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February 2013

your personal trading coach

IntervIew: BrIan Shannon Low-Cap ShareS: how to FInd the BargaInS proFItIng From the hIdden market dImenSIon how to Create a SuCCeSSFuL tradIng Strategy

Trading is Like Ice Hockey

Honing Your reaction SkillS on tHe MarketS


2013 I 02

ShouLd I Change my tradIng ruLeS?

Just imagine your equity curve having increasingly been crumbling for some time. you have lost ten, 20 or even 30 per cent, are confused, and have lost confidence in your method. a classic reaction on the part of traders then is to adapt the rules since the strategy apparently doesnt work any longer. In retrospect, this move turns out to be a mistake if the new set of rules does not generate the winning trades of the original system but instead produces its own drawdowns. this can easily cause a vicious circle, including an emotional rollercoaster. of course, it is possible for the adjusted set of rules to actually be better in the end. this requires a detailed evaluation, which is both time-consuming and nerveracking. at the low point of a drawdown, however, you have very little time and nerve left, which makes any change to the rules a rash decision. So if you wish to change your setup and have good reasons for that, then (and only then) will you do so and not at the low point of a drawdown. Change the rules only when you can make an objective decision and not when you are emotionally under pressure. In the short term, the only thing that helps in a drawdown is to reduce the size of your position or to take a break until you have regained confidence in your method. good traders have a proven system that works much like a casino. even casinos have drawdowns though. If you were a casino operator, would you let in fewer people if lately too many gamblers had been lucky at the roulette table and you yourself have lost money? Certainly not because you have confidence in the statistics, according to which you will win in the long term if you hold on to your system. So think carefully next time you want to change your proven trading rules. good trading Lothar albert editor in Chief

puBLISher Lothar Albert SuBSCrIptIon ServICe;; Tel: +49 (0) 931 45226-15 addreSS oF edItorIaL and advertISIng department Barbarastrasse 31 a, 97074 Wuerzburg edItor-In-ChIeF Lothar Albert edItorS Prof. Dr. Guenther Dahlmann-Resing, Corinne Endrich, Marko Graenitz, Lena Hirnickel, Sandra Kahle, Nadine von Malek, Rodman Moore, Stefan Rauch, Karin Seidl, Bjoern Sommersacher, Tina Wagemann, Florian Walther, Christine Weissenberger, Sarina Wiederer artICLeS Andrew Abraham, Clem Chambers, Richard Chignell, Andrew Hecht, Jens Klatt, Brian Lund, Ziad Masri, Nick McDonald, Azeez Mustapha, Markus Strauch, Dirk Vandycke, Paul Wallace, Mark Wolfinger pICtureS prICe data;;;;; ISSn 1612-9415 dISCLoSure The information in TRADERS is intended for educational purposes only. It is not meant to recommend, promote or in any way imply the effectiveness of any trading system, strategy or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results. 2013 TRADERS media GmbH, Barbarastr. 31a, D-97074 Wuerzburg, Germany

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2013 I 02 Markus Strauch

Mr Markus strauch is a professional trader. at the age of 24, he founded his proprietary trading company Buffalo trading gmbH. In just six months, his Momentumtrading certificate has generated a performance of more than 60 per cent at Beginning in February, he will trade his own certificate at alphatier capital (alphatier global Momentum). contact:

Honing your reaction skills on the Markets

tradIng Is LIke Ice Hockey

Ice hockey is not only the fastest team sport in the world, but also one of the most demanding sports in general. Six players have to coordinate their movements on the ice in such a way that they can switch from attack to defence within seconds. The whole thing is a very fast-paced and tough sport. However, it also appeals to many people because both technically and tactically, it demands a great deal of the players. This means that important similarities to trading can be found. As our cover story illustrates, ice hockey may well be compared to the daily business on global markets.


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hockey player will anticipate the direction that a puck takes during a match even before it is hit. He can therefore position himself to his advantage ahead of time. This means that ice hockey players will be thinking a few moves ahead. This behaviour is very much similar to that of a professional trader. To be successful in the market, there must be a healthy balance between aggressiveness, i.e. in terms of the speed of order entry and the selected position size, and defence" i.e. in terms of risk and stop management. If the trades or setups perform well, the trader will proceed more aggressively in the market and increase his positions if necessary. At the same time, he will drastically rein in his aggressiveness and reduce his positions when he is in defence mode, i.e. making losses, until he finally is in sync with the market. THINkINg aHead Experienced ice hockey players know where to hit the puck and which direction it is going to take. Traders need to have the same quality. Good traders have a sense of the market as well as a plan of attack. Day after day they are prepared for the market, knowing in advance that certain price levels might trigger some movement in the market, and are rigorously focused on their trading strategy. Well ahead of time, they will

WHy you SHouLd Never CeLebraTe Too SooN Winter is the climax of the ice hockey season. Several years ago, this writer watched the Rhineland derby between arch rivals the Dusseldorf Metro Stars and the Cologne Sharks. The fans were equipped with winter jackets, scarves, gloves, and a glass of mulled wine in the old concrete ice hockey stadium located at Dusseldorfs Brehmstrasse. The atmosphere was electric with fans from both sides vociferously cheering on their teams. The first period was scoreless causing the tension and pressure for both teams to continue to rise. In the second period, the Cologne Sharks went on to take a 2 to 0 lead. The match seemed already to have been decided, but in the third period the Metro Stars came back from behind with a brilliant finish to win the match by a score of 3 to 2. It was at this game that this writer noticed many parallels between ice hockey and professional trading on the global capital markets, which will be described in detail below. PreParaTIoN The first few parallels can already be found in the preparatory run-up to the game. Well before face-off time, the players will arrive at the stadium to size up the arena and its environment. That way they will get a feel of what they can expect. In short, the team is gearing up for the important match. In trading, too, the preparation phase is very important. The trader will read the pre-market news and look at key price levels on his charts as well as major items on the business calendar in order to get a general idea of market action. It is also important for the trader to basically have a positive attitude. After all, trading is 80 per cent psychology, which makes it necessary to start every day in the best possible shape. If that is not the case, the position size should be adjusted downwards in advance or a break from trading should be taken. aggreSSIveNeSS Ice hockey players need to display controlled aggression on the ice. They need to be in control of themselves as well as of the puck. A very good ice

exampLe: preparIng For the tradIng day

Develop Mental Strength: Stick to your trading plan and your trading strategy! Be patient and wait for trading opportunities! Sometimes opportunities wont come up until late in the evening or the next day! Stick to your risk management, especially to daily stop-losses and position stops! Complete the trading day when you have reached the loss limit you have set yourself! Staying in business will be your top priority! no losing day must be allowed to be such a burden on you that your trading will be hampered the next day! trade the prices and not your opinion! If you do not feel good psychologically, reduce your position size until you have traded your way into the market! If you stick to all your parameters, you will be successful in the long term! Steady profits are the building blocks of successful traders! US and Asia: how did the uS indices develop after 5.30 pm? Closed on daily high implies strong buying interest until the end of trading (bullish sign for the next trading day). Closed on daily low implies strong selling interest until the end of trading (bearish sign). how did the vIx (volatility index) develop? decline is a bullish sign for more risk-taking on the part of investors while an increase is a bearish signal. was there any relevant news after the uS market close? uS earnings or profit data? Industry heavyweights such as apple, IBm, Intel, Bank of america, Jpm have an impact on the market. how did asia develop? this is often useful as an overnight panic indicator. nikkei 225 hang Seng Market-moving News pre-market indications: Lang & Schwarz or tradegate Indications in the dax Charting/Technical Analysis: Larger primary-trend indices Secondary trend key price levels


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study technical levels, economic and corporate data, and the behaviour of the other market participants. reSPoNSIveNeSS The high speed of play resulting not only from the speed of the players but also, for example, from the very high speed of the puck, which can reach up to 180 kilometres an hour, makes it absolutely essential for the player to be able to react quickly. Ice hockey players will switch from defence to attack in seconds. Besides the ability to act and react quickly, the athletes coordination skills are of crucial importance. Such impulsive changes of direction also occur in global markets. Lets take, for example, a FDAX trader who opens a long position on account of the technical setup as indicated by his charts. Suddenly the head of a government resigns or a countrys credit rating is downgraded by the rating agencies. In such a case, the successful trader will reverse his position within seconds, benefiting from the new direction of the market instead of being stuck with the old position. He is flexible and will, like the ice hockey player, switch from defence (stoploss) to attack (changing his position to the new direction of the trend), benefiting from the overall movement. dISCIPLINe In ice hockey, a disciplined game starts with a solid defensive play as the basis on which to develop a good attack. A trader must be equally disciplined coping with losses and stressful market conditions requires a high degree of discipline, which is the ability to strictly adhere to ones set of parameters. Once you are equipped with a well thought-out trading plan as well as professional risk and money management, nothing whatsoever can go wrong. However, this statement is true only on paper and is of a theoretical nature. What good are entry setups when you are sitting petrified in front of the trading screen or you enter your order late in the market? Stop-loss orders are simply not adhered to or are ignored. A trading plan should also include psychological aspects though. Maybe you didnt sleep properly, your girlfriends causing

F1) end oF the LoCk-up perIod at FaCeBook

prior to the lock-up period, after which the existing shareholders can sell their shares, the Facebook stock was under pressure. there was a short ratio of almost 20 per cent of all outstanding shares. Sentiment among shareholders was at its lowest level. then 14 november rolled around, and market expectations on the day of the lock-up deadline were for prices to drop. But the opposite happened and traders who had shorted the stock now had to quickly buy back their shares. this assessment was confirmed by rising volume. the aggressive, responsive and anticipating trader recognises this situation and buys with the crowd, benefiting from two effects: First, the short sellers need to buy back their shares, and secondly, investors are banking on the stock.

F2) attaCk and deFenCe In the Fdax

positive input for the dax opening. the market participants position themselves first on the long side. Shortly after opening, the markets are shaken by an earthquake in Japan. Suddenly prices start dropping. traders who do not respond quickly suffer 30-point losses in the Fdax. market sentiment has turned significantly and there is profit-taking until 2.30 pm. then the uS labour market data suddenly brightens things up again, generating a new daily high in the Fdax. In turn, those stocks are quickly sold off again, and this downward movement is accelerated by the worsethan-expected uS michigan index. those traders who fail to react quickly here by changing their minds or reversing their position stand to lose a great deal of money. Like the ice hockey player, the trader also needs to quickly switch from defence to attack and back again to defence.


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you stress, or you just simply dont feel well? All these aspects should constitute warning signs for the trading day and you should, if necessary, stick to even tighter daily loss limits. HumILITy On the ice, every opponent must be met with the absolute will to win and a high degree of motivation. How often have we seen a team that had been celebrated in advance as a sure winner, lose to a so-called underdog? If one of the teams lacks the right attitude, the game can turn quickly. Each match starts at zero and lasts 3 x 20 minutes. Humility is one of the most important qualities of a trader. A nice old adage says: Theres no free lunch on Wall Street, which means there is nothing given away by the markets. Consequently, a professional trader distrusts any obvious opportunities offered by the market. More often than not, they are also circumscribed as opportunities of a lifetime or as stocks that must go there/must be held there. A certain market rumour from a reliable source can be unmasked as a market participant on the lookout for some stupid people for his sell order. Following a price spike that was not preceded by any special news, the humble trader will first find out all about the circumstances surrounding the movement or draw on reference markets for confirmation. A humble trader will always make informed decisions and go with the market. In doing so, he will be looking for opportunities in the market with a reasonably good risk/reward ratio (RRR). beINg a Team PLayer Everybody knows the saying, Every team is only as good as its weakest player. Ice hockey is a team game: Individual performance doesnt cut it if the team is not playing together. A single player cannot beat a team. While trading cannot be compared directly to a team sport, you constantly have to keep an eye on the other market participants. It is easier to go with the crowd and the major trends than to fight against

F3a) ICe hoCkey rInk

Figure 3a shows the tactical lineup in ice hockey.

Source: traderS graphic

F3b) pLayIng FIeLd In tradIng

Figure 3b shows the tactical formation in trading.

Source: traderS graphic


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success. The trader should always bear in mind that sometimes the best opportunities may come up shortly before the close of trading as is the case with the above-mentioned ice hockey match. While the Cologne team were 2:0 ahead just before the end of the match, it was the Dusseldorf team that won in the end by a score of 3:2. ThE righT STraTEgy aT ThE righT TimE Each opponent requires a different tactic or strategy. The so-called forechecking in ice hockey means trying to regain the puck in the attacking zone. This tactical behaviour is very aggressive and designed to put pressure on the opponent. However, this tactic is also exhausting, and there is a danger of the players suffering from fatigue

them. All too often we hear from budding traders currently enjoying a lucky streak such expressions as Im the market or The market does my bidding. Flush with their profits from recent transactions, they have developed a large dose of self-confidence, which, of course, would not be objectionable if it were not accompanied often enough by less discipline and humility. But then a losing position suddenly materialises which the trader no longer realises since he does not want to break his winning streak. As a consequence, stops will be moved and ignored. The trader will equate any loss with weakness, which is counterproductive to his ego. After all, he would otherwise have to accept that he had suffered a loss. Traders like that also tend to trade against the crowd or against a trend. They want to be better than everyone else, which causes them to take the opposite position. More often than not, these traders will catch a falling knife and are rebuked by the market with a big loss. Lack of discipline and poor stop management may have grave consequences for their future trading careers. By contrast, the successful trader will go with the crowd as well as the price movement and will not be looking for recognition. He will only be concerned about trading success in combination with appropriate risk management. EndurancE Based on the fact that ice hockey players only stay on the ice for short periods of time, any observer familiar with the game might conclude that endurance only plays a minor role in ice hockey. Obviously, its not quite like that. The very short, but intensive periods of active play make special demands on the players short term staying power. However, it is also necessary for him to maintain this level of energy throughout the match. In low-volume and uneventful periods of time, the trader should also sit on the bench and recharge his batteries in preparation for his upcoming period of activity. Should any important news then be published or his favourite trade pattern appear, he can energetically trade to achieve the greatest possible

T1) Impacts of DIfferent posItIon sIzes

Ice Hockey
attack Defence power play the opposing team plays with one player less with a one-player majority to score a goal. fast break after an attack, the opposing team captures the puck. since the players on the other team are still in forward motion, the opposing team gains an advantage. forechecking forechecking in ice hockey means attempting to regain the puck while youre still in attack mode. this is especially used when you desperately need to regain possession of the puck. Backchecking Backchecking is suitable for players who are good at winning the puck and means that the defending players try to take the puck away from the attackers even before their own third of the rink. Good backchecking ensures predominance in the neutral zone.

position-entry management. attention should be paid to a good rrr. the better the rrr, the more aggressively the trader should choose the position size. However, he ought to keep an eye on risk at all times. stop-loss, money and risk management the trading setup is confirmed, technical breakout of a stock, positive technical analysis, aggressive buying or selling at entry of position. Limiting losses in false breakouts. you get a trading signal that shortly afterwards develops in exactly the wrong direction. since there are probably several market participants on the wrong side here, you need to react quickly. Limiting your loss is paramount. trading intermediate trends In the traders basic positions (long or short), an attempt is made to keep buying and selling the short-lived intermediate trends in order to gain a performance advantage over the buy-and-hold approach. profit taking/stop management the trader uses his trailing stops according to the way his stock position is developing. profits will then be locked in to enable him to act flexibly in the market again.

zone defence Limiting losses zone defence is used especially by a short-handed ice hockey team in order to once a predefined daily loss is made (usually one to three per cent of the capital), minimise its players need to run. Here, each player is assigned a certain space on the trader should immediately liquidate all positions or drastically reduce risk. the ice for him to mark the attacker who is in this space. the base capital must be protected.

table 1 shows the comparison between ice hockey and trading illustrating how many similarities there are between the two disciplines. Ultimately, traders can even learn something when transferring the strategies from the rink to their trading.


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hard nut to crack. Overall, it is safe to say that different strategies used with the right tools can lead to success. concluSion As you have seen, there are great similarities between ice hockey and trading. They begin right at the preparatory stage, which is equally essential in trading and ice hockey, and continue down to discipline, responsiveness, endurance, and so on. The right strategy or tactic can decide a game. But above all, it is important to use them at the right time. In our ice hockey match, the Cologne Sharks had a comfortable

before long. By contrast, the zone defence, which is usually made use of when a team is shorthanded, is designed to help save energy and use the forces available to achieve the maximum defensive result. In trading, there is no Holy Grail and even the best and most profitable traders experience high and low phases. In difficult periods of time, it is important that the trader has a plan and knows what needs to be done to return to profitability. The traders strategy must be adapted to his personality and trading behaviour. Very short term scalpers have the highest hit rate in liquid capital-market instruments that

the right strategy or tactic can decide a game.

allow them to quickly buy and sell in large quantities. They usually focus on the global futures markets. Other traders hold their positions longer and adjust their position size to the volatility of the stock. The more the stock fluctuates or is going to fluctuate, the greater the risk is of getting caught on the wrong side. In reducing their position size, these traders will adjust their risk and try to cash in on a major price boost. Here, the RRR is crucial which indicates which profit you are willing to risk which amount for. Another strategy is to invest. Investors analyse long term fundamental as well as technical chart trends and try to draw conclusions from them as to their future performance. Here, major price movements in particular are traded with any interim fluctuation towards the loss zone being risked. Just as in ice hockey, there is such a thing as the right strategy with the greatest chance of success for every market that traders enter. It is important that the strategy selected fit the traders own personal skills. A long term investor will have difficulty trading a highly volatile niche share which, while technically generating a buy signal, is not supported by the fundamentals. Conversely, a day trader will find a value share in a sideways phase a lead until just before the end, but a late rally and the right tactics enabled the Dusseldorf team to win the game after all. Here you can see how important it is to remain highly focused and disciplined until the match is over. Cologne began to be negligent and were immediately punished. In trading, too, any inattention will be punished. If all the trading parameters (stops, position sizes etc) are ignored, one transaction may turn a positive trading day into a negative one. You must always bear in mind that traders also trade with other people on a daily basis. Behind every transaction, there is another person whose intention in this particular case is different from yours. Trader A buys a stock thinking it will rise. Trader B sells this stock thinking he has presumably managed to catch the highest price. Now which of the two traders is right? Maybe theyre both right since they trade in different time windows. One is a short term trader, while the other one is a long term investor. By relating the main qualities and the sequence of the trading day to the sport of ice hockey, it is easier for traders to comprehend and internalise these processes. And as in ice hockey, it is only the victories or the profits that ultimately count.


What Kinds of Charts Are Being Used around the World?

J. C. parets of had the opportunity to watch paul Ciana, Cmt give an excellent presentation at the new york Society of Security analysts. paul is the author of the book new Frontiers in technical analysis, and currently serves as Bloombergs technical analyst for north america. paul did some interesting research on the charting preferences of Bloomberg users. the chart displays the average charttype preference of market participants from 2005 to 2010. For sample size, assume that for every 100 market participants, 44 were in the americas, 38 in europe, twelve are in asia, and the other two are in the middle east and South africa (meSa). moving over to the use of indicators, the usual suspects come up: rSI & maCd represent 2/3 of the preferred indicators. nothing surprising there. But what is interesting is that Stochastics and Bollinger Bands are used by just a single digit percentage. the directional movement index (dmI), Ichimoku (goC), and Bloombergs volume at time (vat) round out the top seven most heavily used indicators (other than moving averages). Source:, paul Ciana Cmt

Beware Volatility ETFs

any investors who are using volatility-linked exchange traded products as long term portfolio hedges are getting hurt by so-called contango in the CBoe volatility Index (vIx) futures market. the contangobased negative roll yield means the cost of a volatility hedge for long equity positions is extremely expensive. Contango means distant month futures are priced higher than front month futures and thus the roll effect when the funds rebalance their futures upon expiration results in damaging losses, said paul weisbruch at Street one Financial in a recent article. Investors need to remember that these products are designed to track vIx futures, not the spot price. exchange traded products that track volatility have declined sharply along with the vIx. they include ipath S&p 500 vIx Short term Futures etn (nySearca: vxx), proShares ultra vIx Short term Futures etF (nySearca: uvxy) and velocityShares daily 2x vIx Short term etn (nySearca: tvIx). what people are missing is that the futures curve for volatility is telling us that, unless the apocalypse really is coming, it will be nearly impossible to make money with these products today. the futures curve is in such an ugly state of contango that, if the volatility index simply stays where it is today, investors can expect to lose nearly ten per cent every single month, paul Justice, director of north american etF research at morningstar, wrote in the march edition of morningstars etF Investor newsletter. Conclusion: never buy anything you dont understand well. Source:, written by John Spence


In an Up-and-Down Year, US IPO Market Struggles to Gain Momentum

after the fastest start since 2000, with the most anticipated deal in years on the horizon, the uS Ipo market entered may in prime condition. however, the european debt crisis intervened yet again, and a market decline turned into a month-long drought for Ipos following Facebooks botched offering. deal activity returned sporadically in the second half, but uncertainty surrounding the fiscal cliff resulted in a disappointing end to the year, with the second-slowest november and december since the tech bubble. Still, the overall results showed an improvement over last year. with $43 billion raised, total proceeds were at the highest level since 2007, and the 17 per cent average total return was above market indices. Consumer companies, such as organic food maker annies and discount youth retailer Five Below, and enterprise software providers, most notably guidewire and workday, produced some of the best-performing deals. after starting the year at a record high, the pipeline was cut in half largely due to the passage of the JoBS act, which allowed smaller companies to file confidentially and created a large shadow backlog. key takeaways: Ipo proceeds rise, helped by mammoth $16 billion Facebook deal 14 per cent average first-day pop is best in a decade Search for growth creates diverse group of top performers private equity deal flow rises but lack of large deals causes proceeds to fall 50 per cent Facebook marks biggest venture capital-backed deal in Ipo history Investors favour Lps and LLCs in search of yield Confidential filings under JoBS act reduce pipeline visibility

Money Supply Growth at a Decade Low

money supply in the Indian banking system is expanding at its slowest pace in ten years as growth in asias third largest economy is slowing and bank credit and deposit growth has slackened. the broadest definition of money supply, or the so-called m3, grew at 12.5 per cent in the fortnight ending 30 november, the lowest since the 12.03 per cent growth recorded on 23 november, 2003. tighten money supply can decrease inflation. the reserve Bank of India, or rBI, had reduced the m3 growth target to 14 per cent in the second quarter monetary policy review from 15 per cent set in the first quarter review in July. however, the rate of growth in money supply has fallen below the central banks target. Source:; by Joel rebello

Source: renaissance Capital


The Incredible Story of the Last Day of the Year

the chart shows an equity curve for the naSdaQ Composite on the last day of the year. Closing up 29 years in a row is fairly astounding. Just as astounding is the abrupt end to the apparent edge. we have no good explanation for why this may have changed, but it obviously has. and that is something we always need to keep in mind. the market is constantly changing. It is important to always keep studying it, keep an open mind, and adapt as it evolves. Source:

The Bond Market Is a Ticking Time Bomb

In 2012, uS american investors pumped over 90 million dollars in pension funds. at the same time, 150 million dollars were drained off equity funds. now picture the following scenario: stocks rise in popularity and the money flows back to wall Street. 19 billion dollars flowed into the coffers of equity funds in the new years first week. these are the strongest inflows since 2008 and the fourth highest since 2000. But such a trend reversal bears its risks. uS treasury bond yields have gone up for some weeks. 30-year treasury bonds have been auctioned with a yield of over three per cent for the first time in a year. now, if investors increasingly invest their money in the stock market, there will be the risk of a gradual rise in yields. that will lead to a risky cycle: the stronger the rise in yields, the more capital will be drawn from pension funds and the more fuel will be added to yields. a Cnn survey says that 40 per cent out of 32 interviewed investment managers expect interest rates to rise this year. 30 per cent assume that we will see higher interest rates from 2014. however, the Federal reserve plans to hike rates only in 2015. So the question then becomes how does the Fed plan to keep interest rates low? and what does a trend reversal mean for treasuries for the banks tier 1 capital? Source:


Who Owns the U.S. Equity Market?

the image shows the major holders of uS equities as of the third quarter 2012. households (37.92% vs. 55.54% in 1990), mutual Funds (19.38% vs. 6.60% in 1990), rest of the world (13.44% vs. 6.87% in 1990), private pension Funds (8.73% vs. 18.16% in 1990), State & local government employee retirement funds (7.32% vs. 8.06% in 1990), Life insurance companies (5.92% vs. 2.32% in 1990), and etFs (4.05% vs. 0.00% in 1990). this illustrates a large decline in the percentage of the equity market allocated to private pension funds. no doubt theres noise here and it may also be partially explained by demographics but the decline over the past 20 years is glaring. the data also show the growth of mutual funds and etFs since 1990 as households have reduced holdings of individual stocks and increased their allocation to these sectors. Source:, written by macromon

Why the Fiscal Cliff Is Meaningless

there are individuals with income over $400,000 or married couples with income over $450,000 in uS. their top tax bracket rises from 35 to 39.6 per cent, an increase of 13 per cent. the capital gains tax rate goes from 15 to 20 per cent, an increase of 33 per cent. the temporarily reduced payroll tax rate of 4.2 per cent reverts back to 6.2 per cent, an increase of 48 per cent on all wages up to around $110,000. an increase in the tax on high incomes may not have a large immediate effect. the damage done by this tax hike will be felt in future years, as it makes capital harder to accumulate. uS economy and job creation depend on capital accumulation. this tax hike in effect transfers capital out of the hands of those who may save it prudently into the hands of the government to be consumed. Source:; by keith weiner

Japanese Economy in Recession again?

Japans economy sank into recession with the gdp contracting for a second straight time in the third quarter. gdp fell an annualised 3.5 per cent in the September quarter, in line with preliminary figures. at the same time, the Cabinet office revised down the estimates for the second quarter to show a 0.1 per cent contraction. the gdp fell 0.9 per cent quarter-on-quarter in the third quarter, in line with preliminary estimates. private consumption, which accounts for roughly 60 per cent of the economy, was down 0.4 per cent compared to the initial estimate of 0.5 per cent drop. the decline in capital spending was revised to three per cent from 3.2 per cent. Source:


hiring remained moderate at the end of the year as employers appeared undaunted by the fiscal cliff gridlock in december. overall, the labour markets performance in 2012 was pretty lackluster and hiring was not strong enough to get the nation out of its economic rut. the economy added 155,000 jobs in december, bringing the total number of jobs created in 2012 to 1.84 million. the unemployment rate held steady at 7.8 per cent. the report was expected to show that 150,000 jobs were created last month and the unemployment rate remained unchanged. Source:; by tami Luhby

Steady US Unemployment

Bond Yields of the Euro States For China Banks, 2013 Could Be a Year to Forget
For Chinas banking system, 2013 could be shaping up as the year to forget. non-performing loans are set to rise significantly this year. the mounting credit problem coincides with a historical bailout cycle, wherein Chinas banks tend to get rescued every decade or so. green labelled corporate and government balance sheets as highly leveraged. total system leverage at a record 206 per cent of gdp in 2012. In the early 2000s, the last time Chinas banking system got bailed out by the government, total debt leverage was around 150 per cent. Chinas banks generally assume that theyll be bailed out by the government if non-performing loans get too big, whereas the assumption has led to lax standards when assessing credit risk. Source:

Bond yields of the euro states have been on the same level for almost nine years since the introduction of the euro until the beginning of the financial crisis. Source: J.p. morgan asset management, state: 31.12.2012


Jo in Th eP ro s

InTheMoneyStocks .com
The Leader In Market Guidance

Day Trading, Swing Trading, Investing


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paul wallace spent six years in the royal air Force controlling fighter jets before embarking upon a career in the City. he is one of the principal forex traders at kaizen wealth management uk and runs tradingbeliefs, a performance support practice for traders. Contact:

Paul wallace

part 13: the Final wrap

what type oF trader are you?

Achieving consistent success in trading comes only once we learn to trade in line with our individual personality, character and beliefs. It is this garnering of self-knowledge that becomes the real treasure on your trading journey. This series of articles will help you raise your awareness, develop self-knowledge and improve your approach to your trading business as you gain clarity on what type of trader you are.



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range versus Trend: Regardless of whether your approach is fundamental or technical in bias all markets tends to be in one of two states. Markets are either range-bound or they are trending. Are you someone who has the patience to wait for trending market conditions to appear? Or are you engaged in being a steady builder of wealth through periods of trading between ranges of support & resistance? Screen Watcher versus Set & Forget: Screen Watchers like nothing better than to spend all day perched on the edge of their seat, hypnotised by their screens. At the other end of the scale we find the Set & Forget Trader, who for whatever reason does not spend their time watching a moving market. They choose to place their trade on the platform and let the position play-out in its own time. Either path is viable, but only if it suits you and its executed correctly! Physical Stops versus Psychological Stops: We have all heard about using Physical Stop-Losses in the markets to avoid the chance of financial catastrophe. Its generally accepted that they are a good thing and can help an individual manage they made. A Traders worth is based on how well they dealt with losing trades. goal Setting the oPP model: Is there anything that we traders can learn from professional athletes that would help us improve our own performance? Whilst there are many styles and methods of GoalSetting one that is particularly prevalent with professional athletes and can be applied to traders is the OPP model of Goal-Setting. OPP stands for Outcome, Performance & Processes. goal Setting Part 2 absolute versus relative goals: Many traders will set absolute goals. However sometimes this is where goals setting can actually hurt performance. Take a look at your own trading goals and see what type of trader you are. Do you set tough absolute targets or are your goals relative to your own performance? an amateur with a Hobby versus a Professional with a business: Do you like to have a bit of a play at trading? Do you tell friends that youre playing the markets? Are you an amateur with a hobby? Or rather, do you conduct your trading as if it was a professional business? Do you have a business plan as well as a trading strategy plan? Remember most people spend money on their hobbies and make money from their business. Is that your experience of trading? In conclusion the author hopes this series of short articles has helped generate curiosity in the way you presently conduct your trading. By raising your awareness of what type of trader you are and of the possible biases you may be subject to you can make better choices. It can be a valuable investment in helping you achieve the next level of success in your own trading journey. Its not about buying extra monitors, another e-book, another trading strategy or attending another trading seminar. They all have their place but ultimately the keys to your success are within your own understanding of yourself and how to leverage your strengths. The author wishes you every success in your own trading journey.

Its time to draw this series to a close. Over the last twelve months weve looked at some of the areas of a traders make-up where knowing what type of trader you really are can help contribute towards your success. To recap, over the period weve looked at the following topics.

Learning versus earning: Are you at the experimental, investigative stage of learning to trade; or do you conduct yourself in the market like a business with expectations of income and expenses? Do your goals and plan reflect this? greed based Trader versus Fear based Trader: Are you a Greed Based Trader who is always hunting for action, over-trading and over-leveraging their accounts in the hunt for a quick profit? Or are you the opposite end of the Spectrum? A Fear Based Trader who takes an age to pull the trigger on a trade as they wait for what they may convince themselves is the perfect set-up. Long versus Short: Have you reviewed your trading records to determine whether there is a bias in your trade selection, to either the long or the short side? Some people can only take long (buy) positions due to the nature of their work.

Find out what type of trader you are and become a better trader.
Others because of moral or ethical implications. On the other side are those who like to short (sell). The supposedly feared evil short-sellers! Could that bias be helping or hindering your trading? bounces versus breakouts: Most technical trading is based on the interaction of price around levels of support & resistance. Are you someone who trades a bounce off support and resistance or someone who prefers to trade a break-out of a level of support and resistance? risk. However how many have heard or use a Psychological Stop with their trading? How many of you are able to look at the impact that non trading related activities or events may have upon your trading? Trader versus analyst: Do you do analysis and never take the trade only to watch the market go your way? Are you heavily invested in the rightness of your opinions? Or are you in the market to manage risk and grow capital? Remember an Analysts worth is based on how many right calls



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Clem Chambers is Ceo of advFn ( and author of the books 101 ways to pick Stock market winners and a Beginners guide to value Investing.

clem chambers

dont Forget the potential of Smaller Companies

Low-Cap ShareS: how to FInd the BargaInS

In the UK new investors and traders tend to only look at the FTSE100 for opportunities. This means they are missing out on the profits that can be made from the LSEs Alternative Investment Market (AIM). Private investment guru Clem Chambers argues that the trick is to find small, well run companies, with a solid story and super management.



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When it comes to your money, the term trading connotes danger. Trading is to investing what rock climbing is to mountaineering. Even with the proper ropes and equipment, rock climbing has its risks. Yet mountaineering is a whole different ball game. Trading should be reserved for very experienced investors and most of them either dont do it, or only dabble a little on the margins. So firstly, lets drop the T-word. For a start, small caps are expensive to buy and sell. They are also hard to get in and out of. As little as 5000 put into a small company can move the price. That move is not going to be in your favour. This doesnt kill small cap companies for investment but it means that you have to be looking long term. In the long term they can be excellent investments. Beginner investors often dont understand the hidden costs of buying and selling shares. A 20 trade in a 500 investment for example is an eight per cent cost (when the buying and selling total is 40). Thats a big hurdle to clear. It drops to four per cent if you buy 1000 worth and two per cent if you buy 2000. So your investment size is important. Thats just basic maths but many dont understand the bid offer spread, the price you buy and the price you sell at is also key. There is always a bid and offer, the price you buy at is always higher than the price you can sell at. If the bid and offer is 90 to 100, you will be buying at a hundred and selling at 90. Thats another ten per cent charge, which is hidden, it is another hurdle the share must get over for you to be in profit. So if you are planning to buy and sell a stock in two months like this, the cost is 18 per cent. doeS SmaLL meaN LoW rISk? Many small companies are in reality rubbish. They are just too small to do anything. You cannot make money like that. The costs are too high. This is one of many reasons why trading will only makes you poor. However, all is not lost. Small caps are high risk. That means the chances of failure are high. That means the rewards for success are higher. Like much in investing,

what seems bad can be good and visa-versa. The fact small caps are dangerous is why they pay, on average, better than big companies where the risk is lower. Another reason small caps can be lucrative is that they are too small for there to be much interest in them, especially from the institutions. This makes them cheap. If they ever do get attention then their price zooms.

So if you want to buy into small cap companies, plan to buy 20 or more over a period of time. Five years is fine. Or to make them part of a portfolio strategy where they are a small component. Use the internet to research and find small companies that have a solid businesses, look cheap compared to bigger players, have a good balance sheet and impressive management. Select only the

making profits can be slow and boring.

But many small companies are just too small to do anything or go anywhere or even be well run. So the trick is to find small, well run companies, with a solid story and super management. Any other opportunities should be avoided. Then you should buy a small stake, a 1000 or more worth but less than you mind losing. Then you have to repeat the selection process with the plan to buy many to diversify the risk of any one of them coming up dud. If you carefully select 20 to 30 companies the impact of diversification will iron out the risks. Alternately you can buy a few as a spice to a large stodgy portfolio. So if you have 100,000 of big caps you might buy five to ten small caps for a total of 10,000 of added risk. INveSTINg IS Work This sounds really boring and it is. Excitement costs. It costs because the market charges you for all services rendered and when you get a kick out of trading or investing or owning a certain stock the market will make you pay for it. Most people take their payment in kind, which is why they trade. Trading is fun and expensive. You trade exciting stocks and by and large they will hurt you. This might sound supernatural, but the selection of stocks for excitement, like it does with horses, produces a short term price premium and this premium, when it disappears turns into a financial penalty. soundest. Read their reports and statements and judge whether you like the sound of the Managing Director and Chairman. Select a stock you can imagine holding for one to three years. Then make sure their bid/offer spread isnt outlandish. If all the above works, then buy. When it comes to AIM or PLUS (next generation stock exchange), you should look to see how much information can be found on the company. PLUS is even more high risk than AIM but it also lacks the kind of information that AIM stocks enjoy. For me this means I very, very, rarely buy PLUS stocks. It is key to put your purchases into a portfolio tracking piece of software. Dont leave your shares unattended, you need to watch them trade and grow, so you can take profits and weed out poor picks as you go. That way as you build up a portfolio and watch it perform it will hone your skills and improve your stock picking. This is how to make good money in the market; old fashion hard work and diligence. CoNCLuSIoN Its sad to say but the more you risk the harder you have to work to make sure your investments are good. The stock market is a skill game mastered through practice, patience and diligence. Meanwhile in the end, only a portfolio can save you from your many justifiable and unavoidable errors needed to deliver the solid profit you deserve.



2013 I 02 Mark wolfinger

mark wolfinger has been in the options business since 1977 when he became a market maker at the CBoe. after leaving the exchange in 2000, he turned his attention to educating investors on how to adopt conservative options strategies. his most recent book is the rookies guide to options. mark also operates an educational service (options for rookies premium). Contact:

patience Is one of the most Important virtues of a trader

exerCISIng CaLL optIonS For the dIvIdend

An option owner can do only three things with an option: Sell, exercise, or allow it to expire worthless. This discussion involves exercise. Specifically, when should (or shouldnt) a call owner exercise an option in time to collect the dividend. Exercise is most efficient on the day before the stock trades ex-dividend. In this article we examine the strategy of exercise to encourage readers to recognise when exercising can be a costly mistake.



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One of the basic, well-understood facts about options is that the call owner is not entitled to receive dividends. Only the stock owner collects that dividend. Too often the call owners desire to collect the cash dividend turns into a money-losing experience. Lets begin with the basic rationale. Why exercise: To collect the dividend. The option will lose value if not exercised. Why not exercise: The exerciser may lose money because the time premium is worth more than the dividend. Downside risk: Call exerciser now owns stock. Cost to carry: No interest earned on cash used to buy stock (unimportant in todays low interest rate environment). The novice trader believes: If I exercise my call option and collect a dividend, thats cash in my pocket. What else do I have to know? Answer: You

example: The Feb 50 call market is $3.45 to $3.65 and the underlying stock is trading at $53.50 or higher. The intrinsic value is $3.50. b) The stock is going ex-dividend on the next business day. c) The call delta is 100. Failure to exercise under these conditions results in a monetary loss because the option will lose value overnight. This is easiest to illustrate when the stock opens unchanged which means that the stock is trading lower by exactly the amount of the dividend. examPLe XYZ is a non-volatile stock trading at $53.50, pays a dividend of $0.30, goes ex-dividend tomorrow and Feb expiration arrives in one week. The XYZ Feb 50 call is worth $3.50 and has a delta of 100. The next morning, the stock opens unchanged and trades at $53.20 ex-dividend. This call option is now worth $3.22. The call owner who did not exercise lost money. Note: Options that should not have been exercised do not lose this value. They may be a tiny bit lower

strike and expiry as the call) can be bought at a price that is less than the dividend plus trading costs. examPLe XYZ Feb 50 put can be bought at $0.20 when the call delta is only 95. The trader who exercises the call option and buys the put locks in a profit. Why would anyone make this trade? Why would anyone exercise the call and buy the put? When the call is exercised, two things happen: The call is cancelled (sold at zero) and stock is bought (at the strike price). Those transactions (buy stock, sell call) are equivalent to (same risk/reward; same profit/ loss) buying the corresponding put option. This is the concept of equivalent positions. Thus, exercising allows the trader to collect the dividend, and buying the put eliminates extra downside risk that comes with stock ownership. The trader who had not planned on exercising can afford to do so because he earns the $0.30 dividend at a cost of $0.20 (to buy the put) plus trading costs. Those costs may be too high for the small trader, but investors/traders with larger

when the conditions for exercise are not met, the time premium exceeds the dividend.
must understand risk versus reward. All discussions assume that the trader wants to maintain an investment in the underlying asset. If not, sell the option and get out of the position. WHeN IS IT CorreCT To exerCISe? An option should be exercised for the dividend when three conditions are met at the same time: a) The call option is deep in the money (ITM) so that it has (almost) zero time premium and the bid is less than or equal to the options intrinsic value. (due to one days time decay), but they trade at the same price as the previous day. Yes, the stock is lower by the amount of the dividend, but that dividend was built into the value of the option. In other words, the market knew the stock would be 30 cents lower and the option does not lose value. PoSSIbLe Free moNey On rare occasions, a call option may not meet the criteria for exercise. Yet, free money may be available to those who do exercise. That happens (as I said, rarely) when the corresponding put option (same accounts can benefit occasionally by exercising a call (that should ordinarily not be exercised) and buying the put. If those conditions do not apply, it is not a good idea to exercise an option. We understand that you may feel as if you are giving away the dividend for no reason. We hope to convince you otherwise. WHy exerCISe IS oFTeN a mISTake The decision on whether to hold the option or exercise is important from a risk management perspective. Yet, many option holders make poor decisions.



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options intrinsic value, eg the bid is $3.55 or higher in the example used previously) it is better not to exercise. This is where the inexperienced trader goes wrong. You can find evidence by tracking a real-world example or by playing with an option calculator. examPLe This time XYZ is a more volatile stock and that means there is a greater chance that the stock will decline below the strike ($50) by the time expiration arrives and that stock owners have more risk. The market for the Feb 50 call is $3.60 to $3.80 and its delta is 92. Do not exercise. The following morning, the stock opens unchanged at $53.20 and the Feb 50 call is trading with approximately $0.40 to $0.45 worth of time value (i.e., the option can be sold at $3.60 to $3.65 when the stock is $53.20). The correct action for the trader who wanted to collect the dividend and accept the downside risk is to buy stock on the day that it trades ex-dividend, and sell the call. Note: This trader does not get the $30 dividend, but collects $40 to $45 in time premium instead. The exerciser lost the opportunity to earn that extra $10 to $15 bonus. This happens too frequently because some traders do not recognise that not every ITM call option should be exercised for the dividend. When the conditions for exercise (above) are not met, the time premium exceeds the dividend. When the trader sells that option and buys stock, he earns more money than the call exerciser. CoNCLuSIoN Do not be in a hurry to exercise ITM call options for the dividend. Look at the option delta and the remaining time premium. If you do exercise, be sure it is one business day prior to the ex-dividend date.

1. Exercising converts a low-risk position (long call option) to one with a great deal more risk (owning stock). The question to be answered is: Is it worth that risk to collect the dividend? When you own the call option and do not exercise, your possible loss is the value of the option. If you do exercise, you now own stock and with that comes the possibility of losing a lot of money should the stock decline. Yes, you have the dividend, but that is not much consolation when the stock price plunges. Thus the decision has to be based on how you feel about owning stock instead of the call option. That decision depends on how far the option is ITM and how likely it is to fall below the strike of the call. On average, exercising when all three conditions outlines above are met, is the winning decision. 2. When the call option trades with time premium (the bid for the call option is higher than the



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offers proprietary research in a weekly newsletter that contains a short format of charts and commentary on the top 20 markets around the world. more details can be found at that may be optimised for different stock, futures, or forex data. the new release also gives the user more control over the number of clients or processing cores used on your computer and any networked computers. For more information, please visit of oratS option analytics data and aqumins three-dimensional visual interpretation system. optionvision provides a way to view option-related data. By integrating oratS option data into aqumins interactive 3d landscapes, market participants can mahiFx, the proprietary-built trading platform providing retail Fx traders access to institutional level technology and pricing, has launched a new just one click functionality that gives traders the ability to instantly share their trading inspiration and strategies with their social trading community and friends. the new platform feature lets clients export charting screenshots of their trades along with user-generated commentary and analysis instantly via Facebook. traders can now login to Facebook directly from within the mahiFx apI and share screenshots of chosen trades in both the Book view and analysis tab. and to promote knowledge share and discussion, traders have the facility to add comments to each individualised screenshot. as a market maker mahiFx is able to provide traders direct access to institutional level execution speeds and spreads through its proprietary-built fully automated pricing and risk management technology. For more information, please visit

veteran Chicago futures trader Scott Slutsky has launched BrICS global markets, a brokerage firm specialising in futures, forex, and managed products with a focus on international clientele. BrICS helps

bricS global MarketS

bricS global MarketS


commercial and institutional clients navigate an array of global markets, including foreign exchange, precious metals, and other hard assets, providing information on setting up accounts, trading and managing investments,

newedge has released its new Foreign exchange prime Brokerage platform. while forex has been a part of the companys suite of prime brokerage services, this enhanced version will provide institutional clients with unrivaled access to the global currency market. Connectivity to the forex markets electronic platforms has been significantly expanded, and the infrastructure supporting the processing of trades for managers and investors across multiple accounts and clearing brokers has been updated. these updates are intended to provide newedge clients with the ability to seamlessly execute their Fx trading strategies and benefit from significant cross-margining opportunities. additional details can be found at



monitor option metrics for an underlying security across all strikes and expirations on one screen. this product includes multiple, predefined views for


Mln brokerage ServiceS

Mln brokerage ServiceS

as well as how to select and utilise systems designed to capture market movements for electronically traded and monitored products like futures and options. It also

ward Systems group has announced Chaoshunter 3.0 with many user-requested features. Chaoshunter is a stand-alone software tool designed to produce readable formulas to model numeric data for applications such as producing buy/sell signals for financial markets. this release allows a view of the optimisation period and out-of-sample testing results while optimisation is taking place. It is able to save optimisation settings in a template for use with new models, such as a trading model setup

warD SYSteMS grouP

mLn Brokerage Services, previously known as bxChicago, recently became an independent branch office of om Securities. mLn clients now have access to the trademonSter platform. mLn serves both self-directed investors and those needing guidance with an array of experience and knowledge. the mLn team offers financial experience and expertise, especially in options. additional details can be found at


aqumin and option research & technology Services (oratS) have released optionvision, an integration

stocks and options. the landscapes reflect multiple variables, letting users identify changes in volume and volatility. For further information, please go to or



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WHaT THIS book CoverS As the title implies, The Dividend Investor is all about buying shares for the income they generate through the dividends they pay their shareholders, as opposed to investing simply in the hope of returns from rises in share prices. The accent is on buying shares for the longer term rather than looking for quick fixes. The focus is the UK stock market, although the arguments and guidance provided are relevant to all major stock exchanges around the world. The text refers mainly to larger and medium-sized companies because they are more likely to pay dividends than smaller ones. The concentration is on companies with a full listing rather than those quoted on AIM for the same reason. The approach is practical rather than academic. WHo THIS book IS For This book is for those who have grasped the basics of investing but are unsure as to how to build a portfolio of shares that will produce a steady and rising income. However, investors of any experience should benefit from reading this book, irrespective of their investment criteria. Even those who have already built an investment portfolio and those who subsequently decide that they want to be active traders rather than

a practical guide to Building a Share portfolio designed to maximise Income

the dIvIdend InveStor

By Rodney Hobson



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particularly benefit from reading from start to finish. Even those with little knowledge of how the stock daily doses of how share prices rise and fall, often commenting on how billions have been added to or

stick to solid long term investments will learn more about making the most of their capital. Many investors plunge into shares with a vague notion of making money but without properly assessing what it is that they want from their investments. This book argues that regular income is a key part of any investment strategy, whatever the age or aspirations of the investor, and that shares are the best way of securing this income at relatively low risk and with the bonus of providing a hedge against inflation. HoW THIS book IS STruCTured The Dividend Investor is divided into four main sections: (Parts A-D) basic information on how dividends are set and by whom; how to analyse companies to maximise the yield on your investments; how to find companies that fit your investment criteria; and how to build your own portfolio using the knowledge that you have gleaned from the first three sections. Chapters are arranged to lead investors stepby-step through the whole topic of investing for dividends. New and less sophisticated investors will

a trader should recognise the remarkable power of dividends.

market works will feel competent to begin investing by the time they are half way through the book. The book can also be used as a reference work. In particular, the chapters on the key figures and ratios that investors use to choose companies that fit their portfolios should be fully understood. WHy dIvIdeNdS? There are two major reasons for investing: 1. Produce income 2. Store wealth for some time in the future It is very important to recognise the remarkable power of dividends. Newspapers feed the public with wiped off the stock market or how shares in some company or another have gained millions in a single day because of one item of good news. It is easy to be seduced by these dazzling figures that foster the notion that the stock market is all about making a fast buck in a gamblers paradise, especially in a bull market when all eyes are on rising share prices. In fact, the real money is made through solid investments that pay regular, rising dividends. The greater part of total returns for share investors over time will come from dividends, not capital gains. And when markets are falling, your only gains are likely to come from dividends. To demonstrate the importance of dividends we can look at figures produced by the Barclays Equity Gilts Study, which showed that 1000 invested in shares at the end of the Second World War would have been worth 57,210 by the end of 2009. However, had we reinvested the dividends our pot would have ballooned to a massive 924,600. So unless you are a very short term trader, you should be investing for dividends as part of any strategy for capital growth. Companies paying gradually improving dividends are the ones that will see their share price rise over time and the income from dividends will help to offset any capital losses you may suffer. With the help of Rodney Hobsons latest book you can compete easily with the City professionals, retaining the flexibility to invest as, when, and where you choose. The Dividend Investor is a carefully written and thorough guide, a worthwhile read for investors of any experience.

title: Subtitle: author: iSbn: Price: Publisher:

the dividend Investor a practical guide to Building a Share portfolio designed to maximise Income rodney hobson 9780857190963 17.99 harriman house

about the author: rodney hobson is an experienced financial journalist who has held senior editorial positions with publications in the uk and asia, most recently as editor of hemscott, the financial news and information website. among posts he has held are news editor for the Business section of the times, Business editor of the Singapore monitor, deputy Business editor of the Far eastern economic review, head of news at Citywire and editor of Shares magazine. he has also contributed to the daily mail, the Independent and Business Franchise magazine. he is registered as a representative with the Financial Services authority. he is also the author of Shares made Simple (9781905641451), Small Companies, Big profits (9781905641789), understanding Company news (9781906659226) and how to Build a Share portfolio (9780857190215).



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SySTem requIremeNTS Visual Chart 5 runs on all Windows versions: Windows XP, Windows Vista, Windows 7 and Windows 8. Concerning hardware, a minimum of an Intel Core 2 Duo 3 GHz processor and 2 GB RAM is recommended. INSTaLLaTIoN You install Visual Chart with the setup.exe-file, which can be downloaded on the website www.visualchart. com. The file installs Visual Chart 5 quickly on the desired drive and is ready to use immediately after logging in. The program is available in German, English, French, Spanish and Italian and is by default installed in the language of the operating system.

Charts, technical analysis and trading Systems an all-rounder for discretionary and System traders

vISuaL Chart 5
Visual Chart Group has been operating in the field of trading software development since 1998. The fifth version of Visual Chart offers everything you need for successful and professional trading: reliable realtime data and news, technical analysis, programming of trading strategies and automatic trading systems.

CHarTS The user can open the price development of several stocks, indices, forex and commodities via the tab charts. The charts can be adapted individually. The user can change the period, display and colour, can compare the charts of several stocks, as well as insert indicators, studies or technical tools and much more. The program offers a variety of chart types such as Candlesticks, Linear charts, Renko, Three Line Break, Kagi or Histograms, as well as Tick-charts, with extensive price history. PrICe LISTS aNd dePTH oF markeT You can display the prices as charts as well as in the form of quotes bid and ask prices are illustrated in realtime. All realtime prices are colour-coordinated and therefore you can determine the direction of the price faster. The particular colour signals the direction compared to the prior realtime price. Changes (in per cent and in points compared to the prior day) are automatically displayed in realtime as well. The quotes list contains the most important data of the chosen instrument, for example high, low, buy or sell position, volume and so on. In the quotes list menu the user can choose from several



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possibilities to adapt their quotes. For example one can include technical indicators (Relative Strength Index (RSI), Bollinger Bands, moving averages etc.) or fundamental data. The order book can be displayed in two ways in Visual Chart 5: the DOM window, where the cumulated volume is very important for intraday traders and the Times & Sales window. The latter is combined with a small tick chart for a better overview. The trader can place orders directly in the order book with just one mouse click. The so-called Armed-function enables very fast trading (Figure 1). deveLoPmeNT oF a STraTegy In addition to many indicators, studies and trading systems that are included in the program, the user has two programming environments for the development of his own strategy at his disposal. If you already have programming knowledge, you can develop your own strategy in standard Visual Basic (VBA). If you want to take advantage of a simpler system, you can use the visual platform that displays your ideas on flow charts. In addition, the user has the possibility to customise the strategies that are offered free with the program and create his own strategy. TradINg SySTemS STaTISTICS Visual Chart 5 offers more than 150 statistical data like gross profit, accumulated profit, drawdown, profit/losses series or profit factor, in order to test the efficiency of a trading system. The most important features of the statistics are: The possibility to prepare personalised templates. The availability of detailed analysis post trade. Graphic display of the results of the statistics (Figure 3) as well as the ability to adapt these results and export them to Excel.

F1) 5-mInute Chart Fdax wIth market-depth wIndow and order Book

Figure 1 shows the 5-minute dax-future chart with one buy order (green) and one sell order (red). next to the chart you can see the particular dom window and the order book, where you can see the orders as well. Source: visual Chart 5

F2) automated tradIng SyStem wIth StatIStICS

TradINg WITH dIreCT aCCeSS aNd SImuLaTor With the help of Direct Access the user can give orders directly and safely in Visual Chart. The execution of

Figure 2 shows an automatic trading system with statistics with selected data.
Source: visual Chart 5



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the orders as well as the routing-system confirmation allows the user to send orders to the market very quickly. The user can connect to Direct Access in two ways: simulation-mode with a virtual account or real market with real orders executed in the market. For now Visual Chart provides a connection with Interactive Brokers but more partnerships with other brokers are planned in the near future. The most important element of Direct Access is the order manager. The user can see all orders at one glance, he can check the status of those orders and observe how they are placed in the market. The feature Direct Access the display of orders in charts and order books is a good example for the intuitive user interface of Visual Chart. After you have sent buy or sell orders for a stock, they are displayed in the order book of that stock as pending orders. As you can see in Figure 1 the buy orders are displayed with a green background, sell orders with a red background in both DOM windows. Existing orders can be sent with just a single mouse click and can be modified as well. Even faster is the use of the F8 (buy) or F9 (Sell) keys. Of course, the user can place the order for now and save it for later use this means he can use parked orders. Parked orders can also be connected with a graphical object and will then be sent automatically if for example, price breaks a support. Therefore the program automatically executes a parked buy or sell and the user does not have to intervene again. System traders can test and use more than 100 automatic trading systems in Visual Chart 5. As already mentioned, if the optimal strategy cannot be found in the default list, they can program their own system. After the user has planned his strategy, he can program the system, optimise it, test it with the simulator and finally place orders automatically. Traders who want to use their own trading system, but have no time for the programming, can have it programmed by Visual Chart for a very inexpensive one-time-fee. The programming department also creates user-adapted indicators and studies. Visual

F3) StatIStICS

Figure 3 shows the dax30 quotes list, the e-mini S&p tick chart with buy and sell orders and history, the particular bullish and bearish candlestick chart as well as volume window for Classic all Share. Source: visual Chart 5

Chart offers tutorials, newsletters, FAQs and customer service for their clients via phone from Monday to Friday from 9.00 am to 6.30 pm as well as via chat and via email. HIgH daTa quaLITy The quality of the data is high-end. There are no measurable latencies in the futures-markets, CME minis, CBOT minis and Eurex, even at times with fast market moves or shortly after the publication of news. Even data for the European and American stock markets are of very high quality, due to a virtual lack of time delays. CoST The monthly fee for Visual Chart is 35 EUR for private investors. Included are realtime data for forex, international indices and VCGNews. All other markets are offered End-of-Day for free or in realtime at additional cost.

TeST PoSSIbILITy Normally Visual Chart can only be tested for three days for free. But especially for the readers of TRADERS, Visual Chart offers the possibility to try out the program in full in realtime for a month for free. If you are interested you need to send your personal data (name, address, mobile number and email) and the desired markets to or you can call the support-hotline 020 7153 8936 and let them know you are a Traders reader. CoNCLuSIoN Visual Chart 5 is a powerful program that offers realtime data on national and international financial markets and provides as well, the possibility to analyse this data with a large number of useful tools. The discretionary trader as well as the system trader will find Visual Chart an efficient and stable piece of software in oder to make buy and sell decisions effectively.



Create your own professional analysis

Fundamental analysis of stocks offers important clues to long term investors to choose individual stocks. You have either the possibility to revert to professional analysis or to create your own analysis. While the delivery of professional analysis is often impossible or very expensive, you need a considerable knowledge and most of all plenty of time to create analysis on your own especially if the universe of the analysis is large. The online platform offers private investors the ability to work like professional analysts to parse their stocks using the most important factors and, as well to create their own analysis and scenarios in the blink of an eye and without a lot effort.

THe Idea was founded legendary Massachusetts Institute of Technology (MIT) educated engineers and former Wall-Street-analysts with one clear mission: develop an interactive online tool that helps investors evaluate a stock correctly showing how the different aspects or divisions of a company influence a stocks price. So the investor learns immediately what the key figures are in evaluating a stock fundamentally. Investors can analyse fundamental figures of certain aspects of a companys business using For example, price development, market share and profit margin. But even more there is the ability to modify the listed variables and to analyse the outcome on the share price. You do not have to rely on outside profit estimations. And you do not need the complex



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Hurray To THe CommuNITy The innovative platform is surrounded by an air of a social network. The area community offers interested users the possibility to discuss the estimation of certain stocks with other members (private investors, analysts, insiders) and to share the own analysis via Email, Facebook or Twitter. Based on the sum of all members estimations, a weighted prognosis is determined for each company called Community Sentiment. oN-road-TeST PaSSed Lets take a look at in practice. Well start by entering Apples ticker-symbol. A nicely arranged graphic appears which shows the different business areas and their corresponding percentage to the value of the Apple share you can choose between a percentage and absolute figures. The iPhonebusiness dominates with over 40 per cent; so lets take a closer look at the inside of this companys

programming associated with Excel or complicated discounted-cash flow-models. A true paradise for those interested in the analysis of stocks and those who want to include their own expectations in the analysis. This information is available to the investor who of course can look at annual or quarterly reports for free but in general such analysis inevitably fails because one does not have the time and/or the interpretation of endless columns of figures proves too difficult. The above-described simulations are generally not the daily business of private investors anyway. This is reason enough to take a closer look at this tool. THe SoLuTIoN The experienced stock analysts at analyse a considerable amount of data that result in different models of analysis which calculate the fair value of the stock. First, how the different divisions of a company contribute to the value of the company and which factors have the heaviest influence are examined. Every stimulator of the companys value gets an estimate based on a combination of historical data, developments in competition and the sector as well as future trends. The price prognosis that results is published at and should not be interpreted as a target price. Instead, it provides a first view of the company, to which you can add your own estimations of certain key metrics and then it allows you to test different scenarios. Examples: What percentage of the Apple-share price (in USD or per cent) does the iPhone-business make up and what influence would a bisection of the profit margin have? How much would the price of the Microsoftshare change, if Bing could capture 20 per cent of Googles market share?

F1) anaLySIS oF the appLe StoCk

The site is a good starting point for further analysis. However, it should be clear that even the best model is no guarantee for the fulfilment of the prognosis.

we see the iphone-area including estimations of different parameters. they can be modified and can be compared to estimations by other users. every change results in a new calculation of the new fair value of the stock. Source:



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business where defines their estimations of share price, market share, size of the global mobile market and margins for this product sector, shown as a diagram. The chart on the left shows the calculated fair value, the current market price and now it is getting exciting the value based on estimations by users. We modify the predefined estimations and correct, for example, the margin for the next few years to the downside. Immediately we see how this affects the share price: It is only 540 USD. The graphic view of these estimations in the diagram is also very helpful. Figure 1 shows the estimates of, one from the user and the one from other users active in the community. Another highlight is the possibility to see the analysis model. A clear overview shows the most important data from the profit-and-loss-statement historical and estimated as well and is free to use for every user. A good summary of the share is offered in the area below the graphic. The user finds everything he needs to know about the share: a description of the company, key trends in the sector, analytical highlights and factors of up- and downside potential for the stock a very good way to get to know the stock in depth. At the end of the analysis process the user can print his own personal report in PDF-format. Thats it. beCome your oWN aNaLyST Despite the many input-factors and the high complexity of the analysis model, every user needs

F2) dCF-modeL For the appLe StoCk

the p&L-area gives a quick overview of the most important historical data (for example sector, profit margin, free cash flow) and the estimated value for the following years. users who want to modify the analysis model can do so easily.

has not wished for a convenient simulation- and analysis-tool that can be used professionally in a similar way? Within seconds the important aspect of a company are identified, you can look

around 200 American stocks and in the future NonUS-shares are to be added so fans of European stocks will get their moneys worth. A mobile-app for the iPhone is planned as well. offers a transparent, interactive and extremely intuitive platform.

to understand what this tool can and cannot do. It is a model, not a crystal ball. Whereas other websites and analysis services are based on historical development, focuses on the future. And that is the primary reason this tool is so interesting. Hand on the heart: What investor at current estimations, adjust them and get a new value immediately. offers a transparent, interactive and extremely intuitive platform which provides valuable functions for fundamental analysis and in picking interesting stocks. At present there is a choice of CoNCLuSIoN The tool is a wonderful new development and at the price of 15 USD per month represents great value. A basic version which shows what the different areas of a companys business contribute to its share value is available at no cost.


S t r at e g I e S

2013 I 02 ziad Masri

ziad masri is a professional Futures trader and Co-Founder of, a site that is bridging the gap between retail and professional traders by providing intensive training to the independent day trader. he recently developed an innovative online training program. you can catch his trading insights regularly on the professional trading blog at

profiting from the hidden market dimension

how to trade wIth voLume proFILe LIke a pro

What if there were a more robust and effective way to trade the markets? Most traders use indicators and basic chart patterns in their trading, but more and more professionals have been turning to a powerful method known as Auction Market Theory. Utilising a hidden dimension of the markets that relatively few people know about, it can give you a true edge over the competition.

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THe HIddeN dImeNSIoN When you think of volume, you most likely think of how much volume was transacted in a given period of time. For example, how many contracts traded in this 5-minute bar? But theres another dimension from which to view volume that can prove much more useful from a trading perspective. What we are referring to is the horizontal dimension, or whats known as volume at price. Rather than looking at volume per period of time, this dimension tells us how much volume was transacted at each price during the day. Figure 1 shows an example of a chart of the E-mini S&P 500 with horizontal volume overlaid on it. Each horizontal bar is placed over a specific price, and each time the market trades at that price throughout the day, more volume is built up on that horizontal bar. As you can see, 1371.75 and 1372 were the prices where the most volume transacted during this particular day. The horizontal volume bars as a group look like a bell shaped curve, and the middle (dark blue) part of the volume distribution is known as the Value Area. In Auction Market Theory, which is the basis of this methodology, the market is analysed through the lens of value. The more time that the market spends in a particular price range, the more volume gets transacted there, and the more volume is transacted there, the more it is indicating that this area represents fair value between buyers and sellers. By contrast, if the market spends little time in an area and doesnt revisit it throughout the day, it will not build much horizontal volume at any given price there, and this indicates that either the sellers felt price was overvalued and quickly rejected it, or the buyers felt price was undervalued and quickly rejected it. As such, the horizontal volume dimension displayed on a price chart quickly shows us where the market players believed value to be, and where one side quickly rejected prices. HoW To ProFIT From vaLue areaS While there are numerous ways to use the powerful information found on the horizontal volume scale,

well be discussing the most common (and effective) method. This method is all about using the value areas (i.e. price ranges with high horizontal volume) as hidden yet highly accurate support/resistance zones at which to. The reasoning behind it is as follows. When the market spends time balancing (i.e. going sideways or building a trading range), it builds a value area in a narrow range of prices. When price finally moves away from this value area, many market participants are caught on the wrong side of the move. For instance, in the case of an upside breakout, many shorts will be caught. The shortest of the time frames (scalpers and day traders) will quickly exit their losing positions, but many others (swing traders) will still be stuck in the position. As such, if price later revisits this value area, the caught shorts will look to buy back their position at breakeven. This buying activity turns this area into a great support zone. And what makes it

often more powerful than other support zones is the sheer number of participants that will be active there given the fact that so much volume had previously transacted there (which is what made it a value area to begin with). Of course this concept is not new by any means, but what makes this method more powerful is the fact that relatively few traders know of horizontal volume. When they look at their charts, it remains hidden to them, and all they see are the typical support/resistance areas that all traders use (and which often become ineffective for that very reason). You can use previous value areas as both support and resistance, and they work on any time frame and any market. The important thing, however, is to have a contextual view of the market from the larger time frames so as not to use this type of setup in a vacuum. We turn to this next.

F1) voLume proFILe e-mInI S&p 500

this chart displays a volume profile overlaid on a price chart of the e-mini S&p 500. the thickest part of the volume distribution is known as the value area, and its represented here as the area between the two red lines. the price which has accumulated the highest volume is called the high volume node, occurring here at 1371.75-1372. Source: market delta


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THe SeTuP Most traders have been taught to trade via indicators and patterns, and the problem is that they spend their days looking for simplistic setups with no contextual awareness surrounding them. What you need to do to finally separate yourself from the pack is to learn how to view the market contextually. If you learned how to do that, you would not need any indicators to trade with. This setup utilises market context as part of its very nature (as any good setup should). What you want to look for is: 1. Directional conviction in the form of strong oneway price action. 2. A sideways balancing phase in which the market builds a value area. 3. A breakout from the value area in the direction of the previous price move. 4. A test of the previous value area. In the case of an up move, the previous value area will act as great support on the retest, and that is the long setup. In the case of a down move, the previous value area will act as great resistance on the retest, and that is the short setup. THe bIgger PICTure In terms of the first step of the setup, youll want to move to higher time frame(s) to see if you have a bigger picture directional move. For day traders trading off of 1- to 5-minute charts, youll want to look at 15- and 30-minute charts or larger to give you a multiday view of the market landscape. There are no exact numbers and rules. This is not an automated strategy. This is discretionary trading based on everchanging market information that always needs to be put into context. Professional discretionary traders trade off of robust principles and apply them dynamically instead of using rigid rules that specify exact time frames and numerical values. It doesnt matter if you look at a 15-minute chart or a 23-minute

F2) puttIng FIgure 1 Into Context

here we can see our long setup. point 1 in the chart shows a high conviction up move occurring on a large gap from a two day trading range. point 2 shows the market balancing and building a value area with thick horizontal volume. point 3 shows that a breakout occurred above the value area. point 4 shows that we are now testing the previous value area, which gives us our long setup at support. Source: market delta

F3) entry zone and Stop

our entry zone is represented by point a, and it stretches from 1373 down to 1371.5. point B shows where the stop would be placed. If price hits 1370.25 or lower, our support zone is clearly broken and the trade would be invalidated.
Source: market delta


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reality, however, is that if the context is conducive for a trade and the zone is a logical one based on market structure, the odds are in your favour, and you should simply take the trade knowing that in the long-run (after many similar trades are taken) you will come out ahead. Waiting for confirmation does NOT increase accuracy as many assume, because often the market will chop around at a support/resistance zone, and any initial reaction that is interpreted to be confirmation will often be nothing more than chop. If you wait for it you are simply entering at a worse price and youll need a wider stop, making the risk to reward proposition worse. So the entry rule is to enter anywhere in the zone. In Figure 3 (A), we see that the entry zone is anywhere between 1371.25 (lower red line) and 1372.75 (upper red line). This is the high volume node that represents the previous value area. You can put a limit order anywhere from 1371.5 to 1373 (one tick above the zone), or you can enter at market when the price reaches the zone.

chart. Its all the same information in the end. What matters is looking at the charts that will give you the best contextual view, and this changes with each situation. As far as step number two, to draw in the horizontal volume bars your charting platform needs to have this capability built in. Most platforms now have Market Profile (or Volume Profile) charting as its called, as more and more professionals turn to this methodology. The best ones weve found are Market Delta, Investor RT, and Sierra Chart (no affiliation exists with any of these companies). Figure 2 shows that we have a long trade setup. The market had risen strongly through a large gap that broke out of a two day sideways range on November 19th. It then built a value area and broke out above it in the afternoon. On November 20th the setup is complete as we are now getting a retest of the previous value area. THe eNTry Most of the trading education out there tells you to wait for price confirmation before entering. As professional traders, we treat entries very differently. The basic principle you need to understand when entering at a support/resistance zone is to enter at the zone, WITHOUT waiting for price confirmation. This usually means that you will be entering a long when the market appears bearish, and a short when the market appears bullish. In this way youre going against the crowd, which by definition loses most of the time. The reason behind this form of entry simply comes down to two major concepts: trade location and probabilities. Not waiting for a bounce before you take a long (or a drop before you take a short) gives you the best trade location, which means the lowest risk and highest reward possible. The way to be able to execute in this manner is to think in terms of long term probabilities. The people who tell you to wait for price confirmation say that you want to see that a zone is holding before getting in. The

Strategy SnapShot
Strategy name: Strategy type: time horizon: Setup: entry: Stop-loss: take profit: trailing stop: average hit rate: market profile trading pullback trading Intraday trading volume profile value area as support/ resistance on the retest confirmed by directional move on higher timeframe Long at value area retest on bearish action, Short at value area retest on bullish action Long: Below value area retest area, Short: above value area retest allow for risk/reward ratio > 2.0; Long: previous value areas/highs, Short: previous value areas/lows none 70 %

risk and money management: max. 2 % risk per trade

F4) proFIt target

assuming we entered right at the top of the zone at 1372.75 (a), we should look to exit at B, which is the next resistance zone. although the context is bullish and this resistance zone is likely to be broken, the previous day had a very large up move and consolidation is very likely following a day like that. as such, the upside will likely be limited and it would be wise to take profits at resistance.
Source: market delta


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THe ProFIT exIT The profit exit is likely the most complex part of any trading setup. Many traders try to simplify it by always scaling out at fixed point values, but this degrades the overall edge of any strategy. Most educators will teach you to do this because it feels good emotionally to ring the cash register by locking in profits. But your goal should be optimal profits, not emotional comfort. In this case the context is clearly bullish and we are testing a previous value area which should serve as great support. The correct exit would be not to scale out of the position, but rather to hold it at least to the next resistance level, which in this case would be yesterdays high at 1378.5 as shown in Figure 4. This gives us at least a 2:1 Reward to Risk ratio (RRR) on a trade that will work out at least 70 per cent of the time. That translates into a great edge. quICk revIeW The strategy in this article makes use of Auction Market Theory and the hidden dimension of volume at price. The reason it is so robust and effective is because it is grounded on the principles of market behaviour and takes advantage of how the markets really work. No indicators or patterns are needed to find great trades when you use such a sound methodology. But any methodology would be incomplete without correct execution and that is why it is crucial to enter and exit correctly when using the setup taught here. Forget common trading wisdom that says to always wait for price confirmation and scale out of your position. The reason why its common is because the majority does it, and the majority is losing. Instead, learn how to trade like professionals who actually make a living from the markets. This article has provided a glimpse of how to do just that, and we hope you will profit greatly from it.

THe SToP Stop placement is simple in such a setup. Simply place your stop a bit beyond the zone, because if price breaks through the zone it would be invalidating it. Placing it at 1370.25 puts it safely one point beyond the zone, as shown in Figure 3 (B). That would give you a stop size of anywhere between 1.25 and 2.75 points depending on where you entered the trade. PoSITIoN SIzINg A great way to size your position is by using the % Risk model. If for example you had a $50,000 account, you could decide to risk two per cent of your account on this trade, which would place your risk at $1000. Assuming you entered at 1372.25, you would have a two point stop. At $50 a point in the E-mini S&P, that would be $100 of risk per contract. To get $1000 of risk on this trade, you would trade ten contracts ($1000 / $100 per contract).


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S t r at e g I e S

2013 I 02 azeez Mustapha

azeez mustapha is a trading professional, an official analyst and representative at Instaforex Companies group, a blogger at advFn. com, and a freelance author for trading magazines as well as a provider of trading signals at a number of websites. he is also a unique content contributor at, and many of his articles are posted on other websites like Contact:

high probability Scalping in asian Sessions

SCaLpIng wIth preCISIon

Scalping the Forex markets on a short term basis can be highly profitable for disciplined scalpers. This is a trading style that makes you go for a few pips (or a little more) per trade. In most cases, orders are opened and closed in a matter of seconds or minutes. Really, scalping might be one of the best trading styles, if you do it flawlessly and strictly decide to control your emotions. This piece explains one way of scalping effectively.

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SCaLPINg THe markeTS WITHouT HeSITaTIoN Adeptness only is not enough to make you an effective scalper. The essential thing is for you to execute orders with no hesitation. When prices are noisy, counter-trend moves are not overreacted to since they are viewed as something that must happen. Traders go long in an oversold market, expecting that the coming market journey will be favourable to them. Whereas in a downward market, the waves reveal some inexperienced surfers and the results are not good. The truth is this: The more assurance you need before you open positions, the less profitable the positions will be. This scalping strategy deals with the unpredictability of the markets in some form, after which you will be able to deal with the unpredictability with calm. You will no longer bother that your trades should not include any negativity, as that mindset can lead to self sabotage. In this regard, we think this is essential for some scalpers those who do not yet think that trading should not be 100 per cent accurate. When a runaway price is descried, the order often goes positive immediately. Nonetheless, the price might retrace sharply, and it may cause your order to metamorphose from plus into minus, prior to metamorphosing to plus again, during another market retracement in your favour. When one does not have an open position, a trader may be looking for new trading opportunities, or merely, while away the time waiting for the next favourite setups. The next setups can be helpful. To some extent, effective scalpers go short or long as early as it is sensible to do so, and close the order even as the price continues to tank further or rally. Yes, closing an order too early is still better than smoothing it too late. The outcome is that when scalpers scalp the markets with effectiveness and bravery, their account balance increases. Therefore when a scalper opens a trade and scalps with a signal. This would require a wise stop-loss, otherwise she/he would be affected by a premature exit and the tight stop would be unnecessarily hit.

aPProaCHINg THe markeTS WITH a STraTegy In most cases, markets do not travel in straight lines but oscillate within some trendlines. These territories could signify equilibrium zones, as they underpin the market unpredictability. A trading instrument will not go straight but instead gets pushed around accumulation and distribution zones. Whenever a market bias is terminated, for instance, when institutional traders smooth their positions and

stay out of trading, serious equilibrium propensity develops. Trading in an equilibrium zone sometimes need tried and tested speculation tools. If you prefer to be an intraday trader, you would encounter equilibrium zones most of the day, occasionally in the trading week, or in few months. This trading system is ideal for the Asian Session, but is not compulsory for it. The currency markets are generally quiet and ideal for scalping during the Asian

Strategy SnapShot
Strategy name: time horizon: trading period: Indicator 1: Indicator 2: Indicator 3: Currency pairs: Setup: entry condition: Stop: target: trade duration: exit rule: alternative exit rule: money management: number of orders per day: Broker preference: asian Session Scalper 1-minute and 15-minute charts It is ideal to trade from 11.00 pm gmt to 12.30 am gmt (you may mind the eSt equivalent of this time period) Sma period 50 Sma period 90 rSI 14, levels 30, 50 and 70 eur/uSd and gBp/uSd Buy when the Sma 50 crosses the Sma 90 counterpart to the upside and the rSI 14 is above the level 50, but not in the overbought region (the level at 70). Sell when the Sma 50 crosses the Sma 90 counterpart to the downside and the rSI 14 is below the level 50, but not in the oversold region (the level at 30) the entry criteria must be met on both the 1-minute and the 15-minute time frame. the short term trend is confirmed on the 15-minute chart while the signal is taken on 1-minute chart 100 pips from the entry price 5-10 pips 1.5 hours maximum Close an open position after the maximum trade duration has expired Close an order quickly if there is a fast reversal against you do not use more than 1 lot for each $10,000 you may not take more than two trades per night (or a maximum of four trades if the market conditions are favourable). generally, you are not expected to close more than two losses per night Choose only brokers that support scalping. For example, some brokers do not require you to target less than 25 pips per trade


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(Tokyo) Session, since prices tend to be more orderly and easily predictable on a near term basis. Scalping works better when the markets are in equilibrium zones and moving sideways, hence the reason we choose the trading period recommended in this article. This is a period in which this strategy can better be traded effectively (see Strategy Snapshot). During summer, the Asian Session generally opens at 11.00 pm GMT (7.00 pm EST), and during winter, the Asian Session generally opens at 11.00 pm GMT (6.00 pm EST). However, the time zone in your country might be different. Entry condition must be valid on the two time frames. It helps to put your stop around a good demand zone (if you go long), or around a good supply zone (if you go short) since this would safeguard your trading in the short term. Prices would find it difficult to slash through these levels, except there is going to be a perpetually serious countertrend reversal. You need to focus on the job at hand, do not ruin your trading day with side attractions and distractions. In a nutshell, nonetheless the chances of negativity and profitability are extant. That is why too high position sizing is not recommended. And it is not recommended that the maximum trading duration be exceeded, because if huge losses are incurred, they cannot be quickly replaced by small returns. THe SeTuP The mixing of the simple indicators used here enable triggers for opening and smoothing orders. You buy when the SMA 50 crosses its SMA 90 counterpart to the upside and the RSI 14 is above the level 50, but not in the overbought region (the level at 70). You sell when the SMA 50 crosses the SMA 90 counterpart to the downside and the RSI 14 is below the level 50, but not in the oversold region (the level at 30). The entry criteria must be met on both the 1-minute and the 15-minute time frame. The short term trend is confirmed on the 15-minute chart while the signal is taken on 1-minute chart. Although this is not used in trading examples in

F1) a Short SIgnaL ConFIrmatIon on the gBp/uSd

on July 23, 2012, the 15-minute chart (on the right) indicated a short term bear market as the 1-minute chart gave a short signal on the gBp/uSd.

F2) a Short SIgnaL ConFIrmatIon on the eur/uSd

on the eur/uSd, there was a short term short signal on July 24, 2012. this signal was confirmed on the 15-minute chart (on the right) before the one on the 1-minute chart was taken. please note the position of the rSI 14 when the trade was taken.


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this article, you could add a filter in the equilibrium market, for instance, Bollinger Bands (default parameters). If the price is already pushing up the upper bands, you might not open a long order, and if the price is testing the lower bands constantly, you may not open a short order. TradINg examPLeS In the trading examples below, 1-minute and 15-minute charts are juxtaposed for clarity. Spreads were not considered in the examples. In each figure, on 1-minute chart, the vertical red line on the left shows where a trade was entered and the vertical red line on the right shows where it was exited. The blue indicator stands for the SMA 50 and the red indicator stands for the SMA 90. Likewise in each figure, on 15-minute chart, a vertical red line shows where a scalping trade was taken in comparison to its 1-minute chart counterpart. example 1, see Figure 1: On July 23, 2012, the 15-minute chart indicated a downtrend as the 1-minute chart gave a short signal on the GBP/USD. At the time this signal was taken, the RSI 14 on the 1-minute chart was below the level 50, but not in the oversold region. Instrument: GBP/USD order: Sell entry date: July 23, 2012 entry price: 1.5555 Stop-loss: 1.5655 Take profit: 1.5545 exit price: 1.5545 Profit/loss: 10 pips example 2, see Figure 2: In this trading example, there was a bearish signal confirmation on both the 1-minute and the 15-minute charts on July 24, 2012. A short-selling scalping order was taken and it hit the target soon after. Please note the position of the RSI 14 when the trade was taken.

F3) a Long SIgnaL ConFIrmatIon on the eur/uSd

on the eur/uSd, there was a short term buy signal on July 25, 2012. this signal was confirmed on the 15-minute chart (on the right) before the one on the 1-minute chart was taken.

Instrument: EUR/USD order: Sell entry date: July 24, 2012 entry price: 1.2080 Stop-loss: 1.2180 Take profit: 1.2070 exit price: 1.2070 Profit/loss: 10 pips example 3, see Figure 3: On the EUR/USD, there was a short term buy signal on July 25, 2012. This signal was confirmed on the 15-minute chart before the one on the 1-minute chart was taken. The scalping trade was successful. Instrument: EUR/USD order: Buy entry date: July 25, 2012 entry price: 1.2122 Stop-loss: 1.2022 Take profit: 1.2132

exit price: 1.2132 Profit/loss: 10 pips CoNCLuSIoN Safeguarding your portfolio while remaining stolidly faithful to this scalping system may enhance our courage and foster more judicious use of our portfolios. We have to bear in mind that the end result of each order will be governed by chance, yet orders in the long run will possibly augment the value of our portfolios. Dr. Janice Dorn advises that we ought to treat each trade as a possible winner or a possible loser. There is absolutely no such thing as a sure thing in trading. Trading is a game of probabilities, and the goal is to make more than we lose. If we are in a strait jacket of perfectionism where everything has to work all the time, and we have to get just the bottom or just the top, and we cannot tolerate even one downtick, let alone a drawdown, then we are not suited to be traders. We strive for moderation and balance and eschew perfectionism, as it is one of our greatest enemies.


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2013 I 02 Dirk vandycke

dirk vandycke has been actively and independently studying the markets for over 15 years, with a focus on technical analysis, market dynamics and behavioural finance. he writes articles on a regular basis and develops software which is partly available at his co-owned website holding master degrees in both electronics engineering and Computer Science, he teaches software development and statistics at a Belgian university ( hes also an avid reader of anything he can get his hands on. Contact:

how volatility retreats before It explodes

tSunamI SetupS
Setups are the bread and butter of every technical analyst. And they really come in thousands of flavours, even though there are only a few types of them. In this article were going to shed light on how breakouts, one type of setup, can at least in one way be successfully handled.

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breakouT STraTegIeS The basic premise behind trading breakouts is to get on board a trend the moment it starts, moment being the keyword here. This kind of trading also is referenced to as momentum trading, basically

course this is only one of many research examples we could give here. When you think about this, shrinking volatility clearly is linked somehow to some state of rest. Its also not unusual for decreasing volatility to come

breakouts. Some traders and authors also recognise this as leading to overtrading. There is however a difference between overtrading and sticking only a toe in the water on each breakout. Either way, this leads to possible lots of very small losses which only

If one wants to catch a trend, one has to catch a breakout eventually.

assuming that momentum feeds on itself as buying begets buying and selling draws in more sellers. Apart from the fact that its a logical sound idea that moving prices will draw attention, given the abundance in monitoring tools we have at our disposal today and the fact that human behaviour doesnt change. The idea is also conceptually plausible due to the theory of viral/exponential spreading of ideas. Not only is trading breakouts based on simple logic, theres also strong empirical evidence of it. Evidence that springs both from the historical market data side, as well as from behavioural finance scientists. But theres also quite some evidence associating volatility, and especially the lack of it, with breakouts. The metaphor the author likes to use here is that of a tsunami. Just before a tsunami hits a shore, the ocean seems to retract. Translated to volatility this means that after volatility shrinks, theres a higher probability that it will start swinging off the charts. The longer volatility is (very) low, the wilder and longer the ensuing breakout might be. This does not, however, seem to hold true the other way around. Breakouts dont necessarily have to be preceded by a volatility retraction. One example of such research done by Connors Research, calculated that 74.5 per cent of stocks with a 100 day averaged volatility of less than 20 per cent of the stock price, rose within the next 252 days. Of with lower volumes, although one has to keep in mind the relation between volume and prices. Lower prices mean that people spending the same quantity of money will need higher volumes to satisfy their demand. So a stock going $10, but coming from as high as $80 might easily have low volatility when basing without showing lower (and possibly even higher) volumes. Very often low volatility eventually synchronises with low liquidity, which then might cause sharp trend reversals once traders start stampeding on one side. NoTHINgS PerFeCT So breakouts are notoriously popular for lots of traders. In fact its easy to see that breakout strategies go hand in hand with trend following strategies. After all, if one wants to catch a trend, one has to catch a breakout eventually. Its not to say that breakout strategies need to imply trend following on a longer time frame. But any kind of trend following implies some sort of breakout entry strategy. Breakouts, how sound they may seem conceptually, require a strong stomach or at least a mental persistence in order to overcome their disadvantages. Breakout strategies are known for their low reliability, resulting in a high number of false positives, conveniently addressed as false need to be seen as the cost side of trend following strategies. As soon as one finds him/herself in a trend, pyramiding will take care of the rest. However its possible to go for less breakout signals without further lowering the reliability, lowering the overall cost of false breakouts.

Strategy SnapShot
Strategy name: Strategy type: time horizon: Setup: entry: Stop-Loss: trailing-Stop: exit: risk and money management: tsunami Strategy Breakout after volatility contraction most time frames give good results Bollinger Bands contract within keltner Channels trailing entry stop any volatility based stop volatility based stop on stop toe in the water on breakout (0.5% risk), pyramiding on retracements

average number of depends on the time frame signals:


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seven periods exercise can be made on volatility, by looking at the ATR for instance. That way an NATR7 is with NRx signals, you should definitely look into them, even isolated from this article. To play these setups, one can put in two bracketed orders (meaning the filling of one automatically cancels the other). This would implicate, on any of the above signals, putting a conditional short entry order just below the low of the last period (by definition the narrowest ranged one of the last seven) while, at the same time, putting a corresponding long entry order just above the high of the last period. The one getting filled first should indicate the direction of the ensuing

We are going to focus on a breakout strategy without regards to any eventual trend that might

traders all too often change stocks once they are thrown out.
follow or how to handle it subsequently. It is a breakout setup resulting in fewer signals for traders wanting to watch over our common tendency to overtrade. raNge CoNTraCTIoN aNd exPaNSIoN To cope with subjective interpretations one needs to look at technical indicators, rather than chart patterns. One very popular way to detect decreasing volatility is the concept of inside periods. An inside period is one where high and low are set within (one of) the previous periods high and low. If however, the next periods activity (lets call it period 3) is within the extremes of the first period, we call it an inside period to period 1, without it having to be an inside period to period 2. Inside periods, however, dont cope well with shrinking volatility while trending. As a result they can be helpful in detecting base breakouts but they tend to leave us standing in the cold when it comes to trend reversals. A lot of work into these kind of patterns was done by Alan Farley, Toby Crabel and Clive M. Corcoran, resulting in what is called the NR7 signal. According to these authors, inside periods are one of the most reliable forecasting patterns to occur in the marketplace. The precedent condition of narrow range or inside range patterns, so they conclude, are precursors to trend reversals or breakouts. The NR7 stands for Narrow Range 7, indicating any 7th period having the narrowest range of the past seven periods. Figure 1 shows two NR7 signals preceding a trend reversal. If an NR7 signal immediately follows another one this rings a louder bell as odds increase for an immediate breakout event. The second NR7 signal is then called an NR7-2. The same smallest in the past set when the lowest ATR value is registered over the last seven periods. The first NR7 signal in Figure 1 also happens to be an NATR7 signal. If you are not familiar

F1) nr7 SIgnaLS and theIr CouSInS

a trend reversal initiated by an nr7 signals which also happens to coincide with a natr7 signal, giving more weight to both of them. at the end of the ensuing trend we have a nr7-2 signal immediately following another nr7 signal. this, again, puts more importance on both signals.


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trend. The other can be cancelled automatically or function as a trailing stop to the initiated position. THe TeCHNICaLS Although the NR7 family of signals seem to do a good job in their own right, they work even better when volatility on an larger scale also drops. For monitoring this, we use two volatility measures. First we have the famous Bollinger Bands, which basically take two standard deviations of prices from the past 20 periods on either side of the average over the same period. Please note that we disagree with Bollinger on using normal distribution statistics on data that isnt normally distributed (but rather Taleb distributed). Nevertheless, they do a great job in showing range contraction and expansion. And thats what were using them for here. As our second ingredient we take Keltner channels who try to do the same thing but with a number of ATRs (we take the factor 2, but 1.5 seems to do it as well) set off from an exponential moving average over 20 periods. Now, Bollinger Bands will more closely follow price compression and expansion than Keltner Channels will do. This is mainly because of the fact that Bollinger Bands measure price dispersion while Keltner Channels are based upon range. To put this another way, ATR may go down while Bollinger Bands are expanding because of all those narrower periods are still putting up a nice trend. So we want to incorporate both nontrending as well as shrinking volatility into this setup. The setup gets armed whenever Bollinger Bands get between the Keltner Channels on both sides. An example of this can be seen in Figure 2, which shows a multi-year monthly chart of Lennar Corporation (LEN). Notice the fact that an NR7 took place the day before the setup got armed (shown by means of the black lined rectangles). On this play we followed the stock downwards with a trailing entry (buy) stop, also shown on the chart with a black stair cased line. The whole process, however, took almost five months. But the catch was worth the wait, getting us in a yearlong trend at a very nice price, almost tripling our stocks

F2) Breakout Strategy on a very Large tImeFrame

when Bollinger Bands retract between keltner Channels the setup gets armed. on this chart the strategy demands following the stock with a trailing buy stop above the monthly candle, although one could have tried to enter on a lower time frame. note that almost five months passed between the signal and the actual entry here. Source:

F3) Breakout Strategy on a SmaLLer tImeFrame

In this daily chart the breakout strategy was armed five times. although longer periods of volatility contraction give birth to longer lasting trends, the short contractions can clearly be followed by very hefty volatility explosions as well. Source: www.


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value. We cant stress the fact enough that, even though you are zooming in to fine tune the exit of a position, its very useful to keep an eye on the time frame you used to open the position in the first place. Or if you exit on lower time frames, which is perfectly all right to preserve more of ones profit, always go back to the time frame on which you decided to enter and start stalking the stock anew. Traders all too often change stocks once they are thrown out. Dont do that if youve just been thrown out of a stock thats been good to you. This doesnt mean you have to get right in when you are stopped out. Just start stalking the stock for a possible new entry (perhaps even with a trailing entry stop). STory SToCkS Finally, a last word on how widespread this type of setup can be played. One area where this setup can come quite in handy is while playing story stocks (or rocket stocks as ONeils disciples tend to call them). These are stocks that have no fundamentals whatsoever. Theres just a nice story, a promise to make it big and a bunch of ifs and whens. One very nice specimen is Hemisperx Biopharma (HEB), a stock the author already played successfully for many years, of course with large intervals of inactivity in between. Stocks like this can hibernate for months or even years in a row. But once they awake then can get very explosive. In Figure 3, this stock shows five NR7 signals while its Bollinger Bands had fallen

F4) voLume SpIke aLert

this chart of a long gone story stock exemplifies a volume spike alert. while the volume that day was almost 17 times the 100 day average volume, there was no mentionable price movement, nor was there any news out or pending. volatility, meanwhile, had dropped to flat line levels.

voLume SPIkeS One last additional indication of very high probability plays is when they are accompanied by a volume

anticipating something that is not yet known to the general public. Feast your eyes on the chart in Figure 4 for a nice example of what volatility (and liquidity)

one very popular way to detect decreasing volatility is the concept of inside periods.
between its Keltner Channels, each time guaranteeing a nice jump and finally blowing off the top by almost tripling after the last signal. Well leave further study of this type of stock to the willing trader but we also want to warn up front to set tight stops and get out very quickly when a trend finally stalls. spike alert. Just before volatility retracts theres an unexplainable large volume on one day or a few scattered days. No news seems to be out or pending and price doesnt seem to move in accordance with the high volume (we talk ten to 15 times the average volume here). This is very often a sign of insiders imbalance can cause. With these type of stocks, decreasing volatility almost always implies decreased liquidity, which is the fuel we want for a volatility breakout to ignite. So better get started looking for those NR7s and watch those Bollinger Bands and Keltner Channels. Good luck!


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2013 I 02 andrew Hecht

andy hecht is a sought-after commodity trader, an options expert and analyst. most recently andy wrote several columns a week for the Sovereign Society. he spent nearly 35 years on wall Street, including two decades on the trading desk of phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup. today, andy remains in close contact with sources around the world and his network of traders.

wheat Quality Spreads

an opportunIty to proFIt
In the world of commodities sometimes quality trumps quantity. The same commodity may possess different grades and characteristics. Crude oils can have different sulfur content and specific gravity. Sugar can come from sugar cane or sugar beets. Coffee can be Arabica or Robusta. Gold and silver can have different fineness or purities. And, some grains grown in different climates and soil will have different properties. When it comes to quality, different grades command premiums or discounts to benchmark pricing.

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Many food companies that buy wheat in the United States require a different quality of wheat than is traded at the Chicago Board of Trade. These companies may require wheat grades from the Kansas City or Minneapolis exchange. Different qualities of wheat command different prices. Pinpointing economic risk and demand for the various forms of wheat can uncover incredible earnings potential. The busiest futures contracts in the world for wheat are those that trade on the Chicago Board of Trade (CBOT). The CBOT wheat contract is the benchmark price for all international wheat and reflects the macro state of the global wheat market. The CBOT trades soft red winter wheat. The Kansas City Board of Trade (KCBT), trades hard red winter wheat, and the Minneapolis Board of Trade (MGEX) trades hard red spring wheat. While the world watches CBOTs wheat price, it is the KCBT wheat price many U.S. food processors use to price the wheat that goes into their manufactured products. In 2008, the price of wheat soared. After spending much of the previous decades below $4 a bushel, wheat on the CBOT traded up to almost $11 a bushel. Poor weather conditions in the United States, Australia, and Ukraine caused wheat crop yields to fall and prices to soar. Food manufacturers who rarely hedged prior to 2008 began to lock in prices for their wheat requirements. It turned out that many food processors in the United States priced their wheat purchases based on the KCBT price. As the food processors began to hedge, the spread between KCBT and CBOT wheat exploded. Figure 1 illustrates the price spike in 2007/2008 which caused many food manufacturers in the United States to hedge price risk. The earnings of these food manufacturers were at risk if the price of wheat continued to move higher. The KCBT-CBOT wheat spread is a barometer of the demand from food manufacturers for a key ingredient for many U.S. food manufacturers. Figure 2 illustrates the volatility of the spread between KCBT and CBOT wheat.

Strategy SnapShot
Strategy name: Strategy type: time horizon: Setup: entry: Stop loss: take profit: exit: risk and money management: Intra-commodity quality spreads Fundamental, seasonal and technical signal 6-12 months Long or short In combination with fundamental analysis and other technical tools. entry based on fundamentals and establishment of a firm trend in an intra-commodity spread commodity after a significant period of consolidation use a 1:2 risk-reward ratio (rrr) on the spread, risk $1 to make $2 at or beyond established target at established risk-reward level discretionary

F1) QuarterLy Chart CBot wheat FutureS

Figure 1 shows the price spike in 2007/2008 which caused many food manufacturers in the united States to hedge price risk. Source: CQg


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57 cents on July 2013 futures 54.25 cents on September 2013 futures ten per cent while trading volumes have remained robust. Current open interest of 443,000 contracts is well below the 500,000 contract level of just a month ago indicating that the market has seen profit taking and long liquidation but price has not really retreated all that much. This indicates that speculative traders

You will notice that the premium for KCBT wheat over CBOT wheat expanded as the price of wheat rallied. Food manufacturers fearing higher prices for the commodity pushed the premium higher as wheat prices broke out to new historical highs. The hedging activity has created an opportunity for traders to take

The trend in the spread looks poised to continue higher. And, the premium is significant, some 7.3 per cent over the price of benchmark wheat.

Speculative traders expecting higher wheat prices will have room to buy in the near future.
advantage of the spread between the two qualities of wheat. WHeaT FuNdameNTaLS Wheat fundamentals have been strained since prices broke higher in 2007/2008. Currently there is a significant concern over the US winter wheat crop. Record low US wheat ratings following a string of weather-reduced harvests around the world underpin supply worries. This has helped to keep a floor under the price of wheat. Unlike other grains (corn and soybeans) the US is not the worlds largest producer and exporter of wheat, the US is only one of a number of wheat producing countries. Therefore harvests in Australia, Europe, Ukraine and Asia affect prices dramatically. Ratings for the US winter wheat crop fell to 33 per cent good to excellent; an all-time low for late November, due to dry conditions in the US Plains, government data has recently showed. A weatherdisrupted US wheat crop will further tighten the global outlook which is already under pressure following dry growing conditions in the Black Sea region. After peaking at a $1.40 premium the spread between KCBT and CBOT wheat has slowly increased over the past months moving from par to a premium once again. At last glance the KCBT premium over CBOT currently is running at: 59.25 cents on March 2013 futures 58.25 cents on May 2013 futures TeCHNICaLS On the charts the wheat market is in a trading range. The price action has held steady trading in a range between $8.00 and $9.45 on the March CBOT contract. During the long term consolidation period in wheat prices (July-present) open interest in futures contracts on speculative CBOT wheat has dropped by almost expecting higher wheat prices will have room to buy in the near future, perhaps in early 2013. The 200 day moving average, a key technical level of support for traders on the daily CBOT wheat chart stands at around $8 which is below current levels. Resistance stands at $9.30 which if pierced could take prices well above the $10 level.

F2) kCBt wheat verSuS CBot wheat monthLy Chart

the premium for kCBt wheat over CBot wheat which averaged 20 cents per bushel for two decades went to $1.40 in 2011.
Source: CQg


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a non-solution for the fiscal cliff issue could cause the prices of all assets to drop as fears of recession will be reflected in the markets. Recent action in the equity and commodity markets has not been reflected in wheat prices due to the tight supply, aN oPPorTuNITy IN THe kCbT-CboT WHeaT SPread The KCBT-CBOT wheat spread is currently trading well below its historic high of $1.40. The author expects the spread to continue to move higher from current

WHere IS THe PrICe oF WHeaT goINg? While it is anyones guess what the final wheat harvests will yield around the globe in the coming months, the price of the commodity is holding steady at historically high prices. Fundamentals and technical analysis in wheat currently support present price levels. While it is possible that wheat will retreat over the balance of the year and open interest can fall to 430,000 contracts there seems to be an overall bullish long term outlook in wheat. The expanding KCBT premium is indicating that there is concern from consumers that wheat supplies could be strained over the coming six to twelve months. The author believes that wheat is a buy on price dips given the current state and structure of the market. The January USDA report, if bullish, could propel the price of CBOT wheat well above $9.30 which in turn would cause the KCBT premium to further increase. On the other hand,

demand for wheat will continue to be robust.

crop yields and steady demand. Any severe drop in the price of wheat due to the fiscal cliff issue will yield a buying opportunity in wheat. The fiscal cliff will have little to do with the fundamental state of wheat crops, supplies or feeding a world in which population and individual wealth continues on a path of explosive growth. Demand for wheat will continue to be robust. levels given the consumer fears of higher prices and availability. Buy this spread on dips and look to take profits at levels over $1.00. Always pay attention to the spread between different qualities of the same commodity. Whether it is grains, metals, soft commodities or energy; quality spreads can yield some of the best opportunities to profit in todays commodity markets.

Read in the TRADERS March issue

The Psychology of Trading



If you want to become a successful trader you must not neglect the psychology of trading. It is regarded the single most important piece in becoming a consistently profitable trader. norman welz, expert in applied trading psychology, describes how traders can learn to better understand trading psychology primarily by understanding their subconscious self.

Larry Connors

mr Connors is widely regarded as one of the leading educators in the financial markets industry. he has authored top-selling books on market strategies and volatility trading, including how markets really work and Street Smarts (with Linda raschke).



2013 I 02 Jens klatt

Jens klatt is market analyst at and moderates the german dailyFx-forum. he has been in the financial business for over seven years. Besides technical and fundamental observation of the markets, he focuses on sentiment-analysis in the forexmarkets and develops his trading decisions based on this analysis. Contact:;

how to Create a Successful trading Strategy

part 1: market phaSeS

This series of articles is a step-by-step-guide on how to develop your own trading strategy. Before you start creating a strategy, you should consider the following: No strategy works every time. Based on fundamental events, market participants and several further factors, markets show different market phases. This article shows you how to include this fact in your strategy development.



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F1) range at gBp/uSd In the 4-hour-Chart

The predominant market phase can have a strong influence on the probability of success of a strategy. If we trade a range-trading strategy during a trend, the losses could be disastrous. A range strategy should only be used if the markets show signs for a sideways

the development of a strategy is the art of concentrating on net-results.

trend or a trading range. However, if the market is volatile and moves fast, we should use a breakout strategy. It is important to keep this in mind if you want to find a strategy for yourself. People often try to reach perfection. As a trader, this could have fatal effects, because perfection is not only impossible in trading, but can be very expensive as well. The development of a strategy is the art of concentrating on netresults. If traders focus on market phases and choose their strategy accordingly, they can achieve the best net-results. Before we develop our strategy, we should ask ourselves: During which market phase do we use the strategy? WHICH markeT PHaSeS exIST? Basically, market phases can be divided in three groups: ranges, breakouts and trends. They differ in the most favourable point of time of the entry and of the exit.

we see that the currency pair moved in the range between 1,5740 and 1,5470 during the time period of nearly two months. Breakout attempts at the top or bottom were successfully defeated.
Source: FxCm trading Station/marketscope

F2) Breakout at gBp/uSd In the 4-hour-Chart

after two unsuccessful attempts to break the range to the upside, the breakout was finally successful and price rallied to a higher level.

Source: FxCm trading Station/marketscope



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TreNdS Trends often develop after significant support or resistance levels were broken. Downtrends can be identified by a series of lower lows and lower highs, uptrends have higher lows and higher highs. There are different possibilities for finding a trend. Many traders use indicators, for example Moving Averages or the SuperTrend. Others abandon technical tools and only look at the price (see Figure 3). In these trend phases traders have the goal to maximise their profits and to get a bigger piece of the pie. ouTLook In the second part of this series of articles we will take a look at the different time frames that traders can use for their trading decisions.

raNge The character of ranges is that the price moves within a channel. During this phase we assume that price will respect the borders of resistance and support and will not break it. Therefore we act like the established

If you follow a breakout strategy you have to be clear on the fact, that the moment of the breakout is unknown.
stock market wisdom buy at the bottom, sell at the top. Especially quiet markets show the characteristics of ranges. The momentum in the market to break through support or resistance is missing. Range phases do not last forever of course. Eventually market participants succeed in breaking a support or a resistance a breakout. breakouTS After breaking a support or resistance price can follow this direction for a longer period of time. Breakout trading tries to profit from these breakouts and therefore to anticipate a break of the support or the resistance. If you follow a breakout strategy you have to be aware of the fact, that the moment of the breakout if there is any at all is unknown. The main question is then: If the support or resistance breaks, will price follow this direction? In the best case of the breakout, you should get paid for this uncertainty. If a breakout trade succeeds, the price follows the breakout direction. Figure 2 shows a classic breakout of the currency pair GBP/ USD: The price hit resistance twice and at the third attempt the resistance was broken strongly. After the resistance was broken the price increased further. In our example, a trend developed. Trend traders use the old stock market wisdom The trend is your friend. They follow the trend as long as it lasts. That is the case in an uptrend, if price falls below the last low and in a downtrend, if the market exceeds the last high. Figure 3 shows an example for a downtrend.

the Supertrend is a moving stop and reversal line that is calculated on the basis of volatility. Quite simply, the Supertrend delivers information about the primary trend. If the market is above the indicator, it is an uptrend, if it is below the indicator, the market is in a downtrend.

F3) downtrend at eur/aud In the 4-hour-Chart

the currency pair develops lower highs and lows. only the increase of price above the red line would end the downtrend.

Source: FxCm trading Station/marketscope



2013 I 02 andrew abraham

andrew abraham is a commodity trading advisor at the firm abraham Investment management as well as author of the Bible of trend Following. he specialises in systematic and mechanical trend following, utilising stringent risk management techniques to limit losses and capturing a small number of major trends to generate returns. abraham has been trading his proprietary account since 1994 as well as investing with other commodity trading advisors since the mid-1990s. website:

Some thoughts about why It might not Be that easy

So you want to InveSt LIke the worLdS greateSt InveStorS?

Actually Buffetts strategy is remarkably simple, but given the ups and downs of the stock market, it takes a high level of discipline, nerve and conviction in your decisions which the vast majority does not have. The words discipline and patience somehow get forgotten along the path and get blinded. Investors want their 15-20 per cent returns without any periods of drawdowns. At the slightest drawdown investors run. This article examines what it takes to be successful in investing, and especially in trend following.



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following examples how hard it really was/is to have invested with him as well as you will be shocked at the compounded returns. a 50 per cent drawdown. It took six years to recover. Again in 2007 BRK.A suffered another 50 per cent drawdown and going on six years later we still have not surpassed the prior peak. In June 30 1998 shares were approximately 78,000, while in November 2012 the shares were approximately 133,000. In 15 years investing with the worlds greatest investor you would have had a 3.62 per cent compounded annual rate of return (Figure 2). Here is the worlds greatest investor and you see firsthand how hard it really is. There is no get rich quick. There is no consistent one per cent per month or painless All Weather Funds or even any fund of funds which negates some of the pain. The reality is plain and clear. This is a marathon. The author doubts very many of you reading this right now would have waited to get back to break even. The author doubts many of

IF ITS SImPLe, WHy ISNT everyoNe rICH? People want positive returns without the pain of drawdowns. In the real world this does not exist. Oh,

too many investors have no patience and discipline.

we have to take that back, it existed in the warped dreams of the investors in Madoff and Alan Stanford. There are countless investors who have been blessed to be investors in Warren Buffett. Even though there are legions of investors who believe in Warren Buffett. However, no ones perfect, not even Warren. We all know that Buffett made his money through identifying companies that he believed were worth more than their market value, investing in them and holding that investment for the long term (actually almost forever). Buffett has his admirers who hang onto every word he says. Counting their riches before time, they buy whatever Buffett does. However these scores of admirers who mimic his methods and purchases are still wannabees. The vast majority dont have the needed skills (patience, discipline, dedication and knowledge of compounding) such as basketball pro LeBron James has of dunking a basketball shot. The Class A shares in Buffetts company Berkshire Hathaway (BRK.A) were $15 when he first took over in 1965 and they were valued at $83,500 per share by the end of July 2012. All you have to do is invest with Buffett and find an island to buy right? Big wrong! HoW eaSy IT WaSNT (aS you WILL SooN See) How many would love to generate the rates of return that Buffett has over the long decades? Foolish question right! However if you look at the chart of Berkshire Hathaway (BRK.A) in Figure 1 it becomes a lot more complicated. The following are questions you really need to ask yourself. Here is the worlds most successful investor, yet you will see from the The question will arise if you cannot invest in one of the worlds greatest investors, how will you really succeed in investing period? On December 12 2007 one share of BRK.A was $150,300. This amount has not been superseded some five years later. Do you think you would have had the patience to wait all those years with the Worlds Greatest Investor? In 1998 BRK.A suffered more than

F1) Long-term Chart oF Brk.a

performance of Berkshire hathaway since 2005. Buffett has not taken out the prior equity high of 2007. would you still have the patience to wait?



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you would have the mental fortitude to withstand a 50 per cent drawdown. Buffett was not alone. He was joined by other stock market gurus: Ken Heebner (CMG Fund): -56 per cent Harry Lange (Fidelity Magellan): -59 per cent Bill Miller (Legg Mason Value): -50 per cent

F2) Compounded annuaL rate oF return

Some TreNd FoLLoWerS Have ouTPerFormed buFFeTT There are many other unknown money managers that have surpassed him. In the book The Bible of Trend Following the author mentioned a select group of money managers that you probably have never heard of who have compounded annual rates of return of over twelve up to 20 per cent for decades. However, one must firmly understand that past performance is not necessarily indicative of future performance. These managers are not gurus. These money managers are trend followers. Trend followers have no opinions on the future of any market and will go both long and short. Trend followers buy high with the anticipation that high might go higher and sell short with the anticipation that low can go lower. This is completely counterintuitive to how most traders trade. As even with Warren Buffett there is no free lunch and even this unique subset of traders called trend followers have been struggling but not to the same degree. For the last two years even some of the leading trend following traders who have been around for decades have not produced positive returns. They have not had 50 per cent drawdowns as Buffett did, but there have been elusive profits. Due to this there are those that have even called Trend following dead. Investors want it now. Show me the money. Too many investors have no patience and discipline. These two personality traits are imperative for investment success. The author has traded this strategy since 1994 and heard this statement during every inescapable drawdown. It is never easy unless you invest with Bernie Madoff and then lose all your money. What has encouraged us during every drawdown is that Richard Donchian, who invented

In 15 years investing with the worlds greatest investor would have brought you a princely 3.62 per cent compounded annual rate of return. Source: andrew abraham

trend following traded for more than 50 years. The authors mentor started in 1979 with $200,000 and ran it up to $18,000,000 dollars. It was not easy. There were always losses and periods of long drawdowns. The key was he kept his losses small and had the patience and determination to put on that next trade. He did not quit. Quitting is easy! In the news recently, John Henry stated he was retiring. At John Henrys peak he was managing three billion dollars. He put managed futures on the map, and became a billionaire himself with his money management firm. During the dark years while everyone lost money in seven months in 2007 and 2008 he returned approximately 78 per cent. As much as John Henry loved and owned several baseball teams in the US, he swung for the fences. He would have big returns as well as steep drawdowns not like other notables including Warren Buffett. Due to his recent drawdown and possible focus on his professional baseball teams he decided to close his firm. Industry professionals believe he was trading to volatile to the current conditions.

CoNCLuSIoN There is a great deal to learn from the above paragraphs. Beware of the media and crowning trading gurus. Our goal is to compound money over long periods of time as traders and investors. It is never easy. One must internalise that there is no free lunch and all traders and money managers go through drawdowns. However one must read between the lines and know when to sense an opportunity. Trend following has been around since the Bible with Joseph cornering the wheat market in Egypt. There will always be droughts, floods, wars and government mismanagement. Trend followers make their money on the outliers. Trend Following is not dead. At best, trend following is sleeping and no one rings a bell when markets take off. While past performance is not necessarily indicative of future results some trend followers outperformed the worlds greatest investor and if one was a contrarian thinker now is an interesting time to consider trend following as a strategy.


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co-located with

BaSICS: 12 StepS

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nick mcdonald is a leading independent trader with a global following via the company he founded, a specialist in technical trading strategy for any market and any time frame, nick possesses a unique approach to modern technical trading which forms the basis of the strategies that he teaches. nick is in high demand as a speaker on the global trading circuit with speaking engagements on multiple continents each and every year.

nick McDonald

the path to trading Success

part 6: prICe aCtIon maStery part 2

In this article we will continue our discussion on price action mastery and we will introduce the next two key price action mastery components: 1) price support and resistance and 2) price retracements.


BaSICS: 12 StepS

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F1) Support and reSIStanCe In aCtIon

PrICe SuPPorT aNd reSISTaNCe Price support and resistance occurs when a securitys price tests (i.e. touches, or breaks by a few ticks, but is unable to penetrate and bounces off) a price level at least two times. The more tests occur at that price level, and the more precise those tests are, the stronger the support or resistance. Resistance occurs when price cannot penetrate up through a horizontal price point and consequently forms a flat line of price action. Support occurs when price cannot penetrate down through a horizontal price point and consequently forms a flat line of price action. When a resistance level is eventually broken it will often turn into a support level. This is also true for support turning in resistance. You can clearly see this in action on the chart contained in Figure 1 where there were five tests of the resistance level at 0.5262. Once that resistance level was eventually broken 0.5262 then became support and was tested a further two times, holding strong on both of these tests. Price support and resistance is an extremely important component of price action mastery. In fact its so important that we rank it a close second behind trend.

a clear example of a resistance level holding during five separate tests. once the resistance level was broken it then became a support level, where it was again tested twice more. there are also two examples of how a higher high in an uptrend should not be considered resistance.
Source: tradeStation

F2) the SuBJeCtIvIty oF trend LIneS

three different traders could validly draw three different trend lines on the same chart. this highlights the subjectivity which is associated with trends lines and this is the reason why the author doesnt use them in his trading. horizontal levels provide a far more objective assessment of price support and resistance levels.
Source: tradeStation

CommoN mISCoNCePTIoNS arouNd PrICe SuPPorT aNd reSISTaNCe In the authors opinion when it comes to price support and resistance traders often make two critical errors: 1) they place too much emphasis on sloping levels of price support and resistance (i.e. what are often referred to as trend lines) and 2) they consider one test of a price level to be enough to constitute price support and resistance. SLoPINg LeveLS oF PrICe SuPPorT aNd reSISTaNCe (TreNd LINeS) The author believes that trend lines are too subjective to form a support or resistance and consequently he


BaSICS: 12 StepS

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never uses them in his trading. The subjectivity of trends can be clearly seen on the chart contained in Figure 2 where it is demonstrated how three different traders could possibly draw three different trend lines on the same chart. The same cannot be said for horizontal price support and resistance. More often than not the majority of traders will agree on the same level when drawing a flat line to connect two or more price points and therefore increasing the objectivity of horizontal support or resistance. In order to increase your level of consistency as a trader you should attempt to remove as much subjectivity as you can from your trading and this is exactly why we never use trend lines in our trading; they are simply too subjective! oNLy oNe TeST oF a PrICe LeveL An uptrend is formed by a series of higher highs (HH) and higher lows (HL) in price. A very common misconception amongst traders is to consider these HHs in an uptrend as levels of potential resistance. As stated in our definition of price support and resistance there must be at least two tests of the same price level before that level can be considered support or resistance. In a trending market its more likely than not that previous HHs will be broken. If this were not the case then trends would never eventuate i.e. when a market is making HHs and has just made a HL, the most likely scenario is for a new HH to be made and for the trend to continue until the price action tells us otherwise. Refer to the chart contained in Figure 1 for two examples of HHs not acting as resistance. 4TH ComPoNeNT: PrICe reTraCemeNTS Price does not move in straight lines, instead it moves in waves. For example the waves in an uptrend will consist of a long upward thrust (to form a HH) followed by a shorter downward retracement (to form a HL), which will be followed by another long upward thrust and so on. The point at which the shorter downward

F3) retraCement zone

this is an example of how the equilibrium point often occurs within the retracement zone in an uptrend. the black line represents the 10ma, the blue line the 20 ma and the red line the 50ma. as a trend trader the author wishes to attempt to enter a position as soon as possible after the equilibrium point has occurred.
Source: tradeStation

retracement ends and the new long upward thrust begins the author will call the point of equilibrium. As a trend trader his aim is to join the uptrend as close as possible as he can after the point of equilibrium has occurred. One of the simplest, but most effective, techniques for establishing a likely zone in which the point of equilibrium will occur is by plotting a ten and 20 period moving average (MA) on your charts. Continuing with the uptrend example, when an uptrend is underway the 10MA will be above the 20MA and there will be space in between the two. This space is what the author refers to as the retracement zone. In an established uptrend there is a good probability that price will reach its point of equilibrium in or very near to the retracement zone. Once price has retraced back to the retracement zone he would start to look more closely for other layers of evidence which would

indicate to him that a trade opportunity is setting up. Refer to the chart contained in Figure 3 where the author has marked the point of equilibrium and retracement zone in action. CoNCLuSIoN Let us conclude this article by providing a word of warning. Remember that any successful strategy must contain a number of technical factors lining up before a trade can be taken. Never attempt to trade these key price action mastery components in isolation. Just because price has retraced back into the retracement zone in an established uptrend isnt enough reason to enter a trade. In this instance you would only have two technical factors lining up. We need many more than that to have a high probability trading strategy. In the next article the author will discuss the last two key price action mastery components: 1) multiple timeframes and 2) candles.


HOMETOWN: London, UK INTERESTS: Motorsport, trackdays and flying TRADING STYLE: Daytrading/Tape Reading WEBSITE:

Part 5: Mark HolSteaD

the proS proCeSS
In this series we are asking Pro Traders about their psychological processes. Delving a little into how it feels to them when trading. The good and the bad. How this has changed over time and what preparation they do mentally for performing as a trader. One of the key features for us was that we wanted traders with experience who have been through the mill over the years and of course those who were kind enough to broach this subject publicly. We hope this gives developing traders more to learn from. Each interview in this series was conducted by Richard Chignell who is himself a trader. Please visit his blog at



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taking perhaps more heat or stopping me out more than usual, then that will concern me and I know that Ill need to take a closer look at whats going wrong. If I get the odd loss once or twice I'm generally not concerned because I know over the course of the week or whatever that itll be good, it will work out, it will come out in the wash. But if I have a cluster of trades that take some heat, start going against me, perhaps get a few stops in a row, then that does start to concern me a bit because I need to take a step back and stop digging myself into a potential hole! I need to make sure the strategies Im using are still working. Am I analysing the market conditions correctly? Am I using the right strategies and setups for the market conditions? Am I reading the tape correctly? I just make sure that Im doing everything right because quite often we can drift along, a trade goes against you, you get a cluster of trades going against you and if you dont stop that damage early and all you need sometimes is a little tweak, you need to say, Okay well Im taking too many of these continuation type strategies and really the market conditions at the moment are counter trend so knock those on the head and lets concentrate on those, sometimes thats all it takes. richard Chignell: How do you feel when a trade goes for you? mark Holstead: I expect trades to work over time. I know it may sound a little over confident, and I genuinely dont want it to come across that way, but honestly when youre trading for a while, you expect your trades to work. I dont know if the next trade is going to work or not but I expect over time that they will and that most of them are going to work for me. You need to have confidence in your trading ability. Were humans and we feel emotions, of course we do, but the longer I trade the more those emotions become less and less, like anything. Take for example, a newly signed F1 driver. The first time ever he steps into his car hes probably really excited about the performance of that car but after thats worn off all hes looking to do is get a quicker lap time, hes more focused on the process of becoming a quicker driver knowing that over time his lap times will come down. So how do I feel when a trade goes for me? I expect it to happen, Im pleased that it does, pleased that I end the day positive and the week positive, but I dont go out and start jumping up and down for joy because thats my job, making profitable trades. richard Chignell: How have these feelings changed over your trading career? mark Holstead: When youre starting out trading your emotions are swinging quite wildly and theyre also related to position sizing. You tend to put a lot of worth on each trade and it really doesnt matter youve got to put that in perspective. First of all youve got to put trading in perspective, its not the be all or end all, it doesnt matter when compared to your health, friends and family, and each trade really doesnt matter either. As long as your position sizing isnt crazy, it isnt swinging from one lot to 100 lots and magnifying the damage of one losing trade. As long as youve got relatively consistent trading size and your risk is acceptable then your emotions really shouldnt play too much of a part in it. If you want to, just think of it as a thermometer swinging back and forth, you dont want to be too hot, you dont want to be too cold. And so Im always looking to keep gauging my emotional thermometer. When I first started out, that would swing wildly, but over time you learn to put things into perspective and not put so much emotions on things. And if on occasion you do, were all human and from time to time youre going to feel too much emotion coming into your trading, then you learn to step away and say, You know what, Im starting to feel a little bit anxious about this, or somethings not quite right or Im not feeling quite right about things, and step back before you can do any damage. Thats very important, self awareness. richard Chignell: do you have any practices that you do away from the trading screen to help you mentally and emotionally handle trading?

richard Chignell: How long have you been trading? mark Holstead: I started trading in March 2001, so nearly twelve years.

richard Chignell: What style of trading/investing do you practice? mark Holstead: Im a short term trader. I very rarely hold positions overnight and my strategy is predominately based on reading order flow. In a nutshell without getting too complicated, I look for either institutional price action that I want to join, or I look for emotional order flow from retail to fade. Ive got a bank of setups that I use depending on market conditions. When they setup I'll then look at the tape to confirm or negate that trade. richard Chignell: How do you feel when a trade goes against you? mark Holstead: Its to be expected, no one enjoys taking heat on a trade but its part of the game. Generally Im not concerned, trades will go against me. Ive been trading my specific setups and strategies long enough to know how much heat is expected, and obviously my personal stop-loss is beyond my expected heat in a trade. So if I start getting a cluster of trades that are

mark hoLStead
I started trading uk Contacts For difference (CFds) in 2001 in-between lectures whilst studying engineering at university. In 2003 I started trading fulltime. after discovering an edge in reading short term order flow I moved over from uk equities to the more liquid and volatile uS futures markets. now I predominately trade the dow (ym) each day, but will monitor other liquid markets for certain specific trading opportunities. my trading style is short term daytrading, specifically using tape reading around key levels to initiate trades. I place a very big emphasis on risk management. outside of the markets I enjoy motorsport, both watching and participating. I also have private pilots licence and like to get in the air when I can. Several years ago I created the daytrading room as a way of sharing my trading experiences. today it has grown into a community of professional and aspiring professional traders from around the globe.



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But over time Ive realised the importance of using the right tools for the right job, which is where a lot of traders go wrong, theyre using the wrong strategies in the wrong type of market and then they throw those strategies away. Then when the market comes Put it all in perspective, put each trade in perspective, reduce the size if your emotions are going crazy, reduce your size down, and accept your risk because once weve accepted our risk, if we write down our position size, our max loss for the trade, our

mark Holstead: I just try to live a balanced life; I try to do things that involve both sides of the brain. I know that trading is draining when the markets are volatile and active, its really mentally draining, so I like to do things that get the adrenalin flowing, I like

If a textbook tells you to do something and you dont like to do it, dont do it!
to drive cars on track, go jogging, things like that. Just try to live a rounded life and I think that helps in trading. If youre too focused on it and youre constantly thinking about trading it does more harm than good. Even though you think you need to be completely focused on trading, which you do when the time is right but its knowing when to be completely immersed in the markets and when to take a break thats crucial. You need to focus your energies 100 per cent when youre trading, but when youre not trading, completely step back, do something different; go race cars, go ride bikes, go to the gym, whatever floats your boat, do it. Ive gone through spells over the years where Ive become too immersed in my trading and actually when I look back on it, its done more harm than good, and really sometimes you need to step back for a week or step back for a few days and it does you a world of good. If I was struggling with certain things I would focus and focus and focus on it, and actually sometimes you see a different way around when you just step back. richard Chignell: Can you describe a time in your trading life which really rammed home the point that so much of trading comes down to psychological factors? mark Holstead: I think quite early on I realised that its not really all about your strategies and setups, although of course you need profitable strategies. around again to those strategies being profitable, theyre using the old strategies! Theyre always one step behind. But anyway back to the question. I dont really think there was a specific time, I guess when I went through times of not being able to do something I wanted to do, not being able to follow a rule that Id written down, and I just thought why cant I follow this rule, why do I keep not doing this? And I developed processes to break through those barriers. It took me a while to develop those processes, but I took big leaps forward in my trading when I started to realise that actually focusing on specific problems from a mindset perspective was the way to make serious progress. richard Chignell: If you could give aspiring traders one piece of advice about emotionally handling the market what would it be? mark Holstead: One piece of advice well Ill give you a couple. First of all, theres no right or wrong way to trade, so if a textbook tells you to do something and you dont like to do it, dont do it! You do what you think is the right way to trade. Now there are some times when people are going to guide you and say, Hey use a stop, manage your risk, and theyre talking sense, and it would make sense to follow that advice, but if someone says to you, You should be trading trends and you struggle to trade trending markets dont worry about it. Just trade what you can do best and dont get your head in a twist about it, just focus on your strengths and enjoy trading. max loss for the day, our max loss for the week once weve accepted them, put a boundary down and say, Are we happy with that? If it happens are we happy? Yes. Then when a trade loses were not going to feel so bad about it, weve accepted the risk. I think when losses become more than we expect or when things dont go the way we want to thats when we get emotionally too involved in it. Wed like to thank Mark Holstead for sharing about the way he tackles the market from an emotional/mental side of things and for his willingness to allow me to post this as a free resource in the hope that traders who have been in the market for less time or are thinking of entering can perhaps pick up some A-HAs. If you are interested in finding more out about Mark Holstead you can find him: On Twitter: @TapeReadTrade Or on his website:




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brian SHannon
Better tradIng wIth muLtIpLe tIme FrameS
Brian Shannon is an experienced and successful trader, speaker and educator. Involved full time in the markets since 1991, he has worked as a broker, owned a day trading firm, managed a hedge fund, run a proprietary trading desk while simultaneously being the most profitable trader of that prop firm. As Head of Research and Training for MarketWise, Brian taught thousands of traders world-wide. Brians work has been published or written about in Technical Analysis of Stocks & Commodities, Barrons, Active Trader, Stock Futures and Options Magazine, and hundreds of online sites. Brian is best known for his daily technical analysis videos on In addition, he developed a professional screener called alphascanner and published the book Technical Analysis Using Multiple Timeframes. For access to Brians work you can follow him on Stocktwits and Twitter @alphatrends.



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person you will never run out of opportunities to learn, whether it is new methods of analysis, learning about the hot new companies or, most importantly and often overlooked, to learn more about yourself! TraderS: What was the most important aspect in becoming successful in the market? There are obviously a lot of components which factor into being consistently successful but a few of the closely so we can formulate a plan of action while we anticipate the setup to complete. The plan we are coming up with at this point is to estimate our profit potential, theoretical risk and potential for position size. This planning reduces the chance that emotions will cloud our judgement when it is time to execute the trade. As the stock begins to reveal that a shift in trend is forming we have to be patient for the trends to become aligned before taking action.

TraderS: How did you first get in touch with the markets? My first exposure to the markets came when I was about ten years old when I would hang out with my Dad on Friday nights watching Wall Street Week with him. My first trade was when I was about 14 or 15 years old. I was living in Boston, Massachusetts. At the time Boston was the car theft capital of the world. There was a local company called LoJack trying to

as a teen, I thought I was going to be rich beyond my wildest dreams.

come up with a solution. I saw something on the news about the company how they were giving away the tracking units to the State Police. The story mentioned the company was publicly traded so I asked my Dad if he thought it would be a good stock to buy and he agreed that it seemed like a good idea. I had some money saved from different jobs I did as a teen. I told him I had $500. He said the stock was at $4 and hed put up the rest of the money so I could buy 1000 shares. Long story short, he gave me the leverage I didnt realise it was leverage at the time. We bought 1000 shares and the stock went from $4 a share to $10 in about three or four months. As a teen, I thought I was going to be rich beyond my wildest dreams. I thought, Why would anyone ever get a normal job when you could just do something like this that is obviously so easy? It was from that first experience that I became hooked on the markets. TraderS: How did those experiences form into a lifetime career? The early success with LoJack provided me with the curiosity to dig deeper into how the market really works. I would spend a lot of time at the library reading newsletters and combing through stock prices to try to make sense of the market. One of the great things about the market is that if you are a naturally inquisitive more important traits shared amongst the best traders are: honest introspection and understanding of your personal psychology, quick thinking and ability to be flexible as the market presents new information and a strong ability to be disciplined and follow your plan. For me I think that plan should be based around a solid understanding of market structure and a strong emphasis on risk management. TraderS: Please describe the way you approach the markets today. My approach is fairly simple, it is trend trading with multiple time frames. Multiple time frame analysis simply recognises that a stock may have conflicting trend signals depending on which time frame we are studying. For instance, a stock may be in a long term (one to two years) and an intermediate term (two to six months) uptrend but the shorter term trend (five to 20 days) may be declining. The longer, more powerful trend tells us that we should consider the action innocent until proven guilty but the short term trend indicates that the sellers have control and that a cautious stance is warranted until the stock is able to stabilise and show signs that buyers are regaining control of the momentum. While the buyers and sellers fight it out for short term control, it is the best time to study price action Trend alignment occurs when the short-term trend has transitioned from accumulation to an uptrend by making a higher high which is preceded by a higher low under which we should place our stop order. The time to purchase the stock is just as the higher high is made and the upward momentum is coming back into the stock. Buying with that initial momentum surge allows us to reduce the risk of time where our money is tied up in the stock and placement of the stop below the most recent relevant higher low reduces our price risk. The correct entry is crucial for the overall success of the trade as it allows us to be able to have maximum upside potential while strictly limiting our downside if the market disagrees with our analysis. After that, the job is to continue to manage risk that is always our job! Figure 1 (Understanding Market Structure) outlines the market action during various stages of the cyclical money flow on multiple timeframes. TraderS: Please provide a few detailed trading examples both long and short. Id like to begin with a simplified look at a long setup which recently showed in shares of Cliffs Natural Resources (CLF). Figure 2 shows the daily chart. Figure 3 shows in further detail the recent price action (yellow



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F1) underStandIng market StruCture

this graphic was created for readers of Brian Shannons blog to understand the concepts of using market structure on multiple time frames. the idea is to understand the trends within trends to identify more accurate entry and exit points so we can enjoy larger returns with smaller risk. Source:



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shaded area of Figure 2) on an intraday chart of the last 15 days. The daily chart shows the stock had a pattern of higher highs and higher lows above the rising 10, 20 and 50 day moving averages (MA). The recent pullback showed the stock holding above the prior resistance as well as the rising 10 day MA. A closer look at the action on the intraday time frames shows the stock was still in a stage 4 decline as the pattern of lower highs and lower lows had not yet been interrupted. At this point I was looking for signs of stabilisation before considering it for purchase. Figure 4 shows what happened to CLF the next couple of days and reinforced the point of why we dont want to make the mistake of purchasing a stock as it is in the pullback mode, but instead to wait for it to stabilise and then make a pattern of higher highs and higher lows on the intraday time frame. Without an alignment of the daily and intraday time frame, the setup should be avoided. Figure 5 shows how we would have liked to see the stock setup. The intraday time frame shows a sketch of how CLF could have presented us with an opportunity to purchase after some stabilisation had taken place and the buyers then taken control. The point here is not to show a big winner but to show the value of patience in waiting for a setup to fully form before placing our capital at risk. TraderS: Thats a great example. Can you show us another chart with an actual trade? Figures 6 and 7 show another recent setup, this time it was a short trade in American Express (AXP). The daily time frame (Figure 6) shows the stock forming a pattern of higher lows and higher highs below the declining 10, 20 and 50 MAs. The intraday time frame (Figure 7) shows the 10-minute chart for AXP; the anticipated move was to sell the stock short on a break below the recent support near $55.50, a stop would be placed just above the most recent relevant high near $56.40. The next day the stock traded below the $55.50 level which put it in a short term stage 4 decline that

F2) Stage 2 uptrend Buy CandIdate

the daily chart of Cliffs natural resources (CLF) was in a stage 2 primary uptrend. the mantra was innocent until proven guilty. Questions to ask for this buy candidate were: what bullish factors do you see here?, and what would get you to buy this stock?. Source:

F3) SeCondary trend

this is the 10-minute chart of CLF for the last 15 days which represents the yellow shaded area of Figure 2. the chart also shows the 5-day ma which is equal to a ma over 195 periods on the 10-minute time frame. a closer look at the action on the intraday time frames shows the stock was still in a stage 4 decline as the pattern of lower highs and lower lows had not yet been interrupted. at this point you have to be patient and look for signs of stabilisation before considering it for a long position. Source:



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aligned with the daily decline. This is where the trade was initiated. The stock continued to trade lower over the next couple of days and once the June lows were reached partial profits were taken and stops lowered. TraderS: do you use both fundamental and technical analysis? I am generally aware of the fundamentals of a company, but about 95 per cent of my decision making is based on technical analysis. As a trader, timing is key and regardless of how good a story may appear to be, if price action doesnt support the story I consider it too risky to be involved. As I like to say Only Price Pays! TraderS: What criteria do you use when screening the market, and why? Idea generation is rarely an issue for me as my universe of stocks is typically defined by minimum average daily (20) volume of 500,000+ in stocks priced $2-$200. I use to scan a database of close to 7000 equities and Exchange Traded Funds (ETFs) for swing trade opportunities. Generally, I am seeking out long candidates when we have a longer term stage 2 markup and the shorter term trend is: Stage 1 (accumulation). This is where I do my planning, observe, analyse and anticipate the point where buyers will take control and assess my price objectives and stop levels. Stage 2 (markup). As the stock makes a short term higher high, I want to buy it. This is when I participate in what appears to be a developing trend. Stage 2 is also where I manage my winners by raising the stop just below higher lows. Stage 3 (distribution). The stock is now showing signs of fatigue and may be in need of a correction through time. This is a good point to exit the position or at least lock in partial profits. Stage 4 (decline). When the primary trend is higher, this is likely just a pullback and the odds

F4) CLF Setup FaILS

Figure 4 shows what happened to CLF the next couple of days and reinforced the point of why we dont want to make the mistake of purchasing a stock as it is in the pullback mode, but instead to wait for it to stabilise and then make a pattern of higher highs and higher lows on the intraday timeframe. Source:

F5) what to waIt For

Figure 5 shows how we would have liked to see the stock setup. the intraday time frame shows a sketch of how CLF could have presented us with an opportunity to purchase after some stabilisation had taken place and the buyers then taken control. Source:



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Contact with Darcy Lin by Skype: ciotexpo Tel: 86-13719103854 Website:


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do not favour profitable short sales. It is better to avoid these stocks and look for better setups where trends are coming into alignment. For short trading candidates, the focus is on stocks where there is a longer term stage 4 decline and the shorter term trend is: Stage 3 (distribution). This is where I do my planning, observe, analyse and anticipate the point where sellers will take control and assess my price objectives and stop levels. Stage 4 (decline). As the stock makes a short term lower low, I want to enter a short position. This is when I participate in what appears to be a developing trend. Stage 4 is also where I manage my winners by lowering the stops up above lower highs. Stage 1 (accumulation). The sellers are now showing signs of fatigue and the stock may be in need of a correction through time or a bounce in price which will reduce my profits. This is a good point to exit the position or to at least lock in partial profits. Stage 2 (markup). When the primary trend is lower, this is likely just a short term bout of strength and the odds do not favour profitable long trades. It is better to avoid these stocks and look for better setups where trends are coming into alignment.

F6) axp daILy Chart

on the daily chart axp is below the 10, 20 and 50 ma. In addition, all mas are declining.

F7) axp 10-mInute Chart

TraderS: What is the advantage of simultaneously scanning stocks on multiple time frames? The ability to scan multiple time frames allows us to zero in on the trade candidates where there is a primary trend exerting itself on a weekly time frame, which is confirmed by the intermediate term trend on a daily timeframe but the short term (intraday periods up to 15 days) may be running counter, or close to confirming those trends. This type of filtering allows me to quickly hone in on the timeliest opportunities, whether they are long or short. If there

on the 10-minute the 5-day ma was declining. the anticipated move was to sell the stock short on a break below the recent support near $55.50, a stop would be placed just above the most recent relevant high near $56.40 Source:



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is a large number of trading candidates revealed, I will further filter them with some of the other criteria in Alphascanner, such as Short Interest Ratio, Earnings Dates, Beta and numerous other factors. TraderS: do you see looking at several time frames as being an essential part of your trading without which you were far less if even profitable? There is no doubt in my mind that multiple time frame analysis can help anyone from long term investors to the most active daytraders not only decrease the risks of time and price but to increase their profitability. Of course investors and traders will have to consider different time frames to study in order to meet their objectives. TraderS: What time frames would you suggest to be optimal to look at? My focus is to seek out the best swing trade ideas. I consider a swing trade to be a position where the momentum remains positive throughout the period of the hold and that is typically anywhere from two to ten days. To find these opportunities I will study the stock on the following time frames and use the indicated MA as an important reference point to compare the price to on each time frame. Weekly (real long term, two to five years): 200 day (40 week) MA daily (long term, 150 to 250 days, determines Primary Trend): 50 day (10 week) MA

F8) axp Short trade

the trade was opened after the stock broke the $55.50 level (blue horizontal line) in the area highlighted with a. the stop was above the most recent relevant high (red horizontal line). axp continued to trade lower over the next couple of days and once the June lows were reached partial profits were taken and stops lowered. Source:

Short term (very short term, one to two days on 1and 2-minute time frames, fine tuning entries and exits, using the Volume Weighted Average Price (VWAP))

TraderS: What role does volume play in your analysis? I think that analysis of volume for individual equities is much more important than the widely reported trading volume for the indices. For equities I first

risk management is job #1!

Intraday (intermediate term, ten to 30 days on 10- and 30-minute time frames, important for risk/ reward analysis): 5-day MA (65 periods on 30-minute time frame or 195 periods on 10-minute timeframe) look at volume as a measure of liquidity to determine whether or not I want to get involved in the stock. Anything less than 500,000 shares a day is typically where I cut off my search for trade ideas.

Once I have found a stock of interest I like to see the general pattern of volume expanding in the direction of the primary trend followed by lighter volume as the stock experiences a corrective move in that trend. To me the volume represents the level of emotions (enthusiasm or disdain) the participants have for the stock. Increasing volume in a rally shows motivated buyers, while the lower volume corrective move indicates that there is a higher likelihood that the selling is simple profit taking and typically not the beginning of a reversal lower. The opposite would be true for a stock in a downtrend. I should point out that volume is a secondary measure to price action but it does provide us with a good insight into the collective psychology of the participants. TraderS: How do you position size your trades? Position sizing is another component to successful trading which has a lot of variables to consider. After I have determined that the stock is liquid enough to



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swing trade. I always look for swing trade opportunities but I like to reduce overnight risk by peeling some of the position off profitably and then to listen to the market for clues whether or not it is reasonable to continue to hold. My primary consideration in determining to hold or not comes from the definition of trend. If the stock is making higher highs and higher lows on my time frame I will continue to hold until that pattern is broken. As a trend trader, there is no reason to continue to hold if the trend is no longer valid. TraderS: Please explain the concepts of risk management and money management you apply. To me, risk management is about actively managing a position once I have entered it. I consider risk management to be what action I can take in a specific trade to make sure if I take a loss it is not going to result in a devastating loss (either financial or emotional) or how I can manage a winning trade without allowing the market to take back my profits. Risk management needs to be the cornerstone to any approach in the portfolio. We can never be fully prepared for all of the potential negative events which impact price action. We need to have a strong defensive plan in place from the start to assure that we will be able to remain in the market and have the opportunity to make up for losses which occur after those events. TraderS: Should a high risk/reward ratio (rrr) be the top priority for traders? We need to have a plan that is based on a reasonable expectation of success relative to the perceived risk. To me, one of the strongest reasons for utilising technical analysis is that it allows us to determine our risk/reward prior to entering a trade, thereby putting our money at work in the positions where the opportunities for profit appear greatest. As I often point out, coming up with a risk/reward ratio is what programmers would call garbage in, garbage out meaning that if we are not objective about our analysis or if our analysis is flawed, the theoretical risk/reward ratio we determined is useless. I often shudder when I hear

comfortably get in and out during normal conditions I will then consider the potential for what may not be normal conditions and how they may impact my ability to control risk. For instance, if the company is due to report earnings in the near term I may decide to take a smaller size than I normally would or maybe use options to have exposure to the anticipated move and then have my risk absolutely defined. Overall market conditions are another factor which cause me to reconsider my position size. I may see what looks like a great setup on the long side of an individual stock but if the market is undergoing a corrective move lower I will typically trade with smaller size than normal. There are other times when market conditions appear to be ideal and I will take larger than normal size in a trade but then I will monitor that stock extra carefully so I can exit before I get stuck with large losses if the momentum shifts. I could list numerous other reasons to consider changing my position size but it always comes down to perceived risk and how to keep it under control. Risk management is job #1! TraderS: any comments on scaling in and scaling out of positions? I consider my timing into a trade as the momentum commences to be one of my strengths so I will often enter my full position all at once. When market conditions are favourable I will sometimes even try to nudge the stock by taking up all the size offered if it is at a key inflection point where it appears the momentum should begin. If the stock begins to move quickly I will start to look for short term levels of potential resistance to feed a little bit of the position out in an attempt to lock in some profitability and reduce overall risk. Some of the levels I look to scale out of a position on strength would be pivot levels (S2, S1, P, R1, R2), a prior level of support or resistance, or at the location of a retracement level. After feeding some of my stock out to the market in a profitable position I will then be a little more relaxed in the trade and will allow for a wider stop on the balance, and if the market allows me to, I will then determine if the remaining shares can be held for a

to me, risk management is about actively managing a position.

market. It is simply too difficult to come back from large losses to repeatedly take big risks in the market. Money management is more passive (but very important) decisions which are part of the consideration before a trade is initiated. Money management considers: levels of current market exposure (risk) I may have on, current market trends, potential for news items which may have the market or individual stock on a heightened sense of anxiety (earnings reports, monetary policy, political uncertainties, FDA reports, etc.) The fact is there are many surprises which can catch us off guard and cause an outsized loss in our someone tell me they have a fixed risk reward formula such as they expect to take five per cent risk and make 15 per cent profit. I suppose it is better than no plan at all, but the best way to come up with a risk/reward ratio is to listen to the message of the market. Before any money is put at risk in the market, I think that these two questions should be answered after we objectively listen to the markets message: 1. Where has the stock come from? (risk) If the stock has experienced a period of consolidation after a pullback in an uptrend I



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well thought out plan of action emotions will play a larger role in our decision making process; and in the markets it is often the emotional decisions which are the costliest. I learned early on that the market doesnt care about my opinion. Oftentimes the market trades on emotion, not logic, and when we understand and learn to recognise that tendency then we can

consider it to be less risky than a stock which has just broken out after a ten per cent rally in the last week. My goal here is to identify a solid level of recent support under which I can place my stop

Find an approach which suits your personality and then try to learn as much about that approach as possible.
if the stock meets my entry parameters. The closer our entry is to this support level, the less theoretical risk we have. 2. Where does it have the potential to go before it is likely to encounter a source of resistance? (reward) What I am trying to determine with this question is whether the stock has expended most of its energy getting to where it is or if it is reasonable to expect further movement in the near term. If your analysis is objective and you have the discipline to follow a plan which accounts for the risks as well as the rewards then you should be able to accomplish steady and consistent returns from the markets. TraderS: Please tell us about your view on the importance of being absolutely clear what to do in trading, and also in being flexible to change your mind quickly when on the wrong side. Trend Alignment is my method of determining whether a trend is a good trading candidate for my risk tolerance. I use these principles to keep a uniform approach to my trades. By having a consistent methodology I seldom am left without a plan of action in any scenario the market presents. If the market does not provide me with good trade setups I will sit out and wait for the better opportunities. Without a In regards to being flexible, I consider that to be a very important factor to success. The discussion about risk/reward is a good place to emphasise this point. We may think we have a great plan of action for the next day when we go to bed, but market conditions can change quickly so we need to possess the ability to move according to what the market tells us otherwise our rigid planning can hold us in a position longer than what the market indicates is correct. TraderS: at this point of your career who do you look up to for inspiration and guidance? This may not be the answer you are looking for, but I try my best to look to the market itself for guidance. I believe that the market provides us with the clues we need to succeed and it is our job to be as objective as possible at deciphering that message. My inspiration to do my best comes not just from the financial benefits of good trades but from teaching subscribers to think for themselves and to learn to listen to the market. I am also very fortunate to have a wonderful woman (known to twitter followers as Bond Girl) who challenges and inspires me to be my best in all aspects of my life. TraderS: What are some important things that you have learned so far that would have surprised you initially if someone had told you? operate with a deeper knowledge of the market structure. An understanding of the motivations of participants at key levels on a chart are much more important than recognising patterns or following indicators. TraderS: What concepts would you suggest novice traders could start with trading? Find an approach which suits your personality and then try to learn as much about that approach as possible. Go slow with your commitments to the market. However, paper trading isnt very useful once you have the mechanics of trading down. Strive to understand yourself even more than you try to learn about the market and be just as objective in your self-analysis as you are with price action. We all have our biases but if we can recognise them about our personality and in how we interpret market action you will not only be more profitable but you will less likely to experience large losing periods. TraderS: What are some of your personal passions beyond the market? Living in Colorado provides the opportunity for many activities outside the market and the ones I enjoy most with family and friends include: skiing, canyoneering, running, biking, swimming, hiking, scuba and golf. This interview was conducted by Marko Graenitz.


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brian lund

Brian Lund is co-founder of ditto trade and an independent trader who writes about the relationship between the markets and life in general on the Stocktwits Blog network at

doeS It matter IF your mentor IS tradIng?

I want to tell you about an amazing trading blog that those of you who are trying to take their skills up to the next level should definitely check out. Its written by an experienced trader who does a nightly recap of each of his trades, meticulously deconstructing them in order to give you a contemporaneous view of what he was thinking at the time. He details not only his stock selection process, but his setups, his entries, his trade management, and his reasons for exiting the trades when he did. But one of the best things about his blog is that he is willing to share his knowledge with anybody who asks, and is always open to answering questions about his trades and analysis, both in the comments section and via email. I know that many of you right now are waiting for me to give you this blogs URL so you can check it out, but first let me tell you something that I recently discovered about the author. Hes not really trading. Hes just pretending that he is. Do you still want to know the URL for the blog? No? Well you should. Im going to let you in on a secret. A lot of people who claim they are trading in the blogosphere and on social media really arent. To which I say, so what?. Long before trading blogs became ubiquitous across the web I used to religiously follow the blog of a guy named Trader X. His specialty was in trading gap stocks, and he was the best at it. Every night I used to go through his posts and match them up with my own charts. I would study the setups, his risk/reward criteria, and his trade management rules. Often I would ask him to clarify or expand on a

trade he had illustrated, and he was always gracious enough to do so. After a number of months someone emailed me and told me that they were positive that Trader X wasnt really trading, and that he was just cherry picking trades after the market closed and analysing them as if he had traded them. I was aghast. I was incensed. I was angry and upset. Oh, and I was able to trade gaps pretty damn well. Wait, what was that? Oh, yeah, I had become pretty good at trading gaps, apparently by studying the analysis of a guy that wasnt really trading. Thats when I first realised that it didnt matter if the author of trading advice really traded or not, anymore than it mattered if they were short, tall, male, female, ugly, or beautiful. All that mattered was if the content that they put out was of value. This is a good point to remember as you wade through the noise that we are all bombarded with each day when it comes to the markets and trading. Dont waste your time getting involved in guessing games, trying to divine who is REALLY trading and who isnt. Its pointless and serves no purpose. Find and follow those out there who produce good content on a consistent basis, that you can relate to, and that helps improve your trading, and let others spend their precious time going on witch hunts. This post was first published at