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November 2012

your personal trading coach

Interview: Faik giese Neurotrading: Know Your (Trading) Brain How to profit with ipos the basics of pyramiding

successful trading systems with the help of indicators

The right strategy at any time


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Harvard Study: How To Be A Professional

Many traders know the turtle experiment. In the 80s, Richard Dennis made a bet with his friend William Eckhardt that it was possible to help completely inexperienced people enjoy market success by following a few simple trading rules. Dennis taught ten people with completely different career histories a few simple rules and provided them with a million dollars each. What sounded to Eckhardt like a bad joke, actually worked. That experiment yielded an average profit of 80 per cent. Before long, an entire industrys philosophy of success had changed. Suddenly it was not just the veteran traders and their charges that were able to go far in the stock market. Quite the contrary: The result was and is good news for all neophytes: Great traders are not born but made. The question, though, is exactly how? A paper in the Harvard Business Review titled The Making of an Expert shows us how and does so for virtually any area where you wish to continue to improve and eventually be one of the pros yourself. Too good to be true? Far from it. In nearly all walks of life the best of the best are not born but made, causing a whole new world view to materialise. But back to the how?. The study cites three main building blocks you need to make it to the professional level: years of reflective practice, a great coach, and strong family support. The paper concludes that an extraordinary performance in a particular area can be attributed to these factors rather than a given talent or innate abilities. What that means for trading success is obvious: Go trade but reflect on your decisions and results together with an experienced coach. And stay the course for a few years. If you do all that, youll make it. 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 Richard Chignell, Cristof Ensslin, Ralf Kraemer, Arthur Krieger, Tony Loton, Nick McDonald, Azeez Mustapha, Keyur Panchal, David Pieper, Valentin Rossiwall, Maik Schober, Christian Stern, Dan Valcu, Dirk Vandycke, Paul Wallace Pictures, Price data;;; www.; 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. 2012 TRADERS media GmbH, Barbarastr. 31a, D-97074 Wuerzburg, Germany

TRADERS comes to you free of charge. This is possible because of the support of our sponsors and advertisers. So please take a good look at their messages and help them develop their business. Moreover, we are looking forward to your feedback. This is the only way for us to constantly improve our magazine. Please write to:

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2012 I 11 Maik Schober, Cristof Ensslin

Maik Schober is the managing director of Treasury Consulting GmbH, while Cristof Ensslin is managing director of the mindful FX company. Based on their decades of financialmarket, stock-market and forex trading experience, they have jointly developed the FX indicator as well as the FX indicator method. At, the authors verified trading results can be viewed and their strategies subscribed to, making it possible for them to be automated and used in your own account (see FXI symbol).

Successful Trading Systems with the Help of Indicators

The right strategy at any time

Maybe this is something you have experienced yourself: You look at a chart with indicators, clearly identify recurring patterns and start trading them. Initially, you rake in good profits. But to your horror, these will suddenly turn into a losing streak eating up not only the profit youve made so far but also slowly destroying your capital. Our cover story is intended to show how to work with indicators and achieve lasting success and also when to give them a wide berth instead.


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going up just because a mathematical level has been reached that has been arrived at on the basis of historical prices? What seems to be illogical at first sight, surprisingly often turns out to be a self-fulfilling prophecy. It will be announced in a well-received market commentary and is enough to trigger more market demand. When you trade a value such as the EUR/USD or the Dow, you need to know how this market behaves. So regular monitoring of the market is the basis of a good trading strategy. First, pick a chart that you want to trade for example, the 30-minute chart. Now insert indicators whose calculation and interpretation you have

Welcome To the World Of Indicators Technical indicators are not a recent invention. As early as the 80s, the increasing use of computers in trading caused indicators to be used to help shape peoples opinion and assist in decision-making. The well-known Bollinger-Bands, for example, were developed in the 80s. All these indicators mainly

The more time you invest, the better your results will be.
served to help professional traders and analysts at banks and trading desks make their trading decisions. It wasnt until the late 90s that the world of indicators was opened to private traders through fast internet connections and low-cost trading opportunities via direct banks and brokers providing the best software available for free. Taking a closer look at indicator strategies, the regrettable truth is that they are not self-starters and that even experienced traders regularly generate losses when using them. Many new investors consider indicators to be a wonder drug causing them to rake in profits and achieve 100 per cent success rates. Sooner or later they will realise that this is unfortunately not the case. Completing each and every trade successfully just cannot be the goal in trading. Instead, it is necessary for a net profit to be made. Market veteran Andr Kostolany long ago stressed that it is sufficient to be right 51 per cent of the time, which is equally true of trading strategies based on indicators. Why Do Indicator-based Trading Strategies Work? The price has just risen above the 200-day line, which will give it an extra boost. Surely you have heard something like that in one market commentary or another. And why is that? Fundamentally, nothing may have changed. So the price is supposed to keep Indicators such as the 200-day line (average of each of the last 200 closing prices, also called moving average) can be identified simply and clearly. In the literature available on the subject, there are interpretations of indicators on which there is wide agreement. If, for example, the price on a closing-price basis exceeds its moving average, this is considered a bullish (uptrend) signal. If it falls below its moving average, you will get a bearish (downward) signal. Since the calculation and interpretation are both simple and widely used as well as highly regarded, buying or selling interest enter the market at certain times. This means that the signals determined by the market indicators will achieve a good hit rate. This is something that, you too can make use of, if you know the way various indicators work. You will find plenty of information about this on the Internet and in books, so no specific indicators will be presented at this point. It is much more important to learn how to develop your own strategy by using indicators. How To Develop Trading Strategies Are you a trader who doesnt check the stock market regularly, or do you invest a lot of time in trading? The stock market is no different from any other business: The more time you invest, the better your results will be. A scrap dealer, for example, will not be successful in his job if he is not deeply involved in whats going on in his market. The same is true of the stock market: familiarised yourself with ahead of time and that you consider promising. To serve as a base, moving averages (for example, 200-day and 130-day averages) should definitely be included. Bollinger-Bands or envelopes are equally well suited. Next, the real work is about to start: Your task is to find patterns in charts and indicators that occur regularly. You might notice, for example, that in a sideways market the BollingerBands work very well as upper and lower boundaries and that, after touching them, the price will move back to its average level. Or you will notice that in most cases the price is not more than one per cent away from its average level before a counter-movement sets in. Granted, this work is tedious and you need to invest a lot of time in it. As mentioned above, your stock-market success will to a large extent depend on your commitment. The longer you watch a chart (preferably over several weeks and months), the more you get a feel of the performance. In order to illustrate the procedure for developing a strategy based on indicators clearly and transparently, the so-called DSMA strategy will be explained below. In Figure 1, you can see a 60-minute chart of the EUR/USD exchange rate with the 120 and 240 moving average (MA) being used here. After a detailed observation of this chart you will find that a change in trend regularly sets in under certain conditions. These are defined below for long trades and, vice versa, apply to short trades.


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At this point it is especially important that you define the rules of your strategy in writing! This makes it easier to stringently carry out the plan in the face of all eventualities and especially during all psychological pitfalls. A written set of rules is essential for all successful traders and has several advantages. For one, you will be in a position to automatically implement your rules in a computer program (such as, for example, an Expert Advisor (EA) on the popular trading platform MetaTrader). So you dont commit yourself to implementing the rules, but instruct a computer. The latter strictly adheres to your instructions so that human imperfections are ruled out in trading. Secondly, you can only backtest the strategy by following a clear set of rules. This historical calculation of the theoretical success of your trading system is ultimately necessary to see whether the strategy is at all capable of leading to the desired profit. If you change your trading strategy over and over again, you will never be able to find out whether the model is capable of generating profits. And finally, the strategy must be implemented exactly as you have specified in your trading plan whether manually or automatically. Why Do Most Traders Make Losses? At the beginning of the article it was stated that quite a few traders have discovered a super strategy. Once they trade it with real money, however, the hoped-for profits will only materialise for a short time at most. In fact, losses will subsequently have to be suffered that exceed the profit just made. Many investors assume that there must be a kind of master strategy that can generate profits in every market phase at a certainty of (almost) 100 per cent. If this were the case, then why would so many PhDs in physics and mathematics

1st Condition: The 120 MA must be above the 240 MA. If this condition is met, each closing price of the candle will be observed. This means that at the start of each new hour the following criteria will be examined: 2nd Condition: The opening price of the candle just completed must be above the 240 MA. 3rd Condition: The closing price of the candle that has just been completed must be below the 240 MA. In other words, if the shorter average is above the longer average and if the opening price of a candle is between the two average lines and the closing price is below the two average lines, then a long position will be entered in this strategy. So the strategy assumes that the drawdown in the prevailing trend is of a temporary nature. As part of your money management, this order will then include a stop-loss of 0.5 per cent and a take-profit target of initially 1.0 per cent. For an optimal exit, we define as the take-profit rule: Once a candle closes above the short MA, the long-order will be closed at the opening price of the following candle. Later in the article, this simple example of a set of rules will be called the DSMA strategy. DSMA stands for Double Simple Moving Average, i.e. the combination of two linearly calculated moving averages. Are You Following Your plan? Surely you have already entered a trade in anticipation of a specific target price. While you had recorded the stop-loss price, you had not filed it at your brokers as an order. Now as the price is developing contrary to your prediction and is approaching the stop-loss level, you jettison your original plans and make further corrections to the stop price but eventually, your loss keeps increasing. Or you cant resist the temptation of much-too-early profit-taking contrary to your original plan.

F1) Trading Signals of the DSMA Model

Figure 1 shows a 60-minute chart of the EUR/USD. The black line represents the 120 MA and the red line the 240 MA. In accordance with the models trading rules, three long trades materialise for this period, whose entry and exit signals are shown by the arrows (each arrow points from entry to exit).


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movement within one hour joins this trend, i.e. follows the direction of the market. Figure 2 shows how an initial investment of 20,000 euro has changed over time when using this strategy (capital or equity curve). Brokers fees in the various well-functioning strategies and then do some backtesting over a long period of time (five years or more), you will most likely find that (almost) all of these strategies generate losses over one or more extended periods of time. Consequently, it is not only important to develop an excellent trading strategy through long-term market monitoring, but also to use it correctly during the appropriate market phase. Ultimately, this will largely determine whether you are successful or not. Finding the Right Market Phase How do you know what phase the market is in right now? And how are you supposed to operate in this market phase? Basically, there are two options available to you. Either you decide yourself which market phase currently prevails and act accordingly. Or you leave the decision to objective mathematics. If you choose the first option, you need to define in a discretionary manner which market phase you expect

be on the payroll of the big investment banks to do their proprietary trading? Would it not be enough if these people were to develop such a master strategy just once and then go on to use it successfully over the next few years?

The truth is that the markets are constantly changing.

The truth is that the markets are constantly changing. Depending on the mood at the stock market and the economic situation, market participants will not always behave the same but invariably adjust their buying and selling habits as well as their willingness to take risks to the current situation. This will cause the markets to evolve on a regular basis. To describe what phase the market is currently in, four basic segments can be singled out: Steady and volatile trending markets as well as sideways markets with low and high volatility (fluctuation range). If you have found a strategy that is optimal for sideways markets, and the market now moves into a trend phase, you will probably make losses while using this strategy even though it may have worked wonderfully in the past few weeks. Even if the sideways trend continues to remain intact but volatility increases slightly, it is possible for your originally defined stop levels to be reached at higher price fluctuations and for you to produce losses, although your target price turns out to be right in the end. What are the consequences of this for your trading strategies? If you do not take into account the different market phases when selecting your strategies, you can hardly be successful in the stock market on a longterm basis. This can clearly be seen in the equity curve of the so-called Rebot strategy, which found its way into the Trading Signal publications of the authors until mid-August 2012. It is a trend-following strategy, which as soon as the EUR/USD completes a strong form of the bid-ask spread are already factored in, so this represents the net growth without leverage (the volume of each trade corresponded to the capital invested). It is clearly evident that this strategy has consistently made profits from April 2010. Relative to the entire period from January 2007 to June 2012, however, the return would have been around zero per cent, since it developed in a sideways manner or negatively between 2007 and mid-2010. If you define

F2) Equity Curve of Rebot Model

Figure 2 shows the equity curve of the Rebot model. You can clearly see that, due to different market phases, the EUR/ USD shows both profit and loss periods.
Source: TRADERS graphic


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in the coming weeks and months. This procedure entails the risk of the decision turning out to be wrong. Furthermore, additional research is needed since these decisions are partly based on fundamental data. It is much simpler and yet effective to choose a mathematical approach to determine the current market phase. The goal here is not to describe the market phase by using words like sideways or trending market, but rather to just answer the question whether the strategy chosen works in the current market or not. Suppose you have developed a strategy that is very successful in trending markets. Now how can you tell if there is a trending market? The answer to this question may seem trivial, but it is very effective: As long as the strategy generates profits, its the right market phase. In other words, you can let the strategy find out whether the current market phase is appropriate. To illustrate this, the DSMA strategy previously described will again be discussed at this point. In Figure 3, you can see how a starting capital of 20,000 euro would have developed when trading this strategy. It is clearly evident that there were prolonged losing streaks. It wasnt until the year 2010 that a market phase began to appear which was a perfect match for the strategy. What is the exact mechanism by which the strategy or the model is to see whether there is a favourable market phase currently? To determine this, you form a moving average of the equity curve. The strategy will only be traded if the current level of the equity curve is higher than the average line. If so, it follows that this is a clear indication that the strategy is currently profitable. The assumption is now that this phase will continue until one or more losing trades will push the equity curve back below its own moving average. This approach may seem complex at first glance, which is why it is also illustrated in Figure 4. You will see from the equity curve what impact this approach has on the DSMA strategy. The blue line represents the classical equity curve of the model from January 2007 to August 2012 (analogous to Figure 3). The red line

F3) Equity Curve of the DSMA Model

Figure 3 shows the equity curve of the DSMA model on the EUR/USD. Here, too, it can be seen that the model sometimes generated no or even negative returns over extended periods of time. Source: TRADERSgraphic

F4) Equity Curve of the DSMA Model with MA Filter

Figure 4 shows the equity curve of the DSMA model (blue) and a 3-day-moving average (MA, red) on this curve. The yellow line represents the equity curve of the DSMA filtering strategy. The market-phase filter can improve the result and significantly reduce the drawdown. Source: TRADERSgraphic


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is the average of the last three points on each equity curve (i.e. the last three trades). After this filtering (also referred to as a filtering strategy), trading will only be done if the blue line is above the red line, since in this case there is a favourable market environment for the model. If there is any trading according to the filtering strategy, there will consequently be fewer trades than with the original strategy. The result is evident from the yellow line. This describes the equity curve which is achieved through the market-phase filtering. At many points of the yellow line, you can see that it is moving sideways. This means that in live trading you do not make any transactions using the original DSMA strategy but just carry them out on paper (or with greatly reduced trading volume). However, it is absolutely necessary to continue using the original strategy in the form of paper trades in order to be able to calculate the moving average on the original equity curve at all times. Result of Market-Phase-Filtering Besides the extra profit that is clearly visible in Figure 4, the filtering method reduces the risk inherent in the strategy. While the classical strategy (blue line) passes through several upward and downward cycles, the downward potential of the filtering strategy is significantly lower. This can be measured in terms of the drawdown (maximum loss phase measured by the account currency or percentage of the capital). In the above DSMA strategy, the maximum drawdown amounts to 6.54 per cent. Market-phase-filtering using the moving average on the equity curve reduces the drawdown to 2.37 per cent. The market-phase filter has another positive impact on the overall return. Conversely, the drawdown reduction allows a leverage of 2.76 (6.54 divided by 2.37). This leverage means that the drawdown of the filtering strategy will correspond exactly to the drawdown of the original strategy, albeit now with a significantly higher return (see Figure 5). Filtered and leveraged by a factor of 2.76, the DSMA strategy generated 6.88 per cent a year in the linear back-

F5) Equity Curve of the DSMA Model and Leveraged Filter

Figure 5 shows the equity curve of the DSMA model (blue) with the equity curve of the DSMA filtering model (green) leveraged by 2.76. At 6.54 per cent, the drawdown of the two strategies is identical. However, the market-phase-filtering causes the return achieved by the filtering strategy to be significantly higher.
Source: TRADERSgraphic

calculation over a period of more than five and a half years (capital increase from 20,000 to over 27,500 euro, which is equivalent to an overall return of almost 39 per cent, see green line in Figure 5). Following up on that, this is what that means: If you wish to take an even higher drawdown risk because of your increased risk affinity, you can easily do so by using the filtering strategy. If for example, you want to use up to 20 per cent of your equity, you can roughly triple your leverage now (6.54 per cent drawdown times three). On a historically extrapolated basis, his will possibly increase your return to more than 20 per cent a year. Combined with market-phase filtering, the DSMA strategy presented here will reveal an important finding: A sound risk-adjusted model will not lead to quick profits causing your capital to multiply in a few weeks. Instead, a sustainable strategy carries a manageable risk, results in an invariably positive performance and, above all, requires time and

patience. Only a patient investor with confidence in the strategies he has developed will enjoy long-term success in the stock market. Conclusion In this article, you have certainly not found any method that will make you a millionaire overnight. There is no successful trading without a great deal of personal dedication, as you have no doubt experienced yourself. However, this article will be a very good guide as to how to do your trading in a structured and targetoriented way in order to make your trading strategies permanently useful. The above market-phase filtering strategy uses simple mathematics (averaging), in order to let you see whether or not your own trading rules with indicators are suitable for the current market phase. In the long term, this will help you reduce your loss phases, possibly allow even greater leverage, and achieve an accumulation of your profits during good phases.


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Biggest Dow Chart Ever

This is a quarterly chart of the Dow going back to 1900. The PPO and the Elder Impulse bars give you a good sense of the Industrials momentum during the last 100 years. Info: Elder Impulse Bars The Elder Impulse System was designed by Alexander Elder and featured in his book Come Into My Trading Room. According to Elder, the system identifies inflection points where a trend speeds up or slows down. The Impulse System is based on two indicators, a 13-day exponential moving average and the MACDHistogram. The moving average identifies the trend, while the MACD-Histogram measures momentum. As a result, the Impulse System combines trend following and momentum to identify tradable impulses. This unique indicator combination is colour coded into the price bars for easy reference. Green price bars show that the bulls are in control of both trend and momentum as both the 13-day EMA and MACD-Histogram are rising. A red price bar indicates that the bears have taken control because the 13-day EMA and MACD-Histogram are falling. A blue price bar indicates a split or equilibrium between buying and selling pressure. Info: PPO The Percentage Price Oscillator (PPO) is a momentum oscillator that measures the difference between two moving averages as a percentage of the larger moving average. As with its cousin, MACD, the Percentage Price Oscillator is shown with a signal line, a histogram and a centreline. Signals are generated with signal line crossovers, centreline crossovers and divergences. There are a few differences between the PPO and the MACD. First, PPO readings are not subject to the price level of the security. Second, PPO readings for different securities can be compared, even when there are large differences in the price. The standard PPO is based on the 12-day Exponential Moving Average (EMA) and the 26-day EMA. Source:

Warren Buffett Wants to Be the Oldest Man Alive

Because being one of the worlds the richest just isnt enough. Buffett has no plans of slowing down now that hes finished radiation treatment for his non-life threatening prostate cancer, which he announced to newspaper executives. And, at 82, Buffett plans to be around for the foreseeable future. Buffett joked with executives about planning to live to be the oldest man alive, reports the Omaha World-Herald. Source:


Apple Has Quietly Created the Worlds Largest Hedge Fund Worth $117 Billion
Apple (AAPL) is not only the most profitable company in the world, but it also now owns the worlds largest hedge fund as well. Zero Hedge reports that Braeburn Capital, a Nevada-based asset management corporation that Apple founded specifically to manage its cash, now has more than $117 billion in assets under management, making it even larger than hedge fund giant Bridgewater that currently has around $100 billion in AUM. As Zero Hedge notes, Apple has been very secretive about Braeburns investments and activities and has kept the companys profile decidedly low since, Apple for now uses Braeburn primarily in its capacity to find legal tax loopholes all around the world and avoid paying taxes. Whats more, Zero Hedge says that Braeburn exists in a sort of legal black hole where it has no reporting requirements and thus isnt obligated to disclose to anyone what it owns. The website speculates that Braeburn could soon become much more well-known, however, as the government could soon turn its attention toward closing legal loopholes that have allowed hugely profitable companies to avoid paying taxes. Source:, written by Brad Reed,

Demographics Are about to Shift in Favour of Stocks for the First Time since the 1990s
Secular bull and bear markets and how we ought to invest during them are a recurring theme in studying the markets. A report from Tobias Levkovich (Citi) takes a fresh look at the intersection between demography and economics / markets. The timeline of a boom in 35- to 39-year-olds coincides perfectly with the timeframe of the end of the secular bear market we've been in since 2000 (they tend to run 17 years on average). Demographics are about to shift in favour of stocks for the first time since the 1990s, according to Tobias Levkovich, Citigroup Inc.s chief U.S. equity strategist. The chart compares the number of Americans who were 35 to 39 years old at midyear, as compiled by the Commerce Department, with the Standard & Poors 500 Indexs performance since 1980. This age group is poised to increase for the next 17 years, according to estimates compiled by the department and presented in the chart. The outlook reflects the aging of the echo boom generation, or children born in the 1980s and 1990s to post World War II baby boomers. Americans in this category are entering their savings years at 35 through 39, Levkovich wrote in a report. Saving and investing by the echo boomers would generate a new set of equity fund inflows, he wrote. This years total of 19.8 million people is the smallest since 1989 and 14 per cent lower than a record set in 1998. The peak was reached during the Internet bubble of the 1990s, when the S&P 500 and other market benchmarks soared. Source: Tobias Levkovich, Citi, Bloomberg Finance


Why Is Japanese Yen Struggling against Majors?

Japan posted a merchandise trade deficit of 754.127 billion yen in August. The headline figure beat forecasts for a shortfall of 829.3 billion yen following the downwardly revised deficit of 518.9 billion yen in July (originally 517.382 billion yen). Exports were down 5.8 per cent on year to 5.045 trillion yen, beating forecasts for a contraction of 7.5 per cent following the 8.1 per cent decline in the previous month. It also marked the third straight month of contraction. Imports fell an annual 5.4 per cent, topping expectations for a decline of 5.5 per cent after rising 2.1 per cent a month earlier. The adjusted trade deficit came in at 472.8 billion yen, missing forecasts for a shortfall of 384.6 billion yen following the downwardly revised 371.9 billion yen deficit in July. Source:

S&P 500 Total Return vs. Bonds (1800-2012)

What would the total return be like of the S&P 500 with dividends reinvested compared to 10-year US bond with coupon reinvested? Global Financial Data generated the chart on the left, creating an approximate S&P 500 Total Return Index as well as a 10-Year Bond Total return Index over that entire period. After two centuries, its no contest. Stocks actually do beat bonds for the really long time. Source: Ralph Dillon, Global Financial Data

Drunk Trader Moves Oil Prices

In a recently revealed trading incident, a London Broker for PVM Oil Futures, traded company funds while drunk, moving the oil price more than $1.50 and when all was said and done losing $9,763,252. Whats more as a broker he was only authorised to enter trades on behalf of his clients. Yet he was able it seems, with ease, to trade PVMs risk capital. The broker, Steve Perkins had one savage hangover phone call from his boss the morning after asking what hed done with $520 MM of the firms money. Initially he lied saying he had been trading alongside a client. The story fell apart when he couldnt put the client on the phone to corroborate his story. The rub of it all is that he had been drinking all weekend at a company golf weekend which he was rounding out with a day off. He traded $520 MM in orders through the night being responsible for 69 per cent of the total traded volume. Early the following morning he sent a text to the Managing Director trying to pull a sick day when presumably it all began to soak in. Despite the losses he will receive a fine from the FSA (the UK equivalent to the SEC) of only 75,000 (just over $121,000) likely reduced from 150,000 due to financial hardship. Here we have yet another case of both trading without emotional or moral reflection and another company whose risk management procedures are ridiculously lax. Although in the same industry its staggering the difference all too often seen between independent traders and those trading OPM. Source:


US 5-Year Notes Outperform on Record

U.S. 5-year notes are the most expensive ever relative to 2- and 10-year securities based on the so-called butterfly spread measure of value. The spread formed by yield gaps between the securities is tumbling, reflecting demand for the middle security over either end. The figure fell to negative 54.86 basis points on Sept. 10, the lowest closing level on record based on data that go back to 2006, and it was negative 54.61 basis points. The Federal Reserve has cut benchmark borrowing costs to almost zero per cent, meaning holders of short-term Treasuries that track the central bank rate wont benefit from further reductions. Meanwhile, yields show inflation expectations are rising, sparking concern long-term bonds will suffer. Source:

India Is Not Sustaining Its Growth Rate

The International Monetary Fund sees the global economy slowing further in 2012 before gathering steam in 2013. The IMF seems to have underlined that no country will be able to emerge unscathed from the continuing global turmoil, slashing its earlier estimates made in April. India, in particular, will see the biggest impact in growth on account of the slowdown. The IMF has cut its 2012 growth estimate for the Indian economy by 0.7 percentage points to 6.1 per cent, the sharpest revision for any of the countries included in the report. This translates into 10.3 per cent reduction in the growth estimate. In 2010, the Indian economy grew by 10.8 per cent, according to the IMF data. In 2011, this slowed to 7.1 per cent. Source:

Physical Gold Is in Demand in India

Indian buyers bought into the rally ahead of several major gold buying festivals amid concerns that prices could be reach 35,000INR/10g following the announcement of QE3. After a lacklustre buying trend for the past few months, physical demand for gold rose dramatically. Jewellers and investors scaled-up purchases despite local record prices. Indian buyers bought into the rally ahead of several major gold-buying festivals amid concerns that prices could be reach 35,000INR/10g following the announcement of QE3, raising the support level for gold. Moreover, buying gold during festivals is considered auspicious. Source:


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2012 I 11 Mustapha Azeez

Mustapha Azeez 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. He is working as a trading signals provider at some websites. He is also a unique content contributor at, plus his numerous articles are posted on other websites like Contact:

Manual Trading versus Automated Trading Part 2

Hard Facts about Expert Advisors

There are many types of useful automated trading features. For example, trading signals can be sent and executed on numerous accounts and orders can be opened and closed in a matter of seconds. However, what are the advantages and disadvantages of trading robots? What are also the merits and demerits of manual trading? When programming Expert Advisors (EAs), are there any factors that may be considered in order to make them consistently profitable? Are there any forms of automated trading that are agreeable, even to staunch manual traders? How about effective money managers who use automated trading?



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Demerits and Merits of Manual Trading Manual trading has come under fire in recent times since algorithmic and high frequency trading tends to make it pale into insignificance. While manual trading, errors can be made as positions are being opened, coupled with careless errors in risk parameters settings. Undisciplined manual traders often make

2. When EAs are marketed, the marketing is done with excessive hype and gargantuan results are shown based on historical data so that potential buyers can be attracted. A trading robot may be showcased as making about 250 per cent returns in one year, based on historical data. What most people fail to realise is that huge profits usually

trending market. It is often challenging to put all these rules in a single EA. 4. There is no substitute for good trading education. You need to learn this profession; you need to know what works and what does not work. You need to practice until you become a competent trader yourself.

A robot may not be more proficient than a professional trader.

emotional and illogical trading decisions when in the heat of battle. It also takes many years of experience for one to be a successful trader if one is not mentored by an experienced and mature coach. On the other hand, there are highly successful manual traders. They faced many adverse conditions in the markets and survived them all. These traders discovered their edge a long time ago. They know how to control risk and survive any market condition. They know how to remain calm and unperturbed while trading. They know when to trade and when to stay away from the markets. Besides, they can remain consistently triumphant in the face of permanent uncertainty in the markets. Most of these individuals would not want a robot to trade for them. Demerits of Automated Trading 1. A robot can cause a large drawdown on a portfolio if it uses high risk and faces a protractedly adverse market condition. come with huge drawdowns (whereas small profits come with small drawdowns), and in real world, most traders would have received margin calls during huge drawdowns, before things would start going in their favour again. 3. Automated trading that negates human emotions in trading some of which are beneficial if harnessed positively also negates extremely crucial common sense and intuitive weapons of experienced traders, which are invaluable for longterm triumph. While a robot is potent enough to analyse complex information and factors (no matter how many are programmed into it), the brain of the trader remains unique and has no replacement. Ultimately a robot may not be more proficient than a professional trader. 3. A trading veteran has many strategies to deal with various market types. She/he knows which market conditions to avoid. She/he knows how to trade a choppy market as distinct from how to trade a Experiences with Robots The author used some of the heavily marketed trading robots many years ago. Either he initially made good profits before experiencing extremely unbearable drawdowns on the trading accounts he handled, or he experienced drawdowns straight away. Brokers were keeping tabs on those automatic pieces of software, while the EAs manufacturers continued making new versions to replace old versions, raking in lots of money from huge sales all without any long-term statistical improvements. The author kept on buying new robots; the best available. He was using them on Remote Desktop Connection, writing down and implementing their configurations and optimising settings, looking for better robots always, thinking that things would improve soon. He kept on being bombarded with newly manufactured robots almost every week. At last, he had to stop this when he got on the brink of financial bankruptcy. The author would not call himself a professional trader if he was still hopelessly dependent on robots.



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Mr. L. Olanrewaju, a successful trader, experimented so much with a host of EAs for many years; only for him to conclude that: Once you decide to automate a trading strategy, then you would need to struggle to overcome many hurdles. I know when I must ignore a trading setup if other factors do not support it. An EA cannot do this it cannot use discretion. Having worked on developing automated trading products in the past, I know from experience that robots do not work long term, says Kathy Lien. Another content contributor at (who is an ardent EAs enthusiast) deduces that he would like to point to an important fact. The fact is that robots do not always function. Some of them work in trending markets and some of them work in choppy markets... also all of them eventually stop making profit. So his job is to try and discover when to stop using them because he has not found an adaptive EA that is to be installed and forgotten. He has learned to lower his expectations and take a slower approach to trading profits. An Ideal EA If successful trading ideas could be programmed into a robot, it would be great. It would be ideal if an EA could work permanently with positive results. If a robot had sufficient accumulated experience to know which type of market to trade and which type to avoid or if it could switch to a differently suitable strategy when a market condition changes, that would be great. It would be OK if a robot knows when to stop using a method of speculation and when to start using it again. It would be great if a robot could know when a trend-following strategy works and when a counter-trend strategy works. A robot could have a permanent victory if it could use optimal stop-loss, take profit, break-even and trailing stops automatically while giving market prices enough leeway. If a robot had configurations and settings that enable it to use small posting sizing; increasing it gradually when winning and decreasing it gradually when losing, it would be ideal. A robot that could cut its losses and run its profits would deal victoriously

F1) To Good to be True

When something looks too good to be true, it often is. Be careful with EAs providing a hypothetical backtest that looks like this. Source: TRADERS graphic

with the uncertainties of the future. If this kind of robot copies trading signals and transmits them to numerous accounts, using appropriate equity ratio, it would be ideal. There are fund managers that are trying to do this; with a measure of success. There are popular websites like Zulutrade, zipsignals, Currensee etc, which use cutting-edge and topnotch automated trading features. Conclusion As regards the place of auto trading in the trading world, it is an ideal and practical way of making money. Opinion on this issue is not unanimous. Successful manual traders (many people made millions manually before the advent of trading robots) do not see it as a substitute to their trading skills, judgment calls and discretion. The geeks, who would make it omnipotent,

arouse antagonism by their aggressive marketing and preposterous fallacies. But its importance cannot be over-emphasised. Auto trading has come to stay; it has a great potential, but so are determined manual traders. It has many abilities and can raid the markets with adept alacrity, beavering away as programmed; though its intelligence is limited by programming. When it comes to being unemotional, auto trading seems superior, but so are many disciplined manual traders. The most baffling problems in trading are risk-related and psychological rather than automatic. New robots and innovative programming features are useless unless their risk management parameters can make them survive terrible market conditions. The majority of robots manufacturers know within themselves that robots cannot solve all the problems associated with trading.



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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 10: Physical vs. Psychological Stop-Losses

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 garnering this 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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This months article is based upon a present real-life scenario in the authors life. However it still provides a valuable contribution to the underlying question of

So what kind of non-trading related situations arise that are unlikely to leave you operating anywhere near your best? Well moments like:

at a patchy internet connection, open her charts, try to do her analysis, open her trading platform, give the driver directions, do her make-up, rehearse her

Stay away from trading when youre experiencing stressful situations in other parts of your life.
the series as it holds real relevance to the choices we all make as traders about how we conduct our business. We have all heard about using Physical StopLosses 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 risk and live to fight another day. For those completely new to trading there are many forms of physical stop-loss listed below (but we do not have space to explain them all here): 1. 2. 3. 4. 5. 6. Per cent Stops Fixed Amount of Money Stops Volatility Stops Time Stops Discretionary Stops Technical Stops 1. Divorce or separation 2. The death of a significant person 3. When a child is born 4. When you move home or office 5. When feeling psychologically exhausted or burnt out 6. When you are on a vacation 7. When you are on a business trip and cannot follow the market 8. When having experienced a financial set-back The likelihood is that every one of us will experience these events at some point during our trading careers and they will all have an impact upon our emotions and therefore our decision-making. The author tends to call these the Common Sense Stop-Loss Moments because as a trader you should be flat in the market, pure and simple. And yet despite them being common sense the author meets traders who time after time exhibit little common sense and try and trade through these stressful situations. For the author there is no trading at the moment as hes experiencing four out of the eight moments listed above at the same time. So he has placed a Psychological Stop on his trading until set-up in his new home and able to focus solely on trading as opposed to having hundreds of other things going on. Many years ago the author was an observer during a taxi ride with a fellow trader as they headed off to deliver a seminar that she was already very late for. In the back of the taxi the author watched in amazement as she proceeded to open her laptop, curse in vain speech and place a trade. When questioned about her actions she told the author that as she was a professional trader she had to get this trade on which was a dead-cert and that mobile internet was the way forward for placing trades wherever and whenever she liked. The author suggested that hed never met a professional trader who would take such an approach but it fell on deaf ears. You can draw your own conclusions as to whether she was a real professional trader. Oh and that dead-cert trade she said she had to get on? It failed. Quickly and badly. This then affected her speech at the seminar. A double-whammy so to speak. Another trader was seriously affected by the death of a family member. Despite being advised to take a few weeks off and stay away from the markets the overly-emotional, egotistical, headstrong young man decided he was going to trade harder during that period as a form of medication. He managed funds for clients and managed to lose 35 per cent of the fund during that period before the plug was pulled. Do yourselves a favour; trading is hard enough as it is. Use some common sense and stay away from trading when youre experiencing stressful situations in other parts of your life. The markets will still be there tomorrow. There will be another opportunity along soon enough. Even though you may not be taking trades you can still spend time on other elements that make a valuable contribution to your future success. Trade well or not, as the case may be. The choice is yours.

The majority of traders will be happy with the use of physical stop-losses and will utilise one or several of the types of stop-loss listed above. 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 success as a trader? We may like to think that we trade in a bubble; that we can be cold blooded emotionless animals who are left unperturbed by events and actions going on in our non-trading lives. The truth is that as human beings we are influenced by our emotions which themselves can be heavily influenced by other events in our lives.





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2012 I 11 David Pieper

David Pieper has been busy studying the stock market since the late 90s. As early as during his business studies at university and later during a career as an investment analyst at a bank, he combined fundamental analysis with the benefits of technical analysis. Mr Pieper focuses on trading CFDs and works as a freelance writer in the field of technical analysis. Contact:,

How the Fed Influences the Stock Market

The FOMC Effect

The US Federal Reserves monetary-policy decisions invariably are closely followed by traders, investors, and analysts worldwide since they are of great importance to the development of the capital markets. The two economists David O Lucca and Emanuel Moench have examined in a recently-published paper which patterns occur in the stock market and what these could be attributed to. Their findings were a bit of a sensation but read all about it yourself.



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on normal trading days. In both cases, the standard deviation of excess returns was 1.2 per cent. To recap: During the 24 hours prior to the FOMC decision, the annualised excess return of the S&P 500 was around 3.9 per cent as opposed to only 0.9 per cent during the rest of the trading days. All Eyes On the Fed Given the dominance of the US Federal Reserve, it would be interesting to know whether the centralbank effect described above can also be observed internationally. Valuable information on this is provided by the study which examined the stockmarket indices DAX, FTSE 100, CAC 40, IBEX, SMI, the Nikkei and the Canadian TSX: It turned out that, with the exception of the Japanese Nikkei, the interest-rate anomaly described above is a global phenomenon (see Figure 1). Especially in the case of the European indices, there was during the period investigated a statistical price effect that was similar to the US market and can be considered significant at values of between 29 and 53 basis points (equalling 0.29 to 0.53 per cent). Another finding of the study conducted by Messrs Lucca and Moench is that central banks outside the United States failed to trigger any noticeable price movements in the domestic stock indices. Simply put, only the Feds decisions cause a stir while those taken by the other central banks do not. Lucca and Moench go on to show that even major U.S. macroeconomic data have no significant impact on the US stock market. To arrive at this conclusion, a total of nine important macroeconomic data series such as industrial production, jobless claims, housing starts, and so on were analysed in terms of their impact on the S&P 500 before and after the date of their release. The SMI index was the only one to show high

While the European Central Bank and the Bank of Japan play an important role on the markets, its clearly the US Federal Reserve thats calling the shots. And that also shows that any announcement made on future-interest-rate policy or on the introduction-or continuation of unconventional measures such as, for example, a loose monetary policy also known as quantitative easing, will regularly lead to fluctuations in global financial markets. The Open Market Committee of the US Federal Reserve, FOMC for short, usually meets eight times a year on specified dates, releasing an official announcement after each meeting at 2.15 pm local time (8.15 pm CET). The authors of the paper The Pre-FOMC Announcement Drift have studied the performance of the stock market during all 131 FOMC meetings for the period of September 1994 to March 2011. To determine the extent to which market participants operate with a sense of anticipation, the observations of the two authors always refer to the 24-hour period prior to the FOMC announcement itself, i.e. to the period from 2 pm (of the day before) to 2 pm of the day of the release of that announcement. Prices Soar Prior to FOMC Decision In many ways, the researchers have come up with surprising results. For example, the S&P 500 saw above-average returns in the run-up to the FOMC decision being made public. The typical pattern of the US leading index is as follows: On the day before the interest-rate decision, the index rises slightly in the afternoon and goes up significantly on the morning of the day the report is published. Shortly before the release of the FOMC report, the S&P 500 was quoted at an average of 49 basis points (equivalent to 0.49 per cent) above the opening level of the previous day. And what happens after the interest-rate decision is made public at 2.15 pm local time? The S&P 500 will be more or less unchanged in the following hours nor will there be a lot of activity on the day after, the results of the study have shown. From a risk perspective it can be seen that contrary to the expectations of many observers the risk was no higher on FOMC days than

F1) Cumulative Returns Before and After FOMC Meetings

Since 1994, the S&P 500 has shown high excess returns in the 24-hour period prior to the publication of the FOMC report. The phenomenon can also be documented on the basis of the performance of other indices. Source: The Pre-FOMC Announcement Drift,
David O Lucca and Emanuel Moench, Federal Reserve Bank of New York Staff Reports, No 512, June 2012



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excess returns of 23 basis points (0.23 per cent) prior to the announcement. Next, the price performance of other asset classes such as two and ten-year US bonds and currency pairs (USD/JPY, EUR/USD) was investigated. Here, too, there are no statistically significant abnormalities prior to the FOMC interestrate decisions, proving conclusively that the FOMC effect exists on the stock market only. Standard Models Cannot Explain THE FOMC Effect Given the proven high excess returns ahead of FOMC meetings, the question arises as to their possible causes. Lucca and Moench question potential explanatory models and show that the effect described cannot be explained by classical valuation models. Nor can the FOMC effect be adequately explained by the theory that securities must provide compensation to investors since there is a risk of major price jumps upon the release of important macroeconomic data: While volatility rises significantly after the publication of the interest-rate decision (see Figure 2), the excess returns have already been achieved ahead of it. Using trading volume as a possible variable that could explain the high equity premium as a result of the FOMC effect doesnt work here either since, on balance, both traded volume and volatility are below average in the 24-hour time window examined. This is reason enough to think outside the box and look for other variables that might explain the phenomenon. First, the concept of political risk will be reviewed. The core of this theory is that the investors demand a risk premium for the uncertainty that they face in terms of the general political situation and the particular interest-rate policy. As a result, expected stock returns should be higher during periods of increased information density. Even though the Fed itself does not publish any information on its future direction ahead of the FOMC meeting, the media do engage in intensive reporting all the same, which ultimately might well lead to an increase in political risk. Either way, however, this idea does not provide

F2) Intraday Volatility of the S&P 500 Returns

Source: The Pre-FOMC Announcement Drift, David O Lucca and Emanuel Moench, Federal Reserve Bank of New York Staff Reports, No 512, June 2012

On normal trading days, volatility shows a U-shaped pattern. Upon publication of the FOMC decision, a strong volatility spike can be observed.

a coherent explanation. Furthermore, a phenomenon is analysed that years earlier was proven to exist in individual stocks: Shares tend to generate aboveaverage returns ahead of quarterly reports. The reason given here is the so-called attention grabbing. The core idea here is that the more attention investors pay to a certain share media coverage playing a central role here , the more likely they are to buy them then. Even though the odd model offers some explanation, it cannot really explain the FOMC effect since 1994. The Puzzle Remains To recap: Since 1994, high excess returns can be observed on the U.S. stock market shortly before the FOMC announcements. A simple calculation shows how strong this price effect is: If you were to factor out this special effect, the S&P 500 would only be at about 600 points i.e. not even at half the level it is now. In

the past, traders using this simple strategy enjoyed strong profits. The question, however, is: Will this model also work in the future after being presented to the public at large? Another question that needs to be answered concerns the causes of this phenomenon: Neither the classical valuation models nor other nonconventional approaches that take into account the political risk and the attention of investors as well as their participation rate, can completely explain the FOMC effect. The fact that this effect is particularly strong in recessionary phases and hence during periods of interest-rate cuts shows how immense the impact of the US Federal Reserve is. The hope factor is likely to play an important role in explaining the price anomaly in keeping with the slogan, The Fed needs to support the market. But much though the theorists endeavour to decode the phenomenon for the time being it will remain what it is: a puzzle.



2012 I 11 Dan Valcu

Dan Valcu is a Certified Financial Technician (CFTe), Board Member of the International Federation of Technical Analysis (IFTA), Founder and technical analysis consultant with Educofin Ltd, and a private trader. He is the author of the first book on heikin-ashi Heikin-Ashi How to Trade without Candlestick Patterns. For more information visit

Part 1: Hot Spots in Your Brain During Trading

Neurotrading: Know Your (Trading) Brain

Trading is a complex process which involves an invisible body mass of only 1.4 kg in average: the brain. Although the statement sounds trivial, the approach and results of very many traders contradict the reality that all information processing and decisions involved during the trading process take place inside the Grey Box. Traders, and especially retail traders and investors, in their rush for quick money tend to circumvent many common-sense steps that would help reveal smaller and bigger faults in their thinking. The scope of this article is to make traders aware, at a very high level, about how the brain affects all steps taken during the trading and investing process, with focus on chart reading. Hopefully, the facts will bring many traders to the point of realising that they need to rewire their approach to financial reward behaviour. It is not an easy change but sometime, somewhere, somehow, this must be done to the benefit of own trading.



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F1) Too Much Information LEADS to Confusion

If education is expensive, try ignorance The adage above fits very well the profile of many traders. The ideal start in trading would be to enrol in a very good trading school with excellent teachers, coaches, infrastructure, and live training. Since many traders and investors dont follow these steps, they hope that better trading education and financial results can be achieved later through trial-and-error where unfortunately fees and risk get very high. At the end, the natural selection works very well, losers are out, and new and hopeful traders join the troupes of future losers. Since trading is a very egocentric activity we should avoid looking for an approach that works for the majority. The goal is to find the optimal blend which suits the trader himself and brings him or her, success. How? Decomposing the trading process This simple, yet complex mental and highly emotional activity can be decomposed into five distinct phases: 1. 2. 3. 4. 5. Identify Analyse Decide Execute Follow-up

A more complicated chart requires a lengthier processing towards a trading decision. Time is not only money, it leads to confusion, too.

F2) The Benefit Of Simple Charts

The first step consists of the identification of financial instrument(s) to trade or invest in. You may trade the same FX pair or stock or commodity in and out. Or you may scan a larger universe of stocks using own technical and/or fundamental criteria. At the end,

Simpler charts lead to better trading because of the smaller size of information stored and compared during chart reading. If you know and have experienced several times crossings of indicators and their averages at or very near zero, when this pattern occurs again, you are confident that the processing and decision will be almost instantaneous with a higher probability for success.



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Every trader expects to make a profit or, in the worse case, a manageable loss. Unfortunately for many, losses get bigger and the trade becomes a disaster. If combined with a series of similar poor actions, the capital and market survival are at high risk. of traders and more investors who base their input on phone or discussions with their advisers; they use the hearing instead and are not part of our discussion. Any trading actions chain can be summarised as: 1. Visual impact of the chart 2. Comparison what we see vs. our existent knowledge/experience 3. Do we get emotional or not? 4. To launch or not the trade? (based on 2. and especially 3. above) Based on this big picture, the question is now What are the main brain areas and functionality used during this chain of events? How Does the Brain See? As with any object, the eye looks at the chart with its simple or complex information, and creates a three-

you have identified an instrument or several that you are going to trade or invest in. Next step, the analysis, starts looking into technical and/or fundamental details. For our purpose we focus only on technical details. Once we get the instrument

The visual aspect of the analysis plays a major role.

to focus on, traders and most investors, should look at its charts. This is the time when the trader/investor realises that the visual aspect of the analysis plays a major role for any subsequent decision. Of course, some investors dont look at charts; they rely heavily on professional advice. We skip them, being a minority. If we like the charts and the technical setup associated with them we can initiate the third step of the process: Decision what to do. If the charts dont look good, we may look for another instrument (back to Step 1) or we may stay on the sidelines for a while waiting for a better opportunity for the same instrument (back to Step 2). With a good-looking chart and great setup the third phase is ready to start. Its not a simple Yes/No answer from the beginning. Such decision, besides its visual technical input, should be based on a solid risk assessment followed by an appropriate capital allocation (position-sizing). Some may incorporate risk and capital management into the analysis phase leaving the decision as a plain Yes/No answer. At this point, we know what to trade/invest in, the charts look good, risk is under control, and decided how much we should buy. With all stars aligned (are they really so?) pulling the trigger (Step 4) brings us to the real world where risk is out of our control. The only umbilical cord we are attached to our trade is the risk management put in place during the decision phase (Step 3). Once in a trade, we follow-up (Step 5) with all means defined during analysis and eventually, decision phases (trailing stops, profit targets). Somehow, somewhere, something went wrong, Lets follow the trail of destruction and find the culprit Can you guess whose fault is? I see, I compare, I get emotional, I act Since most traders use charts as their primary input, we will focus on this category that employs for analysis visual representations of the price. There is a minority

F3) Mapping the brain for trading

Main brain areas that are activated during trading: A = Amygdala (limbic system), HC = Hippocampus (memory), HT = Hypothalamus, (motivation, rewards), M = Motor Cortex (movement), P = Prefrontal Cortex (decisions), V = Vision Center.
Source: Flickr, Shannon Muskof



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The Army trainee went through a similar process as our trader: He saw and listen to, stored the information and compared subsequent situations with those he already went through, building further knowledge until he/she felt extremely secure. Going back to trading, the third stage is to mix the information translated with emotions. Does the trader feel comfortable with the information on the chart? Is there a similar information/pattern already stored in the hippocampus from previous trading situations? Is the information in the hippocampus strong (more experience) or weak (less experience)? Reasoning vs. Emotions A highly important but very small area of our brains is controlled by the limbic system. Historically it is and the trader initiates the trade. Huge mistake since only luck can save the trade. Taking Action The next step is the activation of the movement center (M) in the brain (motor cortex) in case there is an agreement between the limbic system (emotions) and the information stored in the hippocampus. All voluntary movements are controlled by the brains motor cortex located at the rear of the frontal lobe. In order to initiate such movement, the motor cortex receives positive signals from various areas of the brain such as the prefrontal area (P), the CEO of the brain where decisions are taken and the hypothalamus (HT), the area responsible for motivation and rewarding activities.

dimensional model of it. Light is transformed into electrical signals starting from the retina. Colours and patterns lead to activation of nerves leading to the optical nerve, from the retina into the brain. The optical nerve has its end at the occipital lobe in the back of the vision center (V) where the chart is seen. In short, we look at a chart with its patterns and the final image is projected in the occipital lobe where the vision center is located. The result of the chart visual processing is sent to the hippocampus (HC) where the information is stored. This area is part of the limbic system that is highly responsible for our emotions in life and trading. The hippocampus is the place where new experiences are stored and compared with existent ones. The more experienced we are in an area, the

The trader hesitates if he does not have enough experience to act with high confidence.
easier its for the brain to react in a convergent manner to new and similar experiences. The more charts/patterns you see and understand, the more convergent reactions when new and old experiences are compared. The repetition and training play a decisive role for future comparisons between what we see (visual cortex) and what we already own as a result of the on-going knowledge building process (hippocampus). An Army Example To make a simple analogy, imagine a new recruit arriving at an Army base: He doesnt know too much about combat and survival skills ahead of the tough missions inside the enemy territory. After one month he knows far more, feels more confident, and reacts better to danger than in the first day. The repetition (training) process continues until he/she ends the stage, passes the final test, and is ready to act in any adverse conditions. the oldest area developed in the brain and is linked with all emotions we experience. Later, during the evolutionary process, the brain developed more thinking, non-emotional functionality (neocortex) and surpassed as mass this primitive system. At this stage, the conflict between reasoning and emotions starts. Is there comfort or discomfort between what we saw on the chart and what we experienced in the past? When we recognise the same or similar information as the one in front of our eyes, we feel more comfortable/ secure and inclined towards a positive action to place the trade. If the information we see on the chart is translated into information diverging from what we know, we feel scared, insecure, even panicked, and we, logically, disregard the trade as a wise outcome. Worst, and very popular, is a third option considered and taken by many novices especially in the Forex markets: The strong negative emotions caused by the negative divergence between what we see and what we experienced are removed from the realistic picture In this case, the affirmative signal travels from the prefrontal cortex where the decision is taken and ends up with an activation of the motor cortex that generates a mechanical click on the Buy or Sell buttons, or a phone call to the broker. When there is disagreement between the limbic system and hippocampus due to lack of experience, the signals travel in disarray back-and-forth between the amygdala (A) (limbic system) and the prefrontal cortex (P) (decision) without activating the motor cortex (M) to trigger the trade. When facing a new trading pattern on the chart, the trader hesitates since he/she does not have enough experience to act with high confidence. A wise trader doesnt place the trade (no signal to the motor cortex) but many losing traders, despite the existent emotional chaos, prefer to take a chance (and a loss) with a signal from the motor cortex to the hand to execute the trade or to place a phone call for this purpose.



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a function of time, bars of varying width portray both price progress and the supply/demand forces as trading progresses. EquiVolume charts can be found on and under the EquiVolume tab at and www. The EquiVolume charts are available at no charge to users.


John Bollinger, the creator of Bollinger-Bands, has launched, a free service that provides charts that incorporate volume data into the price chart. charts differ from



eSignal announced its new version eSignal 11.5. Here is an overview about the most important features and tools: Alert Ticker: This new window provides remendous value across multiple pages. It captures a variety of triggered alerts and centralises them in one easy-to-use area. Volume Delta: This chart identifies key price levels within a specific time period to see which side of the market has the most control. Market Profile: Invented by Peter Steidlmayer, the Market Profile chart depicts the distribution of prices throughout a trading day to find the relative shape of the market, enhanced in 11.5 to help futures traders better interpret shifts in price direction. eSignal Futures Trader: The trading integration function of eSignal Futures Trader now has connections to over 50 Futures Commission Merchants (FCMs) and 40 worldwide exchanges. Clients can benefit from a lower cost exchange fee structure. For additional details, please visit is that it takes time off the x-axis of a graph and replaces it with volume. So rather than the steady procession of static-width bars across the chart as

standard candlestick price charts in that the bars show more information than just the high, low and closing prices. The width of each bar varies to include volume information. The strength of this approach

are some key improvements and updates that you will find on the website: 1. Easier access to resources such as Power Trading Radio, Lessons from the Pros, Student Lobby and other pages that you frequently visit. 2. The ability to set your local Online Trading Academy center to permanently display on your homepage for convenient access to course schedules and other information. 3. Updated education pages, including course descriptions for the recently updated Professional Trader and Professional Options Trader courses, with a summary of what you will learn and who you will learn from. 4. Enhanced instructors pages where you can learn more about the background and specialties of your current instructors and those you may work with in the future. In addition, OTA has simplified navigation across the entire site in order to improve your experience and help you to easily find what you are looking for. For more information, please visit

Interactive Data

Interactive Datas FutureSource Workstation (FSW) 3.4 integrates trading capabilities with 50-plus Futures Commission Merchants (FCMs) and 40 worldwide exchanges, plus key content and functionality

Online trading academy

wordens brothers


Worden Brothers TC2000 app for Android, iPad, and Kindle Fire is free in the Mac App Store. TC2000 customers can start using it at no additional cost to their regular service. All the users chart templates, EasyScans, and watchlists are organised on your tablet. You can even flag stocks to make sure you dont forget them when you get back to your desktop. More details at

enhancements, the company said. FSW offers single-click trading execution by supported FCMs via an interface with Continuums trade order execution system and provides

interactive data


Online Trading Academy

The Online Trading Academy (OTA) website has been redesigned and is now live at Here

Traders can share and store knowledge about markets and financial charts with by developer Tim Knight, also founder of Prophet Financial Systems. Users can follow favourite traders, specific ticker symbols, or subscribe to the most popular stacks. For further details, visit

order routing connectivity with multiple clearing firms and exchanges including multiple accounts functionality all from the FutureSource desktop application. For more information, visit



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How to Make Money in the Medium Term in Up, Down and Sideways Markets

Winning spread betting strategies

By Malcolm Pryor

There are two common misunderstandings about spread betting, one being that it is just gambling, the other that is just for the short term. It is easy to see how the gambling misunderstanding comes about. The word betting conjures up images of the casino or the race track. The reality is that spread betting is a leveraged derivative product that can form an important part of a traders arsenal. Particularly for those that are fortunate enough to be successful enough with it to profit more than the capital gains threshold (under current tax laws capital gains tax is not applicable to spread betting). There are of course those that treat spread betting in much the same way as a trip to the casino or the race track with, for the most part, similar results but this book is not for them. The view of spread betting being short-term is prevalent even amongst experienced practitioners, and it is true that there is a large group of traders who use spread betting for intraday bets, or bets that last just one or two days. But there are others who use spread betting for medium-term trades lasting weeks.



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strategies with a very disciplined approach. It is assumed that the reader will already have some familiarity with a range of key trading concepts. investors, depending on the actions they take during bear markets. This leads on to an introduction of the concept of the Spread Betting Investor, together with

Winning spread betting strategies illustrates how winning strategies can be constructed to take such medium-term trades. What this book covers From the author of bestselling The Financial Spread Betting Handbook, this book is about using spread betting in a structured way to take advantage of price moves lasting from around a couple of weeks up to several months. Because many people think spread betting is much shorter-term than this, the book introduces the spread betting investor a concept used to describe the characteristics of someone using spread betting in this way. After this concept has been explored in some depth the major part of the book is the detailed description of seven spread betting strategies specifically designed for this duration and matched to whether the market is rising, falling or trading sideways. Who this book is for Malcolm Pryors Winning spread betting strategies is mainly for traders who already use spread betting products and who are looking to develop additional

The book introduces the spread betting investor.

This book may also be of potential interest to those who have not yet got a spread betting account but have heard about spread betting and are keen to see some of the things that can be done with it. CFDs This book will also be of potential interest to users of other leveraged derivative products, in particular CFDs. If you trade CFDs, rather than spread betting, just substitute CFD every time you see reference to spread betting. All the strategies in this book can be used with CFDs as the vehicle rather than spread bets. How the book is structured Part 1: The books first Part starts by illustrating the very different results obtained by three stock market a brief outline of the profile objectives and resources of such an investor. The following chapter discusses rules of investing and highlights the seven key rules which really separate the winners from losers. Part 1 concludes with an explanation of the mind-set of the Spread Betting Investor. Part 2: Part 2 is the main body of the book. It illustrates the thinking behind and the steps required to build successful strategies for three main types of market: up markets, down markets and sideways markets. The strategies are not designed to be followed step-by-step without question, rather they are intended to demonstrate the art of the possible. The examples contain both winning and losing trades, these are selected to illustrate the implementation stage following the strategy design, and to bring out a number of important points related to the psychology of trading. The examples are not intended to be representative of the results likely to be obtained if the strategies were followed verbatim. Each strategy is formed out of various building blocks which in real life need to be matched to the preferences, objectives and beliefs of the individual. Conclusion In summary, Winning spread betting strategies is a carefully written and well constructed guide that will appeal to the majority of traders and investors who are looking to develop their spread betting strategies.

Title: Winning Spread Betting Strategies Subtitle: How to Make Money in the Medium Term in Up, Down and Sideways Markets Author: Malcolm Pryor ISBN: 9781906659103 Price: 24.99 Publisher: Harriman House About the author: Malcolm Pryor is a member of the Society of Technical Analysts in the UK and has been designated a Certified Financial Technician by the International Federation of Technical Analysts. He is a director of a consultancy practice, and is an expert at several games, including bridge where he has held the rank of Grandmaster or higher since 1996.


Experience pays The story reads like a good curriculum vitae: It starts with the foundation of a brokerage- and analysishouse in the year 1963. Nine years later the analysis service Daily Graph was developed it set the standards for the branch over the following decades. After the transition from print to web at the turn of the millennium the next drumbeat followed: MarketSmith. This web-based platform started in 2010 and offers high-quality research data and an easy handling this promises to be another success. Experience pays; no other than William ONeil is behind this successstory a real value-legend and developer of the CANSLIM-method.

The Professional Tool for Pearl Finders
In this article we want to introduce a high-power and highly efficient tool to choose interesting stocks and funds. We talk about MarketSmith, a web-based screening- and analysis-tool that lives up to even professional expectations. We show you which features the platform offers and how MarketSmith performs in practice.

Overview of the functions MarketSmith combines the most important data of the fundamental and technical analysis and offers the investor a professional, intuitive and practical research-tool. We will show you the most important functions of the platform using concrete examples. We take a look at this tool from the practical point of view. After the login on the MarketSmith-website the user sees the main page. In the middle you see a chart that shows the volume and the Relative-StrengthRating-Line as well as information about insider activities. Above the chart, which covers timeframes from 5-minute to monthly chart, you see the data concerning market capitalisation, performance, volume and a short description of the company. On the left side the user gets a full arsenal of fundamental



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key figures, for example historical profit- and volume developments as well as the prognosis for the future, information about the evaluation of the stock, return on equity, dividend yield and ownership structure in short: everything. The ratings calculated by MarketSmith-analysts are especially helpful, as they are a good and fast evaluation of the stock and enable an easy comparison with other stocks. But that is not all. The most important titles of the peer-group (stocks of comparable companies) are listed as well, therefore the user can make a direct analysis of the competitors. On the right side of the screen you can open another window that offers information about the industry sector, ownership structure and options data. The symbiosis of technical and fundamental analysis is recognisable and runs like a common thread through the whole tool it emphasises the philosophy of MarketSmith. Screening on a high level In the next step we want to show you the powerful screening-engine of MarketSmith. With a universe of more than 6000 stocks and about 4000 funds the tool offers a great choice to search for interesting titles. After one click on the left bar the user can access more than 100 selection criteria in the stock area concerning fundamental and technical information. A good starting point may be the predefined screening models of different investment legends like William ONeil, Warren Buffett or Benjamin Graham. One click is enough to search the whole market for the transparent models of the investment gurus. We decide for the strategy of ONeil and get a list of 84 stocks in a breath, which are listed in the lower part of the screen key figures included. The user can double-click single titles from the list to analyse them further. A comfortable view as slide show is possible as well. Excel fans can use the export-function to execute further analysis. But back to screening: Of course you can construct individual screening models and save them therefore

F1) Main page

The main page offers a clear and very informative view of all technical and fundamental data of a stock and is therefore ideal for analysis.

F2) Screening tool

The powerful and easy to handle screening tool offers the possibility to execute own screening in addition to the already introduced templates of well-tried strategies. About 200 technical and fundamental criteria can be used for the screening of stocks and funds.



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process, you can start an own list of stocks that you can feed by drag&drop and that you can save afterwards. The tracking of own portfolios is done easily in the same way. The user can access several pre-defined lists, so-called reports, just like in the screening process: How about a list of the strongest technical titles? Or a list of stocks that will reach a new yearly high within a short time? Stocks that have the highest Relative Strength? You can do all this and much more within a few seconds. Another advantage: The user can apply the lists that he produced with the use of the screener as a universe for further selections and therefore the screening-process is even faster and more efficient. Quality has its price MarketSmith is a professional tool that fulfils all requirements that an investor has and is therefore a big help to choose the right titles. In addition to the well arranged combination of the extensive fundamental data and technical factors the use of the tool is very convincing. The ratings, that cannot be discussed in detail for lack of space, combine the power of decades of experience of MarketSmith and are a valuable help for orientation in the selection of stocks for advanced traders and newbies at the same time. The Screen-Sharing function shows that the community-thought is present with MarketSmith as well. The platform offers all users the possibility to share own screening setups with other users and to comment and rate them. MarketSmith takes care of education as well: Regular webinars with experienced market analysts and an exemplary tutorial area offer the users help in every way. The fee of 999 USD per year seems expensive on first sight. For everybody who wants to simplify, quicken and systematise research, the platform is definitely worth every cent. Quality has its price. At the moment MarketSmith offers a free 7-day trial as well as a 21-day-trial for 19.95 USD.

the effort for the future is reduced to a minimum. Because of the wide choice of different criteria there really are no bounds. You can set and modify all factors easily with the histogram-charts in the middle of the screen the screening process really does make fun. Every modification is shown immediately in the summary top left. Therefore the user sees all the time which influence a change in parameter has on the number of screening results. The so-called Benchmarks Evaluator offers the possibility to compare the quality of the own screening-universe with the successful strategies of the above mentioned investment legends and therefore offers a brilliant basis to optimise own ideas. Lists and reports save time The positive impression of the web-platform is confirmed with the following features. If you want to keep an eye on the stocks and funds after the selection


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Keyur Panchal

Keyur Panchal has an MBA in finance, a Masters in cost accountancy & finance and is pursuing his CFA. He has been working as a Finance Research Analyst in Ahmedabad, India. He is also handling his clients portfolios using technical and derivative analysis of market movements to profit in any kind of situation. Contact:

Higher Accuracy, Higher Profitability

Piercing & Dark Cloud Cover Pattern Trading

In any kind of market, some patterns act as leading indicators of a bullish or bearish trend. Perfect patterns give signals for profitable trades in intraday, short term or for investment purposes as well. As a result, traders can recover losses from old trades and also can make successful, profitable trades using different time periods. Today, we will look at the Piercing Pattern as well as at the Dark Cloud Cover Pattern.

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Price Patterns and Other Indicators There are many price patterns all with different uses in different time periods such as harami white, hammer, bullish and bearish engulfing, morning and evening star, doji etc. Price patterns give some fair idea about

a short period of time. Piercing and Dark Cloud Cover patterns are exactly opposite to each other in terms of candlesticks. Both use two candlesticks for short term movements and these can be found once out of around 70 to 80 candles.

basis. In this pattern, you will see some significant selling out of the bearish trend and on the next candle, the possibility of some fundamental news is raised. Hence, the second candle will be bullish and runs a new upward trend for some specific time as the

Trend reversal price pattern trading is a low risk, high return strategy.
selling and buying pressure in different time horizons. With price patterns, there are several reversal patterns like bullish and bearish engulfing, morning and evening star etc. Reversal patterns offer traders some short term profit making opportunities. The major drawback of reversal patterns is that they dont occur very frequently in the market and finding such reversal patterns is somewhat difficult using price charts. On the other hand, if we observe other leading indicators such as stochastic and MACD (Moving Average Convergence/Divergence), price patterns can be used to develop ideas about the trend opposite of the indicators. But there is no need to worry about correct or incorrect analysis of price movement in directions different from those of reversal patterns or those of some other indicators. We will take a look and analyse this further in this article. Piercing and Dark Cloud Cover Price Pattern Trading Strategy Trend reversal price pattern trading is a low risk, high return strategy suitable for professional traders and investors in the short term. Here we will look at a couple of such strategies. One is 2-day price pattern trading, which generates some confirmable profitability within The Piercing pattern includes two candles, the first one being bearish, second one, bullish. A Piercing pattern is shown in the circle in Figure 1 on an 8-hour news is absorbed by the market. The rationale behind it is that the bears are in control during the down trend and are getting overly confident in their trends

F1) piercing pattern in uk natural gas

Figure 1 shows the piercing pattern in UK Natural Gas daily chart. After completion of the pattern, you can see some significant buying pressure and a reversal. Source:


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invincibility. Here investors are drawn into one final sell-off, which causes the long black candle. Being the last in, these investors are promptly caught in strong buying pressure. Here, the second bullish candles close will be equal to or higher than first bearish candles average of the open and close. The Dark Cloud Cover pattern is the exact opposite of piercing pattern in terms of price movement. This pattern is the bearish trend reversal pattern and usually occurs in up trends, it can also be seen in consolidation periods. Here, a lot of buying pressure is seen before the pattern occurs but due to some relevant news and price sensitive information, the stock suddenly faces massive selling pressure in the next candle which is shown in Figure 2 as circled candles. This is called a gap up opening and closes equal to or lower than previous bullish candles average of open and close. Entry The right entry price offers higher profitability with less stop-loss difference. Before taking a trade, a trader needs to define the entry level at the exact time in any kind of trade. This gives the best return with least risk. As far as the entry after the Piercing pattern is concerned, the entry price should be justified on the next third candle immediately nearest to the second white candles close. It is here that a trader will buy the stock or commodity. Figure 3 gives a perfect idea about the entry after the Piercing pattern. A Piercing pattern indicates a trend reversal for a rising trend, whereas a Dark Cloud Cover indicates a reversal of the declining trend. In the same way, a trader will have to sell at the third candle immediately next to the second bearish candle. A trader can also exit from a long position if the Dark Cloud Cover pattern occurs so that he or she can save or book profits at the right time which is shown in Figure 4. There are also other good leading upper and lower indicators available in various charting software. There is also the possibility that a reversal pattern and lower indicator show different directions. Lower indicators move as the price line moves and doesnt show the

F2) Dark cloud cover in WTI Crude oil

Figure 2 shows the dark cloud cover reversal pattern in the WTI Crude Oil daily chart. Here, you will see huge selling pressure after immediate successful completion of this pattern.

F3) Entry and exit in the piercing pattern strategy

Figure 3 shows the right entry and exit levels in the piercing pattern strategy for UK Natural Gas daily chart. After successful completion of this strategy, huge buying pressure can be seen for ten to twelve trading sessions. Source:


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trend reversal in real time. So, giving more preference to reversal patterns offers better opportunities to trade. Position Size Practically, a speculative or a short term trader takes higher exposure against his or her margin account for a short period of time. Traders needs to be accurate with planned entry and exit levels. These patterns are for speculators and investors as well. A general rule of thumb is: Never take a risk of more than two per cent of your margin account per trade. Here, the position size should be justified by number of stocks = 0.02 * trading account / (entry level - exit level). Exit The most important point of trading is defining the right exit level. Sometimes traders face losses on aggressive entry before any successful completion of a pattern can occur; as a result, they face huge losses and a short term trader becomes a long term investor. Here, the Piercing and Dark Cloud Cover patterns are effective trend reversal patterns until approximately eight to ten candles. So, a trader needs to book a profit at the eighth candle or within the next ten candles after completion of the pattern. A profit can be calculated for a Piercing pattern i.e. return = (10th candles close - 3rd candles close) * number of stocks were traded. Whereas for a Dark Cloud Cover pattern i.e. return = (3rd candles close - 10th candles close) * number of stocks traded. Stops are placed as secured levels for saving the portfolio from loss, thus ensuring that a trader will not ruin his portfolio with major losses. The second candles low will be the stop as per the Piercing pattern, whereas the second candles high will be the stop for the Dark Cloud Cover pattern. This strategy fails when either rumours or fundamental price sensitive news or information comes out after the successful completion of these patterns. A noticeable increase in volume will add strength to these patterns and can boost the profitability of a trade.

F4) Entry and exit in the dark cloud cover strategy

Figure 4 shows the right entry and exit levels in the dark cloud cover pattern for WTI Crude Oil in the daily chart. Noticeable volume will boost the better reversal in both price patterns. Source:

Strategy Snapshot
Strategy name: Strategy type: Time Horizon: Setup: Entry: Stop-loss: Take profit: Trailing stop: Average number of signals: Average risk/reward ratio: Piercing & Dark Cloud Cover Pattern Trading Countertrend trading Daily chart Wait for candlestick pattern Piercing (for long trades) or Dark Cloud Cover (for short trades) to build; normal or increasing volume; no fundamental news or rumours after completion of the pattern Long: at the first candle after a Piercing Pattern; short: at the first candle after a Dark Cloud Cover Pattern Long: below the low of the second candle of the Piercing Pattern; short: above the high of the second candle of the Dark Cloud Cover Pattern At the 8th to 10th candle after the initial pattern None; use a break-even stopp as soon as book profit equals initial risk One signal for each about 70-80 candles per underlying 1:2

Risk and money management: Maximum risk of 2 % of trading capital per trade for margin accounts


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Valentin Rossiwall

Valentin Rossiwall is author, trader and partner of the German live trading room NextLevelTrader. You can learn more about IPO Trading at the website of NextLevelTrader. Contact:

Initial Public Offerings (IPOs)

How to trade IPOs successfully

An Initial Public Offering (short IPO) is the offering of stocks of a company for the first time on the organised capital market. IPOs are very exciting for short-term traders, because during the first days of an IPO the volatility of the concerning stock is often extremely high. This article deals with the characteristics of trading an IPO.

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Background INFO ON IPOs Traders make money if there are price movements at the market. Price movements occur if there are discrepancies between buyers and sellers which means that traders have different opinions about the market. At IPOs the opinions can be extremely different and therefore there can be strong price movements during the first few trading days. You have to look at the mission of the consortium to understand the background: The consortium consists of several investment banks (so called underwriters), who have the mission to determine a fair value of the company. This is the problem of the underwriters: Nobody can calculate the value of a company that the broad market will accept prior to offering it to them. That is the reason why the charts of IPOs have strong intraday-trends after the IPO. Strong trends usually can be identified by two main attributes: high volume and strong price movement. IPOs with low volume and weak price movement should not be traded by intraday traders because there are often erratic and unclear trends. In general the interesting IPOs are highly discussed in the financial media and therefore cannot be missed.

T1) Impact of Different Position Sizes

Jul 6, 2010 Oct 20, 2006 Mar 18, 2008 Nov 18, 2010 May 18, 2012

Agricultural Bank of China Industrial & Commercial Bank of China VISA General Motors Facebook

Value in Billions of USD

22.9 21.9 19.7 18.1 16

Table 1 shows an overview of the biggest IPOs in the US in recent years. Source:

T2) IPOs in Buy-and-Hold

Australia Brasil Chile Germany Finland UK Japan Canada Korea Austria Sweden Singapoure USA

Author(s) of the Study

Lee, Taylor, Walter Aggarwal et al. Aggarwal et al. Ljungqvist Keloharju Levis Cai, Wie Jog, Srivisrava Kim, Krinsky, Lee Aussenegg Loughran, Ritter, Rydqvist Hin, Mahmood Loughran, Ritter

Number of IPOs
266 62 28 145 79 712 172 216 99 57 162 45 4753

1976-89 1980-90 1982-90 1970-90 1984-89 1980-88 1971-90 1972-93 1985-88 1984-93 1980-90 1976-84 1970-90

Performance (3 years, %)
-46.5 -47.3 -23.7 -12.1 -21.1 -8.1 -27 -17.9 +2 -27.3 +1.2 -9.2 -20

How to trade IPOs? Does it make sense to buy IPOs immediately after going public and hold the stock for the long term? Statistics show that the 3-year performance of IPOs using the buy-and-hold-strategy tends to be negative. Therefore the simple buy and hold is not recommended. A fast market access is essential to trade IPOs successfully. Therefore it is recommended to have an account with a Direct Market Access broker, because then the trader can trade directly at the stock exchange via the ECNs (Electronic Communication Networks). In addition, the trader needs an emotionless system

Table 2 shows that a Buy-and-Hold-strategy is not recommended. The 3-year performance of IPOs is negative on average. A current, continuing analysis of IPO-performance is offered by the Bloomberg IPO Index, which can be accessed through the following link of
Source: Corporate Finance Short- and Long-Run Performance of IPOs; Wolfgang Aussenegg


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to profit from potentially strong intraday trends. Therefore he uses technical analysis, tape reading and analysis of the order book. Rules You can trade all IPOs that are promoted highly in the media and that expect a high market capitalisation (at least 500 millions). Unlike the traditional stock the trader has the problem that there are no price levels of the past at the open and therefore he cannot orientate on prior levels. The experienced trader uses tape reading: Analysing the order book behaviour and thus the behaviour of the buyers and the sellers in the market. After the open it usually takes 30 to 50 minutes until clear price levels form and only then the trader can orientate on important price levels and trade the stock. Every trader who does not know how to do tape reading is forced to wait until the end of the pricebuilding phase. If no clear price levels have formed after 30 to 50 minutes, the probability is high that the underwriters have defined a fair value and the stock will not move much on the current IPO-day. In general IPOs move under high volume and very fast. Therefore it makes sense to choose a short-term chart for example the 1-minute-chart. Unfortunately traders must not short during the first three days of an IPO it is prohibited by law. The highlight of the IPOs of recent years was the company LinkedIn (NASDAQ: LNKD) the first price at the stock exchange was 83 USD on 19th of May 2011. The stock increased to 122,7 USD within two trading hours. Usually a stock needs one to two years to make such a move. The company went public with a value of 350 million dollars and 30.14 million shares were traded on the first trading day. Entries and Exits on the day of an IPO There is an interesting scenario for a daytrader after the pricing if the stock breaks its opening range (sideways range) to the upside or the downside. You must not sell IPOs short on the first trading day, so

Tape Reading
Tape reading is used primarily in short-term trading where price movement and volume are analysed and interpreted. Tape Reading is based on the general principle of supply and demand and therefore the old techniques that were described by Richard D. Wyckoff can be used today as well. In former days, the tape readers, as the day traders were called then, had only the ticker band therefore the name tape reading with the price and the trading volume to predict the price. Today we have much more information in real time at our disposal. Tape reading includes techniques like the analysis of the size of the order, the speed of the orders, the order-prices and their volume. As a result, experienced traders can identify trends in the trading behaviour of insiders, experts and the broad market. This can be used for well-timed entries and exits.

F1) LinkedIn on the day of its IPO

The stock of LinkedIn increased from 83 to 122.70 USD within two trading hours of the day of its IPO. Source:


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focus on long trades. There is the possibility to sell shares of the same sector, that are often influenced by the direction of the IPO, short, if the IPO breaks its opening range downwards. The listed company Zynga (NASDAQ: ZNGA) produces online games for Facebook and is therefore highly correlated to the business model of Facebook. At the IPO of Facebook the stock of Zynga reacted like the stock of Facebook and it was possible to sell it short. Therefore traders could switch to ZNGA if they wanted to sell stocks of Facebook short during the first three trading days assuming that there was a technical sell signal in ZNGA as well. The easiest buy signal of an IPO is the breakout to the upside from an opening range. It is important that the trader analyses the average volatility of the stock since the open and chooses an appropriate technical stop. The Average True Range (ATR) is extremely high during the intraday course of an IPO in contrast to similar stocks. In order to prevent being stopped out too early, the trader needs a large stop-loss that is orientated on the order book (compare HFT Tractor Beam at the price of 38 of the Facebook stock on the day of the IPO http// Trading of an IPO shown on an example The stock of NOW Servicenow Inc. (NYSE: NOW) opened on the 29th of June 2012 at 23.75 USD with a planned market capitalisation of 1.9 billion dollars. Two price levels established during the first five trading hours that the trader could trade during the following days: The open level at 23.75 USD (see upper red line on the left side of the chart, Figure 2): If price breaks and holds above this level, it is a buy signal. The daily low at 23 USD (see lower red line on the right side of the chart, Figure 2): If price stays below 23 USD, it is a sell signal. In general it is important during IPOs, that price stays several minutes above the important levels and

F2) IPO of NOW Servicenow Inc.

You see the 5-minute chart of the stock of NOW Servicenow Inc. from 26th of June to 3rd of July 2012. The open was at 23.75 USD (upper red line on the left side of the chart). The first buy signal occurred at the break of the price building phase (first ellipse) with a stop-loss at 23.65 USD. On the next day a triangle formed after the open accompanied by a break of 24.70 USD and this was another signal for staying in the position (second ellipse). At the end of the day the stock touched the price level of 24.60 USD, made a lower low and crossed the moving average for the first day. The trade was closed (third ellipse) because the volume decreased as well.

F3) IPO of Facebook

Figure 3 shows the 5-minute chart of the stock of Facebook on the day of the IPO. The IPO bombed because it did not offer any clear intraday trends or good chances. At 6pm only one acceptable trade developed: an intraday double bottom after a parabolic drop since the open.


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that it does not break it and falls back right after. The advanced trader uses the analysis of the order book to determine if the break-out levels are bought strongly and if there is an increased demand. The ellipse in the chart shows the break-out from the price-building range and the buy signal. The stop-loss is placed technically below the break-out level at 23.65 USD. In general you can stay in the position of an IPO overnight, if the setup in this case the uptrend is sound. The trend can be defined with the moving average in this case an EMA 30 (red line). There is definitely a higher risk if you hold an IPO over night because gaps may occur. Therefore it is recommended to hold positions overnight only if partial gains have already been earned and if the position is in profit by at least 1.5-times the ATR. In this case it would have been wise to sell half of the position at the parabolic increase in the direction of 24.50 USD at the end of the first trading day of the IPO, although the trend was sound. On the next trading day a triangle formed after the open and built a signal to hold the position with the break of 24.70 USD at 6:30pm German time. At the end of the day the stock touched the level of 24.60 USD,

Strategy Snapshot
Name of strategy: Type of strategy: Timeframe: Holding period: Setup: Stop-loss: Take profit: Number of signals: IPO trading Breakout trading/trend following 1- or 5-minute chart One to five days Break-out of the opening range Individually defined according to technical analysis Sell half of the position in parabolic movement. Stop at break-even and staying in the position overnight, if profit is at least 1.5-times ATR One to five IPOs per month, one to two signals per IPO

Facebook on the 18th of May 2012, with a market capitalisation of about 115 billion dollars. Many traders had high hopes after the spectacular IPO of LinkedIn in the previous year. The expectations of the traders were badly disappointed, because there were no clear intraday trends and no remarkable opportunities during the IPO.

The easiest buy signal of an IPO is the breakout to the upside from an opening range.
built a lower low and crossed the moving average for the first time. In addition the volume decreased compared to the day before and this is another warning signal. The trade was closed at this point with a nice profit. The IPO of Facebook One of the most famous and most popular IPOs of recent was the IPO of the social-media company Traders commented with disappointed faces: That is all that Facebook has to offer? We have been waiting for this IPO for two years and the stock moves only four dollars up and down? But at least one controlled trade could be made at 6pm: an intraday doublebottom after a parabolic drop since the open. An entry at 38.00 to 38.10 USD with a 20-cent stop-loss was possible. Price moved to the open at 42 USD. A clear and fast trade for professional traders, but

much more was expected from an IPO of this size. The important level of the open at 42 USD was never broken substantially and therefore no good trades like the ones in the discussed stock NOW of this article were possible. Another disappointment was the fact that the stock exchange (NASDAQ) had problems with the execution of the orders of the stock of Facebook. Supply and demand of stocks of Facebook were so high during the first trading hour, that the stock exchange could not handle it and some traders had frozen positions. Order tickets were held up to 50 minutes and could not be deleted. Therefore it was not recommended to trade the IPO with higher risk because the danger of technical order mistakes was increased. An IPO-trader must recognise such a danger. If you stay in an open position with margin and cannot close it, because the order is stuck at the stock exchange, you face an uncontrolled risk. Conclusion Interesting IPOs are rare but they offer exceptional chances for advanced daytraders. If you know about potential exceptional IPOs and you have a strategy especially for trading IPOs, you are one step ahead.


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Arthur Krieger studied economics and law and deals with Forex futures since 2007. He favours short-term FDAX-intraday-trading. He is focussed on support and resistance within a chart that is acknowledged by the order book. Contact:

Arthur Krieger

Pivot Point Range Trading

Pivot Points as direction signals

Pivot points were developed by floor traders and have established since their development. They are used in the futures market as well as in the forex market. Pivot points are a tool of technical analysis like Fibonacci-Retracements and are rationally not provable. The term Pivot means centre of rotation and that is its main function: The pivot point tries to define short-term profit targets, to determine the future development of the market and to show support and resistance zones. Therefore this tool is exceptionally suited for short-term intraday trading. Pivots help to determine entries, to place stops and to identify profit targets.

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Like many other technical indicators pivot points are based on a calculation and show trading ranges. 90 per cent of the time the market stays within a range during a trading day and therefore there are good possibilities to trade these points. The pivot points are always related to the previous day. That means that the data of the previous day is used to determine todays expected range of the market. You need three prices for the calculation (Close, High, Low) and therefore the calculation can be adapted in every timeframe. The conventional pivots are calculated with the values of the previous days, the so-called daily pivots. In addition there are the weekly and monthly pivots. Those are calculated from the weekly respectively monthly chart and have bigger ranges than the daily pivots. Therefore they are rather used by swing- or position traders. The principle of the trading strategy with pivot points is nearly the same as the intraday trading with daily pivots. But you have to consider other factors that can be neglected in intraday trading. The intraday trading focuses on tape reading and on the orderbook and orderflow this can be neglected in the longer-term trading.

the smoothing of big gaps. Only the size of the gap is considered. Choice of timeframe The advantage of this strategy is the predominant abolition of the competing timeframe. This means that the question, which timeframe to use?, is partly unnecessary. In contrast to moving averages (short MA) that are often contradictory in different

timeframes, pivot points are the same in every timeframe respectively the same values are shown. Therefore traders that prefer the 5-minute chart can trade their setups with the same priority as traders who use the 1-minute chart. In general it is recommended to use a combination of timeframes. Because paradox patterns can develop in a chart as you can see in Figure 1. A double top formed in the 1-minute chart whereas in the 5-minute

Pivot Point
The pivot point is the mean average calculated of the high of the previous day, the low of the previous day and the close of the previous day. In addition the range of the previous day is measured and added to the calculation. Therefore the following price levels are calculated: R1 = ( 2 * PP ) - low previous day S1 = ( 2 * PP ) - high previous day PP = Pivot Point R2 = PP + range previous day S2 = PP - range previous day R = Resistance R3 = 2 * ( PP - low previous day ) + high previous day S3 = low previous day - ( 2 * ( high previous day - PP ) ) S = Support Depending on the desired application the calculated levels can serve as orientation during the trading day, as signal generator or as a part of a comprehensive trading concept. In addition to the determination of the daily trend, concrete signals for break-outs or reversals can be deduced. Pivot points can be used as target- or stop-loss levels for open positions.

Main idea and calculation of pivot points The main consideration of the pivot points is simple and logical: It is assumed that the past price activity of one trading day influences the future development of price. You only need three prices of the previous day to calculate the pivot points. You add the high, low and close and the result is divided by three; that is the first pivot point. You calculate the mean average. Therefore spikes are absorbed and the range is smoothed. In contrast to other, mathematically complex indicators, pivot points are calculated relatively easily; this may be the reason for their popularity. In addition to the usual floor-pivots further calculations were developed over the following years. The reason is for example,

F1) 1-minute- vs. 5-minute chart

A top has built in the 1-minute chart. You would not have enough information without the pivot points to choose a short entry because in the 5-minute chart it looks like a small recovery. In real trading the trader has to watch the market and how volume acts in such a situation. The graphic shows how different charts can be and that it is an advantage to see support and resistance on the same level but in different timeframes.


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chart only a small drop is shown. This conflict can only be recognised if you observe two timeframes. And it is a good prevention of losing trades. In a situation where the market is contradictory, the volume has much more importance. It may possibly determine if it is only a correction or really a reversal. Definition of profit targets A big issue in trading is the determination of profit targets after the entry. Especially beginners often trade the market without a precise profit target. These trades do not have to be bad setups, because the entry is in no relation to the profit target. But often the market reverses and the winning position turns into a loss. Of course positions that are profitable should not be closed immediately. But they should have a realistic target. The target should be defined prior to entering the trade. This prevents nervous waiting and hoping and is easier on ones nerves. Position and money management Before you enter a position the profit target has to be determined. If the target is extremely high because the range of the prior day is very wide and therefore the pivot points are far away from each other, you have to define partial gains. To have a good combination of target definition and position management you should determine profit targets realistically with not too high expectations and you should be clear about the position size. Should you trade only one or more contracts? Traders who trade only one contract have little space to take partial profits. They can only buy further positions, but this worsens the initial price of a position and heightens the risk. Traders who trade with several contracts are in a better position. They have the possibility to use the full capacity of the market and they can trade the movement to its maximum. The disadvantage of trading several contracts is the absolute size of the loss: If the position moves in the wrong direction and it is stopped out, the loss is bigger than trading only one contract. But the risk is relativized because the options of position

F2) Break after rebound

Figure 2 shows the 5-minute chart of the DAX-future. Shortly after the open there is selling. The market stops exactly at the support on pivot point Support 2 (S1) and starts a correction to the upside. In this phase, volume decreases, which is a signal for a further drop to the downside. At 10am exactly the market forms a Bear 85-pattern, which offers the possibility to sell short (see green line). Possible targets are the pivot points S2 and S3. At 2:35pm, shortly after the news, the 5-minute candle closes under high volume and therefore the position is closed. Source:

F3) Pullback after break

At 9:45am the market crosses the resistance pivot point R1 and stays in a correction afterwards. At 11:20am a Bear 85-pattern forms and a short entry is generated (green line). The position lasts until 2pm. After a volume spike the position is closed. Source:


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management with several contracts are far better. If you can define several targets, partial exits are a good method to secure profits. And that is the advantage: The trader with only one contract is not in the market anymore, but the trader with several contracts is in the market partly and can still participate on the movement. If the trader with only one contract finds another entry, nothing can be said against a new position except the broker and stock exchange fees. But you have to watch the already made profits again. Another entry worsens the average initial price and heightens the risk and you have to pay additional fees. Trading strategy In general the trading strategy of pivot point range trading is based on the trading of the zones that the pivot points show. You try to trade the rebound or the break-out of the pivot point. Because pivot points are either like a wall or like a slingshot. If the market bounces, it usually falls back heavily at least to the next pivot point. If the market breaks through one of these points, it is similar. The first target is always the next pivot point. Volume plays an important role. It reveals the strength of the point where the rebound or the breakout took place. The trader is only active, if price is near the pivot point under appropriate volume. In the zones between the pivot points there is vagueness if the market will increase or decrease. Figure 2 to 4 show descriptive examples of trades based on pivot points. Conclusion In general the trading of pivot points is a reliable strategy. It is understandable and easy to handle. The strategy enables especially new traders a good entry with fixed targets and a solid risk management. Even if you do not like pivot point range trading, you should draw the pivot points in your chart, especially if you are an intraday trader many traders watch these points during the course of the day.

F4) Rebound

This trade is riskier than the examples in Figure 2 and 3. Shortly after the open there is much volume in the market and it stays that way until 9:40am. Afterwards you can see resistance at the R2 pivot point and at the level of 6400 points. Although there is low volume at the red candle at 10:30am we sell short (green line) and close the position at the volume spike at 12:55pm.

Strategy Snapshot Strategy Snapshot

Name of strategy: Type of strategy: Timeframe: Setup: Entry: Stop-loss: Trailing stop: Take profit: Exit: Risk- and money management: Number of signals: Pivot Point Range Trading Trading based on pivot points Minute- or tick-chart Rebound or break-out of pivot points Stop-order after Bull or Bear 85-candle Depending on the market situation, as near at the entry as possible None Support- and resistance levels of the pivots in combination with high volume Discretionary Depending on the market situation up to five contracts One per day and underlying




2012 I 11 Dirk Vandyckce

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. He can be reached at

The Little Formula That Makes a Difference

Sizing positions Part 3

Trading and investing is simple, very simple actually. Particularly in financial markets. Because all we can do there, is just buy and sell stuff. Yet at this very basic level of making decisions, things already start to go awfully wrong. So, however simple it may be, it sure isnt easy. In this article series we explain the single most important formula any trader and investor should know. In fact, its probably the only formula everyone should know about in life. And well discover how most people who know the formula already, probably interpret and apply it the wrong way. In this article well look into the nitty gritty of sizing positions.



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In the first two articles of this series (TRADERS 08/2012 and 10/2012) we introduced expectancy as a way to measure overall profitability of a system. This is surely nothing new to any trader who has been around for even just a little while. But we cannot use it in a quantitative way, as much as some may believe the opposite to hold true. This formula isnt about

much of it. Take the example of a coin toss where we double our stake with each head but lose it when tails come up. This is, according to expectancy, a profitable deal, because we know for sure that the longer we play the more the number of heads and tails will converge towards half of all throws, something we cannot know in financial markets. Yet even this profitable game can

risk. If we invest larger amounts, resulting in bigger positions, we will get greater equity volatility. The whole idea is to limit volatility to the downside while keeping it on the up side. If we dont do that, we are doomed to fail, because of the asymmetrical percentage nature of losses versus profits. Any percentage down can only be made up for by a greater percentage up. So more

Looking at risk as what we invest, is completely unacceptable and not workable.

predicting system quality, its about control and effort! It tells us that 20 per cent of our efforts can control 80 per cent of our results, by focusing on minimising each loss and maximising every winner, when they present themselves as such. We can minimise our average loss by minimising each loss. Over this we have the ultimate control, since the only thing we need to do is pull the trigger and sell the loss. This can be done by the click of a mouse, nowadays. The same can be said for the average profit, which can be controlled simply by taking care of each profit. All of this was explained in the second article of this series. Risk versus Reward Without doubt, whole libraries are written on the subject of risk and reward. But in the end, its clear they are related. Its the basis of postponed but greater rewards, given the concept of investing. Strangely enough most people take as common wisdom the fact that more profit invariably comes from taking on more risk. This is not true. Steady growth of capital mainly comes from figuring out risk, respecting it and not taking on too blow us up easily by taking on too much risk. Going all in, for example, is all one has to do to lose everything for sure when playing continues. All it takes is one loss to wipe out the gambler. So risking more might create an outlook on having bigger winners, but the true risk comes from not being able to play the game long enough, even if we know it will be profitable. Whats more, one can not only take on too much risk but also too little. For the coin toss example, profits are maximised risking 25 per cent each time. Keep in mind though that having four losses in a row (a probability of 6.25 per cent) will take down equity by 57.81 per cent. So risk also has a relationship with volatility. If two systems bring us the same profit, we want the safe bus trip taking us there, rather than the rollercoaster ride. Risk is mainly controlled by sticking to lots of liquidity and the size of a position and is technically implemented by means of stop orders and bought options (contrary to written options). If, for the sake of simplicity, we leave out margin and leverage, risk is directly related to what is invested. Given that we only can lose what we invest (again, leaving out of the discussion any leverage), what we invest is what we volatility in both directions draws down equity over time (as does leverage, by the way, again if we dont take care of limiting the downside). What to Risk Looking at risk as what we invest, is completely unacceptable and not workable. On the one hand risking less would mean investing less, limiting what we can make. Second of all, costs (commissions and taxes) would overrun any attempt to come out ahead if we would risk only small parts. The key to solving this problem is to try and disconnect what we risk from what we invest. This is in fact possible, only if we could limit the downside. This can easily be done by using a stop-loss or defining risk very sharply by translating the position into an option position. Using options would even weed out the risk of gaps that comes with conditional orders like stop-losses. We will, however, not go into the technicalities of using options. Instead we can build our case here assuming stops are perfect. To close this point, stops will work better if liquidity is looked after properly (the same holds true for options) and by using exit stops without a limit.



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a risk of $1.30 dollar for each share we are going to buy, we can buy up to 132.54 / 1.30 or 101.95 shares. We round this off down to a nice 100 shares. What we have done here, is calculate the size of a position based on the total risk we want a position to bring into our portfolio and the risk per share we have to take on a technical basis to make the trade worthwhile. Nevertheless we only risk one per cent of total equity, but we invest 100 x 22.18 / 132.54 or 16.73 per cent of our equity in this position. The position itself however will be stopped out at a loss no less than 5.91 per cent. This money management algorithm is called per cent risk position sizing. The total equity we base our total risk on can be the total net worth of our portfolio. This will give us the biggest position. If we base our total risk only on the available cash, we will get a smaller position size. In between is the position size well get if we take the initial risk on the protected total net worth of the portfolio. This would be the portfolios value if all positions were sold at their stop-loss level. This gives a bigger position then risking only cash but isnt as aggressive as assuming we already earned the paper profits to the full (which we never will, a position that gets stopped out will necessarily first have to decrease in value). Another useful way to size positions is, again, starting from the risk we want to take. Lets go with the one per cent of $13,254 once more. Instead of looking at the risk per share we turn our attention to the volatility of the stock. Suppose the ATR (Average True Range this is the average daily range with gaps added to the range) of FB at the moment of purchase is $0.79. If we only want the FB position to have a daily volatility impact of one per cent on our equity, given that each share brings in a volatility of $0.79, well have to limit the volume we want to buy to 132.54 / 0.79 = 167.77 or 167 shares (one can also round this

Entry stops on the other hand should come with a limit. The logic behind this is that opportunities are everywhere, all the time. There always will be another train we can take. So if slippage on the entry is avoided by using a limit, the downside would only be that an entry possibly could be missed. On the other hand, if trouble comes knocking, we need to get out the position first and foremost, at all cost. Limiting losses is not where we want to nibble off a few cents, while risking a stop not getting us out of a position. Also certain industries (like biotechnology and renewable energy) are far more riskier than most others. So if one invests there, a thorough due diligence is absolutely essential. An Example Taking all of the above into account, we will define risk as the open risk of a position. This is the capital at risk that is not protected by the stop-loss. As an example, take a stock position we hold thats been bought at $22.18, currently trading at $22.66 with a protective stop at $20.87. If we hold a hundred shares, our positions current worth is $2266, the investment was $2218 but our initial risk is limited to (22.18 - 20.87) x 100 = $131. Our current exposure is (22.66 - 22.18) x 100 or $48. That amounts to only 5.91 per cent of the investment being at risk. So what we invest, $2218, clearly isnt what we risk, $131. Given that this position is only one in a portfolio being worth $10,000 the investment is 22.18 per cent of our net worth, but the portfolio risk originating from this position is reduced to a mere 1.31 per cent. Real World Position Sizing Once its clear that we dont have to risk everything we invest, we can turn things around in our processing. Suppose we want to buy Facebook (FB) at $22.18 with an initial protective stop-loss at $20.87. From these two levels we know we will risk $1.30 per share. Now if we want to risk only one per cent of our equity, say for a total net worth of $13,254, in this position, then we can only risk $132.54. Given that we already take

F1) Using the Position Sizing Tool on Chartmill

By clicking right on a chart, it is possible to directly enter data in the position sizing tool. In the position sizing section of the context menu one can choose to pinpoint the entry, exit or profit target to go with the point being clicked.



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to an even ten shares going with 160 instead of 167). This money management scheme is called per cent volatility position sizing. It results in a portfolio where each position has an equal impact on the portfolios volatility. Going life The above position sizing algorithms are theoretically pure, but of course theres also a reality to trading. Theres the impact of commissions, taxes, the possibility that stops will get hit by chance, and so on. On theres a calculator taking care of all this on the advanced charts tab. Just key in your favourite tickers in the chart settings part. On any chart, you can choose entry/exit/profit target goes here, by clicking right on the chart. A screenshot is shown in Figure 1. This will fill in the position sizing tool. Of course each of the numbers can be manually fine-tuned in the tool itself. You have to fill in entry, exit, capital and %risk. Single trip commission and tax percentage will need to be adjusted according to country and broker tariffs. Setting rounding to ten, for instance, will round down the number to the next (lower) multiple of ten shares. If a profit target is set, more analysis will be done. Have a look at Figure 2, where we display the meanwhile familiar FB example used in this article. When everything is filled in (also the profit target), youll get the middle analysis screen of Figure 2, stating total risk and total profit (when the profit target would be reached) in dollars and percentage

F2) Details of the Position Sizing Tool

Filling in all but a profit target in the upper part of the position sizing calculator, shows all of the feedback in the lower part of the left most screenshot. Adding a profit target fills out the rest of the feedback, as displayed in the middle. Taking the suggested risk into account and filling in its percentage, back at the top, leaves us with the screenshot on the right showing an advice to take on a lighter volume with this trade.

of shares, here being 70. Both volumes are also presented as a percentage of average daily volume, which preferably would be so little that 0.00 per cent should always be the displayed. Otherwise stocks with far more liquidity for this kind of equity need to be used. Next are the total investment and break-even price in dollars and the percentage of capital and entry

Entry stops on the other hand should come with a limit.

of the capital presented at the input. Also the risk and profit per share are shown in dollars and percentage to the entry price. The suggested number of shares, here 73, according to the per cent risk algorithm is displayed, followed by the rounded number price given. Then, we have the ATR in dollars and percentage of the entry price, followed by the stop distance in dollars and ATR multiples. In this case the stop distance is only 1.66 ATR, which is rather close and why the tool gives an alert (red). These are warning

signs to the user. The more warning signs pop up, the less this trade should be considered. Do not ever tweak the input to get a warning free output. This is not good money management! Near the end, the tool states the stocks average daily liquidity in number of shares and the days needed to transact the suggested rounded number of shares, which of course would also be as small as 0.0 days. Almost last but not least, the P/L ratio is given and also its reciprocal, the Risk Reward Ratio (RRR). The tool finally suggests a percent risk that could be filled in at the top if one wants to adjust risk to the P/L ratio. A better P/L will ask for a greater percent risk. This suggested risk of 1.35 per cent is filled in in the most right screenshot of Figure 2, changing the suggested position size from 70 to 60. So in this case, the tool advises to take less risk, based on the P/L ratio it sees. Wherever we mentioned dollars, of course one needs to follow the currency of the stock under analysis.



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Christian Stern

Christian Stern (born 1985) studied economics and journalism at the Universitt der Bundeswehr in Munich. He has ten years of experience in the stock markets and publishes technical analysis of stocks at Contact:

How to Improve Your Trading Results

The basics of Pyramiding

To set up a position in the market with the technique of pyramiding is one of the main tools of many successful traders. You can minimise the initial risk with this strategy and you can improve the ratio between maximum reward to maximum risk (so called RRR) substantially and permanently. You can use this system in all timeframes and you can modify it individually the system works especially well in times of trend markets. But be careful, fluctuations in the capital size and the higher influence of the personal hit rate can influence the trading result in a negative way.



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F1) Function of pyramiding

The trend is your friend friendship is binding You need a trend as a basic requirement for successful pyramiding. Trend strength can be observed in highly liquid titles, for example indices, futures market or blue chips. Small caps often quote volatile and are therefore better for other strategies. Function of the system The function of the system is easy and adaptable to your personal preferences. If you already have a position that moves in your desired direction (thus is in profit), you add to the position as an inverse pyramid. The initial stop-loss is trailed. The longer the trend lasts, the more contracts you trade with limited risk. We analyse the function of the pyramiding with a concrete example (Figure 1): We expect an uptrend of a stock and decide to buy at the current price of 100 EUR. Technical analysis tells us the sensible stop lies at 90 EUR therefore the initial risk of one stock is ten EUR. We do not want to risk more than one per cent of our whole capital of 10,000 EUR, therefore we trade ten stocks. During the course of the trading day the stock increases as expected to 110 EUR and we can trail the stop-loss to break-even. The first pyramiding starts with the buying of a further ten stocks. We do not increase our risk, but we participate on following profits with the double amount. Types of Pyramiding There are two types of pyramiding: On the one hand there is the simple reinvesting of already secured paper profits in increasing positions with raising the stoploss at the same time (safety version), and on the other hand the varying of the absolute risk and therefore the changing of the stop according to the evaluation of the (technical) market situation. Your risk stays either the same or you increase it to the maximum, if your

Figure 1 shows the strategy of pyramiding with consistent risk schematically. Source: TRADERS graphic

F2) Setting up a position with a declining pyramid

Here you can see that a relatively high number of contracts are bought and therefore fewer contracts can be added during the course of the trend. This method is a risky version because the initial risk is higher. Source: TRADERS graphic



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money management allows it (for example one to two per cent of the whole capital). In this case you have the risk of pyramiding the loss so called cheapening of the initial price. The safety version allows the raising of the number of contracts only then, if existing positions are in profit or break-even (initial price including cost like spread or commissions). When do you take profits? You exit the position either by reaching the stop-loss (that was possibly trailed several times) or by closing it manually. In this case there is another advantage, especially for trading newbies. If you trade several contracts you can realise partial gains. That means that you can close a profitable position for example 50:50. The trader secured a part of his profits and is not annoyed that he invested time and nerves to no avail. Furthermore he can speculate on a continuation of the trend with less pressure to succeed. Profit and Loss The course of your capital curve of the current result and of the maximum profit/loss can fluctuate much more with pyramid-trading than with other strategies. If there is for example a pull back against you after you increased an already profitable position, you lose depending on your stop-loss and the number of increased contracts considerably more capital. Maybe you even delete all your paper profits. This is because the expected target price has to be reached several times to earn profits because you risk already gained paper profits. If you trade without pyramiding you only have to be right once and then you close your position. Therefore when pyramiding you have to be aware of the risk of all existing and opening positions in the worst case at all times. Hit rate In contrast to usual trading you realise many single trades when pyramiding. That means that your hit rate has to be higher to trade profitably. Setups with a hit rate of a little above 50 per cent will rather delete

F3) setting up a position with an inverse pyramid

Figure 3 shows the inverse type of the pyramid. The trader buys a small position and adds more or equal contracts during the course of the trend. Every trade increases the number of contracts. This is the less risky version because the initial risk is smaller.
Source: TRADERS graphic

F4) DAX 1-minute chart

Figure 4 shows an example of the trading course of the use of pyramiding with an inverse pyramid.



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a reversal. We buy at 7069 points at the exceeding of the latest high after the head-and-shoulder. Our initial stop-loss is below the previous low at 7064 points. At the time of the entry our initial risk is five points. The DAX moves in our direction. After the interim low and the exceeding of the high at 7074 points we for two contracts. The first contract is profitable and the second position increases the chances of the trade. We can repeat this procedure two more times until we are stopped out at 10:25am. Only one of the four contracts is not profitable and results in a small loss. If you expect a continuation of the trend for example because of low volume during lunch time you could make use of the discussed partial selling. We could act the same way on the short side in the following trading course. Conclusion The strategy of pyramiding enables you to leverage your trading, but it requires concentration and discipline. Therefore you should draft your personal trading rules to define when to increase the trading volume and what the risk should be.

earned paper profits than increase the positions during a trend. An example We show the increasing of positions with the method of pyramiding on an example of intraday-trading of

When pyramiding you have to be aware of the risk of all existing and opening positions in the worst case at all times.
the DAX (1-minute chart) on 28th of March 2012 (Figure 4). We recognised a bottom building because of a head-and-shoulder-formation and therefore expect buy another contract. The stop-loss, which is valid for both contracts now, at the same time sits at 7069 the risk stays the same and is minimised at five points

Read in the TRADERS December issue

Trade Like the Pros

marc rivalland



those who have survived the first years of trading will sometimes think about trading at the futures market. But you have to avoid some pitfalls, because when you are trading futures you beard the lion in his den and trade against the pros. therefore, knowledge is power! thomas Bopp will show you what you have to consider when trading futures.

marc rivalland is one of the best-known swing traders of our time. He hails from south africa, where he completed law school and then worked as a stock analyst early in his career. In 1978, he came to the uk, where his jobs included working as a futures trader on the floor of lIFFe.


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 3: Which Market Should You Trade?

In last months article we discussed the importance of choosing a trading style (ie swing or day trading) which was best suited to your personality. We reached the conclusion that there is no best style of trading, there is only the style which is best suited to you. Today we will discuss six criteria to assist you in assessing which market is best suited to you.

basics: 12 steps

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Establishing which market you should trade is similar to the trading style discussed in part 2 of this series in that there is no best market to trade. Provided you are trading a market that is best suited to you personally then there is no reason why you cant be profitable in that market. The below six criteria will assist you in assessing which market is best suited to you: 1. Liquidity Liquidity (in the main sense we as traders are concerned) refers to an assets ability to be brought/ sold without causing a significant movement in the price and without therefore too much slippage (trading terminology for getting a worse price). For

attempting to trade wildly volatile markets that are swinging up and down with no clear direction. 3. Margin/Leverage Leverage is the ability to control an asset with a small initial outlay. For example when you buy a futures contract you arent required to put up the entire contracts value, instead you are only required to put up a small deposit (known as the margin). Margin levels will vary between markets, ranging from 4:1 for equities right up to 400:1 for forex (maximum leverage varies from country to country). Trading a highly leveraged market can be a smart way for a trader to utilise their capital in the most efficient and profitable

5. Personality Do you thrive under pressure, or does it cause you to make errors? Can you quickly and easily forget the past and move on with a clear mind? Or do you tend to brood over your losses and need a greater time to clear your head? Every trader needs to assess whether their personality is better suited to a slow moving market or a faster paced market. 6. Exchange trading hours Depending on your lifestyle demands there may be times of the day or night which are more conducive for you to trade. For example if you work full time and have a young family then realistically the best time for you to trade may be after the kids have gone to bed between 8pm 10pm. If this is the case then you need to find a market that fulfils the above five criteria at that time of the night. What we mean here is that you may want to trade the mini-Dow futures contract and during the US cash market hours it would satisfy the above five criteria but at night when you are available to trade the liquidity and volatility criteria may not be satisfied and therefore this market wont be best suited to you and your lifestyle. Conclusion Whether you are new to trading or have been trading for years and not getting the results you desire we strongly encourage you to take the time to do the above assessment of the markets you currently trade. Finding the market that is best suited to you could be all it takes to turn your trading profits around. Next Month Now that you have established which style and which market you should be trading for your particular circumstances, next month we will assess one of the commonly misunderstood topics; that is the difference between technical analysis and trading strategy.

Typically the best markets to trade are those which have the most movement.
example within the stock market there are very liquid stocks such as Apple and at the other extreme very illiquid penny stocks. When commencing your trading career you may choose to only trade small size therefore liquidity is unlike to be an issue for you. However, as your trade size increases liquidity will start to have an effect, therefore its wise to plan ahead and master your craft on a market which you are unlikely to outgrow. 2. Volatility Volatility is a measure of price variation of a market over time, for example a highly volatile market would exhibit wild swings in price. Typically the best markets to trade are those which have the most movement. Attempting to trade markets which are flat with no volatility can be extremely difficult (unless using certain option strategies). Equally difficult can be manner but it can also be a double edged sword. Without strict risk and money management rules a trader can lose more money than they have in their trading account. However, treated with the respect it deserves and a solid risk management plan, leverage can be a powerful tool. 4. Capital required The amount of capital required to trade a particular market will be dependent upon its value and margin requirements. A trader must ensure their available trading capital is sufficient enough to safely trade their market of choice. If you only have $5000 trading capital then trading a futures contract at $5-10 per tick maybe possible but can you really trade it safely with correct money management rules? In this case spot forex or micro-futures contracts might be a better option where lower stake trades are possible.


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Tony Loton

Tony Loton is author of the books Stop Orders published by Harriman House, Position Trading (Second Edition) published by LOTONtech, and Better Spread Betting at

Youre Profitable when You Take out More than You Ever Put in!

Trading with the Markets Money

If youve ever undertaken any form of gambling outside of trading, that is then the following thought will have crossed your mind at some point: If I double my money, I will then take back my original stake and play on with only my winnings. Youve probably thought the same thought when trading, and what you are effectively saying is that you would prefer to risk other peoples money than your own. Note that this kind of Other Peoples Money (OPM) is money that you have made in the market over and above what you originally staked; its not other peoples money that you have borrowed or which you are managing on their behalf.



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If you treat your trading as a business, then growing your trading account organically by reinvesting your profits (after taking back your seed capital) is no bad thing... just as it is no bad thing in business. Too many first-time businessmen (and women) throw endless amounts of their own money at their obviouslyfailing business ventures, and too many novice traders throw endless amounts of their own money at their obviously-failing trading accounts. The problem with the phrase only invest what you can afford to lose is that many first-time entrepreneurs and traders think they can afford to lose quite a lot of their redundancy payout, for example and so they promptly do lose it. Its time for a reality check. Once youve decided how much seed capital you need to fund your start-up trading business, stick to it, and dont throw any more good money after bad. If you start making good money, reward yourself by taking back your own risk capital (not too soon) and continue growing your account by reinvesting the money that is, the markets money that youre winning. Theres a lot to be said for the viewpoint that you should only risk in the markets the money that you actually made in the markets, rather than the money you earned in your day job or acquired via an unexpected inheritance. Youve got to start somewhere, with some of your own money, but the ultimate aim should be to make your trading selfsufficient... so that ultimately your trading account can comfortably start feeding money to you rather than you uncomfortably feeding money to it. So how do you trade with the markets money? Lets look at some ideas. Double Your Money, then Get Your Own Money Back For traditional investors the most obvious way to get hold of the markets money is to wait until one of your

stockholdings doubles in price, then sell half your shares and take back your initial invested cash. The residual position that is now funded by the markets money can run on, even in traditional long-term buy and hold fashion, with no risk to your original capital. Obviously you could do a similar thing when your investment has risen by only 20 per cent, i.e. take back your original stake and leave the 20 per cent profit to ride, but this could turn out to be a rather inefficient way of doing things. So en route to the 100 per cent profit that lets you take out what you originally put it, you might consider...

The Better-Than-Break-Even Stop Many traders like to trail their initial protective stop orders to break-even as soon as possible; sometimes too soon. Assuming that you dont do it too soon, once youve trailed your stop order to break-even (or even better, to better than break-even) you know that your position has become risk free* and youve locked in some of the markets money. Suppose you bought UK stock Lamprell at 75p-pershare, that you trailed your stop order initially to breakeven and that now you have trailed it even further to 100p-per-share. You have locked in 25p-per-share of

F1) The Markets Money Locked In With a Guaranteed Stop Order

On this profitable trade, some of the markets money is locked in with a stop order guaranteed!
Source: Tony Loton



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So far weve talked about how to lock in the markets money on individual positions, and how to recycle this money within a leveraged trading account such as a CFD account or spread betting account. But the ultimate aim should surely be to make the entire account self-sufficient. Make Your Trading Account Self-Sufficient By self-sufficient we mean that you have taken back from your trading account more money than you ever put in; which is when you know that youre really making money by trading. Henceforth your account is trading only the markets money. It can be useful to plot an alternative external equity curve. Not one that shows the rising and falling paper value of the positions within your trading account, but one which shows the monies that you

the markets money while leaving your position to ride even higher. In some leveraged trading accounts such as CFD and spread betting accounts you may even be able to get your hands on some of this locked in market money without closing the position prematurely, because the trading platform provider will likely raise your available trading funds in response to you trailing your stop order. * Nothing is actually guaranteed in this scenario unless you use... The Guaranteed Stop Your locked in market money is only truly locked in if you are willing (taking account of the fee and wider minimum distance-to-stop) and able (if your provider provides them) to utilise a guaranteed stop order.

The ultimate aim should surely be to make the entire account self-sufficient.
A lack of guaranteed stop orders shouldnt be too much of a problem if youre sufficiently diversified, but where they are available guaranteed stop orders can be worth their weight in gold (or in whatever else it is that youre trading). With a guaranteed stop order protecting your position at better than breakeven, you will definitely get your own money back... guaranteed! Figure 1 provides an example of the markets money locked in with a guaranteed stop order on a profitable trade. A leveraged trading provider is likely to reward you even more for locking in the markets money with a guaranteed stop order, by freeing up yet more trading funds. You can use these trading funds to grow your account organically from within, as an alternative to injecting more of your own money into the account. ever paid into or took out of the account. Figure 2 shows such an external equity curve. A lump sum scenario would be too boring to show, so this figure reflects a modest real-life spread betting account into which small amounts of the traders own money were fed in initially over time (the black columns below the horizontal) to the point at which the total funds invested (the red columns) reached 750. Thereafter, the account became sufficiently profitable for the trader to make a series of withdrawals (the black columns above the horizontal) culminating in a final withdrawal that took this external equity curve just net positive as indicated by the final red column above the horizontal. In simple terms: the trader took back a small reward of 25 from the account over and above what he ever deposited. Not a huge reward, but equivalent to a 3.3



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per cent return on the committed cash in this very modest example. Its not the end of the story, because this external equity curve tells us nothing about the amount of equity remaining within the account... which in this case was 300 worth of still-open positions. So having taken back all of his own money, plus a token 25 of the markets money, this trader continues to trade the now self-sufficient account using only the retained markets money. The example just given was based on a small but bona fide real-life trading account. It shows how a trading account can be taken from initial deficit to eventual surplus, and how the trader can begin to take out some of the markets money as reward for his (or her) efforts while leaving behind the greater part of the markets money to continue trading. Its a small example, but a real one. You can scale it up to suit your tastes, and if you can achieve the same thing in your own trading then youve achieved something significant. When to Take Your Money Back Figure 3 shows what the external equity curve would have looked like if the trader hadnt continued to trade; and had simply withdrawn the entire accumulated 325 profit (i.e. the markets money) from the account. It doesnt make much sense for the trader to cash in entirely upon making a 325 (50 per cent) return on a 750 investment, unless he really needs the cash or he fears a complete meltdown. A better approach would be to continue trading the markets money once hes taken his own money back; but even in this case it could be argued that he took back his own money too soon, because in either case he had risked up to 750 to make 325 worth of market money; a reward-risk ratio of only 0.5:1. So lets conclude by going full circle back to Double Your Money, then Get Your Own Money Back and suggest that he shouldnt take his own money from the account until he has at least doubled it.

F2) An External Equity Curve (Continues Trading)

An external equity curve that treats a trading account as a black box, so that all we can see is the Money In / Money Out (MIMO) and none of the retained equity within the account. Source: Tony Loton

F3) An External Equity Curve (Cashes In)

The same external equity curve as Figure 1, this time with the trader cashing in entirely to take the markets money off the table.
Source: Tony Loton


hometown: High Point, North Carolina interests: Reading, Mentoring, Writing, Family trading style: Swing Trading website:

Part 2: David Blair

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. This we hope gives developing traders more to learn from. Each interview of this series was conducted by Richard Chignell who is a trader himself. Please visit his blog at



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continue to move the price in my desired direction. I have other speculators to thank along with lady luck. Richard Chignell: How have these feelings changed over your trading career? David Blair: I used to take gains and losses personally by patting myself on the back for the former and beating myself up for the latter. Then I realised there are just too many factors involved to allow myself worth to be wrapped up in the speculative outcomes associated with an uncertain and ever changing environment that is the stock market. If a trader sticks with a solid plan with an emphasis on risk management, over time he or she will make money, not from being right quite often but by being wrong quite well. The only way to know this is to experience it over time with strict rules and flexible expectations. Richard Chignell: Do you have any practices that you do away from the trading screen to help you mentally and emotionally handle trading? David Blair: I workout in the mornings during the first hour the US equity markets are open, play golf, read, blog, and spend time with my children and their sports. Helping other traders via my Crosshairs Trading University (CTU) has been a tremendous benefit in helping me sharpen my focus when trading, which, in turn, benefits those I mentor. Richard Chignell: Have you always done this? David Blair: Physical activity has always been important to me and helps create a balance. I started CTU three years ago and it keeps getting better every quarter as my trading has improved along with my ability to better explain to others market structure and how to formulate a strategy to take advantage of the market environment. When you are open to learning, not only from the market but from others, you become a better person, a better trader, and a better mentor. When we no longer desire to improve we begin the process of dying. 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? David Blair: The gentleman who introduced me to trading taught me how not to trade. He was not a seasoned veteran but a ripe for the picking amateur with a passion for trading. Unfortunately, his passion led him to chase too many rabbits. Trading to him was all about multiple time frames on multiple monitors, numerous indicators, the latest stock market book or DVD, CNBC, anything that could help his dismal trading results. As I began to get rid of all these things while he added more my success took off while his failures continued to multiply. He could read a chart but could not trade. He never could understand the importance of the mental game. His failure to look within fuelled his search without. His failure proved to me that trading is not about a system but how well you develop and use the system. Successful trading is about commitment to focus, patience, and discipline, each of which must be developed outside the charts then applied within. My friend passed away last year after a long illness but the memory of the lessons he taught me will live on in me and in those I mentor for many years to come. Richard Chignell: If you could give aspiring traders one piece of advice about emotionally handling the market what would it be? David Blair: Keep it simple. All that matters is price and what we can control, so develop a trading process around current price and accept the outcome based on the future change in price. One is an action; the other a reaction. One we can control; the other we cannot. We'd like to thank David Blair 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 David Blair you can find him: On twitter @crosshairtrader Or on his website: Contact:

Richard Chignell: How long have you been trading? David Blair: Ten Years. Richard Chignell: What style of trading / investing do you practice? David Blair: Purely technical with emphasis on simplicity, looking for multi-day/week moves by following price with classical historic patterns on both weekly and daily charts, along with the aid of my carefully designed indicators.

Richard Chignell: How do you feel when a trade goes against you? David Blair: Ive learned that there is no way to know which trade will work and which will fail, but to experience one is to accept the other. The possibility of loss (for each trade) should be factored into every traders process allowing for acceptance of any outcome. Richard Chignell: How do you feel when a trade goes for you? David Blair: I feel like I got very lucky. The minute I begin to believe that I am making money because of an indicator or because of my chart reading abilities I have to step back and remind myself that the trade is working because there are enough speculators who agree with my trade and can

David Blair
Ive been trading the markets for over ten years as an independent trader and continue to work on my masters degree from the school of hard knocks. After several years of trial and error I developed a trading strategy I call Crosshairs Trading. Crosshairs Trading seeks to capture multi-day, multi-dollar moves associated with the characteristics of swing trading, utilising options of high volume and leadership stocks. I believe trading is easy but that the trader makes it difficult by not developing the focus, patience, and discipline necessary to navigate the volatile and uncertain nature of the financial markets. However, by developing and committing to a specific process, the speculator can experience the desired success necessary to stay in the game long after the less disciplined have quit. I enjoy reading, mentoring, and writing. I also enjoy watching my daughters compete in volleyball and playing golf with my son.


FPL Germany Trading Briefing

15 November 2012 | Frankfurt Marriott Hotel
Created by the Industry, for the Industry
The FPL Germany Trading Briefing is being organised by FIX Protocol Ltd, the global, non-profit industry standards organisation at the heart of the trading industry. Building on the success of the 2011 briefing, this event will provide a forum for debate, tackling the vital issues, challenges and opportunities impacting firms in the coming year. Business and technical topics will be explored over separate streams by 25+ impartial industry experts. The agenda, developed by senior German market participants who truly understand the needs of the local trading community, will explore:


FREE Passes Available for Buy-Side Representatives and an Allocation of FREE Passes Available to all FPL Member Firms

How Germany's financial sector supports economic growth The impact key changes in the German OTC derivatives markets are having on business processes How buy-side market participants manage fragmentation The implications and opportunities presented to fixed income market participants as a result of regulatory and technological change The impact of changing regulation on market infrastructure and trading in Europe How increased adoption of the FIX Protocol aided market progression over the past 12 months How the FIX Repository supports firms seeking to implement the protocol The findings of the Foresight Report into the future of automated trading

This event has received significant industry support from firms including:

town: Zug, Switzerland interests: Chess, Fitness trading style: Systematic Intraday- and Swing Trading website:

Faik giese
How to Successfully Build YOUR Trading Strategy
Faik Giese has a masters degree in electrical engineering and began trading the stock market in the mid-90s, initially working as a private trader. Following a short stint in commodities and futures trading, he went on in 1997 to specialise first in the US and later also in the European stock market. The same year he took a job in the trading department of a German bank where he could apply his experience with US markets. During the turbulent markets of 2000 and 2001 he implemented his equity strategies successfully; therefore, he was put in charge of the banks portfolio management as early as September 2001 after he had been with the company for only four years. Today, Faik Giese trades on his own account as a systematic day and swing trader with a focus on US stocks and exchange traded funds (ETFs) as well as options on stocks and stock indexes. He relies mainly on end-of-day analyses with intraday entries, volatility and chart patterns as well as gap analyses and news without ever losing sight of the fundamentals. Faik Giese is known as a trading coach as well as the author of numerous strategy articles published in TRADERS Magazine. Research-wise, his clients include hedge funds and asset managers on whose behalf he and his team develop, program and test strategies. On his website he also offers various training programs and regular market commentary.



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TRADERS: How did you get into trading in the 1990s? Actually, it was a combination of several coincidences that caused me to taste blood" at that time. Right after completing my masters degree programme in the summer of 1994, I started my first job as an electrical engineer at the Centre for Private Broadcasters in the German state of Rhineland-Palatinate (LPR). This is a public institution, so I already enjoyed job security at that time and was more or less able to plan my entire life right up to my death, including pension rights. After moving to a new home I was able, for the first time in my life, to receive cable television and so it was that I happened to be watching a news channel one evening when a programme on stocks was being aired that immediately piqued my interest. It was all about stock-price gains of three per cent or more. I figured that it would take my savings a whole year what good stocks just needed a day for. At the same time, I increasingly realised at the LPR that in the long term I was going to need a bigger challenge than was posed by my near-tenured position there. So I decided to participate in the stock-market game, soaking up all the books I could get hold of. My first few books were those by Peter Lynch, William O'Neil and Martin Zweig, all of which have left a permanent mark on my trading style until today.

practice several hours a week just to maintain my level of skills and not to lose against weaker opponents. Further improving my game took an even greater amount of time, which wasnt worth the effort for a part-time chess player. In those days, chess to me was something there wasnt any money in. When I discovered the stock market, I literally stopped playing chess overnight to devote myself entirely to studying the markets.

first implemented all the rules manually until I had completed the entire set of rules and then set about doing the programming for automation. TRADERS: How was your venture into commodities and futures? On my own account, I had in the 90s very good experience both with futures on stock indices, such as for example the DAX future, and currency futures

Each trading day brings something new.

TRADERS: Many traders experience good trading as something that should be boring. So is this fascination still alive today, is trading still your dream job? Or has that fascination by now been eclipsed by the daily routine in trading? Oh no, it hasnt, there is certainly no such thing as everyday routine in my trading at least not for the kind of diversified trading as practised by me, with all the fundamentals and group analyses. Each trading day brings something new and thats exactly what makes the stock market so fascinating, doesnt it? In my opinion, the stock market keeps you young and helps you not to get into a mental rut and to respond flexibly to new situations. However, successful trading is indeed boring inasmuch as there is no room for undisciplined behaviour including, for example, ignoring exit marks or failing to wait for suitable setups to develop. If anyone calls trading boring, they presumably follow a set of rules that are so strict that only some mechanical action is required. That raises the question, however, why this approach has not been programmed in order to allow automatic responses. With some of my strategies, I myself have as well as with commodities from coffee to wheat to maize and metals like gold, silver, and copper. However, when in 1997 I ended up at the trading desk of the bank I worked for, I realised after only a few weeks that customers speculating in futures almost lose their money faster than it took for their accounts to be opened. The customers usually had themselves to blame since they had no knowledge of any risk and money management and worked with position sizes that were inappropriate to the size of their account. But I wanted to build lasting relationships with customers and since I also have the greatest respect for limit-up and limit-down movements in futures, I focused relatively quickly on the speciality of the bank, which was the US stock market and the attendant US options markets. TRADERS: Which philosophy and strategies did you use while trading for the bank? Then and now my medium-term equity strategy was based on the application of a top-down approach combined with consistently implemented stoploss limits, conservative money management

TRADERS: What did you find fascinating about trading at that time? From the very first minute I was fascinated by the incredible potential of stocks, options, and futures and the fact that they made it possible for me to be financially independent. From the beginning, I had the feeling that the more time I spent on the subject, the bigger the resulting profit would be, which was exactly what chess, my main hobby until then, could not offer me at that time. As a club player, I had to



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and an individual-stock selection drawing on a combination of technical and fundamental analysis. The top-down approach means that you first look to see how the broad stock market is developing before even thinking about buying any shares. The other approach is the bottom-up approach. Here companies are analysed, and regardless of the current stock-market situation you enter those stocks that meet all the fundamental criteria. This method usually involves a value approach. Its bestknown protagonist is Warren Buffett who enters the stocks of those companies that he considers to be undervalued. From a purely mathematical point of view, however, at least three out of four shares will fall if a broad market index such as the S&P 500 falls over a period of several weeks. So why buy stocks when we have a bear market? At a very early stage, i.e. from mid-March 2000, the application of my overall market model gave me an initial red signal which resulted in me not taking any new positions. This I also communicated to my clients and most of them chose to follow the signals of my models. Concurrently, I was stopped out on all the stocks sometimes significantly away from the high, but still with good profits. During the year 2000, there were several counter-trend signals for buys that, on balance, were also successfully implemented. This caused a markedly positive return to be achieved in 2000, too, in most of the client portfolios managed by me. The first half of 2001 saw a continuation of this pattern: There were few buy signals and since most customers disliked engaging in any short selling, they would hang on to their cash and patiently wait for the crisis to end. Ultimately, we can say what was largely responsible for my success was sticking to my overall strategy which had been developed as early as the late 90s and specifically rules out buying in falling markets. What makes me particularly proud is the fact that the majority of the rules established then are still valid today, which means that the individual-stock strategy has ultimately stood the test of time.

T1) Strategy Overview

Time Window Strategy
Overall market model Broad-market strategies Medium-term trade Trend-following strategies, based on pure price action Individual-stock strategies Option strategies Volatility breakout strategies Pullback trading strategies (total of seven strategies) Swing trading (on closing-price basis, with and without intraday timing) Trend-following trading strategies based on breakouts Base reading Counter-trend trading Special short-selling strategies Option trading strategies Gap trading Volatility breakout strategies Day trading Counter-trend trading Trend-following strategies in individual stocks, futures, and forex Option trading strategies

Short Description
Responsible for identifying the market phase Strategies for broad-market indices (ETFs), based on broad-market, monetary, and sentiment indicators Suitable especially for MSCI-ETFs and currencies Approach combines technical analysis with fundamental analysis Income-generating strategies, directional and non-directional strategies Trading of explosive daily chart formations of selected stocks Covers trading of major, medium, and minor price declines; some strategies are 100 per cent automated Trading of fundamentally and technically strong shares combined with volatility and volume analysis; entry is made on intraday basis using volume and identification of resistance zones Trading on the basis of an analysis of sideways movements with or without the combination of fundamental data Trading against the overall trend Strategies trading solely in bear markets Trading of weekly options, delta-gamma trading Gap fading (trading against the direction of the gap) and gap continuation Trading of explosive intraday chart formations in specially selected stocks Trading against the direction of the daily trend of the stock or ETF These include: early-mover setup, breakout trading and breakout anticipation as well as base reading and pullbacks on the long and short side Trading of weekly options, delta-gamma trading

Table 1 shows a summary of the strategies used by Faik Giese in trading during certain phases of the market. Source: Giese Consult;



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1. Entry is made between 9.34 and 10.15 am New York time (3.34 - 4.15 pm in Germany). 2. The observations are made on the 1-minute chart. 3. The share price must be above $20. 4. The previous average daily volume must be above 10,000 shares per minute. 5. The stock opens with a positive gap of at least one and not more than six per cent. 6. The stock does not necessarily have to be above the previous days high, but there should be enough distance from the previous days high when the first consolidation occurs. 7. High Relative Strength: The stock is one of the biggest price gainers in the US individual-stock universe. 8. The stock has gained at least two per cent on the previous days close. 9. Entry is made in the direction of the trend taken by the stock in the first few minutes. 10. A consolidation of at least three, but not more than ten minutes is awaited. This break gives the trader time to prepare his order and place it. 11. Within the consolidation volatility and volume decrease visibly. 12. All the rules only apply in a market environment that is neutral or positive on a daily basis. This strategy may not to be traded in a bear market! 13. There is no trading right before news like important economic data or political decisions. 14. Only the first two consolidations will be traded. 15. Preferably, this setup should be traded with stocks that are among the market leaders. These are companies that are among the strongest growth stocks in the equity universe in terms of both price action and fundamental data. The last rule is optional; it does not necessarily have to be followed, and may, for example, be considered when too many trading opportunities are generated in one day. If the other rules apply, two different entry methods may be made use of:

TRADERS: Over the years, you have tested and applied many strategies. Could you give us an overview? Sure. First, there are four different categories: day trading, swing trading on the basis of daily closing prices, swing trading with intraday timing, and medium-term trading where positions are held for a period of between several weeks and months. In addition, there is the overall market model whose roles I have already explained. Moreover, a distinction must be made between strategies for options, individual stocks, sector ETFs such as, for example, on financial stocks and broad-market ETFs, such as the SPY which tracks the performance of the S&P 500 index. Each of these strategies again includes subcategories that are based on how each strategy generates its signals, based, for example, on sentiment indicators, technical analysis, and so on. Strategies may also be combined, or there are strategies, such as the overall market model, where certain other strategies are already included. In the case of the market model these are the sentiment and broad-market indicators. The strategy overview shown in Table 1 provides a summary of the trading models I have tested since 1997 and found to work well. In the last all but 15 years I have probably tested more than 500 systems or strategies, but only few of them have made it onto my list. The overview does not show that every strategy has a different degree of automation ranging from fully automated to semiautomated to not automated: A list of candidates can, for example, be generated automatically, but the strategy itself may not be automated. TRADERS: Please tell us about some of your best strategies in detail. For day-trading purposes, I use my early-mover strategy which tries to exploit strong price movements during the first hour of the trading day. The rules that apply to this strategy impressively show how much day trading in particular depends on the type of trade and trading style. The rules of the early-mover setup are as follows:

F1) First Solar (NASDAQ Symbol: FSLR)

The 1-minute intraday chart shows the First Solar stock on 26th January 2012. There are two entry points meeting the early mover setup criteria. Entry can be made either at the breakout point, or in the second case even within the consolidation, i.e. just below the breakout level marked with the black horizontal line. The stop is located between 40 and 50 cents below the entry price. Source:



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The toughest approach is actually that of placing a break-even stop and then not moving this exit mark any further. The goal is to keep the stock position for several hours at best, right to the end of the trading day. As my tests have shown, this is in terms of more than 100 trades by far the most profitable option. However, mental strength is absolutely essential here since even larger profits are given up and not stopped until the break-even point is reached. At this point, an important note is in order: In the first 60 minutes of the trading day, intraday volatility may be very high. For this reason it is advisable to trade the early-mover setup only if a software or trading platform is available that allows an order to be placed quickly. The setup sometimes originates within a few seconds, which calls for a quick response at both the entry and the exit level, i.e. the placing of stops. Consequently, this strategy is not suitable for every day trader. I personally use it only if I feel well, have had enough sleep and can be absolutely sure not to be disturbed by anybody. TRADERS: What does a strategy for somewhat longer time horizons look like? In swing trading with intraday timing, I enjoy using volume and volatility as additional criteria. One concept that I like making use of is based on the interpretation of the intraday volume which I therefore also call the intra-volume concept and use solely with liquid individual stocks. In addition to the method described here, the concept can also be used on the counter-trend-side both in swing trading and day trading. The option that I want to show here I use as a key weapon in bull markets with normal to low volatility, i.e. only when the broadmarket indices such as the S&P 500 or the NASDAQ Composite are in an uptrend. The first step after identifying the market phase is selecting suitable candidates. Figure 2 shows the way I proceed: I

Option 1: Buy within the consolidation (breakout anticipation). This entry can only be made if consolidation occurs somewhat lower. In Figure 1, this applies only to the second consolidation that also leads to a second entry. Option 2: Buy at the breakout, i.e. when exceeding the previous daily high. Figure 1 shows two examples of the First Solar stock of 25th January 2012. Option 1 is the original version, and its success rate is dependent on the exit. Option 2 makes a more favourable entry obviously at the expense of the success rate since the price movement doesnt necessarily have to continue beyond the days high. Options 1 and 2 may also be combined by using both entry points to build a position, which is known as pyramiding. Anyone interested should find out for themselves the more suitable entry option by locating at least 40 to 50 such trades in the 1-minute chart. TRADERS: Whats the exit strategy like that goes with it? The exit may also be made in various ways. The basic rules are as follows: 1. Stop-loss limit: a) One cent below the consolidation. b) Entry point minus average 1-minute range multiplied by a factor between 1.5 and 3 2. Minimum distance between entry point and stoploss limit: 15 cents. 3. Place break-even stop upon reaching old daily high (only in the case of entry according to Option 2). 4. Complete or partial exit if old high is not reached within five minutes (only in the case of entry according to Option 2). 5. Upon achieving a risk/return ratio higher than 3:1 consider partial profit-taking or placing tighter stops. 6. In the case of large price ranges on 1-minute basis, adjust stop immediately. 7. Watch out for false breakouts and respond to them quickly by placing tighter stops.

F2) Stock selection process sequence

Shown here are the steps taken to filter out the suitable candidates from the entire US equity universe. Volume serves as the liquidity criterion: The share price must be more than twelve dollars and the average 50-day volume at more than 250,000 shares. The two key fundamental criteria are: Profits and sales grow by at least 20 per cent. Technically, the stock should be near its all-time high or at least its 1-year high.

Source: Giese Consult;



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will combine technical analysis with liquidity and fundamental-data criteria. TRADERS: Can you please explain the criteria in more detail? Technically, the suitable candidates need to be near an all-time high or at least near a 1-year high. Also, a sideways movement of at least two months must have developed. As far as fundamentals are concerned, Im especially interested in profit growth and sales growth on a quarterly basis. Compared to the previous quarter, the company should have 20 per cent, preferably 25 to 30 per cent or more growth. An example of this is provided by Rackspace Hosting Inc., NYSE symbol RAX in Figure 3. In this strategy, I use as volume criteria an average daily volume of at least 250,000 shares and a minimum share price of twelve dollars. Quality has its price, so Im rather reluctant to go any lower on the latter criterion unless there is a new bull market after several months of a profound bear market. In addition, shares of less than ten to twelve dollars are usually ignored by reputable analysts. But its their recommendations that result in institutional investors such as pension funds, insurance companies, but also equity and hedge funds buying individual shares, thus driving the price of companies to new heights hopefully, after us small traders have entered the fray. TRADERS: How important is the selection of stocks? This is the most important step of all. Numerous studies conducted both by me and by universities have shown that the impact of a successful selection is significantly greater than that of perfect timing, i.e. the kind of entry that is precise/perfect right down to a few cents. That this statement is correct is shown by the mere observation of the performance of certain sectors over several months. In each bull-market cycle, there are certain sectors that perform significantly better than others. In the current environment (February 2012),

F3) Rackspace Hosting (NYSE symbol: RAX) Daily Chart

The daily chart shows the Rackspace Hosting stock over the period of March 2011 to February 2012. For more than four quarters, sales and profits per share have been rising at a rate of more than 25 per cent, and on 1st February 2012 the share price was only slightly below its all-time high. The breakout on 2nd February 2012 resulting in an entry (see also Figure 4), was preceded by a decrease in volume and a narrow sideways movement of prices as a sign of a decline in volatility.

F4) Rackspace Hosting (NYSE symbol: RAX) Intraday Chart

The 1-minute chart shows the Rackspace Hosting stock on 2nd February 2012. Entry was made above the 3-minute consolidation in the first five to six minutes of the trading day after the intraday volume indicator had also shown an increase in volume of more than 140 per cent above the 50day average (see indicator at the bottom of the chart).



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much higher likelihood of a sustained breakout. This raises the question of how to measure within the trading day whether volume is above average. For the strategy has. Hypothetically, an aggressive swing trader risking 0.5 per cent of his total account per position would on this trade have achieved an increase of twelve per cent on his account within those nine days. By the way, the success rate of this approach is not particularly high. Depending on the method of exit selected, it is between 30 and 50 per cent. By the same token, the ratio of average profit to average loss is between 7:1 for hit rates of 30 to 35 per cent and 3:1 for hit rates of around 50 per cent. TRADERS: What are the criteria for exiting a trade? As is the case with all strategies, the exit plays a decisive role in terms of the hit rate. The option easiest to implement is to hold the position on the day of entry overnight only if it shows a book profit and to consider a partial sale only if the position is at least three times the initial risk on the plus side. Every trader should derive his own appropriate exit rules based on sample-trades from the past to develop a feel for how

a particularly large number of shares originate in the Internet sector, from online tour operators to Internet network solutions, so-called cloud computing. The

The exit plays a decisive role in terms of the hit rate.

RAX stock, shown in Figures 3 and 4, is included in this group. So in periods when the strategy is traded, the focus should definitely be on the selection, which in my case means that I spend 30 to 60 minutes every day and a little more time at the weekends trying to understand in fundamental terms as well group behaviour and the products of individual companies that I very much like on the basis of technical analysis. I want to understand what makes the market tick and which industries promise the largest jumps in profits and sales. If, for example, there is a marked increase in the number of unemployed, this will result in less spending. In such an economic climate, cars and homes are repaired much more frequently instead of new ones being bought. This will profit DIY stores and dealers of car spare parts such as Home Depot or AutoZone. While such considerations sound logical, they are not automatically on everybodys mind, and while such knowledge helps when implementing the strategy presented here, it is not an absolute requirement. Buying shares at just below their high is an approach that already works well in combination with fundamental criteria. TRADERS: How do you find the right entry? To identify the exact point, it is necessary for both volume and volatility to decline within the sideways movement. I then identify the next resistance zone on the daily chart and wait for the stock to break out above this zone. At that moment I switch to a 1-minute intraday chart to monitor the volume behaviour of the stock. If there is a breakout through the resistance zone with above-average volume, there will be a this purpose, I have programmed an indicator that accumulates volume and compares it to the average volume of the respective stock at the time in question. As can be seen in Figure 4, it is easy to identify in this way whether the breakout has occurred with strong volume. Figure 3 shows the RAX-daily chart. After entry had been made on 2nd February 2012 with intraday timing at $44.94 and an initial risk of 50 cents per share, the stock as shown in Figure 4 reached a high of $56.94 nine days later. This represents a risk/return ratio of 24 and demonstrates impressively what potential

F5) Apple Inc. (NASDAQ Symbol: AAPL)

Figure 5 shows the Apple daily chart with volume over the period of September 2011 to February 2012. Following the stocks opening on 25th January 2012 with an earnings gap, there is a two-day correction in a low daily range and with declining volume. As early as the third day the potential day of entry , the stock continued its upward trend.



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of attention only a few days ago when the quarterly report was released, suddenly no longer piques the interest of the public, as is shown by the decline of volume and volatility. This is often the time when successful fund managers decide to act again and buy. If the stock then reaches a new high, it will suddenly reappear on the radar of most traders. Hence, the continuous maintenance of an appropriate watch list or candidate observation list is crucial to this setup. The technical setups of the three strategies presented have been the result of a study of the market, i.e. of the regular monitor of thousands of stock charts both on an intraday and a daily basis. Subsequently, I have organised my thoughts with a view to programming and testing at least some components such as, for example, the entry. TRADERS: What is the process of strategy development like? My approach is certainly not an academic one. But over the years I have found what in my opinion is a very effective and efficient way of developing a strategy. It always starts with an idea. This idea may arise from an observation based on literature, or simply from a sudden inspiration, i.e. a thought that crosses my mind, and I say to myself, This might well be worth investigating. Frankly, I get more ideas that way than I actually have time for. The next step is a very important one, namely to answer the question: What do I want to achieve with my idea and where do I want to be at the end of the process? Do I want to develop a swing-trading strategy where I have to watch the market during the trading day, or do I prefer the end-of-day version? These things define the first part of the goal. This also includes the answer to the question to which market environment the strategy is to be of the greatest possible benefit: to volatile downward phases, sideways movements, or a bull market? Otherwise there is a danger of a strategy being developed for those market phases that different or better strategies already exist for. Defining the goal should be consistent with existing technical conditions. Which software and

much profit you are actually willing to give up to allow the open gains to run. I personally try to hold parts of positions as long as possible in the first four to five months of a bull market since when using the setup presented here and making the appropriate selection, the candidates frequently rise 20 per cent or more within a few weeks of a successful breakout. TRADERS: Thanks for the detailed explanation. Can you describe to us yet another setup? Another swing trading strategy is BaG. BaG stands for Base after Gap, a base forming after a positive gap. Just like the setup described earlier, it can result in the position being held over several weeks. Following the release of important data, a stock forms a positive gap and on this gap day marks at least a 1-year high, preferably an all-time high, as is well illustrated in Figure 5. While this setup is relatively common at the time of the quarterly reporting season, only few stocks meet all the criteria. The liquidity and fundamental criteria as well as the selection process are the same as with the previous strategy. In the technical setup, there is after the gap day at least a two-day sideways movement or correction, which is marked by drying up volume and a decrease in volatility measured on the basis of the days range. The setup will still be valid even if the stock is capable of continuing to gain after the gap day. What matters is the subsequent correction. Entry may be made either within the sideways movement or not until the breakout beyond the highest point of the sideways movement. Since a certain timing for entry is not absolutely necessary, the strategy may also be implemented by traders who cannot spend the entire US trading day sitting in front of the screen and/or have no way of automating their entry. Exit can be made along the lines of the previous strategy. With this setup, it is recommended that a break-even stop is placed as early as the second day. At the latest, the stocks momentum should increase after reaching new highs. Otherwise it is likely to drift into a sideways movement. What I find particularly fascinating about this setup is the fact that a stock that was at the centre

data are available? Its no use, for example, developing a swing-trading strategy for individual stocks if the software allows only limited portfolio backtesting or none. The US equity universe includes several thousand shares. A software program that allows me just to test the strategy on a portfolio of up to 100 shares is of little help. The second part of that goal is to define the desired maximum drawdown and the volatility of the performance curve. The maximum drawdown, in combination with the distribution of trades on the basis of risk/return and hit rate, provides an important indication of which direction the risk per trade can be changed to in order to achieve the best risk/return ratio. The precise definition of the goal is key to a developed strategy actually



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results are satisfactory will the out-of-sample period and then the entire period be studied. So the following steps first apply to the in-sample period and then to the other two periods. Testing the entry signals over different holding maximum loss or more? How often does a position achieve twice its initial risk? Examining the reasons for drawdown phases: To understand the strategy, it is absolutely essential to conduct a detailed study of what causes major

being capable of being traded in practice. The subsequent steps are: Determining and calculating a reference value, a so-called benchmark. Will the idea give me a

How often is a position stopped out with maximum loss or more?

mathematical edge? Any approach even if it is, for example, a trend-following one with a success rate of less than 40 per cent should have an advantage over this benchmark over a certain holding period of, for example, 20 trading days. This is precisely what the next step is for. periods to verify over which investment horizon the idea has a mathematical edge on the entry side. Incorporating exit techniques: Usually, albeit not necessarily, this starts with the implementation of the stop-loss limit, followed by profit taking stops, time-dependent exit techniques, and so on. The subsequent portfolio simulation can only be carried out once all entry and exit rules have been established. It shows what kind of return and drawdown can be expected. Of particular importance in this step are also the realistic assumption and consideration of slippage the difference between the intended and actual entry and exit price and transaction costs. If there are tests on individual stocks, a database should, if at all possible, be available for the portfolio simulation. This database should also include shares that used to be listed in the past but arent any more today. Otherwise, there will be inaccuracies due to survivorship bias. Standardisation in terms of profit/loss ratios. If, for example, a 10-per cent stop is used and the profit amounts to 20 per cent, this will result in a ratio of 2:1. Determining the distribution of the profit/loss ratios: How often is a position stopped out with performance setbacks to occur in the simulated portfolio development. Are certain industries responsible for the drawdown? Were there any unusual events? Extending the period which will be tested. Modifying the entry and/or exit rules, if necessary. Conducting a rerun of the previous six steps with different variations of stop-loss limits and all sensible exit techniques. If necessary, finally defining the circumstances under which the strategy requires a discretionary intervention. Expanding the backtesting period by the outof-sample period and corresponding portfolio simulation runs. Determining the maximum drawdown and the maximum drawdown period as worst-case exit. When do I suspend trading at the latest? Regularly reviewing the differences between simulated trades and those actually made in practice. Were slippage assumptions perhaps too optimistic? If so, a new simulation run will be required.

Determining two to three periods of so-called in-sample tests and out-ofsample tests. In-sample defines the period during which the simulation initially runs. Not until these

TRADERS: Many traders who have at one point developed a strategy that works and apply it are uncertain during drawdowns whether it is a normal setback or whether the strategy no longer works. How do I know which is true? This problem and the answer to it are the reason why I rarely or only in highly exceptional cases pass



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only thing that helps here is flexible risk and money management. TRADERS: Please describe to us how fully-automated trading works for you. Entering and closing out positions is done via programmed trading strategies that run on a computer with appropriate software receiving stock prices in real time. A peculiarity of this fully automatic trading is that in the run-up traders usually spend several months if not years working on implementing their ideas and programming them. By the same token, though, once that work has been completed, all they have to do is monitoring the process. Figure 6 provides an example of an automated swing trade according to the rules of Strategy 2 TRADERS: What is the difference between fully automatic and semi-automatic trading? In semi-automatic trading, entry, exit, or stock selection methods in day trading are programmed as individual components. I still have a certain degree of freedom of choice in my trading, but minimise errors at the same time and let the computer do the bulk of the work, which in turn increases effectiveness. Once again, the chart in Figure 6 can serve as an example of semi-automatic trading. Imagine disabling the strategy after an automatic entry has been made. At that moment, you have made a fully-automatic entry, but manage the open position until your exit is in a discretionary manner. Incidentally, such an approach is not rare in my trading, which is particularly the case when I try to hold positions overnight in order to achieve maximum risk/return ratios. TRADERS: Please describe to us how you typically spend your trading days. My entire daily rhythm is geared to trading on the US stock market. Since regular trading hours there are from 3.30 to 10.00 pm German time, there is enough time left for conducting a detailed analysis of the previous day as well as preparing for trading in the afternoon.

on fully-automated strategies. A trader who has not gone through the complete development process for his strategy that I have just outlined and is not in a position either to carry out subsequent simulation runs, can only orient himself to simulation results produced by a third party. However, he doesnt have the opportunity to examine the previous drawdown phases in detail. By contrast, a trader who has tested his strategy in detail himself and adhered strictly to the process of strategy development, has already defined at the development stage exactly when he suspends trading his strategy in order to subject the latter to a general inspection. As a rule of thumb, I would suspend trading a strategy at the latest when the drawdown is twice as high as in the simulation. For that to happen, though, the strategy should have been tested at least for ten years. TRADERS: How do you proceed when trading several strategies together in one portfolio in order to achieve the most stable overall return? For each market phase, I can draw on at least three strategies. In a bull market of the kind we currently experience (mid-February 2012) this mix includes breakout strategies, two of which I have previously described, and pullback strategies trading price declines of varying degrees in an uptrend. Looking at every strategy and every position, I measure the open risk that defines the difference between the entry and exit price. If the risk exceeds a certain limit, no further positions will be taken. As far as the correlations are concerned, it should be noted that these change permanently. A transition of the broad stock market from the bull to the bear market will after a few weeks at the latest almost certainly lead to a correction in those stocks that until then had correlated little or not at all with the broad stock market. Its a similar thing in strategy diversification: Money is made in a bull market by betting on rising share prices. If there is a market correction, it does not matter whether I entered because of a breakout or a pullback. The

F6) Whole Foods Market (NYSE symbol: WFM)

Figure 6 shows the Whole Foods Market daily chart with volume over the period of October 2011 to February 2012. Entry is made in accordance with the rules governing strategy 2, albeit fully automatically in intraday trading (not shown in the daily chart). The exit has also been programmed, but it will usually be deactivated and the exit made by a discretionary decision.



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new additions. So even during day trading, my swing trading is always present, albeit in the background. Depending on how I feel and my coaching activity leaves me enough time to do so, I may also engage in active day trading solely during the first of three TRADERS: What do you think is the biggest obstacle to any advanced traders aspiring to be permanently among the best? One of the biggest obstacles is to see yourself as the best trader after a profitable period. As a coach and judging from my circle of acquaintances mainly comprising traders, I know the reasons for this can be complex. Two reasons that Ive already seen several times are arrogance after a long winning streak and the failure to realise that even the best trader needs constant training. Or why else would basketball superstar Dirk Nowitzki or football superstar Lionel Messi train every day? In my opinion, hard work in combination with a certain humility vis--vis the market, is the best recipe for success. TRADERS: The ultimate goal of most traders is the sense of freedom have you achieved this personal freedom for yourself? Almost every morning I wake up and look forward to the trading day and doing my job. I also know some people who hate their jobs. Unlike them, I was able to make my hobby my profession, allowing me to enjoy all the free choices that I want to make: I am my own boss and decide for myself if and when I want to trade. TRADERS: What are your plans for the future, and how much trading will there be? Currently, I am heavily involved in a very timeconsuming research project for a Swiss hedge-fund company. This will continue for some more months alongside my trading. I would not categorically rule out actively working again in the fund management sector one day, but currently there are no such concrete plans yet. I just try to enjoy whatever freedom trading can offer me. Within the next few years, I will certainly take a long trip to the West Coast of the United States, which would be my first real holiday again after 15 years. However, I cant imagine leading a life without trading being the centre of my professional activity. I just live to trade!

At 8.30 am I start updating my share-price databases and reading various financial papers and news feeds. This way, I combine the review of the previous trading day with making preparations for the afternoon trading. Its the review in particular that I consider to

Every morning I wake up and look forward to the trading day.

be very useful: Only if I learn from my mistakes and look for the reasons why I have missed certain sharp price movements can I improve my trading! I follow a number of strategies in both day trading and swing trading where positions are held overnight for several days. I manually match corresponding lists of potential candidates for the appropriate strategies that I create by using a computer. Provided my other business activities allow me to do so, I will engage in sporting activities at around 11 am, going to the gym, swimming, or playing tennis. Once my lunch break is over, the hot phase of the day begins. Swing-trading orders on the basis of the daily closing price are already being entered and the automated strategies I use here are set on alert, so I can trade them directly by pushing a button. For short-term strategies with entry on an intraday basis, I will prepare my charting software and proprietary indicators as shown, for example, in Figure 4 in such a way that they give audible and visual signals following certain price action. This concludes my preparation for swing trading as early as around 2.45 pm and is followed by a short break prior to my focusing on day trading from 3.15 pm onwards. In day trading I start by observing price gaps at the opening of the market. This is followed by special setups, one of which the early mover I have described to you. There are also other setups according to which I trade. Again, the following applies here as well: Having programmed and automated very many criteria, I can keep control of my portfolio and potential periods of the trading day or only during its final four to five hours. Especially in low-volatility bull markets, I like to limit myself just to observing my setups in shortterm trading and to waiting for my entry signals to be triggered as well as restricting myself in day trading to the six to eight most volatile individual stocks. My trading day ends when the markets close at 10 pm. TRADERS: What is your average discretionary trading component? Do you also have purely discretionary strategies? This varies from strategy to strategy, but is no more than 25 per cent. The moment I have to think for more than a few minutes, I know that the strategy has too high a discretionary component and the systematic component needs to be strengthened. I would like to make decisions that are as independent as possible of my personal well-being and mental state. TRADERS: Looking ahead, do you see tradings greater potential more in automatic or discretionary strategies? For private traders, rather in systematic strategies with discretionary components. The past, especially the last bear market from July to September 2011, has shown that any fully automatic trading strategy needs to be revised sooner or later. Or a discretionary intervention will be required. Of course, in the years ahead pure intraday high-frequency trading (HFT) will continue to exist, but this kind of trading will certainly be irrelevant to the private trader.


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The basic premise of consistently profitable market engagement is cutting your losses short and letting your winners run. If you cant take a small loss, sooner or later you will take the mother of all losses. As a position moves in our favour, we are supposed to move our stops to protect some of the profits. Discipline should always trump conviction. Never say never and never fall in love in anything that cant love you back. Sounds reasonable, sounds wise, but when algos go wild, it might turn against you. I saw a lot of frustrated people on the StockTwits stream on 1 August due to the multiple mini flash crashes and decided to follow up with a few suggestions how to deal with this issue: 1) Most long-term trend followers use closing prices for their entries and exit signals. In the words of a legendary trend follower Ed Seykota: Having a quote machine is like having a slot machine at your desk you end up feeding it all day long. I get my price data after the close each day. Occasionally staying away from your screen has its benefits. If you are an intraday trader, days like today are called an opportunity. 2) Limit your market exposure during noisy market periods. Safety is derived from the timing of your market engagement and position sizing. Proper timing doesnt consider only the technical characteristics of the setup, but also the overall market environment at the time. Market is healthy two to three times a year and this is when the majority of money is made. Trading during the rest of the time will only frustrate you. For example, I made the bulk of my profits in the first four months of the year. After that, I have little to show. A lot of chop, a lot of efforts and basically a little better than breakeven since May. 3) Use option spreads to limit your risk. Of course this is applicable only to liquid stocks.

Ivan Hoff

Ivan is a professional stock trader. He manages the well-known StockTwits 50 list, and he was featured in The Stocktwits Edge, which he edited. Contact:, Twitter: @ivanhoff

I have friends who gave up on the stock market after the flash crash event on May 6th, 2010. They were like: I had my money in trends I understood and stocks that I liked, I had my stops in place just like I was taught and bam, on May 6th I was stopped out of all my positions at prices below my stops. I am not going back, ever. I understand them completely. We have all heard it a thousand times: