Trading Triads

Unlocking the Secrets of Market Structure and Trading in Any Market

Felipe Tudela

• Publisher: Wiley
• Year: 2010
• Print ISBN: 9780470748435
• eBook ISBN: 9780470971581
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

Trading Triads explains the 'Triads' method, a system that enables simple market analysis, flagging accurate turning points as well as precise entry and exit points for trades.

The book begins by introducing the reader to the Triads method and how it was developed, as well as explaining how it reflects the fundamental structure of the market. The author goes on to explain the oscillatory nature of markets, their structure and their key elements. The book explains why most indicators give false signals and explains how to avoid them.

After exploring fundamental market structure, the book explains the Triads strategy. It covers precise entry and exit points as well as stop placement. Also it explains how to use Triads at the same time as other indicators to trade the markets most successfully – for example, how a simple moving average traded with the help of Triads becomes a powerful trading tool that avoids most false signals.

It also shows how to trade an MACD, stochastic or any other indicator/method with the help of Triads. The purpose of these examples is to show how the Triads methodology improves significantly any trading method or trading tool.

The book aims to explain to the reader a new trading method which can simplify analysis of the market, and provide a simple and extremely versatile strategy which can sit alongside the trader's current range of tools to increase precision, and results, in their trading of the markets.

1

The Oscillatory Nature of Markets: Their Component Elements

MARKET SCIENCE, THE SCIENCE OF OSCILLATIONS

What is an oscillation? An oscillation is a vibration. A market has a rate of vibration. Prices are not fixed, but exist in a flow, a stream that appears as quotes or charted bar on a screen.

The underlying market structure is made from these oscillations or vibrations. What we are trying to do is to understand them. They are the origin and cause of market structure. All patterns derive from oscillations.

This is why you must learn about the oscillatory nature of markets. A market’s oscillations or vibrations will exhibit a rhythm. This rhythm has an inner harmony. Changes in the inner harmony provide clues about market behavior.

These oscillations take place in time and space. Their rhythm not only configures the different market patterns and structures, but also the market’s cycles and time forms. Discovering the vibratory rate of a market gives you the key to trading it efficiently. Each market is a law unto itself, and this appears as the specific personality of that market. Commodities have personalities of their own. For example, metals do not vibrate like grains. Stocks differ from financial futures.

Let us take a grain futures chart, such as a chart for soybeans, and compare it to a stock chart, such as that of MMM (that is, Minnesota Mining and Manufacturing Company). Their individual personalities will become immediately evident on first examination - intuitively - even before we know why. A more careful examination enables us to define the characteristics that make them different. For instance, the soybeans chart is cyclical in form with huge bull markets at intervals in time. The MMM chart resembles a continually ascending, noncyclical flow.

Why are they different? It is because their vibratory rates differ. They oscillate to different rhythms and in different ways.

This is why it is so important for you to become acquainted with their underlying natures and to try to understand them. You need to identify the specific vibratory rate of each market - its key number. By knowing this, you can unlock the market’s personality and trade in harmony with it.

This is not new. A trader and writer, R. D. Wyckoff, always had this vibratory rate in mind. He called it the personality of a market. This is why he advised others to trade only a few stocks, so that they would be able to understand the stocks’ subtlest behavior.

In his book on tape reading, Wyckoff provided a way to penetrate and understand each stock’s personality.² To Wyckoff, some stocks are leaders and others are followers. Some stocks behave in certain ways and others behave in other ways. What Wyckoff calls the personality of a stock has its origin in its vibratory rate.

Every stock and market vibrates in a unique way. This is the real key. Here is the secret of the markets. If we had to reduce all market structure and technical analysis to one thing, it would be the vibratory rate from which all fluctuations and movements arise. It is each movement’s specific vibration that gives it its specificity.

Now, where do these vibratory rates or oscillatory rates originate? In answering this, we arrive at a confluence of technical analysis, market structure analysis, and fundamental analysis. We find ourselves confronted by the market’s deepest core.

Why are oscillations the underlying foundation of a market? The answer is that oscillations comprise a primary law concealed behind a market. The rate of vibration expresses the true personality of a market in a single element - its fundamental conditions, technical conditions, and structure. They all stem from it.

When we talk of fundamentals, we are referring only to a perspective from which to evaluate a market. Technical aspects comprise another perspective and market structure comprises still another. What makes them one is the vibratory rate.

All these perspectives emerge from a unique, invisible rate of vibration. This is the essential and profound personality of a market.

We will not delve into the differences between technical and fundamental analysis and market structure here. We will approach this subject in a later chapter. We simply want to emphasize the importance of a market’s vibratory nature.

It is important for you to be able to define and describe the oscillatory nature of a market as the foundation of its market structure. Market structure is the price/time structure that forms the basis of technical analysis. This time/price structure is a flow that vibrates at its own rhythm. We need to understand this market structure and its vibratory rate as they make themselves apparent in the time/price flow of a market.

We can say that volume is also part of such a structure and that we cannot set it apart from the flow of price and time. This is why, for any given price at any given point of time, we have a definite and unique volume.

When dealing with futures, we can also add open interest.

In this book, we will only deal with the time/price elements that define market structure and cause its vibration rate to be evident by the sequence of its oscillations. This sequence will have a definite pattern. The oscillatory rate that appears in market structure must be precisely identified for any market, whether for stocks, stock sectors, commodities, financial futures, or indexes, etc. There is no market or anything that flows that is not subject to a given oscillation.

From an understanding of this law will come our understanding of markets and how to trade them. The vibratory rate will be our clue to understanding the language of the market. An inner law will emerge from behind every market. In the end, as Wyckoff suggested, you must be acquainted with the personality of each market that you will deal with. This will give you a definite advantage in your analysis and trading.

Now, let us turn to the fundamental market structure that arises from this vibration core.

The Fundamental Structure of the Market

The market has its time/price flow underlying its market structure. What our triad model does is describe this structure simply and objectively. By objectively, we mean without human intervention or arbitrary conditions.

By human intervention, the subjective element, we mean such things as counting waves or counting charted bars. For instance, Elliott wave devotees must count waves. They have arbitrarily fixed the number of waves at five. However, it doesn’t work. Also, where does a wave begin and end? You can have as many different answers as there are Elliott wave followers throughout the world. This is not what we want. We need something that is single, unique, and valid for all observers.

We do not mean by this that the Elliott wave theory is useless. There are some traders who succeed with it. However, it is somewhat of an art form that isn’t based on any generally agreed way to define market structure. Traders who use the Elliott wave, a theory that provides interesting market insights, would in this sense benefit from trading it in conjunction with the triad market structure model. This would give their trades an objective frame of reference that would allow them to avoid many false signals coming from incorrect wave counts.

Then, we have, for instance, bar counts. Gann, for instance, has swing charts that are based on two-bar chart counts or three-bar chart counts. This does work. Once you decide that you are on a three-bar chart count, everyone who uses this number will come up with the same answer.³ In this sense, Gann swings are objective, do work, and are very useful. Gann swings are a type of swing that is attributed to W. D. Gann, who was a trader during the first half of the twentieth century and born in the previous century.

However, this method still requires counting. In our method, there is no counting - of anything at all. The market, itself, decides its swings in a natural and completely objective way. The advantage of this procedure is that it enables you to obtain an objective market description that is valid for all observers of the market who use the same descriptive method.

This market model, which the triad makes possible, is so simple that anyone can understand it. It can be used in conjunction with other methods. In the right circumstances, this market model is very convenient and can enhance your trading and analysis.

Our model gives us a general background and a common market language whereby all methods can find a common ground. This enhances the positive features of those methods. You can trade, basing actions only on the market structure described by our model. You can also use our model with mathematical indicators. You can use bar counts or any market approach, system, or method. For instance, you can trade Gann swings, or indicators, such as stochastics or moving average convergences /divergences (MACDs). A moving average becomes an efficient tool when used in conjunction with triads.

In summary, every trading method is significantly enhanced when used with triads. Before explaining triads, let’s continue with our explanation of the fundamental market structure. Markets oscillate. The time/price flow of a market is far from uniform. It is not a line, but rather an oscillating curve. From this oscillatory curve, a market structure will arise. The oscillations within this market structure are called swings. The swings go up and down in an indefinite sequence.

The primal market cycle is composed of these indefinite upward and downward swings. Markets go up and down in a cyclical fashion. All free markets are cyclical in their structures - up, down, up, down.... Cycles exist and do work. We can be sure that an upward market will be followed by a downward market and vice versa. This was true yesterday. It is true today and it will be true as long as free markets exist.

These cycles can vary in length, from micro-oscillations to multiyear bull or bear markets. Also, they resemble Chinese boxes. An oscillation can contain many other oscillations or be contained within many other oscillations. They are fractal in their nature. A swing or market fluctuation is an oscillation. A market oscillation can be composed of other market fluctuations.

What is necessary to understand is that all cycles are oscillations and that all oscillations are cycles. Market swings are market cycles, irrespective of their amplitudes or lengths. Market structure, as defined by these oscillations, was correctly understood by Charles Dow, the father of modern technical and fundamental analysis.

Charles Dow was far ahead of his time. Surprisingly, very little has changed since he made his major discoveries. What Einstein is to modern science, Charles Dow is to modern finance and market analysis. An understanding of his market theory is a must for any serious student of the market. Let us briefly explore his main ideas concerning the structure of the market and his method to read the market’s mind.

For Charles Dow, market oscillations held the key to understanding the market. He developed a theory of markets that enabled the investor and analyst to understand their structure. The principles that Charles Dow discovered are universal and have passed the test of time. He developed a robust model. His theory was not developed systematically, but is found in the collection of articles that he wrote for the Wall Street Journal, and was later studied and developed by Hamilton and Rhea.

Now, let us examine Dow’s idea of market structure. For Dow, markets can be reduced to three kinds of movements:

1. The main trend or market direction

2. The secondary reaction

3. The daily fluctuations.

These three movements have the following traits: first, each is an oscillation or, in market jargon, a swing; second, the smaller movements are contained within the larger ones. The daily fluctuations are contained in the secondary reaction and in the main trend.

Each of these three movements has a time span - years for the main trend, months for the secondary reaction, and less than one day for daily fluctuations. Each of these three movements or swings has a time/price ratio. These are the three kinds of waves on which the market is constructed. These three types of waves and how they are assembled provide the fundamental market structure. Let us examine each of these three waves.

The primary trend has a duration of several years. It is the market’s long-term tendency. There is no method to define its precise duration. However, the past provides some clues. This primary trend separates into a primary bull market and a primary bear market, each of which has three phases.

The primary bull market’s three phases are:

• First, a return to confidence. Hope returns to the investing public. The economic landscape is seen again in a positive light. This coincides with the beginning of a rise in prices.

• Second, a reflection of the public’s hope for higher stock prices. The stock market, as a whole, rises and people again trust the market.

• The third and final phases, speculation and inflation, return. Stocks become overpriced. It is the beginning of the end.

A moment comes when the market reverses itself and the primary bear market takes the place of the previous primary bull market.

The primary bear market also has three phases. They are the reverse of the phases of the previous bull market. The primary bear market’s phases are:

• First, a loss of confidence in the market. The investing public does not trust the economy, the future looks bleak, and shareholders abandon hope.

• Second, as a result of this gloomy outlook, shareholders sell their stocks and companies see their earnings decline noticeably.

• Third, as a result of the selling, panic follows. Now, massive selling occurs. The public sells, regardless of the value of the stocks. The stocks drop sharply in price and the economic landscape is perceived negatively. This phase marks the end of the primary bear market.

Each of these two main waves or market swings includes a powerful reaction that Charles Dow called the ‘secondary reaction.’

In the secondary reaction, the market retraces between 33 and 66 % of its primary movement. This retr...

Table of contents

• Dedication
• Title Page
• Copyright Page
• Acknowledgements
• Introduction
• Chapter 1 - The Oscillatory Nature of Markets: Their Component Elements
• Chapter 2 - How to Measure Oscillations
• Chapter 3 - Market Phases: Learning to Recognize Them Is Your First Step ...
• Chapter 4 - Market Strength: The Conditions for a Change of Phase
• Chapter 5 - Basic Principles and Strategies for Trading Success
• Chapter 6 - The Key Buying and Selling Patterns
• Chapter 7 - The Mastery of Fluctuations: How to Develop Your Sixth Sense of the Market
• Chapter 8 - How to Trade with Indicators while Avoiding False Signals
• Chapter 9 - Trading Patterns with Triads
• Chapter 10 - The Only Way to Succeed: Control Your Risk
• Chapter 11 - Money Management Is Easier Than You Think
• Chapter 12 - How to Find a Trading System or Method That Really Works
• Chapter 13 - How to Create a Trading Plan
• Chapter 14 - Now Try This Simple Experiment
• Conclusion
• Appendix I - Triad Formulas in Metastock Language
• Appendix II - Chart Examples and Charts
• Notes
• Bibliography
• Index