BULL'S EYE

TRADING

A trading champion's guide to

pinpointing tops and bottoms
in any market

by Joe Duffy

Trading futures and options does involve financial risk. Contact us

for a discussion of the potential risks and rewards.
ABOUT THE AUTHOR
Joe Duffy began his career in the investment business as a stock and commodity
broker in 1981. After five years of trading, he entered the U.S. Trading and
Investing Championships on three separate occasions. He finished in the Top Ten
every year he entered, with annualized returns of 121%, 243% and 432%.

As a direct result of his performance in the trading contests, he was contacted by a

publisher to reveal his strategies and market analysis. He subsequently wrote The
Trading Advantage and Turning Point Analysis. Both books have appeared on
Futures magazine's list of "Best Books for Traders."

From 1991 to 1996, Joe worked as a proprietary trader and technical analyst for a
large multinational institution where he initiated and managed multi-million dollar
positions. A the end of 1996, he made the decision to leave his prestigious position
to pursue his goal of trading from home and editing a newsletter for traders.

Joe appears regularly at seminars on trading and market analysis and he edits a
nightly newsletter for traders called Joe Duffy's KeyPoint Advisory Service."
INTRODUCTION

By writing this booklet, my goal is to provide you with the most

information possible and explain each concept as best as I can. I
hope I am able to balance these two factors for your maximum
benefit. As a suggestion, however, I believe you will get more out of the
information in this booklet if you read it several times.

What you are about to read is only a small fraction of the methods I
use in my market analysis. You will be interested to know that
some of the strategies in this booklet are the same one I use to
finish in the Top Ten in the U.S. Trading & Investing Championship
three different times.

Recently, I've been developing some exciting new strategies that I

believe are so good, I'll never reveal them to anyone at any price.
Even so, I want you to possess a basic understanding of some of the
techniques and strategies I use in my personal trading.

The contents of this booklet are not intended for general circulation.
For that reason, I must ask that you please hold the information in these
pages in the strictest of confidence.

WHAT WE ARE GOING TO COVER

What I am about to show you is just part of what I use to trade every
day. There are many different styles of trading and, in my opinion, no
one style is right or wrong. If you read Jack Schwager's Market Wizards
books (which I recommend highly), you will learn that there are literally
dozens of different ways to make money in the financial market. The
unfortunate corollary for this is that there are also many ways to lose it!

I'm telling you this to help you understand how I trade. My way may
or may not be the way you want to trade. It may be close to your style, or
it may be just close enough that you may only want to use a few of my
ideas. My point is that there is no right or wrong way to trade. I am not
telling you this is the best way to trade – it just happens to be what works
best for me.

I thoroughly enjoy teaching others how to trade. However, there is another

important reason why I decided to share some of my ideas: writing them
down helps me improve my trading results.

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Sharing my knowledge forces me to organize my concepts and thought
completely so they can be passed on to people who are seeing them for
the first time. By organizing my thoughts, I am able to stay more focused
during my own trading.

This raises an important point about writing things down. Each day you
should physically write down your potential support and resistance points.
I also like to write down other reasons why I want to take a trade. Once I
write it down, however, I almost never back out by second guessing my
decision during the trading day. Writing things down helps me summarize
what is important, and what I must do is follow my plan. This is absolutely
vital to your trading success.

To conclude my introduction, I'd once again like to reiterate that what I am

teaching you here are techniques, not systems. One of the best analogies
I have heard compares successful trading to gourmet cooking.

There is always a recipe, but the dish is always different depending on

what ingredients are available.

With that in mind, my method of trading features definable, empirical things

that I look for. However, it also allows for some personal input in deciding
exactly what combination of ingredients I will use. This concept should
become more clear as we progress. And as you will soon see, there will be
some trades that will seem obvious to you – those being the high
confidence, high-probability "no-brainer trades!"

Now let's move on to the nuts and bolts of some of my trading techniques.

IDENTIFYING HIGH PROBABILITY SUPPORT AND

RESISTANCE ZONES
The main focus of this booklet is to show you how I identify high probability
support and resistance zones. High probability support zones are low risk
places to buy. High probability resistance zones are low risk places to sell
short. It really is as simple as it sounds.

The philosophy I use to identify high probability points is also simple: I look
to integrate techniques and integrate time frames. The techniques in this
booklet are the simplest and most direct.

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When I combine them on different time frames, I look for a confluence of
evidence at the same approximate price level. This confluence of evidence
is an important concept that should become very clear as we progress.

PIVOT POINTS
The first technique I will show you is the "Floor Trader Pivot Points."
These points have been around for years and every floor trader knows
precisely where they are. You should too. The formulas are as follows:

Pivot Point = (High + Low + Close)/3

1st High Pivot = Pivot Point + (Pivot Point - Low)

1st Low Pivot = Pivot Point - (High - Pivot Point)

2nd High Pivot = Pivot Point + 2(Pivot Point - Low)

2nd Low Pivot = Pivot Point - 2(High - Pivot Point)

3rd High Pivot = Pivot Point + 2(Pivot Point - Low)

3rd Low Pivot = Low - 2(High - Pivot Point)

Most any technical analysis software package can be set up to calculate

these numbers for you. (If you are trading only one or two markets,
however, an old fashioned hand calculator works just as well).

I calculate each of these points using daily, weekly, and monthly data.
Obviously, when using monthly data, the calculations only need to be done
at the start of a new month. When using weekly data, the calculations are
done at the beginning of each week. The daily calculations are done each
day.

Again, it is important to integrate time frames. If we have 2 or more pivots

from different times that are the same or very close to each other, this is a
good setup from which to start. If you have 3 pivots, that is all you need.

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PIVOT POINT CHANNEL
What you are about to learn is something that is being introduced for the
very first time. It is completely new material and I truly believe it is the very
best channel or trading band method there is. I say this (is) because it
combines the best features of the different types of channel indicators that
are currently most popular with traders.

The band is smooth like a straight moving average trading band, but it also
has the ability to adjust for market volatility like a Bollinger band. Notice in
the accompanying charts how the width of the trading band increases
gradually as the market becomes more volatile. This smooth and
controlled self adjustment is key.

Some of those reading this may be familiar with the pivot point techniques
discussed in the last section. Now I will take this technique one more step
and use it in a broader context to create the Pivot Point Channels.

To create the Pivot Point Channels, I use a 7-day exponential moving

average of the Pivot Points as a base. An exponential Moving Average
is a little more sensitive to recent data than a straight simple moving
average, however the basic principle is the same.

Next, calculate the average difference between the first Pivot Low

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and the first Pivot High for each of the last 7 days. To do this, you subtract
the first Pivot Low value from the first Pivot High value for each of the last
7 days. You then add up the difference and divide by 7. This gives you
the average value of the difference between the first high and the first low
pivots.

The final step involves adding this average of the differences to the
moving average of the pivots to get the resistance line. As well, you
subtract the average of the differences from the moving average of the
pivots to get the support line. This creates a channel for the first support
and resistance.

You can use the same technique to calculate a 20-day exponential moving
average of the Pivot Points. This time, instead of averaging the first Low
Pivot and the first High Pivot, employ the average difference between the
second Low Pivot and the second High Pivot. This will give you a second
wide trading channel for support and resistance. (see chart)

The Pivot Channel boundaries can be used as support and resistance just
as the Pivot Points themselves are used. The Pivot Channels also lend
themselves to other strategies, including identifying markets that are likely
to be in a trending mode for a while. We do not have enough space to
cover this subject fully, but some of it should be more clear by looking at
the charts.

As Yogi Berra once said, "You can see a lot just by looking!"

Finally, remember that almost any of today's popular software programs

have a formula builder that will calculate and display this information on
your chart.
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MARKET SYMMETRY
Basically, this concept involves using simple trendlines to determine
potential support and resistance. I do this two different ways.

First, I use just the last two bars to draw trendlines. I join the last two highs
and the last two lows, as well as the low to high and high to low. These
lines are extended to give me our potential support and resistance points
for the next day, week, or month, depending on the chart on which I was
working. To emphasize again, I integrate time frames by using this
technique on the daily, weekly and monthly charts.

The second way I look for straight line symmetry in the market is by
looking for old fashioned trendlines. I do this particularly on the 1/2 day
chart. The 1/2 day chart seems to highlight the potentially significant
support and resistance very well. As with any trendline technique, a
trendline with more points is a potentially stronger support or resistance
level. And remember that old support lines, once broken, become
resistance and vice versa.

As always, I make a written list of the potential support and resistance

point using the monthly, weekly, daily and 1/2 day charts. Again, it is
extremely important to integrate time frames to see if there are any
levels that are the same. If there are two or more levels clustered
together, this level is potentially a more powerful support or resistance
level.

One final important thing about trendline(s) is that I never look for them
to break. They are always either potential support or potential
resistance and, therefore, I expect they will hold. This way of looking at
things takes away the anxiety and questions traders often feel as the
market approaches a trendline (and relieving this question is no small
benefit, believe me). Before I act on any trendline, however, I need to see
a convergence of evidence from other techniques and time frames.

Trendlines represent a straight line symmetry or geometry in the

markets. Markets do follow repetitive patterns and markets often
display symmetry. The concept of trendlines is so basic that it often is
forgotten or overlooked by the majority of traders. (Who do you know
who actually trades off of trendlines?). This is simple, but very effective.
The next few pages provide more examples of the type of situations I look
for in the market.

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7
FIBONACCI
Leonardo Fibonacci was a 13th century mathematician who discovered
what is known as the Fibonacci ratio. The Fibonacci ratio is the division of
any space into a 61.8% and 38.2% division. I also look for a 50% and 50%
division of space. It really is as simple as that.

The Fibonacci ratio and related concepts are found repeatedly in nature.
In financial markets we simply borrow the concept.

To use the Fibonacci ratios in trading, I simply look for a market to retrace
38.2%, 50% or 21.8% of a previous move. The chart example illustrates
this straightforward concept.

In using retracements, I again go back to the basic concept of confluence

and integration to make this method useful. I like this method best when I
can find a confluence of two different retracements coming in at the same
level. The chart example I've included illustrates this point well.

Again, I look to integrate Fibonacci retracement levels with potential

support or resistance levels using other techniques. If I can get additional
evidence to indicate support or resistance at the Fibonacci retracement
levels, then I have a high probability trade in the works. Once in a while
you will get three Fibonacci retracement(s) coming in all at the same level.
When that happens, you do not need much else.

REAL-TIME TRADING EXAMPLES

Examples of some actual trade set-ups follow. The first example is the
trade set-up from page 3 that says, "How to Buy Here!" You'll notice that
virtually everything I have taught you in this booklet so far is setting up at
that low. I hope you agree that anyone who knows this material would
almost have certainly bought here!

The great set-ups like these do not occur very often. It is worth noting,
however, that the amount of evidence supporting a potential high or low is
directly related to the confidence level of success. In other words, set-ups
like these have an extraordinary high ratio of probability. Therefore, you
should try to avoid the marginal trades and concentrate on the good set-
ups with the largest confluence of technical evidence. This is especially
true when you are starting out.

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Here is an example of a real trade in the D-Mark. The following techniques
indicated support at these levels:

Monthly Low Pivot = 6607

Daily Low Pivot = 6498
Short-Term Pivot Channel = 6508
61.8% Retracement = 6505
Natural Squared = N/A

Weekly Low Pivot = 6505

Long-Term Pivot Channel = 6453
2-Day Low to Low = 6506
50% Retracement = 6499
Cardinal/Corner = 6481-1/2

From this we see a real confluence of support around 6500. Look to buy
just above that support or 6510 or so. The low was 6507 and away we go!
The logical stop loss on this trade is the furthest support number in the area
which is the Cardinal/Corner at 6481.

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Here is an actual example of a trade. It is not the ideal set-up of the
previous one, however it is more like what you are going to get most of the
time.

Daily High Pivot = 113 11/32

Weekly Pivot Point = 113 13/32
Gann Cardinal Corner = 113 13/32
Trendline Horizontal Resistance = 113 16/32
50% Retracement = 113 16/32

I am selling around 113 13/32. I am using a stop above the next resistance
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level at 114 00/32. The latter is both the 3 high pivot and the 61.8%
Fibonacci retracement.

The high for the day was 113 19/32. Subsequently, the bonds dropped to
112 22/32 that day and opened the next day at 112 25/32 and traded 112
00/32 within a half hour.

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Here is another trade from the same week. Once again, it turned out to be
a successful one.

Daily Low Pivot = 6980

Weekly Pivot Point = 6972
Daily Low to Low = 6962
38.2(%) Retracement = 6973
Gann Cardinal Corner = 6973

This is a marginal situation as there are enough potential areas, but they
are spread apart more than we would like. However, we have to make a
little allowance for this as the D-Mark has been so volatile.

My strategy here was to buy near the top of the range of support at the
daily low pivot of 6980. The stop would be below the bottom of the range
of support at 6962, so use a stop of 6950 or so.

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DAY-TRADING SECRETS
Finding support and resistance for a day-trader can keep him alive in a
volatile market. Here's one idea, implemented with others, to find those
target areas. My personal preference for day-trading and short-term
trading is to buy dips and sell rallies.

Two components are needed to make this strategy work. First, you have to
be trading in the direction that gives you the best chance of success.
Second, you have to be able to identify potential support or resistance for
that trading day. I'll discuss one technique from each of these components
that make up my day-trading approach.

The first step is to determine which way the market is likely to go

today – in other words, is the trend up, down or sideways?

One method to determine the market trend involves a couple of old standby
technical indicators that are available on virtually any charting software:
the Moving Average Convergence Divergence (MACD) and the stochastic
indicators. These oldies but goodies really can be useful if used in the
proper combination.

Look at both the MACD and the Slow Stochastic on a daily chart to
determine in which direction you want to trade the next day. For the
MACD, I use a little longer time value for my inputs than the standard –
say, around a 10-30-10 exponential moving average combination. I also
use a slow stochastic indicator with an input value of somewhere around 20
days.

Both of these indicators should be displayed together under the price data.
Look for situations when both the MACD indicator and the stochastic
indicator are on the same side of the signal line.

If both are above their respective signal lines, then trade the buy side. If
both are below their respective signal lines, trade the sell side. Quite often
you'll find the MACD and the stochastic indicators are on the opposite sides
of their respective signal lines. In these cases, avoid the market.

The accompanying charts show this simple combination eliminates a lot of

noise from the market and identifies those times when the market has the
best chance to make a trend move. Throw these indicators up on any chart
together, and you will see this combination works infinitely better than
either indicator alone.

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The alignment of the MACD and stochastic indicators together shows you
the market trend. When both indicators are below the strength line, as they
were in early December for both the S&P 500 Index and T-Bonds, you
should be a seller; if both are above the signal line, as they were in early
February, you should be a buyer.

Once you've determined the direction to trade, the next step is to find
support if you want to buy or resistance if you want to sell. There are
several ways to do this, and my usual strategy is to employ several
methodologies to come up with a confluence or a "keypoint" high-
probability trading zone. Here is one methodology that is being described
for the first time. Unfortunately, there is no neat name for this indicator, so
I'll just call it the 3x5ATR. To construct it:

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By combining the five-day average true range with simple three-day moving
averages of the highs and lows, you can create the 3x5ATR indicator to
find support and resistance areas that can be used in a day-trading
strategy of buying on dips and selling on rallies. The S&P charts above
and the above, left T-Bonds chart show examples of support lines using the
3x5ATR.

1. Add up the true ranges for the last five days and divide by five. This is
the 5ATR.

2. Calculate a three-day simple moving average of the highs and a three-

day simple moving average of the lows.

3. To calculate the 3x5ATR for potential resistance, add the 5ATR to the
three-day averages of the highs.

4. To calculate the 3x5ATR for support, subtract the 5ATR from the three-
day averages of the highs.

An important point is that this is not a total day-trading strategy. Look to

combine other techniques that identify potential support and resistance
points. A good rule to live by is to look for a confluence of support or res
istance by integrating analysis techniques and integrating time frames.

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 © 2001 Joe Duffy
All rights reserved

TradeWins Publishing
P.O. Box 1010
Wilkes-Barre, PA 18703-1010