Obviously these „pointy places“ were different from the number two points of 1–2–3 formations. It became equally obvious that they had nothing to do with supply and demand.
If that were the case, there were only two things that could be causing them. One was obvious — the hooks were caused by profit taking. Whenever the market had moved sufficiently to satisfy a majority, profit taking caused the market to begin to move counter-trend.
The other reason was not so obvious, at least not to me, and not at that time. Today, it has become all too obvious and is a splendid way to pick the pockets of naive, tess experienced traders.
At the point in my trading career where I discovered the hooks, I was almost totally unaware of the phenomenon I've come to call „the technical indicator trader.“
I had been taught classical technical analysis which involved learning how people traded heads and shoulders, megaphones, pennants, flags, speed lines, etc. Also, I had been taught how to fade these traders in the markets. I had been taught a great deal about floor trader action in the markets, and how to neutralize what they do.
I could generally spot an engineered move by large operators on the floor. Then I could either participate or not according to my choosing.
What I was ignorant of was the use of moving average crossovers, and technical indicators such as stochastics, RSI, and others that were coming to be used in the markets.
Apart from an offset moving average, the only technical indicator I had been taught was known to me as Percent C. Percent С was a very old indicator and was used to find overbought and oversold areas in the market. Percent С stands for percent of Cycle. It has since been presented as something „new“ in the form of the so-called fast stochastic, which really isn't a stochastic at all, and its flip side. Percent R, which is nothing more than the fast stochastic turned upside down.
If you look up the word stochastic in a dictionary, you will readily see that the term stochastic is a misnomer.
The New World Dictionary of the American Language says, „sto-chas-tic. [<Gr.stochastikos, proceeding by guesswork, lit., skillful in aiming <stochazesthai, to aim at < stochos, a target: for IE, base hastikos, proceeding by guesswork, fit., skillful in aiming <stochazesthai, to aim at <stochos, a target: for IE. base see STING] 1. of, pertaining to, or arising from chance; involving probability; random 2. Math, designating a process having an infinite progression of jointly distributed random variables.“
I will not argue with anyone against the fact that markets are an infinite progression of jointly distributed random variables. But the study which has wrongly been named stochastics is not the market, but rather a mathematical attempt to measure momentum, divergence, and an idiotic concept called „overbought“ and „oversold“, on a fixed scale. It is always relative — where is the closing price today relative to where closing prices were previously? This is precisely why the so-called Stochastics falls apart in a trending market, where it can stay „overbought“ or „oversold“ for many time periods beyond where the market was supposedly in the „overbought“ or „oversold“ condition.
Although I generally take a stance against attempting to trade with cycles, there is enough substance to them that they may prove useful in calculating Percent С should you choose to use it in conjunction with Ross hooks. My friend Dr. Ed Dalton has convinced me of this. However, you'll have to attempt it on your own, as I have no real experience with it.
To conclude the thought I started earlier, about the causes of Ross hooks: it was trading by technicians using technical indicators thar in part caused the market corrections that resulted in Ross hooks.
More than that, as you will see later, it was the incorrect use of these oscillators and indicators that in part caused the corrections that yielded Ross hooks.
Technical traders, thinking the market was in an overbought or oversold condition, were entering the market the wrong way, and adding to the momentum of the correction by profit takers.
In later years, with the advent (or should I say the re-invention) of Fibonacci trading, the corrections often became more pronounced, as these traders would blindly buy or sell at their predetermined „magic“ Fibonacci ratios, where the market was supposed to stop going one way and begin going another. Add to this the more recent, illogical notion that markets are supposed to turn on moon dates, and you will know exactly how to fade these moves and stick a huge chunk of money in your pocket.
