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A Free Technical Analysis E Magazine for Traders of Financial Markets

Volume 1, Issue 1


Finding lows and highs
with the Fibonacci
Can tall buildings shed
any light on financial
Market Sector Maps, A
new way of Relative



SEPT / OCT 2009 - VOLUME 1 Issue 1


Can the Market Price Analysis tool help with this question?
By Robert Lennox.


Alan Oliver shows how an old Fibonacci trick he learnt can aid in
finding lows and highs in the market.



Ross Beck from Gartley Trader takes a look at the Gartley
pattern and gives his advice on its use.


Bennett McDowell from TradersCoach.com details a
powerfully effective trading strategy for consolidated markets.

An in-depth look at the trading success formula. By Ray Barros.



Peter Varcoe gives us his first instalment as he tackles the best

way to trade patterns.



A look at how technology can give us insight into the markets that
we never had before.
By Mathew Verdouw.


Tall buildings and what they forecast for financial markets
By Phil Anderson.


Chris looks at the psychology of the winning performance in


And some good advice on how to use them.
By David Burton.


Dale Gillham takes a look at how he uses market cycles to easily
calculate expected changes in the market.

The Educated Analyst |

SEPT /OCT 2009


SEPT / OCT 2009 - VOLUME 1 Issue 1

elcome to our inaugural edition of "The Educated Analyst". We are really proud and excited to be
able to deliver this free e-magazine to you, and we trust that it is a real benefit to you in your analysis
and trading.
I have spent the last 14 years working with traders from a wide variety of backgrounds and as such I have had the
fortune of seeing what separates good traders from those that get burnt. The bottom line is the amount of
education that they have acquired. In my experience, a successful trader is always someone who has dedicated
themselves to learning more about how to trade and to continually search for new techniques that can improve
their results. I personally see the level of education acquired as a good measure of how serious a person is in any
endeavour in life. Someone who is open to learning new things will always improve, the person who thinks they
know it all is destined to stay the same.
If you have been Trading for any length of time at all, you know that it is hard work. It takes discipline to follow
your strategy when the masses are running the other way. It can be crushing when you have successive losses and
its hard to know in times of "crisis" what to do. On the other hand, trading can make you feel ten-foot tall and
all-conquering when you are able to successfully master a strategy that is giving you good returns. In The
Educated Analyst, we have aimed to put together a collection of articles that will help every active trader; from
trading strategies that you may not have heard of before, to psychological tips that will help you understand your
own tolerances in how you trade. The Educated Analyst has been designed to help you in your education to
become a better trader.
No matter where you are in your trading life, there is bound to be a wealth of information in The Educated
Analyst that will benefit you. The articles are written by seasoned experts in their field that share our passion for
giving you as much information as possible to help you with your trading. We are so grateful that they would
share this information so freely. For many of them, education is their business. If you are looking to further your
education then please consider what these educators have to offer.
I also want to acknowledge at this point the support of four companies that have assisted us with the distribution
of The Educated Analyst. Each of these companies also share our passion for ensuring that Traders are equipped
with the best information and tools to help them succeed.
Market Analyst Software, who is sponsoring The Educated Analyst and who provides software and data to
Paritech, who provide real-time ASX data into Market Analyst.
Kinetic Securities, who provide full-service brokering and real-time data for many of the world markets
through Interactive Brokers.
The Educated Investor Book Store, who provide trading and investing books in their Melbourne store and
via their web store.
To help us keep The Educated Analyst a free e-magazine, please consider one of our supporters when you are
looking for products and services. You will find ads for these in The Educated Analyst.
Again, enjoy this publication and feel free to tell your friends about it. If you have any suggestions on topics that
you would like covered in future editions, please let me know by emailing editor@educatedanalyst.com.
Happy Trading!
Mathew Verdouw
The Educated Analyst

The Educated Analyst |

SEPT /OCT 2009


Invest in the innovations of the next

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That is the Question.
With Robert Lennox
ith just a little basic knowledge of how to
use Market Price Analysis (MPA), the
trader can get a very reliable answer to
that question.
In 1986 Peter Steidlmayer published Markets and
Market Logic. In this book he outlined a revolutionary
way to represent price data. His method eliminated
time from the graphical representation of price. He
instigated the Vertical Arrangement of Data or VAD as
a method of graphing price action.
Steidlmayers methodology was then adjusted (some say
bastardised) and made available as a dynamic intraday
trading tool. Until now, traders wishing to use the real
power of this tool on daily or weekly price data were
forced to hand-chart their VADs and make alternative
arrangements for the basic statistics that are applied to
MPA. Needless to report, not many traders took up this
challenge. A computerised MPA removes this obstacle.
The key to using the VAD for trading is identification of
the price bar representing the movement out of a
distribution or consolidation phase. This is a full topic on
its own.
To construct a VAD, the price axis can be considered to
be a gigantic magnet drawing all of the price action
towards itself. If you look at a series of traditional High
Low Open Close (HLOC) bars you will notice a
considerable amount of overlap in the ranges. On a VAD
this results in a sideways stacking effect.
Take for example six trading days. For convenience the
days will be called a, b, c, d, e, and f. Figure 1 shows the
progress of how the bar charts converts to a VAD.

The Educated Analyst | 5

Basic Statistics
When representing price data on a VAD, Steidlmayer
recognised that the patterns formed by the letters are
similar to those on the most basic of statistical
representations the normal distribution curve.
Even a casual observation of the curve that forms on a
particular chart reveals quite clearly the price at which
most price action occurs. This is the price with the
largest number of letters or occurrences and is referred
to as the price point of control. For some reason the
price action gravitates towards this particular price
from above and below. That central price has a huge
magnetic effect.
From a traders perspective the important question then
comes how far away from this point of control should
the price action go before it loses its influence? In other
words, when can a trade be entered with confidence?
To answer this question the statisticians turned to their
Standard Deviation tools. In a normal distribution 68.2%
of occurrences fall within 1 standard deviation of the
median value. Bottom line dont enter a trade until
price action is beyond 1 standard deviation of the
median or price point of control.
Good News for Traders
What was previously a laborious and painful process is
now available at the push of a button and on any time
frame being used by the individual trader.
The graph in figure 2 shows the Market Price Analysis
(MPA) overlaid on price action for AMP. This is on a
weekly chart and covers the period from June 2001 to
the end of March 2002. Notice that coloured blocks
replace the letters for each day.
The interpretation and pattern
recognition remain the same.

To Trade or not to Trade?

SEPT /OCT 2009

Conclusion and Suggestions

analysis technique is now readily
available to ordinary traders. What
is now available is even more
powerful than what has been used
by intraday traders since 1986. It
has evolved into an extremely
useful trading tool that aligns
trading opportunity with statistical
Simple and effective trading plans
can be developed around this
application of statistics.
Figure 2
The MPA parameters have been set (personal
preference) to show anything within 1 standard
deviation of the major price action level ($19.00) as
being coloured red. Statistically, any trade entry within
this red zone has a low probability of success under
the then current circumstances. In this dynamic analysis
tool every day adds to the pool of data and the
calculated price levels adjust to the most recent
information. Consequently, any trading decisions are
base on current and up to date data.
In the AMP example trade entry at $20.60 could be
made sometime in the future as that represents price
action moving away from the magnetic influence of the
$19.00 point of control.
The other horizontal lines indicate price levels
corresponding to 2 and 3 standard deviations from the
point of control.

Only the normal distribution has been addressed above.

Other set-ups that are observed on the market price
action include the bullish and bearish distributions. Here
again some very simple and effective trading plans can
be devised to take advantage of this representation of
price data.
As with any trading, disciplined adherence to your own
money management rules should be paramount. The
MPA tool is simply a device to improve the probability
of entering a profitable trade.

About Robert Lennox

Robert Lennox is an active trader of Shares, Futures &
CFD's and has been trading since the early 1990's. With a
background in education, Robert began teaching the
skills he developed to successfully trade in the mid
1990's, and has worked with 5 education companies in
this time.
Currently, Robert's main focus is his trading, however he
also works with two education companies as a guest

The Educated Analyst |6

To Trade or not to Trade?

SEPT /OCT 2009

[Type text]

Finding Lows & Highs

With Fibonacci Replacements.

With Alan Oliver

Crisis...What crisis?
In the past few months the word crisis has dominated
the headlines. Many people have lost bundles of money,
but in saying that it must be remembered that mainly
this is due to incorrect analysis of the market movement,
trusting other individuals or so called market experts, or
simply the head
in the sand
hoping things

On September 26 last year, in my newsletter report, I

gave a forecast that the S&P 500 would drop to 856
when it was then trading at 1215. The chart with that
report is below.

In my nearly
twenty years of
trading, I have
developed and
that works very
well for me.
Even then I am
researching and
methods, tools
and systems to
see if I can
Has my plan worked in the current crisis? I am pleased to
report a resounding yes, just as it has done, and will
continue to do so long after I have stopped trading.
Firstly, I am an intraday trader, looking for entries and
exits within the session. I particularly like the SPI200, the
futures contract on the Australian top 200 XJO. This is
similar to the S&P500 or the E mini contract. I will open
and close a position within the day session; in essence, I
dont have an open position overnight, protecting me
from wild swings emanating from overseas markets. I
guess I like uninterrupted sleep too much.

The Educated Analyst | 7

Source: Market Analyst 6 (www.Market-Analyst.com)

I can still hear the howls of protest, particularly from

overseas traders adamant that it would never make it
that low because the government had taken steps to
halt the crisis. The 856 level was determined by an old
trick I learnt many years ago by placing the Fibonacci
retracement tool from a high, then dragging the tool
down to a low below where the market is trading. I do
this until the retracement levels (38.2, 61.8, 23.6 etc) are
then resting on highs and lows. You can do this very
easily using the Fibonacci Retracements tool in Market
Analyst software package.

Finding Lows and Highs with Fibonacci Retracements

SEPT /OCT 2009

[Type text]

In the above case, you can see that IF the market got
down to 856(which is below 1215 where it was at the
time) the high at 1300 would be on the 38.2% line and
low of 1215 would be at the 50% line and the low at
1131 would be on the 61.8% line. This means the market
highs and lows previously mentioned would be in sync
with the market at a low of 856.

At this point, I have Time, Price and Pattern; these are

elementary Gann pointers for a market reversal. This
means that Monday, October 13 Australian time, our SPI
futures contract traders who study overseas moves will
be expecting an upward thrust Monday US trading time
(our Australian night time).

Now we move ahead to Friday October 10, 2008.

Friday October 10 is significant for several reasons:

In expectation of this upward US move, the Australian

futures should rally. My definition of an upward trend is
higher tops and bottoms, so if the Australian futures
Fridays high, the
SPI traders have
expectations and I
will be long at
4144. Remember,
I will close out the
protect my profits
so I am only
looking at shorter
term trends, not
Indeed the market
does move above
the high on Friday
so I am kicked into
a long position.

It is exactly one year or 365 calendar days from the all

time high, a Gann anniversary count has reached our
price forecast and slightly overrun it, something I am
comfortable with especially when it retraces on the
same day to close above the forecast level and becomes
a reversal or Doji bar.

The Educated Analyst | 8

Finding Lows and Highs with Fibonacci Retracements

SEPT /OCT 2009

[Type text]

these two theories that keeps me

on the right side of the ledger
conditions. If you take the time
to learn these tools, you will also
see that some time, effort and
practice on your part can reap
great rewards when everyone
else is yelling Crisis!!

The end result is that the ferocity of the buying pushed

this market up at an alarming rate, and within 3 minutes
I was ahead some 40 points on 5 contracts. This is
abnormal behaviour, and for me this behaviour can
revert just as quickly as it started, so I elected to exit my
position with a great profit. As things would have it, I hit
the buy button on my electronic platform instead of
selling; effectively I am now long 10 contracts when I
wanted to be out. (Grey hair, bad eyesight, and getting
old, whatever....)
I now had to exit 10 contracts and surprisingly enough in
the short time it took to do this I made another 10
points profit on my mistake. Sometimes you can be so
Remember, this trade took around 3 minutes from
entry to exit, and then I had a good lunch.

Alan Oliver is a full time trader and private educator.

Early in Alans career he worked for two major Australian
banks where his interest in the markets began. After
developing and successfully honing the skills of a full
time trader, Alan left the workforce to trade full time
which is what he has been doing ever since. Most
recently Alan has written a book on his favourite subject
of Fibonacci and the Golden Harmonic ratio. Alan has
travelled extensively, been invited as a key speaker to
many countries including: Australia, Hong Kong,
Malaysia, Singapore, Thailand and China. Alan also runs
a web site (named after his book) to assist traders
www.tradingwithgods.com .

Trading is about having a defined set of rules that you

know work the majority of the time, implementing those
trades that comply with your rules in line with money
management criteria.
My trading plan incorporates the fabulous work of
Fibonacci and W.D. Gann, and its the combination of

The Educated Analyst | 9

Finding Lows and Highs with Fibonacci Retracements

SEPT /OCT 2009

Habits of Success
Risk & Mind Management / Trading Foundations
I shall be writing two articles for The Educated
Analyst in my quest to identify why only 10% to 20%
of traders achieve success. It is almost a clich that
trading success is a function of:
Winning Psychology (60%) x Risk Management (30%) x
A Written Plan (10%)

This formula had been known for quite some time. In

other words, the roadmaps (the Habits of Success)
required to succeed have been clearly laid out for all
to see. And given the tremendous advancement in
understanding how our brain works and the role of
emotion, I would have expected that the ratio of
successful traders to unsuccessful traders would have
improved since I started trading over 30 years ago.
But, looking at the figures, the ratio remains the same
- 80% to 90% are long-term losers. And this, despite
the fact we went through one of the most sustained
bull markets in stocks, gold, and crude oil. That
environment should be conducive to trading success,
but this has not proven to be the case.
So, the question must be asked: why?

One answer lies in the unrealistic expectations of each

generation of newbies.

Relatively few (if any) budding doctors, lawyers,

architects would believe that by attending one paid
seminar, and/or reading one book and/or attending a
series of free previews, they will acquire the
knowledge to succeed. But this is not the case with

The fact that we are bombarded by hyperbolic claims

of easy, quick and meteoric success, suggests that the
ads work i.e. the purveyors sell enough products to
make it worthwhile. On the other side of the equation,
the relatively fewer realistic ads would suggest that
genuine vendors are less successful.

But this factor is not the complete answer; I have met

many genuine committed budding traders who have
failed. So again, the question is why is this so?

The Educated Analyst | 10

With Ray Barros

I think it is partly because trading is a probability

game, and because it is a probability game, on any one
trade, a raw novice can beat an experienced trader
i.e. the novice will make money in the trade while a
master will lose money in the same trade.

This aspect exists only in trading: If I took Mike Tyson

or Tiger Woods or Nadal, I would have no chance of
beating them in their chosen sport. As a result of this
quirk of nature, the mental paradigms, which would
be difficult to overcome, become even more
formidable. It does not help that the paradigms are
unconscious and that the trading environment is
surrounded by two additional barriers to success:

1. There is no formalised educational structure

in trading. The gamut ranges from someone
like Dr. Brett Steenbarger (who devotes his
considerable expertise freely and for no
charge to assist the retail trader) to the scam
artists who falsify results to prove that their
trading systems will have a 90% return and
will turn $1 into $1M in 3 months or less. As a
the environment inadvertently
strengthens the unconscious barriers to
2. The low barrier to entry. In sports, to compete
with the best in the world, you need to attain a
certain level of competence - not so with
trading. Indeed with CFDs, you can enter the
arena with as little as S$1000.00 (about
US$750.00).While I am a great believer in the
benefits of CFDs in the appropriate context, in
this case, all it does is encourage a novice to
trade when he has little chance of success.

So, we have thus far traced four reasons why the

more things change, the more they stay the same:

Human nature: wanting something for little

The fact that on any one trade, a novice can
beat a professional
The lack of a formalised educational structure
The low barrier to entry

Habits of Success

SEPT /OCT 2009

All of these factors impact on the three most

important and unconscious barriers.
The biggest block to our trading success is what I call
our default future.

In our childhood we encounter events to which we

develop strategies to enable us to be safe, and secure.
In time, these strategies become automatic,
unconscious responses. To the extent we come from a
functional environment, is the extent to which we
achieve success - the responses become our strong
suits; to the extent we develop dysfunctional
responses, is the extent to which we will fail. By
functional, I mean with the ability to deal with
But whether the responses are functional or
dysfunctional, they key point is they are unconscious
and automatic responses - and as such, until we
become aware of them, they create a default future. In
short, the responses are what we dont know, we
dont know and until they become known to us, we
will continue to respond in the same way, especially
during times of stress.
In addition, it appears that humans are hard-wired
with two traits and these two traits are formidable
barriers to our success:

1. Our
predominantly into the Impulsive or Risk
Manager mode. Its important to understand
that the terms describe a mode of behaviour
we tend to fall into; we need to execute our
trades in the manner best suited to one of the
two modes to which we belong. For more
2. We invariably develop two unconscious
strategies; the fixed mindset and the growth
mindset. We have both, but one tends to
predominate. The fixed mindset says that our
ability and intelligence is limited. Therefore
our success is dependent on the talents we
have. Since that too is limited to what we were
born with, there is no point in seeking to

The Educated Analyst | 11

improve and enhance it. This mindset is seen

most clearly with talented individuals who
do little to enhance their abilities e.g. John
McEnroe. I would venture that this mindset
predominates with those that enroll for
the sure win, no effort school of trading.

The other mindset is the growth mindset that

believes in constant and never ending
improvement. It is the basis of the
recommendations in the Cambridge Handbook of
Expertise and Expert Performance and in the
book, Talent is Overrated. With this mindset, we
believe that success lies in our actions, and it is up
to us to achieve what we can with the talent we
were given.

Like our default future, these traits are unconscious

responses and not something that we know, we
know or that we know, we dont know. Rather like
our unconscious strategies, they fall into the category
of something we dont know, we dont know.
Since our default future falls into the what we dont
know, we dont know category, how do we identify it?

The easiest way is to observe our stated outcomes,

our behaviour and our results. If our behaviour does
not lead to our outcomes but we persist with the
behaviour, you can bet your bottom dollar that some
unconscious response is at play.
For example, you would have a screaming pointer of a
response at play if your goal is to attain consistent
trading success, and yet you continually breach your
trading rules. I have chosen this example because it
allows me to bring in the two human traits:
1. The Impulse/Risk Manager decision-making
process and
2. The Fixed/Growth Mindset.

But before I get into that, let me bring in one more

important variable. Denise Shull rightly promotes
the idea that as long as we are executing our trades
(as contrasted with a computer executing our rules),
we must allow for some form of discretion. In some
quarters, this may be seen as a breach of rules, but she

Habits of Success

SEPT /OCT 2009

likens it to a coach giving his team the play and having

the quarter-back make the on-the-field decisions. A
good example of this took place for me on FOMC night.

that nothing is going to change in their lives if they

dont take conscious actions to make a difference. You
have a choice: Either go after the knowledge and
opportunities that will make a difference in your
lifeor stay where you are.

I saw volume at 896 and

The volume occurred no earlier than 10
minutes after the rate decision was

The problem is it is only now that we are discovering

how to identify and change what we dont know, we
dont know. And until we do that, until we change
that to we know what we dont know, all the
innovations and discoveries will not make one iota of

I had decided to sell the ES if:

Well, right on the button, strong selling volume came

in and at 899, I decided that the strength of the
volume meant that at 896, we would see the volume
that would trigger the sell signal. So, I took the trade
and got filled at 898.75. If I had been proven wrong, I
would have exited the shorts.

Denise is right, if we do not allow some room for our

discretion, we are doomed to not following our rules
in situations which not following is the correct thing
to do.

This brings me to the next point. My dominant

decision-making process is that of a Risk-Manager,
which is why I have better trading results as an 18day swing trader than a day-trader. But there are
times (usually in the execution of a trade) that I act
more like an Impulsive decision-maker, and I am OK
with that - as long as I exit the position, if the market
fails to do what I was looking for.

So, if you are someone who is not following your

rules, check to see your decision-making style. If your
style is the Impulse mode, then make sure you do
some pre-planning as this will help your intuition.
Then just execute on your intuition BUT after
executing, check the reward/ risk, trading
benchmarks, etc. If the trade does not qualify, just exit.
Do not anchor your entry price - just exit. In other
words, the decisions (normally made by the Risk
Manager) before the trade are carried out by the
Impulse Trader after the trade. An example of an
Impulse category would be most pit traders of old.

An acquaintance recently told me: You know theres

one simple reason why most people dont make the
improvements in their lives they long for: The reason is

The Educated Analyst | 12

An example

The last trades I took in the DX (US Dollar Index

Futures) and the ES (e-mini S&P Index Futures)
highlight the importance of being aware of our
unconscious motivators.

(www.tradingsuccess.com/blog) know that I started
2009 with a whimper. I failed to recognize that my
trading was in an Ebb state, and as a result, suffered
the largest monthly loss since I started managing my
private closed fund in 1990. Since then, I have been
struggling to make a significant dent in the losses.
I had great expectations for the two trades, DX and
ES. I will focus on the DX here because the ES trade is
well documented on the Video/Forum/Twitter free
Everything had lined up perfectly, and I was very
confident that my favoured scenarios would unfold. I
entered my first positions at 79.67 and a second set at
80.49. After both entries, the market immediately
went my way.
But then the DX stalled.

I had been looking for a simple correction but instead,

we saw a small trading range develop (see Figure 1).
The second set of positions I had added to the DX
80.49 proved to be around the middle of a congestion
zone bounded by 81.97 and 79.62.

Habits of Success

SEPT /OCT 2009

On Thursday June 25, the DX went to the Death Zone

of the congestion zone mentioned above and sold off. I
was faced with the prospect that:

The DX would at least break 79.62 and if it did

that, a breach of 78.83 was likely. A breach of
78.83 probably would resume the US Dollar
bear market. If I did not exit and the market
broke as expected, I would face a loss or
breakeven trade after the market had moved in
my favour.
Or would the Death Zone sell signal play false?
If I exited the positions, would the DX go up
rather than down, and would I have exited my
positions prematurely? What if I exited and did
another setup
and trigger to
re-enter the
trade? I would
lose the one
chance I had
inroad into my

I have reproduced
some of my journal
entries to give you an
insight into my state
comfortable losing up
to 20% of my capital I do not like it but
accept it as part of the
trading game. When I
lose more than 20%,
my anxiety levels rise.
I respond by cutting
position size and making it a priority to bring the
losses down under the 20%.

Unconsciously, I had placed great faith that these two

trades would not only bring me under 20% but would
also substantially reduce the losses. Then the blinking
market had done this!! (Quote).

The Educated Analyst | 13

Whenever I feel great stress, I find it useful to rant in

my journal - it blows off steam, and it allows me to
safely fully experience what I am feeling. Once I have
calmed down, I return to myself and then the markets.
I realized that the loss and market information I had
received on Thursday had triggered my unconscious
motivator. Hence the emotional response. That
awareness allowed me to deal with market
information in a more centered state.

Having made a decision, I implemented it and felt

better for the way I had gone about it. If I had acted
when my unconscious motivator had hijacked my
emotions and reason, whatever decision I would have
made, would have been wrong for me.


Source: Market Analyst 6 (www.Market-Analyst.com)

Charts made available through the courtesy of MarketAnalyst

In this article, I have focused on the need to start with
the foundations of trading success: risk management
and psychology because although more important

Habits of Success

SEPT /OCT 2009

than a set of trading rules, they usually are at best

given lip service, and at worst, ignored or
disseminated with out-of-date material (for example:
trade without emotion!).
My advice: undoubtedly, you need a set of trading
rules but start with a simple one and focus on
cementing the foundations. In my next article, I will
consider the written trading plan.

About Ray Barros

Ray Barros is a professional trader, fund manager, author,

and educator with over 30 years experience in the markets.
Ray is the Author of 'The Nature of Trends and has appeared
on Singapores Chanel News Asia, Bloomberg and CNBC. Ray
has been regularly featured in regional newspapers and
publications like Sydney Morning Herald, Your Trading Edge
Magazine, Business Times, and Smart Investor. The
interviews have focused on his trading strategies as well as
his opinions on market sentiment. They have also dealt with
his track record, trading philosophy, how and why he got into
trading, and what advice he would give to those wishing to
become traders/investors.
Ray can be contacted through his website

The Educated Analyst | 14

Habits of Success

SEPT /OCT 2009

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With Mathew Verdouw
Technical Analysis / Sector Analysis
For many years a good way to pick stocks was to
compare its performance relative to others in the same
sector. To be thorough you would also need to compare
different sectors to see which way the sectors were
moving. All of this added up to many scans and many
hours spent studying charts to see how the stocks and
sectors compared. Not anymore, in this article Ill show
you a way that you can use Sector Maps to quickly
identify stocks that are worth more detailed analysis.
Set the Scene

contraction) for two different time frames. Perhaps this

will be easier with some pictures.
The picture below shows the state of ASX shares on the
23rd June 2009.
Mostly Red so immediately I see that the sentiment on
the whole market was a bit sour. Each surface in the
map represents a single stock, the physical size tells me
how big the company is, or in technical terms, its
capitalisation. So in the top left corner you can see the
ASXs biggest square which is BHP.

I would classify myself as a relatively

short term trader. I like to take a
position, set a stop and as my trade
moves into profit follow the stop up
fairly tightly. Sometimes this means
that I am out again very quickly, but if
the market moves, I get to stay in for a
bit longer. My main method of
analysis centres on Gann Squares and
geometry, but this takes a lot of time
and while I also run a business I
cannot analyse all the stocks in this
manner. So how do I pick the stocks
that I want to analyse and hopefully
trade? Well this is where I use the
Sector Map in Market Analyst.
What is the Sector Map
The Sector Map is essentially a three
dimensional way to view the rise and
fall of all stocks and sectors in a
market. There have been traditional
maps for some time that have shown
the capitalisation and growth by size
and colour, but the third dimension
allows me to see growth (or

The Educated Analyst | 16

Source: Market Analyst 6 (www.Market-Analyst.com)

Market Sector Maps

SEPT /OCT 2009

The colour of each surface tells me how that stock has

performed over the last week. Green surfaces tell me
that its price has gone up, and a red surface reveals that
the price has gone down. The intensity of the colour
grades the change in price for me. As an example the
bright red surface in the top centre of the map shows
me that VII (Vietnam Industries Inc) dropped by 27%
over the week. The biggest loser that day.
The height of each
surface tells me
how the price of
each stock has
moved over the
last 3 months.
Each sector also
month growth of
the sector, but
you really need to see that on the video below as it is
difficult to show in a picture.
So how do I use it
Obviously how you use Sector Maps will depend on your
personal philosophy. Mine is one where I am searching
for stocks whose value has plummeted, and then I do
some further research on the stocks that I find, to see if I
think that they will rebound. If you would prefer to wait
for the stocks to move up, you could use this just as well,
you would be waiting for some green surfaces to reveal
this trend.
I like to find a sector that has had some growth, like at
this time it was the Energy Sector. On the sector map I
hold down shift and Click my mouse in the Energy area
and it will Zoom in to show me only the stocks that are
in that sector. Then I grab the Sector Map with the
mouse and move it around, looking at the relative
heights and colours of all the stocks in the sector.

The Educated Analyst | 17

The three images below are a result of the rotation of

the Sector Map.
Once I am looking end on (the last image) I can see that
while the sector has improved over the last three
months (revealed by its height off the plane) there are
some stocks that have performed really badly in that
same time. As I move my mouse over the surfaces I can
view the details as shown below.

Source: Market Analyst 6 (www.Market-Analyst.com)

For me, CTP is a standout. Its sector is performing well

but something has happened to make this one not
perform. At this point I right click on the surface and
Open the chart for further analysis.
By the time I saw this chart the stock was already making
a bounce back but after doing my Gann Analysis and a
quick search on the ASX web site to see why this fall was
happening, I was confident that this was a good buy.
The stock went sideways for a couple of weeks but it
never took out the low of the 23rd, and allowed me to
sell on the next retracement for a comfortable profit.
Not all stocks behave this nicely, sometimes they are
Red on the Sector Map and they stay that way. But the
Sector Map makes it really easy for me to find the stocks
that I am most interested in, and then from there do my
detailed analysis to see if I want to take a trade or not.
Of course, so long as you apply sound Money
Management strategies in your trading then you can
continue to trade for a long time even when the markets
have turned against you.

Market Sector Maps

SEPT /OCT 2009

As the Sector Map is a difficult concept to visualise in 2D

pictures, I have included a link to the Sector Map video
on the Market Analyst tips page here http://www.market-analyst.com/tea/links/1

About the Author.

Mathew Verdouw is the Founder of Market Analyst Software
(www.Market-Analyst.com). Holding an Honours Degree in
Computer Systems Engineering, Mathew set about building a
unique technical toolbox that would give traders new and
interesting ways to view market data. Mathews dual
perspective of seeing the issues that face traders as a Trader
and also as an Engineer has given him the ability to drive
further development into some of the most innovative
techniques ever seen by traders.
Mathew can be contacted

The Educated Analyst | 18





Market Sector Maps

SEPT /OCT 2009

The Cantillon Effect

Tall buildings and what they forecast.

ometime in the very early 1800s, a

Manhattan carpenter named Lozier came to
the somewhat startling
conclusion that
the city in which he lived was dangerously
lopsided and had too many taller buildings on its lower
end. If any more structures went up, he warned the city,
the island would sink into the Hudson River. To head off
this expected calamity, Lozier suggested to the city's
mayor that a chunk of Manhattan's northern end be
hacked off, towed down the Hudson, and then attached
to the southern tip. This, Lozier explained, would
redistribute the island's weight and ensure no further
Impressed with the scheme and with Lozier's ingenuity,
New Yorks mayor suggested Lozier commence at once,
handing over to him from the City Treasury a good deal
of cash to do so. To help him, Lozier advertised for
workers. Some 500 showed up one morning, shivering
in the cold waiting for the boss to show up. As the
reader might already have guessed however, our
carpenter Lozier was long gone; taking with him the
city's money intended to finance the project.
Over the years, New York City has had its fair share of
real estate swindles. Another was thought to be in
progress when a 50 metre high 'superstructure' was
started on a six and a half metre plot of Broadway land
in the spring of 1887. The owner, a Manhattan realtor
named John L. Stearns, actually owned the neighbouring
plot as well, off lower Broadway in New Street. The
front plot, however, facing Broadway, had become so
hemmed in that Stearns found it practically unsaleable
except at a give-away price.
Frustrated, Stearns approached Bradford Lee Gilbert, a
nearby architect for a possible way out. The solution,
Bradford recalled in his reminiscences, was to build an
iron bridge truss, but stand it on its end; a solution that
took him a full six months to conceive and design he said
later. In this way, the real structure of the building

The Educated Analyst | 19

With Phil Anderson.

would start several stories above the curb and help

produce the best design to maximize occupancy and
rentals. The world's first skyscraper, as the invention
was later called, built of skeletal steel was born.
So ingenious was the invention, utilizing the land space
as never before, that the design enabled its owner to
reap $90,000 a year more in rentals than would
otherwise have been possible. A mania for tall buildings
quickly developed; a phenomenon that continues to this
day. Since then, the opening of successively taller, then
tallest buildings, has proceeded in waves: the most
remembered being The Empire State Building which
opened for business in May of 1931 to great fanfare, but
practically empty.
Ive given a name to this phenomenon - The Cantillon
Effect: so named after Richard Cantillon (1680 - 1734),
an Irish banker of the early 1700's, generally credited
today as the first economist to suggest that a change in
the supply of money and credit will affect the economy
by changing prices. Cantillon recognised that an
increase in the availability of credit would result in
economic expansion, but that ultimately this would be
overdone as prices rose and imports increased. His work
pre-dates Adam Smith and was just as important, if not
more so.
For maximum forecasting ability, however, the Cantillon
effect should only be interpreted in conjunction with the
18-year real estate cycle, at the end of which is when the
Cantillon effect will usually be at its most obvious, with
easy credit conditions on display and when competition
for the worlds tallest is sure to be at its height: the taller
the building on the drawing board, the more available
and easier to procure is the bank created credit.

The Cantillon Effect

SEPT /OCT 2009

As it happens, the world's tallest buildings have had a

distinct and consistent habit of being completed right at
the top of the real estate cycle, (since Gilbert's first
tower, there has not been an exception to this
occurrence at each real estate peak), producing for us at least so far - the most reliable indicator of an
approaching real estate cycle top.
This is hardly surprising: as any decent architect could
tell you, though rarely these days it seems, an
economist. Tall buildings are just built spaces to make
the land pay. As a general rule, skyscrapers are a
speculative project, built mostly by developers with
other people's money. Such buildings are going to be
built only when credit conditions are easing or at their
easiest, the time when developers are most flush with
funds: hence the link with credit, and to Richard
So what will happen as this latest real estate cycle
approaches its low point in 2010? Already, the
confluence of tallest buildings into the end of yet

The Educated Analyst | 20

another 18-year real estate cycle (the previous cycle low

in the US was in 1992) has repeated, just like every other
since 1837. It can also be seen that the geographic
location that supports the tallest, usually experiences
the severest slump in the years after the general
downturn elsewhere. This does not augur well for
Dubai. (In Shanghai, the 101-story Shanghai Tower is
due to open shortly, being built by Minoru Mori and his
associated company. Whilst he is a rich man, a lot of
debt - US$ 7.2 billion worth - is financing his ambition.
China though, has a tonne of reserves to recover
reasonably well from the present world-wide downturn.)
As for what is happening in Dubai, we know that
development in recent years was proceeding at breakneck speed and long term it is hard to be too bearish on
the whole scenario, but the city will see a few bumps in
the road shortly. Whilst information is not easy to come
by about what is happening there, (the required
information with which to make a judgement is now
classified a state secret) there is no doubt a decent

The Cantillon Effect

SEPT /OCT 2009

amount of debt and leverage was used. The builders of

Dubai are likely to need a hefty state bail-out. Lower oil
prices, should this eventuate, could easily create a panic
in this location later in the year.
The worlds tallest always open in recession and are
never fully occupied.

About Phil Anderson

(Adapted from an article first printed in MoneyWeek, UK,
February 8 , 2008)
Phil Anderson is Managing Director of Economic Indicator
Service Ltd, an economic forecasting service based in London.
Phil uses Market Analyst to help with forecasting and trading
decisions. His book The Secret Life of Real Estate was
published in the UK in 2008. The web site can be found at

The Educated Analyst | 21

The Cantillon Effect

SEPT /OCT 2009

On the Couch
With Chris Shea.
Risk & Mind Management / Trading Psychology.

In this article I want to take a deep look into the actual

performance dimensions that lead to consistent and
growing profits.
Firstly, let me quickly review some important key
attributes of successful traders:

1. A personalized approach
I have worked with scores of successful traders, and
each individual has a unique strategy which gives them a
winning edge. Essentially good strategy integrates a
coherent analytical framework combining multiple time
frames with the management skills that enable losses to
be kept small and to allow winners to be as large as the
market allows.
Conversely if you do what the majority does, you wont
have an edge and you will lose.

2. Discipline
Successful trading is not a hit or miss affair. Success
comes from the will to win and the determination and
endurance to follow through. Successful traders take a
hard headed approach and regard their enterprise as a
business rather than an indulgence or hobby. They
expect their accounts to accumulate, despite being
stopped out often. They know that with discipline and
consistency they will prevail.
Successful traders have the discipline to remain focused
on their business tasks despite the events occurring
outside their control, for example panic and extreme

The Educated Analyst | 22

3. Passion
By passion I do not mean an emotional outlet with
regard to trading. By passion I do mean enthusiasm,
motivation and the commitment to stay with the task,
especially as pressure comes on, as it inevitably will.
My clients who succeed really enjoy their trading. Is this
surprising? Success breeds success. Trading isnt an
ordeal; rather its an absorbing challenge. The successful
ones arent ambivalent about it: they want to do it, and
do it well. Setbacks do not dent their confidence and
enthusiasm (for long), but are regarded as an
opportunity to learn and refine their methods. Passion
enables them to be self- evaluative and to strive for
better outcomes.
Now lets delve deeper into the type of performance
that is essential for success. In particular I want to
compare the type of thinking and action of top
performers, with what is the public or general view
which leads to poor quality outcomes.
To do this I want to use an analogy of performance with
which you will be familiar: driving a car. For more detail
on this analogy refer to my book Licensed to Profit by
Trading in Financial Markets.
When you are in command of your car your
performance is heuristic. All the complex input sensory
data relating to speed, traffic, and direction are
integrated within your brain to instantaneously and
automatically produce the desired outcome moment by
moment that enables you to reach your destination.
There is an emotional component to this. These
emotions are associated with trusting your self to
perform, relaxed and poised, at your best in the dynamic
yet dangerous environment, and to enjoy the journey.

On the Couch with Chris Shea

SEPT /OCT 2009

This is exactly how top operators approach trading. They

perform heuristically in the face of complex market
On the other hand it is difficult to achieve top
performance in trading if you are effortful, mechanical,
judgmental and analytical. Im not saying that analysis is
not important. It is. You need a road map. But you dont
put the road map in front to your vision when you drive.
But if you have to analyze and deliberate, to think about
what you need to do and how to do it before you
execute you will probably hesitate, unable to perform
well to take advantage of the opportunity as it presents
itself. After all if you see a bus coming towards you in
your lane, you dont calculate its momentum and your
breaking distance or consciously think about what you
need to do and how do you do it. Your heuristic
performance enables you to short circuit all this. You just
hit the breaks and swerve away.
Unfortunately the general view of trading is that it
merely relies upon the mechanical application of
analysis. But this is insufficient for great trading

Learning to trade heuristically

Is it possible for you perform in financial markets, i.e.
trade, in a heuristic fashion? Yes of course it is, if you
have the will and the patience to learn how to do it and
trust it. After all you have already demonstrated your
capacity to achieve this feat when you learned to drive
your car.
The heuristic approach is Learned Behaviour. It probably
wont come naturally. Ironically the mechanical and
analytical phase provides you the base to go forward
with. Most traders in the break even zone are so close.

The Educated Analyst | 23

Here are 3 key elements I encourage in my clients:

1. Presence
You need to stay in the present moment and to keep
your mind sharply focused on the trade in front of you.
You have to learn to flawlessly execute in the moment
what the market is presenting to you. You have to
relinquish both past outcomes and the unknowable
future. This moment is all that you have to deal with.
Nothing else matters now.
In the present moment you remain unattached to your
account, your ego and even your desires. You just trust
your capacity to perform well in each moment to create
success overall.
2. Freedom
In that moment, you need to avoid mechanical,
judgmental and analytical thoughts as well as negative
emotions. You should be trusting in your ability and your
acumen to flawlessly execute what you have prepared
for and anticipated. You need to release your fantasies
about wealth and power emanating from your trading,
as well as your anxieties and fears of failure and
You are free to act in the moment because you dont
have a view or prediction about the market in the future
that you need to defend. You are free to implement your
strategy. This is emotionally not only liberating but also
pleasurable and satisfying.
3. Strategy
You need to develop and stick with the routines and
procedures that maximize your strategy.
You trust that you will take the necessary action that
your strategy requires as the market unfolds. You know
that your strategy will project false positive trades as
well as winning trades. Accept that as an ingredient of
the business.

On the Couch with Chris Shea

SEPT /OCT 2009

Your ego or cleverness isnt under scrutiny: the efficacy

of the strategy is. Your detachment allows you to put
your strategy under the spotlight to use feedback to
improve it for the future.

In this article I am suggesting that the way to win at
trading is to learn, develop and use the same type of
performance dimensions as when you drive your car. Yes
you do need an efficient trading platform and excellent
market analysis tools. But to profit consistently and
handsomely you need to go the extra mile and learn and
do heuristic performance in the market setting.

About Chris Shea

Chris Shea is an investor, trader, educator and
psychotherapist who specialises in coaching those who
want to become and stay successful in financial markets.
His emphasis is focused upon assisting clients not only to
overcome their internal barriers but also to discover and
implement their own successful approach based on their
unique personality, experience and talent, to sustain
consistent superior returns.
Through his in depth Best Professional Practice Program
Chris has an established track record in coaching clients
to develop the skills and drive to become independent,
disciplined and very profitable full time traders.
Chris is author of Licensed to Profit by Trading in
Financial Markets.
Chris holds a Bachelor of Education, Master of Science as
well as a Diploma of Professional Counselling. While
based in Brisbane, Australia, Chris has private and
institutional clients in Australia, New Zealand, Ireland,
USA and Singapore.
Do you have a question that you would like to ask Chris
Email your question to thecouch@educatedanalyst.com

The Educated Analyst | 24

On the Couch with Chris Shea

SEPT /OCT 2009

Gann Swing Charts

By David Burton
Before you start to do anything in trading, you should
first make sure you have a very strong foundation and
plan of what it is you are going to study, trade and invest

commodities cannot declare bankruptcy. Another point

to note is that with the USA printing money like
Germany in 1923, commodities are where all the money
is to be made in the future.

Ninety-nine percent of people will never get to the

knowledge and understanding of markets and cycles
that the great W.D.Gann had. Gann dedicated his life to
studying financial markets in an attempt to understand
them, spending years studying day and night.

There are a number of swing charts you can look at on

Market Analyst. I suggest creating monthly, weekly, daily
and point swing charts.

The more time you put into your trading, the bigger the
rewards. The biggest failing that people have when they
start trading, is that they believe that they can have all
the knowledge needed to make all the money of their
dreams within a very short period of time. This is not
going to happen. You have to start off very slow, and
gain more knowledge year by year. It took me twelve
years to work out WD Ganns commodity course (full
time). Its taken me twenty-five years to decode WD
Ganns books The Tunnel thru the air or Looking back
from 1940 and The magic word.
Here are five of Ganns principles that I recommend you
start following, and keep working towards daily:
1. Good health: the better your health is, the
quicker you will learn.
2. Gain knowledge: Start with Ganns seven books.
3. Capital: eliminate your debt and have your own
money to trade.
4. Patience: learn to wait for the market to get to
setups in both time and price (dont jump into a
trade too early just to trade).
5. Nerve: when the market gets to your entry
point, pull the trigger and place a stop lost.

You will see my first chart that I have created is a 91 day

(quarterly chart) swing chart of December cotton, cotton
was one of Ganns favorite commodities to trade. I have
assisted Market Analyst in the development of their
swing charts to ensure that the swing charts provide
more detailed information than was previously available.
As you can see it gives you the dates of highs and lows,
cents per/lb the market has moved and number of days
up and down. This information assists as it allows you to
quickly see the over balancing of time and price. You can
see very easily that the market has broken back through
the lows of 2004 to 2007 turning the trend up. Its
moved up through to May, a seasonal high (In Ganns
book How to make profits in Commodities) at .6375 on
the 12th.That was up 181 calendar days or half a time
cycle (Time in the bible is 360, Time, Times and half Time
= 1260 days or years.) Watch for resistance of 252 days
up which will equal the move down from the all time
high. (252 x 10 = 2520, this is twice 1260).

Another very important thing to do is to get long term

accurate data. You cannot possibly study Gann theory
without high quality data.
In my opinion, Gann works best on commodities, as
there much longer term data available, and also,

The Educated Analyst | 26

Gann Swing Charts

SEPT /OCT 2009

Half the move up is at .6757 a natural level to sell off from.

Source: Market Analyst 6 (www.Market-Analyst.com)

Now that I have my longer term swing charts sorted out, I can look closer at the market action, so I go to a 23
day swing chart (which is Ganns three weeks swing chart). 22.8 days times 16 is 365.25 days (16 planes on
Ganns cover of Tunnel thru the air). You again can see very quickly that if we add .2050 cents (the first move
up) and add it to .4625 (the last low on the 23 day swing chart in the following image) we get .6675, closest to
the .6750 level.

The Educated Analyst | 27

Gann Swing Charts

SEPT /OCT 2009

Source: Market Analyst 6 (www.Market-Analyst.com)

Gann also used the 2 day and 3 day swing chart, depending on where the market was positioned. The next chart is
a 2 day swing chart. The 2 day and 3 day swing chart is based on the moon, as the moon changes sign every 2.5
days. The moon controls the masses emotions, so it is good to watch this chart in the final stages of a move. After
the market makes a top, it will first over balance price, the first indication that it has turned down. You would then
look at the 3 day swing chart to see if it has turned down, and go short with a stop above the swing high of no
more the 3%.

The Educated Analyst | 28

Gann Swing Charts

SEPT /OCT 2009

Source: Market Analyst 6 (www.Market-Analyst.com)

In Summary, for greater understanding, read the first 64

pages over and over of How to make profits in
Commodities and especially follow his 28 rules on page
43 and 44.

About David Burton

David Burton is the C.E.O of School of Gann
(www.SchoolofGann.com), and has been studying the
methods of W.D.Gann since 1983 and financial astrology since
David writes articles on Gann for a number of magazines, and
has made many public forecasts in advance like the 1995 all
time high in cotton, the all time high in wheat in 1996, the
major low in cotton in 2001, the high in cotton in 2003, the all
time high in wheat in 2008 (12 years in advance) and the top
in the stock market in 2007. Due to the- time that he devotes
to his trading and investments, David runs only one workshop

The Educated Analyst | 29

Gann Swing Charts

SEPT /OCT 2009


With Dale Gilham

any of you would agree that the basis of

trading is to time your entry and exit so as to
extract a reasonable percentage of available
profit from a movement in the price of a market.
However, if this is true, why then do so few traders
actually use time analysis in their trading? In my
experience, many traders believe they are using time
analysis to enter the market, when in fact they are
relying on the more traditional methods of price and
pattern to time their entry.
Undoubtedly, price and pattern do have their place in
trading, but only when the time is right. In fact, when
you use time as your primary analysis tool and then
apply price and pattern to aid in fine tuning your entry
and exit signals, you will eliminate many of the false, late
or inconsistent signals that cause traders to lose money.
Many times in other articles I have used Ganns time
projections to demonstrate how you can use this
method of analysis in combination with price and
pattern to trade the market. While this method of
analysis works well over all time
frames, it is used primarily for
shorter term trading to assist in
narrowing down the entry and
exit points of a trade to within
days of a high or low. Therefore,
in this article I want to introduce
you to my preferred method of
timing, which although not well
known, is highly effective and
based on the work of Walter
Bressert and Ray Merriman.

Bressert found that markets moved from low to low in

measurable time frames which he called cycles. As we
have identified with Ganns theory of time analysis,
cycles are intervals of time that can be repeated to assist
in predicting turning points in the market.
According to Ray Merriman, timing cycles are a
measurable phenomenon that occurs consistently at
regular intervals of time. The phenomenon does not
have to occur with 100% regularity, however it should
unfold with an 80% consistency or greater during a
regular interval of time. A regular interval of time does
not mean on a specific date or in a specific week. It
means within an interval, or orb of time. For instance, a
six week cycle does not mean the cycle unfolds exactly
every six weeks, every time; it means a cycle of 5-7
weeks unfolds at least 80% of the time.
Figure 1 shows how a 26 week cycle on CBA unfolded
between Sep 99 and Oct 02. Notice that each of the
cycles ranged in length from 25 to 29 weeks, which is
well within the allowable time frame of 22 to 30 weeks

Timing Cycles
Walter Bressert is credited with
introducing timing cycles into
the Futures market in the late
Figure 1
The Educated Analyst | 30

Source: Market Analyst 6 (www.Market-Analyst.com)

Using Market Cycles

SEPT /OCT 2009


for the lows to occur, which represents a consistency of

can use this method of analysis to predict where the

market is heading in the future.

Cycles range from many years down to minutes.

Common cycles include 54 years, 18 years, 9 years, 4
years, 22 months and yearly. Notice that these cycles are
generally derivatives of each other and unfold to fit
within the cycle of larger degree. Once we get below a
yearly cycle we change the way we label cycles. For
example, a primary cycle is 16-26 weeks, a major cycle is
4-7 weeks and a trading day cycle is 4-7 days. It is
important to remember, that the longer the cycle the
more dominant it is. For
example, a 4 year cycle is more
dominant than all the cycles
below it.

Predicting the All Ords

When analysing a market or stock you need to look at
the complete history to identify the major lows and then
work forward in time (using smaller cycles). Because we
only have reliable data on the All Ords back to 1982, I
will use the Dow Jones Index to highlight how the cycles
have unfolded on our market, given that the All Ords
tends to the follow the Dow Jones in its major moves.

As I indicated above, cycles are

measured from low to low, and
have an average time band, plus
or minus a period known as the
orb, which is 1/6th of the cycle
length. In an 18 week cycle, 1/6th
of 18 weeks is three weeks.
Therefore as shown in Figure 2,
the cycle has a time band of 15 to
21 weeks in which the low will

Figure 3

Figure 3 shows the decline on the Dow Jones from the

market highs in 1929, which lead to the Great
Depression, into the low in July 1932. This low was in
fact a 54 year cycle low, as the previous major crash on
the US market was in 1873 some 59 years earlier, which
is well within the allowable time frame for a cycle low
given that 1/6th of 54 years is 9 years (45 years to 63

Figure 2
To demonstrate how effective this form of analysis can
be I will now apply cycles to the history of the All
Ordinaries Index. In so doing I will show you how you

The Educated Analyst | 31

Source: Market Analyst 6 (www.Market-Analyst.com)

If we use July 1932 as our starting point, we can predict

the next 54 year cycle low on our market, which would

Using Market Cycles

SEPT /OCT 2009


be due in 1986 plus or minus the orb period of 1/6th (9
years) of the cycle length. Given this, we know with high
probability that the cycle low will occur sometime
between 1977 and 1995. And as we already know, the
next major crash on the Dow Jones occurred on 29
October 1987 or 55 years on from July 1932. The actual
low on the All Ords occurred on 11 November 1987 as
shown in Figure 4 below.

Figure 4

Source: Market Analyst 6 (www.Market-Analyst.com)

If we project out another 54 years from 1987, then we

can expect the next 54 year cycle low to occur in 2041
plus or minus 1/6th of the cycle length (between 2032
and 2050).
Remember that all cycles are made up of cycles of lesser
degree (time) with each cycle being a cycle of lesser
degree in a larger cycle. For example, a primary cycle
(16-26 weeks) is a cycle of lesser degree within the
yearly cycle. Therefore, whenever a cycle of larger
degree confirms, all cycles of lesser degree also confirm
at the same time. Given this, all cycles of lesser degree
from the 54 year cycle will start their next cycle from the

The Educated Analyst | 32

low in 1987 and as such we can start to bring our

analysis of cycles down into a time frame that is more
relevant to where we are today.
The next common cycle after the 54 year cycle is the 18
year cycle. It is important to note that with an 18 year
cycle low, the market does not crash like the 54 year
cycle; rather it is a slow decline into the cycle low that
takes place over a period of approximately 3 years. In my
research I have found that in our
market that the 18 year cycle is
around 20 years in length. To
calculate when the next cycle
low is due we simply add 20
years onto the low in 1987 to
arrive at 2007, plus or minus
1/6th (3.33 years) of the cycle
length. Therefore, the next 18
year cycle low on the All Ords is
due sometime between late
2003 and early 2011.
With this in mind and knowing
that there is a high probability
that the low will occur before
the end of February 2011, which
is the outer most limit of our
orb period, then the market
will need to peak no later than the end of 2007 after
which we would expect a long term bear market of
around three years.
Although that said, it is possible that the 18 (20 year)
year cycle concluded when the market formed a
significant low in March 2003. However, the decline
from the high in 2002 only lasted for 13 months which
doesnt comply with cycles theory, because the market
needs to decline over a period of approximately 3 years.
Therefore, the most probable scenario is that the 18 (20
year) year low has not yet occurred, and the likelihood is
that we are over half way into the move down into the
low. Is it possible that March 2009 was the low? Yes as it
fits within our orb period for the low, however we need

Using Market Cycles

SEPT /OCT 2009


to be aware the market only fell for 16 months from the
high in November 07. For now, only time will tell
whether the current move up is simply a bear market
correction, or the start of the next 18 year cycle.

About Dale Gillham

Dale Gillham is the Co-founder and Chief Analyst of Wealth
Within, a specialist share market educator and boutique
investments company supporting individuals to maximise their
investments in the share market. For more information visit

The Educated Analyst | 33

Using Market Cycles

SEPT /OCT 2009

[Type text]


With Ross Beck
ne of the most important aspects of adhering
to any particular trading strategy is to believe
that the strategy is a high probability strategy.
It is very hard to believe in a trade strategy if you dont
know how it works (I.E. Black Boxes.) With this in mind,
lets carefully consider each of the individual legs that
unfold in the Gartley Pattern to understand the
Psychology behind this high probability set up.
Referring to the first example A in figure 27 from H.M.
Gartleys book, Profits in the Stock Market, Gartley first
identifies a bearish A-B leg . This leg appears to be a
significant trend move or impulsive phase with minor
rallies punctuating the down trend. At the completion of
this A-B leg, we notice a significant rally that is labeled as
the B-C leg. This B-C rally exceeds the previous rallies in
the A-B downtrend in both price and time. This B-C price
action indicates that the previous downward trend
might be complete and that the B-C leg might be
indicating the beginning as a new impulsive trend move
in the opposite direction of the previous A-B move
down. This B-C leg is very typical of what happens when
traders all begin to cover their short positions after a
sustained bearish trend. The B-C leg completes when the
short covering is complete. With this in mind, the
assumption is that the market will not take out the low
at point B as a new trend up will probably continue
higher and never look back. Based on this information,
Gartley puts his protective sell stop just below point B.
Though Gartley mentions the A-B leg in his book, most
educators of the Gartley Pattern omit this important
aspect of the pattern.

The Educated Analyst | 34

At the completion of the B-C move, Gartley mentions

that there will be a minor decline that cancels a third to
a half of the preceding minor advance (B-C). In other
words, Gartley is looking for a 33% to 50% retracement
of the B-C move up. Why does this minor decline take
place? This minor decline could be caused by traders
that were anxious to get short in the previous A-B
decline. These bears were waiting for a significant
pullback during this bearish trend down, however the
market kept missing their sell limit orders on the rallies.

Now that the market has had a significant rally against

the downtrend, they start selling at point C and push the
market down. Depending on where they get filled, they
will put their stops just above point C. This selling from
the late bears pushes the market down into what
Gartley describes as a minor decline.
This original Gartley Pattern ends up having a very
different look and feel compared to how it is being
taught today. The original Gartley Pattern was quite a
simple pattern. Gartley did not discuss any Fibonacci
ratios, Elliott Wave, etc. In Gartleys bullish example, it
would appear that all he is looking for is a significant
rally off of a bottom, followed by a retracement of 33%
to 50%.
Based on Gartleys original example, the original pattern
only included four data points or three legs. It is of
interest that the modern version of the Gartley Pattern
does not include Gartleys A-B leg. In Elliott Wave terms,
the original pattern would appear to be the completion
of a Wave Two. That means that if the pattern works,
you would be trading a Wave
three, a trade that most
Elliotticians would consider
very difficult to identify.

Gartley Trading Pattern

SEPT /OCT 2009

[Type text]

If you search the internet for information about the

Gartley pattern, you will at some point come across the
following picture.

As you can see, the pattern above is a complex five

point pattern that has to conform to specific Fibonacci
ratios on each of its four legs.
The main differences between the modern Gartley
Pattern above and the original Gartley Pattern are

1. The labels in the original pattern are A,B,C. The

labels for the modern pattern are X,A,B,C,D.
2. The modern Gartley omits the original A-B leg.
3. The modern Gartley emphasizes the equality of
the A-B leg and the C-D leg whereas the original
does not.
4. The original Gartley pattern did not include any
Fibonacci ratios.
5. The completion of the original pattern was at
33%-50% whereas the modern pattern
completes at the 78.6% retracement of the XA

Larry Pesavento was the first person to apply Fibonacci

ratios to the Gartley pattern. Larry observed that the
Gartley pattern appeared to be a more reliable pattern if
it completed at a 61.8% retracement or 78.6%
retracement. Based on my 10+ years of experience with
the Gartley pattern, it appears that if you have to choose
between the two of these ratios, 78.6% seems to work
the best. With my personal trading, I will only trade the

The Educated Analyst | 35

78.6% Gartley patterns. Why? I would rather trade less

often and increase the chances of my wins on the few
trades that I make. If you feel a need to trade more
often, it may be time to take a personal
inventory. We need patience to wait
for good Gartley Patterns, remember
Gartley himself said, The art in
conducting an operation of this kind
lies in..Having the patience to wait .
In addition, one of the added benefits
of using the 78.6% retracement is its
proximity to where our protective stop
is located. Remember Gartley said, In
the other two cases, only small losses
have to be taken. So if we choose the 78.6% versus the
61.8% Fibonacci level to enter, our risk will be reduced if
we use the location Gartley suggested for our stop. If we
are wrong, we will risk less money with an entry at
78.6% versus 61.8%.
One of the other reasons that I prefer the 78.6% level is
that the public is typically unaware of this level as it does
not appear in the defaults of most Fibonacci
retracement drawing tools. Therefore there is contrarian
value in using this level. Also, by the time a market
arrives at 78.6%, most of the typical 61.8% fib traders
have been stopped out. At this point in time, there is a
lot of uncertainty as traders watch for a bounce or a
break based on their focus on the previous high or low.
Also, typically there is an increase in the volatility in the
78.6% retracement area as the market begins to reflect
the uncertainty of its participants. The volatility in this
zone will help us if we enter with a multiple contract
strategy that allows us to leverage the scale out of the
About Ross Beck
Ross Beck, FCSI is a professional derivatives trader and
publisher of the Gartley Trader newsletter. As a former CTA
(Commodity Trading Advisor), in 2007 Ross was one of the top
ranked CTA's in the world according to Barclay's Trading
Group. Ross is a member of the Market Technicians
Association and a Fellow of the Canadian Securities Institute
(FCSI). For more information, go to www.gartleytrader.com

Gartley Trading Pattern

SEPT /OCT 2009


Concepts Based form the Book The ART of Trading published by Wiley, April 2008

Money in trading is made from catching a significant

trend. Money lost in trading occurs by missing or being
on the wrong side of trends. So the real question is
How do we protect and preserve our trading capital as
we position ourselves to catch the next profitable trend?
Significant trends are known to emerge from market
consolidations and it is during these consolidations that
traders experience
leading to
psychological trauma that can cause havoc with a
traders life, which can cause the trader to miss the
trend altogether!
It is said that markets trend approximately 35% of the
time, meaning that 65% of the time they are trend-less.
Consolidations are known to occur before many
significant market trends and to be a profitable trader
you must learn how to exploit these trends while not
losing your money when the market is trend-less.

Non-Trending Markets Are Lethal To Trend Traders!

Trend traders need to develop skills to:
1) Identify Non-Trending Markets Quickly To Avoid
Trading Losses So They Preserve Their Capital.
2) Have Skills To Identify and Take Advantage Of
Non-Trending Markets:
a) Identify
consolidation with support and
resistance lines forming a clear
visual channel and wait for the
market to break-out of this channel
before trend trading again.
b) Use
consolidation for profits while you
wait for the next trend to emerge.
c) Move to another market or time
frame to trade and come back once
a trend emerges from the

The Educated Analyst | 36

With Bennet McDowell

Consolidations: A Textbook Definition

Lets define a market consolidation. A dictionary
definition of a market is the world of commercial
activity where goods and services are bought and sold;
without competition there would be no market. A
dictionary definition of a consolidation is something
that has consolidated into a compact mass; combining
into a solid mass; an occurrence that results in things
being united. Reading these two text book definitions
leads one to believe that a market consolidation is one
where the competition between buyers and sellers unite
to form a compact mass. A traders definition of a
market consolidation is one where prices have remained
range bound within a narrow price channel.
Is market consolidation an area where little or no new
information has come into the market to cause a greater
disagreement of value or perceived value which would
move prices? And do trends occur because the value or
perceived value is changing so much that the price must
change to represent the new value? Answering yes to
these questions leads to the conclusion that market
consolidations are areas where no new value
perceptions are being generated. Thus, prices remain
tight or range bound. Consolidations are also known
as Bracketed, Channeling, or Range-Bound

The Nature or Psychology Of Market Consolidations

Consolidations by their very nature can not last too long
since they become increasingly unstable with time.
Most traders view consolidations as a stabilization of
price, but consolidations actually become increasing
unstable with time. In fact the longer a market remains
consolidated, the more unstable it becomes.

How to Identify Setups from Consolidated Markets

SEPT /OCT 2009

Market consolidations have their own cycles. During

their initial formation traders are undecided as to value,
and the price oscillates. If this condition continues,
traders perceptions of this assets value remain the
same until new information enters the market to change
Until new information arrives, the consolidation
becomes narrower and narrower to a point where the
consolidation is now very unstable and this is where new
trends are born.
The longer or more mature the consolidation is, the
larger the trend usually is as well. Lengthy or mature
consolidated markets are so unstable that even just a
whisper of new information coming into a consolidated
market can make it move, but a shout of information can
make it trend fast!
Once you spot a mature consolidation, your trading
approach should be to bracket the upper and lower part
of the consolidation. This helps to avoid unprofitable
whip-sawing trades within the consolidation channel
caused by insignificant trading reactions from minor
market information. It is important that your trading
approach not react to every whisper of information
that the market ultimately finds meaningless.
By bracketing your trade entries above and below the
consolidation channel, you automatically eliminate
unnecessary losing trades. If you are an aggressive
trader who welcomes the additional risk of a few losing
trades within the channel to achieve a superior trade
entry price, then you should wait for the mature
consolidation to get very tight and thus very unstable.
This will increase your odds of successfully timing the
next significant trend and therefore reward your
aggressive entry approach. Just as important as the
length or time of the consolidation is the low Average
True Range or volatility of prices in recognizing the
mature end of the consolidation before a significant new

The Educated Analyst | 37

tend emerges. COMPRESSED price bars representing low

volatility and a low Average True Range can be
significant in determining that the consolidation may be
near its end and the new trend may be significant. Any
new information coming into a market with compressed
price bars could cause that market to move quickly. It is
important to note that not all significant trends emerge
only from market consolidations. But if you recognize a
consolidation in the market, the potential is great for a
significant trend to emerge if the consolidation has
become so consolidated it has now also become

Finding & Monitoring Market Consolidations

The first step is to find markets that are in
consolidation so you can be ready to trade the
breakout when it occurs. To find these consolidated
markets, it will be best to scan for markets with low
volatility and narrow price movement. Look for a
consolidation with at least 20 price bars before
considering it for a potential trade based on
"bracketing the high and low of the channel.
On daily charts, markets can consolidate for weeks and
some for even months, so you will want to monitor
several markets simultaneously while they are in
consolidation. This way you do not have to wait a long
time before entering a trade.
On intraday charts, markets that consolidate for 20
price bars may last 20 minutes or more depending on
the intraday time frame you are using.Active
traders can use this technique to scan for trade setups,
and with 9,000 + stocks, the trader can be quite active!
If youre a day trader, you can scan intraday charts
looking for consolidations as well.

How to Identify Setups from Consolidated Markets

SEPT /OCT 2009

Trading Market Consolidations

Where To Place Your Stops

Once you have identified the consolidation of at least

20 price bars, the next thing to do is to draw a line on
the top and the bottom of the consolidation channel
effectively "bracketing" the consolidation
place your long trade entries above the upper
consolidation band, and your short trade entry below
the lower consolidation band.

Once the market breaks and begins to trend, stops can

be adjusted according to market activity, with the
initial stop-loss being placed on the opposite side of the
consolidation channel in relation to which way the
market started to trend. The ART System quickly
identifies key stop-loss levels based on market realities.

There is a HIGH probability of SIGNIFICANT trends

emerging from markets that have been bracketed for
20 price bars or more! And price bars that are
COMPRESSED within a bracketed market have a higher
probability of a significant trend occurring when prices
break the upper or lower part of the consolidation.
Note on this chart how compressed the price bars are
BEFORE the market breaks below the consolidation.

The Educated Analyst | 38

Trade Example Combining Bracketing

The stock chart below illustrates a market consolidation
in the Nortels stock with upper and lower lines drawn
that bracket the consolidation. Trend traders should not
attempt to trend trade during a bracketed market and
should therefore not take any trades inside the drawn
support and resistance lines. Trade entries are then
placed above and below the consolidation. On this chart
we are using the ART Software for specific entries and
exits using ARTs
Pyramid Trading
Point triangles
for both entries
and exits and
information on
The ART of
Wiley & Sons,
April 2008. Also
note how prices
towards the end of the consolidation just before this
market begins to trend. This occurs often since markets
usually spring from compressed price consolidation.

How to Identify Setups from Consolidated Markets

SEPT /OCT 2009

Here is another example of how to bracket a consolidation to avoid trading within the bracketed area. On this
chart, do not trend trade between the upper and lower blue horizontal lines representing the top and bottom of
the consolidation.

The Educated Analyst | 39

How to Identify Setups from Consolidated Markets

SEPT /OCT 2009

How To Quickly Identify Non-Trending Markets!

This is a skill that all traders should master. Lets take a

look at the stages of identification:

3) You now can drawn-in support & resistance lines

as in this chart:

1) The set-up for a non-trending market occurs

when you can see a 1, 2, 3 pattern develop as
shown below. Note that #3 does not exceed #1
and #2 does not go below #0 at this stage:


2) Once #4 is in place and does not go below #2,

we have a CONFIRMED bracket in place as
illustrated on this chart:

Sometimes one good technique is all we need to be

profitable traders. Trading from market consolidations
may just be the trading technique you have been looking
Whether youre a futures trader, stock trader, day trader
or position trader, adding these trading concepts to your
trading toolbox should prove worthwhile.
About Bennett McDowell
Bennet McDowell is founder and president of
TradersCoach.com and created the Applied Reality Trading
system traded throughout the world. He lectures and speaks
at many Trading Expos and writes for several magazines. His
new book The ART of Trading published by Wiley & Sons is
a best seller. Bennett McDowell can be contacted through his
website www.TradersCoach.com.

Copyright 2009 TradersCoach.com, Inc. All rights reserved. Any reproduction and/or electronic transmission of this document is
prohibited without the prior written consent of TradersCoach.com and is a violation of international copyright law.

The Educated Analyst | 40

How to Identify Setups from Consolidated Markets

SEPT /OCT 2009

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with Peter Varcoe

here has been a lot written about reliability in

patterns in trading. However, much of this is
difficult to interpret and effectively apply in
real time. This has driven many people to abandon this
highly effective trading technique.
The correct identification and use of patterns for the
technical trader can be a very profitable trading strategy.
For it to be effective we need to be able to determine,
with a high degree of probability, that: we have correctly
identified the formation; know what is going to occur
when and if the breakout occurs; and know what to do if
the breakout does not occur as expected.
Patterns can tell us not only the expected direction of
price action but also how far we can expect the price
action to travel, thereby showing us a price target which
it should achieve.
As there is too much to write about patterns for
inclusion in a single article, this information will be
provided in a series of articles over the next few months
In this series of articles we will cover some basics of
patterns and their uses, including:

Their shapes.
Their correct identification.
Their target determinations.
How this can help us in our trade entry
How they can aid us in our risk management
applications for trading purposes.
How they can allow us to enter some very profitable
How they can also help keep us out of potentially
harmful transactions.
Their applications in bull and bear markets.

The Educated Analyst | 42

For the highest probability of effectiveness, all patterns

should move through the following phases:


As the pattern begins to form, we then need to be able

to identify it, and its potential, in real time. Once the
boundaries to this formation are identified we watch the
pattern develop to breakout. Upon breakout, we need
the correct confirmation that the pattern has broken
and will continue its current price direction; this greatly
increases the reliability of the pattern by filtering out
most of the non-successful patterns.
Ironically it is this confirmation technique that is lacking
from current writings regarding patterns, yet these
techniques significantly increase the probability that the
pattern will complete satisfactorily, greatly increasing its
When this progression is synchronised we have a high
probability situation that allows us to enter a transaction
or not, depending upon how this fits within our risk
management parameters.
Applying this process to the many patterns available,
two types stand out as potential trading aids. They are:

Direction/Trend change patterns:

o Head & Shoulders Inverted Head &
o Double Top Double Bottom.
o V-Top V-Bottom.
o Rounding Top Rounding Bottom.

A Comprehensive look at Trading Patterns

SEPT /OCT 2009

Directional change patterns have proven to be

unreliable, as a trading pattern, when trading the break
of the pattern. Their use is that they can confirm the
directional change and give us a target to which we can
aim for the price to achieve; we can then make other
determinations on how we use this information.

Continuation patterns:
o Flags
o Ascending Triangle
o Descending Triangle
o Symmetrical Triangle
o Pennants

Directional change patterns confirm that the price

direction has probably changed and tell us how far we
can, as a minimum distance, expect the price to go.
Continuation patterns predict whether the current price
direction will continue and give us a predetermined
target for the price to reach. Continuation patterns are
also known as mid-move consolidations and represent
a consolidation, not a retracement, of which more will
be covered below.

An example of this is that the pattern largely overrides

previous resistance/support levels, which may otherwise
have kept us out of a continuation entry under our risk
management guidelines.

Double top & double bottom patterns

A double top is commonly called an M pattern and a
double bottom is commonly referred to as a W; the
associated graphs illustrate the reason for this naming.
These patterns are directional change confirmations and
are used in the following circumstances:

Directional change patterns

There are many directional changes patterns written
about: four of the most common were detailed above.
While there are others, we will deal primarily with the
first two patterns as these are the ones I have been able
to identify, confirm and use with a high degree of
probability. I have not yet been able to make the Vs or
Roundings work with the same probability. The reason
for this may be as simple as my inability to find a reliable
confirmation technique to use with these patterns to
give me the reliability I need to use them.
I need to be able to get a reliability factor of at least 75%
from any technique I use to make sure that it provides
me with a better outcome than I was previously getting,
before I will adopt and incorporate it as part of my
overall strategy.

The Educated Analyst | 43

Double Top confirms upward directional change

to a downward one and is therefore used in
short transactions.
Double Bottom confirms downward directional
change to an upward one and is therefore used
in long transactions.

The identification of these patterns is relatively straight

forward and very reliable.
A double top needs to have a trend coming into its first
peak, followed by a retracement, to form a low. This is
followed by a rally to form another peak, with a valley
between the two peaks, followed by a fall in price action
to below the low in the middle of the valley.
Conjecture surrounds the relationship between the two
peaks and the maximum variation in price as an
acceptable difference. 3 5% variation between the
two prices seems to be where the major consensus lies; I
have found 5% variation to be acceptable.

A Comprehensive look at Trading Patterns

SEPT /OCT 2009

As an example, if the first peak is at $10.00, the second

peak needs to be between $9.50 and $10.50. Once the
variation becomes larger than 5%, the reliability of these
patterns falls away.
A horizontal line drawn from the low point in the valley,
between the two peaks forms the neckline of the
pattern; this is the critical element in the confirmation of
a double top pattern.
The confirmation which seems to be the most reliable is
a close below the neckline. Patterns of this type which
do not work tend to have a price penetration, but no
close, below the neckline. I believe that the close below
the neckline gives a much higher reliability to the
pattern, and therefore higher probability in its overall
use. These conclusions have been drawn from work I
have collaborated on with Rob Lennox (trader and Dean
of Studies, Australian College of Financial Education and
Leon Wilson (trader and
author, The Business of Share
Trading and Next Step in
Breakthrough Trading)

Their real strength is to confirm a continuation entry,

which occurs after this confirmation, because the
reliability of the pattern reaching its target is higher than
the probable support/resistance levels exhibited by
previous low or high turning points.
We can use the target price of the pattern to give a
stronger support/resistance level, and therefore
calculate our risk management and reward-to-risk ratios
on this level, rather than on intervening levels. This
enables us to enter transactions which we would
otherwise have been kept out of, based upon these
intervening levels.
This is Coles Myer Limited in January 2000. We have a
clear trend coming into the peak of the week ending 0502-1999, followed by a low week ending 23-04-1999,
followed by a peak week ending 13-08-1999.

A similar interpretation can be

applied to a double bottom,
the reverse of a double top.
Here price action falls, rallying
to give a high point, retracing
to give a second low (within 5%
of the price of the previous
low), then rallying again. We
then need to see a close above
the neckline formed from the
ridge between the two lows.
There are many trend change
techniques that help identify
entry signals for either long or
short positions and which occur earlier than any signal
given by the pattern and its confirmation. However, the
double top/bottom pair of patterns seems to be
unreliable for a trade entry from the pattern itself.

The Educated Analyst | 44

A Comprehensive look at Trading Patterns

Source: Market Analyst 6 (www.Market-Analyst.com)

SEPT /OCT 2009

We can also see three penetrations and one touch of the

neckline prior to the last week, and here we can clearly
see there is a close below the neckline of the week
ending 21-01-2000. It is this close below the neckline
which confirms the pattern and gives it the reliability.
To calculate the price target for a double top, draw a line
across the two peaks of price, then measure the distance
from this line to the neckline of the pattern and project
this distance down from the neckline value.
As we can see in this instance, the target was achieved
and penetrated in 17 weeks and the target overrode the
previous support/resistance levels from October 1998.
A double bottom is merely the reverse of this procedure.
We will finish Double Tops and move to Head &
shoulders in the next article.

About Peter Varcoe

Peter started learning about trading with Wallstreet Group
from Melbourne in 1999. He then joined the company to head
up the Queensland Branch in March 2000. He left Wallstreet
Group during 2002 and Joined Stock Market Investors Group to
help with their program of educating Primary Producers, and
for the next 2 years was educating Primary Producers in
Peter joined Australian College of Financial Education as Senior
Lecturer in 2005 and contracted to them for education, a
Peters experience is mainly in shares and CFDs but Forex is
filtering its way into his trading for future incorporation. He
has done many thousands of hours work with patterns, in
particular, flags, pennants, triangles and has developed some
very specific, reliable techniques around these continuation
Peter heads up Aztec Trading & Training which is a subsidiary
of WIN Financial Group incorporating WIN Financial Network
and WIN Investors Club.
Peter Varcoe can be contacted

The Educated Analyst | 45

A Comprehensive look at Trading Patterns




SEPT /OCT 2009