Long Term Secrets To Short-Term Trading

Figure 6.6 Day T-Bonds (daily bars). Graphed by the "Navigator" 
(Genesis Financial Data Services). 

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the initial trade, but far less than the one I would have taken had I not known of this market bias. 
Admittedly, the market could have moved higher; the possibility of being wrong never takes a vacation, 
which is why I still used a stop. I just slightly altered it based on the information at hand. This is a thinking 
business. Always has been, always will be, which is why I am interested in teaching the elements that can 
lead to successful trading. One of the vital elements I have used with a good degree of success is the 
TDM/TDW concept. I am not really certain who first came up with this idea-Sheldon Knight, one of the 
nicest guys and best researchers in the commodities business, or myself. But I think I have relied the most on 
the technique. 
Several of my trading friends reject the TDW concept and insist there is no difference from one day of 
the week to the other. I violently disagree; it is my first building block in determining what I will do 
tomorrow. The data in this chapter indicate the existence of bias on certain days of the week. It is my job as 
a trader to maximize this opportunity. 

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Chapter 7 
Patterns to Profit 
My evidence that there is method to the madness of market 
Chartists have believed that certain patterns or formations on their charts can predict market behavior. 
For the most part, this crowd has looked at long-term patterns of market activity. Serious students of such 
phenomena should start with the Edwards and Magee classic, Technical Trends. 
In the 1930s, Richard Wyckoff, Owen Taylor Gartley-. and George Seaman (my favorite), spent a 
great deal of time on these long-term patterns in an attempt to build a systematic approach to trading. In the 
1950s Richard Dunnigan took a big step forward by focusing on price patterns of 10 to 15 days while the 
older crowd was still looking at 30- to 60-day price patterns. 
As mentioned, these same price patterns con be found in any activity. Flip a coin, chart it, and you will 
see the same formation, found on a Pork Belly or Corn chart' This has turned some analysts price structure 
analysis and for good reason; enerally speaking, these do not forecast or tell us much about the future. This 
may be because there is no predictable ability in chart formations, or the time period studied is not 
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correct. W. L. Linden, writing in Forbes magazine, found that economic forecasts made by leading 
economists have consistently been incorrect at virtually every major turning point since the 1970s. A 
chilling thought here is that the study included forecasts done by Townsend-Greenspan-the latter name is 
that of the man who became head of the Federal Reserve System (the world's most powerful private 
corporation), Alan Greenspan. 
The only ray of hope to be found in the article is the statement that these forecasts were correct in only 
a short time frame. This makes sense; it is far easier to forecast the next 5 minutes of your life than the next 
5 years. AS time progresses, more variables, more change, comes into play. Hence forecasts stumble in the 
unknown dark, black holes of the future altering what was once known or thought to be the path of 
righteousness. 
I guess this may explain why I have actually made money (for many years I might add), trading off of 
patterns. The patterns I have used are for calling very short-term market fluctuations of from 1 to 5 days. 
There may be some grand scheme of things, some master pattern of all major market highs and lows. If so, it 
has never been revealed to me, but certainly there are many short-term market patterns that give you a big--
in some cases, I would go so far as saying huge-advantage in the game. 
The Common Element 
First, I need to prove that patterns can and do work or at least bring an advantage to the table, a cow 
for us to milk. Then I can tell you why I think these patterns do work, what the method to the madness is, 
what my working premise to these patterns to profits is all about. 
Let's start with a basic pattern using the S&P 500, a broadly traded market. What we know is that 50 
percent of the time this market should close up for the day, 50 percent of the time down for the day. What 
will happen tomorrow on any given day is supposed to be a coin flip, if we don't consider TDW. 
Patterns can change all that rather dramatically. 
We begin by establishing a basic parameter. What happens if we buy the S&P 500 every day and exit 
on the next close with a $3,2 50 stop? From July 1982 through February 1998, there were 2,064 trades with 
52 percent accuracy and an average profit per trade of $134. 
Now we add our first pattern, what if we only buy tomorrow if today closed down? In this case, there 
were 1,334 trades with the same 52 percent accuracy, but the average profit per trade escalated to $212. 
Finally, if our pattern consists of three consecutive down closes, the accuracy jumps to 58 percent to 248 
trades and the average profit per trade skyrockets to $353 Could it be there is something to this pattern stuff? 

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Let's mock up a simple pattern to see what happens tomorrow if the following conditions exist: First, 
we want today's price to be greater than the close 30 days ago so we are in some sort of up trend. Next, we 
would like to have seen a slight pullback against the uptrend so we will want today's close lower than the 
close 9 days ago. If that condition exists, we will buy on the open tomorrow and exit on the next day's 
close. If the market is really random, 52 percent of such trades should make money (not 50% because 
during the time period of the study there had been an overall trend bias to rally best evidenced by the fact 
that the initial study showed higher closes 52% of the time). 
The facts of the matter are far different. This meek little pattern produced 354 trades with 57 percent 
accuracy and an average profit of $421 a trade. Accuracy jumps from 52 percent to 57 percent and the 
average profit per trade increases almost fourfold! Hold on to your hat, it gets better. 
If we combine a pattern with our trade-day-of-the-week concept and take these pattern trades on just 
Monday, the accuracy goes to 59 percent and average profit to $672. I rest my case; patterns and days of 
the week can be a helpful trading tool or advantage for the short-term trader. 
The best patterns I have found have a common element tying them together patterns that represent 
extreme market emotions reliably set up trades for price swings in the opposite direction. 
In other words, what the public "sees" on their charts as being negative is most often apt to be positive 
for short-term market moves and vice versa. A case in point is an outside day with a down close. The day's 
high is greater than the previous day's high and the low is lower than the previous day's low and the close is 
below the previous day's low. This looks bad, like the sky is indeed falling in. In fact, the books I have read 
say this is an excellent sell s ignal, that such a wild swing is a sign of a market reversal in favor of the 
direction of the close, in this case down. 
Whoever writes these books does not spend much time looking at price charts! As Figure 7.1 of the 
Dollar Index shows, this can be a very bullish pattern or market configuration. 
Reality is far different than conjecture as a quick computer test shows and reveals the power of one of 
my favorite short-term patterns. It does not take much to prove the validity of patterns or to check to see 
what is really going on. Given this outside day pattern I have noticed, there is a final filter, or event that can 
happen to further influence the pattern tomorrow. This event is the direction of tomorrow's opening, as 
shown in Figure 7.2. If, in the S&P 500 index, tomorrow opens lower than the outside day's down close and 
we buy on the next day's opening, we find 109 occurrences with 85 percent accuracy making $52,062 and 
$477 a trade. 

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