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www.traders.com JANUARY 2017

Seasonal TRENDS
A hybrid approach
to optimize results 8

Anatomy Of A
Analyze and profit
from world events 12

Be Your Own
Hedge Fund
Approach the market
like the pros do 16

Ichimoku Charts
We take out the mystery 20

Denis Globa on trading
system development 34

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Economics 101

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Why is IBKR the least expensive broker?

Because it does more trades.

How did we get here?

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CONTENTS JANUARY 2017, Volume 35 Number 1

FEATURE ARTICLE 28 ETF Sector Investing

8 Use Seasonality To Optimize by Leslie N. Masonson
Interested in learning more about
Algorithmic Strategies using exchange traded funds in 48 Mean-Reversion Daytrading
by Karl Montevirgen your trading? This month, we look by Ken Calhoun
Its not uncommon for markets to at factor-based ETFs, as compared TIPS
Last month, we discussed swing
trend based on seasonal patterns. to the more traditional market- trading mean-reversion pivot
So when your system doesnt capitalization weighting approach. entries. This month, we continue
seem to be giving you the returns
on the same topic but this time for
you were hoping for, it may help
30 Futures For You daytrading.
to turn to seasonality analysis
to try and optimize your trading by Carley Garner
system. Heres how the futures market AT THE CLOSE
really works. 60 How Feelings Influence
12 The Anatomy Of A Your Trading
Brexit Appointment 32 Explore Your Options by Claudio Demb
by Eva J. Tompkins and Jody Wong by Tom Gentile Trading is emotionally demanding.
A trade occurs every day, hour, Got a question about options? Our feelings dictate our actions
and minute. However, its not and without our being aware of it,
very often that you get to trade by INTERVIEW tend to make us trade irrationally.
appointment. Here, we look at the The first step in battling emotions
entry, management, and target of a
34 The Brains Behind A Trading is to be aware of them.
Brexit trade. System: Denis Globa
by Jayanthi Gopalakrishnan
16 Be Your Own Hedge Fund Denis Globa, CEO of Multi
Charts and TradingView, has
by John Ehlers and Ric Way over 15 years of experience in
Think being your own hedge fund system development and trading
is out of reach? Maybe its time to various asset classes. He founded
rethink it. It could be a lot simpler MultiCharts trading platform and WEBSITES FOR TRADERS
than you expected. TradingView online trading com- 40 Barchart.com
munity with the intention of bring- Market data platform
20 Ichimoku Charts ing trading system development to
by Rudy Teseo the hands of retail traders.
Some indicators may appear to be DEPARTMENTS
more complicated than they really 38 Q&A 6 Opening Position
are. Here, we dissect ichimoku by Rob Friesen
charts and take the mystery out of 7 Letters To S&C
them. This professional trader answers 47 Trade News & Products
a few of your questions.
50 Traders Tips
24 EarningsWill Performance 56 Futures Liquidity
44 What Now For Banks?
Trump Fundamentals? by Koos van der Merwe
57 Advertisers Index
by Bani Arora As we search for investing op- 57 Editorial Resource Index
You often base your trades on portunities in the new political 58 Books For Traders
opinions, and those opinions can environment, how attractive are
be wrong. Whats the best way 59 Classified Advertising
the banking stocks? Well take a
to hedge your positions for those look at a few of them.
59 Traders Resource
times when you could be wrong?
Heres one way. This article is the basis for n Cover: Roy Wiemann
TIPS Traders Tips this month.
n Cover concept: Christine Morrison/Roy Wiemann

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January 2017 Volume 35, Number 1
Opening Position
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eve been through the debates, cam-
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Build powerful
expressed in this column do not necessarily represent those of the magazine.Editor trading systems in
Vertical Runup When I studied my stock data pro-
without coding
Editor, viders available stocks from May 2008 to
I enjoyed readi ng August 2011, it had delisted 1,846 stocks
Thomas Bulkowskis in just a little over three years.
article Vertical Run- From 1995 to now, only a little more

up in the November than 1,000 stocks have survived being

2016 issue of Technical listed for that entire 20+ years in my
Analysis of Stocks & providers database, even though they
Commodities. I have a few questions if routinely provide about 7,000+ stocks
the author doesnt mind. at any given date.
Ed S.
1. In his chart in Figure 1, there ap- 301.662.7950
pears to be a six-bar vertical runup Author Tom Bulkowski replies:
that he did not use for this article. Was 1. I think youre referring to the vertical
that because it met his criteria but run that begins on October 2, 2015. I NOTE FROM A BOOK AUTHOR
wasnt needed for this article, or did wanted to show the two different types AND READER
it fail his eye test/criteria? It looks to of outcome after a vertical run, so thats Editor,
me that it does run up for the four-bar why I only highlighted the two shown in I am the author of six books related to
minimum before there is a consider- the figure. The study ended in November trading system development. I have been
able overlapping bar (similar to the 2013, so this figure was not included in a subscriber to Stocks & Commodi-
one identified as EF with overlap at the study. ties for many years and enjoy each and
bar 5). It also has two smallish bars every issue.
similar to the one identified as AB. 2. I have two databases that I use for Howard Bandy
Were either of those two aspects my research. One is for stocks that I fol-
reasons for exclusion? low daily. The other is an archive that We interviewed How-
contains stocks that have merged with ard Bandy, who is
2. I noticed in a response from other companies, that no longer trade an expert in system
Bulkowski to a letter to the editor (for whatever reason), or that I choose to development, statis-
that also appeared in the November no longer follow. I use both databases in tics, math, computer
2016 issue that he uses his own stock my research. I understand your concern science, and modeling,
charting software. I was wondering about survivorship bias. among other things,
if his charting software/database in the November 2015 issue of S&C
includes charts of stocks that are no Thanks for writing, Ed. (available to subscribers in the article
longer listed or if it just includes the archives at our website, www.traders.
survivors/stocks currently listed with Editor: Thomas Bulkowskis latest book com). He published a new book in Au-
available quotes? is Chart Patterns: After The Buy (www. gust 2016 titled Foundations Of Trading:
thepatternsite.com), which provides Developing Profitable Trading Systems
That could possibly have an effect on more information and statistics on the Using Scientific Techniques. (See our
the statistics of his chart study in terms vertical runup pattern, including a Books For Traders section in this issue
of quantity of vertical runup candidates frequency distribution that may help for a description.)Editor
and/or bull market performance of those readers gauge when a vertical run will
stocks that survived the entire 18-year end and the behavior that followed.
study period. Continued on page 42

January 2017 Technical Analysis of Stocks & Commodities 7

8 January 2017 Technical Analysis of Stocks & Commodities

Make The Most Of Your System

Use Seasonality To Optimize

Algorithmic Strategies
Its not uncommon for markets to trend based on n System conjures up the image of an intelli-
seasonal patterns. So when your system doesnt seem gently structured set of rules and parameters
to be giving you the returns you were hoping for, it n Robo-investing elevates software-driven
may help to turn to seasonality analysis to try and speculation to the level of a responsibly man-
optimize your trading system. aged portfolio
n Blackbox signifies a market approach that is

arket seasonality and algorithmic strate- proprietary, non-transparent, and non-modifi-
gies are two distinct concepts that offer able.
a potential edge to traders and inves- Taken as a whole, an algorithmic strategy conjures
tors who use them wisely. Seasonality up the notion that it is strictly a hands-off system,
provides statistical transparency on recurring patterns that you are not privy to the details of its mechanism
of market behavior. Algorithmic trading systems (its a black box), and that you should not intervene
employ proprietary technologies and differentiated by turning it on or off. There is some truth to this,
approaches to analyzing and engaging markets with and some systems have demonstrated robustness.
speed, accuracy, and automation. Nevertheless, there is a possibility that seasonality
Each approach envelops its own unique set of po- can be used to optimize or enhance certain strategies
tential. In this article, Ill explore the advantages that without interfering with their internal logics.
might be created by combining them. Ill begin by
taking a look at the advantages that each approach The seasonality advantage
has to offer. Traders who use seasonality to inform their trading
decisions look for recurring buying and selling trends
The algorithmic advantage within a calendar year. The notion of recurrent sea-
An algorithmic strategy runs according to its own sonal patterns is fairly easy to grasp with regard to
coded logic. Every person who subscribes to an certain commodity classes like agriculture (affected
algorithmic system is motivated by the prospect of by weather, planting, and harvesting seasons), energies
possessing a technology that can outsmart com- (supply/demand patterns correlate with summer and
mon approaches to the market, analyzing assets from winter patterns), and precious metalsparticularly
a unique vantage point, and executing trades with gold, whose demand tends to peak during Indias
superior calculating power and speed. wedding season (among other fundamental factors).
The term algorithm strategy brings up a number of The strength of seasonal trends may be histori-
synonymous concepts like automated trading systems, cally consistent but it cant be treated as an accu-
robo-investing, and blackboxes to name a fewall of rate predictornot all years will show correlation
Roy Wiemann

which house implicit assumptions: between prices and seasonality patterns. But that
historical consistencies exist is evidence enough that
n Automated implies hands-off trading (that economically driven transactional activity may be
is, it runs by itself) the driving force behind these price patterns. Its

by Karl Montevirgen
January 2017 Technical Analysis of Stocks & Commodities 9
the rise of gold demand in this two-month period
Average Gold Performance Since 1975
was partially attributable to the Indian wedding
Monthly average gain/loss in gold 19752013 season among other fundamental factors.
Step 2: Set rules for modifying the strategies. I
1.5% allowed for only long positions during the months
of August and September. The reason for this
1.0% decision was pretty simple: Since August and
September seasonality reflected high demand for
gold, why not follow the historical trend?
Step 3: Select the strategies. Its ideal to have a
-0.5% bunch of systems to choose from. For example,
I can choose from nine algorithmic systems that
-1.0% focus solely on gold futures. Among those nine,

I chose four that represented the entire range of

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec performancefrom most to least profitable. Each
system traded differently: Some were daytrading
Figure 1: SEASONALITY IN GOLD. Gold has shown a consistent uptrend during the months of
systems while others took swing or position trades,
August and September. one traded long-only positions, and one was always
in the market, while the rest took both long and
short positions at different times (Figure 2).
also interesting to note that seasonal buy/sell regularities in Note: Each system combines live and hypothetical results
certain commodities have remained prevalent despite fun- depending on different points in its lifecycle.
damental bull or bear market conditions.
Step 4: Isolate August and September trades and compare
A seasonality/algo hybrid longs and shorts. I focused on the August and September
Using seasonality to optimize a strategy means emphasizing trades, differentiating performance results between com-
longs when seasonal patterns trend upward and shorts when bined long/short trades versus long-only trades. The charts
seasonal patterns trend down. In other words, you would use in Figures 3 & 4 show the results.
seasonality to turn on or off buy/sell signals in months that
seasonal patterns tend to be statistically strong. Comparing performance and efficiency
Does the number of long versus short trades matter when a
Testing the hybrid approach market is trending up?
If seasonality can optimize a well-performing algorithmic Ill start with system 1, which was the best-performing strat-
strategy by emphasizing longs or shorts, then might it also be egy. Among the long trades, 85.4% were profitable. Among the
capable of optimizing a poorly performing strategy as well? This short trades, 91.7% were profitable, but there were significantly
is what I set out to explore, and here are the steps I followed. fewer short tradesin total, 48 trades were long positions while
only 12 were short positions.
Step 1: Identify a seasonal pattern. I decided to focus on It is true the short trades contributed to the overall profitability
the gold market. Based on a 38-year seasonality chart of of this system. But its also hard to argue against the fact that
gold, the months of August and September had consistently system 1s profitability was attributable to the fact that it had
shown a significant uptrend (Figure 1). As mentioned earlier, four times more long trades than short trades.
I also noticed
the following about
Strategy Year of Inception Type Annual ROI Profit Factor Worst Drawdown Total P/L systems 2 and 3:
Short trades had a
System 1 2008 Swing trading +98.8% 2.16 ($9,010) $230,304 good win rate and
were profitable, but
System 2 2007 Day trading +63.1% 1.68 ($5,774) $174,236 there were between
two to three times
System 3 2006 Swing trading +59.8% 1.88 ($5,058) $127,699 more long trades
Position than short trades.
System 4 2007
(always in market)
+11.6% 1.16 ($44,273) $162,533 The takeaway:
Figure 2: select the strategies. Here you see a summary of the performance of four trading systems that focus on trading gold Based on these ob-
futures. servations, staying
10 January 2017 Technical Analysis of Stocks & Commodities
Long vs Short PL (in points) Long vs Short % of Total PL
350 System 1
250 System 2
150 System 3
50 System 4
System 1 System 2 System 3 System 4 0% 20% 40% 60% 80% 100%
Long Short Short Long

FIGURE 3: LONGS VS. SHORTS FOR AUGUST AND SEPTEMBER TRADES. Here FIGURE 4: Does the number of long vs. short trades matter when
you see the performance of long and short positions in points. a market is trending up? Staying with the seasonality trend makes a big
difference. All three systems with completely different trading rules and parameters
correspond with the seasonal long bias.

with the seasonality trend has shown to make a big difference,

as all three systems with completely different trading rules and You would use seasonality
parameters corresponded with the seasonal long bias.
to turn on or off buy/sell
System 5s inefficiencies signals in months that
System 5s performance, an always-in-the-market system, seasonal patterns tend to be
revealed the inefficiencies of taking short positions during a statistically strong.
historically uptrending season. Its long positions contributed
to 94.9% of the total positive P/L. That the short positions con-
tributed a mere 5.1% to the total profits brings up a question:
How necessary were the short trades? Explore seasonality
System 5 took 16 long and 15 short trades, an almost perfect Not all strategies will prove to be robust, and you should have a
50/50 ratio. Yet the long trades made the bulk of the profit. This solid working knowledge as to when to keep or ditch a system.
means that the short tradeshalf of the total trading for the But if you are going to intervene with a system, its best to do
months of August and Septembernot only contributed a mere so with objective criteria. Seasonality analysis is one possibil-
5% in profits, but they racked up a lot of unnecessary trading ity that you might want to explore to optimize your strategies.
costs. Hence, the trades were highly inefficient. It provides historically based parameters and probabilities to
help you better manage your decisions.
How to manage a seasonality-driven
algo portfolio Karl Montevirgen is a content designer/strategist at Halifax
The possibilities for this hybrid approach open up a poten- America LLC, a stocks/option, futures, and forex brokerage
tially promising area of research. We encourage you to further in Sherman Oaks, CA. In addition to creating and designing
research this approach in different markets that show strong content, he has extensive knowledge of and experience with
seasonal patterns. commodity futures and foreign exchange. He can be contacted
Sadly, many people who subscribe to or follow algorithmic through the Halifax America website at www.halifaxamerica.
strategies carelessly alternate between systems, or they turn com or by email at kmontevirgen@halifaxamerica.com.
systems on and off based on nothing other than equity draw-
down. They do this even if drawdown falls within expected Further reading
predetermined ranges specified by the developer. In other words, Montevirgen, Karl [2015]. Calculating Pip Values, Technical
people agree to subscribe to an algorithmic product yet tamper Analysis of Stocks & Commodities, Volume 33: April.
with the product without any clear or objective basis. [2014]. Position Sizing In The Spot Forex Markets,
When people do this uncritically, it is usually because they Technical Analysis of Stocks & Commodities, Volume
dont have an understanding of how a system works and are 32: April.
uncomfortable with losses (even if the losses fall within ex- Katz, Jeffrey Owen, with Donna L. McCormick [1997]. Sea-
pected parameters), or they believe they can contribute to the sonality And Trading, Technical Analysis of Stocks &
systems performance, or they dont have sufficient risk capital Commodities, Volume 15: April.
to trade the strategy (which means they shouldnt be trading
it in the first place).
January 2017 Technical Analysis of Stocks & Commodities 11
Make A Date With Opportunity

The Anatomy Of
A Brexit Appointment
A trade occurs every day, hour, and minute. However, its not pursuant to a set of trading rules. Unlike the intervention of
very often that you get to trade by appointment. Here, we look the Bank of Japan on March 18, 2011 or the Swiss National
at the entry, management, and target of a Brexit trade. Banks removal of the peg of the Swiss currency to the euro
on January 15, 2015, the Brexit (Britain exit) trade could be

by Eva J. Tompkins and Jody Wong anticipated and planned using both fundamental and techni-
cal analysis. The appointment was set for June 23, 2016 at

he referendum of the United Kingdom (UK) on June 5:00 pm EST.

23, 2016 that would decide whether the UK would exit A completed trade is like a good story. There is a begin-
the European Union (EU) was an opportunity to cre- ning (entry), a middle (trade management), and end (when you
ate a GBPUSD trade that could be planned in advance exit the trade and make your profit). Fundamental traders had
12 January 2017 Technical Analysis of Stocks & Commodities

information from both sides of the

Brexit issue. The media had labeled
this event as Brexit or British exit
from the EU. The event could have
just as easily been labeled Bremain
or British remain with the EU, but
it wasnt, so already, a bias had
been created by the media toward
the exit of the UK from its 27 EU
Pro-exit supporters argued that
with the passing of Brexit, food
costs would go down, a health sav-
ings of 350,000 would occur, the Figure 1: trading channels within a trend. Channel traders would look for price to rise into an entry at
immigrant onslaught would not oc-
cur, and the United Kingdom would
be independent. The argument for
remaining in the EU was that a UK
recession would be avoided, the UK
would not appear to be xenophobic,
and the economic prosperity that the
UK enjoyed since entering the EU
in 1973 would continue.
Upon conclusion, the fundamental
traders would surmise that the GBP
will go down if Brexit passed, and up
if it did not pass. With the passage of
Brexit, traders would flee to the JPY
and CHF, causing these currencies Figure 2: trading with bollinger bands. When price breaks the upper Bollinger Band, you would consider the
to go up in value. price high and look for an entry for a short/sell position. Here, price initially pierced the Bollinger Band at 1.4829.

The entry
A trade can only go up, down, or sideways. With Brexit, there
were only two of the three choices available, up or down. A completed trade is like a good
There are differing lengths of time for staying in a trade, and story. There is a beginning (entry),
that measure depends on the emotional personality of each
individual trader. A position trader is willing to hold a position a middle (trade management), and
for a period longer than a few weeks. A swing trader will hold end (when you exit the trade and
a trade for a few days to several weeks, and a daytrader will make your profit).
typically be out of the trade by the end of the trading day.
There are numerous styles of trading and these, too, depend
on the emotional personality of the trader. We will be analyzing to rise into an entry at 1.4740. In Figure 1, traders can see an
the Brexit trade using different styles. The highest probability entry of 1.4740 as price returns to the top of the channel.
for a profitable trade entry is a confluence of styles that overlap Bollinger Bands measure price volatility. It is an indicator
approximately at the same entry price. Of the three main ele- that typically expresses bands as a 2% deviation for a 20-period
ments of a tradeentry, management, and targetthe entry moving average. The purpose of Bollinger Bands is to provide
is the most important because the entry will determine the a relative definition of high and low. When price breaks the
amount of risk in the trade. Without a high-probability entry, upper Bollinger Band, you would consider price as high and
there will be no trade to manage or money to be made. look for an entry for a short/sell position. In Figure 2, price
For our trade analysis, we will be looking at the GBPUSD, initially pierced the Bollinger Band at 1.4829.
since the USD is the reserve currency of the world. The polls Fibonacci or harmonic trading uses specific price pattern
in the UK closed at 5:00 pm EST and the first results reported ratios to determine turning points in the market. These turning
were that the UK would be leaving the EU. The GBPUSD points are based on the idea that patterns are predictive since
began to rise from 1.4520. they repeat themselves. In Figure 3, price has hit a Fibonacci
Channels help locate optimal buying and selling points while extension of 127.2 or a price point of 1.4934 for entry on the
trading within a trend. Channel traders would look for price day of Brexit.
January 2017 Technical Analysis of Stocks & Commodities 13
which are major whole numbers and
a possible Brexit entry. The levels
at whole numbers are considered
psychological levels or comforting
for many traders and thus a higher
degree of strength or probability
is assigned to these more rounded
levels. Major whole numbers are
followed by major quarters, minor
wholes, and minor quarters. In the
context of the GBP, these numbers
have double zeros except for the
minor quarters.
FIGURE 3: TRADING FIBS OR HARMONICS. Here, price has hit a Fibonacci extension of 127.2 or a price point of For example, looking at the chart
1.4934 for entry on the day of Brexit.
in Figure 5, if you trade whole num-
bers, youd concentrate on the selling
level at 1.5000. In Figure 6, you can
see the range of 1.4776 to 1.5100 as
a legitimate, rule-based entry region.
On a daily chart, the difference in
this range was 324 pips.
Heres where it gets interest-
ing. The best of the five possible
entriesbased on either channel,
Bollinger Bands, Fibonacci, unfilled
sell orders, or whole numbers was
the whole number of 1.5000. This
level was also suggested by the
FIGURE 4: TRADING BASED ON PRICE ACTION. Here you see that price rose into a previously untested level trading media on television. Based
(1.49601.5100), represented by a bearish candle where unfilled sell orders were found. on the move away from this 1.5000
level, a trader could see there was a
great amount of imbalance at this
level. The trader could tell this by
the manner in which price exited
this levelwith a strong move out
and displaying force.

Managing Brexit
The management of a trade is the
yin and yang of all traders. Traders
want to be conservative and give
price enough room to breathe, or
move, so that they do not get stopped
out. Traders also have an aggressive
FIGURE 5: PSYCHOLOGY OF WHOLE NUMBERS. If you trade whole numbers, you would concentrate on the mindset and want to get as much
1.5000 selling level.
profit from the trade as possible, as
soon as possible, while minimizing
Price action trading tells you what is and has happened risk. While price is moving in a profitable direction, there are
on a chart without relying on an indicator. The trader of this several styles of trade management that could be used to stay
style looks for size, position, location, shape, and character in the trade and maximize profit. Some trade management
of each candle that helps to identify the unfilled buy and sell styles include, but are not limited to, the use of a trendline,
orders. In Figure 4, price rose into a previously untested level an average true range (ATR), a moving average, and moving
(1.49601.5100) represented by a bearish candle where unfilled your stop while respecting lower highs.
sell orders were found. A down trendline consists of a minimum of two, but ideally
Whole number traders represent simplicity by placing their three, points: a high point in price, a lower high to define the
entries, stops, and targets on double zeros such as 1.5000, downtrend, and a third lower point for confirmation of the
14 January 2017 Technical Analysis of Stocks & Commodities
strength of the trend. A trendline
would not have been viable in this
trade because the next lower high
created a steep angle that would have
an immediate trendline break.
An ATR measures the average
length of a candle on the trade time-
frame. If you had used an ATR, you
would have been stopped out on the
first 30-minute candle when price
reacted with a pullback of 250 pips. If
you entered at 1.5000, price created
a cushion of 40 pips after the first
FIGURE 6: LOOKING AT THE WHOLE PICTURE. Here, it is clear that the range of 1.4776 to 1.5100 is a legitimate,
half hour. The art of this trade was rule-based entry region. On a daily chart, the difference in this range was 324 pips.
to make the next 1,650 pips in profit
before exiting the trade.
A trader also had the option of add-
ing onto this trade or taking profits
as price moved to a projected target.
In Figure 7, you see that if you used
a nine-period simple moving average
(SMA) you would have stayed in the
Brexit trade and exited when price
broke this moving average.
A stop is the traders insurance
policy. If you are wrong about the
degree of price movement, then you
will be stopped out for a profit or
a small loss. As price moves, you FIGURE 7: TRADE MANAGEMENT. If you had used a nine-period simple moving average for your trades, you would
could move your stop to respect have stayed in the trade until price broke the moving average.
lower highs. This method seems
simple, but traders have a tendency to
become emotional and follow price
too closely with their stops such that
price does not have the ability or
distance to move. In Figure 8, you
see that if you had moved your stop
to respect lower highs, you would
have stayed in the Brexit trade.

Taking profit and

exiting Brexit
The satisfaction of having completed
a profitable trade is achieved when
FIGURE 8: using stops. Here you see that if you had moved your stop to respect lower highs, you would have
the profits are taken. Unlike unreal- stayed in the Brexit trade.
ized profit, realized profit can be used
to pay bills and buy groceries.
The turning points in the market that are seen by Fibonacci number of 1.3000, and the 1985 low. In Figure 10, the vari-
traders are used for entries and exits. Fibonacci or Harmonic ous styles of trading with anticipated targets for the Brexit
trading uses specific price pattern ratios to determine turning trade include channel, Fib number, whole number, and the
points in the market. These turning points are based on the 1985 low.
idea that patterns are predictive since they repeat themselves. After the passing of Brexit, a ripple effect was generated
In Figure 9, the target of 1.3351 was forecasted by Fibonacci in multiple markets. Gold soared past $1,300.00 dollars. The
traders at 261.8. yields on German and Swiss bonds sank into subzero territory,
Other possible exits, or predetermined target options for a
trader, included the bottom of the daily channel, the whole Continued on page 31
January 2017 Technical Analysis of Stocks & Commodities 15
Go Solo

Be Your Own Hedge Fund

Think being your own hedge fund is out of reach? Maybe In this article, well address each of these concerns and show
its time to rethink it. It could be a lot simpler than you you that yes, you can in fact be your own hedge fund. That is
expected. to say, you can manage your own money using proven trading
signals while reducing your exposure to risk.

by John Ehlers and Ric Way
You have experience
hedge fund is an aggressively managed portfolio of That you are reading this proves you are almost halfway to
investments that uses advanced investment strategies the goal of having enough experience. You must be thought-
with the goal of generating high returns. Though ful, able to consider alternatives, and be willing to learn from
that sounds daunting, you can do this on your own. others. Everyone has to start someplace, and the advantage
Whats holding you back from trying? You are prob- of learning is that you are exposed to the experience of oth-
ably thinking: ers. Often, education is expensive. But it doesnt have to be.
You can assimilate the experience of others and learn from
I dont have the experience to be a successful trader. their mistakes.
I dont know how to formulate a trading strategy. The problem with learning from others trading experience
I dont have the technology for an advanced investment is that there is a wide diversity of opinion of what a success-

strategy. ful trading style is. Your trading style is a selection that only
I am worried about the risks of trading. you can make, depending on your preferences and comfort
I dont have time. Managing a fund is a full-time job. zone. The first biggest choice is whether you want to follow
I dont have the capital to start a fund. fundamental data or technical considerations. If you prefer
I dont know the legality of running a hedge fund. fundamentals, your best approach to being your own hedge
fund would be to find a combination of stocks and bonds that
16 January 2017 Technical Analysis of Stocks & Commodities
Noisy indicators
delay your analysis
place you on the efficient frontier using modern portfolio
theory. Basically, this means you have a mix of instruments
using random variables that gives you the best tradeoff between
risk & reward. It does not necessarily mean the strategy has
the goal of generating high returns.
Since you are a reader of this magazine, you probably prefer
the technical analysis approach. So lets start with that. Jurik algorithms
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Come up with a strategy low noise analysis
Within the umbrella of technical analysis, there is still a
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If you prefer trend trading, you will necessarily have to be
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tion, you will have to estimate when the onset of a trend has
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We prefer short-term trading due to the cyclic content in the
data. Whats behind some of this cyclic content? In a nutshell,
companies have to make their numbers on a monthly basis. past to be a prolog. A minimum requirement for the track
Our experience is that the monthly cycle is measurably present record would be that it has been established long enough to
in the data, and is there with sufficient regularity to give you a cover several kinds of market conditions and should have a
decided edge in your trade entries & exits. In round numbers, sufficient number of trades so the estimates of profit factor
a month cycle consists of a 10-day move up and a 10-day move and percent winning trades are statistically significant. If there
down. If you are only taking long positions, you will have an are a number of variables constituting the trading system, an
average trade duration on the order of 10 days. This means old rule of thumb is that the track record should have at least
your average risk exposure is less than it would be if you were 30 trades per variable. For example, a simple moving average
expecting the trend to be your friend. This
strategy is simple: Buy on a cyclic trough and
exit the trade on a cyclic peak. 1
The necessary technology 0.8
You say you dont have the technology for an
advanced investment strategy? Balderdash! 0.7
The Internet is teeming with vendors vying 0.6
for your attention. Even our own website,
www.StockSpotter.com, fits this category of
Internet-based services that provide trading 0.4
signals or strategies to implement. It is your 0.3
obligation to do due diligence and to assess
the experience, credibility, and track record of 0.2
any vendor attempting to license their trading 0.1
signals to you.

Manage your risks

-$4,000 -$2,000 $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000

About the only way to evaluate basic potential FIGURE 1: NORMALIZED PROBABILITY DISTRIBUTION. Here you see a normalized example of the
probability distribution resulting from the Monte Carlo simulator by being fully invested in one stock at a
risk is to examine a historical trading track time for a year. It creates credible annual statistics from real historical trades where 100% investment is
record. Its another example of expecting the achieved by trading one stock at a time.

January 2017 Technical Analysis of Stocks & Commodities 17

aspx. Figure 1 shows a normalized example of
0.9 the probability distribution resulting from the
0.8 Monte Carlo simulator by being fully invested
in one stock at a time for a year.
From the central limit theorem, it is no
0.6 surprise that the Monte Carlo simulator
0.5 produces a normal probability distribution.
From these statistics, you can easily estimate
0.4 your expectation (the average profit you can
0.3 expect) as well as the one-sigma and two-
sigma points on the curve. In this case, the
probability of breakeven or better is outside
0.1 the lower one-sigma point, but the probability
0 of having a loss is still uncomfortably high.
-$4,000 -$2,000 $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 But we can fix that.
FIGURE 2: AN INCREASE IN THE NUMBER OF STOCKS. If you trade four different stocks in parallel
It is well-known in statistics that if you
using random selections, the variance of the probility distribution is halved. In other words, it reduces double the number of independent elements
the annual probability of a loss. in your random sampling, you reduce the
variance of the distribution by the square
crossover system has the length of the two moving averages as root of two. So if you increase the number of stocks being
variables, and thus a minimum of 60 trades using the system traded simultaneously by a factor of four, you will halve the
should be used for the track record. This rule prevents curve- variance of the probability distribution. Figure 2 shows what
fitting by optimization. happens when you trade four different stocks in parallel using
Since we are dealing with random variables in the market, random selections.
we think the tests for risk should be far more stringent than Figure 2 shows that your expectation will not increase be-
using just a single equity curve. The variations in equity curves cause your total capitalization is spread across four stocks at
from test to test can be substantial, even when the system has a a time instead of simply being continuously invested in one
high profit factor and high percentage of winning trades. Risk stock at a time. You can reduce the variance still more by add-
is particularly important when you start trading because the ing more stocks. For example, if you traded eight stocks at a
risk of ruin is higher than after you have had a chance to build time, you would halve the variance again. However, reducing
equity based on your trading results. A better way to evaluate the variance quickly reaches a point of diminishing returns,
trading risk is through the use of a Monte Carlo simulator. and you are also taxing the amount of capitalization you can
Heres how a Monte Carlo simulator works: First, take all afford. In general, trading four stocks at a time is adequate
the trades in your history and create another list consisting of to reduce the probability of an annual loss in a well-designed
the profits per day for each day. Then take all of these profits system.
per day and drop them into the proverbial hat (of course, we
will be doing this process on a computer). Randomly draw Strategy pas de deux
the profit per day from the hat, record it, and place the profit Your hedge fund strategy needs a small revision to reduce risk.
per day back in the hat. By repeating the drawing process 260 That is, you want to develop four channels in which to trade.
times, you have simulated a years worth of trading using ran- The trade signals and timing are completely independent in the
domly selected results. Now, repeat the annual process 5,000 four channels and the trade timing is unsynchronized. This is a
or 10,000 times and you have just simulated 5,000 or 10,000 small but crucial modification of the original strategy, because
years of trading using your real track record history. Thats these four channels halve the variance in your returns.
enough random data upon which to create credible statistics
on what you can expect from your trading system. Time is no obstacle
You can find an example of a Monte Carlo simulator at http:// It is easier to manage your hedge fund than you may think.
With over 5,000 stocks and ETFs in the US markets, there
are plenty of trading opportunities every day (not counting
penny stocks, OTC stocks, and the like). Just grab your trading
In general, trading four stocks signals from the Internet every day and apply them to your
at a time is adequate to reduce four trading channels. For example, at StockSpotter we give
the probability of an annual explicit entry signals and exit signals on open positions, in
loss in a well-designed system.
Continued on page 49
18 January 2017 Technical Analysis of Stocks & Commodities
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One-stop chart
Separating the various components of
the ichi seems to thwart the purpose of
the ichimoku, which, in Japanese, means
at a glance. In one indicator, we get
insight into trend, buy/sell crossovers,
support & resistance, stop-loss points,
and the future potential of a stock under
analysis. Still, studying the five plots
individually will emphasize the part
each plays in the analysis.
Heres a tip. Learning these Japa-
nese terms is not easy, so I assigned an
arbitrary A, B, C, D, and E to the five
plots on a printout of the cloud and
then studied the rules without regard
to the names.
Figure 1 shows the ichimoku clouda
lot to swallow in one gulpwith the five
plots. The five plots, in a nutshell, are:

Tenkan-sen (conversion line: blue

(H + L)/2
default period = 9

Kijun-sen (baseline: red line)

(H + L)/2
default period = 26

Chikou span (lagging span: dark

green line)
The closing price shifted back 26

Above The Clouds Senkou A (leading span A: green

Ichimoku Charts
(Tenkan-sen + Kijun-sen)/2

Senkou B (leading span B: red line)

(52-period H + 52-period L)/2
Some indicators may appear to be more complicated than they really are. Here,
we dissect ichimoku charts and take the mystery out of them. Note that leading spans A&B are
shifted forward 26 bars.

by Rudy Teseo
Figure 2 shows the tenkan-sen (blue)
hese days, you have to be careful when you use the word cloud. You have and kijun-sen (red). When these are
to be sure your listener knows whether youre referring to some server in viewed without the surrounding distrac-

the sky or an indicator used by stock chartists (technical analysts). tions, we see our old friend, the moving
Im a latecomer when it comes to the ichi. Like many traders, I took average crossover, reveal itself. You
one look at the indicator and said, No, not for me; there are a lot simpler could analyze the blue and red lines in
indicators that I still havent mastered. And when I couldnt find it in Steve Achelis relation to each other and also in rela-
Technical Analysis From A To Z, that was the death knell. tion to the cloud itself. Heres where it
But then I received an email offering a free ichi ebook, which I downloaded. is similar to moving average crossovers.
Within 15 minutes I was starting to think differently about this indicator. I then When the shorter period line (blue) is
watched a couple videos on the topic at TC2000.com and was hooked. above the longer period plot (red), the
20 January 2017 Technical Analysis of Stocks & Commodities
trend is positive. If
both plots are also
above the cloud, then
the positive trend is
further reinforced. A
buy signal is gener-
ated when the tenkan
sen crosses above
the kijun sen, while
the tenkan sen, kijun
sen, and price are
all above the cloud.
The reverse of these

signals indicates a
negative trend.
Figure 3 shows
FIGURE 1: THE FULL PLATE. On this chart of Dr. Pepper Snapple Group (DPS), you see a full ichimoku cloud with all five plots.
the cloud plot. When
prices are above the
cloud, the trend is
up. When senkouA
is rising and above
senkouB, the up-
trend is strengthen-
ing. When tenkan
sen and kijun sen
are above the cloud
and price is in an
uptrend, then tenkan
sen, kijun sen, sen-
kouA, and senkouB
are all viewed as sup-
port. If you added
tenkan sen and kijun
sen to the chart and
FIGURE 2: CONVERSION AND BASELINE PLOTS. When the tenkan sen (conversion line) and kijun sen (base line) plots are viewed
if both are below without the surrounding distractions, they are similar to moving average crossovers. When the short (green) is above the long (magenta),
the cloud and price the trend is positive. If both lines are above the cloud, the positive trend is further reinforced. A buy signal is generated when the tenkan
is in a downtrend, sen crosses above the kijun sen, while the tenkan sen, kijun sen, and price are all above the cloud.
then tenkan sen,
kijun sen, senkouA,
and senkouB are all
viewed as resistance.
This will help in
your entry and exit
Figure 4 shows
the chikou span in
isolation. This plot
is the closing price
shifted back 26 bars.
When it is above the
price, the trend is
bullish; when below
the price, the trend is
FIGURE 3: THE CLOUD PLOT. When senkou A is rising and above senkou B, the cloud is green, which indicates the uptrend is strength-
ening. When senkou A is below senkou B, the cloud will be red, which indicates a downtrend.

January 2017 Technical Analysis of Stocks & Commodities 21

Bringing it
all together
In Figure 5 you see
a bullish configura-
tion on the chart of
Agilent Technologies
(A). Chikou span
is well above price,
tenkan sen is above
kijun sen, senkou A
is above senkou B,
and price is above the
cloud. This makes for
a good model for fur-
ther analysis of this
charting technique.
FIGURE 4: CHIKOU SPAN PLOT. When the chikou span plot is above price, the trend is bullish; when its below the price, the trend Figure 6 shows a
is bearish.
bearish configura-
tion for American
A i rl i nes (A A L).
Chikou span is well
below price, tenkan
sen is below kijun
sen, senkou A is
below senkou B, and
price is below the
cloud. This is another
good analysis model
for bears.

Knowing all this is
just the tip of the
FIGURE 5: BULLISH CLOUD PATTERN. On this chart of Agilent Technologies (A), chikou span is above price, tenkan sen is above proverbial iceberg.
kijun sen, senkou A is above senkou B, and price is above the cloud. It will take a lot of
analysis of your own
portfolio to become
comfortable with
ichi. What I found
most distressing was
that the consensus
of analyst ratings
was often in direct
contrast to what I was
sure was the correct
ichi analysis. That,
of course, made me
monitor those stocks
to see which analysis
proved to be true.
Try it. Youll thank
me later.
Figure 6: BEARISH CLOUD PATTERN. On this chart of American Airlines (AAL), chikou span is well below price, tenkan sen is below
kijun sen, senkou A is below senkou B, and price is below the cloud.
Continued on page 58
22 January 2017 Technical Analysis of Stocks & Commodities
Keep An Eye On Volatility

EarningsWill Performance
Trump Fundamentals?
You often base your trades on opinions, and those opinions information. You analyze your favorite indicators on charts
can be wrong. Whats the best way to hedge your positions for spanning various time periods, flouting its defects and devia-

those times when you could be wrong? Heres one way. tions from perfect order, ignoring the visual mischief that

creates misleading signals, and celebrate your efforts when a

by Bani Arora buy signal appears as a triumphant symbol of your studies.
You are long the underlying stock and it is a tantalizing
ompany XYZ, the largest holding in your portfolio, thought the company will meet, if not beat, Wall Street expecta-
is due to release earnings tomorrow. You open tions and better still, spike up in price following the earnings
up your favorite charting software and focus all release. But the impending unimagined adversities lead to
intellectual efforts on interweaving your technical unfavorable financials and the stock price takes a nosedive.
analysis insights with historical nuggets of earnings You may think the correction is too steep, but remember,
24 January 2017 Technical Analysis of Stocks & Commodities

markets are never wrong, while opinions often are. Markets

have a way of bridging the gap between the priestly technical Options prices can be a prominent
ability of the professional chartist and the blind reaction of leading indicator for predicting the
the intelligent layman who happens not to have acquired the
finesse of the technical analysis vocabulary.
effect of earnings announcements
After all, as Albert Einstein once said, Insofar as the proposi- because they quantify uncertainty
tions of mathematics refer to reality, they are not certain, and and jump effect via an increase in
insofar as they are certain, they do not refer to reality. implied volatility.
Event-based options strategies
The important question is: How do you hedge yourself in
cases like this wherein the future proves you more wrong the increase in implied volatility will still be embedded in the
than right for a stock-specific event? My answer is this: Trade near-term option), and the next-available expiry as the second
options-based strategies. strip for computing the one-day event implied volatility. I will
Assuming youve already studied options basics with fanatic illustrate the computation with an example.
intensity, lets design some event-based strategies to hedge
your bets and use your singular trading genius to minimize What is volatility?
luck and create truly spectacular profits. Before moving ahead, remember you are dealing with volatility,
The first step is to quantify the expected impact of an and as all you mathematical geniuses are aware, volatility is
earnings catalyst on the stock price move. You need insight the square root of variance. Math 101 teaches us that variance
that will reveal valuable information about the markets ex- is additive, while volatility is not. Heres a quick example.
pectations. But where do you get that from? Yes, you guessed If volatility of one option (vol-1) = 23%, then its variance
rightthe options market. (var-1) = (.23*.23) = 5.29%, and if volatility of the second
Before I get into the details of the strategies, Id like to option (vol-2) = 28%, then its variance (var-2) = (.28*.28) =
remind you that for best results, you should trade liquid op- 7.84%. Now, we are mathematically correct when we add var-
tions, both in terms of strike and maturity. As option pros, 1 and var-2 = 5.29% + 7.84% = 13.13%, but we are making
we know that in terms of strikes, the at-the-money (ATM) a mistake if we add vol-1 and vol-2 directly (23% + 28% <>
options (both calls and puts) carry maximum liquidity and 51%). Rather, to get vol-1+vol-2, we take the square root of
tighter bidask spreads, and in terms of maturity, the near- var-1+var-2 = sqrt(13.13%) = 36.24%.
term options are more liquid than the longer-term options. Now that weve that figured out, lets begin the process of
Given that most stocks now also have listed weekly options quantifying the earnings-related one-day volatility.
(vs. only monthly/quarterly options), it has led to increased Say today is Friday, July 1, 2016. Company XYZ is set to
price efficiency, so its a good idea to also add weekly options report earnings on Wednesday, July 6, 2016. Company XYZ
to your options toolbox. also has weekly listed options, so the options with maturity
The question lingers: Why options? The answer is that nearest to the event expire on Friday, July 8, 2016. These options
options prices serve as a prominent leading indicator for will carry a significant bump up in their volatility to reflect the
predicting the effect of earnings announcements by quanti- increased market uncertainty for the forthcoming earnings.
fying uncertainty and jump effect via an increase in implied You use these options to compute the elevated volatility. The
volatility, which is forward-looking. And since the event is next options expiration falls on Friday, July 15, 2016. You
in the future, this serves as an excellent indicator to quantify use these options to deduce the normal volatility. For both
the markets opinion. maturities, use options with the same strike level.
But how do you determine the magnitude of the increase The next step involves stripping out the normal volatility
in options implied volatility attributable to the earnings from the elevated volatility to compute the one-day event
event? The answer lies in deriving the one-day implied vola- implied volatility. Lets work out the details with an example
tility (attributable to the event) from options of two different (see Figure 1).
maturities. To get started in the process, we need to pick the Lets say the implied volatility for the July 8, 2016 options
options maturities. Ideally, you pick one with maturity prior is 46% (vol_1) and that for the July 15, 2016 options is 28%
to the event and the second with maturity after the event, and (vol_2). So, var_1 = (.46*.46) = 21.16%, and var_2 = (.28*.28)
isolate the one-day volatility from the
difference in their variance, that is,
volatility squared. The astute reader Instrument
Time (T) to Expi-
Implied Volatility Variance (var) Var * T/ T-1
might quickly point out: But what if the ration (days)
nearest available listed maturity is only Option 1 4 46% 21.16% 0.2821
for an expiration date after the event? It Option 2 9 28% 7.84% 0.0882
doesnt matter; we will use the nearest FIGURE 1: CALCULATING ONE-DAY EVENT IMPLIED VOLATILITY. Here you see the variables used to compute
available expiry as our first strip (as the implied volatility for a one-day event such as an earnings announcement.
January 2017 Technical Analysis of Stocks & Commodities 25
Instrument Strike Position Stock Price at Expiration Thats a pretty significant move. How
could you monetize this move? Lets
$140 $145 $150 $155
look at some possible strategies.
Put 1 $141 -2 ($1)*2=($2) $0 $0 $0
Put 2 $150 +1 $10 $5 $0 $0 Selecting the ideal
Total Payoff $8 $5 $0 $0strategies
FIGURE 2: 1x2 PUT RATIO SPREAD PAYOFFS. In this case you buy one ATM put and pay $4.05, and sell two The easiest solution would be to buy
OTM puts to collect $2.60, for a net premium of $1.45. Thats a 60%-plus reduction in premium paid than if you had a call and hedge your short position
only bought one ATM put. in case the stock price spikes, or buy
a put and hedge your long position in
= 7.84%. The time to expiry for the July 8 option (T_1) = four case the stock price tanks. You can do this by trading the ATM
trading days and for the July 15 option (T_2) = nine trading options for the July 8th maturity since it is only an earnings
days. Now, we divide (var_2 * T_2) by (T_2 -1) = 0.7056/8 play and you dont need to pay additional time premium for
= 0.0882, and (var_1* T_1) by T_1 -1 = 0.8464/3 = 0.2821. the July 15th expiry. Of course, with the heightened implied
Why? Remember, there is only one day of jump in implied volatility, option premiums are also high, so buying outright
volatility due to the event. Subtracting 0.2821 from 0.0882, options will be an expensive hedge and will eat into the profits
of our underlying position. So you take advantage of the high
1x2 Put Ratio Spread Payoff premiums by also selling options and trading a spread, thereby
reducing the premiums paid. In other words, if you are long
$8 the underlying and want to hedge against a downside (upside),
you could buy ATM puts (calls) and sell OTM puts (calls). But
Strategy payoff at expiration

as we know, the premium for OTM puts is smaller than that

of the ATM puts, so we decide to trade ratio spreads, that is,
$5 sell >1 OTM puts (calls) while buying 1 ATM put (call).

Ratio spread
Lets work out an example with a simple 1x2 put ratio spread,
and the same logic can be applied to a call ratio spread as well
(see Figure 2). At the time of evaluation, lets say the stock
$132 $140 $145 $150 price is $150.05. The ATM 150 put that expires four trading
Stock price at expiration
days from now at 46% volatility costs (using a simple Black-
Scholes calculator) $4.05. The 141 put at 51.5% volatility
SPREADS. The maximum payoff is $8, which is when the stock price at expira- (remember volatility is not constant across all strikes) costs
tion is at $140. $1.30. So you buy one ATM put and pay $4.05 while selling
two OTM puts and collecting $2.60, for a net premium cost of
you get 0.1939. Now, multiply that with the product of (T_1 $1.45 ($4.05-2.60). Thats a 60%-plus reduction in premium
-1) and (T_2 1) and divide it by (T_1 T_2), which gives paid than if you had only bought one ATM put. Why pick $141
you: (-0.1939 * 24 / -5) = 0.9308. Since this is the variance, as the strike for the OTM puts? Because the model indicated a
you take its square root, which equals 0.9648. This is the an- move of about $9 (so $150-$9 = $141), and you assume that to
nualized event volatility, so if you divide it by the square root be the worst-case scenario for a stock price plunge, in which
of 256 you get our final answer, 0.9684/16 = 6.03%. Note that I case the OTM puts will expire worthless and you would have
use 256 instead of 252 as the number of trading days in a year pocketed the premium. Lets take a look at the graph in Figure
to get a whole number for the square root. This gives you the 3 for the payout of this strategy.
one-day expected stock price move due to the forthcoming
earnings event. So if the current stock price is $150, the market Butterfly spread
is expecting the stock to move up or down by about $9.04. For those of you with a penchant for taking a higher risk and
not indulging in buying/shorting the
Instrument Strike Position Stock Price at Expiration stock prior to earnings, you might
$135 $140 $145 $150
consider trading a butterfly spread.
You can do this by going long one
Put 1 $140 +1 $5 $0 $0 $0
put at $140 strike, short two puts at
Put 2 $145 -2 ($10)*2=($20) ($5)*2=($10) $0 $0 $145 strike, and long one put at $150
Put 3 $150 +1 $15 $10 $5 $0 strike (see Figure 4). Without using
Total Payoff $0 $0 $5 $0 any formulas, try to intuitively guess
FIGURE 4: BUTTERFLY PUT SPREAD PAYOFFS. In this case, youre going long one put at $140 strike, short
two puts at $145 strike, and long one put at $1150 strike. Continued on page 46
26 January 2017 Technical Analysis of Stocks & Commodities
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by visiting www.optionseducation.org.

ETF Sector Investing

Are you interested in learning more about using exchange 2014 in a research paper and found that over this period, mo-
traded funds (ETFs) in your trading? Leslie N. Masonson, mentum was top ranked in annual return in 2005, 2007, and
an active ETF trader, is president of Cash Management 2013, value was top ranked in 2006 and 2012, size was top
Resources, a financial consulting firm that focuses on ETF ranked in 2009 and 2010, and low volatility was top ranked
strategies. He is the author of BuyDont Hold: Investing With in 2011 and 2014.
ETFs Using Relative Strength To Increase Returns With Less Of course, over the short timeframes such as one-year
Risk; and All About Market Timing, as well as Day Trading periods, any factor can go in and out of favor and can under-
On The Edge. His website is www.buydonthold.com, where perform the general market averages and then bounce back as
he writes a weekly blog. To submit topics for future columns, a strong performer years later. This was the case in Vanguards
reach him at lesmasonson@yahoo.com. research. As with any investment approach, there is no way to
know if any of these factors will actually perform better than
by Leslie N. Masonson their benchmarks in decades ahead, but it certainly appears

possible based on an evaluation of these ETFs that have been
ne of the more recent ETF innovations over the past available for a number of years.
decade has been the introduction of factors to enhance Factor ETFs continue to see new entrants to the market.
performance and minimize risk compared to the more For example, Fidelity Investments introduced a handful in
traditional market-capitalization weighting approach. October 2016 that include core dividends (FDVV), rising
A factor is simply a characteristic of a security that has rates (FDRR), low volatility (FDLO), momentum (FDMO),
demonstrated an ability to provide an equal to or better than quality (FQAL), and value (FVAL). Surprisingly, Fidelity
average return with lower risk. As a precursor to factor-based was late to the market in delivering these ETFs, even though
ETFs, Morningstar introduced its equity style in 2000 which the company has been studying factors for over 30 years
consisted of nine boxes with large, medium, and small-cap and has been using them in its active mutual fund strategies
stocks labeled on the vertical axis, and value, blend, and growth for years. Whether or not these ETFs will gather sufficient
labeled on the horizontal axis. Stocks were placed in one of assets to sustain themselves should be interesting to watch,
these nine boxes and their performance was compared. especially since other providers have had similar ETFs in the
marketplace for years and have garnered significant assets.
Factor-based ETFs have shown More and more factor-based, equal-weighted ETFs are being
outperformance offered by providers, since they often perform better than
According to Morningstar, since 2010, factor-tilted ETFs have market-weighted ETFs over many years.
had inflows of over $250 billion. Smart beta (as factor-based
ETFs are often referred to) ETF providers use one or more Factor-based performance comparison
specific factors in their ETF offerings. Moreover, academic, Lets take a look at a handful of well-known factor ETFs to
quant, and institutional research has shown that using these review their performance over the most recent three-year
factors individually or in combination can provide enhanced period ending October 21, 2016, since they all existed during
returns with less risk over long timeframes, such as a few this time period. The first four ETFs listed in Figure 1 are
decades at minimum. iShares ETFs for minimum volatility (USMV), momentum
Among the backtested factors that have shown the charac- (MTUM), quality (QUAL), and value (VLUE), respectively.
teristic to outperform standard benchmarks are quality, value, The last three ETF portfolios invested in large- and mid-cap
and momentum. Other factors that have outperformed at a securities. VLUE focused on three factors simultaneously
lower level include low volatility, size (for example, small- that included return on equity, earnings variability, and debt
cap), and dividend yield. equity. The fifth ETF listed is Guggenheims S&P 500 Equal
In general, according to FactSet, over a 30-year period end- Weight ETF (RSP), which came public in April 2003.
ing in 2015, small-cap stocks have outperformed large caps The best-performing ETF of the five shown was MTUM
in 13 years, including 1991, 2001, 2003, and 2009, where they with a 14.12% return compared to USMVs 13.32% return, and
outperformed by more than 10 percentage points. They had it had the next-to-lowest beta at 0.79, but has very low daily
an average excess return over large caps during this period volume at 28,292. VLUE offered the lowest performance at
of 0.7%. In comparison, value stocks have outperformed the 8.72% while also having the highest standard deviation, which
market in 23 out of 30 years with an average 3.5% excess re- resulted from the out-of-favor years when performance suf-
turn, and momentum stocks accomplished the same objective fered. However, it offers the highest current yield at 2.36%,
in 18 years with a 1.53% excess performance. but the lowest average daily volume of 19,852. RSP has been
Vanguard analyzed common factors from 2005 through in existence for over 13 years and has accumulated $10 billion
28 January 2017 Technical Analysis of Stocks & Commodities
Comparison of Factor ETFs (As of Sept. 30, 2016) horizon is required to gain the true benefit of a
particular factor strategy.
To replicate the data in Figure 2 or see a graph
Inception Date 10/18/2010 4/16/2013 7/16/2013 4/16/2013 4/24/2003
of the return figures just mentioned, you can go to
Net Expense Ratio 0.15% 0.15% 0.15% 0.15% 0.40% StockCharts.com and key in those ticker symbols
30-Day SEC Yield 2.31% 1.68% 1.97% 2.36% 1.57% in the PerfChart section on the left side of the
No. of Holdings 176 121 124 148 506 homepage, and press go. Then move the cursor
Net Assets $13.38B $1.84B $3.11B $952M $10.0B over the left and right arrows at the bottom of the
chart to obtain any starting and ending dates.
3 -Yr. Return 13.32% 14.12% 11.76% 8.72% 10.33%
Investors and traders looking to find a happy
Benchmark 13.50% 14.33% 11.92% 8.88% 10.77%
medium between the standard buy & hold ap-
20-Day Avg. Vol. 723,362 28,292 61,771 19,852 820,787 proach and active investing can potentially add
Equity Beta 0.59 0.79 0.95 1.13 1.00 a rewarding investment strategy to their mix by
Std. Deviation 8.84% 10.80% 10.60% 11.72% 10.95% considering factor-based investing with a portion
Sources: Ishares, Guggenheim, Fidelity of their money. However, this should only be done
FIGURE 1: COMPARING FACTOR-BASED ETFs. Here, five different ETFs are compared. Clearly, after performing the necessary due diligence. This
the low-volatility ETF and momentum ETF had the best returns at 13.32% and 14.12%, respectively, means not only evaluating the possible benefits
but the latter had very low average trading volume. of the ETF being considered but also any down-
sides, such as higher-than-average net expense
ratio, portfolio composition, sector weighting
imbalances, liquidity, bid/ask spreads (for active
traders), and rebalancing frequency resulting in
short-term capital gains.
In addition, traders and investors can use a few
technical indicators with factor ETFs such as an
MACD or a 100- or 200-day moving average to
time their entry and exit points among the five
different factor ETFs discussed here to remain in
the best-performing one until a sell signal occurs,
then reinvesting the proceeds in the strongest
ETF in the mix.

Further reading
FIGURE 2. HOW DO THESE SIX ETFS COMPARE? Viewing these ETFs over a three-year timeframe Masonson, Leslie N. [2016]. ETF Perspectives,
from July 18, 2013 through October 21, 2016 shows that the momentum, low-volatility, and quality
ETF outperformed the S&P 500.
Technical Analysis of Stocks & Commodi-
ties, Volume 34: September.
[2016]. ETF Sector Investing, Technical
in assets, but it has the highest net expense ratio at 0.40%, and Analysis of Stocks & Commodities, Volume
it has the highest average daily volume at 820,787. 34: November.
From the standpoint of traders, USMV and RSP offer the most Pappas, Scott N., CFA, and Dickson, Joel M., PhD [2015].
liquid vehicles, while for long-term investors, MTUM, VLUE, Factor-Based Investing, Vanguard Research: April.
and QUAL offer decent returns with acceptable yields. www.etf.com
In Figure 2, looking at the performance since July 18, 2016 www.ishares.com
when all three ETFs had a common starting point, MTUM www.guggenheiminvestments.com
clearly led the pack for most of the period with a gain of www.fidelity.com
46.27%. VLUE started strong but faded at year-end 2015
through October 21, 2016, ending with only a 26.34% gain. StockCharts.com
Notice that RSP was ahead of the S&P 500 for over 90% of
the time and ended with a 6.64 percentage point advantage.
Just looking at the data from the February 11, 2016 low
2017 Readers
(not shown) through October 21, 2016, we find that VLUE Choice Awards
reversed direction and led the pack with a gain of 22.29%
compared to 22.01% for RSP and 17.06% for the S&P 500.
The takeaway from viewing short-term time periods is that
factors can move from a leadership to a laggard position and
Vote Now!
vice versa rather quickly, and that a long-term investment
January 2017 Technical Analysis of Stocks & Commodities 29
Want to find out how the futures markets really work? Carley Garner is the se-
nior strategist for DeCarley Trading, a division of Zaner, where she also works
as a commodity broker. She has written multiple books on futures and options
trading, the latest is titled Higher Probability Commodity Trading. Garner also
authors widely distributed e-newsletters; for your free subscription visit www.
DeCarleyTrading.com. To submit a question, email her at info@carleygarner-
trading.com or via www.DeCarleyTrading.com. Selected questions will appear
Carley Garner
in a future issue of S&C.

commodity optionS BUYING ing a put option written against a futures each of the major commodity markets
When is the best time to buy commodity contract that is trading at a relatively on a daily, weekly, and monthly basis.
options? elevated level, and buying underpriced We particularly enjoy the opportunity
It is no secret that I tend to favor op- call options in a market hovering near to scroll through the weekly implied
tions selling over options buying, but historical lows. volatility chart of various commodity
that doesnt mean there arent favorable Its easy to determine which markets markets to identify sectors that might
times to buy options. That said, before are trading near highs or lows, but not provide attractive opportunities to buy
delving into strategies to go long options, all futures and options trading platforms options if the IV is low, and sell them if
its imperative to understand that long offer implied volatility (IV) readings. IV is unusually high.
options traders must be more accurate Even those that do arent necessarily easy Once the commodity markets with low
in regard to market direction and timing to interpret or utilize. This is because implied volatility have been weeded out,
than options sellers must. Moreover, they implied volatility is highly relative. What it is a good idea to find those trading at,
must carry the heavy burden of time seems like a high IV level today might or near, significant highs or lows. With
value erosion, which often causes traders seem low tomorrow, and vice versa. In that said, it should be noted that com-
to lose money despite being somewhat case you are unfamiliar with implied modity markets are opposite the stock
accurate in their price prediction. volatility, it is the amount of options market in that increases in volatility
Nearly all books and courses that focus tend to impact call options in a more
on options trading attempt to drill home dramatic fashion than put options. As
the message of buying options when Seek out those is common knowledge, when it comes
volatility is low. Yet, unfortunately, hu- to the S&P or any other stock index, it
man nature lures options buyers to the commodity markets is possible to make money faster, and in
markets during times of high volatility trading at a relative larger amounts, by buying put options. In
and leaves them uninterested in quiet low and stock indexes other words, call options in commodities
markets. This is a habit traders must be trading at a relative tend to become overpriced similar to the
willing to shake if they are going to have way put options in the stock market can
a chance at profiting from an options- high to find option- become overpriced. This is because the
buying strategy. It is not unlike paying buying opportunities. most explosive price risk is to the upside
extra money for a sporting event ticket in commodities and to the downside in
while a team is hot, or paying additional stock indexes.
money for a name-brand pair of jeans; premium priced into an options market Armed with this knowledge, it makes
in most aspects, the increased value is to account for expectations of future sense to seek out those commodity mar-
merely perceived. Thus, in the end, the volatility. It is an increase in implied kets trading at a relative low and stock
buyer is likely to be disappointed. volatility, and therefore in expectations indexes trading at a relative high to find
At times, however, options buying can of upcoming volatility, that causes option options-buying opportunities. In a per-
be particularly attractive. For starters, prices to inflate ahead of major economic fect world, the markets with low volatility
low volatility is a necessary box to check, announcements or political events even trading at relative price extremes will
but its also a good idea to be aware of while the underlying futures market is also coincide with seasonal tendencies.
market seasonality or the technical setup stagnant. For instance, if you are lucky enough
of the particular market in which you are One affordable and easy source of to find a soybean market lurking near
interested in buying options. Specifically, implied volatility information is Moore multimonth lows during the month of
the best options-buying opportunities are Research Center, Inc. (MRCI). The firm Octoberthat is, a time when the annual
countertrend speculations. For instance, specializes in seasonal studies, but it low in soybean prices is frequently seen,
a trader is generally better served by buy- also offers charts of implied volatility in referred to as the harvest lowsin a
30 January 2017 Technical Analysis of Stocks & Commodities
low-IV environment, it just might be the is because most options expire worthless. ing futures price, the timeframe the price
perfect storm required to put the odds of This puts the probabilities overwhelm- move occurs in, and the magnitude of the
success in favor of options buyers. ingly in favor of the options seller in the move itself. Without the stars aligning,
For those wondering why it takes so majority of circumstances. Remember, it can be difficult to make money in the
many things to fall into place for an as an options buyer, it is necessary to be face of such obstacles.
options-buying strategy to make sense, it accurate on the direction of the underly-


risk results in volatility, which adds

fuel to the fire of trading.
Will a trading opportunity like
the Brexit occur again? The simple
answer is yes. Once Article 50 is
signed by the prime minister of the
United Kingdom, the two-year clock
will begin and the United Kingdom
will have a deadline to exit the EU.
As a result of Brexit, a new prime
minister was elected and she had
previously announced that Article 50
will be signed before the end of the
FiGURE 9: FindinG tURninG pointS. Here the target of 1.3351 was forecasted by Fibonacci traders at 261.8.
year, but at the time of this writing,
the timeline for this is undefined.
The first minister of Scotland has
stated that a second referendum for
Scottish independence is highly
likely. Consequently, Northern
Ireland has also expressed interest in
a new movement for independence.
The result of all of these political
issues will cause a ripple effect and
create movement in the Great Brit-
ish pound and further opportunities
for traders.
The ripple effect of Brexit carried
over into the US Presidential election
FiGURE 10: diFFEREnt StyLES FoR diFFEREnt FoLKS. You could apply your entries and exits based on the
bottom of the daily channel, the whole number of 1.3000, and the 1985 low. Here, you see how you can use channels,
on November 8, 2016. During the
Fibonacci levels, whole numbers and the 1985 low for your entries and exits. night of the election, the emini S&P
500 futures dropped more than 120
points into a limit-down move and
tompKinS & WonG / BREXit trading was temporarily halted by the exchange. The price
Continued from page 15 move and its effect on the futures and forex markets would
make for an interesting topic for analyzing further.

while the benchmark 10-year US Treasury bond dropped to Eva J. Tompkins, JD, is a practicing attorney and an active
its lowest level since 2012. Investors rushed into safe haven trader. She can be reached for questions or comments at
currencies and assets for protection from the Brexit storm. evatesq@gmail.com.
The US dollar, the Japanese yen, and the Swiss franc all went Jody Wong, JD/MBA, is a practicing attorney, an active
up in value. trader, and has a masters degree in business administration.
German 10-year bonds fell below zero for the first time ever. He can be reached for questions or comments at JodyGWong@
Amid the confusion, the US Federal Reserve backed away from aol.com.
raising interest rates during 2016. Uncertainty was created in
the currency market. With uncertainty comes risk, and more
January 2017 Technical Analysis of Stocks & Commodities 31
Explore Your Options
Got a question about options? Tom Gentile started his trading career on the floor
of the American Stock Exchange in 1994. He has appeared on many financial
TV and radio shows, as well as hosting a weekly talk show himself, and has co-
authored many books on the markets. He can be found at www.tomgentile.com.
To submit a question for Tom Gentile, post it to our website at http://Message-
Boards.Traders.com. Answers will be posted there, and selected questions will
appear in a future issue of S&C.
Tom Gentile

New Years Resolutions for What am I going sacrifice in order to get really good at one or two strategies
Options Traders get to my trading goal? and be a master of them.
Happy new year everyone! Its a new Trading doesnt come without a price.
year, a new presidency, and the first 100 There are two things I believe a person How will I utilize options as part of
days in the White House will include a will sacrifice over time to be a great trad- my plan?
new cabinet and agenda. ertime and money. But not necessarily Most options traders who have gained
Do you know what else its time for? in that order. You may have heard that if experience fall under one of two cate-
Reviewing your performance as a trader you think the cost of trading education goriesthey either trade for direction or
for the last year as well as setting goals is high, try the cost of ignorance. for volatility. Trading for direction means
and planning for 2017. I find that the leaning bullish or bearish and simply
best time to do this is during the last How much time should I commit to being leveraging options to help create gains for
week of the year, but if you miss that the trader I want to be? less risk. Trading volatility means youre
opportunity due to excessive partying Now that you have some basic knowledge looking for the options premium to rise
or perhaps excessive in-laws at your under your belt, you need to figure out at or fall, regardless of market direction by
house, now is as good a time as any to get some point what trading style you want taking advantage of more market-neutral
started. Creating a trading plan involves to adoptdirectional or nondirectional? trades. Whatever your choice, reread the
answering questions around your plan, Maybe you want to do both. I dont know last paragraph and become a master of
so lets get started. one of these forms of options trading.

Look at the big picture The problem with money Last question: Can I take responsibility
For a trader to be successful, he must is that it has emotional for my own actions?
start at the bottom and build a founda- Heres one that 90% of novice traders
tion. Its just like a builder who wants
value for just about fail to learn. When you accept total
to be successful: he has to start at the everyone on this planet. responsibility for your trades and your
bottom and survey the land before any actions that result from trading, you
work begins. You must take stock of close the door to excuses. That is one
yourself as a trader and ask yourself the too many people who can talk out of giant leap away from the crowd and one
following questions: both sides of their mouth, and I look at giant leap toward consistent success in
trading the same way. Either you are the markets. Imagine for a moment Peter
What do I want out of trading? directional or youre nondirectional. Lynch losing a few million dollars and
Do I want to be right or do I want to be This means either you are looking at then blaming his analysts for their bad
profitable? One thing to remember is patterns in the stock market or patterns advice. Its simply not going to happen
that money is just the icing on the cake in the options markets. because Peter Lynch takes responsibil-
of trading. The problem with money is ity for his own actions. When you take
that it has emotional value for just about What markets am I going to trade? responsibility for your own actions, it also
everyone on this planet. Thats because I have seen and heard a lot of people say means a less likely chance of repeating
all our lives we have been trained to I trade everything, or I trade whatever the same mistake twice.
believe that money can buy different is profitable. But take note: The words Heres your assignment, should you
things at different times. everything and profitable never choose to accept it: Make a monumental
Its OK to want to be profitable but exist in the same sentence. Thats like decision to create a blueprint for success,
too much greed, like anything, can ruin working at a big-box store and being determine how you are going to get there,
a good trading plan. Your desire to be the clerk, stock boy, butcher, bakery and what you have to sacrifice. You also
a great trader should always keep you person, cashier, and manager all at the want to develop a trading plan and take
pumped up. This is what keeps successful same time. You will run yourself ragged responsibility to carry out that plan.
traders consistently profitable. and not make a dime on anything. Dont
become a Jack of all markets. Instead,
32 January 2017 Technical Analysis of Stocks & Commodities
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You Too Can Build One

The Brains Behind A Trading

System: Denis Globa
The thought of developing a trading system can overwhelm you with words
like backtesting, optimization, curve fitting, and performance results whirling
through your head. But anyone who has gone through the learning process and
has successfully applied their own systems to their trading will tell you its a
journey well worth the effort. Denis Globa, founder and CEO of MultiCharts
and TradingView, fits this bill. With over 15 years experience trading various
asset classes, he founded MultiCharts, a trading platform for charting,
system development, and trade execution, and TradingView, an online trading
community and visualization platform, with the intention of bringing trading
system development to the hands of retail traders.
Stocks & Commodities Editor Jayanthi Gopalakrishnan interviewed Denis
Globa via email in early November 2016.

Could you tell us how you algorithmic trading systems, which

got interested in trading made it even more attractive.
I learned about systematic trading as I Who or what was the biggest influ-
was learning about trading. I started trad- ence behind your interest in the Creating a trading system
ing forex and then moved on to trading markets?
futures and stocks. While it has its ad- One of my greatest influences was is like flying on autopilot.
vantages, trading forex is still extremely the Turtles experiment conducted Its something you have to
risky because of the high volatility and by commodity traders Richard Den-
huge leverage. Thats why I recommend nis and William Eckhardt in 1983, in
know and trust.
to all beginner traders that they strictly which they taught students their trad-
follow risk management practices. ing method and had them trade it. Of
To this day, I remain a fan of systematic course, the markets have changed since These are more like basic requirements
trading. System trading is the only ap- then and the markets now behave differ- or principles that form the foundation
proach that lets you evaluate your results ently, which makes the approach obsolete. of system analysis. This includes things
using the scientific method, and it lets But it proved that even new traders can such as the accuracy of input data,
you make concrete conclusions about successfully trade for a long period of time backtesting results that have statistical
the quality of your decisions. Despite all if they use a systematic approach. significance, and methods to accurately
the obvious advantages of discretionary evaluate quantitative and qualitative
trading, you can never truly know if a If someone wants to create a trading trading results.
profitable trade was coincidence, pure system for the first time, what are some If you dont have accurate historical
luck, or the result of your approach. prerequisites for them? By this, I mean data, it becomes impossible to get the
how necessary it is for someone to be correct simulation. If you make conclu-
Do you have a mathematics back- familiar with money management, sions and assessments on partial data,
ground? technical analysis, and so forth? then youll have to do more checkingin
My background in mathematics is not The main prerequisite is to understand other words, more work. When you make
very deep, but I did have a university that it will take a lot of time and effort to conclusions about the specifics of the
education in math, plus I met people create a system that works. It may take system you are testing, those conclusions
along the way who helped me to develop months or even years and youve got to must be founded on a large number of
a system-based approach to trading the be ready for that journey. mutually compensating factors and not
markets. With my university education You also need to thoroughly under- just one single piece of data that looks
and being around people who are strongly stand fundamental and technical analy- impressive to you.
connected to system trading, it was pos- sis, and the basics of statistical methods In addition to knowing the basics of
sible for me to develop fully automated to estimate the quality of trading systems. statistical methods, basic programming
34 January 2017 Technical Analysis of Stocks & Commodities
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Information provided by StockCharts.com is not investment advice. You are responsible for your own investment decisions.
skills are also a must-have. If you dont cess. You usually start with a
have some basic programming skills simple idea, make a beta ver- Optimization is a vital
you wont be able to create a trading sion and see what happens. You tool for finding obscure
system. can make some improvements
and changes, and try it again.
patterns, ones that are
Whats the best way for someone to start You continue to repeat this invisible to the naked eye.
learning to code? Do they need to learn process until its responding
a specific coding language? properly to different market
Basic programming courses are widely conditions. A big mistake is to try to craft thousands of trades, its obvious where
available, either offline or online. There a huge system properly from the very the patterns are. Its also important to
are a bunch of sites now that will teach beginning and spend a ton of time doing make sure all trading-related expenses
you the basics, such as Codecademy, it without testing it in the real market. are accounted for, such as spreads, com-
Coursera, and Udemy, for example. There missions, or extra charges for replacing
are a lot of places that will teach you how What do you think makes system and modifying orders. If you omit such
to code at no charge. As for languages, trading superior to, say, discretionary expenses from your evaluation period,
C# is great for creating complex systems, trading? they can come as a nasty surprise, or
or for some of the more basic tasks, I I would say the two main things are turn what you thought was a profitable
would just focus on the language that speed and objectivity. The markets have system into a terrible one.
your platform uses. become extremely volatile, and millisec- Its the same with optimization. Im
onds can make all the difference between truly convinced that optimization is a
How important is it for a system trader a good trade and a bad one. In this sense, vital tool for finding obscure patterns,
to grasp the topic of trading psychol- algorithmic trading has the advantage, ones that are invisible to the naked eye.
ogy? and plus it has the objective data to help Brute force or genetic optimization lets
Trading psychology is definitely super evaluate its performance. you find optimal parameters, but you
important for both system and discretion- have to check how robust they are with
ary traders. Creating a trading system is What type of systems did you develop walk-forward analysis.
like flying on autopilot: Its something when you started?
you have to know and trust. In order to We developed systems based on ar- How are they different from the systems
be comfortable, youve got to understand bitrage, news, and price patterns. The you create now?
its characteristics and make informed first and the second are still used in I dont create systems for my personal
decisions about when to change the high-frequency trading (HFT), but they use any more. Working on our main
algorithm, and when to just let it run. If arent entirely suitable for retail traders product at MultiCharts leaves no time
youre psychologically unprepared, you due to high speed requirements for in- for trading. We do interact with a large
can end up reducing your trading system teracting with exchanges. Price patterns number of individual and institutional
to a discretionary system, since you will are still relevant today, but they have traders on a regular basis, and the gen-
have constant interruptions. their own set of challenges: Searching eral feeling is that systems evolved and
for them requires complex systems with became much more complicated. Theres
Whats the importance of writing out a uncertain logic. a lot of focus on high speeds of order ex-
plan or visualizing your trades before Its too easy to fit your system to data ecution, depth of market, and order flow
starting to create a system? with a few dozen trades, resulting in analysis because thats the direction in
Building a system is an iterative pro- incorrect analysis. But with hundreds, or which technology has advanced.

Figure 1: drawdown profit/loss. Here you see there are more win drawdowns than loss drawdowns.

36 January 2017 Technical Analysis of Stocks & Commodities

How do these impact the way trading
systems are designed?
In a nutshell, they increase require-
ments for data accuracy and speed of
order placement. What this does is
significantly complicate system develop-
ment and testing, because it requires the
re-creation of detailed history of depth-
of-market price changes and working
with huge data arrays. You also need to
place trading robots in co-location zones
with low latency and dependable com-
munication channels. That complicates Newly Redesigned Software for
Futures, Forex & Stock Traders
It sure does. Im sure many traders
dont realize the complexities of build-
ing trading systems. What are some
mistakes you see people make when
they build trading systems?
Over 500 User Driven
There are a few things I could note, but
I would say some of the big ones are in-
Enhancements Including:
correct evaluation of backtesting results,
incorrect optimization, and absence of Fully multi-threaded core for greater performance
simulated trading on a demo account. Modern user interface with simplified navigation
Some people get too excited when they Major charting enhancements
finally craft a system that shows profit. So
they rush ahead with it, thinking theyve Up to 10X speed improvement in backtesting
considered all possible factors. In reality, Add custom columns & indicators to SuperDOM
while simulated trading is a necessary Historical bid/ask data
step, even that doesnt guarantee good
results in real-market conditions. Expanded C# development support
You need to remember that a brokers
demo-server is just a simulation, since
your orders are not making it to the real
market. This might appear inconsequen-
tial on liquid markets, but weve seen NinjaTrader 8 is always FREE to use for advanced
instances when systems performed well
charting, strategy backtesting and trade simulation.
on sim accounts, but lost their advantage
when launched in a real account.

Sometimes people trade during draw- average trade, since this makes results works today and will likely work in the
downs and that makes them think their much more predictable. near future.
system is broken. What would your
advice be to them? When do you know its time to aban- It never ends, does it? Thank you for
To avoid psychologically difficult mo- don your trading system and create a sharing your knowledge of trading
ments, we recommend that our custom- new one? systems with us, Denis.
ers build systems with a low expected As soon as the system veers outside
drawdown. If you look at the drawdown of its acceptable deviation range, or Further reading
chart in Figure 1, you see there are more stops being profitable, then you know Gopalakrishnan, Jayanthi [2016]. Trad-
win drawdowns than loss drawdowns. its time to reevaluate its market fit. I ingView, Quick-Scan, Technical
When you have a system with a low ex- have never heard of systems that work Analysis of StockS & commoditieS,
pected drawdown, its possible to pause well for years on end. Thats more what Volume 34: October.
your trading and take a look at why the traders wish rather than reality. Its im- MultiCharts, TradingView
drawdown is happening. I prefer systems portant to always track market behavior See Editorial Resource Index
that have a lot of transactions and a small and constantly improve something that
January 2017 Technical Analysis of StockS & commoditieS 37


Confused about some aspect of trading? Professional trader Rob Friesen, president
& COO of Bright Trading (www.stocktrading.com), an equity trading corporation,
answers a few of your questions. To submit a question or suggest a topic, email him
at robfriesen@brighttrading.net, or post your question to our website at http://
Message-Boards.Traders.com. Answers will be posted there, and selected questions
will appear in a future issue of S&C.
Rob Friesen

NEW YEAR, NEW PRESIDENTIAL TERM, our 25 years of business, Bright Trading profits too soon.
NEW APPROACHES has seen a direct correlation between Allow for the expansion of ATR
To begin, I have two announcements: trader profits and volatility levels. Back- beyond the 14-day average.
First, the year 2017 marks the 25-year and-forth movement, higher frequency of Live in the world of probabilities. Not
anniversary of Bright Trading, LLC. gaps and fills, larger directional moves, every idea will work out correctly or
Second, given that we are looking at more overbought/oversold outlier condi- immediately.
four-plus years of anticipated volatility, tions, and abrupt turns and retracements The length of time required to stay
its time for the return of the trader. have all contributed to increased trading in a trade may be increased.
Actually, things began to change on revenue through providing liquidity and Have lists of stocks youd like to
September 9, 2016, in contrast to the correcting inefficiencies. This has been participate in, but only if the price
preceding quiet summer months. On true with individual stocks or ETFs, is right. Be more selective of your
that day, every stock in the Dow Jones pairs, baskets, trading the peers of a sec- entry prices and timing.
Industrial Average was down, 98% of tor (piston trading), opening-only orders Let the market go first and wait pa-
the S&P 500 stocks were down (only 11 and closing imbalances. Daytraders, tiently for an attractive entry level.
were up on the day), and the S&P 500 short-term swing traders, and hedged You could allow stocks to reach
slid 2.5% or 53 points. The catalyst for portfolio traders welcome volatility as outlier levels before entering them.
that decline was Fed-speak and politics. an opportunity to provide a beneficial Instead of entering a stock and
Since that day, we have had increased service to the market and play a small waiting for a profit target or being
volatility, rolling up and down with the part in offsetting greed or fear. stopped out, have a list of stocks
various news on Clinton versus Trump or that you would like to deploy if an
whether the Federal Reserve was going outlier situation occurs. Trading
to raise interest rates or not. Volatility is an from the extremes can provide op-
Since politics is in the forefront at opportunity to provide a portunity or can present additional
the moment, with January 20, 2017 as beneficial service to the risk. If you are implementing mean
Inauguration Day, it is fitting to discuss reversion through pairs trading,
some macro themes here. There are market and play a small then you want to be mindful of the
adjustments to be made for the present part in offsetting greed premium or discount in the spread
and future trading landscape. As a card- or fear. relationship. Accomplishing excel-
carrying member of Wall Street, you lent spread prices when you place
dont want to render yourself obsolete, so capital into a pair relationship is
press on with the necessary adaptations. How to approach it critical for profits.
To quote Benjamin Franklin, When you Lets look at some ways to participate in Trade some. Hold some. Dont be
are finished changing, youre finished. a market with increased volatility. all out on a profitable trade, because
symbols and spreads can often travel
Expect increased volatility Learn to hedge by trading pairs or farther than you would expect. Hold-
Trumps presidency is anticipated to long/short baskets. You can also pair ing onto some of your position can
be unpredictable, therefore increasing a stock with its associated ETF. This make a difference.
movement in the markets, whereas a win allows you to do a swing trade and
for Clinton would have meant an expecta- reduce market exposure risk at the These are times of change and we have
tion of four more years of what we had same time. to change with them. I believe in sudden
been used to for the last eight years. Under Lower your position size so you events, I believe in surprises. The market
the business-as-usual scenario if there can withstand greater moves for or is factoring in everything it knows or can
had been a Clinton win, volatility might against you. This will reduce emo- anticipate, but it cant factor in complete
have declined from recent levels. But in tions that cause freezing up or taking surprises.
38 January 2017 Technical Analysis of Stocks & Commodities
Trumps first 100 days ultimately to a consensus outlook. Then market, a recession, and a sideways
Trumps message during his campaign write down your contrarian takeaways. market. By creating trading plans with
was that he would disrupt the current po- This will help you look for the signposts list of stocks and rules for each scenario,
litical and business environment. Given that suggest you either drive 65 or slow you will be prepared for what the market
that his pledge was to shake things up, down for the S curves. Does the macro gives you.
we should expect the unexpected. catalyst for each item in Trumps agenda
He may surprise everyone and start have wind in the sails? Play relative performance when the
doing everything he said he would do. We may see some similarities to the macro forces are clear
Or on the flip side, since he likes to be Ronald Reagan presidential years and When there are clear and persistent
unpredictable, he might not do any of the market and the economy could be macro forces in play, participate by
what he pledged. There are indications dislocated for a period of time. Given trading best-in-breed stocks within their
that he will work with China rather than the GOP sweep that occurred with the sector. Selecting the strongest stocks in
slap protectionism tariffs on goods we election, there should be fewer obstacles the strongest groups and hedging with
import. Since we have a step-by-step to getting stuff done. It all depends on their corresponding ETF or the SPY
guide of what Trump laid out in a com- what the incoming presidents team is one way to trade it. The same holds
mitment to the American people if he wants to accomplish. true for shorting the weak stocks in
was elected president, we should look There may be a lot of noise and the the weak groups and hedging against
at his list of actions planned for his first markets could stay in a trading range, the corresponding ETFs. Alternatively,
100 days in office. The macro themes but two main outlier scenarios are also buy best-in-breed stocks and pair them
surrounding his campaign promises have possible: against worst-in-breed stocks. The theme
been driving markets since the day after is to start with a single idea and find a
election day, and they will be the litmus hedge for it. It is through hedging your
test for whether he is committed to these Dont be afraid to utilize trades that you may find the ability to
or whether it was only campaign rhetoric macro thinking in your participate in volatile markets without
and empty political jargon. being shaken out.
short-term trading. This Lets look at some examples of macro
Perception of a Trump presidency can help you trade with forces that could act on given sectors.
What has Trump laid out for his presi- the wind at your back.
dency and what do we expect he will If we get an uptick in interest rates,
pursue? Heres a summary: then those stocks with a bond com-
1. This is the start ofeither imme- ponent, such as utilities or those
Large increases in infrastructure diately or delayedan incredible with a larger dividend like REITS,
spending bull market would be sold.
Support of American manufacturing 2. The trouble is only starting, and If infrastructure spending is the
and energy production the worst case will play out and a focus, then the industrials can
Repatriation of corporate profits held serious recession will hit. benefit.
outside the US If national security is a concern or
Lower taxes on business What we have seen so far is the stocks the risk of war has increased, then
Less regulation and industries that did well under the defense contractors may see money
Restrictions on special interests and previous administration are being sold in flow into that group.
placing term limits on Congress favor of buying stocks within industries If there is any potential for decreased
Repealing Obamacare that are anticipated to do well under the regulation in banking and some un-
Reducing the size of the federal new leadership. winding of the restrictions, then the
government beginning with a hir- Multiple scenarios. Multiple strate- financial sector may benefit.
ing freeze gies. Multiple models or variations of
Placing tariffs on imports those strategies. Multiple timeframes. Dont be afraid to utilize macro think-
Tightening up the borders and re- Multiple methods and paths for execut- ing in your short-term trading. This can
stricting immigration ing trades. help you trade with the wind at your back.
Increase in defense and military You may also catch reversals from the
spending Run the scenarios overbought or oversold areas. Remember
Dim view of some of the tech gi- Run scenarios of how the markets may that technicals are great, but understand-
ants. play out in the near future and for the ing the reason behind a trend or move
next four years. You cant predict what may be even better.
You can take each one of these bullet will happen, but you can prepare multiple Your strategy can be as simple as
points and make a list of the conventional trading plans with multiple scenarios
wisdoms that gets echoed and that lead that could play out. Prepare for a bull Continued on page 47
January 2017 Technical Analysis of Stocks & Commodities 39
Barchart.com got a facelift. It looks more
modern, is more intuitive, and easier to
navigate. It still has its rich feature set
that its subscribers have known to ap-
preciate. The contents of the site could
help in your trading whether youre a
stock, options, forex, or futures trader.
Heres how.
Say youre ready to start your trading
day, coffee in hand; you open up Bar-
chart.com on a device of your choice, and
start by reading the Barchart morning
call. It doesnt cost anything to register.
The only time that payments come into
the picture is if you opt to use any of the
premium services. Ill focus on the free
content for this review.

A view from the top floor

Barchart.com could be your one-stop
place to get a good overview of what to
expect in the markets. You will see what
happened in the overnight markets, you
can catch up on world news, get a preview barchart.com homepage
of US stocks before the markets open,
find out about significant movements in tion that could prove to be useful in your you can select the see more option to
the futures markets, and see if any events trading. Youll get a quote overview, a dig a little deeper and find out why the
are going to impact your trading day. Its three-month performance chart, and opinion was made.
a relatively quick read and a good start- fundamental data. Below that is a section Other cool pieces of information you
ing point to plan your trading day. And on price performance, which shows you can see here are ETFs related to your
if you start early enough, you have time how price is performing with respect selected stock, other stocks that may be
to do your analysis before the markets to the high and low for a one-month, impacted by movements in your selected
open. Theres also an S&P sectors mar- three-month, and one-year period. The stock, and support & resistance levels,
ket map from which you can see which data is easy to visualize and you get a which, to me, looked similar to pivot
sectors are performing well and which points. This feature caught my attention
ones arent. And with that overall view so I selected the see more option and
of the market, youre ready to face what The overall view of the came across a cheat sheet that could
the market has in store for you, although market you get from come in handy when selecting entry &
you can never be 100% sure. exit points (Figure 2). On this page, you
At least you can create a roadmap so
Barchart.com helps see the bid/ask pricesI should men-
you can navigate through the markets you create a roadmap tion that prices are updated in real time
and pick a clear direction. If its stocks to help you navigate on this siteand a table listing all key
youre trading, go to the stocks tab and through the markets turning points and support & resistance
youll see a ton of choices divided into levels based on several indicators. You
these categories: market pulse, perfor-
with a clear direction. can deselect indicators you dont want
mance leaders, most active, indices, to use.
trading signals, sectors. I decided to sense of the general trend of the specific With all this information in hand, you
start with the most obviousmarket stocks price. Scroll lower and youll see could start strategizing your trades. And
overview under market pulse. What the most recent news stories related to Ive only touched on the market overview
youll see first, not surprisingly, is an the stock. section under stocks. Theres a lot more
overview of the broader indexes and Along the right-hand side of the page to explore.
the market leaders by volume (Figure youll see the Barchart.com technical
1). Maybe you see something here that opinion of the stock. That opinion could Stock screener
makes you curious. You click on the be similar to yours or it may be different. I was curious to find out more about the
symbol and youll see enough informa- To find out how that opinion was derived, stock screener. It took a little getting used
40 January 2017 Technical Analysis of Stocks & Commodities
to, since there is a limited number of
criteria to choose from. You can set filters
based on price quotes, fundamentals,
technical, profile, and opinion. Within
each of these are other criteria to select.
After playing around with the different
choices, I was able to come up with a
scan that reduced the number of stocks
to over 100. If you find a scan you like,
you can save it so you can use it again.
After running the scan, select the results
tab and youll see a table listing all the
stocks that met your criteria along with
other details. If you set a filter based on
FIGURE 1: STOCK MARKET OVERVIEW. Here you see the performance of the broader indexes, market leaders
by price volume, and 52-week new highs and lows. If you scroll down youll see the most recent news, gainers the price quote and you want to see all
and losers, top 100 stocks, performance leaders, and price surprises. All data is updated in real time. the stocks with a new high price, you
can sort columns by last price, weighted
alpha, or price changes for different time
periods (year, one month, three months).
Once a scan is completed you can save the
results as a watchlist, see all the results in
flipcharts where you can scroll through
all the charts, or download the results
as a .csv file. You can, if you choose, go
through each symbol on the list, analyze
it more, and add an alert or add it to your
watchlist or portfolio.
Under the My Barchart tab, you can
build custom portfolios, watchlists,
alerts, screeners, data view tables, and
chart templates. As you can see, there is
enough information available on this site
to make it your go-to stop before, during,
and after market hours. And youre not
limited to US stocks. You can also view
information from markets in Canada,
UK, and Australia.

Its worth exploring

Barchart.com may not be a substitute
for your trading platform, although you
could pay for premium services, one of
which is BarchartTrader, which allows
you to trade from your desktop, tablet, or
phone. Other premium services include
Barchart Premier, Trends In Futures, and
Futures Trading Education. You have
the opportunity to sign up for a 30-day
trial for these services, some of which
are offered by external companies. Even
if you dont sign up for the premium
services, theres enough on Barchart.com
to keep you busy throughout the entire
trading day.
FIGURE 2: SUPPORT & RESISTANCE LEVELS. Here you see the key turning points and support & resistance
levels for the selected stock based on pivots, stochastics, Fibonacci, moving averages, highs/lows, RSI, and

January 2017 Technical Analysis of Stocks & Commodities 41

Continued from page 7 that combining both CI and r-squared impression was that the performance
improves overall performance? was average. Examining, however, more
Waves AND Profit-taking closely the last four rows of the results
Editor, 3. I did not notice a mention of the you can see that it detected almost all
I am new to trading. I originator of the r-squared indicatoris trend trades (missed only one) and with
read the article Waves Katsanos the originator? the least delay (only six days), capturing
And Profit-Taking in the most profits ($57,700). In addition,
the November 2016 is- Thank you to the author for taking unlike with the other indicators, there
sue of S&C, and I am the time to share his knowledge with the was no problem in detecting V-bottom
interested in finding out many fellow analysts who read Stocks reversals. The main disadvantage and
more about this theory. & Commodities! the reason for the rather poor overall test
I see that the author of the article, How- Ed performance was that it didnt filter out
ard Wang, has published a book about it trades effectively, allowing more trades
called New Concepts In Trading: Profit- Author Markos Katsanos replies: in nontrending market conditions.
Taking Theory, but its in Chinese. Will I didnt include the CI in the comparison This is the main reason for adding the
the book become available in English? test because my intention was for the r-squared indicator in the emini system.
Does the author have any other references test to be as objective and impartial as My intention wasnt to detect missed trend
on this theory in English? possible. The CI, unlike the rest of the in- trades but to filter out false trends. On
Ron Turmel dicators, detects both direction and trend testing the modified system, this improved
and it is not directly comparable, as it can the performance considerably.
Author Howard Wang replies: be also used as an overbought/oversold And finally, concerning your third
Thank you for your interest. I do hope indicator. In addition, I wanted to use question: The r-squared indicator is not
to publish the book at a later date in exactly the same test conditions, and the really a novel idea but rather a statistical
English. CI required certain modifications. method for calculating the correlation
Since you are the second reader between price and its linear regression.
WHICH TREND INDICATOR WINS? who asked me about the CI and how it I am not the originator of the r-squared
Editor, compares with the other indicators, I indicator and I dont know who first
I enjoyed the October 2016 article in decided to test it using the same system started using it to detect trends.
Stocks & Commodities by Markos Kat- and procedure that I used in the article.
sanos, Which Trend Indicator Wins? There was a problem, however, with the
Prior to reading his article, I had been parameter limits because, unlike the
curious about what trend indicator was other indicators, the CI can have both
best, and his article did an excellent job at positive and negative values, so I had
reviewing four popular trend indicators. to change the code to account for the
I have a few questions for the author: negative values.
As you can see in the OOS test re-
1. I found the CI indicator mentioned in sults in the table in Figure 1, my first
Katsanos book (Intermarket Trading OOS-SA M P LE P ERFORM A N CE (2 0 1 1 -2 0 1 6 )
Strategies) to be one of the best in my SY ST EM MA BUY & HOLD A DX R2 VHF ER CI
CMT (Chartered Market Technician) N et Pro fit $44,592 -$38,867 $30,429 $40,968 $21,257 $26,552 $36,600

studies. I wondered whether the author To tal N u m b er o f Trad es

An n u al rate o f retu rn
has evaluated the CI indicator perfor- Percen t Pro fitab le 38.1% 0.0% 57.1% 54.5% 29.4% 27.8% 40.7%
mance as compared to r-squared or any Pro fit F acto r 1.86 3.99 4.18 1.93 2.25 2.44

of the other three indicators discussed in

M ax lo sin g trad e $-2,830 $-38,867 $-2,596 $-2,274 $-3,800 $-3,227 $-3,981
M ax In trad ay d raw d o w n $-16,775 $-41,988 $-14,261 $-10,715 $-19,048 $-14,623 $-12,800
his October 2016 article. Av g. d elay -Bars 0 16 7 11 7 6
M issed tren d trad es 0 4 3 4 3 1

2. I noticed in his modified yen futures

To tal p ro fit in tren d trad es $77,448 $36,628 $47,425 $43,480 $ 47,750 $ 57,730
Av g. En try Efiicien cy 100.0% 56.0% 72.6% 66.0% 63.8% 68.6%
system code and modified emini intraday TEST PARAMETERS

system code the addition of the r-squared M A PERIO D

50 50
indicator and the combined use of both TD I SM O O TH IN G 3 3 4

CI and r-squared in the emini intraday TD I TREN D 30 0.42 0.38 0.36 58

system. Katsanos mentioned in his evalu-

TD I M AX 42 0.85 0.45 0.42 85
TD I/L RS C RIT 22 10 0.24 0.26 28

ation section that each of the indicators L AG 12 10 10 3 4

evaluated missed some strong trends.

M U LT 1.8 1.5 2.5 4.5

FIGURE 1: OUT-OF-SAMPLE RESULTS. You can see in the last four rows of the results that the CI detected
Based on his decision to use both CI and almost all trend trades and with the least delay, capturing the most profits ($57,700). However, it didnt filter out
rsquared in an emini system, has he found trades effectively in nontrending markets, leading to poor overall performance.

42 January 2017 Technical Analysis of Stocks & Commodities

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A Sector Worth Watching

What Now For Banks?

When Donald Trump won the US Presidential election, the With a Republican president in office together with a
Dow Jones Industrial Average immediately rose to a new Republican Senate and Congress, the prospect of sweeping
high, against all predictions. As we search for investing op- changes becomes a possibility. So where should you put your
portunities in this new order, how attractive are the banking money? Rumor has it that President-elect Donald Trump, in
stocks? Well take a look at a few of them. his numerous businesses, has a close association with banks

by Koos van der Merwe

III 80.00
5 77.08
3 b
he United States has elected a

president who promised to make

May 2007 60.00
America great again. With his
I b 1 c 50.00
a 4

history of unpredictability, from 40.00

bankruptcy to making billions of a

c 2

dollars, President-elect Donald 15.03

II 20.00

Trump throws a degree of uncertainty into March 2009

the stock market. Predictions widely given


before the election were that if he were


elected, the stock market would crash. How-


ever, the opposite occurred. The Dow Jones 50.00


Industrial Average (DJIA) rose to new highs,


and meanwhile, the price of goldusually a

popular hedge against uncertaintycrashed.
2004 2005 2006 2008 2009 2010 2011 2012 2013 2014 2015 2016

Figure 1: Monthly chart of JP Morgan. The rise from the low of $15.03 in March 2009 to $76.69 could
The question is, What now for the future of be a WAVE III in the Elliott wave count. Both the RSI and stochastic RSI indicators are almost at overbought
the US stock markets? levels. Volume has, however, dropped as the price rose. A WAVE IV correction is possible from here.

44 January 2017 Technical Analysis of Stocks & Commodities

58.80 5 60.00
3 55.00
v ii
i iv
4 45.00
iii v
in the same way every successful busi-
C 40.00
1 i June 30 4
ness person has. Are investing in banks 1 B iii ii 35.00

the way to go?

2 30.00
i iv
C ii

A look at four banking

A 2 20.00

stocks 12.87

The first bank that comes to mind is JP

March 2009 5.00

Morgan Chase & Co. (JPM). Note that


in the 2008 bank crisis while financial -1.06

services firm Lehman Brothers declared

bankruptcy, JPM was one of the banks 2010 2011 2012 2013 2014 2015 2016

that survived, even though its share price Figure 2: Monthly chart of Wells Fargo. The price rose from a low of $7.63 in March 2009 to a
fell from $53.25 to $15.03. Figure 1 is a high of $58.80 by July 2015. The Elliott wave count suggests that the share is completing a WAVE 4 with a
monthly chart showing how the share price major WAVE 5 still to follow. The stochastic RSI is at oversold levels and starting to suggest a buy.
rose from the low of $15.03 in March 2009
to its present high of $76.69. An Elliott May Jun Jul Aug Sep Oct Nov

wave count suggests that this could be a 203.94

WAVE III. Both the RSI and stochastic 198
RSI indicators are almost at overbought 190

levels. Volume has, however, dropped as


the price rose. This share could be put

on a watchlist, waiting for WAVE IV to Nov 7 172
complete a correction before buying. 165

The second bank that comes to mind


is Wells Fargo & Co. (WFC), which has


recently corrected due to a scandal over Vervoort Trailing Stop 146

bogus account creation within the bank. 139

The scandal led to the departure of vet- 70


eran chief executive John Stumpf. The


chart in Figure 2 is a monthly chart of

11.3 M

WFC showing how the price rose from

a low of $7.63 in March 2009 to a high
of $58.80 by July 2015. The Elliott wave Figure 3: Daily chart of Goldman Sachs. The share surged from November 7, 2016, the day before
count suggests that the share is completing the election, to November 9, 2016, when the presidential election results were announced. The RSI is at
a WAVE 4 with a major WAVE 5 still to oversold levels, so waiting for a correction with a new buy signal would be suggested.
follow. The stochastic RSI is at oversold
levels and starting to suggest a buy at this May Jun Jul Aug Sep Oct Nov

point on the chart.


Figure 3 is a daily OmniTrader chart of


Goldman Sachs, showing how the share 17.6

rose strongly from November 7, 2016, the 16.8

day before the presidential vote. Volume

BUY 16.1

rose strongly with the share price surging

Nov 7 15.7

on November 9, when the results of the 14.9


presidential election were announced. 14.1

The RSI shown on the chart is at oversold 13.4

levels, which suggests that a correction is


likely. It may be a good idea to wait for


a new buy signal before entering a long


position in this stock. But certainly add it Nov 7

319.2 M

to your watchlist.
Figure 4 is a daily OmniTrader chart of
Bank of America (BAC). The share gave
a buy signal on the vote line on November Figure 4: Daily chart of Bank of America. The share gave a buy signal on the vote line on November
7, 2016 based on the buy signals given by 7, 2016 based on the buy signals given by four strategies shown in green below the vote line. The RSI indicator
four strategies shown in green below the is at overbought levels, suggesting a correction should occur.

January 2017 Technical Analysis of Stocks & Commodities 45


margins. Overall, the prospects for the banking sector look

With the prospect of sweeping positive, at least for the short term.
changes, where should you put Koos van der Merwe has been a technical analyst since 1969,
your money? and has worked as a futures and options trader with First
Financial Futures in Johannesburg, South Africa. He can be
reached at petroosp@gmail.com.
vote line. The RSI indicator is at overbought levels, suggesting
that a correction should occur in the near future. further reAding
van der Merwe, Koos [2016]. Gann Fans & Kondratieff
And more Waves, Technical Analysis of StockS & commoditieS,
There are many more banking stocks to keep an eye on. If Volume 34: Bonus Issue.
you look at this from a regulatory standpoint, having Trump Advanced GET (eSignal); OmniTrader (Nirvana Systems)
as president with Republican control of Congress could bode See Editorial Resource Index
well for banks. There is speculation that we could see higher
interest rates and higher inflation rates. This could mean
that banks will lend more and see an increase in their profit


arora/FunDaMentals Put Butterfly Payoff

Continued from page 26
Strategy payoff at expiration

the most probable price level that you are expecting with this
butterfly spread. It will be the middle strike, or $145, a down
move of only $5, that is, approximately 50% of the expected
worst-case bearish scenario of $9+. $0
And without using a Black-Scholes calculator, can you also
tell what your maximum payout of this butterfly put spread
would be? Of course! It will be $5 (the difference in put strikes,
that is, $145-$140 or $150-$145) and indeed, that will be the $140 $145 $150

case when the stock price = $145. Stock price at expiration

Lets verify that. Say at expiration the stock price is un- Figure 5: risk graPh oF ButterFly sPreaD Payout. From this graph
changed at $150 or rises to $155. In this case, all your puts you see that your maximum payout will be $5.00 if the stock price at expiration is
will be OTM and will expire worthless. However, if the stock $145 (the middle strike of the buttery spread).
price drops to $145, the $150 put is in-the-money (ATM) by
$5 ($150-$145) and that is your payout (excluding commis-
sions). In case the stock price drops even further down to for your trade executions. This is what differentiates a suc-
$140, you gain $10 ($150-$140) on the $150 strike, but you cessful options trader from others. After all, options trading
also lose $5 ($140-$145)*2 = $10 on the two $145 strike puts is ultimately a volatility play.
you are short, while you make nothing on the $140 strike put
(since it expires worthless), for a net P/L of zero ($10-$10). Bani Arora is a derivatives trader and can be reached at
So your maximum payout is $5 and it occurs when the stock baniarora@hotmail.com.
price closes at $145, that is, the middle strike of the butterfly
spread (see Figure 5). Sounds simple, doesnt it? further reAding
Arora, Bani [2016]. Revival Of The Gold Myth, Techni-
Veneer of simPlicitY cal Analysis of StockS & commoditieS, Volume 34:
Because it sounds simple, many stock traders think theyre good August.
at trading options. But theres more to it than just knowing the [2016]. VIX: Managing Financial Armageddon!
different options strategies. You also need to be able to design Technical Analysis of StockS & commoditieS, Volume
a trade structure for a specific scenario using correct volatility 34: May.
assumptions together with a thorough risk management, based
on understanding the (a)synchronous relationship of different
options-related risks, and you need to have prescient timing
46 January 2017 Technical Analysis of StockS & commoditieS
NinjaTrader 8 released The charting enhancements are includes a new FX Board and the ability
NinjaTrader, LLC has launched Ninja based on user feedback and include to configure various trading windows in
Trader 8 trading software for futures, a drag & drop functionality to move pip increments.
forex, and equities traders. With more indicators and chart bars between tabs The redesigned alert functionality
than 500 user-driven enhancements to the or windows; a data series option to allows for execution of complex multi
trading software, the update adds func center the last traded price on the faceted conditions without programming
tionality and flexibility, with a focus on price scale; an extended interval selector experience.
greater performance, optimized naviga for customization of any bar type and A detailed listing of the enhancements
tion, and expanded analysis capabilities, interval; and a new no time scroll can be found at http://ninjatrader.com/
while laying the groundwork for future crosshair mode with the ability to lock Whats-New-NinjaTrader-8.
product development. a crosshair at a specific time. NinjaTrader 8 is free to use for chart
Some of the enhancements include The increased performance comes ing, strategy backtesting, and trade
a new interface, new charting features, from a fully multithreaded core and simulation. Traders can use their broker
increased performance, expanded user interface for faster workspace load or market data provider of choice with
C# development support, improved times. All connection technologies are NinjaTrader 8. Among the supported
backtesting, market data enhancements, now supported in the 64-bit version of brokers for new live trading accounts
expanded SuperDOM functionality, a NinjaTrader 8 and data processing & are NinjaTrader Brokerage, Interactive
new forex tool suite, and a new alert storage methods have been configured Brokers, and TD Ameritrade. Data ven
system. to minimize response times. dors include Kinetick, eSignal, IQFeed,
The new streamlined interface seeks The expanded C# development and Google Finance.
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workflow. A new tabbed functionality trading apps and integrate them directly and its subsidiaries provide trading
simplifies navigation and minimizes into NinjaTrader 8, and are no longer software and brokerage services to ac
the screen space used, while further limited to writing custom indicators tive traders.
personalization is available through the and strategies. http://ninjatrader.com
inclusion of four unique skins and For improved backtesting, the Strategy
regionalization options for Spanish, Analyzer has been redesigned to improve
German, and Russian traders. workflow, provide greater fill accuracy,
and allow for optimizations on multiple
objectives simultaneously.
The market data enhancements are
achieved through a rewritten core data
engine, delivering sub-second time
stamps and historical bid/ask prices
stored with each last trade tick. Improved
session management enables users to ex
clude certain calendar dates from charts
and strategies and customize end-of-day
markets for particular dates.
Expanded support for forex traders

FrieseN trades here,
trades here, but
but rather
rather showing
showing youyou how
how The trading
The trading opportunities
opportunities areare abun-
Continued from
Continued from page
page 39
39 you can create a methodology
you can create a methodology that can that can dant. Think about how you
dant. Think about how you can reducecan reduce
incorporate the macro themes
incorporate the macro themes that are that are the risk
the risk ofof losses
losses while
while increasing
increasing your
entering ETF
entering ETF trades
trades at
at the
the open
open of
of the
the present now. You could also
present now. You could also buy somebuy some staying power on the profi table
staying power on the profitable trades. trades.
market, such as going long
market, such as going long XLF andXLF and favored fi
favored financials
nancials while
while shorting
shorting thethe Dont neglect
Dont neglect the the power
power of of research,
short XLU,
short XLU, or or the
the converse.
converse. Another
Another fi nancial ETF. This will reduce variance
financial ETF. This will reduce variance planning, endofday review process,
planning, endofday review process, and and
idea is to go long XLY and short
idea is to go long XLY and short XLP, XLP, and increase
and increase your
your marketneutral
marketneutral stance,
stance, journaling. In 2017, it is going to
journaling. In 2017, it is going to be thebe the
which is discretionary versus consumer
which is discretionary versus consumer and you would be looking for
and you would be looking for the out- the out- year of the traderso trade profi
year of the traderso trade profitably! tably!
staples. performance of the fi nancial stocks
performance of the financial stocks that that
II am
am not not recommending
recommending certain
certain you chose as compared
you chose as compared to XLF. to XLF.
January 2017 Technical Analysis of Stocks & Commodities 47

Mean-Reversion Daytrading
Last month, this professional trader discussed swing trading Daytrading strategy:
mean-reversion pivot entries. This month, he continues on Buying after a mean reversion
the same topic but this time for daytrading. As with swing trading mean reversions, this strategy primar-
ily works for pullbacks of nearly exactly 50%no more and
by Ken Calhoun no less. Once you spot one of these mean-reversion patterns,

you simply enter your trade when a breakout moves above the
ne of the biggest challenges that daytraders face is 50% price level. From a scanning standpoint, it is smart to
rapidly scanning for breakouts during the opening 30 look at several charts within the same sector once you spot
minutes of each days trading session. If you have ever a mean-reversion pattern, because intraday charts within the
overlooked a big opening breakout, you may find the same industry group often exhibit similar price-action patterns
technique Ill discuss here especially useful. that you can potentially capitalize on.
By waiting for a 50% retracement, also known as a mean
reversion, you can use this as a second opportunity to enter a Step-by-step action plan
strong-trending stock following a pullback. This article will Heres how you can put this strategy to work in your intraday
show you how to daytrade mean-reversion pivot entries. trades:
It is important to note that this strategy is best used with
stocks priced $20$70/share with opening moves of at least Step 1: Look for a chart that has moved up at least one point
one point in a single direction, that then pull back to 50% during the first 30 minutes of the trading day (9:3010 am
before pivoting. It is usually unwise to daytrade penny stocks Eastern Time), as seen in the chart of Harley-Davidson, Inc.
or other cheap, less-than-$20 stocks, because they exhibit (HOG) in Figure 1 on the morning of October 18, 2016.
choppier, haphazard price action compared to professional
daytraders stocks with higher volume and sustainable vola- Step 2: Next, calculate the mean of this trading range (in
tility. The best charts to daytrade are those with wide and Figure 1, this is ($50 + $53)/2 = $51.50). This is your mean-
clean, well-defined technical momentum breakout patterns reversion pivot price. Wait for price to drop slightly below
that are relatively easy to enter and exit, unlike choppy, low- this value.
priced risky stocks that amateurs and undercapitalized traders
unwisely seek to trade. Step 3: Enter a buy-stop order to enter your trade once
price breaks above the
50% mean-reversion pivot
price (in this example, it
is $51.50).

Step 4: A second entry oc-

curs once price action has
broken above the current
days high. Use this to add
to your winning position
($53.40 in this chart).

Tip: Although most day-

trades are best done inside
a 20-minute round-trip
timeframe, you may find
it useful to also test an
intraday swing trading
technique, in which you let
the position ride until right
before the closing bell, at
which time you close the

position (for example, at

FIGURE 1. MEAN-REVERSION DAYTRADING PIVOT. Here you see a trade entry for a daytrade after a 50% retracement. 3:50 pm Eastern Time).
48 January 2017 Technical Analysis of Stocks & Commodities
Insights: Why this technique works
The mean-reversion daytrading strategy works because it waits The best charts to daytrade are those
until after the first major wave of short sellers are finished with wide and clean well-defined
exiting their positions. Once sellers are done, a short squeeze
as well as new buyers come in to start lifting price back up to
technical momentum breakout
retest prior highs. By waiting for a full 50% pullback before patterns that are relatively easy to
entering, you will find the likelihood of an upside reversal is enter and exit.
better for initiating a new long position, since this 50% mean
reversion is a favorite strategy of professional traders.
training systems for active traders. He is a UCLA alumnus
Trade management tips and is the founder of TradeMastery.com, an educational
From a risk management standpoint, you can use a tight $0.40 resource site for active traders. In this Trading on Mo-
initial stop for risk management for stocks in the $40$50/ mentum monthly column, he covers the topic of breakout
share price range. Tighter stops of from $0.10$0.20 are best trading techniques.
for stocks in the $20$30/share range for daytrading. Trading
mean-reversion pivots like this can help simplify your ap- Further reading
proach for keeping tight stops, since the pivot low is an obvious [2016]. Mean-Reversion Swing Trading, Techni-
technical price support level. For those who like to daytrade cal Analysis of Stocks & Commodities, Volume 34:
quickly, the initial exit target is simply the high of the current December.
days initial breakout resistance level ($53.25 in Figure 1) or
the nearest whole-number resistance level ($53 in Figure 1), See our Traders Tips section beginning on page 50 for implementa-
whichever gets hit first for your daytrading exit. tion of Calhouns idea (with a focus on his December 2016 column)
in various technical analysis programs. Accompanying program
code can be found in the Traders Tips area at Traders.com.
Ken Calhoun, a professional daytrader and educator, is a
producer of trading courses, a live room, and video-based

EHLERS & WAY/BE YOUR OWN HEDGE FUND what we mean when we say be your own hedge fund is the
Continued from page 18 way you go about conducting your own trading, not accepting
somebody elses money to trade. That way, you dont have to
worry about the legal issues that come with managing other
advance, for exercise at the market on the open of the next peoples money. What weve described here is using proven
trading day. All you have to do is monitor your own open trading signals and employing diversity to reduce your risk
positions in each of the four channels, exit a trade when you exposure.
get a signal, and replace it with another buy signal on that
day. You can do this in the evening and place your market take oWnership
orders. The whole process can be completed in less than 15 The concerns you may have about trading can be addressed
minutes per day. by treating your own money as if it were in a hedge fund with
you as the fund manager. This requires establishing your own
anD then theres capital trading style, acquiring trading signals (if necessary, by lease),
Like any business, trading your hedge fund and applying diversity to reduce risk. This is all very doable
requires capital. Most brokerages require with the technology available today.
a minimum account balance of $2,000 or
so. At this minimum level you would be S&C Contributing Editor John Ehlers is a pioneer in the use
dividing your hedge fund into four $500 of cycles and DSP technical analysis. He is president of MESA
channels. Frankly, thats a pretty small amount, and it leaves Software. MESASoftware.com offers the MESA Phasor and
you with no real initial margin of error for drawdown. Since MESA intraday futures strategies. He is also the chief scien-
you would only be trading a few shares of many stocks with tist for StockSpotter.com, which offers stock trading signals
this low level of funding, commission costs can become a factor based on indicators and statistical techniques.
in your trading. All in all, we would recommend a minimum Ric Way is an independent software developer specializing
$10,000 account for your hedge fund. in programming algorithmic trading signals in C#. He may
be reached at ricway@live.com.
Bypass the legal stuff
This is the United Statesyou can do anything you want with StockSpotter.com
your own money. You can trade any way you like. To be clear,
January 2017 Technical Analysis of Stocks & Commodities 49
For this months Traders Tips, the focus is
Ken Calhouns article in the December 2016
issue of Stocks & Commodities, Mean-
Reversion Swing Trading. Here, we pres-
ent the January 2017 Traders Tips code
with possible implementations in various
The code for the following Traders Tips
selections is posted here:
Traders.com HomeS&C Magazine
Traders Tips
The Traders Tips section is provided to help readers im-
plement a selected technique from an article in this issue
or another recent issue. The entries here are contributed
by software developers or programmers for software that
is capable of customization.

F TRADESTATION: JANUARY 2017 TRADERS TIPS CODE Figure 1: TRADESTATION. Heres an example of the MeanReversion strategy
In Mean-Reversion Swing Trading, which appeared in the and indicator applied to a 60-minute chart of Alphabet (GOOG).
December 2016 issue of Stocks & Commodities, author
Ken Calhoun describes a trading methodology where the ShortOK = true ;
trader attempts to enter an existing trend after there has been end ;

a pullback. He suggests looking for 50% pullbacks in strong if High = UpperBand then
trends and waiting for price to move back in the direction of begin
the trend before entering the trade. HighRef = High ;
LongOK = true ;
Here, we are providing the TradeStation EasyLanguage code
ShortOK = false ;
for a mean-revision strategy based on the authors concepts. end ;
We have also included a companion indicator to help visualize
the trade setups. // 50% Pull Back Level
TriggerLine = .5 * ( HighRef + LowRef ) ;
Strategy: MeanReversion
if LongOK[1] and LongOK
// TASC JAN 2017
and Close crosses over TriggerLine
// Mean-Reversion Swing Trading
and Close > MAValue
// Ken Calhoun
and MarketPosition( 1 ) < 1 then
Buy next bar at Market ;
ChanLength( 20 ),
LongOK = false ;
StopDollars( 1 ),
MALength( 50 ) ;
else if ShortOK[1] and ShortOK

and Close crosses under TriggerLine
and Close < MAValue
UpperBand( 0 ),
and MarketPosition( 1 ) > -1 then
LowerBand( 0 ),
MidBand( 0 ),
SellShort next bar at Market ;
LongOK( false ),
ShortOK = false ;
ShortOK( false ),
end ;
LowRef( 0 ),
HighRef( 0 ),
Sell next bar at Upperband Limit ;
TriggerLine( 0 ),
Sell next bar at Lowerband Stop ;
MAValue( 0 ) ;
Buy to Cover next bar at Lowerband Limit ;

Buy to Cover next bar at UpperBand Stop ;
UpperBand = Highest( High, ChanLength ) ;

LowerBand = Lowest( Low, ChanLength ) ;
SetStopShare ;
MAValue = Average( Close, MALength ) ;
SetStopLoss( StopDollars ) ;

if Low = LowerBand then
Indicator: MeanReversion
LowRef = Low ;
// TASC JAN 2017
LongOK = false ;
// Mean-Reversion Swing Trading

50 January 2017 Technical Analysis of Stocks & Commodities

// Ken Calhoun

ChanLength( 20 ),
MALength( 50 ) ; Ken Calhouns article in the December 2016 issue of Stocks
& Commodities, Mean-Reversion Swing Trading, pre-
variables: sented a visual trading system designed to take advantage
UpperBand( 0 ),
LowerBand( 0 ), of pullbacks in uptrends. The formula given here, used as
MidBand( 0 ), a filter in the explorer, will find such trading opportunities.
LongOK( false ), The first two lines of the formula allow the user to adjust the
ShortOK( false ),
LowRef( 0 ),
parameters of the scan:
HighRef( 0 ), "Z" is the minimum percentage increase in the initial upswing
TriggerLine( 0 ), "Fudge" is the percentage difference allowed between the
MAValue( 0 ) ; close on the pullback and the actual 50% mean reversion.

UpperBand = Highest( High, ChanLength ) ;
LowerBand = Lowest( Low, ChanLength ) ;
The formula is presented using values of 10% minimum
MAValue = Average( Close, MALength ) ; move and a 0.1% allowance on the difference at the reversion
if Low = LowerBand then
begin Exploration filter:
LowRef = Low ; z:= 10;
LongOK = false ; fudge:= 0.1;
ShortOK = true ; p1:= LastValue(TroughBars(1, C, z));
end ; pv1:= Trough(1, C,z);
p2:= LastValue( HHVBars( C, p1 ));
if High = UpperBand then pv2:= HHV( C, p1);
begin meanrev:= (pv1 + pv2) / 2;
HighRef = High ; pv3:= LLV(C, p2);
LongOK = true ;
ShortOK = false ; p1 < PeakBars(1, C, z) AND
end ; pv2 >= pv1 * (1 + (z/100)) AND
Ref(Abs(pv3 - meanrev) <= pv3 * (fudge/100), -1) AND
C > Ref(C, -1) AND LLVBars(C, p2) = 1 AND
TriggerLine = .5 * ( HighRef + LowRef ) ;
pv1 >= 20 AND pv2 <= 70

Plot1( UpperBand, "UpperBand" ) ;
Plot2( LowerBand, "LowerBand" ) ; William Golson
Plot3( TriggerLine, "Trigger" ) ; MetaStock Technical Support
Plot4( MAValue, "Mov Avg" ) ; www.metastock.com

if LongOK then
SetPlotColor( 1, Green ) ;
SetPlotColor( 2, Green ) ; F eSIGNAL: JANUARY 2017 TRADERS TIPS CODE
else For this months Traders Tip, weve provided the study
SetPlotColor( 1, Red ) ;
SetPlotColor( 2, Red ) ;
end ;

To download the EasyLanguage code for the strategy in

this article, please visit our TradeStation and EasyLanguage
support forum. The code can be found at https://community.
The ELD filename is TASC_JAN2017.ELD.
For more information about EasyLanguage in general, please
see http://www.tradestation.com/EL-FAQ.
A sample chart is shown in Figure 1.
This article is for informational purposes. No type of trading
or investment recommendation, advice, or strategy is being made,
given, or in any manner provided by TradeStation Securities or its
Doug McCrary
TradeStation Securities, Inc. Figure 2: eSIGNAL. Here is an example of the Mean_Reversion_Swing.efs study
www.TradeStation.com plotted on an intraday chart of APC.

January 2017 Technical Analysis of Stocks & Commodities 51

Mean_Reversion_Swing.efs based on the formula described
in Ken Calhouns article in the December 2016 issue of S&C,
Mean-Reversion Swing Trading. In the article, Calhoun
presents a strategy of trading pullbacks during a trending
The study contains formula parameters that may be
configured through the edit chart window (right-click on
the chart and select edit chart). A sample chart is shown in
Figure 2.
To discuss this study or download a complete copy of the
formula code, please visit the EFS Library Discussion Board
forum under the forums link from the support menu at www.
esignal.com or visit our EFS KnowledgeBase at http://www.
esignal.com/support/kb/efs/. The eSignal formula script (EFS)
is also available for copying & pasting from the Stocks &
Commodities website in the Traders Tips area.
Eric Lippert
eSignal, an Interactive Data company Figure 3: WEALTH-LAB. This chart shows a potential trade in HeidelbergCement
800 779-6555, www.eSignal.com AG (ticker HEI.DE in Wealth-Data).

avoid trades when a stock is not really trending, as the 1-2-3

pattern seems to perform best in established trends.
F WEALTH-LAB: JANUARY 2017 TRADERS TIPS CODE Wealth-Lab strategy code:
In his December 2016 article, Mean-Reversion Swing Trad-
ing, author Ken Calhoun shows clean and concise rules for using System;
using System.Collections.Generic;
entering in a trend continuation following a pullback after a using System.Text;
breakout. This pattern (widely known as 1-2-3 pattern) could using System.Drawing;
using WealthLab;
be programmed to apply to intraday or daily charts alike. Our using WealthLab.Indicators;
rendition targets daily charts.
Since the rules didnt put much emphasis on exits, leaving namespace WealthLab.Strategies
this to the trader, we added a simple profit target. Here, you public class MeanReversionSwingTrading : WealthScript
can find the complete trading systems rules: {
private StrategyParameter paramUptrendDays;
private StrategyParameter paramReversionLasts;
Entry: private StrategyParameter paramReversionExpiresAfter;
1. Wait for a five-day close-to-close uptrend. private StrategyParameter paramSecondEntry;

2. If the closing prices retrace 50% of the uptrends dis- public MeanReversionSwingTrading()
tance (1 percentage point) over the next 10 bars, a {
paramUptrendDays = CreateParameter("Days in uptrend", 5,
valid pullback has formed. 2, 10, 1);
3. Look for the prices to rebound and buy on a stop 50 cents paramReversionLasts = CreateParameter("Reversion lasts",
4, 2, 12, 2);
above the retracement price. If this condition hasnt been paramReversionExpiresAfter = CreateParameter("Expires
met within 10 days, the setup is invalidated. after", 10, 5, 20, 5);
4. A second entry is made if the first position has been es- paramSecondEntry = CreateParameter("Second entry?", 1,
0, 1, 1);
tablished and the high price breaks through the 15-day }
highest high price.
protected override void Execute()
Exit: bool runup = false, reversion = false, pullback = false,
1. Exit on a $1 stop-loss from the retracement price. secondEntry = paramSecondEntry.ValueInt == 1;
int runupBar = -1, pBar = -1, reversionBar = -1, uptrendDays
2. Exit with a profit target at two times the retracement = paramUptrendDays.ValueInt;
distance. double runupStart = 0, runupHigh = 0, runupRange = 0,
pivotPrice = 0, reversionThreshold = 1.0;

Motivated readers could make various improvements to Highest hi = Highest.Series(High,15);
the programs logic. For instance, to help this technique work if( secondEntry )
PlotSeries(PricePane, hi, Color.Blue, LineStyle.Dashed, 1);
equally well on stocks outside the $2070 price range, make
the stop-loss and profit target adaptive by replacing the fixed- for(int bar = GetTradingLoopStartBar(15); bar < Bars.Count;
dollar distance with a unit of ATR. Another suggestion is to {

52 January 2017 Technical Analysis of Stocks & Commodities

if( ActivePositions.Count > 0 )
if(!SellAtStop(bar+1, Position.AllPositions, pivotPrice -
1.0, "$1 stop"))
SellAtLimit(bar + 1, Position.AllPositions, pivotPrice +
2.0, "Profit Target");

if( ActivePositions.Count == 0 ) // First entry
if( !runup ) {
if(CumUp.Series(Close,1)[bar] >= uptrendDays) {
runup = true; runupBar = bar;
runupStart = Low[bar-5]; runupHigh = High[runupBar];
runupRange = runupHigh - runupStart;
pivotPrice = runupStart + (runupRange / 2d);
if( !pullback ) {
if( runup ) {
if( bar >= runupBar + paramReversionExpiresAfter.
ValueInt ) { Figure 4: NEUROSHELL TRADER. This NeuroShell Trader chart shows the rever-
runup = false;
sion trading system over the past 10 years for Anadarko Petroleum Corp (APC).
//AnnotateBar("Pullback timeout
else {
double runupInPercent = runupRange / (double) F NEUROSHELL TRADER: JANUARY 2017
runupStart * 100d; TRADERS TIPS CODE
double closeToExact = (reversionThreshold / 100d);
An automated mean-reversion trading system as
if( (Low[bar] <= (pivotPrice * 1.0+closeToExact)) && described by Ken Calhoun in his December 2016 article in
(Low[bar] >= (pivotPrice * 1.0-closeToExact)) ) {
pullback = true; pBar = bar; Stocks & Commodities (Mean-Reversion Swing Trading)
DrawLine(PricePane,runupBar,runupHigh,pBar,pivot can be easily implemented using NeuroShell Traders Turning
Price,Color.Red,LineStyle.Solid,2); Points add-on indicators, which compute the relevant peak
} and valley statistics. Simply select new trading strategy from
} the insert menu and enter the following in the appropriate
locations of the Trading Strategy Wizard:
// Buy at stop if price moves $0.50 the pivot price or above
if( pullback ){
double entryStop = pivotPrice + 0.50;
BUY LONG CONDITIONS: [All of which must be true]
if( BuyAtStop( bar + 1, entryStop, "1st" ) != null ) { A>=B(Add2(TPbars(High,Low,Close,3,2,1),1),5)
DrawLine(PricePane,bar,entryStop,pBar,entryStop,Col A>=B(TPslope(High,Low,Close,3,2,1),45)
runup = false; pullback = false; CrossBelow(Close,FibRetr(High,Low,3,1,3,0))
LastPosition.Tag = pivotPrice;
else STOP PRICE: Add2(FibRetr(High,Low,3,1,3,0),0.5)
// Invalidate entry if too many bars have passed since
if( bar >= pBar + paramReversionExpiresAfter.ValueInt
){ TrailPricePnts(Trading Strategy,1)
pullback = false;
AnnotateBar("Rebound timeout If you have NeuroShell Trader Professional, you can also
} choose whether the parameters should be optimized, including
} optimizing the retracement level to different Fibonacci
else retracements besides just 50%. After backtesting the trading
//Second entry strategy, use the detailed analysis button to view the backtest
if( ActivePositions.Count == 1 && secondEntry ) and trade-by-trade statistics for the strategy.
BuyAtStop(bar+1, hi[bar], "2nd");
} Users of NeuroShell Trader can go to the Stocks &
} Commodities section of the NeuroShell Trader free technical
} support website to download a copy of this or any previous
Traders Tips.
A sample chart is shown in Figure 3. A sample chart is shown in Figure 4.
Eugene, Wealth-Lab team Marge Sherald, Ward Systems Group, Inc.
MS123, LLC 301 662-7950, sales@wardsystems.com
www.wealth-lab.com www.neuroshell.com

January 2017 Technical Analysis of Stocks & Commodities 53

FIGURE 6: UPDATA. Here is a point & figure (1x3) approach to mean-reversion
Figure 5: NINJATRADER. The MRST strategy is displayed on the APC daily chart
swing trading as applied to Anadarko Petroleum Corp (APC).
in NinjaTrader 8.

instruments that have a 50% retracement, but that swing to

make new highs. This can be easily realized with a point &
F NINJATRADER: JANUARY 2017 TRADERS TIPS CODE figurebased system, since all the key signals for entry are
The concept discussed by Ken Calhoun in his December 2016 simplified within this methodology.
article in S&C, Mean-Reversion Swing Trading, is now The Updata code is in the Updata library and may be
available as a strategy named MRST for download at the downloaded by clicking the custom menu and system library.
following links for NinjaTrader 8 and for NinjaTrader 7: Those who cannot access the library due to firewall issues
may paste the code shown at the Stocks & Commodities
NinjaTrader 8: www.ninjatrader.com/SC/January2017SCNT8.zip website in the Traders Tips area into the Updata custom
NinjaTrader 7: www.ninjatrader.com/SC/January2017SCNT7.zip editor and save it.
Updata support team
support@updata.co.uk, www.updata.co.uk
Once the file is downloaded, you can import the strategy
in NinjaTader 8 from within the Control Center by selecting
Tools Import NinjaScript Add-On and then selecting the
downloaded file for NinjaTrader 8. To import in NinjaTrader 7
from within the Control Center window, select the menu File F AMIBROKER: JANUARY 2017 TRADERS TIPS CODE
Utilities Import NinjaScript and select the downloaded The chart techniques based on after-the-fact determination of
file. A sample chart implementing the strategy is shown in waves are highly subjective. In real-life trading, you dont know
Figure 5. that the wave has ended until the reversal is large enough.
You can review the strategys source code in NinjaTrader 8 A mechanical approach close to the one described by Ken
by selecting the menu New NinjaScript Editor Strategies Calhoun in his December 2016 column and in this issue on
from within the Control Center window and selecting the MRST a mean-reversion technique was presented in the November
file. You can review the strategys source code in NinjaTrader 2003 Stocks & Commodities article The Zigzag Trend
7 by selecting the menu Tools Edit NinjaScript Strategy Indicator by Spyros Raftopoulos. In that article, a zigzag
from within the Control Center window and selecting the indicator that is appropriately delayed (to ensure its stability)
MRST file. was used to enter pullbacks. Users can find the AmiBroker
Raymond Deux & Paul Hunt code I had provided based on that article at the Stocks &
NinjaTrader, LLC
Commodities website at Traders.com in the Traders Tips
TRADERS TIPS CODE The code given there implements ideas similar to those
Our Traders Tip for this month is based on the article by Ken described by Calhoun. The technique has the advantage of
Calhoun that appeared in the December 2016 issue of Stocks not relying on a strict 50% pullback rule.
& Commodities, Mean-Reversion Swing Trading. Tomasz Janeczko, AmiBroker.com
In the article, the author loosely defined a swing trading www.amibroker.com
technique for entering long positions into uptrending
54 January 2017 Technical Analysis of Stocks & Commodities
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rading liquidity is often over- very high volumes. The greatest number three-year period. Thus, all numbers in
looked as a key technical of dots indicates the greatest activity; this column have an equal dollar value.
measurement in the analysis futures with one or no dots show little Columns indicating percent margin
and selection of commodity activity and are therefore less desirable and effective percent margin provide
futures. The following explains how to for speculators. a helpful comparison for traders who
read the futures liquidity chart pub- Courtesy of CBOT wish to place their margin money ef-
lished by Technical Analysis of Stocks ficiently. The effective percent margin
& Commodities every month. is determined by dividing the margin
value ($) by the three-year price range of
Commodity futures contract dollar value, and then multiply-
The futures liquidity chart shown be- ing by one hundred.
low is intended to rank publicly traded
futures contracts in order of liquidity. Stocks
Relative contract liquidity is indicated Trading liquidity has a significant ef-
by the number of dots on the right-hand fect on the change in price of a secu-
side of the chart. rity. Theoretically, trading activity can
This liquidity ranking is produced by serve as a proxy for trading liquidity
multiplying contract point value times All futures listed are weighted equally and equals the total volume for a given
the maximum conceivable price motion under contracts to trade for equal dol- period expressed as a percentage of the
(based on the past three years historical lar profit. This is done by multiplying total number of shares outstanding. This
data) times the contracts open interest contract value times the maximum pos- value can be thought of as the turnover
times a factor (usually 1 to 4) for low or sible change in price observed in the last rate of a firms shares outstanding.

Trading Liquidity: Futures

Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity
% Margin Trade for Equal
Dollar Profit
S&P 500 E-Mini (Dec 16) GBLX 4.8 23.3 3 >>
Crude Oil WTI (Jan 17) NYMEX 6.9 5.2 1 >
10-Year T-Note (Dec 16) CBOT 1.3 18.4 9 >
Euro FX (Dec 16) CME 2.8 8.7 2
Ultra T-Bond (Dec 16) CBOT 3.8 19.6 2
5-Year T-Note (Dec 16) CBOT 0.8 22.2 18
T-Bond (Dec 16) CBOT 2.9 17.3 3
Russell 2000 Mini (Dec 16) ICEUS 4.9 17.1 2
Natural Gas (Jan 17) NYMEX 8.7 7.4 2
Nasdaq 100 E-Mini (Dec 16) GBLX 4.6 15.7 3
British Pound (Dec 16) CME 5.1 13.2 3
Gasoline RBOB (Jan 17) NYMEX 8.2 6.1 1
Soybeans (Jan 17) CBOT 5.3 9.7 3
ULSD NY Harbor (Jan 17) NYMEX 6.7 5.6 1
Gold (Dec 16) COMEX 5.5 35.9 4
2-Year T-Note (Dec 16) CBOT 0.3 19 24
Corn (Mar 17) CBOT 5.6 11.9 9
Sugar #11 (Mar 17) ICEUS 8.2 16.5 7
Eurodollar (Dec 16) CME 0.1 18.2 41
S&P 500 VIX (Dec 16) CFE 41.5 39.2 5
Wheat (Mar 17) CBOT 5.2 7.1 5
Japanese Yen (Dec 16) CME 4.4 35.9 6
Australian Dollar (Dec 16) CME 3 10.4 4
Canadian Dollar (Dec 16) CME 2.6 9.2 4
Dow Indu 30 E-Mini (Dec 16) CBOTM 4.5 23.7 4
Silver (Dec 16) COMEX 7.7 23 3
Coffee (Mar 17) ICEUS 6 15.3 3
High Grade Copper (Dec 16) COMEX 4.1 10.1 3
Cotton #2 (Mar 17) ICEUS 5.5 15.8 6
Hard Red Wheat (Mar 17) KCBT 4.6 4.7 4
Lean Hogs (Feb 17) CME 6.1 4.1 2 CBOT Chicago Board of Trade, Division of CME
Live Cattle (Feb 17) CME 4.5 7.9 3 CFE CBOE Futures Exchange
Mexican Peso (Dec 16) CME 8 12.9 5 CME Chicago Mercantile Exchange
S&P Midcap E-Mini (Dec 16) GBLX 4.6 18.7 2
COMEX Commodity Exchange, Inc. CME Group
Soybean Meal (Jan 17) CBOT 6.3 10.1 4
GBLX Chicago Mercantile Exchange - Globex
U.S. Dollar Index (Dec 16) ICEUS 2 8.9 3
ICE-EU Intercontinental Exchange-Futures - Europe
Platinum (Jan 17) NYMEX 5.7 8.9 3
Swiss Franc (Dec 16) CME 3.2 13.4 3 ICE-US Intercontinental Exchange-Futures - US
Cocoa (Mar 17) ICEUS 7.5 18.2 8 KCBT Kansas City Board of Trade
Crude Oil Brent (F) (Jan 17) NYMEX 7 4.8 1 MGEX Minneapolis Grain Exchange
Feeder Cattle (Jan 17) CME 5.9 6.2 1 NYMEX New York Mercantile Exchange
New Zealand Dollar (Dec 16) CME 3.7 14.5 4
S&P GSCI (Dec 16) CME 8.6 9.9 1
Soybean Oil (Dec 16) CBOT 3.8 12.3 12
30-Day Fed Funds (Jan 17) CBOT 0.1 11.9 34 1701
Trading Liquidity: Futures is a reference chart for speculators. It compares markets Relative Contract Liquidity places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi-
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. Relative
when compared to others in the same column. Contract Liquidity is the number of contracts to trade times total open interest times a
The number in the Contracts to Trade for Equal Dollar Profit column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return In volume
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price 1 or exp 2
In 5000

56 January 2017 Technical Analysis of Stocks & Commodities

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January 2017 Technical Analysis of Stocks & Commodities 57

The following selection of book descriptions represents a trading system development and trading that could hurt performance.
sampling of recent book releases in the investing field. Books The book shows the reader how to assess key aspects such as the
described here may be from some of the major book publish- traders personal risk tolerance; data analysis; the profit potential of
ers as well as some independent book publishers. These
the financial issue being traded; adjusting the model to fit the data;
are not critical reviews or editorial evaluations, but rather a
brief look at the book marketplace to help keep readers up
validation to estimate future performance; comparing an alternative
to date on new or recent book offerings. use of funds; determining whether the system is broken; and comput-
ing the proper position size to maximize account growth while holding
drawdown within the traders tolerance. Bandy was interviewed for
Foundations Of Trading: Developing the November 2015 issue of Stocks & Commodities.
Profitable Trading Systems Using www.wiley.com
Scientific Techniques (165 pages,
softcover $15.95, August 2016, ISBN The Volatility Smile (528 pages, $85
978-097918386-7) by Howard Bandy, hardcover, September 2016, ISBN 978-
published by Blue Owl Press. Bandys 1-118-95916-9) by Emanuel Derman &
extensive qualifications and educational Michael B. Miller, published by Wiley.
background give him no shortage of ability The Black-Scholes-Merton option model
to write on the topic of trading system de- played a significant role in 20th-century
velopment. His deep education includes finance, and it remains the most widely
university degrees in mathematics, phys- applied theory in all of finance. Despite this
ics, engineering, and computer science, and he was a professor of success, these authors note, the model is
mathematics and computer science, as well as a university dean. fundamentally at odds with the observed
He began studying artificial intelligence, modeling, and simulation behavior of options markets: a graph of
while in graduate school, and continued applications throughout implied volatilities against strike will typically display a curve or
his career. He was a senior research analyst for a commodity trad- skew, which practitioners refer to as the smile, and which the
ing advisor, and the author of six books related to trading system model cannot explain. Option valuation is not a solved problem,
development, of which Foundations Of Trading is the latest. Bandy and the past 40 years have witnessed many new models that try to
writes that developing profitable systems is difficult for several reconcile theory with markets. This book presents a unified treat-
reasons: First, the financial markets are very efficient. Second, the ment of the Black-Scholes-Merton model and the more advanced
profitable patterns are a weak signal in a noisy background. And models that have replaced it. It is also a book about the principles
third, competition is stiff. He writes that, in a nutshell, the traders of financial valuation and how to apply them. Derman and Miller
universal goal is to have confidence in the signals generated by the explain not just the mathematics, but the ideas behind the models.
trading system. He states that the goal of his book is to outline a few The book demonstrates how readers can evaluate and build their
basic and relatively simple, but not necessarily simplistic, ideas that own financial models. The first half of the book serves as a course
will assist readers in their system trading. The focus is developing on option valuation and the Black-Scholes-Merton model, and the
and managing systems that have a good tradeoff between reward & second half focuses on the behavior of the volatility smile.
risk, and systems in which the trader will have confidence. In addi- www.wiley.com
tion, he draws attention to some common misconceptions related to


Continued from page 22 When prices are above the cloud
and all the other plots of the
Rudy Teseo is a private investor in stocks, options, and curren- ichimoku charts are showing a
cies, and has taught classes in technical analysis and option bullish move, it further reinforces
trading. He can be reached at rftess@optonline.net. a possible bullish move.
Elliott, Nicole [2007]. Ichimoku Kinko Hyo Charts, Tech-
nical Analysis of StockS & commoditieS, Volume 25: of StockS & commoditieS, Volume 18: October.
September. TC2000 (Worden Brothers); StockCharts.com
Muranaka, Ken [2000]. Ichimoku Charts, Technical Analysis

58 January 2017 Technical Analysis of Stocks & Commodities

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in your trading endeavors.
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life. Think about ityou feel anxious,
which then leads you to worry about all
the possible bad outcomes. Or perhaps
you detect some physical pain and feel
something is wrong with your body,
which then makes you think you may
have a serious illness. So you see how
sometimes when you think about some-
thing, it triggers a particular feeling.
Trading is an emotionally demand-
ing profession. Your feelings affect the
way you trade. You may have a good
system and iron-fist discipline, but if
you are in a heightened emotional state,
all hell can break loose and everything
you have built over time may be lost
instantly. Some people refer to it as
blowing out. Of course, short of
blowing out and washed away dead,
you can have a very bad fall, heal over
time, and get back in the game.
A helpful image or metaphor, if
you prefer, is the professional boxer
who gets knocked down but gets up
and fights another round. There is a
limit to how many hits you can take,
and there is a point at which you may
have to stop for a while. Intellectually,
you may know all this, but doing it is
a different matter.
I have been at the trading business
for over two decades and have had my
share of bad, bloody hits, and have
even come close to blowing up. But
here I am, doing better, more experi-
enced, and part of a group of traders,
no longer working in isolation; I have
learned the hard way that isolation can
be deadly. When I look back, I know I
have not escaped attending the school
It All Comes Round Again of hard knocks.

How Feelings Influence On to the real world

Your Trading
Lets look at a real-world trading

example to illustrate some of these

concepts. But before that, Ill give a
brief explanation of my trading system.
Of course, describing a trading system

Trading is emotionally demanding. Our feelings dictate our actions and without would be a chapter in itself, and thats
our being aware of it, tend to make us trade irrationally. The first step in battling not the purpose of this article. What
emotions is to be aware of them. Ill describe here regarding my trading
system is an oversimplification.

by Claudio Demb I have two main trading systems
one for the longer term and one for the
houghts, feelings, and actionsthree distinct and separate entities, yet they shorter term. The longer one is based
have a circular relationship. You see this kind of relationship in everyday on the monthly and weekly timeframe
60 January 2017 Technical Analysis of Stocks & Commodities
Trading Psychology

Hypothetical On March 14, 2016, I entered

$100,000 $250,000 $500,000 $1,000,000 $5,000,000 Insider long Cliffs Natural Resources Inc.
KGC $20 5.0K 12.5K 25.0K 50.0K 250.0K No info (CLF) followed by another entry
AUY $20 5.0K 12.5K 25.0K 50.0K 250.0K No info on April 1 and another one on May
HL $11 9.0K 22.7K 45.4K 90.9K 454.5K Y 6, 2016. The first two entries were
SSRI $35 2.8K 7.0K 14.2K 28.5K 142.8K No info good, but the third one was not; in
TRQ $20 5.0K 12.5K 25.0K 50.0K 250.0K No info fact, it was an impulsive entry. That
CLF $75 1.3K 3.3K 6.6K 13.3K 66.5K Y led me to feeling very uneasy and
AKS $50 2.0K 5.0K 10.0K 20.0K 100.0K Y
on May 9, 2016 I closed the entire
CNX $50 2.0K 5.0K 10.0K 20.0K 100.0K Y
position with a small profit (Figure
2). Needless to say, knowing that I
RIG $80 1.2K 3.1K 6.2K 12.5K 62.5K Neutral
had not traded well made me feel
PBR $50 2.0K 5.0K 10.0K 20.0K 100.0K No info
down and upset. A few days later,
FIGURE 1: WHAT KIND OF POSITIONS DO I NEED? Here you see the list of stocks I considered trading and their
hypothetical price target. You will also see the size of my positions in each of these stocks, which is dependent on the on May 19, 2016, a must-take setup
size of my trading account. came up (Figure 3) that I ended up
not taking.
and the shorter one on the weekly and daily charts. In both Lets dig into this trade and see how many psychological
trading systems, I need to take into account the overall market pitfalls I was guilty of.
stage; I need to have an entry trigger, a stop, a first target, and
a second target. This second target is determined by using a Tricks of the mind
trend-following method with a trailing stop. To begin with, I was thinking about
In this example, I developed a trading plan based on the making money. And with that comes
concept of reverse engineering. The concept sounds compli- a lot of excitementsomething that
cated, but in simple terms, its a plan to achieve the defined has always cost me dearly. However,
outcomein other words, what it is that we need to do in I tell myself that this time, I am cool,
order to achieve a specific result. In this example, I calculated I know what I am doing. Even though
what kind of positions I needed in order to make x amount there is some truth to my knowing what
of money. In Figure 1 you can see the stocks with the hypo- I am doing as a trader, the mind can
thetical target based on historical prices. My plan was clear, play powerful tricks. I am referring to
so I only needed to execute my trading system as flawlessly rationalization, which is when you use
as possible. It may sound simple and easy, but lets not get logical explanations to justify your ac-
ahead of ourselves. tions whether they are correct or not.


FIGURE 2: ALL PLANNED OUT. Here you see where I took the first, second, and third entries and where I exited the trade.

January 2017 Technical Analysis of Stocks & Commodities 61

FIGURE 3: LOST OPPORTUNITY. Given that my judgment was clouded by emotions, I missed a great setup that came my way. Its a lost opportunity, but life
goes on. Therell be many more of those to come.

Life goes on, and just as the sun rises every day, the market
Strong feelings dictate action, opens up the following day. But clearly, in this situation, I am
and in the grips of that powerful not in a good emotional place; my emotional capital is almost
spent as a result of my last impulsive trade. Thus, when the
emotional state, you can be next must-take setup shows up, I am not able to take it. I am
forced to enter or exit positions. still anchored to my last trade, and the painful memory of it
makes me too fearful to take the new setup.

Lets take a deeper look and see what happens after tak- Think, feel, act
ing the first and second entries. My entries were good, the As is evident in the example I gave you, feelings dictate our
trade was working well, and the position was growing larger. actions. Feelings happen quickly and we often dont notice
I wanted to have my full position as soon as I could. I was them. Because were not aware of those feelings, we find our-
feeling confident even though my anxiety was rising. I used selves thinking a particular way. In other words, our emotional
the next deep pullback to enter the third and final portion of states color our lenses. All of a sudden, we could be seeing
my full-size position without respecting my entry triggerit a gloomy scenario that is not there, and if you are not aware
was an impulsive trade. of this sort of pitfall, you will end up trading your feelings
The knowledge that entering that third portion was an im- instead of the setups that you are supposed to trade.
pulsive trade led me to experience strong negative feelings. It
is these strong feelings that dictate action, and in the grips of Claudio Demb has been an independent trader and investor
that powerful emotional state, I was forced to get out of the for over 20 years. He is a practicing psychiatrist and lives
position. This is a textbook case of a fight-or-flight response. with his family in Brookline, MA. He may be reached via
In that state of mind, you can no longer be rational. I ended email at claudiodemb@gmail.com.
up closing the entire position with a gain, but that doesnt mat-
ter. The point is I failed to execute my plan. In other words, TradeStation
this unrealistic dream I had was crushed and I was brought
down to reality.

62 January 2017 Technical Analysis of Stocks & Commodities

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