Book Reviews: Trading Day by Day
Coding up Chick Goslin’s ‘Three Point System’
If you haven’t already, I highly suggest picking up Chick Goslin’s book Trading Day By Day. Realistically, I’ve probably read 500+ books on the subjects of active trading, technical analysis, and finance.
The funny thing is, if you were to put all of the ‘experts’ out there in a room together, and then narrow that pool down even further by the number of ‘gurus’ that could provide consistent financial statements AND have written a well thought out, straight forward and to the point book on trading, you could probably count them on both hands. It’s very rare that you get a book on trading that is enjoyable, practical, and useful from cover to cover, and I found Chick Goslin’s book Trading Day By Day to be just that.
Chick takes you through his thought processes for evaluating price, and provides what he calls his “Three Point System” for finding trades based on what he describes as the “Three Natural Laws of Trading”. The book description from Amazon reads, “Trading Day By Day is overflowing with the fundamental truths and reliable trading rules every trader needs to be competitive in any market, at any time. The three natural laws of trading, an intelligent approach and method, a sound mathematical system, the spike rule, the mistake rule, divergences, relative strength, the truth about options, businesslike money management, over a hundred “real time,” day-by-day chart examples, and much more. While specifically about futures trading, its approach and method are equally applicable to forex, stocks and any other market. “
Goslin’s systematic approach is based off of 30 years of his personal trading experience, and is essentially based off of using the 3-10-16 MACD and a 50 period SMA to evaluate price direction, and then make trading decisions. Rather than providing claims to have some “magic system” that produces profits all the time, he walks you through his thought process as he makes trading decisions in realtime on daily commodities charts. The back half of the book is his charts, market commentary, and trades made on daily bars (both winning and losing) that he took and were sent to his newsletter subscribers in realtime.
If you don’t have a copy of his book, just google “Goslin Three Point System” and you’ll be able to find a set of the rules. BUT, don’t cheat yourself and think that you’re even going to have an understanding of them without picking up a copy of the book. The book EXPLAINS the system, and as you’ll read in the many day by day chart commentaries, the trades themselves are often made based on things like divergences, specific S/R levels, and triggers AFTER the trend bias has been determined by his Three Point System.
So…. Naturally being a mechanical trader, I decided to code up Goslin’s Three Point System verbatim with the rules he gives, and see how it does on it’s own. Below are screenshots of yesterday and today’s 2 min ES.
Bar color is Lime for Long directional bias, and Red for short directional bias. I threw up my DS Risk Oscillator just for comparison, and then the 3-10-16 MACD that his rules are derived from (also imagine a 50 sma, I forgot to throw that up on the charts when I took the screenshots.)
As you can see, it did a pretty decent job of determining trend bias mechanically. So I decided to take a look at how his systematic approach looks on a daily chart of GOOG as well.
As you can see over the past several months it looks pretty good. However, I wanted to see how it looked in a more range bound market, so I threw it up on the daily chart of the QQQQ for the past several months.
And surprisingly enough, it looks pretty damn good. Were you to just trade the trend bias itself without using any kind of common sense or logic, you would do just below or at break even during range bound markets, and pretty good during trending market conditions. The KEY is to understand that Goslin’s logical approach to determining the trend bias is Step 1, and then to look at the other things he points out such as divergences, major S/R levels, and to develop a profitable system.
