Original subtitles

Hello, everyone. Today is March 7th, and this is the first session of March

Special Series that we have with Linda Bradford -Rashke. And we called it Her

Traits, Her Story.

We're going to talk a lot about the book that's coming out from Linda. I just

want to go through some of the administrative questions that you might

We're going to have three sessions on March 7th, 14th, and 21st. All of the

sessions are going to be conducted from 3 to 5 p .m.

Pacific time.

We're going to have a switch here in the U .S., so for those of you who are

international students, we'll let you know in the next message that we're

to have the switch to the daylight time.

And another administrative note is that all of the sessions are being recorded,

so don't worry.

Nothing will be wasted as the material.

And you will receive an email with login instructions after this first session,

probably by 9 p .m. Pacific today, depending on how quickly the video could

encoded and uploaded to the website.

I would like to welcome Linda. Linda, hello. How are you doing?

I'm doing fine. Thank you, Roman. Thank you for having me on.

Well, I want to start with an introduction.

And usually, you know, here I would be reading.

the buyer and I want to do this in a slightly different way.

I want to tell a small short story, a personal story of how I met Linda. I

believe that the first time that I met Linda I was I don't remember the city

where it was but I remember that it was after a conference.

So after is an organization that is comprised of

probably the best minds of technical analysis here in the US and

maybe even outside of the US.

And these are the people that use technical analysis professionally.

There are specific requirements for being a member of this society.

I believe it's seven years in the professional field.

You have to have specific contributions.

People there are definitely extremely smart and knowledgeable about technical

analysis. And I met Linda at the conference.

We had a talk. One of the things that I was so at awe and

impressed right away is that we started talking about trading, and

Linda was communicating to me some of her results.

And at that point of time, Linda has...

logged in 32 years of trading.

And this is not just trading for her personal account, but managing the

So managing someone else's money, exposing herself to this constant

accountability to deliver and produce the results.

And out of 32 years, Linda has been profitable for 31, which is

unbelievable.

And then as we were preparing for this session, you know, years later, you

the news stat that I have from LIDA is that out of 39 years, LIDA has been

profitable for 37.

So I would say that this is almost like a miracle.

It's definitely an extreme outlier in our field, especially with...

big accounts where you're managing a lot of money to be that consistent

and to sustain that consistency for so many years, almost for

decades. That's unprecedented.

So therefore, as I was telling you in other classes about

this upcoming event, I wanted you to come and listen to the

mindset that Linda has developed throughout this year.

And also, obviously, we want to understand how Linda functions on a

weekly basis. So there will be a lot of talk about a process.

And then Linda is going to talk about also how she is using her system,

how she understands technical analysis.

There are so many questions that we might have for Linda because Linda is an

expert in technical analysis on a very practical basis.

And this is what I hear from her, and this is what I see from the material

she's going to present.

And when you become an expert at this point, there are some ideas that you're

challenging that were common.

and maybe are still common as a belief.

And that's how I felt in my preparation with Linda, you know, in my

conversations, that some of the common beliefs that we have about trading the

markets or how we should approach those, those could be challenged by Linda. So

we really need to pay attention to that.

Also, I want to say that I started reading the book.

Trading Sardines, and it's a very easy read and very, in

a lot of spots, very funny.

And it has so many insights based on the experience by Linda as to, you know,

how she met specific people, how she, you know, certain situations. And I

definitely highly recommend.

go to her website, lindarashki .net, find the book, order it. I believe

it's under $40.

And look at all of these people, and I haven't put even all of them, but every

name has such a big story and just a big name behind it.

Obviously, we know Linda from Market Streets by Jack Schrager.

In 2013, I was the conference director of the EFTA conference.

That's the International Federation of Technical Analysts. We had the

in San Francisco. Linda was a presenter there.

And a part of the panel on market widgets where Jack Schrager was also

And Jack Schrager was conducting the interviews with Linda and Ed Secorder.

And I don't even remember who else we had.

a lot of funds.

And that's how we know Linda. That's how Linda came to the public and became

known so well. So definitely would recommend the book.

And Linda's going to say a couple of words about this.

And the last slide that I have is just, let's just quickly go through all of the

sessions.

This is what I received from Linda. So the first session is going to be devoted

to the philosophy of technical analysis.

I'm looking forward to hear some, you know, interesting thoughts and nuggets

that price behavior. And we absolutely study that from the not just price, but

also how effort volume influences that behavior.

how to quantify market structures and summary of some of the models Lynn is

going to show us today. Session number two, trading strategies and patterns for

stocks and futures.

Short -term and daily timeframes will be discussed.

Number three, very important.

A session that's going to be devoted on the process.

How do we prepare ourselves, or rather how Linda prepares herself for trading

and what can we learn from that? How to avoid traps laid by cognitive biases.

That is something that is so important for us because we're constantly being

bombarded unconsciously.

you know, from inside to behave in a certain way. So I'm really curious to

how Linda, you know, tackles that problem.

The importance of the proper context, you know, with Wyckoff method, obviously

each session is devoted to defining the context.

So that's going to be also very interesting. And then the last one is

recognize quickly whether short -term strategies are working or not.

In the disclaimer, obviously, all of these three sessions, everything that

either I or Linda says here is only for educational purposes.

Linda, with that, welcome to my special thank you so much for being here. We

are all looking for your presentations, and I'm going to switch the screen to

you.

Thank you, Robin. Let me know when people can see my screen.

Show my screen.

There we go. Is everything good?

Okay.

Thank you guys for attending today.

And I know it was quite a busy day in the markets, so I'm looking forward to

having some fun.

I thought that what we would do today is, first of all, I...

I really would like to lay the foundation as to how I see the market

as well as how I use technical analysis.

And then a lot of the models that I've built, I think you'll be surprised at

simplicity of most of them, and hopefully many of you will be familiar

basic concept behind the simple swing charts, which is really my preferred

of analysis.

I'm going to show you a smattering of models that I've developed over the

All of these are very durable and robust, meaning that even if I developed

30 years ago, the results still hold true today.

And that's difficult to do if you start putting in too many parameters and curve

-fitting things.

It won't hold up in the future.

My models are basically using no more than two variables and perhaps one

and then I feel very confident that that type of price behavior will hold true

in the future. Now, the downside is, of course, it's not a trading system, but

it will teach us a lot of things about price behavior, and I'm going to go

through each of these models and discuss what it taught me about price behavior

along the way.

So with that, let's see here if I can scroll these little slides.

Okay, very simply, with technical analysis, I'm just simply trying to

the most immediate trend.

It doesn't matter to me if a trend is on a five -minute chart or a weekly chart.

A trend is really pertinent to the time frame that you're on.

So, for example, you could be looking at a 30 -minute uptrend within the context

of a daily downtrend. And as you all know by now, I'm sure that trends are

simply higher lows and higher highs.

That's my definition of a trend.

It has nothing to do with moving averages or anything like that. It's the

pattern in the swing. So you could have a pattern of higher highs and higher

lows on an hourly chart within the context of a downtrend on the dailies.

when I trade...

I think the most important thing is to be conscious of the trend that you are

trading. So there's nothing wrong with trading an hourly uptrend within the

context of, say, for example, a daily or a weekly downtrend. And that's where

you have to be really clear about exactly what market you're trading and

time frame you're trading.

So in addition to capturing the most immediate...

which is simply the supply, demand, and balance.

I also like to identify the turning points at the ends of swings.

That's where you have your best risk -reward.

And we'll look at a lot of those patterns in the second session, how we

those turning points, at least the things that I look for.

I am a big believer that I cannot.

predict how high a market's going to go or how low it's going to go.

I don't know when it will get there. See, it'll get you ill if you won't get

there, but when it will get there.

And even today, the markets never cease to surprise me.

Things always go further than you think they will to the upside, and they go

further than you think they will to the downside.

think there's any statistically significant way to predict where a

going to go. We can only predict the most immediate trend that's intact, and

we start to get signs that we're getting a loss of momentum or a price

rejection. I am a trader, not an investor, so I really like to position

myself.

in a manner where perhaps you have the chance of getting a greater than normal

win. And we're going to look at these patterns in the second session as well.

Where are the patterns so that we can position ourselves where there's an

opportunity to trail a stop?

So in other words, a simple bull flag or bear flag, you're not going to

necessarily trail a stop.

You're just going to play for a swing up or swing down.

Whereas, say, for example, you have a breakout from a prolonged chart

that would be a case where you have potentially a room for a bigger win. So

we'll look at the difference between market structure.

capturing a fat tail versus just playing for a sure but small profit.

And that's the bottom line. If there's a dollar lying on the sidewalk, certainly

you're going to pick it up. Those could just be little scalp trades.

But we do want to be aware of positioning ourselves in the direction

could get a fat tail. That's not necessarily the case for investing.

Investing, perhaps you want sure or steadier gains.

Goodness gracious.

What was that stock today?

BPHT, a biotech stock.

Okay, that's the type of company where you might get a fat tail in your favor.

But lots of times the goals of an investor obviously are much different

goals of a trader.

I always try to model anything I can to create a structure.

I don't trade with systems.

I have yet to find a system that I would trade with if I had developed one that

I believed in that worked for all these years.

But the point of modeling is you must have some type of structure, because

tell you, I'm the first to say that I've got numerous cognitive biases.

Everything affects me, whether I want to admit it or not. It's difficult for me

to get it out of my head.

And so I remember once talking with Ned Davis. He gave a lecture, and he said,

For traders, it's very important to have some type of objective indicator.

That objective indicator could be something like a higher or a low or a

pivot or perhaps an oscillator reading, something that's concrete that's black

and white that you can't argue with.

Obviously, chart formations have a lot of gray area in them, so it's very

difficult to –

You know, a lot of people get cognitive biases when they look at chart

formations. You know, sometimes you can kind of see what you want to see a

little bit, even though experienced technicians know you can draw trend

and say, well, the odds are it's going to be head and shoulders or whatever the

case may be.

But it's still important for me to try to have a modeling process that I can

quantify.

And then around those, you'll see, we'll go through some examples, how your

models can change with each new piece of market information, and that allows a

lot of flexibility.

An obvious example would be if you had a breakout from a chart formation, but

then it came back in to the chart formation, you could say perhaps that

Wyckoff spring or upthrust. But at the time, the very first bar, it might have

looked like a breakout.

So we have to allow the flexibility to change our models or adapt with each new

data point that the market gives us.

So like I said, I'm really looking forward to laying this foundation for

because then I'll be able to present more concrete tradable patterns and

have some fun in the second session.

Just quickly, theories of price behavior.

That is what I love to study and it's actually...

not a complicated thing because you're just looking at supply and demand

equations. But there are some conceptual things, for example, auction theory,

the process of price discovery.

I think that in the last ten years there's been a much greater awareness of

market profile types of concepts.

And this is actually the auction theory, the process by which you're trying to

arrive at that equilibrium level where the supply and the demand can balance

out.

Another theory, the theory of efficient markets, I don't think any of us accept

that theory, that they fully reflect all available information at all times, and

that's probably because you've got a bunch of humans and algos and things

cause little distortions and biases and crowd behavior and things that might

take away from the efficiency of the market.

The theory of reflexivity was made popular by Soros, George Soros, and

essentially that a market is going to overshoot from one extreme to another

extreme, perhaps going from extreme bearish sentiment to extreme bullish

sentiment or overshooting in terms of a parabolic rise where price way exceeds

what would be a natural equilibrium point.

And that's often where we get these positive feedback loops.

such as short squeezes or long liquidation flushes. So that's just

of defining some of the aspects of price behavior.

Catastrophe theory is pretty interesting because it was the very first theory

that I came across. I mention it in the book in San Francisco's business

library. And it's different from chaos theory.

Things are in a normal type of behavior and then you just hit this freak radical

point and you jump to a new plane or there's a dislocation in the data. And

see this all the time in the markets.

It was never really accepted as a theory of price behavior because it didn't

have any predictive value.

But it does make a hats off to the fact that truly.

This price behavior is not linear, even though we would like to pretend that it

is. It's not a linear system.

And lastly, I just have to mention the black swans, the fat tails.

that it is not a normal bell -shaped curve, that the distribution much favors

the tails more than we would think so in our normal statistical models. And

that's what's difficult for us humans to see, is to accept the fact that risks

might be greater than we think they are, and likewise, of course, opportunities

could be greater than our models are telling us.

So let's move on.

Basic modeling.

Modeling is nothing more than asking questions.

And when I started off modeling the markets, all I did was a piece of paper

a pencil and sit there and write down price and levels and

fill out spreadsheets. And, you know, it could be.

Of course, we've got so much more sophisticated software available to us

but it's really about asking questions. So anything you see during the day or

that crosses your mind, there's usually a way that we can model that.

and we'll have some fun as I move forward and look at some of the things

we've modeled.

And also with the modeling process, sometimes we think that there's a

pattern that has a frequency of occurrence, but then when we start to

and we look at the times that it doesn't work, we can learn just as much from

that as well for looking at where the situations don't work. Hang on one

My dog was barking outside. I wish she had to shut him up there, so sorry about

that. Okay.

Yes, I know. I've got this yapping in the background. I'm like, I just had a

busy trading day, and I'm trying to give a presentation, and I don't need a

little yipping dog in the background.

Okay. So let's just get on and think about some of these things that we can

in terms of our modeling.

Basic questions.

What happens when price hits an extreme, meaning perhaps a five -standard

deviation move?

How far is something going to retrace after it's moved a particular distance

away from a moving average? Or perhaps these are things that we can't model.

Sometimes you can't model those things in the case of an outlier. Are there

particular tendencies at a time of day?

We'll look at this as we move on, too, because definitely there are.

And there's day of the week tendencies as well.

You know, all of you are very familiar with the seasonal tendencies, how a

market acts before a holiday or around the first day of the month.

What happens if you've just had a very large standard deviation move?

Let's say the market makes a five standard deviation move. What would be

expected outcome after you've done that? And vice versa, what happens after the

market's had a sustained period of below normal volatility?

All of these things we can ask questions about.

And again, we're not trying to create a system.

I don't use stops when I'm modeling.

So right there it tells you, please don't use it as a system.

Pretty much when you do use stops, you will degrade the system or the model.

So we're just looking for tendencies.

And we're not concerned with the actual dollar P &L, but I just want to see the

frequency of occurrence and whether it's something that can lead to a larger

than expected win.

So you can see just some basic, basic questions, and we'll try and keep it

simple, just two or three variables, and then we've got something that will hold

up over time.

Just again, a system has a well -defined rule set with entries and exits and

risk management. I know that you guys know all this, so I'm just going to

through this.

But I do want to mention this alternation of states, which is really

problem in modeling, is that you have periods where the market is extremely

efficient, such as a sustained trend, and then you have periods where the

is very noisy and trading range.

And what happens sometimes is when you try to develop a system or model things,

All the data from these positive feedback states and these severe trends

lumped in with the negative feedbacks, the trading ranges and stuff, and the

results sort of cancel each other out a little bit.

So you have to be aware about the actual environment that you are trying to

model.

See, so it's this linear thinking, you know, everybody would like to fit the

market in a black box. We would like to take a model such as an Elliott wave

type of model with the swings and so forth and be able to categorize it in a

formal structure.

But we really can't do that. The markets just simply don't work that way.

And it's probably a good thing that they don't as well.

Okay, we're going to just get back down to the hardcore structure now.

I try to model things first as a departure point with wave structure.

And if any of you have read Art Merrill's book on filtered waves, he was

of a pioneer in terms of modeling these waves.

And he used a percentage function.

the intermediate term trend, the longer term trend, so forth, you can do the

same thing with the wave structure.

Art Merrill said, okay, if I do a filter and only look at the 10 % swings, or if

I look at the 5 % swings, it will allow a lot more swings in it.

Well, what I do is I use an ATR function, an average true range

And this is essentially something that Wells Wilder wrote about almost 30 years

ago, and it's simply 2 .5 ATRs up from the

highest close or 2 .5 ATRs down from the highest close, or

lowest, excuse me.

ATR up from the low and ATR down from the high, and it will create a pattern

the waves, and we'll see what this looks like on the chart.

So this is nothing more than another way of defining swing charts, and

from there we can define the patterns in the swings, and we can actually

categorize them as to whether it leads to a small swing or a big swing

possibility.

So essentially, you know, I know there is somewhere there is a little pen that

I'm supposed to be able to use here. Yes.

All right.

Here's your trend, higher lows and higher highs.

And now we have a case where we make a lower low and a lower high, but this

not constitute a trend reversal.

This is just a warning sign.

So this is a really important pattern here. It's a warning sign.

And same thing with this. When we take out that last swing low, it's not a

reversal, but it's a warning sign.

Why? Because we could just be an ABC up like we did here. So this is still an

overall uptrend because to create a downtrend, you have to have a lower high

and a lower low.

and then turned down from there.

So you see how that process is? Here we made a lower low and then turned down

from there. And this whole thing almost looks like a head and shoulders top type

of chart formation.

This is probably the most important formation in technical analysis, this

consolidation that either leads to a new leg up or it fails.

All right? So this is so important. If you want to identify the maximum risk

-reward opportunities, they come right here. And part of the reason is is

because the process of doing these swings right here forms a line.

So you see that? And if you're familiar with this market profile concept of

having the high -volume nodes, where the maximum amount of trading took place,

what happens is when you pull up out of this structure, you're either going to

make a new leg up or a new leg down because this process is making the

come into balance.

So a very cool thing there, just a very cool concept. And, of course, These

little flags along the way, these are excellent points for playing for a small

target because obviously you can just go up and fail as well. They don't have

the big target potential that this ABC does.

Let's see what this looks like on some charts here.

And you'll have to erase it first and then pick the normal one.

Okay.

So I erased everything.

And then, yes. There we go.

Teach me to have fun with a pen. Sorry about that, guys.

All right. So this is a dollar index. This is actually from 18 years ago.

It's kind of cool because this market has been building repair, and you can

where it was once upon a time. This dollar index was at 120.

This is a weekly chart.

So the other thing that I'll mention that is really important is that the

are always going to be cleanest and most distinguishable on the higher time

frames.

The lower the time frame that you go down to, the more noise.

So you can see right here this one little structure where we had the lower

so it's kind of this ABC consolidation thing, and that led to a pretty much new

swing up. And same thing here, this little bit of a chart formation here,

ended up bringing a new swing down. But higher high, I mean, excuse me, lower

high, lower low.

Right here is your trend reversal point. At that point, you can definitively say

that the market entered a downtrend.

So same thing here on the inverse. This is the dollar index

to the upside. This isn't the dollar index.

That slide's cut off there. Whoops.

So you can see the process of thinking about a failed ABC.

You have the ABC up, you come down, and then when you take out the high of that

ABC, that is your maximum potential for capturing an

outlier. So think about a failed ABC, and that can lead to your big win.

Obviously, swing charts sound so simple, but you can see there's still plenty of

volatility here. So the computer was saying at this point, all the way

here, that this market is still in an uptrend. And the reason I say that is

because just because we think something's in an uptrend doesn't mean

still shouldn't use some type of risk management or risk control. This would

have been a painful downdraft to ride out before then making a new high.

So a lot of times with stops, what I do is I tell myself, if I get stopped out,

then that's allowing me to reenter the trend at a better price.

That's just a little mental trick that you can use. But I just did want to show

that even in uptrends and downtrends, as we well know from last year, you do

have substantial volatility.

And one more example here of the boons, a daily chart.

you know, little chart formation, and we have our lower high,

lower low, and when we take out that lower low here, that is the point where

you've got a trend reversal.

So everything I look at, I love looking at the swing structure, and obviously

our job is to only trade the swings.

that are going to lead to a supply -demand push imbalance.

We don't want to trade every swing. I think that that would be way too much

brain fry.

The last concept I want to mention, this is just on a short -term tick chart,

but it could be any time frame.

And that's how I look at charts, by the way. This could be a weekly chart. It

could be a daily chart. It could be a one -minute chart. All I see are the

swings. And this concept of the sideways line where price fluctuated around a

central value lot is also the last component of structure.

So I know at the very end of the third session, we're going to look at specific

markets. But just for fun, I wanted to show how this plays out with some

markets and what it will look like when I plot the swings.

Again, this red -green -red rule is simply if it moves up off the low by a

certain average true range function, it turns the swing green, and vice versa to

the downside.

So it makes it very visually pleasing.

in terms of pattern recognition.

Very difficult to create a system off that, but it makes it very pleasing.

And I always like to look at two time frames at once. So we have the weekly

charts and the daily charts. This is IBM.

At the bottom of swings, one thing that we can often find on one time frame or

another are these types of divergences. So even though this was a major

downswing and we took out that low, there was still a momentum divergence

led to a good drive back up.

Now I overlaid a zigzag function.

This is a default on CQG, but actually TradeStation has something similar.

packages do provide some type of function or you can draw it by hand or

good chart study, it's easy visual inspection just to see the swing highs

swing lows.

Another trick, too, is this is a relatively fast oscillator here because

difference between a 3 and 10 simple moving average.

But if you were to plot...

A slower stochastic, and just look for the turning points on that. You'll see

that it's pretty analogous to highlighting the swings as well.

So I'm not going to say much more about this, except for the fact that the

weekly chart of IBM is still in a downtrend.

With that said, I don't look so much at...

The weekly trends, because the trend reversal can only come like once every

or six years. It's a very, very long time horizon.

But you can see here, the thing I wanted to point out with IBM on this daily

chart here is that the computer will say this is still in a downtrend. So even

though we had this huge rally here, it's a downtrend because it still needs to

make a higher low.

These are just formable rules. It's not a trading system.

It's just a way of categorizing things, because when we do start to look at

relative strength, then it becomes critically important to be able to

categorize it. Now, this is interesting, too, because Apple Weekly, I just

wanted to show the contrast.

Apple Weekly is still in an uptrend, and conversely,

this chart right here would show that this is now in a downtrend since we made

lower highs and then took out that low.

So I thought that was sort of interesting where you can see that one

still technically is in an uptrend and this one is in a downtrend. I know that

sounds confusing. Don't try and think about it. It doesn't matter because

find ways to harness this information later in a very simple mode.

Now, I'll also say that we know, see this V spike here on the weekly charts?

We did a lot of modeling with these swings.

And you would be surprised that these V spikes, meaning sharp up, you can see

this last upswing was greater than the previous upswing, and this last

was greater than the previous downswing. So that constitutes a V spike.

These occurrences in the data are a lot more frequent.

than you might imagine.

You know, we like to think that you can just play flags and continuation

patterns up and down and then you'll enter a nice normal trading range, but

that's not so. We get these radical sharp up thrusts and then coming back

and vice versa more than you think.

Now, typically what happens is if you have a sharp up and a sharp down, the

expected outcome is that it'll start to form a prolonged trading range.

So I would suspect that Apple right here, I would guess that this is going

start to form a very prolonged trading range until it can start to find its

balance and equilibrium level. So if I were looking at Apple, I would say it's

lousy investment stock right now because it's probably going to go nowhere.

And this was sort of random. I was actually trying to call up another

I came across this stock purely by accident.

You know, I'm sure you go to punch in the symbol CI or something.

CCI, I'm like, I have no idea what it is. I had to look it up. It was a REIT,

right?

Crown Castle, I thought, well, this is a pillar of relative strength.

And the one thing that's most notable is that when we had that huge weekly sell

-off at the beginning of this year and the end of last year, you can see the

weekly charts here still made a higher low.

At these cycle bottoms or at these extreme points, that's one of the best

components of relative strength that you can do is say, where are the swings

that were up higher than the previous lows, and voila, there was pretty much a

nifty push to new highs here on this daily. So we had the weeklies in an

uptrend. And the dailies were in an uptrend. And remember what I said about

ABC, ABC, ABC.

These types of waves are very well behaved.

And so that was funny because then I called up this stock just out of

And I was like, wow, two radically different.

and it should be a very common sense type of thing that this one had much

investment opportunity, obviously.

And that, to me, is the crux of technical analysis. It has to be common

It has to fit the common sense bill. And so I try to refrain from using anything

like Fibonacci numbers or pivots that people can't see in the market.

You know, just Elliott Wave doesn't work for me because two different people can

come up with the same conclusion, you know, totally different conclusions.

You know, I can't have this alternate count thing because you don't get to do

that in your trading. You don't get to say, oh, well, wait, I'm going to back

and trade in the other direction.

That was just an interesting aside.

And then lastly, I thought this was kind of interesting because these 30 -year

yield charts, right now there's a lot of focus on the yields. Of course, the

boons went screaming to the upside today.

But this was the weekly chart of the 30 -year yields.

And you can see what we did here. It was one of those sort of V -spike things.

So normally, when you take out... that swing high, you should not come back

that range by more than 50 cents. That's 50%. That's a real failure.

And here, I thought there was a chance that we would be able to break out more

to the upside when I printed off this chart, and it just failed to get any.

As I say, it didn't catch hold.

And you can see the swing ended up being shorter than this previous swing. And,

of course, where were we today? We're just trading back down around here. And

looks like very probable this could be a big, broad trading range environment as

well. So the daily chart is always going to give a better.

a different picture than the weekly and a different picture than the monthly

because I know it's very easy for people to get way too bullish on this market

or way too bearish on this market, but it looks to me like it's pretty much

in the water here for now.

Okay, so let's go on and look at some more nuances on different types of

strategies and models, okay, because we're really talking about the models

I tend to categorize most of my models and strategies into several different

groups. Momentum strategies, obviously, like a breakout and continuation and

trend.

Mean reversion after the market's had a big move. Mean reverting strategies as a

market tries to wind down to equilibrium.

And then we also have specific strategies that we can model, such as a

opening gap or time of day functions, even seasonals.

categorize as a specific strategy.

And then I don't want to elaborate on the rest of this stuff too much, but the

market profile concepts, really important when we start talking in our

session, open, test, reject, okay? Open drive, open rotate, open trend. These

were all things that were written about by Peter Stottlemyre originally.

Jim Dalton popularized them. And it's just the fact that when a market opens,

and you can think about the start of the new year as being an opening, the start

of a new month as being an opening.

It's that first data point. And when we judge the market's action, we're always

judging one data point to a second data point. So if it's the market opening, On

the New York open, it can open and it can rally up and then fail. In other

words, it tested to the upside and rejected it.

Or it can open up and rally straight away and never look back. That would be

open drive.

Or it could be open rotate, meaning that you just turn around that central value

and really go nowhere.

So you can think about this, again, at the start of the month. How does the

month play out? How does a week play out? How does the day play out?

Is it a rotational trading range year?

It's just always judging the price relative to another price and how urgent

is that initial supply -demand imbalance.

What I try to do is pretty much capture a piece of the morning trend, probably a

little bit shorter time frame than the bulk of this presentation.

I like to see if I can capture the sweet spot because that's when you have Asia

still open, Europe still open, and the U .S. still open. So you're going to have

the best sustainability, at least for the products that I trade.

Non -confirmation, I know all you guys are aware of that. These are the types

things that I look at just in my definition of technical analysis.

Okay, with all that covered, I'm going to start to get down to some nitty

-gritty models and then what we can learn from them.

This is a two -period rate of change, and it is the only indicator that's a

derivative of price.

Because price is the truest indicator always.

And then when we start talking about a derivative of price, you're talking

a stochastic or an oscillator, ADX, things that use the

price in them. And those things are very, very difficult to use in a model.

just don't have a sustainable edge.

They're great for pattern recognition, but if you try and plug them into a

linear model,

It just doesn't test out.

But the two -period rate of change is the only indicator I've found where

there's a statistically significant edge. Now, mind you, you're not going to

rich on it, but there's selective patterns that we can use. And the first

I wanted to point out here was making these new momentum lows on this two

-period rate of change is one of the strongest.

and most durable statistics. So we made new momentum lows, and here's

the catch with any oscillator or indicator, you also made new price lows.

So if we have a case where we make new price lows and new momentum lows, the

price has great odds of still trading lower.

So it's a very good leading indicator, if you will.

And you can see what I like to look for is this up 1, 2 right here, this little

drift pattern, as it's called in technical analysis, and then we revert

down. So this is just the first little thing that I like to look for in trading

that's pretty much a gimme, one of those 90 % trades, looking to short the first

reaction up after that new momentum low. So that's a pretty common one.

Also, you'll see that the little...

Divergences can show up exceptionally well on this when you have the buy

divergence here.

And then, of course, the price made a new high, and we actually ended up not

quite making a higher high until right here.

But this is the little pattern recognition that I like to look for.

another little drift pattern with this down one, too. And we were actually able

to model this pretty substantially.

So along with this two -period rate of change, it works best in an active

swinging market. Nothing works well in a trading range market.

But see if you can look for these types of patterns on a particular stock that

you like to trade or I only do it off of daily charts.

I don't use anything like this on intraday.

And here's my main goal.

I want to get the main idea.

Right for the day.

I don't always do that, but that's my objective is I want to say, is it going

be a low to high day or is it going to be a high to low day?

So if you just think about getting the main idea right, that's.

That's a good part of the game. Then it takes a lot less pressure on your

entries and your exits.

You know, in theory, if you could buy on the opening and sell on the close, of

course we don't do that. That's get the main idea right.

So when we have these cases where we're in an uptrending market and have this

down one, two, and we've got this close below this five -period simple moving

average,

It's a really high probability buy day and get the main idea right.

And so if I can just go in for one day at a time, one little piece at a time,

and take it from there, that is my favorite game. Now, what happens is

eventually you can see up here at the top, we've had our good markup, and now

I've got what I call is a three -bar.

This was actually something that Richard Dennis used, and I read it in a book

that was written in the 50s, talking about this specific little pattern where

you have the high is below the two -day high, and the low is above the two -day

low, and it forms a three -bar triangle.

When we modeled this, and by the way, you can't see the data point over here

the left side of the chart, but when we modeled this, we found that it had the

highest odds of follow -through the day after, although you can see it didn't in

this case. But what I mean by that is, how many of you are familiar with Toby

Cravel's work or that concept of NR7, narrowest range of the last seven days,

inside range days?

I'm always looking for where do we have the best odds of...

trading above that day's high the following day. So, for example, down

have a range expansion day up, breakout from three bar, and we actually traded

above this high the following day. So I'm just trying to take one data point

a time. So this three bar triangle, even though here it failed to do that, it

failed to take out this high the following day. In fact, it failed to get

expansion.

one of our most successful trading patterns over the last three years.

And then lastly, you can see this slow line here that I have plotted against

this two -period rate of change.

This is nothing more than that 310 oscillator, which I showed you earlier,

we'll look at some more.

It's a 16 -period moving average of the 3 and 10 simple. Whoops.

And there's so many ways we can create this same pattern recognition.

For example, if you had a fast stochastic, say a 9 or a 7 -period

and you simply ran a 16 -period moving average of that.

It creates the trend of the momentum. That's how I like to think about it. And

you can also see how closely it mirrors this moving average, the slope of this

moving average. So you don't even need this at all. It's just a crutch for

visual inspection.

But you can see the moving average sloping up and sloping down and sloping

And wouldn't it be so easy if, as traders, you could say we're only

take trades to the long side when you've got this upsloping momentum.

You're only allowed to take trades to the downside when you've got this

downsloping and so forth. And what we're going to use as our trigger, what I use

as my trigger, is looking for the points where this can flip up.

or flip down, and you can actually calculate out the pivots ahead of time.

And here was the first time that we rolled over to a negative slope, and it

to a wonderful shorting day.

And vice versa here, we just turned up, and it leads to a wonderful buying

day.

Obviously, I'm showing an example that's making it clean and easy for you.

Unfortunately, the problem is that the markets can also enter trading ranges

where the volatility just shrinks and there's not much opportunity at all.

So for me, it's really important as a trader that I go where the action is,

I go where the volatility is.

And I'm pretty much the first to admit that.

If it's a narrow trading range, 99 % of the time I'm going to get the breakout

direction wrong.

Okay, so I'm aware of that.

So back to our process of modeling, finding different ways to express

conditions.

Okay, and I am going to take...

Plenty of time for questions. In about ten minutes, I'll take time for

questions, and then we're going to continue on with the presentation.

So if you have – just hold on a little bit longer here.

The process of modeling, back to testing the entries and the exits and how I do

the modeling, I like to test things on a time window.

I like to say if I bought – on the opening and I exited on the close or on

the next day's opening or on the next day's close.

That's really how I do most of my modeling.

It's also if you look at seasonals or the tendencies that happen around

holidays. If you bought two days before the end of the last trading day and then

exited three days later or if we bought the day before the Thanksgiving holiday

and exited the next Tuesday.

This makes for the most durable and robust framework.

It's like an actuarial table, okay? Of course, you know, I know that if I have

15 occurrences, 15 different years, and 13 of those years are right, okay,

this is just basic modeling stuff. If I look 15 years, I have a sample size of

15 and 13 wins, the odds of a win going forward are only...

It seems like they should be more, but it's not. So it's just a probability,

the reason why it's not more is because you have a fairly low confidence factor

because of the low sample size.

So when I do my modeling, I'm looking at simply if I bought on the breakout and

exited on the close the following day, or if I entered at 12 noon and I exited

at 2 p .m., these types of little pieces of small data to me are really

what has made my model hold up over all these years.

I'm not going to go too much into stops, but we do test different things with

stops. You know, if we trailed a channel stop or we trailed a dollar stop or a

percentage ATR.

I like the time stops and I like the disaster stops, which are like something

very extreme.

And what we found in all of our modeling is that a combination of two stops is

what works best.

I tend to prefer a time stop.

and a channel stop.

So you could say, I'm going to exit after five bars or if it stops me out by

making a new three -day low, okay, for example, in a long. So I'll hold that

long for five days. If it hasn't reached the point where I can trail a stop or

exit, I'll just exit on a time stop or the channel stop will take me out. But

the point I wanted to make, if you're going to create a system, you actually

will do best if you can find two different types of stops to combine.

And we're not developing systems this particular session. We're just doing

models and stuff, but I have to mention that. And then also for the filters.

We can use the time of day, the day of week, seasonals. For example, some

tend to work better at certain times of the year, especially with stocks.

There's groups of stocks, for example, retailers might be better at one time of

the year. Oil stocks might be better at one time of the year than the other

year. Just little subtle nuances.

Volatility filters, are we in a range state?

Or have we broken out and are trending?

Here's something interesting that you might find interesting is

ATRs. Okay, when we do a lot of modeling, we're looking at breakouts and

patterns. I meant to say ADXs. You would think, paradoxically, that when you

have a low ADX, that means there's a lot of price bar overlap.

that that's the point that you should do a breakout trade or that's the point if

you bought a new high, it could lead to a bigger win.

And in fact, the opposite is true.

So if you're in a very choppy, narrow range and it looks like it's coiled

to break out, what you'll find is that it tends to give two or three false

breakouts first.

And so the moral of the story is let the market come to life first.

Let it tip its hand first before you go sticking your nose in it. Then the

swings are tradable.

Buying a new 20 -day high or whatever model that you're looking at tends to

much better.

So don't get stuck in these dull, quiet markets thinking that it's going to come

to life.

Okay, now we're going to have some real fun. I'm going to show specific models

and what each one of them has taught me, and you'll see the different ways that

we have actually modeled data.

This particular model was simply going long when that two -period rate of

that I showed you made a 30 -day high and going short when it made a new 20

low. Now, on this particular model, All we did was test for a very small target,

.5 ATRs.

You'd be like, well, what's the point of doing that? What's the point of getting

into a model and you're just playing for such a really small target?

Because I wanted to know that I would have a super high win rate. And from

there, then you can always trail a stop, take half off and trail a stop. And how

you manage these trades is really a big component of most of these systems. But

the point being, with every single market across the board, when we went

after the two -payer rate of change had made a new high, we had an 80%.

So that really tells you the power of the momentum. So here you can see on

Canadian dollar, our two -period rate of change made new momentum lows, and we

went short, and we just played for a very small piece, half of an ATR with a

very wide stop, but you'll see super high win rate, super high. And same

right here.

Now I'll tell you one more trick that we'll look at just in a minute.

and that is we can get this win rate up to 90%, but it's going to take a little

bit of pattern recognition, and I'm going to show you very clearly how to do

that. But that's pretty cool that I can get a 90 % win rate playing for, of

course, a small target on every single market out there.

And so this concept of momentum is very seductive.

And here is another case, natural gas.

Perhaps you had to take a little bit of heat in here, but you definitely led to

lower lows.

So one of the first tenets of technical analysis is momentum precedes price.

And here, same thing to the upside with the bonds, just starting along the way,

and same thing here to the downside.

Now, you can see on the chart here, it doesn't look like this market's in a

downtrend. on the daily chart, right?

But there's a big difference between new momentum and a downtrend.

Now, here's one of the little traps that I wanted to show you. This will very

often happen when you have a long liquidation flush, which

can set up some of the best buying opportunities, just like a short squeeze

as well.

So this would be a case where we made new momentum lows, but the price didn't

even take out the five -day lows. So we didn't really have a new price low

there, and that's why this would be a false signal. That would be one of the

% of the times that it didn't work.

Do you see the difference? We can take any indicator out there, and the most

important thing is to put it in context.

Put it in the context, is it just a flush or is it really breaking out to

highs and new lows?

Let's look at another trade. This is fun. This was a pinball, and this was

actually published in the Street Smarts book.

And what we found out, of course, after the fact, or else I wouldn't

purposefully withhold anything,

Once you added this filter of only taking the longs if it's above the 20

exponential moving average and only taking the shorts if it's below and

end days after, this is what it would look like. This is the indicator down

here, which is a three -period RSI of a one -period

rate of change.

And you can see here if we bought and then always test out exit day one, day

two, day three, that type of exit, all of these were specific

signals here.

And then this would be the results of the pinball.

And you can see it's not profitable in every single market, but it's profitable

enough that it would catch our attention.

Now, keep in mind, we didn't add any filters to it, such as don't take the

pinballs after a divergence or after a buying or sell climax.

It's just like the last flag and the end of the run will be a bad one.

But the point is that this is a particular pattern that holds true in

stocks, in all futures markets, and just about any market.

And it's just a general.

66 % win -loss ratio, and it's one of the little patterns that I like to look

for to trade.

This is probably the most eye -opening modeling for me

that really changed my thinking in the markets and trading, and I called them

extended runs or persistency of trend.

and I'll show you what it looks like right here. A persistency of trend is

multiple closes on one side of this five -period simple moving average.

So down here at the bottom, I have a histogram that's the difference between

one and a five -period moving average.

So it just tells me that if this is negative, it's below the five -period.

Moving average. See, it's a neat little trick just for visual processing here.

And the reason why this was such an important modeling for me is because

as a trader, I like to be more aggressive on short terms. You know, if

swing trading, you buy for two, three, four days, you sell for two, three, four

days, you buy for two, three, four days, and you get into a nice little rhythm.

And then once in a while, one of these trends come along and it trends and it

trends and it trends.

And if you're too early, you know, it's a good chance it's going to be very

painful. So here you can see I have multiple closes on one side of this

moving average. So we simply said, for starters, after we have seven closes on

one side, what happens if.

I'll just say the computer shorted the first close above, and then the computer

covered the first close below.

Okay, so that's the way I do my modeling is I'm not looking at specific

techniques to time the entry or manage the trade. I just want to say what

happens if the computer went long and the computer then covered, and you'll

Pretty much four trades here. Two were winners and two were losers.

And I always make it a point to show you guys what the losers would look like

from a computer's point of view.

So, of course, if you shorted here on this day, on this close, you had plenty

opportunity to cover it for a profit in the next two days. But the computer

covered it.

Right there. So the computer shorted there and covered there.

The computer shorted there and covered there. And that's how I do my modeling.

But in this process, we learn tremendously powerful things.

Here's the just simple little retracement trades on the spiders. And

just a little, it's just a little testing thing. Sometimes it leads to a

new swing, but we're just playing for this first little reaction down and the

first swing up. And that's simply if you've had seven or more closes on one

of the five SMA, five period simple moving average.

The first reaction on the opposite side of it just sets up a simple retracement

trade. So these are high probability trades, but small wins, small

targets. They're the opposite of capturing the outlier.

What would capturing the outlier be?

Capturing the outlier would be if you could capture this.

whole run down, the whole new swing down. Being able to capture this

run is really where the power is.

And there's some of these things that we'll look at that do that. You can see

right here, one of the little patterns at the end of the swing was that three

-bar triangle in an oversold market. Whoops, right down here.

Obviously, the break from the ABC consolidation.

and we'll look at how the weeklies or the higher time frame is of critical aid

in bagging these extended runs.

Now, here's a very skinny scalp at the top of this extended run, okay, and

we're going to look at the numbers between when is the market too

too oversold to really play this.

Okay,

the tables were coming to that, but the tables simply will show that once you

hit 22 closes on one side of this five SMA, it's actually better

to trade in the direction of the first cross.

So, yes, something can become way too oversold or way too overbought that you

would not want to do a retracement trade at the end of it.

Now, here's another thing that's really cool.

Every single market that we've modeled, and there's about 28 futures markets,

including the currencies and the bonds and soybeans and everything, every

market has had at least 28 closes on one side of a five SMA.

Think about that. That's ridiculous. That's like five weeks of steady grind.

And if you think that you're smart enough to know when the bottom is going

come in or the top is going to come in, it's extremely dangerous to try and play

that game.

So we started off asking, okay, what happens if we actually go long

when a market has had ten closes on one side of the five SMA?

I mean, wouldn't you think that the market's very overbought?

Why would you possibly want to go long if it had already been up ten days?

And then we said, well, okay, then hold it for 10 days after that.

And so we did this type of modeling where here's a case where we were going

short after 10 days, and then we covered the short after 10 days.

Here's another case where you went short after 10 days and covered after 10

days.

Now, mind you, I'm not suggesting that you do this as a system, nor am I

suggesting.

that you do this as a trade.

But what it does illustrate to us is that there's a ridiculous power to this

trend, to this degree of trend. And it's hard for our brains to conceive of just

how far this trend can go.

Natural gas.

This was one entering six days and exiting six days later. And then I'll

you the table for all these things.

Now, at this point, you pulled back. You'd say, who's going to go short

That would be crazy. We're oversold. We just bonked down a little bit.

But then we proceeded to bonk down even more. And then who's going to short down

here? Because at this point, you had one, two, three, four, five, six.

Six closes, and that's what we're modeling. Who's going to go short here?

be crazy.

But it still turned out a winner.

And this is the grid that shows that at the top on

this here, the number of days after we entered.

Okay, so say, for example, you've only had four closes above.

You can see that's not very profitable to go long after four closes.

Here you have eight closes above.

And if we go across over here, the number on the left, whoops, I got it

backwards. Okay, so this would be entering after five closes, exiting

four, five, six, seven, eight days. You can see, not a significant number. If

anything, you would want to make a counter trend trade after five days.

But when we start to jump to eight days on one side of that five -period simple

moving average,

Look what happens if we exit five days later, six days later, seven days later,

eight days later. The longer the holding time, the greater the profit potential.

It was such an eye -opener to me to see that I could enter on day eight when it

felt like the trend had really gotten away from me, and yet still the power of

these numbers is saying, nope, can still easily go for another week or two.

Now you can also see what happens when you enter on after 19 days.

After 19 days, the results start to get fairly negative, and that was the

threshold at which we said we don't want to play that game anymore.

Okay, so.

This was sort of the composition, the makeup of these markets.

And I always remove the biggest winner and the biggest loser then to see what

the results would look like after that. Because, as you know, with systems or a

model, it's going to be very dependent on just a few markets making the bulk of

the profits. For example, a trend -following system, we might have a

15 different.

stocks or futures that we're using in our trend following system, but truly

what's going to happen is three of those are going to make up 70 % of the

profit. So I still have to see that if I remove the biggest winners from my test

result, do I still have a viable edge?

That's something that I always consider in my modeling or testing.

Remove the biggest winner and conversely, I'll also look at removing

loser because that could be perhaps a big gap or a big outlier that might not

happen again. I just want to see that it works on both sides of that.

So here is where we're talking about going with the reversal, and this

is when things do get parabolic.

So you can see a case here on these 10 -year notes.

Can you believe we had almost 26 closes on one side of that five SMA?

You can see how dangerous it is to try and pick a bottom. And even if you

thought, oh, this is a selling climax here, it's so seductive. And then the

day we spike right back up.

But, no, there's still more to go. And trust me, we've all gotten caught in

these traps.

But it's just the power of the numbers. Here with the first close above. So now

what happens if you went long on the first close above?

And then, of course, we test exit day one, day two, day three, day four. And

when something gets that overextended, then you can play a total countertrend

game.

Actually, you can see in stocks, you can see in futures, you can see in almost

every single year examples of this. And it just keeps it open to the fact that

there's these radical occurrences that we don't normally see in the data. We're

so used to seeing something that happens with a regular frequency that when we

do get, like, for example, the radical sell -off that we had at the end of the

year. You know, it rattles us just a little bit because we can't say, oh, it

happened like this and this year, this year, this year, this year.

So, therefore, the confidence, your confidence seems to be at a much lower

level, right? Right? I mean, at least that's the way I work. And, of course,

goes without saying that it's always obvious after the fact, right? So if I

there and I only had the data up to this point, you'd just think, um.

I get to play with my pen again here.

It doesn't matter.

At this point...

You can't see what's coming. I mean, as a technician, you can draw trend lines

and say there's a triangle.

You could even do some type of measured move. The width of the triangle might

project down to here. There's all kinds of things we can do to open our eyes,

and that's the importance of technical analysis too, such as point and figure

charts. Point and figure charts will give you the count or the sideways line

that can give you a downside count.

But remember, I said, things always go further than we think they will. And

that's so important in trading and investing, just to be aware of risk.

If I had to say that sums up the bulk of my experience after 39 years, it's that

the market.

continues to surprise me every month, every year. I never know what's going to

happen. And I just, it's like the more I've been in the markets, the more I

that I don't know if that makes sense.

That used to be Mike Epstein's favorite expression.

Maria Mulder, Mike Epstein was a longtime member of the Market

Association and APTA, and I actually have a whole chapter in the book

to him because he was sort of a surrogate father to me and told me all

amazing stories.

He started off on the floor of the New York Stock Exchange in 1950.

50 years on the trading floor. I don't know of anybody else that was on a

trading floor for 50 years and had memberships to almost every exchange at

point. And he ended up becoming the resident, what do

you call it, head of the department for MIT for their quantitative finance

quant lab.

You know, he was there for eight years before he passed.

Last time I visited him was up in Boston, and he had been losing his

from diabetes, and he had this giant magnifying glass, I mean like

six inches across, and he's staring at his one monitor with this giant

magnifying glass so he could see something. And it was at that time that

bonds were just breaking out to the upside.

30 -year yields were dropping below 4 % for the first time in my lifetime at

least. And Mike said to me, I don't know why they're going up, but I'm long.

It's a breakout.

And it was a point like this with the triangle. Nobody could see that it was

going to go straight up, you know, for goodness knows, multiple, multiple

And I'm trying to get out of this pen mode so I can.

Advance to the next slide here. Any help?

Yes, of course. Yeah, just press the normal mode.

Oh, normal mode. Okay, there we go.

All righty.

So anyway, that was, to me, probably one of the best technicians and best

traders and most savvy market people I know.

Mike Epstein, and here he is, long on a breakout, and he goes, I have no idea

why it's doing what it's doing, but he was positioned in that direction, and

that really struck a note with me. He goes, I have no idea where it's going to

go, but he was just along for the ride.

Okay, here's another case of just a few silver SM.

I wanted to show this just on one or two markets, and trust me, you will find

this equally well with stocks buying the retracement after you've had

a persistency of trend.

So you see there's two concepts here. We can have momentum concept where a

market makes new momentum highs or lows, and it can do that in a very brief

period of time.

But then you also have a different concept relating to trend that's this

persistency of trend and how long it can sustain itself.

And as you know, the old saying goes, trends always have greater odds of

continuation than they do of reversal.

And then, of course, up at the very top, we had just gotten too overextended.

price overlap here. That's the market coming into balance, and then it breaks

the downside and led to some more severe sell -offs. So this particular

model, these test results were done up to 2008.

So the numbers, if I updated this, which I haven't been able to do because my

The fellow that used to work for me put together all these grids. But the

numbers are about double what you'd see on here now just because the range is so

much greater.

And that is if we had 19 closes on one side and then we initiated in the

direction of the reversal and exited after one day, two day, three day, you

there's a window there of positive expectation.

So that's a summary of some of the modeling work I do.

Where's the expectation?

Where's the positive expectation?

What does it tell us about the market? Does it tell us about the strength of

trend or the sustainability of the trend and so forth? Always asking these

questions. Now, this is a different type of modeling because we were feeling

pretty frisky. I had Nigel working for me for 10 years, and he was just a

at using.

all different types of software to model different things. And it started off by

saying, okay, with the S &Ps, if we bracketed everything down into five

windows, let's get the distribution of when the highs and the lows for the day

are made.

And interestingly enough, with the S &Ps, if you just looked at the pit

only,

The best time of day for highs to be made would

be in the first 15 minutes.

So in other words, the market opened and pretty much broke on a number of days.

Now, obviously, there's a distribution all across the days. It's just that this

was the data point that stuck out the most.

And for looking for the longs, when the lows were made, it most often fell.

30 minutes after the opening.

So what that tells me is that the short side is much more urgent. If a market

opens and it's going to make its highs for the day in that first hour, it's

more urgent right off that opening price.

Whereas if it's going to rally, it tends to form an initial balance first and

then break out to the upside.

Now, of course, things are a little bit different with the urgency nowadays with

the overnight gaps and stuff. But I took that idea and I said, well, this should

be fairly easy.

Let's just model the whole 24 hours for every market and see where the time of

day is that we should trade.

And when I did that, I got nothing.

I didn't get anything at all. There was no.

prominent distribution point or something that would catch our

thinking, hmm, how could that be? That doesn't make sense.

But then when we broke it up into the market sessions, start of Asia, start

of Europe, start of the U .S. session, that's where we would see the spikes

would say when the highs or lows for the day most frequently occurred.

So you can see here when does a high occur most frequently in these markets.

And I've got gold,

the S &Ps, the EC, and the crude. I just took four markets here, and you can see

each of them are colored, but it shouldn't really matter.

And these spikes are when the highs are being made. So here's around Europe

open, and this is central time, by the way.

U .S. open here.

This is actually Europe close.

And then this is Asia open.

And same thing for when the lows are made.

So very often you see lows made in the middle of the day when Europe's closing

the end of the session.

And same thing, lows made right on Europe open, on U .S. session open, and

open. So what that tells us is any time that you have a fresh.

new batch of new market participants entering that market or just sitting

and looking at it, you tend to get a little bit more urgency, a lot more

comes in at that period, and that's where truly if you were to do some type

breakout strategy, you would want to organize it so that you were doing

breakouts from that early session, from the Asia session open or the Europe

session open.

or the U .S. session open. And I just thought that was really insightful, how

important it is for us to be prepared at the start of the trading day, because

that's when the opportunity is.

Hold on one second here.

Okay, this next model was some Bollinger Band work, looking at standard

deviations. And even though this table is way out of date, I wanted to show you

some things that were very insightful about the price behavior because we did

lot of modeling time of day that we could do counter trend trades and

days of the week that we could do counter trend trades.

So all we did here was take a five -minute S &P chart.

And by the way, this is a concept that will hold true for many different

markets. But we took a five -minute S &P chart, and all we did was say if it

hits the Bollinger Band, which is two standard deviations centered around the

20 -period moving average,

If we took that first trade and then exited when it came back to the moving

average. So it's a reversion to the mean type of program.

We don't have any filters on this at all. It could be any type of day, and

the reversion to the mean type of thing.

And you'll see right here there's definitely a positive expectation,

you would not do blindly on a mechanical basis because obviously you could have

a day like today that just opened and trended or yesterday opened and trended

the Russell.

But what was interesting was it only worked in the morning. It didn't work in

the afternoon.

So what that tells us is that there's the most uncertainty in the morning as

well, and that's where you can start to get a little bit more testing and

rotations in the opening session, and also why you don't want to fade a trend

that happens after 12 noon. It's very a low -odd type of trade.

So if you like to do counter trend trades, look for it early in the

the morning session before lunch. And you can see it's a fairly hefty win rate

here.

And somehow it manages to eke out a profit, even though you know it probably

smacked on some trend days as well, right?

And also what was interesting is that it worked better for the end of the week.

So we find that the P &L.

radically went up on a Friday, and that was because Fridays tend to have

narrower ranges.

There's not that urgency.

that you would find at the opening of the market or the opening of the week,

start of the week, you know, where you can get a much more urgent market, which

could run over a counter trend trade.

Whereas on Friday, pretty much we know where the ranges were for the week, and

it's going to back and fill and test a little bit more. And so that I also

thought was a very interesting observation, and that still holds true.

So this is...

I know that you'll have the slides, and I don't want to spend too much time

reading every slide, but this was very important for us in doing our

modeling. I need to have at least five or ten years of data.

And I want to see a consistent equity curve. I don't want a system or a model

that was distorted because it had two exceptional years.

You know, I can't base an S &P trading system off of 2009 volatility because

I'll never be able to duplicate those results again.

You know, same thing with trend -following systems. You need to make

it's over a very long, long duration.

And then the second thing, too, is if you are looking at a system, don't take

for granted that you're getting filled where your system says that it would. So

when I look at the results, I know that I'm probably not going to be able to

match that in my real -time trading.

It's just that way that it works out.

So these are just some other little tips.

win -loss ratio, by George, that's got to be fabulous to trade on a mechanical

basis. But an 80 % win -loss ratio can have six losers in a row. So can you

tolerate that?

Okay, here's another fun trade because we still do this every day,

just about every day. It doesn't mean that we do it mechanically, but this was

gap strategy.

This also is a story in the book about this gentleman.

I will give him the name of Genghis because that's what he called himself.

He came to work for me, and I told him he could trade for himself.

Right away, he's initiating trades, counter -trend trades on the gap up or

gap down.

I said, Genghis, what are you doing?

He said, I'm doing the burning dog.

I said, what do you mean the burning dog?

He says,

well, have you ever tried to pet a burning dog?

And I'm like, no, that was a terrible concept. So it was the thing that when

there was a large gap at that time, it was so shook up people that nobody

wanted to touch it. And he was blindly fading these things. And I said, you

can't do that, you know, because your risk is high. We need to model this and

see what the actual statistics are.

So here's the way it pans out. And keep in mind that this was just using a

generic four points, which obviously means nothing in 2009 when the average

range was huge.

But these are good gap rules. They're good gap rules for stocks.

They're good gap rules for pit session openings. Good gap rules in general.

And the trick with the gap is that the first play.

should be to trade back into the gap within two hours. Okay, that's what the

most probable thing to do would be. So we always looked at if you took the

opening price, can we get four points back into the gap if that gap

was greater than four points?

That sounds pretty simple. Market gaps up more than four points. Can we trade

into the gap by four points?

And we found that.

pretty much you get about a 70 % win rate if you played that game.

Some years it's been 76%, some years it's been 68%, but pretty much 75 %

of the time you will trade back into that gap by four points.

Okay, so that's a good start. That means that if the market gaps up, you want to

tape read it for just a little bit and then see if you get your trade back into

the gap.

Same thing with stocks. You know, the first thing that if it stock gaps, we

to see if it trades back into the gap by a little bit.

But then we said, well, what happens if you don't get your gap filled?

And what we found is that.

If you didn't get your trade into the gap of four points, that meant greater

odds that you would then trade in the direction of the original gap.

Well, that makes total sense, right?

So what we do now is if the market gaps by more than four points and it doesn't

trade into that gap by four points, we're going to be very aggressive about

looking to trade in the direction of the trend in that afternoon session.

It held its gap.

A breakaway gap can gap and trend.

And so same thing with stocks. I know that a lot of you are stock traders, and

you're probably pretty familiar with the fact that if a stock gaps up and it

does not trade much into the gap, in the next three days you have greater odds

of going out another week in the direction of the original gap.

So those can be really powerful gaps if a stock doesn't.

to make attempt to fill that gap within the next three or four trading days. You

want to be positioned in the direction of that gap.

So this was just kind of cool. This is how we modeled the table. I know it just

looks like a bunch of numbers and stuff, but the fact of the matter is this just

showed like every 15 minutes, every five minutes where the inflection point was,

and we pretty much came to the fact that One o 'clock right here, one o 'clock

was where you would want to go in the direction of the gap should you do that.

So days of the week. Lastly, days of the weeks.

We wanted to see if there are certain days that are trendier than others. And

already mentioned this, that Friday tends to be the least trendy day of the

week. And this was, again, just a very generic, generic Bollinger Band type of

model. And when I say this type of testing, we usually do like 500 sample

size, you know. So it doesn't look like anything when you look at the P &L,

okay. That's not the point.

But the point is that.

In general, Mondays and Tuesdays were the worst days to sit there and look for

counter trend trades. They actually tended to be the trendiest days of the

Mondays and Tuesdays. And then you can see here it totally dropped off at the

end of the week.

I'm not quite sure why these are.

Here was my table that was supposed to be in here.

when we made those new momentum highs and momentum lows on the two -period

of change. I know you're all going to have these slides, so you can go back

I'll make sure that this is in the proper order then when I give them to

But the bonds, 90 % of the time that you make a new momentum high or low, you

then follow through and get higher prices.

also was an important eye -opener to me, divergences, because divergences are

really seductive, right?

I mean, they look so easy to recognize as a pattern, and we did a pretty darn

good job of programming in a divergence into the computer, and you all know what

they are, where the price makes a higher high, and an oscillator or a momentum

function makes a lower high, and so we wanted to see what happened if the

divergence didn't work, and if the divergence did work, how long was the

average trade in duration?

Okay, so these are all the little statistics that we used to program it.

what we found out is that when a divergence fails, okay, really

when a divergence fails, it can go four to five ATRs against you.

And it continued to move for 15 bars against you.

So what that tells you is that you darn well better need a stop in place if

you're making a counter trend momentum trade, thinking that there's a

divergence. And when it does work, it tends to hit that moving average within

four to seven bars.

So if you don't show a profit after four to seven bars, you want to get out.

Because then if it takes you out, it's going to go 15 bars against you, you

So divergences are seductive, but we don't look at all the times that the

divergences fail.

And one of the cases where a divergence fails is when the higher time frame

momentum is just too strong.

For example, it might look like there's a daily cell divergence, but if the

weekly charts are making new momentum highs,

It can totally run over those momentum divergences on the dailies. And I know

for those of you that trade on shorter time frames, hourly charts, five -minute

charts, what happens when there's a five -minute buy divergence that fails to

yield anything?

It's going to get crushed because those hourlies are in a free fall to the

downside. So always check your higher time frame to put it back into context.

That context is... So important.

And this was the average bars in a winning trade when there was these

divergences. This is a prior period of history, but it still holds true.

So your average bars in a winning trade were just six or seven bars.

And then if it was a losing trade, which meant that you shorted and you had to

hold until it hit that moving average, how many times has anybody said, well,

I'm going to get out when it retraces back to the moving average.

Don't say that because you can see how many bars it can go against you. That is

a trap.

Okay, lastly, we're coming down to the system that I was telling you about that

tells us how noisy markets can go.

And this is an ADX is something that measures the amount of bar overlap.

So if we have a really low ADX, there's usually a chart formation.

It could be a big, long triangle or a big, long rectangle.

And we initially thought, hey, this is a piece of cake. Let's just look for the

low ADXs, and we'll take a break out on the 20 -day high or the 20 -day low.

That would make sense if you're looking to do a trend -following system, right?

Wrong, because the results got too many whip thoughts.

So here's some of the results for the low win rate.

When we had a low ADX and we're taking the breakout of the 20 -day high or low,

look at the percent profitable.

That's terrible.

You wouldn't think that it would be that case.

But yet, if we took it only when the market had already come to life and then

we're taking the breakout of a new 20 -day high or 20 -day low,

Look at how the profit potential jumps way up.

Isn't that crazy? It's very counterintuitive.

That doesn't mean you're going to create a mechanical system out of it, per se,

because you can see the times that it doesn't work. Mind you, we're not using

any stops on this, so you can get smacked on a loser.

But I just wanted to show a dramatic difference in getting off to the correct

start.

So just to sum up what the models have showed us, They've showed us the

importance of the new momentum as just measured by raw momentum.

They've showed us that if you are going to use momentum, use it with price, too.

You need to make new momentum highs and new price, and then your odds of having

a winning trade are phenomenally higher.

In addition to the momentum, we can use persistency of trend because trends go

on longer than we think they will.

And they go to further extremes than we think they will.

And even if we did the hardest trade possible to enter after it's had 10

on one side of a moving average, you'll still show profitability.

If you did that across a basket of 20 markets for a full year, you would be

to make a living.

Your stomach might churn because the drawdowns and the volatility is pretty

high, but it's just the power of that persistency of trend.

And then, of course, if you do have a good trend intact, the retracement

there's all kinds of gimmicky, simple little ways to quantify retracement

trades. You can use RSI.

You can use momentum.

You can use two -period rate of change.

All kinds of fun little games that you can play.

But we have to put it into context first because you don't want to be taking a

flag after you've.

just made a divergence, that will usually be a false signal.

You have to be careful if you've just had three winning flags not to take the

fourth one. I know what I'm saying is common sense, but these are still all

different things that we could model. The time of day functions, how important

it is, the start of the week, the start of the month, the start of the day,

that's where you have your most opportunity.

your biggest supply -demand imbalance, the testing and the volatility tends to

be a little bit bigger around the first of the month than it does in the middle

of the month.

It's just that way.

So let me go back, and I've got – I left lots of time for questions here,

and I'm just trying to –

okay.

I'm trying to get back to an interesting slide here so I can – there we go.

All right.

And I have all the time in the world here.

Well, Linda, first of all, I think this was a great start.

And let me give you a breather a little bit here, and let me address some of the

points that you made here and convert them.

A little bit into our Wyckoff understanding.

Well, first of all, Wyckoff method sometimes could be confused as there is,

know, obviously a specific structure that the market has to follow.

Obviously a misconception.

And I would say that the Wyckoff method is more of the reaction, our reaction to

the market and how the price volume and momentum signatures develop.

So just think about this, guys.

Linda is talking about how a linear approach is not necessarily going to be

most profitable.

So therefore, reacting to how the market develops, understanding the context

of the signal of where it occurs is extremely important to us.

And it seems like we're coming from the same belief, from the same thought,

that if we see the signal, we need to understand the context.

And obviously, we're using Weikert's method for the context.

Alternation of state, that's the change of the environment.

We usually, in Weikert's methodology, would be looking for counter moves with

specific price, volume, momentum characteristics that are going to give

idea that a current environment... and we are most likely from a trending

environment going to a non -trending environment.

And then vice versa, from a consolidation, we might exhibit certain

momentum characteristics that will identify for us a momentum push out of

consolidation formation, and that could begin the trend.

Linda talked about using multiple timeframes.

and how many times have we talked about this in the classes of looking at the

daily chart, but looking at the weekly chart and understanding the higher time

frame, what is happening on the daily within the context of the weekly chart,

what is happening on the daily or on the intranet within the context of the

daily.

I absolutely love the idea of the persistency of the trend.

Think about where persistency is going to be most sustainable.

We see from the stock market off the lows in 2009, in 2010,

11, 12, 15, 16, and then

to the downside as well. We're seeing the first wave of momentum.

give us an indication of the institutional buying because it's the

institutional buying of the lows, of the points of value and liquidity within

the structure of the much longer time frame of a secular and cyclical

let's say bull market, those are going to be the spots where institutions are

going to be most interested. They're going to buy, and that's going to

that initial momentum and sustainability of the trend.

So a very interesting idea there. Also, we have to think about the persistence

of the trend in the speculative environment.

For instance, 2017, where we had a run -up to the upside.

That would be that example that Linda was describing.

where the trend is so persistent and sustainable on a short -term basis.

Gap strategies, so the next three days after the gap, such a great

quantifiable way how Linda showed us how a

test... after the gap, if sustainable at the same price

closer to the gap, would most likely indicate a continuation.

Why? Well, because we always see on the gap a point of liquidity where a mean

reversion trade comes with professional traders. They start shorting into that.

So that's a burning dog, I believe. That was the strategy. That was the name.

And that's going to create that short -term weakness. It's very logical for

professionals to do that mean reversion trade because of how price quickly moves

to the short -term oversold, overbought area.

So if supply is being observed at that level, then most likely we're going to

have a continuation.

What else here?

Persistence institution.

Okay.

Yeah, I thought that was great, Linda. Such a great start.

And by the way, guys, let us know what kind of questions you have for Linda.

Linda, while our listeners are thinking about their questions, let me ask you a

question that is maybe less related to trading.

but more related to your book and your relationship with other people in the

field.

Obviously, I came out of the Golden Gate University, and my first teacher and my

big mentor in life in general was Hank Pruden.

Unfortunately, Hank has passed away in 2017 in August. Such a big loss for our

local community here in Bay Area, for Golden Gate University, specifically for

TFASF. a local technical analysis organization here in San Francisco.

And for a lot of other organizations, Hank has belonged to MTA, to APTA, to

IFTA. Linda, I want to ask, what was your relationship with Hank? How did you

meet? And he was a very fascinating person, and I wonder what kind of

personal experiences where you would say that you've benefited.

from knowing Hank.

I first met Hank, I think it was in 1992 maybe, 91, maybe 91,

at the Santa Barbara Conference held by the Market Technicians Association.

In those days, the institutions would pay for the analysts to have these

wonderful conference experiences and weekends, and unfortunately they stopped

doing that a decade ago, paying for these expensive trips. But it was a

gathering. of prominent people in the industry like Ralph Acampora and

names like that that I met there. And Hank gave a lecture which particularly

made an impression on me about the importance of doing your own homework

a closed window and a closed door.

In other words, no outside distractions. And I think that he actually borrowed

this from Wyckoff or one of the...

tapes, the Evans tapes, I'm not sure exactly, but I did read it somewhere

about the importance of doing your own analysis without any other influences,

and then you will do your own best work. And then he always said, you are your

own best client.

In other words, you're not thinking about other people. You're doing this

yourself and accountability to yourself.

So you are your own best client.

And that stuck with me through all these years, you know, the importance of

always doing your own work and safeguarding that you wouldn't be biased

you heard on TV or blogs or other people's work and let that influence

With that said, I know Hank and I became pretty good friends because my mom

lived in the Bay Area, still does.

And so every time I would go out to San Francisco, often Hank had me speak at

his, I don't remember what they used to call them. I guess they were.

I guess it was the Technical Society there. The San Francisco Technical

used to, or maybe they still do, put on conferences.

And that was a very, very popular organization.

So I would go out there to speak for them. And I remember Hank and his lovely

wife and my mom and I would go out to dinner several times. And just, you

always seeing each other through the years, through these conferences and MTA

and IFTA conferences.

And, you know, he was always upbeat.

You know, I would always go to any lecture he gave that was, you know, at a

conference.

And he did quite a lot of writing too. I think it's very heartwarming that so

much of his writing is still online. You can go and read it.

But, yeah, his upbeat attitude and his enthusiasm, you know, every time

he would talk, I can still picture his round cheeks and sparkling eyes and the

way he would talk and be animated.

It just made it so much fun talking about any subject, you know, as it is

you talk with somebody that has such enthusiasm for it.

Yeah, that sounds exactly like Hank Linda. So thank you for remembering him

that. A couple of questions that we have here. One is from Mark.

Linda referenced a book by Peter Stadelmayer.

What was the name of the book? And I believe this is Stadelmayer on market

trading with market profile.

Yeah, but he just was the one that originated the concept. He was not the

communicator. And the book that I would really recommend is Jim Dalton's book.

that is called Mind Over Markets. And in fact, this particular book, Mind Over

Markets, I remember it was kind of considered the Bible for some prop shops

down, there was a large chain of prop shops, and this was sort of their Bible.

Because in it, in particular, just the first 40 pages, the essence of it, he

really described...

basically six or seven types of action that tend to unfold off of the opening

price. And then if that was going to lead to a normal type of day or some of

these profile terms, a double distribution day or a trend day. And in

particular, what struck me was this concept of open, test, reject, or open,

trend, or open, perhaps it's the day before an FOMC day and there's not the

volume there and everybody's on the sidelines, then you're going to just

and kind of rotate around in noisy nothingness. And it really did a great

conceptually capturing the type of action and the implications for the

in that first hour of trading.

John is asking, is the quantitative modeling used for confirmation or system

generation?

Well, okay,

you mean non -confirmation between two markets? I don't really do any of that

on a quantitative basis.

You know, I've done a lot of modeling with correlation studies. Steve Moore

excellent at that, still is.

And what we find is that you can find...

to markets that are highly correlated.

For example, the yen and the bonds have had periods where they're very highly

correlated, but that might only last for a year and a half, and then they can be

totally inversely correlated.

I mean, just like what we saw happen with the bonds and equities all through

80s when I was first trading, and basically the 90s, they were...

correlated. And I used to be able to make trades in the afternoon, the last

of the day, where, say, for example, the S &P would make a lower low, but the

bonds would make a higher low, and that was a buy signal. And you could do that

just as you would now with the divergence between the NASDAQ and the S

But then, of course, you saw that whole relationship change, you know, when we

first got a whiff of... perhaps a deflationary type of sentiment out there

opposed to the inflationary sentiment. So the correlations change, and that's

why it's difficult to really quantify anything like that between two separate

markets. Other than that, the only type of non -confirmation that we have

modeled is just a pure momentum function, an indicator versus the price.

And, again, the trick to all of these, you know, is putting it in context.

For example, if you're trading with looking at the ticks on an intraday

the S &Ps, on a strong trend day, you know, you can't look for divergences in

the ticks. It'll get run over.

The same thing, like, with certain oscillators. So I'm not quite sure if

really addresses your question.

John is saying confirmation of trading intuition.

Yeah, I'm not sure about that either, Linda. Okay, let's go to the next

question, and we have maybe like a minute or so left.

Carl is asking, and this is in reference to one of your slides where you had the

ATR range in red and green on the chart. He's asking what kind of software you

used and how do you actually set that ATR range?

I use both CQG and TradeStation, and both of those

have scripting language, and it's easy to write the code. In fact, if anybody

has TradeStation or CQG and wants the code, go to my website, drop me an

and I'll mail it to you.

It was really just strictly based off of Wells Wilder's formula, and what we

found is there's not any right or wrong variable. You can make it.

Three ATRs or two and a half ATRs. It can be off the close or the low or the

high. And additionally, it's very similar to a

volatility stop and reverse system.

That's what I think Wells Wilder called it in his book was with the volatility

system.

You need to have a software that can do a scripting language, but you can do it

on any computer that would allow you to write your own indicator.

And it's really pretty easy. It's very, very simple.

All right.

Well, Linda, I think this is where...

We're probably going to stop for today.

I thought that was such a great start. So many great ideas that you've

to us.

And I'm kind of like, as you were talking, writing those down, thinking

you know, how we, you know, Wyckoff students here in the Wyckoff Nation

community could implement that. What does it mean for the interpretation on

of like the Wyckoff basis?

And a lot of these same ideas that we have.

And it's just a matter of understanding how you're using those and how we could

incorporate those into our trading. So thank you so much. And we're looking

forward to the second session, which we will have, which will be conducted next

week, next Thursday at the same time, at 3 p .m. Pacific or 6 p .m.

Eastern. And, Linda, thank you so much.

You bet. Looking forward to it. We're going to have some fun because we're

to get down to the actual trading patterns, not just models.

So I'll see you all then.

Awesome. Thank you, and bye -bye.

Night -night.