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Interview: Ren Wolfram Third Place at the Trading World Cup P. 74
Your Personal Trading Coach
Nr. 09, September 2014
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www.tradersonline-mag.com
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P. 38
News Trading
in Euro/Dollar
How to Take Advantage of Big
Events at the Stock Markets P. 40
Trend Knockouts
Get in Only after the Weak
Hands Are Out P. 50
How to Supercharge in 7 Easy Steps
Supercharge
Your Trading P. 6
EDITORIAL
3
www.tradersonline-mag.com 09.2014
Key interest rates have been so low for such a long time that some market players
have forgotten by now why it is important to have an interest-rate level that makes
sense. After all, permanently low interest rates do not cause an automatic healing
process of the economic system as might be assumed after years of brainwashing
by the central banks. Quite the contrary interest rates are a control variable in
an economy and may lead to devastating inefciencies if they are permanently
suspended, as has been the case in the last few years. But let me explain this step
by step.
What would the interest-rate level be like if it were determined not by the
central bank but by supply and demand? Who would then buy Spanish, Portuguese,
or Greek government bonds that entail high risks but by now only earn the sort of
interest that is barely recognisable? The answer is obvious: Nobody. The interest-
rate level would be much higher.
In addition, there are the guidelines from Basel which, as was the case
in previous years, practically forced large institutional market participants to
buy government bonds, pushing interest rates lower. Without this mechanism,
interest rates would be and would have been so earlier signicantly higher and
institutional investors like insurance companies could have higher equity exposure
(and be more protable).
But lets now turn to why the low interest rates are poisonous for our entire
economic system: Interest rates have lost their steering effect as a result of
systematic manipulation. In normal times, bad investments achieving low
returns do not survive, which means that in the long run only the good projects
will continue to exist. But if interest rates are too low for too long, there will be
no such correction. It will permanently be unclear what good investments are
since bad projects will survive as well, leading to increased uncertainty and lack of
transparency. Furthermore, there will be a shortage of good staff for the protable
projects because those workers will also join the bad competitors that normally
would not be there in the rst place. In other words, the entire investment sector of
the economy will increasingly be out of kilter and inefcient as long as interest rates
are near zero. This is a situation that will not be rectied automatically. After all, its
only when the tide goes out in terms of higher interest rates that you can see all
those people swimming without wearing swimming trunks.
Good Trading,
Why the Low Interest Rates Are Poisonous
Ioannis Kantartzis
Editor-in-chief
TABLE OF CONTENTS
4
www.tradersonline-mag.com 09.2014
06
TABLE OF CONTENTS
September 2014
74
News
Find the latest notes and
announcements from around the world
of trading in our News section.
30 New Products
News from the World of Technology
32 Software Review
MetaTrader Signals Service
and Social Trading
36 Book Review
Clash of the Financial Pundits by
Joshua M. Brown and Jeff Macke
38 App Review
FRED
TOOLS
INSIGHTS
COVER STORY
14 Trading without Losing
Being right is not enough Clem Chambers explains
how you can lose even when you win.
16 Market Dynamics Part 2
Dirk Vandycke elaborates on the powerful law of nature in the
nancial markets, how it appears in different spots in their
dynamics.
20 Hedge Fund Series Part 6
In this part, Bruce Bower will explain how you can build
your own Hedge Fund core.
24 Trading Seasonalitiys Part 14
This time, we show you two long setups for Nike
and Orange Juice.
06 Supercharge Your Trading
Theres no magic formula for becoming a great trader. All
sorts of different personalities can be successful at trading. A
Supercharged Attitude to Life is the common theme amongst
all super-successful people. Skip Archimedes, former 2 X
British Gymnastics Champion, will delve into im-portant
principles such as having high energy, not trading health for
money and acting according to your true priorities.
46
26
TABLE OF CONTENTS
5
Publisher
Lothar Albert
Subscription Service
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Address of Editorial
and Advertising Department
TRADERS Media (CY) Ltd
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Contact:
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Editor-in-Chief
Ioannis Kantartzis, Anastasios Papakostas
Editors
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Prof. Dr. Guenther Dahlmann-Resing, Corinne
Endrich, Marko Graenitz, Lena Hirnickel,
Sandra Kahle, Stefan Rauch, Katja Reinhardt,
Karin Seidl, Tina Wagemann, Christine
Weissenberger, Nadine Wiget
Articles
Skip Archimedes, Thomas Bopp, Bruce Bower,
Arturo Bris, Clem Chambers, Stefan Friedrichowski,
Rob Hoffman, Jens Klatt, Dave Landry, Alexander
Mantel, Azeez Mustapha, David Pieper, Christian
Stern, Dan Valcu, Dirk Vandycke, Rudolf Wittmer
Pictures
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Price data
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ISSN
1612-9415
Disclosure
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.
2014 TRADERS Media (CY) Ltd, Amorgou, 14A,
3047, Limassol, Cyprus
BASICS
STRATEGIES
58 Risk- and Money-Management Part 6
In part 6, Jens Klatt explains how to determine the optimal
position size.
62 Market Structure Indicators Part 1
Rudolf Wittmer describes in his rst part of his new series the
basics of analysing the market structure.
66 The Traders Technical Arsenal Part 9
This time, Azeez Mustapha discusses the On Balance Volume
and the Parabolic SAR.
72 Trading Journal
Alexander Mantel introduces a trade with E.ON.
40 News Trading in Euro/Dollar
Christian Stern und Stefan Friedrichowski show how to use
big events at the stock markets for your trading.
46 The Trend Is Your Friend
David Pieper introduces a long-term trading strategy you can
systematically make prots with in the weekly chart.
50 Trend Knockouts
In this article Dave Landry will dicscuss the thee phases of trend
and one of two setups for getting onboard established trends.
54 Inventory Retracement Bar
Rob Hoffman explains his award-winning trading strategy.
74 Ren Wolfram Third Place at the Trading World Cup
Ren Wolfram got involved in the markets during the New
Economy bubble at the end of the 1990s. Like so many
others his way was quickly uphill only to go quickly down
hill as the bubble burst. But Wolfram is among those who
has learned from his losses how to nally become a suc-
cessful trader. In 2013 he was placed third in the Robbins
Trading World Championship.
PEOPLE
COVERSTORY
6
www.tradersonline-mag.com 09.2014
You all have heard of the saying, health is your greatest wealth. But
how does it correlate with trading? Coaching thousands of people over
the world and running transformational live events globally, have led to
the uncovering of many essential formulas for success.
Supercharge Your Trading
How to Supercharge in 7 Easy Steps
To achieve a strong mindset, you must learn to
manage your emotions and continuously sharpen your
intellectual knowledge of the subject field you are in.
These qualities are pivotal in becoming successful in
any field.
As traders, you need to be able to manage your
emotions effectively, be on the ball in moments of
decision making and have the energy it takes to keep
you focused on the outcome you want to achieve. It is
common belief that 80 per cent of trading is psychology.
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your deposits. Swissquote Ltd is authorised and regulated in the UK by the Financial Conduct Authority: 562170
+ 70 CURRENCY
PAIRS
STOCK
INDICES
PRECIOUS METALS
& COMMODITIES
COVERSTORY
8
www.tradersonline-mag.com 09.2014
of high finance. After all, its all a numbers game, isnt
it? That may well be so, but gut instinct/intuition, can
also play an important part in those time-critical trading
situations. But have you considered that your brain and
gut can only operate at maximum efficiency if they are
kept healthy and alive? What happens to your decision
making processes when you become jaded and sluggish?
Its a bit like driving while under the influence of drink or
drugs you think youre in perfect control, until you study
the results if youve seen The Wolf of Wall Street youll
know exactly what I mean.
Looking after your physical body is essential to
keeping the physiology of all your bodily functions
in optimum condition. And were not talking about
physical fitness alone here. Your body and brain need
to be fit for purpose inside and out. The important
point that relates specifically to trading is that a clean,
fit and energetic physical body will help heighten
your awareness and mental acuity. These are critically
important for remaining in the present moment, and
being able to see and act on trade opportunities as they
present themselves.
Here are a few Skips Tips that you will immediately
feel the benefits from:

Skips Tip 1:
Oxygenate with Correct Exercise
Your most valued and needed
nutrient is oxygen. Unfortunately,
most people dont even realise that
they arent breathing correctly, so
they cant correct the shortfall. Stress
adds to this problem as it causes us
to start to use our diaphragm less
and breathe from our upper chest
area, leading to a diminished oxygen
intake. Yawning is a signal that our
brain is going to sleep, but its also
the bodys mechanism for gulping
great draughts of oxygen into our
lungs to wake the brain up again!
So for this reason, when you
are trading, make sure you practice
power breathing. This will connect
your mind to the present and stabilise
Post the 10 Commandments 4 health on the chart and read through them before and while you are trading.
This will get you in the state to Trade in the Zone.
Source: TradeSignal
F1) 10 Commandments 4 Health on Your Chart
Healthy You = Healthy Trades
Many people who are obese and looking to lose weight,
battle with the emotions of fear, greed and indiscipline.
These emotions can create a junk food habit until the fear
of staying obese and not reaching their goals kicks in. I
have seen all the clients I have coached go through similar
emotions. And these are the very emotions that many
of my trader friends and clients also struggle with. The
fear of losing the profits that they have gained leads to
indiscipline and results in not consistently executing their
trades. Looking after your health can help you overcome
the emotional battle and achieve a strong mindset for
profitable trading.
In our recent interview with Thiru Nagappan, trader
and founder of Master the Markets, we uncovered
some amazing insights into the relationship between
maintaining a healthy lifestyle and developing a strong
mindset for trading. Everyone can benefit by adding a
few simple but very effective habits to their life.
Fitness to Finance
You might think that the brain is the most important
organ in the body when it comes to the cerebral business
COVERSTORY
9
your emotions. It will help massively when trades are
going against you by sharpening up your brain and
allowing you to stay with your trading plan and execute
your trades consistently and with discipline.
Heres an effective power breathing technique
which may sound simple, but its power should not be
underestimated.
Set a reminder to do it a minimum of three times a day
and notice the multiple and immediate positive effects:
Breathe in all the way down to your diaphragm for a
count of two.
Hold your breath for eight.
Breathe out over a count of four.
Complete this ten times
This exercise will also engage your lymphatic system
and help eliminate unwanted toxins that can affect your
performance.
Finally, to maintain that oxygen flow, make sure that
you commit to moving your body for 45 minutes per day
with some kind of fun exercise. This helps deal with stress
and releases endorphins that literally make you feel good
instantly. And dont forget that latest research shows that
physical exercise is more effective at keeping Alzheimers
and dementia at bay than mental exercise.
Skips Tip 2: Thou Shalt Live with Passion
Know exactly the higher goal and vision that is the reason
you are trading. This may be for the benefit of your family
and children and even for a wider community. Have this
The October issue of TRADERS will be published on 25th September 2014.
Preview of the next Issue
Invest Like a Pro
Very few fund managers are able to achieve better returns further
down the road than passive investments. Today, ETFs can be used
to invest in almost all asset classes, be they stocks, indices, bonds,
commodities, or real estate. This enables private investors to put
together their own hedge funds. In our coverstory, Rudolf Wittmer
will explain the basic approach to creating such a structure.
Interview Ruediger Born
Ruediger Born is managing director of BORN Traders
and also founder and head of trading of BORN STAHL-
BERG & PARTNER, his asset managing enterprise in
Switzerland. Since early in the 90s he is an active trader
at the international nancial markets. Besides, he is a
well-known TV market expert and speaker.
PEOPLE COVERSTORY
COVERSTORY
10
www.tradersonline-mag.com 09.2014
or passions. Its often said that if you want a job doing
well you should give it to someone who is always busy,
because they are accustomed to working to deadlines
and usually to high standards. If you have only the one
passion and its also your job, you run the risk of becoming
too narrowly focused and incapable of bringing outside
experiences to bear on your decision-making processes.
Skips Tip 3: Educate Yourself
Use it or lose it! Education keeps us growing and
expanding so we feel unstoppable. If you dont continue
to educate yourself it can start to feel like youre on a
decline.
Information is power. Most big profits are gained
through one person knowing something that most
other people dont. Most losses are incurred through
not recognising the value of some
essential piece of information.
Educate yourself on the subject
of lifestyle habits that will serve
you, your body and your business.
These tips are a good starting
point and will give you an easy
filter for lifestyle choices that will
literally supercharge your life.
Educate yourself by researching
more deeply into these subjects
as you would when youre looking
at future investment and trading
opportunities.
You become who you hang
around with, so make a conscious
effort to educate yourself by
socialising and networking with
people you admire and look up
to. Dont forget that you are your
greatest asset so you must also
invest in your good, healthy and vital
self.
The calm before the storm. Consolidation breakout on EUR/JPY. Take deep diaphrammic breaths during a
consolidation so as not to enter in the trade with impulse action. Patience is virtue and smart breathing
can help.
Source: TradeSignal
F2) Smart Breathing during Consolidation
vision next to you to serve as a reminder when you are
trading. This will help you to overcome all the challenges
and difficulties you will face on the way to becoming a
professional trader.
Finding your passions outside of work is essential.
Passion electrifies the body and mind more than anything
else more than food and more than drink. It doesnt
matter what it is, you just have to have passion for it. The
more you connect with things through passion, the more
electrified you are, the more alert you are and the better
you function at optimum levels.
Passion Killers
If trading is your passion, youre killing two birds with one
stone, but beware of becoming one-dimensional. Most
ultra-successful people have wide-ranging interests
Know exactly the higher goal and vision
that is the reason you are trading.
COVERSTORY
11
Skips Tip 4: Hydrate Yourself
Your brain is over 80 per cent water and the rest of your
body is about 70 per cent water, so it clearly pays to keep
properly hydrated. Dehydration is the enemy of clarity,
the number one faculty needed for watching trading
positions and knowing when to act.
Regular hydration with clean water helps to keep your
mind in the present, clearly focused, alert and aware of
opportunities as they arise. Clarity also helps to prevent
the stress arising from the very act of trading.
Water is the only liquid that can cross the blood/
brain barrier, so its the only thing that can hydrate the
brain. And as the body has so much water in it, water is
one of the most essential nutrients for all the organs and
systems of the body.
By drinking approximately two litres of good clean
water each day, you give your body and brain one of the
foundation stones of good health and vitality to keep you
ahead of the game.
Many people in stressful jobs resort to stimulants to
keep them going long after their senses have told them
they ought to be closing down and recovering. Coffee,
energy drinks (which are mainly
caffeine and sugar based), and in
extreme misguided cases, alcohol
or drugs are all commonly used to
provide a boost or a dulling effect.
They often work to an extent, but
with what after-effects?
The jury is still, to an extent,
out on the long-term effects of
caffeine. The problem is that most
coffee is doctored with a medley
of artificial chemicals, none of
which are any good for our bodies.
Sugar and sugar substitutes are the
number one enemy of good health,
commonly held as being the main
contributor to obesity, heart disease,
diabetes and most of todays biggest
killer conditions. Theres nothing to
be said about the harmful effects
of alcohol and drugs that hasnt
been covered in a million articles,
studies and reports already. What
If you have missed the move, let it go. Do not let your emotions override you and jump into the trade. Get off
the screens and get your body in motion. Go and exercise. Get your blood circulation moving, reset yourself
and come back. Now, you will be more present for future trading opportunities.
Source: TradeSignal
F3) Let it Go and Get in Motion
isnt widely accepted is that you can get a greater high
from living a supercharged life than from any artificial
stimulant.
Many people who live by the tenets in my philosophy
find that they can function at an extraordinarily high
vibrational level for over 24 hours at a stretch without
any adverse reactions and recover in ultra-quick time
because their systems have no toxins to remove while
they are resting and recovering.
Skips Tip 5: Meditate Regularly
Meditation can help stabilise your emotions and let
your intellect shine. This is the reason why some of the
top traders in the world meditate. Its a practice that is
also becoming prevalent in the city, as you may have
read in the papers. Taking some time to meditate each
day connects you to your inner guidance system. Your
intuition then instinctively kicks in to help you make
decisions that would otherwise be troublesome.
It may sound very weird or mystical, but the fact is
that many of the clearest thinkers in history have studied
and depended on meditation as an aid to showing them
COVERSTORY
12
www.tradersonline-mag.com 09.2014
the truth. The act of meditation allows the mind to be free
from the chatter of the world around you. Much of this
noise is indecipherable from important information under
normal circumstances, but meditation can help to filter it
out and allow you to focus on what is truly important.
Youll create space between those thoughts that will
connect you with a power, a wisdom and an intelligence
that resides inside of you.
You can meditate in any quiet place. Sit or lie down
comfortably and empty your mind until trivia stops
coming in and the things that are truly important to you
start to take its place. It does take practice and the more
you do it the better youll feel. Eventually you wont want
to live a day without the gift of meditation. New found
mental and emotional balance will help you to become an
unshakable trader in any situation.
Skips Tip 6: Have a Purpose and a Higher Ideal
Having a higher ideal helps you overcome all the emotional
battles that will happen to you when you are in a trade.
When that voice in your head echoes to take the profit
off the table, when your trading plan tells you otherwise,
remind yourself of the higher ideal and the bigger picture
of why you got into trading in the first place. Then you
can control your emotions and get your trading plan in
line with your true purpose.
If you make health, energy and vitality your purpose
then youre basically committing to a life without the
aches, pains, illnesses, ailments that most people suffer
with, and as you age your bodily functions wont break
down.
People think that as they get older, the body naturally
stops working. This is simply not true. Whats happening
with the ageing process is that your body is getting
more toxic from a lifetime of bad choices, environmental
pollution, etc. So it is essential that you cleanse, detox and
adopt a cleaner lifestyle so that you can live and follow
your purpose effectively for as long as you wish. With
you, this may be trading. Every great leader embraces
challenges and rises to them.
Theres nothing worse than feeling unwell when you
are supposed to be working, so try focusing on having
health, energy & vitality as your purpose and you will
avoid and even reverse those challenges.
Skips Tip 7: Proper Nutrition
Sitting in front of a computer screen for hours on end
is recognised as one of the main reasons why Western
nations are becoming more and more obese. The lack
of exercise and uncomfortable sitting positions that are
inherent in a sedentary, office situation are clearly bad
for your health and therefore for your ability to stay sharp
and focused.
But poor diet is the king of causes of todays major
killer conditions. Eating junk food is often a result of
boredom and by itself can have major effects on your
mental awareness whilst trading.
Your body and mind are the only things that are with
you for every trade, so it makes sense to feed yourself
what is nutritious and tasty so that youre fuelled with
the best nutrition available to you. This will ensure that
you dont suffer from energy dips throughout the day and
stay clear and focused. Little and often is key here.
As a trader, you know all about forward planning, so
is there any reason not to plan your eating for a day or a
week in advance?
With this planning, you could rebuild your relationship
to food and ensure that the right food will help fuel your
body and mind so you can trade with more energy.
In order to feel alive then you simply need to start
eating more live foods. That is, foods in their natural
state. You dont want to be ingesting junk thats going
So many people spend their health
gaining wealth, and then have to spend their wealth
to regain their health. (A. J. Reb Materi)
COVERSTORY
13
Skips Naked Health and TRADERS Magazine have
collaborated to offer TRADERS Magazine readers a special
discount on Skips live London event this September.
TRADERS Magazine readers can secure their place
on whats billed as the most powerful transformational
weekend event available. Held on the 20th & 21st of
September, tickets are only 147 but as a TRADERS
Magazine reader you can purchase tickets for a discounted
price of 97. Simply go to www.superchargeyourlifeuk.
com to benet from this opportunity to join us for a
supercharged weekend. You will learn rst-hand important
steps on how to become a more vibrant version of yourself
taking your business, health and relationships to a whole
new level. Go to www.superchargeyourlifeuk.com and
enter TRADERS into the discount code box to receive
your discounted ticket.
Supercharge Your Life in London
to drain your body of energy. Foods that contain high
sugars or sugar substitutes, are processed, fried or
covered in chemicals and are simply not nourishing
your body and mind. You are in fact trading your bodys
energy for a quick fix that ultimately leads to more body
stress. Most people go about their day with high levels
of acid inside their body. This is literally making their
body rot from the inside outwards and where ever there
is weakness in your body then the acid will rot that place
first. For some it is in their joints and others it could be
body parts like their eyes. By consuming foods in their
natural state youre taking in live enzymes, nutrients,
vitamins and minerals that your body and mind need so
you can function well.
Simply make your plate colourful with live foods.
Getting these into the body as you wake with a alkalizing
green juice or smoothie will flood your body with live
nutrients so you feel more alive for your day. Most
processed foods cause the body to use a lot of energy to
digest it, so you end up trading your energy for a meal,
instead of the meal putting energy into your body. Its
easy to see this isnt a smart trade. Try trading in your
morning coffee for a live green smoothie or juice. Youll
feel the boost of energy almost immediately. It will also
help you start to alkalise your body from an acidic state
to a balanced state.
Food stress is a common condition that people fall
into by eating out of convenience. If you can plan your
food intake one day or longer, ahead, you can be one step
ahead of the game. If you fail to plan then youre planning
to fail. Plan your live green juices/smoothies and meals a
day ahead so that you know that your body and mind are
being nourished on a daily basis.
Buy Low, Sell High Low Risk, High Return
Two aims that are easier written than achieved, you might
say. And thats true, both of your life as a trader and your
existence as a human being.
As a trader, you pull out all the stops to manage both
of these maxims, but what about in your lifestyle? How
much effort and planning, passion and purpose, living
and breathing and learning are you prepared to put into
your health and longevity? Because admittedly the costs
of being fit and healthy are low.
Skip Archimedes
Skip Archimedes is a former gold medallist in
the British Championships. Facing many tough
times himself, he is dedicated to the study of
how we can achieve startling results in the face
of crippling adversity or to simply reach higher
levels of excellence in all areas of life.
www.superchargeyourlifeuk.com
Looking after your mind and body is a very low
risk investment, but the returns are enormous almost
obscene. You could have boundless energy and look
forward to every day with optimism and certainty. Live
your life supercharged and you will supercharge your
trading.
Trade after-work drinks to wind down, for exercise,
time with your family, or quality time alone. Become the
leader that you know is within you, starting with leading
yourself into making decisions that will empower you in
your trading by understanding that health is your greatest
wealth.
So the question is, are you ready to trade your old
habits for supercharged ones?
INSIGHTS
14
www.tradersonline-mag.com 09.2014
Trading without Losing
Being Right Is Not Enough
Dont let margins and interest nibble away at your prot. Private investment guru Clem
Chambers, CEO of the nancial markets website ADVFN.com and author of ADVFN Guide:
A Beginners Guide to Value Investing, explains how you can lose even when you win.
Clem Chambers
Clem Chambers is CEO of ADVFN (www.advfn.
com) and author of several books such as 101
Ways to Pick Stock Market Winners and A
Beginners Guide to Value Investing.
What you should trade is certainties. Thats pretty
tricky. Trading is pretty tricky too. Often correlation is
causation. So why not look for the blatantly obvious and
trade that?
Let us try one for size. The euro is going to fall. That is
pretty obvious, isnt it? It is not a matter of if, its a matter
of when.
The pound is going up because its been made clear
that interest rates will rise soon. America has clearly
telegraphed the end of QE and thus the march to rising
interest rates; meanwhile back in Europe, they are trying
to go the other way. Europe is moving towards loosening
and everyone else is moving away from loosening. Long
term, its a no brainer.
The Position Should Reset to Its Previous Levels
What the Chart Shows
So look at the chart in Figure 1. Its the long-term pound
vs. the euro, the mainstreams of loosening and tightening
My old dad used to say, All you need to know is whether
the market is going up or down, the rest is just detail.
The best advice is always simple and the more it annoys
the more likely it is to be useful.
Most traders lose money speculating on 50/50 trades
so marginal that their costs eat up their capital. They can
be more right than wrong and still lose all their money. A
death by a thousand cuts is a classic route to poverty for
high frequency, short life traders.
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15
in this loose money world. Which way is the chart going?
Up. The fundamentals say up and the chart says up.
The question is, did the basic relationship between
the UK and Europe change that much since 2008? Id say
not. So why wouldnt the pound/euro relation reset to
near those post trauma levels? If you forget the noise this
very simple picture is a map for a long-term position with
big profits along the way.
Lets go sideways a tad. You think the low interest
rates in Europe will drive European equities. Well jump
in. Wait, what is the point of a fat profit in euros if the euro
tanks? Better hedge that! So you see a very simple road
map informs your other trades.
Many traders think that being right is all they need to
make money. There are many ways to be right and still
lose. The main one, of course, is costs but the other is
gamblers ruin. Let us say the chart of the euro vs. pound
is correct; how can the trader possibly go wrong outside
of thrashing his account to death?
The Broker Always Wins
The next most frequent answer is leverage. Leverage
kills. Let me give you a practical example.
At the bottom of the crash of 2008, I went long. In fact
I was on CNBC having a bust up saying that the market
was in a panic. The presenter said I was simply trying to
encourage one and I retorted I was now very long because
you buy when everyone is selling. (Or words to that effect.
The interview is likely still on YouTube somewhere.)
I made about 200 per cent on that
position but had no leverage. I was, as
poker players would say, All in. This
was fortunate because that portfolio
had to drop another 20 per cent
before it turned to zoom to the moon.
With ten times leverage, half of what
I could use if I had chosen to, Id have
been closed out with at least a 50 per
cent loss.
Leverage is very tricky. This
is why we get offered it. If I was a
broker and I didnt hedge or make
your trade. The leverage coupled
with stop-losses is what pumps the
traders money into my account.
It works like this: With leverage
you need a stop, your margin is a
stop in its own right. The more you
leverage the tighter the implied stop.
The tighter the stop the more times
you will be stopped out for a loss. With a given volatility
it is nigh impossible not to get stopped out. Any win is
countered by a mountain of costs from multiple bid/offer
spread re-entry costs.
Then there is the matter of interest. Say I have a
financing rate of five per cent a year. I have a million
pounds of cash in the account. I go 1,000,000 long on
AAA PLC. I pay five per cent on the whole 1,000,000 of
leverage. The 1,000,000 is margin, often not even the
100,000 deposit used is taken off the whole amount. So
at the end of the year, I have spent 50,000 on interest.
So say you started with just the 100,000, used ten
times leverage at five per cent and held for a year. You
could have traded four stocks over the year instead. But
in the end, the stocks didnt move up or down. You just
lost 50 per cent of your capital in interest. If you used
20 times leverage, you spent the lot!
Conclusion
So what is the way to go? If you see a long-term trend,
enter and sit on it. If you want to grow the position buy
the tips. Use leverage sparingly if at all. Be aware of the
financing of your leverage and watch it closely. Keep the
usual extreme volatility in mind when you leverage and
keep plenty of margin at hand.
Most important of all, dont get distracted by the
noise of other opportunities. Dont make your broker rich
because unless you are making as much profit as the
commission you are paying, you are doing it wrong.
The pound versus the euro over the last 15 years the effect of the 2008 crash is clearly seen.
Source: www.advfn.com
F1) EUR/GBP Long-Term
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Market Dynamics Part 2
Laws of Physics in Financial Markets
Physics laws shape the world we live in. Most of the observations we make, how we function as organisms
as well as practically all biological processes are, in effect, tuned in harmony with these universal forces.
Theres no escaping them and todays most successful species have learned to use them to their advantage.
In nancial markets too, there are underlying forces an investor or trader has to know and needs to respect
in order to be successful. This article series aims at exposing the underlying forces driving market dynamics
while detaching them from their protruding visible consequences that are way better known to traders.
Dirk Vandycke
Dirk Vandycke has been actively and independently
studying the markets since 1995 with a focus on
technical analysis, market dynamics and behavioural
nance. He writes articles on a regular basis and
develops software partly available at his co-owned
website www.chartmill.com. He teaches software
development and statistics at a Belgian University.
dirk@monest.net
furthermore as the law of the vital few (and trivial many),
sometimes described as factor sparcity. This rule,
although more an empirical observation than a true
law of nature, states that roughly 80 per cent of effects
(output) come from 20 per cent of the causes (input), as
depicted in Figure 1. Nowadays its even common to see
it pop up under denominators such as power laws (giving
rise to Pareto type distributions), long tail economics with
a lot of attention towards areas like rupture dynamics. We
wont go there in this article.
Although the numbers 80 and 20 are used, in trying
to grasp the main point, one shouldnt focus on them for
two reasons. First of all, they dont have to be exactly
80 and 20, they can be numbers describing minority
versus majority. Secondly, they dont have to add up to a
hundred, even though they are expressing percentages.
The reason for that being they describe totally different
things. So this commonly observed effect might show
itself as 17 per cent of causes accounting for 91 per cent
of the effects (91 and 17 not adding up to a neat 100).
In the previous article we showed how gravity and
capacity are two of financial markets strong underlying
forces. In this article well elaborate on the powerful
law of nature in the financial markets, how it appears in
different spots in their dynamics, effecting participants
and what markets keep in store for them.
Less Drives More
Most people are familiar with the 80-20 rule, also
named the Pareto principle or Jurans principle, known
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17
What this rule is actually saying
is that most things in life arent
distributed evenly. As a consequence
not all efforts have the same or even
proportional impact on the outcome
of what it is we try to achieve (return
in the case of trading).
Lastly, dont think the Pareto
Principle means only 20 per cent of
the work needs to be done (if one
is satisfied with 80 per cent of the
result). It may be true that 80 per
cent of a bridge is built in the first
20 per cent of the time, but you
still need the rest of the bridge in
order for it to work. It may be true
that 80 per cent of the Mona Lisa
was painted in the first 20 per cent
of the time, but it wouldnt be the
masterpiece it is without all the
details. So this principle is mostly
useful in situations where we dont
seek perfection but want to optimise
our bang for the buck. In those cases,
focusing on the critical 20 per cent is a time and energy
saver. See what activities generate the most results and
give them your appropriate attention.
Market Application
Can we find the 80-20 rule in financial markets? For sure, we
can. Numerous studies show how the minority of (hedge)
funds earn the majority of alpha, how the majority of
stock movements happen in the minority of time, how the
minority of stocks make for the majority of the action. But all
these studies are looking at power laws from the viewpoint
of the market. In this article we want to zoom in on how 80-
20 can make a difference for the individual trader.
Lets start with some root cause analysis on
profitability. In trading profitability comes from the
combination of frequency and size of wins and losses
(see Figure 2). And no matter how much the financial
industry makes its customers focus on the number of
winners (having more winners), we have far more control
over the size of wins and losses (just by selling if you
sell each position at a five per cent loss, your average loss
can never get bigger than five per cent).
This is where an interesting deduction can be made.
For if we need to focus on cutting losses (minimising the
average loss) while maximising the average winner to
be profitable in the long run, profitable traders will on
The 80/20 rule is a general rule explaining that a large part of a systems output is determined by a small part of
its input (vital few). Accordingly a large part of its input (trivial many) doesnt matter that much as far as output
is concerned. Although heavily present in business and management, the rule is applicable to trading as well.
Source: www.chartmill.com
F1) The 80/20 Rule Depicted
average have few large winners (the vital few) and lots of
small losses (the trivial many). There you have it, 80-20 in
ones trades. But it doesnt stop there. If we take this a bit
further, 20 per cent of ones trades will also represent 80
per cent of ones profits.
Theres a conservational law stating that the money
flux must be constant (we wont consider money being
printed or destroyed because on an individual scale it
doesnt matter much). Furthermore at any time market
dynamics will follow the path of least resistance. It is
easiest to pay off the smallest group. So if winners on
average have big positions, chances are that there are
more people losing at any one time. If there would be
more winners than losers, their positions couldnt be
larger. If the number of winners and losers would be
equal, markets would on average be nothing more than
breaking even. From this it must follow that, on average,
any trader can expect to have more losing trades than
winning trades in the long run. 80-20 time and again. 80-
20 among traders. The on average here implies that it
dont have to be the same people winning every time. But
for each stand-off, there will be a power law distribution
between winners and losers in the market. With some
caution one might start to wonder if that would mean that
on average 20 per cent of traders gets away with 80 per
cent of the money on a lager time scale.
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is what we call analysis, because the
sole purpose of any type of analysis
is getting us more winners. Therefore
getting from 30 to 40 per cent winners
might take some effort (energy/time/
money for analysis), trying to get
from 40 to 50 per cent will cost us
several times that effort. This is a
power law, showing that, although
analysis might not be futile, it obeys
a law of diminishing returns. To put
this in another way: We probably do
way too much analysis. We should
focus on 20 per cent of the simplest
analysis (like relative strength) which
will get us the most value/effect.
Before you know it you are spending
lots of time on the minor details (like
reading everything through what
fundamental analysis has to offer). Analysis doesnt have
to be perfect but good enough, the rest can be left to
execution. Focus your effort on the 20 per cent that makes
a difference, instead of the 80 per cent that doesnt add
much. Again with caution we can start to wonder if 20 per
cent of analysts produce 80 per cent of total analysis value.
System Quality
To take this away. What holds for a trader can easily
be transposed on a trading system. A system probably
will earn 80 per cent of its money in 20 per cent of its
time/trades. So on average a system probably will be
out of synch with the market the majority of its time and
20 per cent in synch. To separate both phases one could
do equity curve analysis on a system. If its equity curve
goes down, money is taken away from the system but
it keeps paper trading while being monitored. If its (now
paper) equity curve starts going up, the system is put
back on live trading modus.
As far as a portfolio is concerned, lots of research is
done and it would takes us way to far even just by giving
an overview here. But a great place to start would be
comparing what is called the Pareto efficient frontier with
the efficient frontier in modern portfolio theory.
Conclusion
80/20 is a great decision making technique in general but
in the financial markets it might be lurking around every
corner of trading activity. Pay attention to it and always
keep the big picture in mind while taking care of each
individual trade.
Being protable in the long run with trading, or every investment based enterprise for that matter, is about
cutting losses and letting prots run. Although this is a hearsay thing of ages, statistical expectancy actually
proofs the saying mathematical. Making money is not so much about being right or wrong as it is about
handling both prots and losses well.
Source: www.chartmill.com
F2) Expectancy Depicted as Scales
Catching more winners (in percentage) gets exponentially harder. Trying to ride
that steep hill is what we call analysis. Any form of analysis is done with the
sole purpose to aim for more winners.
Source: www.chartmill.com
F3) Analysis Explained
What about Analysis
Take a look at Figure 3. If we wonder how getting from zero
per cent losers towards 100 per cent relates to the effort
to get there, some things are pretty obvious. First, no one
can have 100 per cent winners, for that would implicate
that someone being able to see the future. If such a system
would exist, markets would become obsolete very quickly.
Since we cant get to 100 per cent, the relationship cant
possibly be linear. So even though we dont know how the
relationship looks like, it must be asymptotic to the vertical
line at 100 per cent and it must increase towards the right for
less effort wont get us more winners. Climbing that slope
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Hedge Fund Series
Part 6 The Steps to Building an Investment Process
In the world of investing, hedge funds have an interesting reputation. They are well-known for producing vast riches and
famous fund managers, but their actual operations are still cloaked in secrecy. This mismatch gives rise to some obvious
questions. How do they function? How do they make money? How did their founders become so wealthy? And, most
importantly for traders everywhere: Could you or me become one of those fabulously successful individuals, like George
Soros or Ray Dalio? In this nal part of his series of articles, hedge fund trader Bruce Bower will explain how you can build
your own Hedge Fund core. Its the most powerful concept of all.
Dene Which Markets You
Will Be Looking at and Investing in
You have to strike a balance between being specific
enough that youre handling a manageable number of
potential of investments, versus being so specific that
there arent enough real opportunities.
Take where you have experience and start from
there. If your background is fixed income, trading both
government and corporate bonds, then define that as
your playing field. If you have experience trading equities
in Latin America, then thats your scope. If you are just
starting out, then you might want to have a small universe
to start out on, but nonetheless, youll want to determine
one. By defining your universe, youre doing two things
at once: Understanding and reinforcing your areas of
strength and avoiding other areas, where presumably
you would be weaker.
The reason is obvious. If youre a Latin America
specialist and a broker suggests an interesting trade in
Petrobras, then you would definitely take a look at it,
because its your expertise. If that same broker suggests
a trade in the shares of Tesla, the electric car company,
then you would quickly realise that you have no real edge
there and not look any further. Understand where you
INSIGHTS
21
have an advantage and do it; if it falls outside of your
circle of competence, just pass.
By defining your universe, youve built the first part
of the funnel. You know that youre going to narrow your
focus to an area where you have a good understanding.
What Are You Looking for in a Potential Trade?
You will want to sort through your universe in some way
to look for interesting opportunities. To do that, you need
to be clear in your own mind what constitutes a good
trade:
What are you looking for?
How would you describe a good trade?
What is absolutely essential to see?
What is helpful but not necessarily critical?
What kind of trade would you not do?
When you read in books like Market Wizards about
traders having a methodology, this is the real nuts and
bolts of it. While different traders are looking for different
criteria before getting into any position, they all have
some criteria in mind.
Think of it like a checklist. You have a few things
that need to be there before you are ready to put on an
investment. You look at an investment and check those
boxes. There are a few more that you would like to see.
You check those additional boxes. If it meets your criteria
then you put it on.
A Surgeons Advice
In his book The Checklist Manifesto, the famous surgeon
Atul Gawande introduces pre-operation checklists
into all of his operating rooms, with transformational
results. By writing it all down on paper and systemising
things, it made it easier to get everyone on the same
page and remember what needed to be done. Surgeons
are obviously very smart people, so this is not done to
compensate for their low intelligence. Rather, its meant
to spare them the effort of trying to remember everything
pre-operation; instead, they can just focus on the difficult
operation-related tasks. As the book demonstrates, just
this simple exercise helped them to remember everything
that they needed to do pre-operation and to do it right.
Having this little game plan in place dramatically reduced
the amount of preventable errors during operations,
leading to improved patient outcomes. Its reminiscent of
the famous quip, failing to plan is planning to fail.
The cumulative effect was huge because instead
of having to reinvent the wheel every time they did
an operation, they could just rely on a piece of paper
to standardise and systematise its implementation.
Whats more, the more junior doctors and nurses could
refer to the checklist and were empowered to stop a
procedure if something had been skipped over. The
result? A standardised process, which everyone uses
and contributes to. Just like in any other successful
business. This is exactly what we should do with our
investing.
Applied to Trading
Lets use the William J ONeill CANSLIM system
(TRADERS 08/2012) as an example. Its a methodology
designed for investing in stocks in developed markets.
There are seven pillars to his investment philosophy
(see Info Box). These represent the seven points on the
checklist.
You can set up several ways to screen through your
universe to find investments that meet these criteria.
For instance, you can set up a quantitative screen to find
stocks that are trading at 52-week highs, or which have
very rapid earnings growth, or which show leadership
within their respective industry groups. These screens
would produce a smaller list of companies that you
would want to concentrate your research on. Then you
would dive deeper into the remaining companies and
get to know their respective management teams, their
businesses etc. and figure out whether or not they really
meet all criteria.
C Current quarterly earnings. Companies should have
high growth in earnings per share this quarter.
A Annual earnings. Earnings growth should be similarly
strong, at least 25 per cent per year.
N New Products or Services, New Management,
New Highs. You want a company that develops new
products and services; its stock price should be hitting
new highs.
S Supply and Demand. A product or service that is in
demand by the public, which will drive earnings growth.
L Leadership. The stock should be the leader in its
industry group in terms of earnings and stock price
performance.
I Institutional Support. There should be large institutional
buyers which are supporting the stock.
M Market direction. Only buy winning stocks in an
uptrending market.
7 Pillars of CANSLIM Investment Philosophy
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The point of all of this work is to take the entire equity
universe and to apply your own investment criteria
to generate a list of possible investments. Obviously,
there can be other factors that you look for instead of
CANSLIM. Warren Buffetts list of criteria would look
quite different, and thats because his investment
process has evolved differently over many decades. The
point is that you need several rigorous criteria on which
to filter your investment universe and to get to a list of
potential investments. You are getting rid of the noise
and left just with the signal.
After that, its a question of what it takes for you to get
in a position. In this sense, you are planning the trade that
you will make. In the CANSLIM system, once a company
has met the first six criteria, the last point is Market.
That means you want to wait for an up trending overall
market before buying anything. And preferably, the stock
that you buy should be breaking out from a base pattern,
suggesting that it will have a big run once you put on the
position. Thus, you plan the trade by constructing a list of
all the companies that meet your screening criteria, and
then the entry point that you would seek, plus the kind of
market conditions that you would want to see in order to
take risk.
After putting on a trade, you also have the criteria
that you need to get out of a position. Eventually, you
will want to close the position, either to take profit or
to cut your loss. Closing the position could be about
the individual position itself, i.e. the fundamentals have
changed or the stock price has run 100 per cent, or it
has hit your stop-loss. Or it could be about the overall
market the trend shifts, so you decide to exit all
outstanding positions. Nonetheless, you have certain
criteria that is there for exiting a position and you need
to be rigorous about executing them.
The overall sum of those two is the portfolio
construction. While this is overly simplified, the portfolio
is the result of the balance between positions that you
are entering and exiting, whether those are due to
position-specific factors or overall risk management
considerations. At each step of the investment process,
you are making decisions according to a set of criteria,
which provide rules and guidance for your activities. In
a sense, you have a set of rules for planning the trade,
and then you have them for managing and getting out
of the trade. These rules, and the flow from one step to
another, constitute your investment process.
Not Just for Hedge Funds
This thinking applies equally well to people who wouldnt
characterise themselves as hedge funds with a rigorous
investment process. Think of intraday equities traders,
like the ones at SMB Capital as profiled in Mike Bellafiores
The Playbook. They have many filters and checklists
that they apply to look for potential trades, such as for
example:
Stocks that are in play
Key levels
Order flow
Intraday activity
Moreover, they have evolved a set of guidelines to
determine how to manage an existing position, both in
terms of dialling up and down the position sizing and
also getting out of a position altogether. Thus, at every
step of the way there are guidelines or rules that help
shape a traders decision-making, getting them Step 1 (a
broad universe) to the last Step, becoming a consistently
profitable trader.
While the topic could sound hopelessly abstract
after all, you cant exactly touch an investment process
we hope that this has made it relevant to your activities.
Summing it up for you to learn, there are some questions
for self-reflection:
Do you have an investment process?
Is it well-defined?
Could someone replicate your results by following it,
or at least come close?
Does it work in all market conditions?
Has it been consistently profitable?
In light of these questions, how will you change your
thinking about your investing or trading?
This was the last part of our Hedge Fund series. We
hope you could learn a good deal for your trading. Please
check out Bruce Bowers blog going forward; it contains
consistently great posts about trading.
Bruce Bower
Bruce Bower manages a portfolio of emerging
market equities at a hedge fund. He has
a keen interest in markets, psychology
and self-development, having trained as a
hypnotherapist.
www.howoftrading.com
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www.tradersonline-mag.com 09.2014
a very short time in late July, the Nike stock has remained
a favourite with investors. The industry leader continues to
be on track. In the 2013-14 fiscal year, the company was able
to increase its sales by ten per cent to 27.8 billion dollars. Its
gross margin improved from 43.6 to 44.8 per cent and net
profit increased by nine per cent to 2.7
billion dollars. Thanks to the football
World Cup, order volume is such that
prospects are also good for the current
fiscal year of 2014/15. It all ties in with
the expected positive seasonality
where you can include the stock in
your portfolio on 4th September.
The corresponding exit would then
be due just before Christmas on 17th
December.
In Figure 1, the stock has moved
into a slight correction phase and
was able to escape quite well,
albeit not completely the negative
environment of the overall market. In
the past 16 years, there was a rise in
94 per cent of the cases, amounting
to an average of 13 per cent. If that
were to continue all the way to the
entry point, which is marked by a
Trading Seasonalities
Part 14 of the series Trading Seasonalities includes two long candidates for the month of
September. First, the US stock Nike (symbol: NKE), which by now has found its way into the
Dow Jones, and secondly, the January 2015 futures on frozen orange juice (symbol: OJF5).
Part 14: Long Setups for Nike and Orange Juice
F1) Trading Idea Nike Long
The sporting-goods manufacturer Nike is holding on relatively well considering the losses in the equity markets.
In the case of an entry on 4th September (green line) and a holding period until 17th December (red line) you were,
if successful, able to achieve 13 per cent growth in the last 16 years.
Source: www.lp-software.de
Trading Idea for Nike
In this day and age, everybody knows the major sporting-
goods manufacturers whose products by now have found
their way into the most remote corners of the world. While a
profit warning caused adidas to lose about 20 per cent within
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25
On 4th and 29th September one update each will be made
available on www.tradersonline-mag.com, addressing
the question of where to enter and where to place the
corresponding stop-losses.
Update
green vertical line on the chart, a
breakout to a new historic high would
be possible, attracting in turn new
groups of investors. In the one year
of losses within the last 16 years, the
stock lost seven per cent during the
period mentioned, resulting in a risk/
reward ratio of almost two. However,
using the maximum profit as a
benchmark causes this number to
increase to four. By investing in this
stock, you also bet on a Thanksgiving
rally materialising during the holding
period as well as on further gains by
the end of the year. In the case of a
breakout beyond $80, there will be
a minimum potential of another $10.
Trading Idea for January 2015
Orange Juice Futures
The second trading idea involves orange juice. Here you
can build a long position on 29th September which can
be closed at Christmas. In the January 2015 futures to be
traded here, there was an average rise of 1947 US dollars in
the last ten years in 80 per cent of the cases, corresponding
to 259 ticks with a value of 7.50 dollars. To trade one of those
futures, you need at least 1760 dollars as a margin. The
average profit calculated in terms of the margin would
therefore be an increase of slightly more than 100 per cent.
A stop-loss should be placed more than 177 ticks below the
entry. Here, the risk/reward ratio is not quite as good as it is
in the case of the Nike stock, but still acceptable. The futures
are traded on the NYBOT, using the symbol OJF5.
In Figure 2, you can see a bullish downward wedge
where the peak has been reached right at the entry point.
This is matched by the emergence of lows in two seasonal
lines during this time period. Things took a dive not long
ago after the agricultural authorities of the sunshine state
of Florida announced that US demand for orange juice
had most recently fallen to its lowest level for twelve
years. Still, there is no threat of a glut though since the
dry spell in Florida as well as an ominous tree disease
F2) Trading Idea January 2015 Orange Juice Futures Long
The ideal seasonal entry point for orange juice futures is 29th September (green line). If successful, there was
a rise of more than 250 ticks.
Source: www.lp-software.de
The table shows the key data of the two trading ideas.
Source: www.trademinerpro.com
Instrument Nike Orange Juice
Direction Long Long
Entry 04.09.2014 29.09.2014
Exit 17.12.2014 24.12.2014
%-Win 94% 80%
History (years) 16 10
Average Prot 13% 111%
Maximum Prot 33% 319%
Average Loss 7% 76%
Maximum Loss 30% 119%
Holding Period in Days 104 86
T1) Seasonal Trades of the Month
caused the US Department of Agriculture to assume that
crop yields in the United States would decrease by twelve
per cent compared to the previous season. In addition,
the hurricane season is again due to begin in Florida,
starting with the entry date. In the last few years, there
have often been striking price jumps upwards when such
a storm hit the orange-growing regions between Daytona
and Palm Beach.
Both trading ideas presented can be implemented
by using options. You can write either corresponding
puts below the stop-loss line or build a bullish position by
buying calls.
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Relative Rotation Graph (RRG) charts
are now available on StockCharts.
com. This innovative charts give
you an immediate, concrete sense
of how well or how poorly each
stock in a related group of stocks
has been doing by plotting each
RELATIVE ROTATION GRAPH CHARTS AVAILABLE ON STOCKCHARTS.COM
strength and good momentum, it
typically will start to lose momentum
and rotate into the yellow Weakening
quadrant. Next its relative strength will
probably falter and it will move into the
red Lagging quadrant. After a while,
things may start to improve (relative
to the other stocks on the chart) and
momentum will pick up moving
the stock into the blue Improving
quadrant. Finally, relative strength will
return causing the stock to move back
into the green Leading quadrant.
RRG charts have large dots on then
showing you where each stock is
currently on the chart. Extending
backwards from each dot is a long
tail that gives you a sense of the
stocks recent travels through the
chart. On the live RRG Chart page,
you can interactively control the start
and end date of the chart and watch
the stocks spin around over time.
Source: http://stockcharts.com/freecharts/rrg/
stocks Relative Strength versus its
Momentum.
First things rst: stocks generally follow
a natural clockwise rotation on an RRG
chart as time passes. For instance, if a
stock starts out in the green Leading
quadrant because it has good relative
This index measures the degree of
nancial stress in the markets and
is constructed from 18 weekly data
series: seven interest rate series, six
yield spreads and ve other indicators.
Each of these variables captures some
aspect of nancial stress. Accordingly,
as the level of nancial stress in the
economy changes, the data series are
likely to move together.
The average value of the index,
which begins in late 1993, is designed
to be zero. Thus, zero is viewed as
representing normal nancial market
conditions. Values below zero suggest
below-average nancial market stress,
while values above zero suggest
above-average nancial market stress.
Source: Federal Reserve Bank of St. Louis
ST. LOUIS FED FINANCIAL STRESS INDEX
Source: http://research.stlouisfed.org/fred2/series/STLFSI
INSIGHTS NEWS
27
TRADERS EDITOR WINS
FIRST TRIATHLON OF HIS LIFE
On 27 July 2014 our editor Marko
Grnitz achieved one of his goals in
life: He became the overall winner
of a triathlon race. The race, called
Hofheim Triathlon, consisted of a 1.9
km swim, 76 km bike and 20.4 km run
split (almost half-Ironman distance). It
has always been my dream to cross
the nish line as the overall winner.
Just once in life. An insane feeling
to actually achieve this! A miserable
torture at the end of the race though,
but it was well worth it!
To save a few seconds he decided to go
on the run without putting on socks
a clear mistake as he soon discovered
just a few minutes later. Over the course
of the next 20 km the horny skin at his
foot detached, causing lots of pain on
the run (and putting him on crutches
after the race for about a week). Under
different circumstances I would have
quit the race. But hey, if you actually
get the lifetime opportunity to win a
race, youll run until your feet fall off,
he later said about his decision to keep
going no matter what. In the end, it
was a meager two minutes advance
he managed to keep against his closest
competitor when nishing with a total
race time of four hours, 14 minutes,
44 seconds.
Source: www.triathlon.graenitz.org
equity trading activity on BATS, allows participants to net
their ETF/ETP trades executed on BATS with their trades
that are executed on other venues.
Given as much as 70 per cent of all European ETF
trading occurs over-the-counter, BATS has also made
the interoperable model available to participants using
the Exchange Trade Reporting capabilities within BATS
market-leading BXTR suite of products. This will allow
customers and their clients to realise signicant collateral,
risk and cost benets.
Source: www.batstrading.co.uk
BATS CHI-X EUROPE INCLUDES ETFS
BATS Chi-X Europe (BATS) has extended interoperable
clearing to include exchange traded funds (ETFs) and
exchange traded products (ETPs), as it continues its
campaign to address inefciencies in the European
market so as to increase participation and liquidity for
all investors and traders. Since 21st July 2014, trading
participants are able to select one of three central
counterparties (EuroCCP N.V., LCH.Clearnet Ltd, or
SIX X-Clear) to clear their trades executed on BATS
order books. The change, which brings the clearing and
settlement treatment of ETFs and ETPs in line with other
INSIGHTS NEWS
28
www.tradersonline-mag.com 09.2014
tradegear LLC, Swiss ntech company,
has launched 1touchtrading.com
online service for retail forex traders.
The new service helps both beginner
and advanced traders to trade easier
and more protably, especially from
mobile devices. Whats unique about
the service is that it is free for unlimited
period of time if used with demo
(paper trading) broker account.
User congures a subscription
through guided creation of currency
portfolio to trade, selection of
researched and explained trading
strategies and one of several intra-
day timeframes (daily and weekly
timeframes are also supported).
1touchtrading.com will alert the user
when a trade opportunity matching
his or her preferences occurs in forex
market. Using any device user can
decide whether to place the trade
TRADEGEAR LAUNCHES
1TOUCHTRADING.COM FOREX TRADING SERVICE
and execute it automatically with
forex broker through 1touchtrading
platform. All the trade parameters are
pre-calculated to optimise the risk/
reward prole, but the user can also
adjust them.
1touchtrading.com was created
to relieve traders from boring and
mechanic tasks and enable them to
concentrate on making decisions
instead on time-consuming research
and details of placing orders. As
traders ourselves, we understand
what forex traders need and how
trading can be made easier and
more enjoyable. The service is
optimised for mobile devices and
no app installation is necessary,
said Aleksandar Cetkovic, Head of
Technology & Products with tradegear
LLC. Predrag Micic, Head of Marketing
& Operations, adds: We want our
users to grow and learn how to trade
protably in a safe environment.
Therefore 1touchtrading.com is for
free as long as it is used with demo
broker account (for paper trading).
Once the trader develops enough
skill and opens a live (funded) broker
account, he or she can use the service
for as little as 4.99 US$ per month.
Advanced traders can benet from
expanding their range of markets,
strategies and time frames, at the
same time saving a lot of effort in all
phases of trading.
tradegear continues to develop
1touchtrading.com features such as
automatic alerts on economic news,
portfolio monitoring and poweful
trade reports will be available soon,
as well as automated access to further
forex brokers.
Source: www.tradegear.ch
Billionaire businessman George Soros has upped his ante
in what some industry insiders say in his long-running bet
that the United States will suffer a massive stock market
collapse in the coming months. His nancial lings show
that hes been predicting such a collapse in the Standard
& Poors 500 Index since late 2013, Newsmax reported.
GEORGE SOROS BETS $2B-PLUS ON STOCK MARKET COLLAPSE
Specically, the most recent 13-F ling Mr. Soros made
with the Securities and Exchange Commission indicates
that the Soros Fund Management that he heads up has
increased its puts on the Standard & Poor 500 exchange-
traded fund by a massive amount, between the rst and
second quarters. By the numbers, Mr. Soros boosted his
position to 11.3 million put options
bringing the dollar value of his
position from $299 million to $2.2
billion.
Stock market insiders say such a
move is little more than a bet that the
price of the stock market will take a
dramatic fall, Newsmax reported.
Investors generally watch the
quarterly lings because they give
a good indication on where smart
money is choosing to invest.
Source: www.washingtontimes.com
INSIGHTS NEWS
29
Unfortunately the vast majority of Retail Traders globally lose
money. This is because the standard of Trading and Portfolio
Management education that is available to them is far too
low. Retail Traders in the majority of cases are taught
how to trade by people who are not experts in Trading and
Portfolio Management and do not have their best interests at
heart. Consequently, Retail Traders never get to know the real
truth about how to make money consistently from Trading,
Portfolio Management and the Financial Markets. Until now.
You are invited to join Anton Kreil at a free seminar in
Berlin where you will be taught things such as:
Professional trading secrets they dont want you to know
Why the vast majority of retail traders lose money
Navigating through the Retail Trader landscape
A Survivors Guide
You do not need any prior experience in Trading and Portfolio
Management to attend one of our seminars. All you require is
a basic level of common sense and arithmetic ability. You will
be taught everything you need to know from basic to more
advanced techniques. The approach is challenging both to
a beginner and more experienced traders. The professional
trader approach is like nothing you have ever seen before.
This is because it is simply not taught to the Retail Trader and
is usually only reserved for professional traders.
Register at www.instutrade.com/education for the seminar
on September 8th.
Source: www.instutrade.com/education/
FREE SEMINAR WITH ANTON KREIL: TRADING
THE TRUTH BERLIN ON 8 SEPTEMBER 2014
30
TOOLS www.tradersonline-mag.com 09.2014
Ward Systems Group has released a set of renko
bar indicators that may be optimised based on price
change, volume, or a combination of price & volume.
Developed by Richey Enterprises for NeuroShell Trader,
the InterChart Tools Renko Bars include parameters that
allow the user to specify the number of ticks used to
calculate both the up and down part of the renko bar.
Since rising price jitter is often different from falling
price jitter, and since the function of the bars is to
absorb noise, the IctRenko Bars permit an asymmetrical
definition to accommodate this difference. For more
information visit www.neuroshell.com.
TRADING CENTRAL, a developer of technical analysis
tools, has launched a new application, TC Indicator,
which is a multilingual and customisable plugin that
superimposes Trading Centrals technical analysis
strategies, forecasts, commentary, and key levels
(support/resistance/targets/stop pivots) onto live charts
on most tradable instruments. The plugin is available
on MT4, NinjaTrader, and other trading platforms. The
30
News from the World of Technology
NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPREVIEW
New Products
user can fill in orders based on Trading Central key
levels directly from the trading platform screen. The TC
Indicator app will display the latest Trading Central article
whether on an intraday, short-term, or midterm basis. If
you want to read more, visit www.tradingcentral.com.
Stage 5 Trading integrates trading, brokerage services,
and education. The company states its goal is to help
traders improve their trading through monitoring,
feedback, and individual assistance. The company offers
individual performance monitoring so clients can better
evaluate and improve their trading results. Stage 5 also
offers its clients live interactive webinars, chat rooms,
professional risk management, and homework sessions.
The company also offers its proprietary S5 Trade Analyzer
tool to help clients gain insight into their trading in real
time. Individual feedback may also be available to select
clients to help them construct successful strategies. More
information on www.stage5trading.com.
McMillan Analysis Corp. has launched a website at www.
mcmillanasset.com, which introduces its McMillan Asset
Management service. A variety of money management
services are offered, all geared toward the use of listed
derivatives (primarily options) in individually managed
accounts. The primary strategy used is Lawrence
McMillans Volatility Capture, a proprietary investment
approach that combines option writing with strategies
designed to protect downside risk. The approach involves
the sale of puts and put spreads, hedged by the purchase
of volatility derivatives. McMillan has more than 35 years
of experience trading options and is the author of several
longtime newsletters on options. An overview of how the
firms managed accounts are structured is given at the
site. McMillan Analysis Corp. is a registered Commodity
Trading Advisor and Registered Investment Advisory. If
you want to read more, visit www.mcmillanasset.com.
Neuroshell
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NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPREVIEW
MetaTrader Signals Service
and Social Trading
MetaQuotes Software continues to enhance the MQL5 Signals service, improve the mechanisms, add new
functions and x aws. Only two years ago automated copying of trades was launched in the MetaTrader
platforms. The service already managed to come a long way. The MetaTrader Signals Service of 2012 and
the current MetaTrader Signals Service are simply not comparable. MQL5 developers have paid the utmost
attention to the security of subscribers, improvements in Signals statistics and enhancements of copying
abilities. Currently, the implementation of Virtual Hosting Cloud service, which consists of a network
of servers to support specic versions of the MetaTrader client terminal, is about to be nalised and
introduced. Traders will only need to complete ve steps in order to rent the virtual copy of their terminal
with minimal network latency to their brokers trade server, directly from the MetaTrader client terminal.
The Development Process
The Beginning
MetaTrader Social Trading appeared in the summer of
2012. Thats when MetaQuotes finally decided to launch
a new service for automatic trade copying: Trading
Signals. The idea of this project was to make trading a
more widespread phenomenon: The target audience
was novice traders with no experience or special skills.
The stringent requirements were set for the new service:
TOOLS
33
Clarity, maximum availability regardless of skills and
knowledge, a transparent operation mechanism and
protection of subscribers.
The deadline for launch was the beginning of October,
on the start of the Automated Trading Championship
2012. This online competition was the most ideal venue
for introducing and testing the new service, because
it always attracted the attention of a great number of
traders. Indeed, the signals were welcomed by traders:
The launch of the service during the Championship
enabled users to copy trading of successful participants
on their own MetaTrader 5 accounts. This was a brand
new feature at the competition.
A month later, in November 2012, support for trading
signals appeared in the MetaTrader 4 platform. Suppliers
of signals received access to an audience of millions
of potential investors, and the service began to gain
momentum. At the beginning of November, about ten
signals were added daily; at the end of the month up to 25
were registered each day.
Subscriber Security
At the initial stage MetaQuotes task was to create a
massive service for signal distribution, which would
protect subscribers from connecting to unprofitable
signals. Traders protection was the top priority, as
MetaQuotes understood the danger of copy trading,
which could lead to loss of money. So they decided to
distribute signals on the principle of quality rating, which
is calculated based on a variety of parameters. The
higher the quality rating, the higher
the position of the signal in the list,
and the greater its credibility among
potential subscribers. In this scheme,
potentially dangerous signals appear
at the end of the list.
However, not only the rating
protects users from the danger
of subscribing to a losing signal.
Depending on the degree of risk, the
subscription option can be disabled
for some signals. In special cases,
a warning message is shown, like
A large drawdown may occur on
the account again, This is a newly
opened account, and the trading
The Distribution chart in signal statistics shows the distribution of the symbols and the Sell/Buy ratio.
Source: MetaTrader
F1) Distribution Chart
results may be of random nature, Low trading activity
only three trades three detected in the last month, etc.
MetaQuotes also implemented additional security
measures: Signal suppliers do not know who their
subscribers are (they know only the number of signal
subscribers), every deal carries a unique digital signature,
service developers do not collect personal information
of subscribers and do not have access to their accounts.
They have done everything to ensure security and help
their clients enjoy the service, being confident that their
account is protected.
Signals Statistics
Much work has been done to improve the statistics of
the signals. When selecting a suitable signal, a trader
primarily checks the statistics carefully to understand
how successfully the signal provider trades and how
reliable the signals are. Therefore, it was important to
provide adequate demonstration of trade statistics.
At the start of the Signals service in the autumn of
2012, only the two basic charts of growth and balance
were available. The first one showed deposit growth
in percentage terms calculated based on the results of
trading operations, the second chart showed the amount
of funds on the account without floating unfixed profit of
current open positions.
A little later, in early 2013, MetaQuotes added a new chart
of Distribution that showed the distribution of the symbols
and the Sell/Buy ratio. This allowed the service users to get
a better understanding of the trading strategy of a selected
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www.tradersonline-mag.com 09.2014
the statistics again were significantly
expanded: A vertical line appeared
in the growth and balance charts to
divide trading before connection to
the monitoring and after that, colour
change was introduced for every
non-trade transactions (depositing or
withdrawal), a new option for tracking
the best and worst trade series was
added to the statistics. The aim of
these changes in statistics was to
provide potential subscribers with
a complete picture of the signals
offered by suppliers.
With the same purpose in mind,
a little earlier, in January 2013,
MetaQuotes introduced a unique
innovation for the entire industry:
visualisation on charts. This new
feature made the service even more
convenient for traders, because now
they can see the entire history of signal trading on charts. A
single button opens charts of all currency pairs, which were
traded on the signal account. Despite the unique nature of
this service, traders very quickly got
used to it and began to perceive it as
an integral part of copy trading.
Signals in MetaTrader are like
a living organism, they evolve in
accordance with the laws dictated by
the developers. MetaQuotes is not
in content with the current situation,
and they constantly review the quality
ratings, select signal evaluation
criteria and change the calculation
formula. These actions are intended
to feature only the best and proven to
succeed signals in the top list.
Compatibility of Trading Conditions of
the Subscriber and the Signal Provider
Another important aspect of the
Signals service is compatibility
of the trading conditions of the
subscriber and the signal provider.
This is a critical element for the
normal operation of the service,
since differences in conditions
may lead to a worse copy quality
The Monitoring line is a vertical line in the growth and balance charts to divide trading before connection to
the monitoring.
Source: MetaTrader
F2) Monitoring Line
After clicking Visualise, the client terminal automatically downloads the signals trading history, opens
appropriate charts and displays signals deals as graphical objects in the same way as it is done for the trading
accounts history of the client terminal.
Source: MetaTrader
F3) Visualisation of Signals Trading History
signals vendor. In the summer of 2013 MetaQuotes added
the Equity chart to show the account equity taking into
account the current open positions. A few months later
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35
or even complete inability to copy
trades. If trading conditions are
incompatible, a signal is either
invisible to the subscriber, or is in
the list of prohibited subscription.
It is important that the subscriber is
always informed of the differences
with the providers trading
conditions, both when subscribing
and during each synchronisation of
the terminal with the signal server.
Over time, MetaQuotes has
enhanced this element further.
It started as a comparison of the
subscribers account settings with
those of the signal provider (deposit
currency and leverages), then the
comparison of settings of each trading
instrument was introduced. From the
comparison of trading conditions in
the subscribers terminal, we then
proceeded to provide this comparison
for subscriptions that were performed
mql5.com site. After some time, they added mapping of
instruments now without defining the matching of an
instrument, the service can find the most appropriate one.
For example, if the subscriber does not have EUR/USD,
which is traded by the provider, signals can be copied for
EUR/USD.m, if the subscriber has this one. Mapping has
greatly expanded the possibilities of copy trading, as even
on different servers of the same broker
names of instruments may vary.
Outlook
MetaQuotes continues to enhance
the Signals service, improve the
mechanisms, add new functions and
fix flaws. The MetaTrader Signals
Service of 2012 and the current
MetaTrader Signals Service are like
two completely different services.
Currently, they are implementing A
Virtual Hosting Cloud service which
consists of a network of servers
to support specific versions of the
MetaTrader client terminal. Traders
will need to complete only five steps
in order to rent the virtual copy of
their terminal with minimal network
All trading signals with automatic execution on trader account in MetaTrader 4 Client Terminal. Any trader can
choose signal and subscribe to it in a few clicks.
Source: MetaTrader
F4) Trading Signals Tab in the Client Terminal
If a prot on the providers account is positive, the appropriate window will appear explaining the situation
and offering to wait for better market conditions. Traders may accept the risk and synchronise immediately.
Source: MetaTrader
F5) Synchronisation Warning in the Client Terminal
latency to their brokers trade server directly from the
MetaTrader client terminal. This will provide round the
clock operation of the terminal where traders copy trades
of signal providers. Furthermore, MetaQuotes is planning
to introduce even better statistics of signals and provide
a new option for traders to form their own portfolio of
signals.
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TOOLS www.tradersonline-mag.com 09.2014
Clash of the Financial Pundits
NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPREVIEW
How the Media Inuences Your Investment Decisions for Better or Worse
by Joshua M. Brown and Jeff Macke
How to Separate the News from the Noise
There is no shortage of financial advice these days. From
cocky cable pundits to nattering news columnists to off-
grid online bloggers, there are more so-called experts than
ever before. And the noise can be downright deafening.
This no-bull, bottom-line guide from The Reformed
Broker Josh Brown and Yahoo Finances Jeff Macke
will help you cut through the cacophony and make the
Joshua M. Brown is the CEO and co-founder of Ritholtz
Wealth Management, a national registered investment
advisory rm. He is the author of Backstage Wall Street,
the creator of The Reformed Broker blog, and an on-air
contributor to CNBC.
Jeff Macke is the host of Breakout on Yahoo Finance. Prior
to that he was an original cast member of CNBCs Fast
Money, founder of Macke Asset Management, and a hedge
fund manager.
Joshua M. Brown & Jeff Macke
most of todays media news. Its an eye-opening crash
course in separating financial facts from fiction; featuring
interviews with some of the worlds most influential
investors, including:
Jim Cramer (Mad Money) takes you behind the scenes
of his polarising TV program and talks about his clash
with Jon Stewart on The Daily Show.
Henry Blodget (Business Insider) shares anecdotes
about tangling with Eliot Spitzer, covering the Martha
Stewart trial, and launching his Business Insider site
as a marked man.
Ben Stein (Win Ben Steins Money) reveals how he
really feels about Bernanke, Bogle, Buffett, and
bailouts.
Karen Finerman (CNBCs Fast Money) exposes
the hype behind the headlines and the show biz
demands on television news pundits.
Herb Greenberg (TheStreet.com) explains why
investors need to follow social media, where the
real news is disseminated.
37
TOOLS
Title: Clash of the Financial Pundits
Subtitle: How the Media Inuences Your
Investment Decisions for Better or Worse
Author: Joshua M. Brown, Jeff Macke
Pages: 256
Price: $25 Hardback
ISBN: 978-0-071-81792-9
Release: May 2014
Publisher: Wiley
Bibliography
Barry Ritholtz (Bailout Nation) reveals his secret for
watching financial TV.
Youll also find invaluable insights from the original
father of financial TV, Jim Rogers, and from James
Altucher, the most shockingly honest commentator in
the history of the medium. And youll get a front-row seat
for the processing and packaging of the news and learn
everything you need to know about the talking heads
who shape each days narrative. Up-close. In-depth. All-
true. Clash of the Financial Pundits is the one guide that
will change the way you look at markets and investing
forever:
Draws essential lessons from history providing
investors and traders with guidelines to better
navigate markets in todays tumultuous times.
Offers valuable insights on understanding and
anticipating market responses to shocks and crises.
Introduces his companion website with a Q&A
section containing charts from key moments in past
financial crises and asks readers to choose whether
to go long, short, or step aside.
Conclusion
If youre looking for a better way to make it in todays
dynamic markets, look no further than this timely book.
38
TOOLS www.tradersonline-mag.com 09.2014
NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPREVIEW
FRED
For making medium- to long-term nancial
decisions it is recommended to use a
combination of technical and fundamental
analysis. But for investors who prefer this
mix it is not easy to nd the right data.
Therefore it is very good that there is one
institution that offers extensive economic
and nancial data: the St. Louis FED. In the
following article we introduce the English
app FRED and put it to the test.
FRED means Federal Reserve Economic Data and this
already describes the service: It offers extensive economic
and financial data in total 153,000 based on dozens of
sources. The research-department of the federal bank of
St. Louis offers this huge data to interested people and
has become the first place to go to for in the recent years.
Under www.research.stlouisfed.org everybody can make
use of this information, studies and data tools and it is
completely free. This is a good reason for us to put the
mobile version of FRED to the test.
Endless Data
Lets start with the overview. You can download the app to
your ipad or iphone for free in the app store and then you
can start using it immediately. On the main page you see
the most important information and the 25 most popular
time series that you can display as charts. These are for
example the consumer price index (CPI), the development
of the GDP, yield curves or the stress index created by the
central bank.
The area categories includes everything you can
wish for: data bases of the economic research institute
NBER offer data series from the categories money and
finance, population data, production- and financial
market data from all around the world it is all categorised
further and therefore whatever you search for will be easy
to find. If you do not find it here, where else should you?
In the area releases the user can search for a certain
report (for example home sales, consumer sentiment
and so on) and can select the ones interesting for him
from a wide range of detailed data. The search for data
of one particular source (for example Eurostat or world
bank) is fastest with the menu Sources, where you have
thousands of data series at hand again.
Flexible Charting, Good Information
The high quality and transparency of the data impress:
Whether it is the development of the high school
graduates of the state New York, the daily gold price
fixing or the spread between investment grade- and junk-
bonds you will find all necessary data below the chart
in table form, including the source and length of data
history, the publication frequency, the adjusting as well
as a short description of the particular data series.
The First Address for Economic
Data from A to Z
39
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Figure 1 shows an example for a
request. You see the volatility index
for gold. The chart can be displayed
in full, you can share it in social
media and of course you can save the
picture on your tablet. The editing of
the chart (colour choice, lines and so
on) is easy to handle on the ipad and
therefore your individual design is
only a few steps away.
If you click on the star symbol
you can insert the chart to your
favourites to have it ready for your
next search. If you want to get even
more information you have to click
on the button view data and you
see all the single data points on
the website you can export this
data to Excel. The app also offers
tips for other, similar data series:
Directly below the chart you click on
Related respectively Suggested
and immediately you get further, similar data that only
wait to be analysed.
For those who are not into the fundamental analysis
you will still find FRED interesting: In the area Calendar
you can find out, which data will be published that day.
Unfortunately at our test there were identical results for
every trading day a bug that will
surely be fixed shortly.
Readers who like to take a look at
economic data should register then
they can use the User Dashboard as
well. This is an individual area where
the user can create his own control
centre for future analysis.
Conclusion
The app FRED lives up to its promise:
extensive data in high quality and
order. If you love data and you are
interested in the financial markets
you will find everything you are
looking for. The broad and deep
database invites to experiment with
Excel and to combine technical
indicators with fundamental data
of the FRED-database. If you want
to stay up-to-date with the financial
world with the help of articles and
The app offers a clearly structured and extensive data base including short information and export function.
Source: FRED/St. Louis FED
F1) User Interface
Interested economy- and nancial market-fans should take a look at the app EConWise from the St. Louis FED.
Source: FRED/St. Louis FED
F2) App EconWise
you want even further information we recommend the
blog of the St. Louis FED (www.fredblog.stlouisfed.org).
Another app called EconWise completes the offer
of the central bank and can be downloaded for free as
well. You will find interesting articles as well as videos
that cover a broad range of topics.
STRATEGIES
40
www.tradersonline-mag.com 09.2014
News Trading
in Euro/Dollar
Traders always search for volatility there is even a dependency of it, because
without market movements you will not earn prots. Around the time of the
publication of important economic news the stock markets often show erratic
movements in many underlyings. We show you how to use these movements
successfully with an example of EUR/USD.
On this day, the 6th March 2014, the ECB published an interest-rate decision at 1.45 pm (see mark).
Source: www.trading-stars.de
F1) EUR/USD on the Day of the ECB-Decision
The Trading Idea
There are days when prices only
move in slow-motion there are
only sideways phases and many
false breakouts. But then there are
days where everything changes:
dynamic breakouts up or down,
sometimes even to both sides within
minutes. These events can take
place completely unplanned (for
example because of attacks, riots,
natural disasters) or predictably at
big news-events like the publication
of the gross domestic product (GDP)
or the NFP-data (non-farm payrolls)
or a press conference of the Fed.
Dynamic price movements take
How to Take Advantage of Big Events
at the Stock Markets
STRATEGIES
41
place, but you know the date and time
in advance. We want to introduce a
trading idea based on the monthly
ECB-interest rate decision and we
want to show that we can recognise a
mathematical probability advantage
and use it for a real profit.
An old saying goes: Close your
trades prior to important news or at
least protect them with a stop-loss.
This is absolutely true. There
may be some insiders who know in
advance what will be published, but
the reaction of the market is hard
to predict. For example nonfarm
payroll data is published and they
are better than expected, which
should mean a bullish move. But
maybe because of this the market
fears that the monetary measures
will be reduced and therefore the
DAX drops 100 points. In hindsight
we can always explain the Why.
But to be honest, this could be an
explanation for the contrary as
well. The consequence is clear:
Stay still and close open positions
unless you want to trade the news
systematically.
Assumption and Reasoning
Is it reasonable to trade the break-
out of a certain price-span prior to
the news? Or put differently: If the
price has decided for one direction,
will it stay there for the next hour?
The answer is in general yes, but
this has to be proved. We evaluated
the last 14 ECB-decisions (a period of
more than one year) and measured
the change in price of the EUR/USD
You can clearly see the higher volatility at the time of the ECB-decision. The x-axis shows the time difference
in hours based on 1.45 pm. Therefore we look at the price development twelve hours before and 36 hours
after the decision.
Source: www.trading-stars.de
F2) Relative Change of Price EUR/USD
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
00:00:00 06:00:00 12:00:00 18:00:00 24:00:00 30:00:00 36:00:00
EZB_03.04.14
EZB_06.03.14
EZB_06.02.14
EZB_09.01.14
EZB_05.12.13
EZB_07.11.13
EZB_02.10.13
EZB_05.09.13
EZB_01.08.13
EZB_04.07.13
EZB_06.06.13
EZB_02.05.13
EZB_04.04.13
EZB_07.03.13
In this picture we zoom in the time around the decision.
Source: www.trading-stars.de
F3) Relative Change in Price EUR/USD in Detail
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
00:00:00 01:00:00 02:00:00 03:00:00 04:00:00
EZB_03.04.14
EZB_06.03.14
EZB_06.02.14
EZB_09.01.14
EZB_05.12.13
EZB_07.11.13
EZB_02.10.13
EZB_05.09.13
EZB_01.08.13
EZB_04.07.13
EZB_06.06.13
EZB_02.05.13
EZB_04.04.13
EZB_07.03.13
If price has decided for one direction,
will it stay there for the next hour?
The answer is in general yes.
STRATEGIES
42
www.tradersonline-mag.com 09.2014
is over and the price stabilises.
Only once (on 7th November 2013)
the price movement started in the
first few seconds. Some times the
movement only started 45 minutes
after the decision (press conference).
Clear fake signals, which means
that the price feints one direction
and then turns, do not happen that
often.
Entry
It is not difficult to create a profitable
trading strategy based on this data.
A detailed evaluation showed that
it is wise to place a stop-limit and a
stop-sell order 0.3 per cent below
respectively above the close of
1:44:59 pm. That means we enter
long if the price increases by 0.3 per cent after the interest
rate decision or short if the price decreased by 0.3 per cent.
Back-Calculation
You can see in Figure 5 that it is ok to close the trade
after about six hours. Afterwards there is not that much
movement. We placed a stop-loss at 0.3 per cent below/
above the entry and therefore a profit of three per cent
(see chart after six hours) means that
we earned ten times more than we
risked. A nice result with only 14
ECB-interest-rate decisions.
Risk Management with 1R-Rule
If you trade the strategy consequently
and you always risk 1R you get the
equity curve shown in Figure 6 after
14 months. Please notice that we did
not determine R as a percentage
of the trading capital, but with an
absolute amount (for example 100
EUR per trade). Only then you can
create professional linear lines in the
equity curve.
Position Size Management
We place two orders at the last
15-minute candle prior to the
decision: One stop-buy order 0.3
per cent above the price and one
This picture shows how to place the orders in EUR/USD. The candle at 2.15 pm activated the long-order. At the
same time the short-order was deleted. The stop-loss was placed at the close of 1:44:59 pm.
Source: www.trading-stars.de
F4) Order Placement
Figure 5 shows the average movement of the EUR/USD in per cent (increasing or decreasing) for the last 14 ECB-
interest-rate decisions assuming that the same rules were used.
Source: www.trading-stars.de
F5) Aggregated Movement of EUR/USD
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
02:00:00 06:00:00 10:00:00 14:00:00 18:00:00 22:00:00 02:00:00 06:00:00 10:00:00
in relation to the price at 1:44:59 pm the price prior to
the news. You can see the result in Figure 2.
Watch the Regularities
Prior to the news it is often very quiet. But with the
publication of the decision the movement comes back to
the market and you can often see that the first direction
stays in the aftermath. After about six hours everything
STRATEGIES
43
The concept of the R-multiple was introduced by a trader
named Chuck Branscomb in 1993 and published by Dr. Van
Tharp. It is a method to make trading strategies comparable
in different markets and it does not only compare the
absolute prots. The R-multiple is the prot or loss of a trade
in relation to the initial risk. The initial risk is the difference
between entry price and stop-loss.
An example: A trader buys the stock X at 100 EUR and
places the stop at 95 EUR. The initial risk is ve EUR. This
value is 1 R. If the trader sells the stock at 110 EUR the
prot of ten EUR is in relation to the entry risk a R-multiple
of 2 (10 / 5). If the trade is stopped out at 95 EUR the
R-multiple is -1 (-5 / 5). You always divide the trade-result
by the initial risk.
R-Multiple
stop-sell order 0.3 per cent below the price. If one of the
two orders is executed, the other one is cancelled (one-
cancels-other (OCO)-order). The close equals the stop-
loss of the position. Because of the relatively close stop
and the unlimited take profit we get a very attractive risk-
reward ratio at the end of the trading day.
Exit
After a trade is opened there are two possibilities to exit.
Either the position reaches the close (and the stop-loss)
before the news or we close it in profit. We use a fixed exit
time at 10 pm. On the one hand it is statistically proven
that afterwards there is no dynamic movement and on
the other hand we exclude the risk of price movements
overnight at low liquidity. Furthermore you have to pay
overnight fees with some brokers. Another advantage
is that we do not hold a position over the weekend and
therefore weekend-gaps are not an issue.
The Quality of the Broker Is Important
The choice of the right broker is very important with this
strategy. The size of the spreads (difference between
ask and bid) and slippage (difference between placed
order and executed order) can have a negative effect and
therefore you should always consider these facts when
choosing a broker.
STRATEGIES
44
www.tradersonline-mag.com 09.2014
decisions of the ECB the Fed-
sessions can also be used for trading
because the central banks direct
the monetary policy and the interest
rate (the price of money) decides
about the engine of the markets, the
liquidity.
There are numerous events
that lead to higher volatility and
possible trading strategies. The
employment data show the current
development of the economy and
serve as basis for the decisions
of the central banks. In Germany
the Bundesagentur fr Arbeit
publishes the monthly figures as
well as the current unemployment
rate. In the US there are different
figures: for the stock markets the
monthly employment data the so-
called nonfarm payrolls are the most important. It is
published on the first Friday of each month at 2.30 pm
German time.
Early indicators shall give an indication about
the development of the economy and often serve as
basis for the decisions of the central banks. The ifo-
Geschaeftsklimaindex is important in Germany and
therefore it moves the stock markets. In the US the same
goes for the ISM. It is published on the first working day
of the month for the past month.
Conclusion
If you have the right strategy, news trading can be very
profitable. It is always wise to search for advantages in
probability and to use them for profit. You can also create
strategies for other news events and for nearly all liquid
underlyings like the DAX or gold.
You see an equity curve with a nice linear development and with only small drawdowns.
Source: www.trading-stars.de
F6) Equity Curve in R-Multiple
0
2
4
6
8
10
12
01.03.13 01.06.13 01.09.13 02.12.13 04.03.14 04.06.14
Strategy Name: Trading Stars ECB-interest-rate decision
Strategy Type: News trading
Time Frame: Intraday, 15-minute chart
Entry:
0.3 per cent above (long) or below (short) close
prior to the news, OCCO-order
Stop-Loss: Close prior to the news
Exit: Stop-loss or time-stop at 10 pm
Risk Management: 1R (absolute) of the trading capital
Strategy Snapshot
Christian Stern
Christian Stern is full-time trader and heads
the treasury and the education department at
Trading Stars. The focus is on teaching basic and
expert knowledge for successful trading.
christian@trading-stars.de
Dr. Stefan Friedrichowski
Dr. Stefan Friedrichowski is physicist and fulltime-
trader and manages the scientic work and the
development of trading strategies. The main
focus is statistical research and validations to
create trading strategies. Furthermore he teaches
knowledge in Excel and C-programming for traders.
stefan@trading-stars.de
Economic Data with High Relevance
Many market participants adjust their behaviour to
fundamental news and economic data the market
shows higher volatility and dynamic movements at
these events. In addition to the mentioned interest-rate
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STRATEGIES
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www.tradersonline-mag.com 09.2014
The Trend Is Your Friend
Bollinger Bands are one of the most well known and at the same time most versatile indicators in
technical analysis. They combine trend-following elements and volatility elements and therefore
you can use them for many different trading approaches. The following article shows how long-
term traders and active investors can prot from the trends at the stock markets with a simple
entry- and exit-strategy long and short.
Systematic Prots on the Weekly Chart
Bollinger Band-Breakout Activates the Position
The use of the 40-week or 200-day moving average (MA)
to measure the superior trend has been known forever.
The logic behind it says: If the market moves above the
(increasing) MA the bulls are in control of the market and
if the bears are in control, Figure 2 shows a trading example
in a downtrend. The black vertical arrow highlights the
Inventory Retracement Bar (IRB). The black horizontal arrow
shows the entry in the short trade shortly afterwards as the
price breaks through the low of the IRB downwards.
The international stock markets show strong uptrends
in the long term which are interrupted by strong down
movements. If you are a long-term trader you want to
profit from the strong bull markets a good example
is the ongoing rally since early 2009. You do not need a
crystal ball but a simple and logic system that deduces
entry, exit and stop-loss directly from the most important
source the price development. The use of Bollinger
Bands as trend indicator offers a good possibility to
create such a system.
STRATEGIES
47
the price is below the (falling) MA. If
we take a look at the past we see that
it is wise to consider this old-school
indicator when entering a long-
term trade. But we want the signal to
be clear and significant that means,
the price has to break out above or
below the MA significantly and
therefore we use Bollinger Bands. In
contrast to the standard settings 20/2
we use one Bollinger Band with the
setting 40/1. Instead of calculating
the upper and lower border with two
standard abbreviations based on the
MA, we only use the single distance
as the basis for the calculation and
for the signal generating but based
on the 40-week-line instead of the
20-week line.
Entry and Exit Rules
The entry is defined by the breakout
above or below the outer bands. If the stock market index
weekly close is above the Bollinger Band, we enter long
at the beginning of the following week. We stay in the
position as long as the stock market index closes below
the lower Bollinger Band. Now you have two possibilities:
Conservative investors, who only want to be invested
long, close their long position and wait (flat position). If
you like to take more risk, you can enter a short position,
which means you switch sides and enter short and you
stay in the position until price exceeds the opposite band
on the weekly close. In this setup the Bollinger Bands
serve as a trailing stop in a trending market. At the same
time you can calculate the position size by measuring the
difference between the entry price and the level of the
opposite Bollinger Band.
Figure 1 shows that this strategy is very simple to use.
You see the weekly chart of the DAX with the Bollinger
Bands and the settings 40/1. The red background colour
represents the short-phases and the green background
represents the long-phases. You can see at one glance that
The use of this simple trading strategy delivers a clear outperformance in comparison to a buy-and-hold
strategy over the past 20 years.
Source: www.tradesignalonline.com
F1) DAX Weekly Chart with Trading Signals and Equity Curve
Bollinger Bands calculate the level of the price in relation
to the past price. The bands are calculated based on
the moving average (MA) with the standard settings of
20 periods. The upper Bollinger Band is calculated by
adding the double standard abbreviation of the prices
(measurement of the volatility) to the moving average. The
lower band is calculated by deducting the double standard
abbreviation from the moving average. If the bands are
close together, there is low volatility. If they are far apart,
there is high volatility.
Bollinger Bands
this trading strategy captures the big trend movements
very well although there are of course some false
signals in volatile sideways phases.
Figure 2 shows the development since June 2011.
There was a short-signal at 6893 points first. In March
2012 the position was switched at 6593 points. Since then
The entry is dened by the break out
above or below the outer bands.
STRATEGIES
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www.tradersonline-mag.com 09.2014
be completely different in the years
to come. This is a good reason to
backtest several other indices. If
you use the same strategy with
the EURO STOXX50, S&P 500 and
the Japanese NIKKEI 225, you get
nearly 80 trades for the same period.
Although there are differences
between these indices regarding
their historical performance of
the strategy the core statement
stays the same: The Bollinger trend
breakout strategy is simple yet
profitable and therefore it is a good
basis for long-term traders and
investors. Individual modifications
and changes of the basic setup
are of course possible, but you
should put them to a detailed test.
For example you could think about
closing a short position already at
the break of the median of the Bollinger Bands or you
could use additional stop-losses or another position-
size management.
Conclusion
The introduced trading strategy is trend following
and therefore it goes strong in trending phases in
volatile sideways phases there are more false trades.
The hit rate on the short side is very low with under
30 per cent and therefore it is important to use the
right position size as well as to understand the
psychological pressure: Either you are strong enough
to trade the long-short strategy, but then you need
to do so consequently, because the danger to miss a
long trend movement is high or you trade the long-
only-strategy where you have fewer false signals. All
in all you can earn money with this simple strategy
based on a weekly chart with a relatively low trading
frequency.
The Bollinger trend breakout strategy is in long mode since March 2012.
Source: www.tradesignalonline.com
F2) DAX Weekly Chart with Trading Signals and Equity Curve
Strategy Name: Bollinger Trend Breakout
Strategy Type: Trend following
Time Frame: Weekly chart
Setup: Weekly chart and Bollinger Bands with setting 40/1
Entry:
Long at breakout above the upper Bollinger Band
(per weekly close), long exit resp. short entry below
lower Bollinger Band
Stop-Loss: Opposite Bollinger Band
Trailing Stop: Opposite Bollinger Band
Exit:
Long only: if the stock market index closes below
the lower Bollinger Band. Long-Short: switch to
short-side, if stock market index closes below
lower Bollinger Band. You stay in the position as
long as the opposite Bollinger Band is exceeded
per weekly close
Risk and Money
Management:
According to risk adversity
Average number
of signals:
According to index and market phase
Strategy Snapshot
David Pieper
David Pieper is a CIIA and has been interested
in stock markets since the end of the Nineties.
He concentrates on trading with CFDs and is a
freelance author.
david.pieper@traders-mag.com
the long-position is unchanged. Only if price breaks the
lower Bollinger Band at the weekly close, the position
would be exited.
Is This a Robust Strategy?
Because of the few trades in the DAX there were only
ten transactions since 1996 you cannot really evaluate
this strategy. The price development of the DAX may
STRATEGIES
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www.tradersonline-mag.com 09.2014
In the previous two articles (TRADERS 07 and 08/2014), it was discussed that only short-term market
forecasts are viable. However, through proper money and position management, positions can be held for
weeks, months, and even years should the trend continue. This proper money management involved the use
of stops, taking partial prots, and the slowly widening of trailing stops as the positions became more and
more protable. In this article we will discuss the three phases of trend and one of two setups for getting
onboard established trends.
Trend Knockouts
Get in Only after the Weak Hands Are out
in an established trend pulls back and then resumes its
trend. Trend Acceleration is when a market that is in a
gradual uptrend accelerates higher, pulls back, and then
continues its sharp uptrend. Trend Transition (emerging
Phases of Trend
As illustrated in Figure 1, there are three phases of
trend: Trend Resumption, Trend Acceleration, and
Trend Transition. Trend resumption is when a market
STRATEGIES
51
trends) occurs when the previous
trend ends and a new trend begins
to emerge. For purposes of this
2-part series, well look at two of the
authors favourite trend resumption
patterns: The Trend Knockout (TKO)
and Persistent Pullbacks. Setups
to get on the other two phases of
trends will be discussed in upcoming
articles.
Detecting Trends
Before looking to trade a trend,
you must first identify that trend.
Keep it simple. If the right side of
the chart is noticeable higher than
the left, then it is possibly that the
market is trending higher. Then, use
the following techniques to further
qualify that trend.
Net Net Draw Your Arrows
The simplest and most obvious way to determine trend
is to look at markets on a net net basis. Where did
the market close a week ago relative to now? A month
ago? Two months ago? You then have to compare this
to the volatility of the instrument. If the stock bounces
around 10-20 per cent daily, then a 20 per cent move over
a months time isnt necessarily a trend. That could just
be daily noise alone. However, the same move might
constitute a trend in a lower volatility stock that moves
only -1 per cent daily. Judging the volatility can be done
with indicators such as historical volatility or quite simply
eyeballing the stocks range. Speaking of indicators,
always look the distance the market has travelled first
before applying any indicators. Since all price based
indicators introduce lag, the author isnt a big fan of price
indicators. In fact, other than the occasional moving
average, he doesnt use any directional indicators.
Trend Qualiers
The great thing about trending markets is that they leave
clues behind. These trend qualifiers help to determine
a trend. These include base breakouts, gaps, laps, trend
acceleration, wide-range bars-especially with strong
closes, and obviously, how far a stock moves over a
given period of time (i.e. the aforementioned net net
movement). Look for these characteristics within the
trend. Markets should have mostly positive qualifiers
in the direction of the trend. For instance, a market in
There are three phases of a trend: Trend Resumption, Trend Acceleration, and Trend Transition.
Source: www.davelandry.com
F1) 3 Phases of a Trend
Daylight forms when the lows are greater than the moving average. In other
words, there is a gap between the low and the moving average. Since daylight
is price based, it helps to eliminate the lag of the moving average itself.
Source: www.davelandry.com
F2) Daylight
a strong uptrend should have strong closes and gaps
higher. It should not have down gaps and weak closes.
Persistency and moving average relationships can also
help to qualify a trend.
Moving Averages
The slope of the moving average and daylight can
help to determine trend. Crossovers can also be useful,
especially for emerging trends. The slope for uptrends
STRATEGIES
52
www.tradersonline-mag.com 09.2014
should be a positive one. Obviously, since there is lag we
do not know if the trend has changed but at least we know
that the market has been trending. Daylight forms
when the lows are greater than the moving average. In
other words, there is a gap between the low and the
moving average. Since daylight is price based, it helps to
eliminate the lag of the moving average itself. Daylight
and slope are illustrated in Figure 2.
These two simple concepts can often keep you on
the right side of the market. Again though, always look at
price moves first since all price indicators have lag.
Persistency
Persistency is markets ability to follow through from one
day to the next. For those more mathematically inclined,
this can be measured by complex statistical methods
such as linear regression. The rest of us can simply look
at the chart and draw a trendline through as many bars as
possible. This is illustrated in Figure 3.
Getting on Board
Once a trend is detected, you then need to look for a setup
which will allow you to get on board that trend.
Trend Knockouts
Trend Knockouts (TKOs) are a simple yet effective pattern.
They remain one of the authors favourites, especially
when combined with persistency. Those with very little
money or patience will be quick to dump a market at the
rst sign of a correction. While it is a good idea to trade
in the direction of the trend, you are much better off
waiting until the weak hands are knocked out of the market
before entering yourself. This reduces the probability
of these traders dumping their positions and taking you
out with them. The knockout move also attracts, and can
subsequently shake out, top and bottom pickers.
TKOs work in both uptrends and downtrends. In
uptrends, the knock out move attracts eager shorts who
refuse to believe that the stock deserves its high valuation.
They have confused the issue with facts. Should the trend
resume, they will be forced to cover their short position.
This buying helps to propel the trend even higher. In
downtrends, the knock out move attracts eager bottom
Persistency is markets ability to follow through from one day to the next. For
those more mathematically inclined, this can be measured by complex statistical
methods such as linear regression. The rest of us can simply look at the chart
and draw a trendline through as many bars as possible.
Source: www.davelandry.com
F3) Persistency
The stock should be in a strong uptrend and ideally, a persistent uptrend (1). Use
trend qualiers and/or moving averages to gauge trend. Do not forget to draw
your arrows. Then, the stock should trade below at least the two prior lows.
Ideally, this should also be on an expansion of range. In other words, it should
be a sharp move lower a wide range bar (WRB) down (3). Now go long above
the high of the knockout bar (3).
Source: www.davelandry.com
F4) Scheme of Trend Knockout Setup
Always look at price moves rst
since all price indicators have lag.
STRATEGIES
53
shers who want to buy a stock while
it is still cheap. Should the downtrend
resume, these ckle traders will likely
dump their position. This additional
supply will exacerbate the slide.
Trend Knockouts (TKOs) identify
strong trends from which the weak
hands have already been knocked
out. By placing your order above
the market (or below for shorts), you
have the potential to capture prots
as the trend resumes. Here are the
rules for buys (Figure 4):
1. The stock should be in a strong
uptrend and ideally, a persistent
uptrend (1). Use trend qualiers
and/or moving averages to
gauge trend. Do not forget to
draw your arrows.
2. The stock should trade below
at least the two prior lows.
Ideally, this should also be on
an expansion of range. In other words, it should be a
sharp move lower a wide range bar (WRB) down (3).
3. Go long above the high of the knockout bar (3), and
remember, no trigger, no trade. The bigger the move
lower, the better the chance more players will be
knocked out.
One great thing about TKOs is that you can frequently
trade them in a textbook fashion more than many other
patterns. Your entry can often go right above the high
and the protective stop can be placed right below the
knockout bar.
Now, lets look at a real world example. Referring to
Figure 5, Celldex Therapeutics (CLDX) begins to accelerate
higher (1) from a gradual uptrend. The accelerating trend
is also a persistent one. The stock then has a wide range
bar (WRB) down (2). This Trend Knockout (TKO) shakes
out the weak hands and it attracts eager shorts. An entry
is triggered (3) when the high of the knockout bar is taken
out. After a bit of a slow start, the stock goes on to double
in value.
Looking Ahead
Next time, well cover the second setup for getting
onboard established trends, the Persistent Pullback. Stay
tuned!
Celldex Therapeutics (CLDX) begins to accelerate higher (1) from a gradual uptrend. The accelerating trend
is also a persistent one. The stock then has a wide range bar (WRB) down (2). This Trend Knockout (TKO)
shakes out the weak hands and it attracts eager shorts. An entry is triggered (3) when the high of the knockout
bar is taken out. After a bit of a slow start, the stock goes on to double in value.
Source: www.davelandry.com
F5) Real World Example
Strategy Name: Trend Knockouts
Strategy Type: Trend Following
Time Horizon: Daily chart
Setup:
Persistent gradual uptrend accelerates, retraces
with sharp wide-range bar
Entry: Above high of wide-range bar (for Long)
Stop-Loss: Below low of wide-range bar (for Long)
Take Prot:
Optional; suggested to use for partial position
size
Trailing Stop: Optional; suggested to ude for partial position size
Risk and Money
Management:
2% risk per trade max
Average number
of signals:
Several/day for whole universe of US stocks
Strategy Snapshot
Dave Landry
Dave Landry has been actively trading the
markets since the early 90s. In 1995 he founded
Sentive Trading, LLC, a trading and consulting
rm. He is the author of three books that have
been translated into six languages. He has made
several television appearances, has written
articles for several magazines and has spoken
at trading conferences both nationally and
internationally.
www.davelandry.com
STRATEGIES
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www.tradersonline-mag.com 09.2014 STRATEGIES www.tradersonline-mag.com 09.2014
Inventory Retracement Bar
Developed and used to win trading competitions around the world, the
Hoffman Inventory Retracement Trade is quickly becoming one of the
most popular ways to identify where short-term countertrend institutional
inventory has subsided and when its time to re-enter into a trades original
trend direction. What you will learn here is how to identify when the
conditions arise to make the trade, the entry points, and exit strategy.
Rob Hoffman
Rob Hoffman is two-time International Trading
Champion and a trader who has won numerous
live, real-money only trading competitions. Rob
is President and CEO of BecomeABetterTrader.
com and is also a frequent speaker for top
brokerage rms and nancial exchanges, skilled
educator and passionate mentor.
rob@becomeabettertrader.com
What Is the Hoffman Inventory Retracement Trade?
The Hoffman Inventory Retracement Trade is a strategy
that is used to identify specific types of institutional
trading activity that is counter to the prevailing trend
at hand, and then identify entries when the short-term
countertrend inventory activity has come to an end and
the market is likely ready to resume its original trend.
An Award-Winning Approach to
Finding the Great Trades
STRATEGIES
55
While it is common folklore in the investment industry
that institutions, like wolves, travel in packs, the reality
is that institutions are not all sitting around at a table
conspiring as a group about how to part retail traders
with their money. The institutional investment business
is extremely competitive and these firms are very much
out for themselves and have their own objectives and
performance metrics to achieve to appear most attractive
to prospective investors at any given time.
Therefore, this strategy is designed to identify when
one or a handful of institutions are moving inventory in
and out of the market and are straying away from the
markets current path causing a short-term retracement
against the trend. We are subsequently looking for the
market in question to resume its pre-existing trend when
those short-term countertrend institutional activities and
inventories have dried up.
IRB Bar Characteristics
In an uptrend, look for candlestick bars that open and
close 45 per cent or more off their high. In a downtrend,
look for candlestick bars that open and close 45 per cent
or more off their low. These are Inventory Retracement
Bars (see examples in Figure 1).
Trend Identication
In the absence of advanced trend
identification systems, a simple
approach to trend identification is
looking at the 20 EMA (Exponential
Moving Average) and asking yourself
if it appears to be in approximately
a 45 degree angle based on the
timeframe youre looking to trade.
The next higher timeframe above
the one youre looking to trade
should also be flowing in the same
direction. For instance, if youre
trading off of a 5-minute chart and
its in an uptrend, you would like to
see that your 15-minute chart also is
in an uptrend. If its sideways, or worse yet, trending in
the opposite direction, your trade is much more likely to
fail.
The Entry Strategy
Once an IRB and proper trend is identified, the next step
is to allow the market to move along and wait for the price
action to break one tick/cent below the low of the IRB in
a downtrend. In an uptrend youre looking for the market
to break one tick/cent above the high of the IRB. While
it is not an absolute, it is preferred that the price breaks
beyond the IRB within the next 20 bars based on the time
period youre trading. For example, if youre trading off of
a 2-minute chart, you would ideally like to see the break
in the next 40 minutes.
The Trailing Stop Exit Strategy
While many traders are specific dollar target traders, the
preferred method is more of a support and resistance
target based methodology backed up by a trailing stop
to ensure you are not giving back those profits during
any snapbacks against your position. Typically, a 50
per cent trailing of profit achieved until you approach
a major support or resistance level is desirable, then
move the stop to 90%+ of profit achieved as the major
Figure 1 shows four individual examples of the IRBs in an uptrend and four more individual examples in
a downtrend for illustrative purposes. The candles open or close 45 per cent or more off their high (in an
uptrend, see left) respectively vice versa (in a downtrend, see right).
Source: www.tradestation.com
F1) Inventory Retracement Bars (IRBs)
In an uptrend youre looking for the
market to break one tick/cent above the
high of the Inventory Retracement Bar.
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support or resistance level is hit. Common major levels
include key Fibonacci levels, previous days highs and
lows, daily, weekly and monthly pivot points, etc. For
maximum comfort with the strategy, it is preferred
that you use this with your own favourite support and
resistance levels.
Stop Management
Based on the premise of this trading strategy, the
expectation upon the entry is that the market will
continue into the original direction it was heading after
its brief institutionally driven pullback against the trend.
Very frequently, after breaking through IRBs, the market
will actually rapidly accelerate with fast action and wide
ranges as everyone starts to realise that the brief pullback
was merely a pause against the intended direction and
the market plays catch up with itself.
With that said, once a trade is entered, the price
should not retrace back beyond the opposite side of the
IRB. For instance, if the trade is entered one tick/cent
below the low of the IRB in a downtrend, it should not
stop and reverse to one tick/cent above the high of that
IRB. If it does, that market may be forming more of a
reversal pattern and thus the need to exit the position and
move on to the next opportunity.
When Not to Use the Strategy
This strategy was primarily designed to identify and take
advantage of trend continuations after counter trend
inventory exhaustion. Therefore, this trade is not to be
used in sideways market conditions as continuation
failure will frequently occur.
Why This Strategy Works
In general, the market tends to trade directionally with
as few retail traders on board the correct direction as
possible.
This strategy is so effective due to its ability to find
high probability areas where three things are happening
to retail traders in an uptrend:
1. Buyers are being distracted from taking long side
trades when they see the pullbacks off the highs,
scaring them into believing the move is over.
Figure 2 shows a trading example in a downtrend. The black vertical arrow
highlights the Inventory Retracement Bar (IRB). The black horizontal arrow
shows the entry in the short trade shortly afterwards as the price breaks
through the low of the IRB downwards.
Source: www.tradestation.com
F2) IRB in Action
STRATEGIES
57
2. During pullbacks, sellers are being given false hope
that any shorts taken earlier in the uptrend may finally
start to work.
3. Buyers who bought the high during rapid wide range
ascents hoping it will go higher get stopped out on
the pullback.
After all of these events above, once a new IRB to the
upside appears and is pierced, the market is much more
likely to move without all of those traders above on the
right side of the market.
In a downtrend these three things are happening to
retail traders:
1. Sellers are being distracted from taking short side
trades when they see the pullbacks off the lows,
scaring them into believing the move is over.
2. During pullbacks, buyers are being given false hope
that any buy side trades taken earlier in the downtrend
may finally start to work.
3. Sellers who sold the low during rapid wide range
descent hoping it will go lower get stopped out on
the pullback.
After all of these events above, once a new IRB to
the downside appears and is pierced, the market is much
more likely to move without all of those traders above on
the right side of the market.
Key Points to Remember
No more weight is given to any IRB based on whether its
close is above or below the open (i.e. green or red candle).
In addition, think about the concept of over-extension.
If the IRB has an extraordinary range as compared to the
Average True Range of the last 10+ bars before it then
the break back through the IRB is far more likely to fail.
This will more likely result in an entry that has a higher
likelihood of reversion to the mean as much of the
energy and profit opportunity has potentially dissipated
leaving the trader with a much smaller profit or perhaps
a stop-loss.
Trail your entries to reduce the risks of reversion to
the mean while still giving a trade a chance to push into
your intended direction.
Strategy Name Hoffman Inventory Retracement Trade
Strategy Type Trend Continuation
Time Frame Intraday as well as daily and weekly signals
Setup
IRBs are created where the open and close of the
bar are 45% or more off the low in a downtrend
and 45% or more off the high in an uptrend
Entry
One tick/cent below the low of the IRB in a
downtrend and one tick/cent above the high of
the IRB in an uptrend
Stop-Loss
One tick/cent above the high of the IRB in a
downtrend and one tick/cent below the low of
the IRB in an uptrend
Trailing Stop
Exit Strategy
50% of prot achieved until you approach a major
support or resistance level, then move the stop to
90%+ of prot achieved as the major support or
resistance level is hit
Risk and Money
Management
< 1% per trade
Average Number
of Signals
Every instrument and time duration will be
different based on its frequency of trending;
however for active traders as an example, in
general, it is possible to see as many as 25+ IRBs
on a 2-minute chart over a 24 hour period
Strategy Snapshot
Use a proven trend qualification tool. In the absence
of a well-tested tool of your own, trade in the direction of
an approximately 45 degree angled 20 EMA.
This strategy has very diverse applications across
many markets and asset classes. For instance, in addition
to trading conventional equities, futures and Forex
instruments, traders can consider using this strategy to
analyse underlying equities and then trade high delta, in
the money options plays as an example for active options
day traders.
The Conclusion
What we have shown you here is a simple, award-winning
strategy that you can take away and explore. It is an excellent
tool used for identifying where retail traders are misjudging
the markets movement. It shows where institutions are
temporarily breaking away from the trend due to short-term
inventory acquisition or liquidation. Once that inventory
need is exhausted the overall market is free to resume the
existing trend offering new opportunities for retail traders
to trade back in the direction with the overall trend.
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Risk- and Money-Management
In this series of articles we introduce the multi-level process of creating a risk-
and money-management plan. The sixth part deals with the question of the
right position size for you.
Jens Klatt
Jens Klatt is a market analyst at DailyFX.de and
moderates the German DailyFX-forum. He has been
in the nancial sector for over eight years. Besides
technical and fundamental observation of the
markets, he focuses on sentiment analysis in the
forex markets and develops his trading decisions
based on this analysis.
www.dailyfx.de
The right position size is one of the most important parts
of a trading plan and one of the trading components that
you can influence easily. Traders often seem to forget
this. The main reason for large losses in trading is often
the fact that the position size and the risk is too big in
comparison to the trading capital. Most of the time the
result of the risk-aversion leads to the fact that the trader
Part 6: What Is the Optimal Position Size in
a Good Risk-Management Plan?
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keeps losing positions too long because he hopes, that
the trade will reverse finally and turn into a winning
one. This article will show you, how to determine an
appropriate position size for your account.
What You Should Not Do
In general you can use a simple rule of thumb: If you
start thinking about a trade in absolute money amounts
that you can win or lose then the position size is not
appropriate for you. Right this moment you will come into
an emotional state where the best analysis is worthless.
Two thoughts will pass your head and change steadily:
Hope, that the trade will turn around and lead to a winning
trade (therefore you keep losing trades too long) and too
early profit-taking after I take what I have. The result:
sooner or later you will lose your capital and your trading
career will end sooner than it started.
The Metaphor of the Bridge
We want to visualise the risk that you enter based on your
position size and therefore we use a metaphor of Mark
Douglas, one of the leading trading psychologists and
author of the book trading in the zone: You imagine a
broad valley, for example the Grand Canyon, which you
have to cross over a bridge. The breadth of the bridge
you need to cross is directly linked with your positions
size. If it is a bridge over a highway with ten tracks, you
will not be afraid to fall from the bridge. You know that
the risk to fall is very small, because the bridge is very
stable.
But the bigger the position size compared to your
account, the narrower your bridge. If you use the leverage
respectively your position size to the maximum, you will
only balance on a thin rope. You are well aware, that only
a small gust of wind can bring you down.
Reasonable Position Size
You have to answer an elementary question to find the
right position size: What is the size of risk in per cent
that you are willing to accept per trade? In the trading
literature you often read something about one per cent of
the total trading capital. But this is not optimal, as it does
not include main components for example the size of
the trading account or the risk appetite of the trader. But
the author recommends to limit the risk per trade to two
per cent of the trading capital better less.
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Example
We assume that we want to risk one per cent of our trading
capital at the most. If the account size is 10,000 EUR we
can risk 100 EUR per trade. Based on your analysis and
the resulting stop level you can determine your position
size accordingly.
If we assume that your analysis shows a risk of 100
pips. Therefore you can risk one Euro per pip, because
1 EUR/pip x 100 Pips = 100 EUR. Good trading stations
calculate the so-called pip-value based on your position
size automatically.
How the Leverage Inuences the Protability
The author already talked about the risk that a too large
position can endanger your trading career. DailyFX
analysed twelve million live trades and the significant
effect of an appropriate leverage respectively a reduction
of the position size to the size of the account. The study
showed that the profitability of a trader nearly doubled, if
he reduced his effective leverage in his trading from 26 to
five. The research team of DailyFX analysed the average
position in relation to the actual account balance of the
trader for the effective leverage.
A trader with an account of 10,000 EUR who enters
a position of 100,000 units in EUR/USD uses an effective
leverage of 10 to 1:
Effective leverage = value of the position / account balance
= 100,000 / 10,000 = 10
This shows the possibility to
influence the effective leverage.
Either you increase the trading
capital or you reduce your average
position size to increase your
profitability. It is wise to use an
effective leverage of less than 10 to
1 in trading that means, that you
move 100,000 units of a currency
pair at maximum if you have an
account of 10,000 EUR.
You can reduce or increase
your position size and this is a
strong weapon for every trader.
It goes hand in hand with active
management of the average profit
or loss and therefore with active risk-
and money-management.
The chart shows that the position size in this example is 13 microlots or 13,000
units EUR/USD. The pip value is 0.95 EUR per pip (13,000 / 1.36223). A stop
of 100 pips equals a risk of 95 EUR (and therefore a little below the 100 EUR).
Source: FXCM
F1) Order Ticket
The chart shows that the reduction of the effective leverage has a dramatic effect on the protability of the
trader. An effective leverage of 26 to 1 means for example, that the trader moves 26,000 units of a particular
currency pair with an account of 1000 USD (rst bar). The average position size of a trader with an account
balance of 10,000 USD was 50,000 units with an effective leverage of 5 to 1 (third bar).
Source: FXCM
F2) Effective Leverage and Protability
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Market Structure Indicators
With the exception of the Dow Jones, most stock indexes weight the individual components with market
capitalisation, causing the movements of indices to be signicantly inuenced by the stocks with the highest
capitalisation. This raises the question of whether such indices actually indicate whats really happening beneath
the surface. To arrive at a better assessment of this, market structure indicators are used.
Part 1: Principles of Market Structure Analysis
broad base of stocks or is only due to the behaviour of
a particular sector or an individual stock. Consequently,
this type of indicator is also known as a market-breadth
indicator.
Types of Indicators
For a better overview of market structure indicators, we
first want to place this type of indicator within the context
of technical analysis. Altogether, we distinguish four
types of indicators:

1. Trend Indicators: These indicators use price data
to determine the direction of the trend. Well-known
Stock prices do not exist in a vacuum. It takes more than
just good corporate results for the price of a stock to rise.
Among other things, the stocks environment is equally
important. This includes in particular the macroeconomic
environment as well as investor sentiment. Here an
evaluation of the general health of an equity market
may help to early identify high or low points in the
market with market structure indicators being capable of
providing important information.
These indicators are designed to closely examine
the index-based overall market behaviour of individual
stocks. The purpose of this is to make a statement as
to whether the movement of an index is supported by a
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Figure 1 shows the market structure indices for the US stock market of 11th December 2013. The rst column
shows the number of rising and falling shares for various indices and the overall market. This is followed by
the second column showing the up/down volume and the third column showing the ARMS indices as well
as the number of shares above their 10, 20, 50, and 200-day moving averages for NASDAQ, S&P 500 and
Russell 2000.
Source: www.tradestation.com
F1) Market Structure
examples include Moving
Averages and indicators such as
the Moving Average Convergence
Divergence (MACD).
2. Oscillators: These are typically
used as counter-indicators
and fluctuate within set limits
around a mean value. They are
calculated on the basis of price
data. Examples include the
Stochastic and the Relative
Strength Indicator (RSI).
3. Sentiment Indicators: They are
used as counter-indicators and do
not require any price data for their
calculation. Examples include
put/call ratios and indicators
based on surveys such as sentix,
AAII or Investors Intelligence.
4. Market Structure Indicators:
They are calculated by counting
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is supported by a broad base, i.e.
a large number of shares. If this is
not the case, the indicator should
show an exhaustion of the trend on
the basis of a divergence from the
development of the index.
For most indicators of this kind,
the procedure is of a similar nature.
Doing a count will determine how
many shares of an index rise or fall.
Alternatively, this method may also
be extended to the trading volume,
making it possible for an index to
be calculated from these data that
is updated on a daily basis. For the
major U.S. stock indexes, this data is
provided by most data providers.
Advantages of
Market Structure Indicators
In a healthy upward trend, the
number of rising stocks should
be significantly higher than the
proportion of falling shares. The
same is true of trading volume, enabling statements to
be made on the stability of a trend.
Since abrupt trend changes only occur in the rarest
of cases, market structure indicators also provide timely
hints of the weakening dynamics of a trend.
This is especially important in correction phases
where the mere price development of an index cannot be
used to determine whether it is nothing but a correction
or whether a change in trend is happening.
Disadvantages of Market Structure Indicators
While analyses of market breadth may allow a statement
to be made about whether a trend or market phase
can be described as being balanced or extraordinary,
such statements are inadequate to allow exact timing.
Likewise, it takes quite a bit of experience to correctly
interpret any divergences here.
Outlook
In several contributions appearing in the next few issues
of TRADERS, we will describe in more detail the methods
listed in Table 1. In particular, we will be discussing specific
examples as well as advantages and disadvantages. In
addition, some trading strategies will be presented that
have been developed by the author on the basis of market
structure indicators.
The table shows examples of market structure indicators that we will be discussing in the next few
issues.
Original Name Denition
Advance Issues Number of risen shares
Decline Issues Number of fallen shares
Advance Decline Line Difference between advance and decline
Advance Decline Ratio Ratio of decline to total number of shares
New Highs New 52-week highs
New Lows New 52-week lows
Up Volume Total volume of all risen shares
Down Volume Total volume of all fallen shares
McClellan Oscillator Oscillator on the advance/decline line
ARMS Index Ratio of advance/decline to up volume/down Volume
Number of stocks
above X-day moving average
Number of shares above an X-day moving average
Number of stocks
below X-day moving average
Number of shares below an X-day moving average
9-to-1 Up Volume Martin Zweigs volume indicator
T1) Examples of Market Structure Indicators
Rudolf Wittmer
Rudolf Wittmer, who has a university degree in
engineering, has been active as a fund manager
and hedge-fund consultant in recent years and
is a passionate trader who turned his hobby into
a career more than 20 years ago. By constantly
rening his trading models, he has made a name for
himself as a systems trading specialist in Germany.
rudolf.wittmer@hrconsult.li
the stocks of an index based on certain criteria. Again,
no price data are required here. Examples include the
Advance/Decline Line and the New Highs/New Lows
Index.
Basic Principle
Market structure indicators should always be used
in conjunction with another type of indicator such as
trend indicators. The disadvantage of trend indicators
is a more or less significant time lag, depending on the
time horizon. This means that a trend will invariably not
be detected until part of the movement is already over.
The same applies to trend changes that invariably can
only be shown by trend indicators in retrospect. This is
exactly where market structure indicators come in. They
are designed to indicate whether the trend of an index
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The Traders Technical Arsenal
This piece discusses the On Balance Volume and the Parabolic SAR, as both
work in MetaTrader, which continues to increase in popularity (especially
version 4.0). In most cases, the indicators default parameters are used.
Azeez Mustapha
Azeez Mustapha is an ofcial analyst at Instaforex
Companies Group, a blogger at Advfn.com, and
a freelance author for trading magazines. He is
working as a trading signals provider at some
websites. He is a senior analyst at Paxforex.com.
His articles are also available on other websites like
www.ituglobalforex.blogspot.com.
azeez.mustafa@analytics.instaforex.com
Common Indicators in the MetaTrader Part 9
On Balance Volume (OBV)
This is an indicator based on momentum and it uses
volume to forecast changes in the price. It was created
by Joseph Granville and introduced in his book, which
was published in 1963. This is based on the premise
that an increase in the volume when the price does not
go southward significantly, will force the price to go
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northward. The premise can be reversed for the opposite
direction. With this tool, the intensity of short and long
orders is gauged as volume is added on a bullish day or
subtracted on a bearish day. With this premise in mind,
speculators can look for divergences between the OBV
and the market so as to look forwards to changes in the
market.
We want to recognise the nuances in the markets,
which showcase the difference between institutional
market players and retail market players. When majority
of traders go short on what the big institutions believe
would rally (going long), volume would reflect this.
Ultimately, it is volume that would determine where
the price goes next. When majority of traders begin to
open long orders, that would be the time when those
institutions believe the price would plummet (going
short). These price actions are what cause convergence
and divergence in the market. In Figure 1, you can see
how the default On Balance Volume looks like in the Silver
daily chart. The default parameters are used, except that
the colour is changed to FireBrick. In the chart, we can
see a downtrend, followed by a period of consolidation
and then a rally.
Since OBV was created with the premise that volume
comes before price, the OBV moves upwards when
volume on bullish days (or periods) is more than the
volume on bearish days (or periods). When volume of
bearish days is more, OBV moves downwards. As OBV
rises, it shows positive volume pressure that can likely
lead to rallies. As OBV falls, it shows
negative volume than can likely lead
to plunges in the market. The creator
of the indicator noted that it moved
before the market direction, for the
market might later rise when the
indicator rose and the market was
consolidating or bearish. Conversely,
the market might fall when the
indicator was falling and the market
was consolidating or bullish.
Computation
The OBV is a total of positive
and negative volume. When an
instrument closes above the days
close (or the periods close), volume
is positive. When an instrument closes below the days
close (or the periods close), volume is negative.
If the closing price is above the prior close price then:
Current OBV = Previous OBV + Current Volume
If the closing price is below the prior close price then:
Current OBV = Previous OBV - Current Volume
If the closing prices equals the prior close price then:
Current OBV = Previous OBV (no change)
Using the On Balance Volume for Long and Short Trades
When using the On Balance Volume, we would like to
pay attention to its behaviour rather than its value. The
indicator is based on closing prices of the instrument in
consideration, and this should be borne in mind when
using the indicator as explained below.
Also notice that OBV is based on closing prices.
Therefore, closing prices should be considered when
looking for divergences or support/resistance breaks.
We need to bear these points in mind when using the
indicator:
1. OBV is used according to its direction: It foreshadows
short trades when it is falling and long trades when it
is rising.
2. The instrument we want to speculate on must also be
falling if we want to go short or rising if we want to go
This is what On Balance Volume looks like in the Silver daily chart. In the chart, we can see a downtrend,
followed by a period of consolidation and then a rally. We can see how it behaves in uptrends and downtrends.
Source: www.metaquotes.net
F1) On Balance Volume in the Silver Daily Chart
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Using the On Balance Volume
to Trade Divergences
Astute speculators use OBV to
determine when there are upward
or downward divergences. In a
situation where volume goes before
a directional movement in the price
(as it is true of the OBV), there is an
upward divergence when the OBV
moves upwards (whether straight or
zigzag) and the price is still clearly
bearish. The tepidity in the bears may
enable the price to move upwards.
There is a downward divergence
when the OBV moves downwards
(whether straight or zigzag) and the
price is still clearly bullish. This may
result in lassitude on the part of the
bulls, which may cause the price to plunge. These forms
of divergences alert astute speculators to possibilities of
changes in the markets.
Figure 2 shows a form of downward divergence in
Silver daily chart. In the chart, the candles are enlarged so
that the price action can be seen clearly. Silver has been in
a tardy and precarious uptrend, and where there is a red
vertical line in the chart, there is a bullish candle, while the
OBV has already started a downward slope (lower low and
lower high). The price later goes downwards seriously.
We want to open positions around the price zones where
speculators tend to be wrong and get whacked. When
we sell, we want it to be around the prize zones where
the bulls have been caught in a wrong direction and are
now fighting for survival. This kind
of price action can be reversed for an
upward divergence.
Finally, the OBV can be combined
with chart patterns and other forms
of chart analyses, either to confirm
an existing bias or to look for
potential reversal.
Parabolic SAR
The full name is Parabolic Stop and
Reverse. This indicator was created
by Welles Wilder and it is based on
time and price, which are used to
generate tradable setups. It is also
used to locate where effective stops
and trailing stops can be put. An
important aspect of the indicator is
long. This must be in agreement with the direction of
the OBV.
3. The signal to go short is strong after a support
level has been breached to the downside. Likewise,
the signal to go long is particularly strong after a
resistance level has been breached to the upside. The
start of a new uptrend would mean the disappearance
of the influence of the bears, particularly when
the uptrend is strong enough. When a dark room
becomes illuminated, the darkness in it disappears.
4. Crazy spikes or false breakouts based on unexpected
fundamentals may temporarily render the indicator
unreliable, till the spike or false breakout has been
corrected.
The EUR/CAD 4-hour chart contains the Parabolic SAR (default parameters). It appears as dots in the chart.
We go long when the indicator is below the price and go short when it is above the price. As soon as the
indicator appears above the price, long orders are liquidated. As soon as the indicator appears below the
price, short orders are liquidated.
Source: www.metaquotes.net
F3) Parabolic SAR in the EUR/CAD 4-Hour Chart
This is a form of downward divergence in Silver daily chart. Silver has been in a tardy and precarious uptrend,
and where there is a red vertical in the chart, there is a bullish candle, while the OBV has already started a
downward slope (lower low and lower high). The price later goes downwards. This kind of price action can be
reversed for an upward divergence.
Source: www.metaquotes.net
F2) A Downward Divergence on Silver
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69
the SAR (stop and reverse); it trails a market as it moves
significantly in a direction. The Parabolic SAR shows
under the price in an uptrend. As long as it is under the
price, the uptrend is valid. It shows above the price when
it is in a downtrend. As long as it is above the price, the
downtrend is valid. Having said this, the indicator stops
and reverses when the price assumes a new direction.
This means the indicator that is previously below the
price in an uptrend would change and show above the
price when the market starts a downtrend.
This indicator was created before
the widespread use of the computer;
yet it remains useful and popular.
Please let us see Figure 3. The EUR/
CAD 4-hour chart contains the
Parabolic SAR (default parameters).
It appears as dots in the chart. The
most common default colour is lime,
but here, it has been changed to
blue. We go long when the indicator
is below the price and go short when
it is above the price. As soon as the
indicator appears above the price,
long orders are liquidated. As soon
as the indicator appears below the
price, short orders are liquidated.
What does this reveal? It reveals
that the indicator gives entry and
exit signals. This is particularly
comfortable for intraday and swing
traders who are looking for specific
entry and exit points. That is why the
indicator is also good for timing, for
an exit signal is generated as soon
as a trade is no longer going in the
desired direction.
Another helpful aspect of the
Parabolic SAR is its use to locate
a stop-loss area as well as its use
as a trailing stop. In Figure 4, the
candlesticks are enlarged to make
it conspicuous that the indicator
can also be used as a stop and as
a trailing stop. In that Figure, the
AUD/JPY 4-hour chart, which was
in a bullish trend in the beginning of
May 2014 (the Parabolic SAR gave a
correct bullish signal for this), turned
bearish on May 14, 2014. The signal
was timely. With a closer look, you
would see that the red vertical line in the chart depicts
where the indicator signals the end of the prior bullish
trend and the beginning of a new bearish trend. A trading
instrument moves southward more quickly than it moves
northwards.
In the chart, the up arrow points to where the prior
bullish trend ends and a bearish signal is generated. The
left arrow shows where the Parabolic SAR first appears
above the price to generate a sell signal. The same first
appearance is also used as a stop-loss area, and so, an
It is somewhat difcult to compute the SAR because of certain factors that must
be put into consideration, like if/then variables. However, the example below
would give an overall idea of how this indicator is computed. Since the formulas
for rising and falling SAR are not the same, the computation is done in two ways.
One is about rising SAR while the other is about the falling SAR.
Rising SAR
Prior SAR: The SAR value for the previous period.
Extreme Point (EP): The highest high of the current uptrend.
Acceleration Factor (AF): Starting at .02, AF increases by .02 each time the extreme
point makes a new high. AF can reach a maximum of .20, no matter how long the
uptrend extends.
Current SAR = Prior SAR + Prior AF (Prior EP - Prior SAR)
13-Apr-10 SAR = 48.28 = 48.13 + .14(49.20 - 48.13)
The Acceleration Factor is multiplied by the difference between the Extreme Point
and the prior periods SAR. This is then added to the prior periods SAR. Note
however that SAR can never be above the prior two periods lows. Should SAR be
above one of those lows, use the lower of the two for SAR.
Falling SAR
Prior SAR: The SAR value for the previous period.
Extreme Point (EP): The lowest low of the current downtrend.
Acceleration Factor (AF): Starting at .02, AF increases by .02 each time the extreme
point makes a new low. AF can reach a maximum of .20, no matter how long the
downtrend extends.
Current SAR = Prior SAR - Prior AF (Prior SAR - Prior EP)
9-Feb-10 SAR = 43.56 = 43.84 - .16(43.84 - 42.07)
The Acceleration Factor is multiplied by the difference between the Prior periods
SAR and the Extreme Point. This is then subtracted from the prior periods SAR.
Note however that SAR can never be below the prior two periods highs. Should
SAR be below one of those highs, use the higher of the two for SAR.
Source: www.stockcharts.com
Parabolic SAR: Computation
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will expose you to whipsaws in choppy/sideways markets
something that you certainly do not want. The indicator
is a trend-following one: It works great when it is used
to catch trend and signal a reversal in a highly trending
instrument.
This indicator is also good in trading a strong but
fleeting reversal against a dominant bias. Sometimes,
this kind of fleeting reversal may be strong enough to
give a decent profit before one takes another signal in
agreement with the dominant bias.
Another way of increasing the dependability of this
indicator is to confirm its signal on two timeframes; one
higher timeframe and the other lower timeframe. When
a Parabolic SAR signal is taken on the higher timeframe,
one would make sure that one is not trading against the
Parabolic SAR signal on the lower timeframe. This would
be explained further in another article.
Conclusion
Indicators can be a great tool for traders. A careful
observer of the markets can detect the winning nuances
in the charts. A careful eye can see the nose beneath it. As
the price ambles in the chart, we want
to see how the indicators respond so
that we can reach logical conclusions.
When an indicator is mastered and
used properly in conjunction with the
realities in the markets, the results
can be surprising. This improves
the accuracy of the technique
being considered and reduces the
number of spurious setups, which
in turn would step up the number
of dependable setups and will make
you have more confidence in the
technique.
The next article in this series
would discuss Relative Strength
Index and Relative Vigor Index.
This chart depicts how the Parabolic SAR signals the end of a northward journey on the AUD/JPY, gives a
new signal for a southward journey, shows an optimal stop area, and shows a good trailing stop possibility.
Source: www.metaquotes.net
F4) The Usefulness of the Parabolic SAR
oval shape is put around it. The actual entry price for this
trading signal was 95.53. According to the indicator, the
stop was put at 96.09. You can see the actual price and
time for a dot appearance by merely placing your cursor
on the dot. The down arrow shows how the indicator
trails the price and helps the speculator adjust her/his
stop as the price continues to move in the forecasted
direction. This ensures that you both eliminate risk on
the trade and lock some of your profits which are now
guaranteed.
When one goes short and happens to be correct,
the Parabolic SAR stop is lowered gradually. This kind of
trailing stop is also increased gradually on a correct long
trade, for the indicator follows the price like a trailing stop.
It is even more satisfactory when optimal lot sizes are
used in proportion to equity ratios. However, the position
sizing methods for huge portfolios may be dangerous for
retail portfolios.
It must be noted that the indicator is not very useful
in equilibrium markets. Therefore, you may want to use
it only in trending markets and put it aside temporarily
when equilibrium phases are perceived. Failure to do this
On Balance Volume foreshadows
short trades when it is falling
and long trades when it is rising.
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Trading Journal: Alexander Mantel
In the trading journal traders beginners or professionals introduce one of their
trades. In this issue Alexander Mantel describes a trade where he had the need
for risk reduction after opening the trade and he thought about how to achieve it
without limiting the prot potential or increasing the risk of being stopped out.
Trade with Rectication
in February 2013, because the fundamental situation
was uncertain. But I did not want to use a method that
reduced my profit potential, because I already had to
earn the agio of the options. Therefore a combination of
a call and a put was out of question. I was convinced that
the stock had already reached its bottom, but I feared
that the duration of the options was not long enough for
the stock to increase in value as much as to compensate
the option premium. I assumed that the stock would hold
the bottom at 14 EUR and therefore I chose a discount-
call-option with the strikeprice twelve EUR and a cap at
14 EUR (duration December 2014). The option cost 0.74
EUR and two EUR were paid if the price of the stock was
at least 14 EUR at the end of the duration. Therefore I
Initial Situation
At the end of 2012 I decided to invest in E.ON SE. At
this time the stock started building a bottom at 14 EUR.
The company was (and is) in a challenging fundamental
situation. But I was convinced that all the bad news was
already included in the price and that there was potential
in this stock in the long term. I did not want to use a lot of
money therefore I decided to trade with options. I bought
a call (strike 14 EUR) with a duration until December 2015
at a price of 0.21 EUR (ratio 1:10).
The Trading Idea
Although the capital invested with options is smaller
than with stocks I wanted to reduce my risk further
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73
decided to buy as much discount calls that would result
in the same amount I had invested at the end of 2012
in the initial position at the end of the duration of the
discount call.
Even if the stock would not increase any more and I
would lose the premium for the classic option, I would
not lose any money if the stock would quote at at least
14 EUR at the end of the duration of the discount call.
The discount call would still pay for the loss in the
initial position up to a price of 12.75 EUR. Only if the
price of the stock fell below 12.74 EUR I would lose
additional money with the discount calls. That seemed
to be a justifiable risk especially if you think about
the additional profit potential in case of a profit (in
contrary to most of the hedging-strategies). If the stock
increased to a price where the classic call option would
lead to a profit, the discount call would earn a profit as
well because the price would be above the cap of the
discount call.
The Trade
In addition to the classic call options
I bought at the end of 2012 I bought
discount calls on the 21st February
2014 at a price of 0.74 EUR. One
discount call would pay two EUR
in case of profit and therefore the
profit of the discount call would
compensate the loss of six classic
options (2 EUR - 0.74 EUR = 1.26 EUR
/ 0.21 EUR = 6). Therefore I bought
one discount call per six classic call
options. In other words: I bought
0.167 discount calls per option.
On 19th June 2014 the stock of
E.ON increased to nearly 15 EUR
for the first time since I bought the
initial position. The call quoted at
only 0.18 EUR and therefore at a
loss. In contrary the discount calls
were in profit already. They quoted
at 1.65 EUR more than enough to
compensate the loss of the initial
The chart shows the entry in classical call-options (rst mark), the entry in discount calls (second mark) as well
as the closing of the positions (third mark).
Source: www.tradesignalonline.com
F1) E.ON Daily Chart
position and to earn a profit. Because of the uncertainty in
the energy sector I decided to close the position in profit.
In total the result was as following: The initial position
(classic options) lead to a loss of 14 per cent. The discount
calls earned a profit of 122 per cent. Considering the
division (six discount calls per one classic option) it
resulted in a total profit of 36 per cent, which equals an
annualised yield of 22 per cent.
The Result
The trade was executed as planned. The discount calls I
bought to hedge the initial position served their purpose,
because they compensated the loss of the initial position
and even earned a profit. I cannot yet answer the question,
if the closing of the position was too early, because the
duration of the discount calls is until December 2014. But
I feared that the stock would drop below 12.74 EUR and
then the capital for the initial position as well as the money
for the discount calls would have been lost. In total I was
satisfied with the outcome, because I was able to achieve
a profit although the initial position resulted in a loss.
I did not want to use a lot of money
therefore I decided to trade with options.
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Ren Wolfram belongs to that generation
of traders whose attention was drawn to
the stock market in the late 1990s when
share prices spiralled out of control during
the New Economy bubble. As was the case
with many other traders, things very soon
went extraordinarily well only to go downhill
when the bubble burst. There were also quite
a few others who were thrown out of the
market or gave up for good altogether. Ren
Wolfram is one of those who have learned from
their losses and ultimately managed to become
successful traders. Marko Graenitz visited him
and talked to him about his beginnings, his
learning curve, and his trading philosophy and
about how he managed to nish in third place
at the Robbins World Cup in 2013.
Third Place at the Trading World Cup
Ren Wolfram
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The cups of the Robbins World Cup
Trading Championship of futures trading.
TRADERS: For starters, the almost obligatory question:
What got you into trading?
Wolfram: That happened in 1997 or 1998 when the
markets began to rise increasingly. At the time, I was
doing my national service (non-military option) and
some of my mates made a lot of money playing the stock
market. Around 100,000 deutschmarks, to give you a
ballpark figure. You can imagine that that appealed to me
and got me interested in the stock market.
TRADERS: So you opened an account and got going?
Wolfram: Exactly. I started off with 30,000 marks. By
then, I had begun to study economics but spent more and
more time in front of my computer instead of attending
lectures at university. Things were going well in fact, my
success was too good to be true. I remember my account
hitting 250,000 marks sometime in early 2000.
TRADERS: But then the bubble burst ...
Wolfram: Basically, I had no idea what I was doing but as
long as it worked, it didnt really matter. However, after
peaking in 2000 prices fell and I made losses caused by
too large positions in illiquid stocks, haphazard buying
based on the name of a company and so forth. That way,
my account dropped to 30,000 marks again in 2001. The
only profit I had made was the extra experience Id gained.
TRADERS: What motivated you to continue trading?
Wolfram: I spent a lot of time in front of my computer
carrying out all kinds of analyses, sometimes for up to
14 hours a day. Somehow I just knew that I would be able
to recoup my losses if only I traded more systematically.
This belief was so strong, that I couldn't give up.
TRADERS: When did the breakthrough come?
Wolfram: I think it was in late 2001 or early 2002. I attended
a Larry Williams seminar that really opened my eyes.
Essentially, I then threw away everything I had done up
to that point. Thats how convincing I found his approach.
TRADERS: That sounds really interesting.
What were his core ideas?
Wolfram: In principle, everything he did was based on
statistical evaluations. This suddenly turned trading and
its probabilities into something concrete. Which days
do which setups make sense on and at which trading
hours? What do the seasonal patterns look like, and so
on? Of particular importance was his concept of volatility
occurring in waves and then retreating again. This means
that periods of high fluctuation ranges alternate with
quieter periods (Figure 1). Its a simple concept but it is
one that many traders seem to ignore. After the seminar,
I began to compile a huge set of evaluations of all kinds
of statistical data in spreadsheets. Simultaneously, I
was reading more of his books as well as those by other
US traders like Joe Ross. The concepts went far beyond
what was known and used in Germany. Over here, most
traders still followed simple ideas related to technical
analysis like head-and-shoulder patterns or support
and resistance levels. By contrast, using statistical
evaluations made me feel that I had reached a much
more professional level.
TRADERS: When did you nish
your new trading approach?
Wolfram: In 2003 I had found my basic concept, i.e. my
rough draft.
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I have always been fascinated by being successful
in the markets and making my way there. Of course, Im
still working on the details to this day since the process
never ends.
TRADERS: How much do you intervene discretionarily
in the rules governing your system?
Wolfram: As little as possible. The rules help me to avoid
leaving any way for interpretation. The absence of clear
rules constantly makes you wonder in the end whats the
right thing to do. This automatically leads to mistakes,
which is what I want to avoid.
TRADERS: How did your strategies do in times of crashes
like those in the autumn of 2008 or in August 2011?
Wolfram: My concept is to build up positions into rising
movements during periods of low volatility. Therefore,
these were the very periods that often went my way since
there is a marked increase in volatility in times of crashes,
allowing me to capture larger movement amplitudes.
TRADERS: So you are not active in quiet markets
with no rise in volatility?
Wolfram: Exactly. I use a volatility
filter which filters only those
markets that are currently moving
well. This concept I introduced in
2007 after frequently operating
counter-cyclically prior to that.
While this had caused me to achieve
high hit rates, my average profits
were disappointingly low. Since
then, I have been doing more trend-
based and volatility-dependent
trading.
TRADERS: How does the volatility
lter work?
Wolfram: Basically, its quite easy.
When volatility is low, there is an
increased probability of an imminent
stronger movement and vice versa.
For instance, a market is likely to
make a breakout movement with
a markedly wider range after two
to three days of unusually low
fluctuation. That is simply the nature
of the markets.
TRADERS: Which time frames do you trade?
Wolfram: I have strategies for intraday trading, but also
for longer-term approaches with holding periods of up
to several months. I think a good mix of time horizons
is important in order to achieve a stable overall equity
curve.
TRADERS: And which markets?
Wolfram: Futures. Mostly the S&P E-mini, a bit of coffee,
sugar, and gold as well as just a few currencies. The latter
markets volatility has often been too low lately. Basically,
only the yen pairs went well in 2013. In 2008, however,
there were huge currency movements resulting in very
good opportunities.
TRADERS: Why no shares?
Wolfram: I stopped trading shares back in 2003. The
bear market of that time showed me that shares or their
companies may disappear or that share prices may drop
very sharply. If I trade an index or a commodity, the value
cannot just drop to zero, at least. There will always be
something left there.
The graphic shows a real equity curve of Ren Wolframs Power Candle strategy and below the typical basic
cycle of volatility. The blue boxes in the equity curve mark the periods when the system was in a drawdown.
These are also those periods when there was a regression of volatility in the underlying market. By contrast,
the red boxes indicate the performance periods of the system. These are also those periods when there is
higher volatility in the market again and the intraday ranges increase and performances become more trendy.
Source: www.tradesignalonline.com
F1) Equity Curve and Basic Cycle of Volatility
Equity S&P Power-Candle Setup (5 minutes)
Cyclicality of trend and consolidation
20000
18000
16000
14000
12000
10000
2000
4000
6000
8000
0
-2000
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TRADERS: At the Robbins World Cup of Trading in 2013, you
came in third. Could you tell us the story behind that, please?
Wolfram: The first time I heard about that championship
was via the story of Larry Williams and his incredible
return of more than 11,000 per cent. I dont want to
speculate on how he achieved this performance. At any
rate, I found it fascinating that someone achieves such
worldwide fame this way. You must remember that US
and Asian culture is different from ours in Germany.
Larry Williams was celebrated like a rock star over there.
So I looked at the conditions for entering the competition
conditions and found out that in addition to a fee of $1000,
you had to pay at least $10,000 in real money in advance.
While this put me off at first, I later decided to enter the
2012 competition.
TRADERS: How did it go?
Wolfram: Unfortunately, everything went wrong. This
was actually not my fault though, but was due to the
bankruptcy of PFG, the brokerage firm that handled the
trades of the Robbins Cup that year. After all, Robbins
himself is only the introducing broker but at the same
time the organiser. I had to drop out of the competition.
While there was an evaluation of the fourth quarter later
on, the massive amount of paperwork involving countless
documents I had to contend with as a foreigner meant
that it didnt work out any more.
TRADERS: How did you feel?
Wolfram: Well, as you can imagine, not all that great.
First the collapse of MF Global, then PFG. You had the
feeling that you could no longer put your trust in the
infrastructure of the markets. Imagine doubling the
amount in your account by your trading and then losing
everything again because your broker is broke. Although
I spread my trading by engaging several brokers, the
risk is difficult to calculate hovering as it does like a dark
cloud above us, especially after such events. Who can tell
who will be hit next?
TRADERS: What happened next?
Wolfram: I then pondered the pros and cons of
participating again in the following year. Basically, things
had been going quite well until the PFG mess happened.
Admittedly, my wife had strongly advised me against
participating but I did anyway.
TRADERS: Could you please tell us how the year turned out.
Wolfram: Right on the start page of the Robbins Cup
website you can see a list of the current top five traders
of the competition year in question. After just two weeks
a participant had achieved a return of 50 per cent. Three
months another one had taken the lead with an incredible
return of 500 per cent! Within a few days he had jumped
ahead, which is a clear sign of extremely risky trading.
Thats the only way to pull it off. I was treading water and
doing so at a distinctly lower level, trading mainly micro
contracts and behaving very defensively. I distinctly
Larry Williams is one of the best and most famous traders in the world. At the 1987
Robbins World Cup Trading Championship, he turned 10,000 dollars into more than
a million dollars. He has won many trading competitions and is the only futures
trader worldwide to trade live during his seminars with a one-million-dollar account.
Williams has published a large number of books on this subject, most of which
became best-sellers.
Larry Williams His seminar was the cornerstone of Ren Wolframs approach
Good trading principles are also helpful in normal life.
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was only a performance of 220 per
cent. Only very rarely has it been
necessary to achieve more than 500
per cent for first place. Bit by bit, the
short-lived star of the competition
lost his lead and after several
months was no longer to be found
among the front runners. Later,
he briefly re-appeared there once
more, probably after pulling off a
lucky trade, but then disappeared
again.
TRADERS: And you nished
in third place! Great!
Wolfram: Thank you, I was a bit
surprised, too. At first, I was in
fourth place, but when the accounts
were checked they found out that a
participant ahead of me had made
payments to his account during the
year, embellishing his performance.
This, of course, is not admissible. So I moved up to third
place.
TRADERS: What was the most important thing
you have learned during the Robbins Cup competition?
Wolfram: Defensive strategic trading clearly is more
successful in the long run than you might think! There
will always be people who briefly achieve huge returns
using daring manoeuvres, but in the long term the
Ingmar Koenigshofen (left) and Ren Wolfram
at the CME in Chicago.
Ren Wolfram went short too soon at the high and traded too large a position in silver futures. Such errors not
only cause major losses but linger on in the mind of a trader.
Source: www.tradesignalonline.com
F2) All-time High for Silver in 2011
remember telling one of my mates: I bet this 500 per cent
guy wont finish among the first five.
TRADERS: A risky bet. After all, that bloke simply could
have stopped trading for the rest of the year, which would
certainly have been enough for him to nish among the
top ve.
Wolfram: True. But these people are incapable of doing
that. To win the Robbins Cup, the all-time annual average
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strategist with an approach based on sound statistics
will be successful on the stock market. Although I really
traded defensively during the Robbins Cup competition,
I finished third. To me, that was gratifying confirmation
that my approach is really the right one. As is the case
with any other trader, I start to have doubts every so
often about whether this or that might not be improved
upon or whether my performance is lagging behind that
of others. The truth is that the whole thing is also a mental
challenge.
TRADERS: While we are on the subject,
what do you think about mental coaching?
Wolfram: Thats certainly a good thing although I myself
havent tried it out yet. It happens time and again in
trading, even after years on the job, that you fall prey
to negative thought processes, causing you to make
mistakes. Mental coaching certainly makes a trader less
vulnerable to such influences. However, many traders
think such coaching is a waste of money. Admittedly,
psychologist charge high hourly rates and the whole
thing certainly wont come cheap. But losses on the stock
market caused by stupid mistakes arent cheap either.
Moreover, most traders think topics like mental
coaching or risk management are boring, but thats
exactly where the problem is: These things are the most
important ones in trading. And theres another problem:
Many traders know trading approaches that work but
are simply incapable of implementing them on a regular
basis. Here , too, an individual coach or coaching sessions
can help.
The winner, runner-up,
and third-place nisher of
the 2013 Robbins World
Cup: Song Li (runner-
up), Victoria Grimsley
(winner), Ren Wolfram
(3rd place), together with
Chad Robbins of Robbins
Trading.
TRADERS: Can you remember
one of your trading mistakes?
Wolfram: Yes, of course. Thats something you never
forget. It was at the all-time high of silver in April 2011
(Figure 2). I went short, unfortunately too soon. But that
by itself wasnt the big mistake. The mistake was the
much too large position in silver futures, which cost a
lot of money. And my wife and I wanted to go away for
the weekend enjoying ourselves, which, of course, didnt
work out so well. Emotionally, it takes time to really digest
that kind of stuff. But most people will probably always
refuse to make such an admission.
TRADERS: Thank you very much for such honest words.
Yes, such a situation has caught some traders completely
by surprise. Did you or do you have a coach?
Wolfram: Ive never had a coach. It was always my goal to
teach myself how to trade by attending seminars, reading
books and doing my own analyses. In hindsight, it would
certainly have been easier with a coach.
TRADERS: What typical errors can you think
of that are made over and over again?
Wolfram: Traders often have a pretty good sense of what
is happening in the markets. But you also have to be able
to reflect on that. For instance, if someone is afraid of
buying a share, that may well be a good reason to enter
the market. Ive never understood the way people wait
for a pullback in a stock to enter the market, but when a
pullback does happen they are too scared to do anything.
Quite similar things happen in systematic trading, albeit
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on a different level. Sooner or later,
a drawdown will occur during which
rules are suddenly adapted or trading
is suspended. Nor will a trader rarely
start trading a systematic approach
during a drawdown despite the fact
that a drawdown actually is the best
entry point.
TRADERS: Can you explain
to us one of your setups?
Wolfram: I have a trading concept that
is called Power Candle (Figure 3).
This means that I want to see an
impulse candle that triggers a
movement. This is an exceptionally
big candle which starts a trend
the initial spark, so to speak. The
idea behind it is that a great deal of
volume enters the market here in a
short period of time, which suggests
institutional trading. More often than
not, this will go on for a while, which
means that I can assume that the
trend will continue. As an intraday
setup I use this strategy for the S&P
on the basis of five-minute candles,
but it also works for periods of up to
the monthly chart.
If a power candle emerges and is
completed, I will enter the market as
soon as this candle is exceeded and I
will simply hold the position until the
days close.
I work with an initial stop of
15 points or $750 and try to capture
the intraday trend. The stop is never
adjusted, which means that exit can
be made only at the days close or
at the initial stop. No further details
are necessary, its as trivial as can
be. The hit ratio of 65 per cent is
astonishingly good.
In the S&P Ren Wolfram trades the power candle strategy primarily on a ve-minute basis. On 9th April, such
a candle started the intraday trend, generating a prot of $500 (ten points).
Source: www.tradesignalonline.com
F4) Winning Trade in the S&P
This is the 60-minute-chart of April 2013 showing the crash of the precious metal. Ren Wolfram used the
marked bearish power candle as an entry point for the swing trade. The example is a good illustration of how
above-average-sized candles can generate signals for the beginning of a strong trend.
Source: www.tradesignalonline.com
F3) Power Candle for Gold
Trading has a poor image among
the public, which I dont think it deserves.
PEOPLE
81
TRADERS: Can you show us some sample trades?
Wolfram: Sure. I have picked three trades (Figures 4, 5,
and 6), including a losing trade (Figure 5).
TRADERS: What tips can you give to
follow when they start trading?
Wolfram: Besides a professional
approach, you especially need a
strong capital base if you want to
make a living as a trader. However,
its difficult to build this up slowly,
starting from an undercapitalised
trading account. Its definitely
advantageous for traders to have
a safety net like a regular job or
property enabling you to generate
regular income and to pay the bills.
Back then I was lucky to have my
family provide that safety net I was
able to sort of rely on, giving me the
emotional backing I needed to run
risks in trading. Although I didnt
have to fall back on it in the end, it did
significantly contribute to allowing
me to pursue my trading career. Even
today I generate a sizeable portion
of extra income from newsletters,
seminars, and lectures. Thats just
important for my emotional stability
and allows me to develop more
steadily, automatically causing me
to stay on the ball.
TRADERS: What do you think about
the way trading is perceived by the
general public?
Wolfram: Its a pity that trading is just
ignored by most people in Germany.
I find this especially striking when
we are over at friends in the evening
who dont know exactly what I do
for a living. If I excuse myself for
having to go home briefly to attend
to some business, they sometimes
ask: What business? I will tell them
then that I need to close my open
Figure 5 shows a losing trade of the power candle strategy on 12th March amounting to $500 or ten points.
Source: www.tradesignalonline.com
F5) Losing Trade in the S&P
For the trade of 3rd February, the same strategy generated 38 points or a prot of $1,900.
Source: www.tradesignalonline.com
F6) Intraday Trend Fully Captured
positions in the S&P futures. This is usually followed by a
pause and an incredulous look on their faces, as if I were
from a different planet. You somehow feel like a freak.
PEOPLE
82
www.tradersonline-mag.com 09.2014
This would also improve an
understanding of the stock market,
which unfortunately is only a vision
in Germany. Trading has a poor
image among the general public,
which I dont think it deserves.
TRADERS: What are your plans
for the future?
Wolfram: Most important to me is
a good family life, which is why I
want to make more time for that.
As regards trading, my goal is to
again pursue my own interests
more and attend fewer trading fairs
and seminars. One idea of mine is
to set up a small trading office in
Frankfurt where other traders may
share office space. Who knows
how all that will pan out.
TRADERS: If you hadnt become a trader,
what then (ideally)?
Wolfram: I used to play a lot of football, so such a career
would have been a dream. A dream because I probably
wouldnt have made it quite to the top. Realistically
though, I would probably be self-employed in another
industry, probably as an entrepreneur.
The interview was conducted by Mark Graenitz.
The graphic shows a 6-month equity curve, the system being applied in the 5-minute chart of the S&P.
Although it is a trend strategy, the hit rate is around 65 per cent and the equity curve does not show much
volatility. This suggests that the initial spark of the power candle is indeed of a high quality and that trends
can easily be identied this way.
Source: www.tradesignalonline.com
F7) Equity Curve Power Candle System
S&P Power-Candle Euqity (6 Monate)
20000
18000
16000
14000
12000
10000
2000
4000
6000
8000
0
-2000
1 7 13 16 25 31 37 43 49 55 61 67 73 79 85 91 97 103 109 115 121
From left to right:
Joel Robbins (Robbins
Trading), Steven Silver
(Vision Financial
Markets), Song Li,
Victoria Grimsley, Scott
Warren (CME Group),
Ren Wolfram, Jeff
Bernacchi (CME Group),
Chad and Chelsea
Robbins (Robbins
Trading).
Had I told them instead that I had to turn off the sprinkler
or feed the dog, this would have been completely normal.
TRADERS: Should more people
be in the know about trading?
Wolfram: I would be in favour of adding the subject
Business and Finance to school curricula. Many people
lack the simplest basic knowledge to make their own
financial decisions. It would be good if everyone could
decide for himself at least on the basics without having to
rely too much on others. After all, good trading principles
are also helpful in normal life.
COLUMN
84
www.tradersonline-mag.com 09.2014
three companies left with an AAA rating: ExxonMobil,
Microsoft and Johnson & Johnson. If ratings are an
indicator of bankruptcy, there will be bankruptcies
across the board. If interest rates increased by two
per cent, half of the corporate sector would be wiped
out.
6. War & Conflict
Almost everywhere, except in parts of Europe and
the US, there is increasing geopolitical tension.
Events like the current crisis in Crimea, could trigger
a market crash, even if there is no war.
7. Increasing Poverty
Overall world poverty has increased and whenever
the poor become poorer, we can expect a social
conflict. The crusade against income inequality
could also further hinder innovation and growth by
reducing the benefits of innovation, threatening the
economy.
8. Cash and Hyperinflation
The surplus of cash that central banks and corporations
are holding could end up damaging the economy.
The ECB is lending money to financial institutions
that put it back into the ECB, which is a vicious circle
and today Google could afford to buy a majority stake
in Ireland and Microsoft could buy more than 50 per
cent of Singapore, which is immoral.
While many economies seem to be finally rebounding
since the 2008 crisis, we shouldnt be complacent. Too
often we do not learn from history and do not act when
faced with a crisis we know is imminent.
The global economy faces its greatest challenges
since 2008. A crisis for the global economy is likely and
not enough action is being taken to avoid it. Based on
statistics, the world could expect a financial crisis as soon
as April 2015, ending in March 2016. The cause of crisis
will come from eight possible scenarios:
1. A Stock Market Bubble
In the last year, stock markets have performed
unrealistically well and at some point the situation will
explode. In 2014, analysts were disappointed in the first
quarter because earnings were not in line with market
expectations. This means that if markets were to revert
to a reasonable level with regards to earnings, there will
be a stock market drop of between 30 to 35 per cent.
2. Banking in China
A severe crisis could be driven by growing Chinese
shadow banking, a system which consists of
loans mainly to government institutions whose
performance is not well monitored and not open to
competition. If this system collapses, it will negatively
affect the global economy.
3. Energy Crisis
The United States, as the worlds largest producer
of gas, could cause an energy crisis. If the US begins
exporting to the rest of the world, Russia might feel
threatened, causing a geopolitical storm. The US
would have control over energy prices and would exert
influence over countries like the UK, India and Japan.
4. Another Real Estate Bubble
There is a risk of a property bubble forming in countries
like Brazil, China, Canada or Germany. Prices are going
up because availability of credit is huge and buyers are
pushing prices up without realising that they do not
correspond to fundamental values.
5. Ratings & Bankruptcy Corporate Crisis:
BBB as the New AA
Companies currently have too much debt and the new
norm is to have a BBB rating. In the US there are only
8 Ways a New
Global Crisis
Could Hit by 2015
Arturo Bris
Arturo Bris is Professor of Finance at IMD and directs the IMD
World Competitiveness Center. He was a keynote speaker at IMDs
Orchestrating Winning Performance program where he unveiled his
predictions for the future.
Proprietary Trader
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