FL's talk on how to use the 9-day average
transcribed from voice chat given on 2/16/2005

Ok, I just posted a simple chart. [chart FL63.png] Let's just concentrate on the bottom blue line for a moment. What you're looking at here is something to determine the trend. It couldn't be simpler. What the blue line is (which changes color when it goes backwards, but basically the [dark] blue line) is nothing more than an exponential moving average of 9 days, which is basically 1215 periods on the 3-minute. Guess what? If we're above the 9-day, think of it as a green light to play the long side. If we're above the 9-day (1215 3-minute periods), use it as a green light to go long. If we're below it, use it as a red light to go short. It couldn't be simpler.

Let me post something a little bit different. [chart FL64.png] OK, now you'll notice 2 other lines there. Let's pay attention to the bluish line. The bluish line is a 2-day average, which is 270 periods [on the 3-minute chart]. Forget about the green one for a second. So very simply, the first rule is if you're above the 9-day average (and you can call it the 1215 period average), let's just worry about playing the long side. Don't even think about the short side. Now if you're above the 2-day average (which is 270 periods), the light blue one, you're going to be playing hit and run. You're better off buying into a little dip over there and kicking it out. What is a dip? What I've got over there is a parabolic stop, 20/2. You can use whatever the heck you want. It doesn't make too much difference. So when that goes negative in a downwave, guess what? I'm ready to be a buyer. Goes back into an upwave, thank you very much, I'm going to sell you out. So it's a trading mechanism, which (and I don't want to get too deeply into it) combines with the campaigning and the other stuff. So basically, if you're above the 9-day average let's play the long side. If you're above the 2-day average, you're basically playing hit and run. Ah, but now we have something else that occurs, interestingly. What happens when we go below the 2-day but we're still above the 9-day average as you can see a few days ago when we were down around the 94-95.50 area. To buy the dips down there is not the best thing to do, because that could be a turning point. As you can see, from time to time that works.

Now what is this going to miss? What are you going to be giving up? Yes, at some point you're going to be way extended to the upside, and it's going to come crashing down. You may take a couple of small losses on the way down, but if you're playing it properly you will never go short, because that's not a place to go short. Because you set up your simple rule, Oh! I'm above the 9-day, therefore my rule is play the long side. If I'm below the 9-day my rule is to play the short side. If I'm above the 9-day and above the 2-day, then let's just play kind of hit and run and see what the market does. If I'm above the 9-day and below the 2-day, Oh! That's the place to put on a position where I've got a chance for a bigger run. So the idea is you want to wait for a little bit of a consolidation, a little bit of a pullback, going below the 2-day, getting some sort of a bottoming signal, put your position on, put your stops in. Risk control is always, always, always there. Without getting too fancy into the campaigning, but that's something that you want to expect a little bit more of a move out of. Any questions?

Trumbull: Yes, could you just go over how you play the green line? I didn't catch that.

Now how do you determine the trend? You can use the 3-minute waves, the swing chart (and I'm not getting into this). That's a game in and of itself. Here's another game. Don't try to mix them all together. They're all separate games unto themselves. You've got scalpers long and scalpers short, position long, position short. You've got 3-minute games. You've got windows of opportunity games. And now here's another game that's utilizing moving average. No great genius work, real simple stuff. But the key to this thing is, understand where you are, have the patience to wait for the proper setup that you want to take. If you want to play positions, wait for it to go below the 2-day line. If it goes below the 2-day line, wait for some sort of a failure swing, a dot1, I don't care whether you use a parabolic, a fast one, a slow one, you can use whatever you want. And you get on board and go for a ride. It couldn't be simpler. Any questions?

Trumbull: What were the values on the volatility stop that you had when you're playing the 3 moving averages, or the 2 moving averages?

Actually I had a parabolic stop. It's just a 20/2. If you want to use a 20/3, go right ahead. If you want to use a 50/7, go right ahead. It doesn't matter. None of that stuff is critical, because the first thing that you're going to determine is that I'm using this 9-day. If you want to use an 8-day or a 10-day, I don't care. It doesn't make much of a difference. None of the numbers are critical. It's the concepts that are critical. You must stay consistent to your concepts. So basically, if you've been playing the long side ever since around February 1st, that's basically the only way you should have played the market. Anywhere from January 31st on, based on this game, and remember there are many games, but this game from January 31st on is above the 9-day (which is the 1215). And guess what it says? Play me from the long side. It's not any great genius work. That was down around the 1170 area, and we've gotten up into the 1210-1213 area. You buy the dips, put in stops. You're not going to be right 100% of the time. You're putting in tight stops. All right, you'll get stopped out occasionally. But when it goes your way, play with it a little bit. You wait for it to go down below the 2-day, that's the place for a position to ride with. Where people get screwed up is that one minute they're thinking long, one minute they're thinking short. You don't know what the heck you're doing. And granted, the S&P market, basically hasn't had any real moves in a long time. You get into some markets that are moving, or sometimes when the S&P is moving… I don't believe in support and resistance, but I'm talking about a serious break of the line. So around the 10th or so, you had a couple of little tiny dips below, but it was predominantly above. You want to start seeing some of the little peaks of the parabolic being below that line, then you know that it's turned down. Is it going to fool you once in a while? Absolutely. But as far as I'm concerned you never saw one peak below the 9-day. Every peak has been above the 9-day. When the peaks start being below the 9-day, then you can say it's red light time.

Let me put up the continuous contract and we'll go back quite a ways and see what that looks like. [chart FL66.png] Take a look at that from December 10th on. From December 10th until the beginning of January, which way would you play the market, Trumbull?

Trumbull: I guess you could say the long side. That looks pretty easy.

Trading is easy. Don't out-think it, OK? Any kind of game, and as I say you can come up with a gazillion types of games. Make them simple, make them logical, make them non top-picking. Make them go with the trend. If you want to play around with a little parlaying, that's fine. If you look at December 17th or 18th or so, you were down below the 2-day. Oh! That's a nice place for… What kind of trade would you be looking for on the 17th and 18th? Trumbull, go ahead.

Trumbull: You'd be looking for a position trade.

Again, how much easier do you want it?

Trumbull: I'm always looking for something easier, but that is pretty good. Pretty cool, thanks!

I'm trying to post another one here. [chart FL67.png] All right, who wants to tell me what they would want to do from roughly October 27 to November 18th? Based on this game, which way would you like to trade the market?

Trumbull: Well you'd be trading it on the long side, and it's pretty interesting, you did get a pretty nice run up, even though we don't get a position on because we haven't fallen below the 2-day.

OK, that's fair enough, but at least you know which way you're going. And by knowing which way you're playing it, you're not looking… I mean what people don't want to realize is that the markets are random, basically. They are truly random. They go up, they go down. However, within the randomness you have a trend bias. That trend bias is the edge that you have. If you'll stay with that edge, you'll be fine. And occasionally that edge is going to last for a hell of a long time, like there was a nice period there. Will there be losing periods? Absolutely, I guarantee there will be some losing periods in there. But when the winning period is there, don't out-guess it. Don't out-think it. I mean you can come in there day after day after day, and you'll make money on these up-trends. You don't have to say, "This looks like a top." It's nonsense. Nothing looks like a top, OK? Nothing particularly looks like a bottom. All you've got is a trend, you've got a pullback in the trend, and I'll take it back a little bit… Maybe when you have a pullback in the trend, and the trend is still up, you'll have some sort of a bottoming formation, which will give you a failure swing, a dot1, whatever the heck you want to call it. This is using as a basis the parabolic. If you want to use it with the volatility it's not going to be quite so sensitive. Pick any which way you want to do it, but it tells you which way to play the market. If you look at the bean market last year, the oil market when it was running up, you didn't have to be any kind of a genius. Oh! You take something like this. Guess which way I'm going to play it. That's all it takes. It's that simple. The hard part is emotionally staying with it, and the critical part is maintaining risk control. Don't get carried away. You don't need a million things. Just think of the 9-day average as nothing more than a red-light/green-light. Green light above, I'm playing the long side. Red light below, it'll play the short side. And don't try to figure out the next two-second move, the next 5-minute move, or this or that. That's random stuff, OK? That is random stuff. What did I hear recently? I think it was Warren Buffet. He was selling some stock to buy some other stock. Because he sold one stock maybe it knocked it down. You can have all the chart formations in the world, but somebody had to do something, so on a short-term basis it will maybe look one way or the other, but a trend is a trend is a trend, and the only edge in this business that you have is the trend.

OK, I'll go back a little further and see how far this goes back. [chart FL68.png] OK, starting from October 8, it's a downtrend, so there's no reason in the world to be long after that. But look at October 7th. On October 7th we're above the 9-day, but we're below the 2-day. Looking there I can't see any type of a buy formation whatsoever. So if I'm looking to put on a long, I don't see any kind of failswing, I don't see any kind of dot1 on October 7th. So that's how that trend was ended. Maybe you would have found some reason to buy there, and you would have gotten stopped out, or maybe you would have stayed out for that day and a half, and then, Oh! The trend is down, and there's another opportunity there. Use a little bit of intelligence to see how you want to play it, but if you want to use this as a guide, you can't find anything simpler than this.

Let me go back even further and see what we come across. [chart FL69.png] OK, there's some more. Now remember, here's the philosophy behind it. When you have a movement that really doesn't do too much, you're not going to make much, you're not going to lose much. When it has a nice move, which they will from time to time, even in this thing from September 22nd on it had a nice move. Then again starting about October 1st it had a nice upmove over there. You know which way to do it. You will not make money in all of these. Just like anything else, if you try it 10 times you've got to figure 3 or 4 times are going to be a wash. Three of them you'll lose, well in this case it won't even be 3 of them, but for argument's sake 3 of them you'll lose a little bit of money, and 3 of them you're going to make a lot of money. And when you can understand that, that there's nothing that's going to give you 100% winners, you're going to get areas when you're going to make a little, lose a little. Call them washes. Then you're going to get areas when you're going to make a lot. And in the market there are basically 4 things that you can do. You can take a big profit, you can take a small profit, you can take a big loss, and you can take a small loss. If you can avoid taking that big loss, you're 90% ahead of the game. If you like this way of doing it, that's fine, it's just another game. You want to coordinate it with some other things? Starting to mix and match stuff can get you a little screwy, but you want to think of each game as a simple game unto itself. The 3-minute is one game by itself. That gives you powerbuys, etc. etc. This gives you a simple trend indication on which way to go. Will it catch the top? Absolutely not. Will it catch the bottom? Absolutely not. But maybe the 3-minute might catch the top or the bottom. So now what you're doing is you're getting into more and more and more dimensions of trading. Anyone who tries to guess what the market is going to do is going to lose. You can't guess. You must have a defined plan, and as long as you have a defined plan, in the long run that defined plan will work. As I say, on this game, you're in a downmove if we're looking at September 22. OK, you're below the damn thing. All you've got to do is sell any kind of little rally. You're able to hit and run, thank you very much. And it's really that simple, there's nothing complicated. The complicated thing is that it's not you against the market, like I've always said, it's you against yourself.

Trumbull: What trades do you use to give you those probabilities?