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RHYTHM
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The next column to work with on the Profitunity Trading Partner is the column labeled "Rhythm." We use this column to make sure that our beat or rhythm is in sync with the market. We already know that the best way to make money is to trade with the market rather than try to "buck" it. This column gives us an accurate look at the various market rhythms as we trade. It makes sure that our trading is not dancing to a fox trot while the market is playing boogie-woogie.

The science of chaos has given us overwhelming evidence that the markets are a natural process and do not follow the traditional laws of the Euclidean/Newtonian world. A natural rhythm that almost everyone has witnessed is the tides on a seashore. If you are on a beach and want to know which direction the tide is moving, you can simply stick a piece of shell or driftwood into the sand at the water's edge. After a while, the water will be either above the marker (incoming tide) or beyond the marker (outgoing tide).

If you observe the motion of the tide, you will notice that some waves are coming in with the tide and others are going out against the tide. Look even closer at the waves and you will notice that as the waves come in, some ripples on top of the waves are riding on an incoming wave and some are going out against the next incoming wave.

This is exactly how the longer-term, intermediate-term, and short-term rhythms of the markets interact. We call this the tide/wave/ripple or TWR rhythm. The best way to monitor this market rhythm is to use a 5/13/34 moving average filter (Figure 10-3).

The TWR information lets you know that you are in sync with the rhythms of the market. A simple formula is:

Be long any time the 5-bar average is higher than both the 13-bar and 34-bar averages.

A simple way to mark this in the Rhythm section is to place an up arrow (T) if the 5-bar average is above both the 13-bar and the 34-bar averages. Place a down arrow (I) if the 5-bar average

is below both the 13-bar and the 34-bar averages. Enter a zero as the rhythm if the 5-bar average is between the 13-bar and 34- bar averages.

We can monitor the immediate rhythm of the market even more closely by using our Elliott wave indicator, the 5/34/5 Profitunity MACD, discussed in Chapter 7. To display this MACD, I usually use a histogram to display the oscillator (which simply subtracts a 34-bar moving average from a 5-bar moving average) and a line to display the 5-bar moving average of the oscillator. (See Figure 10-4.) This gives an extremely good immediate momentum indicator. Whenever the histogram is higher (+1 is higher than —1, and —1 is higher than —3), the immediate momentum is up; whenever the histogram is lower, the immediate momentum is down. Your trade (long/short) should be on the histogram side of the signal line.

Now let's record our observations on the Profitunity Trading Partner worksheet (Figure 10-1). We want to record both the TWR and the MACD momentum on our current trading time frame and on one significantly higher time frame. In the Rhythm column, we will use the top row (the buy row) to record the higher time frame readings and the bottom row (the sell row) to record the current trading time frame readings.

Enter the TWR reading on the left portion of the buy and sell rows and the 5/34/5 Profitunity MACD reading on the right portion of the buy and sell rows (Figure 10-5). This creates a Rhythm box that has four pieces of momentum information. The left portion will have up arrows, down arrows, or zeros, and the right portion will only have up arrows or down arrows.

The Rhythm column will give you hours of profitable fun examining all the different permutations of the arrows and

zeros. Remember that our profession is one of speculation and as good (and highly paid) speculators we must see paradigm changes before the masses do. When a move becomes obvious to everyone, it will have all four arrows in the same direction. By then, most likely, it will be too late to climb aboard. It will definitely be too late to squeeze the maximum amount of avail­able profit from the move.

I would want an overriding reason before I would place a new order that is not in rhythm with the lower right-hand arrow (the MACD momentum on the current trading time frame). On the other hand, if all four arrows are pointing the same way, the greatest trading opportunity has already been missed.

Let's review the information we have gathered so far on the Profitunity Trading Partner. We have protection (the air bag) in the form of the two-bar reversal on a significantly higher time frame. We also know more than 95 percent of all traders do, just by looking at the Rhythm column. We know where the market is in its current movement from up to down and back.

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