Traders Mag Gmbh August 2013

7/18/2019 Traders Mag Gmbh August 2013

http://slidepdf.com/reader/full/traders-mag-gmbh-august-2013 1/84

Interview: Ralph Acampora – Godfather of Technical Analysis P. 72

Your Personal Trading Coach

Nr. 08, August 2013 | www.tradersonline-mag.com

Trading withSeasonalitiesOpportunities for Profit in

August with the EUR/USD

and Gold P. 20

How to Enter aTrade Before theBig Move StartsThe Volatility-Breakout

Strategy P. 56

Trading According to Plan P. 6

Strategies to Give Youan Edge in the Markets

N e w S e r i e s :

T h e T r a d i n g

J o u r n a l

P. 6 4



eSignal Futures

Trader allows

you access to

more than 40

FCMs

Seasonal Studyidentifies cyclicalpatterns in the

commodity

futures markets

Advanced GET Dashboard

shows you how your chosenstocks are likely to move

Alert Ticker

features anadjustable,

all-in-one display,

so you'll know

when to make

your trades

Volume Delta displays which

side of the market has control

at any given price level

Market Profileorganizes

market activity

in a distribution

curve (histogram)

QuoTrek Mobile brings

you global quotes, charts

and news; go to theiTunes App Store today

Specialty Chart Types include Point &

Figure, Renko, Kagi and Price Break

For nearly 30 years, eSignal has provided serious traders with the tools they need, in a single, easy-to-use platform

How Do You Turn TradingPossibilities into Profit?

eSignal, an Interactive Data company.

*If you’re not completely satisfied during the trial, cancel the service, and we will refund your subscription fees. Taxes, add-on service/exchange fees and activation fees are non-refundable.

eSignal is a service of Interactive Data (Europe) Ltd., a company regulated in the UK by the Financial Services Authority. eSignal is a service of Interactive Data (Australia) Pty Ltd provided under AFS Licence No. 234689. x14799

eSignal’s award-winning trading software helps you find and execute on trading opportunities

Try eSignal Risk-Free for 30 days!*

Sign up now and start trading in minutes.

+44 (0)20 7825 7925 | www.eSignal.com

Lightning-fast data: Stocks, Forex, Futures, Options, ETFs

Advanced Charting: Customizable technical analysis tools

Access to 100s of exchanges and indices worldwide

Trading integration with 50+ brokers

Award-Winning ProductseSignal products have

consistently been voted #1

by users worldwide

TODD HARRISONCEO and Founder, Minyanville Media, Inc.

“eSignal delivers the industry’s best quality

data at lightning-fast speeds – even on your smart phone or mobile device.”

http://www.esignal.com/ads/esignal/defaultg.aspx?CPID=PAC-ESHDYTPIPTUK-0113&tc=14799










































































EDITORIAL

3

www.tradersonline-mag.com08.2013

The Grass is Always Greener on the Other Side ...

Lothar AlbertEditor-in-chief and publisher

» A house with a garden is a nice thing – if it weren’t for the neighbour ’s lawn. It just

so happens that the lat ter somehow is always greener than your own. And if it is not

the colour of the lawn, then it is the size of the house. Or i t is the neighbour’s car

that ’s more expensi ve. Or his wi fe is more beauti ful.

You will have noticed by now what I‘m driving at . Sometimes it jus t looks as though

other people are simply better off and you are the only one to lose out. This is a

feeling that may also surface in trading, especially when you communicate with

other traders via social media. After all, that is where everybody posts their trades

and opinions, which means that they keep track – more or less consciously – of

how those positions might have developed. And soon enough, you’ll find yourself

just focussing on other people’s winning trades – the classic “the-grass-is-greener

on-the-ot her-side“ syndrome. Any examples? Sure, I have three of them right here,

and you can follow up each of them with this sentence: “And I‘ve lost out again“:

• “Trader X was right to go long on EUR/ USD, he’s already 50 pips ahead now.“

• “Trader Y’s third successive short with gold that is way in the black.“

• “Trader Z has again managed to enter just prior to the big move.“

You know what? These thoughts are just nonsense and nothing but a product of your

imagination since you’re having a bad day and keep thinking negatively. So you don’t

have to feel sorry for yourself. The grass is not greener on the other side. Or maybe

just for the odd day or week when there is more sunshine there or your lawn happens to be waterlogged – figuratively speaking. But don’t let that impress you. Long term, the

grass will still be growing best if you consistently deal with all the necessary work that is

required. The others also have bad days and may have to struggle with problems you know

nothing about. Stop seeing only what others have, and make sure that you also see what

they don’t have. All of a sudden, your own lawn will then look a whole lot better.

You have decided on a very specific trading style and that’s what you will need to

keep focussing on. On good days and bad. And by the way, that’s no different from

the way i t is with your home, car, and wife. «

Good Trading

mailto:%[email protected]



TABLE OF CONTENTS

4


6

TABLE OF CONTENTSAugust 2013

72

News

Find the latest notes and

announcements from around the worldof trading in our “News“ section.

28 New Products

The Latest Trading Technology

30 Web Review

www.kitco.com

34 Software Review

MetaTrader Trading Signals

36 Software Review

VectorBull and ForexBull

40 Book Review

“Kathleen Brooks on Forex“

by Kathleen Brooks

42 Appview

Trading Diary-App

TOOLS

INSIGHTS

COVERSTORY

14 New US-Dollar Indices

Jose M. Piñeiro introduces several US dollar indices that have

been created with the goal of finding the most accurate and

representative valuation of the US dollar.

18 What Investors Need to Know about Japan

Clem Chambers argues that inflation and the Bank of Japan

point towards the country’s economic decline.

20 Trading Seasonalities – Part 2

We show a short idea for EUR/USD and a long idea for gold.

22 China International Online Trading Expo 2013

The CIOTEXPO is the largest forex and options trading expo in

China and Asia. It will take place on 13th and 14th September.

6 Trading According to Plan

To trade systematically means much more than just placing

stops or following chart signals. For a trading plan to work in thelong term it requires us to know our own edge when competing

with other market participants. In this article, pro trader Simon

Betschinger shows how specific trading strategies can be

derived from a theory about the functioning of the markets.

Traders can use those as ideas for their own trading plan.

24

18



TABLE OF CONTENTS

5

Publisher

Lothar Albert

Subscription Service

www.traders-mag.com;www.tradersonline-mag.com;

[email protected]; Tel: +49 (0) 931 4 5226-15

Address of Editorial and Advertising Department

Barbarastrasse 31a, 97074 Wuerzburg

Editor-in-Chief

Lothar Albert

Editors

Prof. Dr. Guenther Dahlmann-Resing, Corinne

Endrich, Marko Graenitz, L ena Hirnickel,

Sandra Kahle, Nadine von Malek, Rodman

Moore, Stefan Rauch, Katja Reinhardt, Karin

Seidl, Bjoern Sommersacher, Tina Wagemann,Christine Weissenberger

Articles

Cesar Alvarez, Simon Betschinger, Thomas

Bopp, Steve Burns, Clem Chambers, Richard

Chignell, Larry Connors, Alexander Mantel, Azeez

Mustapha, Keyur Panchal, David Pieper, Jose M.

Piñeiro, Norman Welz

Pictures

www.fotolia.com

Price data

www.captimizer.de; www.esignal.com; www.

metaquotes.net; www.metastock.com; www.tradesignalonline.com; www.tradestation.com

ISSN

1612-9415

Disclosure

The information in TRADERS´ is intended for

educational purposes only. It is not meant to

recommend, promote or in any way imply the

effectiveness of any trading system, strategy or

approach. Traders are advised to do their own

research and testing to determine the validity

of a trading idea. Trading and investing carry

a high level of risk. Past performance does not

guarantee future results.

© 2013 TRADERS´ media GmbH, Barbarastr. 31a,

D-97074 Wuerzburg, Germany

BASICS

STRATEGIES

60 The Psychology of Trading – Part 2

In part 2, Norman Welz explains among other things how the

egoistic brain works and why successful trading requires a

change in personality.

64 Trading Journal

Thomas Bopp presents a call-write trade in the FTSE-100.

66 Part 2: The Trader’s Technical Arsenal Mustapha Azeez discusses the ADX, the ATR, and the

Awesome Oscillator (AO); as they work in the Meta Trader,

which continues to increase in popularity.

46 Part 3: The Long Pullbacks Strategy

Larry Connors and Cesar Alvarez introduce one of the most

robust quantified equity pullback strategies published. This is a

strategy which will likely become a go-to strategy for you.

52 The Self-Hedging Strategy

Options can be applied as an alternative to direct investment

with their leverage, though, being used to limit risk rather than

increasing it. Alexander Mantel shows how it works.

56 The Volatility Breakout Strategy

David Pieper shows how you can open a position with the help

of the historical volatility before a big move starts.

70 The Pro’s Process

Part 11: Gregory W. Harmon

72 Ralph Acampora –

Father of Technical Analysis

Ralph Acampora is a living legend

among technical analysis with almost

50 years of market experience. In our

interview, he explains how to correctly

interpret the constant recurring cycles

in the markets.

PEOPLE



COVERSTORY

6


Strategies to Give You an Edge in the Markets

How do you actually trade according to plan? Trading systematically means far more than merely setting stop prices or

following technical chart signals. For a trading plan to work long term, it is necessary to know and consistently exploit your

own edge when competing with other market participants. Professional trader Simon Betschinger shows us in this article

how a theory about the workings of financial markets will first lead to specific trading strategies which can subsequently be

integrated into a complete trading plan.

Trading According to Plan

» This article is divided into two parts:

1. Recognising your trading edge

2. Suitable strategies for your trading plan

Part 1: Recognise Your Trading Edge

The Scramble for Yield

There is never-ending competition in financial markets

between intelligent and financially strong players all of

whom share the single goal of making money. If we want

to give these people a face – and we are exaggerating a bit

here – then it is the most talented mathematicians from

Princeton who, together with the smartest physicists

from Stanford and top-tier Harvard graduates, gatheredin the trading department of an investment bank or hedge

fund, devoting all their creative willpower to solving the

financial-market puzzle. This competition is bound to lead

to the profitability of recurring trading patterns being

destroyed. The following example explains why this is.

Suppose a classic breakout to a 20-day high had a positive

expected value. In that case, financially strong market

participants would position themselves right before the

breakout signal and sell their shares again as soon as

the actual signal is triggered and other traders jump on

the bandwagon. Sooner or later, this race for yield will

destroy any profitable trading pattern emerging from the

data series. Anyone who claims that the opposite is true

should be able to come up with appropriate trading results

to prove their point, otherwise such a claim will, soon

enough be debunked as a simple lack of understanding.

Random-Walk Markets

The consequences of this competition are obvious. If we

tried to trade one of the major markets such as EUR/USD



WHY LEARN TO TRADE WITH US?

“This is the best decision I ever made in my life"Pratik Thakar, Customer

Customer

Survey

81% rated

"Excellent"

Winner of LondonInvestor Show

Award 2012

TRADING COLLEGE LTD

Sandford House, Claremont Rd, Teddington, Middlesex, TW11 8DH

Tel: 020 3 005 4905

Email: [email protected]

www.tradingcollege.co.uk - Company Registration: 7080671

- VAT number: GB982448189

FOREX, SPREADBETTING, COMMODITIES, STOCKS AND EQUITIES

FOR BEGINNERS TO ADVANCED

Courses

DVDs

Trading Videos

Free

Indicators

Trading Room

LivePrivate

Mentorship

http://www.tradingcollege.co.uk/
































COVERSTORY

8


personal edge here. Each profitable

pattern that one might find via

backtests and infinite attempts at

optimising a system, is subject to a

half life that is less than the time it

would take a system trader to really

work profitably with such a pattern.

So when it comes to trading an

index or a currency pair, you will be

competing in undoubtedly efficient

markets and Eugene Fama’s famous

conclusion that we are dealing with

a random walk here, proves true.

Disambiguation: The random-walk

theory says that the courses of stock

prices only can be described by

random processes.

Why You Still Have a Chance

The one way of winning the game is

to shift the competition to situations

that are not covered by all the

statisticians with their sophisticated software systems.

The first move is headed towards equity markets, which

resemble a zoom-in on details. You’ll be leaving the level

of anonymity and will raise the curtain on a play thatincludes a wide variety of characters who breathe life

into the stock market. No computer program in the world

can make a judgment on whether,

for example, the latest Samsung

Galaxy phone has the potential for

competing with the iPhone. However,

human beings can. They can form an

opinion and wait for situations where

the market and their own opinion

are in complete sync. This means

that the stock is developing exactly

according to its own price scenario.

These are the moments where you

should be following the trends

in an aggressive and determined

manner. The second move is to trade

whenever the trading algorithms of

statistical traders pause to adapt to

new circumstances. That is the case,

for example, right after any explosive

news that suspends all the statisticalrules of behaviour in one fell swoop.

Or whenever prices move away from

the statistical norm.

It’s not often that candles are formed completely outside the Bollinger bands. This is frequently an indication

that there is an unjustified exaggeration and a backlash is imminent.

Source: www.traderfox.de

F1) Lonely Warrior Signal

If right at the star t of trading there is selling pressure in the market and significant price losses have occurredin advance, this is often an indication of irrational and emotional behaviour on the part of other market

participants.


F2) Expansion Down Gap

on the basis of chart patterns without taking into account

any additional information, we might as well be competing

against Usain Bolt in the 100-metre dash. Our chances

of success are the same in either case. Throughout theworld, the most powerful financial-market players are

busy studying the EUR/USD. There is no such thing as a



COVERSTORY

9

Being Thrown off Balance

Analysts are good at evaluating long-standing business

models. However, their judgment is regularly flawed

when it comes to capturing disruptive changes. Whenever

the financial markets are hit by new information that

describes a drastic change – be it, in the simplest of

cases, significant changes in sales and earnings forecasts

– market equilibrium will be upset for a short period of

time. The chains that had made it a slave of the market

will be cast off the stock. The new equilibrium will not be

found immediately. There will be rapid price movements

and a perceptible sense of general uncertainty. It may

take several weeks for the stock to be revaluated and

the laws of capital-market theory to be applicable again.

Such sudden changes in the calculation bases are an

opportunity for attentive traders who want to gain an

advantage.

Let’s stay with the stock markets. Even stocks with

market valuations in the billions are not yet subject to a

hundred per cent market efficiency where each player

and each individual decision vanishes in the statistical

background noise made by thousands of decision-making

processes. In individual stocks, the fundamental data-

based decision of a fund or large investor to stock up on

positions may lead to noticeable price changes. A stock’s

relevant information base is also much wider than, forexample, in the case of an index. The euphoric coverage of

a revolutionary technology may lure thousands of traders

into the stocks of a particular sector. No computer is

capable of recognising the complexity

inherent in the fact that it is sometimes

many small traders who fall victim

to a fallacy. Astute traders are quite

capable of doing just that – and that’s

exactly why they have an edge over

statistical traders. By reading stock-

market reports the former realise, for

example, that an expansion 52-week

high was triggered by nothing but

unrealistic expectations. And at that

very moment, the risk/reward profile

will shift away from the expected

value of a roulette game towards an

edge that can be exploited for a short

period of time.

What Makes the BestTraders so Successful?

It’s one thing to make money in

the markets, it’s another thing

to comprehend why. We know traders who are very

successful but who find it infinitely difficult to explain

their strategy. It has taken the writer of this article a long

time to understand exactly what his edge is. For most of

the trading day you sit in front of the ticker and spend

your time watching prices. The trigger for a trade is then

usually a well-known behavioural pattern that you can

eventually narrow down and describe. Traders arrive at

experiential data by observing recurrent patterns and

learning what happens subsequently. If this pattern then

occurs again, the experiential data can be accessed and

implemented.

A pattern may be much more than just a technical

chart formation. It may include a huge amount of

information such as corporate development, developing

news, overall market situation, currency movements, and

so on. And this results in what accounts for successful

trading: Actually, as a trader you will just wait for patterns

that you know inside and out to be working well. In the

simplest of cases, such a pattern is, for example, a new

52-week high, a simple trend-following signal. It does not

work throughout the entire year, but does an excellent

job on an estimated 20 per cent of all trading days. For

practical trading, that means analysing whether follow-

up purchases are increasingly made after new highs

or whether the breakout movement peters out. If thebottom line is that there is market sentiment that rewards

breakouts to new highs with further price gains, you will

buy this pattern as a trader. If not, you just won’t.

A momentum high break is the break of a distinctive point in the chart, which is the focus of many traders.


F3) Momentum High



COVERSTORY

10


How Profitable Signals Keep Destroying Themselves

The profitability of patterns in the stock markets is subject

to an evolutionary process that follows the rules of the

efficient markets hypothesis. It starts with a pattern

achieving an excess return in a conspicuous manner.

For example, breakouts to new highs are accompanied

by strong follow-up profits. This excess return will be

observed by more and more market participants who

then begin to trade this pattern. Initially, this may even

enhance profitability, but eventually the trend will be

reversed.

There are two adjustment processes here. First, too

many traders who want to achieve short term gains, have

opened positions upon the emergence of the pattern.

The excess return starts to shrink and the gains that have

been made on the basis of this pattern will be realised

even earlier. Secondly, some market participants will

very soon identify the trigger for the pattern marking the

beginning of the excess-return phase. Market participants

will then naturally anticipate this signal in advance, that is

systematically accumulate a stock one per cent before the

breakout to a 52-week high only to sell the shares again

immediately. This evolutionary behaviour pattern of chart

signals and more complex trading patterns explains, on

the one hand, the nature of eff icient markets. On the other

hand, it serves to open a door: Those who are the first tounderstand which trading patterns are currently working

well, can use this knowledge edge for a short period of

time to systematically trade patterns with a temporary

excess return before other market participants anticipate

and destroy such.

Insights for the Trading Plan

The profitability of trading patterns is comparable to an

evolutionary process. You need to have the opportunity

to conduct a statistical evaluation that can first clearly

identify patterns and, secondly, immediately alert you

as soon as a positive expected value is developing. The

trading patterns that are evaluated need to represent

distinctive situations from which significant changes

have emerged in the past.

Part 2: Suitable Strategies for Your Trading Plan

Lonely Warrior (Short Version)

This trading signal has a history that is easy to remember.

A warrior who has strayed too far from his own lines, at

some point finds himself alone and abandoned in enemy

territory and sees his chances of surviving the enemy

attack on his own dwindle rapidly. He has no choice but

to let himself fall back until his own troops have caught

up with him again.

Applied to the stock markets, the enemy territory

is defined as the price territory outside the Bollingerbands. The Bollinger bands do an excellent job here to

indicate whether prices move abnormally high or low.

The signal “Lonely Warrior” requires

that a complete candle was formed

above the Bollinger bands or – this

is the second version of the signal

– that 90 per cent of a candle with a

trading range of more than three per

cent was formed above the Bollinger

bands. This candle is then the lonely

warrior that the trading signal owes

its name to.

The short position will be opened

the following day, once prices have

fallen below the day’s low of the

“Lonely Warrior” candle. This risk

tolerance for the trading position

should be set at a relatively narrow

range between two and four per cent.

If a stock continues to rise despite

this strong overbought condition,that usually indicates a systematic

accumulation, which could possibly

have fundamental reasons.

An expansion 52-week high is no ordinary 52-week high. It is a high that was formed in the wake of a strong

short term price expansion.


F4) Expansion 52-Week High



COVERSTORY

11

Exact Rules Governing the Lonely Warrior Short Signal

1. Yesterday a complete candle was formed above the

Bollinger bands. Alternatively, a candle was formed

with a trading range of more than three per cent with

90 per cent of the prices being outside the Bollinger

bands.

2. The signal trigger is yesterday’s daily low. Once the

price falls below the low, a short position will be

opened.

3. The trade has a stop with a small risk tolerance of two

to four per cent.

Expansion Down Gap (Long Version)

Emotions are rarely a good counsel when making trading

decisions. In other words, if a wild herd of panicky market

players give away their shares, that will be the right time

to enter. Panic is an emotion that needs to mature on

the stock market. It is like a good meal that only reaches

its full flavour after a long period of simmering. At the

beginning of a price panic there are usually moderate

losses. These will then be more severe, and at some point

there will be a double-digit loss on the books within very

few days, which makes shareholders incredibly nervous

and causes them to make irrational decisions. In terms

of our signal, the irrational decision is the unlimited saleright at the start of trading.

Translated into technical analysis, this results in the

criterion that the share price must

have fallen sharply within a short

period of time. More precisely, the

prerequisite for the expansion down

gap signal is that the price loss of

the last five trading days is greater

than three ATRs. If this downward-

movement criterion is met, one will

have to wait and see whether there

is a supply overhang right at the

opening of the next trading day or

whether there is a down gap. Such

a supply overhang could be an

important indication of emotions,

that is irrational actions. That will

be the right time to open a long

position. Prior to that, it is absolutely

necessary for the news ticker to

be checked. If there is any badnews such as a profit warning, for

example, it will be better to refrain

from opening a position.

Exact Rules Governing the Expansion Down Gap Long Signal

1. On the last five trading days, the stock’s share price

lost more than three ATRs.

2. Today, a supply overhang weighs on the stock right at

the opening. The stock opens with a loss of more than

1.5 per cent.

3. If there isn’t any extremely bad news (for example

hefty profit warning), a long position will be entered

immediately after the opening.

4. The long position is given a risk tolerance of two to

four per cent.

Momentum High Break (Long Version)

There are certain points in a chart that almost every trader

keeps an eye on. These certainly include the local highs

or local lows that are V-shaped. Many traders place their

stops at such prominent points or buy pro-cyclically into

a position – quite in the spirit of the classical literature on

such charts. Any experienced trader will often have had

the experience of prices just once – for a tiny fraction of

time – taking out such a point as described above only

to then move in the opposite direction. This kind of price

behaviour is no accident. It is the outcome of a market

process that lets as many market participants as possible

go the way of the worst pain.“Place stop-loss orders!” That’s what everybody

keeps preaching all day long – in stock-market magazines,

For quite a while, the electric cars made by Tesla Motors were taken seriously by German car manufacturers.

But independent test repor ts confirmed Tesla’s enormous range of up to 500 kilometres. After Tesla Motors

then announced that sales of its Model S had been well above expectations, there was no stopping the stock.Incidentally, Tesla Motors sold more of its Model S cars in the first quarter of this year than Daimler did with

its S-Class.


F5) Pivotal News Point at Tesla Motors



COVERSTORY

12


in broker webinars, and in trading literature. Of course,

minimising risk is a core component of successful trading.

In practical reality, wrongly placed stop-loss orders are

the main reason why many traders are unsuccessful.

Those who set their stop prices in such a way that they

are triggered by the everyday, random price noise, might

as well go to the casino. Whoever places their stop-loss

orders at distinctive points in the chart which virtually

all traders are watching, is playing the part of a herring

just waiting to be eaten by a shark on the prowl. After

all, it is as plain as day that hedge funds or institutional

traders will start testing a distinctive point in the chart if

it can be assumed that that will be followed right away by

automated and unlimited orders.

The “momentum high” chart pattern is defined as

a local high that stands out, V-shaped, from the price

performance. To ensure the V-shape, it is assumed that

in the five days prior to the momentum high, there was

an increase of at least 2.5 ATRs and in the five days after

the momentum, prices must have fallen by at least two

ATRs. If such a momentum high is broken, there is the

signal “high momentum break” there. It is not a signal

that should trigger an automatic trading reflex in a trader.

Rather, it is a stock screening which provides interesting

charts and prompts you to get to the bottom of the cause

of the price movement. If the price increase leading to the

momentum high break was triggered by good corporate

news, the signal should rather be traded long. If, however,

the price increase is purely driven by recommendations,

industry strength or traders, a counter-cyclical positioning

is a good choice.

Real-time hit rates also are a good guide in determining

whether the market currently favours cyclical breaks.

Exact Rules Governing the Momentum High Break

1. A momentum high was formed in the last eight

weeks. There will be such a “high” if in the five days

prior to the “high” an increase of at least 2.5 ATRs

occurred and in the five days after it there has been a

price slump of at least two ATRs.

2. Today this momentum high is broken.

Expansion 52-Week High

A new 52-week high is the

standard signal of every trend-

following trader – and rightly sobecause there is no doubt that it

shows that the bullish forces in the

corresponding stock are strong.

Any stock whose value goes up

dramatically, is bound to go from

one 52-week high to another 52-

week high in its inexorable upward

movement. A trivial insight? Not

necessarily, if one draws the right

conclusion. Anybody watching all

stocks on a daily basis that have

advanced to a new 52-week high,

can be sure to have all the future

hot stocks (those whose prices

keep soaring) on their radar. It is

important now to identify those

stocks where the new high might

be the technical precursor of a

fundamental revaluation process

– much like prior to a tsunami the

water will recede once more beforeforming that big towering wave.

The “expansion 52-week high”

is no ordinary 52-week high but

Real-time hit rates are a tool that informs traders about which signals currently work well on the market.


F6) Real-Time Hit Rates



COVERSTORY

13

one that is accompanied by strong price momentum.

We are looking for situations in the chart that show a

strong rally momentum in the immediate run-up to a

new 52-week high. It is as though the chart is screaming,

“Look here, there is something happening here.” If

screened for on a daily basis, the chart pattern only

occurs for a small number of stocks. These are the

ones that are worth doing more in-depth research on.

In particular, the question should be raised whether

the strong momentum is triggered by pivotal news or

a euphoric sentiment in a particular sector. In the latter

case, counter-cyclical positioning might be promising.

If corporate news was published, downright forcing a

revaluation potential, a long position will be the logical

conclusion.

Exact Rules Governing the Expansion 52-Week High

1. Today, a new 52-week high is reached.

2. The price increase for one day is greater than 1.4

ATRs. Or: The price increase since two days ago is

greater than 2.4 ATRs. Or: The price increase since

three days ago is greater than three ATRs.

Pivotal News Point

Contrary to all the nonsensical claims usually made bymarket players worldwide who have just been taught

a bitter lesson by Mr Market, stock quotes have, in the

long run, always something to do with the fundamental

development of the company. Share prices will follow

the trend of corporate profits, and from a long term

perspective market values originate on a par with

increased profitability. It is no coincidence that many

strong upward trends are initiated after the publication

of company news.

Whenever breaking news is thrown into the market

system, this sets into motion a chain of decision-making

processes to be engaged in by market players. Will the

new realities match our own expectations? If not, trades

will be made. An increase in the earnings forecasts,

for example, may lead to an investment-fund analyst

presenting his new target-price prediction at a meeting

and the decision being made to build a significant position

in the double-digit millions.

Whenever the new realities emerging after pivotal

news pulverise long-held opinions and ideas, the

capital-market players are deprived of their calculationbases. People and, more importantly, management

structures in companies are such that opinions that have

long been voiced cannot be revised overnight. When

Apple’s iPhone was launched and the first gigantic

sales successes were achieved, most analysts probably

suspected that Nokia’s days were numbered for the time

being. But virtually no analyst dared at the time to utter

this insight immediately. It takes time for new realities

to be accepted. This is shown in the stock markets in

periods of strong outperformance or underperformance

of shares following pivotal news.

The Exact Rules Governing the Pivotal News Point

1. Today, a news item is published that at a stroke

throws out the existing calculation bases regarding

the future profits of a company and outlines a

new development path that in this shape has not

previously been considered possible by most marketparticipants. The first price after publication of the

news is the pivotal news point.

2. Buying starts immediately after the publication of the

pivotal news.

Your Next Few Steps

You should take the time to think at length about whether,

objectively speaking, you have an edge in the markets,

and if so, what exactly it is. In the long term, this criterion

is the basic prerequisite for success in the stock market.

Thereafter, make a trading plan in which you explain your

strategy in detail and respond to all contingencies in the

form of scenarios — how to proceed when you are winning

and how do you act in the event of a loss, what to do with

surprising news, and what if there is a sudden market

crash? Anything can happen in the markets, and you need

to have a ready answer to everything. Otherwise, there is

a danger of you having to respond at short notice, deciding

emotionally, and making exactly the wrong decision in

the heat of the moment (which other traders who are

better prepared will benefit from). Professional marketparticipants have worked intensively ahead of time to be

prepared for all eventualities and when it matters know

just what to do – and so should you. «

Simon Betschinger

Mr Simon Betschinger holds a master’s degree ineconomics and has been trading since 1998. He is apartner and founder of TraderFox GmbH (ww w.trader-

fox.de), a real-time stock-market software program forthe systematic trading by chart patterns. In addition,he trades with a real-money portfolio on the tradingportal Master Traders (www.mastertraders.de).

[email protected]



Which Index Should Traders Use?

INSIGHTS

14


New US-Dollar IndicesDetermining a fair valuation for the US dollar, or any other currency, has proven to be a difficult task. Several US dollar indices have

been created with the goal of finding the most accurate and representative valuation of the US dollar. However, considering the many

international currencies competing in the global marketplace, dollar indices appear to disregard an important piece of the puzzle.

» The global consumer-based society is accustomed

to using a base currency for all transactions. People

instinctively use their domestic currency unless they are

frequent travellers or engaged in international commerce.

The same denominator is being used, automatically

making life much easier. Apples never have to be

compared to oranges.

However, currencies also change in value. That value

is determined in the foreign exchange (forex) market,

which allows, for instance, a comparison of the euro to

the dollar. The Euro-Dollar could rise in value but how

would one answer the following question: Is the Euro

strengthening or is the US dollar weakening?

The two main variables for formulating a dollar index

are the selection of currencies and the weights assigned

to each. The standard US Dollar Index, also known by itsticker symbol USDX, has been in use since March 1973

when created by US commodity exchange operator

IntercontinentalExchange (ICE). The USDX measures

the value of the US dollar against a basket of six foreign

currencies (euro, Japanese yen, pound sterling, Canadian

dollar, Swedish krona, and Swiss franc). Unlike two of the

more recently-created dollar indices, the USDX is heavily

skewed towards the value of the euro. The weight given to

each currency was derived from their share of US foreign

trade back in the 1970s. This index has only been updated

once, in 1999, when the euro was adopted. Several

European currencies were replaced by the single currency,

which now has a 57.6 per cent weight on the index.

The IC E takes pride in the stability of the index despite

having maintained the same trade-weights over the

years. The USDX matches relatively close to the Federal

Reserve’s own Trade Weighted U.S. Dollar Index, leading

the ICE to argue that trade flows are not a major driver

of the Dollar Index. The USDX allowed traders to usethe index for trading purposes whereas the Fed’s index

was an ‘after-the-fact’ index based on annually changing

trade weights.



INSIGHTS

15

Trade-Weighted vs. Equal-Weighted

The creation of new indices in recent years has mostly

resulted out of a need to give greater weight to other

currencies. Although the euro and the dollar account

for most of the trading volumes in the currency market,

a heavily euro-weighted index may leave out some very

valuable information. Such an index does not reveal what

currency is the driving force behind the index. For example,

a rising US Dollar Index does not reveal whether it is driven

by a rising US dollar, a falling euro, or a combination of

both. Giving more weight to other currencies in the ‘basket’

could help investors figure out whether the US dollar is

really driving the change in the US dollar index.

The feeling that the USDX was outdated has led the

CME and Dow Jones to unveil their new dollar index in

June of 2010. They created the Dow Jones CME FX$INDEX

as the basis of a new futures contract. Compared to the

USDX, this index replaced the Swedish krona with the

Australian dollar and assigned dif ferent weights to reflect

the most frequently traded CME currency futures and the

“current economic realities as indicated by the Fed’s data

on world trade.”

Nonetheless, the Dow Jones CME FX$INDEX is also

heavily skewed to the euro. Four of the eleven futures

contracts that make up the index are based on the euro,

which in itself has a larger standard contract size. Theinvesting community may have remained unsatisfied

as dollar indices with equal weighting for currency pairs

later emerged.

The Creation of Equal-Weighted Dollar Indices

The Dow Jones FXCM Dollar Index created in 2011

appears to be an attempt to find a solution to the dilemma

of finding a better measure for the US dollar. This index

measures the US dollar against an equal-weighted basket

of the four most traded currencies: the euro, pound, yen,

and Australian dollar. As such, each has a 25 per cent

weight. When traded against the US dollar, these are the

four most liquid currency pairs in the world.

The creators of this index claim that it was formulated

to address the major shortcomings of the older USDX and

was intended to be more relevant, tradable, and easier

to use than existing dollar indices. However, this index

may be oversimplified as it leaves out many important

currencies.

In June of 2012, FTSE and Cürex Group decided to

launch their own index, claiming there was a need fora new USD index that incorporates China’s renminbi

currency as it becomes more prominent in global trade.

Their FTSE Curex USD G8 Index was aimed at providingSources: research.stlouisfed.org, cnbc.com, wsj.com, finance.google.com

F1) Comparison of US Dollar Indices (First Half of 2013)

a more even measure of the US dollar relative to the

rest of the world by including “over 90 per cent of USA’s

international relationships and a more representative

benchmark.” This equal-weighted index includes eight

currencies, the Australian dollar, Canadian dollar, Swiss

franc, Chinese renminbi, the euro, the Sterling pound, the

Japanese yen, and the New Zealand dollar.

Finally, an index was created that reflects an emerging

currency. However, there is the problem of China’s

currency not being a free-floating currency.

Wall Street Journal Dollar Index: A Volume-Weighted Index

Just one month later, the Wall Street Journal announced

its own Dollar Index “to provide a more precise measure



INSIGHTS

16


commonly-used benchmark to measure the dollar has

not emerged.

Example of Dollar Index Shortcomings

By looking at recent trends in the US dollar, one can make

a comparison between commonly-used US dollar indices

and the performance of the US dollar to other currencies.

From April to mid-June, three major US dollar trends

can be detected. In the first trend, from April 1st to May

1st, the US dollar was bearish versus most currencies,

with a few exceptions. This was followed by a period

of remarkable US dollar strength from May 1st to May

22nd across all currencies, developed and emerging

alike. Standard US dollar indices did a fairly good job of

reflecting those trends.

The third period presents a discrepancy. That

period was characterised by strong dollar strength

versus emerging currencies and weakness versus the

majors. However, the US dollar indices very closely

match the dollar weakness seen in the majors and

disregard the emerging country currencies. This

discrepancy is visible in the chart. The red-shaded

lines represent dollar weakness versus the majors

and the green-shaded lines represent dollar strength

versus emerging currencies. The black lines, which

represent the dollar indices, should be somewherecloser to the middle. However, they are closely tied to

the red lines.

The shortcoming of the

dollar indices is that they lack

any indications of dollar strength,

although the dollar was remarkably

strong versus emerging currencies.

Conclusions

A broader dollar index would have

helped capture the dollar strength

that was not reflected on the popular

indices. Emerging markets play an

important and growing role in the

global market; however, they have

yet to make any substantial impact

on the commonly-used measures of

the US dollar.

As seen above, many dollar

indices have been created,

especially in recent years with anincreasingly globalised economy.

Although countless of variations

have been created, a popular broad

The third period presents a discrepancy. It was characterised by Dollar strength versus emerging currencies(green lines) and weakness versus the majors (red lines). However, the US Dollar indices (black lines) very

closely match the Dollar weakness seen in t he majors and disregard the emerging countr y currencies.

Source: www.fxmania.com

F2) Divergence of US Dollar Strength against Majors and Emerging Currencies

of the value of the U.S. dollar, an essential benchmark

for traders and corporate treasurers who need to discern

the true measure of investing abroad or domestically.”

They highlighted that their methodology sets it apart

from the rest by basing the weights of seven currencies

on forex trading volumes as reported by the Bank for

International Settlements. The use of trading volumes

aims at measuring the right relationship between

currencies.

Whether to use forex trading volume or international

trade data is debatable. By using forex trading volume,

the euro weighs about 41 per cent of the WSJ dollar

index compared to 57 per cent for the DXY. However,

this index may also be too skewed towards the euro

in a global economy where emerging markets have a

rising stake.

Exchange-Traded Funds Search for a Perfect Dollar Index

Many currency ETFs (exchange-traded funds) were

created in late 2007 ahead of the financial crisis to

capitalise on the growing role of emerging markets.

With the growth of the ETF market, many investment

banks tried to develop their own products that

tracked the performance of the US dollar versus other

currencies. Most of the time, however, these can be

divided into developed and emerging market funds.While there is an abundance of different combinations

and tradable products, a major reference or a



INSIGHTS

17

Dollar Index Composition When Creators Tradable Volume

Trade-weighted US

Dollar index

Trade-weighted: many currencies based on international tradewith weights aligned according to US trade patterns and

adjusted annually. Weightings at Fed website:

www.federalreserve.gov/releases/H10/Weights

1998 (a newset of FX

indexes were

introduced)

Federal Reserve

No, after-the-fact index is

unsuitable for

trading purposes.

Not available

US Dollar Index (DXY)

Trade-weighted: 6 currencies based on international trade data in

1973. EUR 57.6%, JPY 13.6%, GBP 11.9%, CAD 9.1%, SEK 4.2%,

CHF 3.6%

1973Intercontinental

Exchange (ICE)

Yes, as a futures

contract on

the ICE. Also

available in ETFs,

options and

mutual funds.

1 contract

= $1000 x

Index value.

Approx.

daily futures

volume:

30,000

DowJonesFXCMDollarEqual-weighted: 4 currencies; EUR: 25%, GBP: 25%, JPY: 25%,

AUD: 25%2011

Dow Jones and

FXCM

Yes with online

forex broker

FXCM.

Not available

WSJ Dollar Index

(BUXX)

Volume-weighted based on trading volume measured by Bank

for International Settlements (BIS); 7 currencies: AUD, CAD, CHF,

EUR, GBP, JPY, SEK

July 2012Wall Street

Journal

No but creatorsdescribe it as

barometer for

futures traders

betting on the

direction of the

dollar.

Not available

Dow Jones CME Spot

FX$INDEX

Trade and volume weighted: 6 currencies; specifically, 10 Dow

Jones CME FX$INDEX futures reflect a basket of the following

numbers of contracts: 4 EuroF X; 2 Japanese Yen; 2 British Pound

1 Swiss Franc; 1 Canadian Dollar; 1 Australian Dollar.

This Index is calculated as the basket value divided by $10,000

Dow Jones CME FX$INDE X futures satisfied through the physical

delivery of 50K EUR; 2.5M JPY; 12.5K GBP; 12.500 CHF; 10K CAD;

and 10K AUD. Final settlement price based on settlements in thesix component currency futures.

June 2010The CME and

Dow Jones

Yes, as a futures

contract on the

CME.

Approx. 1

million in

total FX

futures

T1) Overview: Dollar Indices

Source: www.fxmania.com

dollar benchmark has not emerged. Some tools are not

commonly or publicly made available by data vendors.

Perhaps, the ‘right’ US index has not been developed yet.

While the main US dollar indices are fairly accurate

in measuring the direction of the US dollar, the timing

and the size of the moves can vary significantly. The

Federal Reserve’s broad trade-weighted dollar index is a

much more complete index as it includes 26 currencies,

all weighted according to trade data. In comparison to

the other indices, this index does a better job of valuing

the dollar because it includes a fairer representation of

emerging currencies, which play a growing role in the

global economy.

According to the International Monetary Fund’s (IMF)

World Economic Outlook, emerging economies’ share in

global output has increased from less than 20 per cent

in the early 1990s to more than 30 per cent measured at

market exchange rates. Accounting for differences in the

cost of living, that share is even greater and is expected

to surpass 50 per cent in 2013. Most US dollar indices

disregard an important part of the global economy in

measuring the value of the USD.

As can be seen on Figure 1, all indices follow the same

general direction. However, only the Fed’s index showed

the USD dollar reaching new annual highs in June. The

Fed’s index cannot be used for trading purposes because

it is an after-the-fact index that is re-balanced on an annual

basis using trade data. However, an index that includes

a better representation of emerging country currencies

would perform more closely with the Fed’s index.«

Jose M Piñeiro

Jose M Piñeiro started in the forex industryin 2002 as an Operations Specialist and thenCompliance Officer for FXCM in New York when

the online retail forex market was still getting offthe ground and expanding rapidly. He has spentthe last seven years working for Web FinancialGroup (WFG), based in Madrid. He is now forexanalyst for WFG’s forex website, f xmania.com.



INSIGHTS

18


What Investors

Need to Know about Japan

When Shinzo Abe was elected as Prime Minister of Japan investors looked forward

to a new era of growth and recovery for the G8 nation, thanks to his heralded

Abecomics plan. Instead of stability investors are faced with fresh uncertainty.

Private investment guru Clem Chambers, CEO of ADVFN.com and author of “The

Death of Wealth: The Economic Downfall of the West” looks into Abemonics,

what went wrong and argues that inflation and the Bank of Japan point towards the

country’s economic decline.

Clem Chambers

Clem Chambers is CEO of ADVFN (www.advfn.com)and author of several books such as “101 Ways toPick Stock Market Winners” and “A Beginner‘s Guideto Value Investing“.

Most Likely Abe’s Economic Revolt Is Already Crushed

» Last month saw the likely death of Abenomics. It is not

a foregone conclusion but Prime Minister Shinzo Abe will

need to come out fighting in a very un-Japanese way to

save his program of national regeneration. In a few shortweeks he has gone from hero to zero.

Most likely, Abe will soon be the umpteenth one-year

Japanese leader in a line of political failure. Japanese



INSIGHTS

19

politics is in hopeless gridlock because no politician

is able to break the gentle but profound decline. The

situation is very real. Within two generations the

Japanese population will collapse from 120 million to 60

million, underpinned and accelerated by the deflationary

policies of the Bank of Japan.

Japan would like to think of itself as a democracy,

but it isn’t. There are plenty of false democracies, such

as Iran where the dictator Khamenei rules the country. In

Japan the dictator is not a religious zealot but a financial

one, the BOJ.

The Real Power Behind the Japanese Economy

The Japanese Central Bank controls the long term

monetary policy of Japan and thereby the national

chequebook. It wields power as it see fit, which is starkly

against the wishes of the Diet, Japan’s parliament.

The BOJ policy is long term and based on

population collapse whilst, as always, democracy looks

towards growth. Democracy and central banking are

at loggerheads but the BOJ controls the money and

therefore trumps the people.

The strategy of managed decline through deflation

is based around the argument that the population isinevitably falling and continuing to age. This means that

to look after the old you necessarily have to make the

young carry the burden.

Inflation transfers resources from the old to the

young, deflation transfers resources from the young to

the old. Japan must have deflation.

The nation’s sovereign debt will be repaid by death

duties in due course, but Japan’s problems stem from

too large a population. Japan is a resource strapped

nation better suited to 60 million people. The government

cannot make people have children, but it can help look

after the old which is the duty of the nation. Deflation

achieves these goals. This is in diametric opposition to

the elected government.

The economic strategy of democracies is always the

same: inflation. Grow the country and its state through

economic expansion. Take resources from the old and

give to the young through inflation. The young are

economically active and should be boosted at the cost of

the economically passive. Growth and inflation solve all

debt problems in the end.Whilst the BOJ’s strategy is defensive, Abe’s

is attacking. Money talks though and Abe does not

control it. The BOJ strategy spectacularly won this

month as it crushed the Abenomic economic rebellion

by inaction and signalling. The Yen rallied and the

Nikkei crashed.

The Truth Behind the Figures

The crash of the Nikkei is probably the death knell for

Japan as a nation. Japanese demographics have already

rolled over into decline. The population is now falling and

humans do not breed well in captivity. The only way to

halt this collapse, or even slow it, is through economic

growth.

If Japan wants a 90 million population rather than

60 million, a figure less than one per cent of the world’s

population, it must slow its decline now. In ten years it

will be too late and it may end up with a population below

50 million by the end of the century.

The BOJ wants deflation as it sees this as the only

sure way to manage what it sees as the inevitable collapse

of the Japanese population. While it is independent of the

elected government, which is an enemy of its policy, it

is in control through its grip on the money supply and

nothing will shake it from its course. As such, Japan is

doomed.

You might imagine this is unheard of talk in Japan, butin reality many understand this political reality and have

done so for years. Japanese bureaucratic institutions

have a tradition of being overwhelmingly powerful.

Unwanted calls to action are met with passive aggression

and apologies of how difficult the task is.

Today, like the Europeans of pre-WWI, the Japanese

population is well ordered and drilled. They are prepared

to walk without question at the economic machine guns

because they are told to do so. The young are about to be

economically slaughtered on the altar of the BOJ’s policy

of decline. Abe has days to strike back to turn the fortunes

of Abenomics. The odds are low.

You will know if this is happening, not because you

will hear it in the press, because the Nikkei will rally

massively before the political news gets out.

Conclusion

A fight back is a long shot because the only way to

vanquish the BOJ is to take away its independence and

purge the institution. The elected representatives of

Japan simply do not have the will or strength to do this.Most likely Abe’s economic revolt is already crushed.

Like Ireland after the great famine, it may take centuries

to recover. «



INSIGHTS

20


Trading Seasonalities

In our new section “Trading Seasonalities”, we are now starting to introduce trades to you that offer a potential tradingopportunity on the long or short side, based on seasonal and technical behaviour patterns. In this first article, we will be

considering two trading ideas for the month of August. Traders can implement these, using the respective futures or options

contracts. They may also trade the setups via the interbank market (for EUR/USD) or by using warrants, certificates or CFDs.

Part 1: Short Idea for EUR/USD and Long Idea for Gold

From 8th August, the EUR/USD will again be pointing to declining prices. Building a short position at this timecontinues to be supported by the activities of commercial market participants who are already net short (red

bars in the lower sub-graph). The position will be closed on 5th September.

Source: www.trackntrade.com

F1) Trading Idea EUR/USD December Contract Short » Trading Idea EUR/USD Future

After the US dollar the euro is the

most traded currency and is the

second most important reserve

currency next to the US dollar. A

seasonal opportunity on the short

side is offered by the EUR/USD on

8th August. With a holding period

until 5th September, traders can use

the last period of seasonal weakness

prior to things moving upwards

again later. While Forex traders can

be active directly in the interbank

market – even with a small position

size – futures are traded on the

Chicago Mercantile Exchange (CME).In the chart of the December contract

(Figure 1), an additional shoulder-

head-shoulder (SHS) pattern has



INSIGHTS

21

formed. We have marked the

corresponding high points as well

as the valid neckline. As of August,

the seasonality points downwards,

which might coincide with a big sell

signal below the blue neckline. If that

was the case, this would amount to

a target price within a range of 117

points.

EUR/USD Trade Idea: Recent History

The duration of the holding period

can be identified by the area marked

green in Figure 1. The two inserted

lines show the December future’s

movement of the last three and five

years respectively. The average

profit of this bearish position was

196 ticks ($2460 per contract). The

highest profit ever achievable was

made in 2008. Back then, it was pos-

sible for a short position to be opened at 153.21 that was

closed more than ten points lower at 143 four weeks later.

This difference in points translates into $1250. The stop

should be placed 157 ticks ($1965) above the purchase

price and swiftly adjusted if the euro falls quickly.From early July, a short position will also be supported

by the Commitment of Traders (CoT) data (subchart below

the price in Figure 1). For the first time since February

2013, commercial market participants can be found

again on the short side. The red bars below the zero line

indicate that this group of investors sees the euro falling

against the dollar, causing them to position themselves

accordingly. An initial margin of $2475 is required, an

amount that, with a longer holding period, decreases to

the maintenance margin of $2250 per contract.

Gold Trade Idea: Recent History

A future on a troy ounce of gold certainly is in a class of

its own. In the case of this trading candidate, one point of

movement is tantamount to a gain or loss of 100 dollars.

Here, the initial margin is 8800 dollars, which will be 800

dollars less if the position is kept open for a longer period

of time. However, you may also switch to CFDs here or

trade the mini contract where one point only equals 38

dollars.

Trading Idea Gold Future

Since the market plunge in April, the troy ounce has lost

more than 400 dollars. If you entered a long position on

15th August with a holding period until 29th November,

you were able to make money every year in the last

ten years. Figure 2 shows the holding period of the

December contract to be traded. Since 2001, commercial

market participants had not been as bullish as they weremost recently. Back then, it was possible to see for the

last time that the red bar representing this group of

investors was in positive territory above the zero line for

the first time.

After opening the long position, there was an

average profit of 67 points, equalling 6700 dollars, while

the average loss was 45 points ($4500). In the years

2011 and 2008, the maximum loss amounted to 11,000

and 20,560 dollars respectively. This was followed by a

countermovement that just about led to a positive result.

Conclusion

Traders paying attention to seasonalities should take a

very close look at these two trading ideas prior to the

entry date in question. Ultimately, technical analysis

will then provide the crucial signal for the creation of the

position in question. «

The December 2013 contract on a troy ounce of gold is to be purchased on 15th August – with a holding

period until 29th November (area marked green). The average profit was 67 points with 45 points being

the level of risk.

Source: www.trackntrade.com

F2) Trading Idea December Contract Gold Long

On 8th and 15th August, you can find – in the forum of the

TRADERS´ website – one video analysis each of EUR/USD

and gold (www.tradersonline-mag.com/index.php/forum).

Video Update



INSIGHTS

22


China InternationalOnline Trading Expo 2013

This year the third China International Online Trading Expo (CIOTEXPO) will take place on the 13th and 14th September at the

Shenzhen Grand Theatre in China. CIOTEXPO is the largest forex and options trading expo in China and Asia. The expo features a

wide range of exhibitions, conferences, an award presentation, exhibitor dinner as well as personal networking. The CIOTEXPO is

the get-together for traders, investors, brokers, financial providers and institutions to exchange ideas and information.

» The CIOTEXPO is the ideal place to meet professional

traders, brokers and others who are interested in forex

and options trading and discuss the latest trends in online

trading. CIOTEXPO is held twice a year. Exhibitors can find

new business partners in China and enlarge their customer

database quickly. Various possibilities during the expo can

help to promote the company brand and help it to benefit

from the effective networking, which reaches investors,

traders, advisers, financial solution providers and trading

brokers. Of course exhibitors get an insight of the cultural

differences in Chinese trading habits.

The exhibitors and sponsors this year include Alpari,

Ikon Group, IronFX, Instaforex, MIG Bank, Dukascopy

Bank, Interactive Brokers, Axitrader, Commexfx,

Tradency, PFSoft, MarketsPulse, Fxgrow and many

more. Along with others TRADERS´ magazine is a media

partner of CIOTEXPO. The expo expects to see more than

40 brokers and 5000 attendees. For 2013 the main issues

are technology innovation, trading education, tradingsignals, money management, binary options, social

trading, the booming online trading market in China

and forex regulations. At the expo renowned analysts,

experts, CEOs, media representatives both from home

and abroad will be sharing their ideas and experiences

with visitors.

CIOTEXPO is organised by the Eastpearl Group that was

established in 2010. The event management company promotes

financial services and economic development for traders,

investors, brokers and other professionals. It is now established

as one of the most dynamic and innovative event solutions

provider in the investment tradeshow arena. The Eastpearl

Group expedites the growth of the Chinese financial sector on

the international market and has been awarded several Best

Exhibition awards by the local exhibition association.

Apart from the CIOTEXPO, Eastpearl Group hosts

meetings, conferences and workshops in partnership

with local governments and financial associations and

helps overseas enterprises to show their products to

Chinese investors and vice versa.

Visitors and sponsors can get more information on

the official website www.ciotexpo.com or contact theorganiser by e-mail: [email protected] or by phone:

+86-755-36949770. Apart from that everyone can now

register on the website and get free entrance. «

13th and 14th Septemberat the Shenzen Grand Theatre in China



INSIGHTS

23

http://www.ciotexpo.com/





INSIGHTS – NEWS www.tradersonline-mag.com 06.2013

24

RTS Realtime Systems Group announced a number of

actions the firm has taken to further build on its growth

in Hong Kong and Mainland China. The steps include

the launch of a Chinese-language website and recent

establishment of a Shanghai office and expansion of itsstaff there. In Hong Kong, RTS has expanded into new

office space and initiated plans to move its data centre to

the Hong Kong Exchange (HKEx) co-location facility. The

firm will develop low latency gateways to capitalise on

HKEx’s new Orion initiatives and connect to its equities

and derivatives platform. The firm’s Hong Kong operation,

RTS Realtime Systems HK Limited, was exhibiting at LMEWeek Asia 2013 in Hong Kong in June.

Source: www.rtsgroup.net

On June 13, 2013 Utah-based Innovative Market Analysis

acquired the MetaStock technical analysis software line

from Thomson Reuters. Innovative Market Analysis will

continue distributing the MetaStock and MetaStock

Pro charting software packages to self-directed traders

worldwide. The day-to-day business and services will

remain the same including support, programming,

and developing the software as well as management of

customer accounts.

“One of the most important parts of the sale was

ensuring all MetaStock employees remained with the

company. We have a very veteran staff, averaging ten

years of employment with MetaStock,” said Scott Brown,

owner of Innovative Market Analysis. “What excites me

is the addition of programmers dedicated specifically

to MetaStock. We employ more MetaStock-specific

programmers now than the company has had in the last

15 years.”

MetaStock customers are already benefiting from the

addition of the programmers. MetaStock has started to

release bi-monthly service packs, which fix known bugs in

MetaStock. The programming team is close to completing

their first major project for MetaStock – returning the ability

to store data on the customer’s computer. This release willbe available in mid-August for all MetaStock customers.

Innovative Market Analysis’ acquisition also enables the

software to be more flexible to customer needs. “When

we were part of Thomson Reuters, we had to focus on

corporate partners needs first, and then retail customers,”

said Mr. Brown. “This acquisition allows us to explore

what our customers want and add it to MetaStock. There

are numerous possibilities under consideration to enhance

the product right now.”

Innovative Market Analysis will continue to have a working

relationship with Thomson Reuters. Thomson Reuters

METASTOCK HAS BEEN ACQUIRED BY INNOVATIVE MARKET ANALYSIS

RTS REALTIME SYSTEMS EXPANDS IN GREATER CHINA

Scoot Brown

DataLink and XENITH data will continue to power MetaStockand MetaStock Pro. On the institutional side, Thomson

Reuters clients will still use MetaStock Pro functionality in

Thomson Reuters’ flagship desktop Thomson Reuters Eikon.

Scott Brown, former MetaStock President, created

Innovative Market Analysis in order to obtain the MetaStock

software line and move it into a private business setting.

“I created Innovative Market Analysis because MetaStock

has great potential and I feel breaking away from Thomson

Reuters allows us to turn potential into reality,” said Mr.

Brown, owner of Innovative Market Analysis.

Source: www.metastock.com



INSIGHTS – NEWS

25

INSIGHTS – NEWS

25

US MARKETS MAY FALL

When companies begin reporting

Q2 results, investors will look for

signs that profits can keep the bull

market going once the Federal

Reserve steps aside. The prognosis

is not good. Companies in the S&P

500 are expected to report overall

earnings growth of less than one

per cent. Excluding the financial

services industry, with projected

profit growth of 17 per cent,

overall earnings are expected to

decline by 2.4 per cent. In another

troubling sign, a record number

of companies have already issued

negative guidance for the quarter. Out of the 108 companies that have released forecasts, 87 have projected

earnings below consensus estimates. That’s the highest number since the data provider started keeping records

in 2006.

Source: www.money.cnn.com

“Non-bank financial firms” sounds like a non sequitur.

The idea of letting these kinds of financial “grey area”

firms, also known as NBFFs, continue to endanger the

global economic system is fast becoming a non-starter.

The US government’s Financial Stability Oversight

Council, and members Treasury Secretary Jacob Lew

and Federal Reserve Chairman Ben Bernanke, proposed

tightening oversight of NBFFs. If passed, the regulations

would name specific NBFFs as “systemically important”

to the financial system, and subject them to heightened

regulation. Specifically, the move would:

• Place such rms under Federal Reserve oversight;

• Require them to hold more capital in reserve

against potential losses;

• Require them to undergo financial stress tests

such as those that already apply to America’s

biggest banks;

• Obligate each regulated NBFF to prepare a “living

will” explaining how it will safely wind itself down

in the event it becomes insolvent, or otherwise too

weak to go on living.

Source: www.dailyfinance.com

REGULATORS WORRY NEXT FINANCIAL CRISIS WON’T BE CAUSED BY BANKS

Although gold prices dropped 23 per cent in the second

quarter, the appetite for gold still remains. Several factors

are structurally creating a natural floor in gold prices and

will continue to provide support. There are two factors that

will provide support to gold prices. The first factor is that,gold is being viewed as a currency rather than a commodity.

In fact, central banks account for a significant portion of

gold demand. Gold becomes a natural destination for

many players in the currency markets but also many retail

players who are interested in having some sort of security

in the currency space. The changing supply and demand

dynamics for gold is the second factor. Emerging markets

predominantly in Asia remain in the lead in terms of golddemand. Not only is gold culturally important in countries

like India, the uses of the precious metal is evolving.

Source: www.kitco.com

GOLD IS STILL AN ATTRACTIVE INVESTMENT TOOL



INSIGHTS – NEWS

26

www.tradersonline-mag.com 06.2013

Following the most recent shift “away” from a USD-

centric world (with the China-Australia direct currency

convertibility), it seems the possibility of China’s Yuan

as the next global reserve currency is getting closer. The

British, Germans, and now the Swiss (who just signed a

free-trade-agreement with China) are all actively vying to

become Europe’s Yuan trading hub as it seems the long

line of developments to internationalise the currency over

the past two years. The Chinese currency is well on its way

to becoming one of the future global reserve currencies.

Although, the USD is still the most commonly-used

currency for settling trade with China; from virtually zero

in 2010, the Yuan is used to settle over twelve per cent of

trading transactions now and is likely to increase further.

Source: www.zerohedge.com

Electric car maker Tesla Motors (TSLA) entered

the NASDAQ-100 Index on the 15th of June

having experienced surprisingly positive, throughthe roof figures during the last several months.

Simultaneously, Oracle`s (ORCL) shares have dropped

out of the index.Tesla most recently had a market

capitalisation of around 13 Billion dollars.

Source: www.globenewswire.com

Investors are becoming increasingly bullish about

the U.S. dollar in anticipation of a stronger economy

later this year. The newfound enthusiasm for the buck

follows a choppy period as investors prepare for the

Federal Reserve to eventually unwind its stimulus

program. Depending on how the economy performs,

the central bank could begin tapering its bond buying

program by the end of this year. The remarks sent the

dollar higher against its main trading partners as stocks

fell and bond yields rose. Although the Fed trimmed

its outlook for economic growth this year, traders seemed to take Bernanke’s comments as confirmation that therecovery is gaining momentum. At the same time, market volatility is expected to remain high for now, which

should help boost the dollar.

Source: www.money.cnn.com

EXPANDING CHINESE CURRENCY

TESLA MOTORS JOINS NASDAQ-100

DOLLAR GAINS STRENGTH



“I’m a day trader. What can

MetaStock do for me?”

Loaded with real-time news & data, fundamentals, economic

reporting, analytics, and much more, MetaStock XENITHtm is quite

simply the most powerful platform available to the private trader.

MetaStock XENITH is a comprehensive and flexible system with

extremely powerful search capabilities and an impressive array of

options tools. Couple this with the MetaStock Pro PowerTools, and

you will wonder how you ever traded without it.

METASTOCK : Power to the Private Trader

Try MetaStock FREE for 30 days!

metastock.com/tradersezine

http://www.metastock.com/tradersezine



















TOOLS www.tradersonline-mag.com08.2013

28

News from the World of Technology

NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPVIEW

New Products

Best Choice Software

» Barchart.com, Inc. announced that it is now connected

to NYSE Technologies’ SFTI® Network. NYSE

Technologies is the commercial technology division

of NYSE Euronext and provides broadly accessible,

comprehensive connectivity and transaction

capabilities, in addition to data and infrastructure

services for mission critical trading services. SFTI

stands for Secure Financial Transaction Infrastructure

and also offers ultra-low latency connection speeds

and huge bandwidth capabilities. With its connectivity

to SFTI, Barchart has access to virtually all North

American equities and derivatives markets, as well

as many international markets. The additional marketcentre coverage adds to the depth of Barchart’s

data feed division. Further, the strength of the SFTI

backbone enhances the level of resiliency Barchart can

provide to its clients. Additional details can be found at

www.barchart.com

» Best Choice Software, which offers seasonality-based

swing trading software, announced they had combined

forces with Estockoptiontrading to bring clients

daytrading software and training. The system trades one

selected stock for about an hour a day using proprietary

software. Members are trained to use the system to trade

consistently. Additional information can be found at

www.bestchoicedaytrader.com

» Ward Systems Group released ChaosHunter 4.0, a

stand-alone software tool designed to produce readable

formulas to model your numeric data for applications like

buy/sell signals, future value of time series, scientific,

business financial or sales data and many more. To use

ChaosHunter you have to enter text files or historical

data from spreadsheets or data feeds. Af ter that you can

choose between arithmetic and mathematical functions

that you want ChaosHunter to use. It then produces

numeric formulas that you can read, understand, utilise

and even sell outside of ChaosHunter. The Formula

Editor of ChaosHunter allows you to make changes andapply the model to your data file. Additionally, you have

the possibility to save several formulas as long as you

give them different names. They can be the formula you

created or a formula optimised by ChaosHunter. It is

possible to transfer the formulas to other popular trading

platforms, like NeuroShell, Interactive Brokers Trader

Workstation, TradeStation, Ninja Trader, Wealth-Lab Pro,

eSignal, Microsoft Excel. Additional information can be

found at www.chaoshunter.com

» Fidelity has released a Windows Phone 8 brokerage

app, offered through the online Windows Phone Store.

The mobile services and apps of Fidelity offer you access

to your accounts whenever and wherever you want. That

includes watching your portfolio, trading in your brokerage

account, making transactions, getting news, videos, real-

time quotes and charts. You can set up a watch list and

get access to stocks, options, ETFs and mutual funds. You

can pin individual securities directly to your home screen

using Live Tiles. Live Tiles update real-time and flip to

show relevant news stories, allowing you to make tradesquickly and easily. More information at www.fidelity.com



TOOLS

Thomson Reuters

» Monitoring numerous open positions can be challenging

for even the most experienced of Forex traders. To

address this difficulty, MahiFX has created a new range

of platform trade viewing features and options to enable

customers to trade more simply and efficiently. The

newly designed Position Book/Aggregation button gives

traders the option to merge all open positions into easy to

monitor book. By selecting the merge to master function,

traders can feed all following trades of the same pair into

the master trade, giving a snapshot view of their overall

position. This is of particular benefit to traders who

employ a scalping trading strategy. The platform upgrade

also includes a ‘Book Change’ to cater to the preferences

of traders who like to be able to set up multiple books

and those traders who prefer a less cluttered interface.

To lessen any potential confusion for less experienced

traders, books are now only explicitly created and

removed by the trader, rather than automatically being

generated. Traders who do not wish to set up a trading

book can now choose to use the trade view completely

separate from the book view. For further information,please visit www.mahifx.com

» Thomson Reuters has launched a new analytics tool

on Thomson Reuters Eikon to help commodities traders

and analysts predict prices in major European power

markets. The new tool, Power Curve, uses innovative

visualisation techniques to enable traders and analysts

focused on European power markets to obtain real-

time, fundamental fair value assessments of the Nordic

and German power markets. This reduces time spent

on research and analysis, enabling financial markets

professionals to focus on higher-value tasks in the building

and monitoring of trading strategies. Germany and the

Nordics are two of the most liquid power markets in the

world. Power Curve on Thomson Reuters Eikon provides

commodities traders with an intuitive visual display of

Thomson Reuters Power Curve Model, combining power

supply data now available under REMIT (Regulation on

Energy Market Integrity and Transparency) with real-

time fuel prices, weather, available capacity information

and Thomson Reuters proprietary supply and demandmodels, to provide a fair value assessment of the Nordic

and German power markets. Additional details can be

found at www.thomsonreuters.com

» TipRanks announced an enhancement to its Financial

Accountability Engine, a free browser extension that

provides individual investors with information about

analysts who provide stock recommendations. When a

TipRanks user visits a financial website such as Yahoo!

Finance or Google Finance and searches for a stock

symbol, a TipRanks side tab provides instant access

to the three top-performing financial analysts’ stock

recommendations and the accuracy rates of analysts. In

addition, users can access news articles that reference

the analyst recommendations or that quote the analysts

on why they made those recommendations. For more

information, please visit www.tipranks.com

» Trading Technologies International (TT) announced

it will offer X_TRADER with bundled access to its 35

supported markets for a flat rate of $500 per month and

X_TRADER Pro for a reduced price of $1200 per month.In addition, X_TRADER will include synthetic order

functionality through its Synthetic Strategy Engine

(Synthetic SE), which was previously available only

with X_TRADER Pro. For more information, please go to

www.tradingtechnologies.com




Get Updated with Detailed Information & Data for Commodities


h t tp: / / w w w.ki tco.com

www.kitco.com

There are so many websites available which provide various kinds of information and data

for commodity markets especially bullions like gold, silver and platinum etc. In addition to

websites, some applications are also available for collecting detailed information such as

professional leading data, most at varying costs. These kinds of data sources can be costly

and/or difficult to find on the internet and /or are not reliable for full time traders. Here, we

look at www.kitco.com in order to analyse its usefulness to traders.

» Structure & Mode of Operation

Kitco.com is widely used by professional traders incollecting information and leading data. This site provides

the latest news and updates from various sources like

Reuters, Bloomberg, Mining Weekly, Kitco News and so

on. These are some of the most reliable sources which

provide market affecting news. Figure 1 shows kitco’shomepage, which displays the latest market news

reports, commentaries contributed by various traders,

and information from various press releases. Kitco not



TOOLS

only provides information and data about the market,

but it also provides fundamental and technical analysis

from various well known international institutions such

as Standard Bank and Scotia Mocatta etc.

On the bottom of the homepage, you will see updated

data on currency pairs in Figure 1, which is sponsored

by one of the most reliable websites in trading: www.

forex.com. If we move to the right side of the homepage,

some small boxes can be seen. These include gold daily,

monthly and yearly updated charts so that traders can get

some fair idea about the performance of gold amongst

the other underlyings. This website is made for providing

data and information about bullions especially gold.

Precious Information

In the world of trading and investing, the market always

discounts news and information very quickly. Here,

timing in getting this information is very important.

Information, which is received after a major underlying

movement is worthless. So, professional traders need

this information very quickly so that they can take

positions as per their analysis. Furthermore, if we see

the first tab page in Figure 2, which deals with quotes

for all metals. This page contains the updated data for

precious metals in terms of New York spot price and

the world spot price. Difficult to obtain data such asXAU and gold rations as well as three major currency

fix prices for gold, silver, platinum and palladium in

USD, GBP and EUR is also displayed

here. On the left hand side in this

page, some boxes can be seen.

These boxes show the precious

metals updated charts, some major

leading market indicators and

major currency pairs with updated

data. This data is provided by www.

forex.com.

Technical charts for analysis

are also provided in the next tab

page. By clicking on the middle

of the page you will see an

interactive gold technical chart.

After clicking, a new web tab page

will be opened which will start a

java based platform and you will

see the gold interactive chart with

user friendly time horizons. On thatpage, important current market

related news, commentaries,

press releases and important

Figure 1 shows the homepage of www.kitco.com. Here, you will find data in

small boxes on the left side of the webpage in sequence. In the middle of the

page, you will find latest news and market updates, important commentariesand current exchange rates from various reliable sources.


F1) Front Page

Figure 2 shows the “all metal quotes” tab page. Here, you will see all major bullion’s updated quotes and three

major currency fix prices.


F2) All Metal Quotes




Traders can check and discuss with others in the gold

forum tab page, where trader can read some general

thoughts and opinions of other traders, as well as ask

questions to the forum.

Reliable Sources of News and Reports

If we move further to the research reports from various

financial institutions, Figure 3 will give you the perfect

idea about how this looks. You can see and read

numerous in-depth research reports from various well

known financial research firms such as Standard Bank

and Scotia Mocatta etc. These reports are published on

a regular basis as international news and events come

out. Any trader will want to see the latest research before

execution of any trade or taking a position in bullion.Sometimes traders can not analyse some typical

information and data or analyse falsely which leads to

huge losses and a short term trading position turns in

to a long term investment position. Hence, sometimes

traders need to seek advice or opinions and data from

a professional commodity analyst for perfecting trades

and for confirming trends in any bullion is valuable.

Here, Kitco provides the latest research reports, traders

commentaries in the News and Reports tab. On the right

side of reports, a small box shows connection with the

underlying.

Conclusion

Kitco is the professional platform for bullion traders

– especially gold. The only drawback to this site is the

lack of auto refresh. Traders need to refresh whenever

they want fresh information and data. This site provides

updates, news, reports, data as well as analysis of bullion

for professional bullion traders. They no longer need

rely on costly and hard to find subscriptions for software

and financial websites. Android, ipad, Blackberry andWindows mobile users can also enjoy these services by

installing a Kitco software called Kcast on their mobile

devices. «

Figure 3 shows the news & reports page of Kitco, where you can see various

research reports from various financial institutions.


F3) News & Reports

analysis is seen on the right hand side. You can see

technical charts not only for gold, but those for silver,

platinum and palladium as well. Historical charts are

also provided by clicking on the historical charts box.

Detailed lease rates or precious metals are shown after

clicking on the lease rate box. Here, traders will get

all data (forward rates, lease rates from various time

angles) regarding gold, silver, platinum and palladium.

The site provides updates, news, reports, data as wellas analysis of bullion for professional bullion traders.



http://www.inthemoneystocks.com/



TOOLS

34


34

Many possibilities with Social Trading


MetaTrader Trading Signals

More than seven million people use the MetaTrader 4 and MetaTrader 5 client terminals.

Now MetaQuotes has gone one step further by providing a signal-service to every user.

When implementing this feature to the terminals, the most important and most daunting

challenge was the security of all traders that use the ne MetaTrader Trading Signals

service. Any shortcoming could result in risks and losses for subscribers and providers.

» Testmode

During the development of the service the security

of the investor funds accounts was one of the most

critical issues within this complex task. That is why a

signal has to pass an obligatory one-month test period,

before it is available for paid subscription. During the

test period subscription is blocked and the provider

performs trading operations like making profits andbearing losses. Only after completing the one-month

period with a profit the signal can be subscribed to.

Loss-making signals remain in the test mode. Perhaps

they will show profit in the future, but until then they

cannot be subscribed to.

No Overtrading

An important feature of MetaTrader Trading Signals

is the absence of conflict of interest between

all participants. Signal providers receive a fixed

subscription fee regardless of the number of deals andprofits earned, so it does not make sense for them to

perform frequent small trades in order to receive more

commission fees or take too much risk trying to earn



TOOLS

35

more. The incentive for the signals

provider is to show steady profits,

as this will attract more subscribers

and boost income. Users of

MetaTrader Trading Signals can

subscribe their trading account

directly to a signal provider in the

MetaTrader-platform. During the

subscription process the investors

can clearly designate a portion of

their deposit that is to be dedicated

to signal following. Furthermore

copying deals can be stopped as

soon as the deposit has dropped

below a certain level. For example,

it is possible to allocate only five

per cent of the deposit for signal

following to check how profitable

and reliable it is.

Another instrument to protect

the investor is the mechanism that one trading account

can only copy signals of one provider. This limitation

pursues the same goal – security of investors’ funds.

If a trading account is managed by several signals,they seriously overload the deposit and that may lead

to the rapid loss of funds. Besides, several trading

signals on one single account can conflict with each

other. For example, one signal may require entering

a short position with three lots,

while another one may demand

entering a long position with five

lots. Finally, traders can cancel the

automatic copying of deals at any

time disabling the copying system.

Signal providers are also

well protected. First, as already

mentioned, the access to signal

providers’ personal data is strictly

limited. Second, their trading

accounts are also secure, as they

only use an investor password in the

service. This allows them to connect

to their account in read-only mode

without the ability to perform

trading operations. Thus, signalsproviders may broadcast their

signals and make money without

taking risks.

Conclusion

MetaQuotes provides traders with the most secure solution

for social trading. End-users have appreciated it. Thousands

of traders have become signals providers and are alreadyoffering their trading signals on MetaTrader 4 and MetaTrader

5 terminals. Thousands of other traders have become their

subscribers thus gaining the opportunity to make money

on forex with little extra effort. «

In the above window a user can define risk-parameters to the subscribed signal and enable real-time trading.

Sourcee: www.metatrader.com

F1) Subscribe-Window in the MetaTrader Platform

A lot of systems passed the first month and could be subscribed to af ter taking an in-depth look.

Sourcee: www.metatrader.com

F2) Listing of All Available Signal Providers



TOOLS

36


36

Automatic Trading Systems without Additional Cost


VectorBull and ForexBull

The possibility of stock market analysis with the help of computer programs often adds considerable cost to a monthly

subscription. Software company Spring Techno in Bremen, Germany offers an attractive alternative – with their series

VectorBull and ForexBull. The two different versions are suitable for different users. All versions together offer trading system

modules that generate nearly 25,000 stock-, index-, commodity- and forex-signals – at no additional monthly cost.

» Functionality

VectorBull can be used with any kind of historical

price data while ForexBull is specialised on forex and

commodities. Both programs analyse the historical

price development of the chosen instrument and predict

the highest probable price development in the future

based on similarities in the price development of the

past. Different software providers already offer pattern

analysis, but whereas those often offer mainly candlestick

charts, Spring Techno chose a different way.

A current chart pattern for the price development

of a stock, for example, the relation of open, high, low

and close of the last few days, is generalised and then

searched for in the stocks’ historical database. Recurring

chart patterns show the behaviour of market participants

in certain market environments. This assumption is based

on behavioural psychology and has been confirmed

sufficiently in financial studies. Next the software

calculates the probability of occurrence (expressed as a

percentage) of the price tendency based on the number

of similar patterns found. VectorBull makes a preciseprognosis and determines the expected highs and lows

within a certain time period. The user can get a prognosis

for a day or for two to three weeks as well. However, the

longer the period of prognosis, the greater the possibility

of false signals.

Figure 1 shows the working screen with the analysis

of the Apple share in indicator mode. On the left is the

menu bar with all options to choose from. On the 10th of

June 2013 Apple’s share should fall with a probability of 68

per cent. You can find the details of the prognosis and the

formation that determined the result below the chart. On

this day the stock had a potential to 444.25 dollars followed

by a low at 433.68 dollars before closing at 437.11 dollars.

Of course we checked this. The daily high was at 449.08

dollars and the low at 436.80 dollars. The close of the stock

at 438.89 dollars was near the prognosis.

Installation and Possibility of Trial

VectorBull can be purchased for 499 euros or it can be

rented. Before buying, the user has the possibility to test

each version for a period of 14 days. You have to download

a seven MB-file from the website in order to install the

program. The installation is done once per version and if

you buy it you receive an unlock code – a user’s licenceincluding updates and data feed. The software needs an

internet connection, because the historical data will be

downloaded from the company server only when needed.



TOOLS

37

Further cost only occurs with the

forex-version, if you want to follow

analysis and recommendations of

professional traders. If you want

to use the software on the road it

is possible to install it on several

devices, but you can only use one at

a time.

The Entry

The VectorBull version offers over 80

systems on German and American

stocks, forex, indices and futures

that are all based on a trading period

of two to five days. The systems

are no money printing machines

but suggestions for the individual

for further development and can be

used as signal providers as well.

Both, VectorBull and ForexBull,

can be started in indicator mode

or trading system mode. In the

indicator mode a chart is opened with one or more

prognosis that can be examined immediately. The time

frame of the prognosis is set in days and the chart with

the prognosis – bullish, bearish or neutral – is displayedafter a short time of calculation. In the trading system

mode the user is challenged. He can test more than

40,000 entry- and exit parameters with a system finder

for every single stock.

Each trading system can be saved as a scenario and can

be used in combination with hundreds of such scenarios

in different markets to generate orders accordingly. The

so-called “AutoTradeAdvisor” delivers the data that

should be set in the trading platform

– limit entry, position size, stop-loss

and profit target.

Apple in Trading System Mode

Whereas the indicator mode only

offers a prognosis without precise

entry- and exit rules, the trading

system mode is more complex. The

program calculates scenarios based

on the predefined usual rules like

entry/exit, position size and stop-loss

for every instrument with systemfinders that are only valid for this

title. After you have found a system

with positive expectancy value you

The working screen of VectorBull in indicator mode. If the software finds similarities in the past, it displays

the estimation as well as the particular formation below the price chart. Apple should fall the following day

and it did.

Source: www.vectorbull.com

F1) Working Screen VectorBull

The trading signals work in real time as well as in paper trading. The performance curve is based on signals

that were traded with real money on a client account.


F2) System in Real Time

can compose every tradable universe of instruments and

the system will calculate daily signals.

Let’s focus on the Apple share. It has increased

over years. A trading system should be profitable aftera trend reversal to the downside. The holding period

will be five days. Therefore we used the trading system

mode of the program. The price development of Apple

was analysed and the program searched for formations.

Then the system finder searches ideal combinations of

a strategy in so-called “evidence mode”. That means

that signals are tested for two thirds of their history and

then you receive a list of all trading system data as a



TOOLS

38


to the developer you could also trade it with less money

using CFDs. That shows that it is possible to earn money

with the scenarios and that they are not theoretical results.

Every user has the ability to create a scenario for each

of the 25,000 shares and to combine those to generate

trading orders. The developers also deliver, for example,

catalogues for sector-indices to analyse individual shares

within these sectors. Therefore a trading system is

possible that generates signals, for example, based on

the 30 DAX-shares or the shares in the NASDAQ100.

Furthermore, the user can create buying- and selling-

scenarios for all important commodity futures to build

call-write positions after the signal. Another feature is

the so-called “crystal-ball”. It is used to create a list that

shows if the particular day is bullish, bearish or neutral

for the chosen title based on the vector analysis. The

system predicts the next five days and in addition there

is a total prognosis including the evaluation of the trend

strength.

VectorBull-Realtime Offers Intraday-Prognosis

A completely different thing is the Vector-Bull-Realtime-

version. It might be the same name, but it is designed

for a completely different user group. In contrast to the

stock-edition the program does not generate entry- and

exit signals, but a prognosis line for the next 24 timeunits is created – based on a database of up to 15 years

of tick data. If you opt for the software to calculate in

the 4-hour chart, you will know what

may happen in the next 96 hours.

The smaller the time frame, the more

detailed the prognosis. Short term

traders could compare the 5-minute

chart with their own strategy and

trade positions accordingly. Here

as well are no additional costs after

purchasing, because Spring Techno

delivers the necessary realtime-

price-data for free. In total there are

60 DAX stocks, Dow Jones Index,

40 currency pairs and 25 indices,

futures and commodities.

We tested the software non-

stop and the price development

was predicted very well. But there

are difficulties if there is important

economic news. Figure 3 shows ablue prognosis-line in the 30-minute

chart for gold, EUR/USD, DAX-

future, crude oil and bund-future.

A blue prognosis line offers hints how the analysed instrument may develop if the price will develop similarto the past. T he chart shows the prognosis and the actual price development of five markets. T he line shows

96 time units.


F3) Real-time Version for Daytraders

result. The software displayed 1121 profitable systems

out of 9521 calculations. We terminated early to avoid

over-optimisation. We search for a system that shows an

increasing equity curve even with the missing third of data

and sort it by the profit factor. The system recalculates and

updates the equity curve by the last third of the history

that was not included in the first calculation. Although

Apple showed considerable price loss in the recent

past, the price losses of the chosen system are limited.

According to the developer, the software learns with new

data and therefore the pattern analysis is adapted. The

trading system parameters of the system chosen are then

saved as a scenario and are only valid for the Apple stock.

This process has to be done once for each stock that

you want to add to your preferred trading universe. The

AutoTradeAdvisor checks the single scenarios and adds it

as an order for the user.

Trading Systems in Real Practice

Of course we asked if such scenarios could be traded

real time as well. Figure 2 is an example that clients of a

German broker have used on their own trading accounts

for over a year now. Spring Techno determined scenarios

of 14 US-stocks with a holding period of five days. The

result is impressive: The account size was 14,000 euros

and the risk per trade was 0.5 per cent at maximum. Itbegan at the beginning of 2012. The total performance

was 15 per cent or a total profit of 2100 euros. According



TOOLS

39

The prognosis line was created on 24th June 2013. The

current price developments are displayed above the

prognosis line as a bar chart. Processed prognosis stay

in the chart and a new prognosis is generated after the

current bar is closed. The blue line often differs from the

price, but the trend is correct – therefore an update was

programmed in the last days to improve the relation of

the prognosis line to the actual price. And the analysis of

the prognosis and the current price is better. The price of

this intraday-software is 1295 euros, but it can be rented

as well.

ForexBull with Additions

Let us now take a look at ForexBull, a program that stands

out because of its considerable additions and that offers

analysis instruments only for currency pairs, commodities

and some interest- and stock indices. Trading systems

can be developed just like in the stock-version.

You will see what is offered in addition, if you use the

menu “tools”. Following is a list of additions to ForexBull:

• Correlation matrix that opposes all titles

• Overview of volatility with the daily movements of

the past twelve weeks

• Momentum-guard, that shows trends for six different

time frames • Table of the changes since the

beginning of the year, of the past

six months and of the current

week

• Economic calendar of the current

day

• Trading signals that use

movements of the trading night

to generate signals

• Seasonality indicator with

adjustable time frame

• ADX-list to show the strength of

a trend

Furthermore the ATR-

indicator, pivot-lines and a

regression channel, that is drawn

automatically, were added to the

chart module. Figure 4 shows

the overview of volatility of the

German DAX. Option traders cansee from this table when it is wise

to change to the seller- or buyer-

side whereas the daytrader learns

the daily range of fluctuation. Therefore he can place

the stop accordingly and avoid to be stopped out by a

random movement of the market.

An overview of signals offers recommendations

for the trading day. At 7 o’clock in the morning you can

download the so-called “Early-Bird-overview”. This table

concludes entry, direction and potential and shall offer

an advantage to the early-risers. This table, which should

provide a surplus value especially to the early birds,

combines entry, direction, and potential. Another novelty

of ForexBull: Users can exchange trading systems with

each other via a special menu.

Conclusion

The Vector-series of Spring Techno offers automatic

pattern recognition without additional cost – in contrast to

other charting programs. You can count on the accuracy

of the signals in the future, because the software is

continuously fed by the latest prices in all versions. In

the meantime brokers already offer the stock-version to

their clients to generate automatic signals for individual

instruments. We especially liked the real-time version,

because it is another tool for the daytrader to find better

entries. If you are interested you should test the dif ferent

software versions to see which one fits your trading

behaviour. «

ForexBull offers various tools that are not available in the stock-edition. The overview of volatility helpstraders to place stops correctly.


F4) ForexBull Overview of Volatility




Kathleen Brooks is UK and EMEA research director at Forex.

com based in London. She uses both fundamental and

technical methods in her analysis and often fuses the two to

get a complete picture of the market. Her philosophy of market

analysis is to break things down to their most simple parts andbuild from there. She is a regular contributor to Yahoo Finance,

Reuters Great Debate and she is often quoted in international

publications including the Wall Street Journal and the Financial

Times. She can be seen regularly on business TV including

CNBC, CNBC Arabia, Sky News Australia and the BBC. She

started her career in finance at BP where she worked first as

a business analyst in its trading division and then as a trading

analyst in its foreign exchange dealing room. Prior to joining

Forex.com she was a financial features writer for City A.M.

Kathleen holds an undergraduate degree in English Literature

and Classical Civilization from Trinity College Dublin, and a

Master’s of Science from The Graduate School of Journalism

at Columbia University in New York City.

About the Author

Kathleen Brooks on Forex

A Simple Approach to Trading Foreign ExchangeUsing Fundamental and Technical Analysisby Kathleen Brooks


» This concise and well written beginner-level guide

to foreign exchange is something different, with the

author’s approach established at the outset to be the

fusion of fundamental and technical analysis. So often

diametrically opposed to each other, these techniques

are frequently used together by many successful traders,

but this does not seem to be written about very often.

Authors tend to advocate the use of one or the other

method. However, Kathleen Brooks is correct in arguing

they are complementary techniques.

Content

The first two parts of the book discuss fundamental and

then technical analysis. For each, the main news, data,

indicators and techniques that the author uses in her

trading are provided – including labour market surveys,

inflation data, GDP, Moving Averages and Ichimoku clouds.In Part C, real trading examples are provided to show

how fundamental and technical analysis are employed

together. Part D then shows how the author develops and



TOOLS

Title: Kathleen Brooks on Forex

Subtitle: A Simple Approach to Trading Foreign Exchange

Using Fundamental and Technical Analysis

Authors: Kathleen Brooks

Pages: 140, Paperback

Price: £16.99

ISBN: 9780857192059

Publisher: Harriman House

Bibliography

engages trading strategy using effective risk management

techniques.

As you would expect from a book with the author’s

name in the title, this is a look at one FX trader’s personal

approach to the market. It is an illustration of one person’s

way of doing things – it does not claim to be definitive,

or state that you must do things this way, which is to its

credit, as there is no single correct method for trading.

However, it is by learning how other successful traders are

operating – and incorporating some aspects of what they

do into our trading – that we can improve our approach.

Conclusion

The two greatest assets of this book are its concise

length – it is accessible and clear – and that it shows

how someone from a background outside of economics

can still learn how to trade foreign exchange. It is highlyrecommended as a foundation for beginning forex

traders. It also provides food for thought for those who

have been trading for a while. «





Trading Diary-App

The Trading Journal for Your iPadEvery trader who treats his activities at the stock markets as a business knows that keeping a trading

journal can have positive effects. Although it is not the most exciting task – it is worth it, because the

improvement of one’s performance is impossible without failure analysis. For those of us not so savvy

with Excel and its ilk, the trading diary app from Plum Square is a very convenient solution for keeping a

trading journal.

» Step 1: The Planning

After downloading and starting the application, a clearlystructured screen appears in the upper bar depicting the

three steps of keeping a trading journal. Before you start

it is recommended to determine all parameters for the

for risk- and money management. Thus you can enter the

account size as well as the risk per trade and the maximumdrawdown per month. After defining the basic conditions,

the first step requires the following data for a trade that

has to be typed in the area “plan”:



TOOLS

• Ticker symbol

• Order type

• Entry price

• Initial stop-loss

• Profit target

The app automatically calculates the particular

position size, the potential profit as well as the risk-

reward ratio (RRR). A useful feature is the implementation

of graphics from the iPad’s picture gallery. The reason

for the entry is also very important. Thus the trader has

the possibility to put his trading plan into words. Even

weeks or months later you can understand the motivation

behind the precise trade.

Step 2: Entry and Exit

After executing the planned transaction you enter all

parameters of the entry like date, time, order type,

quantity and execution price in the area “trade”. Here

as well, the trader can insert charts as picture files andadd comments. Especially if the

stop-loss is trailed this is a good

way to add pictures or words to a

specific decision. After closing the

trade all necessary data is entered

again. The user also can enter the

daily high and low and then the

app calculates some kind of rating

for the exits and entries that is

displayed graphically elsewhere.

The trading diary then calculates

the result of the transaction and

offers the trader the ability to insert

charts or comments. Differences

between the planned and the actual

entry and exit are calculated and

displayed as well.

The selection-function in the

left area of the screen (see Figure

1), where you can sort all trades,

is very practical. For example,you can look at all open or closed

trades with one click. If the trader

wants to see only profitable trades

or only losing trades, this can be done with a single

click as well.

Step 3: The Analysis

A trading journal is only helpful if the trades entered

are analysed regularly. This is where the area “review”

comes into play. Here you can analyse and evaluate

closed trades. It makes sense to answer questions such

as:

• Did you execute the trade according to plan?

• Did you make mistakes? If yes, which mistakes?

• How do you feel af ter the exit?

• What can you do to improve your trading in the future?

Another interesting feature is the reminder function

which is adjustable. Eight weeks after the analysis the

trader is reminded to perform a “follow-up”-analysis. The

idea: After a certain time period, the trader can evaluate his

own trading behaviour more objectively than immediately

In the area “trade” all parameters concerning the entry and the exit of a transaction are entered. The user has

the possibility to insert comments and charts.

Source: www.plumsquare.com

F1) Entry and the Exit

A trading journal is only helpful if the

entered trades are analysed regularly.




after the exit – furthermore you can

see how the price developed after the

exit, and based on this information

the trader can gain more valuable

information for the improvement of

his trading behaviour.

Equity Curve in the Twinkling of an Eye

This trading diary app is easy to use

– the input of the data as well as the

output of the data. This is especially

apparent during the quantitative

analysis of your own trades. If you

are not a pro excel user and you do

not want to calculate manually, but

you want to receive hard facts about

your trading nonetheless, you will

love the app for its statistics- and

equity-curve functions.

Figure 2 shows the graphic

display of the equity curve. You

can choose different time periodsand therefore you can measure the

current as well as the medium and

long term trading success based on

portfolio development. The best and

worst trade is displayed as well as

winners and the losers. If you click

on a data point the precise relevant

data of the trade is displayed and

you can activate the particular input

screen with another click – therefore

you can look at, for example, outlier

trades very effectively and quickly.

That is as good as it can be.

Facts, Facts, Facts

If you want to take a look at the key

figures of your trading performance

instead of your equity curve, you

can find further display options in

the “statistics” area which offers the

following information:

• Winners versus losers (%)

• Overall results

The function “statistics” offers a detailed view of the performance parameters: A ll important key figures as

well as ratings of the entry and the exit are displayed here.


F3) Overview of Key Figures

In the area “results” the trader finds the equity curve as well as other statistics – for example hit rate, RRR

or holding period.


F2) Equity Curve



TOOLS

• Average winning trade

(absolute)

• Average losing trade (absolute)

• Average result per trade

(absolute)

• Average risk-reward ratio

• Average holding period

It is also possible to divide key

figures in long and short trades. This

can deliver valuable information for

improving your trading behaviour.

The app offers the possibility

to export the data as csv-file for

readers who are interested in further

processing the data with a spread

sheet program. Another highlight

of this app is the diary-function as

shown in Figure 4. The user can

sort by criteria such as trading

instrument, results, entry- and exit

rating or date.

Conclusion

The trading diary app from Plum Square is a powerful and

easy-to-use tool for everybody who wants to document

and analyse their trades directly on the iPad. The risk- and

The flexible data base function enables an easy and quick sorting of all parameters of a trade.


F4) Diary Function

money-management function helps to stick to the risk

limit and offers valuable services calculating position

size. At a price of 159.99 EUR, the app seems expensive at

first glance, but if you look at the extent of functions and

features the price is justified. Thumbs up! «

http://www.twitter.com/TradersMagazine

http://www.facebook.com/TRADERSenglish



STRATEGIES

46


Connors Research Trading Strategy Series – Part 3

The Long Pullbacks Strategy

Pullback trading is one of the most popular forms of trading amongst traders. The good news is that when it is

done correctly it can be very lucrative. The not so good news is that over the past two decades there has been

a proliferation of pullback strategies which have been published that have little to no edge at all. In this article,

we will share with you a strategy which was first published in 2005 and continues to show positive quantified

test results heading into 2013. As a whole, you have here one of the most robust quantified equity pullback

strategies published and this is a strategy which will likely become a go-to strategy for you. As in Part 1 and 2

of this series (TRADERS´ June and July 2013), slippage and commission were not used in the testing.

» The strategy described in this article was formerly

known as the 5x5x5 Portfolio Method because it bought

stocks which closed five per cent below their 5-day

Moving Average (MA) on a limit five per cent below the

close and exited above the 5-period MA. Since that time

we have expanded this strategy further to include multiple

Moving Averages as entry and exit triggers, along with

multiple levels of pullbacks, with multiple levels of intra-

day pullbacks. Then we looked at various exits points to

allow for even more flexibility in your trading.

What Is a Pullback?

A pullback is a security which has moved higher and then

because of profit taking (and numerous other reasons)

sells-off in price. Some traders trade pullbacks intra-day

or on longer time frames but the majority trade them on

daily bars identifying stocks that they feel have pulled

back too far and will likely regain their upward trend.

There are numerous ways to identify pullbacks

ranging from simply eye-balling a chart all the way up to

using indicators such as Fibonacci numbers. Even though

these techniques work for some traders, what we want

to do is to be more precise. We want exact rules in place

and we want to see robust quantifed test results from

2001 to 2011 (our test period). We also want to see thestrategy showing solid test results in the majority if not

all of the many combinations of parameters that we are

testing on. This way you as a trader can then customise



the strategy to fit best into your daily

trading plan.

When trading short term

pullbacks, the best results occur

when you hold the position for at

least a few days. Often stocks pull

back sharply and snap back strongly.

There is no way of knowing ahead of

time how far that upward move will

be so having exit rules in place ahead

of time which allow for the rally to

play out is the best way to trade.

Long Pullbacks: The Rules

The Long Pullbacks Strategy rules

are simple and precise:

1. The stock must be above $5 per

share and close above its 200-

day simple Moving Average.

This signifies it’s in a longer term

uptrend.

2. The stock’s average daily volume

over the past 21 days (one trading

month) must be at least 250,000

shares per day. This assures weare in liquid stocks.

3. The stock’s 100-day historical

volatility is above 30.

4. The stock’s 10-day Average

Directional Index (ADX) is above

30.

5. The stock has closed down two

or more days in a row.

6. Today the stock must close at least X per cent (X = 4,

5 or 6 %) below its Y-period Moving Average (Y = 4, 5,

or 6). This will be clearer once you see the examples.

7. If the above rules are met, buy the stock tomorrow on

a further intra-day limit Z per cent below yesterday’s

closing price (Z = 4 % - 10 %).

8. Exit the position when it closes above its 3-period

simple Moving Average, exiting at the closing price.

We also show the test results exiting the same day,

on the first up close, and using 2-period RSI exits (the

goal here is to empower you with as many choices as

possible).

Let us now go deeper into Rules 6 to 8. Rule 6 is there

to identify the pullback. A stock that closes far below its

short term Moving Average is a good short term pullback.

At point 1, MAKO closes down two days in a row and more than five per cent below its 4-period Moving

Average. The next day, we look to buy on a limit order seven per cent below today’s close (point 2). At point

3, the stock moves sharply higher and closes with its 2-period RSI above 70. This is the signal to lock in your

gains on the close.

Source: www.tradestation.com

F1) Pullback Trade Example

1

2

3

3 4 5 8 9 10

30.00

22.00

23.00

24.00

25.00

26.00

27.0 0

28.00

29.00

70.00RSI

Rule 7 makes everything gel. Whereas most pullback

methods may have small edges, this rule assures that the

pullback is even deeper and because it is occurring intra-

day it is often accompanied by a lot of fear or even panic.

This panic creates the opportunity (behavioural finance is

quantified here).

Rule 8 assures that we have an exit in place. We state

this quite often because it is a pet peeve. Everyone likes to

tell you when to get into a stock. Few tell you when to get

out and even fewer have quantified, structured, disciplined

exit rules. Rule 8 gives you the exact parameters to exit

backed by a decade of historical results.

Examples

Let us look at a chart example. In Figure 1, MAKO Surgical

(MAKO) was trading above its 200-day Moving Average and



STRATEGIES

48


two per cent per trade. This includes all trades. It is the

number of winning trades times their average gain minus

the losing trades times their average loss divided by the

total trades. So, if the system has a total of 100 trades and

60 per cent make two per cent on average and 40 per cent

lose one per cent on average you have 120 per cent minus

40 per cent divided by 100. In this example the average

gain per trade is 0.80 per cent.

We now look at the top 20 returns per variation of The

Long Pullbacks Strategy (Table 1). These are the returns

for the eleven year period 2001 to 2011. The gains and

edges have been substantial, especially for the largest

intra-day pullbacks; those which have pulled back eight

and ten per cent.

The first column shows the number of trades that

triggered during that period of time. To assume a fill was

made in the testing the stock had to trade at least one

cent under its limit price (it need to trade through the

simulated order).

Column 2 shows you the average

gain per trade (the average edge) of

all trades. As we just mentioned 0.5 to

two per cent are considered excellent.

In the Long Pullbacks strategy, the top

20 variations all have edges above

5.70 per cent per trade!Column 4 is the percentage of

trades which were profitable. Most

traders like to get to 55 to 60 per cent

correct. The majority of the top 20

variations here are above 75 per cent

correct.

Column 6 is the Moving Average

used. We ran this test using a 4-, 5-,

and 6-day simple Moving Averages.

As you can see, all are valid.

Column 7 is the percentage

distance the stock closed under its

Moving Average. We used four per

cent below the MA, five per cent

below the MA, and six per cent

below the MA. Again, as you can see,

all are valid.

Column 8 is the percentage

distance from the close that the limit

order is placed. So if a stock qualifies

as a set-up the night before, youplace in your limit order the next

morning. We tested four, five, six,

seven, eight, nine, and ten per cent.

had historical volatility and ADX readings above 30. We use

a 4-period MA (for parameter X), a close at least five per cent

below the MA (for Y), and a buy limit order seven per cent

below the previous day’s close (for Z). This is what happened:

• Point 1: MAKO closes down two days in a row and

more than five per cent below its 4-period Moving

Average. The next day, we will look to buy on a limit

order seven per cent below today’s close.

• Point 2: The stock sells off more than seven per cent

from the previous day’s close and a Long Pullbacks

signal is triggered.

• Point 3: MAKO moves sharply higher and closes with its

2-period RSI above 70. Lock in your gains on the close.

Test Results

When traders ask what is a good edge (meaning the

average gain per trade) on a short term basis, meaning

under a week, the rule of thumb is 0.5 per cent up to

These are the best 2 0 setups based on average profit for the eleven year period 2001 to 2011. The gains andedges have been substantial, especially for the largest intraday pullbacks; those which have pulled back eight

and ten per cent.

Source: Connors, L./Alvarez, C., “The Long Pullbacks Strategy”, Connors Research, LLC, 2012

No. of

Trades

Avg. %

Profit

Avg. Trading

Days Held% Winners

Exit

Methodology

MA

LengthStretch

Limit

Entry %

808 6.75% 6.24 75.62% RSI2>70 6 6% 10%

751 6.55% 6.35 74.17% RSI2>70 5 6% 10%

948 6.41% 6.26 74.89% RSI2>70 5 5% 10%

632 6.35% 6.48 73.42% RSI2>70 4 6% 10%

1071 6.27% 6.18 75.54% RSI2>70 6 6% 9%

1016 6.20% 6.22 75.00% RSI2>70 6 5% 10%

829 6.19% 6.34 74.19% RSI2>70 4 6% 9%

982 6.14% 6.30 74,34% RSI2>70 5 6% 9%

638 6.12% 3.66 77.27% RSI2>50 4 6% 10%

757 6.06% 3.67 76.62% RSI2>50 5 6% 10%

816 6.03% 3.64 77.08% RSI2>50 6 6% 10%1261 6.00% 6.20 75.42% RSI2>70 5 5% 9%

839 5.99% 3.53 77.12% RSI2>50 4 6% 9%

865 5.91% 6.43 72.95% RSI2>70 4 5% 10%

955 5.88% 3.59 77.17% RSI2>50 5 5% 10%

1215 5.87% 6.22 74.73% RSI2>70 5 4% 10%

1245 5.85% 6.18 75.10% RSI2>70 6 4% 10%

1350 5.84% 6.13 75.41% RSI2>70 6 5% 9%

994 5.79% 3.54 76.86% RSI2>50 5 6% 9%

1086 5.73% 3.49 77.81% RSI2>50 6 6% 9%

T1) Top 20 Strategies Based on Average Profit



STRATEGIES

49

Strategy name: Pullback Trading

Strategy type: Countertrend Long

Time horizon: Day- and Swing Trading, holding period 1-7 days

Setup:

Price > $5, Close > MA (200), average daily volume

(21) > 1,000,000, historic volatility > 30, ADX(10)

> 30, 2 down closes in a row, close X% below

Y-period MA (X, Y: 4, 5, 6)

Entry:

Buy the stock on the open tomorrow if setup is met

on a fur ther intraday-limit Z% below yesterday’s

close

Stop-loss: None; use of options recommended

Take profit:RSI(2) > 70, RSI(2) > 50, Close > MA(3), first up

close, intraday exit

Trailing stop: –

Risk and money

management:

1-2% risk per trade as a percentage of trading

capital

Average hit rate: 61.19%-78.29%

Average trade: 1.61%-6.75%

Strategy SnapshotIt should come as no surprise that the higher the

limit order, the greater the fear, and the greater the

edge. Larger limit orders get filled less often, especially

in low volatility, quiet markets but tend to thrive in high

volatility markets where fear is the greatest. When you

decide which variation to use for your own trading you

may want to adjust the size of the pullback to reflect the

current market conditions. In low volatility markets, you

may want to look at six, seven, or eight per cent. In high

volatility markets nine and ten per cent may be the most

appropriate.

Please note though that these tests here do not

differentiate between market conditions. Each individual

variation assumed these were the rules you used no

matter what the year was. It simulated all trades for

eleven years and as you can see the edges have been

extremely large.

In Table 2 we see the 20 highest performing variations

sorted by per cent correct. The

numbers are extremely high with

the 20th best performing variation

on a per cent correct basis coming

in at 77.12 per cent all the way up

to the best coming in at 78.29 per

cent. A common theme again is

the size of today’s limit order. Thelarger the limit order, the greater the

performance.

The Role of Exits

Different exits will give different test

results. The first place traders look is

the size of the edge and use the exit

that provides the greatest edge. But

another factor is how long you want

to tie your money up. RSI 70 exits

often give the highest edges but tie

the money up the longest.

Three-day exits and especially

first-up-close exits often show (on

average) smaller edges but get out

of positions quicker, lessening the

overnight risk. The Long Pullbacks

strategy is extremely robust and it

was created to allow every trader to

decide for themselves which entry

and exit variations they want to usebased upon their own personal style

of trading. Table 3 shows the top 20

test results for each exit type.

In Table 2 we see the 20 highest performing variations sorted by per cent correct. The numbers are extremely

high with the 20th best per forming variation on a per cent cor rect basis coming in at 77.12 per cent all the wayup to the best coming in at 78.29 per cent . A common theme again is the size of today’s limit order. The larger the

limit order, the greater the per formance.


No. of

Trades

Avg. %

Profit

Avg. Trading

Days Held% Winners

Exit

Methodology

MA

LengthStretch

Limit

Entry %

820 5.55% 2.49 78.29% C>MA3 6 6% 10%

1092 5.24% 2.41 78.11% C>MA3 6 6% 9%

959 5.40% 2.47 78.10% C>MA3 5 5% 10%

1276 5.56% 3.46 77.98% RSI2>50 5 5% 9%

1282 5.06% 2.41 77.85% C>MA3 5 5% 9%

1086 5.73% 3.49 77.81% RSI2>50 6 6% 9%

1679 4.95% 3.39 77.67% RSI2>50 5 5% 8%

1430 5.16% 3.41 77.55% RSI2>50 6 6% 8%

1284 4.55% 1.66 77.49% Up Close 5 5% 9%

960 4.84% 1.71 77.40% Up Close 5 5% 10%

839 4.82% 1.66 77.35% Up Close 6 6% 9%

823 4.97% 1.70 77.28% Up Close 6 6% 10%1096 4.67% 1.65 77.28% Up Close 6 6% 9%

638 6.12% 3.66 77.27% RSI2>50 6 6% 10%

638 5.48% 2.50 77.27% C>MA3 6 6% 10%

759 5.48% 2.51 77.21% C>MA3 6 6% 10%

1924 4.79% 3.35 77.18% RSI2>50 6 6% 7%

855 5.88% 3.59 77.17% RSI2>50 5 5% 10%

839 5.99% 3.53 77.12% RSI2>50 6 6% 9%

638 4.92% 1.73 77.12% Up Close 6 6% 10%

T2) Top 20 Strategies Based on Per Cent Winners



STRATEGIES

50


not like to hang onto positions too

long, this exit serves its purpose.

2. Close above the 3-period MA

We like this exit. It does a nice job

between balancing getting quickly

out of a position, with good average

gains per trade, especially for the top

variations.

3. RSI 50 Exit

This exits a position on the close

when the stock closes above its

2-period RSI reading of 50. With this

exit we begin seeing larger average

gains per trade and slightly longer

holding periods.

4. RSI 70 Exit

This exits a position on the close when

the stock closes above its 2-period

RSI reading of 70. Here’s we see the

largest edges. Historically holding a

position for a few extra days was well

rewarded by providing the largest

Long Pullbacks edges, especially using

nine and ten per cent limit orders.

5. Intraday Exit This means exiting the position on the close of the

same day they were entered. The edges with Long

Pullbacks on an intra-day basis are not as large as

they are when holding positions overnight but they

have healthy intra-day edges and these edges are

significantly higher than most day traders are used to

having. Most day traders are very happy with 0.25 to

0.50 per cent edges per trade. The top Long Pullback

Strategy variations go far beyond that. The edges

range from above 1.61 per cent per trade all the way

up to 1.87 per cent gain per trade. «

Laurence Connors

Larry Connors is the chairman and founder ofConnors Research. He is also the founder ofTradingMarkets.com which has been providing

traders with cutting edge trading research forover a decade now. He has over 30 years in thefinancial markets industry. His opinions have beenfeatured in the Wall Street Journal, Bloomberg,Dow Jones, & many others. For over 15 years, Lar ryConnors and now Connors Research has providedthe highest-quality, data-driven research on tradingfor individual investors, hedge funds, proprietarytrading firms, and bank trading desks around theworld. He has also recently co-authored a new bookof statistically-backed trading strategies called“How Markets Really Work, 2nd Ed.”

Cesar Alvarez

Cesar Alvarez is Director of Research and Managing Partner of Connors Research aswell as a private trader. He also co-authored several books on trading including “HowMarkets Really Work, 2nd Ed.” and “Short Term Trading Strategies That Work.”

Connors Research is a financial markets research company.

It owns a proprietary core database of over 8.4 million

equity trades – a unique, hand-groomed repository of

data on short term market behaviour that underlies all of

its products. Connors Research continually adds to and

improves this data, and uses it to create model-driven,

quantitatively validated trading methodologies aimed at

giving traders a professional edge.

Connors Research

Table 3 for each exit type shows the setups with the highest average profit. Traders should use the exit

strategy that best fits into their daily trading plan.


T3) Top 3 of Each Exi t Type (Based on Average Prot)

No. of

Trades

Avg. %

Profit

Avg. Trading

Days Held

% WinnersExit

Methodology

MA

Length

StretchLimit

Entry %823 4.97% 1.70 77.28% Up Close 6 6% 10%

638 4.92% 1.73 77.12% Up Close 4 6% 10%

960 4.84% 1.71 77.40% Up Close 5 5% 10%

820 5.55% 2.49 78.29% C>MA3 6 6% 10%

638 5.48% 2.50 77.27% C>MA3 4 6% 10%

759 5.48% 2.51 77.21% C>MA3 5 6% 10%

638 6.12% 3.66 77.27% RSI2>50 4 6% 10%

757 6.06% 3.67 76.62% RSI2>50 5 6% 10%

816 6.03% 3.64 77.08% RSI2>50 6 6% 10%

808 6.75% 6.24 75.62% RSI2>70 6 6% 10%

751 6.55% 6.35 74.17% RSI2>70 5 6% 10%

948 6.41% 6.26 74.89% RSI2>70 5 5% 10%

977 1.87% 0 63.05% Day Trade 4 5% 10%

1,069 1.84% 0 64.27% Day Trade 4 5% 10%

850 1.84% 0 64.12% Day Trade 5 6% 10%

1. Up Close

The average gain per trade is lower than what we

have seen up to now. But the length of time in the

trade is extremely short. For those traders who do



http://www.affinitytrading.com/



STRATEGIES

52


The Self-Hedging Strategy

More often than not, private investors use the leverage effect of options or warrants for speculative rather than hedging purposes.

The classic way of using puts to hedge long positions and calls to hedge short positions is known to most investors. However, using

options to manage risk may also be done by simply using them as an alternative to direct investment with their leverage, though,

being used to limit risk rather than increasing it. Read for yourself how such a position does its “own hedging”, as it were.

» Some Basics

For the sake of simplicity, there is often no distinction

made in this article between options and their securitised

version, warrants. However, you should know the

following: While options are traded on futures exchanges

like the Eurex, warrants are products issued by banks that

can also be traded on conventional stock markets. While

it is the contract size that needs to be paid attention to in

the case of options, the exchange ratio is similarly relevant

to warrants. The leverage effect of options is caused by

the smaller amount of capital used when compared to a

direct investment. On the one hand, this leverage can be

used for speculative purposes, in which case investors

invest the entire earmarked amount in options on the

underlying asset rather than in the underlying.On the other hand, the leverage effect can also be

used to reduce the capital you invest, that is your risk.

Imagine buying only as many options as the number

of underlying instruments that you could buy with the

amount earmarked. You would then participate just

as much in the performance of the underlying as you

would if you had invested the full amount directly in the

underlying, but could invest the free balance elsewhere

while significantly limiting your risk of loss in the position.

Using put options for a short position allows you to avoid

any potentially unlimited risk of loss that would exist if

the underlying asset were to be sold short.

Examples

The following examples are designed first to illustrate the

strategy of using the leverage effect of options to reduce

your risk – compared to the purchase or short sale of the

underlying asset – rather than increasing it (versions 1aand 2a). This is followed by that strategy being compared

to a hedged direct investment in the underlying or a

short sale of the underlying (versions 1b and 2b). The

How to Trade Options Effectively



STRATEGIES

53

illustration is simplified by fees, commissions, and any

potential borrowing costs being disregarded.

Version 1a: Purchase of Call Options Instead of the

Underlying Asset

If you want to invest €5000 in adidas shares, for example,

you could buy 60 shares for that amount of money at a

price of €82.90. However, if instead you were to invest

the amount in call warrants on adidas with a 13-month

term and at a €65 base price, this would enable you to

purchase up to 2488 warrants at €2.01 each and an

exchange ratio of 1/10. So buying the warrants would

allow you to participate in the performance of up to 248

adidas shares, even though those €5000 would actually

enable you to buy just 60 shares.

Now if you only bought as many warrants as would

match the number of shares that you could buy with that

amount, you would reduce your risk by using the leverage

effect. So in that case you would buy only 600 warrants

at the exchange ratio of 1/10 and have the opportunity to

participate in the performance of 60 adidas shares, even

though you have only used €1206 instead of €5000. This

includes a premium of about three per cent per year. The

benefits are obvious: You can only lose €1206 instead of

€5000 and have the remaining €3794 available for other

investments to spread your capital more widely.

Version 1b: Purchase of the Underlying While Using Put

Options to Secure Your Position

The classic use of options is securing a position in the

underlying. So the amount of €5000 would initially be

invested here directly in the underlying, which means that

60 adidas shares would be bought at a price of €82.90. At

the same time, this long position would be secured by 600

put warrants at the exchange rate of 1/10. A put warrant

with a strike price of €82, that is at the money, costs €0.85,

which means that the hedging costs €510 for a period of

13 months. This represents a premium of approximately

ten per cent a year. However, price losses of less than €82

would be secured. So the maximum amount you will risk

is 60 x €0.90 (equivalent to €82.90 purchase price - €82

base price) + €510 (cost of the put options). So altogether

you could lose a maximum of €564, but a total of about

5500 euros would be tied up, namely the underlying

investment and options.

Version 2a: Purchase of Put Options Instead of ShortSale of the Underlying

If you anticipate falling prices, you could buy 600

put warrants at the exchange ratio of 1/10 instead of

Using the sample positions, the table shows profits and losses of the different

versions for the implementation of a long expectation at different stock prices

at the maturity of the options. Each position was created at a share price of

82.90 EUR.

Share price at maturity Direct Investment Version 1a Version 1b

50 EUR -1974 EUR -1206 EUR -564 EUR

82.9 EUR 0 EUR -132 EUR -510 EUR

110 EUR 1626 EUR 1494 EUR 1116 EUR

T1) Expectation: adidas to rise

Using the sample positions, the table shows profits and losses of the different

versions for the implementation of a short expectation at different stock prices

at the maturity of the options. Each position was created at a share price of

82.90 EUR.

Share price at maturity Short Selling Version 2a Version 2b

50 EUR 1974 EUR 1758 EUR 1452 EUR

82.9 EUR 0 EUR -216 EUR -468 EUR

110 EUR -1626 EUR -1242 EUR -468 EUR

T2) Expectation: adidas to fall

short-selling 60 adidas shares. At a base price of 100

euros, the options are far in the money and the buyer’s

premium is correspondingly low, about three per cent

a year. So at an exercise price of €2.07 you would only

invest €1242 and benefit from the price slump of 60

adidas share for a period of 13 months without being

exposed to the unlimited risk of loss of a short sale of

the shares.

Version 2b: Short Sale of the Underlying Asset While

Using Call Options for Hedging Purposes

In the classic version, a short position of 60 adidas shares

would be entered at a sale price of €82.90 and hedged

with call options. A call warrant with a strike price of €82,

that is minimally in the money – at an exchange ratio

of 1/10 – costs €0.87. 600 call warrants are required to

hedge the short position for 13 months, which means that

hedging will cost 522 euros, representing a premium of

approximately ten per cent a year. Losses incurred by the

short position at share prices of more than €82 would be

secured. So the maximum amount being risked will be€522 (cost of call options) - 60 x €0.90 (corresponding to

a sale price of €82.90 - a base price of €82). Overall, you

could lose a maximum of €468 here.



STRATEGIES

54


lower premium for the versions 1a and 2a is “bought”

by the options used being relatively far in the money.

While this effectively causes more capital to be risked

than is the case in the hedging-version options, there

is still far less capital invested than in the case of a

direct exposure to the underlying. Tables 1 and 2 show,

how each of the versions develops in various scenarios

when compared to a direct investment. For the sake of

simplicity, the tables are invariably based on the end of

the term of the options.

Conclusion

Basically, many investors are familiar with the possibility

of achieving a limitation of risk by combining a position

in the underlying with a hedging position in options on

this underlying. The purpose of this article, however, was

to prove that it is also possible for any risk to be limited

by exclusively investing in options – as an alternative to

the exposure in the underlying. The only prerequisite is

that the leverage effect of the options not be exploited

for speculative use, but – in keeping with leverage – for

reducing the capital invested. Compared to the direct

investment in the underlying – if necessary, combined

with hedging options – significantly less capital will

be tied up. The remaining free capital can be investedelsewhere. Indirectly, this diversification will lead to a

further risk reduction. Compared to the classic version of

using options to hedge a position in the underlying asset,

that strategy appears to be attractive. Instead of having to

make another hedging transaction alongside the original

trade, solely investing in options as an alternative to

direct investment already offers a “built-in” self-defence

– and does so at much lower cost and with less capital

tied up than is the case with hedging using at the money

options.

However, it should be kept in mind that in the

strategy presented by versions 1a and 2a more capital

will be risked than in the classic hedging model –

despite less capital being tied up. This is what traders

need to pay attention to in their risk management. In

addition, investors will have to forgo possible dividend

payments that will not materialise in a sole investment

in options without any investment in the underlying

existing alongside it. As with any investment in options,

it should, of course, be kept in mind that, unlike the

direct investment, this is a long term investment. So fora trade to be successful, the targeted performance of

the underlying needs to be achieved within the term of

the options. «

Alexander Mantel

Mr Mantel is a lawyer who has been studying

the financial markets since the age of 17. Whilethe focus of his interest is on derivative productsand new developments in the financial industry,he is always open to any interesting challenges.

[email protected]

Strategy Name: Self-hedging strategy

Investment Universe:All underlying assets for which options or

warrants are available

Trade Direction:Both long (with call options) and short positions

(with put options) possible

Time Horizon: Predominantly medium to long term

Setup:

First, a determination is made what amount ofthe underlying asset would be bought or sold

with a direct investment. Instead of opening the

position in the underlying, only so many options

are purchased as is necessary to have the

desired amount of the underlying

Entry:

Depending on personal approach, various

technical signals or even fundamental criteria

may play a role

Position Size:

Position size according to the amount of the

underlying to be covered; contract size or

exchange ratio of the options should be paid

attention to

Exit:Maturity of the options or previous liquidation of

the position when target price was reachedRisk and Money

Management:

Maximum loss is limited to the option price,

conduct risk management accordingly

Strategy Snapshot

Comparison

Versions 1a and 2a are characterised by low financing

costs in the form of a premium. They also have the

advantage of only one position being required to

be opened. The versions 1b and 2b correspond to

the classical hedging model. So they consist of two

positions – the direct investment and the hedging

position made up of options, which ties up additional

capital. Another drawback is that the cost, that is the

premium of the hedging position made up of at the

money options amounting to approximately ten per cent

a year, will lead to an unfavourable shift of the break-

even point since that premium is higher. So the price of

the underlying needs to move far more in the direction

wanted than is the case with versions 1a and 2a in orderfor the position to enter the profit zone. However, the



http://www.chartpattern.com/



STRATEGIES

56


The Volatility-Breakout Strategy

The cyclical progress of the volatility of financial markets plays

an important role for every trader. Especially the change of

phases of low movements (low volatility) to phases of strong and

unpredictable movements (high volatility) offers good possibilitiesto active market participants for opening positions. Of course it

is necessary to have a systematic approach to recognise such

situations. The historical volatility ratio can be of great help.

How to Enter a Trade Before the Big Move Starts

David Pieper

David Pieper is a CIIA and has been interested instock markets since the end of the Nineties. Heconcentrates on trading with CFDs and is a freelance author.

[email protected]



STRATEGIES

57

» The historical volatility measures the fluctuations of

an underlying stock within a certain period of time.

It provides information about the past fluctuations

based on the statistical value standard deviation,

where the fluctuation of a price around an average

value is measured. There will be extreme deviations

now and again to the upside or to the downside that

predict a reversal movement – a concept that is used

with the Bollinger bands. The glance in the rear-view

mirror alone offers no advantage for the trader – only

if you compare the current volatility, for example over

ten periods, with the long term “usual” volatility over

for example 100 days, you can make a statement, if

a stock is in a phase of unusually high respectively

low volatility. It is interesting to compare the two

periods of volatility to define clearly, what “high” or

“low” means. An established indicator is the so-called

“historical volatility ratio”, short HVR.

Step 1: Identify Low Volatility Ratios

This HVR key figure is especially

useful to determine short term

breakouts of volatility and

therefore it is the basis for a

trading strategy. We measure the

historical volatility of two different

periods and calculate it as a

quotient. If the short term volatility

differs strongly from the long

term volatility, the indicator will

increase or decrease considerably.

A strong increase of the volatility

ratio shows that the trading

ranges of the current periods are

considerably larger than those

measured over a longer period

of time. A strong decrease of this

ratio signalises the calming of the

trading ranges. The latter signalshall be the basis of our trading

strategy. A value of 0.5 or smaller

is in general a good threshold.

The historical volatility ratio shows the relation of the current volatility (ten days) to the long term volatility(100 days). If the indicator reaches a value of 0.5 it is a signal for an imminent breakout. From the end of April

to the beginning of May 2013 there were three signals for long trades (see marks).

Source: www.tradesignalonline.com

F1) DAX Hourly Chart with HRV (10/100)

Historical volatility – which means the realised volatility of

the past days and weeks – is measured in two different

time frames and calculated as quotient. If the short term

volatility differs considerably from the long term volatility,

the indicator will increase or decrease considerably. Our

strategy is implemented if a strong decrease of the ratio

signals a slow-down of the trading ranges.

Historical Volatility Ratio (HVR)

That means the current volatility is half of the long-

term volatility – a good sign that price dynamic may

increase shortly.

Step 2: Trade-Planning

If the trader has found an underlying with a low volatility

ratio he can plan the trade precisely. The direction of

the breakout cannot be predicted for sure in advance,

therefore the trader should place stop orders long and

The direction of the breakout cannot be predicted for sure in

advance, therefore the trader should place stop orders long and

short to profit from the coming impulse.



STRATEGIES

58


A useful additional requirement

prior to the entry of a trade is

an inside day respectively the

NR4-signal of Toby Crabel (more

information in classic strategies in

TRADERS’ June 2013). The latter

describes a candle that represents

the narrowest trading range of the

past four periods – another hint

that volatility may increase shortly.

If such a pattern occurs, the

probability of success will increase.

At the same time you can place the

stop wisely and that leads to an

improvement of the risk-reward

ratio. The glance at the higher

time frame chart should be done

as well to add possible support-

or resistance levels to the trade.

If you trade stocks you should

also consider important dates like

publication of quarterly figures.

You should protect your capital against false

signals and limit the risk. Therefore, it is important

that you place a stop-loss below the low of the

signal candle when buying. If your short signal wastriggered, the stop should be placed above the high

of the signal candle. If the trade runs into profit, you

should trail the stop to break-even first and then trail

it – as a suggestion – according to the general rules

of market mechanics on a lower time frame to protect

book profits.

Example DAX

Figure 1 shows the hourly chart of the DAX from 24th

April to 7th May 2013. Below the candlestick chart you see

the historical volatility with the settings 10/100 and the

threshold of 0.5 (red line) which is the signal line. During

the shown period there were three situations where the

short term volatility was only half of the long term one

– a good sign for a future breakout. Let us take a closer

look at the first signal on 24th April. After the 2 pm-candle

the HVR reached the signal level and therefore a breakout

was “in the air”. Therefore we placed a stop-buy order

above the high of the signal candle at 7710 as well as a

stop-sell order at 7675.

The glance at the lower time frame (Figure 2)shows, that the breakout took place shortly after wards

and therefore the long order was executed (Point

E). The big candle confirmed the buying signal and

The glance at the shorter time frame – trade 1 in Figure 1 – enables the precise stop placement during the

trade. After the entr y (E) the stop was trailed twice. We closed the position at the end of the trading day (A).


F2) DAX 10-Minute Chart

You can use tools like stockfetcher.com to enter individual screening filters torecognise attractive trading candidates. The picture shows the filter-code for

the HVR with the settings 6/100 and 10/100.

Source: www.stockfetcher.com

F3) Screening Results US Stocks (10th May 2013)

short to profit from the coming impulse. In detail this

means:

• Stop-buy above the high of the signal candle • Stop-sell below the low of the signal candle



STRATEGIES

59

therefore the stop (red line) could be trailed higher

at this time and the risk was considerably decreased.

After a short correction and the following new high

the stop was trailed again to secure a first part of

profit. We avoided the overnight-risk and therefore

the long position was closed at the end of the trading

day (point A) in profit.

Implementation with Screening Software

The strategy described here can be implemented with

the use of a screening tool. The trader has the possibility

with software like stockfetcher.com, to identify all stocks

or ETFs with a HVR of 0.5 or less with one click. Figure

3 shows the filter-code for the HVR, settings 6/100 and

10/100. Stocks that fulfil these requirements are displayed

automatically.

Conclusion

The trading strategy introduced here is neither new nor

complicated. The basic idea of the trading of breakouts in

price areas with low volatility is one of the most effective

methods. Because whether you trade in a short term

Strategy name: Volatility breakout

Strategy type: Momentum breakoutTime frame: Weekly, daily or hourly chart

Setup:HVR < 0.5 – that means an increased probability

of an imminent breakout

Entry:

Long: stop-buy above signal candle with HVR

< 0.5; short: stop-sell below signal candle with

HVR < 0.5

Stop-loss:Above (below) high (low) of the signal candle

respectively at support/resistance

Take profit:Close part of the position if 2 R is reached,

rest of the position with trailing stop

Trailing stop: Manually

Risk management: 0.5% risk per trade

Average number ofsignals:

depends on number of underlyings

Strategy Snapshot

Relative Rotation GraphsJulius de Kempenaer and Trevor Neil developed a unique tool that shows

the movement of many stocks both relative to a benchmark as well as

relative to each other. In other words, it gives traders a quick but still

sophisticated overview of relative movements happening on the markets.

There are four specific chart sectors allowing for convenient trade ideas.

Today, even Bloomberg offers Relative Rotation Graphs in their workstation.

The Wandering TraderMarcello Arrambide is a Daytrader who

travels the world. He has lived in ten

countries across four continents and visited

roughly 70 countries. He speaks about his

way of trading as well as the problems

that arise when trading on the road.

Preview of the next Issue

PEOPLE

The September issue of TRADERS´ appears on 29th August 2013.

Coverstory

period or you trade the daily chart – the change from silent

to turbulent phases is a basic principal at the markets and

offers good chances for active traders. Especially if you

watch a large pool of underlyings to find a signal. «

http://www.tradersonline-mag.com/
























BASICS

60


Part 2: Success Starts Inside

The Psychology of Trading

In the 03/2013 TRADERS’ cover story, Norman Welz, a leading expert in applied trading

psychology, described the basics for success in the stock markets. Here he continues and

observes other important effects that a trader need to be clear about. First he deals with

the importance of knowledge and how the selfish mind works. After a sidebar about the

disadvantages of trading-gurus, Welz eyes one’s weaker self and finally concludes that

learning to trade affords a change in personality.

Norman Welz

Mr Norman Welz is a trading psychologist atGodmodeTrader and is a fully-trained trader whoalso runs a private psychotherapy practice inHamburg. He is the producer of the “Better mind

Coaching Program for Traders” and the TRADERSTALK CD box of intervie ws. His book “TradingPsychology” has made him a best-selling author.

www.bettermind.de, www.godmode-training.de

» We Are Not Able to Do

Something That’s Not Part of Our Brain

The human being can only implement what is firmly

grounded in its neural network. One example: You are abusinessman and travel in China on business. Your mind

might say: “Oh yes, if I talk to Chinese business partners,

I should speak Chinese.”. But if you have not learned how



BASICS

61

to speak Chinese, you cannot do it.

You probably say now: “Sure.” But is

it really clear why? Because it is not

in your neural network. There are no

neural connections in your brain. You

have not learned to speak Chinese –

no vocabulary, no pronunciation, no

grammar.

The same goes for trading. You

are not able to do things in trading

that are not already available in your

brain (in the form of a brain cell): to

understand the relations between

time frames; to find wise reversal

points in the charts; to recognise

when it is pointless to follow a trend

(Figure 1); to notice if the risk of a

trade is higher than the reward and

to be able to estimate if you risk

more or less on one trade – and

much more.

A Thought Is like a Photo Flash

Many traders are convinced that it is enough to understandthings to be able to complete an action. But if that were

true, you would only have to read a good trading book

or attend an educational seminar and you would be a

trading professional. The objective relations of trading

can be understood within several weeks. Despite this you

continue to fail. Why is that? Because in general a thought

is only a momentary understanding. There is a little

current pulse in our brain, nothing more. It is like a photo

flash: It lightens the situation for a short moment, but it is

not enough to illuminate the environment permanently.

The Mind Is Selfish

The human ego is often deceived by this effect. We fail

in the practical implementation, thanks to our mind. Our

mind often pretends something that does not really exist

– it does so because it just can’t help it. The mind needs

a plausible and reasonable world, where it can exist in

a controlled manner. If that is not the case, it creates

this safe and meaningful world. Even if it is absurd – for

example continuing to buy stocks that lose in value. No

human being would buy more and more apples that rotaway just because they are getting cheaper. But people

follow this impulse in the case of stock investments again

and again.

What should you do in this 4-month chart of the stock of BMW ? Should you speculate on increasing prices

and follow the trend or protect your profit s and wait for a strong correc tion? Uncertainty influences the trader

again and again.


F1) Clear Trend, but…

The reason is that money equals existence in our life.And existence has the first priority in our brain. The less

value our money has, the greater the threat to our lives.

The mind automatically tries to compensate for this fear

impulse. Because the mind wants to have everything

under control and does not like uncertainty; it therefore

forces us to buy more and more stocks although it may

be completely wrong. The mind is convinced that it will

save us from death. It is absurd, but the selfish mind does

not care. It has the unconscious task to save us – and then

we can fulfil our most important task – to preserve the

human race.

If You Follow a Guru You Will Always Be a Copy

Most trading beginners imitate the actions of professional

traders by trading their stock market newsletters. This

way they try to get rid of the responsibility that comes

with trading the markets, but they fail to realise that they

are responsible the minute the trade is active.

Inexperienced traders often make the mistake that

they want to be smarter than the professional traders.

They trade their recommended trading signals butthen they are influenced by their own emotions and

thoughts. They take profits too early or miss trades

because they have another opinion of the market



BASICS www.tradersonline-mag.com08.2013

personality. That can be nearly as good, but most of the

time it is an inadequate copy.

One Thought Is Nothing

but Smoke and Mirrors – Not an Ability

If you want to change your trading behaviour, you

immediately encounter an inner opponent. This power of

avoidance is often called one’s weaker self. If you want to

change your behaviour or your personality, two massive

systems fight against each other: volition and ability. And

our mind is in the middle and creates one’s weaker self

to convince us that we are always the ones that make

the decisions. “Mistake” says the hedgehog and climbs

down the brush.

If you want to change familiar behaviour – even if it is

negative behaviour like smoking, drinking, gambling orbinge eating – but also cutting profits short – the brain

perceives it like someone knocking on your door and

saying: “Well, I really like your flat, please move out. I

want to live here now.” Of course we will not move out

(habit) only because the new one (mind) likes our flat.

There are other strategies necessary to reach the goal.

The same goes for unnecessary trading behaviour. If

you do not have enough discipline for a certain behaviour,

you do what you can do instead. Therefore you never

trade falsely but always the way you can. If you want to

improve your trading you have to control yourself: “How

do I behave and how do I want to behave?” For example

if you always let losses run, you need more than pure

brains. Because then everybody would say: “From today

on I trade like I have to to be profitable”. And then you do

it! But as already mentioned, a thought is not the ability

but only the thought. The ability is a verifiable part of our

brain in the form of brain cells. It is part of our body,

like an arm, a nose or feet. A thought is nothing –

smoke and mirrors. I am telling you explicitly: If you

do not have a certain ability in your brain, if it is notpart of your neural network, you do not have it. You

may have another ability, but doubtlessly, it will not

lead to success.

environment. They are not even aware that they then

trade a completely different system. Although it

may not seem that way, their active intervention has

a greater meaning. All actions that people take, are

based on their very personal experiences: things they

experienced, inhered, learned or thought. If you trade

the trading system of someone else you should know

that no two people are the same. You only have to listen

to amateur singers who interpret a song recorded by

someone else. It is the imitation of the original, because

the interpretation is always influenced by one’s own

If you do not have the ability to

let profits run, then it is not partof your brain and you cannot do it.



BASICS

63

If you do not have the ability to let profits run, then

it is not part of your brain and you cannot do it. The

pure intention that it would be wise

to do so to earn more money than

you lose, is not enough. It is that

simple and at the same time so

crucial!

Learning to Trade Means

a Change in Personality

If you ask yourself why trading

is so difficult, there is only one

answer: Because nothing in life is

more difficult than to change your

personality. If you want to change

your personality you need a very

good reason. Otherwise the old

habit has no interest in moving

out of the comfortable penthouse

in your brain. If you want to adapt

a new ability you need a lot of

time, patience, strategies and a

very convincing reason. Because

You should never cheapen a stock. The stock is not getting bet ter because price is getting cheaper.


F2) Solarworld in Free Fall

our brain changes as slowly as a supertanker changes

course. «




» In this trade I used the medium

term sentiment signals of the whole

market to build a pure call-write

position. I used the daily chart and

I calculated the market-breadth

indicators based on the stocks that

build the particular index as a whole.

In addition I used technical analysis

formations.

The Setup in the English Index

2013 is the year of new highs in

some of the most important indices.

Whereas the DAX and some other

indices built one new high after the

other, the English FTSE 100, called

“Footsie”, stays in a sideways range.

At the end of April the time has

come: The daily chart showed a so-called “W-formation” and the signal

line has already been exceeded.

The whole market showed a trend

BASICS

64


Trading Journal:Thomas Bopp

In our new feature “Trading Journal” traders – beginners

or professionals – present actual trades which taught them

something special. It is Thomas Bopp’s turn this time.

26th April 2013 – Call-Write Trade FTSE 100

F1) Sell of a Put on the FTSE 100

A W-formation in the index has to be confirmed by the sentiment. Only then do we get a signal based onthis technical setup. We sold a put with a strike price of 5950 points (green line) below the upper 80 0-days

envelope (blue line). The target was at 66 96 points.

Source: www.captimizer.de



BASICS

65

reversal to the upside based on the Advance-Decline-

Line, but the moving signal line (25 days) in the indicator

was not exceeded in order to trigger a signal. Only if the

sentiment indicator exceeds this line it is recommended

to build a position. On 26th April this signal occurred and

we got the green light in the FTSE 100.

The Trade

Call-writers earn money by selling options that most

likely will be worthless at duration. If such a signal occurs

you sell a put with a basis clearly below the current price.

Therefore it is an option “out-of-the-money” where the

price is only the time value. A put with duration until

the third Friday of July 2013 seemed like a good idea.

You received 51 points per ten pounds for this option.

You needed about 6000 British pounds as margin. The

ideal basis of this option was at 5950. Figure 1 shows an

800-days envelope (blue line) above this green line. If it

would have been a false signal, that would have been themaximum possible loss.

I used the general mirroring

technique of a W-formation to

calculate the minimum target in the

index. The FTSE 100 should rise to

at least 6696 points. As it has not

yet generated a new high of several

years, a sideways tendency was also

possible. But in any case the position

would have been a success because

of the daily time value loss – which

is good for call-writers. But the stock

markets looked bullish worldwide

and I speculated that there would

be a breakout in the FTSE 100. The

position was built shortly before

the weekend. Therefore the option

already lost a little in value until the

following Monday and I generated a

little book profit.

Target Outreached

On the following Monday the option

had already lost ten points or 100

pounds. The position developed better than expected

and was bought back for safety reasons on 23rd May at

the open for eleven points or 110 pounds. The reason

was the crash in the Japanese Nikkei index. At this time

the option had already lost 80 per cent of its value and

therefore the call-writer had achieved considerable

profits.

What about keeping the option? Not a good idea,

because the residual term of 50 days would have been

a considerably higher risk than the additional expected

gain. Figure 2 shows the strong down candle that caused

the doubling of the price of the option on this day.

Because of the the call-writer’s nearly unlimited risk you

have to take this candle into account – because you can

never know how far prices will fall.

We achieved very good results by closing the

position at the market open. We gained more than five

per cent – based on the necessary margin – within four

weeks. «

On 23rd May 2013 the Japanese Nikkei lost more than seven per cent, therefore the pu t-option was closed at

the open. We earned nearly 80 per cent of the premium.

Source: www.captimizer.de

F2) Open: We Bought Back the Option with Considerable Profit

Call-writers earn money by

selling options that most likely

will be worthless at duration.



BASICS

66


Common Indicators in Meta Trader – Part 2

The Trader’s Technical Arsenal

Following part 1 of the series titled ‘Common Indicators in the Meta Trader’ (TRADERS´ 06/2013),

Part 2 discusses the Average Directional Movement Index (ADX), the Average True Range (ATR), and

the Awesome Oscillator (AO); as they work in Meta Trader, which continues to increase in popularity

(especially version 4.0). In most cases, the indicators’ default parameters are used.

» The Average Directional Movement Index (ADX)

Created by Welles Wilder and introduced in his book

called “New Concepts in Technical Trading Systems”

(1978), the ADX then looked futuristic and has now

been tested and trusted. In the book a number of other

important indicators were featured. The ADX was created

to play the commodity markets, but it can also be used

successfully in stock and currency markets. By clicking on

the settings of the indicator, you are able to change some

colours and parameters to your taste. The ADX line itself

shows the strength of a bias, without giving emphasisto the direction of the bias. For example, if the ADX line

is moving above level 30, it shows that the current bias

is getting strong. So any readings above levels 40, 45,

50 et cetera show a very strong bias. Since trendless

markets are often unfavourable to those who follow the

line of the least resistance, it would be wise to stay off a

market when the ADX line is below level 30. This is how

we are spared from the ordeal of the consolidating prices.

Although when the ADX line goes towards level 55 or 60,

there may be a temporary pullback in the extant bias.

There are two other lines in the indicator called

Positive Directional Indicator (+DI) and Negative

Directional Indicator (-DI). It just happens that, when the

+DI is above the -DI, it indicates the supremacy of thebulls, whereas the -DI situated above the +DI indicates

the supremacy of the bears. This means that while the

ADX line can be used to determine the stamina of a bias,



BASICS

67

the situation of the +DI and -DI can

be used to determine whether to go

long or to go short.

For you to harness gains from

the events that move the markets,

it is not mandatory that you are

aware of the reasons behind all the

events. It is like the more you are

aware of them, the worse off you

are. Ultimately, the price direction is

what matters, not what we feel may

happen. In any case, let us examine

two important uses for the ADX.

Example 1: In Figure 1, you see

how the ADX is used as a complete

trading system on the GBP/JPY

4-hour chart. The ADX period 14 was

coloured blue, while the +DI green

and the -DI red. Please pay attention

to that chart; you would see that the bias is strong

whenever the ADX line is above the level 30 or more.

In addition, you would notice that the market is coming

down when the -DI is above the +DI, and vice versa. You

would have noticed that the most favourable positions

would have been taken when the ADX line is above level

30 while there is a ‘sell’ signal or ‘buy’ signal as given bythe positions of the -DI and +DI. It is noteworthy that there

is not much movement whenever the ADX line is below

the level 30.

Example 2: Another way of using the ADX is to

confirm what the other indicators are saying. In this

example, we examine the use of

the ADX with a Moving Average.

In Figure 2 (on the same GBP/JPY

4-hour chart), the 20-period Simple

Moving Average is used. Basically,

a bullish bias is assumed when the

price crosses the SMA 20 (colour

red) to the upside, and a bearish bias

is assumed when the price crosses

the SMA 20 the downside. Looking

at the chart, you would see when a

trade signal could be taken and when

it should be ignored, considering all

the above rules.

The Average True Range (ATR)The ATR was introduced by Welles

Wilder, and it has become a valuable

indicator since then. One needs

You can see how the ADX is used as a complete trading system on the GBP/JPY 4-hour chart. T he ADX period

14 was coloured blue, while the +DI green and the -DI red. You see that the bias is strong whenever the ADX

line is above the level 30 or more. In addition, notice that the market is coming down when the -DI is above

the +DI, and vice versa.

Source: www.metaquotes.net

F1) The ADX as a Complete Trading System

Another way of using the ADX is to use it to confirm what the other indicators are saying. In this example,

we examine the use of the ADX with a Moving Average. Basically, a bullish bias is assumed when the pricecrosses the SMA 20 (colour red in chart above) to the upside, and a bearish bias is assumed when the price

crosses the SMA 20 the downside.


F2) The ADX Used to Conrm the Signals on the SMA

to note that the ATR gives an indication of the market

volatility rather than the direction. This means that, unlike

Moving Averages and the ADX, the ATR only showcases

the intensity of the current volatility, rather than showing

whether the main trend is bearish or bullish. Significant

biases in the markets tend to come with significant

ranges (or significant True Ranges, hence the indicatorname). The ranges tend to become narrow in noiseless

markets. Therefore the ATR gauges the significance of a

bias – giving a range increase during an extremely volatile

bullish outbreak or a range increase during an extremely

volatile bearish outbreak.



BASICS

68


above the prior period’s high and

the low is below the prior period’s

low, then the current period’s high-

low range will be used as the True

Range. This is an outside day that

would use Method 1 to calculate the

TR. This is pretty straight forward.

Methods 2 and 3 are used when

there is a gap or an inside day.

The default parameters of the

ATR on the MT4 is usually period 14

(14 days on daily chart or 14 candles

on a lower time frame), plus we can

see how a default ATR looks on the

GBP/AUD 4-hour chart. Please see

Figure 3.

The Awesome Oscillator (AO)

For the sake of simplicity, this controversial indicator

will be explained in the simplest possible manner, for if

the details of the AO indicator are conveyed as they are

documented in highly technical trading jargon (which

would appear ostentatious to beginners and certain

advanced traders), they may fail to achieve our desired

ambition – which is to make every trader understand the

signals generated by the indicator. Like most indicators,the Awesome Oscillator simply generates long and

short signals. The AO has a bar graph of green and red

bars, with a zero line. Looking at the Figure 4, you would

see the AO on the AUD/USD daily chart, with default

parameters, just as they are in the MT4. When you move

your chart forwards, you would see

how the indicator shows long and

short biases.

Here is the computation for the AO:

It is a Simple Moving Average (SMA)

period 24, plotted through the central

points of the bars (High + Low) / 2,

and subtracted from the SMA period

5, graphed across the central points

of the bars (High + Low ) / 2.

MEDIAN PRICE (MP) = (HIGH+LOW)/2

AO = SMA(MP, 5) - SMA (MP, 34)

The Awesome Oscillator under FireThe AO indicator has come under

fire by its critics. Detractors say that

it is just another indicator, and so

The default parameters of the ATR on the MT4 is usually period 14 (14 days on daily chart or 14 candles on a

lower time frame), plus we can see how a default ATR looks on the GBP/AUD 4-hour chart.


F3) The Default ATR on the GBP/AUD Chart

Like most indicators, the Awesome Oscillator simply generates long and short signals. The AO has a bar graph

of green and red bars, with a zero line. Here, you would see the AO on the AUD/USD daily chart, with defaultparameters, just as they are in the MT4. When you move your chart forwards, you would see how the indicator

indicates long and short biases.


F4) The Awesome Oscillator on the MT4

The True Range

The True Range is described as being the most significant

of the methods below:

• Method 1: Current high less the current low

• Method 2: Current high less the previous close (total

value)

• Method 3: Current low less the previous close (total

value)

Total values are useful for positive numbers, for the

creator of the ATR initially had it in mind to measure the

distance between two extremities not a directional bias.

According to one study, if the current period’s high is



BASICS

69

Azeez Mustapha

Azeez Mustapha is a trading professional, anofficial analyst and representative at InstaforexCompanies Group, a blogger at ADVFN.com, and

a freelance author for trading magazines as wellas a provider of trading signals at a number ofwebsites.

[email protected]

there is nothing awesome about it. But we should not

forget that it is just an indicator, and it may be more

sensible to combine it with other technical factors/

indicators when using it. When your trade has sensible

positive expectancy incorporated into it, it makes you

smaller losses during losing periods and larger gains

during winning streaks. The chance that a trade would

move in your favour is never 100 per cent, so when you

include positive expectancy with the AO, you have a

huge edge. When you are given an equal chance to face

negativity and positivity, you will come out victorious

if you capitalise on your positivity and truncate your

negativity. By effectively controlling risk and using

safe position sizing method, so that losses do not have

catastrophic effects on you, you are far ahead of most

traders, if you are disciplined enough when using the

AO.

Conclusion

Doing something different than what you see on the chart

is suicidal. There is no certainty. This is why technical

indicators are probabilistic in nature, for events only

push prices in the direction of the indicators or contrary

to the direction of the indicators. Do you have to be able

to predict the future with an utmost certainty before

you can open a position? The more you think like this,

the worse off you are. The logic is to capitalise on your

positivity.

With the indicators described above, you can have

some profits (which, however, do not always come). But

when profits do come, you make the most of it, and when

profits do not come, you take control of the situation.

Negativity is part of any business whatsoever, not trading

alone, and it should be seen as an experience that can

bring out the best in you. Positivity will inevitably follow

negativity. «

http://goo.gl/4Z2C8



PEOPLE

70


The Pro’s Process

In this series we are asking Pro Traders about their psychological processes. Delving a little into how

it feels to them when trading. The good and the bad. How this has changed over time and what

preparation they do mentally for performing as a trader. One of the key features for us was that we

wanted traders with experience who have been through the mill over the years and of course, we

appreciate those who were kind enough to broach this subject publicly. We hope this gives developing

traders more to learn from. Each interview in this series was conducted by Richard Chignell who is

himself a trader. Please visit his blog at http://embracethetrend.com.

Part 11: Gregory W. Harmon

» Hometown: Born Basking Ridge NJ,but living in Shaker Heights, Ohio (outside of Cleveland)

» Interests: Outside of trading, family, wine, golf

» Trading Style: Top Down Technical Trader with a focus on Options

» Website: www.Dragonflycap.com, www.presidiumcapital.com

arbitrage type trades, repurchase agreements versus

commercial paper all over night and took over seven

years before moving to equities.

Richard Chignell: What style of trading do you practice?

Harmon: I am a top down technical trader. So I start with

identifying the trend and then look for how inter-market

activity can influence that trend. With a grasp of the big

picture I then search for technical set ups within myuniverse of about 1000 names. When I see something

very interesting I then determine whether to play the

trade in the stock or in options.

I am CMT, CFA, and founder of Dragonfly Capital Management, LLC providing dailytrade ideas, technical analysis of securities markets and consulting services to themarketplace, and I’m Chief Investment Officer at Presidium Capital. Prior to that I traded

in the securities markets since 1986. I have held senior positions including Head of GlobalTrading, Head of Product Development, Head of Str ategy, and Director of Equity andPortfolio Swaps Trading at Chase Manhattan, State Street Corporation and BNP Paribas.I earned an MBA in Finance from NYU Stern School of Business and BS in MechanicalEngineering from Cornell University.

Gregory W. Harmon

» Richard Chignell: How long have you been trading?

Harmon: I have been trading one way or another since

1986. I started with very short term money market



PEOPLE

71

Richard Chignell: How do you feel when a trade goes

against you?

Harmon: It sucks when a trade goes against me. Like

every trader I know, I never want to be wrong. But of

course I am wrong a lot.

Richard Chignell: How do you feel when a trade goes

for you?

Harmon: When a trade goes as good as could be hoped

for it is a great euphoric feeling. I would expect that most

traders feel this way, too.

Richard Chignell: How have these feelings changed

over your trading career?

Harmon: Now this is the crux of the matter. Early on

losing trades would be brushed aside and winners

would have me puffing up my chest like I could do no

wrong. This had a lot to do with the market I was tradingin the late 80’s. As the market got more complex,

trading equities and derivatives, losses, especially a

streak, could really get me down. I would sometimes

feel that maybe it was time to stop and move away

from it for a while. Wins would still help to inflate an

ego. Now 26 years in I know that losses can be learning

experiences and should be studied, even if only for a

few minutes, but then let go. You cannot let them be

an anchor around your neck and give you any doubt at

all about whether the next trade will be successful or

not. Yes they still suck, but next, move on. Wins still

feel great but with age I realise that they come from

preparation and sometimes luck. I am not some great

invincible being but take the time to be ready for what

the market presents.

Richard Chignell: Do you have any practices that you do

away from the trading screen to help you mentally and

emotionally handle trading?

Harmon: Really just recharging the batteries. I like to

spend time with family. What my five and seven yearold children see in the world and how they learn and

experience life can show you the proper context for

trading within your life and reset the emotional faculties.

Richard Chignell: Have you always done this?

Harmon: No, prior to the kids it was going out with co-

workers and friends and talking about other things,

playing sports or working out. You adapt your coping

mechanisms as your life circumstances change.

Richard Chignell: If not, how have you learnt to deal

with the feelings that come up when trading?

Harmon: Added time doing the same thing also allows

you to recognise the same wins and failures and takes a

bit of an edge off of them. Repetition and experiencing

the same things over and over is a good thing.

Richard Chignell: Can you describe a time in your

trading life which really rammed home the point that so

much of trading comes down to psychological factors?

Harmon: For me it is a matter of a slow realisation through

experience. Not a break through moment. Recognisingpatterns and then dealing with them works in trading

charts but also helps in the way that you move through life.

Richard Chignell: If you could give aspiring traders one

piece of advice about emotionally handling the market

what would it be?

Harmon: Wake up every day prepared for the market with

your analysis as well as with a good clean mental state.

If you cannot come into the day ready to accept both

winners and losers and then move on, then do not go to

work that day or do not trade.

We’d like to thank Greg Harmon for sharing the way he

tackles the market from an emotional/mental side of things

and for his willingness to allow us to post this as a free

resource in the hope that traders who have been in the market

for less time or are thinking of entering can perhaps pick up

some A-HA’s.

If you are interested in finding more out about Greg

Harmon you can find him:

» On twitter: @harmongreg

» At his firms website: www.Dragonflycap.com,

www.presidiumcapital.com «

Recognising patterns and then dealing with

them works in trading charts but also helps

in the way that you move through life.



PEOPLE

72

www.tradersonline-mag.com 08.2013

Ralph Acampora

Godfather of Technical Analysis

Ralph Acampora launched the Market Technicians Association (MTA) about 40 years ago and was also the founder of the

International Federation of Technical Analysts (IFTA) whose members today include the Association of Technical Analysts

in Germany (VTAD). Ralph Acampora boasts nearly 50 years of market experience and has witnessed many a bull and bear

market during this time. And it is this very experience that is invaluable when it comes to correctly interpreting the recurring

cycles of the stock market. To this day, Ralph Acampora teaches at the prestigious New York Institute of Finance. He is alsoManaging Director of Technical Analysis at Altaira, a Swiss wealth-management firm. Marko Graenitz has interviewed Ralph

Acampora over the telephone, talking to him about his career and the nature of his analyses as well as his assessment of the

market. This is a very special interview with one of the living legends of technical analysis. Enjoy!



TRADERS´: Mr Acampora, many technical analysts

have pursued different careers before as you yourself

have done. Can you describe to us what caused your

attention to be drawn to the markets?

Acampora: Yes, my original career path was quite

different, and I actually ended up in the markets just by

chance. I had been a student of history and theology and

would certainly have chosen a different profession if it

hadn’t been for a serious car crash I

was involved in at that time, which

was pretty much exactly 50 years

ago today. Sometimes your worst

experiences in life turn out to be the

best in the end. And so it came to

pass that I learned a great deal about

Wall Street during my 3-month stay

in hospital. A certain Mr Downey had

introduced me to a good surgeon to

operate on me. Mr Downey regularly

visited me in hospital, each time

bringing along his financial-market

research, which I found intriguing

and went on to study meticulously.

It was so exciting that I decided to

apply for a job in finance.

TRADERS´: Did you actually

manage to land a job in that field?

Acampora: Well, I had no experience

whatsoever – except for what I had

read in Mr Downey’s research. I

vividly remember talking to the head

of the research unit of a fund company

PEOPLE

The Dow Theory was developed by the American economist

Charles Henry Dow and provides the theoretical background

for trend lines and trend channels. Dow defined a trend

as a market movement that clearly pointed to a certain

direction. Basically, there are three possible trends: uptrend,

downtrend, and sideways trend. Depending on the time

frame, several – possibly opposite – trends can be shown to

exist in any index or security. The long term trend is referred

to here as the primary trend, which may last for a year or

longer. Within the primary trend, secondary trends may

occur which are usually estimated to last for a period of up to

three months. Tertiary trends are short term and only last for

a week up to a maximum of one month.

Dow Theory

According to the Dow Theory, the transport index must confirm the signals of the Dow Jones for a clear trend

to exist. For a while, it may also work without confirmation as it did, for example, in 2012: Here, the Dow Jones

(upper chart) formed an upward trend, which was, however, not confirmed by the transport index (lower chart)

for a long time. Instead, the entry price in the Dow Jones in this case was lower for long positions than it

would be if one were to wait for the actual confirmation. So traders and investors are sometimes faced with

a trade-off between the reliability of the signal and the price potential.


F1) Dow Jones and Dow Transportation Index

during a job interview. He told me to do an MBA at a

university first and then try again. I was very disappointed

to hear that and it looked as though my lack of formal

qualifications kept me from achieving my aspirations.

TRADERS´: What happened then?

Acampora: I refused to give up and went on to read all

sorts of job adverts. Finally, I saw an ad where an analyst



PEOPLE

74


was wanted – with no prior knowledge required. And I

got the job, which was at a small fund company. My tasks

included 50 per cent fundamental research and 50 per

cent technical analysis. Since I had no experience, they

first gave me a book to read which was Edwards and

Magee’s classic “Technical Analysis of Stock Trends.” Iread the book, which was how I picked up the basics.

TRADERS´: What was your job as a technical analyst?

Acampora: Primarily, technical analysis meant collecting,

recording, and evaluating price-related data, which was

still rather laborious at that time. However, studying prices

intensively enabled me to develop a better feel for the market.

TRADERS´: How important, do you think, is technical

analysis now compared to fundamental analysis?

Acampora: I do both and call it “fusion analysis”. Strictly

speaking, it is actually a combination of macroeconomic,

fundamental, quantitative, and technical analysis.

TRADERS´: Can you describe that in more detail?

Acampora: I believe that any professional and meaningful

analysis needs to include all four components. I always

start out at the macro-level, which means that I look at the

national economy as a whole. You do not have to carry

out each of these analyses yourself but can instead draw

on existing analyses conducted by experts. In any event,

the important thing is the interpretation of the relevant

research. The second step to take is fundamental analysis.

This is all about checking to see what the valuations are,what the management of a company is doing and how

the individual products are positioned. The whole thing is

then put into context by quantitative

analysis: What impact do which

fundamental data have, historically

speaking, and what are the most

likely scenarios? There are a lot of

statistics here that you can analyse.

Finally, there is technical analysis

which I always carry out last because

it is there that I want to see the results

of the first three steps confirmed – if

the technical side does not fit into

the picture, I will stay away from the

investment.

TRADERS :́ Do you know of any

example where analysts clearly

contradicted each other?

Acampora: A particularly glaring

example of such a contradictionoccurred when Enron saw its price

plummet when the New Economy

bubble burst. Virtually every

Most recently, Ralph Acampora has been neutral on gold. Since the slump in April, gold and silver have ceased

to be long candidates for him since the technical-analysis picture has clearly deteriorated.


F2) Gold: Avoid Positions

Phase 1: Disbelief and Fear: The early phase of a bull market

is characterised by most market participants – if they invest

in shares at all – much preferring to put their money on

“safe” quality stocks (blue chips).

Phase 2: Belief and Trust: Rising share prices attract

investors. Trust builds up causing minor stocks and previous

laggards to take off.

Phase 3: Complacency and Greed: “Easy profits” onspeculative and risky stocks dominate, the fundamental

valuations rise significantly, and there’s euphoria.

The Three Psychological Phases in Every Major Bull Market



PEOPLE

75

In retrospect, early January was a very good time to be

bullish on stocks. Ralph Acampora was one of the few

people to anticipate this at that time. On 9th January, he

posted 11 reasons on Twitter that made him feel very bullish:

1. The March 2009 low was and is a generational low –

just like the Oct/Dec 1974 bottom. We will work our

way irregularly higher.

2. NYSE breadth is at all-time new highs. The majority of

of stocks are doing very well.3. With close to 50 years’ experience I have never seen so

many people, so negative on the stock market, for so

long.

4. The market has doubled since its 3/09 low and there is

still trillions of dollars on the side lines. This is more fuel

for the bull.

5. The 10-year yield broke above 1.9 per cent recently –

the bottom in yields is in and the air is slowly coming

out of the bond bubble.

6. Rotation is the life-line of every bull market. The long

overlooked financials are leading – this is very bullish.

7. Most markets around the world are doing well despite

local problems. Negative news has been largely

discounted.

8. China has bottomed – it will help power the global

recovery; and Japan is boosting its stimulus.

9. The European bellwether – the DAX – is about two per

cent away from an all-time new high. That has to be a

fantastic omen for Europe.

10. Like the late 1970s, the “Street” is contracting because

the equity market is out of favour with the public. Don’tfollow the herd.

11. And lastly: “Don’t Fight the Fed”. We all have a vested

interest in a strong stock market.

Many of these things continue to be valid. By now, Ralph

Acampora assumes that the bull market has moved into its

second phase – after the “safe” blue chips had first risen

significantly, mid-and small-cap stocks have followed suit

most recently. So investors are becoming more tolerant of

risk. “Corrections or even minor bear markets that might be

in the offing represent buying opportunities,” he wrote on

9th January 2013. And he was right.

9th January 2013 – 11 Reasons Why Ralph Acampora Is Bullishfundamental analyst had a “buy” recommendation

for the stock, but it rapidly slid more and more to rock

bottom. From a technical perspective, the stock was a

clear “sell” recommendation. Only shortly before Enron

went bankrupt did some fundamental analysts change

sides – much too late. And when Citigroup crashed during

the financial crisis, something similar happened.

TRADERS´: What steps do you subdivide your

technical analysis into?

Acampora: You need to keep things simple. Price

is always the most important thing. Nothing has a

higher priority for me. My further analyses are based

on the Dow theory and the trend analysis of the major

markets. In the case of stocks, I analyse the ten major

sectors of the S&P next and then the subgroups right

down to important individual stocks. I will also look at

inter-market relationships and analyse how the markets

interlock and whether everything there is above board

or whether there are any distortions emerging. For

my trend analyses, I use trend indicators like Moving

Averages, the MACD (Moving Average ConvergenceDivergence) and the RSI (Relative Strength Index) –

usually on a weekly basis in order to get a clear picture.

I think that analyses that are more short term are more

confusing to most people and of no value. Depending

on market conditions, however, I will also look at daily

charts.

TRADERS :́ Do you also analyse volatility?

Acampora: Sure. The VIX volatility index is an excellent

market barometer. Many think that low volatility levels

are a sign of a possible slump, but I see that differently:

To me, low VIX levels are bullish since they can stay low

for a long time, signalling a good investment climate.

It is different with high volatility levels: If the VIX goes

up by leaps and bounds in a crash, the bottom often

is not far off. A good example of this was provided in

August 2011: When the VIX had risen above 40, people

desperately turned to me asking whether price losses

would ever come to an end. My answer was that the VIX

historically had only very rarely reached such levels

and that the bottom was highly likely to be approachingfast. And that is exactly how things turned out to be.

Only in 2008 did volatility levels climb significantly

higher.



PEOPLE

76


difficult years on the stock market,

people found it impossible to believe

that we had a new bull market. And

hardly anyone was fully invested –

just like today. I think that the initial

phase – that of fear and disbelief – is

already a thing of the past since the

new all-time highs and that we have

moved on to Phase 2. In early May, I

was interviewed on the US television

station CNBC. I was asked by the

presenter what I would expect now

that my target of 15,000 points for the

Dow had been achieved. I said that the

Dow would now be headed towards

20,000 points, which caused the

presenter to look a little surprised. But

that’s exactly what usually happens in

a bull market. However, Phase 2 is only

just starting because trading volume is

still low, only at about half the level of

previous peaks. This indicates that the

vast majority of market participants

continue to not be in on the action. And there is a similar

situation in other countries of the world. For example,

Germany or the DAX, is the engine in Europe, and it’s doingvery well – just as a Mercedes would (laughs).

TRADERS´: Are there any other

signs to indicate that the first phase

of the bull market is already over?

Acampora: Recently, “safe” stocks

with high dividend yields have

been shown to underperform, such

as utility stocks, for example. This

shows that investors are already

becoming somewhat less risk-

averse, which is a sign of Phase 2

TRADERS´: Is it also possible

for the bull market to get out of

control?

Acampora: In theory, this would

be possible. Since so many big

investors are not in on the action,

fund managers, for fear of losing

their jobs, may well be swiftlyentering the market in a big way. That

in turn could trigger a buying panic,

but this is anything but healthy for

The 1-year chart shows the development of the ET F on the financial sector (symbol: XLF), which is in a clear

uptrend. Most recently, the situation was highly overbought in the wake of the ever steeper rise, which

increased the risk of pullbacks.


F3) Daily Chart of US Financial Sector

The monthly chart of the E TF on the financial sector (XLF) confirms the long term bullish assessment by Ralph

Acampora and puts the overbought situation of the daily chart in Figure 3 in perspective. The latter hererepresents the last twelve candles which produced the successful breakout from a multi-year consolidation.

According to Acampora, larger pullbacks along the way are to be interpreted as buying opportunities.


F4) Monthly Chart of US F inancial Sector

TRADERS´: You have been very bullish since early

2013. What is your current long term assessment?

Acampora: We are in a major bull market. Psychologically,the situation is the same as after 1982: After so many



PEOPLE

77

the market. I hope that we will not be

experiencing anything like that.

TRADERS´: Do you only analyse

long opportunities or would you

also enter into short positions?

Acampora: Sure, if that is what my

analyses require me to do. Primarily,

I would then short individual stocks.

TRADERS´: How do you see other

markets, such as gold, silver, or oil,

for example?

Acampora: Gold and silver have

been struggling since the slump in

April. I’m currently inclined to be

neutral, but would not recommend

any long positions. The same goes

for oil, which is in a sideways trend.

Here you just have to wait and see at

this point in time (as of 28 May 2013).

TRADERS´: How do you invest in

the markets of the world that you think are attractive?

Acampora:ETFs today are a great way of doing this. These

products have really made it easy to invest globally.

TRADERS´: Do you also use ETFs

for sector analysis?

Acampora: Yes, and I have two fine

examples of that. The first is the

financial sector or the corresponding

ETF with the symbol XLF (Figure 3).

The daily chart is clearly overbought.

But that does not change my long

term bullish assessment. If we look

at the monthly chart (Figure 4),

we can see that there was a clean

breakout from a huge base. There is

no evidence of any large tops on the

monthly chart, quite the opposite.

Every major pullback should be

viewed as a buying opportunity.

TRADERS´: That’s an unequivocal

statement. What’s the second

example?Acampora: The monthly chart of the

technology ETF (symbol: XLK) shown

in Figure 5 reveals a solid performance.

The chart shows the development of the ET F on the technology sector (symbol: XLK). While the sector has not

outperformed the market recently, it has consistently been on the rise for quite some time – most recently

with new 10-year highs, which have moved a long-lasting base upwards.


F5) Monthly Chart of US Technology Sector

In late May, the closing price of the Veeco stock marked a new high on the daily chart (see top mark). This

was confirmed by the breakout from the large base, which had developed since early 2012. The share is anexample of a stock that until very recently was at t he very top of Ralph Acampora’s watch list. The upward

trend was confirmed with pullbacks representing buying opportunities.


F6) Breakout at Veeco

While the sector has not outperformed the market recently,

it has consistently been on the rise for some time – most

recently, the sector has made new 10-year highs, alsoleaving a long-standing base by moving upwards.



PEOPLE

78


Acampora: One part is science and one part is art. And

the art part is to find the right interpretation. But you

can always rely on price, which is a fact that will not

be changed in hindsight (unlike earnings estimates or

sometimes even corporate-earnings figures that have

already been reported). The price just keeps pricing in

information and expectations of the future, which makes

it the ideal construct to analyse the strength of the buyers

vis-à-vis the sellers.

TRADERS´: Do you have an example of such an

interpretation?

Acampora: Let’s look at the last few months or even

years. Time and again, we get a wave of bad news on

several fronts, but the markets still go up. If bad news

does not bring the market down, then that is good news.

This is a very classical interpretation. There will be good

times at some point in the future, and that is already being

anticipated now. Five or maybe eight years from now,

the US could be independent of oil and perhaps even be

promoted to being an exporter of natural gas. President

Obama has already laid the foundation for this. Such

things are so-called game changers that today nobody

talks about yet but that create

completely new opportunities.

TRADERS´: How important is the

concept of relative strength?

Acampora: The markets are driven

primarily by the institutions.

Especially for funds, it is important

to outperform. But if those funds are

behind on the benchmark index, they

are going to have a problem since

customers will be withdrawing their

funds. The upshot then is that, more

often than not, especially markets

that have gone up significantly will

again be bought widely – by investors

who had missed the movement. This

may again fuel the relative strength

of this market for some time to come.

TRADERS´: Do you also use stop

prices for your investments?

Acampora: Yes, from a certain level

on I need to exit, which is what Ihave mental stops for. However, it

all depends on which investment is

involved and what time level time

This shows the development of the yields on 10-year US Treasuries over the last five years. Ralph Acampora

believes that the most recent increase above the two per cent mark could have confirmed the turnaround ininterest rates. That would mean that the huge rally in the bond markets that has been going on since 1982 is

coming to an end and that yields will go up again in the long run.

Source: www.bigcharts.com

F7) Has the Big Turnaround in Interest Rates Already Materialised?

TRADERS´: So the big decisions are ultimately always

made on the basis of the long term charts, aren’t they?

Acampora: Yes, they are. In the short term, there is

a lot of market noise and confusion. In view of that,

it is tremendously helpful to take a step back and

look at the long term charts. And that’s what I would

recommend to anyone who doesn’t know where to go

on the markets and who is looking for guidance. And

if you do that – looking at a monthly chart of the stock

market –, you will know where things are most likely

to be headed.

TRADERS´: But such simplistic approaches are rarely

discussed in the media.

Acampora: The problem is that it’s always easier to

talk about problems and scare people since this causes

the media to be more present amongst the people. It is

perfectly natural for threats to be perceived more widely.

This is one of the reasons for ignoring the media as much

as possible and relying on your own analyses.

TRADERS :́ So technical analysis is something you can

count on, isn’t it?



PEOPLE

79

I trade at. More often than not, for example, pullbacks

in an uptrend – that we can currently witness in stocks

– represent additional buying opportunities where I can

further increase my position.

TRADERS´: What’s the maximum amount you would

use from your investment capital to invest in a position?

Acampora: Again, it depends on the situation but ten

per cent would certainly be a very large position which I

might describe as an upper limit.

TRADERS´: Can you remember any analysis that you

are upset about in retrospect?

Acampora: Yes, absolutely. Prior to the crash of 1987,

there was an article in Barron’s where several analysts

were being surveyed. Some said that they expected a

crash. I wasn’t quite as bearish as that and spoke of an

early correction. I now wish I had been more bearish at

the time since that could well have been deduced from

the analyses. “Correction” was clearly the wrong word to

describe what followed.

TRADERS´: Which of your analyses do you remember

that was particularly successful?

Acampora: In June 1995, the Dow was at 4500 points

(Figure 8) and I published a 58-pageresearch report where I suggested

that a rise to 7000 points would be

possible. Over the short term, this

was received with a great deal of

ridicule, but in February 1997 that

target was reached and prompted

my then employer to give me a red

Corvette, which I had always wanted

to have.

TRADERS´: Not a bad reward!

Where did you get the idea that the

Dow might go up that much?

Acampora: The entire analysis was

based on a conversation I had with an

investor by the name of Ken Wood,

who was 85 years old at the time

and had practically seen every bull

and bear market of the 20th century.

I asked him what his most difficult

time had been and I thought he wouldanswer by mentioning the Great

Depression after 1929. But instead

he said that the years from 1963 to

1965 had been the most difficult. The reason he cited was:

During that time, the markets were overbought all the time

without forming a real correction. And that’s exactly what

it seemed to look like in early 1995, which then made it

possible for me to come up with this bullish interpretation.

Who knows, maybe it’s the same again this time.

TRADERS´: When you look back on your successful

career, what are you particularly proud of?

Acampora: In those days when my friend John Brooks and

I laid the foundation for MTA, technical analysis enjoyed

as little recognition as voodoo. I knew that this would

change at some point, but did not think that I would live

to see it. I am particularly proud that we have managed

to establish the Chartered Market Technician (CMT) as an

alternative to the classical CFA certificate – and also of the

fact that the SEC officially recognised that qualification in

2005. That was really a major breakthrough for technical

analysis. Unfortunately, the IFTA refused to follow suit

because they had fallen out with the MTA internally. But

I am confident that this old dispute will be settled in the

future. After all, technical analysts need to hold together

(laughs).

The interview was conducted by Marko Graenitz “

In June 1995, the Dow was at 4500 points (see arrow), having almost doubled since the low in 1991. At

that time Ralph Acampora published a 58-page research report where he suggested that a rise to 7000

points might be in the offing. Hardly anyone thought at the time that this could possibly materialise sinceprices already seemed to be “high”. But as early as February 1997 – just 20 months later –, the target was

reached.


F8) Dow Jones in June 1995



SEMINARS

80


Date Seminar Firm Location Website

04.08.2002 Forex Seminar Knowledge to Action Knightsbridge www.knowledgetoaction.co.uk

02.08.2013 Introduction to Physical Trading & Warehousing London Metal Exchange Shanghai www.lme.com

02.08.2013 Stock Market Seminar Knowledge to Action Oxford www.knowledgetoaction.co.uk

04.08.2013 Stock Market Seminar Knowledge to Action Knightsbridge www.knowledgetoaction.co.uk

05.08.2013 Trading Market Trends and Chart Patterns Phillip CFD Singapore www.phillipcfd.com

05.08.2013 Futures, Options & Derivatives Energy Management Institute Houston www.energyinstitution.org

05.08.2013 Forex Seminar Knowledge to Action Canary Wharf www.knowledgetoaction.co.uk

06.08.2013 Technical Analysis: The Trend is Your Friend Fidelity Investments Del Mar www.fidelity.com

06.08.2013 Demystifying Bond Selection for Your Portfolio Fidelity Investments San Francisco www.fidelity.com07.08.2013 Searching for Stock Ideas on Fidelity.com Fidelity Investments Charlotte www.fidelity.com

07.08.2013 Forex Seminar Knowledge to Action London www.knowledgetoaction.co.uk

09.08.2013 Quarterly Market Update Fidelity Investments Scottsdale www.fidelity.com

12.08.2013Technical Analysis: Gaining Confirmation

and Managing RiskFidelity Investments Towsen www.fidelity.com

13.08.2013 Is a Professionally Managed Account Right for You? Fidelity Investments Kansas City www.fidelity.com

14.08.2013 Basic Options Strategy Fidelity Investments Santa Monica www.fidelity.com

14.08.2013 Understanding Exchange-Traded Funds (ETFs) Fidelity Investments New Haven www.fidelity.com

14.08.2013 Establishing and Maintaining Your Estate Plan Fidelity Investments Jacksonville www.fidelity.com

15.08.2013 Tax-Smart Investing Fidelity Investments Knoxville www.fidelity.com19.08.2013 High Volatility Trading Using CFD Phillip CFD Singapore www.phillipcfd.com

20.08.2013 Is a Professionally Managed Account Right for You? Fidelity Investments Chandler www.fidelity.com

20.08.2013 Maximizing Options Tools in Active Trader Pro Fidelity Investments Paramus www.fidelity.com

21.08.2013 Technical Analysis: The Trend is Your Friend Fidelity Investments Denver www.fidelity.com

21.08.2013 Energy Trading Fundamentals Energy Management Institute New York www.energyinstitution.org

22.08.2013 Technical Analysis: Identifying Chart Patterns Fidelity Investments Birmingham www.fidelity.com

22.08.2013 Intro to Energy Trading for the Non-Trader Energy Management Institute Houston www.energyinstitution.org

23.08.2013 Introduction to the LME London Metal Exchange Shanghai www.lme.com

24.08.2013 Introduction to Hedging with Futures and LMEswaps London Metal Exchange Shanghai www.lme.com

25.08.2013 Introduction to Hedging with Options London Metal Exchange Shanghai www.lme.com

26.08.2013 Automate and Capture trading Opportunities with CFD Phillip CFD Singapore www.phillipcfd.com

Important Dates for Your Calendar






COLUMN

82


The 7 Habits of Highly Successful Traders

1. Traders must have the perseverance to stick to trading

until they break through to success. Many of the best

traders are just the ones that had the strength to gothrough the pain, learn, and keep at it until they learned

to be a success.

2. Great traders cut losing trades short. The ability to

accept that you are wrong when a price goes to a place

that you were not expecting is the skill to push the ego

aside and admit you are wrong.

3. Letting a winning trade run as far as it can go in your

time frame is crucial to having big enough winners to

pay for all your small losing trades.

4. Avoiding the risk of ruin by risking only a small portion of

your capital on each trade. It is a skill to not get arrogant

and trade too big; if you risk it all enough times, you will

lose it all eventually.

5. Being reactive to actual price action instead of predictive

of what price action will be is a winning principle I have

seen in many wealthy traders. Letting price action give

you signals is trading reality. Trading your beliefs about

what price should be is wishful thinking.

6. Great traders are bullish in bull markets and bearish in

bear markets, until the end when the trend turns.

7. Great traders care about making money more thanany other thing. Proving they are right, showing off, or

predicting the future is not as important as hearing

the register ring. «

Steve Burns has been an active and successful trader forover 13 years. He is t he author of “New Trader, Rich Trader“,

“Show Me Your Options“ and “How I Made Money Usingthe Nicolas Darvas Syste m“. He has also been a contributorto ZenTrader.ca and Business Insider. Steve blogs at w ww.

NewTraderU.com and twitters as @SJosephBurns. He lives inNashville, TN with his wife, five children, and granddaughter.

7 Habits of HighlySuccessful Traders

» There are seven things that I believe are pretty common

in the successful traders I have known, read about, and

seen in action. Whether it is stock trader Nicolas Darvas in

the sixties, commodity trader Ed Seykota in the twentiethcentury, or Jesse Livermore at the turn of the last century,

many of these principles hold true. The closer I get to

these principles the better I trade, the farther I stray, the

worse I do. In trading, discipline pays.

Effective habits consist of internalised principles and patterns of behaviour.

Source: TRADERS´ graphic

F1) Development of Habits






http://www.fxmania.com/

Documents

Traders Mag Gmbh August 2013