“Reversal Magic”

A Trading Phenomenon

Written by Michael J. Parsons E-Mail surfingwolf@juno.com

Telephone: (410) 535-9622 Fax: (410) 535-9623

REVERSAL MAGIC When I discovered REVERSAL MAGIC, I had already been trading for years. Twice I had losses become so great that I had to stop trading for a time. It was after this second time that I was determined to find something that wouldn’t let me down. I knew there had to be more that the market was telling me than what I was interpreting. I had become so astute at looking at a chart that at times I could even say where the market was heading and when it would arrive. But more often than not, the market decided a different course than what I expected. Up until this time, I had already studied many of the most highly respected methods for trading the markets. Indicators that worked in some market conditions failed miserably in others. After studying Elliot wave theory, I found it unrealistic to interpret anything meaningful until after the market had done its damage. Fibonacci numbers offered something to calculate but were just unreliable enough to make me too nervous to commit any more real money to trading them. Gann, cycles, and Andrew lines – the list is endless. I can say I learned something from all of them that was positive, but they all had their inherent faults. I needed something better! So I printed out dozens of charts and tried every angle, process, calculation and perspective I could think of. I drew thousands of lines trying to make sense of the market action. Then, when it seemed that I had exhausted all possibilities, I drew two lines that would forever change how I looked at the markets. At first, I thought it was just a coincidence. So I checked to see if it worked elsewhere on the same chart. It worked! So I checked to see if it worked on other charts. Again, It worked on them perfectly, as well. I couldn’t believe my own eyes or contain my excitement! To this day, I couldn’t tell you on what market I first found REVERSAL MAGIC, but after weeks of refining my work, I already knew it was an extremely powerful revelation. You see REVERSAL MAGIC works because it follows a natural law of the markets, a natural phenomenon that exists in nature itself. Cycles naturally occur not only in the elements and life here on Earth, but are quite evident even in the planets and stars. Since the market is controlled by people who themselves are subject to cycles and tend to respond from one extreme to another, then it makes sense that the market cycles are not just random events. While REVERSAL MAGIC cannot determine how high or low a market will go, it does show when a change in the market will take place with incredible accuracy. What is even more amazing is its simplicity. Once I mastered this technique, I didn’t even have to draw lines to locate the time when a change would take place. It quickly became second nature, and I am confident that it will be for you too. I invite you to study the rules and examples. Practice it with your favorite markets. And enjoy your new and very profitable skill!

THE BASIC CONCEPT OF REVERSAL MAGIC If you were to look very closely at the waves on a beach, you would notice that they aren’t made up of just one type of wave. Before a wave breaks on the shore, you will often see smaller waves riding through larger waves. It’s the same with sound. Listen carefully, there are no doubt many sounds that you hear right now. Sound travels in waves and even though they may cross paths, they don’t cancel out one another. Similarly, a market can have many waves riding through it. To the normal eye it may appear as chaos, but in reality it is just responding to a natural order of multiple cycles. Take a look at Figure 1. At first it seems that its movement makes no sense at all. Figure 1

But in reality, Figure 1 is just a combination of the waves found in Figure 2. Figure 2

Each high and low is just a combination of waves as they overlap one another.

Can you see how these waves combine to form the pattern above?

When you separate its components, it’s not hard to understand. Of course, this chart that we just reviewed is a simple one compared to what is really found in the markets. For demonstration purposes, each wave was of the same height. In reality, the markets have, as in nature, waves of different amplitudes (height) as well as different time frames. So when combined, the market becomes even more chaotic and difficult to decipher. Figure 3 is the result of figures 4 and 5. With just these two waves of different amplitude and frequency, the pattern really starts to take on a life of its own.

Figure 3

Can you see a pattern that you have seen in the market? Even Elliott described this pattern in the markets with his works.

Figure 4 Figure 5

So how do you use this fact to your advantage? Even though each cycle may be different, cycles are patterns that have certain characteristics that always exist. The old law “what goes up, must come down” and “history repeats itself” proves true with cycles. This fact is exploited with REVERSAL MAGIC. Take a close look at the cycle in Figure 6. If a cycle were hidden from view because other cycles existed with it, the fact still remains that it will affect the entire waveform each time it completes. By that I mean simply, when a cycle begins rising it will be seen by an added bullish push in the market and when it drops it will result in a bearish pull on the market. What is referred to as highs and lows in the market is nothing more than these cycles reaching their extremes. Figure 6

While its amplitude may not be known, its frequency (when it starts and ends or rises and falls) can be determined and used to our advantage.

It has long been a dream of traders to be able to extrapolate this secret to determine the cycles in the stock and commodity markets. There have been numerous books written and dozens of indicators designed in a feeble attempt to do just that. Traders have used everything from neural networks to moon phases without any reliable success. Because of this, many have come to believe that either cycles don’t exist, or they are just too complex to determine. Yet they couldn’t be any further from the truth. Exploiting this frequency really just takes a very simple technique of visualization.

Figure 7 and 8 demonstrate the basic concept of this technique. A triangle is created by means of two highs/lows and a horizontal line is drawn from the opposing low/high found between the two. Where the triangle intersects in time, you will find a REVERSAL MAGIC point.

Figure 7 In a chart with a downtrend, look for two highs to draw a trend line. Then draw a horizontal line from a low point found between them. Where these two lines intersect, a change in the current market cycle occurs.

Figure 8

In a chart with an up-trend, look for two lows to draw a trend line. Then draw a horizontal line from a high point found between them. Like with the previous example, where these lines meet, expect a change in the market.

Two high points

A low point between the highs

The moment of truth!

Two low points

A high point in between the low points

Again, the moment of change

WHAT CAN YOU EXPECT AT REVERSAL MAGIC POINTS? Normally, what we would expect to see is a reversal. Ideally it would look something like figure 9.

Figure 9 If the market is in an upward trend, then at the REVERSAL MAGIC point the market will reverse and go into a downtrend. If the market is in a downtrend, then at the REVERSAL MAGIC point, the market will reverse and go into an up trend.

However, since we don’t know the amplitude of a cycle when we reach our REVERSAL MAGIC point, we can’t always determine with what degree a change will take place. For example, if the market happens to be in a very strong trend, then obviously a smaller cycle would only create a mild pause in the market before it resumed its course. But in a weaker market the very same cycle would have a much more notable affect. Fortunately, there are plenty of other ways to determine the markets intention that we can use in connection with REVERSAL MAGIC. For the moment, we will focus on what we can expect to encounter at a REVERSAL MAGIC point. There are normally four basic market actions that take place at a REVERSAL MAGIC point and include the following: 1. One Point Reversal Pattern 2. Two Point Reversal Pattern 3. Gap (Could be a common gap, a breakaway gap, a runaway gap, or an exhaustion gap) 4. A Marked Increase Or Decrease In Momentum

All of these are classical patterns that are a standard part of technical analysis. But it is important to review these in order to fully exploit the market when it converges on a REVERSAL MAGIC point. Note: This is just a brief overview of these patterns. For more in-depth review, please refer to a publication that is devoted to these patterns such as John Murphy’s “Technical Analysis of the Futures Markets” Figure 10 shows an example of both a one tick and two tick reversal. Remember, whatever time frame you are trading in, each bar is equal to one tick (for example, in a daily chart each bar would represent one day) Figure 10

These bars have a tendency to stick out like sore thumbs. They seem to stretch a little farther than the pace the market had been keeping prior to this point. Also, the close of the tick is quite often at the opposite side of the tick than the direction that the market was going

When you see this pattern in connection with a REVERSAL MAGIC point, then you have confirmation that a reversal is underway. This is by far the most common occurrence that will happen when you reach a REVERSAL MAGIC point. It’s now time to determine your next REVERSAL MAGIC point, then sit back and relax. When you know this technique, it’s just that simple. Trading the market starts to become fun and of course, very profitable. It doesn’t matter if you trade occasionally or day trade. The technique works in all time frames and in whatever market you prefer to trade. What is the possibility that this method could fail? Of course, no trading method is perfect. There are a few other possibilities that we need to address so that you can avoid being on the wrong side of any trading you do.

Notice how low the close bar is on the tick

One-Tick Reversal Two-Tick Reversal

Another possibility at a REVERSAL MAGIC point is gaps. In this case, the market may not reverse, but will often accelerate in its current direction. There are several types of gaps possible, each with its own interpretation. In figure 11 we find the common gap and the breakaway gap. Figure 11

The common gap occurs within a trading range and doesn’t indicate any major price move. An important point about gaps, they are important to us because they are used to find additional REVERSAL MAGIC points that are about to occur. In fact, all gaps are important in this way. We will consider this phenomenon later on. The breakaway gap does what its name implies; it breaks away from the previous trading range. You will find that these gaps do show up at REVERSAL MAGIC points. Breakaway gaps can offer a great opportunity for fast-unexpected profits if you happen to already be in the market in the right direction. The risk the you have to be careful of is that with this type of pattern if you are caught on the wrong side of the market, then the opposite is true and you will experience a fast-unexpected loss. To avoid this situation, I wait to see what the market appears to be doing at the time of a REVERSAL MAGIC point. If I have determined that a REVERSAL MAGIC point is due on a particular day, I will wait to see if the day opens with a gap before reversing. I almost never place orders at the opening bell, because this is generally not the best time to get the best price on your order anyway. This also gives me time to benefit from a gap if it occurs and not have it work against me.

Common Gaps stay within their current trading range and the market fluctuates back and forth across the gap

Breakaway Gaps jump away from the pack and continue to run in their chosen direction

The next set of gaps is the runaway gap and the exhaustion gap. Figure 12 shows both of these. Figure 12

Runaway gaps don’t happen often, but when they do they are fast moving markets that are hard to get into. But if you happen to already be in them, they offer explosively high profit opportunities. In such cases, knowing REVERSAL MAGIC is essential if you want to keep those high profits because quite often the market springs back just as fast. It’s what I like to call “trading whiplash”. They often include multiple gaps and, at times, limit moves where the market closes all trading activity for the remainder of the day. Exhaustion gaps are at the end of the market move. The market might have been moving up in a strong bull trend and in a last ditch effort pushes itself and gaps only to have the market stop cold and reverse into the opposite direction. They usually occur with high volume, and often the market will gap back down from where it came. This is where some real serious “trading whiplash” occurs. Exhaustion gaps fool the general public, because they appear as a runaway market that knows no boundaries. Only after it gaps do people realize too late that it was an extremely expensive trap.

In a Runaway Gap, the market takes off and doesn’t look back by gapping with one gap after another. Often, limit up or down days are seen.

Exhaustion Gaps occur at the end of a rally or decline and become the market’s last-ditch effort to force itself beyond its limit but then quickly dies and reverses direction.

This is one area where REVERSAL MAGIC is of paramount importance, because it helps prevent you from becoming a victim of these traps and, in turn, actually profit from them. If during a very strong market trend a gap occurs and yet, you know that a REVERSAL MAGIC point is due shortly, then it is a real possibility that you are looking at an exhaustion gap. If this is the case, you have an opportunity to make a huge profit by taking the opposite side of that trade. The last market action that I want to touch on in our list is a marked increase or decrease in market momentum. Figure 13 shows examples of both. Here, in the first pattern, we find a moving market that comes to a halt. However, it could just be a very marked slowdown, as well. In the second pattern, a stalled market suddenly takes off in one direction or the other.

Figure 13

If a particular market stalls out, there are always others that offer the opportunity to make money, so you don’t have to tie up your money needlessly even if it is a favorite market of yours to trade. Simply determine the next REVERSAL MAGIC point and re-enter when the direction of the market reestablishes itself. A stalled market that reaches a REVERSAL MAGIC point and begins moving again is one of my favorites. A sleeping commodity or stock usually wakes up with ferocity and frequently will take off like a rocket. These types of market conditions are often overlooked until the move becomes too great for anyone to ignore. But by then it is often too late to profit much. However, with REVERSAL MAGIC to point out when the fuse is first lit, you can be among the first to ride these rockets to new heights or lows.

A moving market comes to a stop or slows down

A stalled market begins moving again

Before we actually use this technique in any market charts, there is one other issue relating to gaps that we need to cover first. As I mentioned earlier, gaps are important because they help us to find future REVERSAL MAGIC points. Here’s how it works. Whenever you see a gap, it is another point that is used to draw a triangle and create a REVERSAL MAGIC point. Figure 14 demonstrates this principle.

Figure 14

In the example above, note that each gap warrants two separate trend lines and creates two different triangles that converge into two singular REVERSAL MAGIC points, both derived from the same high point. Why do we use these gaps in this way? Gaps are pivotal points in the trading market. Like a picket fence that you can’t walk on, you are either on one side or the other. No in-between is allowed. Obviously then, they represent an important trace point for the rhythm of the cycles. So take advantage of these special windows to the market. They will either confirm REVERSAL MAGIC points that you have found by means of other triangles, or they will provide key new REVERSAL MAGIC points that you don’t want to miss. Now that we have reviewed the basic concept of the REVERSAL MAGIC method, we will look at this technique put to use in real market charts. Take your time reviewing the following charts and their notes. When you feel comfortable with REVERSAL MAGIC, try it on some recent charts of your favorite markets. You will be amazed by its accuracy and wonder how you ever got along without it.

Gap

Trend lines

REVERSAL MAGIC POINTS

High

Low

FINDING REVERSAL MAGIC POINTS ON CHARTS While the basic concept of REVERSAL MAGIC is based on simple geometric lines, using this technique in the real world of trading is as much an art as a science. Why do I say that? Although interpreting a REVERSAL MAGIC point is such an effortless process, choosing where to set your lines to triangulate your REVERSAL MAGIC point does take a little practice. However, once you master this technique, you will develop an eye for picking REVERSAL MAGIC points without the need to even draw actual lines on your charts. I do this all the time when I trade. This has a definite advantage because in very choppy markets you can have so many lines drawn that they obscure the view of price bars on a chart. In figure 15 we see a chart demonstrating REVERSAL MAGIC. Note how the trend reverses right on target at our REVERSAL MAGIC point. Figure 15

When I first started drawing lines for REVERSAL MAGIC points, it was easy to get carried away and overload a chart with lines. The lines on a chart can be drawn from two perspectives, using both bullish and bearish trend line triangles. Often, lines will converge to confirm each other.

A trend line is drawn off of two highs in a bearish move

A low between the two high points is used for the horizontal line

Where these two lines converge, we find a REVERSAL MAGIC point

Figure 16 uses all bearish trend line triangles for the REVERSAL MAGIC point. We will take a look at the bullish trend line triangles in a minute. The chart you see here could actually have more of these downward triangles than what you see here. Some of them just confirm the ones already pointed to here. I have drawn one REVERSAL MAGIC point, but not marked it with an arrow. See if you can find it. Also, as you look at this chart notice that: 1. Both the horizontal and diagonal line can be used for multiple triangles. 2. Both sides of Gaps are used for trend lines. Figure 16

If you have trouble finding the triangles, start at the REVERSAL MAGIC point and go backwards for now. As you begin to get a feel for how they look, they start to stand out very clearly and it becomes much easier to find them. Also, though you can’t see the part of the chart previous to this view, there are additional triangles that are found there that show REVERSAL MAGIC points of this view as well! And these are only the bearish trend line triangles. We still have the bullish trend line triangles to find.

Could you have found all of these REVERSAL MAGIC points? You will be able to before long!

Figure 17 uses bullish trend line triangles. In this case, I have only shown four REVERSAL MAGIC points all using a singular horizontal line. The first point uses the backside of a gap and the second, the front side of the same gap. The third runs directly off of a low point and the fourth off the backside of another gap. In all these cases, the horizontal line is drawn off of a high point that is between each trend line’s two points.

Figure 17

How many bullish trend line triangles can you locate and where are the REVERSAL MAGIC points? As you can see, you have a choice of both bearish and bullish triangles on any given chart. In fact, if you are not careful, you can literally overload your chart with so many triangles that you can no longer see the price bars. So in order to control this over-population of lines, only keep the triangles that will affect you in the future. Delete all past triangles. Also, don’t draw any more than necessary. You will find that a number of these triangles will overlap at the very same point. So if you already have a REVERSAL MAGIC point marked, don’t mark it again. So which are better, bullish or bearish triangles? Both are equally important, and I personally would not want to do without either because one will point to a REVERSAL MAGIC point that the other does not. So be careful about becoming bias toward one type. Learn to use both as effectively. Take a look at figures 18 and 19. Both charts show IBM of the same year. Notice that both bearish and bullish triangles are used successfully to locate the REVERSAL MAGIC points.

Using this high for your horizontal line,

And these points for your trend line – Can you find the REVERSAL MAGIC point?

Figure 18

Figure 19

Can you find the triangle points used to locate this REVERSAL MAGIC point?

Figure 20

With the ability to use both bearish and bullish triangles, there are very few instances where a reversal or change in momentum does not have a forecast. In fact, the challenge is not whether or not you will find a REVERSAL MAGIC point at each reversal, but whether the REVERSAL MAGIC point indicates a reversal or change in momentum. This is obviously an important determination to make. If you are expecting a reversal and the market decides to gap instead, that means a loss. Even if the momentum should just stop all together, you can’t make profits if your money is tied up in a dead market. If you are like me, you want your decisions to improve your financial situation, not obstruct it. So how do you determine what type of action the market will take at a REVERSAL MAGIC point? This is the next topic we will discuss.

Are these the points you used to locate the

REVERSAL MAGIC point?

DETERMINING THE ACTION AT A REVERSAL MAGIC POINT It is important to note that by far in the majority of cases, an actual reversal will take place at a REVERSAL MAGIC point. But because there are the possibilities of a gap or change in momentum, naturally we want to put the odds in our favor. So how do we determine what will actually happen when the market reaches a REVERSAL MAGIC point? There are four ways in particular that you can zero in on what will actually happen at a REVERSAL MAGIC point.

1. The type of market that a REVERSAL MAGIC point triangle is formed in. 2. The current market conditions that a REVERSAL MAGIC point converges in. 3. The actions that have occurred recently at REVERSAL MAGIC points. 4. The pattern that develops at the REVERSAL MAGIC point.

Each of these will give you a clue as to the likely action that you can expect, so we will look at them individually. The type of market that a REVERSAL MAGIC point triangle is formed in. When you draw a REVERSAL MAGIC point triangle, examine the type of market it is taken from. The conditions that exist when a REVERSAL MAGIC triangle is drawn can imply the reaction that you can expect. Many times a market is besieged with so many small cycles that they only result in marked changes in momentum rather than clear reversals. For example, consider highly volatile markets that develop many common gaps. REVERSAL MAGIC points frequently predict these gaps, along with pauses in momentum. In such market conditions you find that the triangles that are drawn using gaps prove more invaluable as an indicator of reversals than those that are drawn from highs and lows. So how do actual gaps impact the occurrence of REVERSAL MAGIC points? As mentioned earlier, gaps point to a marked change in a cycle and can change the geometry of the price patterns, throwing off the rhythm. The result is that an excessive amount of gaps on either side of the triangle can change the timing of the REVERSAL MAGIC point. In effect, the triangle acts like a seesaw that weights the timing. Figure 21 and 22 demonstrate the basic concept of this seesaw effect.

Figure 21 Figure 22

To get the idea of how this concept affects the outcome, look at figures 23 and 24. In figure 23, there are three gap days at the beginning of the triangle, (between the first low point and the high point). Like a seesaw that has been weighted to the left side, timing is pulled back and results in the REVERSAL MAGIC point occurring three days later than indicated. Figure 23

When Gaps load a side of the triangle pattern, the result is that it pushes/pulls the timing of the REVERSAL MAGIC point in the direction of the gapped side.

REVERSAL MAGIC point

3 Days of Gaps

Actual reversal point 3 days later

Figure 24

In figure 24, there are three gap days at the end of the triangle, (between the last point and the REVERSAL MAGIC point). Like a seesaw that has been weighted to the right side, timing is pushed forward and results in the REVERSAL MAGIC point occurring three days earlier than indicated. Obviously, in the case of bearish triangles the effect on timing is the same, only the triangle is in reverse. But what if the gaps are located at the center of the triangle between the high and the last low? Because this is at the center of the seesaw or pivot, there is no imbalance to weight the timing in either direction. Another way to look at it is to view the two points of the trend line and the REVERSAL MAGIC point as the seesaw, with the last trend line point as the center of that seesaw or the pivot point. Admittedly, not every market will react in this way. Quite frequently, a market may have a number of gaps and require no adjustment of the timing of REVERSAL MAGIC points. As a rule, it is when a market reaches a usually high volatility with multiple gaps that this becomes an issue. There is a distinct advantage to gaps. Gaps can be used as trend line points, and because they provide multiple points to draw REVERSAL MAGIC triangles from, they actually give more detail of reversals, pauses and surges in the market. By using other forms of confirmation, they, in turn, can provide more opportunities to generate a profit.

Actual reversal point 3 days early

REVERSAL MAGIC point

3 Days of Gaps

If there are multiple lows, use only the last low before the REVERSAL MAGIC point to count gaps.

Taking this a step further, figure 25 shows a lumber chart with a number of gaps. Notice how these gaps affect the outcome of the REVERSAL MAGIC points. Count the number of gaps and see how many days you are off of the reversal. Figure 25

Being aware of how gaps affect your REVERSAL MAGIC timing is a critical factor for accuracy. With this factored in, REVERSAL MAGIC is absolutely amazing in locating reversals! The next way that you can zero in on what will actually happen at a REVERSAL MAGIC point is by considering: The market conditions where a REVERSAL MAGIC point occurs. Taking another look at our lumber chart in figure 26. The chart changes between a strong bullish and bearish trend to a trading range.

9 days of gaps run the gauntlet – don’t count the days that a price bar covers.

Pivot point of seesaw – Gaps on right pushes timing forward.

Count back 9 days and see how it perfectly matches the reversal!

Pivot point

Two gaps on the left side of the seesaw – pulls timing back

2 days early

ONLY COUNT the gaps from the LAST point until a triangle line or the REVERSAL MAGIC point, whichever comes first.

Figure 26

Every commodity or stock can be compared to a child. Every time you turn around, they are going through another phase with a brand new personality quirk. The lumber chart above seems to do just that. It begins in a strong trend, pulls back and then suddenly explodes, rocketing almost straight up with gap after gap with only a short pause just before it reverses. Then a rapid descent with a mid-point pause until it drops into a volatile trading range. With far too many scenarios than we could possibly cover here, every action in a market can either directly or indirectly affect a REVERSAL MAGIC point and what will actually happen. Some of these scenarios can be rather subtle too. So it would be a good idea to review at least a few of those scenarios like the ones we see in the chart above. For example, a small cycle that completes in the middle of a strong trend will only result in a mild pause in the trend or a temporary pull back. The good part about this fact is that when a strong trend resumes, you know that there is an excellent opportunity to make some fast profits. Remember, too, that these pauses and pullbacks also form the basis for upcoming REVERSAL MAGIC points, as well.

Normal trend with strong pullback resulted in reversal

Very strong trend resulted in only small pause

Trend slowing results in reversal

REVERSAL MAGIC points in a trading range frequently signal reversals

Trading ranges are one of my favorites to trade using REVERSAL MAGIC. In this type of market, REVERSAL MAGIC points most often signal reversals and you have the opportunity to lock in short term trading profits. I believe that it is this type of market that a huge percentage of novices lose their money. When average traders see the market moving, they start to get excited either with greed or panic and make a trade only to find that the market suddenly changes direction on them. Because the market reverses, they get excited again (usually with panic since the market is working against them) and reverse their trade only to see the market turn once again against them. This back and forth trading causes many of the swings associated with trading ranges. Professional traders intentionally play the crowd back and forth this way. Since you know just when the market will change direction, you have the opportunity to use this reaction to your benefit before the big market makers have a chance to do so. The next way that you can zero in on what will actually happen at a REVERSAL MAGIC point is by considering: The actions that have occurred recently at REVERSAL MAGIC points. If you are getting frequent pauses or gaps at your REVERSAL MAGIC points, then you probably have an extremely high number of cycles flowing through that particular market. Viewing the cycles in the markets like the waves of an ocean, on an average day, a boat would be able to navigate fairly easily through any waves. However, if a violent storm were to occur then it becomes rather treacherous to do so. And don’t assume that it’s just the visible waves that make waters treacherous to pass through either. Although you might not see them, strong undercurrents can be just as dangerous to watercraft. So what should you do if the cycles become too chaotic to count on reversals? There are two choices that you can make.

1. Step away from this market until it calms down. 2. Trade it - by using the patterns that develop to help you confirm the type of action

the market is taking at your REVERSAL MAGIC point. So with the last point in mind, the next way that you can zero in on what will actually happen at a REVERSAL MAGIC point is by considering: The pattern that develops at the REVERSAL MAGIC point.

In the first section of this book, we touched on patterns. Patterns provide support and confirmation to REVERSAL MAGIC points. Our advantage over others who try to look at the same patterns is that we know that a particular pattern is at a critical point. For example, suppose you were looking specifically at a down day during an up trend to indicate a reversal. What would the average trader need to have confidence that the pattern was indeed an actual reversal? Take a look at Figure 27 and see what happens to the average trader. Figure 27

What a difference REVERSAL MAGIC makes! If you are looking for patterns to find entry points for your trades, how quickly you can get yourself into trouble if your timing is off. But when you have the timing – then patterns take on a whole new light. When you see a gap at a REVERSAL MAGIC point, then you know it will keep going until the next REVERSAL MAGIC point. If the market stalls at a REVERSAL MAGIC point, then you know it will stay stalled until the next REVERSAL MAGIC point. If the market goes the opposite direction at a REVERSAL MAGIC point, then you have a reversal until the next REVERSAL MAGIC point. What you see is what you get with no surprises. You just look for the pattern confirmation.

1 - Trader finds a down day and thinks possible reversal.

2 - Another down day! Must be reversal and trader places order to sell.

3 - Oh no! It reverses and the trader is in trouble Should trader hold or

close position – waits until next day to see what market will do and is BURNED!

And all the while you know what is happening before it happens because REVERSAL MAGIC points precisely to the reversals!

PRATICING YOUR NEW SKILL OF FINDING REVERSAL MAGIC POINTS Everybody has an opinion, but not everybody is right. As the saying goes, “seeing is believing”. To have the confidence needed to succeed in using REVERSAL MAGIC, it is required that you see it in action and develop your skill. Reviewing a few charts will help you to accomplish this. As you do so, remember that REVERSAL MAGIC will point to practically every reversal, so for now just concentrate on the major reversals. Also, the number of gaps in the back (left side) or front (right side) of the triangle can pull or push the REVERSAL MAGIC point off by the corresponding number of ticks. Figure 28 is a daily corn chart from 1996, and I have taken the liberty of marking three REVERSAL MAGIC points. Can you find where the corresponding triangles are drawn from? Figure 28

Remember that you have both bullish and bearish styles of triangles that you can draw. A ruler works very well as an edge for any trend lines that you believe might work. When looking at charts on a computer screen, I usually just place my mouse pointer where the two lines intersect. But if the lines are really long, I have a ruler, (a architect triangle shape style which makes it easier to hold) which I actually hold across the screen to precisely locate the REVERSAL MAGIC points.

Figure 29 shows the triangles drawn to locate the REVERSAL MAGIC points in figure 28. Of course, you may have located one or two with triangles drawn from another source. (A couple of these have multiple triangles that point to the same REVERSAL MAGIC points.) The first two REVERSAL MAGIC points are easy to see with the triangles drawn. However, I want you to particularly focus in on the last REVERSAL MAGIC point and its corresponding triangle. Figure 29

Note that the indicated REVERSAL MAGIC point actually is a day late. The reason is because of the gap that is between the last trend line point and the REVERSAL MAGIC point. This weights the triangle and pushes the timing forward. To compensate for this, you have to adjust your timing to one day earlier than indicated. This adjustment will not be necessary for every market that contains gaps. It all depends on the volatility. How will you know when to apply this rule and when not to? Check recent past REVERSAL MAGIC points that have gaps. If it was required recently on a chart, then odds are it will continue to required until the volatility quiets down. Look at the next charts, figures 30 and 31. Again, try to locate the triangles that correspond with the REVERSAL MAGIC points. Figures 31 and 32 show the answers.

Actual reversal

Indicated REVERSAL MAGIC point

Gap pushes timing forward – need to pull timing back to adjust for this

Figure 30

Figure 31

Figure 32

Figure 33

The charts that we have just been looking at have all been daily charts. However, this method works equally as well to all other time frames, and I recommend that you use multiple time frames to get a better picture of what is happening in a particular market. In fact, using Separate time frames allows more control over your trading. I will often trade short term (lasting a few days to over a week), but will still use time frames down to even a minute to get the very best price on my trade. Then, when the higher time frame indicates that a reversal magic point has arrived, I revert back down to a much lower time frame to obtain the very best exit price. That way I lock in the highest amount of profit per trade with the least amount of stress. Additionally, by using weekly and monthly charts you get an idea as to where the strongest trends are and when they will reverse, allowing you to take advantage of the biggest moves in any particular market. Another advantage of REVERSAL MAGIC is the ability to tell when there is a change of momentum. There are several markets that have huge moves such as the grains that will sleep dormant for a time, suddenly wake up and move incredibly fast. Most people miss the starting gate on these racehorses. With REVERSAL MAGIC, you have an inside track as to when the starting gun will fire. This gives you an incredible advantage over the average trader. So don't forget to monitor these sleeping giants to see when they awaken. In the next several pages of charts we will take a look at one of those sleeping giants as it awakens and also some intra-day charts. This will be set up just like the previous set of charts. Each page will contain two charts with the arrows to indicate the REVERSAL MAGIC points. The following page will contain the triangles that I used to locate these points. If you find that you are using a different triangle than illustrated, that is perfectly all right. As I mentioned earlier, many times you will find a couple of triangles that point to the very same REVERSAL MAGIC point. Seeing REVERSAL MAGIC in action can help to answer many of the questions that you have or might arise in your trading. Don’t overlook the subtleties of using this method. I’ve learned that everything matters. The more you use this method, the more you begin to see how well it works, and, more importantly, why it works. Before long, others will be amazed at your forecasting ability and may even believe that you have some insider information. Of course, you do in a way. You have REVERSAL MAGIC!

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As you went through the preceding charts, how did you do? Are you starting to get the concept? Of course you are! REVERSAL MAGIC becomes easier and easier each time you use it. Before long, you will be calling every reversal that occurs in your favorite market.

This REVERSAL MAGIC point found by earlier triangle points not pictured

Remember, too, that REVERSAL MAGIC points also indicate a change of momentum, such as pauses in the market. This can be a very important phenomenon, because if a REVERSAL MAGIC point only causes a pause in a current trend, then that trend could be a very strong one and will continue its powerful move once the pause is over, giving you an opportunity to reap the rewards. Why does REVERSAL MAGIC give you an incredible edge over 90% of traders? Because in trading, timing is everything. Most traders are of two camps in their method of determining the direction of the market. They are either the fundamentalist who will use the laws of supply and demand or the technician that will make use of patterns, support and resistance, and indicators. These methods generally make fundamentalists too early and technicians too late. That means that in both camps, a great deal of money is lost on bad timing. REVERSAL MAGIC ends that problem and puts you on the right side of the trade at the right time. Even with a market that has an obvious strong trend, if you enter at the wrong time you could face a possibly large draw down before you begin to see any potential profits, or worse yet, you may even be kicked out of a market with a substantial loss just before the market turns in your favor. Strangely enough, you can be right about the market, but wrong about a trade. Thus, timing is truly everything when it comes to trading. Timing is the one area that is so hard to determine – but now you have the ultimate tool. With this incredible tool, you are in the position to earn fantastic profits. Reversal magic may not be the “Holy Grail” of trading, but it is truly magical. As powerful as reversal magic is, there are some common sense decisions that each trader needs to use to be effective. To help you on your way to develop your own skill and style of trading, here are some additional common sense points to using REVERSAL MAGIC. 1 - If a strong trend is in effect and a REVERSAL MAGIC point only causes a pause

the market, likely the strong trend will continue in the same direction.

2 - If the market changes direction just before a REVERSAL MAGIC point without any forward gaps on your triangle, then the reversal is only temporary, and the reversal magic point will cause the trend to resume in the previous direction.

3 - If a reversal magic point is accompanied by a reversal pattern, then you have

confirmation of an actual reversal. While this seems rather obvious, many traders in the heat of the market action will second guess themselves regarding whether a reversal is actually taking place or not, causing them to lose their trading opportunity. If it is at a reversal magic point with a reversal pattern, then it is a reversal.

4 - A market that doesn't reverse at a REVERSAL MAGIC point will not reverse any earlier than the next REVERSAL MAGIC point. This means that if you do not have a confirming pattern, the REVERSAL MAGIC point indicates a change in momentum such as a pause, gap or acceleration.

5 - Just because you do not see a REVERSAL MAGIC point doesn't mean there isn't

one. For example, a chart pattern far ahead in time of an actual REVERSAL MAGIC points may have been overlooked. Until you develop your skill, you will find that occasionally you will miss a reversal magic point and it will catch you off guard. As you improve, this won't be so much a problem. The rule that protects you is very simple: if the market does not behave the way you expect, then get out until it starts to.

6 - Don't chase a market. If you miss a trading opportunity, wait for another, and don't

force one that you are really too late for. There are always new trading opportunities arising. Remember, you will catch more of the “Big Move” by accident than by chasing.

7 - Don't trade with distractions or with negative thoughts. There are always Gurus

and nobodies that will tell you all the reasons your trading methods won't work. “Seeing is believing” and “believing is seeing”. As you start to use this technique, you will be amazed by how effective it is. But that doesn't mean someone or something can't cause doubt or fear to become a problem in your trading. If you don't allow negative thoughts to affect your trading, then you will keep negative things from happening in your trading.

I recommend that you take advantage of the many chart services on-line and follow a number of commodities and/or stocks to practice locating REVERSAL MAGIC points. Get a feel for what type of action the market will take at each point. Look at the same chart in different time frames to get an even better perspective. On a personal note, there are a number of things that I add to my trading to increase my effectiveness of using REVERSAL MAGIC. For example, I find that if I am looking at one time frame at a REVERSAL MAGIC point and I take a look at the next couple of lower time frames, it will confirm what I expect to happen and also enable me to get in a fantastic position in the market. And I can do this with minimal stress and worry. In fact, one of the beautiful things about REVERSAL MAGIC is that if I want to get up one day and day trade for "extra" income I can do that. If I want to just spend a few minutes each day looking over the charts and spend the rest of that day with my family, then I can do that. How I decide is really based on my interest at the time and not depended on the markets. Many day-traders are afraid that if they leave the market even for a second because they might miss the “Big trade” or be hit with huge losses.

With REVERSAL MAGIC, even if the day doesn't have a record move, you can make incredible profits that far exceed the day’s range by picking off each swing as it occurs. So even if I miss a record 20-point day range of the S&P, there are "average" days where I can still catch 20 points in a single day by using REVERSAL MAGIC. You now have in your possession perhaps the greatest trading technique available today, giving you an awesome advantage over practically every trader who is trading against you in the markets. And this even includes the so-called “market makers”. I encourage you to spend some time practicing this new skill that you have acquired and master it on paper before actually using real money. Develop your skill until you become comfortable with it. Learn to decipher the triangles that have real meaning to your particular trading. Start out small until you really get a feel for using it. I am confident that in the end your trading will be much more satisfying physically, emotionally and, of course, financially. So-called “market wisdom” dictates that no trader really knows what the market is doing and so you can only react to it. This is good advice for those using all other methods of trading. But this is not so with REVERSAL MAGIC. Because you actually do know what the market will do - before it occurs. This advance knowledge gives you an obvious distinct advantage over all others trading in the markets. Your success will appear to other traders as incredible, yes, even magical. All because of the knowledge and skill that you now possess beyond “market wisdom”. Because you now possess REVERSAL MAGIC! So go ahead and triangulate your way to a secure and wealthy future with . . . . REVERSAL MAGIC! It is truly magical!