Chat Seminar with Leroy Rushing on Market Cycles

[Soultrader]

Many thanks to Leroy Rushing for this great chat seminar. Below is transcript from Feb. 15, 2007 on market cycles. Leroy Rushing is a former Excecutive Risk Manager for several Fortune 500 financial insitutions and a current day trader and trading mentor for Trading Everyday.

Leroy: Many traders begin the journey looking for lots of materials, books, seminars, chat rooms, newsletters to help them find the edge.

Leroy: But what I want to share with you, I have found to be overlooked and very few books, seminars, and traders focus on!

Leroy: It's simple, yet very important!

Leroy: http://www.traderslaboratory.com/Cha...roy/Chart0.png

Leroy: Every one looks at the market, but do you see what really happens consistently. Everyone knows that the market goes in cycles, right?

Leroy: But do you use this as the foundation for your trading? Do you realize that this is some of the missing pieces for some of your trade setups?

Leroy: Let's look at some examples

http://www.traderslaboratory.com/Cha...roy/Chart1.png

Leroy: The QQQQ are a proxy for some traders who day trade, while others look at the e-mini's! We will look at both. Do you see the market cycle in this chart?

Tingull: y

Soultrader: yes

MrPaul: yes

Leroy: http://www.traderslaboratory.com/Cha...oy/Chart1a.png

Leroy: How about now?

MrPaul: yes

keymoo: i don't see much sideways bottoming action

Leroy: What stage is the QQQQ's in?

MrPaul: Ill go with top for 500 Leroy

Budman: sideways

traderwilliam: 3

keymoo: sideways top

Leroy: Use chart0 to identify? Good answer, only 30, sorry, smile

Leroy: Lets look at a high flyer today.

Leroy: http://www.traderslaboratory.com/Cha...oy/Chart1b.png

Leroy: What stage is this one in? It gapped up today, that's not on the chart.

MrPaul: 4?

Tingull: Looks like 1

keymoo: i would say 1, but there's no reason it could not go lower, right?

budman: sideways bottom

Leroy: Can you see the market cycle on this chart?

Soultrader: 1

Leroy: http://www.traderslaboratory.com/Cha...oy/Chart1c.png

Leroy: Do you see so far how if you use the market cycle as the beginning guide, it will help you with what is next?

Tingull: I can see that

Leroy: So lets quickly look at DIA.

Leroy: http://www.traderslaboratory.com/Cha...roy/Chart2.png

Leroy: What stage is this one in, this is a proxy for the DOW.

Tingull: 2

keymoo: 2?

Soultrader: 2

Leroy: good

MrPaul: dos

Leroy: What stage comes after 2?

Leroy: http://www.traderslaboratory.com/Cha...roy/Chart3.png

Leroy: This is a proxy for S&P500. You with me so far, if you know what stage the bigger trend is in, when you drill down, you have a better chance of the odds being in your favor.

Leroy: http://www.traderslaboratory.com/Cha...roy/Chart4.png

keymoo: how does this help the intra-day trader?

Tingull: ok

Leroy: This is the mid-caps, can be used as a proxy for the Russell. So lets get to the good stuff.

Soultrader: keymoo if the market is rangebound in the bigger timeframe you will be applying more rangebound strategies to your daytrading.

keymoo: well during a rangebound daily market, you can have some strong trending intra-day days
Leroy: If we call the bigger trend a MAJOR trend, then when we drop down to lower timeframes, we will see the market cycle also, right?

Tingull: Leroy, how can the midcaps be a proxy for the Russell? When the Russell is small caps.

Leroy: It's just a larger base of stocks for this example.

Leroy: So if we put all the pictures together what do we have as a overall market trend?

Leroy: http://www.traderslaboratory.com/Cha...roy/Chart5.png

Tingull: up

Leroy: Sometimes, someone is ahead of the pack, and someone is lagging, is that the case here?

keymoo: bullish/topping

Soultrader: we are still trending upwards.. but topping

Leroy: So I know how much you love the futures, lets look at a few of them.

Leroy: http://www.traderslaboratory.com/Cha...roy/Chart6.png

Leroy: So lets look in more detail at the NQ emini on a 15 min chart. Do you see the market cycle?

Soultrader: 3

keymoo: oh yeah! nice

Leroy: Notice how if you were for example using technical indicators such as the stochastic to buy/sell the NQ, would your trades be good or bad?

Leroy: If you used the market cycles, you would see that you are about go up, while the stochastic is oversold.

Leroy: Stochastic is a indicator that moves up & down. Oscillating, so the first shaded box would signal to some to sell, while the market cycle is indicating the trend to start going up, you see that?

Leroy: See once the emini breaks down and starts stage 4, what did the stochastics say to do?

traderwilliam: oversold

Soultrader: sell

keymoo: I dont know stochastics

Soultrader: haha yea same here

traderwilliam: I am indicator king :p. Because its oversold, so its a buy.

Leroy: That's ok, the point here is that if you use indicators, they may provide a different result that does not concide with price action, see that?

kingking: yeah

traderwilliam: yeah

Soultrader: yes

Leroy: http://www.traderslaboratory.com/Cha...roy/Chart7.png

Budman: Price is king.

Leroy: Here is Russell emini, what do you see?

traderwilliam: nice

Soultrader: 4?

MrPaul: possible double top?

kingking: topping?

Tingull: a bunch of garbage. HAH...jk

Leroy: Again, we are looking at a 15 min timeframe, remember that!

keymoo: there's a downtrending channel looking like a flag on right of chart.

Soultrader: very interesting charts

Leroy: Similar to the last chart, the indicators say one thing, but the market cyle approach says something different, see that?

MrPaul: yeah I see it

Leroy: The potential flag pattern is just that, a pattern. If you look at the market cycle chart again, we are cycling up and down at the top.

traderwilliam: if it goes under the dot yellow line, then it's a signal..*wild guess* :P

Leroy: No, the dotted yellow line is just a 200 ma. Its used to see the macro trend on a 15 min chart.The red line is a 20 ma used to see the minor trend on the chart.

Leroy: http://www.traderslaboratory.com/Cha...roy/Chart8.png
Leroy: Here is the Dow emini. What do you see using market cycles?

Tingull: bull rally

keymoo: bull rally

Leroy: Remember your market stages.

kingking: do you use the indicators according to market cycles e.g. trend period, indicaotr not reliable; non-trend period more reliable.

Soultrader: 2-3

Leroy: If you use the market cycles as a foundation, then you have a good idea of what direction the market will be considering next, right?

Soultrader: Indeed

MrPaul: Agreed

Leroy: So, what I have showed you so far is only half the picture.

Leroy: http://www.traderslaboratory.com/Cha...roy/Chart9.png

Leroy: If we look at the bigger picture, for example we might really see something different! So what do we have for the Russell?

MrPaul: there are cycles within cycles.

Leroy: Great MrPaul. But what stage is it in?

Leroy: Remember, I showed you that little area with the magenta lines?

keymoo: topping stage

Leroy: good keymoo

Leroy: So which is it for professional traders? We buy tops and sell bottoms or we short tops and buy bottoms?

keymoo: don't know, haven't got that far yet. :-)

Tingull: LOL keymoo

Leroy: So if you went back and grabbed any slice of time you can apply the market cycles to it to see what happens next.

keymoo: so if the russell went to 830, that would be the start of a new bull rally?

Leroy: Don't focus on the numbers, remember the market cycles first. If you are at the top and retesting a prior resistance area, what would you do, buy or short it?

budman: short tops, buy bots

keymoo: if it breaks out we get stopped out. how do we know that it won't break out?

budman: Key, we're never sure. that's what stops are for.

MrPaul: This question may be premature but how do you decide to trade these? what is defining a breakdown from a 3 or a breakout from a 1? S/R lines?

Leroy: The market is not going to make it easy for us to see which stage its in, thats why 80+ of traders lose, right?

MrPaul: okay

Leroy: MrPaul, all we are doing is ready the charts, appling the market cycles to them, understanding that a market must follow them exactly in sequence, 1,2,3,4

Leroy: Now how long a market stays in a stage is a good question.

keymoo: so the russell must come down before going to new all-time highs?

Leroy: We are trying to determine direction first. Wouldn't you want to know the direction of your next potential trade before you took it?Everyone with me so far?

Soultrader: yes

keymoo: interesting

Leroy: So if looking at a 15 min and we are at the top, we know that the 15 will lead to the 30, which will lead to the daily and so on. Soby using a simple market cycle approach, you can start to really understand what direction the market is trending right?

Leroy: http://www.traderslaboratory.com/Cha...oy/Chart9a.png

keymoo: i usually use 2min and 50,89 ticks charts, i'm wondering how this is going to help on the very small time frames.

Leroy: Try a couple of examples. The market cycle works on any timeframe and on any tick.

Leroy: The simple saying "the trend is your...."?

keymoo: cool, so the probabilities are in your favour if you start from say, the weekly, down to the daily, 30min, 5min, 2min, 50tick.

Leroy: Yes, Well, if we know the 4 stages and can consistently identify them, doesn't that help us tremendously?

keymoo: no doubt

Soultrader: trend is your best friend

keymoo: yes i've been spanked going against the trend, this very week!

Leroy: So some traders will use fibs to buy and sell. But if we combine our analysis using fibs and the market cycles, see how much more easier it is to follow the professionals?

MrPaul: yeah

keymoo: how do pivots fit into this?

Leroy: You see how the Russell is trading sideways in the upper 38% fib?

Leroy: Pivots are just that, some traders rely on pivots more heavily than others, but if you use pivots and are trading against the trend, thats not good!

keymoo: ah i see now, use the pivots to trade with the trend. nice

Leroy: So any questions so far?

keymoo: could you help me see the 38% fib on the russell? which chart?

Leroy: The last chart, the oval area

Soultrader: Leroy, I have one question

Leroy: You see we have a lot going on in the Russell. . We can apply the same approach to the other emini's also, you see that?

Leroy: Soultrader, what's your ?

Soultrader: when trading small caps or lets say the Russell emini... how much weight do you put into the big caps or the bigger indexes like the dow and S&P. intraday movements between the dow futs and russell futs seem to be never in sync.

Leroy: Right, the market not being in sync is natural. The objective is to know the major trend, and then drill down to find the opportunity to get on board and follow the trend, right?

Soultrader: if the dow is in cycle 4 but the russell is in cycle 2, would you be more careful with the russell?

Leroy: That's our objective....

keymoo: very good

Soultrader: yes i agree

Leroy: You don't need to worry about putting more weight on one emini vs the next if you know what stages each is in.

keymoo: do you pay much attention to divergences to confirm a play? for instance now on the 15min chart the russell is moving up in price on decreasing volume.

keymoo: so, price must come down, right?

Leroy: One all the stages line up for all the emini's you can go cha-ching, right?

Soultrader: ok thank you

Leroy: I pay a lot of attention to divergences in price action and volume. That is a great area to focus on eliminating some of the bad trades we make.

keymoo: great, what are the small dots on your chart?

Leroy: So let me go over the first slide in more details. If you are trending sideways and very little volatility exist, once you breakout, you know what to do, right?

keymoo: sure would you set up buy stops for this?

Leroy: If it breaks out to the upside, your in a stage 2. If it breaks to the downside, your continuing the stage 4 that you were in, you see that?

Soultrader: y

Leroy: You can put buy stop order, yes, but you need to practice scaling in first to learn the movements

keymoo: ok, so you can get 4,1 then a 4

Leroy: We have all seen the breakouts that come back into the range, right?

MrPaul: So Leroy above all else these stages are the core of your strategy?

keymoo: interesting, i've noticed the big banks on the SP always scale in
Leroy: This is the foundation of the market. Lots of principle are built around this.

Leroy: It just seems too easy for a lot of traders

MrPaul: ok

keymoo: easy? what to the pros?

Leroy: Elliott waves occur in stage 2 and 4, right?

Leroy: 3 legs or 5 legs, doesn't matter, the market has to be trending upward or downward for the price action to move

keymoo: what's that? i've heard of it

Leroy: Keymoo, elliott wave is a mathematical approach that some traders use to time their trading strategies for entry and exits.

keymoo: do you use it?

Leroy: So if you look at that last chart of the Russell, we are at the top of the range using fibs, we are in a stage 3 using market cycles, and if you look at the market right this minute we are trending sideways

Soultrader: interesting

Leroy:We either break to the upside, or we retest the low of the range, right?

MrPaul: So knowing this...Where is the level in which you say...This is weakening. A breakdown from the lows?

Leroy: If you can pull up the last slide next to this next one!

keymoo: yes my question also, MrP

Leroy: http://www.traderslaboratory.com/Cha...oy/Chart9b.png

Leroy: MrPaul, one minute and I will answer that, ok?

MrPaul: okay take your time

Leroy: Can everyone see how we are in the upper third of the first fib on the chart?

Soultrader: yes

MrPaul: yeah

Leroy: Now looking inside of that first fib, we were in the upper third of a smaller fib also, can you see that?

keymoo: y

Soultrader: y

MrPaul: yeah

Leroy: So, the first signal of weakness might be on this little fib, we breakdown. The next signal of weakness might be we on the first fib below the 38%, you with me so far?

MrPaul: yea

Soultrader: alot of professionals like to buy pullbacks on the 61.8%

keymoo: yup

MrPaul: near 815

keymoo: 61.8 is a big pullback

Leroy: So if we break the little fib, then break the bigger fib, you can see how you could be scaling in to a position, so if we breakdown on the daily (remember the sideways trending) you would already be in a position that was profitable?

Leroy: You guys with me?

keymoo: ok, if the bigger fib acted as support, would you then get out of your position?

Leroy: Just depends on the if you have all the emini's breaking down or just one of them, see the difference?

keymoo: ok

keymoo: the NQ seems to be the odd one out at the moment

Leroy:One breaking down, you might start to take a little profit, all of them breaking down, you might back up the dump truck, just depends on your risk tolerence.

Leroy: Odd one, or the first one to way his hand and say I'm tired! smile

Leroy: Soultrader, did I answer your question?

Leroy: MrPaul, did I answer your question?

MrPaul: yes very well, thanks

Leroy: ok

Soultrader: yes thank you

Leroy: So if you use multilpe timeframes, and a top down approach, you can see how the odds start to lean in your favor as you setup your trades
Leroy: Did everyone see that?

keymoo: i like it

Leroy: Indeed

Soultrader: yes very interesting

keymoo: for instance on the ES right now price is ranging, the higher prob. play would be to short the top of the range because that coincides with the top of a larger range - is that it?

Leroy: It seems like a simple approach, but once you add chart patterns to it and constantly look for congruency, it make it more challenging
keymoo also volume increases when it comes down, and decreases when it goes up in the range

Leroy: Yes, you expect volume to increase as you transition from one stage to the next, everyone see that?

MrPaul: yeah

Soultrader: y

Leroy: Eveyone, look at the first chart again, lets look at the green oval and the red oval

Leroy: http://www.traderslaboratory.com/Cha...roy/Chart0.png

Leroy: These are the optimal buying and shorting areas on the market cycle.

Leroy: As a stock transitions from sideways with little volatility, buyers step in and volume increases and the breakout occurs

keymoo: sounds easy now. lol

Leroy: When we are in stage 3 trading sideways, volatility is high and sellers step in and over power buyers to the point that price drops

Leroy: In this session, I only covered the basic for what goes into the market cycle.

Leroy: Everyone see that?

Soultrader: y

keymoo: yes

Leroy: So the market has changed, when transistioning from stage 4 to stage 1, we see a lot of 2X bottoms .

Leroy: How many have see the second bottom over shoot the first one and then come back into the range?

Leroy: http://www.traderslaboratory.com/Cha...Leroy/ntri.png

Leroy: Look at how the market over shot the bottom at 42.51 and if you pulled up the chart right now, what do you see?

keymoo: a big gap up

Leroy: This is a good swing trade for those who bought once price action cam back up above 42.51

keymoo: high vol on first bottom, and lower vol on second bottom - does that tell you anything?

Leroy: You see how that second bottom is a shakeout

Leroy: Good keymoo

Leroy: shakeouts have that nice characteristic sometimes

keymoo: thanks leroy, i feel like i'm learning a lot, i hope i am

Leroy: http://www.traderslaboratory.com/Cha...s/Leroy/ma.png

Leroy: what do you see here, what stage is the stock in?

Soultrader: 2

MrPaul: 2 or 3?

Leroy: good

keymoo: stage 2?

Leroy: http://www.traderslaboratory.com/Cha.../Leroy/ma2.png

MrPaul: 2 going into 3

Leroy: How about now?

Soultrader: 4?

keymoo: topping

Leroy: Potentially?

Leroy: Definitely, topping

Soultrader: yea potential 4

Leroy: So, you see how looking at the 15 only might get you in trouble if your entry is late, while the daily is potentially transitioning to a different stage?

keymoo: yes, do you look at longer timeframes, such as a monthly?

Leroy: Only for long term trades, and right now with the market being in a 2 for so long, I think its too late, what comes after 2?

MrPaul: 3

Leroy: Little note, using the market cycles, I am sure you all see that you don't have to trend sideways very long.

keymoo: so a good trade here might be to start scaling in around 114-115?

Leroy: Some refer to these as V-tops and V-bottoms

Leroy: If it gets back to that area! smile

Leroy: notice on the daily the price increasing and volume decreasing

keymoo if not, then get in with a market short order when it breaks?

Leroy: Careful! You want to trade according to your trading plan!

Leroy: If you don't have a plan, then that's dangerous, right?

Soultrader: definitely

keymoo: for sure

Soultrader: having a plan is everything

Leroy: You might practice paper trading it with a different approach first, learn the approach, then use real money

Leroy: So we introduced some concepts for charting by combining market cycles and fibs. Did this help any?

MrPaul: sure, it was refreshing

Leroy: Good MrPaul

keymoo: looks very powerful, thanks for sharing leroy

budman: Thanks Leroy. those TS charts?

Leroy: The basics will stay with you always, and keep you out of trouble if you trust and rely on them!

Leroy: budman, yes

keymoo: leroy what are the dots on your charts?

Leroy: The dots on which chart, keymoo?

Soultrader: great stuff Leroy. Thank you very much

Leroy: The futures charts, keymoo?

keymoo: on all the charts, you have little dots on top of some and under some candles

Leroy:ok, those are pivot highs and lows that can be label in Tradestation using showme(s)

keymoo: right, what are they saying to you?

Leroy: They are easy reference for pivots, the more in an area, the more support or resistance in that area, etc...

keymoo: cool, i found it in TS, what inputs do you use?

Leroy: If you let the system take care of some of the mechanical task, as a trader, you can focus on more important stuff!

Leroy: You can use pivot definitions of 2 bars to the left and 2 to the right

MrPaul: Leroy do you focus on any aspects of Market Profile?

Leroy: Last year I ran across the concepts in TS forum, downloaded the files and started looking at it

Leroy: As a statistician, I understand the concepts completely

Leroy: Each time frame used is a normal distribution turned on its side,...

keymoo: i'm trying to digest Mind over Markets right now, and i like the idea of combining price, volume and time

Soultrader: yea i just had the new MP book shipped

Leroy: Every approach, tool, technique and indicator can be a good approach if it works for you!

Tingull: Market Profile is amazing

Leroy: The key is that you learn it, absorb it, understand it, and clearly know how you use it in your trading and include all of this in your trading plan!

Soultrader: gotta have an edge

keymoo: as a new trader i do find the various methods and techniques a little overwhelming, there seems to be so much information to learn

Leroy: Any questions?

keymoo: so you would use the market cycle as the foundation of looking for signals in your plan?

Leroy: The best kept secret for learning to trade is to focus on 1 and only 1 thing, get good at, I mean really good at it, and the rest takes care of itself

Leroy: keymoo, yes

Soultrader: i totally agreee Leroy

Leroy: I buy when I see the uptrends and short when I see the down trends, and try to stay away from the sideways trends.

Leroy: Its like have a small store and you buy a bunch of stuff and put it on the shelfs and it just sits there, customers look at, but keep going.

Leroy: Great, guys, I am going to take a break, an be back in a few minutes!

MrPaul: cool

keymoo: great stuff Leroy, thanks for spending the time with us

Soultrader: Thank you very much Leroy. Amazing stuff And thank you for your time today.

Leroy: Sure, no problem, we will setup something again soon

Soultrader: I enjoyed it very much. Alot of new ideas came into my mind afer reviewing your stuff.

Leroy: good,Soultrader, we can talk tomorrow or next week

Soultrader: Sounds good Leroy. I'll have this transcript setup in the forums by tomorrow.