Interview: Stephen Temes Striking out on Ones Own

June 2012

Equity Curve Control

Focus on the Bigger
Picture of Your
Performance

Trading Warbots
The Impact of High
Frequency Trading on
Markets

Explaining the
Why Most Traders Fall Victim to Mechanics
A High Frequency

False Breakouts
Traders Apology

Vivaldi Revisited
The Benefit of
Seasonality
 2
TRADERS EDITORIAL

TRADERS comes to you free of charge. This is

possible because of the support of our spon-
sors and advertisers. So please take a good
look at their messages and help them develop
their business. Moreover, we are looking for-
ward to your feedback. This is the only way for
us to constantly improve our magazine. Please
write to: feedback@tradersonline-mag.com.

Placebo Trading

I recently read Brent Penfolds book titled The
Universal Principles of Successful Trading. It touches
on an interesting concept that every trader really ought
to give thought to at one time or another the so-called
placebo traders. A placebo trader is someone who
has found a trading technique that works and that he
therefore regards as the incontrovertible truth of the
market. This may be an indicator in a particular setting,
a specific chart pattern, or Fibonacci ratios. Whatever
it is it causes the trader to gain an enormous vote of
confidence in himself and his method so that he can
survive even difficult markets and deep draw downs.
The amazing thing is that most of these techniques
have no statistical significance but can nevertheless
work. In other words, these traders are not that good
because they use the tool they trust but because
they are good traders and adhere to their principles
which are inextricably linked to their trading approach:
limiting risks, boosting profits and always following
rules. Perhaps they trade on the basis of a nonexistent
relationship, but are nonetheless successful on account
of structured processes. What an insight!
This raises the question of whether all traders
are not placebo traders in the end. Perhaps we
ultimately need our setups only to gain confidence in
the consistent application of a sound process? This
would mean that the setup itself was not the direct
determinant of success. Instead, it would be our own
behaviour in staying the course of a good trading
process, and our ability to turn this into a success
story in the markets.
It is arguably impossible to either prove or disprove
whether Brent Penfolds thoughts have any validity. Find
out for yourself then whether it is your setup that makes
you profitable, or whether those profits are generated
by a good trading process applied on a regular basis.
You may well be amazed by your own abilities.
Good Trading
Lothar Albert

06/2012 www.tradersonline-mag.com
 4
TRADERS CONTENT

06/2012 June COVER STORY STRATEGIES

Why Most Traders Fall Stage 3: Mean Reversion

Victim to False Breakouts
The aim of this article is to prove
to you that breakouts are indeed a
powerful strategy but more often
than not traders are committing
a number of critical errors which
drastically reduces their probability
of success.
13 INSIGHTS
Equity Curve Control Part 3 INSIGHTS
Equity Curve Control Part 3
Focus on the Bigger Picture
of Your Performance
How to Modify Up
Trending Trading Strategies
Candlestick Outliers
Bollinger Band Outliers in
Combination with Candlestick
Reversal Patterns
Protable Medium Term
Investment with Matching
Indicators
How to Combine Stochastic
and Moving Average

What Type of Trader Are You? Red-White-Red Pattern Trading

Are You an Amateur with a Hobby Low Risk, High Reward
or a Professional with a Business?

COVER STORY 2012 A Year of Low Commodity BASICS

Do not Fall Victim to False Breakouts 36 STRATEGIES
Mean Reversion
Volatility?
How to Benefit from Narrow Ranges
in Gold, Coffee, and Co Fundamental and Technical
Analysis of Currency Markets
An Introduction
Trading Warbots: to the Currency Markets
Are They Affecting the Market?
The Impact of High Frequency
Trading Technology on Markets Smart Traders Edge Part 3
Competence and Confidence,
Two Major Trader Qualities
Explaining the Mechanics Part 1
A High Frequency Traders Apology
Vivaldi Revisited:
The Two Seasons
TOOLS The Benefit of Seasonality

PEOPLE
New Products
Stephen Temes
Bookmark Striking out on Ones Own

64 PEOPLE
Stephen Temes 41 STRATEGIES
Candlestick Outliers 61 BASICS
The Benet of Seasonality
Web Review

06/2012 www.tradersonline-mag.com
 5
TRADERS INFO

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Editor-in-Chief Lothar Albert
TRADERS is unique because we do not offer advice or recommendations on what to trade. This makes our con-
tent markedly different from other market magazines. We are not interested in giving people specific buy and sell Editors Prof. Dr. Guenther Dahlmann-Resing,
recommendations, but rather focus on teaching the basics of trading from the beginner to the professional Corinne Endrich, Marko Graenitz, Theresa
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Our magazine has established itself as a source for information and communication for elite Sommersacher, Tina Wagemann, Florian
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and psychological aspects of the markets are discussed in professional articles and Articles Tillie Allison, Bert Antonik, Clem Chambers,
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Bruce Milbury, Florian Neinert, Keyur Panchal,
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Still today, the trader-elite are interested in professional and cur- Pictures www.photocase.de, www.fotolia.com
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Price data www.captimizer.de
no need for buy and sell recommendations. Trading pros make www.esignal.com
their decisions with self-confidence and are self-sufficient. www.metaquotes.net
These people know that trading can be profitable in both bull www.tradesignalonline.com
www.tradestation.com
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strategies lead to success? TRADERS magazine addresses ISSN 1612-9415
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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
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idea. Trading and investing carry a high level of risk. Past
performance does not guarantee future results.

06/2012 www.tradersonline-mag.com
 6
TRADERS COVER STORY

A breakout can be likened to a

volcano. As the lava builds under
the earths bedrock the pressure
builds and builds until finally the
pressure gets too much and lava
explodes from the earths core.
As a breakout trader is scanning
their charts they are attempting to
locate price levels where price is
testing that level but cannot break
through it. Eventually the pressure
becomes too much for the price
level and price breaks through
with a fast explosive move.
But how can we tell the
difference between an explosion
that will continue on and one that
will peter out (i.e. false breakout)?
In the authors experience
there is a large number of things
traders do wrong when trading
breakouts but in this article he is
going to cover what he considers
to be the five most critical errors.
Revealing Five Common Mistakes
Error 1:

Why Most Traders Fall Relying on too Few Criteria

The most critical error traders
make when trading breakouts

Victim to False Breakouts is that their breakout strategy

requires too few criteria to line up
before they will take the trade. We
like to use the analogy of baking
Like a large majority of traders the first strategy we ever learnt was the humble breakout. It is a a chocolate cake. You cannot
common strategy that you will find in a large number of trading books and courses. Whilst it appears bake a chocolate cake with only
on the surface to be a simple strategy that is easy to master, more often than not most traders two ingredients and neither can
struggle to be consistently profitable with it. Falling victim to false breakouts is the main reason why you have a successful trading
traders discard breakouts and continue their search for a profitable strategy. The aim of this article strategy with only two criteria
is to prove to you that breakouts are indeed a powerful strategy but more often than not traders are lining up.
committing a number of critical errors which drastically reduces their probability of success. The author will often speak
to traders who tell him that

Travis McKenzie
Travis is the Head of Online
Trading at Trade With Precision
(www.tradewithprecision.com)
where he is one of their most
highly sought after speakers
and trading educators.
Experienced in both intra-
day and swing trading, Travis
largely focuses on forex &
stock markets where he
applies his precision trading
methodology. Throughout his
career Travis has spoken on
behalf of some of the largest
names in the financial world
including the CME Group,
TradeStation Securities, ETX
Capital, CMC Markets and
City Index to name only a few.
06/2012 www.tradersonline-mag.com
breakouts do not work. When he
probes them a little he typically
discovers that they only really
have two criteria they are looking
for. The first criteria will be they
need to locate an area of support
or resistance. The second criteria
will be that they want price to
break and close above/below that
level before they will enter in the
direction of the break.
The simple truth is that two
criteria simply is not enough in
order to create a high probability
trading strategy. Yes, with only
two criteria you will find a large
number of set ups but they will
be substandard and will lead to a
large number of false breakouts.
When the author is scanning
for a breakout he has a list of 19
possible criteria that he is looking
to have aligned. Out of those 19
he looks for a minimum of nine
of them to align before he would
even consider it a valid set up.
Obviously the greater the number
of criteria which align the higher
the probability becomes of that
set up being successful.
Error 2:
Trading Breaks of Sloping
Support/Resistance Levels
Breakouts can be categorised into
two broad categories: (a) breaks
from sloping support/resistance
levels e.g. trend lines or patterns
such as symmetrical triangles or
(b) breaks from horizontal support/
resistance level.
7
Please note that breakouts
can be applied to any market
and any time frame therefore
we have intentionally cut off the
market and time frame for the
accompanying diagrams as it
really does not make a difference F1) Subjective Sloping Levels of Support/Resistance
what market or timeframe the
chart is.
Breaks of Sloping Levels
In the authors opinion breakouts
are often a self-fulfilling prophecy,
that is because so many traders
are looking for and trading them
that they work. If we are correct
on that point, then would not
it make sense that the most
powerful and highest probability
breakouts will result from those Every trader seems to draw sloping levels of support/resistance
differently therefore making them extremely subjective.
breakouts which are the most
obvious and identified by the Source: www.tradewithprecision.com
greatest number of traders?
The biggest issue a trader has
who attempts to trade breaks of
sloping levels is that the drawing F2) Far Less Subjective Horizontal Levels
of sloping levels is so subjective,
every trader seems to draw them
slightly differently from the next
trader. If we gave a room full of
traders a chart and asked them to
draw sloping trend lines on that
chart it would come back looking
like Figure 1. So where exactly on
that chart is the breakout level?
If the authors theory is correct
that the highest probability and
most powerful breakouts result
from those breakouts which are The large majority of traders will agree where to draw horizontal levels
of support/resistance.
the most obvious and identified Source: www.tradewithprecision.com
by the greatest number of traders

TRADERS COVER STORY
then can you now see the issue
you have with subjective sloping
levels. Most traders will be
drawing in their levels differently
to you therefore meaning that
very few traders will be entering
at the same level you will be
entering and without the crowd
support the likelihood of the
move being a false breakout is
dramatically increased.
Breaking Horizontal Levels
Now let us take the same chart
we used in Figure 1 and ask the
same room of traders to locate
any horizontal levels of support/
resistance. It is more than likely
that the large majority of those
traders would return a chart like
the one in Figure 2.
Horizontal levels are much
less subjective and only trading
the obvious ones will assist us
in ensuring we are only entering
breaks where a large number of
other traders are entering and this
crowd participation will lead to
a stronger initial move and more
follow through as late comers
also join the party.
The author also believes that
it is crucial that you only look
for what he calls true levels of
support/resistance. His definition
of a true level of support/
resistance is a level that has been
tested two or more times (the
more times the better as this will
mean a stronger level but also
give more people the opportunity
06/2012 www.tradersonline-mag.com
to locate the set up too). By
testing a level he means price has
hit (tested) that level, bounced
off that level and then tested it
again (this is opposed to simply
price consolidating around a level
without really testing it). Refer to
Figure 3 for an example of three
clear tests of a level.
Error 3: Not Enough Emphasis
on Trading with the Trend
Another critical error traders
make which leads to false
breakouts is they attempt to
trade breaks against the trend
or where there is no clear trend.
This is often what a trader will be
doing when attempting to trade
a break of a sloping level. For
example the sloping level trader
in Figure 1 would be trading
against a very established
downtrend if they were to
go long on the break of the
downward sloping trend line.
We also see a lot of traders
of horizontal levels make this
mistake when they find a market
which has formed a consolidation
box (ie a horizontal level above
and below the current price
action) and then they simply enter
long if the upper level is broken
or enter short if the lower level is
broken. They have absolutely no
regard for the current trend and
therefore often find themselves
trading against the trend and
once again a victim of a false
breakout.
8
The trend really is your friend
when it comes to avoiding false
breakouts.
In assessing trends the author
tries not to overcomplicate it
and use good old fashion price
action, assessing highs and lows F3) True Level of Support/Resistance
to establish the trend direction.
He will only go long in an uptrend,
short in a downtrend and sit
on his hands in a non-trending
market. If you want that sustained
follow through then you need to
trade with the trend.
Error 4: Trading off
Only One Time frame
Some of the more advanced
traders may be incorporating
trading with the trend as one of Price must test the level, bounce off the level and then retest it again
before it is considered a true level of support/resistance.
their criteria but then they often
fail to take into consideration Source: www.tradewithprecision.com
what the higher time frames are
doing. Trading off only one time
frame is like driving your car on
a foggy night. You will have no F4) Multiple Timeframe Analysis
trouble seeing what is right in
front of you but it is impossible to
see any danger that lies further
ahead on the road. The biggest
danger that lurks in the fog for
traders is that the shorter term
trend they are trading with is
actually in conflict with a bigger
more powerful higher time
frame trend. See Figure 4 for an
example.
The most powerful moves with A long trade out of this consolidation box is actually against the higher
time frame trend therefore dramatically increasing the probability of a
the greatest follow through will false breakout.
occur when you have as a minimum Source: www.tradewithprecision.com
two time frames in agreement.
 9
TRADERS COVER STORY

Error 5: Waiting for too Much to Figure 5 you will see that the line will always guarantee that the
Confirmation of the trader who has entered on the trader will be getting in at a worse
Break Before Entering break could have potentially hit all price with a much wider stop and
The final critical error occurs three of their targets before the therefore will need the market to
when a trader waits for price to trader seeking confirmation has run on so much further just so
break through and close above/ even entered. they can get a 1:1 target.
below the support/resistance The confirmation trader will If you are trading true levels F5) Trading the Break as It Occurs
level before entering the trade. have no choice but to put their of horizontal support/resistance
On the surface it may seem like stop where the more aggressive in the direction of not only the
a smart thing to do as the trader trader also had theirs. The set up charts trend but also the
is waiting for confirmation that confirmation trader now needs a higher timeframes trend then
the break has held and therefore massive market move just so they there is no need to wait for extra
should not fall victim to as many can get to a 1:1 target (refer to confirmation, enter as the initial
false break outs. But what they Figure 6). break occurs.
do not realise is that by waiting In addition to the above by
for the candle to close they are waiting for one candle to close Conclusion
often getting in far too late and above/below the breakout level is If you are currently trading
missing a large portion of the not going to guarantee the trader breakouts and not getting
move. avoids false breakouts as most the results you desire or you
If a breakout level is obvious false breakouts will see at least have given up all together then Trading the break as it occurs allows for a tighter stop and consequently
multiple targets are hit.
and a large number of other a couple of candles trade above/ hopefully we have demonstrated
traders is also trading it then below the breakout level before to you in this article that they can Source: www.tradewithprecision.com
the break of the horizontal level price rolls over and stops them be an extremely powerful strategy
should be powerful and price will out. Whereas by waiting for that when traded correctly. Ensuring
quickly race away. If you refer close above/below the breakout you have a large number of criteria
aligned is critical for any trading F6) Waiting for the Breakout Candle to Close
strategy and breakouts are no
Strategy Snapshot different. Based on the above
you can now add the following
criteria to your checklist: (1) Trade
Strategy name: Breakout Trading only horizontal levels of support/
Setup: Support/Resistance Level tested twice to be a true level resistance. (2) Ensure it is a level
Entry: As the break occurs of true support/resistance with a
Stop loss: Short: above a recent short-term high; Long: below a minimum of two tests. (3) Trade
recent short-term low
only in the direction of the set up
Take profit: Three targets at a Risk/Return Ratio of 1, 2 and 3
charts trend. (4) Ensure you are
Trailing stop: Optional
also trading in the direction of
Risk and Money Management Conservative
the trend on the next higher time What may seem like a safer option on the surface will actually
dramatically decrease your profitability.
Average number of signals: Depends on market and timeframe
frame. (5) Enter as price breaks
Comments: Hit rate increases if traders avoid errors 1-5
the flat level, do not wait for a Source: www.tradewithprecision.com
close above/below the flat level.

06/2012 www.tradersonline-mag.com
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equally as important as strategy.
On this free webinar we teach you both."

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info@tradewithprecision.com | CHICAGO +1 773 546 9562 LONDON + 44 (0) 20 8816 7113 AUCKLAND +64 (0) 9 889 9223 SYDNEY +61 (0) 2 8005 0966
 11
TRADERS NEWS

Do Hedge Funds Really Generate No Alpha?

Morgan Stanley strategist Adam Parker did an analysis of HFRI equity hedge index and
found out that hedge funds do not have alpha anymore. This is not unexpected. It just means Gulf Investors Now Can Trade Copper Futures Contract
that you must be really dumb to hand your money to an average hedge fund. There are two
explanations. Successful hedge fund managers are flooded with money. They usually do not Dubais government-owned commodities center is poised to list copper futures
have 50 great investment ideas. They may have five great investment ideas and maybe another on the Dubai Gold and Commodities Exchange (DGCX) soon as attractive market
five good investment ideas. The rest will be average investment ideas. When they are flooded conditions provide a favourable environment for the exchanges long-standing plan.
with money they have no choice but to invest in all of their investment ideas. Their other choice Copper futures were one of the first projects that were proposed when the exchange
is to return money back to their investors was set up. DMCC-linked DGCX commenced trading in 2005. Other projects the
but in that case they would not be trading center is looking at include tea and diamond futures, these were more
collecting the two per cent fee. difficult to implement.
The second problem is more sinister. Source: www.arabnews.com
There are a lot of unskilled fund managers.
Maybe they themselves know this or
maybe they do not. The problem is the
average investor usually does not know
who is a good manager and who is not.
As the number of hedge funds explodes
investors have only three bad choices. Herbalife Plummets after Questions by Einhorn on Call
First they can invest in an average hedge
fund. This is a bad idea because they do Herbalife shares got hammered amid
not have alpha anymore. The other two choices are to hand their money to a fund of hedge heavy trading volume on 1 May after
funds or hand their money to one of the large reputable hedge funds. Both choices are bad. hedge-fund manager David Einhorn asked
Fund of hedge funds charge more than what they contribute. Large hedge funds invest in pointed questions about the companys
marginal ideas. financials during a conference call this
So what is the solution? The solution is to find the best hedge fund managers based on their morning. Herbalife, a maker of nutrition
recent track records and invest in their best stock picks. and weight-control products, reported a
Source: www.insidermonkey.com, written by Meena Krishnamsetty higher-than-expected quarterly profit but
issued an earnings forecast below Wall
Streets expectations. Shares were down
four per cent earlier on 1 May prior to the
conference call. But the stock was halted
twice this morning, once at 11:42 am
Free Book on Spread Betting Eastern Time and another time at 11:48 after
hitting single-stock circuit breakers. Einhorn, of Greenlight Capital, asked specific questions pertaining
Better Spread Betting is the brand new no-nonsense financial spread betting book being to how Herbalife quantifies distributors, consumers and other clients. Einhorn also asked the company
authored live online by trading author and occasional TRADERS magazine contributor Tony why it stopped disclosing the percentage break-down among its distributors. The questions seemed to
Loton. Read it for free, watch it evolve, and help shape the content by commenting on the show an interest in the kind of minutiae of Herbalifes business that Einhorn mined last year, when he
chapters at www.betterspreadbetting.com. issues a scathing report on Green Mountain and made a big bet against the company.
Source: www.betterspreadbetting.com Source: http://blogs.wsj.com, written by Steven Russolillo

06/2012 www.tradersonline-mag.com
 12
TRADERS NEWS

Green Mountain Chairman Hit with Margin Call
Robert Stiller, founder and
chairman at Green Mountain Coffee
Roasters (GMCR), has been hit
with a margin call, following the 51
per cent May 2 when the K-Cup
maker cut guidance. According to
a Form 144 filed Tuesday morning
with the Securities and Exchange
Commission, Stiller indicated he
planned to sell 5 million shares
worth roughly $125.5 million
pursuant to a margin sell-out.
Stiller has long been an active seller
of Green Mountain shares. Lately, hes stepped up his activity. In February, Stiller sold 1
million shares, netting more than $66 million in gross proceeds. Looking back, those sales
look well-timed. Green Mountain has since cut its 2012 outlook. And Starbucks (SBUX)
unveiled plans to make its own single-cup coffee brewer that some investors expect will
eat into sales of Green Mountains Keurig brewer.
Source: www.marketwatch.com, written by Matt Andrejczak
Spanish Banks in Crisis
US House Prices Inflation-adjusted on the Level of 1895
The latest data to the house prices by Robert Shiller show that they
have fallen inflation-adjusted to the level of 1895. At that time a high
has built in price development that has been reached again today.
The data can be accessed on Shillers website.
Source: www.econ.yale.edu/~shiller
StockTwits Unveils Heatmap
StockTwits is known as a social network for traders, which is, for the most part, accurate. Now the company
has rolled out a new function that appeals to market-following masses. It is a Heatmap page that provides a
cool visualisation of which stocks the sites 200,000 members are discussing most, in real time. You can break
it down by sector and by time frame (last hour, six hours, 24 hours), and the algorithm takes volume, influence
of those discussing the stock, and velocity into account. If a company has never been discussed but suddenly
a small handful of prominent members mention it, it will surface on the heatmap
faster. Naturally Apple dominates discussions. StockTwits founder Howard Lindzon
says Apple has become the Justin Bieber of finance.
Source: www.pandodaily.com, written by Erin Griffith

Spains bad loans reached an 18-year high in February.

About 8.16 per cent of loans held by banks in February were
non-performing, the highest since October 1994. In January,
only 7.9 per cent of total debt was non-performing. The The Scariest Jobs Chart Ever
amount of doubtful debt rose to EUR 143.8 billion, up EUR
3.8 billion from January. The current doubtful loan data have This chart compares the pace of this
been suppressed by Spanish banks camouflaging the true jobs recovery vs. every other one
deterioration of their loan portfolio to the construction and since World War II by looking at the
property sectors by undertaking debt for asset swaps. Bad trajectory of jobs lost and gained
loans will rise steadily throughout 2012 and could spill into since the recession began. The red
2013, with construction companies and property developers line shows recovery in the current
facing accelerating house price falls alongside a stock of recession so far. In comparison it
around one million unsold new properties. clearly represents some deep and
Source: www.rttnews.com long kind of plunge.
Source: www.calculatedriskblog.com

06/2012 www.tradersonline-mag.com

In the first article of this series
(TRADERS 03/2012) we talked
about system dynamics and how
it relates to financial markets.
How tuning a system by definition
consequently changes it, making
any conclusion about the tuned
system practically worthless with
regard to the original system.
After all, it is curve fitting. The
basic premise we came up
with, was that it will likely be
better to view the system as an
unchangeable black box, using
external performance indicators
to measure the quality of that
system.
Second Order Technical Analysis In the second article
(TRADERS 04/2012) we
Equity Curve Control Part 3 introduced several possible
indicators to both quantify and
qualify a system. An honourable
mention goes out to streaks (the
Though technical analysis thrives on the premise that price and volume are the ultimate synthesis of all market clustering) of winners and losers
information digested by all market participants, it is equally important for a trader to see the bigger picture of his as a possible quality indicator of
performance in the long run. Handling each trade right is of course very important. But the weight of each trade the system. We also introduced
on performance diminishes the more trades are taken. Or at least it should. This series of articles eventually goes the concept of an equity curve,
beyond evaluating that performance and shows how it even can be controlled to a certain degree, by focusing giving us the evolution of system
on that bigger picture. equity throughout time. This
article tries to exploit the equity
curve to the fullest, using it
13
to control the systems output
without knowing or tinkering with
its internals.
Control Engineering
To control the system without
knowing anything about the
rules it encloses, we will take a
control engineering approach.
Take a very familiar example like
a thermostat in a central heating
system. As a temperature-
sensitive automatic device
that regulates and keeps the
temperature within determined
limits, it can be developed and
used without any knowledge
about any part of the heating
system at all. All it does is
combine a plain old thermometer
with a switch to turn off the
heating when a temperature is
reached and switch it back on
when the temperature drops
below a certain threshold. There
is not intervention of the controller
in the systems internals. The
whole system is just switched on
and off, based on some external
measurement of its performance
(temperature).

TRADERS INSIGHTS
Dirk Vandycke
Dirk Vandyke has been
actively and independently
studying the markets for over
15 years, with a focus on
technical analysis, market
dynamics and behavioural
finance. He writes articles
on a regular basis and
develops software partly
available at his website www.
xxxxxxxx
chartmill.com. Holding master
degrees in both Electronics
Engineering and Computer
xxxxxxxxxxxxxxxxxxx
Science, he teaches software
development and statistics
at a Belgian University. He
is also an avid reader of
anything he can get his hands
on. He can be contacted at
dirk@monest.net.
06/2012 www.tradersonline-mag.com
Feeding Back the Output
If the equity curve is the output
of the system, than we can use
this output as feedback to the
system itself. This is where the
magic starts. Feeding back the
output to the system to control
it, is what control engineering
is all about. In our daily lives we
have many applications using
this principle. And very often the
controller itself is just a person.
A computer mouse, for instance,
is far from a precise instrument.
The user is actually the controller,
continuously adjusting over- and
undershooting while trying to
minimise aiming errors. Take a
car with a driver wanting to adjust
to the speed limit. He reads his
speed and starts controlling
the system with his brakes if
necessary. The driver is the
controller.
For a trading system the same
applies. We measure the output
through the equity readings and
use our brakes and gas pedal
accordingly. As we do not want to
change the system or its rules, we
are going to adjust the per cent
risk taken per trade, based on
the equity curve. In its most basic
form we can stop live trading and
switch to paper trading if equity is
going down.
Such a feedback/control loop
for a trading system is depicted
in Figure 1. To avoid changing
the systems internals we have
to take total abstraction from
14
it, viewing it as a closed black
box that receives external
inputs from whatever sources
(fundamental, technical, really
any possible input at all). The
second abstraction step is
decoupling the systems input
from its output. We will measure
the systems performance only by
its equity curve, or some other
performance indicator which we
will analyse. We discussed some
performance indicators in the
previous articles in this series.
The equity curve analysis
can be done manually (i.e.
subjectively) or mechanically, by
an algorithm. Now, this analyser
acts like a process controller
steering the system it tries to
control. And just as a classic F1) Equity Curve Control Feedback Loop
process controller, our equity
curve analyser will switch the
system on and off, based on
its performance. The controller
knows nothing about the system
or the rules that lie within. It only
switches the system on or off
based on its performance. The
system in turn knows nothing
about the external controller, nor
about the fact that it is turned on
and off based on its performance.
It just gets the signal to stop or
resume trading from the equity
curve analyser. The equity curve at the output of a system is analysed. Based on
this equity curve analysis, the system trades live or on paper (to be
At this point a deadlock able to continue measuring a theoretically paper equity curve). The
theoretically paper equity curve is shown in grey, the real equity
problem occurs. If a system curve is blue. As soon as the system starts working again, live trading
gets switched off, it cannot is resumed.
trade anymore. If it cannot trade Source: www.chartmill.com
anymore, it cannot generate

TRADERS INSIGHTS
trades and a performance flow.
No performance means a flat
equity curve disabling our equity
curve analyser to switch the
system back on. This is where
paper trading comes in.
Paper Trading
Paper trading is the act where a
trader pretends to trade a virtual
account and records everything
as he would do with a real
account. It is a different kind of
discipline to a trader, because
all emotions are taken artificially
out of the picture. Nevertheless
one has to maintain discipline to
keep recording (and not resetting)
the virtual account. Brokers often
provide paper trade accounts.
One place where paper trading
shines is back testing. Remember
though, what we said about back
testing in the previous article.
Strange enough, the same
technique of paper trading comes
to the rescue in this possible
alternative to back testing.
Paper trading is necessary
as we must be able to keep
measuring our (now theoretical)
Notes
(*) Average True Range, the average
daily range, taking gaps into account. A
measure for the volatility of a time series.
(**) Independent return streams
06/2012 www.tradersonline-mag.com
equity curve. To see what
would have happened if we had
continued taking trades live
through the system. We resume
live trading as soon as this
theoretical equity curve starts
going up again. As such, the real
(adjusted) equity curve becomes
dampened, guarded against too
large a draw downs. This whole
cycle is shown in Figure 1. The
results on an actual equity curve
are shown in Figure 2.
Building an EQA
The Equity Curve Analyser (EQA)
might seem to be the most
important and intelligible part
of the whole control system. As
analysis of the characteristics of
markets and financial products
shift to an analysis of their
performance. But in reality such
an EQA, like most process
controllers, can be and are better
kept very simple. The possibilities
are endless. One could build
an EQA based on trend lines,
moving averages (of the equity
curve of course), or even a simple
volatility adjusted filter starting
to switch between live/paper
trading whenever a retracement
of the equity curve exceeds a
certain Average True Range
(ATR*) multiple from a record top
or bottom. Mainly just like the
principle behind a volatility based
stop loss such as the chandelier
exit described by Alexander
Elder. Any technical analysis used
15
on price charts (first order) can
potentially be used on the equity
curve (second order).
The most conservative
approach in forward testing is to
initialise the EQA with a paper
trade state. Such a system
has to prove its worth from the
beginning, even before it can be
used for live trading.
EQA Aggregation
The whole point of building an
EQA and deciding how complex
it should be, can be taken yet
one step further. First, there is the
idea of an EQA being discrete,
switching the system on/off in
a very rigid all or nothing way.
In a continuous version of the
EQA idea, a controller could
turn the tap giving the system
more or less money, based on F2) Results on an Actual Equity Curve
its recent performance. As such,
the amount of money given to
a system, or percentage risked
on any trade could range over
a [0,1] interval. Zero being the
prohibition of live trading and one
being able to trade or risk the
maximum amount.
Next, one could aggregate a
set of very simple but non- (or
low) correlated trade systems
by multiplexing its money to the Equity curve of a trend following trading system through changing
market environments. Both trend lines and moving averages are
best performing systems, deriving shown on the chart. Moving averages being slightly better candidates
for algorithmic implementation (software). The charts also show the
the worst performing systems at new equity curve not only being rescued from a draw down but also
each moment from live trading starting out avoiding one from the beginning. This implies that the
control loop was started in paper trading mode (the most conservative
possibilities. Nevertheless, approach through the eyes of a feed forward test).
monitoring each system even if Source: www.chartmill.com
its equity curve is composed of

TRADERS INSIGHTS
paper trades. After all, remember
the first article of this series. Bad
performance is, in effect, most
probably just a synonym for
currently out of synch.
So the result would be like an
array of non-correlated** very
simple systems, together making
for a robust aggregate system
watched by an EQA playing
the role of a money manager
allocating money to the best
performing (in synch) systems
while closely watching the others
(out of synch) by measuring their
paper trade performance. As soon
as the latter start to improve, these
systems will regain access to real
money and resume live trading.
06/2012 www.tradersonline-mag.com
There is a bit of an analogy
here with computer hardware
where we started using a bunch
of independent and inexpensive
disks to build one disk far
more robust than any single
disk one could buy. This is
called a RAID (redundant array
of inexpensive/independent
disks). This far outweighs the
costs building evermore reliable
single disk hardware. This
application does the same,
building a robust system out of
lots of independent and easy
to understand (inexpensive)
systems. We could introduce
the acronym ASITS (array
or Aggregate of Simple
Independent Trade Systems). No
need any more to back test, fine
tune curve fit rules and look for a
one-size fits all system holy grail.
The biggest win in such an
aggregate EQA idea is that all
of the trade systems in the pool
can be kept very simple, simply
being a harbinger for robustness.
After all, simplicity is the ultimate
sophistication.
Finally, we should keep
monitoring the correlation
between the systems in our
ASITS as that might change
over time as well. There is no
need for, or even some danger
in, having correlated systems in
aggregate.
Where to Start
Many traders and trade systems
builders probably will have too
many ideas on what rules and
systems to combine. But a few
places to start looking for non-
correlation could be combining long
and short systems or retracement
and swing systems with momentum
systems and breakout strategies.
Even value systems with growth
systems. It might be even as simple
as combining systems making the
same decisions (perhaps built on
moving averages) in different time
frames. That way the true winners
in longer term time frames will start
to shine when markets are trending.
In non-trending or more volatile
16
markets, the shorter term systems
probably will kick butt.
Just start experimenting and
do not forget to share your ideas,
feedback and results on your
ASITS with me. There is still a
lot of ground to cover on this
idea which I developed in our
company (www.chartmill.com).
Next Time
is question time. We will take
on some hard questions and
criticism regarding the ideas in this
series of articles that eventually
led up to the idea of ASITS. Any
questions would be very welcome
by the end of May 2012. Just send
them to dirk@monest.net.
Part 5: Are You an Amateur with a Hobby or a Professional with a Business?

What Type of Trader Are You?

Achieving consistent success in trading comes only once we learn to trade in line with our
individual personality, character and beliefs. It is garnering this self-knowledge that becomes the
real treasure on your trading journey. This series of articles will help you raise your awareness,
develop self-knowledge and improve your approach to your trading business as you gain clarity
on what type of trader you are.

Paul Wallace
Paul Wallace spent six
years in the Royal Air Force
controlling fighter jets before
embarking upon a career
in the City. He is one of the
principal forex traders at
Kaizen Wealth Management
UK and runs Tradingbeliefs, a
performance support practice
for traders. Contact:
paulwallace@tradingbeliefs.com
06/2012 www.tradersonline-mag.com
Well for this instalment, fellow
trader, we might as well just cut
to the chase. Quite simply are
you an Amateur with a hobby or
a Professional with a business?
Come on; be honest, if not with
me at least with yourself.
Do you like to have a bit of
a play at trading? Do you tell
friends that you are playing the
markets? Let the author provide
you with a spot of advice. If you
play the markets then you
should not be too surprised when
you end up being the one that is
played.
Is your investment in trading
nothing more than a few pounds,
dollars, euros or francs in a
trading account, a trawl of trading
forums and perhaps the odd
book you may have picked up?
Are you going to free trading
events basically sales seminars
in the hope of discovering some
Holy Grail style revelation that
will open up the treasure trove of
abundance that is trading?
Do you spend all your research
time on the hard-skills of
trading? Namely devoting all
your time looking for new trading
strategies, tips and ideas. Do you
think that the soft-skill talents
like a business plan, a trading
strategy plan, trading records,
a trading journal and some
personal development goals are
a waste of time? Do they sound
much too boring to spend your
time on when you could be
getting excited over some new
trading strategy you picked up
from a friend of a friend?
If those things are true for you
then be honest with yourself and
admit that you are an Amateur
with a hobby. As Ed Seykota
once said, Everybody gets what
they want from
the markets.
What exactly do
you want from Most people
the markets? Is
it excitement? A spend money on their
diversion from
everyday life? hobbies and make money
The status?
An intellectual from their business.
challenge? Maybe
even revenge? Be
honest with yourself and spend
some time investigating your
underlying drivers.
A Professional with a Business
On the flip-side are you a
Professional with a business? Do
you conduct your trading as if it
was a professional business? Do
you have a business plan as well
as a trading strategy plan?
Does that business plan
cover your goals, objectives and
contingency plans? Have you
done a SWOT analysis on your
business ... and yourself? Do
you have a financial plan? Do
you understand the cost of your
business in absolute terms and
relative to your overall trading
capital? Does it cover your
disaster recovery plan? Does
it cover allocation of resources
etc.?
In your trading strategy plan
do you have your trading tactics
all written out with plenty of
examples of those trade set-ups?
Do you keep a trading journal as
a means of learning more about
yourself? Do you see that as an
aid to determining what type
of trader you are with a view to
improving your performance?
Do you keep records of all your
trades and use them to improve
your trading?
Does it cover your daily, weekly
and monthly routines? Do you
have systems in place for all
aspects of your business? Do
you have objective debriefs of
your performance? Do you have
success structures in place to
help you overcome obstacles and
setbacks?
Remember, most people spend
money on their hobbies and make
money from their business. Is that
your experience of trading?
19
Conclusion
The author makes no apologies
if the article is perhaps a little
harsh. This is ultimately a harsh
business and you should not
underestimate the amount of time
and effort required to achieve a
level of business success.
The author
suspects that the
vast majority of
private traders if they
were really honest
with themselves
would say that they
are an amateur with
a hobby as opposed
to a professional with
a business. Let us
try to be positive and
say that at least raised awareness
is the first step towards making
better choices about your future
path. The other good thing is
that being a professional with a
business entails a set of actions
that are all within your control.
You will be required to take
personal responsibility for your
success.
So if you have admitted that
you are presently an amateur with
a hobby what one thing are you
going to do today to move you
towards being a professional with
a business? It may be no more
than making a simple decision
to do what is required to be a
professional. That is a start.
And work on becoming a
professional.
 20
The first quarter of 2012 ended
with a whimper. Commodity prices
ended up for the quarter by 3.74
per cent but that is only a small
part of the story. Anaemic trading
dominated commodity price
movement. We have witnessed
some of the smallest ranges in
commodity prices during the first
quarter in memory.

Volatility Has Decreased

Enormously from 2011 to 2012
In 2011 the range of the 19
commodities tracked by
the author averaged a price
range of 61.05 per cent. Some
commodities had tremendous
volatility. In 2011 the cotton
market had a price range (from
high to low) of 169.12 per cent!
The smallest price range last year
was in live cattle it only moved
25.51 per cent.
2012 has been a different story.
The 19 commodities averaged a
price range for the first quarter of
21.38 per cent. The widest price
range was in natural gas which
moved 51.92 per cent from high to
low. Coffee had a range of 38.21
per cent making it the second
How to Benefit from Narrow Ranges in Gold, Coffee, and Co. most volatile commodity. Other
commodities did not move much.

2012 A Year of Low Commodity Volatility? Lean hogs had a range of 11.69
per cent, corn only moved up and
down by 12.72 per cent and live
cattle had a range of 13.22 per
Commodity markets traded in a very narrow range for the first three months of 2012. Range bound trading has returned after a volatile decade with commodity cent. The author views the lack
prices experiencing a secular bull market. This article documents the lower volatility and explains why various markets experienced narrow trading ranges. The of volatility in the commodities
author also looks to the future which promises to be very different from action in the first quarter. market during the first quarter as

Andrew Hecht
Andrew Hecht is a commodity
trader and expert with over 30
years of trading experience.
He has traded a wide range
of physical commodities
and commodity derivatives
over the course of his career.
Andrew currently writes
weekly for the Sovereign
Investor as well as for a
number of trading services
including Trader Hunter and
Commodity Trend Alert.
Contact:
www.sovereign-investor.com
06/2012 www.tradersonline-mag.com
a significant development. This
phenomenon is due to a number
of important factors.
Reasons for Low Volatility
The MF Global debacle caused
many commodity hedgers,
speculators and investors to
lose a lot of money when the
company went belly up and
apparently misappropriated
customer segregated account
funds. Many of the customers of
MF Global have not come back
to the futures markets. Many
other futures traders have lost
faith in the brokerage companies
that hold customer segregated
accounts due to the actions of
MF Global. This has decreased
trading volumes.
Increased activity in computer
driven, high frequency trading
(HFT), has also narrowed trading
ranges in the commodity markets
that trade on futures exchanges.
These computers buy and sell
frequently and often for a few
price ticks. The increased activity
from HFT trading has increased
volume but has resulted in
decreased price ranges.
The scent of intervention in some
key commodity futures markets
has kept commodity prices stable.
On February 29th a huge sell
order in gold caused the price
to plummet. Gold was bumping
up against its key psychological
resistance level of $1800. A major
Wall Street bank sold 15,000
21
contracts (1.5 million ounces)
quickly on the floor of the COMEX
exchange. The timing of the order
was interesting. Fed Chairman Ben
Bernanke was speaking as the
order hit the floor of the exchange.
Gold prices plunged due in part
to the speed of execution of that
order. That order turned all of the
commodity markets around. Gold
plunged $100 from the highs on
that day alone. Gold has traded in
a tight range since.
Finally, there has been some
evidence that China, often the
demand side of the equation in
the commodity world, has been
attempting to stabilise global
commodity prices as the Chinese
government fears the effects of
inflation on the tenuous Chinese
economy. China is very good at
keeping their commodity needs
quiet to keep a lid on prices. All F1) Gold Daily Chart
of these factors contributed to
the low volatility in the commodity
futures markets during the first
quarter of 2012.
Highlights of Low Volatility
Precious Metals
The entire precious metals sector
combined was up 9.71 per cent
for the first quarter. The gold and
silver markets are consolidating
after the damage done to the
markets on February 29th. The This chart illustrates the market action in gold after 15,000 contracts
(1.5 million ounces) were sold on February 29th, 2011 as Fed Chairman
sharp move in precious metals Ben Bernanke was speaking. Gold was approaching the $1800 level
and plunged after the selling.
was primarily due to platinum
prices which exploded 17 per Source: www.tradesignalonline.com
cent and silver prices that were

TRADERS INSIGHTS
15.53 per cent higher during the
first quarter. All precious metals
saw tight trading ranges in Q1
2012 when compared to 2011.
Energy
The energy sector was up 2.56
per cent for the first quarter of
2012. That is only a part of the
story. Oil and oil products rallied
sharply during the quarter while
natural gas continued on its
path lower. When the natural
gas market decides to roll over
and rally, watch out the shorts
will have to exit positions and
that liquidation could be very
expensive for them. All energy
commodities saw lower price
volatility in Q1 2012 than in
2011. Natural gas is the only
commodity that had a significant
range and natural gas prices were
a one way street-lower.
Grains
The combined action in the
grain markets was up 5.67 per
cent for the first quarter of 2012.
In grain markets the important
thing to watch is Asian demand
and the weather. The long term
fundamental picture remains
unchanged. There are more
mouths to feed as populations
grow and arable land is a finite
resource. The grain markets will
be volatile in the future and price
dips, while scary, create big
opportunities to make significant
profits for months and years to
06/2012 www.tradersonline-mag.com
come! Much lower price ranges
in the corn; soybean and wheat
market during Q1 of 2012 was the
outstanding characteristic that
defined trading.
Soft Commodities
The soft commodity sector
was down 1.82 per cent during
the first quarter of 2012. Sugar,
cotton and cocoa all posted small
gains while orange juice was
down a touch. The big loser in the
sector was coffee which dragged
the sector results down. Seasonal
patterns and fundamentals will
continue to dictate prices. The
author believes that softs will
regain some ground and prices
will edge higher overall during
the balance of 2012. Coffee is the
authors favourite pick given price
action during the first quarter and
continuing levels of low global
stocks. The soft commodity
sector saw lower trading ranges
in the first quarter of 2012.
Live Cattle and Lean Hog
Live cattle and lean hog prices
finished Q1 trading mixed. Live
cattle prices were down 4.36 per
cent after rising over 12.56 per
cent in 2011. The lean hogs were
up 7.24 per cent after losing 9.40
per cent in 2011.
These two commodities traded
in a narrow range so far in 2012.
Live cattle traded in a 13.22 per
cent range from high to low while
hogs traded in an 11.69 per cent
22
range. In 2011 they traded in a
25.51 per cent and 39.39 per cent
range respectively. The author
believes that these markets will
trade in a range during 2012 and F2) Silver Daily Price Chart
that they will continue to make
a series of higher highs and
higher lows as the bull market for
animal protein continues due to
demographic trends.
Base Metals
Base metals prices moved higher
during the first quarter of 2012
with a few exceptions. Aluminium
prices moved 5.53 per cent higher
gaining back some ground from
losses sustained during 2011. This chart illustrates the market action in silver after 15,000 contracts
(1.5 million ounces) of gold were sold on February 29th, 2011 as Fed
Nickel prices moved 4.65 per Chairman Ben Bernanke was speaking. Silver had broken through key
technical resistance above $36 and plunged after the selling.
cent lower in the first quarter
prompting the worlds largest Source: www.tradesignalonline.com
nickel producer, Russias Norilsk
Nickel, to warn that below $18,000
a ton five per cent of annual nickel
production becomes uneconomic. F3) Coffee Monthly Chart
With nickel currently trading at
$17,840 a ton Norilsk projected
2012 average nickel prices at
$18,000 per ton.
Zinc prices gained 8.67 per
cent for the first quarter. A
deficit in the zinc market is likely
to emerge by 2014. On going
demand for the metal coupled
with significant mine depletion
was the reason for higher zinc
prices.
Lead prices were little changed Coffee is in a long-term uptrend. The price correction during the first
quarter of 2011 has brought the price down close to long-term support.
and down a meager 0.16 per Stocks are low and fundamentally coffee prices should rebound.
cent for the first quarter. The big Source: TRADERS graphic
winner in the base metals sector
 23
TRADERS INSIGHTS

for the first quarter was the tin Conclusion the first quarter is the tight ranges History tells us to always expect our current economic system.
market. Tin prices plunged last Of all of the commodities that the across all commodity sectors and the unexpected in the world of Eventually, inflation will rear its
year. Indonesia is the worlds author tracks, not one was more the lower volatility of individual commodities. History tends to ugly head as deficits eat away
largest producer of tin accounting volatile in the first quarter of 2012 commodities. repeat itself! at the buying power of the U.S.
for 40 per cent of global sales of than prices ranges witnessed in Looking ahead to the balance The lack of volatility in the dollar and other currencies.
the metal. Indonesia cut supplies 2011. In fact, with the exception of 2012 the author sees a pickup commodity markets during the Higher commodity prices are
late last year after the price of a few most of the commodities in trading activity particularly in first quarter is telling. The MF here to stay in the long run
plunge. Tin was up a whopping traded at a minimum of 1/3 the the grain and precious metals Global scandal resulted in lower and volatility will continue. It
19 per cent for the first quarter! price range. sector. He is looking for higher volumes in the futures markets as is possible that we will see
China is an important factor prices in both sectors. Events some customers of commodity more dips in the commodities
in the base metal markets. The Looking Ahead surrounding Iran will dictate brokerage houses exited the markets over the coming months.
overall rebound in these metals Commodity prices recovered oil and oil product prices in markets. These customers had Global demographics point to
during the first quarter has 3.74 per cent in the first quarter the coming months. Natural lost faith in the futures markets, a continuation of the mega bull
signaled that China may not be of trading in 2012. However that gas prices will surely continue the regulators and the safe trend that started several years
experiencing a hard landing. was not the story. The story for to suffer from over supply keeping of their precious assets. ago in commodity prices in the
conditions unless there is a shock A pick up in high frequency long run it is simply the supply
to the system in the natural gas trading has changed the daily and demand equation with finite
T1) Commodity Volatility Chart Q1 2012 vs. 2011 markets. Base metals prices trading patterns in futures supply and ever increasing
will continue to trade in a range markets with computers trading demand due to more people in
Commodity 2011 price range (high to low) 2012 price range (high to low) Q1 as Chinas recovery weighs on for tiny ticks. February 29th the world.
Gold 46.88% 14.02% the mind of the markets. Animal appeared to be a watershed Just remember, markets do
Silver 89.43% 33.40%
Platinum 39.40% 24.99%
protein should continue to make day in commodities in 2012. The the unexpected and they usually
Palladium 61.12% 18.27% higher highs and higher lows as actions in the gold and silver cause a great deal of pain and
Copper 55.29% 17.60% the year wears on. markets felt like intervention of shake out even the strongest
Sugar 76.86% 16.81% Each year the markets tend to some sort. In an election year the position holders before they
Coffee 48.45% 38.21% experience a shock. Last year it last thing that an administration correct. The author expects
Cocoa 101.58% 23.10% was the earthquake and tsunami in power wants to see is runaway incredible volatility to re-emerge
Cotton 169.12% 14.41%
Orange Juice 38.38% 29.12%
in Japan and the European debt precious metals prices. Volatility in some commodity markets in
WTI Crude Oil 53.21% 15.26% crisis. In 2008 and 2009 we in the commodity markets in the 2012.
Natural Gas 72.68% 51.92% experienced a global financial first quarter was one-third of what In the markets where options
RBOB Gasoline 48.58% 22.03% meltdown. it was in 2011. are not expensive, enhance
Heating Oil 36.11% 14.18% This year we look forward to In the US, Congress and the your portfolio by using long
Soybeans 34.11% 22.07% a hotly contested and perhaps administration cannot agree on commodity option strategies. Due
Corn 49.21% 12.72%
nasty Presidential election in the anything. The level of gridlock to the low level of volatility in the
Wheat 74.57% 13.59%
Live Cattle 25.51% 13.22%
US. The Presidential election in the U.S. is unprecedented. commodity market during the first
Lean Hogs 39.39% 11.69% could be a very close contest. Washington is getting nothing quarter, option premiums have
There is a clear division of done for the American people. gone lower across the board.
61.05% 21.40% ideology in the US at this time. Politicians are spinning their Long options will help an investor
This table shows the range from high to low (as a function of price) of commodity prices for 2011 and compares
it to the range during the first quarter of 2012.
The election or perhaps some collective wheels. sleep at night in these markets,
Source: www.cqg.com other unforeseen event will cause Deficits and the declining which are bound to start moving
the commodity markets to move. value of paper currency define violently sometime during 2012.

06/2012 www.tradersonline-mag.com
 StockVest Incorporated
PO Box 47-0420
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 25

Hedge funds and investment

banks use robots to trade stocks
has emerged as one of the
realities of todays global markets
and one that needs to be looked
at closely.
High frequency trading is just
another attempt to beat the highly
efficient market yet the truth
of the situation is different from
the perceived threat currently
creating controversy.
It is natural to think that if
you trade faster, you can beat a
market opponent to the punch.
Lightning speed means you
can run rings around others like
a cheetah preying on slower
The Impact of High Frequency Trading Technology on Markets animals.
The nearly perfectly efficient
market means there might

Trading Warbots: be some money to be made,

yet this edge will quickly be
neutralised by others playing the

Are They Affecting the Market? same gameunless someone is

cheating.

Flash Orders
Technology has revolutionised trading. Real-time stock tickers, charts and trading platforms have provided investors with an arsenal of tools A Thwarted Scam
that they can apply to use in making their fortune. But, has technology changed things for the worst and do they actually beat the market, as High frequency trading came to
is often claimed? Private investment guru Clem Chambers, CEO of the financial markets website ADVFN.com and author of ADVFN Guide: A prominence due to flash orders.
Beginners Guide to Value Investing, casts his expert eye of the current state of market technology and asks what impact it is having. Flash orders were considered

Clem Chambers
Clem Chambers is CEO of
ADVFN (www.advfn.com).
His book 101 Ways to Pick
Stock Market Winners was
published on 24th February
2011 by Beautiful Books,
Paperback, 6.99.
06/2012 www.tradersonline-mag.com
by many in the market to be
cheating. Certain traders were
given advanced notice of other
peoples orders on their way to
the market.
This micro-second advanced
notice was enough to sweep up
cheap shares and feed them
to the flash order. This let high
frequency traders make a bit of
money on each of these orders.
Small profits turned into huge
ones when repeated hundreds of
times a day. This felt like a scam
and was stopped.
It was a scandal. It was the
advanced notice given to a sub-
set of the market that created the
inefficiency that allowed this profit
not simply the raw speed of
execution. It was outrageous that
exchanges should give advanced
warning in the first place.
Once this edge was removed,
speed was irrelevant for this
strategy and the free ride
ended. However high frequency
trading had by then earned its
infamy and has kept it.
This story might not sound
convincing enough you say?
Surely trading at trans-human
speeds is a way of making
money?
Machine-readable Feeds
Is Faster Really Better?
If a computer can read news,
interpret it and jump on a
bandwagon before anyone
else, surely it would give the
high frequency guys an edge.
You would think so, but having
studied the machine-readable
feeds of key players myself,
none demonstrated response
to news in a way indicating
superfast traders were
getting to the news in
microseconds.
So, if in theory this
is possible, up until
recently and over an
extended period of
time, this is not what
is driving the market.
Another question to
ask, who is the most successful,
richest trader of all time? The
answer is of course: Warren
Buffett. An ultra-low frequency
trader. Meanwhile, where are
the incredibly rich day traders?
Apart from the emotional logic,
why should faster be better when
human plus speed normally
equates to hospitalisation?
Of course, the reason high
frequency trading is in the
headlines is because it is so
sexy. You do not have to be
too bright to conclude that
high frequency trading sounds
like cheating and we all
understand cheating is a tried
and tested way to win. Winning
the financial game by cheating
should be a formula for infinite
wealth. What could be more
hypnotic than that prospect?
As such, high frequency
trading has all the spice and
dazzle required to sell a hedge
fund to certain kinds of investors.
The pitch is basic and well-
rehearsed: Invest with a high
tech hedge fund, full of pointy
headed geniuses. We are
Pure speed
however, is not
in itself abuse.
trading at the speed of light. Our
machines are feet away from the
stock exchanges computers.
Lights, cameras, action!
City marketing men always sell
the sizzle not the steak. High
frequency trading is the latest
reason to be parted with two and
20 per cent as the hedge fund
industry piles on the smoke and
mirrors.
High Frequency Trading
Not What People Think It Means
High frequency trading is just the
kind of slick story that lures in
the same kind of investors that
fell for Bernie Madoff and the
legion of funds that lost other
peoples shirts while skimming off
fortunes.
Once you leave the financial
Barnums behind, high-speed
trading robots sit in the markets
and work out large orders
26
by chopping them up into
manageable pieces and dealing
them out over extended periods.
This tranching of large trading
blocks is necessary to get the
best price for the client.
Some robots are
working on complex
positions that are,
in practice, large
insurance policies for
institutions with huge
exposures needing
to cover them with
hedges. Market
robots doing this
grunt work are overwhelmingly
the major component of high
frequency trading and for that
matter, the overall trading on the
worlds markets.
This high frequency trading
is a benign phenomenon that
improves the efficiency of the
market, but it is not what people
think of when they hear the
phrase.
Conclusion
What is feared when it comes to
high frequency trading is that its
capacities are effectively market
abuse. Market abuse is illegal.
It is the job of regulators to spot
activities that disrupt the market
and disallow them. Pure speed
however, is not in itself abuse.
Like all tools it can be used as a
weapon, but that is no different to
any number of potential risks that
will always stalk the market.
A High Frequency Traders Apology

Explaining the Mechanics Part 1

The author is a former high frequency trader. And following the tradition of G.H. Hardy, he feels the need to make an apology
for his former profession. Not an apology in the sense of a request for forgiveness of sins committed, but merely an intellectual
justification of a field which is often misunderstood. In this blog post, he will attempt to explain the basics of how high
frequency trading works and why traders attempt to improve their latency. In future articles in this series, he will attempt to
justify the social value of High Frequency Trading (HFT) under some circumstances, and describe other circumstances under
which it is not very useful.

Chris Stucchio
Chris is a software developer
with a focus on backends
and data analysis. In the
past, he was working at
Mesh Capital devising and
implementing strategies for
high frequency trading. Chris
is an expert in data analysis/
number crunching, systems
programming, and full stack
web development. He holds
a PhD in Mathematics from
Rutgers University. Chris is
currently working as Chief
Technical Officer of Styloot.
www.chrisstucchio.com
06/2012 www.tradersonline-mag.com
Mechanics of HFT
Any serious discussion of
HFT needs to begin with an
explanation of the mechanics of
how HFT works. The fundamental
object in HFT (or exchange-
traded securities in general) is
the order book. Suppose a guy
named Mal comes along and
wishes to purchase some shares
of Blue Sun. He will probably
have in mind some quantity he
wishes to purchase, and he
probably has some maximum
price in mind. So Mal approaches
a matching engine (e.g., ARCA,
BATS) and places his order there:
BUY(owner=Mal, max_
price=20.00, quantity=100)
At this point Mal has not
bought or sold anything he has
merely informed the world of
his desire to buy. The matching
engine takes his order and
displays it (anonymously) to all
other traders with a data feed.
Now suppose a woman named
Inara comes along and wishes to
sell some shares, say 200 shares
@ $20.10. She places her orders,
and it is again displayed to the
world (anonymously) and stored.
The order book now looks like
this:
SELL(owner=Inara, min_
price=20.10, quantity=200)
BUY(owner=Mal, max_
price=20.00, quantity=100)
At this point, no trades have
occurred Mal is only willing to
give $20 or less, Inara is only
willing to receive $20.10 or more,
so no trade occurs. At this point
the market has created a bid/ask
spread of $0.10 = $20.10 - $20.
Let us continue the example.
Suppose now a few more
people place orders suppose
Kaylee places an order to sell
200 shares @ $20.21 and River
places a sell order for 100
shares @ $20.10. These orders
are also stored.
Finally, suppose Simon comes
along and places a buy order for
250 shares @ $20.21. He would
be happy to trade with Inara,
Kaylee or River all are willing
to sell at a price less than or
equal to $20.21. The matching
engine uses two primary rules to
determine who will trade:
Price. The best price always
wins.
Time. If the price is equal, then
whoever placed their order first
wins.
So at the moment before
Simons order is placed, the order
book looks like this:
SELL(owner=Kaylee, min_
price=20.21, quantity=200)
Trades third
SELL(owner=River, min_
price=20.10, quantity=100)
Trades second
SELL(owner=Inara, min_
price=20.10, quantity=200)
Trades first
BUY(owner=Mal, max_
price=20.00, quantity=100)
When Simon places his order,
the matching engine will match it
as follows:
Simon buys 200 shares from
Inara at price $20.10. Simon
trades with Inara before River
because Inara was the first to
place her order.
Simon buys 50 shares from
River at price $20.10 because
River offers a lower price than
Kaylee.
Simon has now bought 250
shares, just as he desired.
At the end of this process, the
order book then looks like this:
SELL(owner=Kaylee, min_
price=20.21, quantity=200)
SELL(owner=River, min_
price=20.10, quantity=50)
BUY(owner=Mal, max_
price=20.00, quantity=100)
Because Kaylee is not willing to
offer a good price, her order goes
unfilled. Poor Kaylee. Anyway,
this is the basic mechanics of
trading. There are many more
details, of course, and far more
order types than merely limit
28
orders. But limit orders are
sufficient for this blog post.
Market Making
Most HFTs run a market making
strategy. What this means is they
play both sides of the table they
take no position on whether a
stock will go up or down. Instead,
they try to offer securities both to
buy and sell. If you want to buy,
they will sell to you at $20.10. If
you want to sell, they will buy
from you at $20. As long as their
buys and sells match do not get
too out of whack, the HFT will
collect $0.10 = $20.10 - 20.00.
Of course, the market maker
takes on risk he might buy at
$20 and then watch the stock
tank. If he buys at $20, and the
stock goes to $15 before he can
sell, he just lost $5. So the market
maker needs to balance risk
with reward if he sets the bid/
ask spread too low, he will lose
money, while if it is too high, no
one will trade with him.
It is important to note that
market making is nothing new. In
the era when stocks were traded
in 1/8ths and 1/16ths, market
making was done by humans
working in the pit. A single human
trader would often run a market
making strategy on larger stocks
with significant volume. Later
on, from the 1980s to the early
2000s, human day traders would
often fill this role. To a much
lesser extent they still do.

TRADERS INSIGHTS
Automated trading systems
have replaced these human
market makers for a very good
reason cost. For a strategy
(and note: this strategy works
only for a few securities, no
human can track hundreds of
stocks mentally) to be worth
a financial professionals time
and effort, it must generate at
least $20-200k profit each year
(this assumes a human smart
enough to day trade would
work for $20k/year). In contrast,
a single server in a data center
can run hundreds of strategies
at a cost closer to $50k/year,
and they can do it faster and
more accurately than any
human.
The rise of algorithmic trading
is merely a special case of
machines replacing humans.
Traders are no more immune to
this than factory workers.
Latency and Order Flow
For market makers, the name of
the game is order flow. As long
as your buys and sells are well
matched (i.e., every time you buy,
you also sell), your profit is going
to be proportional to
(# of shares traded) x (Ask price -
Bid price).
The constant of proportionality
depends mainly on the skill of the
high frequency trader at gauging
the risks.
06/2012 www.tradersonline-mag.com
Basically the more you trade,
the more money you make (all
else held equal). So how can a
market maker trade more?
The answer is that he needs to be
close to the top of the order book.
As we saw in our previous example,
Inara traded more than River, and
River traded more than Kaylee. The
simplest way to reach the top of
the order book is to offer the best
price. Supposing Jayne
wants to jump to the
top of the queue on the
buy side, he needs to The simplest way to
offer a better price than
Mal: reach the top of the
SELL(owner=Kaylee, order book is to offer
min_price=20.21,
quantity=200)
SELL(owner=River,
min_price=20.10, quantity=50)
BUY(owner=Jayne, max_
price=20.05, quantity=100)
Jayne offers a better price than
Mal, so he will trade first.
BUY(owner=Mal, max_
price=20.00, quantity=100)
Of course, there is a balance to
be struck. Since Jayne will only
be earning $0.05/share traded, he
needs to make sure this reward
outweighs the risks. Let us
suppose that the border between
expected profit and loss is $20.05
that is to say, there is not a
single market participant who
believes he can make a profit by
offering more than $20.05. In that
case, Jayne will always trade first,
since he placed his order earliest.
This fact shows why speed
matters. Suppose that at precisely
10:31:30:000 AM, new information
becomes available which suggests
that it will now be profitable to
place a buy order at $20.07
the best price.
perhaps a press release has
hinted that the price will go up, or
a correlated security has just gone
up in price. Because of this, both
Mal and Jayne want to change
the price on their orders to $20.07.
Whoever happens to be fastest will
rise to the top of the book:
SELL(owner=Kaylee, min_
price=20.21, quantity=200)
SELL(owner=River, min_
price=20.10, quantity=50)
BUY(owner=Mal, max_
price=20.07, quantity=100)
received at 10:31:30:427
BUY(owner=Jayne, max_
price=20.07, quantity=100) received
at 10:31:30:639, 212ms too late
This is why automated market
making has morphed into high
frequency trading, and why
so much effort is poured into
creating low latency systems.
Whoever places their order first
will be the most likely to trade.
A second reason
why speed is
important is because
when the market
moves, traders
often wish to cancel
their orders. At
10:31:30:000, an
event occurred which
suggested the price
of the security will
go up. It is likely
beneficial for River to cancel
her sell order at price 20.10 and
raise it to $20.20. Conversely,
after this event, it might also
be beneficial for another trader
(say Wash) to pounce on her sell
order at $20.10. River can make
more competitive sell offers if
she has the ability to rapidly pull
them from the market. If Wash
has the ability to pounce on
Rivers orders after the market
moves, she will need to be more
conservative, perhaps offering
only $20.15 even though she
would be happy to sell at $20.10
(that way she only loses $0.05 if
Wash pounces).
29
Why Does Everyone
Pile on at the Same Price?
The astute reader will probably
ask this straightforward question
why did Mal and Jayne both agree
that the best price to offer was
$20.07? Isnt it possible that Jaynes
calculations predicted the right price
to be $20.075, while Mal thought it
was $20.071? The answer is yes, it
is quite possible that Mal and Jayne
actually disagreed on the best
price to offer. There is no reason
whatsoever why Mal and Jaynes
computer programs or trading
strategies would both predict prices
identical to within many decimal
places.
However, regardless of what
their trading strategies say, they
are not permitted to place orders
at their best prices. SEC Rule
612 explicitly forbids offering to
buy or sell securities in subpenny
increments - i.e., Buy 100 shares
@ $20.07 is legal, while Buy 100
shares @ $20.075 is not. This
is also called the Sub-Penny
Rule. Prior to 2001, the limit was
actually $1/16 or $0.0625.
In real markets, with more than
just four to five participants, you
can also expect many orders to be
placed below the top of the book
(the highest bid price), at $20.06,
$20.05, etc. But the phenomenon of
many people piling up near the top
of the book does repeat in real life.
This article is reprinted from
www.chrisstucchio.com/blog
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This is neither a solicitation to buy or sell any type of financial instruments, nor intended as investment recommendations. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS OR TESTIMONIALS
AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. Thomson Reuters assume no responsibility for errors, inaccuracies, or omissions in these materials, nor shall it be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenue, or lost profits, that may result from reliance upon the information presented.

TRADERS TOOLS
Alpari (UK) Limited has
launched the live MetaTrader 5
(MT5) platform. The key benefits
of MT5 trading with Alpari (UK)
include among other things
a non-dealing desk (NDD)
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The new MetaTrader 5 Strategy
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can be found at www.alpari.co.uk
AgriCharts, the agricultural
division of Barchart.com, Inc.,
which provides market data,
agribusiness website hosting
and technology solutions to the
agricultural industry, announces
06/2012 www.tradersonline-mag.com
a new relationship with Weather
Decisions Technologies (WDT),
a provider in state-of-the-art
weather services, to provide
WDTs iMap, a dynamic and
interactive weather mapping
solution, to clients of AgriCharts.
The new interactive weather
maps are available to clients
using AgriCharts website hosting
service and content solutions.
The iMap solution utilizes the
FXCM
Google Maps API and provides
users with the ability to launch
the weather map into full screen
from a global level all the way
down to a farm level, including
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include among others zoom
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level (from World to Street Level
views), ClickCast (click anywhere
and receive current conditions
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Screen Mode with a single click,
and radar and satellite overlays
(including Local High Resolution).
For more information, please visit
www.agricharts.com
FXCM Inc. has launched an
improved and faster version of
its MetaTrader 4 (MT4) platform
offering. FXCM has added new
trading features including micro
lots (0.01 trade sizes), max
deviation, and the ability for MT4
traders to use FXCMs mobile
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control potential slippage with
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USD/SGD, USD/HKD, SGD/JPY,
USD/TRY, EUR/TRY, USD/RUB,
EUR/HUF, USD/HUF. More details
can be found at www.fxcm.com
TradingView, the social media
offshoot of trading software
company MultiCharts, is offering
users, financial website owners,
and reporters the opportunity
to embed its proprietary charts
on news sites, forums, blogs,
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Investors use TradingView to
present and share ideas and
trading strategies with other
users. The editable desktop-
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studies, and line tools. Users can
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charts. Any published chart
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which is available by clicking
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TradingView supplies free stock
and index charts using data from
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with stock fundamental data and
futures on the way. For more
information, please see
www.tradingview.com or
www.multicharts.com
31
Barchart.com
has released
Commodity
Network, a service
of INTL FCStone Inc
and an important online
source of in-depth news,
information and analysis about
commodities, a suite of services
including real-time quotes and
powerful charting functionality.
The platform incorporates
custom CommodityNetwork
features and information, as
well as CommodityNetwork
branding. Barchart is providing
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both a Professional and Lite
version of the application,
as well as mobile services.
CommodityNetworks services
include CoffeeNetwork
(www.coffeenetwork.com),
Globecot News Network
(cotton, fibers and textiles)
and eDairy (dairy products).
The partnership with Barchart
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data screens that deliver real-
time market quotes, charts and
option pricing as well as breaking
news and analysis which is
necessary to make timely trading
decisions. The service is hosted
and maintained by Barchart, as
well as cloud-based providing
maximum scalability, speed and
reliability. Additional details can
be found at www.barchart.com
or www.commoditynetwork.net

BOOKREVIEW
Top Traders Making Big Profits from the Crash of 1929 to Today
The Greatest Trades of All Time
By Vincent W. Veneziani
Financial and commodity markets
are characterised by periodic
crashes and upside explosions.
In retrospect, the reasons behind
these abrupt movements often
seem very clear, but generally
few people understand what
is happening at the time of the
moves, and fewer still have the
conviction to make a big bet
to capitalise on their unique
insights. However, some top
traders and investors have the
ability to stand apart from the
crowd, embrace a view that is
contrary to other market players,
and the willingness to make a big
bet. When markets break their
way and there is a mad rush to
get in or out of the market by
the general public, the traders
who got in early made the huge
profits.
The Greatest Trades of All
Time describes how top traders
made huge profits during the
most momentous market events
of the past century. From the
1929 stock market crash to
06/2012 www.tradersonline-mag.com
the 2008 subprime mortgage
meltdown, this book will chronicle
how a select few traders
anticipated market eruptions and
positioned themselves to reap
huge profits.
Traders and events discussed
include Paul Tudor Jones,
who shorted the stocks prior
to October 19, 1987, the most
severe one-day crash since 1929;
George Soros, who made an
estimated $1 billion shorting the
British pound during a currency
crisis in the 1990s; Jim Chanos,
who spotted Enron's fraud early
on and shorted the stock prior
to its complete collapse; John
Templeton, who's career was
bracketed by two amazing trades:
buying undervalued U.S. stocks
near the end of the Depression,
just prior to World War II, and
shorting Internet stocks just
prior to the collapse of the
Internet bubble in 2001; John
Paulson, who shorted subprime
mortgages in 2008, capitalising
on the collapse of the U.S.
32
BOOKREVIEW
housing bubble; and finally Jesse
Livermore, who shorted stocks
and made a fortune in the 1929
stock market crash.
Author Vince Veneziani
describes the economic and
financial forces that led to each Title: The Greatest Trades of All Time
market cataclysm and how these Subtitle: Top Traders Making Big Profits
individual traders perceived what from the Crash of 1929 to Today
was happening beforehand and Author: Vincent W. Veneziani
decided to place big bets, often Available on: Hardcover, eBook
Price: 30.99
at great risk and in opposition to
Publisher: Wiley Trading
consensus opinion at the time.
Website: www.wiley.com
This book brings to life important
historical moments in the About the author:
financial markets and provides Vincent Veneziani is Markets Medias content
contemporary traders and development manager and author of the book
investors insight on how great The Greatest Trades of All Time: Top Traders
Making Big Profits from the Crash of 1929 to
traders make great trades.
Today. He has appeared on CNBC, BBC,
The Greatest of All Time is Russia Today, Barrons and other financial
a fascinating historical narrative publications. He has also written in the past for
on how big traders profited Business Insider, Gawker Media, AOL and the
during financial market upheavals New York Daily News. He currently resides in
from one of the top business New York City.
experts out there. It is for anyone
interested in the history of trading
and profit and for anyone looking
to learn from some of the best
traders in our history.
 33
TRADERS TOOLS

WEBREVIEW Screening-Tool with IQ

FusionIQrank.com
It is the investors dream to choose only those stocks or ETFs among the thousands
offered that promise the highest profits. At the same time it would be helpful to
receive information if certain stocks or industrial sectors produce new signals. Other
requirements: Screening should combine not only technical but fundamental criteria
as well. Of course, all this should be affordable and easy to use. Wishful thinking?
Not at all, the web-based software Fusion IQ Rank offers all this and more.

Screening Is the Magic Word The Best of Two Worlds

Investors and traders who are
active in the stock market have
the same goal and that is to
find stocks that offer attractive
opportunities to profit. While
some of them start the search
based on technical analysis,
others believe in the power
of fundamental analysis. A
combination of these two
approaches would not hurt
quite the contrary! But the
implementation of the screening
is not quick or easy.
How about an All-in-One-
solution that is ideal for
everybody who trades on a
daily basis and has only limited
time? The US company Fusion
Analytics Research Partners
provides exactly this. Their online
platform www.fusioniqrank.
com offers a wide screening
tool for thousands of stocks and
What is the concept behind
Fusion IQ Rank? The web-
based software is a stock
ranking system that as the
name implies is based on
the fusion of technical and
fundamental analysis. Based on
many key figures an in-house F1) Main Page
algorithm provides a quantitative
ranking of over 8000 shares,
industrial sectors and ETFs.
Thus emotions and individual
opinions are removed and the
investor or trader gets a tool that
offers the possibility to achieve
higher yields than the whole
market. On the technical side
seven factors are used that are
evaluated individually and build
a scoring-number. Trend, money
ow, short interest and the share The Main Page can be created individually and offers a good overview
of all information. In this precise example the watchlist and the portfolio
of the institutionals invested are placed on the left side. Below you see the stocks with the biggest
moves in ranking. On the right side the Market Risk Model is placed as
are analysed and rated. On the well as lists with new buying signals, breakouts and single stocks that
fundamental side the focus lies scored more than 90 points recently.

ETFs that are listed at US stock on expected profits and cash Source: www.FusionIQrank.com
exchanges. ow. Both scorings are added

06/2012 www.tradersonline-mag.com

TRADERS TOOLS
to one Master-Score that has
a value between zero and 100.
Thus, the user sees at one glance
if a share is interesting or not.
The most important functions of
Fusion IQ Rank are:
Quantitative rankings of over
8000 stocks, industrial sectors
and ETFs with clear signals
(Buy/Hold/Sell)
Trading Screen with overview of
technically interesting stocks
Chart Book: Slide Show-
function for charts
Portfolio with monitoring und
alarm functions
Watchlist with monitoring und
alarm functions
Individual screenings
On-Road Test
The core of the platform consists
of three parts (apart from a
research and charting item) that
are introduced in the following.
Under Rankings investors can
retrieve rankings (updated daily)
that are based on technical and/
or fundamental criteria.
An example: An investor wants
to nd individual stocks with the
best overall valuation. With one
click the list appears (see Figure
2). It is possible to make further
limitations for example, only
technology shares with a buy
signal are shown. If you want to
follow this stock in the future,
you add it to your own watchlist
06/2012 www.tradersonline-mag.com
with a single click. The top-down
approach is easily implemented as
well. You start with the strongest
industrial sector and work through
to the strongest titles.
A highlight for traders is the
second menu Trading Screens.
Updated technical signals are
shown in table form. There are
a lot of signals to choose from,
for example breakouts, short
squeezes, timing-signals, gaps
or stocks with noticeable volume.
A trader who, for example, wants
to identify all stocks with a new
yearly high gets a list ordered by
subsectors that full this criteria.
Signals from the past are shown
in this table as well as information
about performance, volume and
short interest. If you want to take
a closer look at one stock you
just click on the ticker-symbol.
The result is a report based
on the stock. You can print all
results, convert them into an
excel-sheet or save them as PDF.
And the best: you can also take
a look at them in a slide show
a perfect feature to get a quick
overview of the selected stocks.
The third part includes all
individually adjustable features.
The user can congure his main
page, select certain main criteria
(for example market capitalisation,
liquidity) and manage his own
portfolio and the watchlist. The
best: the usual performance data
is shown as well as the current
rankings and their historical
34
change. Therefore you get very
good insight into the current
market situation and the various F2) Ranking
sector rotation. The alarm
functions have to be highlighted
as well. And for creative treasure
hunters there is the screening tool
that can be set up individually, but
is tied to the rankings.
Pro-Tool for Everybody
Interested in Stocks
The screening tool Fusion IQ is
a success all around. The user
gets a modern, structured and Investors can nd interesting stocks that are updated daily and
evaluated based on technical and/or fundamental criteria using the
time saving tool that enables a Rankings menu. There are different rankings for stocks, industrial
sectors and ETFs. After the rst evaluation the user can make further
systematic choice of interesting limitations, interesting stocks can be added directly to your own
stocks, industrial sectors and watchlist. A convenient view of all charts with slide show is possible
as well.
ETFs. The ideal conguration Source: www.FusionIQrank.com
and the ease of use invites you
to do treasure hunting and
analysis. Investors receive several F3) Snapshot
investment ideas; traders can
lter attractive candidates from
a huge universe. The use of the
watchlist and portfolio function is
very convenient and helpful. The
user is always kept up-to-date
if the rankings of candidates in
his portfolio change or if there
are new timing signals. Therefore
the software serves as a kind of
early warning function. There is
the slide show-function for fans
of charting, that allows browsing
through umpteen stocks within
minutes. If you are interested you
can apply for a free 30-day trial You can choose one stock and then a snapshot is shown, that includes
the scoring data as well as a short company description and a chart.
version (regular price: 49.95 USD The trading signals (buy/hold/sell) are shown in the chart.
per month) and let the software Source: www.FusionIQrank.com
convince you of its qualities.
Market Stages and Trading Strategies Part 3

Stage 3: Mean Reversion

The S&P 500 has declined a few per cent off the highs of 1422 since the most recent article, Market Stages and Trading
Strategies Part 2, was published in April (TRADERS 04/2012). In the most recent article about up trending strategies,
traders were to anticipate a possible trend change as the S&P 500 rallied into historical highs (supply zones). How do we
modify the up trending trading strategies if the trend is weakening in the supply zones?

Tillie Allison
As an instructor for Online
Trading Academy, Tillie began
teaching following the financial
disruption of 2007. Her goal is to
educate students on the
realities of the markets and to
teach students how to develop
a skill set to successfully trade
the markets. She is a member
of The Market Technicians
Association, The Certified
Financial Planning Board of
Standards, has an Associates
Degree in the Applied
Science of Real Estate, and a
Bachelors Degree in Business
Administration.
06/2012 www.tradersonline-mag.com
While the news reports focus
on earnings announcements,
debt, and other current events,
technical traders focus on key
price levels to anticipate where
markets will likely change
direction. Earnings reports have
been good. According to briefing.
com, over 70 per cent of reported
earnings have beat expectations
today, but that is actually below
the almost 80 per cent rate
posted so far this quarter for
all companies. Overall, the S&P
500 rallied more than twelve per
cent in Q1 of 2012 and on Friday,
March 23, the S&P 500 closed
negative for the week. Again, on
Friday, March 30, the S&P 500
closed negative for the week
suggesting that the S&P 500 was
weakening.
Fund managers rebalance
portfolios using tactical asset
allocation models and technical
traders use key price levels to
determine where fund managers
are accumulating (buying) and
distributing (selling) a variety
of global markets. Weekly
analysis of the S&P 500 prepares
technical traders in advance of
37
where fund managers are likely to
rebalance.
As the S&P 500 climbed higher
week after week (above the 50
SMA and above the 20 EMA
on the weekly chart), technical
traders rely on supply zones to
indicate where fund managers
are likely to distribute, signalling
a trend change from an uptrend
(stage 2) to a downtrend (stage
4). In Figure 1, the supply zone is
identified in advance and when F1) SPY Weekly Chart
the S&P 500 began to show
weakness on Friday March 23,
2012, technical traders reacted
by either protecting profits in long
positions and/or selling short
in stage 3 and stage 4 (stages
defined in TRADERS 03/2012).
Stage 1 is accumulation, stage
2 is an uptrend, stage 3 is
distribution, and stage 4 is a
downtrend.
Trading Derivate
Markets on Smaller Time frames
The SPY is the most popular
traded Exchange Traded Fund Moving averages are used to determine the direction and the strength
of the trend. The supply zone of 142.84 and demand zone of 136.07
(ETF) and used primarily for are used to identify trading opportunities.
portfolio management. After the Source: www.tradestation.com
S&P 500 declined more than four

TRADERS STRATEGIES
per cent off the weekly highs,
technical traders use the demand
zone to anticipate where fund
managers will buy back in and/
or cover short positions. Futures
traders also analyse the SPY and
the cash S&P 500 index to cross
reference data. Cross referencing
data means to use the analysis
from the weekly time frame as a
point of reference when analysing
the daily chart of the same,
related, or correlated
derivate markets.
On April 5, 2012,
the SPY closed below
the 20 EMA on the
daily chart confirming
a trend termination
(stage 4 downtrend).
In Figure 2, there are
key price levels from
the weekly chart and
there is also a moving
average for the daily trend. The
demand zone of 136.07 is a very
important level since it is a weekly
demand zone. The demand zone
of 136.07 was tested on April 10
and the SPY gapped up on April
11, confirming the validity of the
demand zone. Planning to buy
in the demand zone using the
moving average on the daily chart
as a profit target, is called, mean
reversion strategy. Since the
trade is using a weekly demand
zone, the trade is in the direction
of the primary (weekly) trend but
the daily trend is down. The entry
will be near the demand zone of
06/2012 www.tradersonline-mag.com
136 and the exit will be near the
20 EMA of 138.56 on the daily
chart and the trade parameters
will be identified on smaller
timeframes.
Strategy for Buying in a Weekly
Uptrend and Daily Downtrend
Mean Reversion is a popular
trading strategy. With the demand
zone of 136.07 on the weekly
time frame, futures traders
The trader must
understand each
component of
the plan in detail.
cross reference the data with
the ESM12 (ES) to determine the
parameters for a high probability
trade in the futures market. Since
the market is in a stage 4 on the
daily chart, the 20 EMA is used
as a dynamic supply zone and
will be cross referenced with
horizontal supply zones on an
intraday time frame of the ES.
In Figure 3, the chart of the
240-minute time frame is used to
cross reference and fine tune
data points from the higher time
frame. The 20 EMA on the daily
chart is near 138.50 and the ES
has a supply zone near 1385.50.
38
The demand zone of 136.07 on
the daily chart is near the 1360.70
demand zone on the ES. With the
demand and supply zones clearly
labeled on the 240-minute chart,
the high line of the demand zone
is identified as 1367.50 and the
high line is used to plan the trade
entry price. The high line is
defined as the proximal demand
line relative to the supply zone.
The high line or proximal
demand line was
identified on April
17 at 8:00 am CST
when the ES clearly
traded out of the
zone (labeled with a
1 in Figure 3). When
the proximal demand
line is identified on
the 240-minute time
F2) SPY Daily Chart
frame, the trader can
plan to use that level
for an entry zone for buy orders
the next time that price trades
into the zone. As price drops into
the zone trader will determine
trade parameters including the
entry price, the stop loss, and
profit targets.
Pullback Plan and Execution
The rally out of the proximal
demand zone on April 17 reveals
that there is demand (buying
power) near 1367.50 on the ES. The SPY closed below the 20 EMA on the daily timeframe on April 17,
2012. This trend termination prepares traders for continuation of stage
On April 19, price trades into 4 and is used to trade the mean reversion strategy as price rallies from
demand zones to the 20 EMA.
the zone and the parameters
for the trade are identified on Source: www.tradestation.com
the 5-minute chart. It is very
 39
TRADERS STRATEGIES

important to cross reference Risk-to-Reward Many traders apply a rule-based

the data points to calculate the The risk-to-reward parameters system to increase size during
score of the trade. Trading with are determined on the 5-minute the trade while managing risks. F3) ES 240-Minute Chart
levels of higher time frames like time frame. Although the There are also automated trading
weekly charts, daily charts, and demand zone was originally systems that are programmed to
240-minute charts, increases identified on higher time frames, trade these moves electronically
the probabilities of success for the 5-minute candles enable under strict supervision. The
the Intraday trader. The 5-minute traders to reduce risks by trader must understand each
chart helps traders minimise risk placing the stop-loss below component of the plan in detail
by determining what the low is as the wick of the candle on the to properly monitor the mean
the market trades into the zone 5-minute chart. The profit reversion strategy.
and out of the zone. targets are determined by the
In Figure 4, the demand zone of supply zones on the 5-minute Conclusion
1367.50 was identified in advance time frame. The risk per trade for Determining whether mean
so there are no surprises when one contract of the ES is three reversion is the right strategy for
price drops into the zone at 2:40 points (1368 - 1365 = 3). The ES you will depend on a variety of
CST. point value is $50.00. The total factors. You may need training
risk of $150 (3 points x $50 point to manage the volatility as price The 240-minute timeframe shows the proximal demand zone of
1367.50. The proximal demand zone is used to plan trades.
Trade Details value) is then compared to the trades into the zone. People get
Entry: 1368 potential reward for the trade. very confused during market Source: www.tradestation.com
Exit 1: 1373 There is a potential of $650 (13 hours if emotions kick in. We
Exit 2: 1376 points x $50 point value) if the usually listen to live trading
Exit 3: 1381 position is entered at 1368 and sessions when trading to make F4) ES 5-Minute Chart
Stop: 1365 closed at 1381. sure we are on target and
following the plan. All of this hard
work goes out the window if
Strategy Snapshot emotions interrupt the process.
There are also online tutorials and
quizzes available to help speed
Strategy name: Mean Reversion on the daily chart up and strengthen memory
Market selection: S&P 500 Futures skills. Cognitive thinking skills are
Market tick value: $12.50 necessary to manage emotions
Market hours: Regular and 24 hour sessions and to execute the strategy
Indicators: 20 EMA on daily, 50 SMA (Simple Moving Average) and 20 EMA successfully. Mean reversion (also
(Exponential Moving Average) on weekly
known as counter trend trading)
Demand zone: Gap up on daily chart & proximal demand zone on 240-minute timeframe
and trend trading strategies are
Supply zone: 20 EMA on daily chart and intraday supply zones on the 5-minute applied to all markets. Specific
timeframe
parameters are determined for The 5-minute timeframe is used to determine intraday and swing trading
parameters. The mean reversion trade was first identified on the daily
Risk-to-reward: Risk less than 1/3 of profit per trade
each market but the same rule- chart as a swing trade and also traded intraday on the 5-minute timeframe.
Size: No more than one to two per cent of account value
base strategy and process is Source: www.tradestation.com
applied.

06/2012 www.tradersonline-mag.com
Examine the Power of Candlestick Reversal Patterns That Are also Bollinger Bands Outliers

Candlestick Outliers
What is a candlestick outlier? It is the combination of a Bollinger Band Outlier while also qualifying as one of the candlestick
reversal patterns. When price closes outside the Bollinger bands (more than two standard deviations) it is an event that
happens only about four per cent of the time. Additionally, if the outlier is also a candlestick reversal pattern, this would lower
the odds of an occurrence considerably and create a truly Blue Moon Event worthy of a speculators attention. However,
by choosing to only apply this strategy to daily charts, it gives the speculator the luxury of scanning across the universe of
tradable asset classes including stocks, forex and commodities increasing the odds of finding one.

Bruce Milbury
Bruce had the privilege of
having the last secular bear
market of the 20th century
(1966-82) teaching him the
perils of long term investing
early on; hence, a trader was
born! Due to that experience,
he has many insights on how
to survive and flourish in the
current secular bear market
that started in March 2000.
Excelling at class management
and meeting students indivi-
dual needs are skills Bruce has
honed from numerous years of
classroom teaching.
06/2012 www.tradersonline-mag.com
Logic
The key to successful trading is
to have an edge in ones trade
selection. Otherwise, it can feel
like you are playing the ole shell
game. The pea was there but
not now. Successful speculators
develop a screening process for
their trade selection within an
overall trade plan. Most platforms
will allow a trader to scan
Bollinger Band Readings. Outliers
would, statistically, be negative
readings for price below the lower
band and readings above 100
for price above the upper band.
All outliers are not created equal.
First, if the outlier is not one of
the candlestick reversal patterns
it has little significance. Secondly,
where the outlier occurs is very
important.
Overall, the significance of the
outlier is raised considerably if it
occurs within a dip in an uptrend
or after a rally in a downtrend.
In a sideways market, reliable
signals can appear in overhead
resistance or down in support
areas. Counter trend trades,
although not the best scenario,
can be effective at extreme
levels especially if the rally
or drop is encountering old
zones of resistance or support
respectively. Lastly, a true outlier
is closing above or below the
42
high or low bands, respectively.
Preferably, the entire body is
outside the bands. However, we
will also consider partial outliers
where just part of the candle
was violating the bands but not
closing outside them. Partial
outliers are not the best situation,
but still an edge to exploit.
Rules for Entry
Once the signal occurs as a
total or partial outlier (former
preferred) there are three possible
entries depending on ones level
of aggressiveness. The most
aggressive would be entering
immediately as a swing trade
risking the high or low of the
candle pattern. Or one can wait
for conventional confirmations F1) Soybeans Daily
of candle reversal patterns (not
covered in this short article).
Usually, confirmation would
occur the next day or two. Day
traders can look for entry the
day after the signal by looking
for a little technical confirmation
on their intraday charts such as
momentum breakouts of higher
highs or lower lows or breakouts
from intraday triangles, reversal
patterns or even just the breaking The soybean continuation chart reveals over eight months of sideways
activity, with multiple set-ups in a sideways market. Trade profit/loss
of a trend line etc. Signals as will only be noted if unprofitable. See comments on trade entries
1-14 in the article.
mentioned should be of higher
octane when preceded by an Source: TradeStation
outlier.
 43
TRADERS STRATEGIES

For the sake of simplicity risk Figure 1: Soybeans Daily 11. Bearish engulfing. Yes, the
is defined by violating the highs 1. Short partial outlier of little body is the same colour
or lows of the candle pattern shooting star. as the big body (normally
and reward is three times 2. Short bearish engulfing partial different). This is an accepted
risk making most of these outlier unprofitable. exception when smaller body
candlestick outliers profitable. 3. Bearish engulfing barely is really small.
Either targets or stops exit qualifies as outlier with both 12. This is a total outlier of bullish
trades. Of course traders may candle shadow just touching harami and yet another
elect to extend the holding the bands. exception. The smaller
period in trending markets. 4. Hammer partial outlier. Was body is usually an opposite
Money management could also preceded with a complete colour. When the pattern is in
be tweaked with adjustments outlier but was not a candle oversold territory for bullish
with stops before hitting the pattern. Almost was a harami, harami this qualifies and
target level to lock in profits or but smaller white body is called a homing pigeon
create a break even situation. needed to be totally inside happens enough to make a
One Cancels the Other (OCO) preceding black candle. note of it. As a bonus the little
orders are recommended. 5. Bullish harami as partial outlier. black body was also engulfed
Let us examine three different 6. Hammer partial outlier. by subsequent white candle
asset classes with three different 7. Bullish harami needed to be (Bullish engulfing Pattern).
scenarios: 1) A sideways patient to cash in on this one. And the engulfing also was a
market with soybeans (future). 8. Bearish engulfing partial partial outlier.
2) An upward trending market outlier. 13. Spinning top not truly a
with BMC (equity). 3) Lastly, a 9. Bullish harami nail biter that reversal pattern, but does
downward trending market with paid off. indicate hesitation of the
USD/JPN (forex; long U.S. Dollar/ 10. Another bullish harami barely trend. Also, notice how the F2) BMC Outliers
short Japanese Yen). touching the lower band. bodies are becoming smaller
and smaller indicating a loss
of momentum as the old
Strategy Snapshot resistance area from February
is approached. Partial outlier.
14. Hammer partial outlier and
Strategy name: Candlestick Outlier unprofitable. Notice how
Strategy type: Buying dips and selling rips support area was violated
Time horizon: Daily charts with swing holding time with first closing low below it
Setup: Bollinger Band outliers; Setups come from the daily charts looking for paving the way for additional
overbought or oversold conditions for short or long positions respectively
declines.
Entry: Candlestick pattern break outs on daily charts or follow up intraday trading
with bias from daily pattern
Stop loss: Above the high or below the low of the candle patterns
Figure 2: BMC Outliers
Take profit: When position rewards 3x the initial risk
1. Partial bullish harami. Could One stunningly great set up with a dip in an up trending market.

Exit: When stops or target are met as described in article

have been sold for profit as Source: TradeStation
the gap was closed or at least

06/2012 www.tradersonline-mag.com

TRADERS STRATEGIES
break even when lower low
was made.
2. Partial bullish inverse doji
hammer (being aware of
potential double bottom).
3. Partial no candle pattern.
No trade taken by this
strategy. However, not to
forget basic
technical
analysis, there
was a significant
declining wedge
that could have
been taken upon
breakout.
4. Partial, but body
totally outside candlestick outliers.
lower band.
This is just a
doji not a major reversal
pattern. However, it is a
dip in an uptrend which
is very good. Another
interesting observation is
the magnitude of change.
Notice how the candles
were getting progressively
smaller indicating the selling
is running out of steam with
the doji, by itself, indicating
hesitation of the downtrend.
Figure 3: USD/JPY Daily
1. Partial outlier bearish harami
which actually was a counter
trend trade from prior price
action (not shown).
2. Partial Hammer that was
also part of bullish engulfing.
Counter trend that lost steam
06/2012 www.tradersonline-mag.com
at mean reversion of Moving
Average (20).
3. Partial bullish engulfing and
counter trend trade that was a
loser.
4. Barely touching the lower
bands with this bullish harami.
5. Total outlier of spinning top
Any trader
will see improved
results by noticing
which is also part of a bearish
harami.
6. Partial counter trend
piercing pattern.
7. Total outlier, but not a candle
pattern. I would be inclined
to take those that are flowing
with the trend and this
definitely qualifies.
8. Partial hammer with long
shadow on top. Count trend
trade as loser.
9. Almost total outlier doji
hammer. Counter trend trade
loser.
10. Partial hammer counter
trend trade as yet another
loser. See a theme here yet?
11. Partial not one of the
reversal patterns, but small
body is a spinning top
44
indicating hesitation of the
existing trend (down) given
extra credence by the high
wave pattern just before
it. The high wave boldly
illustrates hesitation of the
current trend. Buying above
the shadow of the spinning
top would be the way
to approach this for a
little confirmation.
12. Partial as with
many examples
before this, we
are looking at two
different candle
signals. The black
bar engulfs the
little white body
before it forming a
bearish engulfing. The little
white body is also a bearish
hanging man.
13. Almost total outlier hammer
that is still working. F3) USD/JPY daily
Conclusion
Constantly referencing the daily
chart and candlestick dynamics
can really help deliver very
profitable trades with high risk/
reward ratios that can more than
overcome many small losses for
swing traders. For the day trader,
paying closer attention to the
overall daily patterns will provide
(we believe) higher octane entries
and exits. Regardless of style, Multiple set ups in a down trending market with some of the
countertrend trades working as well.
any trader will see improved
results by noticing candlestick Source: TradeStation
outliers!
Confirm Entry/Exit with Less Risk

Profitable Medium-Term Investment with Matching Indicators

Indicators show buy and sell signals for a particular short period of time which generate maximum return out of a trade. This generally depends on the parameters of indicators which are applied by a trader or an
investor for analysing intraday, daily, weekly or monthly charts. Standard parameters with standard indicators will provide successful trades with confidence.

Keyur Panchal
Keyur Panchal has an MBA
in finance, a Masters in
cost accountancy & finance
and is pursuing his CFA.
He has been working as a
Finance Research Analyst
in Ahmedabad, India. He
is also handling his clients
portfolios using technical and
derivative analysis of market
movements to profit in any
kind of situation. Contact:
keyurpanchal5@yahoo.com
06/2012 www.tradersonline-mag.com
Price Line and
Standard Indicators
In technical analysis, there are
many indicators like MACD
(Moving Average Convergence
Divergence), Stochastic (full,
slow, fast etc.), RSI (Relative
Strength Index), William % R,
Trix, Momentum, and so on. All
of these indicators are analysed
using the price line. There are
three major standard indicators
which are generally used for
short, medium, and long term
period i.e. MACD, Stochastic
and RSI. But here we are going
to learn how to get maximum
reward out of the perfect
combination of MACD and
Stochastic.
In this article, we will analyse
the most commonly used
parameters for MACD and
Stochastic i.e. twelve (fast), 26
(slow), three (signal) exponential
averages for MACD and five
(%K), three (%D) for Stochastic.
The MACD indicator is primarily
used to trade trends and should
not be used in a ranging market.
Signals are taken when MACD
crosses its signal line. Whereas
the Stochastic indicator consists
of two lines; %K compares the
latest closing price to the recent
trading range and %D is a signal
line calculated by smoothing %K.
Practically, traders can change
46
the inputs for both indicators for
long or short term view for any
trade which means, the higher
the parameters, the longer the
view for analysis. In the general
scenario, Stochastic vibrates
more than MACD in a chart with
standard parameters and gives a F1) EUR/USD MACD and Stochastics Crossovers
short term view to a trader.
Setup and Method of Getting
View from Combination of
MACD and Stochastic
According to general thought
about crossovers, traders
believe that a crossover below
20 or nearer (cutting upward) is
the signal to buy or take a long Figure 1 shows the MACD and Stochastic crossovers with price
movement for EUR/USD in the 1-hour chart. Drawn rectangles are the
position and a crossover above indication of accumulation and correction with related indicators of an
underlying.
80 or nearer (cutting downward),
is the signal for selling or exiting Source: www.icharts.in
the position (20 and 80 are
the stochastic measurements
indicating oversold and
overbought respectively, for a F2) EUR/USD Crossover Signals
stock).
Both MACD and Stochastic
generate crossovers in the longer
period time horizon. But what
to do if one indicator is cutting
upward and another is cutting
downward at the same time or
is nearer (one by one)? This may
be the most frequently asked
question of users of these two Figure 2 shows the EUR/AUD 1-hour chart, which shows a crossover
in Stochastic between the two crossovers in MACD.
indicators. This event occurs
several times in any stock. Here Source: www.icharts.in
are some explanations of how
 47
TRADERS STRATEGIES

to use both indicators and get
the most benefit from them. If
we draw MACD below the price
line, you will see some good
accumulation in a stock when
the indicator is cutting upward or
the crossover is below/near zero.
The opposite is true on the other
side, heavy selling pressure or
profit booking can be seen while
the indicator is cutting downward
or the crossover is above/near
zero. These events can be seen in
Figure 1.
We will take MACD (12,26,9)
and Stochastic (5,3,3) below the
price line. The general difference
between the two crossovers in
MACD is 15 to 25 candles, and
five to ten candles in Stochastic.
Now, the main objective of this
article is to identify the small
differences and locate exact entry
and exit points for confirming
results. However, this will not
happen if a trader takes a long
position and immediately hits
a stop loss then the price line
moves on to the target price. By
putting MACD and Stochastic
together below the price line, you
will see two to three crossovers
of Stochastic between two
crossovers of MACD as indicated
in Figure 2.
Entry
The right entry level determines
the profit of a trade. In Figure
2, we can see some crossovers
of Stochastic (points # 2, 3, 4,
5) which are between the two
crossovers of MACD (points #
1, 6). This shows that there are
some correct entry and exit levels
in Stochastic between points
1 and 6. If we check the trend
between points 1 and 6, it is
up and MACD also shows buy
indications.
On the other hand, point
2 which is a sell signal of
Stochastic occurred immediately
after point 1 which is a buy
signal in MACD. Here, a general
scenario occurs: A trader will
take a buy position at point 1 and
makes a stop loss below two per
cent or at the recent low level for
the target of the next crossover
from above zero in MACD. But
in this case, its stop loss will be
triggered because Stochastic is

Strategy Snapshot

Strategy name: Profitable medium-term investment with matching indicators

Strategy type: Trend reversal pattern for short-medium period of time
Time horizon: 1-hour and daily chart
F3) Entry and Exit Levels
Setup: Normal or increasing volume, no fundamental news and rumours
Entry: Entry at Stochastic crossover below or near 20 for buy position and above or near 80 for sell position
Stop loss: Stop loss at level at recent three candles lowest low for buy position and level at recent three candles
highest high for sell position
Take profit: Book profit at immediate MACD crossover after entry
Trailing stop: Trailing stop at cost to cost when gaining equal as pre-determined risk, with normal volume
Exit: Exit with market price order at profit booking price level if in profit and putting stop loss at lowest low and
highest high and vice versa
Risk and money management: Two per cent risk of margin account
Figure 3 shows the right entry and exit levels with the help of Stochastic
Average number of signals: Average number of signals is one out of 30 to 40 candles, if traded underlying has normal volume and MACD. This event remains only for short term, as a result, traders
should keep in mind to exit from the position.
Average hit rate: Nearly 70 per cent success ratio if conditions are fulfilled
Source: www.icharts.in

06/2012 www.tradersonline-mag.com
 48
TRADERS STRATEGIES

indicating a sell signal at point 2
and then the price line reaches
the target level. The trader
should wait for a buy crossover
in Stochastic after the buy signal
in MACD. In Figure 3, point 1 and
point 2 are not proper levels to
enter the underlying but point 3 is
the right level for opening a buy
position because its low levels
may hit the stop loss if the trader
has taken a buy position earlier at
point A in the price chart.
This strategy is only for short to
medium term time periods. As we
discussed earlier about first a buy
and then a sell position, in the same
way, a trader can first do a short
sell and later cover the position i.e.
indicated in Figure 3, as points 7 to
10 in the indicator graph.
Position Size
A trader will take a large position
if he is convinced about the trade.
But if any news, rumours or some
fundamental information come
out, the price line will be highly
affected and the trader may face
huge losses. Hence, the position
size should be determined as to
whether it is a confirmed trade or
not. Practically, a trader should
not take risk more than two per
cent of his margin account. So,
the number of stocks = 0.02 *
margin account / (difference
between entry and exit levels).
Exit
The exit level measures the profit
earned from the position. Only
a proper exit plan will realise
profit with less risk. In Figure 3,
point D which is the crossover
of MACD above zero, is the exit
level if the entry level is point B in
the price chart. In simple words,
an immediate MACD crossover
after entering the position will be
the exit level. Only the most risk
tolerent traders can speculate
and open an inverse position
against the MACD trend shown in
Figure 3 as points G (entry) and F
(exit) i.e. crossovers of Stochastic
between two MACD crossovers
(points 7 and 10).
The stop level is of the same
significance as entry and exit
points. For this strategy the
recent three candles lowest
low level will be the stop level
for a buy position, and vice
versa, the recent three candles
highest high level will be the stop
level for a short position. As a
result, the trader will not ruin
his portfolio should successive
loss making trades occur. In
calculation, risk = entry level -
three candles lowest low level
for a buy position, and risk =
three candles highest high level
- entry level for a sell position.
The stop can be triggered if
some unexpected fundamental
news, rumours from other
traders or low volume in the
underlying occur.
Review and Outlook
The objective of this article is
to identify successful trades by
combining MACD and Stochastic
crossovers which are two of the
most well known indicators in
the world of technical analysis.
With this article we can use and
analyse both the indicators not
only for oversold and overbought
conditions of the stock but also
for justifying making successful
trades out of them. This strategy
can be used in the 1-hour and
daily chart.

Read in the next TRADERS July issue from 28. June 2012
COVERSTORY
Poker for Your Prots
by Thomas Wacker
A successful poker player must know when he should
push his stake, wihtdraw, or just pass. This is true for
trading as well. However, here you do not look at the
face of your opponent but have to make your decisions
by means of technical analysis. The charts tell the trader
what he has to do: waiting, entering or passing? Playing
poker and trading have a lot in common, therefore it
should be noted: poker for your profits.
PEOPLE
Mark Minervini
Mark Minervini is one of Americas most
successful stock traders; a veteran of Wall
Street for nearly 30 years. Minervini is featured
in Jack Schwagers Stock Market Wizards
Conversations with Americas Top Stock
Traders.
INSIGHTS
The Long Sought for
by Mustapha Azeez
Ultimately, Holy Grail exists in trading and it is
what this article is all about. Those who think the
secret lies in a complicated trading system are
wrong. Key is to keep everything safe and simple.
STRATEGIES
Trading with Heikin-Ashi Charts
by Christian Kaemmerer
Gradually the more or less familiar Heikin-Ashi
charts find their way into the world of trading.
Let us have a look at the world of Japanese
candlesticks and be convinced by its visual clarity.

06/2012 www.tradersonline-mag.com
Low Risk, High Reward

Red-White-Red
Pattern Trading
Pattern Trading can be a low-risk and highly profitable style. Ever-returning
formations are easy to describe, and can be easily tested for their profitability. The
pattern introduced here does not only awaken associations with the Austrian flag
but might also fill up your cash box for vacationing. This article will show how we
can use it to our advantage.

Philipp Kahler
Philipp Kahler studied Electrical
Engineering and has worked in
finance for many years. After
working as proprietary trader
at Bankgesellsachaft Berlin he
now developes and oversees
quantitative portfolios for insti-
tutions. He lives in Graz and
Berlin, and can be contacted at
http://quanttrader.com.
06/2012 www.tradersonline-mag.com
Price Patterns
In general, price patterns count
as highly profitable investment
strategies. You will hardly find a
trading professional who does not
in some way or another integrate
the conclusions he draws from
recurring formations in his trading
decisions.
The most famous pattern
is probably the candlestick
pattern hammer. It describes
the behaviour of the markets in
one day, and shows where and
how the open/high/low/close
is arranged in the price scale.
This in turn allows us to draw
conclusions about the market
behaviour of the following day.
A hammer is a day in the
downtrend, which might lead
to a trend reversal. The day
begins weak, but then the
change comes. The market
compensates for the lost terrain
and closes near the opening.
The chartist does not care about
what introduced the reversal in
the market direction. The only
important thing is that the market
removes itself from the daily low
and closes where it had already
opened. Figure 1 shows this
candlestick pattern.
For the next day, this means
the following: If the market is
50
able to continue rising and pass
the high of the previous day, this
is a strong bullish sign and we
can think about a long position.
If, however, the market begins
to fall again and reaches new
lows, the intraday trend reversal
of the hammer was, after all, a
premature strengthening of the
bulls. In case we are already long,
we should close our position
at the latest at the low of the
hammer.
Therefore, a pattern presents
a good possibility of indicating
exactly where to place the entry
and exit stops. With known F1) Hammer
stops, it is possible to choose
the correct position size and,
as we know, this is the key to a
successful trade.
Red-White-Red
The red-white-red pattern
includes three days total. It
does not describe the market
behaviour of one day only, but
determines the precise sequence
of the development of three
successive days. The first day Figure 1 shows you two occurances of one of the simplest price
patterns the hammer. The market makes new lows in the course
of the pattern is a falling day, of the day, but recovers and closes near the opening. After the first
hammer, displayed in red, the market could build neither a new high
represented as a red candle in nor a new low. The pattern therefore remained without consequence.
the chart. This negative day is The second hammer clarifies how the idea should work. The market
rises further on the day after the hammer and we go long on the high
followed by new lows and a short of the hammer and place the initial stop on the low of the hammer.
break; the market closes above Source: www.tradesignalonline.com
its opening on day two of the

TRADERS STRATEGIES
pattern. This day has to be the
lowest low of the three days. On
the last day of the pattern there
is another negative day. The
correction of the previous day is
over, though the bears are not
strong enough to push the price
under the previous days low; the
market has to trade above the
low of the white candle, however
close under its opening. In Figure
2 we see several examples of this
pattern. The two upper charts
show the DAX30 index, both
lower charts show the S&P500
index.
The idea behind the pattern, as
we can see in the chart, is that a
trend reversal is imminent after
these three days of indecision
and todays higher low. Whether
this pattern is significant enough,
and how you could trade it, is
what we will discuss next.
Entry
With this definition of the pattern,
we know its setup. However,
to be able to make money with
such a pattern we have to decide
exactly where the position should
be opened, how large it should
be, and when the position should
be closed hopefully with an
appealing profit. The pattern
itself (and this is true for all sorts
of patterns) is not a sufficient
reason to jump into the market
immediately and build a position.
First of all, the market has to
confirm the idea. It has to show
06/2012 www.tradersonline-mag.com
that the expected uptrend will
follow the red-white-red pattern,
which we have discoverd.
Only when the market exceeds
the high of the last two candles,
in other words when the bulls
clearly have taken over, is it your
time to enter the market.
When the market rises above
this point and therefore makes
a new high, one can no longer
talk about selling pressure. The
market seems to have made
up its mind about direction
after three days of indecision.
In addition, the low of the white
candle of the formation was
confirmed by the new high as a
swing low.
In practice, you can make this
entry with the appearance of
this pattern by sending a valid
stop-buy order to your broker on
the high of the last two days for
the following day. However, you
should only enter the market if
it has not already opened with a
gap above the formation.
Position Size
Paracelsus knew that the dose
decides whether it is poison
or medicine, and it is similar
for us traders when we have to
determine the size of the next
position.
Before we think about how
many stocks we should buy, we
have to consider the point at
which our trading idea proves
false and we have to close the
51
trade at a loss. Hence, we have
to define our initial stop and
therefore determine the point loss F2) Price Pattern Red-White-Red
which is the maximum possible
for this trade.
As an entry point we decide to
enter the market as soon as it is
clear that new highs are forming.
If this new high proves a bull trap,
and the market falls below the
low of the white candle, it is clear
that in this case the pattern has
not worked, and we have to close
our positions again.
Therefore, the span between
the high of the last two days (=
point of entry) and the low of the Figure 2 shows the appearance of the price pattern in the DAX30 and
S&P 500 indexes. The red-white-red pattern is made up of a total of
formation (= worst-case exit) is three days. The first and the last day close below its opening, the middle
day builds the lowest low of the triplet and closes above the opening
the risk that we take when trading rate. If the high of the previous two days is exceeded, another breakout
this formation. to the upside can be expected after three days of indecision.
Source: www.tradesignalonline.com
To determine the number
of stocks we should buy from
these two values, we remember F3) Position Size
the old money management rule
stating that one should never
risk more than one percent of
ones trading account in a single
trade. The number of the stocks
we should buy therefore results
from the equation: number of
stocks = 0.01 x trading account
/ (entry level exit level). This
approach is visualised in Figure
3.
This ensures that we do not
ruin our portfolio with several A possible entry into a long position at the high of the two last candles of
the pattern. The worst-case scenario for the first day is when the market
successive losing trades. On takes the old highs, then turns and falls under the low of the formation
(= stop point for the long trade). The position size results from the risk of
the other hand the position size the trade (28.60-28.04 = 0.56) and the account size. In case you want to
is large enough to promote the trade this pattern e.g. with a trading account of 10,000, you would risk
1% of your capital when you trade 10,000 * 1% / 0.56 = 180 stocks.
development of our portfolio in Source: www.tradesignalonline.com
case of a win.
 52
TRADERS STRATEGIES

Exit this approach yourself, you will In cases where the market
So far I have shown how to quickly see that you can combine explodes after the appearance
recognise the red-white-red this exit with different patterns of the pattern it is not difficult to
pattern, how large the position and entries. trade further (see Figure 2), we
should be, when to enter the We can see successful merely wait and count the money.
market, and where the initial stop patterns in the chart immediately More challenging are the cases
should be placed. However, this ex post, so I want to show a few where the market does not go up
will not have made us any money, examples in Figure 4 where this after all. Should we always wait
but merely controlled our risk. pattern would not have worked. until we are stopped at the low
In the next step I will show how These examples are far more of the formation, or should we
to minimise our losses, let our important for the development stop, with small losses, when we
profits run, and thereby trade this of the exit than those in which realise that it does not work this
formation with a positive result. the pattern works as planned. time, and that we had better wait
The entry is usually only a From these we can learn what for the next opportunity?
very small step on the way to a may happen, and we can then We have already talked about
successful trade: the money is decide on the method by which the first exit: the initial stop at the
made with the exit, and therefore we can get out of such negative low of the formation. The next
the most consideration has to be examples with the least possible exit deals with the scenario where
put into this exit. When testing damage. we do not see the low of the F4) When It Does Not Work

TRADERS is a premier publisher of trading magazines for

the financial markets. Our vision is to offer an international
platform for industry professionals and serious traders alike.

Freelance Speaker
Your Point of Entry to Ideally you are a practical trader and have considerable knowledge of technical analysis
and all the related subjects like risk and money management, trading software, trading
Finance and Media Industry systems and trading psychology. You will work from home, on your own time-schedule Figure 4 shows you four examples where the expected sustainable
uptrend did not follow the price pattern. Clockwise: In the first
and submit the webinars and seminars at specified deadlines. You should be able to act example, the market could only take the high only one day after the
appearance of the pattern. Thereupon, it stagnated on a high level.
on your own and have experience in presenting. You will not only present and moderate Example 2 shows the case that the market did get above the formation
Please send your but also contribute content. in the first day, then however turned around and fell under the low of
the formation. Example 3 presents a similar problem like in example 1:
the market cannot decide for the uptrend. Example 4 is comparable to
application via e-mail to: example 2, where the market turns after two days and starts to fall. An
jobs@traders-mag.com intelligent exit should be able to limit losses in such situations.

Source: www.tradesignalonline.com
www.traders-mag.com

06/2012 www.tradersonline-mag.com

TRADERS STRATEGIES
formation, however neither does
the market begin to rise. In this
case we close the position if it is
not in the plus two days after the
entry towards the trading end.
The purpose of this is to
eliminate the time risk. The
longer we are in the market, the
higher the risk that something
will happen to our disadvantage.
Originally the idea was that
the market rises sharply after
this formation. If this does not
happen, our analysis may have
been wrong. It is often better to
close the trade, realising small
losses, than to wait for our luck
and be exposed to the risk of
being stopped out with the worst-
case scenario loss at the low of
the formation.
Tests with the stock basket
from the Dow 30 and the DAX30
show that with these two exits
we will at the very least survive.
This strategy does not generate
money, but the losses are kept
within a limit. However, this
strategy can be improved.
With the second exit, the risk
was further reduced and those
cases where the market does
not go up further were dealt with.
However, one more risk remains
to be considered before we think
about making profits.
What if the market rises for a
few days, but then turns, and
starts to sink? This is what
exit number 3 is made for. It
is activated from the third day
06/2012 www.tradersonline-mag.com
onward, and closes the trade
when the market falls back to
the entry price. Although nothing
is won by this strategy, nor is
anything lost, and this is often a
small victory in itself.
With these three exits, and the
correctly chosen position size,
we have risk under control as
much as possible, and can turn
our attention to how and when to
take profits.
The first exit to profit taking is
a simple profit target. Here, the
profit is realised automatically
when the trade has brought in
three times the amount of the
initial risk. The initial risk was the
distance from the low of the white
candle to the high of the last two
candles of the formation.
We can also work with a lower
target. This raises the hit rate
in sideways markets, as the
target is repeatedly triggered
by accidental movements. This
does, however, prevent larger
profits during trend phases. This
can be a clever methode when
we already have a trend-following
strategy in use, otherwise choose
a target no smaller than double
the original risk.
If the target is not reached
within about six days, I try the
exit at the high of the previous
day. This usually brings a few
extra points of profit compared
to the possibility of closing
the trade after a fixed time.
It is also possible to not wait
53
for a fixed number of days for
this exit, but rather try and get
out at the high of the previous
day as soon as no new high
has developed for one to two
days. The exit at the entry price
always stays active just in
case. In Figure 5 you can see
what these exits look like in
practice.
Review and Outlook
This article shows us a potentially
significant price pattern and a
technique to use this pattern in
trading. The technique can be
exspanded in many ways, and
can be combined with other
formations and entry ideas. F5) Exits
The exits introduced show the
importance of bringing the risk of
a trade under control as quickly
as possible. We have to close
all those trades which do not
develop as intended. Not only
does this apply to the losers, but
also to all those cases in which
the market only tends sideways
after the expected breakout. Time
is also a risk, and if the trade
does not develop as intended,
it is often best to accept small
losses and wait for the next Figure 5 shows you different possibilities of getting out of a position.
In the first case, the position is closed after four days at the entry
chance. price. This prevented the exit at the low of the formation. Example 2
shows the lucky case of a time exit. Since the position was not in the
By now do you really still win two days after the entry, it was closed. Example 3 demonstrates
believe that the Austrian ag how reasonable a profit target can be. The high opening was used for
the exit since it was more than three times the original risk above the
can predict the behaviour of entry. In example 4, the position is closed after six days at the high of
the markets? Or is it rather the the previous day. The position size was chosen in a way that in every
trade the same amount of money was at risk.
consolidated exit plan and the
correct position size which are Source: www.tradesignalonline.com
responsible for the profits?

Most people have, at one point or
another, been active in currency
trading before at least at a
bank in order to prepare for
the holidays by buying dollars,
Czech or Swedish crowns and
Hungarian forints necessary for
their travels abroad. However,
few private investors have dared
to engage in currency trading
as a possible source of income
and as an activity for speculative
purposes. This despite the fact
that in recent years there has
been a steady improvement in
general conditions especially
for small and private traders: An
increasingly wider range of banks
and brokers are offering currency
trading, the trading platforms
are becoming more and more
professional and efficient, and
trading is being made easier by
convenient access via the Internet
How to Keep Track of Things in Forex Trading and by telephone as well as most
recently even by using the mobile
Fundamental and Technical phone via Smartphone, iPad &
Co. Furthermore, falling costs
caused by stiff competition have
Analysis of Currency Markets resulted in forex becoming one
of the most attractive markets for
traders to be active in.
But currency trading is no
Forex trading is considered by many traders to be the pinnacle of trading with average daily sales totalling four trillion exception to the initial question
dollars. No other market is as liquid as that. As with all other asset classes, traders also have the opportunity to make being raised, on what basis
their investment decisions on the basis of fundamental or technical analysis. This article is designed to show you trading decisions should be
which factors to consider when trading currencies. made, and which parameters
should determine entry and
exit points. Fundamental and
55
technical analysis provide two
competing, but complementary
approaches designed to assist
investors in their trading setup.
Technical Analysis
Most of the tools provided by
technical analysis may also
be used in currency trading.
Classic chart formations like
trend channels or resistance
and support lines can be used
for trend detection just as much
as advanced techniques can,
and indicators, oscillators,
and candlestick patterns help
determine the optimal entry and
exit points.
Two Heads Are Better Than One
However, all the findings of
technical analysis will apply only
if the fundamental environment
confirms and supports the
technical signals and support.
What is true of other asset
classes may apply even more
to currency trading. Even if the
trading systems used and the
trading decisions made are
primarily or even exclusively
based on the results of technical
analysis, a basic understanding
of the fundamental factors
moving the currency market is
of paramount importance. The
fundamental influences, even on
a short term level, are too strong
to be completely ignored.

Florian Erik Neinert
After completing his
information-science studies,
Mr Neinert worked as a
researcher in finance and
technology. For many years
he has been busy studying
the various aspects of trading
and speculation. Besides
technical analysis, the major
focus of his interest is on
the psychological aspects of
trading. Contact:
florian.neinert@trentix.de
06/2012 www.tradersonline-mag.com
For Best Results,
Combine Technical
and Fundamental Analysis
As is the case with stocks, futures
and commodities, a combination
of the two analytical approaches
seems like an obvious choice:
The general situation and the
overall situation as well as
the overall trend direction are
identified by way of fundamental
analysis while technical analysis
is used to optimise the specific
entry and exit points.
Fundamental Analysis
How do exchange rates develop?
Who decides how many dollars
a euro will cost today? Clearly,
as a largely unregulated off-
exchange OTC market, currency
trading is a free market and
prices are established on the
basis of supply and demand.
If the demand for dollars is
high among many participants,
the price of the dollar will rise.
However the fact remains, that
is not all there is to it, due to a
peculiarity of the asset class FX:
Unlike, for example, equities or
commodities, there will always be
two elements in forex trading that
are traded at the same time: the
base currency and the currency
traded. So you can speculate
on rising dollar rates by buying
dollars and selling euros at the
same time. If both the dollar
and the euro are in demand, the
logical consequence may be that
there is hardly any change to the
EUR/USD exchange rate.
Exchange Rate Regimes
and Central Bank Interventions
Another constraint on unrestricted
currency trading is imposed by
governments and central banks
issuing each currency. Certainly
not all countries in the world
allow their currencies to develop
freely and do so exclusively on
the basis of the forces of supply
and demand. In this connection
the German Bundesbank
makes a distinction between
ten different types of exchange
rate regimes from currency
boards with unilateral exchange
rate pegs (for example, Hong
Kongs peg to the US dollar) to
conventional systems with fixed
exchange rates (the currencies
of many Arab countries are
pegged to the US dollar, some
African countries to the euro) and
stabilised exchange rate regimes
(China, Vietnam) to countries with
freely floating rates. But even in
the latter, most market oriented
system, governments and central
banks often keep the option of
interventionist action open.
Key Interest Rates
In addition to the direct purchase
or sale of their own currencies,
central banks often use the
key interest rates to keep the
exchange rate within an intended
range. The higher the key interest
56
rates are, the more attractive the investments (a German company
currency is for foreign investors building a new manufacturing
investing their money in the local facility in the United States or
currency at high interest rates, an American company buying
causing high demand to develop. shares of a German company),
Here the key interest rates and securities transactions (a
impact both the overnight rates German investment fund buying
of the banks and fixed interest shares of a Brazilian joint-stock
securities. company or a Chinese sovereign
wealth fund buying a stake in a
Foreign Trade and German corporation) as well as
Capital Movements loans from countries, financial
Besides the interest rate level of institutions and other lenders.
a country, the size of its foreign By contrast, the balance of trade
trade has a significant impact on records the volume of foreign
the value and development of its trade. A large part of this cross
currency. A summary of statistics border trade has the actual trade
on this can be found in the in goods usually complemented
so-called balance of payments by a currency trade designed to
with two subcategories being exchange the foreign currency
of particular interest to currency revenues achieved abroad for the
traders: local currency or to allow goods
The capital account measures ordered abroad to be paid for in
the cross border financial the currency that is legal tender
flows while the trade balance there.
represents the value of the goods There are also hedging
and services that are imported transactions used by companies
or exported. Among other things, that want to protect themselves
capital movements include direct against possible future changes in
Info
Typically, central banks intervene whenever the money supply, inflation or other conditions
that are generally considered to be important undergo changes that are detrimental to the
country. Japan had long been known for intervening to keep its yen artificially low for the
good of the countrys export oriented industry, which enabled it to sell its goods cheaper in
the world markets. The Japanese central bank managed to keep the yen weak by continually
buying dollars for yen, causing demand for the U.S. currency to increase in comparison to
its own.

TRADERS BASICS
the exchange rate that work to their
disadvantage. The more closely a
country is tied to other countries by
trade and capital transactions, the
higher also is the forex volume of
its currency, usually. And indeed,
the largest economies in the
world also boast the currencies
most commonly traded in the
foreign exchange market. The only
exception to this rule is provided
by countries with strict exchange
rate regimes, as has already been
noted above.
Economic and
Political Environment
Capital is as timid as a fawn, as
the saying goes. Whenever there
is a worsening of the political or
economic conditions of a country
or such a deterioration is only
anticipated , investors are liable
to withdraw their capital. As a
result, the value of the currency
concerned will decrease. As
regards economic stability, one
should keep an eye on the price
index, gross domestic product
and unemployment rate. And
although the degree of correlation
between equity and currency
markets is usually considered to
be low, it is still useful to follow
the price trend on the stock
markets because it is especially
during stock market crashes that
a significant reaction in exchange
rates can be expected.
The fact that natural disasters
have an impact on the financial
06/2012 www.tradersonline-mag.com
markets was clearly visible to
investors in Japan, for example.
In addition to the stock markets,
there was a significant reaction
of the yens exchange rate to the
news of the earthquake, tsunami,
and impending nuclear disaster.
In the first few days after the
quake, the yen initially made
significant gains against the euro,
but fell again later.
There is an even more
sustainable influence on
exchange rates when the
following factors come into
play: An increase of the political
imponderables of a country,
for example, as a result of
laws restricting personal and
entrepreneurial freedom, lack of
independence of the judiciary,
rampant corruption, increasing
governmental arbitrariness,
and diplomatic or even military
conflict with neighbouring
countries. In such cases, not only
short term oriented speculators
but also long term investors
such as investment funds, hedge
funds, businesses and banks will
withdraw their capital from the
country concerned.
Deadlines, Deadlines
Especially prior to important
publication dates, there will be
a great deal of movement in the
forex market, which is particularly
the case whenever interest rate
decisions by the central banks
are pending but also upon the
57
release of the latest economic
figures. There are many traders
specialising in this kind of news
trading. Beginners, at least,
should engage in news trading
with caution though, as large
price movements are possible
not only during the release of
the data but even in the days and
weeks leading to such a release.
Conclusion
Exchange rates are significantly
impacted by central bank
policies, the key interest rates,
the economic and political
development as well as by the
volume of trade and capital
transactions with other countries.
Make sure that you keep
track of exchange rate related
news. Be prepared for news
and release of data. Know the
dates of central bank meetings, F1) External Factors and Exchange Rates: EUR/JPY
make an educated guess of
how the decisions could turn
out, read between the lines,
(for once) pay attention to the
assessments made by experts,
and position yourself in advance.
Use the chart analysis to check
and see where the support and
resistance lines are and where
limit and stop loss orders may
be placed. Also, watch out for
round prices that are, consciously
or unconsciously, used by The earthquake, the tsunami and the threat of a nuclear meltdown
in Japan led to a violent reaction in the currency markets. When the
many market participants as a news increasingly indicated that a meltdown was approaching, the
yen strongly appreciated against the euro initially, but later was again
reference mark (anchor) and down significantly.
where the price remains stuck Source: www.tradesignalonline.de
even for no particular reason.
 58

Competence and Confidence

Smart Traders Edge Part 3

The Smart Traders Edge articles are not specific buy or sell triggers. They are techniques and
alerts to help determine high probability trading opportunities. This issue will focus on the
competence and confidence needed to identify and act when opportunities exist to enter into a
high probability low risk position.

From our previous articles

(TRADERS 01/2012, 02/2012),
we understand that trading is
actually very easy and because it
is so easy the market purposely
provides excessive information
in order to maintain a level of
mystique so that those not
properly educated will remain
confused. That statement may
seem harsh or contradictory but
the undeniable truth is confused
traders are the necessary
contributors from whom the
properly educated derive their
gains.
Properly educated in trading
means you understand and apply
the KISS (Keep it simple, stupid!)-
Principle, that less is more! Less
complicated and simpler trading
techniques usually produce more
consistent and far better results.

Bert Antonik
Mr Bert Antonik is a retired
US Navy Commander and
senior instructor for Online
Trading Academy who brings
over three decades of trading
knowledge and experience to
his classroom presentations.
For more information, go to:
http://www.tradingacademy.
com/about-us/instructors/
Bert-Antonik.aspx
06/2012 www.tradersonline-mag.com
This months Smart Traders
Edge will try to explain why
competence alone will not result
in consistent gains. The challenge
is to have the confidence to
act without procrastination. An
even greater challenge for some
traders is to accept concepts
that conflict with what the market
preaches. The best way to
illustrate this is to share a recent
experience.
It Cannot Be That Easy
You may recall from the last
smart traders edge article,
whenever a price is involved,
supply and demand will dictate
valuation at any point in time.
If there is more supply than
demand, price must fall. If there
is more demand than supply
price must rise. If there is a
balance between supply and
demand price stays within a
stable range. It then becomes a
matter of simple logic to realise
that if price exits the stable range
very quickly many traders will be
taken by surprise. Sometimes
miracles do happen and the
unexpected move will result in a
windfall. More often than not, an
unexpected and not anticipated
strong price move results in a
loss. The trader that learns to
identify where the demand and
supply levels are and has the
confidence to take the trade will
usually come out ahead of the
game. It really is that easy.
59
How Do We
Demonstrate Competence?
Step 1: Have a Plan
It was about 15:30 in Singapore
and the author was getting ready
for a traders workshop that was
scheduled to begin at 19:00 that
evening. When talking about
trading during a workshop, he
likes to actually demonstrate live
trades based on the supply and
demand trading strategy defined
in his trading plan.
Step 2: Follow the Trading Plan
Because at 19:00 in Singapore
the only live tradable market is
Forex, the author looked for a
trading opportunity in the EUR/
USD currency pair using the
following routine, see Figure 1.
a) Determine the closing price
of the prior day. In Forex that F1) EUR/USD Pre-Trade Set Up Routine
would be the last trade just
before 5 PM New York time.
Draw a horizontal line, the
green line in Figure 1.
b) Determine the daily ATR(15).
Add and subtract the ATR
(Average True Range) to
and from the prior close.
This defines the likely
maximum high and low for
the current trading day. If
price approaches either the
max high or max low there
is a high probability it will a) Prior day close; b) ATR levels; c) Demand Zones; d) Day high/low
ATR extensions; e) Stop, entry and target levels.
change direction. There is an
even greater probability if the Source: www.esignal.com
level also falls within a supply

TRADERS BASICS
or demand area plus other
traders edge layers.
c) Determine supply and demand
areas within the high to low
ATR from paragraph b) above.
d) Plot the current day low plus
ATR and current day high
minus the ATR. This is done
each time a new current day
high or low is made. Now
we know where price may
reverse within the high to
low ATR from paragraph b)
above. Again, look for layers of
multiple conditions to increase
probability and improve your
edge against other traders.
e) Place the stop, entry and
target orders based on high
probability supply and demand
areas particularly if the area is
enhanced by additional traders
edge layers.
f) Wait to see the results! Wait to
see the results! Wait to see the
results! No typo here, the plan
is to, Wait to see the results!
At about 18:30 the first
workshop attendees arrived. The
discussion centred on whether
it was possible to anticipate,
What is the Smart Traders Edge?
To gain a Smart Traders Edge, Market Timing Traders use Technical Analysis Techniques to
focus on the fundamental law of Supply & Demand in order to make High Probability, High
Reward and Low Risk trades.
(For more information on Market Timing Trades based on Supply & Demand go to OnlineTradingAcademy.com)
06/2012 www.tradersonline-mag.com
with a high degree of accuracy,
where price was likely to change
direction. Traders who do not
understand the market timing
strategy based on the universal
law of supply and demand will
always say that there is no way to
accurately anticipate, with a high
degree of probability, where price
is likely to change direction.
After being presented with
the 15:30 screen shot, Figure 1
above, the focus immediately
shifted to the live market. During
the first 30 minutes and by the
end of the workshop, attendees
recognised that market timing is
possible.
Now let us focus on the result
of the trade placed into the
market at 15:30 earlier that day.
How Do We
Demonstrate Confidence?
The consistently profitable trader
is both competent, knows what
to do, and is confident, knows
that he or she knows what to do
and does it. Placing a live buy
limit trade into the market at 15:30
required competence, knowing
how and what to do to establish
consistently result in profits, it
and confidence it puts money into
60
a low risk high probability trade.
But, the confidence to actually
take the risk and enter the trade
comes first from a willingness to
accept the market timing strategy
and then consistently repeating
an objectively defined process
that produces positive results.
From 18:30 to about 19:00
attendees were repeatedly asked
if they would consider going long.
Not one was willing to take the
long trade. All were surprised
when price did exactly as
anticipated. Take a look at Figure 2.
Just after 19:00 the pending
limit buy order was filled and
simultaneously the predefined
stop and initial target were placed
by the charting platform. Price
moved sideways and then quickly
rose to the first target. After a
pullback into the demand area
price again moved up all the way
to the second target. Obviously F2) Trade Results That Surprise the Naysayers
the rest of the workshop
discussion focused on how to
recognise supply and demand
areas in order to implement
market timing trading strategies.
Once competent at objectively
identifying supply and demand on
a chart and applying rule based
market timing strategies that
should come as no surprise that
a traders confidence will also
grow. The end result is that when
traders trade with competence Market timing produces another low risk high probability profitable trade.
Source: www.esignal.com
their account.

Not All Trading
Days Are Made Equal
This truth may be known already
but a study made by Birinyi
Associates for S&P 500 for the
period February 1966 to October
2001 reveals some alarming
realities about buy-and-hold in
various situations.
For an investor holding tight
during the entire period, $1000
translated into $11,710 at the end
(S&P 500 investing is hypothetical
but helps make the point).
Use Seasonality to Improve Your Portfolio Performance Each year has its best and
worst days. The same buy-an-
Vivaldi Revisited: The Two Seasons hold strategy is applied to the
same period after eliminating the
best five trading days of each
year. The result? $150 left, a drop
Similar to human behaviour, financial markets have their ups and downs (read cycles). When markets are roaring, price of -85 per cent. The conclusion is
retracements are seen as normal and are a healthy sign for the trend. People buy on dips anticipating that the future simple: If you miss, as an investor,
looks bright. But in bear markets, the tide leaves many swimmers naked and the view is far from nice. During these times, the best days during the years,
the buy-and-hold strategy is a nostalgic story. Both traders and investors must find other strategies for better timing you should look into something
across various time frames. Traders (may) have access to rule-based black boxes, swing trading, or day trading. What else than investing.
is left to investors? Entries and exits based on seasonality are an option to consider very seriously. This article will show Finally, the third scenario
how investors can use simple seasonality ideas to improve portfolio performance and gain more confidence. At the end applies to the same period but
of the day the basic question which must be answered is Do you want to eat better (trader) or sleep better (investor)? the worst five days of each year
61
are removed from the analysis.
A stunning final capital of
$987,120 shows that for capital
growth an investor must avoid
lethal blows.
These findings highlight that 1)
some periods are (far) better than
others in terms of investing and
(2) the focus should be on risk
and capital management.
A Plain Vanilla Test
How real and effective is the
adage Sell in May and Go
Away? To answer this question
we slice the year into two
periods: May 1 to October 30 and
November 1 to April 30. For each
period we run a buy-and-hold
test for the S&P 500 and the DAX
and look at the results.
For these tests on daily data
the following rules apply:
For May 1 to October 30
Buy at close on May 1 or the
next trading day if May 1 is a
non-trading day

Dan Valcu
Dan Valcu is a Certified
Financial Technician (CFTe),
Board Member of the
International Federation of
Technical Analysis (IFTA),
Founder and technical
analysis consultant with
Educofin Ltd, and a private
trader. He is the author of
the first book on Heikin-Ashi
Heikin-Ashi How to Trade
Without Candlestick Patterns.
For more information visit
www.educofin.com.
06/2012 www.tradersonline-mag.com
62
Sell at close on October 30 or investors to embrace the buy- T1) Buy-and-hold Summer (May - Oct) and Winter (Nov - Apr) Seasonality
the next trading day if October and-hold strategy. On the other
30 is a non-trading day hand, November to April is a gold S&P 500 May - Oct Nov - Apr DAX May - Oct Nov - Apr
For November 1 to April 30 nugget (statistically speaking) Start capital (units) 100,000 100,000 Start capital (units) 100,000 100,000
Buy at close on November and has its merits deserving the Net profit % 40.22 4111.21 Net profit % -46.07 615.15
1 or the next trading day if patience to wait. Annual return % 0.8 9.24 Annual return % -2.86 9.67
November 1 is a non-trading # of trades 62 62 # of trades 21 21
day Seasonality and MACD # of winners 38 46 # of winners 12 16
Sell at close on April 30 or the The previous tests showed that Max system % DD -51.02 -36.24 Max system % DD -71.66 -37.20
next trading day if April 30 is a market index performance was Profit factor 1.13 4.14 Profit factor 0.65 4.67
non-trading day far better during November to Comparison between buy-and-hold in the US and German primary markets during two different periods of the
trading year.
April than May to October. They
For the S&P 500 the coverage did not include any technical
is January 3, 1950 to April indicators which may have
18, 2012 and for the DAX the improved the financial or/and T2) Buy-and-hold Winter Seasonality Taking into Account MACD Signals
coverage is January 2, 1991 to emotional performance. Technical
April 18, 2012. Commissions and analysis offers a wide range of S&P 500 DAX
slippage are not included. indicators and we chose the Start capital (units) 100,000 Start capital (units) 100,000
The results shown in Table 1 Moving Average Convergence- Net profit % 4704.27 Net profit % 621.57
are astonishing (for many) but Divergence (MACD) due to its Annual return % 9.58 Annual return % 9.72
they highlight the benefit of slicing inherent ability to highlight trends. # of trades 62 # of trades 21
the trading year into two equal The next question is Can # of winners 47 # of winners 16
periods with a clear advantage MACD add more value to the Max system % DD -41.02 Max system % DD -39.02
when staying invested during index performance during Profit factor 3.61 Profit factor 5.37
May 1 to October 30 in both the October to April? (Note: the Comparison between buy-and-hold in the US and German main markets taking into account a technical
indicator (MACD(20,50,15)).
American and German primary word value can be translated
markets. into financial gains/losses or/and
The American market offers improved confidence.)
gains during both periods with The rules applied to daily data great results generated during in the stock market, an investor
November to April showing a gain are changed now: November to April. may look at other ways to put the
of 4111 per cent during the period Buy at close during either capital to work or, simply, can wait
covered by S&P 500. The German October, November, or December Final Thoughts for the next favourable window.
market shows a different pattern: and MACD(20,50) crosses above Seasonality in the financial markets These findings can also be used
A loss of 46 per cent during the its signal line(15) or is already is already known and used in as a filter for rule-based strategies
least favourable halves of the above it. various markets and time frames. aiming for more frequent trading.
trading year (May to October) Sell at close during either April, The ideas exposed in this short The bottom line is to consider
and a gain of 615 per cent during May, or June and MACD(20,50) article relate to investors and can seasonality a reality, know about
November-April since 1991. crosses below its signal line(15) or be used by each of them to stay it, and use it to your advantage to
The immediate conclusion is is already below it. longer, safer, and with increased squeeze more juice out of the fruit
that in both markets, the period The results shown in Table confidence in the stock market (US that may appear dry at certain
May to October does not invite 2 are in line with the previous and Germany). When not invested times.
 64

Stephen Temes
Striking out on Ones Own
Until 2001, Mr Stephen Temes worked as a trader for Wachovia (Wells Fargo), having enjoyed a brilliant career even before
then. Following the terrorist attacks of 11 September and the crash of the market, he decided to quit his 16-hour work days
and take a long break. After spending some time in the Caribbean he became bored, causing his interest in trading to be
rekindled. So he returned to New York and founded the proprietary trading firm Lincoln Capital, which he ran on his own at
first. Over the years, he hired other traders as partners, expanding his company to include as many as 14 traders with offices
in New York and Miami. Marko Graenitz met Stephen Temes for an interview during Traders Expo in New York. Enjoy a top-
notch traders story and his ideas!

TRADERS: Could you please
tell us how you got into stock-
market trading in the rst
place?
Stephen Temes: I grew up in
Kentucky and attended Tulane
University in New Orleans,
majoring in business. Even then
I took a great deal of interest in
the stock market programmes on
CNBC. After I graduated, I knew
exactly where to go next: New
York City. I was chasing a dream,
and that was working on Wall
Street. However, I did not know
then what that meant and had no
contacts either to find an entry-
level job at a big company.
TRADERS: How did you
manage to get by in New York
under such unfavourable
circumstances?
Stephen Temes: It was tough
initially. I did not have an
apartment of my own and had to
apply for any kind of job. I quickly
realised that an aggressive
approach was needed here, so I
bought myself a decent suit and
began to cold call one broker
after another. Finally I got lucky
and landed a job at Butcher and
Singer on Wall Street. After a
short stint there I moved on to
Oppenheimer, where I got my
first big break as it were, having
been all but ready to give up in
view of the difficult circumstances
prevailing then.
TRADERS: How did that break
happen?
Stephen Temes: I got a call from
an insurance company that
wanted to talk to our options
department. I had the presence
of mind to respond by saying,

TRADERS PEOPLE
You are speaking to the options
department. At this point, I
practically created the options
business at Oppenheimer
out of nothing and went on to
expand it steadily, eventually
even becoming a partner of the
company. Later on, I left
to go to Wachovia and
you know what the rest
of the story is.
TRADERS: How can
young traders get into
proprietary trading?
Stephen Temes:
Actually, it does not
matter how much
money you have
all that matters in
trading is discipline.
However, in order to
get into professional
proprietary trading
if you do not have
enough equity yourself, you first
need an excellent track record.
For example, I am extremely
picky myself when it comes to
hiring new traders. Once you
have managed to be part of a
team of traders, it is important
to learn from the best and most
experienced traders in the team.
Trading is a combination of
statistics and experience, and
that is what matters.
Stephen Temess phone rings.
He talks briefly to one of his
traders about the open positions
06/2012 www.tradersonline-mag.com
on the market before we continue
with the interview.
TRADERS: You have just been
on the phone, how are your
positions doing on the market
today?
Stephen Temes: One of my
traders is monitoring my
positions, giving me an update
from time to time while I am here
at the Expo. I have complete trust
in him. We have just discussed
making slight adjustments to one
of my positions, but the market is
reasonably quiet today.
TRADERS: Can you remember
your rst few trades?
Stephen Temes: Yes, absolutely.
I started with options right away
because I had little money and
therefore needed good leverage
65
to make it all worthwhile. A family
friend was working for a broker
and therefore in a position to
give me good conditions for my
trades, so I was not overwhelmed F1) Positive Surprise at Caterpillar
right away by the transaction
costs. My tactic was to watch the
ticker tape indicating
current prices and then
figure out good trading
opportunities on that
basis. Those were the
good old days when
options were often
priced wrong and it was
still relatively easy to
make a good trade.
TRADERS: Did you In January, the Caterpillar (CAT) long position performed very well.
In late January the company reported quarterly results that were a
witness the crash of positive surprise, justifying the previous price increase.
1987? Source: www.tradesignalonline.com
Stephen Temes: Yes,
that was really hard. I
had been on Wall Street
for barely a year when F2) Cummons Stock on the Watch List
it happened. I saw experienced
traders crying. Something like
that leaves a lasting impression
as a reminder of the risks involved
in trading.
TRADERS: And did you do any
trading at all during the crash?
Stephen Temes: I clearly
remember that I bought Pepsi
shares on the day after the
crash and that I sold them again
after a short time as the market Stephen Temes kept track of the Cummons share on his watchlist. If it
meets the screening criteria next time, a long trade will be called for.
recovered. However, I did not
know what price I had got I only Source: www.tradesignalonline.com
had that in writing three days

TRADERS PEOPLE
later. Just imagine that, not until
three days later!
TRADERS: How would you
describe your trading style
today?
Stephen Temes: I am a very
aggressive trader. I usually have
a core position around which I
trade all the time. So I increase
or reduce my position depending
on how my assessment of the
stock changes. And if there
is a complete change in my
assessment, I also sell the core
investment. This approach
spared me a lot of losses in 2008
because I did not hold on to bad
trades during the market slump.
TRADERS: Which indicators do
you pay special attention to?
Stephen Temes: The first thing I
always look at is the chart. That
is the most important thing. In
a more detailed analysis I also
look at indicators such as the
50-period moving average, the
Relative Strength Index (RSI) or
the stochastics.
TRADERS: How do you select
the best trading opportunities
from the multitude of stocks?
Stephen Temes: I have a
colleague programming my
criteria for me. This scanning
process then filters out all the
appropriate setups for stocks
and exchange traded funds
(ETFs). Depending on the chart,
06/2012 www.tradersonline-mag.com
market situation and fundamental
assessment, I then decide in
a discretionary manner which
filtered stocks to actually trade.
TRADERS: So you include
fundamental data in your
trading decisions as well?
Stephen Temes: Basically, I do.
Ideally, there is a clear price
movement and I can identify
the catalyst early. In principle,
anything can act as a catalyst
acquisitions, important upcoming
events, clear estimates by
analysts and so on.
TRADERS: Can you give us an
example of a simple technical
ltering criterion?
Stephen Temes: A very simple
concept that has always worked
well is the retracement towards
the 50-period moving average.
I can tell you that many traders
watch out for this indicator. When
prices break above the average
line and a pullback forms right
up to the line later at low volume,
then this is a very good entry.
It sounds really simple, but just
look at a few charts of strongly
trending shares according to this
criterion.
TRADERS: How exactly do you
enter your trades?
Stephen Temes: In general, my
rather large position size does
not allow me to just open my
positions all at once. Besides, it is
66
mentally easier to build a position
over several hours or over the
course of a day since on the
whole you never buy at the high
(though never at the low either).
I use an algorithm that executes F3) Las Vegas Sands for $2.90
my orders over a certain period
of time. The algorithm is based
on the volume-weighted average
price (VWAP for short) to execute
each order when price-volume
relationships are favourable.
TRADERS: How many
positions do you hold
concurrently?
Stephen Temes: Long and short
positions combined, eight to ten
on average. During bad periods, I In the case of Las Vegas Sands (LVS), Temes managed a near-perfect
entry at 2.90 dollars, making it one of his best trades ever.
sometimes only hold four positions,
and in very good times up to 20. Source: www.tradesignalonline.com
Traders with little capital should
hold correspondingly far fewer
positions at the same time. Usually
it is best to have just a few well F4) Good Timing at FCX
performing trades where you get a
sense of the movement behaviour
of the stock. I think it is a mistake
to have too many positions.
TRADERS: What do you look
out for in the stops?
Stephen Temes: I always have
hard stops at key chart markers
of the market. Everything is
based on my risk management. If
things are going well for me, I use
trailing stops in order to use the Here, too, Stephen Temes caught the stock after its final low. The bull
market in the spring of 2009 quickly drove the stock markedly higher.
money in the market to bet on
even higher profits. Sometimes Source: www.tradesignalonline.com
I then exit in a discretionary

TRADERS PEOPLE
manner if the behaviour of the
stock changes or key chart
markers are approached.
TRADERS: Do you have
something like a time stop?
Stephen Temes: Yes, if the
stock initially does not
perform as expected,
I will exit as soon as
possible.
TRADERS: Can
you remember any
particularly good
trades?
Stephen Temes: Many of
my best trades I made
right after the major
downward movement of
2008. I well remember
buying the Las Vegas
Sand (LVS) stock for
a mere $2.90. Also,
Freeport-McMoRan
Copper & Gold (FCX) for 16 dollars.
TRADERS: Can you give us
an example where you had to
close a trade with a loss?
Stephen Temes: Obviously this
happens, too. For example, last
year I underestimated how much
prices of treasuries can increase.
I went short in summer 2011
when there had been a decent
rise, but was then surprised by
a further upward movement of
quotations. I did not think that
bonds could rise that far (i.e.
interest rates would fall that far).
06/2012 www.tradersonline-mag.com
TRADERS: Which stocks or
sectors do you consider to be
particularly risky?
Stephen Temes: Obviously,
biotech stocks most of all. That
is where I was once affected
myself. I was long on a biotech
stock hit by allegations of fraud
against the management, which
is always bad. Basically there
is also an inherent risk in the
binary character of alternative
developments. If a biotech
company is essentially just
developing a major drug or
something similar, its price
reaction, for example, to any
news about the approval process
will be highly volatile. In the end,
it will come down either to the
drug being okayed or not
being okayed. Either way, there
will be massive price movements,
67
usually with large gaps. From
a risk-management point of
view this is, of course, less than
desirable. By the way, this could
in a diluted way also apply to F5) Misjudgement of U.S. Treasuries
major stocks such as Johnson
& Johnson (JNJ) if they were
sued, for example, on
account of one of their
major products. Shares
with such a risk profile
should therefore be
treated with caution.
TRADERS: What
other principles do
you use in trading?
Stephen Temes: The Temes had not expected bond prices to rise further in 2011. The short
trade went underwater although it had opened at an already high level.
primary goal is to
control the risks, i.e. to Source: www.tradesignalonline.com
trade in such a way that
you can still play the
following day. I want my
trades to be relatively F6) Out of Favour
speaking among the
first to be in on a movement.
And I want to be among the first
to be flat again. To a degree, all
good traders sell too early, and
shares often continue to perform
well a lot longer. But getting out
too early still beats exiting too
late. Otherwise I stick to keeping
at least some short positions in
weak stocks even during good
market phases and, vice versa,
at least a few long positions in A prime candidate for Stephen Temess long list is Bank of America
stock (BAC). I like those stocks that are really totally unpopular. Once
relative-strength stocks during the right moment is there, I will pounce. In March 2012, about a month
after the interview, the stock enjoys a high of more than ten dollars.
downward phases. The reason
for this is that this means that I Source: www.tradesignalonline.com
am automatically moderately
 68
TRADERS PEOPLE

hedged as far as market direction
is concerned. However, I do not
force any trades that is, I will
only trade a setup if, on average,
I benefit from it. Sometimes,
though, I need to muster a great
deal of patience for that.
TRADERS: What does your
daily routine look like?
Stephen Temes: I usually get up
at 3.30 am in order to see how
the European markets are doing.
I then go back to bed again to
get some sleep. Despite years of
experience I still have sleepless
nights, but I think this is important
it is a sign that I am focused
and fully committed to my job.
At 7.15 I am usually the first one
to show up at the office. My
favourite time for doing research
is in the morning. From 9.30 to 4
oclock in the afternoon I trade on
US markets. In general, I will be
out of the office by 5 pm.
TRADERS: What are the
biggest mistakes that traders
and investors keep making?
Stephen Temes: If you have a bad
trade and for some reason do not
exit it, then this is a disastrous
error. Doing a part-time job as
a trader is also problematic since
you keep having to do something
else as well. Either you do this
the right way or you do not do
this at all. And then people make
the mistake of not working hard
enough to keep improving. Also, I
think that most people like buying
stocks that are fundamentally
rated favourably. In my view,
however, this is of no benefit to
anybody.
TRADERS: What is the biggest
problem in professional
trading?
Stephen Temes: If you own a
proprietary trading company with
several partners but also when
managing other peoples assets
in a hedge fund the biggest
problem is the residual risk in risk
management. This has nothing
to do with the question of stops
and position sizing in general.
The actual risk is individual
traders who can really mess
things up, the so-called rogue
traders. Examples of this have
occurred time and again at major
investment banks, but in principle
it can happen anywhere.
TRADERS: Can you describe
for us the rogue-trader risk in
more detail?
Stephen Temes: A classic
example is a trader who exceeds
his exposure limits in a big way
when trading on behalf of a
trading firm or a fund and does
so without any of the internal
monitoring systems noticing
anything. This is made possible,
for example, by an over-the-
counter (OTC) transaction. If a
gap then occurs overnight that is
contrary to the direction of trade,
this may result in a disaster. Now
imagine the other traders in the
office not knowing anything about
the OTC transaction and the
trader responsible having sloped
off. That is the worst that can
happen, and there is no way that
this residual risk can be resolved
in the end.
TRADERS: Mr Temes, thank
you for these fascinating
insights!

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!

06/2012 www.tradersonline-mag.com
 69
TRADERS TOOLS

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06/2012 www.tradersonline-mag.com

TRADERS COLUMN
The Greatest Myth About Trading
Risk is something that most
people associate with trading.
In fact, to the public at large,
you are often likely to get the
response, Isnt that risky? when
you tell them that you trade for
a living. However, I think that is
one of the biggest myths about
trading, and I assert that trading
Brian Lund is no more risky than most other
jobs.
Great father. Good friend. Decent When I ran my own business,
trader. Lacking husband. Solid on the first of each month, the
drummer. Sometimes funny. moment I woke up I was 60K
Crappy poker player. Too smart. in the hole. That meant that in
Contact: bclund.com order to just keep the lights on
Twitter: @bclund I had to generate 60K in revenue
each month, even before taking
06/2012 www.tradersonline-mag.com
a quid out for myself. And every
month that I decided to keep my
company going, I had to take the
risk that I would not meet my nut.
Trading has no operational
costs (or very minimal ones),
which makes the decision to
pursue the endeavour a relatively
risk free one.
Yeah, but where else do you
have the possibility of losing
more money than you started the
day with? is the lame rebuttal I
often hear. Really? These people
obviously have never run a
business. If one of my employees
damaged a clients merchandise
or backed a truck into a parked
car I could easily lose more
money than I started the day with.
Trading has no operational risk.
No employee is going to hurt his
back and jack your workmans
comp rates up. No douche from
Occupational Safety and Health
Administration (dreaded US
government agency) is going to
unexpectedly show up at your
office and tell you that you are
not in compliance with a new law
passed the previous week and
you are now on the hook for a
large fine. And you are not going
to have a piece of equipment
go south on you that you have
to drain your bank account to
replace.
But that is only for business
owners right? What if you do the
dance by getting a four-year
degree and going to work for a
solid blue chip company? Well
in some ways that is one of the
riskiest things you can do. Now
you have turned over the fate
of your continued employment
to some mid-level management
functionary or fair weather board
of directors. Take a look at how
many people took that safe
path to corporate security and
got tossed out on their ear when
the economy imploded in 2008.
Trading does not carry that
kind of risk. Nobody will even
come into your trading room
and tell you that you are being
downsized, or that the macrame
conglomerate you work for is
70
going out of business after 75
years because the board of
directors could not resist getting
involved in arbitraging high risk
Collateralised Debt Obligations.
At the end of the day, trading is
one of the rare businesses where
only you decide the amount of
risk you are willing to take.
The reason that most people
go off the rails and blow their
account out is not because there
is any outsized risk associated
with trading, but because the
barriers to entry are so low,
they are able to jump in feet first
without really knowing what they
are doing (or they are a seasoned
pro who lets their ego get the
best of them).
Being a professional athlete
is risky. Being a fire-fighter is
risky. Being a jet fighter pilot is
risky. But the average Joe cannot
just jump into those positions
without a crap-load of training
and without attaining a high level
of competency. And thus the risk
is less for a David Beckham, for
a fire Captain, and for a Top Gun
pilot.
Trading gets a bad rap due
to the Sydney or the bush
portrayal it has received in pop
culture and Occupy Wall Street
type propaganda. Its perception
has been Gekkoized. But in
reality it may be one of the safest
professions, if you do it properly
and make the choice to keep your
ego in check.