we trail our protective stop order half-way between the eighteen day moving average and the forty day moving average. Around the middle of March, we
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market price dips below 18, for the first time
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would have been stopped out of the trade with a very handsome profit When the market turns downward in the middle of April the eighteen day moving average goes below the forty day moving average. This time we wait for the market price to go above the eighteen day moving average before placing a sell order below it. That day does not come until the middle of June. By using the Delphic Phenomenon to trade, we would have missed out on the entire move down. Employing other tactics at our disposal we would not have missed out at all. In a later chapter you will find out how we could have sold short in this market long before the eighteen day moving average ever crossed the forty day moving average.
I want to discuss one more chart before moving on to some of the more exciting things to look for while trading futures and commodities.
That next chart will be the 1997 September cocoa (page 38). It will be followed by other charts so that you will be able to find the formations for yourself.
As you can see, trading by the basic system alone can be very exciting because it is so simple and profitable. It is incredibly easy, and one thirty-second glance at a chart will tell you if the market is worth trading or not. The more exciting part of trading futures is yet to come.
I chose the cocoa chart to emphasize once again the point that when a market makes an
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38
extended run (causing a. long gap) after the eighteen day moving average crosses the forty, it is not time to place an order above (or below) the eighteen day moving average. Near the first of March the eighteen day moving average crosses above the forty day moving average and the market price does not drop inside the eighteen day moving average until the first of April. This is usually too long, and the point is made clear by the brief burst over the eighteen day moving average around the end of April. Do not get sucked into these moves! Have patience. After that burst up, the market drops and the eighteen day moving average crosses below the forty. When the market price goes above the eighteen day moving average we place a sell order below. The situation around the middle of May is a hard call to make. If our sell orders were too close to the eighteen day moving average, we would have gotten into the market and taken a loss when the market crossed the forty day moving average and hit our protective stop. Had our sell orders been farther away from the eighteen day moving average, below the low set on that one particular day, we would have never been involved in the trade.
That brings up an important question. How far from the eighteen day moving average should an order be? As with all stop orders, that's the toughest question in trading. There is no definitive answer. Each market is different, and each day is different. I've tried a number of ways to find a
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average, including previous lows, retracements, different mathematical formulas, etc. After all the effort seeking a magical spot, I have found that it is best to simply place your stop order a few price ticks below the eighteen day moving average. You will see, as you study the charts in this book, that when the market price begins its run from the eighteen day moving average it has a tendency to really move. By placing your order close to the eighteen day moving average you will be in for better fills as the market moves in your favor and, likewise, will reduce your losses if the market should reverse course on you.
The next move on this chart is to the upside and with it comes the eighteen day moving average, crossing the forty day moving average near the end of May. Around the first of June the market drops below the eighteen day moving average and we have the perfect scenario; a quick drop of the market price into the eighteen day moving average, as soon as the eighteen day rises above the forty day moving average. We place our buy order just above the eighteen day moving average and off we go.
When a market moves at breakneck speed as this one did
I
use a different strategy for placing my protective stop. In almost all cases, any market that makes an extremely big move in one direction is followed by the same on the reversal. Don't be fooled into thinking something will go up forever -it doesn't! All markets that go up, will eventually40
come down. The higher and faster they go up, the harder and faster they will usually fall. Therefore, in situations like this I will trail my protective stop order half-way between the eighteen day moving average and the four day moving average. (See, we do use the four day moving average sometimes). By doing so, we would have been able to sell out of the market near the highs around the end of June, with tremendous profits. Study the following charts to test your understanding of this trading system. The more you study them the clearer the Delphic Phenomenon will become. You will be given a quiz at the end of this book. If you fail the quiz, you will have to read this chapter over. Do your best.
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