SEPTEMBER 2013

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PROTECTIVE STOPS
Should you use them? 12
THE MISSING LINK
Between time & price 18
MOVING AVERAGES
Simple is better 28
CURRENCY MARKETS
Here’s how to beat them 32
OSCILLATORS,
SMOOTHED
Swing trading, part 5 38
INTERVIEW
Vikram Murarka on
forex forecasting 44
REVIEW
n TradingMarkets.com
Live Screener
THE TRADERS’ MAGAZINE SINCE 1982 www.traders.com SEPTEMBER 2013
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44 Forex Forecasting With
Vikram Murarka
by Jayanthi Gopalakrishnan
Vikram Murarka has been
forecasting, trading, and hedging
currencies since 1991. Beginning
his career as a currency trader at
Essar Group, he managed a forex
exposure of $1.2 billion. In 1996
he founded Kshitij Consultancy
Services, a leading forex risk man-
agement advisory frm in India.
He regularly writes on forex risk
management issues, including a
series titled “Color Of Money.”
49 Futures For You
by Carley Garner
Here’s how the futures market
really works.
54 Explore Your Options
by Tom Gentile
Got a question about options?
62 Q&A
by Don Bright
This professional trader answers
a few of your questions.
12 Trading Without A Backstop,
Part 2
by Anthony Trongone, PhD, CTA,
CFP
Placing protective stops affects
your trading performance in good
and bad ways. Should you or
shouldn’t you use them? Here’s
a look.
18 The Missing Link, Part 1
by Mircea Dologa
The relationship between time
and price has a direct infuence on
trading proftability. Here’s a look
at how you can gain an insight
by looking at the euro and the
Romanian leu.
28 Muscle Up Those Averages
by Ajay Pankhania
Find out how simple is better
through this example of the
EUR/USD currency pair.
32 Beating The Currency
Markets
by Azeez Mustapha
It may seem impossible, but it can
be done. Find out how.
38 Oscillators, Smoothed
by Sylvain Vervoort
In this ffth part of our article
series on indicator rules for a
swing trading strategy (IRSTS),
we will introduce an oscillator
based on Percent B.
n Cover collage: Christine Morrison
DEPARTMENTS
8 Opening Position
10 Letters to S&C
55 Traders’ Tips
59 Advertisers’ Index
59 Editorial Resource Index
63 Classified Advertising
63 Traders’ Resource
64 Futures Liquidity
65 Trade News & Products
6 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
Copyright © 2013 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis
of STOCKS & COMMODITIES

(ISSN 0738-3355) is published monthly with a Bonus Issue in March for $89.99 per year by Technical Analysis, Inc., 4757 California Ave. S.W., Seattle, WA 98116-4499. Periodicals
postage paid at Seattle, WA and at additional mailing offices. Postmaster: Send address changes to Technical Analysis of STOCKS & COMMODITIES

4757 California Ave. S.W., Seattle, WA 98116-4499 U.S.A.
Printed in the U.S.A.
INTERVIEW
FEATURE ARTICLE
TIPS
This article is the basis for Traders’ Tips
this month.
TIPS
CONTENTS SEPTEMBER 2013, VOLUME 31 NUMBER 10
QUICK-SCAN, REVIEW
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OPENING POSITION
Jayanthi Gopalakrishnan,
Editor
EDITORIAL
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Editor in Chief Jack K. Hutson
Editor Jayanthi Gopalakrishnan
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Staff Writer Dennis D. Peterson
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Contributing Editors John Ehlers,
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ow are Portuguese bond yields? Is the
European Central Bank (ECB) going to
keep interest rates as they are? How is China’s
economy faring? Is the euro still fragile? The
answers to these questions and many more
are what foreign-currency traders need to
know if they intend to navigate today’s 24-
hour market that is dominated by institutional
traders. It’s overwhelming, without a doubt,
but a signifcant event in one country can impact the economy of another. As with
anything, over time, you’ll see similar patterns playing themselves out and you’ll
be able to connect the dots and assimilate that information in such a way that it
creates a positive impact on your trading.
The Federal Reserve has suggested they may end their quantitative easing (QE)
as early as 2014. This has sparked some optimism in the US markets. We have seen
some growth in the US economy — there are signs of a housing recovery, slow and
steady growth in the jobs market, and an increase in manufacturing activity. This
economic growth is mild, but we have seen a slight rise in the 10-year Treasury yields
as well as a rally in the US dollar. If the trend in the Treasury yields continues, it is
likely that we can see more capital being invested in the US, which will contribute
to a further rise in the value of the US dollar. But a rise in the US dollar could have
a negative impact on the earnings of multinational companies. And a slowdown or
end to QE in the US could have a negative impact on other countries.
September 2013 • Volume 31, Number 10
OPENING POSITION
8 • March 2006 • Technical Analysis of STOCKS & COMMODITIES
Jayanthi Gopalakrishnan,
Editor
O
EDITORIAL
editor@traders.com
Editor in Chief Jack K. Hutson
Editor Jayanthi Gopalakrishnan
Managing Editor Elizabeth M.S. Flynn
Production Manager Karen E. Wasserman
Art Director Christine Morrison
Graphic Designer Sharon Yamanaka
Editorial Intern Emilie Rommel
Technical Writer David Penn
Staff Writers Dennis D. Peterson, Bruce Faber
Webmaster Han J. Kim
Contributing Editors John Ehlers, Kevin Lund,
Anthony W. Warren, Ph.D.
Contributing Writers Don Bright, Thomas Bulkowski,
Martin Pring, Adrienne Toghraie
The Traders’ Magazine
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March 2006 • Volume 24, Number 3
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lieved to be reliable but not guaranteed by us without
further verification, and does not purport to be complete.
Opinions expressed are subject to revision without notifi-
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securities discussed herein.
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benefit of the trademark owner, with no intention of infringing
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So
nce again we got a reminder of just
how sensitive the financial markets
are. We saw a major selloff in the Japanese
markets, which — as expected — triggered a
domino effect on markets throughout the
world. Add disappointing earnings numbers
from US corporations and you have a situa-
tion that just got worse. So what started off as
a strong year ended up correcting, and rather
rapidly. I must admit that although correc-
tions are healthy for any market, when you have a 2% drop, it gets you thinking.
Prior to the Federal Reserve’s FOMC meeting, I usually take a look at the yield
curve. At present, it’s looking a little flat, and given that the general consensus
is that the Fed is going to tighten at their January 31st meeting, I am concerned
that the yield curve may be heading in the direction of being inverted. And if that
were to happen, that would not be a good sign for the US economy. I’m not
suggesting that we are going to go through a recessionary period. But given that
almost anything can happen, it doesn’t hurt to expect the worst. If nothing else,
it helps to preserve your capital.
with that in mind, you can see why it’s important to design a trading
system that gets you out of the market at the right time. When access to
the markets is easy, the number of options available increases. This makes it
important to be thorough with the different types of orders, front-end software, and
trading systems that are out there. Lee Leibfarth, in his article “The Automated
Daytrader” starting on page 22, addresses the various options that are available and
how you can take advantage of them.
But before getting to the stage of placing that trade, you need to understand the
market you are trading. You should be able to do so after reading Paolo Pezzutti’s
“Understanding Market Structure.” The markets follow different behavior pat-
terns, and you need to determine if it is volatile, trending, in a trading range, moving
strongly in one direction, or moving but not with much momentum.
Only when you know what the structure of the market is will you be able to apply
the correct trading technique. But that’s just the first step. You still have to have
discipline, as you will find out after reading this month’s Technical Analysis of
STOCKS & COMMODITIES interview with Ken Tower. Only then will you be able to
know when to exit.
Here’s to smart trading!
+0603 Opening Position 1/24/06, 9:48 AM 1
8 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
H
I
ntermarket relationships abound, and they don’t necessarily have the same
end result each time they occur. This makes it necessary to really understand
how markets behave, how they impact other markets, and how you can distill the
information to take advantage of it in your trading. It’s a challenge and may be
enough to turn you away from trading the currency markets. However, once you
fgure out a way to narrow down all this information and apply it to your trading,
the act of placing those entries and exits may just be a matter of looking at a few
simple indicators.
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FORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR
OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO
SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR
LOSSES SIMILAR TO THESE BEING SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE
PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.
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10 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
Author Sylvain Vervoort replies:
1. Days 1 & 2 are not important. I am
simply trying to show the lowest low and
highest high.
2. For the upstep and downstep pattern,
the last candle has to open inside the
body of the previous candle; whether
there are wicks or not is not important
for the pattern.
3. There are some differences. For ex-
ample, in scenario 1 in the upstep pattern,
the second-to-last candle represents the
lowest low. In scenario 3, the lowest low
is represented by the last candle.
TRADING CONTESTS
Editor,
Is there a back issue that covers any
trading contests or that names the best
top traders? Have you published any
ratings or do you offer any newsletters
on this? Can you recommend a good
source for education on trading stocks,
options, and forex, as well as technical
analysis? I am trying to source the best
traders to follow ideas from.
LORNE
As an educational, how-to magazine, we
generally do not cover contests or rate
individual traders. There are several
organizations unrelated to this magazine
that do hold contests and can be found
on the Internet via a search. If it were
ratings on trading systems you seek, we
might suggest trying FuturesTruth.com
or Collective2.com.
As for following other traders, we’ve
recently listed some services in our
monthly Trade News & Products section
that may interest you; you can review
that information for followup.
We do publish a Readers’ Choice
Awards section every year in our Bonus
Issue, which presents the results of our
readers’ votes for their favorite products
and services across more than 20 catego-
ries of investing software and services.
It does not rate individual traders, but
it presents a list of services and some
resources that our readers fnd useful.
You also may be interested in our
monthly interviews, in which we get to
know a trader or analyst in the feld and
learn about their approach.
As for education on technical analysis
itself, simply put, this magazine has been
the best source of education on technical
analysis since its debut in 1982. We hope
you will keep reading to take in all that
the technical analysis community has
to offer by way of this magazine and by
way of our website at www.traders.com.
You can also fnd leads to many other
educational resources within our pages
or at our site.—Editor
SVAPO CODE QUESTION
Editor,
I was reading through your website.
I respect the work of author Sylvain
Vervoort, with his logic and practicality.
His SVAPO, or short-term volume and
price oscillator (November 2007 S&C),
drew my attention as a technical trader.
I loved the concept, as I was looking for
a way to integrate some insight from
volume into my trading setup — that
is, something simple (not like Wyckoff
concepts) — and that also doesn’t have
to go through reading the tape of each
trade. Not only do I not want to get into
that, but I also don’t have it in my trad-
ing platform.
The code for SVAPO has few issues
for me. It’s true each one of us can code
the same concept differently, especially
when it comes to smoothing and
averaging, and I would avoid too many
smoothings, especially with the TEMA
(triple exponential moving averages)
or the LR (linear regression). However,
there’s a specifc line of code that doesn’t
The editors of S&C invite readers to submit their opinions and information on subjects
relating to technical analysis and this magazine. This column is our means of communica-
tion with our readers. Is there something you would like to know more (or less) about?
Tell us about it. Without a source of new ideas and subjects coming from our readers,
this magazine would not exist.
Email your correspondence to Editor@Traders.com or address your correspondence
to: Editor, STOCKS & COMMODITIES, 4757 California Ave. SW, Seattle, WA 98116-4499. All
letters become the property of Technical Analysis, Inc. Letter-writers must include their full
name and address for verifcation. Letters may be edited for length or clarity. The opinions
expressed in this column do not necessarily represent those of the magazine.—Editor
1 2 3 4
1 2 3 4
FIGURE 1: UPSTEP PATTERN. This reproduction of
Sylvain Vervoort’s Figure 2 from his July 2013 article
in S&C demonstrates that four scenarios are possible
for the upstep pattern.
FIGURE 2: DOWNSTEP PATTERN. As with the upstep
pattern, four possible downstep patterns are possible.
STEP CANDLE PATTERN
Editor,
The upstep and down-
step patterns presented
in Figures 2 & 3 in
Sylvain Vervoort’s July
2013 article (“The Step
Candle Pattern”), [re-
produced here as Figures 1 & 2], leave
me with some questions:
1. All eight have four or fve trading days
illustrated. Are days 1 & 2 important?
2. There was no mention of the candle
“wicks” (day’s high & low). Are they
important?
3. For both the upstep and downstep,
why do scenarios 1 & 3 as well as 2 &
4 look the same?
JIM VON DER WISCHE
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 11
LETTERS
make sense to me. I saw a port done by
a respected thinkscripter on another site,
and unfortunately he ported the same
error, translating the study as-is.
Here is the line of code I am referring
to (it’s the main logic/formula for
calculating the SVAPO):
{SVAPO result of price and volume}
SVAPO:=Tema(Sum(If(haC>(Ref(haC,-
1)*(1+cutoff/1000)) AND
Alert(vtr>=Ref(vtr,-1),2), vc,
If(haC<(Ref(haC,-1)*(1-cutoff/1000)) AND
Alert(vtr>Ref(vtr,-1),2),-vc,0)),period)/
(vave+1),period);
Volume and its average will be in the
millions, so what is the value of adding
“1” to a fgure like that?
Vervoort’s article on the SVAPO also
inspired me to think further of volume
integration, so I am now coding another
study looking at net directional volume,
which is the difference between up &
down volume for a given period, as an
indicator of volume accumulation and
dispersion. It’s what I was looking for, so
thank you again for the inspiration.
Keep up all the great and valuable
work.
K.

Sylvain Vervoort replies:
Thanks for your letter. The +1 is simply
for when there is no volume data avail-
able, in which case you would get a
division by zero, which would create an
error in the formula. With 1, there would
be no error message.
RAVE FOR VAN DER MERWE
Editor,
Congratulations on publishing articles in
S&C by Koos van der Merwe. He gets it
right, and I hope you will publish work
by him more often.
MIKE
Thank you for your feedback. Readers
who would like to read additional ar-
ticles by Merwe can visit the Traders.
com Advantage area of our website,
www.traders.com, which contains on-
line articles published daily. You will
fnd many additional articles there by
Merwe.—Editor
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12 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
Placing protective stops affects your trading performance
in good and bad ways. Should you or shouldn’t you use
them? Here in part 2 of this series, we take a look.
by Anthony Trongone, PhD, CTA, CFP
espite the consensus of trading literature advocating the
use of a protective stop-loss order, so far, this analysis
does not appear to support this statement. In part 1 of my
study published last month in the August 2013 issue of
STOCKS & COMMODITIES, I examined the results of taking a
long position from 9:30–10:30 am (that is, in the opening hour
of trading) and the effect of using certain percentage stops.
Here in part 2, I’ll expand on the earlier analysis.
Stops Ahead

Trading Without A Backstop
Part 2
BACKGROUND
In the previous study, I took a long position in the spiders
(SPDR S&P 500 ETF Trust) at 9:30 am, along with a stop-sell
order at various percentages below this opening (9:30 am)
price. If the stop order did not fll, I promptly offset the long
position at 10:30 am ET.
The fndings in the study I will present here expand the ear-
lier analysis from 743 to 764 trading days (June 1, 2010–June
12, 2013) to once again obtain the performance results. Since
most active traders do not enter into trading decisions blindly,
I began experimenting using a stop order with various trading
systems. Last month in part 1, I ran an analysis using early
morning volume (7:30–8:30 volume greater than two million
shares) to assess the effect on trading the spiders (SPY) in
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September 2013 • Technical Analysis of STOCKS & COMMODITIES • 13
the opening hour. Despite the $3.32 loss in
165 trading days, when using a 0.25% stop
(below the 9:30 price), there were just 98
stop flls but a proft of $2.27. When this
same condition was present, a 0.50% stop
(below the 9:30 price) resulted in 64 stop
flls, but it produced a loss of -$5.39.
The beneft of applying a stop order to a
long position is already questionable; how-
ever, it gets even more complicated because
the question of what percentage to use when entering a protective
backstop can make the difference in your bottom line.
HERE’S WHY
We’ll continue the analysis by measuring the proftability of
trading stops using two different predictor variables in separate
studies. I begin by looking at an earlier hour loss. More specifcally,
what impact does a loss of $0.20 or more (<= -$0.20) have on the
performance of the opening hour? In Figure 1, you see the 153
days in the 8:30–9:30 session when this condition was present.
Figure 2 reports the results of these 153 trades in 764
trading days (a 20% activity rate). These premarket losses
had a slightly positive impact on the opening hour (a $1.31
advance) of trading; however, the opportunity cost of entering
this order was -$0.92.
Considering there were 83 stops in 153 trades (54.25%),
a 0.25% (quarter percent) stop-loss order was costly. It is
diffcult to achieve success when more than half your trades
trigger your stop orders (this translates into one fll in every
1.84 trading days).
SCATTERGRAM
Performing an analysis on those scores with a loss equal to
$0.20 or more (<= -$0.20) gives you a snapshot of your fnd-
ings, as it reports a $1.31 advance in 153 trades; however, by
compiling these trades into a summary score, you are losing
information. Figure 3 shows how to correct this by creating
a scattergram of those scores with a strong 8:30–9:30 loss (x-
axis in red) along with the resulting 9:30–10:30 performance
scores (y-axis in blue).
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AFTER A LOSS OF <= -$0.20 IN THE 8:30 TO 9:30 SESSION,
THE EFFECT OF A 0.25% STOP ON THE OPENING HOUR
TRADING
DAYS
0.25%
STOPS
9:30 TO 10:30
PERFORMANCE
REVENUE EXPENSE
OPPORTUNITY
COST
153 83 $1.31 $26.43 $26.04 -$0.92
FIGURE 1: 8:30–9:30 HOURLY DROP OF $0.20 OR MORE (<= -$0.20). What effect does this excessive loss in the preceding hour have on the opening hour of
trading? Should we take a long position at the ringing of the opening bell together with a protective stop-loss order?
FIGURE 2: THE RESULTS OF TAKING A LONG POSITION WITH A 0.25% STOP. In 153 trades, a long
position along with a 0.25% stop was unable to deliver meaningful savings.
FIGURE 3: THE PERFORMANCE RESULTS OF AN 8:30–9:30 LOSS IN THE OPENING HOUR. Although those scores to the far left of the scattergram show the 20
most aggressive losses (<= -$0.70), the opening hour was able to rebound after these declines, lifting it to $5.71 in profits.
SPY
8:30–9:30 am
14 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
scores (lower 10%) as well as the 76 best ROC scores (upper
10%) to assess the 9:30–10:30 performance of the spiders.
The -$5.36 ROC score is a meaningful price change; it
certainly would qualify as one of the scores in the bottom
10%.
Figure 4 reports the fndings of these 76 qualifying days
in the two outlying categories. When given either condition,
the spiders had a positive performance. The upper 10% (ROC
positive) had 39 stops with an opportunity cost of -$0.64,
whereas the lower 10% (ROC negative) had 48 stops with an
opportunity cost of -$4.00. Considering the $11.00 opening-
hour summary gain in 764 days, the $1.65 (ROC positive)
advance together with the $4.91 (ROC negative) advance
accumulated 60% of the profts.
Over the course of this study, the opening hour produced
$11.00 in profts. Figure 4 provides the results of the ROC
study. After separating the outlying scores (76 days in both
the upper and lower brackets), the spiders captured three-ffths
of the profts. Nevertheless, a stop-loss in either category was
not a good strategy; however, it was even costlier when the
ROC was negative (-$4.00).
PLACING STOP-LOSS ORDERS
I am not saying you should never take
stops. What I am advocating is never to
take stops without frst doing your analysis
to determine the best course of action. For
instance, prior to making my frst trading
decision of the day, I notice a morning
with strong volume along with a steady
increase in the price of the spiders. After running my analysis,
I uncover 12 days with a similar pattern:
$0.24, $0.36, $0.42, $0.84, -$1.12, $0.12, $0.16, -$1.32,
$0.64, $0.44, $0.06, $0.54
Would it make sense to take a long position with a protective
stop in this situation?
Without considering the sequence of these results, with 10
advances and $1.38 in profts, I would be willing to take a
long position, but what about the two declining hourly ses-
sions? Since they are excessively strong, I would consider
placing a long position with a stop-loss order or pass on the
protective stop, but take a position with fewer shares. Some
investors may choose to go heavy but would use a stop on
part of their position. What’s the best decision? The answer
A loss of $0.20 or more (<= -$0.20) in the 8:30–9:30 hour
was unable to carry over into the 9:30–10:30 session. This
excessive loss, which gave us 83 stops (using a 0.25% stop
below the 9:30 price) in 153 trading opportunities, resulted
in a $1.31 proft in the opening hour; however, the expense
of executing 54.25 percent of these stop orders resulted in an
opportunity cost of -$0.92.
An assessment of the 10 worst scores (from -$1.74 to
-$0.98) showed they were not consistently brought on by
strong losses. Six of them occurred when the earlier loss in
the spiders was between a loss of -$0.20 and -$0.34; the other
four scores had losses of -$0.63, -$0.65, and -$0.93, and the
biggest hourly setback (-$1.74) followed a loss of -$1.22 (dot
with red border).
MOMENTUM INDICATOR
A three-day rate of change (ROC) is a momentum indicator;
it measures the price change among three trading days. In this
case, I am using the 8:30 am price; therefore, it is the t
1
– t
3
price difference:
8:30 am price of SPY on June 21, 2013: $159.46
8:30 am price of SPY on June 18, 2013: $164.82
$159.46 – $164.82 = -$5.36 ROC
This study includes those ROC scores in the outlying 10% of
the 764 trading days; consequently, it uses the 76 worst ROC
3 day ROC
(10% OUTLIERS)
TRADING
DAYS
.0025
STOP
9:30 – 10:30
RESULTS
REVENUE EXPENSE
OPPORTUNITY
COST
ROC POSITIVE 76 39 $1.65 $13.35 $12.34 -$0.64
ROC NEGATIVE 76 48 $4.91 $15.48 $14.57 -$4.00
FIGURE 4: AN ASSESSMENT OF THE OUTLYING ROC SCORES USING A 0.25% STOP-LOSS ORDER. Both outlying categories were able
to produce a profit in the opening hour, but the opportunity cost of applying a 0.25% stop resulted in a negative outcome.
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September 2013 • Technical Analysis of STOCKS & COMMODITIES • 16
Your best defense is to
become knowledgeable about
market meltdowns. What are
its symptoms and how can you
understand them?
is specifc to the individual, and it depends on many factors,
such as your risk tolerance and how well you can weather a
large hourly loss without it having a negative impact on the
rest of your trading day.
ACTION IS THE ANTIDOTE OF DESPAIR
Most traders who use stops on a regular basis are often at a
disadvantage, because once their stop activates, it automatically
closes their position. As unpleasant as this is, they quickly get
over this disappointment if the market continues its downward
descent; however, emotions fare when it makes a comeback.
If the market rallies above the previous protective order after
the trader has offset a losing position, the desire to get back
in is a natural reaction. The more the market rises, the more
powerful is the emotion to catch the remainder of the rally. Of
course, once the trader bites, the rally often fzzles, or worse,
heads back down. This puts the trader in an unpleasant situ-
ation, and he responds by taking action, which encourages
him to abandon any remaining semblance of a game plan. He
makes refexive trades, solely on the basis of prevailing market
direction. Stops often work, but when they disappoint, it often
stimulates overtrading, which is always costly.
Despite market circumstances, some traders stay with their
specifed game plan. Although the market may be moving against
them, they do not take action. After taking a long position at 9:30,
they do not follow the market until 10:30, when they automatically
offset this position. Without observing the market midstream,
it cannot sway their decision-making process; thus, they can
place a 9:30 stop position without the emotional drama. There
are traders who do not have this remarkable self-control.
The effcacy of your trading systems is another factor to
consider in your decision to take protective orders. If your
systems are ineffective, and you are losing money, then the
assumption that you will lose less money with this form of
protection is a reasonable one. However, if your system is not
working, it is best to stop the bleeding as soon as possible.
Moreover, with stop orders, especially when using them
too frequently, there is the aspect of relying on them as a
safety net. Once you have the perception that you can safely
control losses, it is likely that you may not give your analysis
the attention it deserves.
When using a system that results in a summary loss in the
opening hour, you would expect a protective order to reduce
some of this negativity. While it is unwise to make sweeping
assumptions on the basis of a few studies, it does appear as
if a stop-loss order works best when the performance of your
trading setting is unproftable. But the question is, if you know
your trading system is pointing toward a negative open, why
would you take a long position?
FOR THE SAKE OF SAFETY
Without cultivating some understanding of your system’s
losses, it is best to be cautious by trading fewer instruments,
or trade fewer shares, but always allow your analysis to set
you on the proper path. Remember, knowledge is power.
Your best defense is to become knowledgeable about these
meltdowns. What are the symptoms, and how can you get a
better understanding of these downturns?
According to Baruch Spinoza (1632–1677), the timid man
whose primary concern is safety will always seek fight. It is
reasonable to have a fear of loss, but excessive fear is bound
to hamper growth.
Anthony Trongone has been a Master Educator for eSignal
since 2006. He is a regular contributor to Technical Analysis
of STOCKS & COMMODITIES. His new book, Trade With The
Odds: How To Construct Market-Beating Systems, discusses
more of his trading systems.
FURTHER READING
Trongone, Anthony [2013]. “Trading Without A Backstop,”
Technical Analysis of STOCKS & COMMODITIES, Volume
31: August.
______ [2013]. “Early Morning Activity,” Technical Analysis
of STOCKS & COMMODITIES, Volume 31: June.
______ [2012]. Trade With The Odds: How To Construct
Market Beating Trading Systems, Bloomberg Press.
_____ [2012]. “Warning: Bear Activity,” Technical Analysis
of STOCKS & COMMODITIES, Volume 30: November.
‡Microsoft Excel
‡See Editoral Index
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18 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 19
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CHART PATTERNS
The relationship between time and price has a direct
infuence on trading proftability. Here’s a look at
how you can gain an insight by looking at the euro
and the Romanian leu.
traders progress along their learning curve,
they begin to clearly observe the infuence
of the time/price relation in identifying the optimal
trading setup. In spite of this, some traders — novices
and experienced — always start the learning process
with only price tools and their corresponding indi-
cators, that is, classic technical analysis. Sooner or
later, the successful trader will reach an advanced
stage where learning the importance of time and its
usefulness becomes a priority in the quest to further
develop and acquire the much-sought-after profes-
sional trading techniques.
THE EVOLUTION OF A TRADER
In the early stages of becoming a trader, we are all
motivated to learn tons of techniques and indicators in
order to perform the most proftable trades. We quickly
observe that if the right approach isn’t selected, we
are in great danger of losing our trading capital.
Over time, I began to realize that studying and ap-
plying Elliott waves, Gann methodology, and map-
ping multiple time frames (top-down analysis) are
a prelude to any fnal decision-making. Once this is
done, the next step, which is the detailed study of the
specifc market you are trading, comes naturally. You
can then identify the optimal time frame setup that
works for you, one that consists of the most effcient
elements of modern technical analysis.
ESTABLISHING THE TRADING CONTEXT
Before I describe my time & price technique, I will
briefy present and revisit some of the basic elements
that contribute to its performance.
In spite of the so-called subjective labeling that
many traders give to Elliott waves, I have been suc-
cessfully using them for more than 20 years. Many
traders misunderstand the usage of these waves
mainly because of the lack of a probabilistic approach.
Without probability, there wouldn’t be a successful
trading technique — classic or modern.
Your proftability is infuenced and coordinated
by the time & price relationship. You cannot label
any type of pattern without frst verifying several
elements:
n Where is the market coming from?
n Where is the market going?
n What would be the most probable terminal key
level of the current swing (trend) where time
meets price?
n What is the most probable tendency, if any?
n If an existing sideways behavior is developing,
what is its energy-restoring potential?
n If an existent trend is ongoing, where is the
kinetic energy coming from? Can it be quanti-
fed?
n Is the market in a classic, extended, or failure
mode, or on the contrary, is it in an embryonic
state?
n What kind of technical tools can we use to get
an optimal trading setup?
From an educational point of view, I will present two
classic examples. In this frst article of my series, I will
discuss the euro vs. the Romanian leu (EUR/RON) in
hindsight. In part 2, I will look at the gold continuous
futures contract while it is developing in real time.
Waves & Boxes
The Missing Link
Part 1
by Mircea Dologa
As
20 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
The chart in Figure 1 illustrates the EUR/RON currency pair
on the weekly time frame. I selected this example to establish
a close-to-ideal relationship between time & price. I will focus
the study on just the fourth wave, W(4).
As you can see in Figure 1, the area occupied by W(4) is
mapped with the help of time & price parameters. With respect
to price, W(4) retraced 33.3% of W(3) to the 4.0564 level. With
respect to time, I have applied the alternation principle, which,
from the classical point of view, states that the duration of W(4)
is calculated based on the duration of W(2) wave, using the
following formula:
Time W(4) = n x Time W(2)
The n coeffcient can take, more often than not, the following
values: 1, 2, 3, 4… In this case, the value of n is 4.333. Very
rarely is the value of n less than 1.0.
You should understand and be prepared for the alternation
principle in your daily trading. The fve-rule parameters pertain
to the two corrective waves within an impulsive pattern: W(4) and
W(2). Note that this principle implies that one valid element of
the rules should be present. The alternation principle rules are:
n Price: Measure the distance, in price or in points, and
compare the values of each corrective wave; oftentimes,
W(2) retraces more than W(4).
n Time: Evaluate the duration of each corrective wave;
count the corresponding bars on the time frame you are
using. For example, more often than not, W(4) lasts
longer than W(2) [n > 1]. Very rarely is the duration of
W(4) less than that of W(2) [n < 1].
n Severity: Compare the Fibonacci price retracement ra-
tios of the two waves. Typically, W(2) retraces farther
than the W(4).
n Intricacy: Evaluate the number of subdivisions in both
waves. Usually, W(4) will have more subdivisions
than W(2).
n Construction (wave structure): Observe the degree of
structural complexity (mono/polywave) of the wave. Usu-
ally, W(4) has a higher degree of complexity than W(2).
The chart in Figure 2 illustrates the same EUR/RON currency
pair on the weekly time frame. As you can see from the chart,
the span of W(4) wave is mapped by using the price retracement
parameter [zero to 33.3% of W(3)].
On the time side, I applied the 28-bar multiplier, which is
the duration of W(2), to forecast the duration of W(4). Thus, I
calculated that W(4) will terminate after 121 corrective bars,
which fully complies with the formula:
4.333 x W(2) duration
The value of n = 4.333 corresponds to one of the Charles Dow
ratios, which are typically known as thirds, that is, 0.333, 0.666,
1.333, 1.666, 2.333, 2.666, and so on. The chart in Figure 2
illustrates an interesting observation between the relationship of
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FIGURE 1: TIME AND PRICE RELATIONSHIP. Notice how W(4) retraced 33.3% of W(3) to the 4.0564 level.
E
S
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Identifying and labeling the most
probable Elliott waves comes
down to choosing the optimal
time & price tools.
Weekly chart
Euro/RON spot forex
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 21
W(4) and W(2) with respect to time — the terminations of most
of the lower-degree waves of the double three W(4) complex
wave (labeled W-X-Y) occur at a Fibonacci, Gann, or Charles
Dow ratio threshold, within the duration of W(4).
All these observations were possible through the use of the
alternation principle, that is, through the time formula with the
specifc multiplier. Thus, we can establish the following time
ratios pertaining to the adequate subwaves of W(4):
n Subwave (a): W: W(4) consists of 14 bars, terminates
at the 0.5 multiplier location, and corresponds to a Gann
ratio, on the 4.333 x W(2) scale
n Subwave a: (b): W: W(4) consists of 14 bars, terminates
at the 1.0 multiplier location, and corresponds to a Gann
(Fibonacci) ratio on the 4.333 x W(2) scale
n Subwave b: (b): W: W(4) has 14 bars, terminates at the
1.0 multiplier location, corresponds to a Gann (Fibonacci)
ratio on the 4.333 x W(2) scale
n Subwave c: (b): W: W(4) has 13 bars, terminates at the
1.5 multiplier location, and corresponds to a Gann ratio
[error margin is (+ 1) bar] on the 4.333 x W(2) scale
n Subwave (c): W: W(4) has 21 bars [(0.50 + 0.25) or 0.75
of 28 bars], terminates at the 2.25 multiplier location, and
corresponds to a Gann ratio on the 4.333 x W(2) scale
n Subwave X: W(4) has 14 bars [(2.75 – 2.25) or 0.5 of
28 bars], terminates at the 2.75 multiplier location, and
corresponds to a Gann ratio [error margin is (+ 1) bar]
on the 4.333 x W(2) scale
n Subwave (a): Y: W(4) has seven bars [(3.00 – 2.75) or
0.25 of 28 bars], terminates at the 3.0 multiplier loca-
tion, and corresponds to a Gann (Fibonacci) ratio, on
the 4.333 x W(2) scale
n Subwave (b): Y: W(4) has nine bars [(3.333 – 3.00)
or 0.333 of 28 bars], terminates at the 3.333 multiplier
location, and corresponds to a Charles Dow ratio [error
margin is (+ 1) bar], on the 4.333 x W(2) scale
n Subwave (c): Y: W(4) has 28 bars [(4.333 – 3.333) or 1.0
of 28 bars], terminates at the 4.333 multiplier terminal
location, and corresponds to a Charles Dow ratio, on the
4.333 x W(2) scale.
FIGURE 2: PRICE RETRACEMENTS. Here, the 28-bar multiplier, which is the duration of W(2), is used to forecast the duration of W(4).
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Weekly chart
Euro/RON spot forex
22 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
Figure 3 completes the Elliott W(4) wave setup by adding some
interesting information. Here are my observations and interpreta-
tions of the price chart and the oscillator in the subchart.
n The Elliott subwave count of W(4) with its three wave
subdivisions, a: (a) to W: W(4)
n The time relation of W(4) to W(2), which reveals the termi-
nal levels of most of the lower-degree waves of the double
three W(4) complex wave (labeled W-X-Y)
n The W(4)/W(1) overlapping border line is located at the
3.8382 key level. It is important to continuously monitor
the distance between price and this overlapping border line.
It reveals important information regarding the potential
development of W(4) wave, which could unveil the future
development of W(5), the terminal wave, and implicitly the
termination of the ascending impulsive pattern. The bigger
the W(4) retracement, the weaker the W(5) wave will be in
its development.
n The time relationship within the W(4) wave, considered to
be equal to a ratio of 1.0 but containing 121 bars, in hind-
sight, reveals the terminal levels of most of the lower-degree
waves of the double three W(4) complex wave (W-X-Y)
and the multiple time clusters. Thus, the following time
ratios pertain to the W(4) wave:
● Subwave (a): W: W(4) has 14 bars, terminates at the
0.125 multiplier location, and corresponds to a Gann
ratio [error margin is (-1) bar], on the 121 bar scale.
● Subwave a: (b): W: W(4) has 14 bars, terminates at
the 0.236 multiplier location, and corresponds to a
Fibonacci ratio, on the 121 bar scale.
● Subwave b: (b): W: W(4) has 14 bars, terminates at
the 0.236 multiplier location, and corresponds to a
Fibonacci ratio, on the 121 bar scale
● Subwave c: (b): W: W(4) has 13 bars, terminates at the
0.33 multiplier location, and corresponds to a Charles
Dow ratio [error margin is (- 2) bars], on the 121 bar
scale
● Subwave (c): W: W(4) has 21 bars, terminates at
the0.50 multiplier location, and corresponds to a Gann
ratio [error margin is (-2) bars], on the 121 bar scale
● Subwave X: W(4) has 14 bars, terminates at the 0.66
multiplier location, and corresponds to a Charles Dow
ratio [error margin is (+2) bars], on the 121 bar scale
● Subwave (b): Y: W(4) has nine bars, terminates at
the 0.764 multiplier location, and corresponds to a
Fibonacci ratio, on the 121 bar scale
● Subwave (c): Y: W(4) has 28 bars, terminates at the
1.0 multiplier terminal location, and corresponds to a
Gann (Fibonacci) ratio, on the 121 bar scale.
n The time clusters within W(4), observed in hindsight,
between the ratio locations of 4.333 x W(2) scale and the
121-bar scale, were developed in almost every W(4) sub-
wave termination:
● Time cluster n° 1 at the termination of (a): W: W(4),
● Time cluster n° 2 at the termination of a: (b): W: W(4),
● Time cluster n° 3 at the termination of (b): W: W(4),
● Time cluster n° 4 at the termination of (c): W: W(4),
FIGURE 3: ELLIOTT WAVE SETUP. Most reversals take place at the time & price confluences. Identifying and labeling the most probable Elliott waves is a matter of
choosing the optimal time & price tools.
Weekly chart
Euro/RON spot forex
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24 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
● Time cluster n° 5 at the termination of X: W(4),
● Time cluster n° 6 at the termination of (b): Y: W(4),
● Time cluster n° 7 at the termination of (c): Y: W(4)
n The trending indicator – OSC (5, 70), observed in hindsight,
is an indispensable tool when it comes to practicing the
application of Elliott waves.
The OSC indicator is similar to the MACD in that it measures
the area between two moving averages. It is valuable in defn-
ing and labeling the Elliott waves, in spite of its lagging nature.
We observed, on the chart of Figure 3, the development of the
W(4) wave, which fuctuated in the 0.90–1.40 zone of the OSC
(5, 70). Moreover, the classic divergence between the indicator
and price movement from W(3) to W(5) is obvious here.
Note that most of the reversals take place at the time & price
confuences. In order to identify and label the most probable
Elliott waves, it all comes down to choosing the optimal time &
price tools. The key is to closely monitor the Fibonacci, Gann,
or Charles Dow ratios progressively, from their initial point
(0.03125, 0.0625, 0.09375, 0.125, 0.146, and so on) to the most
extended ones (2.618, 3.666, 4.236, 5.0, 6.85, 7.0, and so on).
If a ratio is overcome, consider the next one.
ORGANIZATION WITHIN CHAOS
Most Gann adepts will agree that his main
credo regarding the time & price relation-
ship plays a big role in identifying market
turns. The ideal Gann tool to use would be
the box, but to successfully use the box, you
need to go through the diffcult task of calibrating its height
(price parameter) and length (the duration or time parameter).
For more details on applying Gann techniques, I suggest you
study Michael Jenkins’ recent book, Square The Range Trad-
ing System.
The weekly chart in Figure 4 illustrates a rectangular Gann
box, drawn in hindsight. It considers the W(4) existing space
(also called the vital wave space) in the price zone between
the termination of W(3) at the 4.3485 level and the termina-
tion of W(2) at the 3.4715 level. Time-wise, the W(4) wave is
developing on the 121 bar scale.
The classic approach of drawing Gann boxes consists of
choosing the adequate time & price parameters (duration
interval and height), and then dividing them in quarters and
halves. You can also select thirds or any Fibonacci ratios you
feel the market adheres to. In the chart in Figure 4 the market
retraced to the 33.33% price threshold and remained in the
0%–33.33% price zone for the duration of the entire W(4)
wave. The market fow almost tested the 50% time threshold,
exceeding it by two bars.
The Gann angles effciently illustrate the time & price
relationship on the chart in Figure 4. You can easily see that
after the market fow has tested the steep 1x4 and 1x2 angles
several times, it climbed to the decisive 1x1 angle. Once price
broke out of this angle, the market fow remained above it,
FIGURE 4: GANN BOXES. The market retraced to the 33.33% price threshold and remained in the 0 to 33.33% price zone for the duration of the entire W(4) wave.
The Gann angles efficiently
illustrate the time & price
relationship on the chart in
Figure 4.
Weekly chart
Euro/RON spot forex
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26 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
thus revealing the strength of the market, by staying above the
33.33% threshold of the W(4) wave space.
The shallow 4x1 angle is of lesser importance on this specifc
time frame. Instead, the angle illustrated by the TL-1/3 trendline
— created by joining the termination of W(3) and W(4) —
becomes the diagonal of the rectangular space of W(4) wave.
It plays an important role here, since it becomes a symmetry
axis within the development zone of W(4) wave.
The Gann box does a good job of revealing the degree of
freedom of W(4) wave, in hindsight. But how can this be studied
in real time, while the market is fuctuating in a chaotic manner
within the rectangular space?
To answer this question, I have used a Gann box and its
multiples, out of the frst swing of the W(4) wave associated
with the use of the 45-degree geometric angle. The Gann boxes
(especially the 144) with the 45-degree angles, both drawn by
hand on millimeter paper, are the specialty of Dawn Bolton-
Smith, the matriarch of technical analysis and a life member
of the Australian Technical Analysts Association (ATAA in
Sydney), who, in spite of being in her 80s, is still doing her
daily market analysis.
The frst Gann box in Figure 5 uses a diagonal size and angle
value that is equal to the trendline of W(4)’s frst subwave swing.
Its angle value coincides with that of the 45-degree geometric
angle. I then multiplied this Gann box size to better describe
the market fow. I associated it with the drawings of the paral-
lel 45-degree geometric angles originating at an extreme pivot
high or a low. These boxes harmonically govern the entire area
occupied by W(4). Moreover, every time there is a change in
trend, the 45-degree angles act as a guide. The entire W(4) wave
terminates at the eighth drawn Gann box with the following
inner coordinates: 0.25 of price, and 0.666 of time.
FINDING THE TURNING POINTS
Most of the reversals in Figures 4 and 5 take
place at the time & price confuences governed
by the Gann boxes or by the 45-degree geo-
metric angle. The time & price relationship
practiced in real time, with its array of boxes
drawn using the frst swing, illustrates its
effciency in revealing a market turn. Once again, you see the
importance of using a systematic approach, which consists of
strictly monitoring the developing process of the confuences.
Once again, if a box or an angle is overcome, just draw and
consider the next one.
Take the time to understand the relationship between time &
price and the likelihood of price meeting confuence points. In the
second part of this article series, I will show you how the time
& price relationship can be seen developing in real time.
FIGURE 5: TURNING POINTS. Most of the reversals take place at the time & price confluences governed by Gann boxes or by the 45-degree geometric angle.
Gann’s main credo regarding
the time & price relationship
plays a big role in identifying
market turns.
Weekly chart
Euro/RON spot forex
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 27
Mircea Dologa, MD, began his investment
and trading career in 1987 as a Commodity
Trading Advisor and a registered general
securities representative. He subsequently
moved into teaching practical aspects of
trading using techniques he developed.
He is a contributor to many magazines
around the world, and is publisher of the
monthly World Charting Report, which
covers international indexes, commodities,
and forex charts. He is a member of several
technical analysis associations (ATAA &
STA) and an MTA associate member. He
may be contacted at mircdologa@yahoo.
com or via his website at www.pitchfork-
trader.com.
RELATED READING AND
REFERENCES
Dologa, Mircea [2006]. “The
Third Wave,” Technical Anal-
ysis of STOCKS & COMMODI-
TIES, Volume 24: May.
_____ [2006]. “Trading The
Trend In Wave 3,” Technical
Analysis of STOCKS & COM-
MODITIES, Volume 24: June.
_____ [2006]. “Trading Wave 3,”
Technical Analysis of STOCKS
& COMMODITIES, Volume 24:
September
_____ [2012]. World Charting
Report, monthly periodical,
Paris, France, http://pitchfork-
trader.com/reports.html.
_____ [2013]. Elliott Waves: Beginner To
Professional Level, http://pitchfork-
trader.com.
_____ [2008]. Integrated Pitchfork Analy-
sis: Basic To Intermediate Level, John
Wiley & Sons, London.
_____ [2008]. Integrated Pitchfork
Analysis: Advanced Level (II), Pïtch-
forktrader.com, Paris.
_____ [2009]. Integrated Pitchfork
Analysis: Advanced Level (III), Pïtch-
forktrader.com, Paris.
Jenkins, Michael S. [2012]. Square The
Range Trading System, www.stock-
cyclesforecast.com.
Neely, Glenn [1990]. Mastering Elliott
Wave: Presenting The Neely Method,
Windsor Books.
‡eSignal (Interactive Data Corp.)
CHART PATTERNS
28 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
Back To The Basics
Muscle Up
Those Averages
M
are a bit more complex and require more
computation. Nevertheless, you can use
both these moving averages to see who
has more muscle in a trend — the bear or
the bull. Both moving averages provide
a foor (support) or a roof (resistance) to
a fnancial asset.
ARE THEY CONVERGING
OR DIVERGING?
The MACD is a popular indicator; it
is the difference between two EMAs.
If you take an average of a smaller
amount of data, your average will be
greater. In this case, it would apply to
a faster moving average (50-day) and
the opposite would happen for a larger
set of data (slower moving average,
that is, 200-day). It would be the differ-
ence between these two averages (see
sidebar “Calculating MACD” on page
30). The signal line is the average for
the graph; usually a nine-day average
is used. You can use the MACD to see
whether momentum is picking up or
declining — if the MACD has rising
lows, then momentum is picking up,
and if it has lower highs, it shows that
the security is losing momentum.
THE CROSSING OVER
Although there are many possible
strategies, I will highlight one basic
strategy. Moving averages help the
trader to determine whether to buy or
sell a fnancial asset at the market price.
This is known as the moving average
crossover strategy. Most traders use a
50-day SMA and a 200-day SMA. The
strategy is fairly simple:
1. If the 50-day SMA crosses over the
200-day SMA, it is a buy signal.
2. If the 50-day SMA crosses under
the 200-day SMA, it is a short
signal.
You cannot, however, base your trades
solely on moving averages and the
MACD; you should look at the bigger
picture. Do the fundamentals support what
the technical indicators are telling you?
THE BIG PICTURE
The chart in Figure 1 is a daily chart of
the EUR/USD pair with the 50-day SMA
INDICATORS
Trading the currency markets means you need to be well aware of global macro
and micro economic variables. But when it comes to trading these markets, simple
is better. Find out more through this example of the EUR/USD currency pair.
by Ajay Pankhania
oving averages, although simple, are sometimes underused. In extreme market
movements, moving averages have a smoothing effect. They are also vital and
fundamental to the foundations of indicators we know today, one of them being
the moving average convergence/divergence (MACD).
BULL OR BEAR?
There are many types of moving averages. Two of the more popular ones are the simple
moving average (SMA) and exponential moving average (EMA). SMAs are calculated
by adding the price of the fnancial asset and dividing it by the number of observations
(See sidebar “Calculating Moving Averages” on page 30). In other words, you can
calculate a simple moving average as you would normally calculate an average. EMAs
N
I
K
K
I


M
O
R
R
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 29
M
E
T
A
T
R
A
D
E
R
Forex traders should look at the big
picture and determine if fundamentals
support technical analysis.
and 200-day SMA overlaid on the price chart. The MACD is
displayed in the subchart below the price chart. In the case
of the EUR/USD, you would look at how quantitative easing
(QE) will affect the dollar, if the Eurozone’s growth rate is
contractive or expansive, political stability in the Eurozone
nations, and so forth.
Let’s see how fundamental events affected the currency pair
through the chart in Figure 1. In late March 2013, the EUR/USD
pair dipped below the 200-day SMA and the MACD indicates
that the pair is oversold. During that time there were concerns
about Cyprus and signs of a recession in the Eurozone. But
better-than-expected retail sales in Germany and the Cyprus
situation showing signs of being under control helped the
EUR/USD move higher. But in mid-April, the 50-day SMA
crossesd below the 200-day SMA (highlighted area), which
is a sell signal. However, the MACD does not confrm this
sell signal until a couple of weeks later when the blue line
crosses below the red line. Even then, it wasn’t a very strong
sell signal. A strong sell signal was given on May 10, 2013
when price broke below the 50-day SMA and the MACD
displayed a sell signal. Note that the MACD indicator was
negative when the price dropped. This weakness in the EUR
coincided with the release of weak Eurozone GDP data.
In early June, the EUR/USD pair traded between the 50-day
and 200-day SMAs (which act as support & resistance levels)
and appeared as if it was looking to break through the 200-day
SMA ahead of the European Central Bank’s (ECB) monetary
policy decision. On June 6, 2013, after the ECB announced its
FIGURE 1: APPLYING MOVING AVERAGES ON THE EUR/USD. Here you see how the simple moving average (SMA), exponential moving average (EMA), and the moving
average convergence/divergence (MACD) helped indicate price movement in the EUR/USD. If you look at economic data, you will see how fundamental data impacts price
movement in this currency pair.
decision to leave interest rates unchanged, the EUR/USD moved
signifcantly higher, leaving its resistance level at the 200-day
SMA (blue arrow) far behind. The MACD confrmed this bullish
rally and will help to determine when the trend is likely to end,
since it looks at momentum and strength of a trend.
30 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
(approximated) as (2 ÷ (n +1)) where n is the simple moving
average length.
Instead of calculating weights for all previous prices, how-
ever, it simply takes the previous day’s EMA and multiplies it
by (1 – weight). Thus,
EMA
n
= (aP
n
) + ((1- a)EMA
n -1
)
where a is the multiplier, or (2 ÷ (n +1))
For a fve-day EMA:
EMA
5
= (0.333P
5
) + ((0.667)EMA
4
)
BE MINDFUL OF THE LAGS
Moving averages are based on past
price actions, so there can be consider-
able lag in its signals. Prices may have
begun their ascent or descent prior
to the crossovers. Since the MACD
relies on the EMA, the MACD is also
a lagging indicator. Therefore, it is advisable to use more
than one indicator. In the case of trading forex, it is important
and necessary to keep an eye on the fundamental data of the
global markets.
Ajay Pankhania is a technical analyst for Accendo Markets.
SUGGESTED READING
Ehlers, John F. [2003]. “Moving Average Computations, Made
Easier,” Technical Analysis of STOCKS & COMMODITIES,
Volume 21: December.
Hartle, Thom [1991]. “Moving Average Convergence/Di-
vergence (MACD),” Technical Analysis of STOCKS &
COMMODITIES, Volume 9: March.
Merrill, Arthur A. [1992]. “Moving Average Crossovers,”
Technical Analysis of STOCKS & COMMODITIES, Volume
10: August.
Pring, Martin J. [2000]. “Using The Simple Moving Aver-
age,” Technical Analysis of STOCKS & COMMODITIES,
Volume 18: June.
Star, Barbara [1994]. “The MACD Momentum Oscillator,”
Technical Analysis of STOCKS & COMMODITIES, Volume
12: February.
‡MetaTrader (MetaQuotes Software Corp.)
‡See Editoral Index
CALCULATING MACD
The moving average convergence/divergence (MACD) is
an oscillator developed by Gerald Appel. The formula for
calculating the MACD is:
Fast line = (12-period EMA) – (26-period EMA)
Signal line = (Nine-period EMA of fast line)
A buy signal occurs when the MACD line crosses above the
signal line. A sell signal occurs when the MACD line crosses
below the signal line.
CALCULATING MOVING AVERAGES
Simple moving average (SMA)
The simple moving average is calculated by summing up all
the prices to be included in the average and then dividing that
sum by the number of observations. The formula for calculating
the moving average is:
(P
1
+ P
2
+ P
3
+ P
4
+ P
5
… + P
n
) ÷ n
where:
P
1
is the price of the frst time period used in the calculation
P
n
is the price of the last time period used in the calculation
n is the number of observations used to calculate the average
Exponential moving average (EMA)
The exponential moving average assigns more weight to recent
prices. The most recent price is assigned a weight, calculated
INDICATORS
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32 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
It may seem impossible, but it can be done. Find out how.
by Azeez Mustapha
rading with the fow of the markets means entering high-
reward and low-risk settings, and taking a small loss
if something goes wrong. We often think that a small
loss will be sustained when trying to pinpoint a turning
point in the market, but that may be unrealistic, especially if
the supposed turning point becomes spurious. How can you
overcome this challenge by using a few popular indicators?
How can you recognize true dips or rallies in the context of an
ongoing trend? How can you recognize a trap that may plunge
you against a serious reversal? How can you exit properly and
safely? This article will try to answer these questions.
It is well known that buying the dips in an uptrend and
Make It A Graceful Exit
Beating The Currency Markets
selling the rallies in a downtrend offers the best trading prob-
ability. Hence, the strategy discussed here trades pullbacks
only (not breakouts).
Some people like to do nothing but trade. They are soldiers,
pure and simple, on the battlefeld of the fnancial markets. For
them, trading has become a calling. However, each trader’s
mindset differs, and studies have shown that most traders spend
more time in positions that are showing positive returns.
INDICATORS AND OPEN TRADES
The market can be in one of these three phases:
n A bull market, where buyers gain the upper hand
n A bear market, where sellers gain the upper hand
n A ranging market, where supply & demand reach
equilibrium.
T
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W
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September 2013 • Technical Analysis of STOCKS & COMMODITIES • 33
Historical data may be adequate to
measure past price behavior, but price
will do what it wants. It may move up,
down, or sideways. When we place an
order, our portfolio is subject to pecuni-
ary uncertainty, and our temperament
is also on the line. Staying glued to the
screen as you monitor open positions
(for example, when there is negativity)
may undermine your fortitude. Staring
at your screen and wanting a negative
position to turn positive has nothing to
do with what the market is really doing.
In fact, monitoring your trades 24/5 will
only entice you to carry out irrational
reactions that may untimely have an
adverse effect on your trading.
The indicators used for this strategy
are the linear-weighted moving average
(LWMA) and the commodity channel
index (CCI). More specifcally, these
indicators are the following:
n 30-period LWMA
n 50-period LWMA
n 14-period CCI
For details on how to calculate the
LWMA, see sidebar “Linear-Weighted
Moving Average.” The CCI is an oscil-
lator developed by Donald Lambert
in 1980 to indicate whether a trend is
beginning or ending.
A long position: A long position is
anticipated after the 30-period LWMA
crosses above the 50-period LWMA.
A price retracement that moves down
to the 50-period LWMA can be taken
advantage of. When this happens, you
prepare to open a long position (within
the context of an uptrend). The CCI
should be in an oversold region and ris-
ing up from there. Entering the market
as soon as price starts going up will put
the odds in your favor.
A short position: The opposite is as-
sumed for a short position in a bear
market. A short position is anticipated
after the 30-period LWMA crosses be-
low the 50-period LWMA. When price
rallies up to the 50-period LWMA, you
can capitalize on the stock. The CCI
should be in an overbought region at this
FOREX TRADING
34 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
time, and must be going down from that region. Entering the
market as soon as you see price start going down will put the
odds in your favor.
Market prices are based on the struggle between buyers &
sellers, resistance & support levels, uptrends & downtrends,
and so on. When the characteristics of these downtrends &
uptrends align with the market’s limitations, you can mean-
ingfully forecast the possible direction of the markets. Some
traders may prefer to include additional rules to flter a possibly
negative trade. But fltering out signals while you still have an
open position is not usually a good idea. If a trading system
is effective and gives you proftable trades in most market
situations, fltering out trades will only reduce your gains.
STRATEGY DETAILS
Strategy name: Swing entry & exit system
Strategy type: Good for part-time traders
Time horizon: Four-hour charts
Indicators: 30-period LWMA, 50-period LWMA, and
14-period CCI
Instruments: Use any currency pair or cross whose spread
is less than 10 pips
Setup: As indicated later in this article in the section titled
“Indicators and open trades”
Position sizing: Use 0.01 lots for each $1,000 (thus making it
FOREX TRADING
LINEAR-WEIGHTED MOVING AVERAGE (LWMA)
The linear-weighted moving average (LWMA) is a moving average
that puts more weight on the most recent market information. This
data is derived from multiplying a specific number of closing prices
by an assigned weight. These weighted observations are then added
and divided by the sum of the weights. For example, when calculat-
ing a 15-day LWMA, the most recent closing price is multiplied by
15, yesterday’s by 14, and so on until day 1 in the period’s range is
reached. These results are then added together and divided by the
sum of the multipliers (15 + 14 + 13 + ... + 3 + 2 + 1 = 120).
Knowing how and when to close
a trade is more favorable than
knowing how and when to enter
a trade.
0.1 lots for $10,000), or 0.1 lots for each
10,000 cents in a cent account (making
it 1.0 lots for each 100,000 cents)
Risk per trade: 0.5%
Stop-loss: 100 pips from the entry
price
Take proft: 200 pips from the entry
price
Breakeven: Move your stop to breakev-
en after you have gained at least 70
pips
Trailing stop: Apply a custom-set trail-
ing stop of 100 pips after you have gained
up to 170 pips or more
Exit: Either the stop-loss, the breakeven
stop, the trailing stop, or the target will
be hit. If not, close the position after
seven days
Hit rate: With the recommended risk
management, you can survive with a
hit rate of 40%
Trade duration: Close an open position
that has been running for 10 days.
SMOOTHING YOUR POSITIONS
Knowing how and when to close a trade
is more favorable than knowing how
and when to enter a trade. It provides
you with an edge. In fact, if you become
adept at using effective exit methods, it
will have a satisfactory impact on your
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www.phantomtrader.com
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and proprietary charting tools.
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 35
Knowing your take-profit level before
placing a trade will help you close a
position as soon as a predetermined
number of positive pip movements
has occurred.
May 5, 2012
May 17, 2012
CCI(14) -21.0771
USDCAD,H4
1.0325
1.0235
1.0190
1.0145
1.0100
1.0055
1.0010
0.9965
0.9920
0.9875
0.9830
0.9785
316.534
100
0.00
-100
-206.122
May 22, 2012
CCI(14) 12.8018
AUDUSD,H4
1.0515
1.0440
1.0365
1.0290
1.0215
1.0145
1.0070
0.9995
0.9850
0.9775
0.9700
0.9625
299.014
100
0.00
-100
-275.018
May 23, 2012
FIGURE 1: USDCAD IN AN UPTREND. Although the USDCAD is in an uptrend, it’s a good idea to wait for price
to pull back to the 50-period LWMA. You do not want to enter the market if the price did not turn and start moving
up again (since that may be a potential turning point to a protracted bear market). When the price started moving
up again, signaling the supremacy of the bulls, a long position was entered at a low-risk price.
FIGURE 2: AUDUSD IN A DOWNTREND. Here, the AUDUSD is in a downtrend. On May 21, 2012, there was
continual bullish pressure that took the price upward until it nearly touched the 50-period LWMA. On May 22,
2012, a bearish candle formed and a short trade was therefore opened.

M
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HERE ARE SOME EXAMPLES
On each chart of the following examples,
the vertical red line on the left shows where
a trade was entered while the vertical
red line on the right shows where it was
exited. The 30-period LWMA is displayed
in blue, and the 50-period LWMA is
shown in red. The CCI is displayed on
the subchart below the price chart. Note
that on the CCI, the area above 100 rep-
resents an overbought region, whereas the
area below -100 represents an oversold
region. Spreads were not considered in
these examples.
Example 1: In the four-hour chart of the
USDCAD in Figure 1, you can see that
the USDCAD is in an uptrend. It is best to
wait till price pulls back to the 50-period
LWMA before entering a long position. I didn’t want to enter
the market if the price did not turn and start moving up again
since that may be a potential turning point to a protracted bear
market. When price started moving up again (vertical red line
on the left), it indicated the supremacy of the bulls. Since price
had retraced in the context of an uptrend, I entered a long posi-
tion. It seemed like a low-risk entry. The CCI was oversold at
this time.
Instrument: USDCAD
Order: Buy
Entry date: May 11, 2012
Entry price: 0.9980
Stop-loss: 0.9880
Trailing stop: 1.0080
Take proft: 1.0180
Exit date: May 17, 2012
Exit price: 1.0080
Status: Closed
Proft/loss: 200 pips
Example 2: In the four-hour chart of the
AUDUSD in Figure 2, there is an obvious
downtrend in price movement. On May
21, 2012, there was a continuation of bull-
ish pressure that took price upward until it
nearly touched the 50-period LWMA. On
May 22, 2012, a bearish candle formed
and the CCI was in overbought territory.
Hence, a short trade was opened, and it
was one that ended up being successful.
Instrument: AUDUSD
Order: Sell
Entry date: May 22, 2012
Entry price: 0.9915
Stop-loss: 1.0015
trading results. Knowing your take-proft level before placing a
trade will help you close a position as soon as a predetermined
number of positive pip movements has occurred, assuming
the trade moved in your favor.
Obviously, not all signals can result in proftable trades,
since prices are sometimes deceptive. Nevertheless, an objec-
tive analysis of the LWMA, the CCI, and an exit method will
often push you ahead.
36 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
Trailing stop: 0.9815
Take proft: 0.9715
Exit date: May 23, 2012
Exit price: 0.9715
Status: Closed
Proft/loss: 200 pips
Example 3: Look at the four-hour AUDJPY
chart in Figure 3. No strategy is foolproof,
and here you see an example of a signal
that failed. A sell signal was generated
after a bearish candle formed (price had
retraced up to the 50-period LWMA during
a downtrend). In this example, even though
this ended up being a false signal, what is
important is how the risk was controlled
and the loss kept negligible.
FIGURE 3: A FAILED SIGNAL ON THE BEARISH AUDJPY. Here is an example of a signal that failed on the
AUDJPY. A sell signal was generated after a bearish candle was formed (since the price had run into the 50-period
LWMA in the context of a downtrend). The trade failed; no strategy is foolproof.
FOREX TRADING
AUDJPY,H4
CCI(14) 16.9952
June 6, 2012
240.594
100
0.00
-100
-339.587
June 5, 2012
83.25
82.50
81.75
81.00
80.25
79.50
78.77
78.00
77.25
76.50
75.75
75.00
74.25
IT’S ALL IN THE EXIT
The currency markets are not to be taken
lightly and if you wish to trade them, it’s
best to keep your strategy simple. You need
to be well prepared to react quickly to any
price movement. Have a well-thought-out
plan and know your entry price, stop-loss,
and proft-taking price before placing your trade. Don’t plan
on staying in the trade long; there’s no time for hoping that
price will move in your favor. What is most important is to
keep your risk exposure at a minimum by defning your exits
and keeping your position sizes at a manageable level.
Azeez Mustapha is a trading professional, an InstaForex
analyst, a blogger at ADVFN.com, and a freelance author.
His articles have been published at Ituglobalforex.blogspot.
com, Forexpeacearmy.com, and in TRADERS’ magazine. He
is also a senior analyst at Paxforex.com. He can be contacted
at azeez.mustapha@analytics.instaforex.com.
SUGGESTED READING
Mustapha, Azeez [2013]. “Keep Your Portfolio Safe,” Tech-
nical Analysis of STOCKS & COMMODITIES, Volume 31,
August.
_____ [2012]. “Profting From Protracted Consolidations,”
Technical Analysis of STOCKS & COMMODITIES, Volume
30, September.
Wu, Amy [2002]. “Commodity Channel Index,” Working-
Money.com, Volume 20, April.
‡MetaTrader (MetaQuotes Software Corp.)

YOUR ONLINE
RESOURCE
FOR
TECHNICAL
ANALYSIS
Instrument: AUDJPY Take proft: 74.20
Order: Sell Exit date: June 6, 2012
Entry date: June 5, 2012 Exit price: 77.20
Entry price: 76.20 Status: Closed
Stop-loss: 77.20 Proft/loss: -100 pips
Trailing stop: N/A
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38 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
In this ffth part of our article series on indicator rules for a
swing trading strategy (IRSTS), we will introduce an oscil-
lator based on Percent B.
by Sylvain Vervoort
ou’re probably familiar with the Percent b (%b, or PB) oscil-
lator that was developed by John Bollinger — it’s derived
from the Bollinger Bands indicator. Here’s how it works:
When the price touches the upper Bollinger Band, then the
oscillator hits 100. If price moves above the upper band, the oscil-
lator moves to +100. When the price touches the lower Bollinger
Band, then the oscillator hits zero, and if price moves below the
lower band, the oscillator moves to a negative value.
Here’s how it’s calculated:
Percent b = (Closing price – Lower band) /
(Upper band – Lower band) * 100
BASIC CALCULATION
When I created my zero-lag oscillator (SVEZLRBPercB),
which is based on the Percent b, I used the same basic formula
as the Percent b. However, before applying the formula, I
The Best Of Both Worlds
Oscillators, Smoothed
manipulated the input data I used.
In a July 1997 STOCKS & COMMODITIES article, Mel Widner
introduced rainbow charts, which is the technique I used to
convert the closing price data to a “rainbow” data series and
give some extra weight for the less-smoothed data:
rainbow_value =
(5 * SMA(2)[0] +
4 * SMA(SMA(2), 2)[0] +
3 * SMA(SMA(SMA(2), 2), 2)[0] +
2 * SMA(SMA(SMA(SMA(2), 2), 2), 2)[0] +
SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2)[0] +
SMA(SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2), 2)[0] +
SMA(SMA(SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2), 2), 2)[0] +
SMA(SMA(SMA(SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2),
2), 2), 2)[0] +
SMA(SMA(SMA(SMA(SMA(SMA(S
MA(SMA(SMA(2), 2), 2), 2), 2), 2),
2), 2), 2)[0] +
SMA(SMA(SMA(SMA(SMA(SMA(SM
A(SMA(SMA(SMA(2), 2), 2), 2), 2),
2), 2), 2), 2), 2)[0]) / 20;
rainbow.Set(rainbow_value);
Next, I averaged this new rainbow data series with an
exponential moving average (EMA) by applying a zero-lag
Y
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September 2013 • Technical Analysis of STOCKS & COMMODITIES • 39
method. The idea of smoothing data
with less lag and zero-lag techniques
was proposed by Patrick Mulloy in
the February 1994 issue of STOCKS
& COMMODITIES and by John Eh-
lers in the March 2000 issue. The
technique compensates for the lag
in moving averages.
Here’s how I created the new data
series ZLRB (zero-lag rainbow):
EMA1.Set(EMA(rainbow, smooth)[0]);
EMA2.Set(EMA(EMA1, smooth)[0]);
diff = EMA1[0] - EMA2[0];
ZLRB.Set(EMA1[0] + diff);
Finally, I calculate and plot the
modifed Percent b formula, but only
after applying another smoothing
step using triple exponential mov-
ing averages (TEMA) and weighted
moving averages on the zero-lag
ZLRB data series:
PB_Plot.Set((TEMA(ZLRB, smooth)[0]
+ 2*StdDev(TEMA(ZLRB, smooth),
stdevperiod)[0] - WMA(TEMA(ZLRB,
smoot h) , st devper i od) [ 0] ) /
(4*StdDev(TEMA(ZLRB, smooth),
stdevperiod)[0])*100);
CHARTING
N
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FIGURE 1: MODIFIED PERCENT B OSCILLATOR. This indicator is a fast-moving oscillator and is often a leading
indicator.
In the main window in Figure 1, you see a
candle chart with a volatility band overlaid
on it. This volatility band was introduced in
my previous article, “Within The Volatility
Band.” In the lower subwindow, you see my
modifed Percent b oscillator based on an
18-day lookback period, using two standard
deviations and an eight-day smoothing. The
modifed Percent b is basically a fast-moving
oscillator and, as you can see, it is often a
leading indicator. Since we are not looking
for fast swing trades with IRSTS, I use the
modifed Percent b oscillator for detecting
divergences, and I use it in combination with
a slow stochastic oscillator.
A positive or negative
divergence of one
or both indicators
tends to be a more
important signal.
40 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
LANE’S WAY
Next I will create this slow stochas-
tic oscillator and overlay it on the
modifed Percent b. Developed by
George C. Lane in the late 1950s,
the stochastic oscillator is a mo-
mentum indicator that shows the
location of the close relative to the
high-low range over a lookback
period. This indicator is calculated
using the following formula:
FIGURE 2: BUY & SELL SIGNALS. Here, the buy areas are displayed in yellow, and sell areas in red. The indicators
also confirm the buy & sell areas.
CHARTING
FIGURE 3: POSSIBLE BUY SIGNAL? There is a positive divergence between price and the indicators. This suggests a
possible up reversal.
Stochastic = 100 * (Close –
Low[Period]) /
(High[Period] – Low[Period])
As a rule, momentum changes
direction before price. Hence,
bullish and bearish divergences
in the stochastic oscillator can be
used to foreshadow reversals.
Once again, instead of simply
using the closing price to calculate
this stochastic, I will smooth the
process using an average price
based on the rainbow data series
and the typical price. I use the sum
of this data and divide the result
by two, creating a new data series
called rainbow closing (RBC). The
numerator is calculated as RBC
minus the lowest low in the selected
period. For the denominator, I take
the difference of the highest high
minus the lowest RBC value in the
selected period. Finally, I smooth
the obtained stochastic further with
a simple moving average. Here is
the NinjaScript code:
// Add a second plot for the slow
stochastic
// Use a numerator/denominator based
on an averaged new data series RBC
RBC.Set((rainbow[0] + Typical[0])/2);
nom.Set(RBC[0] - MIN(Low, periodK)[0]);
den.Set(MAX(High, periodK)[0] -
MIN(RBC, periodK)[0]);
// Calculate and smooth the stochastic
indicator
if (den[0].Compare(0, 0.000000000001)
== 0)
fastK.Set(CurrentBar == 0 ? 50 :
fastK[1]);
else
fastK.Set(Math.Min(100, Math.Max(0,
100 * nom[0] / den[0])));
K.Set(SMA(fastK, smoothK)[0]);
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 41
Continued on next page
SVEZLRBPercB oscillator
// SVEZLRBPercB is Copyright (C) 2012, Sylvain Vervoort <stocata.
org>.
// stocata.org reserves the right to modify this NinjaScript with each
release.
// Release V1.0 December, 2012.
#region Using declarations
using System;
using System.ComponentModel;
using System.Diagnostics;
using System.Drawing;
using System.Drawing.Drawing2D;
using System.Xml.Serialization;
using NinjaTrader.Cbi;
using NinjaTrader.Data;
using NinjaTrader.Gui.Chart;
#endregion
// This namespace holds all indicators and is required. Do not change it.
namespace NinjaTrader.Indicator
{
/// <summary>
/// smoothed zero-lagging Percent b indicator on a rainbow-based
price series.
/// Includes a slow modifed stochastic following medium-term moves.
/// </summary>
[Description(“Smoothed zero-lagging Percent b indicator on rainbow
price series.”)]
public class SVEZLRBPercB : Indicator
{
#region Variables
private int stdevperiod = 18; // Default standard deviation lookback
period
private int smooth = 3; // Default TEMA/EMA smoothing average
private int periodK = 30; // Kperiod for stochastics line
private int smoothK = 3; // Slowing K period
private DataSeries rainbow;
private DataSeries EMA1
private DataSeries EMA2;
private DataSeries ZLRB;
private DataSeries den;
private DataSeries nom;
private DataSeries fastK;
private DataSeries RBC;
private double diff, rainbow_value;
#endregion
/// <summary>
/// Confguring the indicator called once before any bar data.
/// </summary>
protected override void Initialize()
{
Ad d ( n e w Pl o t ( Co l o r . Fr o mKn o wn Co l o r ( Kn o wn Co l o r .
DodgerBlue),PlotStyle.Line, “PB_Plot”));
Add(new Plot(Color.Red, “K”));
Add(new Line(Color.Gray, 100, “Overbought”));
Add(new Line(Color.Gray, 50, “Neutral”));
Add(new Line(Color.Gray, 0, “Oversold”));
Lines[0].Pen.DashStyle=DashStyle.Dot;
Lines[1].Pen.DashStyle=DashStyle.Dot;
Lines[1].Pen.Width=2;
Lines[2].Pen.DashStyle=DashStyle.Dot;
PaintPriceMarkers = false;
Overlay = false;
rainbow = new DataSeries(this);
EMA1 = new DataSeries(this);
EMA2 = new DataSeries(this);
ZLRB = new DataSeries(this);
den = new DataSeries(this);
nom = new DataSeries(this);
fastK = new DataSeries(this);
RBC = new DataSeries(this);
}
/// <summary>
/// Called on each bar update event (incoming tick)
/// </summary>
protected override void OnBarUpdate()
{
if (CurrentBar < 1) // minimum 2 bars required
return;
// Create rainbow-based dataset
rainbow_value =
(5 * SMA(2)[0] +
4 * SMA(SMA(2), 2)[0] +
3 * SMA(SMA(SMA(2), 2), 2)[0] +
2 * SMA(SMA(SMA(SMA(2), 2), 2), 2)[0] +
SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2)[0] +
SMA(SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2), 2)[0] +
SMA(SMA(SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2), 2), 2)[0] +
SMA(SMA(SMA(SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2), 2), 2),
2)[0] +
SMA(SMA(SMA(SMA(SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2), 2),
2), 2), 2), 2)[0] +
SMA(SMA(SMA(SMA(SMA(SMA(SMA(SMA(SMA(SMA(2), 2), 2), 2),
2), 2), 2), 2), 2), 2)[0]) / 20;
rainbow.Set(rainbow_value);
// Smoothing rainbow data in new data set ZLRB applying zero-
lagging
EMA1.Set(EMA(rainbow, smooth)[0]);
EMA2.Set(EMA(EMA1, smooth)[0]);
diff = EMA1[0] - EMA2[0];
ZLRB.Set(EMA1[0] + diff);
// Plot Percent b indicator from smoothed band at 2 standard deviations
PB_Plot.Set((TEMA(ZLRB, smooth)[0] + 2 * StdDev(TEMA(ZLRB,
smooth), stdevperiod)[0] -
WMA(TEMA(ZLRB, smooth),stdevperiod)[0]) /
(4 * StdDev(TEMA(ZLRB, smooth), stdevperiod)[0]) * 100);
// Add a second plot for the slow stochastic
// Use a numerator/denominator based on an averaged new data
series RBC
RBC.Set((rainbow[0] + Typical[0])/2);
The entire code listing can be found in sidebar “SVEZLRB-
PercB Oscillator.”
The IRSTS strategy rule is that the oscillators must be bullish
for a buy signal and bearish for a sell signal. This means that
both the oscillators must be moving up or down. In Figure
2, the typical IRSTS buy areas are shown in yellow and sell
areas in red. At the same time, these areas are confrmed by
the indicators, since they are moving in the direction of the
possible IRSTS buy or sell signal.
There are a few more interesting things to keep in mind.
One is that a positive or negative divergence of one or both
indicators tends to be a more important signal, since these
divergences generally appear during a longer-period turning
point. In the green area in Figure 3, there is a possible buy
signal from the IRSTS strategy rules. Prior to that, there are
lower bottoms in price, but the blue modifed Percent b in-
dicator and the red stochastic indicator have higher bottoms.
This is a positive divergence confrming a more important
42 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
SVEZLRBPercB oscillator (cont’d.)
up reversal.
Another kind of divergence is
shown in Figure 4 where, in two
occurrences, there are higher bot-
toms in price with lower bottoms
in the indicators. This mostly
happens at turning points after a
correction in an ongoing trend. It
is referred to as a hidden diver-
gence and it’s a strong signal that
the previous trend will continue
making a high above the previous
high in an uptrend. Keep in mind
that the inverse is possible at tops.
It is also possible that only one of
the two indicators will show this
hidden divergence.
TRAILING THE STOP
The adapted stochastic oscillator
I created is specially designed to
be useful as a trailing stop, while
the modifed Percent b oscillator
is faster and most practical for
showing entry points in an ongo-
ing trend.
In the uptrend beginning in
nom.Set(RBC[0] - MIN(Low, periodK)[0]);
den.Set(MAX(High, periodK)[0] - MIN(RBC, periodK)[0]);
// Calculate and smooth the Stochastic indicator
if (den[0].Compare(0, 0.000000000001) == 0)
fastK.Set(CurrentBar == 0 ? 50 : fastK[1]);
else
fastK.Set(Math.Min(100, Math.Max(0, 100 * nom[0] / den[0])));
K.Set(SMA(fastK, smoothK)[0]);
}
#region Properties
[Browsable(false)] // prevents data series being displayed in proper-
ties
[XmlIgnore()] // ensures indicator can be saved as part of a template
public DataSeries PB_Plot
{
get { return Values[0]; }
}
/// <summary>
/// Gets the slow K value.
/// </summary>
[Browsable(false)]
[XmlIgnore()]
public DataSeries K
{
get { return Values[1]; }
}
[Description(“PercentB Standard Deviation Period DEF = 18”)]
[Category(“Parameters”)]
[Gui.Design.DisplayName(“1. PercentB Deviation Period”)]
public int PercB_Deviation_Period
{
get { return stdevperiod; }
set { stdevperiod = Math.Max(1, value); }
}
[Description(“PercentB smoothing average DEF = 3”)]
[Category(“Parameters”)]
[Gui.Design.DisplayName(“2. PercentB Average”)]
public int PercB_Average
{
get { return smooth; }
set { smooth = Math.Max(1, value); }
}
/// <summary>
/// </summary>
[Description(“Bars used for calculating K value DEF = 30”)]
[GridCategory(“Parameters”)]
[Gui.Design.DisplayName(“3. Stochastic Period”)]
public int Stochastic_Period
{
get { return periodK; }
set { periodK = Math.Max(1, value); }
}
/// <summary>
/// </summary>
[Description(“Bars for slowing basic K values DEF = 3”)]
[GridCategory(“Parameters”)]
[Gui.Design.DisplayName(“4. Stochastic Slowing”)]
public int Stochastic_Slowing
{
get { return smoothK; }
set { smoothK = Math.Max(1, value); }
}
#endregion
}
}
—S.V.
FIGURE 4: HIDDEN DIVERGENCE. Higher lows in price and lower lows in the indicators usually occur after corrections
in ongoing trends. It’s a strong signal that the previous trend will continue.
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 43
March 2007 in Figure 5, note the
higher bottoms in price with the
lower bottoms in both oscillators.
These are hidden divergences
that are mostly followed by a con-
tinuation of the previous uptrend.
A confrmation is given when
the modifed Percent b oscillator
moves up above the 50 line while
the stochastic oscillator remains
above this 50 reference line.
Toward the end of April, price
moved higher, forming lower tops
in the modifed Percent b oscilla-
tor. Next, there was a reaction that
pulled price down and pulled the
modifed Percent b below the 50
line while the modifed stochas-
tic oscillator nicely continued to
stay above that 50 line. Soon after that, the modifed Percent
b oscillator crossed above the 50 line in early May, indicating
a possible entry point.
In mid-June, there was another top in price with lower tops
in the modifed Percent b oscillator. Remember that a nega-
tive divergence usually appears at the more important turning
FIGURE 5: WARNING SIGNAL. Note how the price and oscillator movements suggested a continuation of this long-term
uptrend. However, when the modified stochastic oscillator fell below the 50 line, you knew it was time to exit.
CHARTING
points. Shortly thereafter, the modifed
stochastic oscillator fell below the 50
line. This is an indication that it’s time
to get out of long positions, given that
during the entire uptrend, the stochastic
oscillator stayed above the 50 line. Keep
an eye on the oscillator and proft from it
by applying it as a trailing stop method
when it falls below the 50 line.
THE FIFTH RULE
Applying my modifed Per-
cent b and stochastic oscilla-
tors supports the ffth rule of
my indicator rules for a swing
trading strategy (IRSTS).
They can be used effectively
to identify expected future
price moves and as stops to help you
make proftable trading decisions.
In part 6, I will show you how to use
an expert indicator to color-code your
candlestick charts.
Sylvain Vervoort is a retired electronics
engineer who has been studying and us-
ing technical analysis for more than 35
years. His book Capturing Proft With
Technical Analysis received a bronze
medal from the 2010 Axiom Business
Book Awards in the category of invest-
ing. The book is a technical analysis reference introducing
a trading method callaed Lockit. His latest Band Break
System trading expert is available on DVD. Vervoort may
be reached at sve.vervoort@scarlet.be or via his website at
http://stocata.org.
Continued on page 52
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44 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
Vikram Murarka has been forecasting, trading, and hedging currencies since
1991. Beginning his career as a currency trader at Essar Group, he managed a
forex exposure of $1.2 billion. In 1996 he founded Kshitij Consultancy Services,
a leading forex risk management advisory frm in India. He regularly writes on
forex risk management issues, including a series titled “Color Of Money.” He
has contributed articles to this magazine as well as to industry journals such
as the Euromoney Foreign Exchange Handbook (UK), Global Treasury News
(UK), The Outlook Magazine (India) and in fnancial newspapers such as the
Hindu Business Line in India. Since 2010, the Reserve Bank of India (RBI) has
been including his currency forecasts in its quarterly Professional Forecasters’
Survey, which sometimes serves as an input for policymaking.
STOCKS & COMMODITIES Editor Jayanthi Gopalakrishnan interviewed Mu-
rarka via Skype and email in mid-July 2013.
INTERVIEW
she resigned shortly thereafter.
The moral of the story: If you want
to get into forex, fle papers.
Going further into history, maybe
it was destiny. I do remember being
intrigued by currency rates even
as a nine-year-old kid and later in
college where I studied economics.
I remember asking my professor
what determined the currency rates
between different countries. She
was fummoxed. I don’t blame her. I am
sometimes still fummoxed today!
Why is that?
In 1987, the foreign exchange market
did not exist in India. It was a totally
administered state, so I don’t think any-
body had a clue about the forex market
outside of the Reserve Bank of India.
So my teacher was not aware as to how
currency rates were determined. I am still
fummoxed today because it is not really
fundamentals between two countries
that set the exchange rate; it has a lot
to do with capital fow and sentiment.
Ultimately, you will have to fall back
on the technicals.
What should traders or investors pay
attention to in the forex markets?
Interest rates between different coun-
Tell us a little bit about yourself.
How did you get interested in
the fnancial markets and spe-
cifcally the forex market?
My getting into the forex market was
an accident I would say, a bit like Obelix
falling into the cauldron of magic potion.
I was in my frst job, in the fnance depart-
ment of a large conglomerate — Essar
Steel — in Mumbai. Initially, I was given
odd jobs like depositing checks into the
bank and fling papers.
Slowly, I found myself helping a
coworker who used to do the hedge
transactions (forward contracts) for the
company, negotiating the rates with the
banks. The company had a very large
forex loan book, some $1.2 billion in
1991, and the hedges were to mitigate
the forex risk on these loans.
I remember she didn’t use to fle any pa-
pers or keep any records. The bosses were
not very happy about that, of course. I took
it on myself to build a fling system and
keep proper track of the forward contracts
we entered into – in those days, it was all
calculators and large paper registers. At
one point, I was asked to stand in for her
when she took a marriage leave. But when
she returned after a couple of months, I
was not asked to discontinue. Rather, they
reassigned her to another post. Incidentally,
tries are the most important things to
watch out for in the forex market. And
since interest rates are a function of infa-
tion and central bank policy, the macro
economic numbers need to be tracked.
Since the macro economic numbers are a
function of infation, we look at the con-
sumer price index (CPI), money supply,
size of the balance sheet of the Fed, of the
Bank of Japan, and US unemployment
fgures, among others.
Of course, given that the global cur-
rency market is the closest you can come
to the utopian economic concept of per-
fect competition, an affnity with charts,
with technical analysis, is a must. Many
a times, the charts tell you something
the underlying macro numbers (funda-
mentals) do not tell you. They also tell
you things in advance of any news that
is later released.
The global currency
market is the closest you
can come to the utopian
economic concept of
perfect competition.
Beyond The Horizon
Forex Forecasting With
Vikram Murarka
Stockcharts-1309.indd 1 7/23/13 8:11:54 AM
46 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
Why do you think that is?
That’s a good question and I don’t think
I have a very good answer. It’s a matter
of experience, which you might have also
noticed before. If we try to fgure out why
technicals are ahead of fundamentals,
maybe it is that technicals are an amalga-
mation of several views in the market, of
several studies of the market, and of several
emotions in the market. It discounts all
possibilities — present and future — ahead
of the fundamentals. Perhaps it is because
the fundamentals or news comes after the
event — it’s a post-factor.
How does the forex market affect the
global economy?
I may be wrong, but I think the forex
market really does not impact the global
economy very much. I tend to think that
forex is the Y variable and the global
economy is the X variable, with forex
(Y) = f(global economy). The common
perception, for example, is that weaken-
ing of the domestic currency leads to an
increase in exports and vice versa. But,
if you look at Japan, you will see that
Japanese exports increased throughout
the 1970s and 1980s even though the
yen appreciated throughout this period.
On the other hand, if you look at the
experience of India, our exports have not
really increased very much, even though
the rupee has had an overall weakening
trend over the last three decades. Yes,
currencies are a good scapegoat for
politicians the world over to target the
“other country” with and to gloss over
their own shortcomings.
Should traders pay attention to all
markets even if they are only trading
equities or commodities or forex?
Today, with information becoming
more easily available, response times
are getting shorter, and more and more
things impact each other. Movements
in gold impact the Australian dollar and
the South African rand and vice versa.
Movements in the Japanese yen impact
the Nikkei and vice versa (Figure 1).
Movements in US interest rates impact
both stocks and forex worldwide. Pes-
simism or optimism about the euro
impacts all markets globally. So, yes,
it has become imperative to track all
markets even if you happen to trade in
only one of them.
Why should traders or investors pay
attention to the forex markets?
Earlier you could have ignored the
forex markets to an extent if you were
trading commodities. But now with large
global hedge funds trading commodities
as an asset, they tend to factor currency
movements into their investment deci-
sions, which ends up impacting the base
asset itself. Therefore, it has become
more important these days to watch the
forex markets. But that’s a subset of the
point that, these days, one has to watch
all markets in any case.
What are some signifcant changes you
have seen in the forex markets over the
years in terms of market participation,
trading volume, and so on?
The biggest change, to me, is that the
major currencies are, perhaps, seeing
smaller, more short-lived trends in the
last fve years, as compared to the 1990s
and early 2000s. There are exceptions,
of course, like the big rise in dollar/yen
this year in 2013. I would say that this is
a direct fallout of the increased availability
of information on the Internet as well as
greater central bank coordination since
the 2008 fnancial crisis. All this has led
to an increase in market participation and
volumes, leading in turn to a contraction
in price trends.
While trends are smaller in the major
currencies, we can see large, long-lasting
trends in some of the exotic/emerging
market currencies, where information
is less easily available and volume and
participation is also smaller than in the
major currencies. This makes sense.
Larger wholesale markets will tend
to see smaller price movements than
smaller retail markets, which will tend
to see larger price movements. So, if
George Soros would want to make a
billion overnight in today’s market, he
would focus on some emerging market
currency. He can’t do the same trick
INTERVIEW
FIGURE 1: NIKKEI/YEN. Movements in the yen affect the Nikkei. Here you see the periods of correlation between
the Nikkei and the USDJPY.
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 47
again in the British pound!
The second biggest change is the ex-
ponential increase in retail participation
(individual traders) in the forex market
due to the advent of online trading plat-
forms. The once-institutional market
has become more “pleb,” if I may say
so jocularly.
The third biggest change is the con-
traction of bid/offer spreads on the major
currencies to such an amazing degree that
prices are now quoted to the ffth decimal
place. As you know, the fourth decimal
place on a currency rate is called a pip.
I call the ffth decimal place a piplet!
Obviously, this could not have happened
without the quadrupling of volumes.
India’s role in the global economy
should not be ignored. Should people
pay attention to the US dollar/rupee
market?
Global institutional investors with an
interest in India do, of course, pay close
attention to the dollar/rupee market. This
is because the currency rate impacts their
dollar returns. In this context, one of the
variables that we at Kshitij closely track
is the Sensex/USDINR rate.
Further, the rupee displays a strong
correlation with a few emerging market
currencies that we at Kshitij call the “R-
currencies,” that is, the Brazilian real,
the Russian ruble, the South African
rand. I suspect this is so because some
institutional investors might be trading in
these currencies as a BRIS basket, or the
famous BRICS grouping, but excluding
China now.
Finally, although I cannot substantiate
this with data immediately, I have some-
times felt that the pound, the BSE Sensex
(Figure 2), and the Indian rupee tend to, at
least sometimes, lead other markets while
forming major tops and bottoms. You come
to realize it only afterwards, but it might
be good to pay closer attention to these
markets while reading the tea leaves.
You used to be a short-term trader.
You are now focusing on forecasting,
hedging, and so on. Tell us about this
transition. How did it happen? What
factors played a role?
When I started Kshitij.com in 1997–
98, we were among the few websites
worldwide offering forecasts and trading
recommendations on the major curren-
cies. We found an audience among retail
traders worldwide. So we catered to them
with short-term trading.
But, by nature and training, I have
tended to trade for relatively large
moves in the markets. As I said earlier,
it was possible to get relatively larger
movements in the major currencies in
the 1990s and early 2000s. This became
more and more diffcult later on as more
and more banks deployed ever-smarter
algorithms in the market. Also, com-
petition increased with more and more
websites coming up and giving out trade
recommendations. So short-term trading
became more diffcult.
Around this time, our clientele changed
from retail forex traders worldwide to
corporate hedgers in India, who are more
focused on longer-term trends. I also
realized that there was a need to create
a proper hedging methodology for this
section of the market, and so we came up
with the Kshitij hedging method.
Finally, as the rupee became more
volatile and our own forecasts became
better, we found more takers for our
services in the corporate sector. So that’s
where we are at the moment.
I can’t help but think of an article on
your website titled “Evolution Of A
Trader.” Let’s talk about this. What
are the different stages a trader goes
through? Why is it important to go
through these stages?
I would summarize the article to say
that a trader evolves from learning the
basic tools of the trade to learning to
trade and fnally, at a professional level,
to managing a portfolio on an ongoing
basis. I cannot see how it can be any
other way. Trading is a skill, a call-
ing, like painting or playing the guitar.
From learning about different colors
FIGURE 2: SENSEX IN USD TERMS. Sometimes the Sensex leads other markets while forming major tops
and bottoms.
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48 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
Possibly; one way to avoid a lot of
lost money would be to paper trade in
the beginning. I suggest that you paper
trade for one month and then place actual
trades for one month. I also encourage
traders to keep their positions very small
at the beginning to get a feel for their emo-
tions. You have to be able to withstand
the losses and that will defnitely come
in the learning period. You would have
to be the exceptionally gifted trader or
artist or musician to hit it off right from
the beginning.
Do you use technical analysis, funda-
mental analysis, or both to analyze the
markets? How do you apply them? What
indicators or data do you look at?
I would say I use both technicals and
fundamentals to analyze the markets.
Within that, I would say the mix would
be 60:40 in favor of technicals. But,
thinking again, I have to correct my
statement. The mix would be 80:20 in
favor of technicals. This is because I
do not do much hard-core economics
study. I look at the charts of a number
of other markets that might impact the
market I am trying to analyze. I do a lot
of intermarket analysis. And charts are
the tool I use all the time. So I would say
I use technical analysis much more. My
intermarket analysis substitutes for pure
fundamental analysis.
Within technical analysis, I use the
most basic tools. I tend to rely mostly
on old-fashioned trendlines and moving
averages. I sometimes use Fibonacci
retracements. And in some very special
instances, I use momentum. On the whole,
though, I am not very enamored of oscilla-
tors. Further, I have developed some tools
of my own, which tend to help a lot.
As I said earlier, I try to do a lot of
intermarket analysis. One example I gave
earlier was to divide the Sensex by the
USDINR rate. This kind of experimenta-
tion tends to sometimes throw up nice
proftable insights.
You have come up with some interesting
ways to apply technical analysis. One of
them is using support & resistance levels
across four different time frames, and
another is the three-day candlestick.
How do these methods help you in your
forecasting?
I especially like to use the three-day
candles. The daily candle gives you a
one-day picture, and weekly gives you
a fve-day picture of price movement.
There is nothing in between, so we cre-
ated the three-day candle and we fnd
that it sometimes gives us insights that
the daily and the weekly don’t capture.
I don’t have anything to back up what
I say, but I would assume that not a lot
of people use the three-day. We use the
three-day candle a lot in our analysis.
As far as the support & resistance
across four different time frames, we
came up with that by considering four
different people trading in the market.
Say one person is trading using the
four-hour chart, another is trading on
the daily chart, a third person is trading
on the three-day, and a fourth person is
trading on the weekly chart. They are
all trading different time frames. How
can I come up with a single tool that can
capture the mind of all four traders? How
can I, in one shot, get a snapshot view
of four different time frames? That was
how we came up with that tool.
What we try to do is determine if there
is a cluster of supports that is common to
all the time frames and if there is a cluster
of resistances that is common along two
or three time frames. These levels become
more important and more robust.
What type of risk management strate-
gies do you apply?
First, keep your position size small.
Second, if you are trading or investing
for the long term (and we tend to take
positions up to 12 months), it helps to
keep the downside protected through an
option trade. For instance, if you go long
on the Dow, you might also want to buy
a put as a protection. Third, our strategy
INTERVIEW
and brushes, to learning about notes
and chords, to making your frst paint-
ing by copying someone’s painting and
playing your frst full song, to fnally
having your own painting studio and
touring the world to stage gigs is a long
journey. Not everyone is cut out for it.
It’s a fallacy to think otherwise.
Yes, anyone can paint, play the guitar,
or trade the markets — as a hobby. But
you should keep things in perspective.
You might paint really nice pictures and
your friends might love your guitar play-
ing at parties, and that’s great in itself;
don’t let anybody knock you on that. You
can do the same trading the markets and
you might even be better than some of
the so-called pros.
But whether you morph your hobby
into a career or not, you still have to
learn the tools of the trade. And that
takes time and dedication and the will to
get over a lot of frustrations of spoiled
canvases, lousy recordings, and lots of
lost money.
So are you saying that even if you keep
losing lots of money, you should not
give up and instead learn from those
losses? Continued on page 66
FUTURES FOR YOU
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 49
INSIDE THE FUTURES WORLD
Want to fnd out how the futures markets really work? Carley Garner is the senior
strategist for DeCarley Trading, a division of Zaner Group, where she also works
as a broker. She authors widely distributed e-newsletters; for your free subscription,
visit www.DeCarleyTrading.com. Her books — Currency Trading In The Forex
And Futures Markets; A Trader’s First Book On Commodities; and Commodity
Options — were published by FT Press. To submit a question, post your question
at http://Message-Boards.Traders.com. Answers will be posted there, and selected
questions will appear in a future issue of S&C.
IS GOLD STILL SHINING?
Gold has dramatically underperformed
recently. Is this the new norm?
The truth is, there is nothing normal
about markets or trading them. The
current environment encompasses
market sentiment and volatility levels,
but tomorrow could be dramatically
different. Accordingly, what you assume
to be the norm won’t necessarily carry
into the future.
Since posting an all-time-high in Sep-
tember 2011 near $1,900, the asset class
once revered as a safe haven has been
tearing holes in investment portfolios.
Just as traders and investors were willing
to jump on gold’s bullish bandwagon,
the speculative community has turned
on the yellow metal with vengeance.
Nonetheless, at the precise time gold
felt most bullish a few years ago was the
exact time it was topping out. We feel
like the eventual bottom in gold will feel
the same; the moment in which the bulls
are desperate for relief and the bears are
salivating for yet another new low will
be the point at which a magnifcent price
reversal will be possible. At the time of
this writing, we were assuming this sce-
nario would be looming within the July
time frame. Once the tides turn, the pain
felt by the latecomer sellers, or simply
market chasers, will be ferce.
If you’ve been reading this column
over the years, or have followed our
newsletters, webinars, or other com-
mentary, you are likely aware that we
are not necessarily believers in the gold
story. We are quick to remind investors
that gold has its limitations as an invest-
ment product. It doesn’t pay a dividend
or a coupon payment, and, aside from
the value humans place on it, it isn’t
worth much. After all, it is too soft of
a metal to be used for most industrial
purposes. If it weren’t for our obsession
with history and the gold standard, it
would be just another element on the
periodic table. Even so, when it comes
to the fnancial markets, perception often
goes much further than reality does. Ac-
cordingly, we feel as though speculators
will eventually fall back in love with the
idea of hedging infation and economic
risk with gold.
The economy has been slowly recov-
ering for years but has yet to show real
signs of strength. Investors, and thus
the markets, will be sure to question the
equity market rally from time to time;
this too will work in favor of the bullish
gold case.
Similarly, although we’ve yet to see
any evidence of infation in the data,
we can’t help but feel it will soon be a
concern. Don’t forget, if traders simply
expect infation, they will react accord-
ingly. Whether we actually feel the
price pressure is almost irrelevant; just
the discussion of it is enough to fip the
markets. If you don’t believe me, look at
a Treasury chart. The market collapsed
in May 2013 on the frst hint of the Fed
possibly tightening its purse strings, yet
the central bank continues to buy the
securities in full force. In other words,
in the fnancial markets, sometimes
words actually do speak louder than ac-
tions. Aside from our personal opinions
on the value of gold, the market could
move with investor sentiment changes,
and gold may perhaps, once again, be
off to the races.
To reiterate, we aren’t stating that gold
is some sort of safe haven or infation
hedge, because history suggests that it
isn’t. All we are saying is that humans are
destined to repeat cycles and we rarely
learn from our exuberant mistakes. If we
are correct, gold bulls will soon be rush-
ing back to their favorite speculation.
Please keep in mind that gold is a
treacherous market and is not for the
risk averse. In the futures markets, most
position traders are likely best sticking
to the emicro contracts that allow for
easy dollar-cost averaging and buy &
hold opportunities for small traders. An
emicro future is one-tenth the size of the
original contract; a trader makes or loses
$10 per dollar of movement in the price
of gold. Trust me, this is enough exposure
for most small retail traders.
Carley Garner
If it weren’t for
our obsession with
the gold standard,
gold would be just
another element on
the periodic table.
50 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
TradingMarkets
Live Screener
PRODUCT REVIEW
THE CONNORS GROUP, INC.
10 Exchange Place, Suite 1800
Jersey City, NJ 07302
Phone: 973 494-7311 or
888 484-8220
Internet: www.tradingmarkets.com
Email: info@tradingmarkets.com
Product: Stock-screening tool
Price: $49.94 per month or $495 for
an annual subscription
by Donald W. Pendergast Jr.
tock and ETF screeners aren’t a
new concept; there have been many
on the market for some time now.
Some come as part and parcel of trad-
ing platforms, and others are offered as
standalone applications that can run on
your computer or in a web browser. Some
specialize in fundamental data such as P/E
ratios, earnings growth rates, return on
equity, and other key fnancial data, while
others focus solely on the analysis of
technical data such as moving averages,
oscillators, relative strength rankings, and
volatility, among others. One of the most
interesting and useful of the technicals-
only online stock and ETF screeners
is offered by TradingMarkets.com. It’s
called the TradingMarkets Live Screener
and is available on a monthly or annual
subscription basis. The TradingMarkets
Live Screener enables subscribers to
analyze key technical and statistical
data in real time on a universe of the
3,500 most liquid US-traded stocks and
ETFs. Leveraged and nonleveraged ETFs
can also be utilized in all of the various
screening confgurations offered within
the product (Figure 1).
Let’s get a general overview of what
it is and what it can do, and then look at
several hypothetical examples of how it
can be put to potentially proftable use
by different types of technical traders in
the stock/ETF markets.
OVERVIEW
When a TradingMarkets Live Screener
subscriber logs in, the main page displays
a number of column tabs, each of which
groups together a specifc set of screening
tools as follows:
n Technicals, which contains the fol-
lowing set of screening tools, all of
which continuously update with fresh
data every 20 seconds:
Two-day RSI (with a range of 10 or
below to 90 and above), four-day
RSI (with the same ranges), 10-day
and 100-day historical volatility
(HV), up & down days (the number
of days a stock or ETF has made
consecutively higher/lower daily
closes), two-day and fve-day re-
turns (with a range of +/- 1% to 20%
or more), fve-day stretch moving
average (the distance a stock/ETF
is above/below its fve-day simple
moving average, expressed in per-
centage terms), and for Bollinger
band fans, a very nice %b function
is also included.
In the hands of a savvy trader, this
selection of technical screening tools
provides plenty of technical screening
power, but the TradingMarkets Live
Screener offers even more, as the next
column tab shows:
S
FIGURE 1: THE TRADINGMARKETS LIVE SCREENER. This feature allows for real-time screening of the 3,500
most liquid stocks and ETFs on the NYSE, NASDAQ, and AMEX exchanges.
The TradingMarkets Live Screener could be a
boon to those who rely on mechanical systems
and need to gain an extra statistical edge for
their methodology.
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 51
n Profle/Price/Volume. This tab,
which lets a trader home in on the
stocks and ETFs (including lever-
aged ETFs) with the specifc price
range and average daily volume
characteristics they desire. Addi-
tional choices include the ability to
screen according to an instrument’s
relation to its 50- and 200-day mov-
ing average, market sector, and par-
ent stock index (DJIA 30, S&P 500,
S&P 100, and NASDAQ 100).
n Proprietary. This column tab al-
lows subscribers to view the current
reading of a unique short-term,
momentum-based oscillator — the
ConnorsRSI.
Also on the main page of the Trad-
ingMarkets Live Screener is a search
box in which you can type in a stock/
ETF ticker symbol (or even multiple
ticker symbols) to receive all of the key
technicals and continuously updating
stats on your favorite equity.
Another useful feature is the ability to
save your customized screening criteria
in the custom tools saved flters box. Late
in the Thursday, June 20, 2013 trading
session (a big down day for the broad
US markets), I created a sample screen
that looks for S&P 500 component stocks
with the following criteria:
1. Average daily trading volume of
500k or greater
2. Price greater than $5 per share
3. Trading above its 200-day moving
average
4. 100-day historical volatility (HV)
of 25 to 50
5. Has made three or more consecu-
tively lower daily closes
6. Its ConnorsRSI is at a level of 10
or below.
Users can also create and save their
own watchlists using any of the stocks
in the TradingMarkets Live Screener
database.
GETTING STARTED
Once the screening criteria is entered,
simply push the flter results button
and the screener output appears in the
window just beneath. To save the screen
flters, simply hit save and enter a unique
name to save it as (in this case, I used
“TASC oversold SP500”). You can then
bring it up again at any time to perform
a fresh daily or live intraday screening.
In this case, the TradingMarkets Live
Screener located eight stocks that met
the input flter criteria, displaying the
current daily indicator values and stock
price in real time (updated every 20
seconds). Glancing at the list reveals
that Marathon Petroleum Corporation
(MPC) has experienced the worst intra-
day decline of the stocks located by the
TradingMarkets Live Screener — down
nearly 6% on the session (Figure 2).
The technical flters output columns
provide a quick and simple way to verify
the output of the screen; one of the most
useful features of all — particularly for
traders seeking stocks setting up for a
potential reversal — is the up days and
down days flter. Using this flter, we fnd
that MPC has made fve consecutive lower
daily closes prior to the current day’s trad-
ing action, and this information can really
help a trader get focused on the stocks that
may be nearing the end of a particular
down (up) swing, just prior to a tradable
reversal, all else being equal.
For example, perhaps a fundamen-
tally attractive stock (one with steadily
increasing quarterly earnings or dividend
payouts) you like to trade has sold off
sharply for seven of the past eight trad-
ing sessions (along with others in its
sector or industry group), its Connors
RSI is below fve, its price is 6% or more
beneath its fve-day stretch MA, the 100-
day HV (historical volatility) is above
40, long-term money fow is positive,
a key support level is holding, and the
stock is also outperforming the S&P 500
index (.SPX) over the past four-, 13- and
26-week periods. Given a scenario like
that (and, after every major market selloff
there always seem to be quite a few stocks
that easily meet such criteria), it might
be a great stock to watch for signs of a
tradable bullish reversal.
Traders could even invert such criteria
to look for potential shorting candidates;
in reality, there are an infnite number
of ways for day, swing, covered call,
FIGURE 2: BIGGEST DECLINER. Clicking on any ticker symbol on the main screen of the TradingMarkets
Live Scanner brings up a new window with additional technical, visual, and monthly performance for the
stock/ETF you wish to analyze.
52 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
a new window will appear (Figure 3). A
trader can then access additional analysis
by clicking on the risk and returns dis-
tribution (the technicals window is the
default view). In the technicals window,
users can see a dashboard with visuals
for the stock’s (or ETF’s) ConnorsRSI,
Bollinger Band%, and two-period RSI.
Just below that is an array of technical/
statistical data not shown on the screen
output window, such as fve-year CAGR
(compounded annual growth rate), fve-
year Sharpe ratio, fve-year risk, 10-day
ADX, 52-week high/low, 20-day high/
low, and maximum fve-year DD (draw-
down). Users can also view a line chart
for the stock/ETF being analyzed, with
time spans ranging from three months
to fve years. There is also a table at the
bottom of the window that displays the
monthly gain/loss fgures for the equity
under review.
Clicking the risk tab brings up a
window that allows users to analyze
maximum drawdown from four vantage
points (more than 12 years of historical
data is available):
1. Start of DD
2. Date of max DD
3. End of DD
4. Max DD
You can choose to look at only the 10
worst periods of DD or can expand that to
include the 50 worst periods, depending
on your analysis needs. This is another
incredibly useful set of stats for those trad-
ers who are looking for reliable reversal
plays; again, the number of creative uses
for this kind of information is nearly in-
fnite, depending on how deep a trader’s
understanding of the markets is. On the
same page, users can also see what the
best and worst performing days were in
the stock/ETF over a given time period
(again, up to 12 years of data is available).
Finally, a click of the returns distribution
tab brings up a histogram of the stock’s
performance based on standard devia-
tions. In the case of MPC’s one-month
distribution pattern since January 2001,
you can see the following dynamics at
work (Figure 4):
1. In 62% of the months, MPC’s
share price increased in value.
and position traders to use the Trading-
Markets Live Screener, and the more
you understand the basic mechanics of
market price movement (it basically boils
down to capitalizing on excessive price
moves triggered and exacerbated by fear
or greed), the more creative you’ll likely
become as you use this screening tool.
The TradingMarkets Live Screener does
appear to be at least one of the missing
links for traders formerly relying on sub-
jective interpretation of fundamentals and
technicals (that is, discretionary traders)
and could even be a boon to those who
rely on mechanical systems and need to
gain an extra statistical edge for their
methodology.
MULTIDIMENSIONAL ANALYSIS
The TradingMarkets Live Screener also
enables traders to obtain additional multi-
dimensional info for the stocks that it
returns after each scan. Simply click on
the ticker symbol in your output list and
FIGURE 3: RISK. Clicking the risk tab brings into focus the drawdown and best daily gain/worst daily loss stats for
a particular stock/ETF. Here, the stats for the 10 worst drawdown phases for MPC since January 2001 are revealed.
Users can expand this to see the 50 worst drawdowns and best day/worst day track records, if desired.
PRODUCT REVIEW
The NinjaTrader script given in this article is available from http://www.traders.com/fles/
Vervoort-NinjaTrader4.html. The NinjaScript .zip fle for this article, “SVEVolatilityBand.
zip,” can also be downloaded from Vervoort’s website at http://stocata.org/ninjatrader/
formulas.html.
See the Traders’ Tips section beginning on page 55 for commentary and implementation
of Sylvain Vervoort’s technique in various technical analysis programs. Accompanying
program code can be found in the Traders’ Tips area of Traders.com.
FURTHER READING
Ehlers, John [2000]. “Hilbert Indicators Tell You When To Trade,” Technical
Analysis of STOCKS & COMMODITIES, Volume 18: March.
Mulloy, Patrick [1994]. “Smoothing Data With Less Lag,” Technical Analysis of
STOCKS & COMMODITIES, Volume 12: February.
Vervoort, Sylvain [2013]. “Indicator Rules For Swing Trading Strategies, Part 1,”
Technical Analysis of STOCKS & COMMODITIES, Volume 31: April. (Parts 2–4
appeared subsequently in May–August 2013 under their own titles.)
Widner, Mel [1997]. “Rainbow Charts,” Technical Analysis of STOCKS & COM-
MODITIES, Volume 18: July.
• www.bollingeronbollingerbands.com
‡NinjaTrader (NinjaTrader, LLC)
Continued from page 43
Vervoort/Oscillators, Smoothed
CHARTING
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 53
FILTERING THROUGH
With the TradingMarkets Live Screener
offering such an array of unique real-
time statistical and technical tools, pro-
spective subscribers should have little
problem with the monthly fee of $49.95
($495 for an annual subscription); in
the hands of market-savvy, industrious
traders who know a thing or two about
statistics, the TradingMarkets Live
Screener may very well be the software
tool that take their trading performance
to a higher, more proftable level.
Don Pendergast is a trader, market tech-
nician, system developer, and fnancial
markets writer. He made his frst trade in
August 1979 and hopes to make his last
one sometime around September 2049.
He may be reached at lineartradingsys@
gmail.com.
FURTHER READING
Connors, Larry, and Ashton Dorkins
[2007]. “Laps And Gaps To Get Your
Edge,” Technical Analysis of STOCKS
& COMMODITIES, Volume 25: July.
Connors, Larry, and Cesar Alvarez
[2007]. “Here’s How To Find Top
Performing Stocks Every Day,” Trad-
ingMarkets.com, September 19.
‡Tradingmarkets.com
FIGURE 4: RETURNS DISTRIBUTION. Unique price performance histograms can be created in the returns
distribution portion of the TradingMarkets Live Screener. The lookback period and can easily be adjusted;
more than 12 years of historical data are available. Note the shaded zones on the graph; these delineate
the one, two, and three standard deviation ranges of returns distribution over a given time span.
2. The skew of the histogram is de-
cidedly shifted to the right of the
median line, visually allowing for
a quick confrmation of the stock’s
long-term bullish bias.
3. The shaded areas represent the
one, two, and three standard de-
viation (SD) ranges for the stock
over this 12-plus-year period;
notice that at the extreme right of
the chart that one month’s returns
were so high that it exceeded the
+3 SD range — coming in with
a 40.5% monthly return on two
occasions. By contrast, the worst
two monthly losses were -27% and
-26.5%, and neither was anywhere
close to the -3 SD line.
It would take a book on statistics to
explain all of the cool ways this particu-
lar SD histogram info could be put to
potentially proftable use by traders, but
here’s an idea or two that might spark a
few more of your own:
1. Any time a stock posts a daily or
weekly gain/loss that is more than
+1/-1, +2/-2, or +3/-3 SDs, con-
sider this to be a possible start of a
powerful trending move or even a
continuation of a preexisting trend
after a consolidation.
2. Perform further analysis in the
TradingMarkets Live Screener,
paying special attention to the
10-day ADX reading, the stock’s
relation to its 50- and 200-day
moving averages, its RSI, %b, and
ConnorsRSI readings and its 100-
day HV (historical volatility).
3. If you see that a valid bullish trend
move is under way, consider put-
ting on a covered call trade or even
selling a near-term, out-of-the
money put option in hopes of al-
lowing strong bullish momentum
to carry the trades quickly into the
proft zone.
4. Contrarians could use similar
technicals to time short-term
bearish reversals in the same
bullish trend.
And for traders who simply like to trade
short-term reversals in range-bound mar-
kets, the TradingMarkets Live Screener
offers a zillion other possibilities, such
as looking for extremely overbought/
oversold ConnorsRSI readings in a
consolidating stock that has a very low
10-day ADX reading (say, below 15)
and high 10-day HV readings. Again,
the possibilities for ways to use the
TradingMarkets Live Screener appear
to be nearly infnite, and a little out-
of-the-box visualization and ongoing
experimentation with this product will,
no doubt, help users to create plenty of
innovative strategies with a meaningful
edge in the markets.
JUST SO YOU KNOW
According to Larry Connors, his Con-
norsRSI is the single most popular
indicator in the TradingMarkets Live
Screener, with the %b and up days/
down days flters also being especially
prized by current subscribers. Accord-
ing to Connors, the ConnorsRSI can be
employed as an overbought/oversold
oscillator or as a momentum indicator,
depending on the needs of an individual
trader. I tested the TradingMarkets Live
Screener using the Internet Explorer
10 browser on a Windows 8–equipped
notebook computer while using a
standard DSL Internet connection,
and I had no technical issues with the
product at all.
‡See Editorial Resource Index
Explore Your Options
54 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
Tom Gentile of Optionetics
Got a question about options? Tom Gentile is the chief option strategist at Optionet-
ics (www.optionetics.com), an education and publishing frm dedicated to teaching
investors how to minimize their risk while maximizing profts using options. To
submit a question for our Explore Your Options column, post it to our website at
http://Message-Boards.Traders.com. Answers will be posted there, and selected
questions will appear in a future issue of S&C.
CURRENCY OPTIONS
As I travel the world speaking at various
conferences, at some point the discussion
usually turns to the world markets. When
I broach the currency markets, the top
two questions usually are: How can a
trader proft from changes in currency
values, and second, are there options in
the currency markets? The answer to the
frst question can be best answered by the
various articles on forex that may be found
elsewhere in this issue or in other issues
of this magazine, so I’ll concentrate on
the types of options that are traded in the
currency markets. The good news is there
are indeed options that trade on curren-
cies, but there are differences between
these and options in other markets, so
it’s good to understand them all before
determining what is right for you. Here,
I’ll discuss a few of them.
Currency options in your equity ac-
count: options on currency ETFs
You don’t have to be a futures or forex
trader to hedge or speculate on currency
prices. There are several ETFs in the
equity markets that correlate directly with
foreign currencies. The products listed in
Figure 1 are known as CurrencyShares
issued by Guggenheim Investments and
are listed on the NYSE. These Currency-
Shares are exchange traded funds (ETFs)
that closely track the spot currency vs.
the US dollar. They are similar to most
standard ETFs in that you can buy and
sell these in units, just like shares of a
stock from your brokerage account. Buy-
ing shares means that you are expecting
the foreign currency to rise against the
US dollar. Conversely, shorting currency
shares means you are expecting the US
dollar to rise against the foreign currency
in the pair.
Options on CurrencyShares are avail-
able. These are standard-vanilla option
contracts, meaning that one contract
controls 100 shares, just as with an eq-
uity option, and come with strikes and
expiration dates that can be entered and
exited any time until expiration. As of
this writing, CurrencyShares have decent
liquidity, especially for the position trader
who looks to hold options overnight. For
more information on CurrencyShares and
options, visit www.etfdb.com or www.
nyse.com.
Options on FX futures
FX options play an important role in
hedging and speculating. In the last 10
years, the billions of dollars of FX futures
and options have gone from roughly 10
billion to over 120 billion traded per
day. FX options have grown sequentially
with their counterpart, the FX markets
themselves. But they also have the ease
of use and fexibility, just like any regu-
lar options. They too have calls & puts,
strikes, expiration dates, and in most
cases, are American-exercised options,
which means they can be exercised (or
assigned) up to expiration.
FX options are traded and cleared
through the Chicago Mercantile Ex-
change. Each contract is specifc to its own
size; the Australian dollar FX contract,
for example, has a $100,000 value, while
the euro has a $125,000 value. Expiration
dates and contract delivery vary. Some
contracts offer weekly options, while
others do not. Some contracts are cash
settled, while others are physical delivery.
For specifc contract specifcations, visit
www.cmegroup.com/trading/fx/files/
FXOptions_Specs.pdf.
FX binary options
Binary options differ because you set the
amount at risk, the price, and expiration
of the product, as well as whether or not
it will touch or not touch the price by
the expiration. Not coincidentally, these
single payment option transactions, or
SPOT, are called touch or no touch op-
tions. Based on where you set the touch
or no touch price, your payout will vary.
You either get paid or not get paid at
expiration. Obviously, the probability of
the binary touching or not touching will
determine how much you get paid.
Think of a binary as an outcome, like
the roll of the dice. Once you buy or sell
a binary, you wait for the outcome. You
cannot sell it to someone else, hence there
is no time value. Either you win or lose,
and you know your potential winnings
or potential losses. Even though you bet
up or down, it’s still a limited reward
and limited risk outcome. You can go
both ways, but realize that your return
on risk will drop as a result. It’s best to
completely understand your risks when
trading binary options.
So which FX option is right for you?
That answer is different for everyone.
Some traders want the security and
regulations of the NYSE or the CME and
choose to trade through clearing frms.
Others like the bank dealers, which offer
competitive spreads, as well as commis-
sions built in. Whatever the case is for
you, there are plenty of ways to trade the
global currency markets!
FIGURE 1: GUGGENHEIM INVESTMENTS
CURRENCYSHARES ETF Database
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 55
For this month’s Traders’ Tips,
the focus is Sylvain Vervoort’s
article in this issue, “Oscillators,
Smoothed.” Here we present the
September 2013 Traders’ Tips
code with possible implementa-
tions in various software.
Code for NinjaTrader is already provided in Vervoort’s
article. Subscribers will fnd that code at the Subscriber
Area of our website, www.Traders.com. (Click on “Article
Code” from the S&C menu.) Presented here is an over-
view of possible implementations for other software.
Traders’ Tips code is provided to help the reader imple-
ment a selected technique from an article in this issue.
The entries are contributed by various software develop-
ers or programmers for software that is capable of cus-
tomization.
Readers will fnd the September 2013 Traders’ Tips
code and formulas at our website, Traders.com, in the
Traders’ Tips area. Here, you can read some discussion
of the technique’s implementation by the Traders’ Tips
contributors as well as some example charts.
To locate Traders’ Tips at our website, click on the link
from our home page, or use our site’s search engine.
F TRADESTATION: SEPTEMBER 2013 TRADERS’ TIPS CODE
In “Oscillators, Smoothed” in this issue, author Sylvain Ver-
voort describes a zero-lag oscillator (SVEZLRBPercB) for
which the calculation was based on the Percent b oscillator.
Vervoort also introduces a slow stochastic oscillator that is
overlaid onto his modifed Percent b.
Provided here is the EasyLanguage code for Vervoort’s
oscillator based on the NinjaTrader code provided in the
article. To download the EasyLanguage code, please visit our
TradeStation and EasyLanguage support forum. The code can
be found here: http://www.tradestation.com/TASC-2013. The
ELD flename is “_TASC_SVEZLRPercB.ELD.”
For general information about EasyLanguage programming,
see http://www.tradestation.com/EL-FAQ.
A sample chart is shown in Figure 1.
This article is for informational purposes. No type of trading or
investment recommendation, advice, or strategy is being made, given,
or in any manner provided by TradeStation Securities or its affliates.
—Doug McCrary
TradeStation Securities, Inc.
www.TradeStation.com
F METASTOCK: SEPTEMBER 2013 TRADERS’ TIPS CODE
In “Oscillators, Smoothed” in this issue, which is the ffth part
of an ongoing series on indicator rules for a swing trading
strategy (IRSTS), author Sylvain Vervoort introduces two
variations on existing oscillators. He describes his take on
John Bollinger’s %b as well as on the stochastic oscillator.
The MetaStock code for these formulas is shown at www.
traders.com in the Traders’ Tips area.
—William Golson
MetaStock Technical Support
www.metastock.com
F eSIGNAL: SEPTEMBER 2013 TRADERS’ TIPS CODE
For this month’s Traders’ Tip, we’ve provided the formula
SVEZLPercB.efs based on the formula code from Sylvain
Vervoort’s article in this issue, “Oscillators, Smoothed.”
The study contains formula parameters to set the values for
the Percent b deviation period, Percent b average, stochastic
period, and stochastic slowing, which may be confgured
through the edit chart window (right-click on chart and select
“Edit chart”).
To discuss this study or download a complete copy of the
formula code, please visit the EFS Library Discussion Board
forum under the forums link from the support menu at www.
FIGURE 1: TRADESTATION. Here is a daily chart of Ford (F) with the oscillator
described in Vervoort’s article in this issue applied to the chart.
FIGURE 2: eSIGNAL, SVEZLPERCB. The EFS study contains formula parameters
to set the values for the indicator.
56 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
esignal.com or visit our EFS KnowledgeBase at http://www.
esignal.com/support/kb/efs/. The eSignal formula scripts (EFS)
are also available for copying and pasting from the STOCKS
& COMMODITIES website at www.traders.com.
A sample chart is shown in Figure 2.
—Jason Keck
eSignal, an Interactive Data company
800 779-6555, www.eSignal.com
FTHINKORSWIM: SEPTEMBER 2013 TRADERS’ TIPS CODE
In “Oscillators, Smoothed” in this issue, which is part 5 of
an ongoing seven-part series from Sylvain Vervoort, Vervoort
describes combining ideas based on Percent b and the stochastic
oscillator to create an indicator smoothed by multiple moving
averages (Figure 3). For thinkorswim users, we have created
both a study and a strategy in our proprietary scripting language,
thinkScript. You can adjust the parameters of these within the
edit studies window to fne tune the periods calculated.
The study:
1. From TOS charts, select Studies  Edit studies
2. Select the Studies tab in the upper left-hand corner
3. Select “New” in the lower left-hand corner
4. Name the study (such as “SVEZLRBPercB”)
5. Click in the script editor window, remove “plot Data =
close;” and paste in the study code (found at www.traders.
com in the Traders’ Tips area).
The strategy:
1. From TOS charts, select Studies  Edit studies
2. Select the Strategy tab in the upper left-hand corner
3. Select “New” in the lower left-hand corner
4. Name the strategy (such as “SVEZLRBPercB”)
5. Click in the script editor window, remove
“addOrder(OrderType.BUY_AUTO, no);” and paste in the
strategy code (found at www.traders.com in the Traders’
Tips area).
—thinkorswim
A division of TD Ameritrade, Inc.
www.thinkorswim.com
F WEALTH-LAB: SEPTEMBER 2013 TRADERS’ TIPS CODE
In his article in this issue (“Oscillators, Smoothed”), author
Sylvain Vervoort presents a near master class of suggestions
on improving some well-known indicators using smooth-
ing techniques. A combination of TEMA (triple exponential
moving average) and WMA (weighted moving average) does
a nice job smoothing out wiggles in a %b oscillator derived
from a zero-lag “rainbow” data series (SVEZLRBPercB). The
same rainbow series, averaged with the typical price, visibly
smooths the traditional stochastic %K oscillator.
To illustrate the application of SVEZLRBPercB and the
smoothed stochastic %K, we include a demo long-only
strategy with just two basic rules: buy when the StochK
crosses above from oversold territory, and sell when it leaves
the overbought zone.
As usual, the complexity of the code is hidden by including
the indicators in our TASCIndicators library (http://www.
wealth-lab.com/Extensions/Details/24). To run the sample
strategy in Wealth-Lab, you’ll need TASCIndicators version
2013.08 or higher. Please install (or update) the library from
the wealth-lab.com website to its latest version.
See Figure 4 for a sample of the strategy output.
—Eugene, Wealth-Lab team
MS123, LLC
www.wealth-lab.com
F NEUROSHELL TRADER: SEPTEMBER 2013
TRADERS’ TIPS CODE
The zero-lag Percent b–based oscillator (SVEZL-
RBPercB) described by Sylvain Vervoort in his article in this
issue (“Oscillators, Smoothed”) can be easily implemented
with a few of NeuroShell Trader’s built-in indicators. Simply
FIGURE 3: THINKORSWIM. Here is an example of a strategy implemented in
thinkorswim based on Sylvain Vervoort’s article in this issue.
FIGURE 4: WEALTH-LAB. Here is a sample Wealth-Lab 6 chart illustrating the ap-
plication of smoothed indicators.
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 57
select “New Indicator…” from the Insert menu and use the
Indicator Wizard to set up the following indicators:
Rainbow
Divide(Add3(Add4(Multiply2( 5, Avg(TimeSeries,2)),Multiply2( 4,
Avg ( Avg ( TimeSeries, 2), 2)),
Mulitply2( 3, Avg( Avg( Avg(TimeSeries,2), 2), 2)),Multiply2( 2,
Avg( Avg( Avg( Avg( TimeSeries, 2), 2), 2), 2))),Add4( Avg(
Avg( Avg( Avg( Avg(TimeSeries,2), 2), 2), 2), 2),Avg( Avg( Avg(
Avg( Avg( Avg( TimeSeries, 2), 2), 2), 2), 2), 2),Avg( Avg( Avg(
Avg( Avg( Avg( Avg( TimeSeries, 2), 2), 2), 2), 2), 2), 2),Avg(
Avg( Avg( Avg( Avg( Avg( Avg( Avg( TimeSeries, 2), 2), 2), 2),
2), 2),2), 2)), Add2( Avg( Avg( Avg( Avg( Avg( Avg( Avg( Avg(
Avg( TimeSeries, 2), 2), 2), 2), 2), 2), 2), 2), 2), Avg( Avg( Avg(
Avg( Avg( Avg( Avg( Avg( Avg( Avg( TimeSeries, 2), 2), 2), 2),
2), 2), 2), 2), 2), 2))), 20 )
ZLRB
Add2( ExpAvg( Rainbow, 3), Subtract( ExpAvg( Rainbow, 3),
ExpAvg(ExpAvg( Rainbow, 3), 3)))
SVEZLRBPercB
Multiply2( Divide( Subtract( Add2( TEMA( ZLRB,3), Multi-
ply2( 2, StdDev( TEMA( ZLRB,3), 18) ), LinWgtAvg( TEMA(
ZLRB,3),18)), Multiply2( 4, StndDev( TEMA( ZLRB,3),18)), 100)
SlowStochastic
SimpleStochastic%D( Avg2(Rainbow, Avg3(High, Low, Close), 30, 3 )
Users of NeuroShell Trader can go to the STOCKS &
COMMODITIES section of the NeuroShell Trader free technical
support website to download a copy of this or any previous
Traders’ Tips.
A sample chart of the SVEZLRBPercB implemented in
NeuroShell Trader is shown in Figure 5.
—Marge Sherald, Ward Systems Group, Inc.
301 662-7950, sales@wardsystems.com
www.neuroshell.com
F AIQ: SEPTEMBER 2013 TRADERS’ TIPS CODE
The AIQ code based on Sylvain Vervoort’s article
in this issue, “Oscillators, Smoothed,” is provided
at www.TradersEdgeSystems.com/traderstips.htm.
In Figure 6, I show a chart of Sanderson Farms (SANF)
with a color bar study that shows potential buys (green bars)
when both oscillators are moving up and they are both oversold
(below 20). It sells (red bars) when both oscillators are moving
down and they are both overbought (above 80). The bands
shown are based on the modifed Bollinger Bands that are
used in the calculation of the modifed Percent b oscillator.
For comparison purposes, I have also provided the formula
for John Bollinger’s original Percent b indicator as well as
for the original smoothed %K indicator.
—Richard Denning
info@TradersEdgeSystems.com
for AIQ Systems
F TRADERSSTUDIO: SEPTEMBER 2013
TRADERS’ TIPS CODE
The TradersStudio code based on Sylvain Vervoort’s article
in this issue, “Oscillators, Smoothed,” is provided at the fol-
lowing websites:
• www.TradersEdgeSystems.com/traderstips.htm
• www.TradersStudio.com  Traders Resources  Traders Tips
In Figure 7, I show a chart of the S&P emini (ES) using data
FIGURE 5: NEUROSHELL TRADER. This NeuroShell Trader chart displays the
SVEZLRBPercB and slow stochastic.
FIGURE 6: AIQ. Here is a sample chart of Sanderson Farms (SANF) with Vervoort’s
modified Bollinger Bands, his modified Percent b oscillator, and his smoothed %K
oscillator, with a color study showing potential buys (green bars with up white arrows)
and sells (red bars with down white arrows).
FIGURE 7: TRADERSSTUDIO. Here is a chart of the S&P emini (ES) showing Vervoort’s
modified Percent b (in white) and his modified smoothed %K (in yellow).
58 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
from Pinnacle Data showing the combination of Vervoort’s
modifed indicators — the modifed Percent b (in white) and
the modifed smoothed %K (in yellow).
—Richard Denning
info@TradersEdgeSystems.com
for TradersStudio
F NINJATRADER: SEPTEMBER 2013 TRADERS’ TIPS CODE
In Sylvain Vervoort’s article in this issue, “Oscillators,
Smoothed,” Vervoort discusses implementing his techniques
in NinjaTrader and provides a NinjaScript in a sidebar to
the article. We have created the LinearTrendSpotter indica-
tor as discussed in his article, and this will be available for
download from our website at www.ninjatrader.com/SC/
September2013SC.zip.
A trendline is one of the oldest and simplest trading tools,
yet it is very versatile and useful. These lines, often hand-
drawn on a chart, are prone to inaccuracy and bias and so can
be greatly improved by automation. The LinearTrendSpotter
indicator offers two sets of lines tracked for uptrends and
downtrends in different sensitivities so inputs can be found
for a wide range of markets and time frames.
Further, the indicator can show a history of the trendlines
printed on the chart, as well as alerts when the slope of the
trend changes by more than a user-defned amount. The history
can be imagined as a snapshot that occurs once every period,
while the alerts can be especially useful when a long-term
period changes direction. Adding to that, users can also set
to draw the current set of trendlines as rays, thereby gaining
the advantage of seeing the trends extrapolated beyond the
last bar’s boundary.
A sample chart is shown in Figure 8.
—Raymond Deux & Chelsea Bell
NinjaTrader, LLC
www.ninjatrader.com
F UPDATA: SEPTEMBER 2013
TRADERS’ TIPS CODE
Our Traders’ Tip for this month is based on “Oscillators,
Smoothed” by Sylvain Vervoort in this issue. In his article,
Vervoort delivers the ffth part in his ongoing series, using
rainbow smoothing to modify John Bollinger’s Percent b
oscillator to create an oscillator with zero lag for use with
swing trading.
All parameters can be optimized within the Updata’s indicator
optimizer to determine the most proftable combinations. A
sample chart implementation is shown in Figure 9.
The Updata code for this system has been added to the
Updata library and may be downloaded by clicking the custom
menu and then system library. Users can alternatively paste
the code shown in the Traders’ Tips area of www.traders.com
into the Updata custom editor and save it.
—Updata support team
support@updata.co.uk
www.updata.co.uk
FTRADESIGNAL: SEPTEMBER 2013 TRADERS’ TIPS CODE
The indicators presented by Sylvain Vervoort in his article
in this issue, “Oscillators, Smoothed,” which is the ffth part
of a seven-part series on indicators rules for a swing trading
strategy (IRSTS), can easily be used with our online charting
tool at www.tradesignalonline.com.
To locate the indicators, check the Infopedia section for our
lexicon. There, you will fnd the indicator and the functions
that you can make available for your personal account. Click
on it and select open script. You can then apply it to any chart
you wish (Figure 10).
—Henning Blumenthal, Tradesignal GmbH
support@tradesignalonline.com
www.TradesignalOnline.com, www.Tradesignal.com
FIGURE 8: NINJATRADER, LINEARTRENDSPOTTER. This screenshot shows the
LinearTrendSpotter applied to a seven-minute chart of a CL light sweet crude oil
continuous contract.
FIGURE 9: UPDATA. This chart shows the rainbow %b as applied to the S&P 500
index of daily resolution.
Continued on page 60
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 59
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tradestation.com, tradestation.com/options
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1309_Ad-Index.indd 59 7/25/13 8:50:24 AM
60 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
Continued from page 58
FIGURE 11: AMIBROKER. Here is a price chart of Ford (F) overlaid with the ZLRB
Percent b and slow %K stochastic, replicating results from Sylvain Vervoort’s article
in this issue.
F VT TRADER: SEPTEMBER 2013 TRADERS’ TIPS CODE
This Traders’ Tip is based on “Oscillators, Smoothed” by
Sylvain Vervoort in this issue.
We’ll be offering the SVEZLRB oscillator indicator for
download in our VT client forums at http://forum.vtsystems.
com along with other precoded and free indicators & trading
systems. The VT Trader instructions for using the SVEZLRB
oscillator as well as the code are shown in the Traders’ Tips
area of www.traders.com.
To add the indicator to a VT Trader chart (see Figure 12),
click the right mouse button within the chart window and
then select “Add Indicator”  “TASC - 09/2013 - SVEZLRB
PercentB Oscillator” from the indicator list.
To learn more about VT Trader, visit www.vtsystems.com.
Risk disclaimer: Past performance is not indicative of future
results. Forex trading involves a substantial risk of loss and may
not be suitable for all investors.
—Chris Skidmore
Visual Trading Systems, LLC
vttrader@vtsystems.com, www.vtsystems.com
F TRADING BLOX: SEPTEMBER 2013
TRADERS’ TIPS CODE
In Sylvain Vervoort’s article in this issue, “Oscillators,
Smoothed,” which is the ffth part of an ongoing series, he in-
troduces a fast and slow oscillator that can be used to help make
buy & sell decisions in the context of a trading system.
Last month in Trading Blox’s August 2013 Traders’ Tip, we
provided an example of how to create standard indicators in
Trading Blox without writing any code in the main scripting
editor. For indicators that require more complex calculations,
it is sometimes necessary to write code in the scripting editor
and, as a result, the process for creating the indicator is slightly
different.
To set up the indicators, we create a new block called “SVE
Percent B Indicator.” Vervoort’s article instructs us to create
FIGURE 10: TRADESIGNAL ONLINE. Here is a sample TradeSignal Online chart
displaying the rainbow data series, the Percent Bollinger preview, and the slow
stochastic rainbow indicator on an intraday chart of the German DAX.
FIGURE 12: VT TRADER, SVEZLRB. Here, Sylvain Vervoort’s SVEZLRB oscillator
is shown on a EUR/USD daily candle chart.
F AMIBROKER: SEPTEMBER 2013 TRADERS’ TIPS CODE
In “Oscillators, Smoothed” in this issue, author Sylvain Ver-
voort presents a smoother Percent b and stochastic oscillator.
Ready-to-use AmiBroker code to implement this indicator is
shown at www.traders.com in the Traders’ Tips area.
To display the indicator, input the code into the formula
editor and press apply indicator. The averaging period and
other parameters can be changed by right-clicking the chart
and selecting parameters from the context menu. A sample
chart is shown in Figure 11.
—Tomasz Janeczko, AmiBroker.com
www.amibroker.com
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 61
FIGURE 14 EXCEL,
OSCILLATOR SPEC-
IFICATIONS. User
controls (in blue) for
the SVE oscillators
can be found starting
at cell BE22.
FIGURE 13: TRADING BLOX, SAMPLE PLOT. Here, Sylvain Vervoort’s modified
Percent b is plotted in a separate graph.
four parameters that act as inputs to our indicator calculations.
In addition, we will create 24 instrument permanent variables
to hold our calculations.
The instrument permanent variables for this example are set
to the variable type series, which stores a series of numbers.
Series variables that are used as indicators must be enabled
for plotting, which is unchecked by default. Under plotting
controls, check plots, choose a color and line style, and create a
new label for the graph area if the indicator will not be overlaid
in the price window. A sample chart is in Figure 13.
Indicator calculations are done in the update indicators
script. Update indicators is run on each bar of the test,
building the indicator bar by bar. The code for both the fast
and slow indicators is available at www.traders.com in the
Traders’ Tips area.
—Trading Blox
tradingblox.com
F MICROSOFT EXCEL: SEPTEMBER 2013
TRADERS’ TIPS CODE
In “Oscillators, Smoothed” in this issue, Sylvain Vervoort
presents the ffth part of a seven-article series on indicator
rules for a swing trading strategy (IRSTS). In it, he presents
a modifed version of the Percent b oscillator as well as his
smoothed stochastic indicators.
The spreadsheet I am presenting here builds on the base of
last month’s that I offered for part 4 of Vervoort’s series and is
cumulative back to the beginning of the article series (which
began with the April 2013 issue of S&C).
The calculations necessary for the two oscillators described
in Vervoort’s article this month occupy 32 columns beginning
in column BE of the charts tab and extending through column
CJ. The calculations are straightforward and the results appear
to be quite predictive of price behavior. See an example chart
displaying the indicators in Figure 14.
You can play “what-if” with these two indicators using the
computational control values (in blue) for these indicators co-
located with the calculation columns. The numbers in black
are derived from the numbers specifed in blue (Figure 15).
With this month’s spreadsheet, I have added support for direct
data retrieval from Yahoo! Finance (Figure 16). This new support
can be used to avoid the extra step of downloading historical
data to disk and then importing the resulting CSV fle.
To use this capability, the user specifes the same four
criteria that you would need on the Yahoo! website: symbol;
date range as a “from” and “to” date; and a data type. Then
click the get historical data button. The available data area
will provide a summary of the data retrieved.
The older capability of importing from disk is still there for
those who want to save bandwidth by downloading once and
then perhaps using the data in multiple spreadsheets that have
been presented in other Traders’ Tips sections.
The spreadsheet fle for this Traders’ Tip can be downloaded
from www.traders.com in the Traders’ Tips area. To successfully
download it, follow these steps:
• Right-click on the Excel fle link, then
• Select “save target as” to place a copy of the spreadsheet fle
on your hard drive.
—Ron McAllister
Excel and VBA programmer
rpmac_xltt@sprynet.com
FIGURE 16: EXCEL, SVEZLRBPERB OSCILLATOR. Shown here is a chart of US
Steel with Sylvain Vervoort’s SVEZLRBPercB oscillator and his smoothed stochastic
indicators, similar to Figure 5 of Vervoort’s article in this issue.
FIGURE 15: EXCEL, DATA DOWNLOAD. A new data download capability has been
added to this month’s spreadsheet, with support for direct data retrieval from Yahoo
1 Finance.
Q&A
62 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
Don Bright of Bright Trading
SINCE YOU ASKED
Confused about some aspect of trading? Professional trader Don Bright of Bright
Trading (www.stocktrading.com), an equity trading corporation, answers a few of
your questions. To submit a question, post your question to our website at http://
Message-Boards.Traders.com. Answers will be posted there, and selected questions
will appear in a future issue of S&C.
SEASONALITY
I was chatting with a group of traders
the other day while visiting friends
in Chicago. We discussed all sorts of
things, and after a couple of beers, the
conversations focused on a couple of dis-
tinct topics. The frst one was something
I have not heard of before — seasonality.
At frst I assumed that they were perhaps
referring to the Christmas season for
retail stocks, or even the travel season
for the leisure industries like hotels and
airlines. After a few minutes I was told
that seasonality occurs every month
in the markets, and many times, twice
a month. Can you help me understand
what this phenomenon is? Anything
you can share will be appreciated.—
Jacko6719
I’m glad that you brought this up.
There are several aspects to what we
call seasonality. I think your buddies
were speaking of monthly seasonality
(sometimes called turn of the month).
Stocks tend to go up the last couple of
days of each month through the frst
couple of days of the next. Some attribute
this effect to the money fows in mutual
funds. However, since so much mutual
fund money has been redirected in recent
years to exchange traded funds (ETFs),
we simply know that more often than not,
these days tend to be up days.
You got me thinking about other
seasonal events that may be of interest
to readers. Before I get into these other
time frames, let me say that professional
traders don’t just sit and wait for all
the stars to align, or for their charts to
quantify buy & sell decisions. Many of
us accept that when something happens
more often than not, we should use it
in our decision-making process. For
example, if you fnd yourself getting net
short the market toward the end of any
month, perhaps you should fatten out or
balance out your positions. Our traders
tend to be market neutral, but they can
still proft from taking advantage of
entries & exits based on the calendar
dates. I’ve had traders who have negoti-
ated to use more of our frm’s capital to
play monthly seasonality.
Let’s talk about other time frames
that might be of interest. Window
dressing comes to mind. This tends to
be quarterly, but it can also add to the
monthly seasonality. It occurs because
mutual funds and other investment
groups and hedge funds don’t want
to send out a quarterly report without
having the top-performing stocks in
their portfolio. Thus, we see the high-
fying stocks going even higher during
these periods.
Several of our traders take advan-
tage of what we call year-enders. The
basics are simple: We buy a group
of those stocks that are classifed as
underperforming before the calendar
year-end. In late November or
early December, many investors
sell their losing positions to cre-
ate tax losses, but they are still
hopeful that those same stocks
will bounce back soon. Since
the wash sale rule prevents
them from buying back these
stocks for 30 days, they tend to
buy them back in January. This
has worked well for decades. Here is
the defnition of the wash sale:
Wash sale—An Internal Revenue
Service (IRS) rule prohibiting a
taxpayer from claiming a loss on
the sale of an investment when the
same investment was purchased
within 30 days before or after
the sale date. Also known as the
“30-day wash-sale rule.”
The January effect is the follow-
through of the year-enders. For the same
reasons having to do with repurchasing
tax-sale stocks, January tends to boost
the overall markets.
Now to the effects you mentioned in
your question. If you look at historical
data, you’ll notice that we have pre-
holiday rallies more often than not. The
good old “Santa Claus rally” may not
be a politically correct description, but
it often works nonetheless. In addition,
many traders believe that they shouldn’t
sell on Mondays or Fridays (I don’t agree
with this one).
Thus, when giving consideration to
seasonality, there are several time frames
to consider when trading or investing.
These seasonal tendencies should not be
the primary motivation to buy or sell,
but they should be included in a trader’s
decision-making process. Perhaps even
the self-fulflling prophecy comes into
play, as with many things related to
trading the markets. I strongly suggest
that all traders take the time to do the
research and see for themselves how
accurate these effects have been over
the last 75 years or so.
There are several
time frames to consider
when making your trading
or investing decisions.
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 63
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These are the 10 forex broker listings clicked on most often in the listing at the
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is not an editorial rating or ranking. For more information on specific products and
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Foreign exchange traders have more choices
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TOP 10 VIEWED FOREX BROKERS
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Trading Liquidity: Futures
Trading Liquidity: Futures is a reference chart for speculators. It compares markets
according to their per-contract potential for proft and how easily contracts can be bought
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only
when compared to others in the same column.
The number in the “Contracts to Trade for Equal Dollar Proft” column shows how
many contracts of one commodity must be traded to obtain the same potential return
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price
Excursion).
“Relative Contract Liquidity” places commodities in descending order according to
how easily all of their contracts can be traded. Commodities at the top of the list are easi-
est to buy and sell; commodities at the bottom of the list are the most diffcult. “Relative
Contract Liquidity” is the number of contracts to trade times total open interest times a
volume factor, which is the greater of:
Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity
% Margin Trade for Equal
Dollar Proft
FUTURES LIQUIDITY
E-Mini S&P 500 Index GBLX 4.6 11.8 44 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
10 Yr Treasury Notes CBOT 1.2 15.9 155 ••••••••••••••••••••••••••••••••••••••••
Crude Oil - WTI NYMEX 4.6 13.6 40 ••••••••••••••••••••••••••••••
Russell 2000 Mini ICE-US 4.2 9.5 31 ••••••••••••••••••••••••••••
S&P 500 Index CME 4.6 11.8 9 •••••••••••••••••••••••••••
Crude Oil - Brent ICE 4.6 13.5 39 ••••••••••••••••••••••••••
T-Bond CBOT 2.5 18.3 78 ••••••••••••••••••••••••••
5 Yr Treasury Notes CBOT 0.6 13.8 269 •••••••••••••••••••••••••
Corn CBOT 11.1 15.1 81 ••••••••••••••••••••••••
E-Mini Nasdaq 100 Index GBLX 3.6 8.6 56 ••••••••••••••••••••••••
Soybeans CBOT 7.3 17.2 54 ••••••••••••••••••••••
Silver 5000 troy oz COMEX 10.2 7.1 10 •••••••••••••••••••••
Sugar-World #11 ICE-US 8.7 7.2 65 •••••••••••••••••••••
Ultra T-Bond CBOT 3 14.2 47 •••••••••••••••••••••
Cotton #2 ICE-US 5.8 3.5 20 •••••••••••••••••
Euro Currency € CME 1.5 11.7 68 •••••••••••••••••
High Grade Copper COMEX 3.9 8.8 24 ••••••••••••••••
Natural Gas NYMEX 6.6 13.5 79 ••••••••••••••••
Gas - RBOB NYMEX 4.7 11.9 28 •••••••••••••••
Coffee ICE-US 10.5 7.3 21 ••••••••••••••
E-Mini S&P Mid-Cap 400 GBLX 3.6 8.3 27 •••••••••••••
Lumber CME 0 0.1 1 •••••••••••••
DJIA Mini CBOT 3.5 9.8 51 •••••••••••••
Australian Dollar CME 1.8 9.5 83 •••••••••••••
Eurodollar Interest Rate CME 0 9.1 390 •••••••••••••
Soybean Meal CBOT 7.1 15.6 83 •••••••••••
Wheat CBOT 9.9 22.1 98 •••••••••••
2 Yr Treasury Notes CBOT 0.1 11.2 531 ••••••••••
KCBT Red Wheat KCBT 2.9 6.9 40 •••••••••
Lean Hogs CME 1.6 6.7 68 •••••••••
Soybean Oil CBOT 6.3 17.9 153 ••••••••
British Pound £ CME 1.4 15.4 169 ••••••••
Live Cattle CME 2.7 9.8 105 •••••••
Swiss Franc CME 1.6 5.1 33 •••••••
Canadian Dollar CME 1.1 12.1 159 •••••••
Gold 100 troy oz COMEX 67.9 157.6 250 ••••••
Nasdaq 100 Index CME 3.6 8.6 11 ••••••
Cocoa ICE-US 7.9 12.7 98 •••••
Feeder Cattle CME 1.1 3.4 25 •••••
Mexican Peso CME 5.5 39.5 259 ••••
Spring Wheat MGEX 8.7 17.2 77 •••
30 Day Federal Funds CBOT 0 3.9 275 •••
Orange Juice ICE-US 9 15.1 113 ••
Platinum NYMEX 53.2 163.4 613 ••
10 Yr Swaps CBOT 1.5 13.5 120 ••
very high volumes. The greatest number
of dots indicates the greatest activity;
futures with one or no dots show little
activity and are therefore less desirable
for speculators.
three-year period. Thus, all numbers in
this column have an equal dollar value.
Columns indicating percent margin
and effective percent margin provide
a helpful comparison for traders who
wish to place their margin money ef-
fciently. The effective percent margin
is determined by dividing the margin
value ($) by the three-year price range of
contract dollar value, and then multiply-
ing by one hundred.
STOCKS
Trading liquidity has a signifcant ef-
fect on the change in price of a secu-
rity. Theoretically, trading activity can
serve as a proxy for trading liquidity
and equals the total volume for a given
period expressed as a percentage of the
total number of shares outstanding. This
value can be thought of as the turnover
rate of a frm’s shares outstanding.
T
rading liquidity is often over-
looked as a key technical
measurement in the analysis
and selection of commodity
futures. The following explains how to
read the futures liquidity chart pub-
lished by Technical Analysis of STOCKS
& COMMODITIES every month.
COMMODITY FUTURES
The futures liquidity chart shown be-
low is intended to rank publicly traded
futures contracts in order of liquidity.
Relative contract liquidity is indicated
by the number of dots on the right-hand
side of the chart.
This liquidity ranking is produced by
multiplying contract point value times
the maximum conceivable price motion
(based on the past three years’ historical
data) times the contract’s open interest
times a factor (usually 1 to 4) for low or
All futures listed are weighted equally
under “contracts to trade for equal dol-
lar proft.” This is done by multiplying
contract value times the maximum pos-
sible change in price observed in the last
Courtesy of CBOT
CBOT Chicago Board of Trade, Division of CME
CME Chicago Mercantile Exchange
COMEX Commodity Exchange, Inc. CME Group
GBLX Chicago Mercantile Exchange - Globex
ICE Intercontinental Exchange-Futures
ICE-EU Intercontinental Exchange-Futures - Europe
ICE-US Intercontinental Exchange-Futures - US
IMM International Monetary Market
KCBT Kansas City Board of Trade
MGEX Minneapolis Grain Exchange
NYMEX New York Mercantile Exchange

1309
1 or exp
In volume
In 5000
– 2
64 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
September 2013 • Technical Analysis of STOCKS & COMMODITIES • 65
IFTA ANNUAL CONFERENCE, OCT. 9–11
The International Federation of
Technical Analysts (IFTA) 26th annual
conference will be held October 9–11,
2013, in San Francisco, featuring discus-
sions on the increasingly interconnected
landscape of worldwide markets.
Professional technical analysts speak-
ing at this year’s conference include
Richard Arms, Martin Pring, Constance
Brown, Howard Bandy, and others. They
will speak on subjects ranging from cur-
rency and emerging market investments
to new technical methods and ideas. Fri-
day’s “Market Wizards Day” will feature
sessions on the future of fnancial analy-
sis with Jack Schwager, Ed Seykota, and
Linda Bradford Raschke.
There will also be industry panels with
Henry Pruden, Gregory Morris, Ralph
Acampora, David Keller, David Sned-
don, David Lundgren, Craig Johnson,
and others. Following the conference, the
American Association of Professional
Technical Analysts (AAPTA) will host
an open mic for casual presentations.
in technical analysis since 1994. Techni-
cal analysts are invited to send submis-
sions for next year’s award, for which
the submission deadline is February 1,
2014. The winning author will receive a
cash prize and will be invited to present
the paper at an MTA seminar or chapter
meeting, and may also be published in the
MTA’s Journal Of Technical Analysis,
e-newsletter, and website.
http://MTA.org
METASTOCK ACQUISITION
Utah-based Innovative Market Analysis
announced it had acquired the Meta Stock
technical analysis software line from
Thomson Reuters. The company was
created by current MetaStock President
Scott Brown. Innovative Market Analysis
will continue selling the MetaStock and
MetaStock Pro charting software pack-
ages to self-directed traders worldwide.
Support, programming, developing the
software, and management of customer
accounts will remain unchanged for
customers. Thomson Reuters’ DataLink
and XENITH datafeeds will continue
to power MetaStock and MetaStock
Pro. On the institutional side, Thomson
Reuters clients can still use MetaStock
Pro functionality in its fagship desktop
platform Thomson Reuters Eikon.
www.MetaStock.com
NEW ELLIOTT WAVE INSTRUCTION DVD
Justine Williams-Lara, trader, educa-
tor, coach, author of Trading Chaos,
and president of Proftunity Trading
Group, has created a 90-minute DVD
course on how to count Elliott waves
using simple and precise techniques
on current charts in all time frames and
markets including futures, stocks, ETFs,
indexes, and forex.
The DVD includes real-time examples
of counting Elliott waves. It also teaches
how to utilize Proftunity indicators such
as fractals and the Awesome Oscillator
(AO) to help identify the underlying
structure of the current market.
Even if a trader already has a proftable
trading system, the DVD is designed to
help improve the trader’s ability to spot
the immediate trend and fne-tune entries
and exits.
www.proftunity.com
NEW DATASETS FOR FUTURESOURCE;
NEW EXCEL ADD-ON TOOLS
Interactive Data, a provider of market
data solutions to the global commodities
and energy industry, announced its lat-
est version of FutureSource for market
data management, analytics, and trade
execution through a variety of futures
commission merchants.
FutureSource 3.6 expands searching so
that data is easier to fnd, and new content
sets from various providers enable users
to see what is trending in the energy,
agriculture, and metals markets. Future-
Source 3.6 updates the way users view
and analyze market data, including the
addition of implied volatility on charts;
the ability to import & export expressions
& external data; symbol linking; and the
addition of a VWAP calculator.
A new and improved suite of Excel
add-on tools will better support the ability
to download historical data into Excel,
enabling users to extract historical data
and formulas from FutureSource. A new
suite of RTD Excel templates enhances
the analytical capabilities within Excel.
www.futuresource.com
DOWNLOADABLE TRADING COURSE
BrooksPriceAction.com offers Brooks
Trading Course, a downloadable trading
course ($249 with a 30-day, money-back
guarantee) by professional trader Al
http://IFTA.org
CHARLES H. DOW AWARD
The Market Technicians Association
(MTA), a professional organization for
technical analysis practitioners and the
governing body for the Chartered Mar-
ket Technician (CMT) designation, an-
nounced its selection of this year’s Charles
H. Dow Award recipient. Selected was
George A. Schade Jr., CMT, for his paper
“The Repeating Story Of On-Balance
Volume,” on the importance of history
to the technical analysis feld. A copy of
this year’s winning submission can be
accessed as a PDF from http://docs.mta.
org/dow-award/2013-dow-schade.pdf.
The MTA has presented the Charles H.
Dow Award for excellence and creativity
66 • September 2013 • Technical Analysis of STOCKS & COMMODITIES
Brooks. The course, consisting of 53 vid-
eos with 27 hours of viewing time) is based
on techniques that Brooks uses personally
for trading the emini, bonds, currencies,
gold, crude oil, stocks, and options on
fve-minute, 60-minute, and daily charts.
Brooks has 26 years of trading experience
and is the author of several books on
price action (Reading Price Charts Bar
By Bar: The Technical Analysis Of Price
Action For The Serious Trader and the
three-book series Trading Price Action)
and numerous trading articles, many of
which are available at the website, as well
as a live trading room.
http://BrooksPriceAction.com
FUTURES SPREADS ANALYZER APP
KeyFutures has released a new app that
allows the user to look through the layers
or legs of commodity spreads on a mobile
device. With its seasonal indicator, the
user can plan spread positions. It allows
synchronization and backup of a spread’s
settings and notes among all the user’s
devices through iCloud. The interface
gives the user tools for following and
choosing spreads for trading. Common
technical analysis indicators can be used,
and the user can write notes and draw. A
ruler tool calculates price & time.
www.key-futures.com
TRADING WEEKLY OPTIONS
VIA DRAG-AND-DROP
Gecko Software, developer of Track ’n
Trade Live trading platforms, announced
the addition of an on-chart, drag-and-
drop option-trading capability to its
live futures trading platform. Users can
now drag options on the screen to the
desired strike price. In addition, traders
may now trade weekly options directly
through the Track ’n Trade platform. The
following weekly options are available:
currencies, grains, emini S&P, emini
NASDAQ, 10-year Treasuries, and
30-year bonds. Gecko Software frst
developed on-chart drag-and-drop order
placement capabilities in 1998, when it
released the frst version of its Track ’n
Trade charting & analytical software
and historical trading simulator.
www.TracknTrade.com
ALGORITHMIC-BASED STOCK-PICKING
FOR RETAIL TRADERS
Tradespoon is a new daily stock-rec-
ommendation service for retail traders
that uses some of the types of tools used
by institutional investors, including an
algorithmic-based, proprietary, quantita-
tive system. It seeks to put retail traders
more on par with institutional and profes-
sional traders. Tradespoon, founded by
Vlad Karpel, former head of technology
at OptionsXpress, provides daily trade
picks generated by its proprietary sys-
tem. The Tradespoon system includes
predicting stock movements in specifc
time periods; monitoring key technical
events (for example, earnings, Fibonacci
replacements, and cash fow changes);
position risk; macroeconomic exposure
of the portfolio; and more.
The service includes stock, options, and
option spread trading strategies. Trade-
spoon’s picks take into account both fun-
damental and technical stock analysis.
www.Tradespoon.com
needs us to be in the market all the time.
That also acts as a risk minimizer I guess,
as some kind of averager. But I don’t
mean it in the normal way of trying to
average out a losing position. I mean
by being in the market all the time, we
are in at the highs and at the lows and
in the middle. And that is all right for
us as hedgers.
I really enjoyed the animated video titled
“The Tao Of The Markets” on your site.
It’s great! It makes you realize that you
are no different from any other trader.
When I fnished watching the anima-
tion, the frst thought that crossed my
mind was, “What can I do to conquer
that typical mindset?” What does it take
to become a successful trader?
I must confess that I copied that
animation off an email forward I got
many years ago. But to answer your
question, I guess the answer lies in the
question you asked yourself, “What can
I do to conquer that typical mindset?” To
a large extent, I suppose, it’s a matter of
understanding our own psychology and
relating it with the way the market works
and then fnding a way to move forward.
It would defnitely involve coming to
terms with the market as the animal it
is, understanding the way it moves and
then playing with its own way of moving.
You cannot want the market to move the
way you want it to move.
And technical analysis is a powerful
tool in coming to understand how the
markets move. That’s one of the frst steps
in becoming a successful trader.
Thank you for your time, Vikram.
SUGGESTED READING
Murarka, Vikram [2008]. “Pay
More, Proft More,” Tech-
nical Analysis of STOCKS
& COMMODITIES, Volume
26: June.
_____ [2005]. “Fundamentals
& Technicals, Together
Again,” Technical Analysis
of STOCKS & COMMODITIES,
Volume 23: April.
‡Kshitij.com
‡See Editorial Resource Index
Continued from page 48
INTERVIEW
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