IFTAJOURNAL

INTERNATIONAL FEDERATION OF
TECHNICAL ANALYSTS, INC.

Journal for the Colleagues of the International Federation of Technical Analysts

A Not-For-Profit Professional Organization

Incorporated in 1986

Editorial
Michael Smyrk, MSTA

Technical Analysis in Securitiy Investment Theory

Hiroshi Okamoto

Using Technical Analysis in Asset Allocation of

Japanese and U.S. Stocks
Hiroshi Okamoto

Head-and-Shoulders Accuracies and How to Trade

Them
Serge Laedermann

14

A Different Way To Forecast An Indexs Behavior

Based On The Very Old Principles Of Support And
Resistance
Ulysse-Oliver Traub, CMT

22

The Accuracy of Candlestick Analysis Using the

German Stock Market Index (DAX)
Corporate Address
International Federation of Technical Analysts, Inc.
Post Office Box 1347
New York, New York 10009 USA
Website: www.ifta.org
IFTA Journal Editor
Michael Smyrk
Town House, High Street
Haslemere, Surrey GU27 2JY, England
E-mail: michael.smyrk@ifta.org
Tel: 44-1428-643310, Fax: 44-1428-641080
IFTA Chairperson
Bruno Estier
Lombard Odier & Cie
11, Rue de la Corraterie
1204 Geneva, Switzerland
E-mail: bruno.estier@lombardodier.ch
Tel: 41-22-709-2041, Fax 41-22-709-2911

Reza Darius Montassr, CMT

27

Predicting the Exchange Rate: A Comparison of

Econometric Models, Neural Networks and Trading
Systems
Giampaolo Gabbi, Ruggero Colombo, Riccardo Bramante,
Maria Paola Viola, Paolo de Vito, Alberto Tumietto

38

International Federation of Technical Analysts

45

1999-2000 IFTA Board of Directors &

Committee Chairs

46

2000 Edition

IFTAJOURNAL

2000 Edition

2000 Edition

IFTAJOURNAL

Editorial
Michael Smyrk, MSTA
Once again this edition of the IFTA Journal attempts to compress
a wide field inside a narrow span. Technical Analysts operate in a
number of disparate spheres, covering an enormous variety of financial markets; these may fluctuate wildly over the short term (Nasdaq
stocks or Energy prices), move erratically over the longer term (old
economy stocks or Government bonds), or trend gracefully for
varying periods of time (the Euro and certain commodity markets
come to mind). The methods of analysing these different markets
may vary, the time-spans may differ, the purposes of the analysis
may be diverse, but the rationale for using this particular approach
remains constant the belief that the present behaviour of prices
reflects the current state of supply and demand for those goods in
that market, and that the progress of price activity indicates the
likely increase or decrease in future supply and demand not, in this
case, the physical supply and demand that will meet a need, but the
urge to buy or sell at a particular price level that will produce future
price movement.
The range of markets and methods is, hopefully, reflected in the
contents of this Journal. With fashions in particular stocks and
sectors growing then fading at an ever-increasing rate, it seems
sensible to present studies on Indices rather than on individual
equities; we have articles covering the Swiss Market Index (SMI),
the German market index (DAX), and Japanese and US market
indices (the Nikkei and the Dow). There is work on Currencies and
Exchange Rates, and a paper referring to the Stock, Bond, Currency
and Commodity sectors. Methodology includes Support and Resistance, Chart Patterns (Head & Shoulders), Econometric Models,
Neural Networks and Trading Systems, and a Japanese technique
(Candlesticks), presented by a German analyst as well as an adaptation of a Western technique (Moving Averages) provided by a
Japanese analyst.
IFTA is fortunate in having access to a very wide spectrum of
nationalities, as far as both markets and analysts is concerned. This
should expand even further over time, as new countries join the
International Federation Egypt, Portugal and New Zealand are
this years new entrants, and this typifies the global spread of interest
both in the subject matter and in the creation of local societies to
cater for its study and dissemination. Enquiry is evident from even
more scattered corners of the earth, and the Editor of the next edition is likely to have an even wider choice of markets and methods.
Another increasingly important feature will be the availability of
Papers submitted for Stage III of the DITA (Diploma in International Technical Analysis) exam process. This 3-stage process, run
by IFTA for the benefit of its international membership, culminates
in a test of TA knowledge that must be fulfilled by the submission
of a 3/5,000 word paper that a) must be original, b) must deal with
at least two different international markets, c) must develop a reasoned and logical argument and lead to a sound conclusion supported by the tests, studies and analysis contained in the paper, d)
should be of practical application, and e) should add to the body of
knowledge in the discipline of international technical analysis. Only
one paper is included in this edition of the Journal (by Mr Hiroshi
Okamoto), but recent submissions demonstrate a stimulating variety of new work which deserves a wider audience.
We open this edition with another offering from Japan, the NTAA
Analysis Tree. Created originally to assist their students in studying for the DITA exams, the tree demonstrates the linkage between
the various branches of Technical Analysis, and is being used by
IFTA as a framework for the current work on a Body of Knowl-

edge. In this endeavour, local societies have been asked to provide

information on a number of Technical Analysis fields (Northern
Europe, for example, is working on price, Southern Europeans on
volume, North America on indicators). Ultimately, templates
will be developed, asking a series of questions (ie: What is the name
of this indicator? Who developed it? What is the commonly accepted formula? What are its strengths? What are its weaknesses?
Show examples of this indicator at work. List all known references
in books, magazines and journals, etc, etc); some of these templates
have already been published on the MTA web site (www.mta.org),
and they will soon be available on the IFTA web site (www.ifta.org),
access to which does not require a password.
The Japanese Society will be providing input on their traditional
forms of analysis; in this edition of the Journal, however, the NTAA
is represented by a previous President of that Society, Hiroshi
Okamoto, who puts forward an original approach to asset allocation
using his own net momentum study. (It should be noted that
charts and comments in all cases are not up to date, but the principles underlying each presentation should remain valid.)
An increasing amount of academics are spending time on Technical Analysis these days, and a good deal of their work relates to
traditional methods, including (frequently) the Head-and-Shoulders pattern on charts. Serge Laedermanns article may give them
as well as active practitioners some new ideas on what works and
what does not, expressed for once in a non-empirical fashion.
Ulysse-Oliver Traub also goes back to traditional theories, of
Support and Resistance, in an approach that relates significantly to
practical experience in the market-place. This is an important factor at present, as Universities and Colleges move into the teaching
of Technical Analysis; the rules as laid down in text-books may
sometimes not work, but very often there is a good reason for this
which is clear to the experienced practitioner but perhaps is not
evident to the academic researcher.
Reza Montassrs work on Candlesticks appears academic, but he
too is a practitioner, technical analyst and market strategist. This
type of study is not just useful to those analysing the DAX Index (as
Montasser does), but can be transferred to other markets where
similar studies might produce differing results. However, this last
comment is based on a personal view that different markets have
their own particular characteristics a view that is empirical but
experience-based.
The closing article is presented by a mixed team of academics and
professionals, comparing modern and traditional methods; much
research is being carried out along these lines, and it will not be
surprising to see further reference to this type of work in future
editions of the Journal.
This edition owes much, once again, to the enthusiasm and expertise (not to mention the patience) of Ms Barbara Gomperts, who
creates the look and feel of the package which is so important in
getting people to actually open the page. Without her assistance,
and of course that of the writers in the first place, we would all be
the poorer. And as before, many thanks are due to the MTA (Market Technicians Association) for permission to reprint articles first
produced in their own Journal. In future, other Societies journals
may prove equally fertile hunting-grounds for the next IFTA Journal Editor.
Michael Smyrk

2000 Edition

IFTAJOURNAL

Technical Analysis in
Securitiy Investment Theory

I-A-

Macro Analysis

I-A-

Micro Analysis

I-A-

Arbitrage Trading

I-B-a-X

Market Psychology

I-B-a-(1)--

Trend Analysis

I-B-a-(1)--

Moving Average

Kondratieff Cycle
Official Discount Rate
Diffusion Index
Dividend
Dividend Discount Model
Yield Spread
Basis
Historical Volatility
Spread
Blow-Off
Selling Climax
Oversold/Overbought
Primary Trend
Parallel Trend Channel
Trend Reversal
Moving Average Channel
Cross-Over
Golden Cross

2000 Edition

IFTAJOURNAL

I-B-a-(1)--

MACD

I-B-a-(1)--

Momentum Analysis

I-B-a-(1)--

RSI

I-B-a-(1)--

Elliott Wave

I-B-a-(1)--

Dow Theory

I-B-a-(1)- -

Consolidation Pattern Analysis

I-B-a-(1)- -

Candlestick Analysis

I-B-a-(2)-

Point & Figure

I-B-a-(2)-

Kagi-Ashi Chart

I-B-a-(2)-

Neri-Ashi Chart

I-B-a-(2)-

Shin-Ne-Ashi Chart

I-B-b-

Volume Analysis

I-B-b-

Analysis of Margin Trading Balance

I-B-b-

Other Market Statistics Analysis

I-C

Ramdom Walk Theory

II-a

Portfolio Analysis

II-b

Portfolio Performance
Evaluation

II-c

Money Management

ESMA
MACD
EWMA
Momentum Indicator
Momentum Oscillator
Soner Momentum
RSI
Non Equilibrium Index
Relative Momentum
Grand Super Cycle
Fibonacci Numbers
Extension
Dow Jones 30 Industrial Average
Three-Wave Pattern
Confirmation Theory of DJ Industrials by Transportation Index
Head and Shoulders
Ascending Triangle
Double Bottom
Bar Chart
Candlestick Chart
Quarterly Chart
3-Point Reversal
Bullish Triangle
Quarterly Chart
10% Kagi-Ashi Chart
10 Yen Kagi-Ashi Chart
5-Yen Method
10% Neri-Ashi Chart
10 Yen Neri-Ashi Chart
50 Yen Neri-Ashi Chart
Shin-Ne 3-Bon Ashi
Shin-Ne 10-Bon Ashi
Trend Line
Upside/Downside Volume
OBV
Arms Method
Analysis of Buying Balance
Analysis of Short Selling
Analysis of Buy/Sell Ratio
Advance/Decline Line
Advance/Decline Ratio
Analysis of New Highs and New Lows
Semi-Strong
Monte Carlo Method
Chaos Analysis
MPT
CAPM
Efficient Frontier
Benchmark
Relative Performance
Indexation
Pyramiding
Martingale Method
Maximum Draw Down

IFTAJOURNAL

2000 Edition

2000 Edition

IFTAJOURNAL

Using Technical Analysis in Asset Allocation

of Japanese and U.S. Stocks
Hiroshi Okamoto
HISTORICAL DEVELOPMENT OF JAPANESE AND U.S. STOCK
MARKETS AND DEDUCING ORDER FROM THEIR
MOVEMENTS

When I examined the Japanese and US stock markets since the

end of the war through the Dow Jones Industrial Average and the
Nikkei Stock Price Average, I found that clear cross cycles (inverted cycles) had been formed. Sometimes this didnt happen, but
such occasions were infrequent. However I could find only one
example of both markets moving in the same direction where there
was no cross cycle, in other words, the seven years from the beginning of 1983 to the end of 1989 within the 40-year period lasting
from 1960 to 1999. This happened only once, and for seven years
only. So perhaps the reason why the stock price trends of both
markets mutually move in opposite directions is because the environment that surrounds both markets is itself becoming a cross cycle.
This being the case, I am interested in why this has happened, as
both have adopted capitalist-style market economies as national
policy within the framework of a liberal social system. My paper will
examine this area first of all.
Graphs 1 and 2 show the DJIA and the Nikkei from 1960 to laate
1999. For analytical purposes, I have grouped the two international
markets into four periods, as follows.

Phase 1 (Graph 1-I, Graph 2-I), 6-year period from early 1960-end 1965

Phase 2 (Graph 1-II, Graph 2-II), 17-year period from early 1966-end 1982

Phase 3 (Graph 1-III, Graph 2-III), 7-year period from early 1983-end 1989

Phase 4 (Graph 1-IV, Graph 2-IV), 10-year period from early 1990-1999 (as at
October 1999)

Phase 1: DJIA Up, Nikkei Down

Phase 1 (Graphs 1-I and 2-I) is a typical cross-cycle phase. In this
period, the DJIA rises and the Nikkei falls. The DJIAs rise has been
dubbed the Golden Sixties, reflecting the booming US economy
which is highly important in the countrys postwar period. In contrast, the fall of the Nikkei was due to medium-term stagnation of
the Japanese economy, referred to as the Securities Recession. At
that time, I think the very fundamentals of the Japanese and US
economies as seen over the medium-term had formed a cross-cycle.
In Phase 1, the DJIA had reached $1,000 (in February 1966) while
the Nikkei had penetrated 1,020 (in July 1965), as each trend had
almost reached its end. I shall go into this again later, but the $1,000
and 1,000 comparison creates an immediate impression.
Phase 2: DJIA level over long-term, Nikkei on long-term uptrend
I shall now move on to Phase 2 (Graphs 1-II and 2-II). Although
the DJIA briefly hit $1,000 at the beginning of 1966, after that it
remained level overall for 17 years. Although I say remaining level,
please look at this based on the intent of Graph 1, which is a logarithmic graph. If we look at the course of this level movement in
detail, we can see mini-cycles occurring every four years. Behind
these mini-cycles are inventory investment cycles and what may be
described as election cycles (economic cycles based on the presidential elections). The decline of the mini cycles is at times steep,
and in 1974 the DJIA dropped to $500 (a level half its $1,000 high).
That was when US President Nixon and Japanese Prime Minister
Tanaka were forced to resign almost simultaneously, leaving the
stain of corruption on the pages of the political history of both
countries. As I remember it, it was around this time that The Wall

Street Journal ran a rather shocking advertisement describing it as

The day Wall Street died. The advertiser was a major US securities company.
In the 17 years that the DJIA remained sluggish, the Nikkei followed an upward trend. When the DJIA fell to 500 in 1974, the
Nikkei also fell at one stage because of the oil shock. However, such
a decline is occasionally seen with an uptrend, and is a type of
correction of an abnormal deviation from a long-term trend. It was
not enough to cause concern about a turnaround to a downtrend.
The long-term uptrend in the Nikkei was attributable to Japans
high economic growth, growth that continued at what can be described as an extremely high level. In fact during this period,
Japans GDP had several years of double-digit growth in real terms.
Putting this in microeconomic terms demonstrates the continued
strong earnings performance of Japanese companies. This led to a
number of books by renowned American writers such as The Sun
Also Rises and Japan as Number One, and this truly was a time when
such topics were popular in the worlds financial markets.
Phase 3: DJIA Up, Nikkei Also Up, the Only Period Since the
End of the War when Japan and the US were in Harmony
Phase 3 (Graphs 1-III, 2-III), when the Japanese and US stock
markets were in harmony, is referred to as a boom, a quite rare period
and the first since the end of the war. In this period, the DJIA at long
last was able to break away from the 1,000 level, and pushed on
upwards for the first time in many years. The return of the uptrend
was due to the US economy surviving two oil shocks unscathed and
then getting safely through the difficult situation brought on by the
savings and loan financial crisis. The tempo of the uptrend was
powerful enough to rival the Golden Sixties, with its length also
coinciding with this period. The Black Monday decline in October
1987 was sharper than expected, but its scars had healed completely
within two years when the DJIA posted a new record high in 1989.
Looking back now, it can be seen that the real reason for the bullish
trend on the Japanese and US stock markets in Phase 3 was the
victory of the West in the Cold War, verified a little while later. In
other words, this trend seems to have preceded the triumph of the
free market economy.
Phase 3 is also regarded as a boom for the Tokyo stock exchange.
Yet the Tokyo market was strongly speculative, later being termed
the bubble market. The bubble itself was also huge, ranking with
the Dutch Tulip Mania of the 17th Century and the South Sea
Bubble of the 18th Century British company of the same name, and
also with the New York stock market which by 1929 had become
hugely speculative. This bubble in the Tokyo market did not confine itself to stocks, but spread over a vast area covering every avenue of capital stock including real estate, paintings, jewelry, and
even golf club memberships. Its funny to think about it now but at
the time, the total market value of land in the Kanto area comprising metropolitan Tokyo and its four surrounding prefectures was
equivalent to that of the whole of the US. This was the extent of the
fever that gripped the Japanese economy then. The Nikkei had
finally reached the 10,000 level in 1984, but five years later was on
the retreat from almost 40,000. Such speed could be seen in the
New York market recently.

IFTAJOURNAL
Phase 4: DJIA Up, Nikkei Down
In Phase 4 (Graphs 1-IV and 2-IV), the performance of Japanese
and US stocks again returned to a cross cycle. Reflecting the firmness of the US economy, the DJIA has maintained an uptrend since
1990, and even picked up speed after 1996. In technical terms, it
seems to be currently following an upcurving trend line (note the
logarithmic scale in Graphs 1 and 2). Assuming an upcurving trend
line, the New York market is likely to rise even further for a little
while. US industry is improving its earnings structure by promoting
restructuring among its older corporations while new venture capital organizations stream onto the market. The US economy in general is buoyant like never before, and I believe the thriving stock
market is the cause of this.
One minor area deserving attention is the fact that the countrys
savings rate is extremely low overall (recently estimated at zero, or
slightly negative), and the rise in stocks is encouraging consumption activity. In such circumstances, the immediate concern is that
any kind of sharp decline in stocks will quickly cool down personal
consumption, and the worsening economy will then lead to a fall in
stock prices. Such a result could give rise to the spiral phenomenon
of a further stock price decline causing even more damage to the
economy. Compared to the 24-year continuation period of the
Nikkeis uptrend (Graphs 1-II+III and 2-II+III), the continuation
period of the DJIAs uptrend is only 17 years (Graphs 1-III+IV and
2-III+IV). This should allow scope for further improvement in the
US economic situation and the DJIA. Fortunately, the situation at
present is moving in the right direction. However, there is such a
thing as anticipation of stock prices. The footsteps of inflation can
slowly be heard, and from a long-term perspective, there are concerns over the New York market.
In contrast, the Nikkei has been following a downtrend since
1990. Seen in detail, the downward pattern is a bilateral symmetry
pattern of the letter N, with the first stage of the decline continuing
through to August 1992 (14,309) and a recovery to June 1996
(22,666), which was then followed by the second stage of the
decline to October 1998 (12,879). The market later rebounded as
expected and had recovered 50% from its bottom as at July 1999, yet
it dipped through to October, fluctuating erratically at a high level.
The situation needs to be watched a little longer to determine if this
recovery marks the end of the bubbles collapse and will lead to a
genuine rally. My interpretation here is an interim report for reference purposes. The post-bubble market has seen the correction of
the Nikkei continue for 10 years now, with the correction itself
being 26,036 (down 66.9% from its high).
In actuality, however, the benefits of a number of economic stimulus packages amounting to more than 100 trillion are finally starting to become apparent. Japans real economic growth in the January-March quarter of 1999 was up 1.9% on the previous term, a
sharp increase which brings the annual rate to 7.9%. The AprilJune quarter also produced positive growth, although at a reduced
rate. The 0.5% rate projected for the year by EPA chief Sakaiya has
been revised up, and there are growing indications that this is achievable. OECD figures announced in early November project Japans
growth rate (real GDP) for this and next (calendar) year at a high
1.4% for both years. On the other hand, Japanese interest rates
remain low, and the monetary authorities continue to push interest
rates to zero in the short-term money market. The 50% rise in the
Nikkei since early autumn last year seems to reflect a favorable
response to this. Moreover, a second supplementary budget is being
debated as an economic stimulation measure for the second half of
the fiscal year, and if it proves beneficial, it seems quite likely to lead
to genuine economic recovery. In stock terms as well, just like thirty
years ago when the trends of the Japanese and US stock markets
turned as they stood at $1,000 and 1,000, the stock price trend
point of change at present may perhaps be $12,000 and 12,000.

2000 Edition

The Nikkeis low to date is 12,879 (October 1998) and the DJIAs
high is 11,107 (May 1999), bringing a touch of reality to this numerical combination.
No Change in Phases of Dollar-Denominated Nikkei
Graph 3 shows a revised dollar-denominated Nikkei Stock Price
Average. It has been calculated based on a fixed exchange rate of $1/
360 up until the day of the Nixon Shock (suspension of dollar
convertibility into gold) in August 1971, and prevailing rates based
on the floating exchange rate system since then. Graph 3 has been
compiled by dividing the yen-based data of Graph 2 by these exchange rates. I have also used the same logarithmic scale used in
Graph 2. I shall now compare both graphs and note the differences.
There are three points worth mentioning. The first is that in the
correction market from 1981 through to 1983 (the final stage of
Graphs 2-II and 3-II), the range of the correction appears much
larger in the dollar-denominated Nikkei. This is when the rapid
weakening of the yen coincided with low stock prices, which to US
investors appears as growing losses. The next is the rise of the Nikkei
in Phase 3 (Graphs 2-III and 3-III). The pace of the rise is faster in
the dollar-denominated Nikkei. Seen from the US, the sharp appreciation of the yen from around $1/250 to less than $1/150 gives
a considerable boost to the upspeed of the Nikkei. US investors who
bought Japanese stocks in 1983 boosted their profits in theory by
combining stock gains with exchange rate gains. My final point is
that the collapsing market since 1990 according to the dollar-denominated Nikkei (Graphs 2-IV and 3-IV) looks fairly mild compared to the yen-based Nikkei. Generally speaking, the strong yen
trend continued until 1995, but then following the extreme phase
of $1/80, the Japanese stock markets decline suddenly got discounted in dollar terms, to a certain extent.
In general however, there are no major differences in the market
trends seen in Graphs 2 and 3. Both declined in Phase 1, rose in
Phase 2 and again in Phase 3, and declined in Phase 4. The central
issue of my paper relates to the cross cycles of US and Japanese
stocks, so substituting Graph 3 for Graph 2 is not a problem. Therefore I would like to proceed with my analysis by comparing the
dollar-denominated Nikkei with the DJIA.
Application of Japanese and US Stock Price Cross Cycle
If the existence of a cross cycle can be recognized with the DJIA
and the Nikkei, then it has many applications in asset management.
In other words, it could find practical application in investment
activities, for example if there is a slowdown in the Japanese market,
assets can be moved to the US market, or if there is a slowdown in
the US market, then assets can be moved to the Japanese market.
Of course, exchange rates have to be taken into account when
shifting assets between countries, however this problem can be solved
if the investors are foreign investors, particularly US investors, and
analysis is conducted with the dollar-denominated Nikkei. The
problem is rather whether reliable investment techniques can be
established in order to correctly detect good stock investment opportunities in each of the US and Japanese stock markets respectively. I would like to develop my theme while introducing a trend
analysis technique, which has been important to me for many years.
READING MARKET PHASES AND SETTING PORTFOLIO
HOLDING RATIOS FOR STOCKS WITH TREND ANALYSIS

Firstly, I wondered about how to express market trends. I must

admit that the trend image I prepared (divided into four phases) to
give an overview of the Japanese and US stock markets I outlined
in general in Graphs 1, 2, and 3 is rather lacking in detail as a
technique, but it is a type of method to recognize trends. In statistical analysis, this type of recognition method is called the Free
Hand Method. The Nippon Techncial Analysts Assocition (NTAA)
tree pattern model classifies trend recognition methods into regular

2000 Edition

time series and irregular time series types. Regular time series types
include the Trend Line Method, the Moving Average Method, and
the Indicator Smoothing Method. If I limit myself to Japanese techniques, there are many trend lines covered by, for example, Ichimoku
Equilibrium. There are also various irregular time-series type expression methods such as P&F, the Kagi line (KAGI-ASHI), the
Block Line (NERI-ASHI) and the New Price Line (SHINNEASHI). I could use some of these in my chosen topic of trend analysis of the Japanese and US stock markets. However, we have been
asked by the examiner (IFTAs Qualification System Committee)
to use original or unpublished techniques in our papers, so I would
like my report to reflect this requirement. In other words, I shall use
my own Okamoto Trend Analysis Method which has been very
important to me since my younger days. This is a new trend image
hypothesis based on moving regression analysis. I would like to
firstly explain this concept.
The difference between this technique and conventional methods is that both actual and estimated stock prices are used in trend
line assumptions. The hint for this came from moving average lines
in statistics. With the moving average lines used in the stock market, the calculated average values usually have to correspond to the
end of the average period. As a result, the cycle of a moving average
line tends to lag compared to the cycle of actual stock prices and this
lag, more or less, leads to delays in investment decisions. Of course,
this lag can also be useful in its own way. In the upward phase of
actual stock prices, the moving average line cycle will lag, so the
moving average line acts like an uptrend line linking the lows of
rising actual stock prices. In the same way, it plays the role of a
downtrend line linking the highs in the downward phase of actual
stock prices. From the effects of this lag, a classic investment technique has been born which sees trading opportunities when actual
stock prices straddle the moving average line. However, delay certainly causes real confusion in the investment world. With minor
cycles in particular, a turn may have just been confirmed when the
next cycle begins. If smoothing curves with no lag exist, they would
be a great asset to technical analysis. Actually, the calculated average value with primary moving average lines used in statistics corresponds to about the center of the average period, with no delay in
the initial series, and the initial series trend being expressed as a
gentle slope.
The Okamoto Trend Line begins with the concept of the primary
moving average line as used in statistics. In other words, it tries to
calculate smoothing curves by targeting trend lines with no lag.
However, if we try to make market timing decisions for the most
recent period, having no calculations for this latest period is unadvisable. If you use the moving average line unchanged as used in
statistics, it will show nothing for the latest period. So a certain
operation must be conducted here using estimated stock prices to
supplement the blank part. So how do you go about finding these
estimated stock prices, and how do you conduct this operation? This
is where regression analysis comes in. Graph 4 shows a 48-month
moving average trend line of the DJIA, and Graph 5 shows a similar
smoothing curve of the dollar-denominated Nikkei. But both of
these are Okamoto Trend Lines and are different to 48-month moving average lines normally used in the stock market. At first glance,
there seem to be only occasional lags compared to conventional 48month moving average lines. This applies particularly to the dollardenominated Nikkei, which has a large number of uneven movements. As an experiment, I prepared a 48-month moving average
line as used in the stock market for the dollar-denominated Nikkei,
which is shown in Graph 6. There is a clear difference between
Graphs 5 and 6. The special feature of the Okamoto Trend Line
technique is its ability to smooth stock price movements through
fairly small lags.
Double calculation is used to compile the Okamoto Trend Line.
Firstly, I conduct regression analysis (primary regression) on the

IFTAJOURNAL
first 24 items of a 48-month data series, and project 24 items of stock
price data on the regression line. Then I try to find the 48-month
average by linking the 24 items of hypothetical data estimated with
the 24 items of real data based on regression analysis. I then plot (on
a chart) the 48-month average value found which corresponds to
the middle (the 24th month) of the average (48-month) period.
This double calculation (regression calculation followed by calculation of the average) moves forward in monthly increments, and
results in the Okamoto Trend Line. In the final stage of the data
series (the latest period) the actual data for the last 24 months is
regressed to give 24 items of projected data on the regression line.
Then by averaging the total of the 24 items of actual data and 24
items of projected data over 48 months, a smoothed value for the
latest period is obtained. These calculations are fairly difficult without a computer. The lower sections of Graphs 4 and 5 show the
momentum (rate of change over previous month of smoothed curve)
of the Okamoto Trend Line shown above. The plus region of the
momentum indicates an upward phase of the market cycle (smoothed
curve), and the minus region indicates a downward phase of the
market cycle.
You can follow the direction of the market by looking at the
momentum in Graphs 4 and 5. Lets firstly look at the DJIA in
Graph 4. The characteristics of each of the phases in Graph 4 are
already apparent. As Phase 1 (section I of the Graph), Phase 3
(section III), and Phase 4 (section IV) are upward phases of the
DJIA, the momentum frequently appears in the plus zone. It occasionally falls into the minus zone, but without even pausing, immediately returns back to the plus zone. Its temporary penetration into
the minus zone is regarded as a type of accent that forms a mini-cycle
(a 4-year cycle). If the momentum falls into the minus zone and
remains there for a long time with no signs of returning to the plus
zone, it means that you should consider the likelihood of a trend
reversal. On the other hand, in Phase 2 (section II), the momentum
repeatedly swings erratically, straddling zero. Generally speaking,
the momentum over this period stayed virtually the same amount
of time in the plus and minus zones. This is the result of a continuously flat pattern, where the trend line neither rises nor falls over a
long period of time. Going a step forward from this stage, the momentum gradually moves into the plus zone, and we can recognize
an upward break in the trend, in other words, a move to Phase 3
(section III of the Graph). Based on this, what is the outlook for the
DJIA (at the end of Phase 4)? I believe it is valid to say that the
uptrend will continue for the time being (my view as at October
1999), and I see little likelihood of a downturn soon. However, the
purpose of my paper is to look at New York in terms of a comparison
with Tokyo. As this involves moving assets between two countries
in accordance with the momentum of each market, a comparison of
momentum is important. Even if New York is strong, the Tokyo
market may be stronger, so it would only be natural for funds to be
switched to the Tokyo market.
What about the Tokyo market as shown in Graph 5? Lets look
at the Tokyo markets momentum. Phase 2 (section II) and Phase
3 (section III) of the Tokyo market are upward phases, so generally
speaking, the momentum at these times should be in the plus zone.
So when we look at Graph 5, the momentum certainly appears
frequently in the plus zone at these times. However there are exceptions. In particular, the momentum declined sharply in 1967, 1974
and 1982, so special consideration of such times is necessary. Actually, when we look at sections II and III, in other words, in the 25
years from 1967 to 1990, the theory holds (momentum in the plus
zone) throughout the period, apart from these three times. Why do
these three times deviate from the theory? We Japanese soon notice
that the issue common to the environment surrounding these three
times is economic shocks from foreign pressure. I have an example
showing how weak Japan is against foreign pressure, which I will
explain.

IFTAJOURNAL
Firstly in 1967 there was the so-called Nixon shock. The fixed
exchange rate system ($1/360) which had lasted since the end of
the war had collapsed by then, so a shock was inevitable. Many
feared at the time that the trading nations would no longer be able
to keep going without switching to a floating exchange rate system
(meaning a sharp appreciation of the yen). This type of panic can
easily lead to technical chart-breaking. As a result, momentum
lingered in the minus zone for a year. Next came 1974. This was the
year of the first oil shock, and when foreign pressure was at its
strongest. The price of a barrel of crude oil had been stable at $2-3,
but suddenly shot up to double-digit figures. Countries with processing trade as their national policy were greatly threatened. Moreover, political turmoil made matters worse. In October 1974, Prime
Minister Tanaka was forced to resign because of the Lockheed bribery scandal.
In 1983, inflationary pressures built up as a result of the second oil
shock, and Japans official discount rate jumped to 9%. The added
impact of such seismic shocks (much of them from foreign pressure)
on the economy stunned investor sentiment. So even though the
long-term cycle of stocks (the economy) is following an uptrend,
the momentum is temporarily affected.
Phases 1 and 4 (Graph 5-I and IV) of the Tokyo stock market are
downtrends, and so the momentum of the Nikkei in general remains in the minus zone. Two areas deserve attention, firstly when
it temporarily slipped into the plus zone in 1963, and then the rise
in 1993-94. The rise in 1963 was from the temporary effects of the
Tokyo Olympic Games, which were soon followed by the Securities
Recession. In 1993-94 there was a mini recovery during the collapse
of the bubble economy. The recovery of 1993-94 is not unconnected to the benefits of government policy, or perhaps a market
(economic) trend reversal. The reason for momentum remaining
only temporarily in the plus zone is the inadequate policies of the
responsible authorities at the time. As a result, financial uncertainty increased, which laid the groundwork for the insolvency of
a number of large Japanese financial institutions. Beginning with
The Hokkaido Takushoku Bank Ltd., a succession of bankruptcies
followed a few years later, including Sanyo Securities Co., Ltd., The
Long Term Credit Bank of Japan, Yamaichi Securities Co., Ltd.,
and Nippon Credit Bank Ltd. After going through this process, the
momentum of the dollar-denominated Nikkei again entered the
plus zone in 1999.
I would now like to have a closer look at around the end of the
momentum section of Graph 5. The momentum of the dollar-denominated Nikkei in Graph 5 has now been in the plus zone for a
year, and the rise (the momentum value) is sharp, more than 5%. A
technical rally is less than 5%, so a rise of more than 5% ranks
alongside those of 1972 and 1986. The latter is right in the middle
of the bubble market, so such a large rise is to be expected. However
the liquidity market of 1972 remains one of the most excessive in
the history of the Japanese stock market, with the Nikkei doubling
that year over the previous 12 months. It is not normal for the
Tokyo market of late to be demonstrating momentum of that scale
This may possibly mean that a major reversal of the correction trend
which has continued for such a long time is close at hand, and
certainly gives us something to think about. To quote one market
saying: A hibernating market will stand tall when awakened. If
this is the case, a comparison of momentum with New York should
be made. Funds withdrawn from New York may have to be switched
to Tokyo. How should this be decided? This is where the concept of
net momentum comes in.
Graphs 7 and 8 show the net momentum for the New York and
Tokyo stock markets. The top section of Graph 7 is the DJIA and
of Graph 8 is the dollar-denominated Nikkei, with the lower sections of both being the common indicator. In other words, net
momentum. The net momentum is the result of subtracting the

10

2000 Edition

dollar-denominated Nikkei momentum from the DJIA momentum.

(However, the momentum I have used here for both Japan and the
US is not in comparison with the previous month, but with the
previous six months.) In general, the DJIA and the Nikkei are moving
in a cross cycle, so the momentum is also frequently divided between
the plus and minus zones. For example, if New York is plus 1 and
Tokyo is minus 1, the net momentum is plus 2 (minus 1 subtracted
from 1 is 2). Based on this, investors would have to invest in New
York. If we look at movements of net momentum, the indicator (net
momentum) in Phases 1 and 4 (sections I and IV) is generally in the
plus zone, which tells us that the New York market has the advantage. It is only natural that funds should be invested on the New
York market in this period.
What should be watched is Phase 3 (section III). In Phase 3, the
DJIA finally returned to its uptrend, and after breaking $1,000,
began to follow a powerful rising trend. In this period, however, the
net momentum indicator was consistently in the minus zone, which
tells us that funds should have been invested in the Tokyo market.
At that time gains could only be made if funds were only invested
on the New York market, so it could not be described as a mistake
to invest contrary to the net momentum indicator. However global
investment must be conducted in line with the indicators, which
meant investing in the Tokyo market. The rate of advance of stocks
also tells that ultimately there were greater profit opportunities in
Tokyo.
Lets now look at Phase 4 (section IV). In Phase 4, the Japanese
economic bubble had burst while the US economy continued to be
buoyant, and the net momentum indicator was generally in the plus
zone. So did this turn out to be correct? At that time, the DJIA was
surging further ahead, surpassing $10,000, yet the Tokyo market
remained sluggish. However I must point out that the situation has
changed since the summer of 1999. The net momentum indicator
has fallen sharply into the minus zone. As seen a little earlier, the
New York market itself is firm, and the DJIA momentum (Graph 4
section IV) is in the plus zone. What we should note, however, is
that the net momentum indicator (Graph 7-IV) has fallen into the
minus zone. At present, the Tokyo market is firmer than New York,
and is attracting funds from around the world.
I would now like to study how Japanese and US stock holding
ratios of fund management portfolios should be operated by using
the net momentum indicator. From the characteristics of the indicator, the conclusion is already obvious. In other words, it would be
correct to invest all funds in the DJIA when the net momentum
indicator is in the plus zone, and all funds in the dollar-denominated
Nikkei when the net momentum indicator is in the minus zone. Of
course, the point of change in portfolio operations is when the net
momentum indicator straddles the zero line. That is to say, when the
net momentum indicator changes from minus to plus, conduct asset
allocation by immediately selling Japanese stocks and buying US
stocks, and turn to Japanese stocks when the net momentum indicator moves from plus to minus by immediately selling US stocks
and investing the total amount in Japanese stocks. How reliable
would such portfolio holding ratio operations be in actual fund
management? I have explained this below based on verification of
previous examples.
ASSET ALLOCATION OPERATIONS AND PORTFOLIO
PERFORMANCE EVALUATION OF JAPANESE AND US STOCKS

In the 40-year period from 1960 to 1999, the net momentum

indicator straddled the zero line a total of 22 times. Please refer to
Table 1. The change from minus to plus (shifting portfolios to New
York stocks) occurred 11 times, and from plus to minus (shifting
portfolios to Japanese stocks) occurred 11 times. To state my conclusion here, of these 22 portfolio operations, 16 were successful
transactions and 6 were failures, which is a success rate of 72.7% on
a transaction frequency basis (16/22 = 0.727). Reliability is also

2000 Edition

fairly high overall. For both the DJIA and the dollar-denominated
Nikkei, the success or failure of the transactions was conditional on
1) the transaction being regarded as taking place at the price when
the indicator reverses, and 2) the transaction cost not being included in the calculations. Now these are rough calculations, but I
believe there is no doubt that they are sufficient to give a general
indication of the effectiveness of this technique.
The time required to the next reversal once the indicator had
reversed was on average 20.6 months for the 22 transactions, in
other words, a little over a year and a half. This can be considered
the continuation period for the trend around the time of one transaction. This means that once a final decision on whether to choose
New York or Tokyo as the investment market is made, investment
funds should be left untouched for a year and a half. I think a year
and a half is an appropriate investment period. However, we should
note that twice there were extremely short-term false movementtype reversals. These were the New York markets reversal in October 1985 and the Tokyo markets reversal in March 1992. Both were
short-term technical changes amid long-term uptrends that were
again reversed the following month. Note also the last reversal, in
other words, the reversal of July 1999 (a reversal from the New York
market to the Tokyo market), and although the current trend is
continuing, I had to finish it off in October 1999 in order to make
my provisional calculations. This resulted in a period of only three
months. From the market environment we can infer that this trend
can reasonably be expected to continue for a long time. So if we
exclude these three instances and have a denominator of 19 instead
of 22, the average becomes a little longer, at 23.7 months. In addition, the average trend continuation periods for Japan and the US
are about the same, so apart from the three extremely short-term
examples mentioned above, the period for Japan is 24.5 months
compared to 22.8 months for the US. This difference is not great
enough to be a problem.
Further analysis of the trend continuation periods reveals that of
the 19 significant cases, a total of 8 had trends that continued for
two years (24 months) or longer, 4 for New York and 4 for Tokyo.
Moreover, a total of 17 cases had trends continuing for one year (12
months) or longer, 9 for New York and 8 for Tokyo. A trend continuing for one year or longer for 17 out of 19 cases indicates a fairly
high degree of reliability for this technique. I believe this proves
that it is quite suitable for use in international diversified investment. Investment in the Tokyo market in the longest investment
period from November 1985 to July 1989 provided an annual margin ratio of 80.45% over that period.
I would like to discuss these profit margins (rates of return relative
to funds invested). The average profit ratio (annualized) of the 22
transactions was 13.94%, with the highest being on the Tokyo market
in the second half of the 1980s (80.45% as mentioned above) and
the lowest being -30.48% on the Tokyo market between May and
October 1963. It should be noted in passing that a total of six transactions produced negative returns, far fewer than the 16 transactions that gave positive returns. The transactions with negative
returns of course include the extremely short-term false movementrelated transactions. A breakdown of the transactions with negative returns shows that the US had two and Japan had four. Japan
had more because two were post-bubble transactions. I looked a
little further at these two transactions which occurred after the
collapse of Japans economic bubble. One was a transaction in the
extremely short period between March and April 1992 that produced the particularly large negative return of 127.2% (annualized,
and should be regarded as an irregular transaction), while the other
was a transaction during the 21-month period from May 1993 to
February 1995 that gave -3.88% (annualized).
Outstanding investment results were achieved from the previously-mentioned transactions in the 1980s when funds were boldly
switched to the Tokyo market despite the New York market indi-

IFTAJOURNAL
cator being plus, although there was a false movement-related transaction of funds being switched to New York in one month from
October to November 1985. These were from a transaction in the
22-month period from December 1983 to October 1985 which provided an annual return of 23.29%, and a transaction in the 44month period from November 1985 to July 1989 that gave an annual return of 80.45%. However after the collapse of the Tokyo
market bubble, asset allocation according to this technique generally meant investing in the New York market.
As the main theme of my paper is the cross cycles of the Japanese
and US stock markets, it should be noted that market movements
divided into four separate phases in a free-hand style may not necessarily be the same with the Okamoto method. Both methods match
exactly for Phase 1 until the end of 1965, but there is a slight lag in
each from Phase 2 onwards. If we look at the connection between
Phases 2 and 3, the trend reversal point is not at the end of 1989 but
around July of that year. Phase 4 then follows. A bigger problem is
the fact that with the Okamoto method, there are 22 divisions (in
actuality, 19), not 4. More phases mean extra transactions, which
leads to a decline in investment efficiency. Nevertheless, high marks
should be given to the fact that average returns of above 13% per
annum are achieved at a reliability level of more than 72%. This
method can also be applicable to individual issues that generate
cross cycles such as Sony Corp. and Mitsui Fudosan Co., Ltd., or
Microsoft Corporation and USX Corporation. Of course it can also
be used to analyze Mitsui Fudosan and Microsoft.
Graph 1
DJIA

Graph 2
Nikkei Stock Price Average

11

2000 Edition

IFTAJOURNAL

12

Graph 3
Dollar-Denominated Nikkei Stock Price Average

Graph 6
Dollar-Denominated Nikkei Stock Price Average

Graph 4
DJIA

Graph 7
DJIA and Momentum Differential (NY-225)

Graph 5
Dollar-denominated Nikkei Stock Price Average

Graph 8
Dollar-Denominated Nikkei Stock Price Average and Momentum
Differential (NY-225)

2000 Edition

IFTAJOURNAL
Table 1

Notes:
N1-N11 refer to DJIA trading
T1-T11 refer to dollar-denominated Nikkei Stock Price Average trading
Price units for both N and T are dollars
Time held refers to number of months
Profit/Loss (annual) shown is percentage
Stock price data is original data from stock price Graphs 1-8.
BIOGRAPHY

Hiroshi Okamoto was graduated from Kohnan University in

March of 1960. In April of 1960 he joined Nomura Securities
Co. where he worked until his retirement in June of 1996 (becoming a Director of Nomura Investment Trust Co. in 1991).
In 1990 Mr. Okamoto became Chair of the Nippon Technical Analysts Association and in 1994 he became a Vice Chair
of IFTA covering the Pacific area.

13

2000 Edition

IFTAJOURNAL

Head-and-Shoulders Accuracies
and How to Trade Them
Serge Laedermann
INTRODUCTION

The Head-and-Shoulders pattern is probably one of the bestknown and venerable of chart formations. It is considered as one of
the most reliable by all odds according to Edwards and Magees
own words in their reference work.
Martin J. Pring quotes the Head-and-Shoulders as probably the
most reliable of all chart patterns, while John J. Murphys analysis
is almost identical when considering probably the best known and
most reliable of all major reversal patterns. Some official legitimacy was gained in August 1995, when the New York Federal Reserve astonished both economists and technicians in publishing a
computer study on the validity of the case: Head-and-Shoulders:
Not just a flaky pattern. The old formation undoubtedly stands the
test of time and represents a powerful tool in todays trading and
analysis. The suggestion is to invite you on a journey inside the
Head-and-Shoulders. Some discoveries are still to be made. Rounding Bottoms and Complex Head-and-Shoulders consisting of multiple left and right shoulders, and should be traded on a level of
confidence that any technician should gain before acting. Traders
have always been faced with some weakness when trying to profit
from the pattern. It is not being irreverent to state that technical
literature does not provide enough clear statistical accuracies on the
subject. Most observations are pertinent or judicious, but they hardly
help when dealing with a trade to do or to avoid.
This paper will first specify what can be considered as a valid or
adequate Head-and-Shoulders. Harmony limits and rules to follow
will be shown according to classical practice. Secondly, the study
will analyze known facts about Head-and-Shoulders. Probabilities
and numbers will be put forward on the major topics such as Volume, Measuring Objective, Pullback and Pattern Length, among
others.
In the third place, the paper will suggest trading techniques to
profit from the pattern and how to estimate the Objective. The
entry level, Stop and three different ways of measuring the Objective will be discussed. A complete track record will be established,
showing the pattern degree of efficiency and the level of risk to take
in order to make a living of it. Precise net valuations will be displayed.

room for various methods of assessment in that field; the margin is

in fact pretty narrow. Despite the lack of statistics, many examples
of Head-and-Shoulders are to be found in technical books, therefore diminishing misinterpretation. This work represents a full coverage of nearly eight years on four major liquid markets. All patterns
discussed have been carefully selected in respect of the classical
methodology as well as strict rules. The information and opinions
contained have been compiled in good faith.
The author asserts that ethical standards of professional conduct
have been highly respected. He is at disposal, upon request, to defend any position or decision taken.
This study is based on daily charts and deals solely with Headand-Shoulders which are tradable by everybody, in contrast with
patterns which are only caught by floor traders. The patterns selected in this study meet two criteria. They are followed by a Close
beyond the Neckline, and a Pullback either to the Breakout level or
the Neckline, on a daily chart. In practice, you will have the time
to analyze many markets and detect which one has just experienced
a Breakout of a Head-and-Shoulders. Your next-day limit order will
be easily calculated as well as your exit levels (Stop and Objective).
RECOGNITION

According to Robert D. Edwards and John Magee, the only qualification on an up-sloping Neckline is that the Bottom of the recession between the Head and Right Shoulder must form appreciably
below the general level of the top of the Left Shoulder. The logic
applies for a down-sloping Neckline as well. In modern trading, the
adverb appreciably tends to disappear as commodities charts look
more stretched than stocks charts in the 1950s.
Multiple or Complex Head-and-Shoulders consisting of some
Left and Right Shoulders, or even Two-Headed, are common.
However, the Neckline is not always easy to draw as two or even
several possibilities often exist. Traders should take a position on
any Pullback following an obvious Breakout, even in the case of
multiple formations.

METHOD

Daily data from January 1990 till October 1997 have been selected on the S&P 500, US Treasury Bonds, Swiss Franc and Gold
in an attempt to cover the major market sectors. Data are on a cash
or spot basis in order to avoid roll-over gaps implied by the future
markets positive or negative carry.
The idea is to detect possible divergences between stocks, interest rates, currencies and commodities. Do Head-and-Shoulders
develop the same way on various markets? Are all markets profitable? Is the Risk-Reward indisputable? These questions need tentative precise answers.
Subjectivity is clearly the main difficulty when dealing with a
pattern formation. After the fact recognitions make trades more
attractive than they are in the real world. Furthermore, patterns
found on a chart may vary from one technician to another. Also,
the picture may sometimes even prove to be rather different the
following day for oneself!
However, well-trained individuals know very well that there is no

14

Head-and-Shoulders Tops or Bottoms are to be found at the end

of a trend. One should not expect to consider as a true Head-andShoulders a pattern whose size is more than half the amplitude of
the prior trend. John J. Murphy states that Reversal patterns can
only be expected to reverse or retrace what has gone before them.
In other words, the maximum objective is the size of the prior move.

2000 Edition

Therefore, too-big patterns may not reach their measuring objective, and imply a doubtful Risk-Reward ratio. Traders may avoid
such trades which usually oblige them to place a Stop too far for fear
of premature exit.

IFTAJOURNAL
possible? This is a good example of an After the fact trade. Whenever the first Breakout occurred, the Symmetry or Harmony of the
Pattern was rather poor. The downward-sloping Neckline was steep,
but not eliminatory. However, the Head and Left Shoulder distance as compared to the Head and Right Shoulder distance was a
matter of worry. The lack of Harmony did not encourage the desire
to trade when the Pullback eventually occurred.
Later on, the pattern looked more balanced and the decision to
trade was logically taken. This time, the market did not give another chance to get in. We must learn to live with it.
FREQUENCY

Symmetry is the key word for a Head-and-Shoulders pattern,

even more so in a group of related formations which carry the same
technical implications. Rounding Tops and Bottoms are Multiple
formations as well and should be traded on a Pullback as soon as an
obvious Breakout is detected.

The pattern has to be in Harmony with the environment. The

word is somewhat romantic, but describes the kind of level of confidence any trader should gain before acting. Some technicians may
consider this Gold-Comex development as a valid Head-and-Shoulders Top, but the assumed Right Shoulder represents, in fact, the
move which negated the formation. The objective completion, a
few days later, does not alter the picture.
Some situations are surprisingly not tradable. The Swiss Franc
IMM picture looked promising in May 1997. Why was this trade not

One hundred and twenty one Head-and-Shoulders patterns have

been found using daily charts on the S&P 500, Swiss Franc, US TBonds and Gold from January 1990 till October 1997 (94 months).
Sixty percent of all formations were Head-and-Shoulders Bottoms, Gold recording an anomalous 76% of Bottoming patterns.
Excluding Gold, Bottoming formations accounted for 53% of all
patterns.
PULLBACK

Sixty five of the 121 Head-and-Shoulders found experienced a

Pullback powerful enough to initiate a trade. The entry or limit
order has been placed at the Breakout point or the Neckline level,
whichever was the less ambitious. Whenever a Breakaway Gap
occurred, the limit was placed at the less ambitious side of it (market
should try to fill the Gap but may not succeed in true Breakaway
situations).
Pullbacks have been seen 59% of the time in the case of Top
formations, but 69% of the time in Bottoming ones. This is a probable confirmation of the gravity factor, showing that a market
advance takes usually more time to develop than a market decline.
Eighty percent of S&P 500 and US T-Bonds Bottom patterns experienced a Pullback after the Breakout. This analysis is not significant for currencies (either bullish or bearish, depending on the

15

2000 Edition

IFTAJOURNAL
country). Gold had too few Top patterns to rely on the Pullback
ratio observed in Top cases.

PULLBACK LIMIT ORDER

OBJECTIVE

The classical method to determine the minimum Objective is

based on the height of the pattern. The vertical distance from the
Head to the Neckline is projected from the point where the Neckline is broken (purists use a logarithmic scale).
Our sample of 79 Head-and-Shoulders demonstrates that another
method should be considered when trading patterns which are experiencing a Pullback (in other words, patterns which are tradable).
The minimum Objective should be estimated by measuring the
vertical distance from the Bottom of the hollow between the Head
and the Right Shoulder, up to the trendline joining up the Heads
crest and the Right Shoulders crest.

That distance is then projected as in the classical style. An even

more conservative method has been tested, using the vertical distance from the Right Shoulders crest to the Neckline, then projected as in the classical style.
Cumulative total profits, on all trades, for the third method is
71.9%, clearly behind the classical measurement (77.8%) and the
recommended one (79%).

Nearly 60% of minimum objectives have been reached using the

recommended style, outperforming clearly the classical one (only
46% of objectives met). The conservative method managed to record
an impressive, but misleading, 70% of success. This is where the
Profit & Loss per trade comes into play, or the other side of the
picture.

16

2000 Edition

IFTAJOURNAL
numbers barely change. Future patterns failures are therefore not to
be found using that statistic alone.

The performance per trade is unsurprisingly favorable to the classical method, almost compensating for the poor rate of success.
However, method two is the best combination taking into account
all the parameters.

The Quality difference between method one and two is not so

clear in terms of cumulative performances, but the picture is much
better if we analyze the length of each transaction. On average, a
trade (from the entry to the exit day) lasts 8 trading days with the
recommended method, while it takes more than 10 days for the
classical one. Considering that 2/3 of the trades in method 1 and 2
are identical, we have to understand what happens with 1/3 of them.
Analysis shows that the classical measuring objective is often too
ambitious and is therefore missed. Then, the short-term trend reverses, and either the Stop limit is activated or the position liquidated at the Objective when the initial trend resumes, much later
on. A position lasts 6 trading days with the conservative method.
The potential move is, however, chronically underestimated.
Objective Not Tradable
Thirty five percent of patterns did not experience a sufficient
Pullback and have been considered as not tradable. In almost
100% of the cases, the market reached the target quickly, sometimes
the same day as the Breakout occurred. Two thirds of the not
tradable patterns lasted less than 10 days. It is highly probable that
Pullbacks occurred on intra-day charts for the majority of these
formations.
VOLUME

Volume characteristics are considered of critical importance in

assessing the validity of the pattern. Activity is normally high
during the formation of the Left Shoulder and tends to be quite
significant, but lighter, when the price is at the peak. Right Shoulder is usually accompanied by lower Volume, a typical warning of
diminishing buying activity during a Head-and-Shoulders Top, or
the end of the selling pressure in the case of a Head-and-Shoulders
Bottom.
Confirmation is provided in ranking the Volume: 55% of Left
Shoulders recorded the highest Volume as compared to 32% for
Heads and 13% for Right Shoulders. Objectives reached or not, the

The lowest Volume was recorded on 61% of Right Shoulders, 30%

of Heads and 9% of Left Shoulders. Numbers were almost identical
for Objectives completed and Objectives missed, which is again not
helpful in detecting which Head-and-Shoulder is going to fail.

Thirty eight percent of the mid (or Nr 2) Volume has been recorded on Heads, 32% on Left Shoulders and 30% on Right Shoulders. Thirty four percent of patterns represented the ideal Volume
sequence: Left Shoulder and the highest Volume, Head and the mid
Volume, Right Shoulder and the lowest Volume. A small 4% developed in the most unusual way, with an inversed Volume sequence.
Volume at Bottom
Theory indicates that the most important difference between
Head-and-Shoulders Tops and Bottoms is the Volume. At Bottoms, the market requires a significant increase in Buying pressure,
reflected in higher Volume on up moves. The rally from the Head
should show an increase of activity, often exceeding the Volume
generated during the up move following the Left Shoulder.
Thirteen percent of Right Shoulders recorded the highest Volume, 5% at Tops and 8% at Bottoms. In this particular situation,
75% of Head-and-Shoulders Tops missed the recommended Objective, while 80% of Bottom patterns succeeded. This is an indication
that a high Right Shoulder Volume is not comforting at Tops, but
not really detrimental at Bottoms.
The Left Shoulder recorded the lowest Volume in 9% of all cases,
1% in Top and 8% in Bottom formations. Objectives have been
met in slightly more than 50% of the formations.
Volume Amplitude
The specific Volume number is not of major importance to the
Technician. However, it is often necessary to classify the Volume
into one of three categories: High, Low, Average. Giving a mark
to each category (1 point for High, 2 points for Average and 3 points

17

2000 Edition

IFTAJOURNAL
for Low), the sample shows an extreme similarity to the grading
study described before.

gravity effect. It does require a much greater effort for the market to
launch a new Bull trend.
This characteristic is clearly confirmed by the current study. Top
patterns lasted 23 days on average, while Bottom ones had a duration of 34 days, a 50% differential.
Trades were completed after 8.3 days for Bottom formations,
slightly above Top ones (7.6 days), showing that velocity was quite
similar after the Breakout. Accordingly, Bottom trades tended to be
shorter (in % of patterns sizes).
However, the major outcome was that 86% of trades lasted, at the
most, half the size of all the patterns found for both Head-andShoulders Tops and Bottoms. Symmetry is perfect knowing that
44% of trades lasted, at the most, 1/4 of the size of all patterns for
both Top and Bottom formations.
Lateral and vertical movements are proportional to each other as
suggested by some theories, a statement of the obvious.

Forty one percent of patterns recorded the highest Volume (as

compared to the Head and the Right Shoulder) and also a high
Volume in amplitude, the typical case.
Despite this ideal situation, the recommended objective has been
met in only 63% of the cases, not a significant edge over non typical situations.
Twenty five percent of patterns recorded the lowest Volume on
the Right Shoulder and a low Volume amplitude as well. This
scenario produced an impressive 80% of accomplished Objectives,
a remarkable performance.

A Head-and-Shoulders is not complete until the Neckline is

decisively broken on a closing basis: The Breakout Day. A close
beyond the Neckline not only completes the pattern, but also activates the minimum measuring Objective. A sharp increase in Volume is usual during the Break out, a factor not always dominant in
a Head-and-Shoulders Top. Following a Breakout, the market runs
and quickly peaks. In 85% of cases, the Breakouts peak was reached
the day of the Breakout (Day 1) or the following day (Day 2).

BREAKOUT

DURATION

Measuring Objectives is discussed in terms of height, but too few

studies deal with classical Objectives durations. In our sample,
Head-and-Shoulders lasted 30 trading days, on average, from the
start of the pattern until completion. A pattern started whenever
the move which was at the very beginning of the Left Shoulder,
crossed the future Neckline. The end of the pattern was materialized by the Breakout. Trades, initiated on the Pullback day, lasted
8 days, or 27% of the patterns size, on average. This is a good
indication of the time required when trading a Head-and-Shoulders. Trades duration were identical for both reached and missed
recommended Objectives, which means that the Stop order method
was efficient (see Trading).

One third of trades lasted less than 20% of Patterns sizes (for
example, less than 6 days on a 30 days Pattern). One half were
shorter than 30% and 2/3 less than 40%.
However, the most significant observation lies in the 50% or less
category where 86% of trades lasted, at the maximum. This is a nice
probability to put forward whenever a measuring Objective is activated.
Bottoms are generally flatter and generally take more time to
develop, as the market falls to the floor more quickly due to the

18

The average Breakouts peak, or incursion level, reached 3/8 of

the expected measured move. In other words, 3/8 of the Objectives
were accomplished before the Pullbacks.

BREAKAWAY GAP

Start of 24 hour trading as well as a high liquidity explained the

absence of Gaps (only 5%), still numerous on stock charts.
RISK VS REWARD

The average gross profit at the recommended Objective was 1.497

higher than the potential loss at the Stop (Exit) level.

2000 Edition

IFTAJOURNAL

TREND

Head-and-Shoulders are reversal patterns. Thus, 78% of trades

were initiated against the Mid term Secondary trend.
TRADING

As mentioned before, this study deals solely with Head-and-Shoulders which are tradable by everybody. One hundred and twenty one
Head-and-Shoulders patterns have been detected using daily charts
from 1990 until 1997. Pullbacks occurred 79 times, allowing in
practice anyone to enter all 79 trades (see Frequency, Pullback &
Method). The trades are first analyzed on a very straightforward
basis showing yearly gross gains and losses on each market.
1990

S&P 500

SW FR

US TB

5.3%

-2.1%

2.6%

Gold
7.4%

1991

11.3

-4.3

3.2

8.3

1992

1.1

4.9

3.8

1.9

1993

0.5

5.1

-0.4

3.3

1994

-0.3

0.9

-1.3

1.7

1995

0.0

0.0

2.6

3.9

1996

-0.1

0.7

4.7

0.2

1997

9.2
26.9%
18 Trades

1.3
6.5%
19 Trades

3.5

2.2

18.8%

26.8%

21 Trades

In order to value the net return of our 79 trades in the real world,
the following rules have been established: $100,000 was the initial
cash put in the account. A contract position in any market never
exceeded 2.5 times the accounts value, a reasonable leverage which
boosted the performance. Margins never rose above 15% of the net
equity and could have been multiplied by 3, with positions in all 4
markets, without causing any disturbance for the trading. Round
turn Commission and Slippage were $80 per contract.
At an average pace of 10 trades per year and knowing that each
trade lasted 8 days on average, the interesting feature was the consistent high level of cash in the account.

21 Trades

Eighty nine percent of traded Pullbacks reached both the Neckline and the Breakout level. However, a limit placed at the most
ambitious level (see Pullback) would have proved to be costly despite an estimated 10% entry level savings. The total profit would
have been cut by as much as 20%. Sixty three percent of trades
generated a profit. The average profit per trade was 2.29%, much
higher than the average loss of 0.90%. No loss above 2.50% had
been recorded and a small 3% of trades lost more than 2%. Half of
the winning trades exceeded 2% gain and 1 out of 10 exceeded 3%
gain.
SYSTEM

Winning Trades

50

Losing Trades

Average Gain

$10,312

Average Loss

-$5,798

Largest Gain

$29,200

Largest Loss

-$15,750

Largest % Gain
Consec. Gain

17.7%
7

29

Largest % Loss
Consec. Loss

Profitable Trades

63%

Total Gross Profit

$371,211

(63/37) * (10,312/5,798) =

Ratio Gain/Loss

Total Net Profit

$347,491

Profit Factor

-5.9%
2
1.78
3.03

19

2000 Edition

IFTAJOURNAL
Therefore, nothing could be more justified than trading other
technical patterns like Double Tops & Bottoms or Triangles using
the same account equity and the same system. Short term traders
may use 10 days of intra-day tick by tick charts and trade roughly 100
times per year.

94/11/28
94/12/06

B 6 US 98.51
S 6 US 100.30

10,260

253,906

REFERENCES

95/01/30
95/03/01

B 6 US 101.60
S 6 US 104.28

15,600

269,506

Edwards, Robert D. and Magee, John; Technical Analysis of

Stock Trends, 6th Edition, 1992

95/02/06
95/02/17

B 16 GC 375.7
S 16 GC 378.1

2,560

272,066

Pring, Martin J.; Technical Analysis Explained, 3rd Edition,

1991

95/03/16
95/03/31

B 17 GC 385.6
S 17 GC 398.3

20,230

292,296

96/02/15
96/02/28

B 7 SF 83.40
S 7 SF 84.28

7,140

299,436

TRADES RECAP
$243,646

Murphy, John J.; Technical Analysis of the Futures Markets,

1986

Murphy, John J.; Intermarket Technical Analysis, 1991

96/02/16
96/02/21

S 6 US 119.30
B 6 US 115.85

20,220

319,656

Shaleen, Kenneth H.; Volume and Open Interest, 1991

96/02/21
96/03/21

S 18 GC 399.8
B 18 GC 398.3

1,260

320,916

Shaleen, Kenneth H.; Technical Analysis & Options Strategies,

1992

96/03/22
96/04/02

B 20 GC 398.5
S 20 GC 393.8

-11,000

309,916

96/05/01
96/05/02

S 7 US 109.66
B 7 US 108.33

8,750

318,666

96/06/17
96/06/19

B 20 GC 384.4
S 20 GC 386.7

3,000

321,666

96/06/19
96/06/21

B 7 SF 79.92
S 7 SF 79.00

-8,610

313,056

96/06/26
96/06/28

B 7 US 108.13
S 7 US 109.51

9,100

322,156

96/08/01
96/08/05

B 20 GC 386.3
S 20 GC 389.9

5,600

327,756

96/08/23
96/08/30

B 7 US 110.17
S 7 US 108.00

-15.750

312.006

96/09/13
96/09/13

B 7 US 107.81
S 7 US 109.12

8,610

320,616

96/09/24
96/09/24

B 7 SF 80.80
S 7 SF 81.46

5,215

325,831

96/10/24
96/10/29

B 20 GC 383.3
S 20 GC 381.2

-5,800

320,031

96/10/28
96/11/01

S 4 SP 701.62
B 4 SP 708.25

-7,190

312,841

96/11/01
96/11/05

S 4 SP 701.62
B 4 SP 708.28

5,260

318,101

97/02/20
97/02/21

B 22 GC 346.1
S 22 GC 353.6

14,740

332,841

97/03/14
97/03/31

S 4 SP 791.42
B 4 SP 761.90

29,200

362,641

97/04/25
97/04/29

B 4 SP 768.06
S 4 SP 789.96

21,580

383,621

97/04/30
97/05/02

B 8 US 108.83
S 8 US 110.39

11,840

395,461

97/05/19
97/05/02

S 8 US 109.41
B 8 US 110.03

-5,600

389,861

97/06/10
97/07/03

B 8 US 110.83
S 8 US 113.69

22,240

412,101

97/08/14
97/08/18

S 4 SP 923.00
B 4 SP 899.83

22,850

434,951

97/10/21
97/10/21

S 12 SF 68.06
B 12 SF 67.16

12,540

447,491

Chang, Kevin P.H. and Osler, Carol; Federal Reserve of New

York, August 1995 Report, Head & Shoulders: Not Just a Flaky
Pattern

Etzkorn, Mark; Futures Magazine, January 1996 article, Fed &

Shoulders

BIOGRAPHY

Since 1998, Serge Laedermann has been a partner at GF

Geneva Finance (located in Geneva, Switzerland) focussing
on Private Banking. Fundamental analysis is used for investment decisions as well as technical analysis, which represents
his major and core tool. He is mainly a specialist on pattern
recognition.
In the 80s Mr. Laedermann was a floor trader and a technical analyst at Credit Suisse and, later on, Chief Economist and
Analyst at Bank of New York - IMB, Geneva.
Serge co-founded in 1987 the Swiss Association of Market
Technicians (SAMT).

20

2000 Edition

IFTAJOURNAL

TRADES RECAP
$100,000
90/02/08
90/02/13

B 3 SP 332.11
S 3 SP 329.91

-1,890

98,110

92/02/14
92/04/03

S 4 SF 68.75
B 4 SF 67.21

7,380

173,718

90/03/13
90/03/30

S 2 SF 65.92
B 2 SF 67.00

-2,860

95,250

92/04/07
92/04/13

B 5 SF 66.92
S 5 SF 66.06

-5,775

167,943

90/05/18
90/05/21

S 2 SF 71.26
B 2 SF 70.57

1,885

97,135

92/05/02
92/05/08

B 4 US 99.16
S 4 US 100.10

3,440

171,383

90/06/20
90/07/03

B 2 SF 70.54
S 2 SF 71.72

99,925

92/06/12
92/06/18

S 4 SP 411.24
B 4 SP 401.83

9,090

180,473

90/06/21
90/07/12

S 2 SP 359.92
B 2 SP 361.24

99,105

92/07/07
92/07/17

B 13 GC 346.0
S 13 GC 355.0

10,660

191,133

90/07/24
90/08/10

B 6 GC 367.5
S 6 GC 387.8

110,805

92/10/08
92/11/06

S 4 US 105.29
B 4 US 102.26

11,800

202,933

90/09/10
90/09/18

B 3 US 89.62
S 3 US 88.54

-3,480

107,325

92/10/23
92/11/02

S 5 SF 74.55
B 5 SF 71.78

16,913

219,846

90/09/12
90/09/14

S 2 SF 75.43
B 2 SF 76.92

-3,885

103,440

92/12/07
92/12/21

B 16 GC 335.0
S 16 GC 332.5

-5,280

214,566

90/10/22
90/11/27

B 2 US 91.29
S 2 US 94.78

6,660

110,100

92/12/09
93/01/08

B 5 US 105.06
S 5 US 104.99

-750

213,816

90/10/30
90/11/02

S 2 SF 77.98
B 2 SF 78.96

-2,610

107,490

93/01/21
93/01/25

B 6 SF 67.71
S 6 SF 68.95

8,820

222,636

90/11/06
90/12/06

B 3 SP 313.07
S 3 SP 332.77

14,535

122,025

93/02/23
93/02/24

B 5 SP 434.55
S 5 SP 438.74

4,837

227,473

90/12/14
90/12/19

B 8 GC 372.0
S 8 GC 378.8

126,825

93/03/19
93/04/01

B 6 SF 66.14
S 6 SF 67.64

10,770

238,243

90/12/28
90/12/31

S 3 SF 77.27
B 2 SF 79.10

119,723

93/03/23
93/03/25

S 5 SP 449.11
B 5 SP 451.03

-2,800

235,443

91/01/25
91/02/27

B 3 SP 334.50
S 3 SP 363.05

140,896

93/05/28
93/06/01

B 5 US 111.10
S 5 US 112.19

5,050

240,493

91/02/21
91/02/26

S 3 US 97.99
B 3 US 97.09

2,940

143,836

93/06/15
93/06/23

S 16 GC 365.4
B 16 GC 373.5

-14,240

226,253

91/03/19
91/03/26

S 9 GC 363.5
B 9 GC 357.6

4,590

148,426

93/06/17
93/07/09

S 7 SF 67.46
B 7 SF 65.56

16,065

242,318

91/05/13
91/06/12

S 3 US 95.58
B 3 US 93.41

6,270

154,696

93/08/03
93/08/10

B 7 SF 66.88
S 7 SF 65.63

-11,497

230,821

91/05/21
91/05/28

S 3 SP 374.30
B 3 SP 379.15

-3,878

150,818

93/09/22
93/09/27

S 4 US 119.37
B 4 US 120.95

-6,640

224,181

91/05/29
91/06/10

B 10 GC 361.7
S 10 GC 370.6

8,100

158,918

93/11/08
94/01/05

B 14 GC 375.7
S 14 GC 396.3

27,720

251,901

91/07/24
91/07/31

B 4 SP 393.1
S 4 SP 387.09

167,368

94/03/15
94/03/24

B 5 SP 466.98
S 5 SP 465.44

-2,425

249,476

91/09/20
91/09/27

B 4 SP 386.72
S 4 SP 384.28

164,608

94/06/10
94/06/16

B 5 US 105.49
S 5 US 104.06

-7,550

241,926

91/10/04
91/10/21

B 11 GC 356.1
S 11 GC 364.2

172,638

94/06/15
94/06/17

B 16 GC 383.9
S 16 GC 387.9

5,120

247,046

91/10/29
91/10/29

S 5 SF 66.56
B 5 SF 67.88

-8,650

163,988

94/08/05
94/08/11

B 5 US 104.15
S 5 US 102.37

-9,300

237,746

91/11/04
91/11/13

S 11 GC 356.8
B 11 GC 357.0

-1,100

162,888

94/08/25
94/08/26

S 6 SF 76.79
B 6 SF 76.11

4,620

242,366

91/12/17
91/12/23

B 4 SP 382.95
S 4 SP 392.10

8,830

171,718

94/10/05
94/10/07

S 15 GC 393.1
B 15 GC 389.1

4,800

247,166

92/01/30
92/02/12

S 4 SP 411.45
B 4 SP 416.51

-5,380

166,338

94/11/01
94/11/15

S 16 GC 384.1
B 16 GC 385.5

-3,520

243,646

2,790
-820
11,700

4,800
-7,102
21,173

8,450
-2,760
8,030

21

2000 Edition

IFTAJOURNAL

A Different Way To Forecast An Indexs Behavior

Based On The Very Old Principles Of Support And Resistance
Ulysse-Oliver Traub, CMT
INTRODUCTION

Its the right moment to sell your index future position, because
the index trades near its resistance, and looking at index Chart 1,
the market participant will agree with that proposition from his
investment advisor and probably sell his position. At first sight the
investment advisor is certainly right. The index is trading near its
resistance and could sell off soon, but the index chart might tell us
only half of the story.
The main idea of this research paper is that the resistance and
support levels on index charts could give misleading trading signals,
because the index chart does not tell much about the index structure. Therefore, finding resistance and support levels for each stock
in an index could probably enhance the assumption that a certain
resistance or support level in an index had been reached. The result
of the calculated support and resistance levels (e.g. capitalization
weighted) may differ from the obvious resistance and support levels
suggested by the index chart.
Its also a purpose of this paper to analyze whether this calculation
can enhance trading performance by preventing wrong decisions
and whipsaws.
BACKGROUND: THE TRADITIONAL APPROACH
TO OBTAIN AN INDEX FORECAST

To be able to get an idea what could happen in the near future

(next few weeks) to a stock index, a technical analyst first looks for
a confirmed trend (up- or down-trendline, at least three times tested).
With this basic tool, the trend analysis, he gets the feeling in which
direction the market is about to move (Chart 1). The volume should
confirm the trend in the index, but in this paper, volume is not
taken into consideration.
As soon as a valid trend up or down is found, the technical analyst
searches for support levels. These levels can be defined as points
where the index comes to a temporary stop in a downtrend before
it starts again to move in either direction. The main reason for this
phenomenon is the fact that supply is superseded by demand.
For resistance levels, the same principle is valid but inversely. At
these levels, demand is superseded by supply and stops the rise of an
index temporarily.
These levels can also be called psychological levels, because
whenever they are reached investors may be willing to buy or sell
because they missed that price level the last time (Chart 1).
Chart 1
SMI - Chart Market Index, January 3, 1990 - December 31, 1996

The following three attributes determine how important support

and resistance levels are: the longer prices trade around a certain
level the more significant the level gets; the trading volume and
how recently the trading took place at these levels are also two
significant indicators to properly define a support and resistance
level.
Putting all these factors together, a technical analyst makes a
forecast of the future index behavior.
POSSIBLE REASONS FOR THE INACCURACY OF
THE DESCRIBED METHOD

The above described approach is certainly an applicable one for

individual stocks and broad market indices (e.g. S&P 500).
For an index with heavily weighted companies such as the Swiss
Market Index (SMI), this forecast method could lead to an inaccurate picture of support and resistance levels and could trigger unnecessary trades with potential losses.
The same applies to individual stock groups in the S&P 500
where the weightings among its index members show considerable
variations (e.g. S&P Auto Parts & Equipment, Table 1).
Table 1

19 Index WGT
US

1)
2)
3)
4)

DGL1 Index W GT

S P A U T P Member Weightings
S&P Auto Parts & Equip
4 Members
GT
GPC
ECH
CTB

UN
UN
UN
UN

GOODYEAR TIRE
GENUINE PARTS CO.
ECHLIN INC
COOPER TIRE & RU

49.033 %
30.604 %
10.664 %
9.693 %

Source: Bloomberg
INDEX CALCULATION

In this paper, the Swiss Market Index (SMI) will be used as the
relevant stock index. The SMI is a market-capitalized index and is
a widely used Swiss stock index for performance comparisons. It has
been calculated since June 30, 1988 and had a market capitalization
of SFr. 402,490.3 Mil (US $300,365.9 millions) at the end of 1996.
The main reason for the development of the SMI was to create an
index which represented a diversified portfolio of Swiss blue chips
on which derivative products could be applied. The SMI is the only
stock index in Switzerland where hedging with futures is available.
From its inception in June 1988 until 1996, there have been at
least 18 shares from 16 different companies in the index (in Switzerland there are different classes of shares; e.g. bearer (B), registered (R) and non-voting shares (PS or GS).
Capitalization-Weighted Index
The SMI is a capitalization-weighted index and is calculated as
follows (dividends are not included in the SMI):
Current Market Capitalization*
Current Index Value = x Index Base Value
Market Capitalization Base Period

(ut = uptrend, s = support, r = resistance)

22

Source: Bloomberg

* Market capitalization = Number of tradable shares x share price

2000 Edition

IFTAJOURNAL

Weighting stocks on the basis of their market capitalizations assigns

a greater significance to the major companies than to smaller ones. But
even in a blue-chip index like the SMI, there are still big differences in
the weightings among the index members.
A closer look at the individual weightings of the stocks in the SMI
shows that 6 companies, each of them having larger weighting than 5 %,
together make up 73.81 % of the entire index (Table 2).
Table 2
Weightings of the Member of the Swiss Market Index (June 94)

SMI - Securities
Securities
SMI
ABB B N100
CIBA-GY B
CIBA-GY R
CS HOLDING B
CS HOLDING R
ELEKTROWATT B
HOLDERBK B
NESTLE B
ROCHE GS
RUECKV R
SAND OZ R
SBG R
SBV B
SBV R
SGS SURVEILL B
SMH R N10
SULZER R
W,THUR R N20
ZUERICH VERS B
ZUERICH VERS R

June 1994
Securities
Number

Closing Market Value

Price # of Securities

21
62602
159152
159151
146249
146248
201676
188058
213768
224181
124558
217194
136101
135799
42204
249748
80044
237645
84434
82878
82876

1174.0
814.0
787.0
553.0
108.5
341.0
880.0
1,121.0
6,360.0
560.0
893.0
1,158.0
391.0
194.5
1,995.0
164.0
885.0
645.0
1,316.0
1,318.0

7,739,560
3,745,170
25,369,870
23,490,730
48,710,270
8,209,850
3,767,000
38,499,026
6,819,120
11,261,710
34,239,260
20,601,020
23,516,892
27,159,836
1,156,747
15,030,000
2,202,318
7,227,722
3,769,594
5,319,856

Market Cap.
(Mil CHF) Weighting
237317.8

100%

9,086.11
3,048.57
19,966.09
12,009.37
5,285.06
2799.49
3314.98
43,157.41
43,369.60
6,306.56
23,727.81
23,855.98
9,195.03
5,282.59
2,305.72
2,484.92
1,949.05
4,661.88
4,957.02
7,011.57

3.83%
1.29%
8.41%
5.47%
2.23%
1.18%
1.40%
18.19%
18.28%
2.66%
10.00%
10.05%
3.88%
2.23%
0.97%
1.04%
0.82%
1.96%
2,09%
2.96%

B=bearer, R=registered, PC & GS= non-voting shares

Source: SWX Swiss Exchange
Price-Weighted Average
Unlike an index, which has a base value to which current values
are compared, an average is simply the sum of each components
prices, divided by a divisor (the divisor is changed to adjust the
average for splits and changes in the component stocks).
Formula
price stock 1 + price stock 2 ....+ price stock N
price weighted average = --
N*

* N is called the divisor. It is adjusted as splits and component

changes occur.
The Dow Jones Industrial Average is probably the best-known
example of a price-weighted average. Because all point changes in
prices affect the average equally, the higher-priced shares have more
influence on the average than the lower-priced shares (a high-priced
share will change more, in point terms, than a low-priced share,
hence the name price-weighted average). This is the major disadvantage of this kind of average: price per share, not total market
value determines each components influence on the average. Table
3 shows the weightings of the Dow Jones Industrial Average based
on their prices per share.

Table 3
The Weightings of the Dow Jones Components (February 97)

INDU Index WGT

US
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
11)
12)
13)
14)
15)
16)
17)
18)
19)
20)
21)
22)
23)
24)
25)
26)
27)
28)
29)
30)

DGL8 Index W GT

I N D U Component Weightings
Dow Jones Industrial Average - 30 Components
IBM
MO
PG
DD
BA
GE
TX
XON
JPM
MRK
EK
MMM
CAT
DIS
ALD
UTX
AA
CHV
AXP
KO
GM
GT
S
MCD
UK
IP
T
Z
WX
BS

UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN
UN

INTL BUS MACHINE

PHILIP MORRIS CO
PROCTOR & GAMBLE
DU PONT (EI)
BOEING CO
GEN ELECTRIC
TEXACO INC
EXXON CORP
MORGAN (JP)
MERCK & CO
EASTMAN KODAK
MINNESOTA MINING
CATERPILLAR INC
DISNEY (WALT) CO
ALLIEDSIGNAL INC
UNITED TECH CORP
ALUM CORP OF AMER
CHEVRON CORP
AMER EXPRESS
COCA-COLA CO
GEN MOTORS
GOODYEAR TIRE
SEARS ROEBUCK
MCDONALDS CORP
UNION CARBIDE
INTL PAPER CO
AT&T CORP
WOOLWORTH CORP
WESTINGHOUSE ELE
BETHLEHEM STEEL

6.997 %
5.534 %
5.279 %
4.888 %
4.876 %
4.729 %
4.729 %
4.650 %
4.621 %
4.134 %
3.929 %
3.839 %
3.476 %
3.311 %
3.238 %
3.124 %
3.107 %
2.994 %
2.790 %
2.693 %
2.614 %
2.523 %
2.183 %
2.058 %
2.053 %
1.888 %
1.780 %
.907 %
.822 %
.386 %

Source: Bloomberg
INTRODUCTION TO THE CAPITALIZATION-WEIGHTED
INDEX BEHAVIOR FORECAST

Since the mid nineties, the trend to invest in large capital issues
has continued to accelerate worldwide. The main reason for that
may lie in the steady flow of capital into mutual and pension funds,
which are professionally managed portfolios. Most of these funds
are under performance pressure. Almost every portfolio manager of
such a fund is measured against a capitalization-weighted index
(e.g. S&P, SMI) on a quarterly and yearly basis as his benchmark.
Because of that pressure he avoids investing a large proportion of
the portfolio into small- and mid-cap stocks as well as the risk of
buying a lagging stock which would produce an underperformance.
Under such circumstances small- and midcap issues have lost
performance in relation to the blue-chips not only in Switzerland
(Chart 2) but in most developed markets worldwide. As examples,
the Russell 2000 index and Wilshire 5000 index are severely lagging
behind large cap stock indices in the US.

23

2000 Edition

IFTAJOURNAL
Chart 2
A comparison between the Swiss Large Companies Index, bold
line and Swiss Small Companies Index, thin line, 12/94-12/96
(both are total return indices) December 31, 1994 = 100

Table 4
SMI
1 Jan. 93
1 Feb. 93
1 Mr. 93
1 Apr. 93
1 Mai. 93
1 Jun. 93
1 Jul. 93
1 Aug. 93
1 Sep. 93
1 Okt. 93
1 Nov. 93
1 Dez. 93
30 Dez. 93

Source: Datastream
To enhance performance or for hedging purposes, portfolio managers use index futures on the SMI (the SMI is the only stock index
in Switzerland which has futures). For this future trading to find the
right entry and exit points, the portfolio manager needs to recognize
resistance and support levels in the index.
As stated earlier, the thesis of this paper is that the trading could
be enhanced by calculating capitalization-weighted support and
resistance levels and it is assumed that such levels are different from
the obvious support and resistance levels in the index chart.

2,118
2,121
2,121
2,188
2,153
2,253
2,376
2,400
2,470
2,482
2,727
2,774
2,958

obvious
capitalization-weighted
support resistance
support resistance
2,005
2,050
2,050
2,127
2,127
2,183
2,274
2,315
2,385
2,362
2,473
2,654
-

2,107
2,128
2,145
2,183
2,196
2,271
2,335
2,419
2,502
2,502
2,723
2,742
-

1,957
1,994
2,022
2,099
2,083
2,117
2,224
2,246
2,315
2,306
2,439
2,587
-

2,105
2,159
2,153
2,203
2,220
2,264
2,374
2,432
2,469
2,482
2,662
2,731
-

Chart 3
A graphical comparison between obvious (dotted lines) and
capital weighted (bold straight lines) support and resistance
levels with the SMI (straight line)

ANALYSIS METHOD

Short-Term Forecast (one calendar month,

month-to-month data)
The calculation of the capitalization-weighted support and resistance levels in January 1993. To define support and resistance,
December 1992 data are used. February 1993 is based on January
1993 data, etc.
Calculation Rules
In each SMI member support is taken from a proven support level
in previous months price chart. If a stock is in a downtrend with no
data in the previous months price range the most recent support
level is taken.
The same procedure is applied to define resistance levels, only
with an inverse approach.
A proven support level is defined as a price level where demand
stops the stock from further coming down and overcomes the supply
at least temporarily.
When all support and resistance levels in each member of the
SMI are found, they are multiplied by their capital weight, then
divided by the data of the previous month. The result shows the
performance from one month to the next in support and resistance
levels separately. The performance is then compounded with the
previous support and resistance level.
The results for 1993 are shown in Table 4 and Chart 3.

24

Interpretation
The results from capitalization-weighted support and resistance
levels vary slightly from the obvious support and resistance levels,
but neither method would have constantly produced better results.
To forecast the index on monthly basis, the obvious index chart
provides quite good results and serves as well as capitalizationweighted support and resistance levels as a monthly forecast tool.
A BEHAVIOR FORECAST OF THE SMI IN A ONE YEAR
TRAILING PERIOD (1993 AND 1994)

For this type of analysis, two years are taken into account: 1993,
a bull market, and 1994, a bear market and a consolidation period.
These two years will provide almost every condition we witnessed
in recent years and can stand as proxies for other years.
This analysis method differs slightly from the short-term forecast
(Method A) above. Here we are looking for individual support and
resistance levels in each security of the SMI.
The following rules are applied:
The psychology of alternation is applied (when a resistance level
is broken it becomes a support level, and vice versa).
If there is only one trading day under support or over resistance,
the level will not change immediately; two trading days are
necessary to alter a support or resistance level (daily closing
prices are used).

2000 Edition

If a stock trades in new high territory, the price is equal to its

resistance until the stock consolidates and a resistance is established.
Chart 4 shows individual support and resistance level data as
applied to ABB bearer shares, a member of the SMI.

IFTAJOURNAL
Chart 6
The SMI (price line) with its capitalization-weighted support
and resistance levels for 1994 (bold straight lines)

Chart 4
A graphical comparison between obvious (dotted straight lines)
and capital weighted (bold straight lines) support and resistance
levels with the SMI (price line)

To calculate the capitalization-weighted support and resistance

levels, the same formula is used as to calculate the SMI index, shown
under D 1.
Formula
current market capitalization
weighted support level**
Current cws* value = x support base value
market capitalization weighted
support level base period

Generally speaking, a capitalization-weighted support and resistance level forms a nice trading band around the SMI. The index
rarely falls below support and rarely breaks resistance.
Taking it one step farther, the comparison between the capitalization-weighted support and resistance levels with the obvious support and resistance levels would be reached (Chart 7 for 1993 and
Chart 8 for 1994).
Chart 7
A graphical comparison between obvious (dotted straight lines)
and and capitalization-weighted (bold lines) support and
resistance levels with the SMI (price line) for 1993

* cws = capitalization-weighted support

** Market cws level = Number of tradable shares x support level value of
each index security
For the capitalization-weighted resistance level the same formula
has been used, but instead of support levels, the resistance levels
have been taken into account.
The most important thing is the first setting of support and resistance levels. For December 31, 1992, the starting point, the initial
support and resistance levels are set equal to the obvious support
and resistance levels. Chart 5 shows the outcome of a capitalizationweighted support and resistance levels for 1993 and Chart 6 for
1994.
Chart 5
The SMI (price line) with its capitalization-weighted support
and resistance levels for 1993 (bold straight lines)

Interpretation
The capitalization-weighted support and resistance levels seem
much more dynamic. Some trades could be made where an obvious
support and resistance line is far away from the price index (May
1993). On the other hand, the capitalization-weighted support and
resistance levels seem much more reliable (July 1993). An example
of a classic whipsaw could have been avoided by using ongoing
capitalization-weighted support and resistance levels instead of obvious ones.
Because of a certain time lag, due to the construction of the
capitalization-weighted support level, it was not possible to prevent
investors from being whipsawed in early September 1993.
In the period between October 1993 and December 1993 neither
the capitalization-weighted nor the obvious support and resistance
levels gave reliable trading signals, mainly because of an extremely
good performance to new highs.

25

2000 Edition

IFTAJOURNAL
Chart 8
A graphical comparison between obvious (dotted) and capitalization-weighted (bold straight lines) support and resistance levels
with the SMI (price line) for 1994

BIBLIOGRAPHY

Edwards, R., Magee, J., Technical Analysis of Stock Trends,

New York Institute of Finance, New York, sixth edition, 1992,
pp 253-281, 428-434.
Murphy, John J., Technical Analysis of the Futures Market, New
York Institute of Finance, New York, 1986, pp. 58-68
Schuppli, Peter, Swiss Stock Guide, Verlag Finanz und Wirtschaft
AG, Zurich, August 1996.
Swiss Exchange, SWISSINDEX , The Index Family of Swiss
Stock Exchanges, Zurich, December 1994.
SWX Swiss Exchange, Monthly report, Zurich, December 1992
until December 1994
Philipp, Beat, Union Bank of Switzerland, Stock and Bond Indices, Zurich, July 1996
Data sources for charts and tables are Datastream, Bloomberg
and Reuters.
BIOGRAPHY

Interpretation
Due to the fact that major stocks turn before averages, losses
could have been avoided by looking at the capitalization-weighted
support level (in early February as well as in late April, early June
and September 1994).
Looking at resistance levels, it was obvious that the capitalization-weighted ones gave much more reliable trading signals. In the
early 1994 correction phase, previous index resistance levels during
reaction rallies were higher most of the time than the capitalization-weighted resistance level, and were therefore too high to give
reliable trading signals (e.g. in early and late February and early
April 1994).
As a simple rule, going long (b = buy on chart 8) in the SMI
futures when the index was trading near its capitalization-weighted
support level and closing the position (s = sell in chart 8) when it
was trading near its capitalization-weighted resistance level could
have produced a profitable trading year in 1994, by utilizing its
support and resistance bands.
CONCLUSION AND RECOMMENDATION

Calculating a capitalization-weighted support and resistance level

in a capitalization-weighted stock market index seems to make sense,
especially when the performance of a few stocks could have considerable influence on the performance of the whole index, due to their
weightings (compare Table 2). The results from Charts 7 and 8 look
very promising and it is certainly worth the effort to take a second
look at the calculated capitalization-weighted support and resistance level before making an investment decision based only on
seemingly obvious index support and resistance levels.
To better forecast an indexs behavior, investors and traders should
take into consideration capitalization-weighted support and resistance bands which might be more sensitive to a trend change in
the index (Chart 8). Therefore, it can be a helpful tool to prevent
anyone from being whipsawed.
Another step farther ahead would be to move these capitalization-weighted support and resistance levels up, down, to the left or
to the right to produce an optimized trading system. But it was not
the goal of this paper to produce the one and only solution.
The main result, in respect to capitalization-weighted support
and resistance levels, shows that trading performances could be
improved by using these levels as opposed to obvious support and
resistance levels which seem to be less accurate.

26

Ulysse-Oliver Traub, CMT, is currently employed by J. Henry

Schroder Bank AG in Zurich, Switzerland as Senior Portfolio
Manager, and is part of the asset allocation committee and a
member of the Senior Management of the bank.
His principal responsibility is the discretionary management
of fixed income and balanced portfolios for international private clients. Before joining Schroders he worked at Pictet &
Cie and Bank Leu Ltd. in institutional portfolio management.
Since 1996 he has been a member of the Market Technicians
Association, and his technical analysis focus is on fixed income, index futures, equities and foreign exchange rates.

2000 Edition

IFTAJOURNAL

The Accuracy of Candlestick Analysis

Using the German Stock Market Index (DAX)
Reza Darius Montassr, CMT
I. INTRODUCTION

This paper is an historical, empirical and statistical examination

of the forecasting accuracy of candlestick analysis shown by taking
the example of the German Stock Market Index (DAX) on a daily,
weekly and monthly basis.
The candlestick chart technique is one of the four best-known
methods to show the course of prices. Open, high, low and close
prices for the time period under study are required. Contrary to the
bar chart, another important piece of information is added. The
analyst not only sees the movements in prices, but, thanks to the
color of the single bar, can quickly recognize whether the prices
have risen or fallen within the measured period. If prices rise within
the trading period, as is the case when the days closing price is
higher than the opening, the body of the bar is white. The upper
and the lower limit of the body is the open and the close. If the close
is lower than the opening price, the bars body is black. The color
of the body is very important, as one can draw the conclusion as to
whether optimists or pessimists had the upper hand during a given
period of time. A future trend can be forecast by combining different
candles.
Chart 1
Candlestick Chart

mark. This is also one of the reasons why it is the most quoted
German stock market index. The examinations made go back to
early 1988 (on the weekly basis from 1959). The necessary data,
such as the open, high and low of the DAX, were not available
before that time. The examination ends on August 31, 1996. It is
important, and worth mentioning, that the DAX was in a primary
uptrend during the period under study. Thus the results apply to a
bull market.
The examination will be presented in a diagrammatic way as
follows. Each individual candlestick formation is accompanied by
an analysis of its accuracy. Of course, only the important cutoffs,
which provide a significant statistical message, will be given here.
1. Statistical Analysis of Single White or Black Candles
1.1. A Single White Candle After a Black Candle
After the appearance of a white candle in the period under study
from January 1, 1988, to August 31, 1996, the DAX closed higher
the next day, or remained unchanged, in 68% of the cases. On
average, the DAX gained 3.8 points each time. However, in 32%
of all these cases, the DAX lost the next day.
It was also noticeable during these examinations that both the
height of the candle body and the upper shadow are of statistical
importance. It can be seen, all in all, that the length of the upper
shadow has a high correlation to the price movement on the following day, i.e. the smaller the upper shadow, the higher the probability
that the next day will be positive. The statistical result was as
follows: if the upper shadow was smaller than five points, a rise by
an average of eight points was seen the next day. A negative trend
was to be expected the following day when the upper shadow became larger than 7 points.
Table 1
Dependence of the Daily Performance on the Length of the
Upper Shadow in Points (White Candles)
Length of Upper Shadow 2

15

11

10

-2

-5

-7 -10

Daily Performance

10

II. MAIN SECTION

Contrary to the bar or line chart analysis, the forecast quality of

the candlestick analysis can be derived from statistics very well.
There is only limited scope for subjective interpretations, thanks to
the precise rules. For this kind of analysis, it is, of course, also
necessary to consider single candlestick formations in the context
of price movements as a whole. That means that here, too, any
situation has to be evaluated individually in order to relativize the
message of the candle signals. However, the signals per se are set off
by the basic rules of the candlestick method and are unambiguous.
The following thesis is to make use of this advantage so that the
significance of several fundamental candlestick formations for the
German stock market is to be tested.
Because an examination of individual shares or sectors is beyond
the scope of this thesis, the author concentrates on an analysis of the
German stock market index (DAX).
The DAX comprises the 30 German corporations with the highest outside share capital. The index is capitalization-weighted and
is statistically adjusted should there be dividend payments or other
corrections (such as capital increases, capitalization issues). The
DAX is a performance index, which means it can be used as a bench-

Chart 2
Dependence of the Daily Performance on the Length of the Upper
Shadow in Points (White Candles)

27

2000 Edition

IFTAJOURNAL
Table 1 shows that there is a statistical connection between the
length of the upper shadow and the daily performance of the following day. The coefficient of determination R2 of 0.98 shows a very
strong statistical relation between the upper shadows length and
the daily performance for the given period of time.
But the size of the white candle body also plays a crucial role. In
general, it can be assumed that the projection for the next day is
directly dependent on the size of the candle body. The following
two factors became apparent during the course of the study:
1. The larger a white body, the higher the probability that the
following day will close in the positive zone,
2. the larger a white body, the higher the median price gain the
next day.
The cutoff for the significance of the above-mentioned factors is
around 5 DAX points. Only from this body height or greater can a
high statistical probability be assumed.

limit for black bodies amounted to 5 points. The examinations led

to the following result:
Table 3
Dependence of the Daily Performance on the Height of the
Body in Points (Black Candles)
height of the body

daily performance

-15

-16

7
-16

8
-17

9
-18

10
-19

11
-20

Chart 4
Dependence of the Daily Performance on the Height of the
Body in Points (Black Candles)

Table 2
Dependence of the Daily Performance on the Height of the Body in
Points (White Candles)
Height of the Body

10

11

Daily Performance

10

Chart 3
Dependence of the Daily Performance on the Height of the
Body in Points (White Candles)

The graph shows what importance the body length of a black

candle has on a Friday. The larger the black candles body on this
day, the larger the daily loss on the following Monday. Within the
period under observation, this applied with a statistical probability
of 71%.
The upper shadows length of black bodies did not have any significant statistical advantage.
1.3 Hammer and Hanging Man
In candlestick analysis, single candles with certain lines have a
certain meaning and thus special names. A small candle with a long
lower shadow and a very small upper shadow (or none at all) is called
Hammer or Hanging Man depending on whether it occurs after a
downtrend or an uptrend.
The statistical probability of the above-mentioned cases (height
of the body, length of the upper shadow) is about 75% each.
1.2. A Single Black Candle after a White Candle
After a black candle the DAX loses on average 1.8 points the
following day. However, the statistical probability that the prices
will fall the day after a black candle is about 50% and is thus rather
coincidental. This bad statistical probability is connected with
the fact that the DAX was in a primary uptrend during the period
under observation so that single black candles did not have a high
forecasting ability. This becomes evident if we look at secondary
phases of consolidation, such as from September 1992 to February
1993. During these times the probability increased to more than
60%.
In this regard, the height of the candle body, combined with the
week day, played a statistically more important role. It was obvious
that the black bodys heights themselves did not imply any significant statistical information on the further course, so that we have
to assume a random result here. The height of the black bodies
becomes interesting and statistically significant if it is combined
with individual week days. Thus, filtering out on which week days
the height of the black bodies showed significant correlations with
future price movements. In this respect, Friday was the conspicuous
and only statistically significant day. The significant minimum

28

1.3.1 The Hammer

Ideally, the Hammer appears at the end of a downtrend. Here
prices fall sharply once again, but recover at the end of the day and
finally close in the upper third of the movement as a whole. This
movement provides evidence that sentiment has changed considerably during the course and that bulls are now gaining the upper
hand.
Chart 5
Hammer

2000 Edition

IFTAJOURNAL

1.3.2 Hanging Man

The Hanging Man is the equivalent to the Hammer and appears
after an uptrend. At the outset, the market is bullish and prices
continue to rise, but then they go down continuously and finally fall
below the previous days close. At the end of the session, they start
rising again and close in the upper third of the movement as a whole,
near the open. The open is ideally the highest price or very close
to it (chart 6). The psychograph of a Hanging Man is plausible.
When the session opens and during its beginning phase, optimists
have the upper hand. During the course of the session, however,
they increasingly lose control and the pessimists gain ground. Although they succeed in making prices rise again at the end of the
session, there is no change for the better, and prices close near the
opening price. This shows clearly that the mood has noticeably
deteriorated and the (buying) power is coming to an end. The next
days opening will then confirm this. If the market opens below prior
days close, it is almost certain that the bears have won the position.
Chart 6
Hanging Man

1.3.3 Statistical Evaluation of Hanging Man and Hammer

The statistical examination analyzed both formations at first. A
Hammer and a Hanging Man appeared 68 times in the course of the
DAX during the period under observation. On average, the DAX
lost 9.5 points.
Looking at each individually, the Hanging Man appeared 32 times.
In around 66% of these cases, the DAX fell in the following days so
that this formation is of high statistical significance. On average,
it lost around 8 points three days later. The Hammer appeared 37
times. This formation proved to be of very high statistical significance with a hit ratio of 72% (in 72% the DAX rose in the following
period) and an average 20-point increase in prices during the next
three days.
Both formations showed a very good forecast quality, although
they consisted of only one candle. It was also conspicuous that the
black Hammers accuracy was three times as high as that of the
white ones. The same applies to the Hanging Man whose hit ratio,
when black, is twice as high as when white. The white candles
(Hanging Man and Hammer) appeared in the majority of cases as
one- to three-day corrections and were good points of entry for a
continuation of the trend. After a white Hammer, which had incidentally occurred 17 times, prices dropped by 7.5 points on average. However, the black candles often indicated a trend reversal
and led to a sustained rise in prices.
1.3.4 The Inverted Hammer and the Shooting Star
The Inverted Hammer and the Shooting Star are the close relations of the above-mentioned formations. As the name already
implies, it is an Inverted Hammer formation: a small, white or black
candle body without or almost without a lower shadow and with a
very long upper shadow. Whether this formation appears at the end
of an uptrend or downtrend has an influence on its name. At the
end of a downtrend it is called Inverted Hammer and at the end of
an uptrend a Shooting Star. Both indicate a trend reversal and are
thus reversal patterns.

Chart 7
Inverted Hammer

1.3.5 Statistical Evaluation of Inverted Hammer and

Shooting Star
The examinations made clear that neither the Inverted Hammer
nor the Shooting Star indicated a significant trend reversal; on
average the result was even negative, i.e. prices continued their
previous trend. Therefore, the formations were carried out according to the color of the real bodies. The result was as follows:
White Shooting Star: There were seven observations. On average the DAX stood 1.5 points lower after three days.
Black Shooting Star: It provided a very positive result. There
were ten observations and each timeprices were around 13 points
lower during the following three days.
Black Inverted Hammer: The 13 formations led to a price
advance of an average 2.5 points after three days.
White Inverted Hammer: It occurred nine times. On average,
the DAX increased by 11 points and was able to gain substantially in the time to follow.
Chart 8
Shooting Star

Based on this analysis it becomes clear, at least for the DAX, that
the color of the real body is of crucial importance for performance.
A black Shooting Star for instance, has a very high statistical significance as far as accuracy and performance are concerned. The
same applies to the white Inverted Hammer. It is obvious that the
colors of the real bodies equal the trend to be expected. This statement does not, of course, lay claim to completeness and general
validity, but it encourages the scrutiny of the currently valid theory
that the color does not play a decisive role in formations with one
candle.
2. STATISTICAL ANALYSIS OF CANDLESTICK
FORMATIONS WITH TWO CANDLES

2.1 Trend Reversal Formations

2.1.1a The Positive Engulfing Pattern
Positive Engulfing plays a key role among formations with two
candles. The formation consists of one small black candle immediately followed by a white candle. Here it is important that the white
body completely engulfs the black body: in other words, the following day opens below the previous days close. At the end of the day

29

2000 Edition

IFTAJOURNAL
the prices will then be in the positive zone. The formation appears
at the likely end of a downtrend and is a clear sign that optimists are
gaining the upper hand.
Chart 9
Positive Engulfing Pattern

Statistically, the Positive Engulfing Pattern can be easily determined. From 1988 until 1996 the DAX had this formation 22 times.
All in all, prices were in 14 cases higher in the next days and lower
in eight of the cases, so that 64% of the time, the Positive Engulfing
Pattern had correctly indicated the direction. On average, the
DAX was 8 points higher in the three following days; this implies
a reliable quality of the forecast. If the subsequent day is taken as
a measure, the result slightly deteriorates to 7 points.
Within the framework of this study it seemed to be important to
answer the question as to how far the signal would carry such a
formation. This is shown in the following table.

However, the most dramatic result was to be seen between the third
and the tenth day on average.
2.1.1.b The Positive Doji Engulfing Pattern
The Positive Doji Engulfing Pattern is a special kind of Positive
Engulfing. Here the body of the first black candle becomes as small
as a line and thus forms the Doji. A Doji is a very important figure
in the candlestick analysis, as some uncertainty can be recognized
during this period of observation. The form of the candle shows
(open and closing prices are equal or near each other [Chart 11])
that neither optimists nor pessimists have succeeded in moving the
market in their direction. Thus a Doji intensifies the structure of
a formation substantially. A Doji Engulfing Pattern appeared during the primary intermediate uptrend of the DAX in early 1995.
After four falling days in the uptrend (tertiary consolidation), a Doji
Engulfing Pattern on April 19 and 20, 1995, indicated the end of the
tertiary consolidation and a renewed start of the primary intermediate movement. This formation occurred 18 times during the period
under observation. All in all, 12 increases in prices were registered;
only 6 times were the prices lower in the following days.
Chart 11
Positive Doji Engulfing Pattern

Table 4
Profit Length of the Positive Engulfing Pattern
Days

Hit Ratio

1
2
3
4
5
6
7
8
9
10
11
12
13

68%
59%
64%
64%
64%
63%
65%
65%
64%
60%
58%
53%
51%

Median Performance

7.2
7.6
8.0
14.0
15.7
13.2
13.5
13.3
19.9
13.3
7.4
3.1
0.5

2.1.2.a The Negative Engulfing Pattern

The Negative Engulfing Pattern is the inversion of the Positive
Engulfing Pattern. It includes a white small candle which is embraced by a black candle following behind it. Thus the opening of
the second day is above the closing price of the first day. The second
days close is below the opening of the first day.
Chart 12
Negative Engulfing Pattern

Chart 10
Profit Length of the Positive Engulfing Pattern

The pattern shows that the effects of the Positive Engulfing Pattern were on average noticeable up to the 13th day inclusively.

30

The Negative Engulfing Pattern clearly shows a change in sentiment on the market. At the beginning, prices still open positive,
but on the close of the day they are decisively in the negative zones.
The statistical predictive ability of Negative Engulfing is as follows.
Thirty one Negative Engulfing Patterns were seen during the period
under study. In 65% of these cases, the DAX was lower three days
later. Looking at the 31 selling signals, the DAX was on average 7
points lower after three days. Here the high accuracy is impressive.
As already mentioned before, the DAX was in a primary uptrend
during the period of analysis. This corresponds to a positive upward
momentum and thus increases the risk of a short position.
For the Negative Engulfing Pattern an extension statistic can also
be calculated.

2000 Edition

IFTAJOURNAL

Table 5
Profit Length of the Negative Engulfing Pattern
Days

Accuracy

Median Performance

1
2
3
4
5
6
7
8
9
10

58%
55%
65%
63%
63%
59%
58%
57%
57%
56%

4.9
3.3
7.0
7.8
7.2
3.8
4.7
4.9
-0.2
-3.5

was in a primary uptrend during the period under study and the bear
cycle represented only secondary corrections.
2.1.3 Harami
The Harami is also one of the important formations of the candlestick analysis. It is made up of two candles.
In case of the Positive Harami, first days black body engulfs the
white body following on the second day.
In case of the Negative Harami, first days white body engulfs the
black body following on the second day.
2.1.3.a The Positive Harami
Chart 15
Positive Harami

Chart 9 clearly shows that the profit length of the Negative Engulfing Pattern is shorter than that of the Positive Engulfing. The
downtrend is already over after an average of nine days and another
uptrend begins.
Chart 13
Profit Length of the Negative Engulfing Pattern

2.1.2.b The Negative Engulfing Doji Pattern

The Negative Engulfing Pattern is also intensified by a Doji.
Here the small white candle of the first day shrinks to a Doji.
Chart 14
Negative Engulfing Doji Pattern

In the period under study, the Negative Doji Engulfing Pattern

occurred 20 times. For instance, a Negative Doji Engulfing Pattern
on September 19 and 20, 1995, led to a correction phase of the 1995
bull market and corrected 50% of the previous uptrend.
However, the DAX lost on average only 5 points after three days.
In around 60% of the time, lower prices had to be expected.
If we calculate the Negative Doji Engulfings according to the hit
ratio of Negative Engulfing Patterns as laid down in 2.1.2, median
performance improves substantially. Then the average loss after
three days markedly increases from 7 to 11.5 points.
In contrast to the assumption that a Doji intensifies the formation, the performance of the Negative Doji Pattern was disappointing. Both the accuracy of 60% and median performance were worse
than that of the normal Negative Engulfing Pattern. This anomaly
is probably as in other cases, too due to the fact that the DAX

The first day is characterized by a gloomy mood. Prices fall continuously. On the second day, there is a change in sentiment, prices
open already higher and close in the positive zone, although below
the previous days opening price.
In the second phase of the 1993 uptrend of the DAX, after the
secondary consolidation, which lasted from early 1994 to the fall of
1995, a Positive Harami appeared on November 23 and 24, 1995.
After this formation, the DAX succeeded in surmounting its secondary line of resistance at 2,120 points for a sustained period of
time and in finishing the secondary consolidation. In the next few
months, the equity market continued to rise and reached the current 2,650 points.
The Positive Harami appeared 26 times during the period under
observation. However, the statistical predictive ability was not very
significant. Only in 54% of the observations, was the DAX to close
higher in the next three days. An extension calculation was not
able to deliver a statistically significant assumption. Therefore, a
closer analysis is here dispensed with.
Thus the Positive Harami obviously was less reliable than the
Engulfing Pattern.
2.1.3.b The Positive Harami Cross
When the second white body shrinks to a Doji, the pattern is
referred to as a Positive Harami Cross, thus putting the downtrend,
which has so far been intact, into question.
Chart 16
Positive Harami Cross

31

2000 Edition

IFTAJOURNAL
The DAX in August 1992 is a good example of the fact that the
Doji of the Positive Harami Cross signals a change in sentiment. At
that time, the Doji indicated an apparent improvement in market
sentiment. The formation appeared in the last week of August . A
sharp price increase which helped the DAX break its secondary
resistance line at 1,525 points followed.
The signals of the Positive Harami Cross are more unambiguous
than those of the Positive Engulfing Pattern. For instance, 65% of
the 20 formations during the period under study announced rising
prices in the next three days. Prices were on average 20 points
higher.
2.1.3.c The Negative Harami
A Negative Harami shows a large white candle of the first day
followed by a smaller black candle on the second day (see chart 17).
Here too, the body of the black candle must be completely engulfed
by the body of the white candle.

2.2 Examination of Trend Reversal and Trend Consolidation

Formations
2.2.1 Formations with Positive Implications
2.2.1.a The Positive In-Neck Pattern
As a rule, this formation appears at the end of a downtrend. The
first day is usually still marked by a negative sentiment. The second
day of the formation is characterized by an extreme initial weakness.
However, during the session the situation changes considerably and
prices start to rise again (see chart 19). At the close of the market,
they have again reached the previous days price level. Normally,
this initiates a short-term trend reversal.
Chart 19
Positive In-Neck Pattern

Chart 17
Negative Harami

The Negative Harami sets off a selling signal and indicates the
end of a euphoric mood.
The DAX had 26 Negative Haramis during the period under
study. In 69% of these cases, prices fell in the next three days. Prices
were on average 16 points lower. This formation has so far been the
only one which showed high accuracy on both the buying side and
the selling side during the course of these examinations. The other
formations mentioned so far were mostly only convincing and statistically significant from a one-sided view, i.e. either as a buying
signal or a selling signal.

2.2.1.b The Positive Thrusting Pattern

If prices continue to rise on this day, but do not exceed the midpoint (Thrusting Line) of the black body, a Positive Thrusting Pattern
will result, which has the same implications as the In-Neck Pattern
(see chart 20).
Chart 20
Positive Thrusting Pattern

2.1.3.d The Negative Harami Cross

Chart 18
Negative Harami Cross

2.2.1.c The Positive Piercing Pattern

The Piercing Pattern is an intensification. Here the midpoint
(Thrusting Line) is pierced and the white body ends somewhere in
the upper half of the preceding black candle (see chart 21).
Chart 21
Positive Piercing Pattern

The Negative Harami Cross is similar to the Negative Harami,

the only difference being that the second day is a Doji. On the one
hand, this shows a certain uncertainty on the market and on the
other, optimists also lose a lot of their strength.
The statistical reliability was 55% in those 11 cases which appeared during the period under observation. Thus it has to be considered to be not as significant, but rather more as a coincidence.
The ideal extension of the forecast is here also three days. After ten
days, the influence of this formation can no longer be felt.

32

As the above-mentioned formations can appear at the end of a

trend (trend reversal) or during a trend (trend confirming), it is hard
to determine the statistical reliability. A consistent analysis of the
market situation is thus very important so that a context-related
integration of the formation should then be made. This is also

2000 Edition

IFTAJOURNAL

proved by the authors statistical examinations. All in all, the Positive In-Neck Patterns, Positive Thrusting Patterns and Positive
Piercing Patterns appeared with a frequency of 96 during the period
under observation. In 51% of these occurrences the DAX was higher
in the next three days, in 49% the DAX was lower in the following
three days. This highlights its low statistical reliability and its high
degree of randomness.

Chart 24
Dark Cloud Cover

2.2.2 Formations with Negative implications

2.2.2.a The Negative In-Neck Pattern
This formation has a negative implication. The first candle has
a white body. The second day initially opens in a euphoric mood and
prices continue to rise. But the sentiment changes during the trading day and prices begin to fall. At the end of the session, the previous days close is more or less reached (see chart 22). This can be
seen as a first sign of a shift in market assessment so that selling may
take place in the next few days.
Chart 22
Negative In-Neck Pattern

The forecasting effect of these three formations is also not very

concrete. They can all occur as both a consolidation formation or
a trend reversal formation. Here too, individual candle formations
should be judged only within their context.
The statistical examination does also not allow any significant
statement. In the period under observation 106 cases of these formations were recognized in all. In 52% of these occurrences the
DAX was lower in the next three days and in 48% it was higher.
Here too, it has to be assumed that the sole observation of formations can provide only a random result.
3. STATISTICAL EXAMINATION OF CANDLESTICK
FORMATIONS WITH THREE CANDLES

2.2.2.b The Negative Thrusting Pattern

However, if prices fall even below the neck line on the second day
and hit the Thrusting Line, a Negative Thrusting Pattern results.
Consequently the implication of this formation is slightly more
negative.

3.1 The Morning Star

The Morning Star is made up of a large black candle, a lowerplaced smaller black candle followed by a higher-placed larger white
candle (see chart 25). The formation clearly shows the turnaround
in sentiment within a few days. The bearish sentiment is still very
high on the first day. The second day also opens weak, but during
the session pressure noticeably eases. Finally the third day opens
more buoyant and ends much firmer.

Chart 23
Negative Thrusting Pattern

Chart 25
Morning Star

2.2.2.c Dark Cloud Cover

If the second day drops below the Thrusting Line and closes in the
lower half of the preceding black candle, a Dark Cloud Cover results. This formation shows very clearly that the sentiment seems to
be changing, and has thus the most negative effects.

The Star can be black or white; in principle, this does not have
any influence on the Morning Stars message.
3.1.1 The Morning Doji Star
It is also possible that the Star appears as a Doji. According to the theory,
this leads to an intensification of the signal (see chart 26).

33

2000 Edition

IFTAJOURNAL
Chart 26
Morning Doji Star

at 51% during the period under study and thus not statistically
significant.
3.3 Three White Soldiers
This formation shows that market players confidence is on the
rise. There are positive price changes every day compared with the
previous day. The positive momentum increases and each individual day closes very near to its high.
Chart 29
Three White Soldiers

Sixty five Morning Stars and Morning Doji Stars occurred in the
period under examination. In 61% of these cases prices were higher
within three days. The DAX was able to gain 7 points on average.
Although the statistical significance was not very high, very good
results could be achieved with the help of consistent trend and
indicator analysis.
3.2. The Evening Star
This is the counterpart of the Morning Star and leads to a selling
signal after the formation has been completed. Market players psychology is similar to that with the Morning Star. The first day is
determined by much optimism, prices are still rising strongly. The
second day also shows its best side, prices start somewhat higher, but
then they lose a considerable amount of strength and close only
slightly higher. On the third day the sentiment changes, as prices
open lower and close noticeably weaker.
Chart 27
Evening Star

Statistically, this formation is of great significance. It occurred 35

times in the period under examination (1/1/88-8/31/96). In 59% of
these cases it had positive implications and led to a DAX gain of 7
points on average.
3.4 Three Crows
This formation shows that investors confidence is declining. After
an uptrend, prices begin to fall and drop to a closing low. Ideally,
prices fall below the open of the previous (white) candles. In the
following two days, prices continue to fall and close near their allday low and below the previous days closing prices (see chart 30).
These three candles with the long black bodies point towards a clear
deterioration in market sentiment and signal a further drop in prices.
Chart 30
Three Crows

3.2.1 The Evening Doji Star

The more intense form of the Evening Star occurs when the Star
shrinks to a Doji.
Chart 28
Evening Doji Star

The statistical predictive power of the Three Crows is also significant. The Three Crows occurred 19 times in the period under study.
In 62% of these cases, the DAX lost after three days and was on the
average of overall events 10 points lower.
4. STATISTICAL ANALYSIS OF WEEKLY CANDLES

Since Mondays opening price and Fridays close is enough for the
analysis of the weekly candle, it was possible to analyze the DAX
over a longer period of time. The analysis thus goes back to 1959.
The statistical significance of Evening Stars is very low. Some
cases have precisely indicated the trend reversal towards a corrective movement after a longer uptrend. But the formation of the
Evening Star was very often only a short period of consolidation,
which lasted only one to two days. The hit ratio of Evening Stars was

34

4.1 General Statistical Data

From 1959 to 1996 the DAX gained 1,693 points, giving an increase of an average of 0.9 points per week. All in all, 1,864 candles
could be drawn; 884 of them were white, 751 were black. After a
white candle the DAX rose by around 1.9 points in the following
week, and after a black candle it fell by 0.3 points on average. But
there were also weeks in which prices remained nearly unchanged,

2000 Edition

IFTAJOURNAL

in other words when Doji candles appeared. 234 Dojis of the DAX
were registered in the period under examination. On average, the
DAX rose by 1 point afterwards; this comes very close to the median
rise of the DAX of 0.9 points over the whole period.
4.2 Consequences of the Body Height of Weekly Candles
As already mentioned, as far as daily candles were concerned, the
height of the body allows assumptions concerning the further development of the DAX.
4.2.1 Weekly White Candles
Examinations have shown that the length of the candles bodies
should be at least 28 points for a statistically significant statement.
With a body length of 28 points, the DAX rose on average by 5
points, with a body of 40 points, the increase was 7.5 points and with
a body of 50 points, the increase was around 10 points in the following week.
Table 6
Dependence of the Weekly Performance of White Candles on the
Height of the Body
Body Height
Daily Performance

28

30

35

40

45

50

55

6.2

7.5

8.9

10

11.4

Chart 31
Dependence of the Weekly Performance on the Height of the Body

Table 7
Profit Length of the Positive Engulfing Pattern (Weekly)
Weeks

1
2
3
4
5
6
7

Hit Ratio

Median Performance

66%
68%
68%
69%
62%
60%
58%

1.9
5.4
4.1
8.2
8.5
9.0
12.0

Table 7 shows that the maximum of the Positive Engulfing

Patterns statistically positive effect is reached after four weeks on
average.
4.3.2 The Weekly Negative Engulfing Pattern
The predictive ability of this formation was much worse. A positive performance can on average only be found during the first two
weeks after the appearance of this formation. The DAX lost after
one week around 2 points on average, after two weeks only 0.5
points, and in the following weeks prices started to rise again. Up
until the second week, the hit ratio stayed in significant regions
with 63%, but then it sank rapidly and reached very unsatisfactory
results. This also statistically confirms the secondary correction of
the Dow Theory.
4.4 The Weekly Haramis
Haramis play a major role on a weekly basis as well. Obvious
differences between the Positive and the Negative Harami were
also to be seen here.
4.4.1 The Positive Harami (Weekly)
The predictive power of the Positive Harami is not as good as that
of the Engulfing Pattern. In the first one to two weeks, the DAX fell
on average 2 to 4 points, then in the following four to seven weeks,
prices rose by 18 points on average.
Table 8
Profit Length of the Positive Harami (Weekly)

4.2.2 Weekly Black Candles

As far as black candles are concerned, there is no statistically
significant size of the body which forecasts further trends. The black
candles trend mostly only continues for a few weeks. Relatively
long black candles for a short period of time are characteristic, but
they do not deliver any sustained indication for further price movements.
This result seems to be obvious if one is aware of the fact that the
German equity market was in a primary uptrend during the whole
period under study so that black candles were mostly secondary
corrections. According to the Dow Theory, it is well-known that
those candles are of a short-term nature.
4.3 Weekly: Engulfing Pattern
Similar to the daily candles, the Engulfing Pattern provides a
high statistical significance in its weekly version, too. There is also
a clear difference between the Positive Engulfing and the Negative
Engulfing Patterns.
4.3.1 The Weekly Positive Engulfing Pattern
This formation has a high hit ratio of 68%. The resulting high
statistical significance makes this formation an important weekly
structure.

Weeks

Hit Ratio

Median Performance

1
2
3
4
5
6
7
8
9
10

44%
46%
46%
60%
62%
63%
68%
62%
60%
51%

-2
-3
-1
5
8
12
18
16
16
11

Table 8 shows that the Positive Harami needs up to three weeks

start-up time to have a statistically significant impact. Then, however, the effect is very positive and the DAX rises for a sustained
period of time. It is important to mention that during the first one
to three weeks, prices do not fall significantly. As a rule only a basis
formation develops.
4.4.2 The Negative Harami (Weekly)
The statistical effects of the Negative Harami were only very
small. Prices fell slightly only in the first week after the appearance

35

2000 Edition

IFTAJOURNAL
of this formation, on average by 0.6 points. Prices advanced in the
following weeks so that the DAX stood on average 5.7 points higher
after four to seven weeks. The Negative Harami proved to be only
a rather slight brake during the uptrend and thus showed sideward
tendencies. It is interesting that prices declined sharply after some
individual Negative Haramis despite their statistically weak predictive power. This can be seen, for instance, in the second week of
April 1975 and 1976. This shows clearly the importance of the first
following week. Only if this particular week confirms the Negative
Harami, with a window or with larger price decreases (dropping
below the support lines), can it be assumed that further strong declines will follow. This was the case for the DAX in over 85% of the
heavy price declines.
4.5 Hanging Man, Hammer, Shooting Star and Inverted Hammer
The predictive power of these single candle formations was more
evident. In the years from 1959 to 1996, 220 Hammer, Hanging
Man, Shooting Stars and Inverted Hammer formations could be
counted.
All in all, a significant movement was to be recognized only after
five to six weeks.
4.5.1 Hammer and Inverted Hammer
When the Hammer occurred, the DAX was around 12 points
higher five weeks later. The hit ratio stood at a significant 72%.
The forecasting effect of the Inverted Hammer was not that high.
After five weeks the DAX had only increased by 2.7 points on
average. The hit ratio was 56%.
4.5.2 Shooting Star and Hanging Man
Shooting Star and Hanging Man did not produce any statistically
significant forecast. Prices were on average 2.6 points higher so that
the predicting effect was negative. The positive momentum of the
primary uptrend is probably the major reason here, too.
4.6 Formation of Series
The first observation of weekly candles already makes it clear that
they tend to form series. A white candle mostly does not occur
alone; it is normally followed by several other white ones, leading
to a trend. The creation of a trend can most easily be proved by
means of the normal distribution. From 1959 until 1996, 1,092
weekly white candles or weekly Dojis occurred. 201 appeared as a
series of one, i.e. black candles were in front and behind them.
However, according to normal distribution, there should have been
273 series of one. This shows clearly that series of one emerge less
frequently (-35%) than in the normal distribution. A similar result
was produced by the series of two. 137 would have been likely overall, but there actually were only 96. The series of three occurred only
62 times instead of 68. The picture changed considerably from series
of four upwards. Here 44 appeared, although only 34 were to be
expected according to the Gaussian distribution. Table 9 shows
that this trend continues.

Table 9
Formation of Series of White and Doji Candles (Weekly)
Number of Candles

Real Occurrence

1
2
3
4
5
6
7
8
9
10
11
12
13

201
96
62
44
23
11
6
5
3
2
1

Normal Distribution

273
137
68
34
17
8
4
2
-

Just the fact that the candle events are always above normal
distribution from the series of four on, contradicts the random walk
hypothesis and shows that the market is very trendy. Of course, it
is possible to take advantage of this insight. The result is as follows:
Table 10
Probability of the Series Formation of White and Doji Candles
(Weekly)
Number of Candles
After
1
After
2
After
3
After
4
After
5
After
7

Probability of Another White Candle

56%
62%
54%
56%
62%
68%

Thus, the probability that prices will rise one more week is highest after the seventh week. From this week on, the probability of
prices climbing up further falls rapidly. It seems, therefore, to be
logical that more than 66% of the corrections took place between
the seventh and the eleventh week. For the DAX, the seventh week
is a good opportunity to take profits and to wait for a secondary
correction.
Such an analysis cannot be carried out for black candles. The
normal distribution of these candles is too strong and statistically
not very predictive. It can only be seen that black candles apparently occur more coincidentally and more vehemently, in other
words only as correction periods during the primary uptrend.
5. STATISTICAL ANALYSIS OF MONTHLY CANDLES

Due to the very meager basis of monthly figures for the DAX, the
author was not able to make a significant statement about the forecasting effect of the 427 monthly candles (1959-1996). The examination of the predictive effect of individual formations such as
Haramis or Engulfing Patterns always proved to be statistically
nonsignificant. It must be assumed that the parent population of
427 candles is not enough for a statistical examination. However,
it is also possible that the psychological factors, which build the
foundation of the candlestick analysis, lose their effects during a
period of one month so that other factors influencing the market
(fundamental situation, political environment, cyclical fluctuations,
portfolio-based considerations of fund managers) gain more weight
and give the market the decisive stimulus in one direction. Within
this overall framework the market moves within a certain fluctua-

36

2000 Edition

IFTAJOURNAL

tion range, which can then be explained on a weekly and daily basis
by means of the candlestick analysis.
III. CONCLUSION

This statistical examination shows that the following criteria are

of great importance for the candlestick analysis:

IV. BIBLIOGRAPHY

1. Context Dependence of the Candlestick Analysis

In the wake of these examinations, it becomes evident that only
a selection of candle formations has a really significant and statistically provable forecasting accuracy. For the DAX, all of the positive candle formations had a high hit ratio (average 70%). However, candle formations which signaled falling prices showed a bad
or negative performance overall. This can be attributed to the fact
that the DAX was in a primary uptrend during the whole period
analyzed, and thus followed a positive upward momentum. Those
candle formations which predicted falling prices only showed good
results in secondary consolidation periods.
Signals of candle formations should only be analyzed and evaluated in connection with the market context.
2. Confirmation of Formations
Another important insight of this study is the fact that all candle
formations should be confirmed by the trend in prices on the following day. Such confirmation increased the hit ratio for the DAX even
further to between 63% and 70%.
All signals of candle formations should be confirmed on the following day.
3. The Period Under Observation
The performance of candle formations also depended to a large
extent on the observation period. On a weekly basis the results were
only significant for some of the candles, for instance, Engulfing
Patterns, Haramis and Hammers. A new additional aspect is the
high statistical predictive ability of uniform candle series, which
cannot be found in such a distinct form in daily analysis. If the
period under study is enlarged in a month, the significance of many
candle formations at least for the DAX will be minimized to a
random level. This seems to be logical, if one is aware of the fact that
candle formations are nothing but direct positive and negative market
forces. The clearest form of these forces is included in one full
trading day, whose two most important points are the opening and
the closing price. Around these points, not only the highest daily
trading activity can be noticed, but the relationship between these
two fixed points helps to derive conclusions about the strength of
the optimists and the pessimists. The more the daily relationship is
left to one side, the more distorted the above-mentioned factors
become, so that the informative value of candle formations decreases on average from the daily to the monthly observation. The
same applies also to intraday analyses. Here too, a rapid fall in the
reliability of formations can be seen.
It must be considered that signals of candle formations are dependent on the observation period.

Sherry, Clifford J., Mathematics of Technical Analysis,

Chicago, Illinois, Probus Publishing Company, 1992.
Morris, Greg, East Meets West: Candlepower Charting, Technical
Analysis of Stocks and Commodities, September 1991.
Murphy, John J., Technical Analysis of the Futures Markets,
New York: New York Institute of Finance, 1986.
Neter, John, Applied Statistics, Boston, Allyn and Bacon, 1993.
Nison, Steve, Japanese Candlestick Charting Techniques, New
York: New York Institute of Finance, 1991.
Pring, Martin, Technical Analysis Explained, New York: McGraw
Hill, Third Edition, 1991.
Shimzu, Seiki, The Japanese Chart of Charts, Tokyo Futures
Trading Publishing Co., 1986.
Wagner, Garry S., Pattern Recognition and Candlesticks, Stocks &
Commodities, September 1991.
BIOGRAPHY

Reza Montassr is Chief Technical Analyst and Market Strategist with Bankhaus Reuschel & Co., a German private bank
in Munich. He began his career at Merrill Lynch in Munich.
Reza received his undergraduate degree and his Masters Degree at Ludwig Maximilians University, Munich and is currently doing Doctorate studies in the field of technical analysis
there. His early education was received in schools in Munich,
Cairo, Teheran and Bern.
Reza has appeared on German news television and has published articles for financial magazines. He is writing a book
about the theoretical evolution of technical analysis. He can
be reached at montasser@markttechnik.com, or log onto his
website: www.markttechnik.com.

37

2000 Edition

IFTAJOURNAL

Predicting the Exchange Rate:

A Comparison of Econometric Models, Neural Networks and Trading Systems
Giampaolo Gabbi, Ruggero Colombo, Riccardo Bramante, Maria Paola Viola,
Paolo de Vito, Alberto Tumietto
INTRODUCTION AND PURPOSE

Financial literature offers a number of papers in which trading systems,

econometric or neural network models [Zhang, Patuwo, Hu, 1998] are
applied. The purpose of the paper is to find out whether these methodologies applied to high frequency financial time series can generate good
forecasts [Gabbi, 1999].
The DEM/USD high frequency time series (recorded during 1998
every 5, 10, 20, 30 and 60 minutes) show, among their properties tested
with ADF, Ljung-Box, correlation dimension, BDS and Lyapunov exponent, the existence of non linear dependence not explained by deterministic chaos.
This result allows us to apply different econometric models (ARCHGARCH and state-space) and neural networks (feed-forward backpropagation and general regression), both to in-sample and out-of-sample
data and compare outputs with an algorithmic trading system.
The best forecasts, for each model category, are good if compared
with random walk, but statistical errors remain too high to consider them
useful in trading. Outcomes are more interesting when the expected output is a signal for position taking. For all the frequencies, forecasting
models generate better results than Monte Carlo simulations; in terms of
reward/risk index, econometric outputs over-perform neural networks.
Non linear and non-chaotic properties of financial time series seem to
be theoretically coherent with the inability to fit the statistical pattern and
the goodness of directional outputs.
We will try to give answers to the following questions:
1. can structural and black box models be applied in forecasting financial
high frequency data characterised neither by random walk nor by
chaotic patterns?
2. are technical analysis indicators useful in predicting time series dynamics?
DATA DESCRIPTION AND PROPERTIES

High frequency time series examined are recorded on minute by

minute data for the exchange rate Deutsche Mark US Dollar
(DEM/USD) during the period January 12, 1998 to May 8, 1998.
From the original data we have then obtained lower frequency time
series (5, 10, 20, 30 and 60 minutes).
For all the cases (Table 1), in order to exclude the weekend effect,
we consider a period of business time, withholding the observations included in the time span from Friday at 22.30 GMT to the
following Sunday at 22.30 GMT.
Table 1
Time Series Number of Observations
Frequency
DEM/USD n observations
5
21,769
10
11,513
20
5,962
30
4,012
60
2,035

All our models are estimated using daily logarithmic returns (r t)

of the exchange rate. For all the time series we verified the presence
of unit roots, through the ADF test (Augmented Dickey-Fuller),
also considered for the case (with constant term) and t (with
constant term and trend). Results show it is always possible to reject
the null hypothesis of non-stationary data.

38

Table 2 displays some properties (coherently with Muller,

Dacorogna, Pictet, 1995): time series are characterised by asymmetry and high leptokurtosis (even if decreasing for lower frequencies). The normality hypothesis has been refused through the JarqueBera tests.
Data Independence and Autocorrelation Analysis
The evaluation of the existence of serial correlation among data,
essential for the phase of the model specification through AR and/
or MA components, has been achieved with the autocorrelation
coefficients, computed for the first five lags and for time difference
of 50, 100, 150, 200 periods: results allow to underline a significant
first-order autocorrelation, with increasing intensity as frequency
decreases.
Comparable results are obtained through the Ljung-Box Q statistic which confirms the presence of serially correlated observations.
We also computed Q statistics in order to avoid the risk to undervalue the phenomenon in case of conditional heteroskedasticity
[Diebold, 1988]. The test values have not changed for any of the
frequencies of DEM/USD.
Table 2
Descriptive Statistics for DEM/USD
Frequency

10

20

30

60

Min

-0.9400

-0.9093

-0.9093

-0.8338

-0.7803

Max

0.2451

0.4273

0.4296

0.4073

0.5307

Average

0.0000

0.0004

0.0010

0.0000

0.0019

Std. Dev.

0.0316

0.0412

0.0547

0.0662

0.0924

Skewness

-2.2841

-1.9290

-1.4091

-1.3531

-0.8715

Kurtosis

62.8194

42.9152

24.6106

21.4675

12.3715

Jarque-Bera 3,264,662

771,426

117,989

58,236

7,704.5

(0.000)

(0.000)

(0.000)

(0.000)

(0.000)

Finally, the analysis of the coefficients for the squared time series
(xx) and in absolute value (||) allows to confirm the presence of
ARCH components and of asymmetrical reaction functions. Coefficients (xx) and (||) are generally higher than the original series
and remain significant for different lags; moreover, the statistics Qxx
and Q|x| are larger than the corresponding Q' (particularly in the
case of DEM/USD for lag > 5).
Chaotic and Non-Linear Dynamics
We know that time series generated by a chaotic process, if studied through conventional statistical methods like auto-correlation
function or spectral analysis, come into view apparently random.
Brock et. al. [1987] proposed a methodology useful to distinguish
stochastic and deterministic processes through a statistics able to
verify the hypothesis of a series identically and independently distributed (IID). Ashley and Patterson [1989] and Hsieh [1991] demonstrate that the independence of a variable from its past values
does not necessarily imply a white noise process. The alternative
reason for the IID are: chaos, non-stationarity and conditional
heteroskedasticity.
Therefore, we adopted opportune tests [Barnett and Chen (1986);

2000 Edition

IFTAJOURNAL

Frank and Stengos (1988a/b)] like the dimension of correlation, the

BDS test and the Lyapunov exponent, in order to evaluate possible
chaotic behaviours.
The dimension of correlation, independently by the time frequency, increases linearly with m, and this suggests that the underlying data process generation are primarily stochastic. Besides, the
dimension assumes relatively low values, between 1 and 2 (with the
exception of DEM/USD 5 minutes for m=10) and they are always
below the random model values.
The BDS tests [Brock, Dechert and Scheinkman, 1987] allow to
verify whether time series are identically and independently distributed, both for series produced by chaotic systems and for non linear
stochastic systems.
The high BDS values point out that it is not possible to accept the
null hypothesis of IID data, while they suggest that the generating
process is non linear. Besides, the BDS test disconnects the random
model N(0,1) from the chaotic one. The empirical evidences bring
us to conclude that time series are non linear even though not
necessarily chaotic.
A peculiar characteristic of the chaotic systems is the dependence from the starting conditions, with trajectories that diverge
exponentially, despite very similar initial values. The most important tool to quantify the dependence from the initial conditions in
a dynamic system is the Lyapunov exponents [McCafferty et al.,
1992 and Dechert and Gencay, 1993].
Our results are consistent with those previously obtained through
the dimension of correlation and seem to exclude the presence of a
chaotic regime. In fact, being that the Lyapunov exponents are
negative for all the currencies examined and all the frequencies, is
indicative of a stable generating process.
All the empirical results show a strong evidence of the existence
of linear and non linear dependencies for all the examined financial
time series, even though deterministic chaos is not an explanation.
These considerations are coherent with the implementation of
econometric models and neural networks, in order to fit the linear
and non linear components here observed.
Data properties authorise some conclusions:
1. our time series are asymmetrical and leptokurtic, therefore non
normal distribution is a coherent result with that traditionally
obtained for daily and weekly observations;
2. dependencies found in data are not linked with a white noise
generating process; however, as well underlined by Hsieh [1991],
it is opportune to treat this conclusion with extreme caution,
since the higher the frequency the greater the probability of false
dependencies, linked to the market microstructure;
3. the possibility to describe the exchange rate dynamics through
a little dimension chaotic model has been clearly refused. This
result is in contradiction with a large part of financial literature
which found a strong chaotic component for daily and weekly
time series.
FORECASTING METHODOLOGIES

The trading system we tested has been introduced by Saidenberg

[1997]: it is based on the levels of maximum and minimum experienced during the previous day which generate the trading levels
[Appendix].
Besides the algorithmic trading system, we wish to describe the
behaviour of our time series by estimating different kinds of structural models and different neural network architectures. The identification of the structural component is made on the basis of alternative models, characterised by different structures, and of the selection of the most useful variables through stepwise regression.
Besides the classical causal formulations, obtainable from the most
general autoregressive distributed lags and state space models, three

autoprojective models were estimated in order to verify possible

autoregressive and/or moving average structures (ARIMA). Moreover, we compared the models performance to extremely simple
structures, such as random walk. As regards the state space model,
we considered using a multivariate state space representation of an
autoregressive moving average process. The investigation is aimed
at the best fitting for every model, in line with an acceptable error
distribution.
With reference to rt volatility, and in line with techniques broadly
proposed in literature, we used ARCH models [Engle, 1982] which
are able to model the conditional variance, according to an
autoregressive scheme. More complex GARCH models were then
estimated: I-GARCH, M-GARCH and E-GARCH. AIC index was
then used in model selection.
The types of neural network architectures used in forecasting rt are
as follows:
1. Standard connections: a) with three layers; b) with four layers; c)
with five layers.
2. Recurrent networks: a) input layer back into input layer; b) hidden layer back into input layer; c) output layer back into input
layer.
3. Feature detectors: a) with two different activation functions; b)
with three different activation functions; c) with two different
activation functions plus jump connection.
4. Jump connections: a) with three layers; b) with four layers; c) with
five layers.
5. General Regression Neural Network.
Back propagation networks utilise various activation functions,
such as linear, logistic, Gaussian and tangent and were tested using
several learning rates and momentum. Optimal average values are
0.1 for both parameters. General regression neural network is tested
in the 20-300 range of genetic breeding pool size and with Euclidean
and city block distance metric.
THE ECONOMETRIC RESULTS

The study is aimed at evaluating the opportunity to use technical

indicators as inputs into state-space and ARCH-GARCH models.
The indicators we used as input are the following:
1. Lower and upper Bollinger Bands
2. Differenza fra medie mobili ponderate lineari (Linearlyweighted moving average difference)
3. Linear extrapolation
4. Linear regression
5. Linear regression slope
6. Linear weighted moving average
7. Differential moving average
8. Exponential moving average
9. Lagged exponential moving average
10. Wilders RSI
Besides, we found out the goodness of outputs as financial signals produced by the single model in a trading system.
Our trading system is based on the following rules: every forecast
is a signal and the trader is assumed to take a position (long, short,
hold) Pt{-1;+1} of constant magnitude. Forecast is exact if it equals
the observed sign of r t, otherwise it produces a loss. In order to
compare structural and black box returns, we computed the perfect
trading system, i.e. the result we could obtain by taking all the right
positions in every period t.
Trading System Outcomes
Empirical results generated by the algorithmic trading system
underline the stability of the model for the different frequencies. On
average, the system introduces a good reliability (60.7%). If we
analyse long and short signals, the former show a lower reliability

39

2000 Edition

IFTAJOURNAL
(50.5%) than the latter (71.2%). The following conclusions can be
formulated (Table 3):
1. the model furnishes both long and short indications;
2. winning trades are relatively high (around 60%);
3. the average performance of the single operations is low (0.0021);
4. the system does not lose the big movements of market;
5. equity lines are very similar, independently from the time frequency.
Table 3
Trading System Report for DEM/USD (10 minutes)
Total net profit

0.0947

Open position P/L

Gross profit

0.2087

Gross loss

47

Percent profitable

Number winning trades

24

Number losing trades

0.0394

0.0000

Table 5
State-Space Trading System DEM/USD

-0.1140

Total # of trades

Largest winning trade

The trading purpose allows to improve significantly the estimation quality of the model (Table 5), since the magnitude of forecasting error becomes less important [Dacorogna, Muller, Jost, Pictet,
Olsen, Ward, 1996].
1. We do not see a performance improvement as the time frequency
decreases;
2. the percentage with respect to the perfect model is not high if
compared with the trading system functioning;
3. the reward-risk index, which is decreasing with the frequency,
points out the presence of risk premia (spread), especially for the
highest frequencies.

Largest losing trade

51%
23

Frequency

Simulation number

60

1,151

596

401

203

979

609

266

176

66

2.82

3.42

3.79

1.34

161.12

138.76

175.78 204.14

48.96

Correct signals number (%)

50.25

52.30

51.51

57.61

57.71

Turning Points (%)

44.73

51.97

40.94

44.57

26.14

-0.003

-0.260

-0.342

Reward Risk Index

11.64

10.84

9.99

12.78

3.28

Perfect Model (%)

6.59

19.55

16.50

23.32

12.15

Average losing trade

-0.0050

Ratio avg win/avg loss

1.7544

Avg trade(win & loss)

0.0020

Annual return

Max consec. Winners

Max consec. Losers

Avg # bars in winners

71

Avg # bars in losers

46
1.8307

State-Space Model Identification

The multivariate ARMA model estimation written in a statespace form implies the following steps:
1. preliminary fitting of a sequence of autoregressive models based
on Yule-Walker equations in order to identify the order of the
model corresponding to the minimum AIC index value;
2. identification of the technical indicators as input in the state
vector through canonical correlation analysis;
3. estimation of the model parameters by maximising the likelihood function.
The model identification has been realised testing, for all the
frequencies of our two currencies, alternative models by explicative
variables and by autoregressive structure.
Empirical results (Table 4) show how the pattern is not adequately
captured by the models; in addition, passing from higher frequencies (5 and 10 minutes) to lower ones (30 and 60 minutes), the
interpretation of the phenomenon does not improve, both in-sample
and out-of-sample.
Table 4
Estimation Fitting
Freq.

In-sample fitting
N obs.
M.A.E.
M.S.E.

19,592

0.02178

0.00101

2,177

0.02058

0.00082

10

10,362

0.02814

0.00170

1,151

0.02589

0.00131

20

5,366

0.03750

0.00294

596

0.03531

0.00236

30

3,611

0.04422

0.00433

401

0.03976

0.00329

60

1,832

0.06386

0.00848

203

0.05481

0.00667

Out-of-sample fitting
N obs.
M.A.E.
M.S.E.

The analysis of the error component exhibits the presence of an

asymmetry associated with a significant leptokurtosis already found
for the original variables; the Jarque-Bera test allows us to conclude
that we deal with non normal distributions. The Lyung-Box test
values, with particular reference to (xx) and (||), point out the
presence of a notable heteroskedasticity degree. Performance improvement can be obtained through volatility information
[Bramante, Colombo, Gabbi, 1998, and Timmer, Weigend, 1997].

40

30

2.94

0.0087

Profit factor

20

Operations number

Average winning trade

-0.0457

2,177

10

-0.0240

Period return

Max drawdown

Max-Drawdown

-0.296 -0.410

Monte Carlo Simulations

Period return
Correct signals number (%)

2.90

2.79

3.44

3.83

1.32

51.31

52.75

51.68

57.9

57.72

1. the number of correct signals is superior than 50% both for insample and out-of-sample estimates;
2. the operational degree is coherent with the different level of
volatility found for the time series;
3. the number of current signals is significantly higher than Monte
Carlo simulations.
Identification and Estimation of ARCH-GARCH Models
The identification of ARCH and GARCH models has been conducted by testing four alternative models, characterised by different
complexity levels, through the application of stepwise regressions:
the general polynomial model with distributed delays; the ARMA
model; the random walk; the random walk plus drift.
The error analysis of M.A.E., M.S.E., SIC and AIC, shows little
descriptive ability of the single econometric structures. This means
that technical indicators used as inputs are not explanatory variables able to recognise the pattern of exchange rate.
The identification of the conditional variance model has been
led up experimenting alternative structures (ARCH, GARCH, IGARCH, GARCH-M and E-GARCH), with different number of
parameters, and comparing the indicators (AIC and SIC) generally
used to select competitive models.
The implementation of the ARCH component has made possible an improvement of the phenomenon interpretation and the
statistical characteristics of errors (leptokurtosis, symmetry, serial
autocorrelation). The data generating process seems to be
characterised by an increasing memory by time frequency.
Among all the alternative models, E-GARCH and GARCH-M
seem to be preferable, since they minimise AIC and SIC indicators.
Very meaningful is the risk premia (spread) (d) incorporated in the
scheme GARCH-M. This parameter assumes more elevated values

2000 Edition

as frequency decreases. Likewise, it is considerable the effect of

asymmetrical answer ( in E-GARCH), even if the relative value
seems to be independent by the time frequency.
Estimated models can be used for interesting applications, such as:
1. accurate forecasting of exchange rates for all the frequencies;
2. finding out forecasting intervals more accurately, especially with
volatility cluster and using theoretical measure of volatility to
improve the trading rules [Zhou, 1996].
Forecasting accuracy and trading system. Results have been operationally experienced into the trading system previously described.
Simulations emphasize that all the models are characterised by
positive performance, especially if compared with Monte Carlo
outcomes. Similar findings are offered by quality indicators such as
number of correct signals and percentage of turning point.
ARCH-GARCH models, better than Monte Carlo simulations,
distinguish the periods in which markets offer higher economic
returns. Operational degree and economic annual return worsen as
time frequency decreases. In fact, annual return should be compared
to the perfect model, to quantify the quality of forecasting activity:
it emerges that the trading system increases its accuracy for lower
frequencies, both for in-sample and for out-of-sample time periods.
Trading system and operational filters. Since the availability of efficient forecasting intervals is usually more interesting than the
instant prediction, we can use ARCH component to build these
kinds of intervals. In our case, the particular dynamics of our financial time series makes this criterion excessively discriminating, allowing the trading system to operate in few occasions only.
Alternatively, volatility indications can be used as tracking signal to find the moments of excessive noise, during which it is more
convenient to apply a stand-by strategy [Bramante, Colombo, Gabbi,
1998]. By the comparison of results with the two trading rules, the
inclusion of a trace signal leads to a significant improvement of
the risk/return indicator.
There are still many aspects that deserve opportune deepening:
a. firstly, our estimations do not allow us to verify the existence of
a threshold level valid for all the considered time series;
b. secondly, the individualisation step requires terms hardly compatible with the normal operational demands.
ARCH and GARCH models do not demonstrate a good ability
to define the structural component; in all the cases, the use of the
technical analysis indicators do not generate a considerable progress
in the interpretation of the single events.
The inclusion in the model of an ARCH component allows to
improve the fitting of the experimented models, reducing the level
of leptokurtosis and asymmetry of the error terms. The existence of
a risk premium guides us to a partial superiority of the GARCH-M
scheme.
Moreover, the knowledge of a theoretical measure of volatility
improves the reliability level of the trading system, through the use
of a tracking signal able to distinguish periods of excessive volatility
when it should be more convenient not to operate.
Empirical Verification with Neural Networks
A first evaluation of the results altogether reached with neural
networks shows a modest performance in statistical terms. The only
remarkable difference between BPNN and GRNN is the value of
the coefficient of determination (R2). The data analyses show a
meaningfully better result for the general regression neural networks (Table 6).

IFTAJOURNAL
Table 6
Statistical Results of the Neural Networks (generalisation set)
Frequency

MSE

MAE

Min R2

Max R 2

0.001

0.021

0.0018

0.0069

10

0.002

0.028

0.0000

0.0103

20

0.002

0.036

0.0029

0.0252

30

0.005

0.048

0.0176

0.0387

60

0.007

0.059

0.0561

0.0910

Errors generated by the application of neural networks to the

generalisation set can be analysed using symmetry and normality
tests already used in the econometric evidences. With reference to
the skewness, results (Table 7) are close to the expected value (equal
to 0, in the case of perfect symmetry of the observations) only for the
frequencies 5 and 20 minutes, both for the back-propagation and for
the general regression. Similar considerations can also be made for
the kurtosis, which should assume a value equal to three in case of
normality.
Table 7
Error Properties (generalisation set)
Frequency Skewness

Kurtosis

Jarque-Bera

Q|x|

Qxx

2,177

73.715

251.61

(0.000)

(0.016)

(0.000)

27,864

65.667

21.294

(0.000)

(0.068)

(1.000)

381

36.206

38.210

(0.000)

(0.928)

(0.889)

3,609

57.390

9.773

(0.000)

(0.220)

(1.000)

-0.304

4.882

10

-2.218

23.826

20
30

60

0.455
-2.034

1.146

3.867
14.365

4.640

210

64.630

56.623

(0.000)

(0.080)

(0.242)

With reference to the financial meaning of results (Table 8), an

elevated annual performance is observed meaningfully.
Table 8
Financial Results of Neural Networks (generalisation set)
Frequency
Results

10

20

30

60

Annual Trading (%)

216.30

148.88

90.00

170.11

140.74

Perfect trading (%)

6.98

8.89

8.42

16.97

24.45

Correct signals (%)

50.80

50.84

76.35

53.90

56.56

0.27

0.57

0.34

0.66

0.63

12.08

4.70

5.16

4.92

4.70

Max drawdown
Reward/Risk Index

Out of 60 back-propagation networks estimated (Table 8), only

five generate negative results with a range characterised by a maximum of 379.6 and a minimum of 13.1% per year.
The higher performances are referable to the trading realised on
the 5 minutes frequency, while the lower average is corresponding
to the hourly frequency. This result is different by the percentage
incidence of the correct movements: the BPNNs record 57% of
good signals, while GRNN records only 54%. A meaningful outcome is related to the frequency of the BPNN with more good than
bad signals: out of 60, 54 neural networks.
The wide number of architectures here applied to forecast the two

41

2000 Edition

IFTAJOURNAL
currencies over the five time frequencies allows us to draw some
useful considerations for the ex-ante choice problem.
Although we do not have elements for a generalisation, all the
results show that the network typology is indifferent for M.S.E. and
M.A.E., which assume the same values for all the BPNN. The choice
rule, therefore, can be the training duration. The most rapid architectures are the jump-connection types and the two and three hidden layers standard connection networks. In all the different cases,
the highest duration of training is recorded by the Jordan-Elman
architectures.
If measured by the coefficient of determination (R2), statistical
quality shows that architectures are very different with each other:
for the DEM/USD exchange rate recorded every 20 minutes, the
architecture n.7 records an R2 eight times higher with respect to the
network n.2.
The reliability of these results can be synthetically calculated
through the RI index proposed by Bramante, Colombo and Gabbi
[1998]:

where O1 and O2 are the first and the second objective. RI index
varies between 0 (least reliability) and 100 (maximum reliability).
Crossing the results of the coefficient of determination and the
financial trading result (performance and number of the correct
signals) we obtain the Table 9. Data show how the reliable neural
networks for statistical purposes become less reliable when financial
trading is the final goal.
Empirical results allow to make some considerations on the architectures choice:
1. the preferable standard connections neural networks has only
one hidden layer; this is true both for statistical error and for
trading performance optimisation. Training duration is, on average, short (especially in the case of two and three hidden layers), like the jump-connection networks which show higher
performance;
Table 9
Reliability Index
O1
O2

DEM/USD

Performance
R2

Correct signals
R2

Performance
Correct signals

41.67

50.00

72.22

1. with reference to the jump connection neural networks, the

choice of the hidden layers number does not depend on the
purpose but, at least in our estimates, on the phenomenon we
studied;
2. relative to the networks with multiple activation functions, statistical results show a meaningful homogeneity of all the three
types of the architectures; simpler is the choice if the objective
is constituted by the financial result, which is maximised by the
three activation functions networks;
3. finally, in the case of the Jordan-Elman networks, a notable
volatility behaviour is recorded, by frequency, by objective and
by market; the only clear indication is the outcome generated by
the net with feedback between output and inputs for the finality
of the coefficient of determination optimisation.
Financial results produced by the application of neural outputs to
the trading system depend on the nature of the entry and exit rules
and on the filters eventually applied. Table 10 shows that all the 12
financial outcomes have positive values and always higher than
random results simulated with a Monte Carlo method. Although in
two cases (10 and 20 minutes) Monte Carlo simulation is preferable, similar considerations apply to correct signals (Table 10).

42

Table 10
Neural Networks and Monte Carlo Simulations Results
Trading

Correct Signals

Freq.

BPNN

GRNN

BPNN

GRNN

M-Carlo

216.3

376.4

M-Carlo

6.20

50.80

53.06

48.95

10

139.4

219.5

-15.32

50.84

50.04

51.90

20

90.0

203.2

-20.64

56.35

54.29

57.08

30

170.1

204.1

-17.17

53.90

52.87

49.83

60

140.7

155.1

3.07

56.56

61.39

49.93

A useful indicator to evaluate this result is the maximum drawdown, that presents the best payoff for the most elevated frequency
(Table 11).
Table 11
Results Order in Terms of Return/Risk by Time Frequency
Maximum Drawdown

Reward/Risk Index

Frequency

BPNN

GRNN

BPNN

10

20

30

60

GRNN

This result is substantially confirmed by the indicator that compares the output to the loss (reward/risk index). The worse values
are referable to the lowest frequencies (60 and 30 minutes).
Empirical and Methodological Comparison

Statistical Outcomes
In order to verify the statistical quality of the study, we compare
all the results among them: firstly, we consider the optimisation of
the differential between expected and real output; in second place,
we evaluate residuals properties.
Econometric and neural network results can be measured up by
different indicators: we choose M.A.E., since it is less influenced by
the underlying methodology. M.A.E. computed on out-of-sample
data emphasises the preferred aptitude of GARCH models (Table
12).
In fact, only GARCH models perform error values significantly
lower than random walk. State-space estimations do not diverge
remarkably from random decisions that often exhibit better M.A.E.
than neural networks.
Table 12
M.A.E. (out-of-sample)
Random
Walk

ARCH
GARCH

State-Space

BPNN

GRNN

0.022

0.002

0.021

0.021

0.022

10

0.028

0.003

0.026

0.028

0.028

20

0.037

0.006

0.035

0.036

0.037

30

0.044

0.009

0.040

0.048

0.043

60

0.062

0.020

0.055

0.059

0.060

Frequency

With regard to error characteristics, the first evaluation is symmetry approximated by skewness (Table 13).

2000 Edition

IFTAJOURNAL
Table 13
Skewness (in-sample)
Random
Walk

ARCH
GARCH

StateSpace

BPNN

GRNN

-2.269

-0.642

-2.303

-2.269

-2.823

10

-1.917

-0.534

-1.959

-1.928

-1.986

20

-1.312

-0.355

-1.235

-1.263

-0.834

30

-1.275

-0.522

-1.267

-1.402

-1.404

60

-0.871

-0.367

-0.878

-0.931

-0.869

Frequency

Only ARCH and GARCH models provide symmetrical errors.

Neural networks, above all GRNN, give results not too different
from the random walk. Results based on data kurtosis (Table 14),
only in the case of the ARCH-GARCH models assume lower values
than the random walk. Positive results show that outputs are distributed with tails thicker than the normal distribution.
Table 14
Kurtosis (in-sample)
Frequency

Random
Walk

ARCH
GARCH

State-Space

BPNN

GRNN

60.63

11.08

59.30

59.25

74.68

10

40.47

6.45

40.22

40.77

40.96

20

21.58

5.12

20.68

20.96

15.63

30

18.19

6.44

18.38

19.04

18.90

60

9.46

4.80

9.30

10.06

9.49

Values improve when frequency reduces and E-GARCH model

is able to gather better than the alternative methodologies. In fact,
errors produced by neural networks show inadequate characteristics
of kurtosis, even worse than random walk.
The estimation comparison shows that black-box findings are
rarely useful to learn the underlying pattern of time series, even
though, among them, we appreciate a moderate preference for GRNN
outcomes.
Econometric schemes are preferable, but the choice is for the
ARCH-GARCH type; especially E-GARCH and GARCH-M give
a better performance for the extraction of non-linear components
in the time series.

Financial Outcomes
In first place, we compare output quality of our trading systems.
The rate of occurrence of signal correctness is a proxy for reliability
of the system. Table 15 compares these results with Monte Carlo
simulations.
Table 15
Correct Signals (out-of-sample)
Freq.

Monte
Carlo

Trading
Systems

ARCH
GARCH

StateSpace

BPNN

48.97

51.99

50.25

52.66

53.06

10

49.57

61.29

53.64

52.30

52.26

50.04

20

49.84

61.96

52.06

51.51

57.31

54.29

30

49.75

58.24

54.81

57.61

55.25

52.87

60

49.99

61.80

55.56

57.71

58.42

61.39

GRNN

All the trading systems based on econometric and neural network

outputs perform levels higher than 50 percent. The most remarkable difference in respect with statistical analysis is the heterogeneous distribution of the best performances: neural networks show
seven bests, while econometric models dominate in three cases only.

Our results demonstrate that econometric and black box models

are competitive only on lower frequencies. An interesting way to
evaluate the forecasting quality is quantifying models capability to
intercept the most extensive differences.
Table 16
% Perfect Model for DEM/USD (out-of-sample)
Trading
System

ARCH
GARCH

StateSpace

BPNN

GRNN

12.44

6.59

10.75

8.38

10

13.23

12.20

19.55

10.55

24.87

20

13.78

15.49

16.50

13.39

20.99

30

19.04

14.25

23.32

12.32

29.66

60

18.48

21.64

12.15

18.71

15.45

Frequency

Table 16 shows the percent ratio of profitability calculated comparing results with the perfect trading model. In this case, neural
networks exhibit the best outcome in six cases out of ten. In order
to consider the risk component we present the reward/risk index,
computed as the ratio between the total net profit of the system and
the maximum drawdown.
Table 17 shows that ARCH and GARCH models, despite the
low percentage of correct signals, are able to record an index value
on average higher than neural networks and state-space schemes.
Table 17
Reward/Risk Index for DEM/USD (out-of-sample)
Trading
System

ARCH
GARCH

StateSpace

BPNN

GRNN

25.82

11.64

18.11

8.27

10

3.57

14.45

10.84

7.37

7.92

20

3.51

11.75

9.99

10.31

8.89

30

9.06

7.33

12.78

5.90

9.13

60

3.04

5.76

3.28

5.41

8.87

Frequency

The comparison of financial forecasting results allows one to underline an high competitiveness of the alternative models to the
ARCH-GARCH ones, especially if the analysts purpose is based on
signals reliability.
Generally speaking, if we consider altogether profitability and
risk, econometric methodologies appear the most efficient, although
it is impossible to determine a universal using rule.
CONCLUSIONS

Non-linear and not-chaotic characteristics of time series are hardly

consistent with the possibility to explicit their structure through
econometric models so to obtain a reliable forecast.
This conclusion comes out from the ARCH-GARCH and statespace schemes: an autoregressive component does not exist (but a
modest third order factor) to justify the exchange rate behaviour, at
least during the period examined and for the analysed time frequencies.
The results are, therefore, coherent with this outcome: our research shows that errors tend towards an asymmetric and non normal distribution.
However, non linearity offers the opportunity to produce meaningful output in financial terms, especially to evaluate: a) volatility;
b) turning points; c) position taking.
Comparison between econometric models and neural networks
architectures suggests a supremacy of the former: GARCH solutions, in particular, are able to fit the high volatility found in the
market. The algorithmic trading system shows better performance
in terms of correct signals.

43

2000 Edition

IFTAJOURNAL
Our results contribute to acceptance of the empirical hypothesis
that, knowing the properties of the series, analysis phase is possible
to find out the forecast quality. If a chaotic component is not found
it is hard to model the pattern structure of time series, but non
linearity helps to generate useful signals for financial applications.
GLOSSARY

AIC
ADF
ARCH
ARIMA
BPNN
GARCH
E-GARCH
I-GARCH
M-GARCH
GRNN
MAE
MSE
RI
SIC

Akaike Information Criterion

Augmented Dickey Fuller
Autoregressive Conditional Heteroschedasticity
Autoregressive - Integrated - Moving Average
Back-propagation neural networks
Generalized Autoregressive Conditional
Heteroschedasticity
Exponential GARCH
Integrated GARCH
Mean GARCH
General Regression Neural Network
Mean Absolute Error
Mean Squared Error
Reliability Index
Schwarze Information Criterion
APPENDIX

Algorithmic Trading System (TradeStation)

input: f1(0.05),f2(0.35),f3(0.55),reverse(0.006);
vars:ssetup(0),bsetup(0),senter(0),benter(0),bbreak(0),sbreak(0),
ltoday(0),htoday(9999),startsys(0),div(0),
Sell1(0),Sell2(0),Sell3(0), Buy1(99999),Buy2(99999),Buy3(99999);
if currentbar=1 then startsys=0;
if Date>Date[1] then begin
startsys=startsys+1;
bsetup=ltoday-f1*(htoday-close[1]);
ssetup=htoday+f1*(close[1]-ltoday);
senter=((1+f2)/2)*(htoday+close[1])-(f2)*ltoday;
benter=((1+f2)/2)*(ltoday+close[1])-(f2)*htoday;
bbreak=ssetup+f3*(ssetup-bsetup);
sbreak=bsetup-f3*(ssetup-bsetup);
htoday=h;ltoday=l;
end;
if high>htoday then htoday=high;
if low<ltoday then ltoday=low;
Sell1=0;Sell2=0;Sell3=0;
Buy1=99999;Buy2=99999;Buy3=99999;
if startsys>=2 and Date>entrydate(1) then begin
if marketposition=-1 then Buy1=entryprice+reverse; {BUY LEVEL STOP AND
REVERSE}
if marketposition= 1 then Sell1=entryprice-reverse; {SELL LEVEL STOP AND
REVERSE}
(BUY REVERSAL LEVEL)
if ltoday<=bsetup and marketposition<> 1 then Buy2=benter-(bsetup-ltoday)/
3;
{SELL REVERSAL LEVEL}
if htoday>=ssetup and marketposition<>-1 then Sell2=senter+(htodayssetup)/3;
if marketposition=0 then Buy3=bbreak; {BREAKOUT BUY LEVEL}
if marketposition=0 then Sell3=sbreak; {BREAKOUT SELL LEVEL}
end;
IF (Sell1>=Sell2 AND Sell1>=Sell3) THEN SELL at Sell1 stop
ELSE IF Sell2>=Sell3 THEN SELL at Sell2 stop
ELSE SELL at Sell3 stop;
IF (Buy1<=Buy2 AND Buy1<=Buy3) THEN BUY at Buy1 stop
ELSE IF Buy2<=Buy3 THEN BUY at Buy2 stop
ELSE BUY at Buy3 stop;
REFERENCES

44

Ashley R.A., Patterson D.M., 1989, Linear versus Nonlinear Macroeconomics: A Statistical Test International Economic Review, 30
(3), 685-704.
Barnett W., Chen, P., 1986, The Aggregation-Theoretic Monetary
Aggregates are Chaotic and Have Strange Attractions, in W. Barnett,
E. Berndt and H. R White (eds), Dynamic Econometric Modelling. Cambridge: Cambridge University Press.

Bramante R., Colombo R., Gabbi G., 1998, Are Neural Network
and Econometric Forecasts Good for Trading? Stochastic Variance
Model as a Filter Rule, in A.-P. N. Refenes A. N. Burgess J. E.
Moody (eds), Decision Technologies for Computational Management Science, Kluwer Academic Publishers, Boston.
Brock W.A., Dechert W.D., Scheinkman J.A., 1987, A Test for
Independence Based on the Correlation Dimension, Working Paper,
University of Houston and University of Chicago.
Dacorogna M.M., Muller U.A., Jost C., Pictet O.V., Olsen R.B.,
Ward J.R., 1996, Heterogeneous Real-time Trading Strategies in the
Foreign Exchange Market, in C. Dunis (eds.) Forecasting Financial Markets, John Wiley, New York.
Dechert W.D., Gencay R., 1993, Lyapunov Exponents as a Nonparametric Diagnostic for Stability Analysis, Journal of Applied
Econometrics, 7, S41-S61.
Diebold F.X., 1988, Lecture Notes in Economics and Mathematical
System, Springer-Verlag, New York.
Engle R.F., 1982, Autoregressive Conditional Heteroskedasticity with
Estimates of the Variance of United Kingdom Inflation, Econometrica,
50, 987-1008.
Frank M.Z., Stengos T., 1988a, Chaotic Dynamics in Economic
Time Series, Journal of Economic Surveys 2, 103-133.
Frank M.Z. Stengos T., 1988b, Some Evidence Concerning Macroeconomic Chaos, Journal of Monetary Economics 22, 423-438.
Hsieh D. A., 1991, Chaos and Nonlinear Dynamics: Application to
Financial Market, The Journal of Finance, No.5.
McCafferty D.F., Ellner S. Gallant A.R., Nychka D.W., 1992,
Estimating the Lyapunov Exponent of a Chaotic System with Nonparametric Regression, Journal of American Statistical Association, 87.
Muller U.A., Dacorogna M.M., Embrechts P., Samorodnitsky
G., 1995, How Heavy are the Tails of a Stationary HARCH Process? A Study of the Moments, Internal document O&A Research
Group.
Saidenberg R., 1997, Trading with a 100% Mechanical Approach,
Workshop Proceedings, Milan.
Timmer J., Weigend A.S., 1997, Modelling Volatility Using State
Space Models, in International Journal of Neural Systems, Vol. 8,
No. 5.
Zhang G., Patuwo B. E., Hu M. Y., 1998, Forecasting with Artificial Neural Networks: The State of the Art, International Journal
of Forecasting, vol. 14.
Zhou B., 1996, Forecasting Foreign Exchange Rates Subject to Devolatilization, in C. Dunis (ed), Forecasting Financial Markets
Exchange Rates, Interest Rates and Assets Management, John
Wiley & Sons, Chichester, England.
THE AUTHORS

Giampaolo Gabbi graduated in Economics at University of Parma,

Ph.D. in Financial Economics at Bocconi University Milan, Associate Professor of Banking and Management Department, University of Siena, Italy and in the Credit Area, SDA Bocconi, Milan
Ruggero Colombo graduated in Economics at Catholic University of Milan, Professor of Statistics at Institute of Statistics, Catholic University, Milan
Riccardo Bramante graduated in Economics at Catholic University of Milan, Professor of Statistics at Institute of Statistics, Catholic University, Milan
Maria Paola Viola graduated in Economics at Catholic University of Milan, Risk Manager at RAS, Milan
Paolo De Vito graduated in Information Technology at University of Turin, CEO of IT Trading, Turin
Alberto Tumietto graduated in Economics at Bocconi University, Milan; Private Banking Manager at Banca Nazionale
dellAgricoltura, Milan; President of SIAT, Italian Technical Analysts Association

2000 Edition

IFTAJOURNAL

he International Federation of Technical Analysts (IFTA), incorporated

in 1986, is a global organization of market analysis professionals. This not-for-profit
federation has four main goals:
Provide a centralized international exchange for information, data, business
practices, local customs and all matters
related to technical analysis in various financial centers.
Provide meetings and encourage the interchange of material, ideas and information for the purpose of adding to the
knowledge of the colleagues of the individual Member Societies. (The Society
is the Member and individual members in
each society are referred to as colleagues.)
Foster the establishment of local (country) societies of technical analysts around
the world.
Encourage the highest standards of professional ethics and competence among
technical analysts worldwide.
These four goals are accomplished by the
dedication and involvement of many IFTA
colleagues around the world. The following
committees were established to complete
these mandates:
Annual Conference Committee
Newsletter Committee
Journal Committee
Accreditation Committee
Education Committe
Data Committee
Membership Committee

INTERNATIONAL FEDERATION OF
TECHNICAL ANALYSTS, INC.

Developing Society
Any individuals can start a Developing
Society with the intent of establishing a
formal Member Society in the future.
They can attend all meetings of IFTA, as
observers.
They cannot vote.
They will receive all IFTA Newsletters,
Journals and meeting notes for a minimum fee.

TERMINATION OF MEMBERSHIP

The membership of any Member Society

in IFTA may be terminated or suspended
if such termination or suspension is recommended by a vote of two-thirds (2/3)
of the entire Board of Directors and is
adopted by the affirmative vote of twothirds (2/3) of the total delegate votes at
the Annual Meeting or a special meeting.
In addition, the membership of any Member Society may be automatically suspended for nonpayment of dues, or as
otherwise provided for in the By-Laws.

Subject to Board approval and payment

of past dues.

LIMITATIONS

Only one (1) Member Society shall be

permitted to join from each country. (The
United States of America is deemed an
exception due to its two (2) societies that
existed before IFTA was created: the
Market Technicians Association and the
Technical Securities Analysts Association of San Francisco.)
APPLICATION

Membership Requirements
There are two classes of members: Member Societies and Developing Societies.
Member Society
Each Society is a Member of IFTA and
must have at least 5 individuals showing an
interest in technical analysis; these people
are now referred to as Colleagues of IFTA.
Colleagues must meet locally established
ethical standards.
Member Societies must have regularly
scheduled meetings.
Member Societies can vote.
Member Societies will receive all IFTA
Newsletters, Journals and meeting notes.
Member Societies pay annual dues.

minimum requirements of membership in

the Federation as they are amended from
time to time. Member Societies must
submit a current updated list of their
Colleagues in order to establish correct
dues payments.

Each application for membership in the

Federation shall be accompanied by (a)
copies of the applicant societys Constitution or Articles and By-Laws, (b) a brief
history of the society, together with a
statement of its current activities, (c) a
complete roster of its Colleagues history
and specialty in technical analysis and
occupations, and (d) payment of one (1)
years dues in advance.
ADMISSION PROCEDURE
MEMBER SOCIETIES

New applications for admission as a Member Society shall be submitted to the

Membership Committee Chairperson.
The Membership Committee is constituted to pass on all applications and
present its recommendations to the Board
of Directors. All applications must be approved by the Board of Directors.

Member Societys term of membership

shall be for a period of one year and is
automatically renewable upon the payment of annual dues. All Member Societies at the time of renewal shall formally
indicate that they continue to meet the

TERMS OF MEMBERSHIP

REINSTATEMENT

Guideline Code of Ethics

The technical analyst (IFTA Colleague)
must maintain at all times the highest standards of professional conduct. Implicit in
the requirement is strict compliance with the
laws of the national, state and local governments which have jurisdiction over the analysts professional activities. The analyst shall
also obey the regulations of his/her local stock
exchange and/or local regulatory authorities.
The analyst shall not make statements
which he/she knows or has reason to believe
are inaccurate or misleading. He/she shall,
in particular, be careful to avoid leading the
audience to believe that his/her technicallyderived views of future price behavior reflect
foreknowledge rather than estimate and projections subject to reexaminations and, as
circumstances may dictate, to change.
The analyst shall not make statements concerning the current technical position of the
financial markets or any of their components
or any of their aspects unless he/she can demonstrate that such statements are reasonable
and consistent in light of the available evidence and the accumulated knowledge in the
field of technical analysis. New departure in
technical analysis as well as modifications of
existing techniques or concepts should be
fully documented as to procedure and rationale.
Further information is available on the IFTA
website: www.ifta.org

The International Federation of Technical Analysts (IFTA) is not responsible for any material published in this Journal and publication of any
material or expression of opinions does not necessarily imply that IFTA agrees with them. IFTA is not authorised to conduct investment business
and does not provide investment advice or recommendations.
Articles are published without responsibility on the part of IFTA, the editor or authors for loss occasioned by any person acting or refraining
from action as a result of any view expressed therein.

45

2000 Edition

IFTAJOURNAL

1999-2000 IFTA
Board of Directors

Committee Chairs

Chairperson

Finance Committee Chairperson

Public Relations

Bruno ESTIER (SAMT)

Lombard Odier & Cie
Phone: (41) 22 709 2041
Fax: (41) 22 709 2911
E-mail: bruno.estier@LombardOdier.ch

Joerg SCHREIWEIS (VTAD)

DG Bank
Phone: (H) (49) 6174 61116
Fax: (49) 69 7447 7980
E-mail: maria-gabriela_stepf@dgbank.de

Robin GRIFFITHS (STA/MTA)

HSBC Securities Inc
Phone: (1) 212 658 4304
Fax: (1) 212 658 4480
E-mail: robin_griffiths@hsbcny.com

Vice-Chairperson The Americas

Membership & New Development

Committee Chairperson

Academic Interface

Nina COOPER (MTA)

Pendragon Research Inc
Phone: (1) 815 244 4451
Fax: (1) 815 244 4452
E-mail: ngcooper@internetni.com

Carl GYLLENRAM (STAF)

S E B Kapitalfrvaltning
Phone: (46) 31 62 18 48
Fax: (46) 31 62 18 50
E-mail: carl-gustav.gyllenram@seb.se

Vice-Chairperson Europe & Africa

Julius De KEMPENAER (VTA)
AMSTGELD NV
Phone: (31) 20 528 2867
Fax: (31) 20 624 3358
E-mail: jdekempenaer@amstgeld.com

Education Committee Chairperson

Vice-Chairperson Pacific Region

Accreditation Committee Chairperson

Hiroshi OKAMOTO (NTAA)

Phone: (81) 3 5542 2257
Fax:
(81) 3 5542 2258
E-mail: [via] ntaa@mug.biglobe.ne.jp

Tony REEVES (ATAA)

Kaplin Reeves & Co.
Phone: (61) 29 299 6797
Fax: (61) 29 299 6069
E-mail: reevesa@ozemail.com.au

Claude MATTERN (AFATE)

BNP Paribas
Phone: (33) 1 43 16 98 39
E-mail: claude.mattern@bnpparibas.com

Treasurer

Data Committee Chairperson

Bill SHARP (CSTA)

Valern Investment Management
Phone: (1) 905 338 7540
Fax: (1) 905 845 2121
E-mail: bsharp@valern.com

Adam SORAB (STA)

Credit Suisse First Boston
Phone: (44) 171 888 7240
Fax: (44) 171 888 7498
E-mail: Adam.Sorab@csfb.com

Secretary

Communications Committee
Chairperson

Bronwen WOOD (STA)

Phone: (44) 1932 850282
Fax: (44) 1932 850282
E-mail: none at present

Len SMITH, CMT (MTA)

Phone: (1) 360 834 3021, ext. 3590
Fax: (1) 360 244 6449
E-mail: lensmith@teleport.com

Immediate Past Chairman & Body of

Knowledge Chairperson

IFTA Conference 2000 Committee

Chairperson

John BROOKS, CMT (MTA)

Yelton Fiscal Inc.
Phone: (1) 770 645 0095
Fax: (1) 770 645 0098
E-mail: JBrooksgcm@aol.com

Administration/ Business Manager

Michael SMYRK
Town House, High Street
Haslemere, Surrey GU27 2JY, England
Phone: (44) 1428 643310
Fax: (44) 1428 641080
E-mail: michael.smyrk@ifta.org

46

Hartmut SIEPER (VTAD)

Phone: (49) 6127 5921
Fax: (49) 6127 5978
E-mail: VTAD@aol.com

Conference Advisory Committee

Chairperson
Frank VLUG, CEFA (VTA)
IRIS/Robeco Nederland B.V.
Phone: (31) 10-2242833
Mobile: (31) 651268322
E-mail: F.Vlug@robeco.nl

Bernardino BRANCA (SIAT)

FIBRA SPA
Phone: (39) 02 945 99801
Fax: (39) 02 945 99973
E-mail: general@intermarketinv.com

Directors at Large
Ralph ACAMPORA, CMT (MTA)
E-mail: ralph_acampora@prusec.com
Larry BERMAN, CTA, CMT (CSTA)
E-mail: bermanl@cibc.ca
Patty BERRY (AMAT)
E-mail: pcberry@cbbanorte.com.mx
Gerry BUTRIMOVITZ (TSAASF)
E-mail: tsaagb@ix.netcom.com
Loic De GALZAIN (AFATE)
E-mail: loic.degalzain@ota.fr.socgen.com
David KRELL, CMT (MTA)
E-mail: dkrell@iseoptions.com
Colin NICHOLSON (ATAA)
E-mail: colinnic@ozemail.com.au
Ian NOTLEY (MTA)
E-mail: none
Alberto TUMIETTO (SIAT)
E-mail: atumie@tin.it
Anne WHITBY (STA)
E-mail: annewhitby@witty.globalnet.co.uk
Adri WISCHMANN (VTA)
E-mail: adri@jaad.nl

World HQ (Banking, Legal etc.)

Shelley LEBECK
c/o Market Technicians Association, Inc.
One World Trade Center, #4447
New York, NY 10048 USA
Phone: (1) 212 912 0995
Fax: (1) 212 912 1064
E-mail: shelley@mta.org

IFTA UPDATE & Journal Production

Barbara GOMPERTS
Financial & Investment Graphic Design
41 Hawkes Street
Marblehead, MA 01945 USA
Phone: (1) 781 639 0169
Fax: (1) 781 639 0187
E-mail: Bgomperts@aol.com

2000 Edition

IFTAJOURNAL

Notes
Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notes

Notesotes

47

INTERNATIONAL FEDERATION OF
TECHNICAL ANALYSTS, INC.
A Not-For-Profit Professional Organization
Incorporated in 1986