TRADIN6INTHEZONES

INTRODUCTION

Wearenowatapointwherewewanttostartbeingaggressivesothatwecanmaximizeourreturnon
investment(ROI).Thisisthepointthatseparatestherealtradersfromthewannabes.Wewanttoinvest
toourlimits,butonlywhen everythingis goingourway.Onceweknowweareinthatposition,we
wantto"goforit."EverythingisgoingourwaywhenevertheMomentumisinthesamedirectionasour
trade and the Momentum is Accelerating in our direction. The final confirmation comes when the
traders take the Price inourdirection. Inotherwords,wehavethe Momentum inourfavor,itis
Acceleratinginourdirection,andthePriceisclosinginourdirection.ThisgivesusanabsoluteMAP
forprofits.MAPstandsforMomentum,Acceleration,andPrice.Thisisthebestofallworldsandnot
thetimetobefainthearted.Thischaptershowshowweputthisfavorablecombinationintoactual
practice.InFigure71,wehavecondensedtheexplanationandtherulesforcreatingaZone.TheZone
iscreatedfromacombinationoftheAOandtheACcharts.RememberthattheAOistheMomentum
andtheACistheAcceleration.Whenbothoftheseareup,whichcaneasilybeseen(thesoftwarepaints
thebarsgreeniftheyarehigherthantheimmediatelyprecedingbar),weareintheGreenZone.When
boththeAOandtheACbarsarered,weareintheRedZone.Ifoneofthebarsisredandoneisgreen,
weareintheGrayZone.TheGreenZoneindicatesaverybullishmarket,theRedZoneindicatesavery
bearishmarket,andtheGrayZoneindicatesamarketthatisintransition.Inverbalcommunication,we
saywearegreen
Figure71TheZonetradingphiLosophy.
(inabuyzone),red(inasellzone),orgray(inatransition/becarefulzone).InChapter9,wewill
demonstratehowthesezonesgiveusanextremelygoodtechniqueforgettingoutofthemarketand
squeezingtheprofitinourfavor.
CREATINGAGREENZONE
Setupyourcomputersothat(1)whenboththeAOandtheACarehigherthantheirimmediately
precedingbars,thecorrespondingpricebarwillbecoloredgreen,and(2)ifboththeAOandtheACare
lowerthantheirimmediatelyprecedingbars,thecorrespondingpricebarwillbecoloredred.IftheAO
andtheACaredifferentcolors,set~.pthepricebartobegray.Youcanthenreadthezonecolor
directlyonthepricebar.(Ifyouhaveproblemsdoingthis,contactyourvendororcallourofficeandwe
willwalkyouthroughtheprocess.)Figure72showshowthepricebarsarecolored,dependingontheir
relationshiptotheimmediatelyprecedingbar.Italsodemonstrateshow
Figure72CreatingtheGreenZone.
thepricecanpullbackbutnotnecessarilyaffectthecolorofthepricebar.Themarket,likeyou
andme,hastobreathe.Thesebarsshowthecontinualinandoutbreathingofthemarket.Wealsouse
thezonestohelpusallocateourresourcesintradingsothatwegetthebiggestbangpossibleperbuckof
trading.InFigure73,thefirstbarontheleftisagraybar.Thesecondbarfromtheleftisagreenbar.

Thethirdbarfromtheleftisalsogreenandfulfillsthethreerequirementsforan"addon"buy:(1)The
Momentumisstillgoingup,(2)theAcceleratorismovingup,and(3)thePriceisclosinghigher.We
havefulfilledtherequirementstobuyonthecloseofthethirdbar.Itdoesnotmatterwhattimeperiod
weareusingnorwhetherwearetradingstocksorcommodities.Ifwearetradingdailies,wecanusea
StopCloseOnlyorder.Ifwearetradingintraday,wemustwatchthemarketandputinamarketorderat
theendofwhatevertimeperiodwearetrading.IfthefollowingbarscontinuetogiveustheMAP
(Momentum,Acceleration,andPrice)signals,weaddonthecloseofeachconsecutivebaruntil
Figure73TradingintheGreenZone.
thepricebarchangescolor,whichsignifiesachangeineither/bothMomentumandAcceleration.
MOREEXAMPLESOFZONETRADING
Figure74givessomevariousconfigurationsthatwillaffectthetradingofthezonesignals.
WHENTOSTOPADDINGINSIDETHEZONES
Thereisoneexceptionthatweoftenusewhenaddingontothezones.Rememberthatthemarketmust
alwaysbreatheanditisunusualforthemarkettohavemorethansixtoeightbarsofthesamecolor.
Therefore,weusethisinformationtohelpusmaximizeourprofits.Afterthefifthredorgreenbar,we
stopaddingonbasedonthe
Figure74Moreontradingthezones.
zones.Westilltakeanyothersignalsinthatdirection.Thereasonis:weknowfromexperiencethatitis
raretocontinuetogetoversixtoeightbarsofthesamecolor.Thismeansthatafterseveralofthesame
colorbars,themarketisgoingtotransitionintoeithergrayortheoppositeofthecurrentbarcolor.If
youfollowafewcharts,youwillseehowthisenhancesourprofitsandcutsourpotentiallosses.
TAKINGPROFITSINTHEGREENZONE
Letmerestateforemphasis:themarkets,likeyouandme,mustbreatheregularly.Observingthe
color of the price bars can easily monitor this breathing. We turn this characteristic into a
profitsqueezingtechniquetotakemoremoneytothebankonourtrades.Hereistheapproach.Afteryou
havefiveconsecutivebarsofthesamecolor,youraise(orlower,inadowntrend)yourstoptoonetick
belowthelowofthefifthgreenbar.Thiswouldbethehighplusonetickabovethehighofthefifthred
barinadowntrend.Afterthis
Figure75TakingprofitintheGreenZone.
initialzonestop,ifthepricebarscontinueinthesamedirectionyouwouldraise(lowerinadown
market)yourstoptothenexthigherlow(lowerhigh)andkeepdoingthatuntilyouarestoppedout.(See
Figure75.)
USIN6ZONESINADOWNMARKET

CreatingaRedZone
Figure76explainsthedetailsforcreatingaRedZoneonyourpricechart.Thiscanbedonewithalmost
anychartingservice(orautomaticallywithourInvestor'sDreamsoftware).Afteryouhavecreatedthe
zonesonyourchart,thenexttaskistounderstandhowtotradethesezonesforthemaximumROI.As
emphasizedelsewhereinthisbook,thesezonesworkequallywellforstocks,commodities,andspread
trading.
TradingintheRedZone
Trading in the RedZone is just the opposite oftrading in the Green Zone (see Figure 77).
Wheneveryouhavearedpricebarthatisprecededbyaredbar,youaddonatthecloseifthecloseis
lower than the close of the previous bar. In other words, you must have a MAP to profit. The
Momentummustbelower(redAObar),theAccelerationmustbeincreasinginadownwarddirection
(redACbar),and,finally,thePricemustcloselowerthanthepreviousbar'sclose.Youaddonuntilyou
havefiveconsecutiveredbars.Afterthefifthconsecutiveredbar,youstopaddingonbasedonthezone
signals.Let'slookatsomeexamplestoseeifyouhavegraspedthisidea.Figure78demonstratesthat
yousellonthecloseofaredpricebarifitmeetsthefollowingrequirements:
1.Itmustbeprecededbyaredbar,indicatingboththeAOandtheACarelower.
2.Itmustcloselowerthanthepreviousbar.
3.Theaddonselloncloseiscancelediftherearemorethanfivepreviousconsecutiveredbars.
Nowlet'sdeterminehowtousethesequentialredbarsasaprofittakingenhancement(Figure79).
TakingProfitsintheRedZone
Rememberingoncemorethatthebreathingcycleofanymarketcanbetracedbyobservingthered,
green,andgraypricebars,wewanttousethatknowledgetoenhanceourROI.Wehavefoundthatthe
optimumstrategyfordoingthisistoexitourshortpositionafterfiveconsecutiveredbars.Thespecific
techniqueistoplaceaprotectivestop(notastopandreverse)onetickabovethehighofthefifth
consecutiveredbar.Ifthemarketdoesnottakeusoutonthefollowingbarandithasalowerhigh,we
moveourstopdowntoonetickabovethenewlowerhigh.ANIMPORTANTPOINT:Afterthefifth
redbar,wecontinuetolowerourstoptojustabovethehighofthecurrentbarNOMATTERWHAT
COLORTHECURRENTBARISuntilwearestoppedout.Nowthatweknowhowtotradethered
andgreenbars,let'sconsiderthegraytransitionbars.GraybarsindicatethattheMomentumisinone
directionandtheAccelerationisintheoppositedirection.Thiscouldindicate(1)theapproachingendof
atrendofsomedegreeor(2)thatthemarketissimplytakingabreather.Whatisactuallyhappeningis:
themarketistemporarilylosinginterestinthedirectioninwhichitwasgoing.Itisrunninglowon
eitherbuyersorsellers.Howthezonesaffectourfifthdimensionalsignalisthesubjectofthenext
chapter.Theimportantpointstorememberherearethatwedonotaddon,basedonthezonesignals,if
thecurrentpricebarisgray.Whenusingthefiveconsecutivebarsofeithergreenorred,we
Figure711Tradingthezonesignals.
docontinuetotrailourstopbehindthecurrenthighorlow,nomatterwhatcolorthecurrentbar
happenstobe.Figure711istheS&Pchartthatwearefollowingthroughallfivedimensions.This

tradingoccurredbetweenApril17andJuly31;noticethatthereare10zoneaddons.Table71givesa
breakdownofeachtradeandtheprofititgeneratedduringjustoverthreemonthsinthedailyS&P
charts.Duringthistimeperiod,onetickequaled$5.00.Shortlyafter,theExchangehalvedthevalueofa
tick.
SUMMARY
hi,chdl~t~l,we~mill~dhow~V~irad~whenlh~markelisabsolutelyinourfavor.Weusethe
zonesto:
1.Addonaggressively.
2.Squeezethemaximumprofitfromatrendmove.
ToRecap:IftheMomentumandAccelerationareinthesamedirection,thenweareineithertheGreen
ZoneortheRedZone.However,ifoneisupandtheotherisdownwhencomparedtotheimmediately
previousbar,thepricebariscoloredgraytorepresentthatweareinatransitionoraGrayZone.The
Zoneconceptdoesthreethingsforus:
1.Allowsustogetaggressivetowardthemarket.
2.AdjuststheBalanceLinesignalinthedifferentzones.
3.Givesusagreatprofittakingtechnique.
In the next chapter, we will examine the Balance Line signal, which is ourfifth dimension. After
understandingtheBalanceLine,wewillputallthedimensionsintoatradableformtouseintradingany
market.