Q & A continued

Brynjolfsson continued from page 17

FM: You successfully have made the transition from a large,

traditional asset management house (PIMCO) to a successful
global macro hedge fund firm (Armored Wolf), with in excess
of $1 billion in assets under management. You launched
Armored Wolf in 2009, arguably one of the most difficult
periods in which to start a fund. Youve seen some tough
markets in which to raise capital and trade. Tell us about your
strategy and how it has evolved and changed since inception.
JB: Our launch was driven by two interrelated super-secular
forces. The first was the end of disinflation, and the second was
the end of benchmark-driven management fees.
The end of disinflation we felt would mean the end of the
free money created by falling yields and rising p/es. By 2008 we
were in the 28th year of a bull market for financial assets. We
saw equities essentially peak in 2000. Though theyve ground
higher since, the combination of volatility, inflation and taxes
suggests that any gains since 2000 are essentially illusory. Given
the end of disinflation, we felt traditional forms of investing,
equities and bonds, had seen their best days. As such we focused
on building Armored Wolfs intrinsic firm capital by focusing
on talent acquistion, infrastructure and solutions that would
do well in sideways or rising inflation environments.
The other aspect involved benchmark-driven management
fees. Though there have been fits and starts, with 2008 being a
rather large fit, increasingly quantitative approaches to markets

40

FUTURES May 2013

CoverStory_May13.indd 40

have characterized the past 50 years. Recently, this has made the
cost of getting benchmark exposure, particularly at the institutional level, essentially zero. Not only would fees for such
services, including [those] embedded within broader products,
gravitate toward zero, but markets themselves would become
more efficient. We no longer could assume simply that stocks
for the long run would work. There would be no frictions, or
disequilibrium conditions, that would allow this heuristic to
apply going forward.
FM: What was it like to make the transition? What were the
hardest lessons you learned?
JB: It was a profound luxury [that] I fortunately could afford. In
particular, it was a reckless tribute to the entrepreneurial desires
I had always harbored, and [that] led me to drop out of my PhD
program decades earlier. While I rely heavily on both my senior
partners who help me run Armored Wolf, and my other colleagues who both ply their trade and support me, I enjoy both the
weight upon my shoulders and the breadth of challenges I face.
FM: What advice would you give new managers starting out?
JB: The landscape is competitive. The most expensive cost one
will face is surely denial--denial regarding ones strengths and
capabilities, or denial regarding ones weaknesses. Ultimately,
passion and desire are the only rocket propellants that will get
one into orbit.

DIGITAL EXCLUSIVE

4/23/13 8:47 PM

FM: Your firm embodies the convergence between traditional

and alternative investments. For about a decade, traditional
firms have been trying to get into the alternatives space,
while hedge funds and other alternative managers have been
trying to launch mutual funds. Meanwhile ETFs have become
all the rage. Can you flesh out this landscape, and Armored
Wolfs role in it?
JB: Yes. At [PIMCO], though I ran the some of the largest mutual
funds in TIPS, commodities and the asset allocation space, my
approach was decidedly quantitative, relying heavily on a concept
called portable alpha, in which alpha became the centerpiece of
my efforts, and the benchmark took a backseat. So analytically
speaking, my ability to allocate across specialist managers and
manage portfolios myself, was seamless.
In terms of clients and mandates, our firm spans the gamut.
Our people and infra-structure, starting with my co-founder
Mohan Phansalker (former CLO for PIMCO, now Armored
Wolf s COO & general counsel), span a variety of structures,
regulatory frameworks and asset classes seamlessly.
Currently our clients are Eaton Vance: Armored Wolf serves
as sub-advisor for the EV Commodity Strategy Fund; Curian
Capital: Armored Wolf serves as a sub-advisor providing ETF
model portfolio for Curians retail separate account product;
OFI: Armored Wolf serves as sub-advisor for the OFI SSPArmored Wolf Euro Inflation-Linked Bond UCITS Fund;
James Alpha: Armored Wolf serves as advisor for the James
Alpha Global Enhanced Real Return Fund; and Armored Wolf
is the manager of various institutional separate accounts and
privately placed funds (hedge funds) in the high-yield and absolute return arena.
FM: So coming back to the current investment environment,
and synthesizing both your background, and your investment

process, what can you tell us about the current outlook?

JB: In terms of inflection points, Im drawn to commodities
generally, and the tensions embodied therein. In the energy
market, you have rapid innovation transforming: The supply
side, transportation infra-structure, and via conservation and
substitution, the demand side. This innovation, or these productivity enhancements, are keeping a lid on energy inflation. In
the metals, and precious metals, you have a different and much
more bullish dynamic going on.
Pricing for commodities, and metals in particular, is based
on three intimately interrelated markets. The first and foremost
of these is the long-term market, where ultimately supply and
demand fundamentals intersect. The second is the spot market, where at each instant for every buyer there is a seller. The
third, the glue that ties these first two together, is the market
of storage, or inventories. Inventories are the time machine
by which spot sale of current production is in effect delayed, as
the material is transported into the future.
With the global economy experiencing a new normal subpar rate of growth and industrialization, for five or more years
as Reinhardt and Rogoff describe in their sarcastically titled
book, This Time is Different, the spot market for many metals
is relatively glutted. Dont be fooled however. The longer term
fundamentals could not be stronger.
I dont expect this to endure. For some commodities, those
that are difficult to store, this disconnect will simply endure,
until gradually the passage of time will resolve the discrepancy.
For metals markets, the cost of storage is low, so the spot market and the long term market remain linked. Low interest rates
further facilitate this arbitrage.
Precious metals are of course the most direct way to play this,
with platinum, at a discount to gold, providing both fundamental, and relative value.

Put Time and Money on Your Side and

Take Your Trading to

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DIGITAL EXCLUSIVE

futuresmag.com

41

T e c h n i c a l a n a ly s i s

Trading Techniques

Creating custom indicators

By J e a n Fo lg e r

Knowing how to build your own indicators is critical for todays technical trader.
Here, we detail the process from conceptualization to coding.

technical indicator is used to

provide a distinctive perspective of market activity that may
be unavailable by simply viewing price
charts. Each indicator is essentially its
own program that tells the computer
what data to use, which calculations to
apply and how to display the results.
While there are hundreds of readily available technical indicators, such as moving
averages and stochastics, some traders
may wish to design their own indicators
to perform specific functions or spot
unique conditions in the market.
Designing your own indicator
How to program it yourself
Testing your work

Many of todays trading platforms

enable users to program their own custom indicators using some sort of proprietary language (such as TradeStations
EasyLanguage or NinjaTraders
NinjaScript) that interprets the concept
for the computer. A list of commands is
written in a specific syntax (known as
the code), and after the code is entered
into the trading platform, it is compiled
or verified by the computer. Then it can
be displayed as an indicator on a chart.
42

FUTURES May 2013

Here, we introduce a step-by-step

process for building a custom indicator, using as an example the Volumizer
indicator, designed to evaluate the relationship between average price and average volume. The graphic in Go with the
flow (right) provides an overview of the
development process that we will use.
Define the concept
The idea for a custom indicator can come
from fields outside of trading; for example, a trader may wish to apply an idea
from mathematics, statistics or simply
the result of observation. A trader might
notice a specific price or volume tendency,
or an intermarket relationship and decide
to investigate further. This is critical: It is
important to have a specific goal in mind
before attempting to develop an indicator,
and traders must be able to verbally (and
eventually mathematically) express what it
is that they want the indicator to do.
For our example, we use a daily price
chart of the SPDR S&P 500 exchangetraded fund, with volume inserted as
a sub-chart. From observation, there
appear to be trading opportunities as
price and volume diverge and converge
(see Behind the moves, right). Further,
it seems that there are often changes in
DIGITAL EXCLUSIVE

For more from Jean Folger,

go to futuresmag.com/Folger

Go with the flow

These are steps involved in building
a custom indicator.

Define the trading concept

Express the concept

objectively

Determine the indicators

appearance

Program the indicator

(or have it programmed)

Test the indicator

Use the indicator to

improve trading
Source: PowerZone Trading

the average volume preceding strong

market trends.
Because we are looking at price and
volume on two completely different
scales, however, it is almost impossible
to measure this type of movement in this
context objectively. If we were simply to
superimpose volume on an existing price
chart, the relationship between price and
volume would be distorted by the scaling
of the chart. In other words, more data (a
wider chart) would provide a much different relationship between average price
and volume than a chart with less data (a
narrower chart). This would render this
type of trading analysis useless because
it would be subjective and, thus, difficult
to reproduce for the purpose of making
consistent trading decisions in the future.
This is where a custom indicator can
help confirm (or negate) the hypothesis
that divergence and convergence between
average price and average volume may be
an early indicator of strong price trends.
Our next step is to combine these two
data sets into a single indicator to visualize the analysis and help determine if it
has merit as a trading indicator.
Express yourself
A large part of developing successful indicators is being clear, specific and objective about the concepts. For example, it
is not sufficient to simply state when
the market is in an uptrend You must
define what exactly it is that constitutes
an uptrend. Examples of specific definitions might be three consecutive higher
highs, a nine-period moving average
crossing above a 30-period moving average or ADX is over 20.
Going back to our example of combining average price and average volume, we
now must define every aspect of the concept and create a method of expressing this
relationship objectively. First, we define the
average price and volume as 40-day averages (see Objectively speaking, right).
Average Price = Average closing
price over the past 40 days
Average Volume = Average volume
over the past 40 days
Because price and volume have many
different values and scales, we attempt
to express one in terms of the other. In

Behind the moves

Our concept begins as an observation: There appear to be trading opportunities as
price and volume move toward and away from one another.
155
150

Price

145
140
135
130
125
120
115
110
700,000,000
600,000,000
500,000,000
400,000,000
300,000,000
200,000,000
100,000,000

Volume

2011

Apr

Jul

Oct

2012

Apr

Jul

Oct

2013
Source: TradeStation

Objectively speaking
As we develop the Volumizer indicator, we define the average price and volume as
40-day averages.
155
150
145

40-day average of price

140
135
130
125
120
115
110
700,000,000
600,000,000
500,000,000
400,000,000
300,000,000
200,000,000
100,000,000

40-day average of volume

2011

Apr

Jul

Oct

2012

Apr

Jul

Oct

2013
Source: TradeStation

this case, we create a formula to express

volume relative to price so both can
be viewed simultaneously. One way to
accomplish this is to look back and determine a range for both price and volume,
and then build a formula that normalizes average volume to fit into the average price scale. We look back over a fairly
DIGITAL EXCLUSIVE

significant amount of time (200 days) to

create the range values:
Price range = (Highest average price
of the past 200 days) (Lowest average
price of the past 200 days)
Volume range = (Highest average
futuresmag.com

43

Trading Techniques continued

volume of the past 200 days) (Lowest

average volume of the past 200 days)
We then build a formula that normalizes volume:
Relative average volume = ((Average
volume) (Lowest average volume of
past 200 days) / (Volume range * Price
range)) + Lowest average price of
last 200 days
Now that this relationship has been
defined, we can continue the process of
converting the concept into a custom indicator that can be applied to a price chart.
Chart it
Once the concept behind a trading indicator has been defined, traders must
decide how the indicator should appear.
Indicators can take on many different forms and its up to the trader to
determine which method is most visually effective for displaying the concept.
Indicators can appear on a price chart in
many different ways:
As a separate study below a price chart
(think Stochastic or CCI)
Lines overlaid on top of price (such as
moving averages or Bollinger bands)
Dots or arrows projected over price
bars
Differently colored price bars
Text, lines or other annotations added
to a price chart
The goal of an effective indicator is to
highlight the condition or conditions
defining the trading concept or calculation. A good trading indicator will provide the trader with a clear and unique
visual representation of trading activity
that may not have been evident from a
price chart alone. Traders should be careful, however, not to add too many indicators to a chart. This can become confusing or detract from the most important
part of a chart: The price.
The Volumizer indicator comprises
two components: The 40-day average
price and the 40-day relative average
volume. We overlay both on the same
price chart. Because we are looking for
differences between price and volume,
we highlight the area between the aver44

FUTURES May 2013

Volumizer indicator code

The below instructions are written for TradeStations EasyLanguage. However, the programming concepts apply to all proprietary languages.
//========================
// Volumizer Indicator
//========================
{======== Program Header ========}
inputs:
AvgLength(40),
LookBack(200);
variables:
PriceAvg(0),
VolumeAvg(0),
PriceHigh(0),
PriceLow(0),
VolumeHigh(0),
VolumeLow(0),
Volumizer(0);
{======== Calcualtion Block ========}
PriceAvg = average(c, AvgLength);
VolumeAvg = average(v, AvgLength);
PriceHigh = highest(PriceAvg, LookBack);
PriceLow = lowest(PriceAvg, LookBack);
VolumeHigh = highest(VolumeAvg, LookBack);
VolumeLow = lowest(VolumeAvg, LookBack);
Volumizer = (VolumeAvg - VolumeLow) / (VolumeHigh - VolumeLow) * (PriceHigh - PriceLow) + PriceLow;
{======== Plotting Instructions ========}
plot1(Volumizer, Volumizer);
plot2(PriceAvg, PriceAvg);
plot3(Volumizer, HighPlot);
plot4(PriceAvg, LowPlot);
if PriceAvg > Volumizer then begin

setplotcolor(3, blue);

setplotcolor(4, blue);
end
else begin

setplotcolor(3, red);

setplotcolor(4, red);
end;
Source: TradeStation

age price and relative average volume. To

accomplish this, we color the area blue
to reflect instances where average price
crosses above the relative average volume, and red when average price crosses
below relative average volume. This way,
DIGITAL EXCLUSIVE

it should be easy to recognize the ideal

conditions in an attempt to substantiate
the concepts of the indicator.
Writing the code
Most system trading platforms use their

own proprietary programming language,

and traders either can write the code for
the indicator themselves or work with a
qualified programmer. The code is simply
a list of instructions that must be written
in an exact format. Each horizontal line
of code, referred to as a statement, gives
the computer a different command; these
statements form the building blocks of
the program.
While the actual programming falls
outside the scope of this articleand,
in any case, will vary depending on what
system you employ generally it is helpful to use a structured approach to programming that breaks the code down
into three sections:
The declaration (or program header):
Assigns values to the variables of the
program, including user-definable
input variables
The calculation block: The math
behind the indicator
The plotting instructions: Tell the program which calculations to plot and
how they are to be displayed
Traders who decide to work with a
programmer can save (sometimes significant) time and money by providing the
programmer with exact specifications for
the project. Programmers generally frown
upon subjective or vague instructions, and
instead require objective rules to code an
indicator efficiently and accurately.
In addition to the indicators function,
it is important to specify how it should
look. Any specific variables for which
traders would like to be able to change
values, such as lookback period or price
type (open, high, low, close), should be
included in the project specs as well.
In the Volumizer example, the length
of the averages and the number of bars
used in the range calculation can be
adjusted by the user. This way, traders
can experiment with different settings
without the need to reprogram the entire
indicator.
We have written the Volumizer
using TradeStation EasyLanguage (see
Volumizer indicator code, left). The
concept, however, easily could be applied
to other charting platforms that allow
the programming of custom indicators.
Charting volume (right) shows the

Charting volume
When average price is above average volume, the area is shaded in blue. The red areas
show when average volume is above average price.
155
150
145
140
135
130
125
120
115
110
700,000,000
600,000,000
500,000,000
400,000,000
300,000,000
200,000,000
100,000,000

2011

Apr

Jul

Oct

2012

Apr

Jul

Oct

2013
Source: TradeStation

completed indicator:
The blue line is the average price
The red line (on the main chart) is relative average volume
The areas highlighted in blue indicate
that average price is above relative average volume
The areas highlighted in red show that
relative average volume is above average price
Get testy
The next step in the development process
is to test the indicator by monitoring it
in a live market. The purpose of testing
is three-fold:
To make sure the indicator does what
you expected it to do
To determine if the indicators appearance is what you intended
To establish if the concept is valid
Once an indicator has been developed,
it may not be a big stretch to incorporate
it as part of a trading strategy that can be
tested and eventually traded using some
level of automation, if desired. By utilizing the indicator in a strategy, a trader
quickly can determine if the trading concept has any merit.
As the flow chart indicates, if testing
reveals that the indicator does not perDIGITAL EXCLUSIVE

form as expected for any reason, it needs

more work. This might entail minor
revisions, such as tweaking one line of
code, or the trading concept may need
to be revised to develop a more useful
trading tool.
Once the development is complete and
the indicator has proved to be useful, it is
ready to be used in the markets. It is up
to each trader to decide how to apply an
indicator to the markets that he or she
trades. It is important not to confuse technical indicators with strategies. Indicators
provide a visual representation of some
type of market condition. Strategies, on
the other hand, are objective sets of rules
that specify the exact conditions for trade
entries and exits. While strategies can be
based on multiple trade filters and triggers, including indicators, it is the strategyand not the indicatorthat determines when a trade is made.
Custom indicators can be important
additions to any traders toolbox because
they allow traders to identify specific
market conditions rather than being
limited to a trading platforms standard
selection of indicators.
Jean Folger is the co-founder of, and system
researcher with, PowerZone Trading, LLC. Jean
can be reached at www.powerzonetrader.com.
futuresmag.com

45

Breakouts

Trading Techniques

Everything you know about

breakout trading is wrong
By To n i H a n s e n

Trading breakouts can be treacherous, but if you follow a few important rules, you can
be successful over the long term. The keys, though, may not be what you expect.

ew trading strategies are as divisive as the trading range breakoutan approach that probably
has as many detractors as followers. This
is illustrated by the results of searching trading breakouts in Google. The
first result provides a basic guide, while
the second emphasizes reasons traders
should not even try to use them.
Keys to trading breakouts
Understanding when breakouts fail
Secrets to successful channel trading

Yet, breakout trading is one of the first

trading strategies many are introduced
to in the field of technical analysis. What
we really want to know, though, is whos
correct? Are breakout strategies a valid,
profitable method for trading, or should
we keep looking elsewhere for the elusive
Holy Grail?
Breakouts 101
A trader focusing on breakouts looks
for a narrow trading channel or trading range in a security or futures where
volatility has diminished. The goal is to
establish a position as price breaks out
of this trading channel concurrent with
a spike in open interest, thereby taking
46

FUTURES May 2013

advantage of the increase in volatility and

catching a strong trend move.
The concept is sound at its core, given
an ideal context, but detractors do have
some valid points. These include the risk
of false breakouts; many price channel
breaks will correct back to the breakout
point, or beyond. These are more common than the ideal explosive moves,
which are rare.
Most traders who start out with breakouts quickly become aware of the cons of
this strategy. At the same time, however,
its easy to see many breakouts work with
textbook perfection, making it difficult
to just throw in the towel, especially if as
a new trader you have no idea what to
move on to next.
The truth is, the way many of us are
taught to trade breakouts is wrong.
Trading a breakout involves more than
simply recognizing a channeling market and placing a trade when the upper
channel is supposedly broken, with a
protective stop under the lower end of
the channel (or vice versa for a short
position). Flushed out (right) depicts
a common scenario. It shows a 15-minute channel breakdown taking place in
E-mini Dow futures. The channel breaks
lower on strong momentum only to turn
DIGITAL EXCLUSIVE

For more from Toni Hansen,

go to futuresmag.com/Hansen

around rapidly over the next 15 minutes

to break through the upper end of the
trading channelwhere traditional stops
would be placed. This flush in the Dow
subsided as quickly as it began. Futures
went on to have a strong break lower
throughout most of the morning.
Using traditional breakout strategies, the
earlier flush would have taken many traders out of a short position established at the
initial break lower. Not only did a profitable move take place without the would-be
short trader, but an initial, ultimately correct, position was stopped out at a significant loss. This is the textbook example of
why you shouldnt trade breakouts.
Simply dismissing the trade shown as
yet another breakout that didnt work,
however, does nothing to help us understand how to make money with this strategy. There were numerous signs that the
trigger shown in Flushed out was high
risk, even though the channel itself was
a strong breakdown candidate. Its just a
matter of knowing what youre seeking.
Signs of success
One of the first things to consider in a

trading channel breakout is the momentum, or pace, of the price moves within
the channel itself. A trading channel is
essentially a series of smaller trend moves
whereby the price of the security bounces
between support and resistance levels (the
lower and upper ends of the channel).
How the momentum of these moves shifts
within the channel is a good indication
not only of the direction of the breakout,
but also whether a breakout is sustainable.
When the momentum of upward
moves within a trading range is slower
than the downside moves, then the
probability of a break lower increases.
In the breakdown in Flushed out, the
situation was reversed. The upside moves
within the channel were stronger than
the downside moves prior to the first
breakdown attempt. This is indicated by
the steeper angle of the moves from A
and C in Momentum setup (right).
It was not until after the first breakdown and upside flush that momentum
shifted. The two-wave correction following the first breakdown attempt began
with the strong flush higher off the lows
from D to 1, but as E-mini Dow
futures went for the second high from
E to 2, this momentum changed. The
buying slowed compared to the selling,
and it took nearly twice as long for the
Dow to recoup losses off the high marked
as 1 than it did to return to the zone of
that high at 2. The breakdown coming
off that second high following the failed
breakdown earlier in the morning had a
better chance for success.
Another notable difference between this
second setup and the first breakout was
the entry trigger. In Momentum setup,
the smaller channel break from the slower
upswing within the channel provided the
entry trigger as opposed to a break in the
lower extreme of the entire channel.
Because the early breakdown in
Flushed out was followed by a twowave correction back into the channel
and because the second wave of that
correction was slower than the first, the
odds of a successful trade dramatically
improved; thus, the need for a wider confirmation of a channel break diminished.
The channel was now ripe for a breakdown, even though the prior low had not
yet been tested, let alone broken. In fact,

Flushed out
How often have you been here: The market initially breaks lower, retraces to your stop loss
level and then proceeds to charge confidently back in the direction of your original position?
14,480
14,471

false signal

14,460

14,440

14,420

14,400

14,380

entry trigger
14,360
10:00

15:00

20:00

3/21

5:00

10:00
Source: TradeStation

Momentum setup
Pre-breakout momentum is a powerful indication of whether the breakout will be
successful. Breaks in the direction opposite of previous strong moves tend to fail.
14,480
14,471
14,460

stop

14,440

entry
trigger

14,420

14,400

E
14,380

14,360
15:00

20:00

3/21

5:00

10:00
Source: TradeStation

waiting for that break to occur would

have increased the risk of failure because
much of the trades potential would have
been spent when the trigger occurred.
Another factor that bolstered the second
setup was the amount of time it took for
the trading channel to form prior to each
breakdown attempt. Corrections within a
DIGITAL EXCLUSIVE

security tend to last for comparable periods of time when the moves leading into
the channels are similar. So, when trying
to determine if a trade may be too early or
whether an ideal amount of time may have
passed, study previous corrective moves.
Timing is everything (page 26)
depicts a similar period of price congesfuturesmag.com

47

Trading Techniques continued

Timing is everything
Time, not just distance, is a critical part of any price formation. In the case of breakout setups, successful breaks tend to replicate
the durations of previously successful moves.

larger
move
starts

larger
move
starts

14,480
14,471
14,460
14,440
14,420
14,400
14,380

small break

14,360

small break

14,340
14,320

10:00

20:00 3/19

10:00

20:00 3/20

10:00

20:00 3/21

10:00

20,000
234
Source: TradeStation

tion on the same time frame two days

earlier than the breakdown weve been
studying (although the strategy was
slightly different because of a wider trading range). When the Dow congested on
the left side of Timing is everything at
A, it was faced with a premature breakdown attempt also.
In terms of time development, the
amount of time the Dow had corrected
off lows prior to the attempted breakdown was similar to the level where
it tried to break lower in B. This is
shown in the blue rectangle. It was not
until later that a larger decline began in
the A congestion. This indicated a risk
that the first breakdown attempt in B
could also be a false start. Once this second period of congestion lasted as long
as the prior one, however, the true breakdown began. For even greater clarity, go
back further in time to locate additional
channels for comparison.
Another example using this method

48

FUTURES May 2013

for entering in anticipation of a breakout

is shown in Go with the flow (right).
The Dow had fallen into a narrow trading range. Near the beginning of the
range, it did not show a strong bias for
the direction of a breakout based on the
five-minute time frame alone because the
momentum of swings off support and
resistance within the range was comparable in A and B.
As the channel progressed, however,
overall momentum shifted and a smaller channel formed in C that consisted
of another two-wave correction off the
highs of the larger channel. This time, the
momentum of the second wave lower was
similar to the first, so when the pullback
broke higher, it retested the entry zone.
Because the second pullback was not
stronger than average, however, it still
held and offered a much larger return
on risk than waiting for the upper end
of the entire channel to break.
The main goal of a trader, no matter

DIGITAL EXCLUSIVE

the strategies employed, is performance

consistency. An ideal strategy is one that
returns more than the risk, and does
so more than 50% of the time. Few raw
breakout strategies will achieve this.
However, by tweaking our setups to use
triggers within the range itself and by
taking momentum into account, stop
levels can be cut by one-third to half,
while the odds for success increase.
Additional tweaking is possible, and
can yield even better returns; however,
the number of trading opportunities
diminishes. Its the burden of every trader to find his or her own comfort level
when approaching risk because higher
accuracy does not translate always into
higher returns.
Toni Hansen is president and co-founder of
the Bastiat Group, Inc., DBA Trading From
Main Street. Learn more about Hansen and
the educational services she provides at
www.tonihansen.com.

Go with the flow

By carefully monitoring momentum and time setups, we can better assess the validity of different channel breakouts. Here, we
might have gotten in much earlier than we would have waiting for a confirmation of a break of the ultimate channel high.

14,471
14,460
A

14,440
1st entry
trigger
1

14,420

stop

14,400

14,380
4,500
7:00

8:00

9:00

10:00

11:00

12:00

13:00

14:00

15:00

3/24

18:00

1,500
121

Source: TradeStation

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DIGITAL EXCLUSIVE

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49

Book ReviewS

Trading Options
in Turbulent Markets:
Master Uncertainty through
Active Volatility Management
By Larry Shover
John Wiley & Sons, Inc., 2013
The first edition of Trading Options
in Turbulent Markets was published by
Bloomberg Press in 2010.
$46.29, 277 pages
R e v i e w by Pau l D. C r e t i e n

Larry Shover options trader, investment officer, portfolio manager and

television commentator opens his
book stating his first objective is the
management of risk while taking advantage of market volatility, including historical and implied volatility. His second purpose
is to explain everything
options: skew, Greeks
(delta, vega, theta, and
gamma), risk tolerance
and trading strategies
(covered call, naked and
married puts, collars,
straddles, vertical spreads,
calendar spreads, butterflies, and wingspreads).
The chapters that follow
fill out the descriptions
and strategic uses of each
of those topics, plus the
VIX volatility index.
Because trading derivatives is by and
large a risky business, it is interesting to
see how Shover applies the trading techniques in an effort to conquer uncertainty.
He states that we still face a stunning
amount of uncertainty in the markets
as in life and addressing this uncertainty as options traders is what this
book is all about. The books subtitle
includes another of the authors objectives: I sought to write this second edition uniquely combining options trading
and volatility in a universe that is beyond
control and sometimes terrifying.
Shovers book assumes that the reader has
a relatively advanced knowledge of options
trading and theoretical pricing models. At
the same time, each trading strategy and
theoretical subject such as skew, volatility
and probability is covered in detail so that
50

FUTURES May 2013

they immediately are useful to both new and

experienced options traders.
However, along with an experienced
and knowledgeable presentation, there
are several questionable points. For
example, early on Shover states that
probability can be determined by using
either the practical observance of the
frequency of past events or theoretical
forecasting models, while later we are
informed that probability does not
actually exist in practice and that probability is a magnificent yet dangerous
concept. Of course, these thoughts do
not impede the use of probabilities and
measurable risk in every trading strategy
and the description of a trading plan as
a high-probability strategy.
The level of options trading experience
and knowledge assumed
is indicated by several discussions in the book. In
the concepts of volatility
and theta, As volatility
increases, so does theta,
and In any option class
there will eventually be a
crossover effect wherein
theta becomes more of
an issue than vega. These
statements are followed
by the warning that It is
absolutely crucial to be
able to delineate the difference, in your position,
between vega and theta.
In many instances the book will make
the reader want to look at options charts
to see if the authors ideas are really true
and useful. Thus, it may indirectly result in
a much larger store of knowledge of trading techniques and variables such as Greeks
and volatility. For example, do out-of-themoney options have a propensity to pick
up more gamma as volatility increases?
Because gamma is the speed of change
in delta (slope), and option price curves
become less steep with increased implied
volatility, this would seem to be counterintuitive. Time to get busy with options charts
to check this out!
Assuming that the trading strategies
and pricing relationships are accurate
an easy assumption in view of Shovers
extensive experience the only error
in the book (calculating the S&P 500
DIGITAL EXCLUSIVE

30-day return by VIX) is calling 3.464

the standard deviation of 12, when it is
the square root of 12.
The book includes three parts: 1.
Understanding the relationship between
market turbulence and option volatility; 2.
Understanding option volatility and its relationship to option Greeks, personal decision
making and odds creation and 3. Ten proven
strategies to employ in uncertain times.
Part 3 is really a book in its own right,
containing five types of spread trades,
including vertical and calendar spreads,
backspreads and ratio spreads, butterflies,
condors and wingspreads. The initial chapter in Part 3 prepares the trader in terms
of sound trading decisions, approaches to
options trading and the mind of a successful trader. Then, before starting on
spread trades, Shover describes the covered
call, covering the naked put, the married
put and collar strategies. In several Part 3
chapters, the trades are shown in relation to
all of the Greeks, assisting a trader to visualize the important connections between
implied volatility and other pricing elements.
Paul Cretien is an investment analyst and
financial case writer.

Trading with Intermarket

Analysis
By John J. Murphy
John Wiley & Sons, Inc.
$85.00; 234 pages
BY LE S LIE N . M A S O N S O N

John Murphy is a pioneer in the area of

intermarket analysis, since his first book
on the subject was published in 1991. At
that time no one was paying attention to
the value of using that type of analysis
for trading or investing purposes. Today
intermarket analysis is more widespread
and useful in explaining the markets
machinations. Murphy emphasizes that
there have been a few changes in the intermarket relationships over the past decade,
and that traders need to be aware of the
new normal in their trading.
He is a well-respected and widely followed technical analyst with more than
four decades of stock market experience.