A GUIDE TO HEALTHY FINANCIAL MARKET GAINS

I AM THE LAW V2.0 2011

Created by: D. Ford

Although I've authored many trading systems in the past, there is only TWO constants in ALL markets that has a successful outcome of 100%. Those constants are the simplest things on this planet. It is natural to any intelligent being. It is (drum-roll) .BUY LOW-SELL HIGH & MONEY MANAGEMENT. I know, your thinking you gotta be kidding me,but in fact it is proven over and over again. Think about it, example: you have only $8.00 in your pock , your hungry, if you go to McDonalds and a #1 on the menu was $4.00,would you pay $8.00?...lets say you had a coupon to get it at half price, would you use the coupon or pay the whole $4.00 .Common sense would dictate that you would save yourself some money and opt for the half off coupon price. Scenario number two, everyone has the newest pair of a brand name shoe, in other words there HOT!. You want to be in the TREND also. But the shoes have been going up in price for the last 5 weeks (YIKES!). If only you could have gotten them when the price was lower. As luck would have it, a store ordered too many in there last shipment. They were supplied with so many that they were running out of space. The store dropped the price of the shoe thinking people would buy more and there storage area wouldnt be short. Now, the shoes are still in trend but the price has dropped. Being that you still want the shoes ,would you buy them now (at the BELOW AVERAGE price) or wait till the price goes up more. You know the correct answer. These situations are no different in the financial market,housing market,retail market, or going about the day to day business of YOU. Even something simple as finding the lowest priced gas station to fill up is second nature to people. So why would it be different anywhere else. When trading, these 2 constants cut down on RISK, improves GAINS, and boost trader CONFIDENCE. We will go over what tools to use & how to simplify the entire process. Welcome to I AM THE LAW V2.0...lets get started.....

Over the years, Ive noted 4 things that work 100% in the market due to its popularity. Here they are.... 1.Long-term direction of average price -Moving averages displays trends in the market. The 200,50,&20 are the most widely used. -Price in relation to all 3 MA's seems to be the most effective technique for understanding price direction 2.Support / Resistance & Market Cycles confluences -Fib levels,Whole numbers, Consolidation areas serve as points of interest for possible trades. -Long wicked price bars are confirmation of such levels. 3.Strength & Weakness -Whether the use of Barometers or the appearance of divergence, measurement of strength and weakness is a force that is dominantly pushing the market... 4.Discipline -In trading, discipline simply means two things: 1. Enter a position as soon as your system triggers an entry signal. 2. Exit the position when your system triggered an exit. -YOU LOSE DICIPLINE....YOU LOSE.... We will first go over Moving Averages, what they mean & how they should be used. The first moving average you should look at is the 200MA. It doesnt matter if it's an EMA/SMA/ or DMA. The 200MA sets the tone for what you need to do, or SHOULD be doing. On any chart prices above the 200MA has a BULLISH BIAS. Price that is below the 200MA has a BEARISH BIAS. This should let you know instantly what the MAJOR DIRECTION is of a chart . The crossover & close above or below the 200MA is important on any time frame. Speaking of TIMEFRAMES, lets nip this in the bud early. The bigger the TIMEFRAME the more accurate the signal is. So, if prices are above the 200MA on a daily but below the 200MA on a weekly, the major bias is bearish because of the indication on the larger time frame. Same thing goes for the HOURLY CHART to a 10,5,or 1 MINUTE CHART. The Bigger time frame is always the chart you MUST look at FIRST! (this is LAW). Lets look at some charts below.

The weekly chart of the AUD/USD says that the MAJOR bias is BULLISH. Dont get BIAS confused with TREND .A BIAS is like taking a side, a trend is in motion with masses. Prices could be above/below the 200MA but not trending. The 200MA is NOT A TRENDING MOVING AVERAGE. Lets look at the daily chart next....

Like the weekly, the daily also has a bullish bias. Note that we are only focusing on the furthest bar to the right because we dont trade the middle of the chart (this is LAW). Now lets look at the hourly chart.....

We can all agree that the bias on all 3 time frames says BULLISH. The way your analysis should flow is largest to smallest. So to be clear, here is the order of trading time frames : MONTHLY-WEEKLY-DAILY-240MIN-60MIN-15MIN-5MIN.You only need to analyze three back-to-back time frames . Next, lets define the 50MA.

The 50MA is only used to tell you to BUY or SELL(short). A 50MA is very important to determine what side of the trade you are on. Once again we MUST take in consideration of the HIGHER TIME FRAMES when referring to the 50MA. I will give 3 examples to explain this in depth. In this example, lets start with the daily chart as our largest.

As you see on the the chart above, price is ABOVE the 200MA but BELOW the 50MA. To translate, the long term bias is bullish but we should only be shorting or looking to short. Confused? Well thats why you pull your DISCIPLINE CARD and stand firm. Until the bar CLOSES ABOVE the 50MA your primary position currently is to short sell . Lets go to the next chart below , the 240MIN chart.

The 240MIN chart says that it is now a BULLISH BIAS due to the close above the 200MA. So, NO TRADE (use discipline!). The Explanation : We started off using our DAILY chart as the largest chart we analyzed, the daily chart had a bullish bias but a signal (50MA) saying short only. So on the next time frame we needed to look for the bias (200MA) to be BEARISH, & it was not. What about the 50MA on the 240MIN chart? It changes its role as the time frame changes. On the Highest time frame the 50MA is used for BUY/SELL. The 50MA on the lower time frames is used for confirmation related to the largest . Meaning that the 200MA and the 50MA have to match on the two lower time frames in order for your trade to be successful. The 50MA's role on the lower time frames act as buy low/sell high zones. The closer the price gets to the 50MA ,the closer price is going on SALE. When price breaches the 50MA and makes it to the 200MA, its a signal that the long term trend has weakened. When the long term trend is weakened we should look for price to reverse in the near future(this is LAW). A cross of the 50MA & 200MA is significant. This tells us that the strength has increased in the direction of the cross. A cross up is referred to as a GOLDEN CROSS, while a cross down is commonly called a DEATH CROSS. The highest probability of success is when price is 100% below or 100% above BOTH moving averages. If price is between the 200MA & 50MA or if both MA's are in a flat twisted state, you should defer to the next highest time frame for strength . If the next highest time frame looks similar (price between 50ma & 200ma or MA's flat and twisted), chance are price is not make new lows or new highs. We call this a SIDEWAYS MARKET. You will only be profitable in a sideways market if you BUY LOW & SELL HIGH(this is LAW). The process that happens after a sideways market is called a BREAKOUT. A BREAKOUT is only used to set the direction. If we are not already in the trade, we NEVER ENTER A TRADE WHILE A BREAKOUT IS HAPPENING. We wait for a SALE and then enter.....remember what goes up always comes down.

In the chart above ,we see the only three scenarios consistantly in a market. Price moves either UP , DOWN , or SIDEWAYS. The Moving Averages tell us instantly what we need to do in each scenario. This is why they work so good & everyone uses them.

The 20MA is known primarily as a trend MA ONLY!. As long as price is above or below the 20MA a good trend is intact. When price breaks the 20MA the trend is over. This only means that if you are IN a position that is trending you should think about taking some profit. Also, If you are trying to GET IN a position you should ALWAYS do it outside the 20MA (THIS IS A SERIOUS LAW). This is what BUY LOW SELL HIGH is all about....buying at below average price and shorting at above average price. The 20MA makes sure you dont OVERPAY for your product (everyone wants a deal).

If all the MA's are driving in the same direction on all three time frames that is what I call a NO BRAINER. In most cases all you have to do is wait until the next week opens and hit either Buy or Sell when price crosses the open in the direction of the MA's.

So lets recap! We are only watching 3 time frames and 3 Moving Averages.
Our first question is which time frame first? The largest of the three. -What are we looking for on this time frame? First thing is the 200MA. -Why? Because we want to find the MAJOR BIAS. -After that then what? We look at the 50MA. -Why? Because we want to know if we need to BUY or SELL(SHORT) Okay. After I get that straight what do I do now? You look at the next time frame down -What does that tell me? Well, If the 200MA matches the 200MA on the largest chart we can say that our chances are better in being more successful. If the 200MA's dont match-up we need to not trade or pick three other time frames that the first two have a agreement of the 200MA's. -So after the 200MA's match, what then? We look at the 50MA on the same chart. -Why? To see if price is 100% below or 100% above the 200MA & 50MA on the same chart. Remember this is important because we are looking for confirmation of strength in the market. -So what if both are different ? Then we understand that it could be a sideways market -What do we do if it is a sideways market? BUY LOW & SELL HIGH -How do I know whats low & how do I know whats high? Support=LOW & Resistance=High, but if this is too confusing....short at the highest Moving Average & Buy at the Lowest Moving average. -Ah, I see. How do I know when to take profit? We'll go over that later. -So what about the 20MA, what that for? The 20MA is used on the third or smallest time frame . Its used mainly in trending markets. It will not work in a sideways market. -Okay so how do I use it? We use the 20MA on the smallest time frame to ENTER and or EXIT a trade. We want to attempt to buy in a situation when the 20MA is a sloping in the direction of the 50MA & 200MA (which is up) and price has breached or closed below the 20MA. And Sell(Short) when the 20MA is sloping in the direction of the 50MA & 200MA (which would be down) and price has breached or closed above the 20MA. -Why do we do that? So we can get the best position for gains and lower our risk.you dont want to overpay for anything. Especially your OWN MONEY! -Sounds great!, One more question...when do I know the right time to do all this? Go to the next page and I'll show you.

Before we go further, I'd like to point out a couple of facts about the author. When I first got into trading, I was trading stocks. The stocks I traded were not the standard, popular, major exchange traded companies. They were micro-cap,small companies that were priced mostly under a dollar. After a few years of trading, I was able to turn some annually profit (Nothing to showcase). After looking at my progress, I then decided that I needed to find a way to increase my bottom-line. So, I started to trade the currency market (FOREX). With the limited knowledge I had from trading stocks I figured it would be a piece of cake. My first account was funded with 800usd. Within the first 2 hours, I was down 300usd and after 1 night I had gotten my account to a level of around 120usd (loser...). After that devastated loss I realized two things. First, If I could lose almost all my cash within 3-4 hours.....I could double it within that same time!. And second, I NEEDED SOME HELP! . The days following Armageddon, I shut down trading live and watched the market for a couple of weeks. I also read a couple of books on strategies and compared it to what I saw in the market. The truth is.....NONE of the literature (outside the basic info) was helpful, but the time I spent notating what I witnessed was INVALUABLE!. In short, its hard to believe someone when you see otherwise. The first day I went back trading live, I made profit. The second day, I made profit. By the third day, I had almost recouped all my losses. What was I doing? I was using the info I had analyzed instead of what the books were saying. Not to say that the books were wrong or incorrect but, the books didnt tell me EVERYTHING!. Why? You can draw up your own speculation but for whatever the reason, I couldnt trust the info because I rarely saw it in the charts. And if I did see it in the charts, it had to be the perfect picture for it to work. Today I look back and realize one thing, no matter what trading system you use all of them work.....(huh?).....yes, all trading systems work....IN A TRENDING MARKET. But they rarely tell you this. I can only tell you the truth. And the truth about the author is....I am not an EXPERT trader....I am a PROFESSIONAL trader who is an EXPERT at ANALYSIS. By the way, I ended up almost doubling that first forex account after my ANALYSIS.

Above is the equity curve from my first forex account. The trades are numbered on the bottom & the amount is noted on the right side. After trade #120, I started using what I learned. Now that we can spot the trend or non-trend in the market using Moving Averages, lets find the precise time & place to ENTER the market.

The next step in this process is TIMED ENTRIES. A Timed entry is the point that you should enter the trade without with a LOW RISK of getting stopped out. We want to enter against the current trend at the point of exhaustion & profit from the new trend at the point of initialization. This sounds like picking bottoms & tops (which is shunned upon by many). Correct me if I'm wrong but the same masses of traders/analyst who talked down about this are the same people who preach low risk high reward. By entering the trade at the top or bottom 5% range of the session we accomplish the low risk scenario. Once again, there is a method to all the chaos in the market and the way to do this is to spot WEAKNESS. Only when something is weak it is at the mercy of it challenger. In nature, the Boa Constrictor weakens its prey before it consumes it....In civilization, man weakens steal by applying heat...and in trading a trend in weakened by the exodus of volume. In other words, the crowds of like minded individuals have dissipated....PARTIES OVER FOLKS!!. We dont need anything special to spot this. I use only ONE indicator to tell me that weakness has arrived in the trend. That is the OSCILLATOR. Why not use a MACD? Or BOLLINGER BANDS? Or even a PARABOLIC SAR?. Because the OSCILATOR tells me two things (NO...not overbought or oversold!), the first is what CYCLE the market is in....and second, is there any DIVERGENCE. YOU WANT TO HAVE A COMPASS AND YOU WANT TO KNOW IF THINGS ARE GOING TO TURN AROUND SOON. The OSCILATOR tells you both in one glance. Lets look at some charts and break-down the code. In the chart below we can clearly see the divergence (labeled in red) & the market cycles (outlined in yellow).

To best determine what cycle the market is in the OSCILLATOR should be divide in half. The Upper half is a zone to sell, & the lower half is a zone to buy. The numbers such as 80 or 20 or 60 or 40 don't have any significance in this method. Only the line in the middle divides the two zones. To add this to what was already discussed earlier involving the Moving Average, If the Moving Averages say we are suppose to be buying on the higher time frames then on our entry time frame we wait until the OSCILLATOR drifts into the buy zone (below the middle line). The opposite happens when we are looking to sell (short), which the OSCILLATOR must be in the top half (above the middle line). We do not take any signals against our Moving Averages. The OSCILLATOR can be your best friend, but need to further pin-point & fine tune our entry even more. You will now need to use the FIBONACCI retrace tool. Consider the stochastic indicator a tool to get us into the neighborhood & the Fibonacci tool to get us on the correct street. But first some examples of how this would systematically work (using the Moving Averages & OSCILLATOR).

#1 Daily chart: 200 & 50 MA's are above price (BIAS=BEARISH TRADE=SHORT)

#2- 240Min Chart : PRICE ABOVE 50MA(DO NOT SHORT UNTIL PRICE CLOSES BELOW 50MA) So we use patience until something gives (either a close above 50MA on DAILY) or (Price closes below 50MA on 240min)

By the way, In all these examples the 50MA is the GRAY LINE and the 200MA is the BLUE LINE. The 20MA will be RED. Lets move along and scan for a match because this is a REAL-TIME scenario. You didnt see an entry opportunity but you now know what to do when things DONT line up...which is go to another chart.

Please understand that just because you have been seeing examples from FOREX, this type of philosophy is present in ALL markets. We will now look at some stock examples (RIMM). #1 DAILY: PRICE BELOW 200MA & ABOVE 50MA = (BIAS BEARISH BUT BUY ONLY)

#2 240MIN Chart: PRICE ABOVE 50MA & BELOW 200MA = Possible sideways market developing which means minimum profit gains . Resistance at 200MA (BLUE) . Until resistance is hit, look for BUY entries on 60MIN chart. Exit all BUYS at resistance.

NOTE: We Ignore the OSCILLATOR on this chart phase because they require a much longer time to develop than our ENTRY TIME FRAME.

#3 60MIN Chart: Since we were already in a small trend and not the BOTTOM, we will join the trend with our entry. Usually a fib retracement level of 38.2% is the most common along with the 61.8% level. We are only interested in the level that has met the requirements at the proper time. As you can see, the divergence around the 38% level is evident. So we have identified the WEAKNESS with the Stochastic Oscillator and the Fib tool put us on a LOW RISK level of support to enable us to make gains quickly. These are the most common entries in any TRENDING MARKET. Our stop will be discussed in the last part (Money Management) but for right now this a normal divergent entry in a trending market. Also notice that our Moving Average requirement has been met also (buy setup- close below 20MA).

NOTE: The Divergence is marked in yellow. The green line is the 38.2% level. The 20MA is colored in red. Also a Fib Retracement is always pulled from the previous pivot (fractal) retracement. Divergence is present in every time frame. It is the strongest method to spot weakness & predict market reversals.

Okay, so now we know how to ENTER a position in either direction. And not to be pigeon toed in our process, this technique is used on any combination of charting intervals. Just remember to use them in the order from LARGEST to SMALLEST (very important).

Monthly J.P. Morgan chart (above left) , weekly J.P. Morgan chart (above right) , & daily is below.

Now comes part one of the two most important things every trader must know. Without knowledge of these topics, a trader is guaranteed to LOSE 70 80 percent of the time they trade. What is about to be discussed is paramount to your CONFIDENCE, PROFIT, & TIME MANAGEMENT. The biggest problem is not getting IN a trade but getting OUT a trade....with PROFIT. I've seen traders over & over again stay in the trade too long or too short. Either they are not making profit or not making enough profit. A lot of traders have their own technique using either indicators or a set number of points made. Both ways are fine......if you want to test out a new trading system or do some market analysis. But if you want to make a REAL profit with protecting the profit you already have...I advise you to read closely. Trading is not so much of trying to win but NOT TRYING TO LOSE. The only consistent thing that everything (indicators, pivots, & orders) follows in the market is PRICE (duh...). Without price you wouldnt have market structure (up-trends, down-trends, candle patterns, harmonic structures, Fibonacci levels, ect....). And without market structure you wouldnt have SUPPORT & RESISTANCE. So the short term answer to all this is no matter what traders do, they have to respect PRICE. When you look at a chart you are looking at PRICE. You are looking at the Past (all the bars that have made support/resistance levels....up & down trends...with strength and weakness), the Present ( buyers vs. sellers...volume of buyers vs. sellers....& real-time market reactions), and the Future (projected support & resistance levels, Fibonacci % levels, Moving average levels). Weve already used the past & present to enter the trade, so now we will focus on the future to get out the trade. Rule #1: You SHALL use previous support & resistance levels for your FIRST exit.

Rule # 2: You SHALL MOVE YOUR STOP TO THE ENTRY LEVEL (BREAKEVEN) AFTER YOUR FIRST EXIT HAS TRIGGERED. Rule # 3: If you DO NOT get stopped out at the BREAKEVEN level, YOUR SECOND TAKE PROFIT LEVEL IS THE 127% FIB EXTENSION LEVEL OF THE LAST SWING HIGH & SWING LOW IN THE DIRECTION OF THE TREND.

Cont. Rule #4: After the profit target of the 127% Fibonacci level has been reached, MOVE YOUR STOP FROM THE BREAKEVEN LEVEL TO THE FIRST TAKE PROFIT LEVEL & YOUR LAST & FINAL AKE PROFIT IS AT THE 161% FIBONACCI LEVEL.
To put this into a visual context a chart below has all the criteria discussed and notated.

Here is another example.

And another....

By now you get the idea. We now know how to find a product to trade by using the simple method of time-frame analysis. We also know how to enter a position. And finally we know where to get out. So whats left you ask?, that would be second part of the puzzle. It's called MONEY MANAGEMENT & its the determining factor in profitability. First lets go over RISK. On every trade that is opened there is the criteria of risk. Risk is what you should be most consistent about when you trade. For example, this goes back to the beginning when I mentioned about not overpaying for a certain item. You dont want to risk more than you need to just like you shouldnt pay more than you need to. In other words, you wouldnt blow your whole bank account on item in the store. That would leave you with nothing until your next pay date. That would leave you with no money for transportation, emergencies, or even food. That type of thinking lacks common sense & discipline. Some people might describe it as stupid. There are enough stupid people in the market and you dont want to join them. So to alleviate this problem, I suggest you only risk a maximum of 5% of your total account value. This will give you a 1.5% gain on every take profit level that is triggered (remember there are a total of 3 take profit levels). The formula is quite simple, lets use the letter A to represent your account value. Lets also use the letter P for the risk percentage. Finally the letter R is the actual maximum amount you should risk on the trade. The formula is (A * P) = R. To put this into a real scenario , say your account balance is 1222.00 & your risk percentage is 5% (recommended). 1222.00 * 5% = 61.00. This means that no matter what happens you will not lose over 61.00 on that trade. You can draw it up any kind of way you want based upon your original stop-loss distance, but the main focus is to not lose over the sum of (A * P). Ive given you this way of calculating the risk amount rather than implementing your stop loss distance because every market trades a different amount of lots,shares, & contracts. A situation of 100 shares in equities trades different than a 100 contracts in futures or a 100 contracts in options. But the principle is all the same when you know how much in dollars you shouldnt lose all together on that one trade. Furthermore, once you find out the principle amount, you can apply that number to calculate your share, lot, and contract size in relevance to your stop loss distance amount. An example for Forex using our previous scenario is (R divided by distance in pips)= amount per lot size used or (61.00/50)=1.22 per lot. Every market has there different calculation and its up to you to get the needed information for the formals. Remember to ALWAYS use the same risk percentage even if you are not successful in the trade. What this does is minimize your risk even more. The thing that a lot of traders dont realize is if you are winning just 30% of the time, you will always end up profitable with good money management. The key to it all is CONSISTANCY. You should be doing the same thing on every trade. A losing streak of 7 trades & a win of 3 trades with a consistent risk management formula will yield profit . In other words, you would only have to win a minimum of 30% of the time (with a consistent risk control formula) using a 3:1 win ratio on all the your winning trades and still rake in an overall profit.

7 LOSSES @ 5% = 35% TOTAL LOSS 3 WINS @ 15% = 45% TOTAL GAIN _____________________________ DIFFERENCE OF 10% TOTAL GAIN

On the other side of losses are gains. And gains are what everyone wants when they are successful. Ive placed a chart below that is based completely on winning trades using consistent money management variables (risk percentage & 1:1 ratio take profits), as you can see it doesnt take long for an account to grow if you use the same formula over & over again.

In just 50 winning trades using 5% risk nets a 1000% return on the original investment, this is what SUCCESSFUL looks like. The main reason that people are successful falls upon DISCIPLINE. I wont go into the so called psychology of trading because I dont believe in it. Either you DO or DO NOT. Either you have common sense or you have no sense at all. As Ive said before, this is no different than what you do in your daily life. In trading people make bad decisions based upon EMOTION rather than LOGIC. My advise is use logic.

In looking back at all the information in this short guide to profit, If I could pin point one thing that will put it all together....I'd have to say that if you arent motivated....dont have any drive to be great...or just dont realize there is more than just working 30-50 years making your boss rich so you can retire average...you will never witness your full potentiality in life. This is not worded as a PEPTALK, but its meant to be understood as a PRO-TALK. The ball is always in your court, handle it well and everything will be much easier. Remember, your life is on a chart also....cut your losses early and protect your gains.

References:
Charts used courtesy of the following: MB TRADING http://www.mbtrading.com/ TD AMERITRADE http://www.tdameritrade.com/welcome1.html GFT FOREX http://www.gftforex.com/ FXCM http://www.fxcm.com/ Worden FREE STOCK CHARTS http://www.freestockcharts.com/

END...