility is inconsistent Furthermore the bars themselves frequently cross one or more of the Stability lines If a stock or futures contract you are examining exhibits similar traits don t include it in your watch list 18 Low risk stocks and futures contracts We re now going to take a look at examples of Low Risk stocks and future contracts whose present cycles are in harmony with TFE The first examples Illustrations 4 11 and 4 12 will show Alcoa s behavior prior to transition into a potentially tradable candidate Notice in Illustration 4 11 that bar length is inconsistent and that there are quite a few longer bars Pr
22. The lowest Stability line below the low of the signal bar is the Tripwire at 25 74 Since the value of the Tripwire is not below the value of the lowest low of the last three price bars we ll set our first day stop loss point at 25 52 red x the lowest of the three most recent bars You may of course employ a different method of determining a stop loss that is in keeping with your risk tolerance and money management practices Illustration 6 13 Possible long trade with MOXO entry PLL Pall CP 8 31 05 11 2 05 a wall I MOXO entry point 26 45 Lowest stability line is the Tripwire at 25 74 hee Boe i i ar i Initial stop loss third bar back Accelerometer 61 Now that we have determined our entry point and initial stop loss point and have either given the information to our broker or entered it into our electronic trading platform we are ready to trade Our overall plan is to enter the market when the price equals or exceeds 26 45 and in accordance with the initial stop loss rule we have set our initial stop loss at 25 52 To demonstrate the functionality of the stop loss algorithms we ll trade aggressively Let s see what occurs on the next day 11 3 05 Day 1 11 3 05 Illustration 6 14 The 11 2 05 bar has exceeded our entry price and we are in the market at 26 45 Since the low of the current bar is above the Stability Lines we are now following stop loss rule 3 We are trading aggressively
23. When the next set of three reds occurs move up to the Fence and so on until stopped out 6 lf the current ACC histogram bar crosses the zero line from positive to negative move immediately to the 3SMA Safety Line and follow it 7 Other than on entry day if the 3SMA Safety Line crosses the Fence so that the value of the Fence is greater than the value of the 38SMA Safety Line move to and follow the 3SMA Safety Line as your stop loss until stopped out As we proceed through our trade you ll have a chance to see how easy it is to apply the stop loss rules So let s continue with Day 1 as viewed in Illustration 6 3 below 49 Day 1 10 31 05 Illustration 6 3 Our entry price has been hit and we are in the market Since the low of the current bar is above the lowest Stability Line we are now following stop loss rule 3 We are trading aggressively so we ll use the lowest Stability Line until the Wall becomes the lowest In this case the Tripwire at 48 95 has the lowest value so we will set that as our stop loss point red x Illustration 6 3 Long trade with Fractal aali ae 1 aaa 8 29 2005 10 31 2005 FaRISGSIAGSHRIS SSIS Accelerometer ame Bales mr Alin Hull rrt jT eter oe eae O Ee Ane oem ey peed es Pon Nov 2005 50 Day 2 11 1 05 Illustration 6 4 As the trade continues we are still following stop loss rule 3 The Wall at 49 12 is now the Stability Line with the lowest val
24. bars a change in overall direction is not yet indicated We ll continue to observe stop loss rule 5 which states that for each set of three consecutive red ACC bars we move up one Stability Line Up to this point we have been following the Tripwire so now we will move to the Fence and use its value of 26 97 as our trailing stop loss red x We will follow the Fence until the ACC either shows us another three consecutive red bars or crosses the zero line into negative territory Illustration 6 21 Long trade with MOXO entry Day 8 PLL Pall CP 8 31 05 11 14 05 100 LL PALL CE CP l Stop loss ye atz6 97 Accelerometer a Wooa io sani Eoria E oaa l ra canana ioa ep 2005 Oct 4005 Novy 2005 Dec z 69 Day 9 11 15 05 Illustration 6 22 At the end of Day 9 we find that the ACC is above zero and has now returned to green Moreover since the MO is above zero and green and the value of the MO signal line is lower than the value of the histogram bars a change in overall direction is not yet indicated We ll continue to observe stop loss rule 5 and follow the Fence using its value of 27 12 as our trailing stop loss red x We will follow the Fence until the ACC either shows us another three consecutive red bars or crosses the zero line into negative territory illustration 6 22 Long trade with MOXO entry Day 9 P LL Pall CP 8 31 05 11 15 05 Et r Stop loss atzi t Ac
25. f Xe Stop loss at 22 21 Accelerometer al F a ea sacl ual cs all LI a F i a i i 3 F i ii i i i E i i E i i i F i a ii i a F i Aug 2005 Sep 2005 Oct 2008 82 Day 3 10 7 05 Illustration 6 33 At the end of Day 3 we find that the ACC is below zero and red In addition since the MO is below zero and red and the value of the MO signal line is greater than the value of the histogram bars a change in overall direction is not yet indicated We ll continue to observe stop loss rule 5 and follow the Tripwire Thus we will use the Tripwire s value of 21 99 as our trailing stop loss red x We will follow the Tripwire until the ACC either shows us another three consecutive green bars or crosses the zero line into positive territory Illustration 6 33 Short trade with Fractal entry Day 3 ORA 7 26 2005 10 7 2005 Prices E i Pi Stop loss at 21 99 Accelerometer ad rit Les ail ITTI LI i Sep 2008 a EI q i i i i i TF I a i I a F i i Aug 2005 Oct 2005 83 Day 4 10 10 05 Illustration 6 34 At the end of Day 4 we find that the ACC is below zero with one green bar showing However since the MO is below zero and red and the value of the MO signal line is greater than the value of the histogram bars a change in overall direction is not yet indicated We ll continue to observe stop loss rule 5 and follow the Tripwire Thus we will use the Tripwire
26. for along the way and it s perfectly treacherous if you don t Imagine the four combinations of green and red bars as signs posted on the bank that describe the bed of that river You are not able to actually see the riverbed but all along the shore there are combinations of green and red signs that tell you what s happening underneath Table 9 4 below describes the signs and their meanings Table 9 4 Volume VRR color combinations and their interpretations and the current VRR baris the underlying structure is If the current Volume bar is Green high volume Green high facilitation Deep broad channel smooth bottom downhill grade strong and swift undercurrent go with the flow Red low volume Red low facilitation Wide smooth bottom no grade almost no current things are slowing down Red low volume Green high facilitation Semi deep narrow man made channel with gate rocky uneven bottom swift rough current possible price manipulation Green high volume Red low facilitation Deep and narrow smooth bottom river forks ahead watch for change in trend Let s take a trip down the river as we examine these four combinations of signs in more detail 164 illustration 9 5 The Psychometric Evaluators Green Green with price chart JNJ 12 4 2001 3 08 2002 100 JNJ JOHNSON amp JOHNSON Prices Volume VAR ou jeepomie Y AUER Green Green Illustration 9 5 imagine that we r
27. is 9 21 05 and we re looking at a chart International Paper IP Illustration 6 39 Recall from Module 5 that for a MOXO sell signal to be valid 1 The first MO histogram bar must be immediately above the zero line and the very next bar the signal bar must cross the zero line from positive to negative 2 The value of the 3SMA Safety Line must be less than the value of the Fence 3 If conditions 1 and 2 are met set entry price at two ticks below the low of signal the bar Setup Day 9 21 05 Illustration 6 39 In Illustration 6 39 below we can see that the Momentum Oscillator has crossed the zero line in the negative direction and that the value of 3SMA Safety Line at 30 65 is lower than the value of the Fence at 31 02 Thus this is a valid MOXO signal The low of the signal bar is 30 37 We will set our entry point at 2 ticks below that price or 30 35 Also the highest high of the last three price bars including the signal bar for this MOXO entry is 31 27 The highest Stability line above the high of the signal bar is the Tripwire at 31 15 Since the value of the Tripwire is not above the value of the highest high of the last three price bars we ll set our first day stop loss point at 31 27 red x the highest high of the three most recent bars You may of course employ a different method of determining a stop loss that is in keeping with your risk tolerance and money management practices 89 U anon o o2 att e Dr CO
28. is not engaged in rendering legal accounting or other professional service If legal advice or other assistance is required the service of a competent professional should be sought ALL RIGHTS RESERVED 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 or otherwise without the prior written permission of the publishers Acknowledgements This course would be incomplete without the work of various scholars researchers and technical analysts among them R N Elliott W D Gann James Gleick Edward Lorenz Benoit Mandelbrot Edgar Peters Robert Prechter and others who lay the foundation for atypical approaches to analyzing data for trading the markets Quantum Futures acknowledges particularly the work of Bill Williams Ph D whose research and findings are shared in his book New Trading Dimensions J Wiley and Sons Inc Publishers 1998 http www wiley com Professor Williams pioneering efforts led to the identity definition and development of the concept of fractals as they appear on price charts and as they apply to the analysis of market action For more information about Bill Williams and the Profitunity Trading Group programs go to http www profitunity com Module 1 Module 2 Module 3 Module 4 Module 5 Module 6 Module 7 Module 8 Module 9 Module 10 Fractal s Edge Basic Use
29. margins listed in this module have been compiled from sources believed to be reliable and are provided here strictly for instructional purposes However since margin requirements are in constant flux and are subject to change without notice it would be best to consult your broker prior to actual trading 153 Illustration 8 3 Secure Growth Mode Level 1 Portfolio 2 500 to 12 000 Lower Risk Moderate Risk Higher Risk Speculative OOS eee ee Sie de e Corn Rough Rice Soe erg Euro Dollars Municipal Bond See w Cocoa m e o Live Cattle S es bannan ee Dollar Australian Dollar For the 2 500 account Select one or more Lower Risk contracts whose margin requirement fall within the 1 000 Max Available Trade Equity For a 2 500 account any of the contracts below is viable Grains Corn 506 Oats 338 Financials Euro Dollars 700 Two year Notes 540 Five year Notes 675 Indices 1 Month LIBOR 405 Softs Sugar 700 Cocoa 980 Depending on your Low risk selection any ONE of the Moderate risk contracts below is viable Grains Rough Rice 513 Wheat 506 OR ANY COMBINATION of allowable contracts that does not exceed 1 000 For example you could go with one Oats and one LIBOR one Corn and one LIBOR one LIBOR and one Wheat one LIBOR and one Rice or one of any contract over 500 As an example let s say you chose one LIBOR and one Wheat Your allocations would be as follows Total Contracts 2 Total equity committed
30. may find some of the lower risk contracts behaving like high risk contracts If this is the case you can move them to the left or right placing them in the cell that best corresponds to their actual risk level Illustration 8 2 Secure Growth Portfolio 2 500 to 50 000 Combined Levels 1 3 Moderate Risk Higher Risk 35 15 Rough Rice Soybean Meal Wheat Soybeans Soybean Oil Municipal Bond 30 year Bonds Two year Notes Index Five year Notes Ten year Notes 1 Month Libor CRB Index Nikkei 225 en e O pee Cocoa Live Cattle Silver Platinum Currencies Canadian Dollar US Dollar Index British Pound Australian Dollar Swiss Franc Japanese Yen New Zealand Dollar Crude Light Heating Oil Determining Available Trade Equity in the Secure Growth Mode Level 1 2 500 to 12 000 We ll use two scenarios in this example the 2 500 account and the 10 000 account We want to commit no more than 40 of total account equity to the pits at any one time To arrive at the Maximum Available Trade Equity multiply the total account equity by 4 2 500 4 1 000 10 000 4 4 000 Thus the maximum Available Trade Equity for the 2 500 account is 1 000 while the maximum Available Trade Equity for the 10 000 account is 4 000 Determining Trading Mix from the Secure Growth Mode Level 1 Portfolio 2 500 to 12 000 Illustration 8 3 below contains sixteen commodities that can be traded within the parameters of Level 1 NOTE The
31. temporary change in direction Illustration 9 7 the blue and violet arrows in area 1 on the price chart If Red Green is followed within one or two bars by higher volume then it is just a pause in the action before the market moves in our direction again Because of Red Green s turbulent nature the close will be at the lower end of the price bar on one day and the upper end on another day and somewhere in between on yet another day ric a r la rf pede A WA ple ce chart JNJ 12 4 2001 Illustration 9 8 The Psychometric Evaluators Green Red with p 100 JNJ JOHNSON amp JOHNSON Prices 61 00 we w iver p C BOO ee a M 0 0003 0 0002 l j ia 1 1 1 a 1 a a boa a OP a ea o a o o l 1 1 l Jan 2002 Feb 2002 Meme Green Red Illustration 9 8 As we continue down the river we come into an area that is deep and narrow On the bank we see a green sign and a red sign Our knowledge of the signs tells us that the riverbed is smooth with no grade There is high water volume and the current is strong but slow moving in comparison to Green Green or Red Green areas We also know that the river forks ahead and each fork is gated A battle over water rights is raging between two neighboring towns and each is trying to get as much of the river to flow down its fork as possible Depending on who is controlling the water flow we ll either continue toward our desti
32. wave to ride The Momentum Oscillator the Accelerometer and the Gatekeeper In this module you will learn how the Momentum Oscillator MO and the Accelerometer ACC work together with the Gatekeeper to provide entry signals stop loss values profit targets and exit points The basic trading rules for stocks and futures are exactly the same so all instructional references to stocks apply to futures and all instructional references to futures apply to stocks In the markets each stock or futures contract emits a signal that we recognize as a price chart That signal carries a wealth of information and expresses itself in the form of price waves moving up and down through time TFE breaks the chart s signal down into its component parts two of which are the MO and the ACC The MO shows us the strength and direction of market movement including approximately where major waves begin and end and how often they occur It also generates buy and sell signals The ACC measures the speed at which price is moving and provides an early warning of possible changes in market direction As an indicator the ACC also identifies minor waves which carry information for stop loss values and exit points Together the MO the ACC and the Gatekeeper reveal the market s underlying structure The following instructional modules will show you how Module 4 answered the question How do select a stock or futures contract to trade This module answers
33. when the histogram bars cross the Zero line movement has begun and we are moving with it NOTE A MOXO buy signal is valid until hit We can use this signal to enter the market regardless of how near or far away a buy fractal is from the MOXO For a MOXO buy signal to be valid the criteria below must be met 1 The first MO histogram bar must be immediately below the zero line and the very next bar the signal bar must cross the zero line from negative to positive Illustration 5 8 depicts this formation 2 The value of the 3SMA Safety Line must be greater than the value of the Fence 3 Set entry price at two ticks above high of signal bar Illustration 5 8 The MOXO buy signal Let s take a look at Illustration 5 9 for an example of how this comes together on a price chart The numbers on the chart correspond to the criteria outlined above 37 illustration 5 9 MOXO buy signal PLL Pall CP 8 31 05 11 2 05 100 7 LL F 3 Signal Bar high 26 43 allies 3 SHigh plus 2 ticks 26 45 e Accelerometer TPs m eult a lly sal pad TTT a 38 Momentum Crossover Sell Signal MOXO Sell The Momentum Oscillator generates a sell signal that consists of only two histogram bars and actually begins above the zero line The zero line is the point at which the momentum has completely changed direction but has not yet begun moving in the new direction However when the histogram bars cross the Zero line movement h
34. 0 1 740000 1 735000 1 730000 1 725000 Momentum Oscillator 0 037250 0 015625 0 000000 0 015625 0 031250 Acceleromet aoon 0 0050 0 0000 0 0050 o o of a ao o l OS ee et tee ee l e a ete a arama a rr aa Aug 2005 Sep 2005 Oct 2005 125 Day 5 9 23 05 Illustration 6 74 At the end of Day 5 we find that the ACC is below zero and red The MO is also below zero and red and the value of the MO signal line is greater than the value of the histogram bars Thus a change in overall direction from down to up is not indicated at this time The foregoing information indicates that the downward momentum is still strong We are still observing stop loss rule 3 and are trailing the Wall whose current value at 1 8152 is the highest of the three Stability Lines Therefore we will use 1 8152 as our trailing stop loss red XE illustration 6 74 Possible short trade with MOXO entry BPZ5 7 15 05 9 23 05 100 1 845000 1 840000 1 835000 1 830000 1 825000 1 820000 Stop loss at 1 8152 gt BABU 1 810000 1 805000 1 800000 Entered trade 1 795000 1 790000 1 785000 1 780000 1 775000 1 770000 1 765000 1 760000 1 755000 1 750000 1 745000 1 740000 1 735000 1 730000 1 725000 at 1 7989 Momentum Oscillator 0 021250 0 015625 0 000000 0 015625 0 031250 4cceleramet 0 0100 0 0050 0 0000 0 0050 a a o Da oa aaa l loo Go o oOo 6 oO o go foe ee Aug 2005 sep 2005 Oct 2005 126 Day 6 9 26 05 Illustratio
35. 0 031250 4cceleromete 0o00 0 0050 0 0000 0 0050 r eee en Do Seno oe bo fo te et or oo a ae 5 Aug 2005 sep 2005 Oct 2005 The preceding examples have taken you step by step through six trades with long and short fractal and MOXO entries for stocks and futures You have learned how to identify entry signals and stop loss points You have learned to use the Gatekeeper the ACC and the MO to help in your trading decisions You have seen how TFE guides you into through and out of profitable trades Finally you have seen how powerful the system is In the next module you ll learn how to exit with minimal loss when the market moves against your position It answers the question If the market moves against my position where do exit 133 Module 7 Exiting when the market moves against your position In this module you ll learn how to exit with minimal loss when the market moves against your position It answers the question If the market moves against my position where do exit Again any reference to stocks in this section applies equally to futures The Fractal s Edge was designed to guide you into through and out of your trades However no system is perfect From time to time TFE will generate a signal you ll do your planning and you ll enter a trade However the market will for whatever reason move in the opposite direction Fortunately because of the interaction between the Gatekeeper the Momentum Os
36. 00 56 90 56 00 57 50 57 00 56 50 56 00 39 g0 55 00 54 50 4 00 o3 o 53 00 52 50 52 00 51 50 Prices To summarize the characteristics of stocks and futures contracts in the High Risk category e the price bars are less consistent in length than those found in the Low and Medium Risk groups e Also breaches of the Stability Lines occur with greater frequency 29 Now that you have been introduced to the methodology of mapping as outlined above you can perform your own screens on the thousands of stocks in the AMEX and NYSE or the hundreds of futures contracts if you desire or you can simply look over the pre screened stock and futures Watch lists A word about volume The Watch Lists do not filter volume because every trader has a different idea of what constitutes acceptable volume levels Thus whether you choose to use TFE s Watch Lists or develop your own be sure to apply whatever volume filter you deem necessary The great thing with TFE however is that once you find a good group of stocks from the Watch Lists or from your own efforts at mapping then all you need to do is follow the signals TFE generates and trade them over the next three to six months Now that I ve screened and mapped my portfolio how do I know if there is a potential trade Proceed to Module 5 to find out how the Gatekeeper the Momentum Oscillator and the Accelerometer work together to reveal potential trades 30 Module 5 Finding a
37. 000 0 1250 0 2500 Daans tf oo i o o Aug 2005 107 Day 18 10 17 05 Illustration 6 57 At the end of Day 18 we find that the ACC Is above the zero line and green Also the value of the MO signal line continues to be only slightly greater than the value of the histogram bars Moreover even though the MO is below zero it is showing a green bar This is an indication that price direction may soon be changing We will continue to follow stop loss rule 6 and will use the current value of the Safety Line 26 95 as our trailing stop loss red x We ll follow the Safety Line until we are stopped out illustration 6 57 Short trade with MOXO entry Day 18 IP 7 27 05 10 17 05 100 Stop loss at 26 95 Homer 0 50 Accelerometer o on o on a o a o o I o o o on on o o sep 2005 Oct 2005 fete eae on Tl Aug 2005 108 Day 19 10 18 05 Illustration 6 58 The market opened at 27 43 Since that price is above our stop loss price of 26 95 we ve been stopped out We entered the market at 30 35 our gain is 2 92 per share illustration 6 58 Short trade with MOXO entry Day 19 IP 7 27 05 10 18 05 Stopped out at 27 43 Momen 0 50 0 00 0 50 1 00 1 50 2 0 Accel t ccelerometer 0 2500 0 1250 0 000 0 1250 0 2500 Daas i oc tee I heey a a l Po ete re Aug 2005 Sep 2005 The preceding examples have taken you step by step through four stock trades remember that
38. 005 Sep 2005 i Dhoo 85 Day 6 10 12 05 Illustration 6 36 At the end of Day 6 we find that the ACC is below zero with three consecutive green bars showing This is a strong early warning of a slow down in the speed at which price is changing However since the MO is below zero and red and the value of the MO signal line is greater than the value of the histogram bars a change in overall direction is not yet indicated We ll continue to observe stop loss rule 5 which requires us to move down one Stability Line with the appearance of three consecutive green ACC bars Therefore we will move from the Tripwire to the Fence and we will use the Fence s value of 20 30 as our trailing stop loss red x We will follow the Fence until the ACC either shows us another three consecutive green bars or crosses the zero line into positive territory Illustration 6 36 Short trade with Fractal entry Day 6 ORA 7 26 2005 10 12 2005 Stop loss at 20 30 Accelerometer Ilall i II i ii i FSE F C F 1U F i i E i iis i i a ii i a i i ii i F 4 a i 4 a i i a E i a ii i a F i Aug 2005 Sep 2005 i oazo 86 Day 7 10 13 05 Illustration 6 37 At the end of Day 7 we find that the ACC is below zero and red but the value of the current bar is very close to zero This does little to change the strong early warning of a slow down in the speed at which price is changing However since t
39. 007513 H HHHH 0 000000 0 007813 0 015625 0 023435 Gatekeeper oE M ee ee 1 l 1 1 1 l l 1 l 1 1 l 1 i f l 1 1 l 1 1 1 l 1 1 1 l 1 l 1 1 1 1 l Mar 2002 Apr 2002 May 2002 To summarize in conjunction with the Stability Lines the GateKeeper histogram e provides another confirmation of the gate s status open closed e gives an early warning that the gate is closing e indicates approximately where channels are located The E Wave Oscillator The E Wave oscillator is an indicator of overall longer range market rhythm It measures the ebb and flow of the market and confirms the Momentum Oscillators estimation of where the market begins to pick up or run out of steam For example when the signal line is no longer touching the histogram bars of the E wave oscillator it is a confirming indicator that the market is running out of energy and possibly changing direction This is particularly true if the bars become shorter and shorter as they move toward the zero line On the other hand when the signal line is cutting through the bars it is an indicator of the strength and direction of the trend particularly if the histogram bars become progressively longer as they move away from the zero line The histogram bars themselves provide the confirmation of overall trend direction If the bars are above the zero line the overall trend direction is upward and if they are below the Zero line the overall tr
40. 07 has the highest value so we will set that as our stop loss point red x We also note that the ACC is negative and red Moreover the MO is also below zero and red and the MO Signal Line is greater than the value of the MO histogram bars Thus an overall change in direction is not indicated Illustration 6 70 Possible short trade with MOXO entry BPZ5 7 15 05 9 19 05 100 1 545000 1 840000 1 835000 1 830000 1 825000 N x Stop loss at 1 8207 1 520000 1 815000 1 810000 p 1 805000 Entered trade fede at 1 7989 1 790000 1 785000 1 780000 1 775000 1 770000 1 765000 1 760000 1 755000 1 750000 1 745000 1 740000 1 735000 1 730000 1 725000 Momentum Oscillator 0 031250 0 015625 0 000000 0 015625 0 031250 4cceleramet 0 0100 0 0050 0 0000 0 0050 a apie e a a a aa ey a a I Ge a a a aa a a n l a a aa aa i e a a a a a a S a aa Aug 2005 Sep 2005 Oct 2005 122 Day 2 9 20 05 Illustration 6 71 At the end of Day 2 we find that the ACC is below zero but showing one green bar This is an early warning that the speed at which price is moving is slowing down However the MO is below zero red and the value of the MO signal line is greater than the value of the histogram bars Thus a change in overall direction is not indicated We are still observing stop loss rule 3 and are trailing the Tripwire whose current value is 1 8163 just above the Wall which is at 1 8156 Therefore we w
41. 10 we are stopped out at 58 73 for a gain of 8 37 per share illustration 6 12 Long trade with Fractal entry Day 10 ANF 8 29 2005 11 15 2005 100 i AR LOC Pe COOME L POS HHT Gel oesk omentum Oscillator So L O n a E ee T Accelerometer eottloge yyy ll Sep 2005 i ti a aS Sa eel Oct 2005 99 A Long Stock Momentum Crossover Entry Trade from Entry to Exit We will now examine another long trade but this time using the Momentum Crossover MOXO buy signal Let s assume that the date is 11 2 05 and we re looking at a chart of Pall CP PLL Illustration 6 13 Recall from Module 5 that for a MOXO buy signal to be valid 1 The first MO histogram bar must be immediately below the zero line and the very next bar the signal bar must cross the zero line from negative to positive 2 The value of the 3SMA Safety Line must be greater than the value of the Fence 3 If conditions 1 and 2 are met set entry price at two ticks above high of signal bar 60 Setup Day 11 2 05 Illustration 6 13 In Illustration 6 13 below we can see that the Momentum Oscillator has crossed the zero line and that the value of 3SMA Safety Line at 26 13 is higher than the value of the Fence at 25 77 The high of the signal bar is 26 43 We will set our entry point at 2 ticks above that price or 26 45 Also the lowest low of the last three price bars including the signal bar for this MOXO entry is 25 52
42. 10022 a JNJ JOHNSON amp JOHNSON 62 50 62 00 61 50 61 00 60 50 60 00 55 50 55 00 ESN S ipe 59 00 TF 57 50 57 00 56 50 56 00 55 50 55 00 54 50 54 00 53 50 53 00 52 50 52 00 51 50 Gatekeeper 0 023438 4 40 015625 ae reg I on M l 0 007813 CK E a i a E 0 015625 0 023435 1 l l May 2002 l 1 1 i l 1 1 1 Apr 2002 I 1 1 1 1 I 1 1 1 1 Mar 2 002 161 The GateKeeper histogram also gives us the advantage of seeing approximately where channels are located We can easily identify channels whenever a series of histogram bars remains relatively close to the zero line This is illustrated by the dotted lines in Illustration 9 2 The longer the histogram remains relatively close to the zero line the longer the channel and the more potential we have of getting in on the beginning of a significant price move Both of the functions described above have been replaced by the interaction of the 83SMA Safety Line with the other elements of the Gatekeeper the Wall the Tripwire and the Fence The Gatekeeper Histogram can still be used to enhance your pre trade analysis illustration 9 2 Gatekeeper histogram showing identifying channels JNJ 2 8 2002 5 13 2002 1004 JNJ JOHNSON amp JOHNSON 62 50 62 00 61 50 61 00 60 50 60 00 59 50 59 00 SS 5 50 d ie 55 00 foe 5750 57 00 56 50 56 00 55 50 55 00 54 50 54 00 53 50 53 00 52 50 52 00 51 50 0 023438 0 015625 0
43. 1670 1660 1650 1640 1630 1620 1610 1600 1530 1580 1570 1560 1550 1540 26 Illustration 4 20 Medium risk futures contract January 06 Unleaded Gas HUH6 9 21 05 12 20 05 Prices 2 03125 2 00000 1 96875 1 93750 1 90625 1 87500 1 84375 1 81250 1 78125 1 75000 1 71875 1 68750 1 65625 1 62500 1 59375 1 56250 1 535725 1 50000 1 46875 1 435750 In summary although the bars in the Medium Risk category are fairly consistent in length e they tend to occasionally produce a few longer bars e The bars are also more likely to breach the Tripwire and once in a while the Wall 2 Stocks on the High Risk Watch List Illustrations 4 21a through 4 23 show examples of stocks and futures from the High Risk watch list Unlike the Medium Risk charts the bars in High Risk charts are less consistent in length However like the Medium Risk stocks the bars often breach the Fence and tend to occasionally breach the Tripwire and once in a while the Wall illustration 4 21a High Risk American Campus Comm after transition ACC 9 8 05 12 7 05 100 x Prices Illustration 4 21b High Risk Equus Il Inc after transition EQS 9 8 05 1 2 7 05 100 z Prices 9 3750 9 3125 9 2500 9 1875 9 1250 9 0625 9 0000 6 9375 8 8750 8 8125 6 7500 6 6875 6 6250 6 5625 6 5000 28 Illustration 4 22 High Risk Limited Brands Inc after transition LTD 9 8 05 12 7 05 Prices g3 50 59
44. 448 30 Eh i i Me S Harmerin Oseillater i Wee ones A coeleroneter veg ti tL peep gt Jj Jil 2005 Aug 2005 113 Day 4 9 13 05 Illustration 6 63 At the end of Day 4 we find that the ACC is above zero and is showing a red bar indicating that the speed of upward price movement is slowing In addition while the MO remains above zero it is also showing a red bar indicating a weakening of the momentum However the value of the MO signal line is lower than the value of the histogram bars Thus a change in overall direction is not yet indicated We are still observing stop loss rule 3 and are trailing the Wall whose current value is 448 80 Therefore we will use 448 80 as our trailing stop loss red x illustration 6 63 Long futures trade with Fractal aie cei Feb 06 Gold 6 28 05 9 13 05 Prices Entered market Momnenium Oscillater i Hic A coelerometer cee ATM TE cep lec me Come m a eos ere EP a a 14 Pau rere eerie a oo Jil 2005 Aug 2005 Sep 2005 114 Day 5 9 14 05 Illustration 6 64 At the end of Day 4 we find that the ACC is now showing two consecutive red bars It has also crossed the zero line from positive to negative indicating that the soeed of upward price movement is continuing to slow down In addition while the MO remains above zero it is also showing a second consecutive red bar indicating further weakening of the momentum However the value of the MO s
45. 5 we are still following stop loss rule 3 We are trailing the Wall and since the ACC remains above zero and green we will use the Wall s value of 50 43 as our trailing stop loss red x lllustration 6 7 Long trade with Fractal entry Day 5 ANF 8 29 2005 11 4 2005 Prices Stop loss at 50 43 FGRISHGSIADSHRISSSINBSS th I 0 50 1 00 PENA PR Halla pyll mE Dea f te agos Sep 2005 54 Day 6 11 7 05 Illustration 6 8 At the end of Day 6 we are still following stop loss rule 3 We are trailing the Wall and since the ACC remains above zero and green we will use the Wall s value of 51 06 as our trailing stop loss red x illustration 6 8 Long trade with Fractal entry Day 6 ANF 8 29 2005 11 7 2005 xy Stop loss at 31 06 SAKRIBOS NOS ARIR SSIS Halll ttyl Sep 2005 O Der2o0s 55 Day 7 11 8 05 Illustration 6 9 At the end of Day 7 we are still following stop loss rule 3 We are currently trailing the Wall However although the ACC remains above zero it has turned red This is an indication that the speed at which price is traveling may be slowing down We will still use the Wall s value of 51 67 as our trailing stop loss red x but we ll watch the indicators closely illustration 6 9 Long trade with Fractal nin Day 7 falaa 8 29 2005 11 8 2005 w Stop loss at 51 67 AUISSSIANOLSHHIe ASI GLH Momentum Oscillator TTT
46. 50 20 25 t Stop loss at 27 93 25 00 aa 275 2r 25 27 00 26 75 Momen 0 50 0 00 0 50 1 00 1 50 2 0 Accel t ccelerometer 0 2500 0 1250 0 000 0 1250 0 2500 pet 2005 on o o U o o oO o oO Gb Gb Oo G G Oo Aug 2005 Sep 2005 104 Day 15 10 12 05 Illustration 6 54 At the end of Day 15 we find that the ACC is above the zero line and red but very close to zero This is an indication that the downward speed of price movement has slowed Also the value of the MO signal line is now only slightly greater than the value of the histogram bars even though the MO is below zero and showing a red bar This is a very strong indication that price direction may be changing We will continue to follow stop loss rule 6 and will use the current value of the Safety Line 27 63 as our trailing stop loss red x We ll follow the Safety Line until we are stopped out illustration 6 54 Short trade with MOXO entry Day 15 IP 7 27 05 10 12 05 Stop loss at 27 63 Momen 0 50 0 00 0 50 1 00 1 50 2 0 Accel t ccelerometer 0 2500 0 1250 0 0000 0 1250 0 2500 7 es a a eee Sep 2005 Oct 2005 foe ee 7 wool Aug 2005 105 Day 16 10 13 05 Illustration 6 55 At the end of Day 16 we find that the ACC is below the zero line and red Also the value of the MO signal line is now only slightly greater than the value of the histogram bars even though the MO is below zero a
47. B 50 n6 00 55 50 55 00 p4 50 n4 00 P3 50 3 00 p2 50 p2 00 51 50 A100 Volume 10 mil F mil e a l VBR 0 0003 0 0002 0 0001 manni MANII ar MT dhs Jan 2002 Feb 2002 ep a Oe ee War 2002 om Green Illustration 9 7 Back to the river Up ahead we see a man made channel with a gate A red sign and a green sign stand nearby From the signs we know that when the volume of water in the river is low farmers in the area sensing a possible change in the weather open the gate They store water in anticipation of a drought or run it off in anticipation of rain Because of the red green combination we know that this channel is narrow just deep enough to be over our heads and uneven on the bottom Although the volume flowing through the channel is not high the channel itself is capable of moving us along at break neck speed Even though we would like to go in another direction if the farmers open the gate we will be drawn into the channel s swift rough current Knowing this we wear life jackets helmets and whatever other safety equipment we may need How does all of this relate to the market The Red Green combination is probably the most frequently occurring of all the patterns When the Psychometric Evaluators show us Red Green we know that we have low volume but high price facilitation If this situation is not followed within the next two bars by an increase in volume we can be pretty sure we are experiencing a
48. B Initial stop loss at 23 46 B Fractal entry at 21 95 5 Accelerometer Lpa otal Ili han po LI oe i a E i a i I a i I i Oct 2005 i Sep 2005 ete aed Now that we ve entered the trade we need to determine our daily stop loss values So before we continue with the trade we will go through the rules for setting trailing stop loss points and exiting with a profit D How do I determine my daily stop loss value 79 Rules for setting stop loss points for short positions TFE s stop loss rules integrate the Accelerometer and the Gatekeeper 1 Set initial stop at the higher of either a the highest high of last three price bars including the signal bar or b or the value of the highest stability line above the high of the signal bar 2 If the high of the entry day bar is higher than the farthest Stability Line stay with initial stop until the high is below the farthest Stability Line then go to Rule 3 If the high of the entry day bar is lower than the farthest Stability Line go directly to Rule 3 3 Depending on your trading style risk tolerance and money management practices a For an aggressive approach if the Wall blue line is the farthest Stability Line follow the Wall otherwise follow the farthest Stability Line until it crosses the Wall then follow the Wall b Fora less aggressive approach if the Tripwire red line is the farthest Stability Line follow the Tripwire otherwise follow the fa
49. CN MESE racer sics characteristics To illustrate how the matrix works we ll assume a beginning account size of 30 000 and ability to buy on 50 margin e We ll use 75 of that amount or 22 500 for available trading equity and we ll hold 25 or 7 500 in reserve The 22 500 represents 45 000 in buying power e First we ll allocate 50 of the 22 500 available trading equity or 11 250 to stocks in the low risk value category e Then we ll put 30 of the 22 500 available trading equity or 6 750 into stocks in the medium risk value category 149 e Finally we ll allocate 20 of the 22 500 available trading equity or 4 500 to stocks in the speculative category Position Size 3 We want to have the ability to maximize our ability to diversify i e stocks from several sectors in odd lots to 100 share lots or to trade with greater initial position size lots of greater than 100 shares as the opportunity arises The following simple formula will help you with your position sizing and risk management goals Assuming that we buy our shares on a 50 margin and we want to diversify our trading across several sectors and with at least ten stocks 1000 total shares then e Inthe low risk category we can purchase 500 shares five 100 share lots representing 50 of the 1000 shares at a price no greater than 45 00 per share 11 250 2 500 e Inthe medium risk category we can purchase 300 shares three 100 share
50. E Stop loss at 30 90 Accelerometer hug 2008 pesos 93 Day 4 9 27 05 Illustration 6 43 At the end of Day 4 we find that the ACC is below zero and is showing a second consecutive green bar a warning that the speed of downward price movement is continuing to slow However since the MO remains below zero and red and the value of the MO signal line is greater than the value of the histogram bars a change in overall direction is not yet indicated We ll continue to observe stop loss rule 3 and follow the Wall Thus we will use the Wall s value of 30 87 as our trailing stop loss red x illustration 6 43 Short trade with MOXO entry Day 4 IP 7 27 05 9 27 05 100 gt INTL PAPER Accelerometer ia a bo jod i bep 2005 BOT i D S aa 94 Day 5 9 28 05 Illustration 6 44 At the end of Day 5 we find that the ACC is below zero and is showing a third consecutive green bar a warning that the speed of downward price movement is continuing to slow However since the MO remains below zero and red and the value of the MO signal line is greater than the value of the histogram bars a change in overall direction is not yet indicated Since we are trading aggressively we have been using the Wall as our stop loss point With three consecutive ACC bars we now observe rule 5 which moves us one Stability Line down In this case the Tripwire at 30 42 becomes our trailing stop loss so we will set that as o
51. N A A eee Prices 61 00 60 50 60 00 A950 59 00 58 50 H 55 00 B 57 50 57 00 56 50 56 00 55 50 55 00 54 50 54 00 53 50 53 00 52 50 52 00 51 50 51 00 Volume 10 mil 5 mil l f Ii WW O mil 0 0003 0 0002 0 0001 nae Jan 2002 9 rebong ie oo 1an A AO III n 9 6 As we onie n the river the current begins to force us toward a narrow branch that opens into a wide but shallow body of water Posted near the entry to that branch are two red signs What do we know about the river at this point We know that the riverbed is smooth and there is no grade so the surface will be calm and there will be very little current Things are slowing way down e a T AA a haa In the market when the Psychometric Evaluators show us two red bars it means that fewer shares are trading and price movement is slowing down This often happens near the end of an Elliot wave of some lower time frame For example the price has been rising but as traders loose interest and are no longer willing to enter the market there is a general slowing or even slight decline in price The close will often be in the lower half of the day s price range 166 Illustration 9 7 The Psychometric Evaluators Green with price chart JNJ 12 f A ff WZ 4 T4 U ap j i i i 4 2U UT J 0 d O 3 2 OC 02 o F JNJ JOHNSON amp JOHNSON eee eee Prices 61 00 60 50 60 00 BEHI 59 00 A S0 feo 00 ee 57 50 pr O0 F
52. OXO entry BPZ5 7 15 05 9 21 05 100 1 545000 1 840000 1 835000 a 1 830000 RY 1 825000 1 820000 x Stop loss at 1 8164 coats 1 810000 i 1 805000 1 800000 Entered trade 1 795000 1 790000 at 1 7989 1 785000 1 780000 1 775000 1 770000 1 765000 1 760000 1 755000 1 750000 1 745000 1 740000 1 735000 1 730000 1 725000 Momentum Oscillator 0 031250 0 015625 0 000000 0 015625 0 031250 4cceleramet 0o00 0 0050 0 0000 0 0050 oa en ee ce I ee I ea ee a a Fe Ne a i Peat enn 2 a Gb a F Aug 2005 sep 2005 Oct 2005 124 Day 4 9 22 05 Illustration 6 73 At the end of Day 4 we find that the ACC is below zero and red The MO is also below zero and red and the value of the MO signal line is greater than the value of the histogram bars Thus a change in overall direction from down to up is not indicated at this time We are still obServing stop loss rule 3 and are trailing the Wall whose current value at 1 8168 is the highest of the three Stability Lines Therefore we will use 1 8168 as our trailing stop loss red x Illustration 6 73 Possible short trade with MOXO entry BPZ5 7 15 05 9 22 05 100 1 845000 1 840000 1 835000 N 1 830000 Ro 1 825000 1 820000 Stop loss at 1 8168 1 15000 1 810000 1 805000 1 800000 Entered trade 1 795000 1 790000 at 1 7989 1 785000 1 780000 1 775000 1 770000 1 765000 1 760000 1 755000 1 750000 1 74500
53. S e E E i ong loss set at highest of last three bars 31 27 bor Highest Stability Line ts the Mis Wo Tripwire 31 15 Ste A MOXO entry point 30 35 Accelerometer 0 2500 0 1250 0 0000 0 1250 0 2500 Tig ee A ALS gapa E a 1 Now that we have determined our entry point and initial stop loss point and have either given the information to our broker or entered it into our electronic trading platform we are ready to trade Our overall plan is to enter the market when the price equals or falls below 30 35 and in accordance with the initial stop loss rule we have set our initial stop loss at 31 27 To demonstrate the functionality of the stop loss algorithms we ll trade aggressively Let s see what occurs on the next day 9 22 05 90 Day 1 9 22 05 Illustration 6 40 The 9 22 05 bar has opened at 30 24 below our entry price of 30 35 so we are in the market at 30 24 Since the high of the current bar is below the Stability Lines we are now following stop loss rule 3 We are trading aggressively so well use the highest Stability Line until the Wall becomes the highest In this case the Tripwire at 31 07 has the highest value so we will set that as our stop loss point red x We also note that the ACC is showing a green bar However since the MO is below zero and red and the value of the MO signal line is greater than the value of the histogram bars a change in overall direction is not yet indicated i
54. Stopped out 27 at 30 98 pe Accalesometer nee song 6 7 147 The preceding modules have provided detailed instruction that answers the following questions How do select a stock to trade After make my selection is there a potential trade If so where is my entry point What should my initial stop loss be How do determine my daily stop loss value How do know when to exit lf the market moves against my position where do exit QOnNmMoOm gt You should now have a good basic understanding of how to trade with The Fractal s Edge However trading without a good money management approach is doomed to failure The next module Module 8 presents a simple system for money management 148 Module 8 SECTION ONE Money Management Guidelines for Trading Stocks with TFE If you are trading only futures skip ahead to SECTION TWO Money management is the most important and most often neglected aspect of trading It answers the questions How much can safely risk on this trade and What should my position size be According to the literature most trading gurus recommend that a trader risk no more than 2 of total account equity on any one trade Some place volatility into the mix while others talk about the virtues of diversification The goal of this module is to present a strategy for preserving capital so that you can trade another day while building account equity In trading with TFE we take a m
55. The Quick And Easy Way To Consistently Profit from Stock And Futures Trading In 30 Days or less In fact as you devour the instructions contained within these pages and put this proprietary information into practice you WILL make a BARE MINIMUM of AT LEAST 10x the price of our software within your first year or your money back The Fractal s Edge Basic User s Guide Fundamental Methodology for Trading Stocks and Commodities with The Fractal s Edge by Ken Herbert Sr developer of the Fractal s Edge Trading System The Fractal s Edge Basic User s Guide The only cutting edge trading system that allows you to consistently profit from the underlying order beyond the chaos of the stock and futures markets www fractalsedge com Congratulations on taking the next step in your trading education Enjoy the course When you re ready to maximize the profit potential of the priceless information contained within these pages then order The Fractal s Edge Stock and Futures Trading Software at http www fractalsedge com order html Let s review exactly what you get with this TOTAL stock and futures trading solution 1 Proprietary Education The Fractal s Edge Stock and Futures Trading Method Also on going education in the form of an email newsletter TFE In Action highlighting the specific applications of TFE in various scenarios 2 The Fractal s Edge Stock and Futures Trading Software This stand alone application illustra
56. ability Line In this case the Tripwire at 32 48 has the highest value so we will set that as our stop loss point red x Illustration 7 9 Set up for possible short Fractal entry LVS 7 26 05 10 11 05 Stop loss at 32 48 142 Day 2 10 12 05 Illustration 7 10 At the end of Day 2 we find that the ACC is negative and red The MO is also below zero and red and the value of the MO signal line is now greater than the value of the current histogram bar At this time an overall change in direction is not indicated We continue to observe stop loss rule 3 using the Tripwire at 32 23 as our stop loss point red x Illustration 7 10 Short trade with Fracta entry Day 2 LVS 7 26 05 10 12 05 i N I A g Entry at 30 85 Accealesometer aug 2006 143 Day 3 10 13 05 Illustration 7 11 At the end of Day 3 we find that the ACC is still negative and red The MO also remains below zero and red and the value of the MO signal line is still greater than the value of the current histogram bar At this time an overall change in direction is not indicated We continue to observe stop loss rule 3 moving from the Tripwire to the Wall which is now the Stability Line with the highest value We are now using the Wall at 32 05 as our stop loss point red x Illustration 7 11 Short trade with Fractal e 100 g ntry Day 3 LVS 7 26 05 10 13 05
57. actices 47 Now that we have determined our entry point and initial stop loss point and have either given the information to our broker or entered it into our electronic trading platform we are ready to trade Our overall plan is to enter the market when the price equals or exceeds 50 36 and in accordance with the initial stop loss rule we have set our initial stop loss at 45 41 To demonstrate the functionality of the stop loss algorithms we ll trade aggressively Let s see what occurs on the next day 10 31 05 Day 1 10 31 05 Illustration 6 2 The 10 31 05 bar has exceeded our entry price and we are in the market at 50 36 Illustration 6 2 Long trade with Fractal entry Day 1 ANF 8 29 2005 10 31 2005 Prices Fractal entry at 50 36 i i rH Tenai Ff iy w SHRHISSSINOeHATeeelho sa Initial stop loss at 45 41 Accelerometet nn eMC Pe SR Ee Ce eee ee Le TT sep 2005 Oct A005 Now that we ve entered the trade we need to determine our daily stop loss values So before we continue with the trade we will go through the rules for setting trailing stop loss points and exiting with a profit D How do I determine my daily stop loss value 48 Rules for setting stop loss points for long positions TFE s stop loss rules integrate the Accelerometer and the Gatekeeper 1 Set initial stop at the lower of either a the lowest low of last three price bars including the signal bar or b or the valu
58. actices illustration 5 16 Setting the initial stop loss for a short trade with MOXO entry KEM 7 27 05 10 10 05 F Rioht Click for Menu 100 KEM KEMET CORP Click and Drag for Cross Hair 6 8750 Stop loss set at high of th rA par back 8 65 Momentum Oscillator Accelerometer Py pee eet aaa ll el Wee ee eee a ce ry a aa a ce a a a Ulich ake a Aug 2005 sep 2005 Oct 2005 Now that you have your entry point and your first day stop loss point you re ready to give that information to your broker or to enter into your online trading platform In the next module we answer these questions e How do determine my daily stop loss value e How do know when to exit e Ifthe market moves against my position where do exit 45 Module 6 Determining stop loss values Making the ride smooth In Module 5 we learned how to identify Fractal and MOXO entry signals and how to determine our initial stop loss point In this module we will go through two long and 2 short stock trades and one long and one short futures trade to see how the ACC and the Gatekeeper show us where to set our daily stop loss points and when to exit a profitable trade A Long Stock Fractal Entry Trade from Entry to Exit Fractal Entry We ll begin this part of our instruction with the set up for a long trade using a Fractal entry Let s assume that the date is 10 28 05 and we re looking at a chart of Abercrombie amp Fitch Illustration 6 1 Recall fr
59. ars or until the ACC crosses from negative to positive or until we are stopped out Illustration 6 79 Possible short trade with MOXO entry BPZ5 7 15 05 9 30 05 100 1 545000 1 840000 1 835000 1 830000 1 825000 1 820000 1 875000 1 870000 1 805000 1 800000 Entered trade 1 795000 1 790000 at 1 7989 1 795000 1 7s0000 Stop loss 1 75000 at 1 7791 1 770000 1 765000 1 760000 1 755000 1 750000 1 745000 1 740000 1 735000 1 730000 1 725000 Momentum Oscillator 0 037250 0 015625 0 000000 0 015625 0 031250 4cceleromete 0 0100 0 0050 0 0000 0 0050 rao a b spo a n a ate ee oa a Me tn ren Aug 2005 Sep 2005 Oct 2005 131 Day 11 10 3 05 Illustration 6 80 At the end of Day 11 we find that the ACC has crossed the zero line from negative to positive This is very strong evidence that the speed at which price is moving has slowed down In addition although the MO is below zero it is now showing two green bars Moreover although the value of the MO signal line is greater than the value of the histogram bars it is only barely so This information is an indication that momentum is in the process of slowing and turning Since the ACC has crossed zero we are required to observe rule 5 which calls for us to change our stop loss line to the Safety Line Accordingly we will use the Safety Line s value of 1 7575 as our trailing stop loss red x until we are stopped out
60. as begun and we are moving with it NOTE A MOXO sell signal is valid until it is hit We can use this signal to enter the market regardless of how near or far away a Sell fractal is from the MOXO For a MOXO sell signal to be valid the following criteria must be met 1 The first MO histogram bar must be immediately above the zero line and the very next bar the signal bar must cross the zero line from positive to negative Illustration 5 10 depicts this formation 2 The value of the 3SMA Safety Line must be less than the value of the Fence 3 Set entry price at two ticks below low of signal bar Illustration 5 10 The MOXO sell signal T Mi MIN Bar Bar Signal gt Signa Let s take a look at Illustration 5 11 for an example of how this comes together on a price chart The numbers on the chart correspond to the criteria outlined above 39 Illustration 5 11 MOXO sell signal KEM Kemet Corp 7 27 05 10 10 05 Signal Barlow 7 86 Low minus ticks 7 84 Momentum Oscillator Accelerometer i Aug 2008 Bes et Sep 2005 pene 40 That s all there is to entry using Momentum Crossover MOXO signals Table 5 12 recaps Fractal and MOXO entry rules Table 5 12 Summary of entry signals and rules LONG ENTRY RULES SHORT ENTRY RULES Sell Fractals O Buy Fractals Buy Fractals are marked with a green B above the high of the fractal bar Enter market when price rises to an amount equal to o
61. as our trailing stop loss red x Illustration 6 78 Possible short trade with MOXO entry BPZ5 7 15 05 9 29 05 100 1 545000 1 840000 1 835000 1 830000 1 825000 1 820000 1 515000 1 510000 1 505000 1 800000 Entered trade 1 795000 1 750000 at 1 7989 Stop loss 1 795000 at 1 7836 1 780000 1 775000 1 770000 1 765000 1 760000 1 755000 1 750000 1 745000 1 740000 1 735000 1 730000 1 725000 Momentum Oscillator 0 037250 0 015625 0 000000 0 015625 0 031250 4cceleromete 0 0100 0 0050 0 0000 0 0050 rao a ce een ee ar et Hee u a a aT a a aa aa Aug 2005 Sep 2005 Oct 2005 130 Day 10 9 30 05 Illustration 6 79 At the end of Day 10 we find that the ACC is below zero and showing four consecutive green bars the fourth green bar has such a low value that it isn t visible This is a very strong warning that the speed at which price is moving is slowing down In addition although the MO is below zero it is now showing a green bar However the value of the MO signal line is greater than the value of the histogram bars This information is an indication that momentum may be slowing and turning Nevertheless while price movement may be slowing a change in overall direction from down to is not indicated at this time We are presently observing stop loss rule 4 and will use the Tripwire s value of 1 7791 as our trailing stop loss red x until the ACC shows three more consecutive green b
62. ation 4 14a Low Risk Agere Systems Inc after transition AGR 9 8 05 12 7 05 jio ow Prices illustration 4 14b Low Risk Ishare DJ FN SRV CMP Inc after transition IYG 9 8 05 12 7 05 Prices 21 illustration 4 14c Low Risk Prudential Financial Inc after transition PRU 9 8 05 12 7 05 illustration 4 15 Low Risk OM Group Inc after transition OMG 9 8 05 12 7 05 22 illustration 4 16 Low risk Futures Contract March 06 Sugar SBH6 9 21 05 12 20 05 Prices 23 illustration 4 17 Low risk futures contract June 06 EuroDollar EDM6 9 20 05 12 20 05 Prices In summary the Low Risk category contains stocks and futures contracts with e bars of consistent length e and relatively low frequency of breaching of the Stability Lines 24 Medium Risk stocks and futures contracts Illustrations 4 18a through 4 20 show examples of stocks and futures from the Medium Risk watch list Notice that while the bars are fairly consistent in length they tend to occasionally breach the Tripwire and once ina while the Wall illustration 4 18a Medium Risk ABV after transition ABV 9 8 05 1 2 7 05 Prices illustration 4 18b Medium Risk HSBC Holdings PLC ADS after transition HBC 9 8 05 12 7 05 Prices 25 Illustration 4 18c Medium Risk Schering Plough CP after transition SGP 9 8 05 12 7 05 Prices 1750 1740 1730 1720 1710 1700 1690 1680
63. bar A MOXO sell signal is valid until hit Recap of the stop loss rules for both long and short trades STOP LOSS RULES FOR LONG POSITIONS STOP LOSS RULES FOR SHORT POSITIONS 1 Set initial stop at the LOWER of either the lowest low of last three price bars including the signal bar or the value of the lowest Stability Line If the low of the entry day bar is lower than the lowest Stability Line stay with initial stop until the low of the current bar is greater than lowest Stability Line then go to Rule 3 If the low of the entry day bar is higher than the lowest Stability Line go to Rule 8 Depending on your trading style risk tolerance and money management practices For an aggressive approach if the Wall blue line is the lowest Stability Line follow the Wall otherwise follow the lowest Stability Line until it crosses the Wall then follow the Wall For aless aggressive approach if the Tripwire red line is the lowest Stability Line follow the Tripwire otherwise follow the lowest Stability Line until it crosses the Tripwire then follow the Tripwire For a conservative approach if the Fence green line is the lowest Stability Line follow the Fence otherwise follow the lowest Stability Line until it crosses the Fence then follow the Fence If the ACC is greater than zero follow rule 3 above If the ACC is above zero and three consecutive red ACC bars including the current bar have occurred move u
64. celerometer e Dec 2 70 Day 10 11 16 05 Illustration 6 23 At the end of Day 10 we find that the ACC is above zero and green Moreover since the MO is above zero and green and the value of the MO signal line is lower than the value of the histogram bars a change in overall direction is not yet indicated We ll continue to observe stop loss rule 5 and follow the Fence using its value of 27 28 as our trailing stop loss red x We will follow the Fence until the ACC either shows us another three consecutive red bars or crosses the zero line into negative territory Illustration 6 23 Long trade with MOXO entry Day 10 PLL Pall CP 8 31 05 11 16 05 aLL PALL CF Stop loss at 27 28 Accelerometer e T E E LS ER PEETRE 71 Day 11 11 17 05 Illustration 6 24 At the end of Day 11 we find that the ACC is above zero and green Moreover since the MO is above zero and green and the value of the MO signal line is lower than the value of the histogram bars a change in overall direction is not yet indicated We ll continue to observe stop loss rule 5 and follow the Fence using its value of 27 47 as our trailing stop loss red x We will follow the Fence until the ACC either shows us another three consecutive red bars or crosses the zero line into negative territory Illustration 6 24 Long trade with MOXO entry Da Bit FEL y 11 PLL Pall CP 8 31 05 11 17 05 Stop loss LE at 27 AT
65. cillator and the Accelerometer TFE will guide you out of those trades usually with minimum loss To demonstrate how this works we ll take you through two trades one long and one short Exiting a long trade where the market has moved against your position The set up Assume that today is 11 17 05 On 11 11 05 TFE generates a MOXO buy signal for BMY at 22 16 Recall from Module 5 that a MOXO signal is valid until hit Your initial stop loss is at 21 15 the low of the signal bar which is also the lowest of the three most current bars as of 11 11 05 The ACC is positive and green The MO is positive and green and the value of the MO Signal Line is less than the value of the histogram bars No change in direction is indicated Your plan is to enter the trade when price equals or exceeds 22 16 and to exit when your daily stop loss is hit Illustration 7 1 depicts the set up Illustration 7 1 Set up for possible long MOXO entry BMY 9 1 05 11 17 05 fox BW MOXO entry signal at 27 16 Initial stop loss at 21 15 Momentum Oscillator Aocealenometer styl Type pe iea Rs bee er SE Neng ating I SES a SO 134 Day 1 11 18 05 Illustration 7 2 The 11 18 05 bar has exceeded our entry price and we are in the market at 22 16 Since the low of the current bar is above the Stability Lines we are now following stop loss rule 3 We are trading aggressively so we ll use the lowest Stability Line In this case the Wall
66. d 6 28 05 9 19 05 Prices Entered market Stop loss at 467 60 Momentum Oseillater ihe _ ILL Acoeleronneter Hh allli 1 if Talii Hi aq Te E atl eo Tn Te ee re oes ee DR oe ee rol il Ton Mir Marin Enon i E han Jil 2005 Aug 2005 Sep 2005 118 Day 9 9 20 05 Illustration 6 68a At the end of Day 9 we find that the ACC is positive but showing a red bar This is an early warning of a possible slow down in the speed at which price is moving However the MO is above zero and green and the value of the MO signal line is still lower than the value of the histogram bars Given the foregoing information no change in the overall upward direction is indicated We continue to observe stop loss rule 5 and are using the Safety Line at 471 20 as our trailing stop loss red x We will follow the Safety Line until we are stopped out Illustration 6 68a Long futures trade with Fractal entry GCG6 Feb 06 Gold 6 28 05 9 20 05 100 Prices Momernium Ozcillatear i TLL P Uli te Acoeleronnetesr il 1 I all i a SALETTE l il l i pie rm nA T rare re PTOA L ee STi TRL ee sees ares fel letet eed freee rat eat ec eee arene Ra ae Rl Tea a ea ee Jul 2005 Aug 2005 Sep 2005 119 Day 10 9 21 05 Illustration 6 68b The market opened today at 471 20 which means our stop loss was hit today and we are out at 471 20 Each 10 of gain or loss in Gold is worth 10 00 We
67. de equity 2 400 to Higher risk contracts One Soybean Meal one Orange Juice one Feeder Cattle Total Higher risk equity committed 2 969 Total Higher risk contracts 3 Total Contracts 16 Total equity committed 15 666 Total reserves 40 000 15 666 24 334 Market sectors represented in portfolio Grains Financials Indices Softs Livestock Metals Currencies 157 Determining Trading Mix from the Aggressive Growth Mode Level 4 Portfolio 51 000 to 100 000 Illustration 8 6 below contains the thirty four commodities that can be traded within the parameters of Secure Growth Mode Level 3 plus an additional set in bold Illustration 8 6 Aggressive Growth Mode Level 4 Portfolio 51 000 to 100 000 Lower Risk Moderate Risk High Risk Speculative 40 35 15 10 Corn Rough Rice Soybean Meal Oats Wheat Soybeans Soybean Oil Euro Dollars Municipal Bond 30 year Bonds Two year Notes Index Five year Notes Ten year Notes 1 Month Libor CRB Index Nikkei 225 a Cotton Orange Juice Lumber Coffee Lean Hogs Feeder Cattle Pork Bellies Live Cattle Gold Palladium Copper Silver Platinum Currencies Canadian Dollar US Dollar Index British Pound Australian Dollar Swiss Franc Japanese Yen New Zealand Dollar Crude Light Heating Oil For an example of Level 4 diversification we ll assume an account size of 80 000 1 Compute Max Available Trade Equity Max Available Trade Equity 80 000 4 32 000 2
68. e continue to observe rule 5 using the Tripwire at 30 08 as our trailing stop loss red x We ll follow the Tripwire until the ACC either shows three more consecutive green bars or crosses the zero line from negative to positive illustration 6 46 Short trade with MOXO entry Day 7 IP 7 27 05 9 30 05 32 00 31 75 31 50 31 25 31 00 30 75 30 50 30 25 Stop loss at 30 08 30 00 29 75 29 50 29 25 29 00 28 75 28 50 28 25 28 00 ZETA 27 50 27 25 27 00 26 75 Momen 0 50 0 00 0 50 1 00 1 50 2 0 Accel t ccelerometer 0 2500 0 1250 0 0000 0 1250 0 2500 pet 2005 i Sewers Cl ener er Aug 2005 97 Day 8 10 3 05 Illustration 6 47 At the end of Day 8 we find that the ACC is below zero and presenting two consecutive green bars This is an indication that the speed of price change is slowing down and an early warning of a potential change in short term direction However since the MO remains below zero and red and the value of the MO signal line is greater than the value of the histogram bars a change in overall direction is not yet indicated We continue to observe rule 5 using the Tripwire at 29 95 as our trailing stop loss red x We ll follow the Tripwire until the ACC either shows three consecutive green bars or crosses the zero line from negative to positive illustration 6 47 Short trade with MOXO entry Day 8 IP 7 27 05 10 3 05 32 00 31
69. e frame In a way it s a barometer of reward and risk High volatility generates enormous price swings within very short intervals Highly volatile markets offer greater potential rewards but also expose the trader to higher risk Low volatility on the other hand produces steadier more gradual increases and decreases in price As a consequence the rewards are usually less spectacular but the risk of heavy losses is also much lower Moreover each market sector has its own volatility For example the livestock group has a higher collective 152 volatility than the grains but a lower collective volatility than the currencies Therefore it is important to build a portfolio across and within all market sectors Illustration 8 2 below shows how the Secure Growth Mode portfolio is broken down for risk and diversification The commodities in the portfolio are categorized both horizontally and vertically according to their scaled volatilities Volatility increases from left to right and from top to bottom Consequently commodities in the upper left cell have much lower volatilities than those in the lower right cell Percentage amounts indicate the proportion of available trade equity to be invested in each market segment Illustration 8 2 is only a guide Whether you use the Watch Lists or do your own mapping you may find that some of the higher risk commodities are currently showing characteristics of lower risk commodities On the other hand you
70. e in a quiet pool just off the main stream If we look down river we can see that there is a fork ahead In front of us are two signs and both are green If we understand the signs what do we know about the river Well we know that the riverbed is smooth deep and running down hill We also know that there is a high volume of water and the undercurrent is swift and very strong Once we enter the main stream we know we will have no choice but to go with the current and travel down whichever fork it takes us If we try to choose the other fork the current will be way too strong to paddle against and we d probably end up capsizing So what do we know about the market when the Psychometric Evaluators show us two green bars We know that a lot more shares are being traded higher volume We also know that the trades are favoring the direction in which the current bar is moving and we know that price movement is picking up speed higher VRR Usually but not quite always the green green combination is accompanied by a close in the upper third of the price bar in an upward trend and in the lower third of the price bar in a downward trend Thus if we enter the market with two greens our best immediate strategy would be to go with the flow It would be disastrous for us to trade against the direction of the current bar 165 Illustration 9 6 The Ps B 2 200 P 2 ychometric Evaluators vith price cha 100 7 JNJ JOHNSON amp JOHNSO
71. e of a long trade in Module 6 Illustration 6 1 we used the bar with the lowest low 45 41 of the most recent three bars to set the stop loss When subtracted from the entry price 50 36 we had a range of 4 95 including the volatility factor This 4 95 represented an initial risk of 495 or 1 7 495 30 000 of our total account equity The minimum account size to make this trade using the volatility risk stop would be 16 500 If your account size were 10 000 then the most you would want to risk on this trade would be 300 On a 100 lot trade this would mean adjusting the stop loss in Module 6 Illustration 6 1 to 50 36 entry price minus 3 00 maximum risk or 50 36 3 00 47 36 For stock traders this answers the question How much am willing to risk on this trade 150 Module 8 SECTION TWO Money Management Guidelines for Trading Commodities with TFE Money management is the most important and most often neglected aspect of trading It answers the questions How much can safely risk on this trade What should my position size be and Will the reward be worth the risk According to the literature most trading gurus recommend that a trader risk no more than 2 of total account equity on any one trade Some place volatility into the mix while others talk about the virtues of diversification As with any system occasional whipsaws will occur usually but not always with a relatively small loss Howe
72. e of the MO s Signal Line is less than the value of the MO In other words the Signal Line is separating from the MO s histogram bars Area 2 in Illustration 5 1 e The third mark of a possible change in trend is when the 3SMA and the Fence cross For an upward move the value of the 3SMA is greater than the value of the Fence Area 3 in Illustration 5 1 In this case the 3SMA s value of 27 55 is larger than the Fence s value of 27 38 31 illustration 5 1 Locating a potential long trade ABV C Comp De Bebi AM ADS 9 24 2005 10 27 2005 Prices 32 50 32 00 31 50 31 00 30 50 30 00 29 50 29 00 23 50 26 00 2y 50 2y 00 26 50 26 00 25 50 25 00 24 50 Momentum Oscillator Hil ETT 2 Uo TELLI HHP Accelerometer a Oo M 0 50 0 25 0 00 0 25 Sep 2005 Daos 9 Nov 2005 When all three criteria are met we have confirmation that a change in direction from down to up could be in the making Illustration 5 2 shows what happened over the next few weeks Prices 32 50 32 00 31 50 31 00 30 50 30 00 29 50 29 00 26 50 25 00 27 50 27r 00 26 50 26 00 25 50 25 00 24 50 Momentum Oscillator a g Accelerometer J A a i Ne Ng hn a in 0 50 0 25 0 00 0 25 T Der2obos Now 2005 I 1 1 1 1 1 1 1 1 Sep 2005 32 Setup for possible short trade Let s move on to Illustration 5 3 for an example of the set up for a possible short trade using the
73. e of the lowest stability line below the low of the signal bar 2 If the low of the entry day bar is lower than the farthest Stability Line stay with initial stop until the low of the current day s bar is above the farthest Stability Line then go to Rule 3 lf the low of the entry day bar is higher than the farthest Stability Line go directly to Rule 3 3 Depending on your trading style risk tolerance and money management practices a Foran aggressive approach if the Wall blue line is the farthest Stability Line follow the Wall otherwise follow the farthest Stability Line until it crosses the Wall then follow the Wall b Fora less aggressive approach if the Tripwire red line is the farthest Stability Line follow the Tripwire otherwise follow the farthest Stability Line until it crosses the Tripwire then follow the Tripwire c For a conservative approach if the Fence green line is the farthest Stability Line follow the Fence otherwise follow the farthest Stability Line until it crosses the Fence then follow the Fence 4 Ifthe ACC is greater than zero follow rule 3 above 5 If the current ACC histogram bar is above zero and three consecutive red ACC bars including the current bar have occurred move up one Stability Line for each set of three red ACC bars For example if you are currently following the Wall and there are three consecutive red ACC bars including the current bar then move up to the Tripwire
74. e red bars or crosses the zero line into negative territory LL Pall CP 8 31 05 11 10 05 ao E E illustration 6 19 Long trade with MOXO entry Day 6 P re T ALLS Fali it Y E Stop loss at 26 34 Accelerometer ce en A T E hel Mee eee ES SS ep 2005 Oct 2005 67 Day 7 11 11 05 Illustration 6 20 At the end of Day 7 we find that the ACC is above zero but is now showing two consecutive red bars However since the MO is above zero green and the value of the MO signal line is lower than the value of the histogram bars a change in overall direction is not yet indicated We ll continue to observe stop loss rule 5 and follow the Tripwire Thus we will use the Tripwire s value of 26 53 as our trailing stop loss red x We will follow the Tripwire until the ACC either shows us another three consecutive red bars or crosses the zero line into negative territory Illustration 6 20 Long trade with MOXO entry Day 7 P J PAI FE kaa TEL ALL LL Pall CP 8 31 05 11 11 05 T E E top loss at 26 53 Accelerometer ce rs al REE el Ge ee ES TT ep 2005 Oct 2005 68 Day 8 11 14 05 Illustration 6 21 At the end of Day 8 we find that the ACC is above zero but is now showing three consecutive red bars a warning of a slow down in the speed at which price is moving However since the MO Is above zero green and the value of the MO signal line is lower than the value of the histogram
75. e speed at which price is moving is beginning to slow In addition although the MO is above zero it is showing a red bar This is an indication that momentum is beginning to weaken However since the value of the MO signal line is lower than the value of the histogram bars a change in overall direction is not yet indicated Since the ACC had presented us with three consecutive red bars it is time to observe stop loss rule 5 Thus we will move from the Wall to the Tripwire At 22 09 we will use the Tripwire as our stop loss point red x Illustration 7 6 Long trade with MOXO entry Day 5 BMY 9 1 05 11 25 05 Prices Entry at 22 16 WE Ft Fa ae i EFJ Pa et es stop loss be amp at 22 09 3 l Momentum Oscillator Accelerometer Det 2005 Now 2005 Deo 200 139 Day 6 11 28 05 Illustration 7 7 TFE guided us out of this trade at 22 09 for a minimal loss of 0 07 per share of es pe oe pe pee eo eo ie mmn m Illustration 7 7 Long trade with MOXO entry Day 6 BMY 9 1 05 11 28 05 Price Stopped out at 22 09 stop loss at 22 09 Momentum Oscillator Accelerometer di l baas OS Now apg T Be ZOE 140 Let s now take a look at how TFE guides us into through and out of a short trade when the market turns against our position Exiting a short trade where the market has moved against your position The set up Assume that today is 10 10 05 and we are foll
76. een bars so since we are trading aggressively we ll use the Wall as our reference point With three consecutive ACC bars we observe rule 5 which moves us one Stability Line down In this case the Tripwire at 22 38 becomes our trailing stop loss so we will set that as our stop loss point red x We ll follow the Tripwire until the ACC either shows three more consecutive green bars or crosses the zero line from negative to positive Illustration 6 31 Short trade with Fractal entry Day 1 ORA 7 26 2005 10 5 2005 Prices B Stop loss at 22 38 Accelerometer LT l E slal EF as 2 Cui E ia TT rrr i E i a ii i a i i ii i i i E i i E i i i a i a ii i a i i i Aug 2005 Sep 2005 Oct 2005 81 Day 2 10 6 05 Illustration 6 32 At the end of Day 2 we find that the ACC is below zero and is showing a red bar We ll continue to observe stop loss rule 5 and follow the Tripwire Thus we will use the Tripwire s value of 22 21 as our trailing stop loss red x We will follow the Tripwire until the ACC either shows us another three consecutive green bars or crosses the zero line into positive territory In addition since the MO is below zero and red and the value of the MO signal line is greater than the value of the histogram bars a change in overall direction is not yet indicated Illustration 6 32 Short trade with Fractal entry Day 2 ORA 7 26 2005 10 6 2005 Prices E i Fo
77. ely matches stocks and futures contracts to TFE s strengths as a trend following system If the stock does not map do not trade it Step One Create and populate your portfolio The first step in the process is to create a portfolio in TFE that will contain the symbols you are interested in mapping Do so by clicking on the Add Portfolio icon in the upper left corner of the screen The Add Portfolio dialog box shown below will pop up Name the portfolio and set it to retrieve one year of data then click OK Your portfolio is now ready to accept symbols See Illustration 4 5 14 fe Add Portfolio Portholio Hame Portfolio Description How Many Years of Data 1 Year Recommended fears 3 Years 4 ears Select a date 1271172000 o A Cancel To add symbols to your portfolio click on the Add Portfolio icon located in the upper left corner of the screen The Add Symbols dialog box shown below will pop up If you have typed a column of symbols in a text editor such as NotePad you can select the I want to import a list from a file button This feature is handy if you have a large list of symbols because it will allow you to import the file without having to enter each individual symbol If you have only a few symbols click on the I Know the symbols and will type them button You can then type in each symbol When you are finished click OK and your symbols will load into the portfolio you created See Illustrati
78. end direction is 162 downward When the signal line is cutting through the histogram bars then market momentum is strong Let s look at Illustration 9 3a the E Wave Oscillator without the price chart and examine it for evidence of overall market direction EIDO JDO 2 aa D wf ka 002 Illustration 9 3a E Wave Oscillator JNJ 1 2 50 2 00 1 50 1 00 if y 0 50 li pint 0 00 0 50 Jii Ny 4 00 i 1 50 2 00 Pac ba ee Pa et Pe Pe Pe bP bP Pa tb reenact Pa ea Pa a Ba a Dec 2001 Jan 2002 Feb 2002 Mar 2002 Apr 2002 May 2002 The dotted vertical arrows indicate separation of the signal bar from the histogram bars with red representing downward pressure or direction and green representing upward pressure or direction The solid vertical arrows indicate where the histogram bars cross the zero line and represent confirmation of major directional change The solid horizontal arrows show the extreme limits of directional movement We do not want to be long the market when the E Wave histogram bars are below the zero line The Psychometric Evaluators When we make a decision to buy sell enter or exit or stay that decision is combined with the decisions of all the other traders in the market The Psychometric Evaluators are a pair of histograms that depict the current day s volume the Volume histogram and a ratio of the current volume to the day s trading range the Volume Range Ratio VRR histogram
79. entered the market at 453 90 and exited at 471 20 for a gain of 173 points which translates to about 1 730 in gains for this trade Illustration 6 68b Long futures trade with Fractal entry GCG6 Feb 06 Gold 6 28 05 9 21 05 Prices Stopped outat i 474 20 Entered market iy i aAA at i ie Ki kH A i a 1 3 Ue Wy FE ca h ae ee IF Aea APSR 5 cae ie S Momentum Oselllatar LE AIII l i a HI dia E S Acgelerometer Eer thha LL yee i Il laa Next let s examine another future s trade this time using a short MOXO entry 120 A Short British Pound Futures Trade with Momentum Crossover MOXO Entry from Entry to Exit Setup Day 9 16 05 Illustration 6 69 In Illustration 6 69 below we can see that the Momentum Oscillator has crossed the zero line and that the value of 3SMA Safety Line at 1 8088 is lower than the value of the Fence at 1 8167 This satisfies the conditions for a valid MOXO entry The low of the signal bar is 1 7991 We will set our entry point at 2 ticks below that price Since British Pound s tick value is 0001 our entry price would be 1 7991 minus 0002 or 1 7989 Also the highest high of the last three price bars including the signal bar for this MOXO entry is 1 8274 The highest Stability line above the high of the signal bar is the Tripwire at 1 8245 Since the value of the Tripwire is not above the value of the highest high of the last three p
80. entum and depicts minor waves When coupled with the Momentum Oscillator it aids in making inferences about how the mass mind has affected the day s trading Formulas are derivatives of the formula for the Momentum Oscillator These components combine to provide you with all of the information you need to make sound trading decisions The modules that follow contain detailed descriptions of the system s indicators Other Indicators The Gatekeeper Histogram assists you in identifying range bound channels E wave Oscillator confirms that the momentum of a current trend has turned and that it s time to exit the market It is a precise indicator of overall market rhythm Formulas for this histogram are based on fractal ratios The Psychometric Evaluators a pair of histograms Volume and Volume Range Ratio that work with the current day s volume to give you a picture of the how the mass mind has affected the day s trading Because of ongoing research findings the last three indicators are now optional Their use will be summarized in Module 9 How do trade with The Fractal s Edge Read the following instructional modules to find out Module 3 The Gatekeeper Staying Out of Trouble This module introduces you to the Gatekeeper a tool to assist you in deciding when it is safe to enter the market and when it is time to exit This tool will also help you to know how long to stay with a trend so that you can maximize the profit poten
81. eously one below the other In addition the software has a cross hair cursor and contains a drawing component that allows you to draw straight lines in any direction However it does not draw arrows circles or other illustrative devices We have added them simply for clarification Below Illustration 2 1 you will see a brief description of the system indicators Illustration 2 1 View of Fractal s Edge system diepniee 72 The Fractal s Edge Advanced Trading Tool a a my File Data Help indicator Value Open 18 05 High 18 55 Low 18 02 Close 18 51 Fence 17 7350 Tripwire 17 5760 wal 17 5031 Indicator Value GateKeeper 0 011534 Ewave 0 02119 EWave Signal 0 04188 Mom Osc 0 36047 M O Signal 0 034312 Accelerometer 0 21 756E Volume 9384600 Momentum Oscillator z tiiij T LIHEG LiLi z I YRR Lopun Accelerometer Parame Value Symbol AMD Name ADVANCED The Fractal s Edge Stock and Futures Trading Software features a visually rich environment that converts market data into the following charts and graphics The below is a description of the components Portfolio and Symbol tables located on the left allows you to quickly thumb through the stocks or futures you are interested in Data tables located on the ri
82. er share Stopped out at 25 10 Momentum Oscillator AT TTT Accelerometer le el weet Weta we a e ace ep 2005 Oct 4005 76 You have followed two successful long stock trades one with a Fractal entry and one with a MOXO entry Remember that futures are traded with the same set of rules as stocks We ll now turn our attention to short trades with Fractal and MOXO entries A Short Stock Trade with Fractal Entry from Entry to Exit Fractal Entry We ll begin this part of our instruction with the set up for a short trade using a Fractal entry Let s assume that the date is 10 4 05 and we re looking at a chart of Ormat Technologies Illustration 6 29 Recall from Module 5 that for a Fractal entry we e Find the most recent valid sell fractal marked with a red S In this case it s the 9 30 05 bar e Subtract two ticks from the low of the sell fractal bar to get the entry point In this case the low 21 97 02 21 95 Illustration 6 29 Possible short trade with Fractal entry ORA 7 26 2005 10 4 2005 10x Stop loss set at high of third bar hack 23 46 Highest Stability Line is Wall at 2 94 Fractal bar low minus ticks 71 95 Accelerometer MiG a laul He Hi rrit eryr ii San 0g i E i a i i a I i j 4 F I a ii i a F i Aug 2005 Oct 2005 11 Initial Stop Loss Recall from Module 5 that for the first day stop loss for a short position we will consider the higher o
83. est of the three most recent bars You may of course employ a different method of determining a stop loss that is in keeping with your risk tolerance and money management practices Illustration 5 13 Setting the initial stop loss for a long trade with Fractal entry ANF 8 29 05 10 25 05 Fractal bar high plus 2 ticks 50 36 Stop loss set at low of third bar back 45 41 FARNSGS NORTH Teo oe Accelerometer Sep 2005 Det 2005 Nov 2005 42 In Illustration 5 14 the lowest low of the last three price bars for this MOXO entry is 25 52 The lowest Stability Line below the low of the signal bar is the Fence at 25 66 However the value of the Fence is not below the lowest low of the most recent three price bars So we ll set our first day stop loss point at 25 52 red x the lowest of the three most recent bars You may of course employ a different method of determining a stop loss that is in keeping with your risk tolerance and money management practices illustration 5 14 Setting the initial stop loss for a long trade with MOXO entry PLL Pall CP 8 31 05 11 2 05 Momentum Oscillator MOXO Entry Accelerometer Det 2005 7 Nov eng ees Short positions In determining the first day stop loss for a short position we will consider the higher of either e the highest high of the most recent three price bars including the signal bar e or the highest stability line above the high of the
84. every case the fractal bar the one with the arrow is higher lower than the two or more bars preceding it and the two or more bars following it Note There are times when two middle bars with the same high low occur see circled fractals in Illustration 5 5 In that case the most recent of the two is the fractal bar llustration 5 5 Frequently occurring fractal formations For stocks the fractal bar is considered valid only if it is completely clear of all stability lines For futures the fractal bar is considered valid only if at least 62 of the bar extends beyond all stability lines Don t worry about this though because the TFE software distinguishes between stocks and futures and automatically identifies valid buy and sell fractals for you It marks valid buy fractals with a green B and valid sell fractals with a red Ss NOTE Once generated fractals remain valid until they are hit Theoretically a fractal is valid until price rises two ticks above a buy fractal bar s high or falls two ticks below a sell fractal s low In reality most fractals over 21 trading days old will have already been superceded by other signals Buy Fractals We ll use Illustration 5 6 to demonstrate how we enter the market using a fractal Let s suppose we want to buy Abercrombie and Fitch ANF e Find the most recent valid buy fractal marked with a green B In this case it s the 10 21 05 bar e Add two ticks to the high of the buy frac
85. f either 1 the highest high of the last three price bars including the signal bar 2 or the highest stability line above the high of the signal bar In Illustration 6 29 above the highest high of the last three price bars including the signal bar for this Fractal entry is 23 46 The highest Stability line above the high of the signal bar is the Wall at 22 94 Since the value of the Wall is not above the value of the highest high of the last three price bars we ll set our first day stop loss point at 23 46 red x the highest of the three most recent bars You may of course employ a different method of determining a stop loss that is in keeping with your risk tolerance and money management practices Now that we have determined our entry point and initial stop loss point and have either given the information to our broker or entered it into our electronic trading platform we are ready to trade Our overall plan is to enter the market when the price equals or falls below 21 95 and in accordance with the initial stop loss rule we have set our initial stop loss at 23 46 To demonstrate the functionality of the stop loss algorithms we ll trade aggressively Let s see what occurs on the next day 10 5 05 78 Day 1 10 5 05 Illustration 6 30 The 10 5 05 bar has fallen below our entry price and we are in the market at 21 95 illustration 6 30 Short Trade with Fractal Entry Day 1 ORA 7 26 200510 5 20057 26 20051 0 5 2005 Prices
86. fr 27 50 of 25 27 00 26 75 Momen 0 50 0 00 0 50 1 00 1 50 2 00 Accel t ccelerometer 0 2500 0 1250 0 0000 0 1250 0 2500 pet 2005 on o o Uo o o oO Aug 2005 101 Day 12 10 7 05 Illustration 6 51 At the end of Day 12 we find that the ACC is below zero and presenting a green bar However since the MO remains below zero and red and the value of the MO signal line is greater than the value of the histogram bars no change in overall direction is indicated We continue to observe rule 5 using the Tripwire at 29 10 as our trailing stop loss red x We ll follow the Tripwire until the ACC either shows three more consecutive green bars or crosses the zero line from negative to positive illustration 6 51 Short trade with MOXO entry Day 12 IP 7 27 05 10 7 05 32 00 i ras 31 50 31 25 31 00 30 75 30 50 30 25 30 00 od r5 29 50 2d 25 29 00 20 ro 20 50 20 25 20 00 aeea ef al of au 2 U0 26 75 Stop loss at 29 10 Momen 0 50 0 00 0 50 1 00 1 50 2 0 Accel t ccelerometer 0 2500 0 1250 0 0000 0 1250 0 2500 pet 2005 on o o Uo o o oO Aug 2005 102 Day 13 10 10 05 Illustration 6 52 At the end of Day 13 we find that the ACC is below zero but is showing two consecutive green bars This is an indication that the downward speed of price movement is slowing In addition although the MO remains below zero and the value of the MO s
87. futures trades use the same rules and methodology You have learned how to identify long and short fractal and MOXO entry signals and stop loss points You have seen how TFE guides you into through and out of profitable trades Let s now examine two futures trades one long fractal entry and one short MOXO entry 109 Long Gold Futures Fractal Entry Trade Setup Day 9 7 05 Illustration 6 59 On 9 7 05 we can see that a buy fractal has formed and TFE has generated a buy signal based on the 9 2 05 fractal bar The high of the fractal bar is 453 70 Gold has a tick value of 0 10 That is for every tick price moves 0 10 on the price chart So we will set our entry point at 2 ticks 0 20 above that price or 453 90 Also the lowest low of the last three price bars including the signal bar for this Fractal entry is 439 1 The lowest Stability line below the low of the signal bar is the Fence at 445 20 Since the value of the Fence is not below the value of the lowest low of the last three price bars we ll set our first day stop loss point at 439 10 red x the lowest of the three most recent bars You may of course employ a different method of determining a stop loss that is in keeping with your risk tolerance and money management practices Illustration 6 59 Possible long trade with Fractal entry GCG6 Feb 06 Gold 6 28 05 9 7 05 foo 0 GCGO6 Gold Feb 06 Prices Fractal entry point 453 90 b pe R i
88. ght displays price data values of the various indicators and information about the stock or futures contract you are trading A standard price chart depicts the high the low and the close Can be set for either candlestick or OHLC bars Initiating Fractal Signals fractal formations appearing on the price chart indicate entry points for trading and pyramiding When combined with the Gatekeeper these fractals show you where to place the initial order On the chart initiating buy fractals are marked with a green B and initiating sell fractals with a red S The Gatekeeper assists you in preventing unwise trades and provides entry and exit points for valid trades It also helps you to know how long to stay with a trend so that you can maximize the profit potential of your trade It is comprised of a series of three moving average Stability Lines colored green red and blue on the chart in Illustration 2 1 and a Safety Line colored white superimposed over the individual price chart Averages are based on ratios derived through the application of fractal geometry The Momentum Oscillator shows the strength and direction of the market s underlying momentum Based on concepts from fractal geometry and wavelet theory it depicts the major price waves The Accelerometer acts as an early warning signal alerting you to future changes in a market s trend It is extremely sensitive to changes in the acceleration or deceleration of market mom
89. he MO is below zero and red and the value of the MO signal line is greater than the value of the histogram bars a change in overall direction is not yet indicated We ll continue to observe stop loss rule 5 using the Fence s value of 19 94 as our trailing stop loss red x We will follow the Fence until the ACC either shows us another three consecutive green bars or crosses the zero line into positive territory Illustration 6 37 Short trade with Fractal entry Day 7 ORA 7 26 2005 10 13 2005 Stop loss at 4 19 94 5 5 Accelerometer 0 50 O25 waggle ii Sati a a 0 00 125 0 50 i omer eG 7a s HITT Le att i a i i i i a i i i i E i i E i i i i i a a E i E i i a f i Aug 2005 Sep 2005 Oc200 8 7 Day 8 10 14 05 Illustration 6 38 Our stop loss was hit at 19 94 and we are out of this trade Our entry point was 21 95 so we experienced a gain of 2 01 per share Illustration 6 38 Short trade with Fractal e ntry Day 8 ORA 7 26 2005 10 14 2005 opped out 5 at19 94 Accelerometer 0 50 025 ALL eg pe iatl l L stl av i i I ooo 1 my I LL m i aE I a i L a I I i Oct 2005 ELEK a i 4 ii i a E i Aug 2005 88 A Short Stock Trade with Momentum Crossover MOXO Entry from Entry to Exit We will now examine another short trade but this time using the Momentum Crossover MOXO sell signal Let s assume that the date
90. hose current value at 1 8023 is the highest of the three Stability Lines Therefore we will use 1 8023 as our trailing stop loss red x Illustration 6 77 Possible short trade with MOXO entry BPZ5 7 15 05 9 28 05 100 1 545000 1 840000 1 835000 1 830000 1 825000 1 820000 1 515000 Stop I 1 810000 Op IOSS 1 805000 at 1 8023 1 800000 Entered trade 1 795000 1 790000 at 1 7989 1 785000 1 780000 1 775000 1 770000 1 765000 1 760000 1 755000 1 750000 1 745000 1 740000 1 735000 1 730000 1 725000 Momentum Oscillator 0 037250 0 015625 0 000000 0 015625 0 031250 4cceleromete 0 0100 0 0050 0 0000 0 0050 u a oe ee aa l tc oe po oo a bee UW Me ft a bo ot Aug 2005 Sep 2005 Oct 2005 129 Day 9 9 29 05 Illustration 6 78 At the end of Day 9 we find that the ACC is below zero and showing three consecutive green bars This is a very strong warning that the speed at which price is moving is slowing down However the MO is below zero and red and the value of the MO signal line is greater than the value of the histogram bars Thus while price movement may be slowing a change in overall direction from down to up is not indicated at this time Nevertheless with three consecutive green ACC bars stop loss rule 4 takes effect requiring us to move down one Stability Line Thus we will move from trailing the Wall to trailing the Tripwire Therefore we will use the Tripwire s value of 1 7836
91. ice movement tends to be erratic The chart doesn t differ too much from the examples in Illustrations 4 7 4 10 above Illustration 4 11 Low Risk Alcoa Inc prior to transition AA 1 21 05 4 25 05 32 00 alra 31 50 31 25 31 00 SU 75 30 50 30 25 30 00 ed fo 29 50 234 25 1i 23 00 20 fo 20 50 20 29 20 00 offal ef 2r 29 Prices In Illustration 4 12 we can see that as time goes forward bar length is shortening and becoming more consistent Chart behavior is somewhere between a poor candidate and a good candidate 19 Illustration 4 12 Low Risk Alcoa Inc beginning transition AA 6 7 05 9 7 05 fox od fa 29 50 as 29 00 20 ro 20 50 20 25 20 00 offal fal PRA 2r 00 26 75 26 50 26 25 26 00 Zp 25 50 20 25 a illustration 4 13 shows Alcoa s behavior after transition into its present stable cycle Notice that the bars are shorter and more uniform in length Notice also that only the Fence gets crossed occasionally the Tripwire rarely and the Wall only during a major change in direction This stock is mapped and can be included in the watch list It can be traded with confidence as signals are generated because it is in sync with TFE Prices 29 00 20 50 20 00 2 50 2 00 26 50 26 00 25 50 25 00 24 50 24 00 23 50 23 00 22 50 22 00 20 lllustrations 4 14a through 4 17 show additional examples of Low Risk stocks and futures that have been mapped for TFE Illustr
92. ignal line is greater than the value of the histogram bars the MO is showing a green bar This is a strong indication that change in overall direction may occur in the near future We continue to observe rule 5 using the Tripwire at 28 88 as our trailing stop loss red x We ll follow the Tripwire until the ACC either shows three consecutive green bars or crosses the zero line from negative to positive illustration 6 52 Short trade with MOXO entry Day 13 IP 7 27 05 10 10 05 100 Stop loss at 28 88 Momen 0 50 Accelerometer Sqr Reel CREM E Tee ae eae a aL Aug 2005 Sep 2005 Oct 2005 103 Day 14 10 11 05 Illustration 6 53 At the end of Day 14 we find that the ACC has crossed the zero line This is an indication that the downward speed of price movement is slowing Also although the value of the MO signal line is greater than the value of the histogram bars the MO is showing two consecutive green bars This is a very strong indication that price direction may be changing We go to stop loss rule 6 which requires us to immediately move to the Safety Line We will use the current value of the Safety Line 27 93 as our trailing stop loss red x We will follow the Safety Line until we are stopped out illustration 6 53 Short trade with MOXO entry Day 14 IP 7 27 05 10 11 05 32 00 31 75 31 50 31 25 31 00 30 75 30 50 30 25 30 00 29 75 29 50 24 25 24 00 20 75 28
93. ignal line is still lower than the value of the histogram bars Thus a change in overall direction is not yet indicated However the ACC has crossed the zero line requiring us to observe stop loss rule 5 and move our stop loss point to the Safety Line The Safety Line s current value is 455 70 Therefore we will use 455 70 as our trailing stop loss red x and will follow the Safety Line until we are stopped out Illustration 6 64 Long futures trade with Fractal entry GCG6 Feb 06 Gold 6 28 05 9 1 4 05 SCGO6 Gold Feb 06 Prices Entered market at 453 90 Momnerium Oseillater Accelerometer vee a aL my iter Tl haa 115 Day 6 9 15 05 Illustration 6 65 At the end of Day 6 we find that the ACC is has crossed the zero line from negative to positive and is now showing a green bar In addition the MO remains above zero and is also showing a green bar Moreover the value of the MO signal line is still lower than the value of the histogram bars Thus a change in overall direction from up to down is not yet indicated We continue to observe stop loss rule 5 and are using the Safety Line at 457 60 as our trailing stop loss red x We will follow the Safety Line until we are stopped out Illustration 6 65 Long futures trade with Fractal ce ie Feb 06 Gold 6 28 05 9 15 05 Prices PNA Ae market me af 1 Stop loss at 457 60 eas i pA E 5 a ooo 5 Momnerniun Oseilstai i
94. ill use 1 8163 as our trailing stop loss red x Illustration 6 71 Possible short trade with MOXO entry BPZ5 7 15 05 9 20 05 100 1 545000 1 840000 1 835000 i 1 830000 RS 1 825000 1 820000 KAUSS Stop loss at 1 8163 ea 1 870000 Ly 1 805000 1 800000 Entered trade 1 795000 1 790000 at 1 989 1 785000 1 780000 1 775000 1 770000 1 765000 1 760000 1 755000 1 750000 1 745000 1 740000 1 735000 1 730000 1 725000 Momentum Oscillator 0 037250 0 015625 0 000000 0 015625 0 031250 4cceleramet 0 0100 0 0050 0 0000 0 0050 oa ae Nee a ee Ce ee I a er ee I a ee ea oa Dilan etree gee steers gate Aug 2005 sep 2005 Oct 2005 123 Day 3 9 21 05 Illustration 6 72 At the end of Day 3 we find that the ACC is below zero and showing two consecutive green bars This is a strong early warning that the speed at which price is moving is slowing down Also although the MO is below zero it is showing one green bar an indication that the strength of the downward trend may be weakening However the value of the MO signal line is greater than the value of the histogram bars Thus a change in overall direction is not indicated at this time We are still obServing stop loss rule 3 and are trailing the Wall whose current value at 1 8164 just above the Tripwire which is at 1 8136 Therefore we will use 1 8164 as our trailing stop loss red x illustration 6 72 Possible short trade with M
95. ipwire When price crosses the Fence it serves as a reminder to pay close attention to what the MO and ACC are telling us The Safety Line The pink moving average line is the Safety Line It s a 3 period simple moving average 8SMA that provides information for a safe exit for profit as well as an exit point for safety when TFE s other indicators warn us to get out of the market quickly Illustration 3 2 Interaction of the Stability Lines on a daily chart Alcoa Inc AA 9 8 2005 12 7 2005 100 Prices Review of the Gatekeeper The Gatekeeper is a series of three Stability Lines plus a Safety Line that combine to help us know when to enter the market when to stay with the current trend and when to exit the market The blue Stability Line otherwise known as the Wall e acts as a measure of long term market direction e provides information for where to place an initial stop loss point The red moving average line or Tripwire e provides information for setting stop loss points after the first day in the market e acts as a measure of the market s intermediate direction e provides an early warning that the trend may be changing The green Stability line or Picket Fence e is ameasure of the market s short term direction e reminds us to pay attention to the MO and ACC when price crosses it e is a3 period simple moving average SSMA e provides information for a safe exit when TFE s other indicators warn us to get out of
96. lity Lines the Momentum Oscillator MO and the Accelerometer ACC playing a more dominant role while the Gatekeeper Histogram the E Wave and the Psychometric Evaluators have become redundant This does not mean that they don t have value It just means that they are now optional Below is a brief description of each optional indicator The Gatekeeper Histogram The Gatekeeper Histogram was designed to 1 provide a confirmation of the Gate s status and 2 to locate channeling range bound markets It is actually a histogram chart of two of the three Stability Lines that make up the Gatekeeper adjusted to give us an early warning of the gate s closing The gate closes whenever two or more of the Stability Lines are intertwined When the gate is closed a trade should not be considered Observe in Illustration 9 1 that the Gatekeeper histogram broadens as the gate Is opening blue arrows and narrows as the gate is closing red arrows The gate is open for long trades when the value of the Fence is greater than the value of the Tripwire and the value of the Tripwire is greater than the value of the Wall The gate is open for short trades when the Wall is greater than the Tripwire and the Tripwire is greater than the Fence Histogram bar positive values indicate upward price movement while negative values indicate downward movement Illustration 9 1 Gatekeeper histogram showing gate opening and closing JNJ 2 8 2002 5 13 2002
97. ll of this is that you don t need a college degree or even a high school education to do well trading stocks or futures However you do need some training you need an objective system and you need a plan This manual provides everything you ll need to get started to become successful and to build real wealth So if you re ready let s get going Purpose The purpose of this Basic Course Book is to help you understand and use The Fractal s Edge an innovative trading system for the stock and futures markets While the system is based on principles and concepts from Chaos Theory Wavelet Theory and Quantum Mechanics the software performs most of the functions automatically So you won t need any special ability with math or computer programming We will show you exactly how to enter the market data and interpret the results Unique Approach The Fractal s Edge Stock and Futures Trading Method will show you that what happens in the market is not random There is an underlying order behind price movement As the underlying structure of the market becomes clear to you through an understanding of the principles and methods taught in this course you will begin to reap the financial rewards The Fractal s Edge TFE is unique in that it does not attempt to predict the future Rather it is a tool that helps you to recognize and go with the market s current flow Mastering this system will give you greater peace of mind because you won t need to keep up
98. llustration 6 40 Short trade with MOXO entry Day 1 IP 7 27 05 9 22 05 Acoelerometer Aug 2008 bea 91 Day 2 9 23 05 Illustration 6 41 At the end of Day 2 we find that the ACC is below zero and Is red In addition since the MO Is below zero and red and the value of the MO signal line is greater than the value of the histogram bars a change in overall direction is not yet indicated Thus we ll continue to observe stop loss rule 3 Up to now Tripwire has been the highest Stability Line Today however the Wall s value at 30 95 is the highest so we will use that value as our trailing stop loss red x illustration 6 41 Short trade with MOXO entry Day 2 IP 7 27 05 9 23 05 i Ss eS ee ce he SAS rt i ee as Stop loss at 30 95 5 Accelerometer Oct 2005 92 Day 3 9 26 05 Illustration 6 42 At the end of Day 3 we find that the ACC is below zero and is showing a green bar a warning that the speed of downward price movement is slowing However since the MO is below zero and red and the value of the MO signal line is greater than the value of the histogram bars a change in overall direction is not yet indicated We ll continue to observe stop loss rule 3 and follow the Wall Thus we will use the Wall s value of 30 90 as our trailing stop loss red x illustration 6 42 Short trade with MOXO entry Day 3 IP 7 27 05 9 26 05 100 NA
99. lots representing 30 of the 1000 shares at a price no greater than 45 00 per share 6 750 2 300 e Inthe high risk category we can purchase 200 shares two 100 share lots representing 20 of the 1000 shares at a price no greater than 45 00 per share 4 500 2 200 Let s see what happens if one of the low risk stocks we want to trade is at a price over 45 00 per share say at 65 00 Assuming the 30 000 account above and 50 margin we would put up 3 250 leaving us with 8 000 of our initial 11 250 In keeping with our goal of five low risk stocks we could still enter four 100 lot trades at a maximum of 40 00 per share 8 000 2 400 The idea here is that you can be flexible in position size and still meet your diversification goals This answers the question What should my position size be Volatility Risk 4 Because we are making short term trades we need to include a measure of short term volatility in our stop loss TFE takes volatility into account when computing stop loss points by using the highest high or lowest low of the three most recent bars including the signal bar This gives us a reliable measure of short term volatility for short term trading We want this stop loss to represent no more than 3 of our total account equity If your account equity is 30 000 then 3 of that amount would be 900 On the other hand if your account equity is 10 000 then 3 of that amount would be 300 In our exampl
100. low the Tripwire otherwise follow the highest Stability Line until it crosses the Tripwire then follow the Tripwire For a conservative approach if the Fence green line is the highest Stability Line follow the Fence otherwise follow the highest Stability Line until it crosses the Fence then follow the Fence If the ACC is less than zero follow rule 3 above If the ACC is below zero and three consecutive green ACC bars including the current bar have occurred move down one Stability Line for each set of three green ACC bars For example if you are currently following the Wall and there are three consecutive green ACC bars including the current bar then move down to the Tripwire When the next set of three greens occurs move down to the Fence and so on until stopped out If the current ACC histogram bar crosses the zero line from negative to positive move immediately to the 3SMA Safety Line and follow it Other than on entry day if the 3SMA Safety Line crosses the Fence and the value of the Fence is less than the value of the 3SMA Safety Line move to and follow the 3SMA Safety Line as your stop loss 171
101. n 6 75 At the end of Day 6 we find that the ACC is below zero and red The MO is also below zero and red and the value of the MO signal line is greater than the value of the histogram bars Thus a change in overall direction from down to up is not indicated at this time The foregoing information indicates that the downward momentum is still strong We are still observing stop loss rule 3 and are trailing the Wall whose current value at 1 8117 is the highest of the three Stability Lines Therefore we will use 1 8117 as our trailing stop loss red XE illustration 6 75 Possible short trade with MOXO entry BPZ5 7 15 05 9 26 05 100 1 545000 1 840000 1 835000 1 830000 1 825000 1 820000 N NS 1 815000 Stop loss at 1 8117 510000 f i 1 805000 E 1 800000 Entered trade 1 795000 at 1 7989 1 790000 1 785000 1 780000 1 775000 1 770000 1 765000 1 760000 1 755000 1 750000 1 745000 1 740000 1 735000 1 730000 1 725000 Momentum Oscillator 0 021250 0 015625 0 000000 0 015625 0 031250 4cceleromete 0 0100 0 0050 0 0000 0 0050 a a o Da oa aaa l loo Go o oOo 6 oO o go te eter te Aug 2005 sep 2005 Oct 2005 127 Day 7 9 27 05 Illustration 6 76 At the end of Day 7 we find that the ACC is below zero and showing one green bar This is an early warning of a possible slowing up of the speed at which price is moving The MO is also below zero and red and the value of the MO signal line is grea
102. n a daily chart The blue moving average line The Wall provides information for setting the first day s stop loss and acts as a measure of the market s long term direction In fact it marks the boundary between stability and chaos and is like a high stone wall that the price must clear before it makes a major change in direction That is why we call it The Wall The Tripwire The red moving average line or Tripwire provides information for setting stop loss points after the first day in the market It also acts as a measure of the market s intermediate direction and provides an early warning that the trend may be changing If the price closes between the Tripwire and the Wall the red and blue Stability Lines it is a warning to prepare to exit your trade However since all of the constituents of The Fractal s Edge should be used together the other components may indicate only that you tighten your stops You ll learn more about this later The Picket Fence The green moving average line or Picket Fence is a measure of the market s short term direction It carries information for tightening stop loss points It s also like a little Picket Fence that is relatively easy for price to jump over Particularly toward the end of a trend price will cross the Fence and enter the area between the Fence and the Tripwire This is still a safe area but as more and more successive price bars collect there the easier it will be for them to cross the Tr
103. nation or we ll have to prepare take a detour In the market a Green Red combination offers us the greatest potential for getting in on the beginning of a trend Almost all major price moves end with a Green Red as one of the top bottom three bars Illustration 9 7 solid arrows Knowing this can help us identify the beginning of a trend However while almost all trends end with Green Red not all Green Red combinations mark the end of a trend Green Reds appear quite often and if they don t end a trend they let us know the current one will go on until the Psychometric Evaluators show us the next Green Red combination Illustration 9 7 dotted arrows Green Reds signify the last great battle between buyers bulls and sellers bears Buyers want the price to rise sellers want the price to fall More and more shares are being traded but there is less price movement in relation to the volume coming in In the river analogy the farmers are duking it out at the gates and whoever wins that s the way the water will flow in the market that s the way the trend will go The course concludes with Module 10 a recap of signals and entry and exit points 168 References Dalton J F Jones E T and Dalton R B Mind over markets Chicago IL Probus Publishing Co 1990 Kindelberger C P Manias panics and crashes New York Basic Books 1978 Lebon G The crowd Deleware Cherokee Publishing 1982 Smith A Powers of the mind New Y
104. nd showing a red bar This is an indication that price direction may be changing We will continue to follow stop loss rule 6 and will use the current value of the Safety Line 27 31 as our trailing stop loss red x We ll follow the Safety Line until we are stopped out Illustration 6 55 Short trade with MOXO entry Day 16 IP 7 27 05 10 13 05 Stop loss at 27 31 Momen 0 50 Accelerometer Pet a a a aa al Aug 2005 Taaa A te el Sep 2005 Oct 2005 106 Day 17 10 14 05 Illustration 6 56 At the end of Day 17 we find that the ACC is below the zero line and green Also the value of the MO signal line continues to be only slightly greater than the value of the histogram bars even though the MO is below zero and showing a red bar This is an indication that price direction may be changing We will continue to follow stop loss rule 6 and will use the current value of the Safety Line 27 03 as our trailing stop loss red x We ll follow the Safety Line until we are stopped out illustration 6 56 Short trade with MOXO entry Day 17 IP 7 27 05 10 14 05 32 00 31 75 31 50 31 25 31 00 30 75 30 50 30 25 30 00 29 75 29 50 29 25 29 00 20 75 28 50 26 25 28 00 arn 27 50 Stoploss 27 25 at 27 03 27 00 26 75 Momen 0 50 0 00 0 50 1 00 1 50 2 0 Accel t ccelerometer 0 2500 0 1250 0
105. nes stability line is the p Fence at 445 20 ioi initial stop loss third bar back 439 10 S ia a l Now that we have determined our entry point and initial stop loss point and have either given the information to our broker or entered it into our electronic trading platform we are ready to trade Our overall plan is to enter the market when the price equals or exceeds 453 90 and in accordance with the initial stop loss rule we have set our initial stop loss at 439 10 To demonstrate the functionality of the stop loss algorithms we ll trade aggressively Let s see what occurs on the next day 9 8 05 110 Day 1 9 8 05 Illustration 6 60 The 9 8 05 bar has exceeded our entry price and we are in the market at 453 90 Since the low of the current bar is above the Stability Lines we are now following stop loss rule 3 We are trading aggressively so we ll use the lowest Stability Line In this case the Wall at 447 30 has the lowest value so we will set that as our stop loss point red x We also note that the ACC is showing two consecutive red bars This is an early warning that the speed at which price is moving is slowing down However since the MO is above zero and green and the MO Signal Line is less than the value of the MO histogram bars an overall change in direction is not indicated Illustration 6 60 Long futures trade with Fra ctal entry GCG6 Feb 06 Gold 6 28 05 9 8 05 CGOE Gold F VDE
106. nge in overall direction is indicated We continue to observe rule 5 using the Tripwire at 29 52 as our trailing stop loss red x We ll follow the Tripwire until the ACC either shows three more consecutive green bars or crosses the zero line from negative to positive illustration 6 49 Short trade with MOXO entry Day 10 IP 7 27 05 10 5 05 100 32 00 31 75 31 50 41 25 31 00 30 75 30 50 30 25 30 00 Zal Ra Stop loss at 29 52 23 50 2425 29 00 20 r5 20 50 20 25 20 00 ered 2r ll Apa 2r 00 26 75 Momen 0 50 0 00 0 50 1 00 1 50 2 0 Accel t ccelerometer 0 2500 0 1250 0 0000 0 1250 0 2500 Daas por a J hf i Aug 2005 100 Day 11 10 6 05 Illustration 6 50 At the end of Day 11 we find that the ACC is below zero and red In addition since the MO remains below zero and red and the value of the MO signal line is greater than the value of the histogram bars no change in overall direction is indicated We continue to observe rule 5 using the Tripwire at 29 29 as our trailing stop loss red x We ll follow the Tripwire until the ACC either shows three more consecutive green bars or crosses the zero line from negative to positive illustration 6 50 Short trade with MOXO entry Day 11 IP 7 27 05 10 6 05 32 00 31 75 31 50 31 25 31 00 30 75 30 50 30 25 30 00 29 75 29 50 Stop loss at 29 29 2g 25 29 00 20 75 28 50 26 25 28 00 o
107. ny given quarter approximately 10 of all the stocks listed on the American Stock Exchange and the New York Stock Exchange and 15 to 20 of all futures contracts exhibit properties that are in complete harmony with The Fractal s Edge That is their price bars only infrequently cut through one or more of the Stability Lines and bar length is fairly consistent This section outlines the methodology we employ when building our watch lists You can also use the same methodology to screen stocks or futures contracts you are interested in Option 1 Choose Stocks Futures from TFE s Watch Lists TFE s Quarterly Stock Watch Lists contain hundreds of stocks assembled into Low Risk Medium Risk and High Risk portfolios according to how well they match TFE s strengths TFE s Bi monthly Futures watch list contains 10 to 20 futures contracts that are highly compatible with TFE However even the High Risk stocks stand a good chance of earning decent profits Each portfolio is well diversified and contains stocks that have been mapped to TFE These stocks and futures contracts are stable in terms of volatility and the frequency at which TFE s Stability Lines are breached To access the pre built Watch List portfolios follow these steps a Click on the Download Prebuilt Portfolios icon located in the upper left corner of the screen Illustration 4 1 b The dialog box shown below will pop up Illustration 4 2 Select QuarterlyStockLowRisk or
108. oderate risk equity committed 18 119 Total Moderate risk contracts 14 c Allocate 20 of the 60 000 available trade equity 12 000 to Higher risk contracts One each of Soybeans Nikkei Orange Juice Feeder Cattle and Crude Light Total Higher risk equity committed 11 540 Total Higher risk contracts 5 d Allocate 20 of the 60 000 available trade equity 12 000 to Speculative contracts One each of Dow Jones E mini Lumber Coffee Pork Bellies and Copper Total Speculative equity committed 11 688 Total Speculative contracts 5 Total Contracts 46 Total equity committed 59 541 Total reserves 150 000 59 541 90 459 Market sectors represented in portfolio Grains Financials Indices Softs Livestock Metals Currencies and Energies By building your portfolio in this manner you limit your exposure by spreading risk not only across the range of market sectors but also within each sector This type of systematic diversification will help you preserve your capital and earn steady profits Let s now go to Module 9 where we ll learn about the optional TFE indicators the Gatekeeper Histogram chart the E wave Oscillator and the Psychometric Evaluators 160 Module 9 Optional Indicators Research has provided insights into relationships among certain concepts found among the sciences and TFE s powerful indicators As a consequence TFE is now easier to use Some indicators such as the Gatekeeper Stabi
109. om Module 5 that for a Fractal entry we e Find the most recent valid buy fractal marked with a green B In this case it s the 10 21 05 bar e Add two ticks to the high of the buy fractal bar to get the entry point In this case the high 50 34 02 50 36 46 illustration 6 1 Possible long trade with Fractal entry ANF 8 29 2005 10 28 2005 _ Prices Fractal bar high plus 2 ticks 50 36 I Lowest Stability Line is Fence at 48 65 Stop loss set at low of third bar back 45 41 65 E4 63 G2 61 bi og 58 5f 56 a 54 od 52 51 a 49 49 47 46 45 44 Accelerometer Sep2g05 pean Ney ados Initial Stop Loss Recall from Module 5 that for the first day stop loss for a long position we will consider the lower of either 1 the lowest low of the last three price bars including the signal bar 2 or the lowest stability line below the low of the signal bar In Illustration 6 1 above the lowest low of the last three price bars including the signal bar for this Fractal entry is 45 41 The lowest Stability line below the low of the signal bar is the Fence at 48 65 Since the value of the Fence is not below the value of the lowest low of the last three price bars we ll set our first day stop loss point at 45 41 red x the lowest of the three most recent bars You may of course employ a different method of determining a stop loss that is in keeping with your risk tolerance and money management pr
110. on 4 6 Illustration 4 6 Add Symbols icon and dialog box 72 The Fractal s Edge Advanced Trading Tool Add symbols File Data Help en a h z Portfolios know the symbols and will type them wart to import a list from a file Cancel Finally click on the Download icon to import the data With that finished you are now ready for the next step Step Two Visual mapping of individual stocks and futures contracts Start at the top of your portfolio s list of stocks or futures contracts and examine each one for the following e Concentrate on the actual trends a stock has made in the past 3 6 months e Determine if the price bars extend through the Fence the Wall or the Tripwire frequently in the course of the trend For mapping ignore the 3SMA Safety Line e Check to see whether the daily range for each bar is consistent or whether there are large variations in bar length or frequent gaps or both In Illustrations 4 7a 4 10 below notice that the price bars are inconsistent in length and cut regularly through the Stability lines If any stock you are studying exhibits characteristics similar to those in Figures 1 4 it is not currently a good candidate for TFE even though it may be trending Discard it and go on to the next one 15 Illustration 4 7a Example of poor candidate for trading with TFE FRO 9 9 05 12 7 05 Inconsistent bar length Bars cutting through Stability Lines Bars cutting through
111. ork Random House 1975 Steidimayer P J and Koy K Markets and market logic Chicago Porcupine Press 1986 Williams B Trading chaos Applying expert techniques to maximize your profits New York John Wiley and Sons Inc 1995 htto www wiley com http www profitunity com Zweig M Winning on Wall Street New York Warner Books 1990 169 Module 10 Quick Reference Tables Recap of entry signals and rules for long and short trades LONG ENTRY RULES SHORT ENTRY RULES Sell Fractals O O Buy Fractals 1 2 3 Buy Fractals are marked with a green B above the high of the fractal bar Enter market when price rises to an amount equal to or greater than two ticks above the fractal bar s high A buy fractal is valid until it is hit MOXO Buy Signal bar is first MO bar that crosses zero line from negative to positive 3SMA Safety line must be greater than Fence Entry point is two ticks above high of corresponding price bar A MOXO buy signal is valid until hit 1 2 3 Sell Fractals are marked with a red S below the low of the fractal bar Enter market when price falls to an amount equal to or less than two ticks below the fractal bar s low A sell fractal is valid until it is hit MOXO Sell 1 2 3 4 Signal bar is first MO bar that crosses zero line from positive to negative 3SMA Safety line must be less than Fence Entry point is two ticks below low of corresponding price
112. ove zero and green and the value of the MO signal line is lower than the value of the histogram bars a change in overall direction is not yet indicated We will continue to observe stop loss rule 3 using the Wall at 21 68 as our stop loss point red x Illustration 7 4 Long trade with MOXO entry Day 3 BMY 9 1 05 11 22 05 Entry at 22 16 at 21 68 Momentum Oscillater Accelerometer I Dez Now 2005 Dec20l 137 Day 4 11 23 05 Illustration 7 5 At the end of Day 4 we find that the ACC is positive but showing two consecutive red bars This is an early indication that the speed at which price is moving is beginning to slow However since the MO is above zero and green and the value of the MO signal line is lower than the value of the histogram bars a change in overall direction is not yet indicated We will continue to observe stop loss rule 3 using the Wall at 21 77 as our stop loss point red x illustration 7 5 Long trade with MOXO entry Day 4 BMY 9 1 05 11 23 05 Entry at 22 16 re p EL stop loss aE a 2 atir Momentum Oscillater F a ep Fe Er eee Il Ls I 1 a t Accelerometer L dat Li Dazs Dee 20 138 Day 5 11 25 05 Illustration 7 6 At the end of Day 5 we find that the ACC is positive but showing three consecutive red bars the third bar s value is so low that it s very visible This is a strong early indication that th
113. owing the 9 21 05 Fractal sell signal at 30 85 Our initial stop loss is at 36 27 the value of the 9 19 05 Tripwire which is the highest Stability Line above the highest high among the 9 21 05 Fractal bar and the two preceding bars The ACC is negative but green The MO is negative and red but the value of the MO Signal Line is less than the value of the histogram bars This is strong evidence that a change in direction may occur in the near future Nonetheless our plan is to enter the trade when price equals or falls below 30 85 and to exit when our daily stop loss is hit Illustration 7 8 depicts the set up Illustration 7 8 Short trade with Fractal entry Day 1 LVS 7 26 05 10 10 05 Initial stop loss Tripwire the highest Stability Line above the highest of the last three bars at 36 27 141 Day 1 10 11 05 Illustration 7 9 The 10 11 05 bar has fallen just below our entry price and we are in the market at 30 85 We note that the ACC is negative but with two consecutive green bars the second bar is not visible because the value is so low In addition the MO is below zero and green and the value of the MO signal line is slightly lower than the value of the histogram bars All of these indications point to a change in overall direction Nevertheless since the high of the current bar is below the highest Stability Line we are now following stop loss rule 3 We are trading aggressively so we ll use the highest St
114. p one Stability Line for each set of three red ACC bars For example if you are currently following the Wall and there are three consecutive red ACC bars including the current bar then move up to the Tripwire When the next set of three reds occurs move up to the Fence and so on until stopped out If the current ACC histogram bar crosses the zero line from positive to negative move immediately to the 3SMA Safety Line and follow it Other than on entry day if the 3SMA Safety Line crosses the Fence and the value of the Fence is greater than the value of the 3SMA Safety Line move to and follow the 38SMA Safety Line as your stop loss 170 Set initial stop at the HIGHER of either the highest high of last three price bars including the signal bar or the value of the highest Stability Line If the high of the entry day bar is higher than the highest Stability Line stay with initial stop until the high of the previous bar is lower than highest Stability Line then go to Rule 3 If the high of the entry day bar is lower than the highest Stability Line go to Rule 3 Depending on your trading style risk tolerance and money management practices For an aggressive approach if the Wall blue line is the highest Stability Line follow the Wall otherwise follow the highest Stability Line until it crosses the Wall then follow the Wall For aless aggressive approach if the Tripwire red line is the highest Stability Line fol
115. r s Guide Table of Contents Introduction to a Radically New Stock and Futures Trading Approach The perfect business How do you fit in Purpose of the course Visual Display and Descriptions of System Components Examples of system graphics Description of The Fractal s Edge Indicators The Gatekeeper Staying Out of Trouble This module introduces you to the Gatekeeper a tool to assist you in deciding when it is safe to enter the market and when it is time to exit This tool will also help you to know how long to stay with a trend so that you can maximize the profit potential of your trade Screening stocks and futures for potential trades In this module you will learn how to use the Gatekeeper to screen and select stocks and futures for potential trades It answers the question How do I select stocks and futures for potential trades Finding a wave to ride The Momentum Oscillator the Accelerometer and the Gatekeeper In this module you will learn how the Momentum Oscillator MO and the Accelerometer ACC work together with the Gatekeeper to provide entry signals stop loss values profit targets and exit points Determining stop loss values Making the ride smooth In this module we will go through two long trades and two short trades to see how the ACC and the Gatekeeper show us where to set our daily stop loss points and when to exit a profitable trade Exiting when the market moves against your position In thi
116. r greater than two ticks above the fractal bar s high 3 A buy fractal is valid until it is hit Signal bar is first MO bar that crosses zero line from negative to positive 8SMA Safety line must be greater than Fence Entry point is two ticks above high of corresponding price bar A MOXO buy signal is valid until hit 41 3 Sell Fractals are marked with a red S below the low of the fractal bar Enter market when price falls to an amount equal to or less than two ticks below the fractal bar s low A sell fractal is valid until it is hit MOXO Sell Signal bar is first MO bar that crosses zero line from positive to negative 8SMA Safety line must be less than Fence Entry point is two ticks below low of corresponding price bar A MOXO sell signal is valid until hit C What should my initial stop loss be Long positions In determining the first day stop loss for a long position we will consider the lower of either e the lowest low of the last three price bars including the signal bar e or the lowest stability line below the low of the signal bar In Illustration 5 13 the lowest low of the last three price bars for this Fractal entry is 45 41 The lowest Stability line below the low of the signal bar is the Fence at 48 65 Since the value of the Fence is not below the value of the lowest low of the last three price bars we ll set our first day stop loss point at 45 41 red x the low
117. rice bars we ll set our first day stop loss point at 1 8274 red x the highest high of the three most recent bars You may of course employ a different method of determining a stop loss that is in keeping with your risk tolerance and money management practices Illustration 6 69 Possible short trade with MOXO entry BPZ5 7 15 05 9 16 05 Stop loss set at high of third bar back 1 8274 Su ye me a ye i tt MOXO entry point 5 set at 1 7989 Momentum O ecilatos wet ia 0 015625 0 031250 0 0700 0 0050 0 0000 0 0050 Sep 2005 Oct 2005 121 Now that we have determined our entry point and initial stop loss point and have either given the information to our broker or entered it into our electronic trading platform we are ready to trade Our overall plan is to enter the market when the price equals or falls below 1 7989 and in accordance with the initial stop loss rule we have set our initial stop loss at 1 8274 To demonstrate the functionality of the stop loss algorithms we ll trade aggressively Let s see what occurs on the next day 9 19 05 Day 1 9 19 05 Illustration 6 70 The 9 19 05 bar has fallen below our entry price and we are in the market at 1 7989 Since the high of the current bar is below the Stability Lines we are now following stop loss rule 3 We are trading aggressively so we ll use the highest Stability Line until the Wall becomes the highest In this case the Tripwire at 1 82
118. rthest Stability Line until it crosses the Tripwire then follow the Tripwire c For a conservative approach if the Fence green line is the farthest Stability Line follow the Fence otherwise follow the farthest Stability Line until it crosses the Fence then follow the Fence 4 Ifthe ACC is less than zero follow rule 3 above 5 If the current ACC histogram bar is below zero and three consecutive green ACC bars including the current bar have occurred move down one Stability Line for each set of three green ACC bars For example if you are currently following the Wall and there are three consecutive green ACC bars including the current bar then move down to the Tripwire When the next set of three greens occurs move down to the Fence and so on until stopped out 6 If the current ACC histogram bar crosses the zero line from negative to positive move immediately to the 3SMA Safety Line and follow it 7 Other than on entry day if the 3SMA Safety Line crosses the Fence so that the value of the Fence is less than the value of the 3SMA Safety Line move to and follow the 3SMA Safety Line as your stop loss until stopped out As we proceed through our trade you ll have a chance to see how easy it is to apply the stop loss rules So let s continue with Day 1 as viewed in Illustration 6 31 below 80 Day 1 10 5 05 Illustration 6 31 Our entry price has been hit and we are in the market The ACC is showing three consecutive gr
119. s Ten year Notes eee ee Cocoa Livestock o dineo OO Live Cattle Currencies Canadian Dollar US Dollar Index Australian Dollar Swiss Franc New Zealand Dollar For an example of Level 2 diversification we ll assume an account size of 20 000 1 Compute Max Available Trade Equity Max Available Trade Equity 20 000 4 8 000 155 2 Select contracts whose margin requirement falls within the 8 000 Max Available Trade Equity a Allocate about 50 of the 8 000 4 000 to Lower risk markets In this case we could go with any combination of these that comes to about 4 000 For example One Euro Dollars 700 one LIBOR 405 one Sugar 700 one Cocoa 980 one Canadian Dollar 1 215 Total Lower risk equity committed 4 000 Total Lower risk contracts 5 b Allocate 35 of the 8 000 trade equity 2 800 to contracts in the Moderate risk markets One Wheat 506 one Gold 2 025 Total Moderate risk equity committed 2 531 Total Moderate risk contracts 2 c Allocate the remaining 15 of available trade equity 1 200 to Higher risk contracts One Orange Juice 910 Total Higher risk equity committed 910 Total Higher risk contracts 1 Total Contracts 8 Total equity committed 7 441 Total reserves 20 000 7 441 12 559 Market sectors represented in portfolio Grains Financials Indices Softs Metals Currencies Determining Trading Mix from the Secure Growth Mode Level 3 Portfolio 30 000 to
120. s 1 Month LIBOR CRB Index Sugar Cocoa Cotton Lean Hogs Live Cattle Gold Silver Canadian Dollar Australian Dollar New Zealand Dollar US Dollar Index Swiss Franc For traders with 51K or more in available trade equity Aggressive Growth Position size 1 3 contracts per market segment up to the This mode is divided into maximum number of contracts e Level 4 51 000 to 100 000 allowed for the mode as determined by available trade e Level 5 above 100 000 equity Traders in this mode are building toward increased wealth Commodities falling within the parameters of the Aggressive Growth Mode Portfolio Market Segments Grains Corn Oats Rough Rice Wheat Soybean Oil Soybean Meal Soybeans Interest Rates Financials Eurodollar 2 year Notes 5 year Notes Muni Bonds Index 10 year Notes 30 Year Bonds Indices 1 Month LIBOR CRB Index Nikkei 225 Dow E mini Nasdag E mini S amp P E Mini Value Line Softs Sugar Cocoa Cotton Orange Juice Lumber Coffee Livestock Lean Hogs Live Cattle Feeder Cattle Pork Bellies Metals Gold Silver Palladium Platinum Copper Currencies Canadian Dollar Australian Dollar New Zealand Dollar US Dollar Index Swiss Franc British Pound Japanese Yen Euro FX Energies Crude Light Heating Oil Natural Gas Unleaded Gas A word about volatility reward and risk Volatility is a statistical measure of the tendency of price to rise or fall sharply within a given tim
121. s Past performance is not necessarily indicative of future results Trading stocks has large potential rewards but also large potential risk You must be aware of the risks and be willing to accept them in order to place responsible informed trading orders Don t trade with money you can t afford to lose The Fractal s Edge Stock and Futures Trading Method is a system that provides information to assist you in making informed trading decisions you are free to disregard the information entirely or to act on it in any manner you see fit No representation is being made that any trade based on use of the system s information will or is likely to achieve profits or losses similar to those discussed in this document or on our web site While we have done our best to provide you with a quality product we must caution you that the past performance of any trading system or methodology is not necessarily indicative of future results WARNING All content provided on our website is protected by copyright law and international treaties Unauthorized reproduction or distribution of this information or any portion of it including information in this User s Manual may result in severe civil and criminal penalties and will be prosecuted to the maximum extent possible under the law Copyright 2001 2006 ALL RIGHTS RESERVED NOTICE This publication is designed to provide valuable information It is sold with the understanding that the publisher or author
122. s red x We will follow the Fence until the ACC either shows us another three consecutive red bars or crosses the zero line into negative territory musrado 6 26 Long trade with MOXO entry may k os Pall CP 8 31 05 11 21 05 vi x Stop loss S at27 76 Momenturn Oscillator TART Accelerometer ao Pa ese Tile ui Eo a Ee emer ower es Pcie mire akoer geome aT ctl beeen ep a005 D 2005 Noy 2005 Dec z 14 Day 14 11 22 05 Illustration 6 27 At the end of Day 14 we find that the ACC has crossed the zero line a strong warning that price movement is slowing down In addition although the MO is above zero the value of the MO signal line is just barely lower than the value of the histogram bars The fact that MO is showing two consecutive red bars adds to the probability of a change in direction Since the ACC has moved below zero we ll now observe stop loss rule 6 and move to the 3SMA Safety Line using its value of 28 10 as our trailing stop loss red x We will follow the Safety Line until we are stopped out Illustration 6 27 Long trade with MOXO siis H Ue ae Pall CP 8 31 05 11 22 05 stop loss fazen at 28 10 a Accelerometer a Woo ede fife Boa e Gere wegen Petite weber wwe Sle Sa ep 2005 Oct 2005 Nov 2005 l Dec z 19 Day 15 11 23 05 Illustration 6 28 On Day 15 we are stopped out at 28 10 Our entry point was 26 45 so we experienced a gain of 1 65 p
123. s module you ll learn how to exit with minimal loss when the market moves against your position It answers the question If the market moves against my position where do exit Money Management The goal of this module is to present a strategy for preserving capital so that you can trade another day while building account equity Optional Indicators This module presents a brief introduction to the Gatekeeper Histogram the E wave Oscillator and the Psychometric Evaluators Quick Reference Tables This module provides a recap of the entry signals entry rules stop loss rules and exit rules Forward to User s Basic Guide The purpose of this User s Basic Guide is to bring you up to speed with TFE s The Fractal s Edge basic trading methodology as quickly as possible While the methodology taught in this Guide is based on certain principles or concepts found in Chaos Theory Wavelet Theory and Quantum Mechanics it does not go into detail If you are interested in the science behind the system a separate manual containing all the fine points is available to our clients This course answers the following basic questions e How do select a stock or futures contract to trade After make my selection is there a potential trade If so where is my entry point What should my initial stop loss be How do determine my daily stop loss value How do know when to exit lf the market moves against my position where do exit
124. se three early warning criteria 1 The first sign of change in a trend s direction from up to down comes from the ACC We re looking for the ACC s histogram bars to turn red The value of each successive bar will be lower than the last as they move toward or cross the zero line from positive to negative Area 1 in Illustration 5 3 2 The second indication of trend change occurs when the MO is above zero the MO s histogram bars turn red Also the value of each successive red bar is less than the last as the MO moves toward the zero line from positive to negative And most importantly the value of the MO s Signal Line is greater than the value of the MO Area 2 in Illustration 5 3 3 The third mark of a changing trend is when the 3SMA and the Fence cross For a downward move the value of the 3SMA is lower than the value of the Fence Area 3 in Illustration 5 3 In this case the 3SMA s value of 42 39 is lower than the Fence s value of 42 53 Telecom ITL New 8 16 2005 10 6 05 33 00 32 50 32 00 31 50 31 00 30 50 30 00 29 50 29 00 20 50 20 00 fal 2 U0 Pelle 0 50 L 0 00 We a 1 00 1 50 eter 0 2500 0 1250 0 0000 0 1250 0 2500 E E EEEN EA Sep 2005 Oct 2005 Moy 2005 33 When all three criteria are met we have confirmation that a change in direction from up to down may be in the making Illustration 5 4 shows what happened over the next few weeks Illustration 5 4 Change in trend TI
125. signal bar 43 In Illustration 5 15 the highest high of the last three price bars for this Fractal entry is 23 46 The highest Stability line above the high of the signal bar is the Wall at 22 94 Since the value of the Wall is not above the value of the highest of the last three price bars we ll set our first day stop loss point at 23 46 red x the highest of the three most recent bars You may of course employ a different method of determining a stop loss that is in keeping with your risk tolerance and money management practices Illustration 5 15 Setting the initial stop loss for a short trade with Fractal entry ORA 7 19 05 10 5 05 100 Prices 425 Stop loss set at high of thitchibar back 23 46 235 23 50 2325 23 00 225 22 B0 21 75 Entry point set at low Ae 2 ticks 21 95 21 00 Momentu scl Accelerometer pet 200s US 2 Se ao ft a Sep 005 See oe a aes as Aug 2005 44 In Illustration 5 16 the highest high of the last three price bars for this MOXO entry is 8 65 The highest Stability line above the high of the signal bar is the Fence at 8 33 Since the value of the Fence is not above the value of the highest of the last three price bars we ll set our first day stop loss point at 8 65 red x the highest of the three most recent bars You may of course employ a different method of determining a stop loss that is in keeping with your risk tolerance and money management pr
126. tal to get the entry point In this case the high 50 34 02 50 36 e Input 50 36 as a buy order electronically or call you broker with instructions to buy x shares when the price reaches or exceeds 50 36 35 Illustration 5 6 Using a buy fractal to enter the market ANF Abercrombie amp Fitch 8 17 05 10 31 05 Prices Sell Fractals We ll use Illustration 5 7 to demonstrate how we enter the market using a fractal Let s suppose we want to take a short position in Ormat Technologies e Find the most recent valid sell fractal marked with a red S In this case it s the 9 30 05 bar e Subtract two ticks from the low of the sell fractal to get the entry point In this case the low 21 97 02 21 95 e Input 21 95 as a sell order electronically or call you broker with instructions to sell x shares when the price reaches or falls below 21 95 illustration 5 7 Using a sell fractal to enter the market ORA Ormat Technologies 7 19 05 10 5 05 100 Prices That s basically all there is to entering the market using fractals Next let s look at Momentum Crossover MOXO signals for entry 36 Momentum Crossover Buy Signals MOXO Buy The Momentum Oscillator generates a buy signal that consists of only two histogram bars and actually begins below the zero line The zero line is the point at which the momentum has completely changed direction but has not yet begun moving in the new direction However
127. ted throughout the course automatically displays the key indicators used to read the current direction of the market and aids in the selection of precise entry and exit points The program distinguishes between stocks and commodities 3 US and Canadian End of Day Stock and Futures Market Data TFE software includes built in single click stock data download capability from Primate Data a premier data vendor 4 Quarterly TFE Stock and Futures Trading Watch Lists Delivered Directly through the Software While there is nothing stopping you from creating your own stock watch list every quarter more often for futures we will filter out thousands of stocks and futures contracts and deliver to you via the software itself the 100 150 stocks and 10 20 futures contracts that we believe have the best potential for use with TFE in the coming months 5 Ability to create manage and share if you choose your own portfolios and access those of other TFE users who are willing to share theirs Visit www fractalsedge com order html to immediately access and download the Fractal s Edge Trading Software and benefits described above To your success Ken Herbert Quantum Futures 7456 SW Baseline Suite 333 Hillsboro OR 97123 USA 503 985 3443 service quantumfutures com IMPORTANT NOTICE This is not a get rich quick scheme Effort is required to learn the system Just as the potential for profit exists in trading stocks so does the risk of los
128. ter than the value of the histogram bars Thus a change in overall direction from down to up is not indicated at this time We are still observing stop loss rule 3 and are trailing the Wall whose current value at 1 8071 is the highest of the three Stability Lines Therefore we will use 1 8071 as our trailing stop loss red x Illustration 6 76 Possible short trade with MOXO entry BPZ5 7 15 05 9 27 05 100 1 545000 1 840000 1 835000 1 830000 1 825000 D 1 520000 NS 1 815000 Stop loss at 1 8071 1 810000 f i i 1 805000 E 1 800000 Entered trade 1 795000 1 790000 at 1 7989 1 785000 1 780000 1 775000 1 770000 1 765000 1 760000 1 755000 1 750000 1 745000 1 740000 1 735000 1 730000 1 725000 Momentum Oscillator 0 037250 0 015625 0 000000 0 015625 0 031250 4cceleromete aoon 0 0050 0 0000 0 0050 oe a Coa oa aana Ih tt foo 5 no e e I a Aug 2005 sep 2005 Oct 2005 Day 8 9 28 05 Illustration 6 77 128 At the end of Day 8 we find that the ACC is below zero and showing two consecutive green bars This is an early warning of a possible slowing up of the speed at which price is moving The MO is below zero and red and the value of the MO signal line is greater than the value of the histogram bars Thus while price movement may be slowing a change in overall direction from down to up is not indicated at this time We are still observing stop loss rule 3 and are trailing the Wall w
129. the market quickly References Beltrami E Mathematics for dynamic modeling Boston Academic Press 1987 Davis R E and Thiel C C A computer analysis of moving average applied to commodity futures trading West Lafayette IN Oulatenon Management Company 1969 Kaufman P J Trading systems and methods Third edition NY John Wiley and Sons 1998 Williams B New trading dimensions how to profit from chaos in stocks bonds and commodities New York John Wiley and Sons Inc 1998 http Awww wiley com http Awww profitunity com 12 Module 4 Screening stocks and futures contracts for potential trades In this module you will learn how to use the Gatekeeper to screen and select stocks for potential trades It answers the question How do I select stocks for potential trades How do select stocks or futures contracts to trade There are two ways to go about selecting stocks or futures contracts to trade 1 choose stocks from TFE s Quarterly Watch List choose contracts from TFE s Bi monthly Futures Watch List or 2 find a stock or contract of interest to you and map it to TFE Rationale All stocks and futures contracts cycle through trending and non trending periods Moreover even when they are trending some will go through phases where the bars are inconsistent in length and frequently cut through more than one of the Gatekeeper Stability Lines and in some cases all three However in a
130. tial of your trade The Gatekeeper is a series of three Stability Lines plus a Safety Line that combine with the Momentum Oscillator and Accelerometer to help us know when to get into the market when to stay with the current trend and when to exit See Illustration 3 1 below Illustration 3 1 The Gatekeeper 100 In his system Williams 1998 calls his combination of moving average lines the Alligator Each of the Alligator s moving averages is based on Fibonacci ratios For example Williams Balance Lines were constructed using time frames that are each approximately 62 of the next higher frame However we have chosen to use a derivative of the Fibonacci sequence that is obtained by applying an additional computation 10 that also allows an iterative accretion of the Fibonacci sequence to occur In addition Williams Balance Lines are offset 3 5 and 8 bars into the future while TFE s are not offset at all So while the Gatekeeper s three Stability Lines are based on time frames that are each about 62 of the next highest time frame they were constructed using an alternative sequence of moving averages We have also added a 3 period simple moving average to the original Gatekeeper These adjustments allow us to be more certain about where a trend is beginning or ending and more precise in entering and exiting the market The Wall Illustration 3 2 below shows the interaction of the three Stability Lines with the bars o
131. tration 8 7 below contains the forty commodities that can be traded within the parameters of Aggressive Growth Mode Level 4 plus an additional set in bold Illustration 8 7 Aggressive Growth Mode Level 5 Portfolio 101 000 and above 30 20 20 Rough Rice Soybean Meal Soybean Oil Municipal Bond 30 year Bonds Five year Notes Ten year Notes 1 Month Libor CRB Index Nikkei 225 Dow E mini Nasdag E mini S amp P 500 E mini Value Line Futures Coffee Live Cattle Gold Palladium Silver Platinum Currencies Canadian Dollar US Dollar Index British Pound Euro FX Australian Dollar Swiss Franc Japanese Yen New Zealand Dollar Crude Light Natural Gas Heating Oil Unleaded Gas For an example of Level 5 diversification we ll assume an account size of 150 000 1 Compute Max Available Trade Equity Max Available Trade Equity 150 000 4 60 000 159 2 Select contracts whose margin requirement falls within the 60 000 Max Available Trade Equity a Allocate about 30 of the 60 000 18 000 to Lower risk markets In this case we could go with any combination of these that comes to about 12 800 For example Two contracts each of all contracts in the Lower risk category Total Lower risk equity committed 18 194 Total Lower risk contracts 22 b Allocate 30 of the 60 000 trade equity 18 000 to contracts in the Moderate risk markets One each of all contracts in this category except Wheat which has two Total M
132. ue In addition the ACC is above zero and green so we will use 49 12 as our trailing stop loss red x illustration 6 4 Long trade with Fractal entry Day 2 ANF 8 29 2005 11 1 2005 Stop loss at49 12 DOS NhOk HH Te Gel oeh Accelerometer 1 50 eysan Mallal PE 0 00 Dhina es heel re fens egal acest Wit Oct 2005 51 Day 3 11 2 05 Illustration 6 5 Moving along we continue to follow stop loss rule 3 We are following the Wall and since the ACC is above zero and green we will use the Wall s value of 49 34 as our trailing stop loss red x Illustration 6 5 Long trade with Fractal sa a 3 GAE 8 29 2005 11 2 2005 Stop loss at 49 34 65 64 63 62 61 60 59 59 57 58 55 54 53 52 51 50 49 48 47 46 45 44 Aceelercene te ere OE itll ee iaai iI gaam ieee a Det 2005 l sai pe ee a ee Ce ened ET ET Nov 2005 52 Day 4 11 3 05 Illustration 6 6 We are still following stop loss rule 3 We are following the Wall and since the ACC remains above zero and green we will use the Wall s value of 49 84 as our trailing stop loss red x illustration 6 6 Long trade with Fractal entry Day 4 ANF 8 29 2005 11 3 2005 Prices y n A Stop loss at 49 84 sia F FaRRISSSIADSHRISSSINSSs in Accelerometer 7 1 50 Mallal a all beretara ll Mt E Sep 2005 O Dez 53 Day 5 11 4 05 Illustration 6 7 At the end of Day
133. ultifaceted approach to money management that can be broken down into these simple strategies 1 Allocate 75 of your total account size to available trading equity and keep the remaining 25 in reserve 2 Screen stocks and allocate them to your portfolio according to the risk diversification matrix below Low Risk 50 Medium Risk 30 Speculative 20 Large Mid Small Cap Large Mid Small Cap Any Size Cap Share Price 5 Share Price 20 Share Price 20 Large Mid Small Cap Large Mid Small Cap Share Price 5 to 20 Share Price 5 to 20 Find stocks that exhibit these traits Find stocks that exhibit these Find stocks that exhibit these e e The stock tends to trend traits traits e Bars are less consistent in ae j ae be pine e The stock tends to trend length i a f nomd Barsarefary consstentin Prebenderance ayy O volatility eo AN ans cancer tanh B y l Iv b h occasional longer bars at SJA SACE the Fence mee ORUN Bars oo also more likely to Bars are also more likel oe Bars rarely breach the a ey breach the Tripwire oe breach the Tripwire Tripwire Barewionee in ewe Bars will once in a while Bars breach the Wall only breach the Wall breach the Wall during a major change in direction Stocks from the Medium Risk Stocks from the High Risk pre Stocks from the Low Risk pre built portfolio match these characteristics built portfolio match these re built portfolio match th icti Pre oO POTTO O MA
134. ur stop loss point red x We ll follow the Tripwire until the ACC either shows three more consecutive green bars or crosses the zero line from negative to positive if f llustration 6 44 Short trade with MOXO entry Day 5 IP 7 27 05 9 28 05 100 gt _ INTL PAPER _ Stop loss at 30 42 T Accelerometer EENT 1 ee ee ee Sep 2005 0 t E E 95 Day 6 9 29 05 Illustration 6 45 At the end of Day 6 we find that the ACC is below zero and red Moreover since the MO remains below zero and red and the value of the MO signal line is greater than the value of the histogram bars a change in overall direction is not yet indicated We continue to observe rule 5 using the Tripwire at 30 25 as our trailing stop loss red x We ll follow the Tripwire until the ACC either shows three more consecutive green bars or crosses the zero line from negative to positive Illustration 6 45 Short trade with MOXO entry Day 6 IP 7 27 05 9 29 05 100 v L PAPEF Stop loss at 30 25 Accelerometer eet Reseed ea need ed ETTI ee a a AET H a de my Ola oe ed le SS ug 2005 Sep 2005 Oet2005 96 Day 7 9 30 05 Illustration 6 46 At the end of Day 7 we find that the ACC is below zero and presenting a green bar However since the MO remains below zero and red and the value of the MO signal line is greater than the value of the histogram bars a change in overall direction is not yet indicated W
135. ver since risk and loss are a fact of life in trading money management is absolutely essential What follows is an outline of money management practices we suggest you use when trading with TFE In this module you will learn how to diversify your own trading portfolio based on your account equity and the risk category for each futures contract While you will find that the mix of contracts in your portfolio will vary according to your available trading equity it is this diversity that helps preserve and build equity With this in mind we have designed portfolios for two modes of trading Secure Growth and Accelerated Growth Illustration 8 1 describes them 151 illustration 8 1 Definition and Description of Trading Modes For traders with between 2 500 and 50 000 in available trade equity Secure Growth Traders in this mode are building equity toward the Aggressive Growth portfolio Position size 1 contract per market segment up to the This mode is divided into maximum number of e Level 1 2 500 to 12 000 contracts allowed for the e Level 2 12 500 to 29 500 mode as determined by e Level 3 30 000 to 50 000 available trade equity Commodities falling within the parameters of the Secure Growth Mode Portfolio Market Segments Grains Interest Rates Financials Indices Softs Livestock Metals Currencies Corn Oats Rough Rice Wheat Soybean Oil Eurodollar 2 year Notes 5 year Notes Muni Bonds Index 10 year Note
136. which price is moving and a signal to follow stop loss rule 5 moving from following the Wall to following the Tripwire We will use the Tripwire s value of 25 93 as our trailing stop loss red x We will follow the Tripwire until the ACC shows us another three consecutive red bars or it crosses the zero line into negative territory However since the MO is above zero green and the value of the MO signal line is lower than the value of the histogram bars a change in overall direction is not yet indicated mueraron 6 16 Long trade with MOXO ome 8 a Pall CP 8 31 05 11 7 05 ral 5 Stop loss at 25 93 in Accelerometer a Woo ede fife eona e aterm weeps Deviate weber wwe Sale sees ep 2005 Oct 2005 Nov 2005 l Dec z 64 Day 4 11 8 05 Illustration 6 17 At the end of Day 4 we find that the ACC is above zero and is showing a green bar We ll continue to observe stop loss rule 5 and follow the Tripwire Thus we will use the Tripwire s value of 26 04 as our trailing stop loss red x We will follow the Tripwire until the ACC either shows us another three consecutive red bars or crosses the zero line into negative territory In addition since the MO is above zero and green and the value of the MO signal line is lower than the value of the histogram bars a change in overall direction is not yet indicated Illustration 6 17 Long trade with MOXO entry Day 4 PLL Pall CP 8 31 05 11 8 05 1002 i
137. with the Fed pending legislation interest rates or the opinions of experts Unlike most other trading systems TFE does not depend on past performance Its formulas are not optimized or curved to fit statistical models And it doesn t depend on pattern recognition algorithms One key principle to always keep in mind is that the past does not equal the future The future is always constantly replacing the past 6 The Fractal s Edge deals with the here and now the thin line between the past and future So what does The Fractal s Edge Stock and Futures Trading System look like Continue on to Module 2 to find out Module 2 Visual Display and Descriptions of System Components The purpose of this module is to provide you with a visual bird s eye view of the The Fractal s Edge Trading System and to give you a quick description of each component Illustration 2 1 below shows the indicators you ll be working with after you update the day s trading data It includes the bar chart with Stability Lines the Gatekeeper the Momentum Oscillator and the Accelerometer By the way don t let the technical sound of the system component names scare you They are based on easy to understand principles that you will quickly learn as you go through the remainder of this course Each part of the system works in concert with the others to give you an accurate picture of current market conditions The indicator display allows you to view all indicators simultan

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