Traders Publication 08 11

Interview: John Carter How to Trade Momentum after Quiet Market Phases
August 2011
A Word of Caution
on Statistics How to Handle Data
Ultimate Imbalances
How to Make Money

in
of Supply & Demand Freewheeling Breakouts
Microseconds
Check Your Trading

Environment Risk, Volatility, and Opportunity
TRADERS EDITORIAL
Too Big to Bail Out

The phrase too big to fail, which gained dubious fame in 2008, is still well remembered by many market participants. It means that large financial institutions and the entire economy are so interconnected that, in the event of bankruptcy, the former may pull the latter down into the abyss. This is reason enough for the government to intervene and save the company. The disadvantage is that large institutions are more or less able to rely on such assistance, causing them to operate in a more risky manner without having to suffer the worst consequences. In addition, survivors will not be swept off the market although they have been unable to hold their own in the free play of market forces, which contradicts the idea of competition in the economy and promotes inefficient structures. Now that the worst of the financial crisis has been behind us for more than two years, I would like to address this phenomenon again. As so often happens when things have somehow turned out reasonably well in the end, not a great deal has changed since then. There continues to exist excessively large financial institutions that need to be rescued to be on the safe side, and for all practical purposes 08/2011 www.tradersonline-mag.com no serious attempts have been made by any policy-makers to change this situation. This means that next time the markets crash, we will be facing the same problem again. However, by now this can only be considered to be half of the truth. After all, once we develop this idea further, an even bigger problem is revealed: During the financial crisis the governments (or their independent central banks) had the option of pumping money into the system, cutting interest rates and saving all and sundry from bankruptcy provided the company in question was just big enough since any small and medium-sized companies had as usual no access to such regimes involving anticompetitive practices. After the industrialised countries, virtually playing an all or nothing game, have desperately conjured up a revival, there is by now a minimum amount of leeway in the event of another crisis. You see, we currently are, at least in parts of Europe, enjoying a decent recovery, and yet Europes wobblers would keel over without receiving massive assistance from outside. Should the world economy take a nosedive now, many countries
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would soon have to be saved if they were no longer able to have recourse to the capital markets as a result of a loss of confidence. Meanwhile, Greece is just the tip of the iceberg. When it comes to large countries such as Spain or Italy, we are no longer talking about too big to fail, but simply about too big to bail out or game over for short. The upshot is that policy-makers have manoeuvred themselves into a situation that must be avoided in trading at all costs: All you can do is hope that everything will be fine. Currently, this hope may keep you afloat but as any trader knows, you must never rely on hope. So keep your eyes open and pay attention to the short side should the markets take a turn for the worse. Good Trading
Lothar Albert
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TRADERS media GmbH is a financial markets publisher specialising in education and continuing education in the field of trading and securities markets. TRADERS media was founded in April 2004. It publishes the trading magazine TRADERS in the English (digital) and German (print) languages every month. TRADERS magazine was founded in 2001 by market mavericks Lothar Albert and Allison Ellis. Lothar Albert is CEO of TRADERS media GmbH and chief editor of TRADERS magazine. Further TRADERS editions will follow focusing on Asia (Singapore), India and Russia and coming soon in the very near future, an edition for Latin America in Spanish. TRADERS was awarded the title of Worlds Best Magazine for Traders by Trade2Win, an international community of traders for four years in a row, from 2004 through 2007. TRADERS is unique because we do not give any advice or recommendations on what to trade. This makes our content very different from any other market magazines. We are not interested in giving people certain buy and sell recommendations, but rather in teaching the basics of trading from the beginner to the professional level. Our magazine has established itself as a source for information and communication for elite traders in Europe and around the world. Current information about technical, mathematical and psychological aspects of the markets is discussed in professional articles and interviews. Each issue contains articles about trading strategies (for basic, intermediate, and advanced traders), risk management, technology for traders, business issues for traders, book and website reviews, and much more! Still today, the trader-elite are interested in professional and current trading knowledge and experience. Dedicated traders have no need for buy and sell recommendations. Trading pros make their decisions with selfconfidence and are self-sufficient. These people know that trading can be profitable in both bull and bear markets. The question is: what are the markets,tools and strategies that lead to success? TRADERS magazine addresses this question every month in multiple languages.
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TRADERS CONTENT
08/2011 August
COVERSTORY
How to Make Money in Microseconds What goes on in stock markets appears quite different when viewed on different timescales. Look at trading activity on a scale of milliseconds, and things seem quite different compared to a whole days trading.
STRATEGIES
Development of a Swing Trading Strategy Part 1 Approach, Procedure and Basic Analysis The Ultimate Imbalance of Supply & Demand Freewheeling Breakouts The Weekly Market Cycle Which Weekday Is most Likely to End on a Positive Note? The Legends of Wall Street and Their Strategies Part 2 Jesse Lauriston Livermore
21
INSIGHTS Market Cycles & Active Trading
INSIGHTS
Boost Your Performance in the Great Trading Game How to Become a more Complete and Successful Trader
COVERSTORY How to Make Money in Microseconds
33
STRATEGIES Professional Swing Trading
A Word of Caution on Statistics How to Handle Data Market Cycles and Active Trading Cyclical and Secular Market Trends
BASICS
Risk, Volatility and Opportunity Check Your Trading Environment Monest Channels Adaptive and Optimised Donchian Channels Zero (In)Tolerance An Alternative to Zero Interest Rates
TOOLS
New Products Bookmark Software Review
PEOPLE
John Carter How to Trade Momentum after Quiet Market Phases
64
PEOPLE John Carter
17
INSIGHTS A Word of Caution on Statistics
49
BASICS Risk, Volatility and Opportunity
Web Review
TRADERS COVERSTORY
Part 1: Algorithmic Trading
How to Make Money in Microseconds

What goes on in stock markets appears quite different when viewed on different timescales. Look at a whole days trading, and market participants can usually tell you a plausible story about how the arrival of news has changed traders perceptions of the prospects for a company or the entire economy and pushed share prices up or down. Look at trading activity on a scale of milliseconds, however, and things seem quite different.
TRADERS COVERSTORY
Donald MacKenzie
Donald MacKenzie is a professor of sociology at Edinburgh University. His books include An Engine, Not a Camera: How Financial Models Shape Markets and Material Markets: How Economic Agents Are Constructed.
When two American financial economists, Joel Hasbrouck and Gideon Saar, took a look at trading activity on the scale of microseconds a couple of years ago, they found strange periodicities and spasms. The most striking periodicity involves large peaks of activity separated by almost exactly 1000 milliseconds: they occur 10-30 milliseconds after the tick of each second. The spasms, in contrast, seem to be governed not directly by clock time but by an event: the execution of a buy or sell order, the cancellation of an order, or the arrival of a new order. Average activity levels in the first millisecond after such an event are around 300 times higher than normal. There are lengthy periods lengthy, that is to say, on a scale measured in milliseconds in which little or nothing happens, punctuated by spasms of thousands of orders for a corporations shares and cancellations of orders. These spasms seem to begin abruptly, last a minute or two, then end just as abruptly. From the Floor to the Screen Little of this has to do directly with human action. None of us can react to an event in a millise-
cond: the fastest we can achieve is around 140 milliseconds, and that is only for the simplest stimulus, a sudden sound. The periodicities and spasms found by Hasbrouck and Saar are the traces of an epochal shift. As recently as 20 years ago, the heart of most financial markets was a trading oor on which human beings did deals with each other face to face. The open outcry trading pits at the Chicago Mercantile Exchange, for example, were often a mle of hundreds of sweating, shouting, gesticulating bodies. Now, the heart of many markets (at least in standard products such as shares) is an air-conditioned warehouse full of computers supervised by only a handful of maintenance staff. The deals that used to be struck on trading oors now take place via matching engines, computer systems that process buy and sell orders and execute a trade if they find a buy order and a sell order that match. The matching engines of the New York Stock Exchange, for example, are not in the exchanges century-old Broad Street headquarters with its Corinthian columns and sculptures, but in a giant new
F1) Long-term Relations
Statistical arbitrage algorithms search for transient disturbances in price patterns from which to profit. A rise in the price of oil would benefit Exxons shares (in the middle) and hurt Deltas (top), while having little effect on Southwests (bottom). However in the long-term, this relation cannot be identified as it is partially compensated by overall market movements. Source: www.tradesignalonline.com
TRADERS COVERSTORY
8
remainder is algorithmic: it results from share-trading computer programs. Some of these programs are used by big institutions such as mutual funds, pension funds and insurance companies, or by brokers acting on their behalf. The drawback of being big is that when you try to buy or sell a large block of shares, the order typically cannot be executed straightaway (if it is a large order to buy, for example, it will usually exceed the number of sell orders in the matching engine that are close to the current market price), and if traders spot a large order that has been only partly executed they will change their own orders and their price quotes in order to exploit the knowledge. The result is what market participants call slippage: prices rise as you try to buy, and fall as you try to sell. In an attempt to get around this problem, big institutions often use execution algorithms, which take large orders, break them up into smaller slices, and choose the size of those slices and the times at which they send them to the market in such a way as to minimise slippage. For example, volume participation algorithms calculate the number of a companys shares bought and sold in a given period the previous minute, say and then send in a slice of the institutions overall order whose size is proportional to that number, the rationale being that there will be less slippage when markets are busy than when they are quiet. The most common execution algorithm, known as a volumeweighted average price or VWAP algorithm (it is pronounced veewap), does its slicing in a slightly different way, using statistical data on the volumes of shares that have traded in the equivalent time periods on previous days. The clock-time periodicities found by Hasbrouck and Saar almost certainly result from the way VWAPs and other execution algorithms chop up time into intervals of fixed length. Avoid Losing Money vs Making Money The goal of execution algorithms is to avoid losing money while trading. The other major classes of algorithm are designed to make money by trading, and it is their operation that gives rise to the spasms found by Hasbrouck and Saar. Electronic marketmaking algorithms replicate what human market makers have always tried to do continuously post a price at which they will sell a corporations shares and a
400,000-square-foot plain-brick data centre in Mahwah, New Jersey, 30 miles from downtown Manhattan. Nobody minds you taking photos of the Broad Street buildings striking neoclassical faade, but try photographing the Mahwah data centre and you will find the police quickly taking an interest: it is classed as part of the critical infrastructure of the United States. Algorithmic Trading Human beings can, and still do, send orders from their computers to the matching engines, but this accounts for less than half of all US share trading. The
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TRADERS COVERSTORY
9
effect on Southwests (because market participants knew that, unlike Delta, Southwest entered into hedging trades to offset its exposure to changes in the price of oil). In consequence, there was normally what was in effect a rough equation among relative changes in the three corporations stock prices: Delta + ExxonMobil = Southwest Airlines. If that equation temporarily broke down, statistical arbitrageurs would dive in and bet (usually successfully) on its reasserting itself. Algo Snifng No one in the markets contests the legitimacy of electronic market making or statistical arbitrage. Far more controversial are algorithms that effectively prey on other algorithms. Some algorithms, for example, can detect the electronic signature of a big VWAP, a process called algosniffing. This can earn its owner substantial sums: if the VWAP is programmed to buy a particular corporations shares, the algosniffing program will buy those shares faster than the VWAP, then sell them to it at a profit. Algo-sniffing often makes users of VWAPs and other execution algorithms furious: they condemn it as unfair, and there is a growing business in adding anti-gaming features to execution algorithms to make it harder to detect and exploit them. However, a New York broker we spoke to last October defended algo-sniffing: I do not look at it as in any way evil I do not think the guy who is trying to hide the supplydemand imbalance [by using an execution algorithm] is any better a human being than the person trying to discover the true supplydemand. I do not know why someone who runs an algo-sniffing strategy is bad he is trying to discover the guy who has a million shares [to sell] and the price then should readjust to the fact that there is a million shares to buy. Spoong Whatever view one takes on its ethics, algo-sniffing is indisputably legal. More dubious in that respect is a set of strategies that seek deliberately to fool other algorithms. An example is layering or spoofing. A spoofer might, for instance, buy a block of shares and then issue a large number of buy orders for the same shares at prices just fractions below the current market price. Other algorithms and human traders would then see far more orders to buy the shares in question than orders to sell them, and be likely to conclude that their price was going to rise. They might then buy the shares themselves, causing the price to rise. When it did so, the spoofer would cancel its buy orders and
lower price at which they will buy them, in the hope of earning the spread between the two prices but they revise prices as market conditions change far faster than any human being can. Their doing so is almost certainly the main component of the ood of orders and cancellations that follows even minor changes in supply and demand. Delta + Exxon = Southwest Statistical arbitrage algorithms search for transient disturbances in price patterns from which to profit. For example, the price of a corporations shares often seems to uctuate around a relatively slow-moving average. A big order to buy will cause a shortterm increase in price, and a sell order will lead to a temporary fall. Some statistical arbitrage algorithms simply calculate a moving average price; they buy if prices are more than a certain amount below it and sell if they are above it, thus betting on prices reverting to the average. More complicated algorithms search for disturbances in price patterns involving more than one companys shares. One example of such a pattern, explained to us by a former statistical arbitrageur, involved the shares of Southwest Airlines, Delta and ExxonMobil. A rise in the price of oil would benefit Exxons shares and hurt Deltas, while having little
F2) Short-term Relations
In the shorter term, the relations between the stocks mentioned in Figure 1 become more apparent. There was normally what was in effect a rough equation among relative changes in the three corporations stock prices: Delta + ExxonMobil = Southwest Airlines. If that equation temporarily broke down, statistical arbitrageurs would dive in and bet (usually successfully) on its reasserting itself. This is just one example there are many other algorithms looking for interconnectedness between stocks. It is important to know that these relations can change, or break down completely, reecting the risk of this approach. Source: www.tradesignalonline.com
TRADERS COVERSTORY
10
data, which come from 2007 and 2008, the salient unit of trading time was still the millisecond, but that is now beginning to seem almost leisurely: time is often now measured in microseconds (millionths of a second). The London Stock Exchange, for example, says that its Turquoise trading platform can now process an order in as little as 124 microseconds. Some market participants are already talking in terms of nanoseconds (billionths of a second), though that is currently more don, New York, Tokyo, Singapore or So Paulo. However, that is not the case in high-frequency trading. Imagine, for example, that your office is in Chicago, the second largest financial centre in the US, and you want to trade on the New York Stock Exchange. You are around 800 miles away from the matching engines in Mahwah, and sending a message that distance, using the fastest fibreoptic route between Chicago and New Jersey that we know of, takes around 16 milliseconds. That is a huge delay: you might as well be on the moon. Technical improvements in the amplifiers needed to boost signal strength and in other aspects of fibreoptic transmission will reduce the delay somewhat, as would straightening the route (fibre-optic cables still tend to follow railway lines because it is easy to negotiate rights of way there, but railways do not usually run in straight lines for long distances, instead going via centres of population). Ultimately, however, the speed of light is an insuperable barrier. If Einstein is right, no message is ever going to get from Chicago to Mahwah in less than four milliseconds. As Close as Possible The solution is what is called colocation: placing the computer systems on which your algorithms run next to the matching engines in data centres such as Mahwah. Colocation is not cheap a single rack on which to place your server can cost you $10,000 a month, and it has become a big earner for exchanges and other electronic trading venues but it is utterly essential to high-frequency trading. Even the precise whereabouts of your computers within data centres is a matter of some sensitivity: you hear tales (possibly apocryphal) of traders gaining entry to centres and trying to have holes drilled in walls so that the route from their server to the matching engine is shorter. The New York Stock Exchange has put quite a lot of effort into ensuring that no one spot within the Mahwah facility is better than any other in terms of speed of access to the matching engines. A Leap Forward Tales of computers out of control are a well-worn fictional theme, so it is important to emphasise that it is not at all clear that automated trading is any more dangerous than the human trading it is replacing. If the danger had increased, one way it would manifest itself is in higher volatility of the prices of shares traded algorithmically. The evidence on that is not conclusive likefor-like comparison is obviously hard, and the academic literature on automated trading is still small but data we do have suggest, if anything, that automated trading reduces volatility. For example, statistical arbitrage algorithms that buy when prices fall and sell when they rise can normally be expected to dampen volatility. The bulk of the research also suggests that automated trading makes the buying and selling of shares cheaper and usually easier. Renting rack space in a data centre may be expensive, but not nearly as expensive as employing dozens of well-paid human traders. 20 years ago the spread between the price at which a human market maker would buy and sell a share was sometimes as much as 25 cents; the fact that it is now often as little as one cent means substantial savings for mutual funds, pension funds and other large institutions, almost certainly outweighing by far their losses to algo-sniffers. When assessed on criteria such as the cost of trading, the effects of automation are probably beneficial nearly all of the time.
sell the shares it held at a profit. It is very hard to determine just how much of this kind of thing goes on, but it certainly happens. In October 2008, for example, the London Stock Exchange imposed a 35,000 penalty on a firm (its name has not been disclosed) for spoofing. Just how Fast Is High Frequency Trading? Some, but not all, automated trading strategies require ultra-fast high-frequency trading. Electronic market making is the clearest example. The spread between the price at which a marketmaking program will buy shares and the price at which it will sell them is now often as little as one cent, so market-making algorithms need to change the quotes they post very quickly as prices and the pattern of orders shift. An algo-sniffer or statistical arbitrageur may have a little more time: We have been told, for example, that statistical arbitrage programs may hold a position for as long as a day (and in some cases even longer) before liquidating it. Even in those cases, however, an opportunity will vanish very quickly indeed if another algorithm spots it first. Speeds are increasing all the time. In Hasbrouck and Saars
The spread between buy and sell is often as little as one cent.
marketing hype than technological reality. Geography Matters Because the timescales of trading have changed, the significance of space has also altered. A few years ago, it was common to proclaim the end of geography in financial markets, and it is certainly true that if one is thinking in terms of hour-by-hour or even minute-by-minute market movements, it does not really matter whether a trader is based in Lon-
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TRADERS NEWS
12
NYSE Shareholders Approve Merger with Deutsche Boerse
execution, Rowady learned that strategy development is where quant research is focused today and going forward. Up to 70 per cent of quant projects involve trade execution. At nearly 50 per cent, strategy development will catch up if not surpass trade execution in the spectrum of quant projects. Rowady writes that firms lacking infrastructure, expertise, budget or patience to get down and dirty in the data are missing the most vital component of the entire quantitative research process. The only way to tame the data beast and ultimately have a shot at enjoying success from quantitative R&D, he says, is through the quant toolbox the combination of the immediacy, concurrency and multiplicity of data needs that cause so much complexity in trading infrastructures and impede improved value extraction from data. There is no single storage solution today able to handle whats coming, says Rowady. Until then, quant teams must rely on multiple data stores that specialise in various datasets and crunch through exceedingly large datasets, in multiple physical locations to access the data they need to perform. Source: www.highfrequencytraders.com NYSE Euronext announced that its shareholders have approved the adoption of the business combination agreement with Deutsche Boerse AG and related proposals. The proposals, which required approval by a majority of the outstanding shares or in some cases majority of shares voted of NYSE Euronext common stock, were approved at a special shareholders meeting held at the beginning of July in New York. Based on preliminary results, approximately 96.09 per cent of the shares present at the special meeting voted for the approval of the combination, representing 65.68 per cent of NYSE Euronexts outstanding common shares. We are delighted that our shareholders support the value inherent in this compelling combination with Deutsche Boerse and recognise the substantial benefits the combined company will be positioned to provide, said Jan-Michiel Hessels, Chairman of the Board of NYSE Euronext. The combination of Deutsche Boerse/NYSE Euronext offers: Compelling industrial logic based on a shared vision that is consistent with the long-term strategy of both companies; a business that preserves competition and delivers clear benefits to clients and customers; the potential for superior cash flow generation and a credit profile and balance sheet that will provide financial flexibility to invest, grow and innovate; synergies of EUR550 million ($798 million), including EUR400 million ($580 million) in full run-rate cost savings and EUR150 million ($218 million) in revenue enhancements. Source: www.euronext.com have reached just about as much speed as we are ever likely to know, at least within individual matching engines and between New York and Chicago. Everything else at the ultrafast spectrum is essentially a me-too clone of the original opportunities. In the Far East,
Ultra-High-Speed Trading in the US is at a Saturation Point

Now that ultra-high speed trading in the US has reached a saturation point, the financial markets are entering a new era of quantitative research, strategy development and other targets of trade workflow automation. In a new research report published in June, TABB Group says this will usher in a period of trading with less focus on speed and greater focus on hunting for patterns in a much larger, diverse sea of financial instruments, market-related data and use cases. While speed is and will continue to be essential, the biggest challenges facing quantitative researchers are data management and the need for a single, unified, storage solution capable of meeting future requirements. According to nearly 50 per cent of the quantitative research directors TABB interviewed for this report, simply dealing with the sheer scale of market, fundamental, reference, internal, broker and client data, not to mention research commentary, is the leading challenge they face in managing a quant research platform. We have reached the tip of the spear on matters related to latency, says E. Paul Rowady, Jr., senior analyst at TABB and author of Quantitative Research: The World after High-Speed Saturation. We
this tipping point will be reached at a faster pace shortly after the last remaining cables are lit and matching engines are upgraded. As old boundaries are tested and more quant-focused firms turn research efforts toward new types of strategies that include but also go beyond speed, the industry will see a greater emphasis on cross-asset, cross-regional, multi-temporal, asymmetric versus symmetric trades, even enhanced front-to-back automation, what TABB calls multidimensional arbitrage. In addition to algorithmic trade
CQG Goes East

CQG has entered into an order-routing service broker contract with Dot Commodity, Japans largest online commodity futures broker. The agreement will allow Dot Commoditys clients the ability to place orders directly to overseas commodity markets as well as Japanese domestic commodity markets, including the Tokyo Commodity Exchange (TOCOM) and the Tokyo Grain Exchange (TGE) by DMA (Direct Market Access) through the CQG Trader and CQG Integrated Client trading platforms. Source: www.cqg.com
TRADERS NEWS
13
Morgan Stanley Lost Millions Betting on Inflation
Morgan Stanley (MS), the firm targeting a two per cent market-share gain in fixedincome trading this year, was burned by a wager on U.S. inflation expectations in the second quarter, three people informed of the dealings said. The banks interest-rates trading group lost at least tens of millions of dollars on the trade, which the firm has been unwinding, two of the people said, declining to be identified because the transaction is not public. Mary Claire Delaney, a Morgan Stanley spokeswoman, declined to comment. Traders at the bank bet that inflation expectations for the next five years would rise in Treasury markets, while forecasts for the next 30 years would fall, according to two of the people. Such wagers on so-called breakeven rates involve paired purchases and short sales of Treasuries and Treasury Inflation Protected Securities, or TIPS, in both maturities. Source: www.bloomberg.com
Advantage Futures Has Joined Patsystems XConnect

Through Patsystems XConnect, Advantage Futures customers will have low latency connectivity to several leading futures exchanges, including CME Group, Eurex, Intercontinental Exchange (ICE) and NYSE Liffe. Customers can access these markets using one of Patsystems award-winning frontend trading platforms, J-Trader or Pro-Mark. Patsystems XConnect is a high performance, fully-managed Application Service Provider (ASP) solution. It is made up of a network of hubs located in Chicago, Hong Kong, Singapore, Sydney, and Tokyo. These hubs are connected to one another using Patsystems XLink capability. Source: www.patsystems.com; www.advantagefutures.com
South-to-North Connection
Mexican Derivative Exchange (MexDer) and CME Group have launched their south-to-north connection, giving Mexican investors access to CME Groups benchmark derivatives contracts including interest rates, foreign currencies, equity indexes, energy, metals, and agricultural commodities. With the establishment of a new CME Group international telecommunications hub in Mexico City, MexDer participants can seamlessly leverage their existing MexDer frontend trading platform or API to route and execute on the CME Globex electronic trading platform. Source: www.cmegroup.com
Fixnetix Claims Worlds Fastest Nanosecond Trading

Fixnetix has announced iX-eCute, an FPGA (Field Programmable Gate Array) microchip for ultra-low latency trading, is now the world's fastest trading appliance for the financial markets. Customers are now seeing latencies as low as 740 nanoseconds through the stack (wire-towire). Fixnetix continues to prove we are the fastest, most reliable and efficient system in the world," says Hugh Hughes, Chief Executive of Fixnetix. "iX-eCute encapsulates our commitment to innovation by offering global customers the world's fastest trading gateway. iX-eCute is a one stop solution for speed as well as regulatory change (20+ pre-risk checks taking less than 100 nano seconds) as its consistent deterministic performance guarantees the speed of every order without latency impact," says Matt Dangerfield, Director of Trading Solutions at Fixnetix. "One order has the same system latency as one million orders per second; this is a crucial point in trading and one which is often over looked. Source: www.automatedtrader.net
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How to Become a more Complete and Successful Trader
Boost Your Performance in the Great Trading Game

Trading is a performance activity; as such you the trader face the same obstacles, hurdles and uncertainties common to all fields of performance and endeavour: on the one hand it is you against the world, and on the other hand it is you against yourself and your own demons.
Trading Performance Trading is unlike any other executive or office function. There are no clients, there are little or no other strategic business considerations and there is no team or support network (unless one is working for a bank or large organisation). Responsibility for results and outcome starts and ends with you. A greater understanding of what lies behind your performance can be the start of a long but highly rewarding journey towards becoming a more complete and ultimately successful trader. To start to understand the nature of performance in relation to trading, think of trading as some sort of a game akin to a modern pc game or perhaps a board game. To win at these games you need a sound strategy and rigorous method. You need to manage your capacity, your ammunition and energy levels and/or retain key pieces. You also need to understand the game, the environment the game is played in, the enemy, the opposition, the rules; explicit and implicit, the nuances and peculiarities of that particular game.
TRADERS STRATEGIES TRADERS INSIGHTS TRADERSSTRATEGIES TRADERS TRADERS
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Underlying all of this however, is the need for you to develop yourself and your abilities and the need to be able to control and regulate yourself and your impulses. You have to remain composed and focused and not get ustered nor anxious and ridden with doubt. You need to be able to think clearly and make rational and appropriate decisions. Any weaknesses you have will be exposed by a ruthless enemy and any chink in your armour will be exploited. This will lead to you perhaps abandoning your strategy/method, ammunition and energy levels will suffer, and in a desperate battle to avoid defeat you make further poor decisions and abandon sound reasoning. Recognise any parallels to trading? The Inner Game What I have described at the end of the above paragraph is the falling apart of ones own Inner Game, consequently leading to the destruction of ones own Outer Game. The concept of Inner and Outer Game, in these terms, derives from the work of Timothy Gallwey, whose seminal 1974 book The Inner Game of Tennis, lies at the root of most modern coaching and performance models. In his book, Gallwey suggests that when one participates in a performance activity one is actually engaged in two separate but inter-connected activities; the Inner and the Outer Games. The Outer Game describes the visible and tangible element where one engages with their opponent(s) within the physical arena or field of play and within the rules of that game or particular activity. The Inner Game, on the other hand, is the game we play against our-self, within our own head, it is our psychological world where our potential, our hopes, aspirations and desires exist alongside our fears, doubts, self-limiting beliefs and assumptions. A good analogy for trading is a golf quote from 1920s great Bobby Jones: Golf is a game that is played on a five-inch course the distance between your ears. Without a strong Inner Game unfortunately ones Outer Game is very unlikely to succeed. In trading terms this means possessing the appropriate psychological and emotional mindset and attitude. The image (see Figure 1) shows what we call the House of Trading Mastery. Atop the house is the roof, representing Mastery of Trading. Building this roof and keeping it securely upon the house is every traders goal. If you achieve Mastery of Trading then you will be a successful trader. The roof rests firmly upon the three pillars of
F1) House of Trading Mastery
Mastery of trading should be the goal of all traders; if you achieve this you will be successful. The three pillars represent your Outer Game; the physical actions you need to master. The Foundations are your Inner Game; the psychological and emotional aspects of trading, this needs to be deep, solid, strong and well grounded to support the whole complex. Source: BGT Edge
Steven Goldstein
Steven enjoyed a highly successful 25 year career as a trader working for major investment banks such as Credit Suisse, Commerzbank and Standard Chartered. He can be contacted at sgoldstein@bgtedge.com. Please also feel free to join his Linked-in Group Trader, Trading, & Risk Psychology.
F2) Tim Gallweys Performance Equation
As a trader, your performance will increase the more you can increase your potential, and the less you suffer from interference. Source: The Inner Game of Tennis by Tim Gallwey
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towards achieving and maintaining Mastery of Trading. The Performance Equation A further idea which Gallwey introduced in his book is The Performance Equation (see Figure 2): Since performance equals potentially less interference, the implication is that the more you can develop and raise your potential and the less you suffer from or allow interference, the greater will be your level of performance. What exactly is meant by Potential? Potential is what someone is capable of achieving or becoming, dependent on their abilities and capabilities. Whilst the debate will always rage on about how inuential inherent capabilities are, there has been a lot of recent research arguing that potential can be largely developed: Developing your potential is a process in which practice and effort make by far the greatest contribution, though motivation, desire, selfbelief and a host of similar factors, plus luck and opportunity, also play a part. However, to achieve and fulfil potential takes time, patience, and sacrifice. Malcolm Gladwell, in his 2009 book Outliers the Story of Success, introduced the 10,000 Hour Rule. This suggested that 10,000 hours of deliberate practice is needed to achieve mastery of any particular activity. Deliberate practice, as opposed to routine practice, is hard practice, deep learning, stretching oneself, putting oneself outside of their comfort zone, competing against superior opposition and learning from failures. Think of the marathon runner practicing for a future Olympics, as opposed to a marathon runner practicing to complete the course or run in local events. Typically is interference. We have identified three broad categories of interference which affect traders: Inner Game interference: Examples include self-doubt, fear of failure, inability to regulate emotions, excessive ego and pride, perfectionism, bad habits, inappropriate biases and heuristics, lack of motivation, poor focus and concentration, meaningfulness, etc. Outer Game interference: Poor strategy selection, poor and ineffective execution of strategy, methods, tactics, and mechanics. Failure to correctly apply risk and money management techniques and practices. Insufficient capital or mismanagement of liquidity. Insufficient knowledge or understanding of markets, poor application of analytical techniques, etc. External interference: Poor and disruptive relationships with family and friends, pressure to succeed, social pressures, the effect of the crowd, divided attention, culture, belief system conict, etc. The above examples are just a few of what is an extremely long and very detailed list, the interferences are not necessarily mutually exclusive, and quite often one type of interference can lead to a different set of interferences. Conclusion To make a difference to your trading performance, you should try to understand yourself and how you work as a performer, be aware of your psychological and emotional aspects, your mental strengths and your own particular weaknesses. Self-awareness is one of the major attributes that all great traders possess, and as Gallwey says Awareness is Curative. We will conclude this article with a couple of quotes taken from two of the most inuential books ever written on trading. In Reminiscences of a Stock Operator Jesse Livermore says The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor. Jack Schwager in Market Wizards asks what sets the great traders apart? His answer; the truth is that any common denominator among the traders I interviewed had more to do with attitude than approach.
trading success which are as follows: 1. Trading approach: Strategy, system, and/or method that you use in your trading, together with the tactics and mechanics used to achieve and enact these. 2. Trading management: This includes Risk, Money, Capital, Trade, Portfolio, Margin and Liquidity management, amongst other things. 3. Trading knowledge: Includes knowledge and intelligence of markets, financial products, trading, analytics, economics, behavioural aspects, and all other factors which are inuential in trading. These three pillars are analogous to the Outer Game of trading, built and maintained effectively, they offer strong support with which to construct and sustain the roof. However, barely visible, but supporting the whole structure is the foundation. This is the Psychological and Emotional aspect, this is your Inner Game. If this foundation is weak, unstable, fractured and/or shallow, it will not support the pillars sufficiently and consequently you will never be able to build or effectively sustain the roof. A strong Inner Game supports a strong Outer Game, and together they allow you to progress
Mastery of trading should be the goal of all traders.

10,000 hours takes around five to ten years depending on how much time one devotes to deliberate practice. Research has found that to become proficient at something takes approximately 5000 hours. Proficiency is the level needed to generally qualify to become a good teacher. What Is Interference? No matter how much potential one has as a trader, whether fully developed or still developing, the big issue which hinders most success
How to Handle Data
A Word of Caution on Statistics

Used, over-used and abused, statistics are everywhere. They are a very important tool for researching trading systems or analysing investment performance, but statistics need to be employed with caution.
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Jez Liberty
Jez Liberty is a System Trader and Developer with a keen interest in researching Trend Following from a quantitative angle He shares his research on the Au.Tra.Sy blog (Automated Trading System http://www.automated-tradingsystem.com). He has been living in London for the last eight years, and also consults as an IT professional for software companies and the banking industry.
The problem is that most of the time, without applying rigor, people can get statistics to tell whatever story they wish consciously or unconsciously. And this is a practice often used by the sensation-seeking journalists. This article is really one of the types where a picture is worth a thousand words, so please consider the following plot diagram (Figure 1). The figure is called Anscombe's quartet. You can clearly see that the datasets used to produce the graphs are substantially different. Yet they are identical. That is, if you look at their summary statistics only (mean, variance, Pearson correlation and linear regression). Surprisingly for most readers, the statistics values for the four datasets are all identical, as described in the summary table (Table 1). This was the actual goal of Francis Anscombe, who decided to find several very different datasets, for which commonly used statistics all told the same story. The result of his research is this quartet of data sets and
plots, created in 1973, as a way to emphasise the pitfalls of relying on summary statistics alone. Clearly, in this case statistics are misleading. Another conclusion is that outliers can have a strong impact on statistical properties. Surely two points that can impact trading system design and testing conclusions. Exploratory Data Analysis Anscombes quartet is often used to highlight the importance of graphical visualisation of the data for analysis. This concept is behind an area of statistics known as Exploratory Data Analysis. From Wikipedia: Exploratory data analysis (EDA) is an approach to analysing data for the purpose of formulating hypotheses worth testing, complementing the tools of conventional statistics for testing hypotheses. It was so named by John Tukey to contrast with Confirmatory Data Analysis, the term used for the set of ideas about hypothesis testing, p-values, confidence intervals etc. which formed the key tools in the arsenal of practising statisticians at the time.
F1) Anscombes Quartet
This is really an article where one picture = 1000 words, so please consider the datasets charted above. The datasets are substantially different when graphed, yet they are identical in terms of their statistical measures (see Table 1). Source: www.tradingblox.com
T1) Statistic Values

Statistic Mean of x in each case Variance of x in each case Mean of y in each case Variance of y in each case Correlation between x and y in each case Linear regression line in each case Value 9 11 7.5 4.12 0.816 y = 3 + 0.5x
The statistics of the four datasets shown in Figure 1 are all identical.
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non-linear relationship exists between these variables, it will go undetected by the Pearson correlation. To illustrate this, consider Anscombes top right dataset, exhibiting a perfect functional tion. The point is evident throughout the study; big moves in one market amplify the correlation between other markets, and vice versa. In the study, he explains that correlation between two instruments becomes much stronger during periods of large standarddeviation moves (when potentially diversification/noncorrelation would be required most). Statistics: a Double-Edged Tool to Use with Caution While developing trading systems or simply analysing trading performance, statistics represent an indispensable tool. However they do require a level of knowledge and understanding in order to analyse results correctly. A usual pitfall being the strong impact of large outliers (a common occurrence in financial markets) on the overall statistics. It is usually worth looking into more robust statistical indicators, such as the median, trimmed or winsorised means, which specifically reduce the impact of outliers.
T2) Data Sets
I x 10 8 13 9 11 14 6 4 12 7 5 y 8.04 6.95 7.58 8.81 8.33 9.96 7.24 4.26 10.84 4.82 5.68 x 10 8 13 9 11 14 6 4 12 7 5 II y 9.14 8.14 8.74 8.77 9.26 8.1 6.13 3.1 9.13 7.26 4.74 x 10 8 13 9 11 14 6 4 12 7 5 III y 7.46 6.77 12.74 7.11 7.81 8.84 6.08 5.39 8.15 6.42 5.73 x 8 8 8 8 8 8 8 19 8 8 8 IV y 6.58 5.76 7.71 8.84 8.47 7.04 5.25 12.5 5.56 7.91 6.89
The objectives of EDA are to: Suggest hypotheses about the causes of observed phenomena. Assess assumptions on which statistical inference will be based. Support the selection of appropriate statistical tools and techniques. Provide a basis for further data collection through surveys or experiments.
Using correlation on market data has its pitfalls.

relationship between x and y (Figure 2). The correlation should be 1, yet the Pearson coefficient is irrelevant at 0.816. Consider the following more extreme case (of the type y=(xa)^2 + b), where a 100 per cent relationship translates in a zero linear/Pearson correlation: Black Swan author Nassim Taleb is probably a bit extreme when he says Anything that relies on correlation is charlatanism. But using correlation on market data (typically described as non-linear) has its pitfalls. Another financial trading author, Ralph Vince (Leverage Space Trading Model), describes the fallacy of correlation through a market data study. His conclusion is: Correlation fails when you are counting on it the most: at the (fat) tails of the distribu-
David Harding, from quantorientated CTA Winton Capital Management, stresses the importance of research and statistical data analysis in his company. The two books he highlights cover Exploratory Data Analysis (Understanding robust and exploratory data analysis and Non-parametric Statistical Inference). Correlation Another topic that Anscombes quartet illustrates is the concept of correlation (and non-linearity), an idea often used in trading systems. The most common measure of correlation is the Pearson product-moment correlation coefficient. Its calculation only derives the linear dependence between two variables. If a
Table 2 shows the actual data that underlies the four datasets in Figure 1 and Table 1.
F2) 100% Relationship but Zero Correlation
Consider this more extreme case (of the type y=(x-a)^2 + b), where a 100% relationship translates in a zero linear/Pearson correlation. Source: www.tradingblox.com
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Secular Markets versus Cyclical Markets A debate about the current bull market in US equities which began in 2009 questions whether it is a new secular bull market, or merely a cyclical bull market rally in a secular bear market. Secular Market Gold A secular trend is a long-term trend which can last several decades. The gold market since the early 1980s has experienced a secular bear market from 1980 to 2000, and a secular bull market from 2000 to date. During the bear market phase, gold had many cyclical bull market rallies, however, each rally failed before gold finally bottomed in 2000. Secular Market US Equities The US stock market had a secular bull market from 1982 until 2000. There were several corrections during that period, however each time the market went on to make new highs. A secular bear market began in 2000, and as of 2010, the US stock market has lost ground for the first time in history. During this current secu-
lar bear market, the US stock market has had two cyclical bull market rallies one from 2003 to 2007, and the current one 2009 until now. Cyclical Market The word cyclical means a cycle. The four stage market cycle is usually a sideways basing phase followed by higher prices, and then another sideways basing phase followed by lower prices which complete the cycle. Sideways basing before a rally is institutional accumulation. Sideways basing before a decline is institutional distribution. Chart patterns and indicators can be used to aid market technicians in determining which sideways phase is occurring, but the eventual breakout in the next direction is the final judge. This four stage market cycle can last for several years, and usually is noted as leading the business cycle by approximately six to nine months. The 2008 Market Meltdown Recalling the severe bear market cycle from the financial collapse
Cyclical and Secular Market Trends
Market Cycles and Active Trading

The purpose of this article is to review the long-term trends called secular trends, and the shorter-term trends, also known as market cycles. Understanding both types of trends helps traders recognise a shift from a bear market to a bull market as early as possible. For longer-term traders and investors, it allows them to buy and hold during a stage two markup cycle. For shorter-term traders, this can aide in assessing the bigger picture from which to frame their active style of swing trading.
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of 2008 can teach us valuable lessons. Prices of all risky assets such as stocks, currencies, and commodities were collapsing as hedge funds and mutual funds were de-leveraging due to margin calls and client redemptions. US Treasury Bonds and the US Dollar were soaring in a bull market cycle due to the fear that was gripping the worldwide markets. In November of 2008, the NASDAQ stock market made a shortterm bottom, and began a bear market rally followed by several retests of the short-term bottom that would last as a sideways basing period into 2009. The Dow and the S&P 500 would go on to make lower lows before the final bottom of the 2008 bear market cycle. The 2008-2009 Bottom and Accumulation Phase The S&P 500 eventually came into a fresh weekly demand level from 1997 which produced the ultimate lows of the 2008 bear market cycle. At the same time, the US Dollar Index was coming into a weekly supply level from 2006 which became the top of the cyclical bull market cycle for the US Dollar Index in March of 2009. Apple Computer (AAPL) 2008-2009 During this 2008-2009 bottoming period, Apple Computer (AAPL) was basing along with the NASDAQ and many of the stocks that would lead the new bull market phase. AAPL had support near $80.00 from the past 2003-2007 bull market phase, and resistance that formed near $100.00 from the 2008 bear market phase. This basing period became a stage one accumulation phase since AAPL broke out to the upside. Institutions were quietly accumulating shares of technology stocks on any weakness because technology is usually a sector that leads the markets higher in the beginning of a new bull market phase. The 2009-2011 Bull Market Phase This breakout then became the next trending phase and was an opportunity for momentum and position traders. Figure 1 shows that AAPL had clearly breaking in March of 2009, beginning a new stage two advance, or bull market phase. Many times markets breakout into a new stage two bull market, but then re-test the breakout point before advancing to make new highs in the stage two markup cycle. This is caused by momentum traders taking profits from their breakout entries without new traders coming in to replace the momentum traders. Prices fall in search of new buyers. This is when pullback
F1) AAPL Chart from May 2009
Figure 1 shows a new bull market cycle in Apple Computer (AAPL) . Source: www.tradestation.com
F2) US Dollar Index ($DXY)
Steve Misic
Steve Misic has been trading since 1990. His experience is broad based, actively trading Equities, Futures, Forex, and Options. Mr. Misic is licensed as a series three commodities broker, series seven securities broker, and holds his NASDAQ series 63 license.
US Dollar Index visits monthly demand level. Source: www.tradestation.com
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2011 as the S&P 500 ETF(SPY) came into a weekly supply level, and the US Dollar Index ($DXY) came into a monthly demand level. Potential Long-term Market Top Going forward, as was the case from November, 2008 to March, 2009 a long period of basing could occur for SPY, the Dow, NASDAQ, and other market leaders between their weekly supply level and the nearest demand levels below and for the US Dollar Index between its nearby supply levels and monthly demand level over the next few weeks or months before the next directional breakout occurs. If the market breaks the support below because all the demand is absorbed, and the US Dollar breakouts out above its current basing levels, then the current market top may become a bull market cycle high. Traders will begin shorting rallies into new supply levels, and the market will fall to the next demand level below and begin to rotate again. If the market breaks the resistance above because all of the supply is absorbed, then this is just another accumulation phase before new market highs are put in, and the market will rise to the next supply level above where another sideways rotation will occur. Conclusion The current secular bear market in the US NASDAQ market could last as long as the secular bull market did which means another seven to ten years or longer before a new high in NASDAQ is achieved. However, new companies and new technologies could make this bear market shorter as traders have short memories. As hard as it is to imagine today after a 100 per cent rally off the market lows, a new secular bear market low is being predicted by many market technicians before the end of the 2000-2018 cycle. If the current rotation becomes a long-term market top, and a severe cyclical bear market were to occur, Apple could become applesauce. A lot of the current high ying stocks could crash to earth again.
buyers can join the new uptrend. Momentum traders who take risks when they enter a breakout should take their profits at some point from the original breakout and they can also buy a pullback if their trading psychology allows them to do so. Short-term and Long-term Market Tops Whenever there is a period of basing in a market cycle, how can we tell if it is a longer- or shorterterm market top? Prices visit several areas of price resistance from the past bear market cycle which sometimes cause a period of sideways trading as supply is absorbed. This sideways basing can lead to a short-term top if the next breakout is to the downside, or a new leg up in the bull phase if the next breakout is to the upside. A long-term market top can occur when the stock market and the US Dollar Index both come into high time frame supply or resistance at the same time. This happened at the end of April,
Prepare for a Bear
F3) S&P 500 Index ETF (SPY)
S&P 500 visits weekly supply level. Source: www.tradestation.com
F4) AAPL Potential Market Top 2011
Market technicians should not try to predict if this scenario will happen, but rather react to changes in trends by knowing where the nearest demand zone is below the market to put a stop loss, or to buy put option protection for their stocks. May all your trades be green, or good learning experiences if they are red. If we do re-test the 2009 bottom make sure you have cash to buy stocks by getting out closer to the top.
AAPL could break weekly support near $320.00 for a move lower and the next support under that is $250. A break of weekly resistance near $365.00 would mean a new all time high for AAPL. Prepare for a bear market by placing some type of protection below $320.00 if you own AAPL stock. Source: www.tradestation.com
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Patsystems, the trading and risk management solutions provider to the derivatives industry, has released a series of key functional enhancements to its realtime risk management product, Risk Informer. Risk Informer is a stand-alone, multi-asset class risk system that provides a comprehensive risk view across an institutions entire trading portfolio. It calculates margin and P&L
MetaTrader 5
The online broker Charles Schwab introduced its new agship trading platform, StreetSmart Edge. The firm says the platform is designed to provide a more integrated and streamlined environment for self-directed traders a platform that brings together a wide range of analytical tools and trade functionality in one place. Central to StreetSmart Edge is the Symbol Hub, a single workspace that allows traders to access various fundamental and technical analysis tools, along with news and the ability to enter trades, for any given symbol. The updated folder-style display reduces need to switch between different windows and functions. The suite of upgraded research and analysis tools includes a chartpattern recognition function, which allows users to access an integrated database of chart formations and their trading implications, and enhanced options analysis tools that can compare option and underlying stock prices for up to nine months, among other features. The StreetSmart Edge platform is free to Schwab clients who qualify as active traders by placing at least 36 trades per year. For more information, please visit www.schwab.com
product offsetting override (e.g. Brent Crude vs. WTI). For more information, please visit www.patsystems.com The CBOE has released an iPad app developed exclusively for option traders, which is free and available now at the iTunes store. Featuring detailed quotes and option chains, interactive charts, streaming video from CBOETV, different trading strategies, a watchlist, and much more. For further information, please visit www.cboe.com/apps/ ipad MetaQuotes Software Corp. released a new version of the MetaTrader 5 mobile terminal for the Apple iPhone. The new iPhone provides mobile traders with the possibility to track price dynamics in realtime mode. The MT 5 mobile terminal now supports full-edged charts for all financial instruments that are available for smartphones and tablet PCs. In addition to the current quote, traders can see previous values as well, facilitating more accurate and faster trading decisions with the help of up-to-date price analysis. Quotes are shown as a sequence of bars, candlesticks, or a line. The MT5 iPhone supports minute as well
as daily time frames, enabling traders to assess the inuence of various market trends. A total of 2000 to 4000 bars can be shown on a chart, which is equal to five to ten years of price history. Additional details can be found at www.metaquotes.net Dillon Gage has unveiled the latest version of its FizTrade online-trading system for precious
Dillon Gage
been added to spot-price displays. Additional details can be found at www.FizTrade.com or www.dillongage.com The Volatility Exchange and The Options Insider have teamed up to offer a new weekly radio program focused on the rapidly growing interest in trading volatility. Called Volatility Views, the program is co-hosted by Options Insider founder Mark Longo and Donald Schlesinger, Chief Strategy Officer of VolX. The program recently premiered with the episode, Can Delta Neutral Capture Price Volatility? with guest Dan Passarelli from Market Taker Mentoring. Longo said that each episode will feature a Volatility Week in Review as well as tips to help traders manage and avoid pitfalls in volatility trading. Volatility Views, geared toward a sophisticated trading audience, is sponsored by VolX, creator of VolContracts, the worlds first listed products on realised volatility. Programs on the Option Insider Radio Network are accessible via the Options Insider website (www. theoptionsinsider.com/radio) or on iTunes.
in real-time and manages risk for products such as exchange-traded derivatives, equities, FX and CFDs. The new features within Risk Informer provide clients with even greater control over their risk exposure. Some of the new functional enhancements include What-if scenario analysis, theoretical options pricing and support for Greeks, Futures prices derived from spreads, offsetting between currency futures and FX, and
metals. The updated system makes trading easier because users do not have to keep travelling between pages. Launched in 2006, FizTrade allows banks, jewellers, coin dealers, refiners, and pawn shops to buy and sell gold, silver, platinum, and palladium bars and coins. Customers can see buy and sell prices for particular metals products on a single page. For the sake of ease and convenience, bid prices have
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the best. Part Three Managing Your Portfolio explores how to avoid doing this, ensuring you are on the right track before you commit to any further investment. Hobson identifies several key ways to monitor your portfolio, the first being to keep a record of every purchase you make, with the name of the company, number of shares bought and also the price paid. Once you have done this, you can measure the performance of each one that you have recorded. Hobson argues that two major benefits come from doing this firstly, you will notice when your shares are either under or overperforming, and secondly you can also see if your portfolio is becoming unbalanced. This information can then inform the choices you make about how to improve your portfolio. Conclusion How to Build a Share Portfolio is a useful guide to building and looking after your investment portfolio. Anyone who is interested in investing would benefit from the information that Hobson gives, and similarly anyone who already has an investment portfolio will find it certainly helps to reassess whether that portfolio is meeting their needs.
How to Build a Share Portfolio

A Practical Guide to Selecting and Monitoring a Portfolio of Shares By Rodney Hobson
BOOKREVIEW
Running an efficient portfolio of shares means buying and selling the shares that make the most sense for you. A new book from bestselling author Rodney Hobson shows how you can do this without being an expert or a full-time investor. How to Build a Share Portfolio simply and logically takes the reader through the process of selecting shares and constructing a portfolio, giving practical examples and case studies along the way so that you build a portfolio that is right for you. The Choice of Assets Hobson begins in Part One The Choice of Assets by looking at exactly what a portfolio is and how the total value of a portfolio is of prime importance. A portfolio investor thinks about the total value of his portfolio rather than the success or failure of the individual stocks within it and, as such, he approaches investing in a very different way than just being concerned with picking a winner every time. Investors should take a sensible and disciplined approach to selecting a
range of assets that should meet the criteria of balancing risk and reward. So how exactly do you go about doing this? Hobson argues that it is not a complicated procedure. It simply takes some common sense and knowledge of exactly what you want out of your investments and also your life; for instance, requirements for a retirement portfolio would be very different to requirements for a portfolio built by a twentysomething. Building and maintaining this portfolio involves selecting appropriate assets, deciding how much to buy, maintaining a balance, and setting and measuring performance targets. He suggests asking some key questions before you begin, for example: do you own your own home, are you looking for capital growth or income, and how averse are you to taking risks? Once you have the answers to these, you should then look at the various asset classes and what they can offer. Shares, cash, gold, funds and many more are covered here, with the merits of
each examined, along with their costs and how they could work for you. Building a Portfolio Part Two Building a Portfolio goes on to look at exactly how you begin building this structured portfolio. Firstly, Hobson takes a look at the basics, so deciding how much you have to invest, your motivation for doing so, etc. After showing you how to decide how much you want to invest and when, Hobson then moves on to how you go about selecting the stocks that you wish to invest in. He looks at the relative merits of top down and bottom up investing, identifying the pros and cons in both of these approaches and illustrates them with helpful case studies from the milk industry and Sage. He also shows how to look at fundamental data, either future or past. Managing Your Portfolio Even after they have gone to the effort of creating a portfolio, some investors will just stick their heads in the sand and hope for
Title: How to Build a Share Portfolio Subtitle: A Practical Guide to Selecting and Monitoring a Portfolio of Shares Author: Rodney Hobson ISBN: 9780857190215 Price: 16.99 Publisher: Harriman House About the author: Rodney Hobson is an experienced financial journalist who has held senior editorial positions with publications in the UK and Asia, most recently as Editor of Hemscott, the financial news and information website. Among posts he has held are News Editor for the Business section of The Times, Business Editor of the Singapore Monitor, Deputy Business Editor of the Far Eastern Economic Review, Head of News at Citywire and Editor of Shares magazine. He has also contributed to the Daily Mail, the Independent and Business Franchise Magazine. He is registered as a Representative with the Financial Services Authority. He is also the author of Shares Made Simple, Small Companies, Big Profits and Understanding Company News. Rodney is married with one daughter.
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The Cyclic Principles of JM Hurst
F1) An Analysis of the US Dollar in Euro Terms
SOFTWAREREVIEW
Sentient Trader
Sentient Trader (www.sentienttrader.com) is a software application that analyses the price movement of any financial market according the Cyclic Principles of JM Hurst, and provides trading signals according to an advanced trading methodology based upon Hursts original trading method, and which incorporates recent developments in the arena of cyclic trading.
Hursts Cyclic Principles JM Hurst was an aeronautical engineer who studied the price movement of financial markets and in the 1970s published his seminal work on the cyclic nature of all markets. 40 years later there has been a resurgence of interest in his ideas, and at the forefront of that renewed interest is a software application called Sentient Trader. Hurst wrote that trading according to cyclic principles would never be computerised, largely because the process of analysis is not purely mathematical, but a matter of applying deductive reasoning, and forming opinions from complex, often contradictory evidence. The process was in Hursts opinion as much an art or skill as it was a science. And yet Sentient Trader delivers what Hurst considered
impossible: a genuine, true-toHurst analysis of price movement according to cyclic principles, and the generation of trading signals on the basis of that analysis. Analysing the Markets Sentient Trader performs an analysis that mimics the unique method presented by Hurst in his JM Hurst Cycles Course. This method is a manual one which involves advanced pattern recognition. Because cycles that affect price movement are subject to a high degree of variation in wavelength and amplitude (which is one of the fundamental principles of Hursts Cyclic Theory), a purely mathematical analysis (such as the performing of a Fourier Transform or other spectral analysis process) is never going to produce
The positions of cycle troughs are marked with diamonds at the foot of the chart. The green and red boxes show price and time projections based on the 20 week cycle. Source: www.sentienttrader.com
F2) Trading Information Displayed on the Chart
Historical trades are represented clearly as green lines (for profitable trades, red for losing trades) joining entry and exit points. Open trades show an entry level and stop loss and take profit exit levels. Source: www.sentienttrader.com
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from following a system, but that is usually a matter of looking back and noting when an indicator or combination of indicators did something that would have generated a trading signal. Because Sentient Trader performs an analysis on the completion of every bar, back-testing is not a matter of simply looking back to see where the trading signals would have been generated. Instead it has its own unique method of back-testing, a process of stepping through the data one bar at a time, performing the analysis and generating trading signals. Building a trading history in this manner, although time consuming, does give you a good idea of how you would have fared by trading a particular cycle, or using a set of parameters to filter the trades you take (which is an element of the advanced Sentient Trading methodology). Portfolio Manager Building a trading history for a single instrument is informative, but the true power of any trading method is in applying the method to several instruments and observing the performance of the full portfolio. Sentient Trader has a Portfolio Manager which allows you to include or exclude instruments, combine the trading results of those instruments and then consider a large number of statistics about the performance of the resultant portfolio. Intraday Version JM Hurst wrote about cycles ranging in length from five days to 18 years, but also mentioned that there was evidence of cycles all the way down to the magnitude of seconds. Sentient Trader has extended Hursts cyclic principles into the intraday arena, and is able to analyse cycles as short as three minutes, and will produce trading signals on cycles as short as 20 minutes. The intraday version includes a system for managing the complex analysis process in real-time, so that the analysis does not take up so much time that the trading signals are generated too late to be acted upon. Part of this process involves short time-frame charts inheriting the analysis of longer time-frame charts. The process of working intraday is of course a good deal more complex because of the necessity to set up workspaces with up to six charts inheriting each others analysis, but the rewards are commensurately greater. 30 Day Trial Theory is all very well, but nothing beats doing something yourself, and the 30 day trial (which costs $29) allows you to do just that.
a satisfactory and meaningful analysis which can be used to successfully project future cyclic inuences on price movement. Sentient Trader does perform those mathematical calculations as part of an initial analysis, but the important work starts after that, at which point the software mimics the complex pattern recognition process that we humans undertake when performing a complete analysis according to Hursts proposed method. If this all sounds a bit complex: It is, but fortunately a user of Sentient Trader does not need to bother about that. All that is important is that the analysis performed by the software matches the analysis performed by an experienced Hurst analyst. Whenever the user thinks there might be a better analysis option they can easily exert their inuence onto the analysis, and produce an analysis that matches one they would have performed themselves (as long as that analysis is valid, and does not contravene any cyclic principles). Building Trading Histories Performing an analysis is all very well, but of course an analysis only becomes meaningful when it is used to generate trading signals which can be acted upon. Back-testing is the process that most technical analysis programs use to test the trading that results
F3) Portfolio Equity Graph
This graph shows the resultant equity curve when combining several instruments in a single portfolio. Source: www.sentienttrader.com
F4) Trading Signals
Trading Signals are presented in a clear table format, with entry levels, stop loss levels and targets all determined prior to entry, and adjusted as the cyclic nature of the price move unfolds. Source: www.sentienttrader.com
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task lists guide you through the processes that an experienced user would follow to analyse and trade the 26 instruments of the bundled workspaces. These workspaces have complete trading histories, and take you straight to the level of an advanced user, giving you a glimpse of what you would be doing with the software once you have mastered all the details. Live Analysis System The 30 day trial version is an EoD version of the software, and although the principles of the intraday version are exactly the same, there is nothing to beat actually seeing the real thing. In a courageous move the makers of Sentient Trader have made available a live analysis system that can be viewed online 24 hours a day, Monday to Friday (while the forex markets are trading). This system shows images of the software performing live analysis and generating trading signals for the EUR/USD forex pair. There are six charts that you can view, ranging in time frame from Daily down to one-minute, which is where all the trading action is. The trading signals are shown there as well as recent trades. The time of the last analysis is displayed, and the online image of the chart updates every three minutes. It is very interesting watching the software make its hypothetical trades. This is a completely frank and open process: you can sit online all day and all night and watch the trading unfold. The mistakes are there to see, as well as the triumphs, the winners and the losers. There is also a small gure in the top left of the chart that keeps track of the Prot/Loss of the hypothetical trades taken. That gure slowly, but constantly moves upwards over time and visitors who return to the site on a regular basis have witnessed the consistent prot made by the system. Hurst Trading Signals Perhaps the most exciting development in the Sentient Trader offering is the announcement of a soon-to-be-launched Hurst Trading Signals Service. For those who are convinced about the efcacy of the system in producing protable trading signals, but who do not have the time or inclination to study cyclic principles, and master a complex trading process, the Hurst Trading Signals Service is the perfect solution. The Hurst Trading Signals Service will provide the end result the trading signals without requiring the user to go through the process of generating those signals themselves by building workspaces and performing the analysis. This work is done behind the scenes by the team at Sentient Trader, ensuring that the analysis is being performed by people who know what they are doing, meaning that the trader will be able to concentrate on their trading rather than wondering whether their analysis is faulty. The trading signals will be provided with a snapshot of the chart that generated the signal, so the system is not a black box. Users of the system will be able to judge for themselves whether the analysis looks good enough for them to trade, and can apply their own cyclic analysis knowledge and experience to lter the trading signals. Conclusion For a theory about the working of the markets to survive over time there must be an element of truth in its underlying principles. Hursts cyclic theory has stood the test of time, and with the powerful suite of products available from Sentient Trader it is now possible to harness the prots that trading according to cyclic principles provides.
The trial software is the EoD (End of Day) version and comes bundled with 26 workspaces (24 US stocks, the EUR/USD forex pair and S&P 500 index future) which read data from Ninja Trader (free EoD data from KineTick). Getting the trial software set up requires downloading and installing Ninja Trader, installing the Sentient Trader indicator into Ninja Trader, and setting up workspaces in Ninja Trader to expose the required data to Sentient Trader. After the initial setup the trial process gives you a thorough understanding of how the software actually works. Helpful
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A Professional Automated Trading Platform
WEBREVIEW
www.Collective2 .com
Automated Trading Systems are growing in popularity. But developing your own automated strategies can be complicated, and can be even more complicated to interface strategies to live brokerage accounts. Collective2 tries to solve that problem. It acts as an all-inclusive automation platform allowing users to evaluate different trading systems, and then to turn on automation in a brokerage account of their choice. Think of Collective2 is as a combination of an eBay marketplace (because lots of people offer their systems on the Collective2 platform), a Bloomberg Terminal (because the site offers in-depth statistics and objective analysis), and an automated broker interface (because any system selected from Collective2 can be traded at a growing number of compatible brokers).
F1) Dashboard
The Dashboard acts as a home page where you can keep an eye on your favourite strategies and monitor the sites activity. Source: www.collective2.com
Find Your System Collective2 (C2) is a website (www.collective2.com) which runs on any Web browser. There is no software to download or install. Generally, the first step is to find a trading strategy (C2 uses the terms Trading System and Trading Strategy interchangeably). For this, C2 offers several options for finding systems. The System Finder is for novice users, and offers a point-and-click interface. You can click on categories of systems that interest you, such as the instrument type, overarching investment style, or a variety of pre-defined filters (popular systems, hidden gems, etc.) The search tool The Grid is designed for power users. It lets you use mathematical criteria to
filter systems. For instance, you can request to see only systems which trade futures, and have a Sharpe ratio of >1.0, and a Maximum peak-to-valley drawdown of <15 per cent. Once you create a set of statistical filters that you like, you can save the filters for later use. Thus it is possible to check back at the site occasionally to see if new strategies are available which meet your personal criteria. The last search feature is the System Guru. Instead of using a grid or a point-and-click interface, the automated Guru interviews you by asking questions which supposedly uncover your personal risk preferences and goals. At the end of the interview, the Guru lists recommended systems.
F2) System Finder
The System Finder lets users select systems using a simple pointand-click interface. Source: www.collective2.com
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nating and voyeuristic to see a list of real trades placed on behalf of real people and the P/L achieved by these traders. Below the C2 trade history is a table of still more statistics, including results of Monte Carlo simulations. These simulations reveal the probability of a system losing some given amount of capital; for example, you can find out the chance of losing 10 per cent of capital. Alongside many statistics and numbers, there is also a lot of critical analysis. Reviews of trading systems, written by actual auto-traders and subscribers to systems are given prominent placement. Many user reviews are brutally honest and scathing, supporting C2s claim that it does not selectively hype systems or censor user opinion. Prices To use a system, you will need to subscribe to it. Each system is offered by an independent system creator that has chosen to use the C2 Platform. Every system has a different subscription price. Many systems offer free-trial periods which allow you to evaluate the system for some period. C2 from the Perspective of Trading-system Developers For programmers and tradingsystem developers, C2 seems to be a legitimate way to earn extra money from ones trading strategies. The business model is simple: essentially, you will list your system on the C2 site, and be in charge of running a Model Account on the site. You will enter buy or sell signals into C2, just as you would to an online broker. Or you can automate the process of running your system by using one of C2s interfaces to popular tools such as TradeStation, NinjaTrader, or MetaTrader. Since you are not sharing your strategy or code with subscribers, your strategy remains protected, even while you earn extra income from people tagging along with your trades. C2 takes care of all subscription processing and AutoTrade technology with various brokers. You just enter your buy/sell signals in one place, and the rest is done automatically behind the scenes. Summary Collective2 is one of the leaders in the new industry of automated trading platforms. It provides tools, technology, and independent analysis to traders desiring to automate their trading. It is also a vibrant community that offers developers of trading systems a place to demonstrate their success and offer their systems to the trading public.
F3) Grid
Precious Information Once you have narrowed the list of systems you next drill down to examine the equity chart and other performance measurements of each system. The equity chart shows the system performance side-by-side with the S&P 500 Index. You can also configure the chart to include trading and brokerage costs. C2 lets you pick from a list of popular brokers, so you can see how your costs will affect system performance. Below the chart, C2 provides further detail about strategy performance. You can study a list of the systems closed trades. The list includes the date and time of the transaction, the instrument class and symbol, entry and exit prices, profit or loss, as well as a trade-by-trade risk measurement. One of the more important features of the site (unfortunately somewhat hidden and hard to find) is the ability to see which users are AutoTrading which systems at real-life brokers. For each trade listed on the C2 Model Account, you can see how many shares or contracts were bought in real-life brokerage accounts, at what price. The names of customers who automate their trades are kept anonymous, unless customers specifically opt into having their name shown with their trade data. But even when customers choose not to reveal their names, it is strangely fasci08/2011 www.tradersonline-mag.com
The Grid lets you filter and slice the strategy database using mathematical criteria. Source: www.collective2.com
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This is neither a solicitation to buy or sell any type of financial instruments, nor intended as investment recommendations. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS OR TESTIMONIALS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. Thomson Reuters assume no responsibility for errors, inaccuracies, or omissions in these materials, nor shall it be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenue, or lost profits, that may result from reliance upon the information presented.
Part 1: Approach, Procedure and Basic Analyses
Development of a Swing Trading Strategy on the Basis of Price, Volume and Volatility Analysis
This article is the first in a series about the development of a swing trading strategy for the stock market. Starting with a market situation consisting of the search for meaningful entry signals into an extended bull market, different lines of thought and procedures are outlined which encompass the nature of the task at hand as well as developing a solution in the form of a trading strategy which is comprehensible and based on statistical evaluation. The paramount objective of this series of articles is to explain every step an active trader needs to take, from the formulation of the idea, to developing a final strategy that meets the traders requirments and expands the reportory of strategies. The procedure is laid out using the American stock market, although it is universally applicable to every market and time horizon barring smaller stock-market-specific exceptions. This series should not only be of interest to outright stock swing traders but to every ambitious, systematically oriented trader.
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Starting Point The movement of a stock or stock index can be divided into at least three stages: Situations in which over a longer time-span of, say, several weeks 1) prices rise (bull market). 2) prices move sideways. 3) prices fall (bear markets). The nature of the movement can be divided as to the duration of the movement and its volatility. For an active stock trader with a holding period of several days it is desirable to have a set of rules or a tool which indicate in a timely manner whether such a change of phase has already taken place or whether it will take place with a high probability in the near future. Because of its complexity this point poses, especially for novices, a major challenge. What exactly, for instance, is understood by a timely indication of a change of direction? How frequent are false signals? How to take into account not only the direction of the market but also the volatility and the accompanying characteristic of bear markets to fall faster than to rise? To find answers to all these questions is extremely time-consuming and, moreover, too theoretical for most traders. The consequence: Especially trading novices disregard any rules whatsoever and regularly miss the first weeks of a strong movement on the stock market. Then at that very moment the novice traders futily chases the movement in hopes of somehow catching up with it. Approach This article addresses exactly this point. At first, we will consider only the bull market phase, meaning the buy side. In a later installment we will also deal with sideways movements and bear markets. Two time spans which are characteristic for the market situation of a long-lasting bull market are highlighted in Figure 1 showing the S&P 500 index which comprises the 500 largest American corporations. During the period February 2010 to April 2010 and September 2010 to late February 2011 the stock index formed a longer bull market phase with low volatility. The absence of stronger pullbacks (only in November 2010 did a marked price correction occur during these bull markets) led to swing traders, who were waiting for pullbacks to enter the market in an otherwise strong upward movement, finding only a few trading opportunities for several weeks. Provided, they could not revert to different strategies, these pullback traders were forced to wait on the sidelines for marked pullbacks which did not
F1) S&P 500 Index from January 2010 to March 2011
The daily chart of the S&P 500 index which was chosen to represent the vicissitudes of the broad overall American market. The S&P 500 exhibited bull market phases from February to April 2010 and from September 2010 to February 2011. Source: www.tradestation.net
F2) Valeant Pharmaceuticals (NYSE Symbol: VRX)
Faik Giese
Faik Giese is a programmer and trader. Through his website www.thewayoftrading. com you can download further background information to his articles. Contact: giese@thewayoftrading.com
The daily chart of VRX for the time-span June 2010 to March 2011. The stock was among the biggest winners over the last ten months, showing a recurrent picture (marked by black arrows): weak pullbacks coinciding with declining volumes and/or volatilities. Below the chart is volume, the Volume Percent Rank Indicator and the Volatility Percent Rank Indicator, each with a 20-trigger-line. Source: www.tradestation.net
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ago in this magazine, was: How to trade the weak pullbacks shown in Figure 2 and which conditions could lead to an actual mathematically advantageous entry? Step 1: Denition of Aim At first, the requirements for the intended strategy have to be determined. The following assumptions were made against the backdrop that the strategy. Once developed, it has to be able to be implemented with as little hassle as possible in order to be attractive to working traders. Features of the Strategy Defined beforehand a) The strategy needs to be programmable so that it is suitable for testing. Later in this series we will explain when it makes sense to override the rules. b) It is to be a swing trading strategy trading on daily closing prices. c) The strategy is to trade weak pullbacks. This has the advantage of being of interest to swing traders who are already trading strong pullbacks and are now seeking an addition to their repertory. d) The holding period is a range between two and ten trading days at most. e) Only price behaviour, volume and volatility and possibly, indicators measuring pullback strength are to serve as analysing tools for the identification of suitable entry points. f) Signals are also generated before the opening of the stock exchange. Therefore orders can be placed before the opening bell which means the strategy is also suitable for part-time traders. g) The entry is conducted by market order. This order type ensures that the buy happens right away at the opening. In a further article we will expand on alternatives to this procedure. At this point, this approach has the initial advantage that the number of new positions can be determined exactly before the markets open. h) The performance target of the strategy is set to come off better than the S&P index over a time span of at least eight years (Figure 1). Additionally, the maximum decline of the performance curve is to be smaller than the decline of the index. i) The strategy is restricted to American shares. j) These shares are to have a minimum liquidity. This is ensured by the following criteria: The closing price is above five dollars; hereafter abbreviated as C > $5. The average volume calculated over a span of 50 days totals 200,000 shares. The average volume calculated over a span of 50 days multiplied by the respective current closing price of the stock is above four million dollars. k) The period of the analysis is fixed at eight years and runs from January 2003 to December 2010. This period offers the opportunity to conduct an out-of-sample test later on by expanding the time-frame to the period from January 1998 to April 2011. For the statistical evaluation, use is made of a database which also includes shares whose stock exchange listings were revoked during the 2003/2010-period. This prevents distorted results. The use of such a database has the effect of the evaluations covering the above-mentioned time-span are based on far more stocks than are listed today. The use of a database which would include only the currently listed shares would reduce the population to only about 7000. It is the authors staunch belief that the entry signals identified by this strategy result in a mathematical advantage. Reality has to show to what extent the implementation of exit variations return strong performance. It is by no means impossible that even a mathematical advantage will vanish into thin air after various stops are taken into account. Step 2: Denition of Set-ups With the aid of Figure 2 we already explained what a set-up which leads to an entry at weak pullbacks might look like. The criteria here can be defined as follows: a) The stock forms a weak pullback which can be defined as follows: after the price has reached a several-week high, there will not be another high for at least three days. b) Volume dries up. For the exact definition as to which conditions constitute dried-up volume, a volume indicator as presented in Step 4 is applied.
yield a profit despite rising stock markets. Development of a Requirement Prole for the Strategy Figure 2 shows the typical case of a strong stock which rose by more than 100 per cent both two months before and during the second bull market shown in Figure 1. During the period between June 2010 and March 2011 there was only one pullback above ten per cent which happened in the wake of a small overall market correction in November 2010. The arrows in the chart show phases when the share forms weak pullbacks which coincided with a decrease in volume. During this period there were a multitude of stocks which developed in a similarly strong fashion while also forming only weak pullbacks. The question the author wondered about a few years
Strategy Snapshot
Strategy type: Time horizon: Portfolio/markets: Set-up:
Trend following and indicator-based Daily charts US individual shares Closing price >$5; average volume over 50 days > 200,000 shares; average volume over 50 days > $4 million; Long-only Entry: Purchase at opening by market order Exit: Sell after x days on day x plus 1 at opening by market order Risk and money management: At first one position is traded; further details not yet defined. Average hit rate: Dependent on holding period (see Table 1)
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for the calculation is set to buy a stock at market opening and in the case of, say, a holding period of three days the position is closed again on the fourth day at market opening. This buying and selling is carried out daily that is to say, right on the next day a new stock is bought at opening. This position is in turn sold only on the fourth day at opening. This results in overlapping positions enabling the exact calculation of the average performance for different holding periods. The calculation of the reference values is executed without making allowance for commissions and slippage and as defined in Step 1 refers to all listed shares in the US between 1st January, 2003 and 31st December, 2010 provided they fulfilled the liquidity criteria as mentioned under Step 1, Point j) on the day before the entry day. The outcome is an average profit-to-loss of 0.2 per cent for the mentioned time-span with a holding period of five days. 52.33 per cent of the 4.13 million trades are wound down at a profit. Average profit amounts to 4.18 per cent which is also the average loss, as it turns out. Step 4: Basic Examinations in the Volume Sector For the examination of low volume phases we draw on the Volume Percent Rank Indicator, VoluP for short. This indicator is set so that its calculations comprise a period of 50 days. A second parameter determines the timespan over which the volume is to be smoothed, that is to say calculating an average figure before conducting a per cent ranking over a period of 50 days. This ranking states the position of the current smoothed volume in comparison to the last 50 days. Figure 2 shows the indicator with a smoothing of five days. A low figure for the indicator points to low volume in comparison to the last 50 days. In Figure 2 the limit is set at 20 per cent. A VoluP lying below the mark of 20 is considered a dried-up market. The period of 50 days was chosen deliberately: stock corporations publish figures once a quarter. Once quarterly figures are out, an increase in volume regularly
c) Volatility falls noticeably. Here, too, the definition as to which conditions constitute low volatility is made in a separate Step 5. The next steps is scrutinising and examining Points b) and c) in order to find out whether the usage of this information indeed results in a statistical advantage. For this purpose, statistical examinations are conducted in Step 4 and Step 5. At first, however, the calculation of benchmark figures in an intermediate step (Step 3) is necessary for a meaningful comparison of the findings. Step 3: Calculating Reference Values In Table 1 the reference values of different holding periods of one, two, three, four, five, and ten day(s) are quoted. The algorithm
F3) Analysis: Volume Percent Rank Indicator (VoluP)
T1) Calculation of Reference Values (Benchmark)

Holding Period (Days): # Trades: Avg Profit/Loss %: Annualised Profit/Loss: Winners %: Avg Profit %: Avg Loss %: 1 2 3 4 5 10 4,132,147 4,132,147 4,132,147 4,132,147 4,132,147 4,132,147 0.04 % 0.08 % 0.12 % 0.16 % 0.20 % 0.38 % 11.26 % 10.97 % 10.68 % 10.47 % 10.35 % 9.93 % 50.60 % 51.18 % 51.66 % 51.96 % 52.33 % 53.50 % 1.89 % 2.67 % 3.25 % 3.75 % 4.18 % 5.82 % -1.85 % -2.63 % -3.22 % -3.72 % -4.18 % -5.8 9%
The benchmark is calculated over holding periods of one, two, three, four, five and ten day(s). For better comparison of different holding periods, the average profit-to-loss (line: Avg Profit/Loss %) is annualised. The calculation encompasses 252 trading days. The results can be found in the line Annualised Profit/Loss. In the line beneath is the hit rate (Winners %). The last two lines show the average percentage profit (Avg Profit %) and the loss, respectively (Avg Loss %).
The volume indicator is smoothed over five days (i.e. averaged out over five days). Then a percentage ranking over 50 days is determined. The average profit-to-loss for three different holding periods and boundary marks between five and 40 are shown defining the zones of low volume. Example: Suppose, with a holding period of two days, there is always buying if the volume indicator falls below the 20-mark, an average profit-to-loss of 0.14 per cent is achieved. This figure can be compared with Table 1 depicting the benchmark (0.08 per cent) to determine the size of the improvement. Source: www.thewayoftrading.com
07/2011 08/2011 www.tradersonline-mag.com
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applied, which is highly popular among professional traders as a measure for determining a stocks volatility. At the bottom of Figure 2 you see the Volatility Percent Rank Indicator (VolaP). The lower the level of the indicator, the lower the volatility. It is clearly discernible that in phases when a slight price correction and low volatility coincide there are bound to be strong price movements. In Figure 4 you see the percentage results for the average profit-to-loss. Here volatility is smoothed over five days. As in Figure 3, the different per cent rankings are shown in 5-point-steps on the X-axis. The lower the ranking, the more the volatility has decreased over the last days and the higher the average profit-to-loss in per cent. It can be stated for the VolaP as well, that there is significant improvement in comparison to the benchmark for all three holding periods. The average profit-to-loss, for instance, boasts 0.38 per cent for a holding period of five days if VolaP lies under the 5-percent mark, whereas in this case the benchmark lies at 0.20 per cent (Table 1). This results in an improvement of more than 90 per cent if VoluP is applied. Here, too, this significant improvement goes at the expense of the number of trades which fall from over 1.43 million for the benchmark to 463,311. Summary and Outlook The motivation for this series starting with this article about the development of a swing trading strategy on the basis of price, volume and volatility analyses, results from the practical experience that the implementation of a strategy which buys into weak pullbacks during strong bull markets can be advantageous. The realisation that these pullbacks are accompanied by drying-up volumes and/or volatilities arose from studying the charts of strong stocks during these bull markets (Figure 2). The indicators for volume and volatility introduced in this article and whose purpose is to identify declining phases in volume and volatility, at first only statistically lead to a significant improvement. The reference values were outperformed by more than 90 per cent. In the next article these indicators will be dealt with anew and the approach will be broadened by a price/trend analysis. As a result, comprehensible rules for an entry will be drawn up which likewise offer a mathematical advantage. Future articles will address exit strategies and portfolio management rules.
occurs. If a period of 50 trading days is chosen this quarterly effect is only a once-off affair. In Figure 3 the average profit-to-loss is plotted in percentage terms. The volume here is smoothed over five days. On the X-axis the percentage rankings are charted in five-point-steps. The lower the ranking, the more the volume declined over the last days and the higher the average profit-toloss in percentage terms. As opposed to the benchmark, a clear improvement can be achieved for all three holding periods. For instance, the average profit-to-loss for a holding period of five days returns 0.43 per cent if the VoluP lies under the five-percent-mark. In this case, the benchmark registers 0.20 per cent (Table 1). So, the application of VoluP brings about an improvement of more than 100 per cent. This improvement is significant and promising, but causes the number of trades to fall markedly (from over 1.43 million to 561,227). Step 5: Basic Analysis of the Volatility Area In analyising the volatility area a Percent Rank Indicator is likewise utilised. Procedure and calculations are exactly as for volume. The only difference: Instead of the volume, the Average True Range (ATR) is
F4) Analysis: Volatility Percent Rank Indicator (VolaP)
The volatility indicator is smoothed over five days (i.e. averaged out over five days). Then a percentage ranking over 50 days is determined. The average profit-to-loss for three different holding periods and boundary marks between five and 40 are shown defining the zones of low volatilities. Example: Suppose, with a holding period of two days, there is always buying if the volatility indicator falls below the 20-mark, you achieve an average profit-to-loss of 0.17 per cent. This figure can be compared with the benchmark in Table 1 (0.08 per cent) to determine the size of the improvement. Source: www.thewayoftrading.com
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Bart DiLiddo
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There are many types of breakouts traders can use; such as the breakouts from continuation patterns i.e. triangles, wedges, flags, etc., and breakouts from reversal patterns such as Head & Shoulder Tops and Bottoms. However, the Mother of all breakouts is the freewheeling breakout which has no overhead supply impeding the advance of the rally. With stocks, many of them can make the 52 week high list, and most will over a period of a few years. However, it is usually only a few stocks making 52 week highs that are also making an all time high the definition of freewheeling action. Why Is a Freewheeler so Special? First, something has changed whether it is a shift in fundamentals or expectations. Technically, demand now exceeds supply with all overhead supply being exhausted. Being aware of freewheeling action creates many benefits. The greatest benefit is time. Momentum and day traders spend a great deal of their time day trading. That is wonderful if you love what you are doing and enjoy the mental stimulation. However, time wise, it is a very expensive commitment. Even swing traders (holding a few days to a few weeks) spend much time in the trading process. The goal in trading should be in making the greatest amount of money, while making the fewest amount of trades (your broker will hate you) with the least amount of time expended on it. By focusing on daily closes only, it frees up a traders entire day. Plus, it allows a trader to expand the universe of assets that can be monitored. Shorter time frames tend to create a situation where you cannot see the forest through the trees because of the intense focus of the activity on just a few assets. Freewheeler selection can easily be applied to weekly closes as well. Think of the extra time you will have. You can trade and still have a life! A trader, if necessary or by choice, could work fulltime and still trade freewheelers. Focusing on the big picture can generate great trades. This strategy works great for retirement accounts as it never goes short and is never leveraged. Also, it is easy to manage for Retirement accounts as the actual trading is quite minimal. Rules for Entry Let us examine the criteria for entering these trades and
Freewheeling Breakouts
The Ultimate Imbalance of Supply & Demand

We cannot remember who coined the phrase freewheelers since it has been over 30 years since we have heard the term. We never hear anyone use it now, but it so aptly describes an asset that has no overhead resistance. The minute an asset (Stock, currency or futures) makes not just a new high, but an all time high where no longs are sitting with losses the asset is said to be freewheeling.
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then follow up with the money management of them. First, we are focusing on an asset making an all time high. One pattern in the price charts we are looking at is where price has been rejected a second time (double top) with a minimum of two years in this time frame between tops. Next, we need a minimum of two months of hesitation before the ultimate freewheeling breakout. The old axiom is third time through. This is one great set-up for a freewheeler where this third assault will be breaking out into all time highs. Focusing on the 3rd assault for entry will mitigate the odds of being sucked into a Bull Trap (buying the upside breakout only to see it fail after the new high). Other breakouts where freewheeling trading is occurring work very well too. The longer the sideways action and tightness of the congestion before the breakout the better the potential freewheeling action. There are diminishing returns with Freewheeling Breakouts. The first or second breakouts are certainly going to have a higher rate of success than the fifth or sixth breakouts. Make sure you go back far enough to ensure an all time high is actually occurring. With stocks there are two recent reference points that must be checked. The first is October of 2007 before the downturn of the 2008 financial panic. The second is March of 2000, before the dot-com crash. If the stock is trading above those levels, then it probably is freewheeling. Some assets, such as silver, must go back decades to find the all-time high. Until 2011, Silver had not traded over 30 dollars an ounce for over 30 years. This was a great breakout but not an all-time freewheeling breakout. There was a great void of price resistance between 30 and 52 dollars an ounce (the latter the 1980 high) which allowed for a swift price advance. Some forecasters were projecting silver to far exceed 52 dollars with inflationary adjustments. Interestingly enough, silver was decisively rejected near that old high. The moral is always sell (at least partially) into a supply zone no matter how old the supply area. When silver breaks above $52.00 it will be freewheeling. A great time to screen for these trades in the stock market is after a big decline. The cream rises to the top and the new sunshine stocks will reveal themselves first by making 52 week highs. Not many stocks will be doing that after a big decline. Simply check to see if an all time high is also occurring. If a two month hesitation at the old high has occurred before the breakout, it is
Bruce Milbury
As an instructor for Online Trading Academy, Bruce enjoys imparting the skills of risk control and technical analysis he has learned from many years of practical trading experience in stocks, options and futures. Excelling at class management and meeting students individual needs are skills Bruce has honed from numerous years of classroom teaching.
F1) Deckers Outdoor (DECK)
DECK broke out as freewheeler on 3rd assault at 56 dollar. Source: www.tradestation.com
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recent low when higher high is made. 4. If stopped out and asset makes a subsequent higher high risk another ten per cent max of entry price or last low whichever is less. 5. Sell 25 per cent of position after 50 per cent advance in price. 6. Sell another 25 per cent of position if 100 per cent advance. 7. Use OCO (Order cancels order) for the remaining position. This allows for selling into extreme overbought areas while also maintaining a stop. To find an area to sell on a strong advance, either make the target three times the risk or use a Fibonacci Extension level. 8. Maximum monthly drawdown should not to exceed ten per cent. 9. Avoid multiple positions with stocks in the same sector. 10. Use conservative pyramiding with new signals (optional). Conclusion There are many effective trading strategies. The common element to all successful strategies is good money management. Freewheelers meeting the entry criteria, give a trader a rare opportunity for explosive profits. Following rules to cut losses and take partial profits are the key to succeeding. This could all be done with options of the underlying incorporating the correct position depending on the implied volatility of the asset. One downside to this strategy is the potential for one to get lazy with a position. Stops should always be used preferably with an OCO order to catch an extremely overbought situation and stops need to be monitored for locking in more profit. Realise that some breakouts will not fulfill the criteria for entry and eventually turn into huge moves. That is the cost of discipline waiting for exactly the right set-up.
less likely to be a fake out of the breakout. Sometimes this pattern with the two month hesitation will look like a large cup & handle (popularised by Investors Daily Founder William ONeal), but it is not a requirement for the set-up. Money Management 1. Do not buy more than three per cent above the breakout. Otherwise, wait for a retest. 2. Risk ten per cent max of entry price or last pivot low whichever is less. This should not be greater than three per cent of the accounts equity. 3. Adjust stop to break even after 25 per cent advance with no pull back. If there is a pull back raise stop under the
Strategy Snapshot
Strategy name: Strategy type: Time horizon: Set-up: Entry: Stop loss: Take profit: Trailing stop: Exit: Risk/Money management:
F2) Netflix (NFLX)
Average number of signals:
Freewheeler Breakouts Trend following Daily & weekly charts Long only and only entering with all time highs being met Fixed with buy stops Stop is 10% of entry price 25% taken after 50% advance and additional 25% taken with 100% increase in asset None Exit is partly above with the last 50% used with OCO order using discretion to raise the stop after a higher low. 10% of asset, but risk only 3% of account, scaling out of winning position is always used. Max monthly drawdown is 10% It is a wide horizon with 20-30 signals or more per year
NFLX gave several examples of freewheeling breakouts, with money management rules applied on first two breakouts. Source: www.tradestation.com
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Which Weekday Is Most Likely to End on a Positive Note?
The Weekly Market Cycle

Investing or trading is not just about finding the right stock to buy; just as important is knowing when to buy it. Even in todays efficient markets there are still a few market patterns that occur with such regularity that knowing them would undoubtedly give you an extra edge and raise your batting average. This article is about one such repetitious trading pattern occurring during the trading week, as well as the average investors misconception of it.
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What Is the Probability of a Bullish Friday? In Figure 1 you can see the percentage of times the S&P 500 index closed above the previous trading days close for each day of the week in both bull markets (green bars), bear markets (red bars) and for the whole period (blue bars). Glancing at the bar chart, you will instantly notice a discrepancy in the common misconception that claims stocks tend to be week Friday and strong Monday. Considering the whole time period (blue bars) it actually seems like the probability for a bullish day increases as you move further out in the week. Monday is really one of the worst days of the week and Friday is the strongest. In bear markets (red bars), Monday is especially horrible, which could explain the term blue Monday. Friday on the other hand is consistently strong in both bull and bear markets. How Bullish Can We Expect the Friday to Be? Now we know that the probability of the market ending a day in positive territory is highest on Fridays and lowest at the start of the week. But in order to get a
ystein Nerva
ystein Nerva has a masters degree in finance, and for the last couple of years he has been working as an equity sales trader in Oslo, Norway. In order to gain an edge for his clients he uses statistical analysis of price movements to optimise timing and to gain insight into likely future trends. Contact: oystein.nerva@ adferdsfinans.no
Many traders mistakenly believe the market is about to sell off on Friday because traders dump their stocks so they do not have to worry about weekend news events. Then, since they have heard it repeated so often, they expect the market to move higher again on Monday after a weekend of sun and fun. The rationale behind this myth is risk aversion: Traders are expected to protect their trading account from the risk of negative news events during the weekend by closing their positions only to re-enter the following Monday. One cannot argue the logic in this, and as rational as this seems, my experience from working with investors and traders tell me most decision processes usually are anything but rational in the line of fire. Driven by scepticism towards the majoritys capability to make smart and rational decisions we decided to study the hypothesis on the S&P 500 index from January 2007 until June 2011. This timeframe is chosen as it includes both bull and bear markets, which later enabled me to compare the results with respect to the different market trends.
F1) Market Performance Each Day of the Week
The question is: Can the fear of missing out on bullish triggers during the weekend (greed) surpass the fear of getting caught by bearish ones (fear)? Please notice how the probability of a bullish day increases towards the end of the week and how the single day with the best probability of ending in positive territory is Friday. Source: TRADERS Graphic
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to know the average return on each trading day. Figure 2 shows the S&P 500 average percentage return compared to previous trading days close. Glancing at this bar chart, the first thing you will notice is high volatility at the start of the week, which gradually decreases towards Friday. Conclusion To sum it up, Figure 1 shows the probability of the market direction being bullish for each weekday, and Figure 2 shows the expected return for each of the weekdays. The charts show us how the first days of the week come with big moves (high volatility) but low predictability of market direction, just as the latter days of the week offer high predictability of a bullish market direction but the expected return is very low (low volatility). Despite the average investor`s belief in Friday sell offs and Monday rallies, this article proves that once again reality and myth collide. Even though average returns are modest on Friday, Friday has the highest probability of ending in positive territory of all the weekdays. The results also show us that Monday has one of the lowest probabilities of ending in positive territory. This should make you think twice about selling stocks on Monday or the first day after a holiday, just as a favourable breakout on Monday mornings should be bought less aggressively than an equivalent breakout towards the end of the week.
complete picture of the markets behaviour during the trading week, we not only need to know the chance for a given day to be bullish, but we need to know how bullish or bearish we can expect each day to be. Hence, we want
Info Box
Bull markets in this study begin with a Golden Cross where the Simple Moving Average (SMA) over 50 days crosses above SMA(200). The bull market ends and bear market takes over with the occurrence of a Death Cross where SMA(50) crosses below SMA(200). With this definition the test period contains 668 days in bull market and 452 days in bear market.
Strategy Snapshot
Strategy 1 Weekend Friday** Monday* -0,06% -14,59% Strategy 2 Week Monday* Friday** 0,07% 1,13% Benchmark S&P 500 index 01.03.2007 06.14.2011 N/A -9,16%
Strategy Name: Entry (closing price): Exit (closing price): Average Return: Accumulated Return:
Do you see how market exposure only during the weekend (strategy 1) is outperformed by being cash over the weekend (strategy 2)? This is a result of unfavourable entries when Strategy 1 buys the strong Friday** just as the weak Monday* makes for weak exits. The Strategy 2 trader however; profit from buying the week Monday then selling the strong Friday and outperform both Strategy 1 and the S&P 500 benchmark index.
F2) Average Market Return
Info Box
* First day of the week. On Monday holidays, the following trading day is included in the Monday figure. ** Last day of the week. On Friday holidays, the preceding trading day is included in the Friday figure.
Volatility is high at the beginning of the week and gradually decrease towards the end of the week. Source: TRADERS Graphic
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THE WORLDS MOST TRUSTED NAME IN PROFESSIONAL TRADER EDUCATION SINCE 1997
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Jesse Lauriston Livermore was born in Massachusetts in the year 1877. Even as a teenager he was interested in stocks and started to work in a job where he wrote stock prices on a chalk board. He made his first profits in the popular Livermore Bucket Shops. Those were betting offices for shares where orders of the customers were never carried out. He was so successful that he was banned from working in the bucket shops, causing him to head to New York, which meant Wall Street. Livermore developed trading rules for himself and after initial losses was able to increase his capital on Wall Street too. At the beginning of the 19th century there was another bubble in the making on the NYSE. Livermore recognised the danger and began to build short positions. After the severe financial crisis of 1907, that strategy helped him to increase his fortune by about three million dollars. By that time, the US economy was in a severe recession and in an inflationary period. The NYSE had just moved into No 11 Wall Street, its current location. The Dow Jones Industrial Average had been trading as the key index of the NYSE since 1896. On 9 January 1907 it was quoted at 70.38 points dropping
Jesse Lauriston Livermore
The Legends of Wall Street and Their Strategies Part 2

Jesse Lauriston Livermore is arguably one of the best-known legends of Wall Street. He may justly be awarded the title of First Trader on Wall Street. Before that time, trusts and finance companies dominated the stock market, but Livermore became famous for his successful trading activity as a lone wolf. He was the first to analyse the functioning of price performance and to use it for his trading. Livermore formulated trading strategies which are still valid today, such as successful short sales. Although he recognised the enormous importance of emotions in the money business, he often succumbed to his feelings which caused him to gain and lose several multi-million dollar fortunes. Yet, he is considered to be one of the most successful traders in stock-market history.
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in the course of the year to 39.29 a decline of about 45 per cent. The banks lack of liquidity triggered a panic on Wall Street and only the personal intervention of JP Morgan and other bankers caused the markets to be calmed. Livermore traded stocks on Wall Street he traded alone and adhered to his most important rule: Always sell what makes losses and hang on to those positions that are in the profit zone. However, an encounter with the cotton trader Percy Thomas brought about a major change. Livermore had gone short cotton and now became a convert to the opposite strategy. He smoothed his winning position in wheat and went long cotton. These and other losses contributed to the fact that Livermore finally had to declare bankruptcy in 1915. However, the support of a friend made it possible for him to return to the financial markets. The golden twenties were very successful years for him. Again, he built a fortune for himself and paid back his debt. During the summer months of 1929, he again felt the market was overbought and went short right across the board. The big crash made him more than $90 million. The trigger for this crisis was 24 October 1929, a day that entered the history books as Black Thursday. On 3 September 1929 the Dow Jones had reached a temporary peak with 381 points. In the preceding years many small investors had driven prices higher by debt-financed stock purchases. After an initial sharp fall, the shares deposited as collateral lost so much value that the banks called in their margin loans, which in turn resulted in further share sales putting further downward pressure on prices. By 8 July 1932, the Dow Jones had dropped to 41 points causing the economic crisis to reach its climax. But Mr Livermores great fortune did not last long. The divorce from his wife and his increasing lack of interest in the stock market caused his profits to evaporate rapidly. By the time he committed suicide in November 1940, he had just five million dollars left. In Figure 1 you can see the development of the Dow Jones from 1900 to 1940. The periods marked represent the most successful periods in Livermores career. Livermore and His Trading Strategy Livermore was a meticulous trader. Whenever a stock or another underlying asset appeared to be of interest to him from a fundamental perspective, he began to systematically observe and record prices. To identify the major trends, he
F1) Performance of the Dow Jones from 1900 to 1940
Ralf Kraemer
Mr Ralf Kraemer studied sports science at university and is a licensed stock market trader. As a full-time trader, he trades his own account. Contact: seeralf@yahoo.de
In the rectangularly marked time periods, Livermore made his biggest profits. Back then, short sales were allowed in unlimited amounts. In 1906, for example, Livermore sold the fabulous amount of 1.5 million bushels of wheat. After 1930 short-selling opportunities were restricted by law. Source: TRADERS graphic
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successful years. So he only exited a position in a trend reversal. He also observed the price-time behaviour of his positions since in his opinion price movement accelerated towards the end of a trend. Current Trading Example In Figure 2 you can see a trade in McDonalds shares that was typical of Livermore. From Point 1 onwards, you can see the stock in an uptrend. In Point 2 a temporary high is formed at the price of 64.75 dollars. There is a pullback down to the 60-dollar mark at Point 3 (Livermore already considered these round prices to be important pivotal points). If the trend was to continue and the previous high was to be exceeded, a long entry would be made. Since no 10-per cent correction had been made yet, Livermore would presumably continue to be invested. Conclusion Jesse Livermore, whom you have just come to know, is the sort of trader that we experience every day in our own trading lives, characterised by the interplay between the emotions of fear and greed. He lived for the stock market and the stock market ruled his life. To this day, Livermores trading rules have not lost any of their validity.
F2) McDonalds in an Uptrend
would analyse two or more stocks from an industry group for example, the stocks of U.S. Steel and Bethlehem Steel. Based on the prices of these stocks in phases of movement and correction, Livermore would develop a key price, which in turn was his basis for anticipating a future price for the individual share. Entries Livermore was always on the lookout for trending stocks. In his notes he would write down only those prices which formed new highs or lows. A price correction of approximately ten per cent would cause him to expect a trend reversal and use a different colour to enter the stocks in a new column of his journal. Once a trend had formed, he would make his entry at higher highs after a small correction. The same was true of the short side. Of particular interest were the stocks that had reached new highs. Exits The likelihood of a trend continuing is greater than the likelihood of a trend reversing itself. This axiom of technical analysis was recognised by Livermore and he consistently took it into account during his
It is better to stagger upwards than downwards.

Stops Risk reduction was very narrowly defined, often only amounting to a few cents. From his notes Livermore knew the extent of small corrections. Sometimes he would also monitor market reaction by making earlier test purchases and then determine the stop for the position. Position Sizes It is better to stagger upwards than downwards. Traders often make their positions cheaper when the latter run into negative territory, causing them to dig their own graves. Livermore, however, did exactly the opposite: He increased his positions only when they quickly ran into the profit zone. To him, that was a sign of the robustness of the trend.
A trade setup as it would have been typical of Livermore. LE stands for Long Entry. Since no 10-per cent correction has so far been made, the trade would probably still be open. Source: www.tradesignalonline.com
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Check Your Trading Environment
Risk, Volatility and Opportunity

When starting out, the world of Foreign Exchange can seem like an environment of unlimited opportunity. Long trends, large moves, rapid changes in price will all appear as opportunities. It is only when trying to harness those moves, which with hindsight seemed so easy, that you probably found the tough bit of trading. Did you find yourself saying those mutterings? You know the ones! Would have, should have or even could have. Teaching in a live classroom to students on four continents has given me a fascinating insight into the challenges most people face. What is of particular interest is the same challenges exist regardless of continent or culture! In this article I intend to highlight some basic steps that you could take in your trading that would improve your success rate and probably remove some of those challenging times when perhaps you wonder whether you will ever get the hang of it!
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News One of the great benefits of trading currency is that you can know when nearly any item of news that may affect the markets will appear. Not only do you know when it is coming, but you can also be confident that for the most part no one has the inside line and can know its likely impact. There are a number of useful websites which will give you the diary of events coming and they will often grade the likely impact of the news too. The challenge is that there is a lot of this data, and it also creates the opportunities we seek, as price will tend to adjust to encompass the new information. This data confirms or denies the current belief of the general consensus in the markets as to the relative values of currencies. Fundamentally a currency is deemed more attractive to own when its interest rates are above comparable others or likely to rise. Any economic data that is likely to have an effect upon inflation and ultimately interest rates will be important to the market, either by reinforcing or denying a belief in the current relative strength of a particular currency. When you are seeking a trade looking at areas of potential entry, I think it is fair to say that regardless of most strategies an erroneous or important piece of data can spoil your results. If you were to consider these factors into your trade plan, it may be that they could be worked around and the data used in your favour. As an example, consider EUR/USD during the week commencing 1 May, a week when little important data regarding the EUR will be announced but a fair bit will affect the USD. Technically the pair finished April in a sideways consolidation area broadly speaking between 1.4800 and 1.4900 with little direction. Historically this area just below the 1.5000 price line has been an area of intense activity and when left has done so with a great deal of energy. It would make a good selling area for a number of other technical reasons too. In Figure 1, showing the beginning of May, you can see that entries at point A and point B were technical and viable, both of which produced over 100 pip movements. However this area is an important one and if the price can break through it or rejects it with confirmation then it is likely that much larger moves could be traded. Looking further ahead Figure 2 has entries at A and B with the potential entry area again entered at C, but this violated the upper limits of the trading zone due to data. At the time when the price got near the 1.4900 level the ADP nonfarm employment
F1) EUR/USD 30 Minute Chart I
Steve Beaumont
Mr Steve Beaumont was trained by Online Trading Academy beginning in September 2006. He has studied Stocks, Forex and Futures and has utilised many of the Academys extensive support programs. He opened his first trading account in March 2007 and produced astonishing results. Since March 2008 he has lived off of his trading and has joined Online Trading Academy as an instructor.
EUR/USD 30 minute chart showing entry points A and B, which produced over 100 pip movements. Source: www.tradestation.com
F2) EUR/USD 30 Minute Chart II
EUR/USD 30 minute chart showing Entry points C and D. Source: www.tradestation.com
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hold perhaps the most current and relevant insight into the companys view of the economy. These two pieces of information are highly important to the market and are therefore likely to create an amount of volatility difficult to trade. This volatility is created by a reduction in volume, if you monitored the Euro futures at the CME (Chicago Mercantile Exchange) just prior to the releases, the volume at the bid and ask would often virtually dry up, so the price can change dramatically on a very few filled low volume orders. The following day, again price entered the potential trade zone at point D and this occurred around 09.00 BST/04.00 EDT with no data releases to concern us, so a trade can be taken. Two hours later the trade is well under way and the stop can be moved to a breakeven price, as the trade zone has been left with confirmation. Later that day at 1.30 BST/8.30 EDT there is an ECB (European Central Bank) press conference followed by US unemployment claims and statements by FOMC member Evans and Fed Chairman Bernanke at 2.30BST/9.30EDT, all of which assisted the trade. In summary, you should now consider data releases in your risk profile and trade plan, in the example highlighted trades A,B and D were good technical trades taken without the volatility risk of data releases. Trade C was in the right zone but with important data arriving the risk of failure increased dramatically. A common response to this is to widen stops to allow the trade to breathe or something similar. As I trade EUR/USD comfortably with ten pip stops or less (including spread) to risk in excess of 60 pips required for Trade C to be viable is never likely to happen. It would also beg the question of how much breathing room there is for data? The data released could have been sufficient to push the price through 1.5000 and continue upward, a bad trade
data was released at 13.15 BST (British Summer Time)/08.15 EDT (Eastern Daylight Time). ADP is the Automated Data Processing Incorporation which provides payroll services to many corporations in the US. They use the data collected from their customers to derive the overall employment estimations. At 15.00 BST/10.00 EDT the ISM Manufacturing PMI was released. ISM is the Institute for Supply Management and the Purchase Managers Index is a leading indicator of economic health businesses react quickly to market conditions, and their purchasing managers
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Please send your application via e-mail to: jobs@traders-mag.com
Ideally you should be a practical trader and have considerable knowledge of technical analysis and all the related subjects like risk and money management, trading software, trading systems and trading psychology. You will work from home, on your own time-schedule and submit articles at specied deadlines.
F3) Session Volatility in EUR/USD 15 Minute Chart
EUR/USD with a ten period Average True Range on a 15 minute chart. The dashed vertical blue lines highlight the dips in the ATR and the black lines mark close/open. Source: www.tradestation.com
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the vertical black lines marking the days close to open at 22.00 BST/17.00 EDT. The ATR shows the cyclical nature of the volatility and highlights the suggestion that trading should ideally be considered from London open to New York lunch. How can this help? Simply put, do you want easier low risk entries or harder high risk difficult entries? When is the easiest time to catch a bus? When it is stationary at the bus stop. You can try to catch it as the bus goes by on the street, but the risk of injury is somewhat higher and the probability of success somewhat lower. When is the easiest time to catch a trade? When the price is moving slowly and can change direction easily, for a price to turn it must first stop, it is this stopping point that you should strive for as your entry. Considering the cyclical volatility can help identify the best time to take a trade. Are you struggling with this as a concept? Look again at the Chart in Figure 3, take note that the cyclical low is very often followed by a strong directional move in price as the ATR increases. So you can find a slower moving price for entry which results in a fast moving price for faster profitability, and if that speed reduces your time in the market it therefore is reducing your exposure to the risk of an event that may cause you loss. Whilst looking at the session timings of your trades, you should also note the very quiet periods, as these can often be a frustrating time for a trade. These periods typically have little or no direction and can be tightly range bound which is unlikely to produce much of a result until the next active session. Figure 4 is a 15 minute EUR/ USD chart, with the grey ellipses showing the inactive periods, the vertical dotted black line denotes the daily close at 22.00 BST/17.00 EDT. It can be seen therefore that trading this pair between 21.00 and 00.15 BST (16.00 and 19.15 EDT) is a trade in an inactive period. Summary A trade plan and rule based strategy are essential, but do not overlook checking your trading environment. With attention to detail and the collection of statistics you will often find the best environment for your trading. With this in mind, remember success is not about the most trades, or enduring the most heat or even trading the biggest size positions your account will bear. Trading success is primarily the minimum number of trades, with the lowest risk and the greatest probability of achieving target. Happy hunting!
is a bad trade you should not need a large loss to prove it. As a suggestion if you use Outlook or similar with a calendar or scheduling tool, try preparing for your coming week. When I first started out, even though I had noted potential risk areas due to data releases, I often forgot about them once in the heat of battle. On a Sunday check the upcoming data calendar and put all the high impact news timings into your scheduler with a 30 minute prior reminder. Then when trading, a small pop up or alert will remind you that the data release is imminent and to take risk reduction measures. Timing Other factors worthy of consideration are time of day and the day of the week. If we focus on EUR/USD as an example, it is best traded from the London open through to lunchtime in New York. This is when it is most active, the moves are stronger and if you can find trades near the session open you will be trading from low volatility into rising volatility. This means entries in the lower volatility, reducing risk, and rising volatility for quicker gains. Figure 3 shows a ten period Average True Range ATR on a 15 minute timeframe. The dashed vertical blue lines are used to highlight the dips in the ATR, with
F4) Inactive Sessions
EUR/USD 15 minute chart showing inactive periods inside the grey ellipses. Source: www.tradestation.com
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Connect with other industry professionals worldwide! myMTA is a private, members-only social network for technical analysts. Access to myMTA is free for members of the Market Technicians Association and offers the ability to establish unlimited connections with other members through detailed search criteria, topic-specific discussion forums, private messaging functionality, and extensive member profiles.
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Ranges Rock Ranges are quite important in the analysis of charts and of their automation. They give birth to the time compression needed for new trends to develop and for existing trends to turn. Even the most well known systems like William ONeils CANSLIM approach, Weinsteins stage analysis and many trend following strategies depend on them to make decisions concerning the possible start of a trend, phase or stage. Consolidation, also known as a base, from where an existing trend continues its run, is another example where ranges emerge. The detection of ranges is where horizontal channels come into the picture. One of the oldest and perhaps most popular ways of describing horizontal channels is by using the definition provided to us by the late Richard Davoud Donchian. Donchian Channels Perhaps Donchians eponymous channels, are even better known as an x-bar high/low. But they are merely the implementation of the mathematical minimum (min) and maximum (max) functions. What these channels stand for is basically the reviewing of a certain period and calculating the lowest low in this interval for a support line, or the highest high for a resistance line. Figure 1 shows an upper Donchian channel line (resistance) with a look back period of 36 days and a lower Donchian channel line (support) with a window of 20 days. When we go back in time, starting at the right side of the chart, the highest high over the past 36 days was 3.29, while the lowest low over the past 20 days was 2.26. These lines are annotated on the chart as D36 and D20. By now, you may have already noticed the fact that the most recent bar is not included in calculating the highest high or the lowest low, because that would mean that our channel could lines never be violated, as, for instance, a higher high for the current bar than the highest high over the look back period, would imply that our current high would be the upper Donchian channel, by definition. Ditto for lower Donchian channel lines. Furthermore, one could redefine Donchian lines using the close. Our D20 from the example, by this definition, would then become the lowest close over the past 20 bars, while our D36 would stand for the highest close over the past 36 days. There is really not much to all this. In fact, Donchian channels are so simple, one might think there is nothing to add at this point. These channels should be
Adaptive and Optimised Donchian Channels
Monest Channels
Channels are the heart and soul of technical analysis, from as early as its conception. However, up to this day, they come with a lot of subjectivity. This implies that it is hard to implement them algorithmically. Yet, computers and automation might have been the single most important driver in the wide spread adoption of the technical analysis discipline. This article will show how to objectify and optimise the calculation of horizontal channels and, hence, the support and resistance lines they are made up of.
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able to help us detect horizontal channels in a fully automated way, but, in fact they do not. Not so Fast The truth is, there is a lot of subjectivity left with Donchian channels, as with many indicators in technical analysis. The question now arises what the look back period should be. Do we take a 50 bar high or a 60 bar high? Answering this question based on back test results, imposes the danger of curvefitting on your system. Secondly, they are static, meaning they do not account for any context adaption, such as absolute versus relative prices or, to a lesser degree, volatility. A channel that is $10 in width in a $10 stock has not the same importance as the same $10 channel in an $100 stock. Even if you were to think about expressing channel-width as a percentage of stock price, this would not account for volatility. Defining width in terms of volatility (like ATR units) would be far better. Still, the issue about adaptivity and subjectivity stands, because of the review period has to be chosen arbitrarily and up front. So which look back period would you choose? Monest Channels Meet Monest Channels, which relieve us of the disadvantages of Donchian Channels. As you will see they, are totally objective in both their definition and their implementation, since they do not need any parameters and they adapt themselves to the context of price, time and volatility. What are they all about? Looking at Figure 1 again, you can see that D36 is the same line as D100. What this means is that our highest high over the past 36 days happens to be the same highest high over the past 37 days, but also the same highest high over the past 38 days. In fact, we have to go back, up to a 100 days before we find a new higher high. So, if we would have arbitrarily chosen a look back period of 36 or higher but anywhere less than 100, we would not have optimal usage of our channels when interpreting them without a chart. For a 36 day look back period we could have gotten an extra 64 days in length without widening the channels. So let us go over this again for a moment as we outline a few important thoughts. First of all, we need to stop focusing merely on the look back window of Donchian Channel lines, which only account for the horizontal dimension. Instead we should calculate the largest possible Donchian Channel line in length for a given price, with
Dirk Van Dycke

Dirk Van Dycke has been actively and independently studying the markets since 1995 with a focus on technical analysis, market dynamics and behavioral finance. He writes articles on a regular basis and develops software some of which are available at his website tools. monest.net. Holding master degrees in both Electronics Engineering and Computer Science, he teaches software development and statistics at a Belgian University. He can be reached at dirk@monest.net.
F1) Donchian Channels
Donchian Channels are amongst the oldest and most basic channels in technical analysis. They are also known as x-bar high/low channels. But they are not completely objectively defined as, in this example, a 36 day upper Donchian Channel can be replaced with a 100 day upper Donchian Channel at the same price. Source: tools.monest.net
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warning to any outbreak. A too short a channel is not meaningful as the longer a channel gets, the more people come to recognise it and use it and thus the more meaningful it becomes as an analysis instrument. So, how can we have both maximum length and minimum width, or, as that is not possible, an optimal trade-off? Implementation The answer to this question is given to us by classic high school math used to solve max/ min problems through the use descending. Translated to our price charts, this simply means we are going to look at how much longer the maximum Donchian Channels line gets as we increase or decrease its height by the smallest increment possible (i.e. a tick being most often one cent). So, to calculate the upper Monest Channel line we start by measuring the length that prices stay lower or equal to our most recent close. Next, we calculate the same length for a price one cent higher. The extra length we get is the first derivative at those price levels. It basically comes down to how many bars our channel line gets longer if we widen our channel with one cent to the upside. The same goes for the lower Monest Channel line while decrementing each time by one cent. By doing this incrementally for every cent, we can get the optimum as the biggest increase in length we gain for any cent we widened the channel line by, during the iteration. Figure 2 shows the length we can go back without encountering prices for each distance form the last close. So on the x-axis is the distance from the latest close. The y-axis gives us the length at that distance. Both Monest bands are shown in the same figure for
price representing the vertical dimension. We need to stop thinking of horizontal channels as having only one dimension, as we probably get tricked into this exactly because of the horizontal nature of the separate channel lines. A horizontal line may not have height in itself, but it sure has a vertical coordinate on a chart, which shows the width of the channel as the difference between the height of both channel lines of which the channel is made up. Secondly, there are opposing forces at work, since the wider we make a channel, i.e. the range of historical prices it captures, the longer its channel lines will be. Look at it this way; if you expand the lines enough, eventually all historical prices will lie between them. Length and width of any channel are, as a matter of fact, functionally interdependent of each other. Length is inversely reciprocal to width. Of course for a channel to be useful it cannot be too wide. On the other hand, the longer it gets, the stronger a breakout signal may be. A too wide a channel might not be as useful, since price has already moved substantially before reaching one of the channel lines, giving late
This sounds a lot more complex than it really is.

of derivatives. There is one problem though, we do not know the function describing a price chart and, as a consequence, neither do we know the functional description of the relationship between width and height of any channels. We will probably never know. Luckily, there is a simple trick to circumvent this problem as we can use discrete derivatives. This sounds a lot more complex than it really is. The first derivative of a function gives us the speed at which that function is ascending or
F2) Optimal Donchian Channels
If we look for the maximum Donchian Channel length we can get at every price offset from the close of the most recent bar, and we can spot the largest increase in length. That is the place where we find the optimal balance between width and length of the Monest Channels. So, on the x-axis is the distance from the latest close. The y-axis gives us the length at that distance. Both Monest bands are shown in the same figure for convenience but are not related to each other. Source: Custom Excel
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tools.monest.net where you not only can visualise them on charts for most American and European stocks. It is also possible to scan the entire stock universe in a myriad of ways, looking for Monest Channels based on their length, width, strength and breakouts. You can even make use of almost all other classic technical analysis tools while searching. Monest Channels first application is, of course, the detection of bases or ranges from where consolidated trends can lift off again or from where new trends can arise. The channels also provide one more way traders can place stops systematically as the channels, by the specifics of their definition, will coincide with swing points and find significant intermediate tops and bottoms. A careful reader might argue there is still the question of how far one must go back in searching for the maximum gain in length for an additional increase in width by one cent. In mathematical theory the answer would be to go as far back as possible. In our context, this would be as far as historical data is available. However from a practical standpoint the implementation on tools.monest. net cuts of its search as soon as channel lines drift away more than 20 per cent from the last close. We are not concerned with length, nor width, in isolation. We are mainly interested in their balance. That is why the scanner lets you specify both dimensions without discarding the relevance to the other, thereby using the advantage of every free length that arbitrarily chosen Donchian Channels would miss. Conclusion Monest Channels free us of any parameters left to the discretion of the trader. They take in consideration both length and width of the channel, thus optimising the balance between both dimensions. Their inception creates the possibility to automatically and objectively detect the same horizontal channels and support and resistance lines traders in different timeframes are drawn to, as time compression reaches a climax, leading to a breakout. Of course every chart will have its upper and lower Monest Band. In a secure trend this will lead to one of the bands being quite lengthy with the other being very short. Though this might seem a disadvantage at first, it can lead to the detection of trends. Further research, nevertheless, will have to verify this.
convenience but have nothing to do with each other. Let us go back to our example from Figure 1, as Figure 2 charts this gain in length for every increase in width by one cent. What this chart tells us, is how much longer the Monest Channels become at every distance in price from the last close. Look at the chart. You will see that the length of the upper Monest Channel line (annotated as UMC), jumps from 32 days to 101 days if we increase its height from eleven cents to twelve cents above the last close. Since the last close was 3.04, this means pulling up the channel line from 3.15 to 3.16, increasing it by 69 days in length, the largest increase we get for a one cent increase in height. The lower Monest Channel line is shown as LMC. This optimum is found the same way. Lowering the channel line from 1.94 to 1.93 gets us the largest increase in length, going from 79 to 106 days, an increase of 27 days. If we look further, the LMC length goes off the chart if we lower it to 1.54, increasing the length with 254 days for a total of 361 days. This kind of increase indicates a very important low, in this case even the all time low. Usage Monest Channels are easy to implement and freely available at
F3) Monest Channels
View of the chart setup in Figure 1, now with Monest Channels added. In this implementation, the channels use the highest close for the upper Monest Channel line and the lowest close for the lower Monest Channel line. Source: tools.monest.net
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What Is It? This Deep-In-The-Money Covered Call strategy, which was originally intended as an alternative investment for negative interest rates, also serves as the most timely and optimal way to invest in stocks, with risk somewhere in between Certificates of Deposit (CDs) and an Index fund or an unhedged stock portfolio. Anyone investing unhedged in this High Frequency Trading casino (currently 70 per cent of NYSE Volume) is vulnerable to corrections such as we have seen recently the average round trip trading time on the NYSE is three minutes. The only flaw in the strategy is the 20 per cent or more bear market, where it will lose much less than unhedged positions. As Standard and Poors and University of Chicago studies show, there have only been no less than one, no more than two bear markets in each of the decades since 1900 these can be weathered by hedging or exiting. The previous decade saw two nasty ones of nearly 50 per cent. One is much less likely to get shaken out of positions having lost two per cent as opposed to twelve per cent. Point of fact, a slightly declining correction is beneficial to the plan, as it: (a) lowers the price of quality stocks and the price for future purchases, (b) raises the dividend yield, and (c) increases the volatility in the option price (as shown by the VIX). A trifecta! After the Millennium financial meltdown, millions of prudent investors and retirees were forced into riskier investments when the Federal Reserve dropped interest rates in violation of the Taylor Rule. Although doing so has the appearance of at least postponing a major financial meltdown in the U.S., the result of which backstopped the banking system resulting in record profits and substantial employee bonuses at the expense of massive taxpayer indebtedness, a weaker dollar, and over $7 Trillion dollars in M1-type securities, which would have added to consumption to the economy, were the rates 2-3 per cent higher exactly what the country wanted to effect. Instead, the Fed, which is a quasi-government entity compensated by the banking system, admittedly forced investors into riskier asset classes, such as stocks, mercurial commodities, foreign markets, and record bond prices penalising folks who were wary of playing that game, especially when they had to compete with high-frequency and insider traders currently being marched off in handcuffs.
F1) Deep-in-the-money (DITM) Strategy at NUE
Brent Leonard
Brent Leonard is a retired stockbroker, current money manager, adjunct professor and author. He published a booklet about his strategy, Zero (In)Tolerance A LowRisk Alternative to Current Zero Interest Rates (2010). Contact: brentleonard@gmail. com; http://brentleonard.com
This chart shows how the DITM strategy can actually make money with a stock descending. Nucor Steel (NUE) dropped ten points from April 2010 to September 2010; a buy/write was executed on Mar 26, 2010 with the stock at $45.92, and the in-the-money covered calls sold were the September 39, bought back and resold the January 2011, 37-strike, so that the stock was called away at $37. Instead of losing nine points in nine months, the trade actually gained an annualised 6.06% including the dividend and call premiums. Source: http://brentleonard.com
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I doubt many readers got in at the very bottom, and exited at the top as well. To explain the plan a bit further: Say one buys a stock at $50 a share and simultaneously sells a $45 call 5-6 months out one or two days prior to the ex-dividend date. The call is priced at $6 five of which is intrinsic, or the $5 you have just pre-sold; and $1 is extrinsic premium the price your buyer pays for the opportunity to take your stock away at $45. Thus, combining the $1 with the three per cent dividend yields much better returns than any CD or money market today, and shall for an extended period! In essence, the stated yield is incorrectly lower, since one is spending a lower outlay ($45) for the stock after the rebate another bonus. The primary benefit of this plan, however, is not so much the yield, but the fact that the stock can fall five to ten per cent without producing any losses, even temporary losses. No more will one get nervously shaken out of a position just as it turns back around to rally. Also, no more hope for the stocks appreciation to rise up to the normal covered call price, only to be taken away as well. In fact, many hedge and mutual funds have this high of an annual turnover in stock positions. If the stock does continue to rise,
T1) Trades in 2009-2011
Date Stock Symbol 07.08.2009 EXC EXC EXC 14.10.2009 INTC INTC INTC 24.05.2010 NOC 18.10.2010 HCN 20.10.2010 DIA 22.10.2010 ETN 04.11.2010 CVX 05.11.2010 LLY 08.11.2010 SPG SPG 18.11.2010 PEP 18.11.2010 JNJ 01.12.2010 RYN 01.12.2010 MRK Date Stock Symbol 05.01.2011 VZ 11.01.2011 SI 13.01.2011 TLT 30.11.2010 TLT 21.01.2011 NI 21.01.2011 RY 27.01.2011 KMP 15.02.2011 COP 16.02.2011 NVS 17.02.2011 MCD 23.02.2011 LO 03.03.2011 BTI Buy Price 49.87 Stock Amount 4996 Dividend Amt 318 53 53 184 47 282 276 378 58 72 98 160 80 96 108 54 76 Dividend Amt 196 270* 124 245 69 101 0 264 0 61 260 266 Option Symbol 4/17/10 45 10/16/10 42.5 4/16/11 41 4/17/10 20 16.10.2010 4/16/11 18 Jan.55 Mar.50 Mar.104 Apr.80 Mar.80 Apr.33 Apr.100 net-rollout Apr.60 Apr.60 May.45 Apr.32 Option Symbol Jul.35 Apr.110 Jun.85 Jun.95 Jul.17.5 Jul.50 Jun.67.5 May.67.5 Apr.55 Sep.72.50 Jun.75 Jun.80 Call Sold 654 Stock Return Total Return #Months in Trade still open Ann.Net Return
Fortunately there is a possible lower-risk alternative to zero CDs, money market funds: safer by definition than an index or mutual fund, which has returned over the past two years of extensive testing, approximately the historical stock market return of an annualised ten per cent or more. What Is this Great Plan? It is simply a variation on the familiar covered call option strategy normally used in rising markets. But to add a large element of safety against sudden electronically-based volatility, one sells a call option below the price at which they buy the stock, simultaneously, with that quality stock having a steady dividend of at least three per cent. Critics of this strategy have mistakenly assumed that the obvious will happen that ones stock will be called away immediately: a rare occurrence, with so much time premium remaining on the call option. Covered Call Writing Covered call writing, or buy/ writes, may not be for everyone, but with fiscal fitness as with physical fitness, a little preventative effort is greatly rewarded. Minimal understanding and monitoring can reap large returns not the doubling that the market has recently given up, but
20.94
6291
520 5391 1428 400 2932 1109 646 598 1022 288 555 (2)689 612 345 Call Sold 623 1035 1502 600 469 1038 505 1352 350 509 1686 214 10.991 9991 31,115 7991 7991 6591 543 1102 706 922 384 231 152 17 8 5 4 4 4 3 6.10% 13.60% 17.01% 8.27% 13.10% 8.17% 8.52%
60.69 49.76avg 111.4 87.65 84.69 35.63 106.06 64.75 63.8 50.15 34.8 Buy Price 37.57 118.72 92.07 99.15 18.66 54.24 72.2 73.63 56.5 76.05 79.71 80.6
12,147 9961 33,429 8774 8478 7135 10,615 Oct.100 6484 6389 5024 3489 Stock Amount 7523 11,881 18,423 9924 5607 10,857 7229 14,735 11,309 7614 15,951 8069
5991 5741 4491 3191 Stock Return 12,479 16,991 9413 5241 9991 6732 190 10,991 7241 17,321 8336
158 450 133 167 Total Return 193 194 223 172 273 8 rollout 32 197 614 217
5 6 3 6 #Months in Trade still open 1 3 6 3 2 1 3 1 1
5.85% 14.09% 10.60% 9.57% Ann.net Return 19.50% 4.21% 4.50% 12.27% 10.10% 1.00% 3.40% 10.35% 46.19% 32.30%
This table shows actual trading results from the test period of May 2009 into 2011, with the annualised returns as if fully invested. INTC shows that if held too long (calls rolled over), it dilutes the return; EXC is still held in the portfolio.
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away at expiry, or roll out the call for another 5-6 months, keeping the stock depending on the current price of the stock one is using the same money for the entire twelve months. It is as if one buys a 6-month CD or T-Bill, then another a half-year later with the same funds. I would also recommend laddering positions monthly to not for steady income, but to spread out risk of a Black Swan to expiring positions. What Can Possibly Go Wrong? Basically, only a bear market crash, during which one can hedge with put options or inverse ETFs, or exit the positions entirely. Or one can ride out the normal V-shaped spike, milking the option and dividends. Options are a wasting asset, and dividend yields increase as stock prices drop. One can possibly even write a normal out-of-the-money call higher on a quality stock one wants to hold. One final thought on a bear market, or Black Swan: stop orders can be placed below the lower Call option, which will get us out of the stock if it and/or the market drops precipitously but remember to close out the short Call as well, or it will become dangerously naked. So even in a bear market, it is possible not to lose much money, if dividends have been collected and the Call premium has wasted. An example of the above: Buy XYZ at $50, sell a $45 Call option six months out, place a stop order at $42. Since most stocks have an upward bias (partly due to inflation), as the stock rises, a larger cushion is built. How to Start Conservatively One can take a minority position, e.g. the DIA ETF, with a portion of ones assets now receiving zilch in cash; once the simple concept is digested, fine tuning by more experience and knowledge is likely, since this extended period seems ongoing. The chart in Figure 1 shows how the DITM strategy can actually make money with a stock descending. Nucor Steel (NUE) dropped ten points from April 2010 to September 2010; a buy/ write was executed on Mar 26, 2010 with the stock at $45.92, and the in-the-money covered calls sold were the September 39, bought back and resold the January 2011, 37-strike, so that the stock was called away at $37. Instead of losing nine points in nine months, the trade actually gained an annualised 6.06 per cent, including the dividend and call premiums. As of June 15, 2011, with the stock market down over seven per cent, of the 18 positions held in the accounts only two or three are barely under water if they remain there, one could write a covered call above the price at expiry, receiving a much higher dividend price and a call with more IV (implied volatility or premium) due to the downmove. If the stock is at the calls strike price, one could step down to a lower strike price enjoying the above. Lastly, if the stock/market continues down steeply, one can hedge or exit these positions. Over the two years of testing with real money, there have only been three or four losses none in the past year while enjoying an annualised return of 10-12 per cent, the 100-year historic return including market risk.
it just provides a better cushion against a loss, while milking the option premium and receiving the dividends (2). By selling the call 5-6 months out, one either gets two dividends or has the call exercised prematurely, compressing the time frame. Which leads me to the term annualised return; since one can either let the stock be called
T2) Scenarios
Strategy Stock Initial XYZ Price/share Divd/share
ZERO Position $27 $0,20
(IN)TOLERANCE 4 Months Later What If 23 27 30
Price At: 20
DITM BuyStock Sell 22 1/2 Call 100 sh.: Divds: 4 months: ($2.700) -450 40 525 115 -450 40 525 115 -450 40 525 115 -700 40 525 -135
525 P/L:
Normal
Covered Call BuyStock Sell 30 Call
100 sh.: Divds: 4 months:
($2.700)
-400 40 125 -235
0 40 125 165
300 40 125 465
-700 40 125 -535
P/L: Long Stock Only Buy Stock
100 sh.: Divds:
-2700 P/L:
-400 40 -360
0 40 40
300 40 340
-700 40 -660
This table illustrates the favourable results while comparing different scenarios of stock market behaviour.
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Clem Chambers
The progress of exchange traded funds (ETFs) in the 21st century has been impressive. They are being used more and more widely as an investment approach and the range of asset classes that they cover has reached the point where a diversified portfolio of investments can be built entirely of these products. As such, it is important for those involved in the finance industry to have a handle on exchange traded funds, either for their own investing or as an adviser to the investments of others. This new book looks at how ETFs are constructed, how they are regulated, the variety of asset classes they cover and some practicalities involved with investing in them. No look at ETFs would be complete without an examination of the indices that they track, and so a discussion of different equity index construction methods is included. With ETFs being an increasingly important part of the investment spectrum, no one can afford to be without a working knowledge of how these products operate. Exchange Traded Funds will give you a good introduction to this area. Code 373325, 26.24 (RRP 34.99) Save 25%
Clem Chambers is one of the world's leading authorities on market performance. His website, www.advfn.com, is hugely successful both in the UK and around the world. In order to maintain his own business at the peak of its performance, Clem trades in stocks on his own personal account. 'If I can't do it myself,' he says with characteristic frankness, 'then how am I supposed to help other people?' That he does so regularly and effectively and profitably demonstrates both his skill and his knowledge. Now he's prepared to share the information. Writing with first-hand knowledge, he provides here 101 pithy and personally researched tips which will help day traders, investors and stock pickers of every kind to focus in on what characterises a potentially successful stock. Incisive, brutally honest and occasionally very funny, 101 Ways to Pick Stock Market Winners is an invaluable manual for anyone wanting to make money out of the markets. Code 556475, 5.24 (RRP 6.99) Save 25%
The Naked Traders Guide to Spread Betting

A guide to making money from shares in up or down markets
Robbie Burns
Sports Betting to Win

The 10 keys to disciplined and profitable betting
Steve Ward
The Naked Trader is back - and this time he's spread betting! The ultimate guide to spread betting - how to do it, have fun and make, rather than lose, a few bob in the process. Robbie takes you through everything from how it works, to managing your risk, working out exposure, and how, often, doing nothing is the best move! He explains the ins and outs of successfully betting on shares in his trademark down-to-earth style, covering everything you need to know. From the simple stuff through to proven strategies, including those that can be used in different markets - it's all here. There are also behind-the-scenes visits to two top spread betting firms. Code 401334, 10.49 (RRP 14.99) Save 30%
Thinking, and betting, like the pros! This is a book that teaches you how to bet on sports with the same discipline and mindset as the professionals. Lots of books and websites give advice on profitable strategies - and tipsters and systems proliferate. But this is the only guide that helps you make your trades and bank your wins for the long term, avoiding the perennial dangers of overconfidence, irrationality and emotion. However successful your selections, you are never safe from crippling losses until you know how to bet with the clear head and calm approach of the masters. Code 522156, 10.49 (RRP: 14.99) Save 30%
Free Capital
How 12 private investors made millions in the stock market
Guy Thomas
Malcolm Pryors Spread Betting Techniques

Winning trend and counter-trend strategies for all time frames and traders
Malcolm Pryor
Take your spread betting to the next level with these proven, documented exclusive strategies - right out of the box. Spread betting expert and bestselling author Malcolm Pryor takes viewers through every stage of successfully setting up and executing three brand new spread betting strategies. Each with a thoroughly demonstrated edge, they work on all time frames and are suitable for traders of all levels of experience. You can use them to start banking profits right away. With this DVD, you also get personal support from Malcolm and other traders via access to the exclusive members' area of the www.spreadbettingcentral.co.uk forums. Code 460349, 220.50 (RRP: 245.00) Save 10%
Wouldn't life be better if you were free of the daily grind the conventional job and boss and instead succeeded or failed purely on the merits of your own investment choices? Free Capital is a window into this world. Based on a series of interviews, it outlines the investing strategies, wisdom and lifestyles of 12 highly successful private investors. Each of them has accumulated 1m or more - in most cases considerably more - mainly from stock market investment. spread betting to another level. Although it presents many advanced insights and valuable investment hints, this is not an overly technical book. It offers practical ideas and inspiration, with revealing detail and minimal jargon, making it an indispensable read for novice and experienced investors alike. Code 450474, 11.39 (RRP: 18.99) Save 40%
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64
John Carter How to Trade Momentum after Quiet Market Phases

John Carters father was a Morgan Stanley stock broker. One day during high school, John came home from the mall where he was working at a store making cookies. He had saved up $1000 over the course of a few months, and his dad told him that he and some of his friends were going to buy some call options on Intel the next day. Although he had no idea what they were talking about, it sounded good. He bought ten call options at 75 cents, and sold them a few days later for $1.50, doubling his money. He was hooked and has been trading ever since going on 20 years now. After high school, John Carter studied at the University of Cambridge, England, then graduated from the University of Texas in Austin with degrees in History and Economics. John Carter was never that intrigued by the brokerage side of the trading world. Instead, he liked to try and test various online trading strategies through college and well into his corporate jobs. He became quite adept at making money, though there were times when holding onto it turned out to be a problem. The road was not always easy and John learned his lessons the hard way like many day traders out there. John Carter eventually found a trading system he was satisfied with. He left corporate America to pursue full-time professional trading in 1998. After a few years of trading on his own, he eventually grew tired of day trading by himself in his office and chatting with his Arrowana (a large fish). He started to seek out other traders and post information online, which led to the launch of TradeTheMarkets.com. John Carter today is a Commodity Trading Advisor with Razor Trading. In 2006 he published his book Mastering the Trade.
05/2010 04/2011 www.tradersonline-mag.com
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about trading over the years is that too much information is a bad thing. Not only can it cause analysis paralysis, but it presumes that a person can actually figure out with 100 per cent certainty what the markets are going to do next, which is impossible. During the day I do not watch any financial news on TV or anything. All they do is tell you what has happened, not what is going to happen. I just watch the charts and try to keep it simple. TRADERS: How did you know this could be for a living? John Carter: That first options trade really sealed the deal for me. It doubled in three days, netting me $1000 US dollars. I had just spent the entire summer working a crap job to make that same amount of money. At that point I knew I wanted to trade. Oddly enough I never had a desire to be a broker or go the Wall Street route and run a fund. I was clear from the beginning that trading was a path to independence. It is a job I could do at my own pace, without a boss, and I could do it from anywhere and take breaks anytime I wanted. That is what really appealed to me. Of course, having that first trade be such a great, easy winner was both a blessing and a curse. The blessing part is obvious it got me excited about trading. The curse was that it took me a while to figure out it was not always going to be that easy! TRADERS: Please tell us about the ups and downs of your career. How long did it take you to develop a systematic approach that was really suitable for you in the long run? John Carter: The first eight years of my trading career was a series of big ups and big downs. I bet big. On more than a few occasions I was able to take a $10,000 account and run it into the six figures trading options. At that point I would do, in retrospect, one thing that was smart and another that was stupid. On the smart side, I would take money out of my trading account and buy investment real estate in order to diversify. On the stupid side, I would then get obsessed with running my account to a million dollars. I did not realise it until later, but whenever I did that I started having all kinds of problems and I would start losing a lot of money. Only later did I realise what an amateur mindset that is trading to make money instead of focusing on a setup and then working to execute that setup as best as you can. When you can do that as a trader the profits tend to take care of themselves. Once I realised this, I quit my job as a financial analyst and started to trade full time. This seems simple writing about it now but this was a painful process and I went through a period where I questioned if I really wanted to keep attempting to do this for a living. Most successful John Carter: There are a lot of great trading tips out there like, Let your profits run and cut your losers short. And they are all true. The problem is a trader immediately forgets them all if they dive into a trade with the mindset of, I am going to make a thousand dollars on this trade. None of that matters if a trader is in that mindset. You can have all the right quotes taped to your computer, but they will not help. The funny thing is, if a trader is focused on their setup and then executing that setup according to their plan to the best of their ability, everything else falls into place. The key is to not get too wrapped up in the current trade you are in. That is a very common mistake because it makes that trade seem like the most important trade in the world. Instinctively we all know that not every trade is going to be a winner, but traders often think that the current trade they are in is going to be, in fact, a winner. This is what causes the stupid mistakes. One thing that helped me a lot was to start tracking trading results in blocks of 25 trades. This way, if I was in a losing trade, I would not get too worked up about it because it
TRADERS: When did you rst get in touch with the stock market and trading? John Carter: My father, Lance, has a masters degree in Physics. He quickly found out there was not much money working as a scientist. A friend of his worked as a stock broker and he talked Lance into joining the firm. Growing up he talked stocks with me and we would look up quotes together on companies that I was familiar with, such as Atari which focused on video games. At the time I did not think very much about it, but by the time I was 18, I started to get interested in the idea of buying and selling stocks as a way to make extra money. I had saved up $1000 working over the summer and I used that money to place my first trade, which was an options trade on Intel. TRADERS: Was the Intel options-trade your rst trade ever? John Carter: Yes, and at the time I had no idea what an option did, only that it was a way to participate in the price movement of a stock without having to buy all the stock. I understood leverage and that made sense to me. I had no idea how options were priced or about time decay or premium or any of that, which actually worked out just fine. One thing I have learned
The key is to not get too wrapped up in the current trade you are in.
traders I talk to, had to have at least one of their accounts blow up in their face. When talking to people who are starting out I always encourage them to start small and focus on a particular trading setup. If they can make money consistently doing that with a few contracts (for options or futures) or 100 shares of stock, then they can start adding some size to their trades. If they keep having losing months, then they should keep trading small. TRADERS: What do you think was the most important lesson on the way to becoming a professional?
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TRADERS: What markets do you trade and in which time frame and frequency? Where do you see your edge? John Carter: I trade futures intraday, typically the stock index futures (ES, YM, TF), Currencies (EC, BP), metals (GC, SI), Crude Oil (CL) and some of the agricultural contracts such as Corn and Soyabeans (C, S). These markets provide plenty of intraday opportunities. I focus fading strategies on the stock indexes and currencies (i.e., fading pivots and key moving averages), and breakout strategies on metals, oil and the agriculture products, typically after periods of consolidation. Over the years I have found that the less trades I do, the better. I would rather take two well thought out and properly planned day trades than try to catch every single move on every market I am watching. The markets will always be there tomorrow so there is no use crying over a missed trade or chasing a trade because you think it will never happen again. Just be patient. For chart intervals I prefer tick charts such as a 500 tick chart. This accounts for the slow overnight periods much better than a regular five minute interval chart. For stock options I trade off hourly and daily charts and look for times when the two are in alignment. For example, if the daily chart is bullish, then I am going to pass on any bearish setups on the hourly chart I am going to wait for the hourly chart to get in alignment with the daily chart. TRADERS: What are your main/general trading rules? John Carter: The general rules and guidelines I utilise are as follows: 1. Focus on a variety of time frames and keep the larger time frames in mind. 2. Use limit orders to force you to plan your trades. 3. Do fewer trades that are very well planned and thought out. 4. Do not lose more than five per cent of your equity on any one trading idea. 5. If a trade does not meet your setup criteria, do not take it. 6. Realise that standing aside is a position. 7. If you miss an entry, relax, another opportunity will present itself. 8. When in doubt, get out. I get to look at a lot of account statements and this is the sad truth everyone who loses money does one or all of those things listed above. From a
was just trade number 13 out of a block of 25 trades. Then after the 25 trades were done I could check whether I was up or down money. If I was up after those 25 trades, I would then do another block of 25 trades, and potentially increase my position size. If I was down, I would take a look at my stop losses. Often times I could double the size of my stop (and cut my position size in half so my monetary risk was the same) and the trade setup would start to work again. The markets are not always the same and stop losses need to be adjusted to take into account market volatility.
Trading System Artist

I trade by my own rules with my own system. Tradesignal Online gives me over 500 ready-made trading systems and a complete code editor. Then there's a professional charting tool with back-testing and a large community with whom to exchange strategies. My idea, my strategy, Tradesignal Online!
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into quiet mode. The only reason markets go into quiet mode is because they are building up energy for their next major move. I like to be on the alert for this move, and of course on the alert for the direction of the move. Both of these setups help me to take advantage of these ebbs and flows in the market. up its energy reserves for the next major move. For Box Plays, what I am looking for is a market that is taking a rest before its next spurt higher or lower. I want to see a period of horizontal consolidation with at least two tests of the highs and two tests of the lows. Once I get these two tests, then I am looking to buy a breakout of the box, or sell a breakdown of the box. My target on these trades is the width of the box. These plays can be done on all time frames, though my preference for day trading is five and 15 minute time frames. For swing trades, a trader can look to the 60 minute and daily charts. I trade these as both swing and intraday plays, with each time frame independent of itself (meaning I could have a 60 minute box play going and a five minute box play going at the same time, with different parameters and in different directions). Also, since the Euro actively trades around the clock, these box plays can be setup at anytime. I like to try to get some sleep each night, but on those nights when I get shafted by the wait staff (i.e., I order decaf coffee after dinner but they give me caffeinated, so I end up lying in bed staring at the ceiling), I can at least get up and check if a box play is forming overnight. TRADERS: What are the rules for this setup? John Carter: For buys, the rules are as follows (sells are reversed). Please note that all times I am using throughout this interview are Eastern. 1. Set up a 24 hour chart so the overnight activity can be accounted for in this indicator setup. 2. I like to set up a simple bar or candlestick chart on the time frame I want to play, without any other junk cluttering up the screen. I will search through various time frames to see where box plays are currently setting up. 3. As the market starts to consolidate I want to see at least five bars of consolidation and then I will take a horizontal line and start marking highs and lows. I will usually have to adjust this horizontal line a few times as the market action develops. Once I get two tests of one of the lines, I have a potential box play developing. 4. At this point I am watching to see if I get another test on the opposite side of the box. Let us assume in this example that I do, and now I have two tests of the highs, and two tests of the lows. The width of the box is 20 ticks. 5. Now that I have my box, I place two orders. I place a buy stop order a few ticks above the high end of the box. I place a sell stop order a few ticks below the low of the box. Whichever way the market breaks, I am sitting there with my order waiting to get filled. 6. My buy stop is hit. I place a limit sell order 20 ticks (the width of the box) away from my entry point. I leave my sell stop in place, as this now becomes my stop loss order on this trade. This represents a risk reward ratio a little over 1:1. I will typically take off half my position at this level and then move my stop to break even. From there I will use various indicators to manage the last part of the trade, typically momentum on the TTM Squeeze indicator. Once the momentum starts to turn, I will dump the rest of the trade. 7. I stay in my play until my stop or my target is hit. Although I will move my stop once the first half of the target is hit, I generally do not trail it after that. I just wait for the signal to get out in terms of loss of momentum. TRADERS: Can you show us a few examples, please? John Carter: Of course. In Figure 1, you can see a daily chart of the EUR/USD. This is an example
simplified perspective, I think it is important to realise if you just stop doing these things, then you are ahead of the crowd. It is like when you go to the doctor, point to your elbow, lift it above your head and say, Doctor it hurts when I do this. And the doctor looks at you and says, Well then do not do that. So many traders would be better off if they just stopped doing that.
TRADERS: Could you please describe a few of your trading strategies/setups? John Carter: I like to focus part of my trading day on scalp plays, where I am jumping in and out of the market with a little piece here, and a little piece there. However, I also like to focus a part of my time on catching potentially bigger intraday moves, as well as multiday and multi-week moves. What I will do is focus on scalp plays in one account, and use a second account for swing plays. The Box Play and Squeeze Play are diverse setups that can be used for both scalp plays and swing trades. For intraday trades, I use five and 15 minute charts. For swing trades, I use 60 minute and daily charts. Box Plays and Squeeze Plays show me when the markets go
The markets will never move straight up or straight down forever.

TRADERS: Can you tell us the details of your Box Play setup, please? John Carter: Yes, of course. I call it Box Plays: Measuring the Move Before it Occurs. The one thing a trader soon learns about the markets is that they will never move straight up or straight down forever. A market can definitely rip higher for long time, but at some point it will have to rest and consolidate, and sometimes it will even come back down to earth and reverse all of those spectacular gains. Just as a runner can only sprint for a limited amount of time before their body gives out, a market can only move so far before it needs to pause, take a rest, and build
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screen. The move on the last half is close to 600 pips. Anyone using a tight trailing stop would have mostly likely been stopped out on the four day retracement rally that started on 16 May and lasted till 19 May. This of course is a swing trade and it is something a trader would be expected to hold for many days if not weeks as long as the trade is going their way. Some people cannot handle this pressure of sitting on a trade but it is a habit that is important to develop. The best thing a trader can do many times is nothing. Just sit on your hands. For traders who just cannot sit on positions overnight, that is OK, this same trade can be done on smaller times frames such as five and 15 minute charts to allow for day trades. Please have a look at Figure 2 now. On 22 June, 2011 the Euro formed a box on the 15 minute charts, as represented by point #1. Once we have five bars of consolidation I draw horizontal lines across the highs and lows of the box, and then place my buy stop and sell stop orders a few pips outside the range of the box. The width of the box is 22 pips, so that would be the first target on half my position. The box eventually breaks to the downside and I am entered short on my sell stop order, and about 30 minutes later my first target is hit at point #2. I then move my stop to my entry and watch the momentum. Once the momentum turns (as seen in the box at the bottom of the chart) I cover the rest of my position. TRADERS: What about the other setup you mentioned, the Squeeze Play could you discuss that in more detail? John Carter: Yes. I call them Squeeze Plays: Jumping on the Train Just as it is Leaving the Station. The Squeeze Play takes advantage of quiet periods in the market when the volatility has decreased significantly, and the market is building up energy for its next major move higher or lower. These quiet periods are identified when the Bollinger Bands narrow in width to the point they are trading inside the Keltner Channels. This marks a period of reduced volatility and signals that the market is taking a breather, building up steam for its next move. The trade signal occurs when the Bollinger Bands then move back outside the Keltner Channels. I use a 12 period Momentum Oscillator to determine whether to go long or short. If it is above zero when this happens, I go long, if it is below zero, I go short. These are all canned studies that come with most charting packages. For the parameters, I just use the default settings on TradeStation. I also took an extra step and turned all
F1) Box Play EUR/USD Daily
of a swing trade and a bigger example of the power of the box. On 20 May and 21 May we form the lows at 1.1620 (point 1). Between 28 April and 4 May, 2011 the market loses steam from its vault higher and starts to consolidate. What I am waiting for here is a minimum of five bars of consolidation, and the price action should form what looks like a box with highs and lows that are not too far away from each other. After the five bars, as represented by point #1, I measure the highs and lows. The high was 1.4939 and the low was 1.4754, forming a distance of 185 pips. After the five bar consolidation, I place a buy stop order a few pips above the highs of the box, and a few pips below the lows of the box, and then I just sit back and wait for the markets to make a move one way or the other. If they break higher, my buy stop order will be triggered and I will be long, and if they break lower, my sell stop order will be triggered and I will be short. This trade is triggered short and at point #2 my first target is hit for a 185 pip profit. At this point I move my stop to my entry point, and let the trade run until there is a shift in momentum, which takes place at point #3 in the price action and is represented by the momentum indicator at the bottom of the
There is a five bar consolidation box in the EUR/USD (point #1). After that we place a buy stop order a few pips above the highs of the box, and a few pips below the lows of the box. This trade is triggered short and at point #2 the first target is hit. We exit the position as there is a shift in momentum (point #3) in the price action. Source: www.tradestation.com
F2) Box Play EUR/USD 15 Minute Chart
There is a consolidation box in the EUR/USD (point #1). We place our buy stop and sell stop orders a few pips outside the range of the box. This trade is triggered short and at point #2 the first target is hit. Once the momentum turns (point #3) we cover the rest of our position. Source: www.tradestation.com
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30 pip stop and a daily chart a 50 pip stop. One pip equals 1/100th of a cent and equates to $10.00 on a regular sized contract, and $1.00 on the minis. 6. My target is based purely on the momentum of the trade. Once the momentum signal starts to weaken (rolls over), I get out of the trade at the market. 7. I do not trail stops. I treat this position like my marriage I may want to try to change something about the trade but in the end I have learned its best to just leave it alone. TRADERS: Please show us a few actual charts where you executed trades based on this setup. John Carter: Have a look at Figure 3. On 29 June, 2011 the 15 minute EUR/USD chart was in a squeeze as represented by the red dots at point #1. At point #2, the dots turn back to green, meaning a trade signal has now been generated. Since the momentum histogram is above zero, it is a long play and I enter the market at point #3 at 1.4370. This long signal is valid until we get a loss of momentum on the histogram, which is represented by two darker shades of blue in a row, which can be seen at point #4. A few bars earlier there was one dark blue bar, and if the next bar would also have been dark blue (representing two in a row) I would have exited then. As it switched back to light blue (indicating a continuation of higher momentum) I stayed in the trade. I exited at 1.4388, for a gain of 18 pips. Of course, it is also fine to scale out of this type of trade as it goes your way, holding onto half or even a third of the position for that momentum shift. This squeeze play can be utilised on any time frame, and I particularly like the one hour and two hour charts. However, it is also important to understand what this signal is doing on the weekly charts, as these can represent huge moves. If you take a look at Figure 4, you will see three squeezes on the weekly chart of the EUR/USD. The first took place at point #1 on 24 August, 2007. When this trade signal occurred, EUR/USD was trading at 1.3550. By the time momentum reversed with two darker bars, the EUR/USD was trading at 1.4560, a move of just over 1000 pips. On 7 March, 2008, another signal took place, taking the EUR/USD from 1.4970 to 1.5528, a move of 556 pips. And finally, on 15 August, 2008, a squeeze signaled a short trade and EUR/USD went from 1.4750 down to 1.3035, a move of over 1715 pips. Needless to say these are all huge moves, and it is difficult for many traders to sit
F3) Squeeze Play EUR/USD 15 Minute Chart
of these into an indicator which makes it easier to read on the chart, which is the same as the momentum indicator I discussed in the first two examples. TRADERS: Can you please tell us the detailed rules just as you did for the Box Play? John Carter: Here we go for the rules of my Squeeze Play setup for buys (sells are reversed): 1. Set up a 24 hour chart so the overnight activity can be accounted for in this indicator setup. 2. The heads up on this setup is the first red dot. This is not a trade signal, but a heads up that a trade signal is setting up. 3. The signal on the indicator is the first green dot after a series of red dots. (This will be shown in detail in the charts that follow). 4. Once the first red dot appears after a series of green dots, I go long if the histogram is above zero. Once the signal fires, I just place a limit order at the current offer. This is a momentum play and I do not want to be messing around with trying to get the very best fill, so I just hit the current offer. 5. I base my stops on the time frames I am using. For five minute charts, I use a 20 pip stop. A 15 minute chart gets a 25 pip stop, 60 minute chart a
The EUR/USD is in a squeeze (red dots at point #1). At point #2, the dots turn back into green and generate a trading signal. The momentum histogram is above zero so we enter a long trade at point #3. We exit as we can see a loss of momentum (two dark blue lines at point #4). Source: www.tradestation.com
F4) Squeeze Play EUR/USD Weekly
There are three squeezes in the EUR/USD. The first is at 1.3550 (point #1). By the time momentum reversed with two darker bars and the EUR/USD makes first a move of 1000 pips and then a move of 556 pips. Finally, a squeeze signals a short trade and the EUR/USD falls by 1715 pips. Source: www.tradestation.com
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my trades. I sleep at night and do not get up and watch the markets. In the morning I will check the quotes. I look at about ten key market charts and glance at the headlines. After that I try to keep it simple and just wait for setups to unfold. TRADERS: What do you recommend novice traders start with? John Carter: In terms of trading, keep it small and simple. Do not get overly complicated. I am a big believer that if you have one market, one indicator and one time frame, and spend six months trading that you will be able to find a setup that you can trade and make a living for the rest of your life. TRADERS: Are there any major mistakes that even professionals make repetitively? John Carter: The biggest mistakes I make, seem to happen after I am on a great winning streak. I have some of my setups done purely mechanically which prevents some natural mistakes like getting over confident. TRADERS: Any comments on the academic ideas of efcient markets and behavioral nance? John Carter: I am a big believer that markets are merely measuring human fear and greed. When too many funds get too greedy, you have a disaster as they are all forced to unwind their positions. The same thing happens on the individual level. A traders job is to focus on their risk and ride the trends these instances create for as long as they can. TRADERS: How do you enjoy your free time? John Carter: I like to spend time with my three young children, and I also have a horse farm out in the country where I like to go and relax. I am a big reader and I also like to have some type of race in the future to compete in because it gives me an incentive to train and stay healthy. TRADERS: Can you imagine any reasons that you would ever stop trading? John Carter: I honestly cannot. Every day is different. It is mentally stimulating. I like to take breaks from time to time where I do not trade for a couple of weeks, but I can imagine looking at the markets right up until the end. This interview was conducted by Marko Graenitz.
through all the ups and downs of these moves. That being said, it is critical to know if there is a weekly squeeze signal on any market you are trading. Even if you do not take the trade because its too large a time frame, just knowing that there is a long squeeze signal on a weekly chart is powerful in and of itself. A trader who knows this does not fight that trend! Even if you are primarily day trading, if you know there is a weekly squeeze on the long side, this mean that you can just focus on buying pullbacks and taking long signals and passing on any short signals you receive. This in and of itself is powerful because it will keep a trader on the right side of the trend. Although weekly squeezes only happen a few times a year, they are ignored only at your own peril! TRADERS: What is the course of events on one of your typical trading days? John Carter: It varies more now than it used to because of having kids. I am a very passionate trader but I realise my kids are in their formative years and there are days when I miss a key market reaction to an economic report in order to see the kids school play, etc. This has forced me to get more mechanical in some of my setups and to also hire assistants to help me execute
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Surely this will sound all too familiar to you when you run into an old school friend of yours you had not seen for years. After the usual exchange of pleasantries, the conversation will eventually turn to what your profession is. Day trading? Are you actually doing something that dubious? By the way, my school friend who had said that works for a company that had made the headlines because of bribery scandals and the improper disposal of uranium waste. There course of the ongoing financial crisis. The pigeonhole housing rogue bankers, locusts and shady financial advisers is so large that it easily finds a cosy place for a trader. According to a poll commissioned by Playboy magazine, almost one in four respondents have no banker in their circle of acquaintances. Only prostitutes and people with a criminal record fared worse. Respondents were not asked about traders in this poll, otherwise they would certainly have done worse. That is what you have to be able to put up with. I also got to hear this at one point: But you have been to university and used to have a well-paid job as a banker. So much prejudice against what has always been my dream job. Strong stuff! But there is also the other extreme: These people would cut to the chase and persistently ask for a hot stock tip as if we traders did not have a right to enjoy a pleasant evening in the beer garden, far away from the hustle and bustle of the financial markets. Equally annoying are questions starting with Hows business? or even worse, You can live on that? No other self-employed peoples monetary situation is constantly questioned. Normally, that is a taboo, but not here. If business happens to be slow, it is no surprise, of course. But if things are going well, you can sense envy. What is forgotten in the process is this: This awesome job should not only be about maximising profits, but also about quality of life. And the latter surely includes your trading being accepted by your environment. But even within your own family, it is not always easy. Dad, are you going to paint mountains again? Charts are the only thing that are of any interest to your offspring, at least for a few minutes. And this is also something you just have to endure and is no different from what is experienced by controllers and IT specialists. The alleged excitement deficit must be made up for elsewhere. Again and again, there is also the prejudice that anyone who is a trader is just too lazy for other activities, sitting in front of the trading screens all day, while drinking coffee and calling around, a latter-day neer-do-well. Far from it after all, those who want to make a living as traders, go through a lengthy process that demands a great deal and causes most people to fail. Of course, people just ignore that because traders have been put into the above-mentioned pigeonhole from the start and as we all know, you have a tight pigeonhole once it is closed. But why am I telling you all this anyway? If you are not at peace with your environment as far as your hobby or profession is concerned, then you must resolve that issue. If you do not, it will constantly rob you of energy that would be better used elsewhere. Job satisfaction is necessary for you to enjoy long-term success in your career and that does include being accepted by your environment. You need to become active yourself! Just explain in detail what you do and how you go about doing what you do. Show your trading room and your trading screens. Explain your strategy, so it will be clear that you are not a gambler (I hope you are not!). Should you be well prepared for the daily struggle with the financial markets, make sure that you also convince your personal circle of friends and acquaintances. The energy guzzlers will make themselves scarce! Should there be sceptics galore, invite them to your trading domicile. Make it look like an event (albeit on a small scale), and it will liven up the sometimes monotonous everyday trading routine. Give it a whirl!
The Day Traders Dilemma

is only one thing to do: you just switch off and hope not to be hit by a stone thrown by your friends naughty offspring the verbal blows are enough. Many traders find the image of the alleged gambler very difficult to live with. The problem is that there is no such thing as an occupational profile of trader and many people cannot associate it with anything except nasty Gordon Gecko from the cult film Wall Street. While the banking profession used to carry a fair amount of prestige, bankers have been branded more and more as an untrustworthy species in the
Till Kleinlein
Mr Till Kleinlein trades, writes the CFX trader column which appears on each trading day, is an active blogger in the CFX broker blog, and publishes a trader service that deals with short-term trading. Contact: www.instinkt-trader.de
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