THE TRADERS’ MAGAZINE SINCE 1982

www.traders.com MARCH 2015

Fundamental
Analysis
And forex trading 10

Moving Averages
Some finer properties 16

Trading System
Design
A statistical approach
for better predictability 28

News Sentiment
Data for retail traders 32

INTERVIEW
Les Masonson of Cash
Management Resources 36

REVIEW
n OptionStrategist.com (part 2)

MARCH 2015
Take Control of Your Trading with the
Professional Traders’ Starter Kit  ™

*Based on the 5-year subscription rate of $299.99. Shipping extra for foreign addresses.

The Foremost Collection For Traders
This massive collection packages the best tools for trading and
investing in any market!
1. Technical Analysis of Stocks & Commodities, the Traders’
Magazine™. The premier magazine for technical analysis.
You’ll get five years — 65 issues — including our annual
Bonus Issues with our Readers’ Choice Awards.
2. S&C Digital Edition. Recent complete issues available in their
entirety as PDFs for you to either download or read directly
in your browser. No more waiting for the mail to deliver your
magazine! You will still receive the printed magazine unless
you opt for a digital-only subscription.
3. Complete Digital Archive. The complete archives as PDFs
— more than 17,000 pages — from Technical Analysis of
Stocks & Commodities from 1982 through the present. The 7 . Optimized Trading. The optimized indicator values can be
articles can be read in your browser or download to your
computer (or any device with Internet
access and the ability to read a PDF)!
4. Traders.com Advantage™, premium website content
delivering real-world technical analysis to you! You’ll get five
years of charts, indicators, and “how-to” advice for specific
markets, currencies, stocks, and commodities; near-term
opportunities; price movement; new techniques. Posted in
real-time with an archive of thousands of articles.
5. Working Money™, the Investors’ Magazine online. You’ll get
five years of market observations; explanations of charts,
markets, and market sectors; money management; and
interviews with money people that will help you trade and
invest wisely. Articles added several times a month.
6. Article Code. Download or copy & paste code presented in
past issues of Stocks & Commodities — no need to type it
out manually.
used as starting points when trying to decide what values
to input into your charting software. Search for a certain
symbol or company or build your own portfolio.

ALSO RECEIVE A FREE✝ BOOK

WITH YOUR PTSK ORDER!
Charting The Stock Market: The Wyckoff
Method, edited by Jack K. Hutson, is yours Online: www.TRADERS.com
free✝ with your order for the Professional Toll free: 1-800-832-4642
Traders’ Starter Kit. 206-938-0570 • Fax: 206-938-1307
✝
Shipping and handling charges apply for foreign orders.
Email: Circ@Traders.com
Join us on Facebook at www.facebook.com/STOCKSandCOMMODITIES Follow us on Twitter @STOCKSandCOMM
 FILTERS
FIND MORE ideas that fit your strategy.
Markets Technicals Options
What’s trending up? What’s gaining momentum? Just choose
Uptrend Stocks 3% on 15% Higher Vol DESCRIPTIONS
from our market and technical filters to get a list of securities
Symbol Last Chg % Chg Bid Ask Volume
DEC 5.22 1.232 30.89 5.20 5.23 9,148,849 to pursue. It’s your idea, powered by Active Trader Pro®.
RTF 56.70 5.04 9.76 55.90 57.95 354,664
LDPE 1.05 0.10 10.53 1.04 1.05 20,110,933
RMA 10.78 0.85 8.56 10.70 10.72 81,673,172
BTS 1.22 0.08 7.02 1.21 1.22 1,475,961
NABP 5.30 0.22 4.33 4.64 5.39 4,299,779

See through
the noise.
Advanced filtering is one of hundreds of features helping you get more out of your

1
investing process. And they all work together on one, easy-to-use platform.
Start using the new Fidelity Active Trader Pro® today. You’ll get 200 #
commission-free trades online and a free walkthrough from a trading specialist.*

2014 BEST OVERALL

Fidelity.com/TryATP ONLINE BROKER
800.544.5115 4 TIME WINNER†

*Trades are limited to online domestic equities and options must be used within 90 days. Options trades are limited to 20 contracts per trade. Offer valid for new or existing Fidelity customers opening or
adding to an eligible Fidelity IRA or Fidelity brokerage retail account. Accounts receiving over $50K of net new assets will receive 200 free trades. Account balance of $50K must be maintained for at least
9 months; otherwise, normal commission schedule rates may be retroactively applied to any free trade executions. See www.fidelity.com/ATP200free for further details. Equity sell orders are subject to an
activity assessment fee (of between $0.01 to $0.03 per $1,000 of principal) and/or eligible securities.
Investing involves risk, including risk of loss.
Images are for illustrative purposes only
Fidelity’s Active Trader Pro PlatformsSM is available to customers trading 36 times or more in a rolling twelve-month period; customers who trade 120 times or more have access to Recognia
anticipated events and Elliott Wave analysis.
System availability and response times may be subject to market conditions.
†
Kiplinger’s magazine, December 2014. Results based on ratings in the following categories: total commissions, investment choices, tools, research, Web site, mobile, and advisory services. Criteria
not equally weighted. In 2014, Fidelity tied for #1 with Charles Schwab which ranked 10 leading discount brokers. In 2011, Fidelity tied with TD Ameritrade which ranked 14 discount brokers, was #1
in November 2008 which ranked 12 discount brokers, and tied for #1 with Muriel Siebert in 2007 which ranked 10 discount brokers.
Fidelity Brokerage Services, Member NYSE, SIPC. © 2015 FMR LLC. All rights reserved. 682376.5.0
 CONTENTS MARCH 2015, Volume 33 Number 3

10 Trading Forex: 28 Trading System Design: TIPS

Fundamental Analysis A Statistical Approach
by Imran Mukati by John F. Ehlers and Ric Way
Forex traders need to keep an eye Here’s how to start with the basics
on fundamental data such as inter- and determine if an identifiable REVIEW
est rates, central bank policies, and event has a statistical edge in pre-
economic data. Here in part 5 of dicting future prices—before you 44 • OptionStrategist.com (Part 2)
this six-part series, we’ll take an even start to build a trading system. Product review: The Option
in-depth look at these fundamental Strategist newsletter and its
variables. related services
32 News Sentiment
by Stephen Massel
15 Q&A News data, which has long been the
by Don Bright
DEPARTMENTS
province of institutional traders, is
This professional trader answers now making its way into the hands 6 Opening Position
a few of your questions. of retail traders. Here’s a look at 8 Letters To S&C
how you can incorporate this data 22 †Traders’ Glossary
FEATURE ARTICLE into your trading strategies. 47 Traders’ Tips
16 Moving Averages: 55 Trade News & Products
Some Finer Properties INTERVIEW
56 Futures Liquidity
by Giorgos E. Siligardos, PhD 36 Using ETF Momentum 57 Advertisers’ Index
Find the answers here to common Strategies With
questions about different types of 57 Editorial Resource Index
Les Masonson
moving averages. by Jayanthi Gopalakrishnan
58 Books For Traders
Leslie Masonson is president of 59 Classified Advertising
23 Futures For You Cash Management Resources, 59 Traders’ Resource
by Carley Garner a financial consulting firm that
Here’s how the futures market he founded in 1987. Masonson’s
really works. 44-year career has spanned trad-
ing, investing, financial advisory
services, bank operations manage-
24 MACD-Suitable Stocks ment, teaching, and corporate cash/
by Kevin Luo treasury management consulting.
Trading signals generated by We spoke with him about trad-
the crossover of Gerald Appel’s ing and investing in ETFs using
moving average convergence/ momentum strategies.
divergence and signal lines are
popular and simple to use. Do they
work for all stocks in all market 42 Explore Your Options
conditions? Find out here. by Tom Gentile
Got a question about options?

AT THE CLOSE
62 Play The Markets
And Keep Your Day Job
by Azeez Mustapha
Not ready to be a full-time trader? This article is the basis for
Here’s a high-probability, part-time TIPS
Traders’ Tips this month.
trading strategy that will help you
master the markets before you n Cover: Wlliam L. Brown
commit to it full time.
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
of Stocks & Commodities™ (ISSN 0738-3355) is published monthly with a Bonus Issue in March for $89.99 per year by Technical Analysis, Inc., 4757 California Ave. S.W., Seattle, WA 98116-4499. Periodicals
postage paid at Seattle, WA and at additional mailing offices. Postmaster: Send address changes to Technical Analysis of Stocks & Commodities™ 4757 California Ave. S.W., Seattle, WA 98116-4499 U.S.A.
Printed in the U.S.A.

4 • March 2015 • Technical Analysis of Stocks & Commodities

 IS YOUR BROKER
TAKING MORE
THAN HIS FAIR SHARE?

Keep more of what’s yours with our low cost platform

for professional traders, investors and institutions.

Interactive Brokers Interactive Brokers Interactive Brokers

Commissions are: 1
Financing Rates are: 1 Executions1 are:

64-89% 78% Stocks:

better than
lower than
• Charles Schwab
lower than
• Charles Schwab
14¢ the industry
per 100 shares

• TDAmeritrade
• ETrade
• TDAmeritrade
• ETrade
Options:
17¢
better than
For 100 to 1000 shares and For a margin loan of the industry
1 to 10 option contracts $50,000 to $1,000,000 per contract
First Half 2014*

Interactive Brokers ibkr.com/iwantmore

LOWER YOUR COSTS TO MAXIMIZE YOUR RETURN

stocks • options • futures • forex • bonds — on over 100 markets worldwide from one account
Interactive Brokers is a member of NYSE, FINRA, SIPC – Lower investment costs will increase your overall return on investment, but lower costs do not
guarantee that your investment will be profitable. Supporting documentation for any claims and statistical information will be provided upon request.
Commissions and Margin Rates as of January 6, 2015. Services vary by firm. [1] For additional information on our commissions and margin rates and
execution quality, see www.interactivebrokers.com/compare. * Based on independent measurements, the Transaction Auditing Group, Inc., (TAG).
03-IB15-877CH855
 O PENING P
Opening Position
OSITION
March 2006 • Volume 24, Number 3
March 2015 • Volume 33, Number 3

The Traders’ Magazine TM

The Traders’ MagazineTM
EDITORIAL
editor@traders.com

T
EDITORIAL

O
Editor in Chief Jack K. Hutson
editor@traders.com
Editor Jayanthi Gopalakrishnan
Editor in Chief JackElizabeth
K. HutsonM.S. Flynn nce again we got a reminder of just
hishow
calendar yeartheso far has been filled
Managing Editor
Editor Jayanthi
Production Gopalakrishnan
Manager Karen E. Wasserman sensitive financial markets
Production Manager
Art Director Karen
Christine E. Wasserman
Morrison withsaw
are. We surprising
a major events
selloff that
in thehave had a
Japanese
Art Director
Graphic ChristineSharon
Designer Morrison
Yamanaka significant impact—
markets, which onaspeople’s
expectedtrading accounts.a
— triggered
Editorial
Graphic Intern Emilie
Designer
Technical
WayneRommel
Shaw
First, there’s
domino the price
effect of crude throughout
on markets oil, which con- the
Writer Writer
Dennis David Penn
tinues to slide
Add lower. We’ve had some surprising
Staff D. Peterson
Staff Writers Dennis D. Peterson, Bruce Faber
Webmaster Han J. Kim world. disappointing earnings numbers
Webmaster Han J. Kim
Contributing Editors John Ehlers,
announcements by various
from US corporations andcentral
you have banks—the
a situa-
Contributing
Anthony Editors
W. Warren, Ph.D.John Ehlers, Kevin Lund,
Anthony W. Warren, Ph.D.
Swiss National
tion that just gotBank
worse. with
Sotheir
whatshocking
started offan- as
Contributing Writers Don Bright, Thomas Bulkowski,
Contributing Writers Don Bright, Thomas Bulkowski,
Martin Pring, Barbara Star, Markos Katsanos
nouncement
a strong year to ended
abandon upthe currencyand
correcting, cap on the
rather
Martin Pring, Adrienne Toghraie
Swiss franc,
rapidly. and the
I must Reserve
admit that Bank
although of India and
correc-
OFFICE
the Bank
tions areof Canada
healthy forannouncing
any market,cuts when in you
inter-have a 2% drop, it gets you thinking.
OFFICEOF
OFTHE
THEPublisher
Publisher
PUBLISHER
est rates.
Prior What’s next? Anything,
to the Federal Reserve’s really,
FOMC and by theI usually
meeting, time you read
take this, at
a look many more
the yield
PublisherJack K.K.
Hutson
significant
curve. At events
present,may it’s have taken place that would
givenaffect thegeneral
financial markets.
Jack Hutson
Industrial EngineerLinda
Jason K. Hutson
Credit Manager Eades Gardner looking a little flat, and that the consensus
Project Engineer
Industrial
Controller
SeanJason
Engineer M. Moore
Mary K. Hutson
Project Engineer
K. Hutson
Sean M. Moore
Such events
is that the Fedclearly pointtototighten
is going something we January
at their have always
31st known
meeting,butI am
failconcerned
to come to
Accounting Assistants Jane Leonard grips with:
that the Anything
yield curve may can happen
be heading in the markets.
in the direction of being inverted. And if that
ControllerAdvertising
Mary K. Hutson Sales were
Yet we think of the
to happen, thatmarkets
would not as something
be a goodthat signwill
formake
the USmoney for us. I’m
economy. We rush
not
4757 California Ave. S.W.
ADVERTISING SALES
Seattle, WA 98116-4499 into stocks after
suggesting that hearing aboutto
we are going them from someone
go through else, whether
a recessionary period.it’s
Butthe financial
given that
1 206 938-0570 Fax 1Ave.
4757 California 206 S.W.
advert@traders.com
Seattle,
938-1307
WA 98116-4499 media
almost oranything
someone’s canTwitter
happen,feed. As muchhurt
it doesn’t as Itoam a fan of
expect thetechnology, information
worst. If nothing else,
1 206 938-0570 Fax 1 206 938-1307
National Sales Manager, Classified & Web Sales
advert@traders.com
overload makes
it helps to it easy
preserve forcapital.
your us to focus on unnecessary information, which clouds
Edward W. Schramm
National Sales Manager Edward W. Schramm our judgment. The result is we end up losing money. And that defeats the purpose
Advertising
Classified &Sales
WebSummer DavisJ. Chrisman
Sales Chris of our being in the markets.

So
Production Coordinator Karen Moore

M
Circulation
CIRCULATION with that in mind, you can see why it’s important to design a trading
Subscription
Subscription&&Order
OrderService
Service1 1800
800832-4642
832-4642
1 1206
206938-0570
938-0570 FaxFax1 1206
206938-1307
938-1307 system that gets you out of the market at the right time. When access to
aybe is weeasy,
need theto approach theoptions
marketsavailable
a different way. Instead
Thisofmakes
think-it
circ@traders.com
circ@traders.com the markets number of increases.
Subscription
SubscriptionManager
ManagerSeanSeanM.M.Moore
ingtoofbethem in terms
withofthe
profits, think of them in terms of losses. Thinking
Moore
Subscription Sales Carmen
Assistant Subscription Hale Sheila Peterson
Manager
important thorough different types of orders, front-end software, and
Subscription Sales Agnes Dimaano, Tina Row oftrading
them as something
systems that that
are outwillthere.
makeLee us lose money in
Leibfarth, mayhishelp us create
article defensive
“The Automated
Website
WEBSITE
http://www.traders.com
strategies
Daytrader” forstarting
trading.onThe pagefirst
22, step in creating
addresses a strategy
the various options is that
to understand
are available your
and
Staff members http://www.traders.com
may be emailed through the Internet personality.
how you can There
takeare a multitude
advantage of ways that you can approach the markets, but
of them.
usingmembers
Staff first initial may
plus be
lastemailed
name plus @traders.com
through the Internet
using first initial plus last name plus @traders.com
youButneed to apply
before strategies
getting to the that
stagematch your personality.
of placing that trade, youIt’s need
tempting to be driven
to understand the
tomarket
buy something that someone
you are trading. else bought.
You should be able Iftoyou
do sofind yourself
after reading making
Paolo hasty de-
Pezzutti’s
Author­i­za­tion to pho­to­copy items for inter­nal or per­sonal
use, or the inter­nal or
Authorization to per­ sonal use
photocopy of spe­
items cific
for cli­ents,
internal orispersonal
grant- cisions without doing
“Understanding MarketyourStructure.”
due diligence, The hit the brakes
markets followbefore you press
different that buy
behavior pat-
eduse,
Cop­
by Tech­
or the
y­right by
ni­cinternal
Clear­
al Anal­yor
ance Cen­
­sis,personal
Inc. for users
ter (CCC)
use ofreg­ is­tered clients,
specific with theis orterns,
sell button.
and youGo back
need to your plan—and
to determine if youtrending,
if it is volatile, don’t have in aone, now’s
trading the time
range, movingto
Inc.Transactional Reporting
go back tointheonedrawing board orto create butone—and make your trading decisions only
granted Technical Analysis, for users registered with
Serv­
theiCopyright
ce, pro­vided that theCenter
Clearance base fee (CCC)of $1.00 per copy,
Transactional plus
Report- strongly direction, moving not with much momentum.
afterOnly
going through all your checkpoints. Place a trade only
is if allyou
yourberequirements
50¢ingper page provided
Service, is paid directly
that thetobase
CCC, fee222 Rosewood
of $1.00 Drive,
per copy, plus
Danvers,
50¢ perMA page 01923.
is paidOnline:
directly http://www.copyright.com.
to CCC, 222 Rosewood Drive, For when you know what the structure of the market will able to apply
those
Danvers,
license
those by
organ­MAiz­ a­t01923.
ions that
CCC, a sep­that
organizations
have http://www.copyright.com.
Online:
a­ratehave
been granted a photocopy
sys­tbeen
em of granted
pay­menta has been
photocopy
For are
themet. Making
correct hasty
trading decisionsBut
technique. without
that’s doing
just theyour
firstdue
step.diligence
You stillis have
a recipe for
to have
arranged.
license byThe CCC, feea code
separate for users
systemofofthe Transactional
payment has been disaster, as isasfollowing
discipline, you will afind trading strategy
out after that doesn’t
reading matchTechnical
this month’s your personality.
Analysis of
Reporting
arranged.Serv­ icefee
is: 0738-3355/2015 $1.00the +Transactional
0.50.
STOCKS
Your success as a trader lies in the quality of Tower.
your trading plan.will
Make youit be
a defen-
The code for users of
Sub­scrip­
Reporting tions: is:
Service USA: one year (13 $1.00
0738-3355/2006 issues) $89.99;
+ .50. & COMMODITIES interview with Ken Only then able to
Magazines
postage
shipped USA:
Subscriptions:
Foreignas follows:
surface
outside
mailCanada,
onethe
add $15 per
year
US$15
US (13require
year. per
issues)additional
$64.95;
year;Europe
Air mail: Europe, add
sive
knowonewhen
that to
approaches
exit. the markets as a battlefield where you are likely to lose
US$25.50
$25.50 perper
Sin­
year; year; all otheradd
elsewhere countries US$39
$39 per year. per copies
Single year. money. Think of the risks you will encounter, and create steps that will lessen your
ofgmost
le copies
past of mostofpastthe issues
currentfromyearthe arecur­ rent year are
chances of encounteringHere’s those risks. Take it one step at a time. It’s the small steps
issues available prepaid
avail­
at $8a­ble
perpre­ paid at
copy. $8 per
Prior years copy.
arePrior years in
available arebook
avail­ a­ble
format to smart trading!
that will lead to success in the long run.
in(without
book format ads) (without
or from ads) or digitally from
www.traders.com. USAwww.traders.
funds only.
com. USA funds
Washington stateonly. Washington
residents add 8.8% statesalesres­i­dents add
tax. VISA,
sales tax for their
MasterCard, locale.and
AmEx, VISA, MasterCard,
Novus DiscoverAmEx, and
accepted.
Discover
Subscription accepted.Subscription
orders: 1 800 832-4642 orders: or 11 206800938-0570.
832-4642
or 1 206 938-0570.
Technical Analysis of STOCKS & COMMODITIES™, The
Technical
Traders’ Analysisisofprepared
Magazine™, Stocks from & Cinformation
ommodities™ ,
be-
The Traders’
lieved to beMagazine™,
reliable but not is prepared
guaranteed frombyinformation
us without
believed to be reliable butdoesnot not
guaranteed bybe uscomplete.
with­out
further verification,
further
Opinions verification,
expressed
and
andare does
purport to
not purport
subject to revision to be complete.
without notifi-
Jayanthi Gopalakrishnan,
Opinions
cation. We expressed
are notare subject
offering to to
buy revision
or sellwithout
securitiesnoti-or Editor
fication.
commodities
commodities
We arediscussed.
more of its officers,
not offer­ing
discussed.
to buy or
Technical
Technical
and authors may Anal­
have
sell securities
Analysis Inc., oneoror
ysisa position
Inc., onein orthe
Jayanthi Gopalakrishnan,
more of its officers,
securities discussed and authors may have a position in
herein. Editor
the securities
The names discussed
of products herein.
and services presented in this
magazine
The names areof products
used only inand an services presented
editorial fashion, andintothis
the
magazine
benefit ofare used only owner,
the trademark in an editorial
with no fashion,
intentionand to the
of infringing
benefit of the trademark
on trademark rights. owner, with no intention of infring-
ing on trademark rights.

8 • March 2006 • Technical Analysis of STOCKS & COMMODITIES

6 • March 2015 • Technical Analysis of Stocks & Commodities
 NOTICE OF CLASS ACTION SETTLEMENT

If you purchased, sold or held NYMEX Light Sweet Crude Oil, NYMEX New York Harbor Heating Oil or NYMEX New York Harbor
Gasoline futures contracts at any time from March 2, 2007 through March 26, 2007, inclusive, then your rights will be affected and
you may be entitled to a benefit.
A Settlement has been proposed in a class action lawsuit concerning the allegedly improper trading of three futures contracts on the
New York Mercantile Exchange (“NYMEX”) from March 2, 2007 through March 26, 2007, inclusive. The Settlement will provide $16.75 million
to pay claims from Persons who bought, sold, or held the referenced futures contracts at any time from March 2-26, 2007. If you qualify, you
may send in a Proof of Claim form to potentially get benefits, or you can exclude yourself from the Settlement, or object to it.
The United States District Court for the Southern District of New York (500 Pearl St., New York, NY 10007-1312) authorized this notice.
Before any money is paid, the Court will hold a Fairness Hearing to decide whether to approve the Settlement.
Who’s Included?
You are a “Settlement Class Member” if you purchased, sold or held NYMEX Light Sweet Crude Oil futures contracts, NYMEX New York
Harbor Heating Oil futures contracts or NYMEX New York Harbor Gasoline futures contracts at any time from March 2, 2007 through March 26, 2007,
inclusive. Excluded from the Settlement Class are (i) members of the judiciary assigned to this case, including their immediate family members;
(ii) Class Counsel and their employees; (iii) Defendants and any parent, subsidiary, affiliate, employee or agent of any Defendant, including
Defendants’ counsel; and (iv) Opt Outs.
Contact your futures broker or futures commission merchant to see if you purchased, sold or held the referenced contracts. If you’re not sure
you are included, you can get more information, including the Settlement Agreement, Mailed Notice, Plan of Allocation, Proof of Claim and
other important documents, at www.nymextassettlement.com (“Settlement Website”) or by calling toll free 1-866-778-9470.
What’s This About?
The lawsuit claims that Defendants Optiver US LLC, Optiver Holding B.V., Optiver VOF, Christopher Dowson, Bastiaan van Kempen, and
Randal Meijer (“Defendants”) caused and aided and abetted the causation of artificial prices of certain futures contracts on the New York
Mercantile Exchange from March 2-26, 2007, inclusive, by amassing dominant NYMEX trading at settlement (“TAS”) contract positions and
offsetting such positions through NYMEX futures contracts transactions in the opposite direction of the TAS positions during the closing period
for the futures contracts at the end of the day. Defendants deny any wrongdoing that Plaintiffs allege in the lawsuit and maintain that they have
complied with their legal obligations.
The Court did not decide which side is right. But both sides agreed to the Settlement to resolve the case and get benefits to potentially affected
market participants. The two sides disagree on how much money could have been won if the Plaintiffs had prevailed at trial.
What Does the Settlement Provide?
Under the Settlement, Defendant Optiver US agreed to pay $16.75 million into a Settlement Fund. If the Court approves the Settlement,
potential Settlement Class Members who qualify and send in valid Proof of Claim forms will receive a share of the Settlement Fund, after it is
reduced by the payment of certain expenses. The Settlement Agreement, available at the Settlement Website, describes all of the details about the
proposed Settlement.
The exact amount each qualifying Settlement Class Member will receive from the Settlement Fund cannot be calculated until
(1) the Court approves the Settlement; (2) certain amounts identified in the full Settlement Agreement are deducted from the Settlement Fund;
and (3) the number of participating Class Members and the amount of their Allowed Claims are determined. In addition, each Settlement Class
Member’s share of the Settlement Fund will vary depending on the information the Settlement Class Member provides on their Proof of Claim
form. Generally, however, if you bought, sold or held more contracts, you will get more money. And if you bought, sold or held fewer contracts,
you will get less money.
The number of claimants who send in claims varies widely from case to case. If less than 100% of the Settlement Class sends in a Proof of
Claim form, you could get more money.
How Do You Ask For a Payment?
If you are a Settlement Class Member, you may seek to participate in the Settlement by submitting a Proof of Claim to the Settlement
Administrator at the address below postmarked no later than August 3, 2015. You may obtain a Proof of Claim on the Settlement Website or by
calling the toll free number referenced above. If you are a Settlement Class Member but do not file a Proof of Claim, you will still be bound by
the releases set forth in the Settlement Agreement if the Court enters an order approving the Settlement Agreement.
What Are Your Other Options?
If you don’t want to be legally bound by the Settlement, you must exclude yourself by April 14, 2015, or you won’t be able to sue, or continue
to sue, Defendants about the legal claims in this case. If you exclude yourself, you can’t get money from this Settlement. If you stay in the
Settlement, you may object to it by April 27, 2015. All objections to or requests to be excluded from the Settlement must be made in accordance
with the instructions set forth in the formal Mailed Notice. The Mailed Notice available at www.nymextassettlement.com explains how to
exclude yourself or object.
The Court will hold a Fairness Hearing in this case (In re: Optiver Commodities Litigation, Case No. 1:08-cv-06842-LAP) on May 19, 2015,
at 1:00 p.m. in Courtroom 12A, United States Courthouse, 500 Pearl Street, New York, NY 10007, to consider whether to approve
the Settlement and a request by the lawyers representing all Settlement Class Members (Lovell Stewart Halebian Jacobson LLP,
Lowey Dannenberg Cohen & Hart, P.C., and Robins Kaplan Miller & Ciresi L.L.P.) for an award of attorneys’ fees of no more than one-third
(i.e., 33 1/3%) of the Settlement Fund for investigating the facts, litigating the case, and negotiating the Settlement, and for reimbursement of
their costs and expenses in the amount of no more than approximately $275,000. The lawyers for the Settlement Class may also seek additional
reimbursement of fees, costs and expenses in connection with services provided after the Fairness Hearing. These payments will also be deducted
from the Settlement Fund before any distributions are made to the Settlement Class.
You may ask to appear at the Fairness Hearing, but you don’t have to. For more information, call toll free 1-866-778-9470, visit the
Website www.nymextassettlement.com, or write to IN RE OPTIVER COMMODITIES LITIGATION SETTLEMENT, c/o A.B. DATA, LTD.,
PO BOX 170500, MILWAUKEE, WI 53217-8091.
 The editors of S&C invite readers to submit their opinions and information on subjects
relating to technical analysis and this magazine. This column is our means of communica-
tion with our readers. Is there something you would like to know more (or less) about?
Tell us about it. Without a source of new ideas and subjects coming from our readers,
this magazine would not exist.
Email your correspondence to Editor@Traders.com or address your correspondence
to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499. All
letters become the property of Technical Analysis, Inc. Letter-writers must include their full
name and address for verification. Letters may be edited for length or clarity. The opinions
expressed in this column do not necessarily represent those of the magazine.—Editor
SUPERSMOOTHER OSCILLATOR angles for the cosine. To code it using
AND EXCEL SPREADSHEET radians, for example, in Excel, the cell
Editor, pseudocode for the tunable constant b1
I really enjoyed John would look like this:
Ehlers’ article “Whiter Is
Brighter” in your January b1 =
2015 issue. He has a way 2*a1*COS(RADIANS
of translating unfamiliar (1.414*3.14159/BandEdge))
concepts into something useful to us.
And the results and final equation prove Also, Ron McAllister’s spreadsheet
that out. that he presented in the Traders’ Tips
The article’s pseudocode of b1 in the section of that same issue contains a
calculation for the SuperSmoother uses small error in it: In cell A21, where he
computes the tunable constant a1, he
gives: =EXP(-1.414*3/A19), where
the 3 should instead be pi (3.14159). I
noticed this when my tunable constants
for BandEdge=20 did not exactly agree
with his.
® For those readers wanting to know
the exact values of the SuperSmooth-
er tunable constants when Band-
Edge=20, so that they can check out
their own formulations, they are:
a1=0.8008, c2=b1=1.5623, c3=-0.6413
NeuroShell Trader and c1=0.0790. Note that c1+c2+c3 =
1.0000.
Now Works with FXCM Don Kraska
Data and Brokerage
Author John Ehlers replies:
I am glad you enjoyed my article “Whiter
Is Brighter” in the January 2015 is-
sue and that you appreciate my efforts
to bring a little science to this art of
trading.
It is my custom to write an exponential
moving average (EMA) in the form:
Output = a*Input + (1-a)*Output[1];
Winner 12 years in a row!
Written this way, you can check by
www.NeuroShell.com inspection that the two coefficients of the
301.662.7950 equation sum to unity. This means the
EMA is guaranteed to have unity gain at
8 • March 2015 • Technical Analysis of Stocks & Commodities
zero frequency. However, if I additionally
multiply the input by K, then I simply give
the EMA a gain of K at zero frequency.
In a nutshell, that is what I did in the
article. I just changed the terminology
to make the philosophical point, and the
scale factor is irrelevant.
My shift in terminology produced a
one-bar difference as the expression
for the white spectrum. But a one-bar
difference produces a 6 dB increase in
the high-pass filter gain at the Nyquist
frequency. I then added a zero of trans-
mission to the one-bar difference filter
at the Nyquist frequency to mitigate the
filter gain (in effect, noise gain) at that
spectral point.
I think the really important part of my
article is that the “pink noise” shape of
the market data spectrum must be leveled
if analysts are to make reasonable filters
and indicators.
Editor: Ron McAllister’s revised spread-
sheet that adds the pi function is avail-
able at our website, www.traders.com,
in the Traders’Tips area for our January
2015 issue.
To reach the Traders’ Tips area at our
website, choose the Traders’ Tips menu
item from the Home–S&C button on our
homepage at www.traders.com.
SUGGESTIONS
Editor,
Please try to publish one or two recom-
mendations on stocks, commodities,
forex, and indexes in every issue, if
possible.
The best way to do so would be to ask
the author of an article to recommend a
security or two at the end of his or her
article using the same method or trading
setup he or she is writing about. This would
quickly filter out real traders with life ex-
perience versus writers with no practical
“war-zone” experiences, per se.
 LETTERS
Please ask the articles’ authors to
provide some backtesting and verifiable
results on their recommended trade setup
as well. This would cement the deal for the
writers’ own reputations and personas.
A few but solid actionable recommen-
dations each month from your contribut-
ing writers would make your magazine
much more appealing to the financial
junta than the typical financial magazine
that offers only repetitive, boring articles
on topics like MACD, SMA, EMA and
any other trading setups.
This would also help writers to work
hard and write something compelling
that back their observations, theories,
and data, not just plain old dry articles
without much meat. Thank you.
Jack Mirza

Thank you for your feedback and your

suggestions. Since we are an educational,
how-to magazine on technical analysis,
our objective is to help people to learn
to trade using technical trading tools
or systems. That has been our focus in
Technical Analysis of Stocks & Com-
modities magazine since its inception.
We try to present trading systems or
ideas for trading setups with backtesting
results when possible. We try to ensure the
reader will be able to see the logic in an
idea presented, and be able to replicate
the strategy for implementation or for
further testing.
But our mission is also to provide a
variety of material in every issue, for
all different levels of traders. Not every
article can present a tradable system with
backtesting results. Some articles are
designed to help introduce basic concepts
to new or next-generation traders.
As an aside, we’d remind readers that
regardless of whether or not an author
can provide backtest results on his
method, system, or idea, we encourage
readers to perform their own backtests
to their own satisfaction. That is the only
way to become comfortable with a system
or strategy, and that is what we preach.
We try to provide the tools to do this,
including the ready-to-use code provided
by software developers in our Traders’
Tips section each month to implement
a selected strategy discussed in that is-
sue. While it’s important for a reader to
be able to glance at an article to see if
he feels it’s worth pursuing for himself,
it’s also important to understand that
most approaches will only work in some
markets some of the time. It’s imperative
that the trader change his approach when
something stops working.
Our online publication, Traders.com
Advantage, contains some content that
may be more in line with what you are
suggesting, since Traders.com Advantage
articles often discuss a specific stock, in-
dex, ETF, or forex pair. Brief analyses are
often provided based mainly on technical
analysis, and the authors sometimes sug-
gest securities to trade. We publish articles
on a daily or weekly basis in Traders.com
Advantage, which makes them timelier
than in a print publication.
Thank you again for taking the time
to write; we value feedback from our
readers.—Editor
March 2015
RETHINKING DIVERSIFICATION
Editor,
I really enjoyed Dirk
Vandycke’s article in
the January 2015 issue,
“Rethinking Diversifi-
cation.” Well written,
clear, and to the point.
Thanks to him for sharing his thoughts
in this article. Looking forward to read-
ing part 2.
MC
Readers will find part 2 of Dirk Van-
dycke’s two-part series on risk in our
February 2015 issue. The article is titled
“Fine-Tuning Your Risks.”—Editor
Errata: NINJATRADER FILE
In the January 2015 Traders’ Tips sec-
tion, NinjaTrader’s Traders’ Tip refers
to an incorrect filename. The download
for the universal oscillator technique
can be found at www.ninjatrader.com/
SC/January2015SC.zip, not www.ninja-
trader.com/SC/January2014SC.zip.
• Technical Analysis of Stocks & Commodities • 9
 J
ust as in equity trading,
there are two basic ap-
proaches to formulating
forex trading strategies. In my previ-
ous articles in this series, I already
introduced you to technical analysis.
Its counterpart is fundamental
analysis, which looks at issues like
interest rates, central bank policies,
and economics to make trading
decisions. In this way, it is similar
to dissecting the financial state-
ments of a company when deciding
whether to buy its stock.

Fundamentals have
their place
Because of the nature of the un-
derlying mechanics, fundamental
analysis is geared more for longer-
term trading. Technical analysis
tends to be more appropriate for
short-term trading. However, it
is possible to combine aspects of
both. For example, fundamentals
might indicate the future course a
currency is likely to take; the only
question would be the exact timing
of the move. Technical indicators
can provide the signals to show
when that movement is beginning.
In some cases, collective trader
psychology might mean following
the technical indicators even when
the underlying fundamentals don’t
justify the price movement.
As an example, billionaire hedge
fund mogul George Soros—who is

MAGHEN BROWN
famous for, among other things,
making fantastically profitable
trades on the Thai baht and the
British pound, earning a $1 billion
Necessary & Useful

Trading Forex:
profit on a $10 billion trade on the
latter currency—bet billions on
gold in 2010. Even though he knew

Fundamental Analysis
that the fundamentals pointed to a
bubble in gold prices, the techni-
cal indicators showed that traders
were nevertheless flocking to buy,
Part 5
and he made money buying the
upward trend.
Forex traders need to keep an eye on fundamental data such as interest rates, central
bank policies, and economic data. In part 5 of this six-part series, we’ll take an in-depth Central banks
look at these fundamental variables. and interest rates
One important factor that distin-
by Imran Mukati guishes forex from equities is the
10 • March 2015 • Technical Analysis of Stocks & Commodities
 FOREX FOCUS

existence of central banks. While companies Interest Rate Demand (Borrowers) Supply (Lenders) (Shortfall)/Surplus
take actions intended to affect the price of their 1% $1,000 $50 ($950)
stock, in most cases they have little power to 2% $600 $100 ($500)
3% $500 $200 ($300)
affect it substantially; the market makes those 4% $400 $400 $0
decisions. A currency, however, is not just 5% $200 $500 $300
something to be traded in the marketplace; it 6% $100 $600 $500
is the economic lifeblood of a country. Valu- Figure 1: different levels of demand for borrowing at different interest rates.
Here you see hypothetical numbers to show you how much borrowers are willing to borrow and how much
ations that are too strong or weak have real commercial banks have available to lend at different interest rate levels.
and important impacts on the economy, so
each central bank is charged with governing
its currency. (if they can get one at all) since they are a higher risk.
First, I’ll talk about who the players are. Just about every There are varying levels of demand for money (loans) at
country has a central bank, but you won’t be trading every different interest rates. If you want to borrow money to buy
currency. The central banks that govern the majors are: a boat, remodel your house, or expand your business, and the
bank tells you the interest rate will be 18%, you will probably
n US Federal Reserve
decide that borrowing simply isn’t worth the cost. Instead,
n European Central Bank you’ll save up the money (and savings rates, by the way, will
probably be quite generous) or just forgo whatever it is you
n Bank of Japan
were going to purchase with the loan.
n Bank of England But what if the bank is lending at 0.5%? If you can get a loan
at that rate, you’ll probably sign up right away. After all, that’s
n Reserve Bank of Australia
nearly free money! So what we find is that there are different
n Swiss National Bank. levels of demand for borrowing at different interest rates.
Look at the table in Figure 1 for some hypothetical num-
Don’t assume that central banks are focused solely on currency bers. Here you see how much borrowers are willing to borrow
values—their responsibilities are much more complex than (demand) and how much commercial banks have available to
that. The US Federal Reserve (the “Fed”) has by law a dual lend (supply) at each interest rate level. Remember that banks
mandate: to maximize employment while controlling infla- are taking deposits from savers and using that money to make
tion. (The Fed’s standard for controlled inflation, by the way, loans. However, a bank can’t loan out everything it has. Cen-
is 2% to 3%.) At the end of the day, any central bank wants its tral banks establish reserve requirements, which dictate what
nation’s economy to grow as fast as possible while minimizing proportion of its deposits a commercial bank has to have on
negative economic effects like bubbles (consider the effects hand as cash or other liquid assets, like securities.
of the popping of the US housing bubble in 2008); recessions If a bank has $1 billion in deposits and the reserve re-
or depressions; and inflation or deflation. Basically, they are quirement is 10%, the bank can’t loan out more than $900
looking for the Goldilocks standard in their economy—not million; it must keep at least $100 million. This, by the way,
too hot, not too cold, but just right. is another tool in the central banker’s toolbox. Adjusting re-
There is one major tool that central banks use to pursue serve requirements up or down can free up more money for
these goals, which is normally labeled monetary policy. loans or reduce what’s available, causing money to flow into
Informally you may hear it called setting interest rates, but or out of the economy. It’s also part of what caused the 2008
this is misleading in that the central bank doesn’t simply say, financial crisis. Some of the liquid assets commercial banks
“This is the new rate,” despite the impression you might get were holding as part of their reserves were mortgage-backed
from the news media in the wake of, for example, a meeting securities (MBSs). When it became clear that no one really
of the Federal Reserve Open Market Committee (FOMC). knew how many bad mortgages were rolled into those MBSs
The reality is more complex. and therefore what they were worth, the banks no longer knew
Understand that an interest rate is basically the price of what they had in reserves. Their response was to hold onto
money—specifically, the price to borrow it. In simple terms, their cash by basically stopping all lending.
if you are a saver, you give your money to a bank. The bank, Going back to the table, 4% is the hypothetical equilibrium
which will be using your funds to make loans, pays you a cer- rate—the rate at which commercial banks have as much money
tain interest rate. If you are a borrower, the bank will charge to lend as people and companies want to borrow. While banks
you a certain interest rate as well. That rate is, needless to might love to make even more loans at 1%, 2%, or 3%, since
say, quite a bit higher than what the saver is receiving. Part their profit margins are basically the same at each rate, they
of the difference is what the bank uses to cover its expenses don’t have the reserves to do so.
and make a profit; another part is a risk premium—an amount Enter the central bank, which, among other things, acts as a
paid to cover the risk that some borrowers will fail to repay bank for banks. Central banks charge interest to commercial
their loans by making up those losses. That’s why a person or banks for loans as well. If they are loaning at 1%, commercial
a company that is a poor credit risk will pay more for a loan banks might need to charge 3% or 4% to be profitable. But
March 2015 • Technical Analysis of Stocks & Commodities • 11

You should make it a habit to
know the central bank targets
for GDP growth and inflation in
each country whose currency
you plan to trade.
if the central bank cuts the rate it charges banks to 0.5% or
0.25%, suddenly the commercial banks can loan money at
1% or 2% and still be profitable. In essence, the central bank
makes up the shortfall in the available lending pool, which
pumps money into the system and drives rates down. Increas-
ing rates works in just the opposite manner.
Why don’t central banks just leave rates low all the time,
encouraging borrowing and therefore causing the economy
to expand constantly? Well, there’s a little matter of inflation.
When more money enters the system, it means people and
companies can make more purchases, which means there
are more dollars competing for basically the same amount of
goods. It also means expanding companies need to hire more
workers, and with more competition for basically the same
number of workers, wages start rising. This drives inflation,
which, if it gets out of control, is very hard to rein in and can
destroy an economy. However, a certain amount of inflation
is a necessary evil, because it comes along with a growing
economy. You might have wondered earlier why the Fed has
an inflation target of 2% to 3%. Wouldn’t zero inflation be
better? It might seem like a great thing, but it would mean a
stagnant economy. Inflation tends to be low or nonexistent—or
even turns negative into deflation—during recessions.
That leads us to the concept of real and nominal interest
rates. The nominal rate is the official or declared rate. Let’s
say that it’s 5%. However, if you are lucky enough to earn 5%
on your money, that won’t be your actual growth in terms of
purchasing power. That’s because inflation eats away at the
value of your dollar (or your euro, or your pound, or your franc)
each year, reducing how much it can buy. So if the inflation
rate is 3% while the interest rate is 5%, the real interest rate
or the actual increase in purchasing power is only 2%.
Clearly, what matters in trading is the real rate. A currency
with a nominal rate of 6% might look great until you find out
that the inflation rate is 5%, at which point the one with a 4%
nominal rate but only 1.5% inflation looks a lot better. Because
interest rate and inflation conditions are likely to differ from
country to country, there is trading value in the differences. If
the real rate on the yen is 1% while the Swiss franc has a real
rate of 2%, holding the franc will be more profitable thanks
to the 1% differential. In other words, it becomes practical to
borrow yen to buy the franc. Since the franc is more attrac-
tive, traders will tend to flock to it over the yen, which means
the price will rise.
12 • March 2015 • Technical Analysis of Stocks & Commodities
Fundamentals in the news
Fundamental analysis relies heavily on
the news. Governments, central banks,
and independent entities like the Confer-
ence Board, which produces the monthly
US Consumer Confidence Index, are
constantly announcing economic data.
Central bankers also announce policy
decisions; in the US, analysts who follow the Federal Reserve
and parse its announcements are nicknamed Fed watchers.
Because the US dollar is so important in the forex markets, US
economic data is king. The top five information groups, ranked
beginning with the highest significance to forex trading, are:
n Nonfarm payroll report
n Retail sales
n International trade reports
n Federal Reserve policy decisions
n Consumer Price Index.
Just as analysts do with corporate earnings announcements
in the equity markets, observers will anticipate specific eco-
nomic numbers prior to the release of the data. This provides
an opportunity to play the news based on how the actual
numbers compare to the expectations. If the numbers come
out as expected, the currency is likely to be flat—any buying
or selling attributable to the data has already been done. This
is known as pricing the data into the market. If, however, the
numbers are better or worse than expected, you can expect
to see buying or selling (respectively) as traders adjust their
positions accordingly—and sometimes, frantically.
Naturally, there are two ways to play economic data an-
nouncements and other news: proactive or reactive. Proactive
trading means placing your trades beforehand, in expectation
of what will happen once the news is released. This is most
useful when you have reason to believe the actual numbers will
not match the expectation (usually called the consensus); you
can be in position to profit when the currency price comes to
you in reaction to the news. While this is the more profitable
approach, it is also much more difficult and will produce some
losses on those occasions when you are inevitably wrong. Reac-
tive trading merely follows the news and trades based on what
was released. In this case, you can use limit orders above and
below the current trading range so that you can take a long
position should the news be positive and the currency rise, or
a short position should it be negative and the currency fall.
Be aware that because trading volume picks up substantially
just before and after such announcements, a phenomenon
known as slippage will occur. This is a condition in which
prices change so quickly that it becomes difficult to enter a
trade at exactly the price you intended. In order to reduce trad-
ing volume and mitigate slippage, brokers tend to increase the
spreads on trades around the time of significant announcements.
By raising the price of forex trades temporarily, brokers try
to keep casual traders out of the market and limit activity to
those who are serious about trading the news.
Economic fundamentals
for forex trading
As we said in the introduction, fundamental analysis usually
takes a longer view of trading. That is because many of the
economic factors that affect currency valuations are slower-
moving. The first factor is economic growth. Determining
whether an economy is growing (or contracting) and how
quickly means measuring its size, and the size of an economy
is measured by its gross domestic product (GDP). GDP is
composed of four elements:
Consumption
n
Investment
n
n Government spending
n International trade balance.
Consumption is essentially consumer spending, which as
we’ve heard over and over is the largest component of the US
economy—about 70%. Investment is not the type of investment
represented by buying stocks and bonds (or currency pairs);
rather, it is capital investment—the purchase of assets, like
factories and machinery, by companies. Government spend-
ing is self-explanatory, and the international trade balance
is simply the value of exports minus the value of imports.
(The trade balance can either add to or subtract from GDP.
The US has run a trade deficit for many years, meaning we
import more than we export; major exporters like China run
a trade surplus.)
Once we measure the size of an economy, it becomes pos-
sible to measure it each year and determine the net change.
An expanding economy is a great thing, but obviously that
doesn’t happen every year. If the economy contracts for two
(or more) consecutive quarters, it is said to be in a recession.
Growth rates of 2% to 4% have been typical for the US, which
is a mature economy, but younger expanding economies like
that of China may grow from 7% to 9% or even more each
year. Remember, an economy that is hot and growing fast will
produce a good bit of inflation, and for that reason, central
banks in emerging nations are often quite comfortable with
6% and 7% inflation rates.
Speaking of inflation, just as there are nominal and real
interest rates, there is nominal and real GDP growth. Just
because the economy grew at a rate of 5% last year doesn’t
mean 5% more goods and services were produced. If inflation
was 3%, those goods and services increased in price 3%, but
the same quantity was produced. Real GDP growth would be
only 2% in this case.
GDP growth and interest rates have an inverse relationship.
That means that as interest rates rise, GDP growth will fall.
Less money being borrowed means less expansion of compa-
nies and fewer new companies, and therefore less economic
activity. Conversely, central banks lower interest rates in order
PivotHunter.com®
Where Order Flow
Meets Price Velocity
Watch the Cops and Kings chase down
the elusive Convict
Live Charting Room
Free to First 100
every week.
to spur economic growth. All of this is done with one eye on
the inflation rate to make sure it doesn’t get out of hand.
You should make it a habit to know the central bank targets for
GDP growth and inflation in each country whose currency you
plan to trade. Some very important economic data announce-
ments won’t mean nearly so much to you if you don’t.
The international trade balance is important as well. In
discussing the basics of forex, one of the reasons for cur-
rency trading I mentioned was the exchange of currencies
by multinational companies. To recap, a US company that
manufactures in China and sells in Europe has to trade dollars
for yuan to pay workers and suppliers in China (a transaction
that pushes down the value of the dollar) and trade euros for
dollars to bring profits home (which pushes up the value of
the dollar). All of these many transactions each day have a
real collective impact on the prices of currencies, so it can be
expected that a country with a large trade deficit will tend to
have a weaker currency.
The existence of a trade deficit isn’t necessarily a bad thing in
and of itself. Successful and strong economies—the US topping
the list—routinely run such deficits. This is in part because
profits from transactions taking place in foreign countries
aren’t included in the balance-of-trade calculation. However,
the period-to-period change in trade deficits will still tend to
affect currency values simply because of the unavoidable need
to exchange one for another, as outlined earlier.
Central banks manage the relative strength of their currency
against others because overly strong and weak currencies have
negative economic effects. International trade is one of the
main arenas where this is the case. A strong currency makes
March 2015 • Technical Analysis of Stocks & Commodities • 13
 FOREX FOCUS
a nation’s exports more expensive in its customer nations.
When talking about Germany selling Mercedes cars in the
US, a vehicle that costs 20,000 euros (wholesale, of course!)
costs $26,000 when the euro is worth $1.30 but $32,000 when
the euro is worth $1.60.
The reduced buying power of the dollar against the euro
means US consumers can’t afford as many euro-denominated
goods, and European exports to the US will fall. That’s not
good for European companies that are exporters! This is why
China goes to great lengths to keep its currency value low.
Its economy relies on exports, so it wants its products to be
cheap in every country to which it sells its goods. Of course,
a currency can’t be allowed to get too weak, or that nation’s
consumers won’t be able to afford things that are imported—
and every country imports something. In the US, a big one is
oil, which can get more expensive the weaker the dollar gets.
Since American consumers (who are also voters) get up in
arms about high gasoline prices, the Fed has to keep the dollar
strong enough to keep oil prices at least somewhat in check.
Clearly, then, central bank policies are an important compo-
nent of currency values over the short and long terms, and bear
a close watch. Capital flows or movement of money between
countries also bear watching. These flows can take a few dif-
ferent forms. The obvious one is what takes place in the various
financial markets—stocks, bonds, and forex. But money can
also flow into a country via direct investment such as when a
foreign company builds a factory, mine, or distribution center
there, and by acquisitions of domestic companies by foreign
buyers. The flow of capital into a country will generally cause
its economy to expand and its currency to appreciate.
Finally, it is important to consider political stability. This
can mean many things, from orderly government transitions—
that is, via fair and open elections rather than coups or rigged
elections—and consistent government policies to the lack of
conflict internally or with neighbors. Investors like predictabil-
ity, so countries that have a reputation of arbitrary actions—like
the nationalization of industries or government confiscation
of foreign assets—will suffer. Investors either won’t do busi-
ness there at all, or if they do, they will demand a heavy risk
premium. This reduced demand for the currency in question
will drive its value down.
Speaking of political stability, on that note I’ll close with
the mention of the US dollar and its resilience as a reserve
currency. Many pundits have long made noise about how the
dollar would gradually disappear as the world’s primary reserve
currency—one of the factors that makes it so dominant in the
forex markets. First it was forecast to be replaced by the yen until
the Japanese economy hit the doldrums in the early 1990s—a
result of demographics, specifically its aging population. As its
population gets even older, Japan’s economic woes will grow,
not fade away, so the yen is no longer a candidate.
Next it was the euro, the currency of the collective of Euro-
pean Union countries. But the 2008 financial crisis revealed
the cracks in the euro’s foundation, namely that weaker
economies in the European periphery (think Ireland, Greece,
and Portugal as examples) were enjoying interest rates in the
14 • March 2015 • Technical Analysis of Stocks & Commodities
bond markets that resulted from the strength of their wealthier
northern neighbors, like Germany and France. That strength
was based on assumptions that stronger EU nations would
bail out weaker ones should the need ever arise, which it did.
That bailout is taking place now—up to a point. The danger
is that if larger but still-troubled economies like Spain or
Italy run into crisis, the bailout costs will be so high as to
probably be unsustainable. That would severely damage the
euro or end it altogether.
The US dollar
still reigns
So it was that even after the credit
rating of US sovereign debt was
downgraded in 2011, and even after
the Fed repeatedly printed money
to dump into the economy, rates on
US Treasury notes fell to historic
lows of under 2%. Despite all the
hand-wringing over the years about
the US dollar, when push came
to shove, the flight to quality still
landed on US shores. While no one
can guarantee the future, let this
serve as an important lesson that the
chorus of “experts” you hear on a
daily basis won’t always be right.
Imran Mukati is the Managing Director of fixed income
securities at Fairbridge Capital Markets, Inc. He may be
reached via http://www.linkedin.com/imranmukati or via
email at imukati@fairbridge.com.
Further reading
Mukati, Imran [2014]. “Trading Forex: Understanding The
Basics (Part 1),” Technical Analysis of Stocks & Com-
modities, Volume 32: November.
[2014]. “Trading Forex: Markets & Trading (Part 2),”
Technical Analysis of Stocks & Commodities, Volume
32: December.
[2015]. “Trading Forex: Charting Your Way (Part 3),”
Technical Analysis of Stocks & Commodities, Volume
33: January.
[2015]. “Trading Forex: More On Charting (Part 4),”
Technical Analysis of Stocks & Commodities, Volume
33: February.
 Q&A
SINCE YOU ASKED
Confused about some aspect of trading? Professional trader Don Bright of Bright
Trading (www.stocktrading.com), an equity trading corporation, answers a few of
your questions. To submit a question, post your question to our website at http://
Message-Boards.Traders.com. Answers will be posted there, and selected questions
will appear in a future issue of S&C.
Note to readers
I want to thank Rob Friesen (president and
COO of Bright Trading) for his help with
this column for the last couple of months.
His contributions are always appreciated.
I was dealing with some health issues—I
had a second heart valve replacement
in November 2014. The procedure ap-
pears to be a success. I want to thank
our readers for their emails of support.
I’m looking forward to a much healthier
2015. A sincere thanks to all.
Now, digging into some recent ques-
tions, here is one paraphrased from two
similar questions from readers:
MAKING SENSE OF THE
PROGNOSTICATIONS
Mr. Bright, at the start of every year I
just shake my head in disbelief when I
suffer through stock market predictions
from a variety of “experts.” I see com-
plete 180-degree comments from many
pundits, sometimes within the same
organization. Do you or any of your
traders use any of these prognostications
with any benefit?
Traders, news organizations, and the
ever-increasing list of forums, chat rooms
or similar services—some free while
some not even worth that, and some
who get away with charging sometimes
exorbitant monthly or annual fees—never
cease to crack me up (while they laugh
all the way to the bank). I have to laugh,
or else my sympathy or empathy for their
audience will cause tears.
I am writing this column in early
January 2015, which you’ll be reading
sometime in March. I thought, What the
heck! Rather than reviewing predictions
from last year, which you can easily do,
why not toss a few out for 2015 that you
can check against what really happens.
Before you do the exercise of checking
reality against predictions, let me say that
professional traders of my acquaintance
do read and even pass along many of
these thoughts—if it fits their own biased
agenda. Much like our current political
climate, many traders, too, only get their
information from sources they tend to
agree with. But let me tell you this: Trad-
ers who make a good living (with a few
exceptions) will digest the information
and then do their own homework to come
up with something simple—that is, by de-
veloping their own analysis tools from an
objective viewpoint. This sounds simple,
but similar to the way people tend to feel
“right” in their political views, many
traders tend to give a result from some
prejudice. Bulls and bears, obviously,
tend to only see good or bad.
Many traders only get
their information from
sources they tend to
agree with.
I like the idea of jotting down alterna-
tive narratives and then creating some
simple if–then statements to help deter-
mine the possible results from whichever
side you see as the most likely to occur.
At the same time, calculate the then result
if things go badly.
I am going to paraphrase some market
forecasts from various sources, purposely
without credit or labels. My idea is not
to see who might be right or wrong but
simply to make a point about the vast
disparity in thinking. Here are the nar-
ratives I’m going to track:
1. Total return: 10%–12%, or even a
little higher.
March 2015
Don Bright of Bright Trading
2. Bullish, but not wildly bullish. Total
return: 6%–10%. Not bad.
3. Total return: 8%—a decent amount
of upside from here.
4. Total return: somewhere between
-5% and 5%.
5. Great returns, less stable condi-
tions.
6. The S&P could gain 10% with a
2% dividend that will give a total
return of 12%.
7. Last year I predicted a stock melt-
up—growth would return and up
we’d go. That prediction was off
by one year. The market will be a
surprise in 2015, going higher before
leveling off in the third quarter.
8. I expect more of the same—interest
rates dragging the bottom, average-
to-poor job creation with part-time
jobs leading the way, more good
stock performance, but with unpre-
dictable and unexplainable panic
selloffs and volatility.
9. US stocks will be down 5% for the
year.
10. A more negative outlook for the
year, including a prediction of global
deflation. The Fed will return to
quantitative easing.
11. The market has been long for so
long. I think we’ll have our first
correction in 2015.
Pick the predictions you like from
above—not really!—and see how that
goes, or do the research, prepare your own
if–then statements, and have a success-
ful 2015. As for me and my team, we’ll
continue to play offense and defense by
responding to the what is vs. the what
might be.
• Technical Analysis of Stocks & Commodities • 15
16 • March 2015 • Technical Analysis of Stocks & Commodities
 TRADING TECHNIQUES

Know Thy Weapons

Moving Averages:
Some Finer Properties
What is the difference between the 10-period of a
five-period moving average and a 15-period mov-
ing average? Does the sum of moving averages
equal the moving average of the sum? How does
the smoothing of a ratio differ from the ratio of
smoothing? How can you algorithmically calculate
the weights of a smoothing procedure? Find the an-
swers to such technical questions here.
of indicators and products of numbers with indicators.
Here’s a more precise look at the properties.
First property
If P and Q are indicators and t is a constant number,
then:
SMAn (t • P + Q) = t • SMAn(P) + SMAn(Q)

and

A
ll technical analysts eventually engage in cre-
ating their own indicators and methods. And
they all eventually use some kind of smoothing
method to filter out noise. Various moving average
methods can be used to smooth a series of values. In
this article, I will discuss four interesting properties
of simple and exponential moving averages (here-
after referred to as SMAs and EMAs, respectively).
These two averaging methods are the most popular
in the technical analysis world, and their weighting
scheme is simple, so they have clear and nice prop-
erties. Those who aspire to create indicators should
find the concepts discussed here useful.
I will denote the n-period simple and exponential
moving averages of an indicator P as
SMAn(P), and
EMAn(P), respectively.
EMAn (t • P + Q) = t • EMAn(P) + EMAn(Q)
This property can easily be proved with basic math-
ematics.
Example
Say you want to smooth the typical price (TP) us-
ing a five-period EMA. The TP has the following
formula:
where H, L, and C represent the high, low, and close
of a bar, respectively. It doesn’t make a difference
whether you take the five-period EMA of TP or sum
the five-period EMAs of H, L, and C and then divide
the sum by three. That is,

Moreover, MAn(P) will denote either SMAn(P) or

EMAn(P).
Commutative property
Linearity You may not realize it, but in successive smoothing,
WILLIAM L. BROWN

The first property of SMAs and EMAs worth remem- using either an SMA or an EMA (or both) can change
bering has to do with the way they treat the addition the order of averages without affecting the outcome.

by Giorgos E. Siligardos, PhD

March 2015 • Technical Analysis of Stocks & Commodities • 17
 Second property
If P is an indicator, then

MA1n (MA2k(P)) = MA2k(MA1n(P))

where MA1n and MA2k are SMAs or EMAs.

Example
If you want to smooth the closing price (C) three suc-
cessive times using a five-period EMA, a 10-period
SMA, and a 15-period SMA, then you can do it in
whatever order you want, since all orders will have
the same result. For example, taking the 5-EMA of
the 10-SMA of the 15-SMA of C is exactly the same
as taking the 15-SMA of the 10-SMA of the 5-EMA
of C. That is,

EMA5(SMA10(SMA15(C))) =
SMA15(SMA10(EMA5(C)))

Like linearity, commutative properties in successive

Figure 1: weighting schemes of successive ema smoothings. The weighting scheme of smoothing can be proved using simple mathematics,
five successive 15-period EMA smoothings is shown using different colors. EMA(15) is the weighting but it is a tedious task. If you only want to grasp the
scheme of the 15-period EMA, EMA(15,15) is the weighting scheme of the 15-period EMA of the underlying reasons behind why this property holds
using a simple approach, try proving that:
15-period EMA, and so on. The weights are expressed as percentages of their total sum of 100% and
they are the y coordinates in the graph. The x coordinates are the ages of the weights in ascending
order from right to left.
SMA2(SMA3(P)) = SMA3(SMA2(P))

It’s simple.

Weighting effect in
successive smoothing
What is the effect of successive smoothing of an in-
dicator? The most logical answer would be that you
would end up with an extremely smooth version of the
indicator. Well, that’s true, but how does successive
smoothing differ from, say, increasing the period of
single smoothing? For example, what is the difference
between EMA5(EMA10(P)) and EMA15(P)?
Let me cut to the chase and give you the answer in
simple terms.

Third property
Successive application of MAs in an indicator creates a
smoothed version of the indicator, where the percentage
weighting scheme as a function of age of data resembles
the shape of a bell. The more MAs applied and the
higher their period, the smoother the indicator you get
and the more widespread, symmetric, short, and chubby
the bell-shaped weighting scheme becomes.
In Figures 1 & 2, you see examples of the weighting
schemes of successive smoothing five repeated times
Figure 2: weighting schemes of successive Sma smoothings. Similarly here, this chart
using 15-period EMAs and five-period SMAs, respec-
illustrates the percentage weighting scheme of five successive five-period SMAs as a function of age. tively. The weights are expressed as percentages of their
For comparison purposes, the weighting scheme of the 25-period SMA is also shown. total sum, which is 100%. In Figure 1, the EMA(15)
18 • March 2015 • Technical Analysis of Stocks & Commodities

is the weighting scheme of EMA15(P), the EMA(15,15) is the
weighting scheme of EMA15(EMA15(P)), the EMA(15,15,15)
is the weighting scheme of EMA15(EMA15(EMA15(P))), and so
on. The weights are sorted in ascending order of age from right
to left so that the weight corresponding to age zero (which is
the weight put to the most recent value of the indicator P) is the
rightmost one. Similar notation is used for the case of SMAs in
Figure 2. For comparison purposes, there is also the weighting
scheme of SMA25(P) in Figure 2 [denoted as SMA(25)]. This
general rule of bell-shaped weighting scheme also holds for suc-
cessive smoothing using combinations of SMAs and EMAs.
What does the change in shape of the weighting scheme show
as new smoothings are applied? Does the change in shape make
sense? It does, because the basic function of moving averages
is to raise the contribution (weights) of old data at the cost of
the contribution (weights) of the younger data. In effect, the
more EMAs or SMAs you apply on top of one another, the
more the older values appear in the calculations (thus getting
comparably bigger weights) and the newer data gets comparably
smaller weights.
This has the effect of a bell shape in the weighting (as a
function of their age), which moves like a wave to the left as
new EMAs or SMAs are applied. Moreover, as the span of ages
having significant percentage weights increases—due to the
involvement of more and more indicator values as new MAs
are applied—the bell becomes wider, relatively chubbier, and
its maximum height becomes shorter.
Calculating the weights
In the cases you have seen so far, the weights depend only on the
time instances in terms of age (and not on other factors like the
values of some indicator or the volume of shares). For example,
let P0, P1, P2… be the values of indicator P where the subscript
denotes the age of its values (P0 is its most recent value, P1 is
its value one bar ago, P2 is its value two bars ago, and so on).
Let’s consider the EMA3(EMA3(P)), which is the three-period
EMA of the three-period EMA of the indicator P. It is profound
that the value of EMA3(EMA3(P)) for the latest bar (that is, for
the bar of age zero) eventually equals a sum of type:
w0P0 + w1P1 + w2P2 + … (Equation 1)
where the weights w0, w1, w2… are constant numbers independent
of the values of P. These weights are not greater than 1; their total
sum is 1, and they represent the contribution of the respective P’s
value to the creation of EMA3(EMA3(P)). For example, you can
see that w0 = 0.25 or 25%, w1 = 0.25 (or 25%), and w2 = 0.1875
(or 18.75%), so 25% of the latest value of EMA3(EMA3(P)) is
attributed to the most recent value of P (which is P0), another
25% of the latest value of EMA3(EMA3(P)) is attributed to the
value of P one bar ago (which is P1) and another 18.75% of the
latest value of EMA3(EMA3(P)) is attributed to the value of P
two bars ago (which is P2).
It is when the weights of a smoothing procedure depend
on only the time instances in terms of age (like in the previ-
Noisy indicators
delay your analysis
Jurik algorithms
deliver low lag,
low noise analysis
Tools for: TradeStation, AmiBroker, Investor/RT, MultiCharts, NeuroShell Trader,
eSignal, NeoTicker, Tradecision, TradingSolutions, MATLAB, Ninja Trader,
Genesis TradeNavigator, Market Delta, Extreme charts, DLLs for custom software
Jurik Tools on live charts, on the web !
tinyurl.com/jurik-online
Jurik Research
2010 -- 2011 -- 2012 -- 2013
Add-In software
jurikres.com • 800-810-3646 • 719-686-0074
ous example) that you can create stable charts like those of
Figures 1 & 2. If you create a smoothing procedure that can
be eventually formulated in a weighting scheme like the one
of equation 1, where the weights depend only on the age of
data, you can use a spreadsheet program like Excel to calculate
and visualize the weights via charts no matter how complex
your procedure is. To accomplish this, you create an artificial
indicator P such that all its values are zero, and you write the
formulas that dynamically calculate your smoothing function
from P’s values. If you now change the value of P0 to 1, then
the last value of your smoothing function will be equal to w0.
That’s because, as you can see in equation 1, when P0 equals
1 and all other older values of P equal zero, then the last value
of the smoothing function equals w0. So you copy this w0 and
paste it somewhere else in your spreadsheet. You then again
set P0=0 and proceed to set P1 equal to 1. This will make the
last value of your smoothing function equal to w1. You copy w1
and paste it below w0. By setting P1 back to zero and setting P2
equal to 1, you can get the value of w2 and put it below w1. If
you continue this way, you will be able to get all the weights
of your smoothing procedure and chart them as a function of
their age. In fact, this is the way the charts of Figures 1 & 2
were constructed. Using this technique, you can also verify
the first and second properties stated earlier.
Unfortunately, since this approach requires repeated sub-
stitution of values and copying & pasting, you will need to
use macros in Excel if you want to calculate a large number
of weights for various cases of successive smoothing. For
educational purposes, the file “succ_EMA_weights.xlsm,”
March 2015 • Technical Analysis of Stocks & Commodities • 19
 sidebar Figure 1: the four sections of the spreadsheet. The Excel spreadsheet is divided into four sections and has a button labeled calc weights to call
the macro, which will calculate the weights for all ages.
Using Excel To Calculate The SMOOTHING Weights
Excel is a simple and quick solution for the calculation and
visualization of the distribution of weights in a smoothing
method. In Sidebar Figure 1 you see a screenshot of the
spreadsheet used to create the chart in the article’s Figure
1. The spreadsheet is divided into four sections and offers a
button to call a macro.
Section 1 is where you enter the desired periods for the five
successive EMAs in the green cells. The respective alphas for
the periods are automatically calculated below the periods ac-
cording to the standard formula: alpha =2/(period+1).
Section 2 contains the functions that calculate the succes-
sive EMAs’ values in descending order of age for an indica-
tor whose values are in the indicator values column. The
spreadsheet assumes 88 historical values for the indicator so
sidebar Figure 2: charting the weights. As soon as you click the calc weights button, both the sec-
tion 4 and its linked chart are updated. The chart shown here is based on the inputs and calculated weights
of Sidebar Figure 1.
20 • March 2015 • Technical Analysis of Stocks & Commodities
that the 88th value (the one that has an age of 88) is the oldest
and the 0th value is the newest. All values of the indicator are
initially set to zero. When only the 0th value (in terms of age)
of the indicator becomes 1, then the 0th values (in terms of age)
of EMAs—that is, the newest values of EMAs—will become
equal to the EMAs’ weights for age zero (namely, w0). Similarly,
when only the first value of the indicator becomes 1, then the
0th values of EMAs will become equal to the EMAs’ weights
for age 1 (namely, w1) and, generally, when only the kth value
of the indicator becomes 1, then the 0th values of EMAs will
become equal to the EMAs’ weights for age k (namely, wk).
Section 3 offers a quick way to calculate the weights of
EMAs for an age. When you enter the age directly into the cell
labeled age, the value of the indicator for that age in section
2 becomes 1 automatically, and the second row of section 3
labeled weight is populated with the weights of the EMAs (in
alignment with section 1) for that age, which
are exactly those in the last row of the table
of section 2.
Section 4 and button: When you click the
button labeled calc weights, a macro runs
in the background that repeatedly changes
the age in section 3 starting from zero and
increasing by 1 until it gets to 88. For every
change in age, the macro copies the weight
row of section 3 and pastes it in the table of
section 4, populating it from the top cell and
down. The table of section 4 is linked to a chart
that offers a visualization of the weights like
the one in Sidebar Figure 2. The labels of the
chart are automatically updated according to
the periods of section 1 as soon as the but-
ton is clicked. In Sidebar Figure 2, you can
see the chart that corresponds to the data in
Sidebar Figure 1.
The Excel spreadsheet discussed here can be
downloaded from the Subscriber Area at our
website, www.traders.com, in the Article Code
area, as well as from http://traders.com/files/
succ_EMA_weights.xlsm.zip.
which I used to create the chart in Figure 1, is provided in the
Subscriber Area of www.traders.com (as well as from http:// All technical analysts eventually
traders.com/files/succ_EMA_weights.xlsm.zip). It works in use some kind of smoothing
Excel version 2007 and above, and you need to enable macros
to make the calculations. You can find out more details in the
method to filter out noise.
sidebar “Using Excel To Calculate The Smoothing Weights.”

Smoothing ratios
of indicators
Ratios of indicators are widely used in
technical analysis, mostly as a way to
produce normalized percentage values.
George Lane’s stochastics oscillator is
such an example. I will now introduce
the fourth property of MAs (which deals
with smoothing indicator ratios) using a
hypothetical example. Suppose you want to divide indicator
P by the positive indicator Q so that you get a new indicator
P/Q. This new indicator has proved to be erratic and you want
a smoothed version of it using, say, a three-period SMA. You
have two options:
Option 1
Calculate the three-period SMAs of P and Q separately and
then divide them:
Option 2
Simply take the three-period SMA of P/Q; that is:
where more weight is given to the values of P/Q, where Q is
larger. Similarly,
results in a modification of
where, again, more weight is given to the values of P/Q,
where Q is larger.
The mathematically inclined might want to try and see that
the underlying reason for this property is the same one that
makes the harmonic mean give less significance to high-value
outliers. If you don’t understand this peculiar connection, don’t
get discouraged. Here is how you can get an idea of why the
fourth property holds in this hypothetical example: If P0, P1,
P2 are the three most recent values of P, and Q0, Q1, Q2 are the
three most recent values of Q (where, as usual, the subscripts
denote the age of the values), then the SMA3 assigns equal
weights to the three most recent values. More precisely, the
latest values of SMA3 for P and Q are:

SMA3(P) = 1/3 P0 + 1/3 P1 + 1/3 P2

and
Technical analysts would consider the first option as a real-
istic solution, since it allows for occasional and isolated zero SMA3(Q) = 1/3 Q0 + 1/3 Q1 + 1/3 Q2
values for Q (it is more difficult for SMA3(Q) to be zero than
for Q to be zero) but if Q is always nonzero, then either of the
Using simple algebra, you can see that:
two options could be chosen. So what is the difference between
these two smoothing options and how can you determine which
one better suits your preferences? The answer lies in the fourth
property for MAs:

Fourth property (Equation 2)

If P and Q are indicators and Q is positive, then the formula
where:

(Equation 3)
results in a modification of
for i = 0, 1, 2.

It is clear from equation 2 that the latest value of SMA3(P)/

SMA3(Q) is just a weighted average of P/Q, where all three
March 2015 • Technical Analysis of Stocks & Commodities • 21

The basic function of moving
averages is to raise the
contribution (weights) of old data
at the cost of the contribution
(weights) of the younger data.
wis have the same denominator. Consequently, the numerator
Qi in equation 3 is the one that determines the relative sizes of
the wis. As a result, the higher the Qi (in relation to the other two
values of Q), the higher the weight wi for P/Q and the higher
the contribution of the ith value of P/Q (in terms of age) to the
latest value of SMA3(P) / SMA3(Q).
Which of the two smoothing options best suits your pur-
poses? By choosing SMA3(P/Q), you assign equal weights
to the three most recent values of P/Q, whereas by choosing
SMA3(P)/SMA3(Q), you demand that the weights in the three
most recent values of P/Q are analogous to the sizes of the
respective values of Q.
Note that charts like those in Figures 1 & 2 cannot be con-
structed for SMAk(P)/SMAk(Q) or EMAk(P)/EMAk(Q), since
the weights of P/Q are not determined purely from the time
instances in terms of age; they are also affected by the values of
Q. As new price data and new values of P and Q are introduced,
the weights assigned to the values of P/Q will change according
to the relative sizes of the values of Q among each other.
Smoother is easier
This article may differ from other technical analysis articles
in that it doesn’t promote a specific trading style or system.
My main purpose here is to make the aspiring creator of new
indicators familiar with four interesting properties of simple and
Commodity Channel Index—Developed by Donald Lambert, this
price momentum indicator measures the price “excursions” from
the mean.
Exponential Moving Average—A variation of the moving average, the
EMA places more weight on the most recent closing price.
Harmonic Mean—An average obtained by taking the reciprocal of the
arithmetic mean of the reciprocals of a set of nonzero numbers.
One of the three Pythagorean means, where the harmonic mean is
always the least of the three means. Since it tends toward the least,
compared to the arithmetic mean, it can help mitigate the impact
of large outliers.
Heuristic Method—Problem-solving approached by trying out several
different methods and comparing which provides the best solution.
In behavioral finance, trial-and-error learning leading to the use of
rules of thumb for decisions.
High-Pass Frequency Filter—A detrending filter that lets pass the
high-frequency noise and rejects low-frequency trend. Implemented
by first applying a low-pass filter to the data, then subtracting the
filtered data from the original data.
Noisy Signal—A signal in which the effects of random influences can-
22 • March 2015 • Technical Analysis of Stocks & Commodities
exponential moving averages and give you a way to calculate the
distribution of weights algorithmically for some moving average
cases. The first two properties may save you some time when
you try different combinations of ideas, whereas the other two
uncover the effects of successive smoothing and the effect of
separate smoothing of numerator and denominator in ratios so
you can know beforehand what kind of smoothing you can use
with respect to how you want your final indicator to react.
SMAs and EMAs are widely used smoothing methods. If
this article has increased your knowledge about these methods,
then it has fulfilled its purpose.
Giorgos Siligardos holds a doctorate in mathematics and a
market maker certificate from the Athens Exchange. He is a
financial software developer, coauthor of academic books in
finance, a frequent contributor to this magazine, and scientific
contributor in the Department of Finance and Insurance at
the Technological Institute of Crete. Material from his course
writings on derivatives has been used in educational enchiridia
for bank managers. His academic website is http://www.tem.
uoc.gr/~siligard and his current views on the markets can be
found at http://market-calchas.blogspot.gr/. He may be reached
at siligard@tem.uoc.gr.
The Excel spreadsheet referenced in this article is available at the
Subscriber Area at our website, www.traders.com, in the Article Code
area. The spreadsheet is also downloadable from http://traders.com/
files/succ_EMA_weights.xlsm.zip.
Further reading
Siligardos, Giorgos E. [2013]. “The Average Age Of Averages,”
Technical Analysis of Stocks & Commodities, Volume
31: April.
‡Excel (Microsoft Corp.)
‡See Editorial Resource Index
not be dismissed.
Optimization—A methodology by which a system is developed with
rules tailored to fit the data in question precisely.
Outlier—A value removed from the other values to such an extreme
that its presence cannot be attributed to the random combination
of chance causes.
Relative Strength Index (RSI)—An indicator invented by J. Welles
Wilder and used to ascertain overbought/oversold and divergent
situations.
Smoothing—Simply, mathematical technique that removes excess
data variability while maintaining a correct appraisal of the un-
derlying trend.
Probability Density Function—A graph showing the probability of
occurrence of a particular datapoint (price).
Probability Distribution Function—A function whose integral over
any set gives the probability that a random variable has values in
this set. Describes the relative likelihood for a random variable to
take on a given value.
Find more terms defined in the Traders’ Glossary at Traders.com.
 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 subscrip-
tion, visit www.DeCarleyTrading.com. Her books—Currency Trading In The Forex
And Futures Markets; A Trader’s First Book On Commodities; and Commodity
Options—were published by FT Press. To submit a question, post your question at
http://Message-Boards.Traders.com. Answers will be posted there, and selected
Carley Garner
questions will appear in a future issue of S&C.

OPPOSITES ATTRACT
Some are blaming the 2014 crude oil
collapse on the strength of the US dollar;
what are your thoughts?
The hideous decline in crude oil dur-
ing the latter half of 2014 was the result
of several factors at work; however, I
believe the biggest role player was the
currency market. At the time of this writ-
ing, the correlation between crude oil and
the greenback was hovering near 91%.
In other words, in roughly nine out of
10 occasions, the price of crude oil had
moved in the opposite direction as the
dollar (during a 180-day dataset). Thus,
any significant repricing in the dollar vs.
other major currencies has a profound
impact on crude oil.
A quick look at the chart in Figure 1
tells a profound story of the relationship
between crude oil and the US dollar. In
July of 2014, the greenback found footing
and forged a sharp rally; crude oil simul-
taneously peaked and fell precipitously.
It is difficult to argue that each market is
moving independently of the other.
Some believe crude oil prices react to
the dollar simply because oil is priced
globally in terms of the greenback. Thus,
as the dollar strengthens, crude oil feels
more expensive to foreign buyers driving
the demand and value lower. Further, a
higher greenback means it takes fewer
dollars to buy the same amount of under-
lying crude oil, thus lowering the asking
price for the commodity.
Another way to look at it is similar to
trading the forex markets, that is, trading
assets as pairs. If a trader buys the US
oil, he is essentially selling dollars, that
is, exchanging dollars for crude. If this
were pairs trading, it might be identified
as a symbol such as USD/CL. You’ve
probably concluded that a trader who
sells oil is buying the USD.
Keep in mind that it is only possible
to value one asset if you have an asset
to compare it with. This concept is true
in our daily lives; when we buy a gallon
of milk at the grocery store, we are, in
essence, selling our dollars.
It is interesting to note that the value
of crude oil priced in gold, rather than
the US dollar, has been relatively stable
for decades. In 2014, the price of crude
oil per ounce of gold changed very little.
Accordingly, it appears as though the
price of the dollar is precisely why crude
oil has fallen.
This theory is corroborated by weak-
ness in other commodity markets such as
the grains, metals, and natural gas. Agri-
cultural products such as corn and wheat
underwent historical bear markets as the
greenback marched higher. Similarly, the
high-flying natural gas market in early
2014 quickly succumbed to pressure,
forcing prices under $3.00. Although
the relationship between grains and the
currency market isn’t as absolute as that
between crude oil and the dollar, it is
difficult to argue the correlation doesn’t
exist. Once again, grain buyers are also
dollar sellers.
Of course, there are additional factors
that weighed on pricing. For starters, the
US Energy Information Administration
(EIA) consistently reported increases
in crude oil stocks, creating what some
referred to as a supply glut. On the
demand side of the equation, slower
growth in China and economic weakness
in European nations resulted in a change
of heart in the energy sector.
In my opinion, the second predominate
influence of crude oil in 2014 was simply
trader emotion and margin call issues.
Specifically, crude oil speculators began
the year with near-record bullish posi-
tions. As these formerly bullish traders
were being forced to exit their holdings
Continued on page 43
QST Desktop

dollar, he is simultaneously selling an-

other currency; and vice versa. We don’t
think of commodities as trading in pairs, Figure 1: crude oil vs. us dollar. On this weekly chart you can see that in July 2014, the US dollar forged
but we should. When a trader buys crude a sharp rally. Crude oil simultaneously peaked and fell.

March 2015 • Technical Analysis of Stocks & Commodities • 23

 Gauging Momentum
MACD-Suitable Stocks
Trading signals generated by the crossover of Gerald Appel’s
moving average convergence/divergence and signal lines are
popular and simple to use. Do they work for all stocks in all
market conditions? Find out here.
by Kevin Luo
The
moving average convergence/divergence (MACD)
signal line crossover is a popular technical indicator
used by many traders and investors. The MACD
was developed by Gerald Appel in the 1960s and is readily
found in trading platforms of all types. It generates trading
signals upon crossovers of its MACD and signal lines. The
method is considered simple to use; however, many have doubts
about how effective the method is. To find out whether the
technique works, I conducted a backtest on a large portfolio
of stocks traded on the major exchanges. The results of the
backtest will help determine the level of effectiveness of the
MACD method.
Here’s what I found
In the study, I selected approximately one third or 1,816 stocks
traded on the NYSE and NASDAQ for the backtest. These
24 • March 2015 • Technical Analysis of Stocks & Commodities
stocks met the following selection criteria:
1. Are common stock
2. Trading at $2.00 or higher
3. Had continuous historical daily data (date, open, high, low,
and close) from January 1, 2005 to August 31, 2014
4. Had no data errors, such as unadjusted price data from
stock splits.
My objective in backtesting using this process was to
produce test summary statistics from the simulated trades
(long trades only) of a portfolio of stocks. The scale of the
backtesting is sufficient to make a reasonable conclusion about
ARROWS: Zmiter/COLLAGE: JOAN BARRETT
the effectiveness of MACD. The parameter setting used is the
default at 12/26/9 (12-day EMA, 26-day EMA for MACD
line, and nine-day EMA of MACD for the signal line). This
study employs the MACD signal line crossover method as the
trading rules for the backtesting.
A buy takes place when an upward crossover occurs. A sell
takes place when a downward crossover occurs. For calcula-
tion consistency and standardization, the close prices on the
crossover days are used as the buy or sell price. For example,
 Intrendstocks.com
Figure 1: MACD Signal line crossover. The up arrow points to an upward crossover while the down arrow points to a downward crossover.

in Figure 1, the up arrow points to an upward crossover, while it is unlikely to make a profit over time on a portfolio of
the down arrow points to a downward crossover, which is randomly selected stocks using only the MACD signal line
the crossover immediately after the upward crossover. The crossover strategy.
buy happens on the up arrow day and the sell occurs on the Why was the MACD signal line crossover method inef-
down arrow day. The close prices on these days are recorded fective in the backtest? The methodology should not take the
as the entry and exit price, respectively. The difference be- entire blame, because markets are not static. In fact, no study
tween the exit price and the entry price is the simulated result has proved that a technical method works on all stocks all the
computed in percentage terms. Using a custom-built stock time. Trading a group of randomly selected stocks using the
analysis system, I ran the backtest and analyzed all trades in MACD or any other simple technique is unlikely to generate
the 1,816 stocks.
The summary of the backtesting re-
sults for the portfolio can be seen in the
table in Figure 2. The value displayed
in the fourth column of the table shows
that from January 1, 2005 to August Figure 2: backtesting summary statistics for selected stocks. The annualized profit/loss for the
31, 2014, for the 1,816 stocks, the an- MACD from January 1, 2005 to August 31, 2014 was only 1.45%.
nualized profit/loss was only 1.45%. I
calculated this profit/loss figure based
on an equal-weighted approach, that is,
the same weight was assigned to each
of the stocks in the portfolio regardless
of stock prices. I used the following FIGURE 3: PRICE STATISTICS ON SIGNAL DAYS. The crossovers for signal days are the ones with the larger price
equation: movements.

Annualized profit/loss = Total profit/loss

/ Number of stocks a meaningful profit over time.
/ Time period (or 9.7 years) Methods are available to improve your results. One ap-
proach is to select suitable stocks. It’s an approach designed
The results of this backtest showed that the MACD method to make the MACD method more effective without revising
did not produce a meaningful return. The finding suggests the MACD setting or directly incorporating other technical
indicators into the technique.
How do you identify suitable stocks? One way is to connect
to the root of the MACD. The MACD is considered a trending
The selected stock groups momentum indicator. In the table in Figure 3, the statistics from
show significant improvements the backtesting process show that the crossover, or signal days,
are the ones with the larger price movements. On the entry
in profitability. signal day, the average close high/low, expressed as closetoday –
closeyesterday in percent, is 2.18% (column 2) compared to 0.44%
March 2015 • Technical Analysis of Stocks & Commodities • 25
 FIGURE 4: TREND CHART. Here you see the isolated up and downtrends for Alcoa Inc. (AA).

What does this

Stocks with greater trend range and tell you?
number of uptrends are considered This suggests that the MACD
was developed with the intention
suitable for MACD trading and could to catch the uptrend movements
be sought for further analysis. by taking a long position when
the upside momentum surges
and exiting the position when the
(in column 3) on average for a typical uptrend day (I’ll discuss downside momentum moves in. If this assumption can be
stock trends later). On the exit day, the average close high/low confirmed, it means the characteristics of an uptrend must be
is -1.92% (column 4) compared to -0.55% (column 5) daily, related to the trading performance of the MACD.
on average, during a typical downtrend. Mathematically, if the entry price remains the same, then
the higher the exit price, the
greater the profit. It is reason-
able to assume that this price
range from the entry to the
exit is positively related to
the stock trend range. The
next step is to confirm the
existence of such a relation-
ship. To establish the connec-
tion, I need information on
stock trends.
FIGURE 5: RANK OF TREND CHARACTERISTICS. When the trend ranges of a stock are found to be suitable for MACD To understand the charac-
trading, selecting the stocks with a higher number of uptrends produces the greater profit. Stocks with greater trend ranges teristics of a price trend, it is
and number of uptrends are considered MACD-suitable stocks.
necessary to first isolate all
stock trends from the raw
datasets. In this study, there
are two types of trends: An
uptrend is recognized when
the uptrend range is mea-
sured at or greater than 20%.
A downtrend is recognized
FIGURE 6: BACKTESTING SUMMARY FOR THE TOP-RANKED STOCKS. The selected stock groups had much better when the downtrend range is
profitability results. The highest-ranked stocks had the highest return. measured at 20% or greater.
26 • March 2015 • Technical Analysis of Stocks & Commodities
 INDICATORS

In Figure 4 you see the isolated trends for Alcoa Inc. (AA).
The software, which was used in the backtesting, is capable
of isolating the stock trends. After the trends of 1,816 stocks
were isolated, the trend range traits can be summarized. The
software outputs and exhibits the statistics of trend range and
number of uptrends for the period that is being studied (see the
table in Figure 5). The number of uptrends statistic (column
3) is considered as important as trend range. It refers to the
trend count for a specific stock. If the trend ranges of a stock
are suitable for MACD trading, then the higher values for
the number of uptrends produce the greater profit. Therefore,
stocks with greater trend range and number of uptrends are
considered suitable for MACD trading and could be sought for
further analysis. In order to pick out stocks fitting that descrip-
tion from the 1,816 stocks, each stock was ranked according
to uptrend range and number of uptrends. The higher rank is
given to the stocks with the greater trend range and number of
uptrends combination (column 4). The rank number is merely
for sorting stocks.
I used three groups of stocks. Group 1 contains the top-25
ranked stocks. Group 2 holds 25 stocks ranked from 26 to 50.
Group 3 includes 25 stocks ranked from 51 to 75. The stocks
are mutually exclusive but are considered to be the more suit-
able stocks for the MACD signal line crossover method. The
expectation is that group 1 outperforms group 2, and group 2
outperforms group 3 in the backtesting because of the rank
levels. After the software implemented the tasks of reorga-
nizing and summarizing the backtesting results according
to the three groups, it resulted in the statistics you see in the
table in Figure 6.
Comparing these results with the initial backtesting results,
it is clear that the selected stock groups show significant im-
provements in profitability (column 5) over the 1.45% profit
generated from the random portfolio of 1,818 stocks (Figure
2). If you look at the average profit & loss per trade in column
6, you’ll see that group 1 has the highest return, followed by
group 2, then group 3. This indicates a positive relationship
between the ranking and MACD profit. There was only one
unprofitable stock in group 2. All other stocks generated profits
in the backtests (columns 7–8).
It works
A given technical indicator is popular for a reason: It works
when it is properly used. By understanding of basics of the
MACD signal line crossover method, I have established,
through this study, that there is a positive relationship be-
tween the method and traits of a stock trend, trend range,
and number of uptrends. The successful confirmation of the
relationship in turn helps to find suitable stocks that can be
used for MACD backtesting. This approach translates to a
significant improvement in the effectiveness of the crossover
method. More important, it is easy to implement.
Kevin Luo is an independent technical analysis researcher
who focuses on automated price trend–related analysis and
generation of trading strategies. He and his project partners
have developed an automated trend analysis and backtest-
ing system for high- and low-frequency trading. He may be
reached via email at kxluopub@gmail.com.
Further reading
Appel, Gerald [1979]. The Moving Average Convergence/
Divergence Method, Traders Press.
Pankhania, Ajay [2013]. “Muscle Up Those Averages,” Tech-
nical Analysis of Stocks & Commodities, Volume 31:
September.
Star, Barbara [1994]. “The MACD Momentum Oscillator,”
Technical Analysis of Stocks & Commodities, Volume
12: February.
‡Intrendstocks.com
‡See Editorial Resource Index

Sneak preview …
Coming soon!

Dissecting Warren Buffett’s
Macro Buy–Sell Indicator
by Matt Blackman
When it comes to investing, the Oracle of
Omaha usually plays his cards close to his
chest. But here is one favorite indicator
that he has been willing to share.
Spatial Pattern-Recognition Skills
by Martha Stokes
There’s more to chart patterns than merely
identifying them. Find out how you can see
relationships between candlestick bars
and patterns to better asses what price is
likely to do.
2015 Readers’ Choice Awards
Stocks & Commodities
presents the 2015 Readers’
Choice Awards for products
and services that our sub-
scribers find useful, in more
than 20 categories.

March 2015 • Technical Analysis of Stocks & Commodities • 27

 Judging By The Numbers
Trading System Design:
A Statistical Approach
Here’s how to start with the basics and determine if an
identifiable event has a statistical edge in predicting future
prices—before you even start to build a trading system.
by John F. Ehlers and Ric Way
M
any trading systems begin with indicators, and because
of that, the question you should be asking is, “What do
indicators indicate?” The correct answer is that most of
the time, they don’t indicate much. Indicators are just
specialized filters.
Visible sieves
Some indicators, like the commodity channel index (CCI),
relative strength index (RSI), and stochastic, are basically
first-order high-pass filters that remove the longer wave
components of the prices and display them as oscillators.
Other indicators, like moving averages, are basically smooth-
ing filters that remove the high-frequency components and
28 • March 2015 • Technical Analysis of Stocks & Commodities
aliasing noise. Of course, there are combinations of the two
kinds of filters. The basic question still remains whether
shaping the price data by filtering has any predictive power
regarding future prices.
Other trading systems involve setups, such as, “Buy when
the current close is below the close nine days ago and the
last four closes have been consecutively lower and the high
27 days ago is higher than the current high by at least the
Peshkova, SHUTTERSTOCK/adaptation: NIKKI MORR
square root of 1.618.” Clearly, such a setup is heuristic and
may or may not be true for future prices. Candlestick pat-
terns and chart patterns also fall into the broad category of
setups. The trick here, again, is to determine whether these
setups have predictive power regarding future prices.
Still other trading systems attempt to predict the direction
of future prices by correlation with other leading indicators.
For example, every trader has heard that volume leads price.
Such correlations would be nice if they were correct for long
enough to make a trading system profitable.
The process of trading system design is very much like quan-
tum mechanics, in that an entity is described by a probability
EasyLanguage Code To Test
density, and a future state can only be estimated statistically. In
The Predictability Of An Event
this article, we will show you how to start with some basics to
see if an identifiable event has the statistical edge in predicting Vars:
future prices before you even start to build a trading system. Event(false),
FuturePrice(0),
Once you identify a predictive event, then it is a simple mat-
I(0),
ter to move on to designing a robust trading system. We will CG(0),
illustrate the entire process with an example. Denom(0);

Price predictors Arrays:

PredictBin[100](0);
The process of designing a trading system starts with mea-
suring prices into the future from any identifiable event. Our {>>>>>>>>> Code for Event Goes Here <<<<<<<<<<}
own bias is that we have noted a more or less monthly cycle
If Event Then Begin
in most market data, particularly in index futures. It is com-
FuturePrice = 100*(Close - Close[9]) / Close[9]; //Future is refer-
forting to note that this cycle activity is consistent with the enced to 10 bars back
fundamental observation that most companies have to make If FuturePrice < -10 Then FuturePrice = -10; //Limits lower price to
their numbers on a monthly basis. A monthly cycle implies a -10%
If FuturePrice > 10 Then FuturePrice = 10; //Limits higher price
movement consisting of 10 days up and then 10 days down.
to +10%
With this consideration, we start with the presumption that FuturePrice = 5*(FuturePrice + 10); //scale -10% to +10%
we want to predict the prices 10 days into the future. to be 0 - 100
Since we are constrained to work with actual data, we shift End;
//Place the FuturePrices into one of 100 bins
the point of reference 10 days back in history as the point of
If FuturePrice <> FuturePrice[1] Then Begin
occurrence of the event. In EasyLanguage, variables are stacked For I = 1 to 100 Begin
for reference in the code. For example, Close – Close[9] means If FuturePrice > I - 1 and FuturePrice <= I Then PredictBin[I] =
the price increase over the last 10 days with reference to the PredictBin[I] + 1;
End;
closing prices. In sidebar “EasyLanguage Code To Test The
End;
Predictability Of An Event,” you see how we measure the //Measure center of gravity as a quick estimate
prediction from the time of the event. CG = 0;
The test code begins by expecting an event that happened 10 Denom = 0;
For I = 1 to 100 Begin
bars ago. This tester is general, and the event can be anything
CG = CG + I*PredictBin[I];
that is describable by computer code. The crossing of two Denom = Denom + PredictBin[I];
moving averages is just one example. Given that an event has End;
occurred, the percentage increase or decrease in prices over CG = (CG/Denom-50)/5;
the next 10 bars is computed, ending with the current closing
Plot1(CG);
price. This percentage price, referenced to the closing price 10
bars back, is assigned to the variable FuturePrice. FuturePrice If LastBarOnChart Then Begin
is limited to be between -10% and +10%. After limiting the For I = 0 to 100 Begin
Print(File(“C:\PDFTest\PDF.CSV”), .2*I - 10, “,”, PredictBin[I]);
range, FuturePrice is rescaled to vary from zero to 100 so that
End;
the FuturePrice can be contained in one of 100 bins. The plan End;
is to accumulate the number of occurrences of a FuturePrice
in each of the bins over the entire span of the price data series.
We use 10 years of data to create a statistically meaningful events are encountered.
sample size. At the end of the data, the number of occurrences The probability distribution function can be viewed by chart-
in the bins creates a probability distribution function of the ing it in Excel. We created a folder on our computer named
prices 10 bars into the future from the event. C:\PDFTest. When the last bar on the chart is encountered,
We also provide a quick measure of the average percentage a text file named PDF.CSV is created in this folder. It is then
future price by measuring the center of gravity (CG) of the a simple matter to view the probability distribution function
probability distribution function. If the probability distribu- by importing this file into Excel and plotting it as a vertical
tion function outline were cut out of a piece of paper, the CG bar chart.
would be the place along the horizontal axis where the outline
would balance. The general procedure of a function in X and Example
Y coordinates is to sum the XY products and also sum all A specific example of testing an event for predictability will
the Y values. The ratio of these sums gives the CG. Since undoubtedly make the process clearer. In a previous article
the X dimension is centered at 50, the 50 is removed so that titled “Predictive Indicators” published in the January 2014
plotting the CG gives a sense of the zero profit point. The CG issue of Technical Analysis of Stocks & Commodities
and ebb & flow are plotted below the barchart as successive magazine, we demonstrated that a stochastic indicator could
March 2015 • Technical Analysis of Stocks & Commodities • 29
 TRADING SYSTEMS

Predictability Test Of A Stochastic Trading System A Simple Stochastic Trading System

Vars: Inputs:
Event(false), StocLength(8),
FuturePrice(0), Threshold(.3),
I(0), TradeLength(14),
CG(0), PctLoss(3.8);
Denom(0);
Vars:
Arrays: HiC(0),
PredictBin[100](0); LoC(0),
Stoc(0);
//>>>>>>>>>> Start Event Code
Inputs: HiC = Highest(Close, StocLength);
StocLength(10); LoC = Lowest(Close, StocLength);
Stoc = (Close - LoC) / (HiC - LoC);
Vars:
HiC(0),
If Stoc Crosses Under Threshold Then Buy Next Bar on Open;
LoC(0),
If Barssinceentry >= TradeLength Then Sell Next Bar on Open;
Stoc(0);
If Low < EntryPrice*(1 - PctLoss /100) Then Sell Next Bar on Open;
HiC = Highest(Close, StocLength);
LoC = Lowest(Close, StocLength);
Stoc = (Close - LoC) / (HiC - LoC);

If Stoc[9] Crosses Under 0.2 Then Event = true Else Event = false;
//<<<<<<<<<<<< End Event Code Once you identify a predictive
If Event Then Begin event, then it is a simple
FuturePrice = 100*(Close - Close[9]) / Close[9]; //Future is ref-
erenced to 10 bars back
matter to move on to designing
If FuturePrice < -10 Then FuturePrice = -10; //Limits lower price a robust trading system.
to -10%
If FuturePrice > 10 Then FuturePrice = 10; //Limits higher price
to +10%
FuturePrice = 5*(FuturePrice + 10); //scale -10% to +10% occurs when the stochastic crosses under a threshold of 0.2,
to be 0 - 100
End; because crossing this threshold anticipates the price turning
//Place the FuturePrices into one of 100 bins up. The complete code for the example is shown in the sidebar
If FuturePrice <> FuturePrice[1] Then Begin “Predictability Test Of A Stochastic Trading System.”
For I = 1 to 100 Begin The basic stochastic indicator is just the current closing price
If FuturePrice > I - 1 and FuturePrice <= I Then PredictBin[I] =
PredictBin[I] + 1; less the lowest closing price over the length of the indicator,
End; normalized to the difference between the highest closing price
End; and the lowest closing price over the length of the indicator.
//Measure Center of Gravity as a quick estimate The event occurs when the stochastic 10 bars ago crosses
CG = 0;
Denom = 0; under the 0.2 threshold.
For I = 1 to 100 Begin When we applied this indicator to 10 years of the S&P
CG = CG + I*PredictBin[I]; futures continuous contract using a 10-bar long stochastic
Denom = Denom + PredictBin[I]; indicator, we found that the CG plotted to be 1.09% at the
End;
CG = (CG/Denom-50)/5; end of the 10-year period. This relatively high 10-year aver-
age profit leads us to examine the probability distribution
Plot1(CG); of predicted prices. This probability distribution function is
shown in Figure 1.
If LastBarOnChart Then Begin
For I = 0 to 100 Begin Since the event of the stochastic crossing under a threshold
Print(File(“C:\PDFTest\PDF.CSV”), .2*I - 10, “,”, PredictBin[I]); is shown to be substantially predictive, we can now proceed to
End; write a trading system that trims the performance by adjusting
End; the length of the stochastic and the precise threshold level that
works best, and by limiting losing trades with a stop-loss.

be the kernel of a successful trading system if the turning
points were anticipated rather than waiting for confirmation.
We will reinforce that assertion in our example.
Our example will create an event when the simple stochastic
swings between zero and one. The turning point for a long entry
30 • March 2015 • Technical Analysis of Stocks & Commodities
Example trading system
In the sidebar “A Simple Stochastic Trading System” you will
find the complete EasyLanguage code for our example stochas-
tic trading system. When we optimize performance over 10
years of the S&P futures continuous contract, we find that the
best stochastic length is
eight rather than 10. The
threshold to be crossed is
0.3 rather than 0.2. The
best length of trade is 14
rather than the 10 bars
into the future used in
Occurrences
the prediction test. We
have also limited losing
trades to be no more
than 3.8%.
The equity growth over
10 years of our stochas-

www.StockSpotter.com
tic system is shown in
Figure 2. Pretty impres-
sive for a really simple Percent price gain after event
system! And we dare
say it’s superior to most Figure 1: probability distribution function. A stochastic indicator crossing under a 0.2 threshold is highly predictive of
commercially available future prices.
trading systems.

Testing, testing
We have outlined a procedure for the
successful development of trading
systems using a statistical approach.
We have developed a code testbed
that can assess whether the prices
Equity ($)

will statistically increase or decrease

over 10 bars after an event. The event
itself is completely general as long
as it can be described in code. The
event can show whether prices will go
up (signaling long position trades) or
whether prices will go down (signaling
short position trades). Once a predic-
tive event has been determined, it can
then be written into a trading strategy, Trade number
whose parameters can be trimmed to
optimize performance. Figure 2: equity growth. Here you see the equity growth curve over 10 years for the stochastic system.
The testbed can also be used to
assess whether an event is robust
across a number of stock or futures symbols. The testbed The code given in this article is available at the Subscriber Area at
works on a basis of sample bars of data. Therefore, the testbed our website, www.traders.com, in the Article Code area.
is equally applicable to any sample rate, including intraday See our Traders’ Tips section beginning on page 47 for commentary
data or even equitick bars. and implementation of John Ehlers’ & Ric Way’s technique in vari-
ous technical analysis programs. Accompanying program code can
S&C Contributing Editor John Ehlers is a pioneer in the use be found in the Traders’ Tips area at Traders.com.
of cycles and DSP techniques in technical analysis. He is
president of MESA Software. MESASoftware.com offers the Further reading
MESA Phasor Futures strategy. He is also the chief scientist Ehlers, John [2014]. “Predictive Indicators,” Technical Analysis
for StockSpotter.com, which offers stock trading signals based of Stocks & Commodities, Volume 32: January.
on indicators and statistical techniques. ‡StockSpotter.com, MESASoftware.com
Ric Way is an independent software developer specializing †See Traders’ Glossary for definition
in programming algorithmic trading signals in C#. He may ‡See Editorial Resource Index
be reached at ricway@live.com.

March 2015 • Technical Analysis of Stocks & Commodities • 31

 A New Frontier
News Sentiment
News data, which has long been the province of institutional
traders, is now making its way into the hands of retail traders.
Here’s a look at how you can incorporate this data into your
trading strategies.
by Stephen Massel
We
all know that news moves the markets, but what is
less easy to determine is exactly how the market
will react immediately after the news event as
well as later, once market participants have had a chance to
digest and analyze the news in more detail. The algorithmic
interpretation of these news events and more detailed news
stories has long been the province of the hedge funds, which
32 • March 2015 • Technical Analysis of Stocks & Commodities
have the resources to spend on research & development in
VICTOR MARCHAND KERLOW
this specialized area. However, as with most advanced tech-
nological developments, there comes a time when it becomes
more widely available. The use of news analytics and news
sentiment has reached this point, and more and more traders
are now gaining an edge by using news data.
Quantifying news
The development of trading strategies based on traditional
technical analysis using price action, volume, fundamental
economic data, and derived indicators relies on backtesting for
performance evaluation. The backtesting is based on historical
data that, of course, has all the news known to the market at
the time backed in. This is all well and good, but would it not
be better if news could be quantized and decoupled from the
history? This would allow an additional dimension of detail
(in the same way as trade volume is separate) affecting price
action. This would also allow the strategy to react and adapt
to real-world market events, rather than rely on a purely sta-
tistical representation of backed-in news events.
In this article I will detail how traders can now access this
news data and incorporate it into their trading strategies. The
focus will not be on the high-speed receipt of news, as the
advantage there lies with the high-frequency trading firms
operating in time frames of micro and nano seconds, with
whom the average trader cannot compete.
What is news sentiment?
The amount of news stories that are broadcast or published
by multiple media outlets on the economy as a whole, on
individual companies, and on global geopolitical events
continues to rise. Making sense of all this data—filtering out
what’s relevant and important, and to what extent—used to
be the job of large investment houses’ research departments.
However, with the advent of digitization of news content,
advanced computing, and language interpretation techniques,
this data can now be effectively and quickly analyzed. The
programs that analyze this data are often referred to as news
sentiment algorithms. They use advanced natural language
heuristics and statistical techniques to quantize the news
from various sources. This is a multistep process running
in real time that involves:
n Inputting news from single or multiple sources (for
example, broadcast TV channels, market data vendors’
newsfeeds, RSS web feeds, Internet blogs, etc.). These
feeds can provide purely news headline and content
(text) or additionally include metadata tags (for example,
topic, company name, sentiment score, etc.)
n Digitizing and formatting the data for processing
n Parsing the data—looking for specific keywords, sen-
tences, phrases, and so on
n Applying weightings to the parsed data based on con-
text, uniqueness, occurrences, extremeness of language,
and so on, and generating a positive or negative value
based on market impact, relevance, etc. (this step and
the previous step are really the secret sauce, where the
algorithm really earns its salt)
n Consolidating all values and providing a news senti-
ment value for the specific news event. Results can be
categorized as required (for example, macroeconomic,
company/country/industry-specific, and so forth).
This sentiment data is provided throughout the day in close
to real time, and often with additional metrics, such as:
n News sentiment (a negative, zero, or positive value rep-
resenting news on a scale of bad to good)
Traders can now access
news data and incorporate it
into their trading strategies.
n News flow (a zero or positive value, representing the
number of news events or stories interpreted)
n Z-score (a negative, zero, or positive value, representing
statistical relevance of the sentiment value above or below
the average)
n A news link (a URL link to the underlying news story).
The key to success, of course, is the way the algorithm in-
terprets the news text together with a strategy for managing
duplication. The good news is that you do not need to create
these algorithms yourself; the resultant news sentiment data
is now becoming more widely available, and ultimately the
best way to test its efficacy will be to create a strategy and
analyze its effectiveness.
Applying it to your trading
News sentiment data can be of great assistance in various ways.
A discretionary trader can use it as an additional indicator, the
portfolio manager or investor can use it to keep track of news
events affecting his holdings, and as I mentioned earlier, it can
be incorporated into an automated strategy for backtesting.
I’ll review each of these areas in some more detail.
Portfolio management
Any portfolio manager or investor will be interested in specific
news pertaining to their holdings. Keeping up with all the
news, especially for large portfolios, can be an overwhelm-
ing task. News sentiment can be of great benefit here, where
a news sentiment feed can alert the manager to news events,
on a per-company or industry basis. This can be achieved by
simply having two or three additional metrics associated with
each holding, namely news sentiment, flow, and z-score. The
manager can then quickly get a high-level view of the news
affecting his holdings, and can be alerted to any elevated
activity. He can then dig down into the specific news articles
from various sources to more fully understand the potential
impact on his holdings. This automated method of highlighting
relevant news saves a huge amount of time in manually scan-
ning various news media, and it’s suitable to mobile devices
for a manager on the move.
Strategy development
There are two main applications of sentiment data in
strategy development. You can either use it as the primary
driver and create a strategy around it directly, or use it as a
filter for an existing strategy. In either case, when using this
March 2015 • Technical Analysis of Stocks & Commodities • 33
 With the advent
of digitization of
news content, this
data can now be
effectively and
quickly analyzed.
StockNewsSentiment.com

history for your purposes.

As with any other data, news
sentiment data can be used to drive
a range of indicators available in
Figure 1: identifying support levels. The stock price finds itself at trendline support at the same time that the
short-term news sentiment trend turns positive.
today’s trading platforms. One of
the most common ones is the basic
moving average indicator, which can
be used to gauge short-term news
trends. For an existing strategy, this
could be used as a filter to improve
performance. Let’s say you have a
short-term strategy that holds posi-
tions for a few days or weeks. You
could decide to only enter a new
position at the start of a positive news
trend and avoid entering positions on
bad news. The potential uses of this
data, including flow and z-score, are
literally limitless and can provide a
significant edge in your strategies.

Figure 2: channel support. The price is approaching a channel support line with decreasing volume at the same
time that the news sentiment trend reaches extreme negative levels.
data, one of the first considerations is to ensure the volume
of data matches your expectations.
News sentiment typically provides a single value per news
story; this may be of great interest in itself, depending on the
magnitude of the value. However, for a trading strategy you will
want to make sure there is sufficient data for your time frame
and style of trading. For example, when daytrading, if your
news sentiment value starts the day off at zero and cumulatively
builds during the day, you may not have sufficient data in the
morning session to make a valid trade decision. Smaller stocks,
including some within the S&P 500, will not have news every
day, whereas macroeconomic or broader categories of news
sentiment will have much greater flow. For strategy development
and backtesting, you will also want to ensure there is sufficient
34 • March 2015 • Technical Analysis of Stocks & Commodities
Discretionary trading
As in strategy development, senti-
ment data can be effective as a de-
cision support tool in discretionary
trading. Like with any other indicator,
there is no silver bullet, but any addi-
tional evidence to support a trade can
sometimes prove very helpful. Here
are some examples of its use.
Example 1: Below the Advanced Micro Devices Inc. (AMD)
chart in Figure 1 is a plot of AMD daily news sentiment (white
line) and the five-day moving average (bar chart). The stock
finds itself at trendline support the same time as the short-term
news sentiment trend turns positive. Here, news sentiment was
useful in assisting the decision with regard to whether there
might be a bounce at support.
Example 2: In the chart in Figure 2, the stock price of Exxon
Mobil Corporation (XOM) is approaching a channel support
line with decreasing volume the same time as the news senti-
ment trend reaches extreme negative levels.
Example 3: In the chart of Coach
Inc. (COH) in Figure 3 you see sev-
eral examples of price approaching
support & resistance levels at the
same time that the short-term news
trend changes direction.

Example 4: In Figure 4 you see ex-

treme positive news sentiment trend
events for Duke Energy Corporation
(DUK) highlight significant turning
points.

Sources of news
sentiment data
News sentiment data in various
forms is available from several FIGURE 3: SUPPORT & RESISTANCE LEVELS. Price approaches support & resistance levels at the same time that the
short-term news trend changes direction.
sources, and of course at various
prices. Here are some specialist news
sentiment data providers:
n Dragonfish (StockNewsSenti-
ment.com, dragonfishgroup.
com)
n Opfine (opfine.com)
n FinSents (finsents.com)
n Ravenpack (sentimentnews.
com)
n Dow Jones (http://new.
dowjones.com/products/dj-
news/news-machine-analysis/)
n Thomson Reuters (http://
www.machinereadablenews.
com/p-sentiment-indices.php)
n Bloomberg (bloomberg.com/
professional/news-research/
news/) FIGURE 4: TURNING POINTS. Extreme positive news sentiment highlights significant turning points in the stock price.

Trading by news
With the increase of news sentiment data availability, the op- and trading strategy development/testing company. He can
portunities now exist for individual traders to utilize this data be reached via his website at www.dragonfishgroup.com.
in their strategies and trading decisions and for investors to be
quickly alerted to important news events affecting their hold- Further reading
ings. Furthermore, this sentiment data can now be obtained Cameron, John [2013]. “Market Mobs,” Technical Analysis
at a fraction of the cost of paying for an expensive newsfeed of Stocks & Commodities, Volume 31: August.
from the traditional big vendors. This is one more example of ‡StockNewsSentiment.com (Dragonfish LLC)
technology that was once only available to the large trading
‡See Editorial Resource Index
firms, but is now becoming available to individuals to bring
their trading up to a more sophisticated level.

Stephen Massel has been developing strategies and indicators

and trading futures & options for more than 18 years. He is
cofounder of Dragonfish LLC, a news sentiment data provider
March 2015 • Technical Analysis of Stocks & Commodities • 35
 INTERVIEW

Don’t Get Caught Unaware

Using ETF Momentum Strategies

With Les Masonson
Leslie N. Masonson is president of Cash Management Resources, a financial
consulting firm that he founded in 1987. Masonson’s 44-year career has spanned
trading, investing, financial advisory services, bank operations management,
teaching, and corporate cash/treasury management consulting. He was a financial
advisor for six years offering investment management services to retail clients of
large financial institutions.
Masonson has authored books on cash management, daytrading, market timing,
and relative strength investing using ETFs. He also writes book reviews for Futures
magazine and has written product reviews for this magazine. His website is www.
buydonthold.com and he can be reached at lesmasonson@yahoo.com.
Stocks & Commodities Editor Jayanthi Gopalakrishnan spoke with him on
January 5, 2015 about trading and investing in exchange traded funds (ETFs)
using momentum strategies.

Les, why don’t you start by tell-
ing us a little bit about yourself
and how you got interested in
the financial markets.
I’ve been interested in the stock mar-
kets since 1957 when my grandmother
gave me a few shares of PanAm Airways
for my 13th birthday. From that point on
I started reading about the markets, even
though there were only a few books in my
local library. I also traveled to Manhattan
to visit the NYSE and AMEX visitor’s
galleries during my summer breaks from
junior high school. I opened a brokerage
account for minors and I also attended a
few stockholder annual meetings in the
NYC area for companies that I owned.
I expected to get into the investment
management business after receiving
my master’s degree in January 1970, but
none of the brokerage houses or banks
were hiring. So I ended up working
for Irving Trust Company as a quality
control analyst. I then managed a num-
ber of operational departments before
departing to become a cash management
consultant at the Bank of America. I then
joined Citibank for seven years, where
I focused on providing fee-based cash
management consulting services to the
banks’ large corporate clients. Thereaf-
ter, I started my own cash management
consulting firm and worked in that
specialty for 17 years.
Buying & holding is
hazardous to your wealth
because you have to sit
through the bear markets,
which can be emotionally
and financially draining.
concerned. Why the buy-don’t-hold
approach?
After spending thousands of hours
researching the markets over decades,
I’ve come to the conclusion that buy-
ing & holding individual stocks is too
WORLD MAP: PILart/NYSE STOCK EXCHNAGE: LUCIANO MORTULO/SHUTTERSTOCK

Those were both interesting learning
experiences. After high school, I received
my college degrees—a BBA in Finance
and Investments from the City College
of New York and an MBA in Operations
Research from Bernard M. Baruch Col-
lege. My master’s thesis title was “Statisti-
cal Evaluation of the Relative Strength
Concept of Common Stock Selection.”
After performing the research for my
thesis, I was convinced that using a rela-
tive strength momentum strategy would
be a viable investing approach.
36 • March 2015 • Technical Analysis of Stocks & Commodities
After that I decided to put my invest-
ment knowledge into practice by becom-
ing a financial advisor for six years. After
conferring with hundreds of people
who were looking for financial advice,
I learned that the vast majority of them
had a very limited knowledge of the stock
market and financial matters.
You’re a big believer in the buy-don’t-
hold strategy, which is contrary to what
most advisors tell their clients to do, as
far as long-term stock investments are
dangerous and too risky a strategy for
investors. First of all, you have to be smart
or lucky enough to buy a portfolio of the
right stocks or your performance will not
be good. Just look at what happened to
the popular “nifty fifty” growth stocks
such as Eastman Kodak, IBM, Polaroid,
and Xerox of the 1960s and ’70s. Their
prices exploded until they ran into the
crushing 1973–74 bear market.
Buying & holding is hazardous to your
wealth because you have to sit through the
bear markets, which can be emotionally

and financially draining. We experienced
this in the 2000–02 bear market when
the S&P was down 49.1%, and then again
during the 2007–09 crash when the S&P
was down 56.7%. So we’ve had two
devastating bear markets in a 10-year
time frame, and we’ll have more down
the road, just based on history. These
bear markets will continue to crush
people’s portfolios and they won’t be
happy about it, and they may sell at the
bottom, which is what many investors
usually do. Many investors, especially
those over 55, cannot afford to lose so
much money when they most need it. If
you have a 50- to 80-year time horizon,
then perhaps buy & hold will work for
you. But that is not realistic for most
people. Defensive investing is the way
to avoid the big bear markets.
Second, the typical investor does not
have the financial training or skill to
evaluate the stock he/she is considering.
Even CFPs, CFAs, and CPAs are not
experts at assessing the risk and value of
companies they cover. That is why over
their careers they make costly mistakes
or errors of judgment and recommend
stocks they should not have. So how is
the average person without the training
going to do better?
Third, I believe that using market
timing or relative strength analysis with
ETFs is a solid, risk-averse way to invest
and trade. I’ve written a book on each of
these subjects with complete informa-
tion, aimed at self-directed investors who
can consider the strategies I recommend.
In my lastest book, Buy DON’T Hold,
I provide a strategy with specific rules
38 • March 2015 • Technical Analysis of Stocks & Commodities
for investing in a portfolio of ETFs that
takes the emotion out of the equation. I
also have a website, www.buydonthold.
com, that supports the book and provides
a weekly report on the strategy free of
charge. I’m also a big user of charting
and technical analysis.
Because of these reasons, I feel that the
most viable investing method is to use a
mechanical, nonemotional approach. By
using a specific time-tested strategy (as
delineated in my books or one developed
by the investor) with a handful of techni-
cal indicators, investors can limit their
risk and protect their principal. The key
to successful long-term investing is to
protect your principal from devastating
bear markets. That can be accomplished
using any number of simple strategies.
Whether I use market timing or relative
strength analysis, I know that it will
definitely not do as well as the market
averages during bull markets because
the strategy may have premature exits
and late entries. The goal is to capture
the majority of the uptrends and miss
most of the downtrends. Over the long
haul and during down markets, these
strategies will save your nest egg. So
that’s why I don’t believe in buying &
holding in individual stocks. It’s just
too risky. People don’t understand that
buying & holding is not a strategy at
all; it’s just hoping for the best. If they
have individual securities and use buy
& hold, I wish them luck.
You mentioned that you use a con-
trolled and systematic strategy for your
trading. You follow a specific plan. One
of the keys to that plan is to first de-
termine your true risk tolerance. How
does somebody go about doing that and
does it affect how they trade?
Determining your level of risk is criti-
cal to your investing and trading success.
Without developing specific parameters
to protect your principal, the odds are
that you may go bankrupt. The major-
ity of the risk tolerance questionnaires
used by financial advisors typically ask
five to 10 questions that tend to be very
weak in determining an investor’s true
risk level. I found that the website www.
riskprofiling.com, which uses a question-
naire that people can fill out (at no cost,
to determine their own risk) is one good
source. It’s a psychometric test that is
closer to reality in determining risk than
those tests used by most advisory, bank,
and brokerage firms.
In addition to taking this test, one good
way to determine your risk parameter is
to look back at your actions and feelings
during the last big market decline that
you experienced. After carefully as-
sessing how you reacted to this market
meltdown, you should have a pretty good
idea of your personal loss percentage that
will be acceptable in the future, allowing
you to sleep at night. It could be a 10%
or 20% decline, for example. If investors
say to themselves that they don’t want
to risk more than 10 or 15%, that is fine,
but they better use stop-loss or stop-limit
orders, if at all possible, to take them
out of the market and not second-guess
it or change those percentages as the
market declines further. Unfortunately,
you can’t put stop-loss orders on mutual
funds. You can place them on stocks and
ETFs. So if you own mutual funds, then
you or your advisor will have to watch
them carefully. The minute the price hits
your mental stop, sell it, because you’ll
be surprised and unhappy if you don’t.
Think of what would happen if the market
crashes and you failed to act according
to your own plan.
Whether someone is a trader or in-
vestor, it is critical that an exit strategy
always be in place to protect principal.
Most of the top traders use stop orders
since they know a high percentage of
their trades may go against them. The key
is to take small losses, which should be
counteracted by large gains in positions
going their way.
What indicators do you use to deter-
mine when the market is in a trend?
The indicators I use are laid out in
Buy—Don’t Hold (BDH) and at my
website www.buydonthold.com. My goal
is to be in tune with the trend. I use four positive MACD crossover. They must 7.5%. And during 2014, the Dashboard
indicators to determine when to be in or confirm each other to be considered a was out of the market for 178 days or
out of the market, which I refer to as the signal change. 48.8% of the year, greatly reducing
BDH Dashboard. When three or more On December 8, 2014, there was a market risk. The beauty of my system
of them are on buy signals, I go long the sell signal on the Dashboard. So I went is that the Dashboard can be out of the
market using the five top-ranked ETFs into 2015 with a 100% cash position. In market between 25–50% of the time
based on their six-month relative strength 2014 the BDH strategy earned 13.63% during the year and still post decent
out of universe of 52 predetermined while the Nasdaq Composite gained risk-adjusted performance. Remember,
ETFs. When one or none of the indica- 13.4%, the S&P 500 gained 11.4%, and if you’re not in the market you have no
tors are on buy signals, then I sell all five the Dow Jones Industrial Average gained risk at that time. But that means you
ETFs. It’s as simple as that.
First of all, I use the daily Nasdaq
Composite index to determine the market
trend. That’s the most volatile of the big
three indexes and the one that usually
leads the market in both directions. The
first indicator used on this index is the
100-day simple moving average (SMA). ninjatrader.com
When the index’s price moves above the
SMA, it triggers a buy signal and vice
versa. As a second indicator, I use that Simple Rates.
index with the moving average conver-
gence/divergence (MACD). When there
is a positive crossover on the MACD,
Clear Savings.
that is considered a buy signal on that
indicator. But if the crossover is negative, Deep Discount Commissions
it is a sell signal.
My third indicator is the American As- as low as $.53 per contract.
sociation of Individual Investor (AAII)
weekly investor sentiment survey. I use
the sentiment index and look for the
extremes—more than 50% bulls or less View Commissions at ninjatrader.com/Commissions
than 25% bulls. A sell signal on this
indicator occurs when it reaches a level You Know our Award-Winning Platform.
of 50% or more bullish reading and then
drops below that level in a subsequent Get to Know our Next Generation Brokerage.
week. A buy signal occurs when it falls
below 25% and then rises above that
level in a subsequent week. NinjaTrader Brokerage™
My last indicator is the Nasdaq Sum- equips traders with
mation Index (NASI). I overlay a five-day
exponential moving average (EMA) on unmatched benefits
the daily price chart of the index and plot including exclusive
the MACD indicator. A buy signal on advanced platform
this indicator is generated when there
is a positive daily crossover of the five- features and single
day EMA by the index coupled with a source support.

Go Direct to the Source.

NinjaTrader Brokerage.
March 2015 • Technical Analysis of Stocks & Commodities • 39

By using a specific time-tested strategy
with a handful of technical indicators,
investors can limit their risk and protect
their principal.
will miss some of the upside, but that’s
part of risk management. During bull
markets you’re not going to capture all
of the upside as the indicators need time
to reverse to the upside. The best part of
the Dashboard strategy is that it pays off
big time in a big bear market. You’ll be
out of the market and stay out until the
market reverses higher. That’s the key
to building wealth.
We’ve had a huge bull market since
March 2009. It may have potentially
peaked the last week of 2014. Looking
ahead to 2015, no one knows where the
market will end the year. The perennial
forecasters are projecting an 8–10%
market advance, as they do almost every
year. One positive for 2015 is that it is
the third year of the Presidential election
cycle, which has had a positive historical
track record. Another positive is that
years ending in “5” have had a good
track record as well. These positives are
nice to keep in mind, but the question
is whether they will kick in this year.
And no one knows the answer to that at
year-end 2014.
You read our
publications. Now
write for them, too!
If you are knowledgeable about
technical indicators, charting,
trading systems, money
management, intraday trading,
trading psychology, options,
cycles...and more... we’d like to
hear from you!
Click on ‘CONTACT US’ at Traders.com
for more information.
40 • March 2015 • Technical Analysis of Stocks & Commodities
You mentioned a few exchange traded
funds. Why do you prefer trading them
to individual stocks?
Stocks are dangerous by themselves.
If you pick a stock that is a winner, then
that’s tremendous. But the odds are
against you. For example, there was a
study done on over 8,000 stocks from
1983–2006. They looked at the stocks
on the Nasdaq Composite, the American
Stock Exchange, and the New York Stock
Exchange, including delisted stocks, and
found that over the total life of that period,
only 25% of the stocks provided all of
the return, and 75% did not participate
in the uptrend.
Even in big bull markets there are
many stocks that have negative perfor-
mance. That’s why it’s difficult to pick
stocks individually. Mutual funds really
are not the way to go either because of
their high internal expenses—about
1.23% for equity funds—and their end-
of-day-pricing. That’s why I love to
use ETFs. They’re passive indexes, low
cost, transparent, very liquid, and can
be traded during the day. The nice thing
is that you have a wide choice of ETFs
in all asset classes. They don’t usually
declare capital gains because they’re not
actively trading.
Another positive for ETFs is you can
invest in an inverse fund. You can buy
an inverse fund of an index and go long.
There are over 1,700 ETFs to choose
from, and the value of the total ETF world
is $2 trillion, so they have really grown
in the past couple of years. They’re going
to knock out mutual funds at some point.
It may take 10 or 15 years but I think it’ll
happen. ETFs are a great product.
They’re much better than mutual funds.
In the past year 79% of the active managers
didn’t even beat their own benchmarks,
according to Morningstar, and interest-
ingly, only 13% of those who were tracking
large-cap stocks beat their benchmark
this year. And anyone who holds them is
paying those internal fees all the time. So
I use ETFs with my strategies.
Then of course with ETFs, you have the
option of being able to rotate among
sectors.
Yes, my BDH strategy rotates into ETFs
in different sectors. I use relative strength
to identify the strongest sectors using a
preselected universe of 52 ETFs, which
are listed on my website and ranked each
week. Each week they are ranked based
on their six-month price performance, and
the five strongest ones are purchased and
held until the Dashboard has a sell signal,
or their individual stop-limit order is hit,
or they drop below rank 20, whichever
criteria is met first.
Each week I look at the four indicators
for any signals—buy or sell. When there
is a majority in one direction, then that
results in a Dashboard buy or sell signal.
Over time, I expected to only get three
or four Dashboard signals a year, but in
2014 there were five buy and five sell
signals because of the market choppiness.
In a nice, trending market, you will have
fewer signals.
There really is no perfect indicator or
trading system.
Absolutely correct. The BDH Dash-
board is not a perfect system, but it hope-
fully will capture most of the gains while
minimizing the losses. There is no perfect
system, and if you were talented enough
to develop one, it will probably decay over
time because the markets change.
Speaking of changing markets, are
there any significant changes that
you have noticed in the markets of
late compared to what they were a few
decades ago?
Yes, there have been many significant
changes in the last decade. These include
lower trading commissions; availability of
free, powerful trading platforms as well
as charting and backtesting software; the
global nature of the markets; the impact
of the Federal Reserve and foreign central
banks; and information explosion.
Today, global political, economic,
banking, and financial events filter their
way back to the US instantly and impact
our markets. This was certainly not the
case 10 years ago. The social media ex-
plosion has also had its impact on certain
stocks, as true and untrue stories circulate
around the world in seconds.
Another major change has been the
commission structure reduction. More
than a decade ago I was paying $45 to
trade and a few hundred dollars a month
for real-time data. Now I’m paying about
half a cent in one of my brokerage ac-
counts, and with another brokerage ac-
count I’m paying $5 to trade any amount
of shares. Most of the large firms, such
as E*Trade, Fidelity, and TD Ameri-
trade have advanced trading software
and platforms coupled with real-time
data for no charge with certain account
minimums, and they keep updating and
improving their offerings.
The availability of powerful trading
and backtesting software has given trad-
ers and investors the ability to analyze
“If elected, I promise to do my darndest to keep money in politics!”
their ideas and strategies in seconds.
Ten years ago this capability was just
in its infancy.
You said you have 52 ETFs listed on your
website. How did you select them?
Anyone can see these ETFs by going to
my website or to one of my links at www.
etfscreen.com/buydonthold. They’re
broad-based indexes representing seven
categories: fixed income, commodities,
international, sectors, styles, currencies,
and inverse funds. Most have high daily
volume and are liquid with low bid–ask
spreads. I select five of the strongest
ETFs and hold them until they have a
sell signal based on a stop limit or a
dashboard sell or if they drop below
rank 20 out of 52.
Any last thoughts?
Investing successfully is all about
protecting your principal from future
devastating bear markets. The next few
decades will most likely not match the
performance of the 1950s, 1980s, and
1990s for many reasons.
Therefore, investors need another way
of investing to eliminate all the noise and
not concentrate on what others are say-
ing or what their opinions are about the
future trend of the market. If you look at
the forecasts of market participants, es-
March 2015
pecially many financial advisors, pundits
on Wall Street, or economists, you’ll find
they’re usually completely wrong—their
predictions will tend to head in the op-
posite direction. Take the forecasts from
prominent prognosticators for 2014 as an
example. Most economists thought that
interest rates were going to go up, but that
didn’t happen. They thought the price of
oil would go up but that clearly didn’t hap-
pen. They thought the dollar was going
to go down, but it went up. So why pay
attention to someone’s forecast? It’s not
going to help you make money.
Thus, it is important to use a rule-
based, logical approach such as relative
strength to have the odds in your favor.
Anyone who uses my website has free
access to an ETF relative strength strat-
egy. There’s no work for anyone to do to
gather updated information, as I do all
the work and provide the links. They can
view the strategy and the weekly update
of the Dashboard indicators and follow it
if they want to. The reason I developed
the blog was to back up my book, and
provide self-directed investors with a
conservative investing approach with
proper risk safeguards. The question is,
“When will the next bear market occur?”
No one knows, but the Dashboard will be
there to help determine when to sell—not
at the top, but close to it. That’s worth
its weight in gold.
Further reading
Masonson, Leslie N. [2010]. Buy, DON’T
Hold—Investing with ETFs Using
Relative Strength To Increase Returns
With Less Risk, FT Press.
_____ [2011]. All About MARKET
TIMING: The Easy Way To Get
Started, 2d ed., McGraw-Hill.
_____ [2011]. Profiting From ETF
Rotation Strategies In Turbulent
Markets (Kindle edition only), FT
Press.
_____ [2014]. “StockCharts University,”
Quick-Scan, Technical Analysis of
Stocks & Commodities, Volume
32: April.
• www.buydonthold.com, lesmasonson@
yahoo.com
• Technical Analysis of Stocks & Commodities • 41
 Explore Your Options
Got a question about options? Tom Gentile started his trading career on the floor
of the American Stock Exchange in 1994. He has appeared on many financial TV
and radio shows, as well as hosting a weekly talk show himself, and has co-authored
many books on the markets. He can be found at www.tomgentile.com. To submit a
question for Tom Gentile, post it to our website at http://Message-Boards.Traders.
com. Answers will be posted there, and selected questions will appear in a future
issue of S&C.
Tom Gentile

PROTECTING YOUR SMALLER STOCK
PORTFOLIO
How do I hedge 10 shares of Google?
Years ago, my answer would have been,
“Get 90 more shares, then we can talk.”
But as of last year, that all changed with
the introduction of mini options. It has
now been a year since this product was
introduced, and I typically wait a year
before trading anything new. Let’s visit
this “small” section of options to see
if it might be a good fit for the smaller
trader.
In March 2014, the CBOE launched
a new product for the smaller investor
looking to hedge odd-lot securities called
mini options. What are they, how have
they performed during the past year, and
who is most likely to benefit from using
these options?
Each regular-sized equity option con-
tract gives the buyer the right, but not
the obligation, to buy 100 shares of the
underlying asset at a set price for a set
time. Regular options have many strike
prices above and below the stock price.
Regular options could have as little as
one week to expiration, or as long as a
few years. A mini option represents 1/10th
of the value of a regular-sized option.
Thus, a mini option contract is good for
10 shares of stock and is in many ways
similar to the standardized options.
Before you go out and analyze your
odd-lot portfolio on every stock that
you might own, mini options have most
of their volume in Apple Inc. (AAPL),
Amazon.com Inc. (AMZN), Google Inc.
(GOOG), SPDR Gold Shares (GLD), and simultaneously sell one mini
and SPDR S&P 500 ETF (SPY). These option contract with one month to
mini options, like the standardized ones, expiration on GOOG at $500, and
offer various strike prices and the same collect premium for the sale, which
expiration dates. In this regard, they at the time of this writing, was $30.
are similar to their bigger brother, but She now has $30 of protection for
smaller. So right off the top of my head, her GOOG shares, and even if the
who is the trader or investor that’s best stock were to stay at $500, she keeps
suited to benefit from mini options? The the amount of money collected at
odd-lot investor! expiration. Bad news is that she has
This is the person like my mother- capped the reward to the amount of
in-law (let’s call her MIL) who buys 10 premium collected, so if at earnings,
shares of GOOG, because that’s all she GOOG jumps to $600 a share, she
wants to buy in her portfolio. She likes is obligated to sell the stock at $500.
to buy and hold GOOG a month before Keep in mind that the chart in Figure
earnings and then sell after earnings. 1 shows 100 shares of GOOG and one
At today’s price, 10
shares of GOOG
is valued at more
than $5,000. That
might not be much
to you, but to her it
represents a lot of
money. With mini
options, she now has
several strategies to
hedge this particu-
lar position if she
intends on keeping
it longer than a few
days. These would
include:
• Covered call
options—MIL
could purchase
her 10 shares of
GOOG at $500

Figure 1: Covered Call Options. This strategy gives you the protection but caps the reward to the amount of premium collected.

42 • March 2015 • Technical Analysis of Stocks & Commodities

 Explore Your Options

full-size option contract; the mini is peace of mind.

1/10th the cost and risk. You can see the
• Married put option—In this case, risk graphs with
MIL could protect her 10 shares of the full option
GOOG with a mini option purchase contracts in Fig-
of GOOG puts. If she bought one mini ure 2, so deduct
option with one month to expiration at 90% off the pric-
a strike price of $500, she would end es to get an idea of
up paying a little less than 10 points what your costs
of protection for her GOOG stock. and risks are with
This is to protect $5,000 of stock for 10 shares of stock
30 days. The good news is twofold: and a mini op-
If GOOG has good earnings and the tion.
stock jumps to $600, she gains 100 • Collarstrategy—
points on the stock, and even though This involves a
the put protection cost less than $10, combination of
she still nets out 90 points of profit. the two strate-
If the company’s earnings aren’t up gies discussed—
to expectations and the stock falls by buying the stock,
Figure 2: Married put options. This strategy gives you the protection and the
100 points, the put she bought gives buying a put, and possibility of higher rewards. The problem would be if the stock moved sideways.
her the right to sell GOOG at $500. selling a call si-
In this case, protection that cost 10 multaneously. This strategy takes but you don’t hear about them much. If
points saves her 100 points if the stock the positives and negatives of the two you’re a small trader, don’t let this dis-
drops below $500. The drawback here strategies, and it protects the stock, courage you. Minis are a great way to
would be if GOOG were to stay in a but the rewards are minimal. start learning how to trade options.
sideways range. This then costs her Good trading!
unneeded protection, but still gives Minis started out with a lot of fanfare,

FUTURES FOR YOU

GARNER / FUTURES FOR YOU
Continued from page 23
(selling long futures positions) due to
a lack of conviction or funding, prices
were forced lower in a dramatic nature.
The panic was real, and it resonated
into the financial markets, causing junk more realistic level; in my view, this is
bonds and energy stocks to plummet. a likely scenario in 2015.
Oftentimes, human emotion interferes
with natural market fundamentals. In ‡QST Desktop (Quick Screen Trading)
such times, prices can overshoot equilib-
rium, or even logical, levels. Eventually,
the panic subsides and prices revert to a
March 2015 • Technical Analysis of Stocks & Commodities • 43
 product review

OptionStrategist.com
Part 2

McMILLAN ANALYSIS CORP.

PO Box 1323
Morristown, NJ 07962–1323
Phone: 800 724-1817
Fax: 973 328-1303
Email: info@optionstrategist.com
Website: www.optionstrategist.com
Price: Various products and services are
available. See website for details.

by S&C Staff

H
ere in the second part of this two-
part review, we’ll discuss The
Option Strategist newsletter and
other products and services of-
fered by OptionStrategist.com.

Option strategist
newsletter
The newsletter comes out biweekly and
has an update called the hotline in between
those weeks. It is typically 12 pages long
and contains a wealth of information. It
starts out with educational material such as
an explanation of a specific strategy. There
will often be examples to help explain the
item under discussion.
The newsletter has specific areas it
covers in every publication. Following the
educational/informative feature article is a
table of follow-up actions as required for
each open position. Next is a section titled
sentiment indicators in which a stock market
outlook is given based on various technical
indicators, followed by sections on index
options & volatility skewing, extremes in
sentiment, and put–call ratios (Figure 1).
Specific trading recommendations may or
may not be given. Various relevant charts
are included, followed by a discussion of the
current state of the volatility in derivatives
markets.

Software products
OptionStrategist.com offers five different
software packages. We’ll look at two of
them. The first one is The Expected Return
Calculator. What it attempts to do is tell you,
44 • March 2015 • Technical Analysis of Stocks & Commodities
 put–call ratio charts

Figure 1: put–call ratio charts. When new buy signals are generated from the put–call ratio extremes, a chart is provided in OptionStrtegist.com.

over a large number of trades, what your put–call ratio charts; volatility charts; a similar to what you see in Figure 2 that
expected profit or loss might be for an op- probability calculator; and back issues allows you to make inputs. Under the
tion position. The key statement here is of McMillan’s newsletters. The best label securities are a couple of lines—
a large number of trades. Any one trade thing is that all of this is in the Strategy one for the underlying and one for the
might be a profit or a loss. It is only after a Zone that goes for $195/year if you option. The volatility on the line for
number of trades that you can reasonably sign up for a yearly subscription with the underlying is historical volatility.
talk about average profit or loss. There autorenewal. The next line below is for the option,
are three inputs to the calculation. The The expected return calculator has and the volatility needed here is the
first, and arguably the most important, been set up to require manual inputs, and implied volatility. The option line lets
is the historical volatility of the underly- there are several sources of data that are you specify a series of options so you
ing. Volatility is free on a weekly basis free and readily available. There is no can see what would happen with spreads.
from OptionStrategist.com. Follow the datafeed service you need to purchase. In this example, a -1 has been input for
path Products→Analysis Tools→Free When you open the expected return cal- the quantity of options to identify sell-
Analysis Tools→Data or go to http:// culator, you are presented with a screen ing the option. A dropdown menu lets
www.optionstrategist.com/calculators/
free-volatility-data. What is impressive
about the data is that the table includes
futures, indexes, and stocks.
The use of percentage in conjunction
with the composite implied volatility is
the type of sophisticated approach typical
of OptionStrategist.com because you
want to know where implied volatility is
relative to prior calculations of implied
volatility.
If you don’t want to wait a week for
volatility calculations, you can subscribe
to the Strategy Zone, which supplies the
data on a daily basis, but it also includes
much more, such as trading candidates
for covered writes; naked put sales;
straddle buys; and calendar spreads.
Figure 2: Expected Return Calculator. Here you see the editor tab. This screen is used to provide inputs for
A wide array of volatility data is also the option position you want evaluated. At the top are the points in time you want to determine your potential profit/loss.
included, along with a daily midday Below that is the securities information. You can input either put or call and add several more options so you can evaluate
market commentary; more than 200 spreads. Historical volatility is used for the underlying line, and implied volatility is used for the option line.

March 2015 • Technical Analysis of Stocks & Commodities • 45

 CHARTING THE
STOCK MARKET
The Wyckoff Method

Edited by Jack K. Hutson

208 pages, 6x9 inches,
chart illustrations, indexed
$14.95 plus shipping & handling. FIGURE 3: Expected Return Calculator Plot. This is a standard option profit/loss graph. Assuming a lognormal
ISBN: 978-0-938773-06-1 distribution of prices and using volatility, this screen lets the calculator estimate profit/loss. The black line corresponds to
the option expiration date, while the blue and purple lines correspond to the two data points from your input.
Charting The Stock Market
describes and illustrates one of the
best pioneering technical analysis
methods. This book takes the
reader step by step through the Different option trading strategies are covered
Wyckoff method: first, the basic for novice and intermediate-level option traders.
principles; second, examples of the
method applied to the bond market;
third, an outline of the steps to put
the method to use. Details of the
Wyckoff method covered in this you input several options, thus allowing consists of 16 seminars by Lawrence
book include: McMillan. The seminars cover novice, in-
spreads to be created.
◆ Point & figure charting After inputting the data, you can choose termediate, and advanced option trading.
◆ Trends
the plot tab from the upper left-hand One of the approaches that McMillan uses
◆ Relative strength and weakness
corner. This will plot the familiar option is to give examples, and when possible
◆ Stop orders
profit/loss chart similar to what you see in he provides charts or diagrams to keep
◆ Forecasting
Figure 3. In the upper left-hand corner is the material interesting while still being
◆ Wave charts & intraday
◆ Group stock behavior
a legend that changes as you move your highly informative. Different option trad-
◆ Stock selection criteria
cursor to different underlying prices. ing strategies are covered for novice and
◆ Price/volume chart reading & If you are looking for another way intermediate-level option traders.
analysis to arrive at implied volatility other than
through the newsletter, OptionStrategist. Summary
Order toll-free: 800-832-4642 com also offers the Option Calculator 2.0 OptionStrategist.com consists of a
(Figure 4). The inputs are straightforward, wealth of option-related information.
Online: www.traders.com with the primary ones being strike price, Besides offering ongoing educational
stock price, and stock price historical material through The Option Strategist
volatility. The calculator uses a Black- newsletter, there is a wealth of educa-
Scholes model to calculate implied tional material. There are over 10 dif-
volatility. It will also show you the option ferent video packages and McMillan has
4757 California Ave. SW, Seattle, WA 98116 • 206 938-0570 greeks for a large combination of stock also authored several books. Software
and strike prices. is available that lets you input your
own data so you can see the effect of
Educational materials changes. All in all, it’s an impressive set
One of the offerings by OptionStrategist.
com is a home study video package that Continued on page 54

46 • March 2015 • Technical Analysis of Stocks & Commodities

 For this month’s Traders’ Tips, the focus is
John Ehlers & Ric Way’s article in this issue,
“Trading System Design: A Statistical Ap-
proach.” Here, we present the March 2015
Traders’ Tips code with possible implementa-
tions in various software.
Code in EasyLanguage is already provided
by Ehlers & Way in their article, which S&C subscribers
will find in the Subscriber Area of our website:
• Traders.com  Home–S&C Magazine 
S&C Article Code
The code for the Traders’ Tips section is posted here:
• Traders.com  Home–S&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 is-
sue or another recent issue. The entries here are contrib- Figure 1: TRADESTATION. Here is an example of a simple stochastic system
uted by software developers or programmers for software applied to a daily chart of the emini S&P 500 (ES), based on John Ehlers & Ric
that is capable of customization. Way’s article in this issue.

The study contains formula parameters that may be config-

ured through the edit chart window (right-click on the chart
F TRADESTATION: MARCH 2015 TRADERS’ TIPS CODE and select “edit chart”). A sample chart is shown in Figure
In “Trading System Design: A Statistical Approach” in this 2.
issue, authors John Ehlers & Ric Way outline a procedure for To discuss this study or download a complete copy of
the development of trading systems using a statistical approach. the formula code, please visit the EFS Library Discussion
In the article, they create a set of data that they analyze using Board forum under the forums link from the support menu
Microsoft Excel spreadsheet software. They have provided at www.esignal.com or visit our EFS KnowledgeBase at
TradeStation EasyLanguage code for an indicator to help http://www.esignal.com/support/kb/efs/. The eSignal formula
create the data for analysis, as well as a simple test strategy script (EFS) is also available for copying & pasting from the
to demonstrate the process. Stocks & Commodities website at www.traders.com in the
To download the EasyLanguage code, please visit our Traders’ Tips area.
TradeStation and EasyLanguage support forum. The code for —Eric Lippert
this article can be found here: http://www.tradestation.com/ eSignal, an Interactive Data company
800 779-6555, www.eSignal.com
TASC-2015. The ELD filename is “_TASC_StatisticalAp-
proach.ELD.”
For more information about EasyLanguage in general,
please see http://www.tradestation.com/EL-FAQ.
A sample chart is shown in Figure 1.
This article is for informational purposes. No type of trading or
investment recommendation, advice, or strategy is being made, given,
or in any manner provided by TradeStation Securities or its affiliates.
—Doug McCrary
TradeStation Securities, Inc.
www.TradeStation.com

F eSIGNAL: MARCH 2015 TRADERS’ TIPS CODE

For this month’s Traders’ Tip, we’re providing the formula
SimpleStocTrSystem.efs based on the formula described in
John Ehlers & Ric Way’s article in this issue, “Trading System Figure 2: eSIGNAL. Here is an example of the simple stochastic system on a chart
Design: A Statistical Approach.” of the S&P 500 emini futures contract (ES).

March 2015 • Technical Analysis of Stocks & Commodities • 47

 Highest HiC = Highest.Series(Close, StocLength);
Lowest LoC = Lowest.Series(Close, StocLength);
DataSeries Stoc = (Close - LoC) / (HiC - LoC);

for(int bar = GetTradingLoopStartBar(1); bar < Bars.
Count; bar++)
{
if (IsLastPositionActive)
{
Position p = LastPosition;
if ( bar+1 - p.EntryBar >= TradeLength )
SellAtMarket( bar+1, p, “Timed” );
else
if( Low[bar] < p.EntryPrice*(1.0 - PctLoss /100d) )
SellAtMarket(bar+1, p, “Stop”);

}
Figure 3: WEALTH-LAB. This chart shows the US market bubble of the 2010s on else
a monthly chart of the S&P 500 index (^GSPC). {
if( CrossOver( bar, Stoc, Threshold ) )
BuyAtMarket( bar+1 );
}
}
}
}
F WEALTH-LAB: MARCH 2015 TRADERS’ TIPS CODE }
In their article in this issue, “Trading System Design: A Sta-
—Eugene, Wealth-Lab team
tistical Approach,” authors John Ehlers & Ric Way outline a MS123, LLC
statistically valid procedure for the successful development of www.wealth-lab.com
trading systems, providing a testbed for assessing whether the
price will increase or decrease over n bars after an event.
From our point of view, it might be optimal to prove the
conclusion regarding the robustness of the example system F NEUROSHELL TRADER:
by using a different subset of data that includes a bear mar- MARCH 2015 TRADERS’ TIPS CODE
ket, given that the in-sample period of 10 years used to opti- The simple stochastic trading system described by
mize the system on was a strong bull market (Figure 3). John Ehlers & Ric Way in their article in this issue, “Trading
The code for Wealth-Lab based on Ehlers & Way's code System Design: A Statistical Approach,” can be easily imple-
follows: mented with a few of NeuroShell Trader’s 800+ indicators.
Simply select “New Trading Strategy” from the insert menu
Wealth-Lab 6 strategy code (C#) and enter the following in the appropriate locations of the
using System;
Trading Strategy Wizard:
using System.Collections.Generic;
using System.Text; BUY LONG CONDITIONS: CrossBelow(Stoch%K(High,Low,
using System.Drawing; Close,5),30)
using WealthLab;
using WealthLab.Indicators; LONG TRAILING STOP: PriceFloor%(Trading Strategy,3.8)
SELL LONG CONDITIONS: BarsSinceFill>=X(Trading Strat-
namespace WealthLab.Strategies egy,14)
{
public class EhlersMar2015 : WealthScript
{ If you have NeuroShell Trader Professional, you can also
private StrategyParameter paramStoc; choose whether the parameters should be optimized. After
private StrategyParameter paramThresh;
private StrategyParameter paramLength; backtesting the trading strategy, use the detailed analysis but-
private StrategyParameter paramLoss; ton to view the backtest and trade-by-trade statistics for the
public EhlersMar2015() strategy.
{ You can also create another trading strategy using the cen-
paramStoc = CreateParameter(“StocLength”, 8, 1, 100, 1); ter of gravity indicator referenced in the article along with a
paramThresh = CreateParameter(“Threshold”, 0.3, 0.1, 0.9, 0.1);
paramLength = CreateParameter(“TradeLength”, 14, 1, 50, 1); one-period lag of the same indicator called the trigger. Both
paramLoss = CreateParameter(“PctLoss”, 3.8, 0.5, 15.0, 0.5); indicators are part of Ehlers’ Cybernetic Analysis add-on
}

for NeuroShell Trader.
protected override void Execute()
{ BUY LONG CONDITIONS: Center of Gravity > Center of Grav-
int StocLength = paramStoc.ValueInt, TradeLength = ity Trigger
paramStoc.ValueInt;
double Threshold = paramThresh.Value, PctLoss = SELL LONG CONDITIONS: Center of Gravity < Center of Grav-
paramLoss.Value; ity Trigger

48 • March 2015 • Technical Analysis of Stocks & Commodities

Figure 4: NEUROSHELL TRADER. This NeuroShell Trader chart displays the simple stochastic
trading system as well as a trading system based on Ehlers’ center of gravity indicator. Figure 5: AIQ. Here is the strategy’s EDS backtest summary for trading the NASDAQ
100 list of stocks over the period from 2009 through 1/13/2015.

Users of NeuroShell Trader can go to the Stocks & Com- Figure 5 shows the EDS backtest summary for trading the
modities section of the NeuroShell Trader free technical NASDAQ 100 list of stocks using the authors’ stochastic sys-
support website to download a copy of this or any previous tem over the period 2009 through 1/13/2015.
Traders’ Tips. —Richard Denning
A sample chart is shown in Figure 4. info@TradersEdgeSystems.com
for AIQ Systems
—Marge Sherald, Ward Systems Group, Inc.
301 662-7950, sales@wardsystems.com
www.neuroshell.com
F TRADERSSTUDIO: MARCH 2015
TRADERS’ TIPS CODE
The TradersStudio code for John Ehlers & Ric
F AIQ: MARCH 2015 TRADERS’ TIPS CODE Way’s article in this issue, “Trading System Design: A Statisti-
The AIQ code based on John Ehlers & Ric Way’s article cal Approach” can be found at:
in this issue, “Trading System Design: A Statistical
Approach,” is provided at: • www.TradersEdgeSystems.com/traderstips.htm
• www.TradersStudio.com → Traders Resources → Traders Tips
• www.TradersEdgeSystems.com/traderstips.htm
The following code file is provided in the download:
!TRADING SYSTEM DESIGN: A STATISTICAL APPROACH
!Author: John Ehlers, TASC March 2015 • System: EHLERS_SYSTEMS: A long-only system that uses
!Coded by: Richard Denning 1/12/2015
!www.TradersEdgeSystems.com daily data and the stochastic indicator for entries.

!STOCHASTIC TRADING SYSTEM FROM ARTICLE: Figure 6 shows an equity curve for this stochastic system
!INPUTS: trading one contract per trade of the S&P 500 full-sized fu-
StocLength is 8. tures contract from 1982 to 2014 using data from Pinnacle
Threshold is 0.3. Data Corp. Slippage & commission of $100 per round-turn
TradeLength is 14.
PctLoss is 3.8. trade were subtracted from each trade.

!SYSTEM CODE: 'TRADING SYSTEM DESIGN: A STATISTICAL APPROACH

HiC is Highresult([Close], StocLength, 0). 'Author: John Ehlers, TASC March 2015
LoC is Lowresult([Close], StocLength, 0). 'Coded by: Richard Denning 1/12/2015
Stoc is ([Close] - LoC) / (HiC - LoC). 'www.TradersEdgeSystems.com
Buy if Stoc < Threshold and valrule(Stoc >= Threshold,1).
PD is {position days}. 'Stochastic trading system from article:
PEP is {position entry price}. Sub EHLERS_SYSTEMS(StocLength, Threshold, TradeLength,
ExitLong if PD - 1 >= TradeLength or [Low] < PEP*(1-Pct- PctLoss)
Loss/100). Dim HiC As BarArray

March 2015 • Technical Analysis of Stocks & Commodities • 49

 Figure 7: NINJATRADER. This screenshot shows the SimpleStochastic strategy applied to
a daily emini S&P futures continuous chart in NinjaTrader.

Figure 6: TRADERSSTUDIO. Here is a sample equity curve trading the stochastic

system one contract per trade of the S&P 500 full-sized futures contract from 1982
menu Tools  Edit NinjaScript  Strat-
to 2014. egy from within the NinjaTrader Control
Center window and selecting the Simple-
Stochastic file.
Dim LoC As BarArray
Dim Stoc As BarArray NinjaScript uses compiled DLLs that
run native, not interpreted, which pro-
If BarNumber=FirstBar Then vides you with the highest performance
'StocLength = 8
'Threshold = .3 possible.
'TradeLength = 14 A sample chart implementing the strat-
'PctLoss = 3.8
HiC = 0
egy is shown in Figure 7.
LoC = 0 —Raymond Deux and Dave Ingram
Stoc = 0 NinjaTrader, LLC DETAIL FROM Figure 7
End If www.ninjatrader.com

HiC = Highest(Close, StocLength, 0)

LoC = Lowest(Close, StocLength, 0)
Stoc = (Close - LoC) / (HiC - LoC)
If CrossesUnder(Stoc, Threshold) Then
Buy(“LE”, 1, 0, Market, Day)
End If
If BarsSinceEntry -1>= TradeLength Then
ExitLong(“LX_time”, “”, 1, 0, Market, Day)
End If
If Low < EntryPrice*(1 - PctLoss /100) Then
ExitLong(“LX_loss”, “”, 1, 0, Market, Day)
End If
End Sub
—Richard Denning
info@TradersEdgeSystems.com
for TradersStudio
F NINJATRADER: MARCH 2015 TRADERS’ TIPS CODE
The SimpleStochastic strategy presented in John Ehlers &
Ric Way’s article in this issue, “Trading System Design: A
Statistical Approach,” has been made available for download
at www.ninjatrader.com/SC/March2015SC.zip.
Once it has been downloaded, 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 or greater.
You can review the strategy source code by selecting the
50 • March 2015 • Technical Analysis of Stocks & Commodities
F UPDATA: MARCH 2015 TRADERS’ TIPS CODE
Our Traders’ Tip for this month is based on the
article by John Ehlers & Ric Way in this issue, “Trading System
Design: A Statistical Approach.” In it, the authors develop a
statistical methodology for the predictability of an event—in
this case, the crossing of a stochastic threshold level. By offset-
ting entry times and measuring the effect this has on overall
profitability in the intervening period given price direction, a
probability distribution function can be created.
The Updata code based on the article is in the Updata Li-
brary and may be downloaded by clicking the custom menu
and system library. Those who cannot access the library due
to firewall issues may paste the code shown here into the Up-
data custom editor and save it.
A sample chart implementation is shown in Figure 8.
'AStochasticSystem
DISPLAYSTYLE 2LINES
INDICATORTYPE TOOL
COLOUR RGB(0,0,200)
COLOUR2 RGB(0,0,200)
PARAMETER “Stochastic Period” #STOCHPERIOD=14
PARAMETER “Threshold” @THRESHOLD=0.3
PARAMETER “Hold Period” #HOLDPERIOD=14
PARAMETER “Stop Loss %” @STOP=3.8
NAME “STOCHASTIC SYSTEM [“ #STOCHPERIOD “|” @
THRESHOLD “|” #HOLDPERIOD “|” @STOP “]” “”
@UPPER=0
FIGURE 8: UPDATA. Here is an example chart of the simple stochastic entry system
as applied to the cash S&P 500 index. Figure 9: AMIBROKER. Here is an AmiBroker exploration chart showing a sample
profitability distribution for the stochastic indicator crossing under 0.2 using hourly SPY
data. Note that hourly data and a significantly larger dataset produces a distribution
that more closely resembles a classic bell curve than the chart that was shown in
@LOWER=0 Ehlers & Way’s article.
@STOCH=0
@ENTRYPRICE=0
FOR #CURDATE=#STOCHPERIOD TO #LASTDATE
@UPPER=PHIGH(CLOSE,#STOCHPERIOD) tab(s) with a profitability distribution chart for each symbol
@LOWER=PLOW(CLOSE,#STOCHPERIOD)
@STOCH=(CLOSE-@LOWER)/(@UPPER-@LOWER) separately. To use the formula, type the code into the formula
'STOCHASTIC ENTRY editor and press send to analysis to perform an exploration.
IF HIST(@STOCH<@THRESHOLD,1) AND OR- As you can see from Figure 9, using more data (in this case,
DERISOPEN=0
BUY OPEN hourly) produces a smoother chart than what was presented
@ENTRYPRICE=OPEN in the article.
ENDIF
'TIME EXIT
LISTING 1
IF ORDEROPENFOR>=#HOLDPERIOD
SELL CLOSE Range = 10;
ENDIF HiC = HHV( Close, Range );
'% STOP EXIT LoC = LLV( Close, Range );
IF HIST(LOW<@ENTRYPRICE*(1-(@STOP/100)),1) Stoc = ( Close - LoC ) / ( HiC - LoC );
SELL OPEN Lookback = Range - 1;
ENDIF Event = Ref( Cross( Stoc, 0.2 ), -Lookback );
@PLOT=@UPPER PctGainRange = 3; // defines % gain range for X axis
@PLOT2=@LOWER FuturePrice = ROC( Close, Lookback );
NEXT // keep values in range
FuturePrice = Min( PctGainRange, Max( -PctGainRange, Future-
—Updata support team Price ) );
support@updata.co.uk // map range to to 0..100
www.updata.co.uk FuturePrice = Round( 100 * ( FuturePrice + PctGainRange )/
( 2 * PctGainRange ) );
PredictBin = 0;
for( i = 0; i < BarCount AND BarCount > 100; i++ )
{
if( Event[ i ] ) PredictBin[ FuturePrice[ i ] ]++;
}
F AMIBROKER: MARCH 2015 TRADERS’ TIPS CODE chartname = "Probability distribution " + Name();
In “Trading System Design: A Statistical Approach” in this XYChartSetAxis(chartname, "[%gain]", "[n]" );
issue, authors John Ehlers & Ric Way present a way to find for( i = 0; i < BarCount AND i <= 100; i++ )
out whether signals generated by a given indicator have a {
XYChartAddPoint( chartname, "",
statistical edge. ( i * 2 * PctGainRange / 100 - PctGainRange ),
Listing 1 presents AmiBroker Formula Language (AFL) PredictBin[ i ], colorGreen );
code that produces a profitability distribution chart for a simple }
statistic crossover system. One can replace the event variable
with any other system to test its statistical edge. When code is —Tomasz Janeczko, AmiBroker.com
used in AmiBroker’s exploration mode, it produces an extra www.amibroker.com

March 2015 • Technical Analysis of Stocks & Commodities • 51

 FIGURE 10: EXCEL, Event testing controls and trading controls. This shows the specification for one stochastic event definition on the left under the heading
“predictive event testing controls.”
F MICROSOFT EXCEL:
MARCH 2015 TRADERS’ TIPS CODE
In their article in this issue, “Trading System Design: A Sta-
tistical Approach,” authors John Ehlers & Ric Way show us a
statistical approach to determine if an event we can define to
a computer has any value as a future price predictor.
Once we have determined the size and shape of such an
event, we can build trading rules around the event and con-
struct a system to follow those rules.
In the article, the authors use a simple stochastic crossun-
der as the event and look ahead a number of bars to determine
a percentage change after the event.
Run this logic against 10 or more years of historical data,
accumulate the events you find as well as the percent change
values associated with the events, and you can then use a
center of gravity (weighted average) calculation to assess the
predictive power of the event. The premise here is that the
FIGURE 11: EXCEL, Predictive Event Computations. Calculations for predictive event testing and center of gravity determination can be found in the columns to
the right of the price chart.
52 • March 2015 • Technical Analysis of Stocks & Commodities
more positive the CG value, the better your event is likely to
be for trading long positions.
Figure 10 shows the specification for one such stochas-
tic event definition on the left under the heading “predictive
event testing controls.” The corresponding “event count by
price gains” chart with a marker for the calculated center of
gravity is shown under the price chart.
Controls specifying a slightly different size and shape of
our event to be used in the simplified trading system appear
under the heading “trading system controls.” A summary of
the trading results for this control set can be found in the
lower-left corner.
Calculations for predictive event testing and center of grav-
ity determination can be found in the columns to the right of
the price chart, as shown in Figure 11.
Figure 12 shows the calculations for the trading system.
These are located in columns yet farther to the right of those
shown in Figure 11.
As described in the article, select-
ing the correct combination of speci-
fications for our predictive event
can be a trial & error process. In the
spreadsheet I am providing, I have
included a rudimentary mechanism
to assist with the tedious business of
evaluating an array of event param-
eter choices to find the combination
that generates the most promising
center of gravity value. FIGURE 12: EXCEL, Trading decisions. This shows the calculations for the trading system.
Figure 13 shows this mechanism on
the PredictiveEventSce-
narioTester tab of the
workbook. Filling in the
values in blue defines the
envelope of events we
want to look at. In this
case, we are set up to look
at all stochastic lookback
lengths from eight to 18
bars; use threshold values
from 0.1 to 0.35 in steps
of 0.05; and try look-
ahead periods from five
to 18 bars, inclusive.
When you click the
run button, the VBA code FIGURE 13: EXCEL, Finding a “Good” Set of Event Parameters. On the PredictiveEventScenarioTester tab of the work-
book, I have included a rudimentary mechanism to assist with evaluating an array of event parameter choices to find the combination
behind the button cycles that generates the most promising center of gravity value.
through all possible com-
binations of these values
one at a time. The results
area keeps track of the
looping process.
The results are sorted
from highest to lowest
on the center of gravity
value, and the three con-
trol values for this “best”
setting are used to set the
CalculationsAndCharts
(Figure 10) predictive
event controls.
The TradingSystem­
Evaluator tab shown in
Figure 14 serves the same FIGURE 14: EXCEL, Finding a “Good” Set of Event Parameters (Cont’d.). The TradingSystemEvaluator tab serves
purpose for evaluating the same purpose for evaluating sets of trading system controls. Here, control values from the best equity value row are used to
sets of trading system set the CalculationsAndCharts trading system controls.
controls. Control values
from the best equity value row are used to set the Calcula- fications as being their best choice. I think one of the reasons
tionsAndCharts trading system controls. for this difference can be found in the trading summary in
Trading results for a given scenario can be seen on the the bottom left of Figure 10: Not every event/entry signal
transaction summary tab shown in Figure 15. participates in a trade. Many are ignored because a trade is
You will find that the automated event evaluator and the already in progress. So while each of these “ignored” events
trading evaluator usually come up with different event speci- contributed to a center of gravity computation, they do not
March 2015 • Technical Analysis of Stocks & Commodities • 53
 contribute independently to the equity value. Moreover, stop- • Right-click on the Excel file link (EventPredictabilityTester.
loss processing of a trade may prevent an event entry from xlsm), then
reaching the potential contribution that was recognized in the • Select “save as” or “save target as” to place a copy of the
event evaluator CG calculation. spreadsheet file on your hard drive.
The spreadsheet file for this Traders’ Tip (EventPredict- —Ron McAllister
abilityTester.xlsm) can be downloaded from www.traders. Excel and VBA programmer
com in the Traders’ Tips area. To successfully download it, rpmac_xltt@sprynet.com
follow these steps:

FIGURE 15: EXCEL, Trade Details. Trading results for a given scenario can be seen on the transaction summary tab.

PRODuCT REvIEW /
OPTIONSTRATEGIST.COM
Continued from page 46

of information and tools to make you a

better option trader.

FURTHER READiNg
Gopalakrishnan, Jayanthi [2002].
“Options Volatility With Lawrence
McMillan,” interview, Technical
Analysis of StockS & commoditieS,
Volume 20: February.
S&C Staff [2015]. “OptionStrategist.
com (Part 1),” product review, Techni-
cal Analysis of StockS & commodi-
tieS, Volume 33: February.
‡OptionStrategist (McMillan Analysis
Corp.)
‡See Editorial Resource Index

FIGURE 4: OPTION CALCULATOR 2.0. Inputs are made to the top two lines, with the result being a matrix of premium
prices for put & call strike prices and stock price combinations. If you click on any one cell of the matrix, the greeks shown
below will change. The implied window (seen as the window overlaying the lower two thirds of this screen capture) is
used to calculate implied volatilities. A series of six input rectangles are there for you to input premium prices for various
strikes depending on whether you have chosen the call or put radial in the upper left. After making the inputs, the matrix
is populated with implied volatilities and the greeks.

54 • March 2015 • Technical Analysis of Stocks & Commodities

NEW WEBSITE FOR MARKET
DATA ANALYSIS
John Ehlers, a Contributing Editor to
this magazine, has announced the release
of his new MesaSoftware.com website.
MESA Software specializes in analyzing
market data using advanced DSP tech-
niques. He takes a scientific approach in
developing filters, indicators, and trading
systems and then uses statistics to verify
performance. Ehlers’ stated mission is to
provide cutting-edge scientific tools for
traders. Among these tools are technical
papers and seminars available for free
download at the website. His MESA Pha-
sor Futures trading strategy is described
at his StockSpotter.com website.
Editor’s note: Readers will find an
article by John Ehlers & Ric Way in this
issue, “Trading System Design: A Statisti-
cal Approach,” beginning on page 28.
MesaSoftware.com, StockSpotter.com
Stock-Picking Service Adds
Option TRADING
With subscribers in 50 countries, Gorilla­
Trades is a global online subscriber
service since 1999 providing news and
professional insights into the stock mar-
ket. Stock picks are listed regularly on a
“menu” of both new and existing invest-
ments for consideration, based on sub-
scribers’ individual investment objectives
and risk tolerance. The service provides
updated stop-loss levels and upside targets
weekly. Subscribers are directed to use
the five-times-weekly subscriber portfolio
named GorillaPicks as a guideline for
investment decision-making. More than
6,000 stocks are sifted through daily to
match each of the 14 technical indicators
for potential growth. Recently, an “option
idea of the week” feature was introduced
for more aggressive investors. A 30-day
free trial is available.
GorillaTrades.com
NEW TREND SYSTEM
Trading Alchemy has released its new
Alchemy TrendCatcher System, which
includes tools for entry triggers, bigger
trend filters, and market reversal alerts.
Alchemy TrendCatcher seeks to iden-
tify market trends and displays what it
construes to be low-risk entry points. Its
self-adaptive trailing stops seek to help
minimize the initial risk while staying
with the trend for longer moves. The
built-in trend detector measures market
strength. With its new trend filter, the
trend-confirmation method seeks to help
eliminate whipsaws while filtering out
a significant amount of noise when the
market is in a nontrending, consolidating
phase. It attempts to capture a majority of
big market moves.
The system’s new market reversal alerts
generate warning signals that tell the user
when to tighten up stops as well as when to
exit all positions. The added entry triggers
confirm momentum changes, seeking to
increase the probability of entering into
the right direction of the market.
TradingAlchemy.com
collection of strategies
Bloodhound Investment Research states
its goal is to give users the tools to turn them
into their own “hedge fund manager” by
March 2015
giving them access to more than one million
ready-to-use strategies. Each of the strate-
gies are complete systems with entry, exit,
and management rules. Bloodhound allows
the user to vet the strategies on 27 years of
historical data and a set of historical metrics
to ensure the strategy will be robust going
forward. Users can choose to implement
any of the strategies via direct integration
with optionsXpress, a subsidiary of Charles
Schwab & Co. Users are also able to modify
any strategy or develop their own using a
point & click interface.
A free trial is available as well as a
discount for the professional subscription
level by using the promomotion code
“bh2015.”
BloodhoundSystem.com
PACKAGES of INDICATORS
PivotHunter.com was formed by seven
traders with more than 50 combined years
of experience in chart analysis. The indica-
tors offered by PivotHunter are designed
to discern action between price velocity
and order flow. Indicators are named af-
ter fictitious scenes with characters that
represent the unfolding chart action (for
example, three indicator packages include
sheriffs, kings, or cavalry). Elements of
analysis include money flow, velocity
checks, and a heatmap. A live charting
room is available.
PivotHunter.com
• Technical Analysis of Stocks & Commodities • 55
 FUTURES LIQUIDITY

T
rading liquidity is often over-
looked as a key technical
measurement in the analysis
and selection of commodity
futures. The following explains how to
read the futures liquidity chart pub-
lished by Technical Analysis of Stocks
& Commodities every month.
Commodity futures
The futures liquidity chart shown be-
low is intended to rank publicly traded
futures contracts in order of liquidity.
Relative contract liquidity is indicated
by the number of dots on the right-hand
side of the chart.
This liquidity ranking is produced by
multiplying contract point value times
the maximum conceivable price motion
(based on the past three years’ historical
data) times the contract’s open interest
times a factor (usually 1 to 4) for low or
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
All futures listed are weighted equally
under “contracts to trade for equal dol-
lar profit.” This is done by multiplying
contract value times the maximum pos-
sible change in price observed in the last
three-year period. Thus, all numbers in
this column have an equal dollar value.
Columns indicating percent margin
and effective percent margin provide
a helpful comparison for traders who
wish to place their margin money ef-
ficiently. The effective percent margin
is determined by dividing the margin
value ($) by the three-year price range of
contract dollar value, and then multiply-
ing by one hundred.
Stocks
Trading liquidity has a significant ef-
fect on the change in price of a secu-
rity. Theoretically, trading activity can
serve as a proxy for trading liquidity
and equals the total volume for a given
period expressed as a percentage of the
total number of shares outstanding. This
value can be thought of as the turnover
rate of a firm’s shares outstanding.

Trading Liquidity: Futures

Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity
% Margin Trade for Equal
Dollar Profit
E-Mini S&P 500 GBLX 3.8 10.2 5 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
10-Year T-Note CBOT 1.1 20.8 26 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
T-Bond CBOT 2.3 15.3 9 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Ultra T-Bond CBOT 2.5 11 5 •••••••••••••••••••••••••••••••••••••••••••••••••••
Euro FX CME 1.7 8.1 6 •••••••••••••••••••••••••••••••••••••••••••
Japanese Yen CME 2.6 4.6 3 •••••••••••••••••••••••••••••••••••••••••••
E-Mini Nasdaq 100 GBLX 2.6 6.3 5 •••••••••••••••••••••••••••••••••••••••
Corn CBOT 13.8 11.9 8 ••••••••••••••••••••••••••••••••••••••
Russell 2000 Mini ICEUS 3.8 10 4 •••••••••••••••••••••••••••••••••••
S&P 500 Index CME 3.8 10.2 1 ••••••••••••••••••••••••••••••••••
5-Year T-Note CBOT 0.6 17.4 44 •••••••••••••••••••••••••••••••
Gold COMEX 7 18.2 4 ••••••••••••••••••••••••••••••
Soybeans CBOT 9.3 11.3 5 ••••••••••••••••••••
Crude Oil WTI NYMEX 10.7 7.5 3 •••••••••••••••
Sugar #11 ICEUS 9 13 15 •••••••••••••
Gasoline RBOB NYMEX 11 6.8 2 •••••••••••
Natural Gas NYMEX 8.7 6.8 5 •••••••••••
Australian Dollar CME 2 6.1 7 •••••••••
DJIA mini-sized CBOTM 3.1 10 7 •••••••••
Heating Oil NYMEX 8.7 8.4 3 •••••••••
Wheat CBOT 12.1 15.8 9 •••••••••
E-Mini S&P Midcap GBLX 3.1 8.1 3 ••••••••
British Pound CME 1.4 10.4 15 ••••••
2-Year T-Note CBOT 0.1 23.2 144 •••••
Canadian Dollar CME 1.3 5.2 9 •••••
Cotton #2 ICEUS 8.6 12.4 9 •••••
Soybean Meal CBOT 8.3 11.8 8 •••••
Soybean Oil CBOT 8.6 11.3 13 ••••
Coffee ICEUS 8 20.8 8 •••
Nasdaq 100 CME 2.6 6.3 1 •••
Swiss Franc CME 1.5 10.7 9 ••• CBOT Chicago Board of Trade, Division of CME
U.S. Dollar Index ICEUS 1.4 8.7 12 ••• CFE CBOE Futures Exchange
CBOE S&P 500 VIX CFE 6.2 14.7 22 •• CME Chicago Mercantile Exchange
Crude Oil Brent (F) NYMEX 10.3 6.2 2 ••
COMEX Commodity Exchange, Inc. CME Group
Eurodollar CME 0.1 53 296 ••
GBLX Chicago Mercantile Exchange - Globex
Hard Red Wheat KCBT 8.7 13.4 10 ••
ICE-EU Intercontinental Exchange-Futures - Europe
Lean Hogs CME 4.9 5.7 8 ••
Live Cattle CME 2.2 8.3 12 •• ICE-US Intercontinental Exchange-Futures - US
Mexican Peso CME 6.5 28.4 24 •• KCBT Kansas City Board of Trade
Cocoa ICEUS 6.4 20.8 21 • MGEX Minneapolis Grain Exchange
DJIA CBOT 3.1 10.2 3 • NYMEX New York Mercantile Exchange
Palladium NYMEX 6.7 23.4 8 •
Spring Wheat MGEX 11 14.5 8 •
30-Day Fed Funds CBOT 0 89.4 823
Canola WCE 5.9 11.5 40 1503
Trading Liquidity: Futures is a reference chart for speculators. It compares markets “Relative Contract Liquidity” places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi-
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. “Relative
when compared to others in the same column. Contract Liquidity” is the number of contracts to trade times total open interest times a
The number in the “Contracts to Trade for Equal Dollar Profit” column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return In volume
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price 1 or exp –2
In 5000
Excursion).

56 • March 2015 • Technical Analysis of Stocks & Commodities

 Free Information From Advertisers
Advertiser Page Advertiser Page How to reach us
Brokerages Software For questions, address changes, or
Fidelity 03 PivotHunter 13 ordering information for Technical
Fidelity.com/TryATP PivotHunter.com Analysis of Stocks & Commodities
Interactive Brokers 05 Vectorvest 09 magazine and its online publications:
ibkr.com/iwantmore www.vectorvest.com/SC Toll-free 800 832-4642
TDAmeritrade 64 Ward Systems 08 (800-Technical) or:
TDAmeritrade.com/thinkorswim www.NeuroShell.com 206 938-0570.
LEGAL Trading Systems
A.B. Data 07 NinjaTrader 39 Email us at:
http://www.nymextassettlement.com NinjaTrader.com/Commissions circ@traders.com.
Publications Trading Concepts, Inc. 38 Or write to us at:
Stocks & Commodities 02, 63 www.OptionsMD.com/IncomeRx 4757 California Ave. SW,
Store.Traders.com, Traders.com Websites
Seattle, WA 98116-4499.
Software StockCharts.com 37
Jurik Research 19 www.StockCharts.com/sales Do your magazines arrive tattered
jurikres.com, tinyurl.com/jurik-online Stocks & Commodities 02, 63 and torn? Polybagging of magazines
NinjaTrader 39 Store.Traders.com, Traders.com (domestic delivery) is available for
NinjaTrader.com/Commissions $6/year.
Single back issues from the current
year (subject to availability) are $8
Editorial Resource Index prepaid. Subscribers have access to
Microsoft Excel . . . . . . . . . . . . . . . . . 20 AIQ . . . . . . . . . . . . . . . . . . . . . . . . 49 our digital archive of all past articles.
QST Desktop (Quick Screen Trading) . . . . . . 23 TradersStudio . . . . . . . . . . . . . . . . . . 49 Individual articles can be purchased
Intrendstocks.com . . . . . . . . . . . . . . . 25 NinjaTrader . . . . . . . . . . . . . . . . . . . 50 from the Online Store at our website,
TradeStation . . . . . . . . . . . . . . . . . . . 29 updata . . . . . . . . . . . . . . . . . . . . . . 50
Traders.com.
StockSpotter.com . . . . . . . . . . . . . . . 31 AmiBroker . . . . . . . . . . . . . . . . . . . . 51 Editorial feedback
MESASoftware.com . . . . . . . . . . . . . . 31 www.MetaQuotes.net . . . . . . . . . . . . . 60 We always want to know more about
StockNewsSentiment.com (Dragonfish LLC) . 34 the needs of our readers: What kinds of
www.BuyDontHold.com . . . . . . . . . . . . 36 articles would you like to see more of?
Tom’s Trading Room, LLC . . . . . . . . . . . 42 What do you find useful? Address your
OptionStrategist.com . . . . . . . . . . . . . 44 written questions and comments to edi-
eSignal (Interactive Data) . . . . . . . . . . . . . 47 tor@traders.com or to: Editor, Stocks
Wealth-Lab . . . . . . . . . . . . . . . . . . . 48
& Commodities, 4757 California Ave
SW, Seattle, WA 98116-4499. Sorry, we
Neuroshell Trader (Ward Systems Group) . . . 48
cannot perform research on individual
financial questions not related to this
For more information about our advertisers, go to Traders.com/reader where magazine and we cannot respond to
you will find the alphabetized list of this month’s advertisers. For reference, the all mail. Letters or emails containing
list is also printed above along with the corresponding page number for each ad. questions or information that other
Just follow the simple directions below and the advertisers will get your requests readers may enjoy or that relate to
the same day! our articles or technical analysis top-
ics may be published in our Letters to
Step 1: Go to Traders.com/reader and
S&C column.
scroll through the list of our current month’s
advertisers. Join us on Facebook
at www.facebook.com/
Click the box for each advertiser you’d like
STOCKSandCOMMODITIES
to hear from. At the bottom of the list, click
Continue when finished.
Follow us on Twitter
Step 2: Fill out your contact information @STOCKSandCOMM
and click Send Request. Your request will
then be sent to the advertisers you selected. To receive information on the products and services listed in the Editorial
and Advertisers’ Indexes, go to: Traders.com/reader/. These indexes are
And that’s it! published solely as a convenience. While every effort is made to maintain
accuracy, last-minute changes may result in omissions or errors.

March 2015 • Technical Analysis of Stocks & Commodities • 57

 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 ma-
jor 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 market-
place to help keep readers up to date on new or recent book offerings.
Doug Kass On The
Market: A Life On
TheStreet (44 pag-
es, $29.95 hardcov-
er, 2014, ISBN 978-
1-118-89298-5) by
Douglas A. Kass
with a foreword by
James J. Cramer,
published by Wiley.
This book offers investment advice and
guidance from this renowned trader. Kass
distills his years of experience as a hedge
fund manager and infamous short seller
to share the theory, technique, and intu-
ition that built his reputation and his port-
folio. Anecdotes about interactions with
Wall Street’s most famous names, includ-
ing Warren Buffett, Jim Cramer, and Leon
Cooperman, highlight tricks of the trade,
value investing insight, and thoughts on
shorting the market. Kass is a CNBC regu-
lar and was a 2013 Buffett Bear roundtable
participant. In this book, Kass lists things
to know when evaluating a possible long or
short investment, and things you may not
be doing to optimize your portfolio. He also
describes how he thinks a stock should be
properly shorted and discusses what fund
managers don’t often discuss.
www.wiley.com
No One Loves Your Money Like You
Do: The Ultimate Retirement Planning
Guide For Business Owners And Private
Practitioners (256 pages, $25 softcov-
er, 2014, 978-0-071-83936-5) by James
Jackson, published
by McGraw-Hill. This
book provides retire-
ment investing ad-
vice for high-net-
worth professionals
such as physicians,
attorneys, and entre-
preneurs, who may
enjoy a good income
and nest egg but who may have large, illiq-
uid assets in the form of their practice as
well as possible partnership agreements
to navigate. Jackson distills his decades of
experience as a Certified Financial Planner
(previously a practicing dentist) into practi-
cal, friendly advice for those who need a
hand in planning their retirement.
mhprofessional.com
The Intelligent Option Investor: Applying
Value Investing To The World Of Options
(304 pages, $45 hardcover, 2014, ISBN
9780071833653) by
E r i k Ko b aya s h i -
Solomon, published
by McGraw-Hill Pro-
fessional. A com-
pany's worth is pre-
cisely the amount of
wealth it will generate
on behalf of its own-
ers over its econom-
ic life. Using this principle as a touchstone,
Kobayashi-Solomon shows that in the vast
majority of cases, valuing a stock requires
the answer to only three questions: How
fast will revenues grow? How efficiently
will the firm translate revenues into profits?
What proportion of the profits needs to be
reinvested in the short term, and how much
will those investments help owners in the
medium term? Kobayashi-Solomon is the
founder and principal of IOI LLC and the
director of research for YCharts Inc. Previ-
ously, he served as a market strategist for
Morningstar and as co-editor of the Morn-
ingstar OptionInvestor newsletter. In addi-
tion to publishing sector and stock-specif-
ic reports for YCharts, he has expertise in
corporate valuation, option investing strate-
gies, and risk-control issues.
mhprofessional.com
Dual Momentum Investing: An Innovative
Strategy For Higher Returns With Lower
Risk (216 pages, $50 hardcover, Novem-
ber 2014, ISBN 978-0071849449) by Gary
Antonacci, published by McGraw-Hill Pro-
fessional. Dual Momentum Investing de-
tails the author’s own momentum invest-
ing method, which
combines US stock,
non-US stock, and
aggregate bond in-
dexes into a formula
designed to increase
profits and lower risk.
The model he pres-
ents combines rela-
tive-strength momen-
tum and absolute momentum to try to
take advantage of intramarket trends while
avoiding large drawdowns. His methodolo-
gy, which he supports with research, is de-
signed to pick up on major changes in rel-
ative strength and market trend. The book
describes the various forms of price mo-
mentum and why they work. Antonacci has
expertise in modern portfolio theory and
optimization. In 1990, he founded Portfolio
Management Consultants, which advises
private and institutional investors on asset
allocation, portfolio optimization, and ad-
vanced momentum strategies.
http://dualmomentum.net,
http://mhprofessional.com
Mystifying Square, Divine Proportions: Na-
ture’s Black Box (276 pages, $150 ebook,
November 2015, ISBN 9781742984827)
by Pauline Novak-
Reich, published by
Port Campbell Press.
This volume traces
W.D. Gann’s “ time
factor” and “law of vi-
bration” back to the
Chaldeans of 3000
BCE Sumer, whose
principal aspiration
was to understand the motion of time. They
divided time into years, months, weeks,
days, hours, minutes, and seconds and de-
vised calendars that helped them predict,
and therefore survive, their two rivers’ rav-
aging floods. Inadvertently, their findings
also solved the mystery behind the ups
and downs of money markets. The square
of 9 is a matrix embodying nature’s cosmic
clock. Pauline Novak-Reich takes the read-
er through ancient math, sacred geometry,
and lore, demonstrating the achievements
of people who lived in tandem with nature.
http://www.portcampbellpress.com.au/

58 • March 2015 • Technical Analysis of Stocks & Commodities

 Advisory Services Brokerages trading systems

Range or Trend? GlobalFutures.com — Precise entries and exits —

Know What’s Coming! www.GoldenTrifecta.com
RangeOrTrend.com Check us out! “Closest thing to the Holy Grail”

Beat The Market! EDUCATIONAL SERVICES

Sector Rotation and Market Timing.
Buy stocks with high relative strength
Free weekly newsletter!
Wallstreetwindow.com
got income?
No Iron Condors • No Credit Spreads
$100M WORTH OF ADVICE www.ConsistentOptionsIncome.com

99 % Success Rate For 6 Yrs Self-Adaptive

Trading Strategies

StockOptionsGuru.com Proprietary Research

TREND FOLLOWING
www.OxfordSTRAT.com
Massive Returns All Markets
Yes, You Can Cash In On Chaos! Certified
Chaos Traders Courses teach you how. trading systems Free Video/Newsletter
Learn to earn at http://moneytide.com?r=s
EMini MoonTide Hotline up 155 months in a row www.trendfollowing.com/go
http://daytradingforecasts.com?r=s www.QuantStrategyBank.com
Easy to trade rule-based strategy
For Emini S&P 500 or SPY ETF A proven automated trading system
HOT in 2014 — up $66,264 or 264% in ES, TF, YM, NQ
732-696-2355
www.tradingmarkettechnicals.com
TRADERS'
RESOURCE

TOP 10 VIEWED ONLINE TRADING SERVICES

LINKS
You can find a wealth of screening, articles, discussion forums, Product Company
information on the Internet online support, and more. 1. FreeStockCharts.com Worden Brothers, Inc.
for nearly any subject imag-
inable, including investing, Traders’ Resource 2. interactivebrokers.com Interactive Brokers
trading, and the financial at traders.com 3. ChartPattern.com ChartPattern.com
markets. You can even find In addition to the online trading services
4. StockCharts.com StockCharts.com, Inc.
a good amount on technical analysis. listing at Traders.com, you’ll also find
We contacted companies that offer ser- listings of other trading-related products 5. Working-Money.com Technical Analysis, Inc.
vices to traders over the Internet as well and services such as brokerages, data 6. ablesys.com AbleSys Corporation
as financial website developers and asked services, courses and seminars, soft-
them to fill out an online survey form to ware, publications, trading systems, and 7. Traders.com Advantage Technical Analysis, Inc.
describe their Internet site. At our website more. We hope this will help you learn 8. eSignal Learning eSignal / Interactive Data
in the Traders’ Resource area of Traders. about products to help in your trading
9. eSignal eSignal / Interactive Data
com, you’ll find a database of the data we endeavors.
collected. Just click on the Traders’ Resource 10. QCharts eSignal / Interactive Data
The listed online services may offer link from Traders.com and follow the
These are the 10 online trading services viewed most often on the
charting, price quotes, and financial news online trading services category link, or Traders’ Resource website, where each company is listed in order
and information; others offer a more special- use the search feature to find products or of clicks received. This is not an editorial rating or ranking. For
ized service that may be useful to investors services with specific attributes in this or more information on specific products and services, try checking
and traders. Features may include stock other categories. 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.

March 2015 • Technical Analysis of Stocks & Commodities • 59

 AT THE CLOSE
Continued from page 62
overall direction of price movement and can be ap-
plied to charts of any time frame. Generally, when
the tendency and pressure of a market is to the upside,
the market will be higher than the SMA. The 90-period
SMA is a great technical analysis tool when it comes
to gauging the overall price movement. If the market
moves above it on a daily chart, you would look for

www.metaquotes.net
a strategic entry point that is in line with this type of
price movement.
Once you are confident of the direction of the FIGURE 1: GOING SHORT. A bearish candle opened above but closed below the SMA(30). The following
market, you need to employ the proper entry tactic day, a short entry was made.
to play the market. For part-time traders, it’s good
to move to a higher time frame chart even though
the higher time frame chart may generate fewer
trading signals.

Steps in using the strategy

Step 1: Glance at your chart and identify the supply
& demand zones. These are areas that price has tested
and retested at least three times in the past. The “smart
money” generally pays attention to these zones. They
watch these levels and react to them.

Step 2: Follow only the line of least resistance. This

will stack the odds in your favor and will increase the
probability of your survival. For example, in a bear FIGURE 2: BUYING THE BULLISH USDCAD. A trigger candle opened below the SMA(30) and later closed
market, you would orient yourself with the bears, above it. On the following day, a long position was opened. You can see that a demand zone has been marked
because that would be the line of least resistance. below the entry scene. The target was hit on the third day.

Step 3: Be aware of the factors that contribute to reli-

able signals and how to take advantage of those signals. You also
need to limit losses with stops, since trades can move against you.
It is important that you not overcomplicate things when looking
for entry signals. Since you’re trading part time, your objective
should be to spend less time analyzing the markets.
signal. But when a bearish candle with shadows opens above the
shorter SMA and closes below it, then I’ll pay attention to it.
Instruments: If you trade the currency markets, you can sift through
30 pairs and crosses to find reliable signals. I recommended trading
pairs and crosses with a spread of 15 pips or less.

Details of the strategy
Strategy type: Trend-following Interpretation of formation
Suitability: Part-time traders of indicators: A bull market is
Time horizon: Daily charts identified when the 30-period
Indicator 1: 30-period SMA SMA is above the 90-period
Indicator 2: 90-period SMA SMA. The logic is reversed
for a bear market.
Long entry: In a bull market, when the price has gone below the
30-period SMA, you would need to wait for price. (I use candle-
stick charts, so I wait for a candle to close above the SMA before
going long.) This candle must be of considerable length, but not
too long. I look for a bullish engulfing candle without shadows,
commonly referred to as marubozu. If it opens below the SMA
(30) and closes above it, I’ll ignore the signal. But when a bullish
candle with shadows opens below the shorter SMA and closes
above it, I’ll pay attention to the signal.
Short entry: In a bear market, when the price has moved above
the SMA(30), you would need to wait for a candle to close below
the SMA(30) before going short. Again, this candle must be of
considerable length. For example, when a bearish marubozu candle
opens above the shorter SMA and closes below it, I’ll ignore the
60 • March 2015 • Technical Analysis of Stocks & Commodities
Stop-loss: When going long, put a stop at the low of the trigger
candle. Conversely, when going short, put a stop at the high of
the trigger candle.
Take profit: Set an initial target for each trade. If you’re trading
forex, then set it at 300 pips. Since this is not a short-term trading
system, you would not need to go for small profits. In some cases,
some moves may be significant enough, giving you a nice gain. It
is best to leave an open position until an exit condition is met.
Exit rule: Make use of optimal breakeven and trailing stops.
This exit rule takes you out of an unfavorable position. You
can also adapt it to make you stay in a risk-free profitable trade
while you run your gains.
Some recent trades
To help you better understand this trading method, I
have provided some examples. The SMA(30) is the
blue line and the SMA(90) is the green line. I have
identified the supply & demand zones with the two
horizontal lines. The red vertical line on the left shows where
I took a signal, which is placed on the candle that serves as a
trigger. The red vertical line on the right shows where I made an
exit. I didn’t consider spreads in any of these examples.
 AT THE CLOSE
Example 1
On November 14, 2011, a bearish candle opened
above but closed below the SMA(30) on the daily
chart of the EURUSD (Figure 1). The following day,
a short entry was made. The supply zone is marked
above this candle by two parallel horizontal red lines.
Some candles which preceded this trigger candle had
repeatedly tested this area.
Instrument: EURUSD Take profit: 1.3300
FIGURE 3. CAPITALIZING ON THE BEARISH EURAUD. In early November 2011, the SMA(30) crossed
Order: Sell Exit date: 11/25/2011
below the SMA(90). About 10 days later, a bearish candle triggered a short signal and the EURAUD was
Entry date: 11/15/2011 Exit price: 1.3300 sold short on the following day.
Entry price: 1.3600 Status: Closed
Stop-loss: 1.3792 Profit/loss: 300 pips
Trailing stop: 1.3450

Example 2
On September 19, 2011, on the daily chart of the US-
DCAD, a trigger candle opened below the SMA(30)
and later closed above it (Figure 2). On the following
day, I opened a long position. I identified a demand
zone below the entry point. The target was hit on
the third day.
Instrument: USDCAD Take profit: 1.0200
Order: Buy Exit date: 9/22/2011
Entry date: 9/20/2011 Exit price: 1.0200
Entry price: 0.9900 Status: Closed
Stop-loss: 0.9805 Profit/loss: 300 pips FIGURE 4: TAKING A LOSS ON THE NZDUSD. A trigger candle was formed on May 20, 2011 and a long
Trailing stop: 1.0050
trade was opened on the following day. The market reversed and hit the stop-loss before it went in the
Example 3 expected direction.
In early November 2011, the SMA(30) crossed be-
low the SMA(90) on the daily chart of the EURAUD (Figure Conclusion
3). More than 10 days later, a bearish candle triggered a short Trading involves making swift decisions. The minute
signal and I sold short the EURAUD on the following day. The you start hesitating, you overanalyze and are unable
supply zone is well above the entry point, and that suggested to place your trades at the right time. The sooner
a strong short signal. you see a good signal on your chart, the sooner you
Instrument: EURAUD Take profit: 1.2950 should be able to react and open a position. The more
Order: Sell Exit date: 12/21/2011 complicated you make a trading signal, the more analysis you
Entry date: 11/30/2011 Exit price: 1.0200 would need to do before you can open a position.
Entry price: 1.3250 Status: Closed To emerge as a consistently surviving trader, you need to put
Stop-loss: 1.3469 Profit/loss: 300 pips
your investments to good use. You need to constantly assess
Trailing stop: 1.3100
data, analyze it, and do something sensible out of that. In the
Example 4 end, you are responsible for your decisions, and the more time
There are times when this strategy may not work, in which you spend doing this, the more competent you will become. The
case you’ll have to honor the stop-loss and never run the loss strategy I have described here is simple and worth trying.
beyond your initial stop. A trigger candle was formed on May
20, 2011 on the daily chart of NZDUSD (Figure 4), and I opened Azeez Mustapha is a professional forex trader, an analyst at
a long trade the following day. The market reversed and hit the instaforex, a blogger at ADVFN.com, and a freelance author.
stop-loss before it went in the expected direction. If the stop His articles have been published at itulglobalforex.blogspot.
was wider I may not have been stopped out and instead would com, and in TRADERS’ magazine. He can be reached via email
have profited handsomely. But as a matter of discipline, never at atazeez.mustapha@analytics.instaforex.com.
widen your stop, because a reversal can be the beginning of a
long-term move in the opposite direction. Instead, take your Further reading
loss and look forward to the next trade. Mustapha, Azeez [2014]. “Beating The Currency Markets,”
Instrument: NZDUSD Take profit: 0.8230 Technical Analysis of Stocks & Commodities, Volume
Order: Buy Exit date: 5/23/2011 31: September.
Entry date: 5/23/2011 Exit price: 0.7904 [2014]. “Recovering Your Fortune,” Technical Analysis
Entry price: 0.7930 Status: Closed of Stocks & Commodities, Volume 32: June.
Stop loss: 0.7904 Profit/loss: -26 pips ‡Metaquotes.net
Trailing stop: N/A

March 2015 • Technical Analysis of Stocks & Commodities • 61

 AT THE CLOSE
The strategy and
the market dynamics
The strategy I am going to discuss is
one I have applied to the forex mar-
kets. It requires charts of a time frame
higher than one or 30 minutes since
it is designed for those who trade on
a part-time basis. You’ll notice I use
supply & demand zones in this system.
The concept of supply & demand zones
may be unfamiliar to you, but it’s not
necessary to know it to make trading
decisions. The zones are merely guide-
lines that you will be able to visually
identify on a chart.
Part-time traders should examine ma-
jor moves and conscientiously anticipate
high-probability trades so they can ben-
efit from those moves. The various price
zones may be used as a compass to assist
you in locating high-probability signals
and exit areas. Perceiving the overall
direction of the market is invaluable.
For example, in a northbound market,
if you had entered a long position at
the previous peak you would be ahead.
Similarly, entering a short position at the
previous trough of a southbound market
will put you ahead.
Don’t Quit Just Yet Whenever a consolidation zone ma-

Play The Markets

terializes, it’s a good idea to stay out of
the markets. This is also true when a
countertrend move occurs. One of the

And Keep Your Day Job

earliest signals of a countertrend move
is the violation of a crucial price zone.
When that happens, it’s an indication
that the market may reverse or it could
Not ready to be a full-time trader? Here’s a high-probability, part-time trading strategy result in a state of price equilibrium.
that will help you master the markets before you commit to it full time. Although this is nothing unusual, it is

To
necessary for you to be confident about
be a winning trader, you need to master a discrete edge. But how do you gain that the general direction of price moves.
edge, especially if you are a part-time trader? Whenever you analyze the markets Of course, not all positions would go
objectively, each trade you make will be of some benefit. Some of the most compe- in the forecasted direction, but having
tent analysts are able to pinpoint winning signals constantly and control risk. Your a system that requires you to spend
ability to sight winning conditions is what will make a world of difference. a short period of time analyzing and
making decisions is something well
Can you trade and keep your day job? suited for the part-time trader.
Some traders — maybe you’re one of them — keep their jobs while using trading systems
WELDER: PHOTOSTOCK10/PLAN POLE: WELF AARON/COLLAGE: nikki morr

that allow them to trade on a part-time basis. Such traders would not use short-term strategies, Chaotic hullabaloo
since that would require that they stay glued to their screen most of the day. The trading The simple moving average (SMA)
systems that are well suited to part-time traders are usually longer term in nature. sometimes gets distorted because of er-
Even those who have transitioned to trading full time have realized that they do not ratic data. This would normally indicate
necessarily have to spend more time trading than when they were trading part time. True, that the sellers are dominant, but that
there are part-time traders who make as much money as full-time traders; in fact, some could quickly change. You need to be
even make more than full-time traders. In addition, some traders’ mindsets prohibit them aware of such erratic movements in data
from watching their computer screen all day long since they may go livid watching their so as not to be caught unaware.
fortunes contract and expand. The SMA is useful in gauging the

by Azeez Mustapha Continued on page 60

62 • March 2015 • Technical Analysis of Stocks & Commodities

 Subscribe Or Renew Today!
Now a subscription to Technical Analysis of  Stocks & Commodities magazine
gets you so much more than just a magazine:

• Full access to our Digital Edition

The complete magazine as a PDF
you can download.

• Full access to our Digital Archives

That’s 30 years’ worth of content!

• Complete access to Working Money

The information you need to invest
smartly and successfully.

• Access to Traders.com Advantage

Ideas, insights, evaluations, tips
and techniques that can help you
trade smarter.

8999
1 year...................
$

2 years.............. 149
$ 99

3 years.............. 199
$ 99

Or try our best value subscription: All for only

PROFESSIONAL TRADERS’ STARTER KIT
5-year subscription to S&C magazine, Working Money and Traders.com
Advantage, access to the digital edition and our entire 30-year archive
PLUS a free* book, Charting The Stock Market: The Wyckoff Method, all for a 5-year
for a price that saves you $150 off the year-by-year price! subscription
*Shipping & handling charges apply for foreign orders.

Visit www.Traders.com to find out more!

Email: Circ@Traders.com • Phone: 206-938-0570 • Toll free: 1-800-832-4642 • Fax: 206-938-1307
Join us on Facebook at www.facebook.com/STOCKSandCOMMODITIES Follow us on Twitter @STOCKSandCOMM
 Featuring

Get into futures.

No DeLorean necessary.
Learn from our veteran futures professionals.
Have the confidence to take on futures with thinkorswim. Explore
strategies by practicing with virtual paperMoney.® Assess portfolio
risk in real time relative to indexes. And get access to real-time
information on commodity and futures markets right from the pit.
So you can get into futures, minus the flaming tire tracks.

Open an account with TD Ameritrade at

tdameritrade.com/thinkorswim

Futures and futures options trading is speculative and is not suitable for all investors. Futures accounts are not protected by the Securities
Investor Protection Corporation (SIPC). Trading privileges subject to review and approval. Not all clients will qualify. paperMoney® application
for educational purposes only. TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP
Company, Inc. and The Toronto-Dominion Bank. © 2015 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.