THE TRADERS’ MAGAZINE SINCE 1982

www.traders.com SEPTEMBER 2018

Weekly & Daily

Stochastics
Two timeframes, one chart 8

The V-Trade
Part 7: Technical analysis—
V-wave count 12

The Truth
Behind PEG
How it should really be
calculated 22

Double Bottom
PATTERNS
How reliable are they? 28

INTERVIEW
Travel the trading world
with Tomas Nesnidal 32

product review
n SlopeOfHope.com

SEPTEMBER 2018
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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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 Contents SEPTEMBER 2018, Volume 36 Number 10

6 Q&A
by Rob Friesen
The Traders’ MagazineTM This professional trader answers
a few of your questions.
EDITORIAL
editor@traders.com FEATURE ARTICLE INTERVIEW
Editor in Chief Jack K. Hutson
8 Weekly & Daily Stochastics TIPS 32 Travel The Trading World With
Editor Jayanthi Gopalakrishnan
by Vitali Apirine Tomas Nesnidal
Production Manager Karen E. Wasserman
Indicators play a big role in a by Jayanthi Gopalakrishnan
Art Director Christine Morrison
technical trader’s life. They act as Travel, eat, meditate, make money,
a GPS to help you navigate around and enjoy life. That’s how Tomas
Graphic Designer Wayne Shaw
price movements. But there’s no Nesnidal describes his life. And it’s
Webmaster Han J. Kim
one way to use them. Here’s how a life many traders would covet.
Contributing Editors John Ehlers,
Anthony W. Warren, Ph.D.
you can combine two stochastic Nesnidal has been a full-time trader
Contributing Writers Thomas Bulkowski, Martin Pring,
oscillators and use them with for over 11 years, specializing in
Barbara Star, Markos Katsanos moving averages and support/ automated algorithmic trading
resistance levels to help identify strategies. Although he has
corrections and trend reversals. developed strategies for different
OFFICE OF THE Publisher trading styles, his affinity is for
Publisher Jack K. Hutson 12 The V-Trade, Part 7: breakout trading systems and
Industrial Engineer Jason K. Hutson
Project Engineer Sean M. Moore Technical Analysis—V-Wave Count market internals.
by Sylvain Vervoort
Advertising Sales Counting waves in price charts 36 Futures For You
4757 California Ave. S.W.
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doesn’t have to be complex. In this by Carley Garner
206 938-0570 Fax 206 938-1307 seventh part of a multipart series of Here’s how the futures market
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22 The Truth Behind PEG Learn more about how you can use
circ@traders.com by Douglas Lyon, PhD exchange traded funds (ETFs) in
Subscription Manager Sean M. Moore The computation of the PEG ratio your trading.
is so seemingly simple and yet is
often reported in different ways. 42 Explore Your Options
Website
Let’s look at how PEG should be by Jay Kaeppel
http://www.traders.com
Staff members may be emailed through the Internet
calculated and why. Got a question about options?
using first initial plus last name plus @traders.com
26 Two-Day High Cup Breakouts 60 Optimize Your Mind For Analysis
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use, or the inter­nal or per­sonal use of spe­cific cli­ents, is grant-
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Bullish cup patterns often continue What do self-confidence,
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The Traders’ Magazine™, is prepared from information 57 Advertisers’ Index
believed to be reliable but not guaranteed by us with­out
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57 Editorial Resource Index
Opinions expressed are subject to revision without noti- 58 Futures Liquidity
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4 • September 2018 • Technical Analysis of Stocks & Commodities

 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

t 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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 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

Seasonality: A Season Begins with
a Reason
The Wall Street community has long
known about seasonal influences on the
marketplace. One of the most impactful is
the turn-of-the-month effect, or TOME.
There have been numerous studies as to
the cause of this event. Some researchers
have exhausted the subject trying to get
to the bottom of the TOME bump. I don’t
necessarily want to debate the reasons
for this market bump here, but I know
there is an extra element of confidence
that comes from uncovering the reason
for a pattern.
Patterns have a basis
What I can tell you is that, on average,
TOME has been so consistent for over
100 years that it has been said that in-
vestors have not received any returns by
holding all the other days of the month.
Monthly returns have come from just
these few days surrounding TOME.
In addition, there is a difference of
opinion in the community as to the
actual days used to assess the TOME.
The choices are:
• The last seven trading days of month
and the first five trading days of the
new month
• Last five, first three
• Last four, first three
• Last three, first two, or
• Buying the close of the last day of
month and selling the open of the
second day of the new month. (Some
lengthen it to the third day in the
new month.)
Does it really matter? Consider:
• The TOME can be observed re-
gardless of which timeframe you
select.
6 • September 2018 • Technical Analysis of Stocks & Commodities
• Performance will vary. One month,
the last three/first two will beat the
others and the next month, the last
five/first three will beat the rest.
• Some months of the year would show
flat performance or a pronounced
market selloff during those same
timeframes.
• Planning for what you do when it
doesn’t work is part of risk man-
agement.
• Your choice of timeframe could
be based on the strategies you
employ.
• The key is in your posture as you
enter the window (all timeframes)
or your timeframe (the one you do
consistently), or you might be able to
be selective of any of the timeframes,
given other inputs and signals.
The cumulative returns
of holding for the 60
days are exactly the
returns of the full
year. This means the
investor isn’t getting
paid for the risk of
holding all the other
days of the year.
Let’s explore this concept of “posture”
a bit more. This means you are armed
with data, know what you are looking
for, have run the scenarios, and are wait-
ing for the ducks to line up. What could
this look like?
After the middle of the month, the
market starts a downstreak from -12, -11,
-10, -9, -8 (-1 would be last day of month)
and you observe those five down days in
a row. You know you have now entered
the month-end seasonality window of
the last seven days/first five days. You
decide that preparing for tomorrow’s
open would be a great starting point.
Reminder: You have no guarantee the
market will reverse, but you do under-
stand the TOME effect and variety of
timeframes to use for it. You prepare for
the open using these scenarios:
• Buy the open at market (not always
recommended due to no control over
what you pay and the risk of paying
too much)
• Place limit OPG orders, if you can,
which specify your price. You could
do better if the stock opened lower
than your limit price
• Do nothing at the open but set up
your parameter for participating
after the open. Here are some things
you might plan for:
{{ Go for a potential gap fill if it opens
down and starts to reverse
{{ Go after a previous close crossover
move up
{{ Go after a pivot crossover move
up (expectations would be to move
toward R-1)
{{ If the market opens up, don’t
buy immediately, but wait for a
pullback to support and buy any
reversal off of that
{{ If the market opens up, don’t buy
immediately but go after an R-1
crossover moving up (expectations
would be to move toward R-2).
You could also do any of those sce-
narios with hedging instruments such as
the SPY or sector ETFs. For example,
buy the open on your selection of stocks
and if they don’t rally but start to decline,
Continued on page 47
 2018 WINNER
AI TRADING SOFTWARE
The editors of S&C invite readers to submit their opinions and information on subjects
relating to technical analysis and this magazine. This column is our means of communi-
cation with our readers. Is there something you would like to know more (or less) about? Winner
Tell us about it. Without a source of new ideas and subjects coming from our readers, this 16 years
magazine would not exist.
Email your correspondence to Editor@Traders.com or address your correspondence in a row!
to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499. All
letters become the property of Technical Analysis, Inc. Letter-writers must include their full
name and address for verification. Letters may be edited for length or clarity. The opinions Build powerful
expressed in this column do not necessarily represent those of the magazine.—Editor
trading systems in
MINUTES
A Technical Method For Concerning your second question: If
Rating Stocks you exit the trade after a holding period
without coding
Editor, of three months, then yes, you can buy
Thank you very much it again and hold it for another three
for Markos Katsanos’ months if it meets the entry criteria.
June 2018 article in I hope this helps. ®

S&C, “A Technical
Method For Rating
Stocks.” It gave me
great insight into riding the trend.
I have a few questions that I was hoping
the author would answer for me:
• He mentions he rebalances weekly.
Which day of the week does he
rebalance, or does that change?
• After he has exited a trade after
the three-month holding period,
when does he get back in? Does he
reenter right away if it still passes
the exploration?
• If so, does he still use a holding
period of three months?
Looking forward to the reply.
Henry van Ginkel
Author Markos Katsanos replies:
The system mentioned in the article is not
really a complete trading system because
I only wanted to test the performance
of the technical rating system. I didn’t
therefore use any other exit conditions
or stop-losses except the time exit.
Despite the lack of exit conditions, the
system outperformed the market so you
can still use it for trading. The system
performed best if you bought stocks with
a rating of 5 or better and held them for
three months.
To answer your specific questions:
I only mentioned the weekly rebal-
ance when testing the analysts’ rating
portfolio. I haven’t applied it to the
technical rating system.
Reader replies:
Thank you for your reply. I do know you
wrote the article for just the technical
rating system, but in this article, you
wrote you backtested the system on the
S&P 500 stocks, so I was wondering
how you did your backtest.
For example, did you let it trade every
day (scanning for new signals)—until
you got 300 stocks in position—and then
exited the positions after a three- (and/
or a one-) month holding period? This
means you also have to exit these posi-
tions maybe every day—is that right? I
just want to figure out how you tested
your system.
In your reply you wrote, “You can
buy it again and hold it for another three
months if it meets the entry criteria.”
Is that what you did in your backtest?
What were your rules for reentering a
position?
I ask because the backtest of this
system looks promising, and I would
like to try to get the same results in my
backtest.
Author replies:
Yes, that’s correct—the system trades
every day until either it runs out of
money or the maximum number of stocks
is reached. It then closes each position
after a three-month holding period and
replaces it with a new one. The initial
equity is $300,000, the max number of
stocks is 500, and the position size is
$1,000 per stock. The initial number of
www.NeuroShell.com
301.662.7950
positions is $300,000/1,000=300 but as
the equity increases (if the system is prof-
itable), so can the number of stocks.
Obviously, these settings are not
appropriate for trading. If you want to
use this system for trading, you should
increase the position size to at least
$5,000 per stock in order to reduce the
excessive commissions.
STIFFNESS COEFFICIENT
Editor,
I enjoyed reading Markos Katsanos’
latest article, “A Technical Method For
Rating Stocks” (June 2018 S&C). He
brings up some excellent points, such
as determination of the holding period.
I liked his “stiffness” criteria—that’s
new to me!
The reduction in drawdown will be
appealing to many—an area that many
neglect to consider.
Ed
Author Markos Katsanos replies:
The “stiffness” coefficient is indeed
one of the most useful concepts to be
extracted from the article, as it improved
Continued on page 47

September 2018 • Technical Analysis of Stocks & Commodities • 7

8 • September 2018 • Technical Analysis of Stocks & Commodities
 TRADING SYSTEMS

Short Or Medium?

Weekly & Daily Stochastics

Indicators play a big role in a technical trader’s
life. They act as a GPS to help you navigate around
price movements. But there’s no one way to use
them. Here’s how you can combine two stochastic
oscillators and use them with moving averages and
support/resistance levels to help identify corrections
and trend reversals.
Fast %K = (Current close - Lowest low) /
(Highest high - Lowest low)*100
where:
Lowest low = Lowest low for the lookback period
Highest high = Highest high for the lookback pe-
riod

T
Fast %K is multiplied by 100 to move the decimal
echnical analysts are familiar with point two places to the right.
George Lane’s stochastic oscillator. It
is a momentum indicator that shows the Slow %K = Fast %K smoothed with 3-period
location of the close relative to the high– simple moving average.
low range over a set number of periods. The weekly
& daily stochastic is different in that it shows the The daily slow stochastic (%Kd) will use a time
location of the close relative to the high–low range period of 14 days, since 14 days is typically the de-
for two different periods. It uses the slow (that is, fault time period for the stochastic oscillator. Thus,
three-day smoothed) version of the stochastic oscil- the 14-day %K would use the current close, highest
lator in its calculation. high over the last 14 days, and lowest low over the
last 14 days.
How to calculate it For the weekly slow stochastic (%Kw), I will use a
For the weekly and daily stochastic, I will be plotting time period of 70 days, which is the equivalent of 14
two slow stochastic oscillators, each with a different weeks (14 weeks × 5 trading days per week). Thus,
time period. The slow stochastic oscillator is simply you would use the current close, highest high over the
a three-day simple moving average (SMA) of the fast last 70 days, and lowest low over the last 70 days.
stochastic oscillator. Here are the formulas for the fast Typically, the stochastic oscillator is plotted with the
and slow stochastic oscillators (%K): %K line and a signal line (labeled %D). The %D line
3-day SMA 3-day SMA
70-day 14-day
Highest Lowest Highest Lowest Current of 70-day Stochastic of 14-day
Date High Low Stochastic Stochastic
High (70) Low (70) High(14) Low(14) Close Stochastic
Oscillator Osc. (%Kw) Oscillator Osc. (%Kd)
8/25/2015 1133.15 1104.05 1296 1104.05 1232.77 1104.05 1104.1 0.03 2.04 0.04 3.03
8/26/2015 1132.63 1102.58 1296 1102.58 1225.09 1102.58 1132.19 15.31 6.12 24.17 9.47
8/27/2015 1157.9 1133.77 1296 1102.58 1225.09 1102.58 1153.61 26.38 13.91 41.65 21.95
8/28/2015 1163.05 1149.32 1296 1102.58 1225.09 1102.58 1162.91 31.19 24.29 49.24 38.36
8/31/2015 1164.89 1152.36 1296 1102.58 1225.09 1102.58 1159.45 29.4 28.99 46.42 45.77
9/1/2015 1159.45 1124.46 1296 1102.58 1225.09 1102.58 1128.05 13.17 24.59 20.79 38.82
9/2/2015 1146.03 1128.05 1296 1102.58 1225.09 1102.58 1146.03 22.46 21.68 35.47 34.23
9/3/2015 1157.63 1143.79 1296 1102.58 1225.09 1102.58 1145.15 22.01 19.21 34.75 30.33
9/4/2015 1142.55 1130.75 1296 1102.58 1224.12 1102.58 1136.17 17.37 20.61 27.64 32.62
9/8/2015 1162.45 1139.07 1296 1102.58 1211.68 1102.58 1161.76 30.6 23.32 54.25 38.88
ROY WIEMANN

9/9/2015 1170.2 1147.33 1296 1102.58 1193.93 1102.58 1148.23 23.6 23.85 49.97 43.95
Figure 1: CALCULATING the WEEKLY & DAILY (w&d) STOCHASTIC. A larger view of the example spreadsheet can be viewed in the Article Code section of
Traders.com.

by Vitali Apirine
September 2018 • Technical Analysis of Stocks & Commodities • 9
 METASTOCK CODE FOR W&D STOCHASTIC is a three-period SMA of the %K line and trades are signaled
when the %K line crosses the %D line. For my weekly and daily
Periods:=14; (W&D) stochastic, I’m only plotting two different slow stochastic
Periods1:=3; %K lines—a 14-day stochastic and a 70-day stochastic—and
Pds:=70; I’ll refer to the indicator as the W&D stochastic.
Pds1:=3; The stochastic oscillator can be calculated using a spreadsheet
similar to what you see in Figure 1 (a partial view is shown
StocD:=(C-LLV(L,Periods))/(HHV(H,Periods)-LV(L,Periods))*100; here, with the entire file available from the Article Code sec-
SD:=Mov(StocD,Periods1,S);
tion of Traders.com). The MetaStock code for calculating the
StocW:=(C-LLV(L,Pds))/(HHV(H,Pds)-LLV(L,Pds))*100; W&D stochastic can be found in the sidebar “MetaStock Code
SW:=Mov(StocW,Pds1,S); For W&D Stochastic.” In Figure 2 you see a chart of the W&D
stochastic oscillator.
SD;
SW;
Interpretation
Since the W&D stochas-
tic oscillator measures
the level of the close
%Kw Close in upper part of 70-day range Close in overbought territory of 14-day range

relative to the high–low

%Kd range over a given period of time, when the close
is in the upper half of the range, the stochastic
oscillator is above 50. When the close is in the
Close in oversold territory of 14-day range Close in lower part of 70-day range lower half of the range, the stochastic oscilla-
tor is below 50. So it makes sense to conclude
Spreadsheet that low readings (below 20) indicate that price
area
is near its low for the given time period. High
readings (above 80) indicate price is near its
high for the given time period. Since the W&D
stochastic oscillator shows the location of the
close relative to the high–low range for different
numbers of periods, a longer lookback period (70
days versus 14 days) produces a less-sensitive
oscillator with fewer signals.
MetaStock

Overbought/oversold
Figure 2: WEEKLY & DAILY (W&D) STOCHASTIC
The stochastic oscillator ranges from zero to 100.
Traditional settings use 80 as the overbought
threshold and 20 as the oversold threshold. These
%Kw levels can be adjusted to suit your analytical
needs and the characteristics of the security
%Kd
you are trading.
Readings above 80 for the weekly (70-day)
stochastic oscillator would indicate the underly-
ing security was trading near the top of its 70-day
Break
high–low range. Readings below 20 occur when
a security is trading at the low end of 70-day
high–low range.
Readings above 80 for the daily (14-day) sto-
chastic oscillator would indicate the underlying
Break security was trading near the top of its 14-day
high–low range. Readings below 20 occur when
a security is trading at the low end of its 14-day
high–low range.
Oversold readings in the daily stochastic dur-
ing an uptrend are often considered to be long
FIGURE 3: OVERBOUGHT/OVERSOLD. Here you see how you can use the moving average and the W&D trade opportunities. Conversely, overbought
stochastic to identify overbought & oversold levels. readings in the 14-day stochastic during a down-
10 • September 2018 • Technical Analysis of Stocks & Commodities
 trend could be considered short trading opportunities.
Oversold readings in the weekly stochastic during an
uptrend can signal a potential correction or trend reversal to
The daily stochastic is a three-day the downside. Conversely, overbought readings in the weekly
simple moving average of the 14- stochastic during a downtrend can signal a possible trend re-
day %K. The weekly stochastic is versal to the upside.
a three-day simple moving average The chart in Figure 3 shows the NYSE Composite Index
(NYA) with the W&D stochastic oscillator (70, 3, 14, 3) during
of the 70-day %K. an uptrend. The oversold 14-day stochastic reading (red ellipse)
in mid-September foreshadowed the index’s decline. NYA briefly
crossed its rising 200-day simple moving average. The weekly
(70) and daily (14) stochastic became oversold (see blue ellipse)
in early November. A trendline break in the first
half of November 2016 confirmed that the uptrend
resumed. The daily (14) stochastic was oversold
(see red ellipse) and weekly (70) stochastic was
overbought at the end of December 2016. It was
another buying opportunity. The oversold daily
(14) stochastic reading (red ellipse) in the first
half of March 2017 foreshadowed the pullback.
Correction

Break The weekly (70) stochastic was almost in the first

half of the 70-day high–low range during this
Break pullback. The trendline break confirmed the end
of decline in the second half of April 2017.
Break

Correction in an uptrend
The chart in Figure 4 shows the S&P 500 In-
dex (SPX) with the W&D stochastic oscillator
(70,3,14,3). The weekly stochastic was oversold
in the second half of June (red ellipse). A break
of the support level in early August signaled the
beginning of a correction. The weekly stochastic
FIGURE 4: CORRECTION IN AN UPTREND. Here you see how you can use support & resistance levels broke above 50 (see green ellipse) when the index
together with the W&D stochastic to indicate if a correction is either beginning or ending. exceeded its late August peak in mid-October.
The weekly stochastic became overbought in the
first part of November (green ellipse). Closing
levels started to move almost into the upper part
of the 70-day high–low range. The SPX exceeded
the late October peak in mid-January 2012 and
confirmed the correction’s end.

Correction in a downtrend
In Figure 5 you see a chart of the Dow Jones In-
dustrial Average (DJIA) with the W&D stochastic
oscillator (70,3,14,3) during the 2008–2009 bear
market. A bearish price crossover of the 200-day
Break
Break
SMA and a weekly stochastic oversold reading
at the end of November 2007 (red ellipse) indi-
cated the potential start of a bear market. The
weekly stochastic became overbought when
the index bounced during the second part of
Bear market
April 2008 (green ellipse). However, the index
didn’t break above its 200-day SMA and broke
FIGURE 5: PUTTING IT ALL TOGETHER. Using moving averages, support/resistance levels, and the
support at the end of June 2008. The weekly
W&D stochastic oscillator can be used to help identify overbought/oversold levels, corrections, and
reversals. Continued on page 27
September 2018 • Technical Analysis of Stocks & Commodities • 11
 Counting Waves
The V-Trade
Part 7: Technical Analysis—V-Wave Count
Counting waves in price charts doesn’t have to be complex. In
this seventh part of a multipart series of articles, we consider
a method that simplifies the art of counting waves so you can
make more successful trades. Find out how.
If
by Sylvain Vervoort
you have been following this series of articles on
the V-Trade, you will know that my intention is to
explain the various techniques I use to make trading
decisions. In this article, which is the sixth part of
the technical analysis portion of this series, I will
introduce the V-wave count, which is a simplified
method of counting waves based on the Elliott
wave theory.
12 • September 2018 • Technical Analysis of Stocks & Commodities
V-wave count
In the mid-1930s Ralph Nelson Elliott explored the correla-
tion between human emotion and trend patterns contained
within price charts. He discovered patterns that repeated
themselves in form but not necessarily in size or length of
time; these patterns subdivide into smaller waves within the
framework of certain rules. He called this phenomenon “the
wave principle.” There are two basic waves in Elliott wave
theory: a five-wave impulse pattern in the trend’s direction,
and a three-wave correction pattern against the trend. The
Elliott wave theory gained wide attention thanks to A.J. Frost
ETCBERRY/SHUTTERSTOCK
and Robert Prechter, who documented Elliott wave theory
in their book Elliott Wave Principle: Key To Stock Market
Profits. An extended overview of the most common Elliott
wave patterns are illustrated in my book Capturing Profit
 TRADING SYSTEMS
With Technical Analysis.
By using modified renko bar charts, I’ve reduced the
complexity of Elliott wave counts into my wave-counting
system.
Modified renko bars limit price noise. I’ve observed that
about 90% of the time, any move in the market is composed
of at least three waves. I refer to this set of waves as a V-wave:
two in the trend’s direction and one retracement. A single
V-wave is a correction pattern.
On the other hand, when price moves in the trend’s direction,
it is called an impulse wave consisting of five waves: three
waves in the trend’s direction and two pullbacks consisting
of either a single wave or one or more V-waves.
A completed impulse wave has either at minimum one V-
wave correction or more V-waves interconnected. Elliott used
a large number of notations, using 1 to 5 for counting many
levels of impulse waves, and a similar setup with the letters
A to C for counting correction waves.
By using modified renko bricks and the V-wave zigzag,
counting waves becomes less complex. However, since price
moves are fractal, each wave can be made up of smaller-sized
waves. Thus, I will stay with the traditional Elliott-style num-
bering and annotations.
To make trading decisions, it is important to look at dif-
ferent time periods. I use the following set of annotations
to label waves relative to each other, from medium-term to
intraday:
• Medium-term impulse wave (months): [1]-[2]-[3]-[4]-
[5]
• Medium-term correction wave (months): [A]-[B]-[C]
• Shorter-term impulse wave (weeks): (1)-(2)-(3)-
(4)-(5)
• Shorter-term correction wave (weeks): (A)-(B)-(C)
• Short-term impulse wave (days): 1-2-3-4-5
• Short-term correction wave (days): A-B-C
• Intraday impulse wave (hours): i1-i2-i3-i4-
i5
• Intraday correction wave (hours): a-b-c
You can use any annotation you like but when looking at your
wave counts on a chart, it must clearly identify where the
market is long term, medium term, and short term.
I will introduce a high-low zigzag indicator based on tick
counts. This will make it easier to recognize and annotate
V-waves. The only purpose of this indicator is to simplify
counting waves by showing price swings.
Note that I can apply any kind of analysis technique in my
V-Trade approach to predict price targets. For example, I can
use it with divergences and convergences between the stochastic
RSI indicator and renko price bricks to confirm support &
resistance for either a reversal or a trend continuation.
Different individuals will come up with different wave counts
and that is fine as long as the current wave points in the expected
A correct long-term wave
count using daily or weekly
charts will help you trade
medium- and short-term waves
with greater success.
direction. If the result is a different direction, you should try
again, and eventually wait for a trend confirmation.
Impulse waves are usually straightforward, showing five
waves up or down, possibly with an extension impulse wave
in waves 3 or 5. Correction waves, on the other hand, could
have complex structures. The best you can do is look for an
impulse wave and if you can’t find one, you are most probably
looking at a correction wave.
Impulse wave rules
Here is a brief description of an impulse wave in an uptrend.
In a downtrend, just reverse the description for the impulse
wave.
Wave 1: Wave 1 is basically part of a bottoming pattern of
the previous downtrend. Because of this, correction wave 2
will retrace most of wave 1. A lot of investors look at wave
1 as an upward correction in a downtrend, which is why it
is important to have a completed wave count before looking
for a wave 1.
Wave 2: Those who believe the downtrend will continue will
see the start of correction wave 2 as a confirmation. A basic rule
is that wave 2 should never go below the start of wave 1.
Wave 3: On its way up, wave 3 will have to confront wave
1’s top resistance. Once that resistance is broken, more inves-
tors will step in thinking the trend has reversed, that is, the
previous uptrend is continuing. Wave 3 should never be the
smallest in size, as far as impulse waves go.
Wave 4: A wave 4 correction is generally predictable in size
and pattern. Wave 4 is mostly a limited correction for wave
3 (23.6% up to 38.2%) and mostly flat. Wave 4 should never
move into wave 2 territory. A wave 4 can be used to synchro-
nize the impulse wave.
Wave 5: Those who missed getting in on wave 3 believe there
will be a further uptrend move. Wave 5 is expected to make a
higher top compared to wave 3, but with lower volume from a
smaller group of investors. Price acceleration is usually slower
than in wave 3 but if wave 5 proves to be built up with another
impulse wave extension, the acceleration could be stronger.
Correction wave rules
Wave A: In the first instance, wave A will look like a tech-
nical correction related to the previous up move. Look for a
September 2018 • Technical Analysis of Stocks & Commodities • 13
 Counting waves
Wave count with a modified renko
chart
Here is how I annotated the waves based
on the zigzags in Figure 1. There are
medium-term brownish waves on top of
blue shorter-term waves.
MetaTrader4 (MetaQuotes Software Corp.)

On the left-hand side, where the chart

starts, the index moves in a downtrend.
The small A-wave down is followed by
a small correction B-wave. Drawing a
Fibonacci projection over the B-wave pro-
vides targets at 161.8% and 261.8%. The
C-wave bottom is possibly a new higher
degree (A)-wave down. This is the first
FIGURE 1: SveHLZigZagTicks zigzag indicator. Here you see the different waves (medium-term to wave starting another downward zigzag
intraday) annotated based on the zigzags. correction. The up correction creates
the (B)-wave followed by an ABC wave
completed V-wave before expecting the start of wave A. If down. The downward move ends with a new low completing
wave A is an impulse wave, it is likely a zigzag correction the (C)-wave. Note the Fibonacci target projection over the
will follow. If wave A, on the other hand, is a correction last B-wave pinpoints the low completing the (C)-wave at the
wave, there is a good chance the entire correction will be a 161.8% Fibonacci target.
flat correction. Notice how the A-wave consists of a smaller abc zigzag. It
is similar for the C-wave, which also consists of an abc zigzag.
Wave B: Wave B is a correction related to wave A. The most On the smallest level you see that both the a-wave and c-wave
common pullback is 50% of wave A’s size. If you are looking have a smaller intraday zigzag, ia/ib/ic. The index completes
at a larger than 61.8% Fibonacci retracement, you are probably the larger (C)-wave. Did you note that wave (A) and wave (C)
not looking at a wave B. both have a size of about 390 index points, confirming that
A-waves and C-waves are usually equal in size?
Wave C: Wave C is the third wave of the correction. The Once there is an upturn at the low of the (C)-wave, you can
complete ABC correction is mostly related to the complete make an up Fibonacci target projection over the last zigzag
previous impulse wave 1 to 5. The correction will mostly be c-wave. You now have target levels at 100%, 161.8%, 261.8%,
between 38.2% and 61.8% Fibonacci levels. Note that it may and 423.6%. Whether this is the start of a larger up move cor-
take multiple consecutive connected waves before the cor- rection wave or the start of a new uptrend, you could expect
rection completes. an upward impulse wave.
From the chart you see that the index moves up, still show-
High-low zigzag ing a lower top to what I marked as wave (1). A down reaction
In Figure 1 you see a modified renko creates wave (2). Wave (2) has a higher bottom, which is a
chart with the zigzag indicator Sve- first sign that confirms a possible further up move. The index
HLZigZagTicks between the lowest moves up creating wave 1, and still remains below previous
low and highest high levels at turning price resistance. Another reaction marked wave 2 follows.
points. I am using up to three different This is probably the start of an extended 1 to 5 impulse wave
zigzags to show short-, medium- and for wave (3).
longer-term trends. Figure 1 is based With higher bottoms and higher highs there is a good
on the German DAX index with a chance for the up move to continue. Wave 3 breaks previous
3,200-tick modified renko brick size price resistance levels with a pullback wave 4, confirming the
(32 index points). I use a brown-colored zigzag reversal of support of the 100% Fibonacci reference level. This is a good
12,000 ticks or 120 index points and a green one with 10,200 sign for the validity of the projected target levels.
ticks or 102 points. The index moves through the 161.8% target and falls back
The MT4 source code for the SveHLZigZagTicks indica- a little bit but finds support on the target. Next, the uptrend
tor is available in the Article Code section of Traders.com. continues, moving past the 261.8% target. This is the end
Source and compiled files are available at http://stocata.org/ of the extended wave 5 and at the same time, the top of the
metatrader/formulas.html. Keep in mind that the last section higher-degree wave (3). Correction wave (4) is a single ABC
will be drawn only after a confirmed reversal. In other words, zigzag that finds support at the 261.8% Fibonacci target. The
you are looking at the last reversal but it is not yet drawn! B-wave up correction is made up of a lower-degree abc zig-
zag. You now look for the completion of the higher-degree
14 • September 2018 • Technical Analysis of Stocks & Commodities
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 Price reversal and continuation
In the 140-tick (14 pips) modified renko
chart of gold in Figure 3, you see that price
reached the top of an impulse (5)-wave up.
A previous Fibonacci 423.6% target price
projection confirms this price top.
A downward reaction starts. You expect
a correction wave but keep in mind that
correction waves A and C are basically
impulse waves of a lower degree. At the
beginning it may not be clear whether
you are looking at the start of a correc-
tion or impulse wave. This isn’t a problem
because in a downward move, correction
FIGURE 2: WAVE COUNTS USING A CANDLESTICK CHART. Applying the SveHLZigZagTicks zigzag indicator waves A and C are moving down. I num-
on a candlestick chart also makes it easier to count waves.
bered these waves as impulse waves 1
and 3, since they are moving in the same
direction as waves A and C. It is best to
start numbering it as an impulse wave
and if, over time, it is not fitting, you can
change it to a correction wave count.
In Figure 3, the top (5) is confirmed with
a negative divergence with higher price
tops but lower SRSI indicator tops (not
visible). Since there is now a completed
uptrend impulse wave, I expect a larger
zigzag correction wave possibly with a
double or even triple zigzag down.
I start numbering the down move as
wave (1), followed by a correction wave
(2), expecting a wave (3) down. The lower
top (2) is matched by a lower SRSI top,
showing a convergent move. This is reason
to expect a continuation of the previous
down move (1). This move down to the
low side of the volatility band looks too
small for a wave 3, so you either have to
FIGURE 3: PRICE REVERSALS AND CONTINUATIONS. Here you see how Fibonacci levels, divergences renumber it as an abc move or start an
between price and indicator, moving averages, and volatility channels all play a role when it comes to identify- intermediate impulse wave down.
ing impulse and corrective waves.
Let’s say you decide to number it as the
start of a smaller intermediate impulse
impulse wave, wave (5). Wave (5) smoothly reaches the 423.6% wave starting wave 1. The lower bottom at 1 shows a higher
Fibonacci target. bottom in the SRSI, which is a positive divergence for a move
up. The up move is limited and marked as a wave 2 correction
Wave count with a candlestick chart pullback. Now you see a lower price top with a higher top in
Counting waves on a modified renko chart and with the the SRSI, which is a negative hidden divergence. You could
SveHLZigZagTicks indicator is, for the most part, clear and expect a further move down.
simple. Identifying waves using a standard candlestick chart Gold fell below the 100-period moving average (MA) and
may not be that clear because it is difficult to identify the the low side of the volatility channel. This is wave 3, followed
limits of taking a wave into account. by a wave 4 pullback to the resistance of the 100-MA. Wave
The good news is you can use the same indicator to help 5 down starts. The lower wave 4 high goes with a higher high
you count waves on any type of chart. In the four-hour chart SRSI on more negative hidden divergence, confirming the start
of the German DAX index in Figure 2, I use the same tick of wave 5 down. If you draw a Fibonacci target over wave 4,
count for this chart as for the modified renko chart. The it gives you targets at 161.8% and 261.8%.
indicator makes it easier to come up with a wave count that The 161.8% target is broken and gold moves further down,
best fits the price move. completing wave 5. This move also completes wave (3). You
16 • September 2018 • Technical Analysis of Stocks & Commodities
 ?DON’T
? ?
?
??GAMBLE
?
? ? ?
?? ?? ?
can now expect some larger corrections

? On? Your?Next
for wave (4), at least a single zigzag cor-
rection. An ABC correction completes
wave (4), which encounters resistance
at the upper side of the volatility band

?
?Investment
?
and price resistance from the previous
wave 3 support.

?
A negative divergence at this level

?? ??
reverses the price move and continues

??? ?
the downtrend for wave (5). Wave (5)
completes at the 261.8% Fibonacci
target. There is a positive divergence

?
at this level, reversing price to an up
move. Now you expect a larger correc-
tion over the complete impulse wave

? ?
(1) to (5).
The positive convergent price up

?ANALYZE? ?ANY
move pushes gold up to a 50% re-
tracement over the complete previous
impulse wave down. Basically, you now
expect a continuation of the downtrend.
If that is the case, you can start renaming
wave (5) to wave (5)-[A] and wave C to
wave (C)-[B]. You expect a correction
wave [C] down.

STOCK FREE!
Correction patterns
Double zigzag correction pattern
The most common short-term correc-
tion pattern is a simple V-wave zigzag
pattern. A frequent medium-term
correction pattern with the use of
Visit www.VectorVest.com/SC
modified renko bars is the double zigzag
correction pattern as shown in Figure
4. This pattern has two single zigzags
connected by a singular short-term
wave or a V-wave correction.
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This correction pattern starts re-
acting to the previous up move with The True Value of a Stock
a short-term abc zigzag correction.
Correction wave-a is identified by the
The Stock’s Overall Safety
negative divergence between price and
SRSI indicator. The continuation after
Whether to Buy, Sell or Hold
correction wave b is confirmed by a
negative convergent move. The end of Award Winning Software 19 Years
the first abc zigzag down reaches the Running
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Next, a singular wave or V-wave up
correction is completed, which retraces
the abc wave. This may be either a new
wave 1, in case the previous uptrend
continues, or it could be an intermedi-
ate wave B that connects the zigzags
together. If it is the latter, you can
September 2018 • Technical Analysis of Stocks & Commodities • 17
 Extended double zigzag pattern
Correction patterns can be more com-
plex and may take much more time
after a larger impulse wave up or down.
Figure 5 is a continuation of Figure 4.
The double zigzag ended with wave
C. If you are expecting another zigzag
extension, you can mark the end of wave
C as a possible continuation for a larger
zigzag and mark it as the first wave (A)
of a larger zigzag composed of another
(B) and (C) wave.
The end of wave (A) and the start of
wave (B) is revealed by a positive di-
vergence between the index and SRSI,
bouncing up from the low side of the
FIGURE 4: DOUBLE ZIGZAG CORRECTION PATTERN. The simple V-wave zigzag pattern is a short-term volatility band. The up correction that
correction pattern. Here you see the double zigzag pattern has two single zigzags connected by a singular creates the (B) wave is an ABC zigzag
short-term wave or a V-wave correction. with a retracement between 50% and
61.8% of the complete first ABC wave
down. It reaches the upper side of the
volatility band with a negative diver-
gence showing up between the index
and SRSI indicator, a clear start for the
(C) wave down.
A downward target projection over
wave (B) gives a first Fibonacci target
at 161.8%. The first smaller a-wave is a
convergent move that crosses the 100%
Fibonacci line. After this convergent
move you expect correction wave b and a
continuation of the down move after the
b-wave correction. This brings the index
down to the end of the c-A wave.
With lower index bottoms and higher
SRSI bottoms, there is a positive diver-
gence for the start of the B correction
wave up. This correction is built with a
FIGURE 5: MEDIUM-TERM DOUBLE ZIGZAG PATTERN. If you are expecting another zigzag extension, you can short-term abc zigzag to the upper side
mark the end of wave C as a possible continuation for a larger zigzag. Here, a further extension is possible where of the volatility channel. The convergent
the current (C) wave would become another higher-range [A] wave.
move confirms the up correction con-
tinuation after the b-wave. A short-term
consider the completed abc wave as wave A (bottom of the negative divergence between the index with a higher top and
first zigzag), B (the connecting wave), and C (the bottom of lower SRSI top reveals the start of the C-wave down.
the expected second zigzag). The first support for the short-term a-wave is found at the
This second zigzag down is created with another short-term lower side of the volatility band and previous price support.
abc wave, creating wave C down. This may be a larger wave Since you are looking at a positive hidden divergent move, you
(A), the start of a higher-degree zigzag correction. can expect an up correction for the b-wave. This b-wave is show-
The connecting wave-B starts with a positive divergence ing a negative convergent move, the start of the c-wave.
and ends with a negative hidden divergence, continuing the The bottom of the c-wave breaks the 161.8% Fibonacci target
downtrend started by the first zigzag. This is the start of Wave-a. and completes the extended (A)(B)(C) zigzag pattern. Each of
The positive convergence and short-term positive divergence these waves is composed of a lower-degree ABC zigzag and
announces correction wave b. A negative convergence at this each of the ABC waves has short-term abc waves.
point confirms the end of the b-wave correction and the start of A further extension is possible where the current (C) wave
wave c. The C wave bottom ends at the 261.8% Fibonacci target would become another higher-range [A] wave. This may double
and starts an up move signaled by a positive divergence. the correction wave time period!
18 • September 2018 • Technical Analysis of Stocks & Commodities
MT4 SOURCE CODE FOR SveHLZigZagTicks indicator
//+------------------------------------------------------------------+ const datetime& time[],
//| SveHLZigZagTicks.mq4 | const double& open[],
//| Copyright © 2008, Sylvain Vervoort | const double& high[],
//| http://stocata.org/ | const double& low[],
//+------------------------------------------------------------------+ const double& close[],
const long& tick_volume[],
// ATTENTION! const long& volume[],
// The first section is not drawn because the highest high or lowest low are not const int& spread[])
//relevant The previous section is drawn when current section is confirmed {
//--- last counted bar will be recounted
#property copyright "©2008-2018, Sylvain Vervoort" int limit = rates_total - prev_calculated; // differenc already calculated
#property link "http://stocata.org/" if (limit < 0) return(-1); // No bars return error.
#property description "Price ZigZag indicator based on a Tick size" if (prev_calculated>=0) limit--; // -1 start addressing from 0
#property description "input value. Aid for waves counting 2018 V1.3" // ----------
#property description "ATTENTION!" flat = 1;
#property description "Last section only drawn after current reversal"
#property strict for(int i=limit-2; i>=0 && !_StopFlag; i--)
{
#property indicator_chart_window if (CurrentTrend > 0) // trend is up, look for new swing high
#property indicator_buffers 1 {
#property indicator_color1 Goldenrod if (high[i] >= LastHigh[i+1])
#property indicator_width1 2 { // found a higher high
#property indicator_style1 STYLE_SOLID LastHigh[i] = high[i];
ZZTemp[i] = high[i];
extern int NumberOfTicks = 200; // Reversal Number of Ticks }
else if (low[i] <= (LastHigh[i+1] - Point*NumberOfTicks)) //
int CurrentTrend, flat; found a swing low
{
//--------buffers LastLow[i] = low[i];
double LastLow []; LastHigh[i] = low[i];
double LastHigh []; ZZTemp[i] = low[i];
double ZZTemp []; CurrentTrend = -1;
double ZigZagFinal[]; }
else LastHigh[i] = LastHigh[i+1]; ZZTemp[i] = LastHigh[i];
//+------------------------------------------------------------------+ }
//| SveHLZigZagTicks indicator initialization function |
//+------------------------------------------------------------------+ else // dir < 0, trend is down, look for new swing high
int OnInit(void) {
{ if (low[i] <= LastLow[i+1]) // found a lower low
IndicatorBuffers(4); {
SetIndexBuffer (0,ZigZagFinal); LastLow[i] = low[i];
SetIndexStyle (0,DRAW_SECTION); ZZTemp[i] = low[i];
SetIndexBuffer (1,ZZTemp); }
SetIndexStyle (1,DRAW_NONE); else if (high[i] >= (LastLow[i+1] + Point*NumberOfTicks)) //
SetIndexBuffer (2,LastHigh); found a swing high
SetIndexStyle (2,DRAW_NONE); {
SetIndexBuffer (3,LastLow); LastHigh[i] = high[i];
SetIndexStyle (3,DRAW_NONE); LastLow[i] = high[i];
ZZTemp[i] = high[i];
//---- name for data Window and indicator subwindow label CurrentTrend = 1;
string StrNumberOfTicks = IntegerToString(NumberOfTicks); }
else LastLow[i] = LastLow[i+1]; ZZTemp[i] = LastLow[i];
IndicatorShortName("SveHLZigZagTicks ("+StrNumberOfTicks+")"); }

// Check validity of the inputs ZigZagFinal[i] = EMPTY_VALUE;
if(NumberOfTicks < 2) if (ZZTemp[i+flat] < ZZTemp[i+flat+1] && ZZTemp[i] > ZZTemp[i+1])
{ ZigZagFinal[i+flat] = low[i+flat];
Alert("Number of Ticks must be > 1, Default used!"); else if (ZZTemp[i+flat] > ZZTemp[i+flat+1] && ZZTemp[i] < ZZTemp[i+1])
NumberOfTicks = 200; ZigZagFinal[i+flat] = high[i+flat];
}
if (ZZTemp[i] == ZZTemp[i+1]) flat = flat+1;
CurrentTrend = 1; // just start assuming trend is up else flat = 1;
}
//---- Init done //----
return(INIT_SUCCEEDED); return(rates_total);
} }

//+------------------------------------------------------------------+ //+-------------------------------------END OF PROGRAM---------------------------+

//| SveHLZigZagTicks indicator iteration function |
//+------------------------------------------------------------------+
int OnCalculate (const int rates_total,
const int prev_calculated,

September 2018 • Technical Analysis of Stocks & Commodities • 19

 Long-term wave counts
How do you know if a longer-term
complex downward (upward) correction
pattern has reached certain targets? To
answer that, you have to look at how it is
related to the previous long-term upward-
(downward-) moving impulse wave.
A long-term view should confirm me-
dium- and short-term wave analysis. This
will give good insight on what to expect
for the medium term. In Figure 6 you see
a long-term weekly German DAX cash
index chart using a 100,000 tick reversal
for the SveHLZigZagTicks indicator to
help simplify the wave count.
A correct long-term wave count us-
ing daily or weekly charts will help you FIGURE 6: LONG-TERM WAVE PATTERNS. A long-term view should confirm medium- and short-term wave
trade medium- and short-term waves with analysis. This will give good insight into what to expect for the medium term.
greater success.

Next steps
This concludes my description of the basic technical analysis
tools used with my V-Trade system. It’s best to learn, under-
stand, and practice with this set of tools as much as possible
if you want to successfully trade the V-Trade system.
Next, you will need to apply this technical analysis knowl-
edge and use it to open and close positions following basic
trading rules. It’s not difficult but neither is it easy to utilize in
real life, because you won’t be in front of your trading platform
all the time. You will need additional tools to help you enter
and exit trades whether you apply a manual, semi-automated
or, in some cases, fully automated system.
In my next article in this series on the V-Trade, I will docu-
ment in more detail the V-Trade trading rules, followed by a
number of trading examples. Stay tuned!
Sylvain Vervoort is a retired electronics engineer who has
been studying and using technical analysis for more than
40 years. Currently, he experiments with trading forex and
CFDs with rule-based systems. His book Capturing Profit With
Technical Analysis received a bronze medal from the 2010
Axiom Business Book Awards in the category of investing.
His Band Break System Expert is available on DVD. More
information about the V-Trade System will become available
on his blog under construction at http://blog.stocata.org.
Vervoort may be reached at sve.vervoort@scarlet.be or via
his website at http://stocata.org.
The source code given in this article is available in the Article Code
section of our website, Traders.com. Source and compiled code
can be downloaded from the author’s website at http://stocata.org/
metatrader/formulas.html.
Vervoort, Sylvain [2018]. “The V-Trade, Part 1: Five Basic
Trading Rules,” Technical Analysis of Stocks & Com-
modities, Volume 36: March.
[2018]. “The V-Trade, Part 2: Technical Analysis,”
Technical Analysis of Stocks & Commodities, Volume
36: April.
[2018]. “The V-Trade, Part 3: Technical Analysis—Fi-
bonacci Projections And Daily Pivots,” Technical Analysis
of Stocks & Commodities, Volume 36: May.
[2018]. “The V-Trade, Part 4: Technical Analysis—
Trends & Reversals,” Technical Analysis of Stocks &
Commodities, Volume 36: June.
[2018]. “The V-Trade, Part 5: Technical Analysis—
Moving Average Support & Resistance And Volatility
Bands,” Technical Analysis of Stocks & Commodities,
Volume 36: July.
[2018]. “The V-Trade, Part 6: Technical Analysis—
Divergence Indicators,” Technical Analysis of Stocks &
Commodities, Volume 36: August.
[2009]. Capturing Profit With Technical Analysis:
Hands-On Rules For Exploiting Candlestick, Indica-
tor, And Money Management Techniques, MarketPlace
Books, Inc.
[2012]. Ground-Breaking Band Indicators: Newly
Discovered Tactics for Timing Profit, DVD, http://stocata.
org. Includes an autotrading expert system.
‡MetaTrader4 (MetaQuotes Software Corp.)
‡See Editorial Resource Index
†See Traders’ Glossary for definition

Further reading
Frost, A.J., and Robert Prechter [2001]. Elliott Wave Principle,
John Wiley & Sons (first published in 1985).

20 • September 2018 • Technical Analysis of Stocks & Commodities

 Simply Advanced

Just launched...
XVI
Featuring the NEW Explorer
Discover the latest features at metastock.com/whats-new
 Something To Hang Your Hat On
The Truth Behind PEG
The computation of the PEG ratio is so seemingly simple and yet
is often reported in different ways, sometimes unbeknownst to the
user. Let’s look at how PEG should be calculated and why.
by Douglas Lyon, PhD
To
a pure technical analyst, the PEG ratio—P/E
ratio over growth—may not come into play
often. But for those who throw in some fun-
damentals to their analysis, especially when
screening stocks to trade, it may come as a sur-
prise that the PEG is often misrepresented.
Over the years, widely varying ways of calculating the PEG
have crept in, confusing the financial community, investors,
data miners, and programmers. Here, I’ll first go back to its
roots to look at how it was calculated when it first arrived on
the scene. Then I’ll survey how some of the major data provid-
ers calculate it and compare them. I’ll conclude by revealing
which calculation is the one I believe is the best to use.
22 • September 2018 • Technical Analysis of Stocks & Commodities
How peg became, well, peg
Famed investor and mutual fund manager Peter Lynch wrote
about PEGY ratios in his book One Up On Wall Street, origi-
nally published in 1989. In it, he describes the computation
of PEGY as the P/E ratio divided by the growth plus yield.
According to Lynch as well as an article at Investopedia.
com on determining P/E and PEG ratios, the P/E used in the
PEGY is the trailing 12-month P/E ratio, computed by taking
the current price of the stock and dividing it by the last 12
months of total earnings per share (EPS).
The PE is a historic metric, and with generally accepted
accounting practices in place, it’s easy to compute without
dispute. The growth figure, on the other hand, is forward-
looking. Some say that growth is a measure of how the annual
EPS will grow, on average, over the next five years, such as
LOVE YOU/SHUTTERSTOCK
described in an Investopedia.com article on the subject.
One cause of dispute is that different people will have dif-
ferent projections on growth. A dispute also arises over the use
of EPS growth vs. revenue growth. Some sources report the
 QUANTITATIVE ANALYSIS
SINCE

PEG ratio as backward-looking, using the P/E ratio divided

by the growth rate over the past 12 months, such as described
in an article on Zacks.
Zacks also uses a forward PE ratio with a forward EPS
growth estimate. Let’s compare the PEG values from two
well-known sources of financial data and see why a poor
NQ (7/6/2018)
understanding of how these metrics are calculated can lead
to confusion.
43.75 pts
Different sources, different results +$875/contract
Yahoo Finance enables users to obtain statistics about most
publicly traded stocks. These numbers are sourced from
Exit at 7207.25
Thomson Reuters and there is little information about how the
calculations are performed. The public typically takes these
numbers as correct without question. But if you compare the
PEG of a sample stock as reported on Yahoo Finance with
the PEG for the same stock as reported on Zack’s, you may
get different numbers.
As an example, I will use the stock Alcoa (AA). On Yahoo
Finance, we get a PEG ratio (five-year expected) of 1.50 (as
quoted on 3/21/2018).
Meanwhile, Zacks reports a PEG of 1.52 for AA (also Target: 7199
quoted on 3/21/2018). The number given by Zacks for EPS
growth is 8.62%. With a PE of 41.34, wouldn’t the PEG then
be 41.34/8.62 = 4.79 on Zacks? However, Zacks uses a forward Potential Reward Zone
PE ratio (FPE) in its PEG calculation. The FPE is reported as +32.5pts, +$650
13.06, and thus, the calculation would be:

PEG = 13.06/8.62 = 1.51

Zacks indicates the forward P/E (FPE) is computed by di-

viding the current market price by the forecasted earnings per
share (EPS). An FPE of 13.06 is a rather large departure from Stop: 7155.75
the trailing 12-month (TTM) PE ratio 41.34. The Zacks PEG
of 1.52 is very close to the Yahoo Finance PEG of 1.50, but
neither resource reports the PEG is computed using a forward
PE rather than a trailing PE. Alcoa seems like a much better
value according to the PEG metric that uses the forward PE •
than when the PEG uses the trailing PE.
Next I’ll look at Finviz.com and the methodology it uses for •
computing the PEG. Finviz.com publishes several statistics
regarding various publicly traded companies. These statistics
•
can be obtained for free (with advertisements) or for a fee
(without advertisements). Using the stock screener feature
and ticking the appropriate boxes for the data I’m interested
in, I got the following set of metrics:

Ticker: AA
Company: Alcoa Corporation
P/E: 37.70
PEG: 4.38
Dividend: -
EPS next 5Y: 8.60%
THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE
THE RESULTS SHOWN IN AN ACTUAL PERFORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE
TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN

Price: 47.95 MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE
FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY
TO ACHIEVE PROFITS
PROF OR LOSSES SIMILAR TO THESE BEING SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF
OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COM-
MODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.

September 2018 • Technical Analysis of Stocks & Commodities • 23

 If you calculate the PEG as P/E divided by a forward-looking
five-year EPS, you get:
PEG = 37.70 / 8.60 = 4.38
The computation is clear but the PE ratio of 37.70 is not close to
Yahoo’s reported PE ratio (41.34). Meanwhile, TD Ameritrade
shows the P/E ratio (trailing 12-month or TTM) is 36.54x (with
the “x” read as times, meaning the stock is trading at 36.54
times its EPS), which is closer to the FINVIZ number than to
the Yahoo data. I am encouraged that TD Ameritrade displays
the following comment: “Therefore, AA seems highly valued
with a PEG value of 4.25x.” This is quite close to the FINVIZ
computation (and confirms the use of a historical PE with a
forward-looking growth metric). Recall that Zacks’ PEG was
1.52 and Yahoo’s PEG was 1.50, although it’s not clear how
these numbers were calculated.
E*Trade reports Alcoa with a P/E ratio (TTM) of 36.54x.
This matches TD Ameritrade’s number. Analyst earnings pro-
jections enable a consensus estimate (8.6%) and could enable
the computation of the PEG. However, neither TD Ameritrade
nor E*Trade explain how they calculate PEG. And E*Trade
offers revenue and earnings projections.
Which one should
you use?
The question of which growth figure
to use—earnings growth or revenue
growth—remains open. The argument to
use revenue growth is that the company
may be investing in its own factories, people, or acquisitions.
If your focus is on earnings, you could miss fast-growing
businesses.
I’ll take Amazon.com, Inc. (AMZN) as an example. FINVIZ
reports a PEG of 14.39 for AMZN. Yahoo Finance reports a
PEG of 7.95. However, if you look at Amazon’s projected total
revenue out to 2022, you see a projected revenue growth from
$166 billion to $356 billion, which is an average 114% growth
rate in revenue over a five-year period. I used revenue growth
figures from an article on the topic at www.statista.com.
Using a PE of 253, you get a PEG of 253/114 = 2.2—far less
lofty. In the case of many fast-growing companies, sharehold-
ers expect revenue growth to turn into earnings growth. This
accounts for the apparently lofty PEG ratios (since they are
based on EPS and not revenue growth).
So the question of which growth metric to use when valuing
a company is still open.
Which PEG?
From examining several data sources, I found that FINVIZ
divides the trailing P/E ratio by the EPS over the next five
years to obtain the PEG. By comparison, Yahoo computes
the PEG by using revenue growth over the next five years,
not earnings. As you have seen, this can result in large differ-
ences. In the example I gave, you saw the PEG from Yahoo
for AMZN was 7.88, yet from FINVIZ it was 14.30. That’s
24 • September 2018 • Technical Analysis of Stocks & Commodities
Over the years, widely
varying ways of calculating
the PEG have crept in,
confusing the financial
community, investors, data
miners, and programmers.
a 180% difference!
The saying “consistency is the hobgoblin of small minds”
may sometimes be true, but in this case, there needs to be
some consistency in the agreed-upon definitions. For the
computation of the PEG, I tend to side with Yahoo on this
one—I prefer using revenue (or sales), and not earnings, as
the growth figure in PEG. However, investors should select a
version of PEG based on its suitability for them as well as its
availability to them. For the risk-averse, the figure used could
be that of earnings; for everyone else, the PEG used could be
based on revenue (sales).
And then you’ll have something to hang your hat on.
Douglas A. Lyon, PhD, PE, is a professor in the Electrical,
Computer, and Systems Engineering department at Fairfield
University. He is a senior member of the IEEE and president
of the Inventors Association of Connecticut. He received his
PhD, MS, and BS degrees in computer and systems engineering
from Rensselaer Polytechnic Institute and worked at AT&T
Bell Laboratories, the Jet Propulsion Laboratory, and other
firms. He has authored or coauthored three books (Java Digital
Signal Processing, Image Processing In Java, and Java For
Programmers) and more than 50 journal articles.
Further reading
Barnes, Ryan. “PEG Ratio Nails Down Value Stocks,” https://
www.investopedia.com/articles/analyst/043002.asp, re-
trieved 3/19/2018.
Lynch, Peter, and John Rothchild [2000]. One Up On Wall
Street, 2d. ed., Simon & Shuster.
Smith, Thomas. “How To Find P/E And PEG Ratios,” https://
www.investopedia.com/articles/fundamental-analysis/09/
price-to-earnings-and-growth-ratios.asp, 12/12/2017,
retrieved 3/19/2018.
Statista, “Project Total Revenue Of Amazon From 2002 to
2022,” https://www.statista.com/statistics/745091/annual-
net-revenue-of-amazon/, retrieved 3/22/2018.
Zacks, “About PEG Ratio (TTM),” https://www.zacks.com/
stock/chart/AA/fundamental/peg-ratio-ttm, retrieved
3/21/2018.
, “Key Earnings Data,” https://www.zacks.com/stock/
quote/AA, retrieved 3/21/2018.
 Legal Notice
If You Owned a U.S. Dollar LIBOR-Based
Instrument Between August 2007 and May 2010
Lawsuits and Settlements Totaling $340 Million
Could Affect You
There are lawsuits impacting individuals and institutions
that entered into over-the-counter financial derivative and
non-derivative instruments directly with 18 banks and that
received payments tied to U.S. Dollar LIBOR. Settlements
totaling $340 million have been reached with Deutsche Bank
Aktiengesellschaft and HSBC Bank plc. Earlier settlements were
reached with Barclays and Citibank. The remaining 14 Non-
Settling Defendants include: Bank of America, Bank of Tokyo-
Mitsubishi, Citizens Bank, Credit Suisse, HBOS, JPMorgan
Chase, Lloyds, Norinchukin, Rabobank, Royal Bank of Canada,
Royal Bank of Scotland, SocGen, UBS, and WestLB.
A Litigation Class continues to assert claims against Bank of
America, N.A. and JPMorgan Chase Bank, N.A. The lawyers for
the Litigation Class will have to prove their claims in Court and
a trial will be scheduled for a later date. The Litigation Class is
seeking to recover money for its members.
What are the lawsuits about?
The litigation claims that the banks manipulated the U.S. Dollar
LIBOR rate during the financial crisis, artificially lowering
the rate for their own profit, which resulted in class members
receiving lower interest payments for their U.S. Dollar LIBOR-
based instruments from the banks than they should have. Plaintiffs
assert antitrust, breach of contract, and unjust enrichment claims.
Deutsche Bank, HSBC, Bank of America, and JPMorgan Chase
deny all claims of wrongdoing.
Who is included in the lawsuits and Settlements?
There are two groups that are impacted by these lawsuits.
Litigation Class: You are included if you (individual or
entity) reside in the U.S. and directly purchased certain U.S.
Dollar LIBOR-based instruments (interest rate swaps or bond/
floating rate notes) from Panel Banks (Deutsche Bank, HSBC,
Barclays, Citibank, Bank of America, Bank of Tokyo-Mitsubishi,
Credit Suisse, HBOS, JPMorgan Chase, Lloyds, Norinchukin,
Rabobank, Royal Bank of Canada, Royal Bank of Scotland,
SocGen, UBS, and WestLB), or any of their subsidiaries or
affiliates; and pursuant to the instruments, a Panel Bank paid you
interest indexed to a 1-month or 3-month U.S. Dollar LIBOR rate
set at any time between August 2007 and August 2009. (This
means you must have owned the instrument(s) between August
2007 and August 2009.)
Settlement Classes: You are included if you (individual or
entity) directly purchased certain U.S. Dollar LIBOR-based
instruments from Deutsche Bank, HSBC, Barclays, Citibank,
Bank of America, Bank of Tokyo-Mitsubishi, Citizens Bank,
Credit Suisse, HBOS, JPMorgan Chase, Lloyds, Norinchukin,
Rabobank, Royal Bank of Canada, Royal Bank of Scotland,
SocGen, UBS, or WestLB (or their subsidiaries or affiliates)
in the United States; and owned the instruments at any time
1-888-568-7640 www.USDollarLiborSettlement.com
between August 2007 and May 2010. The instruments in the
Settlement Class include certain interest rate swaps, forward rate
agreements, asset swaps, collateralized debt obligations, credit
default swaps, inflation swaps, total return swaps, options, and
bonds/floating rate notes.
What do the Settlements provide?
The Settlements will create Settlement Funds totaling $340
million that will be used to pay eligible Class Members who
submit valid claims. Additionally, Deutsche Bank and HSBC
will cooperate with the Plaintiffs in their ongoing litigation
against the Non-Settling Defendants.
How can I get a payment?
You can submit a Proof of Claim online or by mail. The deadline
to submit a Proof of Claim is December 20, 2018. You are entitled
to receive a payment if you have a qualifying transaction with
Deutsche Bank, HSBC, Barclays, Citibank, Bank of America,
Bank of Tokyo-Mitsubishi, Citizens Bank, Credit Suisse, HBOS,
JPMorgan Chase, Lloyds, Norinchukin, Rabobank, Royal Bank
of Canada, Royal Bank of Scotland, SocGen, UBS, and WestLB
(or their subsidiaries or affiliates). At this time, it is unknown how
much each Class Member who submits a valid claim will receive.
There is no money available now for the Litigation Class and no
guarantee that there will be. If money or benefits are obtained in
a future trial, you will be notified about how to ask for a share.
What are my rights?
If you are a member of the Settlement Classes and you do not
file a timely claim, you will lose your right to receive money
or benefits from the $340 million in settlements with Deutsche
Bank and HSBC. If you are a member of the Litigation Class and
elect to opt out of the Litigation Class, you will not be eligible
for any money or benefits obtained in a future trial against, or
class settlements with, JPMorgan Chase or Bank of America,
unless you timely file your own lawsuit. If you would like to
retain your right to file your own lawsuit against Deutsche Bank,
HSBC, JPMorgan Chase, or Bank of America, you must opt out
of the appropriate Class by September 28, 2018. If you stay
in the Settlement Classes, you may object to the Settlements by
September 28, 2018.
The Court will hold a hearing on October 25, 2018 to consider
whether to approve the Settlements and approve Class Counsel’s
request of attorneys’ fees of up to one-third of the Settlement
Funds, plus reimbursement of costs and expenses. You or your
own lawyer may appear and speak at the hearing at your own
expense. More information is available about the Settlement
Classes on the website, www.USDollarLiborSettlement.com,
and in the Long Form Notice accessible on that website, or by
calling 1-888-568-7640.
 TRADING ON MOMENTUM

Looking For Strength

Two-Day-High Cup Breakouts

Bullish cup patterns often continue upward. Here are two Ltd. ADR (NEW) in Figure 1. A bullish cup formed early in
technical entry signals to look for. the day with resistance slightly above the prior day’s high.
Note the prior day was in an uptrend (an ascending triangle

F
by Ken Calhoun
inding strong breakouts often means knowing
which specific patterns might attract new buy-
ers, once price action has broken above prior
resistance. Learning the details behind winning
breakout technical analysis means you have to
look for exceptional strength.
You will often find that trading bullish cups that occur above
the previous day’s high will often continue upward. In this
month’s column, I will show you how to trade this momentum
breakout pattern, which is useful for both daytrading and swing
trading. It combines two different technical entry signals—a
multiday high and a cup breakout.
Trading momentum cup breakouts
Trading breakouts in isolation often leads to losing trades
because of false breakouts and random price action moves.
Instead, you will probably find a higher success rate when you
combine cups with other signals, such as the two-day-high
breakout strategy explained here.
You can see this pattern illustrated in the chart of Puxin
pattern). Once price action moved above the $24 per share
resistance level, it went all the way up to $29 per share.
Step-by-step action plan
Here’s how you can start using the two-day-high cup breakout
strategy:
Step 1: Find charts in an uptrend, as in the intraday chart in
Figure 1. If you are a daytrader, follow price action during
the first hour to see if a bullish cup forms. Swing traders can
look for a two-day pattern resembling Figure 1 for entries
on subsequent days.
Step 2: Wait until price action has broken above the cup
pattern high ($24 in this example).
Step 3: Enter your position at $0.50 over the cup high
($24.50).
Step 4: Use the low of the cup as your stop-out level. Daytrad-
ers use a $0.50 trailing stop to exit winning trades; swing
traders use a $2 trailing stop to lock in profits.

Insights: Why
this technique
works
Institutional buying (in-
cluding high-frequency
trading) occurs primarily
above prior days’ highs
(and 52-week highs). This
pattern seeks to capitalize
on institutional buying by
entering when price action
has broken above a cup re-
sistance level. Conversely,
the worst place to enter a
trade is often inside the
prior day’s high–low trad-
ing range. By combining
a simple two-day-high
breakout with a bullish
cup, this added confirma-
tion signal often generates
winning trades.
esignal

Figure 1: Two-Day-High Cup Breakout (NEW). This bullish cup that occurred above the previous day’s high led to a
multipoint winning breakout.

26 • September 2018 • Technical Analysis of Stocks & Commodities

 TRADING ON MOMENTUM
Trade management tips
Whenever you look to trade breakouts, it is helpful to use
increasing volume as a technical confirmation signal; for
example, you can see increasing volume on the right side of
the bullish cup in Figure 1. When it comes to the depth of the
cup, smaller cups are better; make sure the cup height is less
than half of the prior day’s trading range as in this example.
As always, it is best to trade charts with big multipoint
trading ranges in the $20 to $70 per share range. Note the
range of this chart is ($29.50 - $17) = $12.50. This is one of
the most important technical analysis lessons learned in my
20 years of trading experience; if for example the same chart
pattern had a smaller high–low range (such as two points),
it is best not to trade it. Chart patterns should incorporate
trading ranges as a measure of volatility to make the risk–
reward math work out. Focusing your efforts on consistent,
clean charts with big trading ranges can help you trade the
strongest momentum charts.
apirine/weekLy & daiLy sTocHasTic
Continued from page 11
stochastic became oversold again (red ellipse) and the 200-day
SMA started to fall.
The daily stochastic overbought readings indicated short
trading opportunities. There were good and bad signals. Note
that most of the time, the closing levels of the indicator were
in the lower part of the weekly 70-day high–low range. The
weekly stochastic became overbought again at the end of April
2009 (green circle). Closing levels started to move into the up-
per half of the 70-day high–low range. The trend reversal was
confirmed by a bullish price crossover of the 200-day SMA
in the beginning of June 2009 and resistance break at the end
of July 2009.
long or Short?
Generally, the weekly (70-day) stochastic
defines the medium-term trend. A com-
bination of weekly and daily stochastics
can be used to identify long or short
trade opportunities. An oversold reading
on the weekly stochastic in an uptrend can signal a potential
correction or trend reversal, and an overbought reading on the
weekly stochastic in a downtrend can also signal a possible
trend reversal.
The slow version of the stochastic (three-day smoothing)
was used here. The settings you use on the W&D stochastic
will depend on your personal preferences, trading style, and
timeframe. As with all technical indicators, it is important to
use the W&D stochastic together with other technical analysis
tools such as support/resistance and moving averages.
This pattern seeks to capitalize
on institutional buying by entering
when price action has broken
above a cup resistance level.
Ken Calhoun is a producer of trading courses, a live trading
room, and video-based training systems for active traders. He
is the founder of TradeMastery.com, an educational resource
site for active traders, and is a UCLA alumnus.
The settings you use on the w&d
stochastic will depend on your
personal preferences, trading
style, and timeframe.
Vitali Apirine is a programmer engineer with an interest in
technical analysis, especially the application of the relative
strength index (RSI) to trading. He may be reached at vita-
pirine@mediacombb.net.
The code given in this article is available in the Article Code section
of our website, Traders.com.
See our Traders’ Tips section beginning on page 48 for commentary
and implementation of Vitali Apirineís technique in various technical
analysis programs. Accompanying program code can be found in the
Traders’ Tips area at Traders.com.
Further reading
Apirine, Vitali [2017]. “Moving Average Stochastic,” Technical
Analysis of StockS & commoditieS, Volume 35: May.
Hartle, Thom [1991]. “Stochastics,” Technical Analysis of
StockS & commoditieS, Volume 9: March.
Lane, George C. [1984]. “Lane’s Stochastics,” Technical Analysis
of StockS & commoditieS, Volume 2: No. 3.
‡MetaStock
†See Traders’ Glossary for definition
September 2018 • Technical Analysis of Stocks & Commodities • 27
 Left Or Right?
Double Bottoms Revisited
Chart patterns are often thought of as subjective, but there
are ways to look at them objectively. Here, we evaluate the
double-bottom pattern to see how reliable it is.
A
by Pawel Kosinski
ll traders know at least a little about chart patterns:
double bottoms, double tops, flags, pennants, and
so on. Chart patterns have been explored and
documented in various books on the financial
markets and trading, including the excellent
books by Thomas Bulkowski, which have been
mainstays in the field.
The importance of backtesting
To assess the performance of different chart patterns, you need
to backtest them to determine their reliability. Nevertheless,
writing a computer program that recognizes chart patterns is
challenging—chart patterns are generally meant for discretion-
28 • September 2018 • Technical Analysis of Stocks & Commodities
ary trading and not for automated trading. However, I have
made an effort to do this and created some computer code
using the NinjaTrader platform. In this article, I will go over
the backtesting results I obtained for one of the most common
charting patterns, the double bottom (see Figure 1).
Other traders have made similar attempts. Bulkowski (a
Contributing Writer to this magazine) has written several
important books that dive into the topic of chart patterns.
Of course, each of us will use different algorithms to spell
out chart patterns, so many patterns won’t be detected by my
program and some patterns will probably be poorly defined,
which is why it is best to consider different types of statistical
results. Because of this, it’s interesting to run the tests over
different time periods and scenarios and compare the results.
SASIN PARAKSA/SHUTTERSTOCK
That’s my objective for this article.
In my code, I assumed some constraints: The double bot-
tom should not be longer than 90 trading days; the maximum
price should be located at least five days ago from the breakout
price; and the vertical distance between bottoms cannot exceed
 CHART PATTERNS

10% of the pattern’s entire size. Another TP = 2

trader would, of course, use other assump-
tions, and I hope this won’t influence the H
backtesting results much.
Entry on open TP = 1
When do you exit a trade? Breakout day
H TP = 0.5
For the exit, you can set a stop-loss a few
cents below the lowest of the bottoms, Breakout price
and you can set a take-profit level cor-
responding to the measure rule—that is, H SL = 0.5
the breakout price of the double bottom
pattern plus the height of the pattern (TP SL = 1
= 1 in Figure 1). Either the stop-loss or Possible distance
the take-profit will take you out of the FIGURE 1: Double bottom chart pattern. Here you see the different stop-loss (SL) and take-profit
trade. (TP) levels.

What stocks should you trade? Thus, you should choose the one you prefer. Alternatively,
I’ll consider stocks in the S&P 500 and Russell 3000 and you can try to combine them and calculate the so-called
see how they performed from January 1, 2000 till June 30, Kelly criterion (K):
2017 (exits are allowed until the end of 2017). I will only
trade when the general market (defined by S&P 500 index) is K = P - (1 - P)/R
bullish. Some stocks weren’t traded during the entire period,
so the results here aren’t perfect. Nevertheless, it shouldn’t where P is the percent of profitable trades and R is the aver-
influence the final conclusions by much. I excluded stocks age win/loss ratio.
with breakout day volume of less than 100,000 and priced In this article, I won’t discuss the Kelly criterion. I will just
less than $5 or more than $500. state that the higher the value of this criterion, the better.
I assumed a signal is given when the daily price closes above
the breakout line. You enter the stock on open the next day. Backtesting results (general strategy)
The amount of money that was invested is $10,000. Commis- First I will look at the general backtesting results, that is, I
sions and other costs are not taken into account. will follow the rules defined earlier. This will constitute a
benchmark I can use to compare with other scenarios. The
Which statistical parameters should you consider? results are displayed in the table in Figure 2.
The first one is the profit factor, which is the gross profit di- Your initial reaction may be that the total net profit is higher
vided by gross loss. The higher the factor’s value, the better the for Russell 3000 stocks. If you dig deeper, you’ll see this is
strategy. The second parameter is the maximum drawdown, because of more trades in the Russell 3000 stocks. The other
or the largest decrease (in percentage terms) that your trading parameters show that backtesting results of S&P 500 stocks
account would observe during the testing period. Normally, are “better” in that they show higher profit factor, percent
larger drawdowns occur for riskier profitable, average trade, aver-
strategies. This parameter is im- S&P 500 Russell 3000 age win/loss ratio, and the Kelly
portant for real-life applications. Total net profit $127,212 $219,087 criterion. At the same time, the
No trader likes to lose a few times maximum drawdown is lower for
Profit factor 1.52 1.27
in a row, so this parameter shows S&P 500 stocks. Note the average
you how much you could “suffer” time in the market is almost the
Max drawdown -7.98% -9.15%

on the way. Number of trades 875 2278 same in both cases and therefore
Perhaps the most popular Percent profitable 65.71% 62.16% the results are comparable.
parameter is the percent of prof- Average trade 1.57% 1.17%
itable trades, which is of high Average win/loss 0.80 0.79 The bottoms:
importance for many traders Average time in market (days) 32.63 32.3 left or right
and for their comfort level. This Kelly ratio 22.8% 14.3% The ideal double bottom pattern is
parameter will compete with the FIGURE 2: BACKTESTING RESULTS FOR THE GENERAL STRATEGY. when the two bottoms are located
next one, which is the average Here you see stocks from the S&P 500 and Russell 3000. The trading at the same level. This doesn’t of-
win/loss ratio. Usually, trades period is January 1, 2000–June 30, 2017 (exits are allowed afterwards). ten occur and makes you wonder
that statistically lead to a high Total net profit is higher for Russell 3000 stocks, but the number of if it is better to trade patterns in
percentage of profitable trades trades is higher. The S&P 500 stocks show higher profit factor, percent
profitable, average trade, average win/loss ratio, and Kelly criterion.
which the left bottom is above the
will unfortunately lead to a low Maximum drawdown is lower for S&P 500 stocks. The average time in right one (like the one shown in
win/loss ratio and the converse. the market is almost the same in both cases. Figure 1) or vice versa.
September 2018 • Technical Analysis of Stocks & Commodities • 29
 S&P 500 Russell 3000 S&P 500 Russell 3000 S&P 500 Russell 3000 S&P 500 Russell 3000
Left > right Left < right Left vol. > right vol. Left vol. < right vol.
Total net profit $74551 $118541 $54493 $101379 $82708 $117603 $47260 $107427
Profit factor 1.69 1.32 1.39 1.23 1.46 1.20 1.73 1.47
Max drawdown -5.23% -6.10% -6.06% -6.85% -6.95% -8.08% -3.75% -4.82%
Number of trades 419 1084 466 1213 609 1554 274 742
Percent profitable 68.02% 63.28% 63.73% 61.17% 65.35% 61.58% 67.15% 63.75%
Average trade 1.78% 1.15% 1.22% 1.00% 1.68% 1.00% 1.71% 1.52%
Average win/loss 0.81 0.78 0.80 0.79 0.78 0.75 0.86 0.84
Average time in market (days) 32.26 31.61 32.81 32.85 33 31.39 31.84 34.18
Kelly ratio 28.5% 16.2% 18.4% 12% 20.9% 10.4% 29% 20.6%
Figure 3: four scenarios. Here, the levels at which the bottoms occur relative to each other are considered, as well as the trading volumes associated with each
bottom in the double-bottom pattern. When the left bottom is above the right one, the pattern outperforms. If the right bottom is associated with a higher volume than
the left one, performance is better.

It can also be interesting to analyze volume: Does higher
volume at the left bottom result in superior performance, or is
it better to focus on the right bottom? The results are shown
in the table in Figure 3, where I consider four scenarios:
1. the left bottom above the right one
2. the right bottom above the left one
3. higher volume at the left bottom
4. higher volume at the right bottom
My first observation is that when the left bottom is above
the right one, it outperforms. It doesn’t mean a trader should
neglect the opposite case, as the results are still decent, but it
is still interesting to note.
When it comes to volume, if the right bottom is associated
with the higher volume, performance is better. You will find
a similar observation in trading literature so this shouldn’t
be surprising.
Move the exits
As mentioned earlier, I use certain rules for
exits. These exit methods are common and
used by many traders. But it can be interest-
ing to change these parameters. In the table
in Figure 4, some results are shown for a few modifications,
as follows:
First, I moved the take-profit level higher. Initially, I had
designated the elevation as being equal to the breakout price
plus the size of the pattern (TP = 1). I moved it to a level that
is equal to the breakout price plus twice the size of the pat-
tern (called TP = 2). According to backtesting results, this
will lead to a lower percentage of profitable trades, since it is
now more difficult to reach the “top” (when compared with
the benchmark in Figure 2). On the other hand, the win/loss
ratio is superior, since a trader “follows the trend.” The maxi-
mum drawdown is worse, which is typical for such breakout
strategies. Finally, the average time in market is also longer,
as it should be. The Kelly criterion is slightly better than for
the benchmark, which is positive for this strategy.
You can try to be less “patient” and move the take-profit
level down to TP = 0.5, which is half of the initial one. Doing
this will increase the percentage of profitable trades. This will
influence some of the other variables. Note the win/loss ratio
has decreased and the Kelly criterion is low. On the other hand,
the maximum drawdown is lower, which suggests it could be
a strategy appropriate for traders who don’t want to take high
risks. The average time in the market is also lower since the
trades are exited early.

S&P 500 Russell 3000 S&P 500 Russell 3000 S&P 500 Russell 3000 S&P 500 Russell 3000
TP = 2 TP = 0.5 SL = 0.5 TP=2.0, SL=0.5
Total net profit $286115 $543951 $45032 $82497 $70809 $107580 $144151 $290478
Profit factor 1.85 1.49 1.29 1.17 1.36 1.17 1.57 1.37
Max drawdown -10.4% -11.85% -5.21% -5.88% -6.20% -6.98% -7.92% -8.74%
Number of trades 870 2254 886 2299 883 2296 882 2289
Percent profitable 52.41% 47.74% 76.75% 74.38% 48.47% 45.60% 34.58% 31.8%
Average trade 3.74% 3.01% 0.54% 0.42% 0.95 0.63% 1.86% 1.63%
Average win/loss 1.69 1.65 0.40 0.41 1.45 1.41 2.92 2.93
Average time in market (days) 68.79 69.91 13.66 14.09 17.58 17.24 38.17 36.64
Kelly ratio 24.3% 16.1% 18.6% 11.9% 12.9% 7% 12.2% 8.5%
Figure 4: moving the exit levels. Here you see the influence of exit locations (the take-profit and stop-loss levels).

30 • September 2018 • Technical Analysis of Stocks & Commodities

 Till now, I have con- S&P 500 Russell 3000 S&P 500 Russell 3000 S&P 500 Russell 3000
sidered scenarios in Size: 0% – 10% Size: 10% – 20% Size: > 20%
which the stop-loss
Total net profit $102470 $149869 $60315 $115975 $2366 $26059
was located just be-
low the pattern (let us
Profit factor 1.50 1.23 1.39 1.22 1.66 1.14

call this case SL = 1). Max drawdown -7.14% -8.18% -9.25% -10.41% -10.62% -13.12%
What would happen if Number of trades 803 2022 412 1214 87 314
I moved the stop-loss Percent profitable 65.88% 62.07% 62.14% 60.54% 66.67% 59.87%
to the middle of the Average trade 1.33% 0.87% 1.71% 1.29% 2.99% 1.73%
pattern (SL = 0.5)? Average win/loss 0.78 0.76 0.88 0.82 0.85 0.80
In this case, you can Average time in market (days) 30.64 37.30 41.65 39.30 33.21 41.05
keep the take-profit at
Kelly ratio 22.1% 12.2% 19.1% 12.4% 27% 9.7%
the initial level (TP =
FIGURE 5: PATTERN SIZE. Here you see the influence of the double bottom size as a percentage of the stock price.
1). This is also illus-
trated in Figure 1. As
expected, this strategy decreases the number of profitable From the results, you can conclude that if you were consider-
trades and increases the win/loss ratio. Note that the Kelly ing only the Kelly criterion, the largest pattern results in the
criterion becomes very low, which means this strategy can’t best performance. On the other hand, the lowest performance
be recommended. is for the middle-sized patterns, so there is no clear trend.
What if you try to combine TP = 2 with SL = 0.5, that is, The situation is complicated since the number of trades for
take the profit level higher and leave the trade as soon as the largest pattern is low, so the backtesting results may be
price goes below the breakout line—that is, cut losses early less reliable given the low number of trades. My conclusion
and follow the trend? The results are not great—the number concerning pattern size is simple: When it comes to trading
of profitable trades is relatively low even though the win/ double bottoms, you cannot say that size plays a role. You can
loss ratio looks promising. Nevertheless, the Kelly criterion consider any double bottom patterns you come across. But
is low. On the other hand, the maximum drawdown is better this is a topic that involves more detailed research.
than for the scenario where TP = 2 and the SL = 1 (the first
two columns in the table in Figure 3) so the strategy may not Which scenario fares better?
be so bad. According to my backtesting results, all
scenarios are profitable but some have better
Pattern size performance results than others. You could
Let’s have a look at another possibility: Is it better to focus on research these various scenarios further. For
a large double bottom pattern or a small one? I will consider example, you could consider height differ-
three cases: ences between bottoms. It’s food for thought
1. the size of the pattern is between 0 and 10% of the for another article.
stock price
Pawel Kosinski, PhD, MEng, is a professor in process technol-
2. between 10% and 20% of the stock price ogy at University of Bergen in Norway. His research interests
3. above 30% of the stock price involve mathematical modeling of various physical phenom-
ena, and he uses this experience for researching the financial
The results are shown in the table in Figure 5. The first thing markets. He may be reached at pawel.kosinski@uib.no.
to notice is that most of the double bottoms are small (see
number of trades), which is perhaps not surprising consid- Further reading
ering the algorithm looks back at the past 90 days. Larger Bulkowski, Thomas N. [2005]. Encyclopedia Of Chart Pat-
patterns are also associated with a longer time in the market terns, Wiley Trading.
after entry. This is to be expected since the exits depend on [2012]. Visual Guide To Chart Patterns, Wiley.
the pattern size. [2014]. Getting Started In Chart Patterns, Wiley.
[2016]. Chart Patterns: After The Buy, Wiley.

When it comes to trading double

bottoms, you cannot say that
size plays a role.

September 2018 • Technical Analysis of Stocks & Commodities • 31

 INTERVIEW

The Rise Of Automation

Travel The Trading World

With Tomas Nesnidal
Travel, eat, meditate, make money, and enjoy life. That’s how Tomas Nesnidal
describes his life. And it’s a life many traders would covet. Nesnidal has been
a full-time trader for over 11 years, specializing in automated algorithmic
trading strategies. Although he has developed strategies for different trading
styles, his affinity is for breakout trading systems and market internals. His
personal blog at www.SystemsOnTheRoad.com contains some practical posts
with tips, videos, and a free breakout strategy.
Stocks & Commodities Editor Jayanthi Gopalakrishnan communicated
with Tomas Nesnidal via email in July 2018 to find out more about his breakout
trading strategies.

Tom as, could you tell
us about what got you
interested in trading?
I am a European-based
trader who trades the US
markets. I was born in the Czech Repub-
lic but have been living and trading from
the very south of Spain for about seven
years now. My original professional
background is in the movie industry (I
graduated from a film school), but I found
that my true passion is for the markets.
I decided to trade to fulfill my two big
dreams—to live on a sunny beach and to
travel a lot. Thanks to trading, I achieved
both: I am living in a beautiful location,
right on the beach, and I have traveled
to 65 countries. In fact, your wonderful
magazine published my article “Around
The World In Trading Days” in your June
2016 issue, which tells more about that. A
lot of people who read that article didn’t
believe it was true—that I really travel
so much while fully automated trading
makes money for me.
But it is true; I have been living exactly
like that for many years. It is absolutely
doable and absolutely achievable.
Since the time you published that 2016
That’s good to hear. I know you’ve
traded different strategies, but
you’re known for breakout trading
strategies. What is it about breakout
trading strategies that appeals to
you?
Yes, breakout trading strategies are
my area of specialization. I have been
trading these strategies for about eight
Once you are “all in,”
years now, full-time. And what I like it becomes much more
about them is they are very universal. than just a quest to
They work on any market, timeframe, make money. It literally
both in daytrading and swing trading.
I have developed a universal breakout
pushes your personality to
strategies model, which is very robust. constantly grow.
With this model, it is pretty simple to
build powerful, highly robust breakout
trading strategies almost on any mar- to learn not only about a lot of techni-
ket in the world. In our hedge fund, we cal and conceptual aspects but also the
have 913 breakout trading strategies we psychological aspects of trading. At the
built with this model, and after two years beginning, most traders think they are
of tracking them, 93% of the strategies already Zen masters—until their first
that passed the hardest robustness level drawdown. When that first drawdown
keep making money. That’s what I truly strikes, they are freaked out. They
love about breakout trading strategies— become very emotional, start making
they simply work and I think of them as mistakes, and stop being disciplined.
a timeless trading approach. Fear and greed simply take over the
rational mind—and their trading dreams
You mentor several traders. One of are buried fast.
Rost9/artistdesign29/SHUTTERSTOCK

article about how I trade while travel- the aspects you often discuss is there’s So, to be a successful trader, you
ing around the world, I have had one more to trading than the desire to make need to “conquer” these two trading
significant trading-related news event in money. There’s a deeper purpose—one emotions—fear and greed. But that can
my trading life: Last year, in November, of self-discovery. Could you talk more only be achieved through honest and
I launched my own private hedge fund, about that? deep self-discovery. Thanks to trading
which, so far—knock on wood—has been Trading is a very demanding business. and thanks to the constant need to chal-
performing well. To succeed in the long term, you need lenge the emotions of fear and greed, I
32 • September 2018 • Technical Analysis of Stocks & Commodities

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Trading is a very demanding
business. To succeed in
the long term, you need to
learn not only about a lot of
technical and conceptual
aspects but also the
psychological aspects of
trading.
learned a lot about myself: I learned to
meditate regularly; I became calmer,
more centered, more self-confident but
also happier and able to enjoy life much
more. All thanks to this amazing trading
journey. Once you are “all in,” it becomes
much more than just a quest for the idea
of making money. It literally pushes your
personality to constantly grow.
What do you trade—equities, indexes,
futures? Do you have any favorites?
I trade only the futures markets. I found
the futures contracts to be the easiest to
achieve truly low correlations between
different trading strategies. In general,
stocks are highly correlated, and so are
indexes, but if you trade futures and
focus on very different markets—like,
for example, soybeans versus the emini
S&P 500—you can achieve some truly
low correlations and therefore amazing
and very powerful diversification, which
then leads to a smoother equity curve and
more stable distribution of profits.
That’s all true. Why do you think retail
traders are hesitant to trade futures?
I think the first reason is that the fu-
tures markets are not as hyped as forex
and aren’t as heavily traded as stocks.
So many traders think that futures are
something inferior or riskier. But in real-
ity, I personally found the futures markets
to be the most interesting markets with
the highest potential, and also the easiest
markets to achieve the diversification I
am looking for.
The second reason could be that
there is a learning curve in the futures
markets. That means traders will have to
understand things like margins, contract
34 • September 2018 • Technical Analysis of Stocks & Commodities
margins, contract delivery
months, rolling, different
contract specs, and so on.
But once traders understand
these different nuances, they
may find that the benefits of
futures markets compen-
sate for that extra required
learning.
From the perspective of a
beginner trader who wants
to develop a trading system,
what’s a good starting
point? In other words, what initiates the
development of a trading system?
There is no one definite way, but from
my experience, the best starting point is
a combination of experimentation and
creativity. A beginner trader must not be
afraid of “not knowing it all.” They need
to think of the idea of creating a trading
system as an advantage. They should be
open—deliberately and willingly—to
the learning process through testing and
trying crazy ideas and combinations of
different approaches, trading conditions,
risk-management techniques, trading
indicators, and so on.
I believe that creativity and experience
are the best teachers for creating trading
systems, as well as many other things.
It’s okay to start with the very little you
know, but you should experiment with
it as much as possible. Try many differ-
ent variations and combinations of what
you already know, even if it’s not much;
try it in a creative way, assemble your
first strategy candidates out of what you
already know, and then backtest using
historical data to see what the results
show.
Once you’ve mastered that starting
point, what would be the next steps in
the process?
Creativity and experience give you a
great base for learning how to start build-
ing many trading strategy candidates
out of nothing. That is a great start, and
with a bit of creativity, you will quickly
learn how to put together different trad-
ing concepts and ideas that show some
promise in backtests. But really, this is
the very beginning. About 99% of those
ideas will just be overoptimized junk
and won’t lead you to a viable trading
strategy. So the next step is to learn as
much as you can about robustness-testing
procedures and figure out how to distin-
guish bad strategy candidates from the
potentially good ones.
And once you’ve graduated from
beginner to intermediate, what should
you focus on?
Once you’ve progressed to intermedi-
ate, you should focus on your portfolio.
That’s when you truly start making a
living from trading consistently. Once
you have a good portfolio consisting of
low-correlated, robust trading strategies,
you can start seeing some really nice,
smooth equity lines—even in your live
trading. The distribution of your profits
will become much more stable with
well-designed portfolios, and you can
start making a living from that. In fact,
you don’t even need much at the very
beginning—even a good portfolio of
three to five great trading strategies can
be enough to start making a living from
trading full-time.
Do you have different trading systems
for different market scenarios or
different tradables?
I don’t have different trading systems
specifically, but in our hedge fund, we
change our risk based on different trad-
ing scenarios. For example, if the current
trading scenario is highly favorable, we
can risk as much as 1.5−2% per trade.
If the market scenario is not persuasive,
we allocate only 0.5% on such a trade, or
even less. If the market scenario seems
to be highly unfavorable, we can skip the
trade completely. We designed a special
algorithm for this dynamic risk approach,
so it is all fully automated.
In spite of having a system, system
traders still could fail. What are the
main reasons, in your opinion, for
these failures?
I have spent years trying to figure
out the main reasons why both trading
systems and the traders who trade those
systems fail. When it comes to trading
systems, the biggest reason for the failure,
from my observation and experience, is
the lack of a truly comprehensive, tough
robustness-testing procedure. Today, the
commonly available and commonly fol-
lowed robustness testing and validation
methods either don’t work anymore or
are far from being sufficient.
It is becoming more and more difficult
to beat the markets. The competition is
growing fast, as systematic trading is
more accessible than ever, fast comput-
ers are getting cheaper every day, big
banks now own supercomputers on the
level of those at NASA, and artificial
intelligence is showing more and more
incredible capabilities.
So every day, there is a tough war
of trading algorithms going on in the
markets, and only the strongest, most
robust and fittest algorithms can survive.
So the demand for tougher robustness-
testing procedures is higher than ever.
It’s not enough to just have a “winning”
strategy right now. You need to have a
“super-robust and highly adaptive win-
ning” strategy.
Because 99% of trading strategies fail,
you need to really be able to recognize
the successful 1%, and that can only be
achieved through exceptional robustness-
testing and validation procedures (that’s
also where I spend 80% of my time as
a trader—making my robustness-testing
procedures better every day).
When it comes to the reason why
traders fail, I would say that mostly has
to do with undercapitalization, lack of
experience, and underestimation of the
psychological impact of drawdowns.
Most beginning traders think they can
handle big drawdowns but in reality,
they become highly emotional even with
small losses. Trading, especially in the
beginning stages, requires quite a lot of
humility and self-honesty.
Getting back to breakout
trading strategies: On your site,
SystemsOnTheRoad.com, you share
Come visit one of the most popular trading
chat rooms for Breakout Trading.
Breakout Trading
Momentum Stocks
Swing Trading
Home of Dan Zanger, world record holder for
parlaying $10,775 into $18 million in 18 months!
Home of The Zanger reporT.
the results of a survey you conducted
among your students that revealed the
biggest challenge in trading breakout
strategies is false breakouts. What are
some ways for traders to overcome these
challenges?
Yes, this was a very extensive survey
among hundreds of traders from all
around the world. We did this together
with www.BetterTraderAcademy.com
and www.BetterSystemTrader.com. And
we were blown away when we saw that
coming across false breakouts is the
number-one problem for most breakout
traders!
Now, the first thing to understand
about false breakouts is that you can’t
just filter them out. This is what a lot of
traders try to do, but it only leads to more
overoptimization and overfitting.
September 2018
Bull Flags
Pivot Points
Key Reversals
The solution to reducing false break-
outs is not about blindly trying to filter
them out; it is all about the right timing
and a deep understanding of it. And when
you truly deconstruct timing, you realize
there are many levels to it: there is what I
call general timing, system-level timing,
volatility timing, and market timing. It is
important to understand these four types
of timing, since each has a pretty strong
impact on the breakout trading results.
And then you should start thinking about
where you can improve, just by a little bit,
each of these four timing levels. Then you
may be able to achieve some significant
reduction of false breakouts.
Reducing false breakouts is a pretty
comprehensive topic, so I have written a
small, completely free ebook about that
titled How To Fix False Breakouts Fast—
Quick Guide, which can be downloaded
from https://www.SmashingFalseBreak-
outs.com/.
So should the effort be on having a
robust trading system at all times?
If you truly want to become a long-term
Continued on page 37
• Technical Analysis of Stocks & Commodities • 35
 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.

HEDGING WITH FUTURES & OPTIONS
What are the best ways producers and
end users of commodities can use the
futures and options markets to hedge
their price risk?
Few speculators realize the futures
markets were originally created as a
means of providing a venue for com-
modity producers and end users to
hedge their price risk. Anyone who has
followed renewable commodity markets
such as corn, soybeans and livestock un-
derstands the feast-or-famine prospects
faced by farmers and ranchers. However,
producers can stabilize their businesses
by implementing price hedges; doing so
essentially locks in a price for the product
they plan to sell later in the year. As a
result, farmers and ranchers can create
accurate budgets and avoid disaster
should the price of the grain planted in
the spring collapse by the time fall har-
vest rolls around. In my opinion, failure
to hedge future cash market commodity
transactions is essentially speculating
on favorable prices, which can quickly
turn a legitimate business venture into
a casino.
Traditional hedges generally include
the sale of a futures contract to offset
holdings in the cash market. For in-
stance, a farmer expecting a crop yield
of 30,000 bushels in the fall might sell
six futures contracts (each consisting of
5,000 bushels of corn) near $4.00 to lock
in that price later in the year. To hedge
this way eliminates the downside risk,
because if the price of corn declines,
losses in the cash market are offset by
gains in the futures market. Similarly,
if the price of corn moves higher, losses
in the futures market offset gains in the
cash market. In the end, price is stable
36 • September 2018 • Technical Analysis of Stocks & Commodities
and price risk is eliminated but so is
the benefit of favorable price changes.
Understandably, this can be frustrating
to a farmer.
There are options
Another common hedging tool is the
purchase of a put option. This method
provides a pricing floor and also offers
completely open-ended profit potential.
However, it can be an expensive way
to manage price risk. Buying puts is
synonymous with buying price insur-
ance; as insurance consumers, we all
A great way to
achieve the benefits
of managed price risk
while still allowing for
some favorable price
changes is the risk
reversal, sometimes
referred to as a
market collar.
know that policies are expensive and
payouts are few. Nevertheless, it prevents
a complete meltdown in commodity
valuations from taking a farming opera-
tion down the drain with prices. As an
example, a farmer might consider buying
a December corn $3.50 put for a price
of $0.10. This put expires in 140 days
and the price of corn is currently $0.20
higher, near $3.70. Thus, this insurance
policy will only provide a benefit to the
purchaser if the price of corn is below
$3.40—$0.30 lower! This is because the
insurance kicks in at $3.50 but the $0.10
purchase price brings the breakeven
point to $3.40. As you can imagine,
purchasing such insurance each year
can be a drain on business cash flow and
return a rare benefit to the option holder.
That said, it guarantees the farmer gets
paid at least $3.50 (equivalent to $3.40
after considering the option purchase
price) regardless of how low the price
of corn falls.
In my view, hedging price risk
shouldn’t be an all-or-nothing venture.
Further, I believe it should be less of a
science and more of an art. Blindly ex-
ecuting an absolute hedge using futures
or a costly hedge using long put options
without consideration of price, seasonal
patterns, volatility, and other factors
might do more harm than good over the
long haul. On the flip side, a well-timed
incremental hedge (one in which the
hedger executes several partial hedges
at various price and time intervals, and
offsets the hedge in the same incremental
manner) has the potential to provide
producers with the benefits of price risk
management while leaving the possibil-
ity of favorable price changes.
Market collars
A great way to achieve the benefits of
managed adverse price risk while still al-
lowing for some favorable price changes
is the risk reversal, sometimes referred
to as a market collar. A risk reversal
consists of the purchase of a put option
and the sale of a call option. Often, the
result is the purchase of a free insurance
policy! This is because the premium col-
lected on the sale of the short call option
can be used to finance the purchase of
the long put option.
 FUTURES FOR YOU
Using the same corn put as an example,
a trader who has purchased the $3.50 put
EHLERS MESA
for $0.10 might sell the $4.00 call for
about $0.10; this creates a scenario in
which the hedger is using the market’s
WORKSHOP
money to pay for an insurance policy
against corn prices declining beyond
$3.50.
And yet, “free” in terms of cash flow
doesn’t mean there are no consequences.
The opportunity cost of using a risk-
reversal strategy for price-hedging
October 12–14
purposes is the lack of upside profit
potential. In this example, the farmer
would benefit if the price of corn moved
from $3.70 to $4.00, but beyond $4.00, An intimate and no-holds-barred
losses on the short call option would
offset gains in the cash market; thus, the
learning experience
farmer wouldn’t benefit in an increase
in price above $4.00.
Because of the opportunity cost of
giving up the benefit of favorable price
movement, I believe the best hedges are
done on a partial basis and should be www.MESASoftware.com
executed while prices are high. They
should be partially offset on large dips in
prices. For example, a farmer expecting time it is appropriate to have a full price tion when it comes to timing entry and
to yield 30,000 bushels of corn might hedge on is if prices are at extreme highs. exit and some creativity regarding the
consider hedging 15,000 bushels (three Similarly, as prices decline to extreme hedging method employed.
contracts) on an upswing in prices, then lows, any hedging profits should be offset
another 5,000 bushels should the price incrementally. In short, the practice of
continue to increase, and so on. The only hedging should involve a little specula-

INTERVIEW
Continued from page 35
successful trader, put most of your time
into improving your robustness-testing
procedures first. It isn’t about finding
the “perfect strategy”; it is about finding
the “perfect evaluation and validation
process that can identify dangerous
strategies (usually 99% of them) so
only the truly viable ones are left.” And
once you have this, you can focus on
portfolio building, which is the easiest
way to smooth out your equity curve and
maximize the stability of the distribution
of your profits. If automated breakout
trading is what appeals to you, you can
listen to my podcast episodes at https://
www.BetterTraderAcad-
emy.com, where I share a
lot of my experiences and It isn’t about finding the
know-how from my break-
out trading journey, as well ‘perfect’ strategy; it’s
in my personal blog posts at about finding the most
www.SystemsOnTheRoad. robust ones.
com. It is my hope that visi-
tors will find a few trading
gems at my site.
Thank you for sharing your thoughts • www.SystemsOnTheRoad.com
with us, Tomas. • www.BetterTraderAcademy.com
• www.BetterSystemTrader.com
FURTHER READING
Nesnidal, Tomas. [2016]. “Around The
World In Trading Days,” Technical
Analysis of StockS & commoditieS,
Volume 34: June.
September 2018 • Technical Analysis of Stocks & Commodities • 37
 Small-Cap Growth ETFs
In The Spotlight
Are you interested in learning more about using exchange
traded funds (ETFs) in your trading? Leslie N. Masonson,
an active ETF trader, is president of Cash Management
Resources, a financial consulting firm that focuses on ETF
strategies. He is the authorof Buy—Don’t Hold: Investing With
ETFs Using Relative Strength To Increase Returns With Less
Risk; and All About Market Timing, as well as Day Trading
On The Edge. His website is www.buydonthold.com, where
he writes a weekly blog. To submit topics for future columns,
reach him at lesmasonson@yahoo.com.
D
by Leslie N. Masonson
ecades of stock market research have found
that about 90% of investment returns are due
to asset allocation. And investing a percentage
of assets in small-cap stocks has been a reward-
ing strategy. According to Ibbotson SBBI, from
1926 through 2016, small-cap stocks have out-
performed large-cap stocks by 2.1 percentage
points a year—12.1% vs. 10.0%, and especially in a rising
interest rate environment.
In a more recent timeframe from 1999 through 2017,
small caps have outperformed large caps in 13 of these 19
years—1999 through 2004; 2006; 2008–2010; 2012–2013;
and 2016. The small-cap performance advantage continues
its historical record. Therefore, investors and traders should
consider adding small caps to their investment mix. In this
month’s column, I’ll provide an analysis of small-cap growth
ETFs as a reasonable option.
38 • September 2018 • Technical Analysis of Stocks & Commodities
Small-cap growth ETFs outperform
According to xtf.com, an independent ETF research website,
the small-cap/micro ETF category contains 134 ETFs, which
include those that specialize in industry and sector; equal-
weighting, capitalization-weighting, and custom-weighting;
passively managed vs. actively managed vs. strategically
managed; domestic and international ETFs; and leverage vs.
non-leveraged. Investors have a panoply of choices just in this
limited category.
These ETFs had an aggregate market cap of $240.43 billion
and an average expense ratio of 0.47%, with an average XTF
rating of 6.0 (10 is highest). Note that all the above data is as
of June 15, 2018. It is interesting to note that in comparison to
the number of small/micro-cap ETFs mentioned earlier, there
were 258 large-cap ETFs and 49 mid-cap ETFs available. But
the broadest category of all was broad/multi-cap with 1,012
ETFs. Thus, the small-cap category represents only 9.2% of
all ETFs currently available.
Because of the large number of ETFs in the small-cap
category, I only focused on one slice of the pie—small-cap
growth ETFs. This segment of the space had the best perfor-
mance over the past one-, three-, and five-year periods. Using
xtf.com, I researched six small-cap growth ETFs that use the
S&P SmallCap 600 (SML) as their common benchmark, and
then compared their key characteristics. In Figure 1 you see
KENTOH/SHUTTERSTOCK
the names and tickers of these six ETFs. Although small-cap
growth ETFs based on the Russell 2000 Growth Index exist,
I didn’t include them in this analysis, since that index contains
a much wider universe. Moreover, it is simpler to compare
apples to apples, that is, ETFs based on the same benchmark.
 WHY TRADE ETFS?

Figure 2 shows comparative data on ETF Ticker overall rating, structural integrity,
the ETFs I reviewed. Vanguard Small Cap Growth ETF VBK
and investment ranking. These are
There were differences in these all explained on their website. VBK’s
iShares S&P SmallCap Growth ETF IJT
ETFs such as their assets under man- ratings for each of these categories
agement (AUM), portfolio composi- S&P 600 Small Cap Growth ETF SLYG
are 9.8 (out of 10), 95%, and 79%,
tion, performance, yield, and trading Vanguard Small Cap Growth ETF VIOG respectively. VBK had the top rank-
volume. I will point these out when I First Trust Small Cap Growth AlphaDex Fund FYC ing of the six ETFs reviewed in the
review each ETF. Nevertheless, there iShares Morningstar Small-Cap Growth ETF JKK first two categories, and the next to
were some common elements in most FIGURE 1: SMALL-CAP GROWTH ETFs. Here you see the lowest for investment ranking, one
of these ETFs: ETFs discussed in this article with their ticker symbols. year. This last poor score of 79% is
not surprising, as VBK had the lowest
• Cap weighting (except for FYC,
price performance of all the ETFs over one, three, and five
which is custom weighted)
years—23%, 36.7%, and 89%, respectively.
• Contain US securities only (except for FYC, which is
global) iShares S&P Small-Cap Growth ETF (IJT)
• They use the Small-Cap 600 Growth Index as their This ETF was the first in the category with an inception date
benchmark (none are Russell 2000 Growth) of July 24, 2000. It has garnered $6.2 billion in AUM, the
second largest with 334 securities in its portfolio, about 53%
• Made up of small caps and micro caps (except VBK
less than VBK. This is the only ETF of this group? to offer
and JKK, which had a much higher percentage of mid
both options and futures on it. Also, it has the second-highest
caps than micro caps)
XTF rating of 9.7, and a structural integrity score of 90%, the
• Listed on NYSE ARCA (except IJT and FYC, which second highest. Its investment metric was 83%, slightly below
are listed on the NASDAQ market). the mean for the group. It also scored the second-highest aver-
age daily trading volume of 127,000 shares.
Vanguard Small-Cap Growth ETF (VBK) Small-cap stocks make up 63% of the portfolio, while 32%
I’ll begin the ETF comparison by reviewing the leader of the are micro caps. As far as sector exposure, 20% of the stocks
pack, even though it was late to this category by 3.5 years are in healthcare, 19% in industrials, 17% in technology,
(January 30, 2004 inception date). The Vanguard brand name 14% in consumer cyclicals, and 14% in financials. This is
and lowest expense ratio of 0.07% of the group had a lot to a much broader sector exposure than VBK. Its one-, three-,
do with its huge $8.2 billion AUM. Its 0.76% SEC yield is and five-year performance numbers were 23.7%, 52.2%, and
the highest of the group. The average daily trading volume of 106.95%, respectively.
140,000 shares also leads the group. And its portfolio of 631
securities is the largest of all competitors. In addition, traders SPDR S&P 600 Small-Cap Growth ETF (SLYG)
can also purchase options on this ETF. Although this ETF came to market only two months later
This ETF is made up of 37% small caps and 56% mid than IJT, it has less than one-third the AUM at $1.97 billion
caps, which is with 337 securi-
rare for this cat- Category VBK IJT SLYG VIOG FYC JKK ties. This ETF
egory. The other has the highest
XTF Rating 9.8 9.7 9.6 9.6 5.6 6.7
five ETFs have a investment met-
Expense Ratio 0.07% 0.25% 0.15% 0.20% 0.70% 0.30%
large percentage ric of 96%, and
of micro caps, Market Cap $8.2B $6.2B $1.97B $421.4M $281.3M $189.8M a solid 9.6 XTF
with minimal mid Avg. Daily Volume 139,718 127,051 41,234 11,431 41,146 4,243 rating. Its struc-
caps. The largest SEC Yield 0.76% 0.63% 0.73% 0.68% -0.26% 0.26% tural integrity rat-
exposures are to Inception Date 01/30/2004 07/24/2000 09/29/2000 09/09/2010 04/19/2011 07/07/2004 ing of 81% is in
technology shares Avg. # of Components 631 334 337 336 262 251 the middle of the
(25%) and health- Investment Metric rank 79% 83% 96% 85% 86% 74% pack. The expense
care stocks (18%) ratio of 0.15% is
Perf. - 1 Year 22.92% 23.68% 23.89% 23.69% 28.16% 23.69%
with the following the second lowest
Perf. - 3 Years 36.68% 52.29% 52.52% 52.03% 56.63% 40.24%
industry expo- of the group and
sure: REITS (9%), Perf. - 5 Years 80.01% 106.95% 107.80% 106.65% 99.91% 90.27% its average daily
biotech (9%), and Structural Integrity rank 95% 90% 81% 86% 40% 57% trading volume of
software & pro- Investment Ranking 1 Year 79% 80% 94% 82% 85% 74% 41,234 is the third
gramming (8%). Investment Ranking 3 Years 42% 70% 94% 73% 74% 43% highest.
Xtf.com pro- Investment Ranking 5 Years 40% 69% 94% 72% 52% 42% The sector ex-
vides three pro- FIGURE 2: COMPARISON OF SMALL-CAP GROWTH ETFs. These ETFs have similar characteristics but the posure percent-
prietary ratings— early participants garnered the bulk of the assets. ages match IJT
September 2018 • Technical Analysis of Stocks & Commodities • 39

No one knows ahead of time
which capitalization-size ETF
will outperform over any time
period, but you can lean on
technical analysis indicators
to make a decision.
within a percentage point, as well as the small-cap and micro-
cap percentages. SLYG had the second-highest SEC yield at
0.73%. Its one-, three-, and five-year performance numbers
were 23.89%, 52.52%, and 107.8%, respectively. They mir-
rored those of IJT.
Vanguard Small Cap Growth ETF (VIOG)
It is surprising that VIOG came to market in September 2010
since Vanguard already had VBK in this space since 2004 with
a huge AUM. However, its three- and five-year performance of
52% and 107% did best that of VBR by 15 percentage points
and 27 percentage points, respectively.
It’s almost a carbon copy of IJT and SYLG, which I men-
tioned previously. There is nothing unique about it compared
to those two ETFs, and its average daily volume of 11,431
shares and AUM of $421.4 million is small in comparison. The
number of securities in the portfolio (336), sector exposure,
and percentage of small and micro caps are similar. As far
as industry exposure, 9% are banks, 6% medical equipment,
6% healthcare, and 6% semiconductors.
First Trust Small-Cap Growth AlphaDex Fund (FYC)
FYC is the newest entry to the Small-Cap 600 Growth space
with an inception date of April 19, 2011. Current AUM total
$281.3 million, which is not a bad showing. And it has the
best one- and three-year performance of 28.2% and 56.6%,
Stockcharts.com
FIGURE 3: COMPARISON CHART OF THREE VANGUARD ETFs. Note VBK’s (red line) outperformance periods compared to VUG and VOT. There is a sustained
period where small-cap outperforms for years.
40 • September 2018 • Technical Analysis of Stocks & Commodities
respectively. Over five years it has lagged at the fourth posi-
tion at 100%. It has the highest expense ratio at 0.70%, which
is due to its custom weighting, quarterly rebalancing, and
reconstituting.
This ETF is unique in that it incorporates price momentum
over three-, six-, and 12 months, as well as sales to price,
one-year sales growth, and four value factors in making its
securities selection. Based on its performance over the past
one and three years, that strategy has had better results than
its peers. Its SEC yield of -0.26% is the lowest of the group.
Its sector exposure is 28% healthcare, 17% technology, 16%
consumer cyclicals, and 15% for both industrials and financials.
It had about eight percentage points more healthcare exposure
than IJT, SLYG, and VIOG. Small-cap stocks represented 60%
of the portfolio and 37% were micro caps. Biotech accounted
for 12% of the portfolio dollars, bank stocks were 9%, and
Internet and mobile applications came in at 8%.
iShares Morningstar Small-Cap Growth ETF (JKK)
This ETF was born on July 7, 2004, about five months after
VBK hit the market. However, it has been able to accrue only
$190 million in AUM, much less than VBK’s $8.2 billion. Its
daily trading volume is miniscule at 4,243 shares. Its SEC
yield is the second lowest at 0.26%. Also, its overall price
performance is the second lowest of the category. Its sector
composition is 28% high technology, 24% healthcare, 17%
consumer cyclical, and 11% industrials. In a more precise
industry breakdown, biotech accounts for 10% of the portfolio,
9% is targeted to software and programming stocks, 8% to
medical equipment, and 7% to Internet and mobile applica-
tions. About 60% of the portfolio consists of small-cap stocks
and 34% to mid caps.
Select ETFs using trend
and relative strength analysis
As of the April 30, 2018 ETF.com’s ETF Report (June 2018),
US equity small-cap ETFs (in general) averaged a 12.09%
average annual five-year return, while the growth ETFs
averaged 13.57%, and the value ETFs
averaged 11.31%. Clearly, the growth
category excelled during the most recent
five-year period.
At certain times, small-cap ETFs out-
perform large-cap ETFs and vice versa.
For example, since the November 5, 2016
election season through June 12, 2018,
the Vanguard Small-Cap ETF (VBK)
gained 47.3% vs. 43.9% for the Vanguard
Growth (large) ETF (VUG). Figure 3 il-
lustrates the performance of three different
cap-weighted Vanguard ETFs including
Mid-Cap Growth (VOT) and VUG, since
August 24, 2006 (the earliest common
date). Clearly, VBK (red line) led the way
higher for five years from February 24,
2010 through September 8, 2015, then
VUG took over. But by May 6, 2018, they
both had advanced about 215% from the
August 24, 2006 starting date.
No one knows ahead of time which
capitalization-size ETF will outperform FIGURE 4: CANDLESTICK CHART OF VBK. Note the confluence of three moving averages around May 10,
over any time period, but you can lean where price breaks out to the upside, confirmed by the MACD positive crossover. VBK then moved from $165
on technical analysis indicators to make to $182 unabated.
a decision. You can determine the tim-
ing of when to invest in small-cap ETFs by various ways, rating, and investment ranking for one year, plus its custom
including the popular methods of trend analysis and relative weighting partially focused on relative strength performance.
strength analysis. You can measure the short-, medium-, and The negatives are its high annual expense ratio and average
long-term trends using the common 50-, 100-, and 200-day trading volume of less than 50,000 shares a day. However,
simple moving averages. The relative price strength can be there should be sufficient liquidity and a reasonable bid–ask
measured over a three- or six-month period. And you can spread. Short-term traders and conservative investors should
combine both these techniques to select the best-acting ETFs consider VBK and IJT, which are the two largest, both with
that are in solid uptrends depending on your selected param- trading volume of over 125,000 shares a day. Either SLYG or
eters. There are many free charting sites and ETF websites VIOG can be substituted for IJT for conservative investors
that provide free data, including stockcharts.com for technical since they are almost mirror images.
analysis and etfsreen.com for standard multi-timeframe ETF
relative strength analysis. Figure 4 shows a candlestick chart FurthEr rEading
of VBK with MACD and stochastics indicators, which is a Masonson, Leslie N. [2018]. “XTF.com,” Quick-Scan, Tech-
common type of display to view. You can see the last good nical Analysis of StockS & commoditieS, Volume 36:
buying opportunity in early May 2018. February.
If you plan on buying any of the ETFs mentioned in this . [2017]. “All-Inclusive ETF Websites,” Technical Analy-
column, be sure to obtain the latest information since the sis of StockS & commoditieS, Volume 35: September.
portfolio composition (for example, small cap vs. mid cap • vanguard.com • www.ishares.com • xtf.com • spdrs.com
vs. micro cap) can change over time, as can the sector and • www.ftportfolios.com
industry exposure. Use the providers’ websites and other
well-known ETF data providers such as xtf.com, etf.com,
etfdb.com, and others. And of course, consider the technical
position of each ETF before making a purchase using your
favorite indicators.

which EtF iS bESt

For your invEStmEnt StylE?
Based on an analysis of these six small-cap growth ETFs,
aggressive investors should consider FYC because of its one-
and three-year price performance, high investment metric
September 2018 • Technical Analysis of StockS & commoditieS • 41
 Explore Your Options
will help you to decide which put
Got a question about options? Jay Kaeppel has over three decades of experi- strike price to choose. The higher
ence in the options markets. He was a head trader for a CTA firm, an options the strike price for the put, the more
trading software developer, and is a portfolio manager for an investment downside risk you eliminate. How-
management firm. He also spent several years writing a weekly column titled ever, you also pay a higher premium
“Kaeppel’s Corner” and now publishes a blog, “Jay On The Markets” (http:// for the higher strike price put.
jayonthemarkets.com). He is the author of several books, including The Four
• Another question is, “How much
Biggest Mistakes In Option Trading; The Option Trader’s Guide To Probability,
upside potential are you willing to
Volatility, And Timing; and Seasonal Stock Market Trends. Send your ques-
give up?” If you want to offset most
tions or topic suggestions to Jay Kaeppel at jaykaeppel@gmail.com. Selected
or all of the cost of the put option,
questions will appear in a future issue of S&C.
then you will typically need to sell
a closer-to-the-money call option.
The closer the call option strike
price to the current stock price, the
HEDGING WITH COLLARS FOR YOUR One thing to remember before en- less the upside profit potential will
LONG POSITIONS tering a collar is that there is no “free be during the life of the collar. On
I am holding a stock with an upcoming lunch.” In the case of a collar, the good the other hand, selling a further out-
earnings announcement. I hear talk of news is you can put an absolute limit on of-the-money call will afford you
an earnings disappointment and the your downside risk. The bad news is you more upside profit potential during
potential for the stock price to fall. also cap your upside potential during the the life of the collar, but you will
But I don’t want to sell my stock and time that both options are held. have to pay more out of pocket to
incur a capital gain. I know I can buy When considering a collar there are buy the put option.
a put option to hedge but I don’t want several factors to take into account:
to spend the money to pay the premium. • One last thing to remember is that
Is there another alternative to hedging • How long do you want to hold the there are no universally “correct”
my stock position? hedge? If an earnings announcement answers to the questions above.
Absolutely. One strategy that is well is just days away you can probably get Each trader must asses their own
suited for this situation is referred to as by using shorter-term options. But in expectations in any given scenario
a collar. A collar involves holding shares a different scenario—say, you expect and make decisions based on their
of stock, selling a call option, and buying a stock that has had a good run to own priorities.
a put option. If you already hold shares consolidate for a while—it can make
of a given stock, you can enter a collar sense to use longer-term options. So Now let’s look at two ways to play the
by selling a call option on that stock make that assessment first. same situation. Let’s say a trader is long
and simultaneously buying a put option. • Another key question to answer 100 shares of Alibaba Group Holdings
Selling the call option allows you to take before taking action is, “How much (BABA) and that an earnings announce-
in premium, which can help offset the downside risk do you want to elimi- ment is 10 days away. Let’s also say
cost of buying the put option. nate?” Your answer to this question that Trader A is more concerned about
hedging downside risk and wants to
pay as little out of pocket as possible to
hedge his position. BABA is trading at
$188.38 a share. In this instance, Trader
A might choose to:

• Buy one 187.50 strike price put

(with 15 days left until expiration)
@ $4.45
• Sell one 190 strike price call (also
with 15 days left until expiration)
for $4.25
www.OptionsAnalysis.com

The net cost to enter this position is only

$20 (4.45 paid - 4.25 received × 100
shares). The trader’s profit/loss scenario
while he holds all three positions appears
Figure 1: BABA “tight” collar. The worst-case scenario for the net position is a loss of -$108. Once the in Figure 1.
collar is lifted or the options expire then Trader A goes back to simply holding 100 shares of ticker BABA. In this scenario, as long as the collar
42 • September 2018 • Technical Analysis of Stocks & Commodities
Explore Your Options
is held, the worst-case scenario for the
net position is a loss of -$108. In this
manner, Trader A achieves his or her
objective of minimizing downside risk
while also limiting the cost of buying
the hedge to just $20. Once the collar is
lifted or the options expire, then Trader
A goes back to simply holding 100 shares
of ticker BABA.
The tradeoff for Trader A is that as
long as the collar is held, the maximum
profit potential is $142. So if the earn-
ings announcement comes out favorable
and the stock soars, Trader A will have
forgone some of the upside profit poten-
tial he might have enjoyed if he had not
Figure 2: BABA “loose” collar. As long as the collar is held, the worst-case scenario for the net position
hedged using the collar. is a loss of -$507. As long as the collar is held, Trader B has a maximum upside potential of $1,493.
This illustrates why carefully con-
sidering your answers to the questions
above is so important.
Now, assume that at the same time,
Trader B is also interested in hedging
his 100-share position in BABA. Trader
B, on the other hand, is a bit more opti-
mistic and wishes to retain more upside
potential. To achieve this goal, Trader
B may:

• Buy one 187.50 strike price put

(with 15 days left until expiration)
@ $4.45
• Sell one 207.5 strike price call (also
with 15 days left until expiration)
for $0.39
The net cost to enter this position is
only $406 ($4.45 paid - $0.39 received
× 100 shares). Trader B’s profit/loss
scenario while he holds all three posi-
tions appears in Figure 2.
In this scenario, as long as the collar
is held, the worst-case scenario for the
net position is a loss of -$507. This is
$399 more risk than that of Trader A.
However, by selling a higher strike price
call, Trader B also affords himself much
more upside potential than Trader A. As
long as the collar is held, Trader B has a
maximum upside potential of $1,493.
Just as with Trader A, once the col-
lar is lifted or the options expire, then
Trader B goes back to simply holding
100 shares of ticker BABA.
To fully appreciate the tradeoff
between these two possible collars,
consider Figure 3, which displays the
Figure 3: Both positions shown together. Here you see the profit/loss scenario for Trader A and
Trader B. Trader A’s position is clearly more about managing risk in the short term, while Trader B’s position is
more about “hoping for the best, while still preparing for the worst.”
In the case of a collar,
the good news is you can PUT
HOLD
put an absolute limit on CALL
your downside risk.
profit/loss scenario for Trader A and strike prices available that will offer
Trader B. Trader A’s position is clearly different reward/risk tradeoffs. The key
more about managing risk in the short in all cases is to carefully assess what
term, while Trader B’s position is more objective(s) you hope to achieve before
about “hoping for the best, while still actually entering any position.
preparing for the worst.”
As with a lot of things related to
options trading, there is no one “best”
collar. Even with BABA in this sce-
nario, there are other expirations and
September 2018 • Technical Analysis of Stocks & Commodities • 43

SlopeOfHope.com
SOCIALTRADE CORP.
555 Bryant Street, #711
Palo Alto, CA 94301
https://slopeofhope.com
Product: Website providing a chart-
ing interface, blog posts, and social
trading.
Price: Many free features with email
signup; Slope Plus: $49.95/month or
$499.50/year.
by Karl Montevirgen
E
very era, when in full swing,
is defined not only by its in-
novations, technologies, and
productive output, but also by
its forms of decadence: its repetitions,
replications, and excesses. In today’s era
of electronic trading, these qualities are
evident in the plethora of online trading
resources and technologies available.
Charting, analytics, and technical
analysis tools? We have plenty to choose
from. Trading education vendors?
Perhaps more than we need. Social
trading apps? Not quite as many, but
surely enough to keep us engaged and
entertained.
The challenges facing any competitor
in this space are fairly simple, though
easier said than done: improve upon, add
FIGURE 1: FUTURE TREND. This feature uses price history and seasonal trends differ from other
to make an idealized two-year price projection.
44 • September 2018 • Technical Analysis of Stocks & Commodities
product review
something new, integrate, or transform
the existing technologies. Some of these
improvements are brilliant, while many
can be trite.
Granted, we don’t need more repeti-
tion, more replication, more sameness.
We could, however, use a little more
differentiation, a little more innovative
spark, a little more of that disruptive
impulse that dares to turn something on
its head in order to produce something
useful and interesting. And perhaps the
key to disrupting this space lay not in
the hands of a brilliant developer but
rather in the collaborative brilliance of
an empowered user base.
Leveraging community,
crowdsourcing, and
collective insight
Slope Of Hope offers many of the
features found in the types of services
mentioned earlier—technical analysis
tools, trader education, market insight,
and social trading—while adding novel
features to the standard set of tools and
technologies that often accompany them.
But it does so with a twist: what gives
Slope Of Hope something of an edge
is its dedication toward leveraging the
power of its open source–like community
of traders, called “Slopers.”
As its opening
page states, Slope
Of Hope is “a com-
munity of chart-
focused traders.”
Slopers can create
their own charts,
publish and share
their own content,
get trading ideas
from fellow traders,
and contribute to the
collective body of
knowledge generat-
ed by and benefiting
all participants.
How might this
comparable servic-
es? Slope Of Hope engages its users as
active contributors, dynamic collabora-
tors, and creative participants whose
insights and content serve to enhance
the quality, scope, and relevance of the
site’s offerings.
Tim Knight, trader, author, and de-
veloper who in 1992 founded Prophet
Financial, a web-based technical analysis
company acquired by Investools (and
later, by Ameritrade), and who has
been running Slope Of Hope since
2005, does a great job as the site’s main
facilitator.
Let’s take a look at Slope Of Hope’s
two main organizing features: technical
analysis and social trading.
SlopeCharts: Unique
features
For traders new to the site, SlopeCharts
may serve as the main attraction. It is ac-
cessible, relatively easy to use, has many
free features, and fulfills an immediate
and practical need. It also happens to
be one of Tim Knight’s strongest areas
of expertise.
But let’s look past the more standard
functionalities and focus on the fea-
tures that make SlopeCharts a unique
resource:
Quarterly and yearly bars: While most
charting platforms limit their timeframe
to a range spanning one-minute to month-
ly bars, SlopeCharts’ range starts with
the daily chart and extends to quarterly
and yearly timeframes.
This can be a plus for investors, par-
ticularly those who pay close attention
to earnings reports or those for whom
multiyear performance serves as criti-
cal data.
Future trend: Future Trend uses price
history and seasonal trends to make an
idealized two-year price projection for
a given security (Figure 1). What’s nice
about this feature is it also allows you
to view past “future trend” projections,
which enables you to compare previous
FIGURE 2: HOW WELL DID PAST PROJECTIONS DO? You can view past “future FIGURE 3: TRENDLINES FROM DIFFERENT PERSPECTIVES. A trendline drawn
trend” projections, which enables you to compare previous forecasts against the from the right factors in the two swing lows to the trendline and outlines a relatively
actual prices that materialized. flat support line. A trendLine drawn from the left creates a steeper gradation as it
takes into account the angle of previous swing lows.

forecasts against the actual prices that strategies revolve around a security’s sales, food prices, PPI, CPI, unemploy-
materialized (Figure 2). There you can volatility profile toward its earnings ment rate, to name a few—all of which
view the similarities and discrepancies release date. are typically absent from most charting
between economically-driven predic- There are plenty of other valuable software. As for the rest of the features,
tions and economic reality. features on SlopeCharts. What has been I’ll leave them for you to discover.
covered thus far merely scratches the
Automatic trendlines: The tricky thing surface. For example, the list manage- Blog and social trading
about drawing trendlines is the lines can ment functionalities are easy to use. And Slope Of Hope’s blog and social trade
vary greatly depending on your start- what’s cool about the watchlist is that it pages are “the heart and soul” of the site:
ing point and timeframe. SlopeCharts’ comes preloaded with economic indica- they are where Slopers find and exchange
automatic trendline feature gives you tors such as home prices, motor vehicle ideas; where Slopers can bundle their
several options, from instant lines to
lines that start from the top or bottom
and from the left or right of your cursor.
Essentially, it can help you view multiple
trends and microtrends from varying
perspectives.
You can see the difference between a
trendline drawn to the right and to the
left (Figure 3). From the right, data from
the two swing lows are factored into the
trendline, outlining a flat support line. A
trendline drawn from the left creates a
steeper gradation as it takes into account
the angle of previous swing lows.

Earnings charts: Another unique

feature—earnings charts—merges
historical data to show you how prices
for a given security behaved during the
20-day period approaching earnings
day. You can see this illustrated in the
earnings chart for Apple, Inc. (AAPL),
combining data from 2006 to 2016 in
Figure 4. FIGURE 4: EARNINGS CHARTS. These charts merge historical data to show you how prices for a given security
This can be useful to traders whose behaved during the 20-day period approaching earnings day.

September 2018 • Technical Analysis of Stocks & Commodities • 45

 favorite “stacks” and create and publish
their own market-related content; they
are what enable Slopers to collaborate
with and learn from one another; and they
are what make Slope Of Hope a relevant
archive of ideas—insights ranging from
collective to individual, historical to cur-
rent, contemplative to actionable.
Managing a library of blog posts num-
bering over 10,000 entries spanning over
a decade, Knight does a fine job keeping
users engaged with new, interesting, and
consistent posts; the user comments re-
veal the level of engagement, relevance,
and enthusiasm generated by the content.
The posts are also easily shareable via
Facebook and Twitter.
Woulda, Shoulda, Coulda
The Woulda Shoulda Coulda portion of
the blog site is a unique and handy feature
that allows you to quickly find out what
might have happened had you invested
a specific dollar amount into a stock at a
certain point in time. In short, it saves you
the time of having to look up historical
prices, measuring the drawdown, and
calculating profit & loss scenarios in
both dollar and percentage terms.
SocialTrade
SocialTrade may be the most dynamic
portion of the site: it is where users crowd-
source, stack, comment on, and share
individual content posts. New stacks are
featured through a newsfeed-style activ-
ity section. The graphic format makes the
content more “information efficient” and
engaging. You can also “follow” your
favorite stacks, find trending content via
popularity ranking, and share stacks via
Sneak preview... Coming soon!
Probability: Probably A Good Thing
To Know
by John Ehlers
We’ll measure the probability distribution of a few
indicators to determine if they can be used as part
of your reversion-to-the-mean strategy.
46 • September 2018 • Technical Analysis of Stocks & Commodities
Facebook, Twitter, or email. If you have
a favorite contributor, or if you want to
discover the contributions of your fellow
Slopers, you can view their profiles on the
SocialTraders page. And last but not least,
if you want to fully immerse yourself in
this virtual medium, and if you happen
to have an HTC VIVE Virtual Reality
(VR) headset, SocialTrade has a virtual
reality room.
Slope Of Hope is
accessible, relatively
easy to use, has many
free features, and
fulfills an immediate
and practical need.
Areas for improvement
No review would be complete without
some (hopefully) constructive criticism.
So here are a few items on my wish-
list:
• SocialTrade: It would be helpful
to have the stack titles appear when
your cursor hovers over them. This
way, you could determine more
easily whether a stack covers a topic
that might be of interest.
• SlopeCharts: Many chart plat-
forms have smart search function-
alities; SlopeCharts doesn’t. Thus,
if you don’t know the ticker symbol
for the stock or ETF, the search
engine may not be able to identify
One-Day Wonder Trades
by Robert Seifert
Is there such a thing as a conservative one-day
options trade that gives you an edge? Yes there
is, and here is how professional options traders
put it into action.
what you are looking for.
• General: Finally, it would be
helpful to have a simple “undo”
button, particularly for those using
SlopeCharts. While the user can
currently delete or undo entries or
moves, having a general-purpose
“undo” button could help make
the site more efficient for the user
and would save him or her a few
steps when trying to correct errors
(which are easy to make when
actively working on a chart).
Overall, Slope Of Hope is a unique
resource with an exceedingly ambitious
vision. It has several important and ben-
eficial features; it has a loyal and creative
user base; and most important, it has the
potential to go much further, innovating
to an even greater degree.
Karl Montevirgen is content writer
specializing in financial markets, cryp-
tocurrencies, and the arts. His personal
website can be found at www.kontent-
hammer.com.
Further reading
Gopalakrishnan, Jayanthi [2018]. “Slop-
ing Upward With Tim Knight,”
interview, Technical Analysis of
Stocks & Commodities, Volume
36: August.
‡SlopeOfHope.com
‡See Editorial Resource Index
Mutual Funds or ETFs: Which Ones
Should I Add To My Portfolio?
by Cassandra Wang
Learn to apply a momentum strategy to help
select mutual funds or ETFs to add to the long-
term portion of your portfolio.
 Q&A
FRIESEN/Q&A
Continued from page 6
immediately sell SPY against that long
basket. A more complex strategy would
be to have specifically correlated instru-
ments rather than using a carte blanche
approach like the SPY. It is a good hedge
and can offer great protection, but there
can be more specific choices that you
could use for reducing risk further.
Middle of the month
Did you know there is also a MOME ef-
fect? MOME is the middle-of-the-month
effect bump and it can be the 8th, 9th
10th, or 11th trading day of each month.
I like to focus on the 9th and 10th but
you can observe and prepare on any of
those days. As you approach the MOME
window, the same rules as with TOME
would apply regarding context.
I’ll address this seasonality reason
some more. While it can increase your
confidence to have the reason dialed
in, it could also create overconfidence,
complacency, or a myopic focus and
“missing the trees for the forest.” While
I am an advocate of uncovering reasons
to patterns, especially those with a large
sample footprint, I am not suggesting
you must know the reason. Sometimes
it is difficult to assess the forces that
create biases and patterns. Sometimes
the influences change.
What you can do is focus on the
LETTERS TO S&C
Continued from page 7
test results considerably.
In fact, I am currently testing a new
stiffness indicator and I plan to publish
the results in an upcoming article in this
magazine.
As you correctly mention, an im-
portant factor in the profitability of a
system is the holding period, because
you can’t expect any trading system to
predict price movements too far into
the future.
probability basis for the trade, what
the numbers say versus the underlying
reason, fundamental or otherwise. For
example, if the indicative performance
for the sample period is, on average,
8% annually for which it took only 60
days (five-day TOME) to produce those
returns rather than the full 365 days,
you would pursue harvesting that per-
formance through the windows shown.
In other words, the cumulative returns of
The edge lies in having
your scenarios run
and keeping your
preparation intact so
you can wait patiently
for the signals.
holding for the 60 days only are exactly
the returns of the full year. This means
the investor isn’t getting paid for the risk
of holding all the other days of the year.
If that is the historic case over a long
sample, then make a plan for walking
forward with it so you can handle the
variance, upsets, and adapt to changes
in the strategies over time. A big key
will be patience, discipline, looking for
discount prior to or within the windows,
and exiting with premium. Take slices
rather than extracting absolute tops
and bottoms.
I have discussed two seasonality win-
CODE FOR TECHNICAL STOCK-RATING
METHOD
Editor,
I liked Markos Katsanos’ stock-rating
strategy (“A Technical Method For Rat-
ing Stocks,” June 2018 S&C). Would
you happen to have the code for the
thinkorswim platform?
PRAtik AmiN
Author Markos Katsanos replies:
I am sorry, I use AmiBroker and pro-
vided code for that program in the
September 2018
dows: TOME and MOME. There are
additional seasonality considerations:
• Which day of the week offers the
best returns for the market? (Let’s
use the SPY as a proxy for market
performance.)
• Which day of the month offers the
best SPY returns?
• Which month of year offers the best
SPY returns?
• Which stocks in the S&P 500 index
generate alpha (over the stock’s
beta) in comparison to SPY during
any one of the seasonality windows
or days?
Armed with the statistical prob-
abilities, you could generate a list of
outperformers relative to the SPY and
underperformers relative to the SPY
and monitor for your entry signals just
prior to the seasonality window or dur-
ing the window. The key is to know
that you can enter at any time the ducks
line up. You don’t have to get in at the
start of the timeframe. The edge lies in
having your scenarios run and keeping
your preparation intact so you can wait
patiently for the signals. A trader may
be prepared for the last seven/first five
but only enter on the last day of month
because of the beneficial discount the
market provided on that day. Prior to that,
the trader would have been paying what
he or she observed to be premium.
article. I might suggest contacting
thinkorswim support to ask for a
translation of this code.
• Technical Analysis of Stocks & Commodities • 47
 For this month’s Traders’ Tips, the
focus is Vitali Apirine’s article in this
issue, “Weekly & Daily Stochastics.”
Here, we present the September
2018 Traders’ Tips code with pos-
sible implementations 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.
The Traders’ Tips section is provided to help readers
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
FIGURE 1: TRADESTATION. Here is a daily chart of Apple with the WeeklyAnd-
that is capable of customization.
DailyMACD indicator applied.

SmoothW = Average( StochW, WeeklySmoothingLength ) ;

Plot1( SmoothD, "Daily" ) ;

F TRADESTATION: SEPTEMBER 2018 TRADERS’ TIPS CODE Plot2( SmoothW, "Weekly" ) ;
In “Weekly & Daily Stochastics” in this issue, author Vitali Plot3( OverBought, "OverBought" ) ;
Apirine introduces a novel approach to using the classic sto- Plot4( OverSold, "OverSold" ) ;
Plot5( MidLine, "Mid" ) ;
chastic indicator in a way that simulates calculations based
on different timeframes while using just a daily interval chart. To download the EasyLanguage code, please visit our
He describes a number of ways to use this new indicator that TradeStation and EasyLanguage support forum. The files
allows traders to detect the state of longer-term trends while for this article can be found here: https://community.trades-
looking for entry points and reversals. Here, we are providing tation.com/Discussions/Topic.aspx?Topic_ID=152631. The
the TradeStation EasyLanguage code for an indicator based filename is “TASC_SEP2018.ZIP.”
on the author’s ideas. For more information about EasyLanguage in general,
Indicator: WeeklyAndDailyStochastic please see http://www.tradestation.com/EL-FAQ.
A sample chart is shown in Figure 1.
// TASC Sep 2018 This article is for informational purposes. No type of trading
// Weekly And Daily Stochastics
// Vitali Apirine or investment recommendation, advice, or strategy is being made,
given, or in any manner provided by TradeStation Securities or
inputs: its affiliates.
DailyLength( 14 ), —Doug McCrary
WeeklyLength( 70 ),
DailySmoothingLength( 3 ),
TradeStation Securities, Inc.
WeeklySmoothingLength( 3 ), www.TradeStation.com
OverBought( 80 ),
OverSold( 20 ) ;

variables:
StochD( 0 ),
StochW( 0 ),
SmoothD( 0 ),
SmoothW( 0 ), F THINKORSWIM: SEPTEMBER 2018 TRADERS’ TIPS CODE
MidLine( ( OverBought + OverSold ) * .5 ) ; We have put together a study for thinkorswim based on Vitali

StochD = ( Close - Lowest( Low, DailyLength ) ) / Apirine’s article in this issue, “Weekly & Daily Stochastics.”
( Highest( High, DailyLength ) The study is built using our proprietary scripting language,
- Lowest( Low, DailyLength ) ) * 100 ; thinkscript. To ease the loading process, simply click on http://
StochW = ( Close - Lowest( Low, WeeklyLength ) ) / tos.mx/I4qqIc or enter the address into an open shared item
( Highest( High, WeeklyLength ) from within thinkorswim. Choose view thinkscript and name
- Lowest( Low, WeeklyLength ) ) * 100 ; it “WeeklyAndDailyStochastics.” These can then be added
SmoothD = Average( StochD, DailySmoothingLength ) ; to your chart from the edit study and strategies menu within

48 • September 2018 • Technical Analysis of Stocks & Commodities

 Figure 3: eSIGNAL. Here is an example of the study plotted on a daily chart of
NFLX.
Figure 2: THINKORSWIM. The WeeklyAndDailyStochastics study is added to the
lower portion of a one-year daily chart of the Dow Jones Industrial Average.
Periods1 3
Pds 70
thinkorswim. Pds1 3
The chart in Figure 2 shows the study added to the lower
Notes:
portion of a one-year daily chart of the Dow Jones Industrial The related article is copyrighted material. If you are not a sub-
Average. See Vitali Apirine’s article in this issue for more scriber of Stocks & Commodities, please visit www.traders.com.
details on the interpretation of the study. **********************************/
—thinkorswim
var fpArray = new Array();
A division of TD Ameritrade, Inc.
www.thinkorswim.com function preMain(){
setPriceStudy(false);
setStudyTitle("W&D stochastic");
setCursorLabelName("Daily Stochastic", 0);
setCursorLabelName("Weekly Stochastic", 1);
setDefaultBarFgColor(Color.RGB(0x00,0x94,0xFF), 0);
setDefaultBarFgColor(Color.RGB(0xFE,0x69,0x00), 1);

F eSIGNAL: SEPTEMBER 2018 TRADERS’ TIPS CODE var x = 0;

fpArray[x] = new FunctionParameter("Periods", FunctionPa-
For this month’s Traders’ Tip, we’ve provided the study W&D. rameter.NUMBER);
efs based on the article by Vitali Apirine in this issue, “Weekly with(fpArray[x++]){
& Daily Stochastics.” This study combines two stochastic setLowerLimit(1);
setDefault(14);
oscillators to determine corrections and trend reversals. }
The study contains formula parameters that may be con- fpArray[x] = new FunctionParameter("Periods1", FunctionPa-
figured through the edit chart window (right-click on the rameter.NUMBER);
with(fpArray[x++]){
chart and select “edit chart”). A sample chart is shown in setLowerLimit(1);
Figure 3. setDefault(3);
}
/********************************* fpArray[x] = new FunctionParameter("Pds", FunctionParam-
Provided By: eter.NUMBER);
eSignal (Copyright c eSignal), a division of Interactive Data with(fpArray[x++]){
Corporation. 2016. All rights reserved. This sample eSignal setLowerLimit(1);
Formula Script (EFS) is for educational purposes only and may setDefault(70);
be modified and saved under a new file name. eSignal is not }
responsible for the functionality once modified. eSignal reserves fpArray[x] = new FunctionParameter("Pds1", FunctionParam-
the right to modify and overwrite this EFS file with each new eter.NUMBER);
release. with(fpArray[x++]){
setLowerLimit(1);
Description: setDefault(3);
Weekly & Daily Stochastics }
by Vitali Apirine }

Version: 1.00 07/12/2018 var bInit = false;

var bVersion = null;
Formula Parameters: Default: var xSTOCD = null;
Periods 14 var xSTOCW = null;

September 2018 • Technical Analysis of Stocks & Commodities • 49

 function main(Periods, Periods1, Pds, Pds1){
if (bVersion == null) bVersion = verify();
if (bVersion == false) return;

if (getBarState() == BARSTATE_ALLBARS){

bInit = false;
}

if (!bInit){

xSTOCD = stochK(Periods, Periods1, 1)

xSTOCW = stochK(Pds, Pds1, 1)

addBand(20, PS_SOLID, 1, Color.darkgrey, 0);

addBand(50, PS_DASHDOT, 1, Color.darkgrey, 1);
addBand(80, PS_SOLID, 1, Color.darkgrey, 2);

bInit = true; Figure 4: WEALTH-LAB. This chart illustrates the ease of implementing the W&D
} stochastics indicator. The process can take less than a minute and frees you up
from writing code.
return new Array(xSTOCD.getValue(0), xSTOCW.getValue(0));
}
parameters: period = 70, smooth = 3. It’s a pleasure to show
function verify(){ our users how to make an idea like this work with very little
var b = false; learning curve.
if (getBuildNumber() < 779){
Despite the fact that trading rules haven’t been provided
drawTextAbsolute(5, 35, "This study requires version 10.6 or in the article, it’s not really necessary since all best prac-
later.", tices for the slow stochastic (stochK and stochD) apply here.
Color.white, Color.blue, Text.RELATIVETOBOTTOM|Text.
RELATIVETOLEFT|Text.BOLD|Text.LEFT, Wealth-Lab’s “strategy from rules” feature allows you to cre-
null, 13, "error"); ate a trading strategy from flexible building blocks known as
drawTextAbsolute(5, 20, "Click HERE to upgrade.@ rules in a few easy steps:
URL=http://www.esignal.com/download/default.asp",
Color.white, Color.blue, Text.RELATIVETOBOTTOM|Text.
RELATIVETOLEFT|Text.BOLD|Text.LEFT, Step 1: To start, choose “new strategy from rules” or strike
null, 13, "upgrade"); ctrl-shift-R.
return b;
} Step 2: Drag and drop an entry condition such as “buy at
else market.”
b = true; Step 3: Then switch to the conditions tab, expand the “sto-
return b; chastics” group, and pick a condition. In the parameters box,
} set “stochD period” to 70 and “stochD smoothing” to 3.

To discuss this study or download a complete copy of
the formula code, please visit the EFS library discussion
board forum under the forums link from the support menu at
www.esignal.com or visit our EFS KnowledgeBase at http://
www.esignal.com/support/kb/efs/. The eSignal formula
script (EFS) is also available for copying & pasting from
the Stocks & Commodities website at Traders.com in the
Traders’ Tips section.
—Eric Lippert
eSignal, an Interactive Data company
800 779-6555, www.eSignal.com
F WEALTH-LAB: SEPTEMBER 2018 TRADERS’ TIPS CODE
No coding is required to implement the weekly & daily
stochastics described by Vitali Apirine in his article in this
issue, as this indicator is built in. To match the author’s set-
tings you should use the stochD indicator with the following
By simply combining and reordering them, you can come
up with fairly elaborate strategies.
A sample chart is shown in Figure 4.
—Gene Geren (Eugene), Wealth-Lab team
MS123, LLC
www.wealth-lab.com
F NEUROSHELL TRADER: SEPTEMBER 2018
TRADERS’ TIPS CODE
The weekly & daily stochastic indicators described
by Vitali Apirine in his article in this issue can be easily imple-
mented with a few of NeuroShell Trader’s 800+ indicators.
Simply select new indicator from the insert menu and use the
indicator wizard to set up the following indicators:
Stoch%D(High,Low,Close,70,3)
Stoch%D(High,Low,Close,14,3)
Users of NeuroShell Trader can go to the Stocks & Com-
modities section of the NeuroShell Trader free technical

50 • September 2018 • Technical Analysis of Stocks & Commodities

FIGURE 5: NEUROSHELL TRADER. This sample NeuroShell Trader chart shows
the weekly & daily stochastics.

Figure 6: TRADERSSTUDIO. Here is a sample equity curve for the test using a
support website to download a copy of this or any previous trend-following exit.
Traders’ Tips.
A sample chart is shown in Figure 5.
—Marge Sherald, Ward Systems Group, Inc.
301 662-7950, sales@wardsystems.com
www.neuroshell.com

F T RADERSSTUDIO: SEPTEMBER 2018

TRADERS’ TIPS CODE
The TradersStudio code based on Vitali
Apirine’s article in this issue, “Weekly & Daily Stochastics,”
is provided at www.TradersEdgeSystems.com/traderstips.htm
as well as at the Stocks & Commodities website at www.
traders.com in the Traders’ Tips section.
Using the author’s weekly & daily stochastic indicators
and a moving average to determine trend direction, I created
an example system (long only) with the following rules:
Figure 7: TRADERSSTUDIO. Here is a sample underwater equity curve for the
Enter long next bar at open when all of the following are test using a trend-following exit.
true:
was only 40% to 50%. Figure 6 shows the long equity curve
1) The 200-day simple average of the NDX is greater than
using the trend-following exit. Figure 7 shows the related
the day before
underwater equity curve.
2) The 200-day simple average of the stock is greater than
The TradersStudio code is shown here:
the day before
3) Both the weekly and daily stochastic indicators have
'WEEKLY AND DAILY STOCHASTIC
been below 20 in the last five days 'Author: Vitali Apirine, TASC Sept 2018
4) Both the weekly and daily stochastic indicators are 'Coded by: Richard Denning 7/14/2018
greater than the day before. 'www.TradersEdgeSystems.com

Sub WD_STOCH(stochLenD,stochAvgD,stochLenW,stochAvgW,
The system as coded has two exits: 1) an indicator exit using SMAlen1,exitType)
the weekly and daily indicators (exitType=1), and 2) a three- 'INPUTS:
moving-average trend-following exit (exitType=2). All the 'Periods = 14 (stochLenD)
'Periods1 = 3 (stochAvgD)
tests used the same entry rule and were run on an old 2014 'Pds = 70 (stochLenW)
list of the NASDAQ 100 stocks that included all the stocks no 'Pds1 = 3 (stochAvgW)
longer trading. The test divided total capital by the 100 stocks 'exitType = 2 (exitType 1 uses only WD_Stoch indicator
'exitType 2 is trend following)
traded. In this way, all the signals are traded, but leverage

September 2018 • Technical Analysis of Stocks & Commodities • 51

 Dim StocD As BarArray
Dim SD As BarArray
Dim StocW As BarArray
Dim SW As BarArray

Dim SMA200 As BarArray

Dim NDXc As BarArray
Dim SMA200ndx As BarArray
Dim SMAlen2,SMAlen3
Dim SMA1 As BarArray
Dim SMA2 As BarArray
Dim SMA3 As BarArray

'INDICATOR CODE:
StocD = (C-Lowest(L,stochLenD))/(Highest(H,stochLenD)-
Lowest(L,stochLenD))*100
SD = Average(StocD,stochAvgD)
StocW = (C-Lowest(L,stochLenW))/(Highest(H,stochLenW)-
Lowest(L,stochLenW))*100
SW = Average(StocW,stochAvgW)
SMA200 = Average(C,200)
NDXc = C Of independent1
SMA200ndx = Average(NDXc,200) FIGURE 8: AIQ, BUY & HOLD. Here is the sample equity curve (blue) compared to
SMAlen2 = SMAlen1*2 the NDX (red) for the test using a 21-day hold exit.
SMAlen3 = SMAlen1*4
SMA1 = Average(C,SMAlen1)
SMA2 = Average(C,SMAlen2)
SMA3 = Average(C,SMAlen3)

'SYSTEM CODE:
If SMA200 > SMA200[1] Then
If SW > SW[1] And SD > SD[1] And countof(SW < 20,5,0)>=1
And countof(SD < 20,5,0)>=1 Then
If SMA200ndx > SMA200ndx[1] Then
Buy("LE",1,0,Market,Day)
End If
End If

'EXIT TYPE 1:
If exitType=1 And SD < SD[1] And SW < SW[1] Then ExitLong("L
X","",1,0,Market,Day)

'EXIT TYPE 2:
If exitType=2 Then
If C[BarsSinceEntry]<SMA1[BarsSinceEntry] And C[BarsSinceEn
try]<SMA2[BarsSinceEntry] And C[BarsSinceEntry]<SMA3[BarsS
inceEntry] Then FIGURE 9: AIQ, TREND-FOLLOWING EXIT. Here is the sample equity curve (blue)
If SD < SD[1] And SW < SW[1] Then ExitLong("LX","",1,0,Mar compared to the NDX index (red) for the test using a trend-following exit.
ket,Day)
End If
If C[BarsSinceEntry]>SMA1[BarsSinceEntry] And C<SMA1 Then
ExitLong("LXsma1","",1,0,Market,Day)
If C[BarsSinceEntry]>SMA2[BarsSinceEntry] And C<SMA2 Then
ExitLong("LXsma2","",1,0,Market,Day)
If C[BarsSinceEntry]>SMA3[BarsSinceEntry] And C<SMA3 Then
ExitLong("LXsma3","",1,0,Market,Day)
If BarsSinceEntry > 250 Then ExitLong("LXtime","",1,0,Market,D
ay)
End If

End Sub

—Richard Denning
info@TradersEdgeSystems.com
for TradersStudio

F AIQ: SEPTEMBER 2018 TRADERS’ TIPS CODE FIGURE 10: AIQ, W&D STOCHASTIC EXIT. Here is the sample equity curve (blue)
The AIQ code based on Vitali Apirine’s article in this compared to the NDX index (red) for the test using the weekly & daily stochastic
issue, “Weekly & Daily Stochastics,” is provided at indicators.

52 • September 2018 • Technical Analysis of Stocks & Commodities

www.TradersEdgeSystems.com/traderstips.htm as well as at and SD > valresult(SD,1)
and countof(SW < 20,5)>=1
the Stocks & Commodities website, Traders.com, in the and countof(SD < 20,5)>=1
Traders’ Tips section. and HD.
Using Apirine’s weekly and daily stochastic indicators smaLen2 is smaLen1*2.
smaLen3 is smaLen1*4.
and a moving average to determine trend direction, I created SMA1 is simpleavg(C,smaLen1).
an example system (long only) with the following rules: SMA2 is simpleavg(C,smaLen2).
SMA3 is simpleavg(C,smaLen3).
Enter long next bar at open when all of the following are PD is {position days}.
true: !EXIT TYPE 1 USES THE INDICATOR ONLY
!EXIT TYPE 2 IS TREND FOLLOWING
1) The 200-day simple average of the NDX is greater than Sell if (SD < valresult(SD,1) and SW < valresult(SW,1) and exit-
the day before Type=1)
or (exitType = 2
2) The 200-day simple average of the stock is greater than and ((Valresult(C,PD)<Valresult(SMA1,PD)
the day before And Valresult(C,PD)<Valresult(SMA2,PD)
3) Both the weekly and daily stochastic indicators have And Valresult(C,PD)<Valresult(SMA3,PD)
And SD < Valresult(SD,1) And SW < valresult(SW,1))
been below 20 in the last five days or (Valresult(C,PD)>valresult(SMA1,PD) And C<SMA1)
4) Both the weekly and daily stochastic indicators are or (Valresult(C,PD)>valresult(SMA2,PD) And C<SMA2)
greater than the day before. or (Valresult(C,PD)>valresult(SMA3,PD) And C<SMA3)
or PD > 250)).
I tested three exits. Figure 8 shows a 21-day hold then RSS is C/valresult(C,120).
exit. Figure 9 shows a three-moving-average trend-following RSL is C/valresult(C,240).
exit. Figure 10 shows an exit using only the weekly & daily
stochastic, once both are lower than the day before. —Richard Denning
The 21-day hold test showed a 11.2% return with a maxi- info@TradersEdgeSystems.com
for AIQ Systems
mum drawdown of 29.3%. The trend-following exit test
showed a 17.6% return with a maximum drawdown of 28.8%.
The test using an exit based on only the weekly & daily sto-
chastic indicators showed a return of 2.9% with a maximum
drawdown of 32.5%. All the tests used the same entry rule
and were run on an old 2016 list of the NASDAQ 100 stocks
with the stocks that are no longer trading deleted. F NINJATRADER: SEPTEMBER 2018 TRADERS’ TIPS CODE
The weekly & daily stochastic indicator, as discussed in Vitali
!WEEKLY AND DAILY STOCHASTIC Apirine’s article in this issue, is available for download at the
!Author: Vitali Apirine, TASC Sept 2018
!Coded by: Richard Denning 7/7/2018 following links for NinjaTrader 8 and for NinjaTrader 7:
!www.TradersEdgeSystems.com
NinjaTrader 8: www.ninjatrader.com/SC/September2018SCNT8.zip
!INPUTS: NinjaTrader 7: www.ninjatrader.com/SC/September2018SCNT7.zip
Periods is 14.
Periods1 is 3. Once the file has been downloaded, you can import the
Pds is 70.
Pds1 is 3. indicator into NinjaTader 8 from within the control center by
smaLen1 is 70. selecting Tools → Import → NinjaScript Add-On and then
exitType is 1.

!ABBREVIATIONS:
C is [close].
H is [high].
L is [low].

!INDICATOR CODE:
STOCD is (C-LOWRESULT(L,Periods))/
(HIGHRESULT(H,Periods)-LOWRESULT(L,Periods))*100.
SD is Simpleavg(Stocd,Periods1).
StocW is (C-LOWRESULT(L,Pds))/(HIGHRESULT(H,Pds)-
LOWRESULT(L,Pds))*100.
SW is Simpleavg(Stocw,Pds1).
HD if hasdatafor(1000) >= 500.
SMA200 is simpleavg(C,200).
SMA200ndx is tickerUDF(“NDX”,SMA200).

!SYSTEM CODE:
Buy if SMA200ndx > valresult(SMA200ndx,1)
and SMA200 > valresult(SMA200,1) Figure 11: NINJATRADER. In this sample chart, the WnDStochastic indicator
and SW > valresult(SW,1) shows momentum for the Dow Jones Industrial Average during early 2009.

September 2018 • Technical Analysis of Stocks & Commodities • 53

 selecting the downloaded file for NinjaTrader 8. To import
into NinjaTrader 7, from within the control center window,
select the menu File → Utilities → Import NinjaScript and
select the downloaded file.
You can review the indicator’s source code in NinjaTrader
8 by selecting the menu New → NinjaScript Editor → In-
dicators from within the control center window and select-
ing the WnDStochastic file. You can review the indicator’s
source code in NinjaTrader 7 by selecting the menu Tools →
Edit NinjaScript → Indicator from within the control center
window and selecting the WnDStochastic file.
NinjaScript uses compiled DLLs that run native, not in-
terpreted, which provides you with the highest performance
possible.
A sample chart implementing the strategy is shown in
Figure 11.
—Raymond Deux & Jim Dooms
NinjaTrader, LLC
www.ninjatrader.com
F Quantacula Studio: SEPTEMBER 2018
TRADERS’ TIPS CODE
The daily & weekly stochastic as discussed in Vitali Apirine’s
article in this issue can be easily composed in Quantacula
Studio by using the stochK (stochastic %K) and SMA (simple
moving average) indicators.
Here, we first dragged the stochK indicators onto the
chart, providing them periods of 14 and 70, as described
in Apirine’s article. We assigned them light colors so they
would be visible in the chart in the background. Next, we
dropped the SMA indicator atop each of the stochKs, giving
the two SMA indicators a period of 3.
—Dion Kurczek, Quantacula LLC
info@quantacula.com
www.quantacula.com
Figure 12: quantacula. The stochK indicators are shown on the chart along
with three-period SMAs.
This library contains two indicators named “StocD” and
“StocW,” plus a template and a study named “W&D Stochas-
tics.”
Template
For your convenience, we have added a template to the
library that allows you to modify your chart with a prebuilt
indicator package and settings. To access it, open the charting
pulldown menu, select the templates command, then from the
submenu that opens, select the “W&D stochastics” template.
If you receive the prompt “save the current chart settings as
template?”, your answer will depend on whether you have
made any changes to your current chart template that you
would like to keep. If you choose “no,” these changes will
be discarded, and a “yes” choice will save changes into the
prior template on your chart before switching the template to
the “W&D stochastics” template. A sample chart of the W&D
stochastics is shown in Figure 13.
To recreate these indicators manually, click on the edit
dropdown menu, open the trader’s toolbox (or use CTRL+T),
and click on the functions tab. Next, click on the new button,
and a new function dialog window will open. In its text box,
input the code for the highlight bar. Ensure that there are no
extra spaces at the end of each line. When completed, click
on the verify button. You may be presented with an add in-
puts pop-up message if there are variables in the code. If so,
click the yes button, then enter a value in the default value

F TRADE NAVIGATOR: SEPTEMBER

2018 TRADERS’ TIPS CODE
We’re making available a file for
download within the Trade Navigator library to make it easy
for users to implement the indicator discussed in “Weekly &
Daily Stochastics” by Vitali Apirine in this issue.
The filename is “SC201809.” To download it, click on Trade
Navigator’s blue telephone button, select download special
file, and replace the word “upgrade” with “SC201809” (with-
out the quotes). Then click the start button. When prompted
to upgrade, click the yes button. If prompted to close all soft-
ware, click on the continue button. Your library will now
download. FIGURE 13: TRADE NAVIGATOR, W&D STOCHASTICS. This sample chart shows
the W&D stochastics.

54 • September 2018 • Technical Analysis of Stocks & Commodities

FIGURE 14: TRADE NAVIGATOR, DAILY STOCHASTIC. Shown here is the Trade- FIGURE 15: TRADE NAVIGATOR, WEEKLY STOCHASTIC. Shown here is the
Sense code for creating the StocD indicator. TradeSense code for creating the StocW indicator.

column. If all is well, when you click on the function tab, the the charting dropdown menu, select the add to chart com-
code you entered will convert to italic font. Click on the save mand, then on the indicators tab, find your named indicator
button and type a name for the indicator. and select it, then click on the add button. Repeat this pro-
cedure for additional indicators if you wish. You may also
TradeSense code
consider selecting the studies tab and add the study to your
StocD (Figure 14): chart, which is a prebuilt pane containing the indicators in
preformatted form.
&periods := 14
&periods1 := 3 Users may contact our technical support staff by phone or
&StocD := (Close - Lowest (Low , &periods)) / (Highest (High , by live chat if any assistance is needed in using the indica-
&periods) - Lowest (Low , &periods)) * 100 tors, study, or template.
&SD := MovingAvg (&StocD , &periods1)
&SD
—Genesis Financial Technologies
Tech support 719 884-0245
StocW (Figure 15): www.TradeNavigator.com
&pds := 70
&pds1 := 3
&StocW := (Close - Lowest (Low , &pds)) / (Highest (High , &pds)
- Lowest (Low , &pds)) * 100 F MICROSOFT EXCEL: SEPTEMBER 2018
&SW := MovingAvg (&StocW , &pds1)
&SW
TRADERS’ TIPS CODE
In “Weekly & Daily Stochastics” in this issue, author Vitali
Adding to your chart Apirine continues his exploration of some common indica-
You can insert these indicators onto your chart by opening tors evaluated at different computation intervals (see the past

FIGURE 16: EXCEL. Here is my approximation of Figure 2 from Vitali Apirine’s article in this issue.

September 2018 • Technical Analysis of Stocks & Commodities • 55


FIGURE 17: EXCEL. You can draw trendlines and other lines on the chart by using
the line tool from the shapes dropdown menu.
articles of his, “Weekly & Daily MACD” from the December
2017 issue, and “Weekly & Daily Percentage Price Oscillator”
from the February 2018 issue of S&C).
Quite a bit of information is available on the chart when
we watch the action of the stochastics computed at the week-
ly and daily intervals and contrast that with the price action.
We can see a bit of telegraphing of breakdowns and break-
outs in the stochastics.
With this month’s spreadsheet that I am providing, you
can also change the intervals to play what–if.
See Figure 16 for an approximation of Figure 2 from
Apirine’s article.
Drawing trendlines
I have not found a reliable way to use my code to dynamically
draw trendlines on a chart. So I cannot dynamically replicate
the trendlines and support lines you see in Apirine’s Figures
3, 4, & 5 from his article.
However, you, as the spreadsheet user, can draw your own
lines by way of the straight line tool found in the shapes
dropdown under the insert tab of the Excel ribbon (Figure
17). Here’s how: Click the straight line tool. Next, hover the
cursor over the point on the chart where you want the line
to begin. Then left-click and hold while you drag from that
point to the point where you want the line to stop.
Note this will produce a static line. It will not be dynami-
cally tied to the chart in any way. So it will stay in that exact
spot over the chart no matter what happens to the data and
the chart underneath. However, you can move the line as you
see fit. Left-click and hold on an endpoint of the line and
drag to new locations. Do the same for the other endpoint
of the line.
To open a dialog where you can pick colors and line styles
or change the shapes at the line endpoints, right-click on a
56 • September 2018 • Technical Analysis of Stocks & Commodities
line and select the format shape entry from the dropdown.
Finally, you can delete a line by right-clicking on the line
and selecting cut from the dropdown.
To draw circles on your chart, the circle tool is also avail-
able from the shapes dropdown and can be drawn and ma-
nipulated in the same fashion as lines.
More fixes for Yahoo issues
Several readers have written to say that the recent spreadsheets
have worked well for a time and suddenly they all fail at the
same time with the same error on a “.refresh” statement.
Over time there have been a couple of different failures at
this statement.
If you have already applied all of the previously published
fixes to your spreadsheets and still have a failure, read on.
The current Yahoo Finance history access protocol re-
quires that each request be accompanied by a valid cookie
and the crumb value that matches the cookie.
I believe that this most recent all-or-nothing failure for
some readers is a function of the Yahoo Finance cookie held
in their cookie cache reaching its annual expiration. Behind
the scenes, a new cookie is sent to their computer and a new
corresponding crumb value is generated.
For those with the failure, that newly generated crumb
contains a problem I did not anticipate when I built the code
to extract the crumb from HTML text. And not everyone
will experience the crumb problem, as each Yahoo cookie
is unique and will generate a unique crumb. The problem
crumbs contain an escape sequence for an HTML context-
sensitive character. That escape sequence needs to be trans-
lated back to the real character before the crumb is used.
For further details and a way to fix this escape sequence
problem in each of the recent spreadsheets, please read the
“general construction notes” section on the notes tab of this
month’s spreadsheet.
This month’s spreadsheet for this September 2018 issue
already incorporates the necessary fix.
Downloading the spreadsheet file
The “WeeklyDailyStochastics.xlsm” spreadsheet file for this
Traders’ Tip can be downloaded from www.traders.com in
the Traders’ Tips area. To successfully download it, follow
these steps:
• Right-click on the Excel file link, then
• Select “save target as” or “save as” to place a copy of the
spreadsheet file on your hard drive.
—Ron McAllister
Excel and VBA programmer
rpmac_xltt@sprynet.com
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September 2018 • Technical Analysis of Stocks & Commodities • 57
 FUTURES LIQUIDITY

T
rading liquidity is often over-
looked as a key technical
measurement in the analysis
and selection of commodity
futures. The following explains how to
read the futures liquidity chart pub-
lished by Technical Analysis of Stocks
& Commodities every month.
Commodity futures
The futures liquidity chart shown be-
low is intended to rank publicly traded
futures contracts in order of liquidity.
Relative contract liquidity is indicated
by the number of dots on the right-hand
side of the chart.
This liquidity ranking is produced by
multiplying contract point value times
the maximum conceivable price motion
(based on the past three years’ historical
data) times the contract’s open interest
times a factor (usually 1 to 4) for low or
very high volumes. The greatest number
of dots indicates the greatest activity;
futures with one or no dots show little
activity and are therefore less desirable
for speculators.
Courtesy of CBOT
All futures listed are weighted equally
under “contracts to trade for equal dol-
lar profit.” This is done by multiplying
contract value times the maximum pos-
sible change in price observed in the last
three-year period. Thus, all numbers in
this column have an equal dollar value.
Columns indicating percent margin
and effective percent margin provide
a helpful comparison for traders who
wish to place their margin money ef-
ficiently. The effective percent margin
is determined by dividing the margin
value ($) by the three-year price range of
contract dollar value, and then multiply-
ing by one hundred.
Stocks
Trading liquidity has a significant ef-
fect on the change in price of a secu-
rity. Theoretically, trading activity can
serve as a proxy for trading liquidity
and equals the total volume for a given
period expressed as a percentage of the
total number of shares outstanding. This
value can be thought of as the turnover
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 4.4 12.3 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>>>
10-Year T-Note (Sep ’18) CBOT 1 7.8 5 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
5-Year T-Note (Sep ’18) CBOT 0.7 7.8 8 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Ultra T-Bond (Sep ’18) CBOT 2.3 9.7 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Russell 2000 E-Mini (Sep ’18) GBLX 2.4 5.3 1 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
T-Bond (Sep ’18) CBOT 1.8 7.3 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Crude Oil WTI (Sep ’18) NYMEX 5.6 9.1 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Sep ’18) GBLX 4.3 9.1 1 •••••••••••••••••••••••••••••••••••••••
2-Year T-Note (Sep ’18) CBOT 0.2 6.2 10 ••••••••••••••••••••••••••••••••••••
Eurodollar (Dec ’18) CME 0.1 2.8 13 ••••••••••••••••••••••••••
Ultra 10-Year T-Note (Sep ’18) CBOT 1.2 7.1 4 •••••••••••••••••••••••
Euro FX (Sep ’18) CME 1.7 14.7 5 ••••••••••••••••••
Soybeans (Nov ’18) CBOT 5.2 13 5 ••••••••••••
Sugar #11 (Oct ’18) ICEUS 8.4 7.3 6 •••••••••••
Gasoline RBOB (Sep ’18) NYMEX 5.6 10 2 ••••••••••
Gold (Aug ’18) COMEX 2.8 19.1 4 •••••••••
Dow Indu 30 E-Mini (Sep ’18) CBOTM 4.3 11.1 2 ••••••••
ULSD NY Harbor (Sep ’18) NYMEX 5.2 8.6 1 ••••••••
S&P Midcap E-Mini (Sep ’18) GBLX 4.1 10.4 1 •••••••
Silver (Sep ’18) COMEX 5.1 13.9 3 •••••••
British Pound (Sep ’18) CME 2.1 10.5 5 ••••••
High Grade Copper (Sep ’18) COMEX 4.5 15.3 4 ••••••
Japanese Yen (Sep ’18) CME 2 15.7 6 ••••••
Natural Gas (Sep ’18) NYMEX 4.9 10.9 7 ••••••
Coffee (Sep ’18) ICEUS 5.5 9.6 3 •••••
Corn (Dec ’18) CBOT 4.7 25.1 23 •••••
30-Day Fed Funds (Oct ’18) CBOT 0 2.1 9 •••
Cotton #2 (Dec ’18) ICEUS 6.7 18.7 5 •••
Soybean Meal (Dec ’18) CBOT 5.6 16.9 7 •••
Wheat (Sep ’18) CBOT 5.8 19.3 10 •••
Australian Dollar (Sep ’18) CME 1.9 18.3 11 •• CBOT Chicago Board of Trade, Division of CME
Canadian Dollar (Sep ’18) CME 1.9 18.1 10 •• CFE CBOE Futures Exchange
Crude Oil Brent (F) (Sep ’18) NYMEX 5.9 9.4 2 •• CME Chicago Mercantile Exchange
Lean Hogs (Oct ’18) CME 6.3 8.2 5 •• COMEX Commodity Exchange, Inc. CME Group
Live Cattle (Oct ’18) CME 3.7 10.2 5 •• GBLX Chicago Mercantile Exchange - Globex
Platinum (Oct ’18) NYMEX 4.5 10.2 4 •• ICE-EU Intercontinental Exchange-Futures - Europe
Soybean Oil (Dec ’18) CBOT 3.9 11.2 13 •• ICE-US Intercontinental Exchange-Futures - US
Cocoa (Sep ’18) ICEUS 9.1 18.6 7 • KCBT Kansas City Board of Trade
Hard Red Wheat (Sep ’18) KCBT 5.8 20.7 11 • MGEX Minneapolis Grain Exchange
Mexican Peso (Sep ’18) CME 5.7 29.5 16 • NYMEX New York Mercantile Exchange
Palladium (Sep ’18) NYMEX 7.9 15.7 2 •
S&P GSCI (Aug ’18) CME 4 9.8 2 •
Swiss Franc (Sep ’18) CME 2.4 26 7 •
U.S. Dollar Index (Sep ’18) ICEUS 1.9 19.3 8 • 1809
Bitcoin Cboe Futures (Aug ’18) CFE 41.5 25.5 6
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 • September 2018 • Technical Analysis of Stocks & Commodities

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September 2018 • Technical Analysis of Stocks & Commodities • 59

 Some Mental Tools
Optimize Your Mind
For Analysis
What do self-confidence, classification, and gossip have to
do with technical analysis? Let’s take a look at trading and
investing from a psychology perspective to find out.
T
by Daniel J. Subach
here’s a good reason technical analysis provides
a solution for approaching the markets rationally
instead of irrationally, and the field of psychology
can help explain why. It turns out the reason goes
far back into human history.
The psychological makeup of humans today was
shaped over eons by the conditions our ancestors
faced and the way they adapted to survive. The
uncertainties of living the life of a hunter-gatherer created
winners and losers; some people survived and others perished.
The survivors adapted to uncertainty well. The mindset that
emerged and that is our legacy is a mindset that calls the tune
whenever it is free to do so. But we shouldn’t always let it.
As humans adapted to the world around them, certain traits
and tendencies developed, including, among others, loss aversion,
overconfidence, and the desire to classify things around them.
Humans also learned to depend on intuition and emotion.
Understanding human nature and how our mind prefers to
operate can help us guard against the worst consequences of
letting our preferred nature run the show. We can expect that
60 • September 2018 • Technical Analysis of Stocks & Commodities
the natural adaptations that evolved over time will prevail in the
situations we encounter, sometimes to our disadvantage, unless
we learn to incorporate an understanding of our preferred na-
tures. Analysis can provide the food for that understanding.
Confidence before realism
Overconfidence is part of our genetic legacy, but for inves-
tors, analysts, and traders it can be a two-edged sword. In the
often frightening conditions of past eras in history, those who
survived were those who had confidence. Their confidence
encouraged them, attracted allies, and provided resources to
them. People with outward confidence were those with the best
chances of passing on their genes. People often put their faith
in confidence over realism, believing that those with confidence
must know how to solve the problems at hand. People would
even try to protect themselves from any evidence that would
undermine that display of confidence.
People are driven to feel good about themselves. But run-
ning on a high-energy confidence cocktail can lead you into
several dangers. For example, you may neglect to see important
clues about impending disasters or you may react too late. You
might forge into hopeless business situations, assuming you
PATHDOC/SHUTTERSTOCK
have what it takes to fix any problems that may arise, or you
may work endlessly on a new project that isn’t sound. Some
people behave as if there isn’t a problem in the world they
can’t control, believing—as the adage goes—that “all it takes
 TRADING PSYCHOLOGY
is someone with the right attitude.” And they may have those
around them believing it too.
Here is a little story that illustrates this tendency:
Jerry works in a large chemical plant. He is the type of person
who is always helpful and first to volunteer. One afternoon
there was an explosion in a production area, and fire engulfed
the entire area. Jerry was the first out the door and first to grab
a hose. Jerry assumed, since he called out to his coworkers
to help him, that they would be there holding the other end
of the fire hose. But when he turned around he saw no one
was behind him. Yet he couldn’t put the hose down because
the hose could whip around and harm him. He was in a real
predicament caused by his overconfidence. He was not part
of the official fire brigade who was already responding; not
trained in hazardous material control; and he violated safety
and security standards by endangering himself and others.
Jerry had put confidence before realism.
Several months later, the plant’s president had an important
task he wanted completed and he and his team were looking
for an employee to be assigned to the task. He said, “What
about Jerry? I heard he accomplished quite a feat.” So Jerry
was given the assignment.
Since humans are attracted to confidence, we tend to re-
member people who act with confidence, even more than we
remember their actions themselves.
But confidence alone won’t always bring about the best re-
sults. To improve your chances of getting the best results from
your efforts, it’s necessary to guard against overconfidence
and make sure your efforts are grounded in reality.
Despite how much self-confidence we may have, we cannot
control the world. Many events are random. We might have
tried to apply a method or algorithm to an investment without
success, and later we talked about all the factors that were
outside our control that we couldn’t conquer.
What’s the message here? Perhaps it makes sense to chal-
lenge our nature and ask some questions about how we’re
approaching an issue: Am I being overly optimistic? Am I
expecting too much from my method of analysis? Should I
be using a different combination of tools? Should I integrate
a particular tool that may not make initial sense? Such ques-
tions can force us to separate the emotion of confidence from
facts and reality, because psychology tells us our minds will
not instinctively do that.
Classification before analysis
The world that our ancestors dwelled in constantly presented
new difficulties. Which foods are safe? Where is the hunting
good? What body language or behavior indicates a person
cannot be trusted?
Humans have developed extraordinary capabilities for
sorting and classifying information to make sense of this
complicated universe. Our vast and complex world needed to
be systemized to survive. For our ancestors, these capabilities
were not limited to the natural environment. To prosper in
their groups, they became expert at making judicious alliances.
They had to know whom to share resources with, someone
Learning to weigh the
likelihood of different
events can help you make
better decisions.
who would return the favor when the time came. They had to
learn what untrustworthy people might look like so they could
avoid dealing with them. We became hardwired to stereotype
people based on their looks, their readily apparent behaviors,
and other limited information.
Sorting berries, plants, people, or animals all worked to
the same end. Classification made life simpler and saved
time and energy. Every time our ancestors had food to share,
they needed to know immediately who could and couldn’t
be trusted. A classification scheme had to exist for instant
determination. The faster that decisions could be made, the
more likely a person was to survive.
In the same way, we classify market information and create
an investing or trading methodology. We use technical analysis
in the financial markets for the same reason our ancestors
needed to process information quickly: Acting rapidly upon
receiving and classifying financial information allows us to
succeed (survive).
The tendency toward classification before analysis remains
with us today. People sort others into groups simply by the
way they look and act. We subconsciously, and sometimes
consciously, label other people and things: She’s a snob, he’s a
flirt, she’s different. Technical analysts and financial managers
are not exempt from this tendency. My research has shown
that technical analysts sort approaches that are not their own
into winners and losers within a very short time period, and
we do this in other areas of life as well.
Of course, our inclination to classify nature and character
doesn’t mean it’s the right way to approach something. We
are complex creatures with many variations in behavioral
traits. However, it is illuminating to know that we are actually
programmed not to see these variations as simply being part
of the natural complexity in the world. This is why, regardless
of our best efforts, some ways of thinking and some methods
are hard to adopt.
If you want to improve your analysis skills, give yourself
ways to classify information. Technical analysts and traders
sometimes use complex classification methods and then ap-
ply sophisticated mathematical tools. But one of the easiest
ways to classify information is still just to create lists. We’re
naturally drawn to creating lists, because they help us sort
and remember information.
Education before decisions
When it comes to evaluating methods or technical analysis
approaches, be careful of your innate biases. Instantly judg-
ing and dismissing something could mean you haven’t given
September 2018 • Technical Analysis of Stocks & Commodities • 61
 it fair consideration. Labeling things clouds our eyes and
minds. Make sure your decisions are based on real results
and research. We have a natural tendency to simplify things
in order to make sense of them. But this tendency can create
irrational biases that we don’t even realize we have. Educa-
tion can help us overcome our biases, although even lengthy
training cannot fully eliminate our biases.
What should your education include? Learning to weigh
the likelihood of different events can help you make better
decisions. Developing this probabilistic way of thinking can
help you evaluate things more rationally. After all, advanced
mathematical and scientific tools also use a probabilistic ap-
proach; they largely rely on sophisticated models of processes,
and they seek to produce complex explanations of cause and
effect across different situations. This is what meteorologists
use, and it’s also what technical analysis seeks to do.
Gossip before fact
Our ancestors often faced a scarcity of
resources, the threat of disasters, and a
continually shifting social scene because
leaders were always changing. People
living in groups needed to be able to
anticipate leadership changes, adjust to
them quickly, and adapt to change well
in general. The people who thrived were astute enough to
anticipate changes in the social fabric. Thus, having the skill
of idle talk was valuable because it could keep you aware of
possible changes or events on the horizon. Gathering indi-
vidual observations from different people or being privy to
their intentions might help you predict events or form a more
complete picture.
To this day, humans are attuned to rumor. We want to
know what others don’t in order to gain an edge. We want to
know the “unofficial news” more so than the official news.
And because we’ve mostly learned through oral education
across human history, with information being passed down
through generations, we tend to believe things we hear. But
would it be wise to put money on the line based on a stock
tip we hear or a single tweet we may see on social media, or
based on someone else’s opinion rather than our own analysis
and research? Certainly not, and this is the very reason for
technical analysis. Putting analysis first will help you make
better decisions and obtain better outcomes, especially for
your bottom line.
Daniel J. Subach, PhD, provides performance, innovation,
and creativity evaluation and optimization for individuals and
corporations. He may be reached at db17976@att.net. His
primary research interests are in the psychological tools for
improving investment performance, corporation efficiency,
strategy, and optimized selection of trading platforms.
Further reading
Buss, David [2008]. Evolutionary Psychology, Pearson.
Goldsmith, Timothy H. [1991]. The Biological Roots Of Hu-
man Nature, Oxford Press.
Leakey, Richard [1995]. The Origin Of Humankind, Phoe-
nix.
Ridley, Matt [2004]. The Agile Gene, Perennial.
Subach, Daniel J. [2018]. “The Role Of Evolutionary Psychol-
ogy In Trading,” Technical Analysis of Stocks & Com-
modities, Volume 36: July.
Varki, Ajit, and Danny Brower [2013]. Denial, Twelve-Hachette
Book Group.

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62 • September 2018 • Technical Analysis of Stocks & Commodities
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