Long Term Secrets To Short-Term Trading

 
 
Figure 2.5 Using this system on the next time period. 
I have duplicated this study at various times, on wildly different sets of data and have yet to see the best 
cyclical-based approach to trading be even close to being the best in the next test on out-of-sample data. 
My advice is to forget cycles of time, they are the will-o'-the-wisp of Wall Street. 
There are cycles (maybe it is a pattern) to the way price moves that you can quickly see on any chart, 
any time frame, any market, any country in the world where I have traded. Once you understand these 
patterns, you will be better able to align yourself with where prices will most likely go. 
Over the years, I have codified and identified three cycles and now refer to them as (1) small 
range/large range, (2) moving closes within ranges, and (3) closes opposite openings. 
It is time for your first lesson in chart reading; we will begin with a study of changing ranges. When I 
refer to ranges what I am talking about is the total distance traveled by a stock or commodity in a day, week, 
month, year, it could even be in one minute. Think of range as the price distance traveled in whatever time 
period you are using. For all three cycles you will learn, the rules work equally well in any time frame. The 
rules I have uncovered are universal to markets as well as time frame references. 
The Natural Cycle of Range Change 
On any given day, the range of price in a commodity can do anything. That is what causes so much 
chartist confusion. But over any time period you want to study, you will notice a clear-cut, precise cadence 
to range activity.

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At all times, all markets, ranges fluctuate from-and this is critical-a series of small ranges to a cluster of 
large ranges. 
The cycle continues repeating itself year in and year out; small ranges are followed by large ranges, 
large ranges are followed by small ranges. This is clockwork, this is the basic key to profitable short-term 
trading. 
This seemingly obvious cycle is so powerful and important to us because speculators must have price 
change to make money. The greater the change, the greater the potential for profit. If there is no, or little, 
price change, a speculator is simply stuck in the mud as price fails to trend. 
That is why short-term traders need explosive price moves over a few hours or days. Without this, we 
will wither on the vine. Got it? I hope so, because here comes the fascinating part. What usually attracts the 
public or uninformed to a market is large price change. They, usually incorrectly, think the current large 
change will continue. 
You now know better. 
Large ranges give way, most often, to small ranges. Your objective is to establish a position in advance 
of large price change. It is a classic sucker play to see a market that has been hot, with large ranges for a day 
or two, pull in the public just before a sideways or congestion move. Most short-term traders are losers. The 
reason they are is that they go from one hot market to the next because they have no understanding of how 
the drunken sailor swaggers, how prices move across the great wasteland of their chart books. 
On the other hand, we who are the knowledgeable few, play just the opposite game. We look for 
markets that have been volatile in the past and are known for large daily ranges, but have recently produced 
small daily ranges because we know a large-range day is out there not too far away! 
You can eliminate the madness of charts by laying low on the sidelines, carefully waiting until ranges 
have dwindled, dried up. Once that part of the natural cycle is about over, it is time for short-term fireworks. 
By the same token, large-range days tell us we may soon get stuck in the mud of small ranges where we 
cannot make money. This is certainly no time to overstay our welcome. Let me prove this point with some 
charts. Figure 2.6 shows gold in the September 1997 to January 1998 time frame. 
Do yourself a big favor. Mark off all the large-range days you see in this time period. Then study the 
size of the ranges just prior to these explosive up-and-down days. See what I see? We were given ample 
warning of virtually every large-range day by the shrinkage of ranges a few days earlier. 
Voila! We are on the edge of a major market discovery here. I know-I have not yet told you how to tell 
in which direction these ranges will take off, but don't get ahead of the teacher. For now study every chart 
you can so that you can imprint on your brain, your very speculative spirit, the first undeniable short-term 
truth of the market: 
Small ranges beget large ranges. Large ranges beget small ranges. 

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