Jesse Livermore Methods

THE TRADERS MAGAZINE SINCE 1982
www.traders.com JULY 2016
The Super
Passband Filter
Are low and high frequencies
getting in your way? 10
Trade Using Pure

Price Action
Try naked charts! 14
Wave Theory
What do the swings on
a chart really mean? 18
Shannon Entropy
Know when to trade trends
versus channels 22
INTERVIEW
Fred Meissner of
The FRED Report 32
PRODUCT REVIEW
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CONTENTS JULY 2016, Volume 34 Number 8
FEATURE ARTICLE 26 Q&A

8 Anatomy Of A Trade: by Rob Friesen
This professional trader answers
The One That Got Away a few of your questions.
by Thomas Bulkowski
Have you ever traded with excep-
tionally bad timing? Heres one to 28 Richard Demille Wyckoff,
ponder. Part 4
by Stella Osoba, CMT
AT THE CLOSE
10 The Super Passband Whether youre an investor or 60 The Palm Beach Traders
trader, you need to know how to by James E. Rich
Filter intelligently evaluate price action.
TIPS
Expand your resources and learn
by John F. Ehlers In this fourth of a five-part series more by connecting with other
Are low and high frequencies about Richard D. Wyckoff, we like-minded traders. Heres a
getting in your way? Heres a look at how he evaluated price group to emulate.
filter that will reject both of these action using charts.
extremes so you can focus on what
really matters.
INTERVIEW REVIEW
14 Trade Using Pure Price 32 Measuring Indicators 40 StockCharts.com
With Fred Meissner Technical analysis charting website
Action, Part 1
by Jayanthi Gopalakrishnan
by Solomon Chuama
Looking at charts without indica- Fred Meissner, CMT, is the
tors can make them look naked. founder and president of The DEPARTMENTS
But the charts could actually FRED Report. His professional 6 Opening Position
be more reliable and profitable career spans 27 years, encompass-
ing market analysis, trading strate-
7 Letters To S&C
viewed this way. Heres why. 46 Traders Tips
gies/portfolio management, and
business development/relationship 55 Traders Glossary
18 Another Look At management. He offers a consult- 56 Futures Liquidity
Wave Theory ing service for financial advisors
and speaks around the world on 57 Advertisers Index
by Michael Dylan
What do the swings on a chart market analysis and the markets. 57 Editorial Resource Index
really mean? Maybe organizing We spoke with him about how to 58 Trade News & Products
them into groups based on their effectively apply indicators in line 59 Classified Advertising
size can help answer that question. with broad macro indicators.
59 Traders Resource
62 Books For Traders
21 Futures For You 37 Explore Your Options
by Carley Garner by Tom Gentile
Heres how the futures market Got a question about options?
really works.
45 Multiple-Gap Breakouts
22 Shannon Entropy Indicator by Ken Calhoun
by Stephen Massel This month, this professional
Heres an indicator that discerns trader explains a breakout strategy
the nature of the underlying for finding swing trade entries
market and helps you decide based on a series of upward gaps
whether you should trade trends in an uptrend.
or channels. This article is the basis for n Cover: Lisa Haney
TIPS Traders Tips this month.
n Cover concept: Christine Morrison / Lisa Haney
Copyright 2016 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis
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4 July 2016 Technical Analysis of Stocks & Commodities

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July 2016 Volume 34, Number 8
Opening Position
The Traders MagazineTM
As
EDITORIAL
editor@traders.com
Editor in Chief Jack K. Hutson

Editor Jayanthi Gopalakrishnan
you settle into the dog days of
Production Manager Karen E. Wasserman summer with your long list of
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that with cautionas lethargic as the hot,
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2016 WINNER
AI TRADING SOFTWARE
The editors of S&C invite readers to submit their opinions and information on subjects
relating to technical analysis and this magazine. This column is our means of communi- Winner
cation with our readers. Is there something you would like to know more (or less) about?
Tell us about it. Without a source of new ideas and subjects coming from our readers, this 14 years
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Email your correspondence to Editor@Traders.com or address your correspondence
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letters become the property of Technical Analysis, Inc. Letter-writers must include their full
name and address for verification. Letters may be edited for length or clarity. The opinions Build powerful
expressed in this column do not necessarily represent those of the magazine.Editor trading systems in
MINUTES
MACD and Aroon early 1980s and Ive been a subscriber
Editor, for probably 25 years. You produce a fas- without coding
I consider every article cinating magazine with both brand-new
written by Barbara Star ideas as well as new takes on old ideas
a must-read. Shes my that make them relevant again.
favorite S&C writer and Barbara Star authored an excellent
I use her technical ideas article on MACD in the May 2016 S&C,
to guide me. which was superb in simplifying the
Regarding her most recent article, signal by ignoring the MACD line/signal
Zero In On The MACD (S&C, May line crossover and focusing solely on the
2016), I am trying to figure out the entry MACD zero line crossover. The result is
rules for this approach. I know that: fewer trades while also staying in a trade www.NeuroShell.com
longer, which suits my trading style much 301.662.7950
1. The price needs to be above both more comfortably. She also combines the
moving averagesthe 34 should be aroon indicator with MACD to confirm
above the 55 the current MACD signal, which is very it might be too basic for many S&C read-
2. The MACD or PPO should cross clever, in my opinion. ers, but I have already received several
above zero. Stars writing style is clear, concise, complimentary emails from readers who
and immediately actionable. I hope we are fans of the MACD but who had not
But here is my question: Should the continue to see future articles from her thought to use it for longer-term trading.
aroon-up also be hitting 100 to indicate going forward. Your father created an indicator and
that a trend has begun? Jim Hayes system that have tremendous enduring
Gary qualities. I am glad that I was able to
MACD ORIGINATOR bring some of them to a contemporary
Author Barbara Star replies: Editor, audience. Best wishes to you both.
Thank you for the kind words. I appre- I enjoyed Barbara Stars article about
ciate knowing that the information I the MACD in the May 2016 issue of STUDY GROUP
share helps your trading. Your question Stocks & Commodities. Her approach Editor,
about the aroon indicator is a good one. is intriguing. I am a subscriber to your excellent
Generally, I find that it does hit 100 at I appreciate that she acknowledged my magazine, which has been a source of
about the time the MACD crosses its father (Gerald Appel, who is now retired) knowledge and interesting information,
zero line. But since that doesnt always and will share her article with him. and has played a role in my understand-
happen, my first choice would be to Marvin Appel ing of the complex world of trading and
use the three-pronged strategy of hav- technical analysis. For about three years
ing the MACD cross above zero; price Author Barbara Star replies: now, I have been studying the different
cross above the moving averages; and a I am glad you enjoyed the article. I thought aspects of the market based on technical
price break above resistance. The aroon analysis, and I have been leading a study
can serve to confirm the direction of group. We have learned about the inter-
the MACD. pretation and utility of many technical
indicators and other useful tools. We are
LONG-TIME SUBSCRIBER now able to implement trading strategies,
Editor, set up entry points, targets, and stop-
I have been a reader of Technical Analysis
of Stocks & Commodities since the Continued on page 55
July 2016 Technical Analysis of Stocks & Commodities 7

Resist Temptation
Anatomy Of A Trade:
The One That Got Away
Have you ever traded with exceptionally bad timing? Heres of a flagpole with a flag suspended from E to F. Of course,
one to ponder. this is not an actual flag pattern, because flags are shorter
than three weeks, but it suffices for an overview of the trad-
by Thomas Bulkowski ing landscape.
On
The inset shows what an ideal flag is supposed to look like.
January 5, 2016, I was flush with cash, so I I like to see the rise from b to e forming a straight-line runup.
started window-shopping for stocks to buy. The retrace from e to f should be tight, forming a solid block
Sometimes I use a top-down approach, where I of color, not waving up and down like the markets move
assess the condition of the general market, then from E to F.
find a stock I like on the longer-term chart, and drill down After the flag ends, if the stock behaves, price will make
to the daily scale. a strong push higher and bust out upward, climbing to g and
Figure 1 shows the market landscape as represented by the beyond.
Standard & Poors 500 index. In the fall of 2015, the index bot- Flags in stocks during a bull market break out to the up-
tomed at A and B, with a tall peak between those bottoms at C. side 54% of the time, according to statistics I compiled for
The ABC pattern is a double bottom, which point D confirmed my book Encyclopedia Of Chart Patterns, Second Edition.
as a valid pattern when the index closed above peak C. That is about random. Still, I hoped the index would resume
Nikki Morr
The index continued advancing and soared to E before its upward trend, carrying my stock upward along with it (that
meandering down to F. The move from B to E reminded me is, a rising tide lifts all boats).
ANATOMY OF A TRADE
Stock selection S&P 500 (^GSPC)

I use weekly charts to scan through 2131
nearly 550 stocks I follow, looking for 2115
E
something that piques my interest. I 2099
zeroed in on Christopher & Banks Corp.

2083
2067
(CBK), shown in Figure 2. 2051
The monthly chart (inset 1) shows the 2035
C D
stock starting a long dive from 31.25 in 2019
2003 g
the fall of 2006 and splattering on the 1987 e
ground, falling below $1.00 in 2016. 1971
F
It suggests management cannot figure 1955 f
SOFTWARE BY TOM BULKOWSKI

out how to make the business work. 1939
1923
Ideal flag
In fact, they were closing stores, and 1907 b pattern
comparable-store sales were down. 1891

Usually, these long-term declines will 1875
scare me away from a stock. I reason Jan 15 Feb Mar Apr May Jun Jul Aug A Sep B Oct Nov Dec Jan 16
that if management cannot make the Figure 1: GENERAL MARKET ON A DAILY SCALE. When looking at the broad markets, you can use a top-down
business work over a decade, what will approach to assess the condition of the general market and then find a stock you like, first on the longer-term
it take to turn the situation around, and
chart, and then drilling down to the daily scale.
when will it happen? I would rather look

for a more promising opportunity with Christopher & Banks Corp. (retail [special lines], CBK)
a quicker payback. 12
11
A
However, spurring me on was a wad 10
9
of cash earning almost nothing. On 8
B
the weekly scale, the stock peaked at 7
6
A (shown on both scales) and began C
5
tumbling, making weekly plunges at D
BCDE along the way to the bottom at F. 4
A bounce lifted price up to H before an-

30
24
3 19
other decline took it back down to G.

15
12 A
9
Notice that the FHG move looks like

7
5
E
4
a double bottom, similar to the markets

2 3
2 H
ACB bottom in Figure 1 (although they 1
Inset 1: Monthly scale
happened at slightly different times).

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
In Figure 2, the double bottom (FHG) 1 F G

has not confirmed as a valid chart pat- 14 F M A M J J A S O N D 15 F M A M J J A S O N D 16
tern (yet) because price has not closed Figure 2: STOCK SELECTION. After selecting a stock, you look at it on longer-term charts using weekly and
above H, the highest peak between the monthly scales.
two bottoms.
Drilling down into the stock, accord- Christopher & Banks Corp. (retail [special lines], CBK)
ing to Yahoo! Finance, Christopher 7
A
& Banks Corporationoperates as a 6
retailer of womens apparel and acces- 5
sories in the United States. Womens B

apparel is a competitive business with
4
limited growth potential (hence the J

decade-long decline in the stock). None
3
of these conditions thrilled me.

L
K
The setup
2
C F G
I looked at the daily chart, which I show
in Figure 3. The stock peaked in May
2015 (A) and made a steady but alarm- I
H
ing decline to the bottom at D. Along 1
DOct
May 15 Jun Jul Aug Sep Nov Dec Jan 16 Feb Mar
E
Continued on page 54 Figure 3: DRILLING DOWN. On this daily chart you see how the trade unfolded. You cant win em all.

Trading SYSTEMS
Clean Those Lenses!
The Super Passband Filter

Are low and high frequencies getting in your way? bug or rounding error in the program. The EMA is a
Heres a filter that will reject both of these extremes low-pass, or smoothing, filter. It provides the smooth-
so you can focus on what really matters. ing by rejecting the high-frequency components that
are present in the price data spectrum. The EMA
frequency transfer response can be visualized as in
It s
a well-known fact: The real enemy of Figure 1. The low-frequency components are passed
technical traders is the lag from their unattenuated while the frequency components above
indicators and trading strategies. Sure, the critical frequency are increasingly attenuated.
it is relatively simple to create a fancy filter that will The super passband filter is formed by using two
give you a precise answer to your trading decisions. EMA filters. One has a critical frequency that is set
But fancy filters require more data than simple filters to a lower frequency than the first. Then, the second
do, which will cause a delay in the calculations. What EMA filter is subtracted from the first. Since both
use would that be to a trader? EMAs pass the very low frequencies with no attenua-
It is far better to get a reasonable answer with no tion, the subtraction eliminates the lowest frequencies
lag, which is precisely what my super passband filter by cancellation. This is important, because the very
does. Because it passes a band of frequencies through low frequencies are eliminated without the use of
a filter from the data spectrum, it rejects the very low filtering, which means there is no induced lag.
frequencies and therefore displays as an oscillator. Figure 2 illustrates the concept of the super passband
It rejects the very high frequencies to eliminate the filter. The original EMA is shown by the red line. The
distracting wiggles that often occur in indicators. I second EMA, having a lower critical frequency, is
will show you how to use the super passband filter shown by the blue line. The resultant super passband
with maximum effectiveness to supplement your filter response is shown by the dashed black line.
discretionary trading, and Ill give you sufficient The response of the blue line is subtracted from the
detail so you can also implement the rules as part of response of the red line. At the very low frequencies,
an algorithmic trading strategy. the values of the red and blue lines are the same, so
The filter concept

Perhaps the simplest technical indicator is the ex-
ponential moving average (EMA). The EMA takes EMA1
a fraction of the current price and adds the comple-
ment of the fraction to the value of the EMA one bar
ago. In EasyLanguage notation, using a to denote the
fraction, the equation is:
JOHN EHLERS
EMA = a*price + (1 a)*EMA[1]

Frequency
LISA HANEY
I always write the EMA equation this way to ensure the Figure 1: eXPONENTIAL MOVING AVERAGE (ema) TRANSFER RESPONSE.
This diagram shows that the EMA transfer response rejects high-frequency com-
coefficients add up to unity, thus avoiding a potential ponents.
by John F. Ehlers
PassBand The very low frequencies are
eliminated without the use of
filtering, which means there
EMA1
is no induced lag.
EMA2
and revert toward the mean. Therefore, I will use the computed
RMS value as convenient trigger levels for trading.
The EasyLanguage code for computing the super passband
Frequency filter can be found in the sidebar EasyLanguage Code For Super
Passband Filter. The two inputs to the super passband filter are
Figure 2: SUPER PASSBAND FILTER. The super passband filter is created using the critical periods of the two EMA filters. Cycle periods are
the difference of the two EMAs. the reciprocal of frequency, and so the shorter period is given
first. Dont worry if you get the two inputs reversed. The result
the value of the super passband filter is zero by cancellation. will be that the output waveform will be upside down, which is
Slightly above the critical frequency of the blue line, youll see easily identified. The critical periods are used to compute the
its value decrease, so less cancellation occurs. The response of EMA coefficients, a relationship I obtained heuristically (that
the super passband filter increases until the value of the blue is, by computational trial and error).
line is essentially zero. Then, its response is flat through the I have written the equation for the passband (PB) variable
passband until the critical frequency of the red line EMA is in closed form by taking the difference of the two EMA
reached. The high-frequency attenuation of the super passband Z-transform responses. It could have as easily been done
filter is determined by the attenuation of the red line EMA. by computing each EMA and then taking the difference, as
described conceptually.
Computing the indicator There are only two pieces of input information: the current
The usefulness of the super passband filter can be enhanced closing price and the closing price one bar ago. The equation
by also computing some trigger points, which can increase is completed using the computed value of PB one bar ago and
the efficiency of your entries and exits. I do this by computing two bars ago. The super passband filter will not have unity gain
the root mean square (RMS) value of the cyclic output of the at the center of the passband, but the absolute value of the filter
super passband filter. In working with cycles, the RMS value amplitude is irrelevant because the trigger points are referenced
describes the power in the waveform. The RMS value is the to the RMS value of the PB waveform.
conceptual equivalent of the first standard deviation in a more I compute the RMS value of the PB waveform by summing
generalized waveform. When the waveform exceeds the RMS its square over the last 50 bars and taking the square root of the
value, there is a higher probability that the waveform will turn averaged sum. There is nothing magic in the number 50, and
TRADESTATION
FIGURE 3: SUPER PASSBAND FILTER IN ACTION. Here you see that the super passband filter has a zero mean and nearly no lag.

Noisy indicators
delay your analysis
you can substitute a different value if you choose, but it should
be sufficiently long to use approximately one cycles worth of
data in the calculation.
The super passband filter in action

I have applied the super passband filter to approximately one
years worth of SPY daily data (Figure 3). The filter response Jurik algorithms
is shown as the red line in the first subgraph. The two yellow deliver low lag,
lines display the +RMS and RMS values, and the blue line low noise analysis
is the zero reference. The super passband filter output has a
guaranteed zero mean because the low-frequency components
are removed by cancellation. The near-zero lag of the filter can
Tools for: TradeStation, AmiBroker, Investor/RT, MultiCharts, NeuroShell Trader, eSignal,
NeoTicker, Tradecision, TradingSolutions, MATLAB, Ninja Trader, Sierra Charts,
be verified by comparing a notch in the prices, say, near the Genesis TradeNavigator, Market Delta, Extreme charts, DLLs for custom software
beginning of October 2015 or the third week of January 2016,
to the lowest spots in the filter response.
Jurik Tools on live charts, on the web !
Since going beyond the RMS levels and then starting to tinyurl.com/jurik-online
return to the mean is significant, the red line crossing over
the RMS line is a good trade entry signal. You can also sell
short when the yellow line crosses under the +RMS line for the
Jurik Research
same reason. The basic idea is to hold the trade until the red
line crosses the other RMS line. There are many cases where
the slope of the red line is not consistent when traversing from 2010 -- 2011 -- 2012 -- 2013
one RMS line to the other. In this case, a slope reversal is a Add-In software
good time to exit the trade, even if its a loss. Then, when the
slope of the red line resumes its original trajectory, you can jurikres.com 800-810-3646 719-686-0074
reenter the trade even though the red line has not crossed over
(or under) the yellow line.
Software. MESASoftware.com offers the MESA Phasor and
Less is clearer MESA intraday futures strategies. He is also the chief scientist
Thats all there is to it. I am sure you will find the super passband for StockSpotter.com, which offers stock trading signals based
filter response will accurately reflect the pattern of the prices, on indicators and statistical techniques.
making your trade opportunities clearer. You will find that the
smaller you make the critical periods of the two EMAs, the more The code given in this article is available at the Subscriber Area at
raggedy the filter response becomes. This is the straightforward our website, www.Traders.com, in the Article Code area.
result of using less smoothing in your EMAs.
See our Traders Tips section beginning on page 46 for commentary
S&C Contributing Editor John Ehlers is a pioneer in the use on implementation of John Ehlers technique in various technical
of cycles and DSP technical analysis. He is president of MESA analysis programs. Accompanying program code can be found in the
Traders Tips area at Traders.com.
EASYLANGUAGE CODE FOR SUPER PASSBAND FILTER Further reading

Ehlers, John F. [2013]. Cycle Ana-
//Super Passband Filter PB = (a1 - a2)*Close + (a2*(1 - a1) - a1*(1 - a2))*Close[1] + lytics For Traders, John Wiley
// (c) 2016 John F. Ehlers ((1 - a1) + (1 - a2))*PB[1] - (1 - a1)*(1 - a2)*PB[2]; & Sons.
Inputs: RMS = 0; [2016]. Aliasing, Tech-
Period1(40), For count = 0 to 49 Begin nical Analysis of Stocks &
Period2(60); RMS = RMS + PB[count]*PB[count]; C ommodities, Volume 34:
End; January.
Vars:
a1(0), RMS = SquareRoot(RMS / 50); [2015]. Decyclers, Tech-
a2(0), nical Analysis of Stocks &
PB(0), Plot1(PB); C ommodities, Volume 33:
count(0), Plot2(0); September.
RMS(0); Plot3(RMS);
TradeStation
Plot7(-RMS);
a1 = 5 / Period1;
a2 = 5 / Period2; J. Ehlers

Price action vs.
Fibonacci trading
Candlestick charts are used
to describe price action in
any given timeframe. Price
action can follow a continu-
ation pattern, where price
continues in the direction it
was moving preceding the
patterns formation. Other-
wise, price action can be in
a reversal pattern, indicating
the likelihood of a change in
price direction from prior to
the patterns formation.
A critical aspect of price
action is identifying support
& resistance levels. These
levels help identify trad-
ing opportunities mainly
because these are the areas
where price reverses. To
trade profitably with price
action you have to enter at
the reversal of the trend in
order to catch the trend close
to its beginning. If you buy at
the support level, place your
stop-loss a few pips below it.
If you sell at the resistance
level, place your stop-loss a
few pips above it.
Traders often use Fibo-
nacci retracement levels to
identify potential support &
resistance levels. I will dis-
cuss Fibonacci retracement
levels in part 2. Before you
Charts Sans Indicators can apply Fibonacci levels
Trade Using
to your trading, you need
to understand the concept
of trends, support, and re-
Pure Price Action

sistance.
Trends
Generally speaking, a trend
Part 1 gives you the general direc-
tion of price movement. An
Looking at charts without indicators can make them look naked. But the charts could actually uptrend is when prices make
be more reliable and profitable viewed this way. Heres why. a series of higher highs and
Who is Danny / shutterstock.com
higher lows. A downtrend is
P
by Solomon Chuama when prices make a series of
lower highs and lower lows.
rice action provides first-hand information about the market, whereas indicators provide When prices move without
lagging or secondary information. In the first part of this two-part article, I will discuss a discernible series they are
price action by looking at candlestick charts. said to be trending sideways.
FOREX FOCUS
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more effective at support & resistance levels. When you make Customizable Relative relative strength guru Michael J. Carr, CMT. TAKE
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Resistance is the price level (ceiling) where selling is strong
enough to interrupt or reverse an uptrend. Theres a lot of re-
sistance there, so price will have a difficult time going above There are other bullish candlestick patterns that can help you
that point. In the four-hour chart of USDCHF in Figure 1, the identify reversals to the upside as well, a few of which you will
horizontal resistance level of the currency pair at 0.9573 is find pictured in the sidebar Bullish Candlesticks Or Bottom
pretty clear. Notice how when the uptrend hits that resistance Reversal Patterns. Any one or two of these candlestick patterns
level, it tumbles down. Notice the bearish candlesticks as price that appear after prices hit a support level could indicate a buy
approaches that resistance level. Those bearish candlesticks signal. Markets oscillate, and over time, support & resistance
further confirm the uptrends reversal at the resistance level. levels are continuously formed. Another aspect of support &
This should give traders a cue to get out of long positions and resistance levels is the issueDBdesign 2016 and pullbacks.
of breakouts
take short positions. The bearish CLIENT: RxCrossroads/Omnicare
engulfing pattern highlighted in JOB #: DIP102b
blue clearly shows the beginning SIZE:resistance3.375
Price bounces off horizontal x 2.875
at 0.9573
of a reversal in trend. There are DATE: 4/25/2016 0.9595
ARTIST: db
0.9573
other bearish candlestick pat- Bearish engulfing patterns 0.9555
terns that can help you identify a PROOF: 1 0.9515
trend reversal. Some of these are Stocks & Commodities 0.9473
pictured in the sidebar Bearish 0.9435
Candlesticks Or Top Reversal 0.9395
Patterns. 0.9355
0.9315
Support 0.9275
Support is the price level (floor)
0.9235
where buying is strong enough
0.9195
IFX Trader
to interrupt or reverse a down- 12/29/11 12/30/11 1/3/12 1/4/12 1/5/12 1/9/12 1/10/12 1/11/12 1/13/12 1/16/12 1/17/12 1/19/12 1/20/12 1/23/12 1/25/12
trend. Theres a tough battle
going on to keep prices above FIGURE 1: BOUNCING OFF RESISTANCE. Here you can clearly see that the horizontal resistance level of USDCHF is
at 0.9573.
this level. In the four-hour chart
of GBPJPY in Figure 2, you see
the horizontal support level of 174.25
the GBPJPY currency pair price 173.95
Price bounces off horizontal support level at 170.68 173.65
at $170.68. Notice how prices 173.35
bounced off this level several 173.05
times (see arrows). But how do 172.75
you know when the downward 172.45
172.15
trend will reverse before you 171.85
start taking long positions? In 171.55
Harami cross
this case, its the harami cross 171.25
reversal pattern that gave an 170.95
170.68
indication that perhaps the trend 170.65
170.35
is finally starting to turn up. 7/29/14 7/30/14 7/31/14 8/4/14 8/5/14 8/6/14 8/8/14 8/11/14 8/12/14 8/14/14 8/15/14 8/18/14 8/20/14 8/21/14 8/22/14 8/26/14 8/27/14 8/28/14 9/1/14 9/2/14
The harami cross is a bottom FIGURE 2: BOUNCING OFF SUPPORT. The horizontal support level of GBPJPY is at 170.68. Notice how price bounced
reversal or bullish candlestick. off this level several times.

Breakouts
Breakouts are prices that cross support & resistance levels. What are you afraid of? Try
They are usually accompanied by high volume and large removing those indicators
price movement. I dont find them reliable because the odds
of their continuation are usually not high. They often turn into
and trade on price action or
fakeouts, especially in the currency markets. market movement.
Pullbacks
When a price retouches support & resistance levels that were
previously broken, its referred to as a pullback. When prices Define the direction of the market.
pull back, you can think of it as a high-quality signal to enter Look for bearish reversal candlesticks at the resistance
a trade, since a trend is likely to resume after the pullback. level in uptrends. A minimum of one or two bearish
Pullbacks usually occur a few bars after a breakout. candlesticks must appear as confirmation. In downtrends,
look for bullish reversal candlesticks at the support level.
Price action in the forex market At least one or two bullish candlesticks must appear as
Price action analysis is when you make trading decisions confirmation.
based purely on price bars without any indicators overlaid Enter your positions following confirming reversal candle-
on them. Here are a few steps on how to approach trading stick patterns.
using price action. Place your stop-loss a few pips above the resistance level
for a short position or below the support level for a long
1. Determine the direction of the market. position. You may place trailing stops if the trade continues
2. Identity support & resistance areas. to move favorably.
Support & resistance areas should form the foundation of Remove the indicators
your decisions. You need to wait for price to reach these areas What are you afraid of? Try removing those indicators and
before you initiate your trades. Support & resistance levels trade on price action or market movement. You can get into
are based on historical price action. When you look at a chart trades early. You can try using different timeframes such as
of a particular currency pair, you will notice that price had 30-minute, hourly, or even daily charts. Be mindful of rever-
a tendency to reverse at the same level several times in the sal candlesticks at support & resistance levels. They have a
past. This historical price action helps to identify where the unique characteristicthey tell you when buying or selling
support & resistance levels are on a chart. pressure is exhausted.
In Figure 1, USDCHF was in a downtrend. Initially, the
market started as an uptrend until it reached the resistance Solomon Chuama has been working in the financial industry
level. Price bounced off the 0.9573 resistance level. When for 15 years. He is a trading seminar organizer and instructor
you see this happening, you have to look for a price rejection who tries to pass on to students his passion and knowledge
candlestick. In this case, a bearish engulfing pattern formed. of forex trading.
You can enter a short order immediately after the price rejec-
tion candlestick. But how long do you leave this trade open? Further reading
The converse applies. Chuama, Solomon [2015]. The 10 Principles Of Successful
As the downtrend progresses you have to look for a price Trading, Technical Analysis of Stocks & Commodities,
rejection or exhaustive candlestick patterns. You may find Volume 31: November.
some of these candlesticks along the trend, but youre better [2016]. Explore Trend Trading In FX, Technical
off paying more attention to them when you spot them at the Analysis of Stocks & Commodities, Volume 34: April.
support level of the downtrend. Thats when you should exit IFX Trader (MetaQuotes Software Corp.)
your trade. See Editorial Resource Index
Similarly, a critical look at the chart of GBPJPY in Figure
2 shows a downtrend that reversed at a harami cross. Prices
were bouncing off support levels at 170.68. The harami cross
suggested that the trend has finally reversed, which means you
can take a chance at opening a long position. Exit your long
position when you see price rejection or exhaustive candlesticks
appear at a resistance level.
Trading approach
Heres a recap of some of the points you need to keep in
mind.
BEARISH CANDLESTICKS OR TOP REVERSAL PATTERNS Bullish candlesticks or bottom reversal patterns
Bearish-Gravestone Doji Bearish-Engulfing Bullish-Dragonfly Doji Bullish-Engulfing
Bearish-Evening Doji Star Bearish-Harami Bullish-Morning Doji Star Bullish-Harami
Bearish-Harami Cross Bearish-Shooting Star Bullish-Harami Cross Bullish-Inverted Hammer
Bearish-Hanging Man Bearish-Kicker Bullish-Hammer Bullish-Kicker
Bearish-Dark Cloud Cover Bearish-Tweezer Top Bullish-Piercing Pattern Bullish-Tweezer Bottom

Riding The Ebbs & Flows
Another Look At Wave Theory

What do the swings on a chart really mean? Maybe organiz- (swings) are part of a natural rhythm that markets produce.
ing them into groups based on their size can help answer There are many tradable rhythms, each having a distinct
that question. pattern of movement yet going on at the same time, which is
why its hard for the untrained eye to decipher them. Here,
by Michael Dylan I will demonstrate how Dylan Wave Theory organizes price
S
charts, which can bring clarity to the price swings and help
tock prices move in rhythms, but you never know
when a price drop is a correction or a reversal. A AAPL [CV] [M] Daily 135.00
stock such as Apple Inc. (AAPL) has been up for 130.00
several years, but the price dropped sharply in
125.00
August 2015, as you see in Figure 1. When you see
something like that happen, you have to wonder 120.00
whether the big price drop is a trend reversal or a big 115.00
correction. If its a correction, you would want to buy, but 110.00
108.98
when should you buy? I came up with a wave theory I call 105.00
Dylan Wave Theory that can help determine whether a
price drop is a correction or a reversal. It can also help 100.00
Sierra Charts
you understand what the price swings really mean. 95.00
13 May 15 Jun 12 Jul 14 Aug 17 Sep 15 Oct 14 Nov 16 Dec 14 2

What is it? FIGURE 1: Correction or a trend reversal? When you see a big price drop in a
Dylan Wave Theory organizes price swings into groups stock that has been moving up consistently for several years, you have to wonder whether
based on correction sizes. These groups of price waves its a correction or a trend reversal.

chARTIng
40
40 40
40 40
100
100
FIGURE 2: Two rhythms. In this illustra- 100 100

tion, there is a new uptrend and a correction
of 100 points. The market makes a new high
followed by a 40-point correction, and then
a new high. There are two rhythms on the FIGURE 3: Corrections during trends. Each FIGURE 4: Smaller rhythms complete first. The 40- and
charta 100-point rhythm and a 40-point rhythm has its own first correction and subsequent 100-point rhythms are completed with matching, similar-size correc-
rhythm. matching second correction. tion waves.
you find the natural support levels. rection, and then another new high. Now there are two rhythms
To take advantage of these market rhythms, you need to on the chartone of 100 points and one of 40 points.
follow three simple rules: Rule 1 tells you that for a new rhythm, a correction must be
at least 20% bigger or smaller in size than previous corrections.
1. Identify new rhythms based on correction wave sizes. The 40-point correction is much smaller than the 100-point
To be a new rhythm, the size of the correction wave correction and thats why its considered a new rhythm.
must be 20% bigger or smaller than the other correction Rule 2 tells you that as the trend continues to develop there
waves in a trend. The first new correction by size will will be a similar-size correction(s) to the first correction in a
be marked as correction number one. rhythm. It is important to remember that each rhythm has its
2. As the trend continues to develop, the first correc- own first correction and subsequent, matching second cor-
tion wave in a rhythm will be matched by at least one rection. As the market makes new highs, subtract 40 points
other correction wave of similar size. In other words, from the new highs to calculate the first Dylan support price
rhythms develop between one or more pairs of similar (Figure 3).
size correction waves. To be considered similar in size, Rule 3 says the smaller rhythms will complete first. In other
these correction waves must be within a 20% band. For words, the 40-point correction will match first, followed by the
example, a correction that is 100 points can be matched 100-point correction. As the market makes a new high, you
with a correction of 80120 points. But a 100-point cor- subtract 100 points to calculate the second Dylan support price
STYLIZED WAVE: JAVI RUIZ / ABSTRACT METAL: EKY STUDIO/SHUTTERSTOCK / COLLAGE: CHRISTINE MORRISON
rection cannot be matched with a 75-point correction or (Figure 4). There can be numerous patterns to these rhythms.
a 125-point correction. For example, the next correction may not be 100 points as in
3. Since there are several
different rhythm sizes
on a chart, the smaller
rhythms will complete
first. In other words, there
is a sequence to how
market rhythms work out. 70
The smaller corrections 40 70 40 70
100
are matched first and then 40 40
the bigger ones.
Here is a simple explanation

of these three rules. Lets say 100 100
there is a new uptrend and a cor-
FIGURE 5 : Many patterns to the FIGURE 6: Three rhythms. All rhythms are completed with matching,
rection of 100 points (Figure 2). rhythms. The smallest 40-point rhythm is similar-size waves. Now we wait for a new rhythm to develop.
Then the market makes a new completed. The 70- and 100-point rhythms have
high followed by a 40-point cor- not been completed yet.

AAPL [CV] [M] Weekly #6 first, followed by a rally, even if it is a small rally.
Subsequently, the 100-point correction should be
120.00 matched (Figure 6). At this point, the uptrend has
100.72 105.67 developed in three rhythms, namely, the 40-, 70-,
100.00
and 100-point rhythms.
80.00
Chart analysis
60.00 When AAPL went through its large correction in
55.01
2013 it was bigger than any of the previous cor-
40.00
rections, as you can see on the weekly chart of
20.00 AAPL in Figure 7. According to rule 1, this is a
potential new rhythm. To measure the size of the
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0 new correction wave, draw a box from the trend
FIGURE 7: Measuring correction lows. On this weekly chart of AAPL, you see a new high at 100.72 to the correction low at 55.01, or
rhythm developing in correction 1. you could subtract 55.01 from 100.72 to get the
size of the correction.
AAPL [CV] [M] Weekly #6 When the stock price makes a new high, as il-
lustrated in Figure 8, the new rhythm is confirmed,
120.00 and in the future we should expect a similar-size
New high
100.72 105.67 correction one more time. As AAPL makes new
100.00
highs, keep moving the box up (Figure 9). The
80.00 bottom of the box is the Dylan support price.
Sometimes the second correction in a rhythm
60.00 will not quite reach that support price, which is
55.01 why I recommend that the entry price be placed
40.00
slightly above the support price. The first blue
20.00 box on the chart is the first correction, and the
second blue box represents the matching second
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0 correction of the rhythm.
FIGURE 8: New high, new rhythm. When the price goes above where the first correction Since the theory states that more often than not
began, 100.72, the new rhythm is confirmed. a trend will develop in sets of two similar-size
corrections, and since the correction of 2013 in
AAPL [CV] [M] Weekly #4 134.54
AAPL had not yet been matched with at least
130.00
2-to-1 certainty, then the current rhythm contain-
ing the 31% price drop can be considered a big
120.00
correction and not a trend reversal. Therefore, the
110.00
105.67 Dylan support price at 88.97 is an opportunity
100.72
100.00 to buy (Figure 9).
90.00 Dylan Wave Theory has answered the ques-
88.97
80.00
tion of whether the big downward price action
you saw in Figure 1 is the beginning of a bear
70.00
trend or whether its a big correction. It was a big
60.00 correction matching the one in 2013. The other
55.01 50.00 question Dylan Wave Theory answered is where
May Sep 2012 May Sep 2013 Jun 2014 Jun 2015 Jun 2016 1 to enter the market. The answer is to enter near
the 88.97 Dylan support price.
FIGURE 9: Finding support levels. The size of the first correction, 45.71, is subtracted from
the new highs to find the support price.
It is not necessary to use the rectangular boxes
to find the support prices; however, they do pro-
vide a quick way to find the support prices and
the previous example, but rather 70 points followed by a new organize waves into color schemes. For example, instead of
market high (Figure 5). drawing a box, you could have subtracted the low of the first
Now there are two rhythms in the market, of 70 and 100 correction 55.01 from the beginning of the correction 100.72
points, and very likely the 70-point correction will match and come up with 45.71 for the correction size. As AAPL made
first. The 40-point rhythm is finished, because the 70-point new highs, you would subtract 45.71 to find the support price.
rhythm is 20% bigger. According to rule 3 of the Dylan Wave
Theory, the 70-point Dylan support price should be matched Continued on page 44
FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is the senior
strategist for DeCarley Trading, a division of Zaner Group, where she also
works as a broker. She authors widely distributed e-newsletters; for your free
subscription, visit www.DeCarleyTrading.com. Her booksCurrency Trading
In The Forex And Futures Markets; A Traders First Book On Commodities;
and Commodity Optionswere published by FT Press. To submit a question,
email her at info@carleygarnertrading.com or via www.DeCarleyTrading.com.
Carley Garner
Selected questions will appear in a future issue of S&C.
NEW DOLLAR SPOT INDEX traders might pay as little as $3 per month sion also includes some emerging market
The CME recently launched a new dol- if they subscribe to top-tier data. There currencies it reasoned to be liquid and
lar index futures contract. How does it is a substantial difference between the pertinent to include in the basket. In ad-
differ from the ICE version? $110 the ICE exchange is asking and dition, the CME BDI is designed to keep
The US dollar index futures contract the $3 the CME is asking for live price pace with an evolving FX market via
the DXthat is traded on the Interconti- data. Unfortunately, those seeking the annual rebalancing to Federal Reserve
nental Exchange, better known as ICE, economic benefits of moving their dollar reports and data from the Bank for In-
is the original benchmark. I often refer index trades to the CMEs Bloomberg ternational Settlements. In other words,
to it as the currency ETF of the futures Dollar Spot Index will find that the BDI its basket of currencies is dynamic and
market because it offers speculators a is suffering from a dire lack of liquidity. related to actual cash flows taking place
way to place wagers on the strength, or Nonetheless, this is a growing pain that in the spot forex markets.
weakness, of the dollar against a basket all new futures products undergo, and I A massive drawback to the CMEs
of major currencies, as opposed to a suspect that as traders become more and version of the dollar index is a lack of
single currency. Although the DX has more aware of the alternative, trading available options to use for hedging,
never been a poster child for healthy volume will begin to migrate from the or speculating. In other words, an ICE
trading volume, it sees enough action ICEs DX to the CMEs BDI. dollar index trader could go long a DX
for seamless entry and exit of futures futures contract and then purchase a put
contracts, and the option market mak- option for insurance purposes, but a CME
ers make a relatively fair arena to buy The CME is offering BDI trader wouldnt have the ability to
and sell options against the dollar index fee-free trading until purchase options for risk management
at reasonable prices. However, in light the close of the third purposes. Similarly, the DX offers traders
of the new ICE policy to charge traders the opportunity to purchase calls and puts
$110 per month for access to live price
quarter of 2016. as limited-risk speculative ventures, but
data for the US ICE division of the ex- no such prospect exists using the BDI.
change housing the dollar index futures Although trader interest in the BDI is In an attempt to boost trading in
contract (not to mention another $110 lacking, market makers are in place es- their new product, the CME is offering
per month for price access to products sentially making a market that doesnt fee-free trading until the close of the
on each of their other divisions), the currently exist by offering extremely third quarter of 2016. In short, although
Chicago Mercantile exchange has rolled competitive bids & asks. Accordingly, traders will still be required to pay their
out a competing product, the Bloomberg during normal market conditions (not brokerage firm commission for each
Dollar Spot Index (BDI). high volatility or during a significant transaction executed in the BDI, they
Although the CME also charges users economic data release or news event), I will not be charged the exchange fees that
for price data, they categorize traders as suspect traders would be able to buy and are charged per transaction. The savings
either professional or nonprofessional; sell the BDI with relative ease. is likely a few dollars per contract, and
this acts as a litmus test as to who must There are some notable differences that alone is not necessarily a compel-
pay higher data fees. For example, a between the dollar index traded on ICE ling reason to trade the CMEs dollar
professional trader wishing to have and the new version traded on the CME. index, but for those wishing to trade a
access to real-time data on the CMEs The basket of currencies the ICE version diversified basket of currencies against
version of the dollar index, along with trades against is comprised of roughly the greenback, the savings in exchange
other futures contracts traded on that 60% euro, causing the DX to be more fees and data fees make the CMEs BDI
particular division of their exchange, heavily influenced by action in the euro. worth a good, hard look.
must pay $85 per month to the exchange. The CME version, meanwhile, has a euro
Yet those deemed to be nonprofessional weighting closer to 30%. The CME ver-
described in terms of the mixing or spread-
ing of the total energy of each constituent of
a system over its particular quantized energy
levels. Keeping this concept in mind will be
useful when applying these ideas to trading.
I am looking to identify when the markets
energy is focused in a single direction, as op-
posed to spread out and directionless.
As per a 1948 paper by Claude Shannon, for
whom the term Shannon entropy was named,
entropy, H, is given by:
P
n
H= log2 (Pi)
i
i=1
where P is the probability of a particular

element.
Types of price action

Markets typically act in two fundamental
ways: they oscillate between periods of trend-
ing price action, which could be considered
focused energy, and periods of sideways price
movement or consolidation, which could be
considered unfocused energy. I will examine
these two behaviors and develop a framework
for analyzing each in terms of their entropy.
Calculating entropy
To calculate entropy, Im going to use a slightly
modified form of rank 1 entropy. Recall that
Seek, And Ye Shall Find rank 1 entropy is based on groupings of single
Shannon Entropy
elements. In this case, I will be looking at the
S&P daily close relative to the prior days
close in percentage terms. (The spreadsheet
Indicator
showing the calculations is available from
http://traders.com/files/Pattern_Entropy3.
xls.zip.)
The first step is to quantize the daily price
changes; I have used a threshold of 0.1% for
Heres an indicator that discerns the nature of the underlying market and this. Anything above 0.1% will be considered
helps you decide whether you should trade trends or channels. an up day (U), below -0.1% a down day (D),
and in between that range is a flat day (F).
by Stephen Massel Rather than defining three outcomes U, D, and
F, as you might expect, I am going to define
In
my last article on Shannon entropy in the August 2015 issue of Stocks two outcomes, U and D, with F = (0.5 U)
& Commodities, I introduced the concept of using entropy to detect and (0.5 D), respectively. That is, a single
structure, or nonrandomness, in a strategys trading results. In this up day will be U with frequency 1, a single
article, I will extend this idea and create an indicator that seeks to down day will be D with frequency 1, and a
discern the nature of the underlying market and whether price action flat day will be U with frequency 0.5 and D
is acting randomly or with more purpose. This can then be used to help decide with frequency 0.5. Random entropy (maxi-
SERGY NIVEN/SHUTTERSTOCK
whether to be trend trading or channel trading. mum dispersion) will be given by -log2(1/2)
But first, a few words on entropy. As well as providing a measure of structure/ = 1. Note that this treatment is justified, as
randomness in data, entropy can be considered a measure of dispersion; the more an even distribution of ones and zeros is the
mixed up or evenly distributed the data, the higher the entropy, as in a pack of same as an even distribution of 0.5s (that is,
well-shuffled playing cards. In thermodynamics, entropy changes have been 0+1 = 0.5+0.5). A sequence of 1, 0, 0.5
INDICATORS Pseudo% Uptrend Quant Quantized U/F D/F
0.25 0.25 1 1 1 0
0.90 1.15 1 2 1 0
0.25 1.4 1 3 1 0
will therefore be inter- 8 up days, 8 down days 1.20 2.6 1 4 1 0
preted as U, D, F. See Up 8/16 x 1 + 0/16 X 0.5 = 0.5 1.50 4.1 1 5 1 0
the example of even Down 8/16 x 1 + 0/16 X 0.5 = 0.5 0.08 4.18 0.5 5.5 0.5 0.5
distributions pictured Total: 16 0.80 4.98 1 6.5 1 0
in Figure 1. 0.50 5.48 1 7.5 1 0
Entropy: -0.5 x log(0.5) -0.5 x log(0.5) = 1
Ill start by calculat- -1.20 4.28 -1 6.5 0 1
16 flat days
ing the entropy of three
Up 0/16 x 1 + 16/16 x 0.5 = 0.5 0.60 4.88 1 7.5 1 0
idealized price pat-
0.70 5.58 1 8.5 1 0
ternsuptrend, down- Down 0/16 x 1 + 16/16 x 0.5 = 0.5
1.40 6.98 1 9.5 1 0
trend, and sideways Total: 16
channel (consolida- Entropy: -0.5 x log(0.5) -0.5 x log(0.5) = 1 1.20 8.18 1 10.5 1 0
tion). Then I will per- 1 up day, 1 down day, 14 flat days 1.10 9.28 1 11.5 1 0
form the same analysis Up 1/16 x 1 + 14/16 x 0.5 = 0.5 0.10 9.38 0.5 12 0.5 0.5
on actual price data Down 1/16 x 1 + 14/16 x 0.5 = 0.5 1.00 10.38 1 13 1 0
microsoft excel
exhibiting these types Total: 16 Total: 14 2
of price patterns. Entropy: -0.5 x log(0.5) -0.5 x log(0.5) = 1 Entropy: 0.544
As discussed, the FIGURE 1: EVEN DISTRIBUTIONS. Here are examples of Diff: 45.64%
simple quantization even distributions of maximum entropy for up days, down FIGURE 2: difference between calculated entropy and ran-
scheme will allow days, and flat days. dom entropy for an uptrend. Using idealized uptrend calculations
daily price changes to of U>0.1%, D<-0.1%, and F-0.1% & 0.1% resulted in a diff of 45.64%.
be defined as U, D, and F. To help visualize this I have created

some idealized patterns (my own pseudo price points) and Idealized Uptrend
plotted these cumulative price changes with the cumulative 14 12
quantized levels on the second axis, including +/- signs to
show direction. The entropy can then be calculated for each 12 10
pattern using Shannons entropy formula. Diff is the difference 10
between the calculated entropy and random entropy (maxi- 8
mum dispersion), or diff = (1entropy). An example of this 8
6
calculation is shown in Figure 2 for the uptrend. You can see 6
idealized and quantized plots for an uptrend in Figure 3, for 4
4
a downtrend in Figure 4, and for a channel in Figure 5.
As you can see, the entropy characterizes these patterns 2 2
exactly as you would expect. The diff of 1.1% for the channel
0
is significantly lower than the 45.6% for the trends. 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Real price data Quantized Uptrend

This is all well and good for idealized price patterns, but what FIGURE 3: ENTROPY OF IDEALIZED UPTREND. The diff for the uptrend is
about real price data? Lets find out. In Figures 6 , 7, & 8 you 45.6%.
Idealized Downtrend Idealized Channel

2 2 2.5 0.6
0 0 0.4
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 2
-2 0.2
-2
-4 1.5 0
-4
-0.2
-6
-6 1 -0.4
-8
-8 -0.6
-10 0.5
-0.8
-12 -10
0 -1
-14 -12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quantized Downtrend Quantized Channel
FIGURE 4: ENTROPY OF IDEALIZED DOWNTREND. The diff for the downtrend FIGURE 5: ENTROPY OF IDEALIZED CHANNEL. The diff for the channel is 1.1%,
is 45.6%. which is significantly lower than that of trends.

16-Day SPX Uptrend see selected 16-day segments from the S&P 500 index (SPX)
5 8
from 2014. The segments display up, down, and sideways
price action, along with the quantized plot and calculated
7
4 entropy differences.
6
Again, theres a significant difference in the channel diff
3
5
of 0.28% versus 10.4% for the uptrend and 14.3% for the
4 downtrend. The difference is not as marked as in the ideal-
2 3 ized patterns, but its pretty good given real-world market
2 conditions. Also, the quantized plots match the actual price
1 1 data very accurately.
0 Now we have a framework that shows when the market
0
-1 is trading with focused or directional energy and when its
trading with dissipated, nondirectional energy.
4
4
-1
-1
-1
-1
-1
-1
-1
-1
-1
-1
-1
-2
g
ug
ug
ug
ug
ug
ug
ug
ug
ug
The reason I used 0.5 U and 0.5 D for a flat day (basi-
Au
Au
-A
-A
-A
-A
-A
-A
-A
-A
-A
7-
9-
11
13
15
17
19
21
23
25
27
Quantized S&P% cally 50% up and 50% down simultaneously) is that I want to
view the market through a binary lens of up and down only,
FIGURE 6: USING REAL PRICE DATA. In this uptrend segment, the diff equals
and do not want the entropy measure to consider a sequence
10.4%.
of flat days or a channel to be a focused energy (nonrandom)
16-Day SPX Downtrend price pattern. The objective is to differentiate trends and chan-
nels. Note that as you reduce the quantization level, you will
decrease the number of flat days, and entropy will be more
4
14
14
-1
-1
0
-1
0
-1
-1
t-1
t-1
t-1
t-1
ct-
ct-
ep
ep
ep
ep
ep
Oc
Oc
Oc
Oc
predominantly based on up/down day sequences.

-O
-O
-S
-S
-S
-S
-S
2-
4-
6-
8-
10
12
22
24
26
28
30
-1 -1 Having ascertained that the entropy measure works to

-2 differentiate market conditions, I can create an indicator and
-2
see if it offers any insight.
-3
-3
-4 Putting it all together
-4 In order to create an indicator I need to quantize price and
-5
calculate entropy over a rolling period. In analyzing the
-6
-5
charts I found that a rolling entropy period of 10 days with a
-6
quantization threshold of 0.05% worked well. The indicator
-7 is plotted in the chart in Figure 9 for the SPX from January
-8 -7 2009 to March 2016, together with two diff simple moving
averages of periods 15 (dotted) and 20. The diff plots have
Quantized S&P%
been split up into red (below 3.5%) and green (above 3.5%)
FIGURE 7: REAL PRICE DATA, IN A DOWNTREND SEGMENT. The diff equals to more clearly indicate regions of market trending behavior
14.3%. versus consolidation. I have added some arrows in the chart
that show that the market seems to cycle regularly between
16-Day SPX Channel
periods of focused energy (trendiness) and unfocused energy
1.4 2 (range-bound).
1.2 A zoomed-in view of this chart in Figure 10 shows the
1.5 indicator from January 2014 to March 2016. The moving
1
1 average crossover points (where the dotted MA crosses over
0.8
the solid MA) from within the red channeling zone appear
0.6 0.5 to indicate points where the market is ready to enter the
0.4
0 trending zone. In such a case, a trending strategy is probably
0.2 more likely to succeed.
0 -0.5 At a more macro level, by looking at the diff trend indica-
-0.2 tor (green) and diff moving average peaks, you can see that
14
14
14
14
14
11 4
13 4
15 4
-1
l-1
l-1
l-1
l-1
l-1
l-1
l-1
since around October 2015 the market has been tending

n-
n-
n-
n-
l-
Ju
Ju
Ju
Ju
Ju
-Ju
-Ju
-Ju
-Ju
-Ju
-Ju
-Ju
1-
3-
5-
7-
9-
toward consolidation and may soon be ready to enter a more

23
25
27
29
-1.5
-0.6
-0.8 -2
trending environment.
Quantized S&P% Deploying the right strategy

FIGURE 8: CHANNELING SEGMENT USING REAL PRICE DATA. The diff equals I think this approach can provide insight into the markets
0.28%. behavior, in that it can help you determine if its energy is
S&P vs. Diff (1Entropy)
2300 60%
2100
50%
1900
1700
Green = Trending 40%
Red = Channeling
1500
30%
1300
1100 20%
900
10%
700
500 0%
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-11
Mar-12
May-12
Jul-12
Sep-12
Nov-12
13Mar--
13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Jan-
Close Channel Trend MA20 MA15
FIGURE 9: TRENDING VS. CONSOLIDATING PERIODS. On this chart of the SPX from January 2009 to March 2016, you see the cycles of trending (green)
vs. consolidations (red). The diff moving averages are also plotted and help show how the market cycles between focused (trendiness) and unfocused energy
(range-bound).
focused and more susceptible to trend trading or whether its provider and trading strategy development/testing company.
energy is unfocused and more amenable to a mean reversion He can be reached via his website at dragonfishgroup.com.
type strategy.
It would be interesting to extend this analysis to entropy of A spreadsheet offered by the author with his calculations can be down-
higher rank and different time periods. Of course, like most loaded from http://traders.com/files/Pattern_Entropy3.xls.zip.
indicators, it is delayed, since previous price data is used in
its calculation. However, if you believe that trending versus Further reading
consolidation behavior has some persistence, then this could Massel, Stephen [2015]. Shannon Entropy, Technical Analy-
be a good approach to consider. sis of Stocks & Commodities, Volume 33: August.
[2011]. What Can You Expect, Mathematically?
Stephen Massel has been developing strategies and indicators Technical Analysis of Stocks & Commodities, Volume
and has been trading futures and options for over 18 years. 29: March.
He is cofounder of Dragonfish LLC, a news sentiment data
S&P vs. Diff

2200 60%
Green = Trending
2150 Red = Channeling
Trending / ordered 50%

2100
market
2050
40%
2000
Channeling / increasingly
1950 30%
random market
1900
20%
1850
1800
10%
1750
1700 0%
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Close Channel Trend MA20 MA15
FIGURE 10: ZOOMING IN ON THE SPX FROM JANUARY 2014 TO MARCH 2016. The diff moving average (MA) crossover points (dotted MA crossing over the
solid MA) from within the red channeling zone appear to indicate points where the market is ready to enter a trending zone. In such a case, a trending strategy is
more likely to succeed.

Q&A
SINCE YOU ASKED

Confused about some aspect of trading? Professional trader Rob Friesen, president
& COO of Bright Trading (www.stocktrading.com), an equity trading corporation,
answers a few of your questions. To submit a question or suggest a topic, email him
at robfriesen@brighttrading.net, or post your question to our website at http://
Message-Boards.Traders.com. Answers will be posted there, and selected questions
will appear in a future issue of S&C.
Rob Friesen
Feedback Loops TO Improve - Details of various strategies used trader does. You should have concrete
Future Results -M odels and variations for each of backtesting stats and forward-testing
The three items all traders should have the strategies indications against which to compare
if they want to improve their trading -M ethods used to execute each your ongoing results. Use your journal to
results are their trading plan, a log of opportunity monitor market conditions and specific
all their trades, and a trading journal. - Position sizing items like changes in volatility, cor-
These items are necessary so that the - Risk-management system relations, interest rates, currencies, and
trader can develop a feedback loop. In -T he expected value of each sector performance. By writing these
engineering, a feedback loop is where transaction down and using the stats generated from
a portion of a systems outputs are sent your trade logs, you can begin to notice
back to the inputs to further affect and The trade logwhich should be factors that help or hurt your system over
modify future outputs. multiple documents/spreadsheets if time. This can then help you to modify
The two major categories of feedback youre trading multiple systems or and fine-tune your system/systems for
loops are positive and negative. Negative methodologiesshows you your ongo- future revisions.
feedback loops reduce aspects of the ing results so you can see whether they If you combine discretionary and
future inputs, while positive feedback are within the past results documented systematic trading, youll have the best
loops enhance future systematic feed- in the trading plan. and worst of both worlds. Youll need
back loops. to combine the principles of the fully
The concept of the feedback loop can systematic trader and the discretionary
help a trader refine his trading processes A feedback loop can trader. Oftentimes, youll have to decide
and systems, which can only be accom- help a trader refine his which of your systems to deploy based
plished if a trading plan, trading log, and trading processes and on your read of market conditions. The
trading journal are in place. The trading journal and trade log can help you de-
plan is the utility to engage trades and systems. termine if you are correctly interpreting
is also the baseline from which to com- the conditions and putting the correct
pare future results. The log and journal If youre a fully discretionary trader, systems into place to take advantage of
provide the feedback loop. The goal of you need to make sure you do not go those conditions. Sometimes, youll have
utilizing the log and journal is to remove through style drift. Continue to moni- the leeway to exit your trading strategies
what isnt working from the system and tor the behaviors that are helping you early. You can use your logs and journals
enhance what is working. become a better discretionary trader and to determine over time if you are getting
Whether you trade multiple strategies eliminate those that are hurting you. The better results by interfering with the sys-
systematically through full automation, feedback loop can help you identify fear tem or if your mind is getting in the way
partial automation, or on a fully discre- and greed patterns that are affecting your of optimal performance due to emotions,
tionary basis, those items are necessary trading and causing you to have subpar presumptions, forecasting, speculation,
for spotting issues and inconsistencies trading results. As an aside, discretionary and fear/greed tendencies.
that are affecting your trading results. trading has become more challenging in You can use backtested data that
A trading plan might contain the fol- the last seven years due to the increased displays odds for the stocks behavior
lowing elements (this is not an exhaus- use of information technology, increased the next trading day. Picking up on a
tive list): noise, lower volatility, and smaller trade theme from my June 2016 column and
sizes. using the analogy of betting on streaks,
- Daily procedures checklist If youre a fully systematic trader, the trading plan and feedback loop
- Details of overall system youre not responsible for executing from your trade log and journal may go
- Quantified, backtested results trades. However, you have to make sure something like this:
- Walk-forward test results, if pos- your system is prepared to trade each
sible day. You will use your journal and logs Strategy 1
- Assumptions in different ways than the discretionary Take trades on streaks where a few ducks
Q&A
are lined up in addition to the parameters outperforming the
of a Sharpe ratio filter of +0.20 or greater hedge. Why hedge
Feedback
for longs and -0.20 or less for shorts. A if you have a positive
backtest showed a positive expectation expectation for the
for both of these long/short candidates. longs? Because you Inputs System Outputs
dont know for sure
Trade log feedback: Longs seem to be if your longs will
performing as expected, but you are go up. There could Passage of time
getting hurt on your shorts and they are be a market event FIGURE 1: Basic feedback loop.
causing greater losses than the model that causes a major
displayed. selloff. The key here
Trading journal
is that your longs
Journal entries: Note the problems outperform the short
you are experiencing (your mental and hedge(s) regardless Trading Execute Profit
emotional state) and brainstorm possible of the direction of
plan trades / loss
causes of the short-side drift. Note any the market or instru-
news or macro influences. Research all ments you are trad-
possible ideas that come from the brain- ing. It is the relative Trade log
storming process. Determine the number performance you FIGURE 2: Traders feedback loop.
of live samples you will gather before are after. This would
making a change to the system/trading have been included in your backtesting greater than the signals, and you should
plan. Plan for any additional factors you for odds anyway, as you would have cap- roll to your mean-reverting strategies
can watch for in future samples. tured the previous days performance of that have been on the shelf waiting for
the stocks as compared to the SPY and a time like this. Note: One thing thats
Sample results: After going over your other suitable ETFs. always helpful is to have all your strat-
results for a specified number of live egies in live sample mode through a
trades, observing additional factors, Trade log feedback: Longs are not staging server or demo mechanism, but
recording data, and journal entries performing against the SPY hedge as not live in production. This way, you can
each day, the results show that shorts well as expected. see the daily results without losing any
are consistently underperforming their money. Its not perfect, but it is helpful
projected results. You make a decision Journal entries: Each of your longs went and it can be used as part of the feedback
to change the Sharpe ratio to -0.40. This the wrong way even though the market loop process. Traders who employ these
reduces the number of short selections for was sideways. You wonder whether the methods of tracking strategies while they
the day but increases their quality. You market has entered a phase of perfor- move forward day-to-day are usually the
can make up the difference in capital by mance reversals instead of continuations. most sensitive to market changes and
perhaps using an exchange traded fund What about news and macro catalysts? able to adapt by switching strategies.
to balance long/short dollars. How long will you give this to start This facilitates lower variance and more
working? Monitor events over the next consistent profits.
Strategy 2 week, continuing to keep your execu-
Take long trades in the bin of 2.53.0% tions to the minimum position size you Remember to change one parameter
up on the previous day and hedge with planned for, staying disciplined within at a time instead of changing all your
the SPY. These would be go-with the trading plan. settings. Be patient and disciplined and
trades based on the expectation of the gather the data precisely using the feed-
continuation of strength. Sample results: After a specified amount back loop process strategically.
Your backtest has shown a posi- of samples, you notice that reversals
tive expectation for these long trades dominate. The noise in the market is
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Analyzing Price Movement
Richard Demille Wyckoff Part 4
Whether youre an investor or trader, you need to know how others. So it is worth bearing in mind Wyckoffs caution as
to intelligently evaluate price action. In this fourth of a five- you read what follows, and also bear in mind that there are
part series about Richard D. Wyckoff, we look at how he no rigid rules to chart reading. Study Wyckoffs method, but
evaluated price action using charts. then make it your own.
by Stella Osoba, CMT Be the hitchhiker
T
The goal of chart reading is to watch and detect the intentions
he core skill of a technical analyst is the ability to of major institutions, large operators, well-informed insiders,
read charts to make intelligent trading decisions. As bankers, and other major interests. As Wyckoff said, imagine
with any skill, the more you practice, the better you yourselfthe small traderas a hitchhiker. Someone else sup-
will get at it. For the lay person new to chart reading, plies the car, the gas, the oil, the driver. When the hitchhiker
the admonition bears repeating that chart reading is observes that the car is traveling in his direction, he hops on
not the holy grail. It just increases your chances to for the ride. As long as the car travels in his direction he stays
better than even. Wyckoff said that he had stood at the ticker on, but as the car begins to slow or change direction, the hitch-
and observed as some of the great traders of his day, such as hiker hops off. All the hitchhiker has supplied are the brains
suphatit73 /shutterstock.com
James R. Keene, John W. Gates, and Jesse L. Livermore, traded. to spot the opportunity and the guts to hop on for the ride.
The one thing they had in common was that they used their Someone else has supplied everything elsethe driver, the
judgment. These men practiced constantly and continuously car, the oil, and the gas. In this same way and with a similar
over a long series of years and were thus able to trade suc- intention, the small trader studies the charts, looking for the
cessfully more often than not. As Wyckoff said, all you need opportunity to hop on or off.
for success is to be a little more expert in discernment than
CLASSIC METHODS
Keep it simple Mark down

To judge price action, you only need a few Distribution
facts. They are:
1. Price movement
2. Volume, or intensity of trading Mark up
3. Relationship between price movement
and volume
4. Time required for all the movements to
STOCKCHARTS.COM
run their respective courses.
Accumulation
Wyckoff used two main types of charts to

analyze markets and stocks. He used bar charts FIGURE 1: BROAD PRICE SWINGS. This chart shows the delineation of broad price swings. In between
to time his commitments, and he used point & the main moves indicating extreme low and high are the intermediate-term swings of between five and
figure charts to determine the points or objec- 30 or more points.
tives a campaign could be expected to travel.
This article will focus on bar charts.
According to Wyckoff, there are four
principle phases of a typical stock market Range of accumulation Signal of further
campaign: strength to come
1. Accumulation
2. Marking up
3. Distribution
4. Marking down Springboard
Accumulation and marking up are bullish,

while distribution and marking down are bear- FIGURE 2: ACCUMULATION. Price is locked in a range of accumulation from March 2012 to December
ish. Sometimes there will be periods when there 2012.
does not appear to be an active interest in the
stock and no campaign is underway. These are times when the Wyckoff said that reading charts is like reading music,
stock is neutral and it is best to be out of the position. in which you endeavor to interpret correctly the composers
I will use the bellwether stock FedEx (FDX) to illustrate ideas and the expression of his art. Just so, a chart of the av-
Wyckoffs approach to chart reading. In Figure 1 you see a erages or a single stock reflects the ideas, hopes, ambitions,
five-year chart of FDX showing broad swings in the stock and purposes of the mass mind operating in the market, or of
price, which can be broadly delineated as marked. In between the manipulator handling a single stock. With that in mind,
the main moves indicating extreme low and high are the Ill use Wyckoffs methods to discern what the chart of FDX
intermediate-term swings of between five and 30 or more might be telling us.
points, which Wyckoff pointed out are the best opportuni-
ties for trading. Stock prices are fractal, so the swings in a Accumulation
minute or hourly chart will often mirror the swings in a daily In Figure 2 you see FDX locked in a range of accumulation
or weekly, or even monthly, chart. I will use daily charts for from March 2012 until December 2012. This is something you
this article. want to see because the preparation for an important move in
As in any other business, you want to buy when prices are the market should take a considerable amount of time.
low and sell when prices are high. Study a chart with the Figure 3 starts on August 27, 2012, about six months into
benefit of hindsight and nothing could appear easier, but the the range of accumulation. A decline is checked on September
skill of the chart reader is to be able to determine in real time 5, 2016 and the ensuing rally peaks on September 13, 2016.
when prices are relatively low and when they are relatively The entire decline from September 17 to September 21 that
high. From analyzing price movement you need to be able culminates in a low lower than that of the previous low could
to determine: be seen as part of a selling climax, or the panicky unloading
of stock. An important characteristic of a selling climax is the
Comparative strength and weakness abnormal increase in volume. On the September 17, volume
Previous points of support & resistance is approximately 2.5 million, while on the next day it almost
Rate of acceleration or angles of advances & declines triples to over 6.5 million shares. The other high-volume days
Shakeouts, terminal thrusts, and oversold & overbought are on September 20 at 4.1 million and September 21 at 5.3
conditions. million. After the selling climax is concluded, support comes
that the selling pressure has lost its force.
Also, the volume is lower than that on the
decline from September 17 to September
21, indicating the same thing: a decline in
2
18 selling pressure.
2. The stock makes a higher low on Novem-
13 ber 16 and closes in the upper half of its
14
17 range. This is what Wyckoff would call
the springboard move. It provides another
opportunity to enter a long trade. Your stop
5 16 would be just below the low of this move,
21 which Wyckoff called the danger point. He
FIGURE 3: IDENTIFYING WHEN THE SELLING IS OVER. After being in a prolonged trading range, stressed that it is vitally important to have
the stock is showing signs of the beginnings of a possible uptrend. stops to protect your position. Getting in
and taking a position when a stock is on
the springboard is, Wyckoff said, the best
8 of all times to get into a position. It is at this
19
psychological moment that you can avoid
25 having your money tied up in an inactive
27
long trade.
3. A less-aggressive entry would be on January
2, 2013 when the stock gaps up and closes
above the highs in the range of accumula-
2 tion. This entry is the riskiest of the three
because the proper stop placement would
be a significant distance from entry. But it
is still a viable entry point.
FIGURE 4: MARKUP AND REACTION STAGE. From November 16, 2012 to February 8, 2013 you see
an intermediate price swing. Buying on any except the last reaction during the initial marking up stage
would have given you a profitable trade (blue arrows). After breaking out from the prolonged range
of accumulation depicted in Figures 2 & 3, the
stock entered its markup stage. Figure 4 shows
in to halt the decline of the stock. For the next eight days, it an intermediate swing of about 20 points, which lasted from
trades in a tight range on lighter volume, indicating that poor November 16, 2012 until February 8, 2013. Buying on any
supply (stock being held in weak hands) has been exhausted. except the last reaction during the initial marking-up stage
So we wait for a technical rally to ensue to confirm this is the would have given you a profitable trade (see blue arrows).
case. On October 18, the stock rises to a new high signaling The whole campaign lasted much longer, from about No-
further strength to come. vember 16, 2012 until the high on December 8, 2014. During
Wyckoff points out that if the bulk of buying during a selling this period there were many opportunities to go long during
climax was by the big operators, principally to support the subsequent intermediate markup stages. There were also
stock, then after a technical rally occurs, there is likely to be opportunities to reverse and take the short position during
a secondary reaction as stock is thrown back on the market significant reversals.
at the first favorable opportunity. This happens here and the Here, another word of caution is in order. Remember when
secondary reaction takes the stock back down. The low on reading a chart that there is nothing a stock must or should do.
November 16 is higher than the low after the selling climax. This might seem unceasingly obvious, but a stock only goes
This is an important signal indicating that liquidation might in the direction that it is traveling for as long as it continues
have been completed. Also note that the decline from November to do so. So always be on the lookout for signs of a coming
14 to November 16 is on increasingly lighter volume. This is reaction or reversal. A trader must never get complacent when
the starting point to begin your forecast. Price action is tell- in a position.
ing you that the trend is possibly going to be upward, which The high of 105 on February 8 was tested twice before
means there could be a reversal. A trade can be initiated in reacting to a low of 100 on February 27. This was your first
any of the following ways: signal to exit your longs. Also note the unusually long bar
on February 25. This is unusual behavior that should not be
1. You can take a long trade on any day between Septem- ignored. It is not necessary to guess what the stock is likely to
ber 24 and October 3 when the closing price on each of do, because it is telling you what it is going to do. It is likely
these days is between 82 and 84 and the market shows an that price is meeting supply from those who bought on the
unwillingness to move any lower. This is an indication end of the runup to 105 and are looking to get out even. Those
who bought earlier in the rise may be looking
to get out of a profitable trade. In any event,
there is a change in character of the chart. On
February 27, price closes near the high of its
day range and over the next few days, there is a
quick rise to new highs. The speed of this rise
is not to be trusted. It could well be a buying Range of distribution
climax. Wyckoff observed that any sudden
whooping up after a stock has advanced
in price increases the stocks vulnerability to
selling pressure. Experienced operators pay
attention and are likely to withdraw for a time,
refusing to continue to buy at these high levels. FIGURE 5: RANGE OF DISTRIBUTION. The price of FedEx Corp. (FDX) reached its high of 181 on
The chart shows that price has failed to hold the December 8, 2014. It stayed in the range of distribution until it broke out of the range to the downside
highs over the next few days. Increasing volume on heavy volume on August 20, 2015.
on the March 19th down day is your last good
warning to close out longs. 11
16
By the time the stock has reached the range
of distribution, its lengthy markup has attracted 17
broad interest in the stock. This is when strong
hands start to dispose of their holdings. The stock
works its way into the hands of buyers who are
eager to own the rising stock. Wyckoff describes
these buyers as weak hands because they have
bought near the top of the rise when news about 17
the stock was most bullish, and they will easily
be shaken out of their positions. The symptoms
characteristic of distributions that Wyckoff tells FIGURE 6: PRICES REACH A PEAK AND REVERSE. Price had been in the range of distribution for
us to watch out for are the amplitude of swings about six months. On June 16, 2015 the high volume decline was not a good sign. On the next day,
getting wider and often more erratic. In addition, volume doubled as price dropped further. This was a sign to exit any long positions in the stock.
remember that important distribution always
has to follow a long, sustained increase in price. jumping into it, and
In Figure 5 you see that FDX reached its high of 181 on
December 8, 2014. It stayed in the range of distribution until 2. A habit of optimistic stubbornness that causes them to
it broke out of the range to the downside on heavy volume become wedded to their commitments instead of cold-
on August 20, 2015. bloodedly disposing of them when they no longer act
Figure 6 shows price action from May 11, 2015 to Sep- right.
tember 18, 2015. By this time, price had been in the range of
distribution for about six months. As we can see from Figure I cannot hope to do justice to Wyckoffs methods in such a
5, the swings within the range had become wild and erratic, brief article. The constraints required will not allow for a more
with price making little to no progress. On June 11 the price comprehensive discussion, which this method requires. For
made a high of 183.99, which it was unable to hold onto. Price instance, point & figure charts were important to Wyckoff in
began to reverse to the downside the next day. On June 16, his analysis of price action but we have not been able to touch
2015 the high-volume decline was not a good sign. On the upon their interpretation here. Also, Wyckoff created what he
next day, volume doubled as price dropped further. The stock called Wave charts, which he used to study the market. It is my
was clearly in trouble. Price action was telling you what it was hope that you will read this article and then out of curiosity
going to do. There were ample opportunities to get out of any and interest, research Wyckoffs own writings for yourself.
long positions before any damage was done. As I end this part in the series, it bears repeating here another
one of Wyckoffs admonishments. As you study these charts,
Some final words remember that they are intended only to illustrate some typical
Wyckoff pointed to patience and detachment as two important cases. They should not be regarded as covering all possible
qualities for a trader to cultivate. It will help to offset the two conditions nor be used as exact standards of comparison. In
common faults that are the death knell to most peoples trad- brief, do not make the mistake of attempting to classify chart
ing success. As Wyckoff says, they are: formations according to mechanical rules with the idea that
1. The failure to wait until a stock acts just right before Continued on page 44
INTERVIEW
Take The Macro Road
Measuring Indicators
With Fred Meissner
Fred Meissner, CMT, is the founder and president of The FRED Report. His
professional career spans 33 years in the investment business, including serv-
ing as president of the Market Technicians Association from 2002 to 2004.
His background encompasses market analysis, trading strategies/portfolio
management, and business development/relationship management in diverse
environments. He holds a BS degree in business administration (with a minor
in economics) from Trinity University in San Antonio, TX, and an MA degree
from The University of California, Los Angeles (UCLA) in Latin American
studies with an interdisciplinary curriculum of international business, his-
tory, and sociology. Currently, Meissner publishes The FRED Report (www.
thefredreport.com), offers a consulting service for financial advisors, and
speaks extensively around the world on market analysis and the markets.
Stocks & Commodities Editor Jayanthi Gopalakrishnan spoke with Meissner
on May 9, 2016 about how to effectively apply indicators in line with broad
macro indicators.
Fred, tell us a little bit about it, and realized I had an affinity for it.
yourself and how you got in- And it turned into my career.
I like to look at indicators
terested in the markets. on a discretionary basis and
I was in graduate school at Thats interesting. measure how theyre doing.
UCLA. I had read some books about I was a financial advisorwe called
investing in the stock market before. I them stockbrokers back thenat
Its this measuring part that
saw an ad in The Daily Bruin that asked Dean Witter and knew a guy named is vital and overlooked.
the question, Do you want to be a stock- Jeff Weiss who at that time was the
broker? The ad was by a small firm in number two guy in the technical analy-
Culver City, CA, and this company al- sis department at Shearson Lehman. He I then went to Merrill Lynch from 2004
lowed you to work part-time and get your got me over to Robinson Humphrey as a to 2009 and now Im writing indepen-
securities license. I thought it sounded technician, and I ended up running the dent research along similar lines to the
interesting, so thats what I did. Thats technical analysis department at Robin- research I wrote at Robinson Humphrey
how I got started in this industry. son Humphrey for many years under Bob and Merrill Lynch.
Robbins, who was the chief investment
At that time, were you using funda- strategist. Bob taught me how to relate I noticed that you publish your newslet-
mental analysis? technical signals to fundamentals, an ters on a weekly and monthly basis, giv-
Yes, I was using fundamental analysis, important aspect of technical analysis ing readers a broad perspective of the
and as Im sure youve heard from lots that is often overlooked. current markets. Why is it important
of other people, I began to notice that Robinson Humphrey was the largest for a technical trader to have a broad
sometimes, the fundamentals werent regional brokerage firm in the country, view of the markets before he or she
working out as they should. When I fin- but we were part of Shearson Lehman starts to trade?
ished my graduate studies, I went to work Brothers and then Smith Barney and Ive always done broad macro tech-
for Dean Witter Reynolds in Torrance, then Citigroup. nical analysis. Most of my clients get
CA. There we had a lot more access to in-depth fundamental research but I
fundamental analysis, and I saw that it What do you do now? also believe that comprehensive macro
really didnt work most of the time. While I quit Robinson Humphrey in 1999 trend analysis helps you understand
I was looking for something that worked, and sold my Citigroup stock. I then went where you are in the market, regardless
I met a couple of advisors who used back into research in 2002 with a small of what youre trading. And that would
technical analysis, so I started studying firm that did institutional work on cycles. help you judge your risk management.
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Ill give you an example. I teach are a combination
A lot of technical traders use Bol- of stochastics and moving What I like about the
linger Bands, which is a great indicator. averages. If Im using a daily
I dont publish anything about Bollinger chart to open a long trade and
stochastic is that its
Bands but I do look at them. I think the weekly moving averages essentially a moving
that if youre buying at the top end of a are positive, suggesting that average of trading ranges.
Bollinger Band, your risk management the longer-term trend is up, I And trading ranges are
should be different than if youre buying will be likely to stay with that
at the bottom end. You have to have a trade a little longer than if the
really important to me.
broad perspective to know where you weekly moving averages are
are in order to manage that risk. pointing straight down.
Another thing about technical analysis You can only do this if you have a upgrade and the stochastic is at 90, it pays
I think people sometimes overlook is that big-picture view of things. Without that to wait until it goes back to 20, which it
good technical indicators do two things: big-picture view you could have some will do. But there are traders who will
They help you select a trade and tell you astounding losses. Most brand-new often buy based on what they hear from
where you are in that trading process. traders dont do that well. I know that another trader or friend. Well, how do
But they also measure the progress of a when I was a brand-new trader, I didnt you know where XYZ is unless you
trade that youre in. And that measure- do that well. have a broad-perspective view? Buying
ment can sometimes be more important Netflix at the absolute high in July just
than knowing that youve got a buy or What did it take to change that and because you heard its good is probably
sell signal. I can give you an example become what you are now? not as clever as waiting a bit.
of that. It takes a lot of study and a lot of
When I was trading for myself between time. You can test trading systems us- So you consider yourself a discretion-
2000 and 2002, I embarked on a study ing computers, but I think that people ary trader?
of 30-minute bars on the S&P 500. I had sometimes overlook just stepping back Yes. Im a great believer in discretion-
been saving 30-minute S&P bars from and looking at the indicator and what ary trading systems versus mechanical
the 1980s to the 2000s. So I had over it does. Not many people look at an trading systems. I have some good friends
30,000 S&P bars to study. indicator and ask, What phenomenon who use mechanical trading systems,
Lets say I get a stochastic buy signal. is that measuring? I think thats really but the type of client I work with cant
Whats the average amount of points important to know. really use a mechanical system. Thats
gained before that indicator gives a sell One of the reasons I use stochastics in because different things are happening at
signal? Lets say the average number of my analysis is because it generates more different times. My clients are financial
points on a buy signal is two. If you and buy signals. A trader wants more than advisors who generally do not buy or
I are sitting here trading and we get 12 one signal a year. There may be people sell for purely technical reasons. Often,
points on a buy signal, what does that who want just one signal a year. If you they buy because a stock is upgraded to
tell you about the market? It tells you dont look at what the indicator is trying a buy fundamentally. Another reason
the market is a lot stronger than average. to measure and how it does it, you may could be that it is put on a recommended
It tells you that on the next buy signal, end up using the wrong indicator for list or into a model portfolio. The same
you can add or even double up on your your purposes. can happen in reversea stock can be
trade because the market is stronger Most of my clients dont buy and sell downgraded fundamentally, or could be
than average. for technical reasons. They buy because a removed from a list. Or, in cases where
If you only get one point on the S&P, stock gets a fundamental upgrade. But if the analyst leaves the firm, the advisor
and the stochastic goes all the way up the stock gets a fundamental upgrade and must sell. Of course, the advisor has
to 80 and turns over, you know that the stochastic is at 20, that means a whole some leeway as to when he must take
market is much weaker and you trade different thing than if the stochastic is at action, and thats an area in which I
accordingly. That measuring factor can 90. When a stock gets that fundamental often help clients.
tell you much more. Therere lots of Besides that, one problem Ive always
indicators where that applies. This gives had with mechanical systems is that
me a broad picture of the market instead trading systems cant last forever. At
of just looking at the indicator. some point theyll stop working and
Most new traders look at an indicator youll have to use new ones. And when
and if the indicator gives a buy signal, I ask someone how they know their
they buy. They ignore the trend of the system stopped working, theyll usually
market and everything else. answer with something like high equity
I use a lot of different indicators, drawdown or adverse price excursion,
but the ones that I show and the ones which are just fancy ways of saying, I
ninjatrader.com
lost a bunch of money on that. Now, the
solution to that could be to have five or
six different mechanical systems trading
five or six different markets. That would
mean youre diversified, which is fine,
but because the people I work with are
Simple Rates.
investing in balanced portfolios for their
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a discretionary basis and measure how
theyre doing. Its this measuring part that
is vital and overlooked. And dont forget
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What I use is the standard 14-period
stochastic and the five- and 20-period
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moving averages or different stochastic
parameters. Im going to use a funny
analogy. The secret to being a good surfer
is to know that waves come in sets, and
your job as an optimal surfer is to catch
the right wave in the set every single
time. Say the market has been coming
down, and the five- and 20-period mov-
ing averages are negative. So if I want
to buy using the stochastic, then I want NinjaTrader equips traders with unmatched benefits including
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the buy. If they dont go positive after a indicators, signals and custom strategies.
while and price starts to act badly, you
know thats a bad buy signal. I havent Go Direct to the Source.
figured out a good way to program that,
especially because on a long-term basis, NinjaTrader Brokerage.
moving average systems generally dont
work mechanically.
Why is that? up an additional 1,400 points from there, be a little more cautious while these are
The reason is they give up too much of which it did do. negative and you just had a great run,
the profits you already have, or they dont Well, those moving averages went thats helpful information.
get you in soon enough after they decline. negative in December 2015. So if you
Ill give you an example. In March 2009, use that trend-following system, you went Can you give another example of mea-
we got a great signal on the stochastics long in June/July of 2009 and got out in suring moves?
to buy the S&P. The moving averages December 2015. You were still not back If you look at the stock of Apple Inc.
were negative and did not confirm that in. The market went from 1,800 to 2,000 (AAPL), youll see that the stock goes
trend until the S&P went from roughly and youre still not in. And if you look at through 50% retracements often. Say
670 to 1,070. the moving averages, they got more nega- the stock moves down from 720 to 340
When you get that trending buy signal, tive in the following month. Its going to and you realize that all it did was a 50%
all you know at the time is that it went take even more to get you in. retracement before starting its next up
up 400 points or almost doubled. But This is why no algorithm can be used move, that information can be helpful.
before you got your trending buy signal, for moving average systems. But if you Say the stock went from a low around 56
you did not know that it was going to go look at it and tell yourself that you should to a high closing price of around 130. You
What I like about the sto- the chart. Really, thats why I do it. Its
Good technical indicators chastic is that its essentially easy for people to remember to just take
a moving average of trading off a zero.
do two things: They help ranges. And trading ranges are
you select a trade and tell really important to me. So some We are in the midst of an election year
you where you are in that of the indicators Ive built take in the US. How do elections impact the
trading process. They also into account the entire range. financial markets?
Theres nothing out there that We saw the markets start to narrow
measure the progress of does that except for stochastics. in July/August 2015. That narrowing
an open trade. So I had to build my own. upthat is, the falling off of small-
and mid-caps, and the money flowing
And the same goes for your into large-cap stocksis much more
take 56 and add it to 130 and you get 186. breadth oscillator? important to me than whos going to
Divide that by 2 and you get 93. Where I have a breadth oscillator that essen- be president from the standpoint of the
did the stock bottom? Its at $93.52 right tially works with breadth similarly to market.
now, which is close enough. If you know the way the McClellan oscillator does. There are a lot of mutual funds out
that AAPL has done this type of retrace- I love the McClellan oscillator and often there that have to be 80% invested in
ment several times and you see that the reflect on how wonderful Sherman Mc- stocks. When those big guyswho get
monthly stochastic is at 16 and getting Clellan was to invent it. The issue I have great information that we dont getstart
ready to turn up, even if everybody on with the McClellan oscillator is that its to see a bear or tough market coming,
TV is saying the companys never going very quick. I wanted to slow breadth their tendency is to sell their junk and
to earn any money ever, you see that down, so I had to build my own breadth buy quality, and thats reflected in the
the stock is at your buy point, which oscillator. new high/new low indicators. Those
you knew about in advance. It might be were negative for much of 2015 and the
worth adding to your portfolio for the What timeframe charts do you use? first part of 2016, and that reflects that
dividend. When you get a monthly buy I use daily and weekly charts, and on narrowing.
signal on AAPL and youre $2.00 from occasion, even monthly charts. When In the last month, weve seen that situ-
that retracement point, you might want you think about the 50- and 200-day ation start to reverse. The Russell 2000
to think about buying some AAPL stock. moving averagesand this may sound was up a bit more than the S&P 500. As
Thats another reason to say you want to funny to youone of the reasons those far as the election, what Ive observed and
look at the big macro picture. There are were used was because they were very learned from various senior investment
stocks that never do 50% retracements easy to calculate on a hand calculator. strategists is that after six months, no one
and for those stocks theres no point in Thats why Granville invented them that is going to care. You could say for the
placing Fibonacci levels on your chart way. If you divide 200 by 4, you get 50. first couple of months or three months,
because youll be waiting a long time Its really easy to do. And now we have no one likes uncertainty. And so people
for a 50% retracement. computers so you dont have to do any may be a little bit more skittish. But Ill
of those calculations. If I want my five- look at market internals.
When there are so many indicators, why and 20-day to expand in time, all I have Last year, when I saw the amount of
did you create your own indicators? to do is switch to a weekly or monthly new lows, negative week after week, I
I looked at some of the other indicators chart and see them displayed. knew the big guys were selling. Thats
out there and discovered that they were One of the reasons I use the five and the best footprint you can look at to see
lagging. There were some things they 20 periods is that the average quoting what they are doing. And thats why we
didnt have that I wanted to have. machine has the 50 and 200 as defaults were cautious for the last part of the year
For example, I work a lot with people and its easy for people to remember and into the first part of this year.
who work with Dorsey-Wright, who does to take off just one zero and then save Now that has switched and it looks
a great job of relative strength analysis. like the market is saying that whoever
But I have some issues with point & fig- is elected probably isnt going to be so
ure charting. The biggest issue is it uses bad. I think there will be three of four
only closing prices. If I have a trading months where the markets might be er-
vehicle that goes from, say, $1 to $3, then ratic, but after that, its going to be as if
to 1, then to 3, then to 1, from 1 to 10, the election never happened.
but closes at 3, and then goes to 1, and
then to 3, the most important bar to me Thats what I thought. Thank you for
is the one that goes from 1 to 10. Point & speaking with us, Fred.
figure charting ignores that completely.
Its like that never happened.
Explore Your Options
Got a question about options? Tom Gentile started his trading career on the floor
of the American Stock Exchange in 1994. He has appeared on many financial
TV and radio shows, as well as hosting a weekly talk show himself, and has co-
authored many books on the markets. He can be found at www.tomgentile.com.
To submit a question for Tom Gentile, post it to our website at http://Message-
Boards.Traders.com. Answers will be posted there, and selected questions will
appear in a future issue of S&C.
Tom Gentile
GOLD ON THE MOVE ways to leverage an asset with options is strategy, and I also like to use out-of-the-
Whats up with gold? Why is it on the to use a directional butterfly. I like to use money (OTM) calls when entering and
move up? my target as the midpoint for my butterfly exiting a directional butterfly.
Yes, gold has been moving up. The gold
rush started earlier this year and the
party might not be over quite yet. Lets
take a look at what all the fuss is about
with gold this year, whats likely to come,
and how you can trade it for low risk and
high reward.
Channeling upward
Take a look at the chart of SPDR Gold
Shares (GLD) in Figure 1. It is the life
of the party this year, as it has moved
www.tomsoptiontools.com
from a low of near $100 to a high of near
$125, up nearly 25% since December 31,
2015. Well, it seems to most traders that
buying gold is the same as selling the US
dollar, and since interest rate hikes have
been put on the back burner by the Fed Figure 1: gold is on a run. Since December 31, 2015 gold has been on a run.
at the moment, this has caused a flock of
buyers to rush to the yellow metal.
When looking at short- and long-term
channels, it appears as if this ETF has
paused before wanting to move higher.
There seems to be some good support
at the $115 level, as this is where both
channels seem to collide. Now that I see
the trend is clearly up at this time, how
far is it likely to move over summer?
The chart in Figure 2 is a probability
chart. It takes a look at the range of the
past and calculates a standard deviation
of the future. The gray area on the chart
within the red lines gives a more con-
servative estimate of where GLD might
trade, so Ill use that. One more look at
the chart tells you that in 58 days, GLD
should stay between $115 (support level
from above) and $132.50. Because I am
bullish on GLD, I will use the 130135
range as a target by summer.
Now that I have a target for this ETF, Im
going to create a low-risk option strategy Figure 2: probability chart. The grey area within the red lines is a more conservative estimate of where
around this target. One of the cheapest GLD might trade.

Explore Your Options
One of the cheapest

ways to leverage an
asset with options is
to use a directional
butterfly.
An OTM call butterfly strategy

involves buying a lower strike (the
workhorse) and hedging it by selling at
the target, and finally, buying protec-
tion above the target. I utilize the same
expiration across all strikes, so for this
exercise I will look at GLD options that
expire in August.
My butterfly strategy for GLD would
look like what you see in Figure 3. The
butterfly strategy consists of the GLD
August 2016 125-130-135 calls. Ill break
these down. FIGURE 3: OUT-OF-THE-MONEY (OTM) CALL BUTTERFLY. This butterfly strategy is made up of the GLD
August 125-130-135 calls.
Purchase one contract of the 125

calls for 4.13 Total spread price = 0.00, because tions is 130. Thats because on that day,
Sell two contracts of the 130 calls everything above would expire time is up and the options only have real
and receive 2.60 (x2) worthless value. Heres an example:
Purchase one contract of the 135
calls for 1.66 GLD at 150 by August expiration GLD at 130 by August expiration
Total cost of the butterfly is 0.59 The 125 calls purchased for 4.13 The 125 calls purchased for 4.13 would
(x100) or $59 before commissions. would be worth 25.00 be worth 5.00
The 130 calls sold at 2.60 (x2) would The 130 calls sold at 2.60 (x2) would
The risk on this butterfly be worth 20.00 be worth 0.00
The worst case is that I am wrong and The 135 calls purchased for 1.66 The 135 calls purchased for 1.66 would
GLD drops below 125, or trades above would be worth 15.00 be worth 0.00
135 on the August expiration. Heres a Total spread price = again, 0.00 when Total spread price = 5.00, or a near
look at each scenario: you add everything up 750% return.
GLD at 100 by August expiration In either case, we lose our $59 before I am not expecting this to happen (that
The 125 calls purchased for 4.13 commissions. Thats the total risk. would just defy the laws of probability)
would be worth 0.00 but if GLD were to rise to 130 over time,
The 130 calls sold at 2.60 (x2) would Profiting on GLD theres a good chance that this trade will
be worth 0.00 Where do I want this trade to go? The double or triple in value. Like all option
The 135 calls purchased for 1.66 best position GLD could possibly be in strategies, only time will really tell.
would be worth 0.00 on the August expiration day for the op-
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STOCKCHARTS.COM Frasers Wyckoff charting analysis and ing each plans features, various monthly
11241 Willows Rd. NE, Suite 140 commentary. and annual subscription time periods,
Redmond, WA 98052-1009 Moreover, the site has expanded its and associated pricing. All subscribers
Phone: 425 881-2606 cadre of advisors to join those already receive real-time data during the trad-
Email: support@StockCharts.com contributing for years including John ing day, multiple chartlists with large
Internet: www.StockCharts.com Murphy (its chief technical analyst), numbers of charts, predefined technical
Product: Technical analysis charting Greg Morris, and Arthur Hill. More scans, enhanced charting features, John
website recent additions include a team of highly Murphys Market Message commentary,
Data updates: Real-time with five- knowledgeable and well-known strate- Martin Prings Market Roundup, Arthur
to 15-second refresh rates depending gists and technicians including Martin Hills Arts Charts, and DecisionPoints
on plan selected, as well as end-of-day. Pring, Carl Swenlin, Greg Schnell, Gatis ChartPacks, Reports & Spreadsheets.
Requirements: Works with most Roze, and Tom Bowley. Greg Schnell, The more advanced plans provide more
Internet browsers. Mobile-friendly on for example, writes a blog dubbed The enhanced features, as well as real-time
all web-enabled devices. Canadian Technician. data from the NYSE/NASDAQ/TSX
Price: Four subscription plans are If thats not enough commentary for exchanges, as compared to BATS real-
offered with three different monthly you, users can view the free Top Advisors time data, which is what you get in the
options ranging from $14.95 to $49.95 Corner, which is a collection of articles by two lower-priced plans.
per month, or one- and two-year op- several independent, technically oriented
tions ranging from $154.95 to $519.95 individuals who frequently contribute to Charting tools
per year. A free 10-day trial is avail- the site, including Tom McClellan, Tim The heart of the website is the availabil-
able to new members. Ord, Martha Stokes, Jack Steiman, and ity of various high-quality charts, many
Gene Inger. technical indicators, and the ability to
by Leslie N. Masonson There are four subscription plans with annotate directly on the chart. The free
S
the basic plan (costing $14.95 a month or charting option provides newbies with
tockcharts.com is a well-respected $154.95 for 13 months) with enhanced sufficient tools to quickly become knowl-
and comprehensive online charting charting capabilities and expert com- edgeable, especially after viewing the
site used by advanced technicians, mentary. The website provides a table free ChartSchool section before tackling
traders, and investors as well as by ca- titled service package comparison list- more advanced charting subjects. Only
sual chartists. In 1999, Chip Anderson,
president of StockCharts.com, founded
the site and set it up as a privately held
firm. The site has expanded its technical
analysis tools and charts over the past 17
years and also added valuable analytical
commentary from an ever-expanding
group of savvy market technicians.
Ive been using this website for over a
decade, first as a free member and then as
a paying subscriber at the Extra level
for the past three years. What tilted me
toward the paid subscription option were
the wide-ranging chart choices to track
individual stocks and ETFs, the ability
to analyze market trends, the continual
flow of upgrades, and the add-ons and
expert commentary at no additional
charge. Some of the latest types of charts
added in recent years include seasonality FIGURE 1: PERFCHART DISPLAYED AS A LINE CHART. Any ticker symbol can be compared to any other
charts, Julius de Kempenaers Relative with the result shown in a line chart. This chart compares the S&P Sector ETFs over the past 200 days. Utilities
Rotation Graphs (RRG), and Bruce and consumer staples are the best-performing sectors.

paying members have access to the advanced
chart features and analysis, including real-
time intraday prices, full-screen charts, and
automatically refreshed prices.
Numerous chart types are available for
viewing including SharpCharts (in candlestick,
line, renko, ichimoku, heikin-ashi, and OHLC
bar formats), point & figure (P&F) charts,
gallery charts showing multiple timeframes,
CandleGlance Groups displaying minicharts
side by side, and performance charts (also
called PerfCharts) that allow you to compare
up to 10 tickers over various timeframes in a
line chart (Figure 1) or bar chart (Figure 2)
formation to show percent performance. FIGURE 2: PERFCHART DISPLAYS AS BAR CHART. Here you see the comparison of the S&P Sector
ETFs displays as a bar chart.
Chart annotation allows for customized
comments on most charts. In addition, Sharp-
Charts users can customize the chart type,
colors, time periods, trendlines, indicators,
text, and many other variables. To see how
others have used this software, go to the Public
ChartLists tab. Youll probably be as amazed
as I was at the ingenuity and creativity of
individual public contributors.
CandleGlance Groups are a way to view
multiple charts simultaneously as a group of
minicharts. For example, you can compare
predefined groups such as the S&P sector
exchange traded funds (ETFs), the Dow In-
dustrials, sector breadth indexes, or US major
market indexes. Another option is to view any
of the major industry groups such as airlines,
semiconductors, or electric utilities. By quickly
viewing these charts, you can easily see the
trend as well as which securities are leading or
lagging. Then, by keying in the tickers to the
PerfCharts screen, the relative performance
of any time period can be compared. FIGURE 3: SEASONALITY CHART OF APPLE (AAPL). Notice that Apples best performance months
In addition, there are three other types of for the last four years occurred in March, April, May, and October. This information can be used in
combination with confirming technical indicators to time potential purchases.
specialized charts available to users. Sea-
sonality charts (Figure 3) provide a monthly
performance bar or line chart of any symbol
for a customizable period of time, indicating
percentage change by month. MarketCarpets
provide an individual display of seven different
market segments viewed by either price, RSI,
full stochastics, Bollinger Band width, or six
other technical factors. And third, the Relative
Rotation Graphs (Figure 4) show the relative
strength and momentum for a selected group
of securities. You can track the strength of
individual components of the graph to watch
them move through a complete cycle of lag-
ging to improving to leading to weakening. FIGURE 4: RELATIVE ROTATION GRAPH. This chart shows weekly rotation from weak performance
Astute investors can jump on those vehicles to leading performance for S&P sectors over a one-year timeframe. In this chart, XLE is seen making
that are moving toward improving and lead- a move over weeks into the leading green quadrant, joining XLB and XLI.

ing categories to improve their odds of
making profits. Members have access to
many more symbol combinations and
customized options.
Predefined scans
Predefined scans provide a gold mine of
technical analytical information about
individual stocks, ETFs and mutual
funds. They offer 17 bullish and 17 bear-
ish technical indicators, 26 candlestick
patterns, nine bullish, and nine bearish
P&F patterns. By tracking the number
of securities on a particular exchange
such as the NYSE, you can see the
market shifting from bullish to bearish
extremes and take the appropriate action.
For example, if there were 1,000 new 52- FIGURE 5: PREDEFINED TECHNICAL SCANS. Bullish and bearish indicators are shown with the number of equi-
week lows on the NYSE, then you could ties on seven exchanges that pass the scan. By clicking on any number, a list is generated for further review.
conclude that the market could possibly
be washed out and due for a rally.
By keying any ticker symbol into the
search for symbol box, you can see any
scans that the security passed that day.
For example, on April 28, the morning
after Facebook (FB) announced blow-
out earnings, the stock gapped up at the
open, resulting in passing nine scans
by the close, including: new 52-week
highs, moved above upper Bollinger
Band, new CCI buy signals, gap up,
and P&F spread triple top breakout.
The predefined scans screen provides a
unique way to monitor stocks of interest,
possible stocks to include in a watchlist,
or even for determining the market trend
by tracking the number of stocks that
passed bullish or bearish daily scans. FIGURE 6: STOCKCHARTS TECHNICAL RANK (SCTR). Gold mining, steel, and coal stocks were the top-
In Figure 5 you see some scan results ranked SCTR stocks for the week ended May 5, 2016. All column headings can be clicked to sort the data from
of technical indicators. high to low or in alphabetical order.
User-defined scans ever, the user-defined scan can be

After working with predefined scans for a used to scan the ETF universe, since The heart of the website is the
while, you will become proficient enough one of the search criteria choices is availability of various high-
to develop specific, customized scans for ETFs only. The same scan op-
using single scans or combining multiple tions are available as for user-defined quality charts, many technical
scans to search for potential investing or scans, but multiple scan criteria can indicators, and the ability to
trading ideas. The user-defined scan is a be used to strictly limit the universe annotate directly on the chart.
powerful tool to search for securities on of candidates. For example, on a
specific exchanges, components of major given day you could scan for three
indexes, different country securities, re- criteria all at once for all ETFs that have, Advanced user-defined scans
gions of the world, ETFs with or without say, a P&F triple top breakout, combined Users who want to develop their own
leverage, and inverse funds. with a bullish engulfing candle, and an scan criteria even further can use the
For example, the predefined scans do Elder green bar. The ETFs meeting those 10-scan builder dropdown menus to
not offer a category for ETFs alone since three criteria will be shown and you can select the appropriate criteria, and then
they are part of the NYSE universe. How- view the charts for them. by a mouse click, automatically insert
for the free bimonth-
ly ChartWatchers StockCharts.com offers a
newsletter that offers
commentary from
comprehensive charting
John Murphy, Arthur service with four affordable
Hill, Carl Swenlin, subscription plans.
and many others. One
of the most valuable
features of the service You can also send a message to the
that is free to all users support team by typing in a support
is the public Chart request with the issue at hand. I have
Lists, which contain used this approach a few times over the
the contributions of past few years and the response has been
dozens of users who fast and helpful.
post their annotated
charts and commen- Its all about the charts
tary for everyone to Whether youre a newbie or an advanced
see. Users can then chartist, this product offers advanced
STOCKCHARTS HOMEPAGE
vote for the ones they charting capabilities you can use in
feel are most valu- your trading. StockCharts.com offers
the code in the criteria box and save the able, and the highest-ranked contribu- a comprehensive charting service with
search for future use. No programming tions are displayed in order. Theres a four affordable subscription plans and
experience is necessary, since once the good deal of interesting analysis embed- unique features that provide any user
scan criteria item is selected, the software ded in these ChartLists that any chartist with the ability to customize their charts
codes it and seamlessly transfers it to the can learn from. to meet their individual requirements.
scan criteria box. It couldnt be simpler. It continues to attract traders who are
There is an entire description of scans Product support technical analysis enthusiasts.
in the ChartSchool library, which offers and education
a complete explanation of the process Users will find that this website offers Leslie N. Masonson is a trader and the
involved from the simple to the advanced an in-depth technical analysis education author of Buy, Dont Hold and All About
scanning process. coupled with extensive product support, Market Timing. His blog is at www.
including: buydonthold.com. He can be reached
Stockcharts Technical Rank (SCTR) at lesmasonson@yahoo.com.
Another useful product feature is the FAQs (frequently asked questions)
SCTR technical score, which is based on with 58 questions covered Further reading
six indicators (shown and explained in A troubleshooting tab that covers five Davis, Summer [2011]. ChartCon 2011,
the SCTR section of the site) over vary- areas Quick-Scan, Technical Analysis of
ing timeframesshort-, medium-, and Your account settings with informa- Stocks & Commodities, Volume
long-term. The technical scores are then tion on passwords, logins, automatic 29: December.
ranked from high to low and presented renewal, and upgrading service Gopalakrishnan, Jayanthi [2010].
in a table format. The table can then Online chat-based support StockCharts.com, product review,
itself be sorted to show the strongest to Useful articles on the analysis tools Technical Analysis of Stocks &
weakest stocks. The top 10% of stocks Instructional videos, webinars, and Commodities, Volume 28: August.
will be ranked between 90 and 100, archives Masonson, Leslie N. [2014]. Stock-
and conversely, the bottom 10% will be An extensive ChartSchool Charts University, Quick-Scan,
ranked from zero to 10. You can select An annual user conference, with Technical Analysis of Stocks &
from a handful of stock universes (small- this years streamed live for the first Commodities, Volume 32: April.
cap, large-cap, ETFs, US stocks) to find time S&C staff [2009]. StockCharts.com,
the SCTR ranking. Figure 6 shows the Policies regarding the general terms product review, Technical Analysis
top portion of the table for end-of-day of service, data provided, usage of Stocks & Commodities, Volume
prices for large-cap stocks. limitations, membership, reprint 27: May.
permission, public ChartLists, and StockCharts.com
Blogs, market commentary, and public customer support See Editorial Resource Index
ChartLists All inquiries answered within 24
Seventeen blogs are offered from on-staff hours, and many answered the same
experts. In addition, all users can sign up day.
A chart of the averages or a single
stock reflects the ideas, hopes,
ambitions, and purposes of the
OSOBA/WYCKOFF mass mind operating in the market.
Continued from page 31
you may discover automatic buying and selling signals from [2016]. Richard Demille Wyckoff (part 2), Technical
similar patterns. Do not substitute anything for the necessity Analysis of Stocks & Commodities, Volume 34: May.
of employing judgment and sound, practical reasoning. [2016]. Richard Demille Wyckoff (part 3), Technical
The fifth and final part of this series will be a discussion of Analysis of Stocks & Commodities, Volume 34: June.
Richard Wyckoffs latter years, during which time he invested Wyckoff, Richard D. [1985]. Wall Street Ventures & Adven-
in the phonographic industry, lost control of his Magazine Of tures Through Forty Years. Originally published in 1931
Wall Street, and also published his memoirs. by Harper & Bros.
[1910]. Studies In Tape Reading, Ticker Publishing
Stella Osoba is a freelance writer and trader. She has earned Company.
the Charted Market Technician designation and has writ- [1933]. Stock Market Technique, Number 1, Fraser
ten for several financial websites and publications. She is Publishing Co.
a frequent contributor to Technical Analysis of Stocks & [1934]. Stock Market Technique, Number 2, Fraser
Commodities magazine and Traders.com Advantage online Publishing Co.
publication. She may be reached via email at stellaosoba@ [1937]. Wyckoff Method Of Trading And Investing In
gmail.com. Stocks: A Course Of Instruction In Stock Market Science
And Technique, Wyckoff and Associates Inc.
Further reading StockCharts.com
Osoba, Stella [2016]. Richard Demille Wyckoff (part 1), See Editorial Resource Index
Technical Analysis of Stocks & Commodities, Volume
34: April.
DYLAN/WAVE THEORY AAPL [CV] [M] Weekly #4

Continued from page 20 130.00
120.00
AAPL peaked at 134.54, so subtracting 45.71 will 110.00

give a support price of 88.97. 100.72
100.00
Naturally, the best trades are the ones when 96.96
90.00
the stock price does not reach the Dylan sup- 88.97
port level. To catch these best trades, your entry 80.00
should be placed a little above the support price. 70.00
Note that AAPL came close to the Dylan support
60.00
price of 88.97 twice and then rallied. The second
time it came near the support price, the weekly Sep 2013 Apr Jul Oct 2014 Apr Jul Oct 2015 Apr Jul Oct 2016 2
chart gave a double-bottom formation, and the FIGURE 10: THE RHYTHM OF THE CHARTS. Bigger trend waves will have several smaller
breakout of the previous weeks high was a nice rhythms in it. The yellow boxes illustrate smaller rhythms within the price range of bigger rhythms
confirmation signal. (blue boxes).
FOLLOW the naturaL rhYthM Michael Dylan has more than 35 years of experience analyz-
At any given time, there are bigger and smaller ing the markets and has created trading systems, published
rhythms, as illustrated in Figure 10. Youll notice newsletters and videos, and given seminars. He provides an
that after the first big correction (shown in the analysis and timing service at www.dylanwave.com. The sec-
blue box), the uptrend wave developed in smaller ond edition of his book Smart Trader has just been released as
rhythms, and each of those rhythms is identified an ebook. He can be reached at michael@dylanwave.com.
by the yellow boxes. According to rule 3 of the theory, the
smaller rhythms complete their cycle first. Different-colored Sierra Charts
boxes help you keep track of each rhythm and help to measure See Editorial Resource Index
the support prices. A daily chart will reveal additional rhythms,
and an hourly chart even more. The Dylan Wave Theory can
be used for day, swing, and position trading.
TRADING ON MOMENTUM
Multiple-Gap Breakouts
This month, we present a breakout strategy for finding swing Step-by-step action plan
trade entries based on a series of upward gaps in an uptrend. Heres how you can put this strategy to work in your trades.
This professional trader explains what to look for.
Step 1: Scan through 15-day 15-minute stock charts priced
by Ken Calhoun between $20 and $70 per share with a minimum high-low
F
price range of at least 10% (for example, $3 or more for a
inding strong swing trading breakout charts becomes $30/share instrument) that show a minimum of two gaps
easier when you find a chart with two or more price- up, similar to the chart of Medivation Inc. (MDVN) il-
action gaps in an existing uptrend, occurring several lustrated in Figure 1. Note that the price-action gap needs
days apart. Since one of the strongest technical entry to be only a gap up from the prior days close (as seen on
signals youll find is gaps, a series of gaps up is an especially April 6, 2016), not a gap above prior days high (as seen
strong pattern thats useful in locating new, long swing trad- on March 31, 2016 and April 13, 2016).
ing entries.
Step 2: Check that the sequence of two or more gaps is
Trading Strategy: part of a continuous uptrend, in which the gap up prices
15-Day Multiple-Gap Entries are sequentially higher, as seen in this example. You are
Its common for traders to miss out on an initial price gap up, looking to enter on a day following either the second or
finding it late, several days after a first gap up is seen. The third gap-up day, at a new high breakout price.
good news is that strong breakout charts often have a series
of tradable in-trend gaps that occur during the days following Step 3: Set a buy-stop order to enter your trade on any day
an initial gap up day. For swing trades that could be of several following the second or third gap up day. Enter once
weeks in duration, it could give you new opportunities to enter price has moved at least $0.50 above the high of the gap
trades following second or third gap up days. If you follow up- up day (I use $0.50 above the current 15-day high as a
trending charts that exhibit this multiple-gap technical trading filter to help avoid false breakouts). In Figure 1, this signal
pattern, youll be able to capitalize on new momentum-based occurred on April 15, 2016 ($50 + 0.50) = $50.5.
breakouts as the trend continues upward.
Step 4: You can use
a maximum $2 ini-
tial and trailing stop
value on all stock swing
55.00
54.00
53.00 trades.
52.00
51.00
50.00
49.00
48.00 Insights: why
47.00 this technique
46.00
45.00
works
Third long gap 44.00 Institutional pre-market
continuation breakout 43.00
42.00
large volume buy orders
41.00 is what causes price to
Second long gap
continuation breakout
40.00
39.00
gap up. When two or
38.00 more gaps are seen in
First long gap 37.00
an uptrend, it tells you
continuation breakout 36.00
35.00 that institutional demand
2.00M is so strong that price-
action breakout strength
1.80M
1.60M
is likely to continue.
1.40M
1.20M
1.00M
800K
600K You can trade break-
outs above this series
400K
200K
esignal
09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30
3-29-2016 3-30-2016 3-31-2016 4-1-2016 4-4-2016 4-5-2016 4-6-2016 4-7-2016 4-8-2016 4-11-2016 4-12-2016 4-13-2016 4-14-2016 4-15-2016 4-18-2016 of gaps because buying
FIGURE 1: Multiple Long Gap Continuation. Here you see a sequence of three gaps that provide a technical long breakout
signal. Continued on page 53
Indicator: Super Passband Filter
For this months Trad-
ers Tips, the focus is John //Super Passband Filter
Ehlers article in this issue, // (c) 2016 John F. Ehlers
The Super Passband Fil- // TASC JUL 2016
ter. Here, we present the inputs:
Period1( 40 ),
July 2016 Traders Tips code Period2( 60 ) ;
with possible implementa- variables:
tions in various software. a1( 0 ),
a2( 0 ),
The code for the following Traders Tips selections is PB( 0 ),
count( 0 ),
posted here: RMS( 0 ) ;
Traders.com HomeS&C Magazine a1 = 5 / Period1 ;
Traders Tips a2 = 5 / Period2 ;
The Traders Tips section is provided to help readers im- PB = (a1 - a2) * Close + (a2*(1 - a1) - a1 * (1 - a2))
plement a selected technique from an article in this issue * Close[1] + ((1 - a1) + (1 - a2))*PB[1] - (1 - a1)
* (1 - a2)*PB[2] ;
or another recent issue. The entries here are contributed
by software developers or programmers for software that RMS = 0;
is capable of customization. for count = 0 to 49
begin
RMS = RMS + PB[count]*PB[count] ;
end ;
RMS = SquareRoot( RMS / 50 ) ;
Plot1( PB, "Super PB" ) ;

F TRADESTATION: JULY 2016 TRADERS TIPS CODE Plot2( 0, "Zero Line" ) ;
In The Super Passband Filter in this issue, author John Ehlers Plot3( RMS, "+RMB" ) ;
describes a new oscillator hes developed to help minimize Plot7(-RMS, "-RMS" ) ;
computational lag. Ehlers calls this new oscillator a super
passband filter. He has designed it to reject very low-frequency Strategy: Super Passband Filter
components and thus display as an oscillator as well as reject
//Super Passband Filter
high-frequency components so as to minimize noise. // (c) 2016 John F. Ehlers
For convenience, we are providing TradeStation code for // TASC JUL 2016
super passband filter indicators. In addition, we are providing inputs:
Period1( 40 ),
EasyLanguage code for a TradeStation strategy based on the Period2( 60 ),
super passband filter calculation. UseZeroLineTarget( true ),
UseReversalStop( true );
variables:
a1( 0 ),
a2( 0 ),
PB( 0 ),
count( 0 ),
RMS( 0 ) ;
a1 = 5 / Period1 ;
a2 = 5 / Period2 ;
PB = (a1 - a2) * Close + (a2*(1 - a1) - a1 * (1 - a2))

* Close[1] + ((1 - a1) + (1 - a2))*PB[1] - (1 - a1)
* (1 - a2)*PB[2] ;
RMS = 0;
for count = 0 to 49
begin
RMS = RMS + PB[count]*PB[count] ;
end ;
RMS = SquareRoot( RMS / 50 ) ;
if PB crosses over -RMS then

Buy next bar at Market
else if PB crosses under RMS then
Sell Short next bar at Market ;
Figure 1: TRADESTATION. Here is an example of the super passband filter indi-
cator and strategy applied to a daily chart of the S&P 500 index.

if UseZeroLineTarget then p2:= 60;
begin a1:= 5/p1;
if PB crosses over 0 then a2:= 5/p2;
Sell next bar at Market PB:= (a1-a2)*C + (a2*(1-a1)-a1*(1-a2))*Ref(C,-1) +
else if PB crosses under 0 then ((1-a1) + (1-a2))*PREV - (1-a1)*(1-a2)*Ref(PREV,-1);
Buy to cover next bar at Market ; RMSa:= Sum( pb*pb, 50);
end ; RMS:= Sqrt(RMSa/50);
el:= Cross(pb,-RMS);
If UseReversalStop then xl:= pb < Ref(pb, -1);
begin trade:= If(el, 1, If(xl, 0, PREV));
if PB crosses under -RMS then Cross(trade, 0.5)
Sell next bar at Market
else if PB crosses over RMS then
Buy to cover next bar at Market ; Exit Long:
end ; p1:= 40;
p2:= 60;
a1:= 5/p1;
To download the EasyLanguage code, please visit our a2:= 5/p2;
TradeStation and EasyLanguage support forum. The code PB:= (a1-a2)*C + (a2*(1-a1)-a1*(1-a2))*Ref(C,-1) +
((1-a1) + (1-a2))*PREV - (1-a1)*(1-a2)*Ref(PREV,-1);
can be found here: https://community.tradestation.com/Dis- RMSa:= Sum( pb*pb, 50);
cussions/Topic.aspx?Topic_ID=142776. The ELD filename RMS:= Sqrt(RMSa/50);
is "TASC_JUL2016.ELD. el:= Cross(pb,-RMS);
xl:= pb < Ref(pb, -1);
For more information about EasyLanguage in general trade:= If(el, 1, If(xl, 0, PREV));
please see http://www.tradestation.com/EL-FAQ. Cross(0.5,trade)
A sample chart is shown in Figure 1.
Enter Short:
This article is for informational purposes. No type of trading p1:= 40;
or investment recommendation, advice, or strategy is being made, p2:= 60;
given, or in any manner provided by TradeStation Securities or its a1:= 5/p1;
affiliates. a2:= 5/p2;
Doug McCrary PB:= (a1-a2)*C + (a2*(1-a1)-a1*(1-a2))*Ref(C,-1) +
TradeStation Securities, Inc. ((1-a1) + (1-a2))*PREV - (1-a1)*(1-a2)*Ref(PREV,-1);
RMSa:= Sum( pb*pb, 50);
www.TradeStation.com RMS:= Sqrt(RMSa/50);
es:= Cross(RMS,pb);
xs:= pb > Ref(pb, -1);
trade:= If(es, 1, If(xs, 0, PREV));
Cross(trade, 0.5)
F METASTOCK: JULY 2016 TRADERS TIPS CODE
Exit Short:
In The Super Passband Filter in this issue, John Ehlers pres- p1:= 40;
ents his indicator called the super passband filter and suggests p2:= 60;
ways to trade it. The MetaStock formula given here for the a1:= 5/p1;
a2:= 5/p2;
indicator allows you to set whatever time periods are desired PB:= (a1-a2)*C + (a2*(1-a1)-a1*(1-a2))*Ref(C,-1) +
for the filter. The buy & sell signal formula has set those time ((1-a1) + (1-a2))*PREV - (1-a1)*(1-a2)*Ref(PREV,-1);
periods as variables on the first two lines. If you wish to use RMSa:= Sum( pb*pb, 50);
RMS:= Sqrt(RMSa/50);
different time periods, you must change those two lines in all es:= Cross(RMS,pb);
four formulas or else the signals will not align. xs:= pb > Ref(pb, -1);
trade:= If(es, 1, If(xs, 0, PREV));
Cross(0.5, trade)
Indicator:
William Golson
Passband filter
p1:= Input("short time periods", 1, 100, 40); MetaStock Technical Support
p2:= Input("long time periods", 2, 200, 60); www.metastock.com
a1:= 5/p1;
a2:= 5/p2;
PB:= (a1-a2)*C + (a2*(1-a1)-a1*(1-a2))*Ref(C,-1) +
((1-a1) + (1-a2))*PREV - (1-a1)*(1-a2)*Ref(PREV,-1);
RMSa:= Sum( pb*pb, 50); F eSIGNAL: JULY 2016 TRADERS TIPS CODE
RMS:= Sqrt(RMSa/50);
pb; For this months Traders Tip, weve provided the study
0; SuperPassband.efs based on the formula described in John
RMS; Ehlers article in this issue, The Super Passband Filter. In
-RMS
the article, Ehlers presents a method for filtering data and how
Trading signals: to apply the study to your trading.
The study contains formula parameters that may be config-
Enter Long:
p1:= 40; ured through the edit chart window (right-click on the chart
and select edit chart). A sample chart is shown in Figure 2.
low or too high. The common practice to refine frequency
is to enable smart filters. However, good filters take lots of
computational power. So Ehlers shows us how to use filters
while keep computing power relatively low.
We have recreated Ehlers study using our proprietary
scripting language, thinkscript. We have made the loading
process extremely easy. Simply click on the link http://tos.
mx/zeAlsQ and choose view thinkScript. Choose to rename
your study EhlersSuperPassbandFilter. You can adjust the
parameters of this strategy within the edit studies window to
fine-tune your variables.
In Figure 3, you see a chart of SPY, the ETF built to track
the S&P 500, along with the EhlersSuperPassbandFilter add-
ed. For use of the study, traders should focus on the red line
crossing one of the yellow lines. For more information about
the filter, please refer to Ehlers article in this issue.
Figure 2: eSIGNAL. Here is an example of the SuperPassband study plotted on thinkorswim
a daily chart of SPY. A division of TD Ameritrade, Inc.
www.thinkorswim.com
To discuss this study or download a complete copy of

the formula code, please visit the EFS Library Discussion
Board forum under the forums link from the support menu at F WEALTH-LAB: JULY 2016 TRADERS TIPS CODE
www.esignal.com or visit our EFS KnowledgeBase at http:// Author John Ehlers continues to please readers with more
www.esignal.com/support/kb/efs/. The eSignal formula nearly-zero lag filtersthis time, its the super passband
script (EFS) is also available for copying & pasting from the oscillator, which he describes in his article in this issue, The
Stocks & Commodities website at Traders.com in the Trad- Super Passband Filter.
ers Tips area. Following the trading idea in his article, we are presenting
Eric Lippert a simple WealthScript system that can be applied selectively
eSignal, an Interactive Data company (only long side or both sides):
800 779-6555, www.eSignal.com
Buy on the filter crossing above its -RMS line
Short on the filter crossing below its RMS line
Exit long when the filter either crosses below its RMS
or crosses below -RMS (which signifies a false entry
F THINKORSWIM: JULY 2016 TRADERS TIPS CODE signal)
In The Super Passband Filter in this issue, John Ehlers ad- Cover short when the filter either crosses above its
dresses the problem of frequencies in indicators that are too -RMS or crosses above RMS (which signifies a false
entry signal)
Our tests suggest that this new nearly-zero lag filter looks
promising for countertrend trades and for buying on significant
dips (see Figure 4). To execute this trading system, Wealth-
Lab users need to install (or update) the latest version of
the TASCIndicators library from the extensions section of
our website if they haven't already done so, and then restart
Wealth-Lab.
Wealth-Lab code
using System;
using System.Collections.Generic;
using System.Text;
using System.Drawing;
using WealthLab;
using WealthLab.Indicators;
using TASCIndicators;
namespace WealthLab.Strategies
Figure 3: THINKORSWIM. Here is a chart of SPY along with the EhlersSuper- {
PassbandFilter added, showing the red line crossing one of the yellow lines.

Figure 4: WEALTH-LAB. This sample Wealth-Lab 6 chart illustrates entries made by a system based on John Ehlers super passband filter.
public class TASC201607 : WealthScript spb, mrms) )

{ SellAtMarket(bar+1, p);
private StrategyParameter paramPeriod1; }
private StrategyParameter paramPeriod2; else
private StrategyParameter paramGoShort; {
if( CrossOver(bar, spb, mrms) || CrossOver(bar,
public TASC201607() spb, rms))
{ CoverAtMarket(bar+1, p);
paramPeriod1 = CreateParameter("Period1", 40, 10, 100, }
10); }
paramPeriod2 = CreateParameter("Period2", 60, 20, 300, else
10); {
paramGoShort = CreateParameter("Go short?", 0, 0, 1, if( CrossOver(bar, spb, mrms))
1); BuyAtMarket(bar+1);
} else
if( CrossUnder(bar, spb, rms) && goShort )
protected override void Execute() ShortAtMarket(bar+1);
{ }
int Period1 = paramPeriod1.ValueInt; }
int Period2 = paramPeriod2.ValueInt; }
bool goShort = paramGoShort.ValueInt == 1 ? true : }
false; }
var spb = SuperPassband.Series(Close,40,60);

Eugene, Wealth-Lab team
var rms = SuperPassbandRMS.Series(Close,40,60);
var mrms = rms*-1; MS123, LLC
www.wealth-lab.com
var pbPane = CreatePane(30,true,true);
PlotSeries(pbPane,spb,Color.Red,WealthLab.LineStyle.
Solid,1);
DrawHorzLine(pbPane,0,Color.Blue,WealthLab.LineStyle.
Solid,1);
F NEUROSHELL TRADER: JULY 2016
PlotSeriesFillBand(pbPane,rms,mrms,Color.Yellow,Color. TRADERS TIPS CODE
Transparent,WealthLab.LineStyle.Solid,1); John Ehlers super passband oscillator described

for(int bar = Math.Max(Period1,Period2); bar < Bars.
in his article in this issue, The Super Passband Filter, can
Count; bar++) be easily implemented with a few of NeuroShell Traders
{ 800+ indicators. Simply select new indicator from the insert
SetBackgroundColor(bar,Color.Black);
menu and use the indicator wizard to set up the following
if (IsLastPositionActive) indicators:
{
Position p = LastPosition; PB: ExpAvg1-ExpAvg2(Close,16,24)
if( p.PositionType == PositionType.Long ) RMS: SqrRt(Divide(Sum(Pow(PB,2),50),50))
{ -RMS: Neg(RMS)
if( CrossUnder(bar, spb, rms) || CrossUnder(bar,

Figure 6: TRADERSSTUDIO. Here is a sample equity curve for the system from
1999 through 2014 trading one share per signal of the NASDAQ 100 stocks.
'returns the Ehlers Super PassBand value:

Figure 5: NEUROSHELL TRADER. This sample NeuroShell Trader chart shows Function Ehlers_SPB(Period1, Period2)
the PassBand, RMS and RMS indicators. Dim a1
Dim a2
Dim PB As BarArray
Users of NeuroShell Trader can go to the Stocks & Com- a1 = 5 / Period1

modities section of the NeuroShell Trader free technical a2 = 5 / Period2
support website to download a copy of this or any previous PB = (a1 - a2)*Close + (a2*(1 - a1) - a1*(1 - a2))*Close[1] + ((1
- a1) + (1 - a2))*PB[1] - (1 - a1)*(1 - a2)*PB[2]
Traders Tips. Ehlers_SPB = PB
A sample chart is shown in Figure 5. End Function
Marge Sherald, Ward Systems Group, Inc. '--------------------------------------------------------------------------------------
301 662-7950, sales@wardsystems.com 'returns the Ehlers RMS value:
www.neuroshell.com Function Ehlers_RMS(Period1,Period2)
Dim PB As BarArray
Dim RMS As BarArray
Dim count
F TRADERSSTUDIO: JULY 2016 PB = Ehlers_SPB(Period1,Period2)
TRADERS TIPS CODE RMS = 0
The TradersStudio code for John Ehlers article For count = 0 To 49
in this issue, The Super Passband Filter, can be found at RMS = RMS + PB[count]*PB[count]
www.TradersEdgeSystems.com/traderstips.htm. Next
RMS = Sqr(RMS / 50)
The following code files are contained in the download: Ehlers_RMS = RMS
End Function
Function: Ehlers_SPBReturns the Ehlers Super '--------------------------------------------------------------------------------------
PassBand values
Function: Ehlers_RMSReturns the Ehlers RMS 'plots the Ehlers_SPB and RMS indicators:
Sub Ehlers_SPB_Ind(Period1,Period2)
value plot1(Ehlers_SPB(Period1,Period2))
Indicator plot: Ehlers_SPB_IndPlots the Ehlers plot2(Ehlers_RMS(Period1,Period2))
SPB indicator on a chart plot3(-Ehlers_RMS(Period1,Period2))
System: Ehlers_SPB_sysAn example, not in the plot4(0)
article, created by Richard Denning, that shows how the End Sub
'--------------------------------------------------------------------------------------
indicator might be used in creating a trading system.
'example system created by Richard Denning using the Ehlers
SPB & RMS indicators:
I tried various rules for the shorting but could not find one 'Note the following system is not in the article but is an example
that returns a profit, consequently I added a parameter that ' of how the indicator might be used in a system
Sub Ehlers_SPB_sys(Period1,Period2,TrendLen,longOnly)
shuts off the shorting. Figure 6 shows the equity curve for the
'default: Period1=40, Period2=60, longOnly=1
example system (long only) from 1999 through 2014 trading Dim myRMS As BarArray
one share per signal of the NASDAQ 100 stocks. Dim mySPB As BarArray
Dim NDX As BarArray
'THE SUPER PASBAND FILTER mySPB = Ehlers_SPB(Period1,Period2)
'Author: John Ehlers, TASC July 2016 myRMS = Ehlers_RMS(Period1,Period2)
'Coded by: Richard Denning 5/11/16 NDX = C Of independent1
'TradersEdgeSystems.com If CrossesOver(mySPB,-myRMS)And C>Average(C,TrendLen)

And NDX>Average(NDX,TrendLen) Then
Buy("LE",1,0,Market,Day) F UPDATA: JULY 2016 TRADERS TIPS CODE
If CrossesUnder(mySPB,myRMS) Then ExitLong("LX","",1,0,M Our Traders Tip for this month is based on The
arket,Day) Super Passband Filter in this issue by John Ehlers.
If CrossesUnder(mySPB,0) Then ExitLong("LX_ In the article, Ehlers seeks to filter out both high and low
SE","LE",1,0,Market,Day)
If CrossesUnder(mySPB,0) And longOnly<>1 And
frequencies from market data, eliminating distracting wig-
C<Average(C,TrendLen) And NDX<Average(NDX,TrendLen) gles from the resultant signal with minimal lag effect. This
Then Sell("SE",1,0,Market,Day) indicator achieves this with two differenced exponential
If CrossesOver(mySPB,-myRMS) Then ExitShort("SX_ moving averages (EMAs) of varying periods. Trigger points
myRMS","SE",1,0,Market,Day) for the filter are added with a root mean square (RMS) enve-
If CrossesOver(mySPB,0) Then ExitShort("SX_0","SE",1,0,Ma
rket,Day)
lope over the signal line.
End Sub The Updata code for this article can be found in the Updata
'-------------------------------------------------------------------------------------- library and may be downloaded by clicking the custom menu
and indicator Library. Those who cannot access the library
Richard Denning
due to a firewall may paste the code shown here into the Up-
info@TradersEdgeSystems.com
for TradersStudio
data custom editor and save it.
'SuperPassBandFilter
PARAMETER"Period1"@PERIOD1=40
PARAMETER"Period2"@PERIOD2=60
NAME""""
F NINJATRADER: JULY 2016 TRADERS TIPS CODE DISPLAYSTYLE4LINES
The filter discussed in The Super Passband Filter by John INDICATORTYPECHART
PLOTSTYLETHICK2RGB(255,0,0)
Ehlers in this issue is available for download at www.ninja- PLOTSTYLE2THICK2RGB(255,255,0)
trader.com/SC/July2016SC.zip. PLOTSTYLE3THICK2RGB(255,255,0)
COLOUR4RGB(0,0,255)
Once you have it downloaded, from within the NinjaTrad- @A1=0
er Control Center window, select the menu File Utilities @A2=0
Import NinjaScript and select the downloaded file. This file is @PB=0
#COUNT=0
for NinjaTrader Version 7. @RMS=0
You can review the indicators source code by selecting the
menu Tools Edit NinjaScript Indicator from within the FOR#CURDATE=MAX(@PERIOD1,@PERIOD2)TO#LAST-
DATE
NinjaTrader Control Center window and selecting the Super- @A1=5/@PERIOD1
PassBandFile file. @A2=5/@PERIOD2
NinjaScript uses compiled DLLs that run native, not in- @PB=(@A1-@A2)*CLOSE+(@A2*(1-@A1)-@A1*(1-@
A2))*CLOSE(1)+((1-@A1)+(1-@A2))*HIST(@PB,1)
terpreted, which provides you with the highest performance ...-((1-@A1)*(1-@A2)*HIST(@PB,2))
possible. @RMS=0
Raymond Deux & Jess Pennell FOR#COUNT=0TO49
NinjaTrader, LLC @RMS=@RMS+(HIST(@PB,#COUNT)*HIST(@
www.ninjatrader.com
Figure 7: NINJATRADER. The SuperPassBandFilter is displayed on an SPY daily FIGURE 8: UPDATA. Here, the super passband filter is applied to the SPY ETF of
chart ending in May 2016. daily resolution.

the classic EMA uses factor of 2/(period+1). So the relation-
ship between passband filter parameters and the classic MACD
is given by:
PeriodMACD = -1 + PeriodPassBand/2.5;
A ready-to-use formula that implements the super pass-

band filter as described in Ehlers article is shown here. To
use the formula, enter the code in the formula editor and
press apply to display the passband indicator.
AmiBroker code
Period1 = Param("Period1", 40, 1, 100 );
Period2 = Param("Period2", 60, 1, 100 );
a1 = 5 / Period1;
a2 = 5 / Period2;
Figure 9: AMIBROKER. The Ehlers super passband (red) is shown in the middle
pane together with RMS lines (yellow). A classic MACD with periods of 15 and 23 is // pass band by difference of EMAs
shown in the bottom pane. Both produce the same values. // essentially it is re-invented MACD
PB = AMA( C, a1 ) - AMA( C, a2 );
PB,#COUNT)) RMS = sqrt( MA( PB * PB, 50 ) );

NEXT
@PLOT=@PB Plot( PB, "PassBand" + _PARAM_VALUES(), colorRed,
@PLOT2=EXPBASE(@RMS/50,0.5) styleThick );
@PLOT3=-EXPBASE(@RMS/50,0.5) Plot( RMS, "", colorYellow );
@PLOT4=0 Plot( -RMS, "", colorYellow );
NEXT Plot( 0, "", colorBlue, styleNoLabel );
Updata support team Tomasz Janeczko, AmiBroker.com

support@updata.co.uk www.amibroker.com
www.updata.co.uk
F MICROSOFT EXCEL: JULY 2016 TRADERS TIPS CODE
In The Super Passband Filter in this issue, author John Ehlers
presents an indicator with a very quick reaction profile.
F AMIBROKER: JULY 2016 TRADERS TIPS CODE By replicating Figure 3 from Ehlers article (Figure 10) and
In The Super Passband Filter in this issue, John Ehlers pres- playing with the cursor, we can see that the lowest and high-
ents a passband filtering technique based on subtraction of two est points on the indicator are never more than one bar behind
exponential moving averages (EMAs). It is worth noting that the lowest or highest closes, marking a change in significant
mathematically, such a filter is similar to the classic MACD localized trends. Hard to get much closer than that, eh?
indicator. The difference is the way the smoothing factor is Ehlers suggests using crossover points of the filter value
calculated. Ehlers uses a smoothing factor of 5/period while and an RMS envelope of the super bandpass filter as a means
FIGURE 10: EXCEL. Here is an approximation of Figure 3 from John Ehlers article in this issue, The Super Passband Filter.

of generating long or short entry signals. Here is the formula for Wilders EMA:
For those crossovers where a trend appears to be in progress,
this seems to work well. In sideways patterns where a trend is = 1/N
Using N = 40: = 1/N = 0.02500, and (1 - ) = 0.97500
not well established, this technique can lead to whipsaws.
This indicator can give the trader a very early warning of And finally, here is the formuala as used in the super band-
trend changes. For safety, one should look for additional entry pass filter:
confirmations to control risk.
A note about the EMA calculations used in this article: In = 5/N
this filter, Ehlers is using a more aggressive alpha calculation Using N = 40: = 5/N = 0.12500, and (1 - ) = 0.87500
to build his EMAs than is used in either of the perhaps more
familiar EMA versions. This EMA is significantly more The spreadsheet file for this Traders Tip can be downloaded
reactive to the most recent input value than a standard EMA from www.traders.com in the TradersTips area. To successfully
or a Wilders EMA. download it, please follow these steps:
Generalized EMA formula = price today * + EMA yesterday * Right-click on the Excel file link (SuperPassband-
(1- ) Filter.xlsm), then
Select save as to place a copy of the spreadsheet file
Here is the formula for a more standard EMA, as found in on your hard drive.
many software packages:
Ron McAllister
Excel and VBA programmer
= 2 / (N+1)
rpmac_xltt@sprynet.com
Using N = 40: = 2 / (N+1) = 0.04878, and (1 - ) = 0.95121
Find the complete collection of Traders Tips

and code at our website, Traders.com.
Subscribers will also find code from past
articles (from Nov. 1999 onward) at our web-
site in the Article Code area, for downloading
or copy & paste.
TRADING ON MOMENTUM
CALHOUN/MULTIPLE-gAP BREAKOUTS Strong breakout charts often have a

series of tradable in-trend gaps that
occur during the days following an
pressure leads to a continuous price movement during this initial gap up day.
uptrend. The multiple price gaps serve as technical alerts that
buy-sell imbalance is extremely strong (and likely to continue),
which is why this gap breakout pattern is a favorite among Trading several entries with a strong swing trading chart using
professional traders. the help of multiple in-trend gaps can provide the foundation
of a successful swing trading approach.
TRADE MANAGEMENT TIP:
ENTERING AFTER EVERY GAP Ken Calhoun is a producer of trading courses, live room,
As part of a position sizing approach, you should look to add and video-based training systems for active traders. He is a
to any winning open swing trade on a day following a gap UCLA alumnus and is the founder of TradeMastery.com, an
up ($0.50 above the high of the gap up day), each time a gap educational resource site for active traders.
occurs. The reason for waiting to add to your position until the
day after a gap up is to avoid gap retracement (gap fill) days.

BULKOWSKI / ONE THAT GOT AWAY
When I trade a stock based on emotions
(a hip shot), it is invariably the wrong
the way, it made significant one-day plunges decision. I just did not think about it on
at B (down 18% on an earnings release) and that day when I pulled the trigger.
C (down 48% on preliminary sales results).
These are dead-cat bounces (an event pattern),
even though these two do not show much of
a bounce after the plunge. The stock does
fit the profile of a continued drop after the
bounce. play on the double bottom. Since the stock has dropped from
Statistics show that there is a 38% chance of having a second my buy price, I might have bought too early. Its still throw-
dead-cat bounce within six months (which happened at C). I ing back now.
try to avoid taking positions in a stock for at least six months The chart in Figure 3 shows the price action. I bought at H
after a dead-cat bounce for that reason. This trade happened and watched the stock decline for a week or two before the
just short of five months, so that made me nervous. throwback bottomed. If the company declared bankruptcy,
All of that was the bad news. The good news is that I turned the position was too small to worry about, so I did not place
in the manuscript for a new book titled Chart Patterns: After a stop. My program did say that a volatility stop should be at
The Buy. I studied the behavior of stocks after different chart 1.39 or almost 20% below the buy price. If that stop were in
patterns end to see if that would help with stock selection place, it would have triggered two days after I bought.
before the buy. It does, and the research said that while this Inexpensive stocks (below $20 and especially below $5)
setup happened only 13% of the time, a slow recovery would tend to be more volatile than higher-priced ones, so that was
then unfold followed by a big advance, according to my notes another reason for not using a stop on this trade. I watched
that I had made when I was making this trade. the stock bounce around and travel sideways but was not
The chart pattern I was thinking about trading was the double concerned, nor did I pay much attention to it.
bottom at DE. That confirmed as a valid pattern at G when
the stock closed above the peak between the two bottoms (F). The sale
I started to look into the stock by checking the fundamentals. On March 3, 2016, I got fed up with
Insiders bought the stock nine times in December, scooping waiting for the stock to make its
up 4,000 to 100,000 shares per trade. If insiders believed in move. The sale was what I call a hip
the company, why not me? shot, a quick, thoughtless decision.
The specialty retailers were gathering momentum with two My trading notebook reads: This
stocks up six months ago compared to six up a month prior just didnt work out as expected, so
to the buy. I scored the double bottom using the guidelines in Im selling it. Lousy industry. DCB
my book, Trading Classic Chart Patterns, and it signaled a [dead-cat bounce] emphasized the
strong buy with a 2.10 target. Scoring the pattern means I weakness, I think. But in the face of
looked at several factors such as length of the inbound price improving markets, this just dropped.
trend, overhead resistance, pattern height, volume trend, and Its beyond late to sell, but at least the
so on to help predict a successful trade. amount of loss is small compared to
Overhead resistance was at 3.25, 4 (shown in Figure 3 as normal positions.
two horizontal blue lines) and 5, well above the current price It has been my experience that when I trade a stock based
of 1.54 on the day I bought. Earnings were two months away, on emotions (a hip shot), it is invariably the wrong decision. I
far enough not to worry about. I will not buy a stock within just did not think about it on that day when I pulled the trig-
three weeks of an earnings release because of the risk of a ger. As the chart shows, I sold at point I, the very low for the
sharp selloff on earnings news. day, and watched from the sidelines as the stock shot up to J.
My position-sizing algorithm (discussed in my book, Trading The peak at J was more than double my sale price and 83%
Basics) uses the current portfolio value to size new positions above the buy price. The stock eased back to find support at K,
according to market and stock volatility. For this trade, it said forming a pennant chart pattern. The stock broke out upward
that the position should be no larger than $25,000 (total, for from the pennant and is now throwing back (L).
multiple buys), but I should limit this purchase to 5,800 shares Looking back at trades such as these, I groan. If only I had
worth a bit less than $10,000. remembered the curious observation in my notebook that the
A stock priced near a dollar tells me the company is on the recovery would be a slow one, and had held on a bit longer. I
verge of bankruptcy, so it is rare for me to buy such a stock. had the potential to turn this trade into a big win. Instead, I
I downsized the buy to just 1,000 shares, filled at about $1.61 took a 17% loss. Fortunately, with such a small position size,
on January 7. My notes on the trade said, This is a high-risk I lost just $270.
Stocks & Commodities Contributing Writer Thomas Further reading
Bulkowski (who may be reached via email at tbul@hotmail. Bulkowski, Thomas [2005]. Encyclopedia Of Chart Patterns,
com) is a private investor and trader with more than 30 years 2d ed., John Wiley & Sons.
of market experience and considered by some to be a leading [2016]. Chart Patterns: After the Buy, John Wiley &
expert on chart patterns. He is the author of several books Sons.
including Getting Started In Chart Patterns, Second Edition [2002]. Trading Classic Chart Patterns, John Wiley
and the Evolution Of A Trader trilogy. His website and blog, & Sons.
www.thepatternsite.com, have more than 700 articles of free [2013]. Trading Basics, John Wiley & Sons.
information dedicated to price pattern research.
AttenuationThe fractional part of reduced Implemented by first applying a low-pass for spectrum analysis, the MEM system
energy or lost power due to smoothing filter to the data, then subtracting the can provide high resolution spectra for
or filtering. filtered data from the original data. identifying the dominant data cycles
Bandpass filterAn oscillator that ac- Low-pass f requency filterA data within relatively short time series, such
centuates only the frequencies in an smoother or filter that lets pass low- as open, high, low, close, volume and
intermediate range and rejects high frequency trend sinusoids and rejects open interest, or study results, such as
and low frequencies. Implemented by high-frequency noise. Rsi, Trix, and so on. (Fourier analy-
first applying a low-pass filter to the SmoothingSimply, a mathematical sis, in contrast, gives best results when
data and then a high-pass filter to the technique that removes excess data applied to time series of six months or
resulting data (for example, a two-SMA variability while maintaining a correct longer.) As a forecasting tool, MEM is
crossover system). appraisal of the underlying trend. used in conjunction with moving aver-
Butterfly spreadsA sideways market EntropyThe degree of or degradation to ages to forecast lower and upper trend
strategy using all calls or puts, designed disorder or uncertainty in a system. In channels in the data.
to profit from a stock trading in a spe- thermodynamics, its a measure of the Mean-revertingWhen price is oscillating
cific range. unavailable energy in a closed system. randomly about some (unknown) mean
Cutoff frequencyA point where higher- In information theory, its the unpredict- value. That is, it is not trending.
frequency cycles will not pass through ability of information content. In the Noisy signalA signal in which the ef-
a filter. For example, a 10-day simple financial markets, entropy refers to the fects of random influences cannot be
moving average (SMA) will eliminate constant movement of price. The more dismissed.
cycles of 20 days or less. prices move, the higher the entropy. QuantizeIn signal processing, its map-
High-pass frequency filterA detrending Exponential smoothingA weighted av- ping a large set of input values to a
filter that lets pass the high-frequency erage of past periods; a mathematical (countable) smaller set.
noise and rejects low-frequency trend. series in which greater weight is given Sharpe ratio methodAlso, Sterling ratio
to more recent price action. method. The Sharpe ratio method is a
Heuristic biasThe use of rules of thumb classic measure of return/risk. Both the
LETTERS TO S&C for decisions. Sharpe and the Sterling ratio methods
Continued from page 7 Heuristic methodProblem-solving ap- compare returns with variability of
proached by trying out several different returns, as opposed to risk of loss of
losses. We have a money management methods and comparing which provides original investment.
system in place that helps us minimize the best solution. In behavioral finance, Standard deviationA widely used
trial-and-error learning leading to the statistical concept that describes how
risk and establishes capital allocation for
use of rules of thumb for decisions. a given distribution varies around its
each trade. We have analyzed complex
Heuristics (computer science)Compu- mean observation. In the case of the
mathematical formulas to get to the core
tational rules of thumb. Distinct from P/L statistic, a high standard deviation
of their utility. We are aware that there algorithms, which are programs guar- would indicate a widely varying P/L,
is always more to learn. anteed to generate the correct result while a low one would suggest a more
Roberto under all circumstances, heuristics may stable performance. Also: A measure
only turn out to be correct a certain of the fluctuation in a stocks monthly
Thank you for your note. You may be percentage of time. return over the preceding year.
interested in the article The Palm Maximum entropy methodMore flexible Z-transformConverts a discrete-time
Beach Traders in this issue by James than Fourier analysis, the maximum signal, which is a sequence of real or
Rich on the topic of investing user entropy method is both a tool for spec- complex numbers, into a complex fre-
groups.Editor trum analysis and a method of adaptive quency domain representation.
filtering and trend forecasting. As a tool

FUTURES LIQUIDITY
T
rading liquidity is often over- very high volumes. The greatest number three-year period. Thus, all numbers in
looked as a key technical of dots indicates the greatest activity; this column have an equal dollar value.
measurement in the analysis futures with one or no dots show little Columns indicating percent margin
and selection of commodity activity and are therefore less desirable and effective percent margin provide
futures. The following explains how to for speculators. a helpful comparison for traders who
read the futures liquidity chart pub- Courtesy of CBOT wish to place their margin money ef-
lished by Technical Analysis of Stocks ficiently. The effective percent margin
& Commodities every month. is determined by dividing the margin
value ($) by the three-year price range of
Commodity futures contract dollar value, and then multiply-
The futures liquidity chart shown being by one hundred.
low is intended to rank publicly traded
futures contracts in order of liquidity. Stocks
Relative contract liquidity is indicated Trading liquidity has a significant ef-
by the number of dots on the right-hand fect on the change in price of a secu-
side of the chart. rity. Theoretically, trading activity can
This liquidity ranking is produced by serve as a proxy for trading liquidity
multiplying contract point value times All futures listed are weighted equally and equals the total volume for a given
the maximum conceivable price motion under contracts to trade for equal dol- period expressed as a percentage of the
(based on the past three years historical lar profit. This is done by multiplying total number of shares outstanding. This
data) times the contracts open interest contract value times the maximum pos- value can be thought of as the turnover
times a factor (usually 1 to 4) for low or sible change in price observed in the last rate of a firms shares outstanding.
Trading Liquidity: Futures

Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity
% Margin Trade for Equal
Dollar Profit
E-Mini S&P 500 GBLX 5.1 21 3 >>
10-Year T-Note CBOT 1.1 21.2 11 >
Crude Oil WTI NYMEX 8.1 6 1
T-Bond CBOT 2.7 12 2
Ultra T-Bond CBOT 3.1 14.2 2
5-Year T-Note CBOT 0.8 30.8 24
Euro FX CME 2.8 11.3 2
E-Mini Nasdaq 100 GBLX 6.1 17.1 2
Gold COMEX 4 23.9 4
Natural Gas NYMEX 9.6 4.5 2
Russell 2000 Mini ICEUS 5.3 32.9 4
ULSD NY Harbor NYMEX 8.1 6.9 1
Gasoline RBOB NYMEX 7.2 7.7 1
British Pound CME 2.5 13.5 5
2-Year T-Note CBOT 0.3 28.8 31
Australian Dollar CME 2.7 7.7 3
Japanese Yen CME 2.6 15 4
Sugar #11 ICEUS 7.7 19 10
Canadian Dollar CME 2.2 7.6 3
Corn CBOT 5 5.9 5
Soybeans CBOT 3.1 5.9 3
DJIA mini-sized CBOTM 4.9 28.5 5
Eurodollar CME 0.2 36.5 59
CBOE S&P 500 VIX CFE 35.9 46 6
E-Mini S&P Midcap GBLX 5.1 21.8 2
Cotton #2 ICEUS 4.1 7.1 4
Live Cattle CME 4.1 9.8 4
Mexican Peso CME 7.5 15.8 6
Platinum NYMEX 4.5 8.6 3
Crude Oil Brent (F) NYMEX 7.9 5.6 1
New Zealand Dollar CME 3.8 12.6 4 CBOT Chicago Board of Trade, Division of CME
Soybean Meal CBOT 3.4 9 5 CFE CBOE Futures Exchange
Swiss Franc CME 3.5 16.1 3 CME Chicago Mercantile Exchange
U.S. Dollar Index ICEUS 2.3 13.4 5
COMEX Commodity Exchange, Inc. CME Group
Wheat CBOT 5.6 9.9 6
GBLX Chicago Mercantile Exchange - Globex
Brazilian Real CME 11.7 16.2 4
ICE-EU Intercontinental Exchange-Futures - Europe
Canola WCE 4.6 17.5 27
Hard Red Wheat KCBT 6.4 7.1 4 ICE-US Intercontinental Exchange-Futures - US
Palladium NYMEX 8.3 13.1 2 KCBT Kansas City Board of Trade
Soybean Oil CBOT 4.7 7.9 7 MGEX Minneapolis Grain Exchange
Spring Wheat MGEX 5.9 10.4 5 NYMEX New York Mercantile Exchange
30-Day Fed Funds CBOT 0.1 27.3 61
Class III Milk CME 5.6 6.1 3
Cocoa ICEUS 5.7 21.7 10
Coffee ICEUS 5.6 7 2 1607
Trading Liquidity: Futures is a reference chart for speculators. It compares markets Relative Contract Liquidity places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi-
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. Relative
when compared to others in the same column. Contract Liquidity is the number of contracts to trade times total open interest times a
The number in the Contracts to Trade for Equal Dollar Profit column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return In volume
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price 1 or exp 2
In 5000
Excursion).

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turn for market insight, you improve your trading. Some pub- 1. Technical Analysis of
Technical Analysis, Inc.
trade recommendations, lications have been around for quite a Stocks & Commodities Magazine
and education about while (in fact, this magazine itself has 2. The Zanger Report ChartPattern.com
trading and investing? been published since 1982), and they
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4. Working Money, at Working-Money.com Technical Analysis, Inc.
formation is put out in print, on TV, In the listing, youll find informa-
on your smartphone, and over the tion about each publication, such as 5. Active Trader magazine Active Trader magazine
Internet in various formats, but theres how many years its been published
still nothing more readable, reliable, or and whether it is available on the 6. Options Trader magazine (PDF) Active Trader magazine
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enthusiasm of our participants.
Initially, in an effort to encourage
participation in the meetings, we
had each member submit one stock
symbol at each meeting. The list of
stocks was then tracked until the
next meeting, and the member who
submitted the best-performing stock
won a nominal prize. The process
gave each member the opportunity
to share his or her favorite stock
and tell the group what led to their
choice, while we displayed a chart of
the stock on the screen. The process
also provided a watchlist for the
other members to examine, since
it was not unusual for the list, as a
whole, to have annualized returns
in excess of 40%. Attendance at
specific meetings, always held on
the second Tuesday of every month,
depends on the topic of discussion
and how it relates to the interests of
the individual members. Meeting
topics run the gamut from stocks,
commodities, futures, and forex, as
well as daytrading, swing trading,
and long-term investing.
Over the years, our list of speak-
ers has grown to the point where
presentations are booked four to
five months in advance. Jeffrey
Saut, chief investment strategist for
Like-Minded Gatherings
The Palm Beach

Raymond James, routinely gives pre-
sentations to advisors, analysts, and
money managers all over the world.
Traders
Last year, he finally responded to a
long-standing invitation to speak to
the Traders. When he walked into our
meeting room on the second floor of
Expand your resources and learn more by connecting with other like-minded traders. a Publix Greenwise, he broke into a
Heres a group to emulate. grin and said, I have to admit that
this is the first time I have ever spoken
by James E. Rich in a grocery store. Seeing that we
A
had about 30 members in attendance,
fter spending a career facilitating meetings in which business people met to when he usually addresses several
improve their individual businesses and develop best practices, I decided a hundred, he said, This is going to
similar concept could be applied to trading and investing. In April of 2010, I, be a lot of fun because we can have
along with cofounder Ken King, established The Palm Beach Traders with the a conversation instead of me present-
mission of enhancing the trading performance of its members (Figure 1). ing and you listening. Sauts grasp
The charter meeting of The Palm Beach Traders, with 30 participants, was of domestic and global markets was
FROLOVA_elena/shutterstock
held on April 13, 2010 and featured speaker Michael Thompson, director of business and amazing and provided a big picture
client relations for Worden Brothers. In the six years since that first meeting, The Palm view that the members could not have
Beach Traders roster has grown to over 200 individuals. Weve had the good fortune to otherwise achieved.
feature several internationally known presenters at meetings, but we have determined Paul Desmond, president and
that the true success of the group has been the result of the knowledge, talent, and owner of Lowry Research, a highly
At The ClosE
regarded Wall Street research members.

firm, agreed to share Lowrys The point of this article is
current market analysis as to encourage individual trad-
well as their market outlook, ers and investors to expand
even though Lowry normally their education and research
only provides such detailed resources beyond individual
analysis via paid subscription research, books, and trading
to registered analysts and in- & investment classes. Indi-
vestment specialists. Again, vidual traders and investors
the Traders were provided a have a wealth of knowledge
view of the markets that was that grows exponentially
not available through any when pooled with other like-
other means. minded individuals. Com-
FIGURE 1: THE PALM BEACH TRADERS MISSION STATEMENT
Louis Navellier is the puter user groups and trading
chairman of the board, CEO, & investment software user
and chief investment officer of Navellier and Associates, an groups are a great resource for people looking for a way to
investment firm with $2.7 billion under management. Navel- improve their skills. Publicizing that the group is open to
lier, in addition to addressing audiences all over the world, is the public also helps bring in people who are curious to see
also a regular on CNBC and participates in its annual stock what benefits they might derive from such a group. Time and
challenge. Navellier and Associates is headquartered in Reno, time again, we hear our members discuss how they have been
NV, but Navellier has a home in Palm Beach, so we conspired able to formalize trading plans, improve money management
with his administrative assistant to schedule Navellier for our techniques, or discover new sources for research. Roundtable
December meetings, which allows him to spend the holidays management and brainstorming have been around for a long
at home. Thus, the Traders get to hear Navelliers view of the time and are proven techniques for improving performance
markets, and he gets to spend the holidays with his family. and finding best practices.
At our recent member roundtable meeting, we addressed
the following topics that members had asked we put on the James E. Rich has been trading for more than 30 years and
agenda: currently trades multiple family accounts using a combination
of technical analysis, fundamental analysis, and intermarket
Value vs. growth analysis. He is the cofounder of The Palm Beach Traders, a
Fundamentals vs. technicals group of individuals who take an active roll in the manage-
Changing allocations to fit the market ment of their investments. The group, now in its seventh year,
When to sell; patterns/ meets monthly in Palm Beach
profits/losses Gardens, FL to hear speakers
Trading breakouts, with and discuss various aspects of
or without volume trading and investing. Rich can
be contacted at Richtrader3@
With over 20 members in gmail.com.
attendance, the topics pro-
voked some lively discussions. Further reading
As in the past, the members Rich, James E, with John B.
roundtable proved to be one of Rich [2015]. Simplify
our most productive meetings. It, Technical Analysis of
New members come into the Stocks & Commodities,
Traderswhich is open to the Volume 33: November.
publicbelieving that their Star, Barbara [1991]. Start-
challenges are unique, only ing A Technical Analysis
to find that anyone who takes Group, Technical Analysis
an active roll in managing of Stocks & Commodities,
their own investments faces
Individual traders and investors Volume 9: September.
similar challenges and are al- have a wealth of knowledge that Wasserman, Karen [2011]. In-
ways searching for solutions. grows exponentially when pooled vesting Clubs And Trading
Guest speakers can provide with other like-minded individuals. Communities, Working-
an overview of the market, but Money.com.
day-to-day problems get solved
through interaction among
The following selection of book descriptions represents a winning at trading involves turning your trading
sampling of recent book releases in the investing field. Books into a business. To do this, according to the
described here may be from some of the major book publish- author, you must follow a five-step process
ers as well as some independent book publishers. These
that he explains. He also covers the essential
are not critical reviews or editorial evaluations, but rather a
brief look at the book marketplace to help keep readers up
areas that he believes every winning trader
to date on new or recent book offerings. needs to master, including trading systems,
money management, psychology, good and
bad habits, and trading professionally. The
Concentrated Investing: Strategies Of book is for both novices or those with some
The Worlds Greatest Concentrated experience.
Value Investors (256 pages, hardcover www-harriman-house.com
$49.95, ebook $32.99, April 2016, ISBN
978-1-119-01202-3) by Allen C. Benello, The FINTECH Book: The Financial
Michael van Biema, & Tobias E. Carlisle, Technology Handbook For Inves-
published by Wiley. This book chronicles tors, Entrepreneurs And Visionaries
the virtually unknown but very successful (312 pages, $39.95 hardcover, ebook
value investors who have regularly achieved $25.99, May 2016, ISBN 978-1-119-
results better than those of even the worlds 21887-6) by Susanne Chishti &
top fund managers. Sharing the insights Janos Barberis, published by Wiley.
from four top value investors, the authors discuss the strategies This guide to the financial technology
that can make concentrated value investing profitable, while at the revolution seeks to cover the disruption, innovation, and opportu-
same time showing how to mitigate risk over time. The approach nity therein. Who are the key players? Whats driving the explosive
goes against the conventional wisdom related to diversification and growth? What are the risks? This book collates insights, knowledge,
instead picks a small group of undervalued stocks and holds onto and guidance from industry experts. Key industry developments are
them even through the lean years, such as the approach championed explained, and insights from practitioners offer first-hand lessons.
by Warren Buffett. According to the book, the fintech market captured over $14 billion
www.wiley.com in 2014, a three-fold increase from the previous year. New startups
are increasing, and large banks and insurance companies are being
Anatomy Of The Bear: Lessons From pushed toward increasing digital operations. This crowd-sourced
Wall Streets Four Great Bottoms (336 book seeks to provide entrepreneurs, bankers, and investors with
pages, 29.99 hardcover, 26.99 ebook, information on how to capitalize on this sector.
January 2016, ISBNs 9780857195227 www.wiley.com
/ 9780857195234) by Russell Napier,
published by Harriman-House. How does Multi-Asset Investing: A Practitioners
one spot the bottom of a bear market? Framework (296 pages, $105 hardcover,
What brings a bear to its end? These are $68.99 ebook, May 2016, ISBN 978-1-
important questions to be answered in 119-24152-2) by Pranay Gupta, Sven
modern finance. Financial market history R. Skallsjo, & Bing Li, published by
is a guide to understanding the future. Wiley. Despite the accepted fact that a
Looking at the four occasions when US substantial part of the risk and return of
equities were particularly cheap (1921, 1932, 1949, and 1982), the any portfolio comes from asset allocation,
author sets out to answer these questions by analyzing every article the authors state that today, the majority
in the Wall Street Journal from either side of the market bottom. In of investment professionals worldwide
the 70,000 articles he examines, he begins to unravel the features are focused on security selection. This
that indicate when a great buying opportunity is emerging. Napier book questions this basic structure of the investment process and
tries to look at how markets actually worked in these bear-market investment industry. It poses questions such as: Should alpha and
bottoms rather than theorizing how they should work. beta really be separated? Are the traditional definitions for risk
www-harriman-house.com and risk premium relevant in a multi-asset class world? Does the
emerging markets demarcation make sense for investing? Does
The Way To Trade Better: Transform Your Trading Into A Suc- having a performance fee for your manager create alignment or
cessful Business (208 pages, 34.99 hardcover, 27.89 ebook, misalignment? These and many other questions are asked, and
February 2016, ISBNs 9780857193360 / 9780857195326) by John potential solutions are provided. The authors have worked together
Piper, published by Harriman-House. In this new edition, the author for 15 years and seek to present solutions that have helped them
returns to the fundamental topic of how to transform yourself into a manage large asset pools.
winning trader. Building on more than 30 years of trading experience www.wiley.com
and over two decades of teaching and coaching, he explains how
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THE TRADERS MAGAZINE SINCE 1982

www.traders.com JULY 2016

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FEATURE ARTICLE 26 Q&A

4 July 2016 Technical Analysis of Stocks & Commodities

KNOW WHEN TO GET IN

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believed to be reliable but not guaranteed by us without

6 July 2016 Technical Analysis of Stocks & Commodities

July 2016 Technical Analysis of Stocks & Commodities 7

Stock selection S&P 500 (^GSPC)

zeroed in on Christopher & Banks Corp.

SOFTWARE BY TOM BULKOWSKI

comparable-store sales were down. 1891

when will it happen? I would rather look

A bounce lifted price up to H before an-

other decline took it back down to G.

Notice that the FHG move looks like

a double bottom, similar to the markets

happened at slightly different times).

In Figure 2, the double bottom (FHG) 1 F G

retailer of womens apparel and acces- 5

sories in the United States. Womens B

limited growth potential (hence the J

of these conditions thrilled me.

July 2016 Technical Analysis of Stocks & Commodities 9

Clean Those Lenses!

The Super Passband Filter

The filter concept

EMA = a*price + (1 a)*EMA[1]

12 July 2016 Technical Analysis of Stocks & Commodities

The super passband filter in action

EASYLANGUAGE CODE FOR SUPER PASSBAND FILTER Further reading

July 2016 Technical Analysis of Stocks & Commodities 13

Pure Price Action

higher lows. A downtrend is

Trade using support & resistance levels DynamicInvestorPro.com 877-822-1445

July 2016 Technical Analysis of Stocks & Commodities 15

Bearish-Gravestone Doji Bearish-Engulfing Bullish-Dragonfly Doji Bullish-Engulfing

Bearish-Evening Doji Star Bearish-Harami Bullish-Morning Doji Star Bullish-Harami

Bearish-Harami Cross Bearish-Shooting Star Bullish-Harami Cross Bullish-Inverted Hammer

Bearish-Hanging Man Bearish-Kicker Bullish-Hammer Bullish-Kicker

Bearish-Dark Cloud Cover Bearish-Tweezer Top Bullish-Piercing Pattern Bullish-Tweezer Bottom

July 2016 Technical Analysis of Stocks & Commodities 17

Another Look At Wave Theory

you understand what the price swings really mean. 95.00

13 May 15 Jun 12 Jul 14 Aug 17 Sep 15 Oct 14 Nov 16 Dec 14 2

18 July 2016 Technical Analysis of Stocks & Commodities

FIGURE 2: Two rhythms. In this illustra- 100 100

EMA = aprice + (1 a)EMA[1]

PB = (a1 - a2) * Close + (a2(1 - a1) - a1 (1 - a2))