Long Term Secrets To Short-Term Trading

"Talon." The basic idea is to look at the various swings price has taken from one point to the next over the 
past few years. There are many such points to study. 
The ones I have chosen for this next glimpse into market activity, measure the amount of price 
movement from the high 3 days ago to today's low. That is Step 1. Step 2 is to take the swing distance from 
the high 1 day ago minus the low 3 days ago. Finally, we will use the largest of these values as our basic 
volatility measurement to begin the process of designing a filter or price cushion to add to tomorrow's 
opening for buying or subtract for selling. 
The system does okay; it makes money as the following results on the S&P 500 from 1982 to 1998 
demonstrate (see Figure 4.20).

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72 
The rules are to buy at 80 percent of the swing value above the opening and sell at 120 percent of the swing 
value below the opening. Use a dollar stop of $1,750 and my bailout exit. This makes $122,837 from 1982 
to 1998 with an average profit per trade of $228. 
Results 
As always though, the question becomes, can we do better? Our last attempt at doing better was to use 
TDW as our filter to substantially improve performance. We will now go beyond this and bring in a 
fundamental consideration-the impact of bond prices on stock prices. 
We will now try this concept as a filter (Figure 4.21). The rule is quite simple, we will only take buy 
signals if the closing price of bonds is greater today than 5 days ago, and only take sells if bonds are lower 
than 3 5 days ago. Our reasoning is well founded in the somewhat common knowledge that higher bond 
prices are bullish for stocks, lower bond prices bearish. 
What a difference this makes! An average profit per trade goes from $228 to $281 while our drawdown 
plummets from $13,025 to only $5,250. Best of all though is that in the original "nonfiltered" trades we had 
a largest losing trade of $8,150, whereas with the bond filter the largest loss was only $2,075! 

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73 
One Step Further 
Your education is nearing completion if you are wondering what happens in this model if we only 
take signals on the best TDWs while the trend of the Bond market is giving us bullish or bearish 
confirmation? 
Again, the results speak for themselves: by combining all these ingredients we increase our chances or 
odds for short-term trading success. 'Notice the number of trades is substantially reduced, this means our 
exposure is less, but our average profit per trade increases. Our profits decline to "only" $76,400 but the 
average profit per trade jumps to $444, drawdown stays about the same at $5,912 but the percent of 
winning trades goes to 90 percent. 
What we have done here is filter out trades that are not backed by all three of our conditions. Filtered 
trading for short-term swings will put you a light year-or two-ahead of all the rest of the short-term traders. 
There is an extra advantage here; by using filters you are placing demands on the market, demands that 
mean you will not trade every day, demands that naturally force you to trade less, not more. Active traders 
are usually losing traders. Those of us who pick and choose our spots to speculate are more inclined to 
come out winners as we have tipped the scales in our favor, which is what intelligent speculation is all 
about. 

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Chapter 5 
The Theory of 
Short-Term Trading 
In the short term, theories work, but in the long term, give way to reality 
Now that you have an understanding of how markets move from point to point and the basic strategy 
of how to best take advantage of these swings it is time to examine the theory of what we are doing so I can 
then take you back to practical application. 
Our basic concept or working theory is that something causes explosive market moves. These 
explosions put the market into a trend phase, and these trends, for our purpose, last from 1 to 5 days in 
most markets. Our object is to get aboard as close to the start of this explosion as possible. 
Which gives rise to the questions, "What causes these explosions in market activity, when are they 
most apt to occur, and is there anything here we can use to pin down the time and place of these moves>? 
" 
Succinctly stated, those are the problems I have dealt with most of m, life. Long ago, I recognized that 
if I could not identify a problem there was no way on earth I could find its solution. You now know the 
problems so let's look for some solutions. Let me hastily add that I do not have all the answers to this 
gigantic puzzle. There is nothing like losing to bring you to your senses, to teach you that you are not so 
damned smart, that you need more education. I still have losses, plenty of them. so I too, still need more 
education. And always will. 
The biggest "cause" of these moves is probably news. But we have trouble trading on news because, 
first, the news can change as quickly and as unpredictably as the weather. News, or changes in world 
events and marketplaces, can be random; thus, the markets wobble around from one unknown news event 
to the next. 
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76 
The drunken sailor analogy mathematicians have used is most likely due to news knocking prices back 
and forth. Second, we may be the last guy on the food chain getting such news so we receive it too late. 
Third, there is nothing we can look at or observe that tells us what specific future news might be. Fourth, my 
years of trading strongly suggest that those who are close to the news usually position themselves prior to 
the announcement. (Note: There is not one group taking advantage of news; the group varies from source to 
source.) Bankers might have inside news about the T-Bond market, but not on Cattle, whereas feedlot 
operators might have that data, but nothing on Bonds. There is not an Illuminati controlling all news sources. 
While Mel Gibson's character Jerry Phillips was right on in the movie Conspiracy Theory, do not extend that 
theory to the markets. 
While I was writing this book, a book about some of my archeological exploits, The Gold of Exodus, by 
Howard Blum (New York: Simon & Schuster), was discussed in several magazine and newspaper articles. In 
one of them, where I lived was stated incorrectly as was my occupation, my age, the type of car I drive, and 
my description of what the book is all about' In short, if I can't believe what I read about myself from a 
reporter who personally interviewed me, I suggest you probably can't trust much of what is written about 
Orangejuice, Oats, and Oil.
The supposedly prestigious Wall Street Journal is no exception. In early 1998, they told readers their 
source inside the Federal Reserve System was certain the Fed Open Market Committee was about to raise 
interest rates. Six weeks later when the Fed released their notes on the meeting, we learned the truth, they 
had voted 11 to 1 to not raise rates! On at least two occasions, reporters of the Wall Street journal have been 
found to be touting stocks they, themselves, had already acquired a position in. Television is not exempt 
from this same problem; CNBC's lead "Inside source" Dan Dorffinan is no longer on air for the same 
allegations of misleading viewers. A few years back, even Ralph Nader was caught, or rather his mother 
was, by the Securities and Exchange Commission, selling short stocks in General Motors and a tire company 
just before Nader attacked them with his consumer complaint law-suits. So what else can we look at if we 
can't really examine news'