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LEVERAGE STOCK TRADING
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Now we are ready to examine the concept of "leverage." First, think of a number-one wood, the golf club you use for maximum distance. What makes it possible to drive the golf ball hundreds of yards down the fairway? A combination of strength, coordination, and the leverage of the golf club (Figure

Pretend for a moment that you are in a crazy golf tournament. The rules are different here: every time you drive the ball, the caddy saws 6 inches off the handle of your driver. After a few holes, your score will go up because you are giving up leverage every time you make a drive.

Let's apply the same principle to the market. Whenever you have a fractal start and a fractal signal, you have leverage (see Figure 8-7). If the market comes back toward the fractal start, you lose a bit of leverage. If the market comes all the way back to the topmost (bottommost) bar of the start plus one tick, you have lost all your leverage and the buy or sell signal is immedi­ately canceled.

Figure 8-6 An example of leverage.

TAKING ACTION

Trading the fractal is an easy way to make sure you are trading in the direction of the market momentum. When any market makes a directional move, it builds up momentum. This momentum is like a rolling ball that continues to roll until it meets resistance that has more power than the momentum of the ball. The initiating fractal tells traders which way the market river is flowing. It virtually guarantees being included in any significant trend move.

Remember that we are looking for a specific fractal formation that consists of two adjacent fractals in opposite directions. This sets up a fractal start and a fractal signal. If the fractal signal is triggered, we go in that direction. A fractal stop generally occurs two fractals back in the opposite direction, or if a buy/sell signal is created in the opposite direction. In the first case, we would have a stop. In the second case, we would have a stop-and-reverse signal.

If you determine you are in a trend run, you will maximize your profits by using the regular trailing stop (two fractals back in the opposite direction). If you determine you are in a bracketed market, you may choose to exit or stop and reverse on a thumb signal, described in the next section.

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