1 ~ If
the trend is up and the point total is plus
two (+2) or more, then the trend/momentum
"Status" is "Bullish." A Bullish
Status means that a clear majority of our reasonably reliable
trend/momentum indicators are pointing up and so the
odds for the immediate future favor the
price moving up. Therefore, when the Status of a
market is Bullish, long positions are justified.
2 ~ If
the trend is up and the point total is plus
one and a half points or less, or if the trend is down
and the point total is minus one and a half points or
less (i.e., anytime the points total is between
plus one and a half and minus one and a half points],
then the "Status" of the market is "Neutral."
What this means is that the trend/momentum lines do
not indicate a clear price energy flow at the
moment. Therefore, when Status is Neutral, then
"sidelines" is the indicated position.
3 ~ If
the trend is down and the point total is
minus two (-2) points or more (down to minus
three), then the "Status" of the market is
"Bearish" and short positions are justified.
"CONFIRMING" RULE
As a confirmation of current intermediate-term momentum, you should
have at least one half (1/2)
point from the intermediate-term momentum line (ML) in the direction you wish to trade.
To
"confirm" or "qualify" a trade,
at least a half point needs to come from the ML. However, it is
permissible to override this "confirming"
rule if the trend is particularly "solid"—meaning it will
be virtually impossible to change the trend's
direction for the next few weeks.
TO SUMMARIZE: Two or more with-the-trend points and Status is Bullish if
trend up or Bearish
if trend down. Anywhere in between, from plus one and
a half to minus one and a half, and
Status is Neutral. For a fully legitimate Bullish or
Bearish Status, at least one half point needs to
come from the ML.
Basically the "Status" (or position
indicator, if you prefer) indicates the most favorable position
at any specific moment based on current trend/moment. However, we trade "futures,"
not "pasts."
Therefore, it is vitally
important to always look ahead and anticipate what the Status will most
likely be tomorrow and the few days after tomorrow
(by comparing the most likely numbers to
be added on to the moving averages to the numbers
that will most likely be dropped off). By
looking ahead and anticipating, we are attempting to
be positioned in line with what the Status
will be tomorrow and the next day or so. Therefore,
we need to always look at both current
Status and at
what the Status will most likely be over the next few
days
BOTTOM
LINE ON THE THREE-POINT SYSTEM
The "Status" (or position indicator) is a mathematical
formula designed to clearly and objectively
measure the prevailing trend/momentum situation at
any one moment in time. The SMR
trend/momentum lines and the three-point system of
using them are the "science" of trading. The daily
interpretation of these three trend/momentum lines
and their patterns is the "art" of "reading" the lines.
Unfortunately, I do not believe it is possible to use
the Status as a straight, mechanical trading
system. The lines are trailing or lagging indicators
which means that "waiting for them to be
positioned clearly in one direction too often ends up
being a little too late to produce consistent
profits. Therefore, we have to apply a little bit of
art to interpreting the line patterns. We have
to learn to anticipate them; we have to learn to
"read" them.
The following example is a "classic" case
of trend/momentum trading. Naturally, for my first
example I have chosen a price move that
"worked" according to plan. In the learning of any art
it is best to start with simple, clear cases, and
then from these move on to the more complex.
Later I will present a wide variety of examples. Some
will follow the rules/laws well, others will
be more complex. However, let us start with a classic
case.
While writing this book I was also putting out a
daily market letter covering about twenty
futures markets. All of the daily market commentaries
accompanying the examples in this book
are reprinted verbatim from that daily market letter.
They are as I wrote them at the time. In
other words, they are "real time"
observations and trading suggestions. In a very few instances I
have made some very minor editing corrections to make
them read better; however, I have not
gone back and changed anything in them in an attempt
to make me look better.
What I will do on this, and the other chart examples,
is give you my commentary as it was
written at the time and then add some after-the-fact
critique of this real-time daily
commentary. I will point out what I did right, as
well as what I overlooked. The point here is
not to show my particular ability or inability to
"read" markets. The objective is to show how
the natural laws of trading apply in real life
examples, as well as reveal how easy it is to make
trading mistakes when in the "heat of
battle." There is a big difference between looking at
charts after the fact, with no money riding on the
outcome, and using them to trade in real
time when meaningful money is at stake.
(NOTE: When I wrote the following market
commentaries, December Cocoa was the front/active
month, and so naturally I was covering it. However,
within a couple of weeks the most active month
became March and my coverage in the letter also
switched. Therefore, to keep it simple I have used the
March charts right from the start, rather than
switching from December to March half way through
the example. The two months, December and March
Cocoa, moved in tandem during this period with
the only difference being that March was priced about
ten points higher. Therefore, I have made the
appropriate point adjustments in my commentaries.
Again, the point of this and the other examples is
not whether I was right or wrong at the time but how
they illustrate the approach and method laid
out in this book.)
Once again, the commentary at the top of each page is
what I wrote in "real time." The commentary
below these "real time" comments is an
"after-action" critique of both what I originally wrote as
well as the basic approach/method laid out in the
book and how it worked in this case.
I will take up the third law of trading, prices
fluctuate, later. This is the business law and is very
important to the bottom line. However, first let us
work on the art and science of reading the
lines and prices.