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GOALS:   TO INCORPORATE THE SKILLS LEARNED IN LEVELS ONE, TWO, AND THREE INTO AN EASY-TO-USE CHECKLIST THAT WILL IMPROVE TRADING EFFICIENCY. TO BE ABLE TO COMPLETELY ANALYZE A MARKET IN 10 SECONDS OR LESS
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One of the perennial problems all traders face is how to condense the enormous amount of material the market is putting out each minute into an easy-to-understand decision-making format. A concurrent problem is how to put this material into a form that will automatically prioritize the information so that trading decisions are made in a responsible profit-making sequence.

Figure 10-1 is a sample worksheet of our Profitunity Trading Partner. This is the simplest, easiest-to-use, most profit- producing and time-saving method of keeping market analysis on track that we have seen in 35+ years of trading. The circled numbers on the various columns in Figure 10-1 indicate the order in which the worksheet is filled out. Assume that you are doing your market analysis after a vacation and are coming in absolutely "clean" of any previous information. You are starting from scratch.

The first vertical column contains abbreviations for the commodities you are about to analyze. No month for trading is given. Using a pencil, you will note in the columns the months when the trading occurs. On each row, to the right of the commodity listings, are two rows marked "buy" and "sell." Buy and sell signals are to be entered on the appropriate lines.

THE TWO-BAR REVERSE

Let's start with the first column to the right of the commodity listings. This column is labeled at the top "2-Bar Reverse." It is important to fill in this column first.

As mentioned in Chapter 6, most traders who have left trading because they lost money have been blown out because of one or a very few large mistakes (losses) rather than because they were eaten up by the termite (small) losses. A trader's first and most important job is to protect the trading capital. Earlier, I used an analogy from driving. I have been driving for 45 years and have never caused a serious accident, but I have been in two accidents caused by drunken drivers. I never drink and drive. Should I then conclude that, because I am at least a decent driver, I need not spend money on extras like air bags?

I would never buy a new car without air bags—not to protect me from my own driving but as protection against drunk drivers. Guess what, trading fans: Sometimes the market overindulges and goes on a binge. The binge is usually caused by the market's ingesting too much surprising (intoxicating) information. Therefore, I will never buy or sell a new position without making sure that this profit potential vehicle has a good "air bag." In trading, the air bag is a two-bar reversal, but not just any two-bar reversal. It must be a two-bar reversal on a higher time frame.

The market can be conveniently divided into somewhat equal time intervals. The largest chart most traders view is the monthly chart. With an average of 4.3 weeks in a month, we can say that the monthly chart is a significantly higher time frame than the weekly chart, which contains only the five trading days. The daily chart usually has 4-6 hours of trading, and the hourly chart can be divided into four 15-minute or six 10- minute time periods. Thus, the market gives us at least five different time layers where the time periods above and below are approximate factors of 5. A higher time frame refers to a time frame that contains approximately five times the span of the current trading time frame. For example:

Monthly charts contain 4.3 weeks Weekly charts contain 5 days

Daily charts contain 4-6 trading hours

Hourly charts contain 4 (15-min.) or (10-min.) periods

The two-bar reversal is on one significant time frame higher than whatever time period you are trading (Figure 10-2). For a more complete explanation of how to determine where the air bag should be placed, refer back to Level One (Chapter 6). If your trading time frame is the daily chart, your two-bar reversal will be on the weekly chart. If you are trading the 10-minute intraday chart, your significantly higher time frame will be the hourly chart.

If you are in a long position on the daily chart, your two-bar reversal will be on the weekly chart. Locate this point by reading the weekly chart from right to left, starting with the current weekly bar. Continue to the left until you find the first weekly

bar that has both a lower high and a lower low than the current bar. Inside bars do not count. They do not have both a lower low and a lower high (higher low and higher high). Once this point is established (the bottom minus one tick or the top plus one tick on the two-bar reversal bar), immediately place an air bag stop. This is not necessarily a place to reverse (although it could be). The purpose of this column on the Profitunity Trading Partner is to make sure that you are not long if the price goes below the two-bar reverse low, or short if the price goes above the two-bar reverse high. The air bag protects you from getting killed by a weaving drunken market. That point is the first information entered on the Profitunity Trading Partner, and it is placed on the appropriate buy or sell row—on the buy row if it is a two-bar up, and on the sell row if it is a two-bar down.

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