Professional Documents
Culture Documents
Volume 1, Issue 1
SEPT/OCT 2009
www.EducatedAnalyst.com
CONTENTS
THE EDUCATED ANALYST
10 HABITS OF SUCCESS
42 A COMPREHENSIVE LOOK AT
RELATIVE COMPARISON
TRADING PATTERNS
A look at how technology can give us insight into the markets that
we never had before.
By Mathew Verdouw.
EDITORIAL
elcome to our inaugural edition of "The Educated Analyst". We are really proud and excited to be
able to deliver this free e-magazine to you, and we trust that it is a real benefit to you in your analysis
and trading.
I have spent the last 14 years working with traders from a wide variety of backgrounds and as such I have had the
fortune of seeing what separates good traders from those that get burnt. The bottom line is the amount of
education that they have acquired. In my experience, a successful trader is always someone who has dedicated
themselves to learning more about how to trade and to continually search for new techniques that can improve
their results. I personally see the level of education acquired as a good measure of how serious a person is in any
endeavour in life. Someone who is open to learning new things will always improve, the person who thinks they
know it all is destined to stay the same.
If you have been Trading for any length of time at all, you know that it is hard work. It takes discipline to follow
your strategy when the masses are running the other way. It can be crushing when you have successive losses and
its hard to know in times of "crisis" what to do. On the other hand, trading can make you feel ten-foot tall and
all-conquering when you are able to successfully master a strategy that is giving you good returns. In The
Educated Analyst, we have aimed to put together a collection of articles that will help every active trader; from
trading strategies that you may not have heard of before, to psychological tips that will help you understand your
own tolerances in how you trade. The Educated Analyst has been designed to help you in your education to
become a better trader.
No matter where you are in your trading life, there is bound to be a wealth of information in The Educated
Analyst that will benefit you. The articles are written by seasoned experts in their field that share our passion for
giving you as much information as possible to help you with your trading. We are so grateful that they would
share this information so freely. For many of them, education is their business. If you are looking to further your
education then please consider what these educators have to offer.
I also want to acknowledge at this point the support of four companies that have assisted us with the distribution
of The Educated Analyst. Each of these companies also share our passion for ensuring that Traders are equipped
with the best information and tools to help them succeed.
Market Analyst Software, who is sponsoring The Educated Analyst and who provides software and data to
traders.
Paritech, who provide real-time ASX data into Market Analyst.
Kinetic Securities, who provide full-service brokering and real-time data for many of the world markets
through Interactive Brokers.
The Educated Investor Book Store, who provide trading and investing books in their Melbourne store and
via their web store.
To help us keep The Educated Analyst a free e-magazine, please consider one of our supporters when you are
looking for products and services. You will find ads for these in The Educated Analyst.
Again, enjoy this publication and feel free to tell your friends about it. If you have any suggestions on topics that
you would like covered in future editions, please let me know by emailing editor@educatedanalyst.com.
Happy Trading!
Mathew Verdouw
Editor
The Educated Analyst
ADVANCED TOOLS
FOR
ADVANCED TRADERS
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1800 557 2702
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800 130 1604
Basic Statistics
When representing price data on a VAD, Steidlmayer
recognised that the patterns formed by the letters are
similar to those on the most basic of statistical
representations the normal distribution curve.
Even a casual observation of the curve that forms on a
particular chart reveals quite clearly the price at which
most price action occurs. This is the price with the
largest number of letters or occurrences and is referred
to as the price point of control. For some reason the
price action gravitates towards this particular price
from above and below. That central price has a huge
magnetic effect.
From a traders perspective the important question then
comes how far away from this point of control should
the price action go before it loses its influence? In other
words, when can a trade be entered with confidence?
To answer this question the statisticians turned to their
Standard Deviation tools. In a normal distribution 68.2%
of occurrences fall within 1 standard deviation of the
median value. Bottom line dont enter a trade until
price action is beyond 1 standard deviation of the
median or price point of control.
Good News for Traders
What was previously a laborious and painful process is
now available at the push of a button and on any time
frame being used by the individual trader.
The graph in figure 2 shows the Market Price Analysis
(MPA) overlaid on price action for AMP. This is on a
weekly chart and covers the period from June 2001 to
the end of March 2002. Notice that coloured blocks
replace the letters for each day.
The interpretation and pattern
recognition remain the same.
[Type text]
Crisis...What crisis?
In the past few months the word crisis has dominated
the headlines. Many people have lost bundles of money,
but in saying that it must be remembered that mainly
this is due to incorrect analysis of the market movement,
trusting other individuals or so called market experts, or
simply the head
in the sand
approach
hoping things
will
quickly
improve.
In my nearly
twenty years of
trading, I have
developed and
refined
a
trading
plan
that works very
well for me.
Even then I am
still
working,
researching and
testing
new
methods, tools
and systems to
see if I can
improve
my
trading.
Has my plan worked in the current crisis? I am pleased to
report a resounding yes, just as it has done, and will
continue to do so long after I have stopped trading.
Firstly, I am an intraday trader, looking for entries and
exits within the session. I particularly like the SPI200, the
futures contract on the Australian top 200 XJO. This is
similar to the S&P500 or the E mini contract. I will open
and close a position within the day session; in essence, I
dont have an open position overnight, protecting me
from wild swings emanating from overseas markets. I
guess I like uninterrupted sleep too much.
[Type text]
In the above case, you can see that IF the market got
down to 856(which is below 1215 where it was at the
time) the high at 1300 would be on the 38.2% line and
low of 1215 would be at the 50% line and the low at
1131 would be on the 61.8% line. This means the market
highs and lows previously mentioned would be in sync
with the market at a low of 856.
[Type text]
Habits of Success
Risk & Mind Management / Trading Foundations
I shall be writing two articles for The Educated
Analyst in my quest to identify why only 10% to 20%
of traders achieve success. It is almost a clich that
trading success is a function of:
Winning Psychology (60%) x Risk Management (30%) x
A Written Plan (10%)
Habits of Success
1. Our
decision-making
process
falls
predominantly into the Impulsive or Risk
Manager mode. Its important to understand
that the terms describe a mode of behaviour
we tend to fall into; we need to execute our
trades in the manner best suited to one of the
two modes to which we belong. For more
Trade?
information
read:
Day
(http://tradingsuccess.com/blog/day-trade725.html).
2. We invariably develop two unconscious
strategies; the fixed mindset and the growth
mindset. We have both, but one tends to
predominate. The fixed mindset says that our
ability and intelligence is limited. Therefore
our success is dependent on the talents we
have. Since that too is limited to what we were
born with, there is no point in seeking to
Habits of Success
An example
Regular
readers
of
my
blog
(www.tradingsuccess.com/blog) know that I started
2009 with a whimper. I failed to recognize that my
trading was in an Ebb state, and as a result, suffered
the largest monthly loss since I started managing my
private closed fund in 1990. Since then, I have been
struggling to make a significant dent in the losses.
I had great expectations for the two trades, DX and
ES. I will focus on the DX here because the ES trade is
well documented on the Video/Forum/Twitter free
service.
Everything had lined up perfectly, and I was very
confident that my favoured scenarios would unfold. I
entered my first positions at 79.67 and a second set at
80.49. After both entries, the market immediately
went my way.
But then the DX stalled.
Habits of Success
I have reproduced
some of my journal
entries to give you an
insight into my state
of
mind.
I
am
comfortable losing up
to 20% of my capital I do not like it but
accept it as part of the
trading game. When I
lose more than 20%,
my anxiety levels rise.
I respond by cutting
position size and making it a priority to bring the
losses down under the 20%.
FIGURE 1
Habits of Success
Habits of Success
by
e-mailing
him
at
On the Couch
With Chris Shea.
Risk & Mind Management / Trading Psychology.
1. A personalized approach
I have worked with scores of successful traders, and
each individual has a unique strategy which gives them a
winning edge. Essentially good strategy integrates a
coherent analytical framework combining multiple time
frames with the management skills that enable losses to
be kept small and to allow winners to be as large as the
market allows.
Conversely if you do what the majority does, you wont
have an edge and you will lose.
2. Discipline
Successful trading is not a hit or miss affair. Success
comes from the will to win and the determination and
endurance to follow through. Successful traders take a
hard headed approach and regard their enterprise as a
business rather than an indulgence or hobby. They
expect their accounts to accumulate, despite being
stopped out often. They know that with discipline and
consistency they will prevail.
Successful traders have the discipline to remain focused
on their business tasks despite the events occurring
outside their control, for example panic and extreme
volatility.
3. Passion
By passion I do not mean an emotional outlet with
regard to trading. By passion I do mean enthusiasm,
motivation and the commitment to stay with the task,
especially as pressure comes on, as it inevitably will.
My clients who succeed really enjoy their trading. Is this
surprising? Success breeds success. Trading isnt an
ordeal; rather its an absorbing challenge. The successful
ones arent ambivalent about it: they want to do it, and
do it well. Setbacks do not dent their confidence and
enthusiasm (for long), but are regarded as an
opportunity to learn and refine their methods. Passion
enables them to be self- evaluative and to strive for
better outcomes.
Now lets delve deeper into the type of performance
that is essential for success. In particular I want to
compare the type of thinking and action of top
performers, with what is the public or general view
which leads to poor quality outcomes.
To do this I want to use an analogy of performance with
which you will be familiar: driving a car. For more detail
on this analogy refer to my book Licensed to Profit by
Trading in Financial Markets.
When you are in command of your car your
performance is heuristic. All the complex input sensory
data relating to speed, traffic, and direction are
integrated within your brain to instantaneously and
automatically produce the desired outcome moment by
moment that enables you to reach your destination.
There is an emotional component to this. These
emotions are associated with trusting your self to
perform, relaxed and poised, at your best in the dynamic
yet dangerous environment, and to enjoy the journey.
Conclusion
In this article I am suggesting that the way to win at
trading is to learn, develop and use the same type of
performance dimensions as when you drive your car. Yes
you do need an efficient trading platform and excellent
market analysis tools. But to profit consistently and
handsomely you need to go the extra mile and learn and
do heuristic performance in the market setting.
The more time you put into your trading, the bigger the
rewards. The biggest failing that people have when they
start trading, is that they believe that they can have all
the knowledge needed to make all the money of their
dreams within a very short period of time. This is not
going to happen. You have to start off very slow, and
gain more knowledge year by year. It took me twelve
years to work out WD Ganns commodity course (full
time). Its taken me twenty-five years to decode WD
Ganns books The Tunnel thru the air or Looking back
from 1940 and The magic word.
Here are five of Ganns principles that I recommend you
start following, and keep working towards daily:
1. Good health: the better your health is, the
quicker you will learn.
2. Gain knowledge: Start with Ganns seven books.
3. Capital: eliminate your debt and have your own
money to trade.
4. Patience: learn to wait for the market to get to
setups in both time and price (dont jump into a
trade too early just to trade).
5. Nerve: when the market gets to your entry
point, pull the trigger and place a stop lost.
Now that I have my longer term swing charts sorted out, I can look closer at the market action, so I go to a 23
day swing chart (which is Ganns three weeks swing chart). 22.8 days times 16 is 365.25 days (16 planes on
Ganns cover of Tunnel thru the air). You again can see very quickly that if we add .2050 cents (the first move
up) and add it to .4625 (the last low on the 23 day swing chart in the following image) we get .6675, closest to
the .6750 level.
Gann also used the 2 day and 3 day swing chart, depending on where the market was positioned. The next chart is
a 2 day swing chart. The 2 day and 3 day swing chart is based on the moon, as the moon changes sign every 2.5
days. The moon controls the masses emotions, so it is good to watch this chart in the final stages of a move. After
the market makes a top, it will first over balance price, the first indication that it has turned down. You would then
look at the 3 day swing chart to see if it has turned down, and go short with a stop above the swing high of no
more the 3%.
Timing Cycles
Walter Bressert is credited with
introducing timing cycles into
the Futures market in the late
1960s.
Figure 1
The Educated Analyst | 30
Figure 3
Figure 2
To demonstrate how effective this form of analysis can
be I will now apply cycles to the history of the All
Ordinaries Index. In so doing I will show you how you
Figure 4
[Type text]
[Type text]
CONSOLIDATED MARKETS
Concepts Based form the Book The ART of Trading published by Wiley, April 2008
Here is another example of how to bracket a consolidation to avoid trading within the bracketed area. On this
chart, do not trend trade between the upper and lower blue horizontal lines representing the top and bottom of
the consolidation.
Conclusion
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A COMPREHENSIVE LOOK AT
TRADING PATTERNS
with Peter Varcoe
Their shapes.
Their correct identification.
Their target determinations.
How this can help us in our trade entry
determinations.
How they can aid us in our risk management
applications for trading purposes.
How they can allow us to enter some very profitable
transactions.
How they can also help keep us out of potentially
harmful transactions.
Their applications in bull and bear markets.
Formation
Identification
Development
Breakout
Confirmation
Continuation patterns:
o Flags
o Ascending Triangle
o Descending Triangle
o Symmetrical Triangle
o Pennants
through
his