Discretionary ASX Power Setups – Frequently Asked Questions The Discretionary Power Setups are designed for self directed traders looking for opportunities presented by common chart patterns. Our goal is to search out the many low risk setups and bring them to the attention of subscribers. However, we also expect subscribers to narrow the list down using their own criteria. This is a compilation of common questions and is designed to offer you a better understanding of how this trading strategy operates. When are the patterns updated? All ASX analysis is completed after the market closes each evening. An email will be sent when completed, usually about 9pm Eastern time. How many patterns are there each night? This will vary depending on market conditions. Over the years we realise that the market offers these patterns in cycles. Sometimes there are a lot, other times there are only a few. What we do know is that there will always be some patterns and they will always reappear again in the future. I don’t have enough capital to take all the trades? We understand that there are quite possibly too many trades to take at certain times. The intent is that you filter some out yourself. We have added two filters; “Bang For $$” and “% Risk”. Our recommendation is to use the “% Risk” where best results will tend to come from stocks exhibiting a lower score. Also using leverage can allow more trades to be taken but you need to fully understand the risks associated with using leverage. Do I need software? Ideally you do not need any software to follow these trades as we update the charts each day for you. However, from a learning perspective, we recommend you do build your own charts and follow along. This will allow you to find patterns and make you a better trader in the long term. What software do you use? The charts you can see each evening are produced by TradeStation 2000i but would not recommend it for this style of trading simply because of its expense. Many data providers offer free software with their data and usually their product is more than enough for these patterns. If you wanted stand alone charting software we’d recommend Amibroker at www.amibroker.com What data provider do you use? We use and recommend Norgate at www.premiumdata.net

How do you find the patterns? We eyeball the charts each day as well as run a number of scans using a variety of software packages. When a pattern appears to be developing we place it on a watch list and keep a closer eye on it. How do I enter a trade? An entry is made when prices penetrate the green entry line on an intra day basis. We do not wait for a close beyond the green line. WATCH VIDEO EXAMPLE Do I have to watch and wait for this to happen? No. Most brokers offer a ‘stop entry’ order facility which will allow you to enter the trade without watching the intra day price action. My broker doesn’t offer that facility? Change brokers. WATCH ORDER PLACEMENT EXAMPLE What brokers do you use? We use three brokers; Interactive Brokers, MF Global and Macquarie. Many brokers offer different services. Take the time to do your research and ring the brokers for a list of their services and charges. My commissions are too high for short term trading? You should consider your goals and whether this type of trading is appropriate for you. If you think it is, then its best to change brokers and find one that offers the lowest rate. If not you may wish to consider the Growth Portfolio that has lower trading costs. If I miss an entry should I try again even though the price is higher? That is your choice but the ideal entry is the initial one we suggest. If you miss a trade we recommend you simply wait for a new trade setup. Can I enter and exit at different levels than you suggest? Of course, but we are using support and resistance as barriers to enter. If you attempt to enter before these barriers you may be at risk of being stopped out prematurely. My broker will not allow me to take some of the short recommendations? All brokers will have different availability for shorting stocks. This availability can change on an hour to hour basis and from broker to broker. We cannot possibly account for all brokers and their services. If you find that you consistently miss out on short trades you should consider changing brokers or using the US Power Setups (recommended). Where do I place my protective stop? Once a trade has been entered a protective stop is place at the red line and is activated as soon as it’s touched.

I missed placing my protective stop. What should I do? Exit the position at the next best price. Can I use a CFD provider for the trades? Yes. However, you will need to take into account your level of experience with regard to leveraged products as well as any additional expenses involved using CFD’s. Can I trade the Power Setups using options? We do not recommend the use of options for a number of reasons. Firstly many of the Power Setups do not have options attached. Secondly, the nuances of option pricing dictate that results could differ considerably. Should I take profits at the target level? When markets are choppy and non-trending we recommend using the profit targets and will apply them to the recommendations accordingly. However, during stronger trending markets we will use trailing stops to maximise gains. How do you calculate the profit targets? It depends on the move into the pattern, the size of the pattern itself and whether or not there are levels of support or resistance surrounding. How many trades should I take? It’s impossible to know which trades will be successful and which will not. After 10+ years of trading these kinds patterns I still have no clear idea of which will succeed or not. In this time I have become a manager of bad trades. Ideally you should take as many of the trades as possible but also attempt to balance long trades and short trades without over extending in one direction. I can’t take all trades, so how many should I take? Usually about 5 in either direction is manageable. If you start taking more than 5 in one direction only you will eventually get burnt when the market turns sharply against you. As a new trader, which trades should I take? We would suggest taking trades in the direction of the larger trend and taking trades that are making new significant highs or lows. How much capital should I start with? Our philosophy is ‘more is better’. The major drag on an account is commissions. If your account is too small then this drag can be detrimental to your success. Trading with a larger account allows more positions and less risk allocated to each. How much risk should I use? You should not use more than 2% per trade, but we operate at 0.5% to 1% ourselves. This allows us to make more trades yet trade at a more comfortable level. Trading

longevity is the cornerstone of success. The more you risk, the greater the chances of failure. What do you mean by 2%? It’s vitally important to equalise all trades so their impact, especially losses, will always be the same on the account. We do not discriminate between one trade and the next. The only way to do this is calculating the loss as a percentage of the account balance. The technical term for this is Fixed Fractional Position Sizing. Read more about Position Sizing How much of my account can I expect to lose? Losses are inevitable with trading and there is no solution. One must accept losses as part of the journey; however, the degree of losses, known as Maximum Drawdown (maxDD), can be defined to some extent. The core rule is that the more you risk, the larger the losses could become. To calculate for maxDD one needs the winning percentage of the system being traded and the risk taken per trade. In the table below the vertical column designates the win rate of the system being traded. The horizontal row is the theoretical maxDD that a user is comfortable with. The output values are the maximum risk per trade that should be used to remain below the maxDD level.

Maximum Drawdown 10% 15% 20% 25% 30% 40% 50%

30% 0.35 0.54 0.74 0.95 1.18 1.69 2.28 35% 0.42 0.65 0.89 1.14 1.42 2.02 2.73 40% 0.50 0.77 1.06 1.36 1.68 2.40 3.25 45% 0.58 0.90 1.23 1.59 1.96 2.80 3.78 50% 0.66 1.01 1.38 1.78 2.20 3.14 4.24 55% 0.75 1.15 1.58 2.03 2.52 3.58 4.83

W I N %

60% 0.87 1.35 1.84 2.37 2.93 4.17 5.61 The Power Setups are expected to fluctuate around the 40% to 45% win rate; therefore you should choose a risk per trade level that is aligned with your maxDD tolerance. I would like a higher winning percentage? We all would, but the truth of the matter is that a higher winning percentage is diametrically opposed to the win/loss ratio. With this we can actually prove that higher profitability is achieved from a higher win/loss ratio and not the higher winning percentage. A higher winning percentage may make you feel like a better trader but it doesn’t necessarily equate to making more profits.

I have taken 5 trades and have had 5 losses? Losing streaks are also inevitable with trading, regardless of how good the system is. Even if a system has a 90% winning percentage, you can still suffer 5 losing trades in a row which in turn suggests you still need to keep risk to a minimum on each individual trade. The following table shows probable streaks based on 50,000 trade iterations.

Win % Probable Streak

30% 30 35% 25 40% 21 45% 18 50% 16 60% 12 70% 9 80% 7 90% 5

Why don’t you post your performance record?

We do no trade all our own set ups and our subscribers will get different results trading off the same charts. Hence it’s not possible to offer an accurate track record.

Despite this, having traded these patterns for almost over 10-years, the following can be assumed: approx. 30% of our set ups breakout and do great; about 40% breakout and end up not going very far; these typically result in a small profit or small loss; and 30% result in a loss.

Should I trade the Discretionary Signals or the Systematic Signals? Each person is different when it comes to their trading psychology. Some can associate well with simple chart patterns and like to understand what and why they are making the trades. Others feel it more important to have a set plan to be followed and one that has been rigorously backtested to ensure that a positive expectancy will be had over the longer term. Can I trade both? Of course but we advise not to get too over extended in one direction (namely the buy side) in case the market reverses sharply.

How do you calculate the Daily Trend and Momentum Filters? These are not disclosed but they are based on a two moving averages, a Relative Strength measure and two time frame components. How can I learn more about trading like this? We highly recommend our Profitable Trader Seminar DVD which can be purchased directly from the site.