THE TRADERS’ MAGAZINE SINCE 1982

www.traders.com AUGUST 2013

By The Numbers
Examining trade setups 10

Trading Without
A Backstop
Using protective stops 16

Volatility BandS
Catching reversals 24

INTERVIEW
Lan Turner on
risk management 34

Portfolio
SAFEKEEPING
Breaking bad habits 40

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 CONTENTS AUGUST 2013, Volume 31 Number 9

10 Trading By The Numbers INTERVIEW

by Sami Khan 34 Managing Risk With
Many traders are happy to back-
test their trading systems, but how Lan Turner
often do they study the statistics by Jayanthi Gopalakrishnan
behind their trading setups prior to Lan Turner has worked in the
implementing a strategy? Here’s financial industry for more than 18
a look at how taking this step can years and has taught his ideas on
help determine whether it’s worth stocks, futures, and forex trading
developing a trading system based to clients, professional traders, and
on an idea. brokers from around the world. QUICK-SCAN, REVIEW
Turner is the CEO of Gecko Soft- 44 • System Design Software, Part 2
FEATURE ARTICLE ware (www.GeckoSoftware.com) Overview: eSignal, Trade Navigator
and chief design architect of Track
16 Trading Without A Backstop ’n Trade LIVE trading platforms
by Anthony Trongone, and charting applications.
48 • ValueCharts
PhD, CTA, CFP Review: Indicators that assess price
Stop orders minimize losses, valuation in any time frame
but they can also misfire. Here’s 39 Explore Your Options
a statistical model applied to by Tom Gentile
the spiders that quantitatively Got a question about options? DEPARTMENTS
measures the profitability of 6 Opening Position
protective stop orders. 40 Keep Your Portfolio Safe 8 Letters to S&C
by Azeez Mustapha 52 †Traders’ Glossary
24 Within The Volatility TIPS We often find ourselves making
the same mistakes over and over. 53 Traders’ Tips
Band
by Sylvain Vervoort Coming to terms with the reality 59 Advertisers’ Index
of trading can help you break 59 Editorial Resource Index
In this fourth part of a seven-part
those bad habits. Find out how. 63 Classified Advertising
series on indicator rules for a
swing trading strategy (IRSTS), 63 Traders’ Resource
we look at catching reversals using 43 Futures For You
by Carley Garner 64 Futures Liquidity
the boundaries of volatility bands.
Here’s how the futures market 65 Books for Traders
really works. 66 Trade News & Products
30 Market Mobs
by John Cameron
The markets are powerful and 51 Q&A
propelled by emotions, often by Don Bright
influenced by crowds. Get an edge This professional trader answers
by understanding how shifts in a few of your questions.
sentiment affect the supply/demand
balance, and ultimately, price.

This article is the basis for Traders’ Tips n Cover art: Lisa Haney
TIPS
this month. n Cover concept: Christine Morrison
Copyright © 2013 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis
of Stocks & Commodities™ (ISSN 0738-3355) is published monthly with a Bonus Issue in March for $89.99 per year by Technical Analysis, Inc., 4757 California Ave. S.W., Seattle, WA 98116-4499. Periodicals
postage paid at Seattle, WA and at additional mailing offices. Postmaster: Send address changes to Technical Analysis of Stocks & Commodities™ 4757 California Ave. S.W., Seattle, WA 98116-4499 U.S.A.
Printed in the U.S.A.

4 • August 2013 • Technical Analysis of Stocks & Commodities

 Financial Strength
and Stability
Interactive Brokers is rated ‘A-/A-2’;
Outlook Stable by Standard & Poor’s

S&P Credit Ratings Comparison1

Broker Dealer Rating Outlook
JPMorgan Chase & Co. A Stable

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Bank of America Corporation A- Negative

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claims and statistical information will be provided upon request.
[1] Ratings were obtained on April 1, 2013 from each firm’s website.
08-IB13-637
 March 2006 • Volume 24, Number 3
August 2013 • Volume 31, Number 9
Opening
O PENING POSITION
Position
The Traders’ Magazine TM
The Traders’ MagazineTM
EDITORIAL
[email protected]

M
O
EDITORIAL
Editor in Chief Jack K. Hutson
[email protected]
Editor Jayanthi Gopalakrishnan
nce again we got a reminder of just
Editor in Chief
Managing EditorJack K. Hutson
Elizabeth M.S. Flynn
Production
Editor Manager
Jayanthi Karen E. Wasserman
Gopalakrishnan
oney
how management
sensitive — that’s
the financial what
markets
Art DirectorManager
Production ChristineKaren
Morrison
E. Wasserman makes you a successful
are. We saw a major selloff in the Japanese trader and
Graphic Designer Sharon Yamanaka
Art Director Christine Morrison that’s what should have top priority
markets, which — as expected — triggered a when you
create a trading
effect system. Whenthroughout
we are unsure
Editorial Intern Emilie Rommel
Graphic Designer Wayne Shaw domino on markets the
Technical Writer David Penn
Staff Writer Dennis D. Peterson
Staff Writers Dennis D. Peterson, Bruce Faber about what the future holds
world. Add disappointing earnings for us, wenumbers
tend to
Webmaster
Webmaster Han
Contributing
HanJ.J.Kim
Kim
insure
from US it: we insure ourand
corporations homes, our valuable
you have a situa-
ContributingEditors
Editors John
JohnEhlers,
belongings, our cars, our health, and ouroff life.
Ehlers, Kevin Lund,
Anthony
AnthonyW.
W.Warren,
Warren,Ph.D.
Ph.D. tion that just got worse. So what started as
Contributing
ContributingWriters
Writers Don
DonBright,
Bright,Thomas
ThomasBulkowski,
Bulkowski, The element of the unknown
a strong year ended up correcting, and rather exists in the
Martin
MartinPring,
Pring,Barbara Star
markets
rapidly. as well, admit
yet forthat
somealthough
reason we tend
Adrienne Toghraie
I must correc-
to be reluctant to protect the money
tions are healthy for any market, when you have we invest in the
a 2%market.
drop, itWe don’t
gets youthink of the
thinking.
OFFICE
OFFICE OF
OF THE
THE Publisher
PUBLISHER
Publisher
Publisher Jack
JackK.
K.Hutson
Hutson
market as an unknown. On the contrary, we always think we know
Prior to the Federal Reserve’s FOMC meeting, I usually take a look at the yield what the market
Industrial Engineer
Credit Manager Jason
Linda K. Hutson
Eades Gardner will
curve.do At
andpresent,
that weit’swilllooking
alwaysabe right.
little Yes,
flat, andour egosthat
given canthe
create a lotconsensus
general more harm
Project Engineer
than good.
Industrial Engineer
Sean M. Moore
Jason K. Hutson
Project Engineer
Controller Mary K. Sean
HutsonM. Moore is that the Fed is going to tighten at their January 31st meeting, I am concerned
Accounting Assistants Jane Leonard that
Andthelet’s
yieldnot forget
curve mayemotions
be heading — especially pride,of
in the direction greed,
beingand fear —And
inverted. which have
if that
awere
tendency to be firmly rooted in our memory. As we hold on to these emotions, we
Controller Mary K. Hutson
Advertising Sales to happen, that would not be a good sign for the US economy. I’m not
4757 California Ave.
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Seattle, WA 98116-4499
S.W.
SALES deny ourselves the ability to look at each new trade we place
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We are well aware of happen,
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theasworst.
thoseIfdiscussed in our
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Edward
NationalW.Sales
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Classified &Sales
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Sales Chris J. Chrisman
Davis soon; that is, after getting stopped out, the price may move in our favor had we

So
still held onto that position. On the flip side, if we let the losses become too large,
Production Coordinator Karen Moore

Circulation
CIRCULATION
pride gets in with
thethat
wayinandmind, you can
we refuse see out
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the important
position. to design a trading

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important to be thorough with the different types of orders, front-end software, and
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trading systems that are out there. Lee Leibfarth, in his article “The Automated
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the first step to take in trying to eliminate emotions from our memory is to
Daytrader” starting on page 22, addresses the various options that are available and
WEBSITE
Website
http://www.traders.com quantify the effect of losing positions. In Trading Without A Backstop beginning
how you can take advantage of them.
http://www.traders.com
Staff members may be emailed through the Internet on page 16, author Anthony Trongone creates a statistical model that measures the
Staff members
first initialmay
plusbe emailed through the Internet But before getting to the stage of placing that trade, you need to understand the
costs, profits, and savings of using stops. Trongone analyzes the effectiveness of
using last name plus @traders.com
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market you are trading. You should be able to do so after reading Paolo Pezzutti’s
placing stops at specific times in the market to determine when and where it is best
“Understanding Market Structure.” The markets follow different behavior pat-
use,
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orto­ copy items useforofinter­ nal orclients,
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terns, and you need to determine if it is volatile, trending, in a trading range, moving
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Danvers, MA 01923. Online: http://www.copyright.com. For
Danvers, MA 01923. Online:
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been granted a photocopy For
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commodities discussed. Technical Analysis Inc., one or
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8 • March 2006 • Technical Analysis of STOCKS & COMMODITIES

6 • August 2013 • Technical Analysis of Stocks & Commodities
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 ZIGZAG & 1-2-3 WAVE COUNT
The editors of S&C invite readers to submit their opinions and information on subjects
Editor,
relating to technical analysis and this magazine. This column is our means of communica-
Thank you for Sylvain Vervoort’s recent
tion with our readers. Is there something you would like to know more (or less) about?
articles in S&C. I am looking forward to
Tell us about it. Without a source of new ideas and subjects coming from our readers,
reading and implementing all of them.
this magazine would not exist.
I just downloaded the SVEHLZZper
Email your correspondence to [email protected] or address your correspondence
file. The figures in Vervoort’s articles
to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499. All
show numbers at turning points, but my
letters become the property of Technical Analysis, Inc. Letter-writers must include their full
chart doesn’t show any numbers on the
name and address for verification. Letters may be edited for length or clarity. The opinions
zigzag. I am missing something, or this
expressed in this column do not necessarily represent those of the magazine.—Editor
is how it is?
Javier
GAPO RANGE INDEX section of the June 2013 issue of S&C,
Editor, available at the S&C website at www. Author Sylvain Vervoort replies:
I recently came across traders.com in the Traders’ Tips area. If The high-low zigzag does not automati-
the Gopalakrishnan range TOS is not represented there, you might cally show the 1-2-3 wave count. This
index (“Gopalakrishnan try contacting thinkorswim regarding is done manually. Once you are used
Range Index,” Stocks possibly getting code to use for the to how to count the 1-2-3 waves, there
& Commodities, Janu- strategy. will be no need to keep a manual count,
ary 2001). Do you have this indicator because mostly, you will just be looking
for Microsoft Excel? I would be very 1-2-3 Wave Count at the last couple of waves.
happy if I could implement it in an Excel Editor, In my July 2013 article in which I
spreadsheet. I read Sylvain Vervoort’s use the zigzag to identify candlestick
Antonio article in the June 2013 patterns at the turning points (“The
S&C (“The 1-2-3 Wave Step Candle Pattern,” which is the third
The article included a sidebar on how to Count,” which is the part of my series on indicator rules for
implement the indicator in Excel (“Cal- second part of a series a swing trading strategy), an identifica-
culating GAPO With Excel”). Readers on indicator rules for a swing trading tion of the found pattern will be written
can access the article and sidebar in strategy) and wish to get the code for automatically.
the article archive at our website, www. use in NinjaTrader to implement the
traders.com.—Editor technique, but I cannot locate the .zip 1-2-3 Wave Count
file. Do I take the code and create a .zip Editor,
CODE FOR SWING TRADING STRATEGY file from that to import into NinjaTrader? I read Sylvain Vervoort’s
Editor, Or is the SVEHLZZperc.zip file already article “1-2-3 Wave
Congratulations to Syl- created? Count” published in the
vain Vervoort on his well- Curtis June 2013 S&C. His sug-
written articles (“Indicator gestion is to enter long on
Rules For Swing Trading Author Sylvain Vervoort replies: an expected wave 3 or 1. But I cannot
Strategies,” parts 1 & 2, The zip file is already created and ready find the way to forecast targets for wave
May and June 2013) that do a good job to import into NinjaTrader. You can 3, even if I am guessing the author uses a
of explaining the rules for swing trading. download this file from my website from Fibonacci projection of 168.2% applied
I’ve been working on an objective system http://stocata.org/ninjatrader/zipfiles/ to waves 1-2 and a trigger signal is given
for futures trading myself. The rules have SVEHLZZperc.zip, or to navigate to this by the breakout of wave 1 top.
been working very well. I would like to link at my website, go to http://stocata. Nicolas
expand this to swing trading equities, so I org, then click on the technical analysis
am intrigued about what Vervoort has to menu, then click on NinjaTrader formu- Author Sylvain Vervoort replies:
offer. Will he be offering the indicators las, then click on the item named “1-2-3 Please keep in mind that the 1-2-3 wave
for the TOS (thinkorswim) platform? wave count.” Download the basic Nin- count is just one of the rules to look at
I look forward to learning more about jaScript formula, SVEHLZZperc.zip. for the IRSTS (indicator rules for a swing
his system. This zip file can also be downloaded trading strategy). You look for a wave
Mark from the S&C website from http://traders. 1 or 3 because a wave 2 is a correction
com/files/Vervoort-NinjaTrader.html or wave, and as such, is mostly limited to
Author Sylvain Vervoort replies: from the S&C Article Code area at the a 50% retracement of the previous wave
Code for several charting platforms S&C website, www.traders.com (scroll 1 or 3. The wave count does not predict
based on my swing trading strategy down to the June 2013 issue). a target price, except that a wave 1 or
has been published in the Traders’ Tips 3 will move beyond the top or bottom of
8 • August 2013 • Technical Analysis of Stocks & Commodities
 LETTERS
the previous wave 1 or 3.
To estimate the target price, other
techniques can be used, such as different
Fibonacci projections, price channels,
pitchforks, support/resistance, and so
on.

HEIKIN-ASHI TEMA
Editor,
I was wondering if author Sylvain Ver-
voort has coded the typical price and
• Real-time proprietary charting service with streaming audio and text of
heikin-ashi TEMA average crossing for
market commentary, research and alpha-generating trade ideas.
use on the NinjaTrader platform.
Tristan • Unique set of proprietary algorithms to identify market direction,
trend reversals and patterns.
Author Sylvain Vervoort replies: • Learn to be on the right side of the market and to be disciplined and
I am in the middle of presenting a series confident in your trading abilities.
of articles in S&C on IRSTS (indicator
rules for swing trading strategies) trad- Phantom Trader is unique in that no other intraday market research service
provides tight technological integration between its market commentary
ing system setup. (Part 4 appears in
and proprietary charting tools.
this issue, titled “Within The Volatility
Band.”) The series began with the May
2013 issue. Part of the overall strategy www.phantomtrader.com
involves the heikin-ashi with the typical
203-617-4050 • [email protected]
cross, and an article in the series ad-
dressing this topic will appear in an
upcoming issue of S&C. The article will titled Financial Analysts Journal started September 2000. These are a few of
include the source code. by some people connected with the New the articles that I have cut out and
York Society of Security Analysts. The saved.
MORE BASICS, PLEASE initial articles were great because they Why don’t you start a new section in
Editor, covered some of the basics of investing your magazine, perhaps titled “A Re-
I have been a subscriber to S&C for many and different approaches used and were view Of The Past,” and reprint a couple
years. I am 75 years old. I worked on Wall written in a clear, readable style. Then, of those articles on basic technical anal-
Street for 35 years as an analyst and eq- after a few years, the academics took ysis in each issue? Go all the way back
uity portfolio manager and since retiring over the magazine, and the articles dealt to your early issues and reprint some of
have followed the market closely. only with obscure mathematical models those articles covering the basics. Cut
I am writing to suggest an additional that were hard to understand and only of back on the articles with detailed mod-
feature for your magazine because I interest to a very few readers. This is the els. The basic articles would be highly
think the content has deteriorated over same type of trend that your magazine has attractive to new students of technical
the last few years. Many of your articles shown recently. Instead of broadening analysis and could broaden the market
have gotten away from any discussion interest in your magazine, I think you are for your magazine. How many of those
of the basics of technical analysis, and narrowing it with your approach. new technical students are going to wade
too many are now emphasizing highly Recently, I have been going through through pages of formulas and rules? I
mathematical models and approaches some of your back issues that were don’t think many. Even for long-term
that can be of interest to only a few of published 13 years ago. Those issues students of technical analysis, a review
your readers. An example of this is the had great articles on basics written of the basics could be quite welcome
second article of a seven-part series titled by Martin Pring, such as “Peaks And — it certainly would be for me.
“The 1-2-3 Wave Count” by Sylvain Troughs” in May 2000; “Picking Out Ronald Stuart
Vervoort in the June 2013 S&C. How Your Trading Trend” in April 2000;
many of your readers are going to go “Using The Simple Moving Average” Thank you for taking the time to write
through all those formulas, rules, and in June 2000; “Volume Basics” in July and share your suggestions, and thank
exceptions and use them? I don’t think 2000; “Catching DJIA Breakouts” by you for being a longtime subscriber to
very many. When I see an article like Mark Vakkur in August 2000; “Trading S&C. We appreciate your feedback as
that, it’s an automatic pass. Stochastic Pops” by David Steckler in well as your patronage.
In the 1960s and ’70s when I worked August 2000; and “Trend-Following
in New York City, there was a publication With The ADX” by Martin Boot in Continued on page 52

August 2013 • Technical Analysis of Stocks & Commodities • 9

 Beyond Visual

Trading By The Numbers

Many traders are happy to backtest their trading systems, Are backtests the best action to take?
COLLAGE / CHRISTINE MORRISON

but how often do they study the statistics behind their Let’s take a step back. For simplicity, say the system you
trading setups prior to implementing a strategy? Here’s a are considering will have long-only entries, and you have a
look at how taking this step can help determine whether it’s well defined setup. Before performing a complete backtest of
worth developing a trading system based on an idea. trades, ask yourself, “When I have seen this setup in the past,
did the price usually go up afterward?”
by Sami Khan Note that I’m not talking about actual trades taken here —
I’m talking about understanding the typical price distribution

W
hen you make a decision, chances are you will look after a setup has occurred.
at what happened the last time to see what to expect For this long-only system to be of any interest, price must
this time. For example, you would avoid traveling on have usually gone up after the setup. But what does it mean
a route to work that has been congested in the past, or to say that price must have usually gone up? Fortunately,
you would avoid eating foods that you haven’t liked before. these days, there are huge amounts of financial data avail-
Similarly, if you are looking to trade based on a trading system, able, making it easy to find when the setup has occurred in
you would want to see past information about the system. the past. After locating an occurrence, you can look forward
Typically, this would be done by performing a backtest. in the data and sample subsequent price action. Then you
10 • August 2013 • Technical Analysis of Stocks & Commodities
 STATISTICS
6

4
can perform a standard statistical test

Percentage It using Bloomberg Professional

2
to see whether it is statistically sound
to say that price is likely to go up after 0
the setup.
-2
A simple trading system
For illustrative purposes, I will perform -4
a statistical test on a simple trading sys-
tem – J. Welles Wilder’s relative strength -6
index (RSI). For those not familiar with +5 hrs +10 hrs +15 hrs
its construction, see sidebar, “Calculating
The Relative Strength Index (RSI).” Figure 1: Percentage Bands when RSI has not crossed up through 70 or down through 30
on SPX Hourly Data. Here’s a typical result you would expect to see if you looked at a large sample of data with
The RSI is frequently used as an over- zero mean. The bands are centered on zero, which means there was very little price change. The inner bands are
bought/oversold indicator, with high val- tight, showing that most of the results are clustered in the central area about the mean.
ues (closer to 100) indicating the market
may be overbought, and low values (closer
to zero) indicating the market may be 1
oversold. The principle behind the trading
system is that the price is likely to revert
soon when the RSI is in one of these areas.
This system will use the 14-period RSI, and 0
looks to go short when the RSI exceeds 70,
or long when the RSI falls below 30.
But first, is there any reason to believe -1
that when the 14-period RSI exceeds
70, price is likely to go down shortly
afterward? In an attempt to answer this
question, I will run a test on the S&P 500 -2
index (SPX) using hourly data. I will only +5 hrs +10 hrs +15 hrs
look at the first time the RSI exceeds 70,
ignoring every subsequent bar until the Figure 2: Percentage Bands AFTER RSI crossed up through 70 ON SPX Hourly data. Here you
RSI has fallen below 70, and then watch see some historical downside bias. The darker blue band dips below the zero line, and the most extreme negative
for the RSI to exceed 70 again. values seen are twice the positive ones.

One thing to be careful of is that the

underlying data itself has a bias to it. If you
were to use daily data, for example, from 2
the companies that make up the current
S&P index, you could expect an upside 1
bias, given that the historical data will be
for stocks that have made the current index 0
list. For this reason, when I perform the
statistical test, I will compare the results -1
after the RSI crosses with the rest of the
data. I will look to see if price goes up or -2
down more often after the setup than it
-3
does at other times.
-4
Here’s an example +5 hrs +10 hrs +15 hrs
I will first show some statistical analysis
FIGURE 3: PERCENTAGE BANDS AFTER RSI CROSSED DOWN THROUGH 30 ON SPX HOURLY DATA. The bands
of the index itself. I ran the tests on Janu- are chopping up and down above zero, and more extreme values are seen to the downside than to the upside.
ary 21, 2013, using hourly SPX data from
Bloomberg Professional.
For the data tested, 95.49% of the bars were non-crossover By plotting where price goes next for each of these three
points; 2.68% were hourly prices where the RSI changed from areas, I can see if there is anything different about the mar-
below 70 to above or equal to 70; 1.82% were hourly prices where ket behavior in these areas. These charts are displayed in
the RSI changed from above 30 to below or equal to 30. Figures 1–3.
August 2013 • Technical Analysis of Stocks & Commodities • 11
 STATISTICS

To provide a quick explanation of what I am showing, these bias in the data 14 bars after price crosses above RSI 70, rela-
charts are combining every single instance that the condition tive to the rest of the data.
was met and plotting the percentage change since that bar go- Alternative hypothesis: After the price crosses above RSI
ing forward hour by hour. Each band represents one normal 70, there is a downside bias 14 bars later relative to the rest
standard deviation of the results, so the darkest two bands of the data.
contain 50% of the data, the next darkest two contain 45% The two-sample t-test statistic is calculated by the follow-
of the data, and the outermost bands show the most extreme ing equation:
5% of the results.
x1 – x2
Figure 1 displays what you would typically expect to see if

√( )
t=
you looked at a large sample of data with a mean of zero. The s 12 s22
n1 + n2
bands are centered on zero, which means there was very little
change in price. The inner bands are tight, showing that most
of the results are clustered in the central area about the mean,
which is what you would expect from a normal distribution. where:
Figures 2 and 3 are more interesting. If there was nothing x1 is the mean percentage price change from the first
special about the RSI-based entry, then the results would look sample
similar to those of Figure 1, albeit more blocky, since there x2 is the mean percentage price change from the second
is less data. Figure 2 shows some historical downside bias. sample
The darker blue band dips below the zero line, and the most s 12 and s22 are the variances of the two samples
extreme negative values seen are twice the positive ones. n1, n2 are the sample size.
By contrast, Figure 3 doesn’t look as clear, with the bands
chopping up and down above zero, and more extreme values Looking at just the hourly history of the SPX, and taking
seen to the downside than to the upside. These visual checks the mean and standard deviations from the two samples, I get
are useful for a quick interpretation of what is happening, but a t-statistic of 2.3, which is larger than the required value for
they are not as rigorous as the full statistical check. 95% significance of around 1.7.
My conclusion is that at 95% significance, there is reason to
This statistical check provides reject the null hypothesis and to suspect that the SPX hourly
data has a downside bias, compared with the rest of the data,
a good grounding to build on, after the RSI crosses upward through 70.
and to potentially develop a If I perform the same test for crossings of the 30 level, look-
ing for an upside directional bias, I come out with a negative
system from. sample mean (which would immediately cause me to accept
the null hypothesis anyway), and a t-statistic of -0.5. My
Let’s get rigorous conclusion would be that there is no reason to believe there’s
Now I’ll perform a classic statistical test. The first step is to an upside bias, relative to the rest of the data, after the RSI
define the hypotheses and the significance level to use. I am going crosses downward through 30.
to use a 95% significance level, which is standard in statistics, This statistical test has confirmed what I expected from
and use a two-sample t-test. For the two samples, I will look at looking at the percentage band charts. Often, just looking at
the bars where there was a cross of the RSI level, and the bars percentage charts of this kind is quicker than performing a
where there was not. I’ll look at 14 bars (the period of the RSI) rigorous test.
forward to measure the percentage change in price. This initial statistical check has given me a good grounding to
Note that two conditions of the t-test are that the original data build on, and to potentially develop a system from. The results
is normal, and the sample is independent. I will assume that suggest that I should look to utilize the RSI crossing the 70 level,
the sample set is large enough so that I am looking at roughly but I have no reason to investigate the RSI crossing 30.
normally distributed data. I will also assume that the sample
size is large enough so that the fact consecutive bars show slight Number-crunching the S&P 500
dependence will be insignificant. Is the SPX example a typical one, or have I simply found a
Null hypothesis: There is no difference in any directional price history with a good result? I ran a similar statistical test
on each constituent of the SPX and recorded the
t-statistic RSI cross 70, downside bias RSI cross 30, upside bias t-statistics returned. A summary of the results
can be seen in the table in Figure 4. Remember
95% significance 22.3% 8.2% that statistical tests are designed to be run on a
75% significance 50.1% 28.4% single case rather than multiple cases, so these
results should only be taken as reference.
FIGURE 4: RESULTS SUMMARY for the S&P 500. The percentage of the S&P 500 showing a downside
bias following a cross of RSI 70 looks somewhat larger at 95% and 75% significance than would be expected At 95% significance, you would expect
by chance. roughly 5% of the data to be significant, simply
12 • August 2013 • Technical Analysis of Stocks & Commodities
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 STATISTICS

CALCULATING THE RELATIVE STRENGTH

INDEX (RSI)

Formula:
RSI = 100 – [100/(1+ RS)]

where:
RS = Average up days in the last 14 days
(default parameter) divided by the
average down days in the same time
period.

Column C:
if Close(today)>Close(yesterday)
then Close(today) less Close(yesterday)
else “0”

Column D:
if Close(today)<Close(yesterday)
then Close(yesterday) less Close (today)
else “0”

Column E:
Line 16: Sum of Cells C3 to C16 divided by 14
Line 17: [13x(Value E16) + C17] divided by 14

(Column F analogous)

by chance. Similarly, at 75% significance, you would expect which monitors the market for statistically unlikely
25% of the data to be significant. The data for the RSI 30 activity. He is based in London, UK, and may be
cross is not dissimilar from these levels, but the downside reached at [email protected].
bias at the RSI 70 crossing does look somewhat larger at both
95% and 75% significance levels than you would expect to Suggested reading
see by chance. This would appear to back up the results I got Altman, Roger [1993]. “Relative Momentum Index:
for the SPX. Modifying RSI,” Technical Analysis of STOCKS
& COMMODITIES, Volume 11: February.
Is it valid? ___ [1990]. “Parameter Optimization,” Technical
I have described how to use market-based statistics for in- Analysis of STOCKS & COMMODITIES, Volume
vestigating the validity of a setup when specifying a trading 8: December.
system. You may find it useful to apply standard statistical Down, Walter [1998]. “Combining Statistical And
tests such as this one to justify or disprove assumptions about Pattern Analysis,” Technical Analysis of STOCKS
those setups. & COMMODITIES, Volume 16: October.
In this article, I’ve only looked at one specific situation — a Katz, Jeffrey Owen, and Donna L. McCormick
14-period RSI, on hourly data, looking at 14 bars after the RSI [1997]. “Evaluating Trading Systems With
setup forms, and at crosses of the 30 and 70 levels. It would Statistics,” Technical Analysis of STOCKS &
be interesting to change these parameters and see what impact COMMODITIES, Volume 15: July.
it has on the results. _____ [1997]. “Using Statistics With Trading
Systems,” Technical Analysis of STOCKS &
Sami Khan studied mathematics with computation at Oxford COMMODITIES, Volume 15: August.
University, where two areas particularly interested him: Wilder, J. Welles [1978]. New Concepts In Techni-
algorithm design and statistics. After leaving university, he cal Trading Systems, Trend Research.
joined the development team at Updata, which exposed him ‡Bloomberg Professional/Percentage It
to both technical analysis and the financial markets, subjects †See Traders’ Glossary for definition
which have fascinated him ever since. In 2012, he cofounded ‡See Editorial Resource Index
Percentage It, providing statistically based financial software
including Match It, which analyzes charts to see when the mar-
ket has looked similar to today’s chart in the past, and Watch It,
14 • August 2013 • Technical Analysis of Stocks & Commodities
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16 • August 2013 • Technical Analysis of Stocks & Commodities
 MONEY MANAGEMENT

Untangling The Web

Trading Without
A Backstop
Stop orders minimize losses, but they can The model
also misfire. Here’s a statistical model applied to Popular investment literature has us cutting our losses
the spiders that quantitatively measures the profit- before a small loss grows into a painful experience.
ability of protective stop orders. Nevertheless, for most active traders, would it be
more profitable to simply bite the bullet, or apply
these defensive orders after taking an opening posi-

T
tion? Let’s take a look.
he consensus among market strategists is
that traders should always use stop orders Assumptions:
with long positions. In fact, sometimes even In the 743 trading days studied, I always enter into
questioning the absence of protective orders invites a long position in the spiders (SPDR S&P 500 ETF
criticism; evidently, this is a contentious topic. During Trust) at 9:30 am, along with a stop-sell order below
my presentation for Technical Analysis of Stocks & this opening (9:30) price. If the stop-order executes, I
Commodities at the 2013 New York Trading Expo, take no further action. If, however, I am still holding
the daytraders attending agreed they often found stop a long position, I will promptly offset it at 10:30; in
orders somewhat meaningful; they were, however, the process, I will cancel my protective order.
also quick to acknowledge that these orders can just This analysis is based on the following assump-
as easily misfire. tions:
The main reason supporting the use of a backstop
n When reporting the statistics, this study uses
is to offset your position before a minor loss turns the 9:30 opening price as the buying price of
into a devastating setback. Besides insulating you the long position as well as the 10:30 closing
from further loss, it also offers the psychologically price as the selling price.
calming effect of knowing that your downside ex-
posure is fixed. n If a stop order executes, the entry price is
Although the premise for minimizing loss appears what is reported as the execution price;
this, however, is often a measurement error
to be a sensible strategy, the basis for this recommen-
because when placing this order, the price
dation comes from subjective theory, not empirical
of the fill will be a penny or a few pennies
evidence. Thus, the discussion often skirts around below the entry price of the order.
this issue by giving us platitudes such as “never let
a small loss turn into a big one.” Rather than accept n This study does not consider the cost of
this at face value, I prefer to construct a statistical commissions.
model to quantitatively measure the profitability of
LISA HANEY

n The study does not allow for random shocks.

these protective stop orders. In the case of a catastrophic event, the offset-
ting price will be far below the price of the
stop-sell order.

by Anthony Trongone, PhD, CTA, CFP This investigation (June 1, 2010–May 13, 2013)
August 2013 • Technical Analysis of Stocks & Commodities • 17
 MONEY MANAGEMENT

tracks the perfor- percent average per-share case is $6.86 – $3.15

mance of these pro- stop
stops percent per day
stop price expense = $3.71.
tective orders when
using various per-
0.0025 359 0.483 2.07 0.322 115.56
Measuring

MICROSOFT EXCEL
centage stops below 0.0050 150 0.202 4.95 0.625 93.75 performance
the opening price. 0.0075 56 0.075 13.27 0.913 51.13 The gross income of
0.0100 23 0.031 32.30 1.153 26.52 a protective stop can
Calculations: Figure 1: applying different stop percentages. Here you see the frequency of receiving a fill
be assessed by sub-
9:30 price = $160, on your stop order after taking a long position at 9:30 am. Note the average stop price and the per-share tracting the revenue
stop at 0.25% expense for different percentage stops within these 743 trading days (June 1, 2010–May 13, 2013). from the expense of
triggering a stop-loss
Given a 9:30 price of $160, if you place your stop at a quar- order. Say, for example, I make $20 on days when my stop order
ter percent below the opening price, the order would be set at doesn’t fill (that is, the spiders do not fall below our stop order).
$160 – $0.40 = $159.60. But on the days the stop order executes, my gross income is
Before getting started, I’ll define the performance terms: just $2 since it costs me $18 to place these stops.
This, by itself, is informative; however, without comparing
Gross income = Revenue – Expense it to the performance of the opening hour of trading, I cannot
properly assess its effectiveness. Given a $5 advance in the
Revenue: This is the performance of the spiders (SPY) when you opening hour, the $2 profit from using stops leaves me $3 short;
do not receive a stop-loss fill in this opening hour. For instance, that is, in taking a long position at 9:30 but selling it at 10:30 I
by entering into a long position at $160 with a 0.25% stop order make $5; if I use a stop order, however, I come away with $2;
(at $159.60), if the spiders do not fall below $159.60, there is the opportunity cost of taking a short position is -$3. In this study
no fill; therefore, your revenue is the price change between I have included the gross income of using a stop order together
9:30 to 10:30 am. with the opportunity cost or savings of the stop-loss order.

Expense: This is the cost of using protective orders, which Opportunity

results from receiving a fill on your stop-loss order. With a cost/savings
long position at $160, if the stop order executes at $159.60, In the 384 (743 – 359 stops) days without
the per-share cost of placing this protective order is -$0.40 receiving a fill, the spiders had 310 advances
(100 shares = $40). versus 71 declining sessions (with four ties);
consequently, the spiders — using the 0.25%
Statistical findings: stop — produced $118.71 in revenue. The
question is, would using a different percent-
n There were 359 fills in 743 days (48.32%)
age stop provide similar results? Figure 1
n This means there was one fill in every 2.07 shows the results using a 0.25%, 0.50%,
trading days. 0.75%, and 1% stop.
If you are going to place stop orders, how often do you want
this protective order to work? The 0.25% (359 fills, or about
Revenue = $118.71
two stops per trading day [ptd]), the 0.50% (4.95 fills ptd),
Expense = $115.56 (359 stops at a cost of $0.322)
the 0.75% (13.27 ptd) or the 1% stop (32.30 ptd) each offer
varying degrees of choice. Besides knowing their frequency,
Gross income = Revenue – Expense = $3.15 anyone employing these protective orders should also know the
costs associated with these stops (Figure 1). In the long run,
Although these results seem to support the use of these the smaller the percentage stop, the higher the cost associated
pro­tective orders, we also have to consider the savings or with using them.
cost of placing them. More important,
Anyone buying at percent
revenue on
cost of placing 743-day you have to assess
9:30 without using stop
stops days with no
stop orders performance performance (rev-
a stop-loss order stop fill
enue – expense).
would have made 0.0025 359 118.71 $115.56 $3.15 Figure 2 shows the
$6.86 over these 743 0.0050 150 94.83 $93.75 $1.08 performance (gross
trading days. The income) when ap-
0.0075 56 53.53 $51.13 $2.40
difference between plying different per-
these two conditions 0.0100 23 28.96 $26.52 $2.44 centage stops from
is the opportunity Figure 2: performance of applying different percentage stops. The highest gross income of the 9:30 am price.
cost, which in this $3.15 is from applying the quarter percent stop. All four percentage stops resulted in a positive performance. In these 743 trad-
18 • August 2013 • Technical Analysis of Stocks & Commodities
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 MONEY MANAGEMENT

ing days, the 0.25% stop percent 9:30–10:30 743-day opportunity

stops. Despite trying four
gave the best perfor- stop performance performance cost different percentage stops,
mance ($3.15), whereas placing a protective stop was
0.0025 $6.86 $3.15 -$3.71 ineffective at outperforming
the 0.50% stop was the
less-desirable option. 0.0050 $6.86 $1.08 -$5.78 the strategy of buying at 9:30
The 0.25% stop, at 0.0075 $6.86 $2.40 -$4.46 and selling at 10:30.
$3.15, had the highest
gross income. Since these
0.0100 $6.86 $2.44 -$4.42 Incorporating a
four percentage stops FIGURE 3: OPPORTUNITY COST. Given these four percentage settings, in comparison to sim- trading system
resulted in a positive per- ply holding a long position from 9:30–10:30 am, a protective stop order was unproductive. In the earlier analysis, I did
formance, why would we not incorporate a trading
question the usefulness of the stops? In the table in Figure 3, strategy. Since a good system should strengthen performance
you can see that the four percentage stops were unable to beat results, this study continues with a system that focuses on early
the $6.86 performance of the buy at 9:30 and sell at 10:30 strat- morning trading volume. If early morning (7:30–8:30) activity
egy. There was an opportunity cost associated with using these is strong, will it improve trading performance when trading in
the 9:30–10:30 hour?
The average trading volume
0.0025 stop (¼%) 7:30–8:30 volume in spiders > 2 million shares (ATV) in the 7:30–8:30 session
was 1.488 million shares. When
trading
stops percent
9:30–10:30
revenue expense
gross there is excessive early morning
days performance income trading activity, what performance
impact is there on the 9:30–10:30
165 98 0.5939 ($3.32) $32.25 $29.98 $2.27 session? In the 165 days when
FIGURE 4: EXCESSIVE EARLY MORNING ACTIVITY AND A 0.25% STOP-LOSS. When the 7:30–8:30 am session had trading trading activity was greater than
volume of over two million shares, the opening hour had a loss of $3.32 in 165 trading days; however, placing a quarter percent two million shares in the earlier
stop (0.0025) from the opening price was profitable, advancing $2.27. hour, the spiders had a summary
loss of -$3.32 (Figure 4). With
0.0050 stop (½%) an opening-hour loss, you would
7:30–8:30 volume in spiders > 2 million shares certainly expect the use of these
protective orders to be more ad-
trading 9:30–10:30 gross
stops percent revenue expense vantageous.
days performance income
Unlike with the earlier findings,
a protective stop at 0.25% below
165 64 0.3879 ($3.32) $33.17 $38.56 ($5.39)
the opening price was a good strat-
FIGURE 5: EXCESSIVE EARLY MORNING ACTIVITY AND A 0.50% STOP-LOSS. Applying a half percent stop resulted in egy; however, a 0.50% stop was
a -$5.39 loss.
unable to profit from this declining
hour (Figure 5).
Although I am applying a similar trading strategy, the results
are dissimilar. The placement of the stop was directly responsible
for this performance discrepancy. So now, not only do you have
to be concerned with whether to use a protective stop, but as
this study illustrates, if you choose to use one, the question of
where to set it is the difference between success and failure.

Quantifying fear
Before entertaining the prospect of using these protective
stop orders, it pays to know the worst that can happen. Ex-
actly what were the 20 biggest losses in this opening hour of

Where you set your stop

is the difference between
success and failure.
“The rescue of the stranded cruise ship took place quickly and
smoothly because it was carrying a covention of lawyers.”
20 • August 2013 • Technical Analysis of Stocks & Commodities
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 $0.00

-0.50

-1.00

-1.50
09:30 – 10:30
HOURLY LOSS
-2.00

-2.50

FIGURE 6: QUANTIFYING FEAR. The down arrows represent the 20 worst performance results when trading the 9:30–10:30 am session.

trading? Figure 6 displays these grim findings. But remember, pensating are more likely to place a protective stop, because
this represents every day that had a loss of a dollar or less (20 they want to be insulated from the threat of experiencing any
cases/743 trading days = 0.02692). When you consider that a of these $1 or more losses.
loss of this magnitude came only once every 37.15 days, is it The 0.25% stop in this negative environment (-$3.54 in 30 trad-
worth the cost? ing days) was advantageous, producing a profit of $2.18 (Figure
7). You can see the magnitude
of these losses in Figure 8.
gross
EPICENTER OF MELTDOWN revenue expense My concern is not in these
income
30 days, but in the 75 days
Trading 0.0025 9:30–10:30 preceding this $3.54 correc-
Dates N sum N sum N sum
days stop fills performance tion as well as the 30 days
following it. Figure 9 shows
7/15 – 8/25/11 30 21 -$3.54 9 $8.58 21 $6.40 30 $2.18 the reason for my uneasiness
FIGURE 7: EPICENTER OF MELTDOWN. In these 30 trading days, when the spiders had an opening-hour loss of $3.54, a protective in the shifting performance of
stop order at 0.25% resulted in a gain of $2.18, which is a $5.72 savings. the spiders as they advance,
decline, and advance.
Certainly, the fear of suffering an excessive loss is always In the 75 days preceding this fall, stops do not work (op-
present. The down arrows in Figure 6 represent the sharpest portunity cost of -$2.54); however, in the downturn, they
hourly losses, which contain every one of the 20 losses at or are effective (opportunity savings of $5.72). After providing
less than $1. impressive savings, stop orders again fail to work (opportunity
When holding an hourly long position, these were the larg- cost of -$5.52). Thus, we go from protective orders not work-
est declines. Don’t let these previous downturns inhibit your ing (“I will never use stops!”), to working (“I will always use
aggressiveness. If you do, it will elicit unnecessary caution, stops!”), to not working (“I will never use stops!”).
which will place an emotional strain on your decision-making This inconsistency in performance will tempt you to modify
process. Seen from this perspective, those who are overcom- your trading rules. Changing your rules can sometimes be pro-

$0.00
-0.50
-1.00
-1.50
-2.00
-2.50 SPY (opening hour)
Lowest price – Opening price
-3.00
-3.50
J-10 S-10 D-10 M-11 J-11 S-11 D-11 M-12 J-12 S-12 D-12 M-13 J-13
FIGURE 8: OPENING-HOUR LOWEST PRICE. The nastiest downturns come during the 30 trading days between July 15, 2011–August 25, 2011. Using a protective stop order here
was a money-saving strategy.

22 • August 2013 • Technical Analysis of Stocks & Commodities

 EPICENTER OF MELTDOWN revenue expense
gross oppORTUNITY
Trading 0.0025 9:30–10:30 income cost/savings
Dates N Sum N Sum
days Stop fills performance

03/29 – 07/14/11 75 33 $3.82 42 $12.14 33 $10.86 $1.28 -$2.54

07/15 – 08/25/11 30 21 -$3.54 9 $8.58 21 $6.40 $2.18 $5.72

08/26 – 10/07/11 30 23 $2.28 7 $3.44 23 $6.68 -$3.24 -$5.52

FIGURE 9: THE SHIFTING SPIDERS. The days surrounding the July 15, 2011–August 25, 2011 correction were poor environments for a protective stop.

ductive, but when you make bold shifts in your money manage- Anthony Trongone has been a Master Educator for eSignal
ment rules, such as from I will always to I will never and back since 2006. He is a regular contributor to Technical Analysis
to I will always take stops, it is not conducive to becoming a of Stocks & Commodities. His new book, Trade With The
better trader over the long run. Odds: How To Construct Market-Beating Systems, discusses
more of his trading systems.
The sweet stop
In this article, I first took a look at the efficacy Suggested reading
of using protective stop-loss orders during the Trongone, Anthony [2013]. “Early Morning Activity,” Technical
opening hour without using a trading system. Analysis of Stocks & Commodities, Volume 31: June.
I then examined excessive early morning ______[2012]. Trade With The Odds: How To Construct Market
trading volume, which shed some light on the Beating Trading Systems, Bloomberg Press.
complexities of using these protective orders. _____[2012]. “Warning: Bear Activity,” Technical Analysis of
In an upcoming article, I will look at other trading systems Stocks & Commodities, Volume 30: November.
to assess their performance when applying these protective
backstops. I will also provide some realistic discussion on the ‡Microsoft Excel
emotional impact that protective stops have on your decision-
making process.

August 2013 • Technical Analysis of Stocks & Commodities • 23

 Take It From The Top, Or Bottom

Within The Volatility Band

In this fourth part of a seven-part series, we look at book New Concepts In Technical Trading Systems. The true
NADIR KIANERSI

catching reversals using the boundaries of volatility bands. range indicator is the greatest of the following:

O
by Sylvain Vervoort n The current high less the current low

n The absolute value of the current high less the

ne of the indicator rules for my swing trading strategy previous close
(IRSTS) is to catch potential reversal points using the
upper and lower boundaries of volatility bands. In n The absolute value of the current low less the
this article, I will show you how to create volatility previous close.
bands and use them to make buy & sell decisions.
Simply put, a stock experiencing a high level of volatility
Measuring volatility will have a higher ATR, and a low volatility stock will have
There are many ways to measure price volatility; one of the a lower ATR.
common ways is to use the average true range (ATR), origi- Personally, I prefer to smooth results right from the first
nally developed by J. Welles Wilder and introduced in his data manipulation, which is why instead of using the closing
24 • August 2013 • Technical Analysis of Stocks & Commodities
 INDICATORS

price, I start with typical data, which is the high + low

+ close divided by three.
When the typical price of today is greater than or equal
to yesterday’s typical price, I will then use the typical
price of today minus the low price of yesterday. When
the typical price of today is less than yesterday’s typical
price, I will use the difference between the typical price
of yesterday minus the low price of today.
By default, I smooth this data by summing a 13-day
period. In Figure 1 you can see the difference between
a standard 13-period ATR graph in the middle and the
smoother ATR typical graph at the bottom. The rising
or falling volatility in a selected time period will usually
be smoother than the Wilder ATR. This better suits the
purpose behind the volatility band I want to create.

NinjaTrader
Band components
To create the upper and lower bands, it is necessary to Figure 1: 13-period ATR graph (middle PANE) and smoother ATR (bottom
define some input parameters: PANE). The rising or falling volatility in a selected time period will usually be smoother
than the Wilder ATR.
n The final band averaging period (band average)
In the data section, you can set calculate on bar close to true
n The basic volatility summing period (summing period)
or false (Figure 2). Using false will calculate the indicator on
n The deviation factor from the average median price (devia- every tick.
tion factor) In the visual section, it’s possible to automatically scale the
chart on the level of the bands by setting auto scale to true. If
n The adjustment factor for the low band (low band ad-
you prefer not to automatically scale your chart on the high and
just).
low of the bands indicator, set this parameter to false. Since
I don’t want this data (that is, the plot values of the bands)
Figure 2 shows the default parameter values in the param-
displayed in the data box, I have set this parameter to false.
eters section. These values will work on almost any time frame
The volatility bands plot is set to display in the same panel
used: months, weeks, days, hours, minutes, ticks, or range.
as price data, since you naturally want the bands to overlay
They will also work on Renko bar charts.
the price plot, and the plot is set to be justified with the price
scale at the right of the chart. I also do not want price markers
displayed on the price scale.
Note in the plots section that the upper and lower bands
are to be colored magenta, with the upper and lower bands
displayed as dotted two-pixel lines and the median line a
one-pixel solid line.
The lower band adjust setting is useful to take into consid-
eration the difference in response between the upper and lower
bands. Price usually reaches the upper band more frequently
than the lower band. This is because of the difference in price
behavior between up moves and down moves. This is why
I use the low band adjust parameter to reduce the deviation
factor for the low band.
The complete formula for the volatility band can be found in
sidebar, “SVEVolatilityBand Indicator.” The variables I have
just defined can be found following “#region variables.” The
plotting parameters and new data series are initialized in the
section “protected override void Initialize(). The programming
for the volatility band starts in the section “protected override
void OnBarUpdate()”:
protected override void OnBarUpdate()
Figure 2: VOLATILITY BAND SETTINGS. Here you see the default parameter {
if (CurrentBar < 1) return; // need 2 bars to start
values for the volatility band components as well as chart display options.

August 2013 • Technical Analysis of Stocks & Commodities • 25

SVEVolatilityBand Indicator
// SVEVolatilityBand is Copyright (C) 2012, Sylvain Vervoort <stocata.org>. if (CurrentBar > average*3+2*volperiod) // show only after it is stable
// stocata.org reserves the right to modify this NinjaScript with each release. {
// Release V1.0 March 2012. Upper.Set(EMA(medianaverage,average)[0] + devhigh);
Lower.Set(EMA(medianaverage,average)[0] - devlow);
#region Using declarations Median.Set(SMA(medianaverage,average)[0]);
using System; }
using System.Diagnostics; }
using System.Drawing;
using System.Drawing.Drawing2D; #region Properties
using System.ComponentModel;
using System.Xml.Serialization; /// <summary>
using NinjaTrader.Data; /// </summary>
using NinjaTrader.Gui.Chart; [Browsable(false)]
#endregion [XmlIgnore()]
public DataSeries Upper
// This namespace holds all indicators and is required. Do not change it. {
namespace NinjaTrader.Indicator get { return Values[0]; }
{ }
/// <summary>
/// The SVEVolatilityBand uses an upper and lower band over price bars. /// <summary>
/// Price moves mostly withing this band. /// </summary>
/// </summary> [Browsable(false)]
[Description(“The SVEVolatilityBand uses an upper and lower volatility [XmlIgnore()]
band over price bars”)] public DataSeries Lower
public class SVEVolatilityBand : Indicator {
{ get { return Values[1]; }
#region Variables }
private int average = 8; // Band average
private int volperiod = 13; // Volatility Summing period /// <summary>
private double devfact = 3.55; // Deviation factor /// </summary>
private double lowbandadjust = 0.9; // Low band adjustment factor [Browsable(false)]
[XmlIgnore()]
private double devhigh, devlow; public DataSeries Median
private DataSeries typical; {
private DataSeries deviation; get { return Values[2]; }
private DataSeries medianaverage; }
#endregion
/// <summary>
/// <summary> /// </summary>
/// This method is used to configure the indicator, called once before any [Description(“The Volatility Band average DEF=8”)]
bar is loaded. [GridCategory(“Parameters”)]
/// </summary> [Gui.Design.DisplayName(“1. Band Average”)]
protected override void Initialize() public int Vol_Band_Average
{ {
Add(new Plot(Color.Magenta, PlotStyle.Line, “Upper”)); get { return average; }
Add(new Plot(Color.Magenta, PlotStyle.Line, “Lower”)); set { average = Math.Max(1, value); }
Add(new Plot(Color.Magenta, PlotStyle.Line, “Median”)); }

Plots[0].Pen.Width = 2; /// <summary>
Plots[0].Pen.DashStyle = DashStyle.Dot; /// </summary>
Plots[1].Pen.Width = 2; [Description(“The Volatility Look Back Summing Period DEF=13”)]
Plots[1].Pen.DashStyle = DashStyle.Dot; [GridCategory(“Parameters”)]
Plots[2].Pen.Width = 1; [Gui.Design.DisplayName(“2. Summing Preiod”)]
Plots[2].Pen.DashStyle = DashStyle.Solid; public int Vol_Summing_Period
{
typical = new DataSeries(this); get { return volperiod; }
deviation = new DataSeries(this); set { volperiod = Math.Max(1, value); }
medianaverage = new DataSeries(this); }
Overlay = true;
PaintPriceMarkers = false; /// <summary>
} /// </summary>
[Description(“The Deviation Factor DEF=3.55”)]
/// <summary> [GridCategory(“Parameters”)]
/// Called on each bar update event (incoming tick) [Gui.Design.DisplayName(“3. Deviation Factor”)]
/// </summary> public double Deviaton_Factor
protected override void OnBarUpdate() {
{ get { return devfact; }
if (CurrentBar < 1) return; // need 2 bars to start set { devfact = Math.Max(0.1, value); }
}
// basic volatility in new “typical” data series
if (Typical[0] >= Typical[1]) typical[0] = Typical[0] - Low[1]; /// <summary>
else typical[0] = Typical[1] - Low[0]; /// </summary>
[Description(“Low band Adjustment DEF=0.9”)]
// basic deviation based on “typical” over a period and a factor [GridCategory(“Parameters”)]
deviation[0] = SUM(typical,volperiod)[0] / volperiod * devfact; [Gui.Design.DisplayName(“4. Lower Band Adjust”)]
public double Low_Band_Adjust
// the average deviation high and low band {
devhigh = EMA(deviation,average)[0]; get { return lowbandadjust; }
devlow = EMA(deviation,average)[0] * lowbandadjust; set { lowbandadjust = Math.Max(0.01, value); }
}
// the middle average reference
medianaverage[0] = EMA(Typical,average)[0]; #endregion
}
// creation of the upper and lower band }

26 • August 2013 • Technical Analysis of Stocks & Commodities

 INDICATORS

If the current typical price is greater than or equal to the The reference median average is simply the exponential
previous typical price, the new data series typical holds the volatility band average of the typical price:
difference between the current typical price and the previous
// the middle reference average
low value. If, however, the current typical price is less than medianaverage[0] = EMA(Typical,average)[0];
the previous typical price, the new data series typical holds the
difference between the previous typical price and the current I then display the upper and lower band by adding and
low price: subtracting the high and low deviation value from the median
reference:
// basic volatility in a new “typical” data series
if (Typical[0] >= Typical[1]) typical[0] = Typical[0] - Low[1]; // creation of the upper and lower band
else typical[0] = Typical[1] - Low[0]; // and show only after it is stable
if (CurrentBar > average*3+2*volperiod)
The average deviation is calculated by summing the result- {
ing new typical price over the volatility summing period, Upper.Set(EMA(medianaverage,average)[0] + devhigh);
Lower.Set(EMA(medianaverage,average)[0] - devlow);
divided by the volatility summing period and multiplied by Median.Set(SMA(medianaverage,average)[0]);
the deviation factor: }
}
// basic deviation based on “typical” over a period and a factor
deviation[0] = SUM(typical,volperiod)[0] / volperiod * devfact; Figure 3 shows the volatility band with the default settings.
The IRSTS rule for the volatility band is simple:
The high deviation or devhigh is the volatility band expo-
nential moving average of the average deviation data series. n Up moves should start from the low side of the
The low deviation or devlow is the volatility band exponential band and down moves should start from the upper
moving average of the average deviation data series multiplied side of the band OR they should start from one of
by the low band adjustment factor: the commonly used averages.
// the average deviation high and low adjusted band
devhigh = EMA(deviation,average)[0];
I will add the commonly used averages - 50-, 100-, and
devlow = EMA(deviation,average)[0] * lowbandadjust; 200-period simple moving averages later on.

FIGURE 3: VOLATILITY BAND WITH DEFAULT SETTINGS. Price will often stay above the median line (solid magenta) in an up move and below the
median line in a down move.

August 2013 • Technical Analysis of Stocks & Commodities • 27

 INDICATORS

FIGURE 4: BUY & SELL TRIGGER SIGNALS. You need a minimum reversal amount before you can assume a change in trend. For a buy signal, the upper
side of the band needs to be crossed by the closing price.

Note that price will often stay above the median line (solid In Figure 4 you can see the resulting buy & sell trigger
magenta) in an up move and below the median line in a down signals (green & red arrows). These trading signals are based
move. on the idea that while trading, you need a minimum reversal
amount before you can assume a change in trend. For a buy
Volatility band buy signal, the upper side of the band needs to be crossed by the
& sell trigger closing price.
Although not part of the IRSTS rules, us- Once in a trade, there must be sufficient room for short-
ing the volatility band to trigger buy & sell term price reactions. You will stay in the trade as long as the
signals is a nice trend-following trading closing price remains above the lower volatility band. That
application. All you have to do is adapt the leaves enough margin for short-term price reactions and gives
deviation factor to, for example, a factor of 1. an acceptable stop-loss level. When the lower band is broken
by the closing price, an open long trade is closed and eventu-
ally a short trade is opened.
Trading long or short with a trend-following system will
Learn How To usually be profitable as long as price makes medium- to
GeneraTe a longer-term up or down moves. A longer-term flat moving
price will not make you money.

5%-10%
As I already mentioned, this kind of application of the
volatility band is not part of the IRSTS rules, but you can use
it as an additional confirmation to make buy or sell decisions.
Looking at price in relation to the volatility band is just one
MonTHLy IncoMe!
no Iron condors Trading long or short with a
no credit Spreads
trend-following system will
To Learn More Today usually be profitable as long
Visit our website at as price makes medium- to
consistentoptionsIncome.com longer-term up or down moves.

28 • August 2013 • Technical Analysis of Stocks & Commodities

of the rules to comply with the IRSTS trading strategy. See the Traders’ Tips section beginning on page 53 for commen-
The complete script for NinjaTrader is shown in the side- tary and implementation of Sylvain Vervoort’s technique in various
bar, “SVEVolatilityBand Indicator.” You can download the technical analysis programs. Accompanying program code can be
found in the Traders’ Tips area of Traders.com.
complete NinjaScript file “SVEVolatilityBand.zip” from my
website, stocata.org.
My next article in this series will discuss oscillators and Suggested reading
how they support price moves. Stay tuned! Vervoort, Sylvain [2009]. Capturing Profit With
Technical Analysis, Marketplace Books.
Sylvain Vervoort is a retired electronics engineer who has been _____ [2012]. “Long-Term Trading Us-
studying and using technical analysis for more than 35 years. ing Exchange Traded Funds,” Technical
His book Capturing Profit With Technical Analysis received Analysis of Stocks & Commodities,
a bronze medal from the 2010 Axiom Business Book Awards Volume 30: July.
in the category of investing. The book is a technical analysis _____ [2013]. “Indicator Rules For Swing Trad-
reference introducing a trading method called Lockit. His ing Strategies, Part 1,” Technical Analysis
latest Band Break System trading expert is available on DVD. of Stocks & Commodities, Volume 31:
Vervoort may be reached at [email protected] or via May.
his website at http://stocata.org. _____ [2013]. “The 1-2-3 Wave Count,” Tech-
nical Analysis of Stocks & Commodities,
The NinjaTrader script given in this article is available from the Volume 31: June.
Subscriber Area of the Stocks & Commodities website at www. _____ [2013]. “The Step Candle Pattern,”
traders.com (click on “Article code” from our home­page, then look Technical Analysis of Stocks & Com-
for this article in the listing) or from http://www.traders.com/files/ modities, Volume 31: July.
Vervoort-NinjaTrader3.html. The NinjaScript .zip file for this article, ‡NinjaTrader (NinjaTrader LLC)
“SVEVolatilityBand.zip,” can also be downloaded from Vervoort’s
†See Traders’ Glossary for definition ‡See Editorial Resource Index
website at http://stocata.org/ninjatrader/formulas.html.

Make Your Own Trading Decisions

Beat Wall Street
A SEMINAR BY Anthony Trongone, PhD, CFP, CTA
on behalf of Technical Analysis of StockS & commoditieS magazine

Saturday, July 27th – Sunday, July 28th

9:00 a.m. – 5:00 p.m. • Morristown, NJ
In this seminar you will learn how to:
• Use Excel to identify the best time to trade. Seating is limited to 20 people.
• Supplement your current trading platform. This is an interactive, hands-on,
educational seminar. Bring your
• Expand your ability to study market dynamics.
laptop/tablet with MS Excel
• Place orders based on your own analysis. (2007 or higher) installed.
• Modify your behavior for better results.

For more information and to register for this exclusive seminar:

www.traders.com/seminar
About Anthony Trongone: • Author of Trade With the Odds: How to Construct Market Beating Trading Systems • One of the master educators for eSignal • Written
more than 60 articles for various trading publications, including 21 articles for Technical Analysis of Stocks & Commodities magazine • Extensive trading experi-
ence, including trading equity futures in the commodity pits • 25 years of teaching graduate courses in finance, psychology, and quantitative methods in the United
States, China and Taiwan • Dr. Trongone earned his PhD from NYU in 1987 • Certified Financial Planner since 1990 • Commodity trading advisor since 1998.

Email: [email protected] • Phone: 206-938-0570 • Fax: 206-938-1307

August 2013 • Technical Analysis of Stocks & Commodities • 29

 The Power Of Crowds

Market Mobs
The markets are powerful and propelled by emotions, often greatly respected analyst, strode to the rostrum to enlighten
MAGHEN BROWN

influenced by crowds. Get an edge by understanding how the assembly about the market. The first slide lit the screen
shifts in sentiment affect the supply/demand balance and as he read out his opening remark: “It’s just a mob!”
ultimately price. Most would never think of describing the market in such a
way. But it is an illuminating insight. The market is a crowd,
by John Cameron a phenomenon, or, more straightforwardly, an entity in its

D
own right that amounts to more than the sum of its parts. It is
oes being in the markets make you a mobster? In 2002, powerful and propelled by emotion. As Gustave Le Bon aptly
the International Federation of Technical Analysts (IFTA) put it in 1895, “A crowd is a psychological phenomenon, not
held one of its annual conferences in London. From all a physical one.”
over the world, technical analysts had gathered in convivial
company for the serious purpose of listening to colleagues A sentimental journey
read papers about new approaches and techniques and excit- The crowd’s psychological impact is on the subconscious
ing variations to venerated practices. of its members. It has the dominating emotional effect that
The first speaker, David Fuller, a genuinely gifted and supplants the understanding of its individual constituents.
30 • August 2013 • Technical Analysis of Stocks & Commodities
 SENTIMENT INDICATORS

Supply Supply
(Sellers) (Sellers)

Demand
Price scale Demand Price scale (Buyers)
(Buyers)
Quantity Price scale Quantity Price scale
(Volume) (Volume)

Figure 1: EQUILIBRIUM. The quantity demanded matches the quantity supplied. Figure 2: supply/demand imbalance. The quantity of demand exceeds that
Buyers are willing to pay what sellers consider a satisfactory price. of supply — that is, there is more buying than selling, and this causes a price rise.

Deindividuation is the ugly term that is given to the idea that

personal cognitive assessment is swamped by the emotional
tsunami that is the crowd. Tony Plummer expressed this clearly:
“A crowd has an effective mind of its own; each individual’s
Supply
behavior is altered by membership of a crowd.”
(Sellers)
It is this mass emotion of the crowd that forms what is
known as sentiment. Think of it as the collective emotional
response to all that is known or expected of the market; it’s
what market participants feel. That great market interpreter,
Ralph Nelson Elliott, in his book Nature’s Law commented,
“Simply put, the stock market is a creation of man and therefore Price scale Demand
reflects human idiosyncrasy.” He went on to stress the lack (Buyers)
of appreciation of this understanding when he wrote, “Those Quantity Price scale
who have attempted to deal with the market’s movements (Volume)
have failed to recognize the extent to which the market is a
psychological phenomenon.” FIGURE 3: MORE SELLERS THAN BUYERS. This situation causes a price decline.
I will discuss the role of sentiment and its importance later
on. Those who try to deal with market movements will much
more readily accept the idea that demand & supply is at the What causes the demand/supply DEMAND / SUPPLY IMBALANCE
heart of market or price action. It stems from introductory- imbalance? It’s sentiment! The
level economics and is illustrated in Figures 1 through 3. next step in the model includes
Figure 1 shows the situation known as equilibrium, where sentiment, as shown in Figure 5. PRICE

the quantity demanded matches the quantity supplied, or when Once again, a reflective situation FIGURE 4: SUPPLY/DEMAND
buyers are willing to pay what sellers consider a satisfactory exists. The links show that senti- IMBALANCE. If the demand/supply
price. Figure 2 shows an imbalance in supply/demand. Note that ment drives the demand/supply imbalance causes a change in price,
then price also reflects the underlying
the quantity of demand exceeds that of supply — that is, there is imbalance, which in turn reflects imbalance.
more buying than selling, and this causes a price rise. Figure 3 sentiment.
also shows an imbalance of supply/demand, but there are more Sentiment, as explained, is an SENTIMENT
sellers than buyers, which causes a price decline.
There is nothing revolutionary about price adjust-
ing to the imbalance of supply & demand, but it’s a DEMAND / SUPPLY IMBALANCE

first step in the development of a market model. It

The imbalance of
represents a reflective situation; if the demand/supply supply & demand PRICE
imbalance causes a change in price, then price also represents a FIGURE 5: SENTIMENT IS THE
reflects the underlying imbalance. This is depicted in
Figure 4, where the double-headed arrow indicates reflective situation. DRIVING FORCE. Sentiment drives
the demand/supply imbalance, and
the two-way nature of the link. the latter reflects sentiment.

August 2013 • Technical Analysis of Stocks & Commodities • 31

 SENTIMENT INDICATORS

INFORMATION INFORMATION

SENTIMENT SENTIMENT

DEMAND / SUPPLY IMBALANCE DEMAND / SUPPLY IMBALANCE

PRICE PRICE

FIGURE 6: ANOTHER LINK IN THE FIGURE 7: BUT PRICE IS INFORMATION.

CHAIN. Information assessment gener- The model now becomes a static, recurring
ates sentiment, which in turn reflects process with positive feedback.
assimilated information. This adds price
to the chain.

emotional response to all that is known or expected of the market hypothesis (EMH) is accepted, albeit often challenged,
market. Essentially, information assessment generates senti- in academia and largely ignored or rejected by investment
ment, and sentiment reflects assimilated information — adding professionals. It has nothing to do with whether markets oper-
another link to the chain (Figure 6). ate effectively but has to do with the efficiency of absorption
This depiction is not complete because price is itself infor- of news into price — that is, how quickly and by how much
mation. There is, therefore, a connection, as shown in Figure price adjusts to news.
7. This introduces a complexity to the model as it becomes a In 1970, Eugene Fama published a review in which three
static, recurring process with positive feedback. Although the levels of efficiency were identified: weak efficiency, semi-
model is still not yet complete, this connection does represent strong efficiency, and strong efficiency. Weak efficiency is
an important stage. considered to be when “prices fully reflect the information
implied by all prior price movements.” To illustrate this, I
A change of heart modified Figure 7 by replacing the reflective double-headed
New ideas, information, and intelligence arrows with single ones that are more appropriate for indicat-
as well as updates are news. So are fresh ing the progressive flow of information (Figure 9).
assessments and new evaluations or judg- Semi-strong efficiency is stated as being where “prices
ments. Anything new that changes heart, respond instantaneously and without bias to newly published
mind, or mood is news. It is the latest input information.” I amended Figure 8 to reflect this information flow,
that instantly becomes information, and it which you can see in Figure 10. Strictly, the term news should
can affect sentiment. As seen in Figure 8, it is the exogenous
input that introduces additional variation of sentiment and
negative as well as positive feedback so that the model is New ideas, information,
dynamic. It remains a recurring process.
Besides demonstrating the market process, the model can
and intelligence as well
be usefully adapted for illustrating another great insight, one as updates are news.
that is controversial and much misinterpreted. The efficient

NEWS INFORMATION INFORMATION NEWS INFORMATION

(Public/all data)

SENTIMENT SENTIMENT SENTIMENT

DEMAND / SUPPLY IMBALANCE DEMAND / SUPPLY IMBALANCE DEMAND / SUPPLY IMBALANCE

PRICE PRICE PRICE

FIGURE 8: THEN COMES NEWS. News introduc- FIGURE 9: WEAK EFFICIENCY. This model FIGURE 10: SEMI-STRONG AND STRONG EFFI-
es additional variation of sentiment and negative illustrates what happens when prices fully CIENCY. Here you see what happens when prices
as well as positive feedback. The model becomes reflect the information implied by prior price respond to newly published information.
dynamic and remains a recurring process. movements.

32 • August 2013 • Technical Analysis of Stocks & Commodities

be replaced with publicly available news or public data. Theory And Empirical Work,” Journal Of Finance, May.
Similarly, since strong efficiency is where “prices reflect all Keane, Simón M. [1983]. Stock Market Efficiency: Theory,
relevant information including data not yet publicly available,” Evidence And Implications, Allan.
a suitable expansion of news to all data should be used. Le Bon, Gustave [2009]. Psychology Of Crowds, Spar-
kling Books (first published in 1895 as Psychologie Des
The bottom line Foules).
The purpose here is not to provide a deeper Plummer, Tony [2010]. Forecasting Financial Markets: The
discussion of EMH. If such a simple adap- Psychology Of Successful Investing, 6th ed., Kogan Page
tation of the model effectively explains or (first published in 1989).
informs practitioners on a separate major Rutterford, Janette [2007]. An Introduction To Stock Exchange
issue, it adds credibility or confirmation to Investment, 3rd ed., Palgrave Macmillan (first published
the structure of the model. The important in 1983).
point, whether from the psychological or information flow
models, is that the determination is price. Price is a fact, the
essential quantification of the whole process, and is justifica-
tion for the study of price action.

John Cameron is a training & education consultant and a

fellow of the Society of Technical Analysts, UK. He may be
reached via email at [email protected].

Suggested reading
Elliott, R.N. [2011]. Nature’s Law: The Secret Of The Universe,
Beta Nu Publishing (first published in 1946).
Fama, Eugene [1970]. “Efficient Capital Markets: A Review Of

visit traders.com

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Purchase articles, books,
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August 2013 • Technical Analysis of Stocks & Commodities • 33

 INTERVIEW

One Tick At A Time

Managing Risk
With Lan Turner
Lan Turner has worked in the financial industry for more than 18 years and has
taught his ideas on stocks, futures, and forex trading to clients, professional
traders, and brokers from around the world. Turner is the CEO of Gecko Soft-
ware (www.GeckoSoftware.com) and chief design architect of Track ’n Trade
LIVE trading platforms and charting applications. Turner is also president
of PitNews Press and editor-in-chief of PitNews Magazine. He is an author,
publisher, and public speaker, having taught live trading seminars across the
US and internationally. He has also presented at the Chicago Board of Trade
and the Chicago Mercantile Exchange education centers.
Stocks & Commodities Editor Jayanthi Gopalakrishnan spoke with Turner
on June 5, 2013.

Why don’t you tell us a little bit about I decided that I better figure out how
yourself — your background, and to do this if I was going to do it, so
how you got interested in trading. I started to study. And that’s when I
The key to your success
It started in the late 1980s, back started to look into different markets. is getting out of the market
when the Internet was just getting started I was introduced to the futures market with a profit.
and becoming quite popular. I had a by a friend of mine, and I started look-
small company that imported modems, ing into and researching the futures
network cards, and hubs. It was a whole- market. When I discovered the futures been in the trade for about five days. I
sale distributor of computer hardware. market, I absolutely loved it. responded by saying I thought I’d only
The Internet was really taking off at that made $100. He asked me, “Why would
time, and all the computers needed to Why was that? that upset you? You thought you made
have modems. So I was making quite It always seemed that when you trade $100, but you’ve made $1,000.” Well, I
a bit of money importing modems and stocks, you take a large investment and was upset because I didn’t know where to
selling them up and down the street a long time to make a small profit. The put the decimal point! When I first started
to all the computer stores here in the futures market is the reverse of that — trading, it was difficult to tell how much
Midwest. you take a small investment in a small money I was making in the trade; every-
Since I made a chunk of money sell- amount of time for a large return. So for thing is different in the futures market
ing modems during the Internet boom, I my personality type, that was perfect. I than it is in the stock market. Crude oil
needed to figure out a way to invest some started to fall in love with it. trades in barrels, soybean trades in bush-
of the money. So I started to invest in Back in 1998 when the Internet was els, gold trades in ounces — everything
the stock market at the time the Internet first getting started, I was looking around has a different conversion.
boom was beginning. I made a huge haul at all the different software applications. So when I was trading live cattle, I
on my very first trade. I’ll tell you a funny story. On one of my ended up putting the decimal point in
Most traders will tell you that making first trades, I went short the live cattle the wrong spot. I thought I had made
a bunch of money on your first trade is market. I was doing quite well, making $100, when in reality I had made $1,000.
a big mistake, because then you think some money on it, and I called my broker I thought I was risking $100 on my stop-
you’re really good when really, you don’t and asked, “How much money have I loss on the other side, when in reality
know what you’re doing. That was clas- made so far?” He looked at my account, I was risking $1,000. My broker and I
sic for me, too. I made a whole bunch and said, “Well, you’ve made $1,000.” had a good chuckle at that, and I said,
of money in the stock market and then I kind of hesitated. “There’s got to be a way to know how
turned around and quickly lost most of it He asked me what was wrong, because to do this.” He said he would fax me
and was right back where I started. $1,000 is pretty good when you’ve only a sheet, which he did. It had all these
34 • August 2013 • Technical Analysis of Stocks & Commodities
mathematical formulas. I thought to since sliced bread. It was a tool that did est in risk management. What, in your
myself there should be a software ap- exactly what they wanted, which was mind, does risk and money manage-
plication to do this. to help identify the risk to reward ratio ment mean?
That’s when I started searching for on every market. It did the mathemati- Risk and money management comes
applications to help me trade the mar- cal calculations for them so they didn’t down to how much money you are going
kets the way I wanted to; software with have to do the math to figure out where to risk on each trade, what your profit
mathematical formulas built in. But none the decimal point should be. potential is, and what percentage of your
had what I was looking for; they were return on market you are going to risk.
just as confusing as anything else. Is that how your software product You have a simple mathematical formula
Since I had a small company, I hired a started? to calculate where you’re going to put
computer programmer to write a software Yes. They kept giving me suggestions, your entry point, where you’re going to
utility with a drag and drop interface. I which I incorporated, but I had to start put your stop-loss if you’re wrong, and
wanted a calculator that would tell me charging for the software. That was how where you’re going to start taking profits
how much money I was risking versus Track ’n Trade was born. We came out if you’re right.
my reward. That was the very first risk with the next version, and it was a huge Under the header of risk and money
vs. reward ratio I ever did. That software success. We were taking the first load management, there’s a lot of area to cov-
application helped me identify my risk of sales to UPS in a pickup truck and it er, and it depends on which markets we’re
versus my reward so I knew how much was so full of boxes that they kept fall- talking about, because our approach to
money I was risking versus how much ing off the side. We had to keep pulling each market, from a risk-management
money I was making. over, jumping out, running around and standpoint, is different.
With this software application in grabbing the boxes that fell off and put- My specialization is in the futures
hand, I started a trading forum. I shared ting them back up on the truck on our and forex markets, so in that light, we
my software with some of the other way to UPS! often compare those two markets to
guys on the forum, and they loved it. the more traditional stock market. Risk
They thought it was the greatest thing So that was what triggered your inter- and money management in the futures

August 2013 • Technical Analysis of Stocks & Commodities • 35

 INTERVIEW

How do you choose what markets to market. The margin amounts are regu-
trade? lated and set by the exchanges, based
In the futures market specifically, we on the volatility of the market. The
have to look at the margin requirements. great thing about working on a margin
There are a number of different margin account is that it doesn’t take a large
requirements, and they’ve changed over initial investment to take advantage of
the years. You have your addition mar- the market. You can use a smaller dol-
gin, and your maintenance margin, and lar amount to get in. Of course, where
nowadays you have the day margins for there’s greater risk for profit, there’s also
daytrades, so we have different margins greater risk for loss.
to work with. It’s about the amount of When the market begins to rise in
money that you can afford to risk. Also, price, you’re making a larger amount of
we generally take a certain percentage money because of your leverage. It also
calculation off of the amount of money happens in the opposite direction — that
in our account versus the margin amount. is, when the market begins to go against
market, when it comes right down to We call that the return on margin, and your position, you’re losing money
brass tacks, simply means where you we calculate what percent of our account exponentially, or much more quickly,
are going to place your orders, and how we can afford to risk. because you’re leveraged. That’s where
you’re going to manage them. I always Most people start off with about a risk and money management comes in,
say it’s easy to get into the market; the 20% risk vs. reward ratio, which means and it’s quite important when you’re in
difficult part is getting out. The key to you don’t invest any more than 20% a leveraged account, since you not only
your success is getting out of the market in your market. I’ve heard some very make money more quickly, you also lose
with a profit. So along those lines, risk experienced traders say that they go up money more quickly.
and money management comes down to to as much as 60%, but that’s very ag-
management of your trade, where you’re gressive. If you have a small account, So if risk management isn’t about diver-
going to move your stops to, where it limits the number of markets you can sification in the case of the futures and
you’re going to place your limit orders trade. If you have a larger account, you forex markets, what comes into play?
and take profits, and how you’re going to can maybe look at some different posi- In my mind, when we talk about
manage the position. That’s what risk and tions in some of the larger markets, such managing our risk from within the fu-
money management means to a trader in as crude oil. tures and forex markets, we’re talking
the futures and forex market. Then there’s the day margin, which about how we calculate the profit & loss
In the stock market, we generally think comes into play if you’re just going to potential, or the risk vs. reward of any
of diversification when talking about risk keep your positions during the day. You given trade.
and money management, or spreading our can get into some of these bigger markets For example, we always want to know
investment across different stocks and on a day trade, but you’d have to exit how much money we’re willing to lose
industry sectors. But when talking about before the end of the day to avoid getting before we throw in the towel and call
futures and forex, we, as traders, don’t hit with the maintenance margin, which the trade a loser, and we also want to do
generally spread ourselves out across very would be a much larger amount. our best at trying to predict where we
many multiples of futures, commodities, We’re always looking for the liquid believe the market might go if it goes in
or foreign currency pairs. We generally markets, but as far as risk vs. reward ratio, our favor.
stick to a few of our favorites, and we don’t it comes down to what you can afford This is our risk vs. reward ratio, or
try to diversify across a lot of different with the size of your account. how much money I am willing to risk
markets simultaneously at all. We simply for the potential profit calculated by my
want to focus our attention and expertise When you have the leverage that you do projected price level. As a general rule,
on a few markets, and want to become in the futures and forex markets, how we like to see a 2-to-1 risk vs. reward
very good at trading those few individual do you account for that in your risk/ ratio — that is, risk one for a profit po-
markets. Besides, there just aren’t thou- reward calculations? tential of two.
sands of choices in these other markets The mathematical calculations are
as there are in the stock market. based on the leverage of the individual How do you manage such a position?
When we trade like this, we want to
establish our risk ratio side first, that is,
Have a well-designed how much money we are willing to risk
trading plan with on a trade. This can be determined in
contingencies on both many different ways. Some traders like to
sides — profit and loss. use a percentage of their overall account,
some traders like to use a specific dollar
36 • August 2013 • Technical Analysis of Stocks & Commodities
amount, and some traders like to use the previous 1-2-3 or A-B-C formation,
previous areas of support or resistance. then mathematically projects out into the ®

Personally, I like to look at areas of future where the market is most likely
support or resistance as my risk & reward to be in price & time. It’s based on the
areas. We all know the technical rules: a concept that markets move in waves —
market is considered to be in an uptrend two steps forward and one step back, two
when it is establishing higher highs and steps forward and one step back again.
higher lows, and vice versa — the market Based on the ABC process, we project Thank you for voting
is in a downtrend when it is establishing out to where point D is going to be using NeuroShell Trader #1
new lower lows and lower highs. I like to our projection tool. This tool has proven Artificial Intelligence
use these areas as my risk levels, where to be one of the most effective tools I’ve Software
I establish an exit point for abandoning found in my 18 years of doing this.
11 years in a row!
a losing trade or, on the other hand, a
take-profit point if the market establishes How do you use this Fibonacci projec-
new directional highs or lows. tion tool to help you with your risk vs.
In an uptrend, for example, we might reward management?
see a 1-2-3 bottom formation, and the Once we’ve established our risk level,
general rule for trading this type of recur- I’ll use this Fibonacci tool to project out
ring price pattern is to place a stop-entry into the future where we anticipate the
order on a break above point 2 for a long markets being, based on previous market
position. Well, a lot of traders will then volatility and time calculations. We then
place a stop-loss order back behind point use the Fibonacci scale to establish our
1. This establishes their risk amount in take-profit points along that projection www.NeuroShell.com
case the market reverses and falls back scale, and once we have those points
to the stop-loss order behind point 1. established, we can then calculate our 301.662.7950
This is what we call the risk side of our risk vs. reward ratio(s).
risk vs. reward ratio, or in other words, There are a number of different ways
how much money you are willing to lose of establishing where you think a mar- Once you’ve established a solid risk vs.
before you say, “Uncle!” ket might rise or fall to, and this is just reward ratio, how do you manage your
For myself, in this particular case, I be- one example. However you choose to trade moving forward?
lieve that putting a stop-loss order behind establish your price levels, you still use That’s a good question, because not
point 1 is taking an unnecessarily large the same basic tenets to establish a good only do we need to first determine
risk, since once the market falls back risk vs. reward ratio; and again, some whether we want to take the trade at
behind point 3, the market has already traders may choose a risk-reward ratio of all, we also need to decide how we’re
broken the trend rule of establishing 2:1, others might choose 3:1. These are going to proceed with the trade, and then
higher highs and higher lows, so there is just basic guidelines, and many different manage it moving forward.
no reason to take a larger risk than behind things must be taken into account when First of all, we need to determine if
point 3; but that’s personal preference. making these judgment calls. the risk is worth the projected reward.
Again, it comes back to a proper risk If it’s not, then we scratch the idea of
vs. reward ratio, which brings us to the What else do you look at besides the taking the trade, and look for or wait for
reward side of the equation. Fibonacci projection tool? another opportunity.
This side of the equation is the more We also use our traditional oscillating If we do choose to proceed, my favorite
difficult part of trading, since now we’re indicators to help identify entry & exit method is to enter with multiple contracts
trying to use our best guess, or what I call points. We use it in combination. We initially, place my initial stop-loss order for
SWAG (scientific wild ass guess) capabili- never want to look at any one individual the total amount of the trade, and then es-
ties to establish where market prices are tool by itself in isolation; we want to tablish multiple take-profit limit orders up
going to be at a given time. This is the combine it with other tools to help us the Fibonacci projection scale. This way, if
unknown part of trading, and for obvious confirm one against the other. the market immediately turns against me,
reasons it’s the most difficult. I’m out of all contracts, but if it continues
There are many tools to try and help in my favor, then I take profits off the table
us determine where prices will be during at multiple points up the Fibonacci price
any given price & time cycle, but one of & time projection scale.
my favorites is the Fibonacci projection Once the market moves up the Fi-
tools. I use a specific tool that we’ve bonacci projection scale to higher and
created in Track ’n Trade that takes higher levels, I’ll start to break my
into account the volatility and time of stop-loss orders apart as well and move
August 2013 • Technical Analysis of Stocks & Commodities • 37
 INTERVIEW

position and then peel off trades as the market continues to rise further than you
market moves in your favor? had anticipated, you can still profit from
I occasionally start small and add posi- that scenario, but you always have a set
tions, but personally I haven’t had such limit on how much you’re willing to
good luck with that method. It always lose if you’re wrong. Basically, the way
seems that just as I start adding on new to remove emotion from the market is
positions, that’s when the market turns by having a well-designed trading plan
against me and knocks me out with a with contingencies on both sides — profit
loss. I’ve had better luck starting out and loss.
with multiple contracts and peeling off
contracts as the market moves in my Sounds to me like you’ve figured out a
favor. Some of my limit orders are set way to conquer emotions.
pretty close to my entry point, where I’ll Plan your trade and trade your plan.
take some quick profits on a small move, That’s what we always say. We have a
and this can significantly push the risk lot of little mantras in this industry, and
vs. reward ratio in my favor. that’s one of them. Emotions are always
going to be there. One of the tools built
Earlier you mentioned that it’s easy to into Track ’n Trade is a historical trade
get into the markets but very difficult to simulation tool that allows you to go
get out. That’s certainly one challenge back in time and practice moving the
that many traders face, considering price bars forward one day at a time.
that no one knows what the market will You can move the market forward and
do. The other challenge for traders is backward, and place orders in a simulated
emotions. How do you manage your market and trade forward. You don’t
emotions? have to wait weeks to practice trading
Emotions can be managed by having in different scenarios.
my stops to different price levels behind a solid trading plan. You have to have You get a lot of practice but since you
areas of support & resistance. Sometimes your plan completely worked out so you don’t have real money in the market,
I’ll even use mathematically calculated know what you’re going to do no mat- there is no emotional effect. But the
tools to place my stops, such as the ter what the market does. If the market nice thing about it is that you can reduce
Bulls ’n Bears Blue Light Trailing Stop begins to rise, you know where you’re the effect of emotions since you have
System, or the PSAR system. These have going to place your orders, you know gained the experience from training on
both proven to be good tools in helping where you’re going to take your profits, the simulator.
me to determine calculated trailing-stop and you know where you’re going to
placement locations along the trend. By place your stops. If the market falls and Thanks so much for your time, Lan.
breaking my stops into multiple loca- comes against you, you know where
tions, it gives me more staying power in you’re going to get out and take your Further reading
the market. I may get stopped out with loss. You need to know exactly what Peterson, Dennis [2009]. “Track ’n Trade
one stop-loss order, but my other orders you are going to do — prior to seeing Live Futures,” product review, Tech-
are still active and allow the market to any of the market moves — before you nical Analysis of Stocks & Com-
continue to rise to higher prices while ever get into the market. That way, you modities, Volume 27: September.
still protecting my downside. know how much you’re going to lose Penn, David [2005]. “Track ’n Trade
and how much you can make. Pro 4.0,” product review, Technical
Do you ever get into the market with a Of course, there are always ways to Analysis of Stocks & Commodities,
single contract and then add on addi- continue to profit and make more than Volume 23: July.
tional contracts as the market moves in your initial calculations, but you take ‡Gecko Software
your favor, or do you start with a larger those contingencies into effect. So if the

38 • August 2013 • Technical Analysis of Stocks & Commodities

 Explore Your Options
Got a question about options? Tom Gentile is the chief option strategist at Optionet-
ics (www.optionetics.com), an education and publishing firm dedicated to teaching
investors how to minimize their risk while maximizing profits using options. To
submit a question for our Explore Your Options column, post it to our website at
http://Message-Boards.Traders.com. Answers will be posted there, and selected
questions will appear in a future issue of S&C.

Tom Gentile of Optionetics

Gold: Rusty Metal or Buying report recently came out that someone contracts to cut the cost and risk.
Opportunity? accepted bitcoins for the purchase of
Gold sure has gotten a lot of press so far a Porsche automobile. Some investors 2. Options on GLD: The gold ETF
in 2013. The metal started out the year on believe the bitcoin is the best hedge GLD tracks very closely with the
a high note — the first week of January against inflation, deflation, and outright yellow metal, but trades at roughly
saw gold at its highest levels for the year depression. The only problem is that the 1/10th the price. GLD does trade
so far. Since then, gold has been on the US government isn’t going to allow this options, and as with equity options,
decline, and in April it dropped off a cliff, currency to circulate without some form one contract controls 100 shares of
taking a 10% plunge in just two days. As of regulation. Some bitcoin counterparts GLD. The cost of the ETF option
the bitcoin seems to be the “new thing” have been frozen or shut down for il- will be much less than the cost of
in decentralized currencies, gold had lost legal money-laundering tactics, as the the option on the futures contract.
its short-term luster to investors. This Feds call it. Less cost means less out-of-pocket
digital phenomenon is the reason why The good news is that gold could get a risk, but the reward would also be
gold may only be on a temporary drop, boost from all this and once again shine less if gold were to move higher.
potentially to bounce back as everyone’s in all its glory. How can you capitalize on Options on GLD are one way to take
favorite by year’s end. a position in gold without having to
Is the bitcoin the “Internet bubble” spread your risks by selling options
of the currency markets? The bitcoin Gold may be on a further out-of-the-money.
is a creation that has been around for temporary drop, only
only a few years now. Supposedly, a 3. Options on a gold stock, such as
man using the name Nakamoto laid to bounce back as Gold Corp (GG): Gold stocks have
the foundation for digital currency. Bit- everyone’s favorite by plummeted this year, much more so
coins are paid when someone cracks a year’s end. than the commodity, so if we were
series of computer-coded mathematical to see a real pop in the price of gold,
problems. Once one of the algorithms is perhaps the companies mining it
cracked, the miner receives bitcoins. As the rebound, but at the same time hedge would move higher as a result. This
more and more bitcoins are mined, the yourself if the dip isn’t over? Options! is also a less costly option, and profits
algo gets harder and harder to crack until There are several ways to take a bullish will depend on the price movement
eventually there are no more bitcoins position in the gold market using options. of the stock.
to mine. A bitcoin is a decentralized Here are three:
currency, meaning that no government These three examples demonstrate the
can control it. There is also anonymity 1. Options on gold futures: Gold fu- different costs, risks, and rewards that
in how a bitcoin is spent. It’s traded tures are the most leveraged way to should be considered when evaluating
directly from point to point, with no obtain a long (or short) position in gold futures, gold ETFs, and gold stocks
bank or reserve keeping track of how it’s the yellow metal. One contract on for bullish opportunities. If gold does
swapped. Nakamoto limited the number gold (GC) is equal to 100 oz., and return to its old highs by year-end, or even
of bitcoins to be produced, which is therefore each point that gold rises attempts it, a change in the underlying
pegged to 22 billion. Roughly half of is equal to $100 per contract move. will be reflected in a change in the options
the allotted bitcoins have been “mined” Options on gold are one-to-one, on the underlying. Happy mining!
from various computers thus far. meaning that one call option is equal
Mt.Gox became the first exchange to one futures contract. Of the three
to trade bitcoins as a currency. Some approaches listed here, this one is the
companies even use bitcoin as a form of most expensive, so it makes sense
currency with which to buy and sell. A to use spreads on these longer-term
August 2013 • Technical Analysis of Stocks & Commodities • 39
 Unleash The Victor

Keep Your Portfolio Safe

We often find ourselves making the same mistakes over and by encouraging yourself and other market speculators will go

NIKKI MORR
over. Coming to terms with the reality of trading can help a long way in helping you to evolve as a market wizard.
you break those bad habits. Find out how.
Coming to terms with reality
by Azeez Mustapha Information is vital in conditioning the mindset of a market
speculator. In order to win constantly, you would need to do

M
ost traders do not take risk control and money manage- what most others would not want to do. There is also a need
ment seriously, which is why many are unable to enjoy to learn what it takes to be a permanently successful trader.
long-term survival. Logical reasoning tends to give Each individual or group that speculates or trades employs a
way to inordinate emotions, but emotions are merely method that enables them to know when to buy or sell. Some
biological events like a cough or a sneeze with no meaning combine two or three trading methods on one account. Some
and are the opposite of thinking. Most market speculators use fully-capacitated robots, whereas others use rule-based
like to think that the secret to trading success lies in trading systems. A trader who follows long and short recommenda-
strategies that allow them to enter at the right price, giving tions from a signal provider is also using a strategy.
no thought to risk-control measures or discipline. Knowing Trading, however, is no picnic. Every good strategy has
how to limit losses, how to survive protracted losing streaks, good and bad periods. Those who are aware of this tend to
how not to lose courage in the face of losing trades, how to look for a strategy that has long withstood the uncertainties of
control the emotions of avarice and dread, how to come to the markets. Many people prefer a foolproof trading system
terms with reality in trading, and how to keep on being hopeful that triumphs in all types of financial markets and survives
40 • August 2013 • Technical Analysis of Stocks & Commodities
 MONEY MANAGEMENT

December
all market conditions. Novel methods 2011

of approaching the markets are getting

discovered all the time; time horizons are
being tailored to allow high-frequency
trading; and programs are being written to
create more robust and highly complicated
January
strategies. 2012

METAQUOTES
Charles Kirk of The Kirk Report (www.
kirkreport.com) began trading with a
$2,000 deposit in 1993 and now trades with
a $3 million portfolio. Since 1999, he has FIGURE 1: A Protracted Bearish Move on the EURNZD. On this four-hour chart of EURNZD, you see
serious bearish pressure from December 2011–January 2012. From November 2011–February 2012, this instru-
been a self-employed, full-time, indepen- ment plummeted by more than 2,500 pips. Someone who went long could have suffered a colossal loss by trying
dent trader. If he were not able to keep his to run his loss. Likewise, someone who shorted would have achieved a colossal profit by riding his winner.
account safe when it was $2,000, he would
not be able to keep it safe when it’s $3 million. According to good. The market wizard, through astuteness, is accustomed to
Kirk, the best traders will be wrong 40% of the time. the unpredictability of prices and can keep his or her portfolio
There are two ways of becoming a consistent victor on the safe. You can, too.
battlefield of the financial markets. One is to assimilate the
market dynamics, and the other is to keep your emotions in Safety in currencies
check. Both are a daunting undertaking, but there has to be a There are some general rules you need to follow in order to
way of conquering both. keep your trading account consistently safe.
Market conditions always vary, but a true market wizard
will know how to face the uncertainty of the markets and make 1. Use only a positive expectancy system. A positive ex-
gains from it; it’s not about waiting for prices to be good before pectancy system targets more than the defined risk. It’s a
pulling the trigger. Professional traders weigh everything in bad idea to risk $5 to target $1, or to risk $1,000 to target
terms of probabilities. They know from experience that there $200 (that is, negative expectancy). You will survive the
are no sure bets in the market and that every trade made can markets if you ultimately have an average profit that is
be unprofitable. In essence, they expect and are prepared for much bigger than your average loss, something that is
every trade to fail until proven otherwise. More important is only achievable with a positive expectancy system. It
they know how to manage risk, accept that they will be wrong pays to risk $1 to target at least $2 or $3, and it pays to
most of the time, and understand that proper trade and risk risk $200 to target $1,000 (that is, positive expectancy).
management, more than anything else, determines success.
Trading neophytes, on the other hand, feel that being able to 2. Bet only a very small percentage of your capital on each
predict the markets is the most important aspect of trading. It trade. No matter what strategy you use, you cannot achieve
is because of this that they pay too much attention to market 100% accuracy in the long run. The bigger you bet, the
prediction, which in turn leads them to believe that luck has a bigger you can win, but your losses could also be bigger.
big role to play in speculation. Market wizards acknowledge The smaller you bet, the smaller you gain, but the smaller
that the direction a position is heading is not crucial. What is your losses would be. If you have, for example, $20,000
more important is how you handle a position. in savings, and you start wagering $2,000 per position,
There is also a difference in how a neophyte and a wizard it may be detrimental to the safety of your account. Big
react to trading results. Neophytes gather as much information losses are difficult to recover. Only those who lose small
as possible before opening a position and they are certain their can easily recover their losses when things become fa-
position will move into positive territory. With this mindset, vorable in the markets. Very few traders can escape huge
they feel elated and on top of the world if their positions end drawdowns when betting big. If you open several trades in
in the plus zone, but when the opposite happens, they are a month (that is, seven to 10), it’s a good idea not to risk
filled with grief to the point that they lose their self-esteem, more than 0.5% of your account per trade. If you open
are overcome by depression, and feel dejected. They have no few trades in a month, you should not risk more than 1%
intention of aborting their losers because they will never accept of your account per trade.
that they were wrong in their prediction. Very few people like
to admit their errors. Since every position opened is connected 3. Use hard and physical stops in trading. Never violate your
to their self-esteem, they get disillusioned when things go awry stop or adjust it negatively. The stop is your life insurance
and they forfeit their portfolios subsequently. policy in the markets. It should not be too tight so as to
There is no foolproof strategy in trading the markets. Even cause a premature exit and neither should it be too wide
the best trading strategies will suffer losses, and their perfor- so as to cause too much exposure. In Figure 1, you see
mance may diminish at some point. And let’s not forget that a four-hour chart of EUR/NZD where you see serious
trading strategies can easily be manipulated to make them look bearish pressure from December 2011 to January 2012.
August 2013 • Technical Analysis of Stocks & Commodities • 41
 MONEY MANAGEMENT

April
2012
Break bad
habits, accept
May
your mistakes,
2012 and keep your
emotions in
check.
Figure 2: A Protracted Equilibrium Zone on the EURCHF. The EURCHF has long been in a surpris-
ing equilibrium situation for a long period. When a market condition is in a difficult situation, both buyers and
sellers will lose. It is better to abandon such a market and look for one that is in a trend.

From November 2011 to February 2012, this instrument lock in about 150 pips of it, while still running the trade.
plummeted by more than 2,500 pips. If you had bought You don’t want a decent profit to turn into a loss.
this exotic cross and refused to use a hard stop to cut
your losses at, say, 70–120 pips, think of how much you 6. Stay out of a bad market. You should know when you
would have lost even with a small position size. ought to be in the markets and when you ought to stay
out of the markets. From Figure 2, you can see that the
4. Ride your winners. As you uproot weeds (losses) from EUR/CHF has been in an equilibrium situation for a
your open positions, you must water your flowers (win- long period. In such a situation, buyers and sellers may
ners) by allowing them to run. Looking at Figure 1 again, be stopped out irrationally. Hence, it is better to abandon
you will see that if you had shorted the EUR/NZD in such a market and look for one that is trending well. It is
November or December 2011, you would have gained the trending markets that are easier to trade.
thousands of pips by letting that position run. One win-
ner that is left to run can recover several other truncated Flight to freedom
losses and push you ahead of the markets. And this Traders often repeat the same mistakes. Habits are prone to
can happen because sometimes a market may continue die hard, since they are ingrained within us and show our
longer in a specific direction than what you would have true color. It becomes necessary to make a solid and solemn
expected. A series of small losses can be made up with determination to break these bad habits, which can only be
one longer-running winner. done with constant training, perseverance, and tenacity. If you
make a mistake, use it as a tool to reconsider your erroneous
5. Make use of breakeven stops and trailing stops in your trading style. Accept your mistakes instead of hiding from
trading. A breakeven stop is achieved when the initial stop them, because chances are that others have made those same
is adjusted to be equal to the entry price. This prevents mistakes. If you can free yourself from the cycle of making
you from letting a decent profit slip into negative territory. mistakes and keep your negative emotions from arising, you’ll
A trailing stop is used to safeguard some of your profit in notice a difference in your trading performance.
an open trade. An example would be if you have gained
up to 300 pips profit in an open trade, you may want to Continued on page 52

GOING AGAINST THE FLOW OF THE MARKET

Trading psychologist and author Van K. Tharp once wrote that most move against each position the trader takes, yet the trader refuses
people prefer to struggle against the river. They try everything they can to go with the flow and refuses to accept the loss, no matter how
think of to go upstream. All struggles like this one — going against the small. Eventually, the loss continues to become larger until the loss
flow — have the same result: frustration. If you were in the river, what becomes so overwhelmingly large that the trader has no choice but
could you do to make your life easier? One solution would be to get to take the loss.
out of the river. But that would be giving up. There is only one easy What is the solution? Whatever happens to you in the market stems
solution — to acknowledge or accept that the problem has nothing to from your actions. The market doesn’t care what positions you hold.
do with the river. The river just is. It moves downstream, and there is It simply reacts to the unknown. Whether you decide to follow the line
nothing you can do to change that. When you realize that the problem of least resistance or resist it, the market will continue doing what it
stems from you, then the solution becomes obvious: Just relax and will do, having you either as a beneficiary or a victim. Those who go
flow with the river. According to Tharp, what is worse is the trader who against the markets inadvertently go against their own trading interests.
refuses to accept the inevitability of eventual loss. The market may The price is not to blame.

42 • August 2013 • Technical Analysis of Stocks & Commodities

 FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is the senior
strategist for DeCarley Trading, a division of Zaner Group, where she also works
as a broker. She authors widely distributed e-newsletters; for your free subscription,
visit www.DeCarleyTrading.com. Her books — Currency Trading In The Forex
And Futures Markets; A Trader’s First Book On Commodities; and Commodity
Options — were published by FT Press. To submit a question, post your question
at http://Message-Boards.Traders.com. Answers will be posted there, and selected Carley Garner
questions will appear in a future issue of S&C.

INTERMARKET RELATIONSHIPS sessions (as of early June), these two the time. Meanwhile, corn, wheat, and
FOR FUTURES TRADERS markets traded in opposite directions soybeans are negatively correlated to
An intermarket relationship is simply approximately 91% of the time! Based the dollar about 70% of the time. You
the manner in which particular markets on this information, anyone who was might be astounded to learn that the yen
behave in relation to each other; more looking for a crack in what was then futures contract and wheat move in the
specifically, it is the correlation between the magnificent stock rally may have same direction approximately 94% of
two otherwise unrelated markets. Among looked to any strength in the yen versus the time, as measured by the past 180
the most monitored relationships are the dollar (a higher yen futures contract, trading sessions. It is rare to see such a
those between stocks and bonds, and the or a lower USD/YEN in forex) as a hint strong relationship between what most
US dollar and commodity prices. toward a reversal. consider independent markets.
Most people assume that stocks and Shifting gears to commodities, most I am a big fan of watching intermarket
bonds will always be negatively cor- traders are aware that a higher dollar relationships because in most instances,
related (that is, moving in the opposite one market will make a move before the
direction). But this is a simplistic view other. In such a scenario, the discrepancy
that suggests investors have only two Live cattle futures in the normal relationship might offer
choices, stocks and bonds; money are among the a hint at what is potentially in store for
moved out of one typically coincides future price moves. With that said, this
with money moved into the other. There most responsive type of analysis falls into line with any
are, however, times when both assets other in that it is a tool to guide decision-
can move higher or lower together.
contracts to making but shouldn’t be followed blindly
For example, in the early stages of the changes in the or used without corroboration from other
Federal Reserve’s quantitative easing indicators and techniques.
campaign, the never-ending printing of dollar. The practice of using intermarket
US dollars and the subsequent need for relationships to guide speculation has
liquidity to find a home caused nearly all has a tendency to put pressure on dollar- been difficult in recent months. Many
asset prices to move higher in lockstep. denominated commodities, such as the of the correlations traders had come to
During this time, the equity market grains, energies, metals, and even meats. rely on have dissipated or even reversed;
and Treasury securities were both able This makes sense because a higher dollar accordingly, any trader making the
to climb to multiyear highs. And again value makes exports more expensive for mistake of putting too much faith in
more recently, statistics on the past 180 foreign buyers; as a result, commodity this type of analysis might have suffered
trading days, as of early June, suggest demand falls and, consequently, so does the consequences. Just as the markets
that the S&P 500 futures contract and price. Similarly, a weaker dollar gives a are dynamic and ever-changing, so are
the 30-year bond futures contract were boost to commodity prices because it the relationships between asset classes.
negatively correlated a mere 40% of the encourages demand for the products. The key to benefiting from intermarket
time. This leaves plenty of time (60%) for It is sometimes surprising to see just relationship analysis is being nimble and
the markets to be trading outside of what how strong the relationship is, and even adapting to change.
is the conventional expectation. more so, which markets are more sensi-
An interesting intermarket relation- tive to changes in currency values. For
ship that is surprisingly reliable but that instance, few would guess that live cattle
has managed to go under the radar is the futures are among the most responsive
negative correlation between the S&P contracts to changes in the dollar. Specifi-
500 and the Japanese yen. According to cally, live cattle prices and the greenback
stats spanning the previous 180 trading are negatively correlated nearly 90% of

August 2013 • Technical Analysis of Stocks & Commodities • 43

 product review

Basics Of Using Trading Software

System Design Software

Part 2

In Part 1 of this series on system de-

sign software, we looked at AmiBroker
and Adaptrade. Here in Part 2, we’ll
look at two more products.

by Sunny Harris

D
esigning your own trading system
can give you a unique edge in your
trading. Software with good fea-
tures can certainly help the design
process along. Fortunately, you have
many choices today when it comes to
selecting system design software. Most
offer similar features, but each has its
subtle differences. In this article series
in which I take a look at different system
design software, it is my goal to bring
out the unique features of each of the
products I consider. In this, the second
part, I will discuss eSignal and Trade FIGURE 1: eSIGNAL WORKSPACE. The workspace is sophisticated, the graphics have a modern look, and the
Navigator. interface is intuitive. It is also very easy to use.

eSignal, an Interactive
Data company I carried a transistor radio-sized hand- two additional subgraphs and an indica-
3955 Point Eden Way held device called QuoTrek on which tor on the chart. If I doubleclick the chart
Hayward, CA 94545 I received my real-time quotes — no window, the subgraphs will disappear,
Phone: 510 266-6000 charts, just numbers. It was way ahead of giving me a closer look at the main chart.
Fax: 510 266-6100 its time, and only the coolest traders had Clicking and dragging the indicator
Internet: www.esignal.com one. I also remember paying thousands works as I would hope — it pops onto
of dollars each month for my data. Thank the chart that I drop it on.
In the days when I was newly in search goodness those days are gone, and now eSignal does something I believed
of real-time data, it was eSignal I settled data is all but free. It’s a lot easier to only Genesis Trade Navigator did — it
on. Back then, data was transmitted over make a profit when your overhead isn’t projects future dates. Let’s say that two
the airways on a radio signal dedicated so high. trendlines are going to intersect some day
to data, and I used what was then called in the future. I expect a major turning
Lotus Signal. I remember having a huge Features point when they intersect, but I need to
television-type antenna on my roof, with In Figure 1 you’ll see an eSignal work- know that date. So far, Trade Navigator
wires coming down the side of my house space. I haven’t used eSignal for many and eSignal are the only products I have
and into my trading room. It always years, and in that time I see that they found that will let me run my cursor, or
seemed like when I was in the middle of have made many improvements. The crosshairs, out into the future to deter-
a crucial trade, the antenna would need workspace is sophisticated and beauti- mine the projected date — a very handy
adjustment, and I would have my kids ful; the graphics are modern and slick; feature.
climb the roof while we would yell back and the interface is intuitive — my most The graphics in eSignal are state-of-
and forth, “Turn it this way, turn it that important criterion. It is also very easy the-art and pleasant. Even the trading
way, stop! You’ve got it.” I’m sure the to use. If I click on a symbol in the left bar is futuristic. Yes, it performs the
neighbors thought I was nuts. window, the chart changes to match that same functions as most system design
For the times when I was traveling, symbol. In this example, the window has software, but I find it more attractive.
44 • August 2013 • Technical Analysis of Stocks & Commodities
var fpArray = new Array();
var bInit = false;

function preMain() {
setPriceStudy(true);
setShowCursorLabel(false); I asked the folks at eSignal to permit or dotted lines on the charts. The other
setShowTitleParameters( false ); me use of the Advanced GET version for programs I’ve examined only allow
setStudyTitle(“MACD Gradient”);
setColorPriceBars(true);
a short time to evaluate it for this review, solid, thick lines, and all the patterned
and they were kind enough to do so. lines must be single-width. In the vein
var x=0; Since I was able to try out these tools, I of pleasing graphics, eSignal allows me
fpArray[x] = new FunctionParameter(“FastLength”, can tell you that their Gann fan feature to make camera-ready art by providing
FunctionParameter.NUMBER);
with(fpArray[x++]){
is professional, and even allows me to thick and thicker lines of several styles.
setName(“Fast Length”); optimize the scale so I can more properly I wanted to know if I could make charts
setLowerLimit(1); display the settings particular to the chart with white backgrounds instead of
setDefault(12); I am viewing. I found this to be amazing, black, and whether I could use gradient
}
fpArray[x] = new FunctionParameter(“SlowLength”,
since most software I have come across backgrounds or place a watermark in the
FunctionParameter.NUMBER); does a poor job of displaying Gann fans. background. It turns out that I can change
with(fpArray[x++]){ To display Gann fans, you need to know the background of the chart to any color
setName(“Slow Length”); where the 1:1 squares of movement lie I wish, but I wasn’t able to find a way to
setLowerLimit(1);
setDefault(26);
on each individual symbol, based on its use gradients and background images. (I’ll
} price scale. To place Gann fans on your suggest it to the powers at eSignal.)
fpArray[x] = new FunctionParameter(“Smoothing”, chart, you need to select the option from After drawing a few more pretty things
FunctionParameter.NUMBER); the “Edit chart” window and click on the on my chart, it looked crowded. As usual,
with(fpArray[x++]){
setName(“Smoothing”);
Optimize button. This scales the fan to I thought I would click on the indicator
setLowerLimit(1); the chart in question, and finds its own or tool and press the delete key to see if
setDefault(9); settings. it would remove an item. Once again, I
} Beyond the Gann fan, I found some- found that eSignal has gone one notch
FIGURE 2: eSIGNAL SCRIPT EDITOR. Here you see an thing else really exciting — Gann boxes. better: when I click on or hover over a
example of eSignal code for a gradient MACD. The code I have looked through several software tool or indicator, the background and all
looks similar to C++ or C# or Java. It has its constructs products trying to find this feature, and other items dim. The only item that is
and reserved words and rules and regulations.
this is the first one I have come across. bright is the one I am interested in. This
In Figure 3 you see what a Gann box makes it easy for me to determine if that
The Script Editor in eSignal is not looks like. I am not going to pretend that is the item I wish to remove, and if it
much different than that in other soft- I know how to use it, but I have attended is, I just press delete or move the item
ware. You type your code into a blank lectures on the subject and believe the elsewhere on the screen. I was impressed
window. When you start typing, if the science of the “magic squares” to hold with this feature.
editor encounters a reserved word it rec- great promise. One last thing before I quit extolling
ognizes, it will pop up with the choices While tinkering around and pushing on the praises of eSignal: the Advanced
and parameters in a small help window. I all the buttons, I came across a delight- GET version does a magnificent job of
wish there were a dictionary available in ful discovery: this is the first program displaying Elliott wave counts. Take
the title bar, but I didn’t find one. In Figure that allows me to make thick, dashed, a look at Figure 4. The background is
2, you can see a sample of some eSignal
code for a gradient MACD. Compiling
your code is called verifying.
The code looks similar to C++ or C#
or Java. It has its constructs and reserved
words and rules and regulations. It
doesn’t seem very friendly, however. It
seems more like “computer-eze” than
English-language. I’m sure it’s explained
well in their documentation, which I
found complete, easy to read, and avail-
able on the web.
Getting back to charting, I was very
excited when I saw Gann lines and
squares on the drawing tool menu. But
they are grayed out, so I can’t use them.
I explored the online manual and found
that they only work in the Advanced GET
version. So, without that add-on product,
these features are not available. FIGURE 3: GANN BOXES

August 2013 • Technical Analysis of Stocks & Commodities • 45

 product review

Navigator chart, you can do a neat little

trick. You can ask Trade Navigator to
display orders for the next bar. In Figure
6, you see an example of this feature.
Don’t you just love that you now have
exact numbers for the next day?
Within Trade Navigator, I can ma-
nipulate text in several different ways,
changing size, color, and font to my
heart’s content. I can play with any and
all of the Fibonacci retracement values.
I liked what I saw when I displayed the
lunar cycles on my chart — it wasn’t
just a simple repeating curve as in other
FIGURE 4: ELLIOTT WAVES. The AdvancedGET version does a great job at identifying Elliott waves. The major software. It is a meaningful, automati-
and minor waves are clearly labeled. cally calculated set of cycles that makes
sense to traders.
At the bottom of the Trade Navigator
They project future dates by letting you workspace, there is a little horizontal
place your cursor out into the future to window called “Quote Board.” This
window gives you a quick view of your
determine the projected date. favorite symbols and how they are trad-
ing on the current trading day (Figure 7).
changed to white, and you can see all the problems, of which there are few. Of It displays price action and today’s bar,
major and minor waves labeled clearly. all the products I cover in this series of showing direction, size, and character. The
Figure 4 shows the current wave count system design software reviews, Trade Quote Board is an invaluable quick look
on the Dow Jones Industrial Average Navigator, without question, is the most at your favorite markets. No up-to-date
(DJIA) as having finished a 5 of a 5, with replete with what a trader needs. And if software would be complete without it.
impending corrections down as far as the you need something that the program does Trade Navigator also has chart trading
25% or 38% Fibonacci retracements at not currently offer, call me, and they just and an order bar for order placement.
12,585 and 12,201, respectively. might put it in! To prevent you from making one of
While I am not privy to the price of Figure 5 shows the Trade Navigator the most common trading mistakes when
this add-on to eSignal, I would say that workspace. I selected the “Big icons with you go to place an order, a confirmation
the entire package is the way to go. There labels” option so I can readily see them window pops up to assist you in plac-
are many more Advanced GET tools and have the labels to help guide me. ing stops and limit orders. The triangle
I’ll not get into here, and many more in When you get accustomed to the menus, moves to the appropriate place on the
the basic eSignal package as well. This you can make the icons small and remove bar to show you how the order will be
software, in my opinion, is top-notch. the labels. executed — it’s foolproof.
Programming in Trade Navigator is There are so many other nice features
of the point-and-click variety, for the in Trade Navigator. The toolbar is full of
TRADE NAVIGATOR most part. The programming language features I’ve often wished for. Here are
Genesis Financial Technologies, Inc. is called TradeSense. You start out with some of the fun and invaluable tools:
4775 Centennial Blvd., Suite 150 the Condition Builder and make your n Target shooter
Colorado Springs, CO 80919 choices by pointing and clicking. It’s n Gann fan
Phone: 719 886-0244; 800 808-3282 easy for nonprogrammers to construct n Copy pattern
Internet: http://www.genesisft.com their ideas. n Mirror
Everything I can think of is available. n Dollar difference
I am a big fan of Trade Navigator from Anything I want to do with a chart is n Support/resistance line (dif-
Genesis Financial Technologies — espe- already built in. The optimization feature ferent from a horizontal line)
cially since this is the only software devel- is fast and I like that it displays the results n Sophisticated text capabilities
oper so far who has put my CPC index in while it’s working instead of waiting n Icons
their strategy performance report! I find until the end. I wish they had a column n Wave label
the management to be flexible; in fact, for my CPC index so I could easily sort n Risk/reward line
their code word is flexibility, I believe. from highest to lowest. Currently, I have
They are quick to implement new ideas to manually calculate it. One of the more impressive tools is
and are immediate in their response to When you have a strategy on a Trade the “Copy pattern” tool. With this tool,
46 • August 2013 • Technical Analysis of Stocks & Commodities
 FIGURE 6: ORDERS FOR NEXT BAR. Entering orders for the next
bar is one feature worth noting.

Trade Navigator has just

about every feature a
trader would want.
FIGURE 5: TRADE NAVIGATOR WORKSPACE

you can find a section of price action and look at MetaStock and MetaTrader. be contacted at MoneyMentor.com.
overlay it at a future price on the chart
to see whether the pattern repeats. This Sunny Harris is an author, trader, com- Suggested reading
would be helpful to do around any of the puter programmer, and mathematician Harris, Sunny [2013]. “System Design
significant market crashes to see where the who has been trading since 1981. The Software, Part 1,” product review,
pattern was going to repeat in the future. first printing of her book, Trading 101, Technical Analysis of Stocks & Com-
In Figure 8, I have copied a price pattern sold out in two weeks and continues to be modities, Volume 31: April.
and placed it on the chart. I can move a financial bestseller; her second book, Harris, Sunny [2012]. “Now, Set Up The
that pattern around until I find a place Trading 102, also achieved record sales. Process,” Technical Analysis of Stocks
where price action mimics the existing In early 2000, Harris released Electronic & Commodities, Volume 30: July.
‡eSignal ‡Trade Navigator
pattern. Then I can click to let it fall into Day Trading 101, followed by Getting
place. Cool, huh? Their “mirror” tool is Started In Trading in 2001. Her latest ‡See Editorial Resource Index
similar, except that it flips the pattern into book is TradeStation Made Easy. She may
the location on its right side.
Another tool to mention is one that
I asked Genesis for years ago and that
they quickly implemented, and that is the
ability to visualize dates into the future.
When, for example, I draw the upper
and lower lines of a pennant formation, FIGURE 7: QUOTE BOARD. This window gives you a quick view of your favorite symbols and how they are trading
I would like to see at what date in the on the current trading day. It displays price action and today’s bar, showing direction, size, and character.
future they intersect. Or if I put a cycle
on a chart, I want to know the date of
the next cycle low or high. Running your
cursor or crosshairs into the future and
seeing projections is valuable in different
circumstances.
Trade Navigator has just about every
feature a trader would want. I would like
to see them add Gann squares and would
like to be able to place the square in a
horizontal position and rotate it, say at 45
degrees. This is something I have seen in
several works on Gann, and I may take
it upon myself to request should they be
willing to entertain my suggestion. FIGURE 8: COPY PATTERN. You can copy a price pattern and place it on the chart. You can move
In my next article in this series, I will that pattern until you find a place where price action mimics the existing pattern.

August 2013 • Technical Analysis of Stocks & Commodities • 47

 product review

ValueCharts
MICROQUANT periods and create a floating value axis. The basics
3737 Glenwood Ave., Suite 100 Using a floating value point rather than The idea for ValueCharts originated in the
Raleigh, NC 27612 a fixed one allows for valuations that early 1990s and received a patent in 2008,
Phone: 919 827-0009 adapt to changing market conditions in but was only made available to retail trad-
Internet: www.valuecharts.com real time. ers in November 2011. Most ValueCharts
Product: Indicators that assess price The indicators in ValueCharts incorpo- packages include the flagship trading
valuation in any time frame rate dynamic volatility units that expand tools: the ValueCharts and the Price Ac-
System requirements: NinjaTrader, and contract with price. They detect tion Profile. The indicators provide the
TradeStation, MultiCharts, eSignal, statistically significant areas from which basis for finding and determining whether
TD Ameritrade’s thinkorswim, or price leaves a fair value range and enters a stock, commodity, index, or currency
Bloomberg platforms a zone that represents a better buying or (including forex) is trading at, above, or
Price: Small, medium, and large selling opportunity. Plus, they do this in below its fair value level.
indicator bundles ($499/$999/$1,999) any time frame. An underlying assumption of Value­
Together, historical transactional price Charts is that value is time dependent.
by Barbara Star, PhD activity and dynamic volatility units It can change from minute to minute

T
combine to offer traders defined fair value and across time frames as price activity
he search for fair value embraces zones along with the degree to which changes. Because ValueCharts tools may
the notion of reasonable pricing price is outside of the fair value range. be used in any time frame, traders are able
between buyer and seller. But trad- According to Mark Helweg, president of to drill down through multiple time peri-
ers often want better than fair pricing MicroQuant and creator of ValueCharts, ods to find good entries & exits. Users can
when they buy or sell. ValueCharts offers this product offers an objective method adjust the basic default settings to analyze
indicators based on algorithms that help for determining the fair price of a trade, transactional price activity and volatility
determine price valuation. This enables much like the Kelley Blue Book provides scaling that match their short-term or
traders to assess the fair value of a stock, an objective basis for determining the fair longer-term trading goals. Note that all
commodity, or currency prior to entry price of a car. versions of the program will not provide
or exit and to identify whether price is the same look as what you see displayed
overvalued or undervalued. It brings Installation and support in the chart examples here. You can find
another dimension to trading that I think Installation went smoothly on the Ninja- illustrations for each version at www.
of as value trading. Trader charting platform with a real-time valuecharts.com/documentation.html.
Kinetick datafeed used for this review.
Where are the bargains? The company provides instructional ValueCharts: This indicator, displayed
Like value investors, such as Warren documentation for the installation, indi- as bands of color in the lower portion of
Buffett, many value traders are bargain cator access, and indicator interpretation Figure 1, plots price within five major
hunters. They look for tradable symbols through the use of well-illustrated PDF valuation zones. Instead of a single price
that are underpriced in relation to their material. point, the ValueCharts price window
worth. But, unlike value investing meth- A one- or two-minute video that ex- identifies fair value (the green horizontal
ods, ValueCharts does not use subjective plains each of the ValueCharts indicators band) as one standard deviation around
criteria from rating services or fundamen- is available by clicking on the products the price range at which most historical
tal data to determine under- and overvalu- tab at the ValueCharts.com website. The transactions have occurred. Moderately
ations. Instead, ValueCharts establishes website also offers an abundance of free overvalued and moderately undervalued
its valuations by applying proprietary training videos, articles, and weekly we- in yellow occur between one to two stan-
algorithms to historical transactional binars. For an additional fee, ValueCharts dard deviations beyond fair value. Price
price activity. These algorithms analyze users may join a live trading room that’s enters the significantly overvalued or
the price activity over various lookback available during the week. significantly undervalued red zone when
it falls outside the two–standard deviation
range from fair value.
The black bars seen on the five valuation
ValueCharts detects areas from which price zones are price stated in terms of value.
They display price relative to a floating
leaves a fair value range and enters a zone that value axis based on an average price over
represents a better buying or selling opportunity. a given time period. They register changing
valuations as price activity changes.
48 • August 2013 • Technical Analysis of Stocks & Commodities
 When plotted with a traditional daily
price chart of the June 2013 emini S&P
contract, the ValueCharts price window
in Figure 1 clearly conveys the location
of fair value. But, equally important,

VALUECHARTS; DATA BY Kinetick

it transmits information about places
where price falls into the moderately and
significantly over- and undervaluation
zones in a way that might not be possible
to see by looking at the price chart itself.
During the February to mid-May period
seen on the chart, it identified a good Figure 1: valuecharts price window (june 2013 emini S&p, daily). The ValueCharts price window
buying opportunity in late February when identifies five valuation areas and the relationship of price to fair value levels from approximately February to
price became undervalued. It warned of mid-May. It is easy to spot when price moves out of the green fair value zone and enters the yellow overvalued
potential change when the market became and undervalued zones before and after price corrections. In mid-May, it briefly entered the red zone that warned
price had reached a significantly overvalued area.
moderately overvalued in March, April,
and May, and significantly overvalued
in mid-May. Valuation entries into those less than one percent of the time. Given ValueCharts indicators or with traditional
overvalued levels do not necessarily lead that information, any foray into the red price charts.
to immediate price reversals, but they can zone should be taken very seriously. Several tools help traders locate and
help traders avoid new buying, or suggest While it may not be necessary to keep more quickly zero in on specific valuation
areas where it might be good to book some the Price Action Profile onscreen all areas. The ValueScanner sorts through
profits or tighten stops. the time, it serves as a handy reference lists of symbols and gives their current
for a rapid overview of valuation when intraday or end-of-day ValueCharts
Price Action Profile: Even though the checking a symbol to trade. levels. Alerts, flags, and signals offer three
histogram (Figure 2) looks similar to a ways to set and receive notifications when
Market Profile graph, the Price Action Wait, there’s more certain valuation levels or conditions take
Profile is calculated differently. The In the version used for this review, the place. ValueAlerts can be sent to the screen,
Price Action Profile transfers the bars largest ValueCharts package of indicators email, or phone. SignalBars color a portion
from the ValueCharts price window and contains a total of nine ValueCharts tools of the price bar on which several criteria
stacks them to form a frequency distribu- plus eight MicroQuant indicators that are met concurrently. ValueFlags place a
tion histogram on a scale of +12 to -12. can be used either as an adjunct to the symbol above or below the bars at which
It communicates the degree to which
ValueCharts prices are overvalued or
undervalued in relation to their fair value.
Fair value fills the +4 to -4 levels, while
significantly overvalued begins at +8,
and significantly undervalued begins at
-8. Change the time frame and the Price
Action Profile quickly creates a new fre-
quency histogram for that time period.
The statistical table next to the histogram
shows how often price has traded above
or below the fair value levels. It also tells
what percent of the time trades stay within
each of the five value zones.
The Price Action Profile in Figure 2
references the information shown on the
ValueCharts price window in Figure 1.
In the case of the June 2013 emini S&P
futures contract, it shows that the bulk of
price activity from February to mid-May
remained in the fair value range of +4 to
-4. During this time period, price never Figure 2: price action profile (june emini s&P, daily). This Price Action Profile is based on the Febru-
ary to mid-May emini S&P seen in Figure 1. It creates a horizontal frequency histogram that shows the amount
dipped into the -8 to -12 significantly of time that price remained in each of the valuation zones during that time period. The column on the right tells
overvalued level and only rose into the the percentage of time price spent in each of those valuation zones. The horizontal bar at the bottom of the chart
+8 to +12 significantly overvalued level reflects the current valuation at the time this chart was captured.

August 2013 • Technical Analysis of Stocks & Commodities • 49

 product review

indicator along with the MicroQuant

(MQ) momentum indicator. During the
five days captured on the intraday chart
of Apple, price briefly touched a signifi-
cantly undervalued area, which provided
enough support to generate a rally into
fair value territory. Price could not sus-
tain the rally and soon broke from fair
value and fell deep into the significantly
undervalued levels as AAPL resumed the
downtrend, which lasted for more than a
Figure 3: ValueBars (eurusd, 20-minute). ValueBars converts the information given by the ValueCharts day before beginning another climb out
price window to the traditional price charts of the 20 minute EURUSD. The colors show how much of the price bar of the significantly undervalued zone.
falls into each valuation area. It can be used alone or with other indicators. It is presented here with the ValueCharts The 60-minute ValueLevels provided the
price window at the bottom of the screen to show that it mirrors the information.
larger valuation picture, while the MQ
momentum indicator tracked the price
a specific user-defined valuation level completely replace the price bars while still reversals of the price bars.
occurs, such as significantly overvalued retaining the current open, high, low, and ValueBands serve the same function as
or undervalued, which allows for more close prices of the traditional price bars, ValueLevels, but rather than show every
precise entries or exits. as in the 20-minute forex chart presented valuation level, they highlight the major
Three other tools provide visual in Figure 3. The ValueBars make it easy to valuation zones by filling them with broad
variations of the information given in the see how much of each price bar represents bands of the same colors that are seen in
ValueCharts price window. Each allows fair value and how much falls outside of a ValueCharts price window. However,
traders to view both the valuation zones that area. It presents a visual warning of unlike the static horizontal bands of color
and the traditional price bars simultane- potential price changes as more of the bar seen on the ValueCharts price window,
ously. Each also enables the user to view segments become yellow or red. the ValueBands fluctuate as they follow
a single time frame or to incorporate dual ValueLevels superimpose every indi- price movement.
time frames. vidual valuation level from -12 to +12
ValueBars overlay traditional price bars onto traditional price bars. But it can Value for money
with colors that correspond to the five also track traditional price bars of one The ValueCharts indicators lend another
valuation zones seen in the ValueCharts time frame onto the valuation levels of perspective to price chart analysis by
price window. The unique aspect of these a different time frame to offer a dual adding the component of valuation to
price bars is their ability to color portions perspective. For example, a five-minute the mix. It provides objective reference
of the bar rather than plot the whole bar price bar plotted on 20-minute ValueLev- points from which to help traders de-
as one color. They can be viewed as a els or as seen in the stock chart of Apple termine whether they are overpaying or
separate indicator in a lower panel under (AAPL) in Figure 4, a 15-minute price underpaying for a security. The indicators
the traditional price chart, or they can bar placed on the 60-minute ValueLevels have the flexibility to be applied to any
time frame, and even to more than one
time frame. ValueCharts indicators are
straightforward, easy-to-interpret tools
that could furnish an edge when deciding
to enter or exit a trade.

Barbara Star, PhD, is a retired university

professor. She is a past vice president of
the Market Analysts of Southern Califor-
nia, led a MetaStock users group for many
years, and is a consultant for VectorVest,
Inc. She has been a contributor to Techni-
cal Analysis of Stocks & Commodities
since 1991. Currently, she trades part-
time and provides individual instruction
and consultation in technical analysis.
Figure 4: ValueLevels with Dual Time Frames (apple, 60-minute). ValueLevels applies each
She may be reached at star4070@aol.
valuation level directly to the traditional price charts. The ValueLevels can be of the same time frame as the price
bars, or, as in this chart of Apple, can display the ValueLevels of one time frame and the price bars of another. com or by phone at 818 224-4070.
This chart displays 15-minute price bars placed on a 60-minute ValueLevels indicator. A MicroQuant momentum
indicator appears in the panel beneath the price chart.

50 • August 2013 • Technical Analysis of Stocks & Commodities

 Q&A
SINCE YOU ASKED
Confused about some aspect of trading? Professional trader Don Bright of Bright
Trading (www.stocktrading.com), an equity trading corporation, answers a few of
your questions. To submit a question, post your question to our website at http://
Message-Boards.Traders.com. Answers will be posted there, and selected questions
will appear in a future issue of S&C.

Don Bright of Bright Trading

STILL DAYTRADING? Although the penalty for staying locked smile when I hear people talk about the
I have followed your articles and posts all into a nonworking strategy may not be “birth” of daytrading having taken place
around the web, and I actually met you as severe as the fate of the saber-toothed in the 1990s, when in truth daytrading
and your brother [Bob Bright] at a trading tiger, poverty is a close second. We must has been going on for some 200 years).
expo a few years back. I think you and your constantly be on the lookout for that
brother have set a great example for traders edge. You see, even the term daytrading has
who trade with your firm. often amused me. If we buy and sell shares
I read something you wrote recently that Back then, we had gone through some the same day, I guess we’re “daytrading.”
seemed to imply that daytrading has lost its major changes in the marketplace, thus We still trade the opening-only strategy, and
luster, and perhaps you guys are focusing on requiring our traders to adapt to everything for the most part, we close those positions
other methods of trading. Would you please from new trading instruments (ETFs, SSFs, the same day. Sometimes we plan on selling
let me know if you’re still daytrading, or if and so on), to new ways of analyzing indi- shares back the same day, but the market
your traders have forsaken it altogether? vidual stocks. As the Internet grew, so did conditions (that is, price, as in we’re losing
— OHinvest the amount of information made available to on the trade) dictate that we take those shares
Thanks for the kind words, and I am the traders. We have grown accustomed to hav- home. In my mind, that’s how swing trading
first to acknowledge that my brother has ing so much data available that we wonder came on the scene — nothing more than a
always been my beacon, if you will, and how we ever got along without it. Allow me daytrade gone bad!
has led the way for our firm over the last the liberty of quoting a bit more from the Our traders are using the openings to enter
few decades. same article, and then I’ll share what we’re trades often, and some do exit completely
Now, let’s focus on your question about doing differently these days. by end of day. Others — and this is where
daytrading. Let me assure you that our trad- I think you may have gotten the idea that
ers do indeed engage in basic daytrading. After spending more than a decade trad- we are not favoring going home flat with no
However, over the last few years, many of ing on the exchange floor, and watching positions — prefer to plan position trades
them have focused on longer-term strategies the new products turn to old standards (okay, “swing trades”), or even more likely,
as well. As traders, we must always continue with little room for exploitation, I thought well-planned, correlated pairs trading (see
to adapt to the marketplace. We cannot stay that the trading world would come full my past Q&A columns on pairs trading,
stagnant, or we will be eaten alive. circle… back into the basics of single- available at Traders.com).
Let me quote myself from an article stock equities trading. I shared that In addition, our traders plan out their
I wrote 10 years ago for this magazine with my semi-retired brother, and he longer-term trades — whether simple di-
(“Survival Of The Fittest,” January 2003; shared the feeling. Adapting once again rectional plays, pair trades, or even mergers
you can visit the article archives at Traders. to market conditions and technology — taking into account such things as cost of
com for the complete article): changes, trading resumed in the family carry, seasonality, and other variables. This
… this time it was DOT-based (direct planning can save the traders a lot of money
Take a look around. The market bubble order turnaround) electronic trading. when done correctly. As a result, they tend
has burst, and we must learn how to adapt The “bug” bit harder than ever with this to keep a little more money in their accounts
to the new era of trading the markets. genesis. Having “single digit”–numbered to allow for lower interest costs, and so on.
There are new trading platforms, new DOT machines, with the same access Again, the term adapt comes to mind.
ways to access the markets, and new to the markets as we had on the trading The advent of subpennies and high-
products such as single-stock futures floors, the electronic trading revolution frequency trading has caused some concern,
(SSFs) and narrow-based indexes. Trad- was begun. but after a few years of this, we have simply
ers must adapt to the new climate to A few short years later, the newly aware adapted to these things as well. I suggest
remain successful. public became involved in the world of becoming immersed in a group of fellow
As a species, traders face the same electronic trading. It was from this short- traders to keep up with these things. Hope
dilemma that many of our ancestors lived phenomenon that “daytrading” as this helps!
did — we must adapt or become extinct. many of us perceive it was born. (I always

August 2013 • Technical Analysis of Stocks & Commodities • 51

 Continued from page 42

Azeez Mustapha is a trading professional, an InstaForex dations,” Technical Analysis of Stocks & Commodities,
analyst, a blogger at ADVFN.com, and a freelance author. Volume 30, September.
His articles have been published at Ituglobalforex.blogspot. Gopalakrishnan, Jayanthi [2007]. “Charles Kirk Of TheKirk­
com, Forexpeacearmy.com, and in TRADERS’ magazine. He Report.com,” interview, Technical Analysis of Stocks &
is also a senior analyst at Paxforex.com. He can be contacted Commodities, Volume 25: November.
at [email protected]. Tharp, Van K. [1991]. “Flowing With The Markets,” Technical
Analysis of Stocks & Commodities, Volume 9, June.
Suggested reading ‡MetaTrader 4 (MetaQuotes Software Corp.)
Mustapha, Azeez [2012]. “Profiting From Protracted Consoli-

Continued from page 9 trading to do so!) who value the more sophisticated articles
We do try to include a balance of and subscribe because of them. We try
At different points, we have made articles in each issue, ranging from the to monitor readers’ feedback by way of
slight changes to our format so our more basic, shorter, easy-to-read articles reader surveys on articles and by way of
content reflects changes in the markets to the longer, more involved articles Internet traffic. Readers may also drop us
or in technology, as well as to adjust to that may model techniques or develop a a line at [email protected] to express
what readers are looking to gain from system from the ground up. For example, their interests or disinterests.
reading S&C. Since much basic infor- in the same issue as “The 1-2-3 Wave As for your suggestion of revisiting
mation can be found these days over the Count,” we also featured an article on past articles, subscribers to S&C can
Internet, we try to publish some of the how economic news can affect traders; now access all past issues of S&C from
more sophisticated implementations of a daily stock evaluation method that our website, www.traders.com, in our
techniques and other material that can- anyone with access to a computer and Article Archive area — going back to
not be readily found on the Internet or printer can use; and an interview with the first issue. Thus, subscribers have
elsewhere. In addition, part of our edito- a trading mentor who tells us that it’s the opportunity to revisit all the articles
rial mission has always been to provide possible to become a successful trader you mention and more, all for the cost
either code, formulas, spreadsheets, or by using simple techniques. of a subscription to the print magazine!
other computerized support to make Admittedly, it can be difficult to suit We hope that subscribers will take your
implementing sophisticated techniques all readers’ tastes all the time, since suggestion of reviewing some of our past
easier. (In fact, the very first issue of this different types of traders seek different content and explore all that our archive
magazine in 1982 contained computer approaches; thus, we try to provide a has to offer.—Editor
code, and we were the first magazine on variety of topics. We have many readers

5% Confidence — Before conducting statisti- Renko — A kind of candlestick chart that sample and the mean of the population
cal tests, an analyst must select a confi- does not take time into account. divided by a result obtained by dividing
dence level that will be used to determine Standard Deviation — A widely used the standard deviation of the sample by the
when to accept the null hypothesis. A 5% statistical concept that describes how square root of the number of individuals
confidence level indicates that one is not a given distribution varies around its in the sample.
willing to accept the null hypothesis when mean observation. In the case of the P/L True Range — The largest of the following:
the average net return calculated from statistic, a high standard deviation would today’s high minus today’s low, today’s
the sample could have occurred in only indicate a widely varying P/L, while a high minus yesterday’s close, or today’s
five of 100 samples if the null hypothesis low one would suggest a more stable low minus yesterday’s close.
were true. performance. Also: A measure of the Wilder’s Relative Strength Index — An indica-
Average True Range — A moving average fluctuation in a stock’s monthly return tor used to anticipate trend reversal points
of the true range. over the preceding year. by comparing the top highs and bottom
Null Hypothesis — The hypothesis that there T-Test — A statistical test of significance for lows. It measures the directional price
is no validity to the specific claim that a distribution that changes its shape as N movement’s rate of change or velocity.
two variations of the same thing can be gets smaller; based on a variable t equal
distinguished by a specific procedure. to the difference between the mean of the

52 • August 2013 • Technical Analysis of Stocks & Commodities

 for illustrative purposes only.
For this month’s Traders’ Tips, the focus
To download the EasyLanguage code, first navigate to the
is Sylvain Vervoort’s article in this issue,
“Within The Volatility Band.” Here we pres- EasyLanguage FAQs and Reference Posts Topic in the Easy-
ent the August 2013 Traders’ Tips code Language support forum (http://www.tradestation.com/EL-
with possible implementations in various FAQ), scroll down, and click on the link labeled “Traders’
software. Tips, TASC.” Then select the appropriate link for the month
Code for NinjaTrader is already pro- and year. The ELD filename is “_SVEVolatilityBands.ELD.”
vided in Vervoort’s article. Subscribers will The code is also shown at the Stocks & Commodities web-
find that code at the Subscriber Area of our site at www.traders.com in the Traders’ Tips area.
website, www.Traders.com. (Click on “Article Code” from A sample chart is shown in Figure 1.
the S&C menu.) Presented here is an overview of pos- This article is for informational purposes. No type of trading or
sible implementations for other software. investment recommendation, advice, or strategy is being made, given,
Traders’ Tips code is provided to help the reader imple- or in any manner provided by TradeStation Securities or its affiliates.
ment a selected technique from an article in this issue. —Chris Imhof
The entries are contributed by various software develop- TradeStation Securities, Inc.
ers or programmers for software that is capable of cus- www.TradeStation.com
tomization.
Readers will find the August 2013 Traders’ Tips code
and formulas at our website, Traders.com, in the Traders’
Tips area. Here, you can read some discussion of the
technique’s implementation by the Traders’ Tips contribu-
tors as well as some example charts. F eSIGNAL: AUGUST 2013 TRADERS’ TIPS CODE
To locate Traders’ Tips at our website, click on the link For this month’s Traders’ Tip, we’ve provided the formula
from our home page, or use our site’s search engine. SVEVolatilityBand.efs based on the formula code from
Sylvain Vervoort’s article in this issue, “Within The Volatil-
ity Band.”
The study contains formula parameters to set the values for
the band average, summing period, deviation factor, and lower
F TRADESTATION: AUGUST 2013 TRADERS’ TIPS CODE band adjustment, which may be configured through the Edit
In “Within The Volatility Band” in this issue, author Sylvain Chart window (right-click on chart and select “Edit chart”).
Vervoort describes the construction of volatility bands and a To discuss this study or download a complete copy of the
simple trading idea based on the bands. Provided here is a formula code, please visit the EFS Library Discussion Board
multiple-output function that returns the band values (mid- forum under the forums link from the support menu at www.
line, upper band, and lower band), an indicator that plots the esignal.com, or visit our EFS KnowledgeBase at http://www.
bands, and a sample strategy. The strategy enters long when esignal.com/support/kb/efs/. The eSignal formula scripts
price closes above the upper band, and sells short when the (EFS) are also available for copying and pasting from the
price closes below the lower band. The strategy is provided Stocks & Commodities website at www.traders.com.
A sample chart is shown in Figure 2.
—Jason Keck
eSignal, an Interactive Data company
800 779-6555, www.eSignal.com

Figure 1: TRADESTATION. Shown here is a daily chart of STX with the indicator Figure 2: eSIGNAL, VOLATILITY BANDS. The EFS study contains formula para­
and strategy based on Sylvain Vervoort’s article in this issue applied. To align the meters to set the values for the band average, summing period, deviation factor, and
strategy and indicator, “DevFact” inputs were both set to 1. lower band adjustment.

August 2013 • Technical Analysis of Stocks & Commodities • 53

 Figure 4: WEALTH-LAB. In this sample Wealth-Lab 6 chart, the trend-following
system shows a market mood shift from preferable to suboptimal.
Figure 3: THINKORSWIM. Here is an example of a strategy implemented in
thinkorswim based on Sylvain Vervoort’s article in this issue. The strategy is based
on average true range and uses historical price movements to define price volatility.
LowerBand.SetDefaultColor(GetColor(1));
It builds price bands using those numbers. MidLine.SetDefaultColor(GetColor(7));
UpperBand.SetDefaultColor(GetColor(0));

AddOrder(OrderType.BUY_AUTO, close > UpperBand, name =

“VolatilityBandLE”, tickcolor = GetColor(0), arrowcolor = Get-
Color(0));
AddOrder(OrderType.SELL_AUTO, close < LowerBand, name =
“VolatilityBandLE”, tickcolor = GetColor(1), arrowcolor = Get-
F Thinkorswim: AUGUST 2013 TRADERS’ TIPS CODE Color(1));
In “Within The Volatility Band” in this issue, author Sylvain
Vervoort continues with his fourth installment in his seven- —thinkorswim
part series. This month, he focuses on using historical price A division of TD Ameritrade, Inc.
movements to define price volatility and builds price bands www.thinkorswim.com
using those numbers. His price volatility is found by using a
common technical analysis statistic, average true range. For
thinkorswim users, we have created a strategy in our proprietary
scripting language, thinkScript. You can adjust the parameters
F WEALTH-LAB: AUGUST 2013 TRADERS’ TIPS CODE
of the strategy within the Edit Studies window to fine tune the
This Traders’ Tip is based on “Within The Volatility Band”
periods calculated.
in this issue by Sylvain Vervoort. The strategy code we’re
A sample chart is shown in Figure 3.
providing this month for a simple SAR (stop-and-reverse)
system buys when the close price breaks through the upper
The study:
volatility band, and sells short when the close slips under the
1. From TOS charts, select Studies  Edit studies
lower band.
2. Select the Studies tab in the upper left-hand corner
3. Select “New” in the lower left-hand corner
To make money with this approach, traders might want to
4. Name the study (such as “VolatilityBand”) enhance the system with a trend/range filter (like the ADX
5. Click in the script editor window, remove “addOrder(Order or Dreiss choppiness index). When a market becomes less
Type.BUY_AUTO, no);” and paste in the following code: directional, there’s not enough room for price reactions. For
example, low-probability trades could be avoided when the
input price = hlc3; ADX readings are low.
input averageLength = 8; Motivated readers are welcome to make their own com-
input volatilityLength = 13;
input deviationFactor = 3.55; parisons to similar volatility-based bands available in Wealth-
input lowBandAdjust = 0.9; Lab, like ATR bands or Keltner ATR bands, by plugging the
DataSeries into the code.
def typical = if price >= price[1] then price - low[1] else price[1] -
low; To execute successfully in Wealth-Lab, the system requires
def deviation = deviationFactor * Average(typical, volatility- the latest version of our TASCIndicators library. Please install
Length);
def devHigh = ExpAverage(deviation, averageLength);
(or update if you haven’t done so already) the library from
def devLow = lowBandAdjust * devHigh; the www.wealth-lab.com site to its latest version, 2013.07 or
def medianAvg = ExpAverage(price, averageLength); higher. The code is also shown at www.traders.com in the
plot MidLine = Average(medianAvg, averageLength);
Traders’ Tips area.
plot UpperBand = ExpAverage(medianAvg, averageLength) + A sample chart is shown in Figure 4.
devHigh; —Eugene & Wealth-Lab team
plot LowerBand = ExpAverage(medianAvg, averageLength) - MS123, LLC
devLow; www.wealth-lab.com

54 • August 2013 • Technical Analysis of Stocks & Commodities

 Figure 6: NEUROSHELL TRADER, VOLATILITY BANDS. This NeuroShell Trader
chart displays Sylvain Vervoort’s SVEVolatilityBands with a deviation factor of 1.
Figure 5: AMIBROKER, VOLATILITY BANDS. This price chart of Seagate Technology
(STX) with the SVEVolatilityBand overlay replicates results from Sylvain Vervoort’s
article elsewhere in this issue.

F NEUROSHELL TRADER: AUGUST 2013

TRADERS’ TIPS CODE
The SVEVolatilityBands described by Sylvain
F AMIBROKER: AUGUST 2013 TRADERS’ TIPS CODE Vervoort in his article in this issue, “Within The Volatility
In “Within The Volatility Band” in this issue, author Sylvain Band,” can be implemented with a few of NeuroShell Trader’s
Vervoort presents a volatility band component of his swing 800+ indicators. Simply select “New indicator” from the
trading strategy. Ready-to-use AmiBroker code for the indicator Insert menu and use the indicator wizard to create the fol-
is presented here. To display the indicator, simply enter it in lowing indicators:
the formula editor and press apply indicator. The averaging
TypicalPrice: Average3( High, Low, Close )
period and other parameters can be changed by right-clicking TypicalRange: If ( A>=B( TypicalPrice, Lag(TypicalPrice,1),
the chart and selecting parameters from the context menu. Subtract(TypicalPrice, Lag(Low,1), Subtract(
A sample chart is shown in Figure 5. Lag(TypicalPrice), Low ) )

Deviation: Multiply( SimpleMovAvg( TypicalRange, 13), 3.55

average = Param(“Band average”, 8, 1 ); MedianAvg: ExpAvg( TypicalPrice, 8 )
Volperiod = Param(“VolPeriod”, 13, 1 );
devfactor = Param(“Devfactor”, 3.55, 0, 10, 0.01 ); UpperBand: Add2( ExpAvg(MedianAvg, 8 ), ExpAvg( Devia-
Lowbandadjust = Param(“Low band adj.”, 0.9, 0, 5, 0.01 ); tion, 8 ) )
LowerBand: Subtract(ExpAvg(MedianAvg, 8 ), Multiply( Ex-
Typical = ( High + Low + Close )/3; pAvg( Deviation, 8 ), 0.9) )
MedianBand: SimpleMovAvg( MedianAvg, 8 )
AdjTyp = IIf( Typical > Ref( Typical, -1 ),
Typical - Ref( Low, -1 ),
Ref( Typical, -1 ) - Low ); Users of NeuroShell Trader can go to the Stocks & Com-
modities section of the NeuroShell Trader free technical
Deviation = Sum( AdjTyp , VolPeriod )/ VolPeriod * devfactor;
support website to download a copy of this or any previous
DevHigh = EMA( deviation, average ); Traders’ Tips.
DevLow = EMA( deviation, average ) * Lowbandadjust; A sample chart is shown in Figure 6.
—Marge Sherald, Ward Systems Group, Inc.
Medianaverage = EMA( Typical, average );
301 662-7950, [email protected]
Plot( C, “SVEVolatilityBand” + _PARAM_VALUES() + “ Price”, www.neuroshell.com
colorDefault, styleCandle );

Plot( EMA( Medianaverage, average ) + DevHigh, “Upper”,

colorViolet ); F AIQ: AUGUST 2013 TRADERS’ TIPS CODE
Plot( EMA( Medianaverage, average ) - DevLow, “Lower”, color- The AIQ code I am providing this month is based
Violet );
Plot( MA( Medianaverage, average ), “Median”, colorBlue );
on Sylvain Vervoort’s article in this issue, “Within
The Volatility Band.”
—Tomasz Janeczko, AmiBroker.com Figure 7 shows a chart of CVR Partners LP (UAN) with
www.amibroker.com the setup (yellow circle), the buy signal (green circle), and
August 2013 • Technical Analysis of Stocks & Commodities • 55
 Figure 7: AIQ, VOLATILITY BANDS. Here is a sample chart of UAN with the SVE
volatility bands and setup (yellow), entry (green), and exit (red) signals for the period
Figure 8: TRADERSSTUDIO, VOLATILITY BANDS. Here is a sample chart of ER
October 3, 2011 to May 10, 2012.
with the SVE volatility bands and setup (yellow), entry (red), and exit (green) signals
for the period December 2000–January 2001.

the exit (red circle). Vervoort’s article states that a valid buy
!PLOT THE FOLLOWING AS SINGLE LINE INDICATORS IN
signal does not occur unless the closing price has penetrated THE UPPER PANEL:
the lower band and then closes above the upper band. On SVEupper is iff(HD,expavg(medAvg,BANDAVG)+DevHigh,C).
October 3, 2011, the close of 20.25 is below the lower band SVElower is iff(HD,expavg(medAvg,BANDAVG)-DevLow,C).
SVEmid is iff(HD,simpleavg(medAvg,BANDAVG),C).
of 20.81 and then we have to wait until January 3, 2012 for
the close of 26.48 to be above the upper band of 25.36. We —Richard Denning
would enter the next day at the opening price of 26.57. We [email protected]
would stay in the trade until the closing price is below the for AIQ Systems
lower band. The exit does not occur for several months until
May 9, 2012, when the close of 24.45 is below the lower
band of 27.76. We would then exit the next day at the open of F TRADERSSTUDIO: AUGUST 2013
24.41 for a loss of $2.07 plus commission and slippage. The TRADERS’ TIPS CODE
highest close of the trade occurred on February 2, 2012, just a The TradersStudio code based on “Within The Volatility Band”
few weeks after the entry, for a high open profit of $4.35. The by Sylvain Vervoort in this issue is provided at the following
trade would have been profitable if we had used the middle websites:
band as the exit. Note that I did not code the suggested trad-
ing system, since Vervoort indicates that more is to come in • www.TradersEdgeSystems.com/traderstips.htm
future parts of his article series. • www.TradersStudio.com  Traders Resources  Traders Tips
The code and EDS file can be downloaded from www.
TradersEdgeSystems.com/traderstips.htm. The following code files are provided in the download:

!WITHIN THE VOLATILITY BAND • Function: “SVE_MID_BAND” is a function that returns

!Author: Sylvain Vervoort the SVE middle band value and also returns by reference
!Coded by: Richard Denning 6/7/2013
!www.TradersEdgeSystems.com the upper band and lower band values
• Indicator plot: “SVE_VOLA_BAND_IND” is a plotting
!INPUTS:
BANDAVG is 8. !average=Band average function that allows the SVE bands to be displayed on a
VOLASUM is 13. !volperiod=Volatility Summing period chart.
DEVFAC is 3.55. !defac=Deviation factor
LBADJ is 0.9. !lowbandadjust=Low band adjustment factor Figure 8 shows a chart of the futures contract on the Aus-
tralian dollar (AD) using data from Pinnacle Data with the
!FORMULAS:
H is [high]. setup (yellow circle), the sell short (red circle), and the exit
L is [low]. short (green circle). Vervoort indicates that a valid buy sig-
L1 is valresult(L,1). nal does not occur unless the closing price has penetrated
C is [close].
typPrice is (H+L+C)/3. the lower band and then closes above the upper band. On
typPrice1 is valresult(typPrice,1). October 13, 2000, there is a close above the upper band fol-
typical is iff(typPrice>=typPrice1,typPrice-L1,typPrice1-L). lowed by a close below the lower band on January 28, 2000.
dev is sum(typical,VOLASUM)/VOLASUM*DEVFAC.
devHigh is expavg(dev,BANDAVG).
We would sell the next day (January 29, 2013) at the open.
devLow is expavg(dev,BANDAVG)*LBADJ. We would stay in the trade until the closing price is above
medAvg is expavg(typPrice,BANDAVG). the upper band. The exit does not occur for several months
HD if hasdatafor(BANDAVG*3+2*VOLASUM)>=
BANDAVG*3+2*VOLASUM.
until December 4, 2000, when the close is above the upper
band. We would then exit the next day at the open. This is an
56 • August 2013 • Technical Analysis of Stocks & Commodities
excellent example of a profitable trend-following trade using
Vervoort’s indicator.
The code is as follows (also available at www.traders.com
in the Traders’ Tips area):

‘WITHIN THE VOLATILITY BAND

‘Author: Sylvain Vervoort
‘Coded by: Richard Denning 6/10/2013
‘www TradersEdgeSystems.com

Function SVE_MID_BAND(BANDAVG,VOLASUM,DEVFAC,LBA
DJ,ByRef SVEupper,ByRef SVElower)
Dim typPrice As BarArray
Dim typical As BarArray
Dim dev As BarArray Figure 9: NINJATRADER, STANDARD ERROR BANDS. This screenshot shows
Dim devHigh As BarArray standard error bands applied to a 21-minute chart of a CL light sweet crude oil
Dim devLow As BarArray continuous contract.
Dim medAvg As BarArray

‘INPUT DEFAULTS: gression midline providing the best-fit trendline over the
‘BANDAVG = 8 ‘average=Band average
‘VOLASUM = 13 ‘volperiod=Volatility Summing period user-chosen lookback period, which is our period input in
‘DEVFAC = 3.55 ‘defac=Deviation factor the NinjaScript study. We then place an envelope around this
‘LBADJ = 0.9 ‘lowbandadjust=Low band adjustment factor midline similar to the Bollinger Band/Keltner channel stud-
typPrice = (H+L+C)/3 ies many traders are familiar with; however, in this case, we
typical = IIF(typPrice>=typPrice[1],typPrice-L[1],typPrice[1]-L) use the standard error and not the standard deviation to cal-
dev = Summation(typical,VOLASUM)/VOLASUM*DEVFAC culate the width of the envelope.
devHigh = XAverage(dev,BANDAVG)
devLow = XAverage(dev,BANDAVG)*LBADJ Without getting too deep into statistics, this will provide us
medAvg = XAverage(typPrice,BANDAVG) with an interesting measurement allowing us to differentiate
between trending vs. consolidation periods in our data. As
SVEupper = XAverage(medAvg,BANDAVG)+devHigh
SVElower = XAverage(medAvg,BANDAVG)-devLow the trending price action starts to unfold, the error will get
SVE_MID_BAND = Average(medAvg,BANDAVG) smaller, since the results “stick” closer to our best-fit regres-
End Function
sion line, meaning we see a tightening of the bands.
‘------------------------------------------------------------------- On the other hand, choppy markets generally result in
‘CODE TO PLOT THE BANDS ON A CHART: wider standard errors, offering the bands a chance to expand.
sub SVE_VOLA_BAND_IND(BANDAVG,VOLASUM,DEVFAC,L
BADJ)
Further, all band levels (here you have a choice to create two
Dim SVEmid As BarArray sets of width) can act as excellent support & resistance levels,
Dim SVEupper As BarArray assisting in trade selection and stop management.
Dim SVElower As BarArray
SVEmid = SVE_MID_BAND(BANDAVG,VOLASUM,DEVFAC,LB
Figure 9 shows that analysis with these bands doesn’t need
ADJ,SVEupper,SVElower) to be limited to a price series, but can be expanded to oscilla-
plot1(SVEupper) tor-type studies, for example, as well. In our screenshot, we
plot2(SVEmid)
plot3(SVElower) use our ultimate oscillator supplied as a default in NinjaTrad-
End Sub er. As an added benefit, various smoothing algorithms can be
‘-------------------------------------------------------------------- set by the SwithMAType user input, providing flexibility.
—Raymond Deux & Bertrand Wibbing
—Richard Denning
NinjaTrader, LLC
[email protected]
www.ninjatrader.com
for TradersStudio

F UPDATA: AUGUST 2013 TRADERS’ TIPS CODE

This Traders’ Tip is based on “Within The Vola-
F NINJATRADER: AUGUST 2013 TRADERS’ TIPS CODE tility Band,” which is the fourth part of a seven-part series by
Editor’s note: In Sylvain Vervoort’s article “Within The Volatil- Sylvain Vervoort. In this issue, Vervoort discusses volatility
ity Band” in this issue, Vervoort already provides NinjaScript bands above and below a median average as levels for a buy
for his technique in a sidebar to the article. Here, NinjaTrader & sell swing trading strategy. Breakouts from the upper vola-
discusses a separate but related topic. tility band signal long positions, and breaks from the lower
For this month’s Traders’ Tips, we will discuss standard er- volatility band indicate short signals. All parameters can be
ror bands, which we are providing as an indicator that’s down- optimized within the system optimizer to determine the most
loadable from www.ninjatrader.com/SC/August2013SC.zip. profitable combinations. See Figure 10.
Standard error bands can add a valuable and unique per- The Updata code for this system has been made available
spective to your charts. They are composed of a linear re- in the Updata library and may be downloaded by clicking the
August 2013 • Technical Analysis of Stocks & Commodities • 57
 FIGURE 10: UPDATA. This chart shows the volatility band system as applied to the Figure 11: Tradesignal Online. This Tradesignal Online chart shows the
S&P 500 index of daily resolution. volatility band and the typical price volatility indicator on an intraday chart of the
German DAX.

custom menu and then system library. Those who cannot ac-
cess the library due to a firewall may paste the code into the
Updata custom editor and save it.
F TRADESIGNAL: AUGUST 2013 TRADERS’ TIPS CODE
PARAMETER “Band Period” #BANDPERIOD=8 The indicators presented by Sylvain Vervoort in his article in
PARAMETER “Vol. Period” #VOLPERIOD=13
PARAMETER “Deviation Factor” @FACTOR=3.55 this issue, “Within The Volatility Band,” which is the fourth
PARAMETER “Low Band Adjust” @ADJUST=0.9 part of a seven-part series on indicator rules for a swing trad-
NAME “” “”  ing strategy, can easily be used with our online charting tool
DISPLAYSTYLE 3LINES
INDICATORTYPE TOOL at www.tradesignalonline.com.
PLOTSTYLE LINE RGB(128,0,128) To locate the indicators, just check the Infopedia section
PLOTSTYLE2 DOT RGB(128,0,128)  for our lexicon. There, you will find the indicator and the
PLOTSTYLE3 DOT RGB(128,0,128)
@TypicalPrice=0 functions that you can make available for your personal ac-
@Typical=0 count. Click on it and select open script. You can then apply
@Deviation=0 it to any chart you wish (Figure 11).
@DevHigh=0
@DevLow=0
@MedianAverage=0 Source Code for Typical Price Volatility.eqi
FOR #CURDATE=0 TO #LASTDATE
   @TypicalPrice=(HIGH+LOW+CLOSE)/3 Meta:
   IF @TypicalPrice>HIST(@TypicalPrice,1)  Synopsis(“Volatility Oscillator derived from the Typical Price
      @Typical=@TypicalPrice-LOW(1) of the Period. Based on TAS&C 08 2013 ‘Within the volatility
   ELSE Band’”),
      @Typical=HIST(@TypicalPrice,1)-LOW WebLink(“http://www.tradesignalonline.com/lexicon/edit.
   ENDIF aspx?id=20071”),
   @Deviation=SGNL(@Typical,#VOLPERIOD,M)*@FACTOR Subchart( True );
   @DevHigh=SGNL(@Deviation,#BANDPERIOD,E)
   @DevLow=SGNL(@Deviation,#BANDPERIOD,E)*@ADJUST Inputs:
   @MedianAverage=SGNL(@TypicalPrice,#BANDPERIOD,E) Period_VolaBands( 8 , 1 ),
   ‘Entries & Exits Upon Band Crossing  Period_Vola( 13 , 1 );
   IF HASX(CLOSE,@MedianAverage+@DevHigh,UP)
      COVER CLOSE Vars:
      BUY CLOSE volaValue, tpSeries, devHigh, devLow, midLine, upperBand,
   ELSEIF HASX(CLOSE,@MedianAverage-@DevLow,DOWN) lowerBand;
      SELL CLOSE
      SHORT CLOSE tpSeries = IFF( TypicalPrice >= TypicalPrice[1], TypicalPrice -
   ENDIF  Low[1], TypicalPrice[1] - Low );
   ‘Line Plots volaValue = Sum( tpSeries, Period_Vola ) / ( Period_Vola );
   @PLOT=@MedianAverage
   @PLOT2=@MedianAverage+@DevHigh DrawLine( volaValue, “TP Volatility”, StyleSolid, 2, red );
   @PLOT3=@MedianAverage-@DevLow     
NEXT // *** Copyright tradesignal GmbH ***
// *** www.tradesignal.com ***
—Updata support team
[email protected]
www.updata.co.uk Continued on page 60

58 • August 2013 • Technical Analysis of Stocks & Commodities

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August 2013 • Technical Analysis of STOCKS & COMMODITIES • 59

 Continued from page 58

Source Code for Volatility Band .eqi

Meta:
Synopsis(“Volatility Oscillator derived from the Typical Price
of the Period. Based on TAS&C 08 2013 ‘Within the volatility
Band’”),
WebLink(“http://www.tradesignalonline.com/lexicon/edit.
aspx?id=20071”),
Subchart( False );

Inputs:
Period_VolaBands( 8 , 1 ),
Period_Vola( 13 , 1 ),
Dev_Factor( 3.55 ),
Low_Band_Adjust( 0.9 );
Figure 12: VT TRADER, VOLATILITY BANDS. Here is an example of the SVE
Vars: volatility band indicator attached to a EUR/USD one-hour candlestick chart.
volaValue, tpSeries, devHigh, devLow, midLine, upperBand,
lowerBand;
com along with many other precoded indicators and trading
tpSeries = IFF( TypicalPrice >= TypicalPrice[1], TypicalPrice -
Low[1], TypicalPrice[1] - Low );
systems. A sample chart is shown in Figure 12.
volaValue = Sum( tpSeries, Period_Vola ) / ( Period_Vola *
Dev_Factor ); Name: TASC - 08/2013 - SVE Volatility Band
devHigh = XAverage( volaValue, Period_VolaBands );
devLow = XAverage( volaValue, Period_VolaBands ) * Low_ {Provided By: Visual Trading Systems, LLC}
Band_Adjust; {Copyright: 2013}
midLine = XAverage( TypicalPrice, Period_VolaBands ); {Description: TASC, August 2013 - “”Within The Volatility band” by
Sylvain Vervoort}
lowerBand = midLine - devLow; {File: tasc_SveVolBand.vtscr - Version 1.0}
upperBAnd = midLine + devHigh;
{basic volatility in a new “typical” data series}
GR_DrawSetupTradingBands( upperBand, midLine, lowerBand ); _typical:= if(TP()>ref(TP,-1),TP()-ref(L,-1),ref(TP(),-1)-L);

// *** Copyright tradesignal GmbH *** {basic deviation based on “typical” over a period and a factor}
// *** www.tradesignal.com *** deviation:= Sum(_typical,volperiod) / volperiod * devfact;

Source Code for GR_DrawSetupTradingBands.eqf {the average deviation high and low adjusted band}
devhigh:= Mov(deviation,average,E);
devlow:= Mov(deviation,average,E) * lowbandadjust;
Inputs:
UpperBand( NumericSeries ), {the middle reference average}
MidLine( NumericSeries ), medianaverage:= Mov(TP(),average,E);
LowerBand( NumericSeries );
{creation of the upper and lower band
DrawLIne( upperBand, “Upper Band”, StyleSolid, 2, Black ); and show only after it is stable}
_CalcIsStable:= BarCount() > (average * 3 + 2 * volperiod);
If midLine > 0 Then UpperBand:= If(_CalcIsStable=1,Mov(medianaverage,average,E) +
DrawLIne( MidLine, “Band Average”, StyleDash, 1, Black ); devhigh,Null);
LowerBand:= If(_CalcIsStable=1,Mov(medianaverage,average,E) -
DrawLIne( lowerBand, “Lower Band”, StyleSolid, 2, Black ); devlow,Null);
MedianBand:= If(_CalcIsStable=1,Mov(medianaverage,average,S),Null);
GR_DrawSetupTradingBands = True;
To learn more about VT Trader, visit www.vtsystems.com.
—Tradesignal GmbH
[email protected] Risk disclaimer: Past performance is not indicative of future re-
www.TradesignalOnline.com, www.Tradesignal.com sults. Forex trading involves a substantial risk of loss and may not
be suitable for all investors.
—Visual Trading Systems, LLC
[email protected], www.vtsystems.com

F VT TRADER: AUGUST 2013 TRADERS’ TIPS CODE

This Traders’ Tip is based on “Within The Volatility Band”
by Sylvain Vervoort in this issue. F TRADING BLOX: AUGUST 2013 TRADERS’ TIPS CODE
We’ll be offering the SVE volatility band indicator for In “Within The Volatility Band” in this issue, author Sylvain
download in our VT client forums at http://forum.vtsystems. Vervoort provides a method to calculate the SVE volatility
60 • August 2013 • Technical Analysis of Stocks & Commodities
 Parameters
bandAverage
summingPeriod
deviationFactor
lowerBandAdjust
Indicators
typicalPrice
priorTypicalPrice
priorLow
typical
deviation
devHigh
devLow
medianAverage
Figure 13: TRADING BLOX, SVE
emaOfMedAvg
smaofMedAvg VOLATILITY BANDS INDICATOR
upperBand BLOCK. The SVE band indicator block
lowerBand is made up of four parameters and 12
indicators.
Figure 14: TRADING BLOX, DEVIATION FACTOR. Several of the expressions
needed to calculate the bands are coded in Trading Blox as calculated indicators,
as deviation is here.
band indicator, which may be used as a tool to help make buy
& sell decisions within the context of a trading system.
To use the SVE bands in Trading Blox, we’ve created
a block that defines them as indicators. This block may be
dropped into a Trading Blox system along with other Blox
that determine entry & exit rules, trade sizing, and so on, to
provide a complete trading method.
To recreate the band indicators, we first set up a new block
called “SVE Volatility Band Indicator.” Vervoort’s article in-
structs us to create four parameters that act as inputs to our
calculations along with several expressions that apply some
mathematical transformations to various data inputs. See Fig-
ure 13 for a list of the indicators and parameters we used.
No code needs to be written in the main scripting editor for
this block, but some expressions are coded in the indicator
value expression editor (Figure 14). They include:
Figure 15: TRADING BLOX, SVE VOLATILITY BANDS. The upper band is shown
in green, with the lower band in red, while the moving average of median average
• typicalPrice = High + Low + Close / 3 plots in between in blue.
• priorTypicalPrice = typicalPrice[1]
• priorLow = instrument.low[1] A simple entry/exit block (see the “SVE Band Entry Exit”
• typical = ifthenelse( typicalPrice >= priorTypicalPrice, block in our code archive) consisting of the following code
typicalPrice - priorLow, priorTypicalPrice - instrument. may be used to generate trading signals to go long when price
low) closes above the upper band and short when price closes be-
• deviation = sum(typical, summingPeriod ) / summing- low the lower band.
Period * deviationFactor
• devHigh = EMA( devHigh[1], bandAverage, deviation ) -----------------------------------------------------------------------------------
SCRIPT: Entry Orders
• devLow = EMA( devLow[1], bandAverage, deviation ) * -----------------------------------------------------------------------------------
lowerBandAdjust if instrument.position != LONG then
if instrument.close > upperBand then broker.enterLon-
• medianAverage = EMA( medianAverage[1], bandAver- gOnOpen( lowerBand )
age, typicalPrice ) endif
• emaOfMedAvg = EMA( emaOfMedAvg[1], bandAver-
if instrument.position != SHORT then
age, medianAverage )
if instrument.close < lowerBand then broker.enterShort-
• smaofMedAvg = average( medianAverage, bandAverage ) OnOpen( upperBand )
endif
• upperBand = emaOfMedAvg + devHigh
• lowerBand = emaOfMedAvg - devLow -----------------------------------------------------------------------------------
SCRIPT: Exit Orders
-----------------------------------------------------------------------------------
Once they have been defined in this block, the bands may if instrument.position == LONG then
be plotted on a chart (Figure 15). if instrument.close < lowerBand then broker.exitAllUnit-

August 2013 • Technical Analysis of Stocks & Commodities • 61

 FIGURE 17: EXCEL, VOLATILITY BANDS. This sample chart shows the default
volatility bands with zigzag.
Figure 16: TRADING BLOX, SAMPLE TRADE. The system goes long when price
closes above the green band and reverses to short when price closes below the red
band. The entry price, the initial stop at the opposite volatility band, and the exit price
are shown for the last trade on the chart.

sOnOpen
endif

if instrument.position == SHORT then

if instrument.close > upperBand then broker.exitAllUnit-
sOnOpen
endif

Combined with our built-in fixed fractional money man-

ager block to provide the quantity to purchase or sell on each
trade, we have a complete trading system that buys and sells FIGURE 18: EXCEL, DEVIATION FACTOR OF 1. This chart shows the volatility
a specific quantity on each signal (Figure 16). bands with a deviation factor of 1, similar to Figure 4 from Sylvain Vervoort’s article
More advanced entry/exit rules might be used to filter in this issue.
trade signals, trail a stop, or otherwise augment this basic
timing mechanism.
—Trading Blox Sell: Closing price crossing below the lower band.
tradingblox.com Short continues largely below the V median.
The upper band serves as a stop-loss level.

F MICROSOFT EXCEL: AUGUST 2013 TRADERS’ TIPS CODE The spreadsheet file for this Traders’ Tip can be down-
In “Within The Volatility Band” in this issue, Sylvain Vervoort loaded from www.traders.com in the Traders’ Tips area. To
presents the fourth part of a seven-article series on indicator successfully download it, follow these steps:
rules for a swing trading strategy (IRSTS). This month, he
defines his volatility band indicator and explains some of the • Right-click on the Excel file link, then
appropriate uses for it. The SVE volatility bands are shown • Select “Save target as” to place a copy of the spreadsheet
in Figure 17. file on your hard drive.
This month’s Excel spreadsheet updates the one I present- —Ron McAllister
ed last month for part 3 of Vervoort’s series to add the volatil- Excel and VBA programmer
ity band indicator. [email protected]
Figure 18 shows volatility bands with a deviation factor
of 1. Vervoort suggests that this setting can be used to define
buy & sell triggers:

Buy: Closing price crossing above the upper band.

Long continues largely above the V median.
The lower band serves as a stop-loss level.

62 • August 2013 • Technical Analysis of Stocks & Commodities

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August 2013 • Technical Analysis of STOCKS & COMMODITIES • 63

 FUTURES LIQUIDITY

T
rading liquidity is often over- very high volumes. The greatest number three-year period. Thus, all numbers in
looked as a key technical of dots indicates the greatest activity; this column have an equal dollar value.
measurement in the analysis futures with one or no dots show little Columns indicating percent margin
and selection of commodity activity and are therefore less desirable and effective percent margin provide
futures. The following explains how to for speculators. a helpful comparison for traders who
read the futures liquidity chart pub- Courtesy of CBOT wish to place their margin money ef-
lished by Technical Analysis of Stocks ficiently. The effective percent margin
& Commodities every month. is determined by dividing the margin
value ($) by the three-year price range of
Commodity futures contract dollar value, and then multiply-
The futures liquidity chart shown be- ing by one hundred.
low is intended to rank publicly traded
futures contracts in order of liquidity. Stocks
Relative contract liquidity is indicated Trading liquidity has a significant ef-
by the number of dots on the right-hand fect on the change in price of a secu-
side of the chart. rity. Theoretically, trading activity can
This liquidity ranking is produced by serve as a proxy for trading liquidity
multiplying contract point value times All futures listed are weighted equally and equals the total volume for a given
the maximum conceivable price motion under “contracts to trade for equal dol- period expressed as a percentage of the
(based on the past three years’ historical lar profit.” This is done by multiplying total number of shares outstanding. This
data) times the contract’s open interest contract value times the maximum pos- value can be thought of as the turnover
times a factor (usually 1 to 4) for low or sible change in price observed in the last rate of a firm’s shares outstanding.

Trading Liquidity: Futures

Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity
% Margin Trade for Equal
Dollar Profit
E-Mini S&P 500 Index GBLX 4.7 12.4 40 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
10 Yr Treasury Notes CBOT 1.1 12.1 102 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
T-Bond CBOT 2.4 14.1 52 •••••••••••••••••••••••••••••••••••••••••••
5 Yr Treasury Notes CBOT 0.6 11.6 195 ••••••••••••••••••••••••••••••••••••••
Crude Oil - Brent ICE 4.7 13.9 35 ••••••••••••••••••••••••••••••••••••••
Ultra T-Bond CBOT 2.9 13.1 38 •••••••••••••••••••••••••••••••••
Russell 2000 Mini ICE-US 4.5 11.1 31 ••••••••••••••••••••••••••••••••
Sugar-World #11 ICE-US 8.3 7.5 59 •••••••••••••••••••••••••••••••
E-Mini Nasdaq 100 Index GBLX 3.7 8.8 50 ••••••••••••••••••••••••••••
Silver 5000 troy oz COMEX 9.5 7.5 9 •••••••••••••••••••••••••••
Soybeans CBOT 7.1 18.3 50 •••••••••••••••••••••••••••
Corn CBOT 10.1 17.5 81 ••••••••••••••••••••••••••
Cotton #2 ICE-US 5.6 3.6 18 •••••••••••••••••••••••••
Eurodollar Interest Rate IMM 0 8 293 •••••••••••••••••••••
Coffee ICE-US 10.6 7.2 18 •••••••••••••••••••••
Crude Oil - WTI NYMEX 5.1 18.3 46 ••••••••••••••••••••
High Grade Copper COMEX 3.9 8.7 20 ••••••••••••••••••••
2 Yr Treasury Notes CBOT 0.1 8 328 •••••••••••••••••••
Lumber CME 0.1 0.1 1 ••••••••••••••••
Natural Gas NYMEX 6.6 13.4 67 ••••••••••••••••
Gas - RBOB NYMEX 5 13.3 27 •••••••••••••••
DJIA Mini CBOT 3.7 9.9 45 •••••••••••••••
E-Mini S&P Mid-Cap 400 GBLX 3.8 9.1 26 •••••••••••••••
Euro Currency € IMM 1.5 12.4 63 •••••••••••••
Lean Hogs CME 1.5 4.5 39 •••••••••••••
Wheat CBOT 9.5 24.4 94 ••••••••••••
Gold 100 troy oz COMEX 65.7 171.1 234 •••••••••••
Australian Dollar IMM 1.7 11.7 88 •••••••••••
Cocoa ICE-US 8.3 11.9 79 •••••••••••
CBOT Chicago Board of Trade, Division of CME
Soybean Meal CBOT 6 15.4 71 ••••••••••
Live Cattle CME 2.9 11.7 108 •••••••••• CME Chicago Mercantile Exchange
Swiss Franc IMM 1.6 5.3 30 •••••••••• COMEX Commodity Exchange, Inc. CME Group
KCBT Red Wheat KCBT 2.8 7.2 36 ••••••••• GBLX Chicago Mercantile Exchange - Globex
Soybean Oil CBOT 5.8 22.3 164 •••••••• ICE Intercontinental Exchange-Futures
Feeder Cattle CME 1.1 4.3 27 •••••••• ICE-EU Intercontinental Exchange-Futures - Europe
British Pound £ IMM 1.3 20.3 191 ••••••• ICE-US Intercontinental Exchange-Futures - US
Canadian Dollar IMM 1.1 14 159 ••••• IMM International Monetary Market
Mexican Peso IMM 5.6 42.3 240 •••• KCBT Kansas City Board of Trade
30 Day Federal Funds CBOT 0 3.8 232 •••• MGEX Minneapolis Grain Exchange
Spring Wheat MGEX 8 20.5 79 ••• NYMEX New York Mercantile Exchange
Orange Juice ICE-US 8.7 16.1 104 •••
Platinum NYMEX 53.3 162.9 527 ••
Sugar-World #16 ICE-US 8 7 50 ••
Ethanol Futures CBOT 6.1 17.1 53 ••
Palladium NYMEX 142.8 339.5 810 •• 1308
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).

64 • August 2013 • Technical Analysis of Stocks & Commodities

The following selection of book descriptions represents a sampling of recent book Algorithmic Trading: Winning Strate-
releases in the investing field. Books described here may be from some of the ma- gies And Their Rationale (224 pages, $70
jor book publishers as well as some independent book publishers. These are not hardcover, 2013, 978-1-
critical reviews or editorial evaluations, but rather a brief look at the book market-
118-46014-6) by Ernie
place to help keep readers up to date on new or recent book offerings.
Chan, published by Wi-
ley. Following Quanti-
Extraordinary Popular Delusions And The Big Trade: Simple tative Trading, Chan’s
The Madness Of Crowds, financial edi- Strategies For Maxi- latest book is a guide
tion (128 pages, $14.68 mum Market Returns for algorithmic trading
softcover, 2013, 978- (224 pages, $ 29.95 strategies for institution-
0 - 8 5 7-19 317- 9 ) b y hardcover, 2013, ISBN al traders or serious re-
Charles Mackay, pub- 978-1-118-49895-8) by tail traders. Chan re-
lished by Harriman Peter Pham, published views some of the best financial research
House. First published by Wiley. The Big Trade done in the last few decades and provides
in 1841, this classic guides traders to deter- his own insights. Broadly divided into the
is often cited as the mine the probability that mean-reverting and momentum camps, the
best book ever written a stock’s price will rise or fall in a particular book lays out standard techniques for trad-
about market psychol- time period. The financial markets, and trad- ing each category of strategies as well as
ogy. This Harriman House edition includes ing systems, can be extraordinarily com- the reasons why a strategy should work. The
Charles Mackay’s account of the three infa- plex. This book presents a new system that emphasis throughout is on simple and linear
mous financial manias — John Law’s Mis- seeks to filter out some of the noise, leav- strategies that avoid data overfitting that of-
sissipi Scheme, the South Sea Bubble, and ing behind meaningful signals for trades. ten plague complex strategies. The goal of
Tulipomania. These historic episodes show Pham’s approach codifies past behavior of a the book is to offer a realistic assessment of
that greed and fear have always been the stock to help discern high-probability trading common algorithmic trading techniques.
driving forces of financial markets. With the patterns. Pham’s system breaks with tradi-
benefit of hindsight, Mackay was able to tional analytical tools and rejects the idea of Modern Security Analysis: Understand-
record of a passage of events that was in- predictability. Instead, he covers how mar- ing Wall Street Fundamentals (496 pages,
evitably heading for disaster, resulting in a kets are structured and how they behave, $75 hardcover, 2013,
work that is both a thriller and a historical producing a simple action plan that is as ap- ISBN 978-1-118-39004-
document. plicable for daytraders as it is for genera- 7) by Martin J. Whit-
tional investors. man and Fernando Diz,
How To Make Money In published by Wiley. In
Stocks: Getting Start- Kathle en Brooks the 80 years since Ben-
ed (279 pages, $18 On Forex (127 pag- jamin Graham & David
softcover, 2013, ISBN es, $22.93 softcover / Dodd’s classic Securi-
978-0-071-81011-1) by $20 ebook, 2013, ISBN ty Analysis took the in-
Matthew Galgani, pub- 978-0-857-19205-9) vesting world by storm,
lished by McGraw-Hill by Kathleen Brooks, much has changed in the investing environ-
Education. This book published by Harri- ment. Whitman (with more than 50 years as
is the latest addition to man House. Many for- an investor and fund manager) and coauthor
the How To Make Mon- eign exchange traders Diz take the stance that “safe and cheap” is
ey In Stocks series begun 25 years ago use either fundamental the most reliable way to minimize investment
by William J. O’Neil, founder of Investors analysis or technical analysis, and they’re risk while maximizing long-term returns. This
Business Daily (IBD) and developer of the often considered to be mutually exclusive book offers a bottom-up approach by look-
well-known CAN SLIM method of investing. approaches. Brooks fuses the two types of ing for a company’s potential for generating
Matthew Galgani is the co-host of the IBD analysis for improved research and better wealth in different ways, including mergers &
weekly radio show and editor of the IBDex- trading results. At the heart of her trading acquisitions, spinoffs, recapitalizations, liqui-
tra! newsletter. Galgani’s book provides an philosophy is the principle that fundamental dations, changes of control, access to capi-
easy-to-follow plan designed for busy peo- factors — politics, economics, and societal tal markets, and more.
ple with a limited amount of time to spend changes — cause currency prices to move
on investing. In his book, Galgani presents in the medium to long term, but through- Further information
buying & selling checklists; some simple out the trading day, price movements are www.harriman-house.com
weekend and daily routines for investors; based on technical factors. Read about how www.mheducation.com
chart-reading tips; what to consider before she performs her pre-trade market analysis, www.wiley.com
you buy a stock; and action steps to get forms a plan, puts the plan into action, and
started quickly. applies risk management.
August 2013 • Technical Analysis of Stocks & Commodities • 65
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66 • August 2013 • Technical Analysis of Stocks & Commodities

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