Rule Set Outline

1. Trading Rule SetOctober 27, 2007by Anonymous(work in process – not for use)Comments and editions by Ed, in RedThis document represents a start in the directionof defining a trading system.It is currently incomplete and ambiguous.

2. Rule Set Outline • Markets: Which markets to trade • Entries: When to enter a market • Position Sizing: How many contracts to buy or sell • Stop Losses: How to set stop losses • Exits: When to close a winning position • Tactics: How to buy or sell, how to enter orders

3. Whipsaw Song(not in index)by Ed Seykota What do we do when the market breaks through, honey? What do we do when the market breaks through, babe? What do we do when the market breaks through? Our stops are in, so there's nothing to do . Honey, sugar baby, mine. How do we know when our risk is right, honey? How do we know when our risk is right, babe. How do we know when our  risk is right? We make a lot of money and we sleep at night . Honey, sugar baby, mine. You get a whip and I get a saw, honey. You get a whip and I get a saw, babe. You get a whip and I get a saw. One good trend pays for 'em all . Honey, sugar baby, mine. What do we do when the drawdown comes, honey? What do we do when it gets really big, babe? What do we do when it gets even bigger. We stick to the plan and keep pulling the trigger . Honey, sugar baby, mine. What do we do when we catch a trend, honey? What do we do when we catch a trend, babe? What do we do when we catch a trend? We ride that sucker to the end . Honey, sugar baby, mine.

4. (1) Markets to TradeQuestion from Ed: how do you get this list… A: These are ones I can track on eTrade – I’m planning to change brokers and expand the list. • Euro • Yen • Australian • Canadian • Swiss • Pound • Dow Jones • S&P • Russell 2000 • 30yr Bonds • CrudeOil • Nat Gas • Gold • Silver • Copper • Sugar • Cotton • Soybean Oil • Soybean Meal • Wheat • Corn • Lumber • Pork Bellies

5. (2-a) Entry Rule1—EMA Long If the Daily Low Price is greater than the 100day EMA then place the following market order for execution at the open of the next day: • GTD Buy 1 Contract at Market Questions from Ed: • Show me how to initialize the EMA. • I don’t know a market order / GTD. A: This is how the software works. • Show me when you compute the order. A: After the markets close.

6. (2-b) Entry Rule2—Breakthrough Long If the Daily Low Price is greater than the 100day EMA, and a trendline drawn along the Daily Highs has a negative slope, then place the following buy stop order for 1 Contract at a price ¼ ATR20 above the trendline: • GTD Buy Stop Limit 1 Contract at x price (calculated to be 1/4th ATR20 above trendline) Ed: Show me how you draw the trend-line – such as how many days you consider and how you select the points through which it passes. “What do we do when the market breaks through? Our stops are in, so there's nothing to do.” -- Ed Seykota

7. (2-C) Entry Rule1—EMA Short If the Daily High Price is less than the 100day EMA then place the following market order for execution at the open of the next day: • GTD Sell 1 Contract at Market

8. (2-D) Entry Rule2—Breakthrough Short If the Daily High Price is less than the 100day EMA, and a trendline drawn along the Daily Lows has a positive slope, then place the following sell stop order for 1 Contract at a price ¼ ATR20 below the trendline: • GTD Sell Stop Limit 1 Contract at x price (calculated to be 1/4th ATR20 below trendline) “What do we do when the market breaks through? Our stops are in, so there's nothing to do.” -- Ed Seykota

9. (3) Position Sizing • Set target amount of Heat (risk %) • Multiply Closed Equity in Account times Target Heat to determine Target Risk Amount • Calculate difference between Entry Price and Stop Loss to determine Stop Loss Delta. • Multiply Stop Loss Delta by Tick Size to determine Actual Risk Amount • Divide Target Risk Amount by Actual Risk Amount to determine Number of Contracts (rounded down to nearest integer) • Multiply Number of Contracts by Stop Loss Delta by Tick Size to Determine Actual Risk Amount • Divide Actual Risk Amount by Closed Equity in Account to determine Actual Risk % • If Actual Risk Amount is less than Target Risk Amount plus 10% then OK to enter order Ed: Show me how you determine the risk percent. A: Gut feel at 2.5%. Ed: Stop Loss Delta is in units of price; tick size is in units of price. Multiply these and you get price2. A: Use delta in ticks and multiply by $ / tick. Ed: Multiply # contracts x delta x tick size – units don’t match. Ed: Show me how using closing equity is better than using total equity. You can have negative closing equity and positive total equity. By your formula you wind up going short on a long signal. “How do we know when our  risk is right? We make a lot of money and we sleep at night .” -- Ed Seykota

10. Stop Losses: For Long positions, Stop Losses are set 6 ticks below the low of the lowest day for the Trendline that gives the Entry Signal (See Entry Rules). For Short positions, Stop Losses are set 6 ticks above the high of the highest day for the Trendline that gives the Entry Signal. EMA Trailing Exit: For Long positions, Trailing Stops are set 6 ticks below the 100day EMA. For Short positions, Trailing Stops are set 6 ticks above 100day EMA. Ed: I don’t know “low of lowest day for a trend-line.” Ed: Show me how often you compute 100-day ema. A: every day after the close. Ed: I don’t see how to close a winning position, per the index (#5). (4 & 5) Stop Losses & Exits “What do we do when the market breaks through? Our stops are in, so there's nothing to do.” -- Ed Seykota “What do we do when we catch a trend? We ride that sucker to the end.” -- Ed Seykota

11. (6) Tactics • Enter Stop Losses using Stop Orders that trigger when a certain price is hit. • Enter Buy Stop Orders and Sell Stop Orders for breakthrough trades. Ed: I don’t see any certain prices – I’d like to see some examples. Ed: I’d like to see what markets the system is currently holding.