Chapter 3. Opening the Vault with Key Numbers

Sir Thomas Browne, a noted writer of the seventeenth century, once said that he admired the secret magic of numbers. I do not know exactly what Sir Thomas was referring to several centuries ago, but I agree and I also respect and admire the power and magic of certain numbers. From years of market observation, I know that every financial product has price points, or numbers, that are more important to it than others. These points tend to be price ceilings, floors, and pivots. The interesting fact is that the market remembers these numbers and returns to them over and over again. Therefore, learning about key numbers and knowing how to use them is one of the most important elements in successful trading. I do not believe that anyone can trade to win without using key numbers.

The best way to identify key numbers is through observation. Before trading anything—a stock, bond, future, option, or commodity—watch it trade for a few weeks or months. If that is impractical, pull up some charts and study them. It is a good idea to do both: observe and study. Through observation you learn not only where a stock moved over a given period of time but you have a sense of how it got to that point. You see the up and down bobbles and appreciate how the stock or futures contract travels during specific time intervals. Identify the prices where upward momentum has been halted in the past. How frequently have the bears stepped in at that particular point ...

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