I(ane Trading on:

Trade
Management

by Jim I(ane
Tips, ideas and techniques for market traders
Kane Trading on:
Trade Management

By Jim Kane

KaneTrading.com
Kane Trading on : Trade M anagement

Copyright © 2004 by James J. Kane

Published by Kane Trading

ALL RIGHTS RESERVED. No part of this publication may be reproduced,

stored in a retrieval system or transmitted in any form or by any means,
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without prior written permission of the publisher and the author.

This publication is designed to provide accurate and authoritative

information in regard to the subj ect matter covered. It is sold with the
understanding that the publisher and the author are not engaged in rendering
legal , accounting or other professional services. If professional advice or
other expert assistance is required, the services of a competent professional
person should be sought.

Printed in the United States of America

Disclaimer

No claim is made by James J . Kane, or Kane Trading, that the trading

methods shown in this book will result in profits, or will not result in losses.
There is a substantial risk of loss in trading securities, options on securities,
futures, options on futures or any other trading vehicle. Past performance is
not indicative of future results. Trading securities, options on securities,
futures, options on futures or any other trading vehicle may not be suitable
for all recipients of this book. Always seek competent professional advice
when considering any trade. All examples in this book are for educational
purposes only. All material and examples in this book are based on
information obtained from sources that are believed to be reliable , but which
are not guaranteed as to their accuracy or completeness. Nothing in this book
should be construed, in any way, shape or form, as a solicitation of any offer
to buy or sell any trading instrument. James J . Kane, his family and friends,
and associates of Kane Trading have at times in the past and may now or at
times in the future, trade or have traded any or all of the issues used as
educational examples in the book. Any thoughts or opinions expressed in
this book are subject to change without notice. No information provided in
this book should be construed in any way as an encouragement by the
author, publisher or distributors to trade. Each trader must make his or her
own decisions with regard to trading. Each trader must be responsible for his
or her own decisions and his or her own actions, if any. Purchasing or
reading this book or parts thereof constitutes acceptance of and agreement to
this disclaimer and exempts the author, publisher and distributors from any
and all liability and litigation.

v
Table of Contents

Acknowledgements Xl
.

Introduction 1

Section I Before the Trade 5

Chapter 1 'Trade Management' vs.

'Money Management' 7

Chapter 2 RewardlRisk and Expected Value 17

Chapter 3 Initial Stop Placement 25

Chapter 4 Calculating Trade Size 75

Chapter 5 Correlation Risk 83

Section II Initial Phases of the Trade 89

Chapter 6 Moving the Initial Stop 91

Chapter 7 The Fallacy of the 'Half-Off' 143

Management Style

Chapter 8 The 'Nether Region' 155

Vll
Section III After the Trade Starts Moving 177

Chapter 9 Trailing Stops and Scaled Exits 179

Conclusion 231

IX
 Acknowledgements

In my evolution as a trader I ' ve read more material than I can even recall.
The majority of this material has contributed very little to my knowledge
base. That lack of value, for me, in the material , in and of itself, is important
information . It's shown me, by a process of elimination, the things that don 't
help me, and I can use that information when formul ating a trading plan.

In developing material related to Fibonacci trading, two sources have been

of great help. I would like to acknowledge these sources, and recommend
that readers look into their materials . See if they might be of as much help to
your own trading, as they were to mine.

I ' d like to acknowledge Scott Carney over at Harmonic Trader. Scott ' s book,
The Harmonic Trader, and the material on his website
(www .HarmonicTrader.com). opened my eyes to another way to view the
markets . This was my first substantial introduction to the concepts of
Fibonacci and harmonics in trading the markets . Scott has quite extensive
information on harmonic patterns on his website and has developed several
patterns of his own. Scott and I have since spent endless hours discussing
harmonics and the markets. His historical knowledge of the markets is
extraordinary and has contributed greatly to my own knowledge base.

I ' d also like to acknowledge Robert Miner at Dynamic Traders Group, Inc .
(www.DynamicTraders .com) . Robert ' s book, Dynamic TradingTM, was my
next serious excursion into Fibonaccis and trading. This book is extensive
beyond belief. There is so much material in Dynamic Trading™ I would
have to consider it must reading for anyone interested in increasing their
knowledge of Fibonacci in trading and in Elliot wave analysi s . Robert ' s use
of the time factor is also extensive and will open one ' s eyes to factors
outside of just price. Robert also has Dynamic Trader software available,
which I use for creating charts labeled with various Fibonacci, harmonic and
time factors. It is the software that I used to create the charts for this book. I
would like to extend an additional thanks and acknowledgement to Robert
for allowing me to use these charts in my works. Information on his
products is available on his website. I recommend checking it out to see if
you feel that it has information that you can use to help your trading. His
contributions in the field are practically immeasurable.

Xl
 Introduction

The concept of actively managing a trade is foreign to many traders. They

seek an overly simplistic technique to enter trades, and an equally simpli stic
method to grab profits when they appear. To take an active role in the entire
process, from start to finish, is of seemingly little interest to the vast majority
of traders who claim to be making a decent attempt at becoming full-time,
successful traders. To develop and implement a fully detailed 'Trading
Plan ' , of which trade management would be a good-sized part, is just too
much for them.

I am of the opinion that it is necessary to optimize every aspect of one ' s

'Trading Plan ' i n order to have the best chance of succeeding as a trader. It
is difficult to develop a significant edge in trading. I am usually seeking a
small edge. My ' secret' i s that I try to develop a small edge in every aspect
of my 'Trading Plan ' . I feel that this is an achievable goal . Most traders,
though, try to develop an overly large, unrealistic edge only in the aspect of
the potential trade area, and do little or nothing with the rest of the 'Trading
Plan ' .

Trade management, then, i s only one of many areas where I actively work,
trying to improve my edge. I have written my books in such a manner that I
break up the different areas, focusing on a particular area in each book so
that it is clear what these areas are. I want to point thi s out here so that it is
clear what specific area of the 'Trading Plan ' this book will encompass, and
to further clarify that it is only one part of a comprehensive 'Trading Plan ' .

So, then, what comprises thi s idea of managing a trade? How does one
' manage ' a trade? This is a concept that I hope will be eminently clear by the
end of this book. To get a little bit of a handle on this concept I ' ll present a
brief overview of where we are going to go before we get started.

The first thing I want to point out is that the way I manage a trade is an
active process. I watch the market and see how it behaves during the entire
trading process, making adjustments as I see fit. Those that are familiar with
my methodology already know that I don ' t utilize a lot of ' static' techniques.
I utilize methods that adapt to the changing conditions that occur as a trade
develops.

1
This use of 'adaptable ' techniques really makes clear the dynamic nature of
my trade management. Each step is determined as the market progresses. It
would not be possible to determine ahead of time what the next step will be,
since the future action of the market is an unknown . It is possible to
determine, though, how I might react to all of the possible outcomes that
may occur. Although the number may be huge, there are only so many
realistic outcomes to consider, and I do consider them all .

The whole process unfolds over the course of a trade, from the planning
before a trade is opened up, through the various aspects of the trade, and on
until the trade is finally closed out. This is an evolving process, with many
decisions along the way. It seems very smooth to me, but that ' s because I
have worked out my process for my 'Trading Plan ' over a long period of
time, with great effort. That is not what we are about to deal with here.

Now I have the task at hand to try to explain what I do, how and when I do
it, and how I came to do it in the way that I do. This can ' t simply be a story
of what I have done, though . My task is to help the reader through a similar
journey, to find his or her own management plan. And what I have come to
discover is that this is easier said than done. Or should I say easier planned
out than actually carried out.

Just what is it that I am driving at? I have found out, as I worked endless
hours on the layout for this book, just how difficult my task was going to be.
This is, by far, the most difficult book I have done to date. I think that is
because this book is not about specific trading strategies. It' s about planning
and making decisions. And how do I make clear why I make the decisions
that I make, when I make them?

Sure, I have presented many techniques in my other books where it still

ultimately depends on the trader' s own deci sion making in the end. I have
always been very clear that I am a 1 00% discretionary trader, and what I
present is the basis for my trading methodology. Ultimately, I still have to
read conditions and make the final decision, within the guidelines of my
'Trading Plan ' .

2
It's not going to be any different with the material in thi s book. What is
different i s that some of thi s material is just not as specific to a single aspect
of a 'Trading Plan ' , such as an entry technique or a particular method of
forming a potential trade area. A lot of thi s material will apply to all trades,
from start to finish, regardless of how they came to be . Thi s is only an i ssue
because, from an educational standpoint, it is hard for me to organize and
present this material in as coherent of a manner as I would like to present it.

I have discussed presentation i ssues here and there in my other works, but I
was unprepared for just how tricky this book was going to be. I did, final ly,
come up with some ideas, and hopefully the material will begin to flow and
gel together by the end of the book. All I ask is that you work your way
through it all , and then try to see how it all fits together.

Even though the process i s all sequential in practice, if several options exist
at each step (depending on what the market does at each juncture), and each
option spins one off in a different direction, how do I present the course of
action I take and have the book progress from the beginning of a trade to the
end? Finally, I realized that I couldn ' t . What I have decided to do will have
us going back and forth a bit, backing and filling, but in the end it should all
make sense:

I think the best approach is to organize the book into three major sections.
The first section will be the things that I do before a trade is actually placed.
Thi s is the 'planning stage ' , so to speak. The next section will be things that
happen in the early stages of the trade. This is the time when I don ' t know
yet whether the trade i s going to move in my favor at all, or if it has, it' s
only moved to a small degree. A lot of possibilities exi st during this phase.

Finally, the last section will focus on the aspects of trade management for
trades that have really moved and are in the more advanced stages. Thi s
section w i l l not even b e used on a fair a number o f trades, since many trades
don ' t 'work' to the fullest degree that I play for. 1'm hoping thi s type of
organization will help both of us with the educational process here, and
produce a work that is up to my standards.

3
 Section I

Before the Trade

5
 Chapter 1

'Trade Management' vs. 'Money Management'

I think it is important for me to explain, right off, just what I mean by 'trade
management' . I want to do this right away because I want to dispel any
illusions that this is a book about 'money management' . And I ' m guessing
that more than a few readers are saying right now 'I thought they were the
same thing?' In the way that I use the terms, they aren ' t even close.

For me, trade management is about the specific things I do to actively

manage a trade. This process starts before I actually hit the buy or sell
button, and doesn ' t end until the position is fully closed. It covers every
aspect of the process that requires me to perform an action. If I have to do
any activity, perform any action, it is a part of my active management. Even
thinking what I should do is an action. This is all trade management to me .

Then we have ' money management' . Now, I could define this term in any
way that I want. But it is a term that has a commonly accepted definition,
and I want to stick with that. Money management is the process by which a
trader decides on the size of a trading position, with respect to the account
size, with the goal of optimizing the geometric growth of the account.

For all intents and purposes this is only applicable to leveraged accounts. A
variation of this, applied to unleveraged accounts (such as an un-margined
stock account), is not ' money management' by the most common definition
I have seen. It is managing the money, and could be called money
management, but differs significantly from the specific term ' money
management' . So, why I am making such a fuss about this?

Well, I don ' t want anyone to think this is a book about better formulas for
optimizing leveraged trading accounts. This book is not going to go into that
area whatsoever. In fact, I will shortly, and briefly, explain what I do in that
regard, and give a few references for further research on that particular topic.
And that will be the extent that this book will delve into the topic of ' money
management ' .

7
In order to get a better handle on this concept of 'money management' I am
going to discuss the topic just a bit. To begin with, much research has been
done on how to decide just how much leverage to use in a leveraged account
such as in futures or FOREX trading. Although the margin is set and a
maximum number of contracts could theoretically be traded for a given
amount of money, this is a fully leveraged situation, and mathematically it is
easy to show that this will lead to rapid ruination of the account. Hence, it is
necessary to trade less than the maximum amount allowed.

This has the effect of de-leveraging the position(s). But what is optimum?
There is a supposedly theoretical manner of playing the account so as to
maximize the results. The problem is that no one has come up with an
optimal formula that can be demonstrated to be the most optimal over all the
others . It' s more of a matter of many different variations, each with pros and
cons. Different formulas have different benefits.

The main goal for most of them is to maximize the geometric growth of the
account. This means that as the account grows, the size of the total positions
grows, and the account grows geometrically. I t ' s about growth of the
account by trading larger and larger size. This is not a random process,
though, but one that is dictated by whatever formula the trader chooses to
use for this purpose. And I will reiterate once again that this is not a book
about such formulas.

What I will do instead is explain a few categories of accounts that I utilize,

and then refer the reader to some sources for further information on this
geometric growth money management aspect. In my trading I usually have
accounts that fall into several categories. First, I may have stock accounts
that are either on margin (2 to 1 leverage for overnight positions, or 4 to 1
leverage for day trading accounts), or not on margin (IRA ' s, for example),
and hence unleveraged.

Next, I may have a highly leveraged account such as a futures or FOREX

account. Option accounts loosely fit into this grouping. Lastly, I might have
a leveraged account, such as an e-mini account, but one that I treat in a
totally different manner from a standard leveraged account. The different
types of accounts lead me to do different things in terms of ' money
management' . Let' s look at this.

8
I'll start with the typical fully leveraged account. If my intention is to grow
the account, and to put profits made at risk by using them to allow for larger
trade size, I need a money management plan . I won ' t tell you what specific
plan I use, because the formulas are specific to my situation and my trading
techniques. What I can say is that I have used two sources to get up to speed
with what is available out there, and to formulate my own plan .

I would suggest that the reader check out The Mathematics of Money
Management: Risk Analysis Techniques for Traders by Ralph Vince, and
The Trading Game : Playing by the Numbers to Make Millions by Ryan
Jones. Don ' t let the latter book ' s secondary title scare you off. The book has
a lot of useful information in it. I don ' t want anyone to feel slighted by my
referring you to these sources, but I am not able to add anything to the work
that has already been done in this area. It makes no sense for me to go over
work that is already laid out el sewhere.

The next type of account I may work with is a leveraged account, but one
that I treat in a special way. What if I have a highly leveraged account, but I
don ' t want geometric growth ? I can hear some people saying 'Say what?
How can you not want to grow the account? ' Now, I didn ' t say that I didn ' t
want to grow the account; I said I didn ' t want geometric growth. Let me
explain. Keep in mind all the numbers I will use here are purely for example
purposes .

Let' s say I have a $20,000 account and I ' m going to day trade the ES e-mini .
Currently the margin for day trading the mini at the firms I deal with is $500
per contract. I have seen one offer $400 per contract. The first issue I have is
how many contracts should I trade? With a $500 margin, I could open a
position of 40 contracts. Given that the leverage on the ES at $500 margin is
1 1 2 to 1 as of the day of this writing (and 1 40 to 1 at $400 margin), this
would be account suicide. Not to mention that if it went one tick against you
you ' d be margin called.

Let' s get back to reality. I would be trading some amount well under 40
contracts. The amount would be determined from a starting point based on
the research and formulas I came up with from a standard leveraged account.
Let' s say this amount is 5 contracts. This effectively reduces my leverage by
a factor of eight. Now, here ' s what I might do with this account. I am
comfortable, we' ll say, as a 5-lot trader. That' s where I want to be trading.

9
The liquidity is available at that size for my method, and I am comfortable
when in a trade. I don ' t want to 'get bigger' or geometrically grow this
account. I want to use the profits towards my living. When the account
grows by some set amount, say $2,500, I withdraw that amount. I then keep
trading until the account balance reaches $22,500 again, and again I would
withdraw the amount over $20,000. The account never grows, and I never
trade more than the 5 contracts .

If a drawdown occurs no money is withdrawn . There has to be a plan in

place as to how far one would allow the account to draw down before
pulling the plug, but until this amount is hit I would just be trading 'business
as usual ' . This amount should be based on historical drawdown information
for the 'Trading Plan ' , and so on. It will be specific to each particular trader
and 'Trading Plan ' . There is a lot of information of this type in the books
that I referred to earlier.

Now, I ' m not the first one to mention a plan like thi s. I have heard others
talk about playing an account like this , especially for mini traders. The
interesting thing is the reaction I usually get when discussing this type of an
account setup. I find that something like 99% of the people react in shock
and horror, wondering why I wouldn 't want the maximum possible
geometric growth. They can think of no fathomable reason not to want to get
bigger and bigger, seemingly with no limit.

It seems like delusions of grandeur to me when I hear this. "Are you

kidding, I want to trade 1 00, and then 200, and maybe someday 1 ,000
lots . . . " and "Not me, I ' d be totally comfortable with a 5 or 1 0 million dollar
position, or more. I ' d sleep fine." being commonly heard replies. Well ,
that ' s fine, but I ' m a small trader. And I ' m a small trader by choice . I want
to be small. I ' m also what I consider very realistic . There are a lot of people
who are fine trading 200 million dollars of other people ' s retirement money
in all market conditions, but I ' m not one of them.

I ' m not saying that my techniques don ' t apply to large accounts, as I feel
that the information I provide could potentially be adapted for just about all
. situations. I t ' s just that my focus is on being a small, independent trader
grinding out a living with reasonably small accounts. I am trying to show
techniques that will help other traders who have similar goals. The account
type that I just described is a part of my plan. If it seems boring to you,
perhaps you need to assess your goals and how reali stic they are.

10
This leaves me with the last type of account, the unleveraged account.
Before I get into this, let me say that a margined stock account is a leveraged
account, and falls under the first category. If an account were used for stock
purchases , let ' s say, without any margin (you buy simply what you have the
cash for) , this would be what I call an unleveraged account. For situations
like this, I have come up with some general guidelines that I follow.
Understand that these are general guidelines, and that I change things over
time, as I learn more, make changes in my 'Trading Plan ' , or if I simply see
fit to change them.

I have decided that I do not like to risk more than 1 % of the total capital in
that particular account on a given trade. I have seen other traders using
similar plans choose to risk between 0.5% and 3 % per trade. Of course, I
have seen those that have much higher risk per trade numbers. I don ' t feel
that they are doing this as part of a well-constructed plan, but just to have
something to tell them what size to put on for a given trade.

I can ' t really say how I came to think 1 % was the best for my 'Trading
Plan ' . I don ' t know that there are any great studies that have been done
showing how varying that number alters the 'risk profile' of the plan, as
applied to ' small traders ' . I have experimented around, and done my own
studies, but I find this a difficult problem to 'solve ' mathematically, in the
sense of 'proving ' one choice of number is better than another.

I think every trader has to make this decision on his or her own. It' s a trade
off between greater risk with potentially bigger rewards and lesser risk and
potentially smaller rewards. There likely is some 'sweet spot' that optimizes
this, but it would be totally unique for each 'Trading Plan ' , and as I
mentioned, I ' m not aware of any formulas out there for small traders that
can be realistically applied. And keep in mind we are fully into ' money
management' territory here, which is not the topic of thi s book.

I am presenting some thoughts on what I do here just to assist the reader in

understanding what I do, and to hopefully present some additional ideas and
food for thought for one ' s 'Trading Plan ' . Traders have to decide for
themselves what their relative risk tolerance is, and what their entire
situation and 'Trading Plan' dictate. For me, I came up with a middle of the
road choice, attempting to balance reasonable risk and reward.

11
Now, given that I would be willing to risk 1 % on a given trade, just what to I
mean by that? Well, first off, I mean 1 % maximum, in the sense that I may
vary the trade size, depending on how high I 'rate ' the potential trade, up to
the 1% limit. I don ' t always just trade at the maximum size that I am allotted
within my 'Trading Plan ' in every instance.

If I find a setup that I like and want to trade (and I have capital available that
I feel likely can ' t be put to better use anywhere else at the time), but it is not
among the 'best' , I may opt to take a 50% or 7 5 % position . This would be
one that risks say 0.50% or 0.75% instead of the maximum 1 %. I use
discretion at each step of the 'Trading Plan ' , based on experience.

Next, when I say risk 1%, I mean theoretically. I ' m making an assumption
that my stop will be filled pretty close to where I have it set, whether it is set
mechanically (on or off the exchange), or is a ' mental ' stop. In the case of a
market shock event this will not likely be the case, or even close to the case .
For the purpose of what I do with regards to this 1 % limit, I don ' t take into
consideration a catastrophic market/issue shock event. Although this event
shock issue needs to be factored into a 'Trading Plan ' , for me it is not
factored into this area of theoretical risk.

In addition to this 1 % limit, I also use a total position size limit. I could get
into one trade, for example, with the entire account balance. I could then risk
a small amount, let ' s say 1 %, on that position. I would be within my
guidelines, but I would also have all my eggs in one basket, so to speak. This
is something that I don ' t want to do. To deal with that, I set a total position
size maximum, as a percentage of the total capital in that account.

I do a similar thing here as I did when I chose the 1 % maximum theoretical

risk value. I experimented around, ran some various scenarios, and came up
with what I felt, for my 'Trading Plan ' , was a middle of the road choice. I
cap any given trade at a 1 0% maximum of the account equity. No position
can be greater than 1 0% of the value of the account. Thus, in order to be
utilizing the entire account' s capital, I would have to have ten positions.

12
Let me explain something, though, before I continue on . As far as I ' m
concerned, the numbers are going to vary depending on the relative time the
position is likely to be held i .e . the risk exposure due to time. I ' m sure a few
daytraders are saying right now that no way they could stick to a guideline
like that. No way could they have ten positions open at once. I agree. These
are my guidelines, for my 'Trading Plan ' , and for an unleveraged stock
account for example, I would be ' swing trading ' .

A day trader might choose to have more risk exposure on fewer positions,
with the logic being that the time exposure is so much less it is justified . I
can ' t say that mathematically that isn ' t true. I t just doesn ' t adequately
address the potential catastrophic risk to the overall account if the trader just
happens to be in the wrong issue at the wrong time. I t is a risk, somewhat
unique to daytrading, which few traders address. Most traders that I know
simply tell me 'you worry too much ' .

Unfortunately, I have little to offer here to someone who only day trades,
because I address this by limiting the total amount of exposure to daytrading.
I allocate a specific amount to that style, and hence reduce the overall
exposure by not putting all my risk exposure in one place. I am able to do
this because one of my main trading philosophies is: "I ' ll trade any issue, on
any timeframe, if I can find a setup" .

I ' m always looking for what I think are great setups. I ' m not that concerned
with what the issue is (assuming it has adequate liquidity and other
necessary aspects for my trading it), or what the traded timeframe is. This
way, I can diversify, in a manner of speaking, across many timeframes and
markets. This opens up a lot more setups for me to choose from, with only a
limited number chosen from the 'daytrading ' group .

A s an example, perhaps I have a daytrading account that is 1 0% o f m y total

trading equity. I can then take a single trade with all the capital in that
account, and still meet my 1 0% cap guideline for a trade. Given that the time
exposure is significantly less in a quick daytrade, I might revise that cap to
1 5 % for trades of that type, as long as I was limiting all my day trades to that
one account (in other words, 1 5 % total exposure at any given time).

13
Now, a very curious mathematical relationship comes up when one looks
over this 1 %/ 1 0% guideline. This i mplies, for the math astute, that at a 1 0%
risk on a given trade (calculated as the initial risk divided by issue the price),
both guidelines come into play at the same exact point. Below a 1 0% risk for
that trade, only the 1 0% guideline comes into play, and above a 1 0% risk for
that trade, only the 1 % guideline comes into play. I know that this may be
completely unclear at this point, so let me do a simple example, and it
should then be understandable.

Let ' s say a trader has a $ 1 00,000 total account value. He is using the
1 %/1 0% guidelines . He wants initiate a trade in ABC Company, knowing
that he can risk $1,000 total (the 1 % risk per trade cap), but cannot have over
$ 1 0,000 invested in the trade also (the 1 0% maximum position size cap).
Let' s say that ABC is going for $40 per share. The initial stop is going to be
placed at $38. With a risk of $2 per share, the trader can trade 500 shares, as
long as the 10% cap would not be exceeded with such a trade size. At $40
per share, 500 shares would total $20,000, and would, in fact, exceed the
1 0% cap. The trade size would have to be 250 shares, as that would be the
limit at a cost of $ 1 0,000.

This was to be expected, though, from what was said above: 'Below a 1 0%
risk for that trade, only the 1 0% guideline comes into play . . . ' since the risk
per share was 5 % ($2 risk on a $40 stock) . Now, let ' s look at an example
with a 1 0% risk per share. Say the initial stop on the trade was to be $36
instead of $38. At $4 per share and a $ 1 000 total risk, that ' s a limit of 250
shares. Alas, though, we know that the 1 0% cap also stops us at 250 shares.
This is to be expected, from what I said above : 'This implies, for the math
astute, that at a 1 0% risk on a given trade (calculated as the initial risk
divided by issue the price), both guidelines come into play at the same exact
point. '

And lastly, let ' s say the stop was to be set at $35, or $5 per share. That
would i mply a maximum trade size of 200 shares based on the 1 % ($ 1 ,000
total risk) guideline, but still a 250 share maximum for the 1 0% guideline.
As stated already: ' above a 1 0% risk for that trade, only the 1 % guideline
comes into play ' . It is clear that it is an easy matter to see which guideline to
use based on the risk per share compared to the 1 0% figure. This has some
interesting i mplications for my trading.

14
I am sure many readers have just said, perhaps out loud: "But Jim, I'm not
going to have a stop over 1 0% away on my trades. That ' s way too far for
me. " I agree. In fact, I ' m all about tight, technically placed stops, as we will
see as this book unfolds. So, what does that mean for my criteria? It means
that I almost never use the 1 % guideline. I ' m capped in almost every
circumstance by the 1 0% rule.

I would only even see the 1 % rule come up if I were willing to have a stop
greater than 1 0% away from entry on a given trade . I can ' t think of the last
time, in an un-leveraged stock account, for example, that I did that. For all
practical purposes I ' m only using the 1 0% rule. This is quite interesting,
because it implies, for this type of account, for the type of swing trading I
would do in that account, that I ' m much more concerned with event ri sk
than I am with accumulated loss due to stop outs. I need to not get
'overexposed ' in any one position, so as to not devastate the account balance
if that issue is hit with some news or other event.

The other thing that becomes obvious is that my risk per trade is going to be
less than the 1 % in many cases. If my stop loss amount is at 5 % of the issue
price, then my total theoretical risk, at the 1 0% cap, is just 0.5 % . Since many
portfolio managers seem to feel that risks at that level are far better than the
1 %, 2%, or even 5% that many traders use, I have the advantage that I likely
have a lot less chance of 'blowing out' an account with the risk per trade at
this lower level .

Each trader will have to make an assessment as to what guidelines will work
best for him or her. These guidelines will likely vary depending on the
holding period of the trades . I have shown roughly what I do in many
different circumstances, but keep in mind that these are my guidelines, and
they are far from perfect. All I can do is come up with what I think is the
best plan for me, given my goals, risk tolerance, personal situation, 'Trading
Plan' , etc . , and explain it as best as I can for my readers . You must make
your own decisions in this area, suited to your needs.

15
The bottom line to all this is that I need to come up with a dollar amount that
I am will ing to risk on given trade (or a maximum amount I wou ld invest in
a given trade), in order to proceed ahead down the line with my calculation
of trade size . The goal with these limits for me, then, is not only risk
management, but also the practical use of the limit amount for determining
the size of the trade to initiate. This is where we are headed when we get to
Chapter 4, but first we need to develop some additional background
information .

16
 Chapter 2

RewardIRisk and Expected Value

At this stage of the game I now know how much I am willing to risk on a
potential trade that I am considering . I ' ve found a potential setup, and I ' m
considering i f I want to initiate a trade. This i s the time when you hear a lot
of traders discussing things like 'the risk/reward ratio' and the '% winners '
(or 'win/loss ratio'), and so on . Hence, this seems like as good a time as any
for me to discuss my views on all this .

First off, the astute reader may have noticed something about what I just
said, and the title of this chapter. If you didn ' t see anything unusual , please
reread the chapter title and the first paragraph . See that? The title says
reward/risk, but in the introductory paragraph I said risk/reward, as I'm sure
you say. Think about it. You ' ve probably said: "I like this setup; it has a 3 to
I risk/reward ratio". I know in the past I ' ve said it.

Examine, though, what this implies. We are saying 3 : I and risk: reward.
Think of those analogy tests from grade school . This is implying the risk is 3
and the reward is I , not the other way around. If one wants to say 3 to I ,
with 3 being the reward and I the risk, i t should follow that it's called
rewardlrisk. I don ' t care how it' s l aid out, as long as it makes sense. If one
wants to stick to risk/reward, that ' s fine, but then it would be I to 3
risk/reward.

Imagine telling someone that you found a spectacular trading opportunity

with a I to 5 risk/reward ratio. They' d look at you like you were nuts . So,
I ' ve adopted the unconventional convention of calling it reward/risk, to stay
consistent with putting the reward number first. I ' m very surprised I have
never seen this brought up anywhere before. I ' m sure there is some textbook
somewhere that explains why it is the way it is, and why that ' s correct and
justified, but I ' m rewriting it, for myself and for my readers, to follow
common sense .

17
Now that we understand the convention I will be using here, what can we do
with it? Well , let me point out that among the vast amount of e-mail
questions that I get questions on reward/risk and win/loss ratios (or %
winners) are among the most common . And as I will hopefully demonstrate
successfully, those numbers are not all that useful to me. On the other hand,
a combination of those numbers can be quite useful.

The biggest problem with reward/risk and win loss ratio numbers is that they
contain only one specific aspect of what is going on, and they can be very,
very deceptive, especially if one is not well versed in statistics and
probability. Let ' s start out with reward/risk. People aspiring to be traders
very frequently know little more about reward/risk than that they want it to
be 2 to 1 , 3 to 1 , or even ideally 4 or 5 to 1 .

I ' ll l ay out a scenario where the reward/risk is a solid 3 to 1 . The trader

makes 3 on a winner and loses 1 on a loser. Over time, the trader finds that
he or she is losing money. How can this be possible? Well , the reason is
obvious and likely all the readers already know what I am going to point out.
Nowhere in here did I mention how often the trader wins and loses, the
winlloss ratio. Without that, what does a high reward/risk tell us? Not very
much, it turns out.

What if this particular trading scenario had the trader only 'winning' 1 0% of
the time? That 3 to 1 reward/risk doesn ' t sound so good now, does it? Let' s
look at the other side of the coin. Suppose I show you a scenario where you
will win 99% of the time. How does that sound? If you said: "I ' m in ! " you
could be in for surprise. I didn ' t define any other aspect of the scenario.
Suppose you could 'win' one doll ar, but when you lose, you lose a million
dollars . Now how does it sound?

See, many were ready to go as soon as a 99% chance of ' success' was
apparent. That may have been totally true, but without knowing the
reward/risk, again, it does me very little good. It' s clear that knowing just
one or the other side of the coin is next to worthless. But, as I implied,
knowing both sides of the coin can tell me quite a bit. It's almost like two
keys to a safety-deposit box. Each key, by itself, has little use or worth.
Together they have a synergism that is great.

18
This leads to a couple of interesting questions. The first is how come you
rarely, if ever, see any di scussion about combining these two numbers in a
single calculation ? I really don ' t know the answer to that. I think it's
partially because few people that write books on trading have any
background in statistics, and more specifically probability and game theory.
And partially I think it's because most of the 'back-testing' software gives
the user all the numbers separately, and most importantly, gives the user the
profit they would make with the 'back-tested' ' system ' . If the user sees an
acceptable doll ar profit, they are done.

This has the effect of allowing users to use statistics that they have little
understanding of. 1 ' m not saying that I think a trader has to be a statistician,
but I do think that some understanding of what is going on is important.
Another thing for me is that being a 1 00% discretionary trader, I can ' t 'back­
test' anything. I can look back at charts and estimate what I think I might
have done in some given scenarios, but that ' s about it. For me, then , having
a little better understanding of the ' stati stics ' that I can apply is of great use
to me.

Let' s see what happens when we combine the two measures that we have
been discussing. I want to take into account not only what the reward/risk
ratio is, but al so the likelihood, or probability, of each outcome. There is a
formula for doing just this , and it' s called 'expected value ' . This formula is
used frequently in game theory, calculating lottery ticket ' values ' , and in
many pastimes which involve betting. The formula may require some
familiarity with high school algebra, but overall it's pretty simple.

To start with , let me express the formula in words:

Expected value sum of all (outcomes times the probability that the
=

outcome happens).

That might be a little hard to grasp from just what I wrote there. Let' s look at
an example. Say, hypothetically, that we have a trade setup where get 1 2
points on winners and 4 points when we stop out, for a nice 3 to 1 reward to
risk ratio. And let ' s say we win on 60% of the trades and lose on 40% . What
is the average amount I would make per trade?

19
Expected value = 12 * .60 + (-4) * AO
Expected value = 5 .6

This scenario would average 5 . 6 points per trade, ignoring slippage and
commi ssions. (Slippage and commissions, though, at least average expected
amounts for them, could be taken into account when determining the
winning and losing trade amounts .) This formula is not addressing what we
would need to open such a trade, such as cost for stock or margin for futures.
It only calculates the average profit (or loss) per trade, given the values that
are put into the formula. If the number is positive, it is a 'net positive
outcome ' plan, and obviously if it is negative, it is a 'net negative outcome '
plan.

This allows me to see, in a simple way, if the outcome will produce a profit
given the parameters that I have used to do the calculation . Playing around
with this formula allows one to learn many interesting, and I feel useful ,
things about what happens as the percentage of winners changes, as well as
the reward/risk ratio. I look at plans that fall into two camps, if you will . Of
course there is everything in between, on a spectrum or gradient, but this
artificial division helps me to think about what I am about to present.

Traders can make their money from the winning percentage, or they can
make it from a high reward/risk ratio. Scalpers tend to make money from a
high winning percentage and a fairly low reward/risk ratio. Position traders,
and to a lesser extent swing traders, make their money from a high
reward/risk ratio and a lower percentage of winners. So, why not just go for
both? That ' s the ticket. Only take trades with a high percentage chance of
being a winner and with a high reward/risk ratio.

Good luck with that one . Those kinds of trades may come along here and
there, but I can ' t hold my breath waiting for them. Here ' s the thing, and this
is more a way to visualize this than it is an exact mathematical certainty.
Across the spectrum the expected value remains relatively constant. I feel
this is because the market is watched everywhere, on every timeframe, for
opportunities. 'Hedgies ' and various program trading arbitrageurs are
watching and working every angle, especially in today' s market, where
program trading sometimes exceeds 70%, and is commonly 50%-60%.

20
I f any place on the spectrum is better pickings, it will surely get picked, and
soon it will 'come into line ' . Now, what does that mean to the trader? It
means, to me, that you can ' t 'beat the formula' . I f you try to increase the
reward/risk you will decrease the winning percentage, and if you try to up
the winning percentage, the potential trades will have a lower reward/risk.
The ' secret ' , I believe, is finding where on the curve you are most
comfortable trading. That way you fit your style to your abilities, lifestyle,
and person ali ty.

After that, I use the formula to determine if my plan does have a net positive
outcome. I can use the formula to compare different strategies with each
other, and different variations. The issue is that in order to do this you need a
good-sized data set, and the data has to be reasonably accurate. This is not
all that easy to do when your setups are discretionary. From a practical
standpoint, this formula can be quite difficult to apply across an assortment
of potential scenarios. And it can get even more difficult than that. What if
you scale your exits (or entries)?

Here ' s where I take issue with a lot of 'back-testing ' . When I trade, I almost
never have a ' simple' set of rules for entry and exit, such that it could be
'coded ' . I strongly doubt that anything I do could be coded by anyone. I use
too much experience and evaluation of market action to ever be 'coded ' .
And more than that, I do a lot of scaling, especially out of trades. I have seen
many ' systems ' that 'fail ' on 'back-testing ' that I am sure I could trade to a
'net positive outcome ' .

These systems just have one simple entry and one simple exit signal . I would
break the trade down; I might take some off on an initial thrust, and move up
my stop. Each movement would be based on my study of the individual
issue and how it behaves. I would scale out at various places, which would
be triggered by the dynamic market action of the issue. I would likely do all
this while the ' system' was just waiting around for a simple signal to play
out.

21
Now, what has this got to do with our discussion? That ' s easy. The formula
we are looking at would be hard pressed to accommodate a style of play like
that. I don ' t imagine I ever could, or even if I could that I would, try to come
up with a data series that determines all the percentages and reward/risk
ratios for all the possible/likely scale out points and stop moves that I may
make for a given setup. Even if I did, I would have traded that setup so many
times by then that what a simple formul a could tell me would be crude by
comparison to my first-hand experience, and hence nearly useless.

What does all this imply, for my trading? Wel l , it really means that I am not
able to make much use of the formula, win/loss ratios, percentage winners,
and so on . I have been asked many times what all my stats are, and I surprise
people (almost as much as I surprise them when I tell them I don ' t use
'profit targets ' ) to no end when I tell them I have no clue, and it really
doesn ' t matter much to me what they are. All that matters is that the plan is
'net positive outcome ' , and that you get from your P/L statement, not a
formula.

This doesn ' t mean the formul a is of no use at all. I still play with it, look at
some scenarios, and see what effect different things may have on the net
result. It' s just that the formula is simply too simplistic, in my opinion,
compared to real discretionary trading. I do suggest that every trader play
around with it, run some scenarios, and so on . I just have to make it clear
that it is not something that I use for each new trade setup.

Before we move on, I do want to show one thing the formul a can do,
although the example must be very simplistic . The formula can show you the
percentage of winners that are necessary in a given scenario to be at
breakeven, that is, the breakeven cut-off point. Let' s go back to the example
we started with, but this time do some algebra (sorry, for you math haters
out there), and set the percentage values as unknowns, and the expected
value to zero (breakeven).

22
o =1 2 * x + (-4) * ( I -x)
0 = 1 2x - 4 + 4x
0 = 1 6x - 4
4 = 1 6x
.25 =x

(All the probabilities must add up to I , so if I use x for one probability I ' ll
use I -x for the other probability.)

So we see that the percentage of winners needed in order to break even is

only 25% when you have a reward to risk ratio of 3 to I . Any percentage
over 25% and you are netting a profit (excluding slippage and commissions).
For any given set of values, one can easily determine where the breakeven
point would be. Of course a similar algebraic manipulation could be done to
determine what the reward/risk value would need to be for breakeven, for a
given winning percentage.

When we get to Section II and into the discussion on such topics as the 'half­
off' management style and 'equity curve smoothing ' , we' ll revisit the
concept of expected value. The knowledge that we have gained in this
chapter should be quite helpful there when working through some ideas that
might otherwise be hard to visualize.

We will now move on to initial stop placement. At this point we will switch
over to a much more chart intensive mode, as I lay out my thoughts on
where and how I place my stop as I contemplate a potential trade. Although
my stop placements are always very technically placed, they are also very
'vi sually' placed.

23
 Chapter 3

Initial Stop Placement

Trade Management, for me, comes in steps, or stages. Once I reach the point
where I ' m looking over a potential trade I begin to look at where I might
place my initial protective stop. I see where the possible places may be for a
technically placed stop, and I assess the implications of those various
placements . I use this information to my weigh up my possible deci sions.
I'm trying to determine not only where I might place my stop, but also if I'm
even going to proceed forward with the trade .

Before going any further ahead, though, I want to point out that what I do
not only at this stage of the game, but at every stage, is heavily grounded in
my own personal 'Trading Plan ' . I have experimented, adjusted, and adapted
the techniques I have worked with to specifically answer the needs I had in
my own plan . In this book, and in all my other books, I attempt to show
what I do, with the hopes that it will offer the reader some ideas that can be
modified and used for his or her own personal 'Trading Plan ' .

It's really important to understand this right now because I am going to

discuss initial stop placement, but I am going to discuss it purely in the
'context ' of my 'Trading Plan . And my trading has a certain personal ' style'
'

that I feel works for me. One major aspect of that style is that I am, for the
most part, 'jumpy ' . I don ' t like my stop to be too far away. I understand,
though, that a tight stop can lead to more stop outs.

My 'style' attempts to choose very precise entry points with very close
technically based stops, with the understanding that multiple entries may be
required to achieve my objective. In the long run, I have found that this is
the best ' style ' for me. I have run into very few traders who share my
philosophy. I know many traders who use wide groupings and place the stop
just past the far side of the grouping boundary, which is technically sensible.
I find this just too far away for my purposes.

25
Too help get a better handle on what I am talking about, I'd like to quote
from my book Kane Trading on : A Totally New 5-Point Pattern. (To fully
understand what I mean here it helps if the reader is familiar with the overall
Kane Trading methodology, as outlined in the entire book series.) In that
work I said:

"When I set up my groupings and judge the issue to have an adequate level
of 'harmonicity' , I ' m usually left with between three and five very tight
groupings with small spaces between them. For those Fibonacci writers that
use only the basic numbers, they frequently have one very wide grouping,
which might sit on top of my five groupings.

So, why is this significant? As long as we both find the same area, who
cares? If you ask that, the point is missed. Without pointing any fingers at
anyone else, or their methodologies, it is just far too 'crude' for me.

Let ' s look at just a few of the issues . A wide zone requires a wider stop. I
like tight stops, but they must be technically feasible. A tight stop without a
technical basis is likely to get hit, or hit far too often for a solid 'Trading
Plan ' . Next, with a wide zone, I have no idea where the 'sub-levels ' of
support or resistance are. There is a major area of potential support or
resistance from the wide zone, but that ' s it.

I want to refine my entry and stop placement. I want to watch the price
action and make evaluations. I want layered 'sub-areas' within the main
zone that I can watch for clues. I ' m like a detective, and I ' m trying to see
how the issue is acting when it hits these layered areas. I watch for bounces
and entry triggers. I see what happens, and where. If there are small bounces
(best viewed on a lower timeframe) right on the different 'layers ' , I know
the 'harmonicity' is still there.

As far as technical stop placement, I can use the v arious layers to aid in
determining an intelligent stop. With one 'crude' , wide zone I can just about
only place my stop below the low end of the zone (in the case of a long).
That ' s just too wide, and not refined enough for what I want to do. This may
work for some traders, but it doesn' t work for me.

26
My methodology came about from my wanting to take my 'Trading Plan ' up
to another level . I prefer tight, technical stops with repeated entry attempts if
necessary. This simply wasn 't possible for me with the 'standard ' Fibonacci
approaches that were being taught."

That quote really sums up what I try to do. It needs to be clear, though , that I
am not recommending that anyone else attempt to trade this way. I am going
to show what I like to do, and why. The reader should look over what I
present, and decide what, if anything, within the material may be of use for
his or her 'Trading Plan' . If I sound like I am beating a dead horse here it's
because I am. I have a very unique approach, and it is not for everyone.

Regardless of the uniqueness of what I will show here, it is, still, just a
variation on a basic approach to stop placement. All that I really do that is
radically different is use the 'layered support or resistance' in many cases for
stop placement, and then look to reenter if stopped out and re-triggered. As I
have said, it' s been my experience that it 'costs me less' to approach my
entries this way than just having a much wider stop, placed technically but
well out of the way of any 'retests ' of the grouping.

I realize that at this point I may be discussing this too much in the abstract,
and although 1 understand exactly what I ' m saying, the reader may not. Let
me give an overly simplistic example of the basic concept, and then we'll go
into the details as it unfolds during the chart examples. Let ' s say using a
'wide' zone that is typical for many Fibonacci traders I decide on a stop that
is $3 .00 away from entry. This stop sits just outside the outer boundary of
my wide grouping, but out enough so that I expect a stop run won ' t catch it.
This is a standard type of stop placement, and all is well.

For my own personal 'style ' , let ' s say I have four layers of support (or
resistance), laid out with four distinct, tight groupings . Now, say I get a
reaction and entry trigger off the first grouping. My trade premise is that that
grouping (or sub-grouping, if you will) is ' in play' , and the reversal I am
looking for is now taking place. What is the sense for me to place my stop
four groupings, plus some extra, away from this point? To me, technically,
there is no sense in that.

27
My stop can now be just past the grouping that I have gotten my reaction off
of, or just past the next grouping. Let ' s say that stop is seventy-five cents .
That ' s one-fourth the size of the 'wide stop' used in the other 'style ' . If the
reaction is just a 'bounce ' I can look to reenter if I get another entry trigger. I
could do this for all four groupings and my total stops would equal the
'crude ' method. I find that commissions are so nominal that they have little
consequence in this part of my decision making. After all, this is not a
'scalping ' methodology. I ' m playing for entire swings on my 'traded
timeframe ' .

Now in reality, I find I rarely have to reenter four times, so I believe this
' style ' saves me money on my stops, net overall. I also find that I miss fewer
trades because I don ' t need a large grouping to be 'fully tested ' . In fact, I
will enter a small fraction before the first grouping if I get an entry trigger. I
feel that I can 'afford to' because of the overall ' style ' . I ' m big on seeing
how the issue reacts to my groupings (again, sub-groupings , if you will) on
the lower timeframe.

I am watching and seeing what happens. And many times if it 'rolls over' I
can actually take some of the trade off, scratch the rest, and then take a
reentry. If I do that even three times and then catch a good move, I ' m very
happy with that. Sometimes I will see that happen, and then on the third time
it doesn ' t trigger an entry, but instead plunges through the entire zone. I
walk away with a very small profit, and the 'wide zone' trader walks away
with a full stop loss. Again, this is just my personal preference here, but in
my opinion it works way better for me to approach it as I do.

There are some other, additional advantages to me to take the approach that I
do, and we will get into those as we go through some examples. Understand
that it takes a very certain, specific type of mind set to reenter trades this
frequently, without getting psychologically 'frazzled ' . It either does or does
not fit your personality. For me, it' s not much of an issue. I see the 'risk' as
being so much smaller with this 'style' that I fully expect it to take a few
tries to catch a move . I ' m not bothered in the least by that.

28
Part of the reason is that my focus is on the bottom line, over time, and not
some meaningless statistic like what percentage of winners I have. As I ' ve
told many people who have inquired, I don ' t know what my percentages are,
and I don ' t care. Would you rather have a 90% win rate and net overall be
losing money, or a 1 0% win rate, and net overall be making money, for
example? All that matters to me is if I can make money. I don ' t care what
the stati stics say about my trading, I only care about what the number at the
bottom right hand side of my brokerage statement says about my trading .

Many people, though, may not be comfortable with getting stopped out
multiple times. They may take it personally, and feel inadequate about
themselves. They may not be able to focus on the bottom line and 'do what
it takes ' , regardless of the emotional consequences. I just want to make it
clear that a 'Trading Plan ' is only as good as one ' s ability to follow it, and
that, to some extent, may depend on how well the plan is suited to the
individual .

Take this into account as you form your plan, and as you look over what I
present here. If you do adapt and use some of my material, make sure it suits
you own 'style' and personality. A plan that works for you but is not fun to
trade is not a good choice.

Let ' s move on to some chart examples. I will cover all that I have discussed
here in detail as we work our way through the examples. Hopefully, it will
all be quite clear by the time we finish. I think you will find it a lot less
'technical ' than you may be expecting. I tend to be very visual in this phase.

29
We 'll start with a very simple and basic example in AVY, and get more
complex as we go along. See figure 3 .1.

Figure 3.1

1 . 000

0 . 000

9 . 000

8 . 000

7 . 000

6 . 000

5 . 000

4 . 000

21 28 0ct 12 19 25 Nov
Chart created by Dynamic Trader (c) 1 996-200 1

AVY is forming a simple ABeD correction, set up to continue the uptrend

that started on the bottom left hand side of the chart. One of the key numbers
in the grouping is a .618 retracement of the new upswing. I am showing a
single, tight grouping for this example. I want to cover the basics of where I
might place my initial stop loss with only one area to consider, before we get
to the more complex cases where I have multiple groupings.

Assuming that I get a reaction and entry trigger off this grouping, where
would I place my stop? For me, it' s purely visual . I look at the chart and I
know right where I want it to be. I don ' t use any formulas, any percentages
of the issue ' s value, or anything of that sort. B ased on my experience, I just
look at where the i ssue would tell me my premise is not playing out. Ah-ha,
and just what is the premise?

30
When I trade I have a 'trade premise ' . I have a supposition, if you will, of
what I want to have happen, and that is the basis of the trade. As soon as I
see that the premise is not unfolding, I usually want out ASAP. I then watch
the price action, continually assessing the situation with the new data that is
coming in, and decide what I want to do from there. And my premises tend
to be quite strict.

Many people that look my methodology over at first think my stops are too
tight, and my premises (usually based around my groupings) are too strict.
That ' s their opinion, and I ' m fine with that. As I said, my 'style' is not for
everyone. But keep in mind that I am not just choosing a tight stop or
creating unrealistically tight groupings out of the blue.

I have a larger premise for my 'Trading Plan' that I can create tighter
potential trade areas, and set up tighter stops, all technically based, and
simply reenter, even multiple times, and do better than if I used a wide
potential trade area, didn ' t actively manage with current unfolding price
action, and had a 'normal ' 'wide ' stop. That ' s the conclusion I ' ve come to,
and it is a major premise for my 'Trading Plan ' .

If you haven ' t concluded a similar thing, or don ' t want to be so intensive in
your trading, then don' t even work with my material here as a starting point.
Adapt it to a more conventional approach first, and then experiment with it
in that manner. Take what you see here, adjust, modify, and experiment with
it, and adapt it for your own unique premise. I just want it to be crystal clear
what I am doing, why I am doing it, and why it works for me, in my opinion .

31
With that, let ' s move on, and see where I would put my stop. See figure 3 . 2 .

Figure 3.2

:.:' AVY D-D /em �

1 . 000

0 . 000

9 . 000

8. 000

7 . 000

6 . 000

5 . 000

4 . 000

21 28 0ct 12 1'1 2& Nov

Chart created by Dynamic Trader (c) 1 996-200 1

The arrow points to the approximate area where I would put my stop loss.
Now, let ' s look at some numbers. Although that .6 1 8 retracement looks
almost like an outlier for the grouping, the grouping is only about twenty
cents wide in total. To me, that ' s tight. The . 6 1 8 retracement only looks a
little out because this chart is so close up.

The stop loss is approximately fifty cents below the grouping. Now, a fifty­
cent stop loss on a stock just less than fifty dollars is very, very tight. Under
'normal ' circumstances this would be way too tight. (Note, though, that this
fifty-cent stop number is from the bottom of the grouping and not from a
likely entry spot based on my methodology.) I have seen traders place their
stop loss on a trade like this under the swing-low at the bottom left side of
the chart. That would be about three dollars away. If a trader set a stop like
that few would question the trader' s skills.

32
Understand that this is a daily chart that the setup is forming on . For all you
scalping daytraders out there, we all know you would never even consider a
stop with that kind of capital exposure. But if you bring the chart out a bit,
and look at the stop placement in a larger 'context' , it would still be the most
likely choice for many traders. For me, it' s completely unacceptable. I could
enter (at the grouping, which is not what I actually do, but follow along for
the sake of this example), speaking theoretically, of course, six times to
equal one stop out from this conventional placement. If it takes me six tries
to get in, something ' s wrong. So I figure I have to do better with my
multiple entry 'style' .

Now, all of this is based, though, on my premise that this grouping is going
to get a reaction, and that it isn ' t going to be violated to any great extent. If it
is violated, then I feel my premise that this particular grouping will elicit a
response is not valid, and I want out. I want to watch how it acts with other
groupings (if I have any set up), and if I get another entry trigger, I may
assess if I want to take another shot.

This is totally different than 'riding it out' and hoping the desired price
action develops. I want out until I see what I want to see. That ' s a big part of
why I want to do it the way that I do, as opposed to just using a wide stop,
giving it 'room to breath ' , and waiting to see what happens. We will discuss
this more as the more complex examples unfold.

33
For now, let ' s see what happened next with A VY. See figure 3 . 3 .

Figure 3.3

:':. AVY 0 -0 BGJ �

1 . 000

jjtL1
0.000

9 . 000

1J
8 . 000

��m �t�
7 . 000

6 . 000
-)

5 . 000

4 . 000

21 28 Oct 12 19 2&
Chart created by Dynamic Trader (c) 1 996-2001

A VY has reacted strongly off the grouping. It has done exactly what I
wanted it to do. (Without getting too far ahead of the di scussion, at this point
I am closely watching for a signal to move the initial stop, and getting ready
to take action.) When I see what is on the chart right here it looks very clear
to me why I set the stop where I did, and why it makes perfect sense to me.

As we move on, we will look at examples that don ' t work like this, and I ' ll
show what I do. Not every example will be ' well-chosen ' , although they will
all be 'well-chosen ' to show what I want to show so that the reader can
understand the concept at hand, even if that concept is what I do when a
grouping fails.

34
Let' s see what A VY did from here. See figure 3 .4 .

Figure 3.4

)11
-::."!.. AVY 0 -0 !EU;} £'J

5 . 000

4 . 000

IH / 3 . 000

2 . 000

jtt�,j
)l 1 . 000

0 . 000

r
9 . 000

8 . 000

7 . 000
�!fij �.� 6 . 000

5 . 000

4 . 000

3 . 000
21 28 Oct 12 1'3 2& Nov '3 1&
Chart created by Dynamic Trader (c) 1 996-2001

A VY rocketed off that grouping, and did an even better job at fulfilling my
premise that I could have expected. Even though I don ' t really look at trades
this way (as we discussed in earlier chapters), look at the reward/risk for this
potential trade. I can have a very low winning percentage if I have
reward/risk ratios like this.

35
Before we move on to the next example , let me show where A VY went from
here. See figure 3 .5 .

Figure 3.5

70. 000

--=�F===== !jM� �NJ}l

Oct Nov Dec 02 Feb Mar Apr May

Chart created by Dynamic Trader (c) 1 996-200 1

That ABeD pattern (it was a 5-point pattern, too) really pointed to a key
reversal area. A VY continued to move strongly off the grouping. Even the
much wider three-dollar stop looks l ike a good reward/risk ratio given this
chart. Understand, though, just how infrequently a run like this ensues. Even
so, the reward/risk using the stop that I would have chosen is just incredible.

I want to do one more fun thing here before we move on. For this little
example I ' m not suggesting that anyone could have actually caught most of
this run up, but let ' s say the potential was twenty dollars. With a fifty-cent
stop, the reward/risk is 40 to 1 . Here' s the point. What' s the breakeven
winning percentage for that scenario? In other words, what percentage of
winners would you need to exceed for this to have a positive expected
value?

36
The answer is approximately 2.44% . Keeping in mind that this is just a made
up, oversimplified little example that doesn ' t take slippage, commi ssions,
trading reality, or anything like that into account, it points out that this
scenario would have a net positive expected value (it makes money over
time), if the winning percentage is anything over 2.44% . I thought that was
interesting enough to point out.

Now let' s look at an example with two groupings, in DIS H . See figure 3 .6.

Figure 3.6

:::-:: DISH D-D 1i!f8 £J

30. 000

29.000

28. 000

27. 000

26.000

25.000

24 . 000

23.000

22 . 000

2 1 .000

20.000

0ct Nov Dec 02 Feb

Chart created by Dynamic Trader (c) 1 996-2001

DISH has pulled back significantly, into a potential trade area with two clear
groupings. It is possible to view the area as three groupings, but as we will
see when we zoom in a bit, I see them as two distinct groupings. So, given
this layout, where will I be looking for possible areas for stop loss
placement?

37
Let ' s zoom in, and I ' ll label my areas of focus. See figure 3.7.

Figure 3.7

:'!. DISH D -D !i[;J E'I

30. 000

29.000

28.000

27.000

26.000

25. 000

24 . 000

23.000

22.000

2 1 . 000
Jan 11 18 25 Feb 8 15
Chart created by Dynamic Trader (c) 1 996-2001

The two groupings are much clearer in this view. I have put arrows at the
two possible places I might consider as stop loss placements . I choose these
two areas because they make technical sense to me, for my 'Trading Plan ' .
This is based, as I have explained, on my 'reentry' style of play. If I didn ' t
use that 'style ' , I would b e looking at the area o f the lower arrow.

Now, given the two possible choices that I would consider here, how do I
decide what to do, and when? At this stage, I ' m only looking at where I
would consider placing potential stop losses. I have to see what the issue is
going to do next. If I get an entry signal off the upper grouping, my stop gets
placed at the upper arrow.

If there is no entry signal off the upper grouping, I watch as the lower
grouping is approached. If I get a signal off the lower grouping, I place my
stop at the lower arrow. If I don ' t get an entry signal off the lower grouping,
then there is no trade, and I move on.

38
There is also the possibility that I enter on the upper grouping, get stopped
out, and then get an entry signal off the lower grouping. In this case the
initial play has little to do with my stop loss placement, and I place my stop
at the lower arrow, since the trade is off the lower grouping .

It is also possible to have a reentry trigger off the same grouping as the
initial entry (such as a bounce, which moves the initial stop up, and then a
rollover and stop out). In this case the stop is just a repeat of the first trade,
and hence placed in the same area. I have seen cases where I have done thi s
three times in a row. It all depends on my read of conditions at the time.

Let' s move forward and see how DISH is going to react to the groupings,
and see what I might do. See figure 3 . 8 .

Figure 3.8

::::-. D I S H D-D I!I!J;J �

30 . 000

29.000

28.000

27.000

26.000

25.000

24 .000

23. 000

22. 000

2 1 . 000
Jan 11 18 25 Feb 8 15
Chart created by Dynamic Trader (c) 1 996-2001

DISH has penetrated slightly through the upper grouping, but not to the
point that I wouldn' t take an entry trigger if I got one, and then still use the
upper arrow for my stop loss. Keep in mind that if DISH reacts here and
starts to move up and give me a trigger, it would be well above the arrow.

39
At this point there is no hint of an entry trigger. Of course, I would be
watching this on a lower timeframe, likely a 60-minute chart, for price
action and the actual entry trigger, as explained in Kane Trading on: Entry
Techniques. For this example, I will just explain what happened on the
lower entry timeframe.

Let ' s move ahead one more price bar. See figure 3 .9.

Figure 3.9

;':. D I S H D -D l'Jr;J �
30 , 000

29,000

28 , 000

27, 000

26,000

25,000

24,000

23, 000

22,000

2 1 , 000
Jan 11 18 25 Feb 8 15
Chart created by Dynamic Trader (c) 1 996-2001

DISH dropped through the upper grouping, and has started to react off the
very top of the lower grouping. Thi s is the point where I ' m watching on a
lower timeframe for an entry trigger, and if I get one, I ' d set my stop at the
area of the lower arrow. B ased on the look of that last bar, I ' d be suspecting
that something is shaping up on the lower timeframe .

40
Let' s see what happened with DISH from here. See figure 3 . 1 0.

Figure 3.10

:':. D I S H D -D as £'!
30. 000

29.000

28. 000

27 . 000

26. 000

25.000

24.000

23 . 000

22. 000

2 1 .000
Jan 11 18 25 Feb 8 15 22 Mar 8 15 22
Chart created by Dynamic Trader (c) 1 996-2001

DISH gave multiple entry triggers on the lower timeframe, and just took off
from there. The stop was never threatened, and this is a classic setup that just
worked out great. Not all setups will be this nice, rest assured. We just need
to start with some easy examples before we work up to the more complex.

41
Let ' s move on to an example in AOL that has three distinct groupings. See
figure 3 . 1 1 .

Figure 3. 1 1

;,:, AOL 0 -0 !If;! �

35. 000

30. 000

Jun Jul Aug Sep 0ct Nov

Chart created by Dynamic Trader (c) 1 996-200 1

AOL is in a well-established downtrend, and I ' ve built a potential trade area

that separated into three distinct groupings. The methods I used here are
right out of Kane Trading on: Advanced Fibonacci Trading Concepts. It
should be clear, by now, what I am about to put on the chart. The process
that I follow is pretty standard, and once you ' ve seen it enough times, it
should start to look the same.

42
I'll zoom in on the potential trade area, so that we can get a better look at
what is unfolding. See figure 3 . 1 2.

Figure 3.12

:;:1. A O l D -D �m �

2 . 000

0 . 000

38.000

36. 000

34. 000

32. 000

30. 000

28. 000

21 28 0ct 12 1'l 21> Nov 'l 11>

Chart created by Dynamic Trader (c) 1 996-2001

There are three very clear groupings here, and they are uniformly spread out.
This helps me in the placement of my potential stop loss arrows . The reader
should have a very good idea by now what to expect on the next chart.

43
I ' ll put my arrows on the chart now, showing the three places that I am
looking at as potential stop loss areas . See figure 3 . 1 3 .

Figure 3.13

:':'. AOl D-D �r;J �

2 . 000

I!lft .��
jUft��jj
0 . 000

3g lij� N6 JlW
38 . 000

36. 000

34 . 000

32. 000

30 . 000

28 . 000

21 28 0ct 12 1'1 26 Nov 'I 11

Chart created by Dynamic Trader (c) 1 996-2001

I am looking to let the issue go through the grouping to a small amount, but
not quite reach the next grouping. Keep in mind, again, that if I actually set a
stop loss at a given arrow, I am not initiating the trade right at the grouping.
That would be a 'fade in ' entry, and as I have made clear in Kane Trading
on: Entry Techniques, I require a confirmation entry technique in just about
all of my trades (there are a few exceptions, but they are very limited cases) .

This means that the entry will be triggered at some point after a reaction off
the grouping, putting the actual entry a reasonable amount (for my 'Trading
Plan ' ) away from the stop. The premise, as I have explained, is that I expect
that a reaction off of a grouping is going to 'play OUt' . If it doesn ' t, I want
out relatively close to entry. I ' d prefer to watch the action from the sidelines,
and enter again if I so choose.

44
I ' ll add on one more price bar, and we 'll evaluate what I might do. See
figure 3 . 1 4.

Figure 3.14

;,:, A O l 0-0 R!e S

2 , 000

0 , 000

38 , 000

36, 000

34 , 000

32,000

30, 000

28,000

21 28 Oct 12 19 2& Nov 9 1!

Chart created b y Dynamic Trader (c) 1 996-200 1

AOL has penetrated the lower grouping without giving me an entry trigger
on the lower timeframe. It continued up to the lower end of the middle
grouping, and started to reverse . Depending on the entry trigger chosen, it
has either triggered an entry as this last bar closes, or is very close to
triggering. Once triggered, I would then set my stop loss at the middle
arrow.

45
Let' s see how AOL behaved from here. See figure 3 . 1 5 .

Figure 3.15

:.:" AOL 0-0 BS F!'J

2 . 000

38. 000

36 . 000

34. 000

32. 000

30 . 000

28 . 000

21 28 Oct 12 19 26 Nov '3 1(

Chart created by Dynamic Trader (c) 1 996-2001

AOL continued down off that middle grouping for the next two bars. At this
point the choice of stop loss seems to be just what I strive for. This is also
the point where I sometimes see a reversal, and then the issue goes up and
hits the stop, taking me out. The pertinent thing is that it sometimes then
reacts off the upper grouping, and gives an entry trigger.

If I like the price action and how things are looking, that ' s when I reenter. I
then set the stop at the upper arrow, and wait and see how it plays out. It
may also just hit the initial stop, and then proceed to reverse and give
another entry trigger. Although I would rate that scenario less positively, as
far as trade potential, I may still consider taking a trade under those
conditions. If so, I would choose my stop loss point at the upper arrow.

46
Let' s see how AOL acted from here . See figure 3 . l 6 .

Figure 3.16

:.:' AOl 0-0 ISS �

n:ial�1
2 . 000

?'Vl
0 . 000
!8 :ij8
�lbM�

t
38. 000

Jt �l�
36. 000

t 34.000

32. 000

l�
30. 000

28. 000

26. 000

24. 000

21 28 Oct 12 19 2& Nov 9 1& 23 30 Dec 14 2 1 28 Jan 1 1 18 25 Fe

Chart created by Dynamic Trader (c) 1 996-2001

AOL really dropped off that middle grouping. When viewed in thi s light, it
should be clear just how 'tight' I am trying to set my stops , yet I am
attempting to choose them very technically. I am also trying to not get
caught in the trap of endless stop outs from stops that are way too tight. I am
trying to do something very specific here, and I am figuring in to the picture
that I may need multiple entry attempts. This is a plan that I feel works for
me.

Another approach might be to simply place a stop at the upper arrow, just
outside the last grouping. For many, that is what they do. It' s not my style in
most cases, but it surely has merit, if one is not looking to play the possible
multiple entry game. I just feel my approach is better for me, and my
'Trading Plan ' . Feel free to experiment with what I present, and change and
modify it to suit your needs, if you feel it is of any help.

47
I ' ll wrap up this example by showing just how key this area was for AOL.
See figure 3 . 1 7 .

Figure 3.17

:::-:. A O l 0 -0 e[;J �

5 , 000

0 , 000

35,000

30, 000

25,000

20,000

1 5 , 000

1 0 , 000

Aug Sep Oct Nov Dec 02 Feb Mar Apr May Jun Jul
Chart created by Dynamic Trader (c) 1 996-2001

AOL was absolutely crushed off that area. In this 'context ' it is clear how
this was just a correction in a longer-term downtrend for AOL. And j ust look
at the structure of the pullback. It was an ABeD pattern, with an ABeD in
the Be leg, set up to continue the trend. Those that know my full
methodology know how much I like that. It was also a nice 5-point pattern.
There was a lot pointing to that reversal area, and it turned out to be key.

48
Let ' s move on to another example in AOL. This one will be quite interesting
because it has a 'twist' that might come up. See figure 3 . 1 8 .

Figure 3.18

nlttqn
:':'. A O l 0-0 �t;J �

1 4 . 000

I tJ t
1 3 . 500

j Hlflnl
1 3 . 000

1 2 . 500

1 2 . 000

11 d! j
1 1 . 500

ttp!
1 1 . 000

ljJjJ 1 0 . 500

1 0 . 000
Feb 14 21 28 Mar 14 21 28 Apr 11 17 25 May
Chart created by Dynamic Trader (c) 1 996-2001

AOL has formed two very tight, very close groupings, set up to continue the
well-established uptrend. The procedure I follow is pretty standard. I drop
down to a lower timeframe (this time we will actually do that ! ), put my
potential stop loss arrows on the chart, and watch the price action for entry
triggers .

49
I'll drop down to a 60-minute chart, and add on a few moving averages. See
figure 3 . 1 9.

Figure 3.19

:':. A O l 60-1 �r;J �

1 4 . 200

1 4 . 000

1 3 . 800

1 3 . 600

1 3 . 400

1 3 . 200

II :1" ta�Hil
1 3 . 000

1 2 . 800

1 2 . 600

1 2 . 400

Apr 22t 23w 241 25F Apr 2'lt 30w 1t 2F May E.t 7w 8t
Chart created by Dynamic Trader (c) 1 996-2001

I have added a 1 0-period exponential moving average, and a 20-period

simple moving average to the chart. Thi s is by no means my 'favorite ' entry
trigger setup. I have chosen it here because I have to decide on one of my
techniques for the example, and this i s a reasonable choice. It will allow me
to show two different variations.

50
The two groupings are very clear and distinct on this chart. AOL is
approaching the groupings, and I can now further zoom in on the chart, and
set up my arrows. See figure 3 . 20.

Figure 3.20

::::. AOL 60-1 !Ie f!I

1 3 . 600

1 3 . 500

1 3 . 400

1 3 . 300

1 3 . 200

1 3 . 1 00

1 3 . 000

1 2 . 900

1 2 . 800
MaySm &1 7w 81
Chart created by Dynamic Trader (c) 1 996-200 1

I ' ve done the same thing as I have been doing so far in the other examples. If
you are really astute, though, you might see something different in thi s case.
If not, don ' t worry, as it will be evident soon enough.

51
Let ' s move ahead, and see what AOL i s doing. Keep in mind that we are
now on the entry timeframe, and not the traded timeframe. See figure 3 .2 1 .

Figure 3.21

:::. AOl 60-1 sa D

f1T��� _
1 3 . 600

1 3 . 500

r f
1 3 . 400

1 3 . 300

�
1 3 . 200

{t �{
1 3 . 1 00

1 3 . 000

1 2 . 900

MaySm &t 7w 8t 9f
Chart created by Dynamic Trader (c) 1 996-2001

AOL has hit the top of the upper grouping, and I ' m ready to take an entry
trigger, if nothing about the upcoming price action flags me. So far, this is
much like the other examples, except that we are watching this one as I
usually watch a potential trade unfold, on the entry timeframe (actually I
watch many timeframes as a potential trade unfolds, but I have an entry
timeframe that I concentrate on, and use for the trigger).

52
I'l l move ahead seven more price bars. See figure 3 . 22.

Figure 3.22

:;::: AOL 60-1 e[!J £J

1 3 . 600

1 3 . 500

1 3 . 400

1 3 . 300

1 3 . 200

1 3 . 1 00

1 3 . 000

1 2 . 900

May5m ' &t 7w 8t '3f M

Chart created by Dynamic Trader (c) 1 996-2001

Depending on the choice of entry trigger, this one is either triggered (such as
with a swing-high violation trigger), about to be triggered (close above a 20-
period moving average, or a trendline violation), or nearing a potential
trigger (moving average crossover) . It is interesting that AOL has also
'double bottomed ' on the top grouping.

53
Let' s move ahead one more price bar. See figure 3 .23 .

Figure 3.23

::-:. AOl 60-1 em �

1 3 . 600

1 3 . 500

1 3 . 400

1 3 . 300

1 3 . 200

1 3 . 1 00

1 3 . 000

1 2 . 900

MaySm Gt 7w 8t '3f May

Chart created by Dynamic Trader (c) 1 996-2001

AOL has now triggered using a close above the 20-period moving average.
My stop would now be set at the first arrow, right? Well, no. Can you see
why? Can you see what is different about this example? Before I explain
this, let ' s finish this example up. This will give the reader a little more time
to ponder what I am getting at, before I explain it.

54
I ' ll add two more price bars onto the chart. See figure 3 . 24 .

Figure 3.24

:.-:" AOL 60-1 lEIS l'!'J

1 3 . 600
...._---
..

1 3 . 500

1 3 . 400

1 3 . 300

1 3 . 200

1 3 . 1 00

1 3 . 000

May5m 5t 7w 8t ':If May 12m

Chart created by Dynamic Trader (c) 1 996-2001

AOL would now be triggering an entry for me if I were using the moving
average crossover technique. And again, my stop would be the upper arrow,
right? Let me guess, you think the entry is too far away from that arrow,
right? No, that ' s not my point.

55
Let' s see what AOL did from here, and then I ' ll explain what I saw with this
one. See figure 3 .25 .

Figure 3.25

:':. AOL 60-1 Br;J �

1 4 . 200

1 4 . 000

1 3 . 800

1 3 . 600

1 3 . 400

1 3 . 200

1 3 . 000

1 2 . 800

May Gt 7w 8t 9f May12m 13t 14w 15t lGf

Chart created by Dynamic Trader (c) 1 996-2001

AOL really blasted off the top grouping, and made a substantial move. The
arrows seem to be much like the arrows from the other examples. Everything
seems exactly as I would like it, and the example played out nicely (as all
well-chosen examples do). So, what is wrong with my strategy? Did you
figure it out?

Whenever I follow my procedure, one of the things that I keep in mind is

that what I a m doing must make sense. I like to have a set of guidelines that I
follow, but I must always filter that with plain old common sense. And how
does that apply here? Well , let ' s look at those groupings. The top grouping
was two cents wide, and the lower grouping was barely one cent wide ! The
total spread of the groupings, at the widest, was barely six cents total.

56
I followed the same procedure. I put the arrows on the same as I always do.
But I didn 't look at the setup here and notice that the entire set of groupings
was only six cents wide. These weren ' t two groupings; they were really
more like two 'sub-groupings' (or 'sub-groupings ' of a 'sub-grouping ' ) . I
would have wanted my stop quite a bit below the lower end of the
groupmgs.

To decide where, I would want to look back at the daily chart, and make a
reasonable choice, based on the layout of the setup on that chart. I might
even look at a percentage stop, based on my experience trading this issue
(and other similar issues), and see how the arrow looks with that guideline.
Each trader would have to come up with his or her own guidelines,
consi stent with his or her own 'Trading Plan ' , for this aspect.

The main thing for me is that the stop should be technically placed, and
trying to put stops inside a grouping that is six cents wide is not technical at
all , it' s j ust futile. I wanted to present this example to show that although I
do this vi sually, I also keep an eye on what I ' m setting up, and what sense it
makes.

Let ' s move on to a few examples where some stops are hit. Although what I
would likely do should be quite obvious, I ' m still going to run through some
examples of this type, just to be sure it' s clear.

57
I ' m going to revisit the DISH example that started with figure 3 .6. In this
case I will change the entry trigger parameters in such a way that it would
indicate a different course of events would unfold. I ' ll first show figure 3 . 8
again. See figure 3 .26.

Figure 3.26

::::'. D I S H D -D �m �
30. 000

29.000

28. 000

27. 000

26. 000

25. 000

24 .000

23.000

22. 000

2 1 . 000
Jan 11 18 25 Feb 8 15
Chart created by Dynamic Trader (c) 1 996-2001

This is the point where I mentioned that I would be watching on the lower
timeframe for an entry trigger. Moving ahead one more bar on the daily
chart, I pointed out that the price action passed right through the top
grouping without triggering an entry.

58
Before I take a different look at this, let me show the next chart in that
sequence, which was figure 3 .9. See figure 3 . 27 .

Figure 3.27

:.:' DISH D-D �r;:J �

30. 000

29. 000

28.000

27,000

26,000

25 , 000

24 , 000

23. 000

22, 000

2 1 , 000
Jan 11 18 25 Feb 8 15
Chart created by Dynamic Trader (c) 1 996-200 1

I didn ' t show what was happening on the lower timeframe in the previous
example with DISH, preferring to simply explain what had happened. I was
basing the decisions on my own preferences for entry triggers . But what
about if another trader, using different variations of what I presented in Kane
Trading on : Entry Techniques, did see an entry trigger off that top grouping?
How might I have played that, if I were using an alternate entry trigger?

I felt that this would be a good example so that the reader can see the same
situation from various angles, using various possible options. I will also
have a point to make about the choice of entry triggers, and this was a great
choice as an example for that.

59
I ' ll drop down to a 60-minute chart, and we'll discuss what I ' m looking at.
See figure 3 .28.

Figure 3.28

:':'. D I S H GO-I - - -
�r;J � - -

26.000

Ut��{Jf� 25. 500

25.000

ttw \ 24 . 500

It)r;!1l _ 1
\
24. 000

\lflltl \H",)' f1
21'bO , "
23. 500
H23 4002

23. 000

I rtl III rj
{Hit 22.500

lJ
--

22. 000

12t 13w 1<R 15f Feb19t 20w 211 22f Feb25m 2&
Chart created by Dynamic Trader (c) 1 996-200 1

I ' ve outlined the boundaries of the two groupings with the four horizontal
lines. You can clearly see DISH reacting off the top of the lower grouping.
I ' ve added in a 20-period simple moving average as one potential entry
trigger. When an issue trends thi s nicely into the potential trade area, reacts,
and closes above an average of this sort, I find it can be a very useful entry
trigger.

I also labeled a more conservative swing-high violation trigger, which, based

on a close above the trigger line, would just be triggering right now (when I
use swing point violation lines, though, I tend to trigger as soon as the line is
crossed by a single trade). In either case, the trade would be based off the
lower grouping, and the lower arrow would be used for the stop loss . Both of
these techniques are right out of Kane Trading on: Entry Techniques.

60
Let me add in the two arrows from the daily chart, as near to the same price
location as I can. See figure 3 .29.

Figure 3.29

::.:: DISH 60-1 �r:;:J �

26. 000

25.500

25. 000

24 . 500

24. 000

H 23.480 22Fb9 :30 23. 500

23.000

22. 500

22 . 000

2 1 . 500

12t 13w 14t lSf Feb19t 20w 2 1t 22f Feb2Sm 2f.

Chart created by Dynamic Trader (c) 1 996-200 1

In this light it is clear to see that this trade, which recall from figure 3 . 1 0 was
a real 'home run ' , never threatened the stop loss point at all . What about a
trader, though, whose style is to still use an entry trigger, but to be a lot less
conservative than I generally am? Do you see anything on this chart that
could still fit the guidelines I generally lay out, but would be a bit more
'quick with the trigger finger' ?

61
Let me add a few things to the chart, and I ' ll show what I spotted. See figure
3 . 30.

Figure 3.30

:':. D I S H 60-1 ll!m S

UtU�l: 26.000

�t'"
25.500

I
�

"�
25.000

tHlj 24.500

\ �
24. 000

� \� 'ttJUjtdt �
Jl41itl
H 23.480 22Fb9 :30 23.500

>1, �U- � tt-li t

23 . 000

"'.

rl�t{ �11 tf
lr
22 . 500

22 . 000

-7
2 1 . 500

12t 13w 141 15F Feb19t 20w 2 1t 22F Feb25m 2&

Chart created by Dynamic Trader (c) 1 996-2001

Once the top grouping was penetrated, I would be looking for an entry
trigger. Notice that once the grouping was hit DISH bounced up slightly, and
then rolled over and set a nominal new low. At that point a small swing-high
was put into place. I drew in a small horizontal line to show that. It would be
possible to use that as an entry trigger line. The uppermost arrow points to
where that technique would trigger an entry.

Since the trade was initiated off the upper grouping, the stop loss, for me,
would have been the middle arrow on this chart. As you can see, DISH
would have rolled right over and hit that stop. It then reacted off the lower
grouping and headed up. There is a lot going on here, and a lot to assess. I
think thi s makes a great example for covering a lot of key points.

62
First off, what ' s 'wrong' with this new entry trigger? The answer is
absolutely nothing, for some traders and their 'Trading Plans ' . This entry
trigger is too fine for my 'Trading Plan ' , under these circumstances. The
swing that is barely visible on this chart is really more suited for viewing on
a I S-minute chart. That ' s dropping down just too low for me, unless I am
using either the 'Cool Trick' from Kane Trading on: Entry Techniques or
what I presented in Kane Trading on: A Pattern Trade Entry Technique.

That' s not to say a trader might not want to use this entry trigger, it's just
that it is too fine for me in this situation. It does, however, get the trader in
very early, with a relatively small stop. In this case the stop loss would be
about sixty cents. Some traders who trade a style like mine of small stops
and possible multiple reentries might like this entry, though.

So, speaking theoretically, if I had taken this last entry trigger and been
stopped out, what would my next move be? Well, other than the relatively
small loss I would have, I am now right where I was in the first series, ready
to watch the price action and get ready for an entry trigger off the lower
grouping. And if a trader argued to me that it was worth the shot, overall, to
go in on that first entry given the sixty-cent stop, I would be hard pressed to
debate that. It' s just a matter of the individual trader' s style.

Next, is there anything that might add some useful information to my

decision making process here? Well, one of the things I look at is the size of
the stop compared to what I might be expecting. I don ' t have any specific
guidelines for what I expect as far as stop size, since it varies from issue to
issue, timeframe to timeframe, and situation to situation. With enough
experience over a long period of time, though, I wind up trading a lot of the
same issues, or very similar issues, and that allows me to have a feel for
about what to expect.

When I look at a sixty-cent stop in a situation like this, I ' m alerted to

something being out of line with what I would expect. It' s just a bit smaller
than I would expect on the low end of what I am used to, so I would want to
assess why. If the reason is that the entry technique is on the low end of the
confirmation scale, then I understand what is going on, and I can evaluate
the situation from that perspective. M aybe, to me, the greater potential
reward/risk ratio is worth the downside of a lower confirmation entry in this
case.

63
The point here is that I get a feel for what to expect, say in this case I
expected a stop of about 6% of the stock price, and if I see something
substantially different from that, I can use that to motivate some further
analysis. I ' m always looking for things to run true to form, without a lot of
surprises. I think traders would benefit from developing a similar familiarity
with the issues that are traded.

Lastly, this is a great example of a reaction off of one grouping, and then a
roll over to the next grouping, and then another reaction. I see this quite a
bit, and it is one of the things that I watch for when observing price action on
a lower ti meframe, as it works its way through a potential trade area. In this
case, it was pretty clear to me that the reaction off the upper grouping was
very minor, and once the reaction off the lower grouping began to develop, it
was just as clear to me that that reaction was more substantial. This tips me
off to when to consider taking an entry trigger, and what trigger I might want
to use . It takes a lot of practice, but I think watching the price action closely
can be of great benefit.

64
Let ' s wrap up this chapter with one more example, this time in the intraday
ES. See figure 3 . 3 1 .

Figure 3.31

1 1 40 , 00

1 1 35 , 00

1 1 30 , 00

1 1 25, 00

1 1 20, 00

1 1 1 5, 00

2 1w 22t 23f Apr2Gm 27t

chart created by Dynamic Trader (c) 1 996-2001

The ES formed a 5-point pattern on the 1 3-minute chart, set up to continue

the uptrend. I liked the ABeD aspects in this case better than the overall 5-
point structure, but either way it is viewed, there is a setup potentially
forming here for my methodology. The next step is to get some groupings
set up on the entry timeframe.

65
Let ' s drop down to a 3-minute chart, my timeframe of choice for entry with
a setup on the 1 3-minute chart. See figure 3 . 32.

Figure 3.32

?. E S 04M 3·1 f!j;J �

1 1 44 . 00

1 1 43 . 00

1 1 42.00

1 1 4 1 . 00

1 1 40, 00

1 1 39,00

1 1 38 , 00

1 1 37 , 00

1 1 36,00

1 1 35, 00

1 1 34 , 00

1 1 33,00

Apr
Chart created by Dynamic Trader (c) 1 996·2001

I ' ve highlighted the ABeD pattern, and shown just the upper of two
groupings that I have put together. Normally, I would show all the groupings
right off, but for now I want to focus on this one step by step.

66
Let ' s see how the ES reacted to this first grouping, and see if any entry
triggers gave us a signal . See figure 3 .3 3 .

Figure 3.33

:.:' E S 04M 3-1 !IS �

1 1 44.00

1 1 43.00

1 1 42.00

1 1 4 1 . 00

1 1 40.00

1 1 39.00

1 1 38.00

1 1 37.00

1 1 36.00

1 1 35. 00

1 1 34 .00

1 1 33 . 00

Chart created by Dynamic Trader (c) 1 996-2001

The ES gave several entry triggers as it reacted off the upper grouping.
There was a clear pullback entry trigger, once the pullback bar' s high was
taken out. There was also a clear swing-high violation trigger. I haven ' t even
shown any moving average triggers, or bar high violations of reversal bars
directly off the grouping. There are many ways to be triggered into this
potential trade, and I would be in at this point with any of the triggers that I
normally use.

67
Let ' s see where I would be placing my stop. See figure 3 .34.

Figure 3.34

:':. E S 04M 3-1 1Efr;J �

1 1 44 . 00
1 1 43 . 00

1 1 42 . 00

1 1 4 1 . 00

1 1 40 . 00
1 1 39 . 00

1 1 38 . 00

1 1 37 .00

W
1 1 36 . 00
H 1 135.00 "A,14,40 1 1 35 . 00
1 1 34 . 00

1 1 33.00
1 1 32 . 00

Chart created by Dynamic Trader (c) 1 996-2001

The lower grouping is now visible, and I ' ve placed my arrow in the same
manner as I have in the previous examples. In some cases this will be it. The
issue goes up, and the management plan progresses ahead. Given what I said
before I started these last two examples, the reader already has an idea what
is about to happen.

68
I'll add some more data to the chart, and we ' ll assess what has happened .
See figure 3 . 3 5 .

Figure 3.35

::::" E S 04... 3-1 18r;J �

1 1 44.00

1 1 42 . 00

1 1 40.00

1 1 38 . 00

r-rlTTT""'"" H 1 135.00 26Ap 14:45

1 1 36 . 00

1 1 34 . 00

1 1 32 . 00

1 1 30 . 00

Chart created by Dynamic Trader (c) 1 996-2001

The ES rolled right over and hit my stop. It has just about plunged down to
the lower grouping. This is where many traders will become fearful and not
take another signal . In this 'context' it sure looks like I am bucking the trend
here. Recall that this setup is coming from the 1 3-minute timeframe, though,
which is in a solid uptrend. I am more interested in seeing the price action
from here than anything else. This has the look of a stop run and shake out,
before the uptrend reasserts itself.

69
Let' s move ahead, and see what is happening. See figure 3 .36.

Figure 3.36

:':'. E S04td 3-1 Sr;J S

1 1 44,00

1 1 42 , 00

1 1 40 , 00

1 1 38 , 00

r-rh,,----,- H 1 135,00 2E.Ap 14:45

1 1 36 , 00

1 1 34 , 00

---"""""'''''�'''*tfi= m�lq§ �$)�

-----=====�===i== mH� �e.,fif
1 1 32 , 00

1 1 30 , 00

Chart created by Dynamic Trader (c) 1 996-2001

The ES has reversed off the lower grouping, and is going up just as strongly
as it dropped into the grouping. Although it appears as though the ES has
penetrated through the lower grouping, keep in mind that the grouping itself
is about one tick wide, and the penetration is well less than a single tick.

I ' ve added a second arrow in, in the manner of the previous examples, where
my stop will be placed if I get an entry trigger off this lower grouping. Now,
by some entry methods, a trader would either be triggered at this point, or
may even have been triggered back just a short while ago. I tend to be a little
more conservative most of the time, so I ' d be waiting for a pullback or
something a bit better in here.

70
I' ll add more data onto the chart, and we'll reassess. See figure 3 . 3 7 .

Figure 3.37

::.-;:, ESO .. M 3-1 !I[!J �

1 1 44 . 00

1 1 42 . 00

1 1 40. 00

1 1 38 . 00

1 1 36.00
,.-rl-�"""1TT""- H 1 135.00 2E.Ap 14:45
1 1 34 . 00

------.,''''=''�'''�F' m�lq§ �$}�

-----==����===1t==== mH� �e..•
1 1 32 . 00

1 1 30 . 00

Chart created by Dynamic Trader (c) 1 996-2001

The ES pulled back, and has now triggered a pullback entry by taking out
the inside bar's high. If I had been able to be patient up until now, this
certainly would trigger me. I sometimes run the risk of not getting a pullback
and missing the trade. I try to read the action, and decide how little
confirmation I feel I can live with, given the behavior that I am observing.

If I really feel the issue is about to run, I sometimes take an entry trigger
such as a trade above the high of a reversal bar off the grouping. That is a
trigger I use frequently when I feel I just can ' t be waiting around. In this
case it would have worked quite well .

71
Let ' s see how the ES played out from here . See figure 3 . 3 8 .

Figure 3.38

:':'. E S 04M 3·1 I2IS �

1 1 46 , 00

1 1 44 , 00

1 1 42 , 00

1 1 40, 00

1 1 38 , 00

1 1 36 , 00
.......n'T"TT""----.rr--+'-- H 1 135 ,00 2E.Ap14:45
1 1 34 , 00

1---'�����=tIf'F��=�== m�lq§ ���

I----=====�==tf:== m l!� � �,�
1 1 32 , 00

1 1 30 , 00

27t
Chart created by Dynamic Trader (c) 1 996-200 1

The ES really made a strong move off that lower grouping. A trader who
quit after the first try would not have been on board for this move. The
sequence we have just seen is fairly commonplace for me in my trading. I
have chosen a style where I am comfortable taking reentries, as opposed to
simply having a wider stop and trying to stay with the trade.

Before I conclude this chapter there is one thing that I want to point out with
this last example. Notice that the groupings are only about 1 point apart.
This is quite close. I can imagine that many readers are thinking that the stop
should have been below the second grouping in the first place, due to the
closeness of the groupings . I won' t disagree with that assessment.

72
When I have multiple groupings that are tight, such as when I set up fi ve
groupings as outlined in Kane Trading on: Trading ABeD Patterns, I
frequently drop down an extra grouping for my stop placement. As I have
said, it has to make common sense. Another thing I watch is where my
'normal ' sized stop for that issue on that timeframe would place me from my
entry. I always have a very close idea of what I expect to see for stop size on
a given trade setup. I then see how that fits technically.

If I feel I can 'spare ' some more than where my arrow is implying, and I can
gain some technical strength with another grouping or two between my stop
and the price action, I will commonly do that. It' s discretionary, with
multiple 'checks and balances ' . It all has to make sense within the 'context'
of my experience, especially with respect to the particular situation. I
suggest that the reader try to keep this in mind as he or she develops his or
her skills.

Now that we know how I set my stop loss, and I can determine my entry
point by looking at whatever entry trigger I am using, I can easily figure out
the amount I would be theoretically risking per unit on the trade. This is a
key step in the process of determining the trade size, which is where we will
move to at this point.

73
 Chapter 4

Calculating Trade Size

Once I have determined the stop loss point for a potential trade, I ' m on my
way to determining the size of the trade. I need this size calculation so that I
can move forward and actually place the trade. This may all sound
extraordinarily basic, but I ' m trying to show the systematic way that I
proceed in order to follow a preset 'Trading Plan ' , and make consistent
decisions.

At this point I will already have determined the maximum amount of capital
that I am willing to theoretically risk on the trade, and I know where my stop
loss is going to be set. The next thing that I need to determine is where my
entry point is. For the sake of our discussion here I will not get into the
details of the specific entry techniques, as I have fully outlined how I do that
in Kane Trading on : Entry Techniques .

What I need here is just the p ri ce of the issue at the point where I am
planning on initiating the trade. This will allow me to do some simple
calculations in order to decide how many shares, contracts, lots, or whatever,
that I want to open the trade with. This is, for now, assuming that I won ' t be
doing any ' scaling in' . Once I know where I ' d get in, and where I ' d get out
(again, in theory on the stop loss, because it can be exceeded during a
market shock event), I can determine what my dollar risk would be per unit.

Once I know my theoretical risk per unit, I can simply divide that into the
total dollar risk to determine how many 'units ' I can trade. I then confinn
that this does not violate any of my other rules for capital exposure, as I
outlined in Chapter 1 , and proceed ahead. At this point all I have
determined, though, is the maximum size of the trade. I may opt to trade
smaller, as I mentioned earlier, based on how I 'rate' the trade. But I have
my maximum size at this stage.

75
I ' ll show the equation here, as simple and basic as it is, for reference:

, . , total dollar risk

Maximum n umber of umts = -------

risk per unit

Let me start with an example here. See figure 4. 1 .

Figure 4.1

:':, AOL D-D em s

-7
-4 1 . 000
-7
-40. 000
-7 I
t
39.000

38.000

j
) j1
37. 000

36.000

t
J
)1)jlIt)tj
35. 000

fj
34. 000

IIII
33. 000

32. 000

3 1 . 000

30.000

29. 000
19 2& Nov 9
Chart created by Dynamic Trader (c) 1 996-200 1

Here ' s a close up version of the AOL chart from the last chapter. AOL
begins to react within a few cents of the bottom of the middle grouping. 1 ' d
be watching on the lower timeframe, likely a 60-minute chart, for an entry
trigger. In this case there were several entry signals triggered with various
techniques right out of Kane Trading on: Entry Techniques. It is i mmaterial
for this part of the discussion which technique I use for the example, as long
as it gives me the entry price.

76
Let' s say for the sake of the discussion that I ' m using a swing violation entry
point from the 60-minute chart, and it triggered me in at 37 .99. I would be
setting my protective stop loss at the middle arrow, just above the grouping
that I used for entry. That arrow is at approximately 40.25 . Before I go any
further, let me determine the risk per share, which would simply be the stop
price minus the entry price, since this is a short. For longs it would just be
subtracted in the reverse order, entry price minus the stop price.

In this case I get 40.25 37 .99 2.26 risk per share . Let ' s say that I have a
- =

theoretical $ 1 00,000 account for this example ( l % of $ 1 00,000 is $ 1 ,000) . I

maximum dollar amount of risk for this trade of $ 1 ,000, based on a

can now just plug into the formula, and determine the maximum trade size.

. b er 0if $ 1 , 000
MaXlmum num
f •
u n l ts
f
= = 44 2
$ 2 .26

Now, have I forgotten anything here, or is my answer that I can trade up to

442 shares? Well, assuming that this is an un-leveraged account, I haven ' t
taken into account i f I should b e using the 1 % or 1 0% guideline, a s outlined
in Chapter 1 . Recall that I said in most cases I wind up using the 1 0%
guideline, and not the 1 % guideline. If that were the case, I wouldn ' t even
need to use the formula here.

Given that, I will now do an estimate of what percentage that risk per share
is with respect to the share price. This will tell me, if I do decide to put the
trade on, whether I will be using the 1 % guideline for maxi mum dollar risk
per trade, or the 1 0% guideline for maxi mum amount invested in one trade.
This is, of course, based on an un-leveraged account.

If the account is of a different type, then I would start with the maximum
dollar amount risked on the trade, and go from there. I will show an example
of that kind following this one, where the formula is just applied, and that ' s
it. So, the percentage of risk compared to the stock price here is just under
6%. That has me using the 1 0% guideline to determine my maximum trade
SIze.

77
Now all that I need to make my size calculation is the account size, so I can
calculate what 1 0% of that amount is. Let' s say, again, for the sake of the
example, that the account is $ 1 00,000. Then 1 0% of that would be $ 1 0,000,
and that would be the maximum amount to be invested in this one trade . It ' s
a simple matter to calculate the trade size with those two numbers, with
another simple formula:

, . , total amount invested

Maximum n umber of unzts = ------

p rice per unit

So, putting the numbers I have into the formula gives me :

' $ 1 0 , 000
Maxzmum num b e r OJ
263
J
. ,
$ 7 . 99
3
.

unzts = =

U sing the 1 0% guideline, the maximum trade size is limited to 263 shares.
This was predictable, from the approximately 6% risk based on the share
price. This information told me that I would be using the ' more strict' 1 0%
guideline to do my size calculation.

As an aside, I will not comment on the 'odd-lot' number of shares that these
calculations will usually yield. I will almost always round to the nearest
hundred, usually down, so I can stay with full lots. There can be trading
disadvantages to trading odd lots, but for longer term trades the changes in
the market, with the advancements in electronic trading, have greatly
reduced the reasons not to trade relatively small odd lots. I do know of a few
traders that have no concern at all trading whatever number of shares their
formulas dictate. I don ' t like doing that in very short term trading, but I
don ' t feel that it is necessarily precluded as the time frame gets expanded.

78
Let' s look at an example in the ES . See figure 4.2.

Figure 4.2

:::-:'. E S 04Z 1 -1 �8 £1

I I -1
1 1 36 . 00
1 .000
TCR 80(9:57
80(9 :4580c9 :49

:3 1 -----'-� O.J; 1S
ATP 80(9:53 1 1 35 . 00
r--
80('3 ----I
80('3 :4580c9 :4'3

�
1 1 34 . 00

1 1 33.00

1 1 32 . 00

1 1 3 1 . 00

1 1 30. 00

1 1 29.00

1 1 28 . 00
8f
Chart created by Dynamic Trader (c) 1 996-2001

Here ' s a setup that I discussed on the Kane Trading website. The ES formed
a really nice ABeD pattern on the 3 -minute chart, with excellent 'context '
coming from the 1 3-minute chart, for m y methodology. There were also
some nice time factors coming together as the ES approached the potential
trade area. I dropped down to the I -minute chart to watch for an entry signal.
The lower arrow points to the approximate place where I got an entry
trigger.

There were actually two triggers that came at nearly the same place,
depending on what specific technique was used. One triggered at 1 1 32.75,
and the other at 1 1 32.50. The upper arrow points to where my stop was
placed. The arrow is at 1 1 34.25 , so using the 1 1 32.75 entry trigger for this
example the stop would be 1 .50 points above entry. For an ' intraday swing
trade' based on a 3 -minute traded timeframe, this is about what I would
'shoot for' at the time of this example.

79
Now, let ' s move on to the trade size calculation . At this point I could choose
any ri sk amount for this example. I could choose a risk amount for a very
small trader, or a risk amount for a large fund. There is no significance to the
amount that I choose ; it is somewhat random, just chosen for the example .
Let' s say the maximum theoretical risk amount is $500. Given that this trade
would be risking (again, theoretically, since market shock events can always
come out of nowhere) 1 .50 points per contract, and since the ES has a value
of $50 per point, the dollar risk per contract is $75 .

Now we can put these numbers into the formula:

, . , total dollar risk

Maximum number of unzts = -------

risk per unit

$ 5 00 6.6 7
$7 5
Maximum number of ' units ' = =

In this case I left a few decimals, since they have a bit of significance in this
case that they didn ' t have in the last example . This says that the maximum
number of contracts to be traded is 6, or if I have a small amount of leeway
in my $500 maxi mum, 7 contracts. Keep in mind that this is an example of
how I might determine trade size, based on my mini account concept that I
explained in Chapter 1 .

If a trade like thi s were done in a more 'regular' leveraged account, I would
have to be taking into account all the factors that I outlined about
determining potential trade size, using my own versions of the formulas that
I use, based on the work that has already been done in thi s field. In Chapter
1 I gave some references to existing work in that area.

80
I ' ll show one more example, this time in LC , before we wrap up this chapter.
See figure 4.3 .

Figure 4.3

::;:. Le04J D -D !!GJ �

78. 000

76.000

74.000

72.000

70.000

0ct Nov Dec 04 Feb Mar

Chart created by Dynamic Trader (c) 1 996-200 1

LC formed a great looking 5-point pattern. This was a setup that I showed on
the Kane Trading website, in advance. I received an entry trigger on the
lower timeframe at 82.34. The arrow shows the approximate area where my
stop was set, at 84.50. Thi s trade would require 2. 1 6 theoretical risk per
contract. With the LC valued at $400 per 1 .0 that would be $864 per
contract.

81
Let' s say that the maximum dollar amount of risk is to be $2750 for this
example. I ' ll apply the formula:

Maxlmum num b e r
.
0if ' unlts $ 275 0 18
$ 864
. , = = 3 .

The maximum number of contracts that I would be able to trade under those
conditions would be three. This assumes, again, that I have no other
considerations as far as this trade goes, from other rules that I may apply to
this particular leveraged account.

As I said, this trade size calculation step is quite simple and straightforward,
once the dollar amount of theoretical risk that I ' m willing to take is known. I
simply need to know my entry point and stop loss point, and then it's just a
matter of applying the formula. If the potential trade is subject to additional
guidelines, like my 1 0% cap rule, then I use the version of the formula I
designed for that.

As we move forward here I am going to switch gears a bit, and look at a

topic that is not covered too often in the writings that I have come across.
The area I am going to delve into is the somewhat invisible risk associated
with the possible relationships between issues that the trader is involved
with. It is a topic that I feel the reader should spend some time thinking
about when developing a 'Trading Plan ' .

82
 Chapter 5

Correlation Risk

There is another issue that I have some concern about when I ' m getting
ready to initiate a trade, and that ' s what I call 'correlation ri sk' . Although
this will be a very short 'chapter' , I have decided to make it a full chapter to
ensure that it has a weighting commensurate with the importance that I feel
the topic has. I could have easily just included my comments in another
chapter, and blended it right in quite well. I felt it might not be clear just
how important this topic is, so I broke it away, even if it won ' t take too long
to explain the concept.

In order to come up with a really great example, let's go back to the heyday
of the roaring bubble bull market. In those days it seemed to me almost
everyone was a trader. It reminded me of the stories I had heard from the
20' s about taxicab drivers and shoeshine boys giving out stock tips. As soon
as anyone heard I was involved with the market I would get 'stock tips ' . I
got them at the gym, in social situations, from my plumber, at the grocery
store, just everywhere. Everyone seemed to be a trader.

The thing that stood out to me, though, was that all these 'traders ' , many
who said they were now 'full-time ' , didn ' t have any 'Trading Plan '
whatsoever (I know, because I asked), and seemed to have no understanding
at all about risk. They were, for the most part, just buying dips and holding
through whatever heat they took, with no stops set at all . I know of many
that rode tech stocks from several hundred dollars a share (or higher) all the
way down to the single digits .

To this day some still insist they will come back. They don ' t have much of
an answer about the ones that 'went out of business ' or got taken over at $2
a share. I guess they figure the remaining ones will overcome those losses,
too. But, alas, we already know that whole story, and this isn ' t a discussion
about the insanity of a bubble bull market, or those that trade without a
'Trading Plan ' . So, let ' s go back to before the bubble popped, and I ' ll tell
you what I was hearing.

83
I would ask some 'trader' what he or she was in at that point, and I would
hear, as an example, DELL, MSFT, CSCO, INTC, WCOM , J NPR, JDSU,
QCOM, SCMR, ICGE, and CMGI, frequently as option plays . I would
mention that they are quite 'exposed ' , and that a market shock event would
likely wipe out their entire trading account (which in many cases was also
their retirement account). They looked at me like I was nuts . Utterly and
completely insane.

Besides not really caring at all about what I had to say, they simply didn ' t
comprehend what I was getting at. I told them that they weren' t
'diversified ' . Here ' s what I usually heard. ' Not diversified? Are you
kidding? I have a computer company, a software company, a router
company, a telephone company, an Internet company, a cell phone
company, a fiber optic company . . . Not diversified? I don ' t have anything
that ' s the same at all. I ' m totally diversified ! ' I got this again and again.

I tried to explain that these stocks were all very highly correlated. Not only
were they all stocks, they were all tech stocks. And not only that, they were
all 'high-flyers ' with a lot of public attention at the time. They were also
totally long on all plays. Thi s didn ' t go over well at all , and just about
everyone I talked to about this told me I worry too much, and they went and
talked to someone else. We all know how this played out.

Here ' s the issue. The stock market has a high degree of correlation between
the individual stocks. Sure, some stocks tend to go up when the others go
down, but that' s still a correlation. It' s just an inverse correlation. Think of it
this way. Let' s assume, for now, one wants to play with the trend, and not
get into 'hedging ' . If the market is going up, they get long stocks that are
going up. To 'diversify ' they look at a few stocks that are inversely
correlated to the market.

These are stocks that may go up if the market goes down. But while the
market is going up these stocks are going down . B eing a 'smart trader' , this
person then goes short these inverse issues . They are 'diversified ' . The
problem, as you undoubtedly already see, is that if the market goes down,
the trader is hurt by the longs and hurt by the inversely correlated shorts .
There is no diversification at all in terms of the 'correlation risk' .

84
Now, if the trader went long the inversely correlated stocks, then a 'hedge '
of sorts would be created. But in doing so, the trader is getting long a stock
that is expected to drop, and is expected to continue to drop unless a market
event occurs . That doesn ' t make any sense at all, and will subtract o ff from
the potential profits of the original long plays. If the trader got fully 'hedged'
he or she would basically zero out the profits.

Although hedging is a topic surely worth exploring, it is not the method I use
to address risk when attempting to trade directional ly. I assume a directional
risk when entering trades. I ' m just trying not to take more risk than I real ize
I am taking because all of my trades are correlated in a way that I don't
perceIve.

So, what do I do? Well, there isn ' t an easy answer to thi s one. I try to mix
things up the best that I can, and I try to understand how different issues
move with respect to each other. I know that most tech stocks will move
together, and that most issues in a given sector will move together. I know
that stocks, in general, tend to move together. This implies that even if I pick
my stocks carefully, there is still an event risk. The September 1 1 , 200 1
attack will surely convince you of that.

I know some traders that try to address this by being roughly equally long
and short, or if they trade options, having roughly equal numbers of calls and
puts (or equal deltas between the calls and puts). That may not work too
badly when the market is range trading, but if one attempts that in a trending
market, surely half the positions are bucking the overall market trend. And
the issue still remains that if the counter positions are truly inverse to the
market trend, there is still a near total correlation in the positions, then. If the
market reversed direction then all the positions will start to go against the
trader.

For me, I try to trade diverse markets, as well as having diversity across the
stock market. I look at futures such as grain markets, bonds, energy, metals,
and so on. I also trade FOREX. I try to consider how these different issues
may correlate. If one trades crude oil, heating oil , unleaded gasoline and
natural gas, they are going to see correlation issues similar to the stock
market example. No, they aren ' t all perfectly correlated, but the correlation
is high.

85
The same if one trades wheat, corn, oats, and soybeans. They trade
differently from each other, and have periods of inverse movement, but all in
all the correlation can be high . Now, I ' m not telling anyone who trades
stocks to start trading futures or FOREX here, or that FOREX traders should
start trading stocks. As all my regular readers know, I never tell anyone to
do anything.

What I am doing is pointing out a potential area of concern that many

traders, especially newer traders, tend to overlook. There can be a 'hidden '
risk in here that most don ' t see. Even worse, I commonly (and I mean really
commonly) get comments back from traders I am discussing this with that
they simply can ' t even give that a second thought. It' s 'part of the business ' ,
and just can ' t be thought about.

I hear things like 'Jim, forget about that. Concentrate on the setups and just
make your trades . You have to not worry so much . ' Well, that may be fine
for those that tell me such things, but I ' m a mathematician at heart, and I can
see the risk too clearly. I feel that if it is ignored it doesn' t reduce the risk,
and sooner or later it is going to bite the trader. I have seen traders doing
things I couldn ' t believe they could get away with , for year after year. In
every case that I can think of right now, eventually they got hammered.

I knew one trader that was finding fewer and fewer opportunities for his
methodology, so he started playing bigger and bigger size on the ones that
he did find. I told him he was taking i mmense risk with his account doing
that. He told me it was all part of the business, and that one can ' t worry
about things like that.

Eventually, as the opportunities got very low in number, he basically went

into a single position with his entire account. Imagine that, the entire account
in one trade. Then, guess what happened? Yes, he got 'caught' . Uh-oh, stock
suspended, the company is filing bankruptcy. He got zero as a ' shareholder' .
He never traded again (it ' s hard to trade when all your money i s gone). Yet I
still think that he thinks it was more 'bad luck' than it was that he was taking
inordinate risk.

86
I really can ' t say much more on this topic. I wish there was an easy answer,
but if there is, I don ' t know what it might be. It' s something that I think
every trader should be aware of, and that every trader should factor into his
or her 'Trading Plan ' . It has to be an individual thing, though, decided by the
trader, specific to the trader' s situation and approach to trading. I know that I
try to reduce my correlation risk as much as possible with my choice of
trades. All that I can do here is make the reader aware of the situation, and
suggest that it be thoroughly taken into consideration when formulating a
'Trading Plan ' .

87
 Section II

Initial Phases of the Trade

89
 Chapter 6

Moving the Initial Stop

With this chapter I move not only to the next stage of the process, but also to
another section of the book. Although the divisions are not all that
significant from an actual trade management standpoint, they help me to get
a handle on the various stages, and hopefully they help me do a better job
explaining what I am doing.

Once I have initiated a trade and have my stop set, all I can do is sit back and
wait. Or is that all I can do? My 'style' is much more active than that (which
is one of the reasons why it could never be 'back-tested ' ). In my experience,
the average trader may get to this point, but then he or she sets a 'profit
target' stop, and sits back and waits to see which stop gets hit first (using, of
course, a 'one cancels the other' type of stop order). The really adventurous
or complex trader may set two stops at two different 'profit targets ' .

Well, those that are familiar with my methodology know that I don ' t use
'profits targets ' . I have no idea where an issue may go, once it is set into
motion. I actively manage the trade with various trailing stops and scaled
exits, letting the issue tell me when it is done, not the other way around. And
I actively manage in a similar manner in the early stages of the trade, too.
For me, there is an almost infinite gradient of things that can be done at
various stages from initiation of a trade to the closing of the trade.

My goal is to trade my time and effort, which I presume to be 'skilled labor' ,

for a better rate of return, over time, on my trades. I can ' t scientifically prove
this approach nets me better returns, but I wholeheartedly believe it to be so.
If I didn ' t, I would surely do it the easiest, least time intensive way. And this
is where I differ from many traders.

I recall reading an article once where they asked a champion bodybuilder

what he thought his edge was that allowed him to become a champion. His
answer has stayed with me all these years: He said that unlike many of his
competitors, his goal with the weights was always to make the exercise
harder, not easier. He felt that would increase the stress on his muscles, and
produce better results.

91
In my trading, although I am always trying to 'keep things simple ' , I never
shy away from hard work. I put in my hours. I work at my craft, endless
hours. I estimate that I have over eighteen thousand ' screen hours ' logged at
this point. As you likely already know, one of my main ' slogans' on my
website is: 'For those that want to do the work. ' Hey, if you want simple and
mindless, one entry, set the stop here, set the 'profit target' there, and you ' re
done, you have the wrong book and the wrong guy .

If it were that simple I ' d do it, too, and play a lot more golf. I just don ' t think
that it is, outside of bubble bull market conditions, and even that has its
unique risks. I think trading is a serious business, and it takes a lot of time,
effort, and hard work to develop the necessary skill set. I ' m not looking to
make my plan unrealistically simple. I want it simple, yes, but not
unrealistically simple. So, why am I bringing this up now?

I am about to explain what I attempt to do once the trade is initiated. And

what I do is not one simple thing, to be quickly explained and then followed
(and we all know I say that you should never j ust follow anything that I do,
or anything that anyone else does, without doing your own work with the
technique and seeing if it helps your plan). What I do i s evaluate the
situation at every step, and make discretionary decisions.

I can show examples of the process as I 'talk out loud ' , with the hopes that
the reader can get a handle on what I am doing, and why, but that ' s all I can
do. Each situation i s different, based on the trading behavior, as I see and
read it, for each individual issue, under differing market conditions. Each
trader has to develop this ability, through hard work and experience, for him
or herself.

Before I proceed, I ' m going to explain the general concept of what I do

during this stage. Keep in mind that this is my own creation, and I ' m not
suggesting anyone copy it. This is a standard point that I make with all my
material . I suggest, instead, that it be looked over, and seen if it can be
adjusted or modified for one' s ' Trading Plan ' , if it appears to be of any
possible use.

92
One of the things that I noticed early on once I started to get my
methodology close to the form that it is in now is that I seemed to get an
initial thrust off of many of my potential trade areas . This is a specific
condition that I am talking about here. Generally speaking, one of several
things can happen off of a grouping. The issue can just blow through it, it
can reverse off of it and produce a l arge move, it can reverse off of it and
give a small move and roll over, it can reverse off of it and give a moderate
move and then roll over, and so on.

I noticed that what seemed l ike a high percentage of the time if the issue
reacted off the grouping and gave me an entry trigger an initial move in the
expected direction took place. What happened from there varied, but the
initial 'pop' seemed to happen with some regul arity. Now, I have no data on
this, I haven 't quantified it, and I can ' t 'prove' it is happening. It's just an
observation that I made from my own trading.

I recall in many of my earlier attempts at formulating my 'Trading Plan ' that

I would see many trades just go against me right from the start. In part, that
was what lead me to my current techniques on entry triggers, and motivated
me to develop my current plan. Now, given that I feel I am seeing an initial
'pop' near the entry trigger area, what did I do with this information, and
how did I use this to attempt to maximize my 'Trading Plan ' ?

Wel l , the first, and perhaps most critical , thing that I decided was that I
needed to 'get something ' for this initial move. How many times have we all
seen a trade start in our favor, only to roll over and stop us out, frequently at
a loss? This has led to such statements as 'never let a winner tum into a
loser' , and so on. The problem with that statement is that it doesn ' t say how
much of a winner.

Interpreted literally, once an issue moved one cent above entry, if it drops
one cent below entry it' s a loser. To prevent that, one would have to move
the stop to entry (breakeven) once the issue moved a single cent in one ' s
favor. I t goes without saying that that ' s obviously completely impractical . It
does, though, point out something important. A decision has to be made as
to how much of a winner one must have before the stop is moved up and the
losing situation is taken out of the realm of potential outcomes (in theory, of
course, because of the ever present possibility of a market shock event).

93
This has led to many fairly simple sets of rules for avoiding this 'winner into
a loser' scenario. Most of these sets of rules are based on the idea of taking
some profits when you have them, moving the stop up to break even, and
letting the rest ride as a 'free trade ' . The most common set of rules I have
seen is taking half of the trade off when the move equals the initial risk on
the trade, and moving the stop up to break even . I am going to address this
style of trade management in the next chapter, entitled 'The Fallacy of the
'Half-Off' Management Style ' .

What I will do in this chapter is show what I do, with my observations on

why I do things the way that I do. This will set the stage for the next chapter,
then, where I explain in more detail what I don ' t like about the styles that I
see out there, and I ' ll further explain why I came to develop my style as I
have.

Although it may be better in some ways to explain what I don ' t like and
don ' t do as I also explain what I do like and what I actually attempt to do,
overall I feel it will be best if I break this into two sections, and address each
without the distraction of the other. This is one example of many, as I
discussed early on, with regard to layout difficulty for this book. We will
just have to do the best we can with the way that I have decided to present
the material .

Now, let' s get back to where we left off before. I was saying that I must 'get
something' if I get an initial ' pop ' , but I haven ' t discussed yet the
characteristics of an adequate 'pop ' , or what I mean by 'get something ' . You
see, here is where I am going to diverge from most everything else you have
read or heard, which is the norm for me and my work. I suspect many
readers expect that I will throw out some variation of the 'half-off'
management style, or something of that sort.

I also suspect that some readers figured that when I said that I feel I must
'get something' I meant take some profits. Well, that ' s not what I meant.
There are ways to 'get something ' and not have a dime to show for it. I will
explain exactly what I mean here after we cover the idea of what the
adequate characteristics are for me for a 'pop ' . I will say that what I am
going to discuss about 'getting something ' I have not seen discussed
anywhere before, from any source.

94
The question before us is how do I evaluate a 'pop' ? The general answer is
simple, but the practical application is a skill, like everything I show, and
requires discretion and experience. What I ' ll try to present is the background
information and thinking process that I used as I developed the skills for
myself. It is my hope that by doing that the reader can start a similar process
for him or herself.

So, what is the general answer? It has two parts. The first part comes from
Kane Trading on : Trailing Stops. In that book I said:

"This book is about how to manage trend trades that have begun to move in
the trader' s favor. It' s a book about how to attempt to maxi mize the run,
once a trend is 'caught' . But alas, how can you maximize a trend if you

I feel that it is critical to know what you are trying to accomplish before you
don ' t know what trend it is you are trying to catch? Or even what a trend is?

try to work with the techniques that I will present in this book.

Understand, I am not saying come up with a mathematically rigorous

able to pull up a chart and say something like 'That move, right there, that is
definition of the trend that you are trying to 'catch ' . What I am saying is, be

what I am trying to play. This one and that one there, they are not what I am
trying to play. ' You should be able to see, visually, exactly what you are
trying to do, and what you are not trying to do, and how they differ from
each other.

As long as you can see, on a chart, what you are trying to do, that is
adequate, in my opinion. What I feel is trouble i s thinking too simplistically.
Like thinking that as long as the issue is moving up (or down) it' s trending,
and you just pick a technique and go for it. The choice of techniques and
their variations, and the application of the techniques, should be adjusted for
the specific type, and variation, of trend that the trader is trying to play."

trying to trade? I need to have some idea what I am expecting. Not what I am
Can you see how I put a lot of emphasis on knowing what it is that I am

hoping, in the sense of sitting back with my fingers crossed, but expecting,
in the sense of what I think will happen if this is one of the times when I
'catch the move ' . By knowing what I expect may happen I can then
formulate a plan for this specific trade. The key for me is that my
expectations need to be realistic, and based on the specific issue' s history.

95
One can have any expectation that they want, but I ' m of the opinion that I
will maximize my potential profit over time if I am as close as I can get to
actuality when I assess the potential expected outcome, and formulate my
plan as close as possible to work with that expectation . And I get the clues
for creating my estimate of that expectation from looking at the history of
that specific issue.

Sure, I know that the past history of any given issue doesn ' t 'guarantee' me
anything for the future, but what else do I have to work with? I study the
issue, especially in similar situations, and see what it does. I get a feel for
what it most likely will do if it reacts off my potential trade area. And I see
what the initial 'pops ' that it does look like. That ' s the information that I use
to come to a conclusion about what I expect an initial thrust to look like.

Now, this leads into another issue that must be discussed before we move
on. If the reader is experienced in multiple timeframe assessment of issues,
the question comes up: ' pop ' on what timeframe? The traded timeframe?
The entry timeframe? You see this 'pop ' I am talking about is the initial
thrust. The 'pop' ends when it starts to roll over. But deciding when that is
will depend on if it is evaluated on the traded timeframe or the entry
timeframe, for example .

For those that are not all that familiar with my u s e o f timeframe terms,
please refer to Kane Trading on : Multiple Timeframes and 'Context' , where
I cover this in great detail. The answer to what time frame depends on what I
mentioned in the quote from Kane Trading on: Trailing Stops . It depends on
what I expect and what I am trying to trade. Am I trying for a single thrust
on the traded timeframe ? If so, I will be looking at a first thrust on a lower
timeframe, usually the entry timeframe, as my 'pop ' .

If I am trying to play for a larger move, and sit through the ' smaller'
pullbacks, I may look at the first thrust on the traded timeframe for my
'pop ' . This is something that each trader has to decide for him or herself,
based on his or her 'Trading Plan ' . I can show some examples of what I try
to do, based on my plan, hoping that the thinking process will be clear.
Ultimately it is discretionary, based on a set of guidelines, combined with a
lot of experience.

96
I can say that whatever I attempt to do on a given trade, as far as deciding on
what I expect from an initial thrust, it will be highly based on what I find to
be typical for that individual issue, from my studies. When I said that I have
over eighteen thousand hours of ' screen time ' at this point, I wasn ' t kidding.
I watch the issues I trade over and over, and study them. I learn what they
do, and what is 'typical ' for them. This is key, need to know information for
me. That' s why a 'one size fits all ' approach just won ' t cut it for me.

So, at this point let ' s assume that I can come up with a good idea of what I
think this 'pop' may look like. I initiate a trade, and it does what I expect, it
goes right to the first thrust area. Now what? Take some profits? I said I
need to 'get something' for this 'pop ' . Here ' s where I differ from the crowd.
In most cases, I don ' t want to take profits in here. I will explain the entire
reasoning behind this in the next chapter. For now, let ' s assume it is
reasonable that I don ' t want to take any part of the trade off just yet.

On the other hand, I must 'get something ' . The reader may be wondering
why I keep repeating that phrase over and over, to the point of it possibly
being irritating. If the reader knows my writing style then it should be clear
that I am trying to initiate some thinking, in order to have the ' answer'
already guessed before I lay it out. Do you know what I ' m going to get for
this 'pop ' ? What can I possible get, if it i sn ' t some profit for closing part of
the trade?

It' s going to be a key aspect of my trading, but it may seem almost

I can ' t string this out any longer. If you haven 't guessed it yet, I'll just say it.

insignificant. It' s so good in my opinion that I have had qualms about even
releasing it here. What I get is that I can move my stop up, and let the trade
play out with a lot smaller risk than I initiated the trade with. For every trade
that rolls over completely I will be losing a significantly smaller amount of
money, in most cases a very nominal amount of money compared to the
initial risk amount.

97
You see it doesn ' t much matter to me how I improve the 'bottom line ' . I am
just as happy to improve it by taking a smaller loss as I am by closing out a
winner. As long as the net overall plan is 'optimized ' by the change in my
approach, I am happy. Now, I expect a few people are thinking:

a) This is just a variation of the 'half-off' money management style

b) Why not move the stop loss to breakeven?

To that I say no, it's not like the 'half-off' money management style at all,
it' s just that without it fully laid out that is hard to see right now. And I have
a very specific, technically based reason why I don ' t want to move the stop
to breakeven at this point. That reason is one of the main issues I have with
the 'half-off' money management style. I will explain all this in the next
chapter. For now, let ' s just go with what I have laid out.

This is the point where I will start with examples, showing what I do and
what I am looking for. If the reader just can ' t bear following along with the
process now, without really knowing why I do it the way that I do, skip
ahead to the next chapter, and then come back. It might not even be a bad
idea if you do it that way. If you want to jump ahead and come back, it
won ' t really 'spoil it' . For those that are staying, let ' s move on .

98
I'll start with a look at AOL from the example in Chapter 3 . I ' ll begin with
the chart that I used in figure 3 . 1 5 . See figure 6 . 1 .

Figure 6.1

:::':'. AOl D -D �GJ D

2 , 000

I!l� ��.
�

�HH ��tj
=7

��
0 , 000

1 1
3g iij� Ne 1h�

til
38 , 000

i t j )1
jllj })l 111 ft j 1 1)) 11 j t)l t
36,000

{ 34,000

l)lj tIf
32,000

30, 000

28,000

21 28 Oct 12 1 '3 26 Nov '3 if

Chart created by Dynamic Trader (c) 1 996-200 1

AOL has reacted off the middle grouping and triggered an entry on the lower
60-minute timeframe . I would be using the middle arrow as my stop loss
point.

99
Let' s drop down to a 60-minute chart, and look at the entry and stop loss
areas. See figure 6.2.

Figure 6.2

:.:. AOL 60-1 ea S

0 . 000

39. 000

L 37.950 14Nv14:30 38. 000

37. 000

36. 000

35. 000

34 . 000

33. 000

32.000

3 1 . 000

30t 3 1w 1t 2f Nov Gt 7w 8t 9f Nov 13t 14w 1

Chart created by Dynamic Trader (c) 1 996-200 1

Using either a trendline or swing-low violation entry trigger, the entry would
be triggered somewhere in the area of just under 37 .95 . For the sake of this
example, let ' s say entry was at 37 .94. The arrow has been placed at
approximately the same area as the middle arrow on the daily traded
time frame chart, which is at 40.25 . A theoretical stop loss amount of 2.3 1 on
a stock with the price and volatility of AOL seems reasonable for my
'Trading Plan' , and it is in the neighborhood of 6% of the entry price.

I don' t want the reader to get the idea that I use 5% or 6% for calculating my
stop loss, as that ' s not the case at all . Given the variable volatility between
issues, I would not want to use such a general guideline. Next, the size of the
stop, as a percentage of the issue ' s price, will vary greatly depending on the
timeframe. An intraday trade, based on say a 3-minute chart, would have a
much, much smaller stop as a percentage of the issue' s price than a trade
based on a weekly chart, for instance.

100
What we are seeing here is a bias based on the fact that I use more daily
stock charts for examples than any other type of issue and timeframe, due to
the ease with which I can do scans on that group. M any of the i ssues, too,
have somewhat similar volatility. It turns out, then, that many stock setups
that I show, based on a daily traded timeframe, will usually have stops that
fall in the 5-6% general area. There is something here, but don ' t take it for
more than is intended.

Let' s get back to the example. I have my initial stop and entry price for this
trade now determined. I am in the watching and waiting phase. I now need
to know what I consider an 'average' first thrust for AOL, at this time and
price. By looking over the charts I concluded that five to six dollars was
typical . Understand that this is my evaluation and my judgment, based on an
assessment of the AOL chart at this time. Each trader may come to his or her
own conclusion in this regard, and the answer may differ from mine.

I suggest that the reader go back to this point in time and study the AOL
chart and see if it can be discerned how I came to decide on five to six
dollars. It is an important part of my trade management to come up with
what I consider a reasonable estimate of the typical initial 'pop' . In all cases
I choose the value I will use based on the individual issue and how I see it
behaving, weighting the more recent times most heavily.

For this example I will use five dollars as my expected potential initial
thrust. Note that I am looking at the thrust from the reversal , and not five
dollars from my entry. The issue has no idea where I got in, so the entry
point has no significance for me at this stage. I merely want to know where
AOL may move to on a first thrust, if it does what I feel it ' typically' does.

10 1
Let me draw a line on the chart at the point five dollars from the reversal
point. See figure 6 . 3 .

Figure 6.3

:':'. AOl 60-1 II!! J;J �

0 , 000

39, 000

7/'---- L 37,950 14Nv14:30 38,000

37,000

36, 000

35, 000

34, 000

33, 000

32, 000

3 1 , 000

30t 31 w 1t 2f Nov &t 7w 8t 9f Nov 13t 14w 1St l&f N

Chart created by Dynamic Trader (c) 1 996-2001

The horizontal line I have drawn in represents the area that I am looking for
AOL to reach on an initial first thrust, if it makes what I consider an
'average' first thrust. Let me make a few comments on that before we
continue.

First, thi s i s not a strict guideline. Recall I estimated the first thrust to be
about five to six dollars, and I took the more conservative five dollars as my
number. I am not saying that I wait until that exact spot is hit before I make
any adjustments. Thi s is just a rough guideline for me. I will be watching the
price action very carefully for clues.

Next, thi s price area may look like it is quite far away from the entry area,
but remember that we are on a lower 60-minute entry timeframe here. In the
'context' of the traded timeframe, thi s is not a very large move, based on the
type of swing that I am playing for on that timeframe.

102
For perspective, let me show this line on the daily traded timeframe. See
figure 6.4.

Figure 6.4

:.:" AOl D -D 1I!!J;l �

5 . 000

0 . 000

5 . 000

��� n !l l. 0 . 000

35. 000

30. 000

Jun Jul Aug Sep 0ct Nov De

Chart created by Dynamic Trader (c) 1 996-2001

The initial first thrust area looks very reasonable to me in this traded
timeframe 'context' . As I discussed thoroughly in Kane Trading on: Entry
Techniques and also in Kane Trading on: Trailing Stops, I am very careful
not to attempt to micromanage on too low of a timeframe. The appropriate
perspective, such as I have shown here, helps me stay with my 'Trading
Plan ' .

103
Let ' s go back to the 60-minute chart, and move ahead as AOL approaches
the line. See figure 6.5.

Figure 6.5

.. 1::1 ,x

0 . 000

39. 000

4'\r----,--- L 37 .950 14Nv14:30 38. 000

37. 000

36. 000

35. 000

34. 000

33. 000

32 . 000

Nov &t 7w 8t 9F Nov 13t 14w 1St l&F Nov 20t 21w 23 Nov 27t
Chart created by Dynamic Trader (c) 1 996-2001

AOL made an initial move down, but has then started to drift sideways.
Notice that all the price action is below the entry trigger line, but it surely
isn't trending down to any extent at this point. AOL has moved down 2.07
from entry at the lowest point so far. (For those that did 'skip ahead ' , traders
using the 'one-third off at one-half the initial risk' style would have the
initial take off long since done, and the stop moved down. ' Half-off'
management style traders might have jumped the gun and taken half off, or,
if they were strict, are still sitting on the full position. )

A t this point m y play is t o just sit tight and wait for the line t o be
approached. I understand that this is a lower timeframe, and the perspective
is quite different from the traded timeframe.

104
Let ' s move ahead a bit in time, and assess what is happening. See figure 6.6.

Figure 6.6

7IW:---,�---- L 37.950 14Nv 14:30

131 14w 151 1Eof

Chart created

AOL has started back down, and is approaching my line. I do see something
that has me a little concerned, though. I am seeing a potential pattern
shaping up here. Although we are on a lower timeframe, and I am not
expecting this smaller pattern to overcome the larger timeframe setup, it may
produce a significant bounce. I want to work that into my management plan.

105
Let me add what I ' m seeing onto the chart. See figure 6.7.

Figure 6.7

. I • I

0 . 000

39. 000

7flt:----".:::--T--- L 37 .950 14N" 14:30 38 . 000

37. 000

36.000

35.000
_________ -=====_ 34.410 App 1 .000
34 . 000

33. 000

32.000

No" f>t 7w 8t 9f No" 13t 14w 15t If>f No" 20t 21w 23 0" 27t 28w 2
Chart created by Dynamic Trader (c) 1 996-2001

AOL is forming an ABCD pattern, set up to continue the uptrend on the 60-
minute chart. I put the 1 .000 price projection on the chart to show the area
where AB=CD. Given that this falls just a bit above my line, and that AOL
has thrust down and then formed an inside bar, I would weigh that into the
mix . If AOL starts up now, I would consider the initial thrust 'close enough ' ,
and I would make m y adjustment to the stop placement. I a m not trying to
pick the exact area for this thrust, just the approximate area.

106
Let' s add some more data onto the chart, and reassess. See figure 6.8.

Figure 6.8

0 . 000

39.000

4Y-----'>..r-T-- L37.9S0 14Nv14:30 38.000

37.000

36. 000

--======_ 34.410 App 1 .000

35 . 000
_________

34 . 000

33.000

32.000

Nov &t 7w 8t 9F Nov 13t 14w 1St 1f>f Nov 20t 21 w 23 ov 27t 28w 29t 3
Chart created by Dynamic Trader (c) 1 996-2001

AOL is reacting in the general area that I am watching, and I would now
make my move on the stop. I am looking to move the stop down, but not just
to breakeven. I am looking to move it to a technically feasible area, which
many times will be just above my entry point (in the case of a short).

1 07
Let' s look at where I would move my stop. See figure 6.9.

Figure 6.9

_ '1:1 x

0, 000

39, 000

L 37 ,950 14Nv 14:30 38, 000

37, 000

f
36, 000

35,000
34.410 App 1 .000
34 , 000

33, 000

32, 000

Nov 6t 7w 8t 9f Nov 13t 14w 15t 16f Nov 20t 2 1w 23 ov 27t 28w 29t 3
Chart created by Dynamic Trader (c) 1 996-200 1

The lower arrow shows the point to where I ' d move my stop. It is
approximately forty cents above entry. Given the two swing-highs, it should
be clear the technical reason why I chose this spot. If I tried to save myself
forty cents and went to breakeven for psychological instead of technical
reasons, a 'stop run' might take me out. I am willing to spend the forty cents
here to have a more technical stop placement. Recall that the initial stop loss
amount was 2.3 1 . My theoretical risk is now cut to about 1 7 % of the initial
risk.

To me, until that area where my arrow is placed is reached, everything is

progressing well and I have no cause for concern. A run to the entry trigger
line would not be a big surprise to me. Remember, this is the lower
timeframe, and we are 'micro-watching' this, for the sake of the example .

1 08
I'll add some more data, and we' ll assess this again. See figure 6. 1 0.

Figure 6.10

. I • I

0 . 000

39.000

'N-�--.--- L37.'350 14Nv14:30 38 . 000

37 . 000

36. 000

35.000
-------=====t.� 34.410 App 1 .000
34.000

33.000

32 . 000

'3 � n �
Chart created by Dynamic Trader (c) 1 996-2001

AOL has continued down and taken out the area of my line. The lower stop
area was not threatened at all. This phase of the management is now done;
the initial stop has been moved. Now I wait for further movement, and
further management adjustments. The next management stage is addressed
in Chapter 8, The 'Nether Region' .

1 09
Before we move on to the next example, let ' s look at another chart to see a
little more of what happened with AOL from this point. See figure 6. 1 1 .

Figure 6.1 1

_ 1:1 x

0 . 000

39.000

':I1I:--"<:--or--- L 37.950 141'1,,14:30 38 . 000

37 . 000

36.000

35. 000
-------=====IJi::;�::::!�==- 34.410 App 1 .000
34 . 000

33.000

32 . 000

3 1 . 000

9 if; 23 30 Dec7
Chart created by Dynamic Trader (c) 1 996-200 1

AOL bounced again, and then rolled right over. It is well past the initial
phase at this point, into the 'Nether Region' , and perhaps headed into the
trailing stop/scaled exits phase. It should be obvious, though, how I am
doing this in stages, as the trade progresses. Once the entire book is digested
and assimilated, the process should be very clear.

1 10
I ' ll move on now to a more complex example in DISH. I ' ll start with a daily
chart, like I did in the last example, showing the initial layout. This chart
was shown before as figure 3 . 7 . See figure 6. 1 2.

Figure 6.12

To:" DISH D-D 1I!f9 �

I ) j ttl j 1
30 , 000

I
29, 000

ill f til ljf11

28, 000

27, 000

llUll}j
26, 000

25,000

1
24, 000

23, 000

22, 000

2 1 , 000
Jan 11 18 25 Feb 8 15
Chart created by Dynamic Trader (c) 1 996-200 1

DISH is headed for the two potential trade area groupings. The arrows are in
place for where I might place my initial stop loss based on which grouping
DISH reacts off of. It goes without saying that these arrows would only
come into play if DISH reacted off one of the groupings and gave me an
entry trigger, of course.

111
I ' ll add two more price bars of data back onto the chart before we move on,
to refresh our memories. This chart was previously shown as figure 3 .9. See
figure 6. 1 3 .

Figure 6.1 3

:':. DISH D-D Be D

30 . 000

29. 000

28. 000

27.000

26. 000

25.000

24 . 000

23. 000

22. 000

2 1 . 000
Jan 11 18 25 Feb 8 15
Chart created by Dynamic Trader (c) 1 996-200 1

Recall how DISH didn' t give me an entry trigger with the upper grouping,
based on my entry trigger criteria, but instead went down to the lower
grouping, where I again kept watch for a signal.

1 12
 Let me show a chart on a 60-minute entry timeframe, with some potential
entry triggers that are fairly typical for my 'Trading Plan ' . See figure 6. 1 4.

Figure 6.14

::.�: DISH 60·1 ,-

J
.. . .. .. ._..... "' . - ._
.
�I;J �
26.000

����
\

l 1 HJl11 '"
25.500

25. 000

t HJ 24 . 500

24. 000

� l lf i l i t
23. 500

l '"
i �f-lj
rq � 11 � J
23. 000
�
22. 500
,

--) II 22. 000

--) 2 1 . 500

Feb l lm 121 13w 141 lsF Feb191 20w 2 11 22F

Chart created by Dynamic Trader (c) 1 996-200 1

I have put a 20-period simple moving average and a swing-high violation

horizontal trigger line on the chart. In a l ayout like this, these two entry
triggers would almost definitely be on my chart. In the previous examples
with DISH I showed two other entry triggers, from both ends of the
spectrum. One was a very conservative swing-high trigger (shown in figure
3 .28), and one was a very quick swing-high trigger (shown in figure 3 .30).

1 13
For me, I would likely be using more middle of the road approaches in a
case like this, such as a 20-period moving average cross, or a swing-high
violation like the one shown here. The upper two arrows point to the
approximate areas where DISH triggers entries based on these techniques.
For the sake of this example, let ' s say those prices would be 22.7 1 for the
moving average cross entry, and 22.9 1 for the swing-high violation entry.
Now, I ' m not saying that anyone could, or did, get filled at those exact
prices. I just need to work with some numbers here to convey the ideas
properly.

My stop would be at the lower of the two bottom arrows, since the reaction
was off the lower grouping. That stop price would be about 2 1 .40. The four
horizontal lines are the approximate boundaries of the upper and lower
groupings, to refresh the reader' s memory. At this point I have my entry,
which for this example I 'll choose to be the 20-period moving average cross
at 22.7 1 , and my stop loss point, at 2 1 .40, with a theoretical risk of 1 .3 1 per
share. This works out to a stop amount of about 5 . 8% of the stock price.
Recall my discussion on the use of this statistic.

So far thi s is material that I have covered in previous chapters. What ' s the
next step? I need to have a value for what I consider the 'typical ' first thrust,
my so-called initial 'pop ' . In this case I came up with the value of 2.50. It
was a bit difficult because DISH can be quite choppy. It is my thinking that
the reader might be a bit confused at this point in how I ' magically' come up
with the numbers that I do in thi s step. For sure, it' s not with hindsight.

What I basically do is go back on the chart for the given issue and look at all
the trend reversals and setups that are similar to the current one that I am
considering trading. I then look at what the first thrust amounts actually are
for those cases. I like to look at at least ten cases. If the price is substantially
different as I go back from the current price, I try to 'normalize' the values I
get to the current price.

1 14
What I mean by that is I record the values as a percentage of the price
instead of the actual dollar amount, so that I can then determine a percent
value to use with respect to the issue' s current price. I find this to be a bit
more accurate of a way to make my calculation. Once I have an idea what an
average move has been for the issue I am working with, I am ready to
proceed. It' s not a complicated process, but one that I feel is very important
for my methodology. I ' m just trying to get a fairly unsophisticated
'statistical' average for the 'typical' first thrust.

The next step for me is to now take the 2.50 that I determined for DISH in
this case and add that to the reversal point. Again, I add this to the reversal
point and not the entry point, since I ' m trying to see to where an average
first thrust may go. I then put a horizontal line on my chart, to alert me to the
general area that will likely trigger me to move my stop.

l1S
I'll add the horizontal first thrust line onto the chart. See figure 6. 1 5 .

Figure 6.1 5

:':. DISH 60-1 e8 �

26.000

��-lpJ--!q-" 25.500

� 25. 000

24 . 500

24.000

} t If{ttt '""
23. 500

1 r · i '�-W
p-71� � , t j
�� �r 23. 000

lr
22. 500
I

22. 000

-7
2 1 .500

Feb 1 1m 12t 13w 14t 15f Feb19t 20w 21t 22f

Chart created by Dynamic Trader (c) 1 996-200 1

The process should be starting to become clear at this point. I now watch and
wait to see what the price action does. The reader should be starting to get a
feel by now for the systematic approach that I apply to my trading.

1 16
I ' ll add some more data onto the chart, and we'll assess what we see. See
figure 6. 1 6.

Figure 6.16

J
:',:,", DISH 60-1 !Jr;I£f

to-� �--
26 , 000

l p d�___ 25, 500

t H} j �
25 , 000

24, 500

fl -�
24 , 000

Ifl)p Pi + l+!lJJr�
23, 500

'1 ��-lJ---------�
"'�

'P{
" '" , 23. 000
-lH
.

i i- t

�11 r.t
-
22,500

-7' If 22,000

-7 2 1 , 500

12t 13w 141 15f Feb 19t 20w 2 11 22f Feb25m

Chart created by Dynamic Trader (c) 1 996-200 1

This looks very familiar. It' s very similar to the last example. There is a
thrust and then a pullback. The 'problem' i s that the thrust hasn' t reached
anywhere near the area that I am watching. Some traders who are quick to
take profits may have ' scaled out' of some on this l ast thrust. As I will
explain in the next chapter, that type of a move doesn' t work for me. At this
point I will just keep watching.

1 17
I'll move forward in time here, and also show something that I see shaping
up. See figure 6. 1 7.

Figure 6.17

;,�, DISH 60-1 �e �

26. 000

25.500

25.000

24 . 500

24. 1 10 App 1 .000

24 . 000

23. 500

23. 000

22. 500

22.000

2 1 . 500

12t 13w 14t 15f Feb 19t 20w 2 1t 22f F eb25m 2Gt
Chart created by Dynamic Trader (c) 1 996-200 1

DISH did tum around and begin to go up fairly strongly. It is now starting to
form a nice looking ABeD pattern, set up to continue the downtrend on the
60-minute chart. This is, again, very similar to what we saw in the last
example. I don' t see this in every trade, of course, but when I do see it, I
watch it closely. I ' m expecting the larger timeframe setup to predominate, so
I ' m not going to get too excited if I see a reaction off of a pattern like this.

1 18
Let me add one more price bar, and we' ll see what is happening. See figure
6. 1 8.

Figure 6.18

To:. DISH GO-I �j;J �

26. 000

25. 500

25. 000

24. 500

---+- 24. 1 10 App 1 .000

24. 000

23. 500

23. 000

22. 500

22. 000

2 1 . 500

12t 13w 141 15f Feb 19t 20w 21t 22f F eb25m 26t
Chart created by Dynamic Trader (c) 1 996-2001

DISH blasted right through the ABeD pattem� right up to my first thrust
area. I would now move my stop up. The only question is where would I
consider the most technically significant place to put the stop?

1 19
I only see two possible choices that would fit with my 'Trading Plan ' . Let
me add those to the chart. See figure 6. 1 9.

Figure 6.19

-
J
:::-:'. DISH 60-1 eeEl
26.000

���- 1}! Jf1�

25. 500

t Hlt "',
25.000

)
24.500

, U
24.000

Jh+lflt �
>1
r11{ �11 tl
",Yt)lHJjlJ
H ,.it-�.I. _-----.1-'" tHi-t
23.500

23. 000

If
22. 500
�I
�
� 22. 000

�
2 1 . 500

12t 13w 141 15f Feb19t 20w 2 11 22f Feb25m 2f>t 27w 28t
Chart created by Dynamic Trader (c) 1 996-200 1

I put two arrows on the chart, near the bottom right, showing the two places
I would consider for moving my stop loss. The upper of those two arrows is
my first choice. I don' t feel that that nearby swing-low should be violated at
this point. The only qualm I might have is that my new stop loss placement
is right in the middle of the upper grouping, and it may not be out of the
question for that grouping to be 'tested' .

I f I were really feeling bothered by that I could place my stop at the lower
arrow. This would add about thirty cents to the stop. I have to weigh up how
the chart looks, and if I want to pay out that extra to have what I expect will
be a greater chance of staying with the trade. Although the thirty cents seems
pretty nominal , in this case my inclination is to use the upper arrow, at
22.35. This reduces my theoretical risk from 1 .3 1 to .36, which is about 27%
of the initial risk amount.

1 20
Let' s move ahead, and assess what we see happening. See figure 6.20.

Figure 6.20

::f.. DISH 60-1 B8 I!!I

J k1
{It!J� ht
�
26.000

fi
ltl l�
�
-
F 25. 500

1 t fl}j
25. 000

)f]
\ 24. 500

� "', t jPjl-'
24. 000

}hfljj1 \". ",)� 1 t)lHll� V

23. 500

'1 H '�-H-J --- - �:j:

, rtl �ll tJ
23.000
tHi-t

-7' lr
22 . 500
-7
-7 22. 000

-7
2 1 . 500

12t 'l3w 141 15f Feb1'lt 20w 21t 22f Feb25m 2E.t 27w
Chart created by Dynamic Trader (c) 1 996-2001

DISH has pulled back very solidly after hitting my initial thrust area. I am
simply watching and waiting here, with my new stop in place. My plan is to
let this continue to play out, and not to panic and take what small amount of
profits I have.

I have attempted to construct a 'Trading Plan' that I am comfortable with,

that I think works the best for me, and that plan does not have me just
jumping out whenever the trade takes a little 'heat ' . Keep in mind that this is
the lower entry timeframe, and I am not going to micromanage down here,
outside of what my plan tells me to do.

121
I ' ll add one more price bar of data onto the chart, and we' ll reassess. See
figure 6.2 1 .

Figure 6.21

;,-;. DISH 60-1 er;:r �

26 , 000

j
25, 500

25.000

24 , 500

24 , 000

23, 500

23,000

2 1 . 500

12t 13w 141 15f Feb 1'3t 20w 21t 22f F eb25m 2Gt 27w 2
Chart created by Dynamic Trader (c) 1 996-2001

DISH gapped up huge, and i s now above the initial thrust area. I would be
very unhappy indeed if I had bailed out of the trade on that pullback. We are
now in the 'nether region' , potentially on our way to the trailed stop/scaled
exits stage. We are done with the initi al stop move phase of the trade at this
point.

1 22
B efore we get to our last example, let me show a bit more of what happened
from here. See figure 6.22.

Figure 6.22

:':'. DISH 60-1 I2'I;J S

28. 000

27. 000

26. 000

25. 000

24 . 000

23. 000

22. 000

2 1 . 000
12t 13w 14t 15f Feb 1 '3t 20w 2 lt 22f F eb25m2Gt 27w 28t 1f Mar4m 5t
Chart created by Dynamic Trader (c) 1 996-2001

DISH was just getting started with that gap up. The trade is now quite
advanced at this point, and well into the trailed stop/scaled exits phase. The
moved up stop was never threatened at all . The swing that I was initially
looking for in this potential trade is playing out, making it clear to me why I
don' t jump out of trades like this on minor pullbacks, taking proportionately
small profits. I have a 'Trading Plan ' , and I stick with it.

1 23
I'm going to move on to one more example, this time an intraday example in
the ES . See figure 6.23 .

Figure 6.23

;:':'. ES03H 1 5-1 !,r.;J �

E.t 7F Febl0m 1 1t
Chart created by Dynamic Trader (c) 1 996-2001

The ES is forming a nice ABCD pattern, which also forms the ABCD part of
a distinctive 5-point pattern. The traded timeframe would either be this 1 5-
minute chart, or perhaps a slightly higher timeframe. For this example, I am
going to use the I S-minute chart as the traded timeframe.

1 24
Let' s take a look at the grouping I have put together for this. See figure 6.24.

Figure 6.24

?: ES03H 1 5-1 BS£}

���� i�iiH .�jiJ

ill
&t 7f Feb 10m 1 1t
Chart created by Dynamic Trader (c) 1 996-2001

A very tight grouping came together for this one. Although the grouping
doesn' t appear to be ' super tight' , it is only about one point wide, and the
traded timeframe is the I S-minute chart. In my opinion, that is a very tight
grouping indeed.

Now, because many traders like to trade the ES on the 3-minute, or even 1 -
minute timeframe, what is going to follow may be a bit unfamiliar. Also, at
the time of this writing we are still moving towards smaller and smaller daily
ranges for the ES . Each example must be viewed in the 'context' of the
market action at the time the example occurred, and with respect to the
traded timeframe.

Stops and swings from a I S-minute chart will be much larger than from a 3-
minute, I -minute, or tick chart. I ask that the reader keep that in mind with
this example, especially if he or she trades the ES on a significantly lower
timeframe.

1 25
Before we continue on, let me show one 60-minute chart, to show the
'context' . See figure 6.25 .

Figure 6.25

;,:, ES03H 60-1 8j;J �

30.000

20. 000

1 0 . 000

00. 000

90.000

80. 000

70 .000

1 0 . 000
15w Hit 17f Jan 22w 23t 24f Jan 2Bt 29w 30t 3 1f Feb 4t 5w 6t 7f Feb 11t 12w 13t
Chart created by Dynamic Trader (c) 1 996-2001

The pattern is set up to continue what has been a very strong downtrend. The
ES is some one hundred points below where it started this trend. If anything,
this is a very old trend, and perhaps may be nearing the end of its run. The
'context' here is using the pattern to enter a well-established trend, in the
direction of the trend (of course).

1 26
Let ' s go back to the traded timeframe and the grouping, with a little bit
closer view. See figure 6.26.

Figure 6.26

:.�. ES03H 15-1 1'f!r;J �

rl

ttlll!!l Itl) I)
j Ilt)1
FeblOm l lt
Chart created by Dynamic Trader (c) 1 996-2001

The starting point here is for me to put my arrow on the chart, showing
where 1'd place my stop loss, to be used if the ES reacts off the grouping and
gives me an entry trigger. Again, I am going to do thi s visually, and then see
if what I have done makes common sense to me, based on my experience
with the issue on this timeframe.

1 27
Let ' s see where I ' d place that arrow. See figure 6.27 .

Figure 6.27

:.:.. ES03H 1 5-1 1l!f9 �

11

HHl!t )jU
I IiIt)1
FeblOm l lt
Chart created by Dynamic Trader (c) 1 996-2001

I placed the arrow visually, and then detennined that it was at about 844.25,
or approximately 1 point above the top of the grouping. Although this seems
very close, if I get a reaction off the grouping, I don' t expect the ES to then
penetrate the grouping to this point. I ' m not going to say that a trader who
wants to place a stop a little higher is misguided, only that this is what I
would do the way the ES was trading at this time, on this timeframe.

1 28
Let ' s move forward one price bar, and assess the situation. See figure 6.28.

Figure 6.28

:;::'. ES03H 1 5-1 e-ro a

��������i �ij���

fl
Htlh{ )tll 1
f Ilt)!
Feb 10m l lt
Chart created by Dynamic Trader (c) 1 996-200 1

The ES has reacted solidly off the grouping, and by the completion of this
last price bar, has already given me two clear entry triggers on the lower
entry timeframe. In this case my entry timeframe is the 5-minute chart. I will
not show the entry triggers, as that ' s outside the scope of this book, and is
thoroughly covered in Kane Trading on: Entry Techniques. I suggest the
reader pull up a 5-minute chart of this setup and see what triggers can be
found.

For now, I will just tell the reader what my trigger prices were. The first
trigger, and the one I use more commonly in situations like this, was at
839.25. The second entry trigger came at 838.75, just two ticks lower. The
stop price at the arrow is at 844.25, 5 .0 points above my first entry trigger.
For a setup like this, on this timeframe and at this time, that is very
reasonable for my 'Trading Plan' .

1 29
The next step for me is to determine my 'typical ' first thrust amount. B y
studying the chart, I came to a n amount o f 1 0 points. Notice that w e are now
working a highly leveraged instrument on an intraday timeframe, and the
stop is now approximately 0.6%. So much for the stop amount of 5-6% of
the issue price from the previous examples, huh? Now you see why I didn' t
want too much to b e read into that.

Let me add my line for the initial thrust amount to the chart. See figure 6.29.

Figure 6.29

::':. ES03H 1 5-1 88 a

Febl0m 1 11
Chart created by Dynamic Trader (c) 1 996-2001

At this point the trade is triggered, the stop is set, and the initial thrust line is
ready and waiting. Now I just sit back and watch and wait, letting the trade
do its thing. The process has become very methodical for me in most cases.
My plan is clear, and I just implement it.

1 30
I'll add two more price bars onto the chart, and discuss what I see. See figure
6. 30.

Figure 6.30

:::'. ES03H 1 5-1 er;J �

FeblOm l lt
Chart created by Dynamic Trader (c) 1 996-200 1

The ES is starting to reverse. This might be the area where many traders
attempt to grab what they have, even if it is a tiny amount. They may also
have moved their stop down, perhaps to breakeven. I 've done nothing, and
I ' m just watching as the action unfolds.

131
Since it may not be clear where my entry is on this traded timeframe chart,
let me show that. See figure 6.3 1 .

Figure 6.31

:'--:: ES03H 1 5-1 ee �

Febl0m l lt
Chart created by Dynamic Trader (c) 1 996-2001

The lower arrow shows the approximate place where my first entry trigger
signaled me. Notice that the ES has already exceeded the entry price, and the
trade is now 'underwater' . But what should I do, close the trade? The ES has
barely moved in my favor before reversing. This is a great example of
'letting a winner tum into a loser' . If I were to follow that rule exactly and
literally, I would be out before now.

The ES moved 3 .25 points in my favor before reversing. This is a I S-minute

traded timeframe, though. In t his timeframe 3 .25 points is just too small of
an amount for me to do anything with. Some plans I have seen would
already have had me scaling out of some of the trade. I have decided on my
plan beforehand, though, and I ' ll stick with it.

1 32
Let me add two more price bars onto the chart. See figure 6.32.

Figure 6.32

::':. ES03H 1 5-1 er;H'!'I

������;�i i���.

Il v)!
tJtttlll it!! 11
j lit)!
FeblOm 1 1t
Chart created by Dynamic Trader (c) 1 996-2001

Ouch, right? Well, sort of. I have my stop set, and I ' m just watching this. It
looks like it may be a stop out, but so what, that ' s trading. They don ' t all
work out. If thi s stops me out I wouldn' t be wishing that I took it off at just
over 2 points, or that I cut it off at breakeven. I have a plan that takes all the
outcomes into account, and I created the plan to do what I think is the best
thing in the overall picture. If I felt there was a better way for me to do it, I
would change the plan and do it that way. I am showing what I think is the
best way for me to do it.

Now, the last bar closed very weak, and perhaps this may work out all right.
It really doesn' t much matter, as I just have to ride it out and see what
transpires. Other than closing the trade due to a time stop of some sort, say
like if it drifted sideways endlessly, I just wait and see and let the chips fall
where they may.

1 33
I'll add on two more price bars, and we' ll assess the action. See figure 6.33 .

Figure 6.33

:.:" ES03H 1 5-1 12![;J £'J

��� ����Gi , j l��

f l1ilj
HHhj jll) 1
j llt)l
Febl0m l lt
Chart created by Dynamic Trader (c) 1 996-200 1

This is why I don' t 'jump the gun ' and change my plan on the fly. I have a
plan, and I try to just stay with it. If I learn new things and I think I can
improve the plan, I make the necessary changes. But I do this in the off
market hours, not when I ' m in a trade.

1 34
I ' ll add on another two price bars, and we' ll reassess. See figure 6.34.

Figure 6.34

:':. ES03H 1 5-1 !f EH'!,!

FeblOm l lt
Chart created by Dynamic Trader (c) 1 996-2001

That ' s it. The first thrust area has been reached, and I ' m ready to move my
stop down. Many, many plans would have this trade heavily scaled out of, or
closed out entirely. I can ' t say that there is anything wrong with that. It' s just
that I ' m playing for a longer swing, in the 'context' of the 60-minute chart.
This is a nice move, but it isn ' t quite enough that I want to take any of the
trade off yet.

Understand, though, this is taking into account the market action at the time.
The ES has just trended down about a hundred points. This is a market and a
time when the issue is moving. I am taking that into account when I make
my decisions. The market action in the ES at the time of this writing is
entirely different, and my plan of action would consequently be different.

1 35
So, to where would I move my stop down? I ' ll add an arrow to the chart to
show what I would do. See figure 6.35 .

Figure 6.35

:;':, ES03H 1 5-1 �en

30 .000

25.000

Febl0m 1 11
Chart created by Dynamic Trader (c) 1 996-200 1

Given that the move down was so aggressive, I ' m inclined to move the stop
down just a little more than I otherwise would. The arrow shows the area I
would set it at. This area is at about 839.75, which is about two ticks above
my entry. Thi s i mplies that I would be willing to see a move of about 1 0
points, and actually let i t tum into a loser, albeit a very small loser, relatively
speaking.

The answer to that is yes, I would. In the overall 'context' thi s is in keeping
with my plan. I 'got something' for the move, and that is to get the stop
down. My theoretical risk went from 5 .0 points to 0.50 points, which is 1 0%
of the initial risk. And understand that the entire move was about 1 0 points,
but it was 7 .0 points from my entry. Still a sizable move, but not enough for
me to start scaling out on this timeframe, the way the ES is trading at this
time.

1 36
Let me add something else onto the chart that assisted me in my placement
of the arrow. See figure 6.36.

Figure 6.36

:::'. ES03H 1 5-1 er;J �

Febl0m 1 1t
Chart created by Dynamic Trader (c) 1 996-2001

I made the assumption that the ES might retrace back to the .6 1 8, but likely
not to the .786 retracement. Hence, I placed my arrow just beyond the .6 1 8
retracement. This is a slight variation on one of the techniques from Kane
Trading on: Trailing Stops. I expect a little less penetration of the . 6 1 8 given
the chart layout, based on the 'test' of the grouping, and the subsequent
harsh sell off.

1 37
I 'll add some more data to the chart, and we ' ll assess what we see. See
figure 6.37.

Figure 6.37

::::'. ES03H 1 5-1 �j;J �

Febl0m 1 1t
Chart created by Dynamic Trader (c) 1 996-2001

The ES bounced nicely off my initial thrust line, but then rolled right over
and dropped strongly. My stop was never threatened at all . Once the initial
thrust line i s decisively taken out, I feel the trade is in the 'nether region' ,
and the initial stop movement phase i s over.

1 38
Let ' s see what the ES did from here. See figure 6.39.

Figure 6.39

�:. ES03H 1 5-1 !1m£)'

���iiii
-7jiiiji
i i
45.000
iiii iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii___
iii I.U"Ii"
.------ 840.1;10 Ret 0.78E.
40.000

35.000

30.000

25.000

��
20 . 000

�1�1fl1J
1 5.000

1 0 . 000

05. 000

Feb llt 12w 13t

Chart created by Dynamic Trader (c) 1 996-200 1

The ES went on to trend down 37.50 points. It should be clear now why I
wasn' t too anxious to start scaling out of the trade at less than 7 points. No,
not every trade works out like this, but my plan is to play for trades like this,
and maximize them when they come. That ' s my plan, and it may not be for
everyone. I can only show what I do, and explain why I do it, and the reader
has to decide for him or herself if the material is of any use.

1 39
I ' ll finish by going back to the 60-minute chart to see this move in its proper
'context' . See figure 6.39.

Figure 6.39

:':. ES03H 60-1 !l9" �

30 . 000
20.000
1 0 . 000
00 . 000

90 . 000

80 , 000
70 , 000
60 , 000
50 , 000
40,000
30 , 000

A
20 , 000
1 0 , 000

15w 16t 17f Jan 22w 23t 24f Jan 28t 29w 30t 3 1F Feb 4t 5w 6t 7F Feb llt 12w 13t
Chart created by Dynamic Trader (c) 1 996-2001

This move seems reasonable and balanced in this 'context' . This play was
designed with this chart in mind. If one focuses too closely on lower
timeframes, like entry timeframes, it can skew the view of the trade. If I
watch things on the entry timeframe, or lower, I keep a close watch on what
my plan is, so that I don' t micromanage outside of the parameters of my
plan.

What I am trying to point out is that I am patient as I wait for things to

unfold. I wait for triggers from my plan before I act. For me, and again, this
is just for me, I find that grabbing relatively tiny profits (with respect to the
traded timeframe) before they 'slip away' is not the way to go. I have no
problem giving back tiny profits over and over, because it' s all a part of my
plan.

1 40
I ' m playing for swings; I 'm not trying to 'scalp' . That' s what my plan says. I
get that stop moved up when my plan says to, and I get to an almost 'free'
trade. I can accept a lot of stops outs of that kind, waiting to catch one with
my full position. That ' s my strategy, and I ' m comfortable with it. I don ' t
look a t tiny profits a s something to b e potentially lost; I look at i t a s nothing
more than 'noise' on the charts.

Until that first thrust area is hit, I have nothing that I am 'giving back' . To
me, until that has happened, technically the price may as well be sitting at
my entry point. Figuratively speaking, I am not even watching until the
initial thrust area is hit, or the initial stop loss is hit. That way, I ' m not going
to be tempted to get emotional and grab something that i sn ' t a part of my
plan. I feel it' s key for me to stick to my plan.

Before I conclude this chapter I am going to point out something interesting

that I see quite often in my trading. It came up in all three examples from
this chapter. I can ' t say that there is anything to it, but it is an area worthy of
exploration, and I suggest the reader delve into this a bit with his or her
trading.

Notice how the first thrust move is approximately twice the size of my initial
stop in the examples. I ' m not saying that the thrust goes to twice the distance
of the stop from the initial stop placement itself, though. I ' m saying that the
thrust, from the reversal point, will usually be about twice the size of the
initial theoretical risk (which is the difference between the entry price and
the stop placement point). If I have determined from my studies that an
average initial thrust is 4.00, then it frequently works out that my initial risk
will be about 2.00.

I don ' t take this into account when I look at the stop placement or entry
technique, nor do I take the possible entry trigger and stop loss placement
into account when I study typical first thrusts. I t ' s just an observation that I
have made that occurs with great frequency. I t is dependent on my choice of
entry triggers, stop placements, pattern setups and groupings, evaluation of
first thrusts, and so on. This is all unique to me.

141
I would not expect any other trader to see the exact same ratio as I do, but I
would expect that if the process were consistent, there would be a ratio of
some sort. I ' m not sure exactly what value there is to this knowledge beyond
yet another means of 'checks and balances ' , but there may be more to be
learned and gained from it. This is the first time that I have discussed this
observation in any way. I am passing this on so that the reader can be aware
of this, and so that it can provide a starting point for some more research.

At this point I will now move on from what I do, to what I see others
presenting. I try very hard not to critique or criticize what I see others doing,
or professing to do, focusing instead on just presenting what I do. I will be
making an exception in this case, because I feel there is a lot of information
in this area that is hard to understand and conceptualize, and thus it can be
very misleading. I plan to explain the issues that I have with some of the
most highly touted management styles, and leave the reader to make his or
her own decisions, hopefully from a much better informed position.

1 42
 Chapter 7

The Fallacy of the 'Half-Off' Management Style

I chose the title of this chapter based on one of the main concepts that I am
going to cover here. I will actually be covering quite a few different
concepts and ideas in thi s chapter, but to one extent or another they relate to
the gist of why I don ' t believe in the 'half-off' management style. This is a
very controversial step for me to take (like most of what I do), because it has
been touted by so many 'big names ' .

One advantage of the 'half-off' management style, with all its variations, is
that it is simple. It' s simple to explain, simple to implement (they say), and
supposedly quite effective. I ' m not here to say all that isn' t true. I ' m here to
explain why I don' t like it, and why I do something different. My basis for
this decision is partly from experience, and partly, perhaps a larger part,
mathematical . With my background and skills in mathematics I have
crunched a lot of scenarios, and discovered some interesting things.

I will not delve very deeply into the mathematics or the studies that I have
done, but I will lay out a few scenarios that will require me to do some math
for the reader. I feel that this is necessary to explain what I have discovered,
and why it puts some doubt on the current teachings of the 'half-off'
management style. I know that those that teach (or just like) this style may
not like what I have to say. It can be very hard to teach more complex
methods, and it certainly doesn' t lend itself to 'mass production' .

Since my goal i s not teaching large quantities of people what I consider

oversimplified techniques, I can present what I feel is my best material here
without concern that I will ' lose everyone' . I have written my book series
with a target audience comprised of very serious students of the market,
those that are 'willing to do the work' . I want to be clear here that my goal is
not to put down anyone else ' s work, or anything that someone else is
presenting, but instead to present what I have learned to my readers, and let
them decide for themselves if it is of better use to them.

1 43
Let' s move on, and start with a description of a few variations of the 'half­
off' management style. The main idea is to take some profits once the issue
starts to move in your favor, and then ride the rest. There are more variations
to this style than I could ever count, but a few are commonly taught or
discussed with great frequency. One variation is to not specify how much of
an initial move before the partial profit taking is initiated. The rest is left to
ride, either to another profit target, or using some trailing stop method. Once
the partial profit taking has been done, the stop is usually moved up to
breakeven.

Another variation specifies an initial profit target where half of the trade is
taken off. Thi s technique is frequently used by 'picking services ' , where
they specify the initial target with respect to the specific trade. The play is
like the last example, to let the rest ride and move the stop to breakeven.
Moving the stop to breakeven is a big part of almost every variation I have
seen for this style. A 'sub-variation' to this last version is to break the trade
into three pieces, but this is getting very complex for most of the audience,
so it is not used too commonly in my experience.

The last variation I will discuss is the most specific, and also the most
common that I have seen. There are some slight ' sub-variations ' on this one,
but for the most part what I will present covers the gist of it. In this variation
once the trade has moved an amount equal to the initial risk on the trade, one
half of the trade is taken off. The rest is then let to run, and depending on
who is presenting the method, a second profit target or a trailing stop is used
for the remaining amount. Like the other variations, the stop is then moved
to breakeven, making the remaining amount a 'free trade' .

I would like to look at a very popular 'sub-variation ' of this last one before
we move on. In this 'sub-variation' one-third of the trade is taken off when
the trade moves to one-half the initial risk amount. At that point the stop is
moved up to one-half the initial risk amount, and the remaining two-thirds of
the trade is left to ride, again with various methods to manage that.

1 44
One of the interesting things about this last variation is one of the
mathematical facts that arise from its use. It surely is mathematically true,
but I think it is deceptive, in the sense that it makes it sounds like a no­
brainer, when I think that is far from the case. Here it is: if the trader does
the initial take off, the total risk left in the trade drops to one sixth the
original total theoretical risk on the trade. This does sound good, and at least
worth looking at.

I will give an example of this to clarify just how this works. Let's say a
trader buys 300 shares of XYZ Company, at $ 1 00 per share. The trader is
willing to risk $6 per share, for a total trade risk (theoretically, of course) of
$ 1 ,800. The stock moves to $ 1 03, and one-third of the trade, or 1 00 shares,
are taken off. This nets a profit of $300 on that part of the trade. This leaves
200 shares still on. The stop is now moved up from $94 ($ 1 00 entry with a
$6 stop) to $97 . The risk is now $3 on 200 shares, or $600. But there is a
profit booked of $300, so net overall the total theoretical risk is just $300.

Initially the risk was $ 1 ,800, and now it is just $300. That' s a reduction of
risk to just one-sixth the initial amount, with such a small move and limited
take-off. How can this not be the greatest way to play that has ever been
thought up? And that ' s just why so many use it, or one of the other
variations. It seems incredible, and there just doesn' t appear to be any reason
why it i sn ' t just plain great. I ' m not going to argue it has no merit. I will
explain, though, why I don' t think it is as great as it sounds, and why I do it
differently.

Now, I ' m sure there are some readers who simply can ' t believe I am going
to say these aren' t great ways to manage trades. I also imagine a few have
already decided that nothing I could say is going to change their minds. That
may be the case. All I am going to do is show why I don' t use this style,
using some common sense. Perhaps the extra work I do won' t be worth the
possible benefit to you. A lot of my methodology has to do with trying to
make slight improvements in all areas of my 'Trading Plan' . I ' m trying to
add up a lot of very small 'edges' across the entire plan.

1 45
So, the main thing that bothered me about all these variations is that they are
generic. They don' t take any of the characteristics of the issue into account.
They are simple guidelines that apply regardless of conditions. Sure, in very
tradable market conditions they may still net some solid profits (in
combination with other workable trading techniques for potential trade area,
entry, etc.), but I don' t think they will stand the test of time. Also, for me,
it' s about trying to optimize what I do.

I want the most 'bang' for my effort. I have tried to refine all areas of my
'Trading Plan' to improve upon what I had. In Kane Trading on: A Totally
New 5-Point Pattern I go into a lot of detail about my unique methods with
respect to 'harmonicity' and how I use it in my trading. I explain how having
multiple groupings helps me set my stops and choose my entries in a much
more refined manner. I devised those aspects of my methodology to refine
the process, and hopefully increase the potential profit margin. To me, it' s
almost analogous to trying to get a raise at work by going back to school.
I ' m trying to get a raise in my trading.

It's the same thing here. I ' m trying to refine the methods for managing my
trades to improve the performance. It' s my opinion that what I do improves
my trade potential. Each trader will have to decide for him or herself if what
I do can be of any use. Maybe the conclusion is that one of the previous
methods is best. I just know that it' s not the bestfor me.

So, if the variations could be tailored to each issue, taking into account the
i ssue' s typical behavior and so on, would I then use them? In addition to the
generic nature of the variations, something else bothered me. This is
something that I have never seen mentioned anywhere, and I ' m hoping it
won ' t be viewed as some boring mathematical fact that would only seem
fascinating to a mathematician. This is a key concept about trade
management.

If you split your trade into two pieces, the market doesn' t know, or care, that
the two parts are from the same person, or in the same account. In reality,
they are two utterly and completely separate trades. If you did them in two
separate accounts (assuming no execution disadvantages), would that change
anything? The answer is no. So, then, would it matter if two different people
owned the accounts? Again, the answer is no. The trades are totally
unrelated, even if you think they are part of one trade.

1 46
Now, why is this important? It's key because you could split the trades up,
and compare the performance of the two groups. Here only three things can
happen. The initial take off trades outperform, the ride the second part trades
outperform, or they perform the same. I hope you are saying 'Ah-ha' right
now. See, if that were the case then, it would make more sense, financially,
to go with the better performing half. And if they are equal, what is the point
in splitting them up?

This is where that style falls apart for me. Given what I have just shown,
what is the sense of the method? What is the compelling reason to trade this
way? I ' m not saying that there isn ' t one, I ' m saying that I have never seen
anyone teaching this method discuss this issue. If you have no idea why you
are doing something, I would take a hard look at why you are doing it.

There is a possible reason why one may choose to still follow this approach,
but I have never heard it mentioned anywhere. I ' m saying this because I
want to point out that I may be able to show a reason, but if no one is using
that reason as their premise for using the method (or some other stated
reason), they are trading it without a premise.

What I have discovered is that in many scenarios using this style of

management can 'smooth out' the equity curve. Let me explain what I mean
by that. In trading I see a gradient, or spectrum, of trade styles, that range
from one end, like scalpers, who have high winning percentages and low
reward/risk ratios, to longer swing and positions traders, who have low
winning percentages and high reward/risk ratios.

As I explained before, I feel that the expected values of these different styles
are very similar, and as one raises or lowers the winning percentage, the
reward/risk ratio moves opposite to keep the expected value nearly constant.
The significance to this is in how the two ends compare in terms of the
equity curve. Assuming the plans are approximately equal as far as expected
value over time (they make the same return over time), how do the profits
come to the trader?

1 47
In the 'scalper' style they come small and steady. The trader makes money
most of the time, and the profits are relatively small. On the far other end of
the spectrum, the trader makes most of the profits with a few 'home runs' ,
and actually loses more often than wins. The equity curve 'spikes up' after a
big winner, and then slowly bleeds a good part of that back, and then spikes
up again, and so on.

I have analyzed lengthy and extensive trading records from some hedge
funds, and they made all the money in one or two trades per year. The rest of
this time they were bleeding it back, i.e. in a drawdown. They were in a
draw down almost all of the time. The funds appeared to make a decent rate
of return, but the style is one that few people could handle psychologically.
As one moves on the gradient from one end to the other, this is the type of
transition I see.

Let ' s look at two graphs, showing two hypothetical equity curves, one from
each end of the spectrum. Understand that these are purely 'example' equity
curves, meant to show the general idea. See graph 7 . 1 and graph 7 .2.

Graph 7.1

'Scalp' Style Equ ity Cu rve

Q)
::l
CtI
>
-
C
::l
o
(,)

<
(,)

Time

1 48
Graph 7.2

' Swing' Style Equ ity Cu rve

Q)
::J
res
>
-
c:
::J
o
(,)

<t
(,)

Time

Notice that even though both equity curves are rising at approximately the
same rate, graph 7.2 has a lot sharper drawdowns. Although the net effect
over time is basically the same, the second equity curve may have some
psychological difficulties for certain traders.

Now, assuming the trader has split the trade into two parts, both with
approximately equal expected values, what effect might that have? Well, if
the trader takes off some of the trade on a 'pop' equal to half the initial risk,
for example, that is very much like a scalp trade. If the trader lets some of
the trade run for the 'long move' , that is much like a longer swing or
position trade. The latter trade will have an equity curve more like graph 7 .2.
That may be difficult for the trader to handle if it was the exclusive trading
style.

That type of almost 'permanent drawdown' equity curve might motivate

some traders to try to 'smooth it out ' . B y blending two styles at the same
time, in the same account, the equity curve will become an intermediate
between the two curves, and hence be a bit 'smoother' . Many traders would
find the intermediate curve more psychologically acceptable. It would fit
their personality better.

1 49
I ' m not going to say for one second that this isn ' t a potentially viable reason
for some traders to trade in this manner. I just feel that if one is trading a
plan for a specific reason that reason should be perfectly clear to the trader,
and laid out in full in the 'Trading Plan' . To trade a style because you
learned it in a seminar, but have no idea why or how it fits into the 'Trading
Plan' , is just not the way to go, in my opinion. I have to know why I do
everything that I do in my plan.

This should all start to make some sense in the 'context' that I was leading
towards, which is my concept of 'getting something' for the initial 'pop ' , but
not taking off any of the trade. I prefer to move the stop up, hence reducing
the potential loss, as my 'reward' . I have some thoughts on this that I need to
cover. First, one of the flaws to all these variations of the 'half-off'
management style is that they don' t study the specific issues to see what a
typical 'pop' is. I think it is key to only do things that make technical sense.

I have my idea preset for what a typical 'pop' is. Once that area is being
approached, I can then move my stop, again technically, not what I consider
somewhat randomly. This leads to another key issue. Many, many plans try
to get the stop to breakeven as quickly as possible. The problem here for me
is that breakeven may have no technical significance at all. In fact, I find
that it is frequently the worst place to have the stop from a technical
standpoint (implying it does have some technical significance, but sort of in
the opposite way that I would want).

For my trading, I have noted something that, as mentioned before, I really

didn ' t even want to release. If I get a first 'pop' that is typical, the issue very,
very commonly goes back to 'test' my entry point (based on the usual entry
techniques that I use from Kane Trading on: Entry Techniques, which is an
important point to note here). If I went to breakeven, I would be stopped out
most of the time. On the other hand, by setting my stop just below this (for a
long trade, just above for shorts), I seem to miss getting hit most of the time.

It seems that the point that I get in, based on my entry trigger with
confirmation, is technically significant. If it is significant enough to trigger
me in, it is not just a random area, in my opinion. Thi s i s an area that may be
' tested' , or gunned for stops . I ' m not sure exactly what causes this
phenomenon, but I do think that it is happening. It' s not important that I
know why, either, but it is important I know it is happening, and that I figure
it into my 'Trading Plan' .

1 50
I move my stop, then, to just under breakeven by a little bit, after I get a
typical initial thrust. This reduces my theoretical risk to a very small fraction
of what it was on the initial entry. I feel that I can take a lot of stop outs at
this reduced level, waiting to catch a nice run . That ' s the gist of my own
particular style. It works for me, in my opinion, because of the high
percentage of initial 'pops' off of entry. If that weren't the case, I would
have to change my plan.

The question arises, then, why not take some off on that initial thrust, and
follow the plan as I have outlined? Why not make a little money when it' s
there, and otherwise do as I have said? Here ' s why I don ' t do that. I ' m
basically trying to trade swings. That ' s my style. I am trying to catch a good­
sized portion of the swings that I can see on the traded timeframe. That' s
what my 'Trading Plan' says. If I reduce my trade size based on a small part
of a swing, when I do catch the big run, I will be catching it with a reduced
SIze.

Now, as I explained in the equity curve example, with my style on the low
winning percentage-high reward/risk end of the spectrum, I expect to get
most of my profits by catching a few trades really good here and there. If
that ' s the case, I can ' t afford to have 'light' positions when I finally make a
good catch. Also, as I explained about looking at these like two separate
trades, if I thought the expected value was better on the initial thrust part of
the trade, I would just take it all off at that point.

I accept that my equity curve will be 'up and down' more than a ' scalper' s '
equity curve. But I have also done some things with m y 'Trading Plan' to
adjust for that in a different way. B y choosing a trading style that gives me a
high percentage of initial 'pops' off my entry, and by knowing when to
move my stop up to just under breakeven, I feel that I take a lot less full stop
outs. That allows me to have a lot of very small losers and essentially
' scratch' trades.

This tends to smooth out my equity curve, and increase my potential rate of
return. If I felt that I didn' t get these benefits, I wouldn' t trade this way. I am
always trying to see what works best for me, and then move my 'Trading
Plan' to that. I don' t use the 'half-off' management style because I don' t feel
that it works best for me in most cases. I ' ve come up with better options,
again, for me.

151
So, are there times when I would be inclined to take some off on that initial
'pop ' , and modify my plan to perhaps scale out of more in this ' scalp' area?
The answer should be no, but it actually is mostly no, but sometimes yes .
Here ' s the point. My overall style is to try to catch swings. Like I said in
Kane Trading on: Trailing Stops, I need to know what it is that I am trying to
trade, and I do. Swings. If I want to trade something other than a swing,
that ' s fine, but I need to work that into my 'Trading Plan' .

That may be in the form of something like 'When conditions are I , 2, and 3 ,
I will not attempt to catch swings, but instead implement ' scalp' plan A , as
outlined below' , or something to that effect. In other words, I will switch
styles based on conditions. For example, in the recent trading in the ES e­
mini, in this era of 50%-60% plus program trading, there seems to be a lot
less swings on my favorite 3-minute traded timeframe. I did notice a fairly
consistent initial 'pop' off my entries, though. Following my usual strategy,
this led to a lot of setups that are stopped at or near breakeven.

I also noticed that I would be able (at least in theory, since the mini moves
fast, and I in no way want to imply that fills are 'guaranteed' in this
'theoretical' example here) to take off part of the trade in the 5-8 tick range
(each tick is 0.25 point). With my initial risk at 5 ticks 0 .25 points), this is
right in line with a somewhat typical ' scalp' trade for many styles. My
options seemed to be to take a lot more scratch or near scratch trades,
waiting for the swings to take place, or change the style.

One option would be to simply play as a ' scalper' . This is not my style. If I
were to use an option of taking off part of the trade on the scalp, and riding
the rest, I would be using a version of the 'half-off' management style. If the
scalp isn ' t good enough for me to trade, it isn' t good enough for a partial, in
my opinion. What I concluded was quite interesting. Something was clearly
going on here, and it was screaming out information to me, but before I
changed my 'Trading Plan' , I wanted to know what the information was
actually saying to me.

1 52
It was saying, I believe, that I was going to have to take a lot more stop outs
(or more accurately, moved up stop outs) to catch the swings than I had
previously been taking. This means the net profit would be dropping.
Depending on the specific plan, and in this case let ' s assume it was a net
positive outcome plan, that may mean it may produce less profits, or even
that it may move into being a net negative outcome plan. The bottom line is
that the particular market, at that time, was getting less favorable for that
specific style.

That' s what was key for me to understand. The market was 'chopping' more
and 'swinging ' less on my traded timeframe. You see my plan is based on
specific market conditions. I try to create the very best plan that I can /or the
market at hand. If conditions change, I must interpret how they have
changed, and adapt my plan for the new conditions. Instead of just changing
what I was doing without a clear understanding and interpretation of what I
was observing, I would be doing a disservice to my 'Trading Plan' , my
trading business, and me.

The point here, then, is not: did I switch to scalping for that period of time in
the market, or just accept potentially lower returns, or make some other
adjustment? The point is that I didn ' t switch to something like the 'half-off'
management style because it appeared like it might work better on that
particular day. I analyzed and assessed the new infonnation and my 'Trading
Plan' , and make some logical decisions (I actually modified the traded
timeframe ).

Even if I felt that some variation of 'scalping' was the way to go, I still
wouldn't have done it via the 'half-off' management style. Thinking in terms
of that management style helped me see that something was changing in the
market, and that I might look to modify my 'Trading Plan ' . It didn' t
motivate me to switch to that style of management. I don' t like to 'blend'
styles together, such as ' scalping' and playing for ' swings ' . If I want to play
for 'swings' , I set up the entire plan to play for those ' swings' .

1 53
I will conclude by saying that although I don 't care much for these 'blended'
management styles, at least ones that have take-offs in the very early stages
of the trade, these styles may work for some traders. When we get to the
upcoming chapter on trailing stops and scaled exits, it is possible that one
might start to see my entire management style as a very loose interpretation
of what we have just examined. The key difference, for me, is that I am not
blending styles from the far ends of the spectrum. In what is to come, I am
managing the trade at various points along the swing, as I see fit, based on
expenence.

Regardless of what I have chosen for my own management style, I suggest

that what we have discussed here be studied and tested before being
discarded. I have just found better ways for my own 'Trading Plan' , and I
have been laying that out for the reader. Instead of just focusing on what I
do, I have tried to present a balanced look, including some other approaches.
This way the reader can come to his or her own conclusions on what may be
of use for his or her own individual 'Trading Plan ' .

1 54
 Chapter 8

The 'Nether Region'

I refer to the area between the initial stop adjustment and the time when the
trade has moved enough to implement my trailing stop/scaled exits
management, as outlined in Kane Trading on: Trailing Stops, as the 'nether
region ' . It is the area that requires the most market reading and discretion of
any part of my overall management plan. It is the area that is the hardest for
me to have a clear-cut battle plan for. Like dealing with issues such as trade
correlation, sometimes I don ' t have a lot of ideas to contribute.

The basic thing I am trying to do, once I have moved my initial stop, is get
to the trailing stop phase. That is where I feel I have my best techniques for
maximizing the trade. In this 'nether region' , I am just trying to stay with the
trade, and benefit from any move in my favor, just as I did with the initial
thrust. At this stage the trade will be beyond the initial thrust, but not yet
well into a clear swing move.

I am usually not yet able to implement the typical trailing stop methods that
I use because the moving averages or trendlines will not have had enough
time to form and/or stabilize. In this stage I will attempt to move my stop if
possible, to either 'guarantee' some profit, or further decrease the risk in the
trade. I will do this technically, though, and not based on my breakeven
point, or any particular amount of profit as it may relate to my initial risk.

The question arises, though, just where i s this 'nether region ' , more
specifically? For me, it starts when the swing point near the initial thrust line
is violated (if there is a clear swing point; if not, I use the initial thrust line
itself), and usually continues until I can see my trailing stop methodes)
stabilizing. I do this visually, by putting my chosen trailing stop methodes)
on the chart and looking them over.

1 55
I find that, as a general guideline, once the swing point that formed near the
initial thrust line has been violated (after a reaction in that area, of course), if
I get another thrust, another retracement and subsequent violation of that
new thrust swing point, I ' m usually at the trailing stop point. This is difficult
to explain (relatively easy to show on a chart, though), but basically I mean
that the first thrust i s to the initial thrust area, and the second thrust, once
formed and then violated, is about where the trailing stop techniques take
over. Each case is unique, and I will discuss more about when I start the
trailing stop phase in Chapter 9 on trailing stops and scaled exits.

What I want to do at this stage is assess the chart, and see what trade
assumptions I can make, from a technical perspective. I will look to move
the stop to areas that I think would be unlikely to be hit by what I consider
'normal ' price action, based on my trade premise. One method I like to use
is the Fibonacci stop from Kane Trading on: Trailing Stops, implemented on
the entry timeframe.

For this example I will use a .786 retracement as my stop, keyed off a new
swing point. The assumption is that as a new swing point is formed it should
not retrace back much beyond the .6 1 8 retracement from the previous swing
point. I am only trying to get through this phase, until enough of a new
swing structure has formed to allow me to start using my trailing stop
techniques. I also want to benefit from additional movement favorable to my
position, again by getting that stop moved.

1 56
Let ' s look at an example showing this. First, we will need to cover some of
what I have just discussed, though. We' ll go back to the I S-minute ES
example, again, from where we left off. This chart was shown in Chapter 6
as figure 6.37. See figure 8. 1 .

Figure 8.1

::::,", ES03H 1 5-1 er;:r �

FeblOm l 1t
Chart created by Dynamic Trader (c) 1 996-200 1

The ES has bounced near the initial thrust area, and then taken that area out.
For me, we have entered the 'nether region' . It' s too soon for me to
implement my trailing stop techniques, but on the other hand, I don ' t want to
not 'get something' from additional moves in my favor. This is where I
might apply the .786 trailing stop.

Although this method is a trailing stop method, and one that can be used to
manage a trade, it is one I usually only use when the issue tends to spend a
lot of time consolidating and going sideways between thrusts. This type of
price action can be very difficult to manage with trendline and moving
average management methods. Since I tend to avoid issues that behave like
this, it doesn' t usually become a factor for me.

1 57
The interesting thing is that perhaps a particular trader may like this
management choice, using the .786 trailing stop. If so, guess what? There
really isn ' t a 'nether region ' for this style. It can be implemented right away,
and that's about all there is to it. The 'nether region' only exists for certain
styles of trailing stop management. It' s just that it exists for the ones that I
use most often.

Let ' s move on. The next step is for me to wait until the issue starts to pull
back again, and then get my .786 retracement on the chart. That is the point
that I will move my stop to, once the pullback has started. A word of caution
is warranted here. If the next thrust is a monster, perhaps almost a windfall
move, I don' t want to use this technique. Giving back everything to the .786
retracement at that point is just too much.

This is a case where common sense shows me that using the .786
retracement at that point is just not technically feasible. When this happens I
look at trendlines, Andrews pitchforks (median lines and parallels), and
anything that I can to find a technical place to put a 'tighter' stop. It' s a
judgment call, but one that I have to make from time to time. It' s just
something I want the reader to be aware of. I think it's smart to make sure
every move makes common sense.

1 58
Let' s move on. I ' ll add some more data to the chart, and we' ll assess what is
happening. See figure 8.2.

Figure 8.2

:.:" ES03H 1 5-1 BS �

FeblOm 1 1t
Chart created by Dynamic Trader (c) 1 996-2001

The ES has now started to retrace, and so I will put a .786 retracement on the
chart. I will also put a .6 1 8 retracement on the chart, to show the area that I
actually don' t expect to be significantly breached. I use the .786 because it
gives me some cushion if they 'run' the .6 1 8 a little.

1 59
Let' s see what those retracements look like on the chart. See figure 8 . 3 .

Figure 8.3

?. ES03H 1 5-1 e9' �

������� IGi i���'"

f��\ �
--
:: ::�: ::: :::::
-- 834.307 Ret O .7St>

83 1 :397 Ret O .E- 18

�ttll�)HJ
--

1i
FeblOm lit
Chart created by Dynamic Trader (c) 1 996-2001

I left the anchor lines on the chart so it would be clear exactly from where I
did the calculations. My stop is now moved down to the .786 area, say at
834.50. This puts the stop below entry, and the trade, barring a market shock
or very fast adverse move, in a guaranteed winning position.

Notice how the ES has made two thrusts down in this new move off the
grouping? This is what I was referring to in my description earlier. If there
were a reaction near the initial thrust area, then a new thrust, followed by a
pullback, the issue would be where the ES i s in this last chart. If this new
swing-low (or swing-high in the case of a long) were taken out, that would
likely be the point where my trailing stop technique would be ready to be
implemented. As I said, I go by when the trailing stop technique visually
looks like it is representing the price action, but this additional criterion is a
general guideline that frequently helps me out.

1 60
Let' s move ahead, and see what happened with the ES from here. See figure
8.4.

Figure 8.4

::.';'. E S 03H 1 5-1 am f!J

�����f{!j-7����lli�� ��� __ 840 .& 10 Ret 0 .78&

838.'330 Ret 0 .& 18

---- 834.307 Ret 0 .73E,

tjt
---- 83 1 .'397 Ret 0 .6 18

ti� I

'� V
Febl0m l lt 12w
Chart created by Dynamic Trader (c) 1 996-2001

The ES came close to the .6 1 8 retracement, and then dropped and set a new
low for the move. So far this is a nominal new low, so it' s hard to say if my
trailing stop technique(s) would be ready to go yet or not. I can say that until
a reasonably significant new low is set, I will not start another .786
retracement calculation, and subsequent stop move, if it was indeed needed.
I need to see more of a thrust before I make a change in the stop.

161
Let' s move ahead a few more price bars, and assess what the ES is doing.
See figure 8.5.

Figure 8.5

;'1. E S 03H 1 5-1 �I;J �

����� IUiiH i��

��
1)1\-7
11 �
___ 840.6 10 Ret 0 .736

838.930 Pet 0 .6 1 8

---- 834.307 Ret 0 .78b

---- 831 .'3'37 Ret 0 .& 18

t{� I rji
'� . V
Feb 10m l lt 12w
Chart created by Dynamic Trader (c) 1 996-2001

The ES is bouncing, but I am happy with my stop just as it is. I don' t want to
have another .786 retracement here as my stop, using that last thrust down.
Some traders may prefer to do that, but to me it is too likely to be hit, and it
isn ' t as technically significant, in my opinion, as the stop I now have in
place.

1 62
I'll add on some more data, and we'll reassess. See figure 8.6.

Figure 8.6

:':. E S 03H 1 5-1 ISGH!J

�l ::::�� ::: �::�:

��� �������� iliijj ��Ji
->,---

8 3 1 .'397 Ret 0 ,& 1 8

V
Feb llt 12w
Chart created by Dynamic Trader (c) 1 996-2001

The ES has now taken that l ast swing-low out decisively, and started to trend
nicely. It is now at the stage where I can implement my favored trailing stop
technique(s), and past the 'nether region' . This is what I am looking for, and
we have a classic example here.

In my experience, at least as far as the trades that I tend to pick, I see most of
the volatility up to this point. Thi s seems to be where most of the 'fighting'
takes place. Once past this stage I tend to see smoother trends start to
develop. That ' s why I want 'looser' stops in this part. Remember that I am
trying to catch swings, and in order for me to really catch them, I have to be
patient, and let them move around a bit in the early stages.

1 63
Understand that not all moves have nice structure to work with. I have seen
some trades just take off smoothly from the grouping and trend nicely for a
steady, long move. When this happens I just keep checking for the soonest I
can implement my trailing stop method, and perhaps I use a fixed-amount
trailing stop, albeit a fairly loose one, until that time. I choose the amount of
that stop based on my study of that particular issue, and its 'typical '
behavior.

I will also use a visual assessment for the adjustment and placement of my
stop. For this I ' ll usually be using small swing points. Sometimes, though, if
the issue just starts to go, without any really noticeable swing points, I may
just use a fixed-amount trailing stop, based on the issues behavior. I ' m just
looking for ways to get that stop moving, but not too tightly such that I get
taken out on 'noise' .

All I usually need is another good thrust in this phase to get to the regular
trailing stop methodes). As this thrust is potentially building up, I try to give
the trade some room, but I ' m not willing to not benefit from the movement
so far, even if it does mean that occasionally I get taken out on a trade that
then moves in my favor. I ' m trying to walk a fine line, to find that 'sweet
spot' , between protecting my capital and getting taken out by noise.

I think this takes some discretion, and a lot of experience. I ' m just pointing
out what I attempt to do. I could just come up with some simple rules here,
but that wouldn' t be in my best interest, in my opinion. Each situation is
unique, and I think using my experience to make a judgment call in each
case works best for me.

1 64
Let's take a look at one more example before we move on. I have chosen to
continue with the AOL example, because it is very 'choppy' on the lower
timeframe. I try to choose examples that aren't 'perfect' in their behavior.
Let ' s look at AOL as we left it, as shown in figure 6. 1 0. See figure 8.7.

Figure 8.7

. I • I '.. 1:1 x

0 . 000

39.000

'oN::-----',;--.-- L37 .950 14Nv14:30 38. 000

37.000

36. 000

35. 000
--------=====:t:J;:::;:- 34.410 App 1 .000
34. 000

33. 000

32. 000

9 � n �
Chart created by Dynamic Trader (c) 1 996-2001

AOL has reacted near the 'initial thrust' line, rolled over, and taken that line
out. Recall that the second arrow (the lower arrow) is where I moved my
initial stop to once the area of the 'initial thrust' line (and potential ABeD
pattern) was reached. We are now in the 'nether region' , albeit just barely.

1 65
I'll add some more data onto the chart, as well as some retracements, and
we' ll assess what AOL is doing. See figure 8.8.

Figure 8.8

. I , I _ 1:1 rx

0 . 000

39.000

L,AI-----'>,,---.--- L 37.950 14Nv14:30 38. 000

37. 000
-- 3&.834 Ret 0 .78&

3& . 1 15 Ret 0.&18

--
36.000

35.000

--------..:====�==tJt=;:::;:tt_ 34.410 App 1 .000

34 . 000

33 . 000

1& 23 30
Chart created by Dynamic Trader (c) 1 996-2001

AOL has started to bounce up strongly. Although the new low was
somewhat nominal, it was enough of a new low that I want to 'get
something' for it, and hence I want to get my stop moved down some more.
I will use the .786 retracement trailing stop to do this.

I ' ve added both the .6 1 8 and .786 retracements onto the chart, leaving the
anchor lines in place for reference. Notice which swing points I calculated
the retracements off of. I did not use the last swing-high and swing-low,
which may have seemed the obvious thing to do. I did not choose to do my
calculations as shown because I knew what was coming next. I did them as I
did because it makes sense to me to do them that way.

1 66
When I see a small pullback like the reaction off the area of the 'initial
thrust' line, followed by a somewhat nominal new low, I expect a bigger
pullback may be brewing. This pullback will fre q uently go to the area of the
last swing-high (in the case of a short trade), in my experience. If I set my
stop at a .786 retracement of this last thrust down, I find it will get hit way
too often.

It makes sense to me to be using the longer leg down for my calculations.

That leg has not been used for a stop calculation yet, and to use the smaller
swing would have me 'skipping' an entire stop move. It would be too big of
a move, then, and would put my stop in a position that I felt was too tight.
This should make common sense to the reader. It' s not random or done
knowing what is to come; it' s done with experience and common sense.

I' ve left the .6 1 8 retracement on the chart again, because I want to show the
reader how that can frequently be the area of the 'interaction ' , as I explained
in Kane Trading on: Trailing Stops. I use the .786 as my stop point because I
want some 'cushion' around that .6 1 8. My experience has been that the .6 1 8
is commonly exceeded slightly, and hence a stop just beyond the .6 1 8
retracement may get hit. Using the .786 has given me much better results for
just a small · additional amount of stop size.

1 67
Let's see how AOL reacted to the retracement areas. See figure 8.9.

Figure 8.9

. I • I _ 1:1 X

0 . 000

39. 000

��r.-::----;:=== L 37 .950 14Nv 14:30 38 . 000

----- 3& .834 Ret 0 .78& 37. 000

----- 3& . 1 15 Ret 0 .G 18

36. 000

35 . 000
--------====tJt:;�==::!===- 34.410 App 1 .000
34. 000

33.000

32. 000
1f, 23 30 Dec7
Chart created by Dynamic Trader (c) 1 996-2001

AOL ran up to just under the .6 1 8 retracement area, and dropped strongly.
We are now well into the 'nether region' . I need to manage the trade, and
'get something' as AOL moves more in my favor, but I ' m not at the point
yet where I can implement my favored trailing stop methodes). I will just
continue to use the .786 trailing stop as the situation warrants.

1 68
Let me add on an arrow next to that .786 retracement to make it clear that
my stop was moved down to that level when I did that last calculation. For
clarity, I ' ll remove the anchor lines for the last retracements, as well as
removing the .6 1 8 retracement. I ' ll also add some more data onto the chart,
and we'll assess the situation. See figure 8 . 1 O.

Figure 8.10

':flI:---"r-.---- L 37 .950 14Nv14:30

------ 36.834 Ret 0 .78&

-------.::====tlh:;:+'+=�===- 34.410 App 1 .000

16
1 996-2001

AOL is now bouncing again. Given how nice and solid that last leg down
was, what's my move now? You got it, set up another .786 retracement stop
point. Every time I get a leg in my favor, I need to 'get something' for it.
Once a reversal starts, I put my retracement on the chart, and get my stop
moved. In reality, it is possible to do this bar by bar, as new lows are set. I
tend to do it once I see a good-sized pullback starting to take place.

1 69
Let me add both the .6 1 8 and .786 retracements onto the chart. See figure
8. 1 1 .

Figure 8.11

. I • I - o x

0 . 000

39.000

'oI'lI,---"r--.---- L 37 .950 14Nv 14:30 38.000

------ 3&.334 Ret 0 .78b 37. 000

36. 000

--- 34.90& Ret 0 .78& 35. 000

-------1IIlnJott---:---===- 34.071 Ret 0 .G 13 34 . 000

33.000

32. 000

3 1 . 000

9 1& 23 30 Dec7
Chart created by Dynamic Trader (c) 1 996-2001

It should be starting to get very clear what I am doing here. I ' ve left the
anchor lines on the chart so it is obvious from where I ' ve done my
calculations. My stop now goes down to the new .786 retracement. We are
also seeing a pullback after the leg down from the 'initial thrust' reaction.
Once this new low is taken out (if it is taken out) we may be out of the
'nether region' , and into the area where I can start my favored trailing stop
technique( s).

1 70
I ' ll add my new stop arrow to the chart next to the .786 retracement, as well
as adding on some additional data, and we' ll do another assessment. See
figure 8. 1 2.

Figure 8.12

::�. AOl 60-1 em D

39.000

-7
L 37 .950 141'1..,. 14:30 38 . 000

36 .834 Ret 0 .786

37. 000

36. 000

34.30b Ret 0.7% 35.000

34.071 Ret 0 .&18 34 . 000

33.000

32.000

3 1 . 000

23 30 Dec7 14 21
Chart created by Dynamic Trader (c) 1 996-2001

This is a very good educational example. Notice how AOL slightly

penetrated the .6 1 8 retracement in two places, and then rolled over. This is
exactly why I use the .786 retracement to give me that extra 'cushion ' . This
is something I see with such frequency that it was key to me in forming my
plan in this region. This example is 'well-chosen' only in the sense that it
was 'well-chosen' to demonstrate a key aspect I see a lot, one that plays into
the development of my 'Trading Plan' .

171
Let' s see what AOL has done from here. See figure 8. 1 3 .

Figure 8.13

:':. AOL 60-1 em �

36.834 Ret 0 .78E.

37. 000
�

36. 000

34.906 Ret 0 .78& 35 , 000

34,07 1 Ret O .E. 13 34, 000

33, 000

32, 000

3 1 , 000

30, 000

30 Dec7 14 21 23 Jan4 11
Chart created b y Dynamic Trader (c) 1 996-2001

AOL has continued down, and has decisively taken out that last swing-low.
We are now likely out of the ' nether region' . I can ' t say for sure, because I
am basing this on my 'guideline' , and not on a look at my favored trailing
stop technique, to see if that appears to be ready to use. I usually have the
favored trailing stop technique, or perhaps techniques, already on a chart,
watching for them to stabilize and begin to represent the price action.

I will be watching the price action and the ' nether region' guideline as things
progress. I will usually know a bit in advance when and where things are
most likely going to come together. We are at the area where I would expect
that I could now leave the ' nether region ' technique, and move on to my
trailing stop and scaled exits management technique.

1 72
I ' ll finish with a 1 30-minute chart of AOL, showing the moving averages
used for the trailing stop and scaled exits technique that I will present in
Chapter 9. See figure 8. 1 4.

Figure 8.14

::::'. AOL 1 30-1 Be tI

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Chart created by Dynamic Trader (c) 1 996-2001

I ' ve highlighted with an arrow the approximate area where the last chart left
off. I ' ve also put a vertical line on the chart, so the reader can follow that up
and look at the moving averages at that point. Notice how the moving
averages have all lined up and are now progressing down together uniformly
at this point. The time has come for me to move out of my ' nether region'
management, and into the final trailing stop and scaled exits management
mode.

1 73
How I do that, and all of what is on this chart (including the reason why I
chose a 1 30-minute chart), will be fully explained in Chapter 9 . I just
showed this now so the reader can get some perspective on the 'nether
region' , the area where it ended, and the area where the final management
phase began. I suggest that the reader mark this page and return to look at
this chart after reading Chapter 9. I think it would be instructive to see the
difference in what can be seen in the chart then versus now.

Before I conclude this chapter, I want to add one more thing onto the chart,
and briefly discuss that. See figure 8. 1 5 .

Figure 8.15

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I ' ve added a trendline onto the chart. I didn' t choose any of the lower swing­
high points after the first anchor point, but instead I chose the two 'highest'
points. This is not an uncommon way to form a trendline. What I am trying
to show here is the stability of the price behavior. I use a various assortment
of techniques to determine when I feel I am past the 'nether region' , and
likely into smooth, more trending price action.

1 74
Sometimes the price action never settles down, and using my favored
trailing stop and scaled exits techniques is not even possible. In most cases,
though, the wildest swings seem to happen in the initial phases, and once all
the 'in-fighting' is done and the directional battle is won for the time being,
a much smoother trend emerges. That ' s the point that I can move to the last
phase of my management plan.

Sometimes a trendline can add some useful perspective to the chart for me. I
especially prefer to add that line once I feel that I am close to exiting the
'nether region' and entering the final phase of the management plan . It' s just
an observation that has helped me, and I wanted to pass it on to the reader.

We will now move into another section of the book, and into the final phase
of my management plan. The 'nether region' is now past history, and the
trade is well into the theoretically profitable area. I can now move to the part
of the trade that I like the best, managing a winner using a trailing stop with
various scaled exits. We will look at a specific way that I do this, and I will
be presenting the technique in this book for the first time anywhere.

1 75
 Section III

After the Trade Starts Moving

1 77
 Chapter 9

Trailing Stops and Scaled Exits

At this stage of the game, the trade has really started to move in my favor. A
very distinctive swing is under way, and I would have a solid profit. I am
now in the position to implement my trailing stop methodes), as outlined in
Kane Trading on: Trailing Stops. I am not going to redo the work that was
done in that book. I am, however, going to make the assumption that the
reader is not only familiar with the methods in that work, but also well
versed in them.

I also covered scaled exits in the trailing stops book. So, what does that
leave for us to do here? Well, I am going to go into more detail on scaled
exits, and also introduce another trailing stop technique that I use quite a bit,
as it is a blended technique with a scaled exits technique. I will also be
discussing some comments I made in the trailing stops book with regard to
profit targets, as I think that needs some clarification. Once done with all
this, we will be nearing the end of our journey.

I ' ll start by clarifying something I said about profit targets in Kane Trading
on: Trailing Stops. I frequently state on the Kane Trading website that I
don ' t use 'profit targets' . As I have mentioned many times, this tends to
literally mortify most readers. The use of 'profit targets' is so deeply
engrained in just about every trading methodology taught (and used), that it
is just incomprehensible to most people to imagine a 'Trading Plan' without
them.

Now given that I am, for the most part, dead set against 'profit targets' in my
own trading, what did I say in Kane Trading on: Trailing Stops that requires
clarification? Let me quote a passage from that book:

"Trailing stops are a very important part of my trading plan. They allow me
to let a winning trade run, letting the market action decide on when to take
the trade off, as opposed to pre-deciding when to take profits. That is not to
say that I ' m opposed to profit targets, in fact I use them quite a bit. On the
other hand, though, I almost always prefer to let at least some portion of my
trade run, with a trailing stop following behind it.

1 79
I have found, for my own trading, that a combination of profit targets and
trailing stops work best for me. Traders have to determine for themselves
what works for them, and their trading plans. Some traders may like to use
profit targets entirely, while others may prefer just using trailing stops. Still
others may like a combination of both techniques, and some may not use
either technique. The point is to determine what works for you. I can only
present what 1 prefer."

Unfortunately, after writing extensively on the website since that passage

was written, and answering almost endless e-mail inquiries, I now see how
that passage does not do an accurate job, in my opinion, stating what it was I
was trying to explain. I will attempt to correct that here, before we get to
techniques that are based on my concepts in this area. I ' ll start with my
definition of 'profit target' , as I use it, with the single quotes around it.

For me, a 'profit target' is a price objective that, once reached, triggers a
closure of some part (or all) of the trade. This closure occurs regardless of
the price action, or any observations made about the market. In many, if not
most, cases, a resting order is already in the market that will automatically
trigger if that price objective is hit. In this sense, I do not use 'profit targets'
at all. I agree that this type of 'profit target' may be necessary for certain
types of ' scalp' methods, but I trade swings.

I may trade many different types of swings, but I ' m just about always
trading some type of swing. I explained in Kane Trading on: Trailing Stops
how I make sure I have defined exactly what type of trend (and hence the
swing) I am trying to trade, before I initiate a trade. My style is to play the
various swings, and then when they tum around, to be taken out with a
trailing stop, or most often, a 'layered' assortment of trailing stops. In each
case, though, I don' t take any part of the trade off until the issue triggers me
out by moving against me.

1 80
With a 'profit target', the trader takes the trade off even if it is rocketing in
the trader' s favor at that very instant. This makes no sense to me. The
argument is that with my method, something will have to be given back in
each case, while waiting for the issue to tum and go against the trader to
some extent. This is 1 00% true. I have just found that for my trading, I feel I
catch more net overall by letting the trade run than I give back in total by
capping a trade at a certain set point. Each trader has to work things like this
out for his or her own 'Trading Plan' . I can only say what I do, and why I
feel it works best for me.

Now, with all that said, what did I mean in that passage from Kane Trading
on: Trailing Stops, when I said that I actually use a combination of 'profit
targets' and trailing stops? Well, what I generally do is create a plan for a
specific trade that blends an attempt to catch several different possible
swings that I think might unfold. As mentioned in Chapter 7, there is no
doubt that these are, in reality, totally separate trades. I just see multiple
opportunities shaping up at the same time, and I want to attempt to capitalize
on them at the same time.

If there weren' t execution and other issues, I could very well trade them in
separate accounts if I wanted to. An example of what I ' m saying is that
perhaps I want to trade a first thrust off the potential trade area, and I want to
trade the entire swing, riding out the ' small' pullbacks (as defined in Kane
Trading on: Trailing Stops). I have one trailing stop method for the first
thrust and one for the entire swing. They may be something like a 5 or 6-
period simple moving average trailing stop on the traded timeframe for the
first thrust, and a 34-period simple moving average for the entire swing.

Since I have an idea where I think the first thrust may go to, I tend to let the
trade 'breath' with respect to my trailing stop, until thi s ' area of expectation'
is reached. I then let the trailing stop do its thing, until it takes me out. This
is what I didn' t explain well enough. I made it sound like this 'area of
expectation' was my 'profit target' , where I simply then closed the trade. I
meant that like another trader has his or her profit target, I have areas that I
think things may happen, and at that point I may use a trailing stop to scale
out of some of the trade, if the trade reverses and hits the stop.

181
The big difference is that I almost never take a trade off without a price
action related signal . In the way I used the term in the passage, that was a
'profit target' . Now, on parts of the trade that I use a trailing stop technique
that is designed to catch an entire swing on the traded timeframe, I rarely try
to come up with any idea where it may go. I find 'full swings' a lot harder to
get a good estimate on. I have gone up to a higher timeframe and applied the
same studies I do to determine a first thrust off a pattern, but I rarely use this
to 'tighten up' my trailing stop.

Instead I just let the stop work, and when it tells me to close, I do. My
studies are focused on choosing the right trailing stop variation for that issue
at that time, given the layout of the setup. This is what I referred to in the
passage as the trailing stops part. I think this should clear up what I meant,
and point out how I don' t use 'profit targets ' , as I just defined them, pretty
much at all in my trading. As I discuss scaled exits a little bit more in this
chapter, I will choose an example that blends the two approaches.

At this point I will move into the new technique that I mentioned. This is a
blended technique between trailing stops and scaled exits. It is the most
common method/variation that I use right now at this point in my trading.
On the Kane Trading website I have commonly said that I will be 'scaling
out on the way down ' in a long trade, for example. The idea is that as the
trade goes more and more against me, I start to take more and more of the
trade off.

To accomplish this I use a series of moving averages, usually on the entry

timeframe. I adjust the moving averages to what I learn from my
observations, usually from the traded timeframe. I am not actually managing
on the entry timeframe so much as I am watching the entry timeframe for
cues that would come from the traded timeframe. Let me explain, as that
may be a bit confusing.

Let' s say that I am planning to try to catch a first thrust off a pattern, on the
traded timeframe. I decided that a 6-period moving average was a good
guide for this purpose. I might opt to watch this on the entry timeframe,
though, with a longer period moving average. If the entry timeframe had five
times the data (such as a 3-minute entry timeframe and a I 5-minute traded
timeframe), I might use an average with five times the period length. In this
case, then, I would try a 30-period moving average. The idea is based on the
traded timeframe, but I monitor a close scenario on the entry timeframe.

1 82
Now, why would I bother to do this if the scenarios are roughly equivalent? I
came up with this idea because I want to scale out on a 'gradient' . I want to
'layer' some moving averages, and scale out as each average is breached.
This is a way to set up a gradient that will alert me at subsequent levels that
the trade is continuing to go against me. Instead of just taking the trade off at
one point when a certain condition is met, I want to scale out across a
gradient.

This will make a lot more sense, I think, when visually demonstrated. B efore
I show an example, though, let me fill out the details a bit more. If my
thinking was, in this case, to scale out on a S-period moving average on the
traded timeframe, and the entry timeframe had three times the data, my
'base' moving average would be a I S-period. I would then also use several
multiples of that I S-period, such as 30 and 45 . I sometimes, but not too
often, also use a 60. This looks a lot like what some call 'moving average
ribbons' , but the use is totally different.

Notice that it doesn ' t matter what the traded timeframe is, what the ratio is
between the traded timeframe and the entry timeframe, or anything else of
that sort. I apply this technique in any and all situations if I see fit. In fact,
the technique doesn' t need to be applied to the entry timeframe at all, and
isn ' t tied in any way to anything about the entry technique or timeframe.

I have had situations where the traded time frame was the daily timeframe,
and I opted to use the 60-rninute timeframe for the entry timeframe. I found
the 60-rninute timeframe 'too far away' from the traded timeframe, and too
'noisy' , for management on that particular issue at that time. Recall that I
like to use 60-rninute entry timeframes with daily traded timeframes because
of its popularity, even though it has 6.5 times the data, instead of my
preferred 3-5 times the data. For applying the technique we are looking at
here, I frequently use I 30-rninute charts (three times the data as the daily
chart).

The point is I do the same thing that I do with all my trading. I experiment
and study the individual issue, and decide what I think is the best technique
to use, and what parameters best represent the situation as I read it at that
time. I can show some examples here, but they are extremely specific to my
trading goals and my read for that issue at that specific time. What I want to
present is the general concept, so that the reader can study it and experiment
with it, and see if it may be of any use to him or her.

1 83
For this example, let ' s say I am watching the action of the ES after it has
come off the pattern that we have been discussing in the previous chapters.
Let' s take a look at this at the point where I am seeing a potential setup.
First, we' ll review the chart on the I S-minute timeframe. This chart is
captured at a time just a bit past the chart shown in Figure 6.36. See figure
9. 1 .

Figure 9.1

:::-:'. E S 03H 1 5-1 rn:;J �

FeblOm 1 1t
Chart created by Dynamic Trader (c) 1 996-2001

In this example, I am going to use the I S-minute chart as my 'context'

timeframe. In thi s series, let' s say that I am going to try to trade the
individual thrusts on this timeframe. I will use a 3-minute timeframe for my
traded timeframe. The trade premise is that there is likely going to be
continuation of the trend off the pattern, and I want to try to trade each thrust
separately, on the 3-minute timeframe.

We' ll assume I have set up a grouping, and that I am expecting the trend to
reassert itself back down somewhere right in here. I don' t want to focus on
the setup or entry. I want to jump right to the management phase.

1 84
I 'll move to the 3-minute traded timeframe, and take a look at that. See
figure 9.2.

Figure 9.2

;:-:. E S 03H 3-1 J'II!S S

1) <- IllJ )l!!

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Chart created by Dynamic Trader (c) 1 996-2001

The arrow points to the original potential trade area on the I S-minute chart.
The ES formed a nice ABeD pattern with a very tight grouping, set up to
continue the move off the original pattern. As I said, I don' t want to focus on
the setup; I want to focus on the management once the trade has progressed
for a while. I show this now just so the reader has an idea how a particular
move may be traded from many angles, and how each angle would require a
totally different management plan on my part.

1 85
Let's jump ahead now and see what happened from here, on thi s same
timeframe. See figure 9.3.

Figure 9.3

�
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;,:, E S 03H 3-1

�t�\\� /
�m �

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The ES dropped quite sharply off the ABeD pattern/grouping. Now, with
hindsight, it might be easy to decide how to manage this one, perhaps even
choosing to manage it on this traded timeframe. Keep in mind that it is my
studying of the moves that I see in the issue that I am trading, though, that
guides my manage choices. Each move is different, of course, but it gives
me an idea of 'typical' .

1 86
Before we get to the new technique, I'll show a typical management of this
move, based on what I presented in the scaled exits chapter of Kane Trading
on: Trailing Stops. I'll stay with this 3-minute timeframe. See figure 9.4.

Figure 9.4

::.� ES 03H 3-1

§�, :�B� ��!Iftfu
es D
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I ' ve added S and I S-period simple moving averages. Recall that I discussed
in Kane Trading on: Trailing Stops how I might use a S or 6-period moving
average to trigger scale outs on thrusts, and a longer period moving average
to trigger closing the remaining amount of the trade. I usually use a 20-
period or higher moving average for the latter part, but in this case the ES
seemed to be trending well with a I S-period moving average lately. When it
has more 'choppy' pullbacks, the I S-period would be too short for me, and I
may use a 20 or 2 I -period moving average.

1 87
Now, given what I said the plan is where would the scale outs happen, and
the final close of the trade? Let me add some arrows onto the chart, and
we'll discuss this. See figure 9 . 5 .

Figure 9.5

===�F=== §3':1�� �6!difu

:':. E S 03H 3-1 es tJ
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Working our way down the chart, every time I get a close above the shorter
period moving average, I scale out of some of my position. I generally scale
out in fifths, or 20% at a time. Once I scale out of a part I wait until a new
low is set, usually a new low that is more than just 'nominal ' . I wait until a
new low i s set, or the longer moving average triggers me to close the entire
position.

In the case of the third arrow down from the start of the downtrend, the new
low is nominal, and a scale out there would be a judgment call. I would be
watching the time and sales, the volume, various sectors, indices, and key
stocks, among other things, and I ' d call that one based on my read at the
time. Following this, the fourth arrow is another straightforward scale out,
and the final scale out is on the bar close above the I S-period moving
average, at the fifth arrow.

1 88
What we have done here is pretty much straight out of Kane Trading on :
Trailing Stops, but I feel the review is necessary to see how what I am going
to present now differs from this. I got to thinking that perhaps it doesn 't
make sense for me to do the scale outs on the way down, as this example
shows. Even though each thrust is maximized to a good extent, it' s hard to
be sure this is the best procedure. It occurred to me that perhaps I would be
better off, in many cases, to start the scaling once the indication was that a
potential reversal point was most likely in.

I don' t want to wait until I can 'confirm' the reversal, because then I would
be giving back more than I would be willing to give back. If I were able to
wait until the run had likely ran its course, though, and then give back what I
considered a reasonable amount, well, that might be a good plan. I started to
experiment with different moving averages, adjusted to each issue, to see
what I could find out.

(Understand that the discussion at the beginning of this chapter was

background on some of my thinking up to this point. Going forward from
here I will present the development of the 'finalized' , current version that I
am using at the time of this writing.)

1 89
In a case like this, I looked at 1 0, 1 5 , and 20-period moving averages. Let ' s
see what that looks like. For now, I ' ll remove the 5-period moving average.
See figure 9.6.

Figure 9.6

::::. E S 03H 3-1 1S[;1 D

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I left the arrows on the chart to show the previous scale out points. In this
case, all the scale outs happen at the bottom right of the chart. I might be
doing a single scale out just past the first arrow, but that ' s a separate issue. I
have come to learn, once I started to experiment with this approach, that if
I ' m trading for the swings I must really let them develop, and not use this
method until the moving averages were well aligned.

Depending on the setup and the assessment of the setup, this area of the first
arrow is likely still in the 'nether region' , and it' s too early for starting the
trailing stop/scaled exits management phase. Hence, I am still managing at
that point with the 'nether region ' technique.

1 90
Given that, the procedure is to take 20% of the trade off when the first
moving average is breached, which I define as a close above the moving
average or a strong thrust through the moving average. I then take off
another 20% when the next moving average is breached, and the remaining
amount when the final moving average is breached. As the trade goes more
against me, I take more of the trade off. In the last chart only the second
moving average is breached, with the third moving average very close, but
not breached at this time.

This style has the advantage of starting the scaling out once it is likely that
the run has reversed. Many times one or two of the moving averages are
breached, and then the trend resumes. I will explain what I do in a case like
that once we get to the 'full version' of the new technique. So far, I am
presenting what my thinking was, and how I evolved to this technique. I was
thinking that I sometimes like to manage on a lower timeframe; as long as I
do it within the guidelines of the traded timeframe i .e. I don ' t micromanage
down lower, as I mentioned.

I decided to look at the same thing that we just looked at, but on a lower
timeframe, adjusting the moving averages for the difference in timeframes.
So, if the lower timeframe had three times the data, I chose moving averages
three times as long in period. In this case I was using 1 0, 1 5 , and 20-period
moving averages. In order to really let the run get going, and to scale out 'on
the way up' (in the case of a short trade), I 'skipped' the 5-period moving
average.

If I were to go down to the I -minute chart, I would want to try 30, 45, and
60-period moving averages. Now, these won ' t be exactly the same as what
happens on the 3-minute chart, but they will be close approximates, in my
expenence.

191
Let me show the 1 -minute chart. See figure 9.7.

Figure 9.7

:':. E S 03H 1 -1 !rm F.:J

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Down on the 1 -minute chart a scaled exit was triggered at the first arrow,
and again at the second, third, and fourth arrows, counted along the trend.
Now, why wasn' t an exit triggered with the second bar close above the
moving average just past that first exit? This gets into the specifics of how I
have chosen to work this technique. Recall that this is the area that the first
study, with the 5-period moving average, also wanted to do a second scale
out.

So, is it that the new low was nominal, and I opted not to take the scale out?
No, not exactly. Here ' s what I do. I take a scale out with the first moving
average. Then I don' t take another using that moving average again, unless a
significant new low (or high for long trades) is set. Otherwise, I won' t scale
out until the second moving average is hit. Once a significant new low is hit,
I 'start over' , scaling out as each moving average is hit. That ' s why the three
arrows stack up at the bottom right hand side of the chart.

1 92
The ES closed above the 30-period moving average, and that triggered a
20% scale out. It then breached the 4S-period moving average, and triggered
another 20% scale out. Finally, it breached the 60-period moving average,
and triggered the remaining amount left on the trade to be closed. In this
case 40% of the initial amount of the trade would still have been open.

Now, what observation comes quickly to mind here? For me, it' s that this
technique is usually a bit more ' sensitive' than using the moving averages on
the traded timeframe. That' s why, in my opinion, it started a scale out
midway through the trend. And that leads to some interesting thoughts. How
about experimenting with various moving averages, and styles of moving
averages?

1 93
Let ' s change this one to exponential moving averages, and look at that. See
figure 9.8.

Figure 9.8

::':. E S 03H 1 -1 �r;J �

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I left the old arrows from the simple moving average chart, for comparative
purposes . Notice how the exponential moving averages seem to 'track' each
other a bit better. They also don' t trigger that early scale out. Everything
happens at the bottom right hand side of the chart. This looks like a
significant improvement here. But is it specific to this one trend on this one
issue? It might be.

This is where traders have to do their own research, with the issues and
timeframes that they trade, all studied within the 'context' of their own
unique 'Trading Plan' . Only then, I believe, can it be determined how much
of the results are likely 'curve fitting' , and how much are not. For me, I have
done my research, and I have the parameters that I like to use for specific
situations. I don' t try to 'over-optimize ' .

1 94
I have what I consider a good working set of parameters, and although I like
to play with them in the 'off hours ' , I don' t get too carried away. The point
is this is not a technique that I would set up and 'back-test' extensively,
looking for the best parameters. At least for me, I don' t see a lot of benefit to
trying to 'over-optimize' the technique.

Don ' t get me wrong, I do believe it should be studied, and informed

decisions made as to whether it may be of any use. I ' m just saying that once
I figured out how best to use it, I didn' t 'grind it into the ground' trying to
make it work a tiny bit better. I found that if I improved it here, it was a little
less effective there. For my trading, the 'sweet spot' is close to what we are
seeing in these examples right now.

Before I show a few more examples, let me discuss a bit more the idea of
experimenting with various moving averages and variations of the averages.
This is different than experimenting with various periods, trying to find what
captures the 'typical ' move that you are trying to catch. I mean, experiment
with simple, exponential, weighted, volatility based, and so on, varieties of
moving averages, as well as not just moving averages based on the bar close.
Look over high/ low/close average, as well as any other variety that your
charting package will allow.

I have pretty much tried them all, and have my working guidelines. I am not
going to say specifically what they are here, but not for the reason that you
may think. There is nothing special whatsoever about the parameters that I
use, and they are very close to what we are looking at with the examples in
this chapter. My thinking is that if I say exactly what I use, some readers will
be tempted to just copy me.

My intention with all my works is to educate traders, and help them work on
their own specific trading skills and 'Trading Plan' . I want the reader to
work on this, study it, make a determination if it may be of any use, and if
so, with what parameters. It' s imperative that this material be 'worked with ' ,
not just used. I never want anyone to 'just use' anything they find i n my
material. I want him or her to work with it and get familiar with it, and see
what can be learned from it. I have provided the launch point, and that ' s all
that should be needed. It's the idea of what I do that I think is key.

1 95
Let' s look at a few more examples of the application of this technique. For
me, it' s a straightforward management method, and it shouldn ' t take more
than a few more examples for it to be quite clear.

B efore we move on, though, let ' s see how good of a job this technique did
pointing to the end of the trend in this last example. See figure 9.9.

Figure 9.9

12w
Chart created 1 996-2001

The trend was surely over at the point the technique started to trigger the
exits. The ES trended up, and then went into a big time chop mode. No
doubt about it, for my trading, the technique signaled the exits for me in a
very optimal place. I don ' t expect results this good all the time, but in many
cases I see the technique point to as good of an exit as I could realistically
expect. This technique is my most favored method of management at the
time of this writing.

1 96
As this chapter progresses I will occasionally throw out some remarks about
the technique we first reviewed, and some of the other techniques in Kane
Trading on: Trailing Stops, in comparison to this current technique, as far as
my preferences. In most cases, when the market is trading in a manner
conducive to my trading style, this current technique is my technique of
choice.

1 97
Let' s look at an example in S . This stock, and its move off the area we will
look at, was used as an example in Chapter 8 in Kane Trading on: Trailing
Stops, to demonstrate the adjusting Fibonacci trailing stop technique that 1
devised, and the .786 trailing stop technique. There are some interesting
ways to look at this, so 1 will apply what we are discussing now to this same
example. See figure 9. 1 0.

Figure 9.10

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Chart created by Dynamic Trader (c) 1 996-2001

The arrow points to the potential trade area (I left enough data on the chart
so that the reader can also see the incredible 5-point pattern setup based on a
larger scale chart, such as a weekly). S has started to move off the area, and
at this point I ' d be in the 'management phase' . What 1 want to look at here is
what my set of trailing stop moving averages would look like on a lower
timeframe. To stick with a 3 to 1 ratio of data, 1 want to look at a 1 30-minute
chart, since the traded timeframe is the daily chart (which has 390 minutes
of data).

1 98
I have found that this technique, with the parameters that I prefer to use,
works best for me when I use a 3 to 1 ratio in the timeframes, from the
traded timeframe to the timeframe for this style of management. Although
the moving averages can simply be adjusted for whatever ratio is chosen, I
find that the 'sensitivity' increases as the ratio gets larger, and it becomes
more prone to inappropriate stop outs. The lower timeframe moving
averages become less like the original averages from the traded timeframe,
the larger the ratio is.

1 99
Let ' s see how S looks on the 1 30-minute chart, with the moving averages
added on. See figure 9. 1 1 .

Figure 9.11

::::'. S 1 30-1 �J;J �

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In order to mix things up and show different variations of the moving

averages, this time I used the typical 30, 45 , and 60 period moving averages,
but I went with simple, using the lows. As I do the examples, don' t get the
impression that I vary the style and type of moving average from trade to
trade, or issue to issue.

I tend to use the same parameters, with the exception possibly of the period
lengths, for most of my trading. I am ' mi xing it up' here just to give the
reader a more varied look. I have discovered that the differences tend to be
fairly minimal anyways, and once I found what I liked best, I mostly just
apply it.

200
So, what do we see here? Well, there are quite a few things for me to point
out. This should prove to be a very instructional example. The first thing I
want to show is the approximate point where I could begin to implement this
management technique. Take a look at the chart, and decide on the point
where you think the moving averages have started to stabilize and are
stacking nicely. This is the first point at which I would consider moving over
to this technique.

Let me highlight the chart with the area where I would be thinking about
switching. See figure 9. 1 2.

Figure 9.12

:::':'. S 1 30-1 Be E:J

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Chart created by Dynamic Trader (c) 1 996-2001

Notice that the point I chose is perhaps later than expected. I need to see the
longest period moving average starting to turn up, and a somewhat uniform
spacing developing between the moving averages. Notice, too, by following
the vertical line up from the lower arrow near that line to the upper arrow, it
is clear just how advanced the price action is at that point. Without the
vertical line my eye tends to almost look to the left and think the price action
is not where it actually is.

20 1
This wouldn't happen in 'real time ' because the current price action is
unfolding and will tend to be focused on, but when studying examples, this
is a 'trap' to watch out for. I try to stay aware of when the moving averages
are lined up properly for me, and where the price action actually is at that
time.

Before we move on with the analysis, let me show this same chart with the
moving averages being calculated exponentially, for comparative purposes.
See figure 9. 1 3 .

Figure 9.13

:.:. S 1 30·1 189 �

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Chart created by Dynamic Trader (c) 1 996·2001

Notice how the exponential moving averages tend to stabilize quicker, and
allow the technique to be used sooner. That is definitely one advantage that I
have found in using the exponential moving averages. On the other hand,
perhaps switching to this technique quicker is not in the best interest of the
management plan, though. Each trader has to work this out for him or
herself, in the 'context' of his or her own unique 'Trading Plan ' . Comparing
where each variation triggers one into this phase, compared with where the
'nether region' ends, might be a good place to start the studies.

202
Let ' s go back to the simple moving averages, and I 'll add some highlights to
the chart to aid the discussion. See figure 9. 1 4 .

Figure 9.14

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The two arrows on the upper right hand part of the chart show where all the
scaling is triggered to take place. It is important to see that until that point,
the moving averages indicated just staying with the trade. Also notice that a
small ABeD pattern may be shaping up in here, and if so, the trend may
continue off that. If it does, though, it would do it without the trader who is
using this technique as it is being applied here, since the position would now
be fully closed.

203
In order to see what has happened and discuss it in full detail, I need to get
closer to the action area. Let me zoom in on the area that we are looking at.
See figure 9. 1 5 .

Figure 9.15

:':. S 1 30-1 8m �

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Chart created by Dynamic Trader (c) 1 996-2001

Various traders may have played this one differently because of the
discretion that I have built into the technique. I scale out on a close below
each moving average. For example, if I get a close below the 30-period
moving average I close 20% . If I then get a close below the 45-period
moving average I close another 20%. If I get a thrust down and close below
the 45-period moving average in one shot, from above all the moving
averages, I close 20% for the 30-period moving average violation, and
another 20% for the 45-period moving average violation, all in one shot.

204
I also have the criterion, though, that I may close the trade on a vigorous
thrust below the longest moving average, without waiting for a close, if I see
fit. I am generally watching a lot of market aspects and I weigh these into
my read for a closure like this. Since this is discretionary, different traders
will react differently. At the first arrow it may have been that I would have
closed the entire position. That was a very strong thrust down, on a big gap
opening. If l followed the rules ' strictly' , and didn ' t have the thrust bar
criterion, I would not have taken any of the trade off.

If that were the case, what would then be my procedure? Well, just look at
the moving averages and the price bar closes shortly after this reversing
thrust bar, as S approaches the second arrow. There are successive closes
below each of the moving averages. My approach would be to scale 20% on
the close below the 30-period moving average, another 20% on the close
below the 4S-period moving average, and close the remaining 60% on the
close below the 60-period moving average. This would have the trade
completely closed out at the point the last chart was captured.

Overall, thi s looks like a great trade, with great management, which caught a
nice run. Is that my assessment? My answer to that is: it totally depends. It
depends not as much on what happens from here, as it does on what I was
trying to do off the potential trade area. Was I playing for the first thrust off
the pattern? B y this, I mean the first full thrust visible on the daily
timeframe. This is not to be confused with the 'initial thrust' discussed
before. The 'initial thrust' is usually more like a wave I of this latter thrust I
am discussing now.

205
If so, to assess that I need to look ahead and see if I felt my technique did a
good job with this. I ' ll add one more price bar of data onto the chart, and
assess what that shows us. See figure 9. 1 6.

Figure 9.16

:.:' S 1 30-1 ISS It:J

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Chart created by Dynamic Trader (c) 1 996-2001

Now, there is no way, if my goal is to ride just the first full leg off the
pattern that I would want to be in here any longer. I do see an ABeD pattern
coming together, but that is really irrelevant to my initial trade plan and
premise. I might use this as another potential trade setup, but riding it out to
see if that setup plays out is beyond the scope of an initial plan to catch the
first leg of the uptrend. So far, I think the selection of management plan was
a good choice for my defined goal.

206
I ' ll add some more data onto the chart, and we' ll see what happened from
here. See figure 9 . 1 7 .

Figure 9.17

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Chart created by Dynamic Trader (c) 1 996-2001

It does look like S is reacting to the ABeD pattern. Even if it does, though,
my choice of techniques has still done exactly what I asked it to do. In my
opinion, it i s critical to define what you are trying to do. This is a key part of
my methodology. I can ' t be switching trading plans in the middle of a trade.

207
 \
I ' ll add some more data onto the chart, and we'll keep assessing, until we
clearly see what is taking place. See figure 9. 1 8.

Figure 9.18

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� /
I just don' t need to see any more to know that my plan did the right thing for
me in this situation. It should do the right thing, because I designed it to do
just what it did. The trend thrust has stopped, and S, on this timeframe, is

/
now consolidating, or moving sideways. I play trends, and the trend has
stopped. The technique did the right thing for me.

The question now arises, though, is that it? Is there anything more to learn
here? Oh, we are just getting started with this one. The key thing to
remember about this whole method is what are the timeframes, and what is
the desired move that I am targeting? This may not be obvious yet, but with
time it should be. I am down on a lower timeframe, managing thi s trade
using the set of moving averages that I have decided on. That ' s all fine and
good, but what are they set up to catch? They are specifically targeting
something. Just what are they set up for?

208
This is the key here, and why I say to never just copy anything I do. Do your
own work, and find what, if anything, from my material helps you and your
'Trading Plan ' . These averages, worked on this lower timeframe, are set up
to catch a smooth trend off the potential trade area on the traded timeframe.

By smooth, though, I mean a full first thrust, a larger scale wave 1 off the
pattern. Once the initial wave starts to correct, the technique will take me
out. It seems to have done that quite well . But that ' s all it was designed for.
Not every trade, or trader, may want that as the plan for this trade. And if
not, it requires a different application of the technique.

Let's look at what S fully did off that potential trade area. See figure 9. 1 9.

Figure 9.19

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Chart created by Dynamic Trader (c) 1 996-200 1

The first arrow points to the potential trade area. The second arrow
highlights the approximate area where the trade was closed in the last
example. It i s clear that the technique did a great job catching that first ful l
thrust off the potential trade area, the 'wave 1 ' . Given the parameters o f that
technique, it did all it could do, and I feel it did it quite well .

209
The question arises, though, what if the trader wanted to play a different
move? Recall from Kane Trading on: Trailing Stops how I emphasized
knowing what swing, what trend, you want to play. The trader may have
decided that he or she wanted to sit through pullbacks during an ensuing
trend off the potential trade area, as opposed to trying to catch just the first
wave.

It is interesting to note that this would be similar, in my opinion, to looking

at the daily chart here as the 'lower timeframe' in a sense. Hence, the
technique that we just used on the 1 30-minute chart could be applied directly
to the daily chart. In doing so, the traded timeframe would be a higher
timeframe, and at least for me, that would need to be justified by the chart
pattern and setup.

In keeping with the 3 to 1 ratio of traded timeframe to management

timeframe that I like to use for this specific technique and parameters, this
would imply a traded timeframe of three days per bar. Many traders would
just move up to the weekly chart, but I would want to do an assessment on a
three days per bar chart, to see if that timeframe met the conditions I laid out
in Kane Trading on: Multiple Timeframes and 'Context' .

Let ' s assume this is the case, and that the daily chart is an acceptable
management timeframe for a trade off this potential trade area. I tend to
think this is the case. There can be many ways to trade various swings based
on my methodology, as long as it is clear what the 'context' is, and what it is
that is trying to be played.

2 10
I ' ll add on the moving averages, as I did in the previous example, this time
to the daily chart. See figure 9.20.

Figure 9.20

To:, S 0 -0 sr;U:'1

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Notice that this setup indicated the first, single, scale out at the second
arrow, the area of the entire trade closure in the previous example, if the
method was implemented at that point. In playing this off a higher timeframe
I don' t think the technique would be implemented yet at that point, though.
There was another single scale out triggered when the shortest period
moving average was breached about three-fourths of the way up the chart,
and so far, that' s it.

21 1
Let' s move ahead two more price bars, and assess. See figure 9.2 1 .

Figure 9.21

To:' S 0 -0 �m £1

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S has started to drop rapidly. The trade would now be entirely closed, based
on a bar close below the longest period moving average. How and when any
scale outs might have been done before this would be somewhat
discretionary, due to the 'plunging' nature of the price action. Regardless of
what choices were made, it would all be somewhat 'academic' in short
order, as the price action was pointing right at full closure of the trade in a
very short time from the decision making point.

212
Nonetheless, let's take a close up look at that final area, and discuss what we
are looking at. See figure 9.22.

Figure 9.22

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The arrow shows the area where there was a bar close below the upper
moving average, hence triggering a single scale out. As I said, I tend to scale
out in 20% increments. Now, once the top right of the chart was reached, the
action heated up very quickly. The first 'plunge' bar down closed, again,
below the upper moving average.

As I discussed previously, sometimes I skip scale outs at the same moving

average breach, choosing instead to wait until the next moving average is
breached. In a sense, I act like a scale out at a particular moving average
'uses it up' for scale outs. I tend to do this when the breach occurs soon after
a previous scale out at that moving average. If a substantial new high (or low
for shorts) is set - especially if the trade has moved a fair amount, has a lot
of profit, and the trend is somewhat smooth - I tend to take triggers at the
. .
same movmg average agam.

213
In this case all those criteria would have been met, so I would scale out of
another portion on that bar close under the top moving average, especially
given the bar characteristics. I would have to have been live, though, reading
the market action, watching all the things that I watch, to decide if I would
have closed on the breach of the middle moving average, based on the
continued plunging nature. My sense is that I would have. On the close
below the lower moving average the entire trade would be closed out,
regardless.

Let me show one more thing, and then I ' ll make some concluding remarks
about the management on this one. See figure 9.23 .

Figure 9.23

:':. S 0 -0 em E:J

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Chart created by Dynamic Trader (c) 1 996-2001

I switched the moving averages to exponential, just to get a look at what that
did, if anything. Notice how the area of the arrow no longer triggers a scale
out. The final management and closure were little affected. There are going
to be slight differences by varying all the different aspects of the moving
averages, and it will change the results in many cases.

2 14
As I said before, though, I try to come up with the best general parameters
that I can for my trading, and then just work with them. I don ' t get caught up
in continuously trying to 'optimize' them, and fit them to each situation. I
think that is a losing battle. Instead, I do the best that I can, up to the point of
diminishing returns on any additional effort, and then I just go to work.

Let me conclude this example by saying that once again, this technique did a
great job at catching a very sustained move. The trader' s choice of where to
apply the technique greatly varied the potential outcome. This is why it is
critical to know exactly what move is being played for, and what the
technical sense is behind such a trade premise. I have found this technique
simply awesome, when used with common sense, 'context ', and technical
merit in the trade premise.

I will finish this chapter with a simple, straightforward application example

in GOOG. This is a potential trade example I put on the Kane Trading
website before it completed the pattern. I have been following up on the
website since the reversal right at the pattern, discussing my management. I
have, however, not discussed it in the detail that I am about to present.

Since this book is my first presentation of this particular variation of my

trailing stop/scaled exits technique, I did not explain in the website
commentary exactly what technique(s) I was using, since the reader would
not have any reference work from me regarding that specific material . I will
present here, as close as I reasonably can, my management approach on this
play. The only slight variation is that I am not going to state the exact
parameters that I use, for the reasons already mentioned. What I will show
now will not vary in any significant way because of my specific parameters.

Before we begin, let me say that GOOG was a bit tricky in this case because
the pattern formed shortly after the IPO. There was not a lot of data to go on.
Deciding on the appropriate traded timeframe was a bit of a challenge. I
showed this on the Kane Trading website mostly on a 60-minute timeframe,
outwardly for convenience and reader familiarity. The daily timeframe was
way too long for the limited amount of data that GOOG had. I had to choose
a smaller traded timeframe. I opted to use two bars of data per day as my
traded timeframe. This equates to a 1 95-minute chart.

215
I don ' t feel that this timeframe quite fits the parameters I outlined in Kane
Trading on: Multiple Timeframes and 'Context' , but I had to compromise, I
felt, because of the limited data. Now, to apply the technique that we have
been covering to this example, I first have to decide what type of move I am
trying to capture. I decided that a move down on a lower timeframe, with my
'standard' of about three times the data, would be reasonable. My plan was
to let this run, but only to the extent that the technique we have been
discussing, on the lower timeframe, kept me in.

I decided to apply the technique to the 60-minute chart, which was very
close to a three to one ratio between the traded timeframe and the
management timeframe. This is how I came to show the 60-minute chart in
discussions on the website, from the standpoint of what I was doing 'behind
the scenes ' .

216
I will start by showing the initial pattern setup, two groupings, and the initial
reaction of GOOG to the setup, on a 60-minute chart. Understand, though,
that the traded timeframe is the 1 95-minute chart, and this is the
management timeframe. I am just starting here for convenience. See figure
9.24.

Figure 9.24

:.-:' 6 0 0 6 60-1 1E!J[;j �

1 1 2 , 000

1 1 0 , 000

108,000

1 06 , 000

1 04 , 000

1 02 , 000

1 00 ,000

----�=== �l,� b�

20f Aug 24t 25w 2&t 27f Aug 3H lw 2t 3f Sep 8w 9t 10

Chart created by Dynamic Trader (c) 1 996-2001

GOOG has reacted off the top grouping. It gave me an entry trigger in the
area of 1 00.50, and then another very strong one just over 1 0 1 . At the point
of this chart capture, the play was already starting to move aggressively.

2 17
I'll add the moving averages onto the chart, plus some additional data. See
figure 9.25.

Figure 9.25

::-:. 6 0 0 6 60-1 er;J �

1 1 2 . 000

1 1 0 .000

1 08 . 000

106.000

1 04 . 000

1 02 . 000

1 00 . 000

---�==== §7Im ���

20f Aug 241 25w 26t 27f Aug 3 1t 1w 2t 3f Sep 8w 9t 10f Sep
Chart created by Dynamic Trader (c) 1 996-2001

In this case, to keep things varied, I used exponential moving averages, but
stayed with using the low for the calculations. I have experimented with
calculating the moving averages with closes, OHL averages, OHLC
averages, highs, lows, and everything else I could come up with. Overall, I
see very little difference between all the choices.

About the only preference I can state is that lately I am leaning towards
exponential moving averages. In the 'early days' of working with this
specific technique I almost exclusively used simple moving averages. Again,
the reader needs to do his or her own studies and decide what, if anything, is
useful to his or her own unique 'Trading Plan ' .

218
Let's move ahead quite a bit on the chart, and discuss what is happening.
See figure 9.26.

Figure 9.26

:::', 6 0 0 6 60-1 ee S
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1 1 2 , 000

1 1 0 , 000

1 08 , 000

1 06 , 000

104,000

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----=====�== �a�91S ���

100,000

------==== �11� ���

20 27 Sep3 10
Chart created by Dynamic Trader (c) 1 996-200 1

GOOG is just rocketing away. This points to an issue that I want to mention
with regard to this technique. As I discussed in the chapter on blow-off
moves in Kane Trading on: Trailing Stops, if the move gets too far away
from the moving average(s) such that the moving average(s), or trendlines,
or whatever, no longer represents the price action, the technique is no longer
able to 'do its job ' . In a case like we are seeing here, I am right on the edge
of that.

GOOG is a wild stock, though, and I know that if I want to catch a big move
I have to let it move around a bit. I also know that I am down on a lower
timeframe from the traded timeframe, and things will look wilder here than
they actually are on the traded timeframe. Given that, I felt the best bet was
to just let this one work.

219
I ' l l add some more data onto the chart, and reassess. See figure 9.27.

Figure 9.27

:':. G O O G 60-1 �[;J �

1 20 . 000

1 1 5 .000

I t D .OOO

1 05 . 000

---====����== ��!�f9 �M>lym

1 00.000

----=== �1Im ImPg..�

20 27 Sep3 10 17
Chart created by Dynamic Trader (c) 1 996-200 1

GOOG came back down a bit, but didn' t even make it to the upper moving
average. It then thrust up again. The situation is the same as before, with
GOOG getting pretty far away from the moving averages. For my 'Trading
Plan' I have two obvious choices. I can just let it ride, or I can set a tight
stop on the run up, like a 5 or 6-period moving average, and scale out on the
thrust. This is back to what I outlined in the scaled exits chapter of Kane
Trading on: Trailing Stops. For now, I opted to ride it out and see what
happens.

220
I ' ll add some more data onto the chart again, and we'll assess what is
unfolding. See figure 9.28.

Figure 9.28

:;:� G O O G 60-1 !fr;J S

120,000

1 1 5 , 000

1 1 0 , 000

105,000

-----:=====���==� ��!m �� �
1 00 , 000

--�=
=== §1 1� ���

20 27 Sep3 10 17 24
Chart created by Dynamic Trader (c) 1 996-2001

GOOG has pulled back again, right to the upper moving average. This is the
area of the first scale out trigger. All in all, this would be a great run if
GOOG finishes here and signals further exits.

22 1
I'll continue with the process, adding some more data and assessing what is
happening. See figure 9.29.

Figure 9.29

::-:'. 6 0 0 6 60-1 8S �
135. 000

130. 000

1 25 . 000

120.000

1 1 5 . 000

1 1 0 .000

1 05 . 000

----==��",;""",=== §�M� �M>lt�

1 00 . 000
------ 97 ,m _�

20 27 Sep3 10 17 24
Chart created by Dynamic Trader (c) 1 996-2001

Well, GOOG is just on a run. After the clear single scale out trigger, GOOG
just exploded. It is now way, way above the moving averages. This has the
stop an unrealistic amount below the current price. I would not want to give
back something like fifteen dollars on a position like this . In a case like this,
I might set up a Fibonacci grid for this last thrust up, and scale out of some
more of the position as various l ayers are penetrated.

It is also possible that GOOG may go sideways for a while, as the moving
averages 'catch up' , and the 'problem' will resolve itself. It seems like if
ever there was a time to implement a scale out on a thrust, this is it. I
sometimes use a single bar low (high for shorts) violation as a trigger, or a
fixed amount stop, for a scale out.

222
Again, I ' ll continue with the process, and add some more data onto the chart.
See figure 9.30.

Figure 9.30

::!.. 6 0 0 6 60-1 �r;I �

140.000

1 35 . 000

130.000

1 25 . 000

120.000

1 1 5 . 000

1 1 0 . 000

1 05 . 000

t==='t::=
== =================== �M1I.l gtfplt�
100.000
�==:;:::====:;::=======:;::=======::;::======::;::======::::;:=-:: 9 7 ,m .!1..tWl
Sep3 10 17 24 Oct1 8
Chart created by Dynamic Trader (c) 1 996-2001

GOOG did continue up after that huge thrust without a significant,

immediate retracement back towards the moving averages. It continued to
trend for a while, and has now clearly triggered another scale out. In this
view, the moving averages look to be doing a good job representing the
price action.

223
I ' ll add one more price bar onto the chart, and we' ll assess the situation. See
figure 9.3 1 .

Figure 9.31

::':. 6 0 0 6 60-1 �J;J �

1 40 , 000

1 35 , 000

130,000

1 25 , 000

1 20 , 000

1 1 5 , 000

1 1 0 ,000

1 05 , 000

=' =================== §M'ftl �tfplt�

�!!!===
1 00 ,000

t==;;::===
Sep3
==;:::
10
==: ===;==
17
====::::;:==
24
====:::;:==
Oct1
=====;::=-
8
97,� -�
Chart created by Dynamic Trader (c) 1 996-2001

GOOG has triggered another scale out with a close below the middle
moving average. There has now been three scale out triggers, and if each one
was a 20% scale out, then 40% of the trade would still be remaining at this
point. This doesn ' t take into account that many traders, myself included,
may consider adding back on to the trade in various places, as potential
setups form. I will not go into that here, except to say that I don' t always just
scale out and that ' s that. There are times when I scale out and then add right
back on.

So, if I do that, why not just wait and hold that fraction? Because the action
i s moving against me at that time, and hence I want to lighten up. If it then
yields a setup and triggers an entry, I ' m looking at that almost like a separate
trade, and in I go. I just want it to be clear that sometimes my trading can be
a lot more 'dynamic' than these examples can show.

224
Let' s move on, and see what GOOG did from here. See figure 9.32.

Figure 9.32

145.000

140.000

1 35 . 000

130.000

1 25 . 000

120.000

1 1 5 . 000

1 1 0 . 000

1 05 . 000

�---------------------- " Me � �� 1 00 . 000

�:::;:==
:: ::::;:::
::; ==
:: ==:::;:==
:: ==::::;:==
:: ====;:::==
::: ==:::;:==
:: ==:::;=- "M at _�
Sep3 10 17 24 Oct l 8 15
Chart created by Dynamic Trader (c) 1 996-2001

GOOG again went on to new highs from that scale out area. This chart is
current as of the time of this writing, and the play i s still 'open' . It may be an
interesting exercise for the reader to duplicate this layout, follow up on what
has happened, and think about how I might have managed that, with the
additional data that has occurred since this writing.

(Final edit update: GOOG reported earnings shortly after the above chart
capture, and has jumped up to over 1 94 as this goes to press !)

225
Before I conclude this chapter, let ' s look at a few more things with this
example. I ' ll zoom in a bit on the chart, for clarity. See figure 9.33.

Figure 9.33

:':'. 6 0 0 6 60-1 B'S D

1 45 , 000

140,000

135,000

1 30 , 000

125,000

1 20 , 000

24 Oct1 8 15
Chart created by Dynamic Trader (c) 1 996-2001

The arrow shows the clear signal for the first scale out. The chart i s still too
compressed to get a good view of what happened in the area of the
additional scale outs.

226
I ' ll zoom in again on the chart, and focus on the second scale out area. See
figure 9.34.

Figure 9.34

::'-:, 6 0 0 6 60-1 1@IJr:;J �

1 44 . 000

1 42 . 000

1 40 . 000

1 38 . 000

1 36 . 000

1 34 . 000

1 32 . 000

130. 000

30t iF Oct4m 5t Gw 7t sF Oct 1 1m 12t 13w 14t 15F (

Chart created by Dynamic Trader (c) 1 996-2001

The upper arrow shows the trigger for the first scale out in this second area.
Given the immense move since the first scale out signal, I would want to be
using a breach of the first moving average as a trigger for a scale out. The
second arrow highlights the second signal, with a close below the middle
moving average. No other signals are present here.

Notice how additional closes below either the upper or middle moving
average have no meaning, as those moving averages are 'used Up' . It's a
'one signal per moving average' type of thing, until significant new highs (or
lows for shorts) are set.

227
I' ll finish with a look at the entire GOOG run on the 1 95-minute traded
timeframe, for reference. See figure 9.35.

Figure 9.35

:':. 6 0 0 6 1 95-1 ee £l
145.000

140.000

1 35 . 000

1 30 . 000

1 25 . 000

120.000

1 1 5 . 000

1 1 0 . 000

1 05 . 000

1 00 . 000

20 27 Sep3 10 17 24 Oct 1 8 1�
Chart created by Dynamic Trader (c) 1 996-2001

In this 'context' the run looks not only massive and quite impressive, but
also quite orderly for such a wild stock. Other than the one strong thrust up,
it' s just been a smooth, steady trend, well suited to my management
techniques. It goes without saying that runs like this are few and far
between, but when they occur, my management plan does a fantastic job
maximizing the run, in my opinion. And that is exactly what I have designed
it to do. It' s critical to my own personal 'Trading Plan' that I let my winners
run.

228
Before I conclude this final chapter, I want to address something that
perhaps a few readers are wondering about. What about scaled entries?
Nothing was mentioned anywhere in the book about scaled entries. I gave a
lot of thought to what I might do with thi s topic, and I finally decided that I
wasn 't going to do anything with it. And I have a good, and simple, reason
for that. In my actual trading I don' t do all that much scaling in.

Thi s is a very curious thing to me, because it seems like a very sensible thing
to do. Just as I scale out as trade goes more and more against me, it seems
like it would be a good idea to scale in as a trade goes more and more in my
favor. With thi s reasoning on my mind, I have crunched many scenarios and
I have just not mathematically been able to show the advantage that appears
to be there. (Not only that, in actual trading I have also found the results not
too promising.)

Although the risk seems like it should decrease as the trade moves more in
the desired direction, it actually seems to increase, as the stop gets further
away for each additional scale in. The issue gets more complicated as one
tries to then come up with layered stops at various points to compensate for
the widening stop distances. As I said, I haven't come up with anything
workable at this point i n time. If I do, I will certainly write it up

As the author of seven books on trading I am not 'supposed' to say that I'm
not sure why I can't sort this out. After all, I ' m supposed to know it all, and
have all the answers, right? Those that follow my work know that I don 't
have that attitude at all . I'm still a student of the market, just like all my
readers. Given that, I ' ll state it right out, flatly: I ' m not sure why I haven 't
been able to come up with any solid way for me to incorporate scaled entries
into my 'Trading Plan ' . I am still experimenting with this, but so far I
haven't 'sorted it out ' .

I still think there i s something to the concept, but I just can't find i t yet,
much like the new Fibonacci numbers that I presented in Kane Trading on:
A Totally New 5-Point Pattern . I knew for years that something was there,
but I didn't know back then how quantify it yet. For a similar reason I didn' t
discuss the scaled entry topic in this book. I just didn ' t think I had anything
conclusive yet that was worth presenting.

229
I strongly suggest that the reader investigate this topic, and if anything
noteworthy is discovered, feel free to e-mail me to discuss the findings. My
contact information can be found on the Kane Trading website. I will
continue to research this, as there may be something really worthwhile to
discover on this area. In the meantime, I have hopefully given my readers
some ideas to work with.

With that, let me get to my concluding remarks. I have presented many new
ideas here, not only in this last chapter, but also in the entire book as a
whole. I have tried to show entirely new concepts or new variations on
existing concepts, to give the reader a lot of food for thought. I feel that I
have presented the 'best of the best' of my management ideas. Most of this
material I have not discussed with any other traders, or presented in any
format until now. It is my hope that the reader can study thi s material and
adjust/modify it to be of some use in the development of his or her own
unique 'Trading Plan' .

230
 Conclusion

This book has far exceeded my expectations, not only in terms of the final
quality of what I have put together, but also in the sheer amount of material
and examples that are included. Does that sound familiar? If you are a
regular reader of my books, it should. It is also the introductory line to the
conclusion of Kane Trading on: Trailing Stops. I was unable to come up
with a better way to state how I felt at the end of this book than what I had
already written for Trailing Stops.

As those that follow the Kane Trading website know, this has been a very
difficult book for me to write. I delayed it repeatedly, and took any chance to
start another project that I could find. I did this because it was very difficult
for me to write a book that covered so many various aspects of my trading,
but with each area being somewhat disjointed from the previous area. Sure,
as a trade flows and the management plan moves from one stage to the next,
it all seems to flow nicely. While that may be so, the various stages can still
be almost totally unrelated to each other.

This aspect made it very challenging to me, and it was unlike any of the
other books I have written. No matter how I tried, I really couldn't get any
continuity in my writing, and I wasn ' t enjoying myself. I finally made a
serious commitment to getting it done, and I revamped and reworked the
outline. I filled in the details, and forced myself to find the flow. Once I got
deeper into the work, I began to see the overall picture. It was a different
picture than the other books, but it was an encompassing, holistic picture,
and a great learning experience for me.

I wound up writing a lot more than I expected, with a lot more detail than I
had originally envisioned. I had come to enjoy the writing, and I really gave
it all I had. The book is much better than I thought it would be, with a lot
more information packed in it than I thought was possible. I was beginning
to think I would never get through this one. In fact, I called this 'the book
that will never be done' . Instead, I created a work that I am really proud of,
and that I think will be of great assistance to the trader. If the reader feels the
same way as I do, then I will have succeeded with my goals.

23 1