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THE TRADERS’ MAGAZINE SINCE 1982

www.traders.com AUGUST 2018

Portfolio Strategy
Based on accumulation/
distribution 8

The V-Trade
Part 6: Technical analysis—
divergence indicators 16

Diving Board Trade


Looking for the price spring 26

Seven Forex Myths


Common misconceptions 30

Weekly Options
How to start out slowly 32

INTERVIEW
Sloping upward with
Tim Knight 36

product review
n MarketScope Advisor

AUGUST 2018
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150.00
145.00
7.3 73
UNDERLYING ANALYST OPINIONS Valuation
140.00
Provided By Thomson Reuters StarMine. Overvalued Undervalued
135.00
130.00 94
125.00 1-Year History Quality
120.00
Very Bullish Low High
115.00
110.00
Bullish 90
105.00 Neutral Growth
1.09M ABI INDIVIDUAL
Bearish Stability Low High
Apr May Jun Jul Aug Sep Oct Nov Dec 2017 3 Month Support/Resistance (40 Day) Trade Alert ABI Arbine Industries
Very Bearish B 80.42 x 10 84
84.65 80.4399 A 80.44 x 3
2016
1Y 6M 3M 1M
0.3199 (0.40%)
V 1.655.125 Financial
6M YTD 1Y 2Y 5Y 10Y MAX Frequency: DAILY
83.38 S 83.35 EQUITY SUMMARY SCORE Health Less Healthy Healthy
BULLISH
82.11 0 1 3 7.1 9 10

al Analysis for ABI Social Sentiment for ABI Earnings for ABI80.84 BCO 81
As of 09/24/2017 MORE
View Details Provided by StarMine
80.4399
S-Score Earnings Per Share I/B/E/S Consensus Estimates
EARNINGS vs Adjusted Actuals Earnings Metrics GAAP
A 79.56
Q1 Expected Report Date 09/25/2017 To d a y
vs. Industry: Aerospace & Defense
Neutral 0.840
BPO 79
$4.00 78.29 Consensus Estimate EPS
$3.51
0.876 INDUSTRY
nt 2 weeks to 6 weeks Estimate Low/High Range 0.85/0.92 CDE AVERAGE
PROVIDED BY SOCIAL MARKET ANALYTICS $3.00 View Details

neutral strong $2.00 $1.74


77.02
DIVIDENDS
EPS (TTM) $6.55 $6.76
Extreme Positive $1.00 75.74
75.42
Ex. Dividend Date 08/28/2017
P/E (TTM) 23.89 24.58
Trade$0.00
Confirmation: $ Dividend $0.24

6 weeks to 9 months 74.47


Frequency
-$.44 Annualized/Yield
Quarterly
P/E (5-Year Avg) 17.81 18.32
1,250 shares of ABI
$0.96/1.17%
-$1.00 View Details
neutral strong Neutral -$2.00 73.20 EPS Growth (TTM vs -17.36% +3.82%
Q1 2016 Q2 2016
Positions News Research
Q3 2016
Options
Q4 2016 Prior TTM)
Missed Beat Beat
by $0.09 by $0.48 by $0.89
EPS Growth (Last Qtr vs +45.75% +31.30%
Same Qtr Prior Year)
Commission:
nt 9 months to 2 years
Extreme Negative
neutral strong Consensus Actual Beat, missed or met
consensus estimates
4AImages are 10A
for illustrative

$4.95
7A 1P 4P 7P Model the stock price using P/E

purposes only.

MORE Top Competitors for ABI MORE

Announcement Date Ex-Div Date Record Date Pay Date AS OF 01/03/2017 ABI Industry ABC FGH GHI STU
Arbine Ind. Average
12/13/2016 02/08/2017 02/10/2017 03/03/2017
Industry Energy Energy Energy Energy Energy Energy

Sustainability Growth Equity Summary Score --


Dividend Payout Ratio Annualized Dividend (YoY % chg.) 7.3 2.9 8.3 7.8 7.6
By Thomson Reuters StarMine
AS OF 01/03/2017
CDE Market Median
62 % 60%
50%
Price Performance (52
Weeks)
+8.56% +16.97% +16.65% +27.73% +24.41% +16.61%

46% 87% 40%


30% P/E (This Year’s Estimate) 21.96 24.58 20.58 17.55 19.84 19.62
20%
% Beta (1 Yr Annualized) 0.86 0.90 0.61 0.90 0.54 0.69
10%
Previous Trailing Current Trailing 0%
(12 MONTHS) (12 MONTHS) 2014 2015 2016 2017 Shares Outstanding 617.2M 416.7M 293.0M 304.5M 176.3M 293.6M
(Annualized as of last ex-date 02/08/2017) Shares Short* 16.7M -- 2.8M 3.1M 2.1M 3.0M

* Shares Short data provided by NASDAQ, NYSE, or AMEX and is updated periodica;ly and on a bi-monthly basis (depending on the listing exchange).
View Exchange Agreements

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Contents august 2018, Volume 36 Number 9

6 Q&A INTERVIEW
by Rob Friesen 36 Sloping Upward With Tim Knight
The Traders’ MagazineTM This professional trader answers by Jayanthi Gopalakrishnan
a few of your questions. Timothy Knight began trading in
EDITORIAL
1987. He founded Prophet Financial
editor@traders.com FEATURE ARTICLE Systems in 1992, which started as
8 Portfolio Strategy Based On TIPS a financial data company and then
Editor in Chief Jack K. Hutson
Accumulation/Distribution became a technical analysis site. In
Editor Jayanthi Gopalakrishnan
by Domenico D’Errico & 2005 he launched SlopeOfHope.
Production Manager Karen E. Wasserman
Antonio Zaffino com, recently rebooted with a new
Art Director Christine Morrison charting platform. As a money
Whether you are an individual
Graphic Designer Wayne Shaw manager, he also owns and operates
trader or an asset manager, your
Webmaster Han J. Kim a short-bias hedge fund. We spoke
main goal in reading a chart is
Contributing Editors John Ehlers, with him about why he is drawn to
to detect the intentions of major
Anthony W. Warren, Ph.D.
charting and what he sees in them.
Contributing Writers Thomas Bulkowski, Martin Pring, institutions, large operators, well-
Barbara Star, Markos Katsanos informed insiders, bankers and
so on, so you can follow them. 41 Futures For You
Here, we’ll build an automated by Carley Garner
OFFICE OF THE Publisher stock portfolio strategy based on a Here’s how the futures market
Publisher Jack K. Hutson cornerstone price analysis theory. really works.
Industrial Engineer Jason K. Hutson
Project Engineer Sean M. Moore
16 The V-Trade, Part 6: Technical 46 Explore Your Options
Advertising Sales Analysis—Divergence Indicators by Jay Kaeppel
4757 California Ave. S.W.
by Sylvain Vervoort Got a question about options?
Seattle, WA 98116-4499
206 938-0570 Fax 206 938-1307 In this sixth part of a multipart
advert@traders.com
series, we’ll continue with our AT THE CLOSE
National Sales Manager Edward W. Schramm look at one trader’s techniques 60 Investing: An Objective-Based
ESchramm@traders.com
for making both manual and Primer
automatic buy and sell decisions. by Gabriel Gonzalez
Circulation We’ll also investigate the stochastic Safety, income, and capital—three
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circ@traders.com divergences. any trade or investment. Let’s
Subscription Manager Sean M. Moore explore them further.
25 Acceleration Ramp Breakouts
Website by Ken Calhoun
http://www.traders.com The acceleration ramp is a pattern product review
Staff members may be emailed through the Internet that points to stocks that are 42 MarketScope Advisor
using first initial plus last name plus @traders.com building strong demand over the Subscription service providing
course of several weeks. Here’s how independent information on
Author­i­za­tion to pho­to­copy items for inter­nal or per­sonal to look for this pattern. sectors, stocks, ETFs, and mutual
use, or the inter­nal or per­sonal use of spe­cific cli­ents, is grant-
ed by Tech­ni­cal Anal­y­sis, Inc. for users reg­is­tered with the funds, with both fundamental and
Cop­y­right Clear­ance Cen­ter (CCC) Transactional Reporting 26 The Diving Board Trade technical analysis tools.
Serv­ice, pro­vided that the base fee of $1.00 per copy, plus by Thomas Bulkowski
50¢ per page is paid directly to CCC, 222 Rosewood Drive,
Danvers, MA 01923. Online: http://www.copyright.com. For
What is a diving board pattern and DEPARTMENTS
those organ­iz­ a­tions that have been granted a photocopy can you profit from trading one?
48 Traders’ Tips
license by CCC, a sep­a­rate sys­tem of pay­ment has been
arranged. The fee code for users of the Transactional 57 Advertisers’ Index
Reporting Serv­ice is: 0738-3355/2018 $1.00 + 0.50.
30 Seven Forex Myths Dispelled 57 Editorial Resource Index
Sub­scrip­tions: USA: one year (13 issues) $89.99; by Solomon Chuama 58 Futures Liquidity
Magazines shipped outside the US require additional New traders often get attracted to 59 Classified Advertising
postage as follows: Canada, US$15 per year; Europe,
US$25.50 per year; all other countries US$39 per year.
the forex markets because of the 59 Traders’ Resource
Sin­gle copies of most past issues from the cur­rent year are potential to make great returns
62 Trade News & Products
avail­a­ble pre­paid at $8 per copy. Prior years are avail­a­ble using a small amount of capital.
in book format (without ads) or digitally from www.traders. But there is more that new traders
com. USA funds only. Washington state res­i­dents add
sales tax for their locale. VISA, MasterCard, AmEx, and
should know about it. Here, we
Discover accepted. Subscription orders: 1 800 832-4642 look at some of the common
or 1 206 938-0570. misconceptions about forex trading.
Technical Analysis of Stocks & Commodities™,
The Traders’ Magazine™, is prepared from information
believed to be reliable but not guaranteed by us with­out 32 An In-Depth Look At Weekly
further verification, and does not purport to be complete. Options
Opinions expressed are subject to revision without noti-
fication. We are not offer­ing to buy or sell securities or by Koos van der Merwe
commodities discussed. Technical Anal­ysis Inc., one or If you’re hesitant about trading
more of its officers, and authors may have a position in options, it’s best to try them slowly,
the securities discussed herein.
The names of products and services presented in this
one contract at a time.
magazine are used only in an editorial fashion, and to the
benefit of the trademark owner, with no intention of infring- n Cover: William L. Brown This article is the basis for
ing on trademark rights. TIPS Traders’ Tips this month.
n Cover concept: Christine Morrison
Copyright © 2018 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis
of Stocks & Commodities™ (ISSN 0738-3355) is published monthly with a Bonus Issue in March for $89.99 per year by Technical Analysis, Inc., 4757 California Ave. S.W., Seattle, WA 98116-4499. Periodicals
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Printed in the U.S.A.

4 • August 2018 • Technical Analysis of Stocks & Commodities


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Dow Jones & Co. Inc. [1] Options involve risk and are not suitable for all investors. For more information read the “Characteristics and Risks of Standardized Options”. For a copy, call 312
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Q&A

SINCE YOU ASKED


Confused about some aspect of trading? Professional trader Rob Friesen, president
& COO of Bright Trading (www.stocktrading.com), an equity trading corporation
hosting independent proprietary traders, an online trading school, and the Stock-
Odds database, answers a few of your questions. To submit a question or suggest a
topic, email him at robfriesen@brighttrading.net. Selected questions will appear in
a future issue of S&C.
Rob Friesen

The Odds: USING Statistics on your system and the odds pertaining The odds of a stock’s movement are
in Trading to each stock can do wonders for your dynamic ... not static
In previous columns here, I’ve talked trading performance. There is great value in trading from a
about the trader’s need to have a valid A stock in a streak may perform inde- probabilistic approach. The challenge
reason to trade and to monitor the trade’s pendently from the market trend or could comes from trying to quantify prob-
continued validity. Every trade is an be correlated to the market. You could abilities that are dynamic in nature. A
educated bet without a payoff certainty. check the stats by comparing a symbol challenging area for many traders is
But to place these bets, the trader needs to SPY to identify what is normal or designing a model that can quantitatively
to have information. Either the trader has average versus current conditions. But, reveal probabilistic edges from potential
to compile the data himself, or borrow the trader still doesn’t know for certain trades. Rather than take the time to de-
from an outside source. Regardless of the if that correlation will persist. This velop or research what tools are available,
source, the trader needs to learn to trust is why we keep circling back to each traders often rely on their intuition or
the data through backtests, walk-forward day selecting longs and shorts to trade discretion. However, successful trading
paper trades, and then finally, progress simultaneously. Focus on the edges you may be counterintuitive and require the
to live trading. Computers are great at can identify in the odds of each symbol, trader to do the opposite of what is the
spitting out data points, but humans and through staying dollar-neutral and/or most natural and most logical conclusion
have an adoption curve that is plagued from an observation.
by the challenges of the mind, emotions, An unbiased coin has a 50% prob-
circumstances, normal/average setbacks, There is great value ability of ending up with heads or tails
and the rare events. in trading from a when flipped. In the classic coin-flip ex-
Trading streaks of performance (usu- periment, the probability of getting tails
ally called trends) in stocks can provide
probabilistic approach. after a long streak of heads is still 50%.
a trading edge. Here, “streaks” refer spe- The challenge comes The gambler’s fallacy or common belief
cifically to the days of performance in the from trying to quantify is that the odds of getting heads might
same direction without any reverse-walk probabilities that are be higher after a streak of getting tails
within that trend. We always calculate seven times in a row. In roulette, many
streak from a zero value—a close in the
dynamic in nature. gamblers believe the odds of getting a
opposite direction to the previous day. red is higher after a streak of, say, eight
This resets the count and then a streak volatility-neutral, you could reduce the times on black. But the odds for the next
would be calculated by closes lining up market’s impact on your overall holdings occurrence have not changed and remain
in the same direction, until a reverse for the day. at a 47.4% chance of red or black each
occurs, which ends the streak. Regarding the statistics on individual spin (due to the green 0 and 00).
stocks, I have found that history repeats The gambler’s fallacy might be ap-
Reducing market impact itself, and this can be observed in a stock’s plicable to stocks in that a trader could
A trader could select some high-probabil- ability to streak, continue its streak, or assume a streak would continue. But the
ity longs against some high-probability revert (that is, change direction or move gambler’s fallacy is not valid as an argu-
shorts, doing long and short streak sam- in the opposite direction) from the streak ment if the data sample indicates a bias.
ples. This would be independent of the up to that point. Quantifying the stock’s There may be a distinct probability of
overall market trend. performance after a streak of n number performing better than 50% up or down
I recognize we have discussed market- of days can create a tradable edge. If the after a streak of up or down performance.
neutral strategies here previously, but this trend was up, you may continue to work A coin is a simple object with a static
methodology complements the underly- with that trend by buying the stock or, set of probabilities that are not altered
ing themes of those articles. The value conversely, you could take an opposing from one flip to the next. But a stock is a
of trading long and short simultaneously position by shorting the stock. It’s all dynamic instrument whose probabilities
on a given day cannot be overstated. revealed in the numbers—the odds. of performance change from one occur-
Stripping the market out and focusing rence to the next during a series of streaks
6 • August 2018 • Technical Analysis of Stocks & Commodities
Q&A 2018 WINNER
AI TRADING SOFTWARE
of wins or losses. The underlying factor mean reversion rather than measure by
may not be quantitative at all. While the the distance run.
stats show us numerical values, the forces Let’s take an indicator like relative Winner
contributing to that numerical display strength index (RSI), for example. If a 16 years
could be—for a variety of reasons— stock had an RSI value of 85, what would
qualitative, macro, news-driven, or fol- that mean? Without context of how the in a row!
lowing seasonal patterns. The coin flip stock arrived at 85 or without the odds
doesn’t contain these biases or variables of what has happened subsequently
that would reveal a pattern. The pattern each time RSI reached 85 in a lookback Build powerful
H-T-H-T-H-T may show up as often as period, how is the trader going to bet?
H-H-H-H-H-H as each flip is 50%, but to An 85 RSI might mean something in
trading systems in
an onlooker’s mind, the wheels of pattern general terms like “overbought,” but is MINUTES
recognition start turning and they might this stock really overbought at this time?
come to an intuitive conclusion versus What does history tell us? What is the
without coding
the actual mathematical facts. context now?
Contrarian and mean-reverting traders
Conditional probabilities vs. love to look for things that get stretched
unconditional probabilities out from the mean. They consider these ®

An unconditional probability is the to be signals rather than noise. These


chance an event will occur independent signals attract their attention to dig deeper
of prior outcomes. This is applicable to into the odds. If the odds signal a mean-
a simple model such as an unbiased coin, reverting opportunity, the trader works to
where every coin flip has the same odds capture that reversion to the mean.
of heads or tails. However, this construct One posture is that as stocks begin to
www.NeuroShell.com
fails to reflect the dynamic nature of a streak, momentum increases, sentiment 301.662.7950
stock that has moved in a streak, which increases, liquidity could increase, and
is often a certain distance toward or away eighth day is magnified.
from its mean. Conditional probabilities Successful trading may Everything mentioned so far can also
are measurements of the chances of an be applied to capturing the odds from
event occurring given a prior event has
be counterintuitive and overnight gaps, seasonal events, sym-
occurred or not occurred. It is calculated require the trader to do pathy trades, chart patterns, and more.
by measuring the probability of the pro- the opposite of what You can quantify data in numerous
ceeding event by the updated probability is the most natural ways to overlay signals and compound
of the succeeding event. As a stock per- outputs in an effort to increase the odds
forms at one time period, the odds of its
and most logical of each bet.
performance in the succeeding period is conclusion from an To further smooth performance while
contingent upon the prior period. observation. remaining more market neutral and to use
So, what’s a trader to do, since the leverage wisely, you can use pair trading
moving target of changing probabilities volatility could decrease. This means and stocks versus the SPY or ETF it is
is difficult to quantify and convert to that a body in motion tends to stay in most aligned with. For example, if you
an exploitable edge? For starters, you motion until the inflection point. Many pair Chevron Corp. stock (CVX) with the
can recognize that the performance of traders use discretion to call the inflec- Energy Select Sector SPDR ETF (XLE),
stock prices through a streak of events tion point, and are early, getting run over you could be hedged from market factors
has conditional probabilities that are in the process. while exploiting the spread movement
changing. Always consider the context of Another posture is that as stocks get between the two. The key would be the
previous events in the effort to implement further away from their mean, the prob- analysis or data points that would provide
predictive analysis. ability of continuing gets reduced. So a probability basis to buy CVX and short
with each advance, the probability of XLE looking for that outperformance of
Mean reversion and the odds reversal only increases. It is not static CVX relative to XLE. This type of trade
I have witnessed many traders’ tenden- like a coin but rather reduces with each could be done over various timeframes—
cies to implement short or long positions move further from the mean. If a stock intraday, overnight, or weekly swing
early against a trend. They assume streaks for six days in a row, the prob- trades. Scalability comes from selecting
that because it has already run, it must ability of the seventh day being a reversal and employing additional pair combina-
mean-revert. While we witness mean day increases. If that next day were also tions to increase production.
reversion regularly, the trader has to turn in a row, forming a seven-day streak,
his focus to the odds of continuation or then the probability of reversing on the
August 2018 • Technical Analysis of Stocks & Commodities • 7
8 • August 2018 • Technical Analysis of Stocks & Commodities
TRADING SYSTEMS

The Market’s Life Cycle

Portfolio Strategy Based On


Accumulation/Distribution
Whether you are an individual trader or an asset to make their decisions; they look at fundamentals.
manager, your main goal in reading a chart is to The accumulation phase often falls at the end of a
detect the intentions of major institutions, large op- downtrend, where ordinary investors believe more
erators, well-informed insiders, bankers and so on, so bearishness is likely. For the smart money, however,
you can follow them. Here, we’ll build an automated it can be a good point to enter such a market when
stock portfolio strategy based on a cornerstone price the price is at a low. During the accumulation phase,
analysis theory. the price moves are slow. In my article “Detecting

D
Swings” in the May 2017 issue of S&C, I discuss how
ow theory principles have stood the test of the slowdown in price moves was mainly due to the
time and they still apply to today’s markets. time that major institutions need to complete their
According to the theory, there are three mar- trading operations.
ket phases (Figure 1), and understanding this
logic can help traders make sense of how price moves Public participation
and how bull and bear markets are created. Once price exits the accumulation phase and the new
• Phase 1 is the accumulation phase, or where the trend starts to become visible, the public participation
“smart money” starts to accumulate positions phase begins. More and more investors join the trend
very early on. and drive prices higher. The longer the trend lasts, the
more investors will enter such a market.
• Phase 2 is the public participation phase. This is
where the trend becomes apparent to anyone.
The excess phase
• Phase 3 is the distribution phase, or the final At the end of the public participation phase, you will
stage where the market tops and the smart money often see an excess phase where the trend accelerates
unwinds their positions while the average investor even further. During the surplus period, euphoria and
is usually on the long side. irrational optimism often enter the market, leading

I will break the theory down into algorithms that can


identify significant patterns on charts, and then backtest
the logic on a portfolio of S&P 100 stocks. I’ll start by
looking at these different phases in more detail.

Accumulation phase
The accumulation phase begins when the informed
tradestation

investors (major institutions, large operators, well-


william l. brown

informed insiders, bankers) start opening their long Figure 1: Three market phases. Here you see the accumulation, public
positions. They don’t use charts or technical analysis participation, and distribution phases on a chart of Comex gold futures.

by Domenico D’Errico & Antonio Zaffino


August 2018 • Technical Analysis of Stocks & Commodities • 9
Accumulation Distribution I break down accumulation/distribution (A/D) phases into
1. Down move still in place 1. Up move still in place
three stages.
2. Short-term momentum is 2. Short-term momentum is
strengthening weakening Technical indicators
3. Price move is slowing down = 3. P
 rice move is slowing down = Let’s see how we can spot the A/D pattern components by
Price consolidation Price consolidation
using technical indicators. As you can see by the list of techni-
Figure 2: Breakdown of ACCUMULATION/distribution phases
cal indicators in Figure 3, there are many technical indicators
to work with. It doesn’t matter so much which indicator you
Component Technical Indicators Available
use as long as you’re clear about what to look for. Indicators
Up/down move
Moving averages, ADX, linear regression, higher/ can be used differently according to your preference and
lower highs–lows
style. For example, a moving average can be used to detect a
Short-term momentum
MACD, RSI, moving averages, higher/lower highs–
lows
trend on a major timeframe, but a faster moving average can
be used to detect a pullback as well. In my May 2017 article
Channels, ADX, ATR, Bollinger Bandwidth, volume
Price consolidation
profile, linear regression slope mentioned earlier I describe several approaches you could
use to detect swings.
FIGURE 3: TECHNICAL INDICATORS. Here are some indicators that can be used
to help identify the A/D pattern components. Let’s use several indicators that may be familiar to you, bearing
in mind there are different ways to accomplish the same task.
I’ll consider three possible techniques for identifying a price
to bubble-like behavior. The last of the uninformed buyers consolidation:
enter the market at such a phase, unknowing that the end
1. Range compression
could be near.
2. ATR compression
The distribution phase 3. ADX (average directional index), which ranges from zero
The distribution phase is the initial phase of a bear market— to 100. The higher the value, the stronger the trend. I use
opposite of the accumulation phase. In this phase, the informed a low ADX value to detect congestion.
investors unwind their long positions and, depending on the
markets, might open new short positions. In the chart of Netflix (NFLX) in Figure 4 you see price
consolidations highlighted (black rectangles) when the range
From theory to practice shows some compression (black histograms).
Using the theory of the phases as a foundation, I’ll move on The formula used to identify a price consolidation based on
to how to put it into practice. The first question is, “Can you the range is:
spot the different market phases on a chart with simple techni-
cal tools, and can you use the same indicators all the time to Last four-week range /
analyze any market?” Previous four-week range <
Theoretically, when a trend is in place, everyone can see it, ConsolidationFactor
which is why I prefer to focus my analysis on when the main
trend isn’t yet revealed. I like to focus on accumulation/dis- The consolidation factor is a number between zero and 1. The
tribution phases. In Figure 2, using the previous definitions, lower the number, the narrower the price consolidation.
The code for accumulation/
distribution range can be found
in the sidebar “EasyLanguage
Code For Accumulation/Distri-
bution Range.”
In the chart of Alcoa in Fig-
ure 5, price consolidations are
highlighted with blue rectangles
when the ATR shows some com-
pression (blue histograms).
The formula to identify a
price consolidation based on
the ATR is:

ATR of last four weeks /


ATR of previous four weeks <
FIGURE 4: IDENTIFYING PRICE CONSOLIDATIONS THROUGH RANGE COMPRESSION. Price consolidations are highlighted ConsolidationFactor
with black rectangles when the range shows some compression (black histograms).

10 • August 2018 • Technical Analysis of Stocks & Commodities


The code for the accumulation/
distribution ATR can be found
in the sidebar “EasyLanguage
Code For Accumulation/Distri-
bution ATR.”
In the chart of Facebook (FB)
in Figure 6, you see how price
consolidations are highlighted
with green rectangles on the
price chart when the ADX is
below 30 (green histograms).
The rule to identify a price
consolidation based on the
ADX is:

If ADX is below 30 for the last


FIGURE 5: IDENTIFYING PRICE CONSOLIDATIONS THROUGH ATR COMPRESSIONS. Price consolidations are highlighted four weeks
with blue rectangles when the ATR shows some compression (blue histograms).

The code for the accumulation/


distribution ADX can be found
in the sidebar “EasyLanguage
Code For Accumulation/Distri-
bution ADX.”

A portfolio
rule-based
strategy
I am going to test
the three different
price consolida-
tion techniques mentioned
earlier and two different entry
rules (breakout & pullback)
for a total of six strategies on
FIGURE 6: IDENTIFYING PRICE CONSOLIDATIONS THROUGH ADX. Price consolidations are highlighted with green rect- a portfolio composed of S&P
angles when the ADX is below 30 (green histograms).
100 stocks.

Settings
Backtesting period:
Jan. 2003–Mar. 2018 on
weekly bars
Starting capital: US$ 1M
TradeSize: Starting $10,000,
then 1% of available equity
Commissions: $10 × trade
Slippage: $ 0.10 × no. of shares
Portfolio constraints: Total ex-
posure below available capital
(= no leverage)

Breakout entry (Figure 7)


Price consolidation
A higher 12-week low
Price breaks above the top of the
FIGURE 7: BREAKOUT ENTRY. This type of entry looks for price consolidation, a higher 12-week low, and price breaking consolidation channel
above the top of the consolidation channel.

August 2018 • Technical Analysis of Stocks & Commodities • 11


The code for accumulation/distribution range breakout can be
found in the sidebar “EasyLanguage Code For Accumulation/
Distribution Range Breakout.” It’s best to stay focused on
Pullback entry (Figure 8)
a few techniques and apply
Price consolidation the identical models to a wide
A higher 12-week low investment universe.
Price is above the bottom of the consolidation channel
RSI is strengthening while in oversold territory

Exit rule
Sell if price goes below the bottom of consolidation channel. 5.7 in the range compression strategy, from 7.5 to 7.7 in the
The bottom of the consolidation channel will work as a trail- ADX strategy, and from 6.1 to 6.4 in the ATR compression
ing stop. approach. This is interesting and needs to be investigated
further. Such an analysis would suggest that after a price
Backtesting consolidation, we could have time to wait for a pullback
In Figures 9, 10, & 11 you see the backtesting results for the before opening long positions, but there is a tradeoff—you
six strategies compared to the S&P 500 buy & hold. Let’s could lose some good breakout opportunities.
analyze the results:
• In Figures 10 & 11 you see how both the breakout and
• In the table in Figure 9 you see that although total profit pullback entry approaches produce smoother equity lines
for the buy & hold strategy is the highest ($1.9 million), the than the S&P 500 equity line.
reward/risk ratio (2.0)
is the lowest. It means
that all six strate-
gies beat the buy &
hold approach. The
reward/risk ratio =
Total strategy profit /
Max drawdown. (See
my article in the April
2017 S&C, “Playing
With Numbers,” for
more on this.)
• You can also see how
a pullback approach
generally reduces
the number of trades
with an effect on the
reward/risk ratio: It FIGURE 8: PULLBACK ENTRY. This type of entry looks for price consolidation, a higher 12-week low, and price above the bottom
increases from 5.5 to of the consolidation channel. Also, the RSI is strengthening while in oversold territory.

Price consolidation Number of Max Draw- Reward / Hit Rate Average


Entry Technique Total Profit
based on Trades Down Risk % Trade
Breakout above the consolidation channel top 1,244 $507,593 $92,387 5.5 45% 408
Range compression
Pullback above the consolidation channel bottom 880 355,828 62,078 5.7 40 404
Breakout above the consolidation channel top 804 1,094,880 145,603 7.5 38 1,362
ADX
Pullback above the consolidation channel bottom 883 1,123,285 145,712 7.7 38 1,272
Breakout above the consolidation channel top 1,316 851,530 140,403 6.1 47 647
ATR compression
Pullback above the consolidation channel bottom 770 460,679 72,225 6.4 40 598
Buy & Hold S&P 500 $1,945,594 $956,869 2.0
Backtesting period: Jan 2003–Mar 2018 Starting capital: 1M USD TradeSize: $10,000 1% equity Investment universe: S&P 100
Commissions: $10 x trade Slippage: $0.1 x shares
FIGURE 9: BACKTESTING RESULTS FOR THE THREE TECHNIQUES. Here you see the number of trades, total profit, max drawdown, reward/risk, hit rate %, and
average trade for the three techniques.

12 • August 2018 • Technical Analysis of Stocks & Commodities


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The strategy’s exposure
percentage is a key factor to
monitor, because it explains
how the strategy behaves in the
different market phases.

Some words on the portfolio approach


Backtesting on a portfolio rather than a single instrument
offers several advantages:
FIGURE 10: EQUITY LINE FOR BREAKOUT ENTRY
• Backtesting a strategy on a single instrument may not
produce enough trades to distinguish between a pattern
and a coincidence
• Backtesting a strategy on several instruments is more
likely to reveal any shortcomings and helps to avoid
overoptimization
• A robust strategy is likely to demonstrate consistent
profitability across various instruments.

There are two different ways to backtest portfolios: basket


backtesting and dynamic portfolio backtesting. The difference
between them is as follows:
A. Basket backtesting evaluates each strategy separately
B. Dynamic portfolio backtesting simulates the actions
FIGURE 11: EQUITY LINE FOR PULLBACK ENTRY of a real portfolio manager by taking into account the
overall portfolio considerations such as capital limits,
entry order priority, risk management, and overall port-
folio performance.

Here is where an individual trader and an asset management


firm may behave differently: Asset managers manage clients’
portfolios as a whole. They don’t manage single strategies. So
they have to adopt a dynamic portfolio backtesting approach;
this is what I did in the earlier examples. You need additional
information to fully evaluate a portfolio strategy. In Figure 12
you see the same ADX pullback strategy tested from a different
perspective to evaluate overall portfolio performance.
Note the equity line starts from $100 and not from $1M.
That’s because it is easier to compare it to the overall market
percentage moves.
In the middle chart you see the strategy drawdown calcu-
lated in percentage terms instead of US dollars. To evaluate
portfolio risk, you need to calculate drawdown versus top of
equity curve instead of versus starting capital. That is be-
cause after a few years of backtesting, the concept of “starting
FIGURE 12: EQUITY LINE, STRATEGY % DRAWDOWN, AND % EXPOSURE. capital” loses its meaning.
Note the equity line starts from $100. Strategy drawdown is calculated in percentage In the bottom chart you see the strategy’s exposure per-
terms. The strategy’s exposure percentage explains how the strategy behaves in
the different market phases. Note that exposure percentage never went above 50%
centage. This is a key factor to monitor because it explains
of available capital, which means that no more than 50 stocks out of 100 enter the how the strategy behaves in the different market phases. For
market simultaneously. example, you can see that exposure% at the beginning of 2008
14 • August 2018 • Technical Analysis of Stocks & Commodities
easylanguage Code For Accumulation/ plot1(Avgtruerange(ATRLength)/Avgtruerange(ATRLength)[ATRLen
Distribution Range gth],"ATRRatio",lightgray);
plot2(ATRFactor,"ATRFactor",darkgray);
input:Length(4),ConsolidationFactor(0.75); If Avgtruerange(ATRLength)/Avgtruerange(ATRLength)[ATR-
var:Consolidation(false),Range_(0),Top(0),Bot(0); Length]< ATRFactor then setplotcolor(1,blue);

Consolidation=false;
Range_=highest(high,Length)-Lowest(Low,Length); easylanguage Code For Accumulation/Distribution ADX
input:ADXLength(4),ADXTrigger(30);
If Range_<ConsolidationFactor*Range_[Length] then begin
var:Consolidation(false),Range_(0),Top(0),Bot(0);
Consolidation=true;
Top=highest(high,Length);
Consolidation=false;
Bot=Lowest(Low,Length);
End;
If ADX(ADXLength)< ADXTrigger then begin
Consolidation=true;
If Consolidation then begin
Top=highest(high,ADXLength);
value1=tl_new(date,time,Top,date[Length],time[Length],Top);
Bot=Lowest(Low,ADXLength);
tl_setcolor(value1,black);
End;
value1=tl_new(date,time,Bot,date[Length],time[Length],Bot);
tl_setcolor(value1,black);
If Consolidation then begin
value1=tl_new(date,time,Bot,date,time,Top);tl_
value1=tl_new(date,time,Top,date[ADXLength],time[ADXLength],
setcolor(value1,black);
Top);tl_setcolor(value1,green);
value1=tl_new(date[Length],time[Length],Bot,date[Length],time[L
value1=tl_new(date,time,Bot,date[ADXLength],time[ADXLength],
ength],Top);tl_setcolor(value1,black);
Bot);tl_setcolor(value1,green);
End;
value1=tl_new(date,time,Bot,date,time,Top);tl_
setcolor(value1,green);
if Range_[Length]>0 then begin
value1=tl_new(date[ADXLength],time[ADXLength],Bot,date[ADXL
plot1(Range_/Range_[Length],"RangeRatio",lightgray);
ength],time[ADXLength],Top);tl_setcolor(value1,green);
plot2(ConsolidationFactor,"ConsolidationFactor",darkgray);
End;
If Range_/Range_[Length]< ConsolidationFactor then
setplotcolor(1,black);
plot1(ADX(ADXLength),"ADX",lightgray);
End;
plot2(ADXTrigger,"ADXTrigger",darkgray);
If ADX(ADXLength)< ADXTrigger then setplotcolor(1,green);
easylanguage Code For Accumulation/Distribution ATR
input:ATRLength(4),ATRFactor(0.75); EasyLanguage Code For Accumulation/Distribution
var:Consolidation(false),Range_(0),Top(0),Bot(0); Range Breakout

Consolidation=false; input:Length(4),ConsolidationFactor(0.75);
var:Consolidation(false),Range_(0),Top(0),Bot(0);
If Avgtruerange(ATRLength)<ATRFactor* Avgtruerange(ATRLength)
[ATRLength] then begin Consolidation=false;
Consolidation=true; Range_=highest(high,Length)-Lowest(Low,Length);
Top=highest(high,ATRLength);
Bot=Lowest(Low,ATRLength); If Range_<ConsolidationFactor*Range_[Length] then begin
End; Consolidation=true;
Top=highest(high,Length);
If Consolidation then begin Bot=Lowest(Low,Length);
value1=tl_new(date,time,Top,date[ATRLength],time[ATRLength],T End;
op);tl_setcolor(value1,blue); Input:VolRatio(1),VolAvg(4),VolDelay(4);
value1=tl_new(date,time,Bot,date[ATRLength],time[ATRLength],B //Signals
ot);tl_setcolor(value1,blue); If Date>=1030101
value1=tl_new(date,time,Bot,date,time,Top);tl_ and close > Top
setcolor(value1,blue); and Bot>Bot[12]
value1=tl_new(date[ATRLength],time[ATRLength],Bot,date[ATRL and average(volume,VolAvg)[VolDelay]>VolRatio*average(vol
ength],time[ATRLength],Top);tl_setcolor(value1,blue); ume,VolAvg)[VolAvg+VolDelay]
tl_setcolor(value1,blue); then buy (10000+netprofit)/close shares this bar close;
End;
If close < Bot then sell this bar close;

goes down to 10% and at the beginning of 2009 goes down This gives you room to increase trade size without using lever-
further to zero. This means the strategy was able to stay out age, bearing in mind that both profits and drawdown would
for most of the 2008 bearish market. increase accordingly.
At the same time, you see that exposure percentage never
went above 50% of available capital. That means that no more
than 50 stocks out of 100 enter the market simultaneously. Continued on page 29
August 2018 • Technical Analysis of Stocks & Commodities • 15
introduce a stochastic RSI or SRSI
indicator (SveStochRSI), which I
mainly use to detect divergences
between the indicator and price. I
look for positive and negative di-
vergences, hidden divergences, and
convergent moves. In this article, I
will also present chart patterns used
with the V-Trade method.

Stochastic relative
strength index
The relative strength index (RSI)
was developed by J. Welles Wilder
and introduced in his 1978 book,
New Concepts In Technical Trading
Systems, as well as in the June 1978
issue of what was then Commodities
magazine. The RSI is a momentum
indicator that compares the magni-
tude of recent gains to recent losses,
and converts that information into a
number that ranges from zero to 100.
It takes a single parameter, the num-
ber of bars, to use in its calculation.
In his book, Wilder recommends
using 14 periods. In the 15-minute
chart of GBDUSD in Figure 1, the
RSI indicator (magenta) is just below
the price chart.
The stochastic oscillator is a
momentum indicator that looks at
support & resistance levels. George
Lane promoted this indicator in the
1950s. The term stochastic refers to
the current price’s location with re-
spect to its price range over a period.
This method predicts price turning
points by comparing the security’s
Hey Trend, How Strong Are You? closing price to its price range. Both

The V-Trade
the stochastic and RSI oscillators are
available in most charting software.
BULL HEAD: TOBIAS ARHELGER/FRANKFURT STOCK EXCHANGE: CHRISIIAN COLISTA/

In Figure 1, the red price stochastic


indicator is in the chart below the
Part 6: Technical Analysis—Divergence Indicators RSI indicator.
The stochastic RSI was developed
In this sixth part of a multipart series, we’ll continue with our look at one trader’s by Tushar Chande and Stanley Kroll.
techniques for making both manual and automatic buy and sell decisions. We’ll also Details on this indicator can be found
SHUTTERSTOCK/COLLAGE: CHRISTINE MORRISON

investigate the stochastic RSI indicator (SRSI) to identify divergences. in their May 1993 Stocks & Com-

In
modities article, “Stochastic RSI
by Sylvain Vervoort And Dynamic Momentum Index,”
and in their book The New Techni-
several parts of this series, I discuss the technical analysis portions of my cal Trader published in 1994. The
method (which I call the V-Trade) and explain all the techniques I apply stochastic RSI applies the stochastics
to make manual and automatic buy and sell decisions, or a combination of formula to RSI data values instead of
both. Continuing with this focus on technical analysis here in part 6, I’ll to normal price values. This makes
16 • August 2018 • Technical Analysis of Stocks & Commodities
TRADING SYSTEMS

it an indicator of an indicator. The


result is an oscillator that fluctuates
between zero and 100. The stochastic
RSI is said to be better in identifying
overbought and oversold conditions
than the RSI or stochastics. The green
indicator in the chart in Figure 1 is
a typical, standard stochastic RSI
indicator.
I want an indicator that confirms
price reversals as reliably and quickly
as possible. The SveStochRSI, which
I will refer to as SRSI, seen as the blue
oscillator at the bottom of the chart
in Figure 1, is an efficient tool for
confirming price reversals based on
divergent moves between price and
indicator. SRSI is a smoothed com-
bination of the stochastics and RSI
oscillators. The smoothed stochastic
oscillator uses the basic stochastic
formula and RSI data as input. The

MetaQuotes Software Corp.


MQL4 source code for the SRSI can
be seen in the sidebar, “StochRSI MT4
source code.” Source and compiled
code can be downloaded from my
website at http://stocata.org/meta-
trader/formulas.html. Figure 1: comparing positive and negative divergences. There is a negative divergence between
the first up-moving red arrow with a higher price top but a lower SRSI top. This divergence is only visible in the
Looking at Figure 1, there is a SRSI indicator.
negative divergence between the first
up-moving red arrow with a higher
price top but a lower SRSI top. This divergence is visible in Positive divergence (Figure 2)
the SRSI but not in the StochRSIStandard. A positive divergence appears when price moves down and
The first green arrow shows a positive divergence between makes a new lower bottom while the SRSI makes a higher
a lower price bottom and the indicator with a higher bottom. bottom. This confirms a trend reversal from a down to an up
Again, this divergence is only visible in the SRSI. move. Most profitable positive divergences show up after a
Note how the SRSI oscillator accurately marks short-term five-impulse down wave.
tops and bottoms. However, I use this oscillator mainly to
display normal divergences, hidden divergences, and conver- Positive convergence (Figure 3)
gences between the oscillator and price data. A positive convergent move is when both price and indi-
cator move up and make higher lows or higher highs. A
Positive and negative divergences positive convergence move mostly suggests the previous
Let me first illustrate and define the possible types of uptrend’s continuation after a correction phase that ends
divergences: with a higher low.

Positive hidden divergence (Figure 4)


A positive hidden divergence appears when price moves up

The SRSI is an efficient tool


for confirming price reversals
based on divergent moves
between price and indicator.
Figure 2: positive divergence FIGURE 3: POSITIVE CONVER-
GENCE

August 2018 • Technical Analysis of Stocks & Commodities • 17


Modified renko charts with
divergence/convergence
Figure 8 uses a 4.5 point USA500 modified
renko chart. The text that follows refers to the
reference numbers on the chart.

1. This is not visible on the chart since it would become


unreadable, but it is a Fibonacci projection over the
last correction. Note the up price targets at 161.8% and
261.8%.
FIGURE 4: POSITIVE HIDDEN DI- FIGURE 5: NEGATIVE DIVERGENCE
VERGENCE 2. A convergent positive up move with higher tops and
bottoms appears. The index falls back to the 161.8%
Fibonacci support. This downward pullback is as ex-
pected after a convergent up move. After the pullback,
the index continues its uptrend.
3. The index makes a new top, reaching the 261.8% Fibo-
nacci target. At this point there is a negative divergence
with higher price tops and lower SRSI tops announcing
a trend reversal. This is a good opportunity to open a
short position. You open at 2,475, the low of the second
red bar, using a stop one bar above the double red bar
FIGURE 6: NEGATIVE CONVER- FIGURE 7: NEGATIVE HIDDEN DI- at 2493. That way, the maximum loss will be 18 index
GENCE VERGENCE
points. Assume your basic capital is $1,000 and you
are trading at $5 per index point, meaning your dollar
and makes a higher low while the SRSI shows a lower bottom.
risk is $90.
This pattern mostly indicates that the last price downswing
was a correction of the previous up move. Price continues the 4. The index moves down to a previous price support level
uptrend after the correction. and makes a two-bar up pullback, turning back down
against the volatility band’s middle line resistance. You
Negative divergence (Figure 5) can now draw a Fibonacci target over the first wave
A negative divergence appears when price moves up and makes down. Now you put an automatic closing order at the
a new higher top while SRSI makes a lower top. This confirms 161.8% Fibonacci target. Why this target? What you do
a trend reversal from an up move to a down move. Most profit- not see here and what I plan to discuss in future articles
able negative divergences show up
after a five-impulse up wave.

Negative convergence (Figure 6)


A negative convergence occurs when
price and indicator trend down and
make lower lows or lower highs. A
negative convergent move mostly
announces a continuation of the
ongoing downtrend after a correction
phase ends with a lower high.

Negative hidden divergence (Fig-


ure 7)
A negative hidden divergence ap-
pears with price trending down and
making lower highs in price while
SRSI makes a higher high. This
pattern mostly indicates that the last
upswing in price was just a correc-
tion for the previous down move and
price continues the downtrend after FIGURE 8: APPLYING DIVERGENCE/CONVERGENCE TECHNIQUES WITH RENKO CHARTS. This modified renko
the correction. chart of a 4.5-point USA500 displays the different types of divergences and convergences.

18 • August 2018 • Technical Analysis of Stocks & Commodities


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is the wave count. The previous intermediate up impulse
wave (5) is finished and you expect a larger correction.
This will most probably be a double zigzag correction
with usually a 50% retracement. This is why you would
A negative convergent
rather set a close target for the first zigzag correction move mostly announces a
wave. Otherwise, all your profit at that point will be continuation of the ongoing
lost and you can never be sure that this is not the end of downtrend after a correction
the correction. The index moves further down and your
short position closes at 2443, a profit of 2493-2443 =
phase ends with a lower high.
50 * $5 = $250. The index finds support on a previous
price level and turns up, starting the up correction. With
the convergent move, you expect only a correction. If
you count on a 50% retracement, it is possibly too small either swing trade on every wave or you may decide to
to make money. Instead, you wait for the start of the stay in the trade as long as the upswings are confirmed
second zigzag down. to continue.
5. The index moves up to the upper side of the volatility 8. Wave 1 up starts wave 2 down bouncing against the upper
channel and a previous price resistance. The double side of the volatility band. Lower tops in the index and
red candle at that point is most probably the start of the SRSI confirm the next wave is a correction wave.
second zigzag down. You open a new short position 9. Wave 2 ends at the low of the volatility band and starts
at 2461.5, setting a stop at one bar above the double wave 3 up. There is a convergent move with higher
bar at 2475. The dollar risk is 2475-2461.5 = 13.5 * 5 bottoms in the index and SRSI. The next target is the
= $67.50. Do you see the negative hidden divergence 100% Fibonacci reference with a previous price resis-
with a lower index top and a higher SRSI top? That’s tance top.
a nice indication that you can expect a continuation of
10. The index moves up a fraction above the expected level.
the previous down move.
Again, there is a convergent move and you expect only a
6. The 261.8% Fibonacci target can be used as a downward correction. This correction brings the index down once
target. In addition, you measure the height of the first more to the low side of the volatility channel and a 50%
zigzag down from the last top (the first blue rectangle) retrace of the move up until now.
and project it down for another possible target (second
11. There is a positive hidden divergence showing up with a
blue rectangle). Both of these targets are very close
higher index bottom and lower SRSI bottom. You expect
together. You can use the nearest target plus one bar up
a continuation of the uptrend. The last up move is not a
to set an auto-sell order at 2419.
wave 3 because it falls below wave 1. You assume that
7. When creating the second zigzag wave, there is a small the index made another intermediate wave 1 and 2, now
up correction before reaching the zigzag’s lowest low. expecting a wave 3.
The short position is closed with a profit of 2461.50-
12. The index moves up, finding resistance exactly at the
2419 = 42.50 * 5 = $212.50. The total profit is now
161.8% Fibonacci target. This is a positive convergent
250+212.50 = $462.50. Note the important positive
move, so you may expect an uptrend continuation after
divergence with a lower index and higher SRSI. This is
a correction.
usually an excellent indication of the correction’s end
and the possibility of an up reversal. The index reached 13. There is a small correction down to the middle line of
the projected targets and the low side of the volatility the volatility band. This is a convergent move and the
channel. As soon as you see the green double candle, uptrend continues. It looks like a good time to set an
it is worth taking the risk to open a long position. You auto-closing order at the level of the 261.8% Fibonacci
open a long trade at 2430 with a stop one bar below target once the 161.8% is broken, setting a closing order
the low at 2417, a risk of 13 * 5 = $65. For this new at 2568.
intermediate impulse wave up, you can project Fibo- 14. The closing order target is reached and closed with a
nacci targets at 161.8% and 261.8% with a 0 projection profit of 2568-2430=138*5=$690. The total profit is
at the current lowest low and 100 at the start of the 462.5+690=$1,152.5, more than a 100% profit in less than
second zigzag down. You now expect a smaller wave three months with only $1,000 starting capital at risk.
1, a correction wave 2 (which should have a maximum
size of wave 1) and a larger wave 3, which could be With a higher index top and lower SRSI top, you have a
another extended impulse wave 1 to 5. You can expect negative divergence. You can expect another reaction. If you
resistance at the upper side of the volatility channel, as count the waves, it looks like price is not yet at the top. More
well as at the 100% level of the Fibonacci projection about learning to count waves later.
and the 161.8% and 261.8% Fibonacci targets. You can
20 • August 2018 • Technical Analysis of Stocks & Commodities
of 111.09-110.52 = $0.57 or 57 pips, a profit of 57 * $2
= $114. With lower bottoms in price and SRSI, there is
a negative convergent move. You await an up correction
The stochastic RSI is said related to the size of the double zigzag down followed
to be better in identifying by a continuation of the downtrend after the correction.
overbought and oversold This up correction is possibly limited in size, so you do
conditions than the RSI or not open a long position. The first small zigzag up has
a positive convergent move. You expect a small down
stochastics. reaction followed by a further up move.
5. Price moves further up to the high price resistance of the
previous day, the upper side of the Bollinger Bands, and
previous price resistance. A negative divergence with
Fixed-time-related charts with a higher price top and lower SRSI top announces the
divergences/convergences
correction’s end and a previous downtrend restart. You
Figure 9 is an hourly USDJPY candle chart. The following enu-
draw a Fibonacci down target with 0% at the highest
merated text refers to the reference numbers on the chart.
top in this chart and 100% at the low level of the double
1. Long term, the USDJPY is in a downtrend so you can zigzag down. Watch the 161.8% target at the same level as
expect the end of an up correction. With a higher price the 423.6% of the previous Fibonacci projection. Do you
top but lower SRSI top, there is a negative divergence. enter a new short trade now? Considering the USDJPY
Price reaches the end of the up correction and restarts is making a longer-term down move and knowing this
the long-term downtrend. You decide to open a short chart starts with an up correction, you assume price is
position at the close of the larger red candle down at making a larger A or C correction wave down. Price is
111.09, with a stop just above the current highest high now starting an intermediate C-wave down move. An
at 111.55. A or C wave is normally a five-impulse wave down. On
the other hand, you know a correction wave 2 retraces
2. There is a small upward pullback in price after the most of wave 1. So you decide not to open a short trade
first zigzag leg down. After this upward pullback, the yet but wait for the end of wave 2.
downswing continues to make the second leg down,
finishing the first zigzag correction. Price finds support 6. Wave 1 moves down, finding support on the previous
at the 161.8% Fibonacci target and the 100-hour moving day’s low, the S1 pivot support, the Bollinger Bands
average. Note the negative convergence with lower price low, and previous price support. There is a negative
bottoms and lower SRSI bottoms. You expect prices to convergence with a lower price and SRSI bottom. This
pull back, which would be the link between each zigzag is possibly the start of the wave 2 up correction.
in the double zigzag.
3. The upward pullback during the
link between zigzags moves up
to price resistance, the PP pivot
level of the day, and the middle
line of the Bollinger Bands.
Note the negative convergent
move with lower bottoms. You
expect a continuation of the
previous zigzag down move
toward the 261.8% Fibonacci
target. You decide to set an auto-
sell order a few pips above the
Fibonacci target at 110.52.
4. The double zigzag down ends
very close to the 261.8% Fibo-
nacci target and the second zig-
zag is about the same size as the
first zigzag. Your short position
is closed at 110.52. With starting
capital of $1,000 and trading at FIGURE 9: APPLYING DIVERGENCE/CONVERGENCE TECHNIQUES WITH CANDLESTICK CHARTS. This hourly
$2 per pip, this makes a profit USDJPY candle chart displays the different types of divergences and convergences.

August 2018 • Technical Analysis of Stocks & Commodities • 21


7. Price moves up to the upper side of the Bollinger Bands,
the previous day’s high, the R1 pivot level, and previous
price resistance. This may be the ideal moment to open
a short position. You open a short position at the open
Combining different technical
of the large down red candle at 110.98. Keep a hidden analysis techniques can make
stop a few pips above the previous high, that is, the trading decisions easier and
start of wave 1 at 111.20. The possible loss in points is produce trades with a higher
111.20-110.98 = 0.22 or 22 pips. At $2 per pip, this is
$44. Since you are entering the trade with a low risk
chance of success.
and expecting a wave 3, you decide to go for $4 per pip,
doubling the profit or possible loss.
8. On the way down, price easily breaks the 100% and
161.8% Fibonacci targets. There are only small pullbacks I hope this has convinced you that combining different
on the way down in the form of continuation flags. I will technical analysis techniques can make trading decisions easier
discuss these chart patterns in the next part of this article and produce trades with a higher chance of success.
series. Price moves close to the 261.8% target but you
are still awaiting the wave 4 correction. The wave 4 is Chart patterns
mostly in line with the size of the wave 2 correction. You Chart patterns may predict the next price move but there is an
decide to wait and make sure wave 4 does not move up art to it: You need to know you are analyzing a continuation
too much. Wave 3 is a positive divergent move, which pattern, after which price will either continue its previous
is a good reason to wait for an up correction. trend or there will be a reversal pattern that leads to a trend
reversal. Most common patterns are illustrated in my book
9. The up correction finds resistance at the PP pivot Capturing Profit With Technical Analysis. To keep V-Trade
level of the day and turns back down with the next as simple as possible, I just use two chart patterns.
red candle. To estimate a first down target for the last
wave 5 down, you make a Fibonacci projection over the Patterns used with V-Trade
top and bottom of the correction wave 4 (brown). The One of the charts I use in my V-Trade template is a standard
161.8% target is just below the S1 Pivot support. You candlestick chart. The duration of a single candlestick can be
set a closing order a few pips higher at 108.67. Some 12 from one minute up to a month, for viewing the very short
hours later your short position is closed at 108.67. Your term up to the very long term. Many chart patterns may be
profit is 110.98-108.67 = 2.31 or 231 pips with a dollar used with this kind of chart. With V-Trade, I am only using
profit of 231 * 4 = $924. The total profit is 114+924 = flag and pennant continuation patterns, plus one pattern we
$1,038. Again, it’s more than a 100% profit with only already talked about, the Bollinger Bands squeeze. After a
two trades in six days. flag or pennant pattern there is a high probability of price
continuing the previous trend, while
expanding bands after a Bollinger
Bands squeeze suggest the end of the
accumulation phase.

Flags and pennants


With a continuation of the previous
trend some 80% of the time, flags
and pennants are reliable short-term
continuation patterns in an uptrend
or downtrend.

Flags in an uptrend
On the four-hour candlestick chart
of the German DAX index in Figure
10 you see different flags during an
uptrend. Short-term flag patterns ei-
ther move flat or against the trend and
are potential areas for accumulating
FIGURE 10: FLAGS IN AN UPTREND. On this four-hour candlestick chart of the German DAX index, you can see
long positions. The index continues
different flag patterns during an uptrend. The index continues its previous uptrend by breaking out of a flag pattern. its previous uptrend by breaking out
Fibonacci levels are used to find price targets. of a flag pattern. When the time to
22 • August 2018 • Technical Analysis of Stocks & Commodities
Next time …
In the next part of this article series,
which will be the last one on techni-
cal analysis, I will introduce the basic
application of counting V-waves. It’s a
simplified version of counting Elliott
waves. To make counting waves less
complex, I use modified renko bars
and a high/low zigzag indicator, and
I will show you how I do it.

Sylvain Vervoort is a retired electron-


ics engineer who has been studying
and using technical analysis for
more than 40 years. Currently, he
experiments with trading forex and
FIGURE 11: FLAGS IN A DOWNTREND. On this four-hour German DAX index candlestick chart, you can see flag CFDs with rule-based systems. His
patterns during a downtrend. The index continues the previous downtrend after breaking out of the flag pattern.
Fibonacci levels are used to find the next price targets. book Capturing Profit With Technical
Analysis received a bronze medal
from the 2010 Axiom Business Book
accumulate is long enough you will also see a squeeze in the Awards in the category of investing. His Band Break System
Bollinger Bands. Flags do not give a reversal sign. You must Expert is available on DVD. More information about the
use other means to find the next reversal point. In Figure 10 V-Trade System will become available on his blog under
I use Fibonacci levels to find the next price targets. The first construction at http://blog.stocata.org. Vervoort may be
projection starts with level 0 at the lowest low in this chart. reached at sve.vervoort@scarlet.be or via his website at
The 100% reference uses the last top of the previous up move. http://stocata.org.
The target 161.8% seems to fit nicely as a resistance and
support level. The index tops after two flat flag patterns and The source code given in this article is available in the Article Code
falls back to the 161.8% support. You can now make another section of our website, Traders.com. Source and compiled code
Fibonacci projection over this last reaction to find the nearest can be downloaded from the author’s website at http://stocata.org/
target. When price moves further up, the index remains nicely metatrader/formulas.html.
around the new 161.8% target before breaking down out of
the Bollinger Bands squeeze. Further reading
Chande, Tushar, and Stanley Kroll [1993].
Flags in a downtrend “Stochastic RSI And Dynamic Mo-
Flags in a downtrend are visible in Figure 11 with a four-hour mentum Index,” Technical Analysis
German DAX index candlestick chart. Short-term flag pat- of Stocks & Commodities, Volume
terns either move flat or against the trend accumulating short 11: May.
positions. Breaking out of the flag pattern, the index continues [1994]. The New Technical Trader,
the previous downtrend. When the time to accumulate is long Wiley.
enough you will also see a squeeze in the Bollinger Bands. Vervoort, Sylvain [2018]. “The V-Trade, Part 1: Five Basic
Flags do not give a reversal sign. You must use other means Trading Rules,” Technical Analysis of Stocks & Com-
to find the next reversal point. In Figure 11 the chart starts modities, Volume 36: March.
completing a down move. At that point there is an up cor- [2018]. “The V-Trade, Part 2: Technical Analysis,”
rection toward a 61.8% retrace over the last move down (not Technical Analysis of Stocks & Commodities, Volume
visible). From that point, the downtrend resumes. You now use 36: April.
Fibonacci levels to find the next price targets. This first projec- [2018]. “The V-Trade, Part 3: Technical Analysis—Fi-
tion starts with level 0 at the top of the correction. The 100% bonacci Projections And Daily Pivots,” Technical Analysis
reference uses the start of the up correction. Moving down, the of Stocks & Commodities, Volume 36: May.
161.8% target fits nicely as a support level. From here, price [2018]. “The V-Trade, Part 4: Technical Analysis—
makes a zigzag up retrace back to the 100% Fibonacci level Trends & Reversals,” Technical Analysis of Stocks &
resistance. Drawing a short-term Fibonacci projection from Commodities, Volume 36: June.
the top of the retrace and the start of that move you finally [2018]. “The V-Trade, Part 5: Technical Analysis—
arrive at the 161.8% target. Note that pennants have the same Moving Average Support & Resistance And Volatility
effect as flags. However, pennants are rare. The pennant can Bands,” Technical Analysis of Stocks & Commodities,
be any triangle type. Volume 36: July.
August 2018 • Technical Analysis of Stocks & Commodities • 23
[2009]. Capturing Profit With Technical Analysis: Wilder, J. Welles [1978]. New Concepts In Technical Trading
Hands-On Rules For Exploiting Candlestick, Indica- Systems, Trend Research.
tor, And Money Management Techniques, MarketPlace ‡MetaTrader4 (MetaQuotes Software Corp.)
Books, Inc. ‡See Editorial Resource Index
[2012]. Ground-Breaking Band Indicators: Newly †See Traders’ Glossary for definition
Discovered Tactics for Timing Profit, DVD, http://stocata.
org. Includes an autotrading expert system.

StochRSI MQL4 source code


//+------------------------------------------------------------------+ RSIPeriod = 21; StochLookbackPeriod = 5; StochSummingAverage = 8;
//| SveStochRSI.mq4 | }
//| Copyright © 2008, Sylvain Vervoort | //---- Init done
//| http://stocata.org/ | return(INIT_SUCCEEDED);
//+------------------------------------------------------------------+ }
#property copyright "©2008-2018, Sylvain vervoort"
#property link "http://stocata.org/" //+------------------------------------------------------------------+
#property description "Smoothed Stochastic calculated on RSI 2018 V2.1" //| SVESRSI Indicator |
#property strict //+------------------------------------------------------------------+
int OnCalculate (const int rates_total,
#property indicator_separate_window const int prev_calculated,
#property indicator_level1 20 const datetime& time[],
#property indicator_level2 80 const double& open[],
const double& high[],
#property indicator_buffers 1 const double& low[],
#property indicator_color1 Blue const double& close[],
#property indicator_width1 1 const long& tick_volume[],
#property indicator_style1 STYLE_SOLID const long& volume[],
const int& spread[])
//---- input parameters {
extern int RSIPeriod = 21; // RSI Period int i, limit;
extern int StochLookbackPeriod = 5; // Stochastic Lookback Bars if(prev_calculated<0) return(-1); // Return error No bars available
extern int StochSummingAverage = 8; // Stochastic SMA Smoothing else limit = rates_total-1; // -1 addressing counts to 0

//---- buffers // First we buffer the RSI indicator --------------------------------------------------


double SwingRSI_Buffer[]; for(i=limit; i>=0 && !_StopFlag; i--) RSI_Buffer[i]=
double RSI_Buffer []; iRSI(NULL,0,RSIPeriod,PRICE_CLOSE,i);
double HiRSI_Buffer []; // Buffering the Highest High and lowest low RSI during the Stochastic
double LowRSI_Buffer []; lookback period
double RSILow_Buffer []; for(i=limit; i>=0 && !_StopFlag; i--)
double HiLow_Buffer []; {
double ema_Buffer1 []; HiRSI_Buffer[i] = RSI_Buffer[ArrayMaximum(RSI_
double ema_Buffer2 []; Buffer,StochLookbackPeriod,i)];
LowRSI_Buffer[i] = RSI_Buffer[ArrayMinimum(RSI_
//+------------------------------------------------------------------+ Buffer,StochLookbackPeriod,i)];
//| SveStochRSI indicator initialisation | }
//+------------------------------------------------------------------+ // Now we buffer the RSI minus the Low RSI value of the lookback period
int OnInit(void) // Doing the same for the High minus Low RSI value of the lookback period.
{ for(i=limit; i>=0 && !_StopFlag; i--)
//---- indicators {
IndicatorBuffers (8); RSILow_Buffer[i] = (RSI_Buffer[i] - LowRSI_Buffer[i]);
SetIndexBuffer (0,SwingRSI_Buffer); HiLow_Buffer[i] = (HiRSI_Buffer[i]- LowRSI_Buffer[i]);
SetIndexDrawBegin(0,RSIPeriod+StochLookbackPeriod); }
// Next action is creating the SMA of this 2 last values
SetIndexBuffer (1,RSI_Buffer); for(i=limit; i>=0 && !_StopFlag; i--)
SetIndexBuffer (2,HiRSI_Buffer); {
SetIndexBuffer (3,LowRSI_Buffer); ema_Buffer1[i] = iMAOnArray(RSILow_Buffer,0,StochSummingAverag
SetIndexBuffer (4,RSILow_Buffer); e,0,MODE_SMA,i);
SetIndexBuffer (5,HiLow_Buffer); ema_Buffer2[i] = iMAOnArray(HiLow_Buffer,
SetIndexBuffer (6,ema_Buffer1); 0,StochSummingAverage,0,MODE_SMA,i);
SetIndexBuffer (7,ema_Buffer2); }
// Finally the Stochastics formula is applied
//---- name for data Window and indicator subwindow label // %K = (Current Close - Lowest Low)/(Highest High - Lowest Low) * 100
string StrRsiPeriod = IntegerToString(RSIPeriod); for(i=limit; i>=0 && !_StopFlag; i--) SwingRSI_Buffer[i] = ema_Buffer1[i]/
string StrStochLookbackPeriod = IntegerToString(StochLookbackPeriod); (0.1 +
string StrStochSummingAverage = IntegerToString(StochSummingAverage); (ema_Buffer2[i]))*100;

IndicatorShortName("SveStochRSI ("+StrRsiPeriod+" //----


"+StrStochLookbackPeriod+
" "+StrStochSummingAverage+")"+" - "); return(rates_total);
}
// Check validity of the inputs
if(RSIPeriod<1 || StochLookbackPeriod<1 || StochSummingAverage<1) //+-------------------------------END OF
{ PROGRAM------------------------------------------+
Alert("All Inputs MUST be > 0!");

24 • August 2018 • Technical Analysis of Stocks & Commodities


TRADING ON MOMENTUM

Slow & Steady

Acceleration Ramp Breakouts


The acceleration ramp is a pattern that points to stocks that uptrending channel that has a sharp slope (preferably a 45°
are building strong demand over the course of several weeks. angle, as seen in Figure 1). Visually, this pattern resembles
Here’s how to look for this pattern. a hockey stick.
This breakout pattern works best with charts that have nar-

S
by Ken Calhoun row price channels and wide trading ranges, as illustrated in
Figure 1; for example, the trading range here is 54 - 23 = 21
uccessful swing trading requires strong-trending points and the chart has clean, tight price action.
charts with consistent breakout patterns. You
may find that the easiest charts to swing trade Step-by-step action plan
are those with steady uptrends that slowly climb Here’s how you can start using the acceleration ramp breakout
higher week after week. This is also true for method:
position trading of up to several months.
This month, I’ll show you one of my favorite swing trad- Step 1: Find charts with a slow, steady uptrend, as seen in
ing breakout patterns, which I call an acceleration ramp. Figure 1 (during March and April).
This unique pattern is designed to help you find stocks that
are attracting especially strong buying strength over the Step 2: Follow the chart for at least a week after seeing the
course of several weeks. It simply looks for an increase in steady uptrend to see if the angle of the breakout increases
the breakout line’s slope over time, which tells you buying consistently for at least a week in duration, as seen during
strength is increasing. early May in Figure 1.

How to Trade Acceleration Ramps Step 3: Enter your position at $0.50 over the 90-day high,
This pattern requires a slow, steady increase in price of several using a $2 initial and trailing stop value.
weeks’ duration, identified as an uptrending channel in the
chart of Whiting Petroleum Corp (WLL) in Figure 1. The Step 4: Since this pattern is ideal for scaling in, it is smart
second part of the pattern is the acceleration ramp, which is for experienced traders to add shares every $2.00 or so as
a breakout of at least a week or longer following the initial price continues upwards.

Insights: Why this


technique works
Steady uptrends indicate that
buying is relatively consistent
in the charts that you follow.
Uptrending channels often
attract so many buyers that
you see either a gap up or an
acceleration ramp. This is
a far superior pattern com-
pared to buying breakouts
above sideways box trading
ranges, because those often
have false breakouts that fail
to continue. I prefer charts
such as the one in Figure 1
that have a consistent history
of buying week after week,
which builds momentum and
investor confidence.
esignal

Figure 1: Swing trading acceleration ramp. Here you see an especially strong, consistent breakout swing trading
chart with an acceleration ramp. Continued on page 61
August 2018 • Technical Analysis of Stocks & Commodities • 25
follow, I noticed a recurring chart pat-
tern, one I had not found before.
After researching the pattern, I
remembered that this was not a new
pattern after all. It was a diving board,
a chart pattern I discovered back in
2010. I reviewed that research, traded
on it, and I’ll elaborate on the pattern
in this article with new findings.

What is a diving board?


Let’s look at a picture of a classic
example of a diving board. To find
them, I use the weekly scale, but they
appear on other time scales as well.
However, I only tested them with
weekly price data.
Figure 1 shows a diving board pat-
tern highlighted in red. The board
is the horizontal portion from A to
B. Look for a flat base, that is, the
bottom of the pattern should touch
a horizontal or near-horizontal line
multiple times along its length. The
tops can be as rugged as a mountain
range. I did not concern myself with
the shape of the top.
Select diving boards in a flat to ris-
ing primary (long-term) price trend. I
removed many diving boards from my
analysis if I found them in a downward
trend. The reasoning for this is that I
wanted buying demand to help push
up the stock after completion of the
diving board pattern, not breaking out
upward from a consolidation area only
to be caught by the rushing current of
a longer-term downtrend.
Following the board portion of the
chart pattern, a pronounced dip occurs
that sends price into the water (hence
the diving board analogy). Sometimes,
Splish, Splash

The Diving Board


the dip can be a one-week price spike,
but those are not my favorite. I like
the one shown in Figure 1. The drop

Trade
DIVER: PAULO BONA/SHUTTERSTOCK/WATER: SIRTRAVELALOT/

from B to C is multiple weeks long,


fast, and a straight line down.
At the bottom of the dip (C), price
SHUTTERSTOCK/COLLAGE: CHRISTINE MORRISON

rebounds and climbs back into the

In
base of the diving board (the rise from
What is a diving board pattern and can you profit from trading one? C to D). Not all diving boards will
see price return to the bottom of the
by Thomas Bulkowski pattern (that is, a return to the price
of AB). I will discuss statistics later
the winter of 2017, I was flush with cash, so I started looking for stocks in this article.
to buy. While flipping through the weekly charts of the 515 stocks I For those stocks that climb above
26 • August 2018 • Technical Analysis of Stocks & Commodities
chart patterns

the top of the pattern, price tends to soar, Adobe Systems (Computer Software and Svcs, ADBE)
posting monster gains.
Sometimes, you can draw a trendline
skirting the tops of the drop from E to C
(which becomes the trendline ED). When
price closes above that trendline, it is a buy
signal. It is also a higher-risk entry. Price
might not make it up to AB.
A safer technique is to wait for price
to close above the top of the diving board F E
Buy signal here
(above the price of F) then buy at the open
the next day. Early entry, high risk
In this example, you could draw a down- A B D

TOM BULKOWSKI
sloping trendline from F to E and extend it C
(see green line). When price closes above
this line, it would signal an entry. Buy at FIGURE 1: THE DIVING BOARD PATTERN. This is an example of an ideal diving board chart pattern on the
the open the next price bar. In this case, weekly semi-log scale.
the trendline is not steep enough to make a
difference in the buy price versus entering
after a close above the price of F. E
The volume trend of an ideal diving board slopes downward
from left to right. I show that in the figure with the blue line
(arbitrarily drawn to slope downward). Although this diving Diving Board Top D
board does have receding volume, it is not clear from the
volume bars.
A Diving Board B
My reasoning behind this pattern is that bulls and bears are
in a fight for control of the stock. Price moves horizontally AB = 217 days (7 months)
AC = 246 days (8 months)
with no clear winner (the AB trend). Suddenly, price drops C
below support and makes a strong move down when selling BC drop: 14% in 35 days (1 month)
pressure overwhelms buying demand (the drop from B to C). DE rise: 40% in 211 days (7 months)
As surprising as this move is, it is a head fake. The bulls are C to AB rise: 12% fail to reach AB
waiting to buy the stock on the cheap. That buying sends price B to D rise: 25% stop within AB to D
Rise above D: 63%
higher, so it recovers quickly (CD). But the good news does
not stop there. Often, but not always, buying pressure sends Figure 2: THE STATISTICS. Here are some performance statistics for diving
boards.
the stock moving higher. How much higher? An average of
67% above the top of the pattern (above F).
is lower (20% after being stopped out). Even so, I consider a
Statistics 20% gain quite good for a hold time of about a year.
Let us talk about statistics. I found 865 diving board pat- I measured how many trades failed to return to the base of
terns on the weekly scale using data from mid-1990 to late the diving board. This is the climb from C to AB, and 12%
2017. The statistics I cite in this article pertain only to a bull failed to make it back. I found that 25% of the patterns saw
market. Figure 2 illustrates what I found. All values in the price stop within the diving board. That is, price peaked some-
figure are medians. where between AB and D before closing below the bottom
The median length (AB) of the diving board is 217 days, or of the pattern (C) or dropping by 20%. Sixty-three percent of
about seven months. Half the boards are longer than this and the patterns continued higher, above D.
half shorter. The entire pattern, from board to water plunge
(AC), measures eight months or 246 days.
The BC drop is steep, measuring 14% in just over a month.
Then price recovers. Stocks that close above the top of the
chart pattern see price rise 40% (average is 67%) and it takes For those stocks that climb
about seven months before price tops out. To find those results, above the top of the pattern,
I searched for the highest peak before price dropped at least price tends to soar, posting
20%, measured from high to close. If you put a stop-loss order
20% below the high, you could walk away with an average monster gains.
profit of almost 50% in less than 14 months (the average time
to the ultimate high takes 419 days). Of course, the median rise
August 2018 • Technical Analysis of Stocks & Commodities • 27
Williams Companies Inc. (Natural Gas (Distributor), WMB) they would reduce the dividend starting in
the third quarter of 2016. In that release,
they didn’t disclose what the cut would be,
but it was 69%. The stock hardly budged
on the announcement (it dropped 17% in
about a month during June).
Studies for my book Fundamental
Analysis And Position Trading say that
companies who cut their dividends get
walloped in the first year, but outperform
the following five years. So that was good
news for my trade.
At the time of purchase, the stock yielded
over 4%, so it was like owning an electric
utility except with more upside potential if
Figure 3: THE BUY. This shows a sample chart of Williams Companies on the week of purchase.
the diving board played out as I hoped.
I always hope that insiders love the
company as much as I do, and gobble up
Williams Companies Inc. (Natural Gas (Distributor), WMB) RSI: 53/59 From Yearly High: -15% Underperform
shares to show that love. In this case, in-
B C sider trading was a mixed bag. Some were
A
buying during 2017 and some were selling,
with the emphasis on selling.
Earnings were due out in mid-February,
Bought Sold far enough away that I didn’t have to
worry about it. In other words, I avoid
buying a stock within three weeks of an
announcement.
I set a volatility-based stop price of 28.77
or about 3.5% below the buy price, and set
a target of 47 where I expected overhead
resistance to stop the advance.
The stock trends over one, two, and six
months were up, up, and down, respec-
Figure 4: HOW IT FARED. Here’s the daily chart of WMB showing the trade timing and its aftermath. tively (measure using close-to-close price
changes). The S&P 500 composite was
higher during the same periods. A count
Putting it together of stocks in the industry showed that half were higher and
When I found Williams Companies (WMB), I didn’t know half lower over the three periods. In other words, the price
some of the statistics just described. I depended on my 2010 winds were blowing in the right direction.
research. However, I did believe that a diving board could Price relative strength showed the stock was outperforming
lead to an exceptional gain, so I was willing to hold onto a the S&P at the time. I seek to beat the market.
stock for the long term. Figure 4 shows a daily chart of the stock. On this scale, the
Figure 3 shows the stock when I found it, ready for purchase, diving board looks irregular, but it shows a pronounced splash
on the weekly scale. I outlined the diving board pattern in red. into the water during November.
Notice that the trend leading to the start of the diving board I found the pattern midway in its recovery and bought on
is upward. I found that the median rise is slightly better (40% December 19, filling at 30.185. I was late buying the stock,
versus 36%) if the board appears in an upward primary trend but what can you do? I might have noticed it sooner if I had
versus downward. I measured the primary trend as the differ- started my shopping earlier.
ence between closing prices at the start of the chart pattern After I bought, I discovered that debt was 141% of equity
and the close a year before. with a current ratio below 1. Ouch. The payout ratio was 193%,
The volume trend is downward in this case, according meaning they paid out almost twice what they earned. Jeepers.
to linear regression applied from the start to the end of the I should have done my homework better.
pattern. Regardless of that news, the stock performed better than
I did a quick check of the fundamentals on the company. In I hoped by climbing in a straight line run to A. Then the
their June press release for the quarterly dividend, they said company announced that US energy regulators denied the
that if the Energy Transfer Equity transaction did not complete, company’s request to overturn New York’s denial of a water
28 • August 2018 • Technical Analysis of Stocks & Commodities
permit for the proposed Constitution natural gas pipeline.
With the stock already down for three straight days before I Often, but not always, buying
learned of the news, I sold the stock as shown on the chart, pressure sends the stock
right at the bottom of a double top.
If they cannot build a pipeline, with high debt, and perhaps a moving higher. How much
dividend cut looming, I didn’t want to stick around. I received a higher? An average of 67%
fill of 32.24 on January 19. I made about 7% in one month. above the top of the pattern.
Closing position
Selling at 32.24 when I wanted 47 is well short of my goal,
but I worried that the stock would tank. Instead, it climbed including Chart Patterns: After The Buy, Getting Started In
for three days and made a double top chart pattern (BC). Chart Patterns, second edition, and the Evolution Of A Trader
After the second peak, the stock dropped as I feared and hit trilogy. His website and blog, www.thepatternsite.com, have
a low of 24 as I write this, well below the 30.18 buy price. I more than 700 articles of free information dedicated to price
feel gratified that I sold near the top, even if it was well shy pattern research.
of the intended target.
I didn’t write this article to brag about a measly 7% win Further reading
(annualized, it’s 84%, which is mouth watering). Rather, I Bulkowski, Thomas [2016]. Chart Patterns: After The Buy,
wrote this to show how a new chart pattern called a diving John Wiley & Sons.
board might work for you, and to provide an actual trading [2005]. Encyclopedia Of Chart Patterns, 2d ed., John
example. Maybe you can add the pattern to your technical Wiley & Sons.
toolbox just as I have. [2013]. Fundamental Analysis And Position Trading:
Evolution Of A Trader, John Wiley & Sons.
Stocks & Commodities Contributing Writer Thomas [2014]. Getting Started In Chart Patterns, 2d ed., John
Bulkowski (who may be reached via email at tbul@hotmail. Wiley & Sons.
com) is a private investor and trader with almost 40 years of ‡Tom Bulkowski (ThePatternSite.com)
market experience and considered by many to be a leading ‡See Editorial Resource Index
expert on chart patterns. He is the author of several books

D’ERRICO/PORTFOLIO STRATEGY TradeStation developer contest. He is available for advisory


Continued from page 15 and coaching and can be reached through his website, www.
Trading-Algo.com.

Final consideration Antonio Zaffino is chief investment officer for Dorian Windsor SA,
This purpose of this article was to build an automated strat- a Swiss asset management company whose trading strategies are
egy for a stock portfolio based on the cornerstone of price based mainly on technical analysis and accumulation/distribu-
analysis—Dow theory. I described the rationale behind such tion logic. He can be reached at az@dorianwindsor.com.
a theory, then built some algorithms to identify accumulation/
distribution patterns. I then backtested six different algorithms The code given in this article is available in the Article Code section
on the S&P 100 stocks, adopting a dynamic portfolio logic. We of our website, Traders.com.
analyzed results from both an individual trader’s and an asset
manager’s point of view. Whether you are an individual trader See our Traders’ Tips section beginning on page 48 for commentary
or an asset management firm, technical logic works the same and implementation of D’Errico & Zaffino’s technique in various
way. It’s best to stay focused on a few techniques and apply the technical analysis programs. Accompanying program code can be
identical models to a wide investment universe. That way, you found in the Traders’ Tips area at Traders.com.
won’t forget the reasons why you enter/exit the markets. Taking
the inverse approach—applying many techniques to one single Further reading
instrument—often leads to confusion and overfitting. D’Errico, Domenico [2017]. “Playing With Numbers,” Technical
Analysis of StockS & commoditieS, Volume 35: April.
Domenico D’Errico is an independent research & develop- [2017]. “Detecting Swings,” Technical Analysis of
ment partner for investment management companies and StockS & commoditieS, Volume 35: May.
professional traders. He also runs his own research firm and ‡TradeStation
software house (www.Trading-Algo.com). D’Errico is a Trade- ‡See Editorial Resource Index
Station Open Platform Developer and a two-time winner of the
August 2018 • Technical Analysis of Stocks & Commodities • 29
Beneath The Surface

Seven Forex Myths Dispelled


New traders often get attracted to the forex markets because the only currency still backed by gold. However, in 1971,
of the potential to make great returns using a small amount the Bretton Woods Agreement came to an end when the US
of capital. But there is more that new traders should know indicated it would no longer exchange gold for US dollars
about it. Here, we look at some of the common misconceptions that were held in foreign reserves. As a result of that, float-
about forex trading. ing exchange rates were globally accepted in 1976, and this
became the foreign currency exchange market. Once the

T
by Solomon Chuama exclusive domain of multinational banks and other large
banks, the forex market today includes participants who
he foreign currency exchange market, known as are banks, businesses, governments, investors, professional
forex, has been around since 1976 and has been traders, and novice traders who exchange and speculate on
electronically traded since 1990. I’ll start with currencies. The forex market has no central marketplace
a brief history. The gold standard exchange was where orders are processed.
implemented in 1876. The purpose was to back In this article, I will examine some of the misconceptions
all paper currency with gold to stabilize world about the forex market and dispel them.
currencies by pegging them to gold’s price. The major short-
coming was that European countries didn’t have enough gold 1 “Forex trading is a dangerous business”
to support all the currencies they were printing to pay for The forex market is the largest market in the world, involving
TUPUNGATO/SHUTTERSTOCK

large military projects. So Europe dropped the gold standard hundreds of thousands of transactions valued at trillions of
during World War II. dollars every day. Because of its size, many investors and
In 1944, the world, in the Bretton Woods Agreement, traders consider forex to be the most dangerous market. This
decided to implement a fixed exchange rate, designating leads us to the first myth:
the US dollar the primary reserve currency and leaving it
30 • August 2018 • Technical Analysis of Stocks & Commodities
FOREX TRADING

Myth: The forex market is the most dangerous market to trade.

The reality: Traders who lose money will always blame the The real danger is not in
market, saying it is rigged or saying their broker is fraudulent the market itself but in the
and responsible for their failure.
Forex markets can be risky if you have no knowledge of the
leverage used in trading.
market and are unaware of the risks and dangers involved. But Leverage magnifies your
the real danger is not in the market itself but in the leverage risks and profits.
used in trading. With higher leverage you have the opportunity
to have larger volume to enter more trades. That leverage is a
trap that many traders, including myself, have been victims There are many who are honest and perform their duties as
of. Leverage magnifies your risks and profits. corporate bodies.

2 “Forex trading is easy” 4 “There is a holy grail in forex”


Many people are attracted to forex trading because you can Some traders have come to believe there is a trading system
start with only a small amount of capital, making it easy to get or complex strategy out there that can give them an edge in
into trading. With that small amount of capital you have the forex trading. Others think there must be a unique indicator
opportunity to earn daily profits. This low barrier and ease of or method that brings about success.
entry into trading leads us to the second common myth:
Myth: A trader only needs to find the “secret” to success or
Myth: Trading involves little effort. Simply buying a profitable discover the system that successful traders use.
forex trading strategy will make you rich. Modern technology
makes buying and selling of forex easy since the Internet and The reality: Every trading system, strategy, or indicator has
a wealth of online resources are easily available. its downsides. To be profitable, you may have to continuously
change your strategy and adapt it to current market condi-
The reality: 90% of traders lose their funds when trading tions. A strategy with a simple set of rules must be flexible
forex. The forex market is complex and to succeed and make and adjusted from time to time. It will have to adapt to market
money in that market is not easy. It is risky and comes with conditions and observe all trading rules.
many challenges. To succeed in this market, you will need
the proper education and personal development. You have to 5 “Forex trading is where most traders
constantly improve your skills by learning how to make and lose money”
lose money. A good way is to learn from successful profes- You have probably heard that 90% of new traders lose money
sional traders. You will also have to figure out ways to reduce to forex trading. This group of new traders can be classified
your risks to the barest minimum. into three categories:
• Sheep: Beginners who trade at random without regard
3 “Forex is a scam” to trading rules. They lose when overwhelmed by
People sell trading systems that generate trades automatically,
emotions.
leading the user to believe they can make money even while
they sleep. The trading systems work like robots. Many of • Pigs: Greedy traders who aim at huge profits, applying
these systems have not been submitted or tested by an inde- money management rules.
pendent body to check the system parameters and optimization • Chickens: Out of fear, they rarely open trades until signals
code. There are also signal sellers—retail firms or individual are out of their reach. They are afraid of fixing losses
traders—who say they will trade and provide trading signals and are unable to fully understand the market.
based on professional recommendations that will make anyone
rich. Some traders have lost money to these signal sellers. Myth: Since most of the traders who lose money are the ones
This can contribute to the market getting a bad image, which trading the forex market, that means it must be impossible to
leads us to the next myth: make profits in forex.

Myth: The forex market is not a legitimate marketplace and The reality: You can make consistent profits trading forex
brokers and companies doing business in this market are just by learning from the 10% of traders who are successful.
scam artists. (For suggestions on how, you can read my article “The 10
Principles Of Successful Trading” in the November 2015
The reality: Forex trading itself is not a scam even though issue of this magazine at Traders.com.) Remember, success
there are scammers hiding behind the forex “name.” You can comes over a long period of time, so if you lose money at
find regulated forex brokers, forex account managers, and
other companies whom you can trust and do business with. Continued on page 35
August 2018 • Technical Analysis of Stocks & Commodities • 31
Lured By Greed?

An In-Depth Look At
Weekly Options
If you’re hesitant about trading options, it’s best to try them year, “Wrapping Your Brain Around Weekly Options.” I con-
slowly, one contract at a time. cluded the article by writing, “You don’t have to be a genius.
With approximately $10,000 capital, I am making close to

T
by Koos van der Merwe $2,000 per month selling weekly naked puts. Not bad for an
options beginner.”
“When it comes to trading options, I must Well, after following my options trading strategy for a num-
GAJUS/SHUTTERSTOCK

admit that I was absolutely stupid.” ber of months, I must admit I am still “options challenged.”
I failed to mention the word greed in last year’s article on
hese are the words I used in the opening sentence weekly options, a word and emotion I have come to know
of my article that appeared in this magazine last since January 2018.
32 • August 2018 • Technical Analysis of Stocks & Commodities
options

Greed—and … have found that


When it comes to trading weekly options, what is greed? cash received
Well, greed is when you look at the various strike prices in is larger when
an options chain and you sell the option that is too close to you sell weekly
the stock’s price, taking the risk of having the stock assigned naked puts than
at the end of the week. when you sell
The spreadsheet in Figure 1 is a copy of a weekly option weekly covered
profile listed for Direxion Gold Bull ETF (NUGT), whose calls.
price was quoted at $27.00 on May 14, 2018. The spreadsheet Which is the
shows the option bid/ask and last prices quoted. b et t er st r at-
The chart in Figure 2 is a daily OmniTrader chart of NUGT egy? Not being
suggesting a buy, as shown on the vote line. This suggests greedy, or being
the stock price is in a bull trend and should rise higher. This greedy and hop-
makes an option sale with the strike at $27.00 tempting. By ing price will
selling a naked put at $27.00 you will receive $64.00 (100 × continue rising
0.64) per contract, the bid price as shown. This is what greed till the end of
FIGURE 1: WEEKLY OPTION PROFILE. Here you see
is about—it is more tempting to receive $64.00 per contract the week? Does the option bid/ask and last prices quoted for various strike
than to sell at the strike price of $25.00 and receive $10.00 that always hap- prices in the option chain.
(100 × 0.10) per contract. pen? I wish. As
The chart in Figure 2, however, shows the share price is I write this, I am showing a loss on the price assigned to me
testing the upper Bollinger Band and the candlestick bar is at $35.00 per share in January 2018. Admittedly, selling the
red. This means in spite of the vote line showing a buy, price stock from time to time and then selling weekly naked puts
could fall. The relative strength indicator (RSI) on the chart and weekly covered calls whenever I hold the stock has helped
has been falling below the 30 horizontal line and rising above recuperate most of my loss. But the greedy error I made still
it. It doesn’t suggest a buy. troubles me. The lesson learned: Be “greedy” only if you want
Greed now steps into the picture by hinting that if you sell to own the stock because the charts suggest the stock is a buy
a naked put at $27.00 and you get assigned at the end of the and will rise in the weeks or months ahead.
week, you have only paid $26.36 for the share (100 × 27.00
= 2,700 - 64 = 2,636 / 100 = 26.36.) Admittedly, you don’t The wheel strategy
lose the option cash received, but you could sell the share at What about other options strategies? Yes, there are several to
$26.36 and not show a loss should the stock’s price fall. Of choose from, but one of the strategies I tend to follow is the
course, you could also keep the $64 cash received and then wheel strategy. Wheel trades have the potential to produce
sell covered calls against the stock if you get assigned. high returns.
The problem with
this strategy is that if
the stock price falls
dramatically, you could
suffer a loss, which
can be frustrating. The
lower Bollinger Band
on the chart suggests
a low price of $26.61
($0.25 above $26.36),
but there is no guar-
antee that price will
bottom at this level.
Note I haven’t included
the money received by
selling a covered call
in the calculation, so
the breakeven price is
lower than what I have
quoted. You could keep
OmniTrader

selling weekly covered


calls as the share price FIGURE 2: POSSIBLE BUY SIGNAL? As you can see, there are conflicting signals on this chart. What’s the best strategy to apply
continues to fall, but I in such a scenario?
August 2018 • Technical Analysis of Stocks & Commodities • 33
To start, you should have sufficient cash available to purchase
200 shares of the stock you wish to trade. The wheel strategy
is a systematic way to sell covered calls as part of a long-term When volatility is low, it
trading strategy. You start by selling a cash-secured put. The means option prices will be
put either expires or is assigned. If it expires, you keep the
premium and start again but only if you are still bullish on
lower compared to the past.
the stock. You could even move to another stock if the stock But stock price movement has
you are playing with is no longer bullish. a bigger effect on the option’s
If, however, you are assigned, you will then sell a covered price than volatility itself.
call and also sell a new put. If the stock rises above your
call strike price, the stock is called away and your sold put
expires worthless. Should the stock fall, however, you will
be assigned the stock on the second put and have your full
allocation of 200 shares. Because the stock’s price fell, the • The option’s price should sit still because the option
call option expires worthless. loses value each day with time decay. As the days go
Now that you own 200 shares, you can now sell two calls. by, you can then buy back the option at a cheaper price
If the stock goes up through the calls, the stock is called than what you originally sold it for.
away and your position is once again flat. If the stock price • Do not trade spreads until you understand them thor-
goes down, you can continue to sell two covered calls every oughly. The time spent reading and learning the best
week. A simple strategy isn’t it? But it took me a while to get way to trade a credit spread is worth every cent you
my brain around it. will make.
• If you want to use a stop-loss, place it 25% to 30% below
Credit spreads the strike price.
Another strategy I like to follow, simply
because I can understand it, is the credit • Sell puts on stocks that are stalwarts of the DJIA and S&P
spread. With a credit spread, you sell one 500 index. These stocks move slowly and steadily.
put contract and buy another put contract • Buy the put option back when it gets cheap and close
at a lower strike price. You pocket the dif- out the trade, then move on to the next trade.
ference between the two contracts. The
• Strategy. Select stocks that are on a small dip and are
beauty of a credit spread is the two options form a “safety
expected to move higher. Buy the option back after it
net,” which limits any loss. The tradeoff is that your gains
has decayed 90%. A put option loses value as a stock
are lower than if you had only sold puts. However, the chance
moves higher.
of anything going against you is much lower. The beauty of
the strategy is you can still make returns of more than 36% • The best time to sell put options on stocks is when the
in just a few months. stock is in a bull trend and is going through a pull-
back.
Some rules of thumb learned • Look at the CBOE Volatility Index (VIX). When volatil-
To sum up what I have learned about selling options: ity is low it means option prices will be lower compared
• If the stock market goes straight up, put selling will to the past. But stock price movement has a bigger effect
work well. on the option’s price than volatility itself.
• Sell far out-of-the-money (OTM) options anywhere from • Which stocks should you pick? Always look at quality
20% to 50% OTM. These are levels where stocks most stocks that are in a bull trend and are undergoing a little
likely will not fall to. If a stock’s price is at $50 a share, bit of a correction.
sell a $30 or $35 weekly put option. Should the stock • Sell put options in a margin account to get the best bang
fall to that price, you end up buying a good stock at a for your buck.
good price—a stock you would like to own. If the stock
doesn’t fall to the price you want to pay for the stock, at Even with having learned all this, and practiced it in my
least you are getting paid a weekly income. trading, I still believe I am “options challenged,” because my
• Use a probability calculator to determine if a stock is account is still showing a loss on the stock I was assigned at
likely to fall to that level. Probability calculators can be $35 in January. The stock was trading at $27. Hopefully, one
found on the Internet. Enter the current price, the stock’s of these years, I will make up my loss by being assigned the
volatility, and the option’s expiration date. The stock’s stock at a low price and selling it at $35. I do not use the profit
chances of falling to the strike price should be less than I make in trading weekly options to reduce my loss. Perhaps
10%. That means it has a 90% chance of not falling to I should, but I prefer not to.
the price at which you sold the option.
34 • August 2018 • Technical Analysis of Stocks & Commodities
Trade small and keep on in Johannesburg, South Africa. In Vancouver, Canada, he
learning worked as an investment advisor from 1993 until he retired
So, have I learned a lot about options trading in 2010. He may be contacted at petroosp@gmail.com.
since I wrote my article on weekly options
last year? Yes, and I am learning more every Further reading
week. When it comes to understanding Merwe, Koos van der [2017]. “Wrapping Your Brain Around
how to trade options, I still find that selling Weekly Options,” Technical Analysis of Stocks & Com-
naked puts and covered calls are the way to go. Cash on hand modities, Volume 35: October.
is better than cash in the bush. ‡OmniTrader
‡See Editorial Resource Index
Koos van der Merwe has been a technical analyst since 1969,
having worked as a futures trader at a stock brokerage firm

CHUAMA/SEVEN FOREX MYTHS DISPELLED The reality: Only a correct forecast together with appropri-
Continued from page 31 ate use of leverage will bring about the expected profits. But
the market is also unpredictable; a bad forecast can imme-
diately ruin the account. You still have to apply your money
first, don’t be discouraged. Learn how to not fall into those management rules regardless of how well your position is
pitholes that made you lose your money. Then learn how to doing. I like to risk 2% of my capital per position with correct
make profits. Later, you can have a plan that will allow you leverage. Steady, consistent profits are better than one-time
to make consistent profits. huge profits.

6 “foreX TradinG is only for The riCh” The boTTom line


Forex (that is, foreign exchange) trading can sound, well, Now that some of the common forex trading myths have been
“foreign” to small investors and out of reach. In reality, who dispelled, I hope your expectations have become more realistic.
can access the forex markets? What does it take for someone Traders always need to do their research, especially when they
to trade in forex? trade a different market, and that will involve education and
seeking advice from a mentor. You are probably familiar with
Myth: Forex trading is only accessible to the large players such the narrative, “If it sounds too good to be true, it probably
as banks, businesses, governments, high-net-worth investors, is.” That may not always be the case, but it is far better to do
and large fund managers. your homework first and understand the “nitty gritty” of the
forex markets by practicing on a simulated trading account.
The reality: With the advent of electronic trading via the Of course, you’re not going to really learn until you start
Internet, anyone with a small amount of money and a reliable trading a live account. When you do, trade small and look to
Internet connection can trade in the forex market. You may make small profits.
be able to open a forex brokerage account for as little as $25,
though that’s not a good idea. You will need to deposit the Solomon Chuama has been working in the fi nancial industry
required amount for micro, mini, and standard accounts in for more than 16 years. He is a training seminar organizer
order to trade profitably. Note that forex brokers offer demo and instructor who tries to pass along to students his passion
accounts that allow you to practice trading without investing and knowledge of forex trading.
any real money. Once you start getting a feel for the markets,
you can set up a live account. furTher readinG
Chuama, Solomon [2015]. “The 10 Principles Of Successful
7 “foreX TradinG yields huGe profiTs” Trading,” Technical Analysis of StockS & commoditieS,
Many are of the opinion that forex trading brings in huge Volume 33: November.
profits. This assumption arose as a result of the high leverages _____ [2017]. “10 Reasons Traders Lose And What To Do
offered by brokerage firms, which can be as high as 1-to-500. About It,” Technical Analysis of StockS & commoditieS,
The small amount of capital needed to trade on leverage makes Volume 33: November.
the yield seem larger.

Myth: Returns from the forex market are higher than in


other markets.
August 2018 • Technical Analysis of Stocks & Commodities • 35
INTERVIEW

For The Love Of Charts

Sloping Upward
With Tim Knight
Timothy Knight began his career writing books at the age of 16 and to date
has written two dozen books about both computers and the financial markets.
He began trading in 1987 and founded Prophet Financial Systems in 1992,
which started as a historical financial data company, but when the Internet
was introduced, it became a website on technical analysis, and its charting
technologies were also licensed to brokerages. Knight sold Prophet Financial
to Ameritrade (now TD Ameritrade) in early 2005. Since then, he founded
SlopeOfHope.com, which started as a blog in 2005 but has grown to become
a hub for traders who use charts as the basis for their trading.
Knight recently relaunched SlopeOfHope.com with a new charting platform
in addition to his nearly 20,000 blog posts. In 2014 Knight completed a book
titled Panic, Prosperity, And Progress (Wiley) covering five centuries of his-
tory of the financial markets, and currently, he is working on a book about
Silicon Valley. As a money manager, he also owns and operates a short-bias
hedge fund.
Stocks & Commodities Editor Jayanthi Gopalakrishnan spoke with Tim
Knight on June 13, 2018 about why he is drawn to charts and what he sees in
them.

There’s an interesting story into trading, my whole approach was


What is enchanting
about the first day that you chart-based. I read all the core books to me about technical
traded. Can you tell us that came out in the early 1990s such analysis is that I’m still
about how you got started as Steve Nison’s book on candlestick mesmerized by how,
in the markets? charting. I read the classics from the
Back in college, by happenstance I 1930s and 1940s such as Edwards &
over the long haul, the
picked up a book called Stan Weinstein’s Magee. I loved the foundational books patterns repeat.
Secrets For Profiting In Bull And Bear on charting and technical analysis.
Markets, and I was smitten with the Yes, it’s a good story about the first
idea of chart-based trading. I guess I’m day I ever bought a stock. By sheer the market or were you just focused
a visual soul. It’s funny—I could know a chance, the first stock trade I placed in on your own trade?
person for 10 years and still not be able my life was during the crash of October I truly had no idea, even though I was a
to remember their name, but if I saw that 1987, right on October 19. I like to joke voracious reader of Fortune, Forbes, and
same person 30 years later I would still that I’m a permabear because of that. It business biographies. My interest was
recognize them. Something about my seems almost predestined that I would in entrepreneurship and building busi-
brain is wired to be visual. happen to place my first trade on that nesses, and I had no idea about trading
You may remember, back in the day, day, though oddly, it was a long trade and in the stock market. I was just a babe in
when William O’Neil Company came I eventually wound up making money the woods. I just stepped right into that
out with its Daily Graphs chartbook. on it. The stock was Apple. I made the mess and didn’t know what on earth was
Every week they would ship out this classic beginner’s mistake—I averaged happening. Pure ignorance.
freshly printed book of charts, and I down into December, but by the next
would flip through it. It was love at first year I was in the green, so it worked out. Ignorance is bliss, they say! You said
sight. I didn’t have a lot of money but I But yes, my very first stock buy was on you are a visual person, and that’s
did have some because I had written some Black Monday. what attracted you to looking at charts
champ008/SHUTTERSTOCK

computer books—in fact, those paid my and watching price movements. When
way through college. So I started out with That was quite a time to make your you’re looking at daily price move-
some basic tools and started using chart- first trade. What was that like? Did ments, do you narrow your focus to
ing programs like MetaStock. When I got you notice what was going on with intraday?
36 • August 2018 • Technical Analysis of Stocks & Commodities
Chart
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And when you look at the by those types of analogues, and that’s
same stocks over and over, what I mean by the “personality” of the
If I’m good at anything, in time, you come to know stock. Some stocks won’t succumb to the
it’s looking at a lot of them well. Like people, they same shapes that others do.
have their own personalities,
charts very swiftly, and they have their own charac- That’s interesting. But what if some-
being able to divine the teristics and nature, and it’s thing unusual happens to a stock, like,
most basic patterns and helpful to get acquainted for example, a biotech company fails
trendlines in them. with those. a clinical trial?
The charting products I’ve I try to be relatively agnostic about
developed are as much about what a company does or what happens to
watchlists as they are about a company. I am almost proud of having
Yes. Now that I know the language the charting visuals. One reason for this no clue about what industry a company
involved in chart reading, I can look at is that, besides being a very visual person, is even in. You could even tell me a com-
any level or timeframe, although I think another real driver of my personality is pany is XYZ, Inc. and that’s fine with
I was born to be a swing trader. Over neatness. If you think of the movie or me. It’s just a chart to me. However, I do
the course of—how long has it been TV show The Odd Couple, I’m like the tend to avoid biotechs and those types of
now?—30 years, I’ve looked at literally Felix Unger character. I’m fixated on “shock stocks” that come along, because
millions of charts and not only do I organization, so I like lists and I break as a trader, I tend to almost exclusively
never get bored with it, but I get bored them up into several distinct categories. trade the short side, and waking up to
when I’m not looking at charts! So I’m I’ve got one list for potential bear posi- see that a stock I’ve shorted has gained,
blessed—or cursed—with an endless tions, another for potential bull positions, like, 50%, is lousy. I don’t want that.
appetite for these things, and if I’m good another for interest rates, another for I’m instead going to go for something
at anything—and the list of things I’m major indexes, and so forth. like an emerging-market bond fund.
good at is a short list!—it’s looking at a So although I am fairly agnostic about
lot of charts very swiftly, and being able Why is it important to understand the what I’m trading, I do tend to strike the
to divine the most basic patterns and stocks you’re looking at? biotechs off my list.
trendlines in them. I can tease out what My view of technical analysis is that But even with stocks outside the realm
I think are the meaningful aspects on there is a subset of financial instru- of biotech, there will be times when you
a chart. It’s like I have my own built-in ments that tend to repeat their patterns get zapped, or lucky. You may wake
X-ray glasses, and the value I can provide and echo their past better than others. I up to good news or bad news. I’ve had
to others is making those visuals more don’t think technical analysis has ever instances, though rare, where I’m short
apparent to everybody else. been a one-size-fits-all kind of absolute and I wake up and there will have been
for any particular financial instrument; some sort of news, be it a takeover or
Is there anything that you look for there aren’t perfect definitions that shocking earnings or what have you,
specifically, such as the biggest gainers, work on everything the same way. For and the stock could be up 25%. And that
biggest winners, and biggest losers on example, on a given stock, I may think I hurts. It’s upsetting and it’s no fun, but I
any given day? see an incredible topping pattern, but if will not blame myself if the chart gave
Those sorts of lists are fun and I used I step back and look at the whole price no clue as to that, because, again, in an
to look at those all the time, but those lists history of that stock, I may realize that honest market, the chart’s not supposed
will be very different every day based on there have been three prior instances of to have a clue.
what just happened in the financial world something very similar, and then the So even though I try to avoid very
and what is affecting each stock—such stock paused, and then continued higher, volatile instruments, in those rare times
as, will this biotech get FDA approval so that particular topping pattern doesn’t when I do get hit with a complete news
or will that company have an earnings mean anything to this particular stock. shock, the two things that save me are:
disappointment. I think those things are Whereas with another stock, I may see 1) I only risk a very small portion of my
mostly a distraction. that, “Ah, the past few times this pat- portfolio, such as 1%, on any given posi-
So no, I’m not honed in on all the tern has taken place, the stock price has tion, and 2) I don’t self-flagellate, because
various companies in the market that fallen each time.” So I’m very taken in if the chart was good and my rationale
I’ve never heard of and that just happen was sound based on the information I
to be big movers for the day. Instead, had, then there’s no reason I should have
I look at one core list of the same 430 known that after hours the company was
stocks every single day. My watchlist of going to drop a bomb about its stock.
stocks hardly ever changes. I prefer to And that cuts both ways, of course. I
look at static lists that aren’t constantly could just as easily get a very positive
changing. surprise, but I don’t give myself credit
38 • August 2018 • Technical Analysis of Stocks & Commodities
for that either. Come visit one of the most popular trading
I’ll give you a recent example. Yester- chat rooms for Breakout Trading.
day I saw a chart of AT&T and thought,
“Wow, that’s a nice-looking topping
pattern,” and so I wrote a blog post,
showed the chart, showed my stop, and
commented, “This looks like a good Breakout Trading Bull Flags
short.” Well, the market closed, and
suddenly it was down some 4% due to
a court ruling that was issued. Though
Momentum Stocks Pivot Points
I had known that court ruling was com-
ing, I had forgotten about it, so I didn’t
pat myself on the back as if to say, “Oh,
aren’t you smart to anticipate this court Swing Trading Key Reversals
ruling.” That news wasn’t even on my
mind. My rationale was based strictly
on the chart. And it just happened to
work out nicely.
Home of Dan Zanger, world record holder for
Do you use any kind of stop-loss? parlaying $10,775 into $18 million in 18 months!
There are many great traders out there
who don’t like to use stops. Sophisticated Home of The Zanger reporT.
options traders, for example, may not use
stops. But for a trader like me who likes
to short things, it’s insane not to have a
stop. At every given moment, there is a
stop on every single position I’ve got. As
we speak, I have 63 different positions advertised in your magazine right from come to rely on?
on (which is actually not that high of a the early days, with our “Data Done My charts have a Zen-like simplicity
number for me—at times, I’ve had on Right” ads, that some of your readers to them. I think this is because I’ve been
well over 100), and every single posi- may remember. using charting packages since 1990 and
tion has a stop on it that was lovingly We were strictly a historical data have tried them all, and to me, most of
crafted to the penny. So yes, I’m big on company until about 1995. By that point, the “extras” on charts just amounts to
using stops. I had bought out my partner and it was noise. You can slather a chart with very
just me. So in those early days of the sexy-looking indicators and other bells
Regarding your former company Internet, I started building a website, and & whistles, but it’s not helpful. All that
Prophet Financial Systems, was it your in the late 1990s the company morphed matters to me is trendlines, channels,
love for technical analysis that led you from offering only data to pretty much horizontal lines, and my own pattern
to develop this service? having nothing to do with selling data, recognition. At Prophet, even we were
Yes. Prophet came about initially as but instead just a website dedicated to guilty of this. We had automatic pattern
a data company. After I graduated from tools for technical analysts. It was a two- recognition, and the user could select
college, I flitted around a little and had pronged business. One aspect of it was from well over 100 technical indicators,
a few different jobs. I worked at Apple for individual retail subscribers, and the none of which I use. I don’t even really
Inc. in strategic planning, and I worked at other prong was licensing our charting bother with moving averages. From
an investment bank. I worked at a small products to brokerage firms. time to time, even on my blog, I’ll show
financial data company, and after that a CCI, I’ll show the moving averages,
trio of jobs I set off on my own with a Given that you’ve done so much work just to be visually interesting, but by no
partner to start a historical data company. with charts, do you have any “go-to” means would I ever say, “I am shorting
We offered historical financial data for indicators or patterns that you have this stock because of this crossover.”
futures, stocks, and options. Since this I keep it extraordinarily simple, simple,
was back in the days of 300- and 1200- simple, and that’s not because I’m trying
baud modems, we offered daily data to make a point; it’s because I don’t like
updates via modem, as well as histori- anything else and I don’t need anything
cal data on CD-ROM, since those were else. Oftentimes, I’ll even hide the price
large files. There were several similar bars! I just want a very pure representa-
data services at the time. We actually tion as to what’s going on with the stock,
August 2018 • Technical Analysis of Stocks & Commodities • 39
This brings us up to your point, I’ve written a couple dozen books
current project. Tell us with a new one on the way. So I’ve been
Over the course of 30 years, about SlopeOfHope. a writer for my entire adult life and even
I’ve looked at literally That’s an interesting story reaching back into adolescence. Thus,
unto itself. After I sold writing the blog was very natural for me,
millions of charts and not Prophet Financial to Ameri- and writing about something that I loved
only do I never get bored trade, they were kind enough so deeply—charting—was effortless.
with it, but I get bored when to keep me around for a That, and I’m also cursed with what
I’m not looking at charts. couple of years. It wasn’t I call “blogger’s guilt,”—if more than a
long before things were few hours go by since my last post, I get
running smoothly with the antsy and write another one! We’re now
transition and I had time on in our 14th year of SlopeOfHope, so I’ve
particularly with respect to support, my hands, so my wife encouraged me been doing Slope a long time, actually
resistance, and key breaks, because what to start a blog. As with all good ideas, I longer than I had Prophet Financial.
is enchanting to me about this entire field dismissed it as silly, thinking, “Nah, I’m SlopeOfHope is kind of a trio of things.
of technical analysis is that with as many not going to that.” But she egged me on, Yes, it’s a blog, and that’s the part of
millions of charts as I’ve looked at in and in March 2005, I wrote my first post, the site with the biggest content library.
my life, and for as many decades as I’ve which had maybe 40 readers! In my blog But it’s also a charting platform with
been doing this, I’m still mesmerized by I just started talking about the trading I the SlopeCharts feature. And it’s also a
how, over the long haul, these patterns was doing, and little did I know it would library of knowledge about charts, which
repeat, and how, in retrospect, you can end up becoming my full-time job! The I call SocialTrade.
see patterns. blog took on a life of its own. Slope has been wonderful for me,
They say the market doesn’t ring a bell So just as Prophet Financial had because not only do I love the writing,
when it tops, but when you look back morphed from being a historical data but I also get to have a small business
at a stock, there actually is a bell—it’s company to a technical analysis website, again, and I get to have a relationship
just a matter of hearing it. And I don’t SlopeOfHope has grown from being with our subscribers.
use the word “enchanted” lightly. It’s a personal trading diary to a traders’
just mesmerizing to me that these price community oriented around charting. Since you are a consummate chartist,
patterns—which are the amalgam of mil- As we speak, it was only just weeks ago tell us a little more about the Slope­
lions of individual decisions—express that we launched the new version of the Charts feature.
themselves in a way that is similar to, SlopeOfHope site, and I don’t even call Sure. Back when I started Prophet-
say, looking down at a freeway from a jet it a blog anymore, because it’s now much Charts in the earlier days of software
plane and seeing with amazement at how more than that. development, I just wanted to build the
all those cars are flowing so elegantly, Over the years, Slope has accumulated kind of charts I wanted personally. If I
even though each car contains different about 20,000 posts, almost all of them wanted a new feature, I would just go
people all having their own lives. It’s written by me. A lot of them are about program it myself. I was simply building
like the hive mind, and there’s a certain trading and charting, but many have all the perfect charting product for myself.
beauty in that amalgam. sorts of social commentary, political Fortunately, it turned out that other
commentary, and anecdotes. The posts traders liked the same look and feel in
I know you previously had a show on that tend to be the most popular are the charts that I did.
the Tastytrade website. Do you still ones drawn from personal experience, or After I sold ProphetCharts, it never
do that? stories I have told. They might have been even crossed by mind to ever develop a
Yes, and I was fortunate to have been about how I started the Prophet Financial new charting platform, since that would
involved with that project by Tom Sosnoff business or what have you. take years and headaches and millions of
from day one, first creating documentaries The blog became a wonderful outlet dollars. Plus, we humans get accustomed
for it and later with a daily, 15-minute for me since I had been a writer for a to things and don’t want to change what
live segment. My viewers can attest to very long time. I wrote my first magazine we’re using. But I realized that part of
the challenges of doing a live show—with articles when I was 15. I wrote my first what we don’t like in something has to
the occasional sneezes or dogs barking published book when I was 16. By this do with not being used to it. I eventu-
and things that happen during a live ally reached a point where I wanted to
show—but also, the challenge of putting start making something. It’s like I used
together a good 15 minutes no matter to live in a house that I no longer have,
whether you’ve had a great day trading so I built another house. Now I feel at
or a horrible one, or whether the market home again, you know?
is boring that day or fantastic.
Continued on page 45
40 • August 2018 • Technical Analysis of Stocks & Commodities
FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is the senior
strategist for DeCarley Trading, a division of Zaner, where she also works as a
broker. She has written four books on futures and options trading, with the latest
being a new edition of her book A Trader’s First Book On Commodities (third
edition, October 2017) as well as Higher Probability Commodity Trading (July
2016). Garner also authors widely distributed e-newsletters; for a free subscrip-
tion, visit www.DeCarleyTrading.com. To submit a question, email her at info@
carleygarnertrading.com or via www.DeCarleyTrading.com. Selected questions Carley Garner
will appear in a future issue of S&C.

HOW TO SPECULATE IN A BASKET OF amount (ignoring contango and other and diesel (heating oil).
COMMODITIES (Part 2 of 2) challenges). The grains account for a little over
Is there a cheap, efficient, and conve- 22% of the index, the industrial metals
nient way to speculate in a basket of Contango isn’t eliminated but it is are 17.5% of the weight, precious metals
commodities? mitigated relative to an ETF near 15%, with the softs and livestock
Last month, I discussed the inef- Last month, I touched on the contango completing the index. In my opinion,
ficiencies of commodity index ETFs built into commodity markets that work this is a well-balanced and diversified
and introduced the idea of trading the against traders who are long the market. commodity index.
Bloomberg Commodity Index (BCI) Due to the nature of contango, aside
futures (symbol AW) listed on the from abnormal market conditions, it is Risk and reward prospects
Chicago Board of Trade division of the unavoidable. Nevertheless, its conse- Commodity market volatility is near
CME Group. In my view, this is a great quences are mitigated when using the all-time lows; accordingly, it isn’t sur-
way for speculators to gain exposure to BCI relative to most commodity ETFs prising that a broad-based index has
the commodity markets because of its because of proximal expiration futures been trading sideways in recent years.
diversity, low margin requirement, and contracts used in the index (while the BCI However, volatility will return and when
relatively tame risk. Let’s jump into the uses front-month commodity futures, it does, the upside potential appears to
nitty gritty—calculating profit and loss, most ETFs use back months). be substantially greater than the down-
identifying what the contract represents, side risk.
and looking at the long-term risk and Index weighting For example, the last commodity rout
reward prospects. The Bloomberg Commodity Index in- began in 2014 and ended in early 2016.
cludes 22 commodities with weighting During that time, the BCI fell from the
BCI math that cannot exceed 15% or fall below 2% 135.0 area to 75.0 (the lowest value the
The index value is derived by multiply- for any particular included commodity. index has ever seen). Further, the index
ing each point by $100. As a result, each The index is unique in that it isn’t heav- peaked in 2011 near 170.0, which leaves
tick in the Bloomberg Commodity Index ily weighted toward crude oil. Although the current value (between 85.0 and 89.0)
futures contract results in a profit or the energy sector had a target weight of looking inexpensive. To put things into
loss of $10 to the trade (that is, a move about 30% for 2018, WTI crude oil was perspective, a retest of the lows near 75
from 89.0 to 89.1) but a move from 89.0 a mere 7.3% with natural gas making up would incur a loss of roughly $1,400 but
to 90.0 equates to $100. Accordingly, about 8% and Brent crude oil coming in a retest of the 2011 high would result in
if the index is trading at 89.0, the value at 7.6%. The remaining energy sector a profit of roughly $8,100. Further, while
of the futures contract is $8,900. The weighting belongs to RBOB gasoline we wouldn’t count on a repeat of the 2008
margin per contract is currently commodity boom any time soon, the
less than $250. Thus, a trader can BCI briefly touched 240.0 during the
speculate in the upside of roughly For those looking for chaotic rise, which is roughly 151 index
$9,000 worth of commodities with points away, or $15,100!
a “down payment” of merely $250.
a relatively cheap and Of course, this is a simplistic view;
The same trader could remove the efficient way to play the in reality, there are quarterly rollover
leverage completely by funding upside in a well-diversified hassles, transaction costs, contango
the account with the contract value basket of commodities, burdens, and no downside price limits
($8,900 with the index at 89.0). In other than zero, but my goal was to por-
short, if the index value dropped
here’s an index futures tray the big picture. For those looking
to zero, which is highly unlikely, contract to check out.
the trader should lose roughly that Continued on page 47
August 2018 • Technical Analysis of Stocks & Commodities • 41
product review

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FIGURE 1: MARKETSCOPE ADVISOR HOMEPAGE. The array of research and analysis topics offered is
by Leslie N. Masonson displayed across the top and left side of the screen.

C
FRA, a privately held firm Research and Analysis) may not be a that can be accomplished by typing in
founded in 1994, is an inde- well-known name to individual investors, the ticker symbol on the right side of
pendent research firm that but the company has a solid reputation the screen.
provides subscribers with for independent research among its sub- Directly in the middle of the screen
analytical tools and metrics to help scribers, who include financial advisors, are CFRA’s latest research notes and
them assess their investments in stocks, institutions, wealth management firms, recommendations in date and time
bonds, mutual funds, sectors, industries, corporations, academicians, and govern- order; a short list of recent, detailed
ETFs, and options. Their proprietary ments. Individual investors can subscribe analysis reports with star ratings; a
methodology combines fundamental to this service through their subscribed choice of new articles from Thematic
equity research, forensic accounting, financial advisors. Research; the Morning Briefing report;
and technical analysis to pinpoint in- and the most-viewed articles. Note that
vestments showing the most promise MarketScope Advisor the latest daily stock market commen-
at any given time. The company uses This website contains multiple layers of tary is highlighted on the right side of
a mathematical rating system to assess analysis and commentary on all major the screen. The page index tab on the
investments as well as to pinpoint those asset classes. The amount of available bottom-left of the screen delivers a
falling to the wayside. data and intelligence is truly amazing. The link to a list of about 40 separate links
In October 2016, CFRA acquired and homepage screen (Figure 1), only partially providing a one- or two-line description
integrated the S&P Global Equity And shown here because of its vertical layout, of what is offered. This presents a quick
Fund Research business into its platform. provides a capsulized view of the broad way to get to where you want.
The acquired firm had been providing array of information offered. Across the More focused topics are listed on
investment analysis and commentary top of the screen, the major categories the left side of the screen. For example,
since the 1920s. It was well-known for of asset choices are displayed—stocks, clicking on the thematic research tab
its star ratings, which are still being ETFs, mutual funds, bonds—as well as provides reports on stocks, mutual funds,
used today. One of its well-known and the tabs for options strategies, portfolio ETFs, and fixed income. The reports are
highly respected analysts is Sam Stovall, analysis, alerts, and watchlists. centered around specific themes such as
currently CFRA Research’s chief equity By clicking on the geography tab, you green investing, solar, international, fi-
strategist, who is a regular on business can limit and obtain the research notes nancials, energy, and others. Other topics
cable shows and at CFRA seminars, from one or all countries—UK, US, Ger- covered in this tab include momentum
investment conferences, and other client many, France Italy, Netherlands, Nordic, investing, multifactors, value investing,
and educational events. Spain, and Netherlands. In addition, if and volatility. In each of the four major
CFRA (which was originally founded the user wanted to get a detailed seven- asset classes, the site recommends issues
under the name Center for Financial page research report on any company, to be added to a watchlist.
42 • August 2018 • Technical Analysis of Stocks & Commodities
Stock and mutual fund PDF document that
analysis comprehensively lays
The format and usage of the ETF, stock, out the philosophy
and fund data analysis screens are all and background of the
similar, except that the data views mirror company’s analyti-
the specific asset class characteristics. cal approach (includ-
For example, the data views for stocks ing its ranking system
offer custom, basics, performance, rank- terminology, qualita-
ing, fundamentals, and dividends. For tive, and quantitative
mutual funds the data views are custom, methods), frequently
rankings, performance, risk, cost, and asked questions, and a
qualitative. A full complement of re- glossary of terms. Us-
search and analysis is provided for all ers who plan to make
these asset classes. Users will appreciate investment decisions
the ability to download many of the data based on this research
tables into an Excel spreadsheet, as well and ranking system
as to place ticker symbols automatically should spend adequate
into watchlists. time reviewing this
CFRA developed CFRA Vitals, which document beforehand
offers alternative, forward-looking, to obtain a complete
predictive ETF and mutual fund ratings, understanding.
because the company believed that using Hovering the mouse
only historical mutual fund performance over the ETFs tab on
returns is only part of the story. The the homepage brings
analysis adds an extra dimension to past up three choices: Port-
performance by not only looking at Lip- folios, Focus ETF Of FIGURE 2: SPDR PORTFOLIO S&P 500 VALUE ETF. This is the first of
per peer group classification rankings but The Month, and ETF seven pages of a detailed report on this ETF. The document can be printed
also standard deviation, quantitative risk Screener. The former or downloaded.
assessment, expense ratios, turnover rate, offers four specific
and manager tenure, among other data ETF portfolios—three of which use the egories: default, ranking, fund charac-
points. Moreover, each mutual fund’s qualitative overlay of CFRA’s quantita- teristics, performance and expenses,
core holdings are individually assessed tive methodology. By clicking on each portfolio composition, and risk metrics.
using the company’s star-rating system. portfolio, a screen listing the ETFs ap- And each of those 28 choices is further
In addition, 22,000 mutual funds are pears with basic data that is then supple- broken down into a few more options.
reviewed for quality rankings and credit mented with additional performance For each, the region criteria under the
ratings. screens, as desired. default heading has 13 choices such
The Focus Of The Month option de- as Asian developed markets, Asian
EFT analysis and screener livers an extensive report on a top-rated emerging markets, European emerging
Given the extensive nature of this web- ETF. The latest report was on SDPR markets, frontier markets, US domestic,
site, I’ll cover only selected features here. Portfolio S&P 500 Value ETF (SPYV), and so on.
Accordingly, ETFs are being highlighted shown in Figure 2. Overweight peer ETFs
instead of stocks, mutual funds, and and related headlines and research are ETF research
bonds because of the increased dollar also embedded on the opening page. Clicking on the ETFs tab on the top of
inflows into ETFs resulting from investor Finally, the ETF screener offers users the screen brings up the research tab.
and financial advisor interest. a huge number of screening options to This includes a description of Focus Of
CFRA’s ranking methodology for select ETFs of interest for further analy- The Month research reports, a capsulized
ETFs is provided in a separate 24-page sis. I have not come across another site description of some thematic research
that offers such articles, and a listing of a few related
a large number articles. Next up is the data views tab
The proprietary methodology combines of granular se- that houses all the critical data and ETF
fundamental equity research, forensic lection criteria. analysis.
For exa mple, The data view tab contains six separate
accounting, and technical analysis to the screener pro- subtabs that download into a multi-
pinpoint investments showing the most vides 28 choices column format. These include custom,
promise at any given time. divided into the rankings, performance, risk, cost, and
six major cat- qualitative. All the subtabs can be down-
August 2018 • Technical Analysis of Stocks & Commodities • 43
loaded with a mouse multiyear annualized total return and tax
click into an Excel analysis, asset allocation by percentage,
spreadsheet for further economic sector representation, and top
data manipulation. 10 holdings.
Figure 3 illustrates The second data views subtab focuses
the first web page that on performance. Here, the price per-
comes up after clicking formance for four periods is shown in
on the rankings tab. a table format: YTD, one-, three-, and
Note that the ETFs are five-year returns, and then 12-month
listed alphabetically, yield. Likewise, the risk tab provides
but any column in any three-year data on alpha, beta, r-squared,
of the tabs can be ar- Sharpe ratio, and standard deviation.
rayed by the user in as- The cost tab contains the current price,
cending or descending gross expense ratio, and average P/E
order, thereby chang- ratio. The last tab is qualitative. It con-
ing the listing’s order. tains the name of the fund family, asset
FIGURE 3: EXCHANGE-TRADED FUND RANKINGS. The columns can be By clicking on the PDF class, style, portfolio manager’s name,
arrayed in ascending or descending order. This screen is in alphabetical
order. icon next to any ticker inception date, market cap, and whether
symbol, a complete the ETF is optionable.
seven-page research
report appears on the Sector analysis
screen. The sectors tab on the left side of the
VTI, a well-known homepage provides a sector scoreboard
broad-based domestic of the 11 major S&P sector categories
Vanguard ETF (Figure plus the S&P 500, S&P Composite 1500,
4), illustrates a sample S&P Mid-Cap 400, and S&P Small-
of a report. Much more Cap 600. It begins with commentary
information is provid- by Sam Stovall. This tab provides the
ed on the other pages ability to drill down several levels to
including performance obtain more detailed analysis. Each of
charts; average trading the sector’s percent of the S&P 500 is
volume and total return given, along with the price changes over
over varying time pe- one and 14 weeks; YTD, 2017; and five
FIGURE 4: VANGUARD TOTAL STOCK MARKET INDEX FUND. The top riods; percent sector years. Also, each sector’s star rating is
portion of the detailed report is provided here. Note the useful color-coded representation; top 10 provided, accompanied by the sector’s
information and the overweight peers, which are similar ETFs. holdings with their star relative strength, and recommended
and quality ratings; and weighting.
a glossary of terms As usual, all columns are sortable
used in the report. from low to high readings, as is the
A more concise standard throughout the website. By
report of any ticker clicking on the name of any sector, a sub-
symbol can quickly be industry screen pops up with the same
obtained just by typing data columns as mentioned above, and
the ticker symbol into all the industries in that sector. More-
the search by ticker over, an analysis is given by a CFRA
box on the upper right analyst of the fundamental outlook for
side of the screen. For the sub-industry, recent developments,
example, for the Fi- and price action. By clicking on any
nancial Select Sector industry, another screen emerges with
SPDR ETF (XLF), the the companies in that industry along
information provided with their star rating and seven-page
includes the perfor- report option.
mance analytics rank-
FIGURE 5: TRADER TACTICS INTRADAY COMMENTS. A chart is provided
ing, key statistical data, Technical analysis
with support & resistance lines as well as bullish, bearish, and rotational a candlestick price This two-part section is heavy on text
price points. performance chart, with a limited number of single-style
44 • August 2018 • Technical Analysis of Stocks & Commodities
charts. The first section is labeled trader volatility, momentum, sentiment, and of this program and be able to use the
tactics, which provides pre-market, in- monetary indicators, gold, crude oil, research to assist them in making more
traday market, and closing commentary and the US Dollar Index for varying informed investment decisions.
on many different market segments. timeframes.
Also provided is the intermediate and On the right side of that screen there is Leslie N. Masonson, an active ETF
long-term outlook on the S&P 500, 10- a technical market indicator box indicat- trader, is president of Cash Management
year Treasury, and economic news. Ad- ing whether momentum, sentiment, and Resources, a financial consulting firm
ditional coverage is provided for crude monetary indicators are bullish, bearish, that focuses on ETF strategies. He is the
oil, gold, the euro, S&P/TSX, and Cboe or neutral. Measurements include 30- author of Buy—Don’t Hold: Investing
put/call ratio. week and 30-day moving averages of With ETFs Using Relative Strength To
Moreover, by downloading related the S&P 500, short- and long-term price Increase Returns With Less Risk; and
material (PDF format), the user is volume, relative strength, put/call ratio, All About Market Timing, as well as
presented with about 23 intraday daily Investor’s Intelligence sentiment, and Day Trading On The Edge. His website
charts on major indexes and market 10-year Treasury vs. 30-week average. is www.buydonthold.com, where he
segments pinpointing key zones on the In conclusion, MarketScope Advisor writes a weekly blog.
charts including bullish, bearish, and is a research-rich offering that delivers
rotational support (Figure 5). There is comprehensive data analysis on the ‡MarketScope
also commentary on each chart. many investment options available in ‡See Editorial Resource Index
The technical trends section opens the marketplace. After spending an hour
up to provide a discussion of the current or two working with the software, new
market with analysis of market breadth, users will realize the power and depth

INTERVIEW traders. There are more


Continued from page 40 than 10,000 charts and ar-
ticles available on it. It’s like Writing the blog was
running barefoot through a natural for me, and writing
So I started working on what became technical analyst’s library!
SlopeCharts, and I’ve been very pleased It’s fun and it’s free. And
about something I loved so
with it. I’ve now folded SlopeCharts into SocialTrade is part of the deeply—charting—was
the SlopeOfHope site. It’s always chal- SlopeOfHope site. I invite effortless.
lenging to create something new, but it’s readers to visit the site and
easier than it was 15 or 20 years ago. kick around.
It’s gratifying for me to not only have The way I see it is I’m
a charting product that I love again but very lucky to have an avocation that I ity, And Progress, Wiley.
also that other people can love, too. love, and SlopeOfHope is a way to share [2011]. High-Probability Trade
it with everybody. Setups: A Chartist’s Guide To Real-
Is SlopeCharts available to anyone Time Trading, Wiley.
right from the website? Thank you for speaking with us, and [2007]. Chart Your Way To
Yes, we don’t charge for it. Everything good luck with the site relaunch. Profits: The Online Trader’s Guide
on SlopeOfHope is free. I only ask that To Technical Analysis, Wiley.
people register with their name and email further readinG Nison, Steve [1991]. Japanese Candle-
address. If they register, they receive a Edwards, Robert D., and John Magee stick Charting Techniques, New
more interactive experience. For those [1948]. Technical Analysis Of Stock York Institute of Finance/Simon &
who decide to take it a step further, we Trends. Schuster.
also offer a premium service. But most Knight, Timothy [2014]. Panic, Prosper- Weinstein, Stan [1988]. Stan Weinstein’s
stuff on Slope is free of charge. Secrets For Profiting In Bull And Bear
Markets, McGraw-Hill.
Is there anything else you’d like to • www.SlopeOfHope.com
add? • www.Tastytrade.com
I can also explain what the SocialTrade
feature is. Think of it as “Pinterest” for
August 2018 • Technical Analysis of Stocks & Commodities • 45
Explore Your Options
is the ability to “craft” positions to meet
Got a question about options? Jay Kaeppel has over three decades of experi- a certain goal or set of criteria. The stock
ence in the options markets. He was a head trader for a CTA firm, an options you mentioned, AAPL, recently rallied
trading software developer, and is a portfolio manager for an investment to a new high then settled into a very
management firm. He also spent several years writing a weekly column titled narrow range for several weeks. Let’s
“Kaeppel’s Corner” and now publishes a blog, “Jay On The Markets” (http:// take your assumption that AAPL will
jayonthemarkets.com). He is the author of several books, including The Four soon break out to the upside. Let’s also
Biggest Mistakes In Option Trading; The Option Trader’s Guide To Probability, assume that you wish to enter a trade
Volatility, And Timing; and Seasonal Stock Market Trends. Send your ques- that will act much like the position of
tions or topic suggestions to Jay Kaeppel at jaykaeppel@gmail.com. Selected owning 100 shares of stock, but without
questions will appear in a future issue of S&C. the expense involved of doing so.
As you mentioned, one possibility is
to buy 100 shares of AAPL stock. This
allows you to take full advantage if the
BULL CALL SPREADS FOR at trading a bull call spread to lower scenario you expect (upside breakout)
PARTICIPATING IN RALLIES the cost but that position limits profit occurs. The downside is that at the time
I think a particular high-priced stock potential. Is there a way to participate of this writing, AAPL stock is trading
(AAPL) will break out to the upside. My in high-priced stocks even if my account at $186.87/share, so in order to buy
portfolio size does not allow me to buy is relatively small? 100 shares you will have to pony up
100 shares of the stock and even the call The short answer is “absolutely.” One $18,687—a bit steep for a lot of investors.
options are pretty expensive. I looked of the great advantages of trading options Likewise, if AAPL stock does the op-
posite of what you expect and drops back
to recent support at $160.63, you could be
looking at an open loss of -$2,624.
The alternative you mentioned is a
bull call spread, which involves buying
a lower strike price call and selling a
higher strike price call. At the end of
May you could buy an August 185-190
bull call spread with 78 days left until
expiration. This gives AAPL roughly two
and a half months to make the expected
upside breakout move. The good news is
that this trade costs only $2,367,or 88%
less than what it would cost to buy 100
shares of stock and the position has a
net delta of roughly 94 (a delta of 100
Figure 1: PROFIT/LOSS CURVE FOR bull call spread. This demonstrates the risk curve for the August
means that it would track exactly with
9x9 AAPL 185-190 bull call spread (that is, buying nine August 185 calls and selling nine August 190 calls)
versus the risk curve for owning 100 shares of stock. the stock itself). The bad news is that this
position has a limited profit potential of
$2,133 and a maximum downside risk
of -$2,367.
The limitations of this position are
obvious in Figure 1, which compares
the profit/loss risk curve for the bull call
spread (dark black line) to the risk curve
for 100 shares of stock.
If APPL breaks out as you expect,
you will have the opportunity to garner
a profit, but only to a point. As you can
see in Figure 1, not only does the bull
call spread have limited upside profit po-
tential, it has as much or more downside
risk than 100 shares of stock if AAPL is
Figure 2: ALTERED bull call spread. This shows the risk curve for the August 5x4 AAPL 185-190 bull
call spread (that is, buying five August 185 calls and selling four August 190 calls) versus owning 100 shares between roughly $163 and $188 a share
of stock. at option expiration.
46 • August 2018 • Technical Analysis of Stocks & Commodities
Explore Your Options
Fortunately, with options it is possible Note the relative advantages and disad- the stock shares position keeps losing
to alter simple positions to better fit your vantages between buying this spread and more and more money.
own specific objectives. Consider the buying 100 shares of AAPL stock:
following possibility: Instead of buying As with everything in trading (and
nine August 185 calls and selling nine • You commit and risk only $1,920 to life), there is no “free lunch.” The “catch”
August 190 calls, consider the results if the trade versus $18,678. to this option position is that if AAPL
you buy five of the 185s and sell only shares are trading between roughly
four of the 190s. The risk curve for this $169 and $189 per share at the time of
position compared to the 100 shares of One of the great August option expiration, the option
stock position appears in Figure 2. advantages of trading position stands to experience a larger
For this position: dollar loss than the 100 shares of stock
options is the ability to position.
• The cost to purchase is only ‘craft’ positions to meet But remember, the objective going
$1,920. a certain goal or set of in is to profit if AAPL breaks out to
• There is a delta of 98 (which means criteria. the upside while limiting downside
that once AAPL stock exceeds risk to a manageable dollar figure. The
this position’s breakeven price of position discussed here serves merely
$188.84, it will move essentially point • Above roughly $189.50 a share, the as one example of the ways in which an
for point with the stock just as if you option spread will actually make option position can be crafted to meet
were holding 98 shares of stock. slightly more profit than the 100 a specific objective.
• If AAPL does the opposite of what shares position.
you expect and declines in price, then • Below $185 per share, the maximum
the maximum downside risk is the risk for the option spread is $1,920. If
$1,920 paid to enter the trade. the price of the stock keeps dropping,

FUTURES FOR YOU

From a long-term risk reward perspective, the


Bloomberg Commodity Index futures contract is attractive.
2008 high of 240.0

2011 high of 175.0

2016 low of 75.0

FIGURE 1: BLOOMBERG COMMODITY INDEX

GARNER might be the best solution. That said, cutting corners in areas you are unaware
Continued from page 41 not all futures brokers will offer easy of. If this is the case, you will be better
access to this product; if your brokerage served to find a competent commodity
doesn’t offer it, then it likely doesn’t al- broker. And this isn’t always as easy as
for a relatively cheap and efficient way low trading in many other markets and you might think!
to play the upside in a well-diversified expiration months. To put it bluntly, if
basket of commodities, the Bloomberg your brokerage is cutting corners in
Commodity Index futures contract areas you are aware of, it may also be
August 2018 • Technical Analysis of Stocks & Commodities • 47
For this month’s Traders’ Tips, the fo-
cus is Domenico D’Errico’s article in
this issue, “Portfolio Strategy Based
On Accumulation/Distribution.” Here,
we present the August 2018 Traders’
Tips code with possible implementa-
tions in various software.
The code for the following Traders’ Tips selections is
posted here:
• Traders.com  Home–S&C Magazine 
Traders’ Tips
At Traders.com you can also right-click on any chart to
open it in a new tab or window and view the chart at a
much larger size. Figure 1: TRADESTATION. The accumulation/distribution strategy and indicator
The Traders’ Tips section is provided to help readers are shown on a weekly TradeStation chart of NFLX as well as in TradeStation Port-
folio Maestro applied to the S&P 100 index stocks.
implement a selected technique from an article in this is-
sue or another recent issue. The entries here are contrib-
uted by software developers or programmers for software TL_SetColor( value1, TrendLineColor);
that is capable of customization.
value1 = TL_New( Date, Time, Bot, Date[Length],
Time[Length], Bot ) ;
TL_SetColor( value1, TrendLineColor ) ;

value1 = TL_New( Date, Time, Bot, Date, Time, Top ) ;
F TRADESTATION: AUGUST 2018 TRADERS’ TIPS CODE TL_SetColor( value1, TrendLineColor ) ;
In “Portfolio Strategy Based On Accumulation/Distribution” in
this issue, author Domenico D’Errico presents a trading system value1 = TL_New( Date[Length], Time[Length],
Bot, Date[Length], Time[Length], Top ) ;
based on the concepts known as Dow theory. He provides tl_setcolor(value1,TrendLineColor);
several indicators to help identify the various phases of the end ;
Dow theory cycle as well as a demonstration strategy. Here,
if Range_[Length] > 0 then
we are providing the TradeStation EasyLanguage code based begin
on the author’s work. The strategy can easily be tested on a Plot1( Range_ /Range_[Length],
portfolio of favorite symbols using TradeStation’s Portfolio "RangeRatio", lightgray ) ;
Plot2( ConsolidationFactor,
Maestro application. "ConsolidationFactor", darkgray ) ;
if Range_ / Range_[Length] < ConsolidationFactor then
Indicator: AccumDistRange SetPlotColor( 1, TrendLineColor) ;
// TASC Aug 2018 end ;
// Domenic D’Errico
inputs: Indicator: AccumDistATR
Length( 4 ), // TASC Aug 2018
ConsolidationFactor( 0.75 ), // Domenic D’Errico
TrendLineColor( Yellow ) ; inputs:

ATRLength( 4 ),
variables:
ATRFactor( 0.75 ),
Consolidation( false ),
TrendLineColor( Yellow ) ; ;
Range_( 0 ),
Top( 0 ),
var:
Bot( 0 ) ;
Consolidation( false ),
Range_( 0 ),
Consolidation = false ;
Top( 0 ),
Bot( 0 ),
Range_ = Highest( High, Length )
ATR( 0 ) ;
- Lowest( Low, Length ) ;
Consolidation = false ;
if Range_ < ConsolidationFactor
ATR = AvgTrueRange( ATRLength ) ;
* Range_[Length] then
begin
if ATR < ATR[ATRLength] * ATRFactor then
Consolidation = true ;
begin
Top = Highest( High, Length ) ;
Consolidation = true ;
Bot = Lowest( Low, Length ) ;
Top = highest( High, ATRLength ) ;
end ;
Bot = Lowest( Low, ATRLength ) ;
end ;
if Consolidation then
begin
If Consolidation then
value1 = TL_New( Date, Time, Top, Date[Length],
begin
Time[Length], Top ) ;

48 • August 2018 • Technical Analysis of Stocks & Commodities


value1=TL_New( Date, Time, Top, Strategy: AccumDistRange
Date[ATRLength], Time[ATRLength], Top ) ; // TASC Aug 2018
TL_SetColor( value1, TrendLineColor ) ; // Domenic D’Errico
input:
value1=TL_New( Date, Time, Bot, Length( 4 ),
Date[ATRLength], Time[ATRLength], Bot ) ; ConsolidationFactor( 0.75 ),
TL_SetColor( value1, TrendLineColor ) ; VolRatio( 1 ),
VolAvg( 4 ),
value1=TL_New( Date, Time, Bot, Date, Time, Top ) ; VolDelay( 4 ),
TL_SetColor( value1, TrendLineColor ) ; InitialCapital( 100000 ),
TradeStartDate( 1030101 ) ;
value1=TL_New( Date[ATRLength], Time[ATRLength],
Bot, Date[ATRLength], Time[ATRLength], Top ) ; var:
TL_SetColor( value1, TrendLineColor ) ; Consolidation( false ),
End; Range_( 0 ),
Top( 0 ),
if ATR[ATRLength] > 0 then Bot( 0 );
begin
Plot1( ATR / ATR[ATRLength], Consolidation = false ;
"ATRRatio", LightGray ) ; Range_ = Highest( High, Length )
Plot2( ATRFactor, - Lowest( Low, Length ) ;
"ATRFactor", DarkGray ) ;
if ATR / ATR[ATRLength] < ATRFactor then If Range_ < ConsolidationFactor
SetPlotColor( 1, TrendLineColor) ; * Range_[Length] then
end ; begin
Consolidation = true;
Indicator: AccumDistADX Top = Highest( High, Length ) ;
// TASC Aug 2018 Bot = Lowest( Low, Length ) ;
// Domenic D’Errico end ;
inputs:
ADXLength( 4 ), //Signals
ADXTrigger( 30 ), if Date >= TradeStartDate
TrendLineColor( Yellow ) ; and Close > Top
and Bot > Bot[12]
variables: and Average( volume, VolAvg )[VolDelay] > VolRatio
Consolidation( false ), * Average( volume, VolAvg )[VolAvg+VolDelay] then
Range_( 0 ), Buy ( InitialCapital + NetProfit ) /
Top( 0 ), Close Shares this bar Close ;
Bot( 0 ),
ADXValue( 0 ) ; if Close < Bot then
Sell this bar on Close ;
Consolidation=false;
ADXValue = ADX( ADXLength ) ;
To download the EasyLanguage code for the indicator
If ADXValue < ADXTrigger then presented in this article, please visit our TradeStation and
begin EasyLanguage support forum. The code from this article
Consolidation = true ;
Top = Highest( High, ADXLength ) ; can be found here: https://community.tradestation.com/Dis-
Bot = Lowest( Low, ADXLength ) ; cussions/Topic.aspx?Topic_ID=152631. The ELD filename
end ; is “TASC_AUG2018.ELD.”
If Consolidation then For more information about EasyLanguage in general,
begin please see http://www.tradestation.com/EL-FAQ.
value1 = TL_New( Date, Time, Top, A sample chart is shown in Figure 1.
Date[ADXLength], Time[ADXLength], Top ) ;
TL_SetColor( value1, TrendLineColor ) ;
This article is for informational purposes. No type of trading
or investment recommendation, advice, or strategy is being made,
value1 = TL_New( Date, Time, Bot, given, or in any manner provided by TradeStation Securities or
Date[ADXLength], Time[ADXLength], Bot ) ; its affiliates.
TL_SetColor( value1, TrendLineColor ) ; —Doug McCrary

value1 = TL_New( Date, Time, Bot, Date, Time, Top ) ; TradeStation Securities, Inc.
TL_SetColor( value1, TrendLineColor ) ; www.TradeStation.com

value1 = TL_New( Date[ADXLength], Time[ADXLength],
Bot, Date[ADXLength], Time[ADXLength], Top ) ;
TL_SetColor( value1, TrendLineColor ) ;
end ;

Plot1( ADXValue,
"ADX", lightgray ) ; F eSIGNAL: AUGUST 2018 TRADERS’ TIPS CODE
Plot2( ADXTrigger,
"ADXTrigger", darkgray ) ;
For this month’s Traders’ Tip, we’ve provided the studies
if ADXValue < ADXTrigger then AccDist ADX.efs, AccDist Atr.efs, and AccDist Atrstudy.
SetPlotColor( 1, TrendLineColor ) ; efs based on the article in this issue by Domenico D’Errico,
August 2018 • Technical Analysis of Stocks & Commodities • 49
Figure 2: eSIGNAL. Here is an example of the studies plotted on a daily chart
of NFLX.
Figure 3: THINKORSWIM. The AccumulationDistributionStudy is displayed on a
“Portfolio Strategy Based On Accumulation/Distribution.”
weekly chart of NFLX below the volume pane. The AccumulationDistributionStrat is
shown in the upper pane.
These studies will assist in determining whether “informed
investors” are accumulating or distributing positions.
The studies contain formula parameters that may be con- the volume) and the AccumulationDistributionStrat (upper
figured through the edit chart window (right-click on the pane). See D’Errico’s article in this issue for more details on
chart and select “edit chart”). A sample chart implementing interpretation of the method.
the studies is shown in Figure 2. —thinkorswim
To discuss this study or download a complete copy of the A division of TD Ameritrade, Inc.
formula code, please visit the EFS library discussion board www.thinkorswim.com
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 scripts
(EFS) are also available for copying & pasting from the
Stocks & Commodities website at Traders.com in the
Traders’ Tips section. F WEALTH-LAB: AUGUST 2018 TRADERS’ TIPS CODE
—Eric Lippert Using WealthScript, we’ve coded the multifaceted strategy
eSignal, an Interactive Data company discussed by Domenico D’Errico in his article in this issue,
800 779-6555, www.eSignal.com “Portfolio Strategy Based On Accumulation/Distribution,”
for use in Wealth-Lab. Our formula for this strategy contains
quite a number of variables to adjust its behavior. For example,
you can switch between the three modes of detection of price
compression: range, ATR, and ADX; you can configure its RSI
and ADX thresholds; you can adjust the consolidation factor;
F THINKORSWIM: AUGUST 2018 TRADERS’ TIPS CODE you can choose your preferred type of entry (breakout or
We have put together a study for thinkorswim based on the pullback); and so forth. You’ll find them exposed for optimiza-
article “Portfolio Strategy Based On Accumulation/Distribu- tion as well as for manual fine-tuning at the bottom-left of the
tion” in this issue by Domenico D’Errico. We built the study screen. These “parameter sliders” can be dragged interactively,
and strategy referenced by using our proprietary scripting making the chart redraw instantly with the updated trades
language, thinkScript. To ease the loading process, simply and performance. A sample chart displaying the strategy is
go to http://tos.mx/5K7xQT and then choose view thinkScript shown in Figure 4.
study. Name the study “AccumulationDistributionStudy.” You As the accumulation phase often takes place at the end of
can also add the strategy by going to http://tos.mx/R30R8U, a downtrend, we believe that motivated traders would want
choose to view thinkScript strategy, and name it “Accumu- to throw in some logic to limit the system’s exposure to other
lationDistributionStrat.” This study and strategy can then be market conditions. As discussed by the author, it takes many
added to your chart from the edit study and strategies menu trades during the other phases and thus might benefit from
within thinkorswim. filtering.
Figure 3 shows a weekly chart of NFLX overlaid with If you want more of the same kind of trading technique
the AccumulationDistributionStudy (the lower study below in Wealth-Lab, we’ve got you covered. Hit Ctrl-O, choose

50 • August 2018 • Technical Analysis of Stocks & Commodities


double ConsolidationFactor = paramConsFactor.Value,
ATRFactor = paramConsFactor.Value,
Top = 0.0, Bottom = 0.0;
var Range_ = Highest.Series(High, Length)-Lowest.
Series(Low, Length);
var ATR_ = ATR.Series(Bars,Length);
var ADX_ = ADX.Series(Bars,Length);
int minPeriod = Math.Max(Length * 3, 20);
bool Consolidation = false, breakout = paramEntryBreak-
out.ValueInt == 0 ? true : false;

for(int bar = GetTradingLoopStartBar( minPeriod ); bar
< Bars.Count; bar++)
{
if( !Consolidation )
Figure 4: WEALTH-LAB. This shows some example trades on a weekly chart of {
AAPL (Apple Inc.). bool conditionRange = (Range_[bar] < Consolida-
tionFactor * Range_[bar - Length]) && paramMode.ValueInt == 0;
bool conditionATR = (ATR_[bar] < ATRFactor * ATR_
download, and you should have the downloadable strategy [Length]) && paramMode.ValueInt == 1;
named “rectangle trading system (Acme R)” under the chart bool conditionADX = (ADX_[bar] < ADXTrigger) &&
paramMode.ValueInt == 2;
patterns folder. Like the accumulation/distribution system,
its idea is in identifying tradable rectangle patterns by com- if( conditionRange || conditionATR || conditionADX )
paring the size of consolidation to the size of the preceding {
Consolidation = true;
trending range. An entry is signaled after a breakout if the Top = Highest.Series(High, Length)[bar];
consolidation range (measured in ATR units) is tight rather Bottom = Lowest.Series(Low, Length)[bar];
than volatile. It is also flexible in configuring its various pa- TopBar = bar;
BottomBar = bar - Length;
rameters interactively through “sliders.” ConsolidationBar = bar;
}
Wealth-Lab code (C#): }

using System; if( Consolidation )
using System.Collections.Generic; {
using System.Text; double[] rectangle = { TopBar, Top, TopBar, Bottom,
using System.Drawing; BottomBar, Bottom, BottomBar, Top };
using WealthLab; DrawPolygon( PricePane, Color.Blue, Color.
using WealthLab.Indicators; FromArgb(30,Color.LightSteelBlue), LineStyle.Solid, 1, true,
rectangle );
namespace WealthLab.Strategies
{ if( Range_[bar] > ConsolidationFactor * Range_[bar
public class TASC_2018_08 : WealthScript - Length] )
{ Consolidation = false;
private StrategyParameter paramMode;
private StrategyParameter paramLength; if( bar > ConsolidationBar + ConsolidationTimeout )
private StrategyParameter paramADX; Consolidation = false;
private StrategyParameter paramConsTimeout; }
private StrategyParameter paramConsFactor;
private StrategyParameter paramEntryBreakout ; if (IsLastPositionActive)
{
public TASC_2018_08() SellAtTrailingStop( bar+1, LastPosition, Bottom );
{ }
paramMode = CreateParameter("A/D/ ATR/ ADX", 0, 0, else
2, 1); {
paramLength = CreateParameter("Length", 4, 4, 10, 2); if( Consolidation )
paramADX = CreateParameter("ADX Trigger", 30, 5, 40, {
5); if( breakout ) // Breakout entry
paramConsTimeout = CreateParameter("Cons. tim- {
eout", 4, 2, 20, 2); if( Bottom > Lowest.Series(Low, Length)[bar -
paramConsFactor = CreateParameter("Cons. factor", 12] )
0.75, 0.25, 0.75, 0.25); if( BuyAtStop( bar+1, Top, "Breakout") !=
paramEntryBreakout = CreateParameter("Brkout/Pull- null )
back", 0, 0, 1, 1); Consolidation = false;
} else
Consolidation = bar + 1 - ConsolidationBar
protected override void Execute() < ConsolidationTimeout;
{ }
int mode = paramMode.ValueInt; else // Pullback entry
int Length = paramLength.ValueInt, ADXTrigger = para- {
mADX.ValueInt, if(( Close[bar] > Bottom ) && CrossOver( bar,
TopBar = -1, BottomBar = -1, ConsolidationBar = -1, RSI.Series(Close, Length), 30 )
ConsolidationTimeout = paramConsTimeout.ValueInt; && Bottom > Lowest.Series( Low, Length)

August 2018 • Technical Analysis of Stocks & Commodities • 51


Figure 5: NEUROSHELL TRADER. This NeuroShell Trader chart displays the ac-
cumulation/distribution indicators and portfolio trading system.
Figure 6: NEUROSHELL TRADER. Here are sample results from applying the ac-
cumulation/distribution portfolio trading strategy across the S&P 100 stocks.
[bar - 12])
if( BuyAtMarket( bar+1, "Pullback") != null
) A<B(Divide(PriceRange(High, Low, 4), Lag(PriceRange(High,
Consolidation = false; Low, 4), 4)), 0.75), 1))
else A>B(Momentum(SelectiveAvg(PriceLow(Low,4), A<B(Divide(Pri
Consolidation = bar + 1 - ConsolidationBar ceRange(High,Low,4), Lag(PriceRange(High,Low, 4), 4)), 0.75),
< ConsolidationTimeout; 1), 12), 0)
} A>B(Lag(Avg(Volume, 4), 4), Mul2(1, Lag(Avg(Volume, 4), 8)))
}
} SELL LONG CONDITIONS: [All of which must be true]
} A<B(Close,SelectiveAvg(PriceLow(Low,4),A<B(Divide(PriceRang
} e(High,Low,4),Lag(PriceRange(High,Low,4),4)),0.75),1))
}
} Users of NeuroShell Trader can go to the Stocks & Com-
modities section of the NeuroShell Trader free technical
—Gene Geren (Eugene), Wealth-Lab team support website to download a copy of this or any previous
MS123, LLC
Traders’ Tips.
www.wealth-lab.com
A sample chart applying the strategy is shown in Figure 5.
Sample results are shown in Figure 6.
—Marge Sherald, Ward Systems Group, Inc.
F NEUROSHELL TRADER: AUGUST 2018 TRAD- 301 662-7950, sales@wardsystems.com
ERS’ TIPS CODE www.neuroshell.com
The accumulation/distribution range, ATR, and
ADX indicators discussed by Domenico D’Errico in his article
in this issue, “Portfolio Strategy Based On Accumulation/
Distribution,” can be easily implemented with a few of Neuro­
Shell Trader’s 800+ indicators. Simply select new indicator
from the insert menu and use the indicator wizard to set up F NINJATRADER: AUGUST 2018 TRADERS’ TIPS CODE
the following indicator: The accumulation/distribution range breakout strategy that
is discussed in “Portfolio Strategy Based On Accumulation/
A<B(Divide(PriceRange(High,Low,4),Lag(PriceRange(High,Lo Distribution” in this issue by Domenico D’Errico is available
w,4),4)),0.75)
A<B(Divide(ATR(High,Low,Close,4),Lag(ATR(High,Low,Clos for download at the following links for NinjaTrader 8 and for
e,4),4)),0.75) NinjaTrader 7:
A<B(ADX(High,Low,Close,4,4),30)
NinjaTrader 8: www.ninjatrader.com/SC/August2018SCNT8.zip
To implement the portfolio rule-based trading system, cre- NinjaTrader 7: www.ninjatrader.com/SC/August2018SCNT7.zip
ate a chart containing the S&P 100 stock symbols as chart
pages, select new trading strategy from the insert menu, and Once the file is downloaded, you can import the strategy
enter the following in the appropriate locations of the trading into NinjaTrader 8 from within the control center by select-
strategy wizard: ing Tools → Import → NinjaScript Add-On and then select-
BUY LONG CONDITIONS: [All of which must be true] ing the downloaded file for NinjaTrader 8. To import into
A>B(Close, SelectiveAvg(PriceHigh(High, 4), NinjaTrader 7, from within the control center window, select
52 • August 2018 • Technical Analysis of Stocks & Commodities
Figure 8: quantacula. Here’s a sample chart in Quantacula Studio implement-
ing the accumulation/distribution based on range compression.

Figure 7: NINJATRADER. The AccDistRangeBreakout strategy on a NinjaTrader using QuantaculaIndicators;


chart shows two profitable trades on NFLX from July 2012 to February 2014. using System.Drawing;

namespace Quantacula
the menu File → Utilities → Import NinjaScript and select {
public class MyModel : UserModelBase
the downloaded file. {
You can review the strategy’s source code in NinjaTrader //create indicators and other objects here, this is executed
8 by selecting the menu New → NinjaScript Editor → Strate- prior to the main trading loop
public override void Initialize(BarHistory bars)
gies from within the control center window and selecting the {
AccDistRangeBreakout file. You can review the strategy’s top = new Highest(bars.High, length);
source code in NinjaTrader 7 by selecting the menu Tools → bottom = new Lowest(bars.Low, length);
range = top - bottom;
Edit NinjaScript → Strategy from within the control center TimeSeries rangeRatio = range / (range << length);
window and selecting the AccDistRangeBreakout file. Plot(rangeRatio, "RangeRatio", Color.Silver, PlotStyles.
NinjaScript uses compiled DLLs that run native, not inter- ThickHistogram, "RangeRatio");
DrawHorzLine(consolidationFactor, Color.Gray, Lin-
preted, which provides the highest performance possible. eStyles.Solid, "RangeRatio");
A sample chart implementing the strategy is shown in }
Figure 7.
//execute the strategy rules here, this is executed once for
—Raymond Deux & Jim Dooms
each bar in the backtest history
NinjaTrader, LLC public override void Execute(BarHistory bars, int idx)
www.ninjatrader.com {
if (idx < length)
return;
if (range[idx] < range[idx - length] * consolidationFactor)
DrawRectangle(idx - length, top[idx], idx, bottom[idx],
Color.Black, LineStyles.Solid);
}

F Quantacula Studio: AUGUST 2018 //declare private variables below


private int length = 4;
TRADERS’ TIPS CODE private double consolidationFactor = 0.75;
In “Portfolio Strategy Based On Accumulation/Distribution” private TimeSeries top;
in this issue, author Domenico D’Errico presents three meth- private TimeSeries bottom;
private TimeSeries range;
ods of trading based on accumulation/distribution concepts. }
Quantacula Studio performs backtests at the dynamic portfolio }
level, rather than using the basket-backtesting method that
D’Errico describes in the article. This allows you to interact —Dion Kurczek, Quantacula LLC
with the portfolio backtest as it proceeds bar by bar against info@quantacula.com
www.quantacula.com
all of the symbols included in the test.
The Quantacula Studio C# code for the accumulation/
distribution method based on range compression is shown
here: F AIQ: AUGUST 2018 TRADERS’ TIPS CODE
using QuantaculaBacktest;
The AIQ code based on Domenico D’Errico’s article
using QuantaculaCore; in this issue, “Portfolio Strategy Based On Accu-

August 2018 • Technical Analysis of Stocks & Commodities • 53


Figure 10: AIQ. This color study shows range consolidation (yellow bars).

rRatio is theRange/valresult(theRange,4)*100.

!AVERAGE TRUE RANGE ACCUMULATION/DISTRIBUTION:


avgLen is rLen * 2 - 1.
TR is Max(H-L,max(abs(C1-L),abs(C1-H))).
ATR is expAvg(TR,avgLen).
ConsolATR if ATR < consolFac/100 * valresult(ATR,rLen).
atrRatio is ATR / valresult(ATR,4)*100.

!ADX ACCUMULATION/DISTRIBUTION:
Figure 9: AIQ. Here are the summary results of a backtest using NASDAQ 100 !ADX INDICATOR as defined by Wells Wilder
stocks. rhigh is (H-H1).
rlow is (L1-L).
DMplus is iff(rhigh > 0 and rhigh > rlow, rhigh, 0).
mulation/Distribution,” is provided at my website, www. DMminus is iff(rlow > 0 and rlow >= rhigh, rlow, 0).
TradersEdgeSystems.com/traderstips.htm, as well as well as AvgPlusDM is expAvg(DMplus,avgLen).
at the Stocks & Commodities website at Traders.com in the AvgMinusDM is expavg(DMminus,avgLen).
PlusDMI is (AvgPlusDM/ATR)*100.
Traders’ Tips section. MinusDMI is AvgMinusDM/ATR*100.
Figure 9 shows the summary backtest results of the range DIdiff is PlusDMI-MinusDMI.
accumulation breakout system using NASDAQ 100 stocks Zero if PlusDMI = 0 and MinusDMI =0.
DIsum is PlusDMI+MinusDMI.
from December 2006 to June 2018. The exits differ from the DX is iff(ZERO,100,abs(DIdiff)/DIsum*100).
author’s as follows: I used two of the built-in exits — a 20% ADX is ExpAvg(DX,avgLen).
stop-loss and a profit-protect of 40% of profits once profit ConsolADX if ADX < adxTrigger.
reaches 10%.
Figure 10 shows a color study on REGN. The yellow bars !CODE FOR ACCUMULATIOIN/DISTRIBUTION RANGE
BREAKOUT:
show where the range accumulation/distribution shows a
consolOS is scanany(Consol,250) then offsettodate(month(),day
consolidation. (),year()).
Top is highresult([high],rLen,^consolOS).
!Portfolio Strategy Based on Accumulation/Distribution Top0 is valresult(Top,^consolOS) then resetdate().
!Author: Domenic D’Errico, TASC Aug 2018 Bot is loval([low],rLen,^consolOS).
!Coded by: Richard Denning 6/10/18 AvgVol is simpleavg([volume],volAvgLen).
!www.TradersEdgeSystem.com Bot12 is valresult(Bot,12).
!SET TO WEEKLY MODE IN PROPERTIES BuyRngBO if [close] > Top
!ALSO VIEW CHARTS IN WEEKLY MODE and ^consolOS <= 5 and ^consolOS >= 1
!INPUTS: and Bot > Bot12
rLen is 4. and valresult(AvgVol,volDelay)>volRatio*valresult(AvgVol,volAvg
consolFac is 75. ! in percent Len+volDelay).
adxTrigger is 30. EntryPrice is [close].
volRatio is 1. Sell if [close] < loval([low],rLen,1).
volAvgLen is 4. ExitPrice is [close].
volDelay is 4.

!CODING ABBREVIATIONS: —Richard Denning


H is [high]. info@TradersEdgeSystems.com
L is [low]. for AIQ Systems
C is [close].
C1 is valresult(C,1).
H1 is valresult(H,1).
L1 is valresult(L,1).
F TRADERSSTUDIO: AUGUST 2018
!RANGE ACCUMULATION/DISTRIBUTION: TRADERS’ TIPS CODE
theRange is hival([high],rLen) - loval([low],rLen).
Consol if theRange < consolFac/100 * valresult(theRange,rLen). The TradersStudio code based on “Portfolio

54 • August 2018 • Technical Analysis of Stocks & Commodities


Range_=Highest(High,Length)-Lowest(Low,Length)
avgVol = Average(V,VolAvg)
If Range_<ConsolidationFactor*Range_[Length] Then
Consolidation=True
Top=Highest(High,Length)
Bot=Lowest(Low,Length)
End If
If Close>Top And Bot>Bot[12] Then
If avgVol[VolDelay]>VolRatio*avgVol[VolAvg+VolDelay] Then
Buy("LE", 1, 0, Close, Day)
End If
End If
If Close < Bot Then
ExitLong("", "", 1, 0, Close, Day)
Figure 11: TRADERSSTUDIO. Here is a log equity curve trading the NASDAQ 100 End If
using the system discussed in Domenico D’Errico’s article. End Sub

—Richard Denning
info@TradersEdgeSystems.com
for TradersStudio

F AMIBROKER: AUGUST 2018 TRADERS’ TIPS CODE


In “Portfolio Strategy Based On Accumulation/Distribution”
in this issue, author Domenico D’Errico presents a number of
Figure 12: TRADERSSTUDIO. This shows the underwater equity curve based on techniques for detecting consolidation patterns. The AmiBroker
my test of trading the NASDAQ 100 using the same system. code listing given here provides a ready-to-use formula for
the accumulation/distribution range. Figure 13 shows a chart
Strategy Based On Accumulation/Distribution” by Domenico that was automatically generated by this formula. To adjust
D’Errico in this issue is provided at my website, www.Traders­ parameters, right-click on the chart and select parameters
EdgeSystems.com/traderstips.htm, as well as at the Stocks from the context menu.
& Commodities website at Traders.com in the Traders’ Tips AmiBroker code listing
section. cons_factor = Param( "ConsFactor", 0.75, 0.1, 1, 0.01 );
len = Param( "Length", 4, 1, 100 );
Figure 11 shows the log equity curve trading the NASDAQ
100 using the author’s system given in the article. Figure 12 top = HHV( H, len );
shows the underwater equity curve for the same system. bot = LLV( L, len );
The TradersStudio code is shown here: range = top - bot;
'Portfolio Strategy Based on Accumulation/Distribution
'Author: Domenic D’Errico, TASC Aug 2018
'Coded by: Richard Denning 6/10/18
'www.TradersEdgeSystem.com

Sub AD_RANGE_BO(Length, ConsolidationFactor, VolRatio,


VolAvg, VolDelay)

Dim Consolidation As BarArray


Dim Range_ As BarArray
Dim Top As BarArray
Dim Bot As BarArray
Dim avgVol As BarArray

If BarNumber=FirstBar Then
'Length = 4
'ConsolidationFactor = 0.75
'VolRatio = 1
'VolAvg = 4
'VolDelay = 4
Consolidation = False
Range_ = 0
Top = 0
Bot = 0
End If Figure 13: AMIBROKER. Here is a weekly chart of NFLX replicating a chart from
Domenico D’Errico’s article in this issue. Price consolidations are highlighted with
Consolidation=False black rectangles when the range shows some compression.

August 2018 • Technical Analysis of Stocks & Commodities • 55


FIGURE 14: EXCEL. This sample chart of Facebook (FB) weekly bars demonstrates ADX consolidation zones.

consolidation = range < cons_factor * Ref( range, -len ); F MICROSOFT EXCEL: AUGUST 2018 TRADERS’ TIPS CODE
rr = range / Ref( range, -len ); Domenico D’Errico, in “Portfolio Strategy Based On Ac-
cumulation/Distribution” in this issue, has given us a lot to
rrcolor = IIf( rr < cons_factor, colorBlue, colorLightGrey ); think about with this article. In it, he presents three strategies
mode = ParamToggle( "Mode", "Price|RangeRatio" ); for detecting consolidations using three common and well-
understood indicators. Each of the three strategies provides
if( mode )
{ a slightly different view into the current phase of the market
Plot( cons_factor, "Consolidation Factor", colorDarkGrey ); cycle for a given tradable.
Plot( rr, "Range Ratio", rrcolor, styleArea ); Combining our view of the market trend to date with an
}
else identified consolidation area, we can make some educated
{ guesses as to where the price action might proceed from
Plot( C, "Price", colorDefault, styleCandle ); there.
GfxSetCoordsMode( 1 ); In his article, D’Errico provides an outline of the strategy
GfxSelectStockObject( 5 ); // hollow brush he uses to automate backtesting for each of these consolida-
bi = BarIndex();
tion detections.
The spreadsheet file for this Traders’ Tip can be down-
first = FirstVisibleValue( bi ); loaded from www.traders.com in the Traders’ Tips area. To
last = LastVisibleValue( bi );
successfully download it, follow these steps:
for( i = first; i <= last; i++ )
{ • Right-click on the Excel file link, then
if( consolidation[ i ] ) • Select “save as” or “save target as” to place a copy of the
GfxRectangle( i - len, top[ i ], i, bot[ i ] );
} spreadsheet file on your hard drive.
}
—Ron McAllister
—Tomasz Janeczko, AmiBroker.com Excel and VBA programmer
www.amibroker.com rpmac_xltt@sprynet.com

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August 2018 • Technical Analysis of Stocks & Commodities • 57


FUTURES LIQUIDITY

T
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 contract’s 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 firm’s 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 (Sep ’18) GBLX 4.5 13.4 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>>
10-Year T-Note (Sep ’18) CBOT 1 8.1 5 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Russell 2000 E-Mini (Sep ’18) GBLX 2.5 5.6 1 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
5-Year T-Note (Sep ’18) CBOT 0.7 8 8 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Ultra T-Bond (Sep ’18) CBOT 2.3 10.2 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
T-Bond (Sep ’18) CBOT 1.8 7.6 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Crude Oil WTI (Aug ’18) NYMEX 4.1 6.7 2 •••••••••••••••••••••••••••••••••••••••••••••
2-Year T-Note (Sep ’18) CBOT 0.2 6.2 9 ••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Sep ’18) GBLX 4.5 10 1 •••••••••••••••••••••••••••••••••••••
Soybeans (Nov ’18) CBOT 4.5 13 5 •••••••••••••••••••••••••••••
Eurodollar (Dec ’18) CME 0.1 2.8 13 •••••••••••••••••••••••••••
Ultra 10-Year T-Note (Sep ’18) CBOT 1.2 7.4 4 •••••••••••••••••••••••••••
Sugar #11 (Oct ’18) ICEUS 7.6 8.1 6 ••••••••••••••••••••••••••
Euro FX (Sep ’18) CME 1.7 14.3 4 •••••••••••••••••••••
Gold (Aug ’18) COMEX 2.7 15.4 3 •••••••••••••••••••
S&P Midcap E-Mini (Sep ’18) GBLX 4.2 10.9 1 •••••••••••••••••
Gasoline RBOB (Aug ’18) NYMEX 4.4 7.9 2 •••••••••••••••
ULSD NY Harbor (Aug ’18) NYMEX 4 6.6 1 ••••••••••••••
Corn (Dec ’18) CBOT 4.3 22.1 21 ••••••••••••
Dow Indu 30 E-Mini (Sep ’18) CBOTM 4.4 12 2 ••••••••••
Coffee (Sep ’18) ICEUS 5.3 10.5 3 •••••••••
Live Cattle (Aug ’18) CME 4 8.4 4 •••••••••
British Pound (Sep ’18) CME 2.4 12.8 5 •••••••
Cotton #2 (Dec ’18) ICEUS 6.9 19.9 5 •••••••
Natural Gas (Aug ’18) NYMEX 4.5 10.1 6 •••••••
Soybean Meal (Dec ’18) CBOT 5.4 18.4 8 •••••••
Japanese Yen (Sep ’18) CME 0.2 1.5 5 ••••••
30-Day Fed Funds (Aug ’18) CBOT 0 2.3 10 •••••
Wheat (Sep ’18) CBOT 6.1 22.7 12 •••••
Silver (Jul ’18) COMEX 4.8 16.6 3 ••••
Soybean Oil (Dec ’18) CBOT 3.7 13 15 •••• CBOT Chicago Board of Trade, Division of CME
Australian Dollar (Sep ’18) CME 1.9 19.2 11 ••• CFE CBOE Futures Exchange
Canadian Dollar (Sep ’18) CME 1.8 17.5 10 ••• CME Chicago Mercantile Exchange
Cocoa (Sep ’18) ICEUS 8.4 22.2 8 ••• COMEX Commodity Exchange, Inc. CME Group
Crude Oil Brent (F) (Aug ’18) NYMEX 4.1 6.4 2 ••• GBLX Chicago Mercantile Exchange - Globex
Hard Red Wheat (Sep ’18) KCBT 6.1 21.3 11 ••• ICE-EU Intercontinental Exchange-Futures - Europe
High Grade Copper (Jul ’18) COMEX 4.1 11.8 3 ••• ICE-US Intercontinental Exchange-Futures - US
Lean Hogs (Aug ’18) CME 4.5 10 6 ••• KCBT Kansas City Board of Trade
Mexican Peso (Sep ’18) CME 5.1 17.9 11 ••• MGEX Minneapolis Grain Exchange
Palladium (Sep ’18) NYMEX 8.8 17 2 ••• NYMEX New York Mercantile Exchange
Swiss Franc (Sep ’18) CME 2.4 28.7 7 •••
Feeder Cattle (Aug ’18) CME 4.2 8.2 2 ••
S&P GSCI (Jul ’18) CME 3.8 9 2 ••
Brazilian Real (Jul ’18) CME 5.6 22.8 12 • 1808
New Zealand Dollar (Sep ’18) CME 2.1 20.5 11 •
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
Excursion).

58 • August 2018 • Technical Analysis of Stocks & Commodities


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worry traders have, customers) are great leads. 1. TS support MultiCharts, LLC
from tax advice to Traders’ Resource is available at our
weather reporting. website, Traders.com, where you’ll 2. Divergence Software, Inc. Divergence Software, Inc.
Can all this help find information on other products
you? Maybe. and services in numerous other cat- 3. Jan Arps’ Traders’ Toolbox Jan Arps’ Traders’ Toolbox
The rules for checking out consul- egories, such as data services, broker-
tants are simple: check references, ages, seminars, hardware, software, 4. Traders Accounting Traders Accounting
check references, and (did you guess?) and trading systems. Just click on the
check references. Nothing can be Traders’ Resource link. Then follow 5. ALVentures ALVentures
more vague than a consultant’s initial the Consultants category link, or use
proposal, but nothing is clearer than the search feature to find products or 6. TradersCoach.com TradersCoach.com
a client’s opinion on the success of services with specific attributes in
a consultant’s engagement. When this or other categories. 7. Stuart Okorofsky Stuart Okorofsky
checking references, make sure you Services offered by the consultants
8. Foresight Investment Foresight Investment
use some references not supplied by in our online Traders’ Resource list-
the company you are evaluating. ing may focus on a single specialty Strategies Strategies Ltd.
That said and with that in mind, or be varied and may include custom
you must do your homework before software and hardware program- 9. Ruth Barrons Roosevelt Ruth Roosevelt
calling a consultant in to help you. Be ming; systems integration; money
sure you can say in one sentence what management; trading psychology and 10. Karakhorum Ventures, Inc. Karakhorum Ventures, Inc.
you want the consultant to achieve. In coaching; specific markets; trading These are the 10 consultant listings clicked on most often on the Traders’ Resource
addition, be sure you know of and can systems; and more. website, in order of clicks received. This is not an editorial rating or ranking. For more
contact people who truly specialize information on specific products and services, try checking store.Traders.com for
in your area of concern, not simply archived S&C product reviews.

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August 2018 • Technical Analysis of Stocks & Commodities • 59


Safety, Income, Capital

Investing:
An Objective-Based Primer
For those just starting out in the world of finance (long before right along with you, and I’m going to try to make this as
reaching the world of technical analysis) or for the youngsters mentally ergonomic as possible.
in your life, here is the first part of an ABC on investing.
The mission

T
by Gabriel Gonzalez Let’s start off by establishing a goal. Ultimately, we want to
acquire wealth and resources—whether it is to secure our
hree things to consider in any investment plan are retirement, partake in a business venture, or anything else that
safety, income, and capital. One of my earliest involves money over a period of time. By investing, the idea is
memories of the concept of investing was from the money or assets we invest today will bring us more money/
the 1984 movie Trading Places. Maybe it was that assets in the future. Sounds simple, right? As a concept, it is.
I was more into Jamie Lee Curtis than anything But from there, things start to get more complicated.
else about the movie, but still, the movie ultimately If investing is the task, investment vehicles are the tools
LOVELY DAY 12/SHUTTERSTOCK

made investing seem like a fascinating activity. Ever since with which to perform the task. They tend to be categorized by
then, learning how to invest is something I’ve wanted to do. three fundamental characteristics: safety, income, and capital.
But the topic can be intimidating. The terminology alone can Though each investment vehicle has all three of these traits,
feel like taking an advanced course in, say, Egyptian opera excelling at one usually comes at some cost of the others.
writing … taught in Greek. The good news is I’m learning These characteristics also double as investor objectives and
60 • August 2018 • Technical Analysis of Stocks & Commodities
at the close

are used to guide various investing strategies. I want to lay a


solid foundation on which we can build our investing savvy,
so I’ve decided to take this “objectives-first” approach. If investing is the task,
investment vehicles are the
Safety tools with which to perform
While there is no such thing as a truly risk-free investment,
those that fit into the “safety” bin tend to be the most stable,
the task.
specifically in terms of yield, or the frequency and amount they
pay out. Some of the most common safety-oriented vehicles
include Treasury bills (T-bills; anyone remember those from (safety) and income yields, for which the investment vehicles
Trading Places?), certificates of deposit (CDs), and government aren’t sold or traded. However, with the capital objective, assets
bonds. There are many other vehicles to consider as well, and are sold at prices above or below the purchase price—known
the choices continue to increase as time goes on, but that is as a capital gain or loss, respectively. When assets are sold
for another article. What is important to note here is that the at a value above the original purchase price, money is made.
safest investments tend to be in government bonds, money Otherwise, money is lost. Common stocks and blue-chip stocks
markets, or other relatively stable entities—ideal for those just are the most-used vehicles in this approach.
starting out in investing or with fixed incomes.
The takeaway
Income If there’s one thing to take from this article, it’s that there
Now, onto income-centered investing, where safety and stabil- are three primary principles that should be considered when
ity are forfeited (a little bit) for bigger potential yields. Here, putting your hard-earned money into any kind of investment
we leave the warm coziness of bonds and money markets and scheme. Determine what your resources are, and plan ac-
venture into corporate bonds or preferred shares. Ratings for cordingly. Next time, we will discuss some of the different
these investments range from the safest/lowest-yield grade of terms in greater detail, and see how they apply to the three
AAA to the riskier/higher-yield grades of AA and A, listed with principles. Happy investing!
respect to increasing degree of risk/yield. BBB-rated bonds
are typically referred to as medium risk, while junk bonds Gabriel Gonzalez is a freelance author and software designer
round out the echelon, being the riskiest but most rewarding. with a bachelor’s degree in computer science. His latest book,
If you are an individual on a limited or fixed income, you a work of fiction, is Althea: An Oneiric’s Tale.
should approach this income objective with care.
Further reading
Capital Siegel, David. “Basic Investment Objectives,” Investope-
Finally, we approach the capital objective. So far in this dis- dia.com, December 22, 2017, retrieved online April 23,
cussion, financial gains were in terms of capital preservation 2018.

TRADING ON MOMeNTUM

CALHOUN / ACCELERATION RAMP BREAKOUTS


Continued from page 25 The easiest charts to swing trade
are those with steady uptrends
Trade managemenT Tips that slowly climb higher week
The most important rule in trading is to use tight stops. You after week.
will find that trading clean, consistently uptrending breakouts
is much better than trying to buy pivots or crossover entries.
The simpler and stronger the chart pattern is, the easier it will Ken Calhoun is a producer of trading courses, a live trading
be to trade. As always, focusing on your exits to take profit room, and video-based training systems for active traders. He
is especially important, because many traders wait too long is the founder of TradeMastery.com, an educational resource
before they exit their trades. Tight stops for my swing trades site for active traders, and is a UCLA alumnus.
are usually in the $2.00 range. In addition to trading clean,
consistent trending charts, to make your trading profits worth-
while, it is important to trade charts with enough of a trading
range, such as 10 points or more on a 90-day chart.
August 2018 • Technical Analysis of Stocks & Commodities • 61
TSAA-SF CONFERENCE IN SAN of “time.” Speakers and panels will
FRANCISCO, AUGUST 25, 2018 discuss techniques and methodologies,
The 2018 TSAA-SF (Technical Se- systematic trading systems, momentum
curities Analysts Association of San investing, and more. An exhibition hall
Francisco) annual conference will be will offer vendor displays. The expected
held at Golden Gate University in San audience for the conference is advisors,
Francisco on Saturday, August 25, 2018. fund buyers, asset managers, hedge fund
This year’s theme is “Mastering The managers, analysts, private bankers, and
21st Century Markets Using Technical professional traders, from Europe as well
Analysis.” Guest speakers will include as from the US and Asian countries. Del-
Ralph Acampora, Gatis Roze, Grayson egates will be drawn from different IFTA
Roze, Roman Bogomazov, and David ting trouble in the markets in advance; member societies internationally.
Keller. The cost is $99 for TSAA-SF systematic techniques for trend follow- Earlybird pricing ends July 31, and
members, $199 for nonmembers (a one- ing and risk management; technical there is tier pricing for IFTA members
year TSAA-SF membership is included analysis concepts; mindful investing; and nonmembers.
with the price), or $60 for current GGU and other topics. IFTA.org,
students. Also at this year’s conference, A ChartCon 2018 mobile app will be https://kl2018.ifta-conferences.org/
books from the personal collection of the available.
late Henry Pruden, who was a professor stockcharts.com Forex & Money EXPO,
at GGU and market technician, will OCTOBER 25–26, 2018
be available for sale, with proceeds to ADVANCED RISK AND PORTFOLIO The Forex & Money Expo organized
benefit the TSAA-SF organization. More MANAGEMENT BOOTCAMP, by FINEXPO will take place October 25–
information and registration for the con- AUGUST 13–18, 2018 26, 2018 at Suntec Singapore Convention
ference are available on the TSAA-SF The 2018 Advanced Risk And Portfolio & Exhibition Centre in Singapore. The
website at www.tsaasf.org. Management (ARPM) Bootcamp will Forex & Money EXPO exposition and
www.tsaasf.org present expertise from portfolio manag- forum covers the financial and foreign
ers and risk managers over six days on exchange (forex) trading industry. The
StockCharts.com ONLINE quantitative trading, asset management, expo is offered to help attendees build
conference, AUGUST 10–11, 2018 and risk management. Attendees may re- business connections and widen industry
ChartCon 2018, presented by Stock- ceive professional or academic credits. knowledge.
Charts.com, will stream live on Au- https://cmtassociation.org/events/network- The expo will host speakers, exhibitor
gust 10–11, 2018. This year’s theme is ing-events/ booths, lounges, and workshops with
“Reducing Risk In Uncharted Waters,” panel discussions. The two-day event
and the conference will address how to IFTA CONFERENCE 2018, will also offer entertainment diversions
remain profitable through market swings, OCTOBER 26–28, 2018 and an awards and gala night party.
among other topics. The International Federation of Tech- Represented at the expo will be trading
The conference will present investing nical Analysts (IFTA) 31st annual con- experts, trading companies, banks, and
education from experts, and commentary ference will be held at the Kuala Lumpur money brokers from around the world.
from leading chartists over two days. Convention Centre in Kuala Lumpur Presentations and workshops will cover
The cost of registration is $249. The on October 26–28. This year’s speaker current issues relating to stocks, futures,
price includes a video recording of the lineup will include Perry Kaufman, options, and forex markets, including
event after the event. A limited number John Bollinger, Martin Pring, Constance retail forex, regulation, cryptocurrencies,
of seats will be available for in-person Brown, Joe DiNapoli, and others. global macro trading, trading in the age
attendees, with the option to also make a The theme of this year’s conference is of fake news, and more. Free access to
reservation for a post-conference cruise “Navigating Through Time & Volatility” expo with registration.
to Alaska. and will explore how trading and invest-
Speakers at the online conference ing have evolved from the perspective
will include Chip Anderson, Grayson
Roze, Greg Schnell, Alex Elder, Bruce
Fraser, Tom McClellan, Erin Swenlin,
Tushar Chande, and Arthur Hill. Topics
will include minimizing and reducing
risk and drawdowns; using Wyckoff
methods for entry & stop placement;
the DecisionPoint analysis approach; https://forexexpo.com
using the Chande Trend Meter; spot-
62 • August 2018 • Technical Analysis of Stocks & Commodities
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