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The editors of S&C invite readers to submit their opinions and information on subjects
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Build powerful
expressed in this column do not necessarily represent those of the magazine.Editor trading systems in
MINUTES
Vertical Runup When I studied my stock data pro-
without coding
Editor, viders available stocks from May 2008 to
I enjoyed readi ng August 2011, it had delisted 1,846 stocks
Thomas Bulkowskis in just a little over three years.
article Vertical Run- From 1995 to now, only a little more
M
arket seasonality and algorithmic strate- proprietary, non-transparent, and non-modifi-
gies are two distinct concepts that offer able.
a potential edge to traders and inves- Taken as a whole, an algorithmic strategy conjures
tors who use them wisely. Seasonality up the notion that it is strictly a hands-off system,
provides statistical transparency on recurring patterns that you are not privy to the details of its mechanism
of market behavior. Algorithmic trading systems (its a black box), and that you should not intervene
employ proprietary technologies and differentiated by turning it on or off. There is some truth to this,
approaches to analyzing and engaging markets with and some systems have demonstrated robustness.
speed, accuracy, and automation. Nevertheless, there is a possibility that seasonality
Each approach envelops its own unique set of po- can be used to optimize or enhance certain strategies
tential. In this article, Ill explore the advantages that without interfering with their internal logics.
might be created by combining them. Ill begin by
taking a look at the advantages that each approach The seasonality advantage
has to offer. Traders who use seasonality to inform their trading
decisions look for recurring buying and selling trends
The algorithmic advantage within a calendar year. The notion of recurrent sea-
An algorithmic strategy runs according to its own sonal patterns is fairly easy to grasp with regard to
coded logic. Every person who subscribes to an certain commodity classes like agriculture (affected
algorithmic system is motivated by the prospect of by weather, planting, and harvesting seasons), energies
possessing a technology that can outsmart com- (supply/demand patterns correlate with summer and
mon approaches to the market, analyzing assets from winter patterns), and precious metalsparticularly
a unique vantage point, and executing trades with gold, whose demand tends to peak during Indias
superior calculating power and speed. wedding season (among other fundamental factors).
The term algorithm strategy brings up a number of The strength of seasonal trends may be histori-
synonymous concepts like automated trading systems, cally consistent but it cant be treated as an accu-
robo-investing, and blackboxes to name a fewall of rate predictornot all years will show correlation
Roy Wiemann
which house implicit assumptions: between prices and seasonality patterns. But that
historical consistencies exist is evidence enough that
n Automated implies hands-off trading (that economically driven transactional activity may be
is, it runs by itself) the driving force behind these price patterns. Its
by Karl Montevirgen
January 2017 Technical Analysis of Stocks & Commodities 9
the rise of gold demand in this two-month period
Average Gold Performance Since 1975
was partially attributable to the Indian wedding
2.5%
Monthly average gain/loss in gold 19752013 season among other fundamental factors.
2.0%
Step 2: Set rules for modifying the strategies. I
1.5% allowed for only long positions during the months
of August and September. The reason for this
1.0% decision was pretty simple: Since August and
September seasonality reflected high demand for
0.5%
gold, why not follow the historical trend?
0.0%
Step 3: Select the strategies. Its ideal to have a
-0.5% bunch of systems to choose from. For example,
I can choose from nine algorithmic systems that
-1.0% focus solely on gold futures. Among those nine,
CASEY RESEARCH
FIGURE 3: LONGS VS. SHORTS FOR AUGUST AND SEPTEMBER TRADES. Here FIGURE 4: Does the number of long vs. short trades matter when
you see the performance of long and short positions in points. a market is trending up? Staying with the seasonality trend makes a big
difference. All three systems with completely different trading rules and parameters
correspond with the seasonal long bias.
The Anatomy Of
A Brexit Appointment
A trade occurs every day, hour, and minute. However, its not pursuant to a set of trading rules. Unlike the intervention of
very often that you get to trade by appointment. Here, we look the Bank of Japan on March 18, 2011 or the Swiss National
at the entry, management, and target of a Brexit trade. Banks removal of the peg of the Swiss currency to the euro
on January 15, 2015, the Brexit (Britain exit) trade could be
T
by Eva J. Tompkins and Jody Wong anticipated and planned using both fundamental and techni-
cal analysis. The appointment was set for June 23, 2016 at
BREXIT: KASTASGR/SHUTTERSTOCK
The entry
A trade can only go up, down, or sideways. With Brexit, there
were only two of the three choices available, up or down. A completed trade is like a good
There are differing lengths of time for staying in a trade, and story. There is a beginning (entry),
that measure depends on the emotional personality of each
individual trader. A position trader is willing to hold a position a middle (trade management), and
for a period longer than a few weeks. A swing trader will hold end (when you exit the trade and
a trade for a few days to several weeks, and a daytrader will make your profit).
typically be out of the trade by the end of the trading day.
There are numerous styles of trading and these, too, depend
on the emotional personality of the trader. We will be analyzing to rise into an entry at 1.4740. In Figure 1, traders can see an
the Brexit trade using different styles. The highest probability entry of 1.4740 as price returns to the top of the channel.
for a profitable trade entry is a confluence of styles that overlap Bollinger Bands measure price volatility. It is an indicator
approximately at the same entry price. Of the three main ele- that typically expresses bands as a 2% deviation for a 20-period
ments of a tradeentry, management, and targetthe entry moving average. The purpose of Bollinger Bands is to provide
is the most important because the entry will determine the a relative definition of high and low. When price breaks the
amount of risk in the trade. Without a high-probability entry, upper Bollinger Band, you would consider price as high and
there will be no trade to manage or money to be made. look for an entry for a short/sell position. In Figure 2, price
For our trade analysis, we will be looking at the GBPUSD, initially pierced the Bollinger Band at 1.4829.
since the USD is the reserve currency of the world. The polls Fibonacci or harmonic trading uses specific price pattern
in the UK closed at 5:00 pm EST and the first results reported ratios to determine turning points in the market. These turning
were that the UK would be leaving the EU. The GBPUSD points are based on the idea that patterns are predictive since
began to rise from 1.4520. they repeat themselves. In Figure 3, price has hit a Fibonacci
Channels help locate optimal buying and selling points while extension of 127.2 or a price point of 1.4934 for entry on the
trading within a trend. Channel traders would look for price day of Brexit.
January 2017 Technical Analysis of Stocks & Commodities 13
which are major whole numbers and
a possible Brexit entry. The levels
at whole numbers are considered
psychological levels or comforting
for many traders and thus a higher
degree of strength or probability
is assigned to these more rounded
levels. Major whole numbers are
followed by major quarters, minor
wholes, and minor quarters. In the
context of the GBP, these numbers
have double zeros except for the
minor quarters.
FIGURE 3: TRADING FIBS OR HARMONICS. Here, price has hit a Fibonacci extension of 127.2 or a price point of For example, looking at the chart
1.4934 for entry on the day of Brexit.
in Figure 5, if you trade whole num-
bers, youd concentrate on the selling
level at 1.5000. In Figure 6, you can
see the range of 1.4776 to 1.5100 as
a legitimate, rule-based entry region.
On a daily chart, the difference in
this range was 324 pips.
Heres where it gets interest-
ing. The best of the five possible
entriesbased on either channel,
Bollinger Bands, Fibonacci, unfilled
sell orders, or whole numbers was
the whole number of 1.5000. This
level was also suggested by the
FIGURE 4: TRADING BASED ON PRICE ACTION. Here you see that price rose into a previously untested level trading media on television. Based
(1.49601.5100), represented by a bearish candle where unfilled sell orders were found. on the move away from this 1.5000
level, a trader could see there was a
great amount of imbalance at this
level. The trader could tell this by
the manner in which price exited
this levelwith a strong move out
and displaying force.
Managing Brexit
The management of a trade is the
yin and yang of all traders. Traders
want to be conservative and give
price enough room to breathe, or
move, so that they do not get stopped
out. Traders also have an aggressive
FIGURE 5: PSYCHOLOGY OF WHOLE NUMBERS. If you trade whole numbers, you would concentrate on the mindset and want to get as much
1.5000 selling level.
profit from the trade as possible, as
soon as possible, while minimizing
Price action trading tells you what is and has happened risk. While price is moving in a profitable direction, there are
on a chart without relying on an indicator. The trader of this several styles of trade management that could be used to stay
style looks for size, position, location, shape, and character in the trade and maximize profit. Some trade management
of each candle that helps to identify the unfilled buy and sell styles include, but are not limited to, the use of a trendline,
orders. In Figure 4, price rose into a previously untested level an average true range (ATR), a moving average, and moving
(1.49601.5100) represented by a bearish candle where unfilled your stop while respecting lower highs.
sell orders were found. A down trendline consists of a minimum of two, but ideally
Whole number traders represent simplicity by placing their three, points: a high point in price, a lower high to define the
entries, stops, and targets on double zeros such as 1.5000, downtrend, and a third lower point for confirmation of the
14 January 2017 Technical Analysis of Stocks & Commodities
strength of the trend. A trendline
would not have been viable in this
trade because the next lower high
created a steep angle that would have
an immediate trendline break.
An ATR measures the average
length of a candle on the trade time-
frame. If you had used an ATR, you
would have been stopped out on the
first 30-minute candle when price
reacted with a pullback of 250 pips. If
you entered at 1.5000, price created
a cushion of 40 pips after the first
FIGURE 6: LOOKING AT THE WHOLE PICTURE. Here, it is clear that the range of 1.4776 to 1.5100 is a legitimate,
half hour. The art of this trade was rule-based entry region. On a daily chart, the difference in this range was 324 pips.
to make the next 1,650 pips in profit
before exiting the trade.
A trader also had the option of add-
ing onto this trade or taking profits
as price moved to a projected target.
In Figure 7, you see that if you used
a nine-period simple moving average
(SMA) you would have stayed in the
Brexit trade and exited when price
broke this moving average.
A stop is the traders insurance
policy. If you are wrong about the
degree of price movement, then you
will be stopped out for a profit or
a small loss. As price moves, you FIGURE 7: TRADE MANAGEMENT. If you had used a nine-period simple moving average for your trades, you would
could move your stop to respect have stayed in the trade until price broke the moving average.
lower highs. This method seems
simple, but traders have a tendency to
become emotional and follow price
too closely with their stops such that
price does not have the ability or
distance to move. In Figure 8, you
see that if you had moved your stop
to respect lower highs, you would
have stayed in the Brexit trade.
A
by John Ehlers and Ric Way
You have experience
hedge fund is an aggressively managed portfolio of That you are reading this proves you are almost halfway to
investments that uses advanced investment strategies the goal of having enough experience. You must be thought-
with the goal of generating high returns. Though ful, able to consider alternatives, and be willing to learn from
that sounds daunting, you can do this on your own. others. Everyone has to start someplace, and the advantage
Whats holding you back from trying? You are prob- of learning is that you are exposed to the experience of oth-
ably thinking: ers. Often, education is expensive. But it doesnt have to be.
You can assimilate the experience of others and learn from
I dont have the experience to be a successful trader. their mistakes.
I dont know how to formulate a trading strategy. The problem with learning from others trading experience
I dont have the technology for an advanced investment is that there is a wide diversity of opinion of what a success-
$ MAZE: DIGITAL STORM/SHUTTERSTOCK
strategy. ful trading style is. Your trading style is a selection that only
I am worried about the risks of trading. you can make, depending on your preferences and comfort
I dont have time. Managing a fund is a full-time job. zone. The first biggest choice is whether you want to follow
I dont have the capital to start a fund. fundamental data or technical considerations. If you prefer
I dont know the legality of running a hedge fund. fundamentals, your best approach to being your own hedge
fund would be to find a combination of stocks and bonds that
16 January 2017 Technical Analysis of Stocks & Commodities
TRADING SYSTEMS
Noisy indicators
delay your analysis
place you on the efficient frontier using modern portfolio
theory. Basically, this means you have a mix of instruments
using random variables that gives you the best tradeoff between
risk & reward. It does not necessarily mean the strategy has
the goal of generating high returns.
Since you are a reader of this magazine, you probably prefer
the technical analysis approach. So lets start with that. Jurik algorithms
deliver low lag,
Come up with a strategy low noise analysis
Within the umbrella of technical analysis, there is still a
wide diversityand often contradictoryopinion on what
constitutes a successful trading strategy. But the arguments
Tools for: TradeStation, AmiBroker, Investor/RT, MultiCharts, NeuroShell Trader, eSignal,
NeoTicker, Tradecision, TradingSolutions, MATLAB, Ninja Trader, Sierra Charts,
basically boil down to selecting the best combination of profit Genesis TradeNavigator, Market Delta, Extreme charts, DLLs for custom software
factor and percent winning trades. Profit factor is the ratio of
gross winnings to gross losses and is analogous to the payout
Jurik Tools on live charts, on the web !
in gambling. tinyurl.com/jurik-online
If you prefer trend trading, you will necessarily have to be
in successful positions for a longer period of time. In addi-
tion, you will have to estimate when the onset of a trend has
Jurik Research
taken place. This means you must take a tentative position
and then exit quickly if your estimate of trend onset is not
successful. Therefore, your trading will be characterized by 2010 -- 2011 -- 2012 -- 2013
a relatively high profit factor due to the big winners and a Add-In software
About the only way to evaluate basic potential FIGURE 1: NORMALIZED PROBABILITY DISTRIBUTION. Here you see a normalized example of the
probability distribution resulting from the Monte Carlo simulator by being fully invested in one stock at a
risk is to examine a historical trading track time for a year. It creates credible annual statistics from real historical trades where 100% investment is
record. Its another example of expecting the achieved by trading one stock at a time.
Futures trading is speculative and is not suitable for all investors. Futures accounts are not protected by SIPC. Futures trading services provided by
TD Ameritrade Futures & Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify. This is not an offer or solicitation in
any jurisdiction where we are not authorized to do business. TD Ameritrade, Inc., member FINRA/SIPC. 2016 TD Ameritrade IP Company, Inc.
CHARTING
One-stop chart
Separating the various components of
the ichi seems to thwart the purpose of
the ichimoku, which, in Japanese, means
at a glance. In one indicator, we get
insight into trend, buy/sell crossovers,
support & resistance, stop-loss points,
and the future potential of a stock under
analysis. Still, studying the five plots
individually will emphasize the part
each plays in the analysis.
Heres a tip. Learning these Japa-
nese terms is not easy, so I assigned an
arbitrary A, B, C, D, and E to the five
plots on a printout of the cloud and
then studied the rules without regard
to the names.
Figure 1 shows the ichimoku clouda
lot to swallow in one gulpwith the five
plots. The five plots, in a nutshell, are:
Ichimoku Charts
line)
(Tenkan-sen + Kijun-sen)/2
T
by Rudy Teseo
Figure 2 shows the tenkan-sen (blue)
hese days, you have to be careful when you use the word cloud. You have and kijun-sen (red). When these are
to be sure your listener knows whether youre referring to some server in viewed without the surrounding distrac-
CLOUD BEAR: PHLOXII/SHUTTERSTOCK
the sky or an indicator used by stock chartists (technical analysts). tions, we see our old friend, the moving
Im a latecomer when it comes to the ichi. Like many traders, I took average crossover, reveal itself. You
one look at the indicator and said, No, not for me; there are a lot simpler could analyze the blue and red lines in
indicators that I still havent mastered. And when I couldnt find it in Steve Achelis relation to each other and also in rela-
Technical Analysis From A To Z, that was the death knell. tion to the cloud itself. Heres where it
But then I received an email offering a free ichi ebook, which I downloaded. is similar to moving average crossovers.
Within 15 minutes I was starting to think differently about this indicator. I then When the shorter period line (blue) is
watched a couple videos on the topic at TC2000.com and was hooked. above the longer period plot (red), the
20 January 2017 Technical Analysis of Stocks & Commodities
trend is positive. If
both plots are also
above the cloud, then
the positive trend is
further reinforced. A
buy signal is gener-
ated when the tenkan
sen crosses above
the kijun sen, while
the tenkan sen, kijun
sen, and price are
all above the cloud.
The reverse of these
stockcharts.com
signals indicates a
negative trend.
Figure 3 shows
FIGURE 1: THE FULL PLATE. On this chart of Dr. Pepper Snapple Group (DPS), you see a full ichimoku cloud with all five plots.
the cloud plot. When
prices are above the
cloud, the trend is
up. When senkouA
is rising and above
senkouB, the up-
trend is strengthen-
ing. When tenkan
sen and kijun sen
are above the cloud
and price is in an
uptrend, then tenkan
sen, kijun sen, sen-
kouA, and senkouB
are all viewed as sup-
port. If you added
tenkan sen and kijun
sen to the chart and
FIGURE 2: CONVERSION AND BASELINE PLOTS. When the tenkan sen (conversion line) and kijun sen (base line) plots are viewed
if both are below without the surrounding distractions, they are similar to moving average crossovers. When the short (green) is above the long (magenta),
the cloud and price the trend is positive. If both lines are above the cloud, the positive trend is further reinforced. A buy signal is generated when the tenkan
is in a downtrend, sen crosses above the kijun sen, while the tenkan sen, kijun sen, and price are all above the cloud.
then tenkan sen,
kijun sen, senkouA,
and senkouB are all
viewed as resistance.
This will help in
your entry and exit
decisions.
Figure 4 shows
the chikou span in
isolation. This plot
is the closing price
shifted back 26 bars.
When it is above the
price, the trend is
bullish; when below
the price, the trend is
bearish.
FIGURE 3: THE CLOUD PLOT. When senkou A is rising and above senkou B, the cloud is green, which indicates the uptrend is strength-
ening. When senkou A is below senkou B, the cloud will be red, which indicates a downtrend.
Confidence
booster
Knowing all this is
just the tip of the
FIGURE 5: BULLISH CLOUD PATTERN. On this chart of Agilent Technologies (A), chikou span is above price, tenkan sen is above proverbial iceberg.
kijun sen, senkou A is above senkou B, and price is above the cloud. It will take a lot of
analysis of your own
portfolio to become
comfortable with
ichi. What I found
most distressing was
that the consensus
of analyst ratings
was often in direct
contrast to what I was
sure was the correct
ichi analysis. That,
of course, made me
monitor those stocks
to see which analysis
proved to be true.
Try it. Youll thank
me later.
Figure 6: BEARISH CLOUD PATTERN. On this chart of American Airlines (AAL), chikou span is well below price, tenkan sen is below
kijun sen, senkou A is below senkou B, and price is below the cloud.
Continued on page 58
22 January 2017 Technical Analysis of Stocks & Commodities
Keep An Eye On Volatility
EarningsWill Performance
Trump Fundamentals?
You often base your trades on opinions, and those opinions information. You analyze your favorite indicators on charts
can be wrong. Whats the best way to hedge your positions for spanning various time periods, flouting its defects and devia-
BUTTERFLY: ARCHMAN/CYBERNETIC EYE: LUIMA TAPIA/
those times when you could be wrong? Heres one way. tions from perfect order, ignoring the visual mischief that
SHUTTERSTOCK/COLLAGE: CHRISTINE MORRISON
C
by Bani Arora buy signal appears as a triumphant symbol of your studies.
You are long the underlying stock and it is a tantalizing
ompany XYZ, the largest holding in your portfolio, thought the company will meet, if not beat, Wall Street expecta-
is due to release earnings tomorrow. You open tions and better still, spike up in price following the earnings
up your favorite charting software and focus all release. But the impending unimagined adversities lead to
intellectual efforts on interweaving your technical unfavorable financials and the stock price takes a nosedive.
analysis insights with historical nuggets of earnings You may think the correction is too steep, but remember,
24 January 2017 Technical Analysis of Stocks & Commodities
options
Ratio spread
Lets work out an example with a simple 1x2 put ratio spread,
and the same logic can be applied to a call ratio spread as well
$0
(see Figure 2). At the time of evaluation, lets say the stock
$132 $140 $145 $150 price is $150.05. The ATM 150 put that expires four trading
Stock price at expiration
days from now at 46% volatility costs (using a simple Black-
Scholes calculator) $4.05. The 141 put at 51.5% volatility
FIGURE 3: STOCK PRICE VS. STRATEGY PAYOUT FOR 1x2 PUT RATIO
SPREADS. The maximum payoff is $8, which is when the stock price at expira- (remember volatility is not constant across all strikes) costs
tion is at $140. $1.30. So you buy one ATM put and pay $4.05 while selling
two OTM puts and collecting $2.60, for a net premium cost of
you get 0.1939. Now, multiply that with the product of (T_1 $1.45 ($4.05-2.60). Thats a 60%-plus reduction in premium
-1) and (T_2 1) and divide it by (T_1 T_2), which gives paid than if you had only bought one ATM put. Why pick $141
you: (-0.1939 * 24 / -5) = 0.9308. Since this is the variance, as the strike for the OTM puts? Because the model indicated a
you take its square root, which equals 0.9648. This is the an- move of about $9 (so $150-$9 = $141), and you assume that to
nualized event volatility, so if you divide it by the square root be the worst-case scenario for a stock price plunge, in which
of 256 you get our final answer, 0.9684/16 = 6.03%. Note that I case the OTM puts will expire worthless and you would have
use 256 instead of 252 as the number of trading days in a year pocketed the premium. Lets take a look at the graph in Figure
to get a whole number for the square root. This gives you the 3 for the payout of this strategy.
one-day expected stock price move due to the forthcoming
earnings event. So if the current stock price is $150, the market Butterfly spread
is expecting the stock to move up or down by about $9.04. For those of you with a penchant for taking a higher risk and
not indulging in buying/shorting the
Instrument Strike Position Stock Price at Expiration stock prior to earnings, you might
$135 $140 $145 $150
consider trading a butterfly spread.
You can do this by going long one
Put 1 $140 +1 $5 $0 $0 $0
put at $140 strike, short two puts at
Put 2 $145 -2 ($10)*2=($20) ($5)*2=($10) $0 $0 $145 strike, and long one put at $150
Put 3 $150 +1 $15 $10 $5 $0 strike (see Figure 4). Without using
Total Payoff $0 $0 $5 $0 any formulas, try to intuitively guess
FIGURE 4: BUTTERFLY PUT SPREAD PAYOFFS. In this case, youre going long one put at $140 strike, short
two puts at $145 strike, and long one put at $1150 strike. Continued on page 46
26 January 2017 Technical Analysis of Stocks & Commodities
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WhY tRADE ETFS?
O
possible based on an evaluation of these ETFs that have been
ne of the more recent ETF innovations over the past available for a number of years.
decade has been the introduction of factors to enhance Factor ETFs continue to see new entrants to the market.
performance and minimize risk compared to the more For example, Fidelity Investments introduced a handful in
traditional market-capitalization weighting approach. October 2016 that include core dividends (FDVV), rising
A factor is simply a characteristic of a security that has rates (FDRR), low volatility (FDLO), momentum (FDMO),
demonstrated an ability to provide an equal to or better than quality (FQAL), and value (FVAL). Surprisingly, Fidelity
average return with lower risk. As a precursor to factor-based was late to the market in delivering these ETFs, even though
ETFs, Morningstar introduced its equity style in 2000 which the company has been studying factors for over 30 years
consisted of nine boxes with large, medium, and small-cap and has been using them in its active mutual fund strategies
stocks labeled on the vertical axis, and value, blend, and growth for years. Whether or not these ETFs will gather sufficient
labeled on the horizontal axis. Stocks were placed in one of assets to sustain themselves should be interesting to watch,
these nine boxes and their performance was compared. especially since other providers have had similar ETFs in the
marketplace for years and have garnered significant assets.
Factor-based ETFs have shown More and more factor-based, equal-weighted ETFs are being
outperformance offered by providers, since they often perform better than
According to Morningstar, since 2010, factor-tilted ETFs have market-weighted ETFs over many years.
had inflows of over $250 billion. Smart beta (as factor-based
ETFs are often referred to) ETF providers use one or more Factor-based performance comparison
specific factors in their ETF offerings. Moreover, academic, Lets take a look at a handful of well-known factor ETFs to
quant, and institutional research has shown that using these review their performance over the most recent three-year
factors individually or in combination can provide enhanced period ending October 21, 2016, since they all existed during
returns with less risk over long timeframes, such as a few this time period. The first four ETFs listed in Figure 1 are
decades at minimum. iShares ETFs for minimum volatility (USMV), momentum
Among the backtested factors that have shown the charac- (MTUM), quality (QUAL), and value (VLUE), respectively.
teristic to outperform standard benchmarks are quality, value, The last three ETF portfolios invested in large- and mid-cap
and momentum. Other factors that have outperformed at a securities. VLUE focused on three factors simultaneously
lower level include low volatility, size (for example, small- that included return on equity, earnings variability, and debt
cap), and dividend yield. equity. The fifth ETF listed is Guggenheims S&P 500 Equal
In general, according to FactSet, over a 30-year period end- Weight ETF (RSP), which came public in April 2003.
ing in 2015, small-cap stocks have outperformed large caps The best-performing ETF of the five shown was MTUM
in 13 years, including 1991, 2001, 2003, and 2009, where they with a 14.12% return compared to USMVs 13.32% return, and
outperformed by more than 10 percentage points. They had it had the next-to-lowest beta at 0.79, but has very low daily
an average excess return over large caps during this period volume at 28,292. VLUE offered the lowest performance at
of 0.7%. In comparison, value stocks have outperformed the 8.72% while also having the highest standard deviation, which
market in 23 out of 30 years with an average 3.5% excess re- resulted from the out-of-favor years when performance suf-
turn, and momentum stocks accomplished the same objective fered. However, it offers the highest current yield at 2.36%,
in 18 years with a 1.53% excess performance. but the lowest average daily volume of 19,852. RSP has been
Vanguard analyzed common factors from 2005 through in existence for over 13 years and has accumulated $10 billion
28 January 2017 Technical Analysis of Stocks & Commodities
Comparison of Factor ETFs (As of Sept. 30, 2016) horizon is required to gain the true benefit of a
Ticker Symbol USMV MTUM QUAL VLUE RSP
particular factor strategy.
To replicate the data in Figure 2 or see a graph
Inception Date 10/18/2010 4/16/2013 7/16/2013 4/16/2013 4/24/2003
of the return figures just mentioned, you can go to
Net Expense Ratio 0.15% 0.15% 0.15% 0.15% 0.40% StockCharts.com and key in those ticker symbols
30-Day SEC Yield 2.31% 1.68% 1.97% 2.36% 1.57% in the PerfChart section on the left side of the
No. of Holdings 176 121 124 148 506 homepage, and press go. Then move the cursor
Net Assets $13.38B $1.84B $3.11B $952M $10.0B over the left and right arrows at the bottom of the
chart to obtain any starting and ending dates.
3 -Yr. Return 13.32% 14.12% 11.76% 8.72% 10.33%
Investors and traders looking to find a happy
Benchmark 13.50% 14.33% 11.92% 8.88% 10.77%
medium between the standard buy & hold ap-
20-Day Avg. Vol. 723,362 28,292 61,771 19,852 820,787 proach and active investing can potentially add
Equity Beta 0.59 0.79 0.95 1.13 1.00 a rewarding investment strategy to their mix by
Std. Deviation 8.84% 10.80% 10.60% 11.72% 10.95% considering factor-based investing with a portion
Sources: Ishares, Guggenheim, Fidelity of their money. However, this should only be done
FIGURE 1: COMPARING FACTOR-BASED ETFs. Here, five different ETFs are compared. Clearly, after performing the necessary due diligence. This
the low-volatility ETF and momentum ETF had the best returns at 13.32% and 14.12%, respectively, means not only evaluating the possible benefits
but the latter had very low average trading volume. of the ETF being considered but also any down-
sides, such as higher-than-average net expense
ratio, portfolio composition, sector weighting
imbalances, liquidity, bid/ask spreads (for active
traders), and rebalancing frequency resulting in
short-term capital gains.
In addition, traders and investors can use a few
technical indicators with factor ETFs such as an
MACD or a 100- or 200-day moving average to
time their entry and exit points among the five
different factor ETFs discussed here to remain in
the best-performing one until a sell signal occurs,
then reinvesting the proceeds in the strongest
ETF in the mix.
Further reading
FIGURE 2. HOW DO THESE SIX ETFS COMPARE? Viewing these ETFs over a three-year timeframe Masonson, Leslie N. [2016]. ETF Perspectives,
from July 18, 2013 through October 21, 2016 shows that the momentum, low-volatility, and quality
ETF outperformed the S&P 500.
Technical Analysis of Stocks & Commodi-
ties, Volume 34: September.
[2016]. ETF Sector Investing, Technical
in assets, but it has the highest net expense ratio at 0.40%, and Analysis of Stocks & Commodities, Volume
it has the highest average daily volume at 820,787. 34: November.
From the standpoint of traders, USMV and RSP offer the most Pappas, Scott N., CFA, and Dickson, Joel M., PhD [2015].
liquid vehicles, while for long-term investors, MTUM, VLUE, Factor-Based Investing, Vanguard Research: April.
and QUAL offer decent returns with acceptable yields. www.etf.com
In Figure 2, looking at the performance since July 18, 2016 www.ishares.com
when all three ETFs had a common starting point, MTUM www.guggenheiminvestments.com
clearly led the pack for most of the period with a gain of www.fidelity.com
46.27%. VLUE started strong but faded at year-end 2015
through October 21, 2016, ending with only a 26.34% gain. StockCharts.com
Notice that RSP was ahead of the S&P 500 for over 90% of
the time and ended with a 6.64 percentage point advantage.
Just looking at the data from the February 11, 2016 low
2017 Readers
(not shown) through October 21, 2016, we find that VLUE Choice Awards
reversed direction and led the pack with a gain of 22.29%
compared to 22.01% for RSP and 17.06% for the S&P 500.
The takeaway from viewing short-term time periods is that
factors can move from a leadership to a laggard position and
Vote Now!
vice versa rather quickly, and that a long-term investment
www.Traders.com
January 2017 Technical Analysis of Stocks & Commodities 29
FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is the se-
nior strategist for DeCarley Trading, a division of Zaner, where she also works
as a commodity broker. She has written multiple books on futures and options
trading, the latest is titled Higher Probability Commodity Trading. Garner also
authors widely distributed e-newsletters; for your free subscription visit www.
DeCarleyTrading.com. To submit a question, email her at info@carleygarner-
trading.com or via www.DeCarleyTrading.com. Selected questions will appear
Carley Garner
in a future issue of S&C.
commodity optionS BUYING ing a put option written against a futures each of the major commodity markets
When is the best time to buy commodity contract that is trading at a relatively on a daily, weekly, and monthly basis.
options? elevated level, and buying underpriced We particularly enjoy the opportunity
It is no secret that I tend to favor op- call options in a market hovering near to scroll through the weekly implied
tions selling over options buying, but historical lows. volatility chart of various commodity
that doesnt mean there arent favorable Its easy to determine which markets markets to identify sectors that might
times to buy options. That said, before are trading near highs or lows, but not provide attractive opportunities to buy
delving into strategies to go long options, all futures and options trading platforms options if the IV is low, and sell them if
its imperative to understand that long offer implied volatility (IV) readings. IV is unusually high.
options traders must be more accurate Even those that do arent necessarily easy Once the commodity markets with low
in regard to market direction and timing to interpret or utilize. This is because implied volatility have been weeded out,
than options sellers must. Moreover, they implied volatility is highly relative. What it is a good idea to find those trading at,
must carry the heavy burden of time seems like a high IV level today might or near, significant highs or lows. With
value erosion, which often causes traders seem low tomorrow, and vice versa. In that said, it should be noted that com-
to lose money despite being somewhat case you are unfamiliar with implied modity markets are opposite the stock
accurate in their price prediction. volatility, it is the amount of options market in that increases in volatility
Nearly all books and courses that focus tend to impact call options in a more
on options trading attempt to drill home dramatic fashion than put options. As
the message of buying options when Seek out those is common knowledge, when it comes
volatility is low. Yet, unfortunately, hu- to the S&P or any other stock index, it
man nature lures options buyers to the commodity markets is possible to make money faster, and in
markets during times of high volatility trading at a relative larger amounts, by buying put options. In
and leaves them uninterested in quiet low and stock indexes other words, call options in commodities
markets. This is a habit traders must be trading at a relative tend to become overpriced similar to the
willing to shake if they are going to have way put options in the stock market can
a chance at profiting from an options- high to find option- become overpriced. This is because the
buying strategy. It is not unlike paying buying opportunities. most explosive price risk is to the upside
extra money for a sporting event ticket in commodities and to the downside in
while a team is hot, or paying additional stock indexes.
money for a name-brand pair of jeans; premium priced into an options market Armed with this knowledge, it makes
in most aspects, the increased value is to account for expectations of future sense to seek out those commodity mar-
merely perceived. Thus, in the end, the volatility. It is an increase in implied kets trading at a relative low and stock
buyer is likely to be disappointed. volatility, and therefore in expectations indexes trading at a relative high to find
At times, however, options buying can of upcoming volatility, that causes option options-buying opportunities. In a per-
be particularly attractive. For starters, prices to inflate ahead of major economic fect world, the markets with low volatility
low volatility is a necessary box to check, announcements or political events even trading at relative price extremes will
but its also a good idea to be aware of while the underlying futures market is also coincide with seasonal tendencies.
market seasonality or the technical setup stagnant. For instance, if you are lucky enough
of the particular market in which you are One affordable and easy source of to find a soybean market lurking near
interested in buying options. Specifically, implied volatility information is Moore multimonth lows during the month of
the best options-buying opportunities are Research Center, Inc. (MRCI). The firm Octoberthat is, a time when the annual
countertrend speculations. For instance, specializes in seasonal studies, but it low in soybean prices is frequently seen,
a trader is generally better served by buy- also offers charts of implied volatility in referred to as the harvest lowsin a
30 January 2017 Technical Analysis of Stocks & Commodities
FUTURES FOR YOU
low-IV environment, it just might be the is because most options expire worthless. ing futures price, the timeframe the price
perfect storm required to put the odds of This puts the probabilities overwhelm- move occurs in, and the magnitude of the
success in favor of options buyers. ingly in favor of the options seller in the move itself. Without the stars aligning,
For those wondering why it takes so majority of circumstances. Remember, it can be difficult to make money in the
many things to fall into place for an as an options buyer, it is necessary to be face of such obstacles.
options-buying strategy to make sense, it accurate on the direction of the underly-
TRADE ANALYSIS
TRADE ANALYSIS
while the benchmark 10-year US Treasury bond dropped to Eva J. Tompkins, JD, is a practicing attorney and an active
its lowest level since 2012. Investors rushed into safe haven trader. She can be reached for questions or comments at
currencies and assets for protection from the Brexit storm. evatesq@gmail.com.
The US dollar, the Japanese yen, and the Swiss franc all went Jody Wong, JD/MBA, is a practicing attorney, an active
up in value. trader, and has a masters degree in business administration.
German 10-year bonds fell below zero for the first time ever. He can be reached for questions or comments at JodyGWong@
Amid the confusion, the US Federal Reserve backed away from aol.com.
raising interest rates during 2016. Uncertainty was created in
the currency market. With uncertainty comes risk, and more
January 2017 Technical Analysis of Stocks & Commodities 31
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
New Years Resolutions for What am I going sacrifice in order to get really good at one or two strategies
Options Traders get to my trading goal? and be a master of them.
Happy new year everyone! Its a new Trading doesnt come without a price.
year, a new presidency, and the first 100 There are two things I believe a person How will I utilize options as part of
days in the White House will include a will sacrifice over time to be a great trad- my plan?
new cabinet and agenda. ertime and money. But not necessarily Most options traders who have gained
Do you know what else its time for? in that order. You may have heard that if experience fall under one of two cate-
Reviewing your performance as a trader you think the cost of trading education goriesthey either trade for direction or
for the last year as well as setting goals is high, try the cost of ignorance. for volatility. Trading for direction means
and planning for 2017. I find that the leaning bullish or bearish and simply
best time to do this is during the last How much time should I commit to being leveraging options to help create gains for
week of the year, but if you miss that the trader I want to be? less risk. Trading volatility means youre
opportunity due to excessive partying Now that you have some basic knowledge looking for the options premium to rise
or perhaps excessive in-laws at your under your belt, you need to figure out at or fall, regardless of market direction by
house, now is as good a time as any to get some point what trading style you want taking advantage of more market-neutral
started. Creating a trading plan involves to adoptdirectional or nondirectional? trades. Whatever your choice, reread the
answering questions around your plan, Maybe you want to do both. I dont know last paragraph and become a master of
so lets get started. one of these forms of options trading.
Look at the big picture The problem with money Last question: Can I take responsibility
For a trader to be successful, he must is that it has emotional for my own actions?
start at the bottom and build a founda- Heres one that 90% of novice traders
tion. Its just like a builder who wants
value for just about fail to learn. When you accept total
to be successful: he has to start at the everyone on this planet. responsibility for your trades and your
bottom and survey the land before any actions that result from trading, you
work begins. You must take stock of close the door to excuses. That is one
yourself as a trader and ask yourself the too many people who can talk out of giant leap away from the crowd and one
following questions: both sides of their mouth, and I look at giant leap toward consistent success in
trading the same way. Either you are the markets. Imagine for a moment Peter
What do I want out of trading? directional or youre nondirectional. Lynch losing a few million dollars and
Do I want to be right or do I want to be This means either you are looking at then blaming his analysts for their bad
profitable? One thing to remember is patterns in the stock market or patterns advice. Its simply not going to happen
that money is just the icing on the cake in the options markets. because Peter Lynch takes responsibil-
of trading. The problem with money is ity for his own actions. When you take
that it has emotional value for just about What markets am I going to trade? responsibility for your own actions, it also
everyone on this planet. Thats because I have seen and heard a lot of people say means a less likely chance of repeating
all our lives we have been trained to I trade everything, or I trade whatever the same mistake twice.
believe that money can buy different is profitable. But take note: The words Heres your assignment, should you
things at different times. everything and profitable never choose to accept it: Make a monumental
Its OK to want to be profitable but exist in the same sentence. Thats like decision to create a blueprint for success,
too much greed, like anything, can ruin working at a big-box store and being determine how you are going to get there,
a good trading plan. Your desire to be the clerk, stock boy, butcher, bakery and what you have to sacrifice. You also
a great trader should always keep you person, cashier, and manager all at the want to develop a trading plan and take
pumped up. This is what keeps successful same time. You will run yourself ragged responsibility to carry out that plan.
traders consistently profitable. and not make a dime on anything. Dont
become a Jack of all markets. Instead,
32 January 2017 Technical Analysis of Stocks & Commodities
G A I N I N S I G H T, K N OW L E D G E , A N D P R OV E N
S T R AT E G I E S AT T H E T R A D E R S E X P O N E W YO R K
TOM DEMARK STEFANIE KAMMERMAN HARRY BOXER ALEXANDER ELDER MICHAEL PAULENOFF
STRATEGIES STRATEGIES STOCKS STRATEGIES ETFs
LARRY McMILLAN JASON BOND JEFFREY KENNEDY GARRETT PATTEN RAYMOND RONDEAU
OPTIONS STRATEGIES FUTURES STRATEGIES STRATEGIES
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Figure 1: drawdown profit/loss. Here you see there are more win drawdowns than loss drawdowns.
Sometimes people trade during draw- average trade, since this makes results works today and will likely work in the
downs and that makes them think their much more predictable. near future.
system is broken. What would your
advice be to them? When do you know its time to aban- It never ends, does it? Thank you for
To avoid psychologically difficult mo- don your trading system and create a sharing your knowledge of trading
ments, we recommend that our custom- new one? systems with us, Denis.
ers build systems with a low expected As soon as the system veers outside
drawdown. If you look at the drawdown of its acceptable deviation range, or Further reading
chart in Figure 1, you see there are more stops being profitable, then you know Gopalakrishnan, Jayanthi [2016]. Trad-
win drawdowns than loss drawdowns. its time to reevaluate its market fit. I ingView, Quick-Scan, Technical
When you have a system with a low ex- have never heard of systems that work Analysis of StockS & commoditieS,
pected drawdown, its possible to pause well for years on end. Thats more what Volume 34: October.
your trading and take a look at why the traders wish rather than reality. Its im- MultiCharts, TradingView
drawdown is happening. I prefer systems portant to always track market behavior See Editorial Resource Index
that have a lot of transactions and a small and constantly improve something that
January 2017 Technical Analysis of StockS & commoditieS 37
Q&A
NEW YEAR, NEW PRESIDENTIAL TERM, our 25 years of business, Bright Trading profits too soon.
NEW APPROACHES has seen a direct correlation between Allow for the expansion of ATR
To begin, I have two announcements: trader profits and volatility levels. Back- beyond the 14-day average.
First, the year 2017 marks the 25-year and-forth movement, higher frequency of Live in the world of probabilities. Not
anniversary of Bright Trading, LLC. gaps and fills, larger directional moves, every idea will work out correctly or
Second, given that we are looking at more overbought/oversold outlier condi- immediately.
four-plus years of anticipated volatility, tions, and abrupt turns and retracements The length of time required to stay
its time for the return of the trader. have all contributed to increased trading in a trade may be increased.
Actually, things began to change on revenue through providing liquidity and Have lists of stocks youd like to
September 9, 2016, in contrast to the correcting inefficiencies. This has been participate in, but only if the price
preceding quiet summer months. On true with individual stocks or ETFs, is right. Be more selective of your
that day, every stock in the Dow Jones pairs, baskets, trading the peers of a sec- entry prices and timing.
Industrial Average was down, 98% of tor (piston trading), opening-only orders Let the market go first and wait pa-
the S&P 500 stocks were down (only 11 and closing imbalances. Daytraders, tiently for an attractive entry level.
were up on the day), and the S&P 500 short-term swing traders, and hedged You could allow stocks to reach
slid 2.5% or 53 points. The catalyst for portfolio traders welcome volatility as outlier levels before entering them.
that decline was Fed-speak and politics. an opportunity to provide a beneficial Instead of entering a stock and
Since that day, we have had increased service to the market and play a small waiting for a profit target or being
volatility, rolling up and down with the part in offsetting greed or fear. stopped out, have a list of stocks
various news on Clinton versus Trump or that you would like to deploy if an
whether the Federal Reserve was going outlier situation occurs. Trading
to raise interest rates or not. Volatility is an from the extremes can provide op-
Since politics is in the forefront at opportunity to provide a portunity or can present additional
the moment, with January 20, 2017 as beneficial service to the risk. If you are implementing mean
Inauguration Day, it is fitting to discuss reversion through pairs trading,
some macro themes here. There are market and play a small then you want to be mindful of the
adjustments to be made for the present part in offsetting greed premium or discount in the spread
and future trading landscape. As a card- or fear. relationship. Accomplishing excel-
carrying member of Wall Street, you lent spread prices when you place
dont want to render yourself obsolete, so capital into a pair relationship is
press on with the necessary adaptations. How to approach it critical for profits.
To quote Benjamin Franklin, When you Lets look at some ways to participate in Trade some. Hold some. Dont be
are finished changing, youre finished. a market with increased volatility. all out on a profitable trade, because
symbols and spreads can often travel
Expect increased volatility Learn to hedge by trading pairs or farther than you would expect. Hold-
Trumps presidency is anticipated to long/short baskets. You can also pair ing onto some of your position can
be unpredictable, therefore increasing a stock with its associated ETF. This make a difference.
movement in the markets, whereas a win allows you to do a swing trade and
for Clinton would have meant an expecta- reduce market exposure risk at the These are times of change and we have
tion of four more years of what we had same time. to change with them. I believe in sudden
been used to for the last eight years. Under Lower your position size so you events, I believe in surprises. The market
the business-as-usual scenario if there can withstand greater moves for or is factoring in everything it knows or can
had been a Clinton win, volatility might against you. This will reduce emo- anticipate, but it cant factor in complete
have declined from recent levels. But in tions that cause freezing up or taking surprises.
38 January 2017 Technical Analysis of Stocks & Commodities
Q&A
Trumps first 100 days ultimately to a consensus outlook. Then market, a recession, and a sideways
Trumps message during his campaign write down your contrarian takeaways. market. By creating trading plans with
was that he would disrupt the current po- This will help you look for the signposts list of stocks and rules for each scenario,
litical and business environment. Given that suggest you either drive 65 or slow you will be prepared for what the market
that his pledge was to shake things up, down for the S curves. Does the macro gives you.
we should expect the unexpected. catalyst for each item in Trumps agenda
He may surprise everyone and start have wind in the sails? Play relative performance when the
doing everything he said he would do. We may see some similarities to the macro forces are clear
Or on the flip side, since he likes to be Ronald Reagan presidential years and When there are clear and persistent
unpredictable, he might not do any of the market and the economy could be macro forces in play, participate by
what he pledged. There are indications dislocated for a period of time. Given trading best-in-breed stocks within their
that he will work with China rather than the GOP sweep that occurred with the sector. Selecting the strongest stocks in
slap protectionism tariffs on goods we election, there should be fewer obstacles the strongest groups and hedging with
import. Since we have a step-by-step to getting stuff done. It all depends on their corresponding ETF or the SPY
guide of what Trump laid out in a com- what the incoming presidents team is one way to trade it. The same holds
mitment to the American people if he wants to accomplish. true for shorting the weak stocks in
was elected president, we should look There may be a lot of noise and the the weak groups and hedging against
at his list of actions planned for his first markets could stay in a trading range, the corresponding ETFs. Alternatively,
100 days in office. The macro themes but two main outlier scenarios are also buy best-in-breed stocks and pair them
surrounding his campaign promises have possible: against worst-in-breed stocks. The theme
been driving markets since the day after is to start with a single idea and find a
election day, and they will be the litmus hedge for it. It is through hedging your
test for whether he is committed to these Dont be afraid to utilize trades that you may find the ability to
or whether it was only campaign rhetoric macro thinking in your participate in volatile markets without
and empty political jargon. being shaken out.
short-term trading. This Lets look at some examples of macro
Perception of a Trump presidency can help you trade with forces that could act on given sectors.
What has Trump laid out for his presi- the wind at your back.
dency and what do we expect he will If we get an uptick in interest rates,
pursue? Heres a summary: then those stocks with a bond com-
1. This is the start ofeither imme- ponent, such as utilities or those
Large increases in infrastructure diately or delayedan incredible with a larger dividend like REITS,
spending bull market would be sold.
Support of American manufacturing 2. The trouble is only starting, and If infrastructure spending is the
and energy production the worst case will play out and a focus, then the industrials can
Repatriation of corporate profits held serious recession will hit. benefit.
outside the US If national security is a concern or
Lower taxes on business What we have seen so far is the stocks the risk of war has increased, then
Less regulation and industries that did well under the defense contractors may see money
Restrictions on special interests and previous administration are being sold in flow into that group.
placing term limits on Congress favor of buying stocks within industries If there is any potential for decreased
Repealing Obamacare that are anticipated to do well under the regulation in banking and some un-
Reducing the size of the federal new leadership. winding of the restrictions, then the
government beginning with a hir- Multiple scenarios. Multiple strate- financial sector may benefit.
ing freeze gies. Multiple models or variations of
Placing tariffs on imports those strategies. Multiple timeframes. Dont be afraid to utilize macro think-
Tightening up the borders and re- Multiple methods and paths for execut- ing in your short-term trading. This can
stricting immigration ing trades. help you trade with the wind at your back.
Increase in defense and military You may also catch reversals from the
spending Run the scenarios overbought or oversold areas. Remember
Dim view of some of the tech gi- Run scenarios of how the markets may that technicals are great, but understand-
ants. play out in the near future and for the ing the reason behind a trend or move
next four years. You cant predict what may be even better.
You can take each one of these bullet will happen, but you can prepare multiple Your strategy can be as simple as
points and make a list of the conventional trading plans with multiple scenarios
wisdoms that gets echoed and that lead that could play out. Prepare for a bull Continued on page 47
January 2017 Technical Analysis of Stocks & Commodities 39
www.barchart.com
Barchart.com got a facelift. It looks more
modern, is more intuitive, and easier to
navigate. It still has its rich feature set
that its subscribers have known to ap-
preciate. The contents of the site could
help in your trading whether youre a
stock, options, forex, or futures trader.
Heres how.
Say youre ready to start your trading
day, coffee in hand; you open up Bar-
chart.com on a device of your choice, and
start by reading the Barchart morning
call. It doesnt cost anything to register.
The only time that payments come into
the picture is if you opt to use any of the
premium services. Ill focus on the free
content for this review.
FIGURE 1: OUT-OF-SAMPLE RESULTS. You can see in the last four rows of the results that the CI detected
Based on his decision to use both CI and almost all trend trades and with the least delay, capturing the most profits ($57,700). However, it didnt filter out
rsquared in an emini system, has he found trades effectively in nontrending markets, leading to poor overall performance.
Sto
tors
only
5
cks
$
y Market Research
ed Trading Indica
Trad
Wor
Article Code
Digi
ers.comAdvantage
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tal Archive
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azine
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Magazine. The premier magazine for technical analysis. price movement; new techniques. Posted in real-time with an
Youll get five years 65 issues including our annual archive of thousands of articles.
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you opt for a digital-only subscription. past issues of Stocks & Commodities no need to type it
3. Complete Digital Archive. The complete archives as PDFs out manually.
more than 17,000 pages from Technical Analysis of 7 . Optimized Trading. The optimized indicator values can be
Stocks & Commodities from 1982 through the present. used as starting points when trying to decide what values to
The articles can be read in your browser or download to input into your charting software. Search for a certain symbol
your computer (or any device with Internet or company or build your own portfolio.
access and the ability to read a PDF)!
T
III 80.00
5 77.08
3 b
he United States has elected a
70.00
Figure 1: Monthly chart of JP Morgan. The rise from the low of $15.03 in March 2009 to $76.69 could
The question is, What now for the future of be a WAVE III in the Elliott wave count. Both the RSI and stochastic RSI indicators are almost at overbought
the US stock markets? levels. Volume has, however, dropped as the price rose. A WAVE IV correction is possible from here.
15.00
stocks 12.87
10.00
that survived, even though its share price Figure 2: Monthly chart of Wells Fargo. The price rose from a low of $7.63 in March 2009 to a
fell from $53.25 to $15.03. Figure 1 is a high of $58.80 by July 2015. The Elliott wave count suggests that the share is completing a WAVE 4 with a
monthly chart showing how the share price major WAVE 5 still to follow. The stochastic RSI is at oversold levels and starting to suggest a buy.
rose from the low of $15.03 in March 2009
to its present high of $76.69. An Elliott May Jun Jul Aug Sep Oct Nov
OmniTrader
a low of $7.63 in March 2009 to a high
of $58.80 by July 2015. The Elliott wave Figure 3: Daily chart of Goldman Sachs. The share surged from November 7, 2016, the day before
count suggests that the share is completing the election, to November 9, 2016, when the presidential election results were announced. The RSI is at
a WAVE 4 with a major WAVE 5 still to oversold levels, so waiting for a correction with a new buy signal would be suggested.
follow. The stochastic RSI is at oversold
levels and starting to suggest a buy at this May Jun Jul Aug Sep Oct Nov
to your watchlist.
Figure 4 is a daily OmniTrader chart of
Bank of America (BAC). The share gave
a buy signal on the vote line on November Figure 4: Daily chart of Bank of America. The share gave a buy signal on the vote line on November
7, 2016 based on the buy signals given by 7, 2016 based on the buy signals given by four strategies shown in green below the vote line. The RSI indicator
four strategies shown in green below the is at overbought levels, suggesting a correction should occur.
OpTIONs
$5
the most probable price level that you are expecting with this
butterfly spread. It will be the middle strike, or $145, a down
move of only $5, that is, approximately 50% of the expected
worst-case bearish scenario of $9+. $0
And without using a Black-Scholes calculator, can you also
tell what your maximum payout of this butterfly put spread
would be? Of course! It will be $5 (the difference in put strikes,
that is, $145-$140 or $150-$145) and indeed, that will be the $140 $145 $150
Q&A
FrieseN
FrieseN trades here,
trades here, but
but rather
rather showing
showing youyou how
how The trading
The trading opportunities
opportunities areare abun-
abun-
Continued from
Continued from page
page 39
39 you can create a methodology
you can create a methodology that can that can dant. Think about how you
dant. Think about how you can reducecan reduce
incorporate the macro themes
incorporate the macro themes that are that are the risk
the risk ofof losses
losses while
while increasing
increasing your
your
entering ETF
entering ETF trades
trades at
at the
the open
open of
of the
the present now. You could also
present now. You could also buy somebuy some staying power on the profi table
staying power on the profitable trades. trades.
market, such as going long
market, such as going long XLF andXLF and favored fi
favored financials
nancials while
while shorting
shorting thethe Dont neglect
Dont neglect the the power
power of of research,
research,
short XLU,
short XLU, or or the
the converse.
converse. Another
Another fi nancial ETF. This will reduce variance
financial ETF. This will reduce variance planning, endofday review process,
planning, endofday review process, and and
idea is to go long XLY and short
idea is to go long XLY and short XLP, XLP, and increase
and increase your
your marketneutral
marketneutral stance,
stance, journaling. In 2017, it is going to
journaling. In 2017, it is going to be thebe the
which is discretionary versus consumer
which is discretionary versus consumer and you would be looking for
and you would be looking for the out- the out- year of the traderso trade profi
year of the traderso trade profitably! tably!
staples.
staples. performance of the fi nancial stocks
performance of the financial stocks that that
II am
am not not recommending
recommending certain
certain you chose as compared
you chose as compared to XLF. to XLF.
January 2017 Technical Analysis of Stocks & Commodities 47
TRADING ON MOMENTUM
Mean-Reversion Daytrading
Last month, this professional trader discussed swing trading Daytrading strategy:
mean-reversion pivot entries. This month, he continues on Buying after a mean reversion
the same topic but this time for daytrading. As with swing trading mean reversions, this strategy primar-
ily works for pullbacks of nearly exactly 50%no more and
by Ken Calhoun no less. Once you spot one of these mean-reversion patterns,
O
you simply enter your trade when a breakout moves above the
ne of the biggest challenges that daytraders face is 50% price level. From a scanning standpoint, it is smart to
rapidly scanning for breakouts during the opening 30 look at several charts within the same sector once you spot
minutes of each days trading session. If you have ever a mean-reversion pattern, because intraday charts within the
overlooked a big opening breakout, you may find the same industry group often exhibit similar price-action patterns
technique Ill discuss here especially useful. that you can potentially capitalize on.
By waiting for a 50% retracement, also known as a mean
reversion, you can use this as a second opportunity to enter a Step-by-step action plan
strong-trending stock following a pullback. This article will Heres how you can put this strategy to work in your intraday
show you how to daytrade mean-reversion pivot entries. trades:
It is important to note that this strategy is best used with
stocks priced $20$70/share with opening moves of at least Step 1: Look for a chart that has moved up at least one point
one point in a single direction, that then pull back to 50% during the first 30 minutes of the trading day (9:3010 am
before pivoting. It is usually unwise to daytrade penny stocks Eastern Time), as seen in the chart of Harley-Davidson, Inc.
or other cheap, less-than-$20 stocks, because they exhibit (HOG) in Figure 1 on the morning of October 18, 2016.
choppier, haphazard price action compared to professional
daytraders stocks with higher volume and sustainable vola- Step 2: Next, calculate the mean of this trading range (in
tility. The best charts to daytrade are those with wide and Figure 1, this is ($50 + $53)/2 = $51.50). This is your mean-
clean, well-defined technical momentum breakout patterns reversion pivot price. Wait for price to drop slightly below
that are relatively easy to enter and exit, unlike choppy, low- this value.
priced risky stocks that amateurs and undercapitalized traders
unwisely seek to trade. Step 3: Enter a buy-stop order to enter your trade once
price breaks above the
50% mean-reversion pivot
price (in this example, it
is $51.50).
EHLERS & WAY/BE YOUR OWN HEDGE FUND what we mean when we say be your own hedge fund is the
Continued from page 18 way you go about conducting your own trading, not accepting
somebody elses money to trade. That way, you dont have to
worry about the legal issues that come with managing other
advance, for exercise at the market on the open of the next peoples money. What weve described here is using proven
trading day. All you have to do is monitor your own open trading signals and employing diversity to reduce your risk
positions in each of the four channels, exit a trade when you exposure.
get a signal, and replace it with another buy signal on that
day. You can do this in the evening and place your market take oWnership
orders. The whole process can be completed in less than 15 The concerns you may have about trading can be addressed
minutes per day. by treating your own money as if it were in a hedge fund with
you as the fund manager. This requires establishing your own
anD then theres capital trading style, acquiring trading signals (if necessary, by lease),
Like any business, trading your hedge fund and applying diversity to reduce risk. This is all very doable
requires capital. Most brokerages require with the technology available today.
a minimum account balance of $2,000 or
so. At this minimum level you would be S&C Contributing Editor John Ehlers is a pioneer in the use
dividing your hedge fund into four $500 of cycles and DSP technical analysis. He is president of MESA
channels. Frankly, thats a pretty small amount, and it leaves Software. MESASoftware.com offers the MESA Phasor and
you with no real initial margin of error for drawdown. Since MESA intraday futures strategies. He is also the chief scien-
you would only be trading a few shares of many stocks with tist for StockSpotter.com, which offers stock trading signals
this low level of funding, commission costs can become a factor based on indicators and statistical techniques.
in your trading. All in all, we would recommend a minimum Ric Way is an independent software developer specializing
$10,000 account for your hedge fund. in programming algorithmic trading signals in C#. He may
be reached at ricway@live.com.
Bypass the legal stuff
This is the United Statesyou can do anything you want with StockSpotter.com
your own money. You can trade any way you like. To be clear,
January 2017 Technical Analysis of Stocks & Commodities 49
For this months Traders Tips, the focus is
Ken Calhouns article in the December 2016
issue of Stocks & Commodities, Mean-
Reversion Swing Trading. Here, we pres-
ent the January 2017 Traders Tips code
with possible implementations in various
software.
The code for the following Traders Tips
selections is posted here:
Traders.com HomeS&C Magazine
Traders Tips
The Traders Tips section is provided to help readers im-
plement a selected technique from an article in this issue
or another recent issue. The entries here are contributed
by software developers or programmers for software that
is capable of customization.
F TRADESTATION: JANUARY 2017 TRADERS TIPS CODE Figure 1: TRADESTATION. Heres an example of the MeanReversion strategy
In Mean-Reversion Swing Trading, which appeared in the and indicator applied to a 60-minute chart of Alphabet (GOOG).
December 2016 issue of Stocks & Commodities, author
Ken Calhoun describes a trading methodology where the ShortOK = true ;
trader attempts to enter an existing trend after there has been end ;
a pullback. He suggests looking for 50% pullbacks in strong if High = UpperBand then
trends and waiting for price to move back in the direction of begin
the trend before entering the trade. HighRef = High ;
LongOK = true ;
Here, we are providing the TradeStation EasyLanguage code
ShortOK = false ;
for a mean-revision strategy based on the authors concepts. end ;
We have also included a companion indicator to help visualize
the trade setups. // 50% Pull Back Level
TriggerLine = .5 * ( HighRef + LowRef ) ;
Strategy: MeanReversion
if LongOK[1] and LongOK
// TASC JAN 2017
and Close crosses over TriggerLine
// Mean-Reversion Swing Trading
and Close > MAValue
// Ken Calhoun
and MarketPosition( 1 ) < 1 then
begin
inputs:
Buy next bar at Market ;
ChanLength( 20 ),
LongOK = false ;
StopDollars( 1 ),
end
MALength( 50 ) ;
else if ShortOK[1] and ShortOK
and Close crosses under TriggerLine
variables:
and Close < MAValue
UpperBand( 0 ),
and MarketPosition( 1 ) > -1 then
LowerBand( 0 ),
begin
MidBand( 0 ),
SellShort next bar at Market ;
LongOK( false ),
ShortOK = false ;
ShortOK( false ),
end ;
LowRef( 0 ),
HighRef( 0 ),
Sell next bar at Upperband Limit ;
TriggerLine( 0 ),
Sell next bar at Lowerband Stop ;
MAValue( 0 ) ;
Buy to Cover next bar at Lowerband Limit ;
Buy to Cover next bar at UpperBand Stop ;
UpperBand = Highest( High, ChanLength ) ;
LowerBand = Lowest( Low, ChanLength ) ;
SetStopShare ;
MAValue = Average( Close, MALength ) ;
SetStopLoss( StopDollars ) ;
if Low = LowerBand then
begin
Indicator: MeanReversion
LowRef = Low ;
// TASC JAN 2017
LongOK = false ;
// Mean-Reversion Swing Trading
inputs:
ChanLength( 20 ),
F METASTOCK: JANUARY 2017 TRADERS TIPS CODE
MALength( 50 ) ; Ken Calhouns article in the December 2016 issue of Stocks
& Commodities, Mean-Reversion Swing Trading, pre-
variables: sented a visual trading system designed to take advantage
UpperBand( 0 ),
LowerBand( 0 ), of pullbacks in uptrends. The formula given here, used as
MidBand( 0 ), a filter in the explorer, will find such trading opportunities.
LongOK( false ), The first two lines of the formula allow the user to adjust the
ShortOK( false ),
LowRef( 0 ),
parameters of the scan:
HighRef( 0 ), "Z" is the minimum percentage increase in the initial upswing
TriggerLine( 0 ), "Fudge" is the percentage difference allowed between the
MAValue( 0 ) ; close on the pullback and the actual 50% mean reversion.
UpperBand = Highest( High, ChanLength ) ;
LowerBand = Lowest( Low, ChanLength ) ;
The formula is presented using values of 10% minimum
MAValue = Average( Close, MALength ) ; move and a 0.1% allowance on the difference at the reversion
level.
if Low = LowerBand then
begin Exploration filter:
LowRef = Low ; z:= 10;
LongOK = false ; fudge:= 0.1;
ShortOK = true ; p1:= LastValue(TroughBars(1, C, z));
end ; pv1:= Trough(1, C,z);
p2:= LastValue( HHVBars( C, p1 ));
if High = UpperBand then pv2:= HHV( C, p1);
begin meanrev:= (pv1 + pv2) / 2;
HighRef = High ; pv3:= LLV(C, p2);
LongOK = true ;
ShortOK = false ; p1 < PeakBars(1, C, z) AND
end ; pv2 >= pv1 * (1 + (z/100)) AND
Ref(Abs(pv3 - meanrev) <= pv3 * (fudge/100), -1) AND
C > Ref(C, -1) AND LLVBars(C, p2) = 1 AND
TriggerLine = .5 * ( HighRef + LowRef ) ;
pv1 >= 20 AND pv2 <= 70
Plot1( UpperBand, "UpperBand" ) ;
Plot2( LowerBand, "LowerBand" ) ; William Golson
Plot3( TriggerLine, "Trigger" ) ; MetaStock Technical Support
Plot4( MAValue, "Mov Avg" ) ; www.metastock.com
if LongOK then
begin
SetPlotColor( 1, Green ) ;
SetPlotColor( 2, Green ) ; F eSIGNAL: JANUARY 2017 TRADERS TIPS CODE
end
else For this months Traders Tip, weve provided the study
begin
SetPlotColor( 1, Red ) ;
SetPlotColor( 2, Red ) ;
end ;
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 be- ing 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 TECHNIQUES
TESEO/ICHIMOKU CHARTS
Continued from page 22 When prices are above the cloud
and all the other plots of the
Rudy Teseo is a private investor in stocks, options, and curren- ichimoku charts are showing a
cies, and has taught classes in technical analysis and option bullish move, it further reinforces
trading. He can be reached at rftess@optonline.net. a possible bullish move.
FURTHER READING
Elliott, Nicole [2007]. Ichimoku Kinko Hyo Charts, Tech-
nical Analysis of StockS & commoditieS, Volume 25: of StockS & commoditieS, Volume 18: October.
September. TC2000 (Worden Brothers); StockCharts.com
Muranaka, Ken [2000]. Ichimoku Charts, Technical Analysis
Check us out!
programming, code translation services.
http://daytradingforecasts.com?r=s
www.sr-analyst.com
To Advertise
contact: Ed Schramm
ESchramm@traders.com (206) 938 0570
TRADERS'
RESOURCE
The information in Traders Resource is the most accurate at the time of posting and is subject to change. Because the vendors posting to Traders Resource are responsible for their own listing, Technical Analysis, Inc. declines any and all liability
for any representations made by the businesses and individuals listed. Nor can Technical Analysis, Inc. endorse any business or individual listed on Traders Resource. Technical Analysis, Inc. makes no warranties, express or implied, as to the
accuracy and reliability of claims herein. You agree to release Technical Analysis, Inc., together with its respective employees, agents, officers, directors and shareholders, from any and all liability and obligations whatsoever in connection with or
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If you are aware of a business that should be listed, please email us at Editor@Traders.com.
Your Trading
Lets look at a real-world trading
COMPUTER/LEFT AND RIGHT BRAIN: SHAL_HALUD/SHUTTES-
Trading is emotionally demanding. Our feelings dictate our actions and without would be a chapter in itself, and thats
our being aware of it, tend to make us trade irrationally. The first step in battling not the purpose of this article. What
emotions is to be aware of them. Ill describe here regarding my trading
system is an oversimplification.
T
by Claudio Demb I have two main trading systems
one for the longer term and one for the
houghts, feelings, and actionsthree distinct and separate entities, yet they shorter term. The longer one is based
have a circular relationship. You see this kind of relationship in everyday on the monthly and weekly timeframe
60 January 2017 Technical Analysis of Stocks & Commodities
Trading Psychology
tradestation
FIGURE 2: ALL PLANNED OUT. Here you see where I took the first, second, and third entries and where I exited the trade.
Life goes on, and just as the sun rises every day, the market
Strong feelings dictate action, opens up the following day. But clearly, in this situation, I am
and in the grips of that powerful not in a good emotional place; my emotional capital is almost
spent as a result of my last impulsive trade. Thus, when the
emotional state, you can be next must-take setup shows up, I am not able to take it. I am
forced to enter or exit positions. still anchored to my last trade, and the painful memory of it
makes me too fearful to take the new setup.
Lets take a deeper look and see what happens after tak- Think, feel, act
ing the first and second entries. My entries were good, the As is evident in the example I gave you, feelings dictate our
trade was working well, and the position was growing larger. actions. Feelings happen quickly and we often dont notice
I wanted to have my full position as soon as I could. I was them. Because were not aware of those feelings, we find our-
feeling confident even though my anxiety was rising. I used selves thinking a particular way. In other words, our emotional
the next deep pullback to enter the third and final portion of states color our lenses. All of a sudden, we could be seeing
my full-size position without respecting my entry triggerit a gloomy scenario that is not there, and if you are not aware
was an impulsive trade. of this sort of pitfall, you will end up trading your feelings
The knowledge that entering that third portion was an im- instead of the setups that you are supposed to trade.
pulsive trade led me to experience strong negative feelings. It
is these strong feelings that dictate action, and in the grips of Claudio Demb has been an independent trader and investor
that powerful emotional state, I was forced to get out of the for over 20 years. He is a practicing psychiatrist and lives
position. This is a textbook case of a fight-or-flight response. with his family in Brookline, MA. He may be reached via
In that state of mind, you can no longer be rational. I ended email at claudiodemb@gmail.com.
up closing the entire position with a gain, but that doesnt mat-
ter. The point is I failed to execute my plan. In other words, TradeStation
this unrealistic dream I had was crushed and I was brought
down to reality.
A subscription to Technical Analysis of Stocks & Commodities magazine gets you so much more than just a
magazine! Every subscriber gets full access to the magazine in digital format. No waiting for the mail to be deliv-
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