Trading Examples to Ponder 12/20/08

A long time ago, I remember reading about a conversation between two traders at a trading firm making comments about a third trader. The two talking traders at the water cooler were struggling, while the third trader was considered the top trader at the firm.

The first trader at the water cooler mentioned how the successful trader never left his desk, and pretty much kept his nose about an inch away from the screen watching every move that the market made. The second trader said, "Maybe that is why he is the top trader!"



Here are two examples where money can be made just trading waves 2 to 3. This involves a 3-wave 50% correction of a down trend, and then a return to the down trend following the correction.



In example 1, several things indicate the termination of Wave 2:

• The Wave has reached the 50-62% correction point
• $TICK is starting to show strength following a test of a low.

At this point, the risk is low relative to the potential reward.

In example 2, the market making new lows is a good indication that the 50% correction is over. The market again gives us a 62% correction of Wave 1, at which the %TICK is starting to show weakness. The general rule is that down moves are quicker than up moves for various psychological reasons. Thus the decision to enter on a down move usually must be made faster than up moves. Again, the risks is low relative to the potential reward.

Charles