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This Week's Trades and Key Conversations:

A trade a day, that's all. Simple and stress-free. So you can do other things with your life. Trade alerts are posted daily, in advance of each trade, in our free chat room or on our Yahoo instant messenger service. The method is simple and is explained here.

A note on using stops

Stops are extremely subjective - that is, they depend as much upon your own personality as they depend upon the underlying trading system. There are many different stop methods. Here are a few:

Fixed stop - a specified number of points, or a specified % of the trade value, from the point of entry.
Market structure stop - using previous low or high, or some other visible support / resistance.
Optimized Exit - using a predetermined indicator such as a moving average or Keltner band as your exit, regardless of whether the resulting exit is a profit or a loss. This chart from the YM trade today is a good example. The entry for the short was 12653, it then moved 88 points against us to 12741 before touching the Keltner to exit at 12689. -36 points is much better than -88 !

Regardless of which method you choose, it pays to research trades for any particular method, to help optimize the stop and to understand what kinds of draw-downs to expect. I would recommend at least 100 trades of "data." The best way to do this is to record each trade in a spreadsheet and include all the 'what if's of each trade - the high point, the low point, and the nominal Keltner exit. Then use Solver (which comes with Excel0 to optimize the best stop based upon the criteria.

Trading with the Optimized exit can help you to achieve profits without getting stopped, and it can also help you to minimize your loss on a losing trade. But sometimes the market will move against you for as many as 10~20 ES points before a Keltner exit can be achieved. Make sure you build these into your scenarios so that you understand how frequently these may occur, and what your likely drawdown will be based upon the liquidity you have, the leverage you are using, and the particular rules of your online broker.

On why the Universal is not for "momentum trading"

[07:08] <cuzzo> So what we are doing is catching the reversal trade.
We are not going for the momentum move if the market is going up or down at the current time?

[07:10] <enthios> Correct. This is not momentum, and the reason is simple: We NEVER know when there is going to be a momentum move, until it has ALREADY OCCURRED. It's a false idol. A dream.

[07:11] <enthios> But we DO KNOW (with a reasonable degree of confidence) what will happen WHEN prices touch the VPC. We don't know which VPC the market will touch - whether it is the upper, or the lower - We have no idea. We only know what to do once one of the VPC's is touched. That's why the Universal is an objective method. Or, at least, as objective as they get. I don't' know of any other method that shows you, in advance, where you will go long or short. With clear targets, and a clearly defined entry and exit point

Here is a good example of when to place a break-even stop. If the trade comes to within a few click of the exit target, then moves back, it is always a good idea to set a b/e stop because a return all the way back to entry after a reasonable extension, means that the trade is "over."

This chart shows how you can use Fibonacci the optimize the exit of your trade. Typically, the first wave in the reversal (the "seed wave") occurs between the entry point and the Keltner exit, as shown here. That wave can then be used to measure the amplitude of the next presumed wave, as the Fibonacci tool shows here. With the target known well in advance, you can set a bracket exit for either break-even, or the Fib target.