Click here To attend the Market Maps Basic Seminar and get a Market Maps Basic DVD

I'll start with some of the history behind the science, physics and art that brought Dr. Andrews and Roger Babson together and inspired them to create Action Reaction Lines and Median Lines. Then we'll go through the basics of Median Lines, from the very simple to more advanced use of them [Shane has a nice surprise for all of you planned here!]. Then I'll show you one of my favorite trade entry set ups, step by step – and Shane will show you his favorite entry, step by step. We'll take a few breaks here and there and then launch into case studies, actual trades using these methods; again, you'll get to watch two different professional traders use the same methodologies I've taught for years to trade, using their own style.

If this is your first Basic Seminar, you'll get a Basic Market Maps Seminar DVD of the Best of the prior six Basic Market Maps Seminars and also be able to attend all Basic Market Maps Seminars in the future, free, on me! You can watch the Basic Market Maps DVD over and over, to fully understand the material and you don't have to wait for the next Basic Seminar–Watch the DVD NOW and attend the the Basic Seminars when they come around.  If you have attended the Basic Seminars  If           If

If this is not your first Basic Seminar, you'll have the chance to order a DVD of this special Basic Seminar [a Knowledge Expansion Pack] for a very reasonable price - but more about that later.

Don't miss this Basic Seminar! We have lots of surprises planned. I hope to see you there.

"Master your tools, Master yourself."® 

Tim

When starting with an unmarked chart of a stock, I often point out market structure: Swing highs and lows,ranges, double or triple tops or bottoms, and gaps. On one particular afternoon, I started with a chart and began marking out simple market structure, and after a few minutes, the questions began. Why did I place any significance when price gapped higher or lower? Did it matter if the gaps remained unfilled or were all gaps the same? If gaps are important, how can you use them to make money?

This is the chart I started with:

Then I began to draw in what I considered to be the significant market structure, the “Don't Miss These” things that each of them should see when they first examine an unmarked bar chart.

On the unmarked chart, the first market structure that caught my eye was the unfilled gap that price left right as the downturn began in earnest, and of course, I may have noticed it first because we generally look left to right.

With the unfilled gap out, I added another easily spotted structure—“Three Drives to the Top”—and these were particularly easy to spot because each top was lower than the prior top. Once I marked the three drives to the top formation, its twin formation became evident:

This particular set of three drives to the top and three drives to the bottom are generally very reliable because the tops are forming lower and lower highs and the bottoms were forming a flat base. One of two outcomes flow from this set and the resulting move is generally explosive:

• Either a fourth drive to the top breaks above the prior three highs (and remember, each of the three areswing highs so a break above this formation should indicate a change in behavior), or…

• The third drive lower fails to hold at the test of the flat base (or a minor rally following the third drive runs through the flat base). While forming this flat base, price has been restoring energy, and when the bottom is violated, it generally moves a good amount to the downside.

Let's look at the interplay of the market structure I have marked so far:

When I view these formations, I like to take them apart in my mind and think in terms of the physics behind the market structure, which is how one of my earliest mentors, Dr. Alan Andrews, taught me to think about the markets.

The unfilled gap right at the beginning of this chart (and if you are like me, you view this entire chart as a whole) is like the winding of a spring in a clock. The unfilled gap shows you this market is rested and ready to move, and it also gives you the direction as clearly as the hands of a clock moving in one direction.

To flesh out the analogy, the three attempts price makes to rally are like the swinging of the pendulum in an old fashioned clock—and each time the pendulum swings back within a confined space or range, it's as if the clock spring is being rewound tighter and tighter. When price breaks below the flat base on the third drive lower, the pent up energy is expended quickly and in one direction: Down!

Is there anything else we can learn from physics about this chart before we move on?

Let's examine this chart and keep in mind the analogy of price being a large clock with a wound spring driving price's movements. First, I measure where the wound spring of the clock was originally released and measure how far it powered price lower before it slowed and then restored its energy, in this case by trading within a tightening range that was marked with a flat bottom. Then I project that same distance from the area where the newly rewound spring was released (where price broke below the flat bottom of its trading range). As a student of physics, it is not surprising to me when the lengths of the two distances are very nearly the same, and in this case, price runs out of downside directional energy at almost exactly the same distance.

Now I am focused on the lowest low on the chart and the bars that follow it. Specifically, I am looking at the very last bar, which is a wide range bar. Does this bar have any significance? Or is this bar just a wide range bar in a cascading downtrend? Let's look at it closer.

I zoomed in so you could see the bars after the lowest low much more clearly. My eyes are drawn to the very last bar on the chart. Price had begun to climb out of the hole after meeting its projected low and had a nice little rally going. It may even have broken above a minor swing high or two. And then something—news, a very large sell order, an overall breakdown of the prices in the stock market—made price open up much lower than the close of the prior day. But even though it gapped open much lower, it found nothing but buyers at the lower levels.

How do I know there were buyers at the lower levels? Price closed near its high. In fact, it closed higher than it did the prior day. There is a trading term that was started in the currency markets in the mid-1980s: When this type of action was seen, large, knowledgeable traders would say that there were “whales feeding there!” In this case, when price gapped open much lower, the average retail trader either sold out or was stopped out of their long position, or worse, they may have even gone short when price gapped open, expecting the prior low to be broken. But a few large traders, the whales, bought all the shares being dumped and then began to buy more,pushing prices higher. Soon those traders who had gone short on the lower opening were buying, covering their losing short positions. And at some point, the retail traders who had been long but had dumped their long positions began to realize price wasn't going lower—not today, at least—and they also began buying,establishing new long positions at higher prices. And so the gap was filled and price closed higher on theday—quite a remarkable recovery!

But does one bar like this mean the sell off is finished? Of course not. Price action must be observed these levels. Price will tell us when the downtrend is over: If we continue to see buying activity, there will  come a point where a change in behavior is obvious.

This particular bar is interesting because of the failure of the large gap lower to hold, but at the moment, it is just something interesting to file away in the back of your mind as you watch price unfold from this point. Let's watch price unfold a bit and see what we notice.

First, let's find that wide range bar that gapped lower but closed higher—and you can see I marked it on this chart. You can see that bar did not signal price was about to skyrocket higher; instead, it was indeed something to file away in the back of your mind. There were “whales,” or large traders, willing to buy this stock as it traded towards it prior low.

Depending on the length of your holding period and how much risk you are willing to place upon your account, you can do different things with this information:

• If you are a long-term investor looking to add long-term positions to your portfolio, there may be a price down near the prior low where you are willing to buy some of this stock (it is a major company and has a very large daily volume, by the way) with a stop loss 30 to 50 cents below the prior low.

• If you are a trader who uses daily bars when trading stocks and has a holding period of days or a few weeks, you may be willing to watch price action before deciding where this stock is heading. You maybe willing to trade time and price to get more information before you make a trading decision. Since I am a trader, not an investor, I am always willing to make this tradeoff.

So I watched patiently. As it traded lower from the wide range bar that gapped lower and closed higher and headed towards the prior lows, I had no sign from price that a change in behavior had occurred. I was willing to watch as price declined to see if the whales were still buying at lower levels, and to get me interested in getting long this stock, I would need to see some signs of strength.

Price traded lower but was unable to approach its prior low. Then price began to stair step higher. As I watched patiently, I began marking swing highs and swing lows. Price eventually climbed above two swing highs that I had marked from the prior move lower (marked in dashed red lines), a measurement I generally use to tell me to pay attention, a change in behavior may in the making.

But let's go back to the clock spring analogy again: Price has climbed higher and it has taken out two prior swing highs. But it stopped right where the clock spring should have run out of directional energy if price was still vibrating with the same frequency. Price has now retraced 50% of its sell off, the amount of potential energy price found each time in the clock spring on the way down. To get me interested in buying this stock, I need a sign of strength, and I need to know there are buyers at higher levels.

Or perhaps I will be a seller as price retests the 50% retracement area.

Or perhaps I will continue to wait.

My actions at this point will depend on what price shows me next.

Price rallied even further, breaking above the halfway point marked by the blue multi-pivot line. It also left several unfilled gaps on the way up. Now price may have topped out. It has broken below several swing lows made during this current rally, a sign that generally makes me pay attention in case a change in behavior has taken place.

But look carefully at the last bar on this chart. Price has sold off below two prior swing lows, and these are signs of weakness. It tried to enter and fill an unfilled gap, but it failed to fill that gap. It gapped lower inside the unfilled gap, but closed near its highs. This is a sign of strength. Is this a sign that whales are interested in buying at these higher levels?

In my mind, the next bar should give me key information:

• If price turns lower and fills the currently unfilled gap, price is likely headed lower.
• If price heads higher, leaving this gap unfilled, it is a sign of strength, a sign that the whales missed this move higher (I certainly chose to sit on the sidelines while this stock rallied quite a bit) and have an interest to buy at this unfilled gap.
• If price trades quietly for a bar or two, which is always possible, I'll simply wait for price to show its hand.I believe price is now at a level where the next move will give me a clear direction.

Price gives me an indication that the whales have left limit buy entry orders at the unfilled gap area. I cannot overstate how much of an edge you have as a trader when you have the ability to read where the large buy or sell orders are sitting in the market by the price action on a simple bar chart. I learned this ability because I was one of the five or six cash forex traders who spawned the original term “whales” in the mid-1980's. It was easy for me to see my own “tracks” on a bar chart because I knew what orders I was working in the market and how these orders showed up in the price action. And I quickly learned what the “tracks” of the other whales looked like that traded in my active time zone. Eventually, the similarities of the whale tracks became apparent and it became second nature to me to be able to see these signs on a bar chart. 

Now that I know there are whales feeding at the unfilled gap area and price has shown its hand by gapping and closing higher, what I am going to do with this information?

I add a simple trend line drawn from the low of the prior swing low below the multi-pivot line and connect it to the low of the bar that failed to fill the unfilled gap (where the whales have left large limit buy orders). Are there other things to consider?

I pull back for perspective and simply connect the major highs and lows with simple lines. I add a blue, up-sloping line connecting the major low and the low of the unfilled gap, where I know the whales have left limit buy entry orders.

Price has broken above two major swing highs from the long move lower, a sign that a change in behavior may have occurred, although I have mentioned this several times at various places that this is the first time price action has confirmed this potential change in behavior.

Now that both price and market structure have given me what I was looking for, let me show you my orders:

I want to buy a retest of the green, up-sloping simple trend line at 4.83. My initial stop loss order will be at 4.53, and if my limit buy order is filled, my profit target will be just below the last swing high, at 6.48.

Note that I placed my stop loss order below the low of the bar that failed to fill the unfilled gap, where I know whales have left large limit entry buy orders. If price begins to run through their orders, or if they pull their orders and the gap gets filled, I no longer have the market structure in place that spawned this trade idea.

Sometimes, you must be patient and diligent and stick with your plan until price decides to let your limit orders get filled. As each bar closed (especially because these are daily bars), I move my cursor to see where pricewill intersect with the green, up-sloping line. In this case, I got filled on the fifth bar. Because I am tradingagainst an up-sloping line and the intersection price climbs higher with the close of each bar, there is a pricewhere the risk/reward has eroded too much or the initial stop loss has gotten too large for me to continue towork the orders associated with this trading idea.

After moving my order higher four times, I am risking 63 cents to make a potential $1.32, which gives me arisk/reward of just over two to one. I rarely take trades with risk/rewards under two to one, so if I had not gottenfilled on this bar, I probably would have pulled the order. I also like my retests to be between three and fivebars after the initial test; once it takes more than five or six bars, I will generally pull my orders and watch priceagain, waiting for another clear sign that there are buyers or sellers in the market.

But I do get filled on the fifth bar at $5.16. I immediately check to make sure my initial stop loss is in the marketand then I enter my limit sell order (my profit order) at $6.48. Then I check again to make sure I bought theamount of shares I wanted to buy, and at the price I wanted to buy them. Now is the time to find any problems,not after price has moved far away from this level. Once I am sure I have the position I want, and at the price Iexpected, I double check the orders I am working in the market. Now I have to watch price and execute theplan I made before entering the position.

Once I am long at $5.16, the next several bars are uneventful; then price begins to creep higher. When price gaps open higher and closes quite a bit higher, I cancel my initial stop and enter a break even stop loss order. Remember, the original risk/reward on this trade was barely acceptable to me, so this unfilled gap gives me anopportunity to “collapse” my risk. If price is not heading higher from here after leaving another higher unfilledgap, I don't want to lose money on this trade.

Once I moved my initial stop loss order to a break even stop loss order, price made an orderly climb higher and my limit sell order was filled at $6.48 four bars later, giving me a net profit (before brokerage) of $1.32. You can see the unfilled gaps played a major part in my thought process and decision making. Many traders don't understand the significance of gaps, and this article has just scratched the surface of their meaning and how to use them to your advantage. But understanding and using unfilled gaps, as I have in this example, is something you can practice and ultimately add to your trading tool kit.

I hope you found this example interesting and informative.

I wish you all good trading!

Timothy Morge

Market Geometry Institute

www.marketgeometry.com

We believe in Laozi's well known philosophy: "Give a man a fish and you feed him for a day. Teach him to fish and you feed him for a lifetime."

The MGI is not a ‘chat site’, not plastered with advertising, doesn’t offer trade touts or buy and sell signals for $400 or $500 a month. MGI doesn’t make unrealistic promises.

We have purposely kept a great deal of our material available, free; and we have purposely kept our 'for fee' materials and services prices extremely low. However, on September 15th, prices for Premium Membership will be rising from $129 a month to $159 a month for those that sign up after that date – this price increase will not affect current Premium Member or people that sign up before September 15th. The price of seminars will be rising slightly as well, and a seminar purchase will automatically include a DVD copy sent after the event. If you or a friend have been considering becomg a member, now is your chance to lock in current rates and some very important distinctions from folks that join later.

There will be Live one hour Mid-Mentoring sessions for Premium Members three times a week beginning Monday, August 30th; Monday Mid-day Mentoring sessions will remain free and available to the public, sponsored by the CME GROUP and Infinity Brokers. There will be new Intense Focused Topic Sessions [IFTs] held every other week; these sessions will drill down to basics of what we consider a main topic that every trader here needs to improve and a series of IFTs on that topic will teach the concept, from the simple to the advanced components. My first IFT will be a series of session on Market Structure.

The attendance to these IFTs will be available free to all existing Premium Members before September 15th; we reserve the right to charge new Premium Members that join after September 15th to attend or view the videos of these sessions and if these sessions are as popular as we expect, existing Premium Members will always be able to attend; those that join after September 15th will be able to attend on a 'first come' basis.

The MGI provides quality educational materials, some free and some 'for fee' materials or services at extremely reasonable rates. We have two main goals:

• Help traders, no matter what their current level of trading experience and expertise, become consistently profitable traders.

• Teach traders to think about their trading and manage their trades as large, well-practiced professional traders think about their trading and manage their trades.

The educational staff at MGI are professional traders. We pattern the MGI after the learning institution of Dr. Alan Andrews who was a trader helping educate other traders through his own institution, the FFES [Foundation For Economic Stabilization]. As one of the few surviving members of Dr. Andrews' original inner circle, the Coral Gables Group, I am proud to carry his work forward and add to it. Dr. Andrews was an active trader for just under fifty years; I am on my fortieth year as a professional trader and money manager – that is an amazing amount of market experience from two of the extremely influential traders of their times that we call upon here when we teach at MGI. There isn't another website or institute of learning that is close to offering this depth of experience when educating traders.

We know Market Geometry will continue to evolve to fit the needs of the traders that choose to come to the MGI for quality trading education and this is but one step in that on-going evolution. We will continue to offer the best educational material here and hope our efforts result in our members becoming more consistent traders.

Timothy Morge

President and Founder

Market Geometry and  the Market Geometry Institute 

My first impression? We should have ten- and eleven-year-olds manage our retirement money! The three groups averaged a 12.4% non-annualized increase in the value of their trading account over that short period of time, using no leverage and only being able to be long stocks. They set their maximum risk to no more than 20% of their account on open positions, though they never approached this level of risk. One of the main tenets in my own trading, and one of the things I insist upon when I mentor other professionals is that stops are always in place the moment a position is put on, as well as logical profit targets. I taught this to the students and they practiced it religiously.

What made these students take to trading so quickly and seemingly easily? My slogan is “Master Your Tools, Master Yourself.” I believe mastering yourself and your emotions about positions and money (greed and fear, the “need” to make money) is the most difficult part of trading. I try to build simple tools to help take these emotions out of most traders’ minds, but at this young age, though the students are truly enthusiastic, they are generally not burdened by these emotions. They have no house payments and all the other burdens so many adults have when they first begin to learn to trade. These young adults also have a “clean slate.” They have not been bombarded with the unrealistic and even fraudulent claims so many vendors use when trying to sell their trading books, courses, or software. To these students, this is just another skill, like long division or expository writing, which they have to master, though I dare say the students I helped seemed a bit more
enthusiastic about learning to trade than learning long division!

My son really enjoyed the experience. Those of you who follow my writings here at MarketGeometry.com, MedianLine.com and the presentations I give at The Traders Expos may know that Sean has been helping me update my hand-drawn charts for several years, and has spotted several incredible opportunities that I managed for him (his sharp eyes and charting abilities led to a nice short crude oil position just above $146 a barrel and a nice long position at $35 a barrel). It's safe to say that his college fund is ready to go!

As soon as school was out this year, I got an unexpected request from him: He asked me when I started to learn about trading. Regular readers here or people who follow my writings on my Web pages know that I was extremely lucky to have an older brother who loved to speculate in the commodity markets. His interest in trading and a family friend who owned a large scrap yard in Chicago and traded to hedge his cash metals holdings led to me learning about charting and trading at Sean's age. Once I repeated the story to Sean, he immediately asked me if he could trade an account like I did when I was his age. To be honest, I felt I owed him the same opportunity that my brother gave me, so I offered him this opportunity:

• He will trade a simulated account for a minimum of six months, though depending on the results and his ability to master essential skills, the trial may go longer.
• He may pass; he may fail. As I tell all my students, the profession of “trader” is not stamped on your birth certificate. The key, in my opinion, is whether he can master himself.
• If he passes the simulated account successfully, I will fund a small trading account with a $2,000 maximum stop out on the entire account, which is exactly how my brother started me out in commodities.

He's in the middle of his first simulated trade, and he came rushing into my office during one of my live mid-day mentoring sessions to tell me he got filled on his entry, so several hundred people are now watching the results of his trade live as he moves the stop orders closer. He is nicely profitable in this first trade and about to enter his first stop profit order today after the market closes.

But besides successful simulated trading, he has to learn and master what I consider to be important tools that will give him an edge in the marketplace. For example, over the weekend, we were updating weekly commodity futures charts and cash forex charts. Of course, I never saw the question coming: “Dad, can I trade futures and forex in my simulated account?” I thought about limiting him to stocks, but I teach everyone that the repeatable patterns you should be looking for and researching come in all markets and in all time frames. Since he is in middle school, I wouldn't let him focus on short-term trading, but I decided not to limit him to just stocks.

That opened a whole new set of tools and techniques for him to learn, but I like teaching and I have all the tools pre-built for my own trading. If he was going to trade stocks, futures, and forex, one of the first things I needed him to learn was the concept of equivalent risk. Even if he only traded stocks, this is a very important concept that very few traders understand or utilize. So let's dig into this topic using some simplified examples I put together for people who have only a basic understanding of spreadsheets. (Like most people, I use Microsoft Excel.)

Many retail traders trade in blocks, meaning that they always buy 100, or 1,000, or 10,000 shares of whatever they are trading. If it goes up, they make money, and if it goes down, they lose money. But is always trading the same amount of shares exposing their account to the same risk each time they take a trade? Maybe a simple image will make the flaw easy to spot:

This trader always buys or sells 10,000 shares of whatever he is interested in, regardless of price or the volatility of the stock. This trader is trading the same number of shares each time he trades, but he is not exposing his capital to equivalent risk.

The first thing that jumps out at most people when I say the trader is not exposing his account to equivalent risk is the difference in price between the two stocks. Ten thousand shares of Apple (AAPL) was worth about $2.5 million US dollars when this was written. Ten thousand shares of Archer Daniels Midland (ADM) was worth about $260,000 US dollars. The trader would obviously have much more capital invested in 10,000 shares of AAPL compared to 10,000 shares of ADM. But that's easily fixed, right? What if the trader simply did the math so he invested in an equal face value of each stock? Let's take a look:

Let's do the math. One thousand shares of Apple was worth about $250,000, and 9,600 shares of ADM was worth about $249,600. Now that the trader is initially investing a similar amount of money in each stock, is he exposing his account to equivalent risk?

There are many ways to measure volatility; none are perfect and some are extremely complicated. For this exercise, I used a very rough measurement of the Average True Range (ATR), which is an average of the daily high minus the daily low, adjusted for market gaps. This measurement is available on all charting packages, and although it is a very basic measurement, it's a starting point (I do not use the ATR in my own position sizing and money management calculations, but as I said, none of these measurements are perfect and this exercise is meant as a starting point.)

It's easy to compare the volatility of these two stocks: Simply take the average true range and divide it by the price of the stock. By this measurement, Apple has an ATR volatility measurement of 0.0344 and ADM has an ATR volatility measurement of 0.0230. If you've seen charts of these two stocks, it shouldn't surprise you that Apple is a more volatile stock. But adjusting just the amount of cash you invest in each stock so that you have invested an equal amount of cash doesn't reflect the differences in the volatility of the two stocks. And if we add instruments like exchange traded funds (ETFs) and futures and cash forex to the things we might trade, the volatility becomes extremely important, though most retail traders don't understand they are not accounting for the different volatility of the instruments they trade, nor do they change their position sizes according to the volatility. Let's look at a series of simple Excel spreadsheet examples that will show you how to get started measuring the volatility of the instruments you are trading and how to compare them—and then enter into positions that expose your account to similar, if not equivalent risk.

Let's start out with an Excel spreadsheet and a handful of popular instruments: Apple Computer [a stock],  GLD [The ETF for Gold], SPY [basically a closed-end mutual fund that allows you to buy and sell the stocks that make up the S&P 500 Index in one simple trade--it preceded the ETFs of today but functions about the same way], the CME E Mini 500 S&P Futures [the most popular stock index future traded in the United States, it basically mirrors the cash S&P 500 Index] and the Comex Gold Futures [the most popular futures contract based on the price of cash Gold listed on a United States Exchange].

Let's take this diverse list of instruments and examine different ways we might try to get to the point where we are exposing our account to similar if not equivalent risk when we take a position in any of these instruments. Let me re-state the idea: When we take a trade in Apple computer, we want to expose our capital to the same amount of risk when we take a position in Gold futures several days later.

Some of you may still be wondering why we want to try to expose our account to similar risks each time we take a trade: If you have a wonderful day or week trading Apple Computer and then have a losing trade in Gold Futures, if you are using equivalent risk and a good risk/reward ratio [the importance of which I have written about many, many times], you should still have a very nice profit when you net the outcomes of the two trades.

We've already discussed this and the obvious conclusion is that the price of the instrument does not necessarily relate to its value, especially when comparing it to other instruments. Let's keep building our spreadsheet.

Now we add our first measure of the volatility of each of the instruments we are going to compare. There are many ways to measure volatility and many ways to use these different measurements. For example, a very short-term trader may not be interested in knowing that there are occasionally 'out of character' spikes in price in the instrument he or she trades every five or ten years on weekly bars because they are focused on five minute bars [These events are called 'Black Swan' events and although most people believe these events occur about once every 100 years, the measurements simply predict  that in the case of normally distributed data, roughly 1 in 22 observations will differ by twice the standard deviation or more from the mean, and 1 in 370 will deviate by three times the standard deviation. They are of much greater interest to portfolio managers or traders that hold positions over long periods of time. I use a longer term approach to calculating my measurement of risk and volatility, so I do take into consideration these 'third deviation' moves.].

But for this exercise, using a 20 period average true range is a good start for our volatility measurement of each vehicle. Begin with this measurement and you can always choose to replace it after you work with it for some time and learn about other methods and their strengths and weaknesses.

To do any calculations, we'll need to know both the current price of the instruments but also, the value of one dollar in a stock [of course, one dollar in the United States is worth one Dollar] or one point when trading futures [one point refers to a move from 1075.00 to 1076.00 in the E Mini S&P futures; it refers to the move from 1250.00 to 1251.00 in the Gold Futures]. These values are assigned by the exchanges.

I NEVER trade without entering an initial stop loss order into the market at the same time I enter my entry order; I want my capital protected at all times. I have a maximum size stop loss I use based on my research of the a combination of the volatility of the instrument, as well as how far each instrument can trade past market structure roughly 80 percent of the time and still return to the major trend. Some people feel this is a redundant measure of volatility, but it is a number that relates to my own willingness to risk a certain maximum amount of capital for each instrument, based on its trading characteristics–do not confuse this with the average true range, for instance. I add the size and value of my maximum stop loss for each instrument I trade so I can compare what I am risking.

Now let's start building the calculations that will allow us to compare risk! I'll begin by assuming we are trading 10,000 shares of stock each time we make a trade or 10,000 futures contract. Let's see how that works out numerically.

Just glancing quickly at the row marked 'Dollar Risk on Position' should be an eye opener for those of you that always trade the same number of shares each time you trade different stocks or trade the same number of futures each time you trade different futures. For example, if you trade 10,000 shares of Apple, using the ATR method, you are risking $86,000 if you bought the high and sold the low of the day as projected by the ATR [this assumes you are not using stop loss orders to limit your risk or that your stop loss order is larger than the ATR projected move for the day]; if you traded 10,000 shares of the ETF GLD, you would be risking $20.000. These risks are not equivalent and it gets even more striking if we compare the risk associated with taking a position of 10,000 shares of Apple stock and 10,000 E Mini S&P futures: You'd be risking $86,000 on the Apple position and $9,000,000 on the E Mini S&P futures position – that's an incredible difference in risk!

I'm not suggesting the majority of traders or even a few traders are out there trading 10,000 shares of Apple stock and making the assumption that they are taking the same risk when trading 10,000 E Mini S&P futures. But I am suggesting that the majority of traders have not done an exercise like this and really don't have any idea how the risk on each instrument they trade compares. And it is something each trader needs to know if they trade multiple instruments.

So let's build a new set of calculations and see if we can come with something that approaches 'Equal Risk' for each instrument we trade, each time we take a position.

By taking the ATR of an instrument and multiplying it by its Dollar value or One Point Value and the maximum stop loss I am willing to use for that particular instrument, we can easily generate a standard measurement of risk for each instrument; we can then use that standard risk measurement to compare the 'riskiness' of one instrument as it compares to others.

Are there other ways to measure the risk of an instrument? Yes. This is meant as a beginning example and is actually quite useful, as simplistic as it is, but feel free to explore and use other measures of risk or volatility.

Now let's build a table around this standard risk measurement and see if we can work our way to actual equivalent risks across these instruments.

By using the standard risk measurement, we are now able to use a simple formulae to come up with similar or 'equivalent risks' when taking positions in any of these instruments. This table assumes that the standard position used to determine the position size in any of the other instruments is based on 10,000 shares of Apple, but you could easily change the number of shares or even change the standard from apple computer to any instrument [for example, I use U.S. 30 Day Treasury Bills as my 'standard unit' and compare the riskiness of all other instruments to 30 Day T-Bills].

Note I purposely shared the Excel formulas when making calculations; and as I have said several times, this worksheet is meant as a starting point for each of you. To get a real feel for the relatively volatility of the instruments you trade, I urge you to re-create this spreadsheet, with the instruments you actually trade – or you can simply use the instruments I have used and practice your excel skills. But if you have the ability to get the current 20 day ATR for each instrument, when you create your own copy, use the current ATR and don't forget to use your own maximum stop loss sizes!

I hope you find this exercise interesting. Many of you may have never thought of looking at your position sizes using this type of tool – give it a try! Some of you may have better tools for comparing the volatility of instruments – If so, please feel free to drop me an email and share your thoughts, questions and criticisms.

I wish you all good trading.
 

Timothy Morge

www.marketgeometry.com

On the original webpage, there were several sections:
1. Market Geometry, an area where I discussed the current structure of the market
2. Swing Charts, an area where I marked out longer-term trade setups, and then followed them to the completion
3. Market Maps, an area where I would take unmarked "naked" charts and then update them, showing where I thought price would find natural support and resistance-in other words, were the larger traders, or "Whales" had left their limit buy and sell orders.
For many years, I hosted a mailing list named first Median Line and then renamed it Market Geometry. When the company Yahoo was formed, they offered a simple way to host forums that allow posts by members with attachments like images or Excel spreadsheets. For three or four years, with the help of several hard-working individuals, I hosted the Yahoo group Median Line and at one time, I am proud to say, we had well over 6000 members. But Yahoo made a policy change and would no longer allow these forums to archive the attachments to posts and so once again, I had to host my own forum on my own webpage.
In 2003, I wrote the book 'Trading With Median Lines'. It was the first comprehensive book written specifically about Median Lines and their applications. It is now considered the reference manual for anyone that wants to learn the basics of the various median lines and their applications. In the midst of writing my second book, I was approached by the educational division of the Chicago Mercantile Exchange and asked if I would be interested and willing to help floor members make a successful transition from the trading pits two off floor screen trading. The original program, hosted by my company Market Geometry, developed a basic seminar for professional traders; I called it 'Market Maps'.
By 2005, more than 350 exchange members were enrolled in the day-to-day mentoring program that followed the basic Market Maps seminar; all in all, several thousand professional traders went through the program before I opened it to public nonregistered traders. I have been regularly offering the basic market maps seminars to the public since 2005; and since that, thousands of nonprofessional traders were people that want to learn to be traders have taken the basic seminar. I now offer an advanced Market Geometry seminar and that, too, has been received with rave views.
I begin speaking at the various Traders Expos around the country in 2007 as well as writing for www.money show.com, their online affiliate web page. I'm a very popular speaker and the interviews featuring me from the various Traders Expos are always near the top of their recently viewed video list. Similarly, my articles on www.MoneyShow.com, are generally the most popular each week.

In late 2007, the Chicago Mercantile Exchange once again asked me if I would be interested in helping them with education; this time, we came up with the idea of a premarket commentary, covering a handful of futures markets-what had happened overnight, what areas are likely to be resistance and support and in general, what the probable path of price would be as the day began in each market. This premarket commentary became so popular so quickly that they were soon 10 or 15 other people offering the same service, although most of them charged a significant fee for theirs. Now that others have moved into this arena, I had the luxury of morphing this service from a recap and market commentary service to a purely educational service. The 10 to 15 minute daily opening segments soon became 60 to 90 minute mentoring sessions, where I would take a market or two and show how to set up trades, how to use quality money management and risk reward ratios-in short, the goals of these sessions became how to teach people to become consistently profitable traders.

As attendance increased, and I realized how much work it took to generate 60 to 90 minutes of new educational material each and every day, I made a decision to always offer Monday's Mentoring Session free. I would keep the CME Group sponsorship on Mondays but because the sessions had gone from 10-15 minutes per day to 60 to 90 minutes per day, I would charge a modest fee for Tuesday through Friday sessions and all sessions would be video archive and available for review by the premium members at their leisure. The Market Geometry mentoring sessions continue to grow in attendance throughout these changes; we have members in 47 countries now.
In early 2009, while on spring break vacation, my family noticed that I breathed much easier in the dry environment of Arizona. I suffer from a relatively rare lung disorder, similar to cystic fibrosis, named bronchiectasis; although breathing exercises and inhaling specific medications helped, my health continued to decline while living in the humid Midwest. My family and I visited various parts of Arizona throughout 2009 and finally decided to relocate our home in my money management business, as well as Market Geometry, to Prescott, Arizona. We found a beautiful house on the side of a mountain in Prescott and purchased it the day after Christmas in 2009.

Knowing that the move would be quite stressful and wanting to improve my health, I was blessed when a good friend of mine and someone I had mentored for many years, Shane Blankenship became available to help me with various parts of Market Geometry; it was the right time for him to devote his full attention to both trading his account in working with me at Market Geometry. Shane was the right person for me, because out of all the people I mentored over the years, is one of the few that works as hard as I work and can sit down with me and ask me questions about this methodology that make me pause and think. Having a peer working with me and doing live sessions with me, one that challenges me, brings out the best in me. After many years of working and teaching on my own, I now find myself with a partner that brings more than enough to the table: when the two of us get together, you may laugh, you may see fireworks when the two of us argue or debate a point, but the addition of Shane has brought a new dimension to the Market Geometry sessions and seminars.
Shane joined Market Geometry in early February 2010, so it's been six months and we have had a good deal of time to learn to work with one another and to talk about where we want Market Geometry to go and grow. The members have already seen a great deal of growth over the past six months; much more, soon be coming. As odd as it sounds, I added a second person six months ago, and yet both Shane and I are working harder and harder each day. There are so many things we want to do, so many things we want to add, and so many suggestions from the members. All of these ideas, all these projects have one goal in mind. The National Futures Association states that 95 out of 100 people that open a trading account with $10,000, and the closing their accounts after having lost the money within 6 to 9 months. Our nonscientific poll of our members shows that we have 30 to 40% of our members that are consistently profitable. Our goal is to make all our members work hard get closer and closer to becoming consistently profitable traders, even if it's one dollar net profit per month.

As a first step toward recommitting ourselves to this goal, I'm going to follow in the footsteps of my early mentor, Dr. Alan Andrews, who named his most active in early group of students the 'Coral Gables Group'. I am proud to be one of the few surviving members of the Coral Gables Group. Shane and I are not here to give out trade tips, were not here to sit in a chat room all day long and yell out trade ideas; instead, we will continue to do our best to educate all our members, free and Premium, so that they all have the potential to become consistently profitable. We now view this as a learning institution that extends much further than a mailing list or a website. And we are proud to announce today the formation of the Market Geometry Institute.
In the coming days, many more changes will be announced. It is my hope that you will all look back at where this all started, and all the changes that have happened and at all the good that has come out of these many years of me 'giving back' to the trading community that has supported me for the past 40 years.

I wish you all good trading.

I am pleased to announce the next Basic Market Maps Seminar will be held Satueday, September 25th and we'll begin at 9 am AZ time [-7 GMT].

I am proud to announce Shane will be co-teaching this Basic Seminar, so it will have a slightly different and more diverse flavor-and one I am sure you will all enjoy.

We expect an Advanced Market Maps Seminar will follow about a month later.

There will be a DVD available for those that attend for a nominal fee, produced by our wonderful media guru, Carlos. Look for all the details in a day or two, both posted here, as well as in a mailing.

I wish you all good trading.

Tim

A simple line can be the start of everything. In this presentation, I am going to begin a series of discussions about Action Reaction Lines and Diamonds®, a proprietary charting method I developed well over 20 years ago. Both have served me well in my own trading and this is one of the first times I have given any information publicly regarding the correct rules for using either technique–both are simple, yet powerful if you use solid money management. 

Let us begin this journey with a look towards physics.

Sir Isaac Newton is thought of as a physicist, a mathematician, and the founder of calculus. But he was also the 'Master of the Mint' later in his life and literally saved England's financial system by switching from the silver standard to the gold standard. Even less well known, Newton was a Master Alchemist, so heavily involved in alchemy that he eventually died from having massive amounts of mercury in his body from his many alchemical experiments.

But Sir Isaac Newton's contributions to science should not be diminished; he developed the first practical reflecting telescope and his Three Laws of Motion dominated the scientific world until the early 20th century. His Third Law of Motion 'For every action there is an equal and opposite reaction', is particularly useful when applied to the trading markets. The Third Law of Motion may have had its founding in Newton's first and true love, alchemy, for he was truly one of the most important alchemists in his lifetime. His favorite  alchemical manuscript was the Emerald tablet.

Hermes Thrice Greatest or Thoth, was reported to have lived around 1900 BC. The Emerald tablet is attributed to Hermes and Sir Isaac Newton's translation is perhaps the most popular alchemical work still studied today. Its essence is simple: 'As above, so below'.

Let's take a look at the chart. It can all start with one line:

We are looking at a chart of the Euro FX futures on the Chicago Mercantile Exchange.  The 60 minute bars on this chart appear in early March of 2010.  I begin with a major low pivot on the left of the chart and draw a blue up sloping simple trendline that touches many smaller pivots. I call this simple trend line with many touches a multi-pivot line. Let's look at another chart and I'll show you the pivots I chose to draw this line.

When working with charts and hand drawing lines in particular, it's important that you remember and mark where you trained or curve fit the particular line you are going to work with. Here you can see that I used many pivots and the up sloping blue simple trend line does a good job catching the highs and lows of price as it moves forward. Remember every bar within the blue box was used to train or draw the simple blue trendline.

What can I do with this simple blue trendline? Another name for this simple trendline that goes through so many pivots is a Center Line.

I look to the left and see a Major Swing Low. Starting at the Major Swing Low to the left,  I copy the Center Line and project it forward. The original simple trend line is called the Center Line and  the second line is called the Action Line. It carries the same slope or frequency as the Center Line. Note that the Center Line captures the frequency of Price and the pivot of the Action Line always precedes or comes before the Pivot that begins the Center Line.

Now I think back on the Emerald tablet: 'As above, so below'.

I have generated a Center Line that catches the frequency or probable path of Price and I copied the Center Line to a prior Major Pivot to generate an Action Line.

'As above, So below'.

Now I ponder: 'For every action, there is an equal and opposite reaction'.

I measured the distance from the Center Line to the Action Line and using the same distance, I create a line that has the same slope or frequency of the Center Line and add it below the Center Line. This is called the Reaction Line.

It can all start with one line. One thing passes into another.

Price has been in an uptrend but now consolidates, leaving three simple drives to the top. The three pivots, when connected, have a negative slope. But eventually, price begins its move higher again.

Using the pivot on the far left, I connect the three drives to the top and this gives me a red down sloping simple trendline. You can see that once price broke through this trendline to the upside, it switched back and retested this simple trendline from the upside and then began its climb higher; when it retraced, it tested the simple red trendline from above, and the trendline acted as support.

It can all start with one line.

This is a down sloping Center Line. You can see the pivots and switchbacks marked with green circles that I used in defining this Center Line. I was taught Action and Reaction Lines and the theory behind them from Dr. Alan Andrews. In the mid-1920s, Dr. Andrews studied the work of Roger Babson who was a devout student of Sir Isaac Newton's Laws of Motion. Babson was particularly focused on Newton's Third Law of Motion, 'for every action there is an equal and opposite reaction'.

Though Babson had his own methods of technical analysis, Andrews and a group of graduate students at MIT literally tore Babson's work apart, piece by piece, and then developed the Action Reaction method. It all starts with one line. The one line is the Center Line, which projects the probable path of Price.

'As above, so below'.

Once I find the Center Line, I simply transfer the slope, or frequency, down to the prior Major Swing Low to the left. The second line drawn always begins with a pivot before the pivot that anchors the Center Line and is called the Action Line. The distance between the Center Line and the Action Line when combined with the frequency of the Center Line is used to project a Reaction Line.

Once again, I simply measure the distance between the Center Line and the Action Line and then using the frequency or slope of the Center Line, I draw a line equidistant from the Center Line but this time above it.

You should take note that I have blue up sloping lines and red down sloping lines on the same chart. Because these lines have opposite slopes, they are lines of opposing force.

Let's take a closer look at these lines of opposing force.

I have been a professional trader for nearly 40 years now. When I begin trading, the personal computer not been invented, so software charting packages were not available. In the early 1970s, there were a handful of companies that published comprehensive chart books that came out every Friday afternoon. Most professional traders either subscribed to the services and had them delivered by mail on Saturday or picked them up at a bookstore late Friday afternoon.

Some traders kept their own charts by hand; I was taught to hand chart at a very early age by one of my older brothers that traded commodities. I continue to hand chart to this day. It's one of the routines that I use in my preparation each day.

More than 20 years ago, I began to notice that some of my more effective charts had both up sloping and down sloping lines and both sets of lines had important roles in defining the probable path of price. I did extensive research on these lines of opposing force and they quickly became one of my tools of choice. I named them Diamonds® because of the space formed when lines of opposing force are overlaid on the same chart. Though I have been using them successfully for more than 20 years, this is one of the first presentations of my proprietary work with Diamonds®; in fact, this is also one of my first public presentations of Action Reaction Lines and the theory behind them.

When using Diamonds®, you can project support and resistance from two different sets of lines, lines of opposing force, well into the future. These two sets of lines were defined in early March and by simply measuring the distance from the Center Line to the Action Line and projecting it forward above and below the Center Line numerous times, Diamonds® were formed that project far into the future.

If you look carefully at the top of the chart, you'll see that I marked a pivot that touches the up sloping blue Center Line with a circle. This will help us keep track of where price and time is as we move on to the next chart.

Now orient yourself by finding the place mark on the top left corner of the chart; This place mark coincides With the place mark on the prior chart.

You can see that price sold off hard and looking closely at the large swing down, you should be able to tell that price found support and resistance T both Lines of Opposing Force and their projections. In essence, using Diamonds® adds a fourth dimension to traditional three-dimensional charting. Diamonds® will give you a very accurate probable path of Price if your Center Lines reflect frequencies of price; once you've set up your Diamonds®, look for repeatable entry setups that you know have likely profitable outcomes.

Action Reaction Lines and Diamonds® require the use of strict money management. When you add the second layer of Action Reaction Lines, you will find many more interactions of Price with tested lines. At times, you will be buying against down sloping lines and selling against up sloping lines–something I rarely do when using Median Lines. It is imperative that you master these tools before using them with real money in your trading account–and more important, you must use surgeon-like money management skills to limit your risk. I was taught many of my money management skills by Bruce Kovner, while I was a money manager and mentor at Commodities Corporation–and I urge those that would try to master these tools to work hard on their self discipline and money management skills.

Once the long wave lower is finished, Price corrects and begins to move higher but then it heads lower again; note that it does not make a lower low. Price then begins a vertical move higher and gaps significantly higher one weekend when the markets are closed. Price tries to trade lower but is unable to fill the gap. Once it fails to fill the gap and turns higher, I start to pay particular attention, because an open gap is an unusual event on a long-term chart. Price generally comes back to fill gaps.

The last Major Swing High tested the red down sloping Reaction Line and then traded lower. Price is now testing the intersection or confluence of a red down sloping Reaction Line and a blue up sloping Reaction Line. I call these areas where Lines of Opposing Force meet Energy Points, and find that when price interacts with these Energy Points, either a change in trend occurs or an acceleration of the ongoing trend occurs.

Price stopped at the Energy Point and then turned lower; note that Price failed to break above the prior Major Swing High. Just as the unfilled gap caught my attention, the inability of price to climb above the prior Major Swing High alerts me that there are probably significantly large limit sell entry orders, meaning large traders are looking to enter short positions in this market and have left their orders at or near the last Major Swing High.

As a place marker, note that I've drawn an ellipse. Let's zoom in on this area and take a closer look.

I have zoomed in on this chart to make easier to analyze the significant areas as well as show what entry set up pattern I have spotted. I have also marked in my limit sell entry order as well as my initial stop loss order; both will be entered on my electronic platform at the same time. Never trade without 'hard' stops; stops protect your capital from ruin.

Once again, looking at the chart, price retested the red down sloping Reaction Line. The Reaction Line acted as solid resistance and note that price was unable to break above the prior Swing High. Large traders are aware that markets tend to fill gaps and are looking for a relatively high probability area to enter new short positions. On the test and retest of the red Reaction Line, I note that both tests were made with large range bars that closed with good separation below the Reaction Line; this is another clue that there may be a good amount of sell orders above the market.

Four bars after the retest of the red Reaction Line, I put my orders in the market. I'm risking 40 ticks and even if price only makes it to the retest the top of the open gap, I should make 125 to 140 ticks of profit, giving me a potential risk reward of better than 3 to 1.

Now that the orders are in the market, let's see what price does.

Four or five bars later, price rallies and retests the red down sloping Reaction Line; my limit sell order is filled, so I'm short this market. I immediately check to make sure that my initial stop loss order is in the market and being worked on the exchange server.

Let's see how this trade plays out.

You can see that once I was short this market, my initial stop loss order was never threatened; in fact, price never re-tested the red down sloping Reaction Line again.

Now it's a matter of style and money management: I marked five areas with circles that were potential profit targets. You could have taken profits as early as the area where price filled the gap, or you could have taken profits when price tested either the first or second up sloping blue Reaction Line. Or you could have chosen to take profits at either of the two energy points where down sloping and up sloping Reaction Lines [Opposing Lines of Force] met.

I also marked the new swing highs that were left as price continued to ratchet lower. If you are position trading, you can simply work lower and lower stop profit orders as price leaves new swing highs at lower and lower levels until you eventually get stopped out. If you followed this method strictly. you'd probably still be short the Euro FX futures, with a stop profit order above the prior Swing High. This is called boxing in profits and is generally how I position trade, although I usually do have a logical profit target in mind – some significant level – in this case around the area of confluence or Energy Point just below 126 in the Euro FX futures [There are some Major Lows in the 1.25 to 1.27 area from March and April of 2009].

Whether you are a Physicist, an Alchemist, a Greek or Egyptian God or just simply a trader, it can all start with one simple line. 

Click here for a printable PDF version of this article

Come join us for our FREE Monday Mid-Day Sessions with Tim Morge!!! Tim will be reviewing some chats and talking about how he uses Median Line tools and other techniques of trading. This is a sample of what we do in our Premium Mid-Day Sessions Tuesday through Friday. Once you register for our FREE Monday Mid-Day Sessions, you do not have to register again. Please note: These sessions are recorded and will be kept on the home page until Wednesday. After Wednesday they are archived  and  available to Premium members only.

So, come join us at 11:00 am Arizona Mountain Time (-7 GMT). 

Click here to read the interview with Dr. Shing-Tung Yau

We took a long look, bar by bar, of the Bond futures market and everyone had an opportunity to try their hands at trading, using Median Lines and Action Reaction Lines that I added in as price moved forward.

Then we turned to the 20 min FOREX JPYUSD market and did a bar by bar analysis from last Wednesday through the carnage last Thursday–and of course, the currencies moved as much or more than the stock market, but that didn't get any press–and those trades weren't 'broken' by the SEC…Which begs the question: Are you trading the right markets or still stuck in the E Mini S&P rut? There's easier money out tere, folks.

If you aren't attending the FREE Monday Mid-Day Mentoring  sessions, take an hour or so out of your Monday and learn a lot of about how a professional trader and money with 40 years of experience approaches the market. You can sign up for the free Monday sessions by clicking here.

Why not try a month of Premium Mid-Day Membership? You'll get the same daily sessions Monday through Friday, hosted by Tim and Shane. There are FREE bi-weekly LIVE Beginner Lessons on Median Lines, a very active forum hosted by Mentors taught by me and more than a year of archived sessions, and a free text and chat room. Come it all a whirl. You'll like it!

Click here to sign up for a month of Mid-Day Premium Membership.

Here's some of what we talked about today, from my Word Outline…

 ____________________________________________________

Siddhartha Gautama or the Buddha spoke about how one thing led to another, how one thing and everything is connected.

"When this is, that is."

"From the arising of this, comes the arising of that."

"When this is not, that is not."

"From the cessation of this comes the cessation of that."

____________________________________________________

Discovery Magazine June 2010 Shing-Tung Yau:

Why the Universe is Really Made of Numbers

Differential Geometry and Topology

Calabi-Yau manifoldsare among the ‘standard toolkit’ for string theoriststoday. He has been very active in the exciting interface between geometryand theoretical physics. His proof of the positive energy theoremin general relativityfinally demonstrated—sixty years after its discovery—that Einstein’s theory is consistent and stable. His proof of the Calabi conjectureallowed physicists—using Calabi-Yaucompactification—to show that string theoryis a viable candidate for a unified theoryof nature.