Feb 2011

Interview: Scott Andrews Mind the Gap
February 2011
Stop Trading from
Can You
Forecast
the Markets?
Theory versus Practice
Fools Rules
Reprogram Yourself
for Success
The Best Way to

Trade Trends
Just Wait for a
Pullback
Who Is Afraid of the
Forex Market?
The Biggest Market
the Biggest Chances?
TRADERS EDITORIAL
How Good Are Politicians at Trading?

Have you ever wondered how our politicians might fare in
the trading business all things being equal of course, i.e.
without the help of any possible insider information (after all,
there are those politicians alleged to be well connected
to the business world)? How many of our politicians past
and present have experienced the New Economy stocks
skyrocketing and still carry these skeletons in their closets?
I suspect that politicians would make a mess of trading.
And I do not think that there would be much of a difference
between the political parties in terms of performance.
After all, more than (nearly) anybody else, politicians are
overcondent. In other words: As a rule, these people suffer
from a rather severe case of overcondence bias. While this
02/2011 www.tradersonline-mag.com
is obviously highly advantageous in politics where you can

promise the moon without having to suffer the (at least the
nancial) consequences, things are totaly different in trading
where you immediately get the feedback you deserve. Of
course, a politician might say in the end that he meant
something this way or that way and that he somehow got
it right after all. By contrast, market prices are like faits
accomplis that render any speech useless.
The biggest problem politicians would certainly face would
be that they would have to strictly limit their losses (even
though it would not be their own money rather that of
the taxpayers). Just take a look at the rise in the level of
sovereign debt in many countries and judge for yourself how
On a different note: TRADERS comes

to you free of charge. This is possible
because of the support of our sponsors
and advertisers. So please take a good
look at their messages and help them
develop their business. Moreover, we are
looking forward to your feedback. This
is the only way to improve our magazine
constantly. Please write to feedback@
tradersonline-mag.com.
capable politicians are at limiting losses. Obviously, I would

love to be convinced otherwise. However, no such studies
are available yet, which means that an exciting eld trial may
be waiting to be conducted if any politicians can actually
be found willing to participate. Maybe such a project could
be funded by the treasury
Good Trading,
Lothar Albert
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TRADERS CONTENT
02/2011 February
COVERSTORY
39
STRATEGIES
Using Candle Volume Charts
Can You Forecast the Markets?

Marko Graenitz compares nancial
market theory and trading reality
to highlight essential diverging
aspects. He looks at wheter the
theories deliver what they promise
and tries to answer the question
of wheter theoretical knowledge
leads to an advantage in the
markets or not.
INSIGHTS
STRATEGIES
A Traditional Strategy for Active
Intraday Traders
Buying Oversold Markets
in an Uptrend
The Best Way to Trade Trends
Just Wait for a Pullback
Use Candle Volume Charts to
Improve Your Trading Part 2
Price and Volume
Meaningfully Combined
The Good, the Bad

and the Ugly
Portfolio Performance
COVERSTORY
Can You Forecast the Markets?
BASICS
Stop Trading from Fools Rules

Reprogram Yourself For Success
19
INSIGHTS
The Daily Traders Conference

Which Part Do You Play?
TOOLS
New Products
Bookmark
Software Review
51
PEOPLE
Scott Andrews
34
STRATEGIES
47
BASICS
A Forex Primer
Finding Areas of Supply

or Demand Using Gaps,
Rips of Wicks
G.R.O.W.
A Forex Primer
Who Is Afraid of the Forex Market?
PEOPLE
Scott Andrews
Scott has been a full-time trader
for almost seven years. Prior to
his trading career, he served in
the army, then sold laboratory
products and chemicals to
scientists and eventually founded
his own company SciQuest. Scott
is a very successful gap trader and
has developed his own gap zones,
that are quite similar to the old
Jackson Zones.
TRADERS INFO
Address
TRADERS media GmbH is a nancial markets publisher specialising in education and further education in the eld of
trading and stock markets. TRADERS media was founded in April 2004. It publishes the trading magazine TRADERS in
the German (print), English (digital), and Dutch (digital) languages every month. TRADERS magazine was founded in 2001
by market mavericks Lothar Albert and Allison Ellis. Lothar Albert is CEO of TRADERS media GmbH and chief editor of
TRADERS magazine. Further TRADERS editions will follow focusing on Asia (Singapore), India and Russia and coming
soon in the very near future, an edition for Latin America in Spanish. For four years in a row, 2004-2007, TRADERS has
been awarded the title of Worlds Best Magazine for Traders by Trade2Win, an international community of traders.
TRADERS is different and unique because we do not give any advice or recommendations on what to trade. This makes
our content very different from any other market magazines. We are not interested in giving people certain buy and sell
recommendations, but rather in teaching the basics of trading from the state of the beginning to the professional level.
Our magazine has established itself as a source for information and communication for elite traders in Germany, Europe
and around the world. Current information about technical, mathematical and psychological aspects of the markets
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Still today, the trader-elite are interested in professional and current trading knowledge and experience. For dedicated
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Editors
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Gore, Johann Gorol, Marko Graenitz, Theresa
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Sarina Wiederer
Articles
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The TRADERS magazine is a long-term media sponsor of the Automated Trading
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The information in TRADERS is intended for educational
purposes only. It is not meant to recommend, promote or
in any way imply the effectiveness of any trading system,
strategy or approach. Traders are advised to do their own
research and testing to determine the validity of a trading
idea. Trading and investing carry a high level of risk. Past
performance does not guarantee future results.
TRADERS COVERSTORY
Theory versus Practice
Can You Forecast

the Markets?
The purpose of financial markets is to coordinate supply and
demand for capital. Academics have been trying to explain scientific
market processes for an eternity. The various theories employ
models that presumably define the complex reality of the markets
using certain provable relationships. This article examines the
theoretical process and contemplates arguments used by
theorists to negate alternative methods such as technical
analysis. Furthermore, it looks at whether the theories
deliver what they promise. Financial market theory
and trading reality will be compared to highlight
essential diverging aspects. Finally, the
differening arguments will be summarised
in an attempt to answer the question of
whether theoretical knowledge leads to
an advantage in the markets.
Efcient Market Hypothesis

The basic assumption of most
nancial theories is the existence
of an efcient market. Since
market efciency cannot be
measured we must examine
the sub categories of market
efciency in order to better
understand the theory. These
are information efciency,
valuation efciency and operative
efciency.
Information Efciency
Experts have long been puzzled
over the stock markets ability
to process information rapidly.
There are three classications
of information efciency. Weakform efciency assumes that all
historical information (especially
price) is already considered in
the current price. This leads to
the conclusion that technical
analysis cannot work. Semistrong form efciency implies that
not only historical data but also
all publicly available information
(economic data, company news,
etc) is reected in the current
price. Consequently, this puts the
viability of fundamental analysis
into question. Strong-form
efciency assumes that insider
information is also priced in.
Extensive statistical appraisals
and theoretical models fail to
deliver answers to the question
of how information efcient stock
markets are in reality. What is
certain is that complex trading
systems, liquid markets and a

host of analysts contribute to
market efciency. In contrast,
emerging market exchanges
feature comparably low
information efciency. A series
of company scandals during
the years 2000 through 2002
showed that at least strongform efciency does not apply.
Thus, answering the question
of whether the stock market is
efcient and the extent of that
efciency is mainly speculation.
Valuation Efciency
If stock prices correspond to
basic fundamental data then the
respective market is considered
to be valuation efcient. The
easiest way to determine if a
stock is reasonably valued is
to look at the price-to-earnings
(PE) ratio. If it is too high or too
low when compared to other
similar companies then that is a
sign of a valuation-inefciency.
On the other hand, it could also
be that a company has a low PE
ratio because of certain risks
attached to the rm, for instance
the structure of its balance sheet.
High PE ratios in contrast are
justied if a companys growth
prospects are very good, for
example Google. Since individual
estimates are subjective, it is
very difcult to say on a practical
level if valuation is efcient or not.
Large evaluation errors occur
when markets are at extremes
TRADERS COVERSTORY
TRADERS
such as in the year 2000 (over

valuation) and 2003 or 2008
(under valuation).
Operative Efciency
Operative Efciency can be
understood as the level of
transaction costs, available
liquidity and the quality of order
execution. In the past, all of these
factors have clearly improved in
favour of investors. However, in
theory it is often assumed that
there are no transactions costs or
other fees in reality, of course,
this can never be the case.
Marko Graenitz
Marko studied Business
Administration with Minors in
Finance and Controlling. He is
a freelance editor and nancial
journalist. He is also planning his
Doctoral dissertation in the eld
of momentum trading. Momentum
is one of the few methods
scientically proven to deliver
above-average returns.
Contact:
momentum.trading@web.de
Random Walk
Opinion in this area diverges
strongly. Do stock prices follow
a certain pattern, or do charts
unfold on a completely random
basis? In theory it is assumed
that there are no patterns
trends are simply an incidental
series of connected price moves.
The reason, it is argued, is market
efciency: all information is
contained in the price at any one
point in time, price swings are
just random occurrences. Figure
1 shows the course of a random
walk.
In practice however, that
presumption cannot be
supported. A short glance at
a long-term chart makes clear
that there are indeed trends
labelling them random seems
absurd. Theorists support their
assumptions using so called
drifts. It is presumed that

random price variations take
place along a primary line of
movement. Here is an example:
A (normal) random walk can
be compared with a random
coin-toss experiment, where
zero is the starting point, one
point is added for heads and
one point subtracted for tails.
On a long-term basis, a chart of
this experiment would uctuate
around the zero line. To cause
an upward drift, a value such as
1.2 would be added for heads
and just one point subtracted for
tails. This would cause the long
term chart of the tosses to rise
gradually (Figure 2).
The Mu Sigma () Axiom of
Portfolio Selection
The Mu Sigma model of
nancial algebra demonstratively
illustrates the academic decision
making process. The following
paragraph however, due to space
constraints, only describes the
models central idea.
The axiom starts with the
mathematical parameters mu
() and sigma (). Mu is the
expected return of a stock, for
example, ten per cent, per year.
Sigma is the expected standard
deviation or simply put, the
root of the volatility based on a
period of one year. Thus sigma
represents an investments risk.
For example, standard deviation
could be 20 per cent. The basic
F1) Random Walk
This shows the result of a random coin-toss experiment. One point

is added for heads and one point is subtracted for tails. The resulting
graph illustrates a random walk. Financial market theory argues that
technical analysis is an attempt to recognise patterns where none
exist. The gure also shows a completely randomly created resistance
line (blue). The line cannot be justied because the underlying data
was randomly created.
Source: TRADERS graphic
F2) Random Walk with Drift
This begins with the same data as Figure 1, but this time 1.2 was added
for heads and only one point was subtracted for tails, thus creating an
articial drift. Here the similarity to real charts is quite clear.
TRADERS COVERSTORY
model requires no other input

parameters, only risk and return
are considered. These values can
then be entered into a system of
coordinates (see Figure 3, point
A). Point A represents stock A.
Point B is used as a reference
and represents a secure
investment, for example a savings
bond. The secure investment
returns one per cent, per year
and has a standard deviation of
zero, i.e. zero risk.
Portfolio Theory
Now an investor can decide
whether he wants the secure
investment, the risky stock, or a
combination of both. The straight
line drawn in Figure 3 represents

the possible combinations. Point A
shows a 100 per cent investment
in the stock, point B the same for
the secure investment. Point X
shows a combination of both, in
this case 50 per cent in the stock
and 50 per cent in the secure
investment. This particular mix
has a risk of ten per cent and a
potential return of 7.5 per cent.
This simple model can be
expanded at will. Let us look at
an investor who as thoroughly
analysed three stocks:
McDonalds, Goldman Sachs and
Apple. The analysis delivers the
following prognosis for the three
equities:
McDonalds:
return = 8%, risk = 6%
Goldman Sachs:
return = 10%, risk = 8.5%
F3) Simple-Form Portfolio
Apple:
return = 12%, risk = 10%
The three stocks and their
combinations are shown in Figure
4. The astonishing result is that
the combinations of the three do
not run along a straight line. If
you look at the Goldman Sachs
stock by itself for example; it
has an expected return of ten
per cent and carries a risk of 8.5
per cent. However if the stocks
All combination possibilities fall along a single line with one stock (A)
and one secure investment (B). The portfolios risk depends on the mix
of these two components.
F4) Portfolio with Several Stocks
By investing in different stocks, it is possible to attain a better riskreturn ratio. Certainly, Vodafone has the highest return, but it also
carries the highest risk..
TRADERS COVERSTORY
are combined correctly it leads

to a better results, namely 11.5
per cent return with the same
8.5 per cent risk. The reason
is risk distribution, also known
as diversication. Simply put,
an investment in several stocks
carries less risk because the
probability is lower that all stocks
will drop in price at the same
time. For example, an oil stock
and an auto industry stock could
well compliment one another
depending on whether the oil
price increases or decreases
one of the two stocks well
perform better than the other.
Thus, losses from one stock are
cushioned by the prots of the
other. The more varied the stocks
in a portfolio the less risk there
is. Nevertheless, this effect can
not be expanded at will, general
market risk remains. In practice,
the S&P 500 index can be said
to be strongly diversied, similar
to the Nikkei 225 index. Figure
5 illustrates the diversication
effect.
Optimal Decision
The most efcient combinations
of stocks are those that allow the
highest possible rate of return
under the equal risk conditions.
That would be represented by all
the combinations on the upper
edge of the dot cloud in Figure
4. The right combination for the
investor depends on his/her risk
tolerance. Thus, an investor with
a risk tolerance of six per cent

could attain a maximum return of
about eleven per cent, according
to the example in Figure 4.
The Main Problem
At this point, it seems that theory
is very advantageous. However,
until now we have also assumed
that estimates of risk and return
are correct, but that is exactly
the problem. Where are reliable
estimates actually available?
There are many choices but no
nal solutions. Indeed, there
never can be because peering
into the future has only a
forecasting character. In practice,
complex analysis is created
in order to estimate business
conditions and determine the fair
value of a stock. The difference
between the current price and
the fair value is then the expected
return. Nevertheless, analysts
are dependent on general
market trends. In bull markets
sudden high valuations are
justied, in bear markets they
are not. Ultimately, estimates
are very subjective. There
is of course the so-called
analysts consensus, which
represents a kind of average
expectation of all analyst
opinions. But how often do we
see strong price movements as
a result of quarterly numbers
that obviously did not meet
expectations? A healthy trust in
analysts opinion is necessary
to continue following forecasts

despite the evaluation errors.
Further Difculties
Theoretical models are based on
several unrealistic assumptions.
One example is that the
correlation of two stocks will
remain constant in the future. This
is necessary in order to obtain an
optimal mix of stocks. However if
a stock should suddenly begin to
behave differently, it renders the
calculated scenario sub-optimal.
Additionally, nancial theory is
based on the assumption that
all market participants behave
rationally. Fundamentally, this is
correct, but in certain situations
prices are strongly determined
by psychological factors, for
instance in the nal phases of a
bull or bear market. The modern
theory called behavioural nance
deals with this phenomenon.
Maybe new theories will emerge
from this discipline that better
describe nancial markets.
Exceptional Returns
Reality or Illusion?
Exceptional returns are returns
that are over and above the
average return of the market.
If for example you trade DAX
stocks, the DAX index becomes
the benchmark average to beat.
In order to attain exceptional
returns, you must attain better
performance than the DAX by
trading individual stocks within
F5) Diversication Effect
This shows how risk is dependent on the number of stocks in a

portfolio. Generally, it can be assumed that ten stocks are adequate
to attain acceptable risk. However, part of the risk the so called
systematic risk always remains as neccessary source for the risk
premia.
10
TRADERS COVERSTORY
the index. Assuming that market

efciency theory is true, then it
is not possible to earn higher
returns than the market on a longterm basis especially not with
the help of technical analysis. If
weak-form information efciency
is true i.e. that all historical data
is contained in the market price,
then backwards observance
by means of indicators and
oscillators offers no advantage.
The result of this view is that
technical analysis is discounted
as useless as tea-leave reading.
However, fundamentally oriented
funds are also not reconciled.
If the semi-strong information
efciency is true, then these
funds cannot produce exceptional
returns either. There are a number
of studies showing that the vast
majority of funds do not beat their
benchmark index (e.g. S&P 500
or EURO STOXX 50). The studies
are based on time periods of at
least ten years. This leads to an
unusual recommendation. It is
more protable on a long-term
basis to buy the index then it is
to purchase shares of a mutual
fund. Of course, fund companies
sweep this argument under
the rug, but studies prove the
validity of the claim. A possible
explanation for the comparatively
poor performance of funds is that
the market efciency is partially
created by the funds themselves
through their high volume trading
as well as an environment of
tough competition. Transaction

costs and management errors,
which cannot occur in the
benchmark index, also play a role
in fund underperformance.
Strategic Errors
But now, back to the original
question. Does theoretical
knowledge provide a market
advantage or is one better
served by technical analysis
even if theory sneers at it?
There are in fact, advantages
to using technical or chart
analysis. Traders can, for
example, effectively limit losses
by placing stops at strategically
important support and resistance
levels clearly an advantage
when trading the markets. The
biggest problem in following
recommendations stemming
from theoretical models is their
lack of exibility. For example if
certain price targets are forecast,
it is difcult to accept alternative
market behaviours. Therefore,
positions are held in the hope
that the forecast is ultimately
correct, after all it is a well-known
model. But that is exactly the
problem. The conviction that the
forecast is correct can be so
strong that losing positions are
held instead of liquidated a fatal
error, which cannot occur if chartbased stops are applied properly.
One of the highest orders of
trading success is the ability to
rapidly change market opinion.
However, that does not exist with

theoretical models, which tend
toward stubborn tunnel vision. An
example: an analysis concludes
that stock X is undervalued and it
is duly purchased. Unfortunately,
the price falls unexpectedly. The
investment model is of no help
here because the initial analysis
has not changed. In fact, now
the stock is considered to be
strongly undervalued. After a
while price targets are adjusted
according to market conditions,
which of course do not help
investors already in the stock. It
would be better if these types
of recommendations were
combined with money and risk
management parameters. Just as
in trading with technical analysis,
results improve noticeably.
The Timing Effect
The timing effect is often
ignored in theory, or it is
assumed that it has only a
minor inuence on attainable
returns. The assumption that a
stocks price always reects its
actual fundamental value is not
supportable in practice. Even
a regular uctuation around its
fair value is not realistic. The
price anomalies that occur in
reality cannot be explained
by classic, rationally oriented
theory. That is precisely the
interesting factor for short term
trading. Other more effective
possibilities have materialised
Illusion of Control
Illusion of control is the tendency for people to overestimate their
ability to control events, for instance to feel that they control
outcomes that they demonstrably have no inuence over. The
effect was named by psychologist Ellen Langer and has been
replicated in many different contexts. It is thought to inuence
gambling behaviour and belief in the paranormal. Along with
illusory superiority and optimism bias, the illusion of control is one
of the positive illusions.
The illusion arises because people lack direct introspective insight
into whether they are in control of events. Instead they judge their
degree of control by a process that is often unreliable. As a result,
people see themselves as responsible for events when there is
little or no causal connection.
Source: Wikipedia
11
TRADERS COVERSTORY
for applying the timing effect:

indicators and oscillators as well
as risk and money management
applications. Indicators and
oscillators are not taken seriously
in the slightest way by nancial
market theorists, because they
are considered invalid based
on their historical focus and
the existence of weak-form
information efciency. In contrast,
many well-known traders have
indeed demonstrated that
utilising these tools can lead to
very extraordinary results. What
is required is the consequent
use of risk management and
money management. Success is
rarely possible without this part
of the equation. Ultimately, it is

necessary for any investment
strategy to minimise risk by
limiting losses. One could even
say that limiting risk is the most
important point in trading. This
is true for intraday trading, as
well as for long term investing, by
means of a diversied portfolio.
Diversication in Trading?
The diversication effect itself
is absolutely plausible. As
explained above, risk is reduced
through investment in a number
of different stocks. Nevertheless,
diversication it is not always
the right choice. Short-term
traders are often better off
concentrating on a few or even

only one stock. The reasons
are a better overview and lower
transaction costs. Transaction
costs especially can have a heavy
impact on a portfolio in a shortterm environment. In addition,
you could say a trader purchases
reduced risk with reduced
opportunity. Indeed diversication
improves opportunity to risk,
however short-term trading
essentially depends on risk
acceptance and thus the planned
use of volatile securities. Thus,
risk is not reduced through
diversication but instead through
the effective use of stops.
Additionally, large portfolios
always contain a certain number

of lame ducks that a short-term
trader would never consider using.
The Essentials
Gaining an advantage is what
counts. Theoretical models offer
no advantage because they make
too many assumptions about the
market. In addition, large market
participants know about all the
main theoretical models. Overly
detailed forecasting methods
even represent a danger because
they create the illusion of control.
This makes it very difcult to
consistently limit losses, which is
the most important point of all.
In trading, the alternative
charting and technical methods

are more likely to produce
success when the goal is
extraordinary returns. However,
that also means concentrating
on your own trading plan as well
as risk and money management.
Contrary to popular belief, the
quality of the forecasting method
is not the deciding factor in
trading. Ultimately, it does not
matter which method of market
forecasting is used because
markets are not calculable, and
they never will be.
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17/01/2011
11:43:10
13
TRADERS NEWS
Probably One of the Smartest Hiring Decisions Ever Made

34-year-old former broker Steve Perkins hit the headlines, after he was banned from the UK securities industry for ve years
and ned for executing some $520,000 of unauthorised oil trades from home while allegedly under the inuence of alcohol.
The activity resulted in Perkins' former employer, PVM Oil Futures, taking $10 million in losses when they unwound the
trades. Reuters has now reported that, just two days after his ban was announced, Perkins was hired by Geneva-based
Starsupply Renewables, said to be the world's largest biofuel brokerage rm. Starsupply CEO Kevin McGeeney said in an
e-mail statement: We believe Steve Perkins is a good man, who did a stupid thing. Mr Perkins has been known to one of
the co-founders of Starsupply Renewables for over 15 years. The damage caused by Mr Perkins' actions over a year ago
was substantial and we empathise with those affected. However, we believe in rehabilitation. We want to give Mr Perkins the
opportunity to rebuild his career in a different direction.
Perkins' ban by the Financial Services Authority (FSA) holds no standing in Geneva, but Starsupply has conrmed that the
former broker will not engage in any market regulated activity for the course of his ban, instead getting involved in staff
training, initially writing training materials for graduates. Starsupplys decision to hire Perkins is to be applauded. The former
broker is said to have entered an alcohol rehabilitation program and is clearly trying to get himself together. Employing him
in a different role shows that the rm is respecting the FSA ban, even though it is not obliged to do so.
Source: http://news.hereisthecity.com
Proprietary Traders May Find Hedge Fund Life Harder
SGX Wants to Allow Overseas Membership
As banks spin off their proprietary trading groups into hedge

funds to comply with a new law, traders will nd themselves
in a tougher environment. Independent hedge funds face
higher funding costs and often have less capacity to nimbly
take advantage of opportunities in tough markets, traders
said. Without the infrastructure of their parent banks, senior
hedge fund managers may have to spend more time on
such matters as marketing and managing accounting staff
than their counterparts on proprietary trading desks.
Still, banks are hopeful. With the Dodd-Frank nancial
reform law putting limits on dealers' proprietary trading,
major banks are considering how to change that business.
Goldman Sachs Group Inc is planning to turn its proprietary
equity trading unit into a hedge fund that raises money
from outside investors, sources familiar with the rm said.
Singapore Exchange (SGX) proposes to

expand membership on the securities
market to foreign brokers based abroad.
These brokers, regarded as remote
trading members will observe their
home rules and deal only for foreign
investors. The proposal will expand the
pool of international participation. Foreign
investors can deal in the Singapore
markets with greater convenience and choice. This will in turn lead to increased
liquidity in the Singapore market. All trades will continue to be cleared via a
Singapore-based SGX clearing member. Regulatory standards for remote trading
members in the derivatives markets will be aligned with those of the securities
market, allowing them to observe their home rules.
Source: www.futuresmag.com
Morgan Stanley might also be close to spinning off its

FrontPoint Partners unit, according to news reports.
Many have made the transition from proprietary trading to
hedge fund management before. Eric Mindich, for example,
was a senior proprietary trader at Goldman Sachs before
starting up Eton Park Capital Management in 2004. But
professionals who have made the move said it can be
tough. Proprietary traders have a single boss the bank that
supplies them capital while hedge fund managers have
many bosses, namely their investors.
The best traders will likely be able to raise money in any
environment. But life in a hedge fund will be different
enough to be jarring for most proprietary traders,
experts said.
Source: www.reuters.com, by Dan Wilchins
14
TRADERS NEWS
Volume of Futures Contracts Traded Rises 45%

The number of futures contracts
traded on Chinese exchanges rose
45.22 per cent in 2010 compared with
2009, the China Futures Association
(CFA) said Sunday. The volume of
contracts traded on China's futures
markets reached 3.13 billion contracts
in 2010, the CFA said in an emailed
statement. Turnover, or the value of
the traded contracts, jumped 136.5
percent to 308.67 trillion Yuan (46.83
trillion US dollars).
Futures contracts in China are traded
on the Shanghai Futures Exchange,
the Dalian Commodity Exchange, the Zhengzhou Commodity Exchange and the
China Financial Futures Exchange. Stock index futures started trading on the
China Financial Futures Exchange on April 16, 2010.
Source: www.english.news.cn, by Deng Shasha
Hedge Fund Will Track Twitter to Predict Stock Moves

Derwent Capital Markets, a familyowned hedge fund, will offer investors
the chance to use Twitter Inc. posts to
gauge the mood of the stock market,
said co-owner Paul Hawtin. The
Derwent Absolute Return Fund Ltd.,
set to start trading in February with an
initial 25 million pounds ($39 million)
under management, will follow posts
on the social-networking website. A
trading model will highlight when the
frequency of words used on Twitter
such as calm rise above or below
average.
A paper by the University of
Manchester and Indiana University
published in October said the number
of emotional words on Twitter could
John Paulson Is about to Become a Billionaire for the Second Time over
Now he denitely cannot be called a one-hit wonder. Billionaire John
Paulson's gold fund and short on European nancials paid off big time this
year. According to a report in The Daily Mail, Paulson is set to take home
around $1.2 billion this year, only about half as much as he made during his
record-breaking year in 2008, around $3.5 billion, when Paulson and one
of his employees, Paolo Pellegrini, saw cracks in the subprime market and
predicted a crash with their epic short.
$1.2 billion is no $3.5 billion, but come on, this is just awesome. What
is more, this was a year when the hedge funder was close to having his
reputation torn to shreds and there were no generational swings like there
were in 2008.
Source: www.businessinsider.com
be used to predict daily moves in

the Dow Jones Industrial Average.
A change in emotions expressed
online would be followed between
two and six days later by a move
in the index, the researchers said,
and this information let them predict
its movements with 87.6 per cent
accuracy.
Sentiment and mood dramatically
change the impact of positive and
negative news stories, said Hawtin in
a telephone interview. If the market
is in a very positive and bullish mood,
it can shrug off bad news bad news
comes out and you expect the Dow to
fall, and it does not.
Source: www.bloomberg.com
VIX Methodology Coming to Individual Equities

The Chicago Board Options Exchange (CBOE) announced that for the rst
time it will apply its CBOE Volatility Index (VIX) methodology to options
on individual stocks. CBOE will calculate values for Apple (ticker symbol:
VXAPL), Amazon (ticker symbol: VXAZN), IBM (ticker symbol: VXIBM), Google
(ticker symbol: VXGOG), and Goldman Sachs (ticker symbol: VXGS). The
new benchmarks are designed to measure the expected volatility of
the respective individual equities. CBOE may expand the list of
individual equities on which volatility values would
be calculated in the future, depending on
demand. Values on the ve new volatility
benchmarks on individual equities will
be disseminated daily through CBOEs
website (www.cboe.com/EquityVIX) as
well as through all major data vendors.
Source: www.futuresmag.com
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Portfolio Performance
The Good, the Bad

and the Ugly
Following the last article on diversification (TRADERS 1/2011) using a portfolio
randomizer, the concept of hindsight bias in portfolio selection deserves further
investigation. This article is an illustration of the concept of how portfolio selection
(and possible bias) can materially impact the portfolio performance.
17
TRADERS INSIGHTS
51 Instruments, 40 Picks,
How Many Combinations?
The answer is a lot: there are
47,626,016,970 ways of picking
a portfolio of 40 instruments
from a total set of 51 (formula
is: 51! / [40! x 11!]). Running so
many simulations is not practical
so instead,we take a fraction
of the possible combinations
(5000 random iterations). We can
chart the performance of every
simulation as a scatter plot (with
Compounded Annual Growth
Rate (CAGR) on the x axis and
Maximum Drawdown (MaxDD) on
the y axis). The tests are performed
using the 20/50 Moving Average
cross-over system running from
1990. The average performance
gures for the systems are as
described in Table 1.
Jez Liberty
Jez Liberty is a System Trader
and Developer with a keen interest on researching Trend Following from a quantitative angle
He shares his research on the
Au.Tra.Sy blog (Automated Trading System http://www.automated-trading-system.com).
He has been living in London
for the last eight years, also
consulting as an IT professional
for software companies and the
banking industry.
Isolating Portfolios
The next step was to isolate the
worst and best cases (circled on
the scatter plot in Figure 1) and
identify the difference in portfolio
composition between the two.
Since this is a combination of 40
elements from a set of 51, there
can only be eleven differences at a
maximum between each portfolio.
Indeed, the worst and
best portfolios share 32 of
their 40 components but still
exhibit a wide difference in
their performance gures. For
reference, the good part of the
best portfolio (i.e. its instruments
that do not overlap with the other
portfolio) are, including the name

of the exchange:
Cattle-Feeder (CME)
CopperHG (COMEX)
Euro (CME)
Gas Oil (ICE IPE)
IBEX 35 Index (MEFF)
Natural Gas-Henry Hub
(NYMEX)
OMX Helsinki 25 (EUREX)
Palm Oil-Crude (MDEX)
On the other hand, the bad
part of the portfolio is:
Azuki Beans-Red (TGE)
Cocoa (CSCE)
DJ Euro STOXX 50 Index
(EUREX)
EURIBOR-3 Mth (EURONEXT
LIFFE)
Gold (COMEX)
MSCI Taiwan Index (SGX
SIMEX)
Silver (COMEX)
Soybeans (CBT)
To take the comparison to a
further extreme, the exact same
system was run over both bad and
good portfolios by themselves.
The difference in results is fairly
striking (see Figure 2 and Figure
3 and compare). Going from a
CAGR / MaxDD combination of
26.73 per cent / 34.9 per cent to
-3.20 per cent / -63.3 per cent
is fairly drastic. This is not a big
surprise, knowing that 20/20
hindsight was used in picking
both sets of instruments. But
bearing in mind that the results
T1) Average Performance Stats

Performance Stats
CAGR
Max DD
MAR
Sharpe Ratio
Trade Number
29.68%
43.60%
0.68
0.59
3629
Here you can see the results for our 20/50 Moving Average cross-over system running from 1990.
F1) Scatter Plot
We isolate the worst and best cases and identify the difference
between the two portfolios.
Source: www.tradingblox.com
18
TRADERS INSIGHTS
above come from the exact same

system and parameters, using the
same number of instruments, it
does illustrate the point even more
clearly how portfolio selection can
impact performance results.
Robustness Testing
If anything, I believe this illustrates
that testing over several portfolio
sets might be a good way to
identify robustness in system
results. If the system only shows
good results on specic portfolios,
it might simply be a lucky outlier.
On Diversication
Finally, a note with regards to
how to implement diversication:
this article only focuses on

diversication from a portfolio
point of view. However, I believe
that ideally one should diversify
with a large set of instruments
to trade,with different systems
covering different timeframes.
A problem is that diversication
on all these levels brings on an
increase in required starting
capital (one likely reason why
most Trend Following Wizards
have a minimum managed
account size in the millions). So
you might have to make a choice
in how to apply diversication. As
diversication is really benecial
thanks to the non-correlation
it brings, diversifying across
different systems could also be

a good idea, as systems can be
more or less engineered to be
un-correlated to each other (i.e.
a Trend Following system with
a Mean Reversion system). It is
also possible to trade a large
portfolio without taking all the
signals (by using lters or an
overall risk/size limiter). After all,
this is something that the Turtles
used to do (when they were at
full position size they had to skip
signals). Some ideas to think
about
F2) Equity Curve of the Good Portfolio
The equity curve of the good portfolio rises steadily.

F3) Equity Curve of the Bad Portfolio
Find
on
Facebook
The equity curve of the bad portfolio shows big uctuations with ups
and downs.
19
Reprogram Yourself for Success

One of the most important tenants of trading is to follow your plan and to engage in rule based executions. Rule
based trading is at the cornerstone of getting the results that you want and experiencing profitable returns. Rules are
also part of life. They are derived from cultural and societal norms about everything that is importantrelationships,
business, social settings, politics, science and the arts, just to name a few. Life rules, like trading rules, also encompass
what you believe and furthermore, most of your rules are out of your awareness. Now, if your behaviour is based upon
solid, effective rules then you are going to get more of the results that you want; but if your rules are weak and based
upon illogical or ineffective foundations, then your results will no doubt suffer. Therefore, it is very important to know
what rules you are following in your trading and in your life. If you are aware of them you can change them if necessary,
but if you are unaware of what is driving your behaviour then you will continue to falter.
Fools Rules in Action

Ted did the same thing that
he had always done when the
trade went against him. He was
playing the Dow E-mini (YM) to
the upside. His plan for the trade
was hastily put together and he
had a rule that when he saw a
rally, he would take the breakout, which he jumped at. What
is more is that he did not much
believe in hard stops, he felt the
price action would always come
back. The trade started off ne
but he did not realise he had
traded right into a supply zone
and shortly after entry the price
began to plummet. Oh snap!,
he thought, as he helplessly
watched it bleed in rivulets down
the page of his chart. Then it
happened, he said to himself,
I will just cost-average since
it has gone down and that way
when the price action comes
back, I will recoup my money
faster. Ted was deluding
himselfwhat he was doing
was euphemistically known as
doubling down (a tactic that is
derived from blackjack where the
player is able to double his bet
on a split of his cards). This tactic
might be good for gambling in a
blackjack card game; but it spells
disaster for a serious trader.
He was not cost averaging.
Cost averaging is described as
reducing the average cost per
share of a security, which will
become smaller and smaller as
you increase your share size

as the share cost falls. Dollarcost averaging lessens the risk
of investing a large amount in a
single investment at the wrong
time. For example, you decide
to purchase $100 worth of XYZ
each month for three months. In
January, XYZ is worth $33, so
you buy three shares. In February,
XYZ is worth $25, so you buy
four additional shares this time.
Finally, in March, XYZ is worth
$20, so you buy ve shares.
In total, you purchased twelve
shares for an average price of
approximately $25 each.
The point here is to emphasise
that Ted had several rules that he
was following well, except that
they were rules that were not in his
best interest. He had a rule about
taking break-outs of extended
rallies. He had a rule about not
putting in a hard stop. And, he
had a rule about doubling down
on losers. All of which consistently
lead to results he did not want.
Ted was following Fools
Rules and he was consistently
sabotaging his efforts.
Most of Your Rules
Are Unconscious
Humans live by the stories that
they have constructed from
early in life much like a script to
a play and that play is your life
and the scripts to that play are
your stories. These stories or
scripts can also be termed rules
20
TRADERS INSIGHTS
Dr M Woodruff Johnson
Dr M Woodruff Johnson has been
an active and successful trader of
Stock Options, Forex and Futures for about ten years. He teaches Mastering the Mental Game
courses for Online Trading Academy www.tradingacademy.com.
He is the former Executive Director
of the Kaiser Permanente, Watts
Counseling and Learning Center.
He can be reached at wjohnson@
tradingacademy.com
that form the foundation of your

behaviour. In fact, over time as
humans grow, they develop a set
of typical responses to reccurring
events. These typical responses
or patterns of behaviour could be
termed a list of rules that you live
by. For example, when someone
speaks it is customary that you
speak back. If you incur a debt,
you are expected to pay it back.
These lists of rules or cultural
guidelines are reected in every
decision in your life. These rules
or life stories are about money,
privilege, power, worthiness,
winning and the perceived need
to do or have it now.
For the most part, these stories
or rules never see the light of day
in your conscious awareness. You
make important choices based
upon these life rules and when
you get results that you do not
want, changing the outcomes
can be and often is very difcult.
In other words if your choices
go unchallenged then the
awareness of why you made the
choice remains out of conscious
touch. However, once the rule is
identied, it can be challenged
and modied if need be.
Also, as you challenge
each rule you uncover other
assumptions that were based
upon that rule being truth rather
than myth. The interesting thing
about mythology is that if you
believe it to be real then it is
your truth. Consider this: trader
Dan believes in taking advantage

of every opportunity in life this
rule/belief becomes truth in his
mind and generally may not be
a problem for him. However, in
the markets there is a distinct
disadvantage to overtrading. In
fact, this simple yet powerful
myth can cause your downfall in
trading even though it can serve
you in other parts of your life.
Fools Rules or trading myths
might be:
Get back to even by doubling
down on losers
On a price action pattern, jump
in early to make the most prot
Stops only take me out too
early, it will always come back,
so do not use stops
Big position size makes big
money
The Importance of Uncovering
and Reprogramming Fools Rules
by Documenting Your Trades
Because the market is unique, it
does not follow most accepted
cultural myths and usually your
life-rules only lead to accurate
identication of the order ow by
accident. So, for the most part,
the lter or mental model that
you have will frequently conclude
something inaccurate in the trade
unless you re-program the mental
model that it came from. That
is why intelligent and educated
people can succeed at any
other business and fail at trading
F1) E-mini S&P 500 5-Minute Chart
Here you can see a long breakout trade into a supply zone.
Source: www.tradestation.com
21
TRADERS INSIGHTS
because the usually effective

life-model that works in the real
world is not the same paradigm
that creates price action. So, to
re-program those unconscious
beliefs or life rules, you must
begin to uncover the thinking or
the mental models that you use.
You must identify where they
show up in daily trading.
Let us look again at the above
example of overtrading that could
stem from an unconscious rule/
belief about taking advantage of
every opportunity. By tracking
your trading behaviour; that is,
documenting entries, exits and
follow-through statistics you
will then gain more information
on your patterns. Once you

uncover the rule/belief you then
can examine it closer. By doing
so you might uncover a fear
associated with missing out on
a perceived potential prot and
below that may be the fear of
lacking intelligence and below
that a fear of not being good
enough. When you document
your trades by using a Thought
Journal (a journal that tracks
your thoughts and emotions
that drive behaviour) you will
discover thought patterns and
raise awareness of internal
mythology in order to dance
with the market. In this way you
are able to follow the lead of the
order ow. It takes diligence,

consistency, and time to rstly
become aware of and secondly
to change ineffective patterns a
Thought Journal helps through
questions like these:
What is my emotional
temperature?
What must I be telling myself or

believing to feel this way?
What is my analysis of this trade?
Why do I want to enter at this
point in the order ow?
What is my target and why did I
choose it?
Why do I trust my analysis?
Who told me it would work and
why do I believe it?
Who is showing up to trade
today?
What does money represent to

me?
From where do my beliefs
about money come?
If I experience a substantial
draw down what if anything
does it say about me?
Who am I in this trade?
And, as you delve deeper into

your rules/beliefs; some of these
questions are very important as well:
Conclusion
A Thought Journal can be hand
written or typed, on a notepad
Chart Junkie
I trade daily, and I always want to have complete control over
my charts. At Tradesignal Online, I can find the international price
information and professional tools that I need for charting.
And it's all done through my browser free of charge.
My charts, my analysis, Tradesignal Online!
or input into a log along with

daily inputs of trade results. Your
Thought Journal is an invaluable
tool in uncovering the Fools
Rules that are driving your trade
decisions and consequently
causing results that you do not
want. By uncovering your selfsabotaging rules/beliefs you can
then begin the reprogramming
process because you will have
access to the faulty data. So,
stop trading from fools rules and
start getting the results in your
trading that you want.
22
This Is How the Conference Typically Proceeds:
The Technical Analyst

He sees a clear entry signal which he reports to
the conference participants. He briey explains
his reasons for entry, entry level, stop order, and
exit as well as his risk and money management
methodology. A coherent proposal.
Next, the Sceptic Voices His Concern

Oh yes indeed, I am still very well aware of your last
clear entry signal. Your presentation was well done
and what was the upshot? Hardly had we entered
when the price veered off in the opposite direction
and next thing we knew we had made a loss. Really
brilliant that was...
Which Part Do You Play?
The Daily Traders

Conference
As traders, we always think we are sitting all alone in front of our computers
trading away without the joy of other's company. However, this is actually
not true. In reality, every trade causes us to have a small or perhaps even
major conference. It is no wonder then that in the end some trades are
never made. But read for yourself and ask yourself which "character" will
eventually prevail during your own conference.
Whereupon the Ponderer Weighs in

Well, surely it is absolutely normal for a trade to go
wrong. You know, the stock market is no one-way
street and you wont hear any bell when prices go
up or down. Thats quite simply our own risk.
If we do not want to carry that risk, we need not
bother with trading in the rst place.
The Wimp Supports the Sceptic

Should not we wait for a little while until we have
better and clearer signals to enter the market
without running too big a risk?
23
Mr Shame Pipes up
No, No, not losses again! Now we could live off
our losses better than off our prots. Besides:
No loss is prot enough.
Gerd Kruemmel
The Fundamentals-oriented One Weighs in

I am not so sure that we have reached the right
point to enter. Based on the latest gures as well
as the gures which are due today, there might...
Gerd Kruemmel has a masters

degree in engineering. He
has been actively involved in
the stock market for 15 years.
Initially, he traded stocks, then
warrants and most recently
CFDs, which he nds both
challenging and fascinating.
Contact: trader2912@web.de
Finally, the Constantly

Resigned One Gets to Speak
Oh, what is the point of doing any trading at this
stage today? The market has already moved
way too far in our direction. Surely things cannot
go on like this. We should call it a day. After all
tomorrow is another day, is it not?
That Was the Last Straw for the Impatient One

I am fed up to the back teeth with all this! Now
what are we supposed to wait for? Some magic
bullet perhaps? I will not sit idle all day long only
to not enter the market. I want to do some trading
now! Life as a whole is risky. Why should trading
be an exception? Lets get started!
The Reaction of the

Impatient One Is One of Irritation
If we wait again until the fundamentals are right,
the rally will be over! There will hardly be any price
movement by then. Besides, share prices often
are totally out of snyc with economic data. Positive
data will make them fall, negative data will make
them rise. So let us nally do some trading. The
market has moved so neatly in our direction.
24
TRADERS TOOLS
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(Futuresmag.com) The
international derivatives
VectorVest Mobile
exchange Eurex introduced

equity options with weekly
expiration dates. This is the rst
time that weekly options on
individual stocks are available on

Eurex. The Eurex Weekly Equity
Options are listed as separate
contracts and initially comprise
Track n Trade
derivatives based on shares

of Daimler, Deutsche Bank,
Deutsche Telekom and Nokia
(four per underlying stock).
Eurex offer Weekly Equity
Options for the rst,
second, fourth and fth
Friday of a calendar month,
complementing the standard
equity options series, which
expires on the third Friday of
every month. All other contract
specications correspond to
those of Eurexs existing equity
options.
Weekly options have been
available on the EURO STOXX
50 and DAX indices since
April 2006. Their success with
market participants is illustrated
by their trading volumes: In 2010
more than 2.6 million contracts
TS
EW C
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of which were requested by
clients.
The new version of eSignal
features a signicantly improved
intuitive, user-friendly interface
that allows users to focus entirely
on market analysis and trading.
It also offers a wide range of
customisation options, including
ease of access, themes, objectbased charting and more.
Key features of eSignal 11
include: multiple theme options,
tabbed pages, support in multiple
languages, full multi-threaded
support, integrated research
window, studies in a watch list,
trading integration, and a money
management planner. For a
complete list of eSignal features,
please visit www.esignal.com/
esignal
were traded.
Additional details
can be found at
www.eurexchange.com
www.trackntrade.
com, the online platform
for futures, Forex and
stocks trading software, has
recently unveiled some major
new changes including new
software releases and several
partnerships with prominent
industry experts.
The new software products
have the same capabilities as
their previous award-winning
programs but they now offer
robust real-time charting and
analytical live trading platforms
where users can place actual
trades directly on the charts by
dragging and dropping or by
clicking their mouse. This is just
some of what the new software
programs offer.
Track n Trades new releases
include Forex Autopilot, Futures
Autopilot, a new version of the
Forex LIVE trading platform and
a new version of Futures LIVE
trading platform. According
to the company, these new
products are designed to assist
futures, forex and stocks traders
in becoming successful at
trading in the nancial markets.
More information can be found at
www.trackntrade.com
BOOKREBVIEW
25
BOOKREVIEW
Day Trading Grain Futures

A Practical Guide to Trading for a Living
by David Bennett
Day Trading Grain Futures is a

practical book from experienced
trader David Bennett, which
provides you with everything you
need to be able to day trade grain
futures effectively.
Day traders like volatility and
the grains have more than enough
volatility to keep anyone happy.
With the price per bushel moving
anything from 20 to 60 cents in a
session and sometimes more
there is plenty of scope to prot,
especially when you consider
that each cent the price changes
translates to a $50 prot or loss.
This book shows you how to
trade these volatile markets with
good technique and a protable
day trading strategy.
The opening chapters begin
with a breakdown of why people
trade grain contracts as opposed
to the more popular stock index
contracts. Bennett argues that as
well as the opportunity for bigger

prots, grain futures are often
easier and more convenient to
trade. For example, they have a set
open at 9:30am (US Central Time)
and close at 1:15pm (US Central
Time), and the structure for Davids
contracts are all the same at a
point worth $50.
The author day trades for ve
reasons:
1. Instant gratication
2. Reduced risk
3. Steady prots
4. Less stress
5. What crisis?
Whilst it may seem from this
list that there are no drawbacks
to day trading, Bennett does
highlight the expenditure involved,
as the cost of a larger amount of
smaller moves can swallow up
your prot very quickly.
The book then examines

whether trading is gambling,
and Bennett argues that it is, as
almost everything you do with
your money is a gamble. However,
he goes on to explain that it pays
to gamble when the odds are
in your favour, and you can put
those odds in your favour by using
an effective trading strategy the
successful trader understands
that sustaining losses is just part
of the winning process. He also
describes the criteria with which
he judges himself at the end of
each trading month, including
whether he has won at least half
of his trades, ensured the average
win is bigger than the average
loss and also made sure that
he has found a trade in at least
80 per cent of available trading
sessions. Using these points,
Bennett continually improves his
trading performance.
Title: Day Trading Grain Futures

Subtitle: A Practical Guide to Trading for a
Living
Author: David Bennett
ISBN: 9781905641932
Price: 34.99
Publisher: Harriman House
About the author:

David Bennett is a grain futures trader
living on the Gold Coast in Australia.
His formal career spanned computing,
teaching and human resource
management, but his passion is trading.
David initially became interested in
nance and trading when he was
chairman of the trustees of a large
superannuation fund, working closely
with professional fund managers. He
believes that keeping the body t keeps
the mind sharp, and tries to spend
as much time as possible jogging,
swimming or hitting a ball on the squash
court. He has served as a Community
Magistrate in New Zealand.
26
TRADERS TOOLS
Bennett then explains exactly

how he goes about trading,
beginning with having the right
set-up such as stop losses, an
idea of how much to bet in terms
of capital that is, and also what
the margins are. As he goes on
to explain, as soon as you enter
a trade, your money is on the line
so you need to take the proper
precautions to make sure you do
not lose a lot more money than
you bargained for.
Bennett then takes a look at the
specic contracts that he trades
soybeans, wheat and corn and
explains these in greater depth,
from the contract codes to price.
He also explains his position as
a speculative trader; gambling

on whether a particular grains
futures contract price will rise
or fall in the course of a single
trading session.
Chapters eight and nine
examine charts, and in particular
candlestick charts, and how
these can map the price
movement of the grain futures
that you are interested in.
Chapters eleven and twelve
then take a look at managing
the trade, and begin to put into
practise the trading strategy
examined in the previous
chapters. Bennett goes through
slippage, when the price you get
is different to the price you had
hoped to get; initiating a trade,

and then managing the trade with
sell stops, or sell limits, or even a
One Cancels All order.
In Chapter 13, Bennett uses
screen shots from his trading
calculator to highlight exactly
how he goes about putting his
trades into practice. He goes
through the price, limit, capital,
margin and stop and prot
targets, explaining how he works
out each. He argues that this
one tool allows me to quickly
determine all the information
required to properly implement
my trading planand believe me,
trying to do these calculations
with pencil and paper when you
are in the middle of an adrenalinpumping session just does not

work, and the consequences can
be very expensive.
Chapter 15 is a case study
from Bennetts own trading of
soybeans to show exactly what
the process looks like. This
detailed section is effectively a
y on the wall view of his trades
in action. This chapter is followed
by an extended view of this trade
in order to highlight the longer
trading process.
The concluding chapters of the
book explore the importance of
practice and having the correct
set-up. After all, where you would
be if your internet connection
Trading System Artist

I trade by my own rules with my own system.
Tradesignal Online gives me over 500 ready-made trading systems and
a complete code editor. Then there's a professional charting tool with
back-testing and a large community with whom to exchange strategies.
My idea, my strategy, Tradesignal Online!
went down in the middle of a

trade, or your computer suddenly
crashed? Bennett also highlights
the importance of correctly
logging out of your positions
as it is distressing to log in the
following day to nd yourself in an
unplanned trade that has notched
up substantial losses.
Bennett nishes the book by
re-iterating that simplicity and
routine are the keys to successful
trading, and this concise and
practical book shows just how
this can be achieved.
mmmmmm
27
SOFTWAREREVIEW
TRADERS TOOLS
Effective Immediately, Developing Your Own Systems Is Made Even Easier
TradeStation 9
TradeStation is one of the leading suppliers of market software and its platform offers the user all the tools necessary for creating and testing trading
systems. The platform makes it possible to immediately trade provided that an appropriate brokerage account has been set up. In time for the
20-year anniversary in 2011, the TradeStation company has published a new version which, besides some cosmetic corrections and extensions,
offers a series of interesting novelties especially for developers. This includes the current version of EasyLanguage the programming language of
TradeStation , which is now object-oriented and has a class library of more than 100 classes allowing trading systems, studies and indicators to be
programmed to an efficient and contemporary standard. The first release of TradeStation has been made available to TRADERS for the test phase.
System Requirements
and Installation
According to the manufacturer,
the recommended computer
conguration should include a
dual or quad core processor
with at least 2.5 GHz and four
GB central memory. With multimonitor operations, the graphics
card should have a minimum
memory of 256 MB, the hard
disk should work with 7200
RPM and have a free capacity
of at least one GB. The 32 and
64-bit versions of all the current
Windows operating systems
are supported: Windows XP,
Windows Vista, and Windows
7. Internet Explorer, Version 7
and its subsequent versions
should be used since problems
were encountered during the
test phase while using other
browsers. What is absolutely
necessary is a fast Internet
connection.
There were no problems
whatsoever during the installation

of the new version. Existing
(older) TradeStation installations
were not over written and in
theory may continue to be
used should any problems be
encountered. While the platform
may be installed on several
computers, a simultaneous
registration is only possible
with an additional licence key.
Whenever the application is
started, care is taken to ensure
that the user has installed
the most up to date version;
additionally, missing patches
and updates are offered for
installation.
Prices and Fees
The current version does not
absolutely require a TradeStation
brokerage account to operate
the TradeStation platform.
However, in the absence of such
an account the monthly fees for
non-professional traders amount
to $249.95 and $299.95 for

professional traders.
Customers with a TradeStation
brokerage account may use
the platform for free when there
is sufcient monthly turnover
(for example 5000 shares) or
if their account exceeds one
million dollars whereas smallerscale customers pay $99.95
a month. The monthly fees
for the RadarScreen and the
OptionStation
Info amount to $59.95
each for subscribers, whereas
brokerage clients may use these
tools for free under certain
conditions. In case the user
wishes to make use of real-time
data, the general stock-market
fees will have to be added to the
costs for the platform.
Data Link and Supply
The TradeStation network a
server farm with hundreds of
redundant servers guarantees
the user a very fast and direct
access to the most important

world markets. The user can not
only make use of the markets
real-time data, but also has
access to a historical database
reaching far back, offering
a distinct advantage when
performing backtesting during
systems development. For
example, some of thedata that
can be used include are:
up to 18 years intraday data of
American shares;
up to six months tick, intraday,
and daily data of options;
27 years intraday data of
American futures;
six years intraday data of the
Forex market;
nine years intraday data of the
Eurex.
Since the markets data centres
sometimes supply data that
are not in sync with the current
trading activities, the data will
28
TRADERS TOOLS
rst be ltered before they are

made available for application.
This avoids types of pricing which
cause the user to receive invalid
trade signals. Any of the markets
price corrections are now passed
on directly to the data centre and
are immediately available to the
user for application.
Besides the major markets
data, fundamental data of
American companies may
also be used for analyses and
studies. Altogether, more than
180 fundamental data elds are
available for evaluation purposes.
The First Few Steps
As a rule, switching from
other market platforms or to
a new trading platform is very
complicated since the user
is frequently confronted with
a large number of functions
and functionalities. Novices in
particular may like the fact that
a quick-start tutorial has been
integrated into the new version.
Here the user will be given a
good introduction and provided
with a number of pre-congured
work spaces giving him a very
good and practice-oriented
introduction to the software.
Traders will nd additional
support in the integrated online
help, in diverse internet forums
supported by the TradeStation
company and in a plethora
of tutorials available on the
Internet. Those who still have
questions may turn directly to the

TradeStation support team by
either e-mail or telephone.
Charts and Indicators
The chart interface of
TradeStation is one of the bestdeveloped tools to visualise
data currently available in stockmarket software. Not only can
the data be shown in standard
time intervals such as ticks,
minutes or days but they can also
be freely indicated in nearly any
time frame (for example, two or
13 minutes, 72 hours etc). All the
while there are no restrictions as
to length of time intervals shown,
and choice of indicator, which the
user can choose between bar,
line, candlestick, dot on close,
percentage, and point&gure
charts.
The charts in TradeStation
are shown in real time and are
automatically updated. Users may
access more than 100 predened
indicators, studies (ShowMe,
PaintBar), and strategies that can
all be visualised in one chart, with
no special programming skills
necessary.
The ShowMe studies are
studies that are represented in a
chart and draw the users visual
attention to specic events (for
example gap down) or chart
patterns (for example head and
shoulders). Under certain market
conditions, the PaintBar studies
allow bars in the chart to be
depicted in different colours.

Up to 16 sub-charts can now
be displayed in a single chart
with several symbols referring
to different time frames capable
of being shown together in
one chart. The various tools
and prepared charts may be
saved as a workspace and later
reloaded.
Using the programming
language EasyLanguage, it is
possible for indicators of ones
own design or as PaintBar,
and ShowMe studies as well
as trading strategies can be
implemented.
The TradeStation
Development Environment
For more than a decade the user
has been able to make use of
the EasyLanguage technology
TradeStations programming
language to design his own
indicators and trading strategies.
For all practical purposes, there
have not been any noteworthy
extensions and improvements
during this period. However, the
current version has fundamentally
changed all that. EasyLanguage
is now object-oriented and
has a class library with more
than 100 classes, can react to
events, has local methods, and
in addition, an error-handling
routine has been integrated. In
this aspect EasyLanguage has
many characteristics of an objectoriented programming language
F1) Fundamental Data
Next to technical analysis, TradeStation can display a huge amount of

fundamental data and analyses them with the help of EasyLanguage.
F2) Update Manager
At start up, the TradeStation Update Manager checks for new patches
or updates and installs them if necessary. This ensures that the user is
always working with the most current version.
29
TRADERS TOOLS
and makes efcient and modern

programming possible.
Users with experience in
higher programming languages
such as, Csharp will very much
welcome the changes, whereas
unskilled programmers should
factor in a little more time to get
settled in. In the next few weeks
the TradeStation company will
publish a document titled The
EasyLanguage 9.0 Language
Reference, which is designed to
provide a detailed introduction of
the new features. Likewise, the
Mastering EasyLanguage for
Strategies course is currently
being revised.
For users who prefer to ignore
the object-oriented programming
of EasyLanguage, the good news
is that all previous functions may
continue to be used just as before.
Trading Systems
Before trading systems are
used in practice, they ought
to be checked as closely as
possible by way of backtests
or simulated trades. For that
purpose, TradeStation makes
available, among other things, a
test simulator and the Strategy
Performance Report two tools
which at least in theory provide
the necessary foundation for
successful trading.
The Strategy Performance Report
is an evaluation that makes available
to the user all the relevant indices
of a backtest of the analysed
securities. More than 50 indices

are prepared in the report, which
means that it helps to recognise
potential weak spots in a system
and to correct them if needed.
The Test Simulator allows
trading strategies to be tested in
real time. Instead of trading with
real money, the user also have
the opportunity to trade rst via
an virual money account. This
may possibly put the nishing
touches on the system or
determine that the system does
not work under real conditions.
Trading
The TradeStation platform makes
it possible for orders to be
placed directly via the order bar.
Users can trade options, stocks,
futures, and currencies. Possible
order types include Market,
Limit, Stop-Limit, and StopMarket. Simple buy, sell, sell
short, and buy-to-cover orders,
OCO (one-cancels-other), bracket
OCO and OSO orders (order
sends order) may also be placed.
All orders can be monitored in the
order manager. The TradeStation
platform makes it possible
for different accounts to be
administered, so that, for example,
futures may be traded one minute
and stocks the very next minute.
Additional Functions
and Trading Tools
Nearly all the tools are
integrated into the platform in
order to provide users with a

comprehensive overview of the
current market environment or
their own trading activities be
it an order manager, price lists,
windows to display market
depth, times&sales data or a
trading matrix. Besides extensive
fundamental information,
current news can obviously be
conveniently accessed directly
from the application. Using the
market scanner, markets can
be scanned according to userdened criteria.
This review just touches the
tip of the iceberg so for even
more detailed information, we
encourage interested readers to
the visit TradeStations website
(www.tradestation.com) for
further product information.
Conclusion
TradeStation was found to
be convincing during the test
phase. The program lent itself
to being used intuitively, and by
using the good online help and
the tutorials made available,
any remaining questions were
quickly answered. With the
EasyLanguage extension, the
development of indicators and
systems can proceed in the
future more efciently and with
better results.
F3) TradeStation Matrix
The TradeStation Matrix window is an innovative tool, which presents

the open orders in combination with the market depth.
F4) Development Environment
TradeStation 9 disposes of a object-oriented programming language,

which provides the user many functions in classes. The simple
EasyLanguage Editor, which is still known to many users, developed
to a modern programming environment.
30
Buying Oversold Markets in an Uptrend
A Traditional Strategy
for Active Intraday Traders
The traders and investors mantra, Buy Low and Sell High is one of the oldest and most traditional approaches to
investing. This traditional approach is known as quantitative analysis and is the process of determining the value of a stock
by evaluating the fundamental data including, revenues, earnings, and market share. When these conditions are fairly or
undervalued this is an investing opportunity for traditional investors. When the S&P 500 plummeted to lows near 700 in
March of 2009, stocks were on sale at bargain prices and value investors began investing. This same concept is applied
intraday but instead of using traditional fundamental analysis to determine if the market is on sale, active intraday traders
use quantitative technical analysis to identify oversold conditions in an uptrend.
Trend Trading
The common phrase, The trend is
our friend, is misleading because
there are many trends to analyse
and trade. It is possible to identify
and attempt to analyse thousands
of trends on short term timeframes
which would be exhausting! By
dening some parameters like
timeframe and trend, traders
determine which trend is our
friend. The stock market has long
term trends which are considered
the strongest most dominate price
moves called primary trends and
short term trends. To increase the
probabilities of success, trend
traders identify the long term trend
on a weekly, daily, or 60 minute
chart and apply the appropriate
strategy. These long-term trends
reect investor sentiment and
short-term technical traders use
this information as the underlying
premise for trend trading.
The Rules for Buying
Oversold in an Up Trend
Identify the Uptrend
The S&P 500 is up 13 per cent
year-to-date, an established
uptrend. The origin of an
uptrend can be determined
by identifying accumulation
patterns reecting investor
sentiment and prices start to
rise out of the accumulation
patterns. Figure 1 identies
accumulation patterns which
are identied as green circles.
These patterns reect price
31
TRADERS STRATEGIES
Tillie Allison
As an instructor for Online Trading Academy, Tillie began
teaching following the nancial
disruption of 2007. Her goal is to
educate students on the realities of the markets and to teach
students how to develop a skill
set to successfully trade the
markets. She is a member of The
Market Technicians Association,
The Certied Financial Planning
Board of Standards, has an
Associates Degree in the Applied
Science of Real Estate, and a
Bachelors Degree in Business
Administration.
changes and are given common

names by chart analysts. The
accumulation patterns in the
green circles are similar to
Inverse Head & Shoulders price
patterns. There are variations of
accumulation price patterns and
some of the common names
include double bottoms, cup &
handles, rectangles, ascending
triangles, and asymmetrical
triangles. Does this remind you
of geometry class? Not to worry,
the names are not as important
as investor sentiment and the
anticipation of a rising trend out
of the accumulation pattern. A
key factor of an accumulation
pattern is rising lows which are
identied in Figure 1 with a green
diagonal trend line. For traders,
this is like a broker holding up
a wanted sign (wanting to buy
stocks at low prices) or stacking
on the bid (buyers accumulating)
on Level II, a short term buy
signal. Since this is a weekly
chart of the S&P 500, it is
considered the primary trend.
Choose an Intraday Timeframe
Active intraday traders have
a playbook of strategies just
like professional athletes; and
professional traders also tend to
suffer from analysis paralysis just
like professional athletes. There
are many short term timeframes
for an active intraday trader to
analyse and take trade signals. To
avoid analysis paralysis, choose
one or two intraday timeframes

to identify oversold conditions.
The shorter the timeframe, the
more often the market will sell
off into oversold and give more
entry signals but the rallies
will be narrow range, reducing
prot potential. Consider the
5 minute timeframe for this
strategy although it is applicable
to various other timeframes.
Each timeframe has unique
characteristics including trading
range and frequency (the smaller
the timeframe, the more data is
displayed and the trading range is
narrower). The 5 minute timeframe
was used for analysis and trade
management for this particular
strategy.
Identify Oversold Conditions
Remember the traders mantra,
buy low and sell high. To dene
low, we need to establish a price
that is below the average price
of the market. If the market is
currently trading at 1225, any
price below 1225 is lower but
a substantially lower price will
reduce risk and maximise returns.
Automated studies are used to
identify substantially lower prices.
There are many automated
studies to chose from, and just
like professional athletes, avoid
analysis paralysis. Automated
studies include but are not limited
to the stochastic, commodity
channel index, moving average
convergence divergence
F1) S&P 500 E-mini Future (ES) Weekly Chart
The ES weekly chart showing the primary uptrend and two areas of
accumulation patterns in green.
32
TRADERS STRATEGIES
(MACD), all of which have similar

characteristics and are all used
to identify overbought (high)
prices and oversold (low) prices.
For this particular strategy, we
need to identify
oversold conditions.
Plan to buy when the
stochastic indicator
is oversold (near or
below 20). See Figure
2: green arrows at
the lower part of the
graph, showing the
oversold condition.
am CST) when the stochastic

is oversold. Place a stop loss
below the lowest low of the most
recent price and set a prot target
(see trades list in Table 1). Prot
have simulation trading to test the

strategy, back testing capabilities
providing data for historical returns
in simulation mode, and trading
automation for systematic traders.
Conclusion
Buy, Buy, Buy!!!
The S&P 500 is in an
uptrend continuing
to make higher highs
and higher lows on
the weekly chart,
Buying Oversold
in an Up Trending
Market, is applicable. As the
market trends higher into supply
zones (see the red rectangles in
Figure 1) above 1125 on the S&P
500 Futures, short-term traders
must trade with discipline and
reduce risk by buying low at
demand levels during oversold
conditions. Be on the lookout
for gap downs into demand and
red speed bars into demand
which are short term buying
opportunities while the primary
trend is still up. If these bearish
signals persist in the supply
zone identied on the weekly
chart, the long-term uptrend
is weakening and short-term
traders reduce expectations. If
the market continues to make
higher highs and higher lows
Buy! Buy! Buy!
Plan to buy when

the stochastic
indicator is oversold
Trade Management
Price has retraced back to
historical demand levels following
a news announcement that the
United States employment rate is
9.8 per cent (see the red speed
candle at 7:30 am CST in Figure
2). The market sold off into a level
of demand (short-term bearish
sentiment) before the cash market
opened at 8:30 am CST, creating
a buying opportunity at a demand
level (oversold) for short-term
traders. The advantage of working
with the 5 minute timeframe is
that the trader has 5 minutes to
determine the prot targets and
stop loss. A buy limit order is
placed at the average price when
the stochastic is oversold. The
recent trade example in Figure
2 of the S&P 500 E-mini Futures
(symbol ES) gives a valid entry
signal at 1215.25 (at 8:05 am
CST) and at 1217.25 (at 11:05
targets are determined by volatility

and recent supply zones (see
the red arrows in Figure 2) but a
standardised prot target can be
applied intraday which is usually
two to ve points for this strategy.
Some short-term intraday traders
scale into the positions, moving
the stop loss to lock in two points
of prot and hold the position until
the end of the trading session
(3:15 pm CST).
Risk Tolerance
The examples for this strategy
are traded with the S&P 500
E-mini Futures, a highly leveraged
market. The maximum risk for
each trade listed is $150 (3 points
x $50) and the minimum prot
is $200 (4 points x $50) trading
one contract. This strategy may
also be applied to non leveraged
markets including stocks so that
novice traders can minimise
risk. Advanced trading platforms
T1) Trades List

ES Trade 1 at 8:05 ES Trade 2 at 11:05
Stop Loss
1212.25
Buy Limit
1215.25
Prot Target 1219.25
1214.25
1217.25
1221.25
Here you can see the details of the trades discussed.
F2) ESZ10 Buying Oversold in an Uptrending Market
Two buy opportunities are shown here when the stochastic indicator
became oversold at a level of demand.
Become a Member of the Online

Trading Academy Community
Enjoy free education and market
commentary from Online Trading Academys
master instructors.
Plus get full access to our financial education
center packed with helpful information about
trading and investing.
To register go to www.tradingacademy.com/membershipoffer
TRADERS STRATEGIES
Just Wait for a Pullback

Pullbacks are the most effective way to enter an established trend. In this article, we will discuss
the basics of how to trade them and some of the nuances. However, before we do that we look
at why you should trade trends and why pullbacks are the best way to enter them.
34
35
TRADERS STRATEGIES
Universal Law
You have to capture a trend in
order to prot. You must sell a
market higher than you buy it or
you must cover lower than where
you sold it short. The amount
of prot is equal to amount of
trend you capture. Regardless of
your trading style, all traders are
bound to this universal law. They
must capture a trend. Therefore,
if the ultimate goal is to capture a
trend, why not trade trends all the
time?
Dave Landry
Dave Landry has been actively
trading the markets since the
early 90s. He is author of three
books on trading including the
newly released The Laymans
Guide to Trading Stocks. He has
made television appearances,
written for a variety of publications, spoken at international trading conferences, and has been
publishing daily commentary
since 1997. He is a member of the
American Association of Professional Technical Analysts.

Trading trends does not mean
that you blindly buy (or sell
short) a market simply because
it is trending. Strongly trending
markets are prone to correct.
And, you never know when what
appears to be a correction may
in fact be the end of the trend.
Therefore, it is much wiser to wait
for the correction to occur and
then look to enter if and only if
the original trend begins to reassert itself. In other words, wait
for a pullback.
Trading Pullbacks for Both
Short and Long-term Gains
Referring to Figure 1, the
precursors for trading pullbacks
consist of a stock (or other
security or market) in a strong
trend (a) that has begun to
correct (b). A trade (c) is triggered
when the trend begins to resume
and a protective stop is placed

(d) should the trend not continue.
As the trend persists, partial
prots (e) should be taken and
the stop on the remaining shares
should be trailed higher (f). In
a nutshell, this is the authors
entire methodology. True, each
one of these components could
be broken down in much more
detail. However, if you can
understand this Figure 1, then
you understand the basis of the
methodology. The rest is simply
details. Let us break it down.
Strong Trend
The market should be in a solid
trend. Trends can be gauged
with so called Trend Qualiers
such as moving averages, strong
closes, wide range bars, gaps/
laps in the direction of the trend
etc. However, the best way to
determine trend is to simply look
at the chart and draw an arrow in
the direction of price movement,
see Figure 1(a).
Width
The best stocks in strong trends
usually do not consolidate for
very long if they are to resume
their move. Therefore, as a
general rule stocks should be
ignored after they pull back for
more than eight days. At this
point, you have to wonder if
the previous trend is slowing or
coming to an end (Figure 2).
F1) Trading Pullbacks in a Nutshell
A textbook example of how the trade is set up.

Source: The Laymans Guide To Trading Stocks
F2) Width and Depth of a Pullback
The width and the depth of the correction are easy to measure.
36
TRADERS STRATEGIES
Depth
The depth (Figure 2) of
corrections varies with the
volatility of the stock and the
conditions of the market and its
representative sector. Volatile
stocks can pull back deeply and
still be in an uptrend. In longer term
orderly bull markets, pullbacks are
often shallow in nature. Conversely,
in bear markets the pullback from
the downtrend can be very sharp
and vicious.
The Entry
Waiting for an entry helps
ensure that the stock is moving
in the anticipated direction. If
an entry does not trigger, then
the trade should be avoided.
This technique of waiting for
conrmation can keep you out
of losing trades. The stock must
move in the intended direction
before taking a position. This
means that the stock is trading
above the prior high when we
buy. Again, this helps to ensure
that the market has turned back
in the direction of the longer-term
momentum, see Figure 1(c).
Keep in mind that what is
illustrated in Figure 1(c) is a
textbook type of entry
entering just above the prior days
high. Unless market conditions
are exceptionally good, you
are better off giving the stock
some wiggle room on the entry.
This will help to keep you out
of a losing trade, which in a
textbook situation, would have

been triggered based on noise
or possible short-term market
manipulation alone.
The amount of wiggle room
is arbitrary and depends on the
price and volatility of the stock. It
also depends on where the stock
closed the day prior. If a stock
closed strongly, near its high, then
you might want your entry further
away to help ensure you do not
get triggered on noise alone. If the
stock closed poorly, near its low,
the stock will have to travel a long
distance in order to get past the
prior days high. Therefore, less
wiggle room is needed.
Protective Stops
Once the entry triggers, a
protective stop should be placed
to protect trading capital if the
market does not cooperate. Keep
in mind that on every trade there
is the risk of loss. Therefore,
stops must be used! Stop losses
are a bit of a science and a bit
of an art. There are no precise
rules as to where they should
be placed. Tight stops help to
mitigate large losses, but they
often guarantee that you will
lose since they are likely to get
hit on noise. By thinking they are
keeping risk small, overly tight
stops cause many people to
lose money trading. Loose stops
help ensure that you stay in a
market long enough to capture a
resumption of the trend. However,
when the trend does not resume,

the losses are larger.
Unless you are in a raging bull
market, stocks will often have
ts and starts. A stop placed just
below the low of the pullback in
a textbook type fashion as can
be seen in Figure 3(a) will often
get hit. This can be frustrating as
you then watch the stock take off
as illustrated in Figure 3(b). Stops
must be placed based on the
volatility of the underlying asset.
If a stock bounces around ve
points a day, you cannot use a
one-two point stop. The stop must
be outside of the normal range.
Otherwise, you will be taken out on
noise (i.e. normal volatility) alone.
Taking Partial Prots
When predicting the weather, the
shorter the forecast, the better
your probabilities. If it is cloudy
and thundering outside, chances
are it is going to rain soon.
However, this does not mean it is
going to be raining this time next
week or next month. Similarly,
although market forecasts are
based on probabilities, predicting
short-term moves is much easier
than predicting the longer term.
Unfortunately, the real money is
in capturing longer-term trends.
Therefore, you should look to
capture a small, quick prot but
keep a portion of the position as
long as the market continues to
move in your favour. This allows you
to have your cake and eat it too.
F3) Protective Stops in an Ideal World vs. Reality
Stopshing is a danger for your trading. It is better place your stops

based on volatility rather than simply with a low or high.
F4) Taking Partial Prots
Taking partial prots mentally helps to let your prots run with the
remaining position.
37
TRADERS STRATEGIES
This rst prot objective is

an amount equal to the initial
risk. Once this is accomplished,
you then move your stop up to
breakeven on the remainder of
the position.
For example, suppose you are
risking $5 on a trade. When you
have at least a $5 prot, you exit
half of your shares
and then move your
stop to breakeven
the price at which you
entered the trade. The
worst you can then
do, barring overnight
gaps, is to breakeven
on the remaining shares. Should
the trend continue longer term,
this allows you to play with the
markets money. This is how you
are able to occasionally catch
home runs from a shorter-term
methodology.
This is illustrated in Figure 4.
Partial prots are taken at a level
(b) equal to the entry price plus the
initial risk (a). Once this occurs, the
stop is then moved to breakeven
(c). This gure was designed
to show how basic money
management works. In reality, you
want to trail your stop higher if the
stock moves in your favour even
before the initial prot target is hit,
refer back to Figure 1.
so you do not give up too much

of the trend when it reverses.
Obviously too much is
somewhat arbitrary and would
depend on the volatility of the
stock. Like the initial protective
stop, the looser you are willing
to trail, the better your chances
of capturing a bigger move.
a relatively short period of time

(a). The stock pulls back (b). An
entry is triggered (c) as the trend
begins to resume. A stop is
placed well below the low of the
pullback (d). After a bit of a slow
start, the stock begins to rally
and hits the initial prot target (e).
The stop is then trailed higher (f).
Notice that stop has
become more liberal
as the stock moves
more and more in our
favor. As this is being
written (December
2010) the position
remains open.
F5) Trailing Your Stops More Loosely
The ultimate goal is to

capture the trend
Trailing Stops
Should the market continue
to move in your favour, the
protective stop is trailed higher
However, you will lose more

open prots when there is nally
a reversal. The more the position
moves in your favour, the more
liberal you can be with your trailing
stops. Suppose your initial stop
is $5. Once you have $7 or $8 of
open prots, you can then loosen
your trailing stop to $6. As the stock
continues to move in your favour,
you might loosen the stop even
further. This increases the chances
of you being able to participate in
a longer-term move. The gradual
loosening of trailing stops in attempt
to ride out a longer-term winner is
illustrated in Figure 5.
A Pullback in Action
Uranium Resource (Figure 6),
provides a great example of a
pullback in action. Notice the
stock is in a strong uptrend,
gaining over 200 per cent over
Summary
The best way to trade trends
is with pullbacks. And,
successfully trading pullbacks
starts with identifying a stock in
a strong trend that has recently
corrected. You look to enter
only if the trend shows signs of
resuming. This can often help
you avoid a losing trade. Once a
position has been established,
a protective stop is used just
in case you are wrong. If the
position moves in your favour,
partial prots are taken and a
stop is trailed higher. This is
how you manage a short-term
trade and hopefully have it turn
into a longer-term winner.
Trailing your stops more loosely helps to catch the truly big moves.
F6) Uranium Resources Setup and Trade
Here you can see the whole process at Uranium Resources (URRE).
Source: www.tradesignalonline.com
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39
TRADERS STRATEGIES
Price and Volume Meaningfully Combined
Use Candle Volume Charts

to Improve Your Trading Part 2
In the first part of this series (TRADERS 12/2010)we explained what candle volume
charts are and how they can be used. Now we are going to present an evaluation
of the strongest patterns in the second and final part. In addition to that, we will be
showing when candle volume charts may be unusable.
The Strongest
Candle Volume Patterns
Dening candlestick patterns
only makes sense if a certain
statistical impact can be proven
otherwise the pattern is relatively
useless. Seasoned traders have
suspected this all along: Many
idealised candlestick patterns
to be found in textbooks that
have been used by analysts
for decades, do not work.
Under certain circumstances,
some even have the opposite
effect. This is no monocausal
phenomenon and is actually well
worth a separate investigation.
However, it may also be true that
candlestick patterns may only
be used within a clearly dened
context. In other words: They will
only remain signicant if those

very market conditions are ltered
out where a statistical impact is
measurable.
Most candlestick patterns
include one to three candles.
Testing all the available textbook
patterns in one market is wellnigh impossible since many
candlestick patterns occur so
rarely that no statistical relevance
can be found. If, for example, a
bullish pattern only occurs three
times in three years and then the
market rises three times, that
does not mean a thing. It may
all just be a coincidence. What
makes the study of candlestick
patterns more complicated
is the fact that a dened
pattern may consist of several
40
TRADERS STRATEGIES
Christian Lukas
Christian Lukas studied
economics and engineering and
has been devoting himself to the
markets since 1998. His central
topic is personal trading of
DAX-Futures and Bund-Futures.
Derivatives are only traded via
automatic trading systems.
Within these trading systems
volume is the most important
factor in producing signals.
Contact:
info@volumen-analyse.de
individual patterns. Three-candle

formations can be broken down
again into two-candle or onecandle patterns.
Every market has a rhythm
of its own. Toing and frowing
between markets and mixing
up the results will cause any
conclusions to be distorted.
Statistically speaking, it is
therefore more accurate to keep
focussed on just one market
when conducting a study. That
is why the results described
here only refer to the DAX Future
(FDAX) on a daily basis.
Any candle volume pattern
to be investigated must be
dened in terms of the software
being used. Since there are
no generally accepted rules
governing what the mathematical
description of a pattern looks
like, differences might emerge
between those studies and those
existing. Consequently, when
looking at the results, it must
be borne in mind that a second
test conducted by another
programmer of the candle volume
formations might produce a
different result.
The results of the tests have
shown that the most signicant
basic patterns can be reduced to
just nine (Figure 1).
All the patterns tested were
examined on a hold-out period of
one to ve days and ltered rst
with a low volume and then with a
high one.
This way, the impact of volume

on the respective candlestick
patterns should be made clear.
To further identify tendencies,
an EMA(10) was used as a shortterm trend indicator. The trading
system results are listed in Table
1 with the tables columns to be
interpreted as follows:
Holding Period: Recommended
holding period (in days).
Trades: Number of trades the
analysis is based upon.
Hit Rate: Percentage ratio of
winning to losing trades.
Payoff Ratio: Ratio of average
prots to average losses.
Prot Factor: Ratio of amount
of prot to amount of loss. A
protable trading system has a
prot factor above one.
F1) The Strongest Candle Patterns
Volume: Subdividing the analysis

into two scenarios, low or high
volume.
Brief Assessment
of the Most Important
Candle Volume Patterns
Engulng Pattern
A candlestick pattern that has
an engulng impact on the
previous candles. This pattern is
considered to be very strong in
technical analysis. However, the
tests show the exact opposite.
Candle formations are strongly inuenced by volume. The strongest

candle volumes are shown on this list. Each pattern has a statistical
impact on the next one to ve trading days. The Hammer, for example,
has an impact over a period of one to three days.
41
TRADERS STRATEGIES
The engulng pattern is useless if

applied the way it is shown in the
textbook. But a very good result
will be achieved if the engulng
pattern is used as an exhaustion
pattern in the direction of the
trend. So if the pattern is seen
to be against the trend and, for
example, gives a bearish signal,
a long entry should be chosen
in the direction of the trend. It is
worth noting here that chances
will be excellent if the engulng
candle indicates low volume. The
optimum hold-out period is three
days.
Harami
The Harami is regarded as a
rst warning signal for a reversal
of the short-term direction of
the trend. However, its impact
as a reversal pattern is more
on the weak side. It is better to
see the impact of the Harami as
a brief respite and regard the
pattern as an opportunity for
entry. Entry against the Harami
in the direction of the trend is
exactly the right measure here. A
bearish Harami against the trend
results in a good long signal. The
optimum hold-out period is three
days.
Piercing Line /
Dark Cloud Cover
The piercing impact of the bullish
Piercing Line is at its greatest
if volume is higher. The volume
of the second candle should
therefore be higher than average.

Additionally, the pattern should
only be applied with the trend.
The statistical impact of the
pattern is only one day.
Shooting Star
This is a strong pattern but only
if the second candle carries a
higher volume. In that case you
would have a risk-reward ratio
of 50 per cent after one holding
day. However, the average prot
is signicantly higher than the
average loss. That is why the
authors of the textbooks can be
forgiven for continuing to justify
the inclusion of the Shooting Star.
White Soldiers / Black Crows
Bullish soldiers and bearish
crows are solid three-candle
patterns. The impact of volume
is of minor importance since the
patterns are protable in both
cases. The signicant difference
results from the shift from hit rate
to payoff ratio. When volume is
low, the hit rate is high but the
payoff ratio low. When volume is
high, it is exactly the other way
round. The optimum holding
period is three days.
Marubozu
The Marubozu has its strongest
impact as a pattern against the
trend. That means that a lowvolume Black Marubozu should
be countered with a long entry
in the direction of the trend. The
optimum holding period is three

days. A Marubozu is without any
impact as a reversal pattern.
Gaps
Gaps between candles are
effective patterns showing a
discrete re-evaluation from
one trading day to the next. A
high-volume upward gap in the
direction of the trend suggests
high. It serves as an effective

reversal pattern und may actually
usher in a trend reversal. While
the risk/reward ratio is close to
the random principle, the average
prot after a trading day does
exceed losses by a factor of 1.79.
Hammer
The well-known Hammer is a
strong pattern when volume is
T1) Summary of the Most Effective Candle Volume Patterns

FDAX-daily from 01.01.2003 to 30.10.2009 long and short trades
Formation
Trend Identier = EMA(10)
Holding Period
Trades
Hit Rate
Payoff Ratio
Prot Factor
Volume
Engulng Pattern,
Bullish or Bearish
3
3
24
38
62.50
57.89
2.90
1.07
4.84
1.47
weak
strong
Harami, Bullish or Bearish
3
3
33
9
60.61
55.56
2.14
2.06
3.29
2,57
weak
strong
Piercing Line or Dark Cloud Cover
1
1
27
15
48.15
66.67
1.03
0.80
0.96
1.60
weak
strong
Bullish Shooting Star

or Bearish Shooting Star
1
1
12
16
41.67
50.00
1.45
2.32
1.04
2.32
weak
strong
Three White Soldiers

or Three Black Crows
3
3
12
13
66.67
53.85
0.81
1.92
1.63
2.24
weak
strong
White Marubozu
or Black Marubozu
3
3
45
69
62.22
44.93
1.44
1.27
2.38
1.04
weak
strong
Bullish Hammer
or Bearish Inverted Hammer
1
1
53
74
49.06
47.30
0.58
1.79
0.56
1.60
weak
strong
Gap up or Gap down
2
2
59
47
61.02
61.70
0.64
1.50
1.01
2.41
weak
strong
Doji or NearDoji in trend

(as reversal signal)
3
3
91
68
50.55
47.06
1.32
0.92
1.35
0.82
weak
strong
Hanging Man, Bearish

or Inverted Hanging Man, Bullish
1
1
32
36
52.38
61.11
1.59
1.54
1.09
2.43
weak
strong
The table is the result of 30 selected candle patterns using a bullish and a bearish test each. The evaluation produces two results for each candle pattern one with the
volume high and the other with the volume low. Volume ltering in patterns with more than one candle refers in each case to the last candle. Most candle patterns are not
listed in the table either because the frequency of the patterns was too low or because the results were near-random.
42
TRADERS STRATEGIES
continuing price rises. The

optimum impact of a gap lasts
approximately two days.
Doji / Near-Doji
A Doji is regarded as a
fundamental warning of a
reversal. High volume makes the
Doji more predictive of a potential
reversal. The optimum holding
period is three days.
Hanging Man /
Inverted Hanging Man
The Hanging Man is a strong
reversal pattern when volume
is higher. Otherwise you are in
random territory here. However,
the optimum impact of the
Hanging Man is limited to one
day.
In Figure 1 there is a list
summarising the shapes of the
strongest candlestick patterns.
Drawbacks of
Candle Volume Charts
Futures near expiry dates tend
to feature irrelevant volume
uctuations not based on supply
and demand. Volume peaks of
futures are a result of the transition
from one future contract to the
next. Penny stocks, too, are
subject to random uctuations in
volume. This is an area where a
great deal of caution should be
exercised when evaluating candle
volume charts.
In each case, the drawbacks of
candle volume charts result from
irrelevant volume. A cursory look

at the candle volume chart might
lead to such volume distortions
as described above causing a
misinterpretation. Also, major
distortions are possible as far as
the overall visual appearance of
the chart is concerned.
Since the width of the candles
is a function of relative volume,
the visual appearance of the
chart may be completely
distorted. If, for example, some
important corporate news
increases the turnover of a stock
twenty-fold, this one daily candle
may be wide enough for all the
other candles in the chart to
look narrow. This means that
candles of above-average width
are difcult to identify in the
overall picture. In such a case,
you either do without a candle
volume chart or you manipulate
the data basis using a reduced
volume. Figure 2 shows such an
unusable chart.
Conclusion
If a trader were allowed to choose
only one type of chart, then the
candle volume chart would be
his rst choice since it offers him
a maximum of variety in terms
of the information he is given.
Combining price and volume
highlights the psychological
phases of the market waves.
Extreme emotions like greed
and fear alter the candles in
such a special way that for all
practical purposes they cannot

be overlooked. Especially for
the discretionary trader, the
candle volume chart is a rstclass tool, and he will feel very
comfortable with it. For chart
novices, though, the chart is likely
to be overloaded on account of
it lending itself to many different
interpretations.
By contrast, the experienced
trader will probably love the
candle volume chart. What he
gets from the chart is just the
right amount of information
neither too much nor too little.
Those who wish to be
successful traders need to be
able to make decisions. Each
decision, meanwhile, is made
with a certain sense of insecurity
since nobody knows the future.
The enormous effort that goes
into collecting information can be
considerably reduced by using
a systematic approach, which
is highly recommended for the
candle volume chart as well. If
a trader achieves prots after a
careful analysis, then these are
based on his own skills, which
creates condence. And if he
makes losses despite spending a
great deal of time conducting an
analysis, he knows at least that
those losses are just part of the
system.
F2) Unusable Candle Volume Chart
The chart is meant to be a mild warning against the use of a candle

volume chart. If individual candles are overly wide, the chart will be
virtually illegible. The width of the candles is dependant upon the
volume calculated in the program window. Extreme outliers do not
allow a reasonable analysis to be carried out.
43
TRADERS BASICS
G.R.O.W
Finding Areas of Supply or

Demand Using Gaps, Rips or Wicks
As a new trader, the hardest struggles are often identifying where areas of supply and demand are on a chart, and differentiating them from the traditional concepts of support
and resistance. When I first started as a trader I struggled with the same concepts, and it took an acronym and lots of practice to get better at identifying these levels.
44
TRADERS INSIGHTS
Chuck Fulkerson
Chuck began his trading career
in 2006, primarily focusing on
the options arena and became
procient enough in trading
through the use of options that
he was able to leave his former
career to focus on mastering
the nancial markets. Chuck
graduated from California University of Pennsylvania with a
degree in computer science in
2000. Chuck has hosted trading radio programs and was
a speaker at the International
Money Show in 2009.
Why a Zone over

Support or Resistance?
Support and Resistance are lines
that have been turning points
in the past where price has
ceased to attract new buyers or
new sellers. Prices hit areas of
resistance because at that point
the price stopped attracting
new buyers and price had to
fall in order to nd new buyers.
Prices hit areas of support
because prices fall so far that
they cease to attract new sellers,
causing price to rise. These are
the correct concepts, but the
biggest problem with support and
resistance is that it focuses on a
single point allowing us to draw
a line. That point assumes that
everyone is choosing not to buy
or sell at that specic point, which
is unrealistic.
Imagine if you will, that you are
shopping for a mid level used car.
To briey describe the car: it is
three years old with about 40,000
miles, in good shape with no
major aws and some nice interior
features. What is the most you
will pay for that car? In doing this
example while teaching a class
I ask students to give me their
answers and the answers typically
range in price from $12,000 to
$25,000. That is a large range
indeed, but it shows that the
demand zone for the car I vaguely
described is in that territory. If I
tried to sell that car for $30,000
I would have to lower my price
to enter into the demand zone

and attract a buyer. Conversely
if I wanted to buy that car and I
was only willing to pay $8000, my
chances of nding the car I want
are pretty slim, because I am
below the level where there is any
supply to sell to me.
G.R.O.W Gaps, Rips or Wicks
In chart reading we can spot these
levels of supply and demand by
looking at prior price action and
extrapolating where price may turn
in the future. Of course, there is no
guarantee that this is where price
will turn, but as an experienced
trader this is where we manage
our risk through stop setting
around the zones and position
sizing. The tools I most use to
identify these levels are Gaps,
Rips or Wicks.
Gaps
A gap is the difference between
the closing price of one period
to the opening price of the next
period. Traditionally, the biggest
time to see gaps occur are over
times where a specic market
is not being traded, like stock
markets overnight and currency
markets over a weekend. The
origin of that gap is where price
was in some sort of balance,
meaning supply and demand were
equal. However, something (news,
earnings, products, etc.) made
the price go out of balance and
caused a huge amount of sellers
F1) RIMM Gaps
Daily chart of RIMM showing supply zones based on overnight gaps

where sellers exceeded buyers causing price to fall from that area of
imbalance.
F2) Fast Rip Supply Zone
Monthly chart of the SPX showing a fast move in price after a short
time of consolidation where the imbalance occurred because there
were more sellers than buyers.
45
TRADERS BASICS
to believe that their stock is worth

more than the current price is
willing to pay them. At the same
time, more buyers are willing to
buy than there are sellers willing
to sell. This lack of sellers forces
the market to raise price until there
are enough sellers willing to sell
their security. The area of price
where there were no sellers is
the gap. Once price has gapped,
the remaining gap becomes a
magnet for price. Often times after
gapping, price will run away from
the direction of the original gap,
leaving us with an open gap area.
Trading a run away gap in the
direction of the actual gap can be
difcult, because often times price
has moved faster than what would
make a safe entry. However, due
to that run in price typically the
remaining gap will act as a magnet
for price to trade back into. The
price will have to retrace at some
point. Look for tests of that zone,
because that is where we will get
our biggest moves in price and
our largest demand levels causing
a rally in price. Sometimes the gap
will not completely close, leaving
an opening that will remain a
magnet for price until that gap is
completely closed.
Rips
A Rip is a fast move in price in a
very short period of time. What
causes a rip, much like a gap,
can be a news announcement
creating an extreme imbalance
of supply and demand. Rips can

be traded very similarly to gaps,
the biggest difference being that
Rips occur while the market is
open. The easiest way to spot a
rip is to look for the most violent
move in price with the largest
candles in one direction. The area
of consolidation just before a
move in price will help us to nd
our zone of supply or demand.
That area is strongest if price was
not there for an extended period
of time, giving buyers or sellers
very little opportunity to get in on
the move. That is a concept that
is contrary to most support and
resistance traders belief, which is
the more often a price is tested
the stronger it becomes. In using
supply and demand levels, the
less time price was consolidating
before a move the stronger it
is. This is more in line with the
concept of a one day sale at a
department store. Buyers will wait
longer and buy more during a one
day sale, because that is the only
time prices are at those levels and
consumers love to get a bargain.
We do the same thing in trading,
and look for consolidation before
a fast rip to be relativity short in
duration. The shorter the duration
before a rip, the stronger the rip,
and the more probable that the
zone will hold on the rst retest.
Wicks
A wick, specically what I refer
to as an abandoned wick is
like a footprint of where price

has been. Wicks on candlesticks
are like footprints in the snow,
it is easy to tell where price has
been and where it was unable
to hold. A great example of an
abandoned wick is a hammer
candle where there is a reversal
in price. At one point during
the life of the candlestick in a
hammer, the candlestick was an
expanded range bearish candle.
In a traditional hammer candle
the wick will be at least two times
the length of the body, and the
longer the wick in relation to the
body, the stronger the following
move can be. The wick along with
the move that started the wick,
is typically some kind of a fast
rip on a smaller time frame. That
smaller time frame means that
it is not as strong as a rip on a
larger time frame, but can still act
as a zone of supply or demand
on the smaller time frames, and
help us to nd turning points.
Conclusion
If we look at trading stocks and
remember the concepts of supply
and demand like we do when
we shop at a one day sale then
trading is so much easier. Using
G.R.O.W. can help you to better
nd those opportunities whenever
they happen to show themselves.
F3) Abandoned Wick Demand Zone
A 60 minute chart of the ES (S&P E-mini Futures) showing an area

where the willing sellers ceased to sell and more buyers jumped in
pushing price back up.
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An end-to-end guide for developing spread betting
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47
Who Is Afraid of the Forex Market?
A Forex Primer
When I tell people that I trade in the Foreign Exchange market
(ForEx), I often get responses like, what is that? or I have
heard about that it is real risky. There are other responses,
but these have clearly been the top two since 2003, when I first
began trading Forex. So, let us get back to basics and discuss
what the Forex market is, the strange terminology and how to
potentially trade it. Many times people are afraid of what they
do not understand. Just think how people felt about thunder
and lightning many thousands of years ago: The gods must
be angry. While this is not an exhaustive description of how
the Forex market works and how to trade it, this will provide a
general foundation for you and hopefully answer some questions
you may have had about the currency market.
What Is the Forex Market?

The Forex market is an
international, over-the-counter
market in other words, without
a centralised exchange. The
market is made up of banks,
large corporations, central banks,
funds, brokers and individual
investors. The Forex spot (cash)
market allows all of us to actively
trade the currencies of various
countries. As a matter of fact,
retail traders (us) have only been
allowed to actively trade the
Forex since 1999; previously it
was only available to institutions.
The market opens Sunday
afternoon and remains open until
Friday afternoon. During that
period, the market is open 24
hours. It trades nearly $4 trillion
per day much more than any
stock market. As a result of this,
a hedge fund or broker could not
single-handedly move the Forex
market, which limits the amount
of manipulation.
The Terminology
What we are actually trading
are currency pairs. So, in the
stock market, we trade stocks
but in the Forex market we trade
currency pairs. We never own
the currencies, we simply control
them. Now, what do I mean by
pairs? Well, what we are actually
doing is in essence, pitting one

currency against another. For
example, if I think, based on my
analysis, that the U.S. dollar is
going up against the Canadian
dollar, I would go long the USD/
CAD (U.S. Dollar vs. Canadian
Dollar). In this example, I would
be long on the U.S. dollar, with
the belief the U.S. currency will
gain value against the Canadian
dollar. So, the U.S. dollar will
hopefully go up, in this example,
versus the Canadian dollar
becoming weaker. The currency
pairs can never do the same
thing they act like a see-saw:
as the one on the left goes up,
the one on the right goes down;
when the one on the left goes
down, the one on the right goes
up. In actuality, going back to
our example, you could simply
indicate if you are long or short
the currency on the left side. For
example, if you were long the
USD/CAD, you could simply say
that you were long the U.S. dollar.
The currency on the left side is in
the proverbial drivers seat.
There are many currency
pairs available for us to trade,
withe the exception that just
like with stocks, some are more
appropriate due to liquidity and
movement than others. Some
brokers offer 20-25 pairs to trade
48
TRADERS INSIGHTS
Eric Waddell
Eric Waddell has been trading
for over ten years and teaches
with Online Trading Academy.
He has developed various strategies in the equities and Forex
markets, which he has shared
with students in various parts of
the world. Eric truly considers it
an honor to instruct with Online
Trading Academy and encourages his students to stay in touch
with him.
some offer even more. What

you will probably discover is that
there are only a handful that you
will actually trade. Speaking of
brokers, they are pretty much a
dime a dozen. To be on the safe
side, I would advise sticking with
a U.S.-based Forex broker or else
one from a country which has
ample regulations in place (i.e.
U.K).
The way we make money
in the Forex market is by the
accumulation of PIPs as
opposed to accumulating pennies
and dollars in the stock market.
PIP stands for percentage in
point. Prices are quoted to the
fourth decimal point in the Forex
market. For example, on the
nancial news, you might see
the GBP/USD (British Pound
vs. U.S. Dollar) quoted as 1.50,
meaning that it would take $1.50
to make one British Pound, but
in the Forex market, we take it
a step further, our quote would
be something like 1.5025. There
are 100 PIPs in a .01 move. So,
if the GBP/USD moved .01, to
most observers that would not
seem like anything signicant,
but to those of us who trade
Forex, a .01 move (100 PIPs) can
be quite signicant especially
if we can capture the bulk of it.
Generally, a 1 PIP move is worth
about $1.00 or $10.00 it can be
more or less, depending on which
currency pair you are trading, the
type of account you have and the
number of lots you are trading.

Lots? What is that? Another
strange Forex word.
A lot is the standard unit size
of the transaction. So, again, to
differentiate from the equities
markets: in the stock market we
trade shares, but in the Forex
market we trade lots. Really, it is
just a different word to describe
essentially the same thing.
Now, I mentioned a PIPs value
can be more or less, depending
on which type of account you
have. Generally, a Forex broker
will offer either a mini account
or a standard account. A mini
account enables the trader
to control $10,000 worth of
currency with one lot, whereas
a standard account enables
the trader to control $100,000
worth of currency with one lot.
As you can imagine, depending
on which account you choose to
trade will determine the minimum
equity required to open the
account. Some brokers offering
a mini account will only require
as little as $500 to $1000, while
standards accounts may require
$2000 to $5000 to get startedit
all depends on the broker.
The brokers make their
money on the spread (difference
between the bid and ask price).
Some brokers may also charge
a commissionagain, it just
all depends on the broker.
The spreads are usually pretty
reasonable during active times
F1) GBP/USD
The GBP/USD made a 110 PIP move in about two hours

F2) EUR/USD
The EUR/USD moved 134 PIPs in about 1/2 hour.

49
TRADERS BASICS
of the day or night on some

currency pairs maybe just a PIP
or twodepends on the broker.
Presumably, the brokers who
charge a commission should
have very competitive spreads
(i.e. tighter). The best way to nd
a good broker is word of mouth
or simply do your own research
there is a wealth of information on
brokers via the internet.
Now, one of the challenges to
trading the stock market is the
vast number of stocks from which
to choose. In the Forex market,
that problem is solved with only
a relative few currency pairs to
choose. The major currency
pairs are: GBP/USD, EUR/USD
(Euro versus U.S. Dollar), USD/
CAD, USD/JPY (U.S. Dollar
versus Japanese Yen), AUD/USD
(Australian Dollar versus U.S.
Dollar), NZD/USD (New Zealand
Dollar versus U.S. Dollar) and
USD/CHF (U.S. Dollar versus
Swiss Francs). Notice anything in
common with these? That is right,
they all have the U.S. dollar in
them. Now, I would also add the
EUR/JPY (Euro versus Japanese
Yen) and GBP/JPY (British Pound
versus Japanese Yen) to the mix.
I actually trade the EUR/JPY more
than any pair at the moment due
to its combination of nice moves
and relatively lower spread. Now,
remember how we trade these
things: if I am analysing the EUR/
USD and I believe, based on my
analysis, that this currency pair
is going to move up, then I would

simply execute a long trade; if I
felt it was moving down, I would
execute a short. Since we are
never taking ownership of a
currency pair, there is no need to
ensure the pair is on an easy to
borrow list for shorting.
One of the things which is so
appealing to many Forex traders
is the leverage. Now, as I am sure
you realise, leverage is a doubleedged sword. It is great when it
is going in your favour not so
great when it is going against
you. There have been changes
in the Forex to the leverage
component which brokers are
allowed to offer. It used to be that
some brokers offered anywhere
from 100:1 to 400:1 leverage. As
of October, 2010, this amount has
been reduced to a maximum of
50:1 for U.S.-based brokers. Even at
50:1, the amount of money required
to control $10,000 or $100,000
of currency is still small in the big
scheme of things. To be long or
short one lot still only requires a
minimal amount of money.
Can You Use
Charts/Indicators Just
Like with the Stock Market?
Technical analysis is essentially
the study of human behaviour. If
you subscribe to that denition,
then practically anything can
be charted. As a matter of fact,
the indicators I use to trade the
equities markets are the same
ones I use to trade the Forex

market. I am a big believer
in pivot points and moving
averages, for example. Let us
take pivot points. Just as equities
have a tendency to honour the
pivots, the same is true in the
Forex market. Take a look at this
diagram of the GBP/USD (Figure
3) and notice how this currency
pair will stall at the various pivots
and even reverse. If you use slow
stochastics or MACD to assist
in the evaluation of your equities
trade, the same indicators can
be used for the Forex market:
no difference. After all, what
goes into the formula for most
indicators? That is right, some
variation of price.
Are Certain Times Better to
Trade than Others?
Most of us know that if you are
an active trader (daytrader),
trading during the middle part
of the trading day in the equities
market can be detrimental to your
account equity. Why? Because
during the mid-day doldrums,
volume begins to diminish and
breaks of support and resistance
will often fail. The same holds
true of certain currency pairs
during certain times of the day
and night. You can expect to see
some action on the currency
pairs which have the U.S. dollar
in them during the early part
of the day generally (as our
nancial markets bond and
F3) GBP/USD 8-Minute Chart
Notice how the GBP/USD is honouring the pivot points just as stocks
do in the equity markets.
F4) EUR/JPY
The moves go both ways, of course. Here is the EUR/JPY it moved

down nearly 150 PIPs in just over two hours.
r t tic
h ke
w e fir t to
.lo st th
nd 200 e L
on de unc
in leg htim
ve ate e
st s ( Su
or wo mm
sh rth it
ow 2
. 5!
TRADERS INSIGHTS
stock markets begin to open).

Economic Data may also affect
the Forex market considerably
especially if the announcement
was signicantly different to
what the public was expecting.
As a result, you might not want
to open a position right before a
major news announcement. There
are many sites on the internet
which will provide a detailed list
of economic data being released
and the exact times. However,
sometimes a central bank can
make a move at a particular
time which was completely
unexpected and cause a dramatic
move in the Forex market. As with
any type of investing, you must
always think in terms of mitigating
your downside with a stop order
and consider what might happen
if a news report is released and
it blows right through your stop?
This does not happen very often
but it could happen just like in
the stock market. How much can
I afford to lose on this position if
the worst happens is a question
you must always ask yourself.
One of the things many people
like about the currency market
(myself included) is the 24 hour
aspect of it. What that means is,
let us say you live on the East
Coast of the U.S. and have some
time available in the evening
(around 8 or 9 pm) to trade. Well,
with the Asian stock markets
opening, the currency pairs which
have the Japanese Yen in them
FR
fo
EUR/JPY, GBP/JPY, USD/JPY

may start to get active. If you are
an early riser, as the European
stock markets begin to open, the
GBP/USD, EUR/USD may begin
to get active. So, in essence, the
Forex market works around your
schedule. If you are looking to get
involved in the Forex market but
feel as though you do not have
the time that is clearly a poor
excuse.
What types of moves can you
expect from the currency pairs?
Well, these will, of course, change
over time. As of this writing, the
GBP/USD and EUR/USD are
seeing moves in excess of 150
PIPs per 24 hour time period.
When you consider the amount
of capital required to participate
in this market and the moves
which can potentially take place,
the percentage gains can be
quite impressive. Conversely, if
you do not follow strict money
management guidelines, the
moves against you can be painful
if you are over-leveraging yourself
and not placing stops. Take a
look at some of these charts on
the EUR/USD, GBP/USD and
EUR/JPY. Notice the somewhat
dramatic moves in a relatively
short period of time.
This is how Forex gets its
reputation for being a scary
market to trade. But, in actuality,
if you are implementing sound
money management and have
an understanding of what the
Forex market is and how to trade

it it becomes less and less
menacingjust like anything
else. Hopefully you have seen
that the tools you are using to
trade the equities markets can
translate into trading the Forex
market. There are risks, so please
do not misinterpret this as being
an easy market to trade. As far
as I am concerned, there is no
such thing to trade any market
requires educating yourself and
constant practice. However, for
those of you who have been
frightened or intimidated to trade
Forex, maybe now you will take
that next step to see if this is
something for you.
Conclusion
Now, as stated at the outset, this
is merely an introduction to the
Forex market and an attempt to
begin to dispel the fear many
people have in attempting to
trade it. Nothing can replace
your own study of and practice
trading in this market. Most Forex
brokers offer a demo account
which allows you to trade without
risking any of your own capital
that is a great way to get started.
Stay tuned for future articles as
I delve deeper into the Forex
market and we take a look at
some specic strategies.
friday, 25th february

london olympia
EE
Become an expert
forex trader
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traders around the world are making

consistent profits trading the currency markets.
Using a combination
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technical
analysis,
knowledge of current
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In the forex market,
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Attend the London Investor Show FOREX to find out

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51
Scott Andrews
Mind the Gap
Scott has been a full-time trader for almost seven years. Prior to his trading career he did time in the army and afterwards sold
laboratory products and chemicals to scientists, then started his own company. While taking his company SciQuest public
in 1999 he got he got his first real taste of the stock market. This experience piqued his interest and led him to start trading.
After having problems in the beginning, Scott managed to develop his own personal approach and he has been successful
with it ever since. We talked to Scott about his life, his trading approach and how he managed to overcome the obstacles he
found to be on his way to becoming a successful trader.
Scott, please tell us a little bit

about yourself.
Scott Andrews: I grew up in rural
Virginia and went to college at the
United States Military Academy,
more commonly known as West
Point. After graduating in 1987,
I served as an Aviation ofcer
and helicopter pilot. Serving in
Operation Desert Storm was
enough for me to realise that I
loved the Army and ying, but not
enough to make it a career. So,
I left in pursuit of a more familyfriendly lifestyle.
My rst job was selling
laboratory products and
chemicals to scientists. It did
not take long to realise that they
were not interested in hearing
my war stories; they just
wanted to nd and buy what they
needed as quickly and efciently
as possible. So, in 1995, I
co-founded a company called

SciQuest.com and launched one
of the Internets rst business-tobusiness web applications. In a
nutshell, we created an Amazon.
com shopping experience with
about two million laboratory
products and chemicals for
scientists that integrated with
an organisations procurement
systems. In fact, the Max-Planck
Institute was one of our early
customers.
How did you get in touch with
the markets?
Scott Andrews: Being one of
the rst web-based solutions
for businesses, I had the honour
and good fortune of taking
the company public on the
NASDAQ exchange in 1999. It
was during these crazy times
while interacting with analysts
and institutional fund managers

that I gained a unique, front row
seat of how the markets work.
However, it was the extraordinary
moves in our stock price, in both
directions, that sealed my interest
in technical, short-term investing.
After stepping down as CEO in
2001, I started studying and by
2004 I knew that trading was
something I wanted to do for the
rest of my life.
Were you successful right from
the beginning?
Scott Andrews: In the beginning,
I used a couple of different
mentors and tried a variety of
different techniques ranging from
swing trading with options to day
trading stocks. Generally, I was
mostly successful at generating
commission fees for my brokers,
while making little in actual prots.
52
TRADERS PEOPLE
Ironically, I had surprisingly

good success in terms of win rate
and even made a prot trading
my rst year. But then I increased
my trading size and soon my
average size winner was dwarfed
by my average size loss. Every
time I had a winner, I found an
excuse to take prots prior to the
target I had originally planned.
And worse, I would often
rationalise that my stops were too
tight and that if I gave them just
a little bit more room the trade
would probably turn into a winner.
Well, you can guess how that
turned out.
What did your mentors do to
try to make you aware of these
mistakes?
Scott Andrews: They suggested
a variety of helpful techniques;
one was to turn off the colors of
my Japanese candlesticks so that
I would not be inuenced by the
red and green bars. This helped
a little. Another suggested that
I simply use a line on close to
plot the closing prices only. That
actually helped quite a bit, but not
enough. There was just too much
subjectivity in interpreting the
various indicators on each time
frame.
One mentor in particular was a
great trader and was convinced
that he could teach simple
rules for his students to follow.
But the problem was that the
rules were not detailed enough
to consistently apply. In fact, I

am not sure if he even realised
it, but it appeared to me that,
subconsciously, he was using
his decades of experience to
interpret the charts. And without
comparable experience, I never
knew if the reason a trade failed
was due to me or not.
As a consequence you
changed mentors?
Scott Andrews: Yes, after
spending tens of thousands of
dollars. Not only did I totally
quit following the mentor, I also
cancelled my subscriptions to his
recommended charting and news
services. Not that what he was
teaching or using was wrong or
would not work I just knew that
it was not working for me.
So what made you nally
change this behaviour?
Scott Andrews: Nothing! My
epiphany came when I realised
that trying to change me was
not the solution. My behaviour
was simply a byproduct of my
personality and lack of overall
trading experience. I simply
did not have enough trading
experience to interpret the
inevitable and common conicts
that occurred between the
various indicators and timeframes. Further, without having
a realistic expectation of how
often the setups should work, I
was not able to fully commit to
each trade. Plus, I found holding

trades for days or weeks at a time
was driving me crazy and that
I was better suited for shorter
time-frames.
So, I literally threw everything
out the window and went
looking for a new methodology
that would leverage my
strengths and compensate for
my weaknesses. I knew there
were hundreds, if not thousands,
of ways to make money in the
markets, I just needed to nd the
right one for me.
Did you start with a small or
large account?
Scott Andrews: That is a relative
question of course, but I would
say I started with an account that
was signicantly larger than my
trading skills justied. After some
initial success, I began struggling
and scaled back quickly. I then
slowly increased my position size
as my condence and results
improved.
What were your money
management rules then and
what were they after you
scaled back?
Scott Andrews: As I mentioned,
I started off with a trading
account that was signicantly
larger than my skills justied.
As such, I viewed losses as my
tuition for learning to trade, so
my money management rules
were very loosely dened. Plus,
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my initial success seduced me

into rationalising with thoughts
like this drawdown will end soon
and I will get back on track next
month. This terrible approach
resulted in me giving back all of
my rst years prots in just ten
weeks into my second year.
Which methodologies did you
use at this time?
Scott Andrews: I was using a
basic multi-indicator methodology
with multiple time frames (i.e.
monthly, weekly, daily, and
hourly charts). Trade entries were
signaled when the indicators
simultaneously emerged from
over-bought or over-sold
readings. I was very disciplined
with entering my trades, but the
exit was somewhat subjective
and my emotions seemed to
always cause me to exit either
prematurely or too late.
In hindsight, I believe that my
fundamental challenge was not
that the methodology did not
work, it just was not a good t for
me. I never knew if any given loss
was due to my poor interpretation
of the charts or was simply one
of the ones that did not work.
This was incredibly frustrating
since I could never gure out
if the problem was me, or the
methodology was experiencing
a normal draw-down. This
ultimately led me to abandon
the entire approach and focus
on nding setups that I could
more easily back-test to establish

realistic expectations for targets
and stops.
Was there also a time where
you thought trading is not
for you at all? If so, how did
you overcome these negative
thoughts?
Scott Andrews: I committed
to trading as a profession in a
manner a bit differently than
perhaps most. After
stepping down as
CEO of my prior
company in 2001, I
started looking at a
variety of different
entrepreneurial
ventures for my
next career. In fact,
over the course of
a six month period
I conducted a very
extensive personal analysis
comparing my nancial goals,
skills and resources with the
needs and opportunities of a
variety of different business
opportunities.
After failing to nd a match
that motivated me, it struck me
to consider trading for a living as
business venture. The thoughts
of no employees, no travel,
maximum time with my family,
minimal investment, and unlimited
nancial potential were attractive
to say the least. But I also knew
that my genuine, life-long interest
in the markets combined with a
mathematically and risk oriented

personality would likely serve as
a great foundation for this career
change.
When this light bulb went off
in my head, I committed 110 per
cent to becoming successful
as a full time trader. The only
concern I ever really had was
how long would it take me to
achieve consistent prots and
how long my wife would continue
what I knew factually worked, and

did not work, regarding trading
the markets.
On the list of my personal
strengths were discipline,
work ethic, and mathematical
orientation. My weaknesses
included impatience and lack of
trading experience. Regarding
the markets, I knew that opening
gaps in most equities had a high
probability of lling the same day
that they occurred.
So, it was obvious
to me that I should
focus on learning
how to trade the
opening gap.
That very night I
opened up an Excel
spreadsheet and
downloaded all the
historical data for
the daily Open, High,
Low and Close (OHLC) for the
Dow Jones 30 Index from Yahoo
Finance. And the rest is history as
they say.
I simply focus
on where the gap
opens relative to the
prior days OHLC
to support me and my new
passion. Thankfully, she was
very patient.
How did you arrive at the
methodology you are using
now?
Scott Andrews: Extreme
frustration and loss of condence
after I gave back my rst years
prots in just a ten week period.
I literally cancelled and turned
off every single thing (charting
service, newsletters, etc.) that I
had been using. I then conducted
a personal inventory of what I
did well and did not do well, and
How would you describe your

methodology?
Scott Andrews: My rst analytical
break through was in realising
that the probability of a gap lling
the same day was dramatically
inuenced by where it opened
relative to the prior days direction
(i.e. up or down) and OHLC.
This prompted me to develop a
specic set of rules for trading
gaps based upon where they
opened relative to ten different

zones.
Since then, I have evolved
dramatically and now use a
TradeStation application that
I created and named after my
great-grandfather Otis. Using
Otis I have developed gap signals
for each zone by incorporating
a wide range of factors
including market trend, volatility,
seasonality (i.e. day of week/
month) and so on.
That sounds like the old
Jackson Zones. Is it a
comparable approach?
Scott Andrews: My gap zones
are comparable in some regards,
though I had never heard of
Jackson Zones until March
Chaikin (creator of Chaikin
Moneyow indicator and Chaikin
Oscillator) read my book and
called me last year. He too saw
the parallels.
One of the main differences
in my work and Jacksons (from
what I knowof his approach) is
that he used pivots to dene his
zones whereas I use the actual
OHLC prices of the prior day. In
addition, he considered the zone
in which the prior days action
closed and the one in which it
opened. I simply focus on where
the gap opens relative to the
prior days OHLC and as result
my sample sizes for analysis are
larger. Regardless, they are quite
similar in many regards.
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55
TRADERS PEOPLE
Can you please tell us a little

bit about your zones?
Scott Andrews: These are the
heart of my gap strategy. I use
these to segment and organise
the various gaps into groups
that may exhibit similar trading
patterns (Figure 1). I have tested
many types of support and
resistance including pivots,
Fibonaccis, and moving averages
and found that the prior days
OHLC and price direction from
open to close (up or down), work
well for my grouping purposes.
By using the four levels (OHLC)
and prior day direction (up or
down), I have created a total of
ten different zones.
Gap zones work well for
analysing gap setups because
they inherently incorporate nearby
support and resistance, short
term trend, gap size and trader
psychology.
Do you use your methodology
solely for stocks?
Scott Andrews: I focus my
personal trading primarily on
the four US futures indices
(i.e. Russell 2000 minis, E-mini
S&P 500, mini Dow, and E-mini
NASDAQ-100). Some folks
use my gap zone approach for
other indices like the DAX and
FTSE and individual stocks too.
I have tested a variety of other
instruments including many of the
major commodities, but have not
personally tested currencies or
bonds. The construct of the zone

approach seems to work well
for identifying protable trading
opportunities for most markets.
So how does your trading
day begin? In fact you cannot
start your analysis before the
opening, right?
Scott Andrews: One of the key
components of my approach is to
enter at the precise open of the
regular trading session (i.e. 9:30
am ET). To do this my system
generates a signal ve minutes
prior based upon where (i.e.
which zone) prices are trading at
that time.
Since my original research
started with Excel, I have always
used it to mirror my signals.
After the regular trading session
has closed (i.e. 4:15 pm ET), I
simply enter the OHLC prices for
the day for each market into my
spreadsheet. This generates a
table well in advance of the next
days open that shows me the
exact price ranges in which an
opening gap could occur that
would meet my win rate and prot
expectancy criteria based upon
the history of similar setups.
Did you nd trading candidates
that work especially well with
your approach? Do these
candidates have something in
common?
Scott Andrews: The indices
work great since gaps are often
the byproduct of a single piece

of news that will affect all the
components of the indexes
differently. After the opening bell,
the buying pressure that created
the overnight price movement
normally wanes and prices
retrace back towards the prior
days closing price, lling the gap
in the process. Stocks that are
highly correlated with the indices
work quite well too.
Altogether there are ten
different possibilities. Which
of the ten actually give you a
trading signal?
Scott Andrews: I have signals
in nine of the ten zones. Some
zones even have both fade
and go with signals depending
on a variety of factors. The only
zone that I avoid is the U-L or as
I like to call it, the BLUD zone
(Below Low of Up Day). This zone
has the lowest historical win rate
for most indices and tends to be
bearish since a gap in this area
often signals a signicant change
in market sentiment.
Which of them would you
consider to be the most
trustworthy?
Scott Andrews: The four zones
that border the prior days closing
prices (per Exhibit X: D-OC and
D-CL following down days; and
U-CL and U-CO following up
days) have the highest historical
win rates.
F1) Gap Zones
Figure 1 shows the ten potential zones in which a gap can open in a
day: D = last day was down (from open to close); H = above the high
of the last day; HO = below the high and above the open of the last
day; OC = below the open and above the close of the last day; CL =
below the close and above the low of the last day; L = below the low
of the last day etc.
Source: www.masterthegap.com
56
TRADERS PEOPLE
How do you trade it?

Scott Andrews: If the gap meets
my various criteria for the zone in
which it opens (i.e regarding gap
size, market conditions, seasonality
(e.g. day of the week)) then I will
use a time-activated order to enter
precisely at the open with a market
order. The target and stop orders
are submitted simultaneously
using an OCO/OSO function
that is available via many trading
platforms.
Then, I generally leave it alone
and let the historical probabilities
play out resulting in either my
stop or target being hit. If neither
is hit by end of the regular trading
day, then I will close out. I do
have some time-based stops
that will trigger prior to the close
on occasion for certain zones. I
never hold my gap trades in the
futures markets overnight.
Are there other rules you
combine with your gap
signals?
Scott Andrews: Yes, to be clear,
each of my signals for each
zone has its own set of criteria.
Some are fairly complicated, but
most include just a couple of
extra lters. Since over 70 per
cent of gaps in most indices will
close the same day, the focus
of my system is to avoid the
riskiest setups. Good money
management rules and historical
probabilities take care of the
prots for me.
Could you please give us an

example of one of these set of
criteria and the lters you use?
Scott Andrews: Sure. Some of my
favourite lters are the simplest.
For example: if the prior day
was down (open to close), and
the next day it gaps up, did it
open below the low of two days
prior? If so, then it has a higher
probability of lling. This setup is
analogous to what some traders
call a dead cat bounce.
Does the position of the gap
have any inuence on your
trading?
Scott Andrews: It would, if I were
better at predicting the beginning
and end of trends! I do however,
consider the market conditions
of the prior 20 days, e.g. are they
trending up or down?
Are there setups where you
risk more money than in
others?
Scott Andrews: Yes, but I think
of it a little differently. I will risk
up to four per cent of my trading
account for a setup that meets all
of my criteria and has no major
risks identied. However, if there
are any noted and conicting
patterns or other risk factors, I
will often reduce my position size
by 25-50 per cent. If the stop that
is required is bigger than normal
due to an increase in volatility,
then I will reduce the number of
contracts I can trade in order to
avoid any chance of risking more

than my maximum allowable
dollar loss per trade.
Since I primarily trade the
mini futures in the US indices,
I generally trade one contract
per $10,000 in equity in my
account, though I do have a
smaller account that I trade
more aggressively (i.e. greater
leverage).
F2) Short Trade in the D-OC-Zone
How long is your typical trade?

Scott Andrews: My average time
per gap trade in 2010 was about
one hour. Most gaps that are
going to ll the same day will do
so within the rst two hours of the
market session.
Where does discretion come in?
Scott Andrews: Most of my
discretion is used in position
sizing prior to trade entry. On
occasion, I will use discretion to
scale out if I believe that there
is potential for greater prots by
holding beyond gap ll or my
initial target. However, I do not
scale into trades.
Does volume play a role in your
approach?
Scott Andrews: Not at all. Though
I admit this is an area of interest
for further improvement.
Are you still looking for new
setups?
Scott Andrews: What trader is
not? My criteria are fairly high
Figure 2 shows a short trade in the E-mini S&P 500 in the D-OC-zone
(between the open and close of a prior down day). The gap occurred
after a wide range sell-off the prior day and during a part of the month
that is historically weaker, and therefore, supportive of fading up
gaps. Additionally, the gap opened below the low of two days prior,
indicating strong momentum to the downside. After a quarter size
gap ll, prices reversed and traded up and tested the Globex highs
(around 818) and then some. Prices bucked above the opening price
for what seemed like an eternity, but nally broke the uptrend and
below the open. The rst target was hit fairly easily and Scott opted to
hold 20% for potential further selling. However, knowing that the oversold conditions were ripe for a hard bounce, he ended up closing the
rest of the position for an average of ten points. The trade lasted one
hour and 55 minutes und brought a prot of eight points respectively
$400 per contract).
57
TRADERS PEOPLE
and it is tough to nd setups that

meet my parameters, but I love
testing new ideas. However, most
of my research efforts are spent
on identifying opportunities to
improve my existing signals.
How do you determine when
you are wrong in a trade?
Scott Andrews: At the risk of
sounding pompous, the only
wrong trades that I take are
ones that were not supported by
historical probabilities. When I am
stopped out on a trade, I consider
it the cost of doing business as a
trader.
What is the relation between
your winning and your losing
trades?
Scott Andrews: My historical
averages are 65-68 per cent
winners.
What do you nd most
frustrating with trading?
Scott Andrews: The only thing
that still frustrates me from time
to time is getting stopped out
right before a trade becomes a
big winner. It does not happen
often, but still more than I would
like. If I may substitute the word
challenging in your question, I
would say that sticking with my
system when it has a drawdown
is probably the toughest aspect
for me.
Also, trading is sort of a lonely
occupation and trading well is
a very disciplined process and

can be a little boring at times. I
am a fairly social person and that
is one of the reasons I started a
blog website a couple of years
ago (www.masterthegap.com). It
has since morphed into its own
business that allows me to help
others and provide balance to
the introverted, research work
that I have to do to continually
improve.
And on the other hand, what
are pluses?
Scott Andrews: Personally, I love
the freedom and control over my
own life that it provides. There
are an unlimited number of ways
to make and lose money trading
the markets. One of the surprising
benets for me has been the
ability to use my creative side to
invent new ways to take prots
out of the market. This is truly
exciting and empowering for
those that have the stomach,
means and interest.
Where does the psychological
element come into play?
Scott Andrews: Everywhere.
Finding and creating signals,
though hard, is not nearly as
difcult as trading per your
rules, day in and day out, no
matter what. Often, I will just
know that a signal is probably
not going to work, but I have
not modied my system yet
and pulling the trigger is tough.
Sometimes, after a series

of winners I will nd myself
wanting to take prots more
quickly or reduce position size.
These are challenging situations
to deal with psychologically.
Any words about fear, greed
and self-esteem?
Scott Andrews: The emotions
of fear and greed cannot be
avoided, they just need to be
balanced. You can get yourself in
trouble quickly if you let yourself
focus on just one of these
emotions during a trade.
And self-esteem is a great
one. Since there are no bosses
to provide feedback on a daily
basis, it is easy to link ones
sense of self worth to ones
performance in the markets for
a given day or week or month.
But do not! It will only make you
trading worse. It took me quite a
while to disassociate my trading
results from my self-esteem and
to avoid letting my daily results
affect my mood.
So, when you are you not
trading, how do you enjoy your
free time?
Scott Andrews: I have four
amazing young daughters and
a great wife, and there is always
something fun to do.
F3) Long Trade in the D-CL-Zone
Here you can see a long trade in the E-mini S&P 500 in the D-CLZone (between the close and low of a prior down day). At 5 minutes
prior to the open, prices were trading inside Scotts signal area, so
he set up a time-activated market at open order. A strong pop into
the open resulted in him getting a disappointing ll. However, the
rally continued, resulting in his extended target (above/beyond gap
ll) being hit for +6.0 points respectively $300 per contract about ve
minutes after the opening bell.
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59
TRADERS COLUMN
It is as though this secret is

passed between the elite like a
well guarded doctrine to which
the rest of us are not privy. This
secret covets the title of Holy
Grail. We seek it as though
it actually exists by attending
seminar after seminar, reading
book after book until one day it
materialises in front of us like an
ethereal being.
That moment when true
understanding is attained is the
proverbial A-ha moment when
the penny drops and for you the
planets align, water turns to wine
and for the rst time your vision is
one of pure clarity and focus. The
path is clear, and ever so simple!
All that is left is to welcome the
vast riches into your
life.
So what is it
exactly? I will do my
best to explain it as
it manifested itself
to me and how I
now understand it.
Analysing it from a high
level it can be described best
a process. A process whereby
each individual trader will face
his or her demons in a string
of confrontations much like a
modern game where the hero
faces villains whilst on his quest
to save his love from the clutches
of the evil tyrant.
This process can bring about
extremely painful realisations and
developments as it is a journey
The Secret: Surviving

the Learning Curve
Ryan Schoeld
It has been said that the answer

to becoming a successful trader
living the champagne lifestyle,
sipping Crystal whilst cruising
the azure blue waters of the
Mediterranean on a mega-yacht
is illusive to all but a select few.
The question we all ask ourselves
is what is the secret to unlocking
the riches that the global markets
have to offer?
of introspection, learning and

growth. A dening characteristic
is the failure to make money from
trading in the beginning no
matter what system or market
you trade! A result of this is the
compunction of most newbie
traders to question whether
trading really is for them, can one
actually make money from the
markets? Suddenly the prospect
of sipping vintage champagne on
a oating hotel seems all too far
removed and unattainable much
like the average man on the street
having the chance of walking on
the moon!
Acceptance. The light at the
end of the tunnel. One must
achieve a state of acceptance,
not only consciously but subconsciously which can only be
achieved from experience and
for some this can take years.
Acceptance is the rst part of the
trading secret.
Accept:
You cannot control the markets
You cannot predict price
movements with 100%
accuracy
You can risk as little of your
capital as you choose
You can control how you
participate in the market
You can remain as positive or
negative about your trading as
you choose
You have responsibility for your
actions
The second part of the secret

is a little more discreet as it takes
hold in your mind like a seed. This
seed will grow slowly each and
every day and will help you to
change your trading mindset. This
little seed will one day grow into
a great and towering tree which
represents your belief in yourself,
in your trading system and most
importantly your understanding
that trading is purely a game of
probabilities.
The importance of believing
that trading is a game of
probabilities helps target specic
psychology issues:
1. Every trading system will have
losing trades
2. Every trading system will have
periods of draw down
3. Trading is not about picking
winners; it is about taking as
many trades according to
your system as possible. This
removes the ego from trading
4. Focus on being a great trader
not on having winning trades
The trading process never
ends, even for those who have
achieved trading mastery, they
have to continually manage their
psychology and trading mindset
as success in the markets is a
ckle mistress.
T H E L E A D E R I N R U L E - B A S E D T R A D I N G

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Finding Areas of Supply

Address of Editorial and

Barbarastrasse 31, 97074 Wuerzburg

Prof. Dr. Guenther Dahlmann-Resing, Karsten

Tillie Allison, Chuck Fulkerson, Marko Graenitz,

Automated Trading Championship

TRADERS media GmbH

Theory versus Practice

Can You Forecast

Efcient Market Hypothesis

systems, liquid markets and a

such as in the year 2000 (over

drifts. It is presumed that

F1) Random Walk

This shows the result of a random coin-toss experiment. One point

F2) Random Walk with Drift

model requires no other input

line drawn in Figure 3 represents

F3) Simple-Form Portfolio

F4) Portfolio with Several Stocks

are combined correctly it leads

a risk tolerance of six per cent

to continue following forecasts

F5) Diversication Effect

This shows how risk is dependent on the number of stocks in a

the index. Assuming that market

tough competition. Transaction

However, that does not exist with

for applying the timing effect:

of the equation. Ultimately, it is

concentrating on a few or even

always contain a certain number

charting and technical methods

Become a Member of the Online Trading Academy Community

Probably One of the Smartest Hiring Decisions Ever Made

Proprietary Traders May Find Hedge Fund Life Harder

SGX Wants to Allow Overseas Membership

As banks spin off their proprietary trading groups into hedge

Singapore Exchange (SGX) proposes to

Morgan Stanley might also be close to spinning off its

Volume of Futures Contracts Traded Rises 45%

Hedge Fund Will Track Twitter to Predict Stock Moves

be used to predict daily moves in

VIX Methodology Coming to Individual Equities

Trading requires strategy

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NEW YORK | February, 20-23, 2011