REQUIRED U.S. Government DisclaimerNOTICE: HYPOTHETICAL PERFORMANCE RESULTS HAVE MANYINHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBEDBELOW. NO REPRESENTATION IS BEING MADE THAT ANYACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSESSIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLYSHARP DIFFERENCES BETWEEN HYPOTHETICAL RESULTS ANDTHE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANYPARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OFHYPOTHETICAL PERFORMANCE IS THEY ARE GENERALLYPREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION,HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISKAND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELYACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUALTRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSESOR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITEOF TRADING LOSSES ARE MATERIAL POINTS WHICH CANADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARENUMEROUS OTHER FACTORS RELATED TO THE MARKETS INGENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFICTRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTEDFOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCERESULTS AND ALL OF WHICH CAN ADVERSELY AFFECTACTUAL TRADING RESULTS.PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURESUCCESS. DO NOT TRADE WITH MONEY YOU CAN NOT AFFORDTO LOSE. ALL ASSET CLASSES INCLUDING FUTURES, OPTIONS,FOREX, ETF'S AND STOCKS HAVE LARGE POTENTIAL REWARDSBUT ALSO LARGE POTENTIAL RISKS. YOU MUST BE AWARE OFTHE RISKS AND WILLING TO ACCEPT THOSE RISKS IN ORDER TOINVEST. ALWAYS CONSULT A REGISTERED FINANCIAL ADVISORBEFORE TRADING OR INVESTING TO DETERMINE IF THEINVESTMENT IS APPROPRIATE FOR YOU. THIS WEBSITE IS FORINFORMATIONAL PURPOSES ONLY AND IS NOT A SOLICITATIONTO BUY OR SELL ANY ENTITY MENTIONED.

ABSOLUTE PERFORMANCE INDICATORS

Throughout this manual we refer to the “Absolute Performance Indicators”as the “AP Indicators”. Whether you are a neophyte to trading or anexperienced trader, the AP Indicators and trading strategies will provide youwith tools that you can begin to use immediately to improve your technicaltrading approach.

Every AP indicator is founded on “evidence based technical analysis”.Evidence based technical analysis means that every indicator in this packagemust show its medal as part of an empirical test using clear and simple entryrules and clear and simple exit rules. Right now you probably have a 100 or so technical indicators on yourtechnical analysis software. Not one of them comes with instructions thatshows you how to use the indicator, and/or provides any sort of evidencethat the indicator provides any “edge” that can aid in making profitabletrades. We will show you how each of our indicators works with somesimple entry/ exit strategies. All test rules are fully explained such that userscan program the same tests themselves.

AP INDICATOR FEATURES

• Indicators can readily be displayed on a chart and called up just likeany other indicator your software displays.

• Indicators can be easily imported to your own trading system orstrategy test as your software allows.

• Indicators are displayed free of distracting screen clutter. Priceultimately is what we are trading, and the indicators were designed tobe able to see price, with minimal competition from anything else onon the trading screen.

• Trading Set Ups are clearly explained and readily recognizable on thefly as markets are trading. A trader can process only limitedinformation “in the moment” and the indicators are designed with thatphilosophy.

The following explanations are as focused as possible, such that the info isreadily available when you are learning. We will give one example of eachbuy and each sell set up.

SCOUPE

Our first indicator is Scoupe which rhymes with “Scoop”. The "Scoupe"Indicator is designed to identify entry points for trades in the primarydirection of the market under study. There are no user inputs or optimizableparameters in Scoupe and it is applicable to virtually any market on any timeframe.

The Scoupe chart display was designed to be clean, simple, and immediatelyvisually intuitive. The Buy Set Up occurs when the Scoupe Histogram isabove zero and the Scoupe Line is below zero. The Sell Set Up occurs whenScoupe Histogram is below zero and Scoupe Line is above zero. These areSet Ups representing potential trade entries, not immediate entries. We haveseveral techniques we use for entry as we will discuss next.

SCOUPE DAILY BASED TRADE ENTRY

In our testing on daily charts with Scoupe we used a couple of differententry methods. Our tests were not designed to be finished trading systems.They were basic bare bones modeling to try and help answer the question“does the Scoupe Indicator provide an edge”?

The most straight forward test was a simultaneous Scoupe Buy Set Up and aTrend and Retrace Buy Set Up or a simultaneous Scoupe Sell Set Up and aTrend and Retrace Sell Set Up. When both Set Ups occurred together we didnot require any further entry trigger. The combination was the trigger andentry was at the market at next open.

We used electronic market hour data to test using the 5 most liquid futuresmarkets including e-mini SP, Crude, Gold, Soybeans, and Euro Currency.We used a modest profit objective such that the winning percentage wasabove 80%. The only optimizable parameter was the size of the stop, whichwas tuned to each market in the back test.

This was a very basic but complete system as it had all the basic componentsof a system – entry, exit, money management. It is the basis for furthersystem development, but is perhaps a little too basic to trade as is. But againthe purpose was not to develop a finished system, the purpose was to see ifthe Scoupe Set Up has merit.

The second Scoupe test method we employed used the Daily TrendBreakout. The Daily Trend Breakout is a formula we developed particularlyfor daily based entry. This method facilitates buying on a stop entry if andonly if a breakout point is hit to the upside. Conversely it sells on a sell stopif and only if a breakout point is hit to the downside.

The test we ran was a simple test. After a Scoupe Set Up a market wasbought or sold on a breakout that was calculated off the next day open price.We used electronic market data where applicable, which includes overnighttrading.

The entry formulas in English stated:

Buy: If Scoupe Histogram greater then zero and Scoupe Indicator Line less then

zero then buy at the next day open plus (Daily Trend Breakout * optimized

multiplier) on a stop.

Sell: If Scoupe Histogram less then zero and Scoupe Indicator Line greater then

zero then buy at the next day open plus (Daily Trend Breakout * optimized

multiplier) on a stop.

The “optimized multiplier” was an amount that was multiplied times theDaily Breakout Amount. This gave an optimized threshold for the entrybreakout point in the back test. This was the only optimized parameter in thetest.

This test always held through the day of entry. Thereafter it checked everyday open to see if it was profitable in relation to the entry price. If profitablethen exit at the market. Other then that the only exit in this test was a signalin the other direction.

This was not a complete system test that could be traded as is. It had nomoney management. It was not meant to test so much for profitability asprobability. It was meant to help answer the question as to whether the basicScoupe Set Up had merit most of the time. With those caveats, below areresults.

MARKET # TRADES #WINS #LOSSES % WINS $/TRADE

USD FOREX/CURRENCY

EUR

JPY

CHF

AUS

CAD

COMMODITIES

Corn

Soybeans

Wheat

Crude Oil

Heating Oil

Natural Gas

Cocoa

Cotton

Coffee

Sugar

10 Year Notes

Ger. Bund

Gold

Silver

HG Copper

STOCK INDEX FUTURES

E-mini SP

Ger. Dax

FTSE

STOCKS/ ETF's

SPY ETF Daily

SPY ETF Weekly

Goldman Sachs Daily

Goldman Sachs Weekly

Apple Daily

Apple Weekly

Google Daily

Google Weekly

Amazon Daily

Amazon Weekly

118189240

89177

188103121

251230263

19712116176

172156

128181278

259182250

38745

318259447

1371332050

110165222

87167

17799115

223208239

18010914875

160145

121165252

237165226

34543

284248543

1251327746

82418

210

1146

282224

1712131

1211

71626

221724

422

34194

120434

92.4%87.3%92.5%

97.8%94.4%

94.1%96.1%95.0%

88.8%90.4%90.9%

91.4%90.8%91.9%98.7%

93.0%92.9%

94.5%91.2%90.6%

91.5%90.7%90.4%

89.1%95.6%

89.3%96.0%90.4%91.5%

91.3%100%86.6%92.0%

$272$215$258

$228$229

$121$366$200

$535$553$720

$158$206$265$184

$126$119

$343$525$260

$208$414$220

$187$1684

$564$1771$675$2448

$1425$14,098$308$552

The table above is based on one contract per futures market and one thousand shares for stocksand ETF's. Test period 2000 through February 2013 for futures and Forex and since inceptionand/ or liquidity considerations for stocks and ETF's.

A SIMPLE SCOUPE ES SYSTEM

This is a simple system that tests consistently well every year in the ES v(e-mini SP) using daily bars.

Buy SignalIf Scoupe Histogram > 0 and Scoupe Line < 0 then buy at (highest high oflast 2 days) or at the (close + (Daily Range Breakout Amount * 2.5)) on astop entry. Whichever level is lower will be elected first on the entry stop.

Exit LongEntry Price + (Entry Price – lowest low in the trade) * 1.5

Exit Long Lowest low since up to the day before entry.

Exit LongIf occurrence of close > entry price and yesterday close > entry price and close > yesterday close has happened since trade entry then stop loss atlowest low since entry.

Exit LongStop Loss $500

Exit LongProfit Target $1200.

Short SignalIf Scoupe Histogram < 0 and Scoupe Line > 0 then sell at (lowest low of last2 days) or at the (close - (Daily Range Breakout Amount * 2.5)) on a stopentry. Whichever level is higher will be elected first on the entry stop.

Exit ShortEntry Price – (Highest high in the trade – entry price) * 1.5

Exit Short Highest High since up to the day before entry.

Exit ShortIf occurrence of close < entry price and yesterday close < entry price and close < yesterday close has happened since trade entry then stop loss atlowest low since entry.

Exit ShortStop Loss $500

Exit ShortProfit Target $1200.

211 tradesAverage Trade $255Win 55%Total P/L since 2000 $53,000Drawdown: $4175Profit Factor 2.23

You can really jump the stats, but fewer trades if you require either the daybefore entry to be lower then yesterday or lower then the day before for buysand be higher then yesterday or higher then the day before for shorts.

With the above simple addition:

100 tradesAverage Trade: $430Win: 64%Total P/L since 2000: $43,000Drawdown: $2000Profit Factor: 3.63

REQUIRED U.S. Government DisclaimerNOTICE: HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH AREDESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVEPROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCESBETWEEN HYPOTHETICAL RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANYPARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE IS THEY AREGENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOTINVOLVE FINANCIAL RISK AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THEIMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TOADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICHCAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TOTHE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICHCANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS ANDALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE SUCCESS. DO NOT TRADE WITH MONEY YOU CAN NOTAFFORD TO LOSE. ALL ASSET CLASSES INCLUDING FUTURES, OPTIONS, FOREX, ETF'S AND STOCKS HAVE LARGEPOTENTIAL REWARDS BUT ALSO LARGE POTENTIAL RISKS. YOU MUST BE AWARE OF THE RISKS AND WILLINGTO ACCEPT THOSE RISKS IN ORDER TO INVEST. ALWAYS CONSULT A REGISTERED FINANCIAL ADVISOR BEFORETRADING OR INVESTING TO DETERMINE IF THE INVESTMENT IS APPROPRIATE FOR YOU. THIS WEBSITE IS FORINFORMATIONAL PURPOSES ONLY AND IS NOT A SOLICITATION TO BUY OR SELL ANY ENTITY MENTIONED.

SCOUPE INTRADAY

Scoupe Intraday we have had success trading based on Range Bars thoughthese same principles can be applied to time based bars.

A Range Bar is the same number of ticks in size then a new bar starts. Hencea chart based on 10 Range Bars means all bars in the charts are 10 ticks fromhigh to low.

We often use 40 Range and 10 Range bars. These can be adjusted for therelative volatility of the market you are trading. For example the ES mayrequire slightly smaller range bars … perhaps 32 and 8. But this can changea bit as volatility changes.

There are no “magic numbers” but getting down to less then 5 on thesmallest range bar and you get closer and closer to market noise.

In our example the 40 Range determines the direction we want to trade. Wewant to trade in the direction of a Scoupe Set Up on the 40 Range.

At this point we also might be aware of the Pivot Trading Channels so weare not trying short into long term support or buy into long term resistance.

You need a “big picture” chart somewhere on your trading screen at alltimes. Trading in sympathy with the longer term chart and never against thelonger term chart is one of the keys to success!

Remember that the market is 90% losers so you want to avoid whateveryone else is doing. And as you probably already know most of that 90%is fixated on very short term charts.

We construct the trading screen such that it has at least 2 time frames ofScoupe displayed simultaneously in different windows.

-15007112/201~07/11120130710312013 0710512013 0711012013

1.3000

1.2950

1.2900

1.2850

1.2800

1.3250

1.3200

1.3150

Fri 04126/1316:59:56(66E·201306) 0=1.3040 H=1.3047 L=1.3011 C=1.3033: 711211316:59 = 1.3068 (-0.0033)

... G6E·067: 0212512013*·0711212013 (40 tick breakout bars) Euro FX (Elee) CA<@JlEJ~ ~@~

The above chart is the basic Scoupe Set Up. A Set Up by itself is not anentry. The entry may occur at any time in the highlighted box and sometimesnot at all.

INTRADAY SET UP

A Scoupe Set Up is not the same as an entry. We do not catch falling knivesor stand in front of rockets!

So after we recognize the basic set up, we need to go to step 2, which nowmeans going down to the shorter term chart. We are looking to the shortterm chart to confirm what the long term chart is telling us about thepotential direction.

Essentially the shorter term or 10 Range Bar chart time frame is used as aconfirmation or “permission” to enter a trade in sympathy with the longerterm or 40 Range Bar time frame.

The major way we look for confirmation or permission to attempt an entryon the lower time frame is to see the 10 Range Bar momentum start to turn.

The sign that momentum is turning is shown by rising Scoupe lows for longsand falling Scoupe highs for shorts..

After we see the Histogram and Scoupe Line turn then we are looking for a10 Range bar closing at the high, then enter.

Even after the momentum turn, the price bar itself showing evidence isneeded to enter the trade. These bars would be referred to a “pin bars” or“engulfing candles” or “piercing candles”.

When we go down to that lower time frame it is not going to look like thehigher time frame. The higher time frame has that intuitive set up that saysbuy set up or sell set up by the contrast of each on either side of the zeroline.

On the short term or 10 Range Bar both the histogram and the line are goingto be on the same side of the zero line.

The best entry permission is when the histogram has rising troughs for longsand falling peaks for shorts. The charts below show it much clearer then wecan say it.

·15007/12/201~07/11/201306/27/201307/02/2013 07105/201307/10/2013

·75

1.2900

1.2850

1.2800

. .,'---- ---------------------------, " ' ,, ,, ,, ," ,~ .1 .. J -' .1 .I.

I ,. ,, ,

~- - - ..- - - .. - - - - - .. - - - .. - - - - - .. - - - - ..- - - - - .. - - -" ,, ,, ,, ,, ,

1.3250

1.3200

Men 02125/13 02:2t:27 (66E-201303) 0=1.3209 H=I.3237 L=I.3197 C=I.32377/12/13 16: 59 = 1.3068 (-IJ .0033);

.... G6E-067: 0212512013" - 0711212013 (40 tick breakout bars) Euro FX (Elee) CA~0~ ~@)~

STEP 1Identify on the 40 Range Bar chart a potential Scoupe Buy Set Up as shownin the chart below.

-15002:50 03:33 04:02 05:34 07:59 08:36 09:33 1022 1039 _

1.3100

Wed 05122/1316:59:57 (66£·201306) 0=1.2866 H=1.2868 L=1.2858 C=1.2866 Duffy Trading Band Lower=

7/1111311 :24 = 1.3051 (+;0.0165)

.;.. G6E·067: 02/24/2013··0711212013 (10 tick breakout bars) Euro FX (Elee)cA<ffl013 b]@)@

STEP 2

Go down to the 10 Range Bar chart and look for rising momentum in theScoupe Oscillator.

The blue shaded box is the exact same area outlined on the 40 Range Barchart.

Points A and B clearly show rising momentum. This is the trade permission.

Against that backdrop buy the first 10 Range Bar that closes at the high.

08:25 08:51 09:47 10:26 1058 11:52 1400 15:06 15:51

1.3060

Tue04123/1316:18:14(66E-201306)O~1.3008H~1.3016 L~1.3006 C~1.3016 DuffyTradingBandLower~

:7/11/1321 :08= 1.3093 1"".lI~'

J. G6E-067: 02124/2013" - 0711212013 (10 tick breakout bars) EUfOFX (Hee) (A~013 l]@)®

The next best permission after rising lows in the histogram is rising lows inthe Scoupe line.

After the rising momentum at Point B and Point C in the Scoupe Line theentry is the first 10 Bar strong close.

., ..,1.2950

... G6[·067: 0212512013*-07112/2013 (40 tiek breakout bars) [uro FX (E1ee)CA~13 ~@)@

Next we'll look at the Sell Set Up that was highlighted in the Set Up example

Remember even though this short “Set Up” above does not look great on thischart, at the right edge of the chart as it is happening no one knows how itwill turn out.

So we will proceed through with our rules to look for a sell short signal tosee how it would have played out.

1.2860

1.2880

... G6E-067: 02124/2013··07/1212013 (10 tick breakout bars) Euro FX (Elee) cA@lEJlZl ~@]®

First of all the rally yielded no falling momentum in the histogram until the40 period set up had passed without any permission to enter on the 10 Bar.The chart blow illustrates this.

Even if one decided to stretch the parameters and trade on the fallinghistogram when it did show up at Point B, the trade would have been ascratch or a small winner. We'll discuss our Trade Plan Exits in just a minutethat explain why.

12920

1.2900

1.2880

1.2860

1.2840

.... G6[·067: 02/2412013··0711212013 (10 tick breakout bars) [uro FX ([lec) CA~~13 [';J@)®

The more aggressive trade would have been to sell lower momentum at PointC or Point D based on the falling Scoupe Line highs. Point C would haveyielded a good return according to our exit rules. Point D a small gain.

To recap always, always start the trade off on the longer term chart. If youstart to trade off the shorter term chart you will get beat around by the biggertrends. Be the 10%, not the 90%!

Only go to the short term chart when you know what direction and exactlywhat set up you are looking for. This will allow for calm, patience, anddiscipline. You have a plan and are not ruled by the noise of lower timeframes.

TRADE PLAN EXITS

If we are entering intraday trades based off the 10 Range Bar we would usean 11 tick stop. If our shortest Range Bar was 8 then we would use a 9 tickstop etc.

We usually work in terms of 3 lot trades.

We set up the DOM such that upon any fill on the entry the 11 tick stop isentered automatically.

We always set profit targets to exit. If the market is active we will use profittargets at +11, +17, and +21 ticks from out entry price.

When the market hits the first target at +11 we then move our stop loss to -5on the other 2 contracts or trail the stop at -15. We do not move the stop lossto the entry point. When the +17 target is hit we use a trailing stop of -15from the best price in the trade looking for +21 target on the last contract.

If the market is less active we will set targets at +6, +11 and +17 ticks fromentry price.

When the +6 target is hit move the stop loss to -5 on the other 2 contracts.When the +11 target is hit we use a trailing stop of -14 from the best price inthe trade looking for +17 on the last contract.

The principle oft HOW to move the stop ---- and NOT to move the stop tobreakeven too quickly and knock the legs out from under your edge ----. areprinciples that we have tested empirically across many different tradingsystems and methods, not just with Scoupe.

In this sense the principles are important, the exact numbers are not. Soplease feel free to change the 6-11-17-21 to whatever. But here are theprinciples we adhere to:

Initial profit targets can between .5 and 1 of initial risk. You will need to beright at least 3 of 4 in achieving first target at .5 to 1. Your edge shouldprovide that.

After first target do not move your stop loss to breakeven.

After first target do cut your stop loss amount by 50%.

By cutting your stop loss in half you now raise the risk/reward on yourremaining trades to better then 2:1 and better then 3:1.

Time in the trade is important to the edge. Remember that the longer thetime that has passed since the entry edge, the more likely the effect is todissipate. Act accordingly.

Price distance traveled is also important to the edge. The further price travelsfrom the entry price the less effect your initial edge continues to have.

PLEASE STOP HERE.

If you can manage the entries above with success you can read on. But whatfollows is harder to do and not as reliable in intraday trading!

More Aggressive Scoupe Entries – TREND

The trend occurs after the initial set up starts to move in the forecastdirection on the longer term or 40 Range Bar chart.

In these cases using just the Scoupe Set Up with the entry bar trigger is themore aggressive entry.

A “rabbit ears” or double bottom or double top in the Scoupe Oscillator Linecan sometimes appear in these situations and when it does it adds to theprobability of the trade.

The the strong entry bar trigger is still required to enter the trade.

This is not as high a probability trade as the first set up we discussed. But insustained trends it is an absolute killer entry technique.

In the following chart we see a 10 Range Bar with no filters other then justwait for the set up and then an entry trigger. In trends it works fantastic. Butwhen trends die and pullbacks rollover like at Point A …Points B and C did provide good entries with the trend.

07/09/201315001018

. ---.; _.·i·- .. - - .. - - .. - ... ; ... - - .. - - .. - - .. -f· ---.-_.--_.---+-_.-I- _ .. - - . - - - - i--+-_.-----------_. -75

1.2820

1.2830

1.2840

* ~- - - ~- - -'- - - - - - - - - - - - - - - - ~- - - - - - - - - - - - - - - _I. - - - - - - - - - - - - _, - _i , , , l, , ,

Mon07108/1307:33:09 (66E·201309) 0=1.2853 H=1.2855 l=1.2845 C=1.2845 DuffyTrading8and lower=, , 7/~/1J,04:27 = 1,.2~89 (+0.0011)

, , i I ~ :

... G6[·067: 02/24/2013" - 07112/2013 (10 tickbreakoutbars) [uro FX (£lee)CA€l~13 [)@)~

In these circumstances also have a look at using the Scoupe set ups withDown-A-Level divergence and pay attention to the information the PivotChannels are giving you. This is getting further away from combinations wecan test empirically and as such it is not as much our preference.

The “rabbit ears” or any type of double top or bottom in the Scoupeoscillator is more reliable. Example in the chart above.

TREND AND RETRACE

As the name implies this indicator provides evidence based analysis to thetrader on two fronts; the strength of a trend and the identification ofretracement levels within that trend.

Through many, many historical tests we found that in most markets andunder most conditions entering on a signal after pullback in the direction ofthe main trend is a superior strategy to entering on signals that do not followpullbacks.

Given this evidence we needed an indicator to help identify high probabilitytrade zones after a retracement in the trend.

Our research eventually led to another very important discovery; the strengthof the trend is directly related to the probabilities of successfully enteringduring a retracement to the trend. The Trend and Retrace indicator thereforefirst measures “trend strength” and second identifies the area of a potential“retracement”.

There are zero user optimizable parameters in the Trend and Retraceindicator. However in a system test, or using highlight bars, a strength oftrend measure is optimizable by the user if desired. This does not change theindicator, as it is not an input into the indicator, rather it is a thresholdmeasure of how much strength does the indicator show.

For Trend and Retrace we set up another very basic entry and exit. Our testis:

Buy SignalIf Trend and Retrace < -100 trend and strength of trend > 4 buy at the

market next day. Sell Signal If Trend and Retrace > 100 and strength of trend > 4 then sell at the market

next day.

You could optimize the threshold for different markets. For example insteadof strength of trend being set at “4”, one could use an optimizable parameterfor this value. We set the default at 4 as that works for most markets on adaily time frame.

The higher one sets the “strength of trend” parameter to higher moredemanding levels, the fewer trades one will get. This is logical as marketsare exceptionally strong or weak a smaller percentage of the time. We havefound that in general the higher the strength of trend requirement the fewertrades, but the more high quality trades produced. Additionally somemarkets in general will work better with a higher “strength of trend”requirement then others.

We ran the test with no exits on the day of entry and thereafter exit any daythe market opened in a profitable position relative to the entry price. Asimple dollar stop loss amount was used as well.

The results below show the e-mini SP across various “strength of trend”(SOT) parameters to illustrate the points made above.

Strategy Optimization Report ES

SOT Win% #Trds P/L P/F Avg Drawdown-1 88.6% 175 $40,363 2.11 $231 ($3,600)0 91.5% 130 $42,538 3.11 $327 ($3,600)1 93.1% 102 $36,300 3.79 $356 ($3,450)1 93.8% 80 $30,063 4.20 $376 ($3,450)2 93.8% 64 $25,800 4.39 $403 ($3,450)3 92.7% 55 $20,513 3.70 $373 ($3,450)4 94.6% 37 $17,313 5.81 $468 ($1,800)5 93.5% 31 $15,563 5.32 $502 ($1,800)6 100.0% 21 $15,263 999 $727 $07 100.0% 17 $10,238 999 $602 $08 100.0% 14 $8,163 999 $583 $09 100.0% 11 $6,963 999 $633 $010 100.0% 10 $6,888 999 $689 $0

The general tendencies exhibited here hold true over pretty much everymarket we have tested. This concept of buying dips after strength, or sellingrallies after weakness using the Trend & Retrace Indicator holds across allmarkets we have tested including futures, forex, and stocks. Of course somemarkets work better then others, but as a concept it is exceptionally robust--- the latter meaning that across non correlated markets and different timeframes the concept still produces positive expectancies in historical testing.

Simple System for the 6E (Euro Currency) using Trend and Retrace

Based on Daily Bars

Buy Signal #1If Trend Retrace < -100 and Strength of Trend > 4 buy at market

Buy Signal #2If Trend Retrace <-50 and Strength of Trend > 7 buy at the S1 pivot point.

Exit LongIf occurrence of close > entry price and yesterday close > entry price and close > yesterday close has happened since trade entry then stop loss at 50%of original = (entry price - $1100 stop loss)

Exit LongEntry price + ((Entry Price – Lowest Low since day before Entry) * 1.5)

Exit Long Entry Price + $50 but not on day of entry.

Exit Long Entry Price +600 limit

Exit LongEntry Price - $2200 stop.

Sell Signal #1If Trend Retrace > 100 and Strength of Trend > 4 sell at market

Sell Signal #2If Trend Retrace > 50 and Strength of Trend > 7 sell at the R1 pivot point.

Exit ShortIf occurrence of close < entry price and yesterday close < entry price and close < yesterday close has happened since trade entry then stop loss at 50%of original = (entry price + $1100 stop loss)

Exit ShortEntry price – ((Highest Low since day before Entry – Entry Price ) * 1.5)

Exit Short Entry Price - $50 but not on day of entry.

Exit Long Entry Price - $600 limit

Exit LongEntry Price + $2200 stop.

195 tradesAverage Trade: $272Win: 93.8%Total P/L since 2000 $53,125Drawdown: $2500Profit Factor 3.00

DAILY TREND BREAKOUT

Some of the empirical tests we use particularly on daily data employ anentry trigger commonly called “Daily Trend Breakout”. If you are not usingdaily data, and not interested in running your own historical test tradingsimulations, you can skip this section.

Those who have been around markets for a while may have heard of thevolatility breakout concept. It is nothing more then following an increase involatility in the direction of the volatility.

The thing about it though, is volatility breakout works. It works across awide variety of markets. It works across different decades. Markets can’treally move without it occurring. It is one of those concepts the market has ahard time outsmarting! So we use it.

The theory of Volatility Breakout is that there is a threshold level above themarket that if breached triggers a buy entry. If and only if that pricethreshold is reached or exceeded then one buys. Similarly there is a sellthreshold below the market. If and only if that sell threshold is reached orpenetrated then one sells short.

The major advantage of using volatility breakout on daily data is that itallows intraday entry. If the trader had to wait until the close of the daily barto enter a trade, that would often prove to be a significant obstacle toprofitable trading. Volatility breakouts use “stop” order entries such that nointraday monitoring is required. If the entry threshold is reached the restingstop order becomes a market order.

Most volatility breakout uses “average true range” or simply a measure ofthe average days trading range over recent history. Any test that we have runthat uses average true range as an entry breakout, can be in virtually all casesimproved using the “Daily Trend Breakout”.

In our tests we use a percentage of the Daily Trend Breakout formula andthat percentage is an optimzable parameter. For example in plain English abuy signal would be coded as

Buy at the next day open price + (the Daily Trend Breakout Value * “opt1”) stop entry.

In this simple code above “opt1” is the optimizable variable.

DOWN-A-LEVEL INDICATOR

The "Down-A-Level Indicator" was designed to be used as an adjunct to"Scoupe" but it is optional. Intraday traders should keep things as simple aspossible. We use it our SP Trading System to good advantage. As the nameimplies this indicator gets down "inside" the recent bars to give additionalinformation.

There are several ways we use the "Down-A-Level" Indicator to aid in entrytriggers after a "Scoupe" and/ or a "Trend & Retrace" entry set up. All aresimple, visually intuitive, and can be recognized easily and quickly on achart.

SIMPLE DIVERGENCE

Most traders are familiar with the concept of divergence. It simply meansthat either a new high in price is not accompanied by a new high in theindicator, or a new low in price is not accompanied by a new low in theindicator.

03/01/1101/18/11

-75

o

1.3800

1.3600

1.3400

1.3200

1.3000--<g>- , -

... G6E-067: 0110312006· - 0711 212013 (Oaily bars) Euro FX (Elec] CAdj Uq -- Te§[!,]~J.~@)®

Of course divergence can and often does signal far too early in a stronglytrending market. Other times divergence can nail turns precisely. So howdoes the trader differentiate when divergence will turn out to be valid?

Of course traders can never “know” anything for sure. However when usingDown-A-Level exclusively with a Scoupe Set Up, one narrows down themarket situations to those that we found provided an edge in historicaltesting.

The charts below show the examples of divergence entry signals with the Scoupe Set Ups and Down-A-Level Indicator on both the buy side and thesell side.

I ;J\tAL~6 j\~~'~J; ~: ~'T ; 0

06/05/12 06/19/12 07il 07/12120121/17/12 07/31/12 08/14/12 ...

Tn" 07/1212012(66E-2012091:0=1.2290 H=1.2298 l=1.2215 C=1.2254 Dully T.adingBand lowe.= 1.222908/27/2012 = 1.2541 {..Q.0015} 2 00- ~ 1. 8

.... G6E-067: 0110312006· - 07/1212013 (Daily bars) Euro FX (Elee) CAdj Liq -- Te{E[f>J~. ~@)®

FIVE WAVES

A 5 wave pattern on the Down-A-Level Oscillator consists of 3 waves in onedirection with 2 intermittent waves dividing such that a 5 wave structurecompletes. This is a much better visual and will be readily seen in the chartexample below.

For an up 5 wave to complete the following guidelines are employed:

1. Start the count from most recent swing low in the Down-A-LevelOscillator, which may or may not be also a swing low in price.

2. The Oscillator swing low start point should be below the 20 level. 3. Each of the 3 drives up has a higher high.4. Each of the two drives lower has a higher low.5. The 5th and last wave completes above the 80 level.

For a down 5 wave complete the following guidelines are employed:

1. Start the count from most recent swing high in the Down-A-Level

Oscillator, which may or may not be also a swing high in price.

2. The Oscillator swing high start point should be above the 80 level. 3. Each of the 3 drives down has a lower low.4. Each of the two drives higher has a lower high.5. The 5th and last wave completes below the 20 level.

PIVOT TRADING CHANNELS

The empirical testing on the channels though was focused on the times whenprice closed outside the channels and what that was likely to mean for priceaction in the near future. In practice it is our experience that the channels canalso be used effectively as support and resistance.

HOW TO USE PIVOT TRADING CHANNELS

We offer the channels as an adjunct to the indicators to aid in identifyingsupport, resistance, as well as early identification of new trends. Closing outside of the trading channels on consecutive closes does not occurvery often and hence when it does there is information being given by themarket:

1. Two or more consecutive closes outside of the channel means theemerging trend is strong enough that it should not be faded or played for areversal. 2. Two or more consecutive closes outside of the channel means that tradersshould look to the first pullback to enter in the direction of the trend.

12200

12400

12600flrll ~~I' I~ 1

Fri 07l0612011IG6[·2012091: 0=1.1447 H=1.1453 l=1.1310 C=1.1337 <Cullom High6ghIB.,,) DuffyTrading Band lower= 1.1345 DuffyTrading Band Upper= 1.1811 TOoIM=5 TOolY=13410/23/2012 = 1.3020 (·0.0057) 1.3400

.j. G6[·061: 0110312006'·0111212013 IDailybars) [uro FX IElee) CAdjliq .. Template: Trimae ~ml3~@]~

The strength of the trend as defined by the markets ability to close outsidethe channel for consecutive or a series of closes shows a clear probabilitythat the first retrace can be traded. It is not an overwhelming majority, a littleover 60% depending on the definitions used.

CONCLUSION

The number of trades you make is usually inversely proportional to yoursuccess.

Start with the bigger picture.

Know what you are looking for and know the only direction you will tradewhen you go down to look at the shorter term charts.

Wait for the trigger.

Follow the exits in the Trade Plan.

If you have any questions about anything please contact me.

KeyPoint@sympatico.ca

Thank you.

Joe Duffy

REQUIRED U.S. Government DisclaimerNOTICE: HYPOTHETICAL PERFORMANCE RESULTS HAVE MANYINHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBEDBELOW. NO REPRESENTATION IS BEING MADE THAT ANYACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSESSIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLYSHARP DIFFERENCES BETWEEN HYPOTHETICAL RESULTS ANDTHE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANYPARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OFHYPOTHETICAL PERFORMANCE IS THEY ARE GENERALLYPREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION,HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISKAND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELYACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUALTRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSESOR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITEOF TRADING LOSSES ARE MATERIAL POINTS WHICH CANADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARENUMEROUS OTHER FACTORS RELATED TO THE MARKETS INGENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFICTRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTEDFOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCERESULTS AND ALL OF WHICH CAN ADVERSELY AFFECTACTUAL TRADING RESULTS.

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