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“First come’s thought; then organization of that thought, into ideas and plans; then transformation of those plans into reality. The beginning, as you will observe, is in your imagination.” Tom ConklinNotice the Circles, these are the turning points for money coming in or going out of DBA.The Basic Money Flow Trading System Check List1.The 5 day Exponential Moving Average2.The 20 day Simple Moving Average3.The TSI – True Strength Index4.ADX / DMI – Directional Movement Indicator 5.Support and Resistance Zones – Supply and DemandThis body of work assumes you have a basic understanding of charts and technical trading You do not need to be an expert with years of experience but a basic understand to get the most of the book.If you do not I would highly recommend you visit and click the chart school tab. While you are there visit their store and pick up a copy of,To Trade or Not to Trade: A Beginner’s Guide 3rd Expanded Edition - Dr. Alexander ElderTrading for a Living – Dr Alexander ElderOn pg xxx I have included a recommended reading list.“The ownership of money, property comes as a result of doing things in a certain way; those who do things in this Certain Way, whether on purpose or accidentally, get rich; while those who do not do things in this Certain Way, no matter how hard they work or how able they are, remain poor.” Wallace WattlesDisclaimers and other stuffAll of the charts displayed here were produced with pro subscriber account at I can’t recommend their service highly enough. With nothing to download and install, and completely web based platform you can access from any computer or device with an internet connection it is a great service. Nothing presented here is original work or proprietary in any way. Everything is something I learned from someone before me who learned it from someone before them. I do not consider myself a professional writer nor am I trying to be. I am simply sharing information I have learned that I believe will benefit you.“You will get all you want in life, if you help enough other people get what they want” Zig ZigglerIntroduction toThe Money Flow Trading SystemThe search for the perfect trading system! The Holy Grail….buy at the bottom and sell at the top! I have spent over a decade searching for a winning trading system. I’ve spent tens of thousands of dollars on books, courses, newsletters, seminars and automated trading systems. On the surface trading seems so simple. Truth be told, trading is actually quite easy. Couple clicks of the mouse and you’re trading. You don’t need a license, permit, or even specialized training. If you have enough money to fund an account you can start your own trading business. This combined with an unlimited profit potential makes trading quiet appealing. You can work from the comfort of your own home, set your own hours and not have to answer to a boss. There are no real barriers or restrictions to getting started. You can live anywhere in the world as long as you have access to the internet you’re in business. Just today, I made a trade on my smart phone while I was jogging.I want you to understand I am not going to tell you what to buy or sell. The markets move to fast for a book to make such recommendations. Honestly, you probably should avoid people who do unless you understand their reason for buying and selling. Did they explain in complete detail the risk of the trade? Did they give you a price point when the buy or sell signal is no longer valid? Did they explain the plan to exit the trade with and book a nice profit?There are hundreds of financial newsletters that will overwhelm you with stock picks. Each will tell you how great their picks have performed. What you don’t see advertised are all the trade predictions that lost their subscribers money. Because of our need as humans to find what we want outside of our selves we fall victim to people who don’t have our best interest at heart. These alert service vendors know their subscribers will only hang around for few months. So every few months they have whole new batch of subscribers to sell their predictions too. This book can set you free from fear based marketing and give you control over your own money. Now with that said there are many good finical newsletters available that can help you narrow down your search and give you plenty of good ideas on what to buy and sell. I subscribe to several financial newsletters that I find very valuable, but I still make sure their trade ideas meet the buy and sell criteria I will present to you in this work. You must maintain complete control of your trading if you ever hope to be successful. The trading system I am going to share with you is the exact system I use to trade in the markets every day. I call it The Money Flow. The Money Flow trading system is a complete rules based trend following trading system that automates the entire trading process. The system when followed consistently eliminates the need to guess or even try to predict market moves. You won’t need to waste your time going through company finances, k-10’s and earnings reports. If you find that you enjoy that sort of thing, by all means enjoy, don’t let me stop you. The system rules cover every aspect so you can execute a successful trade, leaving no room for subjective whims, emotional struggles and personal judgment. Each component of a successful trade is detailed. ?Quantifiable Edge – Positive Expectation of Profitable Trades?Markets – What to buy or sell?Position Sizing – How Much to Buy or Sell?Entering Trades – Buy or Sell Signals?Stops – Trade Risk Management?Exits – Taking Profits like a ProfessionalYou will never again have to fear a market selloff’s because you will have a strategy to profit in any market environment. Many new traders while intellectually agreeing that the market is filled with risk, most won’t accept risk and uncertainty as fact of life in the markets. Trading the markets involves risks, uncertainties and at times completely unexpected events. At times you will lose money. Unless you have a plan for dealing with each of the above situations before entering the trade you are trading by the seat of your pants. It will only be a matter of time before you lose all your money. If you have played much black jack in a casino you know what I am talking about. If you learn the simple rules to the game you can actually do pretty well or at least not lose too much money. Losing as little money as possible is half the battle to making money in the markets. How much you lose is actually one of the few areas of trading in the market you actually have control over. You have no control over how much money you will make in a trade. Re-read that last sentence again and take it to heart. It will help you deal with the daily stress of trading.But you can pre-determine how much you are willing to lose before putting on the trade. I am sure you have heard the expression, “Cut your losses and short and let your winners run”. Isn’t that the advantage professional poker players have over amateur players? They know what hands are worth, the risk of adding to the pot by betting or cut their losses short and throw in their hand. They know when to bet and when not to bet and how much to bet on a particular hand. They are able to calculate their odds of winning the pot then make a calculated risk (bet) if the odds (edge) are in their favor. If the odds aren’t in their favor they know to step aside and not bet good money after bad. Trading is no different. We call this trading with an edge. You must be able to define your edge clearly and simply. Your edge will include a set of rules that will keep you out of losing trades and get you in profitable trades. These rules need not be complicated.New traders are often fixated on getting in to a trade. Yes, proper trade execution is important; but the professional traders know when you get out of a trade is more important. I will show you exactly when to exit a trade to put the “odds” in your favor. Another words you will trade with a quantifiable edge!Last thing you want to do is follow advice like, ‘You can’t go broke taking profits”. While maybe you won’t go broke taking profits, but you sure won’t get rich taking profits to early either. You want to let your wining trades run and continue to make you money until the trade is really over. The big winners will take care of the many small losses you will have. Yes, I said the many small losses you will have. The Money Flow Trading system will insure you only take a small loss on any one trade.You need a quantifiable way to know exactly when a price trend has started and when it has ended. Price will tell you when the trend has really run its course. You want to let price action decide when to close the trade and take our profits. The last thing you want to do is take the advice of a talking head on CNBC or an article on the internet. You want to listen and read so you stay informed and find new ideas, but please don’t make your buy and sell decisions from their advice. They are in the business of playing with your emotions so that you will watch their commercials and read their articles.Technical analysis is the main tool many traders use to determine the direction of price. As a trend trader we let price dictate our actions. The majority of traders using technical analysis attempt to predict the direction of future price, but there is a better way to use technical analysis. Predictive technical analysis is based on the idea that you can read charts using indicators, oscillators, price patterns and predict market direction. These second and most quantifiable method of technical analysis is a reactive approach. This method of technical analysis doesn’t attempt to predict but reacts to price. Price itself dictates the actions to be taken. It doesn’t try to guess or get ahead of the market but respond to it. We want to manage our risk and participate in both a rising and falling market. By studying price, then only reacting when a clear signal pattern presents itself, we gain an edge. I will show you how to spot these signals as soon as they occur.The Money Flow Trading System Signaled Sell oil short in the high $90 then covered in the short trade in the $40. One large oil producer covered their hedges in the $70 range because they were sure the bottom. I think they need a better trading systemThe Money Flow Trading System produces a $120 profitable trade in 2 months.Chapter One Building a Complete Trading SystemGood trading plans will also provide guidance on trading strategies for stop-losses. Diversification and flexibility are other important factors to consider.A complete trading system is a trading system that covers every possible aspect of trading and leaves virtually no decision to subjective and emotional whims of the trader. Chances are you think that type of trading system is a black box or green light read light software program. I am going to show you a completely automated, rules based trading system that covers every aspect you need to be a successful trader. You will know your edge, the potential risk on each trade and nothing will be left to chance. You will catch every trend regardless of direction of the markets you follow!I won’t deny that some people seem to have a rare natural ability to trade the markets. They have an intuition as to the next move the market might make. Unfortunately I am not one of those people, and I am assuming neither are you or you wouldn’t be reading this book. Successful trading is a cumulative process that requires a commitment over time, in which you will progress in stages from novice to expert. This process takes place over years not months. There are no shortcuts. If you are looking for a short cut you are approaching trading completely wrong. New traders think the secret to successful trading is good buy and sell signals. They are totally unprepared for the psychological aspects of trading. It is hard to learn from books the mental and emotional issues related to dealing with risks, cutting losses and letting profits run. Creating a rule based trading strategy will help deal with these issues. Most successful traders use some type of mechanical trading system to help deal with these issues.A good mechanical trading system automates the entire decision making process of trading. To trade successfully you must make many decisions quickly and consistently. You must trade with an edge. We can’t reply on how we feel that day or how we think the market will react, or even worse some “guru” on CNBC. Using the trading strategy I call the Money Flow, you will be able to look at a chart and within minutes have a detailed trade plan. You won’t need a “guru” you will be your own guru! The rules based trading system makes it easier for the trader to execute trades consistently because there is a predetermined set of rules which specifically define exactly what should be done. The rules define the trader’s pre-determined edge. When I was a combat Engineer in the army we preformed many simulated combat task. These tasks included putting in and taking out landmine fields to arming and firing the Bangalore torpedo. We preformed these drills exactly the same way each time. This was to insure that when we preformed the same task under the pressure of live combat situation we would perform the task correctly each time with little time for thought. Believe me trading is a war! Extremely smart people are trying to take your money. Some of the smartest people in the world are trading in the markets. They have much more capital, faster computers and access to much more information then you ever will. You will never consistently discover information the large institutional traders don’t already know, so don’t waste your time trying. You must trade with a statically edge not a feeling or hunch.We must trade with a statistically edge to have any hopes of consistently taking home profits. If you know that your trading system makes money over the long run, it is easier to take the next trade even if the last 2 were losers. If you were to rely on your own chart reading to execute a trade, you will find yourself executing trades out of pre-determined basis or even worse out of boredom. Often, discretionary traders become obsessed with a particular market view and then become prone to panic and indecision when that market view falls apart. All of which is the exact opposite of how the most successful traders operate.The more predictive you try to trade the more frustrated you will become. We are raised to work hard and make good decisions. We are taught that being right is good and being wrong is bad. The idea of just going with the flow (trend) can be extremely hard for many traders. The urge to make something happen can be hard to overcome. The money is made just sitting and waiting and letting your positions run.People who are bullish on the markets seem to find bullish patterns. Likewise those who are bearish find patterns and reasons that agree with their bearish bias. I can’t caution you enough against projecting your personal views and opinions of the economy or a particular companies stock onto the market. What I am suggesting is to separate the two. Let price tell you when to buy, sell or step aside. We are always trying to trade in the direction of the money flow not in our opinions.I want you to follow a group of your favorite stocks, ETF’s, currencies or commodities each day. You can’t miss a single day! You must be disciplined enough to check the charts every single day. If you aren’t you need to try something different. If you can’t commit to checking your markets, ETF’s and stocks each day you have no chance at being successful as a trader. The competition will eat your lunch. Always remember you are trading against the smartest people in the world. This alone should persuade you against a predictive style of trading. Unless you’re confident you’re smarter than the college educated, intuitional career Wall Street trader, you want to trader a system that will put the edge in your favor. All we need to be consistently profitable is small edge and to consistently apply that edge each day.This trading strategy is to wait for the perfect set up. The set up that puts the edge in your favor. You will know exactly what your risk of loss before you execute the trade. You will know when to enter and most important when to exit the trade. I want you to jump on to the beginning of a new trend and ride that trend until it ends maximizing your profits along the way while limiting your risk.Chapter TwoMoving Averages -The Foundation of the Money Flow Trading SystemA indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random price fluctuations. A moving average (MA) is a trend-following or lagging indicator because it is based on past prices. The two basic and commonly used MAs are the simple moving average (SMA), which is the simple average of a security over a defined number of time periods, and the exponential moving average (EMA), which gives bigger weight to more recent prices. The most common applications of MAs are to identify the trend direction and to determine support and resistance levels.?Let me start this chapter by saying this is not an exhaustive detailed explanation of technical analysis. There have been hundreds if not thousands of books that will do much better job if this is of interest to you. At the back of this book I give a recommend reading list. My point is to share with u the tools I have found that actually work in real world of trading. You will find many indicators that look great on a historical chart. Unfortunately you can’t trade in historical past so you have to trade the future using the right side of the chart. For every indicator I mention there will be many other similar options. I prescribe to a very simple method of trading. You don’t need to know the complicated mathematically calculations that are involved in each indicator mentioned. I have spent countless hours in research into the trading tools I use. I have complete faith in their ability to keep me on the right side of the trade. Long in a rising market and short or in cash in a declining market.The most effective tool we have for determining trend direction and value is the moving average. The moving average is simply a picture of price. It helps us discover value. The moving averages can give us insight into the short, intermediate and long term picture of the market. We can gain insight into the direction of the money flow into the market, individual stocks or a commodity. An important concept to understand about the moving average is that it is a lagging indicator. It’s what price does at or near the moving average was most concerned with. Price is more important than the moving averages itself. I like to think of moving averages as moving trend lines. Theses moving trend lines give us a visible valuable picture of support and resistance zones and even buy and sell points.We will be concerned with three moving averages. Each serves a different purpose and gives us a different view of the market. * Short Term – 5 EMA is our short term view of price action and acts as our trigger, * Intermediate Term –20 SMA is our one month view of price action and our foundation line* Long Term – the 50 SMA is our long term consensus view of the market. Combined together these three moving averages give us clear signals to buy, sell, or even when to take profits. These three moving lines can quickly give us a clear picture of the strength of trend and direction it is moving. When the three moving averages line up in numerical order, 5, 20, 50 traders who are holding long positions are making money. See chart of Google on page 17. When the moving averages begin to cross each other and get out of order you have a market that is confused or changing directions. Either way it’s a warning sign.The most important moving average for The Money Flow Trading System is the 20 SMA. It is calculated by adding the closing prices for the last 20 trading days and then dividing by 20. It is called moving because only the last 20 days are used in the calculation. Each new trade day data is added (the last day removed) and thus the average moves forward each trading day. There are several different types of moving averages. We will only focus on simple and exponential. The simple moving average weights each day evenly when calculating. Whereas an exponential moving average places greater emphasis on the recent trading action by double weighting the newest data.The Money Flow Trading System uses a simple 20 SMA. As a general rule if price is above the 20 SMA we look to trade from the long side, if price is below the 20 SMA we look to trade to short side or go to cash. The 20 SMA helps to smooth out the price data of the last month of trading. The market is generally open for trading 20 days a month. With a quick glance of a chart you can get a general view of the side of the market you should be working on. Should you be long or short? The 20 SMA can quickly point you in the correct direction. The 20 SMA doesn’t predict price direction, but helps define the current direction. There is an old Wall Street saying, “The trend is your friend until it ends”. The 20 SMA helps you define that trend.I will discuss how to tell when a trend ends in later chapter. The point is, once a trend has presented itself, we stay with it until we receive clear indication that it has ended. You must give it the benefit of the doubt. Similar to Newton’s law, “objects in motion tend to stay in motion”. A Trend in motion tends to stay in motion until it isn’t. Since you aren’t in the predicting business, you simply react to prices based on its reaction to the 20 SMA. The moving averages allow us to respond to price, instead trying to “guess” direction and often end up missing the move. The benefit of the doubt goes to the current trend until the moving averages begin to break their numerical alignment. As long as they stay in order there is no reason to try and second guess the market and make a prediction. Isn’t that refreshing? Notice the Alignment of the three moving averages in numerical Order 5 EM, 20 SMA, 50 SMA this is extremely bullish and should NEVER be considered for a short position. Stay Long!fMoving averages smooth the price data to form a trend following indicator. They do not predict price direction, but rather define the current direction with a lag. Moving averages lag because they are based on past prices. Despite this lag, moving averages help smooth price action and filter out the noise. They also form the building blocks for many other technical indicators and overlays, such as Bollinger Bands, MACD and the True Strength Index. The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). These moving averages can be used to identify the direction of the trend or define potential support and resistance levels.The 5 Day Exponential Moving Average – The Trigger!The Money Flow trading system uses the 5 day EMA as a trigger or signal. Because the 5 EMA is a short period of time, it has little value as a standalone trading tool. It represents the average price of the last 5 trading sessions. Notice how close the 5 EMA hugs price bars?Exponential moving averages reduce the lag by applying more weight to recent prices. The weighting applied to the most recent price depends on the number of periods in the moving average. There are three steps to calculating an exponential moving average. First, calculate the simple moving average. An exponential moving average (EMA) has to start somewhere so a simple moving average is used as the previous period's EMA in the first calculation. Second, calculate the weighting multiplier. Third, calculate the exponential moving average. The formula below is for a 5-day EMA. “Success in life is becoming what you want to be; you can become what you want to be only by making use of things, and you can have the free use of things only as you become rich enough to buy them” Wallace WattlesThe Lag FactorSince moving averages are a lagging indicator, the longer the moving average, the more the lag time of that average. A five day exponential moving average will hug prices quite closely and turn shortly after prices turn. Short moving averages are like speed boats - nimble and quick to change. In contrast, a 100-day moving average contains lots of past data that slows it down. Longer moving averages are like ocean tankers - lethargic and slow to change. It takes a larger and longer price movement for a 100-day moving average to change course.The Money Flow Trading System attempts to combine the quick movements of the shorter term moving average (5 EMA) with the longer term moving average (20 EMA).Simple vs Exponential Moving AveragesEven though there are clear differences between simple moving averages and exponential moving averages, one is not necessarily better than the other. Exponential moving averages have less lag and are therefore more sensitive to recent prices - and recent price changes. Exponential moving averages will turn before simple moving averages. Simple moving averages, on the other hand, represent a true average of prices for the entire time period. As such, simple moving averages may be better suited to identify support or resistance levels.The Money Flow combines the power of both the short term 5 EMA and combines it with the power of a longer term simple moving average like the 20 SMA. “No man, therefore is poor because nature is poor, or because, there is not enough to go around. Nature is an inexhaustible storehouse of riches; the supply will never ever run short.” Wallace. Wattles20 Day Simple Moving AverageNotice how price moves further way from the 20 day SMA compared to the 5 EMA which hugs price? The 20 day SMA gives us visual picture of a full month of trading. Quick rule of thumb, if price is above the 20 SMA prices are trending up, if price is below prices are trending down.Two moving averages can be used together to generate crossover signals. In Technical Analysis this is often referred to double crossover method. Double crossovers involve one relatively short moving average (5 EMA) and one relatively long (20 SMA) moving average. As with all moving averages, the general length of the moving average defines the timeframe for the system. A system using a 5-day EMA and 20-day SMA would be deemed short-term. A system using a 50-day SMA and 200-day SMA would be deemed long-term.A bullish crossover occurs when the shorter moving average crosses above the longer moving average. This is also known as a buy signal. A bearish crossover occurs when the shorter moving average crosses below the longer moving average. This is known as a sell signal.Moving average crossovers produce relatively late signals. After all, the system employs two lagging indicators. The longer the moving average period used the greater the lag time in the signals given. These signals work great when a good trend takes hold. However, a moving average crossover system will produce lots of whipsaws in the absence of a directional trend.There is also a triple crossover method that involves three moving averages. Again, a signal is generated when the shortest moving average crosses the two longer moving averages. A simple triple crossover system might involve 5-day, 10-day and 20-day moving averages. The foundation of The Money Flow Trading System is the 5 day EMA and 20 day SMA crossovers. These two moving averages crossing each other give us our basic buy and sell signals.Sometimes a stock will just flow perfectly with The Money Flow Trading System. On page 22 there is a chart of Netflix. Starting in March and ending the day of this writing, $234 per share profit compared to $100 if you just bought and held it though the up and down cycles. This is over 2x the profit over the same period with only 4 trades. “Whatever maybe said in praise of poverty, the fact remains that it is not possible to live a really complete or successful life unless one is rich”. Wallace WattlesThe Money Flow Trading System produced over $100 per share profit more than a simple buy and hold strategy during the same time period.Notice the Whipsaws that occurred in May and June. The 5 day EMA crossed the 20 day SMA only within a day or two to reverse direction causing the trade to get stopped out for a loss. The whipsaw is an avoided part of trading. It happens. Just consider it a cost of doing business. Notice the first trade and the last trade should have produced more than enough profits to offset any small losses caused by the two whipsaws. But both of those whipsaw trades if you had then immediately changed directions and went short the stock would have resulted in two winning trades.This is picture perfect trade, and is still open as of this writing. During this entire climb financial media insisted we must have a correction. I listened to analyst after analyst come onto CNBC and Bloomberg calling for a correction. I simply waited for The Money Flow Trading System to tell me the trend had changed.Again this is in current time as of this writing and a real trade I am in. While the major market indexes haven’t corrected, small caps have started to pull back. Notice two things, first The Money Flow gets you safely out of the trade in profit. Second notice the 50 SMA (yellow) moving average. It often acts as a moving support and resistance zone. Again Notice how price bounces off or finds support on the longer term 50 day simple (yellow line) moving average. This is also referred to as a demand zone. An area of price where buyers find value and start buying, this buying pressure stops price from falling any lower. The Money Flow Trading System doesn’t use the 50 SMA directly, it does recognize that other trades do assign it value, and it does give a visual picture of the longer term trend.Longer term moving averages like the 50, 100 and 200 tend to work as moving zones support and resistance so it’s a good idea to keep one eye on them. Examples of 5/20 crossover signalsWhile first couple circles resulted in break-even or small profit the circle to the far right has you in a trade with an easy $7 profit and still open. The 5/20 moving average cross over is not perfect, but it does give you an edge. It puts you on the side of momentum and you’re not left to guessing. We will discuss what you can do to add little more precise timing shortly.ConclusionsThe advantages of using moving averages need to be weighed against the disadvantages. Moving averages are trend following, or lagging, indicators that will always be a step behind. This is not necessarily a bad thing though. After all, the trend is your friend and it is best to trade in the direction of the trend. Moving averages insure that a trader is in line with the current trend. Even though the trend is your friend, securities spend a great deal of time in trading ranges, which render moving averages ineffective. Conversely, they do not work well in choppy or non-trending markets. When the markets are non-directional whipsaws can result in many small trading losses. Don't expect to sell at the top and buy at the bottom using moving averages. As with most technical analysis tools, moving averages should not be used on their own, but in conjunction with other complementary tools.Perfect Trades on big moves with AppleTake a look at Facebook (FB) here, really big move followed by a short period of indecision causing us to get whipsawed several times. This will happen, so get comfortable with it. The longer you trade the better you will get at handling these situtions if you don’t let them phscyology distrupt you.New Buy Signal – Delta Airlines (DAL) is one of the best airline stocks as of this writing. Here is a signal I received while writing this book.It is very important for The Money Flow trading system to work that you stick with and follow the same stocks each day. You must not jump around chasing stocks. Yes always be on the look out for new stocks but be very selective of the stocks you add to your follow list.Gold and Silver can really drive people crazy. Gold bugs always make a case why the precious metal should go up. Hey I am a gold bug but look to the charts for your buy and sell signals. This chart shows 2 big winning trades in silver that I made the year of writing this book, and were safely in cash (or short) in the big sell off between the trades.Why use 20 sma as our foundation to the Money Flow System? Easy, it Works! Just notice the Sell Signals how much money you would have saved by selling all or part of your gold holdings now we see a new signal developing $80 lower than the sell signal.The Money Flow Trading System caught a 140% return in Sprint in 4 months! Notice price dipped below the 20 SMA 3 times during this huge move. The trigger line (5 EMA) kept us on the right side of the trade. The 20 SMA serves as the older longer term trend and the shorter 5 EMA re-acts quickly to the latest price information, as our trigger to possible change in trend.If the shorter 5 EMA moving average crosses over the longer term moving average, then a new uptrend is taking place and we look to establish a new long position. Likewise, the shorter 5 EMA crossing under the longer term 20 SMA signals a new down trend is developing and we should look to establish short potions or go into cash.Don’t Trade them But Respect Them – Other Moving Averages to ConsiderTwo moving averages you need to respect because other traders and long term investors use them. The 50 MA is a very popular moving average for traders and the 200 MA is a very popular moving average that imitational investors utilize to determine long term bullish and bearish positions. Notice how the 50 SMA acts as overhead resistance on the chart above.Hawaiian Airlines has been great trading vehicleThis HA chart clearly shows how the 50 SMA first acted as support for the uptrend then as overhead resistance as the stock rolled over and started to move in a down trend.The downward sloping 50 SMA acts as overhead resistanceThe Money Flow Trading System can be used to see the big picture, the long term trend. We want to avoid going short when the long term trend is bullish. The short side of trading is much more dangerous than trading from the long side, so we want to only take short trades when the long term trend is bearish. The weekly chart can be that filter.Notice, the long term down trend followed by a powerful up trend on this weekly chart of the ETF that reflects the price of AIG Coffee Total Return Sub-Index. The circles show the turning points signaled by the money flow trading system.Chapter ThreeTrue Strength Index (TSI)A technical momentum indicator that helps traders determine overbought and oversold conditions of a security by incorporating the short-term purchasing momentum of the market with the lagging benefits of moving averages. Generally a 25-day exponential moving average (EMA) is applied to the difference between two share prices, and then a 13-day EMA is applied to the result, making the indicator more sensitive to prevailing market conditions. After the data is smoothed, some calculations are done to make the indicator fall in a range from +100 to -100, or from +1 to -1.A signal line (7-day EMA) is usually added - as it is to the moving average convergence divergence indicator - to help identify reversals. In addition, values of -25 and +25, like the levels of 30 and 70 used in the relative strength index, can also be used to identify levels where a security is overbought or oversold. The true strength indicator is a variation of the relative strength index.?A key component to The Money Flow Trading System is a little used indicator TSI. Developed by William Blau and introduced first in Stocks & Commodities Magazine, the True Strength Index (TSI) is a momentum oscillator based on a double smoothing of price changes. Even though several steps are needed for calculation, the indicator is actually pretty straightforward. By smoothing price changes, TSI captures the ebbs and flows of price action with a steadier line that filters out the noise. As with most momentum oscillators, chartists can derive signals from overbought/oversold readings, centerline crossovers, bullish/bearish divergences and signal line crossovers.I don’t even begin to understand the math calculations for TSI. Thank goodness for computers. The good news is you don’t need to under it, no more then you need to know how to work on your car to drive it. You just need to understand what TSI is telling you.The True Strength Index (TSI) can be divided into three parts: the double smoothed price change, the double smoothed absolute price change and the TSI formula. First, calculate the price change from one period to the next. Second, calculate a 25-period EMA of this price change. Third, calculate a 13-period EMA of this 25-period EMA to create a double smoothing. The same double smoothing technique is used for the absolute price change. After these initial calculations, divide the double smoothed price change by the absolute double smoothed price change and multiple by 100 to move the decimal two places. I know it’s a mouthful, no need to memorize it, but you do want know what it is doing.InterpretationThe True Strength Index (TSI) is an oscillator that fluctuates in positive and negative territory. As with many momentum oscillators, the centerline defines the overall bias. The bulls have the momentum edge when TSI is positive and the bears have the edge when it's negative. As with MACD, a signal line can be applied to identify upturns and downturns. Signal line crossovers are, however, quite frequent and require further filtering with other techniques. Chartists can also look for bullish and bearish divergences to anticipate trend reversals; however, keep in mind that divergences can be misleading in a strong trend. TSI is somewhat unique because it tracks the underlying price quite well. In other words, the oscillator can capture a sustained move in one direction or the other. The peaks and troughs in the oscillator often match the peaks and troughs in price. In this regard, chartists can draw trend lines and mark support/resistance levels using TSI. Line breaks can then be used to generate signals.Center Line CrossoverThe centerline crossover is the purest signal. The double smoothed momentum of price changes is positive when TSI is above zero and negative when below zero. Prices are generally rising when TSI is positive and falling when TSI is negative. The example below shows Nike (NKE) turning bullish in September 2011 as TSI moved into positive territory (green line). The stock remained bullish as the uptrend extended into the spring of 2012. Nike turned bearish when TSI turned negative and the stock broke support.Trend LinesTSI often produces support and resistance levels that chartists can use to identify breakouts or breakdowns. The example below shows Citigroup (C) with TSI establishing support in March. The indicator broke support in early April and this breakdown foreshadowed a significant decline into May. TSI then rebounded in June and formed a flat consolidation into July. This consolidation resembled a falling flag and TSI broke above the trend line in late July. This breakout preceded further strength into August.Overbought/OversoldOverbought and oversold levels for the True Strength Index vary according to a security's volatility and the period settings for the indicator. The TSI range will be smaller for stocks with low volatility, such as utilities. The TSI range will be larger for stocks with high volatility, such as bio-techs. Using shorter time periods for the smoothing will result in a wider range and choppier indicator line. Longer time periods will result in a smaller range and smoother line. It is the classic technical analysis trade off. Chartists get quicker signals and less lag with shorter periods, but this comes at the expense of more whipsaws and false signals. Longer periods reduce the whipsaws, but these signals come with more lag and a poorer reward-to-risk ratio.Signal Line CrossoversThe last parameter in the TSI setting is the signal line, which is simply an exponential moving average of TSI. Signal line crossovers are by far the most common signals. This is the signal The Money Flow Trading System uses. In an effort to reduce signals and noise, chartists should consider increasing the settings for TSI or the price chart settings. You would interpret this crossover the same as you do the 5 EMA crossing the 20 SMA. The most powerful moves tend to happen at extremes. Bullish crossover in the example above happens in the bearish zone.Again in chart below notice see the strongest bullish moves happen when the TSI crossover happens at the bearish extreme side of the center line.Take your time with TSI. The most important thing to understand is the crossover in the opposite side extreme of the centerline is the most powerful. Over time you will be able to read more into what this powerful indicator is telling you. It will flash warning signs. Yes, at times those signs are wrong. That is why it’s only one part of our trading dash board. Learning to read the TSI indicator will help you lock in more profits while controlling risk. Let’s look at few examples.Here is a current time real trade we have already looked at. This is small caps ETF IWM. Here is what I want you to notice. The TSI signaled a bearish (sell) signal the day before the 5/20 crossover signaled a bearish (sell) signal. I have used blue lines to show you were the bearish crossovers occurred. If you have profit on this trade that is your signal to lock in some of that money.You might be thinking, “If TSI signals first, I’ll just use it for my buy and sell signals”. Yes, you could do this, but because the TSI also acts as an oscillator (identifying overbought and oversold price conditions) it can go bearish or bullish when prices go on real tear. Sometimes the market overshoots in price to the upside and to the downside. I will take some profits when TSI signals, selling ? my position, but I wait for the 5/20 crossover before closing the position.Chapter FourThe Average Directional Index / Directional Movement IndicatorThree lines compose the Directional Movement Indicators (DMI): ADX, DI+ and DI-.?The Average Directional Index (ADX)?line shows the strength of the trend. The higher the?ADX?value, the stronger the trend. The Plus Direction Indicator (DI+) and Minus Direction Indicator (DI-) show the current price direction. When the DI+ is above DI-, current price momentum is up. When the DI- is above DI+, current price momentum is down.There are hundreds if not 1,000’s of indicators available to traders today. Indicators as the name implies give traders indication of possible directional price change. Virtually all indicators are calculated using some moving average based formula. This means they are calculated using past data. I don’t use indicators in predictive nature but as a confirmation of the money flow. The indicator will give us indication if money is flowing in or out of the product. Do we want to buy, sell or lock in profits? Indicators can give you more insight then just buy and sell signals.The Money Flow Trading System uses two primary indicators. Each indicator was originally created as a standalone trading system. The indicators are much more useful when combined with other aspects of the money flow trading system.The Average Directional Index & Directional Movement Indicator or ADX/DMI for short, I know that is a mouthful. This indicator is actually two indicators in one. It was developed by trader named Welles Wilder. Most modern trading software platforms will refer to this indicator as simply ADX.The indicator was originally created to work with commodities but will work equally well with stocks and ETF’s. ADX measures trend strength without regard for direction. ADX helps objectify our trend analysis. A rising ADX line signal’s strength, a declining ADX line signals a trend that is losing momentum. Again this line is NON-directional. When the ADX line breaks outside the DMI lines the indicator is telling you the market is overbought and you should consider taking some profits.The DMI component signals trend direction. DMI consist of two moving lines. Very similar to our moving averages we discussed in last chapter. When the positive line (often green) crosses the negative (often red) signals a bullish move. When the negative –DMI crosses above the positive DMI it signals a bearish move is bined together ADX/DMI gives us very useful information. It gives us insight into the strength of the trend and the possible direction of the trend. Since we trade in the here and now and not in the predictive future, ADX/DMI keeps us on the right side of the trend. If markets are moving up we are trading from the long side, and if markets are moving lower we are trading to short side or safely in cash.Mr. Wilder created ADX/DMI indicator as a complete trading system. When the positive DMI crossed above the negative DMI a long position would be entered. The position is reversed when the negative -DMI crossed above the positive DMI. There is one additional rule to the DMI trading system, the proper placement of stop loss order. Mr. Wilder called this the Extreme Point Rule. On the day the DMI lines cross each other you would enter a protective stop loss order.The Extreme Point Rule – The Low of the cross over day is the stop loss for the long positions and the high of the cross over day is the stop loss for short positions.These points of crossover for the DMI are areas of indecision. Mr. Wilder referred to them as critical points. These are areas of price congestion that often precede extreme price moves.I first began using the ADX/DMI because of a future trader I met. He had a system that used a collection of 10 indicators and oscillators. It seemed to me the easiest to interpret. At one point I mentioned to this trader that all his winning traders were confirmed by ADX/DMI, why not just use that indicator alone? He explained to me that the markets weren’t that simple. Thinking back now I think he made the process little more complicated then it needed to be. I spent years trying to become a successful trader. I bought courses, attended seminars, spent countless hours trying to combine indicators, oscillators, and chart pattern into a winning trading system. Then one day I was analyzing some of my biggest winning and losing trades to see if I could find any commonalities. It hit me like a ton of bricks. Every single winning trade was signaled by the ADX/DMI crossover. I would encourage you to examine a few of your losing trades and see if you don’t come to the same conclusion.By simply giving the benefit of the doubt to the DMI indicator I could have made much larger profits, cut my losses and had a reason for my trade decisions. The ADX/DMI actually tracked the direction of the money flow into the market. I had to learn more about this powerful indicator. Welles Wilder JR. book, “New Concepts in Technical Trading Systems” is must read for anyone using this amazing indicator. There are hundreds of technical indicators available for analyzing price movement. I believe ADX/DMI is one the best trend following indicators available. I believe most traders use far too many indicators, making their trade decisions to complicated. Like many futures trading friend they think more is better. Keeping trading simple is a serious challenge for traders today. Information is moving at speed faster than we can take it in. I believe the ADX/DMI indicator is the best indicator for identifying changes in price trends and allows traders to quickly be able to position their trades on the winning side of that trend.Notice the Green+ DMI crossing the – DMI Red line – This is Buy Sell CrossoversThe DMI crossovers system works just like a moving average crossover. The crossover is the signal of a change in trend. When the + DMI crosses the – DMI a Bullish buy signal is generated. The reverse applies, when the – DMI crosses below the + DMI a Bearish sell signal is generated.When the ADX line breaks the bands of the DMI lines it signals the market is becoming overbought. Again we don’t use this indicator alone but as part of a system. Each of those parts tell us something and help us trade more effectively. Chapter FiveSupport and Resistance or…supply and demandSupport the price level which, historically, a stock has had difficulty falling below. It is thought of as the level at which a lot of buyers tend to enter the stock often referred to as the support level. This can also be referred to as demand zone.Resistance is a chart point or range that caps an increase in the level of a stock or index over a period of time. An area of resistance or resistance level indicates that the stock or index is finding it difficult to break through it, and may head lower in the near term. The more times that the stock or index has tried unsuccessfully to break through the resistance level, the more formidable that area of resistance becomes. This can also be referred to as a supply zone.The idea of support and resistance is one of the most fascinating concepts in technical analysis. Once you understand it, price action will begin to make more sense. Try to keep this concept in mind, price has memory. Areas where buyers have stopped a price decline in the past often repeat. The reverse applies for resistance.The Money Flow Trading System is a trend following system. I believe this is the most profitable way for trading the public markets. With that said however, there are times when trend following methods will give back portions of its gains and price will go into a non-directional sideways movement. Price can appear to become range bound. This non-directional price movement is often referred to as price being in a “trading range”. I believe understanding support and resistance zones will help you identify these possible trading ranges quickly allowing you to lock profits or decreases losses.Support and ResistanceSupport and resistance represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying. These terms are used interchangeably throughout this and other articles. As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control.What Is Support?Support is a price zone where buyers see value and step in and start buying up shares stopping the further decline of prices. You can think of these as value zones. Price is lower enough to attract buyers who see value around the same price each time. This Creates visual area of support for price declines.Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.Support does not always hold and a break below support signals that the bears have won out over the bulls. A decline below support indicates a new willingness to sell and/or a lack of incentive to buy. Support breaks and new lows signal that sellers have reduced their expectations and are willing sell at even lower prices. In addition, buyers could not be coerced into buying until prices declined below support or below the previous low. Once support is broken, another support level will have to be established at a lower level.Here example of short term support and resistance levels in real tradeIn the chart above is breaking out above 3 month resistance level. Also make note of the 5 EMA and 20 SMA. The moving averages are lining up perfectly in order. The 5 MA, 20 MA with the 50 SMA acting as support and starting to turn up further confirming the breakout. I went long at $305 when the 5 EMA crossed over the 20 SMA in late May. $40 to the positive!What Is Resistance?Resistance is a price zone where sellers see prices as to high (over valued) and sell their shares thereby stopping the advance of higher prices. You hear this referred to as overhead resistance.Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. The logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.Resistance does not always hold and a break above resistance signals that the bulls have won out over the bears. A break above resistance shows a new willingness to buy and/or a lack of incentive to sell. Resistance breaks and new highs indicate buyers have increased their expectations and are willing to buy at even higher prices. In addition, sellers could not be coerced into selling until prices rose above resistance or above the previous high. Once resistance is broken, another resistance level will have to be established at a higher level.Where Is Resistance Established?Resistance levels are usually above the current price, but it is not uncommon for a security to trade at or near resistance. In addition, price movements can be volatile and rise above resistance briefly. Sometimes it does not seem logical to consider a resistance level broken if the price closes 1/8 above the established resistance level. For this reason, some traders and investors establish resistance zones.Real money trade I shorted DBA in July, when 5 EMA crossed Below the 20 SMA then when support was broken (blue line) I added to my position. This broken support now becomes overhead resistance. This ETF is a basket soft commodities, sugar, corn, wheat, soybeans etc. Commodity prices tend to have much longer trends then equities. This broken support will become overhead resistance when the DBA starts to trend up. Price has memory and so must we as traders.Trading RangeTrading ranges can play an important role in determining support and resistance as turning points or as continuation patterns. A trading range is a period of time when prices move within a relatively tight range. This signals that the forces of supply and demand are evenly balanced. When the price breaks out of the trading range, above or below, it signals that a winner has emerged. A break above is a victory for the bulls (demand) and a break below is a victory for the bears (supply).Support and Resistance ZonesBecause technical analysis is not an exact science, it is useful to create support and resistance zones. This is contrary to the strategy mapped out for Lucent Technologies (LU), but it is sometimes the case. Each security has its own characteristics, and analysis should reflect the intricacies of the security. Sometimes, exact support and resistance levels are best, and, sometimes, zones work better. Generally, the tighter the range, the more exact the level. If the trading range spans less than 2 months and the price range is relatively tight, then more exact support and resistance levels are best suited. If a trading range spans many months and the price range is relatively large, then it is best to use support and resistance zones. These are only meant as general guidelines, and each trading range should be judged on its own merits.ConclusionPrice is drawn to the support and resistance zones like a magnet, often visiting them many times. The more these zones are tested by price returning to them the more important they are. Once broke they flip flop. Broke resistance now becomes support, while broken support becomes overhead resistance. These zones only have meaning because the thousands of traders around the world give them meaning. Traders remember what happen last time a stock reached this price so they will anticipate it happening again. This is why broken support our resistance is so important. If a zone is broken it should be confirmed by the 5/20 crossover, TSI and the ADX/DMI.Identification of key support and resistance levels is an essential ingredient to successful technical analysis. Even though it is sometimes difficult to establish exact support and resistance levels, being aware of their existence and location can greatly enhance analysis and forecasting abilities. If a security is approaching an important support level, it can serve as an alert to be extra vigilant in looking for signs of increased buying pressure and a potential reversal. If a security is approaching a resistance level, it can act as an alert to look for signs of increased selling pressure and potential reversal. If a support or resistance level is broken, it signals that the relationship between supply and demand has changed. A resistance breakout signals that demand (bulls) has gained the upper hand and a support break signals that supply (bears) has won the battle.rt“Successful, wealthy people are those who have specialized knowledge a burning desire and decisive action.” Loral LangemeierLet’s review at this point. We are looking to capture profits out of price trends. I need to stress at this point you must stay with the products you are trading. I am using product for a stock or commodity. I like to think of myself as running a retail store. I want to buy low (whole sell) and sell high (retail). Remember the Netflix example we looked at? That trade only works if you follow the daily price moves every single day. Many people hop from stock to stock. DON’T do this! I can’t stress enough that you can only know if your trading system works if you stick with it over time.Many people have excellent trading technique and give up because they have many losing trades in a row. Often they just picked the time their system fails with the stock they picked. So instead staying with it, they look for a new trade, a new stock, then that one loses.This idea seems so simple, yet many people don’t realize it. I was one those people. Then one day doing some back testing on various charts I couldn’t believe how well my trading system did in the past but was losing money in real time. Then I realized, if I would have continued to trade the same stocks over and over my system made money. Limit your world to 5-10 products to trade at first. If your account is larger then you can increase the number of products you buy and sell. I follow 40-50 products. If this sounds like a lot, it really isn’t. Remember our backbone to The Money Flow Trading System? I can look at a chart in seconds tell you buy or sell.Just use common sense with your account size and time you can put into trading to determine the number of products you trade. One you have defined your trading edge it’s time to put that edge to the test in the markets. You have to decide what to buy and sell. There are many trading products available to traders today. These includeIndividual stocks, currencies, commodities, sector ETF’s and market Index ETF’s. You want to trade a wide range of market products. You don’t need to limit yourself to just stocks, or just commodities. Since we don’t know what sectors of the market will trend the best we want to position our self to profit from them all!New traders are often thought to build a small stock portfolio of 4-10 stocks. To diversify these stocks picks across different sectors of the market. This diversification will then limit their overall risk. In years past this was good advice. Today’s market though is highly correlated because of ETF’s. These electronically traded funds groups of stocks into a basket. By purchasing this one product you can take trading positions in entire sectors, index or commodity. A good example would be an ETF like the GDX. This product holds many gold mining stocks. This limits your single stock risk by spreading it across an entire sector of similar stocks.The ETF allows a trader to easily trade a particular them or sector. If you think housing stocks are set to rally but you’re not sure which stock will perform the best. You also might not want the counter party risk associated with owning a single stock. An ETF allows you to position yourself to profit from a particular sector and spread your risk across a basket of stocks. The effect of this new trend of ETF buying has caused the markets to be more correlated, rising and falling together.There are literally thousands of ETF products you can trade. As you go through your carrier you will build your own list of favorite go to ETFs. I would suggest you start with the most popular stocks and ETF’s. These are the most liquid making it much easier to buy and sell without fear of slippage. I will share list of my personal favorite ETF products. This list should keep you quiet busy and in the action.Trading Product Resources:etracs.Chapter SixStops, Exits and Pivot PointsThe concept of the stop loss order is very important if you ever hope to be a skilled trader. The stop loss is there to protect you from yourself. It is very important that you don’t let small losers turn into big losses. Your best loss is your first loss. Meaning it is ok to take a position only to be stopped out in few hours to few days. Losing money is part of trading. Sometimes you will lose more then you make. Other times every trade you make seems to turn into a profit. The stop loss order is a point where you will call uncle. The spot you have determined this trade is going the wrong direction and you tap out. Since I am able to watch the markets during the day I don’t enter my stop loss orders at the time of the trade. If you know you won’t be able to watch your trades you really need to enter them in after you enter the trade.Word of caution about where to place a stop loss order. You don’t want the stop so close you don’t give a trade a change to work and at same time you don’t want it so far away you take a real hit if it’s losing trade. I like to use pivot points whenever possible. I know some people teach hard percentages like 5% - 10%. The problem with that is it might not be the most effective way. If you are trading a leveraged ETF they can move 5%-10% in a single session. IF you’re trading a stock like AT&T 5-10% could be way to much room.If is much better to place the stop loss order in a more logical spot that is less likely to be hit even if it means you take a smaller position. The smaller position will give you more room in the trade. See Silver trade on pg. 71 where I recently had this issue.As new trader you will feel urge to make something happen. Over time you will have this feeling less but it will never truly leave you. This is why we create trading rules. Like the stop, the trading rules are there to protect you from yourself. I like to think of it as an emotion free contract I make with myself when I made the trade, a prearranged agreement.You will from time to time break your own rules. Over time as you trade and see your rules work in situation after situation you will build your faith in your system. You will find yourself breaking your own rules less and less. Trading takes time. While trading with The Money Flow System is simple, it is far from easy. It will take you time to master.This rather explosive move and chances are it would have pulled back. I entered at the blue circle because price closed above the 20 SMA and ADX/DMI & TSI were on buy signal. A tight stop didn’t seem logical next logical place was $.60 below so I took smaller position to make the risk management work. Plenty time to add to the trade as it develops. Trader smart and try to stay in tune with the flow of the market.Pivot points are useful in defining trends. Technical analysis is built on the idea that prices trend. We can identify the trend by identifying the pivot points. Pivot lows are used to draw uptrend lines and pivot highs are used to identify downtrends. I have marked the pivot points on the chart below with blue arrows.Pivot points are used to identify support and resistance zones. They are also used to draw trend lines. Pivot points give you valuable information regarding the movement of price. Pivot points give you clear points of reference when trading trends. Uptrend is characterized by higher highs and higher lows. Each time price breaks out it goes to a higher high. Downtrend is characterized by lower highs and lower lows.It is very important to trade only in the direction of the trend! Trends are much more likely to continue trending than to make a reversal. At any point in an uptrend you will be more profitable entering long positions then trying to trade against the trend. Likewise, any point in downtrend you will be more profitable entering a short position then trying to trade opposite of the trend. There is an old wallstreet saying, “The Trend is your Friend Until it Ends”.Stops, exits and pivot points help us identify when trend has ended.“No man is kept poor because opportunity has been taken away from him, because other people, have monopolized the wealth, and have put a fence around it.” Wallace WattlesChapter SevenPosition Sizing and Risk ManagementThe process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making. Essentially, risk management occurs anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance. Inadequate risk management can result in severe consequences for companies as well as individuals. For example, the recession that began in 2008 was largely caused by the loose credit risk management of financial firms.The first decision in trading is what to trade. Once you have decided what you will trade your second and most important decision is the size of the position. The amount of money you allot to a trade is the foundational of proper risk management. Too small a position and potential profits and limited, likewise if your position size is to large you run the risk of a loss that to large. How much you will earn or lose is directly tied to the size of your trading positions. Your position size will also affect your ability to diversify your trading positions. If too large a portion of your account is tied up in one trading position you won’t have the funds necessary to purchase other trades. We never know which of our trading positions are going to be the really big winners. There is no worse feeling then watching the market rally and you are in 2-3 positions that decide to sit out the rally.Every year there will be really big moves in the markets. We have no clue which sectors of the market will be the hot sectors next year and produce the really big gains. I recently read that 72 of the top paid wall street analyst had $90-95 a barrel target on oil when it begin its collapse. By properly sizing our positions so that we can hold a basket of trade positions that are meet our system rules. The smaller your trade capital obviously the harder it will be to achieve proper position sizing across many positions. With that said, regardless of your account size the same risk management rules will apply to each trade.If you are trading with limited capital you will need to take special precautions. You will want to avoid purchasing a single stock or commodity. The smaller the trading capital the fewer trade positions (bets) you will be able make. Each losing trade will represent a larger percentage hit to your account then larger account. The more working you have to trade with the less risk you have to take to make money.Ideally you want to risk 1% or less of your account balance on any one trade. If you are trading with The Money Flow System you will often risk much less than one percent.If you are going to be trading with limited (like who isn’t) capital you will need to assume more risk, much more risk. This will mean you need to be even more disciplined trader. You should consider trading the leveraged ETF’s. These are highly leveraged and extremely volatile trading products, but can produce nice profits very quickly. These ETF’s are available for wide range of market sectors, commodities, bonds and even currencies. Now a word of caution before you start buying leveraged ETF’s. You need to make sure you have the techniques of The Money Flow Trading System internalized before taking on the risk of these trading products. Initially I would recommend using leveraged trading products. Once you are comfortable with the trading system leveraged ETF’s can produce amazing profits.Many financial advisors will try to warn you away from these leveraged ETF’s. But if you have a quantifiable trading edge, you have nothing to fear. Just remember these are not buy and hold products. As quickly as you can earn profits, you can lose money even faster. There are many books written on the concepts of position sizing and risk management. I think using simple common sense goes a long way in this area of trading. We just want to avoid bigger than necessary losses and to completely avoid the risk of ruin. Preserving your working capital is more important the making money. New traders often have this backwards. The truth is the only part of the trading process you really have any control over is how much money you will lose in a trade. When markets move in your favor and you’re making money you simply sit and watch. Your only participation in a winning trade is to adjust your stop loss. We have no control over the actual making money. But we do have control over our position sizes, which directly effects how much money we can potentially lose on a trade.We already touched on stop losses and using pivot points to find logical way to control your losses while maximizing potential profits.I want to caution you on the idea of hard stop losses. This idea is taught by virtually everyone in every book. The idea being you would establish up front a certain percentage your willing to lose on any one trade. This percentage is fixed. Investors Business Daily a popular newspaper ready by many stock traders teaches an 8% stop loss rule. Ten percent is another popular fixed stop loss used by many traders. Problem is fixed stops make no sense. Why would you want to lose 8% if 1-2% would be more logical stop placement? We want to use stops that make logical sense when we look at the chart of the stop, commodity, bond or currency we are trading. Avoid the concept of hard stops. We will discuss much better method that will be based on logical zones of support and resistance.“thought is the only power which can produce tangible riches from the formless substance” Wallace WattlesChapter EightLocking in Profits – Putting Money in Your PocketA predetermined point at which an investor will exit a trade in a profitable position. Profit targets are part of many trading strategies that technical traders use to manage risk. Before an investor enters a trade, he determines a profitable exit point at which he will sell out of the position. Traders establish profit targets to avoid letting emotion take over a trade. A profit target can be expressed as a dollar amount or as a percentage return.Profits only matter if you can put them in the bank. I hear a lot of trading guru’s teach a concept of profit targets. Often when determining their profit targets they will calculate a one-to-three concept. They mean you should have the potential to earn $3 for every $1 you risked. As a trend trader, you shouldn’t be trying to predict price targets. For price targets to work, we have to assume we know what price will do. It makes no sense to close a trade because you have earned $3 for risking $1 when you could have earned even more money by simply letting the trend run its course. The old saying, “let your profits run”, makes much more sense. Since we aren’t trying to predict price movement we let the price decide when to close the trade. If the idea of locking in some quick profits sounds good to you, the 10% rule might be a rule you apply to your trading. Not only does this strategy lock in quick profits it also decreases your overall risk in the trade. When a new trade reaches a ten percent profit you simply sell 10% of your position. This also adds a compounding effect to your trading. You are constantly locking in profits, then putting those profits to work in new trades. If you are taking the 10% profit your stop loss should also be moved at least to break even, but more likely much closer to price. This is a very comfortable trading strategy.Don’t think I am saying you shouldn’t take profits in winning trades. I am not against selling some of a winning trade to raise funds to start a new trading position. But you don’t want to be so quick to sell that you never experience a really big winner. Even worse is downsizing a winning trade only to start a new position that losses you money. So you would want to use little common sense in this situation. Many times I see a new trade possibility, only to pass on the trade because all open positions are in profit and trending nicely.In this situation I would rather see you sell part of a loser, or a trade that isn’t moving very fast then downsize a real winner. Please read that sentence again. I would rather sell a portion of a losing trade if I needed funds for a new trade then to close a trade that is working in your favor. Again, the key is to let the winning trades keep winning, while you continue to look for more winning trades.I speak to so many traders who will sell a winning trade over a losing trade because they don’t want to “lock-in” in a loss. As a trend trader you must trade in the direction of the trend. If you consistently do this, you will have many more profitable trades. Losing trades can only become really big losses if you continue to hold them even though the trend has changed or you entered the trade at the wrong time. “no man therefore is poor because nature is poor, or because there is not enough to go around. Nature is an in exhaustive store house of riches; the supply will never run short.” Wallace WattlesNever be afraid to take a loss. Take the loss then put that money to work in a potential winning trade. We want to hold our winning trade positions and quickly get out of our losing trades. If and when that equity or commodity does turn around you will have plenty of time to start the position again. This is why it’s important to follow the same trading products so that we can stalk and enter the trade at the perfect time. If our entries are timed correctly we will enter right as the trend is changing giving us the highest possible profits with the lowest capital risk. “Success always comes down to an internalizing everything you’ve learned, mapping out your own strategy and boldly making it happen.”Chapter NinePutting it All TogetherA Trading plan is a systematic method for screening and evaluating stocks, determining the amount of risk that is or should be taken, and formulating short and long-term investment objectives. A successful trading plan will also involve details like the type of trading system to be used. Most plans require the use of various types of technical analysis tools.The Money Flow Trading System doesn’t require you to be a day trader, but does require you to scan charts daily. Missing even one day can mean the difference in hundreds to thousands of dollars. If you aren’t willing to track your trades consistently you should not be trading. I can’t put that any nicer. Follow your charts each day and wait patiently for the trader patterns to show themselves. Be patient and let the moving averages cross over then take action. Don’t second guess the trade. Don’t go looking for articles on to confirm the trade. Take action. Put on the trade then let the market do what it will. Once we have imitated a trade, put in your stop loss order and wait. Wait to take a small loss or to close the trade the trade in the future for a nice profit. Either way you followed the rules to your trading system. Both were right. Taking a loss is the right thing to do when the market moves against you. Losing is a cost of doing business.To become a professional trade you must take personal responsibility for all your trades. The foundation to your success in your trading career will be faith that you’re trading system actually works. Even the most successful traders will have periods of losing trades. There will be periods of time where the market doesn’t favor your particular trading style. The Money Flow Trading System is a trend following trading system. When the markets aren’t trending we tend to get whipsawed, and take a lot of small losses. These losses are part of doing business. When the markets resume their trending direction we will make profits that way exceed the small losses we had to endure. If you are diversified you should always have some winning trades. Some area of the market is always trending.You need to love trading in the markets. You will only be disciplined and consistent if you love what you do. If you are passionate about trading and have faith in your system, you will find it easy to devote the time required to be successful. You will have to devote time, energy and money to achieve success trading the markets. If you can’t do this you can’t be trader. You can have the best trading system in the world but if you don’t have the focus to implement it day after day you will never succeed.Do you work better at night or early in the mornings? Maybe you are more like me and find yourself constantly looking at charts. I look at charts in the morning, during the day and before I go to sleep. I will look at 100’s of charts during my day. The first thing I do when I wake up is grab my iphone see if anything happened around the world that might affect my open trades. This process comes easily and naturally to me. If you find you have to force yourself to do the work required, you should consider other options or turning your money over to someone who will put in the work. Trading is simple, it’s just not easy!Trading is serious business. You are your own boss. Only you can determine if your business will be successful or like most people a complete failure. Never forget you are trading against some of the smartest people in the world and they want your money! These people don’t take time off or stop trading for vacations. I learned this lesson the hard way. The silver market had been kicking my butt for months. The last three trades had been losers. I decided I needed a break so I wouldn’t trade while I was on vacation. Two days after I left my system got the buy signal. The precious metals market had its biggest weekly gain in years. My system caught the entire move and I missed it. I decided right then that life is no excuse to miss a trade.Famous commodities trader Richard Dennis, founder of the Turtles, has been quoted as saying, “I always say that you could publish my trading rules in the newspaper and no one would follow them. They key is consistency and disciple. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.Life is filled with distractions. We must not let those distractions cause us to lose focus on our trading. There are no days off. Focus means you take the buy and sell entry signals. You implement and follow your pre-determined risk-loss guidelines. You must have a plan and a trading system you believe in. Belief in the trading system will help you stay focused. Try to develop a routine you can do automatically and consistently. This routine should include checking the charts consistently for new buy and sell signals, adjusting stops, taking profits and watching your account balance.“The creative power within us makes us into the image of that to which we give our attention.”Richard Dennis Quote – Market Wizards, Jack D. SchwagerThe Four Stages of Price MovementTo trade The Money Flow Trading System successfully you must believe that markets trend. Otherwise not much point placing trades using a trend following method. You don’t need to know why they do, but you must accept that prices will move in one direction, either up or down long enough for you to notice it, enter a trade and exit that trade with a profit when the trend begins to change direction.It is generally accepted that all markets, stocks, commodities and even currencies move in four stages. Here is a visual representation of the cycle.Stage One: BasingThe first stage is formed after prolonged decline. The stock or commodity starts to move sideways forming a base. The sellers that were once in control are losing their grip and the buyers are showing up. If you have herd people use the phrase range bound. This stage can be long, and when you get stuck in it, your money will be tied up for a long while. This is what is meant by dead money. Basically price isn’t doing much. As a retail trader this can be quite frustrating.With that said, if you have much longer horizon (think IRA, SEP) you can take advantage of this situation and build a large position over time in high quality dividend paying stock. Identify levels of support, resistance and pivot points will help you pin point this stage on your charts. Another clue will be the indicator ADX/DMI. The ADX line will drop below the DMI bands and stay below 15. That is red flag saying no trend here. This is the stage you can be whip sawed and take many small losses if you can’t identify it on a chart. The moving averages are of little help in stage one. See Natural Gas chart.Stage Two – The Break OutThis is the stage The Money Flow Trading System can give you an edge. It quickly will catch this break out. Price will suddenly wake up and break out above what was resentence. The 5 EMA will Cross the 20 SMA. Both the TSI and ADX/DMI will confirm with crossover signals. Often they will signal before the 5/20 crossover. This may take several days.You want to be fully invested in the trade at this stage. Stage two is where most of the money will be made. You won’t catch the bottom nor do you need to try too. Wait for the break out of price and the indicators to confirm.Stage Three – The ToppingThis is the stage we are looking to close out the trade with a profit. Many people will try to call the top. No need to bother if you are using the indicators we have discussed as you will be notified in plenty of time. Your first sign will often be the ADX line breaking above the DMI bands. This is your first warning. Now, if the moving averages are still sloping up and properly stacked the 5 EMA above 20 SMA there is no reason to take action. The TSI indicator will signal when it is time to take profits. If the TSI signals sell signal crossover in the opposite direction and the 5 EMA is still above the 20 SMA you want to take profits. I often sell a fourth of the position. The ADX line and TSI are our early warning signal that the move is losing steam. We do not close the trade until the 5 EMA crosses and closes below the 20 SMA.Stage Four – DeclineIf you look at the Natural Gas chart again on previous page you will notice the topping stage before the decline. Notice the ADX/DMI and TSI. They signaled first giving you time to lock in some profit a few days before the selloff started. The 5 EMA crossing below the 20 SMA was the death nail. If you want to be a short seller this is the break out from stage two just the opposite direction. Instead of breaking out and up it is breaking down. The trade mechanics are exactly the same just in reverse. Again the ADX and TSI will signal first when you want to lock in some profit on your short sell and the 5 EMA 20 SMA crossover will signal to close out the short trade.You are under no obligation to trade on the short side. Cash is a position. You could have easily just closed out the long natural gas trade and watch stage four waiting for stage one and then ultimately the stage two break out. Walk through few of your own charts.Charting SoftwareStock Charts – Simply the best financial charts Stock Charts is more than charts. Your subscriptions include daily and weekly market updates plus chart school. This website contains a wealth of information that would take 100’s of books to data base it yourself. Recommending Reading List – The Traders LibraryNew Concepts in Technical Trading Systems, J. Welles Wilder JrUnderstanding MACD, Gerald Appel and Edward DobsonADXcellence, Dr. Charles B. SchapTo Trade or Not to Trade: A Beginner’s Guide 3rd Expanded Edition - Dr. Alexander ElderCome Into My Trading Room – Dr. Alexander ElderTrading for a Living – Dr Alexander ElderThe Visual Investor: How to Spot Market Trends, 2nd Edition by John J. MurphyTechnical Analysis Using Multiple Timeframes – Brain ShannonNewsletters I TrustPorter Stansberry Mandel – There are many brokers. Many are less expensive than etrade for trade cost. But reputation and trust have a value too. Pick wisely. I have nothing but good things to say about etrade. Never been error with my account, and they answer the phone any time I call and respond to all support request.Learning to take profits more observation then hard fast rules. But this chart shows a nice winning trade rolling over, giving you plenty time (and alerts) to take profits before then actual sell signal. I sold 1/10 of the trade the day of this writing because RSI hit 73 and price moved too far away from the 5 EMA.This chart shows why it is important for our indicators to agree before entering a trade and why we use them together to make our buy and sell decisions. ................
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