I recognize that volatility breakout players might be upset by this strategy, but I think there is nothing wrong with letting the market calm down a bit before entry. Will you miss some good trades? Of course! Will you miss being stopped out many times? Of course! Will the net effect be positive? I think it will. But, test this strategy on your own and see what you think. Many traders are in this game for excitement, not for profit. Some traders can comfortably tolerate 30% or 40% winning trades. I can't. You need to figure out where you fit in.

STRATEGY 3:

An OB/OS level can be used for stop placement.

If you observe the price corresponding to the value of maximum Overbought or maximum Oversold, you can simply put your stop behind that level by some comfortable margin, a few 32nds in the bonds or perhaps 50 points in the S&P. But, you have to be careful how the order reads. Ifyou are using the close minus Moving Average, as suggested above, you should have a stop close only. Ifyou want a physical, intraday stop, use the high or low minus the Moving Average, depending upon whether you are short or long the market. These Oscillator values will be respectively higher and lower than the Oscillator calculated using the close, and will produce correspondingly different stops. (See Chart 7- 5). I'll guarantee you one thing, your stop won't be located where other stops are, unless by accident. Also, your stop is dynamic, every day it's moved. It should go without saying, that you're within money management parameters, and that whatever signal placed you in the trade remains in effect.

The best time to use Strategy 3 is when you have a lot of confidence in your entry techniques. This implies that you don't want to be bothered by close stops and that you choose to give these methods the time and space they require to work. I'll give you two possible examples.

Larry Williams has come up with a variety of high risk, potentially high profit, non-judgmental systems, usually based on some form of pattern recognition. One problem however, is that some of these systems carry a "stop close" only, or no stop at all on the day of entry. This makes some systems users understandably uncomfortable. An alternative would be to hide your (intraday) stop, as suggested in Strategy 3.

When we get to Fibonacci techniques, you will see on occasion, the desirability of an initial, far away, or disaster stop. Strategy 3 can provide an answer to the question, where should the stop be placed? This stop is almost never hit. If the original entry signal is negated, I simply exit "at market," or at the first retracement in the Direction of my entry. Then I cancel the disaster stop.

Realize that if the market is Oversold, a maximum Overbought stop will be miles away. But ifthe market is nearing Overbought, the stop will be relatively much closer. You can adjust the level of stop placement by using a lower percentage of average Overbought and Oversold, but I would suggest not going below 70%.

STRATEGY 4:

CHAPTER 6 discussed the Directional Indicator called Stretch. It uses an Overbought/ Oversold maximum Oscillator level, in combination with a major Fibonacci resistance or support area, to locate a trade entry range. This is Strategy 4. Admittedly, countering an existing Trend can be risky. It is, nonetheless, worthwhile because the combined strength of these two powerful indicators is substantial.

Since we haven't covered Fibonacci analysis yet, I will jump ahead a bit, with the following explanation. I suggest that you reread this after completing CHAPTERS 8 through 11, if you don't understand it now. The example above, Chart 7-6, showing daily bonds, was chosen for a couple of reasons. The cursor is placed on the initial Stretch sell. From that point, price reacted down to Fibonacci support and then achieved a Logical Profit Objective (COP) on the upside which was in Agreement with the .618 retracement of the down move from A to B. This is the same Fibonacci Retracement area that helped to give us the initial Stretch sell. To reiterate, if at approximately the same price of maximum Overbought, you have a significant Fibonacci resistance area, act on this combined level as an entry range to sell

IMPORTANT POINTS TO NOTE:

The initial Stretch sell gave us two hard down days. It was the setup signal for the break. Do you realize how much you can make on a high probability break, where all the intraday trends are in your favor and you can margin up on your selling? If you have high confidence, you can pile up on size and walk away with the loot. You don't need a five point down move to score big; what you do need is patience for the set up and confidence in what is unfolding. In this case, the intraday down trend after the resistance was met, would have supported an aggressive short position, all the way to a support level which was measurable ahead of time by techniques covered in CHAPTERS 9 and 10 .

On the rally back to the marginal new high, we only managed to achieve a move back to major Fibonacci resistance, as noted above. The Detrended Oscillator was still high and you then had an opportunity for a second shot at the short side. When we determine ahead of time, the level of Overbought or Oversold, corresponding to a given price level, we can make an informed and confident decision about how we wish to handle a given trade.

Every rose has its thorn, and stop placement, utilizing Stretch, can be prickly, since you are countering an existing move. If, for example, your entry sell level was at approximately the close minus MA maximum level, a safe stop may need to be placed at the high minus MA maximum level or behind another, more distant Fibonacci area. I never place money stops in the market. If a safe stop exceeds my money stop, I just don't take the trade.

Since we're on the topic of Oscillators, now is a good time for a prohibition. Don't use an Oscillator to price divergence as an entry technique, unless you have an excellent means of filtering it. In our last example, there was a divergence signal that worked between the initial high and the rally back high, but this is not a high probability signal. Even for the best of Oscillators this can, and often does, spell disaster, particularly for the new participant. Look back at Chart 7-2, as well as other charts contained herein. Price and Oscillator divergences abound, and the market continues to stop out the divergence players. Looking back in time, you're sure to find divergences that work, but when you're going forward in time, as in real trading, the accuracy of this technique just isn't there.

STRATEGY 5:

Special applications of the Detrended Oscillator to determine major Trend changes.

There are a variety of such applications. I'll offer one example. The idea behind this strategy is that long term Detrended Oscillator breakouts can be more significant than long term price breakouts. Look at Chart 7-7, monthly gold.

For the first time since the 1980 break in the gold market, we have an Oscillator reading, monthly basis, which significantly surpassed previous peaks, corresponding to run ups in price. I am not concerned with the divergence the Oscillator has made versus price, but rather with the fact that the Oscillator value has surpassed its previous rally high after a long move down. Note also that when we are measuring momentum in this context, we use the high minus Moving Average or the low minus Moving Average, rather than the close. This is because momentum in this context is attempting to measure the maximum push behind the market, rather than its strength at a given point in time.

This indicates that the bear market in gold is over and that we are likely to be in for a period of prolonged consolidation or an up move. To confirm this supposition we would like to see the 47.71 level significantly surpassed in the next gold rally. It would also be nice to see the pullback in gold contained in an ascending pattern. So far this has not occurred.

I've alluded to volatility breakout techniques in CHAPTER 1 and under Strategy 2, in this chapter. The idea behind the success of such methods is that volatility peaks precede price peaks and there is validity in this reasoning. The gold example is really a variation of this. While I will not endeavor to cover fully the details of how I handle extremes in volatility, I will make the following comments so you can understand my general approach. First, you don't know you have an extreme (let's say twice average Overbought or Oversold) until after the fact, so I prefer to take my profits as I near Overbought or Oversold, as stated earlier. When, in hindsight, I see a true breakout in volatility, I employ the techniques in CHAPTERS 9, 10, 11, and 13, to enter in the Direction of the breakout. Second, I attempt to filter any such breakout to eliminate blowoffs which will produce amazing volatility breakouts but by definition, the termination of any extreme in price.

Finally, as I have suggested, if you are an intraday player, use daily Overbought/Oversold data for calculation of Detrended Oscillator or Oscillator Predictor levels. If you trade daily-based, pay attention to daily and weekly Overbought/Oversold levels. If you trade weekly-based, i.e. using a weekly chart, be aware of both weekly and monthly Oscillator levels. Long term mutual fund switching can be greatly enhanced by using these techniques.

Above all, please keep in mind a market axiom I have been stressing for years. It is inherent in my stock market approach and should be gleaned from the afore-mentioned rules.