Traders Mag 2016JAN

THE TRADERS MAGAZINE SINCE 1982
Ugly Double
Bottom Setup
Profit from bottom fishing 8
Decision Areas
In Daytrading
Identifying probable
turning points
Aliasing
Avoid data distortions
High-Volume
Breakouts
A trading strategy
12
18
26
INTERVIEW
Kevin Davey,
systems developer
REVIEW
n TC2000 Version 16
JANUARY 2016
32
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CONTENTS
8 Bottom Fishing & The Ugly
Double Bottom Setup
by Thomas Bulkowski
Profiting from bottom fishing is
notoriously difficult, but this setup
may help.
FEATURE ARTICLE
12 Decision Areas In Daytrading

by Peter Hill
Its impossible to know when
the market will suddenly turn
and move in another direction.
But there are tools you can apply
to your charts to identify those
probable turning points. Heres
a simple technique any intraday
trader can use.
18 Aliasing
by John F. Ehlers
Since you are likely using sampled
data when trading, there is a chance
that there could be some distortions
in the data. Heres what you can do
to avoid those distortions.
22 Trading Vs. Forecasting:

Whats The Difference?
by Tyler Yell, CMT

Trading is about recognizing
present opportunities where
the risk-to-reward is favorable.
Forecasting, on the other hand, is
outcome dependent. Find out how
you can use both and take advantage of those opportunities.
26 High-Volume Breakouts
by Ken Calhoun
In this final article in a series
weve been presenting on breakout
trading strategies from this professional daytrader and educator, we
look at the role that volume and
price-action breakout patterns play
in confirming entry signals.
JANUARY 2016, Volume 34 Number 1
30 Explore Your Options
by Tom Gentile
Got a question about options?
INTERVIEW
32 Developing Strategies

With Kevin Davey
by Jayanthi Gopalakrishnan
Kevin J. Davey is a professional
trader and systems developer. He
is the author of Building Winning
Algorithmic Trading Systems: A
Traders Journey From Data Mining To Monte Carlo Simulation To
Live Trading. An aerospace engineer and MBA by background,
Davey has been an independent
trader for over 25 years. He placed
first once and second twice in
the World Cup Championship of
Futures Trading during the years
20052007. We spoke with him
about how a retail trader can trade
algorithmically.
38 Failing Successfully
by Stella Osoba, CMT

Were groomed to think of losses
as a sign of failure, which is why
trading is difficult. But experiencing losses is part of a traders life
and is something you have to accept. Heres how to approach the
idea in a healthy way.
AT THE CLOSE
61 The Green Line
by Ron Jaenisch
Knowing when to exit a trade
can work wonders for your trading returns. Heres one tool that
can help you make that critical
decision.
REVIEW
42 TC2000 Version 16
Product review: Stock market
charting software
DEPARTMENTS
6
7
46
57
57
58
59
59
60
Opening Position
Letters To S&C
Traders Tips
Advertisers Index
Editorial Resource Index
Futures Liquidity
Classified Advertising
Traders Resource
Books For Traders
40 Q&A
by Rob Friesen
This professional trader answers
a few of your questions.
45 Futures For You
by Carley Garner
Heres how the futures market
really works.
n Cover: William L. Brown

n Cover concept: Christine Morrison
Copyright 2015 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis
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January 2016 Volume 34, Number 1
Opening Position
The Traders MagazineTM
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As
we approach another year, it may

be a good time to reflect on what
you expect to accomplish in 2016. A good
starting point may be to look at what goals
you set for 2015 at the same time last year.
Did you meet your goals? Did you follow
your strategies as you intended to? For the
most part, 2015 was a strong year in the
financial markets. There were times when
there was some volatilityespecially in
August and Septemberbut the markets
recovered. Also, we are in the midst of a season that has historically been strong
for the US markets. Its easy to get comfortable or complacent with how you
have done when markets are strong. But its not something you can afford to
do. Look at how your trading systems performed during August 2015. Did you
apply good risk-management strategies or did you hold your positions hoping
that the markets would rebound? If you did the latter, you can count your blessings since you would have recovered your losses. But we know too well that
this doesnt always happen, and living on hope isnt going to give you the edge
you are looking for.
ut how do you gain that edge? Youre playing in the same domain as large
institutions who invest billions of dollars into building sophisticated algorithms and communications infrastructure to place trades in nanoseconds. As a
retail trader, you dont have access to any of this sophisticated technology. Youve
got to come up with your own game plan. Coming up with a system is only one
piece of the puzzle. You have to put your systems through rigorous tests so you
know your systems are rock-solid before you start trading with them. And after
all that testing, theres a chance they could still not work the way you expect them
to. Even a simple system that enters and exits trades based on moving average
crossovers will have to be tested. And when your system is no longer working,
its time to abandon it and come up with a new one. Its a never-ending process.
Even though the markets will always be about buying and selling and making
and losing money, the dynamics change. Youve got to be prepared to adapt and
change your trading systems.
Be prepared to face the markets with systems that give you an edge. Theres
nothing more empowering than having control over your own systems. Heres
wishing you a profitable 2016. Happy trading!
Jayanthi Gopalakrishnan,
Editor
Miami Downtown Richard Cavalleri/Shutterstock
EDITORIAL
editor@traders.com
The editors of S&C invite readers to submit their opinions and information on subjects
relating to technical analysis and this magazine. This column is our means of communication with our readers. Is there something you would like to know more (or less) about?
Tell us about it. Without a source of new ideas and subjects coming from our readers, this
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Email your correspondence to Editor@Traders.com or address your correspondence
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expressed in this column do not necessarily represent those of the magazine.Editor
IN MEMORY OF DON BRIGHT

Editor,
I enjoyed reading Don Brights column
each month. He died too young.
Thomas Bulkowski
THANKS FOR YOUR MAGAZINE
Editor,
Your magazine is informative and
touches different areas of the industry.
I especially enjoy Dirk Vandyckes and
Melvin Dickovers articles and their approach to the markets and trading.
Other things that I would like to read
about in your magazine are the so-called
quant traders and the quantitative
trading techniques and systems and
their use. Any resources regarding this
would be helpful.
Another thing I think could be helpful
is a column from the point of view of a
novice trader for those just starting out
in this business. It could be a how-to
column with the required steps for starting out, including advice, choosing the
right hardware, platforms, and systems,
and incorporating as a business, up to
the particulars of different markets and
the best way to trade them.
Thank you for your magazine and for
the hard work you put into making the
magazine a reality. Im looking forward
to reading more interesting articles.
Mihai Arnauta
SIMPLIFY IT: SCREENING AND
AVERAGE DAILY VOLUME
Editor,
I read with great interest James and John
Richs article in the November 2015 issue of Technical Analysis of Stocks &
Commodities, Simplify It, on their
trading channel strategy.
My question relates to scanning for

stocks that are trading more than one
million shares a day. Over what period
of time do the authors use to measure
the average daily volume of one million?
(That is, two days? five days? 20 days?
40 days? 60 days?)
I did a scan for one million stocks over
a 20-day period and many of my results
had a current daily volume, on the day of
the scan, of far below one million.
My scan for volume of over one million
shares, using StockCharts.com, was as
follows:
[Daily SMA(20,Daily Volume) >
1000000]
This scanned for an average daily volume
of the last 20 days that was over one
million shares.
Feedback from the authors would
be most welcome. And thank you for
presenting a workable, simple trading
strategy.
William
Lansing, MI
Author James Rich
replies:
As long as you use 20
days or more, I dont
think its going to
make any difference,
since the point is to
avoid thinly traded
stocks. Using 20 days is equal to four
trading weeks, and theres always the
possibility of picking up a low-volume
day or even a low-volume week, but youll
still have stocks with enough volume to
be traded by institutions.
January 2016
Build powerful trading

systems in MINUTES,
not hours or days.
Maybe its time to try

something NEW!
Winner
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SIMPLIFY IT: MOVING AVERAGE
CRITERIA
Editor,
Thank you for the November 2015 article,
Simplify It, by James and John Rich. As
an individual trader, I appreciate the way
they simplified the process and I liked
the ideas expressed in their article.
A quick question for the authors:
When they are using their 50-day SMA
of the SPY to initially determine market
direction, what specific criteria do they
use to base this determination on? For
instance, does the last 50d need to be
higher than the reading 10 periods prior
(and if so, is there a % requirement)?
Ive attached two sample charts [not
shown] (I quickly grabbed wheat charts
for this example but I would use SPY for
stock scanning, of course). These are
showing the 50d trending in a direction,
but obviously in very different degrees
of trending. The downtrend of the first
is clear, but while the uptrend of the
50d in the second is going higher, it
is happening in a rather range-bound
sideways market.
Continued on page 31
Technical Analysis of Stocks & Commodities 7
how to improve the setup.

Ill begin with a chart pattern I call
an ugly double bottom. In Figure 1
you see an example of this at points
AB. In a traditional double bottom,
price makes a valley, bounces, and
forms a second valley at or near the
price of the first one. In the case of an
ugly double bottom, you are looking
for a second, higher valley.
In this example, price makes a
new yearly low at A, bounces to the
horizontal blue line, and forms a
higher bottom at B. When I first tested
this pattern several years ago, I set a
minimum price difference between
bottoms of 5%. This example shows
bottom B 7% above A.
The ugly double bottom confirms
as a valid chart pattern when price
closes above the top of the pattern.
That occurs at C in Figure 1, although
it may be hard to see on the chart.
Notice how price drops to D and
then recovers. Testing shows that a
stop placed below B is not ideal, but
it will cut losses almost in half. The
tradeoff is a drop of 20 percentage
points in the win/loss ratio. I prefer
a stop below A. Ill discuss testing
results later in this article.
Trading setup
Bottom Fishing &

The Ugly Double Bottom
Setup
Profiting from bottom fishing is notoriously difficult, but this setup may help.
by Thomas Bulkowski
uy low, sell high. How many times have you tried to do that and lost money?
Heres a trading setup for buying stocks making new yearly lows. A shorter
phrase for that is bottom fishing. The technique Ill describe here is not perfect. You can still lose money, perhaps a lot of it, but the setup gives you an
indication of how often bottom fishing works. Perhaps you will have ideas on
1. Only look for stocks during a

bull market.
2. Find a stock making a new
yearly low.
3. Locate an ugly double bottom where the first bottom
sets the yearly low.
4. Place an order to buy the
stock on or after the pattern
confirms.
5. Place a stop-loss order a
penny below the first bottom.
6. Use your favorite sell signal
to exit the trade.
Rocksweeper/Shutterstock
A Turn For The Better
The setup described here is easy

enough to follow. Look for an ugly
double bottom when the stock
makes a new yearly low. Here are
the steps.
TRADING STRATEGIES
Step 1: Only bottom fish in a bull

market. In a bear market, price
tends to keep going down and it
busts ugly double bottoms. Testing
results reinforce that belief. The
median trade in a bull market
gained 32%, but in a bear market
it lost 20%.
Step 3: The second bottom should

be between 5% and 20% above the
first one. The larger the difference
between bottoms, the larger the
potential loss, but the number of
winning trades increases. I tested a
5% to 25% range and found that the
sweet spot is 10% and above.
Tom Bulkowski
Step 2: Using the yearly chart,

look for price to set a new low
for the year at the first bottom of
the ugly double bottom. I did not
test variations with the first bottom
higher in the price range, so that is
something you can explore.
FIGURE 1: THE UGLY DOUBLE BOTTOM. An ugly double bottom appears at AB and confirms as a valid pattern at C
when price closes above the top of the pattern.
Step 4: The pattern confirms

when price closes above the top
of the pattern. That means buying at the open the next day.
However, I often use a buy stop placed a penny above the top
of the chart pattern to get me into a trade. Using a close above
the top helps avoid one-day price spikes that would otherwise
trigger a premature entry.
Step 5: Placing stops. I tested two stop locationsa penny

below the first bottom and a penny below the secondtriggered
on a close at or below that price. Neither stop locations work
well in my opinion. I will discuss stop placement later in this
article.
Step 6: Apply a sell signal. I tested moving averages from
10 to 250 days, trailing stops from 5% to 25% below a highwater mark, and a target price exit based on the height of the
chart pattern.
Testing
I used 59 stocks for in-sample data and 425 for out-of-sample

data starting January 2000 (yes, in the middle of the bear
market whose trades I discarded but logged anyway) to June
2015. Not all stocks covered the entire range.
To find ugly double bottoms automatically, I looked for the
lowest low within a sliding window of five trading days wide.
That means finding the lowest low from five days before to
five days after the bottom (11 days total) and then looking for
the next adjacent bottom.
I used in-sample data to determine the best stop location,
If you were to trade the setup

perfectly, it wins 87% of the
time, making an average of 48%
from winning trades.
how far the bottoms should be from one another (price scale),
best exit technique, and so on. Then I applied the setup to the
larger group of stocks and also ran some of the tests going
back as far as 1990. I didnt see any performance difference
between in-sample and out-of-sample data that would change
the setup.
Perfect trades
The first question bottom fishers will want answered is how

often will trades be stopped out? If you were to trade the
setup perfectly (using ugly double bottoms with bottoms 5%
to 20% apart), it wins 87% of the time, making an average
of 48% from winning trades, but incurring an average loss
of 17% on losing trades. Overall, you could make an average
of 40% per trade.
To find those statistics, I used a stop-loss order placed a
penny below the bottom of the chart pattern, triggered on a
close at or below the stop price, and sold at the open the next
day. Otherwise, the stock sold when it reached the ultimate
January 2016
1x Height
1x Height
2x Height
2x Height
2x Height
3x Height
Results
The table shown in Figure 2

illustrates how performance
Bottom Stop
1
2
1
2
1
1
varied depending on the height
Bottom Diff
5%20%
5%20%
5%20%
5%20% 10%20% 5%20%
of the target and stop placement.
These are out-of-sample results
Win/Loss

75%

56%
66%

47%
68%
60%
using ugly double bottoms with
Avg Win

15%

15%

31%

32%
39%
46%
bottoms between 5% and 20%
Avg Loss
-19%
-11%
-20%
-11%
-22%
-20%
apart (narrower than the 5% to
Avg Profit

7%

4%

14%

9%

19%
20%
25% test range). Consider the
1x height for bottom 1. I placed
Median Profit
12%

8%

22%

-4%

32%

26%
a stop one penny below the first
No. of Trades
862
855
818
865
420
771
bottom of the chart pattern to
FIGURE 2: TRADING RESULTS. Here, you see the performance statistics for the ugly double bottom setup.
limit losses (again, triggered only
at close and sold at the open the
next day). For the target exit, I
high. The ultimate high is the highest peak before price closes computed the height of the chart pattern, added the height to
at least 20% below that peak. This is not the same as a trailing the top of it, and then placed a sell stop at that price.
Trades won 75% of the time. Winning trades made 15%
stop set 20% below a high-water mark. The exit sells at the
but losers lost 19%. The combined average of winning and
highest peak before the stock tumbles, so it is unrealistic.
The 20% price swing is what many use to distinguish a bull losing trades was a gain of 7% (average) or a median of 12%.
market from a bear market. I simply applied that mechanism There were 862 trades.
Since you are buying at the top of the pattern and getting
to stocks. I used 867 perfect trades, so dont expect your
results to duplicate it in actual trading. For a more realistic stopped out at the bottom of it, the loss is large, about 20%
exit signal, I selected selling when price reached a target. The for stops placed below bottom 1. If you use bottom 2 as the
target was a multiple of the height of the ugly double bottom stop location (a penny below it), the loss drops from 19% to
11%. However, the win/loss ratio drops to 56%, so fewer trades
added to the top of it.
work. The overall profit drops from 7% to 4%, too.
I narrowed the price difference
between the two bottoms in the
ugly double bottom from 5% to
10% (second column from the
right). The results are shown in
the table in Figure 2. The win/
loss ratio climbs marginally from
66% to 68%. Losses increase
from 20% to 22% but the average and median profits rise dramatically, 14% to 19% and 22%
to 32%, respectively. If I were to
trade this setup, the 10% to 20%
range with a 2x height would be
my choice.
The table shows that as the
price target gets further away,
profits increase but losses stay
about the same. That makes
sense because the loss size is
determined by how tall the pattern is (with a stop below the first
bottom). If you raise the stop-loss
location, then you will have more
losing trades and you will be
stopped out of potentially winFIGURE 3: TRADING EXAMPLE. Here, the two bottoms are at least 10% apart but no more than 20%. The entry is
ning trades, decreasing profit.
triggered a penny above the top of the pattern. This ugly double bottom trade leads to a 29% gain.
Tall patterns help

assure, but not
guarantee, that
the stock has
changed trend.
Heres an example
The chart in Figure 3 shows an example

of how the ugly double bottom setup
works, using what I call the preferred
setup. The preferred setup has bottoms
at least 10% apart but no more than
20%, and entry triggers using a buy
stop placed a penny above the top of
the chart pattern.
Price makes a new yearly low at A,
at 57.55, in a bull market. At B, 64.91,
the stock makes a higher bottom. The
difference between those two bottoms
is 13%, falling within the 10% to 20%
range.
A buy stop placed a penny above the top of the pattern
(67.21) starts the trade at C. The exit price target is twice the
height of the ugly double bottom, or 2 x (67.21 - 57.55) = 19.32.
Add the height to the top of the pattern (or the buy price) to
get a target of 86.53.
As the chart shows, the stock makes a strong recovery and
soars to D, where it sold for a 29% gain (not including commissions and fees). If the trade failed, it would have meant a
potential loss of almost 15%. Notice that a stop placed below B,
the second bottom, would have triggered on the drop to E.
Thats a wrap
The ugly double bottom setup is flawed because the stop is

placed below the bottom of the chart pattern. This is necessary
because stocks making new lows tend to make lower lows.
Tall patterns help assure, but not guarantee, that the stock
has changed trend. When the trend changes from down to up,
bottom fishers can profit from the rise.
Since the potential loss is large, this setup is best for investors, those willing to buy and hold a stock for the long term.
They are willing to risk money in the short term to boost
profits over the long term. Swing and position traders may
also benefit from this setup, too.
Although I used the height of the chart pattern as the exit tool,
you may wish to use your own stop-loss and exit mechanisms
to perfect this setup for the markets you trade.
considered by some to be a leading expert on chart patterns.

He is the author of several books including Getting Started
In Chart Patterns, Second Edition and the Evolution Of A
Trader trilogy. His website and blog, www.thepatternsite.com,
have more than 600 articles of free information dedicated to
price pattern research.
Further reading
Bulkowski, Thomas [2013]. Fundamental Analysis And

Position Trading: Evolution Of A Trader, John Wiley &
Sons.
[2014]. Getting Started In Chart Patterns, 2d. ed.,
John Wiley & Sons.
[2013]. Swing And Day Trading: Evolution Of A Trader,
John Wiley & Sons.
[2013]. Trading Basics: Evolution Of A Trader, John
Wiley & Sons.
[2015]. 10 Selling Tips, Technical Analysis of Stocks
& Commodities, Volume 33: May.
[2015]. Four Lessons From Three Decades Of Trading, Technical Analysis of Stocks & Commodities,
Volume 33: August.
http://thepatternsite.com
S&C Contributing Writer Thomas Bulkowski (who may be

reached via email at tbul@hotmail.com) is a private investor
and trader with more than 30 years of market experience and
January 2016
TRading systemS
Looking Beyond Price
Decision Areas
In Daytrading
any product in the securities markets. Im certainly not
the first to notice this phenomenon of prices bouncing
around between numbers whose basis is a thousandyear-old mathematical formula, but I had not seen the
particular analysis of intraday price activity that I found
when I started my experimentation. After watching
trader with a small account is in a precarious Fibonacci calculations seeming to exert great pressure
situation judging when to take a position or to on prices in the larger time frames, I had become a
stay out of the action. He is normally a person fan of this method. But it was when I looked at the
who wants to be trading in the markets, who is anxious smaller time frames that I saw I could make the power
to be involved and often thinks more of the reward of the study a safety factor in daytrading.
Of the hundreds of mathematical studies available
than the risk. This is the reason that so many people
who try to scalpthat is, take intraday positions for on computer platforms that are used to access the
short periods trying to capture a few points during the stock, option, and futures markets, I had found Fibodayso often come to grief. Trying to guess which nacci study to be easily the most accurate predictive
way the market will go from one minute to another is study of all. It has many devotees, which I believe is,
a perilous adventure. Often, you can be right in one in itself, the reason it is so powerful. Some have an
time frame and wrong in another, and if youre wrong almost mystical belief in this system, thinking that
in the smaller time frame, it may be too late for you there is a metaphysical force expressing itself in the
way that the Fibonacci number series applies to things
by the time youre justified in the longer term.
With its high degree of leverage, the futures market like the formation of galaxies and the shells of turtles,
is unforgiving of mistakes. That makes it necessary the golden ratio in art, and other kinds of analysis.
for the small trader to take his position at the optimal But I think its enough that many traders see the efmoment, the one during which he will know within fects of the study and thus they use it for guidance
narrow limits whether he has made a good decision when they put in their orders to buy and sell. That is
or not. Between these boundaries is the area I call the what makes it seem as though the Fibonacci levels
decision area within which the trader needs to take are ordained by heaven itself.
his position or keep it or abandon it before being hurt.
The determination of value, meaning the right
Since so many traders are not able to withstand a large price for a securities product, is the job of all market
drawdown, my task was to find a way to trade a small participants, including banks, pension funds, hedge
amount of money in such a way that profits could be funds, and the daytrader. Their opinions about the
made while taking the least possible risk.
worth of things vary with changing conditions; they
are always approximate, and, to a large extent, particiEnter Fibonacci
pants differ according to the time frame in which they
The genesis of this project was my observation of the are observed. The time frame is the most important
effect of Fibonacci analysis on the prices of virtually factor for the daytrader, who is, by definition, out of
Its impossible to know when the market will suddenly
turn and move in another direction. But there are
tools you can apply to your charts to identify those
probable turning points. Heres a simple technique
any intraday trader can use.
WILLIAM L. BROWN
by Peter Hill
January 2016
TD AMERITRADE
are more enthusiastic about buying

than selling, or the opposite. The
charts are pictures of the drama
of the market. These images tell
a story that can be grasped immediately, which reams of written
data cannot.
In Japan, in the 17th century,
charts were hand-drawn by rice
traders, and even some contemporary traders have drawn their
charts by hand. Those were
naturally daily charts, but with
the conquest of the computer in
the mid-90s, everything changed,
FIGURE 1: A BASIC INTRADAY CHART. You can see that its difficult to figure out whats going on here. Sometimes the
and intraday charting came into its
buyers are winning and sometimes the sellers are winning. Theres no way to predict whatll happen next.
own. The computer does it easily,
manipulating data and putting it in
the market when it is closed and therefore unconcerned about a form that can be appreciated at a glance. The trader can use
whether it is going up or down in the longer term. He is inter- these charts to find those areas where price may be too high
ested only in the prices of things from 9:30 am until 4:15 pm or too low, that is, whether the instrument has value or not,
US Eastern Time. During these six and three-quarters hours, even on the most fleeting basis. I think charts have become
prices change in ways that may well look unpredictable to those ascendant because most people are visually oriented and like
the perspective that charts can provide.
without experience and the proper tools.
The chart that I believe is best for the small tradersince
were interested here in safetyis one that is of a very small
Viewing the charts
The security with which I am concerned, and which I will use time frame. I prefer two minutes; others like tick charts,
in this article, is the futures contract that tracks the S&P 500 which paint bars (or candles) according to a specified number
index. It is an instrument of interest to traders over the entire of trades. These are best for the scalpersso-called because
world and it trades nearly 24 hours a day, five days a week, and of their hit-and-run style, taking a little out of the market here
on a good day, over two million contracts will be exchanged, and therebecause it is the safest way to be in what could be a
making it highly liquid. Liquidity is not just an advantage for dangerous environment. There are longer-term investors here,
the daytrader; it is a necessity. The daytrader must be able to too; the two classes of market participants are there together,
jump in and out of the market without delays. Another impor- but its the scalpers that determine the minute-by-minute ups
tant advantage of trading in the futures market as opposed to and downs of the price action. It is the scalpers who are making
the stock market is that you do not have to own the product in their living on this price action, minute by minute, in between
order to sell it. A seller can take his position in the hope of a and sometimes using the activities of the long-term investors
decline in price, after which he can take a profit. This can also as grist for their mills. Of course, they are equally grist for the
be done in the stock market, of course, but you need the fiction mills of the long-term investors. Fair is fair.
of ownership by borrowing the stock in order to sell it. The
Though this is an arena for long-term investors in the end,
effect is the same as long as the stock is not difficult to borrow, its one that could not exist without the scalpers. It is supported
but all in all, its easier with futures, especially in daytrading. by the scalpers in the same way that our farmers are supported
There are two basic ways of describing the financial mar- by the speculators who are willing to buy their crops before
kets. One is appropriate for longer-term investors: it concerns they have even sprouted from the ground. The farmers could
itself with the fundamentals of financial products, the analysis not remain in business without the speculators, and in the same
of the economy, monetary system, and so on. This is usually way, the investors need the scalpers to function.
applied to the equity market by people who want to find the
Lets look at a basic intraday chart in Figure 1. Theres not
best stock to own for the next 20 years. The daytrader is not much to go on here. The chart (one day in two-minute increinterested in the next 20 years, and he is not interestedat least ments) makes market action look like a brawl. Sometimes the
immediatelyin the balance sheet and quarterly report. But he buyers are winning and sometimes the sellers. It looks like
is interested in the first effect that those things have on other theres no way to predict what will happen next. Clearly, the
people, mainly other traders. And where others may use the chart, in and of itself, is not enough. This is where the Fibonacci
daily newspaper, or even listen to the CEOs conference call to tool makes itself felt in the intraday environment. The toolas
decide whats valuable, the daytrader, along with others traders, opposed to the Fibonacci mathematical system that gave birth
uses intraday charts. The charts tell him what effect the CEOs to itis another invention of the last few decades: mathematical
call had on other market participants. They tell him if people studies applied in visual form to price action. The wild-looking
down; instead, you have something

to go by.
What are the charts

telling you?
Now that you have the Fibonacci

levels on the chart, the next step is
to figure out what they are telling
you. In my observations I have
found that they are, sometimes
for just moments, the boundaries of what we call support &
resistance. This idea may be the
most important one in the world
of trading. The traders idea of
FIGURE 2: ADDING FIBONACCI LINES. Here, you can see how the price often pauses at the blue lines, sometimes right support & resistance will be his
on the tick, or sometimes clustering, and then often turning to go in the other direction.
reason for buying or selling or
doing nothing. When the trader
believes the price of something is at
support, he will be willing to buy,
and when its at resistance, he wont
buy, and may sell instead. Support
can be defined as a level at which
buyers are willing to pay up for
the product in question, expecting
that they will be able to get more
for it in the future, even in the next
couple of minutes. Resistance, on
the other hand, comes about when
buyers are no longer willing to
pay up, and also where the sellers, a little anxious, are willing
to take whatever is bid for their
holdings, generally a little less
FIGURE 3: ADDING AN INDICATOR. Here, the stochastic oscillator is used as a confirmation to the Fibonacci levels. than they would otherwise have
Meeting of price and Fibonacci levels combined with a high or low level on the stochastic gives a good indication of what held out for.
will happen next.
Naturally, there are many valid
ways to determine support & rechart that you saw in Figure 1 can be tamed to a large degree sistance. Every trader has at least one, and I am not trying
with this tool. It clearly puts some order into the chaos of the to gainsay any other theory. But the evidence I have found
shows that the delineations that result from the proper use of
chart in Figure 1.
The chart in Figure 2 has horizontal lines (blue on my charts) the Fibonacci tool become excellent estimations of support &
laid across the price activity that were calculated by the Fibonacci resistance, at which times a majority of orders moves the price
system. You can see in this chart how the price often pauses either up from support or down from resistance. Traders will
at the blue lines, sometimes right on the tick, or sometimes respond to these numbers as definitions of the high and low of
clustering, and then often turning to go in the other direction. It an area of value.
But is every Fibonacci line a level of support or resistance?
is almost as though the price was poured into an oddly shaped
mold, the Fibonacci lines being its edges. There is occasional From the chart in Figure 2 you can see that price often changes
spilling over, but it is unusual for price to ignore these lines direction at the blue lines. But these numbers are not always
exact, and sometimes the turn is too small to be of use. You
even at times when excitement and volatility are high.
Those Fibonacci levels are landmarks in the alien territory need something else to give you the confidence to take a posithat we saw in the first chart, a wasteland that gave no clues as tion, and to assure you that the change in direction you expect
to where we were or what to do. You need to have something to will have some follow-through. The thesis here is that there
judge whether the product you are trading was well or poorly is an important relationship between the price and Fibonacci
priced. With the Fibonacci levels, you dont need to buy or levels, but this fact turns out to be insufficient by itself for efsell blindly with no good idea of whether prices will go up or fective trading.
January 2016
Adding confirming
indicators
The Fibonacci tool is not magical. What is needed is one more
indicator that will act like a
compass at Fibonacci levels,
telling you which way to go,
whether it is appropriate to take
a position or not, whether to
buy or sell, and whether there
may be follow-through from
the point at which you take a
position. Its another of those mathematical studies made visual:
the stochastic oscillator. There are others of this variety, but I
like this one.
Notice on the chart in Figure 3 the coincidence of price
meeting a Fibonacci level and the position, high or low, of the
stochastic. (The ovals are drawn at the same times on the upper
and lower panels of each part of the chart. This is the coordination youre looking for.)
Its clear on this chart that the meeting of price and the Fibonacci levels combined with a high or low level on the stochastic
gives a good indication of what will happen next. The probabilities are very high that this combination will be predictive
of the direction that price will go, and that there will be enough
follow-through to make the trade worthwhile. You dont want
to make a trade only to have the thing do an about-face as soon
as you click the buy or sell button. Ideally, you see the price
rise along with the stochastic and then see the price meet a Fib
level while the stochastic is high in its range. That will signal
an opportunity to sell. Itll be the opposite for buys.
By the time the market opens, Fibonacci calculations have
been made for the day: the levels are on the chart. (See sidebar
Calculating Fibonacci Levels

Heres how the Fibonacci tool is used
to create intraday levels of support &
resistance, creating some order in the
chaos. On the two-minute chart in
Sidebar Figure 1, the trader simply,
before the market opens, drags the
drawing icon labeled Fibonacci
retracements from the low of the
overnight session to its high (the areas
designated by the red squares). The
numbers upon which the lines are
based correspond to percentages of
the range of that overnight session
(38.2%, 50%, 62.8%, etc., up to 423%).
You then do the same thing from the
high to the low so you have numbers
that would be appropriate to the market going lower. This way, youll be
ready for anything.P. Hill
Calculating Fibonacci Levels for the method of deriving these

numbers.) At the open, or even earlier, we look for an indication of which way prices will go. Where is the Fib level? Is the
stochastic high or low, if either? These are the things that will
give indications of what the market wants to do.
The chart in Figure 4 shows the first two hours of activity of
the S&P emini futures contract on a recent day. (The vertical
lines are put in to show the connection between the stochastic
and price levels.) You can see that price opened (9:30 am Eastern
Time, the first of the vertical lines) up against a Fibonacci level
at about 2096 and the stochastic was quite high in its range. This
made for a reasonable sell of the contract, which went down to
2083 before reversing for the day. There were various points at
which you could get in or out, but the possibility is clear that a
skillful trader might have captured 13 points on this contract.
Small time frames like this have the advantage of letting the
trader know quickly when a trade is not working as expected.
A large trader might use a five, or 15-minute, or even larger
time frame because he doesnt need to worry as much about
the drawdown that can happen while a single bar (or candle) is
being painted. If a small trader tries to use even a five-minute
time frame he may find himself in trouble before he knows
it. That, combined with the use of the Fibonacci system, is
specifically geared to keep the small trader out of trouble. The
trader has what I am calling a decision area within which
he is safe. The large trader might be able to afford to take 15
minutes to make his decision, but the little guy has sometimes
only a few moments. You want to quickly know when you are
wrong. You need to have guideposts that you respect because
otherwise you will be tempted to think that you know better
than that mathematician who is long dead, and try to pit yourself
against the market, which is always a mistake.
I believe that this system, simple as it is (one chart with two
SIDEBAR FIGURE 1: CALCULATING FIBONACCI LEVELS. You can prepare for any market scenario by creating
intraday levels of support & resistance.
appropriate to the size of my account, never

risking more than I can afford to lose.
With these things in mind, the trader can see
what the uses of the Fibonacci levels are. They
define a place on the chart with the number
that may well be the exact point at which the
price turns. My view is that it is good to put
orders to buy or sell the Fibonacci numbers
as early as possible. Discretion has to be used
in this situation: be wary of a fast-moving
market. Each trader is competing for a place
in the queue of the exchange, which will execute orders on the basis of the time they were
entered. If all the traders who are looking see
that 2089.75 looks like a good number to sell,
they will be putting in their orders to do so as
soon as they can. If I am late in deciding that
it would be a good deal, my order may not be
filled. My order will be left in the queue while
those ahead of me will get into the market.
Then, next time, I will have to get ahead of
FIGURE 4: TRADING THE S&P 500 EMINI FUTURES CONTRACT. At around the open, price was up
the others by using a lower number for sales
against a Fibonacci level at about 2096 and the stochastic was quite high in its range. This would have been
and higher for buys by a tick or two, which
an indication to sell. From the chart, you can see there were several opportunities to buy and sell.
may work but which will make my stop-loss
more vulnerable. This may not be a terrible
problem, but it is something to consider. It is always possible
to cancel orders that look like they might be overrun because
This system, simple as it is (one
there is too much volatility or the stochastic is not in the right
chart with two indicators), would
position for that particular trade.
provide a way for the small trader
Finally, though this is not an attempt to cover all the aspects
of
trading, I would be remiss if I didnt remind anyone who
to function in the market without
wants to use this system that it is always necessary to keep an
taking a lot of risk.
eye on the general conditions of the day, especially the breadth
indicators that will warn the trader of volatility and direction in
the wider market. For example, if there is a strong trend in the
indicators), would provide a way for the small trader to function downward direction, it doesnt mean that he cant take counin the market without taking a lot of risk. I think its just what is tertrend trades, buying significant levels, but it does mean that
needed by so many who inhabit the chat rooms on the Internet he is in more danger doing so, and should not expect as much
waiting for gurus to tell them what to do. This can be learned from that buy trade as he would get if he were selling a good
by anyone and can give all the guidance that a guru could give, number that he could go with for a longer, and better, trade.
at least insofar as daytrading index futures is concerned.
Going with the trend of the day is normally best, as usual, but
days without trend are as promising for this system as trending
The trading plan
days, and possibly safer.
You can see in the chart in Figure 4 that the system does fail
at certain points, mostly when the market is volatile. However, Peter Hill was an equities trader until he made a bad speculathese instances are so rare that a trade will be safe from any tive investment in English real estate. The loss of capital in that
serious drawdown as long as the trader always uses stop-loss deal led him to feel the need to use the higher leverage offered
orders, especially for those volatile times, and as long as the by the futures market. After investing a great deal of time and
trader respects those orders. The stop-loss order has to be un- money in learning how to trade in the futures markets, he
questionable once it has been decided generally how much the came up with a methodology to trade that offers discipline and
trader can afford to risk on a trade. In my backtesting, Ive found reasonable expectations of what might happen in the markets.
that the price will only rarely overrun the Fibonacci level by He may be reached via email at p.healy.hill@gmail.com.
more than two points before going in the desired direction, so I
use a 10-tick, or 2 point, stop-loss, and it is rarely hit. Taking TD Ameritrade
these losses is not terrifying as long as I know that the ratio of See Editorial Resource Index
wins to losses is positive, and as long as I keep my trade size
January 2016
Uncovering Hidden Truths
Since you are likely using sampled data when trading, there
is a chance that there could be some distortions in the data.
Heres what you can do to avoid those distortions.
by John F. Ehlers
imagine that most traders consider the price data they

use for analysis to be a continuous function. Nothing
could be further from the truth. And, depending on your
trading style, the impact of this assumption can range
from trivial to dramatic. The fact is that the data is sampled
data. The sample rate is once per day on daily bars, once per
hour on hourly bars, and so on. It doesnt matter if you average the high, low, and close; you still only have one sample
per day on daily bars.
One impact of sampled data is that it can lead to aliasing. In
my youth, the old cowboy movies had a sample rate of only 16
frames per second, letting the eye integrate those individual
still photographs to produce motion, albeit with a little flicker.
Aliasing at this slow sample rate made the wagon wheels look
like they were turning backwards, and the effect was really
weird. Aliasing can also produce some weird effects on your
market data.
The theory of sampled data states that you must have at
least two samples per cycle. Otherwise, the sampled data will
result in aliasing. The frequency at which there are exactly two
samples per cycle is called the Nyquist frequency. The theory

is demonstrated in Figure 1, where the shorter cycle depicted
by the red line is sampled at a rate less than two samples per
cycle. Since there are less than two samples per cycle of the
real data of the red sine wave, the data is interpreted as the
phantom aliased blue sine wave. Just imagine the impact on
your trading if your data is subject to aliasing!
Mathematically, the process of sampling is multiplying a
sine wave at the sampling frequency with the cycles in the
continuous data. From your high school trigonometry class
you may recall this equation:
Sine(A)*Sine(B) = 0.5*(Sine(A+B) + Sine(A-B))
If A represents the sampling frequency and B represents the
frequencies of the continuous data, the sampling frequency is
heterodyned with the continuous data with upper and lower
sidebands. This is exactly the same process as with your AM
Figure 1: theory of sampled data. Sampling less than twice per cycle
produces phantom aliased signals.
Fred Fokkelman/Shutterstock/Digital collage: nikki morr
Aliasing
TRADING TECHNIQUES
radio, where you tune your receiver to the carrier frequency and
the information is contained in the
upper and lower sidebands. Since
the sampling process is nonlinear,
aliasing can include harmonics of
the sampling frequency mixing
with different harmonics of the
data to produce a really gnarly
soup of noise superimposed on
the information contained in
the data.
Heres the important part for
market data: there is nothing
inherent in the data to preclude
content whose period is shorter
than that of the Nyquist frequency.
That means you should expect the
upper sideband to be folded back
into the lower sideband, producing
a false composite signal due to
aliasing. The real question is how
badly the aliased composite waveform affects your trading. Figure
2 shows the closes of daily prices
of SPY as the green line, while the
red line shows the majority of the
aliased signals removed by filtering in the composite waveform at
the cost of a half bar of lag.
Figure 2: how does the aliased composite waveform affect your trading? Here you see that aliasing
produces short-term volatility in the composite data.
Just how
bad is it?
To get a more quantitative estimate of

aliasing effects,
start by making a
model of market data. It is well
established that market data is
fractal. That is, a chart using
weekly data looks exactly like
a chart using daily data if you
remove the scales. In other words,
the amplitude of the swings
in market data is proportional
to the wavelength of the cycle
components in the data. Simply
put, longer cycles have bigger
swings. Using this model, you can
extend the theoretical shape of the
market spectrum on both sides
of the Nyquist frequency. Figure
3 shows the spectrum amplitude
of the data at frequencies below
the Nyquist frequency as the blue
line and, with the upper sideband
FIGURE 3: ALIASING IMPACT. The lower sideband blue line shows the amplitude doubling every time the cycle period
doubles. In this simplified model, the red line represents the aliased upper sideband amplitude simply added to the
amplitude of the blue line signal.
FIGURE 4: ALIAS AMPLITUDE. The aliasing impact becomes insignificant two octaves below the Nyquist frequency.
January 2016
basically insignificant at longer cycle periods. Other

theoretical models of the market can be created, and
these generally show that the aliasing impacts depicted
in Figures 3 & 4 are a conservative estimate.
So what does all this mean to a trader? If you are a
trend follower and are using tools like a 50-day moving average or a 200-day moving average, the cycle
periods of the data you are using is so far removed
from the Nyquist frequency that you can just ignore
the impact of aliasing. On the other hand, if your
technique involves recognizing short-term patterns
in the range of two to five bars, you should seriously
rethink your approach because aliasing produces
illusory patterns. Short-term traders using cycles or
mean reversion should take active measures to mitigate
the impacts of aliasing.
What can be done
to mitigate aliasing
effects?
The first line of defense to avoid
problems associated with aliasing
is to just accept that you should
not work with cycle
periods within two
octaves of the period of the Nyquist
frequency. For daily
data, that means
you should not expect to use cycle
periods shorter than
eight bars. Even with
this constraint you
should reduce the
swing of the composite waveform by
filtering. For example, if you wanted to
use a cycle having a
FIGURE 6: OVERSAMPLING RESULTS IN SMOOTHER EQUIVALENT FILTERED DATA. The top chart shows a four bar SuperSmoother four-bar period, you
as the red line. The bottom chart shows the equivalent 52 bar SuperSmoother using 30 minute data. The green dots show the sampled need to recognize
data in both cases. The filter output using the oversampled data is much smoother.
that the composite
signal at the Nyquist
frequency has the same amplitude as your desired signal.
folded back about the Nyquist frequency, the amplitude of the
Therefore, it is imperative that a low-pass filter of some kind
composite sidebands show as the red line. The lower sideband
be used to reduce the amplitude of the frequency components
blue line shows the amplitude doubling every time the cycle
near the Nyquist frequency. A simple two-bar moving averperiod doubles. In this simplified model, the red line repreage is often adequate, because this average has a theoretical
sents the aliased upper sideband amplitude simply added to
the amplitude of the blue line signal.
zero of transmission at the Nyquist frequency.
The aliasing impact is better demonstrated in Figure 4,
The frequency response of a two-bar simple moving
where the ratio of the composite signal plus alias is shown as
average is shown in Figure 5. This is an effective way to be
a ratio to the signal in terms of decibels. The maximum imsure that aliasing effects are removed. But when it comes
pact is at the two-bar cycle periodthe period of the Nyquist
to filtering, more is often better, if there is not a price to be
frequency. Two octaves below the Nyquist frequency, at the
paid in terms of lag. Therefore, I also recommend using my
eight-bar cycle, the impact is less than 0.5 dB, and therefore is
SuperSmoother filter set to a four-bar cutoff period.
FIGURE 5: frequency response of a two-bar simple moving
average. here you see that a simple two-bar moving average can remove
much of the aliasing impact.
Noisy indicators
delay your analysis
If you are using short-term patterns
in the range of two to five bars, the
effect of aliasing is dramatic.
A trader can also elect to oversample the data by using a different sample rate. For example, there are 13 half-hour samples
in the trading day. So if you use 30-minute data instead of
daily data, the data of interest is nearly three octaves below
the sample rate. The top chart in Figure 6 shows a four-bar
SuperSmoother as the red line while the bottom chart shows
the equivalent 52-bar SuperSmoother using 30-minute data.
The green dots show the sampled data in both cases. The filter
output using the oversampled data is much smoother.
More important, oversampling enables the trader to create a higher-fidelity waveform closer to the original Nyquist
frequency. For example, the cutoff period of the oversampled
SuperSmoother filter was reduced to 26 bars, resulting in a
smoothed waveform with less lag as shown in the lower graph
of Figure 7.
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Market data aliasing is real, but its impact on your trading
depends on your style. If you are a trend trader using relatively
long moving averages or slowly moving indicators, you
can just ignore it. On
the other hand, if you
are using short-term
patterns in the range
of two to five bars,
the effect is dramatic
and you might want
to rethink your approach. Nonetheless,
its a good idea to be
aware that aliasing is
real and its a good
idea to mitigate its
effects just by applying a simple two-bar
moving average or FIGURE 7: SMOOTHER INDICATORS WITH REDUCED LAG. Reducing the cutoff period of the oversampled SuperSmoother filter to 26
the SuperSmoother bars resulted in the smoothed waveform with less lag.
filter to the data before using any other indicator. More adventurous technicians Further reading
might want to explore oversampling using intraday data.
Ehlers, John F. [2013]. Cycle Analytics For Traders, John
Wiley & Sons.
S&C Contributing Editor John Ehlers is a pioneer in the use
[2015]. Decyclers, Technical Analysis of Stocks &
of cycles and DSP technical analysis. He is president of MESA
Commodities, Volume 33: September.
Software. MESASoftware.com offers the MESA Phasor and
MESA intraday futures strategies. He is also the chief scien- MESASoftware.com, Stockspotter.com, TradeStation
tist for StockSpotter.com, which offers stock trading signals
based on indicators and statistical techniques.
January 2016
Wanna Bet?
Trading is about recognizing present opportunities where the

risk-to-reward is favorable. Forecasting, on the other hand,
is outcome dependent. Find out how you can use both and
take advantage of those opportunities.
by Tyler Yell, CMT
ost of us are conditioned to make all our trading decisions based on what we see on the hard right side of a
chart. When you look at a chart, price movement that
occurred in the past may look like it had only one likely
outcome. But when you look at a chart in real time, you dont
know what the outcome will be. There could have been multiple
scenarios, and credible people will argue for price to move in
completely different paths from a specific point.
Price charts and potential outcomes often play cruel tricks
on the brain. Trading, on the surface, is similar to a casino in
that it informs you of the prize of a low-probability outcome
while the quantitative edge that the casino holds is purposely
hidden from you. Just as the blackjack player thinks about the
number of ways to hit 21, often blind to the hundreds of ways

to go bust or have the dealer beat you, traders often think of a
favorable outcome instead of thinking about what can go wrong.
Traders who are confident in their market forecast often focus
narrowly on their outcome materializing, instead of focusing
on the data and validating their proposed outcome.
Where forecasters get it right
and wrong
Philip Tetlock, who has a new book out titled SuperForecasters, recently brought to light a great analogy of common
forecasting personalities. He explains it well in his prior book,
Expert Political Judgment:
The intellectually aggressive hedgehogs knew one big thing
and sought, under the banner of parsimony, to expand the
explanatory power of that big thing to cover new cases;
the more eclectic foxes knew many little things and were
content to improvise ad hoc solutions to keep pace with a
rapidly changing world.
US bill: YamabikaY/Euro bill: Whataphoto/Dao: gguy/Shutterstock/collage: J. Barrett
Trading Vs. Forecasting:

Whats The Difference?
FOREX FOCUS
2008 Top
a
Labels are from the technical forecasting methodology known as Elliott wave
c
ii
The financial crisis
Some people believe well have

another strong bounce off the trendline,
at least to midline.
i
A
b
iv?
iii
v/C
Many people believe we must hit parity (1.000) or below
FXCMs Marketscope/Trading Station II
e/B
FIGURE 1: WHICH WAY IS THE EUR/USD HEADING? There are often compelling views that the market will go higher or lower but only one of these forecasts
will be proven correct. Here, some traders may have reason to believe that price will have another strong bounce off the lower channel line whereas others
may feel that prices will break below that lower channel line.
Bringing this analogy to trading, you would likely be better

served by adding incoming data to see if your outcome is more
or less likely to come to fruition as opposed to putting your
head in the sand, hoping you are proven right.
Another rock star in the world of nonmarket forecasting
is Nate Silver, who predicted the outcome of the 2008 US
presidential election with far more accuracy than highly paid
political forecasters. He attributes his methodology of forecasting to Bayes theorem, an algorithmic approach for which
its namesake is an 18th-century pastor. Bayes theorem opines
that recently available evidence should be used to bring down
or bring credibility to an outcome. Nate Silvers model used
individual states high-credibility polls in the 2008 election to
predict the likelihood of the winner and updated his forecast
the night of the elections as individual state outcomes were
being announced.
The trading equivalent to this is to look for obvious failures
toward your desired outcome developing in real time. An
Elliott wavebased trader will consider invalidations of a
primary market view as casting doubt or outright invalidating
his forecasts. The point here is that you should not be married
The desire to avoid a loss

is understandable, but the
unwillingness to accept a
loss is futile.
to any one outcome but be flexible with your outlook, because

markets appear chaotic in real time.
In Michael Tomas informative book The Risk Of Trading:
Mastering The Most Important Element In Financial Speculation, he walks traders through the process of identification,
assessment, control, measuring, and monitoring of trading
risks. The purpose is to show traders that when trading, there
is more to risk management than placing a stop-loss. Similarly,
traders would likely be better served by focusing on how their
forecast could be nullified as opposed to validated.
Clash of trading
& forecasting
When looking at the present, a new

thought often creeps into your mind
as a trader. First, you think if I can
only figure out the future I will be
able to avoid a loss and book a profit.
Daniel Kahnemans prospect theory
from his book Thinking Fast And
Slow states that people (traders included) emotionally prefer
to avoid losses than achieve gains.
Unpacking this finding further, traders will often hold
onto forecasts and hope that it will prove true so they do
not have to take a loss. While the desire to avoid a loss is
understandable, the unwillingness to accept a loss is futile.
To avoid such a fallacy, you are probably better off holding
your strong opinions or forecasts with consistent pessimism.
In other words, hold your strong opinions weakly so that you
do not find yourself overrelying on an assumed outcome that
doesnt take place.
January 2016
You can be incorrect in

forecasting but place a good
trade, and you can be good at
forecasting but poor at trading.
Marrying the two worlds of
forecasting & trading
Businesses are fond of making a premortem prior to major

projects. A premortem is an explanation of potential causes
of failure for an important project. As you can imagine, the
goal of the premortem is to think outside of the hedgehog
view so that you may act accordingly before the start of the
real project.
In trading, a premortem will hopefully cause you to trade
smaller or use less leverage than you might have otherwise
done with a more confident but likely flawed forecast. Second,
a premortem may help you identify where, as a trader, you may
want to flip your bias and potentially your exposure. Either way,
optimism surprisingly has little room in a traders career.
Mark Spitznagel, the hedge fund manager and former head
trader for Naseem Taleb, notes in his book The Dao of Capital
that to survive, you must learn to hate to win, love to lose. As
a multibillion-dollar hedge fund manager, he obviously needs
profits to attract new investors. Spitznagel is driving home the
point that staying in a losing position is the quickest way out
of the business. In addition, poor forecasting or overreliance
on your market forecasting methods is one of the quickest
ways to convince yourself to stay in a bad position.
Little bets
Many traders come to the market with a perverted view of their likely success. In other
words, it is common for them to look at stories
on financial news networks regarding the one
big trade that made someones career like betting on subprime mortgages in 2003 or betting
against them in 2007. However, the one big bet
can often turn into one big loss, since few things
unfold in a straight line.
Instead of placing one big bet, a better approach would be
to place multiple small bets. Sure, if your one big bet is large
enough and you come out on the winning side, someone may
write a book about you, but the likelihood of that is understandably small. As a trader looking for double-digit returns
year over year, the better approach is often to manage your
downside aggressively, while strategically looking for a multi
percentage move in the direction of a shorter-term forecast,
which of course, can still be wrong.
The chart in Figure 1 shows the EURUSD, the most heavily
traded currency pair in the spot forex market. My role at DailyFX gives me exposure to a myriad of the top-tier investment
bank (sell-side) research that makes very compelling cases for
their well-researched views. That said, there are often compelling views that the market will go higher or lower. Only
one of these forecasts will be proven correct, although in a
sideways market, both could be correct, revealing the need
for combining risk management with forecasting.
Summary
Learning how to forecast and finding an accurate trading

method should play a separate role from learning how to trade.
Forecasting is outcome dependent, and the road toward the
realized outcome is often full of unpredictable developments.
Trading is about recognizing present opportunities where
the riskreward tradeoff is presently favorable, and taking
advantage of those opportunities. Ironically, yet importantly,
you can be incorrect in forecasting but place a good trade, and
likewise, you can be good at forecasting but poor at trading.
The latter is surprisingly common.
Regardless of your method of forecasting, recognizing a
good riskreward trade setup as per your preferential trading methodology is crucial. It is best to avoid the mistake of
believing the market must end up at a certain juncture a week,
month, or quarter from now and overexposing your account on
that hope. Rather, it is best to use a forecast as a springboard
for entering the market and then analyzing how the market
is reacting to your forecast to see whether or not more weight
should be given to that outcome coming to fruition.
Trade (as opposed to forecast) well.
Tyler Yell, CMT, is a currency analyst and trading instructor
for DailyFX.com, a forex market news and analysis site.
Further reading
Spitznagel, Mark [2013]. The Dao Of Capital: Austrian Investing In A Distorted World, Wiley.
Tetlock, Philip E., and Dan Gardner [2015]. Superforecasting:
The Art And Science Of Prediction, Crown Publishers.
Tetlock, Philip E. [2005]. Expert Political Judgment: How
Good Is It? How Can We Know? Princeton University
Press.
Toma, Michael [2012]. The Risk Of Trading: Mastering The
Most Important Element In Financial Speculation, John
Wiley & Sons.
Yell, Tyler [2015]. Gold & The Yen, Technical Analysis of
Stocks & Commodities, Volume 33: October.
_____ [2015]. Bond Markets & FX Effects, Technical Analysis of Stocks & Commodities, Volume 33: August.
Marketscope/Trading Station II (FXCM)
See Editorial Resource Index
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Heighten Your Confidence
High-Volume
Breakouts
In this final article in a series weve been presenting on breakout trading strategies
from this professional daytrader and educator, we look at the role that volume and
price-action breakout patterns play in confirming entry signals.
by Ken Calhoun
As
many traders know, the two most important technical trading signals are
price and volume. By combining price-action breakout patterns with specific volume confirmation signals, you can identify strong trading entries
as theyre moving to new highs.
You can spot high-volume breakouts whenever volume increases significantlythat
is, at least 30% higher than their average trading volumealong with a move up in
price. These are important because strong volume indicates institutional buying is at
work, which can help you find good entries. In this article, Ill show you how to find
High-volume breakouts & cups

The first volume breakout pattern
to look for is one in which volume
increases steadily near the right
side of a bullish cup, as it tests prior
resistance. You will often notice an
uptrend in the height of volume bars,
in addition to an upward sharp move
in price. The volume bar uptrend
should make a triangle-type pattern,
with the highest volume bars on the
right side.
You can see this pattern illustrated
in the chart of Oceaneering International, Inc. (OII) in Figure 1, in which
the cup breakout is confirmed by a
high-volume breakout on October 2,
2015. The volume trended up heavily
during this triangle breakout pattern.
When youre scanning for these patterns, a good entry strategy is to enter
a new swing trade anywhere from 50
cents to a dollar above the high of the
breakout pattern day on a subsequent
day (in this case, an entry near $44
on October 5, 2015).
You may often come across these
high-volume breakout patterns after
theyve made their initial move. The
good news is that entering above new
highs on a day following this pattern
is fine, as long as it has remained in an
uptrend following the initial volume
breakout day, as seen on the chart in
Figure 1. A simple criterion for con-
violetkalpa/Shutterstock
high-volume breakout patterns when

youre entering your trades.
A popular Wall Street professional
traders saying is that traders vote
with volume, and profit with price
action. Its wise to wait for volume
confirmation prior to entering any
breakout trade, because you want to
have high volume serve as the wind
beneath your wings to support an upside technical price move whenever
you trade. Its not enough to simply
buy new highs for breakout entries.
You want price to continue upward
after you enter your trade, and seeing
strong volume is one of the best ways
in which you can achieve this. Here,
then, are some high-volume breakout
patterns you can look for to help with
finding good entries.
firming a new breakout entry is to determine if volume

and price are both at 15-day
highs. If price alone is at a
15-day high, you may still
wish to take the trade, but
to be cautious, you should
trade a smaller share size.
If price and volume are at
15-day highs, then you can
trade a larger size.
This is an effective guideline for helping to decide
how many shares to trade;
you can also use volume bar
height to help you visually
see if your trade size should
be small versus large, based
on overall trading volume. If
current volume for the chart
youre considering is unchanged during an uptrend, Figure 1: Cup Breakout Confirmed By High-Volume Breakout. Volume trended up heavily during the triangle
then you trade a small size. breakout pattern. A good entry strategy, in this case, would be to enter a new swing trade $0.50$1.00 above the high of the
If, however, current (most breakout pattern on a subsequent day.
recent) volume is at least
30% higher than average, in an uptrend or other breakout
Strong volume indicates
pattern, then you can consider trading a larger size.
institutional buying is at
work, which can help you
find good entries.
Volume gap continuations

The most common high-volume day is one in which price has
gapped up (or down), as seen on the chart of EMC Corp. (EMC)
in Figure 2. These minor
gaps of less than one to two
points will often continue
in the direction of the gap,
often for several days. When
you see a high-volume gap
continuation pattern like
this, its a smart trading
idea to figure out how to
enter your trade during the
two to three days following
the gap day.
You will likely find that
these patterns make for a
primary trading strategy,
since high-volume gap
continuations tend to work
out well. Your initial, as well
as second or third, scaled-in
trades can also use volume
confirmation signals to help
you decide when to add to a
winning position. In Figure Figure 2: Gap Volume Continuation Pattern. These minor gaps, of less than one to two points, will often continue in
2, you can see that October the direction of the gap, often for several days. When you trade high-volume gap continuations, its important to note that the best
12, 2015, on the rightmost ones are in a clearly defined, strong, sustained uptrend.
January 2016
eSignal
CHART PATTERNS
Figure 3: Inverse Head & Shoulders. High volume confirms a bullish upside breakout move. Note how much higher the
overall volume bars are on October 20, 2015 compared to the prior day, during the inverse H&S breakout during the opening
hour of the trading day.
side of the chart, was also

a high-volume day. Entering on a later day, above
the high of this volume
breakout day, would also
make sense.
When you trade highvolume gap continuations,
its important to note that
the best ones are in a clearly
defined, strong, sustained
uptrend. Similar to visiting your eye doctor and
reporting which letters are
the clearest, in trading, its
important to avoid up-anddown choppy charts, even
if they have high-volume
breakouts. Give preference instead to charts that
exhibit price action in a
tight, narrow, strongly uptrending channel like those
discussed here.
Inverse head & shoulders breakout

Another strong pattern for day or swing trading is to enter a
long trade following an inverse head & shoulder (H&S) pattern (series of three bullish cups) on high volume. You can
see how strongly this pattern works on the chart of Weight
Watchers International, Inc. (WTW) in Figure 3. The multiple
retest of resistance near $15/
share finally broke out to
new highs, once volume
increased right after 9:30
am.
Note how much higher
the overall volume bars
are on October 20, 2015
compared to the prior day,
during the inverse H&S
breakout during the opening hour of the trading
day. One interesting point
to note on this chart is
how the prior days range
($15 - $11 = $4) was met
early in the day, as WTW
moved four points during
the early part of the day
due to high-volume buying on the open. When
you are looking for whats
worth trading, charts with
Figure 4: High Volume Confirming 50-Period Simple Moving Average (SMA). High volume confirms an entry in
volume and volatility (the
this 50-period SMA breakout chart. This pattern trended up for three weeks before pulling back, going from $33/share to $39/
two Vs) like this one are
share.
When youre looking for what is

worth trading, charts with volume
and volatility (the two Vs) are
usually the best candidates.
usually the best candidates.

Here are two quick technical points to keep in mind when
entering long inverse H&S breakouts: first, its best if the
neckline is in a slight uptrend (as it is in Figure 3); second,
its best if the depth of the rightmost cup is less than $1, as in
this example. This compression patternone with shallow
cupsin an H&S breakout often leads to solid upside moves.
In this example, it did a full three-point upside breakout.
From a timing standpoint, when you see these types of
upside high-volume breakouts, a nice feature is that theyre so
strong you dont have to enter early or right on time above
the neckline. They will often move a dollar or more before
a pullback, making them ideal for both intraday as well as
swing trading.
drop, its time for you to tighten your trailing stop or exit the
trade altogether.
Here are some trading tips to keep in mind:
High volume above 50-period moving average

For longer-term swing trading, you can use a 90-day daily
candlestick chart with the 50/100/200-period simple moving
average (SMA) lines that are favored by institutional traders.
One high-volume breakout pattern that capitalizes on 50-period SMA breakouts is illustrated in the chart of Best Buy Co.
Inc. (BBY) in Figure 4. A long entry is initiated following a
day in which price action trades above the 50-period SMA
on strong volume.
The 50-period SMA on a 90-day daily chart is a key technical indicator that, when combined with volume, can help
you spot strong breakouts as they progress in an uptrend. You
can see that this pattern trended up for three weeks before
pulling back, going from $33/share to $39/share. Your initial
exit target can be set at the 200-period SMA (in this chart,
thats the black line at $36); this one kept going up strongly
even after that exit target was hit.
The reason this high-volume 50-period SMA breakout
pattern works is simply because professional traders use this
technical moving average value to make their entry decisions.
The strong buying volume that comes in after a move above
the 50-period SMA attracts additional buying momentum,
which leads to the multiday breakout continuation.
zz Selectively trade only the strongest-trending charts in

sustained uptrends; for swing trades, the prior trend
should have at least three to five days of continuous new
highs on your chart prior to entering.
Your breakout trading
plan
Think of the supply & demand involved
in trading; when volume is high and price
continues in an uptrend, its because
theres not enough share supply at one
price point, so price increases. As long as
price and volume both continue increasing in an uptrend, the breakout continues. If you see volume
drop and price move sideways in a consolidation, or start to
zz Use high volume as a disciplined trading guideline; do

not take trades until strong volume (>30% higher than
usual) starts to show up on your charts.
zz High-volume breakouts will usually trend for much
longer than average-volume breakouts. Capitalize on
this phenomenon by planning to scale in and add to
winning trades as they continue in your favor (in swing
trading, you may wish to add additional shares every
two points or so).
Keep the relationship between price action and volume

firmly in mind when you place your trades. See if you can spot
similar high-volume breakout charts when you scan through
your charts to help identify successful trading entries.
Ken Calhoun is a producer of trading courses, live seminars,
and video-based training systems for active traders. He is a
UCLA alumnus and is the founder of TradeMastery.com, an
educational resource site for day and swing traders.
Further reading
Calhoun, Ken [2015]. Trading First-Hour Breakouts, Technical Analysis of Stocks & Commodities, Volume 33:
December.
[2015]. Managing Breakout Trades, Technical Analysis of Stocks & Commodities, Volume 33: November.
[2015]. Breakout Or Fakeout? Technical Analysis of
Stocks & Commodities, Volume 33: October.
[2015]. Gap Continuation Breakouts, Technical
Analysis of Stocks & Commodities, Volume 33: September.
Gopalakrishnan, Jayanthi, and Bruce R. Faber [2011]. Trading
Momentum With Ken Calhoun, interview, Technical Analysis of Stocks & Commodities, Volume 29: March
eSignal
January 2016
Explore Your Options

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

ahead of earnings
Figure 1: PRICE, EARNINGS, VOLATILITY. The red line, or implied volatility, moves within a range of 20 to
80. As the line moves down, there is less fear and as it goes up it means there is uncertainty about the future.
AMZN ATM calls and puts

expiring this week
Figure 2: calls and puts expiring in the near term. Here you see that the AMZN 570 calls and
570 puts are trading at around 50 points when you combine the costs of both.
www.tomsoptiontools.com
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7-30 day ATM IV
SMA (200)
7-30 day ATM IV
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05
that are expiring in the current week are

trading at around 50 points when you
combine the costs of both. Thats what
I like to do to get a read on where this
stock might go after earnings. Based on
these numbers, option traders expect the
range of AMZN to be contained to 50
points after the report. Thats about an
8.5% move in the stock, which is a big
anticipation for a jump after earnings. If
option traders are already digesting 50
points post earnings, there would have to
be a move greater than that to the upside
or downside to profit on the straddle by
Fridays expiration.
Would I buy this straddle that expires
only one day after the earnings announcement? Of course not, since the
opportunity simply isnt there. Heres
why: First, the straddle would cost $5,000
per contract to buy, which already vio-
Stock: AMZN (AMAZON.COM) O=565.27 H=570.94 L=560.31 C=570.73

Next earnings in 6 days (2015-10-22 est)
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8
Stock
few weeks ago seemed to make a lot of

sense in hindsight, as option volatility
has risen with price. Funny thing is that
most novice traders think that buying a
straddle and holding it through earnings
makes sense, because they have seen big
moves happen on the stock, and have
the idea that a trade, like a straddle,
will make money on the big move. Its
not as easy as it sounds, so lets take a
more experienced approach to see if
this indeed is a good idea ahead of this
weeks earnings on AMZN (as I write
this in early November 2015).
The first thing I do is evaluate what
the near-term straddle is trading for,
so it makes sense to look at the near
options expiring in the current week
(Figure 2). This gives me a gauge of
how far the stock could go just after the
report. AMZN 570 calls and 570 puts
20
15
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TO STRADDLE OR NOT TO STRADDLE

Why not just buy a straddle into an
earnings report, attempting to profit on
either side?
While this sounds like a great idea,
it is not always the case. This month, I
want to review straddles but in particular,
I want to show you when not to use one.
The straddle is a nondirectional strategy
in which you buy an at-the-money call
and put with the same strike price and
expiration date. The combined cost of
this option strategy is double what it
would cost to simply take a side, but its
also a nondirectional view. This sounds
simple and I think this covers the basics
of it. Ill show you an example of buying a straddle just before earnings, with
none other than one of the most popular
companies in the world, Amazon.com,
Inc. (AMZN).
The chart of AMZN in Figure 1 is a
great read for straddle traders. It displays
price along with the result of the last
earnings report back in late July, and
it displays volatility. The red line you
see moving up and down is not a moving average or any popular technical
indicator. Its the implied volatility line
for the near-money options that trade
on Amazon.
Take a closer look at the chart, and you
can see that this red line, or options IV,
moves within a range of 2080. This is
what I refer to as a fear factor line. As
the line goes down, there is less fear of
the day-to-day movement of the stock.
As the line goes up, so does the uncertainty about the future, and of course,
option prices. If the line goes from 20
to 80, it means that the time value of
an option theoretically increases by a
factor of four.
A smart straddle trader would try and
buy when volatility is low, and sell when
volatility is high. Buying a straddle a
Explore Your Options

lates a major rule for me. Also, because
theres only one day after earnings for
this trade to become profitable, theres a
big chance of risk at this price.
What I am talking about is called statistical probability. With options, when you
bet on the long shot, you could win more,
but the percentage of winning becomes
far less. Dont let this calculator fool you
into thinking that naked option selling
Straddles are best used

in periods of low volatility
when you expect price to
break or if you expect a
rise in volatility.
is the only way to trade. Its just a guide
and should be treated as such.
Straddles are best used in periods of

low volatility when you expect price to
break but are not sure in which direction,
or if you expect a rise in volatility because
of impending news such as an earnings
report. If youre trading it for any other
reason, then youre not stacking anything
in your favor. Keep this in mind when the
next earnings season approaches!
mFo original Vitali (0.03153), mFo 50 (-0.07436)
Continued from page 7
Which is why Im asking if theres a

criteria they apply to the 50d to determine
if market direction is with conviction and
more valid in establishing the base from
which they then scan for the stocks?
Any commentary and feedback from
the authors on this would be greatly
appreciated to better complete the whole
picture from their article.
Thanks again, and Im looking forward
to more insightful articles from these
authors in the future!
ViNceNt
Author James Rich replies:
If you reread the paragraph under the
subheading The Method, youll see
that I like the 20 SMA above the 50
and the 50 above the 200. When the 50
flattens out, the 20 has normally crossed
below it. If the 20 is above the 50, the 50
has a noticeable slope to the upside that
has been in place since the 20 crossed
it, or shortly thereafter. If you wanted
to be a little more aggressive, you might
consider taking an initial position when
both the 20 and 50 SMAs have turned
up (or down) but have not yet crossed
the 200.
mONEY FLOW OSCiLLATOR CODE
Editor,
Vitali Apirines article in the October
2015 issue, The Money Flow Oscillator, was very interesting.
Im long-term user of MetaStock, but
Im not so good at coding formulas. I
wanted to try Apirines indicator on my
database, but unfortunately, the code
supplied in the article doesnt seem to
work when I put it

into MetaStock. (I
receive the error
message symbol
not fou nd i n
database, so it
seems like it has
something to do
with the .DJI
in the code.)
How can I use
the indicator on
all my different
indexes/securities?
UWe, Germany
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created in metastock from Equis international
FiguRE 1: S&P 500 WiTh READERS TREND-FOLLOWiNg iNDiCATOR AND ViTALi

APiRiNES VOLumE iNDiCATORS. In this chart, green=uptrend, blue=strong up,
red=down, black=strong down, and orange=extreme.
Author Vitali Apirine replies:

Thank you for your inquiry. Following
is MetaStock code to implement the
MFO:
MetaStock MFO code:
{avoid division by zero}
Dvs:=if((H-Ref(l,-1))+(Ref(H,-1)l)=0,.00001,(H-Ref(l,-1)+(Ref(H,-1)-l)));
mlTp:=if(H<Ref(l,-1),-1,if(l>Ref(H,1),1,((H-Ref(l,-1))-(Ref(H,-1)-l))/dvs));
{avoid division by zero}
Dvsv:=if(V=0,.00001,V);
sum((mlTp*V),20)/sum(Dvsv,20);
FOLLOW-ON
Thank you very much to Vitali Apirine
for his fast response and the codethe
code works. My first observation is that
it fits very well with my own simple
trend-following indicator.
Apirines original 20-day time frame
January 2016
fits the actual data very well, if its

smoothed to 50 days (I was able to
manage this...), one might get a better
view of the medium-/longer-term trend.
Although not as clear in the uptrends
(indexes spend more time up, and need
multiple divergences), downtrends seem
to terminate only if downtrends on his
volume indicators are clearly violated.
In Figure 1 is a chart of the S&P
500 with my trend-following indicator (green=uptrend, blue=strong
up, red=down, black=strong down,
orange=extreme!) and Apirines volume
indicators. I definitely will add them to
my arsenal, and Im eager to test this on
individual stocks.
Because of the authors help I wanted
to share this with him, as he might be
able to research it a little deeper and find
something valuable for his trading!
Thanks again.
UWe
INTERVIEW
Algorithmic Systems For The Rest Of Us
Developing Strategies
With Kevin Davey
Kevin J. Davey is a professional trader and systems developer. He
is the author of Building Winning Algorithmic Trading Systems: A
Traders Journey From Data Mining To Monte Carlo Simulation To
Live Trading. An aerospace engineer and MBA by background, Davey
has been an independent trader for over 25 years. Although he has had
a great deal of recent success, many of his early years of trading were
met with failure. Bloodied but not defeated, Davey spent the next few
years researching, reading, and otherwise devouring all he could about
trading. That legwork paid off in a worldwide futures trading contest,
in which Davey came in first place once and second place twice during
the years 20052007.
Currently, Davey trades full-time, writes for trading publications,
and divulges many of his trading practices in his Strategy Factory
workshop. He also consults with private individuals, hedge fund traders, and CTAs when he is not developing new strategies for his own
personal account.
Stocks & Commodities Editor Jayanthi Gopalakrishnan spoke with
Kevin Davey via phone on October 30, 2015 about how a retail trader
can trade algorithmically.
Kevin, tell us a little bit about
yourself and how you got
interested in the financial
markets. From what Ive
read about you, you have had quite an
interesting journey.
I started out the way most people start
outI got a piece of direct mail. This
was about 25 years ago or so, and that
piece of mail stated how much money I
could make trading commodities. That
got me hooked and even though that
particular method was garbage, I was
able to go on from there. I was hooked
because I saw the potential in trading
beyond passive investing, and so I thought
Id give it a try. Then I just grew from
there and made a ton of mistakes. I probably did everything I possibly could do
incorrectly, such as quickly changing
systems, trading without any kind of
system, averaging down, and running to
the bank at lunchtimethis was when
I was workingto wire money just to
avoid the margin call.
The biggest challenge in the

entire procedure was to come up
with a test process that yielded
good results and prevented me
from having too many rules, too
many parameters, and too much
optimization.
It probably took me 10 years

or so of trading part-time, sort
of taking it seriously but not
doing well and just floundering around, to make some
sense out of the markets. After
reading a few of Van Tharps
books, I become interested in systemtype algorithmic mechanical trading.
From there I went on to developing a
couple of systems. I was able to trade
one of those systems and win the World
Cup Championship of Futures Trading.
One year I finished second, the following year I finished in first place, and the
year after that, I finished again in second
place. That gave me a lot of confidence
because I felt like I knew what I was
doing, at least a little bit. About a year
after that last contest I made the leap
from being a part-time trader to being
a full-time one. Ive been trading fulltime ever since.
All the mistakes you made are ones all
traders make, and when those mistakes

keep recurring, thats what leads people
to get frustrated with trading and quit.
What did you learn from those mistakes
and how did those lessons help you in
your trading?
The mistakes I made led me to realize
that trading is a lot more difficult than
what those who sell you information
claim it to be. Trading is hard work and
you have to dedicate yourself to it, even
if youre just doing it part-time. Thats
because youre up against the professionals and people who trade full-time. Its
a zero-sum game; somebody is taking
money from somebody else. I learned to
take it a lot more seriously, and for me
I found it was best to have a methodical
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step-by-step approach. The reason I say

for me is because I have a math/science/engineering-type background, so
doing things with objective steps, even
if the systems good or not, or passes
certain criteria, made a lot more sense
to me. This is something I wasnt doing
when I started trading. I was doing a
little bit of it in the beginning, but not
enough of it.
That was probably what I learned
the most from my mistakes. I realized
that I have to approach this problem a
little differently and treat it a little differently. Once I did that, things started
working better and that helped me with
the psychological aspect of trading. It
was always the psychology of making
and losing money that was difficult to
overcome. The other aspect is that even
if you follow rules, you can still have
those feelings of elation when you make
money, and feelings of distress when
you lose money. Many people think that
automated or mechanical trading means
there are no emotions involved, but thats
not true. There are emotions, but the
emotions are different than those of a
discretionary trader. Thats something
I had to learn as well.
Even if somebody has a trading system
thats mechanical or automated, I
would imagine there are times when
the trader will allow their emotions to
dictate what to do, especially when it
comes to exiting the trade. Are emotions always going to be there, and is
that something you have to accept, or
is it possible to get rid of them completely?
I think, to an extent, emotions are
always going to exist. I was able to
eliminate emotions by trading several
systems. For example, right now I trade
about 80 or so strategies that are all
rule-based. Most, not all, of them are
automated. What I found was when you
start tradinglets say when you get
above five or 10 strategiesit becomes
more difficult to overrule strategies.
Its impossible to make decisions on
each system when therere so many to
look at. You cant keep track of all the
times youre cheating or lying to your
system. I have done that before when I
was trading three to four systems, but

when youre trading more systems, you
just cant keep track of everything. When
you have so many systems, it becomes
easier to just follow the systems without
taking other things into consideration.
For me, that was when the emotions
went out the window. I realized that if
I decide to ignore a signal generated by
one system, I should do the same with all
signals. But its impossible to keep track
of those decisions for each system. Its
better just to follow the systems and do
what they indicate. What is important is
to put mechanisms in place to stop trading if the system stops performing. Then
it becomes completely objective. For all
of my systems I have certain criteria that,
if met, will indicate to me that I should
stop trading that system.
Trading becomes a lot less emotional,
which is nice, but you have to have confidence in your systems, and that goes
back to having a process for developing
systems. I have a process that I use,
and over time, Ive proven to myself
that when I follow the process to create
systems, the systems tend to work well.
This gives me the confidence to build
new ones because I know most of them
will work. Its similar to a feedback loop,
but once you have confidence, its much
easier to follow it. But that comes with
experience. Its not unusual for traders
who are starting out to be tempted to do
something contrary to what their systems
are suggesting.
You mentioned that you follow a process when it comes to creating a system.
What are some of the basic steps that
you follow in that process?
Therere a total of seven to eight steps.
It starts with the goals and objectives that
you set for a strategy. If you dont have
goals and objectives, you get trapped

into continually trying to improve your
system. Theres more to a system than
just developing it. You need to have goals,
and this could include what your annual
return or maximum drawdown is. Many
traders who are just starting out developing trading systems have never thought
of these goals. They are interested in
developing something that makes a lot
of money with a small drawdown.
The truth is you cant design a system
using such nonspecific goals. You have
to set some realistic goals. I come across
people who set some ridiculously unrealistic goals and I can guarantee you that
the steps they take to get there will involve too many rules such as overfitting,
curve-fitting, overoptimizing, and the
system will not work going forward.
A successful system starts with setting
realistic goals. Then, part of it has to do
with the way I do it. I look for systems
that are good; they dont have to be great
or the holy grailtype systems. Too
many people get hung up on that sort of
thinking. I take a different approach. I
can probably develop 10 good systems
and if I trade those 10 systems together,
assuming they look at different markets,
different styles of trading, or different
time frame, I can be diversified and
achieve much better performance than
someone who trades just one system. And
Im not relying on just one strategy.
My next step, after setting goals, is to
always look for trading ideas. Youve got
to have what I call a strategy factory,
where ideas come in the door. These ideas
are your raw material and as you build
strategies based on these ideas, you test
them. I run a lot of tests such as Monte
Carlo simulations and walk-forward testing. Believe it or not, a lot of the strategies
I test dont work well. They may work
for a short time, but my time horizon is
typically five to 10 years long, and the
system I test has to give decent results
during that time period. If it doesnt, the
idea goes into the trash.
Im always looking for ideas to apply
to my trading. If I run out of ideas, then
I have nothing to test, and Im not going to get any strategies. I have to have
a constant flow of ideas. Once you have
your goals and objectives and your ideas,
then its a matter of running some tests. I

do a few different things. I run some tests
on a limited timeframe just to get an idea
of whether the idea has any merit. Most
people take all the rules and put them in
a strategy, apply that strategy to a chart
for all the data they have, optimize it
with all the parameters they can possibly
optimize, hit optimize, get the best
results, and trade that strategy. I would
say that 90% of the time, this method
doesnt work. You want to avoid falling
into this trap. This methodology might
work for those who know what theyre
doing and are really careful, but for most
people, its not going to work.
The biggest challenge in the entire procedure was to come up with a test process
that yielded good results and prevented
me from having too many rules, too many
parameters, and too much optimization.
I try to make the systems as simple as
possible and once I do that I run some
Monte Carlo simulations, which gives me
some probabilities. A lot of people make
decisions based merely on an equity
curve even if its not a sample dataset.
If you look at just one equity curve, you
could underestimate your true drawdown
risk. In Monte Carlo simulations, you
rearrange the trades a little bit and you
could get drastically different results,
especially in the drawdowns. At each
one of those test points in the simulation,
I have some criteria that have helped
me in finding out whether the system is
viable or not. When I run Monte Carlo
simulations I dont have to keep going
back and testing and retesting a system
five or six times. You have to be willing
to throw away an idea if it doesnt work.
I dont become emotionally attached to
an idea. I know a lot of people who spend
years working on one system because
they become attached to it and refuse
to admit that its not working.
Once I find that the strategy is something I think is viable, I do what I call
incubation, which is to say I take the
strategy and set it aside for a period of
time. I just look at it once a month and
if necessary, Ill do some reoptimization
because of walk-forward testing. Then,
after a set period of time, I reevaluate
the strategy to see if its still holding up
six months after I developed it. I have
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found this to be helpful. Ive found that
if you start trading a system soon after
youve finished developing it, it tends to
fall apart right away. This is mostly due
to things like overfitting, but sometimes
it just happens. Its good to avoid trading
systems that never work in real time. This
is an important step, and I wish I had done
it with some of the systems I developed
15 years ago. I would get so excited about
the systems I developed that I would start
trading them the next day.
My approach is different now. Obviously therell be some randomness. Nothing ever performs in a straight line, but
January 2016
you can have some criteria to see if the

strategy is still performing in the same
way. That gives you more confidence to
trade that system.
The final step is to combine the viable
strategy with other strategies to make
sure youre not doubling your risk and
avoid correlation among what youre
trading. Once everything is lined up,
you go ahead and start trading your
strategy. But once you to start trading
itand a lot of people dont talk about
thisyou have to follow up by monitoring the strategies you already have,
decide when to stop trading them, or
maybe decide to increase your position

size. Follow-up is extremely important.
One of the biggest mistakes I see people
make is that they never think their new
system will fail. They dont plan for their
system failing. Instead, they plan for all
the money theyre going to spend when
they make their expected profits. What
they should focus on is what to do if their
system fails. You dont want your system
to wipe out your account, so you have
to know when you should quit trading
a system. I continue to do research on
aspects of trading other than developing
trading systems. One of things I have
been looking at lately is what criteria to
use to stop trading a system.
Could you talk about that a little bit
more? When is it a good time to stop
trading the system, when do you change
the size of your positions, and what type
of an exit strategy do you apply?
For position sizing, I typically use a
simple fixed fractionaltype approach,
which is based on my account size. I try
not to get too clever with it. Theres a lot
of different position-sizing techniques
you can apply, and you can always find
one technique thats best for one of your
systems. You may have strategy A that
suggests you use fixed-fractional position
sizing, strategy B might suggest some
other technique, and strategy C might say
something else. But to me, thats a form of
optimization, because youre taking the
data and then applying different things
to it and selecting the best one. I tend to
keep it simple and use fixed fractional,
and if my account size goes down into
drawdown territory, I will cut back my
position sizes. When I start trading a new
system, I usually start with one contract.
I always have a fear that perhaps I did
something wrong or something isnt quite
right. I letat the beginning at least
profits dictate if Im going to increase
my position size and then I switch over
to a fixed-fractional method.
As far as when to stop trading a system,
its also system-dependent. In my trading,
I use a few different things. For example,
I might use two times the maximum
historical drawdown as a criterion. I
know somebody who uses half of the
historical drawdown as a criterion, and
hes content with it. You can look at the

number of consecutive losing trades and
if in your history youve only had five
consecutive losing trades, then perhaps
by the time you get to seven or eight, it
might be time to quit.
Therere a lot of different ways to
decide when to quit using a system and
I havent found one way that stands
head and shoulders above others. But
what I have concluded is that having
the exact criteria isnt going to make a
huge difference, but what will make a
difference is having the criteria versus
not having them. I think the best way to
approach this is to write down whatever
your criterion is before you start trading.
That would be something along the lines
of if x happens then youll stop trading
the strategy. Ideally, you share this with
someone, whether it is a trading partner,
a spouse, or significant other and theyll
help hold you accountable for it. Ask them
to check in with you every six months or
so and see if the strategy ever hit the point
where you said youd quit trading it. That
will hold you accountable because its
difficult to tell someone that the system
did hit the quitting point but youre still
trading it. Its a good mechanism to help
ensure that when you say youre going
to quit, you do quit. A lot of people will
say theyll quit when theyre down 30%
but when 30% comes, and they continue
to use it for another month to see how
it goes because in their mind, itll turn
around. But what usually happens is
theyre down another 20% and then they
want to just keep going because they
think it has to turnaround sometime.
You know how that goes.
The best thing to do is to have your
criteria defined upfront. Everybody,
myself included, has at some point not
had the criteria defined and then ended
up making an emotional heat-of-themoment decision. Their system is going down, they get frustrated, and then
finally at some point they just quit. And
whats even more frustrating is after you
quit, the system turns around. That of
course makes you angrier and you start
doubting yourself. These are the types of
psychological games that you can play,
so I found it best, before you start trading, to write down when youre going to
quit trading a system. Keep it somewhere
where you can see it or remember it and
if your criteria are met, then quit trading.
This helps for those who trade part-time.
This is how the professionals do it. They
have their risk limits, and if they exceed
them, theyre cut off or fired from their
job. Youve got to treat your own trading
the same way.
This process that you described is what
it takes to create an algorithmic trading
system. When you use the term algorithmic trading, many people tend to
think its reserved for the institutional
or the high-frequency traders. But it
sounds to me like the retail trader can
also apply such a strategy. How should
the retail traders approach to developing an algorithmic system be different
from that of an institutions?
What I mean when I say algorithmic
systems is that the computer makes all
the decisions, which will tell you when
to buy and sell. If you automate that, the
computer will do it for you. Its similar
to mechanical rule-based trading. Youre
right in that a lot of people think algorithmic means high-frequency, and that
they have to be a hedge fund to have
such a system. The key for retail traders
is to not play where the high-frequency
people are playing. I dont try to scalp; any
retail platform is going to have trouble
doing that because youll need to have
a platform, either a professional-type
platform or create your own. Then, you
probably need colocation equipment, and
you may even take your code and burn
it onto a chip so it runs faster. For the
retail trader, this is not an option because
its expensive and youre fighting against
people that have teams of statisticians
with PhDs and a lot of cash to support
an infrastructure suited to trading.
The retail trader is better off staying

away from the institutions domain. That
means more swing trading, that is, more
trades that last days to weeks or even
months. I do have some intraday trading
systems, but oftentimes, Ill get into a
trade and stay in the entire day. I wont
get in and out of trades several times
because in the long run, the trading costs
will gobble up a lot of your profits.
In all the research & development Ive
done, the longer-term systems, that is,
systems based on daily bars, tend to be
easier to create than systems based on
one-minute bars. Yes, you have to endure
drawdowns if youre holding a position
overnight or holding it longer. Theres
a higher probability of intratrade drawdown, but this is where trading multiple
strategies helps because they smooth
things out, which is something you can
afford to do. A retail trader can consider
themselves an algorithmic trader but they
should realize who their competition is
and try to avoid playing in the same territory as the high-frequency firms, because
you cant compete with them.
What are the benefits of using multiple
trading systems?
When you trade several strategies,
youre diversifying. Instead of trading
one strategy, you trade five, 10, 20, or
however many you can. What Ive found
in my trading experience, say in the
last five to six years, is that I went from
trading one or two strategies to the point
where now Im trading about 80. I look
at the volatility of my monthly returns
using standard deviation and what Ive
found is that as I increase the number of
systems, volatility goes down. As a result,
my returns have become a lot smoother
and so have my equity curves. The downside to diversification is that you give up
some of the upside potential.
If there was a trader who was knowledgeable about price-action trading
or had one well-performing algorithm
and traded one market, it is possible
that, from a performance standpoint, he
could do better than somebody trading
10 strategies. Hed have higher upside,
but if his system breaks, then hell have
more downside. Its a tradeoff. For
those who are starting out, its difficult
to diversify, which is
probably a good thing
I trade about 80 or so strategies
because what that is
that are all rule-based. Out of
telling them is to wait
those 80 strategies, I would say
until they have more
that maybe 50 of them are in
money in their account. Then their risk
some type of trade.
of ruin goes down and
things get a lot better.
But diversification, if anything, is like the ing for situations where there might be
holy grail of trading, because its nice to spurts of upward movement. The strategy
trade a handful of systems knowing that might level out for a while after that if
if one stops working, youre not going to market conditions change. Then, it may
lose everything. Itll still hurt you, but go up again. I can handle those types of
there are other well-performing systems strategies because I can afford to break
you can use.
even for a while in the hope that over the
It dawned on me a few years ago that long term, theyll go up at times.
if I was trading four or five systems in
Out of the 80 strategies that I trade at
any given year, one or two would prob- any point in time, I would say that maybe
ably do well, one or two would maybe 50 of them are in some type of trade, and
break even, and one would not do well. sometimes the trades cancel out. Youll
But I did not know which ones would have a system thats long, and another
do well in the next 12 months, which is one thats short. Therell be times when
why it was good to trade them all. You youre just flat and thats okay because Ill
dont want to put all your money behind still monitor the strategies individually.
one system just because it did well the Overall, its not going to have an effect
previous year, because it might not do as on my account, but thats just part of
well next year. In my mind, diversifica- diversification.
tion is really the key.
Besides trading, do you offer courses
When youre saying that you have about or act as a mentor?
80 strategies, do you use them in conThe main thing I do is trade full-time.
junction, or do you use them separately After my book was released, people
for different market conditions?
started becoming interested in getting
All of the systems could trade at any a more in-depth study than what I gave
time. I dont try to discern between mar- in the book. So I hold online workshops
ket conditions. I know a lot people like on strategy development about once a
to trade some strategies when the market month. I help people build strategies and
is bullish and the concept is good. But then support them afterwards. I also do
the problem with this kind of approach some mentoring and consulting for CTAs
is that it depends on you having a good or people who work for hedge funds.
strategy for that particular market and
having a good switching mechanism, or Thank you for speaking with us,
a meta-strategy that will overrule and tell Kevin.
you that on any given day youll trade
strategy A but not strategy B because Further reading
the market is bullish. You run the risk Davey, Kevin [2014]. Building Winning
Algorithmic Trading Systems: A
of curve-fitting and usually what ends
Traders Journey From Data Mining
up happening is your strategy will be
to Monte Carlo Simulation to Live
too late for the bull market and youll
Trading + website, Wiley.
still be trading your bear strategy for a
while. Although I like the idea, I dont
think it works. My strategies will trade all
markets and I dont necessarily need to
have performance that continually goes
up in all types of situations. I am lookJanuary 2016
Osoba:
5.5 W, bleed L, x 6.5 H, bleed top
And that means embracing

failure, for failure is an essential stop on the road to
mastery, and in the financial
markets, mastery is the only
road to success. To succeed
you must fail, you must fail
often, and you must fail
strategically. This article
will show the retail trader
how to approach the idea of
failing successfully.
Have Faith In Yourself
Failing Successfully
Were groomed to think of losses as a sign of failure, which is why trading is difficult.
But experiencing losses is part of a traders life and is something you have to accept.
Heres how to approach the idea in a healthy way.
by Stella Osoba, CMT
To others, being wrong is a source of shame; to me, recognizing my mistakes is a source
of pride. Once we realize that imperfect understanding is the human condition, there is
no shame in being wrong, only in failing to correct our mistakes.George Soros
We
live in a society where the cult of success is worshipped. But what is often
hidden are the failures that go into creating that success. Failure is often
not understood and cultivated as a process that is integral to the creation
of exceptional results. Many of those who come to trading have succeeded
in their day jobs, and they expect success to come to them in trading in much the same
way it came in their other endeavors. But often this is not the case, for nowhere is it
more essential to develop a strategy for building mental strength than it is in trading.
making mistakes,
failing
We all want to be right. We
want to enter a trade on a
reversal, stay with that trade
and multiply our account
countless times with little
effort. We want to be able
to brag about our successes
in the market, to tell others
how our unique brand of
smartness led us to make
that million-dollar gain
on one trade. Maybe we
dream of walking out of
our day jobs to pursue the
dream of living in a tropical
paradise, lying on a beach
with a laptop by our side to monitor
our trades. We dream of watching
our accounts grow as we make trade
after successful trade. This has to
be possible, we think, for we are
smart. After all, we have succeeded
at many other things in life; maybe
we are doctors, or lawyers, or nuclear
physicists.
When we look at the charts, we can
clearly see the trends. We may think
that we have only to start and learn
a few rules to succeed. But success
in trading is often far more elusive
than we think it should be. Statistics
show that most traders fail. Why is
this? Why is it so difficult to make
trading riches and why do so many
people fail trying?
Our unending quest
for rightness
We go through life assuming that we
are mostly right. We equate being
JrCasas/Shutterstock
Being wrong,
TRADING PSYCHOLOGY
right with good, being wrong with bad. Rightness is pleasurable, it pumps up our egos, it enables us to feel good about
ourselves, enables us to feel confident about our place in the
world. When we were in school we were taught to look for the
correct answers to questions. Success was rewarded with a
passing grade. Failure was undesirable. If you failed, you felt
stupid, inadequate, and you had to repeat the class. So you went
through school learning that to be respected, acknowledged,
and to succeed, you needed to be right. You needed to learn
about the hoops society expected you to jump through and to
learn how to be a good hoop jumper. There were right answers
for every subject and wrong answers for every subject. Right
was good, wrong was bad. It was that simple. You came out
of school and your day job also rewarded right answers. You
play it safe because that is how the game is played and you
get the promotions and rise through the ranks.
But when the work fails to be satisfying and you look
around for a way to make your riches, you think about trading
and reason that the same skills that got you through school
exams with good grades and got you promotions on your job
should be enough to enable you to succeed in the financial
markets. Surely, the skills of life are transferable, you reason.
And so you open a brokerage account, subscribe to a couple
of newsletters, find a trading system that promises to return
good results, and begin to trade. Failure, you reason, is not
an option. You will succeed at trading in the same manner
that you have succeeded at everything else. But reality rarely
follows your mental script. If you are lucky, you will fail
early. It is through mastering a skill that was never taught in
schoolfailing successfullythat you can hope to evolve into
the kind of trader who can consistently beat the market.
Trading is often spoken of as a zero-sum game because what
one person wins, someone else must lose. There are always
two sides to a trade. Every trade must have a counterparty who
is willing to take the other side of the trade. For this reason,
you can look at any trade and figure you have a 50% chance
of being on the right side of the trade. If your trading system
gives you wins 50% of the time, you can still make a lot of
money trading, yet many dont. Even the institutions with
their algorithms expect their trading systems to lose anywhere
from 30% to 70% of the time, and yet they are still profitable.
Therefore, in order to trade successfully, it is not the number
of times you are in a losing position that determines your
ultimate success, but the ability to master what to do when
you are in a losing position.
Its okay to lose
Recognizing that the inability to deal with failure successfully is a handicap to our success as traders is perhaps the
most important lesson a trader will learn. If we expect 50%
or more of our trades to fail, then it is statistically possible
to have a series of five, maybe even 10 or more consecutive
failing trades. Preparing ourselves for failure is essential to
being able to manage the stress of trading successfully. With
any discretionary trading system, you should have a setup and
an entry price. But you should also have in mind a price level
To succeed you must fail, you

must fail often, and you must
fail strategically.
below/above which price should not go. This is the price at
which you exit the trade, no matter what. This is where you
set your stops, mental or otherwise.
Once it is hit, the trade has failed and you are out. But once
out, be prepared for anything to happen. Study the chart as
though you had not made the first trade and if a new setup and
entry forms, you should be prepared to go back into the trade
if your new stop will not expose you to too much risk. When
studying the charts, you want to force yourself to stay in the
present as much as possible. Every new bar that is formed on
the chart carries within it information that potentially creates
a new set up. Staying in the present and being prepared for all
contingencies is the only way to trade successfully.
Cognitive biases
The reason that trading can be so

difficult is because even though it
appears to be deceptively simple, it
isnt. Many of the causes of failure
are the result not of the trading
system employed, but of cognitive biases. Cognitive biases are
systematic errors in our thinking
that lead us to act in predictably irrational ways. These biases
are insidious because we are often not aware of them or their
influence on our thinking unless we have trained our minds
to be alert to our thought processes. But many trading systems
do not account for cognitive biases in their methods. Biases
such as the endowment effect can work against us in trading,
causing us to ascribe more value to a position because we
own it. This prevents us from getting out of a position when
we should. Fear of failure is another bias that can prevent us
from entering a position when we should because we fear being
wrong. Fear of regret can lead us to enter a position when it
has moved too far from our stop, thereby increasing our risk.
Loss aversion is another bias that can cause us to hold onto
a losing position too long because we are unwilling to take a
loss. Studies have shown that, on average, we feel the pain of
a loss 1.5 to 2.5 times more than the pleasure of a gain. These
and many other biases actively work against us to reduce our
chances of success in trading.
Often, when a trader has made a series of unsuccessful
trades, he will then go looking for a better trading system.
But trading is more of a psychological game. Many trading
systems work some of the time. But misapplied, trader psychology will jeopardize all trading systems.
Continued on page 41
January 2016
Q&A
SINCE YOU ASKED
Confused about some aspect of trading? Professional trader Rob Friesen, president
& COO of Bright Trading (www.stocktrading.com), an equity trading corporation,
answers a few of your questions. To submit a question or suggest a topic, email him
at robfriesen@brighttrading.net, or post your question to our website at http://
Message-Boards.Traders.com. Answers will be posted there, and selected questions
will appear in a future issue of S&C.
Rob Friesen
PAIR TRADING: LOOK FOR CATALYSTS

In the land of diminishing pair returns,
grab some catalysts for your spreads!
We live in an instant-fix environment.
If youve got a problem, you want an
instant solution. This is often carried
into the trading world. You want access
to information so that your computers
can crunch data and find those statistical
anomalies. The computer does all the
work and spits out the results you are
searching for. In this machine age, traders
often forgo the heavy lifting implied by
quality time spent researching, reflecting,
and contemplating the current and future
economic landscape. Instead, they want
a formula or a magic pill for profits they
think automation can provide.
I am certainly not against the computer age, but I do have an abundance
of street smarts gained from years of
trading, working with other traders,
and observing numerous statistically
significant samples. I understand how
pairs behave in good times, bad times,
and most of the time. Traders will go
after pair opportunities, but this can
also end up increasing risks to their
capital. Attempting to pick up pennies in
front of a steam roller, they make a dime,
make another, and then lose a dollar.
I believe that traders can get much
better bang for their arbitrage buck and
reduce some inherent problems by adding some additional ingredients to their
spread trading soup. For those of you
not familiar with the concept of pair
trading, here is a brief explanation. Pair
trading is the combining of two stocks,
one long and one short, in an effort to
lower market risk and macro risk, where
the focus shifts from trading a stock in
a directional manner to relying on the
spread price between the two. You would
profit from or lose money based on the
relative change between the two stocks.

Both could go up, down, converge or
diverge; it all depends on which stock
you choose as your long stock, which
one you short, and what ratio of capital
is applied to each.
Pair trading can be done with equities,
ETFs, options, futures, or currencies. In
this column, I will discuss the first two.
Typically, the main concept applied to
pair-related strategies is that of mean
reversion, that is, looking for relationships that are stretched out and revealing
anomalies. The trader would go long and
short as simultaneously as their trading
tools can facilitate when presented with
an opportunity that usually comes in
Traders can get much

better bang for their
arbitrage buck by adding
some additional ingredients
to their spread trading
soup.
the form of an anomaly or outlier in the
spread relationship. Once capital is applied, the trader looks for the spread to
mean-revert (return to the norm).
My experience, through trading, observation, research, and working with
many other statistical-arbitrage (stat-arb,
or pairs) traders is that market conditions
play heavily into the yield and risk when
a mean-reverting focus is applied. During times of significant trends caused by
technically driven algorithmic traders or
when the investment community is voting directionally due to macro influences,
mean reversion is frustrating and can
result in diminished returns or outright
losses. Similarly, during seasonal trends
in the market, strategies have times of
best and worst returns; rarely is there

uniform distribution of returns.
Trending conditions would favor
relative-strength pair trading rather than
fading (going against) a directional move.
Its fading in this environment that is like
picking up those pennies at the risk of
losing dollars. I am often asked, Why
not just trade an unhedged position if
you are being directional anyway? If
you are new to the concept of pairs, I
can understand the skepticism, but if you
have experienced the benefits as well as
the problems of pairs you can appreciate
the information I am providing.
Spread traders appreciate watching
a spread number that is experienced as
statistically muted or smoothed compared to watching an individual stock.
Relationship-based trading often provides more information than singlestock trading. An example would be
thus: it is hard to compare an apple to
an orange, but much easier to compare
one apple to another apple.
Having a long and short position
at the same time can reduce eventrelated risk. You want to be protected
from market moves but take advantage
of potentially better performance of
one stock over another. Even though the
VIX is hovering around 17 at the time
of this writing, the actionable volatility
feels much lower. Stocks trend during
the day or even multiday with nominal
retracements. Can you take advantage of
this behavior? Can pairs be optimized
for these market attributes?
Here are some building blocks or
ingredients of pair trades:
Technical patterns on a variety of
time frames
Technical and quantitative indicators
Q&A
Persistence of short-term or longterm performance
Fundamental
Macro catalysts
{{ Currency influences
{{ Interest rate impact
{{ Political platforms
Opportunities created from events
{{ Trader enters post-event
{{ Streaks
{{ Seasonal tendencies
{{ Dividends
{{ Earnings and EPS changes.
Besides a peer group pairing of one long
stock against a stock short, here are some
other combinations that can be done. The
combination can be:
Any stock long against any stock
short
A few stocks long against a single
stock or ETF short
One stock or ETF long against a few
stocks short
A diversified basket of longs against
XXX / XXXXX
a diversifiedContinued
basket of from
shorts
page PB
One industry or sector basket long
against a different industry or sector
basket short.
There are many ideas to draw from to
create a combo trade. Too often, the buzz

words of correlation and cointegration
are thrown around as the sauce that is
going to bring home the bacon. Traditionally, there has been some merit to
that analysis but there are so many more
ducks to line up to increase the odds of
a successful combo trade.
Again, money is made by the relative
performance between your longs and
shorts, so focus on what catalysts would
contribute to your long position(s) slightly outperforming your short position(s),
whether all your positions go up, down,
or stay in a trading range.
I have heard it said that if you want to
write an award-winning screenplay, then
study past successful scripts. If you want
to compose a hit song, then study the
ingredients of songs that have risen in
the charts. If you want to make brilliant
combo trades, then study any red flags,
ducks that lined up, and micro and macro
catalysts that caused peer group stocks
to separate from each other.
Think about the following:
Why Blockbuster went to zero while
Netflix soared
Why Blackberry lost market share
to rivals Apple and Google
Why Facebook is monetizing mobile
OSOBA / FAILING SUCCESSFULLY

Continued from page 39
If trading is a probability game, then a failed trade cannot

be a reflection of your ability as a trader. Many, if not most,
trades will fail. Failure is essential to trading. The ability to
acknowledge the failure early, to not deflect or make excuses
for the failure, and to exit the trade all come with humility
and practice. In the words of Brendan Moynihan in his book
What I Learned Losing A Million Dollars, Success can be
built upon repeated failures when the failures arent taken
personally; likewise, failure can be built upon repeated successes when the successes are taken personally.
Failure is uncomfortable, and repeated failure is many times
more uncomfortable. But you must learn to embrace failure
however it comes and move forward from it. Failure is not a
skill that society prepares most of us for. So many will come
to trading ill-equipped to handle failure. But to become a
successful trader, a mastery of the art of failing successfully
is important. Recognize that failure is an essential part of
and performing better than Twitter

What impacted retailers such as
Aeropostale versus American Eagle
Outfitters
Why Bank of New York Mellon
was able to outperform Franklin
Resources
What is it about Costcos business
model that has its stock outpacing
that of Walmart.
Can you find and exploit these types
of divergent big-picture opportunities
again?
There are many more stocks that
have been than are, so the future will
be filled with winners and losers in each
peer industry. Traders can capture this
potential through pairs or diversified
combo trades. Focus on the ingredients
that make up your opportunities and
write some rules for entry, exit, and risk
management.
I hope I have planted some seeds for
inspiration and creativity.
For more information, contact Rob Friesen at robfriesen@brighttrading.net.
trading, so give yourself permission to fail. Fail often, but fail

successfully. A failed trade is never a reflection of your skill
as a trader, but a refusal to accept failure is.
Stella Osoba is a nancial writer who has written for the
Market Technician Associations (MTA) e-newsletter Technically Speaking, their Journal Of Technical Analysis, and their
CMT e-newsletter, as well as for TraderPlanet.com. She may
be reached via email at stellaosoba@gmail.com.
FURTHER READING
Brooks, Al [2012]. Trading Price Action Trends, John Wiley

& Sons.
Osoba, Stella [2015]. Loss Aversion, Technical Analysis of
StockS & commoditieS, Volume 33: April.
Paul, Jim, and Brendan Moynihan [2013]. What I Learned
Losing A Million Dollars, Columbia University Press.
January 2016
product review
TC2000 Version 16
WORDEN BROTHERS, INC.
PO Box 1139
Wilmington, NC 28402
Phone: 800 776-4940,
international: 1 919 408-0542
Email: support@TC2000.com
Internet: www.TC2000.com
Product: Stock market charting
software
Requirements: Windows-based PC,
or Mac with Parallels Desktop
Price: Basic software and data services
start at $9.99/month for the Silver edition;
$29.99/month for TC2000 Gold; $89.99/
month for Platinum. Real-time data and
LiveBriefs by MT Newswires available
for additional fees. Savings are available
via yearly payment options.
by James E. Rich
orden Brothers new TC2000

Version 16 software was originally developed as a white-label
trading platform for TC2000 Brokerage,
Inc., the companys new affiliated online
brokerage. When the finished product exceeded all of their expectations, brothers
Chris and Peter Worden and their staff
felt it only fair to release the software
to the entire TC2000 family of users,
whether they used TC2000 Brokerage
or just continued to use the software
for analysis.
Features
One of the many new features that first

caught my attention was the simulated
account component. Several platforms
and standalone software programs provide simulated accounts, but TC2000
Version 16 offers by far the most robust
of any that I have tried. The feature allows
you to establish a cash or margin account,
set the opening balance, set buy & sell
stops, track your daily and total profits
& lossesrealized and unrealizedplus
all the other features normally available
only in live accounts. Of course, if you
go to TC2000 Brokerage and open an
account, then youll have the option of
trading in real time or executing simu-
lated trades. Multiple layouts, a feature

introduced in Version 12, enhances
the usefulness of the trading platform
whether you trade live or use the simulated account. With the multiple layout
feature, you can set up a trading layout
with a window to track your portfolio,
a window for orders, and a window for
trades. The windows in your layout can
be pinned anywhere on the screen, hidden, or left free-floating.
In your trading layout there are multiple
ways to enter orders. The detailed order
ticket is available at the top of the chart
(Figure 1) and can be set up as a template,
or even as multiple templates. An abbreviated trade window is also available and
can be set up as one or more templates. A
buy or sell-stop order can also be established using a trendline by first drawing
the trendline and right-clicking to bring
up a dropdown menu (Figure 2) and then
clicking on buy limit or sell stop, which
immediately turns the trendline into an
order and displays the order box on the
chart. When the trendline is turned into
FIGURE 1: ORDER TICKET. In the toolbar directly above the chart are buy and sell buttons that bring up a detailed order ticket that can then be saved as a template.
FIGURE 2: Trendline Order ticket. By drawing a trendline and then right-clicking on the line, a dropdown box appears, allowing you to turn the trendline into a
buy limit or sell-stop order.
a sell-stop order, the line changes to a

dotted line and the abbreviated order
box appears with your completed order.
Once your trading layout is established,
you can create additional layouts with
watchlists, charts, news, and scans to use
for research and analysis.
Upcoming earnings dates is another
new feature and can be applied to any
watchlist. Bring up the S&P 500 watch-
list, add the upcoming earnings date

column, sort, and there you have all the
earning dates, starting with the most
current. In my trading, I personally dont
like to hold positions over earnings dates,
and with Version 16, I can simply take
my trading portfolio, add the earnings
date column, sort, and I can see which
positions have upcoming earnings dates
(Figure 3).
Version 16 of TC2000
gives you the option
of trading in real
time or executing
simulated trades.
FIGURE 3: Earnings dates. The upcoming earnings date column can be added to any watchlist. Here, the column is added onto the positions watchlist and sorted
by date for a heads-up on pending earnings announcements.
January 2016
FIGURE 4: MT Newswire. The recently added newsfeed from MT Newswires offers a wide variety of news announcements on a real-time basis.
Version 16 now allows customization

of the chart toolbars. The top row is the
factory toolbar and cannot be edited,
but now you can add a second, third,
and fourth row with any of the buttons,
data, and so on, that suit your trading or
analysis style.
Since Bruce Fabers review in this
magazine of TC2000 Version 12.2 in
2012, Worden Brothers has added a
reports button that allows you to open
either a prebuilt fundamentals report or a
price & volume report. Or you can create
your own custom report, allowing you
to check the edit box to add, delete, and
move fields. Recently, Worden Brothers
added an optional servicethe newsfeed
from MT Newswires, which offers a
wide variety of news announcements
on a real-time basis (Figure 4).
Support
Worried about the learning curve with a

new platform? Dont be. When you click
on the help button and then on tutorial
videos, links to more than 60 videos appear. The videos average three to seven
minutes each, covering every aspect of
the program. Speaking of videos, if you
want help with your trading, you can go
to www.worden.com to view a myriad
of videos on various subjects related to

trading and then go down to the bottom
of the page to see the entire webinar
archive dating back to 2009.
Still need help? In the past, the
Worden Brothers training guru, Michael
Thompson, put on live seminars around
the country. He took a brief sabbatical
from traveling in 2015 but plans on
scheduling a series of live webinars in
2016, so keep an eye on your email if
youre already a member of the TC2000
user family, or go to the website to see
upcoming seminars. In addition to the
tutorial videos, webinar archives, and
soon-to-come live seminars, TC2000
has a superb support team available six
days a week via phone or email.
James E. Rich has been trading for
more than 30 years and currently
trades multiple family accounts using
a combination of technical analysis,
fundamental analysis, and intermarket
analysis. He is the cofounder of Palm
Beach Traders, an investment roundtable group that meets monthly in Palm
Beach Gardens, FL to hear speakers
and discuss various aspects of trading
and investing. Rich can be contacted at
Richtrader3@gmail.com.
Worried about the

learning curve with a
new platform? Dont be.
More than 60 tutorial
videos are available.
Further reading
Faber, Bruce R. [2012]. TC2000 Version

12.2 Update, Technical Analysis of
Stocks & Commodities, Volume
30: November.
[2012]. TC2000 Version 12,
Technical Analysis of Stocks &
Commodities, Volume 30: January.
Rich, James E., with John B. Rich [2015].
Simplify It, Technical Analysis of
Stocks & Commodities, Volume
33: November.
TC2000 (Worden Brothers, Inc.)
FUTURES FOR YOU

INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is the senior
strategist for DeCarley Trading, a division of Zaner Group, where she also
works as a broker. She authors widely distributed e-newsletters; for your free
subscription, visit www.DeCarleyTrading.com. Her booksCurrency Trading
In The Forex And Futures Markets; A Traders First Book On Commodities;
and Commodity Optionswere published by FT Press. To submit a question,
email her at info@carleygarnertrading.com or via www.DeCarleyTrading.com.
Selected questions will appear in a future issue of S&C.
Commodities: CAN PRICES GO

TO ZERO?
Could a commodity bull with deep enough
pockets weather any storm?
The simple answer to that question is an
unequivocal yes. If you had unlimited
trading capital, an unlimited time horizon,
and the sense to mitigate futures market
leverage, you could theoretically never
lose when trading commodities. This
theory is based on the fact that commodity
prices, although they can get very cheap,
cannot go to zero. In other words, commodities are goods, not bads; unless
something changes dramatically in the
way we live, we will always need corn,
soybeans, crude oil, natural gas, and so,
to some degree.
If society finds a substitute for the
commodities we currently use, then as
the demand for such alternative resources
increases, so will the price of the substitute. Eventually, consumers will migrate
back to the original source. To reiterate,
there will always be some value in commodities. Further, the commodity markets
go through boom and bust cycles. Even
in the most trying timethink natural
gas in the fall of 2015 or crude oil in the
summer of 2015there is light at the end
of the tunnel. Producers and end users
adjust their behavior according to the
state of the boom and bust cycle, only to
trigger a repeat. For instance, when crude
oil was above $100 per barrel, US shale
oil producers were rushing to frack as
much oil out of the ground as they could
with little concern for budgeting or cost
management. However, when crude oil
fell below $40, oil producers were aggressively handing pink slips to employees
and shutting down rigs. Each of these
behaviors works toward repeating the
commodity cycle. When prices are high,

producers rush to bring product to market,
and demand tapers. Yet when prices are
low, producers reign in operations while
demand is on the rise. Simply put, there
are antagonistic forces that prevent prices
from going to zero.
Accordingly, for a trader with the pain
tolerance, financial capital, patience, and
discipline necessary to accept massive
drawdowns in exchange for nearly certain
trading success, it is realistic to say that you
might never lose money trading commodities. Of course, this assumption ignores
transaction costs, the contango (rolling
contract months at unfavorable prices),
the slim possibility of an MF Global or
PFG repeat, and the unpleasant likelihood
of the trader dying before price recovers
from the entry price. Although commodity
markets tend to trade in ranges, the peaks
and valleys are sometimes seen several
years, or even decades, apart.
Naturally, none of us have the luxury
of unlimited time or money. Even the
largest funds in the world dont have unlimited funds, nor do they generally have
the discipline to pace themselves, or the
wherewithal to hold positions indefinitely
without investors withdrawing funds.
With this in mind, lets take a look at how
big the drawdowns might be in any given
commodity per single lot traded. Lets assume that a commodity price could lose as
much as 70% of its current value, which
is a stretch but not impossible. Well use
that as the risk of going long a long-term
position trade with unlimited financial
backing. With crude oil trading at $45,
the potential drawdown of going long here
with no other expectation other than prices
will eventually be higher than $45, a trader
would suffer a paper loss of $31,500 should
January 2016
Carley Garner
the commodity lose 70% from entry. An

emini S&P trader could lose over $70,000
if prices drop 70%. These are substantial
sums of money that the coolest of heads
would struggle to endure.
Obviously, the goal of such long-term
position trading is to go long a market
after it has already made a substantial
decline. Buying into a commodity in a
massive upswing could take both your,
and your kids, lifetimes to recover. Just
imagine going long crude oil at $150 per
barrel in 2008. Oil prices will probably
see this price again, but will it be in our
lifetime? Maybe not.
On a side note, individual stocks, unlike
commodities, have the ability to become
completely worthless. Thus, if you purchase shares of a particular company with
the mindset that it will be impossible to
lose if held long enough, that would be an
even bigger fallacy. In my lifetime, Ive
seen companies that were once staples
in our society disappear, all the while
putting their shareholders through the
ringer. Remember the telephone company
WorldCom or more recently Blockbuster
video? I think we can all agree that in the
history of the commodity markets, weve
never seen a market go to zero. Even if it
did, there would always be potential for a
recovery, which also differs from individual stocks. If a stock becomes worthless,
it is delisted, leaving shareholders with no
chance of recouping lost money.
So again, is it possible to construct a
scenario in which a trader could ride out
any storm? Yes, its possible. Is such a
strategy more feasible in commodities,
than it is for stocks? Yes, it is. Nevertheless, it isnt realistic.
For this months Traders Tips, the focus is

James and John Richs article in the November 2015 issue, Simplify It. Here, we
present the January 2016 Traders Tips
code with possible implementations in various software.
The code for the following Traders Tips
selections is posted here:
Traders.com HomeS&C Magazine

Traders Tips
(Or from Traders.com, scroll down to the current articles

section and click on the Traders Tips tab.)
The Traders Tips section is provided to help the reader
implement a selected technique from an article in this issue or another recent issue. The entries here are contributed by software developers or programmers for software
that is capable of customization.
F TC2000: JANUARY 2016 TRADERS TIPS CODE

James and John Richs approach to trading with the trend, as
described in their article Simplify It that appeared in the
November 2015 issue of Technical Analysis of Stocks &
Commodities, can easily be applied in TC2000 Version 16.
In Figure 1, you see a daily SPY chart with a 50-day moving
average (yellow line). The 50-day average is moving up,
signifying an overall uptrend.
Below the SPY chart are two TC2000 EasyScans: SPY
in uptrend and SPY in downtrend. Since the SPY chart is
indicating an uptrend based on the 50-day moving average,
we have SPY in uptrend selected. This scan shows five stocks
for which the following conditions are true:
Price is above its 50-day average (SMA)
20-day SMA of price is above the 50-day SMA of price
50-day SMA of price is above the 200-day SMA of
price
50-day average volume is greater than one million
shares
Price has just crossed up through the eight-day moving
average of the high.
You can spacebar through the scan results to view the charts
for each symbol. Green dots mark entry points during uptrends
and red dots mark entry points during downtrends. Using the
new simulated trading feature in version 16, you can place
trades on the symbols you find interesting and see how they
perform using this approach.
If you would like a copy of this layout to use in your TC2000
software, simply send an email to support@TC2000.com and
well send it to you.
Patrick Argo
Worden Brothers, Inc.
www.TC2000.com
Figure 1: TC2000. Here is a TC2000 Version 16 layout showing: 1) a chart of

SPY; 2) scans for uptrending and downtrending markets; and 3) a chart showing the
entry points for uptrends (green dots) and entry points for downtrends (red dots).
F TRADESTATION: JANUARY 2016 TRADERS TIPS CODE

In Simplify It, which appeared in the November 2015 issue
of Technical Analysis of Stocks & Commodities, authors
James and John Rich presented a trend-following approach
to trading that they have developed over their many years of
market experience. They noted that they begin by determining
an opinion of the direction of the overall market. With this
information, they described the criteria for selecting candidate
stocks for trading. Finally, the authors listed their rules for
Figure 2: TRADESTATION. Here are example TradeStation Scanner results

and the _RichMethod indicator and strategy applied to a daily chart of Amazon
(AMZN).
entry and exit. Here, we are providing TradeStation EasyLanguage code for both an indicator and strategy based on the
authors work. The indicator can be used in the TradeStation
Scanner to search for candidate stocks as well as in a chart to
visualize the results; the strategy can be used to backtest on
the symbols of your choice.
To download the EasyLanguage code, please visit our
TradeStation and EasyLanguage support forum. The code
from this article can be found here: http://www.tradestation.
com/TASC-2016. The ELD filename is TASC_JAN2016.
ELD. For more information about EasyLanguage in general,
please see http://www.tradestation.com/EL-FAQ.
The code is also shown at the Stocks & Commodities
website at Traders.com in the Traders Tips area.
A sample chart is shown in Figure 2.
This article is for informational purposes. No type of trading or

investment recommendation, advice, or strategy is being made, given, or
in any manner provided by TradeStation Securities or its affiliates.
Doug McCrary
TradeStation Securities, Inc.
www.TradeStation.com
F METASTOCK: JANUARY 2016 TRADERS TIPS CODE

of Technical Analysis of Stocks & Commodities, author
James Rich along with brother John Rich presented a simple
trading system. The article suggested using the direction of
a 50-period SMA on the SPY to find the market trend. Then
look for stocks in a trend going the same direction. From there,
channel lines are used to find the entry & exit points.
The MetaStock formulas provided here combine all those
conditions into entry & exit signals that you can put into a
system test or expert adviser in MetaStock.
Enter long:
s1:= Security("SPY", C);
ma1:= Mov(C, 20, S);
ma2:= Mov(C, 50, S);
ma3:= Mov(C, 200, S);
dir:= If( ROC( Mov(s1, 50,S), 1,$)>0, 1, -1);
tradelong:= dir = 1 AND
ma1 > ma2 AND ma2 > ma3;
tline:= Mov(H,8,S);
bline:= Mov(L,8,S);
el:= C > tline AND tradelong;
xl:= L < bline;
trade:= If(el, 1, If(xl, 0, PREV));
trade = 1 AND Ref(trade = 0, -1)
xl:= L < bline;

trade:= If(el, 1, If(xl, 0, PREV));
Enter short:
ma1:= Mov(C, 20, S);
ma2:= Mov(C, 50, S);
ma3:= Mov(C, 200, S);
dir:= If( ROC( Mov(s1, 50,S), 1,$)>0, 1, -1);
tradeshort:= dir = -1 AND
ma1 < ma2 AND ma2 < ma3;
tline:= Mov(H,8,S);
bline:= Mov(L,8,S);
es:= C < bline AND tradeshort;
xs:= H > tline;
trade:= If(es, 1, If(xs, 0, PREV));
Exit short:
ma1:= Mov(C, 20, S);
ma2:= Mov(C, 50, S);
ma3:= Mov(C, 200, S);
dir:= If( ROC( Mov(s1, 50,S), 1,$)>0, 1, -1);
tradeshort:= dir = -1 AND
ma1 < ma2 AND ma2 < ma3;
tline:= Mov(H,8,S);
bline:= Mov(L,8,S);
es:= C < bline AND tradeshort;
xs:= H > tline;
trade:= If(es, 1, If(xs, 0, PREV));
William Golson
MetaStock Technical Support
www.metastock.com
F eSIGNAL: JANUARY 2016 TRADERS TIPS CODE

For this months Traders Tip, weve provided a study named
Simplify.efs based on the formula described in James and
John Richs article that appeared in the November 2015 issue
of Technical Analysis of Stocks & Commodities, Simplify
Exit long:
ma1:= Mov(C, 20, S);
ma2:= Mov(C, 50, S);
ma3:= Mov(C, 200, S);
dir:= If( ROC( Mov(s1, 50,S), 1,$)>0, 1, -1);
tradelong:= dir = 1 AND
ma1 > ma2 AND ma2 > ma3;
tline:= Mov(H,8,S);
bline:= Mov(L,8,S);
el:= C > tline AND tradelong;
Figure 3: eSIGNAL. Here is an example of the study plotted on a daily chart of

HUM.
January 2016
have made the loading process extremely easy: simply

click on the links http://tos.mx/vTuhvW and http://tos.
mx/YQ7z0L and choose save script to thinkorswim, and
backtest in thinkScript. Choose to rename your study
and strategy SimpleTrendChannel. You can adjust the
parameters of this study within the edit studies window
to fine-tune your variables.
In the example in Figure 4, you see a chart of
National Oilwell Varco (NOV), with the averages
used to define strategies as well as the channels used
to trigger stops and limit orders. Beneath volume
you can see a histogram chart of profit & loss for the
charted time frame. In this example, there is a large
profit, as the green indicates.
For more on this technique, please see the Richs
article in the November 2015 issue of Technical
Analysis of Stocks & Commodities magazine.
Figure 4: THINKORSWIM. Here is a chart of National Oilwell Varco (NOV), with the averages used to define strategies as well as the channels used to trigger stops and limit orders. A
histogram of profit & loss for the charted time frame is beneath volume. In this example, there
is a large profit, as the green indicates.
It. In the article, the authors presented a simple trading method

based on moving averages.
The study contains formula parameters that may be
configured through the edit chart window (right-click on the
chart and select edit chart). A sample chart implementing
the study is shown in Figure 3.
To discuss this study or download a complete copy of the
formula code, please visit the EFS library discussion board
forum under the forums link from the support menu at www.
esignal.com or visit our EFS KnowledgeBase at http://www.
esignal.com/support/kb/efs/. The eSignal formula script (EFS)
is also available for copying & pasting from the Stocks &
Commodities website in the Traders Tips area.
Eric Lippert
eSignal, an Interactive Data company
800 779-6555, www.eSignal.com
thinkorswim
A division of TD Ameritrade, Inc.
www.thinkorswim.com
F wEALTH-LAB: JANUARY 2016 TRADERS TIPS CODE

The WealthScript strategy we are presenting here combines
trend-detection ideas that James and John Rich had researched
and presented in their November 2015 article in Stocks &
Commodities, titled Simplify It. Users have the means to
experiment with which method of determining overall market direction works better: the one that relies on the external
symbols (SPY) movement used by John Rich, or the one that
uses a combination of multiple moving averages as used by
James Rich. The systems C# code for Wealth-Lab is shown
here and can also be found at the Stocks & Commodities
website in the Traders Tips area. A Wealth-Lab chart demonstrating the system is shown in Figure 5.
The method of screening for entries is so simple that it
doesnt require programming. For any Wealth-Lab user, it
should be pretty trivial to drag and drop the conditions in a
rule-based system (Figure 6).
Wealth-Lab 6 strategy code (C#):
F THINKORSWIM: JANUARY 2016 TRADERS TIPS CODE

James and John Rich recounted how they have been using
technical analysis since the 1960s. In that time, they have
experimented with many different strategies, with John Rich
even considered an authority on Elliott wave theory. They
discuss how they have come to the conclusion that simple is
better. Thus, using only moving averages, the brothers have
constructed a strategy that defines trends and also has the
granularity to include stops and limit prices.
We have recreated their SimpleTrendChannel study and
strategy using our proprietary scripting language, thinkscript. We
using System;
using System.Collections.Generic;
using System.Text;
using System.Drawing;
using WealthLab;
using WealthLab.Indicators;
namespace WealthLab.Strategies
{
public class SimplifyIt : WealthScript
{
private StrategyParameter paramTrendRule;
public SimplifyIt()
{
paramTrendRule = CreateParameter("SPY for trend", 1,
0, 1, 1);
}
LineStyle.Solid,1);
}

for(int bar = GetTradingLoopStartBar(200); bar < Bars.
Count; bar++)
{
if (IsLastPositionActive)
{
Position p = LastPosition;
if( p.PositionType ==
PositionType.Long )
{
if( Close[bar] <
smaLo[bar] - Bars.SymbolInfo.
Tick )

SellAtMarket(bar+1, p );
Figure 5: WEALTH-LAB, EXAMPLE ENTRIES. This chart illustrates the application of the systems rules on a daily chart
}
of HUM.
else
{
if( Close[bar] >
smaHi[bar] + Bars.SymbolInfo.
Tick )

CoverAtMarket(bar+1, p );
}
}
else
{
bool uptrend =
// Johns / James method
( useSpyForTrend && (spy.Close[bar] >
spySma[bar] && spySma[bar] >
spySma[bar-1] && Close[bar] >
sma50[bar])) ||
( sma20[bar] >
sma50[bar]&& sma50[bar] >
sma200[bar]);
bool downtrend =
// Johns / James method
( useSpyForTrend && (spy.Close[bar] <
spySma[bar] && spySma[bar] <
Figure 6: WEALTH-LAB, DRAG & DROP. Users can build the system using drag & drop rules and conditions, with no
spySma[bar-1] && Close[bar] <
programming necessary.
sma50[bar])) ||
( sma20[bar] <

sma50[bar] && sma50[bar] < sma200[bar]);
protected override void Execute()

{
if( uptrend ) // market trend is up
bool useSpyForTrend = paramTrendRule.ValueInt == 1;
{
Bars spy = GetExternalSymbol("SPY",true);
if( SMA.Series(Volume,50)[bar] > 1000000 ) //
SMA spySma = SMA.Series(spy.Close,50);
the volume criterion
SMA sma20 = SMA.Series(Close,20);
if( Close[bar] > smaHi[bar] ) // the second step
BuyAtMarket(bar + 1);
}
SMA smaHi = SMA.Series(High,8);
else if( downtrend ) // market trend is down
SMA smaLo = SMA.Series(Low,8);
{

if( SMA.Series(Volume,50)[bar] > 1000000 ) //
//PlotSeries(PricePane,sma20,Color.Orange,WealthLab.
the volume criterion
LineStyle.Solid,1);
if( Close[bar] < smaLo[bar] ) // the second step
PlotSeries(PricePane,sma50,Color.Red,WealthLab.
ShortAtMarket(bar + 1);
LineStyle.Solid,1);
}
//PlotSeries(PricePane,sma200,Color.Blue,WealthLab.
}
LineStyle.Solid,1);
}
PlotSeriesFillBand(PricePane, smaHi, smaLo, Color.
}
Green, Color.Transparent, LineStyle.Solid, 1);
}
}
if( useSpyForTrend )
{
Eugene, Wealth-Lab team
ChartPane spyPane = CreatePane(30,true,true);
MS123, LLC
PlotSymbol(spyPane,spy,Color.Blue,Color.Red);
PlotSeries(spyPane,spySma,Color.Blue,WealthLab.
www.wealth-lab.com
January 2016
Figure 7: AMIBROKER. Here is a daily chart of Humana (HUM) with buy/sell arrows generated by eight-bar simple moving average channel crossovers.
Figure 8: NEUROSHELL TRADER. This sample NeuroShell Trader chart displays the
method described by James and John Rich in their November 2015 article in S&C.
// MA channel breakout rules
UpperChannel = MA( High, 8 );
LowerChannel = MA( Low, 8 );
F AMIBROKER: JANUARY 2016 TRADERS TIPS CODE

James and John Rich presented a very simple trading method
that involves simple moving average channel breakouts.
A ready-to-use formula for AmiBroker is provided here. This
code includes trend filters mentioned in the article for your
use, however, the charts presented in Richs article show all
channel breakouts without filtering, so the formula presented
here does the same.
To use the formula, enter the code in the formula editor
and press apply indicator. To backtest the system, click send
to analysis button in the formula editor and then the backtest
button in the analysis window. You may need to change the
symbol of SP500 to match your data providers symbology
(the code given here uses Yahoo symbology).
AmiBroker code:
// NOTE: the article mentions those filters
// yet charts presented in article dont use them
SP500 = Foreign("^GSPC", "C" );
UpMarket = MA( SP500, 50 ) > MA( SP500, 20 );
UpTrendStock = UpMarket AND
MA( C, 20 ) > MA( C, 50 ) AND
MA( C, 50 ) > MA( C, 200 );
DnTrendStock = NOT UpMarket AND
MA( C, 20 ) < MA( C, 50 ) AND
MA( C, 50 ) < MA( C, 200 );
Filter = Volume > 1000000 AND
( UpTrendStock OR DnTrendStock );
Buy = Cross( C, UpperChannel );

Sell = Cross( LowerChannel, C );
Buy = ExRem( Buy, Sell );
Sell = ExRem( Sell, Buy );
Plot( C, "Price", colorDefault, styleCandle );
Plot( UpperChannel, "UpperChannel", colorBlue );
Plot( LowerChannel, "UpperChannel", colorBlue );
PlotShapes( Buy * shapeUpArrow, colorGreen, 0, H, -80 );
PlotShapes( Sell * shapeDownArrow, colorRed, 0, L, -80 );
Tomasz Janeczko, AmiBroker.com

www.amibroker.com
F NEUROSHELL TRADER: JANUARY 2016

TRADERS TIPS CODE
The trading method described by James and John
Rich in their November 2015 in Technical Analysis of Stocks
& Commodities, Simplify It, can be easily implemented
with a few of NeuroShell Traders 800+ indicators. Simply
select new indicator from the insert menu and use the indicator
wizard to create the following indicators:
And3Long:
Close > SMA Close,50
SMA Close,20 > SMA Close,50
SMA Close,50 > SMA Close,200
And3Short:
Close <= SMA Close,50
SMA Close,20 <= SMA Close,50
SMA Close,50 <= SMA Close,200
To implement the method, simply select new trading strategy

from the insert menu and enter the following in the appropriate
locations of the trading strategy wizard:

BUY LONG CONDITIONS: [All of which must be true]
AND3Long
CrossAbove(Close, Avg(High,8)
SELL LONG CONDITIONS: [All of which must be true]
CrossBelow(Close, Avg(Low,8))
SELL SHORT CONDITIONS: [All of which must be true]
AND3SHORT
CrossBelow(Close, Avg(Low,8))
COVER SHORT CONDITIONS: [All of which must be true]
CrossAbove(Close, Avg(High,8)
Users of NeuroShell Trader can go to the Stocks &

Commodities section of the NeuroShell Trader free technical
support website to download a copy of this or any previous
Traders Tips.
Figure 9: AIQ. Here is a sample equity curve of the trend-following system versus
the NASDAQ 100 index for the period 1/2/2000 to 11/06/2015.
Marge Sherald, Ward Systems Group, Inc.

301 662-7950, sales@wardsystems.com
www.neuroshell.com
F AIQ: JANUARY 2016 TRADERS TIPS CODE

The AIQ code based on James and John Richs article
in the November 2015 issue of Technical Analysis of
Stocks & Commodities, Simplify It, is provided at www.
TradersEdgeSystems.com/traderstips.htm.
The code I am providing matches the description of the
authors trend-following system with additional exit rules.
The long exit has an additional profit-protect exit that is not
coded, but when I ran tests, I used the built-in profit-protect
exit set to 80% protection once the profit level reaches 5%
or greater.
Figure 9 shows the equity curve for the system versus the
NASDAQ 100 index for the period 1/2/2000 to 11/06/2015.
Figure 10 shows the metrics for this same test period. The
system clearly outperformed the index.
!SIMPLIFY IT
!Author: James E. Rich with John B. Rich, TASC Nov 2015 (for
Jan 2016)
!Coded by: Richard Denning 11/1/2015
!www.TradersEdgeSystems.com
!INPUTS
mktTrendLen is 50.
IDX is "SPY".
stkLen1 is 20.
stkLen2 is 50.
stkLen3 is 200.
trdBandLen is 8.
pctStp is 0.07.
minBarsSinceBandCross is 10.
maxBarsHold is 10.
!MARKET DIRECTION:
mktClose is TickerUDF(IDX,[close]).
mktSMA is simpleavg(mktClose,mktTrendLen).
mktTrendUp if mktClose > mktSMA and mktSMA >
valresult(mktSMA,10).
mtkTrendDn if mktClose < mktSMA and mktSMA <
Figure 10: AIQ. Here are the metrics for the trend-following system and the test
settings.
valresult(mktSMA,10).
!mktTrendUp if tickerRule(IDX,stkTrendUp).
!mtkTrendDn if tickerRule(IDX,stkTrendDn).
!STOCK SCREEN FOR UP TRENDING STOCKS:
stkSMA1 is simpleavg([close],stkLen1).
stkTrendUp if [close] > stkSMA2
and stkSMA1 > stkSMA2
and stkSMA2 > stkSMA3
and [close] > 5
and simpleavg([volume],50) > 10000. !volume in hundreds
!STOCK SCREEN FOR DOWN TRENDING STOCKS:
January 2016
stkTrendDn if [close] < stkSMA2

and stkSMA1 < stkSMA2
and stkSMA2 < stkSMA3
and simpleavg([volume],50) > 10000. !volume in hundreds
!TRADING BANDS:
stkSMAhi is simpleavg([high],trdBandLen).
stkSMAlo is simpleavg([low],trdBandLen).
Buy if mktTrendUp and stkTrendUp
and [close] > stkSMAhi
and countof([close] > stkSMAhi,minBarsSinceBandCross)=1.
Short if mtkTrendDn and stkTrendDn
and [close] < stkSMAlo
and countof([close] < stkSMAlo,minBarsSinceBandCross)=1.
PD is {position days}.
PEP is {position entry price}.
ExitBuy if [close] < stkSMAlo * (1-pctStp).

ExitShort if [close] > stkSMAhi * (1+pctStp)
or (PD > maxBarsHold and [close] > PEP).
The code and EDS file can be downloaded from www.

TradersEdgeSystems.com/traderstips.htm.
Richard Denning
info@TradersEdgeSystems.com
for AIQ Systems
F TRADERSSTUDIO: JANUARY 2016

TRADERS TIPS CODE
The TradersStudio code based on the article
Simplify It by James and John Rich, which appeared in
the November 2015 issue of Technical Analysis of Stocks &
Commodities, can be found at www.TradersEdgeSystems.
com/traderstips.htm.
The following code file is contained in the download:
System: SIMPLIFYTrend-following system based on authors description in November 2015 article, Simplify It
Figure 11 shows the equity curve for the system from 2001
through 2013 trading one share per signal of the NASDAQ
100 stocks.
Here is the code:

'SIMPLIFY IT
'Author: James E Rich with John B Rich, TASC Nov 2015 (for
Jan 2016)
'Coded by: Richard Denning 11/1/2015
'www TradersEdgeSystems com
sub SIMPLIFY(mktTrendLen,stkLen1,stkLen2,stkLen3,trdBandLe
n,pctStp,minBarsSinceBandCross,maxBarsHold,allowShorts)
'mktTrendLen = 50
'IDX = "SPY"
'stkLen1 = 20
'stkLen2 = 50
'stkLen3 = 200
'trdBandLen = 8
'pctStp = 0.07
'minBarsSinceBandCross = 10
'maxBarsHold = 10
'allowShorts = 0
'MARKET DIRECTION:
Dim mktClose As BarArray
Dim mktSMA As BarArray
Dim mktTrendUp As Boolean
Dim mtkTrendDn As Boolean
mktClose = C Of independent1
mktSMA = Average(mktClose,mktTrendLen)
mktTrendUp = mktClose > mktSMA And mktSMA > mktSMA[10]
mtkTrendDn = mktClose < mktSMA And mktSMA < mktSMA[10]
'STOCK SCREEN FOR UP TRENDING STOCKS:
Dim stkSMA1 As BarArray
Dim stkTrendUp As Boolean
stkSMA1 = Average(C,stkLen1)
stkTrendUp = C>stkSMA2 And stkSMA1>stkSMA2 And
stkSMA2>stkSMA3 And C>5 And Average(V,50)>1000000
'STOCK SCREEN FOR DOWN TRENDING STOCKS:
Dim stkTrendDn As Boolean
stkTrendDn = C<stkSMA2 And stkSMA1<stkSMA2 And
stkSMA2<stkSMA3 And Average(V,50)>1000000
'TRADING BANDS:
Dim stkSMAhi As BarArray
Dim stkSMAlo As BarArray
stkSMAhi = Average(H,trdBandLen)
stkSMAlo = Average(L,trdBandLen)
'ENTRY RULES:
Dim isAboveSMAhi As BarArray
isAboveSMAhi = C>stkSMAhi
If mktTrendUp And stkTrendUp And C>stkSMAhi And countof(isA
boveSMAhi,minBarsSinceBandCross,0)=1 Then
Buy("LE",1,0,Market,Day)
End If
If allowShorts=1 Then
Dim isBelowSMAlo As BarArray
isBelowSMAlo = C<stkSMAlo
If mtkTrendDn And stkTrendDn And C<stkSMAlo And countof(isB
elowSMAlo,minBarsSinceBandCross,0)=1 Then
Sell("SX",1,0,Market,Day)
End If
End If
Figure 11: TRADERSSTUDIO. Here is a sample equity curve for the trend-following trading system from 2001 through 2013 trading one share per signal of the
NASDAQ 100 stocks.
'EXIT RULES:
If C<stkSMAlo*(1-pctStp) Then ExitLong("LXstop","",1,0,Market,
Day)
Figure 12: NINJATRADER. This sample chart of Humana (HUM) shows entries based on the strategy described in James & John Richs article Simplify It.
If allowShorts=1 Then
If C>stkSMAhi*(1+pctStp) Or (BarsSinceEntry>maxBarsHold
And C>EntryPrice) Then
ExitShort("SXstop","",1,0,Market,Day)
End If
Dim maxProfitSS As BarArray
Dim pctOfMaxProfitSS As BarArray
Dim loC As BarArray
If C<EntryPrice And C>0 And EntryPrice>0 And BarsSinceEntry>0 Then
'maxProfitSS=(Lowest(C,BarsSinceEntry-1)/EntryPrice)-1
If BarsSinceEntry=1 Then loC=C
Else loC = Min(loC,loC[1])
maxProfitSS=EntryPrice/loC-1
End If
If maxProfitSS>0 And C>0 And EntryPrice>0 Then pctOfMaxProf
itSS=(EntryPrice/C-1)/maxProfitSS
If maxProfitSS>=0.05 And pctOfMaxProfitSS<0.8 Then
ExitShort("SXprofitProtectSS","",1,0,Market,Day)
End If
End If
End Sub
Richard Denning
info@TradersEdgeSystems.com
for TradersStudio
F NINJATRADER: JANUARY 2016 TRADERS TIPS CODE

The indicator and strategy presented in James and John Richs
article Simplify It, which appeared in the November 2015
issue of Technical Analysis of Stocks & Commodities, are
available for download at www.ninjatrader.com/SC/January2016SC.zip.
Once you have downloaded it, from within the NinjaTrader
Control Center window, select the menu File Utilities
Import NinjaScript and select the downloaded file. This file

is for NinjaTrader Version 7.
You can review the indicator and strategys source code by
selecting the menu Tools Edit NinjaScript Indicator or
Strategy from within the NinjaTrader Control Center window
and selecting either the SimplifyIt indicator or SimplifyIT
strategy.
A sample chart implementing the strategy is shown in
Figure 12.
Raymond Deux & Cody Brewer
NinjaTrader, LLC
www.ninjatrader.com
F UPDATA: JANUARY 2016

TRADERS TIPS CODE
Our Traders Tip for this month is based on James and John
Richs article from the November 2015 issue of Technical
Analysis of Stocks & Commodities, Simplify It. In the
article, the authors sought to develop a system for first determining the long, medium, and short trends of a market,
and then following the trend, with confirmation based on the
direction of the S&P 500 index ETF (SPY). Exits are a trailing
stop based on an average of the high or low.
Figure 13 demonstrates an implementation of the system,
with the triple moving average filter system applied to a chart
of Humana Inc. (HUM).
The Updata code based on this article is in the Updata
library and may be downloaded by clicking the custom menu
and system library. Those who cannot access the library due
to a firewall may paste the code shown here into the Updata
custom editor and save it.
January 2016
FIGURE 13: UPDATA. Here, the triple moving average filter system is applied to
Humana Inc. (HUM) in daily resolution.
DISPLAYSTYLE 5LINES
INDICATORTYPE TOOL
PLOTSTYLE LINE RGB(200,0,0)
PLOTSTYLE2 LINE RGB(0,200,0)
PARAMETER "Period 1" #PERIOD1=20
PARAMETER "Hi/Lo Avg." #PERIOD4=8
PARAMETER "SPY" ~SPY=SELECT
NAME "AVG[" #PERIOD1 "|" #PERIOD2 "|" #PERIOD3 "]" ""
@AVG1=0
@AVG2=0
@AVG3=0
@UPPER=0
@LOWER=0
@SPYAVG=0
@LONGSTOP=0
@SHORTSTOP=0
FOR #CURDATE=#PERIOD1+#PERIOD2+#PERIOD3 TO #LASTDATE
@AVG1=MAVE(#PERIOD1)
@SPYAVG=SGNL(~SPY,#PERIOD2,M)
@UPPER=SGNL(HIGH,#PERIOD4,M)
@LOWER=SGNL(LOW,#PERIOD4,M)
'ENTRIES
IF @AVG1>@AVG2 AND @AVG2>@AVG3 AND HASX(CLOSE,@
UPPER,UP) AND ORDERISOPEN=0 AND VOL>1000000
BUY CLOSE
@LONGSTOP=PLOW(@LOWER,#PERIOD4)
ELSEIF @AVG1<@AVG2 AND @AVG2<@AVG3 AND
HASX(CLOSE,@LOWER,DOWN) AND ORDERISOPEN=0 AND @
SPYAVG<HIST(@SPYAVG,1)
SHORT CLOSE
@SHORTSTOP=PHIGH(@UPPER,#PERIOD4)
ENDIF
'EXITS
IF ORDERISOPEN>0
IF CLOSE<@LONGSTOP
SELL @LONGSTOP
ENDIF
@LONGSTOP=MAX(PLOW(@LOWER,#PERIOD4),@LONGSTOP)
ELSEIF ORDERISOPEN<0
IF CLOSE>@SHORTSTOP
COVER @SHORTSTOP
ENDIF
@SHORTSTOP=MIN(PHIGH(@UPPER,#PERIOD4),@SHORTSTOP)
ENDIF
@PLOT=@AVG1
@PLOT2=@AVG2
@PLOT3=@AVG3
@PLOT4=@UPPER
@PLOT5=@LOWER
NEXT
Updata support team

support@updata.co.uk, www.updata.co.uk
F MICROSOFT EXCEL:
JANUARY 2016 TRADERS TIPS CODE
of Technical Analysis of Stocks & Commodities, the team
of James and John Rich show us pieces that can be combined
to build a simple trading system.
The proposed system is a combination of several screening rules to establish trade setups along with trigger rules to
actually enter and exit both long and short trades after a setup
has been established.
Since this system is based on bar close to generate signals,
the actual trade cannot logically take place on the signal bar.
So the long and short position shading used here begins and
FIGURE 14: EXCEL, TRADE SETUP SCREENS. This shows Humana with all trade setup screens in place.
FIGURE 15: EXCEL, SCREENING RULES. What a difference removing a couple of screening rules can make!
FIGURE 16: EXCEL, Transaction Summary
ends on the bar after an entry or exit signal.

Perhaps one could change the trigger rules to fire if any
part of the high/low span of the bar crosses the upper or lower
band and then trade at a price from within that span on the
actual trigger day.
One other usage note: To keep the SPY index prices in
sync with the stock prices, I am forcing a refresh of the index

every time you request historical data for a stock symbol. So
there will be a bit of additional screen flickering and flashing,
but not much additional time consumed.
Figures 14 & 15 approximate the data range we see in
Figure 1 of Richs article. They demonstrate some of the
FIGURE 17: EXCEL, SCREEN example. Here is National Oilwell with all setup screens in force.
January 2016
FIGURE 18: EXCEL, TREND SCREENING. Here is the result of dropping the index trend screening rule.
FIGURE 19: EXCEL, SCREENING CONTROLS. Dropping another setup screening control lets in an additional trade, but it did not improve our results.
range of results based on varying the setup rules. Turning

the SMA(200) versus SMA(50) rule will eliminate the losing
short we see in Figure 2 beginning around 11/8/2014.
Figure 16 shows my transaction summary tab, which lists
the details of the transactions that appear on the chart. A bottom line version of the transaction results is carried over to
the CalculationsAndCharts tab for quick reference.
Due to the way I am calculating trades, you may see a
trade at the left of the price chart that actually started on a bar
that occurred prior to the bars displayed in the chart window.
In that event, you will see a partial trade documented here as
an exit with no entry.
This left edge partial trade will not be reflected in the
transaction counts, nor in the totals. If you wish to include
it, you can increase the points to plot value (cell A11) on the
CalculationsAndCharts tab a little bit at a time until you can
see the transaction entry bar on the chart.
Figures 17, 18, & 19 are the results of various combinations of the entry setup controls using my approximation of
Figure 2 from Richs article.
This stock is clearly in a downtrend, but the market, as

reflected in the trend of the SPY index, is not.
With some trial combinations of the screening rules, we
find that the index trend screen was blocking all potential
short entries.
The spreadsheet file for this Traders Tip can be downloaded
from www.traders.com in the TradersTips area. To successfully
download it, follow these steps:
Right-click on the Excel file link, then
Select save as to place a copy of the spreadsheet
file on your hard drive.
James and John Rich have given us lots to play with here.
Enjoy!
Ron McAllister
Excel and VBA programmer
rpmac_xltt@sprynet.com
Free Information From Advertisers

Advertiser
Page
Page
Software
Brokerages
Interactive Brokers
03
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Vectorvest
11
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Interactive Brokers Poster
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Ward Systems
07
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TDAmeritrade
25
Worden Brothers
64
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Trading Systems
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05, 63
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Store.Traders.com, Traders.com
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StockCharts.com . . . . . . . . . . . . . . . . 07
Tom Bulkowski (thepatternsite.com) . . . . . . 09
TD Ameritrade . . . . . . . . . . . . . . . . . . 14
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Stockspotter.com . . . . . . . . . . . . . . . . 19
TradeStation . . . . . . . . . . . . . . . . . . . 19
Marketscope/Trading Station II (FXCM) . . . 23
eSignal (Interactive Data) . . . . . . . . . . . . . 26
www.tomsoptiontools.com (Tom Gentile) . . 30
MetaStock . . . . . . . . . . . . . . . . . . . . 31
TC2000 (Worden Brothers, Inc.) . . . . . . . . . 42
thinkorswim . . . . . . . . . . . . . . . . . . . 48
Wealth-Lab . . . . . . . . . . . . . . . . . . . 48
Amibroker . . . . . . . . . . . . . . . . . . . . 50
Neuroshell Trader (Ward Systems Group) . . . 50
AIQ . . . . . . . . . . . . . . . . . . . . . . . . 51
TradersStudio . . . . . . . . . . . . . . . . . . 52
NinjaTrader . . . . . . . . . . . . . . . . . . . 53
Updata . . . . . . . . . . . . . . . . . . . . . . 53
Charts.com . . . . . . . . . . . . . . . . . . . 61
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January 2016
FUTURES LIQUIDITY
rading liquidity is often overlooked as a key technical

measurement in the analysis
and selection of commodity
futures. The following explains how to
read the futures liquidity chart published by Technical Analysis of Stocks
& Commodities every month.
very high volumes. The greatest number

of dots indicates the greatest activity;
futures with one or no dots show little
activity and are therefore less desirable
for speculators.
Courtesy of CBOT
Commodity futures
The futures liquidity chart shown below is intended to rank publicly traded
futures contracts in order of liquidity.
Relative contract liquidity is indicated
by the number of dots on the right-hand
side of the chart.
This liquidity ranking is produced by
multiplying contract point value times
the maximum conceivable price motion
(based on the past three years historical
data) times the contracts open interest
times a factor (usually 1 to 4) for low or
three-year period. Thus, all numbers in

this column have an equal dollar value.
Columns indicating percent margin
and effective percent margin provide
a helpful comparison for traders who
wish to place their margin money efficiently. The effective percent margin
is determined by dividing the margin
value ($) by the three-year price range of
contract dollar value, and then multiplying by one hundred.
Stocks
All futures listed are weighted equally

under contracts to trade for equal dollar profit. This is done by multiplying
contract value times the maximum possible change in price observed in the last
Trading liquidity has a significant effect on the change in price of a security. Theoretically, trading activity can
serve as a proxy for trading liquidity
and equals the total volume for a given
period expressed as a percentage of the
total number of shares outstanding. This
value can be thought of as the turnover
rate of a firms shares outstanding.
Trading Liquidity: Futures
Commodity Futures
Exchange % Margin
Effective
Contracts to
Relative Contract Liquidity

% Margin Trade for Equal

Dollar Profit
E-Mini S&P 500
GBLX
3.7
11
3
>>
10-Year T-Note
CBOT
1.2
17.9
12
>
Crude Oil WTI
NYMEX
12.1
6.9
1
5-Year T-Note
CBOT
0.6
12.6
17
Euro FX
CME
1.9
5.9
2
E-Mini Nasdaq 100

GBLX
2.4
5.3
2
Gold
COMEX
8.5
13.3
1
T-Bond
CBOT
2.2
12.9
4
Russell 2000 Mini

ICEUS
3.8
11.8
3
Ultra T-Bond
CBOT
2.8
18.7
4
Japanese Yen
CME
2.7
5.2
2
Corn
CBOT
14.9
13.4
5
Natural Gas
NYMEX
10.5
6
2
Silver
COMEX
14.8
10.3
1
Australian Dollar
CME
2.3
4.7
3
Gasoline RBOB
NYMEX
11.4
7.2
1
2-Year T-Note
CBOT
0.1
12.3
41
Canadian Dollar
CME
1.5
4.1
4
DJIA mini-sized
CBOTM
3.1
11.1
4
High Grade Copper

COMEX
10.2
12.3
2
E-Mini S&P Midcap

GBLX
3.1
9.4
2
Sugar #11
ICEUS
9.8
25
16
Soybean Meal
CBOT
9.5
10.6
4
Soybeans
CBOT
10.7
11.9
3
Wheat
CBOT
13.4
16.3
5
British Pound
CME
1.4
10.8
8
Platinum
NYMEX
9.1
8.6
2
Soybean Oil
CBOT
10.3
10.8
6
CBOE S&P 500 VIX

CFE
7
9.6
8
Coffee
ICEUS
11.7
11.7
2
Hard Red Wheat

KCBT
10.9
10.8
4
CBOT
Chicago Board of Trade, Division of CME
Lean Hogs
CME
6.5
4.5
3
CFE
CBOE Futures Exchange
Swiss Franc
CME
1.8
7.1
3
CME
Chicago Mercantile Exchange
U.S. Dollar Index
ICEUS
1.3
6.3
5
COMEX
Commodity Exchange, Inc. CME Group
Crude Oil Brent (F)
NYMEX
11.2
6.6
1
GBLX
Chicago Mercantile Exchange - Globex
Eurodollar
CME
0.1
60.1
181
ICE-EU
Intercontinental Exchange-Futures - Europe
Live Cattle
CME
2.6
8.3
6
ICE-US
Intercontinental Exchange-Futures - US
Mexican Peso
CME
7.4
18.4
8
KCBT
Kansas City Board of Trade
Cotton #2
ICEUS
8
13.8
6
MGEX
Minneapolis Grain Exchange
New Zealand Dollar
CME
2.7
7.5
4
NYMEX
New York Mercantile Exchange
Palladium
NYMEX
9.8
13.8
3
Spring Wheat
MGEX
13
14.6
5
30-Day Fed Funds

CBOT
0
85.6
424

Canola
WCE
5.8
14.5
27

1601
Class III Milk
CME
5.7
9.5
6
Trading Liquidity: Futures is a reference chart for speculators. It compares markets Relative Contract Liquidity places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easior sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. Relative
Contract Liquidity is the number of contracts to trade times total open interest times a
when compared to others in the same column.
The number in the Contracts to Trade for Equal Dollar Profit column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return
In volume
1 or exp
2
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price
In 5000
Excursion).
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TRADERS'
RESOURCE
Trading systems can help take the subjective interpretation out of trading decisions by providing automated
buy and sell signals based on preprogrammed rules.
Trading systems are usually computer programs but
can also be a real-time service issuing signals or a set
of published rules to follow. They can rely on one or
more trading disciplines, such as artificial intelligence,
Gann analysis, astrology, indicator sets, or custom rules.
The product information youll find at our website for trading systems
will help answer questions such as: What indicators does the system
utilize? What markets are followed by the trading system? Are additional
applications required to use the trading system? What types of customer
support are offered? What are the primary features of the trading system?
While we are unable to present track records or rankings in the listing,
we hope this resource will be a starting place for finding out more about
some of the available systems and finding the right trading system for
your trading.
In addition to the trading systems listing at Traders.com, youll also find
listings of other trading-related products and services such as brokerages,
data services, courses and seminars, software, and more. We hope this
will help you learn about products to help in your trading endeavors.
TOP 10 VIEWED TRADING SYSTEMS

Product
Company
LINKS
1. AbleTrend
AbleSys Corporation
2. FXCM Trading Platform
Forex Capital Markets LLC
3. Forex System Selector
Forex Capital Markets LLC
4. Profitunity Trading Group
Profitunity Trading Group
5. Sure-Fire Trading Systems
VectorVest, Inc.
6. GorillaTrades
GorillaTrades, Inc.
7. Bulls n Bears Red Light,

Green Light System
Gecko Software, Inc.
8. Andromeda Trading System
Petros Development Corp.
9. BWT Precision Indicators
Blue Wave Trading R&D
10. BWT Precision Auto Trader
Blue Wave Trading R&D
These are the 10 trading systems clicked on most often on the Traders Resource website. Each entry
is listed in order of clicks received. This is not an editorial rating or ranking. For more information on
specific products and services, try checking store.Traders.com for archived S&C product reviews.
The information in Traders Resource is the most accurate at the time of posting and is subject to change. Because the vendors posting to Traders Resource are responsible for their own listing, Technical Analysis, Inc. declines any and all liability
for any representations made by the businesses and individuals listed. Nor can Technical Analysis, Inc. endorse any business or individual listed on Traders Resource. Technical Analysis, Inc. makes no warranties, express or implied, as to the
accuracy and reliability of claims herein. You agree to release Technical Analysis, Inc., together with its respective employees, agents, officers, directors and shareholders, from any and all liability and obligations whatsoever in connection with or
arising from your use of Traders Resource. If at any time you are not happy with the information posted to Traders Resource or object to any material within Traders Resource, your sole remedy is to cease using it. This list is updated frequently.
If you are aware of a business that should be listed, please email us at Editor@Traders.com.
January 2016
The following selection of book descriptions represents

a sampling of recent book releases in the investing field.
Books described here may be from some of the major book
publishers as well as some independent book publishers.
These are not critical reviews or editorial evaluations, but
rather a brief look at the book marketplace to help keep
readers up to date on new or recent book offerings.
Trading Psychology 2.0: From Best

Practices To Best Processes (448 pages,
into the limelight with the 2007 near collapse of the global financial market.
This book provides thorough, practical guidance toward processing the
trade, and the risks & rewards it entails.
www.wiley.com
Financial Risk Management: Applications In Market, Credit, Asset And Liability Management And Firmwide Risk
$60 hardcover, $39.99 ebook, September

2015, ISBN 978-1-118-93681-8) by Brett N.
Steenbarger, published by Wiley.
Trading Psychology 2.0 is a guide to applying the science of psychology to the art of
trading. Veteran trading psychologist and
bestselling author Brett Steenbarger offers
advice and techniques to help interested
traders better understand the markets, with
practical takeaways that can be implemented
immediately. Steenbarger draws on his own experience in psychology and
statistical modeling as an active trader to offer insights into the practical
aspect of trading psychology. Academic research is made understandable
using examples, illustrations, and case studies to make it meaningful for
practical traders. Interactive features include a blog offering ever-expanding
content and a Twitter feed for quick tips. There are also contributions
from market bloggers, authors, and experts for fresh perspectives to the
topic. Studying the market from the perspective of human behavior gives
traders insight into how human behavior drives market behavior. Trading
psychology is equally relevant to daytraders and active investors, market
makers and portfolio managers, and traders in all different markets. This
book seeks to act as a personal trading coach in print, accessible 24/7 no
matter what the market is doing.
(576 pages, $95 hardcover, $$61.99 ebook,

October 2015, ISBN 978-1-119-13551-7) by
Jimmy Skoglund & Wei Chen, published by
Wiley. This book presents an in-depth look
at banking risk on a global scale, including
comprehensive examination of the US Comprehensive Capital Analysis and Review and
the European Banking Authority stress tests.
Written by experts in global banking risk products and management, this
book provides up-to-date information and insight into risk management.
The discussion begins with an overview of methods for computing and
managing a variety of risks, then moves into a review of the economic
foundation of modern risk management and the growing importance of
model risk management. Market risk, portfolio credit risk, counterparty
credit risk, liquidity risk, profitability analysis, stress testing, and others
are dissected and examined, helping the reader to develop strategies
to construct a robust risk management system. The book takes readers
from basic market risk analysis to major recent advances in financial risk
disciplines seen in the banking industry. The quantitative methodologies are
developed with business case discussions and examples illustrating how
they are used in practice. Chapters devoted to firmwide risk and stress testing cross-reference the different methodologies developed for the specific
risk areas and explain how they work together at firmwide level. Since risk
regulations have driven a lot of the recent practices, the book also relates
to the current global regulations in the financial risk areas.
www.wiley.com
www.wiley.com
The Trade Lifecycle: Behind The Scenes

Of The Trading Process, second edition
+ website (416 pages, $70 hardcover, $45.99
Financial Planning Competency Handbook, second edition (944 pages, $175
ebook, October 2015, ISBN 978-1-118-999462) by Robert P. Baker, published by Wiley.

The Trade Lifecycle catalogs and details the
various types of trades, including the inherent
cashflows and risk exposures of each. Now
in its second edition, this guide includes new
coverage of traded products, credit valuation adjustment, regulation, and the role of
information technology. The author teaches how to dissect a trade into its
component parts, track it from preconception to maturity, and learn how it
affects each business function of a financial institution. You will become
familiar with the full extent of legal, operational, liquidity, credit, and market
risks to which it is exposed. Case studies of real projects cover topics
such as forex exotics, commodity counterparty risk, equity settlement,
bond management, and global derivatives initiatives, while the companion
website features additional video training on specific topics to help the
reader build a strong background in this fundamental aspect of finance.
Trade processing and settlement combined with control of risk was thrust
hardcover, August 2015, ISBN 978-1-11909466-1) from the CFP Board, published
by Wiley. This is a reference for those at any
stage of certification and is also a resource
for practitioners looking to better serve their
clients. The book contains over 90 chapters
for practitioners, students, and faculty. There
is a US edition and an international edition.
The revised text includes an in-depth review of
the major content areas associated with financial planning including estate
planning, taxation, investments, principles of communication, and more. This
edition includes new content on connections diagrams, new case studies,
and instructional videos, and a new section devoted to the interdisciplinary
nature of financial planning. The reference seeks to provide insights from
fields like psychology, behavioral finance, communication, and marriage
& family therapy to help the reader better connect with their clients and
perform to the highest expectations as a financial planner.
www.wiley.com
AT THE CLOSE
Sell With Confidence
Knowing when to exit a trade can work wonders for your

trading returns. Heres one tool that can help you make that
critical decision.
It
by Ron Jaenisch
was a very hot day in September and I was at a private lunch meeting with the CEO and CFO of a legal
consulting company. They were making the rounds to
encourage well-heeled investors to consider investing
in their company. Their stock had a high market cap but a low
daily turnover, which for most money managers, is a criterion
that brings up a caution flag.
I decided to use the opportunity to practice presenting a small
piece of what I was working on, one of the many automated
techniques used by the technical analysis software that was
being built for a family office consortium.
I decided to present them with credible evidence that I had
technology that is used by the money managers of the ultrawealthy in Vienna to know when to sell. This may sound like
a tall tale, but I taught technical analysis to Vienna money
managers several years back.
First I showed them the chart of the Dow Jones Industrial
Average (DJIA) you see in Figure 1 and mentioned that a

year ago I posted a video that suggested the DJIA was near
a topping area. In the chart of the DJIA in Figure 1 a megahorn pattern is in play and price is near the green line. The
technician who first identified the pattern and coined the term
mega horn wrote that it was more reliable for finding highs
than lows. The green line is the far parallel of an Andrews
pitchfork. The pitchfork is drawn using the recent three large
pivots. Most charting software has the ability to draw this
line. The Andrews line was originally written about in this
magazine by Tom French.
Over the years I found that price often finds strong resistance at the green line. This is something I taught to money
managers in Vienna years ago. Figure 2 shows the weekly
scale of the DJIA and you can see that price did reverse near
the green line.
I showed them several other charts such as the daily chart
of Apple Inc. (AAPL) that you see in Figure 3. Once again
I pointed out that prices had made a top at the green line.
Interestingly, a similar scenario took place in AAPL in 2012
(Figure 4) in that prices reversed near the green line. However,
I didnt include this chart in my presentation.
January 2016
muellek josef/Shutterstock
The Green Line
AT THE CLOSE
qcharts.com
FIGURE 2: STRONG RESISTANCE. On this weekly chart of the DJIA you can see
that price reversed at the green line.
FIGURE 1: MEGAHORN PATTERN. On this daily chart of the Dow Jones Industrial
Average (DJIA), price is approaching the green line.
Conclusion
I have come across several charts that show prices reversing at

the green line. Ive seen it enough times that I am convinced the
green line is a reliable tool that lets me know when to sell.
Ron Jaenisch spent time with Dr. Alan Andrews learning
his techniques. Jaenisch has been authorized by Andrews to
teach the Andrews techniques via a course that now includes
videos. In 2015 Jaenisch was part of an international team
that built software that automatically trades forex, stocks,
FIGURE 3: A TOP IN APPLE INC. (AAPL). Here in the daily chart of AAPL is
another instance of prices reversing at the green line.
Price often finds strong

resistance at the green line,
which is the far parallel of
an Andrews pitchfork.
and futures, using the techniques. He can be reached through
Andrewscourse.com.
Further reading
French, Thomas E. [1985]. Median Line Market Analysis,

Technical Analysis of Stocks & Commodities, Volume
3: April.
FIGURE 4: AND IT HAS HAPPENED BEFORE. Interestingly, a similar scenario

occurred in the chart of AAPL in 2012.
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THE TRADERS MAGAZINE SINCE 1982

Profit from bottom fishing 8

Avoid data distortions

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12 Decision Areas In Daytrading

22 Trading Vs. Forecasting:

by Tyler Yell, CMT

JANUARY 2016, Volume 34 Number 1

30 Explore Your Options

by Stella Osoba, CMT

61 The Green Line

45 Futures For You

n Cover: William L. Brown

Printed in the U.S.A.

4 January 2016 Technical Analysis of Stocks & Commodities

2016 Readers Choice Awards

Winners will be announced in the Bonus Issue, available February 2016

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January 2016 Volume 34, Number 1

The Traders MagazineTM

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we approach another year, it may

6 January 2016 Technical Analysis of Stocks & Commodities

Miami Downtown Richard Cavalleri/Shutterstock

IN MEMORY OF DON BRIGHT

My question relates to scanning for

Build powerful trading

Maybe its time to try

how to improve the setup.

Bottom Fishing &

8 January 2016 Technical Analysis of Stocks & Commodities

1. Only look for stocks during a

A Turn For The Better

The setup described here is easy

Step 1: Only bottom fish in a bull

Step 3: The second bottom should

Step 2: Using the yearly chart,

Step 4: The pattern confirms

Step 5: Placing stops. I tested two stop locationsa penny

I used 59 stocks for in-sample data and 425 for out-of-sample

If you were to trade the setup

The first question bottom fishers will want answered is how

Technical Analysis of Stocks & Commodities 9

The table shown in Figure 2

Tall patterns help

The chart in Figure 3 shows an example

The ugly double bottom setup is flawed because the stop is

considered by some to be a leading expert on chart patterns.

Bulkowski, Thomas [2013]. Fundamental Analysis And

S&C Contributing Writer Thomas Bulkowski (who may be

Technical Analysis of Stocks & Commodities 11

12 January 2016 Technical Analysis of Stocks & Commodities

Looking Beyond Price

Technical Analysis of Stocks & Commodities 13