Hey Traders,

“Successful market timing depends upon learning the patterns of crowd behavior. By anticipating the crowd, you can avoid becoming a part of it.”

I pulled this quote directly from the opening paragraphs of the free Elliott Wave Online Tutorial. It’s critical to your understanding of how markets really work.

Now some might say, “What’s wrong with following the crowd? I’m just following the easy money, right?” The problem with this logic is that most investors follow the crowd (or herd) all the way up the mountain … then right off the cliff.

Look at today’s situation: How many people you know got out of the stock market before the October 2007 top? Heck, how many you know cut losses and cashed out even six months after the top?

If you’re like most people, your answer ranges from “zero” to “very few.”

Being a successful investor over the long-term means you must always strive to be part of that “very few.”

Famed market analyst Robert Prechter, the leading practitioner of the Elliott wave method of market analysis, once said, “Missing a market move may be a shame, but getting caught on the wrong side of one means you lose money. People who have gone through the experience know there’s a big difference.”

To be a successful individual investor, you must understand what it means to take risks when the probabilities are behind you and shun risk when they’re not. Robert Prechter’s method of analysis, the Elliott Wave Principle, is designed to help him and his subscribers do just that.

Buy and hold is dead. Trading isn’t any easier. Having a big-picture outlook doesn’t mean you must “set it and forget it,” as the late-night infomercial guy says. And it certainly doesn’t mean you must be in and out of the markets every day. It simply means you can see the forest for the trees.

You can go long when the markets are behind you, short if you have the guts, and stay out completely when the risk is too high. Simply put, adopting an independent, unbiased method is the very best way to ensure you don’t get caught up in the investment herd.

Elliott wave analysis is not for everyone. It’s highly technical. And it presents probabilities, not certainties (there’s no such thing as a black box trading system). The most successful investors and analysts – the guys who are still around after 30 years like Prechter – are able to assign probabilities and assess risk; and they act only when probabilities are high and risk is not.

I encourage you to learn more about the method that has kept Robert Prechter out of the herd and in the game for more than three decades. His company, Elliott Wave International, has an extremely useful Elliott Wave Tutorial for free online. It’s broken up into 10 lessons across 50 pages, so it’s easy to read and review at your leisure.

Check it out at the link below, give yourself some time to digest it, and decide for yourself if Elliott is a method you should add to your investment arsenal.

Separate your investments from the herd; get started with the free Elliott Wave Tutorial today.

Cheers

Vlad

Hey Traders,

What if you could look at a chart and instead of seeing what happened, you could see the potential trading opportunities that could happen.

Elliott Wave International (EWI), the world’s largest market forecasting firm, has just released a free eBook to teach you exactly that.

The How to Spot Trading Opportunities eBook features 47-pages of easy-to-understand trading techniques that help you identify high-confidence trade setups. Senior EWI Analyst Jeffrey Kennedy will show you how some of the simplest rules and guidelines have some of the most powerful applications for trading.

Created from the $129 two-volume set of the same name, this valuable eBook is offered free until September 23, 2009

Don’t miss out on this rare opportunity to change the way you trade forever.

Go here to download it now.

By Bob Prechter

The following is an excerpt from Robert Prechter’s Elliott Wave Theorist.  Elliott Wave International is currently offering Bob’s recent Elliott Wave Theorist, free.

On February 23, EWT called for the S&P to bottom in the 600s and then begin a sharp rally, the biggest since the 2007 high. The S&P bottomed at 667 on March 6. Then the stock market and commodities went almost straight up for three months as the dollar fell.

On March 18, Treasury bonds had their biggest up day ever, thanks to the Fed’s initiating its T-bond buying program. The next day, EWT reiterated our bearish stance on Treasury bonds. T-bond futures declined relentlessly from the previous day’s high at 130-15 to a low of 111-21 on June 11.

That’s when there were indications of impending trend changes. The June 11 issue called for interim tops in stocks, metals and oil and a temporary bottom in the dollar. The Dow topped that day and fell nearly 800 points; silver reversed and fell from $16 to $12.45; gold slid about $90; and oil, which had just doubled, reversed and fell from $73.38 to $58.32. The dollar simultaneously rallied and traced out a triangle for wave 4. Bonds bounced as well. As far as I can tell, our scenarios at all degrees are all on track.

Corrective patterns can be complex, so we should hesitate to be too specific about the shape this bear market rally will take. But from lows on July 8 (intraday) and 10 (close), the stock market may have begun the second phase of advance that will fulfill our ideal scenario for a three-wave (up-down-up) rally. In concert with rising stocks, bonds have started another declining wave, and the dollar appears to have turned down in wave 5 (see chart in the June issue), heading toward its final low. Although commodities should bounce, their wave patterns suggest that many key commodities will fail to make new highs this year in this second and final phase of partial recovery in the overall financial markets.

Meanwhile, our forecast for a change in people’s attitudes to a less pessimistic outlook is proceeding apace. Here are some of the reports evidencing this change:

More than 90 percent of economists predict the recession will end this year. [The] vast majority pick 3rd quarter as the time. (AP, 5/27)
Manufacturing and housing reports this week may offer signs that the recession-stricken U.S. economy is within months of hitting bottom, economists said. (USA, 6/15)

Fewer people say they’ve prospered over the past year than in decades, a USA TODAY/Gallup Poll finds. Over the past two months, however, expectations for the future have brightened significantly amid rising optimism about a stock market rebound and economic turnaround. “I think the administration is going in the right direction,” says… Now 36% of those surveyed in the Gallup-Healthways well-being poll say the economy is getting better. That’s not exactly head-over-heels exuberance, but it is double the number who felt that way at the beginning of the year and a notable spike in the nation’s frame of mind. Thirty-three percent say they’re satisfied with the way things are going in the United States; in January, just 13% did. (USA, 6/23/09)

If only to confirm the socionomic causality at work, an economist quoted in the article above muses, “The one anomaly in the puzzle is that people shouldn’t be feeling better because the jobs market is so terrible and unemployment is likely to keep rising.” Of course it would be an anomaly, and people should not feel better, if mood were exogenously caused. But it is endogenously regulated, and it precedes social actions, which produce events such as job creation and elimination. That people feel better is evident in our rising sociometer, the stock market. If the rally continues, economists will soon agree that the Fed’s “quantitative easing” and Congress’ massive spending are “working.” Those predicting more inflation and hyperinflation will have the last seeming confirmation of their opinions. Then, a few months from now, some economists will probably express similar puzzlement when the stock market starts plummeting again despite the fact that the economy has improved.

But all of these considerations are temporary. Conditions are relative, and behind the scenes, the depression has been, and still is, grinding away.

For more information, download the FREE 10-page issue of Bob Prechter’s recent Elliott Wave Theorist. It challenges current recovery hype with hard facts, independent analysis, and insightful charts. You’ll find out why the worst is NOT over and what you can do to safeguard your financial future.

By Jeffrey Kennedy

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. Now through August 17, Elliott Wave International is offering a special 45-page Best Of Trader’s Classroom eBook, free.

———–

I think that, as a general rule, traders fail 95% of the time, regardless of age, race, gender or nationality. The task at hand could be as simple as learning to ride a bike for the first time or as complex as mapping the human genome. Ultimate success in any enterprise requires that we accept failure along the way as a constant companion in our everyday lives.

I didn’t just pull this 95% figure from thin air either. I borrowed it from the work of the late, great Dr. W. Edward Deming, who is the father of Total Quality Management, commonly known as TQM. His story is quite interesting, and it actually has a lot to do with how to trade well.

Dr. Deming graduated with degrees in electrical engineering, mathematics and mathematical physics. Then, he began working with Walter A. Shewhart at Bell Telephone Laboratories, where he began applying statistical methods to industrial production and management. The result of his early work with Shewhart resulted in a seminal book, Statistical Method from the Viewpoint of Quality Control.

Since American industry spurned many of his ideas, Deming went to Japan shortly after World War II to help with early planning for the 1951 Japanese Census. Impressed by Deming’s expertise and his involvement in Japanese society, the Japanese Union of Scientists and Engineers invited him to play a key role in Japan’s reconstruction efforts. Deming’s work is largely responsible for why so many high quality consumer products come from Japan even to this day.

In turn, Japanese society holds Dr. W. Edward Deming in the highest regard. The Prime Minister of Japan recognized him on behalf of Emperor Hirohito in 1960. Even more telling, Deming’s portrait hangs in the lobby at Toyota headquarters to this day, and it’s actually larger than the picture of Toyota’s founder.

So why do people fail? According to Deming, it’s not because people don’t try hard enough or don’t want to succeed. People fail because they use inadequate systems. In other words, when traders fail, it’s primarily because they follow faulty trading systems – or that they follow no system at all.

So what is the right system to follow as a trader? To answer this question, I offer you what the trader who broke the all-time real-money profit record in the 1984 United States Trading Championship offered me. He told me that a successful trader needs five essentials:

1. A Method
You must have a method that is objectively definable. This method should be thought out to the extent that if someone asks how you make decisions to trade, you can quickly and easily explain. Possibly even more important, if the same question is asked again in six months, your answer will be the same. This is not to say that the method cannot be altered or improved; it must, however, be developed as a totality before implementing it.

2. The Discipline to Follow Your Method
‘Discipline to follow the method’ is so widely understood by true professionals that among them it almost sounds like a cliché. Nevertheless, it is such an important cliché that it cannot be ignored. Without discipline, you really have no method in the first place. And this is precisely why many consistently successful traders have military experience – the epitome of discipline.

3. Experience
It takes experience to succeed. Now, some people advocate “paper trading” as a learning tool. Paper trading is useful for testing methodologies, but it has no real value in learning about trading. In fact, it can be detrimental, because it imbues the novice with a false sense of security. “Knowing” that he has successfully paper-traded during the past six months, he believes that the next six months trading with real money will be no different. In fact, nothing could be farther from the truth. Why? Because the markets are not merely an intellectual exercise, they are an emotional one as well. Think about it, just because you are mechanically inclined and like to drive fast doesn’t mean you have the necessary skills to win the Daytona 500.

4. The Mental Fortitude to Accept that Losses Are Part of the Game
The biggest obstacle to successful trading is failing to recognize that losses are part of the game, and, further, that they must be accommodated. The perfect trading system that allows for only gains does not exist. Expecting, or even hoping for, perfection is a guarantee of failure. Trading is akin to batting in baseball. A player hitting .300 is good. A player hitting .400 is great. But even the great player fails to hit 60% of the time! Remember, you don’t have to be perfect to win in the markets. Practically speaking, this is why you also need an objective money management system.

5. The Mental Fortitude to Accept Huge Gains
To win the game, make sure that you understand why you’re in it. The big moves in markets come only once or twice a year. Those are the ones that will pay you for all the work, fear, sweat and aggravation of the previous 11 months or even 11 years. Don’t miss them for reasons other than those required by your objectively defined method. Don’t let yourself unconsciously define your normal range of profit and loss. If you do, when the big trade finally comes along, you will lack the self-esteem to take all it promises. By doing so, you abandon both method and discipline.

So who was the all-time real-money profit record holder who turned in a 444.4% return in a four-month period in 1984? Answer: Robert Prechter … and throughout the contest he stuck to his preferred method of analysis, the Wave Principle.

For more trading lessons from Jeffrey Kennedy, visit Elliott Wave International to download the Best of Trader’s Classroom eBook. Normally priced at $59, it’s free until August 17.

July 23, 2009

By Jeffrey Kennedy

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. Now through August 10, Elliott Wave International is offering a special 45-page Best Of Trader’s Classroom eBook, free.

———–

Aspiring traders typically go through three phases in this order:

Methodology. The first phase is that all-too-familiar quest for the Holy Grail – a trading system that never fails. After spending thousands of dollars on books, seminars and trading systems, the aspiring trader eventually realizes that no such system exists.

Money Management. So, after getting frustrated with wasting time and money, the up-and-coming trader begins to understand the need for money management, risking only a small percentage of a portfolio on a given trade versus too large a bet.

Psychology. The third phase is realizing how important psychology is – not only personal psychology but also the psychology of crowds.

But it would be better to go through these phases in the opposite direction. I actually read of this idea in a magazine a few months ago but, for the life of me, can’t find the article. Even so, with a measly 15 years of experience under my belt and an expensive Ph.D. from S.H.K. University (i.e., School of Hard Knocks), I wholeheartedly agree. Aspiring traders should begin their journey at phase three and work backward.

I believe the first step in becoming a consistently successful trader is to understand how psychology plays out in your own make-up and in the way the crowd reacts to changes in the markets. The reason for this is that a trader must realize that once he or she makes a trade, logic no longer applies. This is because the emotions of fear and greed take precedence – fear of losing money and greed for more money.

Once the aspiring trader understands this psychology, it’s easier to understand why it’s important to have a defined investment methodology and, more importantly, the discipline to follow it. New traders must realize that once they join a crowd, they lose their individuality. Worse yet, crowd psychology impairs their judgment, because crowds are wrong more often than not, typically selling at market bottoms and buying at market tops.

Moving onto phase two, after the aspiring trader understands a bit of psychology, he or she can focus on money management. Money management is an important subject and deserves much more than just a few sentences. Even so, there are two issues that I believe are critical to grasp: (1) risk in terms of individual trades and (2) risk as a percentage of account size.

When sizing up a trading opportunity, the rule-of-thumb I go by is 3:1. That is, if my risk on a given trading opportunity is $500, then the profit objective for that trade should equal $1,500, or more. With regard to risk as a percentage of account size, I’m more than comfortable utilizing the same guidelines that many professional money managers use – 1%-3% of the account per position. If your trading account is $100,000, then you should risk no more than $3,000 on a single position. Following this guideline not only helps to contain losses if one’s trade decision is incorrect, but it also insures longevity. It’s one thing to have a winning quarter; the real trick is to have a winning quarter next year and the year after.

When aspiring traders grasp the importance of psychology and money management, they should then move to phase three – determining their methodology, a defined and unwavering way of examining price action. I principally use the Wave Principle as my methodology. However, wave analysis certainly isn’t the only way to view price action. One can choose candlestick charts, Dow Theory, cycles, etc. My best advice in this realm is that whatever you choose to use, it should be simple. In fact, it should be simple enough to put on the back of a business card, because, like an appliance, the fewer parts it has, the less likely it is to break down.

For more trading lessons from Jeffrey Kennedy, visit Elliott Wave International to download the Best of Trader’s Classroom eBook. It’s free until August 10.

Hey Traders,

excellent gap fill setup this morning (click on image to enlarge)

Update 10am: market went on to fill full 10 pt gap without any major retracements

Hope this helps

Vlad

Hello Traders,

I wanted to share my opening range ideas for 7-10-09. ES opened with OR of 872-873.75 (white arrow). Draw lines across top/bottom of 1st 1min candle. I wait for two consecutive 1min closes above/below the OR for trigger and to filter out fakes. Entry is 1 tick above/below the OR and came at 9:36 (1st green arrow). I scale out at +2 +3 (on a 3 lot trade). Initial stop is below OR. After 2nd target the stop goes to break-even. Then I wait for Williams%R (setting at 100 length) to close below -20 two times or my profit target for exit on the runner (last lot)  On the exit my profit target came first at daily pivot. But had I waited for crappy econ#s to come out @ 9:55am, I would have had to get out at 1st red arrow which was consecutive close below -20 on Williams%R.
2nd OR entry came at 10:01am (2nd green arrow). Same exits at +2 +3 and a runner this time had to be stopped at 2 consecutive closes below 21ema (white line) @ 10:31. Because williams%r never got above -20 on that trade I had to use 21ema as my exit trigger. Profit target on that runner above daily PP did not get reached. Market got rejected at PP again and down it went. All-in-all two profitable trades even though the 2nd runner objective not met.
So to summarize: entries are 1 tick above/below the OR. Stops are 1-2 ticks above/below the OR (or automatic set stop per trader’s discretion). Exits are +2 +3 +? with stop to b/e after second. Exit on runner at profit target or when williams%r above/below -20/-80 or above/below 21ema two consecutive closes.

Please be advised that while I share with pleasure this overview, it is absolutely not a trade advisory or a cast-in-stone set-up. You are to trade at your own risk and to do your own due diligence.

Special thanks to Vlad who was kind to let me share my notes on his superb blog.

Happy Trading,
Paul.

Opening Range (OR) - is simply the range of the opening one minute bar during US market hours (sounds too simple, but don’t underestimate the power of this tool!). I use two horizontal bars to mark it as it often comes into play and is an excellent gauge of market direction:

(video contains no audio, simply demonstration of drawing opening range bars on 7/8/9)

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Uses of Opening Range

• Excellent set ups for single contract traders
• Determining market direction
• Defining exact risk amount on gap fill plays and helping decide whether to play gaps or not.
• Using OR as a target on market reversals / fade plays.
• OR based trades
• Laminating with other setups you use on regular bases to improve trade success probability

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There is no need complicated computer algorithms and trying to tweak settings of indicators based on indicators based on some other indicators, Opening Range alone is very powerful, simple and profitable trading tool.

Opening Range Examples

It comes into play on daily basis and even if you don’t base trades on it, it is very useful tool to watch for clues in the market. Without much discrimination here are last 7 days and opening range notes:

• Market gaps down if playing the gap, not taking it until ES trades above opening range, defined stop behind OR, gap fills.
• ES retraces back to OR, bounces a bit and break down.
• After breaking down, retraces back to OR and bounces for few points (should be enough to get a target hit / get risk free trade)
• Chops around the rest of the day, until towards the end of the day, breaks above, backtests to the tick and takes off.

• ES breaks down below OR, and fills the gap
• retraces back to OR and breaks down
• trades above OR, backtests and goes on to rally (small break above before backtest easy to miss)

• Market gaps up and never trades below opening range, big time clue to not attempt gap fill play until inside of OR and previous close pocket in entered
• ES goes up, backtests OR and goes on to rally.
• Later on in the day as rally fizzles few more minor bounces on OR

• Market gaps down and never trades above opening range. Warning to not enter gap fill trade.
  • If it does trade above you have defined risk trade of 1.5 pts with reward of 13 pt gap fill / or 6 pt half fill, nice r/r

• market gaps down, trades inside of OR = gap fill is on, risk is defined below OR. Gap fills.
• Market retraces back to OR small bounce and break down
• Backtest of OR after breakdown and tiny bounce
• Break above OR and 2 backtests before moving up

While taking every OR trade might not have been very wise in this particular instance, it still gave some great clues on gap fill and market direction.

• Market gaps down and trades few ticks inside the OR into the gap and then break down from OR. If you were playing the gap you would have been stopped out regardless, at least this time there was defined stop behind OR.
• OR feels bad about letting you down on gap fill and after ES breaks down, smacks it down 15+ pts on the backtest.

Today on the day with highest volume in a month, lowest $tick in 11 days and highest $tick in 2 months you be the judge if it provided any valuable clues on it’s own. (nothing is perfect, sorry to disappoint , this is not the holy grail of trading)

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Opening range is very simple and useful tool, particularly useful when laminated with other trade setups.

If you are too lazy to draw two lines across first 1 minute bar, I post daily OR via my Twitter account @esecfutures within minutes of market opening.

Hope this helps

Vlad

Dow went up 18 of 21 days on first Day of July, including being up over 130 points at one point on July 1st this year.

Good enough probability to add this to my calendar.

Hey Traders,

I had 2 experiences last week which could be described as two evils of trading discipline:

• Breaking rules and being rewarded for it
• Following rules and being “punished” for it

Both of these can be very harmful, especially to new traders in becoming consistently profitable and disciplined traders.

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Breaking rules and being rewarded for it

While in a euro trade, instead of stopping out at a planned 20 pip stop when trade went against me, I moved my stop and let the position go 40 pips against me, where not only did I risk double the amount of the original plan for that trade, I added another same size position, resulting in break of second rule: adding to a losing position.

When trade got back just about break even within about an hour I sold it, breaking the third rule of letting stops take me out of position, instead of taking profit at particular targets, thus trying to produce runners.

Ultimately I executed a trade with unlimited risk and no profit potential during which I broke three rules.

When looking at the end of day summary, I was up on 10 of 12 trades for the day with  a profit factor of 120! (dollars made/dollars lost)

Seeing such performance might seem like a great day, but it is “fool’s gold” and being rewarded for bad habits can and probably will be destructive for traders performance if one doesn’t realize it fast enough

Following Rules and Being “Punished” for it

Another trade took place on Friday afternoon, I entered it based on one of my setups and without getting stopped out closed the position for a loss, since per my trading rules I do not hold any positions over the weekend, especially in such economic news sensitives crazy instrument as Gold futures. Within minutes of futures open tonight, Sunday night, gold plunged over $6 reaching my ultimate target of 200ema hourly and S1 pocket.

Following my rules and closing out position before the weekend, without letting either stop or target being hit ulatimately made a $1500 difference on this trade, but I was disciplined and followed me rules perfectly.

———————–

Being rewarded for bad trading and being “punished”  for good trading, can really create wrong psychological associations with particular trader behavior and might lead to very destructive tendencies especially for newer traders.

While first scenario of terrible discipline yielded amazing results for that overall day and second trade of following rules perfectly resulted in a loss,  trader has be able to step back and review all the trades and realize that regardless of trade performance, in this particular case the first trade was a bad trade and second was a good trade.

Hope this helps

Vlad

Support and Resistance Reversals happen all the time on all time frames and are very simple.

Previous broken support becomes resistance and previous broken resistance becomes support.

Here is a look at few examples from last few days alone.

- SP500 emini futures Spike high from overnight session on Thursday becoming support and low of the day on Friday. Also note few smaller s/r reversals in previous market sessions.

- ES emini support from one week, becoming resistance next week:

- Even after government intervention in the Franc earlier this week, support and resistance reversals still work:

- Gold chart from past 4 days with numerous s/r reversals:

- Euro stair stepping down and then up s/r reversal levels the past 3 days:

Support and resistance reversals are very easy to spot, happen in all markets on all time frames, when combined with other set ups are very powerful.

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Support and resistance reversals are also valid with sloping trendlines, here is a great example during this recent rally of previous support becoming resistance on the SP500 emini

Only problem with diagona support and resistance reversals is that price could “ride” up/down previous s/r line before reversing, thus I prefer horizontal support and resistance reversals since entries and stops are more clear.

Box Trades or range breakout trade is one of the simplest and high probability trades out there, just the way I like it. It works with all markets.

What is needed to create a box:

• at least two lows at same level
• at least two highs at the same  level

Once 2 lows and 2 highs are created (orange arrows), trade is “boxed”, with strategy being buying the break above the highs, or selling breakdown below the lows, with ultimate target of the pattern being full height of the box, and stop being right below the opposite end of original box, i.e if buying break out - stop below the low of original box, if selling the low - stop above the original box.

——————————————————————————————————————————————

That is the definition of the trade, there are several problems that can occur:

• GOTCHA breakout - where new high or low is made by a few ticks and then sharply reverses.
• Box is just too big to fit risk tolerance of a trader, for instance on this particular Swiss Franc Trade of the box is about 80 pips or $1000 / contract.

To solve that problem, wait for a breakout one way or the other and then the backtest of the original box (green arrows) to enter.

Can call Mr Fibonacci for stop and target ideas, for instance multiple lot traders could make 23.6/38/50% of original box extension target, with same amount of stop within the original box (color coded rectangles on last chart)

Single lot traders after reaching what would be first target should move stop to break even or slightly into the money or below the low made on backtest.

Another good stop idea is below the recent significant low - red arrow on the chart, as breaking that low would technically break the uptrend.

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On this same chart there is another box trade:

On this particular box trade , there is no backtest of the original box, so even though trade was successful you would likely never get in. This would generally go down as a set up that didn’t fully develop, unless per your trading plan and your risk tolerance on boxes smaller than x amount of ticks you would simply buy the breakout and stop out on the opposite extreme of original box.

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Box trades develop often, are simple, profitable and easy to spot, this was just from yesterday and also posted a twitter udpate about it as it was developing