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					By Dr. Barry Burns
 FOUNDATIONS TRADING COURSE 2: MOMENTUM TRADING

 Dr. Barry Burns
 Copyright 2006
 Wealthstyles LP

 IMPORTANT-READ CAREFULLY:

 Reproduction, translation, or distribution in any form or by any means, or storage in a data base or retrieval system,
of any part of this work beyond that permitted by Section 107 or 108 of the 1976 United States Copyright Act without
the permission of the copyright holder is unlawful. Requests for permission or further information should be directed to:

 Wealthstyles LP
 1534 N. Moorpark Rd, #222
 Thousand Oaks, CA 91360-5129
 (805) 491-3541

 This publication is sold with the understanding that neither the publisher or author are engaged in rendering legal,
accounting, investment or other professional services. Trading and investing involves substantial risk. Financial loss,
even above the amount invested, is possible and common. Seek the services of a competent professional person
before investing or trading with money.

 By accepting this trading course you agree that use of the information of this course is entirely at your own risk.
Neither the author nor the publisher is a registered investment advisor or a broker dealer. You understand and
acknowledge that there is a very high degree of risk involved in trading options, futures and securities. Past results of
any individual trader are not indicative of future returns by that trader, and are not indicative of future returns which
may be realized by you. Neither the author nor publisher assume responsibility or liability for your trading and
investment results. This course is provided for informational and educational purposes only and should not be
construed as investment advice. The author and/or publisher may hold positions in the stocks, futures or industries
discussed here. You should not rely solely on this Information in making any investment. The information in this course
should only be used as a starting point for doing additional independent research in order to allow you to form your
own opinion regarding investments and trading strategies.

 It should not be assumed that the information in this manual will result in you being a profitable trader or that it will not
result in losses. Past results are not necessarily indicative of future results. You should never trade with money you
cannot afford to lose.

 The information in this product is for educational purposes only and in no way a solicitation of any order to buy or sell.
The author and publisher assume no responsibility for your trading results. There is an extremely high risk in trading.

 This course is sold "AS IS," without any implied or express warranty as to its performance or to the results that may
be obtained by using the information.

 Factual statements in this course are made as of the date the course was created and are subject to change without
notice.

 HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS.
UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL
TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE
UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS
LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT
THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE
THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.




                                                              2
  TABLE OF CONTENTS
Introduction to Momentum Energy                                4

Trend Exercise                                                 6

MACD Explained                                                 17

MOM and DAD                                                    21

How to Use MOM and DAD                                         23

Counting Waves                                                 28

How To Avoid Choppy Markets                                    34

Using MOM as a confirmation indicator and as a trailing stop   36

Putting It All Together                                        38

Conclusion                                                     40

Appendix: Quizzes                                              41




                                          3
INTRODUCTION TO MOMENTUM ENERGY

Welcome to the second course in the Top Dog Trading Foundations Series.

In the first course we examined 3 energies that we measure in the market through the tools of
technical analysis.

Those 3 energies were:

1. TREND (primary direction or destination)
2. CYCLES (temporary turning points)
3. SUPPORT/RESISTANCE (traffic lights)

We focused primarily on the first 2 energies, Trend and Cycles.

In a future course on Market Geometry, we’ll focus on Support/Resistance.

In this course we focus on a new energy – MOMENTUM.

Let’s begin by revisiting an analogy we used in the first course:

        Imagine sitting at home in front of your television watching a bus driving down the city
        streets. The bus is packed with people (the masses) yelling at the driver trying to tell him
        which way to go next. Your job is to predict where the bus is going and type your
        predictions into a computer a block before the bus gets there.

        Is it an impossible task? Almost! But there are some things that could make it easier.
        Some events could put the odds on your side … even if just for a moment.

        If the driver was stopped at a traffic light in the right lane and has his right turn signal
        blinking. This would be a reasonable indicator that the bus is about to turn right, so you
        could type into your computer that the bus will turn right here and go at least to the next
        cross street.

        Of course the bus driver could just go straight anyway (we’ve all been behind some
        drivers who have had their turn signals on for blocks without turning), but the odds are
        with you that when a person activates their turn signal they will probably turn in the
        direction of that signal.

        If the driver is crossing an intersection and you can see up ahead that the traffic light at
        the next intersection is yellow and about to turn red. You could type into your computer
        that the bus will stop at the next light. Will you be correct? The driver could speed right
        though the red light without stopping, and that does happen occasionally. But the odds
        are with you that the bus will stop at the next light. Even a police car with siren blaring
        will slow down at red lights.

        If the bus is speeding down the street at 65 miles per hour, the odds are against it being
        able to stop on a dime in the next block. Yes, again it’s possible, but not without needing
        new tires after the abrupt halt. It’s pretty safe to say that it would be an exception to the
        rule and not the driver’s intention to stop that soon.



                                                  4
That last example is about more than simply trend. It’s about momentum.

According to the American Heritage Dictionary, momentum is defined as:

    A measure of the motion of a body equal to the product of its mass and velocity.
That’s great, but what is the “mass” of the market? Do prices really have mass?
Yes, they do.
The mass of the market is the volume associated with each price bar. We’ll study
volume in a future course.
To look for another definition of momentum we can apply to the markets, we leave
behind the American Heritage Dictionary and turn to www.investopedia.com” (a great
resource), and we find this definition:
        “The rate of acceleration of a security’s price or volume.”
Investopedia goes on to say:
        “To engage in momentum trading, you must have the mental focus to remain
        steadfast when things are going your way and to wait when targets are yet to
        be reached. Momentum trading requires a massive display of discipline, a rare
        personality attribute that makes short-term momentum trading one of the
        more difficult means of making a profit.”
Scared?
In teaching classes as well as mentoring individuals, I’ve found that seeing and
applying momentum has been very challenging for most of my students.
Not only does it require adding other indicators, and “seeing” the meaning of those
indicators (which are a bit more challenging to read than moving averages and
stochastics), but it also requires a completely different psychological discipline.




                                              5
TREND EXERCISE
Before we get to all of those factors, let’s look at some charts and begin laying the
groundwork. These charts will take us through a series of opportunities presented
during a trend. We’ll look at them one at a time and I’ll invite you to make a decision
at each juncture.




                                           6
7
8
9
10
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12
Let’s take a birds-eye view of the chart with our stochastic indicator added and see if
that provided any clues…




No real help.

It does a great job of identifying Cycle Highs and Lows, and we get a double bottom on %K and
a divergence top on %K that helped nail the timing, but nothing that shows how far we can
expect the market to continue.

The Cycle Indicator is to help us find short-term Cycle Tops and Bottoms, but it doesn’t help us
at all when it comes to trying to determine how far the market will move in a direction.


                                                13
Now lets add another indicator … the MACD.




The MACD indicator is the blue “histogram” at the bottom of the chart. It measures momentum.
Before I explain how to read it, take 2 or 3 minutes to examine the indicator in relation to the
points we marked earlier and see if you can find any “meaning” in the indicator.

Would it have given you any clues at those decision points where we posted the questions?

Here’s some things you may have noticed:

At the very top, price was still making a Higher High, but the MACD was making a very clear
Lower High.


                                               14
This is one of the most powerful aspects of momentum. It can LEAD price!

It’s a well-known saying among traders that “momentum leads price.” I would more accurately
say, “Momentum CAN lead price.” It certainly doesn’t always.

Volume and momentum are the 2 indicators we use as “leading” indicators, but calling them that
can be misleading. Nothing FORECASTS the future. Volume and momentum, however, are
some of the best ways the market will tip its hand before you see a change of direction in price.




                                               15
The easiest (but not most profound) way of using the MACD is to look for simple divergences like
this between Cycle Highs and Lows. The Stochastic divergences work great when we get the
“mini divergences” in a single Cycle Top or Bottom, but it doesn’t work as well comparing one
Cycle Top/Bottom with another Cycle Top/Bottom.




                                              16
MACD EXPLAINED

Now that you’ve seen a basic application of MACD, let’s dissect the indicator so you understand
exactly what it’s measuring.

MACD was created by George Appel and is one of the most popular indicators in technical
analysis.

“MACD” stands for “Moving Average Convergence Divergence” and is called this because it
measures how much 2 moving averages are coming together or moving apart. The
traditional MACD indicator has 3 plots.

   1. The MACD line: Traditionally calculated by subtracting the 26 period exponential moving
      average from the 12 period.
   2. The Signal Line. A 9 period exponential moving average of the MACD line.
   3. The histogram. Measures the distance between the MACD line and the Signal Line.


Remember, all this indicator does is measure the difference between 2 moving averages
(traditionally the 12 ema and the 26 ema).

       When the 2 moving averages are moving farther apart from each other and they’re
       moving up, the MACD line will move up.

       When the 2 moving averages are moving farther apart from each other and they’re
       moving down, the MACD line will move down.

       When the 2 moving averages are moving toward each other, but they are still moving up,
       then the MACD line will move down (indicating that momentum is slowing because the
       spread between the 2 moving averages is narrowing).

       When the 2 moving averages are moving toward each other, but they are still moving
       down, then the MACD line will move down (indicating that momentum is slowing because
       the spread between the 2 moving averages is narrowing).

       When the 2 moving averages CROSS, then the MACD line will be at a value of “0”
       because there is ZERO distance between the 2 moving averages.

You can see all of this by looking at the charts on the following pages.




                                                17
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MOM AND DAD

Now that you understand how MACD measures momentum, let’s look at how we’re going to use
it.

First, I don’t use the standard settings for MACD.

The settings we’re going to use are:

       Short ema: 5 (traditional is 12)
       Long ema: 20 (traditional is 26)
       Ema of MACD (“signal line”): 30 (traditional is 9)
       And we’re going to turn the histogram OFF (if you can’t turn it off, just turn it to a thin
       dotted line and make the color the same as the background color of your chart).

Your charting platform may use different terms for its description of the components of the
MACD, but they should be similar enough to these that you have no trouble. In addition, by
placing the normal default settings next to the numbers above, you should just be able to
replace the traditional numbers with Top Dog numbers!

I call MACD with this setting “MOM and DAD.”

        MOM is short-term MOMentum and is represented by the histogram (the MACD line).
        DAD is long-term momentum (the “D” in DAD stands for “Direction”) and is
        represented by the line overlapping MOM (the ema of MACD).

On the next page you can see how it looks when plotted on a chart (I show the traditional MACD
on the top and MOM/DAD on bottom):




                                                  21
As you can see they’re very similar. Here are some of the differences for you MACD fans:

1. Mom and Dad measure the difference between the 5 ema and the 20 ema, which makes it a
   little faster than the traditional 12 and 26 emas.
2. The MACD “line” is plotted as a histogram instead of a line. This makes it easier to see
   “waves” which we’ll be addressing later.
3. The signal line is much slower (30) for MOM and DAD than for the traditional MACD (9).
   That’s because with MOM and DAD we don’t use it as a signal line. We use it as a secondary
   momentum indicator.
4. We don’t use the traditional “histogram” that measures the difference between the MACD line
   and the signal line (since we don’t use a signal line).

If the MACD is already one of your favorite indicators, and you’re accustomed to using the
traditional formula, feel free to continue to use it. But I think you’ll see some advantages to the
way that I employ it, and that the way I plot it aids us in “seeing” what we’re looking for. Still, feel
free to customize the indicator in a way that is visually most appealing to you.



                                                  22
HOW TO USE MOM AND DAD

Just as we use 2 indicators for Cycles, we also use 2 indicators for Momentum. And the idea is
the same.

With the Stochastic Indicator (our Cycle Indicator):
       %D is more accurate, but slower.
       %K is faster, but less accurate.

With the MACD (our Momentum Indicator):
       DAD is more accurate, but slower.
       MOM is faster, but less accurate.


The principles on how to use MOM and DAD are the same as the principles on how to use the
Stochastic Indicator.

   Just as we’re using %K to anticipate turns in %D (and then looking for confirmation);
   so too we’re using MOM to anticipate turns in DAD (and then looking for
   confirmation).

   As we had special patterns we looked for in %K that gave us a high probability early
   indication of a change of %D coming soon; so too we have patterns on MOM that give
   us a high probability early indication of a change in DAD coming soon.


Let’s look at MOM and DAD individually now.

DAD is used for “Direction.” It’s actually our Long-Term Momentum Indicator. It’s very accurate
and is usually not a good idea to trade against it … unless MOM is giving you a signal that DAD
is going to be turning soon.

Reading DAD is simple. Just look at the slope of the line.
      Up = up momentum.
      Down = down momentum.

The only other important thing to watch in reading DAD is to know that (like with trends) the
earlier you get into a new direction with DAD, the better. The longer DAD continues going in one
direction, the lower the probability he will continue in that direction.




                                                23
Even though DAD follows price and doesn’t lead price, it’s still much faster than the 50 SMA.

That doesn’t mean that the 50 SMA isn’t a good trend indicator. It just means that Momentum
tends to lead Price.




                                              24
MOM is our Short-Term Momentum indicator. It’s choppier than DAD, and therefore is subject to
being inaccurate when used by itself. On the other hand, there are CERTAIN PATTERNS that
provide a reliable heads-up that DAD (and therefore the direction of the market) will be turning
soon.

MOM and DAD make a nice couple!

DAD is slow. MOM wishes he would do things around the house faster. But if you want to know
what DAD will eventually get around to doing, ask MOM because she can tell you!

In the example below you see that DAD is still angling up (the black line), but MOM has made a
Lower High, diverging from price. This is an indication of a short-term momentum shift. Because
DAD has already been moving up for such a long time, it proved to be an early indication of a
turn in DAD, which is really what’s important, so be sure to watch and make sure DAD confirms!




But that’s not enough!


                                              25
To get a STRONG shift in Momentum, we don’t want just a Lower High in MOM when price
makes a Higher High.

We want a Lower High and a LOWER LOW in MOM with a Higher High and a Higher Low in
price.

This gives us a much higher probability scenario than just the Lower High on MOM.




Everyone looks for the divergences in the Highs. But not many people also look for the
divergences in the Lows. That is your edge.




                                               26
Does this happen very often? Not nearly as often as simple divergences of the Highs. But when
it does, you want to be the one who sees it.

The slogan for professional traders is:

        “Fewer, Better Trades.”

We’re not trying to catch every twist and turn in the market. We’re waiting patiently on the
sidelines, like a tiger in the brush … waiting for the prey that strays from the pack, has a
limp, and is deaf!

To the tiger, it’s not a sport to test his hunting ability. It’s survival. He needs to eat and isn’t
looking for a fair fight.

You’re not looking for a fair trade. You’re looking for an outstanding trade, because you’re not
trading for sport, but for your financial survival.

Wait … wait … wait …

It might be hours or days or weeks. Like the tiger lies still in the brush waiting for the prey to
come to him, you wait for the market to come to you.




                                                   27
COUNTING WAVES

Another way to use MOM as a leading indicator is to count waves. The average “Wave” in a
trend is 5 waves. Certainly some trends last longer and others are shorter, but that’s the
average.

Trading an average trend isn’t an optimal situation since it doesn’t give you an edge. Better to
wait for an extended trend before you look for a reversal and then get in early on a new trend.

Wave counting can be done with momentum as well as with price. But counting waves on
momentum gives you an earlier warning than counting it on price.

Counting waves is a bit subjective. Where exactly does a Wave begin and end?

The best rule of thumb is to let your eye be your guide and be conservative. That means when
there are obvious Highs and Lows that catch your eye, you count them as a Wave.
You can also reference PRICE to see if the swings are significant.

When there are Highs and Lows in question, that you’re not sure about, then don’t count them.
This keeps you on the conservative side of the count, and the only downside of being
conservative is that you may miss some trades. But that’s better than the alternative.

If you want a purely OBJECTIVE method you can simply use %D Cycle Highs and Lows
for Wave counting on MOM.

However a Wave is NOT the same as a Cycle. Therefore you must use the following filter
when using Cycle Highs/Lows to find Waves:

In an up trend, a new “impulse” Wave is a Cycle High that is Higher than the previous
Cycle High, and a new “retrace” Wave is a Cycle Low that is Higher than (or equal to) the
previous Cycle Low. The reverse would be true for a down trend.

Cycles are simply measured by the Cycle Indicator and can be higher or lower than the previous
Cycle High. Cycles are not measuring direction, they are simply measuring time.

Waves measure direction. In up trends, only Cycles that are higher than the previous
Cycles are considered “Waves,” and not just Cycles.

Therefore every Wave is a Cycle, but not every Cycle is a Wave, and a single Wave can contain
several Cycles.

This approach has nothing to do with “Elliott Waves,” which produce good trade setups, but is a
specialized area unto itself and way beyond the scope of this course.

In addition, I’m not actually teaching you to read Waves on Price either (that’s an advanced topic
and we do it a little differently than described here). I’m only giving you some examples on Price
below to help you see Waves on MOM, which is our topic for this course.

See the charts on the following pages …




                                                28
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Measuring Waves on “MOM:”




                            31
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Students are often confused by wave counts, and I can certainly understand that. Waves can be
hard for some people to see, even when we have an objective method of measuring them like
we do.

One of the biggest problems students run into is that they try to find Waves in every turn of the
market on a chart. Never FORCE any technique on the market.

Always remember this (and it applies to any technique):

        This isn’t an approach you use all the time. Count the Waves when they stand out
        as being obvious to you. The rest of the time, don’t use this technique!

Again, this isn’t going to help you MOST of the time.

Most of the time, the market isn’t giving us a low-risk, high probability trades of any type!

This is just one more setup to look for. Most of the time it won’t be there, but keep it in mind so
when it is, you don’t miss it. I can assure you that there are very few people looking for this
(Wave counts on Momentum), and that is your edge.

Be as patient as a chess master who often wins by simply waiting out the amateur.




                                                 33
HOW TO AVOID CHOPPY MARKETS

One of the most beneficial uses of MOM and DAD is not to tell you when there will be a shift of
momentum, but to tell you when there is NO momentum! This is a prime condition for choppy
markets. Especially look for this on a time frame that is higher than the one you’re trading.

Amateurs are continually looking for when to trade:

       “Give me a new indicator”
       “Show me a new setup”

The pros are more excited if they learn when to stay out of the market. We know how to make
money, but more important is to know how to not lose money.

People often ask me about the significance of the zero line on MOM and DAD. It’s very
significant.

Generally you want to go short ABOVE it and long BELOW it. This gets you in early, which is
the whole point of entering trades on momentum signals (we’ll go over these trades soon!).

In trend continuation trades, momentum will usually already be above 0 for longs and below 0
for shorts, which is fine. Then it just acts as confirmation that there is still momentum in the
direction of the trend.

But when MOM and DAD “flat-line” at ZERO, there is no momentum in the market. It’s best for
most traders to simply wait on the sidelines as this will typically lead to trend continuation trades
that don’t follow through and to choppy market conditions.




                                                 34
35
USING MOM AS A CONFIRMATION INDICATOR AND AS A TRAILING STOP

So far we’ve only considered using MOM on the setup chart to help us find momentum patterns.

MOM can be extremely useful on the longer-term chart also, however, as both a confirming
indicator and a trailing stop.

In other words, so far we’ve been using %D (and secondarily %K) for both of those functions.
That’s because up to this point we didn’t have any other indicators on our charts.

But as already mentioned in the first course, Stochastics has a severe limitation in that can is
mathematically bounded so it can’t go below 0 or above 100, no matter what price does!

This creates “wiggling” at the top and bottom of the range … a dynamic that is not helpful to say
the least.

MACD is not bounded, so as long as the market continues to accelerate in one direction, the
indicator will continue to move in that direction, regardless of the number.

In that way, MOM can serve us better as a confirming indicator and a trailing stop on the longer
term chart.

However, I still always watch %D and %K on the longer term chart for 3 reasons:
   1. This problem of being a bounded indicator only affects it at the top and bottom of the
      range, so the direction of %D is still a great guide in the middle of the range.
   2. I want to watch for probable Cycle turns by watching for %K leading patterns and K/D
      crosses.
   3. When %K, %D and MOM align, it’s clear that the short-term momentum has shifted and
      it’s best to lock in profits.




                                                36
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PUTTING IT ALL TOGETHER:

We’re looking for as many of 5 ENERGIES to align as possible:

   1.   Trend
   2.   Momentum
   3.   Cycle
   4.   Support/Resistance
   5.   Fractals (multiple time frames)


The trade below shows all 5 energies aligning for a Trend Continuation Trade.




                                             38
The trade below shows all 5 energies aligning for a Reversal Trade




                                          39
CONCLUSION

Momentum trading is definitely more challenging that trading only price and cycles, but for the
very reason that most people are not seeing what you’re seeing, it can reap wonderful reward for
you as well.

Put MOM and DAD on your charts and watch them for a minimum of 3 months before you
attempt to use these techniques trading with real money.

Some people see these patterns easily and others never quite get the hang of it. There’s no
reason to place your money at risk until you convince yourself that these tools are going to be
beneficial to you.

If you have any questions about this course, send them to me at:

barry@topdogtrading.com

I’ll respond to you personally, and I’ll add many of the questions to the FAQ section of the
Course 2 web page available exclusively to those of you who have purchased this course.

No names will be included in the FAQ section, and most questions I post there are the ones that
were asked by more than one person.

Thank you for purchasing the course, I hope you find it helpful, and also feel free to send me any
suggestions on how I can improve it.

Next you should go through the QUIZES that follow in this manual, and then proceed to the
videos on the web site.




                                                40
APPENDIX:
 QUIZZES




    41
QUIZ 1:




          42
ANSWER 1:




            43
QUIZ #2:

What should you look for after a failed reversal trade?




                                             44
ANSWER 2:




            45
QUIZ 3:

When is the SAFEST time to look for Reversal Trades?




                                         46
ANSWER 3:




            47
QUIZ 4:

What objective measure can you use to count “Waves?”




                                        48
ANSWER 4:




            49
QUIZ 5:

What other “chart patterns” can you see in MOM?




ANSWER 5:

Plenty! See examples below.




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