THE TRADERS’ MAGAZINE SINCE 1982

www.traders.com APRIL 2022

STOCK MARKET
SEASONALITY
Sell in May? 8

PROFITING FROM
BEAR MARKETS
Simple technical rules 18

ON BEING WRONG
IN THE MARKETS
And still being profitable 22

BEATING THE INDEXES

With fundamental analysis 26

PROFITABLE
DAYTRADES WITH
CANDLESTICK SIGNALS
From 1 minute to 1 hour 32

INTERVIEW
Ric Edelman 36

APRIL 2022
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 CONTENTS APRIL 2022, VOLUME 40 NUMBER 5

6 Daytrading Shorts 32 Profitable Daytrades With

Using Two-Day Lows Candlestick Signals
The Traders’ MagazineTM by Ken Calhoun by Stephen W. Bigalow
The strongest short setups occur Candlestick signals and patterns
EDITORIAL
when price action loses the prior are as effective on a one-minute
editor@traders.com day’s low. chart as on a monthly chart. Here’s
Editor in Chief Jack K. Hutson
a look at using candlestick signals
FEATURE ARTICLE to locate high-probability daytrade
Production Manager Karen E. Wasserman
Art Director Christine Morrison
8 Stock Market Seasonality TIPS setups.
by Markos Katsanos
Graphic Designer Wayne Shaw
Webmaster Han J. Kim
Should you sell in May, or later in 35 Market Rap
the summer, or never? Is October by Emilio Tomasini
Contributing Editors John Ehlers,
Anthony W. Warren, PhD. the best reentry month? Which “Unserious” thoughts on serious
Contributing Writers Thomas Bulkowski, Martin Pring, are the best and worst months for topics in finance.
Barbara Star, Markos Katsanos, Leslie N. Masonson, the stock market? And are there
Karl Montevirgen
statistically significant seasonal INTERVIEW
patterns in the equity markets? Can 36 A Conversation With
OFFICE OF THE PUBLISHER we improve on a seasonal system Ric Edelman
Publisher Jack K. Hutson using other technical conditions? by Leslie N. Masonson
Industrial Engineer Jason K. Hutson
Project Engineer Sean M. Moore Read on to find out. Ric Edelman founded the Digital
Assets Council of Financial
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http://www.traders.com & Commodities contributing
Staff members may be emailed using first initial
22 How To Still Be Profitable writer and ETF columnist Leslie
plus last name plus @traders.com While Being Wrong More Masonson spoke with Ric Edelman
Than Right In The Markets to discuss his successes and
Author­i­za­tion to pho­to­copy items for inter­nal or per­sonal
by Reza Javaheri experience, his advice to investors,
use, or the inter­nal or per­sonal use of spe­cific cli­ents, is grant- On the road toward profitability and his expertise and insights into
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Sin­gle copies of most past issues from the cur­rent year are
Long-Term Trading world.
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 TRADING ON MOMENTUM

Scanning for Stocks to Daytrade Short

Daytrading Shorts Using

Two-Day Lows
The strongest short setups occur Look out below: loss of the exact prior day’s low. In Figure 1,
when price action loses the prior prior day’s support the short entry would be near $11.5.
day’s low. Whenever stocks get under their prior The cover stop-loss value would
day’s low, high-frequency trading be the prior day’s low, for example,
by Ken Calhoun programs start selling, and so should $11.8 in Figure 1. I use 50% of the

W
hen scanning, be on
the lookout for stocks
that ended the prior
day near the intraday
low, as seen in Figure 1 of Palantir
Technologies (PLTR). As market
volatility increases, short selling
becomes increasingly popular. This
month I’ll describe a basic core strat-
egy for daytrading shorts.
we as active traders. To avoid false
breakdowns, it is smart to put your
short entry trigger $0.20–$0.40 under
I prefer shorting only
for intraday trades,
because the risk of
holding shorts overnight
is unacceptably high.
prior day’s range for exit targets; in
this example that would be ($12.7 −
$11.8 = 0.9)/2 = 0.45; ($11.5 − $0.45)
= $11.05 exit target.
Step-by-step action plan
Here’s how you can start using this
strategy:
Step 1: Find a stock that has been
trending down and closed near

eSIGNAL

FIGURE 1: SHORTING THE LOSS OF PRIOR DAY’S LOW. The loss of the prior day’s low led to a nice breakdown for shorts.
6 • April 2022 • Technical Analysis of Stocks & Commodities

Be on the lookout for
stocks that ended
the prior day near the
intraday low.
its low.
Step 2: Place a short entry at $0.20
below the prior day’s low.
Step 3: Once the order is filled,
place a cover stop at the prior day’s
low price.
Step 4: Trail a cover stop at no
more than $0.40 to lock in profits
on your winning short entries.
Insights: Why this
technique works
As with many pattern-based day-
trading strategies, we seek to follow
institutional order flow using open/
high/low/close (OHLC) price trig-
gers. Loss of prior day’s lows gen-
erates new short order flow we can
trade on price action momentum. It’s
also the place at which existing longs
stop out of their positions, generating
additional sell pressure.
Trade management tips
I prefer shorting only for intraday
trades, because the risk of holding
shorts overnight is unacceptably
high due to adverse gaps. As with
long breakouts, you are encouraged
to use position sizing and scale into
winners once they continue in your
favor. Pay attention to small consoli-
dation regions and tighten cover stop
if price fails to continue down after
15 minutes of consolidation.
Ken Calhoun moderates a popular
live trading room for active traders.
He is the founder of TradeMastery.
com, an interactive webinar site
for active traders, and is a UCLA
alumnus.
If you sold any physical gold or financial or derivative instrument
where gold is the underlying reference asset, or you bought gold put
options in transactions conducted over-the-counter or in whole or in
part on COMEX or on any other exchange in the United States between
January 1, 2004 and June 30, 2013, you may be affected by two recent
developments in class-action settlements.
First, there is now a new and additional proposed settlement (the “Third Settlement Agreement”) for
$50,000,000 reached with Barclays Bank PLC, The Bank of Nova Scotia, Société Générale, and The
London Gold Market Fixing (the “Newly Settling Defendants”). Defendants deny any liability, fault,
or wrongdoing of any kind in connection with the allegations in the Action. By entering into their
respective settlements, Defendants have not admitted to any such liability, fault, or wrongdoing, and
nothing in the three settlement agreements or this Notice shall be construed as such an admission.
Second, in connection with earlier settlements totaling $102 million, class members were asked to
exclude on their claim forms positions opened and closed the same day. You must submit a revised claim
form to benefit from a proposed change that would instead allow such claims in part. You may also
be heard to object to this proposed change, or the Plan of Allocation generally. You may also exclude
yourself from the earlier settlements. Please see www.GoldFixSettlement.com for additional details.
Revised claim forms are due by April 19, 2022.
The United States District Court for the Southern District of New York (the “Court”) authorized this
Notice. The Court has appointed the lawyers listed below to represent the Settlement Class in this Action:
Merrill Davidoff Daniel Brockett
Berger Montague PC, Quinn Emanuel Urquhart & Sullivan
1818 Market Street, Suite 3600 51 Madison Avenue, 22nd Floor
Philadelphia, PA 19103 New York, NY 10010
Who Is a Member of the Settlement Class? The proposed Settlement Class includes:
All persons or entities who during the period from January 1, 2004 through June 30, 2013, either (A)
sold any physical gold or financial or derivative instrument in which gold is the underlying reference
asset, including, but not limited to, those who sold (i) gold bullion, gold bullion coins, gold bars, gold
ingots or any form of physical gold, (ii) gold futures contracts in transactions conducted in whole or
in part on COMEX or any other exchange operated in the United States, (iii) shares in gold exchange-
traded funds (“ETFs”), (iv) gold call options in transactions conducted over-the-counter or in whole or
in part on COMEX or any other exchange operated in the United States; (v) gold spot, gold forwards
or gold swaps over-the-counter; or (B) bought gold put options in transactions conducted over-the-
counter or in whole or in part on COMEX or on any other exchange operated in the United States.
The capitalized terms used in this Summary Notice if not defined herein are defined in the detailed
Notice of a New and Additional Proposed Class Action Settlement (“Notice”) and the relevant settlement
agreements, which are available at www.GoldFixSettlement.com. If you are not sure if you are
included in the Settlement Class, you can get more information, including the detailed Notice, at www.
GoldFixSettlement.com or by calling toll-free 1-844-271-4787 (if calling from outside the United
States or Canada, call 1-267-238-9078).
What is This Lawsuit and What Do the Settlements Provide? This lawsuit alleges that the Defendants
engaged in anticompetitive acts that affected the market for gold. If the Court gives final approval to all
three Settlements, there will be a total of $152 million in recoveries, and the case will come to an end.
Will I Get a Payment? If you are a member of a Settlement Class and do not opt out from that class,
you will be eligible to file a Proof of Claim and Release (“Claim Form”). The amount of your payment
will be determined by the Plans of Allocation. Details about the Plans of Allocation are available at
www.GoldFixSettlement.com or by calling toll-free 1-844-271-4787 (if calling from outside the United
States or Canada, call 1-267-238-9078). A date for distribution of the Settlement Funds has not been set.
Claim Forms (new or revised) must be submitted by April 19, 2022. If you filed a claim in connection
with the prior two settlements, that information will be treated as a claim in connection with the Third
Settlement Agreement with no further action required on your part.
What Are My Rights? If you are a member of a Settlement Class and do not opt out, you will release
certain legal rights, as explained in the detailed Notices and Settlement Agreements, which are available
at www.GoldFixSettlement.com. If you do not want to take part in the original settlements you must
opt out by April 19, 2022. If you do not want to take part in the Third Settlement Agreement, you must
opt out by April 19, 2022. You may object to the Third Settlement Agreement and/or application for an
award of attorneys’ fees, payment of litigation costs and expenses, and/or service awards for Plaintiffs for
the Third Settlement Agreement. You may also object to the Plans of Allocation. If you want to object,
you must do so by June 24, 2022. Information on how to opt out or object is contained in the detailed
Notices, which are available at www.GoldFixSettlement.com. Even if you filed an opt-out request
in connection with the prior two settlements, you must do so in connection with the Third Settlement
Agreement if you do not want to be bound by its terms.
When Is the Fairness Hearing? The Court will hold a hearing at the United States District Court for
the Southern District of New York, Thurgood Marshall United States Courthouse, 40 Foley Square,
Courtroom 443, New York, NY 10007, on August 5, 2022 at 10:00 AM to consider whether to finally
approve, among other things, the Third Settlement Agreement, Co-Lead Counsel’s application for an
award of attorneys’ fees and expenses in connection with the Third Settlement Agreement, and the
Plans of Allocation. Given the current COVID-19 situation, the Court currently expects to allow
participants to attend in-person or remotely using the following dial-in information: 1-888-363-4749,
using the access code 3121171, and the security code 2548. Class counsel, defense counsel, and any
objectors must attend in person. You or your lawyer may ask to appear and speak at the hearing at
your own expense, but you do not have to. Any changes to the time and place of the Fairness
Hearing, or other deadlines, or the process for attending remotely, will be posted to
www.GoldFixSettlement.com as soon as practicable.
For more information, call toll-free 1-844-271-4787 (if calling from
outside the United States or Canada, call 1-267-238-9078)
or visit www.GoldFixSettlement.com.
**** Please do not call the Court or the Clerk of the Court for
information about the Settlements. ****
April 2022 • Technical Analysis of Stocks & Commodities • 7
 TRADING SYSTEMS

Sell In May?

Stock Market Seasonality

Should you sell in May, or later in the summer, or
never? Is October the best reentry month? Which
are the best and worst months for the stock market?
And are there statistically significant seasonal pat-
terns in the equity markets? Can we improve on a
seasonal system using other technical conditions?
Read on to find out.
ent a hybrid seasonal system using the best seasonal
pattern derived in the first part of this article, adding
other technical indicators or conditions in order to
improve its performance.
Monthly statistics
The first step in a seasonal study would be to examine

S
each month separately. Do some months have signifi-

“ ell in May and go away, buy in October and cantly different stock market returns than others? In
stay sober” is one of the most well-known Figures 1 and 2 you can see the monthly performance
adages in the financial world and it is based of the SPY ETF during the last 10 and 30 years. The
on the theory that the stock market under- initial trading amount is a fixed $100,000 per year and
performs in the summer months. no compounding of profits, commissions, dividends
Historical data have generally supported this popu- or interest are taken into account.
lar apothegm. According to a study by the Corporate It is evident from the test results that some months
Finance Institute (see “Further reading” at
end), the S&P 500 index has gained since
1945 a cumulative six-month average return
30 YEAR PERFORMANCE
% Ulcer Highest
of 6.7% in the period between November Month Net Profit Car %
Winners
Pf Maxdd
Index Vix

through April compared to an average gain January $13,500 0.42% 56.7% 1.3 −23.8% 10.7 57.4

of around 2% between May and October. February $251 0.01% 63.3% 1.0 −30.2% 11.1 53.2

A more thorough academic study by Ja-

March $12,900 0.41% 60.0% 1.3 −23.5% 5.9 85.5
April $76,500 1.91% 80.0% 6.2 −10.2% 2.0 60.6
cobsen et al (see “Further reading”), which May $23,000 0.69% 70.0% 1.6 −15.5% 6.5 48.2
looked at all the available stock market data June −$1,170 −0.04% 50.0% 1.0 −30.4% 13.6 44.4
from 65 countries around the world going July $37,500 1.07% 60.0% 2.2 −26.2% 8.5 48.5
as far back as 1693, confirmed that stock August −$8,800 −0.31% 63.3% 0.8 −29.1% 15.2 53.3
market returns were on average 4% higher September −$16,800 −0.61% 53.3% 0.7 −36.2% 20.6 49.4

during November to April than during the October $49,850 1.36% 66.7% 2.4 −20.6% 4.7 89.5

May to October period. November $67,400 1.73% 83.3% 3.9 −18.3% 2.8 81.5

A 4% excess return during the winter December $24,846 0.74% 73.3% 1.9 −14.3% 4.0 68.6

months seems to me too good to be true.

Average $23,248 0.62% 65.0% 2.0 −23.2% 8.8 61.7
FIGURE 1: MONTHLY PERFORMANCE OF THE SPY ETF FROM 1/1/1992 TO 12/31/2021.
Considering the fact that this expression The performance of each month is calculated by investing $100,000 in the SPY ETF at the
has been around for a very long time, these beginning of the month (first business day) each year at the open and selling at the beginning
statistics would have evolved or changed of the next month at the open. In the third column is the compound annual return % (CAR)
and in the fourth column you can see the ratio of winning to losing years. The sixth column
over time so I decided to investigate using is the profit factor (PF) which is the ratio of total profit to total loss. The sixth column is the
more recent data, different time periods, maximum drawdown and in the next column is the ulcer index, which is another drawdown
BRIAN TAYLOR

and take into account drawdown and risk- the number of bars. With this number, the lower the better. Finally, in the last column is the
statistic and is calculated by dividing the square root of the sum of squared drawdowns by

adjusted returns as well. I will then pres- highest intraday value of the volatility index (VIX).

by Markos Katsanos
April 2022 • Technical Analysis of Stocks & Commodities • 9
are significantly better than average. 10 YEAR PERFORMANCE
On a risk-adjusted basis and taking both time % Ulcer Highest
Month Net Profit Car % Pf Maxdd
periods into consideration, April and November Winners Index Vix
were the best-performing months. November January $12,950 1.23% 54.6% 2.2 −13.1% 5.0 37.5

was slightly better, as it was always profitable February $14,700 1.38% 80.0% 2.3 −10.5% 4.0 50.3

during the last 10 years and 83% of the time March −$6,040 −0.62% 60.0% 0.7 −27.1% 7.5 85.5

during the last 30 years. April $29,700 2.63% 90.0% 50.0 −4.4% 1.3 60.6

Seasonal factors played an important role May $5,500 0.54% 80.0% 1.4 −8.7% 3.5 40.7
here as increased holiday shopping during the June $14,180 1.33% 70.0% 4.1 −7.1% 2.4 44.4
Thanksgiving and Christmas holidays tended July $25,600 2.30% 90.0% 14.9 −4.3% 1.1 33.7
to lift stock prices. The stock market was August $5,350 0.52% 70.0% 1.4 −10.7% 5.0 53.3
generally up in April due to the anticipated September −$2,900 −0.29% 50.0% 0.8 −10.1% 4.4 38.3
release of the first-quarter earnings. October $15,150 1.42% 60.0% 2.2 −8.9% 3.1 41.2
The best months overall to have been in the November $30,100 2.67% 100.0% N/A −5.6% 0.5 38.8
market were April, July, October, and Novem- December −$1,460 −0.05% 70.0% 0.9 −18.0% 6.0 36.2
ber. These months attained an average 2.3% Average $11,903 1.09% 72.9% 7.34 −10.7% 3.7 46.7
gain and generated positive returns 85% of the FIGURE 2: SPY AVERAGE MONTHLY RETURNS OVER 10 YEARS. Monthly performance
time on average during the 10-year simulation is shown for the SPY ETF from 1/1/2012 until 12/31/2021. For an explanation of the column
(see Figure 2), versus an average monthly headings and testing method, please see the caption under Figure 1.
return of 1.1%. August and September were
the worst months, with an overall negative return and the related to the coronavirus in 2020. April coincided with
highest volatility. the end of both crises, and the oversold bounce contributed
Low volume and the lack of market participants, because to that month’s (April’s) outstanding returns.
of summer vacations, could have been contributing factors.
That’s because in periods of low volume, even minor news “Sell in May”: True or myth?
can send the market lower. July, however, was an exception, Is the “sell in May and go away” calendar effect incidental,
as the release of second quarter earnings, which are usually or is it something to observe? The historical seasonality
better than expectations, resulted in overall gains. of stock market returns is notable and worth understand-
The most unpredictable months were January, March, ing for investors.
June, August, and September, generating positive returns The way that the “sell in May” adage is usually inter-
only 56% of the time. The most volatile months were preted is to sell on the 1st of May (May Day) and buy again
February, March, June, August, and September, with on the 31st of October (Halloween), but this is somewhat
an average drawdown of -30% during the last 30 years. arbitrary, as the exact day of the month is not clear in the
March averaged a loss during the last 10 years, but this was original adage. So I decided to test all possible combina-
mainly because of the Covid-19 steep decline in March tions by selling or buying at the beginning or at the end
2020. Finally, in the last column, you can see the highest of May and October.
value of the VIX during each month. According to the statistical study in Figure 1, the months
As you can see, the VIX has very little correlation with of true market danger are August and September, with
drawdown and no correlation with the month’s return. negative returns and elevated volatility, so I decided to
In fact, during the best-performing months of April include a modification to the original rule by selling in
and November, the volatility was as high as 60 and 81, August and buying again in October.
respectively. This is a little counterintuitive because you
would normally expect higher drawdown and negative
returns during periods of higher implied volatility. On
closer inspection of the VIX chart, however, I noticed that I will present a hybrid seasonal
the VIX was over 55 only two times during the latest 30 system using the best seasonal
years—once during the financial crisis of 2008 and once pattern derived, adding other
during the coronavirus-related market plunge in 2020. High technical indicators or conditions in
values of the VIX from October to December in Figure 1 order to improve its performance.
are associated with the first crisis in 2008, and high values
from March to April are associated with the second crisis
10 • April 2022 • Technical Analysis of Stocks & Commodities
 For the current 30 YEAR PERFORMANCE
simulation, I used Sell End Of Sell Beginning Sell Beginning
Sell Beginning Sell End Of
daily historical System Buy & Hold Of May, Buy
May, Buy Of May, Buy
May, Buy End
Of August, Buy
Beginning Of Beginning Of Beginning Of
data of the SPY End Of October
October October
Of October
October
ETF for the last Net Profit $980,600 $547,200 $1,002,500 $880,400 $627,800 $1,312,200
10-and 30-year CAR (Comp. Annual Return) 8.2% 6.4% 8.3% 7.9% 6.8% 9.2%
periods. Buy sig- RAR (Risk Adjusted Return) 8.2% 13.0% 12.6% 13.7% 11.9% 11.2%
nals were executed Percent Profitable N/A 80.0% 83.3% 80.0% 86.7% 86.7%
at the open and Profit Factor N/A 5.86 5.58 5.31 10.36 6.54
sell signals at the Max System Drawdown −56.5% −34.8% −47.0% −46.7% −35.0% −53.9%
close. Ulcer Index 16.80 6.85 10.06 9.73 7.28 12.74
For the sake of FIGURE 3: 30-YEAR PERFORMANCE OF “SELL IN MAY” SEASONAL STRATEGY. Performance is shown for the SPY ETF
simplicity, divi- from 5/31/1991 until 5/31/2021. For an explanation of the left column statistics, please see the caption under Figure 1. Different
dends or inter- combinations were tested by selling or buying at the beginning or at the end of May and October. You can see that the “sell in
est are not ac- May” strategy outperformed buy & hold only if you sold at the end of May and bought again in the beginning of October.
counted for in the
performance. In 10 YEAR PERFORMANCE

any case, this had

Sell End Of Sell Beginning Sell Beginning
Sell Beginning Sell End Of
May, Buy Of May, Buy Of August, Buy
a minimal effect System Buy & Hold Of May, Buy
End Of October
Beginning Of Beginning Of
May, Buy End
Of October
Beginning Of
on the results as October October October

the interest on
Net Profit $211,300 $102,000 $156,400 $143,665 $112,600 $253,300

cash earned when

CAR (Comp. Annual Return) 12.0% 7.3% 9.9% 9.3% 7.8% 13.5%

out of the market

RAR (Risk Adjusted Return) 12.0% 14.8% 15.0% 16.1% 13.7% 16.5%

partly offsets the Percent Profitable N/A 80.0% 90.0% 80.0% 100.0% 100.0%

missed dividends. Profit Factor N/A 9.03 13.66 14.55 N/A N/A

Typical current Max System Drawdown −34.1% −34.1% −34.1% −34.1% −34.1% −34.1%

discount commis- Ulcer Index 5.33 5.73 6.10 6.70 5.22 4.75

sion rates were FIGURE 4: 10-YEAR PERFORMANCE OF “SELL IN MAY” SEASONAL STRATEGY. Performance is shown for the SPY ETF
from 5/31/2011 until 5/31/2021. For an explanation of the left column statistics, please see the caption under Figure 1. Different
used throughout combinations were tested by selling or buying at the beginning or at the end of May and October. Since 2011, none of the “sell
the test and the in May” combinations beat buy & hold.
initial investment
amount was $100,000. In order to compare the systems percentage point a year and most importantly, all trades
realistically with buy & hold, profits were compounded. would have been profitable during the last 10 years (see
You can see in the table in Figure 3 that the “Sell in Figure 4), whereas if you bought the SPY ETF in the begin-
May” strategy outperformed buy & hold only if you sold ning of 2012 and sold at the end of 2021, the percentage
at the end of May and bought again in the beginning of of profitable years would have been only 80%.
October. But more recent statistics in Figure 4 suggest that
since 2011, this was not the case anymore, as none of the Hybrid seasonal system
“sell in May” combinations managed to beat buy & hold My main objective in designing this system was to im-
during the last 10 years. prove on the seasonal systems by adding other technical
The popular interpretation of the “sell in May” adage indicators but limiting trades, and capital gain taxes, to a
is that the beginning of May until the end of October minimum. In my article in the July 2021 issue of this maga-
was the worst performer, lagging buy & hold by 1.8 and zine (see “Further reading”), I used volatility conditions
4.7 full percentage points in the 30- and 10-year tests,
respectively. This is probably because this expression has
been around for a very long time and seasonal tendencies The historical seasonality of
have meanwhile evolved or changed. stock market returns is notable
On the other hand, what appears to be effective is that and worth understanding for
if you stayed out of the market in August and September
(see the statistics in the last column of Figures 3 and 4) you
investors.
would have outperformed buy & hold by more than one
April 2022 • Technical Analysis of Stocks & Commodities • 11
to improve on the buy
& hold strategy by clos-
ing the position during
high-volatility periods,
which usually precede
major market selloffs.
The results were very
encouraging, so I de-
cided to use them again
in order to improve the
seasonal system as well.
In this case I used both
the VIX for the implied
volatility condition and
the 15-day average true
range (ATR) to calculate

AMIBROKER
the historical volatility.
In specifying the vola- FIGURE 5: HYBRID SEASONAL STRATEGY SIGNALS ON SPY WITH VIX AND VFI. A daily chart of the SPY ETF
is shown from July 2007 until July 2009 with the VIX superimposed in black. The 15-day ATR is plotted in the middle
tility rule, I used only window and the 130-day VFI (volume flow indicator) in the bottom window. Positive values are plotted in green, negative
the volatility change values above −20 in orange, and extremely negative values below −20 in red. Notice that the VFI crossed under zero in
from the most recent October 2007 and remained in negative territory until June 2009. In February 2008 it crossed under −20 and, except for
low value and not the a brief instance in May, it oscillated in extremely negative territory (between −20 and −35) until March 2009.
absolute value of the
indicator, as each major selloff had its own unique char- Buy rules
acteristics with the volatility value at different threshold 1. Seasonal. The “sell in August” strategy (see the last
levels in each case. column in tables in Figures 3 and 4) performed best
This managed to improve on the seasonal strategy but so I used this system for my seasonal rules. The sea-
missed a couple of essential exit signals during the pro- sonal entry was therefore initiated in the beginning
tracted bear markets in 2001 and 2008. I decided, therefore, of October (the first business day of the month at the
to use an additional condition to deal with these cases. open) and, provided that neither the volatility nor the
My first thought was to try a trend indicator but it did not VFI were below the critical threshold described below,
improve on the overall performance mainly because the an entry signal was initiated. During periods of high
reentry signals were too late to materialize. In addition, volatility, the seasonal trade was deferred later in the
it produced considerably more trades, thus increasing month or year until the volatility subsided.
transaction costs and capital gains. My second choice 2. Volatility. All seasonal trades were blocked if the
was to try a long-term money flow condition. I then tried VIX was up by more than 60% and the 15-day ATR
a number of money flow indicators and noticed that the was up by more than 90% over the past 25 days. The
VFI had an extremely negative reading (<−20) during the VIX threshold parameter (60%) was determined by
entire 2008 market meltdown (see Figure 5) and negative optimization and the ATR as a multiple (1.5 times)
readings throughout the 2001–2002 bear market, so I of the VIX threshold.
decided to add this one to my exit conditions.
The volume flow indicator (VFI) is a custom money Sell rules:
flow indicator first introduced in my June 2004 article in 1. Seasonal. The seasonal trade was closed on the first
this magazine (see “Further reading”). It is a long-term business day of August at the open.
indicator and will detect money flowing in or out of a
stock during the last six months or 130 days. Generally,
positive values are bullish and negative are bearish, but
the indicator direction is also important. August and September are
Combining the best seasonal system described above typically the worst months.
with volatility and VFI conditions, I came up with the
following rules:
12 • April 2022 • Technical Analysis of Stocks & Commodities
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 2. High volatility. The seasonal trade was closed if the
VIX spiked more than 2 times (120%) the correspond-
ing entry threshold parameter (60%).
3. Money flow (VFI). A sell signal was triggered if
the VFI crossed under a critical value (−20) while
its 10-day moving average was pointing down. The
critical value was determined by optimization. The
volatility and VFI exits were executed next day at
the open.
AMIBROKER CODE FOR THE SEASONAL HYBRID SYSTEM
//S&P500 Hybrid Seasonal System
//Should be applied on a daily chart of the SPY ETF.
//Copyright Markos Katsanos 2022
SetBacktestMode( backtestRegular );
PosQty = 1; SetOption( "MaxOpenPositions", PosQty );
IE= 100000;SetOPTION( "INITIALEQUITY", IE );
SetPositionSize( 100, spsPercentOfEquity);
SetOption("CommissionMode",3);
SetOption("CommissionAmount",.01); //$ per share
SetOption("MinPosValue",100); SetOption("MinShares",1);
SetTradeDelays( 0, 0, 1, 1 );
BuyPrice = OPEN; SellPrice = OPEN;
SELLMONTH=Optimize("SELLMONTH",8,5,8,1);
VIXUPMAX=Optimize("VIXUPMAX",60,50,60,10);
CRIT=OPTIMIZE("CRIT",-20,-20,-15,5); //VFI SELL
K=Optimize("K",1.5,1.3,1.7,.2); // ATR/VIX RATIO
//Comparison Index
IndexCode = ParamStr( "VIX", ".VIX" );
VIX = Foreign( IndexCode, "C" );
VIXDN=(VIX/Ref(HHV(VIX,25),-1)-1)*100;
VIXUP=(VIX/Ref(LLV(VIX,25),-1)-1)*100;
ATRDN=(ATR(15)/Ref(HHV(ATR(15),25),-1)-1)*100;
ATRUP=(ATR(15)/Ref(LLV(ATR(15),25),-1)-1)*100;
//VFI
Period = 130; Coef = 0.2;VCoef = 2.5;
inter = log( Avg ) - log( Ref( Avg, -1) );
Vinter = StDev(inter, 30 );Cutoff = Coef * Vinter * Close;
Vave = Ref( MA( V, Period ), -1 );Vmax = Vave * Vcoef;
Vc = Min( V, VMax );MF = Avg - Ref( Avg, -1 );
VCP = IIf( MF > Cutoff, VC, IIf ( MF < -Cutoff, -VC, 0 ) );
VFI1 = Sum( VCP, Period )/Vave;VFI = EMA( VFI1, 3 );
VOLCONDITION=(VIXUP<VIXUPMAX OR
ATRUP<K*VIXUPMAX ) AND VFI>CRIT;
BUY=(Month()>=10 OR Month()<SELLMONTH) AND
Ref(VOLCONDITION,-1);
SELLSEASONAL=Month()==SELLMONTH ; //SEASONAL
SELLVOLATILITY=VIXUP>2*VIXUPMAX ; //VOLATILITY EXIT
SELLMF=Cross(CRIT,VFI) AND MA(VFI,10)<Ref(MA(VFI,10),-1) ;
Sell=SELLSEASONAL OR REF(SELLVOLATILITY,-1) OR
Ref(SELLMF,-1);
SHORT=0;Cover=0;
//PLOT
SetChartOptions( 0, chartShowArrows | chartShowDates );
Equity(1); // evaluate stops, all quotes
SetOption("EveryBarNullCheck", True );
Plot( C, "Price", colorDefault, stylecandle | styleThick );
PlotShapes( IIf( Buy, shapeUPTRIANGLE, 0 ), colorBlue, 0, Low
);
PlotShapes( IIf( Sell, shapeDownTRIANGLE, 0 ), colorRed, 0,
High );
14 • April 2022 • Technical Analysis of Stocks & Commodities
Testing method
For the current simulation, I used weekly historical data
of the SPY ETF for the 30-year period from 7/30/1991
until 7/30/2021.
My main objective was to compare the system with buy
& hold but there were a couple of problems: System results
based on a constant dollar trade size cannot be directly
compared with buy & hold results for the same number
of shares as the first trade because the buy & hold case
PlotShapes( IIf( COVER, shapeUpTRIANGLE, 0 ), colorBlue, 0,
Low );
PlotShapes( IIf( SHORT, shapeDownTRIANGLE, 0 ), colorRed,
0, High );
// Custom text labels displayed with PlotText
dist = 2*ATR(10);
for( i = 0; i < BarCount; i++ )
{
if( BUY[i] ) PlotTextSetFont("BUY ", "ARIAL", 11, i, L[ i ]-dist[i],
colorBLUE, colorDefault, 0 );
if( SELL[i]==1 AND SELLSEASONAL[i]) PlotText( "SELL SEA-
SONAL" , i-10,
H[ i ]+dist[i], colorRED, colorDefaulT );
if( SELL[i]==1 AND SELLVOLATILITY[i-1]) PlotText( "SELL
VOLAT" , i-10,
H[ i ]+dist[i], colorRED, colorDefaulT );
if( SELL[i]==1 AND SELLMF[i-1]) PlotText( "SELL MF" , i-5, H[ i
]+dist[i], colorRED, colorDefaulT );
}
GfxSelectFont("Times New Roman", 11, 600, True );
GfxTextOut( "S&P500 Hybrid Seasonal ", 5, 19);
GfxTextOut( "Created By: Markos Katsanos", 5, 41 );
Title = Name() + " " + Date() + " Price = " + Close + " Open = " +
O +" High = " + H +
" Low = " + L + " VIX "+VIX+
" BarIndex "+BarIndex()+" Signal : " + WriteIf( Buy, "Buy Sea-
sonal",
WriteIf( Sell == 1 AND SellSEASONAL==1, "Sell Seasonal",
WriteIf( Sell == 1 AND Ref(SellVOLATILITY,-1)==1, "Sell High
Volatility",
WriteIf( Sell == 1 AND Ref(SellMF,-1)==1, "Sell Money Flow
Bearish",
"none" ) ) ));
//EXPLORATION
FILTER=Buy OR Sell ;
AddColumn(O,"Price",1.2);
AddColumn(VIX,"VIX",1.1);
AddColumn(VFI,"VFI",1.1,IIF( VFI<CRIT,Colorred,colorDefault));
AddColumn(ATR(10),"ATR",1.3);
AddColumn(VIXUP,"VIXUP%",1.1,
IIF( VIXUP>VIXUPMAX,Colorred,colorDefault));
AddColumn(ATRUP,"ATRUP%",1.1,
IIF( ATRUP>K*VIXUPMAX,Colorred,colorDefault));
AddColumn(VIXDN,"VIXDN%",1.1);
AddColumn(ATRDN,"ATRDN%",1.1);
AddColumn(BUY,"BUY",1);
AddColumn(SELL,"SELL",1,IIF( sell, Colorred, colorDefault));
AddColumn(SELLSEASONAL,"SELL SEASONAL",1,
IIF( SELLSEASONAL, Colorred, colorDefault));
AddColumn(Ref(SELLVOLATILITY,-1),"SELL VOLAT",1,
IIF( sellVOLATILITY, Colorred,colorDefault));
AddColumn(Ref(SELLMF,-1),"SELL MF",1,
IIF( sellMF,Colorred,colorDefault ));
increases the position HYBRID SEASONAL PERFORMANCE
size as time elapses. Time Frame  30 YEAR 20 YEAR 10 YEAR
In order to compare Seasonal Seasonal Seasonal
System Buy & Hold Buy & Hold Buy & Hold
the system objectively Hybrid Hybrid Hybrid

with the buy & hold Net Profit $1,037,500 $2,611,000 $262,800 $751,100 $240,500 $343,000

results, I specified the CAR (Comp. Annual Return) 8.4% 11.6% 6.6% 11.3% 13.0% 16.1%

trade size as a percent RAR (Risk adj. Return) 8.4% 14.7% 6.6% 14.5% 13.0% 19.7%

of equity. For the sake Number of trades 1 36 1 25 1 12

of simplicity, dividends Percent Profitable N/A 88.9% N/A 88.0% N/A 100.0%

are not accounted for in Profit Factor N/A 19.20 N/A 32.10 N/A N/A

the performance. In any Max System Drawdown −56.5% −33.3% −56.5% −26.8% −34.1% −25.8%
case, this had a minimal Max trade Drawdown −56.5% −19.8% −56.5% −19.8% −34.1% −19.8%
effect on the results as Ulcer Index 16.80 8.40 15.40 7.50 5.00 5.10
the system was more FIGURE 6: HYBRID SEASONAL STRATEGY PERFORMANCE. Here you can see the seasonal hybrid system perfor-
than 80% of the time in mance applied to the SPY ETF during the last 10-, 20-, and 30-year periods until 7/30/2021. The system outperformed
buy & hold by a wide margin, producing 1.5–3 times more profits with substantially less risk.
the market. In addition,
cash is held between
the sell and the next buy
signal at zero percent so
the interest earned when
out of the market partly
offsets the missed divi-
dends. Typical current
discount commission
rates (0.01 per share)
were used throughout
the test and the initial
investment amount was
$100,000.

System
evaluation
In the table in Figure FIGURE 7: HYBRID SEASONAL STRATEGY SIGNALS ON SPY WITH VIX AND VFI. A daily chart is shown of the SPY
6 you can see the test ETF from July 2016 until July 2021 with the VIX superimposed in black. You can see the buy and sell signals in blue
simulation results of the and red, respectively. The equity line (in blue) and the drawdown (in red) are plotted in the bottom window and the 130
10-, 20-, and 30-year VFI in the middle.
backtests.
The seasonal hybrid system managed to beat both the The worst drawdown occurred in the beginning of 2003
buy & hold and the best seasonal strategy easily with mainly because of accumulated losses originating from
less than half the risk, thus producing a smoother equity two seasonal trades during the protracted downtrend after
curve. The best relative performer was the 20-year test, the internet bubble burst in 2000. Both trades were closed,
which produced almost double the annual return of buy albeit rather late, by the money flow (VFI) condition.
& hold with less than half the risk. The most profitable In the chart in Figure 7 you can see the signals produced
was the recent 10-year test, which produced the highest by the system during the last five-year period. Except
annual return (16.1%), but this was only about 3 percentage for the seasonal sell signals in the beginning of August,
points or 24% better than the buy & hold annual return there were only two additional volatility sell signals
(13%). During that period it was not easy to beat buy & and no money flow exits. The timing of the existing sell
hold because US equities were in a secular bull market signals looks fairly good, especially the most recent (on
with only a few brief corrections during the last ten years. 2/26/2020) as it managed to keep you out of the market
On the other hand, from 2001–2009, we saw two major during the entire COVID selloff. An exit signal, however,
bear markets. in November 2018 during the brief Trump tariff selloff,
April 2022 • Technical Analysis of Stocks & Commodities • 15
never materialized. This produced the maximum system
drawdown (−26%) during the latest 10-year test and the
maximum trade drawdown (−19.8%) as well. In this case,
the volatility exit failed to deploy because the VIX never
reached the minimum threshold value required to trigger
a volatility exit. In addition, the VFI never fell below the
critical bear market threshold (−20) during this brief (three-
month) downdraft. This is because the VFI is a long-term
indicator that takes into account six months of volume data.
Reducing the minimum threshold values did not improve
on the overall test results because it triggered subsequent
superfluous and unprofitable entries and exits.
In designing this system, I didn’t add any money man-
agement rules as my intention was to compare its perfor-
mance with buy & hold and pure seasonal systems. Out
of curiosity, I added a 5% trailing stop loss with a 10-day
reentry delay. This simple rule changed the performance
dramatically: On the 30-year test, the net profit doubled to
$6 million, but the percentage of winning trades dropped
dramatically to 51% (from 89%) and the profit factor
dropped to 3.7 (from 19.2). This was because the trailing
stop generated an additional 154 new trades, making this
system appropriate for frequent traders only.
Final thoughts
Recent testing suggests that selling in May is too early.
After all, nobody takes a six-month vacation, and certainly
not the fund managers. If you are thinking about selling
stocks, the best time to sell would be at the end of July
or the beginning of August, since August and September
are typically the worst months.
There is a broader investment lesson to draw from this
as well: You can’t expect even a statistically significant
pattern to hold up every year, and you need to take other
factors into consideration. For example, the COVID-19
pandemic resulted in a 35% decline in the stock market
from February to March of 2020, a period normally
known for positive returns, whereas the performance in
August 2020, which statistically has poor returns, was
outstanding. In any case, should history repeat, embrac-
ing a more defensive posture in August may prove to be
a prudent strategy.
The primary fundamental consideration of fund manag-
ers, when deciding their allocation to stocks, is valuation.
The problem with this is that an overvalued or overbought
situation can persist longer than you think. A better ap-
proach is to combine a seasonal system with technical
indicators.
The example of the hybrid seasonal system described
in this article managed to beat both the buy & hold and
seasonal strategies with minimal additional trades.
16 • April 2022 • Technical Analysis of Stocks & Commodities
I have no doubt that this can be improved further by
adding money management conditions such as a stop-loss
or more technical conditions.
Markos Katsanos is the author of Intermarket Trading
Strategies published by John Wiley & Sons and a Stocks
& Commodities Contributing Writer. He can be reached
at markos.katsanos@gmail.com or through his website
at http://mkatsanos.com.
The code given in this article is available in the Article
Code section of our website, Traders.com.
See our Traders’ Tips section beginning on page 46 for
code translations and/or implementation of Markos Kat-
sanos’ technique in various technical analysis programs
and trading platforms. Program code from the Traders’
Tips section can be found under the Traders’ Tips menu
at Traders.com.
Further reading
Katsanos, Markos [2021]. “Buy & Hold, Or Buy & Sell?”
Technical Analysis of Stocks & Commodities, Vol-
ume 39: July.
[2004]. “Using Money Flow To Stay With The
Trend,” Technical Analysis of Stocks & Commodi-
ties, Volume 22: June.
Vakkur, Mark [2013]. “Sell In May And Go Away,” Tech-
nical Analysis of Stocks & Commodities, Volume
31: May.
Kaufman, Perry [2020]. “Price Shocks: Anticipation Is
Everything,” Technical Analysis of Stocks & Com-
modities, Volume 38: June.
Corporate Finance Institute, “Sell In May And Go Away,”
https://corporatefinanceinstitute.com/resources/knowl-
edge/trading-investing/sell-in-may-and-go-away
Zhang, Cherry Y., and Ben Jacobsen [2018]. “The Hallow-
een Indicator: “Sell In May And Go Away: Everywhere
And All The Time,” available at SSRN, https://ssrn.
com/abstract=2154873
Gardner, Trent [2012]. “Using VIX To Forecast The S&P
500,” Technical Analysis of Stocks & Commodities,
Volume 30: December.
‡AmiBroker
‡See Editorial Resource Index
 Algo Q&A
ALGORITHMIC TRADING
Have a question about system or algo trading? Kevin J. Davey has over
30 years of system trading experience. Kevin is a full time trader, and also
teaches and consults via his Strategy Factory® online workshop (https://
kjtradingsystems.com). He is the author of 5 bestselling trading books, in-
cluding “Building Winning Algorithmic Trading Systems” and his latest
book “Algo Trading Cheat Codes.” Send your questions or topic suggestions
to Kevin Davey at kdavey@kjtradingsystems.com. Selected questions will
appear in a future issue of S&C.
Kevin J. Davey

WALKFORWARD TESTING matter. If the development approach it is because, when done correctly,
I have heard some experts say walk- works for you in real time, then that it produces the most out-of-sample
forward testing is required for algo is the bottom line. Don’t let experts performance data. And out-of-sample
trading, and others who say it is not. change your approach if you are data is the most realistic performance
Can you resolve this? satisfied with it. data you can get, next to real-time
In last month’s column, I discussed What works for me in algorithmic results.
the primary ways to backtest an trading strategy development is walk- Here is how it works: First, you
algo strategy and I gave my recom- forward testing. The reason I prefer select a time window for optimiza-
mendation for the best approach— tion, your “in-sample” period. It
walkforward testing. I will discuss could be one year, two years, five
Done correctly,
walkforward testing more in this years—whatever you want. You will
column, but first I want to address walkforward can be a optimize over this in-sample period
the issue of what some may see as huge help, but when and determine the best parameters to
“conflicting expert opinion.” done incorrectly, it use. Let’s say you have two param-
Algo trading is not rocket science. can lead to real-time eters, and the best results are X1=5
I speak from experience here, hav- disaster. and X2=12. Those are your in-sample
ing worked at NASA when I was in optimized results.
college, doing actual rocket Next, you choose an out-
science. In that field, there of-sample window size,
are established theories and which will usually be around
equations to use. There is 50% of the size of your in-
usually a right way and a sample window. But it can
wrong way to solve prob- be however long or short
lems. you want it. Then, you run
With algo trading, it is not the strategy with X1=5 and
so simple. Some great traders X2=12 over the first out-of-
refuse to consider walkfor- sample period. You set those
ward testing. Others eschew aside for later.
optimization of any sort. And Once you complete this
some traders refuse to even first test, you shift or “walk”
backtest! So, who is right and the test forward by the out-
who is wrong here? of-sample length, and rerun
Well, they can all be right, the tests. You continue this
and they can all be wrong. on to the present day.
The right answer for trading When all testing is com-
is to produce acceptable risk- pleted, you can then combine
adjusted returns. Whether all the out-of-sample results
you use walkforward test- together into a final equity
ing, intense optimization, FIGURE 1: HOW WALKFORWARD PERIODS CORRESPOND TO THE
or moon phases, it does not FINAL EQUITY CURVE Continued on page 25
April 2022 • Technical Analysis of Stocks & Commodities • 17
 The Technical Advantage
Simple Rules To Profit From
Bear Markets
You can improve your investment returns over time dra-
matically if you can make profits during a bear market
period instead of just suffering losses.
by Jon Wolfenbarger, CFA
T
he goal of most investors is to create wealth
by generating high compounded returns over
time. The primary obstacle to generating high
compounded returns is bear markets, which
cause negative returns. As Warren Buffett
famously said: “Rule number 1 is never lose
money. Rule number 2 is never forget rule number 1.”
If investors are able to generate profits instead of losing
money during bear markets, then their goal of generating
high compounded returns over time will be much easier.
For example, if you gain 50% during a bear market instead
of losing 50%, that is effectively a 200% return.
Unfortunately, bear markets are a recurring phenom-
enon in financial markets. And not only can they create
significant losses, but they can also last a long time, even
18 • April 2022 • Technical Analysis of Stocks & Commodities
beyond the investment time horizon of most mortals.
For example, it took 15 years for the NASDAQ to
return to its 2000 high, 25 years for the Dow Jones
Industrial Average to return to its 1929 high, 27 years
for gold to return to its 1980 high and, after more than
32 years, Japan’s Nikkei stock index is still down about
30% from its 1989 high.
In this article, I’ll demonstrate how to use simple
technical indicators to profit from bear markets.
Similarities and difference between
bull and bear markets
A bull market in a financial asset means there is a rising
price uptrend with higher highs and higher lows, while
a bear market means there is a falling price downtrend
with lower highs and lower lows.
The same technical tools and trading rules can be used
ROMAN KING/SHUTTERSTOCK
for both bull and bear markets. Trend indicators can be
used to invest with the trend and overbought/oversold
indicators can be used to take profits after a trend has
gone too far.
 TRADING STRATEGIES
A key difference is that, for taking profits, oversold
indicators are typically more useful in a bear market
than overbought indicators are in a bull market. That is
because the emotion of fear is stronger than the emotion
of greed.
Bear market technical indicators
The technical indicators I will discuss for profiting in
bear markets are the same ones that are often used to
profit in bull markets: daily moving averages (DMA),
daily percentage price oscillator (PPO), and daily relative
strength index (RSI).
A DMA shows the average price over the past x
number of days. Moving averages smooth out the noise
of daily stock price movements and show trends more
clearly. We will use the 20-DMA as an indicator of the
short-term trend, the 60-DMA as an indicator of the
medium-term trend, and the 250-DMA as an indicator
of the long-term trend.
The daily PPO is a momentum oscillator that measures
the difference between two exponential moving averages
(EMAs)—the 12- and 26-day EMAs—as a percentage of
the larger moving average. It is shown with a signal line,
which is the 9-day EMA of the PPO. When the PPO line
is above the signal line, it shows bullish near-term price
momentum. When the PPO is below the signal line, it
shows bearish near-term price momentum.
The daily RSI is an oscillator ranging from 0 to 100.
Values below 30 are considered “oversold” and values
above 70 are considered “overbought.” RSI signals
provide objective evidence that the price of a security
has likely moved too far and too fast in one direction.
This can provide a warning that the price trend will
likely reverse soon.
Bear market trading vehicles
There are several trading vehicles investors can use to
profit from a bear market. An investor could:
1. Sell short an ETF (such as SPY for shorting the
S&P 500)
2. Buy an “inverse” ETF (such as SH for shorting the
S&P 500)
3. Buy a levered “inverse” ETF (such as SDS for 2x
shorting of the S&P 500)
4. Short futures, or
5. Buy put options.
The details of each of these alternatives are beyond
the scope of this article. For our purposes here, we’ll
assume an investor sells short an ETF, which means
they borrow shares of the ETF from their brokerage and
sell it with the hopes of generating profits by buying it
back at a lower price.
In this article, I will focus solely on price returns of the
S&P 500 and ignore dividends and transaction costs.
Bear market trading rules for
“one trade” strategy
The easiest way to profit from a bear market is to make
one round-trip trade: Sell short (borrow shares from a
broker and sell them) when the bear market begins, and
then cover the short (that is, buy the shares back and return
them to the broker) when the bear market ends.
There are no trading systems that enable a trader to
consistently pick the exact top or bottom of the market.
The simple indicator I will use to determine when a
bear market starts is when the 60-DMA falls below the
250-DMA. This usually occurs around the same time
the slope of the 250-DMA begins to decline. Likewise,
the simple indicator to determine when a bear market
ends is when the 60-DMA rises above the 250-DMA.
This usually occurs around the same time the slope of
the 250-DMA begins to rise.
Here are the technical rules for the “one trade”
strategy:
“One trade” strategy
Sell short when all of the following conditions are pres-
ent:
1. Price < 250-DMA
2. 20-DMA < 60-DMA
3. 20-DMA < 250-DMA
4. 60-DMA < 250-DMA
5. PPO histogram (the difference between the PPO
line and the signal line) < 0 and
6. RSI > 30
Cover the short when the following condition is pres-
ent:
60-DMA > 250-DMA
The primary obstacle to
generating high compounded
returns is bear markets, which
cause negative returns.
April 2022 • Technical Analysis of Stocks & Commodities • 19
 Bear market trading rules
for “multiple trade” strategy
In order to try to generate even higher
profits from a bear market than by using
the “one trade” strategy, I present these
rules for a “multiple trade” strategy during
a bear market:

“Multiple trade” strategy

“Sell short” when all of the following
conditions are present:

1. Price < 250-DMA

2. 20-DMA < 60-DMA
3. 20-DMA < 250-DMA
4. 60-DMA < 250-DMA

STOCKCHARTS.COM
5. PPO histogram < 0 and
6. RSI > 30
FIGURE 1: S&P 500 DURING THE “TECH BUST” BEAR MARKET. This chart shows the
Cover the short when either of the following S&P 500 with moving averages, PPO, and RSI during the early 2000s “tech bust,” along with
conditions are present: the timing of the “one trade” and “multiple trades” strategies.

1. RSI < 30 or
2. 60-DMA > 250-DMA
Re-short after the oversold condition has cleared and
when all of the following conditions are present again:
1. Price < 250-DMA
2. 20-DMA < 60-DMA
3. 20-DMA < 250-DMA
4. 60-DMA < 250-DMA
5. PPO histogram <0 and
6. RSI > 30
“Tech bust” bear market of
the early 2000s
Let’s look at how the “one trade” and “multiple trade”
strategies worked during the tech bust bear market of
the early 2000s.
The chart in Figure 1 shows the S&P 500 during that
bear market. The price of the S&P 500 is the lightly
shaded gray dashed line on the main top chart. The 20-
DMA is the blue line, the 60-DMA is the green line,
and the 250-DMA is the red line on the main price
chart. The PPO is in the middle clip and the RSI is in
the bottom clip.
Implementing the “one trade” strategy started with
short selling the S&P 500 on November 11, 2000, which
is the thick red line on the left. That is when the 60-
DMA fell below the 250-DMA. It ended with covering
20 • April 2022 • Technical Analysis of Stocks & Commodities
the short of the S&P 500 on June 6, 2003, which is the
thick green line on the right. That is when the 60-DMA
rose above the 250-DMA. This trade is labeled as “1”
in blue.
The first of the “multiple trades” (labeled “A” in blue)
also started with the thick red line on the left. It ended
with the first thin green line from the left. The second
of the “multiple trades” (labeled “B” in blue) started
with the first thin red line from the left and ended with
the second thin green line from the left. The third of the
“multiple trades” (labeled “C” in blue) started with the
second thin red line from the left and ended with the third
thin green line from the left. The fourth of the “multiple
trades” (labeled “D” in blue) started with the third thin
red line from the left and ended with the thick green
line on the right. This trade resulted in a loss because
there was not a clear oversold situation with RSI clearly
below 30 before the 60-DMA rose above the 250-DMA.
However, RSI did approach 30 twice during the last
phase of this bear market.
The table in Figure 2 shows the gains and losses from
these trades. The “one trade” (trade 1) resulted in a 28%
gain. That 28% gain translated to a 77% gain versus the
traditional “buy & hold” investor who suffered a 28%
loss during that bear market.
The “multiple trades” (trades A, B, C and D) resulted
in an even higher gain of 45%, despite the loss on trade
D. The gain versus the “buy & hold” investor was 101%.
Thus, the bear market trader would have ended up with
twice as much money at the end of that bear market as
the buy & hold investor would have.

“Great recession” bear market

of 2008–2009
Now let’s look at how the “one trade” and “multiple
trade” strategies worked during the “Great Recession”
bear market of 2008–2009.
The chart in Figure 3 shows the S&P 500 during the
2008–2009 Great Recession bear market. I’ve used the
FIGURE 2: S&P 500 SHORT SELLING GAINS DURING “TECH BUST”
same chart format and trading rules as in the tech bust BEAR MARKET. This table shows the gains—both absolute and relative
example above. to “buy & hold”—earned using the “one trade” and “multiple trades” rules
The table in Figure 4 shows the gains and losses during the “tech bust” bear market.
from these trades. The “one trade” (trade
1) resulted in a 30% gain. That 30%
gain translated to an 85% gain versus
the traditional buy & hold investor who
suffered a 30% loss during that bear
market.
The “multiple trades” (trades A, B, C and
D) resulted in a much higher gain of 76%.
The gain versus a buy & hold investor was
151%. Thus, the bear market trader would
have ended up with 2.5 times more money
at the end of that bear market than a buy
& hold investor would.

Conclusion
As I have shown, profiting from bear
markets instead of suffering losses can
improve investment returns dramatically.
I have also shown how this can be done
with relatively simple technical indicators FIGURE 3: S&P 500 DURING “GREAT RECESSION” BEAR MARKET. This chart shows
and trading rules. Importantly, there are the S&P 500 with moving averages, PPO, and RSI during the 2008–2009 Great Recession,
no fundamental, valuation, or sentiment along with the timing of the “one trade” and “multiple trades” strategies.
indicators that can help you trade bear
markets with this level of precision.

Jon Wolfenbarger, CFA, is founder and CEO of BullAnd-

BearProfits.com, a website devoted to helping investors
generate high returns in both bull and bear markets.
Previously, he was a securities analyst at Allianz Global
Investors for over 22 years and was an investment banker
at JP Morgan and Merrill Lynch for over three years.
He earned an MBA degree from Duke University and a
BBA degree from the University of Texas at Austin. He FIGURE 4: S&P 500 SHORT SELLING GAINS DURING “GREAT RECES-
can be reached at Jon@BullAndBearProfits.com. SION” BEAR MARKET. This table shows the gains—both absolute and
relative to “buy & hold”—earned using the “one trade” and “multiple trades”
‡StockCharts.com rules during the Great Recession bear market.
‡See Editorial Resource Index

April 2022 • Technical Analysis of Stocks & Commodities • 21

 Expected Value And Its Statistical Background
How To Still Be Profitable
While Being Wrong More
Than Right In The Markets
A
On the road toward profitability as a trader, both the
frequency and size of your winning trades are important.
But to what extent? You can use the “expected value”
calculation for the trades in your account as a way of
examining profitability. Find out how.
by Reza Javaheri
22 • April 2022 • Technical Analysis of Stocks & Commodities
HAND/COIN ART: JAMESBIN/ALPHA SYMBOL: SICKSTOCKS/
SHUTTERSTOCKS/COLLAGE: CHRISTINE MORRISON
mong the crowds engaging the financial
markets, some of us are active market
participants—those who look past parking
money in the S&P or some massive sector
ETF—and instead look to enter and exit
one or more markets at particular times,
with the intent of outperforming a passive
buy-and-hold strategy. Like anyone putting
 MARKET TIMING
time into some form of work, we look to get compensated
with returns past those of the buy-and-hold investor for our
time and effort spent actively managing our money.
While the idea of a daytrader sitting in front of their
monitors, scalping candles and poring over economic
reports may not strike anyone as especially outlandish,
we must recognize that we are inherently making several
bold claims with our very existence. The boldest: that
markets are not “efficient.”
The use of the term “efficiency” here does not imply
quickness and productivity of action; rather, it invokes
the “efficient market hypothesis.” (See “Further reading”
at end for a reference to Investopedia.com’s definition of
the efficient market hyposthesis.) This hypothesis, and
the related theory of the random walk of asset prices,
is a claim based in academia wherein some would have
us believe that asset prices cannot be timed, and that
there is no ability via active management to gain any
sort of advantage over holding a diversified portfolio.
When we enter and exit the market and/or various assets
deliberately—or even by being in particular assets at all,
rather than an all-encompassing market portfolio—we
imply that we know something that others don’t. We
claim to be able to time the markets.
Yet how true is this notion that we can, in fact, generate
alpha through active management? And how true must
it be in order for us to begin to see the returns we’d like
to see in return for our efforts in active management of
our money?
Traditional wisdom would tell us that a strong, often
correct strategy to timing the markets is the key to active
trading success, and a nonstarter should it not be pos-
sessed. If we can time the markets, if we can pinpoint when
and where price will turn, then we will be successful. If
we can guess the top, if we can guess the bottom, then
we’ll be successful traders. Otherwise, we won’t.
Or is this all so? Do we need to know when the market
is going to turn in order to be profitable traders?
Absolutely not.
In fact, we can be wrong more than we’re right by
quite a significant margin, and still make money actively
managing our money.
But if you’re right more than you’re wrong, you make
money, and if not, you lose money, right? Not necessarily.
To show why this statement does not need to hold true, we
need to first introduce the concept of expected value.
Expected value
Expected value is a statistical measure of the projected
outcome of a choice or “gamble.” The formula is given
here for a gamble with n possible outcomes:
Eq. 1
The formula states that for an event with n possible
outcomes, the expected value of that event is simply the
sum of the probability-weighted outcomes. The most
straightforward example is the flipping of a two-sided
coin; heads corresponds to one, tails to zero. The coin
is fair, so there is a 50% chance of it landing on each
side. The flipping of this coin has the following expected
value:
EV = (1)(0.5) + (0)(0.5) = 0.5
I took each of the two outcomes—one and zero—and
weighted them by their probabilities, each 0.5 (50%).
Now, for the sake of understanding, imagine the coin
were loaded, and there were an 80% chance of getting
heads (one). The expected value of flipping this coin
would now be:
EV = (1)(0.8) + (0)(0.2) = 0.8
As a second example, imagine the rolling of a three-
sided die (these do exist, believe it or not!) numbered 1
through 3. The die is fair, so each side has an equivalent
one-third chance (roughly 33.33%) of landing on top.
What is the expected value of rolling this die?
EV = (1)(0.3333) + (2)(0.3333) + (3)(0.3333) = 2
As a quick note, observe that, perhaps somewhat unin-
tuitively, the expected value of an event does not need to
be one of the potential outcomes. For this three-sided die,
one of the possible outcomes is rolling a 2; the expected
value of this event also happens to equal 2. For our fair
coin, however, the “expected value” of the event (flipping
it) is 0.5, despite neither of the possible outcomes (0 or 1)
being 0.5. Therefore, keep in mind that your “expected
value” from some event can be different than any of its
possible outcomes.
If you’re right more than you’re
wrong, you make money, and if
not, you lose money, right? Not
necessarily.
April 2022 • Technical Analysis of Stocks & Commodities • 23
 Expected value as a measure of
account profitability
As can be seen from the above calculation, two types of
items are necessary in order to calculate expected value:
the actual value of an outcome, and its probability. To
apply this concept to our trading, therefore, we only need
four total items:
1. The size of your average winning trade
2. The probability of a winning trade
3. The size of your average losing trade
4. The probability of a losing trade
Seeing as there are only two possible outcomes—
winning or losing trade—both necessary probabilities
can be gleaned from knowing one’s winning percentage,
since one’s probability of a losing trade is simply (1 –
probability of winning trade).
How would we calculate the expected value of any one
trade undertaken? Again, we would calculate the sum of
the probability-weighted outcomes: we take the average
winning trade and multiply it by the winning percentage,
and add this value to the average losing trade multiplied
by one minus the winning percentage (that is, the losing
percentage).
An example: call the account’s winning percentage π
(and thus, losing percentage (1−π)); the average winning
trade X, and the average losing trade Y. The expected
value of the account’s next trade is thus:
EV = (X)(p) + (Y)(1–p) Eq. 2
[Note that Y is a negative number]
Let’s say you are right 60% of the time, and you are
wrong 40% of the time. Your average winning trade
is $1,200, and your average losing trade is roughly the
same size at $1,250. What is the expected value of your
account’s next trade?
EV = ($1,200)(0.60) + (−$1,250)(0.40) = $220
How true is this notion that we
can generate alpha through active
management? And how true must
it be in order for us to begin to see
the returns we’d like to see?
24 • April 2022 • Technical Analysis of Stocks & Commodities
So the average winning trade times the probability of
winning trade takes place, plus the average losing trade
times the probability of losing trade takes place. That is
our expected value.
While we can certainly think of expected value as one
(of many) predictor of future outcomes, we can also use
the expected value calculation of our trading account in
this way as a measure of our success to date: namely, if
the expected value calculation comes out positive, then
we have a net profitable account to date. Conversely, if
the expected value comes out negative, then we have a
net unprofitable account to date.
The reason we can also interpret expected value in this
way—namely, as a measure of profitability to date, not
just as an estimator of future results—is because expected
value is also, by construction, a weighted average (the
“average” of a bunch of numbers is simply another way
of thinking about their expected value.) To illustrate
this concept, refer to the examples above—first, refer to
the loaded coin, for example. We have an 80% chance
of getting a 1 (heads), and a 20% chance of getting a 0
(tails). Now, instead of calculating expected value as we
did above—sum of probability-weighted outcomes—we
can calculate the “average” of, say, 100 hypothetical trials.
(Note that this operation is very different than calculat-
ing the average or “mean” of 100 actual trials with this
loaded coin. We would, in this case, be observing the
“sample mean,” which is an outcome of what is known
as a “random variable.” This concept in turn invokes
statistical concepts like normal distributions, standard
error, the t-statistic, and p-value, which, while interesting
and contributory to any statistical analysis of one’s trading
account, lie outside the scope of this article.)
Based on the above probabilities, we can expect 100
trials to yield us 80 heads and 20 tails. Our average,
therefore, would simply be 80 ones plus 20 zeros, all
divided by 100:
(1 + 1 + 1 + ... + 0 + 0 + 0 + ...)
= 0.8
100
This result is the expected value we calculated earlier.
Once we’ve convinced ourselves that expected value
is just a more robust way of calculating an average of a
set of numbers, we can now use the expected value of
the trades in our account to date as a way of looking at
our “average trade.”
If we have a positive expected value of the trades in
our account, we can also say with confidence that our
average trade to date has been a winning one—that is, we
have made money thus far. If we have a negative expected
value of the trades in our account, this result would sug-
gest that a trade of ours, on average, is a losing one—that
is, we have lost money thus far in the account.
Now, if we want to be profitable traders—that is to
say, we want a positive expected value of our trades to
date, a positive “average” trade—we must dig into the
expected value equation. Upon a thorough inspection of
this equation, we see why it is not necessarily imperative
that we time the markets well, that we consistently figure
out the turning points, and that we always be right about
when price will turn and where it will go, in order to be
a profitable trader. How? Well, if the average winning
trade is considerably larger than the average losing trade,
then our winning percentage can actually be fairly low,
while still maintaining a positive expected value for a
trade (that is, a net positive account). So in reality, there
are two values that can be increased in order to increase
your profitability as a trader:
• how often you are right
• how big your winners are when you are right
How would we calculate
the expected value of any
one trade undertaken?
right, to know exactly when price is going to move and
where it’s going to move, to time the markets correctly
to know exactly when the markets are going to turn, it
would be much easier and much more impactful in the
short run simply to cut your losers short when trades go
against you and let your winners run. To do so, however,
you must counteract a very powerful force of human
psychology: prospect theory.
What is prospect theory? Stay tuned for a second ar-
ticle in this series, which will explain it in detail, provide
some examples inside and outside of trading, and give
you some actionable steps to take in your account so you
can use it to your advantage.

In addition, you can decrease the size of losers when
you are wrong.
Furthermore, I would venture to say that decreasing
the size of the average loser and increasing the size of
the average winner is for most people a much easier and
quicker step to take in their account than truly becom-
ing a market timing wizard. Why? Well, inevitably,
improving your odds of being right would have to come
in the form gaining some edge or insight, creating and
mastering some wildly profitable technical analysis tool,
being plugged into earnings better than the millions of
other market participants, or something similar. Rather
than put all this pressure on yourself to always guess
Reza Javaheri graduated from the University of Penn-
sylvania cum laude with a degree in economics and
a minor in chemistry. He currently works in private
equity in Boston in the areas of debt and derivatives.
He can be reached at rjavaheri2020@gmail.com.
Further reading
Downey, Lucas [2021]. “Efficient Market Hypothesis
(EMH),” Investopedia, December 31, www.investo-
pedia.com/terms/e/efficientmarkethypothesis.asp.

Algo Q&A
DAVEY
Continued from page 17
curve, as shown in Figure 1. That
is your complete walkforward test
result. These results are all out-of-
sample. In my opinion, having a lot
of out-of-sample data is what makes
walkforward testing so much better
than traditional optimized testing.
Of course, there are pitfalls to
walkforward testing. Choosing bad Don’t let experts
window sizes, rerunning the test mul- change your approach
tiple times and using an inappropriate if you are satisfied
fitness function to determine the best with it.
case are all traps that inexperienced
traders fall into. In that respect, when done incorrectly, it can lead to
walkforward is similar to all other real time disaster.
types of backtesting. Done correctly,
walkforward can be a huge help, but
April 2022 • Technical Analysis of Stocks & Commodities • 25
 Searching For Alpha By Using Company Fundamentals
Beating The Indexes Using
Fundamental Analysis In
Long-Term Trading
Is it possible to beat the market indexes and generate
alpha returns by using fundamental analysis and com-
pany reports? Here’s a look.
by Zoltan Csesznik
S
tock trading is a hot topic, isn’t it? Over the
decades, technology has opened up a lot more
possibilities for retail traders. For me these
days, it feels like the early 2000s again, when
I happened to be in New York City and over-
heard a taxi driver buying WorldCom stock on
his phone. This characterizes the technology boom and
the trading boom that was happening at the time. Today,
everyone talks about online trading, trading apps, crypto
trading, and how much money a friend of a friend made
26 • April 2022 • Technical Analysis of Stocks & Commodities
last week and so on.
There are many urban legends about the markets, and
some very well may be true. In any case, there’s no doubt
that euphoria fuels the markets from time to time, creat-
ing bubbles in some decades, and sometimes the market
bubbles burst and many retail investors’ accounts are left
in pieces. This phenomenon is nothing new, since human
nature tends to repeat itself.
DRAGON: FULL FRAMES/ALPHA LOGO: MOH SUMARI/
SHUTTERSTOCKS/COLLAGE: CHRISTINE MORRISON
Despite the euphoria and market bubbles that can oc-
cur in the markets, is it possible to invest successfully in
the long term? The answer is a definite yes. Historically
speaking, an investor could purchase a well-known stock
index fund and typically, the indexes rise over time.
The bigger question is: Is it possible to beat the indexes
and generate so-called alpha returns? In this article, I
will try to find an adequate answer to this question. And
 FUNDAMENTAL ANALYSIS
since I have a strong penchant for studying company
fundamentals, I wanted to examine this from the stand-
point of using fundamental analysis to achieve alpha
returns. In the following sections, I’ll present the study
I undertook.
Fundamental analysis backgrouond
Over the decades, people have created countless theories
and approaches to predict market movements. In my
opinion, fundamental analysis is one of the best and most
sustainable. Fundamental analysis provides techniques to
measure a company’s stock intrinsic value by examining
various factors, including economic and financial fac-
tors. Its advantage is that by analyzing company reports,
we can at least know whether we are buying something
valuable.
This approach had utmost popularity until the late
1990s. The world was ticking at a much slower pace
then, and it was unconceivable to get the same amount
of information that we have today. In the decades lead-
ing up to the 1990s, having real-time quotes were the
privilege of a few, especially pit traders and floor traders
who actually made the market during trading hours at the
exchange. The rest of the world would read the printed
reports and price tables the next day in the financial press
or even the next week.
Although many other approaches to trading have risen
in popularity over recent years, such as technical analysis
and charting, algorithmic trading, quantitative analysis,
and even social media-based investing and headline-based
investing—and oftentimes, different approaches can be
combined—I continue to believe that basing investment
decisions on company fundamentals is the safest way
to approach trading in the markets. My belief is that
investing in solid company fundamentals has the best
chance to outperform the market over time.
Given my interest in using company fundamentals, I set
out to study whether I could design a successful model for
using fundamentals to generate alpha returns. I’ll explain
my methodology for my study momentarily.
But first, I will identify and define some financial
ratios I believe are important to consider when judging
any stock. After that, I will use these ratios to select a
basket of stocks based on fundamental data from 2011
to 2015. Then, I will compare the performance of the
stock basket to the overall market performance over the
same years.
So first, here are the ratios I will use in my study:
Net profit margin: Compares sales and profits. It divides
the net profit by total sales. Net profit margin is one of
those comparative figures that should be steady over time.
The more consistent, the better. One important charac-
teristic of a well-managed company is a consistent net
profit margin. This is especially true if revenue is grow-
ing period after period. If net profit margin is steady, it
suggests the management is able to cope with the growth
and with any challenges related to growth,
Current ratio: Measures the company’s ability to pay
its short-term debt, typically those that are due within
a year. We can calculate it by dividing current assets
by current liabilities. It is a very useful ratio because it
shows immediately how liquid the company is. Values
under 1 signal danger, because it means the company
has few assets (cash, receivables, inventory) to cover
the interest payments. Values over 3 are considered too
high, suggesting management is not able to use the assets
optimally. (In other words, the money is just lying there
and not creating any value.) Values between 1 and 3 are
generally considered acceptable.
Debt to equity ratio: This ratio is calculated by dividing
the total liabilities by the shareholder equity. It is an im-
portant metric; it shows the ability of shareholder equity
to cover all the debts. Obviously, a high value means
high debt. D/E values around 1 mean that the company
has just enough assets to pay back its debts, and so the
creditor must consider the risk that there is not enough
collateral to cover the debts.
P/E ratio: The price/earnings ratio represents the stock’s
current price per share divided by the annual earnings
per share for common stock. The ratio shows what the
market thinks a dollar of earnings is worth. In other
words, it reflects how many years it will take for the
company to earn the current value of its shares’ price.
If the P/E ratio is very low (under 5), then the shares of
the company are not very interesting to investors. As a
general guidance, higher P/E ratios mean higher than
average growth potential. However, higher ratios have to
be handled with reservations because the market might
assign great importance to future growth, which places
a lot of pressure on the company management.
Is it possible to beat the
indexes and generate so-
called alpha returns?
April 2022 • Technical Analysis of Stocks & Commodities • 27
 The P/E ratio is a useful Ratio Value
indicator because it compares
the stock price with the funda- Net profit margin Greater than 5%
mentals. It is imperfect like most Current ratio Between 1 and 3
ratios, because it is reporting
Debt to equity ratio Less than 1
in a stationary manner. When
Screening period
be able to pay its liabilities.
These characteristics will
2011–2015 suggest solid, well-managed
2011–2015 companies. I am aware that
the companies found by such
2011–2015
a screen won’t necessarily pro-

MARKETINOUT.COM
the ratio is fluctuating around P/E ratio Between 5 and 25 2015 duce the stocks with the highest
the same values over time, it is Short interest % Less than 10 2015 growth prospects compared to
a sign that market participants FIGURE 1: SCREENING METRICS. The settings used for
all other stocks in the stock uni-
are thinking similarly about the stock screen included the ratios: net profit margin, current verse. However, I am not screen-
the stock. ratio, and debt-to-equity ratio. These ratios were required to ing just for growth potential in
fall between predefined values every year from 2011 to 2015. this study. My logic is that many
Short interest ratio: This ratio The P/E ratio and short interest were observed only in 2015
companies in the stock universe
since they were only used to help gauge market opinion about
is the number of shares short the stocks at the time the portfolio was started. could at any time be coming to
divided by total outstanding the end of their growth cycle
shares. With the help of this ABB, ADP, AJG, ASX, BWA, CACI, CAE, CMT, CVE, CSV, CVS, and therefore could be on the
ratio, we can find out if the stock CVX, CW, DG, DOX, EL, ENSG, EOG, ESCA, ESLT, ETN, FDX, decline. If we instead screen to
FLS, GD, GPX, HON, HSIC, HURN, ICFI, IVZ, KOF, MCRI, MMC,
is heavily shorted or not. It is a MSCI, NDAQ, NOC, NSC, NVO, NVS, ODFL, OXY, PEG, RDY, find the most solid companies
sentiment indicator, showing us ROP, ROST, SBUX, SLB, SMP, STN, TDY, TEVA, TOT, TTC, in the stock universe, then these
what the market thinks about TTEK, UNP, VFC
should be stocks that outperform
the stock. If the value is high, FIGURE 2: RESULTS FROM STOCK SCREEN. Here are the crowd.
the symbols that resulted from the stock screen using the
then participants are pessimistic screening criteria shown in Figure 1. The screen, which was The last two criteria I added
about the future outlook for the run on a universe of approximately 6,000 stocks, returned 56 are P/E ratio and short interest.
company. If few shares are short, stocks. This study was conducted on a period beginning on These two ratios consider the
then fewer people will bet that January 2, 2015, so these screen results are from that date, expectations of market par-
and the resulting symbols were then followed in subsequent
the stock’s price will fall in the years for performance evaluation. ticipants. These ratios might
future. Conversely, if there is be useful because, through the
a large number of shorts, then stock price, they provide insights
more market participants will bet the stock’s price will into how the market evaluates the companies.
fall. For the screening settings, I required net profit margin,
current ratio, and debt to equity ratio to fall between
So that’s a rundown of metrics I will use. These ratios are predefined values every year from 2011 to 2015 (Figure
considered basic ones. But many times, simple is best. 1). Meanwhile, the P/E ratio and short interest I will
observe only in 2015, because I am only interested to
Searching for alpha: A case study know what market participants thought about the stocks
What do we look for in a company? I have three main at the time I started the portfolio.
considerations I prefer to use: profitability, debt, and Next, I apply these screening settings to the stock
liquidity.
First, the company
Year Total Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
should be profitable
year over year. Second, 2015 0.88 −1.44 5.75 1 0.57 0.5 −1.2 0.34 −5.14 −3.87 6.56 0.28 −2.47
it should have a healthy 2016 13.73 −3.7 0.73 6.92 1.34 0.7 −0.27 3.58 0.04 0.15 −2.03 5.53 0.74
debt ratio, not taking on
more debt than it can
2017 17.63 0.29 1.9 −0.14 2.32 1.24 1.51 0.73 −0.62 5.77 1.51 3.1 0.02

cover easily. And the 2018 −4.52 5.13 −3.97 0.64 −0.26 2.43 −0.44 3.67 2.01 0.43 −7.5 2.5 −9.16
last one is the company 2019 30.41 8.48 5.38 0.63 4.28 −3.55 6.88 1.99 −1.04 0.93 1.07 3.66 1.7
should have some liquid
assets. That way, should 2020 17.99 0.49 −7.56 −15.43 10.48 5.83 −1.68 5.3 5.02 −2.18 −1.03 14.61 4.14

anything happen in the 2021 12.77 −4.09 5.81 4.92 6.13 — — — — — — — —

world that could affect FIGURE 3: PORTFOLIO RESULTS OVER SIX YEARS. This shows how the stock portfolio performed from January
the company, it should 2015–April 2021. It assumes we invested long in each symbol shown in the screening results in Figure 2.
28 • April 2022 • Technical Analysis of Stocks & Commodities
universe, which in this Year Total Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
case is limited to the
stocks traded on the 2015 0.12 −3.1 5.49 −1.74 0.85 1.05 −2.1 1.97 −6.26 −2.64 8.3 0.05 −1.75

NYSE and NASDAQ 2016 9.63 −5.07 −0.41 6.6 0.27 1.53 0.09 3.56 −0.12 −0.12 −1.94 3.42 1.82
exchanges (over 6,000 2017 17.94 1.79 3.72 −0.04 0.91 1.16 0.48 1.93 0.05 1.93 2.22 2.81 0.98
listed companies). For
my analysis, I used the 2018 −5.32 5.62 −3.89 −2.69 0.27 2.16 0.48 3.6 3.03 0.43 −6.94 1.79 −9.18

paid service from Mar- 2019 26.39 7.87 2.97 1.79 3.93 −6.58 6.89 1.31 −1.81 1.72 2.04 3.4 2.86
ketInOut.com, which
2020 18.26 −0.16 −8.41 −12.51 12.68 4.53 1.84 5.51 7.01 −3.92 −2.77 10.75 3.71
runs an extensive his-
torical database of both 2021 10.98 −1.11 2.61 4.24 5.24 — — — — — — — —
technical and funda- FIGURE 4: PORTFOLIO RESULTS VERSUS BENCHMARK. Comparing the portfolio results from Figure 3 to the
mental data. Using this returns given by the S&P 500 index, which are shown here, over the same period suggests significant advantages of
service, it is possible the screened portfolio versus the benchmark over the scope of six-plus years. The total performance of the portfolio
in the study is 88.89% versus the benchmark’s total return of 78%.
to define screening pa-
rameters and also run
the screen for specific dates.
The screen returned 56 stocks using
my predefined parameters (Figure 2).
This means that on January 2, 2015,
there were 56 stocks that qualified for
all the criteria.
On the same day we open a long posi-
tion in every stock in the list, each in the
same dollar amount. We hold onto these
56 positions from January 2015 to April
2021. (I have saved the detailed results
for those who might be interested.) In
Figure 3, I provide a summary of the
portfolio.
Then I compared that with the bench- FIGURE 5: PORTFOLIO RESULTS VERSUS BENCHMARK. The difference in returns between
portfolio and benchmark is graphically displayed. The blue line is the portfolio return and the
mark (Figure 4). A quick comparison orange line is the S&P 500 index return. The portfolio return is above the benchmark since the
of the tables in Figures 3 and 4 shows portfolio returns were consistently higher than the index returns.
significant advantages of the screened
portfolio versus the benchmark index over the scope of “solid” is subjective, since company fundamentals and
six-and-a-half years. The total performance of the port- the ratios that measure company fundamentals can be
folio in the study is 88.89%, while the S&P 500 index interpreted in various ways. Although the choice of
only managed to climb 78%. my filtering parameters was subjective, I believe I have
The difference in these returns is better visualized in the shown on the first attempt that it is possible to beat the
chart in Figure 5. The blue line representing the portfolio market consistently by utilizing simple company evalu-
return clearly stays above the orange line representing ation. While a 14% difference over six years is a weak
the S&P 500 index return. This suggests an advantage in
selecting stocks based on their fundamental values. Continued on page 31

Summary
In this article, I set out to find out if I might be able to
achieve alpha returns by basing my investment decisions This suggests an advantage
on company fundamentals. My logic is that investing in in selecting stocks based on
or trading companies with solid fundamentals will likely their fundamental values.
outperform the benchmark consistently.
Of course, how you define what makes a company
April 2022 • Technical Analysis of Stocks & Commodities • 29
 FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is
the senior strategist for DeCarley Trading, a division of Zaner, where she
also works as a broker. She has written five books on futures and options
trading, with the latest being Trading Commodity Options...With Creativ-
ity (July 2020), as well as A Trader’s First Book On Commodities (third
edition, October 2017) and Higher Probability Commodity Trading (July
2016). Garner also authors widely distributed e-newsletters; for a free
subscription, visit www.DeCarleyTrading.com. To submit a question, email
her at info@carleygarnertrading.com or via www.DeCarleyTrading.com.
Selected questions will appear in a future issue of S&C.
Carley Garner

FED STIMULUS AND ASSET PRICES
Does government stimulus result in
higher commodity prices?
Yes. The commodity rallies we
have seen in 2021 and thus far in
2022 can largely be attributed to
the combination of government cash
injections into the economy to battle
the economic impact of the Covid
crisis, and social pressures calling
for renewable energy. In this column,
we will focus on the former.
Prior to the 2008 financial crisis,
isted and was an option for central
banks. I recall Googling the foreign
concept because despite being fresh
out of college with degrees in finance
and accounting, I had never heard the
term. If you haven’t already done the
same, here is the formal definition:
Quantitative easing (QE) is a mon-
etary policy whereby a central bank
purchases predetermined amounts of
government bonds or other financial
assets (municipal bonds, mortgage-
backed securities, corporate bonds,
and even stocks) to inject money into
the economy and expand economic
activity.
As we learned during the Covid
crisis, purchasing corporate bonds
acted as a market stability tool
because it instilled confidence in
investors. Some refer to this as the

TRADINGECONOMICS.COM
the use of quantitative easing was Prior to the 2008
considered unconventional. It was a financial crisis, the
last resort policy that could only be use of quantitative
justified as a means to avoid complete easing was considered FIGURE 1: QUANTITATIVE EASING (QE),
economic devastation. At the time, unconventional. 2000–2020. QE has more or less been part of Fed
few were aware this policy tool ex- monetary policy since the 2008 financial crisis.

FIGURE 2: COMMODITY RALLIES. QE and Fed monetary stimulus led to increasing commodity prices in 2010–2011 and again in 2020. With the Fed
now tapering its stimulative activity and QE expected to end sometime in 2022, will the current bullish price trend continue?
30 • April 2022 • Technical Analysis of Stocks & Commodities
 FUTURES FOR YOU
“Fed put” option.
Since initially pulling the ripcord,
quantitative easing has mostly been
a part of everyday life for the US
federal government (there was a
pause of the operation between 2014
and 2020 but monetary policy was
overall accommodating during that
time). I am not here to debate whether
the policy is right or wrong, just to
point out the impact the practice has
had on asset prices and whether that
trend continues.
Aggressive stimulus enacted to
avoid harsh economic cycles has
resulted in a significant increase in
the supply of money. While the con-
cept of quantitative easing and other
stimulus programs are complex, the
simplest explanation is that the more
money there is floating around, the
higher asset prices tend to be. More
specifically, a higher money supply
tends to open the door for potential
runaway asset prices.
This feels like 2011/2012 all over
again. In the years after the financial
crisis, but more notably the historic
infusion of liquidity into the US
economy, all assets moved higher
together. Although the timing and
magnitude of each asset’s move
wasn’t necessarily in sync, the “path
of least resistance” was higher for
most asset classes in 2010 through
2012. I can’t think of an excep-
tion … corn, soybeans, wheat, oil,
natural gas, gold, silver, stocks, and
even Treasuries moved higher as the
dollar pressed lower and the effects
of quantitative easing made its way
through the financial system. Of
course, this doesn’t mean chasing
prices higher is a good idea but while
the money supply is excessive, large
dips are probably opportunities for
commodity bulls, and even stock and
bond market bulls.
It is nearly two years since the
March 2020 Covid crisis, but more
notably, two years after the govern-
ment threw every penny available
(and those not yet created) along with
the kitchen sink into the US financial
Commodity rallies can
be spectacular but they
have always proven to
be temporary.
system. It worked … but probably too
well. Similar to 2010 through 2012,
we have seen all assets increase in
value at some point, mostly without
regard to common sense. Although
we will attach fundamental stories
to these moves, a primary driver
is simply the abundance of money
chasing a limited number of goods.
On the other hand, the Fed is cur-
rently tapering stimulative activity
and could be ending the quantitative
easing in the coming months, perhaps
as early as the second quarter of 2022.
Thus, bulls should be prepared for
the rug to be pulled at some point.
Commodity rallies can be spectacular
but they have always proven to be
temporary.

CSESZNIK/BEATING
Continued from page 29
alpha, it is still an alpha. By fine-tuning the filtering
criteria further, the difference in returns could possibly
be increased.
Zoltan Csesznik is pursuing a PhD at the Hungarian
University of Agriculture and Life Sciences, Hungary.
He can be reached at csesznik@gmail.com.
FURTHER READING
Kovács, Levente, and Elemér Terták [2019]. “Financial
Literacy: Theory And Evidence,” Verlag Dashöfer,
ISBN: 9788081781209, p. 23, pp. 62-63.
Brealey, Myers, Marcu [2001]. Fundamentals Of Cor-
porate Finance, The McGraw-Hill Companies, Inc.,
ISBN 0-07-553109-7, pp. 140-144, pp. 280-282.
Arslanian & Fischer [2019]. The Future Of Finance:
The Impact Of Fintech, AI, And Crypto On Financial
Services, Springer, ISBN-10: 3030145328, pp. 15-17.
If we screen to find the most solid
companies in the stock universe,
then these should be stocks that
outperform the crowd.
Wewege & Thomsett [2019]. The Digital Banking Revolu-
tion, De Gruyter, ISBN-10: 1547418338, pp. 39-42.
Thomsett. M. [1998]. Mastering Fundamental Analysis,
Dearborn Financial Publishing, Inc., ISBN 0-7931-
2873-0, pp. 22-36, pp. 70-72.
https://www.marketinout.com/stock-screener, retrieved
10/5/2021.
‡marketinout.com
‡See Editorial Resource Index
April 2022 • Technical Analysis of Stocks & Commodities • 31
 From One Minute To One Hour
Profitable Daytrades With
Candlestick Signals
Candlestick signals and patterns are as effective on a
one-minute chart as on a monthly chart. Here’s a look
at using candlestick signals to locate high-probability
daytrade setups.
by Stephen W. Bigalow
C
andlestick signals make powerful tools for
building daytrading strategies. The recurring
nature of human sentiment creates opportu-
nities in the market to find high-probability
daytrade setups. Candlestick analysis helps
reveal these opportunities.
Candlestick signals and patterns are the
32 • April 2022 • Technical Analysis of Stocks & Commodities
graphic depiction of all buying and selling decisions
during specific timeframes. They are as effective on a
one-minute chart as on a monthly chart. Because of this,
daytraders—who need fast and accurate signals—can use
candlestick formations to locate trade setups.
Candlestick analysis makes it easier to determine when
the overall market trend is bullish. Logically, a daytrade
in the bullish direction makes much more sense. And
looking for candlestick patterns that have long been
CROWD: HOBBIT ART/SHUTTERSTOCK
associated with particular patterns of expected investor
behavior allows us to to scan for the highest-probability
COLLAGE: NIKKI MOR
bullish signal trade setups.
Candlestick formations can reveal changes in inves-
tor sentiment. When you observe a reversal signal, you
 CANDLESTICK CORNER

anticipate that a change in price

direction may be imminent.

Some high-probability
candlestick signals
Some candlestick signals in particu-
lar are known to have the highest
probabilities of expected outcomes.
The high probability results from
the information that is built into the
development of the signal. Being
familiar with the candlestick signals
that are historically associated with
particular expected outcomes can
dramatically improve your daytrad-
ing results.

WWW.CQG.COM
There are approximately 12
candle­stick patterns or signals in
particular that can contribute to re- FIGURE 1: DOJI SANDWICH. This chart of Gibraltar Industries, Inc. (ROCK) illustrates the doji
sandwich. A doji is when prices open and close at approximately the same level during a specific
liable market analysis and can help timeframe. This pattern illustrates indecision between the bulls and the bears. Note that day 1 produces
you achieve good trading results. I’ll a strong bullish candle. Positive price movement on day 2 of a doji sandwich would confirm the bullish
discuss a few of them here. trend but not with any decisiveness. The “doji rule” states that price will usually move in the direction
of how price opens after a doji.
Doji
The doji is one of the most recog-
nized candlestick signals. It occurs
when prices open and close at ap-
proximately the same level during
a specific timeframe. This pattern
illustrates indecision between the
bulls and the bears. It produces
extremely powerful price move
expectations!
Daytrade profitability is enhanced
by the “doji rule.” The doji rule
simply states that price will usually
move in the direction of how price
opens after a doji. This expectation
can help guide daytraders.
FIGURE 2: THE FLUTTER KICKER SIGNAL. The difference between a bullish flutter kicker signal
The doji sandwich and a doji sandwich is that day 1 of a bullish flutter kicker signal is a bearish candle. The next candle
The doji sandwich signal can pro- gaps up at or above the open of the previous candle and forms a doji. The gap up illustrates a new
duce a very high probability of a strong bullish sentiment.
positive price move. The chart of
Gibraltar Industries, Inc. (ROCK) in Figure 1 illustrates
how to recognize and take advantage of the doji sandwich Candlestick signals and patterns
as a daytrade setup. are the graphic depiction of all
Note that day 1 produces a strong bullish candle. (This buying and selling decisions during
analysis is as relevant on a one-minute chart, 10-minute
chart, or hourly chart). Positive price movement on day
specific timeframes.
2 of a doji sandwich would confirm the bullish trend but
April 2022 • Technical Analysis of Stocks & Commodities • 33
 the new trend. A powerful trend indi-
cator is the T-line. The T-line acts as
a natural support & resistance level,
reflecting market sentiment (Figure
3). When the T-line is applied in
conjunction with candlestick signals
and patterns, you can get powerful
trend analysis.
Utilizing confirming indicators
such as moving averages and espe-
cially the T-line, daytrade and swing
trade entry probabilities are dra-
matically improved. The candlestick
investor has the advantage of seeing
immediately what investor sentiment
is doing at technical levels that other
investors are looking at. For example,
witnessing a candlestick signal
FIGURE 3: THE T-LINE. The T-line acts as a natural support & resistance level, reflecting market that is breaching a moving average
sentiment.
resistance level that everybody else
not with any decisiveness. is watching enhances the probabilities that the bullish
The doji rule—a positive open after a doji—produces trade is confirming. Witnessing a bullish reversal signal
strong expectations of positive price movement. The at a major moving average support level that everybody
candle after the doji will usually be the same magnitude else is watching is an immediate indication of investor
as the candle prior to the doji. This allows the daytrader sentiment at that level.
to enter the trade immediately. Other confirming tools such as Bollinger Bands, Fi-
bonacci retracement levels, trendlines, and support &
The flutter kicker signal resistance levels can also aid analysis.
The bullish flutter kicker signal also provides a strong
expectation of a particular result. The difference between In closing
a bullish flutter kicker signal and a doji sandwich is that You do not have to be a sophisticated technical analyst
day 1 of a bullish flutter kicker signal is a bearish candle to utilize candlestick analysis. It serves as a visual aid.
(Figure 2). The next candle gaps up at or above the open Out of the 50 or 60 documented candlestick signals, you
of the previous candle and forms a doji. This pattern is really only need to learn the 12 major signals—six longs
easily recognized and can be scanned for. The new bullish and six shorts. The signals are merely commonsense
force is already built into the signal. The gap up illustrates investment perspectives put into a graphic depiction.
a new strong bullish sentiment. Then the doji rule kicks If an investor is already using a chart-based trading
in, which, again, states that price will usually move in the system, adding candlesticks to the chart will improve
direction of how prices open after a doji. A positive open visual analysis. Quick visual analysis can help you identify
after the doji produces a strong probability of having a high-probability trade setups based on how price opens
bullish candle. This allows daytraders to take advantage during the next timeframe.
of an extremely high-probability trade entry. The Japanese rice traders of past centuries who are
The doji sandwich and the flutter kicker signal are credited with first developing the candlestick charting
just a couple of the candlestick patterns that can lead method were using a graphical depiction to illuminate
to excellent results for the daytrader. There are another when trend reversals are occurring. Where do most people
dozen or so candlestick signals not covered here that a buy? They buy exuberantly at the top. Where do most
daytrader can use to help find trade setups. people sell? They panic and sell at the bottom. Knowing
these aspects of human nature, the graphic clues provided
The T-line trend indicator by candlestick signals give clarity as to when it is time to
Candlestick signals and patterns not only illustrate when
a new trend is starting; they also illustrate the strength of Continued on page 43
34 • April 2022 • Technical Analysis of Stocks & Commodities
 MARKET RAP
THE WORLD OF RETAIL TRADING
Emilio Tomasini is an adjunct professor of corporate finance at the
University of Bologna in Italy and is a professional trader. He has au-
dited over 5,000 accounts of traders during 13 years of a real-money
trading competition, giving him unique insights into what helps a retail
trader to succeed. He has expertise in technical analysis and trading
Emilio Tomasini
system design. In this column, he shares his sometimes “unserious”
thoughts on serious topics in finance. In his writings, he hopes to help the retail trader better understand the leap
from unprofitable to profitable trader, firmly believing that the right answers can come only if the right questions
are asked. At his website at www.emiliotomasini.com, he offers some of his expertise in a free video course.

SOME PHILOSOPHICAL THOUGHTS
ON OPTIMIZATION AND ITS ROLES
How many angels can dance on
the head of a pin? This well-known
rhetorical question suggests it is fool-
hardy to debate what can’t practically
be answered. The topic of optimiza-
tion often strikes me the same way
when it is discussed theoretically by
those who aren’t actively involved in
practicing it, leading to a dead-end
discussion.
The subject of “optimization”
frequently comes up in the field of
technical analysis. As a simplistic
example of what optimization is and
what I’m really focusing on here, we
might consider whether we should
use a 14-day RSI versus a two-day
lookback; whether we should draw a
trendline between two swing highs
instead of three swing highs; and so
on. The answers are easy, right? We
use a 14-day RSI or a 10-day moving
average or two swing highs because
a statistical test showed that those
choices will produce lower drawdown
or higher net profit.
Or is the answer really that easy?
Sure, we all can fall into the pitfall
of not taking other choices into ac-
count or unquestioningly using the
commonly accepted parameter. But
that’s not really what I’m focusing on
here. In actuality, the most difficult
thing of all is to acknowledge the
point at which optimization stops
being an ally and becomes your foe.
This is the most frequent mistake
I made in my trading career and it
is also the most common mistake a
novice trader makes.
It is easy to think you will always
“optimize properly” for an indicator, a
trading system, or whatever quantita-
tive model comes into your hands. But
in practical terms, what does it really
mean to optimize properly? What is
the liturgy that you are assumed to
perform, like a wizard who tries to
transform a stone in gold?
During the course of my 30 years
of trading, my eyes would practi-
cally glaze over while constantly
optimizing systems and indicators.
According to my learned experience,
there are four key steps for how to
consider optimization before you get
to walk through the door to paradise.
These steps are defined in relation to
the importance you are placing on
optimization in your process—how
much you rely on it and to what extent
it is the “driver of value” when you
build a quantitative model.
Four considerations
1. Will optimization turn an unprof-
itable system into a profitable one?
The first consideration is whether
optimization can make a losing sys-
tem or indicator turn profitable. In
this case, optimization becomes the
driver of value in your business, since
you are starting from scratch with a
loser and optimization carries out the
most difficult task to save your (trad-
ing) life. If optimization is the unique
April 2022
“driver of value,” then you really have
to be very experienced in this area
in order to fix the nearly irreparable
damage of a useless trading system.
In this case, you are depending highly
on the wizardry of optimization, and
optimization here takes on a crucial
amount of importance.
2. Can optimization improve some-
thing that’s already decent? The
second consideration is whether
optimization of the indicator or
trading strategy can add value by
improving system profitability. Here,
the role of optimization is reduced
compared to the first consideration
just discussed. In this case, the system
itself is already making money and
the optimization may improve it. The
optimization isn’t as crucial here.
3. Is optimization necessary at all?
Then you have the situation where
your system is already so good that
you wonder whether optimization
will add any value at all. But in the
end, since you will be forced to pick
a parameter for your indicator in
order to display it, or forced to fill
in some number to use something
on your platform, you will inevitably
perform the optimization since it is
enshrined in your process.
4. Is optimization in reality useless?
But there is a fourth stage, and this is
Continued on page 43
• Technical Analysis of Stocks & Commodities • 35
 INTERVIEW

On Digital Currencies And Digital Assets

A Conversation With
Ric Edelman
Ric Edelman founded Edelman Financial Engines (EFE), an investment
and financial planning firm, in 1986 and it has grown to having nearly
$300 billion in assets under management. Consumer Reports magazine
and Barron’s have each at one point ranked the firm the number one
independent advisory firm for quality. According to the InvestmentNews,
Investment Advisor, and RIABiz publications, Edelman is one of the
most influential personalities in the investment and financial planning
arena.
After departing EFE more than 30 years after its founding, Edelman then
founded the Digital Assets Council of Financial Professionals (DACFP)
in 2018 to help financial advisors learn about the digital asset revolution
encompassing blockchain, bitcoin, digital assets, NFTs, DeFi, DAOs, and
CBDCs. DACFP provides education, training, advice, and consulting to
financial advisors and executives in the financial and crypto communi-
ties. Moreover, DACFP offers the Certificate in Blockchain and Digital
Assets for financial professionals, the only online self-study course of its
kind. Moreover, he created the first exponential technologies ETF and
holds two patents for financial innovation. My focus has always been
The radio show “The Truth About Your Future With Ric Edelman” has on financial education.
aired for 30 years and is heard across the country. TALKERS magazine Consumers are in great
named Edelman one of the 100 most important radio talk show hosts in need of understanding
the US. Edelman has also produced and hosted TV finance programs for
decades. He is the author of 10 finance books with his 11th book, The Truth
how money works and
About Crypto, to be published in May 2022 by Simon & Schuster. there are few outlets
Over the years, Edelman has appeared in major media hundreds of available to help them.
times including USA Today, C-SPAN, CNBC, The Washington Post,
The Wall Street Journal, The New York Times, and many more. He is
a force in providing financial education and literacy to many, including serving as the host for TV specials on
the PBS network.
Stocks & Commodities Contributing Writer and ETF Columnist Leslie N. Masonson spoke with Ric Edelman
on February 2, 2022 to discuss his success and experience, his advice to investors, and his expertise and insights
into the digital asset revolution that is expanding at a rapid pace.

Ric, the major focus of
this interview will be
your insights regarding
the explosion in digital
assets. However, I first
huge asset size, employee growth,
and recognition?
My focus has always been on
financial education. Consumers
are in great need of understanding
winning monthly newsletter. And
we’ve given thousands of seminars
where consumers have enjoyed our
message and our focus on education.
All that attracted many clients to our
GUALTIERO BOFFI/SHUTTERSTOCK

wanted to ask you about your prior how money works and there are firm over the years.
financial advisory and financial few outlets available to help them.
planning experience running So my wife and I focused on finan- Based on your 36 years of experience,
Edelman Financial Engines. How cial education via radio, television, how critical have you found the role
were you able to achieve the firm’s bestselling books, and our award- of financial advisors to be in the
36 • April 2022 • Technical Analysis of Stocks & Commodities
financial success of their clients
over the long term?
Our firm’s advisors are key. They’re
the ones who get to know the clients
on a very intimate level, learning ev-
ery aspect of their personal finances
and providing advice that’s in each
client’s best interest. And there is
no substitute for those relationships
that are developed over the years.
The quality of our advisors is the
reason that our firm has been so
successful.
What percent of self-directed
investors do you think can be suc-
cessful?
Maybe 10% or 20% of the invest-
ing public can succeed on their own.
Most people don’t have the time, the
knowledge, or the desire to handle
their money on their own and are
better served by turning to a financial
advisor.
As a bestselling financial author,
investor, financial advisor and fi-
nancial planner as well as educator,
what have you found to be the most
common mistakes that investors
make in the stock market over and
over again?
The failure to learn from history.
Investors continually make the same
mistakes that investors have been
making for decades. They tend to be-
lieve that past performance predicts
future results, which is never the case.
They act emotionally out of fear and
greed and that causes them to buy
high and sell low. And these mistakes
are easily avoided if you understand
how the financial markets work, but
most investors are not aware of these
basic principles.
So how can they best overcome
their mistakes? What should they
be doing?
They should be relying on the as-
sistance of a financial professional.
Because our behavior
is largely emotional, we
need a dispassionate pro- This new technology is
fessional to help us when revolutionary. It was invented
we’re making emotionally just a short time ago in 2009
charged decisions that and it is unlike anything any of
pertain to our financial
security. A financial advi-
us have ever experienced.
sor can help you to protect
yourself from making bad
decisions at the moment that you’re That’s why I created Digital Assets
about to make them. Council of Financial Professionals
(DACFP) four years ago.
Does your firm use any technical
analysis in combination with fun- How did you first get interested in
damental analysis to analyze securi- the digital space?
ties and ETFs before recommending I was first introduced to bitcoin in
them for purchase or sale? 2012 and I very quickly realized that
Over the years, we have used a this is a transformational technology
wide variety of investment analysis, that will revolutionize global com-
predominantly fundamental analysis, merce on an unprecedented scale,
but also acknowledging technical and but I also realized that most financial
quantitative research. All of it has a advisors are not familiar with this
role in portfolio management. technology and are failing to under-
stand the incredibly powerful invest-
Does your firm generally recom- ment opportunities that it represents.
mend a buy & hold strategy for So I have been working over the past
most retail investors, or more of a decade to improve financial advisor
portfolio diversification approach knowledge of this technology so that
with perhaps some rebalancing? they can learn how to incorporate it
Our approach has always been into their practice management and
about extensive diversification with a client portfolios so that their clients
long-term time horizon and periodic can enjoy better returns and the advi-
rebalancing. sors can better serve their clients.
In 2021, you left Edelman Financial Ric, before we delve into our discus-
Engines. Could you briefly tell us sion of digital assets and curren-
why you left? cies, could you briefly explain the
Our firm had grown very large. It following terms: “cryptocurrency,”
now has over 350 financial advisors, “bitcoin,” “blockchain,” and “min-
1,500 employees in 170 offices around ing.”
the country, and three private equity Sure. Why don’t we take them one
partners. The firm has not needed my at a time.
involvement like it previously did.
And I have grown more and more Let’s start with cryptocurrency.
interested in focusing on exponential This word is actually a misnomer.
technologies and digital assets. So The proper phrase is “digital assets
it has made sense for me to devote and digital currencies.” We have to
my energies to financial education take “cryptocurrency” and break
for investors and for advisors in the it into two parts. A digital asset is
area of blockchain and digital assets. something such as bitcoin, which
April 2022 • Technical Analysis of Stocks & Commodities • 37
 onto the blockchain. It binars and providing substantial
is very similar to having amounts of content on our website,
Mining is the process an auditor validate your last year we launched the Certificate
that is used to verify the information. And you in Blockchain and Digital Assets.
data that you put onto the don’t need to pay much This is an 11-module online self-study
blockchain. attention to mining. It is course for financial advisors to learn
something that happens in about blockchain and digital assets
the background to make (course price is $649). It provides 13
has a value or a price that fluctuates. sure that the data on the blockchain CE credits and offers a world-class
Just like the stock market fluctuates is accurate and valid. faculty that allows advisors to get
and the real-estate market fluctu- the knowledge they need so they can
ates, digital asset prices fluctuate The subject of digital assets is not determine how to integrate this into
as well. Digital currencies, instead very well understood by financial client portfolios and how to use this
of fluctuating in price, are stable in advisors and stock brokers, and within their financial advisory prac-
value much like the dollar is, and especially the investing public. Why tice. We’ve had over 2,000 advisors
they operate more like a bank ac- do you think that is the case? enrolled in the program so far, and
count or a money market account. This new technology is revolution- everybody has expressed apprecia-
We need to recognize which of them ary. It was invented just a short time tion for the course and we’re very
we’re talking about. “Cryptocur- ago in 2009 and it is unlike anything proud of it.
rency” is too antiquated of a term any of us have ever experienced. Re-
now and doesn’t accurately describe member the first time we all heard How do you and your firm keep
the marketplace today. So we should of the Internet and the opportunity up with the news in the field as it
refer to either digital assets or digital to send emails to each other instan- proliferates at a warp speed?
currencies. taneously for free? This was new and This is why we now have 18 em-
And one final thing to add: It’s just radically different. Blockchain is also ployees in our company. It takes a
digital money. Instead of having dol- new and radically different and many dedicated full-time effort to do all
lars in your pocket, this is money that people refer to it as the “Internet 3.0.” that research and we spend all of our
is digital on the Internet just like your Whereas the first Internet allowed us time focused on it. We can then distill
Visa card or your airline miles. to communicate with each other via all of the news to keep financial advi-
Blockchain is the technology that email, this is the Internet of money. sors informed so that they don’t have
allows digital assets to exist. Block- And since money makes the world to spend massive amounts of time
chain is simply a ledger just like your go round, this is profound, but it has researching it all themselves—we do
checkbook is a ledger, but instead of nothing in common with any other it for them so they can stay apprised
you owning your checkbook and you asset class we have ever experienced. of the latest while staying focused on
being the only one with access to it, It has nothing in common with stocks, serving their clients.
a blockchain checkbook is available or bonds, or real estate, or gold, or
on the Internet for everyone to see. oil, and therefore advisors need to Who are some of the most knowl-
Anyone can put data on it and every- learn from scratch because their prior edgeable individuals in the digital
one can see it. But once the data is knowledge and experience won’t be asset space based on their insights
there, it is permanent. It can never be of any help to them as they explore and guidance?
changed, or deleted, or copied. This this new technology. There are so many, it’s almost
makes it wonderful for use by com- too many to count. I would include
merce because it allows businesses After hosting two meetings in July Hunter Horsley and Matt Hougan at
to work together. Everybody’s seeing and September of 2018 with more Bitwise; Zac Prince at BlockFi; Tom
the same data and it allows business than a dozen digital asset thought Jessop at Fidelity Digital; Luis Ber-
to operate faster, cheaper, and more providers, you founded DACFP ruga at Global X; Marty Flanagan at
securely on the Internet. later that year to provide digital as- Invesco; Jenny Johnson at Franklin
set education to financial advisors. Templeton; Ryan Radloff at Choice;
What about the term “mining”? To date, what accomplishments of Greg King at Osprey; and Chris King
Mining is the process that is DACFP are you most proud of? at Eaglebrook. The list goes on, and
used to verify the data that you put In addition to hosting many we- on, and on.
38 • April 2022 • Technical Analysis of Stocks & Commodities
Bitcoin’s price has had a wild rise
in the past two months, dropping
50% to $33,000 on November 10,
2021 before rallying to $38,700 on
January 24, 2022. And over the
course of a dozen years, bitcoin has
declined 50% at least eight times
(Figure 1). Isn’t this volatility a
problem for most individuals and
investors?
I don’t believe so. If you look at the
price performance of bitcoin since its
inception in 2009 and you were to
compare it to the price performance
of, say, Amazon stock in its first 12
years of existence, you would find
very similar levels of volatility. It is
common for brand-new investments,
brand-new asset classes to be very
volatile. That is the nature of an
emerging technology. So it is not at
all surprising that bitcoin has been
very volatile in its history, but it has
also been the best-performing asset
in history by far. There is no other
investment anywhere in history that
has performed as well as bitcoin.
And so, people need to recognize
that volatility is simply an inherent
part of investing. It is not a reason to
fear investments and certainly not a
reason to avoid them.
Well, if bitcoin declined to, say,
$10,000, would you reconsider its
viability as a worthwhile invest-
ment?
The lower bitcoin goes, the happier
I get because I continue to buy. And
I’ve been buying steadily since 2014.
I think that as the number of people
owning bitcoin grows, we will see
higher and higher prices. And as
market dips continue to occur, the
dips probably won’t be as deep or
long-lasting and it’ll become more
and more stable, similar to what
happened with the price of Amazon
stock over its history. I think we’ll
experience something similar with
bitcoin.
STOCKCHARTS.COM
FIGURE 1: BTC/USD, APRIL 2014–JANUARY 2022. This monthly chart of the currency pair
BTCUSD over a little less than eight years shows how bitcoin has skyrocketed. Along the way it
has had several 50% corrections, but has performed well since its 2009 inception with a high near
$69,000 in November 2021.
If an investor wanted to invest in and credit unions that use NYDIG
blockchain, what might he do? to provide bitcoin services to their
Well, there’s really no direct way customers. Are you familiar with
to invest in blockchain because that’s this company and do you think this
simply an underlying technology, just type of offering will expand to banks
like you can’t invest directly in the across the country?
Internet. You can invest in companies Yes. NYDIG is a very impressive
that are developing Internet technol- organization and they have relation-
ogy or blockchain technology, but ships with hundreds of banks and
you can’t invest in the technology financial institutions across the
directly. So I believe that it makes country, including a major arrange-
sense to invest in the digital assets ment with community banks that are
that the technology makes available providing access to tens of millions
and also to invest in the companies of depositors who will now have the
that are developing that technology. opportunity to buy digital assets
In fact, we refer to that as “the picks through their banking institution.
and shovels approach.” Think back This is another example of how digital
to the California gold rush, when assets are becoming mainstream. It
Levi Strauss made more money than is no longer something that tech ex-
anybody but he never even mined for perts and investors on the fringe are
gold. He just sold blue jeans to the gold engaging in. This is becoming very
miners. That’s the picks and shovels commonplace within the investment
approach, and it’s a very effective way and financial community.
to engage in the digital assets and
blockchain asset class—by investing In September 2021, El Salvador
in the companies that are
developing the technol-
ogy that the digital assets
are using. Blockchain is also new and
radically different and many
In the January 25th, people refer to it as the
2022 Wall Street Jour- “Internet 3.0.” This is the
nal, there was a full-page Internet of money.
ad for NYDIG present-
ing a list of 35 banks
April 2022 • Technical Analysis of Stocks & Commodities • 39
 Cathie Wood of Ark for people to own digital assets.
Invest projects a bitcoin
It is not at all surprising price of at least $1 mil- A June 2021 survey of over 1,000
that bitcoin has been very lion by 2030. Is that a adults over age 18 by the National
volatile in its history, realistic number or is Opinion Research Center at the
but it has also been the that pie in the sky? University of Chicago (NORC), a
best-performing asset in I think the number is large independent social research
certainly plausible. When organization, found that 10% of
history by far.
you consider that only American adults had invested in
300 million people in the bitcoin and their average age is
world own bitcoin today under 40 with 55% having a college
adopted bitcoin as legal tender. out of 7 billion on the planet, imag- degree but only 2% were getting
About 3.8 million of its citizens use ine what happens when that number information about bitcoin from a
a bitcoin wallet known as “Chivo,” doubles, triples, and quadruples. financial advisor. Do these statistics
which has an 84% adoption rate. Think back to when Facebook only worry you in any way?
Is this in the best interest of their had 300 million users; today they They do in several ways. It shows
population? have three billion users, and look that people are often getting infor-
Yes. This is wonderful news for at the stock price then versus the mation from the wrong sources, and
those living in El Salvador because stock price today. So as the number that many people are approaching
that country is experiencing a very of people join the bitcoin network, I bitcoin as a get-rich-quick oppor-
shaky economic environment with believe that the price of bitcoin will tunity rather than as a fundamental
massive inflation. And because most rise exponentially because the supply new technology that will improve
do not have access to a bank account, of bitcoin is fixed. And, therefore, it’s commerce on a global scale. Those
they are struggling to be able to store a classic supply-demand equation. As people may end up buying and sell-
and distribute their money in a safe, demand grows with a fixed supply, ing at the wrong time for the wrong
convenient way. Bitcoin allows this to the price will rise. reasons. That is a little troublesome
happen very quickly, very safely. That and worrisome, not for bitcoin, but
provides inclusion for all citizens. Why are there only 21 million bit- for those individual investors. But
And this is why there is such a high coins that are able to be mined? it does demonstrate that there is an
rate of engagement among people Because Satoshi said so. Sorry, bad increasing amount of interest from
living in El Salvador and why you’re joke. Seriously, Satoshi Nakamoto, all age groups and everybody of dif-
going to see other countries follow the inventor of the bitcoin blockchain ferent education levels and different
their lead and do the same thing. and the bitcoin digital asset, wanted income levels. This is demonstrating
to create a form of digital money that how this new asset class is becoming
The January 28th 2022 Wall Street is immune to inflation. By creating mainstream.
Journal contained a multipage a fixed number of coins, dilution
article titled “Crypto Cribs” about (inflation) is prevented. Thus, greater Since September 2020, the correla-
the use of digital currency in the demand for bitcoin has to result in tion between cryptocurrency prices
property market. The article pro- an increased price. This is one of and the S&P 500 and the Nasdaq
vided examples where at least three the key reasons many people believe Composite has increased to about
luxury homes or apartments with the price will rise as more people get 63%, up from about 40% earlier.
price tags from $3.5 million to $22.5 engaged. With such a recent close correlation,
million were paid for in cryptocur- there does not seem to be much of a
rency. Do these types of purchases By 2030, do you expect that digital diversification advantage to adding
legitimize digital currency, and do assets in some form will be owned bitcoin to a portfolio. What is your
you see this trend continuing? by more than 50% or more of the view of this?
I think all this demonstrates that US adult population? Well, it’s still too early to tell. In
huge fortunes have been made via this Yes. I think that over the next sev- its early years, bitcoin had a zero
new asset class, and that much more eral years, digital assets will become correlation to other asset classes. As
wealth will be created in the future a routine part of every diversified more and more institutional investors
for a great many more people. portfolio and it will be commonplace buy bitcoin, such as pension funds,
40 • April 2022 • Technical Analysis of Stocks & Commodities
endowments and major corporations,
the correlation may increase. But we
will have to wait and see how that
plays out. In the meantime, even if it
is not as non-correlated as it used to
be, it still remains an opportunity to
further diversify a portfolio.
Do you agree with Steve Hanke,
professor of applied economics
at Johns Hopkins University, who
said in a January 2022 Wall Street
Journal article: “As currently con-
structed, the crypto ecosystem lacks
accountability and legal recourse,
so there is little basis for trust and
… cryptocurrencies are untethered
from economic value.”
He’s missing the point. The whole
point of blockchain technology is
that you don’t need trust. Trust is
replaced by cryptographic authenti-
cation. That’s the entire point of the
technology. So, what the professor
argues is a problem is actually one
of the best features of the technol-
ogy. I’m a member of the Global
Blockchain Convergence, which is
a group of about 200 people from
around the world—mostly lawyers—
who are working with governments
around the world to resolve important
jurisdiction questions. At present,
the professor is correct: there’s little
law on this, and that poses risks to
business and investors. But we have
to remember that this is still a new
and emerging technology and laws
and regulation always come after
the innovation. Think back to when
Henry Ford created the Model T
and we suddenly had thousands of
cars—and then car accidents. It was
only after that that state and federal
governments created rules of the
road, painted lines in the middle of
the road, and built traffic lights. The
innovation comes first and the regu-
lation follows, and we are going to
experience the same thing with this
technology.
Ticker Fund Name
ProShares Bitcoin Strategy
BITO ETF
BTF Valkyrie Bitcoin Strategy ETF
XBTF VanEck Bitcoin Strategy ETF
Global X Blockchain
BITS
& Bitcoin Strategy ETF
FIGURE 2: CRYPTO-RELATED ETFS. There are only a handful of crypto-related ETFs, which came
to market in October and November 2021. They each have different characteristics and compositions.
The ETF seen here with the highest AUM is ProShares Bitcoin Strategy ETF.
Do you believe that the three
branches of the federal government
should set legal and regulatory re-
quirements for digital assets going
forward?
Yes. It’s essential. And the good
news is the government is engaged
on every level. The IRS, CFTC,
SEC, FINRA, Treasury Department,
FinCEN and others are all actively
engaged in regulation. Congress has
already begun to hold hearings. We
can expect to see legislation as well,
and that is very healthy. It is essential
for the protection of investors and
it will increase investor confidence
and further allow the technology to
develop for the benefit of business
and consumers.
Why has the SEC approved a few
bitcoin ETFs based on futures
rather than on spot prices?
One reason is that the SEC feels
it has clear regulatory authority for
bitcoin futures. It might not have the
regulatory authority for a spot bitcoin
ETF. So this is an illustration of how
we need greater clarity and we need
to give the SEC broader authority to
be able to serve its consumer protec-
tion goals.
How do you suggest that
the average investor in-
vest in the digital asset
space other than directly
in the companies?
There are many ways
that you can invest in the
April 2022
Inception Date Exp Ratio AUM ($MM) 1 Year Flows
($MM)
10/19/2021 0.95% $950 $1,619
10/22/2021 0.95% $37 $61
11/15/2021 0.65% $22 $21
11/15/2021 0.65% $7 $13
digital asset space. You can buy coins
and tokens directly from a digital
asset exchange. You can buy ETFs
(Figure 2) that invest in companies
that are building this technology.
You can invest in what we call proxy
stocks such as MicroStrategy Inc.
(MSTR), which owns billions of
dollars in bitcoin. You can invest in
over-the-counter securities that invest
in digital assets. You can even have
an IRA account that invests in digital
assets. So there are a wide variety of
ways that you can participate in this
new asset class.
Can you mention any particular
ETF tickers of interest that readers
might want to look up when they
get a chance?
At our website, https://dacfp.com,
we show a complete list of investment
opportunities on our “DACFP Yellow
Pages” web page. This is designed
to be a comprehensive listing of all
of the investment products and sur-
rounding services to help investors
and financial advisors learn about
investing opportunities. The DACFP
Yellow Pages can be viewed for free
at dacfp.com.
Over the next several years,
digital assets will become
a routine part of every
diversified portfolio.
• Technical Analysis of Stocks & Commodities • 41

Many people are
approaching bitcoin
as a get-rich-quick
opportunity rather than
as a fundamental new
technology that will
improve commerce on a
global scale.
That’s great. I have already checked
it out. It’s very comprehensive and
looks like an excellent resource.
Thank you.
A Bloomberg online post on Janu-
ary 29, 2022 said the following:
“There’s a growing concern about
criminal activity in the digital asset
market while regulators wonder
whether 18% yields on crypto sav-
ings accounts might be too tempting.
Russian president Vladimir Putin
may be a fan of crypto mining, but
memories of 2018 are sparking fears
among bitcoin faithful.” Do you
have any comment on that?
I don’t agree with the premise. The
latest data shows that illicit activity
comprises only 0.15% of all bitcoin
transactions. The World Bank esti-
mates that 3% of the world’s GDP is
engaged in illicit activity. Nobody’s
suggesting that we ban cash. So
the notion that people think bitcoin
is largely being used to for illicit
activity is simply wrong. This is an
inaccurate assertion that is not sup-
ported by the facts.
I understand you recommend that
investors place only 1% to 2% of
their assets into digital assets to limit
their downside but to also potentially
benefit from the huge long-term gain
that you foresee coming down the
road. Under what circumstances
would you suggest they increase that
42 • April 2022 • Technical Analysis of Stocks & Commodities
percentage, if any?
As you become more
experienced and more
knowledgeable and more
comfortable with this
new asset class, you can
consider increasing your
allocation. But for most
people who are just get-
ting started who don’t
know very much about
this asset class, a 1% al-
location is plenty.
Your 11th financial book, The Truth
About Crypto, will be published
in May 2022. Is one of the reasons
you wrote it because you forecast
that about one-third of American
adults will be owning digital assets
by the end of 2022, and that trend
will continue to accelerate and you
wanted them to really understand
the topic?
Yes. One of my biggest concerns
is that people often invest in things
they don’t understand, or they fail to
invest in opportunities that they are
unfamiliar with. So my book The
Truth About Crypto is designed to
help investors and financial advisors
learn what they need to know about
this new asset class so that they can
proceed in the right way. We’re very
excited the book is being published
by Simon & Schuster. It’s available
for order now through Amazon or
your favorite bookseller.
Your new weekly radio show, “The
Truth About Your Future With Ric
Edelman,” is broadcast on 30 radio
stations across the country as well
as being accessible at the website
TheTAYF.com. The show focuses on
five personal finance topics, includ-
ing longevity, wellness, and health;
retirement security; exponential
technology; and blockchain and
digital assets. Why did you decide
to add another activity to all your
other responsibilities and interests,
not even mentioning your philan-
thropic activities?
Well, my wife and I have been
fully committed to financial educa-
tion throughout our careers. It’s why
we first created our financial planning
firm in 1986. It’s why I have been
hosting radio and television shows
throughout the last 30 years and why
I’ve written 11 books. And we want
to continue our financial education
activities. We are now focusing, as you
pointed out, on the five subjects that
matter most for personal finance today,
because most consumers are unaware
of these issues. They don’t know how
to incorporate them into their financial
plan. And so that is my focus in an
effort to help American consumers
increase their financial knowledge so
that they can achieve financial security
and retirement security.
Well, you answered all of my ques-
tions directly, succinctly, and with
granularity for our readers. I want
to thank you very much for taking
the time from your busy schedule
to provide your in-depth insights,
expertise, and upbeat assessment
of the digital asset landscape.
I really appreciate the opportunity.
Thank you very much.
Leslie N. Masonson is president of
Cash Management Resources, a fi-
nancial consulting firm that focuses
on ETF strategies. He is an active
ETF and NASDAQ futures trader,
and the author of Buy—Don’t Hold
and All About Market Timing, as
well as Day Trading On The Edge.
He can be reached at lesmasonson@
yahoo.com.
Further reading
Edelman, Ric [2022]. The Truth About
Crypto, Simon & Schuster.
Continued on page 56
 MARKET RAP
TOMASINI/MARKET RAP
Continued from page 35
the key to entry into trader heaven: It
is actually your indicator or system
that is the unique driver of value, and
optimization is useless. Your system
will make the same amount of money
independently from the inputs you
will feed into your trading platform.
Optimization at this point is 100% a
waste of time.
This is my experience. It may or
may not fit your experience.
Is fitting to the back data
really the goal?
Now for the punchline. There is a
drawback in telling you this story:
It’s the amount of time you will need
to move from step 1 to step 4. I’ll be
frank: Optimization just does not de-
serve the 30 years that I spent on it.
This is why I have a final recom-
mendation for you, and it is this:
Just to try to keep away from the
edge of the ravine, so to speak. Do
not over-manipulate your indicators
and moving averages, and try to be
flexible. Work more on pattern design
than on historical price moving aver-
age data. I realize it is much more
difficult to program a pattern than
it is to spend a few minutes setting
up trading systems using pre-built
averages. But it’s the only way to
avoid being trapped by optimization.
It could take too much time before
seeing the light, since the tunnel is so
long and dark that many traders will
get lost during the journey.
A so-called “good” optimized sys-
tem supposedly allows your system to
perfectly fit the data. But therein lies
the heart of the problem—the system
is supposed to decipher the inner
intelligence of the market to predict
a proposed outcome. The more you
optimize, the more you move into the
realm of the “follow the crowd men-
tality.” After all, is the crowd always
intelligent? We all know the crowd
can be fickle. And who is the crowd
anyhow? That mythical beast has
never been tamed for long. So dare if
you wish to be the first to create some
magical code that consistently predicts
the market without drawdowns by
using optimization. But my money is
with the professional thinking—the
tried and tested principles of logical
combinations that are backtested and
forward-tested in the world of real-
ity, not in the optimized dreamworld
where everything is pretty, fits in with
the crowd, and always follows the pre-
vious path, believing the market is not
a dynamic and unpredictable beast.
Programming a pattern means that
you play with a precise disposition of
the highs, lows, opening, and closing
prices of a bar with the minimum use
of numbers. When I say “minimum
use of numbers” I acknowledge that
it is impossible to write a quantita-
tive model without using “numbers”
of days, minutes, indicators and the
rest, but be aware that the less you
use them, the better is the possibility
that something can ripen with expe-
rience. Optimization can be an ally
in trading, but it can also turn out to
be your worst enemy. So it’s wise to
avoid over-relying on it.
It’s like this: In wet, wintry weather,
you should never drive at the cliff’s
edge on a mountain road because for
some of the bends in the road, the
path may no longer exist.

BIGALOW/CANDLESTICKS Stephen W. Bigalow is the owner and operator of www.

Continued from page 34
buy and when it is time to sell. Candlestick displays help
to put all the stars in alignment, so to speak. Candlestick
analysis can help you analyze the market indexes as easily
as individual stocks for determining direction.
Keep in mind that the candlestick patterns work just
as well on intraday charts as they do on daily, weekly,
and monthly charts.
As a daytrader, candlestick signals can help you iden-
tify strong daytrade setups quickly and easily. Using
candlestick signals along with confirming tools puts the
probabilities in the investor’s favor. The visual aspects
of candlestick analysis are a valuable resource you can
use for the rest of your trading career.
candlestickforum.com, which provides education about
candlestick analysis. He has 40 years of trading and
investing experience, with heavy emphasis on candle-
stick analysis.
fUrther readIng
Bigalow, Stephen W. [2011]. Profitable Candlestick
Trading, John Wiley & Sons.
[2011]. Candlestick Profits: Eliminating Emotions
With Candlestick Analysis, Profit Publishing.
[2005]. High Profit Candlestick Patterns, Profit
Publishing.
April 2022 • Technical Analysis of Stocks & Commodities • 43
 Explore Your Options
GOT A QUESTION ABOUT OPTIONS?
Jay Kaeppel has over three decades of experience in the options markets. He
was a head trader for a CTA firm, an options trading software developer,
and was a portfolio manager for an investment management firm. He is
presently Senior Research Analyst for Sentimentrader.com. He is the author
of several books, including The Four Biggest Mistakes In Option Trading;
The Option Trader’s Guide To Probability, Volatility, And Timing; and
Seasonal Stock Market Trends. Send your questions or topic suggestions
to Jay Kaeppel at jay@sentimentrader.com. Selected questions will appear
in a future issue of S&C.
Jay Kaeppel

OUT-OF-THE-MONEY option (typically out-of-the-mon- commitment of $84,635. This trade

BUTTERFLY SPREADS
I want to trade some of the bigger
name stocks. However, many of them
are extremely expensive per share. I
also looked at buying call options,
but even those are quite expensive.
Is there a way to use options to make
it more affordable to trade these
stocks?
Absolutely. Of course, there are
tradeoffs. When you buy shares of
stock, you get point-for-point move-
ment, that is, if the stock goes up to
$50 a share, you make $50 a share
and vice versa. You can often emulate
this position by buying deep-in-the-
money calls as a stock replacement.
But as you mentioned, with high-
priced stocks, this can require a large
amount of capital. So, let’s consider
an alternative.
ey), selling two higher strike price
calls, and buying one more call at
an even higher strike price.
The setup
A trader looks at the chart of TSLA
in Figure 1 and believes:
• The stock is extremely oversold
based on the RSI reading of
33.93
• That the test of the 200-day mov-
ing average will be successful and
that the stock will rally off of this
level in the months ahead
Based on this interpretation, the
trader wants to enter a bullish posi-
tion in TSLA. On January 28, TSLA
is trading at $846.35 a share. To buy
100 shares would require a capital
is mathematically out of our trader’s
ballpark. So, let’s consider an al-
ternative trade, whereby our trader
commits roughly 4% of their trading
capital ($50,000 × 4% = $2,000).
Example OTM butterfly using
TSLA calls
Our example trade is entered as
follows:
• Buy 1 June17 2022 TSLA 1100
calls @ $51.60
• Sell 2 June17 2022 TSLA 1350
calls @ $20.65
• Buy 1 June17 2022 TSLA 1600
calls @ $9.15
The particulars for this trade appear
in Figure 2 and the risk curves in
Figure 3. Things to note:

• We will look at Telsa Motors

(TSLA), as it basically defines the
“high-flying” (and high priced)
type of stock you are referring
to.
• We will assume a trader with
a $50,000 trading account is
bullish on TSLA and wants to
participate in the expected upside
price movement that they expect
to occur sometime in the next
3–4 months.
• One possible strategy to consider
in this scenario is the out-of-the-
FIGURE 1: TESLA (TSLA). The trader may look at this chart of TSLA and hold a belief that the
money butterfly spread. This stock is oversold at the far right of the chart and will rally in the months ahead. The trader may thus
strategy involves buying one call seek to enter a bullish position in TSLA using options.
44 • April 2022 • Technical Analysis of Stocks & Commodities
 Explore Your Options
• It is recommended that you enter
the trade all at once using a limit
order rather than entering each
leg of the trade separately.
• The cost to enter this trade is

$1,945. This is also the maximum
risk on the trade if the trade is
held until June expiration and
TSLA is below $1,100 a share at
that time.
• As you can see in Figure 3, this
is a bullish trade that will require
TSLA stock to advance sometime
between entry and June expira-
tion (140 calendar days away) to
generate a profit.
• The cost of $1,945 is only 2.3%
of the cost of buying 100 shares
of TSLA stock.
• The cost of $1,945 is 3.9% of the
trader’s total trading capital.
• The trade has a delta of 7.4,
which means (at least initially) it
will behave much like a position
of holding long seven shares of
TSLA (The $1,945 trade cost is
roughly 33% of the cost of buying
seven shares of TSLA at $846.35
a share).
Now let’s look at some of the finer
points regarding this trade.
A closer look at risk curves
The risk curve lines in Figure 3 rep-
resent the expected profit/loss at any
given price for TSLA as of:
• Red line = 1/28 (date of entry)
• Blue line = 3/15 (94 days before
expiration)
• Green line = 5/1 (47 days before
expiration)
• Black line = 6/22 (June expira-
tion)
There are two key things to note about
what these lines tell us:
• Time decay works in our favor,
that is, thanks to the negative
OPTIONSANALYSIS.COM
FIGURE 2: TRADE PARTICULARS FOR OTM BUTTERFLY SPREAD USING TSLA CALLS.
FIGURE 3: RISK CURVES FOR OTM BUTTERFLY SPREAD USING TSLA CALLS. The risk curve
lines represent the expected profit/loss for the options trade at any given share price for TSLA. If
TSLA’s share price moves above the middle strike price, the risk curves “roll over” and the trade
becomes less profitable at each successive higher price.
“theta” for this position (see • Set a hard-dollar or % of capital
Figure 2), if TSLA rises above stop (say 2% or $1,000).
its price at the time of entry, this
trade gains some value each day Now let’s consider possible action if
due solely to time decay. TSLA does move to the upside:
• If TSLA’s share price moves above
the middle strike of $1,350, the • In any event, the trade should be
risk curves “roll over” and the exited or adjusted if TSLA does
trade becomes less profitable at reach $1,350 a share since profits
each successive higher price. will shrink at any price above
that level.
Managing the trade • Consider exiting or adjusting if a
Let’s first discuss risk. If TSLA stock previous resistance level of $1,208
fails to rally and instead declines, (Jan 2022 high) or $1,243 (Nov
this trade will inevitably accrue a 2021 high) is hit.
loss. Our trader can consider any • Consider exiting or adjusting if
or all of the following potential exit a trusted overbought indicator
criteria: reaches an extreme level (that is,
attempt to lock in a profit on price
• Hold the trade until expiration and strength).
hope TSLA rebounds (risking the • Set an arbitrary dollar profit target
full $1,945). (for example, $970 or 50% of the
• Exit or adjust the trade if TSLA capital risked).
falls below its September 2021
low of $708.85.
April 2022 • Technical Analysis of Stocks & Commodities • 45
 The focus of Trad-
ers’ Tips this month
is Markos Katsanos’
article in this issue,
“Stock Market Sea-
sonality.” Here, we
present the April 2022
Traders’ Tips code
with possible imple-
mentations in various software.
The code for the following Traders’ Tips selections
is posted here:
• Traders.com → S&C Magazine →
Traders’ Tips
At Traders.com you can also right-click on any
chart to open it in a new tab or window and view
the chart at a much larger size.
The Traders’ Tips section is provided to help read-
ers implement a selected technique from an article in
this issue or another recent issue. The entries here
are contributed by software developers or program-
mers for software that is capable of customization.

Vc( 0 ),
VCP( 0 ),
VFI1( 0 ),
F TRADESTATION: APRIL 2022 TRADERS’ TIPS CODE VFI( 0 ),
Historical data has generally supported the long-standing BuySignal( false ),
VolCondition( false ),
financial adage “Sell in May and go away, buy in October SellMF( false ),
and stay sober.” Markos Katsanos decided to investigate this SellSeasonal( false ),
apothegm with more recent data, different time periods, and SellVolatility( false );

taking into account drawdown and risk-adjusted returns. In VIXClose = Close of Data2;
his article in this issue, he presents his in-depth findings and
possible rational behind them. He then presents his hybrid if Highest(VIXClose, 25)[1] <> 0 then
begin
seasonal system designed to improve on the seasonal systems VIXDown = (VIXClose/Highest(VIXClose, 25)[1]
by adding other technical indicators. of Data2 - 1) * 100;
Markos Katsanos’ volume flow indicator (VFI) calcula- end
else
tion uses a default period of 130 days for daily charts. As a begin
result, when applying the strategy, you will need to set the VIXDown = 0;
maximum number of bars the study will reference in the end;
general tab of properties for all to at least 130. In order to if Lowest(VIXClose, 25)[1] <> 0 then
compare the system objectively with the buy & hold results, begin
he specified a trade size as a percent of equity. The supplied VIXUp = (VIXClose/Lowest(VIXClose, 25)[1]
of Data2 - 1) * 100;
strategy code does not have specified trade sizes. end
Strategy: TASC APR 2022 Hybrid Seasonal System
// TASC APR 2022
// Seasonal Hybrid System
// Copyright Markos Katsanos 2022

inputs:
SellMonth( 5 ), // 5 to 8 by 1
VIXUpMax( 60 ), // 50 to 60 by 10
Crit( -20 ), // -20 to -15 by 5
K( 1.5 ); // 1.3 to 1.7 by 0.2

variables:
VIXDown( 0 ),
VIXUp( 0 ),
ATRDown( 0 ),
ATRUp( 0 ),
RefSymbol( 0, Data2 ),
VIXClose( 0 ),
Period( 130 ),
Coef( 0.2 ),
VCoef( 2.5 ),
Cutoff( 0 ),
MF( 0 ),
Inter( 0 ),
VInter( 0 ),
Vave( 0 ), FIGURE 1: TRADESTATION. Here is a TradeStation daily chart of the S&P 500
Vmax( 0 ), ETF (SPY) and the CBOE Volatility Index ($VIX.X) with the VFI indicator and hybrid
seasonal system strategy applied.

46 • April 2022 • Technical Analysis of Stocks & Commodities

else VC( 0 ),
begin MF( 0 ),
VIXUp = 0; DirectionalVolume( 0 ),
end; myVFI( 0 );

ATRDown = (AvgTrueRange(15) TP = TypicalPrice;

/(Highest(AvgTrueRange(15), 25)[1]) - 1) * 100;
ATRUp = (AvgTrueRange(15)
/(Lowest(AvgTrueRange(15), 25)[1]) - 1) * 100;
Inter = Log( TypicalPrice ) - Log( TypicalPrice[1] );
Vinter = StdDev(inter, 30 );
Cutoff = Coef * Vinter * Close;
Vave = Average( Volume, Period )[1];
Vmax = Vave * Vcoef;
Vc = MinList( Volume, VMax );
MF = TypicalPrice - TypicalPrice[1];
VCP = IFF( MF > Cutoff, VC,
IFF( MF < -Cutoff, -VC, 0 ) );
if TP > 0 and TP[1] > 0 then
Inter = Log(TP) - Log(TP[1])
else
Inter = 0;
VInter = StdDev( Inter, 30 );
CutOff = Coef * VInter * Close;
VAve = Average(V,Period)[ 1 ];
VMax = VAve * VCoef;
VC = IFF( V < VMax , V, VMax );
MF = TP - TP[1];
DirectionalVolume = IFF( MF > CutOff, +VC,
IFF( MF < -CutOff, -VC, 0 ) );

VFI1 = Summation( VCP, Period ) / Vave; if VAve <> 0 then

VFI = XAverage( VFI1, 3 ); myVFI = Summation( DirectionalVolume, Period )
/ Vave
VolCondition = (VIXUp < VIXUpMax or else
ATRUp < K * VIXUpMax) and VFI > Crit; myVFI = 0;

BuySignal = (Month(Date) >= 10 if SmoothingPeriods > 0 then

or Month(Date) < SellMonth)
and VolCondition[1];
SellSeasonal = Month(Date)= SellMonth ; // SEASONAL
SellVolatility = VIXUp > 2 * VIXUpMax; // VOLAT EXIT
SellMF = Crit crosses above VFI
and Average(VFI, 10) < Average(VFI, 10)[1];
if BuySignal then buy this bar at close;
if SellSeasonal then
Sell ("SELL SEASONAL") this Bar at Close
else if SellVolatility[1] or SellMF[1] then
Sell ("SELL VOLAT") this Bar at Close;
Indicator: TASC APR 2022 VFI
{ trading or investment recommendation, advice, or strategy
*******************************
VOLUME FLOW INDICATOR (VFI)
Provided By : MARKOS KATSANOS
Copyright 2004
*******************************
For more information see Markos Katsanos's
articles in the June 2004 and July 2004 issues
of Technical Analysis of Stocks & Commodities
magazine. Period=days for VFI calculation. Default
values are 130 for daily and 26 for weekly charts.
Coef=coefficient for minimal price cut-of (use 0.2
for daily and 0.1 for intraday 5-15 min data)
Vcoef=coefficient for volume cut-off (use 2.5 for
daily and 3.5 for intraday charts)
} Katsanos explains a method for trading the market with hybrid
inputs:
Period( 130 ),
Coef( .2 ),
VCoef( 2.5 ),
SmoothingPeriods( 3 ),
MA( 30 );
variables:
TP( 0 ),
Inter( 0 ),
VInter( 0 ),
CutOff( 0 ),
VAve( 0 ),
VMax( 0 ),
myVFI = XAverage(myVFI, SmoothingPeriods)
else
myVFI = myVFI;
Plot1( myVFI, "VFI");
Plot2( 0, "0");
Plot3( XAverage(myVFI, MA), "MA" );
A TradeStation daily chart of the S&P 500 ETF (SPY)
and the CBOE Volatility Index ($VIX.X) with the VFI indi-
cator and hybrid seasonal system strategy applied is shown
in Figure 1.
This article is for informational purposes. No type of
is being made, given, or in any manner provided by TradeS-
tation Securities or its affiliates.
—John Robinson
TradeStation Securities, Inc.
www.TradeStation.com
F METASTOCK: APRIL 2022 TRADERS’ TIPS CODE
In his article “Stock Market Seasonality” in this issue, Markos
seasonal system. His system employs the VFI indicator that
Katsanos introduced in 2004. The formulas shown here include
the code for the VFI. You must create that indicator first and
name it “VFI” and then create the system test.
VFI Indicator:
name: VFI
formula:
VFIPeriod := 130;
Coef:= 0.2;
VCoef:= 2.5;
inter:= Log( Typical() ) - Log( Ref( Typical(), -1 ) );
Vinter:= Stdev(inter, 30 );

April 2022 • Technical Analysis of Stocks & Commodities • 47

 Cutoff:= Coef * Vinter * CLOSE;
Vave := Ref( Mov( V, VFIPeriod, S ), -1 );
Vmax := Vave * Vcoef;
Vc := Min( V, Vmax );
MF := Typical() - Ref( Typical(), -1 );
VCP := If( MF > Cutoff, VC, If( MF < -Cutoff, -VC, 0 ) );
VFIa := Sum( VCP , VFIPeriod )/Vave;
If(BarsSince(Cum(1)>268)>=0, Mov( VFIa, 3, E),0);
Seaonal Hybrid System:
Buy Order:
vix:= security("ONLINE:.VIX", C);
VFI:= Fml("VFI");
{Optimizations}
sellmonth:= opt1; {5 - 8, step 1}
vixupmax:= opt2; {50 or 60}
crit:= opt3; {15 or 20}
k:= opt4; {1.3 - 1.7, step 0.2)}
{system calculations}
FIGURE 2: THINKORSWIM. The strategy can be seen on a chart of SPY for August
vixdn:= (vix/ref(hhv(vix,25),-1)-1)*100;
2007 through July 2009 along with the ATR and VIX comparison studies.
vixup:= (vix/ref(llv(vix,25),-1)-1)*100;
atrdn:= (atr(15)/ref(hhv(atr(15),25),-1)-1)*100;
atrup:= (atr(15)/ref(llv(atr(15),25),-1)-1)*100;
{buy signal}
volcond:= (vixup < vixupmax OR atrup< k*vixupmax) and vfi>crit;
(month() >= 10 or month()<sellmonth) and ref(volcond, -1);

Sell Order: F THINKORSWIM: APRIL 2022 TRADERS’ TIPS CODE

vix:= security("ONLINE:.VIX", C);
VFI:= Fml("VFI"); We put together a strategy based on the article by Markos
{Optimizations} Katsanos in this issue, “Stock Market Seasonality.” We built
sellmonth:= opt1; {5 - 8, step 1} this using our proprietary scripting language, thinkscript. To
vixupmax:= opt2; {50 or 60}
crit:= opt3; {15 or 20} ease the loading process, simply open the link http://tos.mx/
k:= opt4; {1.3 - 1.7, step 0.2)} acCJizc or enter the address into setup→open shared item
{system calculations} from within thinkorswim and choose view thinkscript strategy
vixdn:= (vix/ref(hhv(vix,25),-1)-1)*100;
vixup:= (vix/ref(llv(vix,25),-1)-1)*100; and name it “HybridSeasonalStrategy” or something you can
atrdn:= (atr(15)/ref(hhv(atr(15),25),-1)-1)*100; easily remember. You will then be able to add the strategy
atrup:= (atr(15)/ref(llv(atr(15),25),-1)-1)*100; to your charts under the edit studies menu and selecting the
{sell signal}
sellseason:= Month() = sellmonth; strategies subtab.
sellvol:= vixup> 2*vixupmax; The strategy can be seen on a chart of SPY for August
sellmf:= cross(crit, vfi) and mov(vfi,10,s)<Ref(mov(vfi,10,s),-1); 2007 through July 2009 along with the ATR and VIX com-
sellseason or ref(sellvol or sellmf, -1);
parison studies in Figure 2. Please see Markos Katsanos’
Optimization Variables: article in this issue for more information on how to read the
OPT1: chart and utilize the strategy.
Description: Sell Month
Minimum: 5 —thinkorswim
Maximum: 8 A division of TD Ameritrade, Inc.
Step: 1 www.thinkorswim.com

OPT2:
Description: Vix Up Max
Minimum: 50
Maximum: 60
Step: 10
F ESIGNAL: APRIL 2022 TRADERS’ TIPS CODE
OPT3:
Description: VFI Sell For this month’s Traders’ Tip, we’ve provided the study “El-
Minimum: 15 egant Oscillator.efs” based on the article by John Ehlers in the
Maximum: 20 February 2022 issue, “Inverse Fisher Transform Redux.”
Step: 5
The study contains formula parameters that may be con-
OPT4: figured through the edit chart window (right-click on the
Description: ATR VIX Ratio chart and select “edit chart”). A sample chart is shown in
Minimum: 1.3
Maximum: 1.7 Figure 3.
Step: 0.2 To discuss this study or download a complete copy of
the formula code, please visit the EFS library discussion
—William Golson
board forum under the forums link from the support menu
MetaStock Technical Support
www.MetaStock.com
at www.esignal.com or visit our EFS KnowledgeBase at
http://www.esignal.com/support/kb/efs. The eSignal formula
48 • April 2022 • Technical Analysis of Stocks & Commodities
script (EFS) is also available for copying & pasting from
the Stocks & Commodities website at Traders.com in the
Traders’ Tips section.
/**********************************
Provided By:
Copyright 2019 Intercontinental Exchange, Inc. All Rights Re-
served. eSignal is a service mark and/or a registered service
mark of Intercontinental Exchange, Inc. in the United States and/
or other countries. This sample eSignal Formula Script (EFS)
is for educational purposes only. Intercontinental Exchange, Inc.
reserves the right to modify and overwrite this EFS file with each
new release.

Description:
Inverse Fisher Transform Redux
by John F. Ehlers FIGURE 3: ESIGNAL. Here is an example of the study plotted on a daily chart of
$SPX.
Version: 1.00 11/02/2022

Formula Parameters: Default: xClose = close();

BandEdge 20 addBand(0, PS_DASH, 1, Color.grey, 1);
xDeriv = efsInternal('Calc_Deriv', xClose);
Notes: xNDeriv = efsInternal('Calc_NDeriv', xDeriv);
The related article is copyrighted material. If you are not a sub- xIFish = efsInternal('Calc_IFish', xNDeriv);
scriber of Stocks & Commodities, please visit www.traders.com. SS = null;
**********************************/ SS_1 = null;
var fpArray = new Array(); SS_2 = null;
var bInit = false; a1 = Math.pow(Math.E, -Math.SQRT2 * Math.PI / Band-
Edge);
function preMain() { b1 = 2 * a1 * Math.cos(Math.SQRT2 * Math.PI / BandEdge);
setStudyTitle("Elegant Oscillator"); c2 = b1;
setCursorLabelName("Super Smoother", 0); c3 = -a1 * a1;
setCursorLabelName("IFish", 1); c1 = 1- c2 - c3;
setCursorLabelName("Clip", 2); xInteg = efsInternal('Calc_Integ', xIFish);
setPriceStudy(false); xClip = efsInternal('Calc_Clip', xDeriv);
setDefaultBarFgColor(Color.RGB(0x00,0x94,0xFF), 0); xIntegClip = efsInternal('Calc_Integ', xClip);
setDefaultBarFgColor(Color.RGB(0xFE,0x69,0x00), 1);
setDefaultBarFgColor(Color.RGB(0x00,0x94,0xFF), 2); bInit = true;
setPlotType( PLOTTYPE_LINE , 0 ); }

var x=0; if (getCurrentBarCount() < 50) return;

fpArray[x] = new FunctionParameter("BandEdge", FunctionPa- if (getBarState() == BARSTATE_NEWBAR) {
rameter.NUMBER); SS_2 = SS_1;
with(fpArray[x++]){ SS_1 = SS;
setLowerLimit(1); SS = 0;
setDefault(20); }
} SS = c1 * (xIFish.getValue(0) + xIFish.getValue(-1)) / 2 + c2 *
} SS_1 + c3 * SS_2;

var bVersion = null; return [SS, xInteg.getValue(0), xIntegClip.getValue(0)];

var xClose = null; }
var xDeriv = null;
var xRMS = null; function Calc_Clip(xDeriv){
var xNDeriv = null; ret = xDeriv.getValue(0);
var xIFish = null;
var SS = null; if (ret > 1) ret = 1;
var SS_1 = null; if (ret < -1) ret = -1;
var SS_2 = null;
var a1 = null; return ret;
var b1 = null; }
var c1 = null;
var c2 = null; function Calc_Integ(xSeries){
var c3 = null; ret = 0;
var xInteg = null; ret = xSeries.getValue(0) + 2 * xSeries.getValue(-1) + 3 *
var xClip = null; xSeries.getValue(-2) + 3 * xSeries.getValue(-3) + 2 * xSeries.
var xIntegClip = null; getValue(-4) + xSeries.getValue(-5);
return (ret / 12);
function main(BandEdge) { }
if (bVersion == null) bVersion = verify();
if (bVersion == false) return; function Calc_IFish(xNDeriv){
ret = 0;
if ( bInit == false ) { ret = (Math.pow(Math.E, 2 * xNDeriv.getValue(0)) - 1) / (Math.

April 2022 • Technical Analysis of Stocks & Commodities • 49

 pow(Math.E, 2 * xNDeriv.getValue(0)) + 1)

return ret;
}

function Calc_NDeriv(xDeriv){
ret = 0;
RMS = 0;
for (var i = 0; i < 50; i++) {
RMS = RMS + xDeriv.getValue(-i) * xDeriv.getValue(-i);
}
if (RMS != 0) {
RMS = Math.sqrt(RMS / 50);
ret = xDeriv.getValue(0) / RMS;
}
FIGURE 4: WEALTH-LAB. This shows sample trades taken by the system applied
return ret;
to a daily chart of SPY.
}

function Calc_Deriv(xClose){
ret = 0;
ret = xClose.getValue(0) - xClose.getValue(-2);
return ret;
}

function verify(){
var b = false;
if (getBuildNumber() < 779){

drawTextAbsolute(5, 35, "This study requires version 10.6 or

later.",
Color.white, Color.blue, Text.RELATIVETOBOTTOM|Text.
RELATIVETOLEFT|Text.BOLD|Text.LEFT,
null, 13, "error");
drawTextAbsolute(5, 20, "Click HERE to upgrade.@
URL=http://www.esignal.com/download/default.asp",
Color.white, Color.blue, Text.RELATIVETOBOTTOM|Text.
RELATIVETOLEFT|Text.BOLD|Text.LEFT,
null, 13, "upgrade");
return b;
}
else
b = true; FIGURE 5: WEALTH-LAB. A plot with a distribution of monthly returns reveals that
the second half of the year’s months have been benevolent for trading in SPY in the
return b; last two decades.
}

—Eric Lippert section (see Figure 5). Its code is available here:
eSignal, an Interactive Data company
800 779-6555, www.eSignal.com https://www.wealth-lab.com/Discussion/Traders-39-Tips-2019-09-
A-Simple-Way-to-Trade-Seasonality-Kaufman-7566

Wealth-Lab code for seasonal hybrid system

using WealthLab.Backtest;
using System;
F WEALTH-LAB: APRIL 2022 TRADERS’ TIPS CODE using WealthLab.Core;
using WealthLab.Indicators;
We have coded the seasonal hybrid system presented in Markos using System.Drawing;
Katsanos’ article in this issue for the benefit of Wealth-Lab using System.Collections.Generic;
7 users. using WealthLab.TASC;
To get the ^VIX data for backtesting, make sure to check namespace WealthScript1
“Yahoo! Finance” or other supported data source in the Data {
Manager (historical providers tab). As icing on the cake, in public class SeasonalHybridSystem : UserStrategyBase
{
Figure 4, its history is plotted as candlesticks rather than as public SeasonalHybridSystem() : base()
a line chart. {
On a related note, we wanted to remind motivated traders AddParameter("Sell month", ParameterTypes.Int32, 8,
5, 8, 1);
about a different way to gauge the monthly seasonality. A AddParameter("VIX up max", ParameterTypes.Int32,
trading system for Wealth-Lab 7 based on the frequency of 60, 50, 60, 10);
positive monthly returns introduced by Perry Kaufman was AddParameter("VFI sell", ParameterTypes.Int32, -20,
-20, -15, 5); /* VFI sell */
featured in the September 2019 issue in the Traders’ Tips AddParameter("ATR/VIX Ratio", ParameterTypes.

50 • April 2022 • Technical Analysis of Stocks & Commodities

Double, 1.5, 1.3, 1.7, 0.2); }
} /* declare private variables below */
BarHistory vix;
/* create indicators and other objects here, this is ex- TimeSeries atr, vixDn, vixUp, atrDn, atrUp, vfi;
ecuted prior to the main trading loop */ int sellMonth = 8, vixUpMax = 60, vfiSell = -20;
public override void Initialize(BarHistory bars) double atrVixRatio = 1.5;
{ }
sellMonth = Parameters[0].AsInt; }
vixUpMax = Parameters[1].AsInt;
vfiSell = Parameters[2].AsInt; —Gene Geren (Eugene)
atrVixRatio = Parameters[3].AsDouble; Wealth-Lab team
/* obtain the VIX from Yahoo */ www.wealth-lab.com
vix = GetHistory( bars, "^VIX");
vixDn = (vix.Close / Highest.Series(vix.Close,25)>>1) -
1 * 100;
vixUp = (vix.Close / Lowest.Series(vix.Close,25)>>1) - 1
* 100;
F NINJATRADER: APRIL 2022 TRADERS’ TIPS CODE
atr = ATR.Series(bars, 15);
atrDn = (atr / Highest.Series(atr, 25) >> 1) - 1 * 100;
The “S&P 500 Seasonal System Strategy” as described by
atrUp = (atr / Lowest.Series(atr, 25) >> 1) - 1 * 100; Markos Katsanos in his article in this issue, “Stock Market
Seasonality,” is available for download at the following links
vfi = VFI.Series(bars, 130, 3, 0.2, 2.5);
for NinjaTrader 8 and NinjaTrader 7:
PlotBarHistoryStyle( vix, "vix", "VIX");
PlotTimeSeriesOscillator( vfi, "VFI", "vfi", -20, +20, NinjaTrader 8: www.ninjatrader.com/SC/April2022SCNT8.zip
default, Color.Red, Color.Green); NinjaTrader 7: www.ninjatrader.com/SC/April2022SCNT7.zip
StartIndex = 130;
} Once the file is downloaded, you can import the strategy
into NinjaTrader 8 from within the control center by select-
/* execute the strategy rules here, this is executed once
for each bar in the backtest history */ ing Tools→Import→NinjaScript Add-On and then selecting
public override void Execute(BarHistory bars, int idx) the downloaded file for NinjaTrader 8. To import in Nin-
{ jaTrader 7 from within the control center window, select
/* Buy conditions */
bool volCondition = (vixUp[idx] < vixUpMax) || (atrUp[idx] the menu File→Utilities→Import NinjaScript and select the
< atrVixRatio * vixUpMax) && vfi[idx] > vfiSell; downloaded file.
bool volConditionRef = (vixUp[idx-1] < vixUpMax || You can review the strategy source code in NinjaTrader 8
atrUp[idx-1] < atrVixRatio * vixUpMax) && vfi[idx-1] > vfiSell;
by selecting the menu New→NinjaScript Edito →Strategies
bool buy = (bars.DateTimes[idx].Month >= 10 || bars. folder from within the Control Center window and selecting
DateTimes[idx].Month < sellMonth) && volConditionRef; the SP500SeasonalSystem file. You can review the strategy
bool sellSeasonal = bars.DateTimes[idx].Month == sell-
Month; source code in NinjaTrader 7 by selecting the menu Tools→
bool sellVolatility = vixUp[idx] > 2 * vixUpMax; Edit NinjaScript→Strategy from within the control center
bool sellVolatilityRef = vixUp[idx-1] > 2 * vixUpMax; window and selecting the SP500SeasonalSystem file.
bool sellMF = vfi.CrossesUnder(vfiSell,idx) && SMA.
Series(vfi,10)[idx] < SMA.Series(vfi,10)[idx-1];
bool sellMFRef = vfi.CrossesUnder(vfiSell,idx-1) && SMA.
Series(vfi,10)[idx-1] < SMA.Series(vfi,10)[idx-2];

bool sell = sellSeasonal || sellVolatilityRef || sellMFRef;

if (!HasOpenPosition(bars, PositionType.Long))
{
/* code your buy conditions here */
if (buy)
PlaceTrade( bars, TransactionType.Buy, Order-
Type.Market);
}
else
{
/* code your sell conditions here */
if (sell)
{
string sellSignal = sellSeasonal ? "Sell Seasonal" :
sellVolatilityRef ? "High volatility sell" : "VFI sell";
DrawBarAnnotation( sellSignal, idx, false, Color.
Purple, 18, true);
ClosePosition( LastPosition, OrderType.Market,
default, sellSignal);
FIGURE 6: NINJATRADER. The SP500SeasonalSystem strategy displayed on a
}
} SPY chart from July 2019 to July 2021. Note: Volume-related parameters are modi-
fied to better fit volume read from a Kinetick datafeed.

April 2022 • Technical Analysis of Stocks & Commodities • 51

 A sample chart displaying the strategy is shown in Figure
6.
NinjaScript uses compiled DLLs that run native, not in-
terpreted, to provide you with the highest performance pos-
sible.
—Chris Lauber
NinjaTrader, LLC
www.ninjatrader.com
F NEUROSHELL TRADER: APRIL 2022 TRADERS’
TIPS CODE
The hybrid seasonal system presented in Markos
Katsanos’ article in this issue can be easily implemented in
NeuroShell Trader by combining a few of NeuroShell Trader’s
800+ indicators in a trading system. To implement the hybrid
seasonal system, select new strategy from the insert menu
and use the trading strategy wizard to create the following
strategy:
BUY LONG CONDITIONS: [All of which must be true]
Or2(A>=B(Month of Year(Date),10),A<B(Month of
Year(Date),8))
Or2(A<B(Divide(CBOE Volatility Index Close,Lag(Min(CBOE
Volatility Index Close,25),1)),1.6), A<B(Divide(ATR(High,Low,Clo
se,15),Lag(Min(ATR(High,Low,Close,15),25),1)),1.9))
A>B(VFI(High,Low,Close,Volume,0.2,30,2.5,130),-20)
SELL LONG CONDITIONS: [1 of which must be true]
August Flag(Date)
A>B(Divide(CBOE Volatility Index Close,Lag(Max(CBOE Vola-
tility Index Close,25),1)),2.2)
And2(CrossBelow(VFI(High,Low,Close,Volum
e,0.2,30,2.5,130),-20), A<B(Momentum(Avg(VFI(High,Low,Close,
Volume,0.2,30,2.5,130),10),1),0))
Note that this system uses the volume flow custom indica-
tor, which can be created by selecting new indicator from
the insert menu and using the indicator wizard to create the
following indicators:
TYPICAL: Avg3 ( High, Low, Close)
FIGURE 7: NEUROSHELL TRADER. This NeuroShell Trader chart displays a chart
of the NeuroShell hybrid seasonal system.
52 • April 2022 • Technical Analysis of Stocks & Commodities
CUTOFF: Multiply3 ( 0.2, StndDev ( Momentum (Ln (TYPI-
CAL),1), 30 ), Close )
VAVE: LagAvg ( Volume, 1, 130 )
VC: Min2 ( Volume, Multiply2 ( 2.5, VAVE ) )
MF : Momentum (TYPICAL, 1 )
VFI: Divide ( Sum( IfThenIfThenElse ( A>B(MF,CUTOFF), VC,
A<B(MF, Negative(CUTOFF)), Negative(VC), 0 ), 130 ), VAVE )
Users of NeuroShell Trader can go to the Stocks & Com-
modities section of the NeuroShell Trader free technical
support website to download a sample chart which includes
the volume flow indicator.
—Ward Systems Group, Inc.
sales@wardsystems.com
www.neuroshell.com
F TRADINGVIEW: APRIL 2022 TRADERS’ TIPS CODE
Here is the TradingView Pine Script code for implementing
the hybrid seasonal system described in this issue’s article by
Markos Katsanos, “Stock Market Seasonality.”
//  TASC Issue: April 2022 - Vol. 40, Issue 5
//  Article: Sell In May? Stock Market Seasonality
//  Article By: Markos Katsanos
//    Language: TradingView's Pine Script v5
// Provided By: PineCoders, for tradingview.com
//@version=5
strategy("TASC 2022.04 S&P500 Hybrid Seasonal System",
 default_qty_type=strategy.percent_of_equity,
 commission_type=strategy.commission.percent,
 currency=currency.USD,
 overlay=true, 
 initial_capital=100000,
 commission_value=0.01,
 default_qty_value=10)
volatility (float Src, int Period) =>
    [(Src / ta.highest(Src, Period)[1] - 1.0) * 100.0,
     (Src / ta.lowest (Src, Period)[1] - 1.0) * 100.0]
FIGURE 8: TRADINGVIEW. Shown here is an example of the seasonal hybrid sys-
tem.
// ref: https://mkatsanos.com/volume-flow-vfi-indicator/
vfi(int Period=130, float VCoef=2.5, float Coef=0.2) =>
    lastHLC3 = nz(hlc3[1], hlc3)
    MF     = hlc3 - lastHLC3
    Vinter = ta.stdev(math.log(hlc3) - math.log(lastHLC3), 30)
    Vave   = ta.sma(volume, Period)[1]
    Cutoff = Coef * close * Vinter
    VC     = math.min(volume, Vave * VCoef)
    VCP    = MF >  Cutoff ?  VC :
             MF < -Cutoff ? -VC : 0.0
    VFI1   = math.sum(VCP, Period) / Vave
    VFI    = ta.ema(VFI1, 3)
ig_so = "Short Signal Options"
i_sMonth = input.int(8, "Sell Month:",  1, 12, 1, group=ig_so,
                  tooltip="The worst performing month.")
i_maxVI = input.int(60, "Max VIX up:", 50, 60, 5, group=ig_so,
                  tooltip="maximum VIX volatility threshold")
i_critVFI = input.int(-20, "Critical VFI Sell:", -20, -15, 5,  www.tradingview.com/u/PineCodersTASC/#published-
     group=ig_so, tooltip="Critical VFI threshold")
i_K = input.float(1.5, "ATR/VIX Ratio:", 1.3, 1.7, 0.2,  —PineCoders, for TradingView
     group=ig_so, tooltip="ATR to VIX ratio for sell signal")
i_showT = input.bool(true, " - Display Table")
i_Tpos  = input.string(position.middle_right, "Position:",
 options=[position.top_left,      position.middle_left,
          position.bottom_left,   position.top_center,
          position.middle_center, position.bottom_center,
          position.top_right,     position.middle_right,
          position.bottom_right])
// Comparison Index
VIX = request.security("VIX", timeframe.period, close)
[VIXdn, VIXup] = volatility(       VIX, 25) // Implied
[ATRdn, ATRup] = volatility(ta.atr(15), 25) // Historical
VFI   = vfi()
VFI10 = ta.sma(VFI, 10)
string[] rightLabels = array.from(
     "   by\n\n Markos\nKatsanos",str.tostring(date),
     str.tostring(SIGNAL),        str.tostring(open),
     str.tostring(VIX),           str.tostring( VFI,   ".00"),
     str.tostring(atr10, ".00"),  str.tostring(VIXup,  ".00"),
     str.tostring( ATRup, ".00"), str.tostring(VIXdn,  ".00"),
     str.tostring( ATRdn, ".00"), str.tostring(BUY),
     str.tostring(   SELL),       str.tostring(SEASONAL),
     str.tostring(VOLATIL),       str.tostring(MNYFLOW))
    for _i=0 to 15
        table.cell(dTable, 0, _i, array.get( leftLabels, _i),
         0,0, #330033, text.align_right, bgcolor=_i%2?evn:odd)
        table.cell(dTable, 1, _i, array.get(rightLabels, _i),
         0,0, #000000, text.align_left,  bgcolor=_i%2?evn:odd)
The indicator is available on TradingView from the Pine-
CodersTASC account:
scripts
www.TradingView.com
F AIQ: APRIL 2022 TRADERS’ TIPS CODE
The importable AIQ EDS file based on Markos Katsa-
nos’ article in this issue, “Stock Market Seasonality,”
can be obtained on request via email to info@TradersEdg-
eSystems.com. The code is also available on this magazine’s
website at Traders.com in the Traders’ Tips section.
Code for the author’s system is set up in the AIQ code file.
Figure 9 shows a summary EDS backtest of the system using
the SPY ETF from 1/1/2000 to 2/17/2022.

lowVolat  = VIXup < i_maxVI or ATRup < (i_K * i_maxVI) CODE:

VolatCnd  = VFI > i_critVFI ? lowVolat : false !Stock Market Seasonality
BUY       = (month <  i_sMonth or month >= 10) and VolatCnd[1] !Author: Markos Katsanos, TASC April 2022
SEASONAL  =  month == i_sMonth      //   SEASONAL EXIT !Coded by: Richard Denning, 2/10/2022
VOLATIL   = (VIXup > (2 * i_maxVI)) // VOLATILITY EXIT
MNYFLOW   = ta.cross(i_critVFI, VFI) and VFI10 < VFI10[1] C is [close].
SELL      = SEASONAL or VOLATIL[1] or MNYFLOW[1] C1 is valresult(C,1).
H is [high].
LONG  = strategy.long L is [low].
SHORT = strategy.short V is [volume].
if strategy.equity > 0 Avg is (H+L+C)/3.
    strategy.entry("Long",              LONG, when=BUY)
    strategy.entry("Short",            SHORT, when=SELL)
    strategy.entry("Short Seasonal",   SHORT, when=SEASONAL)
    strategy.entry("Short Volatility", SHORT, when=VOLATIL[1])
    strategy.entry("Short MF Crit.",   SHORT, when=MNYFLOW[1])

atr10 = ta.atr(10)
date  = str.format("{0,number,0000}-{1,number,00}" +
       "-{2,number,00}", year, month, dayofmonth)
SIGNAL = switch
    BUY                 => "Long Seasonal"
    SELL and SEASONAL   => "Short Seasonal"
    SELL and VOLATIL[1] => "Short Volatility"
    SELL and MNYFLOW[1] => "Short MF Bearish"
    => "Exit"

var string[] leftLabels = array.from(

 "S&P500   \nHybrid    \nSeasonal   \nStrategy   ", "Date:",
 "Signal:", "Price:", "VIX:", "VFI:", "ATR:", "VIXup:%",
 "ATRup%", "VIXdn%", "ATRdn%", "Long:", "Short:",
 "Short Seasonal:", "Short Volatility:", "Short Money Flow:")
evn = #D6DAE3, color odd = #CCCCCC
var dTable = table.new(i_Tpos, 2, 17, #00000080)
FIGURE 9: AIQ. This shows the summary EDS backtest of the system using the
if i_showT and barstate.islastconfirmedhistory
SPY ETF from 1/1/2000 to 2/17/2022.

April 2022 • Technical Analysis of Stocks & Commodities • 53

 VIXc is TickerUDF("VIX",C).
VIXc1 is valresult(VIXc,1).
VIXllv is lowresult(VIXc,25).
VIXllv1 is valresult(VIXllv,1).
VIXhhv is highresult(VIXc,25).
VIXhhv1 is valresult(VIXhhv,1).
VIXDN is (VIXc1 / VIXhhv1)*100.
VIXUP is (VIXc1 / VIXllv1)*100.

TR is max(max(C1-L,H-C1),H-L).
ATR is expavg(TR,15*2-1).
ATR1 is valresult(ATR,1).
ATRllv is highresult(ATR,25).
ATRllv1 is valresult(ATRllv,1).
ATRhhv is highresult(ATR,25).
ATRhhv1 is valresult(ATRhhv,1).
ATRDN is (ATR1 / ATRhhv1)*100.
ATRUP is (ATR1 / ATRllv1)*100.
FIGURE 10: ZORRO PROJECT. Here is the author’s seasonal system shown on a
!VFI sample chart.
Period is 130.
Coef is 0.2.
VCoef is 2.5. var VFI(var Period,var Coef, var VCoef)
{
inter is ln( Avg ) - ln( valresult( Avg, 1) ). vars Inters = series(log(priceAvg(0))-log(priceAvg(1)));
Vinter is Sqrt(variance(inter, 30 )). var Vinter = StdDev(Inters,30);
Cutoff is Coef * Vinter * C. var Cutoff = Coef * Vinter * priceC();
Vave is valresult( simpleavg( V, Period ), 1 ). vars Volumes = series(marketVol());
Vmax is Vave * Vcoef. var Vave = SMA(Volumes+1,Period);
VC is Min( V, Vmax ). var Vmax = Vave * VCoef;
MF is Avg - valresult( Avg, 1 ). var VC = min(Volumes[0],Vmax);
VCP is iff(MF > Cutoff, VC, iff(MF < -Cutoff, -VC, 0 )). var MF = priceAvg(0)-priceAvg(1);
VFI1 is Sum( VCP, Period ) / Vave. vars VCPs = series(ifelse(MF > Cutoff,VC,ifelse(MF < -Cutoff,-
VFI is expavg( VFI1, 3 ). VC,0)));
var VFI1 = Sum(VCPs,Period)/Vave;
SELLMONTH is 8. return EMA(VFI1,3);
VIXUPMAX is 60. }
CRIT is -20. !VFI SELL
K is 1.5. !ATR/VIX RATIO function run()
VOLCONDITION is (VIXUP<VIXUPMAX OR {
ATRUP<K*VIXUPMAX ) AND VFI>CRIT. StartDate = 2006;
BUY if (Month()>=10 OR Month()<SELLMONTH) AND EndDate = 2022;
valresult(VOLCONDITION,1). BarPeriod = 1440; // 1 day
SELLSEASONAL if Month() = SELLMONTH. !SEASONAL LookBack = 150;
SELLVOLATILITY if VIXUP>2*VIXUPMAX. !VOLATILITY EXIT
SELLMF if CRIT > VFI AND valrule(CRIT < VFI,1) AND simpleav assetList("AssetsIB");
g(VFI,10)<valresult(simpleavg(VFI,10),1). MaxLong = 1;
Sell if SELLSEASONAL OR valrule(SELLVOLATILITY,1) OR Capital = 100000;
valrule(SELLMF,1). Margin = Equity; // invest all you have
Leverage = 1;
—Richard Denning BarZone = EST;
info@TradersEdgeSystems.com Fill = 3; // enter/exit at next day open
set(PARAMETERS,TESTNOW,PLOTNOW);
for AIQ Systems
asset("VIX");
var VIXdn = (priceC(0)/HH(25,0)-1)*100;
var VIXup = (priceC(0)/LL(25,0)-1)*100;
F T HE ZORRO PROJECT: APRIL 2022 TRADERS’ asset("SPY");
TIPS CODE int SellMonth = optimize(8,5,8,1);
In his article in this issue, Markos Katsanos ex- var VIXupMax = optimize(60,50,60,10);
var Crit = -optimize(20,15,20,5); //VFI SELL
amines the saying to “sell in May and go away.” Following is var K = optimize(1.5,1.3,1.7,.2); // ATR/VIX RATIO
the C code translation for the AmiBroker code given in his
article’s sidebar, except that we’ve moved his VFI (volume vars ATRs = series(ATR(15));
var ATRDn = (ATRs[0]/MaxVal(ATRs,25)-1)*100;
flow indicator) code to a separate indicator function to avoid var ATRUp = (ATRs[0]/MinVal(ATRs,25)-1)*100;
having the trading logic cluttered with indicator code. Here
is the C code for use in Zorro: vars VFIs = series(VFI(130,0.2,2.5));
vars SMAVFIs = series(SMA(VFIs,10));
var priceAvg(int Offset) { bool VolCondition = (VIXup < VIXupMax || ATRUp <
return (priceC(Offset)+priceH(Offset)+priceL(Offset))/3; K*VIXupMax ) && VFIs[0] > Crit;
} bool Buy = (month() >= 10 || month() < SellMonth) &&
ref(VolCondition,1) != 0;

54 • April 2022 • Technical Analysis of Stocks & Commodities

FIGURE 11: EXCEL, USER CONTROLS. This replicates Figure 5 from the article in Excel.

bool SellSeasonal = month() == SellMonth ; //SEASONAL

bool SellVolatility = VIXup > 2*VIXupMax ; //VOLATILITY EXIT
bool SellMF = crossUnder(VFIs,Crit) && SMAVFIs[0] < SMA-
VFIs[1] ;
bool Sell = SellSeasonal || ref(SellVolatility,1) != 0 ||
ref(SellMF,1) != 0;

if(Sell)
exitLong();
else if(Buy)
enterLong();
}

A chart in Zorro can be seen in Figure 10.

The VFI indicator and trading system can be downloaded
from the 2022 script repository on https://financial-hacker.
com. The Zorro software can be downloaded from https://
zorro-project.com.
—Petra Volkova
The Zorro Project by oP group Germany
FIGURE 12: EXCEL, TRADE SUMMARY, 2009–2000. This trade summary cor-
https://zorro-project.com
responds to Figure 1 above. Changing cell A11 changes that right-most bar and thus
the window into SPY history.

F EXCEL: APRIL 2022 TRADERS’ TIPS CODE
In his article in this issue, Markos Katsanos uses his hybrid
seasonal system to explore the adage that suggests an investor
should be out of the market from May to October and in the
market from October to May.
In his article, he uses the AmiBroker automatic optimiza-
tion feature to cycle four different control values through 48
possible combinations to determine a “best fit.” The choices
used in the AmiBroker code provided with the article are
listed in the “user controls” area in Figure 11. You can try
any of these values or choose your own.
Replicating the performance tables included in Katsanos’
article were beyond the time available to create this spread-
sheet. As a substitute, I have included a snapshot “trade
summary” tab that incorporates all of the trades currently
available on the ComputationsAndCharts tab. “Currently”
as used here means that the trade summary reaches back
approximately nine years in time from the “right-most bar”
shown on the chart.
Figure 12 is a summary of the transactions selected by
this system in a window ending on 7/14/2009 and stretching
back to 8/31/2000. This is the same ending date as chart in
Figure 1 and includes transactions that fall off the left edge
of the chart.
Figure 13 replicates Figure 7 from the article and looks at
a more recent and wider window into SPY history. Figure 14
is the trade summary corresponding to the period displayed
in Figure 3.
It will be interesting to test this with other symbols.
Note: I offer my apologies. There is a lot of computation
involved in this spreadsheet along with a significant amount
of VBA macro processing to produce the charts. That means
that each change you make to user control numbers at the
left or to the “show” buttons and boxes at the right will take
a bit of time to complete. You may be “locked out” in that
Excel may not respond to clicks or typing while this takes
place. You may see a spinning cursor or even a flash of the
charts during the lockout period.
To download this spreadsheet: The spreadsheet file for
April 2022 • Technical Analysis of Stocks & Commodities • 55
 FIGURE 13: EXCEL. This replicates the article’s Figure 7 in Excel. It looks at a more recent and wider window into SPY history.

this Traders’ Tip can be downloaded from traders.com in

the Traders’ Tips area. To successfully download it, follow
these steps:

• Right-click on the link to the Excel file, then

• Select “save target as” to place a copy of the spreadsheet
file on your hard drive.
—Ron McAllister
Excel and VBA programmer
rpmac_xltt@sprynet.com

FIGURE 14: EXCEL, TRADE SUMMARY, 2012–2020. This shows a more recent
nine-year trading window corresponding to Figure 13 above.

INTERVIEW [1999]. The New Rules Of Analysis of StockS & commodi-

Continued from page 42
[2017]. The Truth About Your
Future, Simon & Schuster.
[2010]. The Truth About Money,
4th edition, Harper Business.
[2008]. The Lies About Money,
Free Press.
Money, William Morrow Paper- tieS, Volume 38: February.
backs. [2020]. “A Nondirectional
Kaufman, Perry [2021]. “Playing It Trading Strategy For Cryptocur-
Safe With Cryptos,” Technical rencies, Part 2,” Technical Analy-
Analysis of StockS & commodi- sis of StockS & commoditieS,
tieS, Volume 39: August. Volume 38: April.
Mustapha, Azez [2020]. “A Nondirec-
tional Trading Strategy for Cryp-
tocurrencies, Part 1,” Technical

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April 2022 • Technical Analysis of Stocks & Commodities • 57

 FUTURES LIQUIDITY

T
rading liquidity is often over-
looked as a key technical
measurement in the analysis
and selection of commodity
futures. The following explains how to
read the futures liquidity chart pub-
lished by Technical Analysis of Stocks
& Commodities every month.
Commodity futures
The futures liquidity chart shown be-
low is intended to rank publicly traded
futures contracts in order of liquidity.
Relative contract liquidity is indicated
by the number of dots on the right-hand
side of the chart.
This liquidity ranking is produced by
multiplying contract point value times
the maximum conceivable price motion
(based on the past three years’ historical
data) times the contract’s open interest
times a factor (usually 1 to 4) for low or
very high volumes. The greatest number
of dots indicates the greatest activity;
futures with one or no dots show little
activity and are therefore less desirable
for speculators.
Courtesy of CBOT
All futures listed are weighted equally
under “contracts to trade for equal dol-
lar profit.” This is done by multiplying
contract value times the maximum pos-
sible change in price observed in the last
three-year period. Thus, all numbers in
this column have an equal dollar value.
Columns indicating percent margin
and effective percent margin provide
a helpful comparison for traders who
wish to place their margin money ef-
ficiently. The effective percent margin
is determined by dividing the margin
value ($) by the three-year price range of
contract dollar value, and then multiply-
ing by one hundred.
Stocks
Trading liquidity has a significant ef-
fect on the change in price of a secu-
rity. Theoretically, trading activity can
serve as a proxy for trading liquidity
and equals the total volume for a given
period expressed as a percentage of the
total number of shares outstanding. This
value can be thought of as the turnover
rate of a firm’s shares outstanding.

Trading Liquidity: Futures

Contracts to
Effective
Commodity Futures Exchange % Margin Trade for Equal Relative Contract Liquidity
% Margin
Dollar Profit
S&P 500 E-Mini (Mar ’22) CME 5.5 10.9 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>>>>
Ultra T-Bond (Mar ’22) CBOT 3.9 11.2 3 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
10-Year T-Note (Mar ’22) CBOT 1.4 12.5 13 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
30-Year T-Bond (Mar ’22) CBOT 2.5 9.6 5 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Crude Oil WTI (Apr ’22) NYMEX 8.2 5.7 1 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Russell 2000 E-Mini (Mar ’22) CME 3 5.8 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Mar ’22) CME 5.9 11.2 1 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
5-Year T-Note (Mar ’22) CBOT 1 14.2 22 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Ultra 10-Year T-Note (Mar ’22) CBOT 1.9 13 9 •••••••••••••••••••••••••••••••••••••••••
Gold (Apr ’22) COMEX 3.5 10.4 3 ••••••••••••••••••••••••••••••••••••
Soybean (May ’22) CBOT 2.3 4.4 2 ••••••••••••••••••••••••
2-Year T-Note (Mar ’22) CBOT 0.4 17 33 ••••••••••••••••••
Soybean Meal (May ’22) CBOT 0.9 2.5 2 ••••••••••••••••••
Corn (May ’22) CBOT 5.9 10.9 10 ••••••••••••
Gasoline RBOB (Apr ’22) NYMEX 6.5 7.5 2 ••••••••••••
Euro FX (Mar ’22) CME 1.7 18.9 14 ••••••••••
Dow Futures Mini (Mar ’22) CBOT 5.2 11 2 •••••••••
S&P 500 VIX (Mar ’22) CFE 33.6 18 3 ••••••••
ULSD NY Harbor (Apr ’22) NYMEX 6.6 8.4 2 ••••••••
Eurodollar (Dec ’22) CME 0.2 11.6 43 •••••••
Coffee (May ’22) ICE/US 10.7 16.5 3 •••••
30-Day Fed Funds (Apr ’22) CBOT 0.1 4.8 21 ••••
Natural Gas (Apr ’22) NYMEX 18.8 27.9 6 ••••
Australian Dollar (Mar ’22) CME 2.2 9.6 11 •••
British Pound (Mar ’22) CME 2.8 17.5 13 •••
High Grade Copper (Mar ’22) COMEX 5.4 9.8 3 •••
Japanese Yen (Mar ’22) CME 2.5 18.4 12 •••
Silver (Mar ’22) COMEX 8.7 17.1 3 •••
Sugar #11 (May ’22) ICE/US 7.5 15.4 19 •••
Wheat (May ’22) CBOT 6.5 13.5 9 •••
Cotton #2 (May ’22) ICE/US 6.4 10.6 5 ••
Crude Oil Brent (F) (Apr ’22) NYMEX 7 8.5 2 •• CBOT Chicago Board of Trade, Division of CME
Hard Red Wheat (May ’22) KCBT 6.5 11.4 8 •• CFE CBOE Futures Exchange
Lean Hogs (Apr ’22) CME 4.8 7.2 6 •• CME Chicago Mercantile Exchange
Live Cattle (Apr ’22) CME 2.6 6 7 •• COMEX Commodity Exchange, Inc. CME Group
Bitcoin Futures (Feb ’22) CME 36 39.6 1 • ICE-EU Intercontinental Exchange-Futures - Europe
Canadian Dollar (Mar ’22) CME 1.9 14.5 18 • ICE-US Intercontinental Exchange-Futures - US
Mexican Peso (Mar ’22) CME 5.8 26.5 34 • KCBT Kansas City Board of Trade
New Zealand Dollar (Mar ’22) CME 2.3 12.5 15 • MGEX Minneapolis Grain Exchange
Platinum (Apr ’22) NYMEX 6.7 14.1 7 • NYMEX New York Mercantile Exchange

Bitcoin Micro (Feb ’22) CME 36 47.9 60
2204
Brazilian Real (Mar ’22) CME 6.2 16.3 24
Trading Liquidity: Futures is a reference chart for speculators. It compares markets “Relative Contract Liquidity” places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi-
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. “Relative
when compared to others in the same column. Contract Liquidity” is the number of contracts to trade times total open interest times a
The number in the “Contracts to Trade for Equal Dollar Profit” column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return In volume
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price 1 or exp –2
In 5000
Excursion).

58 • April 2022 • Technical Analysis of Stocks & Commodities

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Traders’ Resource is available at our website where
you’ll not only find the brokerages listing, but also numerous Resource link. Then follow the Brokerages category link,
other categories, such as data services, seminars, hardware, or use the search feature to find products or services with
software, and trading systems. Just click on the Traders’ specific attributes in this or other categories.
The information in Traders’ Resource is the most accurate at the time of posting and is subject to change. Because the vendors posting to Traders’ Resource are responsible for their own listing, Technical Analysis, Inc. declines any and all
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April 2022 • Technical Analysis of Stocks & Commodities • 59

 Trading Perspectives

SOME PERSPECTIVES ON THE EQUITIES WORLD

Rob Friesen is a professional trader and president & COO of Bright Trading
(www.stocktrading.com), a proprietary trading firm hosting independent
trader/members, an online trading school, and utilizing the StockOdds
database (www.mystockodds.com). This column shares his thoughts and
outlooks on trading, locating opportunity, probabilistic outcome, and
maintaining perspective throughout industry changes. He can be reached
at robfriesen@brighttrading.pro or via stocktrading.com.
Rob Friesen

THEMATIC TRADING FOR Performing screens for fundamen- stocks with volumes less than 200k
BASKETS & PAIRS tal metrics can shape your universe per day average would need to be
As market regimes change, trad- of available symbols in the same way traded differently than stocks with
ers should adapt to preserve that you might filter by volume. De- over 5 million in volume.
their edges or find new ones. fining your universe before venturing The same would be true if selecting
One of the edges that can be em- out has remarkable benefits. Readers a list of stocks with prices greater
ployed is statistical. Mining data can imagine that a predefined list of than $400 per share versus stocks
for behavioral attributes can assist less than $15 per share. Again, the
you to develop a framework for Mining data for same would be true with stocks hav-
mean reversion or continuation of behavioral attributes ing greater or lesser weekly/monthly
a trend after an indicator or signal volatility. For those who utilize beta,
is generated.
can help you develop imagine how differently you would
How then do statistics fit into deci- a framework for trade stocks with a beta over 3 versus
sion making when the markets are so mean reversion or a beta under 0.5.
roiled due to macro forces? continuation of a trend The secret to fine-tuning your
It is one of the pillars, the building after an indicator or trading is the choice of universe before
blocks of trading as a career, but it is signal is generated. you add the technical, statistical, or
not all that is available to us in our performance-based indicators.
trader’s toolchest. As with any Here is an example. It is one
service person who uses tools, thing to be looking for strong
having the correct tool for the stocks to buy, but it’s a whole
task is paramount. With some lot better to understand what
projects, it is necessary to is causing that strength. This
have a number of tools work- understanding improves con-
ing at the same time. fidence and the ability to press
What we have witnessed the trade. Figure 1 provides
so far this year is a dramatic a look at Chevron Corpora-
shift in how investors view tion (CVX), which showed
fundamentals. They are con- strength from the end of Sep-
sidered more relevant now. tember 2021 to mid-February
For many years, growth at all 2022. We all are aware of the
cost has been in the forefront, catalysts behind the strength
and value (low P/E, low P/B, in this oil & gas stock. The
and dividends) took a back- strength comes from the rise
seat. Fundamentals, though, in demand after much pro-
are back in vogue to some duction was curtailed during
degree and remain as one of global lockdowns, coupled
the pillars of trading. They are FIGURE 1: CHEVRON CORPORATION (CVX), DAILY. The oil & with supply chain disruption.
considered a valuable tool in gas stock showed strength from the end of September 2021 to mid- Perhaps with the focus on
selecting stocks to trade. February 2022 due to increase in demand. sustainability, reduction of
60 • April 2022 • Technical Analysis of Stocks & Commodities
 Trading Perspectives
carbon footprints, sequestering CO2,
solar, electric vehicles and more, the
world thought we could step away
from fossil fuels. But it appears we
are not there yet, even with the World
Economic Forum (WEF) agenda for
The Great Reset initiative.
Forming a bias from fundamental
and macro catalysts can provide the
trader with the conviction to buy
pullbacks along a trendline. This
could form the basis for one of the
selections in your long basket or
could be the long side of a good pair
relationship. You could locate a few
great energy-related stocks and pair
them with XLE, the energy ETF.
There are a variety of themes in
the types of markets that cycle over
short or longer-term cycles. These
are a few of them: growth or value
driven, bull or bear, thematic, fear
due to negative catalysts, greed or
fear of missing out (FOMO).
Markets can adjust for various
upcoming factors such as:
• Changing of government lead-
ership or political party
• Major geopolitical events (for
example, Brexit, sovereign debt
default, wars; whether trade-
related, economic, cyber, or
military)
• Natural disasters
• Pandemics
• Inflation/deflation/stagflation
• Interest rates (and other federal
banker policies/actions glob-
ally).
The secret to fine-
tuning your trading is
the choice of universe
before you add the
technical, statistical,
or performance-based
indicators.
FIGURE 2: JPM/BAC RATIO CHART, DAILY. This pair opportunity (long JPM, short BAC) with
the potential to mean-revert was discussed in last month’s column.
Markets factor in what is known or
anticipated to occur, and traders can
tap into the same process and adjust
ahead of time. There are opportuni-
ties to create thematic baskets or
motifs to capture the drift, trends, and
events. Research, and plan ahead!
Trends are really obvious seen
through the lens of hindsight, but it is
much harder to trust that a trend will
stay in play once you get aboard that
train. That is why buying a pullback
in a trend is so difficult, as it involves
an element of trust. Humans tend
to weight what is right in front of
them, so when the stock pulls back,
the thought is the upward trend is
finished and the stock is moving
lower. To strengthen your resolve
and confidence, you must know and
remember why you had your eyes
on this stock.
Pairs can be utilized for trend trad-
ing or for mean reversion, but they
can be different in construct.
Let’s take a moment to review
last month’s example of a pair op-
portunity that was stretched out and
FIGURE 3: SHORT 300 BAC/LONG 100 JPM.
had the potential to mean-revert (see
Factor spread of 3 * BAC-JPM. Mean-reversion
Figure 2). of this factor-based spread is arguably in prog-
Figure 3 showcases placing BAC ress here.
as the first symbol in the spread and
JPM as the second symbol by trading movement supports the argument of
300 shares short of BAC and 100 ongoing mean reversion.
shares long of JPM. We can see this Also last month, I mentioned value
factor-based spread moving from the moving higher versus growth. Let’s
outlier area in January 2022 and the check how has it done since then
April 2022 • Technical Analysis of Stocks & Commodities • 61
 Trading Perspectives
(see Figure 4).
Since I presented this relationship
January 18, 2022, it has been volatile,
but it is on track, moving lower, which
is that the growth ETF is declining
relative to the value ETF. Remember,
these types of spreads are extremely
helpful to monitor daily/weekly to
extract insights from.
Let’s peer under the hood of these
two ETFs (Figure 5). Right away, we
can see that the growth ETF is more
impacted by four companies: Apple, FIGURE 4: VALUE VS. GROWTH. IVE (iShares S&P 500 Value) vs. IVW (iShares S&P 500 Growth)
as a factor spread of 2 * IVW − IVE.
Microsoft, Amazon, and Google,
which, combined, have 41.38% of
the weight; adding Tesla, Nvidia, and
Meta brings it to 51.46%. It is much
more tech-driven, and we know that
higher P/E companies have been hit
harder since the highs in November
2022.
My question to you is this: If given
the task of creating your own version
of a value basket against a growth
basket, what would that look like?
If the task was to create a “risk-on” FIGURE 5: THE TOP 15 STOCKS BY WEIGHT IN IVE AND IVW
basket versus “risk-off” basket, could
you do it? We can look through the
existing ETFs for ideas, or search for with large cap with no earnings
lists that other people have compiled, In this current and some red flags
such as ESG-friendly, or Metaverse environment, I would • Long a quality stock that has
stocks, or stay-at-home versus re- look through peer high beta, short low beta (best
opening stocks. If you borrow from for risk-on environments)
stocks comparing
others, then you should still evaluate • Stocks that have had notewor-
whether each stock is still valid for fundamentals and areas thy events, gaps, and are now
your desired theme. of correlated versus considered “post-event.” Can
uncorrelated risk. you find a catalyst to bring that
Relationship mining relationship back in line? Can
Where are the best anomalies for outlier performance differences in you set up the trade to risk $1.00
mean reversion? In this current the past. to make $5.00 in movement
environment, I would look through Then there is the aspect of timing. on the spread price if using a
peer stocks, comparing fundamentals If you can identify a reason for a factor-adjusted differential?
and areas of correlated versus uncor- change, a catalyst that would benefit
related risk. your long idea and one that would be Pairs and baskets can be imple-
I would also look at how the stocks the wind behind a short idea. mented for the day, for swing trades,
have traded historically with each Here are some ideas for selecting or for trading around core positions
other. The best opportunities could the best opportunities (to get the over the long sample.
come from a relationship that is biggest bang for the buck): Research, and use your tools!
fundamentally distorted, and at the
same time has proven itself to come • Long small cap with no debt
back from those extremes or from and earnings growth paired
62 • April 2022 • Technical Analysis of Stocks & Commodities
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