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"THE 4% RULE"
This rule applies whether you are trading commodities futures, currencies,
markets, or stocks.
The
“BIG MO” is a technique that relies on major shifts in momentum to throw off buy
and sell signals. Momentum trading relies on catching the beginnings –
“catching a falling knife” – (or endings) of a price move. Such an approach is
used by traders interested in bottom fishing, when prices are falling, or
snagging a top in the market, when prices are rising.
The “BIG MO” can be riskier than the trend-following
approach because shifts in momentum can be unproven and short-lived, causing
traders to feel they zigged when they should have zagged. This can often occur
in trending markets. As an example, a momentum trader may try to catch a
countertrend rally – a short-term uptrend going in the opposite direction to the
prevailing downtrend, or a short-term downtrend in a predominant uptrend – only
to have the position fail as the countertrend rally dissipates.
This does not preclude the fact that momentum-based
strategies have a significant advantage when it comes to catching big market
moves early in the game.
The fundamental difference between a trend trader and
momentum trader lies in the fact that a momentum trader will be into a bottom
long before a trend trader based solely on the different signals they employ.
The trend trader will usually wait for confirmation that a new uptrend has
indeed occurred and proven itself. “Show me the money.”
Another subtle difference lies in the fact that as momentum
shifts, and a new trend appears to be under way, most momentum traders will take
profits quickly, unlike trend traders. Alternatively, they may wish to start
using a trailing stop, or totally shift gears and play trend trader for a while
to optimize their potential profits, which means of course riding out the
trend.
Now, let’s have a look at “The 4% Solution” …
Here, I want you to pay close attention, as this idea has taken me a long time
to find, and it for once and for all offers a way to “prove” that a
market has changed direction conclusively.
Here we go … We are talking about a “momentum-shift
indicator.” It uses a shift of 4%, plus or minus 1%, in the weekly closing
price as a sign of a shift in momentum. More specifically, what we are talking
about is observing that the current week’s close is 3-5% higher than the week
before – in the event of an upturn, or 3-5% lower for a downturn . This means
that price action is “probably” reversing its course. Remember, trading is a
business of “probabilities.”
The key here is that this is the first week that you have
observed a roughly 4% differential between the previous week’s close and this
week’s. This is a reasonable indication that momentum is changing.
“The 4% Solution” is a momentum-shift
indicator that provides an early warning that a possible major market move might
just be imminent.
Regarding whether “The 4% Solution” should be 3%, 4%, or
5%, there is no magic here. Both 3% and 5% will do the trick, although the
lower number would increase the number of signals, and the higher number would
decrease the number. More volatile tradables tend to outperform less
volatile ones.
SWING TRADE
This
three-bar pattern is the one that futures traders use. It denotes a change in
the direction of price. The commodity establishes a low price as a swing point.
Once the commodity closes above the high of the low day, that is a change of
direction for an undetermined period. For a detailed explanation of how
this pattern works, please
click here. It works for all markets, not just commodities futures.
CLASSIC
“REVERSAL” WEEK
Record volume and a weekly close toward last week’s high is
consistent with a classic “reversal” week that is found at bottoms. Another
variation sees lower price spikes intraweek followed by a weekly close toward
the high for the week on record volume. Either occurrence could be taken as
significant evidence of a bottom.
There are four other complementary indicators that help
“prove” a bottoming or topping market. They are all explained in great detail
and come with my book ...
When it comes to commodities investment research
and commodity
trading rules, you can learn more about smart trading behaviour by taking a
look at what the top 10% elite traders do at
Big Dogs. Or, even
better still, why don't you just go ahead and buy my book now by clicking
here and save yourself the time.
You're going to end up buying my book anyway. Trust me. Don't wait
until they're all gone.
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BIG
DOGS EXPOSED 