Traders 2012 01

Interview: Anton Kreil Million Dollar Trader Reveals Trading Secrets
January 2012
What Type of Trader

Are You? Trading to Learn vs. Trading to Earn
Two Incompatible Investment Dogmas?
Breakout Trading
Trading vs. Investing
Intraday Strategy for Experienced Traders How to Understand Basic Market Structure
Smart Traders Edge
TRADERS EDITORIAL
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It is very important for traders to continuously adapt to market conditions in order to survive in the long run. As in nature, the three main principles of evolution are Competition, Adaptation and Natural Selection. Depending on the type, number and behaviour of market participants, markets are more or less efficient over time. Professor Andrew Lo established and promoted the Adaptive Markets Hypothesis (AMH) in researching Behavioural Finance. AMH says that it is not unusual for market efficiency to diminish at times. This usually happens when there is high insecurity, and the market needs some time to collect new information before prices properly mirror the changed situation. However, this uncertainty can offer high rewards to traders who are willing to take risks, especially in the short-term. Above all, AMH as well as evolution itself teaches us something even more important: Survival is the utmost priority! Therefore, not only the markets, but also the trading of each and every individual market participant are part of an evolutionary process. Without a professional trading plan and conservative risk management, there is no chance of long-term survival in such an ever changing environment. Gaining insight of the approach of a successful professional can also be very useful, so we think you will enjoy the interview with former Goldman Sachs retail trader Anton Kreil. He talks about the wild days around the turn of the millennium and he calls a spade a spade. Carefully read through the probably longest TRADERS interview ever, and learn as much as you can. Maybe his experience can help you to get even better in the never-ending evolution of trading. Good Trading
Trading Is Evolution
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Lothar Albert
01/2012 www.tradersonline-mag.com
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TRADERS CONTENT
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COVERSTORY
Trading vs. Investing If you want to invest money, there are two possibilities: trading or investing. But what does that mean and above all which is better? To give you a detailed overview of these two essential trading methods David Pieper reveals their differences as well as their advantages and disadvantages.
01/2012 January
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INSIGHTS Are you Ready for Change?
STRATEGIES
Development of a Swing Trading Strategy Part 5 Analysis of Further Exit Methods Breakout Strategy For Aggressive Day Traders How to Implement Options Strategies Correctly Bull Call Spread and Bear Put Spread Part 2 Morning and Evening Star Pattern Trading Short-term Strong Trend Reversal Signal
INSIGHTS
Trading: Myths and Facts Part 4 We Are only Humans One Thing Leads to Another Part 2 Sector Rotation
COVERSTORY Trading vs. Investing
BASICS
Smart Traders Edge Basic Market Structure Point & Figure Charts Part 3 Discover the benefits of this Exotic Charting Technique Proper Management of Money and Risk Basic Risk Control Methods Monest Value Indicator Part 3 A New Breed of Oscillator
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STRATEGIES Morning and Evening Star
Are You Ready for Change? What to Do when You Are Tired, Frustrated, and Angry The Dollars Reserve Currency Status Not Under Serious Threat What Type of Trader Are You? Are You Trading to Learn or Are You Trading to Earn?
TOOLS
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PEOPLE Anton Kreil
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STRATEGIES Breakout Strategy
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BASICS Smart Traders Edge
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Anton Kreil Million Dollar Trader Reveals Trading Secrets
TRADERS INFO
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TRADERS media GmbH Barbarastrasse 31, D-97074 Wuerzburg +49 (0) 9 31 4 52 26-0 +49 (0) 9 31 4 52 26-13 info@traders-mag.com Lothar Albert www.traders-mag.com; www.tradersonline-mag.com abo@traders-mag.com Tel: +49 (0) 931 45226-15 Barbarastrasse 31, 97074 Wuerzburg Lothar Albert Prof. Dr. Guenther Dahlmann-Resing, Corinne Endrich, Marko Graenitz, Theresa Hussenoeder, Sandra Kahle, Nadine von Malek, Rodman Moore, Stefan Rauch, Bjoern Sommersacher, Doris Schuster, Tina Wagemann, Sarina Wiederer Tillie Allison, Bert Antonik, Mustapha Azeez, Michael Derks, Dirk van Dycke, Faik Giese, Keyur Panchal, Scott McCormick, David Pieper, Adedoyin Sorounmu, Brandon Tristan, Paul Wallace, Detlef Wormstall www.photocase.de, www.fotolia.com www.captimizer.de www.esignal.com www.metaquotes.net www.tradesignalonline.com www.tradestation.com 1612-9415
The information in TRADERS is intended for educational purposes only. It is not meant to recommend, promote or in any way imply the effectiveness of any trading system, strategy or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results.
TRADERS media GmbH is a financial markets publisher specialising in education and continuing education in the field of trading and securities markets. TRADERS media was founded in April 2004 and publishes the trading magazine TRADERS in the English (digital), French (digital) and German (print) languages monthly. TRADERS magazine was founded in 2001 by market mavericks Lothar Albert and Allison Ellis. Lothar Albert is CEO of TRADERS media GmbH and chief editor of TRADERS magazine. Further TRADERS editions will follow focusing on Asia (Singapore), India and Russia and coming soon in the very near future, an edition for Latin America in Spanish. TRADERS was awarded the title of Worlds Best Magazine for Traders by Trade2Win, an international community of traders four years in a row, from 2004 through 2007. TRADERS is unique because we do not offer advice or recommendations on what to trade. This makes our content markedly different from other market magazines. We are not interested in giving people specific buy and sell recommendations, but rather focus on teaching the basics of trading from the beginner to the professional levels. Our magazine has established itself as a source for information and communication for elite traders in Europe and around the world. Current information about technical, mathematical and psychological aspects of the markets is discussed in professional articles and interviews. Each issue contains articles about trading strategies (for basic, intermediate, and advanced traders), risk management, technology for traders, business issues for traders, book and website reviews, and much more! Still today, the trader-elite are interested in professional and current trading knowledge and experience. Dedicated traders have no need for buy and sell recommendations. Trading pros make their decisions with self-confidence and are self-sufficient. These people know that trading can be profitable in both bull and bear markets. The question is what markets, tools and strategies lead to success? TRADERS magazine addresses this question every month in multiple languages.
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TRADERS COVERSTORY
Two Incompatible Investment Dogmas?
Trading vs. Investing

Whether you are a business student attending a lecture on capital markets or a customer sitting across from an investment adviser what you are told again and again is that you should use your capital to make long-term investments. The magic word is buy and hold. By the same token, it is especially since the advent of the Internet and low-cost trading platforms that it has been obvious to everyone that short-term trading in securities may be much more lucrative not least because volatility has increased and transaction costs have fallen. Where exactly are the differences between trading and investing and what are the benefits and drawbacks of these approaches? You can learn about this and find out more if you read the following article.
The Investment Horizon as the Dividing Line between Investors and Traders The most important distinguishing feature between investors and traders is their investment horizon. Let us look first at the most important representatives of the traders camp. So-called scalpers trade extremely short periods of time from a few seconds to minutes, trying to benefit from the movements in the minute or tick chart. Day traders have a horizon of half an hour to a maximum of one day while swing traders are interested in larger movements (swings) that may continue from several days to a few weeks. Medium-term oriented market players called position traders generally stay in the market for several weeks or
even months while the investment horizon of trend followers may be several months to several years. As a rule, the investment horizon of a regular investor or a buy-and hold investor is in the neighbourhood of several years and may even be several decades. Warren Buffett, arguably the most famous representative of this approach at the moment, describes his investment horizon as follows: When we own portions of outstanding businesses with outstanding management, our favourite holding period is forever. The following conclusion may be drawn from this: If an investor is convinced of his investment, he is also prepared to hold it for several years, in fact decades even if things are not going his way.
TRADERS TRADERS COVERSTORY
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Fundamental Analysis the Tool for Investors The different investment horizons of the two approaches are also reflected in the choice of the analytical tool. Here two sides that could not be more different are pitted against one another: technical and fundamental analysis. Long-term investors rely on fundamental factors when it comes to tracking down attractive investment opportunities. Using various models, the fair value of an investment is calculated here. The next step is for this to be compared to the price traded on the capital market. The difference between the market value and the model value indicates whether the security analysed is being undervalued or overvalued. To quote Warren Buffett: It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price. So fundamental analysis assumes that the current mispricing of a security will be corrected sooner or later, causing the security to return to its fair value. The problem here even when using the correct parameters is that the period during which the security or the market returns to the level considered fair may be very long and that high (book) losses may originate intermittently. Figure 2 shows the long-term development of the U.S. stock market and its major influencing factor corporate profits. Both time series were adjusted for inflation and are expressed logarithmically. Technical Analysis People, Not Models Move Prices Unlike investors, traders exclusively use technical analysis to find buy or sell signals. The philosophy of this approach can be described on the basis of the following fundamental assumptions: Assumption 1: All the available information is already included in the price so that mispricing a security can be ruled out. This was described by trading icon Paul Tudor Jones in the following words: At the end of the day, your job is to buy what goes up and to sell what goes down, so really who gives a damn about PE's (priceearnings ratio)? Assumption 3: Prices move in trends. If market movements were purely accidental, technical analysis could provide no added value. So technical analysis deals exclusively with the interpretation of market movement (price and volume) by means of charts. The goal here is to find certain price levels which promise a certain movement. Trading the prognosticated movement with partially protect accrued profits. Trade direction is not important here, so traders can respond flexibly to the particular market situation. This means that they have a crucial advantage over investors. Follow the Crowd or Defy the Crowd? Successful investors are characterised by a countercyclical approach. They do not care about the consensus of the masses, which rather serves as a warning to them. This is confirmed in the following quotes: Baron Rothschild: The time to buy is when there is blood running in the streets. John Templeton: The best bargains can be found only at the point of maximum pessimism.
David Pieper
David Pieper has been busy studying the stock market since the late 90s. As early as during his business studies at university and later during a career as an investment analyst at a bank, he combined fundamental analysis with the benefits of technical analysis. Mr Pieper focuses on trading CFDs and works as a freelance writer in the field of technical analysis. For more information, visit his blog at www.trade4life.de.
History repeats itself. The charts represent the human psyche that always makes it possible to recognise patterns.
the help of appropriate risk and money management is the task facing every trader. This is precisely where there is an essential difference between Investors and traders. The latter have clearly defined stops that serve to limit losses should a trade not pan out. Depending on their strategy, traders also use profit targets enabling them to
Assumption 2: History repeats itself. The charts represent the human psyche that always makes it possible to recognise patterns, causing them to be tradable.
Warren Buffett: You want to be very fearful when others are greedy and very greedy when others are fearful. These three examples follow a counter-cyclical approach. And especially Warren Buffett has proven that this approach works: When he warned against
TRADERS COVERSTORY
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quite clear that trading decisions need to be adjusted to the market situation in question. If there is a clear uptrend, it is recommended that long entries be sought while a clear downtrend means that it is advisable to look out for low-risk short entries. That is exactly why a trader who wants to survive long-term in the markets must have a high degree of flexibility. As soon as the facts change, your strategy must also be adjusted. Emotional Attachment to Ones Investment In practice, long-term oriented investors can very often be seen to have a kind of emotional bond to their investment. So the investor very quickly falls in love with certain stocks or sectors, because he or she is convinced that they know them well or because an investment in these securities has yielded positive returns in the past. This is also a major reason why many investors buy more of those stocks in their portfolio that are losing money, the operative word being averaging. The thing is that they are absolutely convinced that shares A or B are bound to rise again. So it is that Telekom shares that were purchased at triple-digit euro rates will still be in traders portfolios when their price is being quoted in single digits. This would make the hair of traders like Paul Tudor Jones stand on end since one of his best-known resolutions is Losers average losers. By the same token, many investors make their choice of shares dependent on whether their past experience with this particular security has been good or bad. Their own profession or local ties to a company are often reflected in the content of their portfolios as well. While the resulting subjectivity is only human, it is not exactly advantageous, as is evidenced by the results arrived at in numerous studies. In summary, it can be said that investors, on balance, have a certain emotional attachment to the securities they hold. Now if you compare a trader to an investor, the differences come to light immediately. Due to his or her significantly shorter investment horizon, a professional trader has no emotional ties to the trading instrument. Regardless of whether they use a screening process as a basis for selecting the securities traded, or whether he or she only trades a particular market a pro only trades the signals offered by the chart; the instrument traded is basically irrelevant. It Is Risk rather than Duration that Counts Many investors take the view that the long-term picture is
exaggerated ratings in tech stocks amid the Internet boom and instead invested in traditional sectors, he was ridiculed by all sides. Only a few years later he turned out to be vindicated at least his former critics were not heard of again. By the same token, there are plenty of examples showing that a counter-cyclical approach may be totally out of place. There are investors or analysts who for years or even decades stick to their bullish or bearish views, just because their model does not include market psychology, causing wrong decisions to be triggered. This approach may lead to ruin since it always ignores the fact that any counter-cyclical trading only works at the extremes. After all, if one finds a structural trend such as the now almost eleven-year-long bull market in gold , pro-cyclical investors have got it right most of the time. Traders, on the other hand, in most cases follow the trend and do not trade against it. Looking at other areas of life, this seems to be the only logical consequence after all, we do not drive our cars in the opposite lane either. In the financial markets this simple rule is anything but natural especially for beginners. The philosophy of successful traders can be summarised as follows: Trade what you see and not what you think. This makes it
F1) Difference between Trading and Investing
Figure 1 shows the main distinguishing features between trading and investing. Source: TRADERS Graphic
F2) S&P 500 vs. Earnings Growth (inflation-adjusted)
From a long-term perspective, the development of corporate profits represents the most important factor influencing the stock market. Source: Prof Shiller, Yale University
TRADERS COVERSTORY
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Regardless of whether a market participant feels more like a member of the investors camp or the traders camp the goal of both players is always the same: Both want to grow the value of their capital. While the aspect of risk and money management plays a central role in trading, buy-and-hold adherents still support the view that the timing of any investment in securities plays no decisive role. For this reason, no fixed protective stops are used as a rule. And that is exactly where an investor is confronted with the greatest risk. Trading Market vs. Buy-and-hold Market Time and again, long-term investors relying on the buy-andhold strategy will be confronted with time periods requiring a completely different and active investment style. Such a phase can currently be observed on the stock markets of developed countries. For example, stock indices like the DAX and the S&P 500 oscillate in a sideways movement characterised by very high volatility. Investors who had entered the market in the spring of 2000, now hold investments stuck in negative territory. Instead of being rewarded with high returns, buy-and-hold investors had to cope with high volatility. How wild the roller coaster ride for the DAX was is shown in Table 1 indicating the high and low points. So a distinction needs to be made between market phases during which an approach based on the buy-and-hold principle is promising. For example, if a long entry in the stock market after the end of a long and deep bear market is successful, high returns are possible in subsequent years and without much effort being expended. Such a phase existed from 1982 to the spring of 2000. Especially after longer bull-market phases there are market periods in which buy-andhold investors were not rewarded for their perseverance, but were punished by high volatility and low or negative returns. Let us look at a couple of examples from the past:
F3) DAX Performance Index since January 2000
less concerned with timing, following the motto: In the longterm it does not matter when you buy. Moreover, buy-and-hold investors assume that market timing is just a matter of luck and therefore does not add value in the long-term. On the contrary, they believe that it will have its drawbacks. That is why technical analysis is viewed with suspicion. Summarising the arguments, one finds that the discussion is actually unnecessary, because the risk inherent in an investment is what counts rather than the duration of an investment. It has been the very development of equity markets since the beginning of the 21st century that clearly shows that their price gains over several years may be wiped out again within a short time. In this respect the risk of a buy-and-hold investment is underestimated. An important reason for this may be the widespread opinion that shares will yield positive returns in the long-term. While this is true, returns are certainly subject to very large fluctuations over time.
T1) High and Low Points in the DAX
March 2000 8136 points March 2003 2188 points (-73%)
Figure 3 shows the performance of the DAX since early 2000. As of the date of the first TRADERS issue published in November 2001, the German lead index closed at 4990 points. Today, some ten years later, the DAX was at 6046 points. This represents an increase of 21.2 per cent or about two per cent per annum not exactly exciting, considering the range of fluctuation. On balance, performance briefly was even negative when the crash caused the DAX to hit bottom in October 2011. Source: www.tradesignalonline.com
F4) S&P 500 since 1950
July 2007 8151 points (+272%)
March 2009 3588 points (-56%)
May 2011 7600 points (+112%)
September 2011 4966 points (-35%)
October 2011 6430 points (+29%)
The graph shows the performance of the S&P 500 with logarithmic scaling. Clearly visible are market phases representing trend markets (green) and trading markets (red). Source: www.tradesignalonline.com
Table 1 shows the high and low points in the DAX from March 2000 to October 2011. This clearly demonstrates that the buy-and-hold strategy has failed in this case.
TRADERS COVERSTORY
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To date, no matter whether we are talking of the DAX or Dow Jones, the stock markets of the developed countries are quoted below the all-time highs reached then including a highly volatile rollercoaster ride. A look at the past shows that the emergence of a longstanding trading market is the result of an overvalued stock market. Figure 5, which shows the Shiller price-earnings (P/E) ratio since 1880, confirms this in an impressive manner. The Shiller P/E ratio is calculated by dividing the current price and the average earnings per share over the last ten years. Due to its long-term perspective, the Shiller P/E ratio is highly significant. For example, in each of the three years 1929, 1966 and 2000 the US stock market was clearly overvalued. What followed were very lean years for stocks and this time it is no different. And yet such market phases could be used for active trading. Table 2 illustrates how severe price losses might be in a crash. At the same time there is clear evidence showing what enormous potential there is for a rebound after such a crash. In contrast to long-term oriented market participants who act passively, such high volatility offers numerous opportunities for those active traders who enter both long and short positions. Combining Investing with Trading? The contrasting nature of the two approaches and the
F5) Shiller P/E Ratio since 1870
Investors who bought Japanese equities in 1986 still hold investments that are in negative territory. Investors who invested in US stocks at their high point in 1929 had to wait for 27 years (ex dividend) before their investment had recovered enough to achieve its nominal initial price. Also, during the inflationdominated 60s and 70s US stocks were by no means the right choice. The level of the 1963 S&P 500 was not achieved until 20 years later. The most recent example in stock-market history is the technology bubble that reached its climax in the spring of 2000.
T2) Crashes vs. Rebounds
Crash High USA 1930s USA 1970s Europa 1970s Gold 1980s Japan 1990s Hong Kong 1994 Hong Kong 1998 USA 2007-09 19/09/1929 05/01/1973 31/08/1972 18/01/1980 29/12/1989 04/01/1994 07/08/1997 09/10/2007 Low 01/06/1932 03/10/1974 31/12/1974 21/06/1982 18/08/1992 23/01/1995 13/08/1998 09/03/2009
The P/E ratio introduced by Professor Shiller, which is smoothed over ten years and adjusted for inflation, shows the four major valuation bubbles in the stock market since 1880. The Shiller P/E ratio can also be used as an indicator for purchasing decisions. The market is considered to be undervalued if the Shiller P/E ratio is below the dashed line, and overvalued if it is above that line. Source: Prof Shiller, Yale University
F6) S&P 500 vs. Index Gain in Points
Price Increase -86% -48% -45% -65% -63% -44% -64% -57%
Duration (Months) 32 21 28 29 32 13 12 17
Rebound End of Rally 12/07/1933 15/07/1975 30/01/1976 16/02/1983 13/09/1993 07/08/1997 10/03/2000 02/05/2011
Price Increase from Low 170% 54% 55% 72% 48% 114% 159% 106%
Duration (Months) 13 9 13 8 13 30 19 27
Stock market performance correlates very strongly with the growth of corporate profits. That is why a combination of fundamental and technical indicators makes sense at key high and low points. Source: Prof Shiller, Yale University
Table 2 shows selected bear markets and stock market rallies since 1929.
TRADERS COVERSTORY
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resistance or support levels, retracements, or moving averages should contribute in the longterm to a positive performance especially when it is necessary to identify bearish phases in the stock market (for example, from the autumn of 2007 to March 2009). And that is exactly what constitutes the main risk associated with a passive buyand-hold strategy. If, for example, the investor recognises a reversal pattern, a trend break or negative divergences in a stock index with the fundamental indicators (for example, earnings growth or macroeconomic leading indicators) gradually beginning to change direction, he or she will have a much better basis for their investment decision. Conclusion Finally, the DAX history since 2000 is used to show what benefit can be derived from simple trend-following systems. While the classic buy-and-hold investor on balance only made losses since the bursting of the dotcom bubble despite a more than ten-year holding period , a simple crossover system (the combination of an 8- and 34-week average) made it possible for the capital to be doubled and at a significantly lower volatility (Figure 7). In addition to supplementing the buy-and-hold approach with a trading component, a parallel implementation of both styles also makes sense. For example, an investor might have, in addition to his or her long-term portfolio, another one which is solely intended for trading. Those investors who wish to become traders, however, should note that trading requires a great deal of time and effort and also places totally different demands on people. In addition to learning a wide variety of different approaches to technical analysis, an in-depth study of risk and money management, statistics, and financial psychology is particularly necessary. Furthermore, developing ones own trading strategy is a prerequisite for the long-term survival of any trader in the markets. On a personal level, discipline, mental strength and endurance are crucial in achieving sustainable success in the markets. While the classic long-term investor rarely needs to make any decisions, the trader depending on the strategy is under pressure to act day after day and week after week, and as everybody knows, that is not exactly everybodys cup of tea. But once all these obstacles are overcome, a reward beckons that is higher than that achieved by a passive buy-and-hold investment.
clearly evident separation of the two disciplines create the impression that a combination of trading and investing is neither possible nor sensible. And yet both camps have one goal in mind, namely to achieve an optimal return on the capital invested. And honestly, any form of analysis has its advantages and disadvantages. After all, both analytical approaches are anything but objective. Likewise, both styles require a high degree of knowledge, experience, and discipline albeit in different areas. The following considerations should therefore demonstrate that a combination of the two approaches is perfectly possible and may, above all, be profitable. Specifically, it would mean using a trading component as a complement to the classic buyand-hold strategy. Why should a long-term investor be concerned with the subject of trading in the first place? The answer is simple: Technical analysis takes into account the psychological factor, compensating the weakness of fundamental analysis. Risk and money management can be integrated into the buy-and-hold approach in order to reduce the volatility of the capital invested and to avoid large drawdowns. Even simple strategies such as the use of trend lines and
F7) DAX with Crossover System and Capital Curve
The chart shows the performance of the DAX since early 2000 with its 8- and 34-week averages. We buy when the 8-week average intersects the 34-week average from the bottom up, and sell when the 8-week average crosses the 34-week average downwards. The use of this simple trend-following system would have protected the investor against high losses in downturns resulting in a significant increase in performance (see equity curve below). Source: www.tradesignalonline.com
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This is neither a solicitation to buy or sell any type of financial instruments, nor intended as investment recommendations. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS OR TESTIMONIALS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. Thomson Reuters assume no responsibility for errors, inaccuracies, or omissions in these materials, nor shall it be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenue, or lost profits, that may result from reliance upon the information presented.
TRADERS NEWS
13
Eurozone Debt Web: Who Owes What to Whom?
Europe is struggling to find a way out of the eurozone crisis amid mounting debts, stalling growth and widespread market jitters. After Greece, Ireland, and Portugal were forced to seek bail-outs, Italy approaching an unaffordable cost of borrowing has been the latest focus of concern. But, with global financial systems so interconnected, this is not just a eurozone problem and the repercussions extend beyond its borders. While lending between nations presents little problem during boom years, when a country can no longer handle its debts, those overseas banks and financial institutions that lent it money are exposed to losses. This could not only unsettle the home country of those banks, but could, in turn, spread the troubles across the world. So, in the tangled web of intercountry lending, who owes what to whom? The circle below shows the gross external, or foreign, debt of some of the main players in the eurozone as well as other big world economies. Visit http://www.bbc.co.uk/news/ business-15748696 and click on a country in the circle to find out what they owe to banks in other countries, as well to find out their total foreign debt, including that owed by governments, monetary authorities, banks and companies. Source: www.bbc.co.uk
The Biggest IPO Player Continues Public Offering in Declining Market

The Hong Kong IPO market, the world's busiest, is finishing the year with a surprising rebound as low prices and leading names are luring big investors to three big initial public offerings worth as much as $6.75 billion. IPOs in Hong Kong this year so far have raised US$30.2 billion, ahead of New York at US$29 billion. Some listing companies like New China Life's Hong Kong-Shanghai listing, which could raise up to US$2.28 billion, and Chow Tai Fook Jewelry's IPO, which is targeting US$2.8 billion, also saw big investors jump at their deals. Source: www.online.wsj.com
RTS Expands Global Hosting to Asia

RTS Realtime Systems Group opened new data centre hubs in Singapore and Mumbai to support low latency trading across asset classes on major exchanges throughout the Asia Pacific region. The new hubs will serve as the RTS gateway from and into the APAC region and will be linked to the firms global network, which already provides proximity hosting and direct market access (DMA) to more than 65 exchanges globally. Clients in and outside of Asia use the RTS network for high-speed, low latency access to multiple asset classes in fully managed environments. The RTS Global Network already includes hubs in Chicago, Frankfurt, London and New York. RTS clients can be co-located to dozens of exchanges across the globe while improving risk management and decreasing operational costs. Customers can choose connectivity to as many exchanges as desired, with the ability to evaluate and quickly trade new markets. RTS provides the flexibility to tailor solutions that cater to the each clients trading needs. Source: www.rtsgroup.net
Sharp Bounce back Expected in Declining Market for Brazil in 2012

Brazils economy posted its slowest growth of the year in Q3 as global uncertainties finally undermined activity in Latin Americas largest economy. Its GDP expanded 2.1 per cent in Q3 compared with same a year ago. It is expected for record-low unemployment, higher wages should work in tandem with the governments latest measures to stoke domestic demand. However, with strong stimulus in the pipeline, the economy should start gaining momentum till Q2 of 2012. Brazils economy is expected to grow 3.3 per cent in 2012, but the pace of the expansion will be all but gentle. Expected growth is likely to bounce back sharply next year. Source: www.online.wsj.com
Global X Launches Social Media ETF (SOCL)

Global X became the latest issuer to offer an ETF targeting a segment of the global technology industry, rolling out the first ETF to specifically target the social media industry. The new Global X Social Media Index ETF (SOCL) will seek to replicate the Solactive Social Media Index, a benchmark that includes companies engaged in various aspects of the rapidly-expanding social media industry. Currently, the underlying index consists of about 25 stocks, including firms that provide social networking, file sharing, and other web-based media applications. The portfolio includes some of the firms that have recently completed IPOs, as well as more established companies in the social media space. Source: www.etfdb.com
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Trading Technologies X_TRADER Named Best Commodities Trading Platform
Trading Technologies International, Inc. (TT) announced that its X_TRADER trading platform was named Best BuySide Commodities Trading Platform in the Buy-Side Technology Awards 2011 hosted by Waters Technology. X_ TRADER was chosen from a crowded pool of applicants by the magazines editorial team and industry consultants from Accenture, The Aite Group, Deloitte Consulting, Investit and Morse Consulting. This is the fourth year that TT has won this award. The next release of X_TRADER, version 7.11, is currently in beta testing and slated for release within the next few months. It features ADL (Algo Design Lab), a revolutionary new visual algorithm programming platform that employs a drag-and-drop building-block interface, allowing traders and programmers alike to create and deploy trading algorithms in hours or days rather than weeks or months. With connectivity to more than three-dozen exchanges in North America, South America, Europe, the Middle East and the Asia/Pacific region, TT provides access to more than 10,000 products across multiple asset classes, including futures, options on futures, and cleared and OTC energies. Source: www.tradingtechnologies.com
Getco to Buy Bank of Americas NYSE Market-Making Business

Getco LLC, an electronic market maker and high-frequency trading specialist, agreed to buy Bank of America Corporations (BAC.N) floor-trading operations at the New York Stock Exchange, significantly expanding its market-making operations. Terms were not disclosed. Getco said the transaction will make it the second-largest NYSEdesignated market-maker, responsible for trades in about 650 companies and 850 securities. Among the companies it would be responsible for are blue-chip names such as CocaCola Co (KO.N), General Electric Co (GE.N) and McDonalds Corp (MCD.N). The transaction will leave just four designated market makers at the exchange: Getco, Barclays Plc (BARC.L), Goldman Sachs Group Inc (GS.N) and Knight Capital Group Inc (KCG.N). Barclays is the largest. They had been preceded by so-called specialists, which according to the NYSE numbered 25 as recently as 2000, but the need for human traders has declined as the Big Board moved toward an electronic model. Getco attained designated market-maker status in February 2010. It said it will assume responsibility for its new assignments from Bank of America over the course of December. Bank of America is the second-largest U.S. bank, but has been shedding assets in an effort to comply with new international capital standards. Source: www.reuters.com, Reporting by Jonathan Stempel in New York
Bats Global Markets Completes Acquisition of Chi-X Europe

BATS Global Markets (BATS) announced the completion of the Chi-X Europe acquisition. BATS intends to combine the BATS Europe and Chi-X Europe MTFs, which will be known as BATS Chi-X Europe and will account for approximately 25 per cent of overall European equities trading, making it the largest pan-European securities market1. Planning for the migration of the Chi-X Europe trading platform to BATS Europe technology will begin immediately. The technology migration is expected to be completed in the second quarter of 2012. The completion of this deal joins two pioneering companies and together we will continue to be at the forefront of competition and innovation in Europes securities markets, said Joe Ratterman, chairman and chief executive officer of BATS Global Markets. By leveraging the mutual resources of BATS and Chi-X Europe, we are now even better positioned to keep Europes markets competitive, as well as affect market structure reforms that support competition and innovation that ultimately benefit investors at all levels. Source: www.batstrading.com
GDP Slowdown in India

Real GDP expansion is projected to slow to 6.9 per cent for the quarter ending in September on a year on year basis, down from 7.7 per cent growth clocked in the three months ending in June. GDP growth is expected to rise in 2012, though the downside risk to the economy has increased, mainly due to prolonged turbulence in global financial markets. The Wholesale Price Index is expected to remain over nine per cent this month and moderate to about eight per cent in December. The RBI (Reserve Bank of India) may stay on hold as expected inflationary pressures wane and the growth slowdown broadens in coming months. The RBI has hiked interest rates 13 times since March, 2010, to tame demand and curb inflation. Source: www.steelguru.com
TRADERS TRADERS INSIGHTS
We Are Only Humans
Trading: Myths and Facts Part 4

Ace trader Tudor James said that the trader should not be a hero. We should not have an ego. We should always question ourselves and our ability. We should never feel that we are very good. If we do that, the consequences may be grim. Traders should talk in terms of probabilities and caution, not with brazen impudence and guarantees. We must be humble in our trading career permanently humble. Pride is very dangerous to our long-term survival in the markets. A skilled surfer humbly knows his size and strength relative to the ocean, and respects the waves. A skilled trader, likewise, knows his size and strength relative to the worldwide marketplace. There is no place for over-confidence. We should always use discretion and common sense in our trading careers. We should always acknowledge and learn from our errors: trying never to repeat them. This is the only way to become better at trading. Trading mastery is an on-going process; a journey of a lifetime. We shall discuss more facts in this series.
Myth #7: Institutional traders are far more competent than private traders. Fact: Trading success has nothing to do with any trading system under heaven. You do not become a successful trader merely by predicting the markets correctly. The markets are not predictable. You just have to be a humble trader who is trying to do the right things on the markets. And you have to work hard to become a better trader. Popularity has nothing to do with skills on the markets, and neither does formal education. Someone talking on a popular financial program may be having serious problems trading successfully on his own while an unknown trader may be making consistent profits in his own living room.
09/2011 11/2011 01/2012 www.tradersonline-mag.com
A top trader is not necessarily smarter than we are, he just has access to a colossal fund. Top traders also lose, though most of them survive losing streaks. The only difference is the hugeness of their accounts. I heard of a rogue trader in Europe who lost billions of Euros, while I know a humble trader who manages $5000 successfully. Someone is not a wizard simply because he has access to a huge fund. If someone makes 20 per cent per annum on $1000, who would call him a great trader? But if he makes the same 20 per cent on $10 billion per annum, why would you not call him a great trader? $2 billion is a great amount of money. If you had $1 million to play the markets, you could be very much comfortable if you are
making only one per cent per month. But if you funded your cent account with $10, no-one would even take you serious if you boasted of 50 per cent per annum, unless it was 50 per cent of $50 billion. You see, great traders do not necessarily double accounts to be called successful. Although some of them risk too much of the funds they manage, and you know the possible consequences of that. For them, only a small percentage profit will make a big difference. But most traders do not have a great amount of money. You might want to fund your account with $100 and make ten to 20 per cent on a daily basis (if you have been trained to be a suicide trader). So this is where frustration comes in; we want
TRADERS STRATEGIES TRADERS INSIGHTS TRADERSSTRATEGIES TRADERS TRADERS
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to trade with a small amount of money and live a big life. You would not appreciate ten per cent profit in three months if your account is small. Please let us have a rethink! One renowned trading coach declares: From my market research and other sources, I know how a number of market wizard calibre traders function. They have good systems with positive expectancy. But those systems are not much different than the kind of systems the average person can get. The difference between making a fortune in the markets, as most of them have done, and average performance is simply one of position sizing. Great traders apply great position sizing to good systems and have the discipline to carry it out. A hugely successful trader was reported as using mathematical models in making trading decisions. One would first think the models are his secret, but when I delved further, I saw that he usually uses 1:2 or 1:3 risk-toreward on swing trades. Honestly, this good risk to return ratio (RRR) is also part of his secret. Now let me emphasise a point: Institutional traders are never more skilled than professional retail traders. They merely have huge funds to trade with, and that does not make them better than somebody who is trading consistently profitably on a live micro account started with $1000. The one who started with $1000 may even be far more competent than the one managing millions of dollars. One quail is not taller than the other; except the one that stands on a ridge. When people want to choose a trading mentor, they feel that the mentor must be rich, without thinking whether the person actually made his money from trading. They look down on skilled traders who are not yet extremely rich. Myth #8: Trading is too difficult in the month of August. It is better to stay away from the markets in August. Fact: Some traders think that it is very difficult to make money in August of every year. One top trader even declared that the month of August has always been his worst trading month in his entire career, and as a result of this, he usually takes a monthlong break every year. The month of August appears to be difficult because most market makers are on vacation, thus forcing many disciplined professionals to stay out of trading until the market makers return. While there is nothing wrong with this conventional attitude, I would like to point out that Forex markets always provide opportunities for wise traders irrespective of
Mustapha Azeez
Mr Mustapha Azeez is a professional Forex trader, Forex signals strategist, funds manager, researcher and coach. He is a senior analyst at FX Instructor, LLC, and also a content contributor at Fxstreet. com. His numerous articles are posted at Forexpeacearmy. com, Ituglobalforex.com, Trade2win.com, and Elitetrader. com as well. Contact: amustapha@fxinstructor.com; www.fxinstructor.com
F1) GBP/CAD
From August 1 to August 19 2011, GBP/CAD rose by over 800 pips and fell by over 500 pips from August 22 to September 1 2011. Source: www.tradesignalonline.com
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skyrocketed by more than 1300 pips within the following four days. Example 4: AUD/CHF: This exotic cross moved southward by more than 1700 pips from July 28 to August 9 2011. Then it rose by more than 1300 pips from August 10 to August 30 2011, and dropped by over 500 pips within the following four business days. It has moved up by more than 1000 pips since September 6 2011. There are more examples like the ones above. The lessons that can be learned here are simple: a) It does not pay to continue suffering as a result of zigzag movements on popular pairs/ crosses while other less popular pairs/crosses are trending nicely. Remember that your goal is to survive in the markets and ultimately make some gains, not necessarily doing what is popular. Some of the successful traders I know look only for the instruments that are trending well. b) The best thing is to ride a trend for as long as possible or until the maximum trade duration expires. This is one of the secrets of effective traders. c) If one happens to be in the wrong direction, then one will be stopped out with an inconsequential loss, providing that the position sizing is very small. d) If one is in the right direction, one must let it run until ones target is possibly hit. The key to survival will forever be this: Make more money in good markets than you lose in bad markets. One way of handling the quirks of the markets is to use proper strategies to take care of breakouts and sustained trend movements. Sometimes, a combination of two different but reliable strategies may improve the overall statistics of a trading portfolio. Conclusion What, though, if you are not currently using risk control methods? Is it possible to change your trading style? Would your past mistakes hold you back from your future success? Consider the fact: Some market wizards were formerly gambling, nave, irrationally emotional and undisciplined. They chose to change their trading styles, and they reaped great benefits. Today, thousands of traders throughout the world have made a similar choice. They have freed themselves from dangerous trading styles and have experienced the benefits of bringing their conduct in harmony with safe trading principles.
the month, but one needs to be flexible. Awareness will continue to be curative. There is no need to stick to the ranging USD/JPY when the EUR/JPY is trending nicely. Why should one continue to suffer due to the irrationality of the EUR/USD when the AUD/ USD is moving in a predictable manner? In a difficult month like August, a highly versatile Forex trader would do well by considering trades only on pairs and crosses that are trending well. Let me give you a few examples of instruments that trended well in the month of August 2011: Example 1: GBP/CAD: From August 1 to August 19 2011, this cross rose by over 800 pips. It also fell by over 500 pips from August 22 to September 1 2011. Example 2: AUD/CAD: This instrument plummeted by over 600 pips from August 1 to 9 2011, and it later rose by almost 400 pips from August 10 to September 1 2011. Example 3: GBP/CHF: The price on this cross dropped by over 1600 pips in August 1-9 2011; while it rose by roughly 1900 pips in August 10-29 2011 before going southward by another 800+ pips in August 30-September 5 2011. You should know what happened after that: The price
F2) GBP/CHF
GBP/CHF dropped by over 1600 pips in August 1-9 2011; while it rose by roughly 1900 pips in August 10-29 2011 before going southward by another 800+ pips in August 30-September 5 2011. After this the price skyrocketed by more than 1300 pips within the following four days. Source: www.tradesignalonline.com
Sector Rotation
One Thing Leads to Another Part 2

In the last article (TRADERS 12/2011) we talked about Asset Class Rotation and the benefits of understanding the relationships between the three key asset classes (Bonds, Equities, and Commodities) and their typical performance patterns during various stages of an economic/market cycle. This information would help focus the investor on which asset class to own, or at least own more of relative to other assets within a balanced portfolio. However, what about which sectors to own during this same economic/market cycle? This is where Sector Rotation comes into play, and not only can knowledge of this benefit the long-term position trader it can also benefit the short-term swing or day trader looking for the hot sectors. This article will help you understand the basic performance patterns of sectors leading to rotation from one to the next, and the tools to apply this theory practically in the markets.
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Background Beginning with the second level of the Chartered Market Technician (CMT) program emphasis in the curriculum was placed on understanding the larger market cycles, and how various asset classes and sectors and industry groups performed during the various stages of the cycle. The inference was that if you understand the rotations then you would be able to anticipate changes that would need to be made in the ownership of different securities. Sam Stovall of Standard & Poors is widely referenced and credited for his research of sector rotation. In summary, it was stated that as the interest rates are changed affecting monetary conditions during the different stages of economic cycle expansion and contraction the aggregate demand for goods, services, or commodities would shift resulting in a positive or negative impact on companies earnings, the anticipation of which leading to the accumulation or distribution of various companies stocks. The nice thing about this shift in accumulation and distribution of stocks is that this pattern typically repeats from one cycle to the next, resulting in what is known as sector rotation. Obviously there are some exceptions as some groups will not always demonstrate leadership as they normally would due to supply/ demand issues, policy, or regulation issues for a particular group affecting the demand for the industries stocks. Tools A simple and free tool that many have been using for years is found on www.stockcharts.com. John Murphy has created a tool that you can use to perform this exact analysis; more specically it is the Perfchart: S&P Sectors ETFs Study. The symbols used on this site are $SPX, XLY, XLK, XLI, XLB, XLE, XLP, XLV, XLU, XLF in that order. You will note that the symbols are all Sector Spyder Exchange Traded Funds, and that they are being used as proxies for the nine sector groups which are Consumer Discretionary, Technology, Industrials, Materials, Energy, Consumer Staples, Healthcare, Utilities, and Financials. They are listed in this order as this is the order in which the performance typically ows from one stage of the market cycle to the next; see Figure 1. Stage Determination/ Relative Strength According to the model referenced in Figure 1, one would expect that the strong performance of one or more groups at any given time would help them approximate not only the location of the market in
Scott McCormick
Scott is a Chartered Market Technician, and holds the Series 7 and 66 licenses. He began his career in the year 2000 with Charles Schwab as a Registered Representative. In addition to those markets, Scott began trading foreign currencies in 2004. As an instructor for Online Trading Academy, Scott teaches his students the use of technical analysis to identify high probability trading opportunities controlled with proper risk management.
F1) Sector Rotation Model
Notice the order in which the sectors line up with the different stages of the market cycle (shown as the red sine wave) and the economic cycle (shown as the green sine wave). Source: www.stockcharts.com
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when it comes to buying and selling various sectors. To see where the sector performance has been and possibly where it is going the writer suggests that you consider conducting a twelve month, six month, and a three month performance look back beginning of May showed that the best performing sectors were Industrials, Materials, and Energy, the Past Six Months performance showed the same leaders in performance Energy being the best, and the Past Three Months performance showed Consumer Staples, Healthcare, and Utilities leading or beginning to lead versus the previously mentioned sectors. The fact that Materials and Energy were leading, and had been since 4th quarter 2010 showed that the market cycle was maturing, and the emersion of leadership in the defensive sectors of Staples, Healthcare, and Utilities were pointing to a potential slow down. Conclusion As a matter of practical application this can be an effective tool for managing a portfolio on a short-, intermediate-, and longterm basis when combined with other tools. This approach simply tells you which direction you need to be looking to anticipate the next change. However, this approach requires discipline, patience, and strong technical analysis skills which signal that an asset class may be turning.
its cycle (combine this with asset class rotation and it becomes stronger at conrming location in an economic cycle), but also which groups are currently demonstrating leadership which would be very effective for identifying which stocks to target for short-term momentum trades whether they are day or swing trades. For example, if looking at the last three months and the leaders in performance versus the SPX (S&P 500) have been Consumer Discretionary, Technology, and Industrials one would assume that the market cycle is bull market, and the economic cycle is early recovery. They would also be able to identify potential swing or day trades in these same sectors, while the position trader may decide to look forward to Materials or Energy in anticipation of outperformance versus the SPX over the next three to six months.
TRADERS French
This approach simply tells you which direction you need to be looking to anticipate the next change.
every month; doing so allows you to see the rotation and identify the current phase of the cycle. The tool on www.stockcharts.com allows you to right-click on the scroll bar to change the time period being analysed, so you would begin with Past Year, then Past Six months, and nally Past Three Months. This will again help you understand where the market is in the big picture as described above, but it also allows you to anticipate what should happen next, and where you should be looking for trading opportunities in the short to long term. As an example the Past Year performance at the
Asset Class Rotation in Practice Since this article is intended to provide you with the proper perspective of the current state of the economic and market cycle it should also allow you to identify what you should consider next
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What to Do when You Are Tired, Frustrated, and Angry
Are You Ready for Change?

The process of changing bad habits involves how we view success and failure, and the reward and punishments we give ourselves based on these views. Whether you already have a written trading plan, have a trading plan in mind, or are following along under the direction of a successful trader, you may still find yourself (believe it or not), not following the plan. There is an old saying in business: Fail to plan and you plan to fail. Truth is, following the plan is easier said than done. Ask any trader who consistently makes money and they will tell you that you have two choices, follow a methodical rule based on a written plan, or fail. Starting with simple changes in your behaviour pattern can get you on the path to success.
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Tillie Allison
As an instructor for Online Trading Academy, Tillie began teaching following the financial disruption of 2007. Her goal is to educate students on the realities of the markets and to teach students how to develop a skill set to successfully trade the markets. She is a member of The Market Technicians Association, The Certified Financial Planning Board of Standards, has an Associates Degree in the Applied Science of Real Estate, and a Bachelors Degree in Business Administration.
Treat Trading as a Business Do you really treat trading as a business? Buying or selling stocks or any other asset class can be a very expensive hobby. Excessive losses lead us to realise that there is a fundamental flaw in the trading system or in our ability to follow the plan. Business 101, seek professional guidance on how to write a real trading plan. Reading some books, buying a charting program, opening a brokerage account and starting to trade is not a business plan. Trading is a business and having a written plan with guidelines creates accountability and a structured process for reviewing performance. Like any other business, plans evolve with the market and the traders skill set. There are many components to developing a professional trading plan. If you already have a trading plan, determine what parts of it may be flawed and start evaluating how to change it or improve it. Compare your plan to a successful traders plan or have another trader review it. Use constructive criticism to determine what components
need to be changed. Make it a team effort! Skill Assessment Keeping detailed records of each trade is the best way to evaluate performance and the records serve as a reference point to make changes to the plan when necessary. Start with a simple plan and learn how to manage a simple plan before attempting to manage a sophisticated trading plan. One of the most interesting topics in trading and throughout life is random reinforcement. Random reinforcement (as it relates to harmful trading practices) occurs when a trader attributes a random outcome to skill. It is especially harmful if a novice trader who wins a few trades, without a plan, continues to trade without realising the losses until it is too late. Having a sophisticated trade plan in mind is ok but start with a written, simple plan and manage it successfully before developing a sophisticated plan. Knowing how to develop a simple plan is not so simple considering that many novice traders learn from very advanced successful traders
F1) Planning and Reviewing the Trade
Taking detailed notes of trade performance and reviewing progress is necessary. Source: Online Trading Academy
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a successful trader, using stop losses and risk management techniques will help you develop good trading habits. Clinging to memories of the few trades that went well or the few big losses will prevent you from moving forward and following the plan. Discovering your true intention of following a rule based trading system that will minimise losses and maximise returns will lead to success. After identifying what your true intention is, write down the steps to take to begin the process to make change. If you are not sure, ask a successful trader or mentor for help. Rewards and Punishment After you have evaluated your success and failures in your trading, develop a set of simple guidelines to begin making changes. An accountability partner or mentor may be the key to success. When you understand how you are personally defining success and failures, you need to apply a process of reward and punishment to change these habits as quickly as possible. Your internal dialog plays a key role in trading and the best time to start changing bad habits is now. When you begin to make changes in your thinking and in your trading, reward yourself and withhold rewards (a form of punishment) when you fail to follow the plan. The punishment for failing to follow a plan should withhold something we want, but not to be negative or self-damaging. Consider treating yourself to luxury items such as gourmet dinners or a weekend getaway (whatever makes you happy)! Conclusion the Choice is Yours! Emotions and Ego make it difficult to change our behaviour patterns. Set goals to treat trading like a business. Make a list of account types and strategies (for each strategy, start with a simple plan) and a record keeping system when trading. After you begin to organise your thoughts and identify with your true intentions it will become easier to measure your success and failures. Write down your goals in the business plan and create a routine to evaluate your progress. Random reinforcement and selective memory make it difficult for us to assess our skill set objectively so consider working with an accountability partner or mentor. A weekly or daily routine (a checklist) will help you stay on target. Give a copy of the checklist to your accountability partner or mentor and use it to measure your progress. This system of accountability works great if you partner with other traders because they want to be as successful as you!
who are trading a sophisticated trading plan. The successful trader may not even consider the plan to be sophisticated but to a novice trader there are many unanswered questions. It is very important for every trader to accept that there is a simple approach to developing a sophisticated trading plan and you need to begin with a simple plan, trade the simple plan, and build on it. Success and Failures Since the process of changing bad habits involves how we view success and failure, traders must realise and accept that we have selective memory. Traders are people and people choose to ignore the bad experiences or even worse, dwell on the bad experiences. Either way it becomes an emotional approach and not the rule based approach necessary to trade the markets. Denial is not a river in Egypt. Accepting that excessive losses led you down the path to failure looking into the dismal abyss and realising that you have selected memories will give you the strength to evaluate your approach and objectively measure your success and failures. Excessive losses are among the most common reasons for failure. Whether you are developing your own trading system or following along with
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Money Managers Love-Hate Relationship with the USD Against the backdrop of an explosion in foreign exchange reserves over the past decade, especially in the developing economies of Asia and Latin America, those charged with looking after this bounty have rightly sought to query the dollars dominance. Indeed, over the past decade, the dollars share of allocated official foreign exchange reserves has fallen from close to 71 per cent in 2001 to just over 60 per cent in the second quarter of this year (source: International Monetary Fund). This reflects a conscious decision by those managers of currency reserves to diversify out of the greenback. Much of this diversification has gone into the single currency the euros share of allocated global currency reserves was 18 per cent in 1999, but rose to just under 27 per cent by the middle of this year. Given the sums involved, such a shift in allocation represented an enormous source of demand for the euro, and an enormous source of selling impetus for the dollar, which has generally been under downward pressure over the past decade. The Dollars Decline Reflects the US Economys Malaise One of the major justifications for lowering what was a very large allocation to dollars was the increased vulnerability of the economy. A critical rationale for any reserve currency is that the underlying economy is both strong and stable. Over the past five years particularly, the US economy has been under constant siege. It is currently beset by very high unemployment, a household sector intent of deleveraging after a prolonged borrowing binge and an unsustainable fiscal position. Luckily for the United States, its economy has not been alone, as the difficulties it currently faces are shared by virtually all other major advanced economies. The predicament being endured by these large developed economies is likely to persist for some considerable time. In effect, the global growth dynamic has unalterably shifted to one in which the major advanced economies are scrambling to compete with the giants of the emerging world whilst shackled with huge debts and outdated working practices. For its part, America has been using both fiscal and monetary
Not Under Serious Threat
The Dollars Reserve Currency Status

One debate that has gone rather quiet over the second half of this year is the concern over the US dollars reserve currency status. Given the very serious question-marks over the future of the euro, this change of focus is perfectly understandable. That said, should Europe resolve what remain very challenging issues, it is entirely likely that the discussion concerning the dollars pre-eminent position in currency reserves will regain the limelight.
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policy aggressively in order to promote growth, but both of these policy options are now virtually exhausted. As a result, policy-makers are increasingly recognising that longer-term sustainable growth will only arise out of structural reform and investment in infrastructure. The American economy desperately needs both in order to overcome its current malaise local infrastructure is extremely dated for the worlds number one economy and it urgently needs to rein in social security and raise the retirement age to arrest the hyperbolic growth in the governments long-term liabilities. more credible than previous examinations of bank capital, but rather alarmingly, the vast majority of those banks with inadequate capital are choosing to achieve higher capital ratios by shrinking the size of their balance sheet rather than actually finding new sources of capital. Unfortunately, this is merely reinforcing the severe credit crunch already underway in Europe, and is forcing many banks to offload exposure to European sovereigns, further accentuating the crisis. Second, the US economy and the dollar provide global public goods and services (such as defence) which others value highly. Many countries may bemoan the extraordinary sums the United States spends on defence, but no other country has the appetite to play the role of global policeman at a time when financial turmoil is raising tensions around the globe. Third, Americas financial markets are by far the deepest in the world, and as a result have the greatest liquidity during times of crisis. This fact has been reinforced many times over recent years recently, for example European banks have been desperately attempting to get dollar funding, conscious that funding avenues in other currencies had all but dried up. At times over the last few years, during episodes of extreme
T1) Currency Composition (%) of Global FX Reserves
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 USD 70.7 66.5 65.8 65.9 66.4 65.7 64.1 64.1 62.1 61.8 60.2 EUR 19.8 24.2 25.3 24.9 24.3 25.2 26.3 26.4 27.6 25.9 26.7 GBP 2.7 2.9 2.6 3.3 3.6 4.2 4.7 4 4.3 4 4.2 JPY 5.2 4.5 4.1 3.9 3.7 3.2 2.9 3.1 2.9 3.8 3.9 Other 1.6 1.9 2.2 2 2 1.7 2 2.4 3.1 4.5 5
Table 1 demonstrates that diversification out of the dollar into other hard currencies such as the euro and sterling has been a feature of the activities of fx reserve managers over the past decade. It is entirely plausible that we shall see a further reduction in the dollars weighting within global currency reserves over the next decade. Source: International Monetary Fund
Michael Derks
Michael joined FxPro in May 2010 having been previously at Deutsche Bank, Rothschild and Schroders. He is a multidiscipline investment and market strategist/economist with extensive expertise in FX, strategic and tactical asset allocation, fixed income, equities, property and alternative assets. An accomplished economic and investment writer and researcher, Michael holds a Bachelor of Economics degree from Macquarie University in Sydney.
Eurozone Crisis Sheds More Favourable Light on the Dollar Notwithstanding these genuine concerns over the dollars reserve currency status, of interest over recent months is that the euros numerous shortcomings have brought about a sharper appreciation of the dollars relative strengths. In the first instance, the United States has come to be regarded as something of safe haven for those concerned at the lack of sufficient capitalisation of Europes major banks, in large part because America has done a much better job of ensuring that banks have enough capital. Recent stress tests conducted by the European Banking Authority were certainly
uncertainty, liquidity in reserve currencies such as the euro and sterling has been remarkably thin. Fourth, the dollar remains both the currency of international trade and capital flows. Recent figures from the Bank for International Settlements show that the dollar accounts for 85 per cent of the daily volume of foreign exchange transactions (which averages $4 trillion). Certainly more trade is being denominated in other currencies these days, and there are more bilateral trading arrangements being done which bypass the dollar completely. For instance, Turkey and Russia have deals with China whereby trade is settled only using the relevant local currencies. Even so, the
dollar still accounts for the vast majority of global trade and this is unlikely to alter any time soon. Like It or Not, Right Now There is Nowhere Else to Turn In reality, because the US dollar still occupies such a dominant position, and because there is no viable alternative in sight, financial markets are much more forgiving of US policy exigencies and excesses than they might otherwise be. Eventually, sometime next decade, a credible alternative to the dollars status as the major reserve currency might well emerge. Right now, it is not remotely clear whether that alternative will be the euro or the yuan. It may be neither.
Are You Trading to Learn or Are You Trading to Earn?
What Type of Trader Are You?

Achieving consistent success in trading comes only once we learn to trade in line with our individual personality, character and beliefs. It is garnering this self-knowledge that becomes the real treasure on your trading journey. This series of articles will help you raise your awareness, develop self-knowledge and improve your approach to your trading business as you gain clarity on what type of trader you are.
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Paul Wallace
Paul Wallace spent six years in the Royal Air Force controlling fighter jets before embarking upon a career in the City. He is one of the principal forex traders at Kaizen Wealth Management UK and runs Tradingbeliefs, a performance support practice for traders. Contact: paulwallace@tradingbeliefs.com
This first instalment poses a basic question: Are you trading to learn or are you trading to earn? It is really very simple. Are you at the experimental, investigative stage of learning to trade or do you conduct yourself in the market like a business with expectations of income and expenses? Have you ever asked yourself that question? Have you looked at your results? Have you looked at your approach and routine? Is your frustration with trading a result of unfulfilled expectations? This often happens, if a trader has a goal of earning X amount of money but is still engaging without a clear business plan that defines the 3Ms of Trading Method, Mindset and Money management skills. Then you are still trading to learn and you are probably failing to achieve your goals and therefore feeling a sense of frustration, despair, or hopelessness. Having goals based around financial outcomes when you are still learning the basic skills of trading can actually be counter-productive. If you have expectations of earning from trading whilst you are still learning, then it should not come as a major shock when you fail to meet those expectations!
Complete beginners should engage with a mind set of trading to learn as opposed to trading to earn. If you are trading to learn then look to create goals and objectives that are based upon your stage of development and motivate and inspire you rather than deflate you. Those goals and outcomes should be based around developing the necessary technical, risk management, business and personal skills that will move you forward towards your ultimate goal of being a disciplined, effective and consistently successful trader. The added bonus of working on developing such skill sets is that most of them can be measured. If they can be measured, they can be managed and if they can be managed they can be improved over time. Any good business regardless of its industry segment is aware of its key performance indicators and strives constantly to improve them. You should be aware of your key performance indicators and also the processes you need to develop in order
to achieve those performance metrics. Additionally as you see your technical, risk management, business and personal skills improve you will also develop added confidence and belief in your method, your business and ultimately yourself. You should
Do not underestimate the importance of building, maintaining and managing condence.

not underestimate the importance of building, maintaining and managing confidence as a trader. It is always a priority task. As you work upon those process and performance indicators there will come a point when you will be required to commit fully to your trading business. A time to narrow down the options, focus on what has been working for you and conduct your trading as a fulltime business. This point should
be achieved more swiftly and smoothly if you have used your goals and objectives to develop a robust business. If you are already at a position of being able to trade to earn then once again what key performance indicators and processes do you use to ensure you maintain your ability to trade to earn? Does your business plan truly reflect how you generate and utilise your revenue streams? So ask yourself honestly: Have you been trading to learn or trading to earn? Most people are at a stage of development that means they are trading to learn. However, their goals and expectations are based around trading to earn. If you do not know which type of trader you are then here is a hint: It is probably the former. Neither path is wrong; it simply needs to match your stage of development. In the end you should be looking to set your goals and expectations accordingly, in order to make your trading a positive experience, regardless of the outcome of trades.
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methodology that identifies the current stage of the economic business cycle. His Pring Barometers Signals then determine the asset classes and equity sectors that historically outperform during those particular stages. For further information please visit www.djindexes.com or www.pring.com
BollingerOnBollingerBands.com
BollingerOnBollingerBands. com now offers screening for stocks forming W bottoms. A W bottom is a decline followed by a rally and then a second decline and subsequent rally roughly tracing out the pattern of the letter W. BollingerOnBollingerBands now searches more than 6000 U.S. stocks each evening for potential W patterns. It looks for a low outside the lower Bollinger Band followed by a second low inside the lower Bollinger Band separated by a meaningful intervening rally and then applies a number of filters to eliminate marginal or questionable patterns so investors are only presented with the best candidates. W-bottom picks are provided at the homepage in the Lists section, which presents a daily list of potential Ws for trading consideration, and the Screening section, which provides a list of Ws from prior trading days. More information can be found at www. BollingerOnBollingerBands.com Dow Jones Indexes and Pring Research announced plans to develop and co-brand a U.S. business cycle gauge designed to track Pring Researchs proprietary investment strategy. The principal and president of Pring Research, Martin J. Pring has developed a rules-based
is almost identical in structure to the Chicago Board options Exchanges flagship S&P 500 SPX contract except, as the SPXpm name implies, it has a p.m settlement. As of press time, no launch date was available. For further information please go to www.cboe.com/SPXpm TradeStation has launched a new website designed to help visitors to find the information they are looking for with ease and efficiency. To make finding information faster and more intuitive, the former TradeStation Support Center has been reorganised into three new areas: Client Centre, TradeStation Community and Education Centre. The Client Centre provides TradeStation clients with one-stop access to all of their account management and reporting tools. TradeStation Community is now the home for TradeStations Discussion Forums and Trader Wiki. The new Education Centre is now divided into three key areas: TradeStation Labs, TradeStation University and the Event Centre. TradeStation Labs offers articles covering technical and market analysis concepts, and hosts a series of webcast events featuring well-known traders and market analysts. TradeStation University provides educational
information for TradeStation clients of all levels. The Event Centre provides an entry point to TradeStations live events, gains access to on-demand webcasts 24 hours a day, and download sample TradeStation workspaces and EasyLanguage documents. You will find further information at www.tradestation.com
TradeStation
By using mental training methods like animations, advice and deep phases of relaxation TradingMind tries to promote better Trading behaviour. These indirect methods of influence should show positive effects in trading manner within some weeks. The tool, therefore, offers the possibility to take a closer look at the psychological aspects of Trading. For more information, please visit http://www. directyourmind.com/scripts/ tradingmind.php TradingScreen announced it has completed certification by the BM&FBOVESPA to provide low-latency directmarket access (DMA) through its trading platform from its local data centre in Sao Paulo. The new TradingScreen solution will allow international institutional investors to access Brazilian markets through local Brazilian and international brokers connected to Trade Net. The integration will also provide the opportunity for the local Asset Manager community to avoid high latency linked to long round trip to foreign data centres. Additional details can be found at www.tradingscreen.com
The Chicago Board Options Exchange announced the Securities and Exchange Commission (SEC) has approved the rule filing to launch on a pilot basis SPXpm, the exchanges proposed new S&P 500 Index option product. It will be traded on the C2 Options Exchange (C2), the Companys all-electronic exchange. C2s SPXpm product will be a cashsettled index option based on the S&P 500 Index, the premier benchmark of the broader U.S. market. SPXpm
Ross Trading is both known as a publisher for reference books about trading and for chart formations like the so-called Ross-Hook. Now the company developed with the help of Jake Bernstein a new training software called TradingMind which exclusively looks at the psyche of a trader. It is supposed to take away fears and mistakes and makes the subconscious receptive to positive advice. It is a kind of personal trading coach who ought to solve mental and specific problems in trading.
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BOOKREVIEW
The Definitive Guide to Making Money Trading Spread Bets
Financial Spread Betting Handbook

By Malcolm Pryor
Malcolm Pryors first spread betting book was released in 2007. Since then the markets and spread betting firms have changed considerably. Pryor has also authored two further books and a pair of in-depth strategy DVDs. This new edition of his original bestseller not only takes account of market changes, but also adds those four further years of trading wisdom creating a truly indispensable companion for all spread bettors. Pryor has been a successful TA-focused trader for some time now. He took up his pen to write about spread betting in order to share what he had learnt as he became successful in the markets. He has gone back to update his popular handbook because, he says, spread bettings incredible growth has done little to change the ratio of winning to losing traders. The majority still lose most of the time. And they still do not have to. Understanding first-hand the dangers and frustrations
all spread bettors will face at different times, Pryor has organised this comprehensive guide around the metaphor of mountaineers setting out to climb a mountain. Proceeding from base camp through to planting your flag on the summit, he says, neatly mirrors the challenge of moving from understanding trading platforms to devising, and executing, successful strategies. This sees the book divided into three parts: Base Camp, Climbing The Mountain and The Route To The Summit. Base Camp Base Camp is all about making sure you do not try and get to the top of Everest armed with nothing more than a pair of Nikes and invincible self-belief. It is the part of the journey where winners load their underwear with goose fat and check their tent is not missing its zip. Pryor shares his selection criteria for choosing a spread
betting firm essential reading in this age of countless suppliers and white label offerings. He goes through everything you will need hardware and software-wise, so that you can avoid wasting money on systems and packages that do not do anything truly useful. And he lists the ten most common and devastating mistakes that spread bettors can make. This chapter in particular is chilling but bracing reading, the kind of thing that too many authors either do not know or will not actually tell you. But the point is, you only need to be scared if you are uninformed. The path to spread bettings rewards is reached by those well aware of the sheer icy drops on either side. In this part Pryor also helps readers narrow down the kind of spread betting they are interested in. Timescales for trading really are vital to get right before you make a bet, as you are almost guaranteed to spoil your exit strategy if a commitment to a
certain kind of time frame is not clear in your mind beforehand. It also cuts to the heart of the kind of trading strategy you will be looking to deploy, which is where Part 2 Climbing The Mountain comes in. Climbing The Mountain This part comprises a golden 100 pages of some of the most useful spread betting information out there for beginners or those who have tried and failed and are ready to try sensibly this time. Here Pryor lays bare all the ins and outs of putting together effective strategies ones you can try and test, and use to make serious profits; which is to say, not improbable overnight lottery wins, but regularly banked sums that quickly add up. These are the kinds of successes that a trading career is built on. Three kinds of strategies are given the limelight betting on a trend; betting on reversals; and getting in and out within a day.
Title: The Financial Spread Betting Handbook Subtitle: The definitive guide to making money trading spread bets Author: Malcolm Pryor ISBN: 9780857190857 Price: 16.24 Publisher: Harriman House
About the author:
Malcolm Pryor is a member of the Society of Technical Analysts in the UK and has been designated a Certified Financial Technician by the International Federation of Technical Analysts. He is a director of a consultancy practice, and is an expert at several games, including bridge where he has held the rank of Grandmaster or higher since 1996.
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covers how and when best to exit either triumphant or with the ejector-seat help of a stop order. The last chapter in this part touches on more advanced strategies, but Pryors further books and DVDs the latter offering proven off-the-shelf strategies for a couple of hundred quid, as well as online support if necessary are probably the best place for this. And you have got to get to the summit before you can start dabbling in that kind of wonderful stuff. The Route to the Summit The summit approaches through the mist. Dozens of your fellow mountaineers have fallen by the wayside frostbitten by margin calls; mauled by abominable trading systems; or over-reliant upon bulletin board sherpas that have now abandoned them. But you can go on and get there. Enough traders have done and do succeed and Part 3 of this book is all about the trading techniques for doing so. This is about matching strategy to your personality. It is about how to stay in control. It is about keeping records, and giving yourself regular reviews. Most especially, it is about risk management. Because whilst the difference between a good strategy and a duff strategy certainly separates some of the losers from the winners, the difference between effective execution and ineffective execution separates far more. You can have a quiver of superb strategies to hand, but if your hands turn to jelly at the mere whiff of a win or loss your aim will never be true enough to count. You can make all the taxfree spread betting winnings you want, and if you do not have mental and actual ring-fences around that capital and your trading habits you can lose it all plus the house in an afternoon. So in this part, Pryor details what is required to develop a winning attitude not some feel-good motivational buzz, but a dead-eyed ruthlessness about behaviour that does not help your trading, and a nimbleness and courage needed to take advantage of opportunities that do. Conclusion The Financial Spread Betting Handbook is a genuinely impressive and leading guide to trading that, with this second edition, has surely done enough to lay claim to the summit of spread betting guides. It will be hard for anyone else to ascend the mountain and knock it off.
Pryor is quick to point out this is hardly a definitive list; the point is rather to show in detail exactly how such strategies work and how you can either adapt them for your own ends or use their principles to devise your own ones from scratch. Pryor details the basic concepts at each strategys heart. He explains their positive expectancy. He looks at how to identify suitable conditions for their execution. Then he drills down into specific trade selections; triggers to watch for; and detailed examples of trades in action both going and not going the traders way. Finally, he
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TRADERS TOOLS
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The Encyclopaedia of Trading Systems
F1) Screener
WEBREVIEW
Quantpedia.com
Trading without a precise strategy will never be successful in the long run. But how do you develop a trading idea and test its quality? Traders who want to delegate this work to somebody else should take a look at the website Quantpedia.com. It offers many different trading strategies that have all been tested carefully. Short-term or long-term stocks, futures or forex: the choice is broad and the site invites poking around. We will look at the benefits of the encyclopaedia of trading systems and how to use its contents in practice.
The screener offers a fast and convenient selection of specic strategies. Several criteria can be chosen. The trading strategies that match the criteria are shown in the lower part and can be analysed in detail. Source: www.quantpedia.com
What Is the Idea? The philosophy of Quantpedia is to turn academic research into nancial prot. That is exactly what the website offers its users: Instead of doing research on your own you can use the tried and tested methods offered here and decide for yourself which one is right for you. The team at Quantpedia is made up of former portfolio managers and they focus on checking the many research platforms, nancial publications and research dealing with quantitative trading strategies. But nding strategies is not the only important thing. The quality of every strategy is carefully evaluated based on practicability, reliability and backtest-length. Additionally, how well a strategy was checked is
explained. Black boxes that do not have a sufcient description are eliminated during this phase. Another aspect is the question of risk. Strategies are preferred that include risk parameters like maximum drawdown or volatility. By the end of the testing process only a few of the many trading strategies nd their way into the Quantpedias database. In the second step the selected trading strategies are summarised in a generally understandable manner. The user gets a clear description of every trading system. The most important factors are, for example, the risk- and performance-data, the instruments used for trading and the backtest period length. Finally, each strategy is categorised using a number of
F2) Description of the Strategy
The user gets a detailed description of the strategy and a chart showing the hypothetical performance. Source: www.quantpedia.com
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year. After inputting these three criteria three trading strategies are shown (see Figure 1). We assume further that the user decides on the strategy Pairs Trading with country specic ETFs. With a click we get to the heart of Quantpedia the strategy description. As shown in Figure 2, all important information is available. First the term Pairs Trading and the fundamental background of the strategy is described. Then all the key data and criteria are listed. In the next step the strategy is presented in even greater detail. For further information you can see the research and its summary. Finally, a graphical overview of the hypothetical future performance of the trading strategy is presented. The expected performance (one or two standard deviations included) is displayed. As a result the user of Quantpedia receives a complete summary of any given strategy. It just does not get any easier than that. Another way is to choose one or more strategies in the Summary Data Table. This interactive graphic (see Figure 3) shows all available strategies on Quantpedia: name, length of backtest, information about performance/volatility and Sharpe ratio. It is very easy and intuitive and invites poking around and makes comparing different strategies a sinch. Everything Comes at a Price There is also a weekly update published in the Quantpedia blog. The user learns about new strategies in general two or three trading strategies are added each week, continuously adding to the encyclopaedia. But it does come at a price. Two subscription services are offered: a threemonth subscription costs USD 299, the annual subscription is priced at USD 499. Not cheap but for traders and investors looking for common trading strategies and wanting to save time and work, Quantpedia ts the bill. Encyclopedia of Trading Systems Quantpedia delivers what it promises. Apart from the content itself, which brings together many different trading and investment strategies, the clear design speaks for the website. With a few mouse clicks the user nds what he or she is looking for and the description of the various strategies is very understandable. Every strategy is linked to research for deeper understanding. Another advantage is the interactive graphics that make the selection of the strategies with certain criteria easy. So, thumbs up for the encyclopaedia of trading systems.
keywords and database links to similar strategies are created. Strategies en Masse with Seal of Quality At present, Quantpedia offers 124 trading strategies, the majority of which cover strategies based on stocks and futures. The leading strategies are those concerned with stockpicking, long/short positioning and those dealing with momentum. Strategies on a monthly basis predominate but daily, weekly and intraday strategies are offered as well. The integrated screener helps the user in nding the favoured strategy. The database is searchable for the following criteria (for example): Trading periods (intraday, weekly, monthly,) Instruments (stocks, futures, funds, ETFs, CFDs, bonds,) Backtest period Keywords (Momentum, volume, reversal,) Performance Drawdown Volatility Sharpe ratio Passing the Practical Test with Flying Colours Let us get to the practical test. We assume a trader is interested in trading strategies for stocks on a daily basis. The minimum yield target is 20 per cent per
F3) Overall View
An interactive overview of all available trading strategies aids in strategy selection. Source: www.quantpedia.com
TRADERS STRATEGIES
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Analysis of Further Exit Methods Part 5
Development of a Swing Trading Strategy on the Basis of Price, Volume and Volatility Analysis
This series of articles deals with the question of how to develop a swing trading strategy for stocks that can be traded during a certain market situation. We will see how to trade stocks that have already rallied using experience gained during periods like March to June 2007, February to April 2010 and September 2010 to February 2011 when American stocks were in a bull market accompanied by low volatility. In this series of articles we only use price, volume and volatility analysis as tools. To keep the rules as simple as possible, no other indicators are used. The strategy is based on US stocks, but can be adapted to any market and any time frame with minor modifications. The aim is to deduce programmable rules that statistically lead to positive results.
TRADERS TRADERS STRATEGIES
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Faik Giese
Faik Giese is a programmer, consultant, and trader. Through his website www. thewayoftrading.com you can download further background information about his articles. Here he offers a comprehensive training programme for novices and an online course for traders who would like to learn the independent development of trading models on a technical-quantitative basis. Contact: giese@thewayoftrading.com
Starting Point In the first three parts of this series (TRADERS 08/2011, 09/2011, 10/2011) a chart pattern was defined that identified stocks that reached a new 200-day high followed by a correction (or consolidation) of at least seven, at most 15 days. Another criteria for the consolidation: The low of the pullback must not be below three times ATR (Average True Range) that is calculated at the high of the correction that initiated the consolidation and is subtracted from this high. We increased the maximum duration of the consolidation from 15 to 20 trading days in the fourth part of this series of articles (TRADERS 11/2011). This new value is used in this article as well. If a stock fulfils the criteria it becomes a buy candidate only if the following two timing criteria are met as well: a. Volume dries up during the consolidation. The Volume Per
cent Rank Indicator (VoluP) that was deduced in the first article is used to identify a situation when volume dries up. b. The stock builds lower highs on two consecutive days and a lower close. This criteria was deduced in the second part of this series. In the previous article (Part 4, TRADERS 11/2011) the strategy was adjusted to the behaviour of the broad stock market by introduction of a volatility indicator on the S&P 500: Only if the S&P 500 is in a phase of low volatility as well, can an entry in stocks that met the above mentioned criteria be made. The portfolio simulation testing the entry rules was done with a weighting of 4.8 per cent, a holding period of ten trading days and a stop loss of 20 per cent (that leads to a shorter holding period if triggered) over the period of 1st of January 2003 to 31st of December 2010
Strategy Snapshot
Strategy name: Strategy type: Timeframe: Portfolio/markets: Setup: Swing Trading of weak price retracements on the basis of price, volume and volatility analysis Part 5 Trend-following and indicator-based Daily chart US-stocks listed over the period of 2002 to June 2011 Long only; volume indicator VoluP identies a phase during which volume dries up; new 200-day high followed by a consolidation of at least seven, at most 20 days; low of consolidation may be 3xATR off from 200-day high at most. Entry only if VolaP (calculated for a period of 256 trading days with a 20-day ATR) of S&P 500 is below 50 per cent and therefore shows a phase of low volatility Buy at the open of the following day once all the setup criteria are met on the previous day and the stocks built lower highs on two consecutive days and a lower close 20 per cent below entry At 30 per cent None Sell after ten trading days on next days open (market order) unless stop-loss or target prot was executed; see tables and gures 4.8 per cent per position See tables and gures
Entry:
Stop-loss: Take prot: Trailing stop: Exit:
Risk and Money Management: Average number of signals/ average hit quote:
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1. Trailing Stops: This method subtracts the amount X from the high of the previous trading day and thus defines the exit. If the exit is below that of the previous day, the stop of the previous day remains. This is to make sure that the stop is only adjusted higher. The amount that is subtracted from the high is either based on the ATR or percentage-based. 2. Implementation of target profits, triggering an exit at a certain point to realise profits. We will pass on the use of the 20-per cent stop loss used in method 1), as these methods already include a stop loss. Analysis of Trailing Stops Table 1 shows the results during the period of 1st of January 2003 to 31st of December 2010 for both exit methods (strategies II a) to c) and strategies III a) to c)) and for comparison strategy I, that relates to the strategy of the previous article. Strategy I uses only a stop loss of 20 per cent and an exit if the stop loss is not triggered after ten trading days. If an ATR-trailing stop with a factor 2.0 is used, the results shown in the column strategy II b) are produced.
F1) Development of a 100,000 Dollar Account
without further stops, without commissions and slippage, with a 100,000 USD-margin account. The annualised performance amounts to 17.75 per cent and the maximum drawdown is -9.84 per cent this result is positive against the background of an average degree of investment of 21.41 per cent. The result is shown in Table 1, column Strategy I. Further Exit Methods The next question is: Can the result be improved by implementation of further exit methods? We will look at two methods:
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The depicted portfolio development is reached if the rules stated in the strategy snapshot are used with a 100,000-dollar margin account and a weighting of 4.8 per cent per position. Entries and exits are done at the open. The holding period is ten days unless the stop loss of 20 per cent or the target profit of 30 per cent leads to an earlier exit. Commission of one cent per share is considered, slippage is not considered. Source: AmiBroker. own research: www.thewayoftrading.com
www.traders-mag.com
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developing trading strategies shows that trailing stops in stock-swing-trading only work in exceptional cases. There is no improvement opposed to an exit after x days. The reason is among others, that the typical holding period in swing trading is three to ten trading days (in exceptions one to two trading days). The advantage of trailing stops (letting profits run) can not develop during such short holding periods. The results in Table 1 (testing stops further apart) show that the strategy is not useful for longer holding periods. Strategies IIc), IIIb) and IIIc) hold their positions longer than 25 trading days on average and do no better than strategy I. Analysis of Target Profits Finally, we analyse whether the use of target profits will lead to an improvement over the previous results (strategy I of Table 1). The previous analysis showed that the
The annualised performance amounts to 6.64 per cent, the average holding period to 13.44 days and the maximum drawdown to -13.56 per cent. There is no improvement compared to strategy I (without trailing stop). For the record: In all six cases there is no improvement because of the use of trailing stops over strategy I. This is no surprise: The authors 14-year experience in
T1) Analysis of Trailing Stops
Initial Capital Ending Capital Net Prot % Exposure % Annual Return % All Trades Avg. Prot/Loss % Avg. Bars Held Winners Avg. Prot % Avg. Loss % Max. System % Drawdown CAR/MaxDD Prot Factor
Holding period Exit with ATR-trailing stop 10 days + High High 20% stop loss 1*ATR(12) 2*ATR(12) 100,000 100,000 100,000 369,669 65,606 167,225 269.67% -34.39% 67.23% 21.41% 8.71% 26.77% 17.75% -5.13% 6.64% 1627 1.72% 9.87 60.11% 5.65% -4.20% -9.84% 1.81 2.04 2043 -0.42% 3.23 34.21% 1.56% -1.45% -35.58% -0.14 0.55 1645 0.69% 13.44 46.63% 5.13% -3.19% -13.56% 1.83 1.4
High 3*ATR(12) 100,000 226,427 126.43% 46.59% 10.76% 1316 1.37% 29.15 45.52% 8.49% -4.57% -17.50% 0.61 1.49
Exit with percentage-trailing stop 3% below high 5% below high 7% below high 100,000 87 163 -12.84% 36.98% -1.7% 1879 -0.14% 14.9 38.27% 2.31% -1.66% -18.84% -0.09 0.85 100,000 16,2017 62.02% 50.06% 6.22% 1516 0.71% 27.91 45.58% 4.93% -2.83% -7.62% 0.82 1.46 100,000 198,231 98.23% 63.09% 8.93% 1190 1.23% 45.57 45.80% 7.18% -3.19% -9.43% 0.95 1.58
Drawdowns of the account shown in Figure 1. The maximum drawdown amounts to -9.34 per cent. Source: AmiBroker. own research: www.thewayoftrading.com
F2) Drawdown Chart
Table 1 shows the results of ATR-trailing-stops (strategies II a) to c) and per cent-trailing-stops (strategies III a) to c)) in comparison to the strategy of article 4 (exit after ten trading days, unless the 20-per cent-stop is triggered earlier). Source: AmiBroker. own research: www.thewayoftrading.com
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Prot Target in % 20 30 10 20 30 10 20 10 30 20 30 10 30 20 30 20 10 10 30 20 30 10 20 30 20 30 10 20 10 10 30 20 10 30 20 10 Net Prot in % 80.61 78.64 76.54 78.29 76.35 74.28 75.48 71.53 73.56 70.32 68.65 67.12 270.41 257.74 253.99 241.86 213.61 199.77 220.3 209.31 184.01 169.29 174.98 246.1 233.2 237.58 199.59 222.9 191.68 138.92 206.4 194.86 165.45 170.46 160.47 134.44 Exposure in % 12.65 12.69 12.41 12.62 12.66 12.39 12.52 12.28 12.56 11.87 11.91 11.62 21.28 21.1 21.16 20.97 19.93 19.8 20.66 20.47 18.78 19.3 18.6 28.46 27.98 28.16 25.77 27.68 25.47 17.38 27.28 26.82 24.54 24.29 23.77 21.44 Annual Return in % (CAR) 7.67 7.52 7.36 7.5 7.35 7.19 7.28 6.98 7.14 6.88 6.75 6.63 17.78 17.27 17.12 16.61 15.36 14.71 15.66 15.16 13.94 13.18 13.48 16.79 16.24 16.43 14.7 15.78 14.32 11.5 15.02 14.47 12.98 13.24 12.71 11.24 Max. System Drawdown in % (MDD) -8.15 -8.35 -8.16 -8.09 -8.29 -8.1 -7.6 -7.57 -7.6 -7.15 -7.28 -7.09 -9.34 -9.34 -9.45 -9.45 -8.88 -9.05 -9.03 -9.03 -7.95 -8.81 -7.95 -17.64 -17.65 -17.49 -16.29 -17.49 -15.93 -7.53 -15.19 -15.18 -12.75 -13.31 -13.3 -10.53 CAR/ MDD 0.94 0.9 0.9 0.93 0.89 0.89 0.96 0.92 0.94 0.96 0.93 0.94 1.9 1.85 1.81 1.76 1.73 1.63 1.74 1.68 1.75 1.5 1.69 0.95 0.92 0.94 0.9 0.9 0.9 1.53 0.99 0.95 1.02 0.99 0.96 1.07 Prot Factor 1.54 1.54 1.53 1.53 1.52 1.51 1.5 1.49 1.49 1.47 1.46 1.46 2.06 2.04 2.01 1.98 1.96 1.91 1.88 1.86 1.77 1.77 1.75 1.74 1.73 1.72 1.71 1.71 1.69 1.66 1.65 1.64 1.61 1.6 1.59 1.56 Number of Trades 1755 1755 1759 1755 1755 1759 1760 1764 1760 1791 1791 1793 1623 1625 1623 1625 1643 1643 1626 1628 1682 1645 1685 1506 1511 1509 1556 1514 1557 1699 1526 1530 1569 1606 1610 1641 Avg. Prot/ Loss 0.72 0.71 0.7 0.71 0.7 0.68 0.69 0.66 0.68 0.64 0.62 0.61 1.72 1.68 1.67 1.62 1.49 1.44 1.53 1.49 1.32 1.3 1.28 1.82 1.76 1.79 1.56 1.72 1.52 1.1 1.63 1.57 1.38 1.36 1.31 1.12 Avg. Bars Held 5.97 5.98 5.87 5.95 5.97 5.85 5.88 5.78 5.89 5.44 5.46 5.34 10.84 10.76 10.75 10.67 10.15 10.06 10.42 10.34 9.06 9.73 8.98 15.62 15.37 15.38 13.94 15.13 13.7 8.4 14.66 14.42 13.01 12.22 11.99 10.71 Winners in % 55.67 55.61 55.83 55.67 55.61 55.83 55.63 55.78 55.57 53.77 53.71 53.88 60.2 60.18 60.01 60 60.93 60.74 59.23 59.21 53.8 59.88 53.89 59.56 59.63 59.38 60.67 59.31 60.37 54.21 58.06 58.1 59.21 49.94 50.06 51.19 Avg. Prot in % 3.83 3.81 3.77 3.83 3.81 3.77 3.83 3.76 3.81 3.81 3.8 3.76 5.63 5.55 5.63 5.55 5.14 5.15 5.65 5.57 5.75 5.16 5.65 6.84 6.72 6.85 6.16 6.74 6.16 5.26 6.84 6.72 6.14 7.01 6.88 6.24 Losers in % 44.33 44.39 44.17 44.33 44.39 44.17 44.38 44.22 44.43 46.23 46.29 46.12 39.8 39.82 39.99 40 39.07 39.26 40.77 40.79 46.2 40.12 46.11 40.44 40.37 40.62 39.33 40.69 39.63 45.79 41.94 41.9 40.79 50.06 49.94 48.81 Avg. Loss in % -3.18 -3.17 -3.18 -3.21 -3.21 -3.21 -3.24 -3.25 -3.24 -3.06 -3.06 -3.06 -4.18 -4.17 -4.29 -4.28 -4.2 -4.3 -4.44 -4.44 -3.83 -4.46 -3.83 -5.57 -5.58 -5.6 -5.53 -5.6 -5.56 -3.84 -5.58 -5.56 -5.54 -4.27 -4.27 -4.25
T2) Analysis of Target Profit

Test Run Number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Holding Period in Trading Days 5 5 5 5 5 5 5 5 5 5 5 5 10 10 10 10 10 10 10 10 10 10 10 15 15 15 15 15 15 10 15 15 15 15 15 15 Stop Loss 20 20 20 15 15 15 10 10 10 5 5 5 20 20 15 15 20 15 10 10 5 10 5 20 20 15 20 15 15 5 10 10 10 5 5 5
Table 2 shows the results for different holding periods, stop losses and target profits, based on the same account used in Table 1 and Figure 1.
Source: AmiBroker. own research: www.thewayoftrading.com
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trades leads to an annualised performance of 7.67 per cent and a maximum drawdown of -8.15 per cent. A comparison of annualised performance (CAR = Compound Annual Return), maximum drawdown (MDD) and profit factor to the results of strategy I shown in Table 1 leads to the conclusion that there is some improvement if the target profit is 30 per cent. Thus, the profit factor and the proportion of CAR to MDD could be improved. From the psychological view it makes sense to realise a profit if it amounts to 30 per cent or more. Therefore the target profit of 30 per cent is implemented in the strategy for the exit. Results of the Strategy with Wider Timeframe Figure 1 and 2 as well as Table 3 and 4 show the results of a simulation of a 100,000 USDaccount during the period of January 2002 to June 2011 based on the rules of the setup shown in the strategy snapshot. If all entry criteria are met entry is made at open the next day. Exit is ten days later at open unless the stop loss or the target profit has been reached earlier. The weighting of every position is 4.8 per cent. With a stop loss of 20 per cent the risk per position is only 0.96 per cent of
T4) Monthly and Annual Performance of the Strategy
Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Avg Jan 1.5% -1.0% 8.0% -2.1% 6.7% 3.6% 1.6% 1.9% 2.0% Feb -0.9% 0.0% 5.1% 2.7% 2.1% -4.0% 0.5% 2.3% 0.7% Mar 1.5% 0.1% -1.4% 1.6% -1.4% 0.9% 2.0% -0.8% 0.2% Apr 6.9% 0.5% -0.5% 1.2% 0.0% 0.4% -0.6% 9.7% 2.1% 2.0% May -0.5% 5.7% -1.8% 0.0% -4.5% 5.4% 2.2% 0.1% -1.8% 0.9% 0.6% Jun 1.1% 1.3% 0.8% -0.7% 0.2% 1.0% -1.6% 0..2% Jul 2.4% -0.4% 3.6% 0.2% -0.8% 0.6% Aug 10.3% -0.2% 0.6% 0.6% 2.1% 3.6% 2.2% 2.1% Sep -2.7% 1.% 0.8% 0.4% -5.4% 6.2% 2.7% 0.4% Oct 12.6% 0.3% -1.5% 0.7% 2.2% 1.3% 1.7% Nov 8.7% 1.5% 1.2% 2.6% 4.1% 5.6% 2.6% Dec 0.4% 2.2% 0.8% 1.8% 2.3% 8.2% 11.5% 3.0% Yr% 9.1% 46.3% 14.7% 9.7% 9.8% 5.1% -0.4% 26.4% 40.5% 4.9%
implementation of trailing stops makes no sense, therefore target profits are analysed based on a combination of holding duration and stop losses. Table 2 shows the results of 36 trials with various holding periods, stop losses and target profits. A commission of one cent per share is considered as well. Example: Trial 25 exits on the open of the 25th trading day, if the 20 per cent stop loss or the 20 per cent target profit is not reached earlier. Trial 25 with 1755
T3) Statistics of the Portfolio Simulation
Initial Capital Ending Capital Net Prot % Exposure % Annual Return % All Trades Avg. Prot/Loss % Avg. Bars Held Winners Avg. Prot % Avg. Loss % 100,000 430,335 330.34% 20.26% 16.61% 1801 1.74% 9.02 59.86% 5.75% -4.25%
Table 4 shows the monthly and annual performance of the account shown in Figure 1 during the period of January 2002 to June 2011. Source: AmiBroker, own research: www.thewayoftrading.com
Max. System Drawdown % -9.34% CAR/MaxDD 1.78 Prot Factor 2.00

Table 3 shows the typical key figures of the portfolio simulation based on the described criteria shown in Figure 1. Source: AmiBroker. own research: www.thewayoftrading.com
the actual account size, which is a conservative number. As the stop loss is triggered only a very few times, it is possible to change the weighting to 6.8 per cent and increase the annual performance. In the simulation, a margin account is used that allows to trade double the amount of the account. 40 positions are opened at maximum. On days with more entry signals than the account allows, candidates are sorted according to the 200-day performance and only the best stocks are used until all capital is invested. A commission of one cent per share is included, but no slippage. As the entries and most of the time the exits are executed at open, slippage
should be minor. Table 3 shows the main statistics of the portfolio simulation. The annualised performance amounts to 16.61 per cent, the maximum drawdown as a ratio for the risk taken is -9.34 per cent. The profit factor as a measure of the quality of the strategy is a very good 2.00. The increased backtestingtime frame leads to stable results as well. Table 4 shows that the strategy trades selectively and therefore there were few trades during the bear markets 2002, 2007 and 2008. By contrast an exceptional performance was reached during typical bull markets September 2010 till December 2010 with low volatility and that was the aim of this series of articles.
Summary and Outlook In this fifth and second to last part of this series of articles the strategy was combined with different exit methods. Only the consideration of a 30 per cent target profit showed a little improvement in the strategy. The results of the simulation were positive during the period of January 2002 to end of June 2011 against the background that during negative, high-volatility market phases there was no trading and that during bull markets with low volatility a very good performance was achieved. In the last part of this series drawdowns will be analysed. Finally, we will discuss in which cases the strategy needs discretionary intervention.
For Aggressive Day Traders
Breakout Strategy
There are times when the market does not provide great opportunities for traders. For instance, the market was at a better level overnight and we missed the opportunity for execution at the best possible price. When the market is trending nicely either up or down, there is a strategy that may provide us with an opportunity. This is the breakout strategy. The breakout strategy is a great arsenal to add our trading plan and works very well, when used properly. The breakout strategy may do wonders for your trading. Please take the time to test the breakout strategy and to be comfortable with its execution before going live.
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Why Trade Breakouts? There are days when we have a feeling that tells us price will break out of its daily high or break below its daily low. For a trader to feel this confident about price action is exciting, yet risky. If trading breakouts is in our trading plan, then we have to recognise that trading breakouts is not a low risk opportunity. However, if our target is within our risk to reward, we have an opportunity to execute a day trade. We may also view the breakout strategy as being a confirmation trade. This means that we are convinced that the trend and momentum of price is moving up or down. This strategy can easily be applied to any product. In this example, we will use the E-Mini S&P futures contract. This is the most highly traded product in the E-Mini Futures market. It averages over two million contracts a day. It is critical that we choose a product that has tremendous liquidity. There are some products that have less liquidity, which will equate to slippage and increased stop outs. Included in this group would be the FDAX (DAX Future) and the Russell futures. We should leave these two futures products to be traded by very experienced momentum day
traders. However, the Euro futures and FESX (EURO STOXX 50 Future) are additional safe futures products to use with this breakout strategy. Strategy for Breakout Opportunity We want to make it clear that if we want to go short or long on a breakout strategy it must be with the long- and short-term trend. This stacks the odds in our favour. Figure 1 is a 5-minute chart of the E-Mini S&P futures. They are traded 24 hours a day from Sunday 5pm central to Friday 3:15pm central. During overnight trading, the E-Mini S&P futures puts in a 24-hour high and a 24-hour low. On November 21, we put in a 24-hour high of 1209 and a low of 1192. The E-Mini S&P futures are in a long- and short-term downtrend. It is better that we look for a short as price breaks down below the 24-hour low 1192. Let us analyse Figure 1. On the 8:45am candle, price fails to close below the 24-hour low of 1192. However, price has pierced through the 24-hour low putting in a new low at 1190.50. The candle formed at 8:50 closes on the 24-hour low of 1192. We want to see a red candle with tremendous
weakness that closes below the 24-hour low and breaks the previous two candle lows. At 8:55am, this candle closes below previous 5-minute candle lows and makes a new low. Now we can lean on the 24-hour low as a shorting opportunity. Remember that this is a high risk trade due to the fact that there are better opportunities above. Breakout Plan and Execution The E-Mini S&P futures contract is in a downtrend so, we shall prepare for a short entry at 1192
Strategy Snapshot
Strategy name: Strategy type: Time horizon: Setup: Entry: Stop-loss: Take Prot: Trailing stop: Exit: Risk and Money Management: Average number of signals:
or just below. Our trading plan will be a short entry at 1191.50 with a stop limit above. The target will be 1185.50. Risk to Reward Our risk will be two points and our reward will be six points. We will use the 5-minute ATR (Average True Range) for our risk and the 60-minute time frame (Figure 2) for our target. Since the ATR on a 5-minute is 1.73 we will round it to two points. The ATR on November 21 on the 60-minute is 6.70. We will
Brandon Tristan
Brandon has ten years energy trading analytical experience, working on the energy trading floors in Houston. He decided to become an independent professional trader, so in 2007 he graduated from Online Trading Academys Professional Trader Course and continued his education in their Extended Learning Track Program (XLT). Since September 2009, he has exclusively traded the futures and the Forex markets.
Breakout Breakout Strategy only for the aggressive trader 60-minute chart, 5-minute chart 24-hour daily lows must be broken or 24-hour daily highs must be broken Limit below or at 24-hour low or high 5-minute Average True Range = two S&P contract points 60-minute ATR = six S&P contract points None Either stopped out at two S&P contract points or hit six S&P points for target Risk = 1193.50 - 1191.50 = 2 points, 2 * $50 = $100 Target = 1191.50 - 1185.50 = 6 points, 6 * $50 = $300 Reward to Risk = $300/$100 = 3 to 1 At least two per week if trend intact
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S&P = $50 a point Entry = 1191.50 Risk = 1193.50 - 1191.50 = 2 points, 2 * $50 = $100 Target = 1191.50 - 1185.50 = 6 points, 6 * $50 = $300 Reward to Risk = $300 / $100 = 3 to 1 Managing the Trade As our entry was executed, there was a lot of basing before the S&P continued its downtrend. If we would have moved our stop to break-even, we would have been stopped out. That is why we always have to remain disciplined and always stick to our plan. Results of Breakout Strategy Trade The breakout day trade worked out nicely. It took approximately one hour to meet its target. What a great day of work. We must be aware that this is not a low risk, high probability trade, but it is a strategy we may add to our trade plan when the better opportunity was missed and we feel confident the market will continue its trend. Conclusion Breakout trading is for veteran traders. Due to the higher risk involved, new traders should simulate this strategy. The breakout strategy is like a knife. It can just keep cutting up our account if we do not prepare with extreme caution. We should simulate and test this strategy when the market is in an uptrend and a downtrend. We do not want to trade a strategy until we feel comfortable with its execution and results. With patience and discipline, the breakout strategy will make a wonderful fit into your trading tools. This strategy can be applied to any product. We need to do our homework and find out all the specifications of the product before we apply this strategy. The results when not doing our research can be detrimental to our account. Why take the risk with our precious assets? We have to use our professional judgment in deciding when to execute this breakout strategy on a live account.
use six points, because this gives us a higher probability of hitting the target and this is only a momentum day trade. This calculates for a good 3 to 1 reward-to-risk ratio for our opportunity. Trade Parameters and Risk Management Entry: 1191.50 Stop: 1193.5 Target: 1185.50 The S&P moves $12.50 a tick. A tick is 0.25. So four ticks at 0.25 equals one point. In which, one contract of a point of the S&P equals $50. We are risking two points on one contract S&P which equals $100 to make six points that totals $300. This is a 3:1 reward-to-risk ratio. So, this trade opportunity meets our prerequisite.
Average True Range (ATR)
F1) S&P E-Mini 5-Minute Chart
Pink: 24-hour high 1209 and 24-hour low 1192 Black: Entry at 1191.50 Blue: Stop at 1193.50 Green: Target at 1185.50 Source: www.tradestation.com
F2) S&P E-Mini 60-Minute Chart
The Average True Range (ATR) is a technical analysis volatility indicator originally developed by J. Welles Wilder for commodities markets. The indicator does provide the degree of price volatility in the market. By calculating the difference between: High and Low of today High of today and Close of yesterday Low of today and Close of yesterday The advantage of the ATR is therefore the consideration of gaps and limit moves within a trading margin by not only recording the Highs and Lows of the day but also orders made overnight. Looking at an average (common are 14 days) can help considering the right trades.
We use the 60-minute chart for our target. The ATR is 6.70. We will use six points, because this gives us a higher probability of hitting the target as this is only a momentum day trade. Source: www.tradestation.com
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Bull Call Spread and Bear Put Spread Part 2
How to Implement Options Strategies Correctly

If a trader has a certain idea about where a share is headed in the future, using an options strategy can enhance performance. This is especially profitable if the trader has previously achieved gains and is now in a scenario to increase profits even further. In the second part of this series of articles on options, we will take a look at some simple strategies dealing with increasing and decreasing prices. This time we will focus on limiting risk.
Bull Call Spread In the first case we believe that the price of our share can increase further but not by very much. We try to profit from the completion of a movement and try to improve the remaining profit with a combination of two options. So we buy a call with a strike at the money, which means that the current price of the underlying share is at or just a little below this price. At the same time we sell a call with a higher strike that does not differ too much from the current price of the share but is clearly out of the money. This combination is called Bull Call Spread or vertical Bull Call Spread. Both calls should have the same expiration month and the same underlying stock. The idea of this options strategy is to use the increasing price to full capacity and to boost the profit considerably with the help of options. However, we are limiting risk by simultaneously buying and selling calls. As the call at the money is bought, this options strategy is also called a covered spread. Most brokers have no special margin rules for this kind of spread. However, it can only be traded within a margin account. Anybody using a cash account cannot short shares or speculate
on credit and therefore will not be able to execute such a strategy. Let us look at a practical example. Commissions are not considered. Let us assume we have a stock that rallied to a price of 70 USD and we do not think that it will continue to rise much further, maybe only a few points. But we want to improve the profit by using an options strategy think of it as kicking in the turbo. As we have already made a profit with this stock, we want to limit the possible loss as best as possible. So we buy a call with a strike price at the money, thus $70 or little below. In our example the call costs $4. At the same time we sell a call with a strike price out of the money in our case higher than $70. We choose a call with a strike price of $80. As the call is clearly out of the money it is cheaper, say it costs $1. In this example we use calls on standard contracts. This means that one contract controls 100 shares. We therefore have to pay $4 x 100 shares = $400. We receive $1 x 100 shares = $100 for the sale of the out of the money call. The full cost of the complete strategy amounts to $400 - $100 = $300. To avoid a loss, the price of the share has to increase to $73 at expiration date. Anything over $73 is profit. However, profit and
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loss are limited with this strategy. If price rises above $80 the maximum profit amounts to $10 x 100 shares = $1000 (for the call bought at $70) minus the cost of $300 = $700. Independent of the continuing price rise, profit will not increase further. The same goes for the possible loss. If the price falls below $70 at expiration date, the maximum loss is the cost of the strategy, in this case $300, as both options expire at nil value. Figure 1 shows the profit area. The profit potential is interesting. The possible gain of $700 amounts, after all, to 233 per cent of the risk ($700 / $300 x 100). That is much more than the profit potential of the share itself. If we had bought 100 shares at $70 the initial investment would have been $7000. The rise of $10 to $80 would have achieved a profit of 100 x $10 = $1000. That means a profit of only 14.28 per cent of the risk ($1000 / $7000 x 100). The profit with options is considerably higher. But the strategy is only interesting if we do not expect the share price to move too much further. If we expect the price to increase further, then this strategy will limit profit potential and is therefore not ideal. We would still achieve a higher profit than we would with the share alone, but there are better options strategies in such a situation. Bear Put Spread In the second example we assume decreasing prices. So we choose two puts for our options strategy. The idea is the same: We expect the price of the share to fall, but not by much. That means the slump in price is nearing its end. In this scenario we want to achieve the highest possible profit so we choose two options to earn a certain amount of profit and loss. Again the risk is limited. Take the following example: The share price is $70 and we assume that the price can decrease a further $10, say to a price of $60. We use our options strategy and buy a put with a strike price of $70 that costs $5. This means, we have to pay $5 x 100 shares = $500 to buy this put. Additionally, we sell an out of the money put, for example, at a strike price of $62. This put costs $2. As we sell it, we earn $2 x 100 shares = $200. The difference of this deal is -$500 +$ 200 = -$300. The cost of our strategy amounts to a loss of $300. Again, the risk is limited. If the price of the share increases above $70 at expiration date, both options expire with no value and the maximum loss of $300 is realised. The disadvantage of the strategy is that the profit is limited as well. The maximum profit is $8 - $3 = $5.
F1) Bull Call Spread
Detlef Wormstall
Detlef Wormstall started trading US stocks and futures in 1996 and later specialised on risk and money management. He runs www.tradenetconsulting. com where he publishes his articles. He can be hired as an individual coach. Contact: info@tradenetconsulting.com
The profit is limited, but it is higher than the profit of the share itself. Source: TRADERS graphic
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that price movement has nearly reached its end. It is not wise to use these strategies during an existing trend. They are best implemented if there are indications that the shares movement of a share is coming to an end. This could be a substantial overvaluation that is indicated by an increasing price/ earnings-ratio (PER). Based on the fact that markets have an average PER between ten and 20, a share with a PER of 80 is considerably overvalued. But that does not mean that the price of this share can not increase further, because that depends only on supply and demand; but it offers the possibility to speculate on the end of the trend. Bad news can be another hint. The relevant company delivered good news in the past, but suddenly there is bad news. That as well could well mean the end of an existing trend. Pay Attention to the Following If you trade based on these strategies, the cost of the spread should be less than half of the difference of both strike prices of the options, otherwise you limit the risk but the possible profit is too small and thus the risk taken is unjustifiable. The spread should have the same expiration month in both options. The minimum maturity should at least 45 days. It is important that the difference between the two strike prices is not too great. The share price should not have to increase more than ten per cent to reach the upper option price. Conclusion These options strategies are simple approaches with limited risk and limited profit. They are suitable if a trader thinks a movement is coming to an end. If one chooses short maturities and minor differences between the two options, both strategies earn a higher profit than trading the stock itself. The strategies earn particularly good profits if a gain has already been achieved on the prior trend.
This scenario is also called Covered Spread and you need a margin account to execute it, but there are no further requirements. Profit and loss are limited, but profit is higher with this approach than by shorting the stocks. After all we can achieve a maximum profit of 166 per cent ($500 / $300 x 100). Figure 2 shows the development of profit that is achieved if price in contrast to our first strategy decreases. Strategy We would like to point out again: Both strategies have the aim of increasing the profit potential of a share price movement if a trader expects
Strategy Snapshot
Strategy name: Strategy type: Timeframe: Setup: Bull Call Spread: Bear Put Spread: Stop-loss: Take prot/exit: Trailing stop: Risk and Money Management:
F2) Bear Put Spread
Bull Call Spread/Bear Put Spread Trend following Several months Stocks in a trend that may weaken; increasing the prot in comparison to the share with limited risk Bull Call Spread: long at the money call, short out of the money put Long at the money put, short out of the money put; same details of the options None; max. loss = cost long option - prot short option Early exit at sharp increase in price None Not more than 2 per cent of total capital for the remaining risk per position. No progressive entries.
Especially with decreasing shares, the risk needs to be limited. This strategy allows a nice profit. Source: TRADERS graphic
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Short-term Strong Trend Reversal Signals
Morning and Evening Star Pattern Trading

Trend reversal pattern trading is a low risk-high return strategy for short-term professional traders. The pattern introduced here not only sounds similar to certain stars but can also fill your account with sound profits while reducing worry. This article shows you how to get the best benefit out of star pattern trading.
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Pattern Trading There are as many patterns for reversals in the world of technical analysis as there are stars in the night sky; to name a few, double tops and bottoms, engulfing patterns, flags et al. Technical analysis pattern trading allows trading with less risk with the possibility of maximising profits for a particular pre-determined time period determined by the professional trader. On the other hand, volume is an important factor for determining the perfect reversal pattern. A noticeable increase in volume should cause traders to look for the completion of price patterns. Accordingly, trend reversal price patterns with normal volume indicate where and when to place entry and exit limits. Pre-determined and calculated entries and stops are also helpful in selecting position size. One of the first signs of a trend reversal is the breaking of an important trend line. However, the breaking of the trend line will be no more than a signal of a change in trend whether it be a sideways trend or price pattern proving later to be a reversal or consolidation. Morning and Evening Star I have found that three day price pattern trading strategies are more effective than two day price pattern trading strategies as they involve a longer time period. Hence, the effect of a three day price pattern trading strategy is more often more sustainable than a two day pattern strategy. Morning and Evening Star price pattern trading strategies include three candles and can be found in daily, weekly, monthly as well as in intraday charts. These reversal patterns first occur after 20 to 25 candles. Morning Star setups include firstly, a bearish long candle, secondly, a small-bodied candle and thirdly, one long and bullish candle. The Morning Star candlestick is shown circled in Figure 1. This Morning Star candlestick works as a bullish reversal pattern of the downward price trend. The reason for this is that the price declines into the candle and exits out of its top. We can see that the bottom of the candlestick pattern acts as a support zone created by the tall black candle which gaps downward. Evening Star patterns are somewhat like a Morning Star price movement in inverse and occur at the upper side of the chart for bearish movements in some short intervals. Evening Stars include three candles total. The first candle needs
F1) Morning Star Doji Type
Figure 1 shows the Morning Star doji type of candle in the S&P 500 daily chart. After completion of the pattern, some good short covering can be seen for a short period of time. Source: www.tradesignalonline.com
Keyur Panchal
Keyur Panchal has an MBA in finance, a Masters in cost accountancy & finance and is pursuing his CFA. He has been working as a Finance Research Analyst in Ahmedabad, India. He is also handling his clients portfolios using technical and derivative analysis of market movements to profit in any kind of situation. Contact: keyurpanchal5@yahoo.com
F2) Evening Star
Figure 2 shows an Evening Star pattern in the CAC 40 daily chart. We can see some downside movement for a short period of time. Source: www.tradesignalonline.com
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investments are not favourable and advisable using this strategy. Practically, the second candle of these reversal trading price patterns show some heavy buying pressure for Morning Star and selling pressure for Evening Star patterns respectively. Figures 3 and 4 indicate ideal entries for both reversal price strategies. Position Size If traders profit, then all is well and good, and profit can be booked. But if a trade starts to lose, traders might take a longterm position till he or she is back to black. Perhaps this point never comes. Hence, defining the position size is keenly important for any trade in any price pattern strategy. As a general rule of thumb, never risk more than two per cent of the margin account capital per trade. Practically, size is defined by the number of stocks = 0.02 * trading account / (entry level exit level). This is the level to use in order to not ruin the portfolio when several losing trades in a row occur. Exit The most important factor in trading is finding an exit point. Sometimes traders incur losses due to entering the market and failing to exercise positions without a proper exit plan when real money is involved. Both, Morning and Evening Star price pattern strategies have a particular short-term exit point that should be maintained at the sixth candle from the starting point of these patterns. Here, traders will enjoy returns similar to risk i.e. return = (3rd candles high - 2nd candles low) for Morning Star and return = (2nd candles high - 3rd candles low) for an Evening Star pattern. High volatility will provide more profitable exit targets. The second candles low should be maintained as a stop for the Morning Star pattern and the second candles high for the Evening Star pattern. Beware that these pattern strategies may fail if rumours, fundamental news and low or abnormally high volume occur. Additional confirmation for trend reversals while tracking these patterns are analysing indicators (MACD, Stochastic and RSI), moving averages and insider news of the underlying asset. Greater risk offers greater returns and vice versa. Review and Outlook The objective of this article was to identify successful profitable trading patterns which usually occur on intraday and daily charts. These price pattern strategies can be interpreted in different ways and can be combined with several formations in defining entry and exit points.
to be a long white candle, a second candle will have a small body and the third will be a long red bearish candle. The Evening Star candle works as a bearish reversal of the uptrend as the breakout is downwards. A downward breakout occurs when price closes below the bottom of the candlestick pattern. In Figure 2, the new downtrend is a lasting one, however, it takes its time in trending lower. Entry Before applying any trend reversal trading strategy, a trader needs to determine the best entry level for his or her trade. i.e. when or where the entry is to be made. As far as Morning and Evening Star patterns are concerned, the entry should be made on the third candles closing time for these patterns. If a trader is less risk tolerant and desires more confirmation of the entry level, entry should be made on the fourth candle of these patterns which occurs after pattern completion and gives a perfect idea of the reversal trend. Here, Morning Stars indicate a rising and bullish trend for a short period of time. Evening Stars indicate a declining and bearish trend for a short time period. These patterns are only for shortterm trend reversals so mediumterm or long-term horizons for
F3) Morning Star Entry and Exit Levels
Figure 3 shows entry and exit levels for the Morning Star strategy for the FTSE 100 daily chart. After the entry, some good movement can be seen in 2-3 trading sessions. Source: www.tradesignalonline.com
F4) Entry and Exit Level in Evening Star
Figure 4 shows entry and exit levels for the Evening Star strategy for EUR/CHF spot daily. A noticeable increase in volume will boost the reversal in both price patterns. Source: www.tradesignalonline.com
Basic Market Structure
Smart Traders Edge

Smart Traders Edges are not buy or sell triggers. They are techniques and alerts to help you determine high probability trading opportunities. This issue will focus on understanding Basic Market Structure to help you determine where some opportunities exist to enter or scale into a position.
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From prior articles (TRADERS09/2011, 10/2011), we understand that trading is actually very easy and therefore the market purposely provides excessive information in order to maintain a level of mystique. So maybe those who are not properly educated will remain confused. That statement may seem harsh or contradictory but the undeniable truth is that confused traders are the necessary contributors for the properly educated to derive their gains. Properly educated in trading means you understand and apply the KISS (Keep it Simple, Stupid!) concept. It says that less is more! Less complicated and more simple trading techniques usually produce more consistent and far better results. The goal is to identify basic market structures. When you know how to analyse structure you will be better prepared to anticipate movement that can help you become a more effective and efficient trader. It Is All about Seeing Basic Market Structure Without structure nothing exists. Think about anything and ask yourself why does it exist? Could it still exist if the critical components that are part of its structure were removed? What is its purpose? Could it still serve its purpose if it was built up without regard to specific blueprints (set of rules) that cause it to function properly? Beyond all question, markets have a basic structure and if a trader does not recognise this, his account will suffer. Here are the components of basic market structure: 1) Observed Price Pivots 2) Price Cycles or sometimes called Price Swings 3) Impulse and Corrective Moves 4) Trend Do not confuse observed price pivots with calculated pivot points/levels. Observed structural price pivots are significant high and low points to show where prices change direction. There also is an absolute that exists between the relationships of these pivots. A high price pivot must be followed by a low price pivot which must be followed by a high price pivot and so on and so on. This is the basic structure of any chart in any market. It is impossible for prices to move from a high pivot to another high pivot without first going to a low pivot. Likewise, prices cannot go from a low pivot directly to another low pivot without first going to a high pivot. Some say there are no absolutes in the market. This is an absolute that cannot be disputed. It is fundamental market structure
In Figure 1 the observed price pivots are labeled. Movement from low price pivot A to high price pivot B is called a price cycle. Also, B to pivot low C is a price cycle. Each move from low to high or high to low is a cycle or swing. Source: www.tradestation.com
F1) 1st Two Components of Basic Market Structure
F2) 3rd Component of Basic Market Structure
Bert Antonik
Mr Bert Antonik is a retired US Navy Commander and senior instructor for Online Trading Academy who brings over three decades of trading knowledge and experience to his classroom presentations. For more information, go to: http://www.tradingacademy. com/about-us/instructors/ Bert-Antonik.aspx
In Figure 2 the confirmed impulse moves are labeled and it becomes obvious that when the normal rotation from impulse to correction to impulse and on and on is violated the trend either reverses or goes into consolidation. By always anticipating normal rotation and trading the anticipated impulse move with proper risk management, traders increase their probability of entering early in a trend. Source: www.tradestation.com
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impulse move with the proper risk management. A Trend Can only Exist in the Direction of Impulse Moves Statistically, trends last three to five impulse moves. This is anticipated impulse move is always traded with proper risk management, steady profit will be the natural result. Only market timing using supply and demand zones, offers a better opportunity to anticipate, in advance, significant price pivots levels where trends are likely to change. When an anticipated impulse fails it becomes a corrective move. The prior move is renamed impulse. This is done to guarantee that the impulse count of the trend and the trend lines are correct. Conclusion In prior articles (TRADERS 09/2011, 10/2011), the stochastic indicator and hard numbers were reviewed. Try combining them with market structure and write down the results you get compared to usage of only one enhancer. In the next issue, Smart Traders Edge will focus on identifying The Wall as a way of confirming the origin of a fresh supply or demand zone. When you know how to distinguish supply and demand zones, market timing becomes easier. Be sure to watch for next months Odds Enhancer to grow your trading account.
101. Significant price pivots always coincide at the origin of the best supply and demand zones, where the pros take advantage of the novice. Only two kinds of price cycles exist. The swing will either be an impulse move or a corrective move. None of them has a predefined direction. Impulse and correction can either be up or down. The market has a normal rotation that it wants to maintain. Impulse followed by correction followed by impulse and so on and so on. When the normal rotation is violated the market is screaming out the alarm to change direction either by reversing or entering into consolidation. By definition, an up impulse is confirmed when prices move past the prior high pivot and a down impulse is confirmed when prices move past the prior low pivot. Therefore, all other moves are corrective by definition. The secret to steady profits is to trade the anticipated
Trading with the trend will normally provide the best results.
the basic structure underlying that supports most theories that are trying to predict price movements. It is no secret that trading with the trend will normally provide the best results. When drawing trend lines, you should start at the beginning of a confirmed impulse move and draw through the beginning of the next anticipated or confirmed impulse move in the same direction. This removes subjectivity and will yield consistent results. If the
F3) 4th Component of Basic Market Structure
What Are Smart Traders Edges?

Smart Traders Edges are Technical Analysis Techniques used by Market Timing Traders who focus on the fundamental law of Supply & Demand in order to make High Probability, High Reward and Low Risk trades. For more information on Market Timing Trades based on Supply & Demand go to www.OnlineTradingAcademy.com
In Figure 3, trend lines are drawn objectively rather than subjectively. Low pivot A is the beginning of a confirmed impulse move. Low pivot C was initially an anticipated impulse move so a trend line is drawn from A through C. If price had not moved beyond high pivot B, the trend line A through C would most likely be violated providing another alert that a change was in progress. Source: www.tradestation.com
Discover the Benefits of this Exotic Charting Technique
Point & Figure Charts Part 3

In the last article (TRADERS 11/2011) we introduced you to the different patterns that you can find in point and figure charts which have a high probability of occurrence. In this part we will show you how we determine price targets within these patterns. Finally we estimate the health of the price development with the help of the Bullish Percentage Index.
A careful analysis of risk and reward of a trade is of utmost importance for every trader. Risk can be easily determined on a point & figure chart by placing the stop of a long trade below the low of the last O-column. On the short side you place the stop above the high of the last X-column. If the defined stop is triggered, a double top- or respectively a double bottom-signal appears. Although the parameter risk is probably the more important figure for you as a trader, you are of course also interested in the reward that comes with the investment. Technical analysis offers many approaches, for example support and resistance, trendlines, Fibonacci retracements or indicators like the 200-day Moving Average. The technique of point & figure only knows two methods to determine a target: the Vertical Count and the Horizontal Count. The Vertical Count can be used anytime while the Horizontal Count can only be used at breakouts from trading ranges, which means formations that consist of several columns. The Vertical Count To determine the bullish target price with the Vertical Count, you
identify the first valid buy signal after a downtrend. After this buy signal, a correction in the manner of a X-column is necessary which confirms the buy signal and the height of the X-column. The bullish target price is calculated in accordance with the following formula: low of the X-column + (number of X in X-column x reversal size x box size) A reversal size of two boxes is assumed with the Bearish Vertical Count. The formula reads as follows: high of the O-column (number of O in the O-column x 2 x box size) The Horizontal Count As mentioned earlier, you use the Horizontal Count only at breakouts from formations that consist of several columns. The number of columns of the widest and unbroken point of the bottom building formation is identified with the bullish Horizontal Count. Contrary to the Vertical Count it is important that the basis of the calculation is not the low of the X-column but the low of the
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formation. The target price is calculated as follows: low of the formation + (number of columns of the formation x reversal size x box size) To calculate the target price of the bearish Horizontal Count a reversal size of two boxes is assumed. The basis is the high of the formation: high of the formation (number of columns of formation x 2 x box size) Target Price Calculation The examples in Figure 1 and 2 show that the target price calculations are a helpful tool to get an idea about the possible price range of a trend. But please be aware that these target prices are in no way set in stone and can be exceeded or drop below quite often. Both techniques can show different target prices. Against this background, it is helpful to determine target prices with the use of both techniques if a Horizontal Count is possible. The Bullish Percentage Index An important aspect for an investor is the question of how sustainable a certain development of the market is. This is substantial as regression analyses prove that the total market is for the most part responsible for the yield respective to the risk of an investment in shares. To answer the question of market breadth respectively market health a variety of tools offered by technical analysis can be used. Some examples are Advance/ Decline studies, determination of number of stocks over the 50or 200-day Moving Average or volume analysis. These market indicators are compared to the development of the index and this is examined for any divergences. All of these methods need to be determined independently of the underlying trend. For example a stock can reverse to a downtrend after a strong uptrend and still quote above the 200-day Moving Average. The traditional market indicator shares over 200-day Moving Average would register this positively although the trend is already down. The US company Chartcraft developed a market indicator called Bullish Percentage Index in the 1950s. Its calculation is very simple: The number of shares of an index, for example DAX or S&P 500, that are bullish in accordance with the point & figure chart, are determined and divided by the total number of shares. In this way the dominant trend is taken into account. The result is a value of zero to 100 per cent and is inserted in a point &
F1) Bullish Vertical Count S&P 500
The Vertical Count can be used to determine target prices. Source: www.tradesignalonline.com
Thomas Kaschel
Mr Thomas Kaschel is a CIIA (Certified International Investment Analyst) and holds an MFTA (Master of Financial Technical Analysis). Until 2009, he was an asset manager at a savings bank and in this position was responsible for developing trading strategies and optimising portfolios as part of asset allocation. Since 2010, he has been an independent trader and parttime lecturer at universities, teaching courses related to banking and capital-market issues.
F2) Bullish Horizontal Count S&P 500
In order to use the Horizontal Count it is necessary that the market was previously in a trading range. Source: www.tradesignalonline.com
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the limit of 70 per cent, it is called Bull Correction. This development is shown on the charts as a light correction or consolidation. After a strong rise the Bullish Percentage Index quotes within the overbought area, thus over 70 per cent. In this phase you can close first long positions and take profits or place tighter stops. New investments are not recommended. The trend may continue further, but the Three-Box-Reversal over the 30 per cent-limit, it is called Bear Correction. This is shown on the charts as a break or a small rebound. You can get the Bullish Percentage Indices of the US markets at www.stockcharts. com, but for any other markets you will have to do the calculation yourself. The author uses software called Bulls Eye (www. archeranalysis.com) for doing this. In Figure 3 we see the NYSE Bullish Percentage Index, which is the indicator with the most (US) market breadth as all stocks quoted at the New York Stock Exchange are included. Conclusion The Bullish Percentage Index has the advantage over common market indicators, such as the A/D-line, in that the trend is considered. The indicator shows the phase of the trend of the market. In my experience the oversold-signals are especially significant. Therefore, the Bullish Percentage Index is particularly useful after downtrends. This information is especially useful in the simple assetallocation process, for example for the determination of the stock investment quota.
figure chart. Concerning the scale we have to consider that the box size is two per cent in general. The pre-defined range of zero to 100 per cent is now divided into an overbought, normal or oversold area. The area below 30 per cent is oversold, the area over 70 per cent is overbought. Of course it is possible to determine buy and sell signals for this indicator. In this case it is helpful to know the sector where the signal occurs. In total there are six market conditions of the Bullish Percentage Index. The first market condition after a bear market is the Bull Alert. The Bullish Percentage Index leaves the oversold area, thus exceeding the 30 per cent limit without breaking the high of the last X-column. The bull alert is the first sign of a trend reversal. In this market condition you can do your first long investments in strong stocks. If the Bullish Percentage Index increases further and breaks the high of the last X-column, the new status is called Bull Confirmed. The trend is definitely up and you can start buying. In general there are corrections of these movements. This is the same with the Bullish Percentage Index. If there is a Three-Box-Reversal below
In the Bullish Percentage Index the trend is considered.

risk/reward-ratio is in general unfavourable. If the Bullish Percentage Index falls below 70 per cent without triggering the last O-column, it is called Bear Alert. The Bear Alert is a first sign of a reversal of the bullish trend. Cautious short positions may be placed in weak stocks. If the Bullish Percentage Index falls further and breaks the low of the last O-column, the new status is called Bear Confirmed. The market trend is definitely down. You should sell all long positions and start short investments. Like an uptrend, a downtrend consists of corrections as well. If there is a
F3) Bullish Percentage Index NYSE
The percentage of the number of shares of an index that are bullish in accordance with the point & figure chart are inserted in the Bullish Percentage Index. Source: www.stockcharts.com
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Dealing with the Unpredictable Future No trading strategy, as good as it may be, can survive in the market on a long-term basis without effective risk control methods. This includes managing the risk of individual trades and managing the risk of entire portfolios. Everyone has their risk control rules, but in the opinion of the great Ed Seykota, anyone risking more than three per cent of his equity per trade is probably a gunslinger. One per cent per trade looks like the best; neither does 1.5 or two per cent per trade look too bad. If you are risking too much, say five per cent per trade, your account can grow like weeds, but the losses may also be unbearable. Risk on a trade is simply the difference between the entry price and your stop loss; the amount of exposure you have on each trade. The purpose of this section is to show you how you can manage trading risk. Managing risk effectively would make you preserve your trading portfolio during periods when the market is not favourable to your trading system, so that it would be easier for you to recover and move ahead when the market is smiling at you. It also ensures that you do not give a significant profit back to the market, and sometimes you might break even instead of going negative from being remarkably positive. You would even ride the trend while creating some leeway for market volatility. Risk Control Tools The tools discussed briefly below, as simple as they are, can ensure your survival in the unpredictable financial markets. They are discussed briefly. 1. Position sizing: It tells how much your risk is, and it is the greatest determinant of how much you can lose and gain in the market. Whenever you want to open new orders on the markets, make sure that your position sizing for each order is very small. It is true that this will bring small profits, but your losses will be minor in case some trades go against you. The smaller the losses are, the easier it is for you to recover them. 2. Reward-to-risk: You must target at least two dollars for each dollar you risk. In practice, the more the amount of dollars you plan to gain for each dollar you risk, the better your odds of survivability. 3. Stop-loss: This is the order that takes you out of the market if the market goes against you. This is your insurance policy in the markets. Without stoploss, even a small position sizing could turn out to be a great loss if the market moves protractedly fast against the trader. Your stop order should take you out of the market should it move against you by a predetermined amount. When trading, your stop-loss must never be widened under any circumstances. Those who survive the markets long enough have used stop-loss orders to their advantage. 4. Take profit: This is the price level at which you would prefer to get out of the market, should things go in your forecasted direction. It is better to have a physically solid exit target so that you can close your position with a profit after your predetermined level is reached. For example, it may be painful if your profit of 300 points turns into a loss. 5. Break-even: This is achieved when your stop-loss order is adapted to be equal to your entry price. If you shorted the USD/JPY at 76.70 and put your stop at 77.30, you might later adapt your stop-loss to 76.70 after the price has moved in your direction by some amount of points. If you went long on the GBP/USD at 1.5712 and set your stop-loss order at 1.5652, you might later adapt your stop-loss to 1.5712 after the
Basic Risk Control Methods
Proper Management of Money and Risk

According to an old British banker, the return of your money is sometimes better than the return on your money. The safety of ones capital is far more important than the profit one is planning to make. Nearly all traders the world over would be far better off if they applied the principles discussed in this article. Without these basic risk control measures, nearly all traders in the world would constantly find trading to be some recalcitrant impasse. Beginner traders would find it easier to attain success if they apply the simple methods discussed here.
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price had gone in your favour by a certain amount of pips. If this was achieved, you would only be stopped out with no profit and no loss if the market moved rapidly against you. This would ensure that you did not sustain a loss after you had seen yourself in the profit zone. 6. Trailing-stop: This is the tool that is used to lock some of the profit you have made in the green zone. If a price which is moving in your direction very well has not reached your target level, you could lock part of it. But the amount you lock must not be too close to the current market price; otherwise you would experience a premature exit. A Typical Trade The typical trade mentioned here is according to the authors personal trading style. Every good market speculator has their personal trading style. No matter how good a trading signal may be, you should not risk more than one per cent of your total equity balance (but in reality you risk less than one per cent per trade). This means that you should not use more than 1.2 lots on an equity balance of $120,000 if your stop loss would be around 100 pips from the entry price. On a good day, if you buy the EUR/ USD at 1.3700, you should put your stop-loss at 1.3640 (see Figure 1). Your take profit would be at 1.3880. Then you would expect the market to go against you sooner or later. If it does not, the price may move up to 1.3760. Then you should adapt your stoploss to 1.3700 that is breakeven. If the market continues to move in your direction, and the EUR/USD price moves to 1.3820, then you may apply a trailingstop and adapt it to 1.3760. If the market later turns against you and hits your trailing-stop, you would have safeguarded the same amount of points you risked initially. If the market continues to move in your favour, it may hit your take profit at 1.3880. Conclusion According to Paul Liburd, trading is not a win-win situation. Be prepared to lose on some trades as well. It is not really a question of whether you are right or not, the fact is that markets move in an unexpected way and they have a knack for surprising people when they least expect it. The use of risk control tools in trading can be your power to becoming a permanent victory in the markets. However, your risk control parameters should not be too tight so as to cause premature exits; neither should they be too wide so as to cause too much exposure.
F1) How to Place Stops
Adedoyin Sorounmu
Adedoyin Sorounmu has about 7 years of experience as a trading risk manager and a non-directional trading expert. He likes to write articles for readers interested in knowing what works in trading and how to keep their capital safe in face of future unpredictability. He can be contacted at: doyinsho95@yahoo.com
We open the trade as the market exceeds the former short-term high (see first blue circle) with a stop at 1.3640. As the EUR/USD goes up we put the stop to break-even at 1.3700. With the run to 1.3820, we increase the stop to 1.3760 and exit the trade not much later as the EUR/USD hits the target at 1.3880. Source: www.tradesignalonline.com
introducing a social network...
for technical analysts
myMTA
network.mta.org
Connect with other industry professionals worldwide! myMTA is a private, members-only social network for technical analysts. Access to myMTA is free for members of the Market Technicians Association and offers the ability to establish unlimited connections with other members through detailed search criteria, topic-specific discussion forums, private messaging functionality, and extensive member profiles.
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A New Breed of Oscillator
Monest Value Indicator Part 3

In the first article of this series, we developed an oscillator that was not prone to stickiness in the overbought and oversold regions and which lacks the lag that oscillators built on moving averages suffer. In this article, as in the previous one, we are studying its usage and usefulness.
Recap We assumed anything less than -8 (two standard deviations) to be considered oversold or short-term undervalued, while overbought and short-term overvalued is indicated by any value greater than eight. As this might give us too few signals in back tests we can lower limits to anything outside of the [-7, +7] interval to increase our number of samples, if necessary. In the previous article (TRADERS 12/2011) we proved that buying at undervaluation might aid any long trade to stay largely out of initial loss before take off. Likewise, short trades can be more successful, not needlessly getting stopped out, when entered in the presence of an overvalued MVI (Monest Value Indicator). In Figure 1 different pure entry systems (i.e. based on nontechnical entries) are compared with entry on undervaluation, during a bull market. The undervalued MVI entry clearly seems to make a difference.
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This sets stage for our MVI as an add-on to existing trading systems or existing indicators, since no indicator is a complete trading system in its own right. In fact, the minute most indicators make it to the back tests, results seem to get disappointing very often and very fast. For the record, no set of indicators is a complete system either. Successful trading needs careful risk management and consistent money management discipline. However, in this article we are going to look at the effect of the MVI when added to other indicators or entry systems. We look at the Monest Value indicator as a catalyst. Pattern Filter First we want to assess the value of the MVI indicator as a pattern filter. For this purpose we use an objectively defined pattern and see if we can pimp it with our newly discovered oscillator. As an objectively defined pattern we chose a key reversal bar, defined as a bar opening below the previous bars close but closing above the previous bars high. In our back test we round up all those key reversal days and have a look at the average profit for each day forward after such a bar. Figure 2 shows an average profit of about three per cent, 30 days after a key reversal day was taken. After 30 days the effect of a key reversal day seems to wear off. In the first five to seven days the chart shows an average loss never amounting to more than one per cent. When the key reversal days get filtered with a Monest Value indication on top, allowing only those key reversal day entries to be taken when they were accompanied by an MVI less than -4, the number of valid entry signals drops by about 50 per cent. However, the average profit on 30 days almost doubles. This can be seen on the chart in Figure 2. Of course, adding an additional criteria to the signals taken, can never change anything about the wearing off effect. After about one month, the signal effect fades away. What is more is that the minor (average) adversity in the beginning of a key reversal day trade seems to be half in length (only about three days instead of up to seven). System Filter A key reversal day is just a pattern. We see patterns everywhere. We are evolutionary designed to do this. In evolutionary terms, it pays off to assume a tiger where there is not one (false positive). That programming happened a really long time ago, because even a horse is scared of a garden hose
F1) Different Entries vs. Undervalued MVI Entry
Dirk Vandycke
Dirk Vandycke has been actively and independently studying the markets since 1995 with a focus on technical analysis, market dynamics and behavioural finance. He basis and develops xxxxxxxx software, some of which are available on his website www.chartmill. xxxxxxxxxxxxxxxxxxx com. Holding master degrees in both Electronics Engineering and Computer Science, he teaches software development and statistics at a Belgian University. He can be reached at dirk@monest.net. writes articles on a regular
Buying while short-term undervalued (MVI <= 7) seems to pay off against other entry strategies. All systems are compared to a random entry system. Source: www.chartmill.com
F2) The Monest Value Indicator as a Pattern Add-on
Effect on the average return up to 50 days after a key reversal day when only the key reversals are taken that are accompanied by an MVI < -8. This demonstrates the Monest Value Indicator as a pattern catalyst. Source: www.chartmill.com
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term temporary undervaluation. Of course the moving averages requirement also still holds. The result here is quite impressive. First, the average trade has far less initial drawdown, both in terms of duration as well as in terms of size. The maximum drawdown is about half the original drawdown, while the days the average trade is in losing territory are minimised to only about five to six days (from almost 30 in the original, un-enhanced, system). Secondly, the average trade has an overall much clearer trend. And finally, compared 50 days upon entry, the average trade for the enhanced trend following trade system has up to five times more profit. Conclusion In our search towards a better oscillator that produces sharper and more objective signals with the least lag, we built the Monest Value Indicator based on the concept of context. Short-term valuation perception being mainly lead by the most recent prices, we used statistical normalisation to capture an objective interpretation of the idea. However, the distribution in bull and bear markets will be skewed from perfectly normal, meaning that under- and overvaluation, now fixed at -8 and +8, could be calibrated onto the real distribution. So, in a bull market, undervalued probably will have a slightly higher threshold than -8. Likewise, in a bear market, overvaluation perhaps could be calibrated a little lower. But as far as different financial instrument were studied (futures, commodities, equities, ) there were no family specific, nor product individual differences. So a certain stock (of a certain company) neither has a different value distribution, nor a specific one. We conducted three back test experiments. One experiment was aimed at proving the standalone quality of the Monest Value Indicator in its own right. We compared buying undervaluation with buying at random, buying overvaluation, buying on a dollar cost averaging basis and a combination of random entry with undervaluation. An experiment which made more than a nice case for the quality of our new breed of oscillator. In a second and third experiment we tried to answer the question of whether the Monest Value Indicator oscillator could act as catalyst to enhance both pattern performance and system performances. And though two experiments might be too few to make a general case, they seem very promising, at least justifying further research.
(assuming it is a snake). So one of our common ancestors already must have developed this trait. However, it takes far more than a pattern to make a complete trading system. The pattern on which to enter a trade might well be of less importance. But if entries can be fine tuned by adding our MVI as an additional filter, it might certainly be a good idea to put the idea to the test of adding an MVI filter to a complete trading system. We backtested a really easy, but totally objectively defined trend following system that can only enter a trade when the 25 bar simple moving average is above the 75 bar simple moving average. Trades are entered when prices break above the highest high of the previous five bars. That is actually called a five period Donchian Channel breakout. Again, we wanted to see what happens, on average, with price, up to 50 days after entry. The result is shown in Figure 3 and they are far from impressive. It takes the average trade about 30 days to become only marginally profitable. Next we superimpose the trend following trading system with an MVI < -8 filter, meaning only those five bar Donchian Channels breakouts are taken when the Monest Value Indicator has a value below -8, a sign of short01/2012 www.tradersonline-mag.com
F3) Average Random Buy vs. Postponed Random Buy
Effect on the return of a trend following trade system when only entries are taken when the Monest Value Indicator shows undervaluation. Source: www.chartmill.com
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Anton Kreil Million Dollar Trader Reveals Trading Secrets

Anton Kreil is a professional trader formerly of Goldman Sachs, Lehman Brothers and JP Morgan. Whilst at university and by the age of twenty he built a profitable portfolio and was hired by Goldman Sachs to work on Wall Street, later returning to London to trade on their Long/Short Pan European Equities desk. At the age of 26 Kreil was a Vice President of JP Morgan European Equities. He retired from the Investment Banking industry at the age of 28, and after travelling the world, returned to London in the summer of 2008 to film the BBC T.V. programme Million Dollar Traders. Eight novice traders were provided with two weeks training and one million dollars to trade during the financial crisis. They outperformed professional hedge fund managers by four percent over the two month period. Whilst most of the contestants could not handle the pressure and were either fired or resigned, the show proved that normal people can actually trade on par with the professionals given the right instruction. The show was aired in 2009 and received global cult status, reaching territories as far as Australia, catapulting Kreil into the limelight during the ensuing credit crisis. Kreil is now the CEO of the Institute of Trading and Portfolio Management in London and spends his time managing the Institute of Trading and Portfolio Managements global trading portfolio. The Institute also provides educational support through trading seminars to independent traders and provides resources to those traders and their brokers. Today Kreil gives us a rare glimpse into his trading methodologies and his life.
TRADERS: Can you explain your personal background, and how you rst got in touch with trading? Anton Kreil: Firstly thanks to TRADERS Magazine for the opportunity to talk about my passion. I have been trading since I was 16 years old. I am thirty three now so obviously that is over half my life. That is longer than any company I have ever worked for, longer than any girlfriend I have ever had or house
I have lived in. Trading has always been there and will always be there. One thing I have learnt over the years is that people, careers and possessions come and go, but the market will always be there on Monday morning. For me it truly is the gift that keeps on giving. I guess I got into trading pretty much like anyone else probably would. When I was fifteen I was watching a documentary on Thatchers Britain and what
the deregulation of the financial markets in London had done for the British economy. Not just the numbers but also the social trends. I saw a lot of TV clips of people who did not look so smart with lots of cash and got very excited. This got me curious in thinking that if they could do it, then so could I. So I started investigating. I then came up with a two pronged plan. Firstly I opened an account with a few old traditional stockbrokers in the
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had just become available and the course administrators had decided to put the entire course notes online. So I bought a personal computer from a government insolvency auction for next to nothing and attended university most days from my bedroom, choosing to spend the majority of my time researching and putting on trades. TRADERS: How was your thinking different compared to other students? Anton Kreil: I pretty much operated on the fringes of the student community. Beyond the odd conversation, I just did not get on with most students. They all seemed to be at university because they could not do anything else or did not know what else to do. I guess that is fair enough if daddy or the government is paying. Also at university I could not understand why so many people wanted to become accountants. The argument seemed to be that the average national salary is 25,000, but if I work for one of the big accounting firms I will earn 40,000. My response was so what? That is about 550 per week after tax. Surely if I was working and living in London as an accountant I would spend that? So it is therefore a zero sum game and a total waste of time! I realised quickly it was not about the money for these people. It was to enable them to do a safe and respectable profession that perhaps mildly impressed their parents and other people. As long as those people told themselves they were great then they all must get some sort of self affirmation out of that. TRADERS: Certainly you would not have wanted to be an accountant in the rst place. Anton Kreil: I decided I was not going to measure myself on a relative basis but on an absolute basis. All these people telling each other that what they were doing was the right thing just all seemed totally wrong. None of them seemed to have the ability to think outside the box. The way I viewed it was that my downside would be that I ended up doing an average job for 25,000 a year, so a 15,000 difference or 200 difference per week to being an accountant, but I would also have infinite upside. I decided to multiply everything by at least ten before I considered it so that any opportunity would have to present me with the potential to earn ten times the national average salary within a few years. So I just focused solely on my own trading and getting a job as a trader at an investment bank. TRADERS: Did you manage to get a foot in the door? Anton Kreil: It worked. In my final year at university I was given an unconditional offer to work on the Goldman Sachs Pan European Equities trading desk. I had basically by-passed the Human Resources department and had eight interviews in one day. I was Goldman Executives and outside contractors. The real education started when I actually started doing it. It is really funny looking back at my first day on the desk. I sat down and the boss gave me a $10 million limit. The guy next to me was told to make sure that I do not do anything stupid and to teach me how to use the system. It was the tech boom, we were in a massive bull market and they threw me in at the deep end. My first thought when looking at the screen was that the bid and the offer were the other way round to what I was used to. I asked the guy next to me if that was right and he said yes. I asked him if that means I have to now learn the opposite of everything I had ever known. He laughed hilariously and told everyone on the desk. The message back was Absolutely. Try to learn the opposite of everything you have ever learnt about trading. I came to realise that this was so true! Soon I found out that the guy I was sitting next to was one of the largest tech stock traders in the world! TRADERS: So you had the opportunity to get in touch with the top traders in the
North West of England. I started investing and trading in physical shares. There was no leverage and I was paying stamp duty and commission on each transaction. I was making money on the positions so I added money every week from evening and summer jobs I was doing. Secondly, I also chose my A-levels based around the idea that I wanted a career in the financial markets. So I made sure that I chose Economics. I wanted to learn about the financial system and how everything worked. TRADERS: When did you decide to aim for a professional trading career? Anton Kreil: After finishing my A-Levels I studied Economics at the University of Manchester, by which time I had managed to build a decent size portfolio at the time from trading. I was not a typical student per se. I hardly ever went to student nights instead preferring to go out to local bars, restaurants and nightclubs. I also attended only about one third of all lectures and tutorials over the three years I was there. Economics at Manchester had over four hundred registered students in my year. The lecture theatres were always packed and it was always difficult to get the seat at the back that I wanted. This wonderful thing called the internet
The guy I was sitting next to was one of the largest tech stock traders in the world.
given the contract to sign at 8pm in the evening by the head of Equities. TRADERS: Please tell us about your training and your rst day on the oor. Anton Kreil: When I first got on the trading floor and was shown my seat at Goldman I had already been in training in New York for a few months. The training in New York was not training for becoming a trader. It was a generic all round applied finance course, run by
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was down $500,000 and never recovered. I had to crystallise the loss and it was gutting. However my mentors at the end of the day, made me keep a diary of what lessons I had learnt. It was reviewed each week, not just by my mentors but also by the head of the desk. The lessons I had learnt were pretty simple. Firstly that analysts are generally useless in fast market situations and in times of panic. Valuation does not matter. Reaction and momentum are far more important. Secondly, that hedge funds who want a pre-market price have more information than you and in a situation like a profit warning the first trade is more than likely going to be a sale, so I should have made them an aggressive sellers price and sent them on their way. Third, when reading and reacting to a trading statement I should decide what I want to do first then make my price around what I want to do, not what the market wanted me to do. Lastly, that a stock that has poor fundamentals will just go down and a stock with good fundamentals will just go up. Technical levels are irrelevant in these situations. The discipline of the fundamental backdrop and being aggressive with conviction was instilled in me very early on. A few months later Invensys had another profit warning and I made about $700,000. I went into the next trading update short and added to the position on the open. I ended up doing all the business in the market that day. This was about six months into my career and I felt vindicated. TRADERS: How long did it take you to become consistently protable? Anton Kreil: In terms of becoming consistently profitable it took me about a year till I was consistently knocking in good returns every month. TRADERS: How large was your trading book at the time? Anton Kreil: After my first year I was moved to trade the U.K. banks, Insurance and transport stocks. I was not a big trader on the desk to begin with. For example the $500,000 I lost on the first Invensys profit warning was nothing in terms of the desks overall daily Profit/Loss at the time. After a year I had a proprietary trading book of about $50-$100 million although there were no official limits at the time. In terms of market making there was no limit to what we could do, but anything big had to be cleared with the boss before making a price. Big at the time was around a $25 million price to a client. In my second year at the firm management decided I deserved to be promoted and teamed
world early in your career. That is really impressive. How did things develop further? Anton Kreil: After working on desk projects, taking my trading exams and being the desk bitch for a few months, I was officially given the U.K. industrial sector to manage and given my mentors who ran the U.K. Telecoms and Media trading books. The Risk and Profit/Loss from my book was bolted onto the Telecoms and Media book so it was well within the interests of my mentors to teach me well. I was also the sweeper for the senior traders in Telecoms and Media so I got a lot of experience in those sectors too, even though I was junior and I was the number three trader on the book. TRADERS: What was the most important lesson in your career? Anton Kreil: My most important and first big learning situation was in the U.K. industrial stock Invensys. The company issued a second profit warning that year and I was asked to make a price before the market opened for a hedge fund. The research analysts thought the stock would be down 5-10 per cent. So I made a fairly tight price of down roughly seven per cent. I got hit and the stock never saw that price the whole day. It was down 15 per cent+ all day and I
F1) Spread Trade Entry in April 2011
The Spread shown is (Autonomy + SAP) / (Dell + Hewlett Packard) denominated in USD since September 2005.
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year that my total compensation would be $180,000. That was a real low point in my career. They paid me a seriously low bonus for what I had achieved. They did this because they knew they could hold me to ransom. My trading stats were not accounted for in the way I had expected due to the insistence from management that profit for trades like the one I did had to be accounted for in different way. It was also a bad market for hiring at the time and that I probably would not consider leaving the company until I had been officially promoted. What was even more gutting was that the bonus pool was actually up that year. Basically it seemed like my bosses and the partners were paying themselves the money I had made and not cut me in on what I deserved. I had basically been shafted on a promise of becoming promoted. At the same time many of my peers that had been on my training programme two years earlier were being let go. I figured out the likely game that was being played but there was nothing I could do about it unless I left the company. The bonus was not in my bank account yet so if I kicked up a fuss I might have been choosing to pay them more. The mistake they made was thinking that I would forget about it within a month or two and just get on with things. They probably thought I was like one of those guys I had gone to university with, comparing my overall compensation that year with the national average salary to make myself feel good about it. I did not give a toss. I just wanted what I deserved which was far more than I had been paid. Based on the compensation metrics of the industry at the time I probably should have been paid ten times that. Instead it probably went to other traders and sales people who could have been replaced by robots. The most money probably went in my bosses pocket. TRADERS: What did you learn from that experience? Anton Kreil: That was a seriously valuable lesson at the time. I decided to look upon it positively. I had been paid to learn a very valuable lesson. No-one is your friend and everyone, when the numbers are big, even your peers and bosses will try to take responsibility for the gains. That is a valuable lesson not just in investment banking but in most businesses. I was still twenty two years old at the time and had confidence that if I carried on with what I was doing, but not allow this to happen again then I would succeed as a trader and get paid properly. The next few years worked out okay and I did get paid well. This then culminated in Lehman Brothers knocking on my door and offering a large guaranteed bonus to move there. Consequently, I actually only had one year in the city where I was paid lower than made an experienced hire and guaranteed someone a bonus in year one at the firm, they would always pay them lower no matter what in their second year at the firm. I guess that is fair given that experienced hires generally changed the basis of their compensation by moving to Lehman Brothers. The whole experience also taught me the most valuable lesson of my career. Trading at investment banks and trading generally in the city as a professional is not really about trading at all. Bonuses are discretionary and not a fixed percentage. It is what you get paid at the end of the year that matters. That was a big disappointment to me to find that out. However it hardened and made me more cynical, which helped me read between the lines and made my trading a lot better. Generally speaking the city was then and still is full of people that genuinely add no value to the businesses they are in, yet they still get paid a lot of money. Finally they are getting found out now and the industry is genuinely going through a structural change. Traders, research analysts and Corporate Finance are actually the most important people at the
me up with a senior trader on another sector, so I was number two on a sector instead of number three. I responded to that aggressively and basically lived in the office. That year we were up about $100 million in total. That was split amongst $80 million in commission generated within the sectors I was trading with clients and $20 million in proprietary trading revenues. Pretty much all proprietary trading revenues were generated by me and commission for the sector was far greater than the year previously. I was a very aggressive market maker and we ended up becoming the market in a lot of the stocks we traded. The figures at the time did not accurately show the overall performance and my individual performance at the end of the year. For example, one proprietary trade I did generated over $12 million and was accounted for as a one off item somewhere else. TRADERS: What was the most important experience in your trading career? Anton Kreil: The most important experience was actually at the end of my second year of trading for Goldman Sachs. My trading stats were not accounted for in the way I had expected they would be, on an absolute basis for the team and on an individual basis. I was told at the end of the
the previous year. That was in 2006. Lehman Brothers always had an internal policy that if they
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size of it but it is fairly sizeable. The portfolio is leveraged around three times deposited margin. It is myself and only myself that trades the portfolio, so I eat what I kill. I will not take outside investment because I know going into each year that I will always have at least three months plus where I will probably lose money. I do not want to be on the phone the following month and on email constantly explaining to investors why I lost money last month. I would rather be trading trying to make it back. I have been offered outside investment several times, but I firmly believe that outside investment and a management fee will just turn me into a bad trader. Also the returns I make in absolute dollar terms I am more than happy with. I measure myself against the market and I do not need to measure myself relative to people who generate no alpha and take a management fee. They are not traders, they are just sales people that take positions. It took me a while to get used to it and I much prefer it this way. It is actually a lot harder trading with your own money than with someone elses and takes a while to adjust to. TRADERS: What markets do you trade? Anton Kreil: In terms of what I trade? Generally speaking the portfolio will be weighted around 70 per cent Equities, 20 per cent Commodities and ten per cent Currencies. I do take the occasional punt in bonds and rates but tend to avoid it. I find not taking positions in bonds or rates, but using them as indicators to trade other assets works better for me. Especially in Equities as there is always a lag between asset classes and the bond market is often right vs the Equities markets. The Equities market always focuses on the positive spin and the potential upside, whereas the bond market prices risk and is forced to think about the what if or worst case scenario. TRADERS: Can you please explain your approach? Anton Kreil: Within Equities I will hold around twenty positions at any one time. It is a long / short portfolio split into themes. I take a Macro approach to decide whether my book should be full of bearish themes or bullish themes. I then construct the portfolio around these themes and the beta net long or short I want to have in the overall portfolio. I tend to restrict myself from opening up the book too much to market risk and generally speaking I will hardly ever be above plus or minus 25 per cent beta net long or short. Everything has a 60 day plus time horizon and I place mechanical stops and targets
banks. Sales people just provide distribution to the producers to sell a deal. They like to pretend they are smart but they are not. Forwarding a Bloomberg message from the traders to your clients can be done by a five year old. Yet they still claim that their relationships and expertise with the clients they cover brings incremental commission dollars into the firm. I have been right on the sharp end of these businesses and I can tell you now that if a sales person leaves or is fired, the account is handed to another person that again forwards the traders Bloomberg messages and the amount of business the client does never ever diminishes for the reason that the sales person has left. So much money is wasted in the city on useless functions and talentless individuals it is not even funny. In any business, those that produce the returns for shareholders should get paid, not the other way around. That is the only way to have a sustainable model that works; otherwise you just end up with resentment and backlash within society. That is what we are witnessing right now. TRADERS: How are you trading today? Anton Kreil: Now I am trading with my own money which is basically 100 per cent the Institutes portfolio. I will not go into the
F2) Spread Trade Exit in August 2011
Figure 2 shows the development of the spread trade until Anton exit in August 2011.
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it probably means I am wrong as the market is always looking at least one year ahead. So I generally take a view on my stops and trade out, before I get stopped out. That simple three month rule has saved me tons of money over the years! In terms of frequency I probably do on average about twenty trades a month. Ten per month in quiet times and 40 per month in volatile times. Most of the time I am just trading around core positions that I have on in the portfolio. If I think I can add value to the position for example buying more for an intraday punt then I will not be afraid to do that in volatile times. In quiet times I read a lot of research, reports and try to sit on my hands and allow my positions time to just work or not work as the case may be. Too many people think trading is about bashing a keyboard every 60 seconds. That is what I used to do as a market maker, not as a proprietary trader. A good proprietary trader participates only on a short term basis when the opportunities exist. If they do not exist then sit on your hands and do something else. That is hard when you are working for someone else because people have to always try to justify their positions. However, if you sit on your hands and just make money, no-one will argue. In my position it is a pleasure to not have to pretend that I am busy. So if I think just being long for the next year is right then I have got a year of reading reports, teaching through the Institute, playing golf and travelling to be getting on with. TRADERS: What does it really take to adapt and succeed in the very long run from your point of view? Anton Kreil: Success in the long run for me is defined as consistently positive returns with a consistency for never losing too much money when things go wrong. For those starting out I think it is very important to develop a trading strategy that will stand a very good chance in working through all business cycles. The world looks very different now to what it looked like in 2006, 1999, 1991, 1982 and is forever changing. Trading strategies that depend on a certain market environment will always get found out when the market environment changes. As a trader you want to be trading from now till the day you drop dead. I always use the analogy of a casino. You can walk in at lunchtime, sober, count cards,
(not automatic) on spreads, themes and the whole portfolio. So basically because I am trading Equities and focusing on Gross Domestic Product for the next twelve months I split everything up into financial quarters. At any one time I am always asking myself the following questions; What is my view on the Economy? The Market? Cyclical & Defensives Sectors? And Stocks within those sectors for the next twelve months, nine months, six months and three months? So I am always looking sixty trading days plus. Generally speaking if something has not worked within sixty days then
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over the time period you choose. However it is just a guess at the end of the day. You are not counting cards. This to me is just walking into the casino at 2am drunk. You need a lot more than a few inputs to decide whether to be long or short an asset. An argument used by technical analysts is that everything you need to know is displayed by the chart. Try explaining that one to Bear Stearns and Lehman Brothers shareholders who bought every Technical Rally and in the end got totally wiped out! It is perceived by most people that Fundamentals are hard to understand. They are not. You just need a good mentor and to do your homework. Technicals are far easier to understand for a reason. That is because it takes no brainpower and application to draw a line on a chart and deduce that something is bullish or bearish. I would not give a penny of my money to a trader that only used technicals to decide what to buy and sell. If ever I asked them a question of why they were long or short something, the response would be because this line says so. That is just not good enough. TRADERS: So what is the value of Technical Analysis from your point of view? Anton Kreil: I am not advocating that technical analysis should not be used at all. On a similar note I would never give my money to someone who only used fundamentals. My belief is that you have to use a mix of everything to make your mind up as to whether you are being dumb or smart. Take Price Earnings ratios for example. Imagine a $10 stock with $1 of earnings. If earnings go to $0.90 next year, where does the stock have to go to maintain ten times earnings? It has to go to $9 right? The stock could be at $0.10 (down 99 per cent) and still be trading on ten times earnings. That is why most analysts are totally useless. They try to predict the future using default discounted cash flow models and they respond to news and do not predict it. They are always late! That is because they have careers and pensions that they want to keep and they will very rarely stick their necks out. I have only experienced a few analysts in my career that have done this. The rest are at best average at what they do. When someone tells you something is cheap it is not cheap. There is no such thing as cheap or expensive. This statement should be treated in the same way one treats the statement from a technical analyst that a stock is going up because the line says so. TRADERS: What does your combination of Fundamental and Technical Analysis look like? Anton Kreil: Personally I use a mix of 80 per cent fundamentals and 20 per cent technicals. I am also always looking for the piece of information in the market that is contrary to my opinion. If I am bullish on something I want to find the guy that is bearish and find out why he is bearish. What the hell do I want to speak to an and you have a good position. Everyone pats each other on the back and congratulates each other for agreeing and having the same view. That is a seriously bad habit and a clear recipe to lose money over your lifetime. In summary, what I believe will work over my lifetime is a trading strategy that adapts to the changing world, one that utilises both Fundamentals in the majority and Technicals in the minority and a curiosity to seek out information that is contrary to my opinion. TRADERS: Where do you see your edge compared to other traders? Anton Kreil: Very simple. I believe very little anyone says. I know, regardless of how good it sounds, or whatever their pedigree, whether they are wearing a tie, a $50 suit or a $2000 suit that at the very best they will probably only get half their trades right themselves. If they get over 50 per cent right, it just probably means they are long the market in a bull market and short the market in a bear market. In that case they do not deserve capital to trade with as their risk is not truly under control. So I guess you could say I believe my edge comes from not believing that anyone does
stay at the table till they kick you out and take the houses money. Or you can walk in at 2am, drunk with a bunch of women, put all your money on black and wake up in the morning with only enough money to buy yourself a coffee and not remember what happened. If you want to be consistent for the rest of your life you need a framework that adapts to the changes that occur in the world. TRADERS: How can traders use this advice in practical trading? Anton Kreil: Do not just use one tool. Technical analysts love to go back to things that they know and they are comfortable with. They learn one or two technical indicators that a broker once taught them and think they are traders. Those indicators were taught to you for a reason. The reason being that the broker wants paying trades every day, so they showed you some sexy lines on a chart that worked a few times and now you think they work all the time. If you happened to read it in a book that is even better for the broker. Then it is not their responsibility. That is not a trading strategy. When you look at a chart of a stock for example its telling you what has happened in the past and some indicators might give you an indication of what may happen in the future
The bond market is often right vs the Equities markets.

analyst for who has a buy rating on something I am long? I am already long and I know all the reasons why I am long. That is just called confirmation bias. It is a waste of time and will just lose you money over the long run. You are long something and you spend all day on the phone and reading research reports seeking out information and drawing charts that support your views, because it makes you feel like you are doing the right thing
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Anton Kreil: In April this year I bought Autonomy as part of a theme in the portfolio, which was basically long Cloud software stocks for businesses switching to the Cloud and short P.C. Hardware for a fall in Gross Domestic Product growth and decrease in capital investment and consumer discretionary spending. There were several positions as part of the same theme. The Cloud switchover for medium sized enterprises was really just beginning in 2010 and it started to cause positive earnings surprises in Cloud stocks. It became apparent that software stocks that presented medium sized businesses globally with Cloud solutions on a pay as you go model did not deserve to be classed fully as Cyclicals anymore and the sector was seeing fresh money that had never owned software stocks before coming into the sector. The old licensing model of unpredictable chunky revenues at the beginning and end of the year had put many investors off for years. A more streamlined revenue model providing strong cash flows, combined with the notion that in an austere world, businesses would simply have to migrate to the Cloud for cost effectiveness, ease and efficiency savings made software and Cloud names extremely appealing relative to hardware and in particular PC stocks. I knew I was not early to the trade but I thought there was a lot more juice in it. So the positions I had on to play this theme were long Autonomy, Long SAP, Short Dell and short Hewlett Packard. TRADERS: How did this trade develop? Anton Kreil: I put the trade on during the first trading week in April when the spread blew out above the 1.5 level. I worked into the spread over that week with a 1.55 limit. So whenever the spread got to 1.55 or below I would buy Autonomy and SAP and short Dell and HP at the same time. In terms of risk I was Beta neutral, each position represented five per cent of the equities portion of my portfolio and the theme represented 20 per cent of the equities exposure of the portfolio. Throughout the life of the position, a twelve per cent rolling stop on the spread was applied and a 36 per cent rolling target. So basically I was likely to lose 2.5 per cent net (2.4 plus fees) in the equities portion of the portfolio if I was stopped out. I was actually nearly stopped out in absolute terms on the theme a couple of times on the way up. However the rest of the portfolio was paying for it and more. You remember I mentioned earlier a portfolio stoploss? Major things happened when I had the spread on. Hewlett Packard beat Q2 earnings and guided down for the year. Dell beat Q1 earnings and guided up for 2012 and traded flat over two days after reporting. Both these events gave me a lot of confidence to run the spread even when the market collapsed in August. On August 18th in the evening, Hewlett Packard announced a takeover of 25.50 per share for Autonomy and announced their exit from the P.C. business. The spread went immediately above 2.3. The U.S. market was closed. I had already got a lot of the Institute traders that subscribe to my monthly report into the trade. I had a flight at 06.05am on the 19th from City Airport to Ibiza and had to stay up most of the night sending SMS messages to the guys that were in the trade and also to make sure that they had their exit strategy correct for the morning. This was because I was touching down in Ibiza on the market open. The plan was to just sell Autonomy at 25.00 and get
have an edge, including myself. That is the basis for my approach. Consequently, just by having that, it filters out a lot of noise for me on a daily basis. I do not get distracted each day by information that is irrelevant and get on with the task at hand. Which is to provide myself with the greatest probability of succeeding in the near, medium and long term. TRADERS: Please could you describe a trade you have done recently that highlights your strategy and set-ups in detail?
T1) A Typical Day for Anton when Working from Home

6am 7:15am Wake up, check Bloomberg, have shower, eat breakfast, watch news Get ready for market open and run scenarios in the portfolio and work out what my actions will be if various scenarios play out during the day. The scenarios can be anything that is happening at the time. I am basically trying to plan what I will do if certain things happen 8am Sit in front of screen and watch volume trade. I never trade in the rst hour unless I have a very strong view 9am Trade if have to or want to 9:30am Go through tons of emails 10:30am Read reports, news 12:00 Lunch 12:30pm U.S. Economic numbers preparation and run portfolio scenarios again 1:45pm Chat to institute traders and brokers in U.S. 2:30pm Watch screen for U.S. open 3pm Trade if I have to or want to 3:30pm Read more reports and news 4:10pm Re-check market and all positions in Europe into the close and trade if I have to or want to 4:40pm More Phone calls, usually to the U.S. 5pm Chill on sofa and watch news. Keep eye on market 6pm Generally responding to emails, reading reports (research) chatting to brokers and Institute traders, always keeping eye on market 8:40pm Re-check market and all positions in Europe into the close and trade if I have to or want to 9:45pm Dinner, TV, Relax 00:00 Bed
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and professional institutional traders approach the markets and trading and what are the Anton Kreil: Well, it is a penny stock first of all that has fallen from being a large cap liquid name and that always draws a lot of retail attention. Most people think if a stock has fallen by a lot then it must go up at some point and when it goes up it will go up big. Only problem is it can still go down 50, 70, 80, 90 per cent before it ever rallies. The main reason however people buy stocks like Lloyds is because it is always in the media and therefore it gets everyones attention. It falls from grace for genuine fundamental reasons and makes a great shock horror headline because shareholders have been burnt, everyone wants to lynch the CEO, shareholders of other banks get worried etc. Also at some point you always get some monkey who goes on TV or in the newspaper; usually an analyst whos estimates that were made two years previously and tweaked a few months before the event, defending his position by downgrading the stocks rating but telling people he still likes it and its cheap. Or at some point the stock finds a short term floor and people think it is a good idea to get in and try to make money on a mean reversion or contrarian rally. At that point they do not even realise it but they are now emotionally married to that stock and they will continually try to pick the bottom and get stopped out, either until they get wiped out or it goes to zero. TRADERS: How can one nd out if they tend to be hoping instead of selling losing positions? Anton Kreil: Here is a typical Goldman Sachs question we used to ask graduates when interviewing for trader positions. You are now a trader on the desk. You walk in on Monday morning and you buy a stock at 1.00. 1. Do you buy more, hold or sell? You have to make one of the three choices. Please write down your answer. The next day, Tuesday, you walk into the office and the stock opens at 87p. 2. Do you buy more, hold, or sell? You have to make one of the three choices. Please write down your answer. In the afternoon you realise ten minutes before the market closes the stock is now trading at 81p. 3. Do you buy more, hold, or sell? You have to make one of the three choices. Please write down your answer. The next day, Wednesday, you walk into the office and the stock opens at 67p. 4. Do you buy more, hold, or sell? You have to make one of the three choices. Please write down your answer. My guess is by now most people have sold their position. When talking to retail traders I always ask this question. You would be amazed at how many people in each of the four steps
out of the rest of the trade in the afternoon. The trade paid 45 per cent net in five months; however during the life of the trade I did assume some market risk occasionally and ended up making over 50 per cent. Not bad. Not only that but Institute traders, who are all just independent traders, all trading with their own money and most with day jobs, had a blow out in August when the rest of the world was losing money. Looking back at the trade I definitely had the right spread on fundamentally and it was working well even before the takeover. I admit that I did not see the takeover coming at all and that I was clearly lucky. But hey, you make your own luck in life! TRADERS: What is the course of events on one of your typical trading days and weeks? Anton Kreil: I spend Mondays to Wednesdays working from home. Thursdays and Fridays I spend in the office in the city and organise all my meetings for those days. Sunday is spent at home, seeing friends and or playing golf. My typical trading day is to be seen in Table 1. TRADERS: What is the major difference in the way professional retail traders
worst mistakes traders do over and over again? Anton Kreil: I think the main difference is approach and risk management. A typical retail trader will usually react to a piece of news in the media and get sucked into being long or short the situation based on a media report either on TV or in a newspaper. For example this year and the last few years actually, Lloyds has probably been the most traded retail stock in value terms in the FTSE. Every time you see retail broker reports citing the most popular stocks traded today, Lloyds is always top of the list. I always wonder what the hell attracts people to trade Lloyds. TRADERS: What exactly do mean by that?
In the afternoon you realise ten minutes before the market closes the stock is now trading at 92p.
TRADERS PEOPLE
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Professional traders spend their entire lives trying to predict the future. What ends up in the paper is either confirmation that you are right or confirmation that you were wrong. The point is professional traders are trying to predict what will be in tomorrows newspaper and in the newspaper in a years time. If I am fundamentally short the market, what do I want there to be in the newspaper in three moments time? I want to see Armageddon! I want to see occupy riots, Greek and Italian prime ministers getting fired, the Euro collapsing etc. I do not want to see it in the paper and then get short! At that point I know I am late to the party. In terms of risk management, in the situation above a professional trader would just cut at least some if not all of that position at 92p. These are the mistakes that retail traders make all the time AND professional traders are guilty of it too. I have seen careers ended by traders who have been trading on a professional basis fifteen and twenty years because they were in one situation that destroyed their year all because they would not cut a position. It happened to me many times in my younger days. It is an awful feeling having to cut, but you just simply have to do it. TRADERS: How would you dene trading when you were asked to write a short summary for a dictionary? Anton Kreil: Sadomasochism by numbers. TRADERS: We have heard about your plan to y to space soon. Please tell us more about that. Anton Kreil: I have bought a ticket to fly on the Lynx XCOR Mark II in January 2014 with the Dutch company Space Expedition Curacao. The project is being run by Michiel Mol who was the founder of the global media company Lost Boys International and is a team principal of the Formula One racing team Force India. We will be flying from a newly built spaceport from the island of Curacao in the couth Caribbean. It is a really unique once in a lifetime trip. In the shuttle I will be by myself with the pilot, NASA astronaut Rick Searfross. We take off on a runway like a normal aircraft and travel at Mach III to 103 km above Earth. 100 km is officially Space. So basically we will be going 2400 miles per hour and will reach space in four minutes. When were up there we will be weightless in the cabin and be able to see the full curvature of the Earth. We will spend an hour up there floating around before coming back. The plan is to shoot a live broadcast of the entire trip via the internet so the whole world can watch it. I have to do quite a bit of training to get used to the sensations of flying at that speed and being in space. So in 2013 I will be doing G-Force training in a centrifuge, like from the James Bond movies and I will be taking practice flights in an L39 Albatross Jet. I will also be doing parabolic flights to get used to the sensation of weightlessness. What really excited me about this trip is that once I have completed the training and been 100 km above Earth I will officially be an want to be involved in everything this project has to offer for the rest of my life. If space travel can become viable and significantly break the time barriers to global travel, then I want to be right at the forefront of it. TRADERS: What other extraordinary adventures do/ did you pursue? Anton Kreil: I love travelling and doing Extraordinary stuff. Extraordinary however implies abnormal, but to me I think anything is possible and I do not like to define what is normal and what is abnormal. What is a normal life? Everyone has an amazing story to tell and stories that are unique. The space trip is just another experience and unique story that I can personally tell. That is what is so exciting about life. Ten months ago I was not going to become an Astronaut, now I am going to be. It is going to be an amazing experience. There have been many experiences before and I am sure there will be a lot more before I really leave this Earth. Thanks for the interview! This interview was conducted by Marko Graenitz.
choose to either buy more or hold. The point is regardless of what is in the media and whatever anyone says, on day one you should be cutting the majority, if not all of that position. If you had come in on day two and seen it at 87p you could have shorted it and made all of that money back and more. Human beings are risk seekers when faced with negative outcomes and risk averse when faced with positive outcomes. Retail traders get sucked into situations that they can never get out of because they do not know why they are in the situation in the first place and how to get out of it. TRADERS: What about professionals? Anton Kreil: Professional traders take a totally different approach. It is actually the exact opposite in terms of approach and risk management. Instead of reading a newspaper article and reacting to it, professional traders realise two things. Firstly that what ends up in the paper is old news. It is what happened yesterday. Secondly, papers are in business to sell papers and TV channels are in business for ratings. Both report the news and do nothing to attempt to predict the future.
One proprietary trade I did generated over $12 million.

Astronaut. This will be quite a nice addition to the resume. The idea is that one hundred normal people will become Astronauts on this trip. Then in about ten years time were going to try and fly from London to Sydney in one hour forty five minutes, using the same craft but slightly modified. It is a pioneering project and I just
TRADERS TOOLS
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Date
23.12.2011 27.12.2011 27.12.2011 29.12.2011 03.01.2012 04.01.2012 04.01.2012 04.01.2012 05.01.2012 07.01.2012 07.01.2012 10.01.2012 10.01.2012 11.01.2012 11.01.2012 13.01.2012 13.01.2012 14.01.2012 15.01.2012 16.01.2012 16.01.2012 17.01.2012 17.01.2012 18.01.2012 19.01.2012 20.01.2012 23.01.2012 23.01.2012 25.01.2012 27.01.2012 27.01.2012 28.01.2012 29.01.2012 30.01.2012 31.01.2012
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for a financial transaction tax. After all, it is only logical for the alleged source of all evil to be reined in. Yet it is this shortterm mentality that is probably far more dangerous than our short-term trading. After all, even if there is a change to home country regulation, the long-term damage done by such a tax to European financial centres can be avoided only partially since institutional market participants can relocate, if necessary, to tax havens, or by trade via foreign subsidiaries. Since this is usually not possible for private traders, they would fall victim. Nevertheless, in view of events of recent years and the growing protest movements, it makes sense to reconsider the subject of financial-market regulation. It should also be remembered though, that the dream of a world in which we can get rid of the powerful bond of markets is only a romantic notion as Mr Joachim Gauck, a former German presidential candidate, aptly put it at a conference organised by the newspaper Die Zeit in the autumn of 2011. The purpose of the exercise should also be to limit the drawbacks for private investors to a minimum. After all, it is that mixture of stereotyping and hastily apportioning of blame that is responsible for a large part of the population caring so little about stock-market trading. When a 25-year-old has a business idea which he or she uses to start a new company, one can certainly count on favourable coverage in one media outlet or the other if it is successful. Should the same 25-year-old choose to earn a living as an independent trader, however, media coverage would probably be dominated by skepticism and criticism. The reason for that is that according to the ABCs of financial markets, only the real economy (as the name implies) stands for what is real in business. The financial industry and especially traders have no part in it since we do not really do any work we just gamble, so goes the clich. Any type of entrepreneurship carries risk. It is, therefore, equally important to be properly prepared to work as an independent trader and to not allow oneself to be deterred. And, of course, this includes being aware of the risks and being able to deal with them but also taking advantage of the opportunity to familiarise oneself open-mindedly with the almost endless possibilities, strategies and instruments that make trading so fascinating. That is why I am grateful that magazines like TRADERS have helped me learn so much more about financial markets than just the ABCs.
The ABCs of Financial Markets
Alexander Mantel
While completing his German law-degree programme, Mr Alexander Mantel concentrated in banking and capital-market law and is currently working on his Master of Law (LLM). He has been interested in financial markets since he was 17 years old. His primary focus is in derivative products and new developments in the financial industry. Previously, he worked on projects in the financial-services and media sectors and continues to seek challenging tasks. Contact: finanzlabor@gmx.de
We hear it everywhere these days in news broadcasts, daily papers, political talk shows, and on the streets: the ABCs of financial markets, but reduced to catchy, media friendly sound bites. Let us not forget that we are also in a political season and class-warfare sabre rattling, as well as a nostalgia for socialistic fairness are being used to stir up resentment and to curry favour among potential voters in search of a scapegoat for their malaise. And a convenient one, as you, my dear reader well know, has already been found: It is all the fault of speculators. According to the ABCs of the
financial markets (as taught by those unfamiliar with the natural laws of economics), national debt, famine, oil prices and probably a lot more can all be attributed to one cause: speculation. So much for the myths. Surely there is no need to mention that the actual causes are much more complex. But then, it is simple explanations that people love and that can be used so effectively by office seekers to distract from real problems. The ABCs of financial markets also comes in very handy for fiscal purposes since its doctrines can be used to justify calls
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Interview: Anton Kreil Million Dollar Trader Reveals Trading Secrets

What Type of Trader

Two Incompatible Investment Dogmas?

Trading vs. Investing

Smart Traders Edge

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COVERSTORY Trading vs. Investing

STRATEGIES Morning and Evening Star

PEOPLE Anton Kreil

STRATEGIES Breakout Strategy

BASICS Smart Traders Edge

Anton Kreil Million Dollar Trader Reveals Trading Secrets

Address Phone Fax E-mail

Publisher Subscription Service

Address of Editorial and Advertising Department Editor-in-Chief Editors

Pictures Price data

Two Incompatible Investment Dogmas?

Trading vs. Investing

TRADERS TRADERS COVERSTORY

F1) Difference between Trading and Investing

F2) S&P 500 vs. Earnings Growth (inflation-adjusted)

F4) S&P 500 since 1950

July 2007 8151 points (+272%)

March 2009 3588 points (-56%)

May 2011 7600 points (+112%)

September 2011 4966 points (-35%)

October 2011 6430 points (+29%)

F6) S&P 500 vs. Index Gain in Points

F7) DAX with Crossover System and Capital Curve

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