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THE TRADERS’ MAGAZINE SINCE 1982

www.traders.com OCTOBER 2018

Probability—
probably a good
thing to know
Measuring the probability
distribution of indicators 8

The V-Trade
Part 8: The basic
trading rules 16

ETFs vs. Mutual


Funds: Which Way
To Go?
Battle of the funds 24

One-Day Wonder
Trades
A strategy for short-term
options traders 30

INTERVIEW
Walking forward
with Dion Kurczek 34
OCTOBER 2018
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Contents OCTOBER 2018, Volume 36 Number 11

7 Inside-Range Gap Breakouts charting and backtesting site,


by Ken Calhoun JuicyCharts.com. We spoke with
The Traders’ MagazineTM They may not be your traditional Kurczek to find out more about why
gaps, but they can end up with it’s important to him to offer traders
breakouts that are just as big as a way to develop and test their own
EDITORIAL
or bigger than some of the more trading systems and ideas.
editor@traders.com
popular type of gaps. Discover how
Editor in Chief Jack K. Hutson
to use these gaps in your trading. 38 Futures For You
Editor Jayanthi Gopalakrishnan by Carley Garner
Production Manager Karen E. Wasserman
FEATURE ARTICLE Here’s how the futures market
Art Director Christine Morrison really works.
Graphic Designer Wayne Shaw
8 Probability—Probably TIPS
Webmaster Han J. Kim A Good Thing To Know 40 Q&A
Contributing Editors John Ehlers, by John F. Ehlers by Rob Friesen
Anthony W. Warren, Ph.D. The idea of reversion to the mean This professional trader answers
is one that traders tend to take
Contributing Writers Thomas Bulkowski, Martin Pring,
a few of your questions.
Barbara Star, Markos Katsanos for granted. Can you confidently
assume all indicators subscribe to
the normal probability distribution? 42 Explore Your Options
OFFICE OF THE Publisher
Here, we measure the probability by Jay Kaeppel
Publisher Jack K. Hutson
distribution of a few indicators to Got a question about options?
Industrial Engineer Jason K. Hutson
Project Engineer Sean M. Moore determine if they can be used as
part of your reversion-to-the-mean 44 The Trend Is Your Friend
Advertising Sales trading strategy. by Bruce Ross
4757 California Ave. S.W.
Seattle, WA 98116-4499
All trends aren’t created equal.
206 938-0570 Fax 206 938-1307 16 The V-Trade, Part 8: How do you know if a trend is truly
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The BasicTrading Rules your friend? Here are a couple of
National Sales Manager Edward W. Schramm by Sylvain Vervoort pointers that’ll help you have a long
ESchramm@traders.com
In this eighth part of a multipart and sustained relationship with the
series, we look at the V-Trade trend.
Circulation
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Website Even short-term traders will have it comes to investing or trading?
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Serv­ice, pro­vided that the base fee of $1.00 per copy, plus funds or ETFs to add to your signals for stocks, futures, forex,
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Sin­gle copies of most past issues from the cur­rent year are is, and here is how professional 57 Editorial Resource Index
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Discover accepted. Subscription orders: 1 800 832-4642 34 Walking Forward With 62 Books For Traders
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Technical Analysis of Stocks & Commodities™, Dion Kurczek
The Traders’ Magazine™, is prepared from information by Jayanthi Gopalakrishnan
believed to be reliable but not guaranteed by us with­out
further verification, and does not purport to be complete.
A software developer and
Opinions expressed are subject to revision without noti- individual trader, Dion Kurczek has
fication. We are not offer­ing to buy or sell securities or developed charting and backtesting
commodities discussed. Technical Anal­ysis Inc., one or programs for trading, including
more of its officers, and authors may have a position in
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the Wealth-Lab platform (acquired This article is the basis for
The names of products and services presented in this by Fidelity Investments in 2004). TIPS Traders’ Tips this month.
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Quantacula, and a Javascript-based
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
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4 • October 2018 • Technical Analysis of Stocks & Commodities


Simply Advanced

Just launched...
XVI
Featuring the NEW Explorer
Discover the latest features at metastock.com/whats-new
The editors of S&C invite readers to submit their opinions and information on subjects The main purpose of the SRSI is to
relating to technical analysis and this magazine. This column is our means of communi- confirm corrections and reversals based
cation with our readers. Is there something you would like to know more (or less) about? on the convergent or divergent moves.
Tell us about it. Without a source of new ideas and subjects coming from our readers, this The SMAs applied to the RSI differences
magazine would not exist. are there to smooth the signal.
Email your correspondence to Editor@Traders.com or address your correspondence The ideal SRSI should indicate buy
to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499. All and sell signals when turning up or
letters become the property of Technical Analysis, Inc. Letter-writers must include their full down from the low or upper side (see
name and address for verification. Letters may be edited for length or clarity. The opinions the vertical dotted lines in the chart in
expressed in this column do not necessarily represent those of the magazine.—Editor Figure 1 here) while at the same time
showing the type of reversal based on
the convergent and divergent moves.
ERRATA: THE V-TRADE, PART 6 interested in Vervoort’s SRSI indicator, Personally, I apply all the techniques
Editor, which I programmed for the Nanotrader explained in my V-Trade article series.
When reading part 6 platform. That works fine but it is not easy. You
of Sylvain Vervoort’s To be honest, I find it difficult to in- need a lot of practice.
series on the V-Trade in terpret the results of the SRSI, as they I find that the trader needs to apply a
the August 2018 issue, are quite different from the normal series of different techniques to remain
I was a little irritated RSI or STO. Can the author offer any consistently profitable. In addition, you
when I read the text on more explanation on why he uses the should not use, or use as little as possible,
page 17 referring to positive divergence stochastic on the two SMAs of the RSI any technique that uses optimization.
in Figure 2. Is it possible that Figures 2 differences?
and 5 were mistakenly exchanged, since In my opinion, one of the greatest Weekly & Daily Stochastic
the author writes that price is going down influences on the success of a trading Editor,
but in Figure 2 price is going up? system is the timeframe used. Prices are First and foremost, thank you for Vitali
Currently, I am working on a trading not fractal, and if you use too small of a Apirine’s September 2018 article in S&C,
system based mainly on Bollinger Bands timeframe, any trading system is going to “Weekly & Daily Stochastics,” which
for the entry (enter long if close>0,5 up- fail. At least that is my experience. even a novice technical analyst like me
per Bollinger Band). My main problem juergen can truly understand.
is that there are too many entries, so I My investing timeframe is longer than
need to find another indicator to reduce Author Sylvain Vervoort replies: that of most traders/investors and thus,
the bad entries. Thank you for writing. You are correct— I find the weekly/monthly charts to be
After testing dozens of different Figures 2 and 5 were switched. (My very important in my work. In Apirine’s
indicators, I am still not satisfied with fault, I marked these files with the wrong article, he uses settings of 14 (daily) and
the system’s reliability. Thus, I was very name.) 70 (weekly). I would like to construct
a weekly and monthly dual stochastic
on a single chart. Therefore, would the
author be so kind as to tell me what
monthly input setting he would use for
the monthly, assuming that 70 would
still be used for the weekly input? Thank
you very much.
Nancy West

Author Vitali Apirine replies:


FIGURE 1: SRSI. Ideally, the SRSI indicates buy & sell signals when turning up or down from the low or upper
Thank you for your kind words about
side (see vertical dotted lines) while at the same time showing the type of reversal based on the convergent
and divergent moves. Continued on page 33

6 • October 2018 • Technical Analysis of Stocks & Commodities


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They may not be your traditional gaps, Step-by-step action plan Build powerful
but they can end up with breakouts that Here’s how you can start to use the inside-
are just as big as or bigger than some of range gap breakout strategy:
trading systems in
the more popular type of gaps. Discover MINUTES
how to use these gaps in your trading. Step 1: Find charts with a small gap
up that is above the prior day’s close
without coding
by Ken Calhoun and below the prior day’s high, as seen

T
in Figure 1 on July 24, 2018.
rading gaps is a long-time
favorite strategy for active Step 2: Use an entry price of $0.20 ®

day and swing traders. In above the low of the gap up ($34.80 plus
this month’s column, I will $0.20 equals $35 in this example).
show you a new strategy for
trading gaps that begin inside the previ- Step 3: Use an initial stop of the prior
ous day’s trading range. This is different day’s low ($34.50 in this example).
from traditional gap-trading strategies,
www.NeuroShell.com
which rely primarily on multipoint gaps Step 4: Anticipate reversals right 301.662.7950
above prior resistance levels. under whole numbers and close out
These smaller inside gaps often lead to all daytrades once they reach a price Insights: Why this
big breakouts once they continue upward level of 0.80 or above ($35.80 in this technique works
above the previous day’s high. You can example). If you’re swing trading, use Gaps occur when traders are willing to
see these visually by using a two-day the prior day’s high as your initial pay a premium price above the previous
chart similar to the one featured here stop level.
in Figure 1. Continued on page 46

Trading inside gaps


Whenever a stock opens
at a price higher than
the previous day’s close,
this small gap is likely
to attract additional buy-
ing. This is because it
will show up on vari-
ous scanning programs
that identify percentage
gainers each morning for
active traders, who then
buy shares.
You can see this pat-
tern in the chart of Noble
Energy Inc. in Figure 1,
when, on July 24, 2018,
the inside-range price
gapped up from the previ-
ous day’s close of $34.55
up to $35/share. It ran
esignal

all the way up to $35.80


before pivoting. Figure 1: Inside-Range Gap Breakout (NBL). In this case, the small inside gap continued upward for a full point.

October 2018 • Technical Analysis of Stocks & Commodities • 7


8 • October 2018 • Technical Analysis of Stocks & Commodities
TRADING SYSTEMS

Back To Normal

Probability—Probably A
Good Thing To Know
The idea of reversion to the mean is one that traders accumulate the bin counts across the data history.
tend to take for granted. Can you confidently assume Then, on the last bar on the chart, I export all the bin
all indicators subscribe to the normal probability values to a text file. I can then import this text file into
distribution? Here, we measure the probability Excel and plot the occurrences in each of the bins as
distribution of a few indicators to determine if they a bar chart. The result is the probability density of
can be used as part of your reversion-to-the-mean the indicator.
trading strategy. In the sidebar “EasyLanguage Code For Measur-

S
ing Probability Distribution,” I provide a listing titled
wing trading, or reversion to the mean, is a “Code fragment to measure indicator probability
popular trading style mainly because it is distribution” that shows how to accumulate the bin
a strategy that typically yields a relatively counts and export them to a text file.
high percent of winning trades. The idea In my May 2018 Stocks & Commodities article
behind it is that if prices have swung far enough from “RocketRSI,” I described an RSI indicator that swings
their mean price, there is high probability that price from -1 to +1. I’ll use that indicator to measure the
will swing back to the mean value. Two of the most probability distribution of an RSI. You can find the
inelegant technical analysis terms—overbought and complete code listing for doing this in “MyRSI With
oversold—imply probability considerations. There Probability Distribution Measurement” in the sidebar
are a number of strategies based on overbought and to this article. Since this RSI only swings from -1 to
oversold conditions. For example, a commonly pro- +1, I won’t be using all the bins, but it will still provide
moted rule is to buy when an RSI is crossing over 20. a good handle on the probability distribution itself.
The assumption is that when RSI is below 20, it is a The measured probability density of the MyRSI
low-probability event and prices could recover back indicator, measured with default settings and applied
toward the mean. Similarly, the complimentary rule to daily data of SPY for the 10-year period from
is to sell short when the RSI is crossing under 80. January 1, 2008 to December 31, 2017, can be seen
in Figure 1. The probability distribution is certainly
Let’s challenge those assumptions
It turns out that measuring the probability distribution
of an oscillator-type indicator is relatively easy. First
of all, you can assume the oscillator has a zero mean.
If it doesn’t have a zero mean, it will be apparent in
the probability distribution measurement itself.
microsoft excel

Next, assume the oscillator swings between -3 and


+3. (I will revisit the oscillator with scaling to make
this a good assumption.) I will provide 30 bins be- Figure 1: RSI MEASURED WITH DEFAULT SETTINGS ON SPY FROM JANUARY
low zero and 30 bins above zero in which to place 1,
KEN SMITH

2008 TO DECEMBER 31, 2017. Here you see the RSI probability distribution is
nearly uniform with an upside bias because of the uptrend in data over the time period
the indicator value on each bar through history, and analyzed.

by John F. Ehlers
October 2018 • Technical Analysis of Stocks & Commodities • 9
article “Deviation-Scaled Moving Average.” The code for this
oscillator is shown in the code listing titled “Deviation-scaled
oscillator” in the sidebar to this article, with the code to measure
the probability distribution appended.
That indicator starts with an oscillator called zeros that is a
simple two-bar difference of prices. This oscillator is important
because of two characteristics in its transfer response, which
I’ll describe next.
First, when the cycle periods are long, and at the limit there
is no change in price, the transfer response is zero. It is this
Figure 2: rocket rsi indicator’s effect on probability distribution. characteristic that provides the nominal zero mean in the
The RocketRSI has a bell-shaped Gaussian probability distribution, which suggests oscillator output. Further, its filter rolloff from shorter-cycle
it’s an indicator that could be used in a mean-reversion strategy. periods is -6 dB per octave. Market data is fractal, meaning the
cycle amplitudes in its spectrum increase in direct proportion
not the bell-shaped probability distribution that is commonly to their cycle periods. That means the data cycle amplitudes
assumed. I would characterize it as having a nearly uniform increase statistically at the rate of 6 dB per octave. Since the
probability distribution with a bias toward the upside due to oscillator rolloff is -6 dB per octave and spectrum amplitudes
the uptrend in the data over the 10-year period. Certainly, are statistically increasing at the rate of +6 dB per octave, the
this probability distribution shows the RSI should not be your result is that the zeros oscillator whitens the price spectrum.
indicator of choice to swing trade the SPY. The probability of This is a good thing.
being “overbought” is more than twice the probability at the Second, when the cycle period is exactly at twice the sampling
mean. The upside bias due to the general trend up is also ap- rate, the samples are exactly one cycle period apart. This is called
parent in Figure 1. the Nyquist frequency period and is the shortest possible period
in sampled data. In the zeros oscillator, the transfer response
But there is a way around it is zero at the Nyquist period because the samples are exactly
All is not lost if you really want to use reversion to the mean as one period apart for that spectral component. Having a zero
your trading strategy. A characteristic of the nonlinear Fisher in the transfer response at the Nyquist period eliminates the 6
transform is to convert virtually any waveform into a waveform dB increase in noise produced by a simple one-bar difference.
having a nearly bell-shaped Gaussian probability distribution. I Having a zero in the transfer response at the Nyquist period also
used this characteristic of the Fisher transform when I described reduces the impact of aliased data in the oscillator output.
the RocketRSI. The RocketRSI swings are limited to plus and The zeros oscillator output is smoothed in my two-pole
minus three standard deviations, which is the reason I scaled SuperSmoother filter (for more on this, see my January 2014
the bins to measure probabilities to range between -3 and +3. S&C article “Predictive And Successful Indicators”). The
The code for the RocketRSI is repeated here from my earlier critical period of the SuperSmoother filter is the “half the
article and can be found in the code listing “RocketRSI with input” period to retain the oscillator’s responsiveness, and the
probability distribution measurement” in the sidebar to this filter coefficients are calculated only on the first bar of data for
article, with the code to measure the probability distribution computational efficiency.
appended. Since the zeros oscillator has a nominally zero mean, the
When you apply the RocketRSI indicator to the same 10-year SuperSmoother filter output also has a nominally zero mean.
span of SPY data, it results in the beautiful bell-shaped prob- Therefore, the standard deviation can be calculated as the square
ability distribution you see in Figure 2. The nearly Gaussian root of the average sum of the squares of the smoothed filter
probability distribution means we have an indicator that we can waveform over the input period. This is commonly called the
use in a reversion-to-the-mean strategy with confidence. root mean square (RMS).
For example, if the indicator crosses above -2, this means it is
departing a region that has only a 2.5% probability of occurring.
In other words, there is a high probability of reversion to the
mean, and that is a good opportunity to buy. Alternatively, you
could anticipate the turning point by buying when the RocketRSI
Not all oscillators are suitable
crosses under the -2 level. You might be a little early in your for swing trading because their
entry if you use this strategy, but you have also mitigated some probability distributions don’t
of the lag created by calculating the indicator itself. necessarily have low-probability
Beyond RSI events at the extreme swings of
The use of indicators for swing trading or reversion-to-the-mean the indicator.
strategies isn’t limited to the RSI. For example, I created a simple
oscillator indicator in my July 2018 Stocks & Commodities
10 • October 2018 • Technical Analysis of Stocks & Commodities
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A characteristic of the nonlinear
Fisher transform is to convert
virtually any waveform into a
waveform having a nearly bell-
shaped Gaussian probability
distribution.
FIGURE 3: PROBABILITY DISTRIBUTION FOR DEVIATION-SCALED OSCILLATOR.
The oscillator is suitable for swing trading but there is a trend bias and the distribution
has “fat tails.”
Dividing the RMS into the smoothed filter waveform scales the
waveform in terms of standard deviations, and you can evaluate
the indicator by measuring its probability distribution. I did that
using the same data as before, and Figure 3 shows the oscillator
is suitable for swing trading, but the trend bias is obvious and
the distribution has “fat tails.” That is, the probability of being
further from the mean is higher than a Gaussian probability
distribution would have at the same deviation. This necessarily
reduces the efficacy of the indicator for swing trading.
It is possible to improve the probability distribution by using
a trick associated with the Fisher transform. The indicator is
FIGURE 4: adding THE FISHER TRANSFORM TO THE DEVIaTiON-SCALED
already scaled in terms of standard deviations. You don’t care OSCILLATOR. This improved the probability distribution, as can be seen by the nearly
much if the deviation exceeds an absolute value of 2. So you perfect bell-shaped Gaussian probability distribution. This makes it a suitable indicator
simply apply the Fisher transform to absolute values of the for swing trading.
indicator that are less than 2, and divide the input to the Fisher
transform by 2 to avoid having the transform blow up. Fisher Stocks & Commodities Contributing Editor John Ehlers is
transform inputs must be limited to absolute values less than a pioneer in the use of cycles and DSP technical analysis. He
unity. In the code listing “Deviation-scaled oscillator with is president of MESA Software and cofounder of StockSpotter.
Fisher transform” in this article’s sidebar, you see the same com and BeYourOwnHedgeFund.com, which is a new site that
code as for the deviation-scaled oscillator but with the Fisher provides portfolios based on his algorithmic strategies.
transform trick included.
When the Fisher transform is introduced with this trick and Further reading
added to the deviation-scaled oscillator, and the oscillator Ehlers, John F. [2018]. “RocketRSI—A Solid Propellant For Your
is applied to the same data as before, it results in the nearly Rocket Science Trading,” Technical Analysis of Stocks &
perfect bell-shaped Gaussian probability distribution. This is Commodities, Volume 36: May.
demonstrated in Figure 4. [2018]. “The Deviation-Scaled Moving Average,”
Technical Analysis of Stocks & Commodities, Volume
Low or high probability? 36: July.
Not all oscillators are suitable for swing trading because their [2014]. “Predictive And Successful Indicators,” Tech-
probability distributions don’t necessarily have low-probability nical Analysis of Stocks & Commodities, Volume 32:
events at the extreme swings of the indicator. With this article, January.
I have provided a code fragment that can be appended to any Ehlers, John F. [2013]. Cycle Analytics For Traders, Wiley.
properly scaled oscillator and modified to produce the prob- ‡TradeStation
ability distribution of that oscillator on any data symbol of your ‡See Editorial Resource Index
choice. If the oscillator is not scaled, you can apply the RMS
scaling without distorting the oscillator response or introducing The code given in this article is available in the Article Code section
any computational lag. Almost any oscillator-type indicator can of our website, Traders.com.
have its probability distribution improved for swing trading by
applying the Fisher transform using the technique I’ve described See our Traders’ Tips section beginning on page 48 for commentary
here and that is shown in the code listing “Deviation-scaled and implementation of John Ehlers’ technique in various technical
oscillator with Fisher transform” in the sidebar to this article. analysis programs. Accompanying program code can be found in the
Good swing trading! Traders’ Tips area at Traders.com.

12 • October 2018 • Technical Analysis of Stocks & Commodities


EasyLanguage Code For MEASURING Probability Distribution

Code fragment to measure indicator probability distribution If LastBarOnChart Then Begin


For I = 1 to 60 Begin For I = 1 to 61 Begin
J = (I - 31) / 10; Print(File("C:\ProbabilityDensity.CSV"), (I - 31) / 10, ",", Bin[I]);
K = (I - 30) / 10; End;
If Indicator > J and Indicator <= K Then Bin[I] = Bin[I] + 1; End;
End;
RocketRSI with probability distribution measurement
If LastBarOnChart Then Begin {
For I = 1 to 61 Begin RocketRSI Indicator
Print(File("C:\ProbabilityDensity.CSV"), (I - 31) / 10, ",", Bin[I]); (C) 2005-2018 John F. Ehlers
End; }
End;
Inputs:
MyRSI with probability distribution measurement SmoothLength(8),
{ RSILength(10);
MyRSI Indicator
(C) 2005-2018 John F. Ehlers Vars:
} a1(0), b1(0), c1(0), c2(0), c3(0), Filt(0), Mom(0), count(0), CU(0),
CD(0), MyRSI(0), RocketRSI(0), I(0), J(0), K(0);
Inputs:
SmoothLength(8), Arrays:
RSILength(14); Bin[61](0);

Vars: //Compute Super Smoother coefficients once


a1(0), b1(0), c1(0), c2(0), c3(0), Filt(0), count(0), CU(0), CD(0), If CurrentBar = 1 Then Begin
MyRSI(0), I(0), J(0), K(0); a1 = expvalue(-1.414*3.14159 / (SmoothLength));
b1 = 2*a1*Cosine(1.414*180 / (SmoothLength));
Arrays: c2 = b1;
Bin[61](0); c3 = -a1*a1;
c1 = 1 - c2 - c3;
//Compute Super Smoother coefficients once End;
If CurrentBar = 1 Then Begin
a1 = expvalue(-1.414*3.14159 / (SmoothLength)); //Create half dominant cycle Momentum
b1 = 2*a1*Cosine(1.414*180 / (SmoothLength)); Mom = Close - Close[RSILength - 1];
c2 = b1;
c3 = -a1*a1; //SuperSmoother Filter
c1 = 1 - c2 - c3; Filt = c1*(Mom + Mom[1]) / 2 + c2*Filt[1] + c3*Filt[2];
End;
//Accumulate "Closes Up" and "Closes Down"
//SuperSmoother Filter CU = 0;
Filt = c1*(Close + Close[1]) / 2 + c2*Filt[1] + c3*Filt[2]; CD = 0;
For count = 0 to RSILength -1 Begin
//Accumulate "Closes Up" and "Closes Down" If Filt[count] - Filt[count + 1] > 0 Then CU = CU + Filt[count] -
CU = 0; Filt[count + 1];
CD = 0; If Filt[count] - Filt[count + 1] < 0 Then CD = CD + Filt[count + 1] -
For count = 0 to RSILength -1 Begin Filt[count];
If Filt[count] - Filt[count + 1] > 0 Then CU = CU + Filt[count] - End;
Filt[count + 1]; If CU + CD <> 0 Then MyRSI = (CU - CD) / (CU + CD);
If Filt[count] - Filt[count + 1] < 0 Then CD = CD + Filt[count + 1] -
Filt[count]; //Limit RocketRSI output to +/- 3 Standard Deviations
End; IF MyRSI > .999 Then MyRSI = .999;
If CU + CD <> 0 Then MyRSI = (CU - CD) / (CU + CD); If MyRSI < -.999 Then MyRSI = -.999;

Plot1(MyRSI); //Apply Fisher Transform to establish Gaussian Probability Distribu-


Plot2(0); tion
RocketRSI = .5*Log((1 + MyRSI) / (1 - MyRSI));
//Bin the indicator values in Bins from -3 to +3
For I = 1 to 60 Begin Plot1(RocketRSI);
J = (I - 31) / 10; Plot2(0);
K = (I - 30) / 10;
If MyRSI > J and MyRSI <= K Then Bin[I] = Bin[I] + 1; //Bin the indicator values in Bins from -3 to +3
End; For I = 1 to 60 Begin
J = (I - 31) / 10;
//Output the Bin measurements to a file K = (I - 30) / 10;

October 2018 • Technical Analysis of Stocks & Commodities • 13


If RocketRSI > J and RocketRSI <= K Then Bin[I] = Bin[I] + 1; End;
End;
Deviation-scaled oscillator with Fisher transform
//Output the Bin measurements to a file // Fisherized Deviation Scaled Oscillator
If LastBarOnChart Then Begin // (c) 2013 - 2018 John F. Ehlers
For I = 1 to 61 Begin
Print(File("C:\ProbabilityDensity.CSV"), (I - 31) / 10, ",", Bin[I]); Inputs:
End; Period(40);
End;
Vars:
Deviation-scaled oscillator a1(0), b1(0), c1(0), c2(0), c3(0), Zeros(0), Filt(0), RMS(0),
// Deviation Scaled Oscillator count(0), ScaledFilt(0), FisherFilt(0), I(0), J(0), K(0);
// (c) 2013 - 2018 John F. Ehlers
Arrays:
Inputs: Bin[61](0);
Period(40);
If CurrentBar = 1 Then Begin
Vars: //Smooth with a Super Smoother
a1(0), b1(0), c1(0), c2(0), c3(0), Zeros(0), Filt(0), RMS(0), a1 = expvalue(-1.414*3.14159 / (.5*Period));
count(0), ScaledFilt(0), I(0), J(0), K(0); b1 = 2*a1*Cosine(1.414*180 / (.5*Period));
c2 = b1;
Arrays: c3 = -a1*a1;
Bin[61](0); c1 = 1 - c2 - c3;
End;
If CurrentBar = 1 Then Begin
//Smooth with a Super Smoother //Produce Nominal zero mean with zeros in the transfer response at
a1 = expvalue(-1.414*3.14159 / (.5*Period)); DC and Nyquist with no spectral distortion
b1 = 2*a1*Cosine(1.414*180 / (.5*Period)); //Nominally whitens the spectrum because of 6 dB per octave rolloff
c2 = b1; Zeros = Close - Close[2];
c3 = -a1*a1;
c1 = 1 - c2 - c3; //SuperSmoother Filter
End; Filt = c1*(Zeros + Zeros[1]) / 2 + c2*Filt[1] + c3*Filt[2];

//Produce Nominal zero mean with zeros in the transfer response at //Compute Standard Deviation
DC and Nyquist with no spectral distortion RMS = 0;
//Nominally whitens the spectrum because of 6 dB per octave rolloff For count = 0 to Period - 1 Begin
Zeros = Close - Close[2]; RMS = RMS + Filt[count]*Filt[count];
End;
//SuperSmoother Filter RMS = SquareRoot(RMS / Period);
Filt = c1*(Zeros + Zeros[1]) / 2 + c2*Filt[1] + c3*Filt[2];
//Rescale Filt in terms of Standard Deviations
//Compute Standard Deviation If RMS <> 0 Then ScaledFilt = Filt / RMS;
RMS = 0;
For count = 0 to Period - 1 Begin //Apply Fisher Transform to establish real Gaussian Probability
RMS = RMS + Filt[count]*Filt[count]; Distribution
End; If AbsValue(ScaledFilt) < 2 Then FisherFilt = .5*Log((1 + ScaledFilt /
RMS = SquareRoot(RMS / Period); 2) / (1 - ScaledFilt / 2));

//Rescale Filt in terms of Standard Deviations Plot1(FisherFilt);


If RMS <> 0 Then ScaledFilt = Filt / RMS; Plot2(0);

Plot1(ScaledFilt); //Bin the indicator values in Bins from -3 to +3


Plot2(0); For I = 1 to 60 Begin
J = (I - 31) / 10;
//Bin the indicator values in Bins from -3 to +3 K = (I - 30) / 10;
For I = 1 to 60 Begin If FisherFilt > J and FisherFilt <= K Then Bin[I] = Bin[I] + 1;
J = (I - 31) / 10; End;
K = (I - 30) / 10;
If ScaledFilt > J and ScaledFilt <= K Then Bin[I] = Bin[I] + 1; //Output the Bin measurements to a file
End; If LastBarOnChart Then Begin
For I = 1 to 61 Begin
//Output the Bin measurements to a file Print(File("C:\ProbabilityDensity.CSV"), (I - 31) / 10, ",", Bin[I]);
If LastBarOnChart Then Begin End;
For I = 1 to 61 Begin End;
Print(File("C:\ProbabilityDensity.CSV"), (I - 31) / 10, ",", Bin[I]);
End;

14 • October 2018 • Technical Analysis of Stocks & Commodities


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Reversals, Retracements, Continuations

The V-Trade
Part 8: The Basic Trading Rules

In this eighth part of a multipart series, we look at the V-Trade part. And in part 9, I will show a number of trade examples
trading rules. applying these rules.

Trading rules

T
by Sylvain Vervoort
I have split the rules into two basic parts: a downtrend-to-
he objective of this series on the V-Trade is to uptrend reversal, and an uptrend-to-downtrend reversal. In this
explain the techniques I apply to make manual article I will look at the up or down reversal; the retracements
and automatic buy & sell decisions, or a combina- during the up or down move; and finally, the continuation of
tion of both. the up or down move after the retrace.
Last month in part 7, I discussed the V-wave In addition to applying the basic rules, it is good practice
count, which is based on Elliott wave theory. This to look at short-term candlestick charts for flag and pennant
WAVE: NATINKA/V: WOO GRAPHICS/SHUTTERSTOCK/

count can be applied to almost any move in the continuation patterns before opening or closing a trade.
markets. In that article, I documented the rules
for the basic wave counts. In reality, this count Downtrend-to-uptrend reversal
will likely be more complex with possible extensions in any Price reaches the end of a downtrend, either finishing an
COLLAGE: CHRISTINE MORRISON

of the basic waves. impulse wave 5 or a correction wave C.


Also in part 7, I reviewed the V-Trade trading rules and
tried to condense them as much as I could. DU1 Expecting a wave 1 or A after a double upward renko
Before I move over to the expert tools, I will first look at the brick.
V-Trade buy & sell trading rules in more detail in this eighth DU2 Price is near the bottom of the volatility band.
16 • October 2018 • Technical Analysis of Stocks & Commodities
TRADING SYSTEMS

DU3 The last move down is a completed (5) (5) 5


2
impulse or correction wave.
B 3
DU4 The SRSI is near the bottom with
a positive price divergence. 1
4 1 or A
DU5 Price is at a support level, reaching 1
4
1 or A A
passive/active down targets. 3
DU6 Price has a wick below the double-
C 2
sized reversing renko brick. 5
Diagram 1 Diagram 2 Diagram 3

Diagram 1: New impulse wave 1 to 5 C 5 C


or a larger ABC up correction after a 3
A A
completed impulse wave down.
4
Diagram 2: New impulse wave 1 to 5 or a 1
(B) wave up correction after a completed B B
correction wave down. 2
Diagram 4 Diagram 5 Diagram 6
Uptrend retrace
UR1 Expecting a pullback wave 2, 4, or 5 C 2
B after wave 1, 3, or A reaching a 3 A
price target. 1
1 or A
UR2 Price meets passive/active resis- 4 1 or A 4
tance or top of volatility band. 1
B
UR3 The SRSI indicator is near the upper 3
side, showing a hidden divergence (C) 2 (5) 5
or convergent move. Diagram 7 Diagram 8 Diagram 9

Diagram 3: Waves 2 and 4 retrace the


impulse wave. UD5 Price is at a resistance level reaching passive/active up
targets.
Diagram 4: Wave B retraces the correction wave. UD6 Price has a wick above the double-sized reversing renko
brick.
Uptrend continuation
UC1 Expecting a continuation of the up-moving impulse wave Diagram 7: New impulse wave or a larger ABC correction
after the retracement of wave 2 or 4 to create impulse after a completed up impulse wave.
waves 3 or 5, or a continuation of the up-moving cor-
rection wave C after the wave B retracement, reaching Diagram 8: New impulse wave or a (B) wave down correction
a retracement target. after a completed up correction wave.
UC2 Price is near passive/active support or near the bottom
of the volatility channel. Downtrend retracement
UC3 The SRSI indicator shows a convergent move or hidden DR1 Expecting a pullback wave 2, 4, or B after wave 1, 3,
divergence. or A, reaching a price target.
DR2 Price meets passive/active support or the bottom of the
Diagram 5: After retracing with waves 2 and 4, waves 3 and volatility band.
5 continue the up move. DR3 The SRSI indicator is near the bottom, mostly with a
hidden divergence or convergent move.
Diagram 6: After retracement wave B, wave C continues
the up correction. Diagram 9: Waves 2 and 4 retrace the impulse wave.

Uptrend-to-downtrend reversal Diagram 10: Wave B retraces the correction wave.


UD1 Expecting a wave 1 or A after a double downward
renko brick. Downtrend continuation
UD2 Price is near the top of the volatility band. DC1 Expecting a continuation of the down moving impulse
UD3 The last move up is a completed impulse or correction wave after the retracement of wave 2 or 4 to create
wave. impulse waves 3 or 5, or a continuation of the down
UD4 SRSI is near the top with a negative price divergence. move correction wave C after the retracement of wave
October 2018 • Technical Analysis of Stocks & Commodities • 17
2 Positive convergence (Diagram 14)
B B
This is an illustration of a positive convergent
move. Price and indicator move up and make
1
higher lows or higher highs. A positive con-
4
vergence move mostly suggests the previous
A A uptrend’s continuation after a correction phase
3
C C that ends with a higher low.
5
Diagram 10 Diagram 11 Diagram 12 Positive hidden divergence (Diagram 15)
A positive hidden divergence appears when
price moves up and makes a higher low while
the SRSI shows a lower bottom. This pattern
usually indicates the last price downswing was
a correction of the previous up move. Price
continues the uptrend after the correction.

Negative divergence (Diagram 16)


Diagram 13 Diagram 14 Diagram 15
A negative divergence appears when price
moves up and makes a new higher top while
SRSI makes a lower top. This confirms a trend
reversal from an up move to a down move. Most
profitable negative divergences show up after a
five-impulse up wave.

Negative convergence (Diagram 17)


A negative convergence occurs when price and
Diagram 16 Diagram 17 Diagram 18
indicator trend down and make lower lows or
lower highs. A negative convergent move usually
B reaching a retracement target. suggests a continuation of the ongoing down-
DC2 Price is near passive/active resistance or the top of trend after a correction phase ends with a lower high.
volatility channel.
DC3 The SRSI indicator shows a convergent move or hidden Negative hidden divergence (Diagram 18)
divergence. A negative hidden divergence appears with price trending
down and making lower highs in price while SRSI makes a
Diagram 11: After retracement waves 2 and
4, waves 3 and 5 continue the down move.

Diagram 12: After retracement wave B,


wave C continues the downward correc-
tion.

Positive and negative


divergences
In part 6 of this V-Trade series, I discussed
the different divergent and convergent moves,
but it will be helpful to repeat that informa-
tion here as a reference.

Positive divergence
MetaQuotes Software Corp.

Diagram 13 is an illustration of a positive


divergence, which appears when price moves
down and makes a new lower bottom while
SRSI makes a higher bottom. This confirms
a trend reversal from a down to an up move.
Most profitable positive divergences show up FIGURE 1: MODIFIED RENKO CHART, impulse wave. Rules are applied to a modified renko chart
after a five-impulse down wave. impulse wave for a downtrend-to-uptrend reversal.

18 • October 2018 • Technical Analysis of Stocks & Commodities


SINCE

higher high. This pattern usually indicates the last upswing


in price was just a correction of the previous down move and
price continues the downtrend after the correction.

Trend reversals: Applying CL (8/15/2011)


downtrend-to-uptrend
reversal rules
Modified renko chart reversal after a
downward impulse wave
In Figure 1 you see an S&P 500 modified
renko chart illustrating a downtrend- Exit at 64.84
to-uptrend reversal after a downward 1.47pts
impulse wave. $1,470/contract
The index complies with the downtrend-to-uptrend V-Trade
trading rules:

DU1 Expecting wave A or 1 after a double upward renko


brick.
DU2 Price low is at the bottom of the volatility band.
DU3 The last move down completes a wave 5 impulse
wave.
DU4 The SRSI started from the bottom with a positive price
divergence.
DU5 Price is near a support level reaching a down target at
the 161.8% Fibonacci projection over the last wave up
before the start of the impulse wave down.
DU6 Price has a wick below the current double-sized revers- Potential Reward Zone
ing renko brick. 0.28pts, $280
Looking at the start of wave 4, do you see a positive diver-
gence and price reaching the Fibonacci target already? All
rules are complied with, except that the impulse wave is not
completed at that point!
This is possibly a good sign to close an open short trade.
But it’s not the time to open a long trade. Since you are ex-
pecting a wave 4 correction, you have to verify whether there
is a downtrend retrace signal at this point with the following
rules applied: •

DR1 Expecting a pullback wave 4 after wave 3. •


DR2 Price reaches a Fibonacci target and the bottom of the
volatility band. •
DR3 SRSI indicator has a positive divergence starting from
the bottom of the indicator.

In this scenario, you have to wait for the end of correction


wave 4 for the downtrend continuation signal to be in agree-
ment with the following rules:

DC1 Expecting a continuation of the down moving impulse


wave after the wave 4 retracement to create impulse
wave 5.
DC2 Price is near active resistance of the middle line of
THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE
RESULTS SHOWN IN AN ACTUAL PERFORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES
HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET

volatility channel. FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT
THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE

DC3 SRSI indicator has a negative hidden divergence with


PROFITS
PROF OR LOSSES SIMILAR TO THESE BEING SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS
AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND

a lower top in price and higher top in the indicator.


AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.

October 2018 • Technical Analysis of Stocks & Commodities • 19


At this point, you may decide to go in for a
short trade with the wave 5 down. This short
position must be closed at the occurrence of
the current downtrend-to-uptrend reversal
signals at the bottom of current wave 5.
The downward impulse wave is most likely
completed, which means it is an opportunity
to open a long trade.

Candlestick chart reversal after


a downward impulse wave
You could apply similar rules to a candlestick
chart although they may not be as clear as
with the modified renko chart. Figure 2 is a
one-hour candlestick chart of the S&P 500
(US500) that illustrates a downtrend-to-
uptrend reversal using the same time period
as in Figure 1. Note the high volatility in the
second part of wave 3. This high volatility
is also true for wave 4 and 5. This makes
FIGURE 2: CANDLESTICK CHART, impulse wave. Rules are applied to a one-hour candlestick chart
counting waves less easy compared to the impulse wave for a downtrend-to-uptrend reversal.
modified renko chart.
The index is complying with the down-
trend-to-uptrend V-Trading rules:

DU1 Expect Wave A or 1 after a larger


green upward candle.
DU2 Price low is at the bottom of volatility
band.
DU3 The last move down is a completed
impulse wave.
DU4 SRSI started from the bottom with a
clear positive price divergence.
DU5 Price is near a support level reaching
a down target at the 161.8% Fibonacci
projection over the last wave up before
the start of the impulse wave down.
DU6 Price has a wick below the lowest
candle low.

The downward impulse wave is most FIGURE 3: MODIFIED RENKO CHART, correction wave. Rules are applied to a modified renko chart
probably complete, which means this could correction wave for a downtrend-to-uptrend reversal.
be the time to open a long trade.

Modified renko chart reversal after DU4 The SRSI started from the top with a convergent move
a downward correction wave after the tops of waves B and b for a continuation of the
Figure 3 is a modified renko chart of the S&P 500 that il- down move. Now that prices have reached the bottom
lustrates a downtrend-to-uptrend reversal after a downward with a convergent move between wave bottoms a and
correction wave. c, you can expect a wave A up correction.
The index complies with the downtrend-to-uptrend V- DU5 Price is near a support level reaching a down target at
Trading rules: the 261.8% Fibonacci projection over the first b-wave
correction.
DU1 Expect wave A after a double upward renko brick. DU6 Price has a wick below the current double-sized revers-
DU2 Price low is at the bottom of the volatility band. ing renko brick.
DU3 The last move down is a completed double zigzag cor-
rection wave. Looking at the start of the second wave b, do you see a
20 • October 2018 • Technical Analysis of Stocks & Commodities
positive divergence with price coming close
to the 161.8% Fibonacci target? All rules
are complied with, except, at that point, the
correction wave is not completed.
This is probably a good sign to close an
open short trade. But it is not the time to
open a long trade.
Since you expect a b-wave correction, you
have to verify whether there is a downtrend
retrace signal at this level with the following
rules applied:

DR1 Expect a pullback wave b after wave a


down while reaching a price target.
DR2 Price comes close to the Fibonacci
target at 161.8% and touches the bot-
tom of the volatility band.
DR3 The SRSI indicator has a positive
divergence starting from the indicator FIGURE 4: DOWNTREND TO UPTREND. Downtrend-to-uptrend rules are applied to the one-hour US500
bottom. candlestick chart.

You now have to wait for the end of the


second correction wave b for the downtrend
continuation signal to be in agreement with
the following rules:

DC1 Expect a continuation of the down-


ward move correction wave after
the retracement of wave b to create
correction wave c-C and reach price
retracement resistance in wave b.
DC2 Price makes a common 50% retrace-
ment of the down move until now.
DC3 SRSI indicator has a negative conver-
gence between second wave B and b.

At this point, you may decide to go in for a


short trade with wave C down. This short must
be closed with the downtrend now reaching
the bottom of wave c-C while complying with FIGURE 5: UPTREND TO DOWNTREND. Rules are applied to a modified renko chart impulse wave for
downtrend-to-uptrend reversal signals. an uptrend-to-downtrend reversal.
The downward correction is most probably
complete. It’s time to open a long trade!
DU4 The SRSI started from the top with a hidden negative
Candlestick chart reversal after move after the tops of waves B and b, now reaching the
a downward correction wave bottom with a convergent move between wave bottoms
Figure 4 is a one-hour candlestick chart of the S&P 500 a and c. We should expect an upward correction wave
(US500) illustrating a downtrend-to-uptrend reversal using A.
the same time period as in Figure 3. The index complies with DU5 Price is close to a support level and reaching a down
the downtrend-to-uptrend V-Trading rules: target at the 261.8% Fibonacci projection over the first
b-wave up correction and price turns up from the S3
DU1 Expect wave A after a large reversal candle at the bot- pivot support level.
tom, which is confirmed by up-moving candles. DU6 Price has a large wick at the last bottom.
DU2 Price low is at the bottom of the volatility band.
DU3 The last move down is a completed double zigzag cor- It is likely the downward impulse wave is completed, which
rection wave. means it’s time to open a long trade!
October 2018 • Technical Analysis of Stocks & Commodities • 21
UR1 Expect a pullback wave 4 after wave 3 while reaching
In addition to applying the basic price resistance.
rules, it is good practice to UR2 Price reaches a Fibonacci target resistance and the top
of the volatility band.
look at short-term candlestick UR3 SRSI indicator has a negative divergence starting from
charts for flag and pennant a previous indicator top.
continuation patterns before
opening or closing a trade. In such a scenario, you have to wait for the end of correction
wave 4 for the uptrend continuation signal, which should be
in agreement with the following rules:

Trend reversals: Applying uptrend-to- UC1 Expect a continuation of the up move impulse wave
downtrend reversal rules after the retracement of wave 4 to create impulse wave
Modified renko chart reversal after 5, while retracing to price support.
an upward impulse wave UC2 Price is at a Fibonacci price support level.
Figure 5 is a modified renko chart of Nasdaq 100 (USTEC) UC3 SRSI indicator has a positive hidden divergence with
illustrating an uptrend-to-downtrend reversal after an upward a higher bottom in price but a lower bottom in the
impulse wave. indicator.
The index complies with the uptrend-to-downtrend V-
Trading rules: The Nasdaq is likely at the top of wave 5. The upward impulse
wave is coming to an end. Time to open a short trade!
UD1 Expecting a wave A or 1 after a double downward
renko brick. Candlestick chart reversal after an upward impulse wave
UD2 Price is near the top of the volatility band. Figure 6 is a 15-minute candlestick chart of the Nasdaq 100
UD3 The last move up is a completed impulse wave. (USTEC) illustrating an uptrend-to-downtrend reversal using
UD4 The SRSI is moving down from the top with a negative the same time period as in Figure 5. Note the high volatil-
price divergence between the top around the middle ity that starts wave 1 and wave 3. Making a count using a
of wave 3 and wave 5 top. There is a convergent move candlestick chart is less easy compared to using the modified
between the top of wave 3 and wave 5. At first instinct, renko chart.
you have to expect the start of a correction. The index complies with the uptrend-to-downtrend V-
UD5 Price is at a resistance level, reaching the 423.6% Trading rules:
Fibonacci targets projected over the last small c-wave
down of the previous downtrend, just before the start UD1 Expect a wave A or 1 after a series of negative candles
of the up impulse wave 1. and approaching a price target.
UD6 Price has a wick above the double-sized
reversing renko brick.

At the top of wave 3, do you see the nega-


tive divergence and price that’s close to the
Fibonacci target? You may think the impulse
wave is complete, if you count the small cor-
rection in the middle of wave 3 as a wave 3
followed by a wave 4. However, the previous
ABC downward double zigzag correction
looks like a wave 4 correction in a larger up
move. This means you expect the (extended)
larger impulse wave 5 to move above the
previous longer-term wave 3 (start of the cor-
rection wave c-C-4). This is not the case yet.
Furthermore, wave 3 at that point is smaller
than wave 1, which is exceptional.
You wait to see how the index develops. As
price approaches the top of wave 3, you expect
a wave 4 correction. You have to verify whether
there is a downward pullback at this point with FIGURE 6: UPTREND TO DOWNTREND. Rules are applied to a 15-minute candlestick chart impulse wave
the application of the following rules: for an uptrend-to-downtrend reversal.

22 • October 2018 • Technical Analysis of Stocks & Commodities


UD2 Price is near the top of the volatility
band.
UD3 The last move up is a completed im-
pulse wave.
UD4 SRSI is near the top with a convergent
move. I would prefer to see a negative
divergence. But you can presume the
index made the higher indicator level
for the top of wave 5 because it took
a long period of small candles to get
to the top.
UD5 Price reached a Fibonacci target at
423.6% projected over the last small
down move just before the start of the
impulse wave.
UD6 Price has a wick above the reversing
candle. FIGURE 7: MODIFIED RENKO CHART, CORRECTION WAVE. Rules are applied to a modified renko
chart correction wave for an uptrend-to-downtrend reversal.

The upward impulse wave has likely com-


pleted, which indicates you can now open a
short trade.

Modified renko chart reversal after an


upward correction wave
Figure 7 is a modified renko chart of the
S&P 500 (US500) illustrating an uptrend-
to-downtrend reversal after an upward cor-
rection wave.
The index complies with the uptrend-to-
downtrend V-Trading rules:

UD1 Expect a wave 1 after a double down-


ward renko brick.
UD2 Price is at the top of the volatility
band. FIGURE 8: CANDLESTICK CHART, CORRECTION WAVE. Rules are applied to a one-hour candlestick chart
UD3 The last move up is a completed ABC correction wave for an uptrend-to-downtrend reversal.
correction wave.
UD4 SRSI is near the top with a negative
price divergence between the top around the middle that illustrates a correction wave uptrend-to-downtrend reversal
of wave C and the current top of wave C. using the same time period as in Figure 7.
UD5 Price is at a resistance level, reaching the 50% retrace- The index complies with the uptrend-to-downtrend V-
ment projected over the completed downward impulse Trading rules:
wave. More resistance is coming from the active 200-bar
average and a price resistance at the previous impulse UD1 Expect a wave 1 after a large negative reversing
wave down’s level, that is, the bottom of wave 1. candle.
UD6 Price has a wick above the double-sized reversing renko UD2 Price starts the down move from the top of volatility
brick. band.
Continued on page 33
Note correction wave A turns down against the active 100-
bar average and the upper side of the volatility band. And
wave B turns up at the low side of the volatility band and
price support, from the low of previous wave 3. Most profitable positive
divergences show up after a
Candlestick chart reversal after an
upward correction wave
five-impulse down wave.
Figure 8 is a one-hour candlestick chart of the S&P 500 (US500)
October 2018 • Technical Analysis of Stocks & Commodities • 23
Battle Of The Funds

ETFs vs. Mutual Funds:


Which Way To Go?
Even short-term traders will have some investments they hold Making choices: ETFs or mutual funds
for the longer term. But even those longer-term investments Are ETFs better investment vehicles than mutual funds? In
need some monitoring from time to time. Here’s how you can this article, I will attempt to address this question using a
apply a momentum strategy using technical analysis tools to sector rotation strategy to compare the returns, volatilities,
help select mutual funds or ETFs to add to your portfolio. and maximum drops produced by these two investment ve-

E
hicles. The sector rotation strategy I’ll use is one presented
by Cassandra Wang by Marisa Yang in the February 2018 issue of Stocks &
Commodities.
xchange-traded funds (ETFs) have become popular Sector rotation is an investment strategy that involves the
among investors for their flexibility and ability to be periodic allocation of money from one industry sector to an-
traded like a stock. The $476.1 billion cash inflow into other in an attempt to control market exposure, manage risk,
US-listed ETFs in 2017 far exceeded the inflow of and hopefully, beat the market. The momentum-based sector
$287.5 billion in 2016. Because of the tax efficiency rotation strategy described by Yang has been shown to be
and low fees of ETFs, many investors tend to add ETFs instead beneficial to investors. The strategy used quarterly data from
NATEE K JINDA KUM/SHUTTERSTOCK

of mutual funds to their investment portfolios, even though nine of the 10 S&P depositary receipt (SPDR) sector ETFs
mutual funds have a much longer history and offer a similar between 2000 and 2016. The nine ETFs used were Consumer
diversification vehicle through active management. Overall, Discretionary (XLY), Consumer Staples (XLP), Energy (XLE),
the mutual fund industry faces strong competition from ETFs; Financials (XLF), Health Care (XLV), Industrial (XLI), Ma-
the $174 billion cash inflow into mutual funds in 2017 was terials (XLB), Technology (XLK), and Utilities (XLU).
less than half the value of the inflow into ETFs. To make a side-by-side comparison of ETFs, I selected nine
24 • October 2018 • Technical Analysis of Stocks & Commodities
INVESTING IN ETFS

?DON’T
? ?
?
??GAMBLE
?
? ? ?
?? ?? ?
sector-based mutual funds from Fidelity.

? On? Your?Next
These mutual funds are Fidelity Select
Industrials Portfolio (FCYIX), Fidel-
ity Select Consumer Staples Portfolio
(FDFAX), Fidelity Select Financial

?
?Investment
?
Services Portfolio (FIDSX), Fidelity
Select Consumer Discretionary Portfo-

?
lio (FSCPX), Fidelity Select Materials

?? ??
Portfolio (FSDPX), Fidelity Select En-

??? ?
ergy Portfolio (FSENX), Fidelity Select
Health Care Portfolio (FSPHX), Fidelity
Select Technology Portfolio (FSPTX),

?
and Fidelity Select Utilities Portfolio
(FSUTX). I downloaded monthly data
for mutual funds and ETFs from Yahoo

? ?
Finance for the period between the years
2000 and 2017.

?ANALYZE? ?ANY
Momentum-based sector
rotation strategy
The sector rotation strategy I am using
for this article ranks sectors by their per-
centage change in price for the current
month. The price is an adjusted price,
accounting for price and dividend. Upon
ranking the percentage price movements

STOCK FREE!
from highest to lowest, the sector with
the highest percentage return is denoted
“rank1” and its performance in the fol-
lowing month is then calculated. The
sector with the second-highest return
is denoted “rank2,” and so on through
Visit www.VectorVest.com/SC
rank9. Next, you calculate the annual
return for each rank by summing the
12 monthly returns (January through
December). To determine which rank
was most profitable, I calculated and
Get 9 FREE Reports Showing:
compared the average annual returns
over the period between 2000 and The True Value of a Stock
2017. I then compared the returns of
ranks 1 through 9 with the total return The Stock’s Overall Safety
of the S&P 500 (SPY), which served
as a baseline. I also evaluated the rank
Whether to Buy, Sell or Hold
strategies based on their volatility (the
standard deviation of annual returns)
Award Winning Software 19 Years
and maximum drop (MaxDrop), which Running
is defined as the largest annual drop. VectorVest analyzes, sorts, ranks and graphs over
1999 - 2018
19,000 stocks daily for value, safety and timing. Get
As you can see from Figure 1, the
clear Buy, Sell or Hold recommendations on every
rank4 strategy, which selected the stock, every day.
fourth-highest ranked sector mutual
fund at the end of the current month,
was the best strategy among all nine
momentum-based strategies. Rank4 had
an average annual return of 15.21% and
a relatively low volatility and a small
maximum drop, as shown through its
October 2018 • Technical Analysis of Stocks & Commodities • 25
small bubble in Figure 1. The aver-
age annual return of rank4 was more
than 7% higher than the S&P 500’s
total return with a small increase in
volatility. The highest (rank1) and
lowest (rank9) momentum strategies,
on the other hand, did not perform
well in terms of average annual
returns and volatilities. Both rank1
and rank9 underperformed relative
to the S&P 500.

Mutual funds
outperformed
The annual returns for the mutual Figure 1: Annual Returns from the Ranking System. The y-axis describes the percentage of average
fund, ETF, and S&P 500 are tabu- annual return and the x-axis is the annual volatility of each rank as calculated by standard deviation. The size of each
lated in Figure 2. As shown, rank4, bubble is proportional to the maximum drop. The rank of each mutual fund is labeled on the graph and the red dot
the best strategy for the mutual fund, represents the S&P 500 total return with dividends. The navy blue dot represents the Rank4 strategy for the mutual
fund; it has significantly higher returns than the other ranks and the S&P 500.
yielded an average annual return of
15.21% with a volatility of 19.43%
and MaxDrop of -26.67%. Rank4 ETF, which was the best and MaxDrop.
performer among the nine ETF momentum strategies, yielded When I applied the same moving averages to the ETF, rank4
an average annual return of 13.31%, 1.90% worse than that of still performed best among the nine ETF momentum strate-
the rank4 mutual fund. The annual volatility and MaxDrop gies. As emphasized by the red border around the blue bubble
of the rank4 ETF are 17.32% and -31.74%, respectively. The in Figure 3, the rank4 ETF with a moving average of three
best performers from mutual funds and ETFs outperformed months (SMA3) had the best combination of annual return
the S&P 500 by 8.27% and 6.37%, respectively. (7.97%) and volatility (10.92%) as determined by the Sharpe

Benefits of applying Rank4 Mutual Rank4 Mutual Rank4 ETF Rank4 ETF SPY
a moving average Year
Fund (no SMA) Fund (SMA8) (no SMA) (SMA3) (no SMA)
I applied a moving average to 2000 31.28 31.48 8.83 -10.55 -9.03
the same momentum-based 2001 -4.79 -2.91 18.70 3.77 -11.85
sector rotation strategy to see 2002 -20.36 7.42 -31.74 -6.40 -21.97
if the results improved. I added 2003 17.84 13.41 32.89 21.25 28.36
simple moving averages (SMA) 2004 28.34 10.49 19.85 15.78 10.74
with monthly lookback periods ranging from two 2005 16.94 11.05 9.22 3.25 4.83
to 12 months for each rank (ranks 1 through 9) 2006 8.99 8.25 8.71 10.41 15.61
between 2000 and 2017. Here’s how I applied the 2007 17.81 7.31 8.09 7.82 5.48
SMA: If the underlying sector value is greater than 2008 -26.67 -6.40 -18.37 -4.13 -36.55
or equal to the corresponding SMA’s value, you 2009 51.36 31.02 41.28 18.95 25.94
could execute the trade. Otherwise, you avoid the 2010 38.49 22.20 20.46 19.49 14.82
trade and hold cash. 2011 12.47 6.38 7.83 10.01 2.10
When I tested each rank with the SMA, rank4 2012 17.59 17.69 30.18 15.51 15.89
was found to yield the best results again. Overall, 2013 33.84 33.84 29.13 13.67 32.15

a moving average with a lookback period of eight 2014 13.07 10.35 14.40 7.12 13.52
2015 14.61 3.51 9.68 -14.16 1.38
months (SMA8) (orange bubble with red border in
2016 -0.20 2.28 7.90 9.30 11.77
Figure 3) produced the most favorable results for the
2017 23.15 27.48 22.45 22.45 21.64
mutual fund. Its average yearly return was 13.05%, Avg. Annual
significantly higher than the S&P 500’s return (6.94%). Returns
15.21 13.05 13.31 7.97 6.94
Although the annual return of the rank4 mutual fund MaxDrop -26.67 -6.40 -31.74 -14.16 -36.55
with SMA8 was ≈2% lower than the return without Volatility 19.43 11.88 17.32 10.92 17.77
the moving average, its maximum annual loss was FIGURE 2: Annual returns calculated from mutual funds and ETFs, with and
improved to -6.40%. Its annual volatility also de- without moving averages, compared to SPY. Rank4, the best strategy for the mutual
creased from 19.43% to 11.88%. Based on this, you
fund, yielded an average annual return of 15.21% with a volatility of 19.43% and MaxDrop of
-26.67%. Rank4 ETF, which was the best performer among the nine ETF momentum strategies,
would be better off if you sacrifice a small percent- yields an average annual return of 13.31%. The best performers from mutual funds and ETFs
age of profit in return for reduced annual volatility outperformed the S&P 500 by 8.27% and 6.37%, respectively.

26 • October 2018 • Technical Analysis of Stocks & Commodities


ratio. The annual return from the ETF was about 5% lower
than the annual return from the mutual fund. In addition, the
MaxDrop of the ETF (-14.16%) was significantly greater than
the MaxDrop of the rank4 mutual fund (-6.40%). Ultimately, Applying a simple moving
these results demonstrate that with moving averages, the average to the mutual fund
mutual fund again outperforms the ETF in terms of annual
return, volatility, and MaxDrop.
and ETF can reduce annual
It is interesting to note that the rank4 mutual fund performs maximum drop and volatility at
consistently across different moving average lookback periods. a small sacrifice of returns.
It attains a maximum annual return of 13.05% with SMA8 but
remains within a buffer of 12% ±2% for all moving averages
ranging from two months to 12 months. The standard devia-
tion of the annual returns for all moving averages (SMA2
through SMA12) for the mutual fund was 0.81%, an indication Further reading
of system stability. The maximum annual drops were also ICI, “Net New Cash Flow To Mutual Funds In The United
reduced across different lookback periods, as illustrated by States From 2000 To 2017 (in billion US dollars),” info-
the relatively small bubble sizes in Figure 3. graphic, Statista, May 2018, accessed June 18, 2018, https://
The ETF, on the other hand, performed worse than the mutual www.statista.com/statistics/255766/net-new-cash-flow-to-
fund. The bubbles in the lower y-axis positions in Figure 3, mutual-funds/Sta.
which represent the lowest average annual returns, show that Roy, Sumit, “2017 ETF Inflows Big Record Breaker,” ETF.
the rank4 ETF with different lookback periods performed com, last modified December 29, 2017, accessed June 18,
consistently worse than the mutual fund. The relatively larger 2018, http://www.etf.com/sections/weekly-etf-flows/2017-
sizes of the bubbles representing the ETF indicate that the etf-inflows-big-record-breaker?nopaging=1.
maximum annual drops from the ETF are larger than those Yang, Marisa [2018]. “Capitalizing On Sector Rotation Strate-
from the mutual fund. gies,” Technical Analysis of Stocks & Commodities,
Volume 36: February.
And the winner is …
The mutual fund performed better than
the ETF within a momentum-based
strategy. Rank4 emerges as the most
profitable among the ranking strategies.
The Rank4 mutual fund outperformed
the Rank4 ETF by about 2% with a lower
annual maximum drop. The Rank4 strategy for the mutual
fund and ETF outperformed the S&P
500 by more than 2%.
Applying a simple moving aver-
age to the mutual fund and ETF
can reduce annual maximum drop
and volatility at a small sacrifice of
returns. Upon applying the moving
average, the annual return and maxi-
mum drop of the mutual fund still
outperform the ETF, and the mutual
fund and ETF outperformed the S&P
500. Thus, investors should consider
choosing the mutual fund over the
ETF to minimize annual volatility
and maximize returns within the
momentum strategy.

Cassandra Wang studies patterns


in the stock market and she is also
FIGURE 3: The Rank4 Mutual Fund and ETF with Moving Averages. Moving averages with lookback
a contributor to seekingalpha.com. periods ranging from two months to 12 months were applied to the Rank4 mutual fund and ETF. The x-axis describes
She may be reached via email at annual volatility, the y-axis represents the percentage of average annual return, and the size of each bubble cor-
wang_cassie@yahoo.com. responds to the percent maximum drop.

October 2018 • Technical Analysis of Stocks & Commodities • 27


MarketClub
INO.com
228 Park Ave. South, Suite 320
New York, NY 10003-1502
Phone: 410 867-2100 or
800 538-7424
Email: support@ino.com
Internet: www.MarketClub.com
Product: Web-based trade-selection
scanning platform with buy & sell
signals for stocks, futures, forex, and
mutual funds
Requirements: Internet access
Membership price: 30-day trial; $59/
Figure 1: Trade Triangles Chart. Trade triangles provide directional buy and sell signals. Both monthly
month; $150 quarterly; $449/year. An and weekly trade triangles are displayed on this daily chart of the Toronto Exchange–traded stock CNR. The chart
options feature is also available for an also includes a few of the technical indicators available in the program. Note: Area enlarged to show detail.
additional fee.

by Barbara Star

Its name may evoke visions of a chat room


for traders, but in reality, MarketClub
is an online subscription-based scan
and trade selection website. A premium
service of INO.com, the site tracks
more than 300,000 tradable entities
that encompass stocks, futures, indexes,
mutual funds, and forex listed on US and
Canadian exchanges.
Once logged in, the MarketClub mem-
ber homepage offers several valuable
Figure 2: Trade TriangleS Scan. Recently triggered daily, weekly, and monthly trade triangles update
and easily accessible trading tools that throughout the trading day within several asset categories. The resulting list offers potential trading opportuni-
provide potential entry and exit signals ties.
and reduce time-consuming searches for
both position and swing traders. signify trend changes in multiple time- is a tremendous convenience.
In addition to tabs that take you to the frames and can serve as potential buy Click on the trade triangle tab on the
main features that will be highlighted in or sell signals. homepage and it will bring up a list of
this review—trade triangle charts, cus- Access trade triangles for a specific recently triggered symbols based on your
tomizable smart scans, and portfolios— individual chart by typing in the ticker choice of a particular type of asset—
the member homepage provides links symbol on the member homepage and equity, foreign exchange, future, index,
to top stocks, futures, and currencies; selecting “live chart.” Once the price etc. They can be filtered by volume, type
trade alerts for stocks in your portfolios; chart appears, select one or more of the of triangle, trend strength score, and
a featured analysis of one of the stocks trade triangle icons to be applied to the whether the signal was issued that day,
in a portfolio; a daily reminder of key chart. Daily, weekly, or monthly trade the day before, three days, a week, or a
economic reports; a traders’ blog; and triangles may be viewed separately or all month ago. (See Figure 2.)
videos that focus on market activity. on the same chart (see Figure 1). Because prices are updated throughout
Also conveniently housed on the mem- In Figure 1 you can see the monthly the day on a 15-minute delay, the list will
bers’ homepage are links to videos that and weekly trade triangles applied to constantly refresh, bringing to the top
explain the features in MarketClub and a daily chart of Canadian National those symbols most recently issued. In
how to access them. Railway (CNR), which looks like it is addition to price data, each list contains
heading for a retest of the January 2018 columns showing the date and time the
Trade triangles highs. The ability to view the direc- signal occurred, a trend strength score,
One of the most innovative features tional changes of triangles from multiple and the direction of the daily, weekly, and
of MarketClub is their Trade Triangle timeframes on the same chart, instead monthly trade triangle for each symbol.
technology, which is based on a propri- of the more usual method of viewing A yellow background color on a triangle
etary algorithm. Red and green triangles multiple charts in different timeframes, indicates it was newly identified that
28 • October 2018 • Technical Analysis of Stocks & Commodities
day. Clicking on one of the small icons
in the last column allows direct access
to a price chart, a chart analysis, or the
numeric price data for any symbol on
the list.

Charts
The charts display prices on fixed
timeframes from intraday to quarterly
but may also be customized for specific
dates. The daily, weekly, and monthly
trade triangles may be placed on the
chart of most timeframes. They aren’t
available for use on intraday charts. The
triangle shows the direction, but hover
your mouse over any triangle to see the
date and price level when that triangle
occurred. The trade triangles are small Figure 3: Smart Scan. MarketClub scores each symbol in its database for trend strength and direction
and triangles in every timeframe are and places them in categories ranging from +100 to -100. The scan results are shown as small charts, which
colored red and green so it is difficult
also contain links to a full-size trade triangle chart or a more detailed chart analysis.

to differentiate the timeframes being


displayed without zooming in on the
chart. Fortunately, the gray box in the
upper-left corner of the price chart dis-
plays the color of the current monthly,
weekly, and daily trade triangles as well
as the price level at which they occurred
and the overall trend score.
The training video suggests trading
with the trend. Position traders use
monthly trade triangles to identify the
longer-term trend and weekly trade tri-
angles for entries when trading stocks,
forex, or mutual funds. And for those
who trade futures, it’s recommended that Figure 4: Chart Analysis of the S&P emini Futures contract. A chart analysis offers compre-
you use weekly trade triangles for the hensive information about the trade triangles and commentary about trend strength.

longer-term trend and use daily triangles


for the shorter-term trend when making ment for each symbol in the MarketClub brief commentary about price strength
entries. However, I have found that com- database. The higher the positive or in relation to the longer-term trend. This
bining weekly and daily triangles on a negative score, the stronger the trend in feature may also be accessed for any
daily stock chart can also be useful for that direction. With this tool, subscribers individual symbol from the homepage.
short-term or swing trading. In either may scan for 24 different trend levels that Figure 4 illustrates a chart analysis of
case, only take trades in the direction of can be filtered by type of tradable asset, the June emini S&P 500 futures contract
the longer-term trade triangle. price, volume, and exchange. It offers a taken in May 2018.
Subscribers may choose to view prices fast and easy method for finding early
with candlestick, bar, or line charting trends as well as locating pullbacks in Portfolio
style. Along with trendlines and Fibo- an existing trend (See Figure 3). MarketClub members may create as
nacci retracement tools, the program pro- many portfolios as they wish in order
vides several commonly used technical Chart analysis to keep track of core holdings, current
analysis indicators to help with trading For many, simply viewing the trade trades, or watchlists. Each portfolio can
entry and exit decisions. triangles chart will be sufficient, but contain as many symbols as the user
for more detailed information, the chart wishes. Changes in trade triangles and
Smart scan analysis feature provides the most recent trend scores are made to the symbols
The smart scan feature uses a proprietary date, direction, and price level of the long, in each portfolio as soon as they occur
scoring method for determining the intermediate, and short-term trend trade
strength and direction of price move- triangles, the current trend score, plus a Continued on page 32
October 2018 • Technical Analysis of Stocks & Commodities • 29
A Strategy For Short-Term Options Traders

One-Day Wonder Trades


Is there such a thing as a conservative one-day options trade put or call and the selling of an equal number of nearer-term
that gives you an edge? Yes there is, and here is how profes- options of the same type but a different strike price. It uses
sional options traders put it into action. the at-the-money (ATM) +1, +2, or +3 strikes for calls and
ATM -1, -2, or -3 strikes for puts. The trade is predicated on
by Robert J. Seifert rapid time decay (theta), which accelerates as the options reach

T
their expiration. As Friday’s expiration approaches, all the air
he existence of weekly options makes it possible to (premium) comes out of the balloon (option price) and that is
create weekly credit spreads, which in turn makes what makes this trading opportunity possible.
possible a specialty trade I call the one-day wonder It is the certainty of time decay that makes it difficult for
trade. Want to find out more about it? Well, it com- many retail traders to make money trading options. They
bines the strength of a computer-generated opinion think that buying out-of-the-money (OTM) calls and puts
or advisory with an options strategy that I developed is a cheap way to trade options. The problem is, they don’t
several years ago. The computer-generated opinion is used to consider how quickly the premium collapses in the OTM
provide the probable direction of the underlying stock. I apply options as expiration approaches. They can be correct on the
this trading strategy to weekly options. price direction for the underlying stock but unfortunately,
they still lose money.
Here’s how I trade it The one-day wonder trade is designed to take advantage of
I initiate the trade on Thursday as near to the close of the this phenomenon. To see how this works, check out the options
market as practical. If it is a short holiday week, use Wednes- chains in Figure 1. They are both for Chipotle Grill (CHG).
FIZKES/SHUTTERSTOCK

day as your trade day. The trade is an off-strike horizontal The first chain is for the February 9, 2018 expiration while
spread that takes advantage of the time decay in expiring the second is for the February 16, 2018 expiration. On this
weekly options. day, CHG was trading at $266.91, down $5.30 on the day. It
A horizontal spread involves the purchase of a deferred should be immediately apparent that even though the stock
30 • October 2018 • Technical Analysis of Stocks & Commodities
OPTIONS

was down more than $5.00 for the day,


the OTM puts in the expiring weekly
serial were also down on the day. How
can this be? Don’t puts increase in
value as price declines?
This is precisely what drives many
retail traders crazy and eventually
leads them to give up trading options.
Even when they were 100% correct
on the underlying stock’s price di-
rection, they still lost money. On the
other hand, you will notice that in the
February 16, 2018 options chain, all
the puts—in the money (ITM) and
OTM—were up on the day.

Set-up for the one-day


FIGURE 1: OPTIONS CHAINS. Here you see two options chains. The first chain is for the February 9, 2018 expiration
while the second is for the February 16, 2018 expiration.
wonder trade
As I mentioned, the one-day wonder
trade is set up using horizontal spreads. Here’s a description Assume the opinion for the underlying stock (CHG) is
of how the spread is initiated and why it works. bearish. This would imply an off-strike bearish horizontal
There is no right or wrong way to do this trade. It is the spread trade. In this scenario, you can use any strikes you
trader’s choice when choosing the strikes. I will discuss the like, but as usual, I prefer the deferred ATM strike, since it
pros and cons of each transaction and you can make your always has the most air in its price. The spread is initiated by
own decision. The key is to have reliable conviction as to the buying the longer-term ATM deferred put and then selling
probable short-term direction of the underlying stock. You the near-term expiring ATM -2 put. Referring to the CHG
can use any sentiment indicator to determine if a move is options chain in Figure 1 and using puts (right side of table),
likely to be bullish or bearish. I use the Market Edge Opinions the trade would look like what you see in Figure 3 when the
when structuring these trades. If it is bullish on the short- stock closed at $266.91.
term outlook for a stock, I recommend an off-strike bullish The idea is that during the last day of trading, the options
horizontal spread using calls. Conversely, if the opinion is in the second serial (deferred) will keep their premium while
bearish, I would recommend an off strike bearish horizontal the air will get drained from the front month (expiring) option.
spread using puts. The “premium spread,” or difference between the two prices,
creates the potential profit for the trade as the option’s price
Off-strike bullish–bearish trades diverges. This trade has limited reward and as always, limited
Assume the opinion for the underlying stock (CHG) is bull- risk. Once more, you want to buy the deferred option at the
ish. This would imply trading an off-strike bullish horizontal current strike price (ATM) and sell the expiring (ATM) +1,
spread. In this scenario, you can use any strikes you like, but I +2, or +3 for calls or ATM -1, -2, or-3 puts.
prefer strikes that are at or close to the ATM strike, since they
usually have the most air in their options prices. The spread Manage your spread
is initiated by buying the longer-term deferred call and then Off-strike: bullish trade
selling the near-term expiring call with a different strike but Depending on the stock’s price action, you may or may not
in the direction (up) the opinion is favoring. Referring to the end up with a loss in the trade. For a loss to occur, the stock
CHG options chain in Figure 1 and using calls, the trade would would have to close above the short call strike price plus the
look like what you see in Figure 2 when the stock closed at premium received. Otherwise, you would have a small gain
$266.91.
In this example, you
Stock Open Date Market Edge Open Stock Option Short ATM +2 Long ATM Debit Debit
would sell the ATM +2 Opinion Price Put/Call Expiring Option Deferred Option Spread Target
expiring call and buy CMG 02/08/18 Bullish $266.91 Call 272.5 267.5 $5.49 $10.98
the ATM deferred call. FIGURE 2: OFF-STRIKE HORIZONTAL BULLISH TRADE. In this case, you would sell the ATM +2 expiring call and buy the ATM
The decision to use deferred call.
ATM +1, +2, or +3 is
Stock Open Date Market Edge Open Stock Option Short ATM -2 Long ATM Debit Debit
up to you. The wider Opinion Price Put/Call Expiring Option Deferred Option Spread Target
the spread, the bigger CMG 02/08/18 Bearish $266.91 Put 262.5 267.5 $4.43 $8.86
the risk but bigger the FIGURE 3: OFF-STRIKE HORIZONTAL BEARISH TRADE. Here you would want to buy the deferred option at the current strike price
reward. (ATM) and sell the expiring (ATM) +1, +2, or +3 for calls or ATM -1, -2, or-3 puts.

October 2018 • Technical Analysis of Stocks & Commodities • 31


simplest expiration transactions that can be made on a weekly
The premium spread, or basis. All trades have limited risk and either a substantial or
difference between the two unlimited reward over a short-term timeframe. When you
are wrong, your risk is limited, and you should go on to the
prices, creates the potential next trade. As with all trades, you should limit your exposure
profit for the trade as the to no more than 3–4% of your available risk capital. Over
option’s price diverges. the long run, you should have positive results in any type of
market environment.

Robert J. Seifert is president and CEO of The Optionomics


even though the stock closes above the short option’s strike Group LLC, www.optionomicsgroup.com. He is a 35-year
price. Also, since you would be long the deferred ATM op- veteran options trader and was an options market maker for
tion, if the short option moves higher, the ATM will also move almost 20 years at the CME, CBOT, and CBOE. In the early
higher. While you can hold the deferred leg and let it run over 1990s, he was appointed by the CME to the position of Vice-
the next few days, I recommend you close both sides of the Chairman of International Monetary Markets (IMM), which
trade on the expiring option’s expiration day. was the highest-ranking options floor position at the CME.
Until his retirement in 2018, he was an adjunct instructor at
Off-strike: bearish trade UNLV where he taught Finance 485, an advanced options
If the stock closes at or near the short expiring ATM put’s strategy course. He is the author of Profiting From Weekly
strike price, you should buy back the option or you will be Options and Trading Options My Way. He may be reached
long the stock come Monday morning. You may or may not at optionomics@marketedge.com.
have a loss in that trade. For a loss to occur, the stock would
have to close below the strike price plus the premium received. Further reading
Otherwise, you would have a small gain even though the stock Seifert, Robert J. [2015]. Profiting From Weekly Options:
closes below the short option’s strike price. Also, since you How To Earn Consistent Income Trading Weekly Option
would be long the deferred ATM option, if the short option Serials, Wiley Trading.
moves lower, the ATM will also move lower. While you can . Trading Options My Way, digital booklet, www.
hold the deferred leg and let it run over the next few days, I optionomicsgroup.com.
recommend you close both sides of the trade on the expiring ‡Optionomics Group LLC, ‡MarketEdge.com
option’s expiration day. ‡See Editorial Resource Index
†See Traders’ Glossary for definition
It’s a wonderful trade
If you like a lot of short-term action, the one-day wonder trade
may be for you. The trades described here are some of the

QUICK-SCAN/MARKETCLUB
Continued from page 29
MarketClub offers traders a mechanism
for scanning a broad array of symbols in
during the trading day. Alerts may be many types of asset categories, and uses
set to notify the trader when changes
occur. The portfolio tab on the homepage can incorporate the multiple timeframe
enables access to all portfolios. directional signals into a trading system.
Members receive daily emails that
keep them apprised of new trade tri-
angles; smart scan portfolio alerts; a many types of asset categories, and users Barbara Star, PhD, is a retired university
list of the holdings in the portfolio each can incorporate the multiple timeframe professor and a Contributing Writer for
with price information, trend scores, and directional signals from MarketClub this magazine. She can be reached by
directional trade triangles; plus current into a trading system. With the potential email at star4070@aol.com.
blog postings. to shorten the search for good trading
candidates and trading opportunities, it ‡MarketClub
don’t searCH so Hard might be worth taking a trial to determine
MarketClub offers traders a mechanism whether those features provide a good
for scanning a broad array of symbols in fit for your trading needs.
32 • October 2018 • Technical Analysis of Stocks & Commodities
VerVoorT/The V-Trade
Continued from page 23 You have to learn, understand,
and practice the V-Trade
rules as much as possible to
UD3 The last move up is a completed ABC correction
wave.
successfully trade with the
UD4 SRSI is near the top with a negative divergent move, a V-Trade system.
higher top in the index, but a lower top in the indica-
tor.
UD5 Price reached the 50% retracement over the complete
impulse wave down. There is resistance from the 100 Vervoort, Sylvain [2018]. “The V-Trade, Part 1: Five Basic
bars active average and resistance from the R1 daily Trading Rules,” Technical Analysis of StockS & com-
pivot level. moditieS, Volume 36: March.
UD6 Price has a wick above the reversing doji candle. [2018]. “The V-Trade, Part 2: Technical Analysis,”
Technical Analysis of StockS & commoditieS, Volume
The upward correction wave has most likely completed, 36: April.
which means it’s time to open another short trade. [2018]. “The V-Trade, Part 3: Technical Analysis—Fi-
bonacci Projections And Daily Pivots,” Technical Analysis
First, know the rules. then … of StockS & commoditieS, Volume 36: May.
Now that you know the V-Trade rules, stay tuned for part [2018]. “The V-Trade, Part 4: Technical Analysis—
9, where I will look at a number of example trades for you Trends & Reversals,” Technical Analysis of StockS &
to study. You have to learn, understand, and practice the V- commoditieS, Volume 36: June.
Trade rules as much as possible to successfully trade with [2018]. “The V-Trade, Part 5: Technical Analysis—
the V-Trade system. You will need additional tools to assist Moving Average Support & Resistance And Volatility
in entering and exiting trades, whether you apply a manual, Bands,” Technical Analysis of StockS & commoditieS,
semi-automatic or even fully automatic method. These tools Volume 36: July.
are integrated in the V-Trade expert system, which I will look [2018]. “The V-Trade, Part 6: Technical Analysis—
at starting in V-Trade part 10. Divergence Indicators,” Technical Analysis of StockS &
commoditieS, Volume 36: August.
Sylvain Vervoort is a retired electronics engineer who has [2018]. “The V-Trade, Part 7: Technical Analysis—
been studying and using technical analysis for more than V-Wave Count,” Technical Analysis of StockS & com-
40 years. Currently, he experiments with trading forex and moditieS, Volume 36: September.
CFDs with rule-based systems. His book Capturing Profit With [2009]. Capturing Profit With Technical Analysis:
Technical Analysis received a bronze medal from the 2010 Hands-On Rules For Exploiting Candlestick, Indica-
Axiom Business Book Awards in the category of investing. tor, And Money Management Techniques, MarketPlace
His Band Break System Expert is available on DVD. More Books, Inc.
information about the V-Trade System will become available [2012]. Ground-Breaking Band Indicators: Newly
on his blog under construction at at http://blog.stocata.org. Discovered Tactics for Timing Profit, DVD, http://stocata.
Vervoort may be reached at sve.vervoort@scarlet.be or via org. Includes an autotrading expert system.
his website at http://stocata.org. ‡MetaTrader4 (MetaQuotes Software Corp.)
‡See Editorial Resource Index
Further reading †See Traders’ Glossary for definition
Frost, A.J., and Robert Prechter [2001]. Elliott Wave Principle,
John Wiley & Sons (first published in 1985).

LeTTerS To S&C haNGING oUT WITh The JUNKIeS Once again, thank
Continued from page 6 Editor, you, and I enjoy your
I would like to thank Hector Landazabal magazine.
my article. Unfortunately, a monthly for his December 2017 article in S&C, WiLLie
setting doesn’t work properly because “Hanging Out With The Junkies.” Very
of the large lookback period. Instead, interesting concept of using bonds with Thank you for writing
I use 200-day simple moving average SPY. and for your interest.
(SMA). I am wondering if the author has We have forwarded your note to the
I hope this helps. software, an Excel file, or a website for author.—Editor
following this strategy.

October 2018 • Technical Analysis of StockS & commoditieS • 33


INTERVIEW

The Art Of System Design

Walking Forward
With Dion Kurczek
Dion Kurczek is a software developer and individual trader. Developing gaming
for chess players in the early days of the Internet led him down the path of
developing charting and backtesting programs for trading, after he discovered
technical analysis and became interested in trading. In 2000, he created the
Wealth-Lab backtesting platform, acquired by Fidelity Investments in 2004.
He worked with Fidelity until 2017, enhancing and developing the platform.
Since then, he has developed a cloud-based backtesting platform, Quantacula,
and a Javascript-based charting and backtesting site, JuicyCharts.com. He is
also an abstract artist and resides in Sarasota, FL.
Stocks & Commodities Editor Jayanthi Gopalakrishnan spoke with Dion
Kurczek on August 8, 2018 to find out more about why it’s important to him to
offer traders a way to develop and test their own trading systems and ideas.

Tell us a little bit about out and then pull back, and that’s when
yourself and how you got he would get in. That way, he would hit
interested in the industry. these large bull market sort of moves.
I was primarily, and still So that’s what got me interested. At
am, a software developer. that point, I started reading a lot of
That’s my main talent, which I recog- books on my own and learning all the I believe it’s valuable
nized pretty early on. I was working basics of technical analysis, indicators, for the trader to develop
with a company back in the late 1990s, in and chart patterns. his or her own strategy
Vancouver, British Columbia, in Canada,
named Grandmaster Technologies. We How did that interest lead you to
to cater to his or her
were developing strategic network games develop the software product Wealth- individual tastes,
on the Internet. The Internet wasn’t very Lab? especially when it comes
old at the time. And this company was Once I learned about technical to risk tolerance.
run by two chess grandmasters who analysis, I started trying different soft-
wanted to develop an Internet-based ware packages that were available at
chess-matching network. So they hired the time. Unfortunately, none of them
me and when I traveled to Vancouver, could do the kind of analysis I wanted to You developed Wealth-Lab and it has
I would stay at a colleague’s home. He do. Either they only allowed you to test since been sold. What have you done
was from Taiwan, and he had a trad- trading systems with a single position, or since then and what are you doing
ing setup with all these computers and there were other limitations. My system now?
charts. I found that fascinating, and my ideas managed multiple positions and I After the sale of Wealth-Lab to Fidel-
curiosity led me to ask him questions, wanted a product that would let me do ity, I continued to work with Fidelity until
and he explained some things about that. So I started developing one just about a year ago, working to improve
technical analysis. for my own use. I was showing it to a Wealth-Lab to keep it up to date. Since
friend of mine who was impressed with then, I’ve been working on a couple of
What types of things did he explain? it and who told me that I should make it a new projects. One is Quantacula, which
He showed me trendlines, for example, commercial product. I thought about his is a new backtesting platform I’ve de-
and said, “Notice how the stock always advice and went ahead and put in some veloped, and the other is JuicyCharts,
bounces off of this trendline.” This got additional work and then launched the which is a web-based JavaScript charting
me interested in charts and technical Wealth-Lab website. The first version of package. I’m also an abstract artist, and
analysis in general. And he was good at Wealth-Lab, which was called Wealth- I put effort into my painting, which also
identifying breakout points after a long Lab Desktop, was released around the takes up some of my time.
decline. The stock would finally break year 2000.
34 • October 2018 • Technical Analysis of Stocks & Commodities
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Information provided by StockCharts.com is not investment advice. You are responsible for your own investment decisions.
develop their own systems. As an example, to create a basic oscilla-
We believe in technical Why is it important for tor oversold/overbought trading system,
analysis and charts because traders to develop trading you would use the condition called
systems on their own? indicator compared to value. You can
we believe the movement of Everybody has their own then select any indicator and any value
the free markets is based unique trading personality— as parameters to the condition. Exposing
on the psychology of the almost a fingerprint—of the drag-and-drop building blocks to all
participating traders. their risk tolerance and the of the indicators in the platform results
markets they’re interested in in an enormous level of flexibility.
trading, and there’re so many
individual variables. That’s And as they advance, what would they
Are Quantacula and JuicyCharts why I believe it’s valuable for the trader do next?
connected or are they independent to develop his or her own strategy to cater Once they get a good grasp of the
products? to his or her individual tastes, especially product and are interested in getting
They’re based on the same kind of ob- when it comes to risk tolerance. more advanced, then they could go to
ject model, but the code base is different. either the Windows-based software,
One is a C#, a Windows-based product, Do you feel there are too many people Quantacula Studio, which has the same
and JuicyCharts is in JavaScript. I took out there who are just looking for the drag-and-drop model-building capabil-
a lot of the C# code and converted it to best trading system and don’t want ity as the Q-Web website, but that also
JavaScript. So yes, they have similar to make the effort to build their own lets users program their models in C#.
origins but different manifestations of system? The flexibility increases so they can
that. Absolutely, and we’ll never get away do more.
from that. Unfortunately, there are some
What inspired you to develop these two companies that will try to take advantage Do you still trade, and if so, what do
products? of those people. So yes, it’s important you trade?
I was inspired to develop Quantacula for people to get as well educated in the I trade the NASDAQ-100 stocks.
because I wanted to create a new product industry as they can. And that’s why I try That’s what I’ve always traded, that’s
with enhancements to the backtesting to develop tools that let people test their what I know, and I’m currently trading a
engine. Rather than running a system own ideas to see if those ideas work on trading model that I built in Quantacula.
against each stock one by one, and then past historical data instead of just trusting The rules are pretty simple. Basically, it
after the fact, combine all the results into some product that issues vague signals looks for stocks that are quite oversold
an equity curve, as some products do, I such as, “if it’s red, sell and if it’s green, and it buys those. Then it sells when the
am seeking to make Quantacula more buy.” It’s important for traders to know stock becomes a little bit overbought.
dynamic so the backtesting engine goes they need something that can be tested Basically, it follows the “buy low, sell
step by step, or bar by bar. Then it runs and validated. high” idea. And I use a position-sizing
each trading system on each symbol. That rule based on a 10% curve, so I could
way, you get a more dynamic result and You have different models in Quantacula generally have, at most, 10 or 11 stocks.
you can interact with the current equity such as Q-Web and Q-Studio. How are I go on 10% margins so I could have up
curve in a more flexible way. So that was they different and what do they do? If to 11 stocks at once.
my purpose in developing Quantacula. there’s somebody who doesn’t know
And with JuicyCharts, I was interested how to create a trading
in seeing how far I could push trading sys- model and they wanted to
tem creation and execution completely in try this, where would they
the browser using JavaScript. So that’s start?
my experimental product, and I continue A good place to start would
to work on that. I have some ideas on be on the website quantacula.
some next steps for that. It’s not anywhere com. We have a series of edu-
near complete, but it has provided some cational pages that walk you
interesting results so far. through the process of creat-
ing a trading model using Q-
An important part of both of these Web. There’s a drag-and-drop
products seems to be about bringing feature for different entry
traders together in a community so they and exit conditions (Figure
can share ideas. Quantacula aims to 1). Going through all those
give people who don’t have knowledge conditions would be a good
of a coding language the ability to starting point. Figure 1: Q-Web drag-and-drop

36 • October 2018 • Technical Analysis of Stocks & Commodities


How do users have the ability to Since human psychology
incorporate risk management into is pretty consistent, the It’s important for traders to
whatever model they’re using? idea is the reaction will be know they need something
In Quantacula, you can incorporate the same going forward.
different risk-management strategies. It’s not always the case, that can be tested and
You can put in stop-losses, or your model but I think it does provide validated.
can even look at the equity curve as the some edge.
history is progressing, and you can make
decisions based off of that. So yes, there’s What are the benefits, if any, of opti- be a good starting place. If a trader
a lot of flexibility there. mization? wants to start with something simple
I believe somewhat in optimization, such as a moving average crossover,
And what about JuicyCharts? What but I’m not a big fan of it because it’s they could implement that trading rule
can users do with this product? often abused. If you take a set of vari- in backtesting software. They could test
JuicyCharts is a JavaScript-based ables, say, if you have five variables, and that simple system in whatever market
version of the same scripting language you run through every combination of they’re interested in and see how well it
used in Quantacula, so people can code parameters, then of course you’ll get works. Seeing those results can lead the
complete trading systems in JuicyCharts the set of five variables that happened trader to refine the idea, and they can
using JavaScript. And there are a few to perform the best. But that’s no better proceed little by little from there.
examples on the site they can look at. than having a crystal ball and looking
As an example, I even programmed one back and saying, “Well, you know, these Sometimes people are intimidated to
of John Ehlers’ indicators from a recent would’ve been the best five numbers.” try something like this on their own.
issue of this magazine. That’s overoptimization. So it would probably help them to start
But I think optimization can be useful with something simple to reduce the
Do each of these sites attract a different if you do a walk-forward optimization. learning curve. Once they understand
type of trader or do they appeal to a So if you optimized it on one set of data the product, they can try other things.
similar type of trader? and then used those parameters on a And one nice thing about your products
I think both will appeal to the demo- future piece of the data and do it in that is that there is an online community
graphic of anyone who’s really interested manner, that can be useful. Also, you can there from whom they can learn.
in technical analysis, indicators, and test a range of different parameters to see Yes, the community is very helpful.
charting. My intention for JuicyCharts if the system is robust across a certain Users can post questions in our forums
is to eventually license it as a charting range of parameters. I think in that way, and they’ll often get an answer the same
package to other websites or services. optimization can be useful. day. Interestingly enough, we’re attract-
ing a diverse group of traders. On the one
In terms of designing systems, users Correct me if I’m wrong, but I assume hand, we’re seeing folks coming in at a
have the opportunity to backtest. What the first step is to come up with some very basic level, attracted by the ability
is the importance of backtesting? kind of trading idea. Before somebody to create trading systems without coding.
We believe in technical analysis and tries their hand at developing a trading On the other hand, we see professional
charts because we believe the move- system, how useful is it to come up with fund managers and analysts using the
ment of the free markets is based on the one or more trading ideas? platform.
psychology of the participating traders. Ideas can ultimately be codified into a And we try to respond quickly to
Human psychology hasn’t changed over trading system. So yes, getting a trading community requests. For example, we
the few hundred years the markets have idea or two would be the first step. There recently integrated historical cryptocur-
existed. If the market does a certain are traders who rely just on their gut rency data into the Quantacula website
thing and then reacts in a certain way, instincts. But even they have some kind based on user demand.
it’s because the participants are reacting of idea on a subconscious level. What
in a certain way based on their human we’re trying to do with our platforms is Anything else to add?
psychology. So if that event happens give users a way to get those ideas into I just want to thank your magazine
again, we can hope and think that the a form that can be codified. for being there all these years as a great
participants will react in a similar way. resource for people interested in techni-
In that way, we can try and get an edge How would a trader go about getting cal analysis.
in the market by seeing what it did in the trading ideas? Can it be anything
past and how people reacted, and then that pops into their mind or should Further reading
anticipating that reaction when a similar they start with something simple and • www.quantacula.com
event happens. I think that’s why back- well-known such as a moving average • www.juicycharts.com
testing is important, because it lets you crossover?
see how your rules performed in the past. Using a simple, well-known idea can
October 2018 • Technical Analysis of Stocks & Commodities • 37
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.

SIMULTANEOUSLY LONG & SHORT? on the sidelines! In other words, traders the rule against being long and short
Why won’t my futures broker allow me are paying transaction costs to not have a simultaneously. While you can have two
to use a “hedging strategy” in which I position in the futures market. The only separate trading accounts trading two
am long and short a futures contract party benefiting from such an arrange- different strategies that occasionally and
simultaneously? ment is the brokerage and the exchange coincidently are long and short the same
I am asked this question often and (who would be earning transaction fees commodity at the same time, consistently
am surprised at how many traders are on positions that have no risk exposure entering offsetting trades in two differ-
interested in having equal and opposite or profit potential). ent accounts is forbidden. This is true
positions in the exact same futures There are traders who legitimately even if the accounts are held at different
contract. The reality is, a trader who is believe this rule is a hindrance to their brokerage services (each futures trader
both long and short a futures contract ability to profit in the markets. Their with platform access is assigned an ex-
is simply “flat” the market. In other argument is that if they were able to hold change ID for tagging purposes and IP
words, the trader has no position at all. a long and short position simultaneously, addresses are recorded). In addition to
On balance, this is the point of hav- the unnecessary and difficult-to-digest
ing futures markets. Traders can buy transaction costs involved in the strategy
or sell in any order because they are A trader who is both of being long and short the same market,
trading obligations rather than assets. there are deeper regulatory concerns
In addition, the only way to exit a long long and short a futures including money laundering (if you think
or short position is to take the opposite contract is simply ‘flat’ long and hard about this, the concern
side of the trade—that is, traders who the market. will become apparent).
sold short a December emini S&P 500 If you truly believe you have uncovered
futures contract must buy a December a trading edge employing a strategy of be-
emini S&P 500 futures contract to exit they could eventually offset the win- ing long and short simultaneously, don’t
the trade. Because of this process and ning trade to lock in a profit and hope break the rules. Instead, get creative; a
the logistics of the futures markets, it is the losing side of the trade eventually trader who buys a futures contract and
not possible to be both long and short at recovers. Nevertheless, the losing trade then sells an at-the-money (ATM) call
the same time. The trader is simply out might never recover and while both the option, or even sells two of them, is
of the market. long and short contracts were open, the recreating a similar trade while staying
The lack of ability to employ a “hedg- trader would have had the same fate had within the rules. This type of strategy
ing strategy” in which a trader is both the trader been flat the market. Offset- probably makes more sense in that it
long and short the same futures contract ting the profitable side of a simultaneous enables traders to benefit from options
is not the decision of the brokerage ser- long and short futures position in hopes time-value erosion. That said, if the
vice; it is a futures exchange and regula- of the losing side recovering mimics the goal is to mimic being long and short a
tory rule that is enforced by the CME profit, loss, and risk potential of simply futures contract exactly, a trader could
Group as well as the NFA and CFTC. entering a fresh position at the point the go long a futures contract and then buy
Rulemakers’ disdain for the practice of profitable leg of the “hedging strategy” an ATM put option and buy an ATM
being long and short the same instrument was liquidated. Yet in the meantime, call option.
is simple: There is no potential for either the trader would have paid two sets of While I am a big fan of premium-
profit or loss. Instead, the trader simply transaction costs rather than one. collection strategies, and particularly, of
paid commission, exchange transaction Keep in mind, opening two separate trading covered calls using ATM strike
fees, and potentially platform fees to trading accounts to house the offset-
have the same risk exposure as being ting trades is not a viable way to bypass Continued on page 41
38 • October 2018 • Technical Analysis of Stocks & Commodities
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Q&A

SINCE YOU ASKED


Confused about some aspect of trading? Professional trader Rob Friesen, president
& COO of Bright Trading (www.stocktrading.com), an equity trading corporation
hosting independent proprietary traders, an online trading school, and the Stock-
Odds database, answers a few of your questions. To submit a question or suggest a
topic, email him at robfriesen@brighttrading.net. Selected questions will appear in
a future issue of S&C.
Rob Friesen

October equals opportunity December not knowing what to expect Here are some particulars about the
While October is synonymous with in the new year and are looking for upcoming elections as far as what is
risk, opportunity favors the bold and information. in play:
informed. What do most traders think The US federal government fiscal
about October’s typical market activity? year-end is September 30. I am not en- At the federal and state levels: 500 to
Most thoughts run toward, “Beware of tirely sure what, if any, impact this has be elected
potential market crashes,” and “Volatility on October’s behavior, but it is worth House of Representatives: 435 seats
reigns supreme.” a mention for those who may wish to Senate: 33 of 100 seats
Let’s add a few more items to this con- research this further. Many financial Governors: 39 states will vote.
versation about the month of October: institutions have their fiscal year-ends
in September or October. As you can see, there is enough at stake
• It is an important earnings season Mergers are often consummated in the to cause some market movement as we
• There are potential macro events at third or fourth quarters of the year, and move through September and October,
home and globally over the years we have seen some large factoring in the probable outcomes.
• It can be the start of significant IPOs debut in the fall. These may be These election results will play into how
market rallies contributing factors to market movement the second half of Trump’s presidency
• It can be a generally tense month and behaviors. Once again, context. unfolds. In addition, there is always
during election cycles. plenty of opportunity for macro forces
to add some excitement between now
Context You can reference the and then as well.
There is a need to pay special attention various VIX charts
to what happens in the month before Oc- Trading
tober. This is because looking at context from the CBOE to view There are stocks you could trade regard-
helps to anticipate activity. the average volatility less of the market’s direction. Some
September can be an interesting per month, and October trades could be assembled as sound
month partly because it is the first month is the clear winner. fundamental pairs, others as technical
after the summer season, and investors plays, and still others as quantitative
are not sure what to expect for the fall trades based on historical patterns. Some
season. Investors usually lean on the November 2018 election season trades might have ingredients of all those
analyst community for information in The potential outcome of the elections things to overlay the probability sets.
September more so than they would in could exert pressure on the market even In addition, long versus short baskets
other months. before November 6. Remember, the mar- could be formed for either intraday op-
It usually takes a week or two into the ket is almost prescient in the way it seems portunity or as swing trades.
month of September for the indecision to to know about things before they happen, The wild card in swing trading for an
be brushed aside and then for a trend to or as it is often put, “The market factors extended period is the earnings season.
catch on either way (up or down), setting in everything it knows or can anticipate, You could have a situation where your
the stage for an interesting October. Oc- just not surprises.” Outcomes like Brexit trade is going swimmingly but an earn-
tober tends to lend itself to more “drama” or our most recent US presidential elec- ings event is on the horizon. This is your
than other months. You can reference the tion were disruptive because they were call as to how effective your research
various VIX charts from the CBOE to a surprise to many. can be. I still think that earnings plays
view the average volatility per month, The actual outcome of the upcoming are a gamble and the only time I see an
and October is the clear winner. elections on November 6, 2018 could edge is where one side of a correlated
Just a note here for future reference: cause a continuation of the October move pair has reported and the other side
January is like September in that inves- or a reversal depending on how things hasn’t. You have information on how
tors lean more on the analyst commu- play out and how much of the outcome both the earnings stock and sympathy
nity. Market participants come out of was truly factored in beforehand. stock performed, and you can evaluate
40 • October 2018 • Technical Analysis of Stocks & Commodities
Q&A
your risk/opportunity from where the looking for anomalies in a group and other months. Recall my column from
pair finds itself just before the next side’s exploiting those relationships. In turn, last month’s issue on MOME (middle-
earnings event. you play a part in helping them return to of-the-month effect) and TOME (turn-
For single-stock trading, if one of the their mean (and hopefully return to you of-the-month effect) and remember to
dominant stocks in a peer group has some profit) through your actions. You observe context as we approach those
reported and none of the others have, can use ATR as percentage of price or timeframes.
you can watch all stocks in the group straight-up dollar balancing when tak- Last year in 2017, we saw a bad selloff
for information from their respective ing these trades. You can form pairs or in August and from that correction, the
behaviors. If there is enough disruption, keep it as baskets, or just take the long market rebuilt and closed high by the end
creating premium or discount from the or short naked trade, or balance one of September. That played into continued
industry mean, that might attract some stock or a few stocks against the SPY strength for October.
piston trading. Back as early as 2001, or appropriate ETF. In 2016 there was a big October selloff
I coined the term piston trading as a Utilizing automation or semi-automa- right before the November elections.
strategy to take advantage of the percent tion to assist your trading can increase In 2015 we had a huge drop in August
separation of a peer group from the indus- your ability to harvest anomalies. Being and another perfect retest of those lows
try mean or from each other, on the day armed with data about the historical at the end of September that set the stage
of or within your specified timeframes. percent separation amounts and how for an October rally.
It came from my experience in rebuild- long that persists before snapping back This shows just how important con-
ing a small-block eight-cylinder motor. to the mean can only assist you in your text is.
In a four-stroke engine, pistons can be at expectation and risk management. There are stocks that, with beta and risk
the top dead center (TDC) on the intake, adjustments, beat the SPY every October.
exhaust, and compression cycle or at bot- What if you could tap into those stocks
tom dead center (BDC) at the end of the With earnings plays, while shorting those that perform worse
power stroke. The stroke is the length of the only time I see an than the SPY? You could trade intraday
the movement from TDC to BDC. The each day by taking trades if things are
pistons rotate around a crankshaft. edge is where one side still lining up, or you could stay with an
The parallels here between a motor of a correlated pair has ongoing swing trade.
engine and trading are that if you have reported and the other October opportunities abound!
eight stocks in a peer group that are side hasn’t. Even though I am suggesting there is
moving in different directions, that is opportunity in October, the decision is
like eight pistons in an engine being yours on whether to play or be benched.
at various positions between TDC and I always encourage traders to find a But I would not be active unless you put
BDC while they are still connected to scalable methodology to build a stock- a lot of effort into research and then rely
the industry mean, represented by the trading business, and the best founda- strongly on that data. In the past, it’s been
crankshaft. tion is to apply capital in a distributed our observation that increases in volatil-
Compression ratios could be like fashion with an emphasis on being closer ity can enable point-and-click discretion-
Bollinger Bands and %B indicators to market-neutral. That is done by long ary traders to perform a bit better than
in that the greater the compression (or dollars against short dollars simultane- during periods of lower VIX.
penetration of the Bollinger Band), the ously or with minimum lag time.
more power is produced as we come
away from it. Seasonality
I could go on with analogies, but I think There are seasonal patterns for October
you get the point. Piston trading is about just as there are seasonal patterns for

FUTURES FOR YOU


Garner or mimicking this with a combination also playing not to win, and that can’t
Continued from page 38 of futures and options. Trades that fail possibly be benefi cial for anybody other
to lose also fail to win. That is just the than the brokerage earning a commission
nature of the markets. It is impossible on each transaction.
prices, I have never been a fan of creating to create a risk-free strategy that offers
a strategy that “fails to lose” such as being any potential for return. In other words,
both long and short the futures market, if you are playing not to lose, you are
October 2018 • Technical Analysis of Stocks & Commodities • 41
Explore Your Options
answer to the question, “What will you
Got a question about options? Jay Kaeppel has over three decades of experi- do if the stock price goes down?” When
ence in the options markets. He was a head trader for a CTA firm, an options selling a covered call, the second most
trading software developer, and is a portfolio manager for an investment important question to ask and answer is,
management firm. He also spent several years writing a weekly column titled “What will you do if the stock price rises
“Kaeppel’s Corner” and now publishes a blog, “Jay On The Markets” (http:// above the call strike price?” If the stock
jayonthemarkets.com). He is the author of several books, including The Four price rises above the call strike price,
Biggest Mistakes In Option Trading; The Option Trader’s Guide To Probability, then the option buyer may “exercise” the
Volatility, And Timing; and Seasonal Stock Market Trends. Send your ques- call and your stock shares will be called
tions or topic suggestions to Jay Kaeppel at jaykaeppel@gmail.com. Selected away at the strike price. In this scenario,
questions will appear in a future issue of S&C. you have three basic choices:

1. Allow your shares to be called away


at the strike price
WRITING COVERED CALLS AGAINST shares of stock you hold, what you have 2. Buy back the call option (possibly
STOCK PORTFOLIO is a position with: at a higher price than the price at
I keep reading about the potential to gen- which you originally sold it)
erate income from my stock portfolio by a. limited upside potential, and 3. “Roll up” to a higher strike by buying
writing covered calls against the stocks b. unlimited risk reduced only by the back the original call and selling one
I hold. But I am not sure of the best way amount of premium received when with a higher strike price. This may
to go about trying to do so. Are there any the call option was sold. be done at a loss and will require that
rules that might be helpful? more commissions be paid.
There’re a lot of rules and guidelines The good news is that if the stock
that can be helpful. But let me start by remains below the strike price you As with most things in trading options,
stating what I call “the great irony of “generate income” by virtue of the op- there is no “one best choice,” but there are
option trading” and it goes like this: The tion expiring worthless. Likewise, you considerations that can help you decide
best thing about option trading is also have downside protection equal to the the best course of action.
the worst thing about option trading. To amount of premium you received when Here are some times when it might
wit, the best thing about option trading you sold the call. The bad news is that make sense to consider selling a cov-
is there are so many choices available. if the stock price goes way above the ered call:
The worst thing about option trading is strike price, you have only limited upside
that there are so many choices available. potential and if the stock goes down you 1. If you have established a “profit
Therefore, it is critically important for have only limited downside protection. target” at which price you intend
a trader or investor to think seriously Generally speaking, this is an unfavor- to sell your shares anyway.
about specifically what objectives they able reward-to-risk scenario. See the risk
are trying to achieve via a given option curves in Figure 1. Let’s say for example you buy a stock at
strategy, as well as the potential downside Presumably, a smart trader who holds $50 a share and intend to sell if the price
to doing so. shares of stock will always have an hits $60 a share. In this scenario, there is
The good news regarding selling cov-
ered calls (or any option strategy for that
matter) is that you can set up a “method’
to follow. The bad is that there’s no “one
best way” to trade covered calls. Still
there are some important guidelines and
some useful “rules of thumb” that can
point you in the right direction.The first
and most important concept to grasp is
the tradeoff between reward and risk
for a trader who sells one covered call
for every 100 shares of stock they hold.
www.OptionsAnalysis.com

For example, let’s say a trader holds 100


shares of Intel stock (INTC) trading at
$49.30 a share and sells one September
50 strike price call for $1.22.
The key thing to note is this: When Figure 1: SELLING one covered call for every 100 shares of stock held. Risk curves are
you hold one short call for each 100 shown for long 100 shares of INTC and short one out-of-the-money (OTM) covered call.

42 • October 2018 • Technical Analysis of Stocks & Commodities


Explore Your Options
a built-in incentive to sell calls at the $60
strike price. If the first 60 strike price
call you sell expires, then you can sell
another and so on. As long as the price
of the stock remains below $60, you
take in and keep the premium received
from selling the 60 strike price calls. If
the price of the stock ultimately exceeds
your target of $60, you can simply let the
call option be exercised and allow your
shares to be called away.

2. You expect the price of your stock to


be “range-bound” for a while.

Stocks often run into overhead “re-


Figure 2: SELLING calls AGAINST JUST A PORTION OF THE STOCK POSITION. Risk curves are shown
sistance” at previous highs. If in your for long 1,000 shares of INTC and short one out-of-the-money (OTM) covered call.
opinion, a stock you hold has significant
overhead resistance that you think may
prove tough to work through, you might premium available and gives option If you’re long 500 shares of stock, sell
consider selling a call at a strike price sellers, including covered call writers, perhaps two or three calls instead of five.
near or even above your expected level of an incentive to write options. The logic behind this suggestion is to
“resistance.” For example, if a stock has One more rule of thumb regarding attempt to improve the reward-to-risk
tried several times to break above $70 a covered call writing is stated to sound ratio displayed previously in Figure 1. If
share and failed, it might make sense to like a rule, but it isn’t really a “rule,” you hold 1,000 shares of INTC at $49.30
sell a covered call at a strike price of $70 and sell only five 50 strike price calls,
or even $72.50 or $75 a share to gener- then your risk curves look like those
ate some income while the stock price As with most things displayed in Figure 2.
decides if it will break through, break Following this rule of thumb, the
down, or simply trend sideways. in trading options, tradeoff is that while you do not gener-
there is no “one best ate the maximum potential amount of
3. If implied volatility is excessively choice,” but there are income, you
high. considerations that
a. still do in fact generate income,
When you write a covered call, the can help you decide the and
amount of premium you receive at the best course of action. b. still retain unlimited profit potential
time the trade is entered represents your if the stock goes up significantly.
maximum profit potential. Implied vola-
tility (IV) essentially measures whether merely a suggestion. It goes like this: If the stock price explodes, you may
the time premium built into an option, “Never write covered calls against your see some of your shares called away at
or series of options on a given stock, is full stock position.” the strike price, but you continue to hold
relatively high or low. At times, and for In other words, if you hold 1,000 other shares free and clear and thus can
any variety of reasons, the IV for the shares of stock, instead of selling 10 still enjoy unlimited profit potential.
options on a given stock may “spike.” covered call options, sell only three or
This indicates that there is above-average five or seven—something less than 10.

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October 2018 • Technical Analysis of Stocks & Commodities • 43


Follow It, With Caution

The Trend Is Your Friend


All trends aren’t created equal. How do you know if a trend These are all good questions. Let’s try to find some an-
is truly your friend? Here are a couple of pointers that’ll help swers.
you have a long and sustained relationship with the trend.

In
Determine the trend
by Bruce Ross How can a trader or investor determine whether a stock’s trend
is up or down? Some draw a straight line along the tops or
the stock trading world, we’ve all heard the bottoms of major lows and major highs on a price chart. To
saying “The trend is your friend.” But that them, these highs and lows represent support & resistance
rule of thumb raises some questions: levels. This simple method is often effective.
Some have used various indicators that are generally ac-
• How do you determine the direction of a stock’s cepted as being trend-following indicators. There are several
trend? of them. Some work but many don’t. As an example, some of
• What determines when a stock’s trend begins or ends? these indicators may indicate an overbought situation, which
Arthimedes/SHUTTERSTOCK

• What trend length is best to follow? makes you expect a trend reversal but the security continues
• Once a trend is identified, how do you use the trend to moving in the same direction (up or down). As in that example,
make investment profits? these types of indicators are sometimes not reliable. Other
• Which securities best follow a trend? traders have found using MACD or moving averages—which
can be adjusted—to be helpful.
44 • October 2018 • Technical Analysis of Stocks & Commodities
CHART PATTERNS

One of the most effective methods to identify a trend is


to superimpose an elaborate algorithm on a price chart. The
algorithm will often reflect hundreds of factors that track
Down trend
many conditions within the price movement and volume.
A mathematical formula is determined based on those
factors, and that algorithm is used to track the security’s
trend. These are usually developed and used by professional Down
money managers.
trend

Up trend
What trend length is best?
Trend length is determined by the timeframe used in the Up
chart setting. It could be used on a daily or weekly chart, or

bruce ross/midtermalgo
trend
on a one-minute or 15-minute chart. That is usually selected
based on the individual trader’s or investor’s time horizon.
A long-term trend—such as on a daily, weekly or monthly
chart—is best for those with a long-term buy & hold plan.
A shorter timeframe, such as a five-minute or 30-minute FIGURE 1: UPTRENDS & DOWNTRENDS. All trends go through peaks and valleys.
chart, is for those who want to hold their security for a There are many ways to trade them—it’s a personal choice.
shorter time period.
The trend length you select is a personal choice. Both types, separated from the men. How do you use the trend? How do
long- and shorter-term trends, can be profitable. If you look you make the trend your friend? How do you use your newly
at a security’s price chart, you’ll likely see several peaks acquired friend to make trading profits?
and valleys over any timespan (Figure 1). Some traders or As already mentioned, along any trend there are up and
investors will hold their position along all those peaks and down peaks and valleys. So in an uptrend, you can expect to
valleys (ups and downs) for a long-term buy & hold approach. see pullbacks that create valleys along the uptrend—like a
Others may wish to buy during the shorter up moves and sell saw tooth blade—up and down. One approach is to wait for
short during the smaller down moves—sometimes referred a pullback (or a down valley) and look for an opportunity to
to as swing trading, or for very short-term trading, it might enter a trade when it indicates that it will turn back up to go
be called scalping. higher in the already established uptrend. Using an established
Different traders can profit in different ways using different trend to look for key opportunities to re-enter along the trend
trend lengths. One isn’t necessarily better or worse than another. is a good way to utilize a trend.
It only has to suit each investor’s profit objective or investment Another method of utilizing an established trend is to “ride
horizon. The longer the trend length, the fewer the number the trend.” When the indicator or method you have established
of trades will be generated. The shorter the trend length, the to determine the trend, whether long-term or short-term, shows
greater the number of trades will be generated. a trend change is about to occur, you could enter the trade
Each trader must determine for themselves how active and stay in the trade for as long as that trend continues, even
they want to be. Shorter-term traders would rather “take” through all its ups and downs. You may hold that trade for
profit before it disappears. Longer-term traders will hold for several hours, days, weeks or months. It depends on the length
the long term through all the ups and downs. Both methods of the price trend’s time frame. Whether long term or short
have their benefits and shortcomings. No one will ever pick term, you hold on to that position until the trend indicates it
the very bottom or top of any price trend. is about to turn in the opposite direction.
When a trend reversal is about to occur, you need to decide
How to utilize a trend whether you will exit the buy (long) position, or exit the buy
Once someone has come up with a reliable method to identify and then sell short to attempt to profit in the downtrend. These
a trend and has it set at a timeframe length that suits their are the decisions a trend trader often faces. If you have con-
investment style, how do they use it to make good investment fidence in your trend-following model (whatever its length),
decisions? If they are following any method that has lines that you may choose to follow the trend, up or down, and make
cross over each other, should they enter the trade as soon as profits. How far will each uptrend or downtrend last? No one
the lines touch, after they cross, or anticipate their crossing? knows. The next one might be the big one.
Should they stay in the trade as long as the trend is indicated Obviously, the smoother the price action and trend of a stock
to be continuing, or exit before they ‘give back’ any profit they or security, the better a trend-following system will perform.
had realized? If the trend turns down, should they be selling Part of developing a trend-following model is being able to
short to profit on the downside? apply the model to the best stock or security. If a stock has a
Many so-called professional traders will readily tell you the history of being choppy and moving erratically, the trend will
trend is your friend, but do they explain how to use the trend be difficult to determine and/or difficult to follow.
in a practical way to profit from it? Here is where the boys are It is a beautiful thing for a trend trader to find a stock with a
October 2018 • Technical Analysis of Stocks & Commodities • 45
smooth trend and that fits the trend model well. When a stock
or security follows a smooth trend, you can see the trend and
follow it clearly. It increases the chances of the profitability One of the most effective
of your trades. methods to identify a trend is
Long, smooth, and profitable to superimpose an elaborate
You want the trend to be your friend, but to do that, you algorithm onto a price chart.
have to:

• Choose a security to trade that has a history of trending


smoothly. about trend trading. Nothing and no one can be your friend until
• Then develop a method or model to determine what the it or they prove themselves to be reliable. Therefore, test your
trend is and to indicate when it is about to change. trend concept and develop a model or system you have tested
• Select a timeframe for your charts and the trend length and can rely on. Then the trend can be a great friend. Test it,
that suits your investment objectives. Then determine tweak it, adjust it ... until it has proven to be a true friend, one
what method you will implement to make the best use that could help guide your trading to greater profits.
of the trend. Will you follow the selected trend for its Here’s to profitable trend trading!
entire duration, or will you look for key pullbacks during
which to enter to join the established trend? Bruce Ross can be reached at midtermalgo@gmail.com.
TRADING ON MOMENTUM
The trend can be your friend, if you know the key factors

caLhOUN is no exception. The price that proves or other instrument you are trading.
Continued from page 7 the trade wrong here is the loss of the Once you learn how to identify mo-
previous day’s low. The price that proves mentum breakout patterns like the ones
the trade correct here is a continuation I share in this column, the next step is to
day’s close. This could be for a number breakout above the prior day’s high. Two- develop a trading plan with conservative
of reasons. As a technical price action day charts like this are useful for day and risk-management strategies. Managing
trader, you simply look for strong patterns your trades using small gaps and prior-
like this that are likely to continue. In day support & resistance levels can
general, the worst place to enter a new Gaps of any size will provide you with an effective strategy
trade is inside the prior day’s trading attract attention from for successful active trading.
range, with the important exception experienced traders but
of this particular gap pattern. Gaps Ken Calhoun is a producer of trading
of any size will attract attention from
you may find this pattern courses, a live trading room, and video-
experienced traders, but you may fi nd gives you an early start based training systems for active traders.
this pattern gives you an early start on on strong breakouts. He is the founder of TradeMastery.com,
strong breakouts. an educational resource site for active
traders, and is a UCLA alumnus.
traDe management tips swing trading, because they provide an
Using tight stops is always a smart idea excellent technical analysis tool to help
and this technical gap trading pattern you see close-up price action in the stock

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46 • October 2018 • Technical Analysis of Stocks & Commodities


S&C Digital Edition
Did you know that every subscriber to Technical Analysis of  Stocks & Commodities magazine
has full access to the magazine in digital format? No waiting for the mail to be delivered, no need to carry
around back issues — just log on to Traders.com on any internet-capable device to read any issue or article
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— including Traders’ Tips code.

Optimized Trading — starting points when trying


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or build your own portfolio.

Visit www.Traders.com to find out more!


Email: Circ@Traders.com • Phone: 206-938-0570 facebook.com/STOCKSandCOMMODITIES @STOCKSandCOMM
For this month’s Traders’ Tips, the
focus is John Ehlers’ article in this is-
sue, “Probability—Probably A Good
Thing To Know.” Here, we present
the October 2018 Traders’ Tips code
with possible implementations in
various software.
The code for the following Traders’ Tips selections is
posted here:
• Traders.com  Home–S&C Magazine 
Traders’ Tips
At Traders.com you can also right-click on any chart to
open it in a new tab or window and view the chart at a
much larger size.
The Traders’ Tips section is provided to help readers
implement a selected technique from an article in this is-
sue or another recent issue. The entries here are contrib-
uted by software developers or programmers for software
that is capable of customization.
Figure 1: TRADESTATION. Here, the Fisherized deviation-scaled oscillator is ap-
plied to daily chart of AAPL.

count( 0 ), ScaledFilt( 0 ), FisherFilt( 0 ),


Idx( 0 ), J( 0 ), K( 0 ) ;
F TRADESTATION: OCTOBER 2018 TRADERS’ TIPS CODE
In “Probability—Probably A Good Thing To Know,” author arrays:
John Ehlers introduces a procedure for measuring an indica- Bin[61](0);
tor’s probability distribution to determine if it can be used as if CurrentBar = 1 Then
part of a reversion-to-the-mean trading strategy. The author //once
demonstrates this method with several of his existing indicators begin
//Smooth with a Super Smoother
and presents a new indicator that he calls a deviation-scaled a1 = expvalue( -1.414 * 3.14159 / ( .5 * Period ) ) ;
oscillator with Fisher transform. b1 = 2 * a1 * Cosine( 1.414 * 180 / ( .5 * Period ) ) ;
Here, we are providing TradeStation EasyLanguage code c2 = b1 ;
c3 = -a1 * a1 ;
for an indicator and strategy based on Ehlers’ concepts. c1 = 1 - c2 - c3 ;
The code for the complete set of indicators presented by end ;
the author in his article can be downloaded by visiting our
//Produce Nominal zero mean with zeros in the transfer response
TradeStation and EasyLanguage support forum. The files at
for this article can be found here: https://community.trades- //DC and Nyquist with no spectral distortion
tation.com/Discussions/Topic.aspx?Topic_ID=152631. The //Nominally whitens the spectrum because of 6 dB per octave
rolloff
filename is “TASC_OCT2018.ZIP.” Zeros = Close - Close[2] ;
For more information about EasyLanguage in general,
please see http://www.tradestation.com/EL-FAQ. //SuperSmoother Filter
Filt = c1 * ( Zeros + Zeros[1] )
A sample chart is shown in Figure 1. / 2 + c2 * Filt[1] + c3 * Filt[2] ;
This article is for informational purposes. No type of
trading or investment recommendation, advice, or strategy //Compute Standard Deviation
RMS = 0;
is being made, given, or in any manner provided by TradeS- For count = 0 to Period - 1
tation Securities or its affiliates. begin
RMS = RMS + Filt[count] * Filt[count] ;
Indicator: Fisherized Deviation Scaled Oscillator end;
// TASC OCT 2018 RMS = SquareRoot( RMS / Period ) ;
// Ehlers FDSA
inputs: //Rescale Filt in terms of Standard Deviations
Period( 40 ), If RMS <> 0 then
OverBought( 2 ), ScaledFilt = Filt / RMS ;
OverSold( -2 ),
OutPutData( false ), //Apply Fisher Transform to establish real Gaussian Probability
FilePath( "C:\ProbabilityDensity.CSV" ) ; //Distribution
If AbsValue( ScaledFilt ) < 2 then
variables: FisherFilt = .5 *
a1( 0 ), b1( 0 ), c1( 0 ), c2( 0 ), Log( ( 1 + ScaledFilt / 2 ) / ( 1 - ScaledFilt / 2 ) ) ;
c3( 0 ), Zeros( 0 ), Filt( 0 ), RMS( 0 ), Plot1( FisherFilt, "Fisher Filt" ) ;

48 • October 2018 • Technical Analysis of Stocks & Commodities


Plot2( 0, "ZL" ) ;
Plot3( OverBought, "OB" ) ;
Plot4( OverSold, "OS" ) ;

//Bin the indicator values in Bins from -3 to +3


if OutPutData then
begin
For Idx = 1 to 60
begin
J = (Idx - 31) / 10;
K = (Idx - 30) / 10;
If FisherFilt > J and FisherFilt <= K then
Bin[Idx] = Bin[Idx] + 1;
end;

//Output the Bin measurements to a file
once ( LastBarOnChartEx )
begin
FileDelete( FilePath ) ;
For Idx = 1 to 61
begin
FileAppend( FilePath, NumToStr( .1 * ( Idx - 31 ), 1 )
+ "," + NumToStr( Bin[Idx], 0 ) + NewLine ) ; FIGURE 2: eSIGNAL. Here is an example of the study plotted on a daily chart of
end; NFLX.
end ;
end ; RMS = SquareRoot( RMS / Period ) ;

Strategy: Fisherized Deviation Scaled Oscillator //Rescale Filt in terms of Standard Deviations
// TASC OCT 2018 If RMS <> 0 then
// Ehlers FDSA ScaledFilt = Filt / RMS ;
inputs:
Period( 40 ), //Apply Fisher Transform to establish real Gaussian Probability
OverBought( 2 ), //Distribution
OverSold( -2 ), If AbsValue( ScaledFilt ) < 2 then
OutPutData( false ), FisherFilt = .5 *
FilePath( "C:\Data\ProbabilityDensity.CSV" ) ; Log( ( 1 + ScaledFilt / 2 ) / ( 1 - ScaledFilt / 2 ) ) ;

variables: if FisherFilt crosses below OverBought then


a1( 0 ), b1( 0 ), c1( 0 ), c2( 0 ), Sell Short next bar at Market
c3( 0 ), Zeros( 0 ), Filt( 0 ), RMS( 0 ), else if FisherFilt crosses over OverSold then
count( 0 ), ScaledFilt( 0 ), FisherFilt( 0 ), Buy next bar at Market ;
Idx( 0 ), J( 0 ), K( 0 ) ;
if FisherFilt crosses below 0 then
arrays: Sell next bar at Market
Bin[61](0); else if FisherFilt crosses over 0 then
Buy to Cover next bar at Market ;
if CurrentBar = 1 Then
//once —Doug McCrary
begin
//Smooth with a Super Smoother TradeStation Securities, Inc.
a1 = expvalue( -1.414 * 3.14159 / ( .5 * Period ) ) ; www.TradeStation.com
b1 = 2 * a1 * Cosine( 1.414 * 180 / ( .5 * Period ) ) ;
c2 = b1 ;
c3 = -a1 * a1 ;
c1 = 1 - c2 - c3 ;
end ;

//Produce Nominal zero mean with zeros in the transfer response


at F eSIGNAL: OCTOBER 2018 TRADERS’ TIPS CODE
//DC and Nyquist with no spectral distortion
//Nominally whitens the spectrum because of 6 dB per octave For this month’s Traders’ Tip, we’ve provided the study
rolloff FDSO.efs based on the article by John Ehlers in this issue,
Zeros = Close - Close[2] ; “Probability—Probably A Good Thing To Know.” This study
//SuperSmoother Filter displays a Fisher deviation-scaled oscillator on the chart.
Filt = c1 * ( Zeros + Zeros[1] ) The study contains formula parameters that may be con-
/ 2 + c2 * Filt[1] + c3 * Filt[2] ; figured through the edit chart window (right-click on the
//Compute Standard Deviation chart and select “edit chart”). A sample chart is shown in
RMS = 0; Figure 2.
For count = 0 to Period - 1 To discuss this study or download a complete copy of the
begin
RMS = RMS + Filt[count] * Filt[count] ; formula code, please visit the EFS library discussion board
end; forum under the forums link from the support menu at www.

October 2018 • Technical Analysis of Stocks & Commodities • 49


esignal.com or visit our EFS KnowledgeBase at www.esig- c3);
xRMS = efsInternal("calc_RMS", Period, xSSFilter);
nal.com/support/kb/efs/. The eSignal formula script (EFS) addBand(0, PS_DASH, 1, Color.grey, 2);
is also available for copying & pasting from the Stocks &
Commodities website, Traders.com, in the Traders’ Tips bInit = true;
}
section.
if (Math.abs(xRMS.getValue(0)) < 2) {
/*********************************
var nFisherFilt = 0.5 * Math.log((1 + xRMS.getValue(0) / 2) /
Provided By:
(1 - xRMS.getValue(0) / 2));
eSignal (Copyright c eSignal), a division of Interactive Data
}
Corporation. 2016. All rights reserved. This sample eSignal
Formula Script (EFS) is for educational purposes only and may
return [xRMS.getValue(0), nFisherFilt]
be
}
modified and saved under a new file name. eSignal is not
responsible
function calc_Zeros (xClose){
for the functionality once modified. eSignal reserves the right
if (xClose.getValue(-2) != null)
to modify and overwrite this EFS file with each new release.
return xClose.getValue(0) - xClose.getValue(-2);
}
Description:
Probability—Probably A Good Thing To Know by John F. Ehlers
var nSSFilter = 0;
Version: 1.00 8/13/2018
var nSSFilter_1 = 0;
Formula Parameters: Default:
var nSSFilter_2 = 0;
Period 40
Notes:
function calc_SSFilter(xZeros, c1, c2, c3){
The related article is copyrighted material. If you are not a sub-
if (xZeros.getValue(-1) == null) return;
scriber
of Stocks & Commodities, please visit www.traders.com.
if (getBarState() == BARSTATE_NEWBAR){
**********************************/
nSSFilter_2 = nSSFilter_1;
nSSFilter_1 = nSSFilter;
var fpArray = new Array();
}
function preMain(){
if (getBarState() == BARSTATE_ALLBARS){
setPriceStudy(false);
nSSFilter = 0;
setStudyTitle("Fisher Deviation-scaled Oscillator");
nSSFilter_1 = 0;
nSSFilter_2 = 0;
setCursorLabelName("DSO", 0);
}
setCursorLabelName("FDSO", 1);
setDefaultBarFgColor(Color.RGB(0xFE,0x69,0x00), 1);
nSSFilter = c1 * (xZeros.getValue(0) + xZeros.getValue(-1))
/ 2 + c2 * nSSFilter_1 + c3 * nSSFilter_2;
var x = 0;
fpArray[x] = new FunctionParameter("Period", FunctionParam-
return nSSFilter;
eter.NUMBER);
}
with(fpArray[x++]){
setName("Period");
function calc_RMS(Period, xSSFilter){
setLowerLimit(1);
if (xSSFilter.getValue(-Period) == null) return;
setDefault(40);
}
var nRMS = 0;
}
for (var i = 0; i < Period; i++){
var bInit = false;
nRMS += Math.pow(xSSFilter.getValue(-i), 2);
var bVersion = null;
}
var xClose = null;
var xRMS = null;
nRMS = Math.sqrt(nRMS / Period);
function main(Period){
var nRMSScaled = xSSFilter.getValue(0) / nRMS;
if (bVersion == null) bVersion = verify();
if (bVersion == false) return;
return nRMSScaled;
if (getCurrentBarCount() < Period) return;
}
if (getBarState() == BARSTATE_ALLBARS){
bInit = false;
function verify(){
}
var b = false;
if (getBuildNumber() < 779){
if (!bInit){
var a1 = Math.exp(-Math.SQRT2 * Math.PI /(0.5 * Period));
drawTextAbsolute(5, 35, "This study requires version 10.6 or
var b1 = 2 * a1* Math.cos(Math.PI * Math.SQRT2 / (0.5 *
later.",
Period));
Color.white, Color.blue, Text.RELATIVETOBOTTOM|Text.
var c2 = b1;
RELATIVETOLEFT|Text.BOLD|Text.LEFT,
var c3 = - a1 * a1;
null, 13, "error");
var c1 = 1 - c2 - c3;
drawTextAbsolute(5, 20, "Click HERE to upgrade.@
URL=http://www.esignal.com/download/default.asp",
xClose = close();
Color.white, Color.blue, Text.RELATIVETOBOTTOM|Text.
var xZeros = efsInternal("calc_Zeros", xClose);
RELATIVETOLEFT|Text.BOLD|Text.LEFT,
var xSSFilter = efsInternal("calc_SSFilter", xZeros, c1, c2,
null, 13, "upgrade");

50 • October 2018 • Technical Analysis of Stocks & Commodities


return b;
}
else
b = true;

return b;
}

—Eric Lippert
eSignal, an Interactive Data company
800 779-6555, www.eSignal.com

Figure 3: WEALTH-LAB. This shows the histogram of the oscillator’s probability


density overlaid on a daily chart of SPY (10 years of data).

F WEALTH-LAB: OCTOBER 2018 TRADERS’ TIPS CODE double[] bin = new double[61];
In his article in this issue, “Probability—Probably A Good for(int bar = GetTradingLoopStartBar(10 * 3); bar <
Thing To Know,” author John Ehlers shares an interesting Bars.Count; bar++) {
for(int i = 1; i <= 60; i++)
technique that charts the probability density of an oscillator //Bin the indicator values in Bins from -3 to +3
to evaluate its applicability to swing trading. {
However, exporting the data to a text file to be used by double j = (i - 31) / 10d;
double k = (i - 30) / 10d;
Excel for plotting as a bar chart is something we’d like to if( rrsi[bar] > j && rrsi[bar] <= k)
avoid. What we call the “Wealth-Lab way” would be to con- bin[i] = bin[i] + 1;
veniently build the chart on the fly. }
}
To approach this, we’ll leverage the power of .NET frame-
work (preinstalled on any Windows PC), which comes with Chart chart = new Chart();
a powerful charting control under the hood. Its broad feature //Histogram chart
chart.Width = 600;
set can be easily used to extend Wealth-Lab’s ability to plot string name = "Bins";
various objects, images, and text. Let’s employ it to overlay a chart.ChartAreas.Add(name);
stock chart with a nice histogram of an oscillator’s probabil- chart.ChartAreas[0].AxisX.MajorGrid.Enabled = chart.
ChartAreas[0].AxisY.MajorGrid.Enabled = false;
ity density. Below, you can have a look at the short sample chart.ChartAreas[0].AxisX.Title = "Deviation";
code in C#, which takes RocketRSI as an example (but can //Custom axis titles
be adjusted to accept any oscillator). chart.ChartAreas[0].AxisY.Title = "Occurences";
chart.Series.Add(name);
The bottom line is that Wealth-Lab lets a trader build chart.Series[name].ChartType = SeriesChartType.Col-
some complex logic or visualization without having to resort umn;
to third-party applications.
for(int b = 0; b < bin.GetLength(0); b++)
A sample chart is shown in Figure 3. chart.Series[name].Points.AddXY( (b - 31)/10d,
bin[b]);
Wealth-Lab strategy code (C#):
using System; using (MemoryStream memStream = new Memo-
using System.Collections.Generic; ryStream()) {
using System.Text; chart.SaveImage(memStream, ChartImageFormat.
using System.Drawing; Png);
using WealthLab; Image img = Image.FromStream(memStream);
using TASCIndicators; //required DrawImage( PricePane, img, Bars.Count-50,
using System.IO; //required for plotting Close[Bars.Count-50], false );
using System.Windows.Forms.DataVisualization.Charting; }
//1. Click "References...", then "Other Assemblies..." > "Add a }
reference" }
//2. In "C:\Windows\Microsoft.NET\Framework64\v4.0.30319\" }
(or "Framework" on 32-bit systems),
//choose and okay "System.Windows.Forms.DataVisualiza- —Gene (Eugene) Geren, Wealth-Lab team
tion.dll" MS123, LLC
www.wealth-lab.com
namespace WealthLab.Strategies
{
public class MyStrategy : WealthScript
{
protected override void Execute() F NEUROSHELL TRADER: OCTOBER 2018
{ TRADERS’ TIPS CODE
var rrsi = RocketRSI.Series(Close,8,10); John Ehlers’ probability distribution and associ-
ChartPane paneRocketRSI = CreatePane(40,true,true);
PlotSeries(paneRocketRSI,rrsi,Color.DarkBlue,LineStyle. ated indicators, which are discussed in his article in this
Solid,2); issue, can be easily implemented in NeuroShell Trader using
October 2018 • Technical Analysis of Stocks & Commodities • 51
Figure 5: TRADERSSTUDIO. This shows the Fisher deviation-scaled oscillator
on APPL.
Figure 4: NEUROSHELL TRADER. This NeuroShell Trader chart displays an SPY
chart with the probability file output indicator applied to MyRSI, RocketRSI, devia-
tion-scaled oscillator, and deviation-scaled oscillator with Fisher transform. minal window and then choose the first option “Save to file.”
I ran all the tests on Apple Inc. (AAPL). Figure 5 shows the
probability distribution for the Fisher transform deviation-
NeuroShell Trader’s ability to call external dynamic linked scaled oscillator.
libraries. Dynamic linked libraries can be written in C, C++,
or Power Basic. 'PROBABILITY-PROBABLY A GOOD THING TO KNOW
'Author: John Ehlers, TASC Oct 2018
After moving the code given in the article to your pre- 'Coded by: Richard Denning, 8/19/2018
ferred compiler and creating a DLL, you can insert the re- 'www.TradersEdgeSystems.com
sulting indicator as follows:
Sub Ehlers_Prob(SmoothLength, RSILength)
1. Select new indicator from the insert menu. Dim a1 As BarArray
2. Choose the external program & library calls category. Dim b1 As BarArray
3. Select the appropriate external DLL call indicator. Dim c1 As BarArray
Dim c2 As BarArray
4. Set up the parameters to match your DLL. Dim c3 As BarArray
5. Select the finished button. Dim Filt As BarArray
Dim count As BarArray
Dim CU As BarArray
Users of NeuroShell Trader can go to the Stocks & Com- Dim CD As BarArray
modities section of the NeuroShell Trader free technical Dim MyRSI As BarArray
support website to download a copy of this or any previous Dim I As BarArray
Dim J As BarArray
Traders’ Tips. Dim K As BarArray
A sample chart is shown in Figure 4. Dim Bin As Array
—Marge Sherald, Ward Systems Group, Inc.
If BarNumber=FirstBar Then
301 662-7950, sales@wardsystems.com
'SmoothLength = 8
www.neuroshell.com 'RSILength = 14
a1 = 0
b1 = 0
c1 = 0
F T RADERSSTUDIO: OCTOBER 2018 c2 = 0
c3 = 0
TRADERS’ TIPS CODE Filt = 0
The TradersStudio code presented here is based count = 0
CU = 0
on John Ehlers’s article in this issue, “Probability—Probably CD = 0
A Good Thing To Know.” The code can be found at www. MyRSI = 0
TradersEdgeSystems.com/traderstips.htm as well as at the I=0
J=0
Stocks & Commodities website at Traders.com in the Trad- K=0
ers’ Tips section. It is also shown here. End If
To run the four sets of probability output code, they
ReDim (Bin, 62)
need to be set up as separate sessions. The code needs to Bin = GValue501
be saved as a system. These code sets do not produce buy If CurrentBar - 1 Then
& sell signals but rather print the probability bins to a ter- a1 = Exp(-1.414*3.14159 / (SmoothLength))
b1 = 2*a1*Cos(DegToRad(1.414*180 / (SmoothLength)))
minal window. c2 = b1
To save the results to a .csv file, right-click inside the ter- c3 = -a1*a1

52 • October 2018 • Technical Analysis of Stocks & Commodities


c1 = 1 - c2 - c3 If CurrentBar - 1 Then
End If a1 = Exp(-1.414*3.14159 / (SmoothLength))
Filt = c1*(Close + Close[1]) / 2 + c2*Filt[1] + c3*Filt[2] b1 = 2*a1*Cos(DegToRad(1.414*180 / (SmoothLength)))
'Accumulate "Closes Up" and "Closes Down" c2 = b1
CU = 0 c3 = -a1*a1
CD = 0 c1 = 1 - c2 - c3
For count = 0 To RSILength -1 End If
If Filt[count] - Filt[count + 1] > 0 Then Mom = Close - Close[RSILength - 1]
CU = CU + Filt[count] - Filt[count + 1] 'SuperSmoother Filter
End If Filt = c1*(Mom + Mom[1]) / 2 + c2*Filt[1] + c3*Filt[2]
If Filt[count] - Filt[count + 1] < 0 Then 'Accumulate "Closes Up" and "Closes Down"
CD = CD + Filt[count + 1] - Filt[count] CU = 0
End If CD = 0
Next For count = 0 To RSILength -1
If CU + CD <> 0 Then If Filt[count] - Filt[count + 1] > 0 Then
MyRSI = (CU - CD) / (CU + CD) CU = CU + Filt[count] - Filt[count + 1]
End If End If
For I = 1 To 60 If Filt[count] - Filt[count + 1] < 0 Then
J = (I - 31) / 10 CD = CD + Filt[count + 1] - Filt[count]
K = (I - 30) / 10 End If
If MyRSI > J And MyRSI <= K Then Next
Bin[I] = Bin[I] + 1 If CU + CD <> 0 Then
End If MyRSI = (CU - CD) / (CU + CD)
Next End If
'Output the Bin measurements to a file If MyRSI > .999 Then
If BarNumber = LastBar Then MyRSI = .999
For I = 1 To 61 End If
Print (I - 31) / 10,",", Bin[I] If MyRSI < -.999 Then
Next MyRSI = -.999
End If End If
GValue501 = Bin RocketRSI = .5*Log((1 + MyRSI) / (1 - MyRSI))
End Sub 'Plot1(RocketRSI);
'------------------------------------------------------------ 'Plot2(0);
'Bin the indicator values in Bins from -3 to +3
Sub EHLERS_PROB2(SmoothLength, RSILength) For I = 1 To 60
J = (I - 31) / 10
Dim a1 As BarArray K = (I - 30) / 10
Dim b1 As BarArray If RocketRSI > J And RocketRSI <= K Then
Dim c1 As BarArray Bin[I] = Bin[I] + 1
Dim c2 As BarArray End If
Dim c3 As BarArray Next
Dim Filt As BarArray 'Output the Bin measurements to a file
Dim Mom As BarArray If BarNumber = LastBar Then
Dim count As BarArray For I = 1 To 61
Dim CU As BarArray Print (I - 31) / 10,",", Bin[I]
Dim CD As BarArray Next
Dim MyRSI As BarArray End If
Dim RocketRSI As BarArray GValue501 = Bin
Dim I As BarArray End Sub
Dim J As BarArray '------------------------------------------------------
Dim K As BarArray
Dim Bin As Array Sub EHLERS_PROB3(Period)

If BarNumber=FirstBar Then Dim a1 As BarArray


'SmoothLength = 8 Dim b1 As BarArray
'RSILength = 10 Dim c1 As BarArray
a1 = 0 Dim c2 As BarArray
b1 = 0 Dim c3 As BarArray
c1 = 0 Dim Zeros As BarArray
c2 = 0 Dim Filt As BarArray
c3 = 0 Dim RMS As BarArray
Filt = 0 Dim count As BarArray
Mom = 0 Dim ScaledFilt As BarArray
count = 0 Dim I As BarArray
CU = 0 Dim J As BarArray
CD = 0 Dim K As BarArray
MyRSI = 0 Dim Bin As Array
RocketRSI = 0
I=0 If BarNumber=FirstBar Then
J=0 'Period = 40
K=0 a1 = 0
End If b1 = 0
c1 = 0
ReDim (Bin, 62) c2 = 0
Bin = GValue501 c3 = 0
Zeros = 0

October 2018 • Technical Analysis of Stocks & Commodities • 53


Filt = 0 Filt = 0
RMS = 0 RMS = 0
count = 0 count = 0
ScaledFilt = 0 ScaledFilt = 0
I=0 FisherFilt = 0
J=0 I=0
K=0 J=0
End If K=0
End If
ReDim (Bin, 62)
Bin = GValue501 ReDim (Bin, 62)
If CurrentBar - 1 Then Bin = GValue501
'Smooth with a Super Smoother If CurrentBar - 1 Then
a1 = Exp(-1.414*3.14159 / (.5*Period)) 'Smooth with a Super Smoother
b1 = 2*a1*Cos(DegToRad(1.414*180 / (.5*Period))) a1 = Exp(-1.414*3.14159 / (.5*Period))
c2 = b1 b1 = 2*a1*Cos(DegToRad(1.414*180 / (.5*Period)))
c3 = -a1*a1 c2 = b1
c1 = 1 - c2 - c3 c3 = -a1*a1
End If c1 = 1 - c2 - c3
Zeros = Close - Close[2] End If
'SuperSmoother Filter Zeros = Close - Close[2]
Filt = c1*(Zeros + Zeros[1]) / 2 + c2*Filt[1] + c3*Filt[2] 'SuperSmoother Filter
'Compute Standard Deviation Filt = c1*(Zeros + Zeros[1]) / 2 + c2*Filt[1] + c3*Filt[2]
RMS = 0 'Compute Standard Deviation RMS = 0;
For count = 0 To Period - 1 For count = 0 To Period - 1
RMS = RMS + Filt[count]*Filt[count] RMS = RMS + Filt[count]*Filt[count]
Next Next
RMS = Sqr(RMS / Period) RMS = Sqr(RMS / Period)
'Rescale Filt in terms of Standard Deviations 'Rescale Filt in terms of Standard Deviations
If RMS <> 0 Then If RMS <> 0 Then
ScaledFilt = Filt / RMS ScaledFilt = Filt / RMS
End If End If
For I = 1 To 60 If Abs(ScaledFilt) < 2 Then
J = (I - 31) / 10 FisherFilt = .5*Log((1 + ScaledFilt / 2) / (1 - ScaledFilt / 2))
K = (I - 30) / 10 End If
If ScaledFilt > J And ScaledFilt <= K Then For I = 1 To 60
Bin[I] = Bin[I] + 1 J = (I - 31) / 10
End If K = (I - 30) / 10
Next If FisherFilt > J And FisherFilt <= K Then
'Output the Bin measurements to a file Bin[I] = Bin[I] + 1
If BarNumber = LastBar Then End If
For I = 1 To 61 Next
Print (I - 31) / 10,",", Bin[I] 'Output the Bin measurements to a file
Next If BarNumber = LastBar Then
End If For I = 1 To 61
GValue501 = Bin Print (I - 31) / 10,",", Bin[I]
End Sub Next
'--------------------------------------------------------------- End If
GValue501 = Bin
Sub EHLERS_PROB4(Period) End Sub
'-------------------------------------------------------------------------
Dim a1 As BarArray
Dim b1 As BarArray —Richard Denning
Dim c1 As BarArray info@TradersEdgeSystems.com
Dim c2 As BarArray
Dim c3 As BarArray for TradersStudio
Dim Zeros As BarArray
Dim Filt As BarArray
Dim RMS As BarArray
Dim count As BarArray
Dim ScaledFilt As BarArray
Dim FisherFilt As BarArray
Dim I As BarArray
Dim J As BarArray F NINJATRADER: OCTOBER 2018 TRADERS’ TIPS CODE
Dim K As BarArray The probability-distribution indicator discussed by author John
Dim Bin As Array
Ehlers in his article in this issue, “Probability—Probably A
If BarNumber=FirstBar Then Good Thing To Know,” is available for download at the fol-
'Period = 40 lowing links for NinjaTrader 8 and NinjaTrader 7:
a1 = 0
b1 = 0
c1 = 0 NinjaTrader 8: www.ninjatrader.com/SC/October2018SCNT8.zip
c2 = 0 NinjaTrader 7: www.ninjatrader.com/SC/October2018SCNT7.zip
c3 = 0
Zeros = 0
Once the file is downloaded, you can import the indicator

54 • October 2018 • Technical Analysis of Stocks & Commodities


F MICROSOFT EXCEL: OCTOBER 2018 TRADERS’ TIPS CODE
Regardless of what type of trading methodology we actively
pursue, we are looking for ways to predict, or at least quickly
recognize, turning points on which to capitalize. For the swing
trader, reversion to the mean is a central concept.
Various oscillators have been developed that attempt to
measure how far recent price activity has strayed from the
local mean. Exceeding minimum and maximum thresholds
for a given oscillator are accepted as anticipating or recog-
nizing turning points.
In “Probability—Probably A Good Thing To Know” in
Figure 6: NINJATRADER. Here, the bell curve for the RocketRSI indicator is this issue, John Ehlers provides two useful tools that he dem-
shown over daily SPY data using the TASCProbabilityDistribution utility. onstrates on two different oscillators.
First, Ehlers demonstrates a way to determine if our oscil-
into NinjaTader 8 from within the control center by selecting lator of choice is relatively bias-free. His method is to run a
Tools → Import → NinjaScript Add-On and then selecting large data sample and create a histogram of the resulting in-
the downloaded file for NinjaTrader 8. To import in Ninja- dicator values. We then consider: Does our histogram show a
Trader 7, from within the control center window, select the relatively Gaussian distribution of indicator values centered
menu File → Utilities → Import NinjaScript and select the on zero? Or is the distribution skewed away from zero or
downloaded file. significantly distorted in some way?
You can review the indicator’s source code in NinjaTrader Second, Ehlers demonstrates the ability of the Fisher
8 by selecting the menu New → NinjaScript Editor → In- transform to “clean up” an oscillator so that the resulting
dicators from within the control center window and select- histogram approaches a balanced Gaussian distribution.
ing the TASCProbabilityDistribution file. You can review One result of the Fisher transform is that the transformed
the indicator’s source code in NinjaTrader 7 by selecting the values may far exceed the range of the values of the original
menu Tools → Edit NinjaScript → Indicator from within the oscillator.
control center window and selecting the TASCProbability- The plot of the Fisherized oscillator in Figure 7 has a ver-
Distribution file. tical range that is approaching four times the vertical range
NinjaScript uses compiled DLLs that run native, not in- of the MyRSI oscillator. An immediate question comes to
terpreted, which provides you with the highest performance mind: Where to best set the oversold and overbought thresh-
possible. olds for the Fisherized oscillator?
A sample chart displaying the indicator is shown in For the RocketRSI example, Ehlers suggests thresholds of
Figure 6. 2 and -2, assuming that 2.5% of the histogram values are be-
—Raymond Deux & Jim Dooms low -2 and 2.5% of the values are above 2. That is to say, we
NinjaTrader, LLC are expecting 95% of the values to fall between -2 and 2.
www.ninjatrader.com Is 95% the
best cutoff choice
for every Fisher-
transformed os-
cillator?
Figure 8 shows
the histograms of
the MyRSI and
the RocketRSI os-
cillators overlaid
using indepen-
dent scaling with
a common zero
point. I used a line
chart instead of a
bar chart to make
it easier to see and
compare the plots.
(Note that radio
Figure 7: Excel. This shows the MyRSI and RocketRSI oscillator histograms with sampled median, overbought, and oversold lines set for buttons in the yel-
90% containment of the sampled oscillator data points. low box can be
October 2018 • Technical Analysis of Stocks & Commodities • 55
Figure 8: Excel. Since it’s necessary to compute both versions of a given oscillator to create the profiles, I have gone ahead and plotted them here since that helps us
to get a feel for what we are profiling.

used to selectively display the basic oscillator, the Fisherized and turning points.
version, or both.) To keep this spreadsheet to a manageable download size,
We can clearly see that the red MyRSI histogram is rather I reduced the capacity to 1,000 bars for the computations.
broad with much of its bulk offset to the right of zero as Keeping it to under 1,000 bars translates to just under four
confirmed by the red mean value line at 0.167. And we can years, as opposed to the 10 years used in Ehlers’ article. This
see the blue RocketRSI diagram presents a tight, balanced leads to slight differences in the histogram distributions from
profile with a mean that centers rather nicely on zero. those shown in the article.
The overbought and oversold values shown in the figure The spreadsheet file for this Traders’ Tip can be down-
were estimated by using a simple running accumulation of loaded from Traders.com in the Traders’ Tips area. To suc-
the histogram buckets to have roughly 5% of the data points cessfully download it, follow these steps:
below the oversold threshold and roughly 5% of the data
points above the overbought threshold, with the remaining • Right-click on the Excel file link, then
90% of the data points falling in between. You can change • Select “save as” or “save target as” to place a copy of the
the 90% as you see fit to observe what happens to the thresh- spreadsheet file on your hard drive.
olds estimated using this technique.
Since we have to calculate the oscillator values to build —Ron McAllister
Excel and VBA programmer
the histograms, it seems like a good idea to go ahead and
rpmac_xltt@sprynet.com
plot them. Again, I have placed them on the same subchart,
color-coded to independent vertical scales. While using in-
dependent scales can distort the apparent vertical range, it
allows us to see the similarities and differences of the shapes

Sneak preview... Coming soon!

The Stiffness Indicator The Options Risk Curve, Part 1 The V-Trade, Part 9:
by Markos Katsanos by John Sarkett Example Trades
How “stiff” are your stocks? Find out If you’ve ever tried to make profits from options by Sylvain Vervoort
how this new indicator can help answer “decay,” you may have found yourself waiting In the ninth part of this ongoing series, the
the question and/or identify the next patiently too eek out even a bit or profit. Find author demonstrates some example trades
FAANG stock. out what some pros have to say about this. for study and practice.

56 • October 2018 • Technical Analysis of Stocks & Commodities


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October 2018 • 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 (Sep ’18) GBLX 4.5 12.1 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>>
10-Year T-Note (Sep ’18) CBOT 1 8.4 6 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Russell 2000 E-Mini (Sep ’18) GBLX 2.3 5.1 1 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
5-Year T-Note (Sep ’18) CBOT 0.7 8.2 9 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Ultra T-Bond (Sep ’18) CBOT 2.3 10.7 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
T-Bond (Sep ’18) CBOT 1.7 8 3 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Crude Oil WTI (Oct ’18) NYMEX 5.6 9.1 2 ••••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Sep ’18) GBLX 4.3 8.9 1 •••••••••••••••••••••••••••••••••••••••
2-Year T-Note (Sep ’18) CBOT 0.2 6.3 10 •••••••••••••••••••••••••••••••••
Soybeans (Nov ’18) CBOT 6.1 14.6 5 •••••••••••••••••••••••••••••••
Sugar #11 (Oct ’18) ICEUS 9.2 6.8 5 •••••••••••••••••••••••••••
Ultra 10-Year T-Note (Sep ’18) CBOT 1.2 7.7 4 •••••••••••••••••••••••••
Eurodollar (Dec ’18) CME 0.1 2.9 14 ••••••••••••••••••••••
Corn (Dec ’18) CBOT 4.9 22.5 21 ••••••••••••••••••
Euro FX (Sep ’18) CME 1.8 17 5 •••••••••••••••••
Gold (Dec ’18) COMEX 2.9 16.9 4 •••••••••••••••••
S&P Midcap E-Mini (Sep ’18) GBLX 4.1 10.1 1 ••••••••••••••••
Coffee (Dec ’18) ICEUS 6.1 8.3 3 •••••••••••••••
Gasoline RBOB (Oct ’18) NYMEX 5.9 10.9 2 •••••••••••••••
Dow Indu 30 E-Mini (Sep ’18) CBOTM 4.2 10.5 2 ••••••••••••
ULSD NY Harbor (Oct ’18) NYMEX 5 8.2 1 ••••••••••••
British Pound (Sep ’18) CME 2.2 10 5 ••••••••••
Soybean Meal (Dec ’18) CBOT 5.7 15.6 7 •••••••••
Wheat (Dec ’18) CBOT 6.3 18.7 9 ••••••••
30-Day Fed Funds (Oct ’18) CBOT 0 2.1 10 •••••••
Natural Gas (Oct ’18) NYMEX 4.5 9.8 6 •••••••
Silver (Sep ’18) COMEX 5.5 12 2 •••••••
Japanese Yen (Sep ’18) CME 1.1 8.9 6 ••••••
Cotton #2 (Dec ’18) ICEUS 7.2 22.6 6 •••••
Lean Hogs (Oct ’18) CME 6.4 7.9 5 •••••
Live Cattle (Oct ’18) CME 3.8 11.5 6 ••••• CBOT Chicago Board of Trade, Division of CME
Soybean Oil (Dec ’18) CBOT 3.9 11.3 14 ••••• CFE CBOE Futures Exchange
Crude Oil Brent (F) (Dec ’18) NYMEX 5.7 8.9 2 •••• CME Chicago Mercantile Exchange
Hard Red Wheat (Dec ’18) KCBT 6.4 19.1 9 •••• COMEX Commodity Exchange, Inc. CME Group
Platinum (Oct ’18) NYMEX 4.8 8.8 4 •••• GBLX Chicago Mercantile Exchange - Globex
Australian Dollar (Sep ’18) CME 1.9 15.5 9 ••• ICE-EU Intercontinental Exchange-Futures - Europe
Canadian Dollar (Sep ’18) CME 2.2 19.8 10 ••• ICE-US Intercontinental Exchange-Futures - US
Cocoa (Dec ’18) ICEUS 8.9 19.3 8 ••• KCBT Kansas City Board of Trade
High Grade Copper (Sep ’18) COMEX 4.7 17.4 5 ••• MGEX Minneapolis Grain Exchange
Mexican Peso (Sep ’18) CME 5 30.7 19 •• NYMEX New York Mercantile Exchange
S&P GSCI (Sep ’18) CME 4 9.7 2 ••
Swiss Franc (Sep ’18) CME 2.3 25.3 7 ••
Brazilian Real (Sep ’18) CME 6.1 17.1 9 •
Feeder Cattle (Oct ’18) CME 4.1 11 3 • 1810
New Zealand Dollar (Sep ’18) CME 2 14.3 9 •
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 • October 2018 • Technical Analysis of Stocks & Commodities


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October 2018 • Technical Analysis of Stocks & Commodities • 59


Safety-Based Investing

Safety Is More Than A Dance


Is there such a thing as safety when it comes to investing or What, again, does “safety” mean?
trading? Let’s find out. When something is considered safe, you typically think of it
as being, at the very least, reliable and secure. In the context

F
by Gabriel Gonzalez of investing, and this applies particularly to rookie investors or
those with fixed incomes, you want your investment vehicle to
or fixed-income earners, safety-based investments are be reliable in fulfilling its purpose and secure against outside
ideal and tend to be the most stable in terms of payout. change that could compromise that reliability. Safety-based
But they also tend to pay back the least. When you investments meet these criteria, typically because the insti-
think of safety-based investment vehicles, you think tutions involved are usually established and stable, such as
treasury bills, notes, government bonds, certificates of governments or big corporations.
deposit, commercial paper, and bankers’ acceptance I should add that it cannot be emphasized enough that
slips. These are commonly known as debt securities. there is ultimately no such thing as a truly safe investment.
Money markets and bond markets are where most of the Everything mentioned here will always carry some kind of
safety-based investment vehicles are exchanged. Stable, es- risk. That risk is just the lowest relative to other investment
tablished business entities and governments issue many of the vehicles and markets. Get it?
safest investment vehicles.
Last time, in my August 2018 article, I established three big Securities
VICTORIA KURPOS/SHUTTERSTOCK

objectives you could use when determining what investment At the foundation of safe investing are debt securities, which
strategy to implement with your hard-earned money. I also are defined by parameters such as notional amount (amount
suggested you can’t typically excel in one without compro- borrowed), interest rate, maturity, and renewal date (where
mising the other two. That said, I will continue building upon applicable). We all know what a debt is, but what is a secu-
the foundation of general investing knowledge and give each rity? A security is an official document, verifying a specific
objective its due diligence, starting with safety. fact—usually, credit or ownership of stocks and/or bonds. In
60 • October 2018 • Technical Analysis of Stocks & Commodities
AT THE CLOSE

this case, we are referring to debt; more specifically, debt


securities of the government-issued variety. Financial markets are places
When you purchase a government-issued security, you where safety-centered vehicles
are basically entering into a financial agreement with that along with many other, riskier
government by lending it money. The type of security you
purchase determines the terms of executing that agreement.
vehicles are traded.
One of the safest forms of government security is the treasury
bill, also known as a T-bill, which is basically a government- A Brief intro to financial markets
issued “IOU.” These are considered short-term loans with Financial markets are places where safety-centered vehicles
their maturities—or rates of duration—ranging from a few along with many other, riskier vehicles are traded. They come
days up to a year (rarely exceeding this), and are typically in two main categories: money markets and capital markets.
arranged in one-, three-, and six-month intervals. During Though there is some overlap in form and function, for the
these monetary gestation periods, interest is accrued. The purpose of explaining safety, suffice it to say for now that most
longer the maturity, the higher the interest rate goes. When of the vehicles mentioned here reside in the money market,
the end of maturation is reached, the debt is repaid along where most short-term vehicles are traded, though the long-term
with whatever interest is acquired. vehicles are usually found in the capital market. Stability—
and this includes market stability—wherever it can be found,
Notes & bonds will only help these vehicles. In short, markets are considered
Now we move on to notes and bonds, the next-tier government stable when they can handle large volumes of trades without
securities. They function similarly to T-bills, but the biggest causing large shifts in prices.
differences are the maturity rates and interest payment meth- All things said, dealing with organizations that have so many
ods. Notes and bonds are long-term loans, where notes are digits on their ledgers usually means they work in large denomi-
offered at one-, three-, five-, seven-, and 10-year maturities, nations of investment vehicles. For most individual investors, this
while bonds are offered at even greater intervals, typically 20 simply isn’t an option. These numbers are too big to keep up.
and 30 years. Though T-bills are paid back at the end of the But this is no reason to tap out just yet. Groups of investors can
contract, notes and bonds pay the lender interest payments, form what are called investment funds, pooling their resources
called coupons, in six-month intervals. together to make these gargantuan bulk purchases.

Certificates of deposit The takeaway


Edging toward the deep end of the relatively shallow risk Debt securities tend to be a good, safe start for the novice or
pool are certificates of deposit, or CDs. Like T-bills, notes, fixed-income investor. Short maturities, more often than not,
and bonds, CDs have a maturity and interest rate. Unlike T- result in safer investments because there is less time for outside
bills, notes, and bonds, they are promissory notes issued by influences to affect their interest rate. Longer maturities are
banks that establish a time deposit, restricting the owner from often made safer if they are issued and backed up by large,
withdrawing funds on demand. Despite this, their value is reputable financial entities. Ultimately, for the most reliable,
covered by the government, specifically the Federal Insurance albeit modest, return, going with stable markets and purchasing
Deposit Corporation, or FDIC, which will cover the costs in debt from large borrowing bodies that can weather uncertainty
the event of the issuing bank’s catastrophic failure. CDs tend and the occasional crisis are the way to go.
to be favorable as they are more autonomous, meaning they
are usually issued electronically, and can be set to automati- Gabriel Gonzalez is a freelance author and software designer
cally renew themselves upon reaching maturation. with a bachelor’s degree in computer science. His latest book,
a work of fiction, is Althea: An Oneiric’s Tale.
Bankers’ acceptance slips and commercial papers
Finally, the riskiest of the safety-oriented vehicles are bank- Further reading
ers’ acceptance slips and commercial papers. The former Gonzalez, Gabriel [2018]. “Investing: An Objective-Based
are short-term debt instruments issued by a company with Primer,” Technical Analysis of Stocks & Commodities,
the backing of a commercial bank. Each of the mentioned Volume 36: August.
institutions is liable for the amount due when the investment Kenny, Thomas [2018]. “Differences Between Treasury Bills,
matures, making it another relatively safe investment. On the Notes, and Bonds,” The Balance, April 18, retrieved online
other hand, the latter is known as an unsecured debt, mean- 7/9/2018.
ing it has no form of collateral to back it up in the event the Siegel, David [2017]. “Basic Investment Objectives.” Investo-
borrowing entity can’t repay the debt. But to reiterate the pedia, December 22, retrieved online 6/25/2018.
recurring theme with most of these vehicles, the short-term Zucchi, Kristina [2018]. “Financial Markets: Capital Vs.
maturation of these loans makes them relatively safe from Money Markets,” Investopedia, January 2, retrieved online
detrimental outside influence. 7/2/2018.

October 2018 • Technical Analysis of Stocks & Commodities • 61


the wealth management sector is being affected by competition
The following selection of book descriptions represents a
from low-cost robo-advisors; it explores how to keep customers
sampling of recent book releases in the investing field. Books
described here may be from some of the major book publish- happy while managing their assets; and offers inspirational success
ers as well as some independent book publishers. These stories. The book is intended for investment and fund managers,
are not critical reviews or editorial evaluations, but rather a asset allocators, family offices, and entrepreneurs.
brief look at the book marketplace to help keep readers up www.wiley.com
to date on new or recent book offerings.
Review Of Financial Economics (quarterly journal, $676, print ISSN:
1058-3300, online ISSN 1873-5924), edited by Tarun Mukherjee
Silicon Valley Babble On (440 pages, $39.95 and Gerald Whitney, published by Wiley Periodicals. The Review
softcover, $79.95 full-color version, $9.99 Of Financial Economics (RFE) publishes original research in vari-
ebook, August 2018) by Tim Knight. Tim ous areas of financial economics (for example, corporate finance,
Knight started the SlopeOfHope.com website investments, financial institutions, international finance, and the
before the 2007 financial crisis began, with relationship between macroeconomic factors and corporate financial
the site named after the maxim “markets decisions). The RFE’s scope is to consider empirical research rather
climb a wall of worry and slide down a slope than theoretical work.
of hope.” It attracts a community of traders www.wiley.com
who use charts, economic cycles, and political discourse to shape
their investment decisions. Over a dozen years, Knight posted High Frequency (bimonthly journal, online ISSN 2470-6981), edited
over 20,000 blog entries on the Slope Of Hope site, and for this by Ionut Florescu and Frederi Viens, published by Wiley Periodi-
new book, he gathered up what he considers the best and most cals. High Frequency is a interdisciplinary journal on applied and
illuminating of them. Topics covered include startups and culture in theoretical topics devoted to high-frequency data questions. The
Silicon Valley; his own experiences building and selling high-tech intent is for the journal to be a focal point around which the emerging
businesses; lessons from the fast-paced world of equity trading; high-frequency community of modelers, quantitative researchers,
and life lessons drawn from personal experience. Some of the empirical analysts, and data scientists can coalesce without regard
wide-ranging questions considered in the collected writings include: to disciplinary boundaries, to help enhance and produce impactful
What do the words “color” and “clinkle” have to do with one another? applications in all areas of science and engineering.
How many successful companies have launched from The Startup www.wiley.com
Castle? Where do Silicon Valley parents send their kids instead
of normal summer camps? How did Marissa Mayer make millions Engines That Move Markets: Technology
while at the same time bungling Yahoo? How did Knight get into Investing From Railroads To The Internet
the financial data business by way of a convicted speed dealer? And Beyond, 2d. ed. (570 pages, £49.99 hard-
What cofounders pocketed $6 million in investor cash and got away cover with free ebook version, August 2018,
with it? What company raised a billion dollars and got nothing for it ISBNs 9780857195999 / 9780857196002)
except a federal indictment? What is China’s social credit score and by Alasdair Nairn, published by Harriman
what will it mean? Will the concept of universal basic income save House. This book’s premise is that some of
or ruin us? What is going to be the most meaningful technological the biggest technological innovations in the
shift in the next 20 years? world have followed similar market and social
SlopeOfHope.com patterns: scepticism is replaced by enthusiasm; venture capital is
supplied; many companies are started and their stocks rise. But as
The WealthTech Book (336 pages, $39.95 the technology is developed and financial reality sets in, compa-
softcover, $25.99 ebook, April 2018, ISBN nies disappear, stocks collapse, and naive investors lose money.
978-1-119-36222-7) by Susanne Chishti Nairn examines the impact that some of the greatest technological
and Thomas Puschmann, published by inventions of the past 200 years have had on financial markets and
Wiley. This crowdsourced guide aims to investors’ fortunes. Each chapter explores a different technologi-
show the disruption, innovation, and op- cal innovation and offers insights on how to apply these lessons
portunity that technology is bringing to the investment management to appraise the “new technology” companies of the future. Some
sector. It seeks to provide information for entrepreneurs, innovators, of the key historical episodes examined include electric light and
investors, insurers, analysts, and consultants working in or interested its commercial exploitation; the railway boom; development of the
in investing in this space. The digital evolution is enabling the creation automobile industry; early development of the crude oil industry;
of sophisticated software solutions that make money management the rise of the personal computer; the rise of wireless communica-
more accessible, affordable, and eponymous. Full automation is tion; the Internet and dotcom bubble. The books seeks to teach the
attractive to investors at an early stage of wealth accumulation, reader how to recognize these patterns unfolding in the economy
but hybrid models are of interest to investors who control larger to profit from market-shaping events.
amounts of wealth, particularly those who have enough wealth to www.harriman-house.com
be able to efficiently diversify their holdings. The book explains how
62 • October 2018 • Technical Analysis of Stocks & Commodities
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