Reprinted from Technical Analysis of STOCKS & COMMODITIES magazine. © 2007 Technical Analysis Inc., (800) 832-4642, http://www.traders.

com
REAL WORLD

How To Make One, How to Follow One

The Trading Plan

We all know that creating a trading
plan is the first step in trading. Find
out how one futures trader creates a
plan and follows it.

by John “Jay” Norris

ombining analytics

C
and execution is not
new for individuals or
professional entities,
and most companies
separate the two. Many individuals
lean toward one or the other, but
traders must do both. Traders must
be patient and disciplined and ac-
cept that they will not have a choice
regarding when a trade scenario will
unfold. Traders just need to be in the
habit of being at their stations every
trading day rested and relaxed and
ready to make their moves.
This plan concentrates on follow-
ing all markets with the understand-
ing that they will always follow their
path of least resistance. If you are a
novice, you need to do your home-
work and remember that futures trad-
ing carries risk of loss.

HERE’S THE PLAN

Prior to any analysis I need to be
able to see the market on three time
frames simultaneously, a tactic I was
introduced to in Alexander Elder’s
book Come Into My Trading Room.
Once I have the three charts in front
of me, I determine the long-, inter-
mediate-, and short-term trends for
the daily, 240-minute, and 60-minute
charts. This is a total of nine direc-
tional determinates that I break down
into a directional ratio. I record these
AI TATEBAYASHI

on a simple grid with up arrows,

down arrows, or a hyphen indicat-
ing neutral or sideways.
With this setup, the short-term
trend is considered 15 candle bars or less, the intermediate- example of this would be (5 up/2 down/2 neutral), which
term trend is 16 to 49 candles, and the long-term trend is more would lead me to lean toward buy triggers, particularly if the
than 50 candles. I make these determinations from the market’s up arrows were coming from the daily and 240-minute charts.
highs and lows, trendlines and from moving averages. An I can choose to trade or take triggers off shorter-term time
 Reprinted from Technical Analysis of STOCKS & COMMODITIES magazine. © 2007 Technical Analysis Inc., (800) 832-4642, http://www.traders.com

frames, but I always use the daily, 240-minute, and 60- the pattern of highs and lows and the 18-bar simple moving
minute charts to give me the directional ratio and aid in averages, and for the short term a 5&5 simple moving
determining between trend and countertrend trade triggers/ average cross, which is a five-bar open simple moving
signals. average coupled with a five-bar close simple moving aver-
For long-term trading you can use the daily charts to key age. When the 5 close is above the 5 open the short-term trend
off, the weekly charts to check the long-term trend, and the is up, and when the 5 open is above the 5 close the short-term
240- or 60-minute charts for trade triggers. For intermediate- trend is down.
term trading you can use a 240- or 60-minute chart as the Professional traders say that the way to make money
primary time frame to key off, with 15- or even five-minute trading currencies is to know how to buy support and sell
charts for the triggers. The primary decision you will have to resistance, so that’s where I’ll start. In addition, as we are
make is what time frame you should trade. daytrading in quantities greater than one contract, I suggest
Regardless of what time frame you decide to trade, you always looking to take two-thirds of the position off at an
will still want to take your directional ratio from the daily, approximately 20- to 30-pip profit target depending on the
240-, and 60-minute charts. I personally trade the currency structure of the chart.
markets using the 15- and five-minute charts. Then it’s just
a matter of staying in the “now,” as trader Bill Williams calls
it. All I need to follow is the trend on the 60-, 15-, and five- BUYING SUPPORT AND
minute charts, and because I’m trading such a fast time SELLING RESISTANCE
frame, I need to know of any major economic releases Before trading I always know the
pertinent to the market I’m trading. Major economic releases current long-, intermediate-, and
are noted on online calendars or economic publications. short-term trends for the daily,
240-, and 60-minute charts, which
TRENDS AND COUNTERTRENDS is determined by the market’s near-term past and current
I focus on two types of trades: trends and countertrends. All price behavior, or directional ratio. At this point I also
trends start with a countertrend move. This is the fractal determine where and what time the last trade trigger fired on
nature of markets. Markets go up and down and sideways to my primary time frame (the 15-minute chart) because this is
their own beat, and every segment can be broken into a the predominant time frame I trade. Next, I mark trendlines
smaller fractal of activity. Any market is unique in that it is and channel lines, and support and resistance levels such as
manmade, yet follows a seemingly unpredictable pattern previous daily highs and lows, and pivot points.
more akin to nature than science. The markets remind me of It is always noteworthy when a market or currency pair
a saying: “Chaos is the law of nature; order, the dream of stops and then turns at a significant support or resistance level
man.” To trade this plan you need no knowledge of chaos or such as trendlines or channel lines, or at previous daily highs
order; you just need to show up at your station every day and and lows. No matter which way the trend is, the natural
go with the flow of the market. behavior of markets is to oscillate, up and down and back and
Typically, there is a tendency to make more per trade with forth, seeking out the path of least resistance. This is why
a trend than a countertrend. Trending price action is when a trading support and resistance levels are so important.
market follows its path of least resistance or its predominant It is at these junctures, or fractals, that a market’s price
impulse, and it is marked by an obvious direction. A downtrend action is currently bounded and its previous direction reaf-
is marked by lower highs and lower lows on the price chart, firmed. When I see a market stop on a trendline with similar
and an uptrend is marked by higher lows and higher highs. A confluence of technical tools such as moving averages, pivot
countertrend trade is marked by indecisive price movement points or Fibonacci levels, then I know I am a step closer to
with every bit of price structure proving resistance one day a trade trigger.
then support the next and is seen as sideways price action. The second event I look for prior to a trade trigger is for the
Markets naturally spend more time countertrending than market’s technical indicators to fulfill specific conditions.
trending, but we must know how to trade in either environ- These conditions are “an order of operation” that the indica-
ment. tors need to fulfill to shift from corrective or countertrend
You should know how to gauge with a glance the primary trade, to impulsive or trending trade. It is at this shift, or
trend in any market. You can easily do this with the naked trigger, that I initiate a position and go with it until the market
eye, but you will see how to use simple and exponential hits support or resistance and downshifts from impulse trade
moving averages to aid you as well. Initially, you will back to corrective action. This technique is used only for
identify the current chart’s long-term trend by noting the buying support and selling resistance. Later, I will spell out
pattern of highs and lows or lower highs and lower lows and how to trade breakouts, which are less common in currencies
also the slope of your long-term moving averages. relative to the percentage of time that support or resistance
I use a 144-day exponential moving average for trading holds. (See sidebar, “Cheat sheet,” on the next page.)
currencies and 50- and 200-day simple moving averages for So the market determines the parameters of your opera-
futures. To determine the intermediate-term trend, I also use tions, while trendlines or channel lines and other support and
 Reprinted from Technical Analysis of STOCKS & COMMODITIES magazine. © 2007 Technical Analysis Inc., (800) 832-4642, http://www.traders.com
REAL WORLD

resistance levels determine the market parameters. Previous • Previous day’s high and low
highs and lows and the trendlines or channel lines drawn from • Pivot points on appropriate time frame
them are the most important occurrences on a price chart. I
Moving averages for trend identification, support or
would also add pivot points, longer-term moving averages,
resistance, and trade triggers:
and Fibonacci levels to the list.
Significant support or resistance levels also illustrate the • 144-day exponential moving average for currencies
of 15 minutes
other side of the market; if they do not hold, despite a shift in
the order of operation, the market will revert to its path of • 50- and 200-day simple moving average for futures
and indexes over 15 minutes
least resistance and either continue to countertrend trade or
shift to impulse trade in the other direction. • 18-day simple moving average for all markets over 15
minutes
Most of us instinctively don’t like a cluttered chart, and
most of us are also incorrect when it comes to melding instincts • 5&5 moving average crossover on all charts. The 5&5
moving average crossover is a 5 simple moving aver-
and market movement. When you board an airplane, do you age set to the close and a 5 simple moving average set
ever look left as you’re passing the cockpit and see the console to the open on all markets.
full of indicators and gauges? They look intimidating to
Technical indicators placed on chart:
someone who has never flown, but not to the pilot. It would
look intimidating to the pilot if there weren’t enough gauges or • MACD histogram (12-26-9)
indicators. I feel the same about the charts I use. • Relative strength index (RSI) set to 14
• Slow stochastic (12-3-3)
CANDLESTICK CHARTS Calendar
I use candlestick charts exclusively. Like any tool, single- • www.fxstreet.com
candle analysis or candlestick formations work better against • I will always be aware of news announcements in
existing support or resistance. To profit on a trade or identify bold, and be out of the market five minutes ahead of
a coming trend reversal, I look for possible reversal bars — that the announcements. I will also know how to use the
is, dojis, inverted hammers, shooting stars, and inside bars on one- and five-minute charts to enter markets follow-
resistance. Similarly, I look for dojis, hammers, and inside bars ing announcements.
on support. I also look for combinations of these to identify
double tops and double bottoms, preferably with divergence on LINES ON CANDLESTICK CHARTS
the moving average convergence/divergence (MACD). Figure 1 is an excellent example of a trendline and pivot point
converging to provide support in early June, followed by a
ADDITIONS AND INDICATORS buy trigger in the British pound. The trend is approximately
Below is a checklist of additions and indicators that I keep on eight months in length and marked in thick blue, and the
my chart or, in the case of Fibonacci numbers, if not placed monthly pivot support 1 is the thin blue dashed line. We see
on my chart, to at least keep in mind. I will spell out how they these two levels converge where the market turns.
each apply to trading. Only two points are needed to draw a trendline. We also
use the DeMark trendlines, which are drawn in reverse off
Lines placed on candlestick charts: two previous points — this to avoid form-fitting. For pivot
• Trendlines and channel lines points (PP) you would need the formula — which is fairly

CHEAT SHEET
6) 5&5 simple moving average cross
7) MACD
Prior to trading:
8) Stochastics
1) Check calendar, note currency pairs with news 9) RSI
2) Measure three different trends on daily, 240- and 60- 10) Volume
minute charts
Prior to impulse trading, look for:
Place on charts and adjust everyday:
11) Price pause on support or resistance
3) Trendlines and channel lines and previous high and low 12) Price creates reversal candles: dojis, inside bars, change
4) Pivots on appropriate time frames and retraces on 60 of direction candles, then closes below (open above)
minutes on up 13) Note volume behavior
14) Stochastic cross
Always on charts: 15) MACD histogram reversal
16) Note RSI direction and level
5) Long-term EMAs (or SMAs for futures and indexes) and 17) 5&5 trigger
18-day SMA on intermediate- and long-term charts 18) MACD cross
 Reprinted from Technical Analysis of STOCKS & COMMODITIES magazine. © 2007 Technical Analysis Inc., (800) 832-4642, http://www.traders.com

(GBP A0-FX British Sterling Composite,D) 21000

20800
20600

simple — if your chart package does not pro-

vide it. There are generally five levels per time
period: 19600
Convergence of 19400
1) Pivot point = (high + low + close)/3 trendline and 19200
pivot support 1 19000
2) Pivot resistance 1 = [(PP x 2) – low] 18800
18600
3) Pivot resistance 2 = [(PP + High)– low] 18400
4) Pivot support 1 = [(PP x 2) – high]
5) Pivot support 2 = [(PP – high) + low] 100

0
For charts of 15 minutes or less use the daily 100
pivots, for 60 minutes and up use the weekly 50

pivots, and for 240 minutes or greater, use the 16 23 30 6 13 20 27 4 11 18 25 1 8 15 22 29 5 12 19 26 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 25 2 9 7/23/07 6 13

eSIGNAL
Nov Dec 2007 Feb Mar Apr May Jun Jul Aug
monthly pivots. Many professional traders fol-
low these levels, and so should you. I tend to
FIGURE 1: CONVERGENCE OF TRENDLINE AND PIVOT POINT. Note that the trendlines and pivot
view the pivot point as support or resistance, point converge where the market turns. This point is just below the 50% retracement level of the March–
depending on which side price is on; price April rally (not shown). Also worth noting is that the 89- and 144-period EMA provided an area of
below the pivot point can be seen as market support in June and March 2007.
weakness; likewise, price above the pivot points
can be seen as market strength. Because the (EUR A0-FX Euro Composite,D) 1.4100
chart shown is a daily time frame, the monthly 1.4000
pivots are used. 1.3900
When you look at the June low you can see 1.3800
how one day’s low related to the next as the
market found support prior to rallying. Relat- 1.3600

ing to the previous day’s lows and highs is

particularly helpful in trading on a short-term
1.3300
time frame. This helps to identify future sup- 1.3200
port and resistance. Buy trigger as 1.3100
You can place Fibonacci levels on the charts, green line crosses 1.3000
above red line
or just be aware of the approximation of these 1.2900
levels. The most common are 0.382, 0.5, and 1.2800
0.618. Trendlines and pivot levels often cluster 0.01

at the same levels as Fibonacci levels. In Figure

100
1 the June lows were just below the 50%
retracement level of the March–April rally. I 0
did not place it on the chart, but that these levels 50
were clustered just below the 50% retracement
19 26 2 9 16 23 30 7 14 21 28 4 11 18 25 2 7/12/07 23 30 6 13
level is significant. Apr May Jun Jul Aug

MOVING AVERAGES FIGURE 2: THE 5&5 MOVING AVERAGE CROSSOVER. When the green line (average of close) is
above the red line (average of open), the trend is up. If the red line is above the green one, the trend
During trending behavior, price is supported by is down.
the moving averages, and as the trend acceler-
ates, price is propelled away from it. In counter-
trend trading, price falls back to its moving averages and then MOVING AVERAGES AS A TRADE TRIGGER
starts to oscillate or pivot around a tighter, more level mean. The 5&5 moving average crossover is a 5 simple moving
The long-term moving averages help visualize whether the average (Figure 2) set to the close (green) combined with a
market is trending or in a countertrend. This is important 5 simple moving average set to the open (red). When the
information if you decide to seek out only trend triggers. green line is above the red line, the trend is up; likewise, if
Looking back to Figure 1, you see how the 144-day exponen- the red line is above the green line, the path is lower. I use
tial moving average provided an area of support for the a crossover of this moving average indicator as a trade
market in June and March 2007. The longer-term moving trigger when there is visible separation between the two
averages provide a measured value and their current direc- lines. This crossover with separation is the last occurrence
tions mark a market’s path of least resistance. in my order of operation prior to taking a trade.
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REAL WORLD

Figure 2 is an example of a 5&5 cross that indicated a long of a trending market, and any signal taken because of diver-
trigger in the euro. The blue line below the price is the 144- gence is by definition a countertrend trade on that time frame.
day EMA. Note also the hammer candle right on the 144-day
EMA three days before the trigger, then the doji on the day TRENDING VS. COUNTERTRENDING
after the hammer, both potential reversal candles when One of the paradoxes of trading is that on a longer-term time
formed on support. However, it was not until the 5&5 frame, in trending markets the technical indicators work great
crossed up that you could say the short-term trend had — sometimes. Sometimes they work great in countertrending
shifted from being bearish. markets on a shorter-term time frame, but rarely in both
combinations. As a rule of thumb, the technical indicators
THE ORDER OF OPERATION will work better in a trending market than in a countertrend.
The technical indicators used are the stochastic, the MACD, There is no doubt the technical indicators placed at the
and the relative strength index (R SI). Prior to a trigger bottom of price charts are secondary, even tertiary, math-
these must all cross in that order; in the case of the R SI, ematical measurements of price itself, so price will always
when it comes to shorter-term trading, when the indicator lead. The indicators oscillate by design, so regardless of the
is above 50 is seen as strength, and below 50, weakness. length and/or timing of a price move, the indicators are going
Once price pauses on support or resistance and gives a to cross and oscillate up and down. Likewise, in the immedi-
possible reversal candle or inside bar, the next step is to look ate wake of economic events and pertinent, scheduled news
for the stochastic to have flattened out and turned. Simulta- releases, the value or reliance on a MACD or stochastic
neously, you would look for the histogram on the MACD to continues to lose value.
change direction and start to stairstep higher or lower. Next, For me, the value on the chart starts with price, then
check to see that the RSI has turned and moved in the new trendlines, then pivot points, then moving averages, followed
direction. Once that order of operation has taken place from by Fibonacci retracements and extensions, and finally tech-
the stochastic turn to the MACD histogram stairstep to the RSI nical indicators such as MACD, stochastics, and RSI. This
turn, you are clear to take a trigger. order of operation of the technical indicators works well
The trigger itself is a 5&5 cross with visible separation, or when they line up together and cross on areas of previously
a close above previous support or resistance (a breakout identified support or resistance.
trade). Note on the chart of the euro that prior to any turning I have not covered stops. This is because the same market
of technical indicators, the long-term trend is up as seen from occurrence that creates a trigger/signal would also indicate a
the slope and direction of the 144-day EMA, and the interme- stop for a trade or a reversal. The 5&5 cross is my primary stop,
diate-term and short-term trends are down as seen by the and this too depends on whether we are in a trend or a
lower lows and lower highs in May and the first two weeks of countertrend trade. I always try to keep my risk on any trade to
June, and the direction of the very short-term 5&5 in June. So approximately 2% of my trading account.
while the trend was countertrend on two time frames, it was
in agreement with the long-term trend. SIDEWAYS CHANNEL BREAKOUT
It is common for markets to conflict on different time Another trade signal I want to mention is a sideways channel
frames. In addition, the market finds support on that 144-day breakout. Once the market closes above the high or low
EMA. We only use the order of operation to assist in a trigger barrier of a sideways channel, it is seen as a trigger. For
if support or resistance has already proven itself. There must better positioning, you may take the trade on a close outside
be an obvious structure in place in the way of trendlines, the range on a shorter time frame chart such as a 15- or a
intermediate- and long-term moving averages, and/or Fi- five-minute. But if you do not get a close outside the range on
bonacci confluence. This is generally followed by single- the next higher frame, you have to consider exiting or stopping
candle reversal signs (hammers and dojis, and so on), and the trade on the same time frame you took the trigger.
volume patterns indicative of a decrease in activity, where we The stop-loss on the trade would be three closes above or
see the market wavering at previous direction. below the range, or a recross of the 5&5, or a crossover of the
Often in currencies you will see a double bottom or top moving average overlaid on the MACD. If you take the trade
with divergence on the MACD. Once all of this is in place you on a 15-minute trigger you are generally committed to a sell
could consider committing to a trigger. Once you take the signal on the 15-minute trigger to exit or reverse. Should the
trigger you key off the moving averages that make up the
MACD to help in letting profits run. When the MACD opens up
it indicates the trend is strengthening, and as it closes it Often in currencies you will see a
indicates slowing momentum. It is also this indicator that helps
determine positive or negative divergence in the market.
double bottom or top with divergence
If the market makes a higher high and the MACD makes a on the MACD. Once all of this is in
lower one, the market is showing negative divergence. Before place you could consider committing
reading too much into divergence between price and MACD to a trigger.
you must recognize divergence is also a common characteristic
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trade move in your direction, you would key off the moving
average overlaid on the MACD to aid in letting the trade run.
Keep in mind that in a sideways trading range the technical
indicators — stochastic, RSI, and MACD — are of little
consideration, as the upper and lower limits of the range John “Jay” Norris
supersede them. Also of note is that when dealing with Senior Market Strategist
sideways ranges, if one side of the range is violated then both Brewer Futures Group, LLC
the previous support and resistance become invalidated. 200 S. Michigan Avenue, 21st Floor
Chicago, IL 60604
312-896-3986 or 800-971-2154
A SUCCESSFUL TRADER
Bill Williams has written about
how trading is the most intense DISCLAIMER FROM BREWER FUTURES GROUP, LLC:
psychoanalysis we can put our- Futures, options and Forex (off-exchange foreign cur-
selves through and insists that if rency futures and options, or “FX”) trading involves
you have problems in your life, substantial risk of loss and is not suitable for every
they will be magnified in your trading. If you are content with investor. The valuation of futures, options and Forex
yourself and you stay focused in your trading, your potential may fluctuate, and, as a result, clients may lose more
for success will be greater. than their original investment. The impact of seasonal
and geopolitical events is already factored into market
John “Jay” Norris is the senior market strategist at Brewer prices. In no event should the content of this correspon-
Futures Group. Norris has more than 25 years’ experience in dence be construed as an express or implied promise,
the futures industry, having started on the trading floor of the guarantee or implication by or from Brewer Futures
Chicago Board of Trade and held analyst positions before Group, LLC, Brewer Investment Group, LLC, or their
switching to the brokerage side of the business. He may be subsidiaries and affiliates that you will profit or that
contacted at 800 971-2154. losses can or will be limited in any manner whatsoever.
Loss-limiting strategies such as stop loss orders may
REFERENCE not be effective because market conditions may make
Brewer Futures Group, LLC, 200 S. Michigan Avenue, 21st it impossible to execute such orders. Likewise, strate-
Floor, Chicago, IL 60604, 312-896-3986 or 800-971- gies using combinations of options and/or futures posi-
2154. tions such as “spread” or “straddle” trades may be just
as risky as simple long and short positions. Past results
SUGGESTED READING are no indication of future performance. Information
Elder, Alexander [2002]. Come Into My Trading Room, John provided in this correspondence is intended solely for
Wiley & Sons. informational purposes and is obtained from sources
Person, John [2004]. A Complete Guide To Technical Trad- believed to be reliable. Information is in no way guaran-
ing Tactics, John Wiley & Sons. teed. No guarantee of any kind is implied or possible
Williams, Bill [1995]. Trading Chaos, John Wiley & Sons. where projections of future conditions are attempted.

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