Rob Booker - Wallaby Trade.pdf

Copyrigh © 2010 ob Booker Copy his book and give i o your riends. Prin your own copies and sell hem (really), (r eally), and keep he money or yoursel (r (really). eally). oll some weed ino he pages and smoke hem, i you wan. I don’ give a crap. I jus wan you o make sure ha i you give away, prin, copy, disribue, sell or do anyhing wih his book, ha you lis me as he auhor because, like, hey, I wroe he damn hing, so I ge he credi. Oher han ha, I would like or as many people as possible o learn abou he  Walla  W allaby by rad radee � and perhaps perhaps,, one day day someone someone will make make me a coa made made o  wallaby  wall aby lea leahe herr. Ple Please ase sen sendd sai saidd coa coa o Rob Booker, 1201 Main St., Mezzanine Level, Wheeling, W heeling, WV W V, 26003.

Oh, yeah, and I’m serious abou he copying and disribuing hing. Jus go nus  wih his. his. Do whaever whaever you wan. wan. Once you read read his inorm inormai aion, on, i’s as much  yours  you rs as as ii is mine mine.. Here’s where you can download he original Here’ or iginal publicaion file, so you can even add o he book, and hen sell i or give i away as your own. www.WallabyTrade.com

P.S. I apologize in advance or all he bad language in his book.

ISBN: 1460957490 ISBN-13: 978-1460957493

 Also  Al so by Rob Book Booker er

Books: “Advenures o a Currency rader”  “e Currency rader’s Handbook”  eBooks: “Forex Sraegy 10: Low isk/High eurn Currency rading” 

o all he Wallabies who ollow me on witer, his is or you. anks or reading all he crap I’ve been wriing.

Contents 1 2 3 4 5 6 7 8 9

Inroducion W ha he Hell is a Wallaby? W ha Can Tis Wallaby Do? Bearish Diverge Divergence nce Bullish Divergenc Divergencee Bending he Diverge Divergence nce ules Enering Ener ing a Wal allaby laby rade Wal allaby laby rade Sizi Sizing ng Sop-Losses on he Wallaby Profi arges or he Wallaby Appendices

FREE STUFF

Te Wallaby Indicaor is ree and available here:

htp://www.Wallabyrade.com  You  Y ou can oll ollow ow Walla allaby by r rad ades es on wit witer er a:

htp://www.witer.com/wallabyrade

i 1 21 27 51 65 85 113 125 171 195

INTRODUCTION WHA YOU GE WIH HIS BOOK  I’m going o share every las deail abou my avorie mehod o shor-erm rading. And you can apply his mehod o longer-erm rading, oo. Tis book is filled wih chars, sep  by sep insrucions, some sories, and quie a bi o offensive language. I shouldn’ ake you long o read he book, bu I hope you come back o i again and again as you learn o rade he sysem. I’ve had he Wallaby indicaor buil or a number o charing plaorms, and as menioned a ew pages ago, you can have he indicaor or ree. In ac, as you’ll learn in chaper 1, you can even rade he mehod wihou he indicaor. Mos o all, I look orward o hearing rom you. Please conac me on witer (preerred) or Facebook. Tis isn’  your average rading book. Bu afer all, you’re no he average rader. And I wan o hear wha you do wih wha  you’ve learned. Le’s dive in. And be warned: I does ge a bi sicky a imes.

WHAT THE HELL IS A WALLABY?

1

2

THE WALLABY TRADE

 A ew years ago, I was in Ausralia doing a seminar. During hese seminars I raded live. I showed hundreds o chars and broke down every sysem I used ino specific seps. I  was he mos exhausing work I’ve ever done. I me some o my bes rading riends a hese evens � people I’m sill in ouch wih o his day. I generally invened somehing new o share wih each seminar group. Creaing new sysems was un. I’d have somehing resh and exciing o offer he raders. Tey knew hey were geting he very bes I had o give, as well as he laes inormaion. I had more un. Tey had more un. When we had more un, we made more money. You ge he poin.  Well, a his Ausralia seminar I inroduced he Wallaby Indicaor, which I buil in he lobby o he hoel. I can’ remember he name o he hoel chain, bu he beds were crap. I el like you were lying on Syrooam. Neverheless, he view o Darling Harbour rom my room was awesome, and I spen a lo o ime sanding in ron o he window,  wondering wha he hell ime i was, and wondering why I coninued o fly around he world.1 1. I am no making his up: When I flew on his rip rom San Francisco o Sydney, he gae agen realized ha he name on my passpor did no mach my airline icke. Tis was because some jackhole a he U.S. Passpor office could no spell, and because I had been oo lazy o ake he ime o send i in or correcions. Because he gae agen was a litle bi fliry, and because I was  willing o ac a litle bi gay, I go on he plane, anyway, and he even upgraded me o Firs Class. Fancy!

WHAT THE HELL IS A WALLABY?

3

Here is a picure I ook rom my hoel window:

FIG. 1-1: Te view rom my room in Sydney, Ausralia.

 While siting in he lobby o he Novoel (wow! I remembered he hoel name � see, I haven’ damaged every las brain cell in my skull by flying millions o miles) or a ew days, rying o orce my body ino submission o a 14-hour ime change, i occurred o me ha I’d like o see a bunch o Sochasic Oscillaors on op o one anoher. No, his wasn’ some kind o kinky dream I’d had (or ha, see Chaper 2), bu raher, i was a sincere desire o see  wha would happen i I sared overlapping indicaors.  Would hese indicaors ge along? Would hey mae?  Wha would hey produce?

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THE WALLABY TRADE

Okay, maybe i did ge a litle bi kinky. I ge ha way abou rading.  Anyway, he nex hing you know, I’m saying up lae and  waking up early, and I’m uriously yping away on my lapop, programming a new indicaor. I ook sandard indicaors and used hem o do new hings. ime passed  wihou me even noicing. I skipped meals � even he  yummy breakas poaoes rom he Novoel, which were served up by his really cue Czech girl.  Afer a couple o days, he indicaor was complee. I was in  Ausralia, so I called i he Wallaby.  And now you ask again: Wha he hell is a Wallaby?  Well, I’m glad you asked. The Wallaby Is an Indicator Built From the Stochastic Oscillator.

 An oscillaor is somehing (duh!) ha “oscillaes,” or swings  back and orh. When you place an oscillaor on your char,  you’re atemping o ge a eel or he swinging movemen,  back and orh, ha a financial insrumen makes.  A he ime I buil he Wallaby, I’d already been using oscillaors in my everyday rading. You probably have, as well. From he elaive Srengh Index (“SI”) o he

WHAT THE HELL IS A WALLABY?

5

Commodiy Channel Index (“CCI”) o he Sochasic, here are probably hundreds o oscillaors ou here. And hey are mean o do jus one hing, really: Tey ell you  when a financial insrumen is overbough or oversold. For he purposes o his book, I’ll use he leters “OB” o reer o overbough and “OS” o reer o oversold, and I’ll use hese inerchangeably, jus o shake hings up. By he  way, I’ll also use he words sock, currency pair, uures conrac, securiy and financial insrumen � all o reer o he ypes o hings you can rade wih he Wallaby.  A financial insrumen is said o be overbough when i’s gone up so high ha people/chars/asrologiss hink i’s coming back down again. Mos oscillaors have a se o lines ha will show ha his overbough exiss. Tis is hard o describe wih jus words, so I hough I’d wrie a poem abou i:

ere once was a sock named Ford I never moved, so people go bored I wen overbough  And I bough he sock And I can’ rhyme, so he end o his limerick makes no sense.  All righ, i’s clear ha he poem idea ailed. You can be sure ha I will ry i again laer on, o see i I can make i any worse.

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THE WALLABY TRADE

Insead o rying o work wih a poem, le’s jus move onward and show you wha an oscillaor looks like when  you plo i on a char. Behold:

FIG. 1-2:  Oversold!

 And also:

FIG. 1-3:  Overbough!

Ta’s he regular Sochasic Oscillaor. Te indicaor  will show wo lines, one line ha moves aser han he oher. When he aser line goes above 80, we call ha

WHAT THE HELL IS A WALLABY?

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overbough, and when he aser line goes below 20, we call ha oversold. When boh lines go above 80 or below 20, we ge our briches on and ge ready o rade. Te Sochasic Oscillaor was invened in 1492 by Teodore oosevel.2 I’s premised on he belie ha as a financial insrumen ravels higher, he momenum wih  which i ravels will slow down. Imagine or a momen ha you’re running uphill. You are probably able o go aser a he botom o he hill han a he op. I’s he same idea wih an overbough reading on he Sochasic Oscillaor. emember, an oscillaor measures he abiliy o somehing o swing back and orh � and when i swings upward (overbough), i’s going o evenually swing back lower. Bu he Sochasic doesn’ jus measure overbough condiions, righ? I’s also used o predic when a price may have moved down so ar ha i should no be able o ravel any lower. Ta’s a prety wild saemen o make, since exacly predicing price movemen is acually impossible.  Anyway, ha’s oversold: Te price o a sock has raveled so ar low ha we hink i’s ready or a swing back upward.  As a financial insrumen ravels lower, i’s evenually 2. Tis is no acually rue. I was invened by George Lane, one o he mos amous echnical analyss o all ime. He goes way back � he sared his career a E.F. Huton (so you know when he alked, people lisened) in 1950.

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THE WALLABY TRADE

going o ge ired, and he momenum will slow down. Price will move a bi lower. I even migh creae a gian spike downward in one las swan dive. All o his pushes our Sochasic lines below he 20 mark. Ta’s a sign ha a sock has gone oversold, and i’s an early warning sign ha i could be ready o head higher. Here’s he ormula or he oscillaor (H  = high, L = low):

I ha ormula seems conusing, you’re no alone. In he 50 years since he Sochasic was invened, no one person has ever gone hrough he rouble o calculae i by hand, or even using a calculaor. I’s no necessary. Te chars do all he hard work or you. All ha ormula means is ha he Sochasic compares he closing price o a financial insrumen o is recen price range. Your chars will auomaically do all his mah or you, so we don’ need o have a big, long conversaion abou i. As long as you plug in some numbers o sar i off, he chars can do he res. Te numbers you need o plug in are or he number o  bars you’re going o look back over in order o ge your high o low range, and hen a number or he moving

WHAT THE HELL IS A WALLABY?

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average associaed wih he “%D” par o he ormula. You have complee conrol over hese numbers. You are he maser o he Sochasic. Te Big Cheese. Te one who calls he shos. You ge he idea. Mos people choose 7, 3, 3, or heir setings on he Sochasic. I’s used by 99% o all he people in he world  who ever plo his indicaor. Only Kim Jong-il o Norh Korea and ob Booker use differen setings. o keep hings simple, we’ll sick wih he 7,3,3 setings righ now. Once you se i up on your chars, here’s wha i looks like:

FIG. 1-4: A char wih he Sochasic Oscillaor

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THE WALLABY TRADE

The Problem

 Wha? A problem?! Already? Te problem wih jus ploting he indicaor “as is” comes  when you ry o build a complee rading sysem ou o showing he sandard oscillaor. O course you can plo i on your chars and buy when he oscillaor goes below 20, or sell when i goes above 80. Or you can do somehing slighly more original � and do he opposie o wha I jus said � buying when i goes above 80 and selling when i goes below 20. Millions o raders have come and gone and done exacly hose hings.  While ha migh be enough or some raders, i’s no enough or me. And I’m guessing you bough his book  because i’s no enough or you, eiher. Jus puting some colorul lines on my chars isn’ going o be enough o creae a rading mehod. I don’ wan o look a he same hing, in he same way, as mos oher raders. I’m a counerrend rader by choice, and I’m a couner-rend person in my lie. I I find ou ha everyone is waching he same movie, I cross i off my lis. I I find ou ha everyone is ploting he same indicaor in he same way, I look or a  way o do i differenly. Te las hing I wan o do is ollow he majoriy o raders. Especially because he majoriy o raders lose money.

WHAT THE HELL IS A WALLABY?

11

What I’m Trying to Say

People all around he world pick up a book and learn somehing and ollow i blindly. God, I’m happy ha’s no he way you’re approaching his book. I wan you o hink criically, alk o me on witer, alk o he Wallaby on Facebook, and generally pick his all apar and pu i  back ogeher again. I’m going o guide you hrough ha process, each you how o hink abou he Wallaby and show you los o examples � and hen you’re going o have a sysem ha you can call your own.  As or he res o he people in he world ha don’ hink criically abou rading sysems, well, good or hem. I  would gladly si a shouing monkey in ron o a compuer and have i rade agains hose people, and I be you he monkey would win. Hell, on some days he monkey would  bea me. FIG. 1-5:

“Bobo he rading Monkey” afer a loss.

12

THE WALLABY TRADE

 Afer he monkey finished beaing himsel up or making common beginners’ misakes, he’d probably have a  banana. And afer he banana, he’d probably hrow some poo around unil he go ired. And afer ha, when he had exhaused all his oher diversions, he monkey would probably ask himsel, “Why don’ I mix his up a bi and show he indicaor in a differen way?” Ten, off o he  bahroom wih our litle primae riend, where he’d wash his hands and come back o he compuer and ge o work.3 Ta’s prety much wha I did, oo. I didn’ fling any poo around, bu I did wash up and ge back o work � and hough abou displaying a common indicaor (he Sochasic) in a unique way. I decided o show he Sochasic overlapping on op o anoher Sochasic, overlapping on op o ye anoher. I sounds crazy. I is, I admi, jus a litle bi insane. I was like a hree-layer Mexican dip, only slighly less spicy. Here’s wha I did: I pu he 1-minue Sochasic 7,3,3, on he char. (cheese layer) I hen pu he 5-minue Sochasic on op o i. (second cheese layer!) I hen pu he 15-minue Sochasic on op o ha. (hird cheese layer!)

WHAT THE HELL IS A WALLABY?

13

 And wha I ended up wih was hree oscillaors, rom hree differen ime-rame chars, all on he same char. Firs le’s ake a look a wha i looks like when you do ha, and hen I’ll explain why I used he ime-rame chars ha I did.

FIG. 1-6:  Te Wallaby 

3. I srongly sugges ha any ime you see an indicaor � no mater wha i is, including he one you’re reading abou in his book � ha you immediaely look o change he setings o see i you can look a i rom a differen perspecive. When you change he setings, you sar o make rading more personal. When you make i more personal, i’s beter. I’s as easy as ha.

14

THE WALLABY TRADE

 As you migh have observed, i’s almos impossible o see anyhing useul on ha litle picure. I’s jus a bunch o ligh-colored lines running up and down hrough he middle o he indicaor window. Because hese lines are overlapping, i looks like a hear monior or an earhquake measuring device. I’s hard o ell one line rom he oher. Bu I el like I had he essenial elemens I was looking or. I was happy wih wha I had, a leas or sarers. emember, I didn’ jus wan o see i a currency pair was overbough/oversold on he 1-minue char. I waned more: I waned o know i i could go up so ar, so as, ha i would end up being overbough/oversold on hree ime-rames simulaneously. Sop and hink abou i or a momen: Doesn’ i jus seem more powerul, more excepional, i a securiy goes o an exreme on hree differen ime rames, raher han jus one? I means ha across he board, somehing has gone  wacko. Ta’s worh my atenion. Ta’s somehing I’d be ineresed in rading. So, while he overlapping lines gave me a headache, i was a good kind o headache � he kind  you ge when you’re saring o hink o somehing really cool and new. I bears repeaing: I don’ wan o look a he same shi ha 99 ou o 100 raders are looking a. You and I wan o see somehing new and resh and off he map. Mos people  would never hink o consider a financial insrumen

WHAT THE HELL IS A WALLABY?

15

oversold or overbough only i he condiion exised on hree ime rames simulaneously. Tey don’ hink o his suff, bu i’s no because hey’re dumb. I have never been he smares rader in he room. I don’ know any more han anyone else. Bu i’s rue ha i I creae somehing differen, I’m more likely o sick wih i. I I use he Sochasic Oscillaor off he shel, wih no unique wis, I’m no very likely o dedicae mysel o is applicaion. I’s boring o do he same hing as everyone else (and, as we know, i’s also financially dangerous). When we look a somehing rom an innovaive angle, i’s special. I means somehing o me. I didn’ inven he Sochasic, bu I applied i differenly. So wha i you and I aren’ rocke scieniss? You can sill dream big, and you can sill do some impressive hings.  And i’s simply easier o do grea hings when you’re doing hem on your own erms. Ta’s why we became raders in he firs place. Tink o people who have made a difference in he world. Tink big. Seve Jobs. John Lennon and Paul McCarney.  Jesus. Te guy who invened ho dogs on a sick or wo-ply oile paper. Tese people ook he ools a heir disposal � suff ha prety much anyone had access o � and did somehing special. And I’m sure i was easier o ge up in he morning and do he hard work necessary o achieve greaness when hey were working on somehing ha hadn’ been done beore.

16

THE WALLABY TRADE

I humbly sugges ha he Wallaby can do ha or you. I’s no he Holy Grail. I’s no even he igheous Grail, or he eormed Grail � or even he I-Promise-o-DoBeter Grail. Bu i is differen. I hink you’ll find ha i’s un. And wha we enjoy doing, we do beter, because we’re  willing o do he work. Rob, There’s Still a Problem

Even hough I’d spen he ime o build he indicaor, and I hough i looked prety cool, here was a problem. We’ve already menioned i: Te problem was ha he indicaor,  wih all he crazy, jagged lines all over he place, was jus oo difficul o see clearly. How I Solved the Problem I Just Mentioned

 Wih he help o a riend, I decided o average ou he  Wallaby lines on he indicaor, so ha we could see wha  was going on wih jus one line. Tis one line would represen an average o he oher hree lines. I would represen he beans in our our-layer Mexican indicaor dip. You know, beans provide he gas, and ha’s wha our “average” line would do � i would provide he gas or he enire rading mehod.

WHAT THE HELL IS A WALLABY?

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Here’s wha he average line looks like:

FIG. 1-7: Te Wallaby, cleaned up.

Once his black line appeared on he char, i all became simpler. In ac, once I had he average line up on he indicaor, I didn’ need he oher lines a all. So I diched hem. I called ha average line “he Wallaby line,” and now,  because i was easy o read and packed hree ime-rames’  worh o inormaion ino one simple line, I was perecly happy. And ready o go o work.  Wan o see i?

18

THE WALLABY TRADE

FIG. 1-8: Te Wallaby. I’s he shiz-bombies!

 And now you know wha he Wallaby is. And why I buil i.  And wha i looks like. Now le’s see wha i can do.4

4. By he way, all he examples o he Wallaby on he chars in his book are aken rom he laes ieraion o he indicaor, buil by my riend ega-San in  Japan. You’re seeing he Mearader chars, which I use o plo he currencies and some uures conracs. And yes, he indicaor is ree, and you can ge i on he Web sie a: Wallabyrade.com.

WHAT THE HELL IS A WALLABY?

You can ge he Wallaby indicaor or a number o charing programs or ee, by visiing WallabyTrade.com. Bu you don’ even need he Wallaby indicaor. I you can’ ge he indicaor on  your chars, jus do he ollowing: Add he regular Sochasic Oscillaor se o 30, 10, 10; or he elaive Srengh Index (SI) se o 22, and you’ll be on your way. Alhough hese aren’ perec subsiuions or he Wallaby indicaor, hey will do jus fine. eally.

19

22

THE WALLABY TRADE

Beore I ell you wha he Wallaby can do, I need o be oally up ron abou wha i canno do. I canno: urn back he clock so you can ask Kaherine McDonald o he prom. Speed up he imeline or Te apure (ake me, Jesus!). Make Geddy Lee no sound like a dying cow (sorry, ush ans). Here Are Some Things the Wallaby Can Do

 You don’ have o se up he Wallaby wih he 1-minue, 5-minue and 15-minue chars. Le’s run hrough he differen setings you can use. Type of Trading

Wallaby Settings

Timeframe Watch

Trade Length

Shor-erm

1, 5, 15

15

1 day

 Medium-erm

15, 60, 240

1530

3 days

 Long-erm

240, 1440, 10080

240

1 week

TABLE 2-1

able 2.1 is mean o help you ge sared seting up your  Wallaby. I you’re ineresed in shor-erm rading, hen I’d sugges seting he Wallaby indicaor o show he 1-, 5- and 15-minue Sochasic Oscillaors.

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In Figure 2.1 I’ll show you wha my setings box looks like when I se up he Wallaby on my chars using he Mearader charing plaorm � a ree and easy-o-use program. eer o Appendix One or more inormaion abou seting up your chars.1

FIG. 2-1: Wallaby setings in Mearader.

Now, assuming you’ve decided o do shor-erm rading and you’ve go your Wallaby se up wih he righ ime rames, nex you need o know which ime-rame char o wach or he rades. Ta’s he nex column. For example, i I’ve se mysel up or shor-erm rading using he 1-minue, 5-minue, and 15-minue setings, hen 1. Te Wallaby indicaor is available or ree or a variey o charing plaorms. See Appendix One or more inormaion.

24

THE WALLABY TRADE

I keep eiher my 1- or 5-minue char open and in ron o me, in order o wach or and ake he rade. Te las column les you know how long rades ypically say open. Incidenally, his is he average lengh o ime beween rade seups, as well. Tese are all imporan poins o remember, because laer on we’re going o look a los o examples. I wan you o know ha every ime you see ha we’re using a 15-minue char, we’re doing medium-erm rading. We’ve go our  Wallaby se o 15, 60, 240, and we can expec ha our rades will be open or a maximum o abou hree days.  We’ll ge a rade seup (a mos) every hree days.  Also, you’ll noe ha he numbers ge airly large in he longer-erm rading setings. Te number “1440” reers o he number o minues in each day, and 10080 reers o he number o minues in each week. Simply pu, I’m using minues o display a ull day or week.

WHAT CAN THIS WALLABY DO?

25

28

THE WALLABY TRADE

Divergence is easy. And i’s powerul. I’ve been rading or 10 years, and i sill exhilaraes me. o sar us off, I’ll share a un flip book-syle drawing. In he upper-righ corner o his book, on he nex 100 pages, you’ll see an experly drawn litle man. He looks like his:

Flip hrough he pages righ now, paying atenion o he animaion. Super high-ech, righ? I am probably he firs auhor o embed video o a regular, old-school book. I  you hough video on he World Wide Web was huge, wai unil you see how his akes off! ... All righ, maybe no.  As you flip hrough he pages, you’ll see he litle man ossing he ball up ino he air. Somehing special happens  when he ball rises o he op o he arc. Do you noice i? I’m sure you did: Even hough he ball has gone higher, is speed has decreased. I’s moving higher bu no as quickly.  We’ll call his phenomenon a “lack o momenum.”  You know when he ball ges up here a he op � reaching is zenih � ha i’s going o all. As i urns over (also  wha I call “rolling over”), i’s going slower now. Graviy

BEARISH DIVERGENCE

29

 becomes more powerul han he orce ha propelled i upward. I has run ou o gas. Tese are signs ha he iniial rajecory has encounered an obsacle (in his case, he laws o naure). I you’ve go a small animal or a roten piece o rui nearby, go ahead and hrow i sraigh up ino he air and ry his ou. Please also clean up afer yoursel. I you are a beting man (or woman, o course), you’d  be ha he roten dead animal you launched ino he air  was going o drop when i reached he op o is arc. And  wihou somehing o cach is all, such as your hand, i  would all all he way o he Earh, jus like he ball does in our litle animaion. You’d also wager ha he speed  wih which he dead creaure is going o all increases as i drops. Ta’s all easy o undersand, because everyone has seen an objec go up ino he air and hen all back down o he ground ... especially any o you who have seen Alex Smih play quarerback or he San Francisco 49ers. Ta  was a joke. Okay, no i wasn’. In he rading world, he same hing happens. Financial insrumens ac jus like he ball. ake, or insance, he EU/USD currency pair. I’s my avorie roten animal. Here’s a char:

30

THE WALLABY TRADE

FIG. 3-1: An upward rend

 Above we observe he EU/USD moving higher and higher, in wha mos people call a rend � higher highs, higher lows � ha kind o suff. emember, as hey say, he rend is your riend. rade wih he rend. Be he rend. Blah Blah. You know he drill. Bu i he EU/USD is he ball (or roten animal) rom our example, hen i is prone o he same orces o naure as any rising objec. I will drop. Even a currency pair suspended in ouer space by he orces o he Federal eserve (Quaniaive Easing) or a jobs repor (such as he inamous Non Farm Egg oll epor) evenually succumbs o wha I affecionaely call “Financial Graviy.”1

BEARISH DIVERGENCE

31

Te remaining quesion is: How, pray ell, will we know  when EU/USD reaches he criical poin a which i  begins o urn? Sure, we know ha i mus evenually relax, all, rerace, correc and so orh. Wha kinds o ools sand ready o broadcas he news ha his rend migh end? I presen o you, Dear eader, a parial lis: Candle paterns (see my riend, Seve Nison, abou ha); Bollinger Bands (see Kahy Lien’s “Litle Book o Currency rading” or a grea chaper on he bands); Moving Average Convergence Divergence, he Momenum Indicaor, he Commodiy Channel Index; “Flow analysis” (whaever he hell ha is – ollow @xflow on witer or he Down Low on his business); Sraigh-up economic analysis, such as reading annual repors, financial saemens, and parsing governmen economic repors;

 And, because I know some o you do his � here’s he Psychic Friends Nework (when all else ails, as hey say, consul an asrologer). Each one o he iems lised above is a ool. Each is a common mehod. Tousands o raders use hese (and oher) ools o se up rades. For every one hing I’ve lised above, here exis 100 addiional indicaors or char 1. I you have a currency pair ha says up or our hours or more, call a docor immediaely. Tis is a “Viagra Candle,” and i’s no o be oyed wih (or more han our hours, anyway).

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THE WALLABY TRADE

doohickeys ha raders buy, ren or worship. Each ool is simply a lens hrough which o look a he markes. Tey are equally useul, or worhless, depending on who  you are and wha you wan ou o he marke. eally. Endless debaes rage on abou Te Bes echnique. Meanwhile, he debaors coninue o lose money jus as easily as beore. My personal avorie conribuion o his purposeless debae is he idea o having an acual monkey make sock picks and hen compare i o a porolio run by a proessional. You can already guess who I hink would do beter. Let’s Get Back to the Ball/ Rotten Animal Flying in the Air

 All righ, hen. How does he ball relae o he EU/USD char shown previously? How can we see ha a securiy has reached a poin where i slows is rae o change upward? Te Wallaby, o course. Ta’s my preerred mehod, anyway, and I plan on convincing you in he nex 150 pages ha you should enslave yoursel o i or eerniy. Or a leas sar a church in is honor or somehing. Te  bes hing abou pledging your undying allegiance o he  Wallaby is ha i won’ require you o build pyramids or mercilessly slaugher all he litle Jedi knighs in he emple.2

BEARISH DIVERGENCE

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FIG. 3-2: OMG

Te Wallaby will require you, o course, o learn how o ideniy bearish divergence. Te bes par: I’s as simple as i is powerul, and over he nex ew pages, I’ll show you how o do i in hree easy seps. So le’s ge his show on he road. How to Identify Bearish Divergence

Tis will be he easies hing you ever did. Even easier, Men, han learning hose eenage, nocurnal discoveries o sel-graificaion.3 2. Tank you, @huckspin rom witer, or he Jedi Wallaby picure. For anoher “Sar Wars” Wallaby, urn o page 121.6. 3. However, learning o ideniy bearish divergence will no cause blindness or damn you o hell. Tese are reasons you migh consider rading divergence as an alernaive.

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THE WALLABY TRADE

In he nex ew paragraphs, combined wih a ew images, I will show you how o ideniy bearish divergence. I’m going o ask you o play along and even do he unhinkable ac o drawing inside his book, which, when I was a kid,  was grounds or a good spanking. Bu my babysiter was ho, so i was oally worh i. (I ound mysel ripping pages rom books every ime she came over. No really.) Te firs hing we’ll do is show a EU/USD char again, his ime adding jus one more Sochasic Indicaor. Ten a ew words o clariy wha we’re looking a. I promised  you hree seps, bu we’ve go o see his damn char firs.  And hen I promise we’ll proceed wih he seps.

FIG. 3-3: Char elemens

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I you have any quesions abou wha you see on he above char, hen jus flip o he back o his book o he Appendix One, eniled “Seting Up Your Chars,” and you’ll ge he  whole sory. eading he enire secion requires jus five shor minues o your ime. I’s worh en minues i you’re conused in any way abou wha you see. Or i you wan o know how o obain he Wallaby indicaor or your chars. In Figure 3-3 we see price (he candles – which I use insead o bar or line chars), he Wallaby Indicaor and he regular-flavor Sochasic Oscillaor se o 30, 10, 10. ime or he hree seps. Step One

Find wo high poins on he char. I don’ care where you look firs. eally. Sar rom he lef or he righ. I jus wan  you o ideniy any poins ha you could call “highes” on he char. Ten circle hese poins wih a pencil. Go ahead righ now and do he circling on he EU/USD char above. I you don’ have a pencil, you are welcome o jus circle he area on he char wih your finger. When you’re finished, i probably ough o look somehing like his:

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THE WALLABY TRADE

FIG. 3-4: Tese poins are high

I will no help you draw beter circles on he high poins i you’re soned or inebriaed. Acually, i you’ve been smoking dope while reading his book, his is wha your char probably looks like now:

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So please pu down he doobie and ge back o work.  You’re acually almos finished wih Sep One, bu here’s one more hing we need o do ... we need o: DRW A VEICAL LINE FOM HE HIGH PEAKS DOWN O HE EGULA SOCHASIC LINES. I wroe ha in capial leters o make sure you undersand  wha I’m asking you o do. Please ake a momen and use your pencil, and do i righ now. Draw a sraigh line down rom each peak, connecing ha line o he regular Sochasic Oscillaor lines below. Here’s wha i will look like:

FIG. 3-5: Connecing he peaks

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THE WALLABY TRADE

 We jus did his so we can find ou i each peak was overbough on he Sochasic Oscillaor. In his example above, he answer is yes, hey’re all overbough. How do we know ha? Because he Sochasic Line is above he op line � he 80 line � on he indicaor. Ta’s overbough. And as you’ll remember, ha means ha price has become overexended o he upside and could  be ready or a subsanial drop. Perhaps, as we’ve said, he  ball is ready o all. Le’s lay ou Sep One in a single senence. Here goes: Wallaby Bearish Divergence Step One:

Going rom lef o righ, find a leas wo separae peaks in price which are also each overbough on he egular Sochasic Oscillaor, se o 30, 10, 10.  You’ve jus compleed Sep One. I you’ve read his ar, hen here’s no urning back. You simply have o read Sep wo, because his is where hings ge wild and crazy. I’s ars and crafs ime! Step Two

 All righ, I lied. I’s no going o ge wild and crazy, bu  you’re more han one-hird o he way hrough he seps, so keep going!

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Te nex sep is as simple. ake your special Wallaby Brand Hi-ec Wriing Device® and your Wallaby Brand Measuring Sick Tingy® and place he Measuring Sick (commonly known as a “ruler,” bu I hae ulers, and I hae oyaly o any kind, so I’m no using ha word) and draw a line over he ops o he candles moving upward on he EU/USD char. Please do i on he char above, and please do i righ now.4  When you’re done, i should look like his:

FIG. 3-6: rendline across he high poins.

4. I you didn’ ge a Wallaby Brand Hi-ec Wriing Device® or a Wallaby Brand Measuring Sick Tingy® wih your book � which are available as par o he Wallaby Box Se o Books® � hen you can jus prick your finger wih a needle and use your blood as a pen, and cu ou your ibia bone and use ha as a ruler. Seems compleely reasonable.

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THE WALLABY TRADE

Hey! You’re a genius. I’m going o call your mom and ell her how well you’ve done. In ac, you jus compleed Sep wo! Bu in order o ensure ha I’ve aken somehing simple and urned ino a complicaed nighmare ha’s impossible o remember, I’ve writen ou a longish descripion o his Second, Very Imporan Sep, and here i is: Wallaby Bearish Divergence Step Two:

Draw a rendline above he candles, rom lef o righ, connecing he wo peaks rom Sep One, using he highes candle wicks as saring and ending poins. Ta’s Sep wo, and we’re almos finished.  Jus so you know, a he end o he chaper, I’ll re-wrie all hree rules in one place. Also, i you bough he box se o books (rom my Web sie), you’ve go a Wallaby Divergence Special Noecard Chea Shee® wih all he rules, and you’ve probably already posed ha nex o your compuer. Step Three

Nex we need o draw a rendline on he Wallaby Indicaor � and we’re going o do i in such a way so ha we can compare he line we drew on price wih he line we’ve

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drawn on he Wallaby. As you can imagine, we’re going o compare he slopes o he wo lines. o do his, please go back o he previous char or he EU/USD, Figure 3.6, and draw a verical line down, saring a he exac beginning poin o he rendline  you drew on he candles, and ending a he red Wallaby Indicaor line. Call his poin “1.” Why are we doing his? o se up he precise posiion where we’ll sar our rendline on he Wallaby. We wan i o begin direcly  below he saring poin o he rendline on he price. Nex draw anoher verical line downward, saring a he exac ending poin o he rendline you drew on he candles, and erminae your new verical line a he red Wallaby line. We’ll call his poin “2.” When you’ve compleed your maserpiece o verical lines, he char should look somehing like his:

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THE WALLABY TRADE

FIG. 3-7: Nice verical lines!

 You’re doing grea. Tis isn’ difficul a all, is i? Some o  you are jus flying hrough his secion (you know, he A and B sudens rom high school geomery: Wha is he circumerence o he square roo o he quadraic diameer o a hexagonal arhropod? Why, i’s orange, o course!).  As noed a momen ago, hese verical lines can presenly serve as our saring and ending poins or a rendline on he Wallaby Indicaor. Your saring poin is he verical line on he lef, or poin “1.” Your ending poin is he verical line on he righ � poin “2.” Please ake a momen now, and wih your own blood, draw a line across he op o he red Wallaby Indicaor, rom lef o righ. When you’re finished, i should look like his:

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FIG. 3-8: Nice blood sains!

On second hough, le’s no draw he rendline wih your  blood; insead, le’s jus use a regular pen like normal people. Here’s wha i should look like:

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THE WALLABY TRADE

FIG. 3-9:  Well done!

 You’ve now go a rendline on he Wallaby Indicaor. Le’s summarize Sep Tree and hen you can ie up a ournique and sop he flow o blood rom your wounds creaed by Figure 3-8. Wallaby Bearish Divergence Step Three:

Draw a rendline on he Wallaby Indicaor using he rendline on he price (candles/bars) or saring and ending reerence poins. My avorie par is nex: We’re now ready o bring his all ogeher. I’ll summarize he hree seps or us, and hen give egular Wallaby Bearish Divergence a definiion.

BEARISH DIVERGENCE

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Wallaby Bearish Divergence Step One:

Going rom lef o righ, find wo separae peaks in price  which are also each overbough on he egular Sochasic Oscillaor, se o 30, 10, 10. Wallaby Bearish Divergence Step Two:

Draw a rendline above he candles, rom lef o righ, connecing he wo peaks rom Sep One, using he highes candle wicks as saring and ending poins. Wallaby Bearish Divergence Step Three:

Draw a rendline on he Wallaby Indicaor using he rendline on he price (candles/bars) or saring and ending reerence poins.  And once we finish hese hree seps, ideniying egular  Wallaby Bearish Divergence is easy.

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THE WALLABY TRADE

REGULAR BEARISH WALLABY DIVERGENCE:

egular bearish divergence exiss when: a) A securiy produces higher highs in price. b) ese highs are also simulaneously overbough on he regular Sochasic Oscillaor se o 30, 10, 10. c) And he Wallaby Indicaor, over he exac same  period o ime, produces lower highs.

Ta’s i. Using his as a definiion, do we see bearish divergence on he EU/USD in he chars rom his chaper? Well, or sarers, i would have been a massive  wase o your ime o do all his work and hen answer he quesion wih a “no.” So you can probably already guess ha he answer is yes. Bu can you see why he answer is  yes? Le me show you one more char and explain visually  why he answer is yes:

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FIG. 3-10: Poins 1 and 2 show bearish divergence.

I’s clear rom Figure 3-10 ha we have regular bearish divergence. We call i “regular” because here are oher kinds o divergence (which we’ll cover laer). We call i “bearish” because he occurrence o his phenomenon means ha price is probably soon heading lower (ha’s  bearish). We call i “divergence” because wha price is doing is differen (divergen) rom wha he indicaor is doing. o summarize his again, o make sure ha i’s oally and compleely clear � we have jus compared wha price is doing (going higher) wih wha he Sochasic Oscillaor on hree differen ime-rame chars is doing (going

48

THE WALLABY TRADE

lower). Te ac ha price is able o jump a bi higher,  bu he indicaor can’ keep up � ha ac jus by isel is a sign ha somehing has gone wrong. Te ac ha he Sochasic Oscillaor across hree ime-rame chars ailed o confirm he new highs is imporan. I’s more powerul han i we simply showed one oscillaor by isel and made he comparison.  Why is his happening o he EU/USD a his exac poin in ime? Maybe people are less excied abou buying he pair because a major economic announcemen is due or release. Maybe here is sill buying going on, bu i’s going on a a slower rae beore he sar o a holiday  weekend. Maybe here are ewer people ou here willing o send he EU/USD higher because he daa coming ou o Europe is now only perceived o be slighly beter han he economic numbers coming ou o he Unied Saes. Maybe some rend-raders are saring o ake heir profis. Whaever he underlying cause, i’s here, righ in ron o us. And i means somehing. I means ha we’re ineresed in finding a way o sell his currency pair.  We’re even more ineresed in selling he currency pair  because hese peaks on price aren’ jus progressively higher, bu hey’re also overbough on he regular, old Sochasic Oscillaor. Did you orge ha we originally ook noice o he overbough saus o he Sochasic in he lower panel o he char? Go back o Sep One and Figure 3-5 i you need a reminder (don’ worry, we won’

BEARISH DIVERGENCE

49

coninue wihou you). O all he raders who look a divergence, 99% do no incorporae his overbough requiremen ino he analysis. Over ime you’ll find ha i can make a subsanial difference and filers ou some o he rades you really don’ wan o ake. Nex, we’re going o ake a look a wha our Wallaby superhero is up o.

 By now some o you have wondered i here are  possibly some differen places o draw your rendlines on he candles and he Wallaby Indicaor. e answer is yes. In hese chars, you acually could have drawn he rendlines saring a litle bi earlier and ending a litle bi earlier � and I wan you o know ha i would have been perecly fine o do so. We’re no alking abou an exac science here, and here’s  pleny o wiggle room. Laer on we’ll look a los more examples ha will show you how flexible we can be wih drawing hese lines.

52

THE WALLABY TRADE

Because you’re now an exper in bearish divergence, we can do somehing ineresing in his chaper (insead o aking you hrough a long and boring hisory o how King  James commissioned 75 monks o sarve hemselves while ranscribing he ancien Wallaby scrolls ono parchmen, using only Koala blood as ink and heir unrimmed fingernails as pens).  And so you ask, wha is ha very ineresing hing ha  we’re going o do insead o he long and boring crap? I’m going o show you a Wallaby rade, sar o finish, o sor o whe your appeie or more. Yeah, you heard me. Here’s  why I wan o show you one complee rade, righ now: I  wan you o finish his book in one siting. I wan you o keep moving orward. And by showing you he good suff � an enire rade � I hink you’ll be moivaed o discover he oher really good suff ha’s coming laer in he book.  Also, i your eyeballs finish reading he book soon, you’re more likely o do somehing wih he inormaion you’ve learned. I you use he inormaion, you’re more likely o learn i beter. Te beter you learn i, he beter you’ll be a rading i. And rading i is, well, he mos un I’ve ever had on he shor-erm chars. And helping you o rade more profiably is he enire poin o his book. I’ll shu up now, and we’re going o launch up o he nex level. Here’s a char o a bullish divergence Wallaby seup, rom sar o finish.

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FIG. 4-1: A Wallaby buy rade rom sar o finish.

 Wha’s happening in Figure 4-1? Firs, he EU/USD made lower lows on price � you can see ha along he rendline I drew beneah he candles. Across ha same period o ime, he currency pair was oversold on he regular Sochasic Oscillaor se o 30,10,10. (I’ve poined his ou by enclosing hese areas in boxes a he botom o he char.) Las o all, he Wallaby Sochasic, over his same period o ime, was making higher lows. o sum i up: Te currency pair was sreching lower on price, bu he Wallaby Indicaor jus couldn’ agree o ollow. I  waned o go up. Ta’s bullish divergence, Friends, and i was an early  warning sign ha he EU/USD could be headed upward nex. And ha’s wha i did � 50 poins worh o

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THE WALLABY TRADE

movemen wihin he nex couple o hours. As indicaed  by he arrows, we bough near he very botom and hen  we sold when he currency pair had risen by abou 50 pips. I’ll describe he mehod or enering and exiing he rades in laer chapers. Bu his is wha a rade looks like rom sar o finish. I’s a sandard Wallaby rade when hings go well. Some o you have already seen everyhing you need o see abou bullish divergence or now. I you eel compleely comorable wih he concep, eel ree o skip ahead o he nex chaper. However, I’d recommend ha you sick around. I’s only a ew pages, and I promise i will be worh  your ime, as well as eneraining. For he res o he examples in his chaper, I’m going o use he S&P 500 index (cash) or charing examples. Bu don’ orge, everyhing we’re alking abou here is as applicable o socks, currencies, uures, precious meals,  bonds and anyhing else you can rade.1 Identifying Regular Bullish Divergence

Tree seps is all i akes. Wih he oundaion you already have rom he previous char, we can breeze hrough each one o hem. 1. For more inormaion on which financial insrumens have radiionally  worked well wih he Wallaby Indicaor, see Appendix Six in he back o he  book.

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Wallaby Bullish Divergence Step One:

Going rom lef o righ, find wo separae valleys in price ha are also each oversold on he egular Sochasic Oscillaor, se o 30,10,10.  You’re clearly aware ha all we’ve done is reversed he firs sep rom he previous chaper. We wan o see ha price has been able o make new lows. We also wan o know ha hose lows are oversold, hus indicaing ha he pair is flying ou o conrol in a downward move. I’ve gone ahead and prepared a char or us:

FIG. 4-2: S&P 500 makes lower lows ha are oversold.

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THE WALLABY TRADE

I’ve drawn arrows on he char in Figure 4-2 so you can see ha low poins #1 and #2 are each oversold on he regular Sochasic Oscillaor. Do you noice ha hese wo valleys o oversold candles are separae and disinc? By ha, I mean ha a poin #1, he index wen oversold and hen  jumped up ou o oversold, and hen in poin #2 dipped  back down ino oversold erriory? Ta’s imporan o me. For a sandard Wallaby rade, I wan o see wo disinc poins ha are each oversold beore I’m ready o se up a divergence rade (and ha goes or boh bullish and bearish divergence). [FOONOE: For hose o  you who are wondering, here are in ac non-sandard  Wallaby rades, and in hese cases we don’ require wo separae overbough or oversold ses o candles. We’ll alk abou hese rades in a laer chaper. ENDFOONOE]  And onward o Sep wo: Wallaby Bullish Divergence Step Two:

Draw a rendline above he candles, rom lef o righ, connecing he wo peaks rom Sep One using he highes candle wicks as a saring and ending poin.

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Ta’s easy enough, righ? I’ve go he char ready, and here i is:

FIG. 4-3: rendline in place!

Simple, righ? You’re jus zooming hrough hese rules. No reason we can’ jus fly ino he nex one. Wallaby Bullish Divergence Step Three:

Draw a rendline on he Wallaby Indicaor using he rendline on he candles above or saring and ending reerence poins. I’ve go his char ready, oo. Beore I show i o you, I wan

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THE WALLABY TRADE

o prepare you or somehing: Tere are los o differen  ways o draw rendlines on hese chars and wha you  would draw may look differen rom wha I draw. Mos o he ime, my chars and your chars are going o look very similar. Bu here are imes when hey don’. Ta’s okay. Te differences are usually very minimal. Also, please keep in mind ha while I’ve included as many chars as possible in he book, I’ve posed hundreds more chars online so  you can see he various ways i’s possible o se up he rades. Here’s he char:

FIG. 4-4: rendline on he Wallaby.

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Can you see ha while he S&P 500 is alling rom poin #1 o poin #2, he Wallaby is rising? Ta’s wha we like o see. Nex ake a closer look a area #2. Jus wihin ha small zone, he price makes wo rapid new lows in succession. Each ime i alls in area #2, i ges jus a bi lower. Bu he  Wallaby in ha same period o ime rises � even across a small number o candles. I’m going o pause and acually poin his ou on a char.

FIG. 4-4: A closer look a area #2

So, is he S&P 500 index bullish divergen in Figure 4-4?  You be i is! I’s no only bullish divergen across poins

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THE WALLABY TRADE

#1 and #2, bu i’s also bullish divergen across a smaller number o candles in area #2.2 Le’s do a quick review. REGULAR BULLISH WALLABY DIVERGENCE:

egular bullish divergence exiss when: a) A securiy produces lower lows in price.  b) Tese lows are also simulaneously oversold on he regular Sochasic Oscillaor, se o 30,10,10. Te Wallaby Indicaor, over he exac same period o ime, produces higher lows. Figure 4-4 clearly shows his phenomenon across poins #1 and #2. Te index wen lower on price bu ailed o do he same on he Wallaby Indicaor. We love ha! I shows reduced enhusiasm or selling he pair. And ha’s naural, righ? I mean, a some poin he buyers dry up and people sar o hink, “Holy crap! Te S&P has allen a lo oday. I’m going o sar aking profis.” A he same ime hese raders are exiing profiable shors (by purchasing he index), oher raders sar o noice ha hey’d like o buy he S&P because i’s “on sale.” As hey buy i, he shorsellers who didn’ already ge ou begin o have heir sops 1. Te only reason I brough his up is because I knew some o you were going o ask, and hen sar o wonder.

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riggered. Ta brings he index up a bi higher as well. O course, his is all a generalizaion o he sory behind he rade, bu you ge he idea. Shors are geting squeezed ou, buyers are coming ino he marke and he index sars o rise. Tis ype o rade seup can ofen occur laer in he rading sessions (or even in afer-hours rading on he uures marke), when all he craziness has subsided and binge sellers have passed ou on he sree, drunken wih he swee, inoxicaing aroma o a sock index marinaed in he blood o a housand shor-sellers. You, however, may have sayed on he sidelines or he enire rading session,  jus waching his downward move play ou, wondering i you’ll ge he chance o rade a divergence seup. And  you do. Paience pays off. Saying ou o he marke and  waiing or a seup is one o he mos enjoyable hings a  Wallaby rader does. Ofen smar raders will ask me i here is a way o capure ha enire move downward and rade wih ha shorerm daily rend � and hen jump in and go he oher  way when he Wallaby rade ses up. Te answer is yes, o course; here was mos likely a bearish Wallaby rade previously ha led o all his wild selling. So here’s no reason why you wouldn’ have been able o (occasionally) ride he move down and hen ge yoursel geared up o go he oher way. Some raders are beter a doing ha han ohers. I requires a lo o screen ime.

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THE WALLABY TRADE

Here is a summary o he rules, all in one place or you: Wallaby Bullish Divergence Step One:

Going rom lef o righ, find wo separae valleys in price ha are also each oversold on he egular Sochasic Oscillaor, se o 30,10,10. Wallaby Bullish Divergence Step Two:

Draw a rendline above he candles, rom lef o righ, connecing he wo peaks rom Sep One using he highes candle wicks as a saring and ending poin. Wallaby Bullish Divergence Step Three:

Draw a rendline on he Wallaby Indicaor using he rendline on he candles above or saring and ending reerence poins.  And, o review: REGULAR BULLISH WALLABY DIVERGENCE:

egular bullish divergence exiss when: a) A securiy produces lower lows in price.  b) Tese lows are also simulaneously oversold on he regular Sochasic Oscillaor, se o 30,10,10.

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 And he Wallaby Indicaor, over he exac same period o ime, produces higher lows.  When his happens, we’re going o hink abou seting up a buy rade. In he nex chaper, I’m going o show you why women are beter raders han men ... a leas, i I’ve go enough ime o alk abou ha, during he course o a discussion abou bending he Wallaby rules. igh now, you’ve go he basics. You can ideniy regular bearish and regular  bullish Wallaby divergence. You’re on he road o aking some really good rades, bu ha’s no everyhing. You haven’ learned how o bend he rules ye. And once  you learn how o bend he rules, you open an enire new level o Wallaby rading, wih wice he opporuniies or rading, and some o he very bes, mos profiable, mos exciing Wallaby rades.

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THE WALLABY TRADE

I once los a job because I didn’ realize we were supposed o come o work every day. One uesday I walked in around 10:31 in he morning, bagel and newspaper in hand, wiping he ired, crusy sand ou o my bloodsho eyes, walking pas he cubes o deah, and someone said, “Hey, Booker, where were you yeserday?” Te res o he exchange wen somehing like his:

 ME: I didn’ come in yeserday because I needed a day o hink.  INCEDULOUS LEMMING: Well, um, ha’s kind o odd.  ME: Wha’s odd?  I.L.: aking a day off work jus o hink.  ME: Well, like, wha would you advise me o do when I need a day o hink deeply abou some hings? is place sifles every las molecule o creaiviy in humans. e florescen lighs, he realiy ha we’re all boxed ino a small workspace, he lack o any music or background noise. Have you ever noiced ha  you never hear laughing ou loud in he office? And why is everyhing here ligh brown?  I.L.: Um, I don’ know how o respond o ha. Sure, all hose hings are rue abou he office, bu wha am I going o do abou i? Why no jus wai or he weekend or some o ha downime? Or lunch?

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 ME: I’s easier or me o hink in Las Vegas.  I.L.: Wai a minue � you wen o Las Vegas?  ME: Yeah. You should have come. I was a rio.  I.L.: I couldn’ do ha! I have o work!  ME: Wai. Are you elling me ha everyone here comes in every day? I sill shocks me ha employers expec you o come o  work every weekday, even i you know you’re going o be unproducive and have beter hings o do. A day off now and hen o recharge, wach some Neflix, give yoursel an exra day in he same underwear � you can call i a day off, bu I’d raher call i a “day on.” I you say ha no coming o work is a day off, wha you’re really saying is ha you’re only really “on” while you’re a work. Ta’s insane and you know i.  A ha same job, which lased or a ew monhs, I also wore  jeans o work every day, excep Friday, jus o be a jackass abou he dress code. On Fridays I’d wear a ull sui or a  blue chiffon uxedo.1  I also reused o wear underwear.2

1. No acually rue. 2. Acually rue.

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 And once I compleely covered a woman’s cubicle in phoos o Mario Lopez prined off rom he gian priner (wha else would ha hing be used or?). For hese innocen violaions o egular Employee Policy Bible Code, I go my desk moved o he area righ ouside o Human esources, where hey could keep an eye on me. Forunaely, his desk was also in he main raffic line  where people raveled in order o ge o he bahroom and he break room. Needless o say, wihin a couple o days, I had an exra-comorable chair, a elevision and a seady sream o guess over in my area all day long. Work wasn’ so bad afer all.3 I jus old you ha sory o inroduce he concep o  bending he rules. Bending he rules can be un, and when we’re alking abou he Wallaby rade, i can also be profiable. In he nex ew char examples, I wan o show you some ways in  which Wallaby divergence doesn’ se up exacly righ, bu i’s sill worh calling divergence or he purpose o geting a rade.

3. Also, or he record, I sayed up lae and worked a nigh when everyone  was gone. I pu in more han 10 hours a day, easily, and I worked every single  weekend. I missed my high school and law school reunions or work-relaed rips. And, las o all, I loved hose people. I sill miss you all every day. Hi, Carrie, Mark, Will, Heidi, Andrew, odd, Jon, Chris, Mat, Amanda, Lonnie, Genny, Chaz, yan and Ken!

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 Jus so you know ahead o ime, whenever we see a problemaic Wallaby rade � somehing ha bends or breaks he rules � we’re going o call i Wallaby “Pervergence.” Ta’s because or some reason, he  Wallaby seup has been pervered. Somehing is wrong  wih i, in oher words. Bu we’re sill going o ake i. One  by one, le’s consider he differen ypes o problems you’ll see wih Wallaby seups.4 Divergence Problem #1: Not Oversold or Overbought

Someimes he regular Sochasic Oscillaor jus doesn’ go oversold or overbough all he way. And everyhing else abou he divergence seup looks perec. In a siuaion like his, we’re going o bend he rules and give our samp o approval o he seup. In his firs char, he S&P doesn’ quie ge overbough on he righ side o he seup:

4. Tanks, Max. You invened he erm “Pervergence,” and I’ve always been graeul or your creaiviy and humor. Gluen Morgen! (Ta means “have a pasry or breakas” in German.)

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FIG. 5-1: No overbough a posiion #2. Ta’s okay!

I’ve drawn a box over he area in quesion, so you can see ha neiher o he Sochasic lines goes above 80 a posiion #2. Bu look a wha else we have going or he seup: Te index is clearly making higher highs on price rom poin #1 o poin #2, and i’s making lower highs on he Wallaby Indicaor across he same wo poins in ime. Is i bending he rules o say his is Wallaby divergence?  Yes! We’re in clear violaion o ule One � which saes: Wallaby Bearish Divergence Step One:

Going rom lef o righ, find wo separae peaks in price ha are also each overbough on he regular Sochasic

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Oscillaor, se o 30,10,10.  We don’ have wo separae overbough peaks, and so  we’re breaking his rule. Or we’re bending i. And I’m here o ell you ha no mater wha else I said previously in his book, I’m going o accep his seup as a ben-rules divergence rade. Ta’s good enough. Le’s look a an example o his rule-bending on a bullish divergence char:

FIG. 5-2: No oversold a posiion #2. Ta’s okay!

In Figure 5-2, he regular Sochasic doesn’ go below 20 a posiion #2. I ges really close o reaching he 20 line

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 bu doesn’ do i. Well, we’re going o bend he rules. Te  Wallaby judges have decided ha i’s good enough. Here’s he principle you can ollow when considering  wheher o accep a divergence seup when poin #2 isn’ quie overbough or oversold all he way: Pervergence, Principle #1

I he regular Sochasic Oscillaor is no oversold or overbough or poin #2, does i a leas ge close? How exreme is he difference beween he angle o he rendline on price versus he angle o he rendline on he  Wallaby Indicaor? Divergence Problem #2: One Single Area of OB/OS

Someimes a seup shows you ha a financial insrumen  was able o go overbough or oversold � bu i’s no oversold or overbough across wo poins in ime on he regular Sochasic. Here is wha ha looks like:

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FIG. 5-3: One longish area o “oversold-ness.”

Te divergence is obvious � price is going lower, and a he same ime, he Wallaby is going higher, and i’s so clear ha i’s hard o resis geting involved. Te Wallaby has wo separae valleys (and in ac, i’s go hree). A he same ime, he regular Sochasic is jus in he dephs o hell. One solid line jus scraping along he botom. You know rom he rules in Chaper 4 ha we’d like o see wo separae and oversold valleys on he regular Sochasic. Tis char doesn’ have wha he rules seem o require. Bu is i jusifiable? Can we call i Pervered Divergence and ake a rade? o me here’s one simple way o properly  bend he rules in his case, and i means we need o drop

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down o a lower ime-rame char. Tink abou i: Over his same srech o ime on he 5-minue char, here will  be more candles on he 1-minue char, and across his greaer number o candles, maybe we’ll see wo separae oversold areas. I bears repeaing here: I wan wo separae overbough or oversold areas, or a leas wo separae valleys or peaks on he regular Sochasic. I’d preer no o ake a divergence rade wihou his condiion being me. In order o mee his condiion, hen, we migh need o swich o a shorer ime-rame char so we can see more candles. Here’s he 1-minue char:

FIG. 5-4: Preso! wo areas!

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 You can see in Figure 5-4 ha our plan worked. Boh poins #1 and #2 are oversold on he regular Sochasic. From his poin on, we can ener he rade and wach he lower ime rame 1-minue char. We’ve swiched he ime rame ha we’re going o look a. For me, his isn’ hal  bad. We now ge an earlier enry on he rade, which you’ll learn laer is very imporan o me. For hese reasons, I’d go ahead and say he divergence seup is valid on he 1-minue char. Te only way we were able o consider his rade is because we moved o a lower ime-rame char. You could do his or any ime-rame char, o course � you could have seen a “single area” problem seup on he 1-hour char, and hen moved down o he 15-minue char o see i i looked any beter. For now, le’s jus summarize he principle: Pervergence, Principle #2

I all he elemens o divergence appear, bu across only one coninuous area o overbough/oversold candles, i’s appropriae o move o a lower ime-rame char (any lower ime-rame char) o see i he divergence appears across wo separae overbough/oversold areas. Keep in mind ha Pervergence Principle #2 can be used on his lower ime-rame char o “jusiy” he divergence. Our final Pervergence Principle should cause he mos conroversy (like wearing jeans o work on a non-casual

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Monday). Beore you read his secion, I’m already going o ell you ha here will be people ou here who say ha his nex secion shows ha we can break every rule we have previously discussed. And i we can break every rule  we previously discussed, why do we have rules a all? Why do we have a Wallaby Indicaor a all? I you’re ready or a grea example o Pervergence and my answer o he above quesions, hen you’re ready or he nex secion. Divergence Problem # 3: “Pervergence”

 Wha i price and he Wallaby aren’ really divergen? Wha i price is fla? Wha i he Wallaby is fla? I can happen. I price is fla bu he Wallaby Sochasic clearly shows divergence, i’s all righ. Bu wha i ha is combined wih all sors o oher Pervergen eaures? Wha hen? We have Massive Pervergence, which rankly, jus sounds gross. Le’s ake a look.

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FIG. 5-5: Can you see all he problems on his char?

Figure 5-5 has more problems han a jar o New York salsa in a exas saloon. One by one, le’s discuss he our major problems on his char.

 Problem A:  Te price is acually fla across he candles ha  we’re considering. You migh recognize his as a “Double Botom” ormaion. When we go looking or divergence,  we wan o see price rising or alling over ime. How can we find divergence i price is moving flaly? I admi, i’s hard o somach. Bu say wih me, and hink abou his: Over

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he same srech o ime, a leas he Wallaby Indicaor is rising sharply. Ta’s go o coun or somehing. Believe me, you’re going o find examples o his on he chars, and  you’re going o be emped o jusiy a divergence seup.  We migh as well cover i, so i you do jusiy i, you a leas know how o rade i.

 Problem B:  I’ve drawn a rendline sraigh hrough he  Wallaby Indicaor. I cu righ hrough i, as i i doesn’ mater a all. Why would I do such a hing? Well, I’m doing i o beter highligh he ac ha over his srech o candles, he Wallaby is making higher lows, and i’s very clear. I jus have o draw on op o a line in order o do i.  Jus so you know � i’s perecly accepable o draw your rendlines and cu hrough indicaors or even candles.  As long as you find divergence across price versus he  Wallaby, i’s okay ha your rendline passes hrough some candles or some Wallaby lines. You’ll see more examples o his laer on.  Problem C:  Te regular Sochasic isn’ really oversold on he exac, perec spos. I you look closely, i’s easy o see ha Oil was oversold a ew candles beore he end o he rendline ha we’ve drawn on he candles hemselves. emember, we’d like o line up he oversold poins a exacly he same saring and ending poins as he rendline on he price. Bu we didn’ do ha here. Is ha accepable? Why he hell no? We’re breaking every oher rule, and we’re no even done!

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 Problem D: Our rendline on he Wallaby doesn’ mach  wih he rendline on price! We sared drawing our rendline on he Wallaby Indicaor earlier han where we sared drawing i on he candles. Is his okay? Yeah, i’s fine. Wha we’re showing is sill he same hing: Price is fla  while he Wallaby is rising. We’re bending he rules here, and we’ve done a on o bending in a very shor period o ime, in jus one char.  And ha’s why we call his las example “Pervergence.” I’s pervered divergence � almos compleely wacko o he poin ha mos people would overlook i. Bu i urns ou ha his seup, alhough clearly deficien in some areas, produced an early warning sign ha price was going o rise. And ha’s why we’re here in he firs place. I’s jus like  work: Tey pay you o ge suff done, and hey shouldn’  be so ridiculous abou he workplace rules. Someimes he crazy people (and crazy seups) are jus as good � or  beter � han he plain vanilla ones. Here’s a summary o he final principle: Pervergence, Principle #3

“Pervergence” is pervered divergence. I’s when here are muliple weak poins in he divergence seup all a he same ime, cenering on or semming rom he ac ha price is fla (or worse, going in he wrong direcion) over he se o candles you’re considering. Consider hese

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rades as a whole � and pay special atenion o he slope o he Wallaby rendline and he deph o he overbough/ oversold condiion on he char. Fair enough. Someimes he seup looks crappy. Would anyone ake he pervergence rade in Figure 5-5? Would his be accepable a all? Te answer is yes. You’ll find ha some o he ben-rules Wallaby divergence seups have muliple weak poins all a he same ime, and hey’re sill  worh rading. Wha makes i jusifiable? How can we say ha Figure 5-5 is a valid rade seup and no desroy everyhing we’ve worked so hard or so ar in he book? Te answer is simple: Tese Pervergence seups are no or everyone. You do no have o ake hem. Tey look crappy, and hey have all sors o deficiencies. Tey look like divergence, even hough hey don’ comply wih some o he divergence guidelines. Looking like divergence, as i urns ou, can be good enough. Bu maybe i’s no good enough or you. Principle #3 above saes ha we consider he rade as a  whole. We consider all he acors and hen we sep back, and we hink in probabilisic erms. Is his somehing  we’ve seen beore in our esing? Are price and he  Wallaby doing somehing differen across one srech o ime? Many raders are uncomorable wih he hough o bending he rules, because once hey bend some o he rules, hey’re araid hey’re going o bend all he rules. Or hey’re araid ha once some rules have been ben, none

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o he rules apply in he firs place. And his is all crap. No rading sysem is perec, and every rading sysem has seups ha exis on he edges o he rules. Tese are he rades ha no one wans o alk abou. Are hey valid rades or no? Wha do hey look like, and how do we handle hem? Ta’s wha I am here o do: explain wha happens on he edges o he rules and ell you wha o do  when somehing doesn’ look quie righ � bu i doesn’ look so errible ha you’re going o walk away rom he rade. I find ha hese ben-rules seups � especially Pervergence � appear afer economic news is released. Ta’s when raders go berserk and sar vomiing all over heir keyboards. Wall Sree and reail raders alike consume so much ums/Valium/Viagra during he 15-minues beore and afer he Non Farm Payroll repor ha hey could open heir own pharmacies. When hings ge a bi wild, a financial insrumen migh no make a new high or low. igh up unil he momen he repor is released, a divergence rade migh be orming. And hen BAM! Te repor is released, and here isn’ any more ime or he divergence rade o se up. We ge wha we ge, and he marke goes racing off ino he disance. I wan you o sar seeing he early signs o divergence so ha beore hese economic repors are released, you can see pieces o he puzzle fiting ogeher. Even i you choose no o rade during he ury and madness o a Non Farm Payroll repor,  you a leas can see he bigger picure. As my riend, Dirk du oi, once old me, perspecive is everyhing. Seeing

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he big picure, being able o sand back and ge a view o hings and sor hem ou � ha’s gold. Ta’s where profiable raders are made.  You migh consider reducing your rade size on a benrules rade by hal, and hen you won’ be risking as much on a rade ha didn’ mee all he condiions or  Wallaby divergence. You migh consider passing on he firs ew ben-rules rades you see and jus paper-rading hese seups. Ta way you can ge a eel or wha hey look like, how hey ac differenly and how you can bes ake advanage o hem. You migh consider, on he oher hand, only aking ben-rules rades. You migh find ha  you become beter a rading hem han even he normal, “perec-looking” seups. Bu wha does i even mean o “ake” a Wallaby rade? urn he page and find ou.

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THE WALLAB WALLABY Y TRADE

 W hen I go o rading conerences, I hear people arguing  When all he ime abou wheher he enry or exi or a rade is more imporan. I’ve engaged in such debae as well. Tis is like arguing abou he name o God, or abou wheher or no a peanu buter and jelly sandwich would wear a one- or wo-piece bahing sui. Sheezy-Weezy, people! Some prety heaed conronaions erup when you ge people on his subjec, and a he end o he day, day, he ruh r uh is ha hey boh mater. I you’re a jackass abou his opic, and you eel like arguing wih me righ now, jus pu his  book down or a ew minues and collec yoursel. We’ e’re re no going o engage in any useless debaes inside he pages o my book. Now ha we’re on he same page, le’s cover some imporan ground, saring wih he basis or he enry o a Wallaby rade. The Crossover Is the Entry

ake a look a his screen-sho o he regular Sochasic Oscillaor.. Te arrow in he image poins o he as line on Oscillaor he oscillaor oscil laor as i crosses above he slower line:

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FIG. 6-1: Crossover, close up.

Ta’s all you need Ta’s n eed o know abou enering eneri ng a Wallaby Wallaby rade. rad e. Heree are he rules: Her rul es: Trade Entry for Bullish Divergence

Sumo obses ut tunc candela pr propinquus opinquus congruo per a bovis crossover of ordin or dinari arius us St Stoch ochast astic ic Osc Oscill illa ator. Oh. I orgo. I’ve go o ranslae his suff beore I pass i on o you. I ook ha las quoe sraigh rom he ancien scrolls o Mordor, writen in he Elfin ongue and ranscribed wih he inkish saliva o a housand hobbis. Le’ss ry Le’ r y ha again, bu in English his ime.

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Trade Entry for Bullish Divergence

Buy he securiy when he nex candle close coincides  wih a bullish (upward) crossover o he regular Sochasic Oscillaor. Trade Entry for Bearish Divergence

Sell he securiy when he nex candle close coincides wih a bearish (downward) crossover o he regular Sochasic Oscillaor. Bullish Wallaby Trade Entry

I we ake a closer look a some examples, you’ll ge a  beter idea o how o ideniy his crossover enry. Here’s a char wih a bullish Wallaby divergence seup ready o go:

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FIG. 6-2: Bullish Wallaby Divergence, 1-hour Oil.

In ha char, Oil is moving lower and he Wallaby is rising over he same period o ime. And simulaneously, he regular Sochasic Oscillaor has been oversold (below 20) wo separae imes. Ta ulfills every requiremen or a rade seup. Based on his, we believe ha Oil is se o move higher. For righ now, I jus wan you o ocus on he area marked wih he “A” on he candles and on he  Wallaby. I’s okay ha Oil gapped upward on he char. I doesn’ make he rade any less appealing. Because we know we wan o buy Oil, we jus need o have a mehod or geting ino he rade. Here are some hings I

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 wan o accomplish when geting ino a rade: I wan o ge in early. I wan o keep my sop-loss close. I wan my profi arge arher away. Do you see why I’d wan o do he hree hings above? I  wan o lose he leas amoun o money possible on he rade. I wan o make he mos amoun o money possible. In order o do his, I need a way o ener he rade early. I don’ wan o wai or 17 differen kinds o confirmaion in order o jusiy he enry. O course, by making an early enry he prioriy, I’m going o have more rades ha sopou a a loss. Bu ha’s he Jazz we’re playing wih his rade: You’ve go o roll wih i. I’m willing o sop-ou muliple imes on a rade � wih small losses � in order o cach a bigger move ha I ride as long as possible. Now ha we’ve go he general seup, le’s ake a closer look a he areas I’ve marked wih he leter “A.”

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FIG. 6-3: Enering he rade a poin A.

Here’s he jig ha’s going down a poin “A”: Oil jumps up (a gap, as we menioned). Te regular Sochasic Oscillaor shows he aser line crossing up above he slower line.  When his happens, i’s ime o ener he buy rade. Tis means ha you pull up your rading plaorm, and you ener an order o buy Oil on he spo marke or uures marke, or you buy a call opion, or somehing ha ges  you long Oil. igh now we’re no going o worry abou he exac placemen o he sop loss or he profi arge.  Jus ake a momen and wrap your mind in he sof, warm

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orilla ha is he Wallaby rade enry. We’ll cover he res o hose subjecs in he nex chapers. Bearish Wallaby Trade Entry

Enering a bearish Wallaby rade is jus as simple as wha did or a bullish rade. Insead o buying, we’re going o be selling. Insead o waiing or a posiive crossover on he regular Sochasic, we’re going o be waiing or a negaive crossover. An example will help make his clear.

FIG. 6-4: Enering he rade a poin A.

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In Figure 6-4, he EU/USD is moving higher on price bu moving lower on he Wallaby. Ta’s bearish divergence, and as you know, ha means we wan o plan a sell rade or he pair. Te sell rade comes a poin A, where he regular Sochasic Oscillaor makes a downward crossover. Te aser line crosses down below he aser line. I’ve drawn a box around his area o make i easier o see. I’ve hen drawn an arrow sraigh upward on he char, o show he area on price where we’d wan o sell he currency pair.  Jus o make sure you undersand wha I do a his poin on he char: 1. As he EU/USD alls, he regular Sochasic Oscillaor makes a bearish / negaive crossover. 2. Tis means we sell he EU/USD. Te box around he candles a poin A show a group o candles – and enering he sell rade on eiher o hose candles would be fine. Bu i’s imporan o noe ha here is one candle – one poin in ime when a candle closes – and he Sochasic has made he crossover ha we require. I always wai or he candle close. Tere aren’ any midcandle enries or my Wallaby rades. Once he candle closes, and he crossover has happened, we can sell he currency pair. I don’ ypically wai or a beter price or delay my enry. Once all he condiions or a rade are me, I make he rade.

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Does this require you to watch the charts?

For hose o you wondering i you need o be siting a he compuer in order o ake he rade, he answer is yes – i  you are a shor-erm rader. For his example (and many o he examples in his book), we are shor-erm rading, so  yes, you need o be in ron o he compuer, which is wha many shor-erm raders do. I you don’ like waching he chars or siting a he compuer, hen you could have someone program an auomaed enry or you. Bu here’s anoher answer.  You could also simply move your Wallaby rading o he longer-erm chars and ake ewer enries ha ake longer o se up, ha have wider sop losses and much wider profi arges. For now, le’s cover he enry on a Pervered Wallaby rade. Entering a Pervergence Trade

 You’ll remember rom he previous chaper ha a Pervered Wallaby rade includes cerain deficiencies in he original seup: Te currency pair migh no have made new lows or highs, our rendline may appear ugly as i slices hrough candles or he Wallaby, or he char may no have gone overbough or oversold in wo separae places.  Any o hese problems make i a bi more difficul a firs o ideniy he seup isel, as well as he evenual enry on

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he rade. In Figure 6-4, you’ll see he previous example o a Pervergence seup:

FIG. 6-5: Classic Pervergence

 As you already probably know, his is Pervered bullish  Wallaby divergence. From wha we see on his char, we’ expecing ha Oil is going o move higher. I you’re sill having rouble seeing he seup, you should go back and quickly re-scan he previous chapers. I won’ ake long, and hey’re un o read. Also, make yoursel some cheashee noe cards o help you ideniy divergence. I you  bough he special ediion o his book, you received hese ree wih your purchase, and I love you. Follow he

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 Wallaby � i he Wallaby is rising, ha’s your clue ha  we’re going o wan o buy he securiy. Now please ocus your atenion on Poin “A” in he char. See how he regular Sochasic Oscillaor crosses upward,  jus like we’d like i o � bu i does ha early? Look a  where he regular Sochasic alls below 20 and hen rises up above i again. Ta’s where you see he firs crossover going upward, and generally, ha would be our rade enry. Te problem is his: We can’ ener he rade here,  because we’ve no even finished seting up he rade a ha poin! emember ha one problem wih Pervergence in his example is ha Oil goes oversold oo early. Ta’s wha causes he crossover (ha would usually be he rade enry) o come early as well. o solve his problem requires paience. We’re going o  wai a bi longer or he nex bullish crossover o occur. Here’s he char:

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FIG. 6-6: Crossover #2 comes a poin “B”

I’ve highlighed he area where he subsequen bullish (upward) crossover occurs a poin “B”. And I’ve placed an arrow on he candle ha coincides wih his crossover. Ta’s our enry. I migh help i you look back and orh  beween Figure 6-5 and 6-6 a ew hundred imes. I’ve purposeully no hidden he subsequen candles on mos o he chars, so ha you can see wha happens nex. In his case, Oil rises up subsanially. And i you’re  wondering i I am only showing you successul rade examples in his book, I wan you o know ha I’m going o show pleny o losing rades in he secion on sop losses. Te Wallaby is no a perec rading sysem. I will

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lose money. rading always involves a subsanial risk o loss. I works or me, and I’ve had a lo o un (and profis) rading i, bu I do wan you o know ha here are pleny o imes you wan o kick he Wallaby in he eeh and hrow i ou on he sree. I would be grea i i never los, and i i never made you look silly or beting agains he rend, and i i se up 700 profiable rades a day, and i i  were like Bety Crocker in he kichen and a porn sar in he bedroom. Ten again, I really wouldn’ wan a Wallaby cooking or me. Or, er…orge i. Now ha we’ve goten ha ou o he way, I’d like o show off a ew more examples o he rade enry in rapid-fire ashion. We’ll look a boh Pervered and radiional  Wallaby enries.

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Example 1

FIG. 6-7: 15-minue Wallaby enry 

In Figure 6-7, I’ve atemped o show you a close-up view o wha he candles (A) and he crossover (B) look like, righ a he poin o enry. You’ll see ha here is a group o candles in area (A) and  You migh noice in figure 6-7 ha he EU/USD currency pair has allen a bi beore he acual rade enry fires off. Ta’s fine. I has pleny o addiional alling o do, and los o profi poenial.

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Example 2

FIG. 6-8: rade enry on Pervered Bullish Divergence

Clearly we’ve go Pervergence on our hands in his example above – he regular Sochasic Oscillaor did no go oversold a wo separae poins. o see his more clearly, jus look a he regular Sochasic a poin B on he char (jus inside he circle I drew). You’ll see ha he Sochasic is no even close o he 20 line (which would mark an oversold condiion). As you already know, his doesn’ mean we’ll compleely avoid he rade. I jus means ha we’re bending he rules a bi.  A poin B, we ge a crossover on he regular Sochasic,

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and ha’s our signal o ener he buy rade. I’s no a second crossover – i’s he firs one, and ha’s grea. Ta  will do jus fine, hank you. Buy me some Euros, ring he regiser, serve me up some resh, ho orex pippage. o see his crossover enry even more precisely, I’ve given  you a close-up view o wha he candle or enry, and he crossover a ha ime, look like. Te char in Figure 6-8 is a 15-minue char, and ha means we’re doing medium-erm rading here. emember ha or medium-erm rading, our Wallaby indicaor is se o 15, 60, and 240, and we’re going o do our rading rom eiher he 15-minue char. By now, you’re really geting he hang o his, so le’s jus do one more example.

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Example 3

FIG. 6-9: Microsof, regular Bearish Wallaby Divergen

Some o you have been waiing wih your hands down  your pans, jus dying o see a sock char. You may now commence sock-loving, bu please also pay atenion o he ollowing discussion. Noice ha he crossover happens when he regular Sochasic Oscillaor is sill above he 80 line � i’s sill overbough when we ake he rade. Ta’s fine. We don’ care ha i’s sill overbough. We’re no going o wai or he regular Sochasic o all below 80 or anyhing like ha. Many rading sysems would require ha o happen, bu

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 we’re no going o. I say, o he gallows wih hose oher rading sysems! And heir MILQUEOAS creaors!  We’re going o do whaever we wan o do. Please also keep in mind ha I’m rying o ge early enries. I’d sell my lef esicular appendage o ge an early enry on every single rade I ake. Why? Because I learned ha you only acually need one. And: Tis keeps my sop-loss closer. Tis pus my profi arge arher away.  You’ll also noice ha Microsof gaps down afer he rade enry � i’s a airly subsanial 5% drop in he sock. Ta’s go o be an earnings repor. Or news ha Seve Ballmer  was seen a ech conerence, waving around anoher able device hey didn’ acually end up releasing. Or maybe he sock didn’ really gap down, bu he sock exchange servers were running Windows Visa and crashed. In any case, I do wan you o know ha i’s no uncommon or  Wallaby divergence o appear righ beore an earnings repor, or beore somehing big is going o happen. Tink o i as he Wallaby giving you a heads up abou wha migh be se o happen wih he undamenals o a sock. I’s no a crysal ball.

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When you hink more abou i, i makes sense ha he Wallaby sends ou is mellow call or divergence righ beore some kind o caaclysmic even. When a sock has reached a criical poin, and i has raveled a grea disance up or down, and raders are way overleveraged, hen hey (and he sock) are mos vulnerable o bad news. Bad news is likely o have he wors effec possible, and margin call raders, and lead o panic. Someimes you can see on a calendar ha an earnings repor is due ou soon. Or ha a major economic number is se o be released shorly.  And someimes he news is unexpeced. Bu I hink  you’ll find ha divergence (especially on he longer erm chars) appears beore game-changing evens.

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Example 4

 While I’m wriing his, I’m realizing ha i insead o  wriing his book, I were reading his book, I’d cerainly appreciae anoher example o wha a Wallaby enry looks like. So, or hose o you who eel he same way, his one’s or you.

FIG. 6-10: Briish Pound/Canadian Dollar Wallaby rade.

I waned o show his example o he GBP/CAD currency pair or wo reasons. Firs, i’s a grea example o he ac ha someimes you have o wai a long ime or one o hese rades o se up. Tis is he 1-hour char, and here

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 wasn’ a rade on his pair or more han a week (in ac, i ook even longer, bu he char doesn’ go back ar enough o show i). I you’re rading on he medium-erm chars,  you’re going o find ha waching a ew differen financial insrumens will provide you he variey and requency o rades ha you’re looking or. More on ha in a momen. Second, his char shows ha even afer he divergence appears on he 1-hour char, i’s no like we jump ino he rade. Several bullish candles appear on he 1-hour char  beore we ge he enry. Waiing can be a bich someimes. Especially or impaien people like me. Some o you don’  wan o wai or he “official” rade enry. Some o you are going o jump righ in on he rade as soon as you see he divergence. You’re going o hink ha you’re doing even more o wha I like: Te earlier he enry, he beter he rade, or somehing like ha. I’m here o ell you ha you go righ ahead, and you do ha. Knock yoursel ou. Seriously. I you ideniy he divergence in is super-early sages, and you wan o ake a firs rade, I’m no going o sand in your way. In ac, le’s go ino bonus-round erriory and alk abou he earlies o early enries ha you could ake on his one. Tese enries are so early you’ll hink we’ve gone back in ime.

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Example 5

Here is he same GBP/CAD char again, wih noes:

FIG. 6-11: An earlier enry.

I’ve ried my bes o ideniy he candle ha represens he earlies possible enry. I’s he righ edge o he divergence seup. By enering a his poin, you’d ge in on he rade 50 poins (pips) earlier. Te rade, le’s say, has he poenial o ne 300 poins o profi wih an enry a he “official” enry poin. Wih an enry a he earlier candle, 50 poins lower, you’re increasing your profi poenial by 16% (50 pips is 16% o 300). Bu ha’s no all. You’re also going o

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THE WALLABY TRADE

have a sop-loss ha’s closer o your enry. And ha means ha you’re risking less o gain more. All good, righ?1 igh. Tere isn’ anyhing wrong wih geting in early. Bu le me explain why I usually wai or he “official” Wallaby enry poin. Firs, he earlies enry comes a a ime when I don’ know ha he divergence is all he way complee. I have no idea i his currency pair is going o all arher. I i does, i could desroy he divergence (by causing a new low in he  Wallaby), and i could sop-ou my rade. Ta’s a pain in he but because i i sops-ou my rade and desroys he divergence, I don’ even have a new rade seup. And I will have aken a divergence rade ha didn’ really exis. Second, i’s no really divergence unil he enry. I you hink abou wha I said in he paragraph above, you’ll realize ha we don’ even know i we have divergence (and he seup is no complee) unil we ge ha regular Sochasic crossover on he “official” enry. Ta’s when  we know ha he divergence se isel up properly, and he pair is coming up off is lows. By waiing a litle bi longer, he divergence is ully ormed, and we can ener he rade knowing ha we’re no misinerpreing he basic exisence o he rade seup. 1. I didn’ mean o jump ahead by alking abou he profi poenial and he sop loss. Tose subjecs are jus around he corner.

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Tird, i you ake he earlies o early enries, you’re going o be aking shos in he dark. Ta migh be fine or he Prince o Darkness, bu no or you and me. You can’ jus fire off rades he momen you hink you see divergence seting up. I you do, you’ll find very quickly ha you ake a lo o rades ha are so early ha you sop-ou more ofen. Even i your sop-loss is closer because o he ulraearly enry, you’re going o rack up ons o losses. In he end, rading like ha is more like working in a coal mine han i is rading. You do a lo o work, you ge really diry,  you’re dead ired a he end o he day, and you live mos o your lie in he dark. What About Using a Lower Time-Frame Chart?

Some o you ou here are scraching your heads, and no jus because you haven’ showered in weeks. You’re hinking: I be we can go down o a lower ime-rame char and look or divergence here, and i we find i, ake an early enry. Ta way, we’d make sure we didn’ ener he rade unil divergence really exised on he char, and  we’d ge an early enry wih all he special eaures and  benefis ha come wih i. Saying wih our GBP/CAD char, we can observe his exac phenomenon. Example 6

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THE WALLABY TRADE

On he 5-minue GBP/CAD char, wih our Wallaby setings a 1, 5, and 15, we observe ha during he same ime he currency pair is seting up a rade on he 1-hour, i’s also seting up a rade on he 5-minue.

FIG. 6-12: An earlier enry on he 5 minue char.

 We can ge almos everyhing we wan rom he 5-minue char. And we don’ even have o bend any rules. By now he divergence should be obvious o you, bu I’ll quickly run hrough i. Te currency pair is making lower lows on price � and hose lows also creae wo separae

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oversold poins on he regular Sochasic. During he same ime, he Wallaby indicaor is making higher lows. Ta’s bullish Wallaby divergence, and i means ha we hink he pair is going o make a move upward.  A poin A, we see a bullish crossover on he regular Sochasic � and ha’s our enry. When he candle closes, he pair is rading a 1.5360. I we had sayed wih he sric rules and enered on he 1-hour char, our enry would have been a 1.5400 (look back a he previous chars i  you have any quesions abou ha). By bending he rules on he 1-hour char in Figure 6-11, we hough we migh  be able o ener a 1.5350. We go excied because ha was an enry 50 poins early. Now we’re looking a an enry a 1.5360, which is 40 poins early � and we’re doing i in a oally legi, Wallaby manner. By now, you’re probably wondering wo hings:  Wha’s our rade size?  Where do we se our sop-loss?  And i’s ime o jump on hose subjecs.

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 Wihou ail, he firs quesion afer I each he enry o a rading mehod is, “Wha should my rade size be?” Bu his is no a book abou money managemen. In he Appendix, you’ll find a shor lis o books I like on rading, and I direc your atenion here or an expanded discussion o he subjec. Bu i would also be super lame o me o dismiss he opic compleely, so here are my five rules o money managemen when rading he Wallaby. I don’ believe ha hese rules apply universally o every syle o rading, so don’ sar World War VII on me  because you have a differen se o rules. Calm down. We can all jus ge along. Rule #1: Use a stop-loss when short-term trading

Se a sop-loss in he rading plaorm and say wih i. Don’ adjus i unless you se i wrongly in he firs place. Don’ widen your sop because you wan o give he rade more room o breahe. I have generally ound ha when  you give a rade more room o breahe, i urns around and srangles you. Tere are long-erm raders, or undamenals-based raders, who migh disagree wih his rule. Bu I’m seting ou some rules or rading he Wallaby, no or every kind o rading sysem ha exiss. When you’re rading he  Wallaby, jus close ou he losing rades quickly, and I  believe your overall experience is going o be very posiive. My riend Jamie Saetele, a rader and brillian echnician,

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is ond o elling me, “ob, i you ake care o seting and keeping he sop loss, and you le he marke ake care o he profi – you le he marke carry your profiable posiions as ar as i can, you’re going o be all righ.” And he’s righ, even hough he’s like 13 years old. Rule #2: Don’t risk more than 1% on a trade

I don’ know wha financial resources you have. Bu I’m probably sae o assume ha you do no have an unlimied amoun o unds wih which o replenish your rading accoun. So do us all a avor and don’ risk 50% o your accoun on a single rade idea. Ta’s like King Henry VIII  beting his enire kingdom on chasing afer some new ail. No advisable. Doesn’ end well. Ten you end up in a awdry Showime cable elevision series. I you are using he Wallaby as a shor-erm rading mehod � a leas he way we’ve discussed i so ar � you’re going o have 10, 20, even 30 or more rading opporuniies each  week. Tere is simply no reason o blow your bank on your firs rade o he week. Or any rade o he week. Don’ go Lehman Brohers on me. Jus ake i a bi a a ime. rading success comes rom a series o good decisions over ime. I  you’re rading he Wallaby longer-erm, hen you’re ar less likely o have a problem wih overrading or wih beting  your enire accoun on a single idea.

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 When I say ha you shouldn’ ry o pick he “bes” rade seups and be more on hose – I wan you o know ha I am speaking rom experience. I have spen years clowning around wih rades, rying o call one rade seup “higher qualiy” and worh a larger invesmen. Ta is bullocks.  When I do ha sor o hing, I always manage o ge mysel suck in he wors rade ever, and hen I find mysel a ew days laer having o saw off my arm jus o ge mysel unwedged. And because I’ve risked more on ha one rade, I end o no wan o sop-ou, so I hold he rade open longer. I’s he wors o all possible scenarios. I is a horrible cycle o beting oo big, wishing i would urn around, adding more o a bad decision, and leting a rade go so ar ha I sar o hink ha i jus can’ ge any worse. I always does. And i’s always beter o jus exi as when i has gone wrong. See ule #1 again. Mos people’s single larges losing rade is a gian percenage o heir accoun, meaning, mos people lose a huge amoun o money on heir larges losing rade each week, monh or year. One misake is usually wha kills people. I’s rue o individuals, and i’s rue o hedge unds and invesmen banks and even cenral banks. Mos people don’ lose a iny amoun 1,000 imes and hen find hemselves wih an empy rading accoun. o he conrary! I we each were only losing a very small percenage o our accoun on a bad rade, we’d evenually  be able o urn hings around.

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o preven any o his rom ever happening, jus do a simple calculaion: 1. Figure ou how much 1% o your rading accoun is. I  you have a $10,000 rading accoun, hen ha’s $100. 2. Now decide where you’re puting your sop-loss (or ha, see he nex chaper). 3. Nex, deermine your rade size by making sure ha i  your sop-loss is hi, you lose no more han ha 1% o  your rading accoun ha you calculaed in #1. For mos o you, his mah is easy, and you’ve been doing i or years. I applies o you wheher you rade opions, socks, uures or orex. Te poin values are differen, o course. Some o you are rading uures conracs, and some are rading socks, and some are rading currency los. Bu you can do he basic mah necessary o no lose more han 1% o your accoun on a losing rade. And ha one simple decision, o do one simple calculaion, and simply say wih your decision, makes mos o he difference beween he long-erm winners and losers. Rule #3: Just keep banking profits.

Each Wallaby rade is a single opporuniy o bank some profi (or suffer a small loss). Your goal isn’ o become he  world’s mos imporan rader o all ime, or o break he Bank o England. You jus wan o make money.

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Don’ ry o do anyhing ancy wih hese rades. O he  winning Wallaby rades, 99% reach some profi arge (discussed laer), and hen you ge ou (or proec your profi and ry or more � see chaper 9), and hen you wai or he nex one. Don’ ry o be a hero wih anyhing. Jus keep proecing and aking profi. I’ve seen ime and ime again ha when raders wan more ou o rades, hey hold ono heir winners bu hey don’ do anyhing o proec he profis. And evenually ha winner becomes a loser. Someimes you have o admi o yoursel ha exiing now  wih he profi you have is he bes decision. I you have a  winning rade, bank he profi. Or proec ha profi and ry or more. Bu don’ le ha good rade go bad. Don’ le a winner become a loser. I’ll lay ou some sandards or aking and proecing profi in Chaper 9. Rule #4: Set a maximum number of daily trades.

 A he beginning o each day, give yoursel a maximum number o rades ha you’re allowed o ake. For a shorerm rader, I’d say hree o five rades ough o be pleny.  And hen when you’ve aken ha many rades, jus sop. urn off he compuer. Walk away. By seting a maximum number o rades ha you can ake, you do he ollowing:

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1. You wai more paienly or he rade o ully se up. 2. You do a beter job o managing he rade you’re in (which is o say, you don’ ge crazy wih i, because  you know you don’ have an unlimied number o rades ha you can ake oday). 3. You don’ overrade. You se a limi o how many rades  you can ake, and ha’s he end o he line or you. I have wached people lose heir lie’s savings by siting in ron o a compuer and aking hundreds o rades over a  very shor period o ime. I have seen people double down, and hen riple down, and hen quadruple down on rades.  And hen ake he same rade five, six, or seven imes, unil hey’re leveraged o he hil, and he smalles move agains hem buss heir rading accoun.  You can’ do his i you have a cerain number o rades ha you can ake each day. I’d raher no sugges ha you pick a se ime o day o rade and only rade during ha ime. Te problem wih ha hinking is ha you migh si in ron o he compuer during a couple o hours in he morning and ge no  Wallaby seups, and hen laer in he day miss everyhing. Ta doesn’ make any sense. For orex raders, you can prety much si in ron o he compuer 24 hours a day, i you wan, and ake hese rades. I see no reason why  you wouldn’ wan o ake any Wallaby rades ha pop up, any ime o he day, as long as you’re saying wihin your

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maximum rade limi. Rule #5: Set a “Max Loss Per Day” and stick to it.

Se i in your mind ha you have a maximum amoun ha  you are willing o risk on a day’s worh o rading. And once you reach ha number � wha I call he Max Loss Per Day (MLPD) � shu i all down and ake a break.  When you do his, you accomplish a number o hings: 1. You absoluely preven yoursel rom losing more han  your Max Loss Per Day. You know how much you can lose. I migh seem like a small hing, bu i’s no. 2. You preven yoursel rom aking a gian loss in your accoun. 3. You ake he ocus off he “One Grea rade You Canno Miss” and realize ha rading successully is abou aking a series o rades, no jus one grea rade. 4. You preserve your menal sabiliy. People go insane rying o make up or a loss in one day. 5. You realize ha you don’ have o make back he money you’ve los in he same session. You become more realisic, and realism is a rader’s mos producive mindse. 6. You never lose your enire accoun.  Your accoun is your uure. You can’ risk losing i. You’ve go o preserve your capial. You already know his, and I undersand I don’ have o bea you over he head wih he

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same advice a housand imes.  When I lose money on a rade, I do become upse. I hae losing money. I hae urning off he compuer when I’ve los money or he day. I bohers me. Bu afer abou 20 minues, I orge abou i and, when my head is cleared, I can look back on he chars and see where I migh have gone wrong. I can replay hings and see how I would have handled i differenly or he nex ime. Bu when I say in ron o he compuer, I keep making he same misakes. I end o ake earlier and earlier enries, rying o win back wha I’ve los. I end o srech he  boundaries o my maximum number o rades or he day, hinking ha i I ake jus one more, I’ll give mysel a chance o ge ou o he hole. All o hese hings evenually lead o my wors rading days ever. Random, Additional Thoughts About Risk 

ere are good losers and bad losers.  I I ollow he rading rules, and he rade is a loser, I consider i a success raher han a ailure. I is poinless o ge upse abou a loss on a legiimae seup. Ta’s like geting angry ha your poop smells, or arguing abou poliics wih a una fish sandwich.  I look a my accoun balance every day. Some people would ell you no o do his, bu I rack daily changes in my accoun balance. Am I gaining huge amouns in a shor

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period o ime? Ta’s a worry (because I probably ook oo much risk, oo large a rade size or oo many rades). Did I lose more han a small amoun or he day? Ta  would also be a worry.

 I don’ se goals. I never, ever, ever se a goal or rying o make a cerain amoun o money in a defined period o ime. I believe ha when you se goals abou making a cerain amoun o money rading, you are saying ha you  wan he marke o provide you wih he opporuniies o rade. You can’ ell he marke o do ha! You can’ ell he marke o do jack. I ells you wha o do. Focus on he now. Insead, I ry o make he bes o every rade ha I’m in, and hen he res akes care o isel.  While I can’ se a goal o ge a cerain number o rades every day, or a cerain amoun o profi every day, I can absoluely do my bes no o corkscrew-up he rade I’m in. All ha maters is: 1. 2.

Te rade I’m planning or Te rade I’m in.

I don’ ry o plan or anyhing else.

 I es everyhing I do beore I rade.  I you wan o do he same, jus go back in ime on he chars and paper-rade he Wallaby. Find a seup and walk hrough i one sep a a ime. Sofware is available o make his easier. For

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example, i you’re a currency rader, you can ge a copy o Forex eser (jus Google i) or abou $100, and i will allow you o go back in ime and es he Wallaby rade.  You can replay he 1-minue chars rom anyime in he las 10 years, and place rades, and learn how you wan o handle rades beore you ever use real money. I’ve even had he Wallaby indicaor buil or several differen charing programs, so he odds are you can se i up, es i ou, all wihou any risk.

 I say in ouch wih people abou wha I’m doing. Tere are a leas 20 o 30 people who, a any ime, can see exacly  wha I’m rading. Because I manage accouns or invesors, and hey can see every rade I ake when I ake i, I can’ hide anyhing. All o my misakes are ou in he open. I’s amazing how you will rade differenly i you le your moher see your accoun anyime she wans o. Mos money managemen is common sense. I implore  you o keep your losses small and se limis or yoursel. Hell, I implore mysel o do he same. Bu how do we keep our losses small on he Wallaby rade?

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 Many a man can save himsel i he admis he’s done wrong and akes his punishmen. - orvald Helmer, “A Doll’s House”

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I’d love o ell you ha he Wallaby rades work perecly every ime and don’ lose any money. I’d also love o be able o ell you ha hese rades have a specific, defined, cerain winning percenage � bu how in he hell would I be able o do ha or you, across he enire universe o currency pairs, socks and uures conracs? I’s jus impossible o give you a number ha would make sense. Insead, wha I can do is help you learn rom ailed Wallaby rades. I can help you see wha i looks like when i doesn’  work. I can help you avoid some common misakes and place your sop-loss a levels where you’re likely o lose as litle as possible on he rades ha go bad. And yes, some o he rades go bad. Some basic information about stopping out

Mos raders can se a sop-loss on a rade a he same ime hey ake he rade. Tere are wo reasons or seting a sop-loss and puting i ino your plaorm so ha you don’ ge he chance o make a decision abou i laer (o course you can change your mind and aler i laer, bu having i in he rading plaorm rom he sar is a leas a good way o ry o sick wih your loss rules).

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Tose reasons are: 1. A sop-loss is simply an order o exi a rade when i has los a cerain amoun o money. 2. A sop-loss is se o exi he rade when he reason or aking he rade in he firs place is no longer valid.  When I ake a rade on he EU/USD, a litle box pops up, and I can se he sop-loss a he same ime I’m enering he rade. I looks like his:

FIG. 8-1: Seting up a sop-loss

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In Figure 8-1, you’ll see I’ve highlighed he area where I choose a sop-loss. I’s measured in poins (called “pips” in currency rading). In his case I’ve seleced o cu he rade off a a loss o 50 pips. Your screen migh look differen,  bu you ge he idea. I he rade loses more han a cerain amoun, hen you ge ou. Te poin o having a sop-loss isn’ jus o preven you rom losing oo much money, alhough ha is admitedly he mos imporan reason or having one in he firs place. Te second reason or having a sop-loss is o simply le  you know when a rade idea has become invalid. You sopou when he reason or being in he rade no longer exiss. Can you hink o wha ha reason would be, in he case o a Wallaby rade? We stop-out when the divergence no longer exists

Makes sense, righ? We sop-ou o a Wallaby rade a he momen when he divergence ha creaed he rade in he firs place disappears. Ta’s prety easy o undersand:  Why would we wan o be in a divergence rade i he divergence no longer exiss? Say, or example, ha XOM (Exxon Mobil) is showing  bearish Wallaby divergence on he 15-minue char.

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THE WALLABY TRADE

FIG. 8-2: XOM. ime o sell.

Te sock has made higher highs on price, bu he Wallaby made lower highs a he same ime. Boh highs are separaely overbough on he regular Sochasic. We’ve go a perec bearish Wallaby seup and we wan o sell he sock. Figure 8-2 shows he poin o enry or he rade a “A”. (I’ve purposeully erased he candles on he char so  you can’ see wha happens nex.) Our firs order o business when seting a sop is o deermine he maximum amoun o loss ha we’ll be  willing o susain on he rade. I don’ wan you o know  wha we migh be hinking abou or a profi arge jus  ye because I don’ wan o se a sop-loss based on our

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profi arge. I hink ha’s insane. aher, we se a sop-loss  based on he wo principles we’ve already discussed: he maximum we’re willing o lose, and when he divergence ha sared he enire rade idea no longer exiss. Le’s discuss boh iems one a a ime.

Sop-loss based on money los.  Assuming we’re able o sell  XOM a approximaely $71 (jus slighly above where I’ve drawn poin A), we migh decide ha we’re going o sopou i we’ve los .75 on he rade (or in oher words, abou 1% o he value o a share a he ime we sold i). Tis is no he only way o calculae a sop-loss, bu le’s jus sar wih his as an example. Sop-loss based on disappearing divergence.  A he ime we sell XOM, we don’ know exacly how high he sock has o go beore i invalidaes he bearish divergence. Bu we know ha i such a hing happens � i i makes new highs on price and on he Wallaby � hen we no longer wan o be in he rade. Because we don’ know exacly when ha’s going o happen, we’ll jus wach he sock, and i he divergence disappears beore we lose .75, we’ll close he rade early and ake he loss.

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THE WALLAB WALLABY Y TRADE

Here’s an updaed char, showing a dashed line where  we’ve se our sop-loss sop-loss based on a sop-loss se o $71.75.

FIG. 8-3: Tick line a he sop-loss level.

I’m guessing (and his is based on he ac ha I’ve seen housands o Wallaby rades over he years) ha i he price goes o 71.75, hen he bearish divergence is going o disappear, anyway. I jus happens ha way: I price keeps going higher, insead o breaking down � he  Wallaby  W allaby indicaor is bound o ollow ollow.. And ha desroys he raionale or he rade. Over ime, you’ll become  very skilled a seeing hese hings beore hey happen, especially i i  you do a lo o esing. You’l You’lll be able o size up a rade and make esimaions abou where he indicaor

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1 33

 wi ll be i price  will pri ce rises or alls al ls over a cerain amoun o ime. Here’s wha i looks like on he char.

FIG. 8-4: Our hopes and dreams are desroyed.

In Figure 8-4, he sock rises o $71.75 and hen our broker closes ou he rade a he nex n ex prevailing marke price. We We lose 1% (ha’s an approximaion, o course, because we have o accoun or slippage, ransacion ees, ec). Ta’ Ta’ss easy o see. Te price rose up so high ha i hi our exi poin. And we don’ don’ argue abou i i  or say in longer or pray or a beter oucome. oucome. Hope is no a rading sraegy, sraegy, righ? Bu somehing else is happening a he same ime. No only have we los he maximum amoun allowable on his

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THE WALLAB WALLABY Y TRADE

rade, bu he divergence has disappeared. Here’s proo:

FIG. 8-5: Wallaby divergence disappears.

In Figure 8-5, he divergence disappears because he  Wallab  W allabyy sars sars o mak makee new new high highss during during he same ime ha ha he candles are making new highs. Ta’s wha you would expec, righ? r igh? Every Everyhing hing going higher a he same ime.  You’lll noice ha he Wallaby  You’l Wallaby’’s rise is very sligh � barely percepible. Bu i does sar rising. Ta’s all i akes. Te divergence is over. I’s ough o see your divergence disappear. I know. We invesed ime and energy in his rade, and i sinks o le go. Bu here’s a brigh side: We los a small amoun. We

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1 35

ollowed he rules. Ta’ Ta’ss ha. Can we trade it again?

Te mos common quesion a his poin is: Can we ge  back in? W hen can we ge reveng revengee on his sock? We We had i righ, damn i! We knew ha his sock was due or a decline. When we se up a Wallaby rade, we can become “married” o he idea ha he sock has o all (or rise).  Afer dedicaing ime and atenion atenion and effor o he rade plan, we can’ le go o he idea ha he sock should move in jus one paricular par icular direcion. I was elling us somehing � i spoke o us. Over he course o 20 o 30 candles, and maybe an enire day or wo or even a week, we ollowed his seup seup.. One o he mos dangerous habis o culivae is he endency o keep rying o ake he same rade over and over, when i has clearly given us he signal ha i is no longer valid. I’s beter no o argue wih he marke. O course, someimes you sop-ou o he rade, and hen all o he sudden, he blased sock moves 100 poins in he direcion you originally waned, and you eel like an idio. You You si here wih w ih your humb up your but and sar cursing a he screen. I know I do ha.1

1. Tis reminds me o a saying ha my menor augh me: He who ries o pick marke botom ge sinky finger.

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THE WALLAB WALLABY Y TRADE

 W hen you chase afer  When afer a seup seup,, here’ here’ss wha goes wrong. wrong. You You ake he nex rade even earlier han he firs, o ry and secure as much profi poenial, o replace he loss ha  you jus experi experienced. enced. Ten you le he rade run agains  you longer longer han han your se sop-loss, sop-loss, because you don’ don’ wan o have anoher loser. We end up expressing our anger a he marke by squandering our rading accoun on a goodor-nohing rade seup ha never mean us anyhing bu harm. Geting revenge on he marke is like li ke geting revenge revenge on he weaher: You can’ do i. You are he only one ha ends up hur. Tink abou i. Te marke is sill here afer hundreds o years. We can’ say he same or Bear Searns or Long-erm Capial Managemen, or any oher number o firms and individuals who ough he marke and were desroyed. So, in shor, he answer is, So, i s, unorunaely unor unaely,, we don’ ake he rade all over again unless he divergence ses up a second ime. I i ses up again a second or hird ime, hen I ake he rade again. again. Bu i he divergence divergence disappears, I close he char and walk away. I do no ry o jusiy anoher rade. Te marke knows somehing I don’ know. Ta’s enough. I he divergence compleely disappears and does no re-emerge, hen we’re probably looking a a srong rend, and i’s beter o ge ou o he way.

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Other Ways to Calculate Stop-Losses

 Percenage o Accoun  In he firs example, we sopped-ou o our XOM rade  when we’d los 1% o he value o a share a he ime we sold i. Ta’s jus one way o hink abou i, and i works  well when you’re no using any leverage. ypically, I sop ou o a currency rade when I’ve los a cerain percenage o my rading accoun. I I’m rading  wih an accoun wih $300,000, hen I wan o exi my rade i I’ve los $3,000. We’ll assume ha we’re working  wih his $300,000 accoun in he nex ew examples. Le’s now look a an example o how his works wih my avorie rading insrumen � he EU/USD.

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THE WALLABY TRADE

FIG. 8-6: Te EUR/USD 1-minue char. Enry a “A.”

In Figure 8-6, he currency pair makes higher highs wih price, bu creaes lower highs on he Wallaby. You can see ha we don’ have wo separae overbough peaks on he regular Sochasic, bu ha’s common on he 1-minue chars, and we’re no going o make a big deal abou i. Because his is bearish divergence, we wan o sell he EU/USD. When he regular Sochasic makes a bearish crossover a poin “A,” ha’s he signal o ake he rade. Our rade enry is a approximaely 1.3120. And here’s  where we have a quandary. Wha size rade? Where o pu he sop-loss?

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13 9

 When you’re rading wihou leverage, i’s prety easy o calculae a sop-loss, as we saw in he previous example or XOM. Bu wih currencies � or uures � we’re using leverage, so we have an added componen (rade size) ha we need o consider. We’ve already deermined ha  we don’ wan o lose more han $3,000 on he rade, and ha’s our firs concern. Nex we need o deermine a wha poin he divergence seup is no longer valid � and hen  we’ll alk abou rade size. In Figure 8-7, we move up o he 15-minue char o ge a  bigger-picure view.

FIG. 8-7: Seting a sop a a previous high.

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THE WALLABY TRADE

Te 15-minue char shows a lo more aciviy, over a much larger period o ime, so I’ve drawn a box around our rade seup rom he 1-minue char. I’s only a small area on his longer ime-rame char. Nex I’ve drawn a dashed line across a previous high rom abou 5 hours earlier on he same day. I he pair crosses ha previous high, hen we’re no likely o wan o be in he rade anymore. Why is ha? Previous high poins on a char can ac as resisance, and a financial insrumen can sruggle o go higher han ha poin i i reurns here, and ha makes i a good place o sar hinking abou a sop-loss. Te same goes or previous lows (see nex example). I he currency pair moves higher han his previous high, hen I’m no longer ineresed in being in he rade. A move higher han ha poin means ha buyers are in conrol, and hey’re pushing he pair beyond an area o resisance. Once ha level is broken, we’re likely o see he pair move even higher sill. And why say in a rade i i’s going agains us? We can jus dump he rade and wai or i o se up again laer.  Wha’s more imporan is ha i he pair rises up above ha previous high, hen he divergence ha go us ino he rade in he firs place will mos likely disappear. emember, ha’s he second reason or he sop-loss:

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 When he reason ha we ook he rade is no longer valid, hen we no longer wan o be in he rade. A break above ha previous high should ake care o his requiremen. Tis previous high marked on he char comes a he price 1.3145. Ta’s 25 poins (pips) higher han our enry on he rade. Le’s round ha number o 1.3150 o make he mah easier and move orward. I we place our sop-loss a 1.3150, ha’s a 30-pip sop. I he currency pair rises 30 pips afer we sell, hen we’re ou.  We’ve los. And we know ha we don’ wan o lose more han $3,000. I we divide $3,000 by 30, we ge 100. Here’s he calculaion:

 Wha his means is ha each poin o movemen in he EU/USD canno equal more han $100. I i did, hen  we’d lose more han $3,000 i our 30-poin sop-loss is hi. In currency rading, $100 per poin is a $1 million lo size, so ha’s he rade size we’re going o use. I you’re  wondering how in he world we can command a $1 million posiion in he currency marke i we only have a $300,000 rading accoun, here’s your answer: Because we can use leverage in currency rading, we need o pu up margin o

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THE WALLABY TRADE

$25,000 (1/50h o a $1 million posiion) in order o ake he rade. Our broker “lends” us he res necessary o ake he rade. I all his discussion abou rade size bohers you or conuses you, hen jus don’ worry abou i or now. Te Appendix secion on money managemen will poin  you o some resources or learning more abou his suff. Now we know where we wan o place he sop-loss, we know how many poins agains us he currency pair can go beore we exi, and we know he rade size we’re going o use. We’ve go everyhing we need. I we move o he 5-minue char, we can see enough candles ino he uure o see wha happens wih he rade.

FIG. 8-8: Sopped-ou.

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I’s no even a close batle here. Te currency pair never cooperaes, and rom he momen we sell i, i rises upward unil we sop-ou. And i orures us or quie some ime, as well. Mos Wallaby divergence rades are over wihin he firs 20 o 30 candles or bars. In his case, i’s a ull 100 candles ha go by beore we are sopped ou. Hey, ha reminds me. I waned o alk o you abou ime-based sops. Time-Based Stops

Mos Wallaby rades are eiher going o be successul in he firs 20 o 30 candles afer he enry, or hey are going o sop ou.

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Here’s an example using he S&P 500.2

FIG. 8-9: Bearish divergence on he 15-minue S&P.

Te index makes higher highs wih price � and each higher high is separaely overbough on he regular Sochasic. A he same ime, he Wallaby is making lower highs. Ta’s bearish Wallaby divergence, and i means ha we are ineresed in selling he index. Our enry is a poin “A,” and I’ve drawn an arrow o help you see his area on he char. I also circled he Sochasic crossover on he lower panel o he char o help you see he area ha “creaed” he enry poin.

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For a sop, his ime, insead o picking a previous high,  we’re simply going o give he index 30 candles o ime. Ta’s 15 minues or each candle, so in oal, we’re going o say in his rade or a maximum o 450 minues (7.5 hours). O course, i he rade his our profi arge firs (see nex chaper), hen we’ll ake our money and run. Bu i we are in he rade or 450 minues and we don’ ge a resul ha we like, we’re closing he rade, win or lose.  A poin “B,” he index has gone nowhere. All 30 candles have passed. We’re a prety much he same exac price  we were a when we ook he rade. I’m no going o even quoe he price o enry and exi, because i’s jus a difference o a ew icks. We’ve los hardly anyhing and  because we have a ime-based sop, we exi he rade. In his case, i’s a wise choice. Te index jus keeps on rising. I remember his example, in ac, and i came a a ime when he Federal eserve was pumping money ino he economy and every index, commodiy and echnology sock was shooing o he moon. I was a rend oo ough o figh. Te grea hing abou he ime-based sop on his rade is ha we never even made a new high in he index during he ime we were in he rade, so a price-based soploss wouldn’ have been hi. Bu i we had chosen a price based sop, we would have suffered hrough a bad rade or 24+ hours, only o be rewarded by a loss in he end. In shor, by using a ime-based sop, we saved ourselves some money. And reduced he amoun o aggravaion

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associaed wih saying in a losing rade.  And he sory ges even beter. Less han 24 hours afer he rade sopped ou, We go anoher crack a he bearish  Wallaby divergence on he S&P. Here’s he char ha shows i:

FIG. 8-10: A second crack a he S&P.

 Why do I menion his? Firs, so ha you know ha even in he mids o a gian rend upward, here are very successul bearish Wallaby rades. Second, o show ha sopping ou and losing a small amoun o money is no big deal. Anoher rade comes along, less han a day laer, and  brings us some swee profiable happiness.

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More Examples of Stopping Out

Sopping ou wihou previous high or low Someimes you ake a rade, and you can’ find a previous high or low o use as a reerence poin or a sop-loss. Tis happens when a rend is so exreme ha a financial insrumen is making new all-ime highs or lows. Or perhaps our chars don’ go back ar enough o find a previous high or low. Wha, hen, do we use? Here’s a view o Oil rom December 2010. I’s making new highs or he year, and our chars don’ go back ar enough o find a previous high reerence poin or a sop-loss.

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FIG. 8-11: Oil, bearish divergen. Enry a “A.”

 As Oil makes new highs � which are also overbough on he regular Sochasic oscillaor � he Wallaby makes lower highs. Ta’s bearish divergence. Ergo, we wan o sell he precious liquid. You migh be hinking hinki ng o yoursel, ‘Why he devil would anyone wan o sell Oil?’ Afer looking a he char, and reading he Wall Sree Journal,  you may end up wih a core belie ha Oil is headed o $100 and here isn’ anyhing ha anyone can do abou i.  And you migh be righ. righ. Maybe Maybe your undamenal oulook is pure genius, and you’ll be awarded he Nobel Prize or Predicing Wha W ha Happens Nex Nex in i n he Marke. My guess, however, however, is ha you’re you’re jus like he res o us, and mos o he ime, you don’ don’ know wha he crap is i s going o

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happen nex. Someimes when w hen I’m he mos convinced o a undamenal oulook on a financial insrumen � when I would deend my views o he deah � I laer realize ha’ss when I am he dumbes. When ha’ W hen I am mos subborn, I happen o also be mos wrong. Why do I say all o his? Because I’ve learned ha I’m I’m simply beter off rusing my esing, and jus aking aki ng he rade. Does his mean you have o rus every Wallaby rade? No! I means ha you need o rus your own experience and be careul abou rying o ousmar he marke. Someimes (abou once a week) I sruggle o ake he rades I plan because I hink I know somehing hidden behind he char. Usually ha’s when I mess everyhing up.  All righ, le’ l e’ss ge back o o he char. In Figure 8-11, he sell enry on he rade comes a poin “A.” because ha’s when he regular Sochasic creaes a bearish crossover. Bu  we need a sop-loss. Ho How w do we find i, i we don don’’ hav havee inormaion abou a previous high, and i we don don’’ wan o use a ime-based  ime-based sop? I’s no ha difficul, acually. Jus draw a line across he ops o he recen price acion. Don’ even worry abou going ar back in ime. Here’s ha line:

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THE WALLAB WALLABY Y TRADE

FIG. 8-12: A line across he mos recen high.

 You don  You don’’ hav havee o be a rocke scienis or procologis o see how I drew he line across he recen high on his char. I’s I’s simply he highes poin ha Oil Oi l reached during he course o ime ha i se up he divergence. Simple as ha. We We drew a line lin e across ha level. And we decide dec ide his i i Oil rises r ises higher han ha afer we ener he rade ha we’re we’re going o exi.

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 And ha’s ha’s wha i does.

FIG. 8-13: Oil erups hrough our sop-loss.

Oil rises by less han $1, and we’re ou. Ta’s convenien, isn’ i? No waiing around, no suffering hrough days o movemen. I’s clear and simple. Our sop-loss is super igh, which is he way we like i. emember: We wan o lose he smalles amoun o money possible.  W hen he candle jumps up hrough  When hrough our recen high poin, he Wallaby is also going o make a new high (or ge  very close o doing do ing so so), ), and ha’ ha’ss going o invalida invalidaee our divergence rade, anyway. So he enire reason we ook he rade disappears. No reason o be in.

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 You don  You don’’ know his righ now � because we’ve no reached he subjec o aking profis � bu his sop-loss is 5 o 6 imes smaller han our poenial profi arge was on he rade. Ta may be he bes par o all. all . Wih a small smal l loss on each rade, compared o a large profi on he ones ha work, we can survive even prolonged periods o ime  when he rades don’ don’ work ou. Two More Examples of Stopping Out

Gold 15-Minue I’ve no shown enough examples o rading precious meals so ar in he book. Wallaby rades are enormously un o do on hese financial insrumens, and I ofen pos chars on witer and he Wallaby Wallaby blog abou hese seups.  Why  W hy no ake a momen and consider wha w ha a losing rade looks like on Gold?

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FIG. 8-14: Gold makes a new high and sops us ou.

By his poin, he char isel is sel-explanaory. Gold on he 15-minue char makes new highs on price. Boh o hese highs are overbough on he regular Sochasic Oscillaor. A he same ime, he precious meal isn’ able o make new highs on he Wallaby. In ac, he divergence is very clear � he Wallaby is acually alling hard a he same ime Gold is making new highs. Ten we ge an enry on a sell rade. I’s worh noing ha divergence rades end o be more difficul when a financial insrumen is making new allime highs or lows. Te marke jus sars o reak ou, and i’s hard o find a sopping place. In he Gold example

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in Figure 8-14, he precious meal was making new allime (inflaion-adjused) highs. Tere was alk abou he impending collapse o he U.S. Dollar. Every ime you urned on he elevision, you saw Glenn Beck screaming abou he apocalypse and chewing on a solid bar o gold. Tere was an awul lo o hype a he ime. Would his preven you rom aking a rade? Perhaps. I cerainly is differen rom rading IBM, or insance, a he same poin in ime, or some oher financial insrumen ha was no reaching meeoric levels and backed by such ridiculous hype.  And or hose o you who believe ha inflaion is going o ge ou o conrol, and ha gold is he only hedge agains ha inflaion, and ha gold will reach $2,000, or $3,000 … I don’ have any argumens wih you. I’s cerainly possible. I’m sill going o be over here, a my desk wih my swim runks on, waiing or he nex Wallaby rade. I’ll  be sopping ou quickly and riding my winners. I migh even buy some gold during ha ime. Okay, back o he example. Once we ener he rade, we see ha Gold alls a bi and hen soon begins o climb. A ime-based sop would no have helped us. Te rade jus sinks. I ricks us a litle bi by going down a firs. I ges our hopes up. Bu ha’s wha Gold does, righ? Successul Wallaby rades are going o give you posiive eedback in he orm o candles moving in he righ

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direcion (in his case, down), almos rom he very sar. And in his case, we do ge some o ha eedback. In oher words, here isn’ any oher danger sign ha we can ideniy. Te rade looks really good on he char. And ha’s rue o a lo o errible Wallaby rades. Some o he  bes-looking seups urn ou o be he wors rades. Ofen I’ll find mysel saying, “Wow, ha looks like a really good rade.” I’ll look a how he rendlines are drawn, and I’ll be really atraced o he ac ha he lines are clean. Tis is a misake nearly every ime. I sar geting involved in he rade rom an emoional perspecive. When i  begins o ail, I sar making excuses or i. I’ve allen in love wih i, in oher words. In ha sense, rades aren’ any differen han women. You sar o overlook relaionshiphreaening auls because she’s go a grea body.  When his happens, slap yoursel around a bi and ge  your mind righ. Don’ ever become emoionally atached in rading. Save ha or your disasrous personal lie. Speaking o personal relaionships, le’s alk abou IBM.

 IBM 15 Minue Char, Boobs, and Bananas Once I had a job or abou 3 monhs. I was he chie marke sraegis a a financial firm. I was a good job. I loved he people. Bu here was his one girl who would ask her boyriend o ake picures o her a nigh (yes,

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THE WALLABY TRADE

hose kinds o picures), and hen he nex day she would send me an email wih hose phoos atached. Some o you hink ha sounds like he perec on-he-job siuaion. I haed i. I was rying o launch a currency-rading poral  Web sie, and she was sending me picures o her boobies. Ugh.  Anyway, one day, she sen me a paricularly explici phoo and I decided i was ime o leave or he day beore she sared walking over and hovering around my desk. So I shoved my lapop ino my bag, raced ou o he office, and  wen o he movies. I hink I saw “Burn Afer eading,” bu I’m no sure. I didn’ ake my lapop ou o my bag or wo more days. During ha ime, he compuer was resing on op o an old banana. In ha dark, cool space, he banana wen sof. Over he nex 48 hours, he banana acually go shoved ino he air-ven holes in he lapop. Te nex ime I urned on he compuer, I didn’ noice i because all he smooshy  banana was underneah he machine. 20 minues laer, he enire house smelled like Banana Fosers. I was like, “Whoa, wha is ha delighul aroma? Who’s cooking desser?” I menion all o his because ha lapop was an IBM TinkPad, and i ran like a champion, even wih a banana inside. Ta cooked banana sared o burn, and hree  weeks laer he enire compuer exploded. And guess wha?

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I called up IBM in he middle o he nigh and conessed everyhing. Jus wo days laer I had a compleely repaired lapop on my ron porch. Ta’s why I’d like o now spend a ew minues alking abou IBM.

FIG. 8-15: IBM sops-ou o a bearish divergence rade.

I you’re wondering why I’m showing so many examples rom he 15-minue chars, i’s because I love ha imerame. I find ha many o he successul rades I ake are rom his ime-rame char. Every rader is differen, o course, and you migh find ha a differen ime-rame  works beter or you. Bu I like he 15-minue char  because he rades don’ se up so requenly ha I have o babysi he compuer or 24 hours a day. And when he rades do fire off, I’m in he rades or abou 1 or 2 days.

15 8

THE WALLABY TRADE

Ta seems o be he perec amoun o ime or me. Tis may acually be he bes-looking rade seup in he enire book so ar. Look a how boh he Wallaby indicaor and he regular Sochasic drop violenly, even as he sock is making gradual higher highs. o see wha I’m alking abou, jus look a he difference in he slope beween he price o IBM and he Wallaby indicaor. o me, ha’s  when I sar saying all hose supid hings like, “Tis rade is a no-lose proposiion,” and I go ou and buy a new car or elevision o pre-celebrae my impending success and elecion o he Hall o Fame o Grea rade-Predicors. In realiy, his rade sinks. Because he sock made higher highs wih price � also overbough – bu made lower highs on he Wallaby, we’ve go bearish divergence. And ha, my Friends, means  we wan o sell he crap ou o he sock. We wai or an upick, order some shares rom our broker, place he rade, and wai or he swee profis o sar rolling in, Baby.  Wrong. Wha a crap rade!  A leas i doesn’ lose ha much money, righ? We have a sop-loss jus above he highes poin he sock reached  beore he rade enry. On a $127 sock, our sop-loss is a $129, jus wo bucks. Hardly anyhing a all, righ? You can buy a pound o bananas or wo bucks. Jus a sligh

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movemen agains us, and we give up on he rade.  As i urns ou, we are rewarded (as usual) or making a quick exi. Te sock ravels abou $4 higher sill afer we sop-ou. No need o si hrough ha disaser. We’re no rying o ride ou he sorm or prove how ough we are. A rader’s oughness isn’ measured by her abiliy o si in a dumb rade or a long ime. I’s proven by her willingness o accep he loss and keep her composure long enough o ake he nex rade.  We’ve seen oo many examples o sopping-ou o sell rades. Le’s oss ou a bonus example and show wha a  buy rade looks like when i goes pear-shaped.

GBP/CHF 15 Minue I ge bored saying he same hings over and over again. So, or his example, I’m going o show you a char, and hen I’m going o wrie a shor play. Te play will explain he char. For hose o you wishing o only read he secions o his book writen in radiional, boring mass-marke rading orma, please skip he nex ew pages.

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Behold, Te Char:

FIG. 8-16: GBP/CHF bullish divergence sop ou.

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Behold, Te Play, Based Loosely on Henry Ibsen’s “A Doll’s House” :  A Dollar’s House

 AC I

[SCENE – A well-appoined office rading area, wih a 30inch monior and comorable work chair. A bushy-musached, handsome young man is inspecing a char, back urned o audience. He is humming a une, clearly in high spiris. A sage lef, a small marsupial wearing a cowboy ha is lounging in a plush recliner, much oo large or his ame, holding a remoe conrol, flipping hrough channels.] OB: Te pair is making lower lows! Bu on he Wallaby, i’s making higher lows!

[Noe o reader: see Figure 8-16].  WALLABY: Yeah. I noiced. I’m divergen. OB: I’m going o buy his currency pair. I can already eel ha once I ake his rade, i’s going o save us rom our financial problems.  WALLABY: I’m no he answer o your financial problems. Bu since you brough i up, where are you going o buy he currency pair?

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OB: When he regular Sochasic Oscillaor makes a  bullish crossover. Look, here. I’ve drawn an arrow on he char o show where he enry will be.  WALLABY: [clearly no paying atenion]. Ta’s nice, Honey. OB: Fine. I can see you don’ care. Bu his is going o be he big-ime. I’m going o se a profi arge or 100 pips. I’m eeling chills go up my spine.  WALLABY: urn on he hea. OB: Very unny. You’ll be excied or me, and you’ll show me more love and atenion when you see he rade profis roll in. Such pips you have never seen!  WALLABY: You are a hopeless dreamer. A reckless spender. Ta’s all you’ll ever be.  AC II

[SCENE – ob sis, pulling on hair while head in hands, back sill urned. Wallaby now sanding beside desk, hands on hips, head cocked o one side. Deep sighs heard om ob.]  WALLABY: So, are hese swee profis here ye? OB: No. Nohing ever works or me.

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 WALLABY: You never dance wih me. You were rading  when we should have been dancing. Our relaionship is alling apar. Ye you ignore me. OB: I’m a ailure.  WALLABY: [hands in pouch]. OB: Te GBP/CHF made resh lows. I exied he rade  where I drew his litle circle. I couldn’ say in he rade any longer. I had already los significan pippage. Tere shall be no Chrismas presens in he Booker household.  WALLABY: I’m sorry o hear his. OB: Wha shall we do?  WALLABY: I’m considering commiting suicide in order o cover up he errible ruh o your ailed rade. OB: [alling on Wallaby’s breas, hand across orehead or effec]. Please, no!  AC III

[SCENE – ob and Wallaby si ogeher in recliner, snuggly and lovey o each oher. Wallaby uses paw/hoo/appendage o sroke ob’s hair in caring ashion.]

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 WALLABY: I orgive you. OB: Now I’m orever indebed o you. You have orgiven me and proven ha you are my moral superior. Wih his ac you have made me oally dependen upon you, as a child is o a paren. Or as a doll is o her child owner. Or a quoe currency is o he base currency, or a oreign subsidiary o he muli-naional corporaion, or as George Bush was o Dick Cheney. Our relaionship is premised on anciul and unreasonable noions such as hese.  WALLABY: ...Such as he abiliy o a marsupial and a human o mae? OB: No, ha par has always been good. You know ha.  WALLABY: How rue ha is. OB: You would never undersand. You’re jus a narcissisic mammal wih no capaciy or empahy.  WALLABY: Shhh. I hink “op Che” is coming on. Te secre ingredien is kangaroo. I FIGGIN’ hae kangaroos.

[curain].

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Frequently Asked Questions About Wallaby Stops

Tere are hree very common and imporan quesions ha I ge abou Wallaby sops.  What’s the worst consecutive losing streak on Wallaby trades? My wors losing sreak on he EU/USD was

hree rades in a row. I happened during he period o ime when he U.S. Federal eserve was se o prin one rillion dollars in he program called “Quaniaive Easing.” Jus saying ha almos sounds like a joke. Bu i’s no. Tey really did ha! Tis program o dollar-creaion sen he EU/USD flying ou o conrol. As a noe, he 1-minue char (or any financial insrumen) is prone o consecuive losses because a quick spike in price can ake ou our sop-loss. Bu because our risk:reward raio is healhy, his generally is no a problem.  You migh wonder wha he wors losing sreak will be or index uures, or socks, or bonds, or somehing else ha you’re going o rade. I simply don’ know a rock-solid answer o ha. I don’ rade hose financial insrumens every day. Bu I have wached every Wallaby rade on he 15- and 5-minue S&P chars or abou a year now, and he maximum number o consecuive losses ha I remember seeing was our. I suspec ha’s rue o jus abou any securiy ha you’re going o rade wih he sysem.  What about not using a stop? You’re going o find ha

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 you can ge lucky every once in a while by saying in a rade and no sopping ou. In he Figure 8-13 or Oil, i almos seems laughable o sop-ou so quickly. Mos raders would say in ha rade or much longer and le he conrac rise $5 or more agains hem beore hey exied.  While I’m sure ha occasionally his works ou jus fine, I don’ undersand why we can’ jus ake he loss, hen se up he nex rade. In every insance where I’ve aken he loss, and se up he nex rade, I’ve been happy. Happier, indeed, han when I sayed in he losing rade and ried o “hope i back o break even.” Some traders have decided that instead of stoppingout of a Wallaby trade, they will simply wait for the next setup, and then double down on the entire move.

Tis is called “Maringale” rading, and i’s named afer  John Wilkes Booh, who sho Abraham Lincoln.  While ha’s no acually rue, I do believe ha saying in he rade and doubling down can be as dangerous as shooing he Presiden o he Unied Saes. Jus like an assassinaion atemp, i a) seems like a good idea a he ime;  b) is a way o release your anger; c) i evenually urns ou really crappy. I find mysel doing his very hing someimes (doubling down � no shooing he Presiden), and every ime, and

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I’m no making his up, I eel like chopping off my legs  while I do his. Every single ime, I kick mysel. “Booker,  wha he hell are you doing?” I say o mysel. Invariably, he second atemp a he rade urns ou o be jus as awul as he firs (kind o like going back and daing someone  you broke up wih, even when you know she’s no good or  you). And hen, wih ha second ugly rade, I’m in a ar  worse siuaion and wondering wha o do abou i. I is a ruh abou rading ha:

he greaer he loss, he less likely a rader is o accep i  Te larger he loss, he more we wan o avoid i, and he more willing we are o hold on and hope. I call his “Possum rading,” where you simply close your eyes and pray o S. Anhony ha he will find your los rades. We sar doing crazy suff when our rades go wrong. You promise God you’ll sop looking a porn or yelling a  your kids or eaing chocolae-covered hamser paws by he caronul a midnigh. Even when God answers hose prayers, you evenually do he same hing all over again, and hen one day, He jus ges really fired up and sends  your avorie financial insrumen off he chars, margin calls your accoun, and on op o ha, he’s damned you o hell. I you make a deal wih he devil, you ge a financial  wedgie.

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 And hen your parner makes you sleep on he couch or a year.  What about taking the loss on the first stop, and then doubling up on the next trade?   Te marke le you

down. You wan your money back. Mos people hink ha revenge rading is dangerous. I say i’s unavoidable. I he marke akes your money, you should go and knock i in he skull and ge i back. One way o do his is o ea  your crow, ake your small loss on he firs rade, and hen, he second ime around, when he rade ses up all over again � slighly increase he rade size and pound on he marke. Tere are some o you shaking your heads righ now in disagreemen. Booker, ha’s no a very responsible hing o do! Oh, I know ha. Like many o he hings I do wih my rading, i’s no very radiional. I’s also no wha you hear rom he average guru-ype. Bu I employ his echnique all he ime when I sop-ou on he firs rade. However, I don’ increase he size afer he hird rade. I jus go back o rading he regular rade size.  Armed wih he abiliy o minimize he negaive impac o a ailed rade, you’re now ready o hear everyhing he  Wallaby knows abou aking profis. And his is where hings ge exciing.

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THE WALLABY TRADE

Tere’s no elling wha you can do when you allow your mind o accep ha abundance is he naural sae o being. Beore  you can make any money rading, I say, you need o firs undersand ha you deserve o be making money rading. So many raders begin rading because somehing negaive has happened in heir lives. Tey’ve los a job, run up heir credi cards or find hemselves in a precarious financial posiion, and hey need a quick fix. Te whole enerprise sars off rom a negaive perspecive: I’m screwed, and I’m an idio or geting ino his siuaion, and now I gota find a way ou. No surprisingly, when we sar off his way, our rading ends o reflec his very perspecive. We sar rading, and hen we ge ourselves ino rouble, and hen we ge mad a ourselves, and hen we desperaely seek a way ou o he rouble. Our cycle o rading ollows he cycle o our lives. Have you ever el yoursel rapped in his patern? I’ve  been here. I his cycle doesn’ seem amiliar o you, perhaps you sared rading afer a successul career or experience in some oher arena. You come o rading wih his mindse: I’ve been successul a running a corporaion, so why  wouldn’ I be successul a rading? People in his second caegory become really rusraed  when profis don’ come quickly. Tey expec success as.

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 And rying o orce profis o come quickly has a errible effec on rading. You sar o orce rades. You sar o increase he rade size (I’m smar; I’m powerul; I know  wha I’m doing). Many people in his caegory also eel uncomorable sharing heir resuls openly wih ohers. Tey’ve been successul, and hey don’ see any reason o answer o oher people. I’s hard o ask or help when or years you’ve been in charge. rading is made more difficul when you don’ eel comorable showing your  weaknesses. Saring over rom scrach is a humbling experience. Why I Said All of That

From he sar, beore we conclude our discussion o he  Wallaby rade wih a bang, I wan o encourage you o shif  your perspecive. aher han hink o rading as a way ou o a problem, or o anoher conques, I wan you o consider i a game.  You’re playing a game here, and no single round o his game is supposed o be very criical or imporan. Te enire mach is wha maters. You’re going o make some misakes along he way. When you do, jus move on and don’ ge atached o he resul. When you have a good experience, a good rade, don’ ge atached o ha, eiher. Play he mach poin ha is now, and don’ worry abou  wha you jus did, or wha you hink you need o do in order o pay he ren.

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For his reason, I don’ make weekly or monhly or yearly rading plans. And I sure as hell don’ make any rading goals or anyhing excep he rade in ron o me. How am I going o know wha I can plan or 6 monhs rom now? A a maximum, I can know ha a Wallaby rade is seting up righ now, on he EU/USD, and he only hing I can really do is plan o do my very bes wih his one opporuniy. I I ake care o business now, hen he res o i jus akes care o isel.  Your abiliy o rade or a living is based on your abiliy o build profis over ime, one rade a a ime. Sounds obvious, bu all o us can very quickly become obsessed  wih seting goals or wha we’re going o be able o buy  wih profis ha we haven’ made ye. And hen, when hings go wrong, we become obsessed wih rying o ge  back he money we los quickly. Insead, jus hink abou your nex rade, or he rade  you’re in, and ocus on geting ha righ. I can’ say i enough: Your only responsibiliy is o proessionally manage your curren opporuniy. Taking Profit with Support and Resistance

Te easies way o plan or a profi arge on a Wallaby rade is o ge ou when you’ve seen your rade reach a previous high or low. You’ll remember he basic concep

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o suppor and resisance rom he chaper on sops.1 I  you wan more help wih he concep, I’ve included some helpul resources in he Appedix Tree or you.

 Exiing a Wallaby buy rade Buy Profi Example 1: EU/USD 15-minue In Figure 9-1, he EU/USD ses up a bullish Wallaby rade. Here’s he char:

FIG. 9-1: aking profi on a EUR/USD buy rade.

1. I miss ha chaper. We had some good imes back hen, didn’ we?

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 A poin “A,” he currency pair ses up a buy rade � i’s  bullish Wallaby divergence. Te EU/USD makes new lows, which are oversold, and a he same ime he Wallaby makes higher lows. A poin “B,” we buy he currency pair because we see a bullish crossover on he regular Sochasic. Te approximae price or enry is 1.3005.  You already know ha our sop-loss will go below he lows ha he pair made as i se up he rade � a abou 1.2955, or a risk o 50 poins (pips). Tis is no shown on he char  because i’s he very botom o he price scale (look a he ar righ edge o he char).  A poin “C,” when he pair reaches is mos recen previous high, we exi he rade. Te price a ha ime is 1.3125 (I’m rounding down here), or a profi o 120 poins. We risked 50 poins o ge 120. Nohing wrong  wih ha. I’d love o keep ha raio going – wih a risk o 1 or a poenial profi o 2 – as ofen as possible. Someimes he raio is even beter. Someimes i’s a bi worse. I he rade seup shows a risk o 1 poin or a gain o 1 poin, hen I’ll usually skip ha rade and wai or he nex one. I’s worh noing ha here exis more complicaed ways o planning a profi arge. We’ll even address some o hose mehods laer on. Bu I wan o say righ now ha his single example shows you everyhing ha has ever  been imporan o me on he subjec o aking profi on a  Wallaby rade. While i seems simplisic o jus draw a line

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across a recen high and use ha level as a profi arge, I’m elling you ha i doesn’ ge much beter ha his.

 Buy Profi Example 2: HPQ 15-minue In Figure 9-2, HPQ ses up a bullish Wallaby rade.

FIG. 9-2: HPQ ses up a bullish Wallaby rade.

Lower lows on price, higher lows on he Wallaby. Ta’s all shown in poin “A”. Our enry a poin “B” comes a around $39.30. You can already figure ou ha our soploss is going o go jus below $39 – below he lowes poin ha he sock reached while i se up he Wallaby rade. For he sake o argumen, le’s say we pu he sop-loss a $38.90, so i i alls o ha level afer we ener he rade,

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hen we’re geting ou. Ta would be a loss o abou 40 cens per share. Plus we have o pay ransacion coss and he spread. Ten we’ve go o ip he massage herapis o help us relax i we do in ac have an unhappy ending on he rade. Our profi arge comes a a previous high, and we don’ even need o move o a differen ime-rame char or look ar back in ime o find his level. In ac, he sock made a double op a abou $40.50 jus abou a day ago (on he char). Ta works jus fine or a profi arge. When he sock reaches ha poin (“C”), we can happily exi. I’s a move o $1.30 per share, or 3% on he sock, which is a perecly reasonable gain. And we risked only .40 o ge i. Bu wai. Is here more ha we can do here? Yes.  Am I going o ell you wha ha “more” is? Yes. Riding a Winning Buy Trade

I jus love hese rades because we can ake a good profi arge a poin “C” and even make i beter. I you’re he ype o rader ha likes o ride your winners even longer, hen he nex char is or you.

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FIG. 9-3: Exending he profi arge on HPQ.

For Figure 9-3, I’ve moved o he 1-hour char. You can see he Wallaby divergence rendlines drawn on he sock on he righ side o he char, jus o give you an idea o  where we se up he rade in he firs place. I you’re having rouble finding hose lines – jus look or he dashed black rendlines on price and on he Wallaby. I’ve moved o he 1-hour char or he purpose o going  back urher in ime, seeing more candles, so we can find a higher, previous peak on he sock � and we’re going o use ha as a secondary profi arge or he rade.  A poin “1” in he char, we find our original profi arge

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THE WALLABY TRADE

a abou $40.50. As you’ll remember, ha was a 3% gain in he sock. Bu wha i, insead o exiing he rade a ha poin, we sayed in longer? We can do ha, and here’s how: 1. We stay in the trade. When he sock reaches poin

“1,” we don’ exi he rade. 2. Move our stop-loss. Insead, we move our sop-loss o $39.30, so he wors hing ha can happen now is ha we end up wih zero money los on he rade. I’ve heard Jim Cramer reer o his siuaion as “playing  wih he House’s money,” and ha’s an accurae way o describe i. Some raders a his poin sell par o heir posiion and ake some profi off he able. Ta’s no my syle, so I’m no even going o ge ino an expanded discussion o he opic. I say, i you believe he sock can go higher, say in he enire posiion. I you don’ hink i can go higher, exi he enire posiion. Make a decision and sick wih i. 3. New profit target. Now we have a new profi arge a poin “2,” and as you know, we deermined ha level by looking back in ime, as ar back as necessary, and drew a horizonal line (a resisance level) a he las obvious peak. I you sill don’ undersand how we ound ha peak or made ha deerminaion, please reer o he shor Appendix Tree resource secion on suppor and resisance, or do some Googling o suppor and resisance, or buy a book, or jus sop making i so difficul and jus realize ha we drew a line across a place where he sock previously couldn’ go any higher.

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 Wha happens nex? Te sock moves up o he profi arge a posiion “2,” all he way a $41.60. Ta’s a gain o $2.30 on he rade, or 5%. Could you move he profi arge again, and move he sop again? And keep doing his orever? Te answer is yes. We’ll alk more abou his a he end o his chaper. For now, I wan o make sure we alk abou exiing a Wallaby sell rade. Exiting a Wallaby sell trade

Sell Profi Example 1: Gold 30-minue In nex char, you’ll see ha we ener a sell rade on Gold (spo price) a abou $1,421. Te precious meal has made higher highs wih price (which are also overbough) and lower highs on he Wallaby. Ta’s bearish Wallaby divergence. Our sop goes above $1,431. Figure 9-4 shows wo possible profi arges.

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FIG. 9-4: Exending he profi arge on Gold.

 When Gold his profi arge #1, a approximaely $1,410,  we’ve made $10 on he rade (and you’re mos likely rading wih leverage here, so he gain is muliplied by ha leverage). I’s an impressive gain already. Here’s where we have a choice. We can ring he cash regiser and close he rade. Or we can move he sop-loss on he rade o break even and see i God will send he swee Cherubic Angels o Profi o serenade you. In oher  words, we’re wondering i Gold can all o profi arge #2. In overnigh rading, ha’s exacly wha i does � i alls arher, all he way o $1,385 � which more han riples our rading profi o $35.

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Te precious meal alls even arher sill aferward, bu  you ge he idea. Beore we coninue, I jus wan o remind you ha his rade could have sopped ou a a loss. We could have los  jus over $10 on he rade (imes leverage!). No every rade will be a winner. By exending our profi arge, we’ve given ourselves o make $35 on he rade in exchange or risking abou $10. Ta’s a very reasonable risk:reward raio.

Sell Profi Example 2: USD/JPY 5-minue Figure 9-5 shows bearish divergence. Our enry on he rade comes a 81.30. Te sop on he rade would come above he highs ha he currency pair made beore we ook he enry. Ta number is abou 81.67 (see he quoes a he ar righ side o he char), or a maximum possible loss o 37 poins.

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THE WALLABY TRADE

FIG. 9-5: USD/JPY rade. Profis 1 and 2 are near each oher.

Te currency pair makes higher highs on price, bu lower highs on he Wallaby. You migh also noice ha he regular Sochasic Oscillaor does no make separae overbough highs across he wo peaks in price. Does ha invalidae he rade seup? No. I’s jus a slighly pervered version o bearish Wallaby divergence, and we’ll happily sill ake he rade. I’s good o look a examples o rades ha aren’ quie perec, righ? Earlier in a previous chaper I menioned ha someimes he bes-looking rades end up perorming erribly. And someimes he rades ha look  bad end up wih swee, delicious profi. Jus remember ha! Profi arge “1” is a approximaely 80.75. Ta’s 55 poins (pips) o profi, or an original risk o 37 poins. Once

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again, our risk:reward raio is jus fine. Bu i we hold on or he second profi arge a poin “2,” we can exi near he 81.60 mark, or a profi o 70 pips. Now we’ve almos gained wice as much as we risked on he rade. Try it Yourself!

 DIY Example 1: IBM 15-minue ake a look a his 15-minue char or he echnology and consuling services gian, known or ormerly producing lapop compuers ha could also make a delecable Bananas Foser. Char:

FIG. 9-6: Look a Appendix wo or he answer.

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 Wha would you do here? Can you draw he divergence lines o se up he rade? ake a momen and do he ollowing: 1. Set up the divergence trade. Draw lines on he price,

and on he Wallaby, and show me he divergence. 2. Circle the trade entry.  Show me a which candle (approximaely) we would ener he rade. Wrie your  bes esimae or he price a enry over ha same area. 3. Set the stop-loss.  Draw a border across he area  where we’d sop ou o he rade. I he sock moves pas ha line, he rade is over and we sop-ou. 4. Set the profit target. Where is your firs profi arge? Does i reach ha level? Wha did we risk on he rade compared o wha we could have gained? Now ake a look a Appendix wo in he back o he book. See i you’ve drawn your lines and such in he same way I did. I yours are differen bu also somewha similar, ha’s fine. Bu i you find ha you ook a rade in a compleely differen direcion, or ha his rade became a loss, hen go back o he seps above, and ry again, his ime using he char rom he back o he book as a chea shee. My Philosophy on Profit-Taking

Te more comorable you become a pracicing wih profi arges on hisorical chars, he more money you’re

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going o make in live rading. For me, i’s always easier o say in a good rade han i is o exi i and hen ry o find a good place o re-ener. Wha I’m rying o say is, i  you have a good hing going, you migh wan o consider sreching ou he profiable run ha you’re having. In his order, here are my preerences or dealing wih a profiable rade: 1. Move the stop and extend the profit target.  Every

super-successul rader I know does his. urn your  winners ino bigger winners. Increase he size o your average profi. Do his and you’ll be able o ride ou periods o ime when he rades don’ go as well. Do his and you’ll learn o be paien. 2. Exit the trade. Jus ake he money and run.  As a reminder, I’m no a big an o exiing par o he rade  wih a small profi and hen leting he res o he rade run.  Again, here’s my view: I you don’ like he rade enough o say in i, hen ge ou. I I’ve bough 100 shares o HPQ, and he sock has moved $1 in my avor, I’ve made $1,000. I I sell 50 shares and  bank $500, ha migh be saisying rom a psychological perspecive. I’m lef holding 50 shares. Was ha a good choice?

18 8

THE WALLABY TRADE

Question: How ar does HPQ have o move in order o

ne me he same profi � $1,000 � as I had when I was holding 100 shares?  Answer: I needs o move anoher $1 again. Jus o ge me

he same profi I already had a momen ago! I we’d jus held ono all 100 shares, and he sock had moved anoher $1, we’d now have $2,000 in profis. I you hink i can go up arher, le me ask you � why are you no holding ono he enire posiion? “Because,” you say, “I have no idea ha i will go up, so I  wan o bank some profi now.” And i you have no idea ha i’s going up, and you’re unsure abou saying in he rade, hen why are you in i a all? Exi he whole posiion! On he oher hand, i you’re confiden ha he sock can go up anoher ull $1 (which is wha i would ake o a leas equal he profi you already have), hen jus say in he ull posiion and move your sop so you won’ ake a loss. Te  very wors ha can happen o you is ha you end up wih zero won, zero los � minus some small ransacion ees, o course. And hen you wai or he nex rade o se up,  which doesn’ really ake ha long (here are hundreds o hese rades ha se up every week across he universe o financial insrumens). By saying in he posiion longer when you have an obvious

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18 9

nex profi arge, you help offse your ransacion coss.  You make more money or yoursel. emember, you have o pay axes on hese gains, and axes can be subsanial.  You migh as well do everyhing you can o make he mos o wha’s going well.  And i you don’ eel comorable saying in he rade �  jus ge ou and ake he money. Keep banking your gains. What About Not Trying To Be a Hero?

Do you remember rom a while back when I alked abou no rying o be a hero? I wan o make sure I clear up any possible conusion. I can sound like I’m conradicing mysel when I say, “Don’ be a hero,” and hen nex hing  you know, I’m saying, “Exend your profi arge.” Mos people will quickly close a winning rade. Even  beore i reaches he profi arge hey se a he very sar (and hey se ha profi arge based on experience and esing). Tey do his because hey have los so many imes, and hey’re jus very happy o finally have a good rade going. I’s odd bu rue o say ha many raders panic  when hey’re winning � and hey ignore he losses when hey’re holding ono bad rades.  You wan o do he opposie. You wan o panic when somehing’s gone wrong. And by panic, I don’ mean you should pee in your pans and sar reaking ou on your

19 0

THE WALLABY TRADE

amily. Wha I’m saying is ha you should be quick o exi a bad rade. So, back o he possible conradicion. Being a hero is when you keep your winning rade open  bu do nohing o proec he profi. rying o be a hero is when you say, “I know I could move my sop o break even, bu I wan o give he rade room o breahe.” Herorading is when you wan o ac ough, insead o acing smar. rying o be a hero is when you rade wihou a cuoff poin or your bad rades, like a rock-climber  wihou proper gear or a sailor wihou a lie ves, or a hooker wihou a sash o condoms. So, when I say ha i’s a good hing o exend your profi arge, wha I’m rying o communicae is ha you ry o make more money while simulaneously removing or reducing any possibiliy o loss. How Do You Know When to Extend the Profit Target?

Te hones answer is nobody knows. Tere are as many answers as here are raders. Bu here are wo ways you can deermine wheher or no o exend your profi arge.  When he regular Sochasic is overbough or oversold. Le’s use he example rom Figure 9-5.

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191

FIG. 9-7: When we hi profi arge #1, we’re OS.

In Figure 9-7, you can see ha when we hi he firs profi arge on he currency pair, he regular Sochasic is already oversold (below he 20 line). Ta’s one way ha some people can decide o exi he rade and ake he profis. However, I wan o noe ha here are many, many examples o a financial insrumen saying overbough or oversold or a longer period o ime afer i his he 80 or 20 level. In ac, look back on your chars (and he examples in his book), and you’ll find ha here are pleny o imes when he guideline I’ve jus described will cos you money, insead o making you money. So, wih ha said, here’s Guideline #2.  Just flip a coin. Seriously, I gota ell you sraigh: I have

19 2

THE WALLABY TRADE

no rigging idea how o absoluely ell he difference  beween rades ha go o profi arge #2 (or 3, 4, 5 or 6 or 10) and he ones ha sop a #1. Mos o he ime, I simply say in he rade longer i I’ve made money or he week, and I’m jus adding profi o an already successul sring o rades. I I’ve los money or he week, I say in he rade longer, because � wha he hell! I can’ ge much worse, and i I’ve made i o profi arge #1, hen my sop is a  break-even, and I have a ree ride. I I’m jus saring off he week o rading, I’m more likely o bank he profi a #1, because I jus wan o sar making money and build up my confidence and ge ino he groove o rading. Ta’s he way i works or me. I migh seem arbirary o you, bu i’s he way I do i. And I’d be happy o hear rom you i you can es a beter way o disinguish beween he rades ha go o #1 and he ones ha go o #2. I can’ believe i, bu we’re already a he end o he book. Beore I send you off o rade some Wallabies, I have a ew las words or you.

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193

 APPENDIX ONE SETING UP YOU CHAS Everyhing you read in his book can be applied o he sock marke (including indexes and exchange-raded-unds – EFs), uures, currencies, and bonds. I’m happy or you o apply i o any marke you choose. o display he Wallaby indicaor on my chars, you’re going o need wo hings: Firs, a charing program; Second, a  Wallaby indicaor or somehing equivalen.  When I say ha you can use a “Wallaby Equivalen,” I am saying explicily ha you don’ need he Wallaby in order o rade he seups in his book. Oher indicaors work in similar ways, and ha should work ou jus fine. When  you look or an indicaor ha is similar o he Wallaby, you should look under he “oscillaors” secion o your charing program. Ta’s where you’ll find he indicaors ha measure overbough and oversold condiions. Please remember ha one indicaor is no beter han all oher indicaors. Ta kind o hinking ges raders ino rouble, when hey eel ha hey have discovered he Greaes Indicaor O All ime and hey are going o pay off he U.S. defici wih heir nex rade. Finding he “bes indicaor” is no some universal search. I didn’ creae he Holy Grail o

19 6

 APPEND IX ONE

divergence indicaors. I ound somehing ha works very  well or me. Bu as you’ll see on he Wallaby web sie and  blog – I’ll pos divergence chars using all sors o differen indicaors, o show differences and similariies and so orh. Te Wallaby is my primary ool or finding he divergence in he firs place. Bu i’s no he only way o do i, and i migh no even be he bes way or you. Charting Programs

I’ve had he Wallaby indicaor buil or a variey o charing plaorms, and i’s available or ree when you visi he  Wallaby web sie. As o he ime o publicaion, he indicaor  was available or hese plaorms:

 Measock radesaion  Ninjarader  FXrek Inellichars  Mearader eSignal  MoiveWave  And more are on he way. You can check on he Wallaby web sie o see updaes on new releases. I you wan o have he  Wallaby indicaor on your chars, do wo hings: Call your  broker and le hem know o conac me, and also conac me and ell me o conac your broker.

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The Wallaby Indicator or Something Equivalent

Le’s say you’re rading wih a broker or charing plaorm ha does no offer he Wallaby. No problem. Le’s discuss some equivalens and how you can use hem. e elaive Srengh Index (SI) Here’s a char wih he Wallaby and he SI (se o 13) ploted on he same SP char.

FIG. A1-1: Wallaby and RSI ogeher

 As you can see rom Figure A1-1, he Wallaby and he SI look very similar. You can play around wih your SI setings o find somehing you like. I have ound ha he SI

19 8

 APPEND IX ONE

can end o find divergences ha he Wallaby canno, and also he oher way around – he Wallaby someimes finds divergences ha he SI does no.

e Commodiy Channel Index (CCI) Developed by Donald Lamber, he CCI measures how ar an asse’s price has deviaed rom is average. I’s unique in he sense ha i doesn’ look – or move – in he same way as mos oher oscillaors.

FIG. A1-2: Te Wallaby and he CCI

In he above char, he Wallaby and he CCI (se o 14) si nex o each oher. Tey look and ac quie similar: When

SETTING UP YOUR CHARTS

19 9

he Wallaby moves up, he CCI ends o do he same. I’ve noiced ha he CCI can make a sharper, more defined move han he Wallaby. So you’ll see a lo o sharp angles on he CCI. Ta’s jus wo examples o oscillaors ha work as more han adequae subsiues or he Wallaby. I you find ohers – or inven your own – ha work well or you, please le me know on he witer sream or on he Wallaby web sie.

 APPENDIX TWO  ANSWES O CHA QUESIONS

Earlier in the book, I asked you to draw a set of lines on a chart, to test your knowledge of the Wallaby trade. This Appendix contains a chart, an answer, and an explanation.

I your noes and drawings on he chars are significanly differen han mine, please don’ launch any grenades or hur anyone. Mos o he ime here will be sligh differences in he way you and I hink abou hese rades. However, now ha I’ve said ha – you need o know ha i you ge he rade direcion incorrec, hen you’re messing up he enire concep o divergence and you should sudy he example more closely unil you undersand wha you did wrong. I, even afer you sudy he example, you can’ find ou why  you and I go a compleely differen direcion on he rade, hen make sure you’re looking a he righ example. I you sill ge a differen answer, you migh consider ha you didn’ make a misake a all, bu raher han he book conains an error. I ha’s he case, hen I apologize prousely. Ta’s unaccepable. I’ve double and riple checked hese examples, so ha shouldn’ be he case. Bu i i is he case, I wan you o know I undersand how rusraing ha is.

20 2

 APPEND IX TWO

 Answer to Figure 9-6

In Chaper 9, I asked you o ideniy some divergence on a char. Here’s my version o he char:

FIG. A2-1: Answer o Figure 9-6

I’m sure you ound he bullish Wallaby divergence. Te sock is making resh lows on price while a he same ime making higher lows on he Wallaby. Boh areas are separaely oversold on he regular Sochasic Oscillaor. Our buy enry comes a approximaely $123, and he sop down below he lowes price he sock reached beore i se up he rade. Ta’s a abou 122 (which is below he lowes

 ANSWER S TO CHART QUESTIONS

203

quoe displayed on he righ side o he char). Te profi arge comes a abou $126. Ta’s a move o $3, or abou 2% or he sock. A perecly reasonable profi and risk:reward raio. Tere is no obvious profi arge #2 on his rade. I’m sure i we moved o a higher ime rame char and wen back urher in ime, we’d easily find a second profi arge o work  wih here.

 APPENDIX THREE ESOUCES AND FUHE EADING

Support and Resistance

Te bes raders in he world undersand he basic conceps o suppor and resisance. I doesn’ mater i you’re a rend rader or a couner-rend rader. I jus makes sense o ge a oundaion in ideniying hese areas. Tere are wo books ha sand ou, in my opinion:

“Pring on Price Paterns”  (Marin Pring) “echnical Analysis o Sock rends”  (Edwards and Magee) Basics of Technical Analysis

wo books on his subjec have been on my shel or years. Tese are excellen inroducions o he primary amily o indicaors and ools ha raders use on heir chars.

“echnical Analysis Explained” (Marin Pring) “echnical Analysis o he Financial Markes”  (John Murphy) I you’re going o spend a lo o ime looking a he chars, i makes sense o have one (or boh) o hese reerences

20 6

 APPEND IX THR EE

ready on your desk. I believe ha rading sysems come and go. Tere are los o ways o make money rading. No one in paricular has he single bes mehod, or he one exac  way ha you have o use an indicaor on a char. Ta’s why learning abou he indicaors or yoursel can be so helpul. Tese wo Web sies are also invaluable resources or diving ino echnical analysis:

invesopedia.com sockchars.com/school Economic Fundamentals

Tere are wo reerences ha I go back o ime and ime again:

“Currency rading and Inermarke Analysis” (Ashra Laidi) “e rader’s Guide o Key Economic Indicaors”   (ichard  Yamarone) Tere are los o oher books on his subjec, and Amazon is ull o choices. I like Ashra’s book because i helps pu pieces o he puzzle ogeher and answer quesions abou how differen financial insrumens affec one anoher. Te second book is valuable i you wan o sar o undersand he useulness (or uselessness) o economic numbers released  by he governmen.

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207

What it takes to be a trader

Tere is no one way o rade. Successul raders do no all look alike. Tey rade differen markes, keep differen schedules, avor he rend or rade agains i, and so orh. Every successul rader finds her own way o he goal o rading or a living. I regularly reer back o hese hree books o remind mysel ha being a successul rader requires consan deense o one’s individualism.

“Millionaire raders”  (Kahy Lien and Boris Schlossberg) “Marke Wizards”  ( Jack Schwager) “eminiscences o a Sock Operaor”  (Edwin Leevre) More Books

 Alhough I have a large and growing collecion o rading  books, I find ha books on oher subjecs are ar more imporan. I believe ha raders don’ read enough poery, hisory or ficion. Seriously! I’m no joking around. Te vas majoriy o raders wan o spend all heir ime hinking abou he markes. When i comes o being a paien, independen-hinking, cu-your-losses, ride-your winners ype o rader, however, here isn’ anyhing beter han reflecing on oher subjecs.

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 APPEND IX THR EE

 A ew books come o mind, alhough his lis is ar rom exhausive.

“Good o Grea”  by Jim Collins may be he bes rading-as-a business book ever writen, and i’s no even abou rading. I’s abou running a grea company or he long haul. Te lessons rom grea companies conained in he book are 100% applicable o becoming a grea rader. His companion  book, “How he Mighy Fall,”  is equally sunning in he clariy  wih which he describes how businesses and (as you’ll see) raders ail. Speaking o ailure, I highly recommend Jared Diamond’s excellen work, “Collapse,”   or he same reason. Sudy he grand ailures in world hisory, and you’ll sar o see a patern o sel-saboage ha emerges in individuals and socieies. Avoid hese pialls, and you jus migh say solven long enough o rade or a living. Mos people hae poery, and I’m no going o lie � i’s no my avorie. Bu when I ake he ime o si down wih somehing by Wal Whiman, or John Milon, or Dane, or ober Fros, my mind changes gears. Pars o my brain wake up. I see he world a litle bi differenly. For goodness sakes, ge ou o your elemen! ead somehing ha simulaes  your brain hopper! Good ficion plays he same role. My avorie work o ficion migh be Joseph Conrad’s “Hear o Darkness.”   You hink

RESOURCES AND FURTHER READING

20 9

 you’re no prone o empaion? You hink you’re going o do somehing your own way, ignore he warning signs in ron o you, and everyhing will be okay? So did Kurz. And he nex hing you know, he guy’s eaing human flesh and running around naked in he jungle. Las o all, biographies o successul people are my avorie way o reminding mysel o he basic ingrediens o a successul endeavor: persisence, rugaliy, fiery deerminaion and luck. O every book you could choose in his caegory, here is one ha sands ou apar rom he res. I’s on Chernow’s “ian,”   which chronicles he lie o he greaes American  businessman who ever lived � John D. ockeeller. Do no pass up he chance o diges he book and he lessons rom he lie o America’s riches man. In shor, please read more, and read more expansively. And lisen o, wach and involve yoursel in aciviies ha are posiive. Fill your lie wih posiive people. Delee rom your lie people and siuaions ha are oxic. Does someone hink  you can’ rade or a living? Shu hem up or urn hem off by never alking o hem again.

 APPENDIX FOUR ESING HE WALLABY  Some people will read his book (I’d guess hree o our people, a leas) and hen immediaely begin o rade he  Wallaby. Tere’s no subsiue or learning how o rade a sysem using real money. Tere’s also no beter way o needlessly lose money. I’s a rade-off: While i’s rue ha paper rading doesn’ give you he same adrenaline rush as live rading � and hereore, i’s no as “accurae,” in a sense � i’s also rue ha paper rading simply helps you ge he oundaion down beore you commi o anyhing. Tere are wo kinds o paper rading or “esing,” as I call i. Te firs syle o esing involves moving backward in ime on your chars, and hen playing he candles orward and ideniying every rade seup ha emerges. Ten you wach he rade seup play ou and es your heories abou how price should move. You can do his by programming rules ino sofware and having i spi ou a repor. You can do his manually by scrolling back on your chars or by using a program such as Forex eser (which simplifies his enire process or currency rading). Because his syle o esing les you move hrough a subsanial amoun o marke aciviy in a relaively shor period o ime, I’d recommend  working hrough a leas 200 o 300 seups beore ever

21 2

 APPEND IX FOUR

rading wih real money. I sounds like a lo o esing, bu i’s an enjoyable process. I you’re a shor-erm rader � a day-rader � hen I’d srongly recommend spending 15 o 20 minues every day  beore your rading session running hrough 10 o 20 rades in he manner described above. I ses he one or he rading day, and i ses your ocus. Once you’ve compleed his process, i’s a good idea o move on o he second syle o paper rading. Tis involves opening a demo accoun (or a pracice accoun) wih your  broker � or racking a virual porolio online. You can do his easily or uures, socks, and orex, and here really isn’ any excuse or no geting yoursel se up o do his. When  you have your virual porolio or demo accoun open, you simply wach or and rade real seups ha occur in live marke condiions, bu you commi only “pracice” dollars o he rades. I’d recommend opening he pracice accoun  wih he same amoun o money you inend o rade when  you open he accoun wih real money. I’d also sugges ha  you work hrough a leas 20 o 30 rades wih a sysem in his manner beore you rade live.  A very small percenage o people, less han 1%, I’d imagine, ever do eiher o hese kinds o esing beore hey rade. I’d sugges you become par o he 1%. When you es beore  you rade, you accomplish he ollowing:

TESTING THE WALLABY

2 13

 You ou don’ don’ wan wan You understand the rules of the system.  Y o be wondering abou wha o do in he hea o he momen  when a r rad adee is go going ing wro wrong ng.. We mak makee e erribl rriblee dec decisio isions ns as raders in hese ense momens. Our monkey-lizard  brain  br ain a ake kess ov over er,, and we in inva varia riably bly re reve ver r o fig figh h-or -or-fli -fligh gh menaliy and end up eiher fighing he marke (bad idea) or fleeing a perecly good rade because we reake  reakedd ou (also a bad idea). You don’ have o go all figh-or-fligh on your rading accoun! Tere’s a hird way, and i’s called Sicking  Wihh h  Wi hee Pl Plan. an. Mos Mos rader raderss don don’’ even have have a pla plann o sar sar  wih,, so he  wih hey’r y’ree ob obvious viously ly go going ing o be mak makin ingg all kind kindss o crap up on he fly, while in he wors possible emoional sae. You don’ wan o be par o ha crowd. You’ll take the trades you plan.  When

you es or a significan lengh o ime beore you rade, you’re likely o ake every rade your sysem produces. Have you ever ound ha you can alk yoursel ou o a perecly good rade or reasons ha don’ have any bearing on he sysem you’re rading? I find ha when I’m reading witer updaes rom people I respec, I sar o wonder i hey know more han I do, and i I shouldn’ avoid my nex rade on he EU/USD.  Wee all do his  W his.. No No one one is immu immune ne.. I yo youu hink hink yo youu are, are, he henn  you’  yo u’re re God God,, and and I’ll see see you you on Su Sunda ndayy. You won’t take the trades t rades you don’t don’ t plan. Anoher errible

hing I’ve done in he pas is ake off-plan rades. You know  wha hos  wha hosee are are.. Tey’r Tey’ree ra rades des yo youu nev never er pla planne nnedd o o ak akee bu bu suddenly seemed like a good idea. Tey rarely are. You see a

21 4

 APPEND IX FOUR FOU R

recommendaion rom someone, and you blindly ollow i. Ten you find ou laer hey really didn’ ake he rade you hough hey did, or somehing o ha effec. I’s a errible habi. I’s impulsive. We all all prey o his once or wice (or many more imes, in my case) in our rading careers.  Whe  W henn yo youu e es s beore beore you rade rade,, you’re you’re less likely likely o ollow ollow someone else’s advice, and you’re more likely o ollow your own plan. Because you pu ime ino i, i means more o you. Because you’ve invesed subsanial effor ino your rading success, you’re less likely o wan o inves your resources on someone else’s idea. I have already said i, bu i’s worh repeaing: esing is he engine ha drives he profi machine. rading isn’ easy. rading is perhaps he hardes proession ha you can choose. esing doesn’ ensure success, bu i can help  youu av  yo avoid oid com common mon pr prob oblem lems. s. While i’s rue h ha a pas pas perormance is no indicaive o uure resuls � which means ha even a sysem ha ess profiably in he pas is no a guaranee o success � i sure as hell beas no having any idea wha you’re going o do every day. For more inormaion abou he esing ha I’ve done on he Wallaby � and more han 200 chars o he EU/USD � visi he Wallabyrade.com Web sie, and look or he keyword “esing.”

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2 15

 APPEN  AP PENDI DIX X FI FIVE VE  DEALING  DEALIN G WIH ADV ADVESIY  ESIY  No all rades (or people, or ha mater) can be winners. I spen all my high school years wandering around he halls, hoping he bell would ring and save me rom looking supid and alone. I, jus like anyone else, sruggle wih sel-doub and imes when I eel like giving giv ing up. up. Te absence o adversiy isn’ a sign o success; i’s a sign ha you’re no rying o do anyhing worhwhile. I’s only human o wonder I’s wonder i you should should qui rading a sysem s ysem (or a all) when you have a ew losses in a row. How many losses in a row are oo many? For Wallaby rades, you really shouldn’ ever see more han our consecuive losses. Wih abou 1% los per rade (i  youu handle  yo handle your money money manag manageme emen n well) well),, ha’ ha’ss no a big deal. I’d be all righ wih even six or seven losses in a row. I  wouldn  wou ldn’’ s sar ar o ge ge worrie worriedd abou abou ii unil unil af afer er h ha a poi poin. n. I I have consecuive losses, I have o consider why I ook hose losses beore I ge overly concerned. Firs, I ask mysel: Did I ollow he rules when I ook hese rades? I he answer is yes, hen I’m ully ready o have six or seven losses in a row, i ha’s wha happens. And I’m no going o worry abou i. Because I ollowed he rules, I should

21 8

 APPEND IX FIVE

 be okay. I I didn’ ollow he rules � i I ook early enries or dumb exis, hen I need o sop rading or a day or so. Second, I ask: Did I ake larger han usual (more han 1%) losses on hese rades? I he answer is yes, hen I need o sop rading � or a leas a week. I you find yoursel aking  big losses, hen he problem is no wih he sysem. Te problem is ha you’re gambling, and you need o sop. In a momen I’ll menion some hings you can do when you sop rading or a ime.  Wha i you have a losing monh? For hose o you who are planning on rading or a living, he quesion arises: Wha happens i you go an enire monh, and you’ve los money? My answer is: You ake your living expenses ou o your accoun, and you move on o he nex monh. And you’ve had a ne wihdrawal on he accoun. No wha you’d wan,  bu ha’s lie. No every monh is going o be a winner. I you’re hinking ha raders like Seve Cohen (o SAC ame � i’s one o he larges hedge unds in he world) don’ ever have losing monhs, you’re missing he poin. Individual raders a his firm do in ac have losing monhs. Every hones rader on he plane is going o have losing monhs. I’s jus going o happen. When i does, you jus move orward. Don’ change oo much, unless you’ve been breaking all kinds o rules wih your rading. And i you’re breaking all kinds o rules wih your rading, hen you deserve o have a losing monh.

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 As I was wriing his book, I sared breaking rules and holding ono losing Wallaby rades � and I’m he auhor o his book! Wha a jackass, righ? Well, we’re all ha same  jackass someimes. We all do his. None o us is exemp rom making misakes. Te bes raders in he world go hrough periods o ime  when hey’re sel-desrucive. Tere’s no one excepion o his � no Warren Buffet (see his invesmen in Solomon Brohers), no Seve Cohen, Julian oberson, San Druckenmiller, or any o he “marke wizards” you’ve read abou. Every grea rader has a sory abou he ime he was a complee screw-up. Coming back rom ha is par o wha makes you, one day, a grea rader. In oher words, he definiion o being a grea rader isn’ he absence o misakes; i’s he abiliy o deal wih misakes in a posiive manner and come back. o prepare yoursel or a losing monh, I’d recommend seting aside profis each monh or week � a rainy day und, in oher words � o compensae or imes when he marke doesn’ cooperae, or hose imes when you’ve ollowed he rules and you go smacked around. Ten, when you have a monh ha jus doesn’ work ou, you can ake a bi ou o  your rainy day und, and you migh no have o wihdraw money rom your rading accoun.

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 Anoher idea is o se aside one exra monh (or wo) o living expenses beore you even sar rading, so you’re menally prepared or ha one bad monh. Maybe i will never happen. By preparing in advance or i, he prospec o having a bad monh won’ scare you (and you’re likely o do much beter i you aren’ araid). One o he smares hings a rader can do is lower her living expenses. Everyhing in lie is easier when you don’ have money problems. I have ound ha here are very ew problems in lie ha canno be solved  wih cash.1 I you have a losing monh (I know I’m repeaing mysel here), and i’s because you didn’ ollow your rules, hen  you’re in rouble. I means ha you ook wha should have  been a good monh and you urned i ino a bad one. Wha’s o say you will ever have a winning monh again? No much. I you can’ ollow your rading rules, hen sop rading, and go do somehing else ha doesn’ require ollowing rules, like running or Congress or being presiden o a small, Caribbean naion. Make a decision o make i work. I decided some ime ago ha I wasn’ going o le adversiy ge in he way o somehing I wan o do. One reason I don’ se goals is ha I believe goals are hings you wan o do, hings you’re going o ry o accomplish. Here’s how I view i: You eiher ge suff done or  you don’. I don’ se goals. I jus decide o do hings � or no o do hings. And i’s as simple as ha. Once I decide o do somehing, ha’s he end o he discussion. I jus do i.

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 When you’re aced wih adversiy in rading, i’s easy o suddenly find yoursel re-evaluaing wheher or no you should coninue. I hink ha’s a load o crap. Wheher or no  you’re going o rade or a living is a decision you make one ime. A some poin in ime you sill have a rading accoun, and you’re rading or a living, or you don’ have a rading accoun anymore, and you’re no. I you’re consanly rying o make up your mind abou somehing, you’re losing  valuable ime in acually geting ha somehing done. I’m no saying you should keep deposiing money in your rading accoun (also known as flushing your lie’s savings down he oile). Bu I am saying ha you se a cerain amoun o money aside, and hen you � Proec ha money  rade ha money  I you ocus well enough on #1 above, hen #2 akes care o isel. Seriously! I’m no joking around here. I you proec he base accoun balance, hen you’re going o find yoursel in a posiion o make money over ime, even wih a losing monh � even wih wo losing monhs!

1. elaionship problems canno be solved wih cash. Bu herapy migh help, and guess wha herapiss like o be paid wih? Cash! Oher problems ha you can solve wih cash: loneliness, ooh decay, hunger, boredom, lack o syle, and o course, povery.

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 APPEND IX FIVE

 When o sop: I’ll repea a ew reasons ha you should sop rading. I any o hese hings happen, hen sop.  You aren’ ollowing your rules, and you’ve los more han 5% o your accoun balance.  You lose more han 10% o your accoun balance in any period o ime.  You regularly ake rades ha you did no plan o ake (wheher profiable or no).  You regularly do no ake rades ha you did plan o ake. (Tis comes rom second-guessing oo much.)  When hese hings happen, and you sop rading, here’s a hree-sep process I’d encourage you o ollow: ransparency. alk o your spouse or paren abou wha  you’ve done. Ge i ou in he open and hide nohing. Bring accoun saemens and journal enries o he conversaion. ransparency solves nearly all rading problems. esing. eurn o esing your sysem. Follow he seps I’ve oulined or esing, and do a crap-on o addiional esing or he sysem you rade. By re-esing wha you already (should) know, you reinorce he good suff. You remember how o avoid he bad suff. ime. Never be araid o ake ime off rom rading. ake a day off now and hen, afer a loss or a big win. ake a week off on a regular basis. Make his ime off a oal vacaion rom

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he markes. Clear your head. Ge away rom he compuer.  When you eel yoursel sor o losing your rading balance, hen sep off he carnival ride and ake a break. raders ofen ask me, “Bu wha i his means I’m going o miss some o he bes rades?” I jus answer, “Tere will be 1,000 Wallaby rades beween now and he end o he year. Are you hinking ha he very mos imporan one is coming oday?” One rade should never mater. Sop worrying abou missing ou on rades, and sar worrying abou missing ou on lie. Tis advice wasn’ comprehensive. Tere’s room in an enire  book o alk more abou dealing wih losses and wins, bu his should ge you sared.

 APPENDIX SIX WHA O RDE  Wha financial insrumens work well wih he Wallaby? Here are some houghs. Firs, rade he securiies you know. I you know socks, hen I’d sugges sicking wih socks. Don’ aler your rading plan o rade some new financial insrumen because you heard ha i works beter. I you’re amiliar wih he essenials o rading socks, hen i makes sense o firs apply wha  you’ve learned in his book o somehing you already know. However, i you eel ha you’ve go o make a change, and  you wan o sar rading somehing differen, pick up a  book and sar reading on he Web abou he new financial insrumen you’ve chosen. Spend a couple o monhs geting amiliar wih he new marke beore you make any moves. Second, rade he ime rame you know. I you’re a day rader, hen i doesn’ make sense o pick up a book and expec ha overnigh you’re going o become a long-erm rader. As  you already know, day raders and long-erm raders have differen menaliies, varying degrees o paience wih rades, and so orh. I you have decided ha now is he righ ime o make a swich on which ime rame you wan o rade, I’d sugges picking up a good book on rading psychology, such as Mark Douglas’s excellen ome, “rading in he Zone,”

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 APPEND IX SIX

or visi Bret Seenbarger’s insighul blog (jus Google his name; he’s amous) and sar reading.  You’ve already figured ou ha he key here is paience. Tere’s no magic financial insrumen or ime rame. Wha maters is ha you ake he necessary ime o ge amiliar wih who  you are, wih wha you’re rading, and your expecaions or he ime rame in which a rade will complee. Ta’s wha maters.  Wih all o ha cleared up, I’d like o alk a bi abou our markes: socks, sock indexes, uures and currencies. Stocks.  I

you’re going o rade he Wallaby on socks, I’ve looked a some o he bigger names � IBM, HP,  XOM � and I liked wha I saw. Even on he shorer ime rame chars, I liked he way hese socks moved wih he divergence seups. I you have experience and rade oher socks (including smaller cap issues), I’d love o hear rom  you abou your experiences wih he Wallaby. Stock Indexes. You

can rade he indexes hrough uures conracs, EFs, opions, muual unds � a variey o ways. I wan o clearly sae ha beore you rade any sock index  wih he Wallaby, you should pu your esing ime in. I’d sugges a leas 500 esed rades and a leas 50 live paper rade seups beore you commi real money. Successul sock index raders are some o he smares, mos dedicaed, mos enacious people I know. And you’ll be rading wih hem

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 when you choose o rade he $SPY or he $ES. Te Wallaby can work fine wih hese financial insrumens, bu you’re definiely running wih he big dogs when you join his crowd. Futures. Corn,

beans, oil � you name i. Fuures rading has los some volume o currencies over he pas 10 years,  bu i’s sill a huge business wih ens o housands o raders specializing in hese issues. Fuures rading is exchangedriven, which means ha here’s a cerain amoun o price ransparency, which is very appealing o some. Also, you can easily access deph-o-marke inormaion, which or some is very imporan. I don’ rade uures a all. I’s no my hing. Bu I’ve been waching he Wallaby on a variey o uures conracs � in paricular, oil � or some ime now, and I like wha I see. I you’re a uures rader and you have an ineres in esing and rading he Wallaby, I’d love o hear more rom you. Currencies. I rade currencies exclusively, and my primary

 vehicle or Wallaby rades is he EU/USD. I also very much like he way he Wallaby ses up rades on he USD/  JPY on he shorer erm (5- and 15-minue) chars. Te currency marke has enormous liquidiy. I moves very as. I offers subsanial leverage, even afer governmen regulaions in 2010 orced margin requiremens upward. I  you enjoy macroeconomics, rends ha las or long periods o ime, and a as-moving marke, hen currencies migh  be a good fi. However, I’d suspec ha more han 95% o

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 APPEND IX SIX

currency raders lose money on a regular basis. Because he marke moves as, and especially because so much leverage is offered, i’s easy o lose a subsanial amoun o money  very quickly. I you choose his marke, I srongly cauion  you agains diving in wihou compleing your esing firs. I’m always ineresed in hearing rom you i you rade he  Wallaby on any financial insrumen, any ime rame, in any marke.

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 APPENDIX SEVEN  MONEY MANAGEMEN   When I look back on his book, I hink I should have writen 150 pages abou risk and five pages abou he Wallaby. I’m sorry I didn’ do ha.  When we sar ou as raders, we rarely consider he risks.  We sar off hinking abou he rewards. I’s naural. Wealh is a moivaing orce. We are atraced o wha we wan, and we ocus our minds on i. Te hough ha we migh someday accomplish somehing grea (a profiable rade, a series o profiable rades or rading or a living) drives us orward, even during he bad imes. However, he hope o making a lo o money can also be a disasrous emoion, pushing us onward, even when we have proven ha we are impulsive risk-akers. I’s imporan o know yoursel beore you sar rading. And i’s imporan o undersand wha his book is abou, and  wha i’s no abou. o a cerain exen, afer I wrie his book and you have i in your hands, i’s your book, oo. I did he  bes job I could wriing i. And you clearly wan o do he  bes job possible implemening wha you’ve learned. Wha  you do rom here on ou is up o you. I can’ push he butons or you. I can’ place your rades or you.

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 APPEND IX SEVE N

 A he same ime, I wan o repea somehing I said many imes earlier in his book: Please consider keeping a igh sop on your Wallaby rades. A sop jus above he highs or  jus below he recen lows would be fine. Tese rades aren’ deserving o your paience or hope. Hope is no a rading sraegy. I he rading isn’ working ou, i isn’ working ou.  You jus move on and ge ou. I you’ve broken his rule, and you’ve le a rade go agains you, i becomes harder and harder o close as i ges worse. I’s a errible realiy abou rading. I you se a sop-loss a he ime you ener your rade, i’s done. I you se a reasonable small rade size on each rade o begin wih, you’ve done more han mos raders do. I  you never overexend yoursel, i’s hard o imagine geting ino errible amouns o rouble on hese rades. Sep one is o simply limi he risk you ake on each individual rade. rading or a living isn’ abou scoring he big win, no mater  wha you read in he headlines abou amous raders hiting he jackpo. For every gian rade ha led o an enormous payoff or a amous rader like John Paulson, here are a leas 100 individuals or unds ha wen bankrup. I’s why  you hear abou jus a ew people making huge money in he financial crises, bu you hear abou housands o people who  were wiped ou. As raders we fixae our minds on he big  winners, and we associae ourselves wih hem, orgeting how easy i is o become jus anoher losing saisic. Please don’ do ha.

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Te second mos imporan hing you can do is o ride ou  your winners. I know I’ve said his repeaedly. I know I’ve no  been he bes example o his in my own rading. I’m beter a  wriing hese words han I am a ollowing hrough on hem. Bu he ac is ha mos o us say in our losing rades longer han we should, and we don’ say in our winning rades long enough. urn i around. Our earul rading mind � he mind ha remembers he losses � is so happy o have a win ha we quickly move o bank he profi beore a rade is ully maure. Our hopeul mind looks a a loss and dreams ha i can (and should) urn around. In each case, we are me  wih disappoinmen. I’ve ound ha even raders wih very modes profi arges on heir rades end o close he rades ou early. I doesn’ seem mater i we’re going or 10 poins or 100. When he rade sars moving o our profi arge,  we become proecive o i. I’s like we’re sill living in caves and proecing he kill we made, because we know i could  be weeks beore we find anoher anelope ou on he plains. I you’re having rouble wih his (and mos o us do a one poin or anoher), here are some houghs ha have helped me. I you find ha you jus can’ ge ino he habi o leting your  winning rades ride all he way o he profi arge, sar wih  jus one or wo rades. I doesn’ mater which rades hey are. Afer you’ve aken a ew modes profiable rades or he  week, consider leting he nex wo rades ride ou longer, all he way o your profi arge. Don’ ry o make a lo o

23 4

 APPEND IX SEVE N

progress in a shor ime. Jus do i once, wih one rade. One sep orward is beter han no sep a all. Don’ ry o pick he “bes” rade. Jus pick a rade, rom he sar, and decide ha his one rade is going o say open longer i i is profiable. Ten do i again anoher ime. Don’ pu yoursel on some kind o schedule or deadline o do his. Jus do i when you can, and he habi sars o orm. Mos o us never become grea a his; I’ve me housands o raders, bu very ew are consisenly able o say in heir winning rades all he way o he profi arge. I hope his is jus he beginning o our conversaion abou risk managemen. For me risk conrol is more abou psychology han i is abou numbers. Le me know wha you discover or  yoursel.1

1. For more inormaion abou he numbers side o risk managemen, I recommend alph Vince’s heavy-on-he-mah “Handbook o Porolio Mahemaics,” which I’ve no been able o compleely diges all he way mysel,  bu i has been equally challenging and hough-provoking.

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235

 APPENDIX EIGHT HOUGHS ON COUNE-END RDING  Wha‘s he definiion o a rend? Is i a move on he daily char wih higher highs and higher lows? Is a rend only a rend when a financial insrumen says above is 20-period  weekly moving average? When does a correcion become a ull-blown rend? Tese are reasonable quesions in a book abou counerrend rading. In many examples o rades in his book, I’ve shown a 15-minue ime-rame char, wih a couner-rend divergence rade seup. Bu ha rade could very possibly coordinae wih an overall rend on a longer ime-rame char. When you look a i rom ha perspecive, you’re rading wih he rend, raher han agains i.

23 8

 APPEND IX EIGHT

FIG. A8-1: An upward rend on he 1-minue EUR/USD.

I you ook a couner-rend rade on he EU/USD, using Figure A8-1 as your char, you’d be selling he pair. Bu i  you did ha, you’d be rading in he direcion o he overall, 4-hour rend rom he char in Figure A8-2. So which is i? Is i a couner-rend rade or a rend rade?

THOUGHTS ON COUNTER-TREND TRADING

23 9

FIG. A8-2: A downward rend on he 4-hour EUR/USD.

I doesn’ really mater wha you call i. Ta’s wha I say. Tis is a book abou rading agains he recen rending movemen on whaever ime-rame char you’re looking a. In ha sense, his is a book abou couner-rend rading. I is always going o be he case ha you’re rading wih someone else’s rend, and agains someone’s else’s rend. And here are always going o be naysayers. I won’ mater which direcion  you rade. I you sar alking abou your rades in public,  you’ll always find someone who hinks you’re an idio. Afer a while, we all learn o ollow wha we have esed and sick o our own plan, or we don’. I’s no very complicaed.

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 APPEND IX EIGHT

People someimes wonder i i’s reasonable (or responsible) o ry and “pick a op” on a shor-erm char.

He who ries o pick a botom only ges a sinky finger. � ob Booker

 Abou once a week when I ake a rade, someone on witer menions how ridiculous i is ha I’ve ried o pick a op or a botom. And my answer is his: Every single ime you’re aking a rade, you’re making a choice abou he direcion o a financial insrumen. You’re eiher beting ha i will coninue o go up or down, or ha i won’. Saying ha one syle o rading is smarer, saer, more responsible, wins more o he ime � or whaever, is preposerous. Do you wan o know wha works bes? Finding wha works or you, and shuting ou he res o he chater. Cuting off your losses quickly so when hings go wrong, you don’ suffer a loss o a subsanial amoun o your accoun. iding ou your  winning rades. Tose are imeless principles, and hey don’ have anyhing a all o do wih rends or couner-rends.

THOUGHTS ON COUNTER-TREND TRADING

241

 APPENDIX NINE  AN INVIAION  I hope you’ll do he ollowing:

Follow me on witer. You can find me a @robbiebooker on witer, and rom here I’ll ge you on your way o ollowing  Wallaby rades (which by he ime o publicaion also has is own witer accoun). Here you’ll see me pos Wallaby chars, alk abou he marke generally, and do some wisecracking. Tis is a grea place o ask quesions, pos your own chars and engage in conversaion.  Mark up he book, do some esing, say in ouch.  Wrie quesions and commens in he margins o his book. Scan he page where you have quesions and upload i o witer and ask me abou i. Do some esing and pos he resuls. Engage in conversaion wih oher raders abou his � or abou anyhing. Jus ge ou here and sar communicaing  wih oher people. We generally do beter when we openly alk abou our rading.  Pos your rading resuls.  Use a service like Profi.ly or jus  blog i. Pos your rade resuls. Tere isn’ anyhing beter han accounabiliy. I’s he bes orm o moivaion and discipline ha I know. Le he world see wha you’re doing. Don’ worry abou people copying you. You’re no engaging

24 4

 APPEND IX NI NE

in arbirage on whea uures across hree world markes.  You’re jus aking a rade. I you buy IBM, you wan everyone in he world o know i, and o buy i wih you, righ?  Ask quesions. Some ideas or quesions: What indicator works best for me to set up divergence trades?

I’s no necessarily he Wallaby Indicaor. You migh find ha he CCI or he Momenum indicaor work beter or you. I  welcome variey and individualism in rading. A he hear, his is a simple book abou rading agains he recen rend.  And here are hundreds o ways o do i. Consider looking a candle paterns or price paterns when planning divergence rades. Consider comparing he way ha you do i wih he way ha oher raders do i. I his  book is a saring poin or you o consider his ype o rading, I will have done wha I waned o do. I’m no he sarring acor in your rading lie. You are. Te  Wallaby isn’ imporan. I’s no he only or bes indicaor.  You’re he mos imporan elemen in your rading. Le your creaiviy ou. I you would like o sugges improvemens, ell a sory abou how you alered an indicaor o plan divergence rades � I’d love o hear rom you. Please say in ouch abou ha.

 AN INVITATION

245

Can I trade with the trend better than against it?

In he previous appendix, we ackled his quesion. Tere is no one rend or one couner-rend. Tere are movemens on all kinds o chars, and hey don’ always say he same hing. However, i you find a rend on a daily char, can you find good places o rade wih ha rend by using he Wallaby rade on a shorer-ime rame? Can i help wih your enries? Do you find ha hese kind o “rend rade Wallaby rades”  work beter or you in esing? What is the optimal amount of risk per trade for me?

 Are you aking oo much risk in your rading? How much risk is appropriae or you? I srongly encourage you o deeply hink abou his by yoursel and wih a group o raders. Tink abou his quesion in mahemaical erms, and in psychological erms. From a mahemaical sandpoin, hink abou how ofen you  win versus how ofen you lose. Tink abou he size o your average win agains he size o your average loss. Tink abou he number o consecuive losses ha you’ve experienced in your esing and live rading. Tink abou he size o he  bigges loss you experienced in esing: Wha percenage o  your oal accoun balance was i? Wha percenage o your ne profi over he preceding 20 o 30 rades was i? Tere are hundreds o addiional ways o hink abou risk, and i bears repeaing: When you ge a handle on risk, you ge a handle

24 6

 APPEND IX NI NE

on your rading. I’s no abou magical indicaors. I’s abou no losing money … and hen making money.  When you hink abou risk rom a psychological perspecive, consider how you eel when you are in a losing rade. Wha are your endencies in ha siuaion? How well do you handle losses? Gains? Do you become wild and angry when  you lose? Or euphoric when you win? How does ha affec  your rading? Is one ype o emoional sae more beneficial o your rading? Can you race your emoions on each rade and find how hose emoions have played a role in  your perormance? How do your relaionships affec your rading? I could keep lising ou quesions like his all day long, bu you ge he poin. What do I want to get out of trading?

Sar wih he end in mind, as Sephen Covey would say. Are  you rying o make enough money o pay your morgage?  All your living expenses? Wha is success in your mind,  when i comes o monhly rading perormance? Is i abou never having a losing monh (which is probably impossible). Is i abou never having a losing day (which is definiely impossible). Wha exacly do you believe you’re capable o doing, and wha do believe he marke is capable o providing o you?

 AN INVITATION

247

What is my worst trading habit? What’s my best?

 Where do you ail mos consisenly? Is here somehing  you can do abou ha? Who have you old? Wha is he consequence o no doing somehing abou your wors rading habi righ now? Where will you be as a rader in 12 monhs, i you do nohing abou i? Will you sill be rading in five years i your habi becomes worse?  Wha would happen i you amplified your bes rading habi?  Wha would occur? Wha i you became even more skilled a ha one hing? Perhaps i is one paricular kind o rade seup: You jus seem o do i beter han anyhing else. Bu  you don’ ocus on i exclusively because i doesn’ produce “enough” rade seups. Ta’s bullocks! Wha would happen in five years i you oally ocused on wha you did bes and  you le everyhing else go?

ry i.