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PUTTING IT TOGETHER AT LEVEL ONE
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We now have the elements that can take us from ground zero— a losing trader—toward the first level of consistent profits. When you understand this chapter, you will know more about making profits in the market than 90 percent of all the traders do. You will understand that volume controls the stock market movements and that trends come from off the floor. All our markets are now basically worldwide markets and will be even more so in the future.

You have the basic tools to translate market action into easily understandable terms and funnel the enormous amounts of information the market gives off each minute into a manageable and concise formula for both analyzing the market and making good stock trading decisions. You also know how to analyze the incoming volume and how to use the most accurate evaluation of the market's reaction to that volume, the MFL You know that by combining the raw tick volume and the MFI you have an even better and more sophisticated instrument for understanding exactly what the market is doing and what the likely next move will be.

For example, if the particular bar you are examining opened in the top third and closed in the bottom third (its internal designation of 13 makes it a drifter and tells us exactly what happened during that time period), the market is moving down. If the midpoint of the current bar is above the range of the previous bar, we designate the immediate trend as a minus (-). If we have increasing tick volume compared to the previous bar, which gives volume a plus (+), and the MFI (range divided by ticks) is less than the previous bar, which gives the MFI a minus ( —), we would have the following designation:

From this designation, we know that the trend is down, the sellers are in charge throughout this time period, they continue to be in charge at the end of the period, and the Profitu- nity window is a squat. Ideally, we should be ready to reverse and go long.

Between this and the prior example is that buyers were in charge throughout this bar and the Profitunity window is a green. Ideally, we should already be on board on the long side, especially since we had a squat bar five bars previous to the current green. This is a "go-with" bar, and we want to stay with it until the market tells us otherwise.

SUMMARY

Our purpose at this novice level is to trade the market without losing money and while gaining valuable experience. If you are not breaking even in your trading, you are not at this level. Even if you are losing, you should continue to read the rest of this book. Look especially at Chapter 10, where we begin using the Profitunity Trading Partner. That aid will improve your trading at any level.

The tools you should now be using are the individual bar analyses (OHLC: open, high, low, and close), which will tell you who is in charge and what they are doing. You should be familiar with information coming from the extreme, neutral, climber, and drifter bars.

You should recognize quickly and easily the immediate trend direction.

You should thoroughly understand the MFI (Market Facili­tation Index) and how to combine the MFI with raw volume to produce the Profitunity windows, which offer insight that was not available before. You now know that any bar with increasing volume (compared to the preceding bar) must be either a green or a squat. Either one should wave a flag in your mind, telling you to examine the market closely for any trading opportunities.

Decreasing volume means you will have either a fade or a fake bar. Fades and fakes are much less important than greens and squats, but they alert us to pay attention because big moves most often come from dull markets.

Review Questions

In the next chapter, we move from not losing money to making profits on a consistent basis. From a focus on only two consecutive bars, we will change to a wide-angle view consisting of a minimum of 100 bars. We will continue to use everything learned at Level One in the new, broader, and more profitable Level Two.

The following questions are for your review. Before moving to Level Two trading, you should be able to answer them easily. If some of them still stump you, I suggest you reread the chapter or the relevant sections.

REVIEW QUESTIONS

•  How can you tell who is in charge during a given spe
cific time period?

•  In our bar identification code, which number is the
open? Which is the close?

•  What are the two extreme bars, and what information
do they give us about the continuation of the present
trend?

•  What information does a neutral bar give us?

•  Which of the three climbers gives us the most informa
tion about the current market and which gives us the
least?

•  Which of the three drifters gives us the most informa
tion about the current market and which gives us the
least?

•  Where are trends made and how can you identify
them?

•  Explain clearly why the MFI is so valuable to profitable
trading.

Level One: Novice Trader

9. Define and describe the four Profitunity windows.

•  Which two Profitunity windows are accompanied by
increasing volume?

•  Which of the four Profitunity windows is the most
valuable to you as a trader? Why? Where do windows
of this type occur?

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