Chick Goslin: Three Natural Laws of Trading

The Three Natural Laws of Trading

1. The future is unknown
2. Continuation is more likely than change
3. Prices fluctuate

from "Trading Day By Day" by Chick Goslin. For further explanation and insight, I highly recommend Chick's book to readers. Someday, I'll provide some links to my book recommendations in the column at the right side of my blog.

Law #1 above is manifest in this next graphic (see below with further explanation) at a point of uncertainty. Law #3 is obviously a constant. If I was forced to place a bet, which I am, I am going to bet that Law #2 will re-emerge and become dominant -- eventually. I am going to prepare or at least expect to go long, but will exit my short position if prices stagnate into a consolidation (I have placed a stop loss to prevent me from losing money). A consolidation would at least allow me to take some limited time picking an optimally-profitable exit point. Prices don't appear to be poised to continue downward for now, so I will want to do it fairly soon, before buying strength re-emerges.

Given Laws 1 and 2 above, how is it possible to make profits in the futures markets? Chick provides a much better answer than I ever could in his book.

Conflicting Signals = Market Indecision

There are some conflicting signals in this chart. Interestingly, the chart for corn today looks nearly identical. Wow! On the 15 minute and 3 minute charts, prices are showing dynamic support at this level via the EMAs. We are also seeing strong buying in the 3 minute chart Klinger indicator (see the rising green line in the middle chart, 1st subgraph below the candlestick chart). If the Bollinger Squeeze indicator (in the 2nd subgraph, with the histogram and coupled with Stochastics) begins to show one green and then a series of red dots, I will look to exit quickly with a small profit. Probability appears poor for continued downward prices, especially since the overall trend is UP. My short position is just slightly profitable, and I'm not going to risk it going negative. A much higher probability is for prices to consolidate (go flat), or for the uptrend to resume. The Bollinger Bands and Bollinger Squeeze indicators will tell me which (uptrend or consolidation) will emerge.

On the other hand, the MACD on the 15 minute chart has turned down, and the 15 minute Klinger appears to indicate further selling, despite the green color of the current candle. Times of conflict in the charts tend to favor a consolidation, at least temporarily, until the battle between buyers and sellers is resolved.