THE TRADERS’ MAGAZINE SINCE 1982 www.traders.com NOVEMBER 2014

THE SMART MONEY When they fail 10 Price Projections With daily pivots and more 20 SWING TRADING When is a breakout really a breakout? 26 FOREX TRADING The basics 32 INTERVIEW Larry Levin, futures trading educator 36 THE EQUITY CURVE Arbiter of success 42 PRODUCT REVIEW n thinkorswim Sharing

NOVEMBER 2014

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TASC-Nov2014-Futures-LGP.indd 1 9/11/14 12:31 PM CONTENTS NOVEMBER 2014, Volume 32 Number 12

FEATURE ARTICLE 32 Trading Forex: 10 When The Smart Money Fails Understanding The Basics, Part 1 by Giorgos E. Siligardos, PhD The Commitments Of Traders by Imran Mukati REVIEW aggregated report is a handy tool In this first part of a new series on for watching the moves of the foreign exchange trading, you’ll 48 • thinkorswim Sharing most significant players in the get an overview of the basics of Product review: Social media markets. But what happens when trading currencies. sharing tools and online the “smart money” fails? You may community for thinkorswim users be able to gain some insights from 35 Q&A the reports. Find out how. by Don Bright DEPARTMENTS This professional trader answers 20 Price Projections, Part 5 TIPS a few of your questions. 6 Opening Position by Sylvain Vervoort 8 Letters To S&C Here in part 5 of Sylvain Ver- INTERVIEW 54 Traders’ Tips voort’s “Exploring Charting 36 Battling The Futures 57 Advertisers’ Index Techniques” series, he looks at techniques such as measured With Larry Levin 57 Editorial Resource Index moves, Fibonacci projections & by Jayanthi Gopalakrishnan 59 Classified Advertising retracements, and daily pivots to Larry Levin is president and 59 Traders’ Resource estimate future price levels. founder of Trading Advantage, a firm specializing in trading 61 Trade News & Products 62 Books For Traders 25 Explore Your Options education. Trading Advantage has made it its mission to teach 63 Futures Liquidity by Tom Gentile students to trade online. We spoke Got a question about options? with him about what it takes to start trading futures. 26 Swing Trading With Momentum On Your Side 41 Futures For You by Ken Calhoun by Carley Garner Seeing a simple breakout may Here’s how the futures market convince you to place a trade, but really works. how do you know if a breakout is really a breakout? Here’s one way 42 Slow Down: you can jump into a trade and not get caught off-guard. Equity Curve Ahead by Robert Cocchiola The equity curve judges the success or failure of your system. What makes an equity curve good or bad? What does it take to achieve a good equity curve? We’ll take a look.

This article is the basis for Traders’ Tips n Cover: David Goldin TIPS this month. n Cover concept: Christine Morrison

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The Traders’ MagazineTM

EDITORIAL [email protected]

Editor in Chief Jack K. Hutson Editor Jayanthi Gopalakrishnan ven though traders may convince Production Manager Karen E. Wasserman themselves otherwise, most enter and Art Director Christine Morrison exitE positions based on intuition or emotions. Graphic Designer Wayne Shaw Staff Writer Dennis D. Peterson Rarely do they make their trading decisions Webmaster Han J. Kim based purely on objective reasoning. Many Contributing Editors John Ehlers, Anthony W. Warren, Ph.D. people don’t realize that participating in Contributing Writers Don Bright, Thomas Bulkowski, the markets based on intuition is the reason Martin Pring, Barbara Star, Markos Katsanos traders or investors get so shattered when the market falls sharply. Not knowing what OFFICE OF THE Publisher to do, they freeze and just watch their profits Publisher Jack K. Hutson turn into losses, surprised that things can Industrial Engineer Jason K. Hutson Project Engineer Sean M. Moore turn around so quickly. The sad reality is that it’s natural to get drawn to the idea Controller Mary K. Hutson of making profits, so if a stock keeps moving up, you sometimes buy it without giving it much thought. Advertising Sales 4757 California Ave. S.W. We forget that the markets are not logical. They thrive because of the irrational Seattle, WA 98116-4499 1 206 938-0570 Fax 1 206 938-1307 nature of our emotions. In fact, if the market was a living being, it would probably [email protected] get a good dose of daily entertainment observing our actions. The thought of making National Sales Manager, Classified & Web Sales Edward W. Schramm money gets us excited, but when it comes to thinking of how to protect our capital, Advertising Sales Summer Davis we write it off thinking it won’t be necessary. Yet protecting our capital is what will separate us from the average, unsuccessful trader. Only a handful of people give Circulation importance to or take pride in protecting capital, which is probably why there are Subscription & Order Service 1 800 832-4642 1 206 938-0570 Fax 1 206 938-1307 more unsuccessful traders than successful ones. [email protected] Subscription Manager Sean M. Moore Subscription Sales Carmen Hale opular media plays a big role in luring people into participating in the markets, Website http://www.traders.com since they always hype up bullish markets. As tempted as it may be to get Staff members may be emailed through the Internet swayedP by what you hear, step away from the market chatter and see what is really using first initial plus last name plus @traders.com going on. Invest time in figuring out what variables will help you identify the market internals. Is it volatility, market breadth, money flow, or some other variable? What

Author­i­za­tion to pho­to­copy items for inter­nal or per­sonal will make you scratch your head and say to yourself that something is not right? If use, or the internal­ or personal­ use of spe­cific clients,­ is grant- you look back at the past market crashes, you’ll find that they took place because ed by Tech­ni­cal Anal­y­sis, Inc. for users reg­is­tered with the Cop­y­right Clear­ance Cen­ter (CCC) Transactional Reporting of some anomaly in the market. Something didn’t sync, and as a result, the markets Serv­ice, pro­vided that the base fee of $1.00 per copy, plus 50¢ per page is paid directly to CCC, 222 Rosewood Drive, crashed and took away profits from those who were unprepared. There’s no reason Danvers, MA 01923. Online: http://www.copyright.com. For for you to be in that camp. those organ­iza­ tions­ that have been granted a photocopy license by CCC, a sep­a­rate sys­tem of pay­ment has been Before I sign off, I would like to mention that voting in our annual Readers’ Choice arranged. The fee code for users of the Transactional Reporting Serv­ice is: 0738-3355/2014 $1.00 + 0.50. Awards poll has begun. Please take a moment to visit our website at Traders.com Sub­scrip­tions: USA: one year (13 issues) $89.99; Foreign surface mail add $15 per year. Air mail: Europe and vote for your favorite products, services, and articles. The results of this poll, add $25.50 per year; else­where add $39 per year. Sin­gle which will be published later in our annual Bonus Issue, can be helpful — who copies of most past issues of the current­ year are avail­a­ble pre­paid at $8 per copy. Prior years are avail­a­ble in book knows, you may discover something new that may just help you figure out how to format (without ads) or from www.traders.com. USA funds only. Washington state res­i­dents add sales tax for their identify those market anomalies. Happy trading! locale. VISA, MasterCard, AmEx, and Discover accepted. Subscription orders: 1 800 832-4642 or 1 206 938-0570. Technical Analysis of St o c k s & Co m m o d i t i e s ™, The Traders’ Magazine™, is prepared from information believed to be reliable but not guaranteed by us with­out further verification, and does not purport to be complete. Opinions expressed are subject to revision without noti- fication. We are not offer­ing to buy or sell securities or Jayanthi Gopalakrishnan, commodities discussed. Technical Anal­ysis Inc., one or more of its officers, and authors may have a position in Editor the securities discussed herein. The names of products and services presented in this magazine are used only in an editorial fashion, and to the benefit of the trademark owner, with no intention of infring- ing on trademark rights.

6 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s I watch for the perfect moment

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scottrade.com/passion Member FINRA/SIPC com, in the Complete Article Archive The editors of S&C invite readers to submit their opinions and information on subjects area. Readers can also visit the Complete relating to technical analysis and this magazine. This column is our means of communica- Author Archive at www.traders.com and tion with our readers. Is there something you would like to know more (or less) about? search for “Kaufman” to help locate his Tell us about it. Without a source of new ideas and subjects coming from our readers, past S&C articles or to look up John this magazine would not exist. Ehlers’ past articles.—Editor Email your correspondence to [email protected] or address your correspondence to: Editor, St o c k s & Co m m o d i t i e s , 4757 California Ave. SW, Seattle, WA 98116-4499. All LOOKING AT CYCLES letters become the property of Technical Analysis, Inc. Letter-writers must include their full Editor, name and address for verification. Letters may be edited for length or clarity. The opinions I just wanted to compliment Koos van expressed in this column do not necessarily represent those of the magazine.—Editor der Merwe for his September 2014 S&C article, “Looking At Cycles.” No one else gets it right like he does. OPEN NOTE TO READERS • A smoother indicator for more reli- Mi k e , New Jersey Editor, ability (see some of John Ehlers’ I’ve been reading TAS&C since its be- past articles in this magazine as my ginning [in 1982], but lately I’ve seen a favorite example); tendency for comments to request and • Calculation periods that are coordi- stress specific parameters, especially for nated with the primary strategy; and indicators. I’d like to share my experi- • Robustness, which means an indicator ence in hopes that it will be meaningful that works over a wide range of time to some of the newer technicians. Please periods and for many markets. note that these are generalizations. There Thank you for your feedback. are always exceptions, but exceptions Most indicators transition from trend- Readers who enjoy van der Merwe’s are not the rule. ing to mean reversion as the calculation work — and appreciate his insights from periods get shorter. And because we can’t his 45 years of history in the markets • An indicator is not a system. Don’t know what calculation period will work — may also be interested in his posts try to make it one. It is a tool to help in the future, you’ll want to use multiple at our Traders.com Advantage online entry & exit timing. time periods to give more stable results. publication at Traders.com, available • There are too many requests for “opti- Above all, remember: “Loose pants fit to all S&C subscribers (http://technical. mal parameters” and too many authors everyone.” traders.com/tradersonline/home.asp). showing the “best parameters.” There Pe r r y Ka u f m a n Past S&C articles by van der Merwe is no such thing as “the best.” There [email protected] can be found in the Complete Article is only “the best” for one example. Archive area of Traders.com.—Editor • One or two examples of good per- Thank you for sharing your comments, formance does not make a robust which are based on several decades of BINARY OPTIONS system. market research and which will no doubt Editor, • The more parameters and the more benefit many readers. And thank you, I read Gail Mercer’s Sep- rules, the less chance of future suc- of course, for being one of the original tember 2014 article in cess. subscribers to this magazine. S&C, “Binary Options: • Unless you’re looking to capture Perry Kaufman is the author of several Scam Or Trading Meth- noise, longer calculation periods books on market analysis, including the odology?” with great improve results while price noise will seminal Trading Systems And Methods, interest, since I have always been very make shorter patterns unreliable. now in its fifth edition (Wiley). skeptical about this kind of offering • Finding the optimal parameters is an Kaufman’s most recent articles in this due to the low payout rate. Thus, I was exercise in overfitting and ultimately, magazine were “A Better Trend” (April surprised to find a payout table (Figure in losing money. 2014) and “Slope Divergence: Capital- 6 in the article) suggesting that with a izing On Uncertainty” (June 2014). Our payout rate of 70%, after 500 wins and What you do want is: most recent interview with him appeared 500 losses the trader would have netted in our July 2014 issue (“Keeping Abreast $3,500. In my mind, the net payout would • To use an indicator for timing; With Perry Kaufman”), in which he be $-1,500. If my stake is $10 (as in the • Show that an indicator is “scalable,” discusses the evolving markets and the example) and the payout rate is 70% that is, it generates a predictable importance of evolving your strategies ($7.00), I would win $7 on my stake (not increase or decrease in signals as the with them. $10 plus the $7 payout) which, after 500 calculation period is made shorter or Subscribers to S&C can read past S&C wins, would equal $3,500. Taking the longer; articles at our website, www.traders. 500 losses with a stake of $10 into con-

8 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s LETTERS sideration, which would equal $-5,000, my balance would be $-1,500. ninjatrader.com To win with this kind of system, you would need a win ratio of 59% (590 trades out of 1,000 x $7 win = $4,130 against 410 trades with a $10 loss = $-4,100; Leave the net win = $30). This would be a return of only 3% after 1,000 trades with a Complications Behind. negative win probability (41/59). Th o m a s Bl e e s

Editor’s note: We also received several $3.38 per ES round turn all-in* other letters from readers with a similar question.

Author Gail Mercer replies: No hidden costs. No volume tiers. On payout, the broker pays the original stake of $10 plus the 70% return. Thus, Just transparency. it’s not $7 * 500 but rather $17 * 500, or $8,500. You need to calculate in the original “bet,” which was $10. When the binaries pay out, they return the original bet ($10) plus the 70% increase ($7) for View Commissions at ninjatrader.com/Commissions a total payout of $17 per trade. The table in Figure 6 is not a profit & loss table. It shows the total net payout. For example, if the trader started with Introducing a $1,000 account in binaries, had 500 winners, followed by 500 losers, at the NinjaTrader Brokerage. end of 1,000 trades he would have an in- crease of $3,500 in profit (over his initial NinjaTrader Brokerage deposit of $1,000). But if he started with will advance your a $5,000 account and had 500 negative trading experience trades immediately, he would have blown through award winning his account. And if it was just random winnings and losers, then he could services, transparent potentially still end up with a profit of commissions, and $3,500 at the end of 1,000 trades. The optimized customer care. percentage-based payouts on binaries do not pay commissions. Our goal is to address VOTING UNDERWAY FOR ANNUAL unfulfilled traders’ READERS’ CHOICE AWARDS expectations by disrupting the traditional ways Editor’s note: Voting is now brokerage is conducted. open in our annual Readers’ Choice poll on your favorite Expect More from Your Broker. products and services related to trading and investing. Fill out the ballot *Rate is all-in for an E-mini S&P 500 round turn including all transactional exchange, clearing and at our website to cast your vote in each data fees. Requires NinjaTrader Lifetime License. category, then look for the compiled FULL RISK DISCLOSURE: Futures trading contains substantial risk and is not for every investor. An results in our 2015 Bonus Issue due out investor could potentially lose all or more than the initial investment. Risk capital is money that can in February. Only subscribers to S&C be lost without jeopardizing ones financial security or lifestyle. Only risk capital should be used for are eligible to vote, so if you’re not trading and only those with sufficient risk capital should consider trading. Past performance is not subscribing, visit our website at www. necessarily indicative of future results. traders.com to sign up!

November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 9 10 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s INDICATORS

Because… Nobody Is Infallible When The Smart Money Fails

The Commitments Of Traders aggregated report inception, the COT report has gone through various is a handy tool for watching the moves of the most changes, such as the increase in frequency of release, significant players in the markets. But what happens use of combined futures & options positions, and when the “smart money” fails? You may be able to introduction of the disaggregated report. However, its gain some insights from the reports. Find out how. core purpose is always the provision of information about the sum of long and short positions of the most he year 2008 was an important year for stock influential market participants. This is accomplished market analysts, not just because it was one more in aggregated reports through the release of the posi- T crash to study but also because it debunked the tions of two major categories: commercial hedgers myth of infallibility of some highly regarded market and large speculators. participants. In this article I will first provide a brief, The commercial hedgers (or simply “commercials”) yet comprehensive, overview of the Commitments are the large and influential market participants who are Of Traders (COT) aggregated report along with its theoretically not interested in price speculation but use characteristics and the way most analysts use it. Next the derivatives market to hedge their business risk as- I will discuss the commercials’ failure to anticipate sociated with the underlying instruments. A large wheat the crash of 2008 and the lesson to be learned from producer and a wholesale commercial consumer are their fiasco. Finally, I will provide a short overview of typical examples of “commercials” in the wheat market. the disaggregated and Traders In Financial Futures Both hedge their risk regarding wheat prices. (TFF) reports introduced a few years ago by the Com- An oil-producing firm and a transportation company modity Futures Trading Commission (CFTC). are examples of “commercials” in the oil market. The first hedges its risk of descending oil prices whereas COT b a s i c s the second exerts hedging to be protected from rising Each week, the CFTC, an independent agency created prices by locking in the delivery of oil at a specific by the US Congress to regulate the US commodity price. In the stock and bond markets, examples of futures and option markets, releases the aggregated commercials are capital market mutual funds, insur- COT report to the public from its website, www.cftc. ance companies, and pension funds offering hybrid gov. The report is free of charge for transparency products to their clients. In the currency markets, reasons and contains the collective positions of all examples of commercials are large firms who sell market participants and the major players in various or buy products internationally. derivatives markets based on their volume of trades The large speculators (or “large specs”) are large

BARRY BRUNER BARRY and predominant role in the marketplace. Since its market participants who try to profit from the price fluctuations of the derivatives market. Their busi- ness is almost always completely unrelated to the underlying products of the derivatives they trade. A by Giorgos E. Siligardos, PhD speculative fund that applies algorithmic trading in

November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 11 futures & options on the S&P 500 is an example of a large spec. using the underlying in their off-the-market business. The official name of large specs in the COT report isreportable The large specs almost always close their positions non-commercials. before expiration since they are only interested in price The commercials and the large specs are what the CFTC speculation. Even though a small part of the small specs calls reportable categories (since they are required to report category uses the derivatives for hedging their business their positions to the CFTC). But the COT report also contains risk, the participation of small specs in the exercising information about the total positions of all market participants. and delivery processes is negligible compared to that Subtracting the positions of commercials and large specs from of the commercials. these totals, the CFTC derives the positions of all those who n don’t have the obligation to individually report their posi- The term hedge fund can be a misnomer. Almost all tions. These form the COT’s non-reportables category, or modern hedge funds are unregulated pooled investment the small speculators (“small specs”). As you have probably vehicles of private equity that engage in high-risk trad- guessed by now, the small specs include all the small fish or ing strategies on behalf of affluent venturous clients. I all those who engage in either hedging or pure speculation therefore deliberately avoid using the term hedge fund but are significantly undercapitalized compared to the other in this article to prevent misunderstandings. Instead, I two categories. The discrimination between the small specs use the term speculative fund. and the other categories is thus based on their average trading volume. The small specs do not meet the CFTC’s reportable Sm a r t a n d d u m b m o n e y level of trading volume. The commercials are widely consid- It is important to emphasize the following: ered to be the most knowledgeable when it comes to the fundamentals n The small specs category contains small hedgers (who of supply or demand in the underly- use the underlying for their business) and pure specula- ing instruments of the derivatives tors. Most traders in this category however, are pure markets. Since the primary motive small speculators. for their engagement in derivatives n The classification of a market participant for a com- is to hedge their business risk, they modity depends on his trading volume and his major are considered more unbiased when role in the marketplace for that particular commodity. it comes to evaluation of price exag- The CFTC states that it classifies traders by market and gerations. The ideal situation for a large wheat producer, for not by trading activities. Thus, a market participant example, is to know that he can sell his product at a specified may be classified by the CFTC as a commercial in price in the near future. The more he believes the prices will fall some commodities and as a non-commercial in other in the future, the more he is in need of hedging his increased commodities. Once a trader is classified as a com- risk. He can do this by either taking a short position in the wheat mercial for a commodity, all his activities are reported futures market or by buying puts in the wheat options market. in the “commercials” category of the COT report for The summative net position of all commercials’ positions in that commodity. For example, if a cotton producer is the wheat futures and options uncovers their general perception classified as a commercial for cotton but he engages in about the future price for this commodity. Since they are consid- some speculative trading in the cotton futures market, his ered the most informed and prudent of all market participants positions will still be presented as commercial activity when it comes to the future prospects of their products, that is, in the COT report for cotton. they know the information from its source, they have earned the term smart money in the market jargon. n Most derivative contracts never go to actual delivery of The large specs, on the other hand, are considered less the underlying. Hence, it is profound that the commercials knowledgeable about the fundamentals of the markets than are those who primarily participate in the exercising and the commercials. Due to the nature of their job, they are delivery procedure, since they are the ones interested in only interested in speculation and are more vulnerable in assuming risks and following price trends. They generally do not have the same quality and timing of information as commercials do. Greed, panic, and the inability The small specs are considered the uninformed public. Their small financial assets make them much more susceptible to to know future prices should low-quality, lagging information. The speculative part of the be assumed even for the ultra- small specs category usually assumes reckless risk blinded by informed market players. eagerness for quick and large profits. Even the hedgers of this category are often the last to know when a trend change is im- minent. Because of this they are granted the nickname dumb money by analysts who study COT reports. 12 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s Noisy indicators delay your analysis Cl a s s i c COT a n a ly s i s If you plot the individual net positions (longs minus shorts) of commercials, large specs, and small specs as three separate indicators below the chart of the underlying commodity, you can see how the various market participants value the prospects of that particular commodity. The sum of the three values of Jurik algorithms these indicators is always zero. The three classes of participants deliver low lag, in the derivatives markets sell and buy contracts to (and from) each other. These indicators, therefore, slice the zero-sum of low noise analysis all open interest into three numbers, which are the net positions

of commercials, large specs, and small specs. Tools for: TradeStation, AmiBroker, Investor/RT, MultiCharts, NeuroShell Trader, A typical COT analyst watches for extreme values in rela- eSignal, NeoTicker, Tradecision, TradingSolutions, MATLAB, Ninja Trader, tion to their past. This is because each indicator has specific Genesis TradeNavigator, Market Delta, Extreme charts, DLLs for custom software idiosyncrasies that may vary from time to time. For example, it is typical for the indicator of commercials in physical com- Jurik Tools on live charts, on the web ! modities to be negative (see sidebar “Commercials Are Usu- tinyurl.com/jurik-online ally Net Sellers”). Hence, it doesn’t help to wait for a positive reading of that indicator to arrive at the conclusion that the smart money bets in a bull market, generally speaking. Some Jurik Research analysts even apply volatility bands around these indicators or construct stochastic-like oscillators to quantify occasions when the COT indicators are relatively high or low with re- 2010 -- 2011 -- 2012 -- 2013 Add-In software spect to their past. The ideal situation for a trend-reversal signal from a pro- jurikres.com • 800-810-3646 • 719-686-0074 longed bullish market seems to be a relatively low value for the commercials indicator (indicating that the smarts are afraid that the market is prone to decline) and a relatively high value for the small specs indicator (indicating that more and more the professional speculators are emotionally positioned at the of the dumb money blindly and emotionally enter the uptrend wrong side, drunk by the ferocity and duration of the trend. when the party is about to end). Similarly, if during a prolonged That is widely considered a perfect scenario to apply contrary downtrend the commercials indicator is relatively high and the opinion. Note that the indications from the commercials are small specs indicator is relatively low, a trend reversal from generally of value for long-term analysis and not short-term. bearish to bullish is considered to be likely. Commercials usually build their hedging positions slowly and Many analysts who study COT reports would also like to don’t focus on being protected by sluggish short-term price see the large specs and small specs indicators following a swings. As a result, the commercials indicator readings are not trend while the commercials indicator goes against it during timing signals but alerts as to whether the prices have moved extreme trending conditions. That would indicate that even too far above or below reality-justified levels.

THE COMMERCIALS ARE USUALLY NET SELLERS

In most cases (during the history of COT report), the commer- prices in the derivatives market. This drives up the commercials’ cials have usually been net sellers and consequently, the com- indicator, and when an indicator that is usually negative starts mercials indicators have been negative for significant periods taking high positive values, it tells you something. of time. For the physical commodities, this is because a lot of Since many of the commercials are conservative investment the commercials are producers, which means they are long the firms, when it comes to the bond and stock markets, they need underlying. They therefore hedge their risk by taking the short to protect their portfolios from depreciation, and this again side of the price either via futures or options. Wholesale buyers makes them more willing to take the short side of the prices via of the underlying products, who are also considered commercials, derivatives. In the currency markets, there is no general bias for may hedge their risk of high prices by going long the price via the commercials to be net sellers or buyers. derivatives. However, since they can usually transfer a portion of the high prices to the end consumers, they are generally not as worried as the producers and are not so aggressive in hedging. But if extreme and sudden shortages are projected, it can send the prices of commodities flying. At those times, the wholesale buyers step in and hedge their risk by going aggressively long the

November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 13 S&P 500 1 2 3 4 5

firmly bullish. To their surprise, the S&P 500 fell quickly during the following months and they turned into bears and took their most negative net position near the worst time, that is, close to the reversal point at line 3. The large specs were also completely out of reality near the bottom, as they had a nega- Commercials tive net position. Since the commercials and the large specs were largely net short at the bottom, the small specs were largely net long and consequently they had the right position at the right time. Then, all of a sudden, the behavior of Large specs commercials and small specs followed the textbook model I discussed earlier. During the times represented by lines 4 and 5 in particular, their behavior correctly indicated that the setbacks of the S&P 500 were only minor corrections in the context of a long- term uptrend.

Small specs Wh e n in d o u b t , g e t o u t Before discussing why the smart money fails at times and to put it in a rational frame, I find it worthwhile to elaborate on two concepts. The first has to do with the definition offail - ure of the commercials, and the second has to do with the importance of filtering your 2005 2006 2007 2008 2009 2010 2011 2012 2013 perceptions and analysis tools through the

Microsoft Exc e l Microsoft touchstone of technical analysis. Figure 1: cot indicators before and after the crash of 2008. During the times indicated by lines Regarding the first concept, I loosely define 1, 2, and 3, the commercials indicator was strikingly incorrect, whereas at times 4 and 5, it correctly showed that these setbacks of the S&P 500 were merely temporary pauses in the context of a long-term bullish trend. “failure” for the commercials as wrong sig- nals generated by the commercials indicator according to the classic guidelines I set forth Th e c r a s h o f 2008 earlier. For example, when the commercials indicator is unusu- Are the commercials right all the time? The crash of 2008 gives ally high with respect to its past, but in the sequence it declines us a case to study. In Figure 1 you can see a chart of the S&P swiftly and the market falls significantly (see, for example, the 500 with three subcharts below it. The first subchart shows the behavior of the commercials indicator between lines 1 and 3 in commercials indicator, the second shows the large specs indica- Figure 1), then this constitutes a failure. It is important to clarify tor, and the third shows the small specs indicator. There are also this because the commercials are predominantly hedgers. They five vertical (enumerated) dotted lines that pinpoint five time participate in the derivatives markets to lessen or eliminate instances. You will notice that there is no scaling in the vertical the risk they have on their open positions or their opportunity y-axis except the zero lines in the COT indicators. This is done cost in the spot markets. Consequently, failure for them must in order to concentrate on the juice of the charts. logically mean an inability to make a good hedge. Later in this The time represented by line 1 near the end of 2007 finds the article, however, you will see that the commercials engage in commercials indicator positive and making a historic multiyear soft speculation or they alter their rigid hedging rules at times, high (not clearly shown in this chart due to the limited time and this adds more common-sense meaning to the term failure span it covers). At the same time, the large specs indicator was in relation to their COT indicator. sharply negative, whereas the small specs indicator was in a Regarding the second concept, let me show you how I dealt downtrend albeit in highly volatile fashion. Could it be that the with the commercials’ failure in 2008. During the last days of smart money was seeing something that the large specs and the 2007, while the stock market seemed to be in the early stages of dumb money were unable to see? a correcting phase, I wrote an article titled “What The End Of A couple of months before the summer of 2008 (line 2), the 2007 Showed” (see “Further reading”), which first went public S&P 500 fell, giving blatant sell signals according to almost all in January 27, 2008. The purpose of that article was to report classic technical analysis disciplines. The commercials, on the the conflicting signals of four non-strictly technical tools I use other hand — albeit more wary than previously — were still to gauge the long-term prospects of the stock market: the COT 14 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s 1700 S&P 500 (daily) 1700 1650 1650 1600 1600 1550 1550 1500 1500 1450 1450 1400 1400 1350 1350 1300 1300 1250 1250 1200 1200 1150 1150 1100 1100 1050 1050 1000 1000 950 950 900 900 850 850 800 800 750 750

98 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Figure 2: technical “sell” signals in S&P 500 just before the strongest part of the crash. The technically weak situation of the S&P 500 at that time was obvious. indicators, the insiders’ activity, the sector rotation model, and several non-strictly technical indicators (including the COT the cash levels of mutual funds. The first two were severely report) being still positive. In that article I wrote: bullish whereas the others were clearly bearish. Although I couldn’t arrive at a firm answer regarding what to expect for What does technical analysis say about the current situation? 2008 due to this and other conflicts, and given that there was My proprietary technical indicators stopped considering the no firm technical signal for trend reversal at that time — the long-term trend of the S&P 500 as bullish in November 2007 long-term uptrend had technically ended and the stock market and the current trend of the S&P 500 is considered bearish by almost any classic technical analysis tool. In Figure 4 you was nondirectional — I stated in the article that I was leaning can see that the S&P 500 is under its 200-day simple moving toward the continuation of the bullish environment after the average and both the horizontal support HL-2 and the upward correction was over. I gave some nontechnical arguments for trendline TL-1 are broken. Also, near the horizontal line HL-1 this, including my strong belief as to the importance of the (a previous resistance), the S&P 500 index created a confirmed bullish signal from the commercials. Here’s how my article reversal formation (double top or head & shoulders, whichever concluded: you prefer).

…all the indications require confirmation from the market (Note: The Figure 4 that I refer to can be seen as Figure 2 in and this is where technical analysis comes in. During the last this article). months of 2007, the stock market is fluctuating, trying to find a Then, in the final paragraphs I concluded: direction and the strong multiyear uptrend that started in 2003 is in serious danger. The technical signals in the broad stock Undoubtedly, the current state of interest rates sends bullish market indices will give the final answers. One thing is for sure, signs for the stock market via the bond uptrend and the normal however: This unusual coexistence between extreme readings steep yield curve, but the final trigger must be given by technical in the four indicators and its implications should be noted for analysis. One should not only look at what the market must do future reference when similar situations emerge. but he must also look at what the markets are doing. The cur- rent stock market status is technically bearish, and “playing” a A couple of months later, you could see how important these bearish game from the long side is not appropriate. words were with respect to the technical factor in such conflict- I am not comfortable when my technical analysis contradicts ing situations. I wrote one more article that went public in April my other analysis tools, and my answer when being asked my 20, 2008. The title of the article was “Interest Rates And The opinion about the current situation is: “Well, my perception Stock Market: The Current State” (see “Further reading”). In is bullish… but you know, the trend became bearish and I that article I first reported the bullish behavior of interest rates don’t argue with the trend.” In those tough times when you get contradictory signals from your various analysis tools, the at that time along with the steep upward-sloping yield curve minimum you can do is stop trading aggressively and consider that facilitates bull markets in stocks. I then contrasted the significantly reducing your risk exposure using the derivatives bearish technical situation of the S&P 500 index. The market market. If the contradictory signals are really strong and you had already fallen from its January levels, triggering sell signals feel uncomfortable then you can always stop trading completely according to any rational technical analysis discipline despite until all things become clear. November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 15 The market viciously plummeted a few weeks later. What effect of their sudden change of view is the psychological shock initially seemed to be a sharp correction in the context of a to all those who watch and respect their actions. The feedback bull market back then is seen as the highs of a steep waterfall loop takes care of the rest. in today’s historical charts. Note also that the money entering and leaving the stock mar- ket investing funds — even the most conservative ones — is Fi n a n c i a l s v s . p h y s i c a l co m m o d i t i e s strongly affected by market prices. A mutual fund investing in Let’s now move into some subtle issues of the COT report by large S&P 500 stocks, for example, may be forced to liquidate stressing an important difference between the commercials in positions in order to satisfy redemptions from frightened inves- the financial markets (stocks, bonds, and currencies are what tors during a severe bear market. This may alter its hedging CFTC puts in the financials category) and the commercials in needs in S&P futures. the classic commodities markets. As I mentioned earlier, the commercials are theoretically not interested in price speculation Ev e n t h e co m m e r c i a l s c a n b e e m ot i o n a l (unlike large specs) but they use the derivatives market to hedge Although there is a lot of automatic trading behind the scenes their business risk associated with the underlying instruments. to facilitate and objectify the hedging process, the trading is The discrimination between the commercials and large specs is planned and overseen by humans. Who is to say that even pretty clear when the classic commodities are concerned (like a commercial participant in nonfinancial commodities, who agricultural or mined products), but for the case of financial knows the fundamentals of his market well, will not buckle markets, this discrimination is a bit hazy. This is because doing in front of a potential opportunity for big profits and resist in business in the financial sector (especially in the stock market) altering his strict hedging rules? For example, in the paper is often translated in seeking additional profits from the price “Why Do Hedgers Trade So Much?” (see “Further reading”), movements of the financial instruments. the authors argue that hedgers in wheat, corn, soybeans, and For example, a large corn producer isn’t really focused on cotton markets frequently change their futures positions over making a profit from the price fluctuations in the corn market. time for reasons unrelated to output fluctuations. This implies But an actively managed conservative mutual fund that uses a form of speculation. Recall that earlier I stressed that com- fundamental analysis to invest long term in large-cap stocks mercials in a commodity can at times engage in speculation mostly for their dividends usually expects some additional profits for that commodity but their trading activity is still reported in through capital appreciation. The corn producer and the mutual the commercials category (since their categorization is based fund can be categorized as commercials — those who need to on their predominant trading activity), and you will understand hedge their risk. The corn producer would prefer the price of that the scenarios I presented are not pure fiction. corn to be relatively stable, but the mutual fund would prefer Consider what will happen when these deep-pocket smart some volatility for its stocks so that it could exploit possible types realize that they are positioned on the wrong side of cheap opportunities to add to its portfolio. This places the mutual the market and they have also deviated from their strict hedg- fund closer to — although not exactly — a large spec than the ing plan. What will happen to a stock mutual fund or wheat corn producer. This subtle idiosyncrasy of the commercials in producer (who is typically long in the stock and wheat spot the financial markets makes them less unbiased and more prone markets, respectively) when they realize that they are softly to assume some kind of extra risk by being less hedged for the hedged against price declines at a time when a sudden crash sake of additional profits. Undertaking risk is the nature of the occurs for whatever reason? They’ll panic. financial services business. Was greed the reason for the commercials’ unusually high net Since it is common for some commercials in financials to long position in the S&P 500 near the beginning of the crash expect some profit from the price movements of the underlying of 2008? Or was fear the reason for the commercials’ large net instruments, they are doomed to employ valuation techniques short position near the end of the crash? I don’t know, but what in order to find times when it is best to be loosely hedged. This I know is that greed, panic, and inability to know the future adds a guessing factor and of course room for errors. Yes, they prices should be taken for granted even for the most prudent are more knowledgeable, more informed, and more prudent than and ultra-informed market players. It must come as no surprise the pure speculators, but they don’t know the future. In fact, they to see the commercials following a trend, especially in markets can be wrong at times. Most important, they will possibly be where the concept of risk-taking is interwoven with the concept wrong at the worst times, that is, at those times where sudden of doing business. If all big players were prudent, there would unforeseen news strikes the markets. This is because the smart be no bankruptcies for large firms. Later, you will see how the money, by definition, foresees the news that can be foreseen; advent and significant presence of swap dealers in the markets otherwise, it wouldn’t be called “smart.” Now, consider this: made it possible for pure speculative or diversification actions What happens when striking news hits the financial markets and (unrelated to fundamental supply/demand) to sneak into the the most informed players are positioned on the wrong side? commercials’ positions. They will have to cut short their losses by altering their hedging positions of course, and since they are big fish (otherwise they Sm a r t d o e s n ot m e a n n e u t r a l wouldn’t be in the COT’s reportable category) they will also be Even if there are commercials who will at times engage in tumultuous on their way out. But perhaps the most important some kind of speculation, most of them are mainly concerned 16 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s Scan, Chart &Trade! about hedging their business activities. The amount of hedging they would need all on one platform with eSignal 12.0 to undertake would depend on their views and expectations with respect to the funda- mentals of their business. In other words, even if their motive is benign and they are focused only on hedging their business risk, they may conservatively change their hedging from time to time based on their estimations about their products’ prices. Though the commercials do not base the prosperity of their business on projecting the market price swings, and even if they may not be interested in extra profits from them, they have a projected price — acting more like a fair value — for their com- modity in their mind. When they anticipate deviations from that price, or the market moves away from that price, they tighten or relax their hedging. Is it a bad thing that the commercials may conservatively accommodate their hedg- ing according to their perception about Our award-winning trading software lets you: the price of their business products? Not necessarily. The commercial hedgers in 4Scan global exchanges with Market Screener Plus+ the derivatives market have, by definition, • Scan on both technical and fundamental data an opposite position in the spot market. If 4Chart with exclusive technical indicators their business is in physical commodities and they always perform 100% hedging, 4Trade instantly with your choice of 50+ brokers then the commercials’ indicators will move in sync with the current production or 4Get lightning-fast data: Stocks, Forex, Futures, Options demand levels of these commodities. That is good, but it is the slight deviation from Get started now with a risk-free, 30-day trial!* full hedging that conveys some extra piece of information regarding the projected supply & demand from the commercials’ deep knowledge to the COT analyst. Yes, this makes room for errors, but hey, we can’t have it all, can we? The moral, therefore, is that there is no 800.943.6039 | www.eSignal.com waterproofing in the markets. The com- eSignal, an Interactive Data company. JointheConversation *Ifyou’renotcompletelysatisfiedduringthetrial,canceltheservice,andwewillrefundyour mercials are usually right in their view of subscriptionfees.Taxes,add-onservice/exchangeandactivationfeesarenon-refundable.x15341 when the prices of physical commodities or financials are unusually high or low because they know the fundamental infor- Introducing Options Analytix! mation from its source. 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The original aggregated report (now called the Legacy Report) whereas the managed money, along with the other reportables, breaks down each Tuesday’s open-interest positions of all major substitutes for the large specs category. The managed money derivatives contracts that have more than 20 traders into com- includes participants such as Commodity Trading Advisors, mercials and large specs, whereas the disaggregated report for Commodity Pool Operators, and speculative funds (market the classic commodities markets breaks down the same open participants who are engaged in managing and conducting interest into the following categories: large-scale organized futures trading on behalf of clients), whereas the other reportables include deep-pocket participants • Producer/merchant/processor/user who don’t fall into the other categories (for example, affluent • Swap dealers individuals who trade their own accounts). Again, the positions • Managed money of small specs can be indirectly derived by subtracting the posi- • Other reportables tions of the reportable categories from the sum of positions of all market participants. The categories of disaggregated report The producers/merchants/processors/users (includes the large are currently applied to classic commodities futures markets producers and consumers of the underlying) and the swap deal- like metals, agricultural products, and livestock as well as for ers substitute for the commercials category of the legacy report goods like lumber and energy (gas, oil, etc.).

A s p e c i a l t y p e o f h e d g e r A n e w c l a s s o f r e p o r t s There is a group of market participants falling into the commercials In 2009, the CFTC began publishing a more detailed, or disag- category of the aggregated COT report whose activity — although gregated, version of the COT report for physical commodities clearly hedging in nature — arises from, and conveys actions from, with four categories of market participants as a way to cope ambiguous incentives. This is the group of swap dealers (SDs). with the SDs’ ambiguous role in the marketplace. In the sidebar An SD is defined by the CFTC as an entity that deals primarily in “The Disaggregated COT Report,” there is a detailed explanation swaps for a commodity and uses the futures markets to manage of this relatively new version of trader categorization. For the or hedge the risk associated with those swaps. The SDs are over- sake of transparency in financial instruments, the CFTC started the-counter (OTC) dealers offering swap agreements tailored to publishing the Traders In Financial Futures (TFF) report in the needs of large firms and institutions. The SDs need to hedge 2010. The TFF redistributes the positions of commercials and the risk exposure from their positions in those swaps, and when large specs in financials into four categories. In the sidebar they cannot do it in the OTC markets, they do it in the organized “The Traders In Financial Futures Report,” you can see a exchanges. In this sense, the SDs act to transport positions from comprehensive overview of the TFF report. OTC markets to the exchange markets. It must be stressed that although the disaggregated COT data Say that a large firm enters a swap agreement with an SD, for physical commodity markets can be re-aggregated to get which implies a long position in oil. The SD is therefore short back to the three categories of the old type of report (called the oil and needs to hedge its risk via either the OTC market or Legacy Report), the TFF is not a disaggregation of the legacy the oil futures market, taking an appropriate long position. As report for the financial futures markets, and it is for this reason a result, the long position in oil for the firm raised from the the CFTC does not use the term disaggregation for the TFF (see OTC swap agreement may finally be transformed into a long sidebar “Re-Aggregating The New COT Data”). The CFTC, position in the oil futures market, and it is reported to the CFTC as of now, continues to publish the legacy reports along with as the SD’s hedging position. The character of the firm that the disaggregated and TFF ones. entered the swap and motives for its actions are unknown and, The new reports are a significant improvement in terms of although in most cases it just tries to satisfy its business needs, transparency and information. Their history, however, is short it could be an outright speculator. Regardless, this OTC action and, at present, it is difficult to derive fact-based conclusions about was transformed in an action categorized as hedging due to the how they could be used to gain additional insight on the market involvement of the SD. As another example, consider a firm that dynamics. The TFF in particular is different from the legacy report enters a swap just to diversify its risk with no particular interest of the financials and it should not be uncritically compared to in the underlying instruments. Any implied position from the it. The aim of these new reports is to weed out the commercials swap may finally result in a commercial’s reportable position category from hybrid or ambiguous cases. It will be interesting in the COT report because of the involvement of the SD. to see how the new pure commercials will weather future market It is apparent that since SDs hedge their positions using crashes and booms. For the time being, it is important to keep in the exchange derivatives markets, they must be registered as mind that the commercials in the legacy report may contain pos- hedgers in the exchanges. Hence, they must be categorized as sible speculative positions brought from the OTC world. a type of commercial. However, their massive trading volume and ambiguous character as potential conveyors of speculative How m u c h c a n t h e y f a i l ? or otherwise non-hedging positions from the OTC markets to Since the COT indicators are not derived from price or volume, the exchanges is what motivated the CFTC to start reporting they offer a different view of the market than classic technical the so-called disaggregated and TFF reports a few years ago. analysis does. It is helpful to keep an eye on them for additional To avoid misunderstandings, these reports do not contain the information. The COT’s smart money can experience bad times, commercials designation. which is when the statement “when smarts fail, their failure is

18 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s THE TRADERS IN FINANCIAL FUTURES REPORT

The Traders In Financial Futures (TFF) report breaks down dealers) who design and sell various financial assets to clients. the open-interest positions of all major derivatives contracts in The traders in this category could be thought of as commercial financial instruments into the following categories: producers for the financials since their business is mostly to create financial products and earn commissions from selling • Dealer/intermediary them. The other three TFF categories represent the buy side • Asset manager/institutional of market participants who predominantly buy what the sell • Leveraged funds side creates and offers. More precisely, the asset manager/ • Other reportables institutional, who could be thought as commercial consumers for financials, includes large institutional investors and organiza- The main idea behind the TFF report is to divide the financial tions such as mutual and pension funds, insurance companies, derivatives market participants into sell and buy sides. The term and institutional fund managers who are what we think of as buy & sell here has nothing to do with the long/short positions large (mostly conservative) investors. The leveraged funds are these participants might take but rather with their role in the primarily speculative investment pools that engage in systematic marketplace. It remains to be seen how this division will be of or proprietary aggressive trading on behalf of clients who prefer practical use for the COT analysts since, contrary to the legacy high-risk investments. The other reportables category includes report, it separates the (previously considered similar) roles of affluent individuals who trade their own accounts as well as institutional investment funds from the creators and dealers of some other market participants who — according to CFTC’s financial products. judgment — don’t fall into one of the other categories such as The dealer/intermediary category represents the sell side corporate treasuries and credit unions. and includes market participants (mostly large banks and swap

highly likely to be of epic proportions” comes to light. When RE-AGGREGATING THE NEW COT DATA such an event takes place, small traders have a distinctive ad- vantage over the big players because they can get in and out of It is possible to derive the legacy report from the disaggregated the market quickly and efficiently. The small traders can weather one for the physical commodities. The producers/merchants/ the failures of the big players when they happen by filtering the processors/users and swap dealers form the commercials commercials indicator. category. The managed money and other reportables form the It is important to cut both your losses and your risks short. large specs category. For the financials, it is not possible to When something doesn’t act the way it should, such as the re-aggregate the TFF report to get back to the legacy report. market ignoring the commercials’ indicator calls, and you start This is because — as the CFTC points out — participants to worry, there’s no point waiting for a loss to appear. It’s time classified into one of the four categories in the TFF are drawn to cut your risk short and get out. In Jack Schwager’s Market from either the commercial or noncommercial categories of Wizards, Michael Marcus said that he was heavily long in soy- traders in the legacy report. beans during the late 1970s. He was expecting the market to be limit-up for the next three days because of extreme soybean shortages and bullish government reports. But on the first day, t i e s , Volume 23: August. the market opened limit-up and it then started trading down. Here Briese, Stephen [2008]. The Commitments Of Traders Bible: is how Marcus reacted (in his own words): “I said to myself, How To Profit From Insider Market Intelligence, Wiley ‘Soybeans were supposed to be limit-up for three days and they Trading. can’t even hold limit-up the first morning?’ I immediately called _____ [1990]. “Commitments Of Traders As A Sentiment In- my broker and frantically told him to ‘sell, sell, sell!’” dicator,” Technical Analysis of St o c k s & Co m m o d i t i e s , Volume 8: May. Giorgos Siligardos holds a doctorate in mathematics and a Cheng, Ing-Haw, and Wei Xiong [2004]. “Why Do Hedgers Market Maker certificate from the Athens Exchange. He is a Trade So Much?” available online at SSRN, http://ssrn. financial software developer, coauthor of academic books in com/abstract=2353218 finance, frequent contributor to this magazine, and scientific CTFC, “Disaggregated Commitments Of Traders Report: Ex- contributor in the Department of Finance and Insurance at planatory Notes,” http://www.cftc.gov/ucm/groups/ the Technological Institute of Crete. Material from his course public/@commitmentsoftraders/documents/file/disaggre- writings on derivatives has been used in educational enchiridia gatedcotexplanatorynot.pdf for bank managers. His academic website is http://www.tem. _____ “Traders In Financial Futures: Explanatory Notes,” uoc.gr/~siligard and his current views on the markets can be http://www.cftc.gov/ucm/groups/public/ found at http://market-calchas.blogspot.gr/. He may be reached @commitmentsoftraders/documents/file/tfmexplanato- at [email protected]. rynotes.pdf McEwan, Ron [2012]. “Mining For Gold,” Technical Analysis Fu r t h e r r e a d i n g of St o c k s & Co m m o d i t i e s , Volume 30: November. Braswell, Jason [2005]. “Commitment Of Traders Report: Demystified,”Technical Analysis of St o c k s & Co m m o d i - Continued on page 52 November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 19 Wh a t is a m e a s u r e d m o v e ? A measured move is a price projection based on a previous price swing. The idea behind it is that any new price swing is of approximately the same size as the previous swing. For the defini- tion of the swings, I will use my SVEHLZZCandlepattern zigzag indicator that was introduced in my article in the July 2013 issue of St o c k s & Co m m o d i t i e s . In addition, I will use my 1-2-3 wave count as introduced in my article in the June 2013 issue of St o c k s & Co m m o d i t i e s as a reference to calculate measured moves. In Figure 1, you see that after a down move, a wave 1 up was followed by a first pullback wave 2 with a higher bottom. This typically indicates the start of a change in trend, in this case, a change from a down- to an uptrend. The first logical target for wave 3.1 — as it is for any wave 3 — is at least the height of the previous correction wave 2. This is because you expect a higher top than the previous top. In general, after a new wave 1 starts, you can expect the first wave 3.1 to have at least the same height as wave 1. I have identified this on the chart in Figure 1 with yellow rectangles. Following wave 3.1 is a new

corrective wave 2. After this cor- NIKKI MORR rection a new wave 3.2 started. You Exploring Charting Techniques can now expect a further move up with a height that is equal to (give or take 10%) the height of the previous wave 3.1. If however, Price Projections the previous wave 3 is the first of the wave 3s (as it is in this case Part 5 with wave 3.1), and the first 1-2-3 wave is relatively small, you can Here in part 5 of Sylvain Vervoort’s “Exploring Charting Techniques” series, he looks try to use the complete height of at techniques such as measured moves, Fibonacci projections & retracements, and daily that 1-2-3 wave to determine the pivots to estimate future price levels. next move. I have identified this as blue rectangles in the chart in by Sylvain Vervoort Figure 1. As you can see, wave 3.2 is reached, and it is followed by a rice projections estimate future price levels. Last month in part 4, I discussed some wave 2 cor rection a nd a new swing basic price projection techniques based on support & resistance and trendlines. But up. You next take the height of the P there are also other methods to project prices. I’ll start with measured moves. previous wave 3.2 and use that as 20 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s CHARTING

your projection for wave 3.3 (green). Similarly, you find the projections for waves 3.3 (brown) and 3.4 (red). Figure 2 is a continuation of the chart in Figure 1. After the top of wave 3.4 there is a valid wave 2 correction. After the correction, you would expect a new wave 3.5 up. However, price turns down again after about a 50% correction of the previous wave 2. Price reached the same level as the previous wave 2 correction, so you still have a valid wave 2 correction jaTrader n

for wave 3.4. Ni Next, you take the height FIGURE 1: MEASURED MOVES IN AN UPTREND. Here you see measured moves on range bars with the high–low zigzag in an uptrend. of the previous wave 3.4 and Note how you can effectively use the height of previous waves to determine the length of future price moves. project it up (yellow rect- angle). A wave 3.5 is completed just a fraction above wave 3.4. generations, became known as Fibonacci numbers. This could be a top, or price could move into a trading range. The number sequence was known to Indian mathematicians The best thing you can do here is to wait for a reversal signal. as early as the sixth century, but it was Fibonacci’s Liber Abaci The reversal only takes place after the moderately higher top that introduced it to the West. Fibonacci numbers have the fol- at 3.7 when the correction wave 2 is no longer valid (purple) and lowing sequence: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, and it becomes a new downward wave 1. You measure the height of so on. Each number is the sum of the two previous numbers. this new wave 1 and project it for wave 3.1 down (purple). The higher up in the sequence, the closer two consecutive To project wave 3.2, you use the height of wave 3.1 (green) numbers of the sequence divided by each other will approach instead of the complete 1-2-3 wave, since wave 3.1 is large the so-called golden ratio (approximately 1:1.618, or 0.618:1). enough. Next, you take the height of wave 3.2 to project wave 3.3 (brown). Since wave 3.3 is barely breaking the low of wave Fibonacci levels 3.2, you have to wait for wave 3.4 (brown) to reach that level. Charting Fibonacci levels is done by first drawing a fictitious Note that there are still lower highs and lower lows. Last but vertical line between two turning points. Next, you draw not least, you use the height of wave 3.4 (red) from the start of wave 3.3 to project wave 3.5 (red).

Fi b o n a c c i p r i c e p r o j e c t i o n s Leonardo Pisano Fibonacci was an Italian mathemati- cian born in 1170. In Liber Abaci, Fibonacci introduced the so-called modus Indo- rum (method of the Indians), which today is known as Hindu-Arabic numerals. Liber Abaci also pre- sented, and solved, a problem involving the growth of a hypothetical population of rabbits, which was based on idealized assumptions. The FIGURE 2: MEASURED MOVES IN A DOWNTREND. Here you see measured moves on range bars with high-low zigzag in a downtrend. solution was a sequence of Paying close attention to the retracements will help you determine when a trend reverses. Here you see how an uptrend changed to numbers that, over several a downtrend. November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 21 or down move, you can draw these types of Fibonacci projec- tions to project fu- ture price targets.

Historical Fibo- nacci projection Oftentimes, and based on the idea that resistance be- comes support and vice versa, you can also use historical data turning points to create a Fibo- nacci projection. In FIGURE 3: FIBONACCI RETRACEMENTS AND TARGETS. Once you have that first reaction point after the start of an up or down move, you can Figure 4, the emini draw these types of Fibonacci projections to project future price targets. reaches a top in an up move. At point 1 horizontal lines through retracement levels at 100%, 61.8% where the downturn starts, there is no forward reference to (100*0.618), 50% (not a Fibonacci number), 38.2% (61.8*0.618), draw a standard Fibonacci projection. To create a projection, 23.6% (38.2*0.618), and 0%. you can use the previous (historical) upturn to create the Then you draw horizontal lines at three or more Fibonacci downward projection. As you can see, price reaches the target target levels at 161.8% (100*1.618), 261.8% (161.8*1.618), and of 161.8% with a nice profit. 423.6% (261.8 * 1.618). After price moves up or down, there often will be a partial retracement, which will find support Single-point reference (SPR) Fibonacci projection & resistance near Fibonacci levels. Another possibility is making a projection from a single refer- In Figure 3 you see a four-tick modified renko chart of the ence point. To begin a projection, you can select any single emini (ES). A projection between the low at the beginning of turning point confirmed by a zigzag. In the five-pip modified the chart and the first reaction point after an up move shows all renko chart of the EURUSD in Figure 5, I used the point labeled retracement levels and the target levels at 161.8% and 261.8%. SPR as my starting point. Once you have that first reaction point after the start of an up The first target at 1.3540 is mainly a reference to detect a smaller pullback leg. If price does not move beyond this first target point, there often will be no change in trend. This can be seen at the beginning of the chart (the first shad- ed yellow box). From the SPR starting point, the second projection target is reached at 1.3560. Notice how price hovers around this point before continuing to the next target at 1.3585 and then moving straight FIGURE 4: HISTORICAL FIBONACCI PROJECTION. You can use historical price data to create projections. Here, price reaches the target of through to the next 161.8% with a nice profit. level at 1.3630. Price 22 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s remained here for a longer period of time, moving around that level, and then continuing to move up slowly to the next level at 1.3700. The projection targets I have used are based on the Fibonacci golden ratio and are shown in Figure 6. Note that you need to use some multiplier to adapt the basic FIGURE 5: SINGLE-REFERENCE POINT FIBONACCI PROJECTION. To begin a projection, you can select any single turning point confirmed by reference values to a zigzag. Here, I used the point labeled SPR as my starting point. the price level of the underlying. I used a basic multiplier of 0.11 and multiples of this value. In Figure 5, I used a multiplier of 0.22.

Da i l y p i v o t s Daily pivot levels that are calculated based on the previous day’s high, low, and close provide important intraday support & resistance levels. Here’s how the various levels are calculated: FIGURE 6: SINGLE-REFERENCE POINT FIBONACCI CALCULATION. The projection targets used PH = Previous day’s high here are based on the Fibonacci golden ratio. You need to use some multiplier to adapt the basic PL = Previous day’s low reference values to the price level of the underlying. I used a basic multiplier of 0.11 and multiples PC = Previous day’s close of this value.

Pivot point (PP) = (PH + PL + PC)/3

Resistance level r1: r1 = (2 * PP) - PL Resistance level r2: r2 = PP + PH - PL Resistance level r3: r3 = R1 + PH - PL Support level S1: S1 = (2 * PP) - PH Support level S2: S2 = (2 * PP) - PH - PL Support level S3: S3 = S1 - PH - PL

I have created an indicator that draws these levels on a real-time chart using different colors. You can adapt these colors if required. In the properties window of this indicator (Figure 7), which is called “SVEPivotsUtcRt,” you can see the colors used. You can download this indicator from my website at http://stocata.org/ninjatrader/formulas.html or from the St o c k s & Co m m o d i t i e s website at http://www.traders.com/ files/VervoortNov2014.html. This indicator can only be used on charts with a fixed horizontal time relation. Please note

A new price swing is of approximately the same size as the previous swing. FIGURE 7: PIVOT PROPERTIES. Different colors are used to identify the different support & resistance levels calculated based on pivot points.

November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 23 FIGURE 8: REAL-TIME PIVOT LEVELS ON 30-MINUTE CHART (UTC +1). Here you see the pivot lows, pivot highs, support & resistance levels, and pivot points.

that the SVEPivotsUtcRt indicator uses some nonsupported Sylvain Vervoort is a retired electronics engineer who has been NinjaTrader 7 script language. It is provided as-is. studying and using technical analysis for more than 35 years. His Calculating and showing these levels on a chart that trades book Capturing Profit With Technical Analysisreceived a bronze during normal US trading hours will not be a problem because medal from the 2010 Axiom Business Book Awards in the category the trading session break, high, low, and close are clearly of investing. The book is a technical analysis reference introduc- defined. For any underlying that trades continuously such as ing a trading method called LockIt. His latest Band Break System currency pairs, it is necessary to define where a trading day trading expert is available on DVD. Vervoort may be reached at ends. If each trader uses his local time zone, then everyone [email protected] or via his website at http://stocata.org. would be using different support & resistance levels. The most common time used as the end of a trading day’s session is the The code for this article is available at the Subscriber Area at our website, www.Traders.com, in the Article Code area, as well as at Coordinated Universal Time or UTC (GMT) zero hours. the direct link http://www.traders.com/files/VervoortNov2014.html, Most people use charts displaying local time in the x-axis. and also from the author’s website at http://stocata.org/ninjatrader/ That means you will have to shift to UTC:0 for starting the formulas.html. new day’s support & resistance levels at the correct local time. The good news is that the indicator will do this for you Fu r t h e r r e a d i n g automatically. Gopalakrishnan, Jayanthi [2014]. “Swing Trading With Sylvain Vervoort,” interview, Technical Analysis of St o c k s & Co m - Pu t t i n g it t o g e t h e r m o d i t i e s , Volume 32: May. In Figure 8 you see a 30-minute chart of Vervoort, Sylvain [2014]. “Exploring Charting Techniques, Part 1,” the EURUSD with UTC+1 local time. Technical Analysis of St o c k s & Co m m o d i t i e s , Volume 32: July. The first date on the chart is September [2014]. “Exploring Charting Techniques: Basic Chart 25, 2013 and it begins with a move toward Trading (Part 2),” Technical Analysis of St o c k s & Co m m o d i - the median pivot level PP, but falls back t i e s, Volume 32: August. to the previous day’s low PL. Then an up [2014]. “Exploring Charting Techniques: Creating A move starts up to the previous day’s high Trading Strategy (Part 3),” Technical Analysis of St o c k s & PH. A reaction follows after which the up move continues up Co m m o d i t i e s , Volume 32: September. to the second resistance level R2. During the remainder of the [2014]. “Exploring Charting Techniques: Demystifying trading day, price finds support at the previous day’s high. Support & Resistance (Part 4),” Technical Analysis of St o c k s On September 26, 2013 price falls further to the support & Co m m o d i t i e s , Volume 32: October. of the median PP pivot level. This support does not hold and [2013]. “Indicator Rules For Swing Trading Strategies, Part price falls through, followed by an attempt to move up again. 1,” Technical Analysis of St o c k s & Co m m o d i t i e s , Volume 31: However, the PP resistance level is too strong and price drops May. [Parts 2–7 appeared in the June–November 2013 issues.] to the level of S1 support. ‡NinjaTrader (NinjaTrader, LLC) Now that we know various ways to project price movements, ‡See Editorial Resource Index the next step is to apply our knowledge to identify the larger cy- clical moves. I will discuss this in the next part of my series.

24 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s Explore Your Options

Got a question about options? Tom Gentile started his trading career on the floor of the American Stock Exchange in 1994. He has appeared on many financial TV and radio shows, as well as hosting a weekly talk show himself, and has co-authored many books on the markets. He can be found at www.tomgentile.com. To submit a question for Tom Gentile, post it to our website at http://Message-Boards.Traders. com. Answers will be posted there, and selected questions will appear in a future issue of S&C.

Tom Gentile

THE STARBUCKS/COFFEE suggests that it’s time for SBUX to roll ward would be five points minus the $1.55 CORRELATION over, but I would also look at the price cost, or a reward of $3.45. As I have stated on several occasions of coffee. If coffee moves to fresh highs before here in this column, I am a rules- for the year, that could be the signal for Bearish scenario based trader. I don’t like trading off tips, SBUX to move lower. Now obviously, If you take the contrarian approach, then recommendations, analyst buys or sells, it’s anyone’s guess as to where SBUX, or you believe SBUX will fall into spring. or so on. I like one plus one to equal two coffee for that matter, will be as we turn In that case, you’re looking for a bearish before I take a short-term trade. But long into 2015. Just remember, our summer is approach that limits upside risk while term? That’s a different story. I hate to say South America’s winter. Couple that with maximizing profit if SBUX drops. A it, but sometimes I get my best ideas for a robust (pun intended) stock market and bearish spread is similar to the bullish long-term trades while reading the news it could lead SBUX to higher prices into spread, but involves puts. The higher or watching TV. next spring. How can you take advantage strike put would be bought, and a lower As I write this article, I am hearing a of a potential move higher while limiting st r i ke put wou ld fi na nc e t he ot her to lower news story that somehow seemed to pass risk exposure? Continued on page 52 over my desk until now. Coffee, that stuff The case study that’s just to the left of my keyboard ev- in Figure 2 in- ery morning, is up 65% to date this year. volves a bull call Bullish Projection above 82 Looking at the chart in Figure 1, you can spread, which is Top in Starbucks? see that coffee (the solid green line) has a bullish spread indeed bounced off the bottom of 2014 where you finance and looks to have made a 50% retracement one option with from its highs of 2011. Though it has hit another to lower resistance earlier this year, this is still a the cost and overall Bearish Projection below 72 far cry from where it began the year. risk of the position As a contrarian trader, I pay attention to its expiration. In Bottom in coffee? to what the crowd is doing. Looking at the this case study, I chart of Starbucks (SBUX) once again, am long the April Figure 1: INTERESTING CORRELATION. Even though the price of coffee dropped, I want to draw your eyes to the waves 2015 80/85 call Starbucks (SBUX) stock rose. How can you take advantage of this potential move indicated by the numbered circles 3, 4, spread last priced higher? and 5. The third wave on the chart had at 1. 55. T h is mea ns the strongest up move, indicating that for $155 plus com- i nst it ut ions were buyi ng up SBU X i n l ig ht m issions, you have of the drop in coffee prices. At that time, t he r ig ht to buy 10 0 SBUX nearly doubled in price, moving shares of SBUX from the low $30s to above $60 in 2012. at $80 a share, The following year saw a much-needed but you are also pullback, at the same time that the price obligated to sell it of ca sh cof fe e wa s ret r a ci ng f rom it s lows. at $85 a share if a This happened between April and August buyer chooses to 2013. Since then, SBUX has been on a exercise. This is rise, doubling in price again, from near precisely what I $40 in April 2013 to $80 recently. would wa nt — buy it at $80 and sell Figure 2: bullish scenario. In this bull call spread, for $155 plus commissions Bullish scenario it at $85. In such you have the right to buy 100 shares of SBUX at $80 per share but also are obligated A quick look at the chart in Figure 1 a scenario, the re- to sell at $85 a share. November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 25 Candles, Cups, Gaps, And Pivots

Swing Trading With Momentum On Your Side

Seeing a simple breakout may convince you to place stick patterns alone runs the risk of buying near a pivot or a trade, but how do you know if a breakout is really a exhaustion area. Similarly, relying too heavily on complex

breakout? Here’s one way you can jump into a trade and lagging indicators like moving average convergence/diver- KEN SMITH not get caught off-guard. gence (MACD) crossovers, relative strength index (RSI), or stochastics can generate false positive entry signals and lead by Ken Calhoun to overtrading weak signals. One solution is to combine the best of strong, wide-range eveloping a consistent approach to identifying and trad- candlestick breakouts with cups, average true range (ATR) ing breakouts that continue in an uptrend after a trade expansions, and gap continuations. These techniques are D has been placed is a common challenge faced by active designed to help experienced swing traders capitalize on traders. Traders may often enter a position based on a price volatility breakout patterns. Swing trading is defined as simple breakout above new highs, which subsequently trades lasting from several days to several weeks in duration, consolidates or pulls back, causing stop losses. using 90-day daily candlestick charts and 15-day, 15-minute Trading breakouts based on simple price action or candle- candle charts. 26 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s TRADING TECHNIQUES

Sw i n g t r a d i n g w i d e -r a n g e c a n d l e s & c u p s A simple, strong breakout pattern is found whenever a wide-range candle occurs at the rightmost side of a bullish cup pattern. A “wide range” is defined as one in which the height of the candle is at least twice the height of the prior two daily candles. For example, in the 90-day daily chart of Tesla Motors, Inc. (TSLA) in Figure 1, you can see that on July 16, 2014 and August 7, 2014, the wide- range candle at the right side of each bullish cup pattern led to more than a week of sub-

sequent new-high breakout eSignal price action. FIGURE 1: Wide-range Candles & Cups. Finding taller-than-average candles at the right side of bullish cup patterns often These wide-range candle provides good breakout entry signals. days often attract new in- stitutional money flow, as seen by the taller volume bars on versus increasing candle heights. These will visually show each of those days. An astute swing trader will wait until the ATR patterns. An example of both of these is illustrated in day following one of these high-volume wide-range candle the 90-day daily chart of Bituato Holdings Ltd. (BITA) in days to enter a new trade. A visual scanning process includes Figure 2. Similar to a classic three-line break (exhaustion) looking through 90-day daily candlestick charts to identify pattern, three decreasing-height candles leads to consolidation those charts in a reasonably strong uptrend that show this or reversal of price action. In contrast, when there’re three pattern, and developing a trading plan to initiate new entries increasing candles, this momentum of taller candles often above the highs of these wide-range candles. leads to a breakout continuation.

Av e r a g e t r u e r a n g e s a n d w i d e - r a n g e c a n d l e s On a 90-day candlestick chart, the visual pattern of increasing candle heights shows increas- ing ATRs. Spotting emerging new momentum breakout volatility therefore becomes a matter of simply looking for taller candles above key support/resistance areas (like the bullish cup highs I men- tioned earlier). Rather than depending on a derived ATR pattern, it becomes easier to spot breakouts by looking at increasing candle heights (daily trading ranges), over several days’ time. On a 90-day daily chart, one pattern to look for is a Figure 2: Average true ranges and Candles. Looking for a sequence of three increasing vs. decreasing candle height pat- series of three decreasing terns provides clues as to price exhaustion vs. breakout continuation. November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 27 fact, gaps often con- tinue in-trend when- ever characterized by high volume on the gap day and a wide-range candle. In the chart of US Steel (X) in Figure 3, this technical pattern is easily confirmed. Price action gapped from 28 to 32 and sub- sequently continued up an additional five points in the two weeks following the gap. Gaps — or windows in candlestick termi- nology — often occur after earnings releases or following a news release that impacts the price of the stock. Figure 3: Gap Continuation Entries. Gaps often continue in the direction of the gap, especially when the gap day has a wide-range high A technical entry pat- volume breakout candle pattern like in this chart. tern confirmation is found when price action takes out new Ga p continuation highs during the two to three days following the gap day. e n t r y pat t e r n s It’s often wise to avoid entering on the day of the gap, A common trading myth is that gaps often unless you are daytrading, because gaps will often have a fill, and that buying new gap highs is risky. resting or low-volatility day or two following the gap. In Nothing could be further from the truth; in the chart of Noodles & Co. (NDLS) in Figure 4, this is seen on the two days fol- lowing the gap down: August 17 and August 18, 2014. In this chart, no short entry would be indicated unless price action loses the three-day support at 19.50. By waiting to confirm an entry on a technical confirma- tion signal like this following a gap, you can avoid the un- certainty that occurs during the immediate day or two following a gap chart.

Ex i t i n g w i n n i n g g a p s w i n g t r a d e s Once in a winning long Figure 4: Resting Day Following Gap. Price action will often consolidate or rest following a major gap. It’s best to wait for new direction gap continuation trade, prior to entering. it becomes important 28 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s SPECIAL HOLIDAY SALE 15% OFF ALL ABLESYS SOFTWARE PRODUCTS!

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to identify signals that indi- cate a slowing of breakout momentum. The two most important, as always, are price action and volume. In the chart of Canadian Solar Inc. (CSIQ) in Figure 5, there’re two warning signs, indicating that if you had Figure 5: Exiting After Winning Gap Trades. Once entered, it’s important to look for clues that breakout momentum may be bought the initial gap up, declining, such as a series of decreasing candles on lighter volume. you should now be looking to tighten in trailing stops to protect your profit. mentum. The second warning sign is the decreasing volume The first signal is the decreasing candle heights during bars, which indicates that buying momentum is slowing down the most recent three trading days. The candles are getting as well. So it’s a smart time to start closing out the trade with progressively smaller, indicating a slowdown in buying mo- tight trailing stops. November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 29 gap fill buyers, to near a 50% retracement zone. If you look for these types of pivot zones, you can use a position-sizing approach where you would enter a small position once price action makes its initial pivot, followed by a secondary scale-in entry to add to the initial position once price action has taken out new 15-day highs, above the gap high. In this case, that would mean an initial entry in the 20.30–20.90 region, and a second entry above 22.60 Figure 6: Retracement Following Gaps. Following gaps that fill, price action will often retrace to near a 50% zone and then resume the initial direction of the gap. for a scaled-in continuation breakout trade.

Ga p r e v e r s a l s : 50% Pi v o t s a n d m o v i n g av e r a g e s retracement z o n e s As has been the case in the S&P 500 index during 2013–14, On the rare instances where weak gaps retrace, they price action will occasionally find support at the 50-, 100- and/ will often pivot near a 50% retracement zone, as or 200-day simple moving average (SMA) support areas on a seen in the 15-minute, 15-day chart of SunEdison, 90-day daily candlestick chart. Looking for classic candlestick Inc. (SUNE) in Figure 6. A minor gap that fails hammer patterns at these major moving average areas can help to take out new highs on the day following the gap day will you identify likely pivot points to use for your trade entries. occasionally drop and chop to near a 50% midline retracement You would enter your trades above these pivot points. In the area, after which it may get buyers and pivot back to the upside. example of the chart of Southwest Airlines (LUV) in Figure The same is true of gaps down that bounce up, attracting long 7, classic daily hammers are found at the 50-day SMA lines, indicating long entries could be entered above the high of each hammer. As a general guideline, it’s best to enter above daily hammers on 90-day candlestick charts that find support at the 50-day SMA (as opposed to the 100- or 200-day SMA), since price pullbacks and selling pressure are less at the nearer 50-day SMA signal. When selling pressure has taken price action all the way down to the 100- or even 200-day SMA, there’s less strength for long trades indicated. While still viable, they should be entered more cautiously than with ham- mers that pivot early, off Figure 7: Hammers and moving averages. Pivot entries can be found following hammers that rest on a 50-, 100-, or 200-period of the 50-day SMA as seen simple moving average line. in Figure 7. 30 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s De v e l o p i n g a n a c t i o n p l a n and gap patterns) can provide a potentially successful trading After making thousands of real-money trades, approach for savvy technical traders. I have found during the last 15 years of trading that a key to success is to focus on the simplest, Ken Calhoun produces trading courses, live seminars, and strongest, and most obvious breakouts. Steady video-based training systems for active traders. A UCLA continuous uptrends, punctuated by occasional alumnus, he is the founder of DaytradingUniversity.com, an bullish gaps and/or wide-range high-volume online educational site for day and swing traders. candle days, are much better because they are the charts that best attract new money flow from institutional Fu r t h e r r e a d i n g technical traders and astute home retail traders. Calhoun, Ken [2012]. “Daytrading Price Volatility Break- Developing a personal action plan can be as simple or outs,” Technical Analysis of St o c k s & Co m m o d i t i e s , complex as meets the needs of the individual trader. It helps Volume 30: June. to troubleshoot problem charts and failed trades by looking Nison, Steve [2009]. Beyond Candlesticks: New Japanese at which charts led to wins versus stops, and key differences Charting Techniques Revealed, John Wiley & Sons. between them. Keeping a traditional trading journal is often a ‡eSignal (Interactive Data) useless exercise because traders don’t specify the exact tech- ‡See Editorial Resource Index nical entry signals used to enter a trade, nor the profit & loss (P&L) trade-management process used to produce wins versus stops. A technical trading journal that combines the best of the momentum breakout entry signals along with profit & loss per trade can be a much more effective strategy. Keeping technical analysis simple yet consistent is the hallmark of a good trader. Looking for the story of net buying vs. selling pressure with the help of candle heights (combined with traditional Western technical signals like volume, cups, 2015 Readers’ Choice Awards Winners will be announced in the Bonus Issue, available February 2015.

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Subscribers to St o c k s & C o m m o d i t i e s can access our back library of articles at our website, Traders.com. For those interested, here are a few related articles, among others: Arms Jr., Richard W. [1991]. “Cross Your Arms,” Technical ote Now! Analysis of St o c k s & Co m m o d i t i e s , Volume 9: May. _____ [1989]. “What Volume Is It?” Technical Analysis of St o c k s & Co m m o d i t i e s , Volume 7: December. Voting begins October 1 and ends December 31, 2014. Hartle, Thom [1991]. “Arms On Arms,” interview, Technical Must use your subscriber ID number to vote. Analysis of St o c k s & Co m m o d i t i e s , Volume 9: July. Join us on Facebook at www.facebook.com/STOCKSandCOMMODITIES Follow us on Twitter @STOCKSandCOMM

November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 31 orex, foreign ex- change, FX — they all refer to F the trading of, or exchange of, one foreign currency for another. While the practice began simply as one of many routine banking mechanisms, it has recently evolved into a speculative market — that is, some people and institutions trade curren- cies strictly to make money.

Th e a dv e n t o f f o r e x m a r k e t s From the 19th century until World War I, the economi- cally developed nations of the world adhered to the gold standard. To simplify a complicated issue, a nation’s wealth depended on how much gold it possessed, because the currency of any nation on the gold standard had a set value relative to gold. The British pound, for example, was fixed at the equivalent of 113.00 grains of pure gold, while the US dollar was fixed at 23.22 grains. This meant that a nation could only issue the total amount of currency that it could back with its gold reserves. In practice, some nations held a combination of gold and other currencies also backed by gold, but the end result was the same — a limit

on its total currency in circu- GOLDINDAVID lation. You may have already realized that such limits on a Starting Out country’s currency also limit its government spending. This is precisely why World War Trading Forex: I caused a breakdown in the gold standard system. Understanding The Basics Wars are expensive, and since the Great War (as it was Part 1 then known) involved most of the world’s developed nations, In this first part of a new series on foreign exchange trading, you’ll get an overview of the it became necessary to spend basics of trading currencies. vast sums on armies, navies, weapons, and warfare. The by Imran Mukati only way to accomplish this 32 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s FOREX FOCUS

was to decouple currency and gold reserves. After the war n United Kingdom: 4% ended, a few nations returned to the gold standard briefly, n Canada: 3% but most did not. Then came another war, which left the de- n Australia: 2% veloped world (except for the US) in shambles. Out of World n Switzerland: 1% War II came the Bretton Woods agreement, which created an international currency system tied not to gold but to the Together, these seven countries generated 68%, or two-thirds, US dollar. In other words, other currencies would have their of the world’s economic activity! And as you’ll see later in this values determined in relation to the US dollar. However, the series, currency value and economic strength are intimately US pledged to make its own currency exchangeable for gold, related. so an indirect gold standard remained in effect. Of the majors, three pairs represent about half of all trading Economic realities of international trade and the costs of activity: EUR/USD at roughly 27% of trading volume, USD/ the Vietnam War eventually made the linkage between gold JPY at about 13%, and GBP/USD at about 12%. Obviously, and the US dollar untenable. On August 15, 1971, President the world has far more than just seven currencies, many of Richard Nixon unilaterally severed that linkage, announcing which can be traded, and these make up what are called exotic that the US would no longer exchange dollars for gold. It took currency pairs. Matched against the US dollar, these curren- a few years for the global economic system to adjust to this cies represent countries that are smaller players in the grand new reality, but what eventually replaced Bretton Woods was economic scheme of things. a system of managed floats. Theoretically, currencies change As you’ll see when we discuss the nuts and bolts of currency value, or float, freely relative to each other in the marketplace. markets, the exotic pairs are riskier and much more expensive In practice, the various central banks step in to moderate the to trade. Here are some examples: value of their respective currencies should those values grow n USD/TRY: Turkish lira too strong or too weak. Both cases have negative economic n consequences for a national economy. The emergence of this USD/SEK: Swedish krona system of floating-value currencies is what permitted the n USD/SGD: Singapore dollar creation of the modern forex marketplace. n USD/ZAR: South African rand n USD/MXN: Mexican peso Cu r r e n c y p a i r s n USD/HKD: Hong Kong dollar Because the forex marketplace is all about the value of one n USD/THB: Thailand baht currency relative to another currency, all forex trading takes place in currency pairs. Today, seven currency pairs represent Finally, there are currency pairs that do not include the about 85% of all forex trades: US dollar. Since these cross two foreign (for US traders) n Euro vs. US dollar (EUR/USD) currencies, they are known as crosses. Following are just a n US dollar vs. Japanese yen (USD/JPY) few examples: n British pound vs. US dollar (GBP/USD) n Euro vs. British pound (EUR/GBP) n Australian dollar vs. US dollar (AUD/USD) n Canadian dollar vs. Japanese yen (CAD/JPY) n US dollar vs. Swiss franc (USD/CHF) n Australian dollar vs. Swiss franc (AUD/CHF) n US dollar vs. Canadian dollar (USD/CAD) n Euro vs. Japanese yen (EUR/JPY) n New Zealand dollar vs. US dollar (NZD/USD) n British pound vs. Swiss franc (GBP/CHF) n Swiss franc vs. Japanese yen (CHF/JPY) If you study this list for a moment, two things will become clear. One is that the countries shown here represent some of You probably get the idea; it’s possible to match any two the world’s largest economies. Major countries like Germany non-USD currencies to get a cross. As long as they represent and France use the euro, and although China’s yuan technically two major currencies, trading costs won’t be unreasonable. floats, in truth, the Chinese government closely manages its value. The other is that the US dollar is part of every one of Th e a l m i g h t y d o l l a r these seven major pairs, making it the most traded currency Between the majors and the exotics, the dollar is involved worldwide. in the vast majority of currency trades worldwide. If you’re The reason these seven pairs are the majors is simple: wondering why this is the case, that’s an astute question. As economic power. Consider the contributions each represented it happens, no single factor accounts for this dominance. One country made to total global economic output in 2010: reason is the lingering effect of Bretton Woods. For a quarter- n European Union: 26% century after World War II, the US dollar was the official n United States: 23% reserve currency, and that didn’t change with the flick of a n Japan: 9% switch even after Nixon locked and barred the gold exchange window at the US Treasury. November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 33 a rare painting has value to a small group of people (and even The greatest benefit of this fewer have the millions needed to pay for it). massive trading volume can Neither real estate nor collectible art is considered a liquid be summed up in one word: asset in that they cannot readily be exchanged for cash. Certain assets, like stocks or commodities, are much more liquid, since liquidity. there is more demand for them and they can be sold fairly quickly. But keep in mind that some stocks are more liquid than others. Another has to do with stability. While the American If liquidity is a measure of how quickly something can be economy has its ups and downs like any other, overall it is exchanged for cash, currency is cash! Of course, it’s not nec- stable and well-managed. The US also does not have prob- essarily the currency that a trader wants. But the tremendous lems with political instability or violence, like coups or civil amount of currency changing hands every day means there wars or border conflicts, which contributes tremendously to are plenty of buyers and sellers in the market, and that means economic stability. a high level of liquidity. This is part of what makes trading Directly related to the stability of the American economy exotic pairs riskier — liquidity is much lower for low-demand is its size. US businesses engage in economic activity around currencies than for the majors, in the same way that IBM or the world, and that means many different currencies have to Apple stock is more attractive than penny stocks. be exchanged to and from dollars. Coca-Cola, for example, has to trade dollars for pounds to pay wages or vendors for its Th e i r n a t u r e operations in Britain, and trades pounds for dollars to bring The last aspect of the markets that you need to understand its profits home. is their nature. For investors accustomed to equity markets, The size of the economy also translates to massive financial the notion of a central marketplace is almost second nature, markets. People and institutions in countries around the world reinforced by images in the business news media of the trad- want to trade in the US markets, and to do so they have to have ing floor of the New York Stock Exchange. As it happens, dollars. Finally, many major commodities are traded only or even most equity trading now takes place purely electroni- mostly in dollars. Oil is foremost among them, thanks to an cally. But the forex markets have no central trading arena or agreement with Saudi Arabia that was inked in the 1970s. One clearinghouse. consequence of this linkage is that when the US dollar is weak Instead, currency traders sell directly to one another, a mar- (that is, less valuable against other currencies), oil becomes ket system called over the counter. Unlike a stock exchange, more expensive in absolute terms — dollars per barrel. which has a uniform set of rules for buying and selling the stocks listed there, each currency’s home country has its own Ma r k e t b a s i c s rules and regulations governing the movement of money across The global forex market is massive. its borders. For that reason, it’s more efficient for the world’s Daily trading volume is currently equal major banks to act as wholesalers of currency, governing to about $4 trillion — and again, that’s the flows and setting prices. From them, pricing flows to daily volume. By comparison, the US electronic brokering services, which distribute quotes down gross domestic product (GDP) for all the chain. Midsized banks act as intermediaries, and it is at of 2010 was $14.5265 trillion, and the this level that most institutional traders (like large companies McKinsey Global Institute reported that and hedge funds) trade. Below those smaller banks are retail at the end of 2010, global equity (stock) brokerages serving individual investors. It has really been market capitalization and outstanding the advent of the Internet that has permitted individuals to bonds and loans represented about $212 participate in the forex markets. As an individual trader, you trillion. In other words, the world’s total are functioning in the cracks of the market, making relatively financial value changes hands on the tiny trades compared to the massive sums of money moved forex markets every 53 days. by major players, and it is those players that drive prices, in Most of this trading volume comes from governments, central combination with external factors, of course. banks, private banks, multinational corporations, and institutions In my next article of this series, I’ll look at the mechanics that are moving money for financial reasons, not for specula- of trading currency pairs. tive reasons. But regardless of the source, the greatest benefit of this massive trading volume can be summed up in one word: Imran Mukati is the Managing Director of fixed income secu- liquidity. Some investments are more liquid than others. If you rities at Fairbridge Capital Markets, Inc. He may be reached own land or a house, you can sell it, but doing so will probably via http://www.linkedin.com/in/imranmukati. take weeks or months. If you own a Picasso or Renoir painting worth millions, you can sell it too, but doing so could take even longer. That’s because everyone needs a place to live, though not everyone has the funds, or can secure a loan, to buy a house, but 34 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s Q&A

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

Don Bright of Bright Trading

AND NOW FOR THE BASICS Last price: The last trade price or index buy & sell buttons (and sell short, of Mr. Bright, I have finally put together value course), symbol, price type (limit or enough money to trade live, and I’m Change: Price change from previous market), destination (be careful not to now setting up my workplace. I have two day’s closing price pay for providing liquidity when you computers with multiple screens. I recall Pct change: Percentage change in can receive money for it), quantity, price, that a while back you had some tools and price. time in force, and probably some sort of setups that you and your traders were account reference. using. Has much of that changed in the Here is how I set up mine, and why: Everything can be done from this last couple of years? I know there are screen, but many use other screens like many ways of setting things up, but I was Bid price: Current consolidated best bid a montage. A montage will show Level hoping for an update.—J. Keller price — I say “consolidated” to account 2 data (depth of market), can be person- Thanks for the question and for reading for ECNs and other market centers. alized to fit your needs, and have auto- previous columns. Although I am not sure You may use “primary market” instead updates of orders (bid or offer changes, which specific column you are recalling, I with some vendors and so on). did find enough to get you started. I’ll try Ask price: Same as bid price, but for the We also have a message monitor that to cover the basics to the more complex best offering price shows order entries, executions, or can- setups so you can determine what fits Last trade size: I like to see if this cellations. This has a tab to show what your style of trading. symbol is trading in small units or you’ve done for the day, average prices, First, a quick review of the basics. Each big blocks and other helpful information. new trader at Bright Trading has a choice Last one: The previous trade size (as a We tie our data vendor (front end) of using either RediPlus or RealTick, horizontal ticker) with (at minimum) an Excel spreadsheet. with other options available for specific Last two: The previous trade before RediPlus has an add-in for Excel, which uses. I’ll use RediPlus for my examples. the above allows us to put together a spreadsheet Other data vendors have similar screens Volume weighted average price that is linked to RediPlus. The data can available. (VWAP): The VWAP is particularly be transferred to the spreadsheet using The first window is what we call the helpful near end of day direct data exchange (DDE) links. You basic quote monitor. This is where you Open: Opening price for that stock can organize all data into a spreadsheet, can cut & paste a list of symbols into the Day high: High for the day add in the current fair value, and have a first column (symbol). This is standard on Day low: Low for the day formula for determining if the futures all platforms. We like to pick and choose Volume: Volume for day, excluding are trading at a premium or discount, the columns in such a way that it is easy premarket which is helpful information. You can to determine what is happening in real Alert low: Set alerts to trigger a flash of keep track of your trades at any time time, for any symbol. some sort when hitting your predeter- during the trading day, set up conditional For the sake of simplicity, I’ll provide mined buy prices formatting such as coloring the cells red a good example of column headings and Alert high: Set alerts to trigger sell or green, and much more. their uses: prices, or for entries after a breakout I don’t have the space here to get into price is hit. more advanced tools this month, but I’d Symbol: We generally place the indexes love to get into how to write to the vari- before i ndividua l stocks. For exa mple, This is about all I can focus on here, but ous application program interfaces (APIs) Dow Jones Industrial Average (INDU), there are many other columns that are of and automated execution programs, and S&P 500 spot price (SPX), Nasdaq 100 value, such as ex-dividend date, amount various other tools. Perhaps next month; (NDX), euro vs. dollar (FXE), VIX, of dividend, and yearly high and low. stay tuned. TICK, and any specific index you may Below the quote monitor we have an be trading in order entry window. This screen has November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 35 INTERVIEW Stop, Be Realistic! Battling The Futures With Larry Levin

Larry Levin is president and founder of Trading Advantage, a firm specializing in trading education. Levin started out over 25 years ago as a runner at the CME fu- tures exchange, then quickly climbed the ranks from phone clerk to desk manager to eventually trading his own account. At the height of his trading career, he averaged between 2,500–3,000 S&P contracts per day trading. Since he recognized early on the inevitable shift away from the open outcry pits to an electronic marketplace, Trading Advantage has made it its mission to teach students to trade online. He has made regular appearances on major financial media outlets including CNBC, Bloomberg TV, and Fox Business News. His daily blog can be found at www.tradewithlarry.com. St o c k s & Co m m o d i t i e s Editor Jayanthi Gopalakrishnan spoke with Larry Levin on September 8, 2014 about what it takes to start trading futures.

Larry, we last interviewed you even a first income is what gets people for our January 2007 issue. So interested in trading futures. what’s been going on with you Traders have to keep since then? Do most people who come to you already practicing the techniques We’ve been around for 20 years, have experience trading something else and recipes, and make teaching people to trade. We’re getting such as equities, or do they want to start ready to expand again. We now have out by learning to trade futures? sure all their rules are met 61 employees in three different cities. I’d say it’s about half and half. Half of before entering a trade. We have an office in Miami, an office the people who approach us have some in Los Angeles, and a really large office investing experience, usually in equities. teach people to daytrade, so when those across the street from the Board of Trade But it’s not always people who trade for who have traded equities start trading in Chicago. We’ve also expanded our themselves. Most of them have financial futures, trading those shorter time frames course offerings. We don’t just teach advisors who give them advice or place is a big change for them. Sometimes in futures anymore. We teach options, the trades for them. A lot of these people futures, you can have trades on for five stocks, back options, futures options, have never traded futures. We also get a or 10 minutes, or even less. and currencies. We’ve been pretty busy lot of people who’ve never invested at all But regardless of whether somebody since we last spoke. when they come to us. They would have has traded before — equities, futures, seen us on the Internet or seen me on or anything — what I want to do with You got your start trading futures. Say television. To be honest with you, it’s the everybody is to first teach them our someone wants to start trading futures people who have no experience at all who methods and techniques, and second, and has no experience. Why would they are usually the easiest people to train. get them on a simulator for an awfully even trade futures? long period of time. That, to me, is the A lot of people that we come across Why do you think that is? key. You shouldn’t trade with real money trade futures because they’re looking for It’s because they don’t have any pre- when you first start. The simulator has to one of two things: They’re either look- conceived notions or bad habits that you be fairly sophisticated. There are a lot of ing for a second income, that is, they are have to work through. That sometimes simulators that work in such a way that already employed, or they want to trade makes it easier. if your desired price is touched, you get full-time. Trading futures gives you a filled. But that’s not realistic, which is lot of leverage, and that means it carries How difficult is it for those trading equi- why it’s important to trade on simulators risks, just like any type of investing. ties to transition to trading futures? that are sophisticated and realistic. There are good opportunities available These days, most people — unless in trading the futures markets. You can they have fairly deep pockets — aren’t Why do you focus on daytrading futures make money quickly but you can also going to be daytrading stocks. You need instead of holding them for a longer lose money quickly. I think the possibility to have at least $25,000 if you fall within time period? that you could have a second income or the category of being a daytrader. We One reason is that if you’re going to 36 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s

someone has traded before and they are have a big influence on the way futures interested in a specific market to trade, move on a daily basis. we won’t push them away from it. But For example, the employment number if they don’t have any particular markets that was released this past Friday was that they’re interested in, I believe the worse than expected. A layman would S&P emini is the easiest market to train think that if a number is much worse people on because it’s got so much move- than expected, that the market would ment. There are so many opportunities drop on that day. But the market did when it comes to trading the S&P 500 the opposite. So you have to be careful emini. It’s very popular so it’s easy to how you interpret and apply the data. find lots of information about it. It’s a You have to connect the dots. The likely great place to start. reason the market went up on Friday is But going back to what I said earlier, no because the Fed is not going to be eas- matter what market someone starts trading ing and not get out of the way. All those or what type of experience they have, they things are connected and you have to daytrade, you’re able to get away with still need to start on a simulator so they can have basic knowledge about them. You using less money or less margin. That also learn the techniques and methods without have to be careful not just about the data usually lessens the risk. Unfortunately, risking any money. Otherwise, they could that is released but also about how they people usually keep the losers on and take lose a lot of money when they start, which affect the market. You need to do some the winners off. That’s a big problem in will get them frustrated and at that point, research and have some knowledge about the industry. they’ll stop learning. the fundamental data and how they are Another reason is you have more likely to influence the market. opportunities to make money when When it comes to trading futures, daytrading. Those opportunities have including the four markets you just How important is it to understand the risk associated with them, but if you mentioned, what kind of fundamental specs of a particular market that you are looking to make income every day, data should traders look at? are trading? then leaving trades on for weeks, or what What is important these days — and I would say that knowing the funda- people call swing trading, will leave you you wouldn’t necessarily put a trade on mentals is much more important than with days or weeks with no income. You because of this — is to be aware of the knowing the specs of a particular market. will need to trade every day if you are Federal Reserve (Fed) and the influence Obviously, you need to know what a tick looking to make an income. they’ve had in our markets since 2008. is worth and what the dollar value of each That’s something you want to watch. You tick is, but I would say that you’d be hard- When you’re trading something for want to keep an eye on the movement pressed to find too many professional such a short time period, are there of interest rates. The Fed can influence traders that really know what the specs of certain markets that you trade? the movement of interest rates so it’s a contract are. Obviously, they know the Yes, we love to trade the S&P emini important to pay attention to what they tick values, and they know when they are contract. It has a lot of liquidity, strong are up to. Are they going to continue getting close to the upside or downside volume, and is very popular. There’s a lot with the monetary easing or are they limits, but beyond that, I don’t think it’s of information available about it, but you going to continue to pull away from necessary to know other details. It’s not don’t have to limit yourself to the S&P that? I wouldn’t necessarily put on a bad to know the details of a contract; it’s emini. We trade different commodities trade based on the Fed’s decision, but if just not necessary to know them to trade such as oil, soybeans, and gold. Gold is I was long equities or long stock index the contracts. Knowing the support & really exciting and has great liquidity. futures contracts and the Fed announced resistance levels is more important. The four major commodities we trade are that they were planning to pull away from the S&P emini, oil, soybeans, and gold. monetary easing sometime in the future, Since you’re looking at such short-term I would lighten my load. movements on something that’s very When you teach people to trade, what The second thing I would pay atten- liquid, what type of technical indicators do you encourage them to look for when tion to, as far as fundamental activity is or patterns do you look at? it comes to identifying which market concerned, is the economic data that is We look at a lot of technical data. In to trade? released almost on a daily basis, whether fact, we’re much more technical than we If people have no experience at all, it’s new home sales, the employment are fundamental, but both are extremely we like them to trade the S&P emini report, or anything. All of those things important. You wouldn’t want to have for a couple of reasons. One is that the one without the other. We use a num- liquidity and interest is very high. That ber of technical indicators, and we use goes a long way to making sure that algorithms. That’s one of the things we you can get decent fills. Beyond that, if teach our students when they’re trading 38 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s It’s important to trade on simulators that are sophisticated and realistic. the S&P emini. We’re also big fans of you have an algorithm trade, and you’re ® Market Profile, which was introduced looking for the reversion to the mean or by Peter Steidlmayer. We use that same for the market to come back to the aver- Market Profile chart with the letters age. The first rule may be to look for the and the bell curve, like we did before market to come back to the middle. If it there were computers. Even though it’s automatically puts a stop-loss in for you done on computers nowadays, it’s still at that point, you want to make sure that NeuroShell Trader the same thing in that you’re looking at stop-loss is less than two points in the Offers Optimizable those bell curves and finding where the S&P emini. distributions are taking place. There will be five or six rules like Renko Bars Add-on We also use something called a buyer this and if one of them doesn’t line up, vs. seller indicator, which charts the then you don’t want to take the trade. volume and who’s winning the wars. In You only take the trade if all the rules electronic trading, you basically have are met. That’s what that recipe-based two dynamics: You either buy the offer or technical trading is about. you sell the bid. This indicator tells you who is winning that war. Are more people Is that a technique you apply to disci- buying the offer or are more people sell- pline traders? ing the bid on a moment-by-moment Absolutely; most people come into basis? If you’re long, you obviously want trading without much discipline. Even Winner 12 years in a row! more people to be buying the offer than as they’re learning the trade, it’s difficult you do selling the bid. If you see more to put the discipline into practice. Hav- www.NeuroShell.com people buying the offer and the indicator ing those recipe-based techniques helps shows you that the trend is continuing, people know when to stay out of the 301.662.7950 then you feel fairly comfortable staying trades and when to get into them. That with the long trade. really teaches discipline. It’s easy for On the other hand, if you’re long and us to — for lack of a better way to put seller indicator, which is being aware of you’re getting more people selling the it — catch our students doing the wrong who’s winning that war. In other words, bid or pushing that bid lower, and you see things that way. We can go through their are more people buying the offer or are that in the indicator, that may either make rules and tell them something like, “You more people selling the bid? you exit the trade or move your stop-loss have three rules that didn’t get checked Within that, there are specific rules, up. The buyer vs. seller indicator is an off, but you still did the trade.” The but I wouldn’t call it a recipe. It’s more important tool for us. We want to know student’s response might be something of a numbers-based indicator. I’ll give who is winning that war. like, “Well, the other three were okay.” you an example. Say the buyer vs. seller We can respond by saying, “Yes, but we indicator is at 1,000, and one of your rules Are there any other indicators such need all six.” I hope they learn from that to manage the trade is that it stays above as trend-following indicators that you so they won’t do it next time. 1,000. One of the rules for entering the look at? trade may be that the number of people We have several individual trading It’s a good way to get them to be disci- buying the offer exceeds 1,000. Say that techniques. One is called the slo-mo. plined without them realizing it. all six rules for entering the trade were One of our algorithms is a reversion to That’s why I coined that term recipe- met and you were in the trade. When the the mean. Those are all individual tech- based trading. If you are baking a cake, buyer vs. sellers indicator drops below niques. They work on almost any futures you have to follow a recipe and it has to 1,000, regardless of what’s happening, market. We use these techniques mostly be exact if you want it to be good. You you need to exit that trade. You’re looking on the S&P emini because that’s what can’t just throw a bunch of sugar and a for that continuation, and if it’s not there, we teach, but it can work on soybeans, bunch of flour in a bowl and hope your you want to be out of that trade. gold, or oil. The reversion to the mean cookies turn out. Trading should also is seeing a trade or trend picking up in be very exact. It shouldn’t be a random In addition to these techniques, do you one direction and then waiting for a activity in any way. encourage the use of stop-losses? pullback to that mean or average price Always! For every trade we place before entering the trade. Are these five or six rules just for the in any market, except perhaps when it All of our techniques are what I call entries? comes to buying options, we require “recipe-based.” What that means is that Yes, the rules are for the entries. There stop-losses. The stop-losses are point- we have five or six rules that need to line are different techniques to manage the based. We rarely, at least in the S&P up before you take the trade. So let’s say trade. That’s where we apply the buyer vs. emini, risk more than two points or $100 November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 39 per contract. Most of the time you’ll conditions have to be as if they’re stop-loss in, to me, it’s suicide. All it takes know where your stop-loss needs to be, second-nature, so doesn’t consistency is one instance when you don’t have a so you’ll base your entry on that. For play a role? stop-loss in place and the market flushes example, if you don’t want to risk more It does, and we even take it a step further. all the way down, wiping out your entire than two points, and you place your stop We teach the emotional side of trading, account. There’s no time machine to go at 1505 in the S&P emini, then you can’t and one thing I take pride in is our visu- back in time to fix that. buy it if it’s higher than 1507. alization techniques. We encourage our Oftentimes, you’ll use the stop-loss students to spend some time away from No, you just have to get comfortable as a map point to determine where you the screen, close their eyes, and visualize taking that loss. can get in because you know where your their trades. We want them to visualize Yes, and here’s what is unfortunate: If stop-loss needs to be. Since you’re not their good trades, their bad trades, and someone lost their entire account (which going to risk more than two points, you what they’re trying to accomplish. This was, say, about $10,000) because they can’t buy any higher than two points is similar to what lots of athletes do. never put a stop-loss in and never exited above that stop-loss. If it’s higher than Learning to trade is difficult. We the trade, then they want that $10,000 that, you have to wait until the market try not to give anybody false hopes or back right away. Prior to the loss, they comes down or leave the trade alone. make them think they’re going to make may have only been looking to make millions of dollars right away. We let $300 or $400 a day. Now all of a sud- Earlier, you mentioned that people tend everyone know that it’s extremely dif- den, they need to make $10,000. That’s to hold onto their losers but sell their ficult to be a good trader. If you have a just not realistic. We have to avoid those winners. This is typical, since people lot of bad habits you’ve picked up from types of situations and make sure they don’t want to admit they’re wrong. trading for several years and you’re not never happen in the first place. What’s a good way for them to overcome following rules or you’ve fared poorly, that type of thinking? you’ll find it even more difficult to ac- But when they lose that much, wouldn’t It’s easy, really. All you have to do is complish what you want. they be tempted to blame the trading practice, practice, and practice without The only way anyone can learn to trade system they learned and move on to a using real money. It’s important to un- successfully is to learn the way they did different technique taught by someone derstand everything with the simulator. in school. They need to learn the mate- else? They would lose consistency, since We’ve had students on simulators for as rial, they need to learn the techniques, there are so many different ways to long as a year. We’d love to have the stu- and they need to be able to practice trade. And they would end up making dent off sooner, but if they’re not having what they are learning. It takes a while. similar mistakes, wouldn’t they? success and they can’t get a grip on the People need to realize that they need to For sure. The wheels come off, mindset, then they continue practicing put their time in. They think it’s a quick and they lose a significant amount of on the simulators. They’ve got to keep and easy way to make money since you money because they didn’t put a stop practicing the techniques and recipes, and don’t have to get a degree to trade. All in or something like that. They then go make sure all their rules are met before you need is a trading account and be to another educator. It’s just too late at entering a trade. It’s really important to able to either press the buy or sell but- that point. They may be better off not use a realistic simulator and keep watch- ton or tell your broker to. And if you’re going down that road again. After such ing the news at the same time. lucky, you could make money that way. an emotional turmoil, you want to make It’s similar to a flight simulator in that Unfortunately, if you make money the that money back, but it’s so difficult to it tries to recreate a similar environment. first time you trade, you probably think get back on your feet and start trading A flight simulator recreates a realistic you know what you’re doing. and be successful. environment for the pilot so he can learn to fly. Similarly, when you are learning to I would think continuous learning Thank you for sharing your thoughts, trade, you want the environment to be as is necessary because markets never Larry. close to the real trading environment as behave in the same way. You never possible. You have to get realistic fills, not know what you’re going to face at any Fu r t h e r r e a d i n g just those that take place when price hits time. It is not objective like many other Gopalakrishnan, Jayanthi [2007]. “Larry a certain level. Trading in an unrealistic professions are. Levin Has Those Traders’ Secrets,” environment gives people false hopes and That’s a good point. Even if the chart interview, Technical Analysis of they’re not practicing in the right envi- formation looks similar to previous ones, St o c k s & Co m m o d i t i e s , Volume ronment. Only if you practice correctly Janet Yellen, chairman of the Federal 26: January. will you be able to get over holding onto Reserve, could say, “We’re going to • www.tradingadvantage.com losers and selling the winners. raise interest rates tomorrow,” and that • www.tradingadvantage.tv would change everything. That’s why • www.tradewithlarry.com In addition to practicing under realistic stop-losses are so important to place on conditions, their reactions to market any open position. If you don’t have a 40 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s FUTURES FOR YOU

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

SO MANY CHOICES (PART 2) hours. Obviously, brokerage firms must contract for the same expiration month Shopping for a commodity brokerage is keep records of all client communica- traded only five contracts. Quite simply, overwhelming; what should I be looking tions, so in some cases, electronic com- if you make the mistake of getting into for? (part 2 of 2) munications are preferred due to the ease domestic sugar, you might have a hard Last month in part 1 of my response of compliance monitoring. time getting out at a reasonable price. to this question, I discussed the various Other common mistakes are trading types of brokerage firms along with the • Self-directed online the wrong year or month, buying when pros and cons of doing business with Traders with enough experience to have the intent was to sell or vice versa, not each format. This month, I’ll focus on garnered the basic knowledge necessary being aware of open and close times of various levels of service available to to navigate a trading platform — such as each market, and not fully understanding futures traders and briefly consider which commodity symbols, available trading the difference between stop and limit makes the most sense for typical traders months, and calculating risk — might orders. Further, it isn’t uncommon for of differing skill and experience levels, opt to save money on commission and beginning traders to sell a contract that as well as accounting for the cost of place orders through an online platform. is locked limit up. In such a scenario, errors when considering an appropriate However, before doing so they must be the exchange’s daily price limit has commission rate. capable of emotionally coping with the been reached, leaving an environment urge to overreact, or worse, overtrade. in which you are able to sell but not buy. Choosing a brokerage service I’ve seen too many beginning traders The justification beginning traders often level rush into online trading. Their goal is to use for selling into a limit move is that • Full-service (broker-assisted) prices cannot go against them because of Technically, “broker-assisted” describes There is no such thing the price limit. They see it as a risk-free a moderately lesser service than “full- as a perfect brokerage trade; however, nothing could be further service,” but for simplicity and brevity, I from the truth. Although price cannot go lump them together. Full-service brokers firm, but there is likely up in the current session, you may not generally offer their clients a substantial a perfect brokerage for be able to exit the position until the next amount of hand-holding; this most often session, at which time prices might be involves trade placement and execution, your individual needs. considerably higher, maybe even limit- market guidance, trading recommenda- up to trap them into the position with tions, and other hands-on tasks such as save money, but the goal of trading is to large losses. margin call management. Most impor- make money, not to save it. There are Each of these mistakes is costly but can tant, they attempt to steer clients clear of unlimited numbers of examples in which be easily avoided with proper experience. the most common pitfalls in commodity traders choosing this service type for eco- If you are not ready to trade online, you trading. nomic reasons end up losing thousands should be willing to pay a little extra for Full-service brokerage service comes of dollars in the markets making rookie the expertise of a full-service broker and at an additional cost in terms of com- mistakes. For example, I’ve witnessed work your way toward being an online mission, but it might be cheaper than traders trade the domestic sugar futures trader. Simply put, don’t trip on dollars paying costly tuition to the markets in rather than the more liquid world futures while chasing pennies. the form of trade placement errors and contract. This simple mistake can easily other avoidable mistakes. cost you several hundred dollars on a • Discount online Unlike the days of old, a good full- single contract because of the lack of Traders opting for this level of service service broker should be able to accom- liquidity. To put this into perspective, the should be experienced and highly capable modate your orders during market hours day I wrote this article, the world sugar fu- of operating with little help from their via telephone, email, instant message, or tures contract for March had traded nearly maybe even text message, during market 37,000 contracts but the domestic sugar Continued on page 52 November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 41 This One Is Just Right! Slow Down: Equity Curve Ahead

The equity curve judges the success or failure of your system. daytrading was a swell idea for a person as smart as you. What makes an equity curve good or bad? What does it take To help avoid those little unpleasantries, here are a few to achieve a good equity curve? We’ll take a look. steps you can take.

by Robert Cocchiola To o l s o f t h e t r a d e Let’s start by examining your tool bag. The basic building echnical analysis can lead to successful trading, but blocks of a trading system are: the platform, the optimizer, N only if you have a good equity curve. A good equity the bars, and the algorithm. T curve, like a bad one, is constructed from various The platform you select depends on your skill level and parts of your project. The success or failure of your efforts your need for something special or particular offered by a e MORRISO will be revealed in the equity curve, which is the ultimate given platform. Since I can’t know every reader, this will be judge of your creation. Success in trading is not found in the all that I will say about platforms. final value of the account. What’s an algorithm? It’s a set of one or more rules that What makes an equity curve good is the way it indicates articulate the conditions necessary to enter and exit trades. steady growth in your account without scary pullbacks. What These rules may, and almost always do, contain variables makes an equity pullback scary? It causes loss of sleep. Your that control the sensitivity of some type of threshold. The eyebrows start to fall out. You can’t eat because everything thresholds inside the rules are there to filter out undesirable tastes like week-old flounder. But most of all, it makes you patterns in the data. It is these thresholds that are manipulated

stop trading and want to kill the friend who convinced you that by the optimizer to warp the rules into effective filters. SPEED BUMP: 1975; SERGLY ART: CHRISTIn

42 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s TRADING TECHNIQUES

What about bars? They’re filters too. Their job is to be and conquer the market. But what it really does is fairly the right type and size to absorb noise in the data and reflect straightforward: It manipulates parameters to find the least patterns of meaningful change in the data. objectionable configuration of an algorithm. The task boils And finally, what is theoptimizer ? Its purpose is to marry down to creating an aperture, using your supplied bars and the bars to the algorithm by tweaking the variables in the algorithm, which will allow the most hopeful data patterns algorithm across many iterations to generate good trades in to pass through while blocking the most objectionable. The the past and create a behavior that will carry on into the future difficulty is that objectionable data occurs above and below and make you rich. the desirable data. So as it changes your filter’s amount of Okay! We’re all set. Go forth and subscribe to a platform. acceptance and sets the thresholds higher or lower, it is simul- Take some courses and buy some DVDs that describe money- taneously rejecting certain nasty data that was out of reach, making systems. Plug some historical data into a chart. Plug while readmitting data that was previously rejected on a prior in your get-rich-quick algorithm. Run the optimizer and start iteration. When it finishes, it presents the least objectionable trading tomorrow. By the next week, everyone who reads this result. Generally, this result is only ideal for very little of the will be in receipt of a perpetual annuity and my email inbox data, even though you thought that you would get ideal set- will be flooded with all your notes of thanks, right? tings. You are thinking positively while the tool is working I don’t think so, and here’s why that won’t happen. The somewhat negatively. proprietary trading system described on that DVD for $89 So what can you do? Think negatively. If you understand or $5,000 no doubt claims to reveal wonderful mechanisms its limitations, you can partner with it and remove some of the to get you to the promised land. But I’m here to tell you that burden. The single most effective thing I’ve seen is a do not I have spent many hours with clients who spent good money trade indicator. It is part of the logic that identifies patterns in on “the answer.” the data where no trade should be attempted. In order to design Here is the truth of it. If you had a system that generated this logic, you must understand what behavior your formula steady profits, would you: needs to succeed and focus on blocking as much as possible of the data structures that it can’t reasonably handle before asking a) Trade your account and reinvest all your profits to the optimizer to find compromise. So first, you need to build compound your return and become a multimillion- the positive formula that does what you want it to do. aire very quickly Next, look at the bar size of the data. What’s going to happen or to your algorithm if it hits a patch of big bars? How about a b) Go through the headache of publishing DVDs patch of small bars? How about a sequence of three bars up containing your system so that lots of folks can use and then three bars down? Any of these conditions and many your concept against you? more can generate losses based on the needs and vulnerabilities of your formula. Note that many formulas don’t like bars that Given that in every transaction on an exchange, one person are too big or too small, just like the proverbial Goldilocks, and just did a smart thing and the person on the other end of the the optimizer will try to adjust the thresholds to accommodate trade didn’t, is the answer really b? And another thing to this. Think of the potential assortment of bars and sizes as consider is this: If the system really is useful, how can it stay Goldilocks’ 3,000 bears. You’ve got to find the “bed” that’s useful if 10,000 traders buy the system and begin using it, just right or you’ll wake up in a painful state indeed. and they all get the same signals that you do, all at the same time? If all of you tried to place a buy order at the same time, Wh i c h o n e is “j u s t r i g h t ”? who is selling, and at what price? The optimizer doesn’t have your brain power or your knowl- In my line of work, I have seen all the “unique, confidential, edge of what you’ve built. One possible scenario is that you and proprietary” systems than I care to remember, along with may have a productive set of parameters that produce some the traders who believed in them. The problem is that, regard- nice trades when they are in their element. Unfortunately, less of platform, everybody is trying to solve the exact same when bars of a dangerous configuration are evaluated during problem with the exact same tools. After a suitable amount optimization, the damage exceeds the good. The optimizer of frustration, they find themselves subconsciously fashioning will then walk away from this setting. Remember the concept a hangman’s noose, frozen with analysis paralysis, and they of the least objectionable behavior. If you can eliminate the become desperate enough to try anything. dangerous bars for the optimizer, then it might find that the current iteration has now become a sweet spot. Ze r o i n g in For index futures and all stocks, the potentially nastiest bars Let’s go back and take a closer look at the tools and examine can come at 9:30 am US Eastern time (ET). That’s the open of our role in using them. the US markets. If your algorithm finds this data to be unpre- The optimizer is a useful piece of software. Any lack of dictable and consequently draws you into bad trades, then block desired outcomes that it produces is generally caused by trading at this time until the market settles. One of the quietest a discrepancy between what it does and what you hope it times is around 1:00 pm ET. Apparently, people take a break or does. You hope that it will place your algorithm on steroids eat lunch or get up and stretch. Whatever the cause, that time is November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 43 “this” refers to the method of moving five bars in one direction and five bars in the other direction.

in the functions that you use and also the minimum window The straightness of the equity size needed for a successful trade. If your function uses a 10- growth is far more important bar simple moving average either explicitly or internally like than the final value of the a Bollinger Band, it will generate five bars of lag. This means that something that you care about will occur and you won’t account. be able to recognize it for five bars. So if you’re going to put on a trade — and this is part of the logic — then you will need to move five bars in a direction to get in and then five bars the much calmer than the open. So pick your poison. Avoid trading other way to get out. You’re going to need a data stream of at times that scare your algorithm. Use hard-fixed rules to offload least six or seven bars in one direction to have time to get in that headache from the optimizer. and out and still be able to harvest something. Remember that How can you identify data that is too aggressive or too bland? your logic is held back by the function with the worst lag. Consider the ATR (average true range), the RSI (relative strength index), the r from linear regression, the relationship between two Wh a t c a n y o u moving averages, and the current bar’s high, low, and close. I can’t d o a b o u t t h i s ? offer specific formulas here because they depend on knowing Smaller bars will generate longer the strengths and weaknesses of the rest of your logic. sequences for a directional move at Here’s a brief statement about expectations. Trend-following t he exp ense of releasi ng more noise as methodologies tend to have win/loss ratios in the vicinity of data. Range, volume, and renko bars 30–35%, while scalps or reversion-to-mean strategies tend can replace time bars and generate to have higher win/loss ratios. Keep in mind that the trend- longer sequences while absorbing followers need to score some decent trends to make up for more noise than their time-based all the losers. Meanwhile, in the mean reversions, you’ll win counterparts. The bottom line is that for any collection of more trades but the duration of a pullback is shorter, which data (defined at the tick level of a symbol), there is only one limits your profit, and when your trade fails, the size of your type of bar in only one size that will give the best result for loss will be substantially larger. one of your algorithms. You can turn that around and realize that your concept will work best with a certain bar type and Yo u a n d y o u r o p t i m i z e r : size and will disappoint if used in the wrong environment. If A l i tt l e h e l p f o r y o u r f r i e n d you think that your idea is not performing as it should, hold What else can you do to help your optimizer? You could fix the idea steady and change bar types and sizes along with the the bars. Bar data consists of signal and noise. Signal is a col- time window and observe the variety of results that can come lection of bars moving in one direction. Noise is one or more from a single recipe and a given dataset. bars that go the other way without starting a reverse trend. Bars come in types and they absorb data to create signal patterns Th e p o w e r o f t h e e q u i ty c u rv e and noise traps. The usual bar types are time-based (for this Finally, we come to the fruit of our labor: the equity curve. discussion, we’ll consider minute bars and hourly bars only), This is the bar-by-bar accounting of the cash value of your range bars, volume bars, and renko bars. portfolio. The straightness of the equity growth is far more Time bars absorb everything in their time frame. If you important than the final value of the account. If you have a have two minutes of signal data and three minutes of noise daytrading system that yields $30,000 a year and never pulls data and if this occurs continuously within the confines of down the equity by more than $300, then you’re good. You a five-minute boundary, then congratulations, you’re going can sleep well and have confidence that you’ve built a bullet- to be rich! You will put up a five-minute chart and it will be proof system. Take a second mortgage on the house, sell the noiseless. All you have to do is trade the trends. They will dog and cat, and get the kids to start a lemonade stand to raise be obvious. cash for you to trade with. In other words, bet the farm. Put Of course, as we know all too well, that’s not going to as much money as possible into slow, steady, and safe growth happen. So observe this: A time bar in a tight time frame and you will achieve the best results. will usually be compatible with all other same-sized time However, if you only focus on the final account value, you bars in the same-time window. That is, you could possibly might drown. A system with a final yearly return of $60,000 get good results from a strategy based on time bars that run may be hazardous to your health. Many times, a system will from 9:45 am ET to 10:15 am ET because the volatility and achieve a high level of profit midway through the out-of-sample trading ranges will be similar across days. By confining the period and then give back half of it near the end of the data. times, you offload some of the burden from your partner, the This is something you must consider. optimizer. If you would like to continue trading, optimize a Say a system started at zero, then ran up to $120,000, and second strategy for the next hour. Again, the teamwork between then down to $60,000. If you began using this system near you and your optimizer will pay off. its $120,000 high point, by the end of the period, the system Now take a good look at your main logic. Observe the lag would show a nice net profit of $60,000, butyou would have 44 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s er d Neuroshell DayTra FIGURE 1: AN IDEAL EQUITY CURVE. The pullbacks in the equity curve in the middle window are unnoticeable. It generates 82% winning trades and yields $100,000 in profits. The starting equity is $2,300. The bottom window shows what happens when you start with a $40,000 account and trade 75% of equity, reserving 25% for possible pullbacks.

a substantial loss. Slow and steady wins the race. Moreover, based on futures trading; $4 roundtrip commissions; daytrading if your system is prone to equity swings, then you must ask with conservative margins; and charts built around static data yourself whether you would stay the course when it gives back that can be used for optimization and measurement of outcomes profits or whether you would panic and halt trading until your on your favorite platform. I am not presenting actual market blood pressure drops. experience. No slippage is assumed. The ideas I present here To do this work, you need an understanding of your tools. are applicable to equity markets and forex markets.) You have help files and the Internet (and this magazine) to The chart in Figure 1 of the emini S&P continuous futures explain what’s going on inside an RSI, a stochastic, or a Bol- contract, which looks at two months in 2013, indicates what linger Band. If you don’t know the internals of your project, I believe is an ideal equity curve. Look carefully at the eq- then you can only guess about how to avoid pitfalls. uity curve in the middle window. The pullbacks are almost You also need imagination. You will struggle if you are unnoticeable. Here, one contract of the emini S&P futures doing the same thing as everyone else. Say you construct a contract is traded. It generated 82% winning trades. It made well-reasoned algorithm. When you test it against historical 8,535 total trades yielding a $100,000 profit and a 35,500% data, you may learn that it doesn’t produce the outcome you APR. To begin trading, it required a $2,300 account. This expect. One possible explanation is that many other traders chart is out-of-sample. are using that same logic, and the limited historical profits What’s so different about this example? When you have a are a result of too many shares trading in the same direction high-quality equity curve, then you can test for a more normal at the same time and thus distorting the market. You must do trading pattern. No one who achieves that kind of result would something different. keep on trading one contract. The bottom window shows what happens when you start with a $40,000 account and trade 75% Thinking o u t s i d e t h e b o x of equity, reserving 25% for possible pullbacks. As you can see, Let’s step outside the box. Watch your head; I’ve seen people the two-month profit goes to $47+ trillion. However, before you knocked unconscious trying to step out of the box. Here, I’ll try to place a down payment on the purchase of Costa Rica, give some examples of something different. please keep in mind that the required trade volume cannot (But first, a note and disclaimer. The examples shown here are be executed. The other thing that makes this different is that

November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 45 FIGURE 2: NEURAL NET INPUT. Using the curve shown here as the only input to a neural net generated the trades shown in this backtest.

it behaves the same way when applied to any time frame for chart in Figure 2 shows the input to a neural net. The neural the S&P contract, and it requires no optimization. net input shown is the only input. No price data or anything Here’s another example of thinking outside the box. The else is input. From this sole source, the neural net was able

FIGURE 3: ANOTHER GREAT EQUITY CURVE. This system generated 73% winning trades. There were a total of 81 trades yielding $13,575 in profit and a 1,572% APR.

46 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s FIGURE 4: REMOVING THE NOISE. Using renko charts to absorb the noise resulted in 78% of trades being profitable, a $74,000 profit, and an APR of 99,000%.

to configure itself to generate the trades shown. the total number of variables that can be manipulated. As this Figure 3 shows the data of Figure 2 when zoomed out. Note number rises, it becomes easier for the optimizer to give you a the equity curve when one contract is traded. This data is from great backtest and terrible out-of-sample results. Remember, four months in 2014. It generated 73% winning trades. It made you and the optimizer are partners. Find a fixed (nonoptimized) 81 total trades yielding a $13,575 profit and a 1,575% APR. way to block data that the optimizer can’t accommodate and To begin trading it required a $2,900 account. As before, I you will generate superior results. asked the system to set up a $40,000 account and trade 75% of equity while holding back 25% for drawdowns. As you can Robert Cocchiola is a consultant and the author of the Inter- see, this resulted in a $2,750,000 profit in four months with a chart Tools series of add-ons for NeuroShell Trader software. 31,000% APR. You will also notice that the small pullbacks These programs allow NeuroShell Trader’s optimizer to select in the one-contract equity curve are magnified by the com- the correct bar size for a given symbol and algorithm. The pounded profits. Still, considering the performance, I would optimized bars work with all 800 NeuroShell functions and expect that these temporary losses should be tolerable. are tradable on TradeStation accounts. Cocchiola may be The chart in Figure 4 uses optimized renko bars to absorb reached by email at [email protected] or by contacting the noise. The noise removal is so effective that the trading NeuroShell Trader sales at Ward Systems (301 662-7950). strategy consists of only two statements. The simple rule is: Compare the current optimized renko bar to the previous one Fu r t h e r r e a d i n g and place the appropriate trade. Note that the renko bars are Peterson, Dennis [2011]. “NeuroShell Trader 6,” product not displayed. Only the underlying ticks are shown. Again, this review, Technical Analysis of St o c k s & Co m m o d i t i e s , system was set up with a $40,000 account and to trade 75% Volume 29: September. of the account balance, reserving 25% to cover drawdowns. Sherald, Marge [2010]. “Neural Network Pair Trading,” The final equity curve is excellent, with 78% of the trades Technical Analysis of St o c k s & Co m m o d i t i e s , Volume being profitable. The final result is a profit of $74,000 with 28: February. an APR of 99,000%. ‡NeuroShell DayTrader (Ward Systems Group) Kn o w y o u r o p t i m i z e r w e l l In summary, the equity curve is everything. In the three charts shown, there are no lagging functions of any kind. The first chart’s algorithm predicts the next bar and generates 82% profitable trades. If that sounds difficult,it is. If you’re going to use optimizable functions, then you must keep an eye on November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 47 product review thinkorswim Sharing

TD Ameritrade, Inc. Sh o r t e n i n g t h e found both within the thinkorswim AND AFFILIATES l e a r n i n g c u r v e platform and the thinkorswim web-based Website: www.thinkorswim.com, Traders who use thinkorswim as their trading platform: www.mytrade.com broker and trading, charting, and n thinkorswim is the actual trading Email: [email protected] analysis platform might just find that and analysis platform; a web and Product: Social media sharing all of those pertinent questions — and mobile version are also available tools and online community for more — can be answered within the thinkorswim users thinkorswim/MyTrade section of this n thinkorswim/Sharing is the broad, Price: Free for TD Ameritrade comprehensive analysis and trading descriptive name that encom- account holders platform. The platform already offers a passes all of the sharing features myriad of unique technical, analytical, linked to thinkorswim by Donald W. Pendergast Jr. and forecasting tools for serious trad- n thinkorswim/MyTrade is a web- ers and investors. Experienced traders site and section within the thinkor- nce an individual makes the using the thinkorswim/MyTrade tools swim platform where user-posted important decision to pursue the will have an eager audience of newer trades, ideas, and charts are dis- O goal of becoming a successful and maturing traders with whom they tributed to other MyTrade users trader, chooses a stock/option/forex/ can freely share their trade ideas, charts, commodity broker, and funds his ac- scans, watchlists, and chart layouts. The n thinkorswim/MyTrade is subdi- count, he may then find himself faced exposure that up-and-coming market vided into four sections: Think with some vital questions that, for many participants get to the nonstop stream Share, Dashboard, My Page, and newer or struggling traders, could take of meaningful market-related content People. The Dashboard allows years to get answered — if at all. In has the potential to dramatically shorten complete customization so you can the meantime, new traders may lose so their learning curve. Here, newer traders organize all of your charts, watch- much trading capital that they could end may be able to: lists, quotes, company links, stock up quitting in disgust and frustration. headlines, and RSS/blog feeds. 1. Learn the operation of the charting, Some of these vital questions could be The People section lists those you scanning, and analysis tools within along the lines of: follow on a single web page. I’ll the platform discuss the Think Share and My n “How can I shorten the learning 2. More effectively analyze simple Page features a little later. curve so I can eventually trade to complex option trades successfully?” Ba s i c s 3. Gain access to prewritten trading n For this review, I used thinkorswim in “Who can help teach me the key strategy code for backtesting charting, systems, scanning, anal- its paperMoney demo version (a live, ysis and trading workflow routines 4. Learn more about order entry simulated trading account offering all that can help me toward consistent tactics and position management the same features that thinkorswim live trading accounts have) and its MyTrade profitability — thus saving me lots 5. Analyze charts and other visual features on my Windows 8 64-bit of trial and error?” forecasting tools to identify prom- notebook computer equipped with an n ising trade opportunities “How/where can I find other trad- Intel Core I7 processor and 8 MB of ers to interact with; those who 6. Maintain a productive trading RAM; my Internet connection was a are willing to share the acquired mindset; the social interaction with standard DSL line. After downloading wisdom and trading procedures skilled traders can be vital for trad- the software, installation was fast and that have helped them become ers just starting on the sometimes trouble-free and the real-time datafeed successful?” arduous pathway to success in the operated flawlessly, as did every feature n “Are any/all of the above resources markets. I subsequently used within the platform. available to me in a convenient, Although thinkorswim is a desktop easy-to-access venue, and free of Before we continue, I’ll provide a computer application, users can also log charge?” quick primer for some of the terminology into a convenient web-based platform related to the thinkorswim/Sharing tools that allows all of their basic trading and 48 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s It’s a terrific, easy-access venue in which traders with a solid track record and top- notch trading skills can get noticed. order entry processes; mobile users are also afforded the same kind of access. The desktop version obviously has many more features, one of which is the thinkorswim chat room; however, anyone with web or cells containing content related to AAPL your chart with your studies and/or trading mobile access who is following others in will populate your screen within a few strategy, just hit the share button and your MyTrade can still receive all of the same seconds. Once you locate a trade setup chart will be ready to share with others via trades ideas and charts as those using the you like — all of them provide detailed your MyTrade page, Twitter, Facebook, desktop version. buy/sell information, and some even and email accounts. Your followers will Since MyTrade makes use of Twitter, come with a descriptive video clip — get the chart and will be able to use it Facebook, and email, web and mobile simply click the copy trade icon to the as-is or tweak and adjust it to suit their users can always stay abreast of what’s right of the trade and then hit the paste own trading biases or needs. Meanwhile, going on with the financial instruments icon at the top right corner of the page. if you’re a follower, you can do the same and markets they choose to analyze The same exact trade will appear in your with the charts that your MyTrade feed and trade. MyTrade is integrated within order entry screen within thinkorswim. sends your way. Your followers can also thinkorswim; users can also log in at the You can modify it in any way you like save your exact workspace study and website at http://www.mytrade.com/ (quantity, buy/sell, option strike price, trading strategy parameters for future thinkshare/. and so on) if needed, and then you can use, thus saving time and “trial-and-error” send the order in to be executed by misadventures that can eat up valuable Sh a r e a n d s h a r e a l i k e thinkorswim. You can elect to have your trading capital. The MyTrade section of the platform trade shared on your MyTrade page, and provides thinkorswim users with a any thinkorswim users who are following My t r a d e b e c o m e s continuous stream of fresh trading you via Twitter will instantly be alerted to y o u r t r a d e ideas, complete descriptions of trade your latest (and hopefully greatest) trade. I decided to visually scan through daily setups, charts, market commentaries, If you choose not to share trading setups, charts of key S&P 500 index (SPX, SPY) and other useful information that keeps advice, charts, scans, and watchlists but stocks and I located a very promising thinkorswim/MyTrade users abreast of simply prefer to follow those who do, buy opportunity in shares of Autodesk what’s moving in the markets, along the process works the same way, only Inc. (ADSK); the stock staged a sharp, with practical ways to trade the related in reverse. wide-range, big-volume rally on Friday setups. Users can also link their Twitter Let’s say you’re a very talented chartist July 18, 2014 after having tested several accounts to their MyTrade page, along and technical analyst; you’ve visually significant support levels. It only took with the RSS feed from their personal identified an attractive chart pattern, a moment to draw the linear regression blogs. Users also have access to the trading signal, or breakout move on your channels on the chart (Figure 1), and thinkorswim chat room, which opens favorite stock and you want to share it then I applied the thinkorswim Long- up yet another way for traders to share with your followers. Once you’ve detailed Haul filter by clicking on thecharts tab and discuss trade setups, charts, scans, watchlists, and code in greater depth. Users can opt to receive all content or only content from those they follow, and there’s tons of it in a never-ending flow. Posts from users appear under the Think Share tab, with data organized into two main categories: n Trades n Ideas and charts A filtering feature enables you to opt to receive all posts in both categories or to only receive content from those sharers you choose to follow. Alternatively, you can search for specific content on a particular keyword or ticker. For example, let’s say you are interested in trading Apple Inc. (AAPL); just type FIGURE 1: A PROMISING OPPORTUNITY. Once a thinkorswim MyTrade user has detailed his chart with buy/ “AAPL” into the search box on the sell signals, trading strategies, drawings, and other visuals, simply clicking the share icon will launch the next step Think Share page, and a plethora of of the sharing process. November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 49 www.mytrade.com/thinkshare/. I clicked the Think Share tab and then the share a chart link on the top right side of the page. A small window popped up and I entered the ticker symbol (ADSK) and a title for my post before clicking browse so I could upload my ADSK chart from my drive to MyShare (Figure 2). Once it’s ready to be uploaded, a small preview image of the chart will appear in the popup window. All that was needed now was for me to add my trade-detail comments for the chart (Figure 3). When I was satisfied with my chart and comments, I simply hit submit and everything appeared at the top of the ideas and charts column in the Think Share portion of MyTrade. A much larger version of my chart and comments also appeared in the My FIGURE 2: SHARING A CHART. The next step in sharing a chart from within the thinkorswim sharing window is Page section of MyTrade; this is the deciding whether to send it via email, Facebook, and Twitter or to have it posted directly to your MyTrade page. area where sharers can post their social media contact information, a photo and a in thinkorswim and then following this peared in the 2014 Bonus Issue of this brief biography (Figure 4). Sharers need pathway: magazine (“A Trading Method For The expend little effort to distribute their Long Haul”). The actual strategy code content within thinkorswim MyTrade, Studies/Add Study/Stocks and Commodities for the thinkorswim LongHaul Filter (as and it’s a terrific, easy-access venue in Magazine/A-R/LongHaul Filter well as many other code listings) can be which traders with a solid track record accessed via the thinkScript Strategy and top-notch trading skills can get The LongHaul Filter is a basic visual webpage at http://tos.mx/fIH5JZ. noticed by the rest of the thinkorswim alert for potential buy opportunities in Once I had detailed and annotated my sharing gang. trending stocks (the little blue/white light ADSK chart to my liking and saved it to bulb icon near the bottom of the chart my computer’s drive, I wanted to share it Le s s c a n b e m o r e (u s e f u l ) identified the last four signals). This filter with the rest of the thinkorswim sharing Given the enormous amount of content is based on a complete trading strategy community, which was very easy to do, being posted, tweeted, and emailed via that I described in my article that ap- once I was logged into MyTrade at http:// thinkorswim/Share, here are some ideas on how to streamline your daily workflow within thinkorswim/MyTrade, especially if you are new to the world of trading: n Limit your trading focus to a small, specific, diversified group of stocks and ETFs (or forex or commodity markets) n Trade the same time frame for each portfolio you construct. If you work at a day job, then trade end-of-day (daily or weekly charts) only n After reviewing the final trade results of those you follow within MyTrade, boot those with mar- ginal or losing track records and then focus on the two or three FIGURE 3: DISTRIBUTING CONTENT. thinkorswim users can also share directly from the MyTrade website sharers whose trading approach at http://www.mytrade.com/thinkshare/. After clicking share a chart, this popup window appears for entering a description and comments. A thumbnail image of the chart is also displayed. Hitting submit sends the chart and produces winning outcomes text to the user’s MyTrade page. and whose methodologies most

50 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s closely resonate with your own trading psychology (Figure 5) n Use a thinkorswim paperMoney simulated trading account to paper-trade the output of your favorite sharers before you put real money on the line in the markets; when you’re satisfied with the simulated results, begin trading with just a small fraction of your trading capital.

Su mm a r y The thinkorswim/Sharing concept may just be the ultimate fulfillment of the FIGURE 4: SHARING ACCOMPLISHED. I posted this chart and commentary to the MyTrade website on July 19, trader’s dream of a “one-stop shopping” 2014. It was also shared to the Think Share and My Page sections within the thinkorswim trading platform, as venue for financial market participants, well as to my Twitter account. Sharers can list a brief biography of themselves, their location, and other contact one where dedicated traders and educa- details on the MyTrade website. tors can meet, learn, research, analyze, test strategies, share trades, charts, ideas, and then place trades with a higher degree of confidence than ever before. Thinkorswim has always been one of the preeminent option analysis/trading platforms, and the new sharing features elevate this already first-rate platform to an even higher level for retail traders.

Donald W. Pendergast Jr. has contrib- uted articles and reviews to this magazine since 2008. A trader, market technician, and system developer, he is a consultant who offers stock-specific trading signals and customized analysis. He can be reached at [email protected] and via his website http://ezstocksignals. sitespawner.com/.

Fu r t h e r r e a d i n g Pendergast Jr., Donald W. [2014]. “A Trading Method For The Long Haul,” Technical Analysis of St o c k s & C o m - m o d i t i e s , Volume 32: Bonus Issue. [2013]. “Swing Trading With Three Indicators,” Technical Analysis of St o c k s & Co m m o d i t i e s , Volume 31: December. Peterson, Dennis [2012]. “Thinkorswim. com,” product review, Technical Analysis of St o c k s & C o m m o d i t i e s , Volume 30: May.

‡thinkorswim (TD Ameritrade Inc.) ‡See Editorial Resource Index FIGURE 5: MANY WAYS TO SHARE. Here is a small sampling of the MyTrade/Think Share content for Apple Inc. (AAPL) on July 23, 2014.

November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 51 Explore Your Options

Continued from page 25 at the same time. This is called a the cost and overall risk of the position short condor, but to its expiration. In this case study, I am the combination long the April 2015 75/70 put spread last would cost more priced at $1.70 (Figure 3). This means and reward less, so for $170 plus commissions, you have the keep that in mind. right to sell 100 shares of SBUX at $75 It depends on your a share, but you are also obligated to buy outlook — either SBUX at $70 a share if a buyer chooses bullish, bearish, or to exercise. It’s not a bad scenario: Sell both — and your SBUX at $75 and be forced to buy it lower risk tolerance. One at $70. With this case study, the reward thing is for certain: would be five points minus the $1.70 cost, you will know the FIGURE 3: BEARISH SCENARIO. Since you are long the April 2015 75/70 put spread or a reward of $3.30. outcome of this priced at $1.70, it means that for $170 plus commissions, you have the right to sell 100 shares of SBUX at $75 a share but are also obligated to buy SBUX at $70. You could create a doppio (another and all stocks in pun) and trade the call and put position due time.

FUTURES FOR YOU

Continued from page 41 ing leveraged futures contracts, being on would like to place most orders through a hold for several minutes can be a pricy platform. It is the best of both worlds — brokerage fi rm. In essence, a discount experience. Many of the clerks work- high level of service with the convenience online brokerage fi rm provides clients ing at such fi rms are inexperienced and of online account access and moderately with access to the markets and account are offering their services at minimum lower commission rates. statements, but generally, the service wage with small opportunities for earn- ends there. For some traders, this makes ing commission incentives. Thus, your WHICH ONE SHOULD YOU CHOOSE? sense. After all, there is no need to pay for service expectations should be tapered There is no such thing as a perfect bro- service you absolutely do not need. and you should be willing and capable kerage fi rm, but there is likely a perfect Even if you are an experienced trader, of performing on your own. brokerage for your individual needs. you must understand that you will always Finding the appropriate brokerage rela- get what you pay for. Occasionally, • Hybrid (broker-assisted/self-directed) tionship will take a considerable amount there could be technical issues with an A good brokerage fi rm will offer clients of work, and shouldn’t be overlooked; exchange or Internet outages that might the option of a hybrid service level in nor should the decision be made solely require additional service from your which they have access to a live broker on the price of commission. After all, brokerage. In general, the fi rms offering throughout the day in addition to the choosing a brokerage fi rm might just highly discounted commission rates can- ability to place orders via a computer be the most important trading decision not afford to hire a large, or experienced, platform. This is a great option for those you’ll ever make. staff; so you can expect long hold times, who prefer to have somebody to bounce delayed service, and other obstacles ideas off of, or don’t always have com- should an emergency arise. When trad- puter access during market hours but

SILIGARDOS / WHEN THE SMART MONEY FAILS articles/1098-what-end-2007-showed Continued from page 19 Upperman, Floyd [2005]. Commitments Of Traders: Strate- gies For Tracking The Market And Trading Profi tably, Schwager, Jack [1993]. Market Wizards: Interviews With Top Wiley Trading. Traders, Harper Paperbacks. Williams, Larry [2005]. Trade Stocks And Commodities Siligardos, Giorgos [2008]. “Interest Rates And The Stock With The Insiders: Secrets Of The COT Report, Wiley Market: The Current State,” online article available at Trading. http://www.trade2win.com/articles/1100-interest-rates- Wikipedia: “Swap (fi nance)” entry,https://en.wikipedia.org/ stock-market-current-state/p/1 wiki/Swap_(fi nance) _____ [2008]. “What The End Of 2007 Showed,” on- line article available at http://www.trade2win.com/ 52 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s

52 • November 2014 • Technical Analysis of St o c k S & co m m o d i t i e S

52 • November 2014 • Technical Analysis of St o c k S & co m m o d i t i e S Job # 63898 Filename 63737_63898_M01.indd Last Modifi ed 9-19-2014 11:29 AM User / Pre- Derrick Edwin / Tim.Kinzler

Client TD Ameritrade Art Director na Bleed 8.5” x 11.5” Path Premedia:Volumes:Premedia:Pr CMYK epress:63737_63898:Final:Prepr Create 9-19-2014 10:27 AM Artist kfl ynn Trim 7.875” x 10.5” ess:63737_63898_M01.indd Proof 2_FINAL Traffi c lpino Saftey 7” x 10”

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Art TDAM_LOGOS_V2_td_ameritrade_White_KO.ai (Arts_Logos:TD Ameritrade:Logos:Logos:TDAM_LOGOS_V2_td_ameritrade_White_KO.ai), TDAM_63737_01a_SW_Or- der_Entry.psd (Arts_Logos:TD Ameritrade:Art:Artwork:2014:TDAM_63737_01a_SW_Order_Entry.psd), TDAM_CUSTOMERLOGOS_V1_thinkorswim_KO.eps (Arts_Logos:TD Ameritrade:Logos:Customer Logos:TDAM_CUSTOMERLOGOS_V1_thinkorswim_KO.eps) Client Name: TD Ameritrade This advertisement prepared by: Job Number: 0000063737_0000063898_M01 HAVAS WORLDWIDE NY Description: Options Revise – 4/C Mag 200 Hudson Street Pub/Issue Date: New York, New York 10013 Stocks & Commodities – Nov issue AD: N/A (Previous Agency) – Cover AD: TBD Bleed: 8.50”w x 11.50”h AE: Derek Monson/Ryan Maloney Trim: 7.875” x 10.50 Prod: Linda Pino Safety: 7 x 10 BILL LABOR TO JOB NUMBER: 0000063737 P4C BLEED BILL OOP TO JOB NUMBER: 0000063737 B:8.5” T:7.875” S:7”

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The Sizzle Index is the ratio of an underlying’s volume/implied volatility for the current day against the simple average of the prior ve days. Delta is a measure of an option’s sensitivity to changes in the price of the underlying asset. Market volatility, volume and system availability may delay account access and trade executions. Offer valid through 3/31/15. Minimum funding (within 60 days) of $2,000 required for up to 500 commission-free Internet-equity, ETF or options trades. Contract fees still apply. See Web site for details and other restrictions/conditions. TD Ameritrade reserves the right to restrict or revoke this offer at any time. This is not an offer or solicitation in any jurisdiction where we are not authorized to do business. TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2014 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission. EasyLanguage code for a daily pivot indicator based on the For this month’s Traders’ Tips, the focus is calculations given in Vervoort’s article. mainly Sylvain Vervoort’s article in this is- To download the EasyLanguage code, please visit our sue issue, “Price Projections” which is part TradeStation and EasyLanguage support forum. The code 5 of his Exploring Charting Techniques se- ries. Here we present the November 2014 can be found at http://www.tradestation.com/TASC-2014. Traders’ Tips code with possible imple- The ELD filename is "_TASC_SVEPivots.ELD." mentations in various software. For more information about EasyLanguage in general, please Code for NinjaTrader was already pro- see http://www.tradestation.com/EL-FAQ. vided with Vervoort’s article by the author. A sample chart implementing the indicator is shown in S&C subscribers will find that code at the Subscriber Figure 1. Area of our website, www.Traders.com. (Click on “S&C This article is for informational purposes. No type of trading or Article Code” from the homepage.) Presented here is an investment recommendation, advice, or strategy is being made, given, overview of some possible implementations for other soft- or in any manner provided by TradeStation Securities or its affiliates. ware as well. —Doug McCrary Traders’ Tips code is provided to help the reader imple- TradeStation Securities, Inc. ment a selected technique from an article in this issue or www.TradeStation.com another recent issue. The entries here are contributed by various software developers or programmers for software that is capable of customization. Readers will find the November 2014 Traders’ Tips F eSIGNAL: NOVEMBER 2014 TRADERS’ TIPS CODE code and formulas at our website, Traders.com, in the Traders’ Tips area. Here, you can read some discussion For this month’s Traders’ Tip, we’ve provided the formula of the techniques’ implementation by the Traders’ Tips SVEPivotsUtcRt.efs based on the formula described in Syl- contributors as well as some example charts. vain Vervoort’s article in this issue, “Price Projections” in his To locate Traders’ Tips at our website, Traders.com, ongoing Exploring Charting Techniques series. click on the Traders’ Tips link from our “Home—S&C The study contains formula parameters that may be config- Magazine” menu at the top of the home­page, or scroll ured through the edit chart window (right-click on the chart down to the “Current articles” section and click on the and select “edit chart”). A sample chart implementing the Traders’ Tips tab. study is shown in Figure 2. To discuss this study or download a complete copy of the formula code, please visit the EFS Library Discussion Board forum under the forums link from the support menu at www. F TRADESTATION: NOVEMBER 2014 TRADERS’ TIPS CODE esignal.com, or visit our EFS KnowledgeBase at http://www. In “Price Projections” in this issue, which is part 5 of an esignal.com/support/kb/efs/. The eSignal formula script (EFS) ongoing series titled Exploring Charting Techniques, author is also available for copying & pasting from the St o c k s & Sylvain Vervoort introduces several methods he uses for Co m m o d i t e s website at www.traders.com in the Traders’ defining possible support & resistance levels. In the article, Tips area. —Eric Lippert Vervoort provides code for his version of a daily pivot indicator eSignal, an Interactive Data company that calculates support & resistance based on the prior day’s 800 779-6555, www.eSignal.com high, low, and closing prices. We are providing TradeStation

Figure 1: TRADESTATION. Here is a sample 30-minute chart of the SPY with the Figure 2: eSIGNAL. Here is an example of the study implemented on a 30-minute daily pivot indicator applied. chart of the Euro Composite.

54 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s Figure 3: WEALTH-LAB, PIVOTS. Here is a sample Wealth-Lab 6 chart illustrat- ing the application of the floor trader pivots trading system on a five-minute chart of Twitter (TWTR).

Figure 4: NEUROSHELL TRADER. This sample NeuroShell Trader chart displays F WEALTH-LAB: NOVEMBER 2014 TRADERS’ TIPS CODE a few of the turning point add-on indicators. In his article in this issue, “Price Projections,” which is part 5 of his ongoing series on exploring charting techniques, author ability that the current price level is at a new turning Sylvain Vervoort introduces his SVEPivotsUtcRt indicator as point based on statistical measures. a way of drawing daily pivots on the chart. In today’s trad- ing platforms, the ability draw pivots is commonplace, and 2. Past price swings. Sylvain Vervoort’s SVEHLZZperc Wealth-Lab is no exception. Thus, we don’t need to provide indicator, which he introduced in his June 2013 St o c k s any custom code. & Co m m o d i t i e s article “The 1-2-3 Wave Count,” uses After you download all the available strategies using the the zigzag indicator to identify past price swings on the download button in the open strategy dialog, look for the chart. This indicator is available for download from our strategy named “floor trader pivots.” Likewise, the other support site www.ward.net. techniques mentioned by Vervoort — namely, the step candle pattern and 1-2-3 wave count — are also ready to be explored 3. Fibonacci levels. You can draw Fibonacci retracements, as downloadable strategies in Wealth-Lab. Fibonacci projections, and even Fibonacci timelines on the A sample chart showing some floor trader pivots is in chart using NeuroShell Trader’s built-in drawing tools. Figure 3. —Eugene, Wealth-Lab team 4. Pivot points. Create daily pivot indicators using a few of MS123, LLC NeuroShell Trader’s 800+ indicators. Simply select “New www.wealth-lab.com Indicator …” from the Insert menu and use the indicator wizard to create the following indicators: F NEUROSHELL TRADER: NOVEMBER 2014 Pivot Point PP: Avg3(DayHigh(High,1), DayLow(Low,1), TRADERS’ TIPS CODE DayClose(Close,1)) In “Price Projections” in this issue, author Sylvain Resistance R1: Subtract(Add2(PP, PP), DayLow(Low,1)) Vervoort discusses more elements of charting in his ongoing Resistance R2: Add2(PP, DayRange(High,Low1)) series on exploring charting techniques, including measured Resistance R3: Add2(R1, DayRange(High,Low1)) Support S1: Subtract(Add2(PP, PP), DayHigh(High,1)) moves, Fibonacci projections & retracements, and daily pivots. Support S2: Subtract(PP, DayRange(High,Low1)) Here, we’ll take a look at how some of the charting techniques Support S3: Subtract(S1, DayRange(High,Low1)) he describes can be invoked in NeuroShell Trader. Price levels and projections can be easily implemented in 5. Projected price swings. Use NeuroShell Trader’s built-in NeuroShell Trader using the following methods: neural network predictions to find patterns in past data and then use those patterns to identify likely future price 1. Turning points. The Turning Points add-on for Neuro- swings. Shell Trader helps find local peaks & valleys in a price series. It allows implementation of price swings and Users of NeuroShell Trader can go to the St o c k s & projections into automated trading systems. Among other Co m m o d i t i e s section of the NeuroShell Trader free technical things, the turning points indicator computes support support website to download a copy of this or any previous & resistance lines from prior price swings; Fibonacci Traders’ Tips. retracement lines from each price swing; and the prob- A sample chart is shown in Figure 4. November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 55 —Marge Sherald, Ward Systems Group, Inc. 301 662-7950, [email protected] www.neuroshell.com

F METASTOCK: NOVEMBER 2014 TRADERS’ TIPS CODE Sylvain Vervoort’s article in this issue, “Price Projections,” includes his version of daily pivots. The following MetaStock formula is designed to change “days” when the Coordinated Universal Time (UTC or GMT) shows midnight. The formula prompts the user to enter his time zones UTC adjustment. If the indicator is being plotted on a daily or higher interval, the UTC adjustment is not used.

rollmod:= Input(“Coordinated Universal Time (or UTC) adjust- ment”, -12, 13, -5); rolltime:= If(rollmod >= 0, rollmod, 24-rollmod); Figure 5: AMIBROKER. Here is a sample EURUSD 30-minute chart with daily roll:= If(rolltime = 0, Hour() < Ref(Hour(),-1), pivots and support/resistance levels shown. Hour() < rolltime AND Hour() >= rolltime); intraday:= LastValue(Max(Cum(Hour())<>0, Cum(Minute())<>0) >0); new:=If(intraday, roll, ROC(DayOfWeek(),1,$)<>0); yh:=ValueWhen(1,new, Ref(HighestSince(1,new,H),-1)); S2 = 2 * PP - PH - PL; yl:=ValueWhen(1,new, Ref(LowestSince(1,new,L),-1)); S3 = S1 - PH - PL; yc:=ValueWhen(1,new, Ref(C,-1)); Plot( C, "Price", colorDefault, styleBar | styleThick ); Plot( PH, "PH", colorGreen, styleNoRescale ); pp:=(yc+yh+yl)/3; Plot( PL, "PL", colorViolet, styleNoRescale ); r1:=(pp*2)-yl; Plot( PP, "PP", colorBlack, styleNoRescale ); s1:=(pp*2)-yh; Plot( R1, "R1", colorBlue, styleDashed | styleNoRescale ); r2:= pp+r1-s1; Plot( R2, "R2", colorLightBlue, styleDashed | styleNoRescale ); s2:= pp-r1+s1; Plot( R3, "R3", colorAqua, styleDashed | styleNoRescale ); r3:= pp+r2-s2; Plot( S1, "S1", colorRed, styleDashed | styleNoRescale ); s3:= pp-r2+s2; Plot( S2, "S2", colorOrange, styleDashed | styleNoRescale ); Plot( S3, "S3", colorDarkYellow, styleDashed | styleNoRescale ); r3; r2; —Tomasz Janeczko, AmiBroker.com r1; www.amibroker.com pp; s1; s2; s3; F AIQ: NOVEMBER 2014 TRADERS’ TIPS CODE —William Golson The AIQ code for this month is based on Sylvain MetaStock Technical Support Vervoort’s article in this issue, “Price Projections,” www.metastock.com which is part 5 of his ongoing series on exploring charting techniques. The AIQ code and EDS file can be downloaded from www.TradersEdgeSystems.com/traderstips.htm. The code runs on daily bars only and computes the various F AMIBROKER: NOVEMBER 2014 TRADERS’ TIPS CODE support & resistance levels for the next day’s intraday trading. In “Price Projections” in this issue, author Sylvain Vervoort The levels cannot be plotted on the real-time alerts chart. continues his article series on charting techniques, including In Figure 6, I show a report that was run on the major using daily pivot points to estimate future price levels. indexes for 9/10/2014. A ready-to-use AmiBroker formula for daily pivots is The code is as follows: presented here. A sample chart is shown in Figure 5. !PRICE PROJECTIONS !Author: Sylvain Vervoort, TASC Nov 2014 ph = TimeFrameGetPrice("H", inDaily, -1 ); !Coded by: Richard Denning 9/10/2014 pl = TimeFrameGetPrice("L", inDaily, -1 ); !www.TradersEdgeSystems.com pc = TimeFrameGetPrice("C", inDaily, -1 );

PP = ( PH + PL + PC )/3; C is [close]. H is [high]. R1 = 2 * PP - PL; L is [low]. R2 = PP + PH - PL; R3 = R1 + PH - PL; !To get next day levels we will be running the report at the end of day

S1 = 2 * PP - PH; Continued on page 58

56 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s Free Information From Advertisers

Advertiser Page Advertiser Page How to reach us Brokerages Software For questions, address changes, or Interactive Brokers 5 MetaStock 64 ordering information for Technical ibkr.com/iwantmore MetaStock.com/traders-summit Analysis of St o c k s & Co m m o d i t i e s Scottrade 7 NinjaTrader 9 magazine and its online publications: scottrade.com/passion ninjatrader.com/Commissions Toll-free 800 832-4642 TDAmeritrade 53 Vectorvest 2 (800-Te c h n i c a l ) or: TDAmeritrade.com/thinkorswim www.vectorvest.com/PowerCombo 206 938-0570. TradeStation 3 Ward Systems 39 TradeStation.com/FuturesToolkit www.NeuroShell.com Email us at: Publications Worden Brothers 65 [email protected]. Stocks & Commodities 31 TC2000.com/TryFree Or write to us at: Traders.com Trading Systems 4757 California Ave. SW, Software NinjaTrader 9 Seattle, WA 98116-4499. Ablesys 29 ninjatrader.com/Commissions ablesys.com/SCM14 Trading Concepts, Inc. 38 Do your magazines arrive tattered eSignal 17 www.OptionsMD.com/IncomeRx and torn? Polybagging of magazines www.esignal.com Websites (domestic delivery) is available for Jurik Research 13 StockCharts.com 37 $6/year. jurikres.com, tinyurl.com/jurik-online www.StockCharts.com/sales Single back issues from the current Stocks & Commodities 31 year (subject to availability) are $8 Traders.com prepaid. Subscribers have access to our digital archive of all past articles. Editorial Resource Index Individual articles can be purchased Microsoft Excel ...... 14 from the Online Store at our website, NinjaTrader 21 Traders.com. eSignal (Interactive Data) ...... 27 Editorial feedback Neuroshell DayTrader (Ward Systems Group) 45 thinkorswim (by TDAmeritrade) ...... 48 We always want to know more about TradeStation ...... 54 the needs of our readers: What kinds of Wealth-Lab 55 articles would you like to see more of? What do you find useful? Address your MetaStock ...... 56 written questions and comments to edi- AmiBroker ...... 56 [email protected] or to: Editor, St o c k s AIQ 56 & Co m m o d i t i e s , 4757 California Ave TradersStudio ...... 58 SW, Seattle, WA 98116-4499. Sorry, we updata 60 cannot perform research on individual financial questions not related to this For more information about our advertisers, go to Traders.com/reader where magazine and we cannot respond to you will find the alphabetized list of this month’s advertisers. For reference, the all mail. Letters or emails containing list is also printed above along with the corresponding page number for each ad. questions or information that other Just follow the simple directions below and the advertisers will get your requests readers may enjoy or that relate to the same day! our articles or technical analysis top- ics may be published in our Letters to Step 1: Go to Traders.com/reader and S&C column. scroll through the list of our current month’s advertisers. Join us on Facebook at www.facebook.com/ Click the box for each advertiser you’d like STOCKSandCOMMODITIES to hear from. At the bottom of the list, click Continue when finished. Follow us on Twitter Step 2: Fill out your contact information @STOCKSandCOMM and click Send Request. Your request will then be sent to the advertisers you selected. To receive information on the products and services listed in the Editorial and Advertisers’ Indexes, go to: Traders.com/reader/. These indexes are And that’s it! published solely as a convenience. While every effort is made to maintain accuracy, last-minute changes may result in omissions or errors.

November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 57 Continued from page 56

Figure 6: AIQ. Support & resistance levels are calculated based on end-of-day data as of 9/10/2014 for the major indexes. The levels are for use in intraday trading for the next day (9/11/2014).

!so prior high will be the current H, etc. The report will give the Figure 7: TRADERSSTUDIO, SUPPORT & RESISTANCE. Here is a sample chart !values for the next day but cannot be ploted on a real time chart of the emini futures contract (ES) 60-minute bars with the support & resistance levels !since we are using daily end of day data to compute the levels. calculated from yesterday’s daily bar data. !THIS CODE RUNS ON DAILY DATA: P is (H+L+C)/3. R1 is (2*P) - L. real-time module. R2 is P + (H - L). In Figure 7, I show a chart of the emini futures contract (ES) R3 is (2*P) + (H - (2*L)). 60-minute bars with the support & resistance levels calculated S1 is (2*P) - H. S2 is P - (H - L). from yesterday’s daily bar data. S3 is (2*P) - ((2*H) - L). The code is as follows:

NextDayLevels if C > 0 and H > 0 'PRICE PROJECTIONS and L > 0 and H - L > 0. 'Author: Sylvain Vervoort, TASC Nov 2014 'Coded by: Richard Denning 9/10/2014 —Richard Denning 'www TradersEdgeSystems.com [email protected] for AIQ Systems Function PIVOTS(PriceH as bararray,PriceL as bararray,PriceC as bararray,ByRef P,ByRef R1,ByRef R2, ByRef R3, ByRef S1, ByRef S2, ByRef S3) 'THIS CODE RUNS ON DAILY DATA AND COMPUTES THE F TRADERSSTUDIO: NOVEMBER 2014 NEXT DAYS SUPPORT AND RESISTANCE LEVELS: 'Dim P As BarArray TRADERS’ TIPS CODE P = (PriceH+PriceL+PriceC)/3 The TradersStudio code based on Sylvain Vervoort’s article R1 = (2*P) - PriceL R2 = P + (PriceH - PriceL) in this issue, “Price Projections,” is provided at the follow- R3 = (2*P) + (PriceH - (2*PriceL)) ing websites: S1 = (2*P) - PriceH S2 = P - (PriceH - PriceL) • www.TradersEdgeSystems.com/traderstips.htm S3 = (2*P) - ((2*PriceH) - PriceL) PIVOTS = P • www.TradersStudio.com → Traders Resources → Traders Tips End Function '------The following code files are provided in the download: 'INDICATOR PLOT CODE: Sub PIVOTS_IND() Dim priceH As BarArray • Function PIVOTS: Returns the pivot point and all the Dim priceL As BarArray support & resistance levels based on daily high, low, and Dim priceC As BarArray Dim P As BarArray close of the input data. This is the value for the next day if Dim R1 As BarArray the input is the current end-of-day close Dim R2 As BarArray Dim R3 As BarArray Dim S1 As BarArray • Indicator plot PIVOTS_IND: Plots the six support & re- Dim S2 As BarArray sistance levels from the PIVOTS function on the next day’s Dim S3 As BarArray intraday bars shifted back one day priceH = H Of independent1 priceL = L Of independent1 • System DISPLAY_PIVOTS: This is not a trading system priceC = C Of independent1 but just my way of displaying the levels on a chart. P = PIVOTS(priceH,priceL,priceC,P,R1,R2,R3,S1,S2,S3)

The support & resistance levels can be displayed on any plot1(R1[1]) historical intraday chart. The code uses the same data file plot2(R2[1]) plot3(R3[1]) compressed to daily data by setting it up as the child datastream plot4(S1[1]) with the type set to “daily.” Note that this cannot be used to trade intraday, as TradersStudio does not as of yet have a Continued on page 60

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LINKS BROKERAGES TOP 10 VIEWED BROKERAGES Self-directed traders, as St o c k s & Co m m o d i t i e s readers usually are, have more choices than ever in their search for Brokerage speed, pricing efficiency, and good accounting when it comes to 1. Interactive Brokers brokerages. First, you have to find a brokerage that handles your tradable; you can choose between a full-service brokerages or a 2. Forex Capital Markets LLC (FXCM) d i s c ou nt b r oke r age. F u l l s e r v ic e wou ld m e a n you wou ld sit dow n 3. optionsXpress with your broker, whereas discount brokerage would involve trading online without any advice from a professional. Most 4. Scottrade institutions that offer full service brokerages also have the discount broker option. 5. TradeStation Other considerations are what kinds of tools or services do they provide? Do they provide real-time data? Which markets do they give you access to? Do they have ac- 6. Fidelity Active Trader Pro (Fidelity Investments) count minimums? How fast are their executions? How much are their commissions? What kind of support do they offer? 7. TD AMERITRADE, Inc. With the presence of freely available company information online, retail broker- 8. E*TRADE Group, Inc. age research is less valuable than it ever has been. Nevertheless, if you’re in less intensively studied but highly commercial markets such as futures, a brokerage’s 9. Global Futures Exchange & Trading Company, Inc. ability to provide market statistics, hedging activity reports, and other commercial 10. Infinity Futures information may be critical to your trading and investing decisions. Finally, don’t forget the security of your money. Inquire about a brokerage’s These are the 10 Brokerages viewed most often on the Traders’ Resource website, where each company is listed in order of clicks received. This is not an editorial rating or ranking. For more clearing operations, and if you’re in equities, about Securities Investor Protection information on specific products and services, try checking store.Traders.com for archived S&C Corp. (Sipc) coverage. product reviews.

The information in Traders’ Resource is the most accurate at the time of posting and is subject to change. Because the vendors posting to Traders’ Resource are responsible for their own listing, Technical Analysis, Inc. declines any and all liability for any representations made by the businesses and individuals listed. Nor can Technical Analysis, Inc. endorse any business or individual listed on Traders’ Resource. Technical Analysis, Inc. makes no warranties, express or implied, as to the accuracy and reliability of claims herein. You agree to release Technical Analysis, Inc., together with its respective employees, agents, officers, directors and shareholders, from any and all liability and obligations whatsoever in connection with or arising from your use of Traders’ Resource. If at any time you are not happy with the information posted to Traders’ Resource or object to any material within Traders’ Resource, your sole remedy is to cease using it. This list is updated frequently. If you are aware of a business that should be listed, please email us at [email protected].

November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 59 Continued from page 58

Figure 9: NINJATRADER, CHOPPINESS INDEX. This screenshot shows the indicator applied to a 15-minute EuroFX futures chart in NinjaTrader.

FIGURE 8: UPDATA, PIVOT POINTS. Here is an example of Sylvain Vervoort’s described technique for finding pivot points applied to the currency pair EUR/USD in 60-minute resolution. F NINJATRADER: NOVEMBER 2014 TRADERS’ TIPS CODE plot5(S2[1]) Since NinjaScript code for NinjaTrader was already given in plot6(S3[1]) Sylvain Vervoort’s article in this issue (“Price Projections”) for his techniques in this month’s installment of his “Explor- End Sub '------ing Charting Techniques” series, we’ll focus here on another sub DISPLAY_PIVOTS() topic: the choppiness index. Dim DailyData As BarArray DailyData = C Of independent1 The choppiness index was designed to help determine If BarNumber > BarSize Then Buy("LE",1,0,Market,Day) whether the market is choppy (that is, trading sideways) or If BarNumber = LastBar - 1 Then ExitLong("LX","",1,0,Market,D not (trading with a trend in either direction). This study is not ay) meant to predict the future market direction, but rather, it’s End Sub just a metric to be used for defining the market’s trendiness. '------Higher values equate to more choppiness, while lower values —Richard Denning signify more directional trending character in price. [email protected] However, it can be hard to determine the exact trend in for TradersStudio which the market is making with the lower values. With this in mind, we have included additional checks for when our values are falling and our closing prices start to go below or F UPDATA: NOVEMBER 2014 above a moving average. If the market is trending up, we will TRADERS’ TIPS CODE see a green study plot; if down, a red one. Our Traders’ Tip for this month is based on the article “Price This indicator is available for download at www.ninjatrader. Projections” in this issue by Sylvain Vervoort, which is the fifth com/SC/November2014SC.zip. part of his ongoing series, Exploring Charting Techniques. Once you have it downloaded, from within the NinjaTrader In the article, Vervoort defines a set of pivot points, which Control Center window, select the menu File → Utilities → are supposed places of support or resistance, based on ratios Import NinjaScript and select the downloaded file. This file of the previous day’s high, low and close. These levels are is for NinjaTrader version 7 or greater. then plotted over the current day’s price. You can review the indicator source code by selecting the Hardcoded versions of Fibonacci levels already exist in menu Tools → Edit NinjaScript → Indicator from within Updata, so we don’t need to provide custom code for those. the NinjaTrader Control Center window and selecting the The Updata code for Vervoort’s technique of finding pivot “ChopIndicator” file. points has been introduced into the Updata Library. You can NinjaScript uses compiled DLLs that run native, not download the code by clicking the custom menu and then interpreted, which provides you with the highest performance indicator library. Those who cannot access the library due possible. to a firewall may paste the code shown in the Traders’ Tips A sample chart implementing the choppiness index is shown area of www.traders.com into the Updata custom editor and in Figure 9. save it. —Raymond Deux & Cal Hueber A sample figure is shown in Figure 8. NinjaTrader, LLC —Updata support team www.ninjatrader.com [email protected], www.updata.co.uk

60 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s NEW CERTIFICATION PROGRAM FOR interactive charting; technical indica- INDIVIDUAL TRADERS OR INVESTORS tors and overlays; Bollinger Bands The Technical Securities Analysts As- Expert, an artificial intelligence system sociation San Francisco (TSAA-SF) has to analyze stocks delivered via audio launched a new exam for certification in or text; customized chandelier and technical analysis. The exam was devel- parabolic stops; BBScript programming oped by industry experts, is administered and backtesting for creating custom in- by the TSAA-SF, and is sponsored by dicators and trading systems; a pattern- StockCharts.com. recognition system; a stock-screening The program includes a self-study program; portfolio tracking; an “Edge” Shift Theory Ratio indicator course, online practice questions, the feature that highlights expected strength ChartSchool at StockCharts.com, a prac- and weakness; new video tutorials; and The Shift Theory Ratio indicator is cur- tice exam, and a TSAA-SF Certificate of widgets for quick access to news and rently available as an add-on for the Nin- Completion after successfully passing personalized features. jaTrader, TradeStation, and MultiCharts the final exam. www.BollingerOnBollingerBands.com, platforms, and soon for eSignal. Platform www.BBands.com users can create simple crossover or other strategies in these platforms based on the FX BROKERAGE COMPARISON FEATURE indicator to help identify trend conditions, FXStreet announced an improved Bro- with no programming necessary. kers Comparative Table and updated its www.shift-theory.com design with real-time spread data. The company reports its FXStreet Brokers NeuroShell Now CONNECTS TO FXCM Table now supports 21 regulated brokers, The latest release of NeuroShell Trader with more to follow, and six currency from Ward Systems includes a built-in pairs, designed to help investors track, connection to FXCM brokerage services compare, and analyze pricing activity. and data for FXCM account holders, Ward Real-time updates allow users to see the Systems reports. real-time contrast between broker offer- NeuroShell Trader software allows us- ings. The table also lists commission costs. ers to create their own trading systems and www.tsaasf.org, StockCharts.com FXStreet stated the data published in the predictive models. The point-and-click table comes from real accounts. interface lets users to build, optimize, SITE UPGRADE includes ADVANCED A historical study of currency prices and test trading systems without coding. stock analysis tools offered by each broker provides informa- Users can develop trading systems with The Bollinger On Bollinger Bands web- tion to traders about how prices behave traditional indicators and rules combined site (BBands.com) by Bollinger Capital around key levels. Content is provided by with genetic optimization and neural Management was created to support John Myfxbook, an online automated analyti- network predictions. Trading systems and Bollinger’s book of the same name. The cal tool for forex. Myfxbook data shows predictive models can be built for multiple website provides access to the analytic not just spreads but also the impact of instruments in one pass. and trading approaches introduced in the implicit costs such as slippage. www.neuroshell.com, www.fxcm.com www.FXStreet.com book, plus technical analysis tools. The recent upgrade to the website was done UPGRADED COMPANION APP FOR ADD-ON INDICATOR FOR PLATFORMS to commemorate the 30th anniversary of MARKET DATA AND NEWS the creation of John Bollinger’s Bollinger Shift Theory offers its Shift Theory Barchart.com, a provider of market Bands. The revamped site features a new Ratio indicator to help solve three of information, announced upgrades to its look and new technology and provides: the biggest issues many traders have: free companion app. The app for iOS or recognizing choppy conditions; trading Android devices provides data for US signal lag or delays; and signal noise. It and Canadian stocks and indexes, futures, is intended to help eliminate data that and forex markets. In addition to standard can cause false trading signals and noise. charting and data, users can access analysis The Shift Theory Ratio is aimed at either and information, company income state- short-term or longer-term traders, as well ments, related stock options, headlines and as spread or pairs traders, and on markets news, and company performance reports. including stocks, commodities, index The app is designed to help users more futures, futures, and forex. The indicator easily see correlations and impacts of is based only on price action, not volume market fluctuations and global financial data. According to the company, this news on their portfolio. may make the indicator appropriate for www.barchart.com forex trading.

November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s • 61 The following selection of book descriptions represents a sampling of recent book Non Random Profits releases in the investing field. Books described here may be from some of the ma- ($9.95, an ebook re-re- jor book publishers as well as some independent book publishers. These are not lease, hardcopy origi- critical reviews or editorial evaluations, but rather a brief look at the book market- nally published in 1978) place to help keep readers up to date on new or recent book offerings. by R. Hanson and R. Mann, published by CT Integrating Technical terns that the author considers highly reli- Financial. Author Robert Analysis For The Inves- able and that can be used on any market. K. Mann, a financial advisor, has used this tor (136 pages, $9.99 The book details how to put the method method of stock selection for nearly four Kindle edition, August to use, including how to spot develop- decades and originally outlined it in the 2014, ASIN B00N7V- ing patterns for high-probability, low-risk 1978 hardcopy version of this book. The 6VDE) by BC Low, trades; where to place entry orders and authors do not promise their approach will published by Technical stop-losses; and what the author con- be the quickest path to riches nor do they Analysis Consultancy. siders as the five best setups to look for. claim it will spot every winner, but Mann’s Technical analysis has Charts are included to illustrate the au- premise is to identify stocks with good always been seen as a tool for short-term thor’s points. Also included is a trading dia- profit potential and limited, definable risk. trading rather than investing. However, this ry of a four-month trading campaign in gold Mann’s method is to seek value in the least author believes that technical analysis can and the Dow Jones Industrial Average to popular areas and left-behind names. His also be used for investing and not just for demonstrate application of the method. method puts forth two specific rules to help trading. He shares with investors an orig- www.harriman-house.com investors locate stocks meeting these cri- inal approach to technically define trends teria. He suggests the investor use online for various time frames — daily, weekly, Statistically Sound Machine Learning charting to identify stocks with the given monthly, and so on — and explains which For Algorithmic Trading Of Financial In- characteristics, and that the investor build time frame dictates a market’s behavior. struments: Developing Predictive-Model- a risk-management system to diversify and He then shows how to invest better with Based Trading Systems Using TSSB (503 control risk. The main principle behind the this knowledge. The book also seeks to pages, $129.95 soft- method is tracking market cycles. help investors integrate technical indicators cover, 2013, ISBN www.elevenquarterstocks.com (trend, timing, and price) for optimal mar- 978-1489507716) by ket entry & exit in trending and nontrending David Arondson Decoding The Hidden Market Rhythm, market environments, so the investor isn’t and Timothy Mas- second edition (237 pages, $145 soft- just relying on signals from a single indi- ters, self-published. cover, 2014, ISBN 978-1-499-56259-0) cator. The author is a past president of the This book, in a tutori- by Lars von Thienen, self-published by Singapore Technical Analysts & Traders al style, teaches the WhenToTrade.com. This book discuss- Society (STATS) and was a senior lecturer importance of us- es the correlations that the author be- at Singapore Polytechnic where he taught ing sound statistical lieves arise between markets and exter- technical analysis. methods to evaluate a trading system be- nal energy cycles such as gravity and geo- www.taconsultancy.biz fore it is put to real-world use. Arondson is magnetism. Digital author of Evidence-Based Technical Anal- signal-process- Tramline Trading: ysis (Wiley, 2006); Masters has a doctor- ing techniques are A Practical Guide ate in statistics. The book also shows how used in an attempt To Swing Trading the authors’ free program TSSB (Trading to reverse-engi- With Tramlines, El- System Synthesis & Boosting) can be em- neer W.D. Gann’s liott Waves And Fi- ployed to develop and test trading systems. master cycles in bonacci Levels (184 The software, downloadable from TSSB- order to design a pages, 2014, ISBN software.com, offers machine learning and mechanical, cycle- 978-0-857-19395-7 statistical algorithms. To accommodate based trading sys- softcover, $56.70, readers with limited mathematical back- tem. The book introduces nonlinear indi- 978-0-857-19434-3 ground, the techniques are illustrated with cators and weighs in on the significance ebook, $45.50) by John Burford, pub- step-by-step examples using actual market of a cyclic sentiment predictor for the Dow lished by Harriman House. This book out- data, and examples are explained in plain Jones Industrial Average. The book in- lines a trading method to forecast markets language. The stated goal is to give the cludes some programming code to build based on patterns. The author holds a doc- reader the tools to build portfolios of trading the indicators and trading systems, as well torate in physics. The method incorporates systems and rigorously test their expected as some generic pseudo code and step-by- Fibonacci levels, basic Elliott wave theo- performance by using the book’s method- step guidelines. ry, and the author’s own tramline concept, ology and software. www.WhenToTrade.com which is based on a small number of pat- TSSBsoftware.com 62 • November 2014 • Technical Analysis of St o c k s & Co m m o d i t i e s FUTURES LIQUIDITY

rading liquidity is often over- very high volumes. The greatest number three-year period. Thus, all numbers in looked as a key technical of dots indicates the greatest activity; this column have an equal dollar value. measurement in the analysis futures with one or no dots show little Columns indicating percent margin T and selection of commodity activity and are therefore less desirable and effective percent margin provide futures. The following explains how to for speculators. a helpful comparison for traders who read the futures liquidity chart pub- Courtesy of CBOT wish to place their margin money ef- lished by Technical Analysis of St o c k s ficiently. The effective percent margin & Co m m o d i t i e s every month. is determined by dividing the margin value ($) by the three-year price range of Co m m o d i t y f u t u r e s contract dollar value, and then multiply- The futures liquidity chart shown be- ing by one hundred. low is intended to rank publicly traded futures contracts in order of liquidity. St o c k s Relative contract liquidity is indicated Trading liquidity has a significant ef- by the number of dots on the right-hand fect on the change in price of a secu- side of the chart. rity. Theoretically, trading activity can This liquidity ranking is produced by serve as a proxy for trading liquidity multiplying contract point value times All futures listed are weighted equally and equals the total volume for a given the maximum conceivable price motion under “contracts to trade for equal dol- period expressed as a percentage of the (based on the past three years’ historical lar profit.” This is done by multiplying total number of shares outstanding. This data) times the contract’s open interest contract value times the maximum pos- value can be thought of as the turnover times a factor (usually 1 to 4) for low or sible change in price observed in the last rate of a firm’s shares outstanding. Trading Liquidity: Futures Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity % Margin Trade for Equal Dollar Profit E-Mini S&P 500 GBLX 3.9 8.4 5 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>> 10-Year T-Note CBOT 1.2 12.8 20 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••> 5-Year T-Note CBOT 0.6 10.7 33 ••••••••••••••••••••••••••••••••••••••••••••••••• Russell 2000 Mini ICEUS 3.9 8.4 4 ••••••••••••••••••••••••••••••••••••••••••••••• Corn CBOT 16.4 10.5 9 •••••••••••••••••••••••••••••••••••••••••••••• E-Mini Nasdaq 100 GBLX 2.7 5.5 6 ••••••••••••••••••••••••••••••••••••••••••• Soybeans CBOT 9.8 10.7 5 •••••••••••••••••••••••••••••••••••••••• T-Bond CBOT 2.5 20.3 14 ••••••••••••••••••••••••••••••••••••••• Gold COMEX 7.5 15.5 4 ••••••••••••••••••••••••••••••••••••• S&P 500 Index CME 3.9 8.4 1 •••••••••••••••••••••••••••••••• Silver COMEX 11.8 10.6 2 •••••••••••••••••••••••••• Ultra T-Bond CBOT 2.9 16.7 9 •••••••••••••••••••••••••• Japanese Yen CME 2.3 5.3 5 ••••••••••••••••••••••••• Euro FX CME 1.5 14.2 13 •••••••••••••••••• Crude Oil WTI NYMEX 5.4 23.2 11 ••••••••••••••••• Sugar #11 ICEUS 9.1 11.2 16 ••••••••••••••• CBOE S&P 500 VIX CFE 8.4 4 7 ••••••••••••• Wheat CBOT 13.6 13.8 10 ••••••••••• Natural Gas NYMEX 6.3 9.6 9 ••••••••••• DJIA mini-sized CBOTM 3.2 8.1 7 •••••••••• E-Mini S&P Midcap GBLX 3.2 6.6 3 ••••••••• 2-Year T-Note CBOT 0.1 15.2 115 •••••••• Gasoline RBOB NYMEX 5.8 15.1 6 ••••••• Soybean Meal CBOT 8.7 11.1 9 ••••••• Soybean Oil CBOT 8.8 11 15 •••••• Australian Dollar CME 1.9 8.2 11 ••••• High Grade Copper COMEX 7 22.2 10 ••••• Heating Oil NYMEX 5.3 22.6 9 •••• Live Cattle CME 2.1 7.3 12 ••• Cotton #2 ICEUS 7.9 11.7 11 ••• Coffee ICEUS 7.4 16.8 8 ••• CBOT Chicago Board of Trade, Division of CME British Pound CME 1.3 13.7 24 ••• CFE CBOE Futures Exchange Eurodollar CME 0.1 40.4 274 ••• CME Chicago Mercantile Exchange Cocoa ICEUS 5.6 13.1 16 •• Hard Red Wheat KCBT 8.9 12.8 12 •• COMEX Commodity Exchange, Inc. CME Group Lean Hogs CME 3.7 9.3 15 •• GBLX Chicago Mercantile Exchange - Globex Canadian Dollar CME 1.2 8.2 17 •• ICE-EU Intercontinental Exchange-Futures - Europe U.S. Dollar Index ICEUS 1.6 13.2 23 • ICE-US Intercontinental Exchange-Futures - US Swiss Franc CME 1.7 16.8 18 • KCBT Kansas City Board of Trade Palladium NYMEX 6.5 19.5 9 • MGEX Minneapolis Grain Exchange Spring Wheat MGEX 12.1 13 9 • NYMEX New York Mercantile Exchange Mexican Peso CME 5.9 51.3 53 • Crude Oil Brent (F) NYMEX 5.1 16.2 8 • Platinum NYMEX 5.8 18.6 11 • Nasdaq 100 CME 2.7 5.5 1 • 1411 Trading Liquidity: Futures is a reference chart for speculators. It compares markets “Relative Contract Liquidity” places commodities in descending order according to according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi- or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. “Relative when compared to others in the same column. Contract Liquidity” is the number of contracts to trade times total open interest times a The number in the “Contracts to Trade for Equal Dollar Profit” column shows how volume factor, which is the greater of: many contracts of one commodity must be traded to obtain the same potential return In volume 1 or exp –2 as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price In 5000 Excursion).

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