SMR Trading Guide

Table of Contents Pg 1

SMR – The Trader’s Edge

INTRO – Trading with an Edge p. xx
How This Guide Can Help You Create Your Edge

CH. 1 – Trading with the Trend p. xx
Using the 49-Day Moving Average Line: The MA

CH. 2 – Timing the Trade p. xx
The Momentum Oscillators and Buy/Sell Signals

CH. 3 – How to Enter the Trade p. xx
Using Confirmation and Verification to Improve your Odds

CH. 4 – Trading with the Mode p. xx
Using SMR’s Concurrent Mode to Enter Trades

CH. 5 – The SL Divergence p. xx
An Excellent Tool for Pinpointing Price Reversals

CH. 6 – Getting Out p. xx
Some Ideas for Exit Strategies

CH. 7 – Keeping a Sharp Edge p. xx
Tips and Strategies for Better Trading Results

Appendix A – Recommended Reading p. xx
Trading Day By Day, by Chick Goslin

Appendix B – Getting Started with SMR Pro p. xx
How to Request your 30-day Free Trial

SMR - The Trader’s Edge CH. 1: Trading with the Trend Pg 2

INTRODUCTION – Trading with an Edge
How This Guide Can Help You Create Your Edge

XXXXXXXXXXXXXXX
(In Progress)


CHAPTER 1 – Trading with The Trend
Using the 49-Day Moving Average Line: the MA

If you are going to trade with the trend (and you should), you need a clear-cut, reliable way
to determine the primary trend of a chart – Uptrend, Downtrend, or Flat. The way we
determine the trend in this guide is to use the MA line on the SMR chart.

The MA is the Foundation of the SMR Chart
Whenever we make a trading decision using the SMR charts, the first step is always to
determine the state of the MA. All of the pre-defined Buy/Sell set-ups, which we discuss in
detail later in this guide, depend on whether the MA shows the chart to be in an Uptrend, a
Downtrend, or a Flat trend.
This chapter discusses how we determine the trend of the chart using the MA.

Markets don’t always trend well. But when they do, the trend is indeed your friend. This
chart shows several examples of excellent Buy Signals during an Uptrend, and excellent
Sell Signals during a Downtrend.


Defining the Trend of a Market
So much is said about how you should always trade with the trend. And how “The Trend is
Your Friend.” And I agree, absolutely, that you’ll have the best chances for success if you
stick only to trades that are with the primary trend.
Yet, even with all this stress on the importance of trading with the trend, it is strange that
most trading books fail to provide a clear-cut way to determine the trend of a market.
So when you look at a chart, how do you determine what the trend is? Do you just know by
your experience? Or, do you have an objective method that eliminates any guesswork?
It is my belief that an objective, clear-cut definition of trend is the single most important
component of a solid trading methodology. Without a clear definition, there is way too
much wiggle room in the decision-making process.
Whatever definition of trend you choose to use, it is important to be consistent with your
definitions. Don’t bend the rules, even a little. Sticking to a consistent way to determine
trend is part of the discipline of good trading. It will pay off in more winnings over the long
run.
Did you even realize that the trend of the market depends on how you define the term
“trend”? Joe looks at a chart of May Soybeans and says “It’s in an uptrend.” Fred says “No
way, Joe, that chart’s in a downtrend. What do you say, Bob?” Bob hesitates for a moment,
then says “Hmmm. I’m gonna have to call this one sideways.” Who’s right? Can they all
three be right?
Actually, yes, they can all three be right, depending on their personal definitions of trend.
The way we define trend in this Trading Guide is very simple, and completely objective. And
it only depends on the behavior of the MA line. Our definition of trend has proven its
usefulness by the quality and reliability of the Buy/Sell signals that are based on it.
Let’s talk a little more about the MA, and then we’ll see how we use it to define the trend.


Using the MA to Define the Trend
The MA is the black dotted line in the chart below. It plots a 49-day Simple Moving Average
of the closing prices, and it is the tool with which we determine the primary trend of the
market.
Why do we use the 49-Day Simple Moving Average to define the trend? It is an arbitrary
choice, of course. You could in fact use a 30-day Exponential Moving Average, a 75-day
Weighted Moving Average, a MACD indicator, etc., etc.
We use the 49-Day Moving Average (the MA Line) simply because it works quite well over a
wide variety of charts, including Indexes, Stocks, Futures, and FOREX. Traders keep
coming back to this indicator (or a 50-day MA, essentially the same thing) because it has
worked very nicely for years, and continues to work.

The Uptrend
In the chart above, we see a market in a very clear uptrend. The MA is slanting up, and
every price bar since the second week in August has been completely above the MA.
I still haven’t told you what my definition of trend is. Before I do that, lets take a look at a
chart in a Downtrend.


The Downtrend
In the chart below, we have a market that is definitely in a clear Downtrend. The MA is
slanting down. While not every bar is completely below the MA, the vast majority of them
are. Since the downtrend began, only a tiny fraction of the total price activity has pushed
above the MA.

And now, for my definition of Trend…

A Simple and Completely Objective Definition of Primary Trend
If today’s MA is HIGHER than yesterday’s MA, the Market is in an Uptrend.
If today’s MA is LOWER than yesterday’s MA, the Market is in a Downtrend.


Yes, it’s a Simple Definition
I admit that this definition is very simple. In fact, some traders might argue that our
definition is too simple. They would say that our definition does not take into account
whether the latest closing price is above the MA, or below the MA, for example.
Based on the results we have seen with our automated Buy/Sell setups, we have come to
realize that our definition of trend is completely adequate, and does not need any other
criteria added on to it.
One reason that our definition works is that the MA is a rather slow-changing indicator. It
takes a lot of shift in the price action to get a 49-day moving average to switch its direction.
So when the MA says it is pointing up, it really does indicate the medium-term momentum
of the market is up.

Trading the Uptrend
The choice of how to trade a chart in an Uptrend is straightforward. When trading an
Uptrend chart, we are looking only for good Buy signals so we can take long positions.
NOTE: None of the Buy/Sell signals that we define and discuss in this Guide are counter-
trend signals. We only define trades that are with the primary trend.

Trading the Downtrend
Likewise, the choice of how to trade a chart in an Downtrend is equally straightforward.
When trading a Downtrend chart, we are looking only for good Sell signals so we can take
short positions.

Do We Ever Trade a Flat Trend?
Yes, we do have one type of Buy/Sell signal, the “F” signal, that can be triggered when the
MA is determined to be Flat. In this type of trade, we look at the whether we have a clear
consolidation of the price activity either above or below the MA to determine if we may have
a Buy or Sell signal. And yes, we use a very objective definition of a flat trend. We cover all
of that in detail in the next chapter.

Don’t Try to Get In Too Early

Only Trade Well-Trending Markets
If you want to succeed at trading, one of your objectives will be to trade only the well-
trending markets, and to avoid the choppy ones. Obviously, you can never know in advance
when a well-trending market is suddenly going to become not-so-well-trending, and vice
versa. And a big part of the art of successful trading requires having enough experience to
be able to tell when the market is acting too choppy for safe entry.
However, if you follow the rules for trade entry set out in this Guide, you will tend to avoid
trade entry in the choppy periods of a chart. That’s not a guarantee, but over the long run,
you should find that the rules really do help to keep you out of the market during the non-
trending periods.


About the MA Extension
You may have noticed that, in the chart illustrations, the SMR Pro software adds a heavier,
solid “extension” at the end of the MA. This is known as the MA Extension.
So, what is it’s purpose? In the books Intelligent Futures Trading and Trading Day By
Day, Chick Goslin suggests that you try to predict which way the MA will be likely be
heading over the next 4-5 trading days. You do this by looking back in the chart and seeing
which prices are next in line to be dropped off of the calculation of the MA.
By showing the MA Extension, SMR Pro is just doing the work for you. It projects which
way the MA will head over the next several trading days, assuming that the closing price
will remain flat over that timeframe.

The MA Extension

SMR - The Trader’s Edge CH. 2: Timing the Trade Pg 9

CHAPTER 2 – Timing The Trade
The Momentum Oscillators and Buy/Sell Signals

The SMR trading signals have stood the test of time. They are the favorite indicators among
many traders because they just plain work – that is, when you learn how to use them
properly. Do they work all of the time? No, of course not. But, they work at least as well,
and usually better, than anything else you can stack them up against. That is the
consensus opinion among the traders who use them.

How to Improve Your Trading Results
Enter a market in the right direction, at the right time. Do this more often than the average
trader does. Learn from your experiences, and just keep getting better and better at doing
it.
This is what we try to do as traders. But, actually doing it is another matter – a whole lot
easier said than done, huh?
When you learn how to time your trades using the SMR signals, I believe you can
significantly improve your chances of entering the markets in the right direction, and at the
right time. In this chapter, I discuss the specific techniques for using the SL and DL
momentum oscillators to time your trade entries.

Buy the Dips, Sell the Rallies
When using the SMR oscillators to time our trades, what we want to find are low-risk, high
probability entries in the direction of the primary trend. For the majority of our trades, we
wait for short-term pullbacks from the trend so that we can enter our trades with relatively
close stop-loss levels.

In an Uptrend, we wait for a short-term dip in price, and try to enter just after the market
has started to turn back up. In a Downtrend, we wait for a short-term rally in the price,
and attempt to enter the market just after the market has started to turn back down.


The SL and DL Momentum Oscillators

The SL (Solid Line) and DL (Dotted Line) Momentum Oscillators are located immediately
beneath the price panel in the SMR charts. These indicators oscillate above and below a
value of Zero.

SL (Solid Line)
DL (Dotted Line)

In this chapter, we explain in detail how we use these indicators to time our entries into a
market. In a nutshell, there are specific trade set-ups which involve the Price, the MA, the
DL, and the SL. These set-ups are automatically detected, and then displayed as Buy/Sell
signals, by the SMR Pro software.
After you take a little time to become familiar with how these Buy/Sell signals are
generated, you will have a better understanding of how the SMR indicators can help to
predict profitable moves in price.


About the SL Oscillator
The Solid Line, or SL, is a fairly simple oscillator that is constructed from short-term
moving averages of the price, plus a secret ingredient that is also derived directly from the
price action. The function of the SL is to indicate very short-term swings in the price. It
helps us to pinpoint the precise timing of our trade, and is also sometimes called the
“Signal Line.” It oscillates above and below a value of Zero.
On the SMR Pro screen, both the SL and the DL (the Dotted Line) are plotted in the first
lower indicator panel, directly below the Price panel. Even if you choose to add other
indicators to your chart, the SL/DL panel will always be immediately below the Price panel.

To use the SL, you look for a reversal in its direction, back toward the direction of the
primary trend.

These reversals in the SL can occur above or below Zero, as well as above or below the DL.
When we look for Buy/Sell signals, we consider the position of the SL as will as its direction.
There is yet another very important and valuable function of the SL. When there is a
divergence between the SL and the price action, highly reliable signals of short-term price
reversals are often generated. We will cover the topic of SL Divergence, and explain what we
mean by divergence, in a later chapter.

About the DL Oscillator
The Dotted Line, or DL, is a medium-term moving average of the SL. It helps to find the
medium term “momentum” of the market, and so it can also be called the “Momentum
Line.” It moves slower than the SL, so we don’t use it for precise trade timing. Instead, it is
a happy medium between the MA (long-term, primary trend indicator) and the SL (short-
term swing indicator).
In this chapter, we primarily consider the position of the DL (above or below Zero) rather
than its direction (pointing UP or pointing DOWN).
For a special class of set-ups we discuss in a later chapter, the direction of the DL does
become important. However, for the formation of the primary Buy/Sell signals (the ones
discussed in this chapter), we don’t need to be concerned about the DL’s direction.


The Position of the DL Helps to Confirm the Trend

DL above Zero
DL below Zero

In this chart of Live Cattle, notice how the DL (Dotted Line) stays above Zero during the
Uptrend phase of the market, and then stays below Zero during the Downtrend phase. This
is typically how the DL behaves in well-trending markets. For that reason, this kind of DL
action serves to confirm that a market is trending well.

NOTE: Even when a market is trending well, the DL can occasionally dip or rise across the
zero line briefly. This does not mean the trend has been broken, as long as the MA
indicates that the trend is still in place. What it means, though, is that the price is making
a pullback, so we should be on the lookout for a possible entry signal.

About the DL Extension
The solid heavier line at the end of the DL is the DL Extension. It works just like the MA
Extension. It predicts the direction that the DL will head over the next several days, based
on the prices that are next in line to be dropped from the calculation of the DL.


Trade Set-Ups using the SL and DL Momentum Oscillators
Now that we’ve covered all the background material, let’s get into the fun stuff. Let’s cover
some specifics on how we use the SMR indicators to time our trade entries.
SMR has identified eight primary trade set-ups that we call the Buy/Sell signals. These
signals are produced by a set of rules that are based on the price action, together with the
action of the SL, DL, and MA indicators.
The 4 Buy Signals The 4 Sell Signals
Buy-A Sell-A
Buy-B Sell-B
Buy-C Sell-C
Buy-F Sell-F

We will examine each of these signals and show plenty of chart examples.
Take some time to get familiar with the rules for these Buy/Sell signals, and you will have a
good understanding of how the SMR indicators work.

Buy-B

Sell-B
Buy-B

Buy-B

Buy-B

The SMR Pro software automatically generates the Buy/Sell Signals and displays them as
green and red arrows.


The B Signals
We’ll start with the Buy-B and Sell-B Signals. These are the most basic, and the most
common, of the Buy/Sell Signals.

The Buy-B Signal
The Buy-B Signal is generated when the MA
is headed UP, the DL is ABOVE Zero, the SL
is BELOW Zero, and the SL has just turned
UP.
Here is how the Buy-B signal looks on the
Buy-B day the signal is generated.

NOTE: The horizontal blue line in the SL/DL
section of the chart is the Zero Line.

Zero Line

Here is how the same chart looks after the
Buy-B signal was successful.
Notice how the DL was headed down, then
flattens out and turns up again.
Notice how the SL forms a “V” shape.
This is an example of what I would call the
“classic” Buy-B signal.

Buy-B


The B Signals (cont’d)

The Sell-B Signal
Sell-B
The Sell-B Signal is generated when the MA is
headed DOWN, the DL is BELOW Zero, the SL
is ABOVE Zero, and the SL has just turned
DOWN.
Here is how the Sell-B signal looks on the day
the signal is generated.

Here is how the same chart looks after the Sell-
Sell-B B signal was successful.
Notice how the DL was headed up, then flattens
out and turns slightly down.
Notice how the SL forms a “V” shape. In this
case, it’s an inverted “V.”
This is an example of what I would call the
“classic” Sell-B signal.



The Rules for the Buy-B Signal

1) Today’s MA > Yesterday’s MA
2) Yesterday’s DL >= 0
3) Yesterday’s SL <= 0
4) SL has just turned UP

Rule 1) for the Buy-B signal is our definition of Uptrend: Today’s MA is higher than
Yesterday’s MA.
Rule 2) means that the DL is above the Zero line, or right at it.
Rule 3) requires that the SL has gone below the Zero line, or is sitting right at it.
Rule 4) means that the short-term momentum has just turned back UP.

The Rules for the Sell-B Signal

1) Today’s MA < Yesterday’s MA
2) Yesterday’s DL <= 0
3) Yesterday’s SL >= 0
4) SL has just turned DOWN

The rules for the Sell-B Signal are just the reverse of the rules for the Buy-B Signal. The
trend is DOWN, the DL is below the Zero line, the SL is above the Zero line, and the SL has
just turned DOWN.

Next, let’s look at some real-life chart examples of the Buy-B and Sell-B Signals.



Buy-B

Buy-B
Buy-B
Buy-B

Here are a series of Buy-B Signals in an Uptrend. Notice how, at each of these signals, the
SL dips below zero, while the DL remains above zero.



Buy-B Buy-B

Buy-B
Buy-B

Buy-C

More Buy-B Signals in an Uptrend. The SL and DL at the second Buy-B Signal on this
chart (where the SL dips down the lowest) make what I call the “classic shape” of the Buy-B
signal.



Sell-B Sell-B

Sell-B

Here are some Sell-B Signals in a Downtrend. Notice how the first Sell-B Signal is not
successful. (In the next chapter, you’ll learn why you would not have traded that first
signal, if you had followed the rules for Confirming the Trade.)
The second Sell-B Signal, however, is quite successful.
Lastly, that third Sell-B signal would have ended up with a small loss, had it been traded.



Buy-B

Here is a Buy-B signal that was triggered near the start of a very profitable up-move.
NOTE: There were other Buy signals triggered after first Buy-B signal. But what I am
emphasizing here is how profitable any of these signals can sometimes be when they
appear near the start of a new trend.



Buy-B
Buy-B Buy-B

Sell-A Buy-B
Buy-B

Buy-B

Buy-B

Here is a whole series of Buy-B signals on a Stock chart. Notice how getting in early on this
up-move would have paid off very nicely, with around a 50% gain.
NOTE: In the following chapter, we give you additional tools for improving your odds for
success with the Buy/Sell signals. We show you how to enter only when the probabilities
for a winning trade are greatest. So, following those guidelines, you would enter the first
Buy-B signal, and then you would know how to “pick and choose” among the remaining
Buy-B signals on this chart.



Sell-B Sell-B
Sell-B

Buy-B

Sell-B

Here is a series of Sell-B signals during a Downtrend on a Stock chart.


The C Signals
The C Signals are probably triggered less frequently than any of the others. But when they
do occur, they can often signal the start of a very profitable trend. They can also just be a
good continuation signal, much like the B Signal.

The Buy-C Signal
The Buy-C Signal is generated when the MA is
headed UP, the DL is BELOW Zero, the SL is
ABOVE the DL, and the SL has just turned UP.
Buy-C For the Buy-C Signal, the SL can be either
ABOVE or BELOW Zero, but it must be ABOVE
the DL.
There are also price conditions for the Buy-C
signal: 1) today’s closing price must be HIGHER
than yesterday’s closing price; and 2) today’s
closing price must be HIGHER than at least one
of the closing prices of 10, 11, or 12 days ago.
Here is how the Buy-C signal looks on the day

Buy-C signal was successful.
Notice how, as soon as the Buy-C Signal is
triggered, the SL, DL, and MA are all headed
UP. This will very often be the case with the
Buy-C signal.
In this example, the Buy-C signal was
Buy-B followed by a successful Buy-B signal.

Buy-C


The C Signals (cont’d)

The Sell-C Signal
Sell-C
The Sell-C Signal is generated when the MA is
headed DOWN, the DL is ABOVE Zero, the SL is
BELOW the DL, and the SL has just turned
DOWN.
For the Sell-C Signal, the SL can be either ABOVE
or BELOW Zero, but it must be BELOW the DL.
There are also price conditions for the Sell-C
signal: 1) today’s closing price must be LOWER
closing price must be LOWER than at least one of
the closing prices of 10, 11, or 12 days ago.
Here is how the Sell-C signal looks on the day the
signal is generated.

Sell-C Sell-C signal was successful.

Notice how, as soon as the Sell-C signal is
triggered, the SL, DL, and MA are all headed
DOWN. This will very often be the case with
the Sell-C signal.



The Rules for the Buy-C Signal

3) Yesterday’s SL > Yesterday’s DL
5) Today’s Close > Yesterday’s Close
6) Today’s Close > Close of 10, 11, -or- 12 Days Ago

Rule 1) requires that the chart must be in an Uptrend.
Rule 2) requires that the DL must be below Zero. This means that either
a) there has been some pullback in the price action, or
b) the chart has recently shifted from Downtrend to Uptrend
Rule 3) requires that the SL be above the DL. This improves the probability of a successful
trade, based on observation of historic chart behavior.
Rule 4) means that the short-term momentum has just turned back UP.
Rules 5) and 6) insure that today’s price is breaking out above recent price activity.

The Rules for the Sell-C Signal

3) Yesterday’s SL < Yesterday’s DL
4) SL has just turned DOWN
5) Today’s Close < Yesterday’s Close
6) Today’s Close < Close of 10, 11, -or- 12 Days Ago

The rules for the Sell-C Signal are just the reverse of the rules for the Buy-C Signal.
Rule 1) requires that the chart must be in a Downtrend.
Rule 2) requires that the DL must be above Zero. This means that either
a) there has been some pullback to the downward price action, or
b) the chart has recently shifted from Uptrend to Downtrend
Rule 3) requires that the SL be below the DL.
Rule 4) means that the short-term momentum has just turned back DOWN.
Rules 5) and 6) insure that today’s price is breaking out below recent price activity.

Let’s look at some real-life chart examples of the Buy-C and Sell-C Signals.



Buy-B
Buy-B Buy-C

Here is a Buy-C signal that gets triggered on a bar that is below the MA. This Buy-C signal
marks the end of the price pullback. Then the trend continues upward.



Buy-B Buy-C

Buy-B

Here is a Buy-C signal that occurs at a bar that closes just slightly above the MA.
NOTE: When any Buy signal (A, B, C, or F) occurs on the same day as an uptick bar though
the MA, or a gap up through the MA, it is a sign of extra validation for that signal. Tall
uptick bars through the MA are especially good signs for a Buy signal.
In the chart above, the Buy-C signal occurs on the same day as an uptick bar through the
MA.



Sell-A

Sell-C

Sell-C

Here we have two Sell-C signals in a downtrending market. Notice how, in both cases, the
DL is above (or just at) the Zero line, and the SL makes its downturn below the DL.



Sell-B
Sell-C

Even if you had gotten stopped out after shorting at the Sell-B entry, the Sell-C signal that
soon follows would have worked out very well.


The F Signals
The F signals will sometimes occur as the market reverses from Downtrend to Uptrend, and
vice versa. Although they are relatively rare signals, they can be excellent opportunities to
get on board for some very nice moves, as we will see. They can also occur as the trend
temporarily flattens out, then advances in the same direction as before.

The Buy-F Signal
The Buy-F Signal is generated when the MA is
essentially FLAT, the price activity has held up
ABOVE the MA, and the SL has just turned
UP.
For the Buy-F signal, there is no requirement
for the DL. Also, the SL can be either above or
Buy-F below Zero.
Here is how the Buy-F signal looks on the day

Here is how the how the same
chart looks after the Buy-F was
successful.
A Buy-F signal can sometimes
signal the start of a very nice
Uptrend.

Buy-F


The F Signals (cont’d)

The Sell-F Signal
The Sell-F Signal is generated when the MA is
essentially FLAT, the price activity has been
Sell-F contained BELOW the MA, and the SL has just
turned DOWN.
For the Sell-F signal, there is no requirement for
the DL. Also, the SL can be either above or
below Zero.
Here is how the Sell-F signal looks on the day

Here is how the how the same chart looks
Sell-F after the Sell-F was successful.
A Sell-F signal can sometimes signal the start
of a very nice Downtrend.



The Rules for the Buy-F Signal

1) The MA is essentially Flat
2) At least 4 of the last 5 Low prices are ABOVE the MA

Rule 1) requires that the chart is neither in a clear Uptrend or Downtrend. That is, the MA
has NOT been steadily increasing over the last 4 trading days, nor has it been steadily
decreasing over the last 4 trading days.
Rule 2) means that price action has formed a consolidation ABOVE the MA.
Rule 3) means that the short-term price momentum has just turned UP.

The Rules for the Sell-F Signal

1) The MA is essentially Flat
2) At least 4 of the last 5 High prices are BELOW the MA

The rules for the Sell-F Signal are just the reverse of the rules for the Buy-F Signal, except
that Rule 1) is the same in both cases.
Rule 2) means that price action has formed a consolidation BELOW the MA.
Rule 3) means that the short-term price momentum has just turned DOWN.

Now, let’s look at some real-life chart examples of the Buy-F and Sell-F Signals.



Buy-B

Buy-F

Here is what can happen when the Buy-F signal works out extremely well. The market had
been in a rather shallow Downtrend, then it decides to take off to the upside in a big way.
The Buy-F signal allowed us to hop on board the train just as the trend is beginning to turn
up.
NOTE: Sometimes the market moves too fast for even the Buy-F signal to get triggered.
Luckily, we have yet another way to catch those kinds of moves, which we will show you in
a later chapter.



Buy-B

Buy-B

Buy-F

Here is an example of a Buy-F signal that catches the reversal from Downtrend to Uptrend
on a Stock chart.



Sell-F

Buy-B
Sell-B

Even though the previous Buy-B signal doesn’t work out for us, the Sell-F signal more than
makes up for it.
The Sell-F signals can work as well to the downside as the Buy-F can to the upside.



Sell-F

Another very nice example of a Sell-F success. Notice how the Sell-F gets triggered just as
the MA is rolling over to the downside.


The A Signals
Like the C Signals and F Signals, the A Signals do not occur nearly as frequently as the B
Signals. But when these babies work out, they can really smoke. Like the F Signals, they
can often get you in at the start of some very good price moves.

The Buy-A Signal
The Buy-A Signal is generated when the MA
is headed UP, the DL is BELOW Zero, and
the SL has just crossed ABOVE the DL from
below.
There are also price conditions for the Buy-A
Buy-A signal: 1) today’s closing price must be
HIGHER than yesterday’s closing price; and
2) today’s closing price must be HIGHER
than at least one of the closing prices of 10,
11, or 12 days ago.
Here is how the Buy-A signal looks on the
day the signal is generated.

Buy-A signal was successful.
Like the Buy-F signal, the Buy-A signal will
sometimes get triggered just as the market
is reversing over to an Uptrend.

Buy-A


The A Signals (cont’d)

The Sell-A Signal
Sell-A
The Sell-A Signal is generated when the MA is
headed DOWN, the DL is ABOVE Zero, and the
SL has just crossed BELOW the DL from above.
There are also price conditions for the Sell-A
signal: 1) today’s closing price must be LOWER
closing price must be LOWER than at least one
of the closing prices of 10, 11, or 12 days ago.
Here is how the Sell-A signal looks on the day

Sell-A Sell-A signal was successful.
I always like to see Buy-A and Sell-B signals,
because they tend to be the most reliable of
all of them.



The Rules for the Buy-A Signal

3) The SL has just crossed ABOVE the DL from below

Rule 1) requires that the chart must be in an Uptrend.
Rule 2) requires that the DL must be below Zero. This means that either
a) there has been some pullback in the price action, or
b) the chart has recently shifted from Downtrend to Uptrend
Rule 3) is a cross-over of the SL and DL oscillators. The “A” signals are the only Buy/Sell
signals where we look for an SL/DL cross-over.
Rules 4) and 5) insure that today’s price is breaking out above recent price activity.

The Rules for the Sell-A Signal

3) The SL has just crossed BELOW the DL from above

The rules for the Sell-A Signal are just the reverse of the rules for the Buy-A Signal.
Rule 1) requires that the chart must be in a Downtrend.
Rule 2) requires that the DL must be above Zero. This means that either
a) there has been some pullback to the downward price action, or
b) the chart has recently shifted from Uptrend to Downtrend
Rule 3) is a cross-over of the SL and DL oscillators.
Rules 4) and 5) insure that today’s price is breaking out below recent price activity.

Let’s look at some real-life chart examples of the Buy-A and Sell-A Signals.



Buy-B
Buy-B

Buy-A
Buy-F

Even though the market pulls back some after the Buy-F signal, it really takes off after the
Buy-A signal.



Buy-B Buy-A
Buy-B
Buy-A

The Buy-A signals can mark the beginning of an upmove, or they can just be good
continuation signals, as in this chart.



Buy-A
Buy-B
Buy-B

Buy-B
Buy-A

Here are Buy-A continuation signals on a Stock chart that provide excellent places to
initiate or add to market positions.



Buy-B

Sell-B Buy-B
Buy-B

Buy-B

Buy-B
Buy-B
Buy-A

Here is another example of how the Buy-A signal lets you get in the game very early in the
move.



Sell-F Sell-B Sell-B Sell-A

Buy-B
Buy-B
Sell-B

Here we have a series of sell signals that are just so-so, and then the Sell-A comes in and
really gets things rolling.



Sell-B Sell-A

Buy-B

Remember what I said about a gap through the MA? Here is a Sell-A signal that occurs on
the same day as a price gap down through the MA. The gap through the MA adds an extra
piece of validation to the Sell-A signal.



Sell-A Sell-A

Sell-B

Sometimes you will see two Buy-A or two Sell-A signals in a row. If the first one doesn’t
work out, the second signal very often will.

Now, speaking of signals not working out…
Obviously, I have shown some of the very best examples of these Buy/Sell signals. They
won’t all be this good. You will have some winners, some break-evens, and some losers.
That, or course, is the nature of this crazy business.
There is some good news. There are some very easy-to-apply techniques to put more of the
odds in your favor, every time you make a trade. That’s what we’ll look at next.

SMR - The Trader’s Edge CH. 3: How to Enter The Trade Pg 47

CHAPTER 3 – How to Enter the Trade
Using Confirmation and Verification to Improve Your Odds for Success

In the previous chapter, we looked at the various Buy/Sell signals that SMR Pro provides
for timing the trades. Now, we’ll take a look into the specifics of how to enter the trades.
Always Wait for the Buy/Sell Signals to be Confirmed!
The Buy/Sell signals we just learned about are pretty good signals. However, if you just
jumped into each and every Buy/Sell set-up on the next trading day, your trading results
would probably not be very good.
Luckily, there is a very simple and objective method you can use to confirm every signal
before you enter.

If you always wait for the Buy/Sell signals to be confirmed, you will increase
your overall percentage of winning trades very substantially.

The rules for confirming the Buy and Sell signals are very simple.

For a Buy Signal, only enter the trade if the price trades ABOVE the High of
the Signal Day within the next 2 trading days.
For a Sell Signal, only enter the trade if the price trades BELOW the Low of
the Signal Day within the next 2 trading days.

Target Entry Price

Target Entry Price

Buy-A

Buy-A

The charts above illustrate the confirmation of a Buy-A signal. We set our Target Entry
Price a few ticks above the High of the Signal Day (the day the Buy-A Signal was triggered.)
In this example, the Buy Signal is confirmed on the next trading day. Even though the
market hovers around our entry price for a few days, it then takes off for a very nice run in
our favor.


Some Confirmation Examples

Sell-B
Sell-B

Target Entry Price
Target Entry Price

Here’s an example of a Sell-B signal that confirmed very nicely on the next trading day.
Notice how we set our Target Entry Price a few ticks below the Low of the Signal Day.

Target Entry Price

Sell-F

Buy-B

Target Entry Price

Above are two good examples of why it’s a smart idea to wait for confirmation. Even though
Buy/Sell signals were triggered, waiting for the price to confirm the signals would have kept
you out of these losing trades.


More Confirmation Examples

This Signal did NOT
Confirm within 2 days

Buy-B Buy-B

Buy-B

Buy-F

The chart above shows a series of Buy signals in a shallow Uptrend. The only signal that
does not result in a winning trade is the signal that failed to confirm. Notice that the
confirmation does come on the third day, but then the prices move sideways. Sticking to
the 2-day rule for trade confirmation will tend to keep you out of losing trades.

Opening Price Gap on Day 1 The chart to the left shows a big price gap
on the open, which occurs the first day
after the Signal day. My advice is to avoid
chasing these big gaps. If I wanted to trade
this Buy-B Signal, I would wait for the
price to come down closer to the Target
Entry Price. In this example, that is exactly
what the price does on the second day after
the Signal day.

Buy-B You will often see that big gaps on the first
day after the Signal day indicate trades that
do not pan out very well.
Target Entry Price
However, if a market makes a big gap, and
then takes off without me, I simply wait for
another Buy or Sell signal to be triggered
before attempting to enter that market.


Better Entry Price –vs– Improved Trading Results
Some traders, when presented with this idea of signal confirmation, may be saying to
themselves, “Hey, if I ‘jump the gun’ and enter the trade on the first day, before the price
gets to the confirmation point, I can enter the trade at a better price.” Yes, you can enter
the trade early, but you will have a lot more losers that way.
The whole point of confirming the trade is to improve your win-to-loss ratio. Those little bits
of extra profits you will obtain, by getting in on the winners too early, will be eaten up
many times over by the additional losses you will sustain from the increased number of
losing trades.
By the same token, that little bit of price advantage that you will sacrifice, by waiting for
confirmation, is a small price to pay to reap the reward of an increased percentage of
winning trades.
It is no contest: the trader who waits for confirmation will have much better overall results
than the trader who jumps in too early to get the better price.
If you are serious about your trading success, you will do everything you can to improve
your odds of a winning trade. Waiting for confirmation of a Buy/Sell signal is the simplest
and most objective tool you can use to improve those odds.

WIN
Break-Even

Use Confirmation!
Lose
That way, you will
automatically eliminate
Never-
this whole class of
Confirmed
losing outcomes from
your overall trading
results.
Buy Signal

Get This: Confirmation Automatically Improves Your Odds
The chart above shows that, basically, the price can do only one of four things every time
you place an order to enter a trade:
1) It never reaches your Target Entry Price (the “Never-Confirmed” path).
2) It reaches your Target Entry Price, then turns against you (the “Lose” path).
3) It reaches your Target Entry Price, then drifts sideways (the “Break-Even” path).
4) It breaks through your Target Entry Price, then runs in your favor (the “WIN” path).
This is the only guarantee you will ever get in trading: by using Confirmation, you
automatically eliminate a whole class of possible outcomes from the “loser” category, which
guarantees you a higher percentage of winners and break-evens.


Plan Your Trades in Advance
Always go into your trades with a plan. Give yourself plenty of time before the market
opens, and determine all the price levels for your trade entries.
Having a plan in advance helps keeps you detached from the emotions of trading. If you
stick to your plan, it’s more likely you will be calm and objective when you place your
trading orders.

Buy Signals
Max Entry Price
For long trades, determine your Target
Entry Price, your Max Entry Price, and
Target Entry Price
your Initial Sell-Stop level.
The Max Entry Price is the highest
price you would be willing to enter the
Initial Sell-Stop
trade, if the market has already moved
above your Target Entry Price.
Buy Signal

Sell Signals
Sell Signal For short trades, determine your
Target Entry Price, your Min Entry
Initial Buy-Stop Price, and your Initial Buy-Stop level.
The Min Entry Price is the lowest price
you would be willing to enter the
Target Entry Price
trade, if the market has already moved
below your Target Entry Price.
Min Entry Price


Guidelines for Trade Entry when using Confirmation

1. How do you set the Target Entry Price for your trade? How many ticks are “a few
ticks”? There is no cut-and-dried answer. But just by looking at the chart history and
the recent price activity, you should be able to judge where a good entry point would
be. For example, if you are considering a Buy signal, and you see several instances
where entering at two ticks above the Signal Day High would have resulted in losing
trades, you might choose to use a three-tick to five-tick margin to set the Target
Entry Price. And of course, it is always a good idea to avoid numbers that are too
round. For example, 219-3/4 is a better choice than 220-0.
2. It is good trading practice to take your time and already have all your price levels
determined well in advance of the market open. Mark each chart with your Target
Entry Price, your Max or Min Entry Price, and your Initial Stop level.
3. Whenever you can, I suggest waiting for the market to open. Then check the latest
price before placing the trade.
4. If the Market has not yet reached your Target Entry Price, I suggest placing a Stop
order at the Target Entry Price. This is the simplest way to be sure you will enter the
trade only if the Signal is confirmed.
5. If the Market has already moved beyond your Target Entry Price, then it is your call
as to how willing you are to “chase” the price beyond your Target Entry Price.
6. If you want to be a disciplined trader, you should never enter the trade beyond your
Max/Min Entry Price. So, if the Market has already traded beyond your Max/Min
Entry Price, you could choose to place a Limit order at any point between your Max/
Min Entry Price and Target Entry Price. You may miss a few winning trades that way,
but it will make you a better trader if you always follow your plan.
7. Remember that Markets which make big gaps on the Open are often sending a
warning that the trade may not be a good one. However, if the Market does “take off”
without you, it is better trading practice to sit this Signal out, rather than to chase
the market by entering beyond your Max or Min Entry Price. If a decent trend
develops, there will almost always be another chance to get on board.
8. If the Market does not reach your Target Entry Price on the first trading day after the
Signal Day, the Buy/Sell signal is still valid. The guidelines for trade entry on the
second day are exactly the same as above.
9. If the Market still has not reached your Target Entry Price by the end of the second
trading day after the Signal Day, then consider the Buy/Sell Signal as no longer
valid. Move on and look for the next good opportunity.


Another Way to Improve Your Odds: Verification of the “B” Signals
Using confirmation of the Buy/Sell signals, as we just explored in the first part of this
chapter, is an excellent idea if you want to have better odds of entering a winning trade.
But it gets even better.
When I first examined the chart behavior of the Buy/Sell signals, I was not satisfied with
the win/loss ratio of the Buy-B and Sell-B signals. Even when using confirmation, I
thought the overall probability of success was just “OK,” but not anything to get overly
excited about. I had hoped that these signals would be significantly better than what I was
seeing. Because the B signals were by far the most common, I wanted to find a way to
improve their success rate. The A, C, and F signals seemed to work reasonably well, as long
as the rules for confirmation were followed. If I could just get the B signals to achieve a
fairly high degree of reliability, then I knew I would have all the tools I needed to make up a
truly superior methodology, and not just another “pretty good” one.
I must confess that I got pretty lucky. One of the early Beta Testers for the SMR Pro
software sent me a letter about the method he was using with the SMR Pro signals. I won’t
go into the details, because I since discovered that there are some problems with his
method, at least from my perspective, that keep it from being a first-class approach. In
short, it works great during its “streaks”, but then it misses a whole lot of good signals. But
one component of his method turned out to be a real gem: the CCI-FP indicator.
One of first things I tried when looking for an improvement to the B signal was to check its
success rate against the CCI-FP: how many times did the B signal succeed whenever the
CCI-FP was also flashing a particular signal. I was very impressed with the results. Almost
spooky, it worked so well. And no, it’s not 100%, but it’s good enough to pay some very
serious attention to.
The name I chose for this tool is “Verification,” to set it apart from the Confirmation tool.

The CCI-FP Indicator is a Departure from “Pure” SMR
I know that some long-term fans of SMR will have an objection to introducing a “foreign”
indicator into their methodology. They believe that the SMR Signals (MA, DL, and SL) are
everything you ever need to trade successfully, and throwing anything else into the mix is
downright sacrilege.
While I can understand how someone would feel that way, I have a different perspective. My
mission is to always strive to create the very best trading methodology I can, and to
continually look for ways to improve it. I do this both for myself, and for the users of the
SMR Pro software. I am willing to do whatever I need to do. If adding another indicator or
two improves my chances for success, then I will gladly do that, even if it irritates some
purists.
I consider myself pretty lucky to have found a tool that works as well as it does to improve
the success rate of the Buy-B and Sell-B signals. I will continue to use it and recommend it
until I come across something that works better.


Verification: How to Apply the CCI-FP Indicator
The first step in using Verification of the Buy-B and Sell-B signals with the CCI-FP is pretty
simple. Whenever you are considering entering into a B signal, just add the CCI-FP
indicator to the chart, as shown below.

Choose “Add Lower Indicator 1” from the
Indicators menu.
(If you already have added one or two
Lower Indicators to your chart, just add
the next available Lower Indicator.)

Select the CCI-FP indicator type from the pull-down list. Keep the Upper Marker set to 80,
and the Lower Marker set to -80. Click “Add.”
This will add the CCI-FP indicator to a new panel on the chart, just below the SMR panel,
which contains the DL and SL.


Verification: About the CCI-FP Indicator
The CCI (Commodity Channel Index) indicator was developed by Donald Lambert. It is a
momentum oscillator which can be useful for identifying short-term overbought and
oversold conditions of a chart. Despite the use of the term “Commodity” in the name, this
indicator works as well on Stock charts as on Futures charts.
The basic CCI indicator takes one parameter, which is the period. The CCI-FP indicator is a
special type of the CCI indicator. Its full name is “Commodity Channel Index – Fibonacci
Peaks.” It is constructed by computing three different CCI lines, each with a different
period, and then taking the average of the three. The three periods are 8, 13, and 21, which
are Fibonacci numbers.
When I use the CCI-FP indicator to cross-verify the “B” signals, I am looking for signals
formed when the CCI-FP line crosses values of +80 and -80. Therefore, I set the Upper
Marker value to +80, and the Lower Maker value to -80. These values are already set up as
the defaults in the SMR Pro software.

CCI-FP Middle Marker Upper Marker

Lower Marker

When you add the CCI-FP indicator to your SMR Pro chart, the Upper Marker will already
be set to +80, and the Lower Marker to –80.
There is also a Middle Marker at the Zero line. I do not use the Middle Marker for anything
in my methodology.


Verification of the Buy-B Signal
Now that we know how to add the CCI-FP indicator to our charts, let’s look at how to Verify
the Buy-B signals.

This chart shows a Buy-B signal that has been
Verified by the CCI-CP signal.
Notice how the CCI-FP line has dipped BELOW
the Lower Marker, but has already crossed back
ABOVE the Lower Marker on the day the Buy-B
signal is triggered.
Buy-B In order to Verify the Buy-B signal, the CCI-FP
Indicator must have already crossed ABOVE the
Lower Marker from BELOW.

CCI-FP

Buy Verification

And here is the same chart after the Verified
Buy-B signal was successful.

NOTE: This Verified signal was also Confirmed.
Verification does not take the place of
Confirmation! It is just another tool you can use
in addition to Confirmation.
Buy-B

CCI-FP


Verification of the Buy-B Signal (cont’d)

Notice how in the first Buy-B signal, the CCI-FP
failed to Verify, because it had not crossed
BELOW the Lower Marker.
The second Buy-B signal does get Verification
from the CCI-FP, and is successful.

Buy-B
Buy-B

CCI-FP

Verification Verification
Failed OK


Verification of the Buy-B Signal (cont’d)

Buy-B
Buy-B

CCI-FP CCI-FP

Verification Failed

In the charts above, notice how the CCI-FP has not yet crossed back ABOVE the Lower
Marker on the day the Buy-B signal was triggered. Therefore, the Verification of the Buy-B
signal did NOT occur.


Verification of the Sell-B Signal
Now let’s take a look at how we verify the Sell-B signal using the CCI-FP Indicator.

This chart shows a Sell-B signal that has been
Sell-B Verified by the CCI-CP signal.
Notice how the CCI-FP line has popped up
ABOVE the Upper Marker, but has already
crossed back BELOW the Upper Marker on the
day the Sell-B signal is triggered.
In order to Verify the Sell-B signal, the CCI-FP
Indicator must have already crossed BELOW
the Lower Marker from ABOVE.

Sell Verification

And here is the same chart after the Verified
Sell-B Sell-B signal was successful.

NOTE: This Verified signal was also
Confirmed. Verification does not take the
place of Confirmation! It is just another tool
you can use in addition to Confirmation.


Verification of the Sell-B Signal (cont’d)

Notice how, in the first Sell-B signal, the CCI-FP
Sell-B failed to Verify, because it had not even crossed
Sell-B ABOVE the Upper Marker.
The second Sell-B signal does get Verification
from the CCI-FP, and is successful.

Verification Verification
Failed OK


Verification of the Sell-B Signal (cont’d)

Sell-B

Sell-B

Verification Failed

In the charts above, notice how the CCI-FP has not yet crossed back BELOW the Upper
Marker on the day the Sell-B signal was triggered. Therefore, the Verification of the Sell-B
signal did NOT occur. Notice how the market just moves sideways after this signal is
triggered.


Verification: Making an Exception for the First “B” Signal
As you study the charts, you will find that the first Buy or Sell signal in a new trend will
very often work out well, even if the Verification check failed. Here are two examples.

Exception for a Buy-B Signal
Since the Buy-B signal is the first Buy
signal that follows a series of Sell signals, I
will consider this trade, even though the
CCI-FP Verification failed.
I especially like to consider the first Buy-B
signal if looks a lot like a Buy-F signal, as
Buy-B in this example.

Verification Failed

Exception for a Sell-B Signal
Sell-B
Since the Sell-B signal is the first Sell
signal that follows a series of Buy
signals, I will consider this trade, even
though the CCI-FP Verification failed.
I especially like to consider the first
Sell-B signal if looks a lot like a Sell-F
signal, as in this example.

Verification Failed


Verification: Making an Exception for the First “B” Signal (cont’d)

Below is another example of when you could have made an exception for the first “B” signal
in a new trend.

Sell-B
Sell-B

Sell-B

Verification Failed Verification OK Verification Failed

In this chart, we see three Sell-B signals in a row, which come after a series of Buy signals.
Notice how the first Sell-B signals works out well, even though the Verification check failed.
The Verification check passes on the second Sell-B signal, and it turns out to be an
excellent short trade. The third Sell-B signal fails the Verification check. Unlike the first
Sell-B signal, the third Sell-B signal results in a losing trade.

SMR - The Trader’s Edge CH. 4: Trading with the Mode Pg 64

CHAPTER 4 – Trading with the Mode
Using SMR’s Concurrent Mode to Enter Trades

In addition to the primary Buy/Sell signals, the SMR charts provide yet another tool which
you can use to achieve excellent timing of your trade entries – the Concurrent Mode.

What is Concurrent Mode?
Whenever the MA and the DL are both headed in the same direction, the chart is said to be
in Concurrent Mode. If the MA and DL are headed in opposing directions (one going UP and
the other going DOWN), the chart is said to be in Cross-Current Mode.
Why would we want to use Concurrent Mode? Because many of the best moves occur when
the chart enters Concurrent Mode and stays there for an extended period of time.
Sometimes these changes occur in such a way that the Buy/Sell signals miss the trade
entry. However, if we can recognize Concurrent Mode on the day that it starts, we can often
jump on board and go for a nice little ride (and sometimes a nice long one).
Also, we can look for small, subtle pullbacks in the middle of a Concurrent Mode run. In a
strongly trending chart, these entry opportunities can often be missed by the conservatively
structured Buy/Sell signals. But for those who are occasionally willing to trade a little more
aggressively, I will show a method for entering trades during these periods of fast-moving
market activity.
While I don’t advocate jumping into each and every market as soon as it enters into
Concurrent Mode, I do believe there are setups that make sense to watch for and consider,
and I will show examples of these.


Viewing the Modes in Color
With SMR Pro, it is now very easy to instantly recognize the Mode of the chart. Go to the
View or Colors menu and select “Mode Colors ...”. Then check the option to “Show Mode
with Colored Bars.” If you want to change the color for any of the modes, click on the small
colored box next to the Mode type, and select a different color.

This chart shows the default colors for the SMR Modes:
GREEN for Concurrent Mode, MA heading UP (Concurrent - Uptrend)
BLUE for Cross-Current Mode, MA heading UP (Cross-Current - Uptrend)
BLACK for Cross-Current Mode, MA heading DOWN (Cross-Current - Downtrend)
RED for Concurrent Mode, MA heading DOWN (Concurrent - Downtrend)


Mode Entry Setup #1 – First Concurrent Bar
What about those times when the market moves so fast that you don’t get alerted by an
automated Buy/Sell signal? Those are often the times when entering into a market as soon
as it enters Concurrent Mode can result in a very good trade. To do this, we look for the
First Concurrent Bar that’s clearly breaking out from recent price action. Let’s look at a few
examples.
Here we have a Concurrent Mode bar that is
breaking out to the upside. The Green bar tells
Target Entry Price me that the chart is in Concurrent Mode, and
the Trend is UP.
Notice how the last bar is clearly breaking out
above the recent market Highs.
I follow the rules for Confirmation by setting
my Target Entry Price a few ticks above the
high of the Signal bar. Then I wait to see what
happens on the next day’s market open.
NOTE: Just being the First Concurrent Bar
does not qualify as a trade set-up. As you can
see, there are other Green bars, but they do
not break out above the price action, so we
don’t consider those.

This is a case where being alert for the First
Concurrent Bar really paid off, since there
was no other Buy signal triggered for this
trade.
The chart stayed in a strong Concuurent
Mode Uptrend for the next 23 trading days,
which is a very good run.
Target Entry Price

NOTE: A market will sometimes move too
quickly for one of the automated Buy/Sell
signals to be triggered. That’s when you need
to know how to recognize the Mode Set-ups.


Mode Entry Setup #1 – First Concurrent Bar (cont’d)

Here we have a Concurrent Mode bar that is
breaking out to the downside. The Red bar
tells me that the chart is in Concurrent Mode,
and the Trend is DOWN.
Notice how the last bar is clearly breaking
down below the recent market activity.
I follow the rules for Confirmation by setting
my Target Entry Price a few ticks below the
Low of the Signal bar. Then I wait to see what
happens on the next day’s market open.

Target Entry Price

Since no other Sell signal was triggered for
this trade, it definitely pays to be alert to the
First Concurrent Bar set-up.

Target Entry Price


Mode Entry Setup #2 – First SL Turn
The second type of Concurrent Mode trade set-up occurs when you see a First SL Turn in a
chart that is already in Concurrent Mode. What do we mean by “SL Turn?” The SL Turn
occurs on the first day that the SL line turns back into the direction of the Trend. For
example, if the chart is in an Uptrend, and the SL is currently heading DOWN, the SL Turn
will occur on the first day that the SL turns back UP.

Target Entry Price Here we have a chart with six Green bars in
a row, so it is solidly in Concurrent Mode,
and in an Uptrend.
If I want to enter into a long position, or add
to an existing long position, I can consider
doing it here. That’s because the SL has just
turned UP, and it’s the first SL Turn of this
Concurrent Mode.
Again, I follow the Confirmation rules by
placing my Target Entry Price a few ticks
above the High of the Signal bar.
NOTE: This is another case where you can
have a good trade set-up, even though an
automated Buy signal was not triggered.

You may be wondering why I’m only looking
for the first SL Turn of the Concurrent Mode.
That’s because the first SL Turn has a much
higher probabilty of success than any
Target Entry Price second or third SL Turn which might occur.
It is just a safer bet, and it will definitely get
you in at a better price if a good trend
should develop.
A second or third SL Turn will most likely
happen too far into the trend to be a good
bet. It would be better to look for any of the
automated Buy signals instead.


Mode Entry Setup #2 – First SL Turn (cont’d)

Here we have a chart with six Red bars in a row,
so it is solidly in Concurrent Mode, and in a
Downtrend.
If I want to enter into a short position, or add to
an existing short position, I can consider doing it
here. That’s because the SL has just turned
DOWN, and it’s the first SL Turn of this
Concurrent Mode.
Target Entry Price Again, I follow the Confirmation rules by placing
my Target Entry Price a few ticks below the Low
of the Signal bar.

After the First SL Turn, the market continues
with a very nice sell-off.
In this case, even an entry at the second SL
Turn would have paid off nicely. However, I
still recommend to avoid those, because they
aren’t nearly as good a bet as the First SL
Target Entry Price Turn.

SMR - The Trader’s Edge CH. 5: The SL Divergence Pg 70

CHAPTER 5 – The SL Divergence
An Excellent Tool for Pinpointing Price Reversals

Let’s take a look at one more way that we can use the SMR oscillators to anticipate future
movements in price. When the Solid Line (SL) forms a divergence with the price behavior,
we have a highly reliable indication of a reversal in price within one or two trading days. I’ll
explain what I mean by divergence, and show examples of how we can use this information
to improve our trading.

2 Bearish Divergence
Now what do we mean by divergence? In the
1 chart to the left, notice how the Price makes
a HIGHER High from Point 1 to Point to, but
the SL makes a LOWER High from Point A to
Point B. The line that connects Points 1 and
2 is pointing UP, but the line connecting
Points A and B is pointing DOWN.
This is a clearly defined SL Divergence, a
difference in behavior between the SL and the
Price. Notice that even though the price has
made a new short-term high, the SL is
A signaling that the market is likely to head
B lower. So, whenever you have an SL
Divergence, it is the direction of the line
drawn on the SL signal that is pointing to the
direction, in the short term, that the market
is most likely to take next.

Bullish Divergence
In the Bullish Divergence, the Price
makes a LOWER Low, but the SL
makes a HIGHER Low.
Again, it is the direction of the line
drawn on the SL signal that is
indicating the likely future price
direction.


Some SL Divergence Examples

Buy-B

Buy-B

In this chart, we see a Bullish Divergence (marked by the Blue lines) that occurs in
conjunction with a Buy-B signal. This is a very nice validation of the Buy Signal. Notice
how the Bullish Divergence pinpoints the end of the first pullback from the Uptrend.
Next, the Bearish Divergence (marked by the Red lines) tells us to be on the alert for the
end of that upward wave of price movement. You might choose to take at least part of your
profits here, then wait to see if another Buy Signal develops.
This chart is a very good example of the two ways we use the SL Divergence:
1. To signal the possible end of a pull-back from the primary trend
2. To signal the possible end of a price move in the direction of the primary trend


Some SL Divergence Examples (cont’d)

In this chart, we first see a Bullish Divergence
(marked by the Blue lines). Now, we don’t use
this as a signal to go long, because that would
be a trade against the Bearish trend. Instead,
we just recognize it as an “alert” that the trend
could very likely be ready to turn UP.
Next, take a look at the Bearish Divergence
(marked by the Red lines). The SL has just
turned down, which completes the divergence
signal. This divergence flashes a big alert that
we should think seriously about getting out of
this market, if we are long.

And here we see that the market does indeed
sell off, and sells off hard.
Whenever you are in a position, you should
always be alert to any possible development of
an SL Divergence against the direction of your
trade.


Some SL Divergence Examples (cont’d)

Here is an example of a Bearish Divergence on a weekly chart. We don’t see as many
divergences on the long-term charts as we do on the daily charts. When they do occur,
however, you should pay close attention to them. They can alert you to some very big
changes in the trend.
Notice how hard and fast the market sells off after this Bearish Divergence was signaled.


Notes on the SL Divergence
1. The SL Divergences are highly reliable signals of price reversals. In fact, they are
sometimes the most reliable indicator on the chart. Always be on the lookout for
them.
2. The SL Divergences tend to run in “streaks.” Sometimes you see them all over your
charts, and sometimes you can go weeks or even months and only see a few. They do
not occur frequently enough to build a whole methodology around them.
3. When the line drawn across the SL is at a steeper incline that the line drawn across
the Price, the SL Divergence is more likely to indicate a reversal in price action.
4. SL Divergences with large differences in SL values (the line drawn on the SL is very
steep) are the most reliable reversal indicators.
5. If an SL Divergence fails to signal a price reversal, be on the lookout for another
divergence to develop soon after the first one. If it does, this second divergence is an
especially reliable predictor of a price reversal.

SMR - The Trader’s Edge CH. 6: Getting Out Pg 75

CHAPTER 6 – Getting Out
Some Ideas for Exit Strategies

If you are like most traders, getting out of a trade always feels different than getting into
one. You never have the same level of confidence that the timing is correct. You always
wonder if you are getting out too soon, and missing out on some additional gains. There’s
just more uncertainty to the process.
Well, there’s no way to remove all that uncertainty, because the future is, of course, always
uncertain. But there are some tools you can employ which cut down on the guesswork, and
add more strategic thinking and objectivity to your exit techniques. Just as you want to
have a plan for entering trades, you should also have a plan in mind for how you are going
to exit. Using a pre-planned strategy will, over the long haul, help you to let your winners
run and catch more of those occasional big moves. You are also more likely to be better
protected when the market turns against you.
In this chapter, we identify four distinct methods we can use to exit a winning position.
These methods are:
• The SL Divergence Exit
• The Cross-Current Mode Exit
• The Displaced Moving Average Exit
• The 2-Day Trailing Stop Exit
These methods all involve the use of trailing stop orders. The only exception is the SL
Divergence, where you could also choose use a market order to exit.


The SL Divergence Exit
We saw in the last chapter how we can use the SL Divergence to alert us to an upcoming
price reversal. Let’s look at an example of how we might exit the trade when an SL
Divergence develops.
This market has been in a steady Uptrend
for weeks. On this day, we see that a
Bearsish Divergence of the SL has just
occured, signalling that the top may be in
place.
I make my plans to move my sell-stop just
under the low of the latest bar. I will place
Move Stop to Here the order to move my stop as soon as the
market opens the next day.
Of course, you also have the choice here to
just exit the trade on the next day’s market
open.

Even though the market does not sell off
right away, it’s a good thing we got out
when we did. It drops hard a few weeks
later.
The SL Divergence did an excellent job of
telling us that there was no more upward
momentum left in this market, at least for
the short term.


The Cross-Current Mode Exit
This is a strategy we can use whenever the market is in a strong Concurrent Mode. The
technique is very simple. Whenever the first Cross-Current Mode bar appears, we move our
stop-order just under the Low of that bar (if we’re long), or just above the High (if we’re
short).
Here we see a market that has been in a strong
Concurrent Mode, as indicated by the Green Bars.
As soon as I see the first Blue bar, I know the
market has switched to Cross-Current Mode. At
this point, I want to be on the alert for a possible
pullback in the price. This is especially true if the
market has just made a fast move, as is the case
with this chart.
As soon as the market opens the next day, I’ll move
Move my stop to just under the Low of the Blue Bar.
Stop to
Here

Just a few days after entering Cross-Current
Mode, the market begins its sell-off.
Now, sometimes the market will continue
trending in your favor, even as it switches
back and forth between Concurrent Mode and
Cross-Current Mode. That’s why you should
consider using trailing stops for these kinds of
strongly thrusting market moves, rather than
just exiting at the market.


The Displaced Moving Average Exit
This is a strategy you may want to consider to help you position your trailing stops during
the beginning and middle phases of your trades.
The Displaced Moving Average (DMA) is simply a moving average that is shifted to the right
by one or more periods. When a moving average line is shifted to the right on a chart, it is
able to “capture” more of a price move in a trending market. That is, the market will run for
a longer period of time before any of the price bars cross the moving average line. Because
of that, it is a very useful guide for setting the level of your trailing stops.
Non-Displaced Moving Average
In the chart to the left, the Blue
line is a 20-day simple moving
Using a 20x0 DMA, average. It has not been displaced.
you would have I call this a 20x0 DMA (“Twenty by
gotten stopped Zero”).
out here.
Notice where we would have exited
this trade, if we had used the 20x0
DMA to set our trailing stops.

Displaced Moving Average
The Blue line is this chart is also
a 20-day moving average. The only
difference between this chart and
the chart above is that the moving
Using a 20x5 DMA, average has been shifted to the
you would have right by 5 periods.
gotten stopped
I call this a 20x5 DMA (“Twenty by
out here.
Five”).
Now, notice how much more of the
price move we are able to capture
by using the 20x5 DMA rather
than the 20x0.


Choosing the DMA Parameters
On the previous page, we used a 20x5 DMA to help us set our trailing stop levels. However,
what you will use really depends on how fast the market moves after you enter the trend.
Of course, you can never know in advance what setting for the Displaced Moving Average
will work the best for any particular trade. But there is a logical method you can use to
adjust the DMA to fit the price action as the trade progresses.
I suggest keeping your moving average displacement set to 5. That value seems to work well
over most markets.
Start out with a 40x5 DMA. If the price bars seems to be pulling away from this line, then
try a 35x5 DMA and see if that seems to fit the trend better. Basically, you just have to try
different values and see how well they fit. Then be ready to adjust the period of the DMA
any time the price action appears to require it.
You may find there are a few settings you tend to come back to as favorites. You might start
out with experimenting with 40x5, 25x5, and even 7x5 for very fast-moving markets.

Adding the DMA to Your Chart
To add a DMA to your chart, click on the “Moving Averages” button in the control area of
the SMR Pro screen. Or, select “Moving Averages” from the Indicators menu. You will get
the following form:

You can add up to 4 different Moving Averages to your chart at one time. If I’m using a
Displaced Moving Average to help me set my trailing stops, though, I usually will just turn
on the MA3 line. I keep the MA Type set to “Simple”, and the Source set to “Close.” I adjust
the Period, and keep the Displacement (“Disp”) set to 5.
Make sure to choose the option for “This Chart Only.” Otherwise, you will apply the same
DMA to all of the Daily Charts.


The 2-Day Trailing Stop Exit
Suppose I am in a trade that has already made a nice profit. I start to think about taking
my gains, but I also want to let the trade run as long as the market keeps moving in my
favor. Here is a simple strategy you can use to keep your trailing stops tight against the
price action, yet still allow a little space to let a winner keep running.
This chart shows a market that I have entered
Thursday’s price bar at the Buy-B signal. I have a little profit, and I
want to protect it.
Suppose the last day on this chart is a
Thursday. My plan is to place a trailing stop
just under Wednesday’s Low. I will place this
stop order when the market opens on Friday
morning
Since, on the day that I actually place the order
(Friday), I am basing my stop level on a bar
When the market that occurred two days ago (Wednesday), I call
opens on Friday, I this a 2-Day Trailing Stop.
will set my stop just
under the low of
Wednesday’s bar

At the end of each trading day, I check
to see if the market has made a Higher
Low. If so, then I make a note to move
my trailing stop to just under
yesterday’s Low. I actually place the
order to move the stop on the next
day’ s open.
If, at the end of the trading day, the
price has not made a Higher Low, I
simply leave the stop order as is.
On the Market Open, if
the previous day’s Low Here you can see the results of using
was a Higher Low, I will this technique. I get stopped out for a
set my stop just under decent profit on the last bar of this
the Low of 2 day’s ago. chart.

SMR - The Trader’s Edge APPENDIX A: Recommended Reading Pg 81

CHAPTER 7 – Keeping a Sharp Edge
Tips and Strategies for Better Trading Results

(In Progress)

SMR - The Trader’s Edge APPENDIX A: Recommended Reading Pg 82

Chick Goslin’s TRADING DAY BY DAY

Trading Day By Day is one
of the few truly great books
on trading, and we highly
recommend it. Chick
explains his methods for
using the SMR signals in a
simple, straight-forward,
and thorough style.
But it’s about a lot more
than just the SMR signals.
This book covers all aspects
of what it takes to become a
success at the difficult
game of trading: the
psychology, the discipline,
and excellent guidelines for
money management.
A trading classic.

Buy direct from:

www.tradingdaybyday.com

SMR - The Trader’s Edge APPENDIX B: Getting Started with SMR Pro Pg 83

XXXXXXXXXXXXXXX
(In Progress)

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