Introducing Neely River Trading Technology:

A Paradigm Shift in Market Trading

An interview series with Glenn Neely,
Part 3 of 3

Interviewer: Hello, this is Bud Fox from GreedAndMoney.com. Today I have the
privilege to have Glenn Neely with me, an expert in NEoWave analysis as
well as the Neely River theory. This is going to be our last of a three-part
interview series to provide an introduction to Neely River theory. Glenn,
would you like to provide a brief recap of what we discussed in the last
couple interviews?

Glenn Neely: The goal of Neely River theory is to move away from the standard type of
technical analysis and any kind of forecasting-based approach, because I
realized over 30 years in following markets that the real reason people
have problems with trading is because they get emotionally involved in
their prediction of the future. Since they want to be right, they frequently
will risk more capital than they should. They’ll hold trades longer than
they should in the hope that they’re going to be right. The whole goal of
Neely River theory is to remove that forecasting egocentric “I’m smarter
than you” paradigm to make trading more objective, easier, unemotional
and more successful.

That didn’t start off as the goal, but 10 or 15 years ago when I began this I
knew that Wave theory wasn’t going to be as useful once the bear market
began in 2000, and it probably wouldn’t be that useful for a significant
portion of 10 to maybe even 20 years. I had to figure out some way to
follow and trade markets and deal with them in an environment where
Wave analysis wasn’t going to be as helpful. That was the beginning of

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 Neely River theory. Little did I know where it was going to exactly lead
me, but it definitely has gotten me to a point where I designed a training
technology that’s independent of forecasting.

Neely River theory focuses on strategy and how the trader should behave,
act, and maneuver more than based on what he thinks is going to happen
into the future. What you’re doing here and now has nothing to do with
where the market might be going, what you think might be happening or
how much money you’re going to make. It has to do with surviving until
the market does whatever it’s going to do.

It’s the same concept that we talked about that if you’re in a boat in a
river, you’re not worried about where the ocean is. You’re worried about
surviving in the river, rapids, and waterfalls until the river gets to the
ocean, because you’re eventually going to get there, as long as you don’t
hurt yourself before you get there.

The idea of Neely River theory is just survival in the here and now until
the flow of the market takes you wherever it’s going to go. That’s a bit
from our last discussion.

This is one of the last charts showing how money is the force that’s
driving markets up and down instead of gravity, such as in a river.

If you take some kind of object, such as a Ping-Pong ball or something

that floated on top of the water, wherever you place it at the edge of the
river, it will not go perfectly horizontal with the flow of the water. It’s
going to chop around and get caught in eddies, currents and everything
else. We discussed how this movement could start to mimic the behavior
you see in an impulsive Wave pattern, or potentially even corrective wave
patterns, but in this case an impulsive wave pattern which starts to connect
Neely River theory to Wave theory or Wave theory to Neely River theory.
I almost think Neely River theory is a superset of Elliott Wave theory.

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 Wave theory is one portion of the equation of Neely River theory. Wave
theory really doesn’t deal well with the middle of patterns or how to trade
markets, specifically how to move stocks or how to exit. It only allows
you to do that when the structure’s clear. Structure is only clear in a
market maybe 10% or 20% of the time, so what do you do the other 80%
to 90% of the time? Wave theory doesn’t really tell you what to do the
majority of the time that you might be in a position. I just wait, hold and
hope.

Interviewer: This is what we discussed toward the end of the discussion last time about
how similar or how beneficial teaching the Neely River theory is.
Obviously that was an impulse wave that you showed in the NEoWave or
Elliott Wave chart.

Glenn Neely: Right. This happened when I was at a conference in Paris about 10 years
ago talking to another well-known person in the industry. He had asked
me what I had been doing lately. I said that I was working on a new
technology to trade markets without forecasting. He looked at me as if that
was the stupidest thing he’d ever heard of in his life, because virtually the
entire industry has this belief system that forecasting is the only valid
approach to making money in the future. You have to know what the
future’s going to be to be able to make money. If you don’t, you’re not
going to make money. If you’re not good at forecasting, you’re going to
lose money.

He just didn’t get it at all. That’s pretty much the way most people behave
and react when I talk about this, but the process has to begin in a different
kind of way than the way most people get involved in markets. When most
people come to a market and decide they want to invest or make money
trading, they come with a belief system. That belief system might be that
the moon and the stars, for those who believe in astrology, are the core

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 reason markets move. The timing of the moon and stars will tell you when
you’re going to get market tops and bottoms.

They might believe in cycles or that interest rates are the primary driving
force behind markets. They might believe that psychology and sentiment
are the driving forces. They come in with a belief system. Then they try to
force that belief onto the market and try to get the market to fit their belief
system. That’s a backward way of approaching markets because, of
course, the markets could care less what you believe. The markets are
going to do whatever they want. Your goal shouldn’t be to try to get the
market to fit your belief system. Your goal should be to try to understand
what the motivating or foundational factors are relating to markets, not a
connection to something else.

I always consider technical analysis, any kind of fundamental analysis or

anything that uses something else to predict what a market’s going to do to
be sort of like a crutch. It would be similar to going to a doctor. Let’s say
that you’re in a hospital, and you’re the patient lying in the bed. The
doctor walks into the room and proceeds to ask your mother, father,
brother, and sister, “How does Johnny feel?” Everybody gives his or her
opinion of how you feel. Instead of asking you how you feel, he’s asking
everybody else how you feel. That’s what most technical analysis is all
about. It’s trying to correlate something external to the market to tell the
market how it’s supposed to feel and behave, which obviously on the
surface is pretty preposterous.

The goal of Neely River theory was to start with a foundation that is so
solid, logical and incontrovertible that it has nothing to do with opinion or
philosophy. It’s just a core fact and reality. This is the first time I’ve ever
seen an approach done in this way. The whole River phenomenon builds
off an indisputable and unchangeable foundation, which I’ll go to in a
minute.

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Interviewer: It makes sense because the majority of the analysis in the marketplace is
essentially a derivative of the trader behind it.

Glenn Neely: Absolutely.

Interviewer: What you’re trying to do is go to the trader behind it who’s dominating the
market at the moment of the price actions to identify that entry
accordingly based on their behavior. Obviously nobody else is doing that
in the marketplace. Everybody is based on a secondary observation of the
price action to identify how to enter and how to exit the market.

Glenn Neely: Let’s say that you’re long in the market and all of a sudden a bomb strikes
New York City or Los Angeles and the market goes up. You’re going to
make money independent of whatever that bomb supposedly was
supposed to do. The bomb is an external nonmarket event. It may have an
impact, but the only thing that decides whether you make money is what
happens to price action.

If you’re long and the market goes up, independent of any world news or
any personal feelings about anything, you’re going to be in a more
positive position. If you’re long and the market goes down, you’re going
to be in a more negative position. The only determining factor whether
you make or lose money is price action.

Neely River theory is strictly based on what prices are doing, nothing else.
I’m not interested in correlations, opinions, or sentiment. I’m interested in
what price has actually done.

The next big step with Neely River theory that’s extremely different is I
have no interest in what I think the future’s going to be. I only have
interest in what has actually been verified currently or historically. It’s not
what you think is going to happen but what you know has already

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 happened. Those are things that can’t be changed by the future or by
opinion and can’t be interpreted. They’re fact, and that’s it.

As part of this process and to make this concept work, I mentioned to you
early on that Neely River theory does what no system I’ve ever seen does
with markets. It divides it into three different types of traders.

We’re not going to get a system that is following, bargain hunting or top
and bottom picking. We’re incorporating all three technologies and types
of trading into one sort of all-encompassing approach.

A critical part of River theory is dividing the market into those different
traders, the bargain hunters, trend followers and top and bottom pickers
and their motivations, understanding how they behave and enter and exit
markets, not necessarily what they believe about the future, but how they
get in and how they actually get out.

It has to do with their entry style. If you’re a trend follower, you’re going
buy into strength or sell into weakness. If you’re a bargain hunter, you’re
going to buy on a pull-back or sell on a corrective rally against the
downtrend. If you’re a top and bottom picker, you’re going to sell into
strength and buy into weakness. Each of them has their own individual
style.

You need to understand all of them if you want to be a good trader and
make money consistently, not just one-third of the time by picking a
system that’s going to be one-third of the reality of markets.

Another thing that I’ve never seen any system address has to do with what
I call financial capacity. If you come into a market with $5,000 or
$10,000, it’s absolutely impossible to trade that market and keep risk at
1% or 2% per trade because the minute you get in, unless your stop is just

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 a few ticks away, you’re automatically going to be risking 10%, 15% or
20% on your trade.

The amount of money you have has a great deal to do with how you trade
and how you can trade. Virtually no system I’ve ever seen takes into
consideration that rich people trade differently than people with less
money, because they can hold positions longer, have bigger stops and risk
less percentage-wise.

Those are all ingredients in understanding how to work with the market in
a way that reflects not perceptions or opinions about the future, but the
current reality.

Let’s talk about what I call a forecasting paradigm. Then I’ll talk about
what Neely River theory attempts to do. The forecasting paradigm has
three steps. Most traders spend virtually all their time in the first stage of
this process, which I call the forecasting process. As a neophyte myself the
first almost 20 years in this business, my primary belief system was that
forecasting was the road to riches in trading markets, just like virtually
everyone believes when they first get involved.

Because of that I tried to perfect Wave theory, which led me to eventually

creating a lot of new innovations for Wave theory and write my book,
Mastering Elliott Wave. My book is about all those new discoveries about
proper Wave analysis.

After 15 years of that process, I started to realize that my Wave analysis

and ability to predict the future were getting better, but my trading was
getting better at a much slower pace. It wasn’t nearly keeping up with my
ability to predict markets. That started causing some problems for me.
Why is this divergence happening between my ability to predict, trade and
make money? They should go hand-in-hand like everyone believes, but
they weren’t. That’s when I started to realize something was wrong with

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 this belief system or paradigm. That was the impetus for me to begin
developing Neely River theory.

I spent probably 10 to 15 hours a day, sometimes seven days a week,

looking at charts, applying Wave analysis and trying to figure out what the
market was going to do – to decide if I was going to buy or sell, move my
stops or stay out. I spent an enormous amount of time in this area.

Once I decided that something was going to happen and I knew what it
was going to be, then I had to worry about where I was going to enter,
how much I was going to risk, how large of a position, how big of a stop
and all that. If you get in, the next thing you have to worry about is where
you’re going to exit, how much you’re going to exit and how often you’re
going to raise your stop.

There’s a lot of stuff involved in this three-step process. If we’re generous,

we might be right 50% of the time on our forecast and 50% of the time on
our entry. If you have an entry of 400, the market goes to 401, you’re
trying to go long and then it shoots up to 500, then you didn’t get in. Your
entry was wrong. Let’s say you’re right about your entry half the time and
you’re right about the exit. Maybe you get out way too soon, or your exit
is to get out at 501 and it only makes it to 500, so you never get out and it
goes back down to your stop. You break even or lose money.

If you’re lucky, you might be right on each one of those half the time. If
you do the math with this three-step process, by the time you get to the
end, you’re only going to be right 12% of the time.

This is the reason why the forecasting paradigm doesn’t work. You have
to be right about too much too often. In the end, if you’re lucky to be right
half the time in each one of them, you’re still only going to be right about
12% of the time. Bud, do you have any comments about that or any
personal experience?

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Interviewer: As a trader, that’s how I trade, based on what you just said.

Glenn Neely: Pretty much 90% to 95% of the entire population trades based on this
process.

Interviewer: It’s challenging because, like you said, you have to be right all the time in
those three processes to have a very profitable trade.

Glenn Neely: Let’s compare it to the river analogy again. Let’s suppose you’re standing
next to a river. You’re trying to decide which direction the ocean is. In that
forecast, we have a 50/50 chance. It can be to the right or to the left. If
you’re trying to forecast, you can just observe and see the water is moving
one way, so you know that has to be the way the ocean is. Water can’t go
contrary to the ocean, at least not in 90% to 95% of circumstances.

If there are manmade rivers, sometimes you can get reversed, but
otherwise water always flows toward the ocean and the lake, not away
from it. Instead of predicting the direction, you just observe the direction.
You can wipe out this portion right away, because you don’t have to
predict. You just observe.

As far as entry, it really doesn’t matter where you enter in a river. You’re
still going to get to wherever it’s going as long as you don’t crash, fall off
the waterfall or whatever. The entry really doesn’t matter that much.

The exit would really be the goal, which is reaching the ocean, or in this
case making a profit on the trade. Do you really have a choice on which
way the water flows? No. It doesn’t matter what you believe about the
river and what it’s going to do. If you get in a boat, it’s going to take you
the direction the water is flowing.

If you’re worried about where you’re going to get in, does it really matter?
Not really, because eventually you’re still going to get to the same place.
As far as exiting, that’s going to matter because it will determine whether

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 you actually get to the ocean, don’t get to the ocean, make it to your goal
or don’t make it to your goal. The first two don’t really matter that much.

The goal of Neely River theory is to try to get rid of the first two in the
equation. You certainly don’t have any control over number one, which is
the direction the market or river is going.

You do have some control over where you’re going to get in, but that’s
being more dictated by the market than by you. Where you’re going to get
out is to some degree up to you, but it’s also should be more dictated by
the market or by circumstances.

Let me move on to the next diagram. First of all, Neely River theory
completely gets rid of Step 1, so you don’t have any attempt to predict
anything. Reaching your goal has nothing to do with what you think about
the direction of the river or market, so that is completely ignored.

As far as entry and exit, there are many different places you can enter into
a market and still make money. If it’s going from 400 to 500, you can get
in at 410, 420, 440 or 450 and still eventually make money. The exact
entry point is not critical, but the stop placement is critical.

In other words, that’s similar to how you’re going to manage that boat in
the river. Are you going to paddle to the right or left, avoid the sandbars or
stay in the middle of the river? The things you’re going to do here and
now matter to your survival until you reach your goal.

When it comes to market trading, what you do with your stops is really
what decides whether you survive and whether your position stays in until
the market reaches its destination. The way you behave matters, but
specifically where you enter isn’t that important.

It reduces the importance of the exact entry point quite dramatically, but
focuses much more on the exit which has to do with both the target, which

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 is your goal to make money, and the stop, which is to control loss. When
you hit a stop or get out of the boat, that’s still an exit.

All of the focus of Neely River theory is on exactly how to exit, which
means where you’re putting your stops and targets. Very little time is
spent on this. Most of the time is spent on exactly the opposite of what
everyone spends most of their time on.

My first 10 or 15, years I was worried about what the market was going to
do before I got in. Then I would get in and just sit, wait, hope and pray,
and not really pay much attention to where and how I was going to get out.
That was probably the least of my concerns, because I was more focused
on making a lot of money. I didn’t want to get out at any particular time. I
wanted to just make a lot of money.

Neely River theory turns it all upside down. It puts most of the focus on
what most people don’t spend any time thinking about, which is how
they’re going to manage their trade, which means in reality where you’re
going to get out.

Interviewer: That makes total sense, because most new traders care so much about
forecasting and catching that big wave. The number-one thing in
successful trading is survival, money management and how you manage
your exit. It’s exactly focused on that.

Glenn Neely: Without knowing who’s speaking or what the event is about, all you need
to do is look at a transcript of any conference in the world and you can
pretty much tell if it’s a conference for beginners, intermediate or
professionals. The beginners are always going to be talking about systems,
forecasting, making a lot of money, super leverage with options and all
that kind of stuff. Then the professionals are always talking about risk
management, trading technique, and capital preservation.

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 There’s one thing I wanted to say regarding the exit. I was saying that the
entry isn’t important, but it’s the exit that decides everything. I could trade
every market in the world and be virtually certain I’m not going to lose
money if I got in all of them right now and one second later got out of all
of them. It’s the exit that decides whether you make money or not. If I
held all of them, then who knows what’s going to happen? The exit is
what controls your loss and profit. All the power is on the exit.

Let’s move to the next chart. I’ve mentioned this solid foundation earlier.
That’s an indisputable, non-changeable market reality. Instead of trying to
create a philosophy that we build market behavior around, we’re going to
deal with market behavior first and then construct a trading technology
around that reality.

We’re going to focus on the facts, which I mentioned earlier. The fact is
that price action is the only thing that determines whether you make or
lose money. It doesn’t depend on the moon, stars, sentiment or the Fed. It
only depends on what price action does after you get in. That’s a fact.

Neely River theory talks about a logical process of tracking the controlling
elements in the market. The controlling elements are the three that I’ve
mentioned already, which are trend traders, top-and-bottom pickers and
bargain hunters. If the trend is up, one of those three has to make the most
money. If the trend is down, one of those three will make the most money.
Everyone else of that group of six will either make less money or lose
money.

There’s always only one group making the most money. The goal of
Neely River theory is to identify the group that is doing the right thing in
the right way – and managing trade in just the right way that they don’t get
stopped up prematurely while they’re waiting for the flow of the market to
take them wherever the market decides it’s going to go.

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 Neely River theory talks about where that control begins and ends and
how you identify it. It shows a fluid process that constantly changes over
time from one group to the next.

There’s never one group or strategy that always work the best. Trend
following doesn’t always work the best, nor does bargain hunting or top-
and-bottom picking. They all have their day. Each works better in a
particular environment. The goal for you as a trader if you want to survive
and really do well in trading is to be able to adjust the way you trade
instead of trying to get the market to fit your belief system. Does that
make sense?

Interviewer: Absolutely.

Glenn Neely: When it comes to market action, price is the only reality if you’re looking
to trade and make money. Your goal should be to understand what is price
doing and how does that affect what I should be doing?

When it comes to markets, if you’re dealing with a bar chart, there are
only four realities that exist. You have up bars, down bars, inside bars and
outside bars. Each one of these bars represents a financial reality that is
indisputable.

If you’re looking at a bar chart, and it doesn’t matter if this is daily,

weekly, monthly, hourly or for one minute, and the high of the current bar
is higher than the previous and the low of the current bar is higher than the
previous, by definition that means that retail buyers, those who are willing
to buy near the highs, are willing to pay more this bar than the previous
bar, and wholesale buyers are also willing to pay more with this bar than
the previous bar.

Your retailers are near the higher end, because when you’re buying
something you’re paying retail in most business transactions, but in the

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 market you have a wholesale end too, just like you do with people who
warehouse products or manufacture products. We have the wholesale end,
which is the lower end of the bar, and the retail end, which is the higher
end of the bar. Then you might have a middleman where the transactions
are done toward the center of the range.

Markets reflect that economic reality. If you have a bar in which all the
players were willing to pay more this time than last time, then by
definition it means that the buyers were in charge of the market for that
one particular bar. You weren’t trying to predict that they were going to be
in charge. You let it happen. Then you observe that it’s a fact. Do you
follow me?

Interviewer: Yes.

Glenn Neely: It’s just like looking at the river. You don’t determine and predict the trend
of the flow of the river. You just observe and say, “Those are the facts. It’s
going that way.” It may not be going that way five minutes from now as
you turn the corner and the river starts going the other direction, but at this
point, you can easily say buyers are in charge if you have an up bar. If the
river flows to the right at that moment in time, it’s going a particular
direction.

Up bars imply that buyers were in charge for that one moment in time,
whether that’s a day, week, month or year. When you get a down bar, to
the contrary, it indicates that the sellers would have been in charge for that
one moment in time. When you have an inside bar, the financial reality is
that very few people are affected. Remember that when it comes to
markets, most people place stops above previous highs or lows.

It doesn’t matter whether the highs and lows they’re using are a one-
minute, five-day or two-year chart, but they generally use the high or low
of some timeframe that they’ve determined is important. In whatever

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 timeframe they’re talking about, stops tend to start to congregate right
above and right below previous bars going back in time. The further back
you go, the more stops that might be accumulating near a certain high or
low.

When you have an inside bar, the financial reality is that most people are
not going to be stopped in or out or taking a new position because we
haven’t broken to a new high or new low. When we have an inside bar,
that’s when we consider that nobody is in charge of this particular moment
in time. There’s very minimal financial impact maybe to options traders,
but virtually no one else is impacted. We just assume nobody’s in charge
of that bar.

When you have an outside bar, it’s a split reality. It could be that the
buyers are in charge or that the sellers are in charge. You don’t know, so
what do you do? When you’re in that environment, we use the laws of
physics, physical motion and financial reality. Let’s say you have a billion
dollars and you’re trying to buy something. You can’t buy all of it in one
second. You have to buy it over time. It could be days, weeks or who
knows what amount of time, but it takes time to move in a lot of money
and to move it out.

When it comes to markets, you always want to assume inertia and

momentum, which are laws of physics and laws of money in the market,
and that inertia favors the direction that the market was already going.

Let’s say that you’re next to the river and you notice that the river is
flowing to the right. If you close your eyes and step 10 steps to the right,
you can probably assume it’s still flowing to the right because of inertia
and momentum.

It’s the same idea with markets and price action. If the trend of the market
was already down before you got an outside bar, the probabilities are

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 pretty strong that the trend will continue to be down and that the sellers are
actually in charge, even though the buyers are attempting to take control
and will probably fail.

If the trend is already up, then you’re going to assume that the buyers are
still in charge and that the sellers are just attempting to take control, but
they probably won’t succeed.

Those are the four different realities that you can have: up bars where
buyers are in charge, down bars where sellers are in charge, inside bars
where nobody is in charge, and outside bars where the group in charge
favors not the future predicted momentum, but the prior established,
confirmable momentum.

Those are the four realities of a bar chart. There will never be any new
realities that occur. We know that we’re dealing with a very solid and
logical foundation. We’re not trying to have some grand philosophy.
We’re just starting with a solid foundation.

From this foundation, every concept of river theory is built. It’s built on
something that’s incontrovertible, unchangeable and not based on opinion.
Unfortunately, I can’t give you details on how that’s done.

Interviewer: The $1 million question is how exactly that works. A few fortunate
students of yours are receiving that knowledge as we speak and learning
from you about how that’s done. It’s really interesting that you talk about
the inside and outside bars. This interview is taking place on November
29. Yesterday we had a hammer candle in the S&P. Essentially, it’s almost
like an outside bar. Then today we had somewhat of a breakout. It’s really
interesting how you talk about how the bar and the psychology work, and
what kind of trader is inside those bars and how they work. What you just
said makes sense.

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Glenn Neely: You’re managing each bar as it happens. It’s just like you’re managing
your boat as you’re in real-time experience and deciding whether to
paddle to the right or left, or stop or whatever you’re going to do. It’s all
real-time based on current, real observations, not expectations of the
future. I look at the market as being an object flowing through a river that
has to do with how you should behave based on where you are in the river.
The river channels are self-created by the market. They’re not determined
by the analysts. They’re market defined. It’s a scientific process on how
that’s done so that you’re always dealing with a very objective process of
creating channels.

When most people look at charts, they just pick highs and lows, draw lines
and decide that that’s it. The problem of drawing channels on the chart
that you’re looking at is it’s like being in the forest and trying to decide by
looking at the trees what the perimeter of the forest is. You can’t decide
the perimeter of the forest by looking at the individual trees as you’re
walking through the forest.

River channels, and channeling in particular, has to be done on a larger

scale to make sense and to contextualize market action. All channeling is
always done in a larger degree, not the current timeframe, which gives
context and a river environment to market action, which then starts to
make all the concepts of Neely River theory really come to life.

The final piece of the puzzle for me was I discovering the individual
components regarding price, time and bias, or what I call top-and-bottom
picking, bargain hunting and trend following, how traders enter the
market, when they enter, where they put their stops, how they exit and all
that stuff. I didn’t understand how to contextualize it all and what it all
meant for quite a long time. It took me probably five to seven years to
come up with that idea. Then it all started making a lot more sense.

© 2013 Glenn Neely, NEoWave, Inc. www.NEoWave.com Page 17 of 18

Interviewer: Glenn, I really appreciate your time. I hope those three segments of
interviews regarding Neely River Technology have been beneficial to our
audience. If there is any question, please contact www.NEoWave.com.
I’m sure the customer service representative will be more than happy to
help you.

Glenn Neely: I appreciate it. Thanks for taking the time to do the interview. Hopefully
my customers will find this interview useful in understanding better what
I’ve been doing for the last five or so years in my trading service. This is
integral to my trading service. I just wanted my customers to get a better
idea of what Neely River theory is all about, so they understand what I’m
doing and why, and so it wouldn’t be such a mystery to them anymore.

Interviewer: In some ways it makes total sense, because in your trading service, you
actually categorize based on hourly, daily and weekly. Now you
mentioned your detailed analysis based on the bar. That makes sense that
based on those timeframes you can actually chart the price action of a
weekly bar, an hourly bar or a daily bar, and where the river is going and
how it’s going to flow. Then it allows you to set stop and profit targets for
different timeframe traders. What you’re doing makes total sense. Thank
you very much, Glenn.

Glenn Neely: Thanks a lot.

© 2013 Glenn Neely, NEoWave, Inc. www.NEoWave.com Page 18 of 18