OK, HERE IS WHERE WE ARE.
We acknowledge we cannot compete if the competition is based on
information and knowledge of supply/demand;
therefore, we will waste no time or effort trying
to do so We see that one truth (the first natural law) of
trading says the future is unknown;therefore,
we will not waste time and energy trying to see into
this unknown future. In other words,
we will not try to predict or guess where prices are
going. We also see that another truth (the
second natural law of trading) stipulates that
continuation (of price movement) is more likely
than change. Therefore, we needed, and found, some
reasonably reliable indicators of price trend
and momentum—SMR's three trend/momentum lines.
To keep it simple we have limited our measurements of
trend/momentum to long, intermediate,
and short term (long meaning months, intermediate
meaning weeks, and short meaning days).
We then determined that a 50-day or ten-week moving
average of the price is a reasonably
reliable indicator of long-term trend. Next we
accepted (and as we go along you will see for
yourself how effectively) that SMR's
intermediate-term momentum indicator (the ML) is a
reasonably reliable indicator of intermediate-term
momentum (and trend).
What we are trying to do here is observe the price
movement of a market, from past to present,
and in so doing attempt to discover some clearly
identifiable price energy flows. Now, how do
we start putting all of this to some practical use?
As mentioned earlier I believe it is helpful to
visualize the movement of market prices as if they
were rivers of energy—unexplored rivers whose
future paths are unknown. Picture the trend
(the ten-week moving average) as the prevailing
"current" of these rivers of price energy and look
at the intermediate-term momentum line (the ML) as the
"tide" (cycling
in and out).
Now, when a river has both a strong current and a
powerful tide moving in the same direction
(i.e., moving concurrently), it will be very
difficult for the surface water to move against this
underlying concurrent flow for very far or for very
long. Market prices are no different. When
both the trend and intermediate-term momentum of a
market's price are moving in the same
direction (concurrently), then the daily price
movement will tend also to be persistently in that
same direction. Conversely, if the underlying current
and the tide of a river are moving opposite
one another (i.e., are at crosscurrents), then the
result on the surface is usually choppiness. Once
again, market prices act no differently. When trend
and intermediate-term momentum are at
crosscurrents, the price will tend to move in a
choppy, more sideways manner.
CONCURRENT MODE is
when trend and intermediate-term momentum (ML) of a market are
both pointing in the same direction (i.e., concurrently).This
market "mode" will tend to produce
sustained, with-the-trend market moves; or, at the
least, it will not produce much in the way of
counter-trend moves.
CROSSCURRENT MODE is
when trend and intermediate-term momentum (ML) of a market are
pointing in opposite directions (i.e., at crosscurrents).
This market "mode" will tend to produce
choppy more
sideways-type market moves; or at the least, with-the-trend movements will be
more limited in time
and distance.
If you look at the
charts on the following two pages you will see that both markets tended to
make their best, most
sustained, with-the-trend moves when they were in concurrent mode. In
addition, when they
were in concurrent modes any counter-trend moves were limited in time
and distance.
Furthermore, you will see that when either market was in crosscurrent mode
their
prices tended to move
in a choppy, more sideways manner.
As we go through the
charts later in the book you shall see that these tendencies (of concurrent
and crosscurrent modes)
tend to be remarkably consistent. Naturally, it is not perfect; nothing is
in trading. However,
having and knowing the tendencies of these two technical background
"modes" can
be extremely helpful to your trading. Being aware of these tendencies enables a
trader to
know when to look for
sustained moves versus when to focus on shorter-term trades, as well as
when to hold big
positions versus small ones.
It is very important to
be always aware of whether a market is in concurrent or crosscurrent
mode, and then act
accordingly It is also important to be aware of whether the particular
"mode"
is solid or tenuous. By
this I mean how easy or difficult would it be for the mode to switch to its
opposite condition over
the next few days (again, this is done by "anticipating" the
most likely
near term movement of
both trend and intermediate-term momentum lines).
BOTTOM LINE ON CONCURRENT & CROSSCURRENT
MODES
Once trend and intermediate-term momentum of a market
are determined, the next step is to
see whether they are moving concurrently or are at
crosscurrents. This is VERY
IMPORTANT
because it tells you how long you should plan to hold
on to the trade as well as how aggressive
to be in your positioning. In other words, whether a
market is in concurrent or crosscurrent mode
is a good indication of both odds and
risk/reward.Therefore, always be fully aware of whether a market
is in concurrent or crosscurrent mode, as well as how
solid this mode is. The
odds of success
are best and the risk/reward most favorable when
positioned with a solid concurrent mode.