SEPTEMBER 2013US $6.99 Canada $6.99 PROTECTIVE STOPS Should you use them? 12 THE MISSING LINK Between time & price 18 MOVING AVERAGES Simple is better 28 CURRENCY MARKETS Here’s how to beat them 32 OSCILLATORS, SMOOTHED Swing trading, part 5 38 INTERVIEW Vikram Murarka on forex forecasting 44 REVIEW n TradingMarkets.com Live Screener THE TRADERS’ MAGAZINE SINCE 1982 www.traders.com SEPTEMBER 2013 SIZE: 2-PAGE SPREAD PROOF #1 2page-Ad.indd 2 7/24/13 12:39:30 PM 2page-Ad.indd 3 7/24/13 12:40:09 PM TradeStation’s tools help you spot opportunities before other traders do. See for yourself. Go to TradeStation.com and take the TradeStation Tour. 1.800.264.7538 | TradeStation.com No offer or solicitation to buy or sell securities, securities derivatives, futures products or off-exchange foreign currency (forex) transactions of any kind, or any type of trading or investment advice, recommendation or strategy, is made, given or in any manner endorsed by any TradeStation affliate. 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The Proof is in the Platform. ™ 2013 READERS’ CHOICE AWARDS WINNER 6 “BESTS” C a l l 8 0 0 . 2 6 4 . 7 5 3 8 t o r e c e i v e y o u r F R E E T e c h n i c a l A n a l y s i s T r a d e r P a c k tasc_april013.indd 1 2/25/2013 4:14:45 PM Tradestation-1309.indd 1 7/23/13 8:35:27 AM IDEA GENERATION TOOLS DYNAMIC TRADE TICKET ADVANCED CHARTING CUSTOMIZABLE LAYOUTS STREAMING MARKET DATA How do you trade? Trade up to the all-new Active Trader Pro ® and get fully customizable layouts that let you see everything you need to discover, execute, and monitor your next big trading idea — all in one place. Or start with one of our prebuilt layout options and get trading in seconds. Active Trader Pro. One more innovative reason serious investors are choosing Fidelity. Get 200 free trades when you start using Active Trader Pro.* 800.FIDELITY | Fidelity.com/TryATP Investing involves risk, including risk of loss. Fidelity’s Active Trader Pro Platforms SM is available to customers trading 36 times or more in a rolling twelve-month period; those trading 120 times or more receive advanced charting with Recognia anticipated pattern and events and Elliot Wave analysis. Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Prior to trading options, contact Fidelity Investments by calling 800-343-3548 to receive a copy of Characteristics and Risks of Standardized Options and to be approved for options trading. Supporting documentation for any claims, if applicable, will be furnished upon request. * See Fidelity.com/ATP200free for further details. Valid for new or existing Fidelity customers opening a Fidelity retail account and funding it with at least $50,000 in cash and/or eligible securities. System availability and response times may be subject to market conditions. Fidelity Brokerage Services, Member NYSE, SIPC. © 2013 FMR LLC. All rights reserved. 652588.2.0 Mobile Retirement Planning Trading Investments OPTIONS TRADING 130836_02_Ad_ATP_StckComm.indd 1 7/10/13 4:47 PM Fidelity-1309.indd 1 7/23/13 7:56:19 AM 44 Forex Forecasting With Vikram Murarka by Jayanthi Gopalakrishnan Vikram Murarka has been forecasting, trading, and hedging currencies since 1991. Beginning his career as a currency trader at Essar Group, he managed a forex exposure of $1.2 billion. In 1996 he founded Kshitij Consultancy Services, a leading forex risk man- agement advisory frm in India. He regularly writes on forex risk management issues, including a series titled “Color Of Money.” 49 Futures For You by Carley Garner Here’s how the futures market really works. 54 Explore Your Options by Tom Gentile Got a question about options? 62 Q&A by Don Bright This professional trader answers a few of your questions. 12 Trading Without A Backstop, Part 2 by Anthony Trongone, PhD, CTA, CFP Placing protective stops affects your trading performance in good and bad ways. Should you or shouldn’t you use them? Here’s a look. 18 The Missing Link, Part 1 by Mircea Dologa The relationship between time and price has a direct infuence on trading proftability. Here’s a look at how you can gain an insight by looking at the euro and the Romanian leu. 28 Muscle Up Those Averages by Ajay Pankhania Find out how simple is better through this example of the EUR/USD currency pair. 32 Beating The Currency Markets by Azeez Mustapha It may seem impossible, but it can be done. Find out how. 38 Oscillators, Smoothed by Sylvain Vervoort In this ffth part of our article series on indicator rules for a swing trading strategy (IRSTS), we will introduce an oscillator based on Percent B. n Cover collage: Christine Morrison DEPARTMENTS 8 Opening Position 10 Letters to S&C 55 Traders’ Tips 59 Advertisers’ Index 59 Editorial Resource Index 63 Classified Advertising 63 Traders’ Resource 64 Futures Liquidity 65 Trade News & Products 6 • September 2013 • Technical Analysis of STOCKS & COMMODITIES 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. INTERVIEW FEATURE ARTICLE TIPS This article is the basis for Traders’ Tips this month. TIPS CONTENTS SEPTEMBER 2013, VOLUME 31 NUMBER 10 QUICK-SCAN, REVIEW 50 • TradingMarkets Live Screener Product review: Stock-screening tool FOREX FOCUS 07-IB13-653CH628 Interactive Brokers LLC is a member of NYSE, FINRA, SIPC. Lower investment costs will increase your overall return on investment, but lower costs do not guarantee that your investment will be profitable. Supporting documentation for any claims and statistical information will be provided upon request. Margin Rate as of July 1, 2013. *For additional information regarding margin loan rates, see www.interactivebrokers.com/interest Financing Rates. How much is your broker charging? Interactive Brokers LOWER YOUR COSTS TO MAXIMIZE YOUR RETURN interactivebrokers.com/interest 0.73% For a margin loan of $3,500,000 1.34% For a margin loan of $200,000 0.96% For a margin loan of $1,500,000 1.59% For a margin loan of $25,000 Interactive Brokers lends margin* at just . . . Trading on margin is only for sophisticated investors with high risk tolerance. You may lose more than your initial investment. Financing Rates. How much is your broker charging? IB-1309.indd 1 7/23/13 7:49:50 AM OPENING POSITION Jayanthi Gopalakrishnan, Editor EDITORIAL
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[email protected] Subscription Manager Sean M. Moore Subscription Sales Carmen Hale WEBSITE http://www.traders.com Staff members may be emailed through the Internet using frst initial plus last name plus @traders.com ow are Portuguese bond yields? Is the European Central Bank (ECB) going to keep interest rates as they are? How is China’s economy faring? Is the euro still fragile? The answers to these questions and many more are what foreign-currency traders need to know if they intend to navigate today’s 24- hour market that is dominated by institutional traders. It’s overwhelming, without a doubt, but a signifcant event in one country can impact the economy of another. As with anything, over time, you’ll see similar patterns playing themselves out and you’ll be able to connect the dots and assimilate that information in such a way that it creates a positive impact on your trading. The Federal Reserve has suggested they may end their quantitative easing (QE) as early as 2014. This has sparked some optimism in the US markets. We have seen some growth in the US economy — there are signs of a housing recovery, slow and steady growth in the jobs market, and an increase in manufacturing activity. This economic growth is mild, but we have seen a slight rise in the 10-year Treasury yields as well as a rally in the US dollar. If the trend in the Treasury yields continues, it is likely that we can see more capital being invested in the US, which will contribute to a further rise in the value of the US dollar. But a rise in the US dollar could have a negative impact on the earnings of multinational companies. And a slowdown or end to QE in the US could have a negative impact on other countries. September 2013 • Volume 31, Number 10 OPENING POSITION 8 • March 2006 • Technical Analysis of STOCKS & COMMODITIES Jayanthi Gopalakrishnan, Editor O EDITORIAL
[email protected] Editor in Chief Jack K. Hutson Editor Jayanthi Gopalakrishnan Managing Editor Elizabeth M.S. Flynn Production Manager Karen E. Wasserman Art Director Christine Morrison Graphic Designer Sharon Yamanaka Editorial Intern Emilie Rommel Technical Writer David Penn Staff Writers Dennis D. Peterson, Bruce Faber Webmaster Han J. Kim Contributing Editors John Ehlers, Kevin Lund, Anthony W. Warren, Ph.D. Contributing Writers Don Bright, Thomas Bulkowski, Martin Pring, Adrienne Toghraie The Traders’ Magazine TM March 2006 • Volume 24, Number 3 Authorization to photocopy items for internal or personal use, or the internal or personal use of specific clients, is granted by Technical Analysis, Inc. for users registered with the Copyright Clearance Center (CCC) Transactional Report- ing Service, provided that the base fee of $1.00 per copy, plus 50¢ per page is paid directly to CCC, 222 Rosewood Drive, Danvers, MA 01923. Online: http://www.copyright.com. For those organizations that have been granted a photocopy license by CCC, a separate system of payment has been arranged. The fee code for users of the Transactional Reporting Service is: 0738-3355/2006 $1.00 + .50. Subscriptions: USA: one year (13 issues) $64.95; Foreign surface mail add $15 per year. Air mail: Europe add $25.50 per year; elsewhere add $39 per year. Single copies of most past issues of the current year are available prepaid at $8 per copy. Prior years are available in book format (without ads) or from www.traders.com. USA funds only. Washington state residents add 8.8% sales tax. VISA, MasterCard, AmEx, and Novus Discover accepted. Subscription orders: 1 800 832-4642 or 1 206 938-0570. Technical Analysis of STOCKS & COMMODITIES ™ , The Traders’ Magazine™, is prepared from information be- lieved to be reliable but not guaranteed by us without further verification, and does not purport to be complete. Opinions expressed are subject to revision without notifi- cation. We are not offering to buy or sell securities or commodities discussed. Technical Analysis Inc., one or more of its officers, and authors may have a position in the securities discussed herein. The names of products and services presented in this magazine are used only in an editorial fashion, and to the benefit of the trademark owner, with no intention of infringing on trademark rights. OFFICE OF THE PUBLISHER Publisher Jack K. Hutson Credit Manager Linda Eades Gardner Industrial Engineer Jason K. Hutson Project Engineer Sean M. Moore Accounting Assistants Jane Leonard Controller Mary K. Hutson ADVERTISING SALES 4757 California Ave. S.W. Seattle, WA 98116-4499 1 206 938-0570 Fax 1 206 938-1307
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[email protected] Subscription Manager Sean M. Moore Assistant Subscription Manager Sheila Peterson Subscription Sales Agnes Dimaano, Tina Row WEBSITE http://www.traders.com Staff members may be emailed through the Internet using first initial plus last name plus @traders.com So nce again we got a reminder of just how sensitive the financial markets are. We saw a major selloff in the Japanese markets, which — as expected — triggered a domino effect on markets throughout the world. Add disappointing earnings numbers from US corporations and you have a situa- tion that just got worse. So what started off as a strong year ended up correcting, and rather rapidly. I must admit that although correc- tions are healthy for any market, when you have a 2% drop, it gets you thinking. Prior to the Federal Reserve’s FOMC meeting, I usually take a look at the yield curve. At present, it’s looking a little flat, and given that the general consensus is that the Fed is going to tighten at their January 31st meeting, I am concerned that the yield curve may be heading in the direction of being inverted. And if that were to happen, that would not be a good sign for the US economy. I’m not suggesting that we are going to go through a recessionary period. But given that almost anything can happen, it doesn’t hurt to expect the worst. If nothing else, it helps to preserve your capital. with that in mind, you can see why it’s important to design a trading system that gets you out of the market at the right time. When access to the markets is easy, the number of options available increases. This makes it important to be thorough with the different types of orders, front-end software, and trading systems that are out there. Lee Leibfarth, in his article “The Automated Daytrader” starting on page 22, addresses the various options that are available and how you can take advantage of them. But before getting to the stage of placing that trade, you need to understand the market you are trading. You should be able to do so after reading Paolo Pezzutti’s “Understanding Market Structure.” The markets follow different behavior pat- terns, and you need to determine if it is volatile, trending, in a trading range, moving strongly in one direction, or moving but not with much momentum. Only when you know what the structure of the market is will you be able to apply the correct trading technique. But that’s just the first step. You still have to have discipline, as you will find out after reading this month’s Technical Analysis of STOCKS & COMMODITIES interview with Ken Tower. Only then will you be able to know when to exit. Here’s to smart trading! +0603 Opening Position 1/24/06, 9:48 AM 1 8 • September 2013 • Technical Analysis of STOCKS & COMMODITIES H I ntermarket relationships abound, and they don’t necessarily have the same end result each time they occur. This makes it necessary to really understand how markets behave, how they impact other markets, and how you can distill the information to take advantage of it in your trading. It’s a challenge and may be enough to turn you away from trading the currency markets. However, once you fgure out a way to narrow down all this information and apply it to your trading, the act of placing those entries and exits may just be a matter of looking at a few simple indicators. 30 DAY TRIAL START TODAY! $20 DISCOUNT CODE: SC0913 THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN ACTUAL PER- FORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THESE BEING SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC. A b l e T r e n d 7 . 0 ® Award Winning Trading Software 1997 - 2013 For Stocks, Futures FOREX & Options CTA Firm Reader’s Choice Awards 1997-2013 in Stock Trading System; Futures Trading System & Option Trading System LINKS TRADERS' RESOURC E Get Started Today! www.ablesys.com Ablesys Corp. • 20954 Corsair Blvd. • Hayward, CA 94545 • Tel: 510-265-1883 • Fax: 510-265-1993 Did It or Didn’t It? Market Trend Changes Instantly. So Does AbleTrend Indicator. AbleTrend Identifies Trend Changes As Soon As They Happen! SINCE 1995 CTA REGISTERED WITH THE CFTC Test Drive AbleTrend 7.0 To Pinpoint True Market Support/ Resistance Levels And The Early Stages Of Trend Changes AbleTrend T2 offers the following advantages: 1. Small blue dots are T2 Support for buy positions showing the market support levels 2. Small red dots are T2 Resistance for sell positions showing the market resistance levels 3. T2 Support helps to define the retracements 4. T2 Resistance helps to define the early trend changes 1. T2 Support/Resistance are defined by the market’s own support and resistance levels and are therefore 100% objective. 2. The scientific calculations behind T2 Support/Resistance are universal, not curve-fitted. 3. T2 Support/Resistance can be back-tested to reveal the characteristics of individual markets. 4. T2 Support/Resistance are updated with each new tick so there are no delays. 5. T2 Support/Resistance are proprietary, not shareware, and are for the exclusive use of software owners. 6. Successful AbleTrend users around the world have relied on T2. Their common conclusion: “Never fight T2 Support/Resistance.” Ablesys-1309.indd 1 7/23/13 8:18:50 AM 10 • September 2013 • Technical Analysis of STOCKS & COMMODITIES Author Sylvain Vervoort replies: 1. Days 1 & 2 are not important. I am simply trying to show the lowest low and highest high. 2. For the upstep and downstep pattern, the last candle has to open inside the body of the previous candle; whether there are wicks or not is not important for the pattern. 3. There are some differences. For ex- ample, in scenario 1 in the upstep pattern, the second-to-last candle represents the lowest low. In scenario 3, the lowest low is represented by the last candle. TRADING CONTESTS Editor, Is there a back issue that covers any trading contests or that names the best top traders? Have you published any ratings or do you offer any newsletters on this? Can you recommend a good source for education on trading stocks, options, and forex, as well as technical analysis? I am trying to source the best traders to follow ideas from. LORNE As an educational, how-to magazine, we generally do not cover contests or rate individual traders. There are several organizations unrelated to this magazine that do hold contests and can be found on the Internet via a search. If it were ratings on trading systems you seek, we might suggest trying FuturesTruth.com or Collective2.com. As for following other traders, we’ve recently listed some services in our monthly Trade News & Products section that may interest you; you can review that information for followup. We do publish a Readers’ Choice Awards section every year in our Bonus Issue, which presents the results of our readers’ votes for their favorite products and services across more than 20 catego- ries of investing software and services. It does not rate individual traders, but it presents a list of services and some resources that our readers fnd useful. You also may be interested in our monthly interviews, in which we get to know a trader or analyst in the feld and learn about their approach. As for education on technical analysis itself, simply put, this magazine has been the best source of education on technical analysis since its debut in 1982. We hope you will keep reading to take in all that the technical analysis community has to offer by way of this magazine and by way of our website at www.traders.com. You can also fnd leads to many other educational resources within our pages or at our site.—Editor SVAPO CODE QUESTION Editor, I was reading through your website. I respect the work of author Sylvain Vervoort, with his logic and practicality. His SVAPO, or short-term volume and price oscillator (November 2007 S&C), drew my attention as a technical trader. I loved the concept, as I was looking for a way to integrate some insight from volume into my trading setup — that is, something simple (not like Wyckoff concepts) — and that also doesn’t have to go through reading the tape of each trade. Not only do I not want to get into that, but I also don’t have it in my trad- ing platform. The code for SVAPO has few issues for me. It’s true each one of us can code the same concept differently, especially when it comes to smoothing and averaging, and I would avoid too many smoothings, especially with the TEMA (triple exponential moving averages) or the LR (linear regression). However, there’s a specifc line of code that doesn’t The editors of S&C invite readers to submit their opinions and information on subjects relating to technical analysis and this magazine. This column is our means of communica- tion with our readers. Is there something you would like to know more (or less) about? Tell us about it. Without a source of new ideas and subjects coming from our readers, this magazine would not exist. Email your correspondence to
[email protected] or address your correspondence to: Editor, STOCKS & COMMODITIES, 4757 California Ave. SW, Seattle, WA 98116-4499. All letters become the property of Technical Analysis, Inc. Letter-writers must include their full name and address for verifcation. Letters may be edited for length or clarity. The opinions expressed in this column do not necessarily represent those of the magazine.—Editor 1 2 3 4 1 2 3 4 FIGURE 1: UPSTEP PATTERN. This reproduction of Sylvain Vervoort’s Figure 2 from his July 2013 article in S&C demonstrates that four scenarios are possible for the upstep pattern. FIGURE 2: DOWNSTEP PATTERN. As with the upstep pattern, four possible downstep patterns are possible. STEP CANDLE PATTERN Editor, The upstep and down- step patterns presented in Figures 2 & 3 in Sylvain Vervoort’s July 2013 article (“The Step Candle Pattern”), [re- produced here as Figures 1 & 2], leave me with some questions: 1. All eight have four or fve trading days illustrated. Are days 1 & 2 important? 2. There was no mention of the candle “wicks” (day’s high & low). Are they important? 3. For both the upstep and downstep, why do scenarios 1 & 3 as well as 2 & 4 look the same? JIM VON DER WISCHE September 2013 • Technical Analysis of STOCKS & COMMODITIES • 11 LETTERS make sense to me. I saw a port done by a respected thinkscripter on another site, and unfortunately he ported the same error, translating the study as-is. Here is the line of code I am referring to (it’s the main logic/formula for calculating the SVAPO): {SVAPO result of price and volume} SVAPO:=Tema(Sum(If(haC>(Ref(haC,- 1)*(1+cutoff/1000)) AND Alert(vtr>=Ref(vtr,-1),2), vc, If(haC<(Ref(haC,-1)*(1-cutoff/1000)) AND Alert(vtr>Ref(vtr,-1),2),-vc,0)),period)/ (vave+1),period); Volume and its average will be in the millions, so what is the value of adding “1” to a fgure like that? Vervoort’s article on the SVAPO also inspired me to think further of volume integration, so I am now coding another study looking at net directional volume, which is the difference between up & down volume for a given period, as an indicator of volume accumulation and dispersion. It’s what I was looking for, so thank you again for the inspiration. Keep up all the great and valuable work. K. Sylvain Vervoort replies: Thanks for your letter. The +1 is simply for when there is no volume data avail- able, in which case you would get a division by zero, which would create an error in the formula. With 1, there would be no error message. RAVE FOR VAN DER MERWE Editor, Congratulations on publishing articles in S&C by Koos van der Merwe. He gets it right, and I hope you will publish work by him more often. MIKE Thank you for your feedback. Readers who would like to read additional ar- ticles by Merwe can visit the Traders. com Advantage area of our website, www.traders.com, which contains on- line articles published daily. You will fnd many additional articles there by Merwe.—Editor It not only lets me execute like a pro - their Ecosystem, support and training have me thinking like a pro too. I work hard at my trading and want a platform that works as hard as I do. That’s why I chose NinjaTrader. kwikpop.com marketfy.com fxcm.com Featured Ecosystem Partners to view more go to ninjatrader.com/partners I may not be a pro, but I trade like one. Professional traders move through the markets with confdence and precision. NinjaTrader’s extensive video library, partner Ecosystem and live training webinars provide you with the foundation to become a more confdent trader. Our award winning software lets you execute trades with professional precision, and the best part is that getting started with NinjaTrader is FREE. So what are you waiting for? Start trading like a pro today! ninjatrader.com/TASC 12 • September 2013 • Technical Analysis of STOCKS & COMMODITIES Placing protective stops affects your trading performance in good and bad ways. Should you or shouldn’t you use them? Here in part 2 of this series, we take a look. by Anthony Trongone, PhD, CTA, CFP espite the consensus of trading literature advocating the use of a protective stop-loss order, so far, this analysis does not appear to support this statement. In part 1 of my study published last month in the August 2013 issue of STOCKS & COMMODITIES, I examined the results of taking a long position from 9:30–10:30 am (that is, in the opening hour of trading) and the effect of using certain percentage stops. Here in part 2, I’ll expand on the earlier analysis. Stops Ahead Trading Without A Backstop Part 2 BACKGROUND In the previous study, I took a long position in the spiders (SPDR S&P 500 ETF Trust) at 9:30 am, along with a stop-sell order at various percentages below this opening (9:30 am) price. If the stop order did not fll, I promptly offset the long position at 10:30 am ET. The fndings in the study I will present here expand the ear- lier analysis from 743 to 764 trading days (June 1, 2010–June 12, 2013) to once again obtain the performance results. Since most active traders do not enter into trading decisions blindly, I began experimenting using a stop order with various trading systems. Last month in part 1, I ran an analysis using early morning volume (7:30–8:30 volume greater than two million shares) to assess the effect on trading the spiders (SPY) in D C O L L A G E / C H R I S T I N E M O R R I S O N September 2013 • Technical Analysis of STOCKS & COMMODITIES • 13 the opening hour. Despite the $3.32 loss in 165 trading days, when using a 0.25% stop (below the 9:30 price), there were just 98 stop flls but a proft of $2.27. When this same condition was present, a 0.50% stop (below the 9:30 price) resulted in 64 stop flls, but it produced a loss of -$5.39. The beneft of applying a stop order to a long position is already questionable; how- ever, it gets even more complicated because the question of what percentage to use when entering a protective backstop can make the difference in your bottom line. HERE’S WHY We’ll continue the analysis by measuring the proftability of trading stops using two different predictor variables in separate studies. I begin by looking at an earlier hour loss. More specifcally, what impact does a loss of $0.20 or more (<= -$0.20) have on the performance of the opening hour? In Figure 1, you see the 153 days in the 8:30–9:30 session when this condition was present. Figure 2 reports the results of these 153 trades in 764 trading days (a 20% activity rate). These premarket losses had a slightly positive impact on the opening hour (a $1.31 advance) of trading; however, the opportunity cost of entering this order was -$0.92. Considering there were 83 stops in 153 trades (54.25%), a 0.25% (quarter percent) stop-loss order was costly. It is diffcult to achieve success when more than half your trades trigger your stop orders (this translates into one fll in every 1.84 trading days). SCATTERGRAM Performing an analysis on those scores with a loss equal to $0.20 or more (<= -$0.20) gives you a snapshot of your fnd- ings, as it reports a $1.31 advance in 153 trades; however, by compiling these trades into a summary score, you are losing information. Figure 3 shows how to correct this by creating a scattergram of those scores with a strong 8:30–9:30 loss (x- axis in red) along with the resulting 9:30–10:30 performance scores (y-axis in blue). M I C R O S O F T E X C E L AFTER A LOSS OF <= -$0.20 IN THE 8:30 TO 9:30 SESSION, THE EFFECT OF A 0.25% STOP ON THE OPENING HOUR TRADING DAYS 0.25% STOPS 9:30 TO 10:30 PERFORMANCE REVENUE EXPENSE OPPORTUNITY COST 153 83 $1.31 $26.43 $26.04 -$0.92 FIGURE 1: 8:30–9:30 HOURLY DROP OF $0.20 OR MORE (<= -$0.20). What effect does this excessive loss in the preceding hour have on the opening hour of trading? Should we take a long position at the ringing of the opening bell together with a protective stop-loss order? FIGURE 2: THE RESULTS OF TAKING A LONG POSITION WITH A 0.25% STOP. In 153 trades, a long position along with a 0.25% stop was unable to deliver meaningful savings. FIGURE 3: THE PERFORMANCE RESULTS OF AN 8:30–9:30 LOSS IN THE OPENING HOUR. Although those scores to the far left of the scattergram show the 20 most aggressive losses (<= -$0.70), the opening hour was able to rebound after these declines, lifting it to $5.71 in profits. SPY 8:30–9:30 am 14 • September 2013 • Technical Analysis of STOCKS & COMMODITIES scores (lower 10%) as well as the 76 best ROC scores (upper 10%) to assess the 9:30–10:30 performance of the spiders. The -$5.36 ROC score is a meaningful price change; it certainly would qualify as one of the scores in the bottom 10%. Figure 4 reports the fndings of these 76 qualifying days in the two outlying categories. When given either condition, the spiders had a positive performance. The upper 10% (ROC positive) had 39 stops with an opportunity cost of -$0.64, whereas the lower 10% (ROC negative) had 48 stops with an opportunity cost of -$4.00. Considering the $11.00 opening- hour summary gain in 764 days, the $1.65 (ROC positive) advance together with the $4.91 (ROC negative) advance accumulated 60% of the profts. Over the course of this study, the opening hour produced $11.00 in profts. Figure 4 provides the results of the ROC study. After separating the outlying scores (76 days in both the upper and lower brackets), the spiders captured three-ffths of the profts. Nevertheless, a stop-loss in either category was not a good strategy; however, it was even costlier when the ROC was negative (-$4.00). PLACING STOP-LOSS ORDERS I am not saying you should never take stops. What I am advocating is never to take stops without frst doing your analysis to determine the best course of action. For instance, prior to making my frst trading decision of the day, I notice a morning with strong volume along with a steady increase in the price of the spiders. After running my analysis, I uncover 12 days with a similar pattern: $0.24, $0.36, $0.42, $0.84, -$1.12, $0.12, $0.16, -$1.32, $0.64, $0.44, $0.06, $0.54 Would it make sense to take a long position with a protective stop in this situation? Without considering the sequence of these results, with 10 advances and $1.38 in profts, I would be willing to take a long position, but what about the two declining hourly ses- sions? Since they are excessively strong, I would consider placing a long position with a stop-loss order or pass on the protective stop, but take a position with fewer shares. Some investors may choose to go heavy but would use a stop on part of their position. What’s the best decision? The answer A loss of $0.20 or more (<= -$0.20) in the 8:30–9:30 hour was unable to carry over into the 9:30–10:30 session. This excessive loss, which gave us 83 stops (using a 0.25% stop below the 9:30 price) in 153 trading opportunities, resulted in a $1.31 proft in the opening hour; however, the expense of executing 54.25 percent of these stop orders resulted in an opportunity cost of -$0.92. An assessment of the 10 worst scores (from -$1.74 to -$0.98) showed they were not consistently brought on by strong losses. Six of them occurred when the earlier loss in the spiders was between a loss of -$0.20 and -$0.34; the other four scores had losses of -$0.63, -$0.65, and -$0.93, and the biggest hourly setback (-$1.74) followed a loss of -$1.22 (dot with red border). MOMENTUM INDICATOR A three-day rate of change (ROC) is a momentum indicator; it measures the price change among three trading days. In this case, I am using the 8:30 am price; therefore, it is the t 1 – t 3 price difference: 8:30 am price of SPY on June 21, 2013: $159.46 8:30 am price of SPY on June 18, 2013: $164.82 $159.46 – $164.82 = -$5.36 ROC This study includes those ROC scores in the outlying 10% of the 764 trading days; consequently, it uses the 76 worst ROC 3 day ROC (10% OUTLIERS) TRADING DAYS .0025 STOP 9:30 – 10:30 RESULTS REVENUE EXPENSE OPPORTUNITY COST ROC POSITIVE 76 39 $1.65 $13.35 $12.34 -$0.64 ROC NEGATIVE 76 48 $4.91 $15.48 $14.57 -$4.00 FIGURE 4: AN ASSESSMENT OF THE OUTLYING ROC SCORES USING A 0.25% STOP-LOSS ORDER. Both outlying categories were able to produce a profit in the opening hour, but the opportunity cost of applying a 0.25% stop resulted in a negative outcome. MONEY MANAGEMENT Advanced algorithms deliver low lag, low noise analysis. TradeStation, AmiBroker, Investor/RT, MultiCharts, NeuroShell Trader, eSignal, NeoTicker, Tradecision, TradingSolutions, MATLAB, Ninja Trader, Genesis TradeNavigator, Market Delta, DLLs for custom software www.jurikres.com • 800-810-3646 • 719-686-0074 Now featuring Tools for... Scottrader ® Streaming Quotes lets me customize the tools I need to go from thought to trade. All in one place. Advanced charting. Personal watch lists. Real-time news. Advanced order entry. And more. I can even set alerts based on my criteria. The choices are numerous. The decision is mine. Scottrader ® Streaming Quotes. Another reason why, at Scottrade, $7 trades are just the start. Scottrade.com/Scottrader Online market and limit stock trades are just $7 for stocks priced $1 and above. Market volatility, volume and system availability may impact account access and trade execution. ©2011 Scottrade, Inc. All rights reserved. Scottrade ® , the Scottrade ® logo, Scottrader® and I’m with Scottrade™ are the registered and unregistered trademarks of Scottrade, Inc. Member FINRA/SIPC. IT’S LIKE HAVING MY OWN PERSONAL TRADING FLOOR. RIGHT AT MY FINGERTIPS. I’M WITH SCOTTRADE. ™ ++Full pg Ad Template.indd 1 4/12/12 11:41:42 AM Scottrade-v1-1309.indd 1 7/12/13 1:04:39 PM September 2013 • Technical Analysis of STOCKS & COMMODITIES • 16 Your best defense is to become knowledgeable about market meltdowns. What are its symptoms and how can you understand them? is specifc to the individual, and it depends on many factors, such as your risk tolerance and how well you can weather a large hourly loss without it having a negative impact on the rest of your trading day. ACTION IS THE ANTIDOTE OF DESPAIR Most traders who use stops on a regular basis are often at a disadvantage, because once their stop activates, it automatically closes their position. As unpleasant as this is, they quickly get over this disappointment if the market continues its downward descent; however, emotions fare when it makes a comeback. If the market rallies above the previous protective order after the trader has offset a losing position, the desire to get back in is a natural reaction. The more the market rises, the more powerful is the emotion to catch the remainder of the rally. Of course, once the trader bites, the rally often fzzles, or worse, heads back down. This puts the trader in an unpleasant situ- ation, and he responds by taking action, which encourages him to abandon any remaining semblance of a game plan. He makes refexive trades, solely on the basis of prevailing market direction. Stops often work, but when they disappoint, it often stimulates overtrading, which is always costly. Despite market circumstances, some traders stay with their specifed game plan. Although the market may be moving against them, they do not take action. After taking a long position at 9:30, they do not follow the market until 10:30, when they automatically offset this position. Without observing the market midstream, it cannot sway their decision-making process; thus, they can place a 9:30 stop position without the emotional drama. There are traders who do not have this remarkable self-control. The effcacy of your trading systems is another factor to consider in your decision to take protective orders. If your systems are ineffective, and you are losing money, then the assumption that you will lose less money with this form of protection is a reasonable one. However, if your system is not working, it is best to stop the bleeding as soon as possible. Moreover, with stop orders, especially when using them too frequently, there is the aspect of relying on them as a safety net. Once you have the perception that you can safely control losses, it is likely that you may not give your analysis the attention it deserves. When using a system that results in a summary loss in the opening hour, you would expect a protective order to reduce some of this negativity. While it is unwise to make sweeping assumptions on the basis of a few studies, it does appear as if a stop-loss order works best when the performance of your trading setting is unproftable. But the question is, if you know your trading system is pointing toward a negative open, why would you take a long position? FOR THE SAKE OF SAFETY Without cultivating some understanding of your system’s losses, it is best to be cautious by trading fewer instruments, or trade fewer shares, but always allow your analysis to set you on the proper path. Remember, knowledge is power. Your best defense is to become knowledgeable about these meltdowns. What are the symptoms, and how can you get a better understanding of these downturns? According to Baruch Spinoza (1632–1677), the timid man whose primary concern is safety will always seek fight. It is reasonable to have a fear of loss, but excessive fear is bound to hamper growth. Anthony Trongone has been a Master Educator for eSignal since 2006. He is a regular contributor to Technical Analysis of STOCKS & COMMODITIES. His new book, Trade With The Odds: How To Construct Market-Beating Systems, discusses more of his trading systems. FURTHER READING Trongone, Anthony [2013]. “Trading Without A Backstop,” Technical Analysis of STOCKS & COMMODITIES, Volume 31: August. ______ [2013]. “Early Morning Activity,” Technical Analysis of STOCKS & COMMODITIES, Volume 31: June. ______ [2012]. Trade With The Odds: How To Construct Market Beating Trading Systems, Bloomberg Press. _____ [2012]. “Warning: Bear Activity,” Technical Analysis of STOCKS & COMMODITIES, Volume 30: November. ‡Microsoft Excel ‡See Editoral Index MONEY MANAGEMENT Job # Filename 55844_M02 55845_55844_M02.indd Art Director Artist rrosen l. garcia User / Pre- Last Modified CMYK 4-15-2013 2:39 PM Bleed Trim Saftey 8.375” x 11” 8.125” x 10.75” 7” x 10” Path sMProSL11:Users:rwang:Deskt op:55845_55844_M02.indd Richard Wang / Kevin Flynn Client Create Proof Charles Schwab 4-11-2013 2:58 PM Traffic hlind 1_final Fonts Minion Pro (Regular, Bold; OpenType), Avenir LT Std (95 Black, 45 Book, 65 Medium; OpenType) Art L12SWA_OptionsXpress_MAG_VV2_P.eps (Arts_Logos:Charles_Schwab:2011:OPTIONSXPRESS:LOGOS:MAG:L12SWA_OptionsXpress_MAG_VV2_P.eps), L13SWA_OptionsX- press_QR_001_54697_Bottom_Line.eps (Arts_Logos:Charles_Schwab:2011:OPTIONSXPRESS:QR_Codes:L13SWA_OptionsXpress_QR_001_54697_Bottom_Line.eps), L13SWA_Op- tionsXpress_MAG_007_54697_Trading_Patterns_4cSWOP_V1.tif (Arts_Logos:Charles_Schwab:2011:OPTIONSXPRESS:ART:MAG:L13SWA_OptionsXpress_MAG_007_54697_Trad- OPEN AN ACCOUNT 1-888-980-5734 OPTIONSXPRESS.COM Options and futures involve substantial risk and are not suitable for all investors. 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Client Name: Charles Schwab/Options Xpress Job Number: 0000055845_0000055844_M02 Caption: Bottom Line Resize - MAG Bleed: 8.375” w x 11” h Trim: 8.125” w x 10.75” h Safety: 7” w x 10” h PG 4CB Tis advertisement prepared by: HAVAS WORLDWIDE NY 350 Hudson Street New York, New York 10014 AD: Ron Rosen AE: Elyssa Nemetsky Traf: L. Pino x8010 Prod: L. Pino x8010 BILL LABOR TO JOB NUMBER: 0000055845 BILL OOP TO JOB NUMBER: 0000055845 S:7” S : 1 0 ” T:8.125” T : 1 0 . 7 5 ” B:8.375” B : 1 1 ” OptionsXP-v1-1309.indd 1 7/12/13 12:54:25 PM 18 • September 2013 • Technical Analysis of STOCKS & COMMODITIES September 2013 • Technical Analysis of STOCKS & COMMODITIES • 19 A Y A K A K E D A CHART PATTERNS The relationship between time and price has a direct infuence on trading proftability. Here’s a look at how you can gain an insight by looking at the euro and the Romanian leu. traders progress along their learning curve, they begin to clearly observe the infuence of the time/price relation in identifying the optimal trading setup. In spite of this, some traders — novices and experienced — always start the learning process with only price tools and their corresponding indi- cators, that is, classic technical analysis. Sooner or later, the successful trader will reach an advanced stage where learning the importance of time and its usefulness becomes a priority in the quest to further develop and acquire the much-sought-after profes- sional trading techniques. THE EVOLUTION OF A TRADER In the early stages of becoming a trader, we are all motivated to learn tons of techniques and indicators in order to perform the most proftable trades. We quickly observe that if the right approach isn’t selected, we are in great danger of losing our trading capital. Over time, I began to realize that studying and ap- plying Elliott waves, Gann methodology, and map- ping multiple time frames (top-down analysis) are a prelude to any fnal decision-making. Once this is done, the next step, which is the detailed study of the specifc market you are trading, comes naturally. You can then identify the optimal time frame setup that works for you, one that consists of the most effcient elements of modern technical analysis. ESTABLISHING THE TRADING CONTEXT Before I describe my time & price technique, I will briefy present and revisit some of the basic elements that contribute to its performance. In spite of the so-called subjective labeling that many traders give to Elliott waves, I have been suc- cessfully using them for more than 20 years. Many traders misunderstand the usage of these waves mainly because of the lack of a probabilistic approach. Without probability, there wouldn’t be a successful trading technique — classic or modern. Your proftability is infuenced and coordinated by the time & price relationship. You cannot label any type of pattern without frst verifying several elements: n Where is the market coming from? n Where is the market going? n What would be the most probable terminal key level of the current swing (trend) where time meets price? n What is the most probable tendency, if any? n If an existing sideways behavior is developing, what is its energy-restoring potential? n If an existent trend is ongoing, where is the kinetic energy coming from? Can it be quanti- fed? n Is the market in a classic, extended, or failure mode, or on the contrary, is it in an embryonic state? n What kind of technical tools can we use to get an optimal trading setup? From an educational point of view, I will present two classic examples. In this frst article of my series, I will discuss the euro vs. the Romanian leu (EUR/RON) in hindsight. In part 2, I will look at the gold continuous futures contract while it is developing in real time. Waves & Boxes The Missing Link Part 1 by Mircea Dologa As 20 • September 2013 • Technical Analysis of STOCKS & COMMODITIES The chart in Figure 1 illustrates the EUR/RON currency pair on the weekly time frame. I selected this example to establish a close-to-ideal relationship between time & price. I will focus the study on just the fourth wave, W(4). As you can see in Figure 1, the area occupied by W(4) is mapped with the help of time & price parameters. With respect to price, W(4) retraced 33.3% of W(3) to the 4.0564 level. With respect to time, I have applied the alternation principle, which, from the classical point of view, states that the duration of W(4) is calculated based on the duration of W(2) wave, using the following formula: Time W(4) = n x Time W(2) The n coeffcient can take, more often than not, the following values: 1, 2, 3, 4… In this case, the value of n is 4.333. Very rarely is the value of n less than 1.0. You should understand and be prepared for the alternation principle in your daily trading. The fve-rule parameters pertain to the two corrective waves within an impulsive pattern: W(4) and W(2). Note that this principle implies that one valid element of the rules should be present. The alternation principle rules are: n Price: Measure the distance, in price or in points, and compare the values of each corrective wave; oftentimes, W(2) retraces more than W(4). n Time: Evaluate the duration of each corrective wave; count the corresponding bars on the time frame you are using. For example, more often than not, W(4) lasts longer than W(2) [n > 1]. Very rarely is the duration of W(4) less than that of W(2) [n < 1]. n Severity: Compare the Fibonacci price retracement ra- tios of the two waves. Typically, W(2) retraces farther than the W(4). n Intricacy: Evaluate the number of subdivisions in both waves. Usually, W(4) will have more subdivisions than W(2). n Construction (wave structure): Observe the degree of structural complexity (mono/polywave) of the wave. Usu- ally, W(4) has a higher degree of complexity than W(2). The chart in Figure 2 illustrates the same EUR/RON currency pair on the weekly time frame. As you can see from the chart, the span of W(4) wave is mapped by using the price retracement parameter [zero to 33.3% of W(3)]. On the time side, I applied the 28-bar multiplier, which is the duration of W(2), to forecast the duration of W(4). Thus, I calculated that W(4) will terminate after 121 corrective bars, which fully complies with the formula: 4.333 x W(2) duration The value of n = 4.333 corresponds to one of the Charles Dow ratios, which are typically known as thirds, that is, 0.333, 0.666, 1.333, 1.666, 2.333, 2.666, and so on. The chart in Figure 2 illustrates an interesting observation between the relationship of M I C R O S O F T E X C E L FIGURE 1: TIME AND PRICE RELATIONSHIP. Notice how W(4) retraced 33.3% of W(3) to the 4.0564 level. E S I G N A L Identifying and labeling the most probable Elliott waves comes down to choosing the optimal time & price tools. Weekly chart Euro/RON spot forex September 2013 • Technical Analysis of STOCKS & COMMODITIES • 21 W(4) and W(2) with respect to time — the terminations of most of the lower-degree waves of the double three W(4) complex wave (labeled W-X-Y) occur at a Fibonacci, Gann, or Charles Dow ratio threshold, within the duration of W(4). All these observations were possible through the use of the alternation principle, that is, through the time formula with the specifc multiplier. Thus, we can establish the following time ratios pertaining to the adequate subwaves of W(4): n Subwave (a): W: W(4) consists of 14 bars, terminates at the 0.5 multiplier location, and corresponds to a Gann ratio, on the 4.333 x W(2) scale n Subwave a: (b): W: W(4) consists of 14 bars, terminates at the 1.0 multiplier location, and corresponds to a Gann (Fibonacci) ratio on the 4.333 x W(2) scale n Subwave b: (b): W: W(4) has 14 bars, terminates at the 1.0 multiplier location, corresponds to a Gann (Fibonacci) ratio on the 4.333 x W(2) scale n Subwave c: (b): W: W(4) has 13 bars, terminates at the 1.5 multiplier location, and corresponds to a Gann ratio [error margin is (+ 1) bar] on the 4.333 x W(2) scale n Subwave (c): W: W(4) has 21 bars [(0.50 + 0.25) or 0.75 of 28 bars], terminates at the 2.25 multiplier location, and corresponds to a Gann ratio on the 4.333 x W(2) scale n Subwave X: W(4) has 14 bars [(2.75 – 2.25) or 0.5 of 28 bars], terminates at the 2.75 multiplier location, and corresponds to a Gann ratio [error margin is (+ 1) bar] on the 4.333 x W(2) scale n Subwave (a): Y: W(4) has seven bars [(3.00 – 2.75) or 0.25 of 28 bars], terminates at the 3.0 multiplier loca- tion, and corresponds to a Gann (Fibonacci) ratio, on the 4.333 x W(2) scale n Subwave (b): Y: W(4) has nine bars [(3.333 – 3.00) or 0.333 of 28 bars], terminates at the 3.333 multiplier location, and corresponds to a Charles Dow ratio [error margin is (+ 1) bar], on the 4.333 x W(2) scale n Subwave (c): Y: W(4) has 28 bars [(4.333 – 3.333) or 1.0 of 28 bars], terminates at the 4.333 multiplier terminal location, and corresponds to a Charles Dow ratio, on the 4.333 x W(2) scale. FIGURE 2: PRICE RETRACEMENTS. Here, the 28-bar multiplier, which is the duration of W(2), is used to forecast the duration of W(4). LEARN HOW TO GENERATE A 5%-10% MONTHLY INCOME! No Iron Condors No Credit Spreads To Learn More Today Visit Our Website At ConsistentOptionsIncome.com Weekly chart Euro/RON spot forex 22 • September 2013 • Technical Analysis of STOCKS & COMMODITIES Figure 3 completes the Elliott W(4) wave setup by adding some interesting information. Here are my observations and interpreta- tions of the price chart and the oscillator in the subchart. n The Elliott subwave count of W(4) with its three wave subdivisions, a: (a) to W: W(4) n The time relation of W(4) to W(2), which reveals the termi- nal levels of most of the lower-degree waves of the double three W(4) complex wave (labeled W-X-Y) n The W(4)/W(1) overlapping border line is located at the 3.8382 key level. It is important to continuously monitor the distance between price and this overlapping border line. It reveals important information regarding the potential development of W(4) wave, which could unveil the future development of W(5), the terminal wave, and implicitly the termination of the ascending impulsive pattern. The bigger the W(4) retracement, the weaker the W(5) wave will be in its development. n The time relationship within the W(4) wave, considered to be equal to a ratio of 1.0 but containing 121 bars, in hind- sight, reveals the terminal levels of most of the lower-degree waves of the double three W(4) complex wave (W-X-Y) and the multiple time clusters. Thus, the following time ratios pertain to the W(4) wave: ● Subwave (a): W: W(4) has 14 bars, terminates at the 0.125 multiplier location, and corresponds to a Gann ratio [error margin is (-1) bar], on the 121 bar scale. ● Subwave a: (b): W: W(4) has 14 bars, terminates at the 0.236 multiplier location, and corresponds to a Fibonacci ratio, on the 121 bar scale. ● Subwave b: (b): W: W(4) has 14 bars, terminates at the 0.236 multiplier location, and corresponds to a Fibonacci ratio, on the 121 bar scale ● Subwave c: (b): W: W(4) has 13 bars, terminates at the 0.33 multiplier location, and corresponds to a Charles Dow ratio [error margin is (- 2) bars], on the 121 bar scale ● Subwave (c): W: W(4) has 21 bars, terminates at the0.50 multiplier location, and corresponds to a Gann ratio [error margin is (-2) bars], on the 121 bar scale ● Subwave X: W(4) has 14 bars, terminates at the 0.66 multiplier location, and corresponds to a Charles Dow ratio [error margin is (+2) bars], on the 121 bar scale ● Subwave (b): Y: W(4) has nine bars, terminates at the 0.764 multiplier location, and corresponds to a Fibonacci ratio, on the 121 bar scale ● Subwave (c): Y: W(4) has 28 bars, terminates at the 1.0 multiplier terminal location, and corresponds to a Gann (Fibonacci) ratio, on the 121 bar scale. n The time clusters within W(4), observed in hindsight, between the ratio locations of 4.333 x W(2) scale and the 121-bar scale, were developed in almost every W(4) sub- wave termination: ● Time cluster n° 1 at the termination of (a): W: W(4), ● Time cluster n° 2 at the termination of a: (b): W: W(4), ● Time cluster n° 3 at the termination of (b): W: W(4), ● Time cluster n° 4 at the termination of (c): W: W(4), FIGURE 3: ELLIOTT WAVE SETUP. Most reversals take place at the time & price confluences. Identifying and labeling the most probable Elliott waves is a matter of choosing the optimal time & price tools. Weekly chart Euro/RON spot forex OK Prepared by The Production Arts Studio | Goodby Silverstein & Partners. All rights reserved. 415.392.0669 Released on 5/3/13 Printed at 100% Round 1 Client Job Number Ad Number Ad-ID Job Title File Name File Format Start Date Color /Media Materials Due 1 st Insertion Vendor Pubs B T L G S People Creative Director Assoc. Creative Director Art Director Copywriter Copyeditor Account Management Account / Operations Print / Int. Producer Art Producer Product Specialist Legal Production Arts Studio Mechanical Specs TD Ameritrade Print TDAME-113 000449 None TOS Options Print TDAME-113 TOS Options Opportunities 8.125x10.875.indd Adobe InDesign CS5 3-11-2013 5:37 PM 4/C Mag 3/19/13 May DMAX Stocks & Commodities 8.375” x 11.125” 8.125” x 10.875” 7” x 10” None 1” = 1” None Notes Mark Dunn None Pier Madonia Michael White Molly McLafferty Lindsay Walsh Noah Dasho None None Mike Brink @ 5-3-2013 9:55 AM TODAY’S OPTIONS STATISTICS OPTIONS TIME & SALES Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before trading options. Contact us at 800-672-2098 for a copy. The Sizzle Index is the ratio of an underlying’s volume/implied volatility for the current day against the simple average of the prior five days. Delta is a measure of an option’s sensitivity to changes in the price of the underlying asset. 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OPPORTUNITIES DON’T MEAN JACK S:7” S : 1 0 ” T:8.125” T : 1 0 . 8 7 5 ” B:8.375” B : 1 1 . 1 2 5 ” S19957_1n_Options.indd 05.03.2013 Epsons jn S19957x01L_CS6.ai 80 70 70 100 10.2 7.4 7.4 100 100 100 100 100 60 100 100 7070 30 30 100 100 60 100 100 100 100 7070 30 30 100 100 60 70 70 40 70 70 3030 100 40 100 40 40 100 10 40 40 20 70 70 3.1 2.2 2.2 70 40 40 75 66 66 50 40 40 25 19 19 B 0 0 0 0 100 70 30 100 10 25 50 75 90 100 100 60 100 70 30 100 60 4070 40 70 30 100 40 40 100 40 100 40 70 40 70 40 40 3 40 70 40 7040 40 100 60 A 3% ISO 12647-7 Digital Control Strip 2009 TDAmeritrade-1309.indd 1 7/23/13 7:38:23 AM 24 • September 2013 • Technical Analysis of STOCKS & COMMODITIES ● Time cluster n° 5 at the termination of X: W(4), ● Time cluster n° 6 at the termination of (b): Y: W(4), ● Time cluster n° 7 at the termination of (c): Y: W(4) n The trending indicator – OSC (5, 70), observed in hindsight, is an indispensable tool when it comes to practicing the application of Elliott waves. The OSC indicator is similar to the MACD in that it measures the area between two moving averages. It is valuable in defn- ing and labeling the Elliott waves, in spite of its lagging nature. We observed, on the chart of Figure 3, the development of the W(4) wave, which fuctuated in the 0.90–1.40 zone of the OSC (5, 70). Moreover, the classic divergence between the indicator and price movement from W(3) to W(5) is obvious here. Note that most of the reversals take place at the time & price confuences. In order to identify and label the most probable Elliott waves, it all comes down to choosing the optimal time & price tools. The key is to closely monitor the Fibonacci, Gann, or Charles Dow ratios progressively, from their initial point (0.03125, 0.0625, 0.09375, 0.125, 0.146, and so on) to the most extended ones (2.618, 3.666, 4.236, 5.0, 6.85, 7.0, and so on). If a ratio is overcome, consider the next one. ORGANIZATION WITHIN CHAOS Most Gann adepts will agree that his main credo regarding the time & price relation- ship plays a big role in identifying market turns. The ideal Gann tool to use would be the box, but to successfully use the box, you need to go through the diffcult task of calibrating its height (price parameter) and length (the duration or time parameter). For more details on applying Gann techniques, I suggest you study Michael Jenkins’ recent book, Square The Range Trad- ing System. The weekly chart in Figure 4 illustrates a rectangular Gann box, drawn in hindsight. It considers the W(4) existing space (also called the vital wave space) in the price zone between the termination of W(3) at the 4.3485 level and the termina- tion of W(2) at the 3.4715 level. Time-wise, the W(4) wave is developing on the 121 bar scale. The classic approach of drawing Gann boxes consists of choosing the adequate time & price parameters (duration interval and height), and then dividing them in quarters and halves. You can also select thirds or any Fibonacci ratios you feel the market adheres to. In the chart in Figure 4 the market retraced to the 33.33% price threshold and remained in the 0%–33.33% price zone for the duration of the entire W(4) wave. The market fow almost tested the 50% time threshold, exceeding it by two bars. The Gann angles effciently illustrate the time & price relationship on the chart in Figure 4. You can easily see that after the market fow has tested the steep 1x4 and 1x2 angles several times, it climbed to the decisive 1x1 angle. Once price broke out of this angle, the market fow remained above it, FIGURE 4: GANN BOXES. The market retraced to the 33.33% price threshold and remained in the 0 to 33.33% price zone for the duration of the entire W(4) wave. The Gann angles efficiently illustrate the time & price relationship on the chart in Figure 4. Weekly chart Euro/RON spot forex 26 th Annual IFTA Conference 9-11 October 2013 InterContinental Mark Hopkins Hotel • San Francisco, CA USA The 26 th Annual IFTA Conference features compelling sessions focused on the ever-increasing interconnectedness of global financial markets. The conference features: Bloomberg international pre-conference event Technical walkabout lead-off session Sessions on trending techniques; innovations in technical analysis; and a live trading session Workshops with industry leaders on system building; and the ‘mental landscape’ Panels: industry panel; veteran technical analysts; and market wizards Power hours featuring six speakers per session AAPTA post-conference brainstorming session Social events: opening reception, gala dinner, wine tasting, Napa Valley tour, partner’s program Early Registation Discounts End July 15, 2013. Register Now and Save conference.ifta.org/2013 IFTA-1309.indd 1 7/11/13 10:27:07 AM 26 • September 2013 • Technical Analysis of STOCKS & COMMODITIES thus revealing the strength of the market, by staying above the 33.33% threshold of the W(4) wave space. The shallow 4x1 angle is of lesser importance on this specifc time frame. Instead, the angle illustrated by the TL-1/3 trendline — created by joining the termination of W(3) and W(4) — becomes the diagonal of the rectangular space of W(4) wave. It plays an important role here, since it becomes a symmetry axis within the development zone of W(4) wave. The Gann box does a good job of revealing the degree of freedom of W(4) wave, in hindsight. But how can this be studied in real time, while the market is fuctuating in a chaotic manner within the rectangular space? To answer this question, I have used a Gann box and its multiples, out of the frst swing of the W(4) wave associated with the use of the 45-degree geometric angle. The Gann boxes (especially the 144) with the 45-degree angles, both drawn by hand on millimeter paper, are the specialty of Dawn Bolton- Smith, the matriarch of technical analysis and a life member of the Australian Technical Analysts Association (ATAA in Sydney), who, in spite of being in her 80s, is still doing her daily market analysis. The frst Gann box in Figure 5 uses a diagonal size and angle value that is equal to the trendline of W(4)’s frst subwave swing. Its angle value coincides with that of the 45-degree geometric angle. I then multiplied this Gann box size to better describe the market fow. I associated it with the drawings of the paral- lel 45-degree geometric angles originating at an extreme pivot high or a low. These boxes harmonically govern the entire area occupied by W(4). Moreover, every time there is a change in trend, the 45-degree angles act as a guide. The entire W(4) wave terminates at the eighth drawn Gann box with the following inner coordinates: 0.25 of price, and 0.666 of time. FINDING THE TURNING POINTS Most of the reversals in Figures 4 and 5 take place at the time & price confuences governed by the Gann boxes or by the 45-degree geo- metric angle. The time & price relationship practiced in real time, with its array of boxes drawn using the frst swing, illustrates its effciency in revealing a market turn. Once again, you see the importance of using a systematic approach, which consists of strictly monitoring the developing process of the confuences. Once again, if a box or an angle is overcome, just draw and consider the next one. Take the time to understand the relationship between time & price and the likelihood of price meeting confuence points. In the second part of this article series, I will show you how the time & price relationship can be seen developing in real time. FIGURE 5: TURNING POINTS. Most of the reversals take place at the time & price confluences governed by Gann boxes or by the 45-degree geometric angle. Gann’s main credo regarding the time & price relationship plays a big role in identifying market turns. Weekly chart Euro/RON spot forex September 2013 • Technical Analysis of STOCKS & COMMODITIES • 27 Mircea Dologa, MD, began his investment and trading career in 1987 as a Commodity Trading Advisor and a registered general securities representative. He subsequently moved into teaching practical aspects of trading using techniques he developed. He is a contributor to many magazines around the world, and is publisher of the monthly World Charting Report, which covers international indexes, commodities, and forex charts. He is a member of several technical analysis associations (ATAA & STA) and an MTA associate member. He may be contacted at mircdologa@yahoo. com or via his website at www.pitchfork- trader.com. RELATED READING AND REFERENCES Dologa, Mircea [2006]. “The Third Wave,” Technical Anal- ysis of STOCKS & COMMODI- TIES, Volume 24: May. _____ [2006]. “Trading The Trend In Wave 3,” Technical Analysis of STOCKS & COM- MODITIES, Volume 24: June. _____ [2006]. “Trading Wave 3,” Technical Analysis of STOCKS & COMMODITIES, Volume 24: September _____ [2012]. World Charting Report, monthly periodical, Paris, France, http://pitchfork- trader.com/reports.html. _____ [2013]. Elliott Waves: Beginner To Professional Level, http://pitchfork- trader.com. _____ [2008]. Integrated Pitchfork Analy- sis: Basic To Intermediate Level, John Wiley & Sons, London. _____ [2008]. Integrated Pitchfork Analysis: Advanced Level (II), Pïtch- forktrader.com, Paris. _____ [2009]. Integrated Pitchfork Analysis: Advanced Level (III), Pïtch- forktrader.com, Paris. Jenkins, Michael S. [2012]. Square The Range Trading System, www.stock- cyclesforecast.com. Neely, Glenn [1990]. Mastering Elliott Wave: Presenting The Neely Method, Windsor Books. ‡eSignal (Interactive Data Corp.) CHART PATTERNS 28 • September 2013 • Technical Analysis of STOCKS & COMMODITIES Back To The Basics Muscle Up Those Averages M are a bit more complex and require more computation. Nevertheless, you can use both these moving averages to see who has more muscle in a trend — the bear or the bull. Both moving averages provide a foor (support) or a roof (resistance) to a fnancial asset. ARE THEY CONVERGING OR DIVERGING? The MACD is a popular indicator; it is the difference between two EMAs. If you take an average of a smaller amount of data, your average will be greater. In this case, it would apply to a faster moving average (50-day) and the opposite would happen for a larger set of data (slower moving average, that is, 200-day). It would be the differ- ence between these two averages (see sidebar “Calculating MACD” on page 30). The signal line is the average for the graph; usually a nine-day average is used. You can use the MACD to see whether momentum is picking up or declining — if the MACD has rising lows, then momentum is picking up, and if it has lower highs, it shows that the security is losing momentum. THE CROSSING OVER Although there are many possible strategies, I will highlight one basic strategy. Moving averages help the trader to determine whether to buy or sell a fnancial asset at the market price. This is known as the moving average crossover strategy. Most traders use a 50-day SMA and a 200-day SMA. The strategy is fairly simple: 1. If the 50-day SMA crosses over the 200-day SMA, it is a buy signal. 2. If the 50-day SMA crosses under the 200-day SMA, it is a short signal. You cannot, however, base your trades solely on moving averages and the MACD; you should look at the bigger picture. Do the fundamentals support what the technical indicators are telling you? THE BIG PICTURE The chart in Figure 1 is a daily chart of the EUR/USD pair with the 50-day SMA INDICATORS Trading the currency markets means you need to be well aware of global macro and micro economic variables. But when it comes to trading these markets, simple is better. Find out more through this example of the EUR/USD currency pair. by Ajay Pankhania oving averages, although simple, are sometimes underused. In extreme market movements, moving averages have a smoothing effect. They are also vital and fundamental to the foundations of indicators we know today, one of them being the moving average convergence/divergence (MACD). BULL OR BEAR? There are many types of moving averages. Two of the more popular ones are the simple moving average (SMA) and exponential moving average (EMA). SMAs are calculated by adding the price of the fnancial asset and dividing it by the number of observations (See sidebar “Calculating Moving Averages” on page 30). In other words, you can calculate a simple moving average as you would normally calculate an average. EMAs N I K K I M O R R September 2013 • Technical Analysis of STOCKS & COMMODITIES • 29 M E T A T R A D E R Forex traders should look at the big picture and determine if fundamentals support technical analysis. and 200-day SMA overlaid on the price chart. The MACD is displayed in the subchart below the price chart. In the case of the EUR/USD, you would look at how quantitative easing (QE) will affect the dollar, if the Eurozone’s growth rate is contractive or expansive, political stability in the Eurozone nations, and so forth. Let’s see how fundamental events affected the currency pair through the chart in Figure 1. In late March 2013, the EUR/USD pair dipped below the 200-day SMA and the MACD indicates that the pair is oversold. During that time there were concerns about Cyprus and signs of a recession in the Eurozone. But better-than-expected retail sales in Germany and the Cyprus situation showing signs of being under control helped the EUR/USD move higher. But in mid-April, the 50-day SMA crossesd below the 200-day SMA (highlighted area), which is a sell signal. However, the MACD does not confrm this sell signal until a couple of weeks later when the blue line crosses below the red line. Even then, it wasn’t a very strong sell signal. A strong sell signal was given on May 10, 2013 when price broke below the 50-day SMA and the MACD displayed a sell signal. Note that the MACD indicator was negative when the price dropped. This weakness in the EUR coincided with the release of weak Eurozone GDP data. In early June, the EUR/USD pair traded between the 50-day and 200-day SMAs (which act as support & resistance levels) and appeared as if it was looking to break through the 200-day SMA ahead of the European Central Bank’s (ECB) monetary policy decision. On June 6, 2013, after the ECB announced its FIGURE 1: APPLYING MOVING AVERAGES ON THE EUR/USD. Here you see how the simple moving average (SMA), exponential moving average (EMA), and the moving average convergence/divergence (MACD) helped indicate price movement in the EUR/USD. If you look at economic data, you will see how fundamental data impacts price movement in this currency pair. decision to leave interest rates unchanged, the EUR/USD moved signifcantly higher, leaving its resistance level at the 200-day SMA (blue arrow) far behind. The MACD confrmed this bullish rally and will help to determine when the trend is likely to end, since it looks at momentum and strength of a trend. 30 • September 2013 • Technical Analysis of STOCKS & COMMODITIES (approximated) as (2 ÷ (n +1)) where n is the simple moving average length. Instead of calculating weights for all previous prices, how- ever, it simply takes the previous day’s EMA and multiplies it by (1 – weight). Thus, EMA n = (aP n ) + ((1- a)EMA n -1 ) where a is the multiplier, or (2 ÷ (n +1)) For a fve-day EMA: EMA 5 = (0.333P 5 ) + ((0.667)EMA 4 ) BE MINDFUL OF THE LAGS Moving averages are based on past price actions, so there can be consider- able lag in its signals. Prices may have begun their ascent or descent prior to the crossovers. Since the MACD relies on the EMA, the MACD is also a lagging indicator. Therefore, it is advisable to use more than one indicator. In the case of trading forex, it is important and necessary to keep an eye on the fundamental data of the global markets. Ajay Pankhania is a technical analyst for Accendo Markets. SUGGESTED READING Ehlers, John F. [2003]. “Moving Average Computations, Made Easier,” Technical Analysis of STOCKS & COMMODITIES, Volume 21: December. Hartle, Thom [1991]. “Moving Average Convergence/Di- vergence (MACD),” Technical Analysis of STOCKS & COMMODITIES, Volume 9: March. Merrill, Arthur A. [1992]. “Moving Average Crossovers,” Technical Analysis of STOCKS & COMMODITIES, Volume 10: August. Pring, Martin J. [2000]. “Using The Simple Moving Aver- age,” Technical Analysis of STOCKS & COMMODITIES, Volume 18: June. Star, Barbara [1994]. “The MACD Momentum Oscillator,” Technical Analysis of STOCKS & COMMODITIES, Volume 12: February. ‡MetaTrader (MetaQuotes Software Corp.) ‡See Editoral Index CALCULATING MACD The moving average convergence/divergence (MACD) is an oscillator developed by Gerald Appel. The formula for calculating the MACD is: Fast line = (12-period EMA) – (26-period EMA) Signal line = (Nine-period EMA of fast line) A buy signal occurs when the MACD line crosses above the signal line. A sell signal occurs when the MACD line crosses below the signal line. CALCULATING MOVING AVERAGES Simple moving average (SMA) The simple moving average is calculated by summing up all the prices to be included in the average and then dividing that sum by the number of observations. The formula for calculating the moving average is: (P 1 + P 2 + P 3 + P 4 + P 5 … + P n ) ÷ n where: P 1 is the price of the frst time period used in the calculation P n is the price of the last time period used in the calculation n is the number of observations used to calculate the average Exponential moving average (EMA) The exponential moving average assigns more weight to recent prices. The most recent price is assigned a weight, calculated INDICATORS TRD-12-069_SpreadMasterTASC_M3.indd Prepared by DiMassimo Goldstein (DIGO) 220 E. 23rd St., NY, NY 10010 212.253.7500 Job Client Media Pubs Live Trim Bleed TRD-12-069 TradeStation Magazine TASC Magazine Release Date: TBD 7.625” x 10.25” 8.125” x 10.75” 8.375” x 11” Job info Specs Document Path: PRODUCTION:Volumes:PRODUCTION:PRINT:TradeStation:PRINT:TASC_Mag:2013:TRD-12-069_Spread Master TASC:1_Mechanical:R3_Mech:TRD-12-069_SpreadMasterTASC_M3.indd Cyan Magenta Yellow Black Inks Fonts None Images TRD_optionstraderpro_Newbg_v1_CMYK.tif (CMYK; 351 ppi; 102.3%; PRD-ASSETS:CLIENT-ART:TradeStation:OptionsPro:TRD_optionstraderpro_Newbg_v1_CMYK.tif) spreadbuilder_window_CMYK.psd (CMYK; 375 ppi; 79.96%; PRD-ASSETS:CLIENT-ART:TradeStation:OptionsPro:spreadbuilder_window_CMYK.psd) TRD_Logo_tag_ko.eps (27.65%; PRD-ASSETS:LOGO-LIBRARY:T_Logos:TradeStation:TRD_Logo_tag_ko.eps) Fonts & Images Printed at None Print/Export time 5-8-2013 11:25 AM Last saved 5-7-2013 11:04 AM Workstation Freelance Production 1 Page # 1 APPROVAL SIGNOFFS Initial & Date AD CW CD Design Studio Studio Mgr Account Proofreading LR PDF to Account Client Approval Release Date Round #: 3 S:7.625” S : 1 0 . 2 5 ” T:8.125” T : 1 0 . 7 5 ” B:8.375” B : 1 1 ” Tradestation-1309b.indd 1 7/23/13 8:40:15 AM 32 • September 2013 • Technical Analysis of STOCKS & COMMODITIES It may seem impossible, but it can be done. Find out how. by Azeez Mustapha rading with the fow of the markets means entering high- reward and low-risk settings, and taking a small loss if something goes wrong. We often think that a small loss will be sustained when trying to pinpoint a turning point in the market, but that may be unrealistic, especially if the supposed turning point becomes spurious. How can you overcome this challenge by using a few popular indicators? How can you recognize true dips or rallies in the context of an ongoing trend? How can you recognize a trap that may plunge you against a serious reversal? How can you exit properly and safely? This article will try to answer these questions. It is well known that buying the dips in an uptrend and Make It A Graceful Exit Beating The Currency Markets selling the rallies in a downtrend offers the best trading prob- ability. Hence, the strategy discussed here trades pullbacks only (not breakouts). Some people like to do nothing but trade. They are soldiers, pure and simple, on the battlefeld of the fnancial markets. For them, trading has become a calling. However, each trader’s mindset differs, and studies have shown that most traders spend more time in positions that are showing positive returns. INDICATORS AND OPEN TRADES The market can be in one of these three phases: n A bull market, where buyers gain the upper hand n A bear market, where sellers gain the upper hand n A ranging market, where supply & demand reach equilibrium. T R O Y W E I M A N N September 2013 • Technical Analysis of STOCKS & COMMODITIES • 33 Historical data may be adequate to measure past price behavior, but price will do what it wants. It may move up, down, or sideways. When we place an order, our portfolio is subject to pecuni- ary uncertainty, and our temperament is also on the line. Staying glued to the screen as you monitor open positions (for example, when there is negativity) may undermine your fortitude. Staring at your screen and wanting a negative position to turn positive has nothing to do with what the market is really doing. In fact, monitoring your trades 24/5 will only entice you to carry out irrational reactions that may untimely have an adverse effect on your trading. The indicators used for this strategy are the linear-weighted moving average (LWMA) and the commodity channel index (CCI). More specifcally, these indicators are the following: n 30-period LWMA n 50-period LWMA n 14-period CCI For details on how to calculate the LWMA, see sidebar “Linear-Weighted Moving Average.” The CCI is an oscil- lator developed by Donald Lambert in 1980 to indicate whether a trend is beginning or ending. A long position: A long position is anticipated after the 30-period LWMA crosses above the 50-period LWMA. A price retracement that moves down to the 50-period LWMA can be taken advantage of. When this happens, you prepare to open a long position (within the context of an uptrend). The CCI should be in an oversold region and ris- ing up from there. Entering the market as soon as price starts going up will put the odds in your favor. A short position: The opposite is as- sumed for a short position in a bear market. A short position is anticipated after the 30-period LWMA crosses be- low the 50-period LWMA. When price rallies up to the 50-period LWMA, you can capitalize on the stock. The CCI should be in an overbought region at this FOREX TRADING 34 • September 2013 • Technical Analysis of STOCKS & COMMODITIES time, and must be going down from that region. Entering the market as soon as you see price start going down will put the odds in your favor. Market prices are based on the struggle between buyers & sellers, resistance & support levels, uptrends & downtrends, and so on. When the characteristics of these downtrends & uptrends align with the market’s limitations, you can mean- ingfully forecast the possible direction of the markets. Some traders may prefer to include additional rules to flter a possibly negative trade. But fltering out signals while you still have an open position is not usually a good idea. If a trading system is effective and gives you proftable trades in most market situations, fltering out trades will only reduce your gains. STRATEGY DETAILS Strategy name: Swing entry & exit system Strategy type: Good for part-time traders Time horizon: Four-hour charts Indicators: 30-period LWMA, 50-period LWMA, and 14-period CCI Instruments: Use any currency pair or cross whose spread is less than 10 pips Setup: As indicated later in this article in the section titled “Indicators and open trades” Position sizing: Use 0.01 lots for each $1,000 (thus making it FOREX TRADING LINEAR-WEIGHTED MOVING AVERAGE (LWMA) The linear-weighted moving average (LWMA) is a moving average that puts more weight on the most recent market information. This data is derived from multiplying a specific number of closing prices by an assigned weight. These weighted observations are then added and divided by the sum of the weights. For example, when calculat- ing a 15-day LWMA, the most recent closing price is multiplied by 15, yesterday’s by 14, and so on until day 1 in the period’s range is reached. These results are then added together and divided by the sum of the multipliers (15 + 14 + 13 + ... + 3 + 2 + 1 = 120). Knowing how and when to close a trade is more favorable than knowing how and when to enter a trade. 0.1 lots for $10,000), or 0.1 lots for each 10,000 cents in a cent account (making it 1.0 lots for each 100,000 cents) Risk per trade: 0.5% Stop-loss: 100 pips from the entry price Take proft: 200 pips from the entry price Breakeven: Move your stop to breakev- en after you have gained at least 70 pips Trailing stop: Apply a custom-set trail- ing stop of 100 pips after you have gained up to 170 pips or more Exit: Either the stop-loss, the breakeven stop, the trailing stop, or the target will be hit. If not, close the position after seven days Hit rate: With the recommended risk management, you can survive with a hit rate of 40% Trade duration: Close an open position that has been running for 10 days. SMOOTHING YOUR POSITIONS Knowing how and when to close a trade is more favorable than knowing how and when to enter a trade. It provides you with an edge. In fact, if you become adept at using effective exit methods, it will have a satisfactory impact on your • Real-time proprietary charting service with streaming audio and text of market commentary, research and alpha-generating trade ideas. • Unique set of proprietary algorithms to identify market direction, trend reversals and patterns. • Learn to be on the right side of the market and to be disciplined and confdent in your trading abilities. www.phantomtrader.com 203-617-4050 •
[email protected] Phantom Trader is unique in that no other intraday market research service provides tight technological integration between its market commentary and proprietary charting tools. September 2013 • Technical Analysis of STOCKS & COMMODITIES • 35 Knowing your take-profit level before placing a trade will help you close a position as soon as a predetermined number of positive pip movements has occurred. May 5, 2012 May 17, 2012 CCI(14) -21.0771 USDCAD,H4 1.0325 1.0235 1.0190 1.0145 1.0100 1.0055 1.0010 0.9965 0.9920 0.9875 0.9830 0.9785 316.534 100 0.00 -100 -206.122 May 22, 2012 CCI(14) 12.8018 AUDUSD,H4 1.0515 1.0440 1.0365 1.0290 1.0215 1.0145 1.0070 0.9995 0.9850 0.9775 0.9700 0.9625 299.014 100 0.00 -100 -275.018 May 23, 2012 FIGURE 1: USDCAD IN AN UPTREND. Although the USDCAD is in an uptrend, it’s a good idea to wait for price to pull back to the 50-period LWMA. You do not want to enter the market if the price did not turn and start moving up again (since that may be a potential turning point to a protracted bear market). When the price started moving up again, signaling the supremacy of the bulls, a long position was entered at a low-risk price. FIGURE 2: AUDUSD IN A DOWNTREND. Here, the AUDUSD is in a downtrend. On May 21, 2012, there was continual bullish pressure that took the price upward until it nearly touched the 50-period LWMA. On May 22, 2012, a bearish candle formed and a short trade was therefore opened. M E T A T R A D E R HERE ARE SOME EXAMPLES On each chart of the following examples, the vertical red line on the left shows where a trade was entered while the vertical red line on the right shows where it was exited. The 30-period LWMA is displayed in blue, and the 50-period LWMA is shown in red. The CCI is displayed on the subchart below the price chart. Note that on the CCI, the area above 100 rep- resents an overbought region, whereas the area below -100 represents an oversold region. Spreads were not considered in these examples. Example 1: In the four-hour chart of the USDCAD in Figure 1, you can see that the USDCAD is in an uptrend. It is best to wait till price pulls back to the 50-period LWMA before entering a long position. I didn’t want to enter the market if the price did not turn and start moving up again since that may be a potential turning point to a protracted bear market. When price started moving up again (vertical red line on the left), it indicated the supremacy of the bulls. Since price had retraced in the context of an uptrend, I entered a long posi- tion. It seemed like a low-risk entry. The CCI was oversold at this time. Instrument: USDCAD Order: Buy Entry date: May 11, 2012 Entry price: 0.9980 Stop-loss: 0.9880 Trailing stop: 1.0080 Take proft: 1.0180 Exit date: May 17, 2012 Exit price: 1.0080 Status: Closed Proft/loss: 200 pips Example 2: In the four-hour chart of the AUDUSD in Figure 2, there is an obvious downtrend in price movement. On May 21, 2012, there was a continuation of bull- ish pressure that took price upward until it nearly touched the 50-period LWMA. On May 22, 2012, a bearish candle formed and the CCI was in overbought territory. Hence, a short trade was opened, and it was one that ended up being successful. Instrument: AUDUSD Order: Sell Entry date: May 22, 2012 Entry price: 0.9915 Stop-loss: 1.0015 trading results. Knowing your take-proft level before placing a trade will help you close a position as soon as a predetermined number of positive pip movements has occurred, assuming the trade moved in your favor. Obviously, not all signals can result in proftable trades, since prices are sometimes deceptive. Nevertheless, an objec- tive analysis of the LWMA, the CCI, and an exit method will often push you ahead. 36 • September 2013 • Technical Analysis of STOCKS & COMMODITIES Trailing stop: 0.9815 Take proft: 0.9715 Exit date: May 23, 2012 Exit price: 0.9715 Status: Closed Proft/loss: 200 pips Example 3: Look at the four-hour AUDJPY chart in Figure 3. No strategy is foolproof, and here you see an example of a signal that failed. A sell signal was generated after a bearish candle formed (price had retraced up to the 50-period LWMA during a downtrend). In this example, even though this ended up being a false signal, what is important is how the risk was controlled and the loss kept negligible. FIGURE 3: A FAILED SIGNAL ON THE BEARISH AUDJPY. Here is an example of a signal that failed on the AUDJPY. A sell signal was generated after a bearish candle was formed (since the price had run into the 50-period LWMA in the context of a downtrend). The trade failed; no strategy is foolproof. FOREX TRADING AUDJPY,H4 CCI(14) 16.9952 June 6, 2012 240.594 100 0.00 -100 -339.587 June 5, 2012 83.25 82.50 81.75 81.00 80.25 79.50 78.77 78.00 77.25 76.50 75.75 75.00 74.25 IT’S ALL IN THE EXIT The currency markets are not to be taken lightly and if you wish to trade them, it’s best to keep your strategy simple. You need to be well prepared to react quickly to any price movement. Have a well-thought-out plan and know your entry price, stop-loss, and proft-taking price before placing your trade. Don’t plan on staying in the trade long; there’s no time for hoping that price will move in your favor. What is most important is to keep your risk exposure at a minimum by defning your exits and keeping your position sizes at a manageable level. Azeez Mustapha is a trading professional, an InstaForex analyst, a blogger at ADVFN.com, and a freelance author. His articles have been published at Ituglobalforex.blogspot. com, Forexpeacearmy.com, and in TRADERS’ magazine. He is also a senior analyst at Paxforex.com. He can be contacted at
[email protected]. SUGGESTED READING Mustapha, Azeez [2013]. “Keep Your Portfolio Safe,” Tech- nical Analysis of STOCKS & COMMODITIES, Volume 31, August. _____ [2012]. “Profting From Protracted Consolidations,” Technical Analysis of STOCKS & COMMODITIES, Volume 30, September. Wu, Amy [2002]. “Commodity Channel Index,” Working- Money.com, Volume 20, April. ‡MetaTrader (MetaQuotes Software Corp.) YOUR ONLINE RESOURCE FOR TECHNICAL ANALYSIS Instrument: AUDJPY Take proft: 74.20 Order: Sell Exit date: June 6, 2012 Entry date: June 5, 2012 Exit price: 77.20 Entry price: 76.20 Status: Closed Stop-loss: 77.20 Proft/loss: -100 pips Trailing stop: N/A The Traders’ Library Hall of Fame Award recognizes the accomplishments of an exceptonal trader and educator. The winner has always been someone who has helped grow the industry through their dedica- ton and commitment to the educaton of traders. We realize that our business wouldn’t exist if it wasn’t for the hard work and dedicaton of the recip- ients of this award as well as the many others who have gone before us, work beside us, and contnue to grow this industry. We are thrilled to induct Jack Hutson into the Trad- ers’ Hall of Fame to honor his ongoing contributons to trading educaton through the publicaton of Technical Analysis of Stocks and Commodites mag- azine. First published 31 years ago, in a year when the Dow didn’t even touch 1000, Technical Analysis of Stocks and Commodites has been a staple of the actve trading community and has brought traders the most up to date informaton regarding strategies, events, and new technology related to the markets. 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Traderslibrary-1309.indd 1 7/23/13 8:31:47 AM 38 • September 2013 • Technical Analysis of STOCKS & COMMODITIES In this ffth part of our article series on indicator rules for a swing trading strategy (IRSTS), we will introduce an oscil- lator based on Percent B. by Sylvain Vervoort ou’re probably familiar with the Percent b (%b, or PB) oscil- lator that was developed by John Bollinger — it’s derived from the Bollinger Bands indicator. Here’s how it works: When the price touches the upper Bollinger Band, then the oscillator hits 100. If price moves above the upper band, the oscil- lator moves to +100. When the price touches the lower Bollinger Band, then the oscillator hits zero, and if price moves below the lower band, the oscillator moves to a negative value. Here’s how it’s calculated: Percent b = (Closing price – Lower band) / (Upper band – Lower band) * 100 BASIC CALCULATION When I created my zero-lag oscillator (SVEZLRBPercB), which is based on the Percent b, I used the same basic formula as the Percent b. However, before applying the formula, I The Best Of Both Worlds Oscillators, Smoothed manipulated the input data I used. In a July 1997 STOCKS & COMMODITIES article, Mel Widner introduced rainbow charts, which is the technique I used to convert the closing price data to a “rainbow” data series and give some extra weight for the less-smoothed data: rainbow_value = (5 * SMA(2)[0] + 4 * SMA(SMA(2), 2)[0] + 3 * SMA(SMA(SMA(2), 2), 2)[0] + 2 * SMA(SMA(SMA(SMA(2), 2), 2), 2)[0] + SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2)[0] + SMA(SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2), 2)[0] + SMA(SMA(SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2), 2), 2)[0] + SMA(SMA(SMA(SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2), 2), 2), 2)[0] + SMA(SMA(SMA(SMA(SMA(SMA(S MA(SMA(SMA(2), 2), 2), 2), 2), 2), 2), 2), 2)[0] + SMA(SMA(SMA(SMA(SMA(SMA(SM A(SMA(SMA(SMA(2), 2), 2), 2), 2), 2), 2), 2), 2), 2)[0]) / 20; rainbow.Set(rainbow_value); Next, I averaged this new rainbow data series with an exponential moving average (EMA) by applying a zero-lag Y J O A N C H I V E R T O N September 2013 • Technical Analysis of STOCKS & COMMODITIES • 39 method. The idea of smoothing data with less lag and zero-lag techniques was proposed by Patrick Mulloy in the February 1994 issue of STOCKS & COMMODITIES and by John Eh- lers in the March 2000 issue. The technique compensates for the lag in moving averages. Here’s how I created the new data series ZLRB (zero-lag rainbow): EMA1.Set(EMA(rainbow, smooth)[0]); EMA2.Set(EMA(EMA1, smooth)[0]); diff = EMA1[0] - EMA2[0]; ZLRB.Set(EMA1[0] + diff); Finally, I calculate and plot the modifed Percent b formula, but only after applying another smoothing step using triple exponential mov- ing averages (TEMA) and weighted moving averages on the zero-lag ZLRB data series: PB_Plot.Set((TEMA(ZLRB, smooth)[0] + 2*StdDev(TEMA(ZLRB, smooth), stdevperiod)[0] - WMA(TEMA(ZLRB, smoot h) , st devper i od) [ 0] ) / (4*StdDev(TEMA(ZLRB, smooth), stdevperiod)[0])*100); CHARTING N I N J A T R A D E R FIGURE 1: MODIFIED PERCENT B OSCILLATOR. This indicator is a fast-moving oscillator and is often a leading indicator. In the main window in Figure 1, you see a candle chart with a volatility band overlaid on it. This volatility band was introduced in my previous article, “Within The Volatility Band.” In the lower subwindow, you see my modifed Percent b oscillator based on an 18-day lookback period, using two standard deviations and an eight-day smoothing. The modifed Percent b is basically a fast-moving oscillator and, as you can see, it is often a leading indicator. Since we are not looking for fast swing trades with IRSTS, I use the modifed Percent b oscillator for detecting divergences, and I use it in combination with a slow stochastic oscillator. A positive or negative divergence of one or both indicators tends to be a more important signal. 40 • September 2013 • Technical Analysis of STOCKS & COMMODITIES LANE’S WAY Next I will create this slow stochas- tic oscillator and overlay it on the modifed Percent b. Developed by George C. Lane in the late 1950s, the stochastic oscillator is a mo- mentum indicator that shows the location of the close relative to the high-low range over a lookback period. This indicator is calculated using the following formula: FIGURE 2: BUY & SELL SIGNALS. Here, the buy areas are displayed in yellow, and sell areas in red. The indicators also confirm the buy & sell areas. CHARTING FIGURE 3: POSSIBLE BUY SIGNAL? There is a positive divergence between price and the indicators. This suggests a possible up reversal. Stochastic = 100 * (Close – Low[Period]) / (High[Period] – Low[Period]) As a rule, momentum changes direction before price. Hence, bullish and bearish divergences in the stochastic oscillator can be used to foreshadow reversals. Once again, instead of simply using the closing price to calculate this stochastic, I will smooth the process using an average price based on the rainbow data series and the typical price. I use the sum of this data and divide the result by two, creating a new data series called rainbow closing (RBC). The numerator is calculated as RBC minus the lowest low in the selected period. For the denominator, I take the difference of the highest high minus the lowest RBC value in the selected period. Finally, I smooth the obtained stochastic further with a simple moving average. Here is the NinjaScript code: // Add a second plot for the slow stochastic // Use a numerator/denominator based on an averaged new data series RBC RBC.Set((rainbow[0] + Typical[0])/2); nom.Set(RBC[0] - MIN(Low, periodK)[0]); den.Set(MAX(High, periodK)[0] - MIN(RBC, periodK)[0]); // Calculate and smooth the stochastic indicator if (den[0].Compare(0, 0.000000000001) == 0) fastK.Set(CurrentBar == 0 ? 50 : fastK[1]); else fastK.Set(Math.Min(100, Math.Max(0, 100 * nom[0] / den[0]))); K.Set(SMA(fastK, smoothK)[0]); September 2013 • Technical Analysis of STOCKS & COMMODITIES • 41 Continued on next page SVEZLRBPercB oscillator // SVEZLRBPercB is Copyright (C) 2012, Sylvain Vervoort <stocata. org>. // stocata.org reserves the right to modify this NinjaScript with each release. // Release V1.0 December, 2012. #region Using declarations using System; using System.ComponentModel; using System.Diagnostics; using System.Drawing; using System.Drawing.Drawing2D; using System.Xml.Serialization; using NinjaTrader.Cbi; using NinjaTrader.Data; using NinjaTrader.Gui.Chart; #endregion // This namespace holds all indicators and is required. Do not change it. namespace NinjaTrader.Indicator { /// <summary> /// smoothed zero-lagging Percent b indicator on a rainbow-based price series. /// Includes a slow modifed stochastic following medium-term moves. /// </summary> [Description(“Smoothed zero-lagging Percent b indicator on rainbow price series.”)] public class SVEZLRBPercB : Indicator { #region Variables private int stdevperiod = 18; // Default standard deviation lookback period private int smooth = 3; // Default TEMA/EMA smoothing average private int periodK = 30; // Kperiod for stochastics line private int smoothK = 3; // Slowing K period private DataSeries rainbow; private DataSeries EMA1 private DataSeries EMA2; private DataSeries ZLRB; private DataSeries den; private DataSeries nom; private DataSeries fastK; private DataSeries RBC; private double diff, rainbow_value; #endregion /// <summary> /// Confguring the indicator called once before any bar data. /// </summary> protected override void Initialize() { Ad d ( n e w Pl o t ( Co l o r . Fr o mKn o wn Co l o r ( Kn o wn Co l o r . DodgerBlue),PlotStyle.Line, “PB_Plot”)); Add(new Plot(Color.Red, “K”)); Add(new Line(Color.Gray, 100, “Overbought”)); Add(new Line(Color.Gray, 50, “Neutral”)); Add(new Line(Color.Gray, 0, “Oversold”)); Lines[0].Pen.DashStyle=DashStyle.Dot; Lines[1].Pen.DashStyle=DashStyle.Dot; Lines[1].Pen.Width=2; Lines[2].Pen.DashStyle=DashStyle.Dot; PaintPriceMarkers = false; Overlay = false; rainbow = new DataSeries(this); EMA1 = new DataSeries(this); EMA2 = new DataSeries(this); ZLRB = new DataSeries(this); den = new DataSeries(this); nom = new DataSeries(this); fastK = new DataSeries(this); RBC = new DataSeries(this); } /// <summary> /// Called on each bar update event (incoming tick) /// </summary> protected override void OnBarUpdate() { if (CurrentBar < 1) // minimum 2 bars required return; // Create rainbow-based dataset rainbow_value = (5 * SMA(2)[0] + 4 * SMA(SMA(2), 2)[0] + 3 * SMA(SMA(SMA(2), 2), 2)[0] + 2 * SMA(SMA(SMA(SMA(2), 2), 2), 2)[0] + SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2)[0] + SMA(SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2), 2)[0] + SMA(SMA(SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2), 2), 2)[0] + SMA(SMA(SMA(SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2), 2), 2), 2)[0] + SMA(SMA(SMA(SMA(SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2), 2), 2), 2), 2)[0] + SMA(SMA(SMA(SMA(SMA(SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2), 2), 2), 2), 2), 2)[0]) / 20; rainbow.Set(rainbow_value); // Smoothing rainbow data in new data set ZLRB applying zero- lagging EMA1.Set(EMA(rainbow, smooth)[0]); EMA2.Set(EMA(EMA1, smooth)[0]); diff = EMA1[0] - EMA2[0]; ZLRB.Set(EMA1[0] + diff); // Plot Percent b indicator from smoothed band at 2 standard deviations PB_Plot.Set((TEMA(ZLRB, smooth)[0] + 2 * StdDev(TEMA(ZLRB, smooth), stdevperiod)[0] - WMA(TEMA(ZLRB, smooth),stdevperiod)[0]) / (4 * StdDev(TEMA(ZLRB, smooth), stdevperiod)[0]) * 100); // Add a second plot for the slow stochastic // Use a numerator/denominator based on an averaged new data series RBC RBC.Set((rainbow[0] + Typical[0])/2); The entire code listing can be found in sidebar “SVEZLRB- PercB Oscillator.” The IRSTS strategy rule is that the oscillators must be bullish for a buy signal and bearish for a sell signal. This means that both the oscillators must be moving up or down. In Figure 2, the typical IRSTS buy areas are shown in yellow and sell areas in red. At the same time, these areas are confrmed by the indicators, since they are moving in the direction of the possible IRSTS buy or sell signal. There are a few more interesting things to keep in mind. One is that a positive or negative divergence of one or both indicators tends to be a more important signal, since these divergences generally appear during a longer-period turning point. In the green area in Figure 3, there is a possible buy signal from the IRSTS strategy rules. Prior to that, there are lower bottoms in price, but the blue modifed Percent b in- dicator and the red stochastic indicator have higher bottoms. This is a positive divergence confrming a more important 42 • September 2013 • Technical Analysis of STOCKS & COMMODITIES SVEZLRBPercB oscillator (cont’d.) up reversal. Another kind of divergence is shown in Figure 4 where, in two occurrences, there are higher bot- toms in price with lower bottoms in the indicators. This mostly happens at turning points after a correction in an ongoing trend. It is referred to as a hidden diver- gence and it’s a strong signal that the previous trend will continue making a high above the previous high in an uptrend. Keep in mind that the inverse is possible at tops. It is also possible that only one of the two indicators will show this hidden divergence. TRAILING THE STOP The adapted stochastic oscillator I created is specially designed to be useful as a trailing stop, while the modifed Percent b oscillator is faster and most practical for showing entry points in an ongo- ing trend. In the uptrend beginning in nom.Set(RBC[0] - MIN(Low, periodK)[0]); den.Set(MAX(High, periodK)[0] - MIN(RBC, periodK)[0]); // Calculate and smooth the Stochastic indicator if (den[0].Compare(0, 0.000000000001) == 0) fastK.Set(CurrentBar == 0 ? 50 : fastK[1]); else fastK.Set(Math.Min(100, Math.Max(0, 100 * nom[0] / den[0]))); K.Set(SMA(fastK, smoothK)[0]); } #region Properties [Browsable(false)] // prevents data series being displayed in proper- ties [XmlIgnore()] // ensures indicator can be saved as part of a template public DataSeries PB_Plot { get { return Values[0]; } } /// <summary> /// Gets the slow K value. /// </summary> [Browsable(false)] [XmlIgnore()] public DataSeries K { get { return Values[1]; } } [Description(“PercentB Standard Deviation Period DEF = 18”)] [Category(“Parameters”)] [Gui.Design.DisplayName(“1. PercentB Deviation Period”)] public int PercB_Deviation_Period { get { return stdevperiod; } set { stdevperiod = Math.Max(1, value); } } [Description(“PercentB smoothing average DEF = 3”)] [Category(“Parameters”)] [Gui.Design.DisplayName(“2. PercentB Average”)] public int PercB_Average { get { return smooth; } set { smooth = Math.Max(1, value); } } /// <summary> /// </summary> [Description(“Bars used for calculating K value DEF = 30”)] [GridCategory(“Parameters”)] [Gui.Design.DisplayName(“3. Stochastic Period”)] public int Stochastic_Period { get { return periodK; } set { periodK = Math.Max(1, value); } } /// <summary> /// </summary> [Description(“Bars for slowing basic K values DEF = 3”)] [GridCategory(“Parameters”)] [Gui.Design.DisplayName(“4. Stochastic Slowing”)] public int Stochastic_Slowing { get { return smoothK; } set { smoothK = Math.Max(1, value); } } #endregion } } —S.V. FIGURE 4: HIDDEN DIVERGENCE. Higher lows in price and lower lows in the indicators usually occur after corrections in ongoing trends. It’s a strong signal that the previous trend will continue. September 2013 • Technical Analysis of STOCKS & COMMODITIES • 43 March 2007 in Figure 5, note the higher bottoms in price with the lower bottoms in both oscillators. These are hidden divergences that are mostly followed by a con- tinuation of the previous uptrend. A confrmation is given when the modifed Percent b oscillator moves up above the 50 line while the stochastic oscillator remains above this 50 reference line. Toward the end of April, price moved higher, forming lower tops in the modifed Percent b oscilla- tor. Next, there was a reaction that pulled price down and pulled the modifed Percent b below the 50 line while the modifed stochas- tic oscillator nicely continued to stay above that 50 line. Soon after that, the modifed Percent b oscillator crossed above the 50 line in early May, indicating a possible entry point. In mid-June, there was another top in price with lower tops in the modifed Percent b oscillator. Remember that a nega- tive divergence usually appears at the more important turning FIGURE 5: WARNING SIGNAL. Note how the price and oscillator movements suggested a continuation of this long-term uptrend. However, when the modified stochastic oscillator fell below the 50 line, you knew it was time to exit. CHARTING points. Shortly thereafter, the modifed stochastic oscillator fell below the 50 line. This is an indication that it’s time to get out of long positions, given that during the entire uptrend, the stochastic oscillator stayed above the 50 line. Keep an eye on the oscillator and proft from it by applying it as a trailing stop method when it falls below the 50 line. THE FIFTH RULE Applying my modifed Per- cent b and stochastic oscilla- tors supports the ffth rule of my indicator rules for a swing trading strategy (IRSTS). They can be used effectively to identify expected future price moves and as stops to help you make proftable trading decisions. In part 6, I will show you how to use an expert indicator to color-code your candlestick charts. Sylvain Vervoort is a retired electronics engineer who has been studying and us- ing technical analysis for more than 35 years. His book Capturing Proft With Technical Analysis received a bronze medal from the 2010 Axiom Business Book Awards in the category of invest- ing. The book is a technical analysis reference introducing a trading method callaed Lockit. His latest Band Break System trading expert is available on DVD. Vervoort may be reached at
[email protected] or via his website at http://stocata.org. Continued on page 52 Come visit one of the most popular trading chat rooms for Breakout Trading. Home of DAN ZANGER, world record holder for parlaying $10,775 into $18 million in 18 months! Home of THE ZANGER REPORT. Breakout Trading Bull Flags Momentum Stocks Pivot Points Swing Trading Key Reversals 44 • September 2013 • Technical Analysis of STOCKS & COMMODITIES Vikram Murarka has been forecasting, trading, and hedging currencies since 1991. Beginning his career as a currency trader at Essar Group, he managed a forex exposure of $1.2 billion. In 1996 he founded Kshitij Consultancy Services, a leading forex risk management advisory frm in India. He regularly writes on forex risk management issues, including a series titled “Color Of Money.” He has contributed articles to this magazine as well as to industry journals such as the Euromoney Foreign Exchange Handbook (UK), Global Treasury News (UK), The Outlook Magazine (India) and in fnancial newspapers such as the Hindu Business Line in India. Since 2010, the Reserve Bank of India (RBI) has been including his currency forecasts in its quarterly Professional Forecasters’ Survey, which sometimes serves as an input for policymaking. STOCKS & COMMODITIES Editor Jayanthi Gopalakrishnan interviewed Mu- rarka via Skype and email in mid-July 2013. INTERVIEW she resigned shortly thereafter. The moral of the story: If you want to get into forex, fle papers. Going further into history, maybe it was destiny. I do remember being intrigued by currency rates even as a nine-year-old kid and later in college where I studied economics. I remember asking my professor what determined the currency rates between different countries. She was fummoxed. I don’t blame her. I am sometimes still fummoxed today! Why is that? In 1987, the foreign exchange market did not exist in India. It was a totally administered state, so I don’t think any- body had a clue about the forex market outside of the Reserve Bank of India. So my teacher was not aware as to how currency rates were determined. I am still fummoxed today because it is not really fundamentals between two countries that set the exchange rate; it has a lot to do with capital fow and sentiment. Ultimately, you will have to fall back on the technicals. What should traders or investors pay attention to in the forex markets? Interest rates between different coun- Tell us a little bit about yourself. How did you get interested in the fnancial markets and spe- cifcally the forex market? My getting into the forex market was an accident I would say, a bit like Obelix falling into the cauldron of magic potion. I was in my frst job, in the fnance depart- ment of a large conglomerate — Essar Steel — in Mumbai. Initially, I was given odd jobs like depositing checks into the bank and fling papers. Slowly, I found myself helping a coworker who used to do the hedge transactions (forward contracts) for the company, negotiating the rates with the banks. The company had a very large forex loan book, some $1.2 billion in 1991, and the hedges were to mitigate the forex risk on these loans. I remember she didn’t use to fle any pa- pers or keep any records. The bosses were not very happy about that, of course. I took it on myself to build a fling system and keep proper track of the forward contracts we entered into – in those days, it was all calculators and large paper registers. At one point, I was asked to stand in for her when she took a marriage leave. But when she returned after a couple of months, I was not asked to discontinue. Rather, they reassigned her to another post. Incidentally, tries are the most important things to watch out for in the forex market. And since interest rates are a function of infa- tion and central bank policy, the macro economic numbers need to be tracked. Since the macro economic numbers are a function of infation, we look at the con- sumer price index (CPI), money supply, size of the balance sheet of the Fed, of the Bank of Japan, and US unemployment fgures, among others. Of course, given that the global cur- rency market is the closest you can come to the utopian economic concept of per- fect competition, an affnity with charts, with technical analysis, is a must. Many a times, the charts tell you something the underlying macro numbers (funda- mentals) do not tell you. They also tell you things in advance of any news that is later released. The global currency market is the closest you can come to the utopian economic concept of perfect competition. Beyond The Horizon Forex Forecasting With Vikram Murarka Stockcharts-1309.indd 1 7/23/13 8:11:54 AM 46 • September 2013 • Technical Analysis of STOCKS & COMMODITIES Why do you think that is? That’s a good question and I don’t think I have a very good answer. It’s a matter of experience, which you might have also noticed before. If we try to fgure out why technicals are ahead of fundamentals, maybe it is that technicals are an amalga- mation of several views in the market, of several studies of the market, and of several emotions in the market. It discounts all possibilities — present and future — ahead of the fundamentals. Perhaps it is because the fundamentals or news comes after the event — it’s a post-factor. How does the forex market affect the global economy? I may be wrong, but I think the forex market really does not impact the global economy very much. I tend to think that forex is the Y variable and the global economy is the X variable, with forex (Y) = f(global economy). The common perception, for example, is that weaken- ing of the domestic currency leads to an increase in exports and vice versa. But, if you look at Japan, you will see that Japanese exports increased throughout the 1970s and 1980s even though the yen appreciated throughout this period. On the other hand, if you look at the experience of India, our exports have not really increased very much, even though the rupee has had an overall weakening trend over the last three decades. Yes, currencies are a good scapegoat for politicians the world over to target the “other country” with and to gloss over their own shortcomings. Should traders pay attention to all markets even if they are only trading equities or commodities or forex? Today, with information becoming more easily available, response times are getting shorter, and more and more things impact each other. Movements in gold impact the Australian dollar and the South African rand and vice versa. Movements in the Japanese yen impact the Nikkei and vice versa (Figure 1). Movements in US interest rates impact both stocks and forex worldwide. Pes- simism or optimism about the euro impacts all markets globally. So, yes, it has become imperative to track all markets even if you happen to trade in only one of them. Why should traders or investors pay attention to the forex markets? Earlier you could have ignored the forex markets to an extent if you were trading commodities. But now with large global hedge funds trading commodities as an asset, they tend to factor currency movements into their investment deci- sions, which ends up impacting the base asset itself. Therefore, it has become more important these days to watch the forex markets. But that’s a subset of the point that, these days, one has to watch all markets in any case. What are some signifcant changes you have seen in the forex markets over the years in terms of market participation, trading volume, and so on? The biggest change, to me, is that the major currencies are, perhaps, seeing smaller, more short-lived trends in the last fve years, as compared to the 1990s and early 2000s. There are exceptions, of course, like the big rise in dollar/yen this year in 2013. I would say that this is a direct fallout of the increased availability of information on the Internet as well as greater central bank coordination since the 2008 fnancial crisis. All this has led to an increase in market participation and volumes, leading in turn to a contraction in price trends. While trends are smaller in the major currencies, we can see large, long-lasting trends in some of the exotic/emerging market currencies, where information is less easily available and volume and participation is also smaller than in the major currencies. This makes sense. Larger wholesale markets will tend to see smaller price movements than smaller retail markets, which will tend to see larger price movements. So, if George Soros would want to make a billion overnight in today’s market, he would focus on some emerging market currency. He can’t do the same trick INTERVIEW FIGURE 1: NIKKEI/YEN. Movements in the yen affect the Nikkei. Here you see the periods of correlation between the Nikkei and the USDJPY. September 2013 • Technical Analysis of STOCKS & COMMODITIES • 47 again in the British pound! The second biggest change is the ex- ponential increase in retail participation (individual traders) in the forex market due to the advent of online trading plat- forms. The once-institutional market has become more “pleb,” if I may say so jocularly. The third biggest change is the con- traction of bid/offer spreads on the major currencies to such an amazing degree that prices are now quoted to the ffth decimal place. As you know, the fourth decimal place on a currency rate is called a pip. I call the ffth decimal place a piplet! Obviously, this could not have happened without the quadrupling of volumes. India’s role in the global economy should not be ignored. Should people pay attention to the US dollar/rupee market? Global institutional investors with an interest in India do, of course, pay close attention to the dollar/rupee market. This is because the currency rate impacts their dollar returns. In this context, one of the variables that we at Kshitij closely track is the Sensex/USDINR rate. Further, the rupee displays a strong correlation with a few emerging market currencies that we at Kshitij call the “R- currencies,” that is, the Brazilian real, the Russian ruble, the South African rand. I suspect this is so because some institutional investors might be trading in these currencies as a BRIS basket, or the famous BRICS grouping, but excluding China now. Finally, although I cannot substantiate this with data immediately, I have some- times felt that the pound, the BSE Sensex (Figure 2), and the Indian rupee tend to, at least sometimes, lead other markets while forming major tops and bottoms. You come to realize it only afterwards, but it might be good to pay closer attention to these markets while reading the tea leaves. You used to be a short-term trader. You are now focusing on forecasting, hedging, and so on. Tell us about this transition. How did it happen? What factors played a role? When I started Kshitij.com in 1997– 98, we were among the few websites worldwide offering forecasts and trading recommendations on the major curren- cies. We found an audience among retail traders worldwide. So we catered to them with short-term trading. But, by nature and training, I have tended to trade for relatively large moves in the markets. As I said earlier, it was possible to get relatively larger movements in the major currencies in the 1990s and early 2000s. This became more and more diffcult later on as more and more banks deployed ever-smarter algorithms in the market. Also, com- petition increased with more and more websites coming up and giving out trade recommendations. So short-term trading became more diffcult. Around this time, our clientele changed from retail forex traders worldwide to corporate hedgers in India, who are more focused on longer-term trends. I also realized that there was a need to create a proper hedging methodology for this section of the market, and so we came up with the Kshitij hedging method. Finally, as the rupee became more volatile and our own forecasts became better, we found more takers for our services in the corporate sector. So that’s where we are at the moment. I can’t help but think of an article on your website titled “Evolution Of A Trader.” Let’s talk about this. What are the different stages a trader goes through? Why is it important to go through these stages? I would summarize the article to say that a trader evolves from learning the basic tools of the trade to learning to trade and fnally, at a professional level, to managing a portfolio on an ongoing basis. I cannot see how it can be any other way. Trading is a skill, a call- ing, like painting or playing the guitar. From learning about different colors FIGURE 2: SENSEX IN USD TERMS. Sometimes the Sensex leads other markets while forming major tops and bottoms. www.NeuroShell.com 301.662.7950 ® Thank you for voting NeuroShell Trader #1 Artifcial Intelligence Software 11 years in a row! 48 • September 2013 • Technical Analysis of STOCKS & COMMODITIES Possibly; one way to avoid a lot of lost money would be to paper trade in the beginning. I suggest that you paper trade for one month and then place actual trades for one month. I also encourage traders to keep their positions very small at the beginning to get a feel for their emo- tions. You have to be able to withstand the losses and that will defnitely come in the learning period. You would have to be the exceptionally gifted trader or artist or musician to hit it off right from the beginning. Do you use technical analysis, funda- mental analysis, or both to analyze the markets? How do you apply them? What indicators or data do you look at? I would say I use both technicals and fundamentals to analyze the markets. Within that, I would say the mix would be 60:40 in favor of technicals. But, thinking again, I have to correct my statement. The mix would be 80:20 in favor of technicals. This is because I do not do much hard-core economics study. I look at the charts of a number of other markets that might impact the market I am trying to analyze. I do a lot of intermarket analysis. And charts are the tool I use all the time. So I would say I use technical analysis much more. My intermarket analysis substitutes for pure fundamental analysis. Within technical analysis, I use the most basic tools. I tend to rely mostly on old-fashioned trendlines and moving averages. I sometimes use Fibonacci retracements. And in some very special instances, I use momentum. On the whole, though, I am not very enamored of oscilla- tors. Further, I have developed some tools of my own, which tend to help a lot. As I said earlier, I try to do a lot of intermarket analysis. One example I gave earlier was to divide the Sensex by the USDINR rate. This kind of experimenta- tion tends to sometimes throw up nice proftable insights. You have come up with some interesting ways to apply technical analysis. One of them is using support & resistance levels across four different time frames, and another is the three-day candlestick. How do these methods help you in your forecasting? I especially like to use the three-day candles. The daily candle gives you a one-day picture, and weekly gives you a fve-day picture of price movement. There is nothing in between, so we cre- ated the three-day candle and we fnd that it sometimes gives us insights that the daily and the weekly don’t capture. I don’t have anything to back up what I say, but I would assume that not a lot of people use the three-day. We use the three-day candle a lot in our analysis. As far as the support & resistance across four different time frames, we came up with that by considering four different people trading in the market. Say one person is trading using the four-hour chart, another is trading on the daily chart, a third person is trading on the three-day, and a fourth person is trading on the weekly chart. They are all trading different time frames. How can I come up with a single tool that can capture the mind of all four traders? How can I, in one shot, get a snapshot view of four different time frames? That was how we came up with that tool. What we try to do is determine if there is a cluster of supports that is common to all the time frames and if there is a cluster of resistances that is common along two or three time frames. These levels become more important and more robust. What type of risk management strate- gies do you apply? First, keep your position size small. Second, if you are trading or investing for the long term (and we tend to take positions up to 12 months), it helps to keep the downside protected through an option trade. For instance, if you go long on the Dow, you might also want to buy a put as a protection. Third, our strategy INTERVIEW and brushes, to learning about notes and chords, to making your frst paint- ing by copying someone’s painting and playing your frst full song, to fnally having your own painting studio and touring the world to stage gigs is a long journey. Not everyone is cut out for it. It’s a fallacy to think otherwise. Yes, anyone can paint, play the guitar, or trade the markets — as a hobby. But you should keep things in perspective. You might paint really nice pictures and your friends might love your guitar play- ing at parties, and that’s great in itself; don’t let anybody knock you on that. You can do the same trading the markets and you might even be better than some of the so-called pros. But whether you morph your hobby into a career or not, you still have to learn the tools of the trade. And that takes time and dedication and the will to get over a lot of frustrations of spoiled canvases, lousy recordings, and lots of lost money. So are you saying that even if you keep losing lots of money, you should not give up and instead learn from those losses? Continued on page 66 FUTURES FOR YOU September 2013 • Technical Analysis of STOCKS & COMMODITIES • 49 INSIDE THE FUTURES WORLD Want to fnd 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 questions will appear in a future issue of S&C. IS GOLD STILL SHINING? Gold has dramatically underperformed recently. Is this the new norm? The truth is, there is nothing normal about markets or trading them. The current environment encompasses market sentiment and volatility levels, but tomorrow could be dramatically different. Accordingly, what you assume to be the norm won’t necessarily carry into the future. Since posting an all-time-high in Sep- tember 2011 near $1,900, the asset class once revered as a safe haven has been tearing holes in investment portfolios. Just as traders and investors were willing to jump on gold’s bullish bandwagon, the speculative community has turned on the yellow metal with vengeance. Nonetheless, at the precise time gold felt most bullish a few years ago was the exact time it was topping out. We feel like the eventual bottom in gold will feel the same; the moment in which the bulls are desperate for relief and the bears are salivating for yet another new low will be the point at which a magnifcent price reversal will be possible. At the time of this writing, we were assuming this sce- nario would be looming within the July time frame. Once the tides turn, the pain felt by the latecomer sellers, or simply market chasers, will be ferce. If you’ve been reading this column over the years, or have followed our newsletters, webinars, or other com- mentary, you are likely aware that we are not necessarily believers in the gold story. We are quick to remind investors that gold has its limitations as an invest- ment product. It doesn’t pay a dividend or a coupon payment, and, aside from the value humans place on it, it isn’t worth much. After all, it is too soft of a metal to be used for most industrial purposes. If it weren’t for our obsession with history and the gold standard, it would be just another element on the periodic table. Even so, when it comes to the fnancial markets, perception often goes much further than reality does. Ac- cordingly, we feel as though speculators will eventually fall back in love with the idea of hedging infation and economic risk with gold. The economy has been slowly recov- ering for years but has yet to show real signs of strength. Investors, and thus the markets, will be sure to question the equity market rally from time to time; this too will work in favor of the bullish gold case. Similarly, although we’ve yet to see any evidence of infation in the data, we can’t help but feel it will soon be a concern. Don’t forget, if traders simply expect infation, they will react accord- ingly. Whether we actually feel the price pressure is almost irrelevant; just the discussion of it is enough to fip the markets. If you don’t believe me, look at a Treasury chart. The market collapsed in May 2013 on the frst hint of the Fed possibly tightening its purse strings, yet the central bank continues to buy the securities in full force. In other words, in the fnancial markets, sometimes words actually do speak louder than ac- tions. Aside from our personal opinions on the value of gold, the market could move with investor sentiment changes, and gold may perhaps, once again, be off to the races. To reiterate, we aren’t stating that gold is some sort of safe haven or infation hedge, because history suggests that it isn’t. All we are saying is that humans are destined to repeat cycles and we rarely learn from our exuberant mistakes. If we are correct, gold bulls will soon be rush- ing back to their favorite speculation. Please keep in mind that gold is a treacherous market and is not for the risk averse. In the futures markets, most position traders are likely best sticking to the emicro contracts that allow for easy dollar-cost averaging and buy & hold opportunities for small traders. An emicro future is one-tenth the size of the original contract; a trader makes or loses $10 per dollar of movement in the price of gold. Trust me, this is enough exposure for most small retail traders. Carley Garner If it weren’t for our obsession with the gold standard, gold would be just another element on the periodic table. 50 • September 2013 • Technical Analysis of STOCKS & COMMODITIES TradingMarkets Live Screener PRODUCT REVIEW THE CONNORS GROUP, INC. 10 Exchange Place, Suite 1800 Jersey City, NJ 07302 Phone: 973 494-7311 or 888 484-8220 Internet: www.tradingmarkets.com Email:
[email protected] Product: Stock-screening tool Price: $49.94 per month or $495 for an annual subscription by Donald W. Pendergast Jr. tock and ETF screeners aren’t a new concept; there have been many on the market for some time now. Some come as part and parcel of trad- ing platforms, and others are offered as standalone applications that can run on your computer or in a web browser. Some specialize in fundamental data such as P/E ratios, earnings growth rates, return on equity, and other key fnancial data, while others focus solely on the analysis of technical data such as moving averages, oscillators, relative strength rankings, and volatility, among others. One of the most interesting and useful of the technicals- only online stock and ETF screeners is offered by TradingMarkets.com. It’s called the TradingMarkets Live Screener and is available on a monthly or annual subscription basis. The TradingMarkets Live Screener enables subscribers to analyze key technical and statistical data in real time on a universe of the 3,500 most liquid US-traded stocks and ETFs. Leveraged and nonleveraged ETFs can also be utilized in all of the various screening confgurations offered within the product (Figure 1). Let’s get a general overview of what it is and what it can do, and then look at several hypothetical examples of how it can be put to potentially proftable use by different types of technical traders in the stock/ETF markets. OVERVIEW When a TradingMarkets Live Screener subscriber logs in, the main page displays a number of column tabs, each of which groups together a specifc set of screening tools as follows: n Technicals, which contains the fol- lowing set of screening tools, all of which continuously update with fresh data every 20 seconds: Two-day RSI (with a range of 10 or below to 90 and above), four-day RSI (with the same ranges), 10-day and 100-day historical volatility (HV), up & down days (the number of days a stock or ETF has made consecutively higher/lower daily closes), two-day and fve-day re- turns (with a range of +/- 1% to 20% or more), fve-day stretch moving average (the distance a stock/ETF is above/below its fve-day simple moving average, expressed in per- centage terms), and for Bollinger band fans, a very nice %b function is also included. In the hands of a savvy trader, this selection of technical screening tools provides plenty of technical screening power, but the TradingMarkets Live Screener offers even more, as the next column tab shows: S FIGURE 1: THE TRADINGMARKETS LIVE SCREENER. This feature allows for real-time screening of the 3,500 most liquid stocks and ETFs on the NYSE, NASDAQ, and AMEX exchanges. The TradingMarkets Live Screener could be a boon to those who rely on mechanical systems and need to gain an extra statistical edge for their methodology. September 2013 • Technical Analysis of STOCKS & COMMODITIES • 51 n Profle/Price/Volume. This tab, which lets a trader home in on the stocks and ETFs (including lever- aged ETFs) with the specifc price range and average daily volume characteristics they desire. Addi- tional choices include the ability to screen according to an instrument’s relation to its 50- and 200-day mov- ing average, market sector, and par- ent stock index (DJIA 30, S&P 500, S&P 100, and NASDAQ 100). n Proprietary. This column tab al- lows subscribers to view the current reading of a unique short-term, momentum-based oscillator — the ConnorsRSI. Also on the main page of the Trad- ingMarkets Live Screener is a search box in which you can type in a stock/ ETF ticker symbol (or even multiple ticker symbols) to receive all of the key technicals and continuously updating stats on your favorite equity. Another useful feature is the ability to save your customized screening criteria in the custom tools saved flters box. Late in the Thursday, June 20, 2013 trading session (a big down day for the broad US markets), I created a sample screen that looks for S&P 500 component stocks with the following criteria: 1. Average daily trading volume of 500k or greater 2. Price greater than $5 per share 3. Trading above its 200-day moving average 4. 100-day historical volatility (HV) of 25 to 50 5. Has made three or more consecu- tively lower daily closes 6. Its ConnorsRSI is at a level of 10 or below. Users can also create and save their own watchlists using any of the stocks in the TradingMarkets Live Screener database. GETTING STARTED Once the screening criteria is entered, simply push the flter results button and the screener output appears in the window just beneath. To save the screen flters, simply hit save and enter a unique name to save it as (in this case, I used “TASC oversold SP500”). You can then bring it up again at any time to perform a fresh daily or live intraday screening. In this case, the TradingMarkets Live Screener located eight stocks that met the input flter criteria, displaying the current daily indicator values and stock price in real time (updated every 20 seconds). Glancing at the list reveals that Marathon Petroleum Corporation (MPC) has experienced the worst intra- day decline of the stocks located by the TradingMarkets Live Screener — down nearly 6% on the session (Figure 2). The technical flters output columns provide a quick and simple way to verify the output of the screen; one of the most useful features of all — particularly for traders seeking stocks setting up for a potential reversal — is the up days and down days flter. Using this flter, we fnd that MPC has made fve consecutive lower daily closes prior to the current day’s trad- ing action, and this information can really help a trader get focused on the stocks that may be nearing the end of a particular down (up) swing, just prior to a tradable reversal, all else being equal. For example, perhaps a fundamen- tally attractive stock (one with steadily increasing quarterly earnings or dividend payouts) you like to trade has sold off sharply for seven of the past eight trad- ing sessions (along with others in its sector or industry group), its Connors RSI is below fve, its price is 6% or more beneath its fve-day stretch MA, the 100- day HV (historical volatility) is above 40, long-term money fow is positive, a key support level is holding, and the stock is also outperforming the S&P 500 index (.SPX) over the past four-, 13- and 26-week periods. Given a scenario like that (and, after every major market selloff there always seem to be quite a few stocks that easily meet such criteria), it might be a great stock to watch for signs of a tradable bullish reversal. Traders could even invert such criteria to look for potential shorting candidates; in reality, there are an infnite number of ways for day, swing, covered call, FIGURE 2: BIGGEST DECLINER. Clicking on any ticker symbol on the main screen of the TradingMarkets Live Scanner brings up a new window with additional technical, visual, and monthly performance for the stock/ETF you wish to analyze. 52 • September 2013 • Technical Analysis of STOCKS & COMMODITIES a new window will appear (Figure 3). A trader can then access additional analysis by clicking on the risk and returns dis- tribution (the technicals window is the default view). In the technicals window, users can see a dashboard with visuals for the stock’s (or ETF’s) ConnorsRSI, Bollinger Band%, and two-period RSI. Just below that is an array of technical/ statistical data not shown on the screen output window, such as fve-year CAGR (compounded annual growth rate), fve- year Sharpe ratio, fve-year risk, 10-day ADX, 52-week high/low, 20-day high/ low, and maximum fve-year DD (draw- down). Users can also view a line chart for the stock/ETF being analyzed, with time spans ranging from three months to fve years. There is also a table at the bottom of the window that displays the monthly gain/loss fgures for the equity under review. Clicking the risk tab brings up a window that allows users to analyze maximum drawdown from four vantage points (more than 12 years of historical data is available): 1. Start of DD 2. Date of max DD 3. End of DD 4. Max DD You can choose to look at only the 10 worst periods of DD or can expand that to include the 50 worst periods, depending on your analysis needs. This is another incredibly useful set of stats for those trad- ers who are looking for reliable reversal plays; again, the number of creative uses for this kind of information is nearly in- fnite, depending on how deep a trader’s understanding of the markets is. On the same page, users can also see what the best and worst performing days were in the stock/ETF over a given time period (again, up to 12 years of data is available). Finally, a click of the returns distribution tab brings up a histogram of the stock’s performance based on standard devia- tions. In the case of MPC’s one-month distribution pattern since January 2001, you can see the following dynamics at work (Figure 4): 1. In 62% of the months, MPC’s share price increased in value. and position traders to use the Trading- Markets Live Screener, and the more you understand the basic mechanics of market price movement (it basically boils down to capitalizing on excessive price moves triggered and exacerbated by fear or greed), the more creative you’ll likely become as you use this screening tool. The TradingMarkets Live Screener does appear to be at least one of the missing links for traders formerly relying on sub- jective interpretation of fundamentals and technicals (that is, discretionary traders) and could even be a boon to those who rely on mechanical systems and need to gain an extra statistical edge for their methodology. MULTIDIMENSIONAL ANALYSIS The TradingMarkets Live Screener also enables traders to obtain additional multi- dimensional info for the stocks that it returns after each scan. Simply click on the ticker symbol in your output list and FIGURE 3: RISK. Clicking the risk tab brings into focus the drawdown and best daily gain/worst daily loss stats for a particular stock/ETF. Here, the stats for the 10 worst drawdown phases for MPC since January 2001 are revealed. Users can expand this to see the 50 worst drawdowns and best day/worst day track records, if desired. PRODUCT REVIEW The NinjaTrader script given in this article is available from http://www.traders.com/fles/ Vervoort-NinjaTrader4.html. The NinjaScript .zip fle for this article, “SVEVolatilityBand. zip,” can also be downloaded from Vervoort’s website at http://stocata.org/ninjatrader/ formulas.html. See the Traders’ Tips section beginning on page 55 for commentary and implementation of Sylvain Vervoort’s technique in various technical analysis programs. Accompanying program code can be found in the Traders’ Tips area of Traders.com. FURTHER READING Ehlers, John [2000]. “Hilbert Indicators Tell You When To Trade,” Technical Analysis of STOCKS & COMMODITIES, Volume 18: March. Mulloy, Patrick [1994]. “Smoothing Data With Less Lag,” Technical Analysis of STOCKS & COMMODITIES, Volume 12: February. Vervoort, Sylvain [2013]. “Indicator Rules For Swing Trading Strategies, Part 1,” Technical Analysis of STOCKS & COMMODITIES, Volume 31: April. (Parts 2–4 appeared subsequently in May–August 2013 under their own titles.) Widner, Mel [1997]. “Rainbow Charts,” Technical Analysis of STOCKS & COM- MODITIES, Volume 18: July. • www.bollingeronbollingerbands.com ‡NinjaTrader (NinjaTrader, LLC) Continued from page 43 Vervoort/Oscillators, Smoothed CHARTING September 2013 • Technical Analysis of STOCKS & COMMODITIES • 53 FILTERING THROUGH With the TradingMarkets Live Screener offering such an array of unique real- time statistical and technical tools, pro- spective subscribers should have little problem with the monthly fee of $49.95 ($495 for an annual subscription); in the hands of market-savvy, industrious traders who know a thing or two about statistics, the TradingMarkets Live Screener may very well be the software tool that take their trading performance to a higher, more proftable level. Don Pendergast is a trader, market tech- nician, system developer, and fnancial markets writer. He made his frst trade in August 1979 and hopes to make his last one sometime around September 2049. He may be reached at lineartradingsys@ gmail.com. FURTHER READING Connors, Larry, and Ashton Dorkins [2007]. “Laps And Gaps To Get Your Edge,” Technical Analysis of STOCKS & COMMODITIES, Volume 25: July. Connors, Larry, and Cesar Alvarez [2007]. “Here’s How To Find Top Performing Stocks Every Day,” Trad- ingMarkets.com, September 19. ‡Tradingmarkets.com FIGURE 4: RETURNS DISTRIBUTION. Unique price performance histograms can be created in the returns distribution portion of the TradingMarkets Live Screener. The lookback period and can easily be adjusted; more than 12 years of historical data are available. Note the shaded zones on the graph; these delineate the one, two, and three standard deviation ranges of returns distribution over a given time span. 2. The skew of the histogram is de- cidedly shifted to the right of the median line, visually allowing for a quick confrmation of the stock’s long-term bullish bias. 3. The shaded areas represent the one, two, and three standard de- viation (SD) ranges for the stock over this 12-plus-year period; notice that at the extreme right of the chart that one month’s returns were so high that it exceeded the +3 SD range — coming in with a 40.5% monthly return on two occasions. By contrast, the worst two monthly losses were -27% and -26.5%, and neither was anywhere close to the -3 SD line. It would take a book on statistics to explain all of the cool ways this particu- lar SD histogram info could be put to potentially proftable use by traders, but here’s an idea or two that might spark a few more of your own: 1. Any time a stock posts a daily or weekly gain/loss that is more than +1/-1, +2/-2, or +3/-3 SDs, con- sider this to be a possible start of a powerful trending move or even a continuation of a preexisting trend after a consolidation. 2. Perform further analysis in the TradingMarkets Live Screener, paying special attention to the 10-day ADX reading, the stock’s relation to its 50- and 200-day moving averages, its RSI, %b, and ConnorsRSI readings and its 100- day HV (historical volatility). 3. If you see that a valid bullish trend move is under way, consider put- ting on a covered call trade or even selling a near-term, out-of-the money put option in hopes of al- lowing strong bullish momentum to carry the trades quickly into the proft zone. 4. Contrarians could use similar technicals to time short-term bearish reversals in the same bullish trend. And for traders who simply like to trade short-term reversals in range-bound mar- kets, the TradingMarkets Live Screener offers a zillion other possibilities, such as looking for extremely overbought/ oversold ConnorsRSI readings in a consolidating stock that has a very low 10-day ADX reading (say, below 15) and high 10-day HV readings. Again, the possibilities for ways to use the TradingMarkets Live Screener appear to be nearly infnite, and a little out- of-the-box visualization and ongoing experimentation with this product will, no doubt, help users to create plenty of innovative strategies with a meaningful edge in the markets. JUST SO YOU KNOW According to Larry Connors, his Con- norsRSI is the single most popular indicator in the TradingMarkets Live Screener, with the %b and up days/ down days flters also being especially prized by current subscribers. Accord- ing to Connors, the ConnorsRSI can be employed as an overbought/oversold oscillator or as a momentum indicator, depending on the needs of an individual trader. I tested the TradingMarkets Live Screener using the Internet Explorer 10 browser on a Windows 8–equipped notebook computer while using a standard DSL Internet connection, and I had no technical issues with the product at all. ‡See Editorial Resource Index Explore Your Options 54 • September 2013 • Technical Analysis of STOCKS & COMMODITIES Tom Gentile of Optionetics Got a question about options? Tom Gentile is the chief option strategist at Optionet- ics (www.optionetics.com), an education and publishing frm dedicated to teaching investors how to minimize their risk while maximizing profts 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. CURRENCY OPTIONS As I travel the world speaking at various conferences, at some point the discussion usually turns to the world markets. When I broach the currency markets, the top two questions usually are: How can a trader proft from changes in currency values, and second, are there options in the currency markets? The answer to the frst question can be best answered by the various articles on forex that may be found elsewhere in this issue or in other issues of this magazine, so I’ll concentrate on the types of options that are traded in the currency markets. The good news is there are indeed options that trade on curren- cies, but there are differences between these and options in other markets, so it’s good to understand them all before determining what is right for you. Here, I’ll discuss a few of them. Currency options in your equity ac- count: options on currency ETFs You don’t have to be a futures or forex trader to hedge or speculate on currency prices. There are several ETFs in the equity markets that correlate directly with foreign currencies. The products listed in Figure 1 are known as CurrencyShares issued by Guggenheim Investments and are listed on the NYSE. These Currency- Shares are exchange traded funds (ETFs) that closely track the spot currency vs. the US dollar. They are similar to most standard ETFs in that you can buy and sell these in units, just like shares of a stock from your brokerage account. Buy- ing shares means that you are expecting the foreign currency to rise against the US dollar. Conversely, shorting currency shares means you are expecting the US dollar to rise against the foreign currency in the pair. Options on CurrencyShares are avail- able. These are standard-vanilla option contracts, meaning that one contract controls 100 shares, just as with an eq- uity option, and come with strikes and expiration dates that can be entered and exited any time until expiration. As of this writing, CurrencyShares have decent liquidity, especially for the position trader who looks to hold options overnight. For more information on CurrencyShares and options, visit www.etfdb.com or www. nyse.com. Options on FX futures FX options play an important role in hedging and speculating. In the last 10 years, the billions of dollars of FX futures and options have gone from roughly 10 billion to over 120 billion traded per day. FX options have grown sequentially with their counterpart, the FX markets themselves. But they also have the ease of use and fexibility, just like any regu- lar options. They too have calls & puts, strikes, expiration dates, and in most cases, are American-exercised options, which means they can be exercised (or assigned) up to expiration. FX options are traded and cleared through the Chicago Mercantile Ex- change. Each contract is specifc to its own size; the Australian dollar FX contract, for example, has a $100,000 value, while the euro has a $125,000 value. Expiration dates and contract delivery vary. Some contracts offer weekly options, while others do not. Some contracts are cash settled, while others are physical delivery. For specifc contract specifcations, visit www.cmegroup.com/trading/fx/files/ FXOptions_Specs.pdf. FX binary options Binary options differ because you set the amount at risk, the price, and expiration of the product, as well as whether or not it will touch or not touch the price by the expiration. Not coincidentally, these single payment option transactions, or SPOT, are called touch or no touch op- tions. Based on where you set the touch or no touch price, your payout will vary. You either get paid or not get paid at expiration. Obviously, the probability of the binary touching or not touching will determine how much you get paid. Think of a binary as an outcome, like the roll of the dice. Once you buy or sell a binary, you wait for the outcome. You cannot sell it to someone else, hence there is no time value. Either you win or lose, and you know your potential winnings or potential losses. Even though you bet up or down, it’s still a limited reward and limited risk outcome. You can go both ways, but realize that your return on risk will drop as a result. It’s best to completely understand your risks when trading binary options. So which FX option is right for you? That answer is different for everyone. Some traders want the security and regulations of the NYSE or the CME and choose to trade through clearing frms. Others like the bank dealers, which offer competitive spreads, as well as commis- sions built in. Whatever the case is for you, there are plenty of ways to trade the global currency markets! FIGURE 1: GUGGENHEIM INVESTMENTS CURRENCYSHARES ETF Database September 2013 • Technical Analysis of STOCKS & COMMODITIES • 55 For this month’s Traders’ Tips, the focus is Sylvain Vervoort’s article in this issue, “Oscillators, Smoothed.” Here we present the September 2013 Traders’ Tips code with possible implementa- tions in various software. Code for NinjaTrader is already provided in Vervoort’s article. Subscribers will fnd that code at the Subscriber Area of our website, www.Traders.com. (Click on “Article Code” from the S&C menu.) Presented here is an over- view of possible implementations for other software. Traders’ Tips code is provided to help the reader imple- ment a selected technique from an article in this issue. The entries are contributed by various software develop- ers or programmers for software that is capable of cus- tomization. Readers will fnd the September 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 contributors as well as some example charts. To locate Traders’ Tips at our website, click on the link from our home page, or use our site’s search engine. F TRADESTATION: SEPTEMBER 2013 TRADERS’ TIPS CODE In “Oscillators, Smoothed” in this issue, author Sylvain Ver- voort describes a zero-lag oscillator (SVEZLRBPercB) for which the calculation was based on the Percent b oscillator. Vervoort also introduces a slow stochastic oscillator that is overlaid onto his modifed Percent b. Provided here is the EasyLanguage code for Vervoort’s oscillator based on the NinjaTrader code provided in the article. To download the EasyLanguage code, please visit our TradeStation and EasyLanguage support forum. The code can be found here: http://www.tradestation.com/TASC-2013. The ELD flename is “_TASC_SVEZLRPercB.ELD.” For general information about EasyLanguage programming, see http://www.tradestation.com/EL-FAQ. A sample chart is shown in Figure 1. This article is for informational purposes. No type of trading or investment recommendation, advice, or strategy is being made, given, or in any manner provided by TradeStation Securities or its affliates. —Doug McCrary TradeStation Securities, Inc. www.TradeStation.com F METASTOCK: SEPTEMBER 2013 TRADERS’ TIPS CODE In “Oscillators, Smoothed” in this issue, which is the ffth part of an ongoing series on indicator rules for a swing trading strategy (IRSTS), author Sylvain Vervoort introduces two variations on existing oscillators. He describes his take on John Bollinger’s %b as well as on the stochastic oscillator. The MetaStock code for these formulas is shown at www. traders.com in the Traders’ Tips area. —William Golson MetaStock Technical Support www.metastock.com F eSIGNAL: SEPTEMBER 2013 TRADERS’ TIPS CODE For this month’s Traders’ Tip, we’ve provided the formula SVEZLPercB.efs based on the formula code from Sylvain Vervoort’s article in this issue, “Oscillators, Smoothed.” The study contains formula parameters to set the values for the Percent b deviation period, Percent b average, stochastic period, and stochastic slowing, which may be confgured through the edit chart window (right-click on chart and select “Edit chart”). To discuss this study or download a complete copy of the formula code, please visit the EFS Library Discussion Board forum under the forums link from the support menu at www. FIGURE 1: TRADESTATION. Here is a daily chart of Ford (F) with the oscillator described in Vervoort’s article in this issue applied to the chart. FIGURE 2: eSIGNAL, SVEZLPERCB. The EFS study contains formula parameters to set the values for the indicator. 56 • September 2013 • Technical Analysis of STOCKS & COMMODITIES esignal.com or visit our EFS KnowledgeBase at http://www. esignal.com/support/kb/efs/. The eSignal formula scripts (EFS) are also available for copying and pasting from the 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 FTHINKORSWIM: SEPTEMBER 2013 TRADERS’ TIPS CODE In “Oscillators, Smoothed” in this issue, which is part 5 of an ongoing seven-part series from Sylvain Vervoort, Vervoort describes combining ideas based on Percent b and the stochastic oscillator to create an indicator smoothed by multiple moving averages (Figure 3). For thinkorswim users, we have created both a study and a strategy in our proprietary scripting language, thinkScript. You can adjust the parameters of these within the edit studies window to fne tune the periods calculated. The study: 1. From TOS charts, select Studies Edit studies 2. Select the Studies tab in the upper left-hand corner 3. Select “New” in the lower left-hand corner 4. Name the study (such as “SVEZLRBPercB”) 5. Click in the script editor window, remove “plot Data = close;” and paste in the study code (found at www.traders. com in the Traders’ Tips area). The strategy: 1. From TOS charts, select Studies Edit studies 2. Select the Strategy tab in the upper left-hand corner 3. Select “New” in the lower left-hand corner 4. Name the strategy (such as “SVEZLRBPercB”) 5. Click in the script editor window, remove “addOrder(OrderType.BUY_AUTO, no);” and paste in the strategy code (found at www.traders.com in the Traders’ Tips area). —thinkorswim A division of TD Ameritrade, Inc. www.thinkorswim.com F WEALTH-LAB: SEPTEMBER 2013 TRADERS’ TIPS CODE In his article in this issue (“Oscillators, Smoothed”), author Sylvain Vervoort presents a near master class of suggestions on improving some well-known indicators using smooth- ing techniques. A combination of TEMA (triple exponential moving average) and WMA (weighted moving average) does a nice job smoothing out wiggles in a %b oscillator derived from a zero-lag “rainbow” data series (SVEZLRBPercB). The same rainbow series, averaged with the typical price, visibly smooths the traditional stochastic %K oscillator. To illustrate the application of SVEZLRBPercB and the smoothed stochastic %K, we include a demo long-only strategy with just two basic rules: buy when the StochK crosses above from oversold territory, and sell when it leaves the overbought zone. As usual, the complexity of the code is hidden by including the indicators in our TASCIndicators library (http://www. wealth-lab.com/Extensions/Details/24). To run the sample strategy in Wealth-Lab, you’ll need TASCIndicators version 2013.08 or higher. Please install (or update) the library from the wealth-lab.com website to its latest version. See Figure 4 for a sample of the strategy output. —Eugene, Wealth-Lab team MS123, LLC www.wealth-lab.com F NEUROSHELL TRADER: SEPTEMBER 2013 TRADERS’ TIPS CODE The zero-lag Percent b–based oscillator (SVEZL- RBPercB) described by Sylvain Vervoort in his article in this issue (“Oscillators, Smoothed”) can be easily implemented with a few of NeuroShell Trader’s built-in indicators. Simply FIGURE 3: THINKORSWIM. Here is an example of a strategy implemented in thinkorswim based on Sylvain Vervoort’s article in this issue. FIGURE 4: WEALTH-LAB. Here is a sample Wealth-Lab 6 chart illustrating the ap- plication of smoothed indicators. September 2013 • Technical Analysis of STOCKS & COMMODITIES • 57 select “New Indicator…” from the Insert menu and use the Indicator Wizard to set up the following indicators: Rainbow Divide(Add3(Add4(Multiply2( 5, Avg(TimeSeries,2)),Multiply2( 4, Avg ( Avg ( TimeSeries, 2), 2)), Mulitply2( 3, Avg( Avg( Avg(TimeSeries,2), 2), 2)),Multiply2( 2, Avg( Avg( Avg( Avg( TimeSeries, 2), 2), 2), 2))),Add4( Avg( Avg( Avg( Avg( Avg(TimeSeries,2), 2), 2), 2), 2),Avg( Avg( Avg( Avg( Avg( Avg( TimeSeries, 2), 2), 2), 2), 2), 2),Avg( Avg( Avg( Avg( Avg( Avg( Avg( TimeSeries, 2), 2), 2), 2), 2), 2), 2),Avg( Avg( Avg( Avg( Avg( Avg( Avg( Avg( TimeSeries, 2), 2), 2), 2), 2), 2),2), 2)), Add2( Avg( Avg( Avg( Avg( Avg( Avg( Avg( Avg( Avg( TimeSeries, 2), 2), 2), 2), 2), 2), 2), 2), 2), Avg( Avg( Avg( Avg( Avg( Avg( Avg( Avg( Avg( Avg( TimeSeries, 2), 2), 2), 2), 2), 2), 2), 2), 2), 2))), 20 ) ZLRB Add2( ExpAvg( Rainbow, 3), Subtract( ExpAvg( Rainbow, 3), ExpAvg(ExpAvg( Rainbow, 3), 3))) SVEZLRBPercB Multiply2( Divide( Subtract( Add2( TEMA( ZLRB,3), Multi- ply2( 2, StdDev( TEMA( ZLRB,3), 18) ), LinWgtAvg( TEMA( ZLRB,3),18)), Multiply2( 4, StndDev( TEMA( ZLRB,3),18)), 100) SlowStochastic SimpleStochastic%D( Avg2(Rainbow, Avg3(High, Low, Close), 30, 3 ) Users of NeuroShell Trader can go to the STOCKS & COMMODITIES section of the NeuroShell Trader free technical support website to download a copy of this or any previous Traders’ Tips. A sample chart of the SVEZLRBPercB implemented in NeuroShell Trader is shown in Figure 5. —Marge Sherald, Ward Systems Group, Inc. 301 662-7950,
[email protected] www.neuroshell.com F AIQ: SEPTEMBER 2013 TRADERS’ TIPS CODE The AIQ code based on Sylvain Vervoort’s article in this issue, “Oscillators, Smoothed,” is provided at www.TradersEdgeSystems.com/traderstips.htm. In Figure 6, I show a chart of Sanderson Farms (SANF) with a color bar study that shows potential buys (green bars) when both oscillators are moving up and they are both oversold (below 20). It sells (red bars) when both oscillators are moving down and they are both overbought (above 80). The bands shown are based on the modifed Bollinger Bands that are used in the calculation of the modifed Percent b oscillator. For comparison purposes, I have also provided the formula for John Bollinger’s original Percent b indicator as well as for the original smoothed %K indicator. —Richard Denning
[email protected] for AIQ Systems F TRADERSSTUDIO: SEPTEMBER 2013 TRADERS’ TIPS CODE The TradersStudio code based on Sylvain Vervoort’s article in this issue, “Oscillators, Smoothed,” is provided at the fol- lowing websites: • www.TradersEdgeSystems.com/traderstips.htm • www.TradersStudio.com Traders Resources Traders Tips In Figure 7, I show a chart of the S&P emini (ES) using data FIGURE 5: NEUROSHELL TRADER. This NeuroShell Trader chart displays the SVEZLRBPercB and slow stochastic. FIGURE 6: AIQ. Here is a sample chart of Sanderson Farms (SANF) with Vervoort’s modified Bollinger Bands, his modified Percent b oscillator, and his smoothed %K oscillator, with a color study showing potential buys (green bars with up white arrows) and sells (red bars with down white arrows). FIGURE 7: TRADERSSTUDIO. Here is a chart of the S&P emini (ES) showing Vervoort’s modified Percent b (in white) and his modified smoothed %K (in yellow). 58 • September 2013 • Technical Analysis of STOCKS & COMMODITIES from Pinnacle Data showing the combination of Vervoort’s modifed indicators — the modifed Percent b (in white) and the modifed smoothed %K (in yellow). —Richard Denning
[email protected] for TradersStudio F NINJATRADER: SEPTEMBER 2013 TRADERS’ TIPS CODE In Sylvain Vervoort’s article in this issue, “Oscillators, Smoothed,” Vervoort discusses implementing his techniques in NinjaTrader and provides a NinjaScript in a sidebar to the article. We have created the LinearTrendSpotter indica- tor as discussed in his article, and this will be available for download from our website at www.ninjatrader.com/SC/ September2013SC.zip. A trendline is one of the oldest and simplest trading tools, yet it is very versatile and useful. These lines, often hand- drawn on a chart, are prone to inaccuracy and bias and so can be greatly improved by automation. The LinearTrendSpotter indicator offers two sets of lines tracked for uptrends and downtrends in different sensitivities so inputs can be found for a wide range of markets and time frames. Further, the indicator can show a history of the trendlines printed on the chart, as well as alerts when the slope of the trend changes by more than a user-defned amount. The history can be imagined as a snapshot that occurs once every period, while the alerts can be especially useful when a long-term period changes direction. Adding to that, users can also set to draw the current set of trendlines as rays, thereby gaining the advantage of seeing the trends extrapolated beyond the last bar’s boundary. A sample chart is shown in Figure 8. —Raymond Deux & Chelsea Bell NinjaTrader, LLC www.ninjatrader.com F UPDATA: SEPTEMBER 2013 TRADERS’ TIPS CODE Our Traders’ Tip for this month is based on “Oscillators, Smoothed” by Sylvain Vervoort in this issue. In his article, Vervoort delivers the ffth part in his ongoing series, using rainbow smoothing to modify John Bollinger’s Percent b oscillator to create an oscillator with zero lag for use with swing trading. All parameters can be optimized within the Updata’s indicator optimizer to determine the most proftable combinations. A sample chart implementation is shown in Figure 9. The Updata code for this system has been added to the Updata library and may be downloaded by clicking the custom menu and then system library. Users can alternatively paste the code shown in the Traders’ Tips area of www.traders.com into the Updata custom editor and save it. —Updata support team
[email protected] www.updata.co.uk FTRADESIGNAL: SEPTEMBER 2013 TRADERS’ TIPS CODE The indicators presented by Sylvain Vervoort in his article in this issue, “Oscillators, Smoothed,” which is the ffth part of a seven-part series on indicators rules for a swing trading strategy (IRSTS), can easily be used with our online charting tool at www.tradesignalonline.com. To locate the indicators, check the Infopedia section for our lexicon. There, you will fnd the indicator and the functions that you can make available for your personal account. Click on it and select open script. You can then apply it to any chart you wish (Figure 10). —Henning Blumenthal, Tradesignal GmbH
[email protected] www.TradesignalOnline.com, www.Tradesignal.com FIGURE 8: NINJATRADER, LINEARTRENDSPOTTER. This screenshot shows the LinearTrendSpotter applied to a seven-minute chart of a CL light sweet crude oil continuous contract. FIGURE 9: UPDATA. This chart shows the rainbow %b as applied to the S&P 500 index of daily resolution. Continued on page 60 September 2013 • Technical Analysis of STOCKS & COMMODITIES • 59 FREE INFORMATION FROM ADVERTISERS Advertiser Page Advertiser Page To help our readers connect better with our advertisers, we have updated our reader service process. Go to Traders.com/reader where you will find the alphabetized list of our current monthly advertisers. For reference, the list is also printed above along with the corresponding page number for each ad. Just follow the simple directions below and the advertisers will get your requests the same day! STEP 1: Point your browser to Traders.com/ reader and scroll through our alphabetized listing of our current month’s advertisers. Click the box for each advertiser you’d like to hear from. At the bottom of the list, click “continue” when finished. STEP 2: Simply fill out your name and address and click “Send Request.” Your request will then be sent to the advertisers you selected. And that’s it! To receive information on the products and services listed in the Editorial and Advertisers’ Indexes, go to: Traders.com/reader/ . These indexes are published solely as a convenience. While every effort is made to maintain accuracy, last-minute changes may result in omissions or errors. HOW TO REACH US For questions, address changes, or ordering information for Technical Analysis of STOCKS & COMMODITIES magazine and its online publications: Toll-free 800 832-4642 (800-TECHNICAL) or: 206 938-0570. Email us at:
[email protected]. Or write to us at: 4757 California Ave. SW, Seattle, WA 98116-4499. Do your magazines arrive tattered and torn? Polybagging of magazines (domestic delivery) is available for $6/year. Single back issues from the current year (subject to availability) are $8 prepaid. Subscribers have access to our digital archive of all past articles. Individual articles can be purchased from the Online Store at our website, Traders.com. EDITORIAL FEEDBACK We always want to know more about the needs of our readers: What kinds of articles would you like to see more of? What do you find useful? Address your written questions and comments to edi-
[email protected] or to: Editor, STOCKS & COMMODITIES, 4757 California Ave SW, Seattle, WA 98116-4499. Sorry, we cannot perform research on individual financial questions not related to this magazine and we cannot respond to all mail. Letters or emails containing questions or information that other readers may enjoy or that relate to our articles or technical analysis top- ics may be published in our Letters to S&C column. SOFTWARE NinjaTrader 11 ninjatrader.com/TASC Lumineye 34 www.PhantomTrader.com Track ‘n Trade 30 www.TryTnT.com Vectorvest 29 www.vectorvest.com/SC Ward Systems 47 www.NeuroShell.com Worden Brothers 68 tc2000.com TRADING SYSTEMS Consistent Options Income 21 ConsistentOptionsIncome.com NinjaTrader 11 ninjatrader.com/TASC Trading Concepts, Inc. 46 www.OptionsMD.com/IncomeRx WEBSITES PureTick 48 www.puretick.com StockCharts.com 45 stockcharts.com/scu Stocks & Commodities 36, 67 Traders.com EDITORIAL RESOURCE INDEX BROKERAGES AMP Clearing 2–3 ampclearing.com, ampfutures.com Fidelity 5 fidelity.com/TryATP FXCM 27, 33 fxcm.com/ninja, fxcm.com/lowspreads Interactive Brokers 7 interactivebrokers.com/interest OptionsXpress 17 optionsxpress.com Scottrade 15 scottrade.com/Scottrader TD Ameritrade 23 tdameritrade.com/thinkorswim TradeStation 4, 31 tradestation.com, tradestation.com/options CONSULTANTS Consistent Options Income 21 ConsistentOptionsIncome.com COURSES/SEMINARS Consistent Options Income 21 ConsistentOptionsIncome.com IFTA 25 conference.ifta.org/2013 Traders’ Library 37 tlforum.com/TASC/2013 PUBLICATIONS Stocks & Commodities 36, 67 Traders.com SOFTWARE Ablesys 9 ablesys.com ChartPattern 43 www.chartpattern.com Jurik Research 14 jurikres.com Join us on Facebook at www.facebook.com/ STOCKSandCOMMODITIES Follow us on Twitter @STOCKSandCOMM Microsoft Excel 13 eSignal 20 MetaTrader 29 NinjaTrader 39 Kshitij.com 46 TradingMarkets 50 ETFDatabase 54 TradeStation 55 METASTOCK 55 thinkorswim 56 WealthLab 56 NeuroshellTrader 56 AIQ 57 TradersStudio 57 updata 58 Tradesignal 58 Amibroker 60 VisualTrading Systems 60 TradingBlox 60 1309_Ad-Index.indd 59 7/25/13 8:50:24 AM 60 • September 2013 • Technical Analysis of STOCKS & COMMODITIES Continued from page 58 FIGURE 11: AMIBROKER. Here is a price chart of Ford (F) overlaid with the ZLRB Percent b and slow %K stochastic, replicating results from Sylvain Vervoort’s article in this issue. F VT TRADER: SEPTEMBER 2013 TRADERS’ TIPS CODE This Traders’ Tip is based on “Oscillators, Smoothed” by Sylvain Vervoort in this issue. We’ll be offering the SVEZLRB oscillator indicator for download in our VT client forums at http://forum.vtsystems. com along with other precoded and free indicators & trading systems. The VT Trader instructions for using the SVEZLRB oscillator as well as the code are shown in the Traders’ Tips area of www.traders.com. To add the indicator to a VT Trader chart (see Figure 12), click the right mouse button within the chart window and then select “Add Indicator” “TASC - 09/2013 - SVEZLRB PercentB Oscillator” from the indicator list. To learn more about VT Trader, visit www.vtsystems.com. Risk disclaimer: Past performance is not indicative of future results. Forex trading involves a substantial risk of loss and may not be suitable for all investors. —Chris Skidmore Visual Trading Systems, LLC
[email protected], www.vtsystems.com F TRADING BLOX: SEPTEMBER 2013 TRADERS’ TIPS CODE In Sylvain Vervoort’s article in this issue, “Oscillators, Smoothed,” which is the ffth part of an ongoing series, he in- troduces a fast and slow oscillator that can be used to help make buy & sell decisions in the context of a trading system. Last month in Trading Blox’s August 2013 Traders’ Tip, we provided an example of how to create standard indicators in Trading Blox without writing any code in the main scripting editor. For indicators that require more complex calculations, it is sometimes necessary to write code in the scripting editor and, as a result, the process for creating the indicator is slightly different. To set up the indicators, we create a new block called “SVE Percent B Indicator.” Vervoort’s article instructs us to create FIGURE 10: TRADESIGNAL ONLINE. Here is a sample TradeSignal Online chart displaying the rainbow data series, the Percent Bollinger preview, and the slow stochastic rainbow indicator on an intraday chart of the German DAX. FIGURE 12: VT TRADER, SVEZLRB. Here, Sylvain Vervoort’s SVEZLRB oscillator is shown on a EUR/USD daily candle chart. F AMIBROKER: SEPTEMBER 2013 TRADERS’ TIPS CODE In “Oscillators, Smoothed” in this issue, author Sylvain Ver- voort presents a smoother Percent b and stochastic oscillator. Ready-to-use AmiBroker code to implement this indicator is shown at www.traders.com in the Traders’ Tips area. To display the indicator, input the code into the formula editor and press apply indicator. The averaging period and other parameters can be changed by right-clicking the chart and selecting parameters from the context menu. A sample chart is shown in Figure 11. —Tomasz Janeczko, AmiBroker.com www.amibroker.com September 2013 • Technical Analysis of STOCKS & COMMODITIES • 61 FIGURE 14 EXCEL, OSCILLATOR SPEC- IFICATIONS. User controls (in blue) for the SVE oscillators can be found starting at cell BE22. FIGURE 13: TRADING BLOX, SAMPLE PLOT. Here, Sylvain Vervoort’s modified Percent b is plotted in a separate graph. four parameters that act as inputs to our indicator calculations. In addition, we will create 24 instrument permanent variables to hold our calculations. The instrument permanent variables for this example are set to the variable type series, which stores a series of numbers. Series variables that are used as indicators must be enabled for plotting, which is unchecked by default. Under plotting controls, check plots, choose a color and line style, and create a new label for the graph area if the indicator will not be overlaid in the price window. A sample chart is in Figure 13. Indicator calculations are done in the update indicators script. Update indicators is run on each bar of the test, building the indicator bar by bar. The code for both the fast and slow indicators is available at www.traders.com in the Traders’ Tips area. —Trading Blox tradingblox.com F MICROSOFT EXCEL: SEPTEMBER 2013 TRADERS’ TIPS CODE In “Oscillators, Smoothed” in this issue, Sylvain Vervoort presents the ffth part of a seven-article series on indicator rules for a swing trading strategy (IRSTS). In it, he presents a modifed version of the Percent b oscillator as well as his smoothed stochastic indicators. The spreadsheet I am presenting here builds on the base of last month’s that I offered for part 4 of Vervoort’s series and is cumulative back to the beginning of the article series (which began with the April 2013 issue of S&C). The calculations necessary for the two oscillators described in Vervoort’s article this month occupy 32 columns beginning in column BE of the charts tab and extending through column CJ. The calculations are straightforward and the results appear to be quite predictive of price behavior. See an example chart displaying the indicators in Figure 14. You can play “what-if” with these two indicators using the computational control values (in blue) for these indicators co- located with the calculation columns. The numbers in black are derived from the numbers specifed in blue (Figure 15). With this month’s spreadsheet, I have added support for direct data retrieval from Yahoo! Finance (Figure 16). This new support can be used to avoid the extra step of downloading historical data to disk and then importing the resulting CSV fle. To use this capability, the user specifes the same four criteria that you would need on the Yahoo! website: symbol; date range as a “from” and “to” date; and a data type. Then click the get historical data button. The available data area will provide a summary of the data retrieved. The older capability of importing from disk is still there for those who want to save bandwidth by downloading once and then perhaps using the data in multiple spreadsheets that have been presented in other Traders’ Tips sections. The spreadsheet fle for this Traders’ Tip can be downloaded from www.traders.com in the Traders’ Tips area. To successfully download it, follow these steps: • Right-click on the Excel fle link, then • Select “save target as” to place a copy of the spreadsheet fle on your hard drive. —Ron McAllister Excel and VBA programmer
[email protected] FIGURE 16: EXCEL, SVEZLRBPERB OSCILLATOR. Shown here is a chart of US Steel with Sylvain Vervoort’s SVEZLRBPercB oscillator and his smoothed stochastic indicators, similar to Figure 5 of Vervoort’s article in this issue. FIGURE 15: EXCEL, DATA DOWNLOAD. A new data download capability has been added to this month’s spreadsheet, with support for direct data retrieval from Yahoo 1 Finance. Q&A 62 • September 2013 • Technical Analysis of STOCKS & COMMODITIES Don Bright of Bright Trading 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. SEASONALITY I was chatting with a group of traders the other day while visiting friends in Chicago. We discussed all sorts of things, and after a couple of beers, the conversations focused on a couple of dis- tinct topics. The frst one was something I have not heard of before — seasonality. At frst I assumed that they were perhaps referring to the Christmas season for retail stocks, or even the travel season for the leisure industries like hotels and airlines. After a few minutes I was told that seasonality occurs every month in the markets, and many times, twice a month. Can you help me understand what this phenomenon is? Anything you can share will be appreciated.— Jacko6719 I’m glad that you brought this up. There are several aspects to what we call seasonality. I think your buddies were speaking of monthly seasonality (sometimes called turn of the month). Stocks tend to go up the last couple of days of each month through the frst couple of days of the next. Some attribute this effect to the money fows in mutual funds. However, since so much mutual fund money has been redirected in recent years to exchange traded funds (ETFs), we simply know that more often than not, these days tend to be up days. You got me thinking about other seasonal events that may be of interest to readers. Before I get into these other time frames, let me say that professional traders don’t just sit and wait for all the stars to align, or for their charts to quantify buy & sell decisions. Many of us accept that when something happens more often than not, we should use it in our decision-making process. For example, if you fnd yourself getting net short the market toward the end of any month, perhaps you should fatten out or balance out your positions. Our traders tend to be market neutral, but they can still proft from taking advantage of entries & exits based on the calendar dates. I’ve had traders who have negoti- ated to use more of our frm’s capital to play monthly seasonality. Let’s talk about other time frames that might be of interest. Window dressing comes to mind. This tends to be quarterly, but it can also add to the monthly seasonality. It occurs because mutual funds and other investment groups and hedge funds don’t want to send out a quarterly report without having the top-performing stocks in their portfolio. Thus, we see the high- fying stocks going even higher during these periods. Several of our traders take advan- tage of what we call year-enders. The basics are simple: We buy a group of those stocks that are classifed as underperforming before the calendar year-end. In late November or early December, many investors sell their losing positions to cre- ate tax losses, but they are still hopeful that those same stocks will bounce back soon. Since the wash sale rule prevents them from buying back these stocks for 30 days, they tend to buy them back in January. This has worked well for decades. Here is the defnition of the wash sale: Wash sale—An Internal Revenue Service (IRS) rule prohibiting a taxpayer from claiming a loss on the sale of an investment when the same investment was purchased within 30 days before or after the sale date. Also known as the “30-day wash-sale rule.” The January effect is the follow- through of the year-enders. For the same reasons having to do with repurchasing tax-sale stocks, January tends to boost the overall markets. Now to the effects you mentioned in your question. If you look at historical data, you’ll notice that we have pre- holiday rallies more often than not. The good old “Santa Claus rally” may not be a politically correct description, but it often works nonetheless. In addition, many traders believe that they shouldn’t sell on Mondays or Fridays (I don’t agree with this one). Thus, when giving consideration to seasonality, there are several time frames to consider when trading or investing. These seasonal tendencies should not be the primary motivation to buy or sell, but they should be included in a trader’s decision-making process. Perhaps even the self-fulflling prophecy comes into play, as with many things related to trading the markets. I strongly suggest that all traders take the time to do the research and see for themselves how accurate these effects have been over the last 75 years or so. There are several time frames to consider when making your trading or investing decisions. September 2013 • Technical Analysis of STOCKS & COMMODITIES • 63 ADVISORY SERVICES EDUCATIONAL SERVICES EDUCATIONAL SERVICES SOFTWARE SOFTWARE TRADING SYSTEMS BROKERAGES BEAT THE MARKET! Sector Rotation and Market Timing. Buy stocks with high relative strength Free weekly newsletter! Wallstreetwindow.com Yes, You Can Cash In On Chaos! Certified Chaos Traders Courses teach you how. 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Because the vendors posting to Traders’ Resource are responsible for their own listing, Technical Analysis, Inc. declines any and all liability for any representations made by the businesses and individuals listed. Nor can Technical Analysis, Inc. endorse any business or individual listed on Traders’ Resource. Technical Analysis, Inc. makes no warranties, express or implied, as to the accuracy and reliability of claims herein. You agree to release Technical Analysis, Inc., together with its respective employees, agents, officers, directors and shareholders, from any and all liability and obligations whatsoever in connection with or arising from your use of Traders’ Resource. If at any time you are not happy with the information posted to Traders’ Resource or object to any material within Traders’ Resource, your sole remedy is to cease using it. This list is updated frequently. If you are aware of a business that should be listed, please email us at
[email protected]. These are the 10 forex broker listings clicked on most often in the listing at the Traders’ Resource website. Each company is listed in order of clicks received. This is not an editorial rating or ranking. For more information on specific products and services, try checking store.Traders.com for archived S&C product reviews. Foreign exchange traders have more choices than ever in their ongoing search for speed, pricing efficiency, and good accounting when it comes to forex brokerages. First, you must find a forex brokerage that handles your particular currency cross or pair. You should also look at margin requirements/leverage, and whether the broker offers a miniaccount. With a little research, you will be able to find a forex brokerage targeted on your interest. Your first question might be, “How fast can I execute an order?” Test out a demo account offered by the brokerage. This gives you the opportunity to see if the prices on the screen are actually honored and the speed at which your order gets executed. A forex brokerage’s ability to provide market statistics, hedging activity reports, and other such information may be critical to your trading and investing decisions. For more complete information, see the Traders’ Resource area at our website, www.Traders.com. TOP 10 VIEWED FOREX BROKERS 1. Interactive Brokers 2. TradeStation Securities, Inc. 3. FXCM / Forex Capital Markets LLC 4. Global Futures Exchange & Trading Company, Inc. 5. A. Packard Trading 6. FCStone LLC Futures Direct 7. Interbank FX, Member of Monex Group 8. Robbins Trading Company 9. Lightspeed Trading / Lightspeed Financial Inc. 10. Beverly Hills Capital Company LINKS TRADERS' RESOURCE Cycles & Trends TradeMiner.com Amazing Options Software TrackNTrade.com TRADE LI VE WI T H J A C K 100TRADEJACK.COM New Trading Software GeckoSoftware.com Ed Schramm To Advertise here contact Ed Schramm
[email protected] • (206) 938 0570 1309_classified.indd 63 7/23/13 12:54:38 PM Trading Liquidity: Futures Trading Liquidity: Futures is a reference chart for speculators. It compares markets according to their per-contract potential for proft and how easily contracts can be bought or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only when compared to others in the same column. The number in the “Contracts to Trade for Equal Dollar Proft” column shows how many contracts of one commodity must be traded to obtain the same potential return as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price Excursion). “Relative Contract Liquidity” places commodities in descending order according to how easily all of their contracts can be traded. Commodities at the top of the list are easi- est to buy and sell; commodities at the bottom of the list are the most diffcult. “Relative Contract Liquidity” is the number of contracts to trade times total open interest times a volume factor, which is the greater of: Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity % Margin Trade for Equal Dollar Proft FUTURES LIQUIDITY E-Mini S&P 500 Index GBLX 4.6 11.8 44 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••> 10 Yr Treasury Notes CBOT 1.2 15.9 155 •••••••••••••••••••••••••••••••••••••••• Crude Oil - WTI NYMEX 4.6 13.6 40 •••••••••••••••••••••••••••••• Russell 2000 Mini ICE-US 4.2 9.5 31 •••••••••••••••••••••••••••• S&P 500 Index CME 4.6 11.8 9 ••••••••••••••••••••••••••• Crude Oil - Brent ICE 4.6 13.5 39 •••••••••••••••••••••••••• T-Bond CBOT 2.5 18.3 78 •••••••••••••••••••••••••• 5 Yr Treasury Notes CBOT 0.6 13.8 269 ••••••••••••••••••••••••• Corn CBOT 11.1 15.1 81 •••••••••••••••••••••••• E-Mini Nasdaq 100 Index GBLX 3.6 8.6 56 •••••••••••••••••••••••• Soybeans CBOT 7.3 17.2 54 •••••••••••••••••••••• Silver 5000 troy oz COMEX 10.2 7.1 10 ••••••••••••••••••••• Sugar-World #11 ICE-US 8.7 7.2 65 ••••••••••••••••••••• Ultra T-Bond CBOT 3 14.2 47 ••••••••••••••••••••• Cotton #2 ICE-US 5.8 3.5 20 ••••••••••••••••• Euro Currency € CME 1.5 11.7 68 ••••••••••••••••• High Grade Copper COMEX 3.9 8.8 24 •••••••••••••••• Natural Gas NYMEX 6.6 13.5 79 •••••••••••••••• Gas - RBOB NYMEX 4.7 11.9 28 ••••••••••••••• Coffee ICE-US 10.5 7.3 21 •••••••••••••• E-Mini S&P Mid-Cap 400 GBLX 3.6 8.3 27 ••••••••••••• Lumber CME 0 0.1 1 ••••••••••••• DJIA Mini CBOT 3.5 9.8 51 ••••••••••••• Australian Dollar CME 1.8 9.5 83 ••••••••••••• Eurodollar Interest Rate CME 0 9.1 390 ••••••••••••• Soybean Meal CBOT 7.1 15.6 83 ••••••••••• Wheat CBOT 9.9 22.1 98 ••••••••••• 2 Yr Treasury Notes CBOT 0.1 11.2 531 •••••••••• KCBT Red Wheat KCBT 2.9 6.9 40 ••••••••• Lean Hogs CME 1.6 6.7 68 ••••••••• Soybean Oil CBOT 6.3 17.9 153 •••••••• British Pound £ CME 1.4 15.4 169 •••••••• Live Cattle CME 2.7 9.8 105 ••••••• Swiss Franc CME 1.6 5.1 33 ••••••• Canadian Dollar CME 1.1 12.1 159 ••••••• Gold 100 troy oz COMEX 67.9 157.6 250 •••••• Nasdaq 100 Index CME 3.6 8.6 11 •••••• Cocoa ICE-US 7.9 12.7 98 ••••• Feeder Cattle CME 1.1 3.4 25 ••••• Mexican Peso CME 5.5 39.5 259 •••• Spring Wheat MGEX 8.7 17.2 77 ••• 30 Day Federal Funds CBOT 0 3.9 275 ••• Orange Juice ICE-US 9 15.1 113 •• Platinum NYMEX 53.2 163.4 613 •• 10 Yr Swaps CBOT 1.5 13.5 120 •• very high volumes. The greatest number of dots indicates the greatest activity; futures with one or no dots show little activity and are therefore less desirable for speculators. three-year period. Thus, all numbers in this column have an equal dollar value. Columns indicating percent margin and effective percent margin provide a helpful comparison for traders who wish to place their margin money ef- fciently. The effective percent margin is determined by dividing the margin value ($) by the three-year price range of contract dollar value, and then multiply- ing by one hundred. STOCKS Trading liquidity has a signifcant ef- fect on the change in price of a secu- rity. Theoretically, trading activity can serve as a proxy for trading liquidity and equals the total volume for a given period expressed as a percentage of the total number of shares outstanding. This value can be thought of as the turnover rate of a frm’s shares outstanding. T rading liquidity is often over- looked as a key technical measurement in the analysis and selection of commodity futures. The following explains how to read the futures liquidity chart pub- lished by Technical Analysis of STOCKS & COMMODITIES every month. COMMODITY FUTURES The futures liquidity chart shown be- low is intended to rank publicly traded futures contracts in order of liquidity. Relative contract liquidity is indicated by the number of dots on the right-hand side of the chart. This liquidity ranking is produced by multiplying contract point value times the maximum conceivable price motion (based on the past three years’ historical data) times the contract’s open interest times a factor (usually 1 to 4) for low or All futures listed are weighted equally under “contracts to trade for equal dol- lar proft.” This is done by multiplying contract value times the maximum pos- sible change in price observed in the last Courtesy of CBOT CBOT Chicago Board of Trade, Division of CME CME Chicago Mercantile Exchange COMEX Commodity Exchange, Inc. CME Group GBLX Chicago Mercantile Exchange - Globex ICE Intercontinental Exchange-Futures ICE-EU Intercontinental Exchange-Futures - Europe ICE-US Intercontinental Exchange-Futures - US IMM International Monetary Market KCBT Kansas City Board of Trade MGEX Minneapolis Grain Exchange NYMEX New York Mercantile Exchange 1309 1 or exp In volume In 5000 – 2 64 • September 2013 • Technical Analysis of STOCKS & COMMODITIES September 2013 • Technical Analysis of STOCKS & COMMODITIES • 65 IFTA ANNUAL CONFERENCE, OCT. 9–11 The International Federation of Technical Analysts (IFTA) 26th annual conference will be held October 9–11, 2013, in San Francisco, featuring discus- sions on the increasingly interconnected landscape of worldwide markets. Professional technical analysts speak- ing at this year’s conference include Richard Arms, Martin Pring, Constance Brown, Howard Bandy, and others. They will speak on subjects ranging from cur- rency and emerging market investments to new technical methods and ideas. Fri- day’s “Market Wizards Day” will feature sessions on the future of fnancial analy- sis with Jack Schwager, Ed Seykota, and Linda Bradford Raschke. There will also be industry panels with Henry Pruden, Gregory Morris, Ralph Acampora, David Keller, David Sned- don, David Lundgren, Craig Johnson, and others. Following the conference, the American Association of Professional Technical Analysts (AAPTA) will host an open mic for casual presentations. in technical analysis since 1994. Techni- cal analysts are invited to send submis- sions for next year’s award, for which the submission deadline is February 1, 2014. The winning author will receive a cash prize and will be invited to present the paper at an MTA seminar or chapter meeting, and may also be published in the MTA’s Journal Of Technical Analysis, e-newsletter, and website. http://MTA.org METASTOCK ACQUISITION Utah-based Innovative Market Analysis announced it had acquired the Meta Stock technical analysis software line from Thomson Reuters. The company was created by current MetaStock President Scott Brown. Innovative Market Analysis will continue selling the MetaStock and MetaStock Pro charting software pack- ages to self-directed traders worldwide. Support, programming, developing the software, and management of customer accounts will remain unchanged for customers. Thomson Reuters’ DataLink and XENITH datafeeds will continue to power MetaStock and MetaStock Pro. On the institutional side, Thomson Reuters clients can still use MetaStock Pro functionality in its fagship desktop platform Thomson Reuters Eikon. www.MetaStock.com NEW ELLIOTT WAVE INSTRUCTION DVD Justine Williams-Lara, trader, educa- tor, coach, author of Trading Chaos, and president of Proftunity Trading Group, has created a 90-minute DVD course on how to count Elliott waves using simple and precise techniques on current charts in all time frames and markets including futures, stocks, ETFs, indexes, and forex. The DVD includes real-time examples of counting Elliott waves. It also teaches how to utilize Proftunity indicators such as fractals and the Awesome Oscillator (AO) to help identify the underlying structure of the current market. Even if a trader already has a proftable trading system, the DVD is designed to help improve the trader’s ability to spot the immediate trend and fne-tune entries and exits. www.proftunity.com NEW DATASETS FOR FUTURESOURCE; NEW EXCEL ADD-ON TOOLS Interactive Data, a provider of market data solutions to the global commodities and energy industry, announced its lat- est version of FutureSource for market data management, analytics, and trade execution through a variety of futures commission merchants. FutureSource 3.6 expands searching so that data is easier to fnd, and new content sets from various providers enable users to see what is trending in the energy, agriculture, and metals markets. Future- Source 3.6 updates the way users view and analyze market data, including the addition of implied volatility on charts; the ability to import & export expressions & external data; symbol linking; and the addition of a VWAP calculator. A new and improved suite of Excel add-on tools will better support the ability to download historical data into Excel, enabling users to extract historical data and formulas from FutureSource. A new suite of RTD Excel templates enhances the analytical capabilities within Excel. www.futuresource.com DOWNLOADABLE TRADING COURSE BrooksPriceAction.com offers Brooks Trading Course, a downloadable trading course ($249 with a 30-day, money-back guarantee) by professional trader Al http://IFTA.org CHARLES H. DOW AWARD The Market Technicians Association (MTA), a professional organization for technical analysis practitioners and the governing body for the Chartered Mar- ket Technician (CMT) designation, an- nounced its selection of this year’s Charles H. Dow Award recipient. Selected was George A. Schade Jr., CMT, for his paper “The Repeating Story Of On-Balance Volume,” on the importance of history to the technical analysis feld. A copy of this year’s winning submission can be accessed as a PDF from http://docs.mta. org/dow-award/2013-dow-schade.pdf. The MTA has presented the Charles H. Dow Award for excellence and creativity 66 • September 2013 • Technical Analysis of STOCKS & COMMODITIES Brooks. The course, consisting of 53 vid- eos with 27 hours of viewing time) is based on techniques that Brooks uses personally for trading the emini, bonds, currencies, gold, crude oil, stocks, and options on fve-minute, 60-minute, and daily charts. Brooks has 26 years of trading experience and is the author of several books on price action (Reading Price Charts Bar By Bar: The Technical Analysis Of Price Action For The Serious Trader and the three-book series Trading Price Action) and numerous trading articles, many of which are available at the website, as well as a live trading room. http://BrooksPriceAction.com FUTURES SPREADS ANALYZER APP KeyFutures has released a new app that allows the user to look through the layers or legs of commodity spreads on a mobile device. With its seasonal indicator, the user can plan spread positions. It allows synchronization and backup of a spread’s settings and notes among all the user’s devices through iCloud. The interface gives the user tools for following and choosing spreads for trading. Common technical analysis indicators can be used, and the user can write notes and draw. A ruler tool calculates price & time. www.key-futures.com TRADING WEEKLY OPTIONS VIA DRAG-AND-DROP Gecko Software, developer of Track ’n Trade Live trading platforms, announced the addition of an on-chart, drag-and- drop option-trading capability to its live futures trading platform. Users can now drag options on the screen to the desired strike price. In addition, traders may now trade weekly options directly through the Track ’n Trade platform. The following weekly options are available: currencies, grains, emini S&P, emini NASDAQ, 10-year Treasuries, and 30-year bonds. Gecko Software frst developed on-chart drag-and-drop order placement capabilities in 1998, when it released the frst version of its Track ’n Trade charting & analytical software and historical trading simulator. www.TracknTrade.com ALGORITHMIC-BASED STOCK-PICKING FOR RETAIL TRADERS Tradespoon is a new daily stock-rec- ommendation service for retail traders that uses some of the types of tools used by institutional investors, including an algorithmic-based, proprietary, quantita- tive system. It seeks to put retail traders more on par with institutional and profes- sional traders. Tradespoon, founded by Vlad Karpel, former head of technology at OptionsXpress, provides daily trade picks generated by its proprietary sys- tem. The Tradespoon system includes predicting stock movements in specifc time periods; monitoring key technical events (for example, earnings, Fibonacci replacements, and cash fow changes); position risk; macroeconomic exposure of the portfolio; and more. The service includes stock, options, and option spread trading strategies. Trade- spoon’s picks take into account both fun- damental and technical stock analysis. www.Tradespoon.com needs us to be in the market all the time. That also acts as a risk minimizer I guess, as some kind of averager. But I don’t mean it in the normal way of trying to average out a losing position. I mean by being in the market all the time, we are in at the highs and at the lows and in the middle. And that is all right for us as hedgers. I really enjoyed the animated video titled “The Tao Of The Markets” on your site. It’s great! It makes you realize that you are no different from any other trader. When I fnished watching the anima- tion, the frst thought that crossed my mind was, “What can I do to conquer that typical mindset?” What does it take to become a successful trader? I must confess that I copied that animation off an email forward I got many years ago. But to answer your question, I guess the answer lies in the question you asked yourself, “What can I do to conquer that typical mindset?” To a large extent, I suppose, it’s a matter of understanding our own psychology and relating it with the way the market works and then fnding a way to move forward. It would defnitely involve coming to terms with the market as the animal it is, understanding the way it moves and then playing with its own way of moving. You cannot want the market to move the way you want it to move. And technical analysis is a powerful tool in coming to understand how the markets move. That’s one of the frst steps in becoming a successful trader. Thank you for your time, Vikram. SUGGESTED READING Murarka, Vikram [2008]. “Pay More, Proft More,” Tech- nical Analysis of STOCKS & COMMODITIES, Volume 26: June. _____ [2005]. “Fundamentals & Technicals, Together Again,” Technical Analysis of STOCKS & COMMODITIES, Volume 23: April. ‡Kshitij.com ‡See Editorial Resource Index Continued from page 48 INTERVIEW Subscribe Or Renew Today! Subscribe Or Renew Today! Now a subscription to Technical Analysis of STOCKS & COMMODITIES magazine gets you so much more than just a magazine: Or try our best value subscription: • Full access to our Digital Edition – The complete magazine as a PDF you can download. • Full access to our Digital Archives – That’s 30 years’ worth of content! • Complete access to Working Money – The information you need to invest smartly and successfully. • Access to Traders.com Advantage – Ideas, insights, evaluations, tips and techniques that can help you trade smarter. PROFESSIONAL TRADERS’ STARTER KIT 5-year subscription to S&C magazine, Working Money and Traders.com Advantage, access to the digital edition and our entire 30-year archive PLUS a free * book, Charting The Stock Market: The Wyckoff Method, all for a price that saves you $150 off the year-by-year price! *Shipping & handling charges apply for foreign orders. 1 year .................. $ 89 99 2 years ............. $ 149 99 3 years ............. $ 199 99 All for only for a 5-year subscription Visit www.Traders.com to find out more! Email:
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