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THE TRADERS’ MAGAZINE SINCE 1982

www.traders.com JANUARY 2019

Moon Rocket
To the moon & beyond 8

Volatility: What
They Don’t Teach
You In Grad School
Theory vs. reality 16

Double Bottom
Patterns
Increasing the odds 22

Inverse ETFs
For bear markets and
market downturns 28

INTERVIEW
David Stendahl on
seasonal patterns 32

review
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Contents JANUARY 2019, Volume 37 Number 1

7 Daytrading VWMA Breakouts INTERVIEW


by Ken Calhoun 32 David Stendahl
The Traders’ MagazineTM Adding in a volume component to On Seasonal Patterns
your moving average calculation by Jayanthi Gopalakrishnan
can help you know when With over 25 years of experience
EDITORIAL
editor@traders.com momentum may be slowing, which in trading and designing pattern
Editor in Chief Jack K. Hutson
may improve your trade timing. and momentum-style trading
Here’s how. systems, Stendahl is founder and
Editor Jayanthi Gopalakrishnan
president of Signal Trading Group
Production Manager Karen E. Wasserman
FEATURE ARTICLE (SignalTradingGroup.com) and
Art Director Christine Morrison
8 Moon Rocket focuses on trading the global
Graphic Designer Wayne Shaw
by Jay A. Leavitt, PhD futures markets. He follows a
Webmaster Han J. Kim
First it was to the stratospheres. systematic, low-leveraged, highly
Contributing Editors John Ehlers, diversified trading regimen.
Anthony W. Warren, Ph.D. Now we’re off to the moon, and
We spoke with him about his
Contributing Writers Thomas Bulkowski, Martin Pring, maybe even further. company’s latest developments in
Barbara Star, Markos Katsanos
using seasonal charts for trading.
16 Volatility: What They Don’t Teach
OFFICE OF THE Publisher You In Grad School 36 Explore Your Options
Publisher Jack K. Hutson by Perry J. Kaufman by Jay Kaeppel
Industrial Engineer Jason K. Hutson You’re most likely not going to Got a question about options?
Project Engineer Sean M. Moore
engage in a conversation about
Advertising Sales
“lognormal volatility” at a cocktail 43 Futures For You
4757 California Ave. S.W. party. But you may have come by Carley Garner
Seattle, WA 98116-4499
206 938-0570 Fax 206 938-1307
across the term in financial texts. Here’s how the futures market
advert@traders.com This may or may not surprise really works.
National Sales Manager Edward W. Schramm
you: When it comes to the stock
ESchramm@traders.com market, what you read may not 44 Algo Q&A
be completely accurate. Here’s by Kevin J. Davey
Circulation something that may turn out to be Got a question about system or algo
Subscription & Order Service 1 800 832-4642 important to you. trading?
1 206 938-0570 Fax 1 206 938-1307
circ@traders.com
Subscription Manager Sean M. Moore
22 Double Bottom Patterns: 46 Trading Perspectives
Increasing The Odds by Rob Friesen
Website
by Pawel Kosinski Some perspectives on the equities
http://www.traders.com
Any trading strategy can be world.
Staff members may be emailed through the Internet improved. Here’s a look at how
using first initial plus last name plus @traders.com trading double bottom patterns 60 How Does Impulsivity Affect
can be modified to give you better Your Trading Results?
Author­i­za­tion to pho­to­copy items for inter­nal or per­sonal trading results.
use, or the inter­nal or per­sonal use of spe­cific cli­ents, is grant- by Claudio Demb
ed by Tech­ni­cal Anal­y­sis, Inc. for users reg­is­tered with the Just knowing if you are trading
Cop­y­right Clear­ance Cen­ter (CCC) Transactional Reporting 26 Stock It To Me: based on impulse can, at the very
Serv­ice, pro­vided that the base fee of $1.00 per copy, plus Income-Based Investing least, make a difference in your
50¢ per page is paid directly to CCC, 222 Rosewood Drive,
Danvers, MA 01923. Online: http://www.copyright.com. For
by Gabriel Gonzalez approach to trading. And that can
those organ­iz­ a­tions that have been granted a photocopy Putting some of your investment have an impact on your bottom line.
license by CCC, a sep­a­rate sys­tem of pay­ment has been dollars to work in securities that
arranged. The fee code for users of the Transactional
Reporting Serv­ice is: 0738-3355/2019 $1.00 + 0.50.
offer payouts can be a good tradeoff
Sub­scrip­tions: USA: one year (13 issues) $89.99; between risk and reward. Here’s review
Magazines shipped outside the US require additional how to go about it. 38 StockCharts.com
postage as follows: Canada, US$15 per year; Europe,
US$25.50 per year; all other countries US$39 per year. Pro version of charting and
Sin­gle copies of most past issues from the cur­rent year are 28 Profiting From Inverse ETFs technical analysis website.
avail­a­ble pre­paid at $8 per copy. Prior years are avail­a­ble In Bear Markets
in book format (without ads) or digitally from www.traders.
com. USA funds only. Washington state res­i­dents add
by Leslie N. Masonson
sales tax for their locale. VISA, MasterCard, AmEx, and When the market heads down, there DEPARTMENTS
Discover accepted. Subscription orders: 1 800 832-4642 are still ways to profit that don’t 6 Letters To S&C
or 1 206 938-0570.
Technical Analysis of Stocks & Commodities™,
require taking an outright short 48 Traders’ Tips
The Traders’ Magazine™, is prepared from information position. Here’s a look at some of 57 Advertisers’ Index
believed to be reliable but not guaranteed by us with­out the inverse ETFs available, how 57 Editorial Resource Index
further verification, and does not purport to be complete. they have performed, and what 58 Futures Liquidity
Opinions expressed are subject to revision without noti-
fication. We are not offer­ing to buy or sell securities or
risks are involved. 59 Classified Advertising
commodities discussed. Technical Anal­ysis Inc., one or 59 Traders’ Resource
more of its officers, and authors may have a position in
the securities discussed herein.
The names of products and services presented in this
magazine are used only in an editorial fashion, and to the
benefit of the trademark owner, with no intention of infring-
n Cover: Jose Cruz
ing on trademark rights.
n Cover concept: Christine Morrison
Copyright © 2018 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
of Stocks & Commodities™ (ISSN 0738-3355) is published monthly with a Bonus Issue in March for $89.99 per year by Technical Analysis, Inc., 4757 California Ave. S.W., Seattle, WA 98116-4499. Periodicals
postage paid at Seattle, WA and at additional mailing offices. Postmaster: Send address changes to Technical Analysis of Stocks & Commodities™ 4757 California Ave. S.W., Seattle, WA 98116-4499 U.S.A.
Printed in the U.S.A.

4 • January 2019 • Technical Analysis of Stocks & Commodities


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Futures, foreign currency and options trading contains substantial risk and is not for every investor. Only
risk capital should be used for trading and only those with sufficient risk capital should consider trading.
The editors of S&C invite readers to submit their opinions and information on subjects understand it and don’t have any mistakes
relating to technical analysis and this magazine. This column is our means of communi- in my code. I am getting results close to
cation with our readers. Is there something you would like to know more (or less) about? what you presented in the article.
Tell us about it. Without a source of new ideas and subjects coming from our readers, this
magazine would not exist.
Email your correspondence to Editor@Traders.com or address your correspondence STIFFNESS INDICATOR
to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499. All Editor,
letters become the property of Technical Analysis, Inc. Letter-writers must include their full I read Markos Katsa-
name and address for verification. Letters may be edited for length or clarity. The opinions nos’s article about the
expressed in this column do not necessarily represent those of the magazine.—Editor stiffness indicator/strat-
egy (S&C, November
2018), which I found
STIFFNESS INDICATOR Position size = $10,000 very interesting.
Editor, Max open positions = 500 Could you let me know about the
I found the article “The Stiffness In- Portfolio size = $200,000 position sizing method he used in the
dicator” by Markos Katsanos in the Commissions: $0.01 per share backtest mentioned? It would be very
November 2018 issue interesting and Min position value = $100 no margin and helpful for me. Thank you.
wish to thank the author for sharing this no compounding David
insight with the trading community. It Data provider : TC2000
is a new way to look at trading. It was Author Markos Katsanos replies:
great that your magazine also offered Here are some questions that have come The position size was $10,000 per stock
the associated code for major trading up as I try to replicate his results: and no margin.
platforms and for Excel. I downloaded • What does he use for Position- If you want to replicate the test, the
the latter as a way to explore the stiffness Score? rest of the settings are:
indicator some more. • It appears that he has “AllowPo-
M. O’Neill sitionShrinking” unchecked. Is Max open positions=500
that correct? Portfolio size=$200,000 with no
Readers can find the code for Katsanos’ • What is he using for the round profit compounding
stiffness indicator in a sidebar to the lot size? It appears it’s 10. Is that Commissions: $0.01 per share
article for the AmiBroker platform, correct? Min position value=$100
and for other platforms in the Traders’
Tips section of our magazine and at our I understand that this is not a complete
website, Traders.com, in the Traders’ strategy. I will first try and replicate his
Tips area.—Editor results and then add some additional
2019 READERS’ CHOICE AWARDS:
rules to see if I can improve on them to
VOTING CLOSes SOON!
make a strategy. Thank you.
Cesar Alvarez Voting is underway for
www.AlvarezQuantTrading.com our 2019 Readers’ Choice
Awards! If you haven’t yet
voted, please take a minute
Author Markos Katsanos replies:
to visit traders.com and
I am not sure about all of the set- vote for your favorite prod-
tings because it was a while back ucts and services. We want to hear from
that I ran the tests. I am sure that I you! Voting ends December 31, 2018. The
didn’t use the positionscore function Readers’ Choice ballot at our website offers
and the AllowPositionShrinking was a list of products, services, websites, and
unchecked, but I am not sure about articles to choose from (or write in your own
STIFFNESS INDICATOR the round lot size. choices!) and later, you can see how your
Editor, Do let me know if you develop a viable picks compared with other readers’ choices.
I like what Markos Katsanos is conceptu- strategy and perhaps I can offer my tips Results of the voting will be featured in an
upcoming issue.
ally trying to capture in his November for improving the results.
2018 Stocks & Commodities article, Categories include: data • brokerages •
“The Stiffness Indicator.” I have been Reader replies: trading platforms • AI software • educational
trying to replicate the results. I am close Thank you for your response. I will test services • technical analysis websites •
but would like to know a little more about a couple of different values. My first favorite Stocks & Commodities article •
the difference I got in my results. Here is step when using a new indicator is to try and more!
the information I am going on: and replicate the results to make sure I
6 • January 2019 • Technical Analysis of Stocks & Commodities
TRADING ON MOMENTUM
2018 WINNER
Worth The Weight AI TRADING SOFTWARE

Daytrading VWMA Winner

Breakouts
16 years
in a row!

Adding in a volume component to your to minimize stops or lock in profits Build powerful
moving average calculation can help you correctly.
know when momentum may be slowing, This month’s strategy is designed to
trading systems in
which may improve your trade timing. help you let your winning trade work MINUTES
Here’s how. out long enough to capture most of the
price action, and then exit at the first sign
without coding

If
by Ken Calhoun of weakness. By using a VWMA, this
technique gives you a visual, technical
you have ever struggled with exit signal that is easy to follow.
knowing when to exit an ®

intraday trade, this month’s Using VWMA to daytrade


column may be helpful. It Some of the best daytrades are minor
combines a two-day high gap continuations, as illustrated in the
breakout pattern with a volume-weighted chart of Interpublic Group of Cos. (IPG)
moving average (VWMA) line. When it in Figure 1. Configure your two-day,
comes to daytrading volatile breakouts one-minute candlestick chart to use a
www.NeuroShell.com
successfully, you will find that exiting 50-period VWMA. Start by looking at 301.662.7950
your trade in a timely manner is the
most important decision you will make Continued on page 20
esignal

Figure 1: Volume-Weighted Moving Average Breakout (IPG). Here you see an example of a trade where you use the VWMA to help define intraday entries
and exits.

January 2019 • Technical Analysis of Stocks & Commodities • 7


8 • January 2019 • Technical Analysis of Stocks & Commodities
TRADING TECHNIQUES

There’re No Limits

Moon Rocket
First it was to the stratospheres. Now we’re off to the “Through The Stratosphere On The @NQ.” It trades
moon, and maybe even further. the technology emini, @NQ, on the 30-minute chart,
seven days a week, 24 hours a day.

I
am a mathematician. Fifty years ago, I Moon rocket is its successor. As a way to compare
started studying supersonic flows and some of these strategies’ unusual features, I’ll present
shock waves. I worked on the same ma- this allegorically as a trip through the planets of our
chine as was featured in Hidden Figures, solar system.
except mine was more powerful. Their Moon rocket gets a fuel boost from the 15-minute
machine was owned by NASA; mine, by chart that enables it to fly past the moon toward other
the Atomic Energy Commission. planets in our solar system.
Since then, my research has carried me through many The Leavitt convolution (which I introduced in my
fields, including chronobiology, linguistics, differential November 2017 S&C article “Trading The Tech Emini
equations, and most recently, prehistoric migrations. With The Leavitt Convolution”) was my response to
All of these studies have involved waves. the Hull challenge.
Challenges capture my attention. Two in the past To counter the economists winning the Nobel Prize,
decade or so have motivated my market analysis. I developed the riding the waves strategy (which I
In 2005, Tom Hull claimed his moving average had described in my August 2017 S&C article “Riding
the shortest lag of all moving averages. The Waves With The Leavitt Convolution”). It traded
In 2013, three Americans won the Nobel Prize in the SPX and the QQQ with bull put spreads relying
Economics. They were working independently, using on the Leavitt convolution and probabilities that
different principles, and came to the same conclu- options offer. It performed very well, showing that
sion. consistent and significant profits could be made over
This is my interpretation of the conclusion reached the short term.
by the three winners of the Nobel Prize: It makes I gave a presentation about the riding the waves
no difference if you are using technical analysis or strategy to a trading club. Someone suggested I try and
fundamentals; relying on spiritualists or gurus or apply the Leavitt convolution to futures on intraday
analysts or Jim Cramer; investing in stocks, indexes, charts—areas in which I had no prior experience. That
mutual funds, currencies, property, or collectibles. If resulted in a set of articles in this magazine, the last
it relies on its price, the chance of a short-term win- one being the March 2018 article on my stratosphere
ning trade is only 50/50. strategy.
Each strategy was an improvement on its predeces-
Above the stratosphere sor. Essentially, I threw out the book and started from
Stratosphere is an exceptional terrestrial trading scratch when I started working with futures. Many
strategy. It’s a strategy I developed and presented new concepts were developed, such as partitioning
JOSE CRUZ

in my March 2018 Stocks & Commodities article the wave.

by Jay A. Leavitt, PhD


January 2019 • Technical Analysis of Stocks & Commodities • 9
Overcoming lags derived from average 11
Lag can be likened to speed. We see lightning before we hear true range (ATR),
10
the thunder. The speed of sound is slower than the speed of the Keltner channel,
9
light. Moving averages of market data are always behind and Bollinger Bands.
the event. With technical analysis strategy, entries and exits Pivots and Bollinger 8
are determined by signals from indicators. Lag refers to the Bands provide strat- 7
amount of time the signal is given after the market has changed. egy entries. 6 y = mx + b
Thinking mathematically, the idealized simplified market is 5
represented by a straight line. Most of the market indicators Stratosphere results 4
used by analysts in their strategies are composed of moving 8/30/2012–8/31/2017 4 5 6 7 8 9 10 11 12 13 14
averages. This implies the best strategies should have the least According to many FIGURE 1: LINEAR REGRESSION
lag. Hull attacked the lag issue with his version of the moving benchmarks, the moon
average. My approach was much more aggressive: I exchanged rocket’s predeces-
the moving average with the straight line that is calculated from sor, stratosphere, is
the same data points. an excellent strategy.
Here’s a description of my strategies and their succession: However, it has two
peculiar behaviors.
• Leavitt projection When the trade size
Mathematicians call the process of finding the line linear regres- changes, it doesn’t
sion. If you were an engineer, you would say this was a least trade on the same FIGURE 2: EXPANSIONS AND CONTRAC-
square’s fit of a straight line to a set of N data points (Figure 1). dates. This is related TIONS
Then the line is extrapolated one point. In contrast with moving to its money manage-
averages, which signal their information sometime in the past, ment. Many of its measurements, such as rate of return (ROR),
this extrapolation represents the value of the market in the next aren’t constant, nor do they grow linearly.
trading session. Unlike moving averages, which have positive
lag, the Leavitt projection has a negative lag of -1. Features of the stratosphere backtest:
• Linear growth in net profit (Figure 3) with nonlinear rate
• Leavitt convolution
The Leavitt convolution is the extrapolation of the square root
of Leavitt projections. It is an extrapolation of extrapolations.
This is aggressive! When I used to teach material involving
these concepts I always mentioned how dangerous it was to
extrapolate. This is a forecast two sessions ahead. Don’t get
nervous. I do not have a crystal ball. Remember, this is an
idealized, simplified market represented by a straight line. The
real market does not behave this way.
See the sidebar “Leavitt Convolution Advantage” for its
main points.

• Stratosphere
The wave is the area between the fast and slow Leavitt convo-
lutions. Partitioning the wave into expansion and contraction FIGURE 3: LINEAR GROWTH IN NET PROFIT
areas had a dramatic effect (Figure 2). It moved the signal back
several bars from the crossover. Stratosphere has all sorts of
stops including a stop-loss based on the number of eminis
being traded and the entry price. Some of the other stops are

Leavitt Convolution Advantage


• The Leavitt convolution has negative lag because it
plots in front of the leading edge.
• It has fewer whipsaws relative to the moving aver-
ages.
• The Leavitt convolution does not predict the market.
FIGURE 4: NONLINEAR RATE OF RETURN

10 • January 2019 • Technical Analysis of Stocks & Commodities


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Moon Rocket (Gains) Statistics
# @NQ
Assumed
Required
Account
Net Profit Rate of
RINA
Profit
Fac-
Percent
Time in
Number Percent
Ratio Avg
Win over The data in the two spreadsheets (Figures 5 & 6) is from
a two-year backtest of each of these strategies ending
Risk [AR] [NP] Return of Trades Wins
Size [RAS] tor Market Avg Loss
1
2
$100,000
$200,000
$4,415
$7,530
$70,200
$158,810
27%
29%
637.17
747.39
1.73
1.87
47.69%
47.29%
978
983
33.95%
37.33%
3.25
3.07
4/30/2018. I used the information in the spreadsheet with
5 $500,000 $17,925 $427,690 31% 813.45 1.99 46.73% 983 40.90% 2.87 11 columns to analyze the gains. The other corresponds
10 $1,000,000 $35,250 $879,540 32% 856.00 2.03 46.60% 988 41.80% 2.83 to the losses. Each is divided with the moon rocket data
on the top and stratosphere’s below.
25 $2,500,000 $83,080 $2,184,360 32% 868.22 2.02 46.90% 982 39.71% 3.06
50 $5,000,000 $165,580 $4,387,360 32% 873.64 2.02 46.91% 982 39.61% 3.08
100 $10,000,000 $330,580 $8,794,360 32% 876.60 2.03 46.91% 982 39.61% 3.09 Column 1 has the number of @NQ being traded. Col-
200 $20,000,000 $660,580 $17,608,360 32% 878.08 2.03 48.09% 982 39.61% 3.09 umn 2, labeled “Assumed risk [AR],” equals column 1 *
$100,000. Column 3, “Required account size [RAS],” is
Stratosphere (Gains)
Required Profit Percent Ratio Avg
# @NQ
Assumed
Risk [AR]
Account
Net Profit
[NP]
Rate of
Return
RINA Fac- Time in
Number
of Trades
Percent
Wins
Win over the minimal deposit to cover the drawdown in column 2
in the other spreadsheet.
Size [RAS] tor Market Avg Loss
1 $100,000 $6,460 $39,020 17% 299.40 1.45 49.65% 700 40.29% 2.01
2 $200,000 $9,930 $88,050 18% 324.58 1.52 42.94% 720 42.56% 1.95 Traditional analysis uses only a single row because if
5 $500,000 $13,945 $233,650 19% 348.55 1.60 44.95% 807 48.95% 1.67 it is assumed, the other rows are simply scale versions
of the initial row. Here, it is not the case. This analysis
10 $1,000,000 $29,360 $459,130 19% 355.78 1.61 42.47% 871 48.56% 1.70
25 $2,500,000 $81,250 $1,108,795 18% 365.94 1.59 40.33% 929 46.18% 1.85
50 $5,000,000 $155,250 $2,202,250 18% 374.63 1.59 39.60% 950 45.68% 1.89 will start by looking at the columns.
100 $10,000,000 $327,900 $4,339,720 18% 365.95 1.57 39.43% 964 45.02% 1.92

Reward vs. risk


200 $20,000,000 $630,000 $8,610,500 18% 366.55 1.57 38.83% 975 44.31% 1.97

FIGURE 5: MOON ROCKET AND STRATOSPHERE GAINS


• Profit factor = Gross profit/gross loss
of return (Figure 4) as a function of the number of @NQ {{ Guideline: Seek ratios over 2.
being traded • RINA index = Net profit/(average drawdown * percentage
• High average win to average loss ratio of time in market)
• High RINA due to low time of equity exposure to risk {{ The RINA index rewards strategies that spend
• Low drawdown less time in the market, decreasing the inherent
market risk.
• Good returns for the small investor and excellent returns
for the large investor
{{ Guideline: Seek ratios over 100, but over 200 is
ideal.
• Round-trip commission plus slippage $20.
(For more about the RINA index, see “Evaluating Trading Strate-
• Moon rocket gies” at https://inovancetech.com/strategyEvaluation.html.)
Moon rocket keeps all of stratosphere’s keys. The partition A discussion of large returns is meaningless without consid-
of the wave is expanded to create transition areas, leading to ering the risks. RINA is an index that takes into account how
expansion. Expansion is much time equity is at risk. It rewards for smaller times. As a
Moon Rocket (Losses) the region where both fast measure of ratio of risk to reward, RINA is more sophisticated
Max Draw- and slow are increasing, than variations of profit factor, which ignore the time that equity
the distance between them is at risk. After all, black swans of various colors seem to appear
Down Trade Maximum
MDD / MML /
# @NQ Close to Monthly Loss
AR AR
Trade Close
[MDD]
[MML]
isn’t decreasing, and fast in the market more often than you would expect.
1 ($4,415) -4.42% ($2,555) -2.56% is greater than slow. This
2 ($7,530) -3.77% ($4,590) -2.30%
implies expansion starts Percent of time in market
with a crossover. Just before In Figure 7, the scale for RINA is on the left-hand side while
5 ($17,925) -3.59% ($10,125) -2.03%
10 ($35,250) -3.53% ($19,350) -1.94%
25 ($83,080) -3.32% ($42,880) -1.72% the crossover, it is possible the profit fac-
50 ($165,580) -3.31% ($84,880) -1.70%
the other two conditions tor scale is on
are satisfied. These are the this chart’s
100 ($330,580) -3.31% ($168,880) -1.69%
200 ($660,580) -3.30% ($336,880) -1.68%
Stratosphere (Losses) transition areas. r ig ht. T he
Max Draw-
Down Trade Maximum
The strategy still trades recommend-
# @NQ Close to
MDD /
AR
Monthly Loss
MDD /
AR on the 30-minute chart. A ed minimum
criterion was required to jus- profit factor
Trade Close [MML]
[MDD]
1 ($6,460) -6.46% ($1,480) -1.48% tify the earlier entry in these value is 2.
2
5
($9,930) -4.97%
($13,945) -2.79%
($2,190) -1.10%
($8,495) -1.70%
new areas. The 15-minute Strato-
10 ($29,360) -2.94% ($21,020) -2.10% chart provided the solution. sphere never
25 ($81,250) -3.25% ($48,090) -1.92% The strategy looks for areas reaches this
50
100
($155,250) -3.11%
($327,900) -3.28%
($84,880) -1.70%
($202,860) -2.03%
on the 15-minute chart that value al-
200 ($630,000) -3.15% ($391,880) -1.96% satisfy the three conditions though moon FIGURE 7: PROFIT FACTOR. Stratosphere never reaches 2,
although moon rocket reaches 1.99 at 5 and surpasses it for all
FIGURE 6: MOON ROCKET AND STRATO- whenever the 30-minute rocket reach- the subsequent values. The recommended ideal RINA index is
SPHERE LOSSES chart is in transition. es 1.99 at 5 200. Stratosphere’s index is always above 225.
12 • January 2019 • Technical Analysis of Stocks & Commodities
and surpasses it for all the subsequent values. The recom- in my March 2018 S&C article that detailed my stratosphere
mended ideal RINA index is 200. Stratosphere’s index is strategy.
always above 225.
There appears to be contradiction here. In Figure 8, moon Net profit = AP * Number of trades
rocket spends more time with equity at risk than stratosphere It showed the AP for the five-year backtest was:
does. However, its RINA is substantially higher, beginning
with an index over 600. 3 * %wins – 1
AP = Average winning trade *
There are only three terms in the RINA index. One is the 2
numerator and the other two are in the denominator. Since the This has not changed for these two years. In contrast, the AP
drawdowns of the two strategies are close, stratosphere has the for the moon rocket strategy is, as a minimum, represented
advantage in the denominator. This implies that the numerator, by:
which is the net profit, must be significantly greater in order to
explain the huge difference in their RINAs. 4 * %wins – 1
AP = Average winning trade *
Both strategies place equity at risk less than 50% of the 3
time. This explains their high RINA indexes (Figure 9). All The chart in Figure 11 shows the product of the # of trades *
of stratosphere’s scores are above 299—a sign of excellence. % wins * ratio. These values are almost uniformly more than
However, most indexes of moon rocket are all above 600—and 50% higher for moon rocket. These values explain why net
that is remarkable! profit is so much higher than stratosphere’s.

Average win/average loss Net profit


The ratio of average trade win over average trade loss leads to The net profit for 10 shares increases by a factor of 12.5 over
their RINA index difference (Figure 10). Stratosphere enjoys trading one share. The ratio of trading 100 shares to trading
ratios neighboring 2 while moon rocket values are almost all 10 has a factor of 10.
over 3. It is worth noting that trading a block of 10 single shares
You will find a discussion of average profit per trade [AP] produces better results than trading 10 singularly.
The net profit for both
strategies has good linear fits.
However, moon rocket is close
to 50% higher.

Rates of return
We will assume the amount of
money deposited in an account
is the amount you are willing
to risk. TradeStation calculates
the rate of return based on the
size of this deposit. The larger
the difference between the de-
FIGURE 8: HOW LONG IN THE MARKET? Moon rocket FIGURE 10: RATIO OF AVERAGE TRADE WINS OVER LOSSES. posit and observed drawdown,
spends more time with equity at risk than strato- Stratosphere’s ratios are around 2 while moon rocket’s values the more conservative the
sphere does. However, its RINA is substantially higher, are almost all over 3. investment. Thus, the column
beginning with an index over 600.
of assumed risk represents an
extremely conservative invest-
ment. Similarly, the column
of required account sizes is
extremely optimistic. It as-
sumes drawdown in the future
won’t exceed the maximum
drawdown observed in the
backtest.
With either assumption,
moon rocket performs signifi-
cantly better than stratosphere
FIGURE 9: EQUITY AT RISK. Both strategies have high RINA FIGURE 11: HIGHER NET PROFIT. These values are almost
does. In the “assumed risk”
indexes. Stratosphere’s scores are above 299 and most indexes uniformly more than 50% higher for moon rocket. chart in Figure 12, it is 50%
of moon rocket are all above 600. higher. Its performance in the
January 2019 • Technical Analysis of Stocks & Commodities • 13
required account size in Figure 13 is investment groups. The group trading
astronomical. one @NQ, the technology emini, both
Its actual ROR is somewhere be- long and short, for two years yielded
tween these two superlative values. In a phenomenal net profit of $70,000.
both charts, moon rocket appears to I used Trade­Station to calculate the
level off at around 10 shares. None of ROR. For the extremely conservative
the four curves are linear. Only one is assumption of AR, $100K, it came up
nondecreasing. with a ROR of 27%. With the optimistic
assumption that the drawdown in the
Dealing with the future won’t exceed the maximum
consequences FIGURE 12: ASSUMED RISK ROR drawdown realized in the backtest of
Whether you go to the moon or to Mars, about $4,400, it calculated an extrater-
the nice thing is all spaceships have restrial ROR of 142%. Even doubling
toilets. The issue is: Do the strategy’s this risk yields a return of 110%. These
losses drive you to the toilet? are returns you would expect for a
trader living on the moon.
Maximum drawdown During this period, earthbound buy
Maximum drawdown is calculated & hold traders of @NQ had an ROR
as the maximum difference from a of 51.48% while the RAS traders’
trade close to a subsequent lower trade annualized return was almost three
close. times higher.
There isn’t a big difference between This singular alien report applies to
them in terms of magnitude (Figure 14). FIGURE 13: REQUIRED ACCOUNT SIZE ROR group 2. The net profit of $158,000 is
Most of their drawdowns as a percent more than double the $70,000 of group
of assumed risk are in the -3.5% range 1. The RORs continue to grow.
(Figure 15). The net profit for group 5 is more
than $17,000 ahead of what you would
Monthly excursions expect from five times the net profit
Most traders I know would love it if for group 1. Its ROR of 31% AR only
their monthly reports looked like the grows to 32% for the remainder of the
ones in Figure 16. They have small destinations.
drawdowns—less than 2% of the The rocket ship earned handsomely
maximum scale on their chart. Those for group 10. It was fueled with $1 mil-
are few in number and they have large lion in its “assumed risk” account. Its
average monthly returns. The biggest required account size has a deposit of
difference between these histograms is FIGURE 14: SIMILAR DRAWDOWNS. $35,000. With this new fuel, it bypassed
only their scaling. the moon and headed for Mars. The
Martian net profit is almost $880,000.
Trip through the planets Its gain of $170,000 from 1 to 10 is
Choices for various initial deposits and notable, especially when compared
corresponding reward are displayed to the $17,000 gain from 1 to 5. So,
in Figure 17 on the image of the view assuming a cash deposit that doubles,
through the planets. Each shows three the $35,000 of required account size
initial deposits, labeled AR, 2*RAS, results in an ROR of 131%. Effectively,
and RAS. They carry different levels this number is maintained throughout
of risk. A deposit is required to cover the rest of our solar system.
the risk, which is shown on the chart. The net profit for group 25 is ap-
There is a reward for completing the proximately two and a half times the
trip. It is shown on the next line in the FIGURE 15: DRAWDOWNS AS PERCENT OF ASSUMED RISK. net profit for trading 10. The AR of
column labeled “net profit.” Next on Most drawdowns are around -3.5%, which isn’t so bad. $2.5 million resulted in the net profit
that row are the RORs associated with exceeding $1,000,000 per year.
that deposit. This consistency of growth in net profit is maintained for
Only one chart is displayed of net profit (Figure 18) because group 50. Other statistics show little or no change with desti-
they all look virtually the same. Obviously, their scales are nation 25.
different. The data for group 100 is as expected. Neither value for AR
I’ll refer to the number of contracts being traded as different or RAS has changed. We waved through the portholes as we
14 • January 2019 • Technical Analysis of Stocks & Commodities
Monthly Net Profit - @NQ 30 min (5/1/16 18:30 – 4/30/18 17:00) Monthly Net Profit - @NQ 30 min (5/1/16 18:30 – 4/30/18 17:00)
1 @NQ 2 @NQ
13000 30000
12000

My approach was much more


11000 25000
10000
9000 20000

aggressive: I exchanged the


8000
Net Profit ($)

Net Profit ($)


7000 15000
6000
5000 10000
4000
3000
2000
5000
moving average with the
straight line that is calculated
1000 0
0
-1000 -5000

from the same data points.


-2000
-10000
8/16 12/16 4/17 8/17 12/17 4/18 8/16 12/16 4/17 8/17 12/17 4/18

Monthly Net Profit - @NQ 30 min (5/1/16 18:30 – 4/30/18 17:00) Monthly Net Profit - @NQ 30 min (5/1/16 18:30 – 4/30/18 17:00)
10 @NQ 100 @NQ
130000 1300000
120000 1200000
110000 1100000
100000 1000000
90000 900000

passed Elon Musk’s rocket.


80000 800000
Net Profit ($)

Net Profit ($)

70000 700000

After our heat shield started to melt and we passed Icarus,


60000 600000
50000 500000
40000 400000
30000
20000
300000
200000 we decided to turn back. We had surpassed the goal of reach-
ing the moon.
10000 100000
0 0
-10000 -100000
8/16 12/16 4/17 8/17 12/17 4/18 8/16 12/16 4/17 8/17 12/17 4/18 This report of group 200 confirms that the three rates of
FIGURE 16: MONTHLY EXCURSIONS return stabilized after group 5, with values of 32%, 133%, and
167%.
With this information, you can configure the investment that
best fits your needs and expectations.
High rates of return are not unusual. But they are often ac-
companied by large drawdowns. Having a high RINA index is
rare. Uniquely, moon rocket enjoys a high ROR with a super-
lative RINA index and low drawdown. It is a trading strategy
appropriate for both the small investor and large institutions.

Jay Leavitt has a master’s and PhD in applied mathematics


from the Courant Institute of Mathematical Sciences and he also
attended the University of Italy at Pisa on a Fulbright Scholar-
ship. He has been active as an advocate for the disabled and
has served on multiple commissions. He taught mathematics
and computer science at the University of Minnesota and has
since retired from SUNY at Buffalo as Director of Academic
Computing. He now develops computerized trading systems.
He may be reached via email at leavitt@buffalo.edu.

Further reading
Leavitt, Jay A. [2017]. “Beyond The Hull With Leavitt Projec-
tions,” Technical Analysis of Stocks & Commodities,
FIGURE 17: A VIEW FROM SPACE
Volume 35: February.
[2017]. “Riding The Waves With The Leavitt Convo-
lution,” Technical Analysis of Stocks & Commodities,
Volume 35: August.
[2017]. “Trading The Tech Emini With The Leavitt
Convolution,” Technical Analysis of Stocks & Commodi-
ties, Volume 35: November.
[2018]. “Through The Stratosphere On The @NQ,”
Technical Analysis of Stocks & Commodities, Volume
36: March.
• RINA index: http://signaltradinggroup.com/wp-content/
DCSArticles/TSperform.pdf
• RINA index: Slaff, Tad [2015]. “Evaluating Your Trading
Strategy,” https://inovancetech.com/strategyEvaluation.
html.
FIGURE 18: ON TO MARS

January 2019 • Technical Analysis of Stocks & Commodities • 15


Challenge The Theory

Volatility: What They Don’t


Teach You In Grad School
You’re most likely not going to engage in a conversation about 1. Optimization is overfitting and lacks forecasting
“lognormal volatility” at a cocktail party. But you may have ability.
come across the term in financial texts. This may or may not 2. Price movement isn’t normally distributed.
surprise you: When it comes to the stock market, what you
read may not be completely accurate. Here’s something that Together, these two characteristics of the market make modern
may turn out to be important to you. portfolio theory not adaptable to real trading. But that isn’t a

G
new revelation. So it’s puzzling that it would still be taught
by Perry J. Kaufman the same old way.

raduate finance courses teach the theory of price Measuring volatility


relationships and tools for working with them. You A bigger problem is how volatility is measured. Volatility is
MAREKULIASZ/SHUTTERSTOCK

would like to think that what is taught is always used to determine risk and often your position size. If you
correct. Take the concept of modern portfolio measure volatility incorrectly, then you don’t get the right
theory, that is, optimizing the assets to find the balance of diversification and you have more risk than you
best portfolio in terms of reward to risk. Over the thought.
years we have learned two important facts: Most literature on volatility in the stock market says there is
16 • January 2019 • Technical Analysis of Stocks & Commodities
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a lognormal relationship between price and volatility. That’s positions in stocks with lower prices. I’ll show how to do
the same as saying volatility increases as price increases, both that in the next section.
in a percentage relationship. You would then expect that when
the stock price of Bank of America (BAC) doubles in price Where did the idea of lognormal
from $10 to $20 that the volatility, measured as the daily come from?
percentage change, would increase in proportion, or at least First, you may be interested in how the analysts arrived at their
it would increase noticeably. That’s not the case. lognormal concept. I’m going to speculate that it was adopted
Figure 1 shows a scatter diagram of price versus price from the futures markets, as were many other techniques. In
changes for BAC. The price changes stay about the same and Figure 5 is a scattergram of cash corn prices and daily returns.
possibly even decline, as prices move between $5 and $48 per The dotted line is a log curve showing that as prices increase,
share. Figure 2 shows the price versus the daily returns, or volatility increases at a slowing rate. This is what stock analysts
percentage changes. Daily returns clearly get more volatile think happens in the equity markets, but it doesn’t.
at low prices.
Sizing positions in a
Looking abroad futures portfolio
I chose BAC because it had a wide price range, but you may I’ll start with futures because position
feel that it’s a poor example. Figures 3 & 4 show the same sizing is done with volatility parity, a
relationships for one of China’s largest companies, Tencent sensible process that doesn’t depend
(TCTZF). Here, the price differences are somewhat larger on an overarching theory. It simply
when prices are higher. But on a percentage basis, it’s still not measures the current volatility of each
enough. Figure 4 shows a relationship similar to BAC. You market and assigns position size in
can prove this for yourself using Excel by creating a column proportion. As an example, the table in
of daily price returns and applying a scatter diagram of the Figure 6 shows the allocations of five
price column and the return column. futures markets based on an investment
The conclusion is that there should be smaller relative of $100,000.

Figure 1: price vs. price changes. Price changes are relatively stable in FIGURE 3: PRICE VS. PRICE CHANGES IN TENCENT
Bank of America stock.

Figure 2: price vs. daily percentage change. As prices decline, daily FIGURE 4: PRICE VS. DAILY PERCENTAGE CHANGE IN TENCENT
returns become more volatile in BAC.

18 • January 2019 • Technical Analysis of Stocks & Commodities


2-year notes, which has the lowest volatility. Next is the euro­
bobl, then crude oil and copper, and then the Nasdaq index,
which has the highest volatility. This is intuitively correct be-
cause we expect interest rates to have the lowest volatility.
Note that there is no “theory” applied. It’s simply a measure
of the current volatility. Of course, volatility can change on
short notice, so you need to adjust the ATR period to the
holding period of your system. A slower system might use a
60-day ATR and a faster one a 10-day ATR. In either case
you are adjusting the market conditions.

Sizing positions in a
stock portfolio
FIGURE 5: DAILY RETURNS IN CORN PRICES. As prices increase, volatility Stocks are not as easy. In futures, you
increases at a slowing rate.
trade only about 25% of your total
investment, leaving reserves to absorb
the equity fluctuations that come with
high leverage. That means in the table
in Figure 6, the actual investment
was $400,000, and $100,000 was
designated for margin. But in stocks
you will want to use the entire investment. That will require
FIGURE 6: SIZING POSITIONS IN FIVE FUTURES MARKETS. Here you see the
allocation of crude oil, eurobobl, copper, Nasdaq, and two-year Treasury notes.
some arithmetic using Excel.
The allocation is based on a $100,000 investment. You will want to compare the use of the ATR method with
the common practice of deriving the position size by divid-
ing an equal allocation ($20,000) by the current stock price.
This is shown in the table in Figure 7. You’ll see that Visa
(V) has the lowest price and largest allocation, while Ama-
zon (AMZN) has the highest price and smallest allocation.
FIGURE 7: sizing positions in a stock portfolio. Here you equally al-
locate the entire investment across five stocks. So if your investment is $100,000 According to our charts, that will put too much on V and too
you allocate $20,000 to each stock. Then you divide the $20,000 by current stock little on AMZN.
price to get the position size. The table in Figure 8 goes through the process of using
ATR and rescaling to the investment size. You start with the
same method as futures by calculating the 20-day ATR for
each stock. When you divide the $20,000 allocation by the
ATR you get very large positions. The row “Value” shows
the value of each position. Note they are far greater than the
$20,000 allocated and the total investment. This is why you
need to find the ratio of the total $100,000 investment to the
sum of the “Value” line, which is 0.0179, and scale the posi-
tion size by that ratio. That gives the correct position sizes on
FIGURE 8: Position size using ATR and rescaling to the investment the line “Adj Share Size.” The total value of those positions
size. You first calculate the 20-day ATR for each stock. When you divide the $20,000
allocation by the ATR the positions are very large. So you find the ratio of the total will be $100,000.
$100,000 investment to the sum of the “value” line, which is 0.0179, and scale the The last row in Figure 8 shows the ratio of the allocation
position size by that ratio. That results in the adjusted share size. using only price (Figure 7) and the ATR allocation. AMZN
is smaller, NFLX is bigger, but this depends on the current
volatility. V and BAC have similar position sizes, indicating
• First, divide the investment equally for the five markets, similar volatility and risk, although the BAC price is nearly
giving them each $20,000. twice the price of V.
• Calculate the 20-day average true range (ATR) for each
(line 3). Avoid low-priced stocks
Even with a method of allocating based on current volatility,
• The number of contracts will be the allocation divided low-priced stocks can be unpredictable. You might enter a
by the (ATR × conversion × currency value). trade when volatility is low but within a few days it increases
by four times that amount. Figure 1 shows that BAC was 10
The results are on the last line. The largest position goes to times more volatile at $5 than it was at $50. It’s safest to avoid
January 2019 • Technical Analysis of Stocks & Commodities • 19
trading stocks that are below $10. There are many others to
choose from.
If you measure volatility
Sizing positions correctly incorrectly, then you don’t
While it may be extra work, equalizing the risk of each stock
in your portfolio maximizes your diversification and, in doing get the right balance of
that, minimizes your risk. It is sometimes necessary to look diversification and you have
beyond what is taught in school and prove it for yourself. That more risk than you thought.
is the way all good analysts should operate.

Perry Kaufman is a trader and financial engineer. He is


the author of many books on trading and market analysis, [2017]. “Optimization—Getting It Right,” Techni-
including Trading Systems And Methods, 5th ed. (with the cal Analysis of Stocks & Commodities, Volume 35:
first edition published in 1978 as a seminal book in the field September.
of technical analysis), and A Guide To Creating A Successful [2013]. Trading Systems And Methods, 5th ed., Wi-
Algorithmic Trading System (2016). For questions or com- ley.
ments, please go to www.kaufmansignals.com. [2016]. A Guide To Creating A Successful Algorithmic
Trading System, Wiley.
Further reading [2003]. A Short Course In Technical Trading, Wiley.
Kaufman, Perry J. [2017]. “In Search Of The Best Trend,” [1995]. Smarter Trading, McGraw-Hill.
Technical Analysis of Stocks & Commodities, Volume
36: July.

tRaDIng on momentUm
TRADING ON MOMENTUM

calhOun in the position as long as price stays approach allows traders to capitalize on
Continued from page 7 above the red VWMA line. longer intraday trends than the classic
less-than-10-minute open range daytrad-
Step 4: Once price touches or breaks ing breakout scalping does.
a variety of minor gap charts, so that down under the red line, you close As usual, with this technique, most
you can see this pattern in action before the position. daytrading should be done between 9:30
you trade. and 10:30 am, before price action slows
This strategy can also be used for inSightS: Why thiS down. When you’re looking to capital-
intraday swing trading, in which your techniQue WorkS ize on strong breakouts like these, it is
goal is to enter your trade early in the This technique is helpful mainly to visu- important to be decisive and exit your
morning and exit toward the end of the ally tell you when to close out an open, trades as soon as a breakdown under the
session, as long as price continues up- long daytrade. The underlying technical red VWMA line occurs.
ward and holds over the VWMA. You analysis simply uses a classic moving
may wish to test values other than the average breakdown to signal uncertainty
default 50-period setting, depending on or reversal of a directional uptrend. the vWMa approach
the chart you are trading. The reason I use a VWMA instead allows traders to
of a simple moving average (SMA) is
Step-by-Step action pLan because the addition of volume in the
capitalize on longer
Here’s how you can start using the moving average calculation helps you to intraday trends.
VWMA breakout strategy: know when momentum is slowing down
due to a change in trading volume. This
Step 1: Scan for charts, premarket, generates a signal line that is more ac- Ken Calhoun is a producer of trading
that have small (less than $1) gaps curate for identifying correct exits. courses, a live trading room, and video-
up, as seen in Figure 1. based training systems for active traders.
trade management tipS He is founder of TradeMastery.com,
Step 2: Enter your position at $0.20 Both initial and trailing stops for intraday an educational resource site for active
above the opening 9:30 am price. trades in the $20–70 per share range is a traders, and is a UCLA alumnus.
maximum of $0.40, often as tight as $0.10
Step 3: Once you get an order fill, stay for fast-moving charts. The VWMA
20 • January 2019 • Technical Analysis of Stocks & Commodities
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Change Things Up!

Double Bottom Patterns:


Increasing The Odds
Any trading strategy can be improved. Here’s a look at how them here. The backtesting results are shown in the table
trading double bottom patterns can be modified to give you in Figure 1 and I will use these results as a benchmark for
better trading results. further testing.

by Pawel Kosinski High volume

In
In my previous article, I tested the performance of the double
my September 2018 S&C article, “Double Bot- bottom chart pattern for the case where higher volume occurred
toms Revisited,” I showed some backtesting at the right or left bottom. But what if we approach it a bit
results of the double bottom chart pattern. In this differently and look for very high volume on any day within
article, I would like to continue the discussion the entire pattern? This may indicate institutional buying
and show how a trader can make this pattern somewhere in the pattern, not necessarily at the bottoms. In
even more profitable. As in the previous article, Figure 2, note the high-volume day during the double bottom
NAPHAPOL HPS/SHUTTERSTOCK

I used software I created for recognizing the double bottom formation. On such a day, I state that trading volume must
pattern and used it for backtesting. be at least twice the average volume of the previous 14 days.
I had a look at stocks from the S&P 500 and Russell 3000 In addition, this volume had to be the highest of the past 60
indexes from 2001 until the beginning of 2018. The rules trading days. Of course, you can also try other combinations,
are similar to those in my previous article so I won’t repeat although I don’t think it will change the conclusions.
22 • January 2019 • Technical Analysis of Stocks & Commodities
charting

Market S&P 500 Russell 3000 The backtesting


Profit factor 1.62 1.22 results are shown
Maximum drawdown -6.93% -8.47% in Figure 3 and you What if we approach it a
Number of trades 943 3047 can compare them
Profitable trades [%] 66.60% 61.31%
with those in Figure
bit differently and look for
Average trade [%]
Win/loss
1.64%
0.81
1.06%
0.79 1. The results are very high volume on any day
Number of days held 33 32 better, which sug- within the entire pattern?
Figure 1: STANDARD DOUBLE BOTTOM PATTERN. gests the strategy
Here you see the backtesting results for a standard with high volume
double bottom for two markets: the S&P 500 and Rus- somewhere in the
sell 3000 stocks. The results constitute a benchmark
for further analysis. pattern outperforms. The only negative much better than for the standard case
aspect is that the number of days you shown in Figure 1. The results for S&P
hold a stock is a little longer. 500 stocks are notable. Nevertheless, the
Let us now try to be more specific number of trades is three times less than
and assume the high volume occurred for the standard case, so the quality of
relatively recently, namely on one of the statistics may be questionable.
the days between the right bottom and We could do it a bit differently: I
breakout day. In other words, the high came across an idea that three higher
volume is associated with the recent closes should lead to superior results.
increase in price. Backtesting results Therefore, I considered patterns where
are shown in Figure 4. Note that the the closing price of the breakout day
results really improve. For example, the (“today”) is above the closing price of
percentage of profitable trades has even “yesterday” and this is above the closing
reached 70% for S&P 500 stocks. price of the “day before yesterday” (for
clarity, this is illustrated in Figure 5 b).
The final ascent The backtesting results are displayed in
We discovered that high volume be- Figure 7. I would say the results aren’t
tween the right bottom and breakout so bad, but they’re not so good either.
would improve performance. Now The only improvement I can see is the
let’s consider a situation when the final reduction of maximum drawdown, that
ascent takes place within a short period is, some bad trades were eliminated.
of time, that is, price accelerates. This Therefore, I don’t think it is necessary
means—at least we hope—that the smart to search for such patterns, even though
FIGURE 2: ATTENTION: HIGH VOLUME. A high volume money has decided to buy the stock and you should feel encouraged when you
is detected somewhere in the pattern.
we should join them. In my backtesting, can spot them.
Market S&P 500 Russell 3000 I assume the duration of the final ascent Another issue I wanted to investigate
Profit factor 1.84 1.31 is shorter than the descent from the top is the presence of a long bullish candle
Maximum drawdown -5.28% -6.85% in the middle of the pattern to the right (see Figure 5c). This resembles a heavy
Number of trades 491 1590 bottom, that is, b < a, as it appears in truck on the highway that is unlikely to
Profitable trades [%] 69.86% 62.45%
Figure 5a. be stopped easily. In my backtesting, I
Average trade [%] 2.45% 1.63%
Win/loss 0.80 0.80
The backtesting results can be seen stated this happens when the candle’s
Number of days held 41 40 in the table in Figure 6. It is interesting body is longer than the bodies of the
FIGURE 3: BACKTESTING RESULTS OF HIGH-VOLUME that the results are promising and again three previous candles. The results are
DAY. The new strategy outperforms the standard double
bottom performance.

Market S&P 500 Russell 3000


Profit factor 2.05 1.27 a
Maximum drawdown -3.78% -5.65%
Number of trades 197 695
Profitable trades [%] 70.05% 61.29%
Average trade [%] 2.89% 1.49%
Win/loss 0.90 0.81 b
Number of days held 44 47 (a) (b) (c)
FIGURE 4: BACKTESTING RESULTS WHEN HIGH VOL- FIGURE 5: THE FINAL ASCENT. Here we look at three scenarios: a) The time between the right bottom
UME OCCURRED BETWEEN THE RIGHT BOTTOM AND and breakout day is shorter than the time between the day with maximum price and right bottom (b < a);
BREAKOUT DAY. The percentage of profitable trades b) Three upper closes occurred on the breakout; c) A candle with a long body detected on any day between
has even reached 70% for S&P 500 stocks. the right bottom and breakout day.

January 2019 • Technical Analysis of Stocks & Commodities • 23


in the table in Figure 8. opening price is almost the same as the day’s low (in other
What we can see is the strategy leads to satisfactory results, words, the shadows/wicks of the candle are very small). The
perhaps comparable to the ones seen in Figure 7. It means word “almost” means that I allow the upper and lower shadow
this strategy is slightly better than the standard one, but the of the daily candle to be at maximum $0.05 long. This sce-
difference isn’t significant. nario indicates price constantly increased on this day. I don’t
pay attention to the total length of the candle. This situation
The breakout day is represented in Figure 9a and the backtesting results appear
Finally, I will analyze the breakout day. I will consider three in Figure 10.
potential scenarios. The scenarios are displayed in Figure 9. The results are good. Note the extremely high percentage
First, what if the breakout day is associated with a “bullish of profitable trades for S&P 500 stocks. Note, however, there
candle”? I’ll loosely define a bullish candle as a day where is a significant reduction of trades so statistical results are
the closing price is almost the same as the day’s high and the less reliable. Also, the number isn’t so marvelous for Russell
3000 stocks, although they are still
Market S&P 500 Russell 3000 Market S&P 500 Russell 3000 decent. This indicates you should use
Profit factor 2.35 1.33 Profit factor 3.22 1.56 different markets when backtesting
Maximum drawdown -3.27% -5.67% Maximum drawdown -1.54% -3.59%
your results, not only “blue chips.”
Number of trades 322 1062 Number of trades 75 302
Profitable trades [%] 74.22% 63.56% Profitable trades [%] 82.67% 67.22%
Anyway, the existence of a bullish
Average trade [%] 2.93% 1.55% Average trade [%] 3.05% 1.68% candle seems to be positive for your
Win/loss 0.83 0.78 Win/loss 0.67 0.76 trading.
Number of days held 34 36 Number of days held 29 29 Next, we can have a look again at
FIGURE 6: RESULTS FOR DISTANCE BETWEEN RIGHT FIGURE 10: BACKTESTING RESULTS FOR BULLISH the candle with a long body—that
BOTTOM AND BREAKOUT DAY. This scenario showed BREAKOUT CANDLE. Note the extremely high percent- is, the body is higher than it was
the best results. It outperformed the others. age of profitable trades for S&P 500 stocks. Note the
significant reduction of trades, making statistical results the previous three days—but this
less reliable. time it occurs on breakout. This is
Market S&P 500 Russell 3000 Market S&P 500 Russell 3000
illustrated in Figure 9b.
Profit factor 1.71 1.19 Profit factor 1.77 1.35 The results can be seen in Figure
Maximum drawdown -4.30% -5.96% Maximum drawdown -3.78% -5.47% 11. The new strategy outperforms.
Number of trades 341 1122 Number of trades 385 1346 Actually, the win/loss ratio is lower;
Profitable trades [%] 68.91% 61.32% Profitable trades [%] 70.39% 64.86% this may be because by the time we
Average trade [%] 1.85% 0.90% Average trade [%] 1.78% 1.32% buy a stock, the price is well above
Win/loss 0.78 0.76 Win/loss 0.75 0.74
the breakout line.
Number of days held 37 36 Number of days held 29 29
Finally, we can try to find out if the
FIGURE 7: Results for WHEN three higher FIGURE 11: RESULTS FOR WHEN BREAKOUT DAY HAD
closes occurred on the breakout. The results LONG CANDLE BODY. Again, the strategy outperforms upper shadow/wick of the candle on
are decent but not necessarily outstanding. even though the win/loss ratio is lower. the breakout day is short (see Figure
9c). This way, you make sure the
Market S&P 500 Russell 3000 Market S&P 500 Russell 3000
Profit factor 1.85 1.25 Profit factor 1.70 1.24 candle won’t resemble the bearish
Maximum drawdown -3.07% -4.90% Maximum drawdown -5.82% -7.75% shooting star candlestick. Here, I
Number of trades 223 809 Number of trades 788 2537 assume the upper shadow has to be
Profitable trades [%] 67.71% 62.18% Profitable trades [%] 67.77% 61.92% shorter than the candle’s body. Of
Average trade [%] 2.09% 1.02% Average trade [%] 1.81% 1.09% course, you could argue this is still
Win/loss 0.90 0.77 Win/loss 0.81 0.78 not enough, but I wish to keep the
number of trades as large as possible.
Number of days held 30 31 Number of days held 33 32
FIGURE 8: RESULTS FOR LONG BULLISH CANDLE. If FIGURE 12: RESULTS FOR WHEN BREAKOUT DAY
a long bullish candle occurred recently, the performance CANDLE HAS SHORT UPPER SHADOW/WICK. The The results are in Figure 12.
is also better than for the standard case. results outperform, even though the difference between It is clear the results outperform,
this strategy and the standard one isn’t significant. even though the difference between
this strategy and the standard one
isn’t significant.

Increasing the odds


We have found that bullish price
action within a chart pattern may
increase the odds. This may occur
as high trading volume, bullish
(a) (b) (c) candles, high price acceleration,
FIGURE 9: BREAKOUT DAY. Here you see possible scenarios on the breakout day: a) a bullish candle; b) a candle
with a long body; c) a short upper shadow/wick. Continued on page 62

24 • January 2019 • Technical Analysis of Stocks & Commodities


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Finding The Middle Ground

Stock It To Me:
Income-Based Investing
Putting some of your investment dollars to work in securities focused investor can buy stock in a company, becoming
that offer payouts can be a good tradeoff between risk and part owner. With this, certain ownership rights within
reward. Here’s how to go about it. the issuing company may be granted.
• How can the investor gauge the riskiness of a chosen
by Gabriel Gonzalez
investment or security? One way is to look at credit rat-

L
ings on the security or issuing entity. Financial entities,
ast time, in my October 2018 article, I wrote about
including governments, are given credit ratings to measure
safety-based investing, which focuses on relatively
credit worthiness. These credit ratings are issued by vari-
stable and established investment vehicles including
ous financial institutions, each of which implements their
notes & bonds, CDs, and commercial papers. This
own method of analysis to determine ratings.
time, I’ll take a step beyond that and look at what
could deliver a little more return but that still won’t
keep you awake at night. Income-based investing in a nutshell
As a middle ground between risk and return, income-based As we drift away from the calm, relatively safe shores of safety-
investing forfeits some of the certainty of safety-based invest- based investing, we find ourselves heading into the deeper, less
ing, but it is still more certain than capital-based investing. With certain waters of income-based investing. Here, the proverbial
WILLIAM POTTER/SHUTTERSTOCK

this increase in risk comes a greater potential for reward. fish are bigger, as bonds are no longer the primary investment
Here is some of what could be involved in income-based vehicles. Instead, they have been replaced by securities com-
investing: monly known as stocks. Though stocks come in a variety of
forms and functions, they center around a company’s profits
• Instead of purchasing debt from a company, the income-
and assets, rather than their debt and interest.
26 • January 2019 • Technical Analysis of Stocks & Commodities
INVESTING

Taking stock…in stocks


Stock is the general term used to describe a security of own-
ership—in this case, partial ownership of a company. Often Credit quality is the metric
sold by startup companies and established ones alike, they
offer the holder a claim on some of that company’s earnings,
by which all financial
and under certain circumstances, assets. Payout is usually institutions—including
quarterly, and needless to say, the more stock you own, the federal, state, and local
bigger the claim. Stocks come in two main forms: common governments—are measured.
and preferred:

Common stock investment grade. Speculative grade describes those entities


The basic, run-of-the-mill income securities are known as that carry higher risk, while investment grade are those that
common stock. They give the owner a stake in the company— carry lower risk. Though each ratings agency has its own
meaning you get a portion of the issuing company’s earnings. unique naming system and method for devising credit scores,
These dividends, or payouts, typically occur quarterly, after the grades generally range from the highest and most reliable
the company finalizes its income statement for that timeframe. as being “AAA” to the lowest being “D,” which is usually
Along with the periodic payout, owning common stock in a given to companies that fail to meet their financial obligations,
company gives the owner various powers within that company, which is to say, they default.
such as voting rights in selecting a board of directors and on
some policymaking. Entering default mode
When a business entity fails to meet its financial obligations,
Preferred stock it is said to be in default. While in default, that business’s as-
In the next tier, we have what is referred to as preferred stock. sets are liquidated to pay off any outstanding debts. It is here,
Like common stock, preferred stock gives its owner a claim under these circumstances, where the type of stock you own
on the issuer’s profits, and dividends are usually issued in the plays a role in collection. Typically, the first to collect are the
same intervals. But unlike its common counterpart, preferred creditors and bondholders, then the preferred shareholders,
stock tends to pay out more, at least in the short term. and finally, the common shareholders.
As far as voting rights go, owning preferred stock doesn’t
provide voting rights the way owning common stock does. The takeaway
However, under certain circumstances, voting rights may be With a little bit of luck and planning for the long haul, income-
granted in lieu of dividends. Preferred stock is considered based investing can be a good middle ground between risk
less risky than common stock because it gets higher priority and reward. The voting and policymaking power that comes
in final payout, should the issuing company ever be forced to with becoming a part owner of a publicly traded company
liquidate due to default (more on this later). can offer insights into how the most profitable companies are
Some preferred stocks are callable, meaning that after a set run. Pairing that with devices like the credit rating system
date they can be bought back by the issuing company at an will help investors make better-informed decisions in their
at-par value. Preferred stocks can also be convertible, mean- investment plans.
ing they can be exchanged for common stocks. Both of these
are terms usually set by the issuer. Gabriel Gonzalez is a freelance author and software designer
with a bachelor’s degree in computer science. His latest book,
Giving (good or bad) credit a work of fiction, is Althea: An Oneiric’s Tale.
where credit is due
Needless to say, investing is a risky thing. With so many factors Further reading
playing into the overall worth and reliability of a corporation, Gonzalez, Gabriel [2018]. “Safety Is More Than A Dance,”
such as credit payment history, revenue, and earnings, it can Technical Analysis of Stocks & Commodities, Volume
be overwhelming to try to determine which are the safest 36: October.
bets. For this reason, the credit quality system was devised. [2018]. “Investing: An Objective-Based Primer,”
This being said, it should be noted that despite the elaborate Technical Analysis of Stocks & Commodities, Volume
methodologies used in calculating a credit rating, it is not an 36: August.
exact science. www.spratings.com/en_US/understanding-ratings
Credit quality is the metric by which all financial institu- www.moodys.com/researchandratings
tions—including federal, state, and local governments—are www.fitchratings.com/site/definitions
measured. Entire ratings agencies were constructed for the www.share.com/a-guide-to-investing/investment-types/
sole purpose of this. The biggest three are Standard & Poor’s stocks--shares
(S&P), Moody’s, and Fitch Ratings. Any share- or bond-issuing
entity falls under one of two categories: speculative grade or
January 2019 • Technical Analysis of Stocks & Commodities • 27
When The Bear Knocks

Profiting From Inverse ETFs


In Bear Markets
When the market heads down, there are still ways to profit Most likely, there will be a few false breakdowns or whipsaws
that don’t require taking an outright short position. Here’s along the way before the big decline takes hold, but once it
a look at some of the inverse ETFs available, how they have does, your indicators will have signaled that situation, so you
performed, and what risks are involved. can take action. The key is to preserve assets and grow them

T
in all market conditions. As traders and as readers of this
by Leslie N. Masonson magazine, we know that technical analysis provides a time-
tested, nonemotional approach to profitably participating in
he current bull market has had a terrific run both bull and bear markets, while employing risk-management
since its launch on March 9, 2009. Since then, strategies to limit losses. Technical analysis isn’t perfect, but
through October 12, 2018, the major market if you can capture 80% of the downtrend, and then 80% of
averages have risen between 283% (DJIA) to the uptrend, your asset base will grow nicely.
477% (Nasdaq Composite), with the S&P 500 Since the topic of this regular column of mine is ETFs, I
advancing 303%. Inevitably, a bear market will occur, since will review a number of inverse, that is, bear, ETFs that are
stock markets always experience boom and bust cycles. The suitable trading vehicles during market declines. Of course,
key to profitable investing is to be ready beforehand with a you can also short individual stocks or ETFs, or buy put op-
defensive strategy when the market trend starts to turn down. tions on stocks or ETFs, or use other combinations of finan-
No one wants to sit through a 50%+ drawdown, something cial instruments to accomplish the same objective, but those
that occurred once in each of the 2000–2002 and 2007–2008 options will not be covered here. A few worthwhile books
bear markets. But how do you know when to switch from that provide insight into shorting equities in bear markets or
offense to defense? investing in bear markets are listed in the “Further reading”
You probably have heard financial gurus, financial advisors, section at the end of this article.
and well-known personalities like Jack Bogle of Vanguard
fame claim that no one can time the market. That is pure Inverse ETFs
rubbish based on research that has been done by Meb Faber One of the simplest ways to profit from a correction (defined
as well as by academicians and timers tracked for years by as a decline of 10%) or a bear market (a decline of 20% or
Timer Digest and TimerTrac. By using one or more of the more) is to buy inverse ETFs, which rise in price as the market
LIGHTSPRING/SHUTTERSTOCK

basic technical tools such as moving averages, MACD, RSI, falls. One major advantage of using these ETFs is that they
and stochastics with weekly charts, you can observe the mar- can be purchased through a regular brokerage account and
ket peaking, then stalling out, and then declining. It is just a in retirement accounts. Since the ETF itself goes short, you
matter of looking at a chart right in front of you instead of are buying the ETF long. Retirement accounts do not permit
listening to all the talking heads on the business networks or margin or borrowing, so the only way to go short is to use
reading useless daily blogs. inverse ETFs or buy put options.
28 • January 2019 • Technical Analysis of Stocks & Commodities
WHY TRADE ETFS?

Following are some pro-


viders of inverse ETFs and
some background on them.

ProShares
ProShares introduced the
first inverse ETFs on June
21, 2006. They offered the

Stockcharts.com
Short S&P 500 (SH), Short
Dow 30 (DOG), Short QQQ
(PSQ) and Short Mid-cap
400. Six months later on FIGURE 1: INVERSE ETF PERFORMANCE IN BULL MARKET. Holding inverse ETFs in a bull market is suicide. Losses over
January 23, 2007, a Short 85% occurred in the last bull market.
Small-Cap 600 (SBB) and
Short Russell 2000 (RWM) ETF were added. These ETFs were
Bear Market Short Duration Declines
set up to return -1x of the underlying benchmark on a single Symbol
5/30/07 to 3/9/09 12/23/15 to 2/9/16 1/25/18 to 3/23/18
day. That means if the S&P 500 declines 1% today, the SH
ETF will rise by 1% and vice versa. Due to day-to-day com- SH 90.92% 10.44% 6.64%
pounding, an exact opposite price performance to the ETF’s DOG 79.11% 9.03% 11.11%
underlying index won’t be seen, as will be illustrated later. PSQ 55.34% 15.84% 5.36%
According to xtf.com, these ETFs are passively managed,
nonleveraged, and listed on the NYSE Arca. By far, SH has SPX -53.90% -8.99% -8.84%

the most assets at $1 billion with PSQ coming in second at BTAL N.A. 14.05% 2.56%
$394 million, and DOG third at $234 million. RWM has $271 FIGURE 2: INVERSE ETF PERFORMANCE IN BEAR MARKET. SH, PSQ, and
million is assets, while SBB only has $3 million. SH trades DOG all had solid performance during this period with gains exceeding 55% while
3 million shares daily compared to 1.2 million for PSQ, and
the S&P 500 declined 54%.

367,000 for RWM. All these ETFs are cap-weighted, except


DOG which is price-weighted. This is unique to the Dow DOG, and -17.4% for PSQ.
Jones Industrial Average. Note that both options and futures Look at the price performance data (Figure 2) comparing
are available for SH, PSQ, and RWM, but only options are SPY with SH, DOG, and PSQ during the last bear market from
available on DOG, and neither are available for SBB. May 30, 2007 through March 9, 2009. Logically, there should
The expense ratios are similar with DOG, PSQ, RWM, be a 1:1 negative correlation and mirror image between the
and SBB at 0.95%, and SH at 0.89%. Incoming money flows S&P 500 benchmark and the inverse ETF SH. In actuality,
tend to be highest after a bear market has started. Neverthe- SH was up about 90.9% for that period while the S&P 500
less, some investors and institutions keep a small portion of was down 53.9%. That resulted in an unexpected gain of an
their money in these funds year-round as insurance against a additional 41.8 percentage points because of daily compound-
decline. They are willing to give up part of the upside so that ing. Clearly, being invested in any of these three inverse ETFs
they are partially protected if a “black swan” or large market during this last bear market was very profitable.
drop occurs at random. During the two most recent market declines prior to October
PSQ had inflows of $110.6 million for one month ending 2018, the inverse ETFs also outperformed as expected. In
on October 12, 2018, much larger than any of the four other order to cash in during these three periods, you can use your
ETFs. That makes sense as it advanced 4.41% for that period, favorite technical indicators (Figure 3) to enter the market
as the market took a tumble from October 2 through 11. So as when it begins its decline to confirm the trend change. Notice
the market falls, fund inflows start accelerating from institu- in the chart that the brunt of the 2000–2002 and 2007–2009
tions, short-term traders, and investors. bear markets were avoided when the MACD and RSI gave
Since we’ve been in a big bull market, it is no surprise all simultaneous sell signals. Consider using stop limits based
these ETFs have had negative performance since the market on a percentage decline to a certain support level, two ATRs,
bottom. According to Figure 1, these inverse ETFs collapsed or other criteria you are comfortable with in case the market
in price at least 84%, whereas the S&P 500 index skyrocketed reverses direction and begins to advance.
over 315% (dividends not included). Clearly, inverse ETFs
should never be used as long-term buy & hold vehicles. They AGFIQ
are most suited for traders, short-term market declines, during One unusual ETF to consider in bear markets is AGFIQ US
market corrections, and bear markets. Market Neutral Anti-Beta Fund (BTAL). This seven-year-old
More recently, according to xtf.com, as of October 12, 2018, ETF was not around during the last bear market so I could
these three ETFs have annualized five-year returns as follows: not include it in the first column in Figure 2. This unique ETF
-10.6% for RWM, -12.1% for SH, -12.2% for SBB, -12.9% for rebalances monthly by buying long very low beta stocks and
January 2019 • Technical Analysis of Stocks & Commodities • 29
(WBIC). Moreover, Direxion and
ProShares offer many leveraged
bear ETFs for gold, dollar, fixed
income, sectors, international,
and indexes.

Advisor Shares Ranger Eq-


uity Bear (HDGE) came into
existence on January 11, 2011.
Its goal is to achieve capital ap-
preciation by using short sales
on US-traded securities with
low earnings quality or down-
grades or aggressive accounting
practices to hide operational de-
ficiencies. It has a high expense
ratio of 2.86% with $145 million
in assets. It is an actively man-
aged cap-weighted fund with
37 positions with options but
no futures. The average daily
trading volume is 206,000 shares
FIGURE 3: NASDAQ COMPOSITE MONTHLY CHART 1998–2010. Using MACD and RSI produced four sell signals and
with a monthly inflow of $4
three buy signals during this period. The only missed uptrend was early 2004 to November 2008. million as of October 12, 2018.
Its five-year annualized return
is -10.8%. HDGE has an 80%
shorting very high beta stocks. There are 383 equally weighted correlation to RWM, as well as to ProShares Ultra Short
stocks in the portfolio. Some negatives concerning this ETF Russell 2000 (TWM).
include a very high 1.93% expense ratio, AUM of only $11
million, low average daily trading volume of 4,000 shares, Direxion Daily S&P Bear (SPDN) performance mirrors that of
and no availability of options or futures. However, it had a SH within a few basis points even though its portfolio contains
five-year annualized return of +0.65% (through October 5, only 50 securities while SH holds 505 securities. It was born
2018), which is much better than the approximate -12% return on June 8, 2016 and has a limited track record. It is -1X the
of the inverse ETFs mentioned earlier, and acceptable as the S&P 500 index, which is cap-weighted. It has a small market
market soared higher. cap of $26.2 million with an average daily trading volume of
As shown in Figure 2, BTAL gained 14.05% in the late 2015 13,600. There are no options or futures available. The annual
to early 2016 market correction, the second-best performance yield is 1.16% with an annual expense ratio of 0.56%. It has
compared to the three inverse ETFs, and had a low but posi- a 97.5% correlation to SH and SPXS (-3X).
tive return of 2.56% in the two-month market decline in 2018
when the S&P 500 declined 8.84%. WisdomTree Dynamic Bearish U.S. Equity Fund (DYB)
Believe it or not, BTAL’s price performance for 2018 through came into existence on December 23, 2015. According to
October 8, 2018 was 4.76% compared to 7.78% for the S&P the WisdomTree website and fact sheet, “The WisdomTree
500, and -7.85% for SH, -7.84% for DOG, and -14.06% for Dynamic Bearish US Equity Fund seeks to track long equity
PSQ. So BTAL performs decently in bull markets and holds positions or long US Treasury positions and short equity posi-
up fairly well in short market declines of less than 10%. But tions. The long equity positions consist of approximately 100
we need to see how it performs in the next bear market to US large- and mid-capitalization stocks that meet eligibility
assess its true value. requirements and have the best combined score based on
fundamental growth and value signals. Stocks are weighted
Other bear market ETFs according to their volatility characteristics. The short equity
There are around 100 ETFs that have the positions include the largest 500 US companies, weighted
designation “bear” in their name. For ex- by market capitalization, designed to act as a market risk
ample, here are five: Advisor Shares Ranger hedge.”
Equity Bear (HDGE), Direxion Daily From December 28, 2015 its performance mirrored SH
S&P Bear (SPDN), WisdomTree Dynamic through April 8, 2016, but then did not decline as the market
Bear (DYB), WBI Bull/Bear Quality 1000 rallied through 2018. It was up 7.2% for that entire period when
(WBIL), and WBI Bull/Bear Quality 2000 the S&P 500 was up 40.1% and SH cratered 32.9%. So the
30 • January 2019 • Technical Analysis of Stocks & Commodities
dynamic nature of this ETF certainly paid off if you had held
it for the entire period. This ETF’s strategy appears complex,
so I recommend investors and traders who are considering this The key to profitable investing
ETF for purchase do their due diligence reading the appropriate is to be ready beforehand with
materials on the website to make sure they understand exactly a defensive strategy when the
how this ETF operates and the risks involved.
market trend starts to turn
WBI Shares down.
This ETF offers eight bull/bear ETFs focused on various
attributes including rising income, value, and yield quality.
WBI is a dividend ETF shop with an active risk management
bent. Their ETFs were offered beginning in August 2014 so 3%, and vice versa. Because of this leverage, this type of ETF
performance history is limited. Two are mentioned here: is mostly used by daytraders and short-term traders.
In today’s rising interest rate environment, the use of a
WBI Bull/Bear Quality 1000 ETF (WBIL), born on Au- bear fixed-income ETF makes sense since as interest rates
gust 25, 2014, focuses on global large-cap high-quality and rise, the price of the bear ETF rises as well. Direxion offers
dividend-paying stocks. three nonleveraged fixed-income ETFs—SAGG, TYNS, and
Its investment focus is on multifactor quantitative analysis TYBS. Two 3X treasury ETFs offered include TY0 and TMV
with active risk management using the Russell 1000 Value for more aggressive traders.
Index as its benchmark. This ETF participates in market Check Direxion’s website for complete details on ETFs of
advances and protects principal during declines using its interest to you. And be particularly careful with leveraged
risk-management approach. Its expense ratio is 1.05% with ETFs, since their prices reset daily, resulting in price com-
a 30-day SEC yield of 0.84%. Its average daily trading pounding. If the market goes against you, the results can be
volume is low at 6,444. This ETF has underperformed its disastrous.
benchmark by gaining 1.70% since inception compared to
7.12% for the benchmark through June 30, 2018. Are you interested in learning more about using exchange
From August 27, 2014 to October 9, 2018 it did not do as traded funds (ETFs) in your trading? Leslie N. Masonson,
well as SH when the market declined, but performed bet- an active ETF trader, is president of Cash Management
ter than SH from November 2, 2016 to the present when it Resources, a financial consulting firm that focuses on ETF
advanced 36.6% compared to the S&P 500 up 37.3% and strategies. He is the author of Buy—Don’t Hold: Investing With
SH -29.0%. ETFs Using Relative Strength To Increase Returns With Less
Risk; and All About Market Timing, as well as Day Trading
WBI Bull/Bear Yield 2000 ETF (WBIC) was also born On The Edge. His website is www.buydonthold.com, where
on August 25, 2014. It invests in stocks with high-quality he writes a weekly blog. To submit topics for future columns,
fundamentals and high yield using a similar quantitative reach him at lesmasonson@yahoo.com.
analysis and risk management as WBIL. Its 30-day SEC
yield is 1.59% and pays a dividend monthly. It has under- Further reading
performed its Russell 2000 Value benchmark since August Elder, Alexander [2008]. Sell & Sell Short, John, Wiley &
2017 to the present. It has lost 1.18% versus a gain in the Sons, Inc.
benchmark of 9.59%, through June 30, 2018—not a good Faber, Meb [2009]. The Ivy Portfolio: How to Invest Like the
showing. Average daily trading volume is 9,983. Top Endowments And Avoid Bear Markets, Wiley.
From August 27, 2014 to October 9, 2018 it didn’t do as Harding, Sy [1999]. Riding The Bear: How To Prosper In The
well as SH when the market declined, but performed bet- Coming Bear Market, Adams Media Corporation.
ter than SH from November 2, 2016 to the present when it Mamis, Justin, and Robert Mamis [1977]. When To Sell:
advanced 13.3% compared to the S&P 500 up 37.3% and Inside Strategies For Stock-Market Profits, Cornerstone
SH -29.0%. Based on the limited time WBIC and WBIL Library.
have been active, it is hard to tell how they will perform in Masonson, Leslie N. [2011]. All About Market Timing: The
a big correction or bear market. So I wouldn’t recommend Easy Way to Get Started, 2d ed., McGraw-Hill.
them at this time. Yanis, Edward M. [2002]. Riding The Bull, Beating The Bear:
Market Timing For The Long-Term Investor, John Wiley
Leveraged ETFs for aggressive traders & Sons, Inc.
Direxion offers the largest array of leveraged bull and bear www.advisorshares.com • www.agfiq.com • www.direxion-
ETFs. As far as bearish ETFs, they offer five 1.0 beta (-1X) or investments.com • www.proshares.com • www.wbishares.
nonleveraged ETFs, one 2.0 beta high-yield ETF, and 20 3.0 com • www.xtf.com
beta sector, international, and fixed-income ETFs. In a 3X bear
ETF, if the underlying securities decline 1%, the ETF gains
January 2019 • Technical Analysis of Stocks & Commodities • 31
INTERVIEW

A Reason For Season

David Stendahl
On Seasonal Patterns
With over 25 years of experience in trading and designing pattern and momentum-
style trading systems, David Stendahl understands risk management. Stendahl
is founder and president of Signal Trading Group (SignalTradingGroup.com)
and focuses on trading the global futures markets. He follows a systematic,
low-leveraged, highly diversified trading regimen. He co-created various
financial software that centers on evaluating trading systems, position sizing
application, and portfolio construction. You can follow him on Twitter at @
David_Stendahl.
Stocks & Commodities Editor Jayanthi Gopalakrishnan communicated with
David Stendahl by phone and email in November 2018 about his company’s
latest developments in using seasonal charts for trading.

David, we last talked time. If it does, then I match normal


more than a year ago. seasonal tendencies against the current
Anything new you’ve year, looking for high levels of correla-
worked on since then? tion. If a market is closely tracking its
First, let me say thank normal tendencies, I can then produce
you for having me back. a short-term forecast, which then al-
I always enjoy our talks. lows me to have a directional bias for
As a systems trader, I like
Yes, it has been a busy year, as I’ve the underlying market. It’s just one to program everything so
been refining the tools I use to evaluate more tool I can use to improve my that when we are in the
the seasonal tendencies for the futures systematic trading style. midst of a trade, I can
markets. My team and I have made great
strides by improving the process we use What are some of the benefits of
remain calm and allow the
to determine when to watch seasonal using seasonal charts? systems to make all the
charts and when to avoid them. Seasonal Seasonal charts act as a roadmap trading decisions.
tendencies are ingrained in every market. to past seasonal trends. Now, I’m not
Now that we have better analytics, we saying they are precise, but they can
know when to focus attention on the provide a general directional bias for Can you give us an overview of your ap-
correct markets. many markets. Take for example the proach to applying seasonal charts?
bearish bias in crude oil in the last half My approach is to measure the accu-
While it’s true that markets can be of the year as we end the summer driv- racy of the seasonal trends and exploit
cyclical, you can’t expect markets to ing season. Or the bearish bias in corn them to the best of my ability. I don’t
move a certain way at certain times. during the growing season June through use the seasonal charts in the traditional
What underlying variables do you August. Or the bull phase in sugar after sense where we buy and sell on specific
look at to identify seasonal or cyclical the September–October harvest. Or even dates. The true use for our seasonal charts
patterns? the bull run in the S&P as we deal with is as a position-sizing tool, indicating
As a systems trader, I like to program year-end tax selling. when to trade aggressively.
everything so that when we are in the Knowing that these tendencies exist If the seasonal projection is bullish or
midst of a trade, I can remain calm and comes from analyzing seasonal charts. bearish, and this outlook corresponds
allow the systems to make all the trading A quick look at a seasonal chart could with our trading system, we might
perfectbright/SHUTTERSTOCK

decisions. When it comes to seasonal very well save you a lot of money if you consider trading more aggressively. If,
charts, they too can be controlled. I find yourself fighting a seasonal trend. however, our system conflicts with the
basically have an on/off switch for my People say the trend is your friend; well, seasonal outlook, we might consider
seasonal charts. First, I evaluate whether I’d add that a seasonal trend is your trading more conservatively. The bottom
a market has seasonal consistence over best friend. line is we respect the seasonal trends
32 • January 2019 • Technical Analysis of Stocks & Commodities
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strong potential long/short Step 5 is the final step, where we
trading opportunities. This summarize our seasonal analytics into
We like to watch for step can be used weeks in a short-term trend forecast. We look at
markets that are seasonally advance and is used simply 7/14/21-day return projections, based on
accurate. So even if a major to draw attention to markets weighted seasonal charts, to focus atten-
or minor disruptive influence that require focus so that we
have the necessary time to
tion on potential market movers. Based
on these time horizons, we will get a
occurred, it won’t alter our apply our analysis. It preps short-term upside, downside, or mixed
analysis. us to know which markets outlook. Those markets that receive a
could be in play. definitive strong upside or downside
Step 2 focuses on a long- projection will factor into our position-
term overview of typical sizing algorithm. It’s a lot of extra work
so much that we use them to guide our seasonal trends, so we review seasonal to create these charts and projections, but
position sizing. charts over 5/10/15/20-year periods. This it certainly has had a positive influence
step highlights possible turning points on our performance.
What does trading conservatively mean that could turn into new seasonal trends.
for you? It essentially provides a visual overview Are there specific markets that are
Position sizing is the true key to trading to prepare us for change. more seasonal than others? If so,
success. So when I refer to conservative Step 3 begins our analytical process, which ones?
trading, I’m talking about lowering my where we look for consistence between Most certainly. We run a report every
position size when seasonal trading the 5/10/15/20-year seasonal charts. If night that ranks 40 global futures markets
conditions are working against my the charts are all highly correlated to based on seasonal depth, meaning high
systems. As an example, if our trading one another, we consider them to have consistency over time (Figure 2). The
systems are long a particular market and high seasonal depth, meaning seasonal markets that rank the highest for seasonal
the seasonal trend is bearish, we would consistence over time. Markets that offer consistence over a long period of time are
lower the number of contracts normally high seasonal depth often provide bet- lean hogs, S&P 500, and RBOB Gasoline
traded. It’s a simple way to minimize ter projections for our trading. When it at present. The markets that offer the most
trading exposure during strong seasonal comes to seasonal analysis, consistence erratic seasonal tendencies over time are
trends. Of course, we only do that after is the key. copper, wheat, and gold.
we have measured the seasonal trend Step 4 allows us to evaluate the real- On my Twitter account (@Da-
with our projections. time accuracy of the seasonal charts. We vid_Stendahl) I’m always pointing out
compare the current year contract against which markets are most receptive to
What specific steps do you follow then to various seasonal timeframes, looking for seasonal analysis. I think it also helps
determine your seasonal projections? similarities to past seasonal
I like to follow rules, so I have a five- tendencies. Markets that are
step seasonal trading process to generate accurately tracking their
bull/bear projections. I won’t bore you 5/10/15/20 seasonal charts
with all the details, but let me give you are great candidates for fur-
a brief overview as to what we do to ther analysis. These are the
generate our projections. markets we want to closely
Step 1 deals with seasonal opportuni- monitor over the next few
ties where we highlight markets that offer weeks (Figure 1).

Figure 1: seasonal accuracy chart. Periods highlighted in gray offer strong direc- Figure 2: seasonal depth chart. Markets high on the list
tional bias. offer greater seasonal consistency over time.

34 • January 2019 • Technical Analysis of Stocks & Commodities


people new to trading with their market but again, it’s well worth
selection. If you have a choice between the effort.
two markets, I’d gravitate to the one People say the trend is your
with greater seasonal consistence. A What type of outside friend; well, I’d add that a
little seasonal analysis can go a long inf luences can affect
way toward market selection. seasonal charts?
seasonal trend is your best
When it comes to markets that are When it comes to sea- friend.
seasonally accurate, we generate a top- sonal charts, you must
10 list (Figure 3). Currently, the energy keep a close eye on major
markets top the list with crude oil, RBOB events that can alter normal seasonal for coming up with an automated way
Gasoline, and London Gas Oil leading tendencies over the short or even long to factor seasonal analysis into our sys-
the way. The seasonal top-10 list changes term. Here are a few examples to watch tematic trading style.
on a regular basis, more so than does the for: major moves in the US dollar can
slower seasonal depth ranking. influence wheat exports, droughts can Thank you for telling us about the
So you have to keep a close eye on the influence corn, diseases can influence newest additions to your approach,
markets, since seasonal trends can come cattle/hogs, winter freeze can influence David.
into and out of phase very quickly. coffee, political unrest can influence
crude oil, political tariffs can influence Further reading
What are some challenges with soybeans, and selective earthquakes can Gopalakrishnan, Jayanthi [2017]. “Risk
seasonal analysis? influence copper. Management With David Stendahl,”
Seasonal charts can be found all There is a lot to watch for when it interview, Technical Analysis of
over the web. The challenge, however, comes to changing seasonal tendencies. Stocks & Commodities, Volume
is they can quickly become out of date. These events will most certainly influ- 35: August.
Because we update all our charts nightly ence the market over the near term, but Gopalakrishnan, Jayanthi, and Bruce
to maintain our seasonal projections, their disruptions will be absorbed into Faber [2012]. “David Stendahl And
the main challenge is time. We have to the seasonal tendencies over time. If the Position Sizing,” interview, ” Techni-
spend over an hour each night to run influence is truly major and long-lasting, cal Analysis of Stocks & Commodi-
the projections. It’s a lot of added work then the seasonal tendencies will take ties, Volume 30: August.
to adjust our position-sizing algorithm, longer to adjust. That’s just a trading Helweg, Mark, and David Stendahl
reality. [2002]. Dynamic Trading Indicators:
The good news is that we Winning With Value Charts And Price
like to watch for markets that Action Profile, Wiley.
are seasonally accurate. So Stendahl, David [1999]. Profit Strategies:
even if a major or minor dis- Unlocking Trading Performance
ruptive influence occurred, With Money Management, Wiley.
it won’t alter our analysis. [2000]. The Systematic Trader:
That’s the true beauty to our Maximizing Trading Systems &
five-step seasonal trading Money Management, video/audio.
process. It can adjust to any Zamansky, Leo, and David Stendahl
market conditions. It’s either [1998]. “Secure Fractional Money
on or off. If conditions are Management,” Technical Analysis
correct, we use our seasonal of Stocks & Commodities, Volume
projections. If they’re not, 16: July.
FIGURE 3: SEASONAL TOP-10 LIST. The list identifies the markets we don’t. So over the last
with the strongest current seasonal accuracy levels. year, I’m proud of my team

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January 2019 • Technical Analysis of Stocks & Commodities • 35


Explore Your Options

Got a question about options? Jay Kaeppel has over three decades of experi-
ence in the options markets. He was a head trader for a CTA firm, an options
trading software developer, and is a portfolio manager for an investment
management firm. He also spent several years writing a weekly column titled
“Kaeppel’s Corner” and now publishes a blog, “Jay On The Markets” (http://
jayonthemarkets.com). He is the author of several books, including The Four
Biggest Mistakes In Option Trading; The Option Trader’s Guide To Probability,
Volatility, And Timing; and Seasonal Stock Market Trends. Send your ques-
tions or topic suggestions to Jay Kaeppel at jaykaeppel@gmail.com. Selected Jay Kaeppel
questions will appear in a future issue of S&C.

HOW TO POSITION A TRADE USING A tance of support & resistance levels and a calendar spread.
CALENDAR SPREAD (Part 2) of implied volatility levels. These are key Regarding implied volatility, remem-
Last month, I addressed the question of considerations when contemplating any ber first from my column last month that
using calendar spreads to take advantage calendar spread, neutral or directional. a rise in IV typically helps a calendar
of time decay and/or trading ranges. I In a neutral play, we would like to see spread (as the longer-term “long” option
went over a lot of the basics of calendar resistance above the current price and gains more time premium from a rise in
spreads and discussed the key factors in- support below the current price. With IV than does the shorter-term “short” op-
volved when considering entering into a a directional play, however, we might tion) and vice versa. So ideally, a trader
neutral calendar spread. I mentioned that look to use support & resistance in a will enter a calendar spread when IV is
there are any number of ways to position different way. One possibility is to look relatively low and, in a perfect world,
a trade using this strategy, and I would for a failed breakout above resistance IV will subsequently rise after the trade
therefore continue with this topic this is entered.
month. Here, I’ll continue the discussion To illustrate these principles, let’s con-
and address the question: Is it possible After an upside sider an example. In August 2018, Kohls
or practical to use a calendar spread to breakout fails and price Inc. (KSS) attempted to break out above
make a directional trade? falls back below a key a major level of resistance. Figure 1 dis-
In most reference material, the cal- plays the significant multiyear resistance
endar spread is covered as a “neutral”
support level, a trader level that KSS was trying to clear. In late
strategy, that is, one that allows a trader may look to play the August, KSS broke above resistance and
to make money if the underlying secu- bearish side using a then quickly fell back below. This type of
rity remains relatively unchanged over calendar spread. failure is often followed by sideways-to-
a given period of time. But this strat- lower price action (as the security either
egy also lends itself well to directional tries to muster for another test or sells off
plays—often with a relatively low dollar (or below support). For example, after as the bulls bail out). If implied volatility
risk. Let’s look at how a calendar spread an upside breakout fails and price falls is low when this happens, it can be an
can be used as a directional play. back below a key support level, a trader excellent setup for a directional calendar
Last month I mentioned the impor- may look to play the bearish side using spread for three reasons:
• The security may break lower in price
following the failed breakout.
• If the security does break down in
price, there is a good chance that
implied volatility will rise as fear
kicks in.
• There is an obvious “I was wrong,
it’s time to cut bait” point (that is, if
price turns around and confirms a
breakout to the upside).
aiq trading expert

As I mentioned, the level of implied


volatility is a key consideration. In Figure
2 we see that implied volatility for KSS
FIGURE 1: RESISTANCE LEVEL BREAKOUT ATTEMPT. KSS tests and fails at long-term resistance. options is at a relatively low level. This
36 • January 2019 • Technical Analysis of Stocks & Commodities
Explore Your Options
tells us we can enter this “long premium”
position at a reasonable price and that
if IV subsequently rises, it may help to
generate additional profit.
One other thing to note is that “spikes”
in IV for individual stocks tend to hap-
pen when price falls (due to an increase
in fear) and sharp declines in IV tend to
happen when price rises (as fear abates).
So as a rule of thumb, a volatility “spike”
is generally more likely to favorably
impact a put calendar spread than a call

www.OptionsAnalysis.com
calendar spread.
So let’s consider an actual example
trade that involves:
• Buying 10 Jan2019 KSS 65 puts
FIGURE 2: WHERE’S IMPLIED VOLATILITY? KSS implied volatility is relatively low.
• Selling 10 Oct2018 KSS 65 puts

Buying a 10-lot in this example


would cost $1,570. This represents the
maximum risk on the trade. Now let’s
consider the possibilities.
The particulars of this trade and the
risk curves at the time of entry appear
in Figure 3.
In a nutshell:
• This position can make money if
KSS declines.
• Profits will increase as the stock
price declines until the stock price
reaches $65 a share, at which point
the risk curves “roll over.” This is
important to remember from a trade
management perspective.
• If price once again breaks out above
the recent highs, then this position
will start to lose money and a trader
may consider cutting a loss if that
occurs.
Following up on my column regarding FIGURE 3: KSS PUT CALENDAR RISK CURVES. The position can make money if the price of KSS declines.
the “greeks” in the November 2018 issue,
at the time of entry, this position has a: because theta is positive—that this cal Analysis of Stocks & Commodi-
position will make money due to ties,Volume 36: December.
• “delta” of -79, which implies it will
time decay. [2018]. “Explore Your Options:
behave like a position holding short
What Are The Greeks And Why Do
79 shares of stock
I hope this has helped to demonstrate They Matter?” Technical Analysis of
• “vega” of $76, which implies that some of the ins and outs of using a calen- Stocks & Commodities, Volume
if implied volatility rises one full dar spread to make a directional trade. 36: November.
percentage point, this position will ‡AIQ TradingExpert
gain $76 (that is, a rise in IV helps Further reading ‡www.OptionsAnalysis.com
and a decline in IV hurts) Kaeppel, Jay [2018]. “Explore Your Op- ‡See Editorial Resource Index
tions: How To Position A Trade Using
• “theta” of $2.80, which implies—
A Calendar Spread (Part 1),” Techni-
January 2019 • Technical Analysis of Stocks & Commodities • 37
product review

StockCharts.com
STOCKCHARTS.COM large portion from the US, UK, India, and daily, weekly, monthly, quarterly, and
11241 Willows Rd., NE Suite 140 Canada. Given its considerable content yearly price charts in various styles
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Internet: www.StockCharts.com of technical analysis websites but it was interactive PerfCharts, plus others. The
Product: Technical analysis charting also the winner in that category in many chart price information provided is up-
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Data updates: Real-time with five- to Over the past several years, I’ve applied
15-second refresh rates depending on data from this service to my trading rules, Members dashboard
plan selected; or end-of-day. first as a free member, then for three years Figure 1 provides a snapshot of a portion
Requirements: Works with most as a paying subscriber at the “Extra” level, of the Members Dashboard, which is the
browsers. Mobile-friendly on all and currently as a member at the “Basic” first page shown after you sign in. It has
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Price: Three monthly subscription been knocked off due to capacity issues. their visual preferences. The homepage
plans are offered with prices ranging Over the past two years, there has been for free users of the site is much different
from $14.95 to $39.95 per month (plus a full-site redesign producing a cleaner and will not be covered here.
a free level); paying annually provides homepage look. In addition, it is now
one free month. A free one-month trial more user-friendly, incorporating mo- Control Center and DP Scoreboard
of the paid service option is available bile device access. The more advanced The PRO Control Center tab on the upper
to new members. plans provide more enhanced features left highlights six choices of ChartLists,
as well as real-time
by Leslie N. Masonson data from the NYSE/

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candlestick, line, renko, ichimoku, charts, and auto-
heikin-ashi and OHLC bar formats), matically refreshed
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charts showing multiple timeframes, In this review I’ll
CandleGlance groups displaying mini- look at the “Pro”
charts side by side, and performance member subscription
charts (called PerfCharts) comparing level, which includes
up to 10 tickers and showing percent all the website’s fea-
performance. tures. I’ll focus on the
This charting software and site has recent enhancements
been reviewed in this magazine on as well as a number
three occasions since 2009. My last of the more useful ca-
review covering its essential features pabilities. The chart-
was published in the July 2016 issue. It’s ing software offers
not surprising that there are hundreds multiple chart types FIGURE 1: STOCKCHARTS PRO MEMBERS HOMEPAGE. The various sections
of thousands of worldwide users with a including intraday, are clearly displayed in six boxes, some with additional tabs.
38 • January 2019 • Technical Analysis of Stocks & Commodities
scans, and alerts. The other two major ticker symbol, a chart pops up on the has been enriched, allowing a user to
categories hidden in that tab are Chart- screen. A full explanation of the SCTR view saved charts in various formats:
ing Tools with nine subcategories, and is provided at the website. summary; 10 per page; ChartBook; gal-
finally, Reports and Analysis, which lery view, CandleGlance; RRG, magic
contains 11 choices. A current Market Alerts and ChartLists carpet, seasonality; and correlation. In
Overview is provided in the center of the The daily Predefined Alerts section pro- the CandleGlance view, for example, a
screen with real-time numbers during vides information on key market levels candlestick chart automatically opens
the day for the major markets. achieved by the major indexes such as of every ticker symbol in your saved
Next, on the upper-right side, the DP a new all-time high, the crossing of key list for the selected time period (either
Scoreboard shows the DecisionPoint market levels (for example, the DJIA for two days, two months, six months,
Signals on any one of three major in- crossing above 26,000 or below 25,000), or one year).
dexes and the S&P 100, including the any of the 10 major sectors having a bull- There is also a choice of over 20 indica-
short-, mid-, and long-term trend and ish percent crossover of 70 or 30, or a tors (one indicator can be shown on the
PMO signals (a DecisionPoint indicator bullish or bearish crossover of the 50/200 chart at a time since these are thumbnail
explained on the website). That table moving averages of an index or sector. size) that can be used. Another option
shows the data for the S&P 500 index. Other security alerts also automatically is to open point & figure charts. The
By clicking on the DP Signals down ar- included are for gold, oil, TSX, the US benefit of using the list option is that you
row, the ticker cloud appears. It shows dollar, and the euro. The alert feature can look at all the saved chart patterns
the most popular 200 ticker symbols does not include any specific securities, in minutes by scrolling down pages of
accessed by StockCharts users during only the previously mentioned items. multiple snapshot charts. You can then
the day; the more popular they are, the Moreover, past daily alerts are available save the most promising chart patterns
larger and bolder the symbol. by specific dates back to October 4, for further tracking and review.
2011. Predefined alerts can also be ac- The public ChartLists section of
Market Movers and cessed on the StockCharts Twitter feed the website has been redesigned and
Technical Rankings and are updated in real time during the upgraded with new features so that site
Down one level on the left side of the day on the website. Keep in mind that members are able to share their commen-
screen is the Market Movers group- a specific alert only triggers once each tary with others. This very informative
ing, which displays the 10 most active day, even though it may hit that criteria free service contains the commentary
issues or the Top 10 performers either again during the day. of 163 members who post their highly
up or down for multiple indexes of your The three other sections of the home­ annotated charts and analysis, mostly
choice, including the Dow 30, S&P 500, page that can’t be seen in Figure 1 are daily. The highest-ranked contributions
NYSE, NASDAQ, TSX, London, and for your personally developed scans, are displayed in order based on the com-
India. By checking this information a alerts, and ChartLists. The member pilation of user votes.
few times a day, the user can get a feel ChartList Views with nine options The current top-ranked contribution
for the market leaders and whether there
is a concentration or price momentum
in any sectors or groups.
The Technical Rankings section pro-
vides analysis on multiple data points and
multiple security types including large-,
mid-, and small-caps, ETFs, as well as
Toronto, London, and India securities.
This screen contains the SCTR (Stock-
Charts Technical Rank) tool, in this case
ranking large-cap stocks. Each stock
listed has a SCTR numerical score. The
SCTR score is calculated based on six
technical indicators (moving averages,
rate of change, and RSI, among others)
over different timeframes—short-, me-
dium-, and long-term, and then ranked
from high to low (99.9 to zero). The
top-10 stocks are shown. The top 10%
of stocks will be ranked between 90 and
100, and conversely, the bottom 10% will FIGURE 2: PUBLIC CHARTLISTS EXAMPLE. Above The Green Line is the top-ranked service in this instance, some-
be ranked zero to 10. By clicking on any thing that is updated daily. This sample chart shows the three rules used to select high-quality candidates.

January 2019 • Technical Analysis of Stocks & Commodities • 39


in the list is called “Above The Green From a trading or investing perspec- your favorite indicators.
Line” and was contributed by user Joanne tive, knowing that these stocks are at all- A scan on August 31, 2018 revealed
Klein. Figure 2 shows a sample of her time highs and that they are the highest- that there were only 113 NYSE new
work. She has 1,613 followers and 1,063 ranked SCTRs provides confirmation 52-week highs, and 118 NASDAQ Com-
votes. Her focus is on ETFs, momentum for possibly entering a long position. posite highs. Based on the major market
stocks, and swing trading, and has been Of course, it is necessary to also view indexes (S&P 500, NASDAQ Composite
providing her views for nine years. If the chart for the support & resistance and Russell 2000) hitting new highs,
you appreciate the insights of experi- levels, and the percent deviations from you could logically conclude that many
enced technical traders with different the moving average prices. On that screen stocks were not participating in this
approaches, then this is a goldmine page, just click on the chart symbol to market uptrend, compared to the robust
waiting to be explored. the left of the ticker symbol to bring up performance of the leading tech stocks
various chart types where you can add (NFLX, AMZN, AAPL, and MSFT).
Scanning for
opportunities
One essential diagnostic feature of this
software is the Predefined Scan Results
table (Figure 3) containing 80 scannable
conditions. They cover 18 bullish and 17
bearish technical indicators, six major
candlestick patterns with 26 patterns,
and 19 bullish and bearish point & figure
charts. The scan results are displayed
by indicator type and then placed in
columns for the different exchanges
(NYSE, NASDAQ, AMEX, etc.) with
a separate tabulation for mutual funds.
The number in each cell indicates how
many securities encountered that condi-
tion today.
These scans cannot be altered for any
reason. The table history contains about
five days of data that can be brought
up by selecting the date option. Un- FIGURE 3: PREDEFINED SCAN RESULTS. Scanning by criteria such as bullish and bearish technical indica-
fortunately, the software functionality tors, candlesticks, and P&F charts returns the number of equities by exchange that meet the criteria as well as
does not provide historical data beyond mutual funds meeting the criteria.
the current week. That additional data
would be useful for tracking changes in
trend and extreme readings of certain
conditions, which could possibly be a
tip-off of a market that was potentially
reversing direction.
By clicking on 113 stocks in the NYSE
column, a list of all the stocks making
52-week highs will pop up in a table
format. Figure 4 shows a portion of the
list in alphabetical order. The informa-
tion includes the sector, industry, SCTR
ranking, cap size, close, and volume. All
those columns are sortable from low to
high and vice versa. Thus, if you wanted
to see which securities had the highest
SCTR score, just click the upper arrow
in the SCTR column heading. The top
five tickers on September 3, 2018 were FIGURE 4: PREDEFINED SCAN RESULTS FOR NEW NYSE 52-WEEK HIGHS. You can see that on September
XHE, SQ, CVNA, MDE, and PXMG. 3, 2018 at 11:06 am, there were 113 new highs. The results can be sorted alphabetically by sector, industry
All of them had SCTRs above 99. SCTR (StockCharts Technical Rank), or daily volume.

40 • January 2019 • Technical Analysis of Stocks & Commodities


Interestingly, on the same day there were and P&F bearish signal reversal. JPM as standalone indexes or benchmarks for
20 MACD bullish crossovers compared also had two scan hits: P&F triple top specific portfolio comparison.
to 85 bearish ones, certainly not a sign breakout and P&F bear trap. In both
of robust market participation. cases, pulling up a P&F chart will let StockCharts TV
you validate the current scan results. In A more recent software enhancement
Additional scan resources this case, the first condition mentioned was the April 2018 introduction of Stock-
If you are a paying subscriber, then you was correct, but there was no current Charts TV. This 24/7 streaming video
can design unique scan criteria by using bear trap, which did occur on July 16. program provides live and pre-recorded
the Standard Scan Workbench as well as That is why it is important to double­ presentations from the StockCharts top
the Advanced Scan Workbench in the check everything to make sure the scan technical experts throughout the trading
Your Scans section of the homepage. results are 100% accurate before putting day, as well as selective replays of live
The dropdown menus provide access to money to work. sessions. The focused presentations are
different global filters (exchange, coun- There are no current predefined scans devoted exclusively to financial chart-
try, SCTR ranking level, average daily of ETFs. However, the user-defined ing and market analysis. This service is
trading volume, price, and 30 predefined scan option can be used to scan the accessible not only on laptop or desktop
conditions). There are also choices for ETF universe, as ETFs are one of the computers, but also available on iOS and
four chart patterns (for x number of days search criteria choices with this scan Android phones via an app at the App
ago) among a listing of candlestick and type. Also, multiple scan criteria can Store and Google Play respectively. This
P&F patterns that can be added to the be used to strictly limit the universe of feature is a great option, if you are travel-
scan criteria. candidates. For example, you can scan ing or shopping and find yourself with
Fortunately, you do not need program- some spare time to catch up on missed
ming experience. Once the scan criteria viewing opportunities.
are selected they can be seamlessly A recent upgrade to the This TV service is free to all. Non-
transferred to the scan criteria box for technical scan engine paying visitors to this site can benefit
permanent saving. The ChartSchool includes a new user from the wide selection of material
library contains a complete description covered by experts in their field. This is
of the scanning process. Additional scan interface for creating a great source of in-depth stock market
formulas for relative strength, selling and modifying custom technical education, and it is certainly not
climaxes, ichimoku clouds, and for a technical scans. available in any MBA finance programs
range of dates are available for view- as far as I know. This TV service coupled
ing. Extra scan formulas are provided with the free ChartSchool content, plus
from published books and articles, user- for three criteria all at once, such as all working with charts on the site will allow
contributed scans, and Gord Greer’s (a ETFs that have a P&F triple top breakout anyone to gain an in-depth knowledge of
long-time StockCharts member) scan combined with a bullish engulfing candle the subject matter with the appropriate
building blocks. His snippets of scan and an Elder green bar. The ETFs meet- study time. Coupled with a number of
syntax can be easily added to new scans ing that criteria will be shown and then good technical analysis books such as
that you build. a chart can be viewed. those written by John Murphy, Martin
A multi-condition scan can easily A recent upgrade to the technical scan Pring, Thomas Bulkowski, and Charles
be set up, for example: a 52-week high engine includes a new user interface Kirkpatrick, among others, an individual
today together with an RSI reading of for creating and modifying custom with a thirst for knowledge can climb the
greater than 70; a SCTR ranking of 90 technical scans. Another new feature is learning curve rather well.
or higher; an ADX uptrend in effect; and the customized price alerts feature that The TV contributors’ knowledge range
a bullish engulfing pattern within the notifies the user via text, email, or web provides for unique market perspectives
last five days. You can also select from notification when a security that they that may even conflict with one another’s.
predefined chart patterns, global filters follow has crossed a specific pre-set Areas typically covered include current
(price, volume, exchange, country, and price level. For example, a predefined market commentary, intermarket analy-
30 technical conditions), as well as ad- or custom alert can be set up to look for sis, charting, technical analysis tools, and
ditional technical expressions that you a simple or complex technical criterion. more. Some of the contributors include
design to add to this search. A simple one could be, say, the S&P 500 Bruce Fraser, Tom Bowley, Carl and Erin
You can also key in any ticker symbol crossing 2800, and a more complex one Swenlin (Carl was formerly founder of
in the search table box to see if any could be an MACD upward crossover DecisionPoint in 1981, a well-respected
of the stocks or ETFs you own or are today, coupled with an oversold CCI market timing and technical signal
considering buying show up in any of value of your choice. The user-defined service), John Murphy (author and well-
the scans each day. For example, I keyed indexes feature has been upgraded, al- known former CNBC technical analyst),
in NFLX and found out that there were lowing users to develop and chart their Greg Schnell (with the moniker The
two scan results: Elder bar turned blue, own unique market indexes to be used Canadian Technician), and Greg Morris
January 2019 • Technical Analysis of Stocks & Commodities • 41
(author, conference speaker, TV financial breached a double bottom in the second some of the industry’s top technical
show guest, and formerly chief technical to the right row of zeros. Another sell practitioners, a number of whom are
analyst and chairman of the Investment signal occurred at a price of $288 in well-known authors or traders. The
Committee for Stadion funds), among the last column of zeros. As I write this, conference theme was Reducing Risk In
others. Moreover, the daily state-of-the- TSLA is in freefall with the April low Uncharted Waters; thus, each one-hour
market session by Dan Russo of Chaikin (shown by the red “4”) of $248 (on the presentation was associated with risk
Analytics provides a useful handle on the bottom left of the chart) as its potential management and volatility.
current market and sector health using support area. The majority of the presenters were
that site’s analytics. Users of the free portion of the site StockCharts.com contributors with a
In 2013, DecisionPoint was purchased can create daily and weekly P&F charts few guest speakers. I also attended this
by StockCharts.com and the founders on any stock, ETF, or index going back conference in 2016 and wrote a review
now contribute to the TV show and about a year; however, paying subscrib- of that for this magazine (see “Further
write additional market commentary ers have access to not only more data, reading” at end). New 2018 speakers
using their previous site’s capabilities but also can plot the prices for one, five, included Tom McClellan, Alexander
and analysis techniques. Elder, Tushar Chande, and
Erin’s live webinars appear David Keller. The conference
on Wednesdays and Fridays, organizers also provided a
when she reviews the cur- number of presentations that
rent market situation using provided useful insights.
standard technical analysis In August 2011 the first
indicators and those brought live ChartCon was offered
over from DecisionPoint such to the public. Since that time,
as PMO, Swenlin TradOsc- this conference has been re-
Breath, and TradOsc-Volume, peated in 2012, 2014, 2016,
among others. with the last one on August
10–11, 2018. The last two
Point & figure were broadcast online, and
(P&F) charting attendees received unlimited
In the past decade, P&F charts access to a virtual recording
have been adopted by more in- and slides of all the sessions,
vestors and traders because of as well as the Q&A. Viewer
the number of ETFs using the questions were handled in a
Dorsey Wright & Associates separate room with an online
(DWA) methodology and the video connection.
number of retail brokers and FIGURE 5: POINT & FIGURE CHART OF TESLA. Here you can see the large price Attendees can play back
financial advisors using that drop that has occurred in Tesla since August 2018. Two sell signals were given at these recordings and view
platform. StockCharts offers $348 and $288. The peak price was $384 on August 8. the slides to reinforce the
users well-designed and easy- information presented at any
to-use P&F charts, and information about 10, 15, 30, and 60 minutes with intraday time, with no time limit for accessing
them is provided in its ChartSchool. I will up-to-the-minute pricing. As a daytrader, them. The last two conferences were
not go into an explanation of how to read, I use the one-minute and five-minute live streaming broadcasts over the Live­
interpret, and trade them in this review, charts during the day, in conjunction stream platform that was downloadable
because I plan to write about these in with my standard technical tools (such as to a desktop, laptop, tablet, or mobile
future articles in this magazine. CCI, RSI, MACD, and moving averages device. This platform provides the useful
A typical daily P&F chart of Telsa to make buy & sell decisions. I look for ability to pause, rewind, and rejoin the
(TSLA) is shown in Figure 5. The last the intraday support & resistance levels, live broadcast.
29-point price drop was a result of the which are very easy to see on this type For both ChartCon 2016 and 2018, all
surprise news that Elon Musk wanted of chart. of the speakers flew in to give their pre-
to take the company private plus other sentations. Attendees numbered 1,487 in
news about the company. Before that 2018 ChartCon 2016, and a similar number participated
news was even published, the stock had While writing this review, I was able in 2018. A big benefit of the conference’s
already fallen from $384 on August 8 to attend the online virtual two-day online format is the cost and time savings
to just below $300 at the end of August. ChartCon 2018 in August focusing on for the attendee, since the virtual format
By September 7 it fell further to $263. technical analysis and charting. This negates the need to travel. All in all, I
Note that a P&F sell signal was given $249 conference was focused on provid-
in August at a price of $344 when it ing education to online investors from Continued on page 45
42 • January 2019 • Technical Analysis of Stocks & Commodities
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, where she also works as a
broker. She has written four books on futures and options trading, with the latest
being a new edition of her book A Trader’s First Book On Commodities (third
edition, October 2017) as well as Higher Probability Commodity Trading (July
2016). Garner also authors widely distributed e-newsletters; for a free subscrip-
tion, visit www.DeCarleyTrading.com. To submit a question, email her at info@
carleygarnertrading.com or via www.DeCarleyTrading.com. Selected questions Carley Garner
will appear in a future issue of S&C.

LEVERAGED ETFS VS. FUTURES: brokerage, or another platform. From a ing leveraged is an artificially derived
A GOOD SUBSTITUTE? marketing standpoint, this was a genius financial instrument intended to mirror
Why do some speculators opt to trade development but from a practical view, changes in that particular commodity
leveraged ETFs rather than futures it is undesirable. in the futures market. You might find
contracts? These products conveniently brought the fund summary for such ETFs refer
This is a great question. One for which leveraged commodity trading to the to the product as being a hypothetical
I do not have a logical answer. The truth masses, in my estimation much to their futures position or the investment seeks
is, beyond the argument of convenience, peril. These ETFs are inefficient vehicles to replicate one. In short, the underlying
there is no reasonable reason to trade for commodity speculation; they often asset of a leveraged ETF is not a thousand
leveraged ETFs in lieu of futures trad- fail to follow the underlying commodity barrels of crude oil or 100 ounces of
ing. That said, not everybody should be effectively. They are not viable candi- gold; the leveraged ETF value is based
speculating with leverage. Thus, the first dates for buy & hold positions; they are on a synthetic asset. Bluntly, traders
decision a trader should make is whether are speculating using hypercharged de-
to utilize leverage. rivatives based on the value of another
Only those with the risk tolerance and
Unlike leveraged ETFs derivative. I think we can all agree this
capital to trade on margin will then need that must be rebalanced is an extremely inefficient means.
to decide which venue to participate in. constantly to keep Futures contracts, on the other hand,
For full disclosure, I am a futures and the derivative product represent a delivery obligation of the
options broker who makes a living from underlying commodity. Thus, a trader
commissions generated in the commod-
behaving similarly to the holding a long corn futures contract
ity markets; of course, my opinion is bi- associated commodity, opting to hold to expiration would then
ased. Nevertheless, I’ve yet to encounter futures contracts are actually take delivery of 5,000 bushels of
a compelling argument in favor of using naturally tied to the corn! In the futures market, derivatives
leveraged ETFs over futures. of derivatives are not changing hands—
The primary skill of the financial
underlying commodity derivatives of the actual commodity are.
industry is to identify the demand for price. This is an imperative difference that
speculative products and then meet enhances efficiency. Further, because
that demand, regardless of the potential intended for daytrading—which is great futures contracts are naturally leveraged
impact on unsophisticated investors. for brokerages and funds because it keeps and tied to the underlying commodity,
In my opinion, leveraged commodity “transaction revenue generation” flow- they can be used effectively for buy &
ETFs are the epitome of this practice. ing. There also might be counterparty hold trading. Unlike leveraged ETFs
Knowing that far more investors have risk when trading certain ETFs. This that must be rebalanced constantly to
stock and bond investment accounts than means that under extreme volatility, the keep the derivative product behaving
futures accounts, the industry developed original investor capital and any paper similarly to the associated commodity,
products intended to mimic the futures returns rely on the ability of the coun- futures contracts are naturally tied to the
markets but are accessible through a terparty (often a bank) to pay. I admit, underlying commodity price.
traditional investment account. The the odds of a situation in which the fund In addition to efficiency, commodity
result was leveraged commodity ETFs (ETF) goes belly up isn’t substantial but futures contracts are available to trade
that could be traded side-by-side with it isn’t impossible. Why take the risk? nearly 24-hours per day. Most futures,
traditional investments such as mutual Leveraged ETFs effectively double or such as gold and crude oil, close for one
funds, stocks, bonds, and sector index triple exposure to a certain commodity hour per day but are otherwise liquid
ETFs. Suddenly, trading commodities such as gold or crude oil. However, it is
didn’t require a separate account, another important to note that the product be- Continued on page 45
January 2019 • Technical Analysis of Stocks & Commodities • 43
Algo Q&A
ALGORITHMIC TRADING
Have a question about system or algo trading? Kevin J. Davey has over 25 years of
system trading experience. Davey is a full-time trader, and he also teaches and con-
sults via his Strategy Factory online workshop (http://kjtradingsystems.com). He is the
author of several bestselling trading books, including Building Winning Algorithmic
Trading Systems and Introduction To Algo Trading. Send your questions or topic sug-
gestions to Kevin Davey at kdavey@kjtradingsystems.com. Selected questions will
appear in a future issue of S&C.
Kevin J. Davey

DISCRETIONARY VS. ALGORITHMIC exception. There is no discretion in pure Strategy A has 10 years of profitable
TRADING algorithmic trading. trading history. Strategy B, on the
I currently trade in a discretionary man- Why would you want to trade algorith- other hand, has 10 years of consistently
ner using price action and trendlines. I mically according to rigid rules? Three losing performance. Which would you
find it very difficult. I have heard a lot primary reasons come to mind. First, choose? Of course, most of us would
about systematic and algorithmic trad- algorithmic strategies can be historically choose strategy A, even though there
ing. Can you tell me more about it? tested. This is important, even though as is no guarantee it will generate profits
Certainly, but first of all, you should traders we are continually taught “past going forward.
realize that any type of trading is dif- performance is not indicative of future Historical testing can therefore be im-
ficult, no matter what kind of trading, or results.” Imagine you had this choice: portant for an algorithmic trader. Having
what kind of instrument, you trade. As a the confidence in knowing your approach
retail trader, you are up against profes- has been profitable in the historical long
sional traders, and they enjoy profiting
Simply put, algorithmic run helps you weather the short-term
from your misfortune. Be skeptical of trading can be defined drawdowns that all strategies experience
anyone who tells you trading is easy. They as “rules to trade by.” from time to time.
usually have an ulterior motive, which Once you have those A second reason to trade algorithmi-
typically involves money coming out of cally is for diversification. Imagine a
your pocket and going into theirs!
rules, you always follow discretionary price-action trader who
Systematic trading, which over the them, without exception. trades the mini S&P. He might do
years has also been called mechanical There is no discretion in well, but what if the market suddenly
trading, rule-based trading, and most pure algorithmic trading. changes, and most of his market “tells”
recently, algorithmic trading, is different and setups no longer work? What does
from discretionary trading. Dis- he do then?
cretionary traders usually make An algorithmic trader, on the
buy/sell decisions based on charts, other hand, typically has dozens
order flow, indicators, market con- or even hundreds of strategies to
text, news, and a myriad of other trade, in many different markets.
inputs. Intuition is a big part of This helps the trader diversify the
discretionary trading, and today’s trading portfolio, which produces
buy based on certain conditions a smoother equity curve. An ex-
might be tomorrow’s sell for those ample of this is shown in Figure
same conditions. 1. And, if an algo strategy starts
System trading, or algorithmic to fail or underperform, it can be
trading as I’ll refer to it, is quite turned off or replaced without a
a bit different. The buy/sell deci- major impact on overall results.
sions are based on rules, and those Traders fantasize about the trad-
rules, once formulated and tested, ing “holy grail,” and while I don’t
do not change. So if your rules tell believe one exists, the diversified
you to buy a hanging man candle- trading available via algorithms
stick pattern, five years from now certainly comes close.
those rules would also tell you to A third and final reason to
buy a hanging man pattern. consider algorithmic trading is
Simply put, algorithmic trading automation. Discretionary chart
can be defined as “rules to trade watchers can miss trades, or are
by.” Once you have those rules, Figure 1: EXAMPLE EQUITY CURVEs. Trading multiple diversified limited in the number of markets
you always follow them, without strategies can significantly smooth the overall equity curve. they can trade. Algorithmic trad-
44 • January 2019 • Technical Analysis of Stocks & Commodities
Algo Q&A
ers, on the other hand, can have their be automated, freeing up the trader to in various markets, and placing orders
trading platform execute trades for as monitor strategies, develop new strate- automatically, you certainly should con-
many markets as they desire, and do it gies, and so on. sider this approach to trading.
automatically. Now, that doesn’t mean Algorithmic trading is not for every-
algorithmic trading is “set and forget,” one, but if you favor having profitable
but the burden of placing trades can historical results, trading many strategies

REVIEW/MASONSON most cases. the author of Buy—Don’t Hold and


Continued from page 42 With the roster of talent provided by All About Market Timing. His blog is
StockCharts.com, it is no wonder this ser- at www.buydonthold.com. He can be
found the video conference to be well vice continues its category dominance, reached at lesmasonson@yahoo.com.
worth my time. I will be replaying the continued success, and evolutionary
presentations for all the information they development. FURTHER READING
offered, especially four of the sessions Readers not familiar with this service Masonson, Leslie N. [2016]. “Stock-
that were the most valuable for me, by and its charting software are encouraged Charts.com,” product review, Techni-
Gatis Roze, Alexander Elder, Julius de to read my earlier review in the July cal Analysis of StockS & commodi-
Kempanaer, and Martin Pring, to make 2016 issue of StockS & commoditieS tieS, Volume 34: July.
sure I didn’t miss anything. Just listen- as well as going to the site and using the [2014]. “StockCharts University,”
ing to any of these four speakers alone free access option to review its wide- Quick-Scan, Technical Analysis of
was worth the price of admission to this ranging capabilities, or use the 10-day StockS & commoditieS, Volume
conference. Access to the ChartCon 2018 free trial period to examine the advanced 32: April.
conference video recordings can be pur- subscription option. Users will find that Davis, Summer [2011]. “ChartCon 2011,”
chased online through the StockCharts this website offers an in-depth technical Quick-Scan, Technical Analysis of
store at store.stockcharts.com. analysis education coupled with exten- StockS & commoditieS, Volume
sive product support. 29: December.
CONCLUSION In summary, this service offers mem- Gopalakrishnan, Jayanthi [2010].
This website provides high-quality and bers top-notch advanced charting and “StockCharts.com,” product review,
extensive customer support through vari- technical analysis software that works Technical Analysis of StockS &
ous means including online chat-based flawlessly. Moreover, the remarkable commoditieS, Volume 28: August.
support, instructional videos, webinars customized scanning option is a very S&C staff [2009]. “StockCharts.com,”
and archives, an in-depth ChartSchool, useful tool for advanced users who want product review, Technical Analysis
FAQs, troubleshooting, 24-hour or to tinker with variable search criteria to of StockS & commoditieS, Volume
quicker turnaround on messaged ques- produce scans that are worthwhile, rather 27: May.
tions, and of course, the new StockCharts than just using a few well-worn common ‡StockCharts.com
TV. I’ve used the message feature several technical indicators on their charts. ‡See Editorial Resource Index

FUTURES FOR YOU


times over the past few years and have
received a response within an hour in
Leslie N. Masonson is a trader and

GARNER of management fees, potential interest 3 to 1. For this reason, I strongly rec-
Continued from page 43 charges, large account size requirements, ommend traders overfund their futures
and more. Futures market participants account (deposit more than the minimum
and accessible via a trading platform or are offered leverage without interest margin required) to delever trading, and
mobile phone app around the clock. This charges or a need for special permis- I recommend utilizing a combination of
is an obvious advantage in a globalized sions. A futures trader can speculate with long and short options to manage risk and
economy; overnight news of Chinese tar- leverage in an account with few thousand slow down profit and loss volatility.
iffs or a European banking crisis can be dollars on deposit, much less than the six- In summary, those looking beyond
reacted to in real time, rather than being figure accounts a stock brokerage might daytrading and capable of maintaining
forced to wait for the US stock exchanges require for leveraged trading. However, trading discipline will likely find the
to open at 9:30 am Eastern Time. leverage isn’t always an advantage. It can efficiency and mechanics of the futures
The futures markets also offer traders be a painful disadvantage to those who markets superior to that of leveraged
built-in and cost-free leverage. Leveraged underestimate its power. For instance, ETF products.
ETFs are something that involves incre- futures contracts are often leveraged at
mental costs and burdens in the form 20 to 1, while a 3X ETF is leveraged at
January 2019 • Technical Analysis of Stocks & Commodities • 45
Trading Perspectives

SOME PERSPECTIVES ON THE EQUITIES WORLD


Rob Friesen is a professional trader and president & COO of Bright Trading (www.
stocktrading.com), a proprietary trading firm hosting independent trader/members,
an online trading school, and utilizing the StockOdds database (www.stockodds.
net). This column shares his thoughts and outlooks on trading, locating opportunity,
probabilistic outcome, and maintaining perspective throughout industry changes. He
can be reached at robfriesen@brighttrading.net or via www.stocktrading.com.
Rob Friesen

2019: The Year of the familiar technical patterns emerg- tom performers within a peer
Pair Trader! ing. The pair trader could profit from group).
It’s a new year, a new day, and time to the favorable move of the spread
know how to trade up, down, and side- while remaining insulated against Note that the goal for the portfolio
ways. That is to say, hedged. the overall market. style would be to have a reduction
As I’ve mentioned previously in my • Fundamental mean-reversion op- of cross-correlations, like evaluating
columns in this magazine, markets don’t portunity. You have identified fun- selections for a long-only portfolio.
and won’t go up forever. Sometimes damental differences between two You can accomplish this through
they fall, and there are many periods of stocks and are looking for them to various strategies within your
range-bound, sideways markets through- become more similar in time. overall holdings. It is fine to select
out history. As the entire foundation of • Statistical anomalies. You have some value vs. growth, but allocate
public equity markets is the buy-side, it is gathered or rely on statistical data a portion of your total capital to this
understandable that the focus is always on and take trades based on what your rather than all of it. Throughout
buying strong stocks, buying pullbacks, data tells you to do in order to history, we have seen sentiment
and investing for the long term. capture small and perhaps frequent oscillate between value and growth
My definition of a pair is the relation- anomalies. but perhaps less frequently than you
ship of any two stocks. It is the trader’s see the oscillations with risk-on/
choices that create good or bad pairs. It The rule of thumb is risk-off.
is the market variables, news, and other The purpose behind creating pairs and
forces that change a good pair into a bad
to act quickly when then developing trading strategies for
pair. Occasionally, we witness a bad pair parameters are met. In these instruments is obviously to make
changing its tune and we acknowledge other words, respond money. What you do is not a hobby.
that we were lucky rather than smart. quickly to opportunity, Don’t spend all your time researching,
There are many ways to trade a pair. designing plans, or building widgets. You
To list a few:
signals, and your need to trade as if you will only “eat from
parameters. what you kill,” all the while maintaining
• One-time catalyst opportunity. a balance in these other areas. I have
You believe there is a driving force • Intraday only. This is really a func- seen traders allowing themselves to be
behind one stock and you are using tion of volatility. The greater the distracted when markets are tough, or
the other stock as a hedge against the VIX, the greater the oscillation of their holdings are giving them trouble,
market, so you can hold it overnight supply and demand influencing the spending time on the trivial, nonessential
with less risk or concern. spread prices. The more the spread items, instead of rolling up sleeves and
• Compounded trading from an ob- moves, the greater the probability of attending to their trading business. The
servation of a range-bound pair. being able to put it on, take it off, or core is to have performing pairs and
The two stocks are comparable and trade some of your core position. bring on new ones that you believe will
should maintain that market-neutral • Portfolio style. This involves hold- perform (through the eyes of probability,
protection. ing a quantity of pairs. There is not assumption), and then fire the non-
• Trading around a core position. This a risk of cross-correlations being performers as your plans dictate. This
could be a stationary pair, or one that quite high if you utilize the same implies that you are disciplined enough
is oscillating back and forth or even procedures to select the pairs. to follow your detailed plans.
one that is trending. The key is that In the portfolio approach, you When you trade pairs:
you are trading some and holding could be impacted by:
some for the bigger picture. {{ Value vs. growth • You close profits (we refer to this as
• Technical swing trades. There are {{ Risk-on vs. risk-off production)
multiple ways to chart the spread {{ Picking worst in breed vs. best • You carry open profits (to reach your
of the two stocks and there can be in breed (such as the top/bot- targets or stretch out your profits past
46 • January 2019 • Technical Analysis of Stocks & Commodities
Trading Perspectives
your original targets) When you fly in a plane, what is your that, if it’s a substantial loss, I will first
• You carry open losses confidence that the jet engine will work consider whether there is anything else I
• You close losses (yes, you must have based on? can do with the position. Could two good
parameters that you will follow to Let’s carry these thoughts over and pairs be made from one bad pair?
protect your major tool, which is consider that you have a pair with open If you have a mentor or coach, get a
your capital) losses in. Ask yourself these questions: second opinion before closing out the
• As you close profits and hold losses, pair with a significant loss. For retail
your pair, or portfolio, will drift to • Why did I get into this pair? investors and traders, consider the tax
extra short dollars • What was the initial reason, inspira- consequences of closing positions.
• This means your long dollar hold- tion, or validity to put it on? Please seek tax advice from your profes-
ings will decline relative to your • From that perspective, is this pair sional advisor. Consider any dividend
short dollar holdings. still valid? implications. Long positions can collect
• Is there any new information? dividends if the stock is held over record
Open losses • Or, was I wrong in my determina- date, while short positions are obligated
Carrying open losses while trading tion that this would be a good pair to pay the dividend.
pairs is a bit like the concept of having to trade? The rule of thumb is to act quickly
religious faith or confidence and trust when parameters are met. In other words,
in anything that is unknown or not inti- Or if I was right that this is a good pair respond quickly to opportunity, signals,
mately understood. An example would to trade and it is still a valid pair, then and your parameters.
be that most people have no idea how a go back to the trading plan for the pair. Then, if you discover you have made
jet engine really works, but anyone who Review with yourself: mistakes, been undisciplined, and caused
gets on a plane has some trust that the a significant loss, add some reflective
engines will perform their job and carry • Did I change my timeline? time and brainstorm all possible solu-
the passenger to the destination without • What was my plan for a loss on tions without reacting from a center of
failing at the task. that pair? frustration and anger.
Traders and investors operate by belief • Did I exceed that designated loss
daily. Within media venues, individuals for the pair?
use the word “believe” concerning mar-
kets, valuations, and intentions. It goes
back to, why would someone have faith
If my original reasons were valid, and
are still valid, and I would put it on today
submit an article!
or confidence in something, someone, without hesitation, then this current pair
or some company?  price is still a good opportunity.
What principle do you stand on to Yes, I have lost some, but am I still
establish a confident pose? Could the within my predetermined boundaries?
principle be misunderstood? If it were a I now require confidence to continue
“truth,” it cannot be an “untruth” at the working my plan.
same time, but the truth can be viewed As the song popularized by Dinah
through different filters and lenses, so it Washington goes, “What a difference
is a matter of interpretation. a day makes.” This confidence can be
rewarded slowly or quickly, or even
Are you knowledgeable about technical
Presume or assume? suddenly!
indicators, charting, trading systems, and
Using the meaning of “to suppose,” the Or on the other hand, maybe your money management? Or do you have a solid
word presume is usually used when you answer was: background with intraday trading, trading
suppose based on probability, while as- psychology, options and cycles? If so, we’d
sume is used when you suppose without • I was wrong on my original re- like to hear from you!
any evidence. search. To write for any of our publications or
What is your probability view based • I assumed things that I had no evi- obtain more information, please click on
on? dence for. Contact Us at www.Traders.com.
• I did not operate with a probabilistic
• History through other eyes or ex- mindset.
periences? • I broke my rules.
• Your personal experience? • The pair has exceeded my param-
• Knowledge and understanding? eters.
• A thorough analysis of the prob-
abilities? If that is the case, then I need to deal
with this loss situation. But before I do
January 2019 • Technical Analysis of Stocks & Commodities • 47
For this month’s Traders’ Tips, the focus is At Traders.com you can also right-click on
mainly Sylvain Vervoort’s article in the July any chart to open it in a new tab or window
2018 issue, “The V-Trade, Part 5: Techni- and view the chart at a much larger size.
cal Analysis—Moving Average Support & The Traders’ Tips section is provided to
Resistance And Volatility Bands.” Here, help readers implement a selected tech-
we present the January 2019 Traders’ Tips nique from an article in this issue or an-
code with possible implementations in var- other recent issue. The entries here are
ious software. contributed by software developers or pro-
The code for the following Traders’ Tips grammers for software that is capable of
selections is posted here: customization.
• Traders.com  S&C Magazine 
Traders’ Tips

BandsDeviation( 2.4 ),
LowBandAdjust( .9 ),
MidLineLength( 20 ) ;
F TRADESTATION: JANUARY 2019 TRADERS’ TIPS CODE
In “The V-Trade, Part 5: Technical Analysis—Moving Average variables:
HighBand( 0 ),
Support & Resistance And Volatility Bands” in the July 2018 LowBand( 0 ),
Stocks & Commodities, author Sylvain Vervoort introduced MidLine( 0 ),
a new type of price band that he calls the SVEVolatilityBand. ATRVal( 0 ),
WtdAvgVal( 0 ) ;
He created this new type of band to better highlight volatility
changes when using non-time-related charts. According to the ATRVal = AvgTrueRange( BandsPeriod * 2 - 1 )
author, when using charts such as renko, traditional bands may * BandsDeviation ;
WtdAvgVal = WAverage( Price, BandsPeriod ) ;
fail to effectively highlight these changes. HighBand = WtdAvgVal + WtdAvgVal
The TradeStation EasyLanguage code for the SVEVola- * ( AtrVal / Price ) ;
tilityBands indicator based on the author’s work is presented LowBand = WtdAvgVal - WtdAvgVal
* ( AtrVal * LowBandAdjust / Price ) ;
here. MidLine = WAverage( TypicalPrice, MidLineLength ) ;
Indicator: SVEVolatilityBands Plot1( HighBand, "Upper Band" ) ;
// SVEVolatilityBands Plot2( LowBand, "Lower Band" ) ;
// Sylvain Vervoort Plot3( MidLine, "Mid Line" ) ;
// TASC Jan 2019

inputs: To download the EasyLanguage code, please visit our


Price( Close ), TradeStation and EasyLanguage support forum. The files
BandsPeriod( 20 ), for this article can be found here: https://community.trades-
tation.com/Discussions/Topic.
aspx?Topic_ID=156727. The
filename is “TASC_JAN2019.
ZIP.”
For more information about
EasyLanguage in general,
please see http://www.trades-
tation.com/EL-FAQ.
A sample chart is shown in
Figure 1.
This article is for information-
al purposes. No type of trading
or investment recommendation,
advice, or strategy is being made,
given, or in any manner provided
by TradeStation Securities or its
affiliates.
—Doug McCrary
TradeStation Securities, Inc.
www.TradeStation.com
FIGURE 1: TRADESTATION. A TradeStation mean renko chart of the S&P 500 displays the SVEVolatilityBands indicator.

48 • January 2019 • Technical Analysis of Stocks & Commodities


FIGURE 2: THINKORSWIM. Here, the study can be seen on a range chart set to FIGURE 3: THINKORSWIM. Here, the study has been added to a two-day, 30-minute
ATR (average true range) of the GBP/USD forex pair. chart of the forex pair GBP/USD.

thinkorswim. Choose view thinkscript and name it “SVE-


Pivotnew.”
The newly enhanced study adds to the original by includ-
F THINKORSWIM: JANUARY 2019 TRADERS’ TIPS CODE ing six plots at in-between levels and the previous day’s high
We have put together a study for thinkorswim based on the and low plots. Something of note is that unlike in some other
July 2018 article by Sylvain Vervoort, “The V-Trade, Part 5: platforms, there is no need to do any manual tuning of the
Technical Analysis—Moving Average Support & Resistance study to work with specific instruments. The chart in Figure
And Volatility Bands.” 3 shows the study added to a two-day, 30-minute chart of
We built the study and strategy by using our proprietary the forex pair GBP/USD. See Sylvain Vervoot’s article in
scripting language, thinkScript. To ease the loading process, the May 2018 issue for more information on how to use this
simply click on http://tos.mx/ODAWqm, then choose view study.
thinkScript study and name it “SVEVolatilityBand.” This —thinkorswim
can then be added to your chart from the edit study and A division of TD Ameritrade, Inc.
strategies menu within thinkorswim. www.thinkorswim.com
In Figure 2, the study can be seen on a range chart set to
ATR (average true range) of the GBP/USD forex pair. See
Sylvain Vervoot’s article in the July 2018 issue for more de-
tails on how to interpret the study.
—thinkorswim
A division of TD Ameritrade, Inc.
www.thinkorswim.com F QUANTCONNECT: DECEMBER 2018 TRADERS’ TIPS CODE
The team at QuantConnect has developed an algorithm us-
ing the SvePivots indicator described in Sylvain Vervoort’s

F THINKORSWIM: DECEMBER 2018 TRADERS’ TIPS CODE


We have improved the SVEPivot points study in thinkor-
swim to better align with the methods discussed in Sylvain
Vervoot’s May 2018 Stocks & Commodities article, “The
V-Trade, Part 3: Technical Analysis—Fibonacci Projections
And Daily Pivots.”
The study is included as part of the available studies
within thinkorswim. To add this to your chart, simply navi-
gate to the studies menu on the charts tab, then select add
study. You can either scroll down to the study and select it,
or select edit studies and then search for SVEPivots and se-
lect add selected. Alternatively, you can load the study by
simply clicking on http://tos.mx/uh0djM or enter this URL
into a web browser and click open shared item from within FIGURE 4: QUANTCONNECT. This sample chart in QuantConnect implements the
SvePivots indicator.

January 2019 • Technical Analysis of Stocks & Commodities • 49


May 2018 Stocks & Commodities article, “The V-Trade,
Part 3: Technical Analysis—Fibonacci Projections And Daily
Pivots.”
You can view the backtest and code at the following link:
https://www.quantconnect.com/terminal/processCache/?request=
embedded_backtest_0173e7a7af8e49717287f4e21c20e4f0.html

A sample chart implementing the indicator is shown in


Figure 4.
—QuantConnect.com

Figure 5: quantacula. The equity curve for the SVE smoothed volatility band
lower trading model in Quantacula Studio is shown.
F Quantacula Studio: JANUARY 2019 TRADERS’ TIPS
CODE
using QuantaculaIndicators;
The smoothed volatility bands indicator described by author using TASCIndicators;
Sylvain Vervoort in his July 2018 article, “The V-Trade, Part
5: Technical Analysis—Moving Average Support & Resistance namespace Quantacula
{
And Volatility Bands,” is available in Quantacula’s open-source public class MyModel : UserModelBase
TASC Extensions library. The sourcecode for all 100+ indica- {
tors is available in the following GitHub repository, which is //constructor
public MyModel() : base()
a treasure trove of Quantacula programming knowledge: {
}
https://github.com/LucidDion/TASC-Extensions
//Initialize is called once prior to backtest
The SVESmoothedVolatilityBandUpper and Lower were public override void Initialize(BarHistory bars)
recently added to the repository by a Quantacula user and {
vb = new SVESmoothedVolatilityBandLower(bars, 20, 20,
have since been included in the latest builds of the Quantac- 3.0, 0.90);
ula.com website and the Quantacula Studio desktop back- Plot(vb);
testing platform. }
We noticed that the bands identify extreme price excur- //Execute is called once for every bar of data in the history
sions when the deviation parameter is set to 3.0. The follow- public override void Execute(BarHistory bars, int idx)
ing trading model uses simulated limit orders to try and buy {
PlaceTrade(bars, TransactionType.Buy, OrderType.Limit,
Nasdaq 100 stocks that penetrate the lower band. The model vb[idx]);
then sells the next day at market open. It uses the following foreach (Position pos in OpenPositions)
settings: ClosePosition(pos, OrderType.Market);
}

• Starting capital: $400,000 //declare variables


• Margin ractor: 2:1 private IndicatorBase vb;
}
• Commission: $4.95 per trade }
• Position size: 5% of equity per trade
—Dion Kurczek, Quantacula LLC
We tested the model on the QPremium Nasdaq 100 uni- info@quantacula.com
verse, which contains dynamic logic that swaps symbols in www.quantacula.com
and out of the universe as they were added and removed
from the Nasdaq 100 historically. The equity curve for the
SVE smoothed volatility band lower trading model in Quan-
tacula Studio is shown in Figure 5.
The model’s C# code for Quantacula.com or Quantacula
Studio is shown here (and available at the Stocks & Com-
F NINJATRADER: JANUARY 2019 TRADERS’ TIPS CODE
modities website at Traders.com in the Traders’ Tips sec-
The SveVolatilityBand indicator, as discussed in the July 2018
tion):
article “The V-Trade, Part 5: Technical Analysis—Moving
using QuantaculaBacktest; Average Support & Resistance And Volatility Bands,” is
using QuantaculaCore; available for download at the following links for NinjaTrader

50 • January 2019 • Technical Analysis of Stocks & Commodities


8 and for NinjaTrader 7.
NinjaTrader 8: www.ninjatrader.com/SC/January-
2019SCNT8.zip
NinjaTrader 7: www.ninjatrader.com/SC/January-
2019SCNT7.zip

Once the file is downloaded, you can import


the indicator in NinjaTader 8 from within the
Control Center by selecting Tools → Import
→ NinjaScript Add-On and then selecting the
downloaded file for NinjaTrader 8. To import in
NinjaTrader 7 from within the Control Center
window, select the menu File → Utilities → Im-
port NinjaScript and select the downloaded file.
You can review the indicator’s source code
in NinjaTrader 8 by selecting the menu New →
NinjaScript Editor → Indicators from within FIGURE 6: NINJATRADER. The SveVolatilityBand indicator displayed on a one-minute ES 12-18
the Control Center window and selecting the chart on November 8, 2018.
SveVolatilityBand file. You can review the indi- link from the support menu at www.esignal.com or visit our
cator’s source code in NinjaTrader 7 by selecting the menu EFS KnowledgeBase at http://www.esignal.com/support/kb/
Tools → Edit NinjaScript → Indicator from within the Con- efs/. The eSignal formula script (EFS) is also available for
trol Center window and selecting the SveVolatilityBand file. copying & pasting from the Stocks & Commodities web-
NinjaScript uses compiled DLLs that run native, not in- site at Traders.com in the Traders’ Tips section.
terpreted, which provides you with the highest performance —Eric Lippert
possible. eSignal, an Interactive Data company
A sample chart implementing the strategy is shown in 800 779-6555, www.eSignal.com
Figure 6.
—Raymond Deux & Jim Dooms
NinjaTrader, LLC
www.ninjatrader.com

F WEALTH-LAB: JANUARY 2019 TRADERS’ TIPS CODE


Don’t be confused by the SveVolatilityBands name: The
new bands discussed by author Sylvain Vervoort in his July
2018 Stocks & Commodities article “The V-Trade, Part 5:
F eSIGNAL: JANUARY 2019 TRADERS’ TIPS CODE Technical Analysis—Moving Average Support & Resistance
For this month’s Traders’ Tip, we’ve provided the SveVolatili- And Volatility Bands” are different from the synonymous
tyBand.efs study based on the article by Sylvain Vervoort that indicator from his August 2013 article in Stocks & Com-
appeared in the July 2018 issue of Stocks & Commodities, modities and which we wrote about in the Traders’ Tips
“The V-Trade, Part 5: Technical Analysis—Moving Aver- section of that issue.
age Support & Resistance And
Volatility Bands.” This study
displays the volatility band on
the price chart.
The studies contain formula
parameters that may be con-
figured through the edit chart
window (right-click on the
chart and select edit chart). A
sample chart is shown in Fig-
ure 7.
To discuss this study or
download a complete copy of
the formula code, please visit
the EFS library discussion
board forum under the forums
FIGURE 7: eSIGNAL . Here is an example of the study plotted on a 60-minute chart of EUR A0-FX.

January 2019 • Technical Analysis of Stocks & Commodities • 51


namespace WealthLab.Strategies
{
public class SVESmoothedVolatilityBands : Wealth-
Script
{
private StrategyParameter paramBandAvg;
private StrategyParameter paramMiddleLine;
private StrategyParameter paramDevFact;
private StrategyParameter paramLowBAdj;
private StrategyParameter paramSqueezeLook-
back;

public SVESmoothedVolatilityBands()
{
paramBandAvg = CreateParameter("Band
FIGURE 8: WEALTH-LAB. This sample chart demonstrates the characteristic volatility expansion
average", 20, 2, 100, 1);
trade in AAPL (Apple Inc). paramMiddleLine = CreateParameter("Middle
line period", 20, 2, 100, 1);
paramDevFact = CreateParameter("Deviation
Since this indicator does not come with a trading system, factor", 2.4, 0.2, 5.0, 0.2);
we decided that a good illustration of its application may be paramLowBAdj = CreateParameter("Low Band Adj.",
through the concept of volatility contraction and expansion. 0.9, 0.1, 3.0, 0.1);
paramSqueezeLookback = CreateParameter("Squeeze
Price breakout following a volatility contraction implies an lookback", 200, 5, 150, 1 );
expansion in volatility of the price range, which acts as cata- }
lyst to longer-term trends. The opposite phase, that is, when
protected override void Execute()
the bands’ volatility reaches its longer-term high, signifies {
considerable price changes and a potential end of the trend. int average = paramBandAvg.ValueInt;
The width percentage of the smoothed volatility bands is int middleperiod = paramMiddleLine.ValueInt;
double devfact = paramDevFact.Value;
measured over desired lookback (here, 200 days). double lowbandadjust = paramLowBAdj.Value;
int squeezelen = paramSqueezeLookback.ValueInt;
System rules:
// Smoothed Volatility Bands
• Buy at stop at the highest 20-day high when the percent var TypicalPrice = AveragePriceC.Series( Bars );
width of the SveVolatilityBands contracts to its lowest var MedianAverage = WMA.Series(TypicalPrice, middlep-
200-day value, and there’s a bullish trend (close price eriod);
var HighChannel = SVESmoothedVolatilityBandUpper.
above 200-day SMA). Series( Bars, average, middleperiod, devfact, lowbandadjust );
• Sell at market when the percent width of the SveVola- var LowChannel = SVESmoothedVolatilityBandLower.
tilityBands widens to its highest 200-day value, and to- Series( Bars, average, middleperiod, devfact, lowbandadjust );
day’s low drops below the 20-day lowest low. SolidBrush shadowBrush = new SolidBrush(Color.Fro-
mArgb(50, Color.Violet));
The system may be risky in its current barebone state PlotSeriesFillBand(PricePane, HighChannel, Low-
Channel, Color.Blue, shadowBrush, LineStyle.Solid, 2);
so motivated traders might want to use a stop-loss and/or a PlotSeries(PricePane, MedianAverage, Color.Blue,
trend filter to liquidate the position if the trend has changed LineStyle.Solid, 1);
from bullish. HideVolume();
A sample chart is shown in Figure 8. // Squeeze and expansion in SveVolatilityBands
For extra flexibility in configuring various parameters, var PctWidth = ( ( HighChannel - LowChannel ) / Me-
drag “sliders” at the bottom of the screen interactively. The dianAverage ) * 100; PctWidth.Description = «% Width»;
var PctWidthMax = Highest.Series( PctWidth, squee-
strategy’s code is downloadable and can be found under the zelen );
“breakouts” folder in the “open strategy” dialog (Ctrl-O, var PctWidthMin = Lowest.Series( PctWidth, squeezelen
then click download and begin download). );

To execute successfully in Wealth-Lab, the system re- ChartPane PctWPane = CreatePane( 20, true, true );
quires the latest version of the TASCIndicators library. PlotSeries( PctWPane, PctWidth, Color.Blue, WealthLab.
Please install (or update if you haven’t done so already) the LineStyle.Solid, 2 );
PlotSeries( PctWPane, Lowest.Series( PctWidth,
library from our Wealth-Lab.com site to its latest version. squeezelen ), Color.DarkGreen, LineStyle.Dashed, 2 );
PlotSeries( PctWPane, Highest.Series( PctWidth,
Wealth-Lab strategy code (C#):
squeezelen ), Color.DarkRed, LineStyle.Dashed, 2 );
using System;
for(int bar = GetTradingLoopStartBar(average); bar <
using System.Collections.Generic;
Bars.Count; bar++)
using System.Text;
{
using System.Drawing;
if (IsLastPositionActive)
using WealthLab;
{
using WealthLab.Indicators;
if( PctWidth[bar] >= PctWidthMax[bar] )
using TASCIndicators;
{

52 • January 2019 • Technical Analysis of Stocks & Commodities


Exponential Moving Average: ExpAvg(Close,100)
Linearly-weighted Moving Average:
LinWgtAvg(Close,100)

SveVolatiltyBands:
Upper Band: Mul2( LinWgtAvg(Close,20), Add2(1,
Divide( Mul2( Avg( Sub( Max2( High, Lag(Close,1)),
Min2( Low, Lag(Close,1))), 20), 2.4), Close)))
Lower Band: Mul2( LinWgtAvg(Close,20), Sub(1,
Divide( Mul3( Avg( Sub( Max2( High, Lag(Close,1)),
Min2( Low, Lag(Close,1))), 20), 2.4, 0.9), Close)))
Middle: LinWgtAvg(Avg3(High,Low,Close),20)

Bollinger Bands:
Upper Band: BB High(Close,20,2.4)
Lower Band: BB Low(Close,20,2.4)
Middle: LinWgtAvg(Avg3(High,Low,Close),20)

Users of NeuroShell Trader can go to the


Stocks & Commodities section of the Neuro­
Shell Trader free technical support website to
FIGURE 9: NEUROSHELL TRADER. This NeuroShell Trader chart shows a comparison of the differ- download a copy of this or any Traders’ Tips.
ent moving averages and volatility bands.
A sample chart is shown in Figure 9.
—Marge Sherald, Ward Systems Group, Inc.
SetBackgroundColor( bar, Color.FromArgb(30, 301 662-7950, sales@wardsystems.com
Color.Red) );
www.neuroshell.com
if( Low[bar] <= Lowest.Series(Low, average)
[bar] )
SellAtMarket(bar+1, LastPosition, "Vola
expansion");
}
} F AIQ: JANUARY 2019 TRADERS’ TIPS CODE
else The AIQ EDS file for Sylvain Vervoort’s July 2018
{
if( PctWidth[bar] <= PctWidthMin[bar] ) article in S&C, “The V-Trade, Part 5: Technical
{ Analysis—Moving Average Support & Resistance And Vola-
SetBackgroundColor( bar, Color.FromArgb(30, tility Bands,” can be obtained on request via email to info@
Color.Green) );
if( Close[bar] >= SMA.Series(Close, squeezelen) TradersEdgeSystems.com. The code is also available on this
[bar] ) magazine’s website.
BuyAtStop( bar+1, Highest.Series(High, The EDS file contains the code for the various moving
average)[bar], "Vola contraction" );
} averages mentioned in the article as well as code for the Bol-
} linger Bands and exponential bands. I did not code the SVE
} bands discussed by Vervoort in his article. I coded a system
}
} that uses the concept of a squeeze, as discussed in the ar-
} ticle. A squeeze occurs when the Bollinger Bands are inside
the exponential bands. Figure 10 shows a sample trade from
—Gene (Eugene) Geren, Wealth-Lab team the system on NVDA. Figure 11 shows the EDS summary
MS123, LLC
report for a four-year backtest using the NASDAQ 100 list
www.wealth-lab.com
of stocks.
!THE V-TRADE, PART 5
!Author: Sylvain Vervoort, TASC July 2018
F NEUROSHELL TRADER: JANUARY 2019 !Coded by: Richard Denning 11/15/18
TRADERS’ TIPS CODE !www.TradersEdgeSystems,com
The moving averages and volatility bands described !ABBREVIATIONS:
by Sylvain Vervoort in his July 2018 Stocks & Commodities C is [close].
article “The V-Trade, Part 5: Technical Analysis—Moving C1 is valresult(C,1).
C2 is valresult(C,2).
Average Support & Resistance And Volatility Bands” can be C3 is valresult(C,3).
easily implemented in the NeuroShell Trader by combining a C4 is valresult(C,4).
few of NeuroShell Trader’s 800+ indicators. To implement the C5 is valresult(C,5).
C6 is valresult(C,6).
indicators, select new indicator from the insert menu and use C7 is valresult(C,7).
the Indicator Wizard to create the following indicators: C8 is valresult(C,8).
C9 is valresult(C,9).
Moving Averages: C10 is valresult(C,10).
Simple Moving Average: Avg(Close,100) C11 is valresult(C,11).

January 2019 • Technical Analysis of Stocks & Commodities • 53


!SIMPLE MOVING AVERAGES:
smaLen1 is 50.
smaLen2 is 100.
smaLen3 is 200.
esaLen is 20.
esaBandPct is 10.

sma1 is simpleavg(C,smaLen1).
sma2 is simpleavg(C,smaLen2).
sma3 is simpleavg(C,smaLen3).

!LINEAR WEIGHTED
LWMA is (C*20+C1*19+C2*18+C3*17+C4*16
+C5*15+C6*14+C7*13+C8*12+C9*11
+C10*10+C11*9+C12*8+C13*7+C14*6
+C15*5+C16*4+C17*3+C18*2+C19*1)/210.

!ESA BANDS:
esa is expavg(C,esaLen).
upperESA is esa*(1+esaBandPct/100).
lowerESA is esa*(1-esaBandPct/100).

!BOLLINGER BANDS:
!SET PARAMETERS FOR BANDS:
BBlen is 20.!Default is 20
Mult1 is 2. !Default is 2
Mult2 is 2. !Default is 2

Variance is Variance([close],BBlen).
StdDev is Sqrt(Variance).
SMA is simpleavg([close],BBlen).
Figure 10: AIQ. This shows a sample trade from the squeeze system. UpperBB is SMA + StdDev * Mult1.
LowerBB is SMA - StdDev * Mult2.

ShowValues if 1.

Squeeze if upperESA > UpperBB and lowerESA < LowerBB.

SqIndicator is iff(Squeeze,1,iff(not Squeeze,0,-1)).

Buy if upperESA < UpperBB and valrule(Squeeze,1)


and C > sma3 and C<LWMA.
Sell if (PD>=3 and LWMA < valresult(LWMA,1)) or C < PEP.

—Richard Denning
info@TradersEdgeSystems.com
for AIQ Systems

F TRADERSSTUDIO: JANUARY 2019


TRADERS’ TIPS CODE
The TradersStudio code file for Sylvain
Vervoort’s July 2018 article in S&C, “The V-Trade, Part 5:
Technical Analysis—Moving Average Support & Resistance
Figure 11: AIQ. Here is a summary EDS report for a four-year backtest of the
And Volatility Bands,” can be obtained on request via email
squeeze system. to info@TradersEdgeSystems.com. The code is also available
on this magazine’s website.
C12 is valresult(C,12). I did not code the SVE bands that are discussed in Ver-
C13 is valresult(C,13). voort’s article. I coded a system that uses the concept of a
C14 is valresult(C,14).
C15 is valresult(C,15).
squeeze, as discussed in the article. A squeeze occurs when
C16 is valresult(C,16). the Bollinger Bands are inside the exponential bands. Figure
C17 is valresult(C,17). 12 shows a sample equity curve trading the list of the NAS-
C18 is valresult(C,18).
C19 is valresult(C,19).
DAQ 100 stocks from 2000 to 2014 using the SQUEEZE_
PD is {position days}. MKT code.
PEP is {position entry price}.
'THE V-TRADE, PART 5
!MOVING AVERAGES: 'Author: Sylvain Vervoort, TASC July 2018

54 • January 2019 • Technical Analysis of Stocks & Commodities


Else
SQZE = 0
End If

If C Of independent1 > SMAmkt Then


If upperESA < upperBB And SQZE[1]=1 And C > SMA And C <
LWMA Then
Buy("LE",1,0,Market,Day)
End If
End If
If (BarsSinceEntry >= minHold And LWMA < LWMA[1]) Or C <
EntryPrice Then
ExitLong("LX","",1,0,Market,Day)
End If
End Sub

—Richard Denning
info@TradersEdgeSystems.com
for TradersStudio

Figure 12: TRADERSSTUDIO. This shows a sample equity curve trading the list of
the NASDAQ 100 stocks from 2000–2014 using the SQUEEZE_MKT code.

'Coded by: Richard Denning 11/15/18


'www.TradersEdgeSystems.com
F AMIBROKER: JANUARY 2019 TRADERS’ TIPS CODE
Sub SQUEEZE_MKT(smaLen,lwmaLen,esaLen,esaPct,minHold) In “The V-Trade, Part 5: Technical Analysis—Moving Average
'smaLen=150,lwmaLen=20,esaLen=20,esaPct=7,minHold=3 Support & Resistance And Volatility Bands” in the July 2018
Dim SMA As BarArray
Dim upperBB As BarArray Stocks & Commodities, author Sylvain Vervoort presented
Dim lowerBB As BarArray the Sve volatility bands that can serve as a complementary
Dim ESA As BarArray tool to Bollinger Bands. Sve volatility bands are essentially
Dim upperESA As BarArray
Dim lowerESA As BarArray ATR-based bands with a small twist.
Dim LWMA As BarArray Some ready-to-use code for AmiBroker is provided here.
Dim SQZE As BarArray A sample chart is shown in Figure 13.
Dim SMAmkt As BarArray
SMA = Average(C,smaLen) BandsPeriod = Param("Bands Period", 20, 2, 100 );
SMAmkt = Average(C Of independent1,smaLen) BandsDeviation = Param("Bands Deviation", 2.4, 1.0, 3.0, 0.1 );
LWMA = WeightedMA(C,lwmaLen,0) LowBandAdj = Param("LowBand Adjust", 0.9, 0.5, 1.5, 0.1 );
upperBB = UpperBolBand(C,esaLen,2,0) MiddleMA = Param("Middle LWMA", 20, 2, 100 );
lowerBB = LowerBolBand(C,esaLen,2,0)
ESA = XAverage(C,esaLen) TR = ATR( 1 ); // true range
upperESA = ESA*(1+esaPct/100)
lowerESA = ESA*(1-esaPct/100) // TASC code uses simple MA
MATR = BandsDeviation * MA( TR, BandsPeriod * 2 - 1 );
If upperESA > upperBB And lowerESA < lowerBB Then
SQZE = 1 MAC = WMA( C, BandsPeriod );

HighChannel = MAC * ( 1 + MATR / Close );


LowChannel = MAC * ( 1 - LowBandAdj * MATR / Close );

// WMA from typical price


MedAverage = WMA( Avg, MiddleMA );

Plot( Close, "Price", colorDefault, styleCandle );


Plot( HighChannel, "HighChannel", colorPink );
Plot( LowChannel, "LowChannel", colorPink );
Plot( MedAverage, "MedAverage", colorBlue );

—Tomasz Janeczko, AmiBroker.com


www.amibroker.com

F MICROSOFT EXCEL: JANUARY 2019 TRADERS’ TIPS CODE


In “The V-Trade, Part 5: Technical Analysis—Moving Aver-
age Support & Resistance And Volatility Bands” in the July
Figure 13: AMIBROKER. Here is an example range bar chart of GBPUSD with 2018 Stocks & Commodities, author Sylvain Vervoort has
Sve Volatility bands and a weighted moving average.

January 2019 • Technical Analysis of Stocks & Commodities • 55


This “timeless” nature
of renko charts reduces
the predictive utility of
the moving averages on
renko charts.
Compare the loca-
tion of the cursor on the
price chart and on the
renko chart. The cur-
sor on the renko chart
is over the bar that
most closely matches
FIGURE 14: EXCEL, MOVING AVERAGES ON PRICE AND RENKO CHARTS the time stamp of the
bar under the cursor on
the price chart. Select-
ing peaks and adjacent
valleys with the cursor
on the price chart can
give you a feel for the
renko bricks inserted
for a steep price move,
or the price bars “de-
voured” in a shallow or
sideways price move.
Figures 15 & 16 al-
low us to compare and
FIGURE 15: EXCEL, SVE VOLATILITY BANDS ON PRICE AND RENKO CHARTS contrast two approach-
es to using volatility
banding in predictive
strategies.
The envelope cre-
ated by Vervoort’s new
SveVolatility band strat-
egy does a nice job of
tracking both the price
and renko bars.
Bollinger Bands are
by design much more
sensitive to changes in
FIGURE 16: EXCEL, BOLLINGER BANDS volatility and among
other features, they do
a very nice job of locat-
laid out a couple of ways to look for support & resistance in ing sideways and well-defined price trend channels.
a price time series. The spreadsheet file for this Traders’ Tip can be down-
Among the first he describes are a set of moving averages, loaded from www.traders.com in the Traders’ Tips section.
where we are looking at price action reaching and frequently To successfully download it, follow these steps:
bouncing off one of these averages as the pricing continues a
trend, or penetrating one or more of the averages in reversal • Right-click on the Excel file link, then
situations. • Select “save as” or “save target as” to place a copy of the
Figure 14 shows a price chart and a renko chart of roughly spreadsheet file on your hard drive.
the same time period. Due to the nature of creating renko —Ron McAllister
bars, the renko chart will almost never display the exact Excel and VBA programmer
same number of bars as in a price chart of the same period. rpmac_xltt@sprynet.com
It usually displays many fewer bars since the process of cre-
ating a renko bar may have “devoured” many price bars in
the areas of sideways or very low-pitch trending price action.
56 • January 2019 • Technical Analysis of Stocks & Commodities
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January 2019 • Technical Analysis of Stocks & Commodities • 57


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 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 contract’s 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 firm’s shares outstanding.

Trading Liquidity: Futures


Contracts to
Effective
Commodity Futures Exchange % Margin Trade for Equal Relative Contract Liquidity
% Margin
Dollar Profit
S&P 500 E-Mini (Dec ’18) CME 4.9 15.2 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>>>
10-Year T-Note (Dec ’18) CBOT 1 7.7 6 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
5-Year T-Note (Dec ’18) CBOT 0.7 7.5 8 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Ultra T-Bond (Dec ’18) CBOT 2.4 8.6 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
T-Bond (Dec ’18) CBOT 1.8 6.7 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
2-Year T-Note (Dec ’18) CBOT 0.2 5.2 10 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Russell 2000 E-Mini (Dec ’18) CME 2.6 6.9 1 ••••••••••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Dec ’18) CME 5.8 13.7 2 ••••••••••••••••••••••••••••••••••
Ultra 10-Year T-Note (Dec ’18) CBOT 1.2 6.8 4 ••••••••••••••••••••••••••••••••
Crude Oil WTI (Jan ’19) NYMEX 7.6 15.3 3 ••••••••••••••••••••••••••••••
Eurodollar (Dec ’18) CME 0.1 2.8 15 ••••••••••••••••••••
Euro FX (Dec ’18) CME 1.8 13.6 5 •••••••••••••••••
Natural Gas (Jan ’19) NYMEX 12 19.2 3 •••••••••••••••
Soybeans (Jan ’19) CBOT 5.2 13 5 •••••••••
Gasoline RBOB (Jan ’19) NYMEX 7.7 12.7 2 ••••••••
Gold (Dec ’18) COMEX 3.1 21.3 5 ••••••••
Dow Indu 30 E-Mini (Dec ’18) CBOT 4.7 12.6 2 •••••••
ULSD NY Harbor (Jan ’19) NYMEX 5.8 10.6 2 •••••••
Corn (Mar ’19) CBOT 4.8 24.7 24 ••••••
Japanese Yen (Dec ’18) CME 2 13.4 5 ••••••
Sugar #11 (Mar ’19) ICE/US 7.5 8.2 7 ••••••
British Pound (Dec ’18) CME 2.6 13.8 6 •••••
30-Day Fed Funds (Jan ’19) CBOT 0 1.9 9 ••••
S&P Midcap E-Mini (Dec ’18) CME 4.9 14.2 1 ••••
Silver (Dec ’18) COMEX 5.6 11.5 2 ••••
Coffee (Mar ’19) ICE/US 7.1 12.1 3 •••
Soybean Meal (Jan ’19) CBOT 5.2 12.5 7 •••
Wheat (Mar ’19) CBOT 5.4 17.8 11 •••
Australian Dollar (Dec ’18) CME 1.9 15.2 9 ••
Cocoa (Mar ’19) ICE/US 9.9 16 6 ••
Cotton #2 (Mar ’19) ICE/US 7.4 25.4 7 ••
Hard Red Wheat (Mar ’19) KCBT 5.8 18.5 11 ••
Live Cattle (Feb ’19) CME 3.4 15.7 8 ••
Mexican Peso (Dec ’18) CME 5.5 21.5 14 •• CBOT Chicago Board of Trade, Division of CME
Soybean Oil (Jan ’19) CBOT 3.4 8.4 13 •• CFE CBOE Futures Exchange
Canadian Dollar (Dec ’18) CME 1.7 17 11 • CME Chicago Mercantile Exchange
Crude Oil Brent (F) (Jan ’19) NYMEX 7.3 13.2 3 • COMEX Commodity Exchange, Inc. CME Group
High Grade Copper (Dec ’18) COMEX 5 16.7 4 • ICE-EU Intercontinental Exchange-Futures - Europe
Lean Hogs (Feb ’19) CME 5.7 13.6 8 • ICE-US Intercontinental Exchange-Futures - US
Palladium (Mar ’19) NYMEX 6.4 10.6 1 • KCBT Kansas City Board of Trade
Platinum (Jan ’19) NYMEX 4.4 10.6 5 • MGEX Minneapolis Grain Exchange
S&P GSCI (Dec ’18) CME 4.5 13.2 2 • NYMEX New York Mercantile Exchange
Swiss Franc (Dec ’18) CME 2.3 20.8 6 •
Bitcoin Cboe Futures (Dec ’18) CFE 51 11.3 5 1901
Bitcoin CME Futures (Nov ’18) CME 55.6 12.3 1
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).

58 • January 2019 • Technical Analysis of Stocks & Commodities


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If you are aware of a business that should be listed, please email us at Editor@Traders.com.

January 2019 • Technical Analysis of Stocks & Commodities • 59


The Spur Of The Moment

How Does Impulsivity Affect


Your Trading Results?
Just knowing if you are trading based on impulse can, at the acknowledged and it affects all levels of traders. As you ad-
very least, make a difference in your approach to trading. vance in your trading career, the number of impulsive trades
And that can make a difference in your bottom line. you make decreases significantly. It really never disappears
completely. When you are a professional trader, you are able

W
by Claudio Demb to recognize that you have entered an impulsive trade, closing
it as soon as you can, end of story.
hat is impulsive trading and what does it look How do you know that the trade you have put on is an
like? Let’s begin with defining impulsivity. impulsive one? That has an easy answer. Every trade has
As the word implies, it is something we do to fall within a specific strategy. Therefore, any trade that
fast without much forethought, mostly with a is outside your strategy is classified as impulsive. How do
negative outcome where regret reigns supreme. you address this problem? Many people, including traders,
Bplanet/SHUTTERSTOCK

We all know this, but why is it that knowing it might say it’s about a lack of discipline. That is partially
is not enough to stop this behavior from hap- correct, but it misses a key ingredient: the feelings behind
pening in ourselves? the impulsive behavior.
Impulsive trades are more common than
60 • January 2019 • Technical Analysis of Stocks & Commodities
trading psychology

Bringing about a change Here’s what not to do


As with anything else in life, with impulsive behaviors there Let’s move on to a trading example to illustrate what an impul-
is a range that goes from severe impairment on one end to no sive trade might look like. For this example I’ll use one of my
impairment on the other end, with many gradations in between. own impulsive trades, which was a trade in Petroleo Brasileiro
In addition, there will be times when you would be prone to (PBR). I’ll walk through it, since the details matter.
be more impulsive than at other times; we are only human. Figure 1 shows a chart of PBR after it suffered a significant
On one end of the spectrum, there are people with addiction decline. My trade gone awry was a typical example of trying to
disorders (gambling, drugs, alcohol, and so forth). Just imagine pick a bottom. I had no strategy that calls for entering at that
telling a person who has an addiction to stop doing that and time. The blue arrow marks the entry and the red arrow the
be disciplined. If they smack you they may have a point. Of exit. Therefore, any trade that is outside your system is classi-
course, addiction is an extreme behavior and we are talking fied as impulsive. Greed, you bet! I wanted a quick profit after
here about impulsivity, which is not the same. But there are being battered by a slew of losing trades in a choppy market.
some strong similarities. Sometimes, you just want to get even, to have the sweet taste
In my clinical practice, the patients who have overcome ad- of revenge, but the market could care less about my feelings
diction have been the ones who accepted help. Not only therapy and handed me a sobering dose of reality. Fortunately, I have
but also support groups, sometimes medication, group therapy, very good risk management and the loss was quite small, the
or other treatment options. The key is to have a support system equivalent of a mosquito bite.
that will help you to overcome the problem. And of course, it What would need to happen to get the green light for a trade
goes without saying that you have to want to change. here? First, you need to have a strategy for this kind of trade
Back to trading: I adhere to the firm belief that this is the and that depends on your style of trading and the type of ac-
kind of work not to be done in isolation. Why is discipline count you are managing. I am mostly a trend-follower focusing
not enough? It is a necessary component but that’s only the on the long side. But I have some strategies for countertrend
thinking part (the cognitive portion). We need to address the trades within my short-term account. For that, I need to see
emotional part of it that leads directly to becoming impulsive. either a bullish divergence, or price action that shows that
I can only speak in general terms,
because the way it will unfold in
each of us will be different due to our
own personal history and individual
characteristics.
Behind any impulsive act there
are strong feelings that dictate the
behavior. We may be able to avoid
becoming impulsive as long as we
don’t hit the “point of no return” when
feelings become too strong to ignore.
Delayed gratification is an important
concept that applies here, given that
many times we succumb to impulsiv-
ity just because it feels good. FIGURE 1: AN IMPULSIVE TRADE. Trying to pick a bottom in Petroleo Brasileiro (PBR) after it suffered a significant
What are the most common emo- decline was tempting to try to do but it hadn’t actually met the criteria in my strategy. The trade ended in a loss.
tions that would trip us up in our
trading? Fear and greed—we have all
heard that ad nauseam. What about
when we have been sitting on our
hands for too long and we are itching
to get back into the game? What about
when we have had a string of losses
and we are angry and frustrated and
we just want to get even? What about
when we had big gains and become
too relaxed, cocksure that we know
what we are doing? What about when
tradestation

we have made a mistake and are quite


mad about that and now we want to
make sure that we do it right? FIGURE 2: A BETTER SETUP. This chart meets my strategy’s criteria. Marked on the daily chart is the trigger bar
for a false breakdown, or spring. A possible trend change is afoot.

January 2019 • Technical Analysis of Stocks & Commodities • 61


to the upside. In addition, this is the first bar that closes above
the 8 EMA, indicating a possible trend change.
Delayed gratification is This added up to a proper setup—one that I did not take.
Why not? The answer is clear: My emotional capital was spent.
an important concept that Because I had done an impulsive trade, I was still under the
applies here, given that negative influence from it. Not a good recipe for good trading!
many times we succumb to In the end, that impulsive trade cost me a little money but it
impulsivity just because it actually cost me much more because when the good trade
came along, I was not in the right mental state to take it.
feels good. Despite this example of my impulsive trade, know there is
hope: Of the 50 trades in my trading account in the past year,
that PBR trade was my only impulsive trade.

price stopped falling. For this particular trade, the strategy Claudio Demb is a psychiatrist, private trader and investor,
used could either be playing an oversold bounce or fading an and the author of the blog “Trading Your A Game” at www.
extreme. I have defined a minimum of three weekly bars and claudiodemb.com. He is also the author of the new book
ticking up of the MACD for this strategy. In this case, none Trading Your A Game: Are Feelings Expensive? He lives in
of that was in place and as soon as I entered the trade, I took a Brookline, MA and can be reached at claudiodemb@gmail.
screenshot of it, as I always do, and sent it to my trading buddy. com.
Without hesitation, he told me it was bottom-picking—that
is, an impulsive trade. I sat on the trade and by the next day Further reading
I started feeling uneasy, realizing that he was right and that I Demb, Claudio [2017]. “The Pernicious Effect Of The Loss
was sitting on an impulsive trade. With my hard stop in place, Of Opportunity,” Technical Analysis of Stocks & Com-
I let it be for a little longer and then closed out the trade at the modities, Volume 35: May.
first evidence of weakness. The outcome? A small loss and a [2018]. “Decision-Making: Why Is It So Difficult?”
bitter taste for having made a mistake. Technical Analysis of Stocks & Commodities, Volume
36: November.
A better way [2017]. “Successful Trader Must-Haves,” Technical
What would I have needed to see to have it qualify for a proper Analysis of Stocks & Commodities, Volume 35: March.
setup? Let’s look next at the chart in Figure 2. Here, we have a ‡TradeStation
very different picture. I marked on the weekly chart the fourth ‡See Editorial Resource Index
bar that passes the minimum of three weekly bars requirement
and coincides with the ticking up of the MACD histogram.
The daily is much clearer. I marked the trigger bar that shows
a beautiful false breakdown—also known as a spring using the
language of the classic Wyckoff method—of the recent low,
closing on a firm note. The MACD lines are already crossing

KOSINSKI/DOUBLE BOTTOM PATTERNS financial markets. He was the principal founder of the site
Continued from page 24 LookIntoTrade.com, which offers backtesting of various strate-
gies. He may be reached at pawel.kosinski@uib.no.

and/or a candle with a short upper shadow. Look for them Further reading
before you place an order entry. More experienced traders Kosinski, Pawel [2018]. “Double Bottoms Revisited,” Tech-
may try to enter before the pattern has been confirmed but nical Analysis of StockS & commoditieS, Volume 36:
that may lower the probability of success, even though the September.
potential reward/risk ratio is superior.

Pawel Kosinski, PhD, MEng, is a professor in process tech-


nology at University of Bergen in Norway. His research
interests involve mathematical modeling of various physical
phenomena, and he uses this experience for researching the
62 • January 2019 • Technical Analysis of Stocks & Commodities
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