Daytrading Fractal Dimension Forex Gambit How To Succeed at Forex Trading Volume Profile Interview Product Review Traders' Resource

THE TRADERS’ MAGAZINE SINCE 1982
http://www.traders.com/
DAYTRADING
With volatility 10
FRACTAL DIMENSION
Cycle or trend? 16
FOREX GAMBIT
Bold, aggressive — risky? 22
how to succeed at
forex trading
And learn about yourself 28
volume profile
Identifying support &
resistance 44
INTERVIEW
Daytrader Josh DiPietro 54
PRODUCT REVIEW
■■ Wave59
Traders’ Resource
Data Services 83
+1006 Cover.indd 2 4/22/10 1:54:14 PM

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04IB10-271

CONTENTS JUNE 2010, Volume 28 Number 7
10 Daytrading With Volatility 44 Trading With Volume Profile

by Mark Hodge by Sam Whitehill
This trading strategy lets you take Daytrading stocks is largely a game
advantage of volatility. of knowing critical support and
resistance price levels. Here’s a
FEATURE ARTICLE TIPS valuable tool that identifies these
levels quickly so you can make
16 Fractal Dimension As sound trading decisions.
A Market Mode Sensor
by John F. Ehlers and Ric Way 47 Explore Your Options
You can use the fractal dimension as by Tom Gentile
a way to sense whether the market Got a question about options?
is in a cycle mode or a trend mode. product REVIEW
62 • Wave59
FOREX FOCUS 48 Smoothing The Bollinger %b, Review: Trading software
22 The Forex Gambit Part 2
by Sylvain Vervoort
by Walter T. Downs
Here’s how to use the Bollinger %b
DEPARTMENTS
This trading strategy uses logic and 6 Opening Position
analysis from math and chess. It’s indicator as a trigger to buy and sell
a stock. 8 Letters to S&C
bold, it’s aggressive, and you don’t
lose sight of risk. 61 †Traders’ Glossary
INTERVIEW 70 Traders’ Tips
82 Futures Liquidity
28
WM Becoming A Successful 54 Josh DiPietro And 88 Trade News & Products
Forex Trader The Reality Of Daytrading 90 Advertisers’ Index
by Leslie vanWinkle by Jayanthi Gopalakrishnan 90 Editorial Resource Index
You can learn a lot about yourself and Bruce Faber 92 Books for Traders
on the road to making a profit. You can win at daytrading, but do 94 Classified Advertising
you have the patience? Josh DiPi-
32 Signal Processing Basics, etro, our interview subject for this
Part 3 month, has been daytrading for 12
years. Here’s how he did it.
by Glenn A. Barlis

Part 3 addresses momentum and TRADERS’ RESOURCE
oscillators and how the tools may be
applied to trading systems. 83 Data Services
Here’s a sampling of data
39 Q&A services.
by Don Bright
This professional trader answers
AT THE CLOSE
a few of your questions. 98 Gann Charting Essentials
by Koos van der Merwe
40
WM The Rubber Band Effect Here are the basics of a traditional
by Alexander Elder, M.D. charting technique that can still be
SpikeTrade.com is a group of trad- implemented in the modern finan-
ers involved in a weekly competi- cial markets.
tion. This time, the trader focuses on
strategy and short-term tactics.
This article is the basis for Traders’ Tips
TIPS
43 Futures For You this month.
by Carley Garner This article – and articles like it – can be n Cover art: Brian Taylor
Here’s how the futures market WM found online at www.working-money.com
n Cover concept: Christine Morrison
really works.
Copyright © 2010 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis of
Stocks & Commodities™ (ISSN 0738-3355) is published monthly with a Bonus Issue in March for $64.95 per year by Technical Analysis, Inc., 4757 California Ave. S.W., Seattle, WA 98116-4499. Periodicals
postage paid at Seattle, WA and at additional mailing offices. Postmaster: Send address changes to Technical Analysis of Stocks & Commodities™ 4757 California Ave. S.W., Seattle, WA 98116-4499 U.S.A.
Printed in the U.S.A.
4 • June 2010 • Technical Analysis of Stocks & Commodities
+1006 Contents.indd 1 4/23/10 10:05:39 AM

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• All proprietary technology in TradeStation is owned by TradeStation Technologies, Inc., an affiliate of TradeStation Securities, Inc. • Trading foreign exchange carries a high level of risk
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tasc_June2010.indd 1 4/13/2010 2:24:29 PM

June 2010 • Volume 28, Number 7
March 2006 • Volume 24, Number 3 O
Opening Position
PENING POSITION
The Traders’ MagazineTM

The Traders’ Magazine TM
T
EDITORIAL
EDITORIAL
editor@traders.com
editor@traders.com
Editor in Chief Jack K. Hutson
O
he word “daytrading” gives rise to all
Editor in Chief Jack K. Hutson
Editor Jayanthi Gopalakrishnan
Editor Jayanthi Gopalakrishnan
Managing Editor Elizabeth M.S. Flynn
Managing Editor Elizabeth M.S. Flynn sorts of emotional
nce again we gotreactions.
a reminder People are
of just
Production Manager Karen
ProductionManager KarenE.E.Wasserman
Wasserman either attracted to it or are revolted by it. Those
how sensitive the financial markets
Director Christine
ChristineMorrison
who are drawn to it think of itinasthea desirable
Art
Art Director Morrison are. We saw a major selloff Japanese
Graphic Designer Wayne
GraphicDesigner SharonShaw
profession where income possibilities area
Yamanaka
Staff Writers
Editorial Dennis
Intern D. Peterson,
Emilie Rommel Bruce Faber
markets, which — as expected — triggered
Webmaster Han J.David
Technical Writer Kim Penn limitless. I don’t on
domino effect blame them. throughout
markets It does havethe its
Contributing Dennis John
Staff WritersEditors
Anthony W. Warren, Ph.D.
Ehlers, Bruce Faber
D. Peterson,
charm, but boy, can it be painful! Parting
world. Add disappointing earnings numberswith
hard-earned money is never easy, buta ifsitua-
you
Webmaster Han J. Kim
from US corporations and you have
Contributing EditorsDon
ContributingWriters Bright,
John Thomas
Ehlers, KevinBulkowski,
Lund,
Martin
AnthonyPring, AdriennePh.D.
W. Warren, Toghraie
have that hunger to become successful off
tion that just got worse. So what started at it,
as
Contributing Writers Don Bright, Thomas Bulkowski,
Martin Pring, Adrienne Toghraie you have to work hard, persevere, focus, be
a strong year ended up correcting, and rather
OFFICE OF THE Publisher committed,
rapidly. I mustand most
admit important,
that althoughbe extremely
correc-
Publisher Jack K. Hutson
Credit OFFICE OF Eades
Manager Linda THEGardner
PUBLISHER disciplined. It’s just like with any other activity,
tions are healthy for any market, when you have beait2%professional
drop, it getssports
you or academ-
thinking.
PublisherEngineer
Industrial Jason K. Hutson
Jack K. Hutson ics. You have to start at the bottom and work your way up. With experience,
Prior to the Federal Reserve’s F OMC meeting, I usually take a look at and
the yield
Credit Manager
Project Sean M.
Engineer Linda
Industrial Engineer
Moore
Eades
Jason
Gardner
K. Fisher
Hutson
that includes
curve. making
At present, it’smany
looking mistakes, you and
a little flat, will given
learn that
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general you and be
Agnes
able to the
create
Fedstrategies that are unique to January
you. Take themeeting,
time to learn from others
Accounting Assistant
Project Engineer Sean M. Moore is that is going to tighten at their 31st I am concerned
Controller Mary K. Hutson
and combine different people’s styles and techniques to come up with
that the yield curve may be heading in the direction of being inverted. And your own
if that
Accounting Assistants Jane Leonard
Controller Mary K. Hutson
Advertising Sales
4757 California Ave. S.W.
strategy. But make sure that it’s your own unique strategy or style.
were to happen, that would not be a good sign for the US economy. I’m not
suggesting
Think of some chess
are grandmasters such asaGarry Kasparov, SergeyButVokarev, and
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advert@traders.com may be offensive
it helps to preserve players,
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Classified & Web
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Edward W. Schramm
strategies and some may be very unpredictable. Each player has a unique style that
Production Web Sales Karen
Classified &Coordinator Moore
makes them successful.
Chris J. Chrisman
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Production Coordinator Karen Moore
SubscriptionCIRCULATION
Circulation
& Order Service 1 800 832-4642
Similarly, as athat
with daytrader,
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you can learn from others and combine various people’s styles to
circ@traders.com
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Subscription Manager Sean M. Moore number of options available increases. makes
Subscription Sales
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Karen M. Moore
Adams-Thomas, have that desire
important to be successful
to be thorough with the,you’ll
different learn from
types of those
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front-end software, and
Teresa Shockley,
Assistant CarmenManager
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trading systems that are out there. Lee Leibfarth, in his article “The Automated
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Subscription Sales Agnes Dimaano, Tina Row
Website Daytrader” starting on page 22, addresses the various options that are available and
http://www.traders.com
WEBSITE
Staff membershttp://www.traders.com
may be emailed through the Internet how you can take advantage of them.
using
Staff first initialmay
members plusbe
last name plus
emailed @traders.com
through the Internet Butake Joshgetting
before DiPietro, our
to the Stocks
stage & Commodities
of placing that trade, youinterview
need to subject for the
understand the
June 2010 issue, as an example. DiPietro is an extremely active trader who,
using first initial plus last name plus @traders.com
market you are trading. You should be able to do so after reading Paolo Pezzutti’s
Authorization to photocopy items for internal or personal instead of being Market
“Understanding discouraged by all his
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markets chose
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http://www.copyright.com. a the correct trading technique. But that’s just the first step. You still have to have
photocopy license bythat CCC, a sep arategranted
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have to face. The interview starts on page 54.
those organizations have been
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license The fee code
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been discipline, as you will find out after reading this month’s Technical Analysis of
tional Reporting
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users of the Transactional
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STOCKS
A daytrader liquidates his
& COMMODITIES or her position
interview with Kenat Tower.
the endOnly
of thethen
trading
will day.
you beThe next
able to
Foreign surface mailUSA:
Subscriptions: add one $15 yearper year. Air mail:
(13 issues) Europe
$64.95; day is another day
know when to exit. with different challenges. The advantage of trading this way is
add $25.50 per year; else where add $39 per year. Sinadd
gle
that your risk of ruin is limited. Interestingly, Walter Downs’ article “The Forex
Foreign surface mail add $15 per year. Air mail: Europe
copies of most past issues of the cur r ent
$25.50 per year; elsewhere add $39 per year. Single copies year are avail able
pre paid past
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copy.ads)
Prior
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current
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from www.traders.com.
areavail able in
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USAformat
funds Gambit,” starting on page 22, presents
Here’s to smart atrading!
risk management strategy that uses logic
only.
locale.
Washington
(without ads) or from
VISA,
statewww.traders.com.
MasterCard,
residents add sales
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USAtax
Discover
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only. and analytical reasoning from math and the game of chess to apply to your trading.
Read it straight from the chessmaster!
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Analysis of S isTOCKS
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& COMMODITIES ™
, The
believed
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Magazine™, butprepared
not guaranteed by us witho
from information ut
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lieved verification,
to be reliable andbut doesnotnot purport toby
guaranteed be us
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Opinions expressedand aredoes
subject notto revision without noti-
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fication.
OpinionsWe are not are
expressed offer ing to buy
subject
purport to be
or sell without
to revision
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securities or
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Jayanthi Gopalakrishnan,
commodities
cation. We are not offering to buy or sell securities or
discussed. Technical Anal y sis Inc., one or Editor
more
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ing on trademark
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8 • March 2006 • Technical Analysis of STOCKS & COMMODITIES
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The editors of S&C invite readers to submit their opinions and information on subjects ter the trade. You’ll have to determine
relating to technical analysis and this magazine. This column is our means of communica- if it closed at a seven-day low (rule 2).
tion with our readers. Is there something you would like to know more (or less) about? Essentially, you’ll have to count back-
Tell us about it. Without a source of new ideas and subjects coming from our readers, this wards. If it closed at a seven-day low,
magazine would not exist. you buy at the close. If not, then you
Address your correspondence to: Editor, Stocks & Commodities, 4757 California Ave. wait for the next day and count back-
SW, Seattle, WA 98116-4499, or email to Editor@Traders.com. All letters become the wards again. You then exit your posi-
property of Technical Analysis, Inc. Letter-writers must include their full name and address tion if the Etf closes at its seven-day
for verification. Letters may be edited for length or clarity. The opinions expressed in this high (rule 3). For this too, you’ll have
column do not necessarily represent those of the magazine.—Editor to count backward.—Editor
Schaff Trend Cycle Indicator ed at your website at www.premium. Kondratieff wave

Editor, working.money.com, is a really great and natural gas
In his interesting article article on Gann’s square of nine. It was Editor,
in the April 2010 S&C clear and easy to understand. Rather I enjoyed Koos van der Merwe’s
(At The Close: “The than obscuring Gann analysis in esoteri- recent article on the Kondratieff wave
Schaff Trend Cycle”), ca, the article presented mathematically (“Kondratieff Wave Comeback,” April
Brian Twomey looked at valid explanations for Gann’s “mysti- 2010 S&C). I have followed it loosely
the Schaff trend cycle indicator (Stc), cal” parabolic calculator. Thank you for for about 40 years. I would appreciate
which applies market cycles to the the insight. getting his outlook for usages and
Macd, resulting in an efficient banded B. Chang prices going forward for natural gas
indicator. — a plentiful asset, not being used to
While I’ve used Stc since Doug TECHNICAL ARTICLES its potential. Any comments would be
Schaff released the code in 2008, a Editor, appreciated as I have been involved
simple change seems to increase the As someone who has read your magazine with the Etf Ung not realizing it was
reliability of the indicator. If the Macd back to its very start, I would like to trading the commodity, not invested in
signal line is replaced by the Trix (triple vote against more simplified articles as natural gas stocks.
exponential smoothing oscillator), proposed by one of your other readers Bob Hylard
while the indicator looks similar, it (Letters to S&C, April 2010). Technical
signals trends earlier and sticks with analysis is by its nature “technical.” Koos van der Merwe replies:
a trend longer. To distinguish between There are many publications that cover It is true there is a great deal of natural
Trends
the two, I call this indicator the Trix simplified approaches to market trading, gas around, and as technology improves,
trend cycle (Ttc). but you publish the only magazine that its use becomes more efficient. Since
To retain the rest of the TradeStation covers in-depth technical analysis of it is so readily available, I cannot see
code from page 96 of the April stocks, options, commodities, and the natural gas tying in with the K-wave
issue (sidebar, “Schaff trend cycle market. cycle. It does not influence a currency,
EasyLanguage code”), the change is to Please continue to provide the and hence, the economy.
replace the lines: quality, detailed articles that you have It does provide a cheap source of
in the past. energy, but getting the product to the
{Calculate a MACD Line}
XMAC=MACD(c,MA1,MA2);
Joe Nemecek user is costly. One could argue that
cheap energy helps the economy, but to
with: Three Rules, One Easy Way what extent?
To Trade Etfs Natural gas has always perturbed
{Calculate Trix}
XMAC=Trix((h+l+c)/3, MA1); Editor, me because it is methane, and methane
I liked the article “Three Rules, One Easy is a by-product of coal that has killed
MA2 is not used. Note also the suggested Way To Trade Etfs” by Larry Connors many miners, hence “the canary in the
use of the typical price rather than the and David Penn in the January 2009 cage.” This was always off-putting to
close, since, other than on weekly and issue of Stocks & Commodities, but me. And a look at Ung falling from a
longer charts, the close of a bar has no I’m confused about how to count the high of $64-odd in July 2008 to a value
real significance in forex. days: Where do I start counting “day 1”? of $7.01 as I write this seems to justify
David Gianelly Helen Chen my thought.
Victoria, Australia By the way, looking at the chart (dai-
Based on the three rules presented in ly), I would not be a seller (as I write this
Great online article the article, say you see an Etf close at the end of March 2010). As the mar-
Editor, above its 200-day moving average (rule ket starts regaining investor confidence,
“The Chartist” by Gary Goldberg, post- 1). You are trying to decide when to en- it should start rising, but it may take a
June Letters.indd 1 4/22/10 2:00:52 PM

LETTERS
long time, and still, I find it difficult to
see the Etf going back up to $64.
K-wave count
Editor,
I read “Kondratieff Wave Comeback”
by Koos van der Merwe in the April
2010 S&C. Merwe mentions in the
article that we are already in a wave II.
However, with the S&P moving above
wave I, wave II has not yet started.
Has there been any change in his wave
counts since the article was published?
If so, what are the new wave counts?
Mayur Shah
India
Koos van der Merwe replies:

In my article (on page 15 of the April
2010 issue), I wrote, “Figure 1 suggests
that the S&P 500 is currently in a wave
I up. This is confirmed by the relative
strength index (Rsi).”
This means that we are not yet in a
wave II down, but that we are still in a
wave I up. However, wave 1s are followed For more information, visit the S&C ad index at Traders.com/reader/ or circle No. 23
by wave 2s down, so a market correction
is due for sometime in the future. At the Some readers are probably able to Is there a way a Traders’ Tip could be
moment, as I write this on April 5, my translate the mathematical formulas offered for this software, since I don’t
charts are suggesting that the S&P 500 into programming language for their know how to program the code given
is completing a wave 4 of wave I. This technical analysis program. for the other programs into BullCharts?
means that wave 5 of wave I is still ahead As for programming code presented Tony Sheedy
of us. When this is complete, only then in the magazine (which some software
will wave II down start. developers refer to as “formulas”), Code provided in our Traders’ Tips
Hope this answers your query. most of the code is for a specific techni- section is provided by the technical
cal analysis program. The name of the analysis software developers themselves
formula input program that the code is written for, or — we don’t write the code. Thus, we can’t
Editor, the name of the programming language, offer it if they don’t provide it. We suggest
How do I input the formulas that are is always given somewhere near the contacting their support department
presented in the magazines? Do I need code or in the article. We occasionally directly for the code you seek, and they
a special program or do I use the C present formulas for use in Microsoft may be able to provide it.—Editor
prompt? I have Microsoft XP that I run Excel in sidebars to articles.
on a real AT. I hope this answers your question.— S&C on DVD
Andrew Guyton Editor Editor,
Is your S&C on Dvd
You would likely need a specialized traders’ tips for bullcharts? product (your fully indexed
program such as Matlab to make use Editor, compilation of S&C articles
Version 12.27
of the equations and mathematical I subscribe to your mag and like many on Dvd) compatible with Windows 7?
formulas given in some articles, of the articles, but in your Traders’ Javier Muñoz
which are provided mainly for visual Tips section, there is nothing for the
inspection to help communicate the software from BullCharts. Yes, the latest version of our S&C on Dvd
logic behind a concept or to define an BullCharts is very popular trading is compatible with Windows 7.
indicator. They could also possibly be software here in Australia. (I am Readers can call 800-Technical or
used in Excel if the reader is able to speaking of www.bullcharts.com.au, not visit our website at Traders.com for more
translate the mathematical formulas www.bullcharts.com or www.bullchart. information or to order.—Editor
into Excel spreadsheet format. com, which is a different product.) S&C
June 2010 • Technical Analysis of Stocks & Commodities • 9
June Letters.indd 2 4/22/10 2:01:22 PM

A Surprisingly Simple Solution
Daytrading With Volatility

This trading strategy lets you take advantage of volatility to daytrading. So is volatility really that bad? Could you accom-
PAT KINSELLA
establish your profit targets and stop-losses. modate periods of greater volatility and lower volatility, and
actually use volatility to your advantage with the markets you
T
by Mark Hodge trade? Yes, you can!
he term “volatility” is typically associated with losses. Defining volatility

It’s easy for media and money managers to blame Simply, volatility is the degree of uncertainty, and it is the
losses on volatile market conditions, but is that re- potential for price changes in a given market. It can be de-
ally the case? Higher volatility can mean greater risk, but fined in various ways, but the Cboe Volatility Index (Vix) is
greater risk is a direct result of greater price fluctuations in a great gauge of volatility in the US markets. Vix measures
the market. Greater price fluctuations might be a concern for volatility on the Standard & Poor’s 500, based on 30-day
investors, but active traders need markets to move, and these option premium. When option premiums are high, traders
price fluctuations are a necessary component for successful expect future volatility to be high, and Vix rises. When op-
+Hodge_1006.indd 1 4/23/10 11:52:04 AM

DAYTRADING
tion premiums are low, traders expect future volatility to be

Average daily range =
low, and Vix drops.
Vix might be a great way to gauge volatility in the US (|Session high(yesterday) – Session low (yesterday)|
markets, but how can you identify and track volatility in + |Session high (2 days ago) – Session low (2 days ago)|
the individual markets you trade? This can be accomplished + |Session high (3 days ago) – Session low (3 days ago)| …
by tracking the actual ranges that a security or market has + |Session high (7 days ago) – Session low (7 days ago)|)
traded in a given period of time. This can be examined in a /7
few ways.
Let’s begin by introducing average true range (Atr). Atr is Adr does not factor in gaps and is best used in markets that
an indicator that measures a security’s or market’s volatility. do not experience consecutive limit moves in price, which
Atr was created by J. Welles Wilder and introduced in his was Wilder’s original concern when he introduced Atr in the
New Concepts In Technical Trading Systems. To determine 1970s. However, Adr is easy to use and effective for futures
the “average” true range, you first need to calculate the true traders who trade electronic markets but focus on trading in
range of a market. True range is defined as the greatest of the open outcry sessions. These sessions are standard trading hours
following: when pit and electronic trading are conducted simultaneously
n The current high less the current low (range) (such as 9:30–16:15 Eastern time for the emini S&P 500).
Because the average true range takes gaps into consideration
n The absolute value of the current high less the previous and average daily range does not, the Adr will have a smaller
close (true high) value between the two and be more representative of volatility
n The absolute value of the current low less the previous in the actual daytrading session.
close (true low).
How can you identify and track
The formula is: volatility in individual markets
you trade?
True range =
MAX (|High(today) – Low(today)|, Trade management
|Close(yesterday) – High(today)|, Whether you prefer a market’s Atr or Adr, you can use recent
|Close(yesterday) – Low(today)|) volatility in the market you are trading to set targets and stops.
This is most easily done by using a percentage of volatility for
By taking the greatest of these values, Wilder’s goal was to your stop-losses and profit targets. By using a percentage of
account for gaps and potential limit moves in commodities. volatility for exits, targets and stops can expand and contract
Once you understand how to determine the true range of a depending on current volatility and market conditions. In
market, it is easy to calculate the average true range by tak- volatile periods, stops and targets based on the percentage of
ing a simple moving average of the true range for specified volatility will be larger. In quiet conditions, stops and targets
periods. When used as an indicator, the standard setting for based on a percentage of volatility will be smaller. You will
average true range is 14 periods. risk more and make more when markets are more volatile, and
Although a 14-period Atr setting is standard, active trad- you will risk less and make less when markets are quiet. This
ers might want to consider a smaller time frame for intraday is a great way to take advantage of opportunities in a market
trading. As with any indicator, the more periods you use, the when there is fluctuating volatility like we have experienced in
smoother the average and more representative the indica- the last year. With the extreme volatility that was experienced
tor is of the longer trend. The shorter the period, the more in autumn 2008, followed by the lower volatility that we are
responsive, and the more representative the indicator is of experiencing at the current time, many traders who are not
the immediate trend. considering volatility for targets and stops have struggled.
In volatile periods a market will have a higher Atr, and Once you’ve determined the Adr, you can calculate conser-
in calm periods a market will have a lower Atr. Once you vative exits for daytrading by using 10% of the Adr as your
have the Atr of a market, you have a better understanding of stop-loss and 15% of the Adr as your profit target. Although
recent volatility in the market(s) you are trading. I am concentrating on exits in this article, feel free to test any
trend-following daytrading strategy with percent volatility
Average daily range stops and targets.
An alternative to the average true range is the average daily
range (Adr), popularized by trader Markus Heitkoetter, author Applying the ADR
of The Complete Guide To Daytrading. The Adr takes the Let’s say you use a seven-day Adr to determine targets and
difference between the trading session high and low, averaged stops. For example, take the emini S&P 500 at the end of the
over a seven-day period. The formula is: day on June 30, 2009. To calculate the Adr and your stop
+Hodge_1006.indd 2 4/23/10 11:52:21 AM

DAYTRADING
Based on the current 16-point

Adr, you should consider us-
ing a 1.50-point stop-loss and a
2.50-point profit target. Because
the range of each trading day will
change, the Adr will change too.
This means it might be necessary
to adjust your targets and stops
daily. These adjustments will help
you accommodate current market
conditions by using appropriate
targets and stops in the markets
you trade.
Using the emini S&P 500 again,
let’s take the Adr from the close
of October 24, 2008, as our next
Track ’n Trade
example. On this day, the Vix was

at its highest level since it first
Figure 1: weekly $VIX chart. Over the last year, volume has increased and decreased, making some strategies started being tracked by the Cboe,
difficult to trade. Note the difference between profit targets and stop-losses from October 2008 to June 2009. indicating extreme volatility in the
Analysis of STOCKS & COMMODITIES magazine US markets:
and target for the next trading day, you need the following
th approval or changes:
information:
10/24/08 Daily range 56.75 (High 889.25 – Low 832.50)
06-938-1307 • email: KMoore@Traders.com 10/22/08 Daily range 61.00 (High 925.75 – Low 864.75)
6/29/09 Daily range 12.50 (High 924 – Low 911.50) 10/21/08 Daily range 35.00 (High 978.25 – Low 943.25)
6/26/09 Daily range 9.75 (High 918.25 – Low 908.50) 10/20/08 Daily range 52.75 (High 985 – Low 935.25)
6/25/09 Daily range 26.50 (High 917.75 – Low 891.25) 10/17/08 Daily range 69.75 (High 980 – Low 910.25)
PROOF #36/24/09 Daily range 15.00 (High 906.50 – Low 891.50) 10/16/08 Daily range 84.75 (High 942.25 – Low 857.50)
6/22/09 Daily range 20.00 (High 907.75 – Low 887.75) Total 7-day range = 427.25 points/7 = 91.75 Adr
Stop-loss 10% of Adr = 9.175 (rounded to 9.25)
Total 7-day range = 112 points/7 = 16 Adr Profit target 15% of Adr = 13.7625 (rounded to 13.75)
Stop-loss 10% of 16 Adr = 1.60 (rounded to 1.50)
Profit target 15% of 16 Adr = 2.40 (rounded to 2.50) Taking a look at a weekly Vix chart in Figure 1, you can
see how volatility has increased and decreased over the last
year, making some strategies difficult to trade.
The first thing you’ll see is the substantial difference between
AUTOMATION IS HERE With The BWT Precision Auto Trader • Now Automate the profit targets and stop-losses from October 2008 to June
BWT Precision Indicator Signals • A Truly Universal Trading System • Trades All 2009. This is the beauty of using percent volatility targets
and stop-losses. It wouldn’t make sense to continue to use
Liquid Markets • Robust Performance • Available in Tradestation or Ninja Trader Only
a 13.75-point profit target for daytrading in June 2009 if the

entire daily range were only 16 points. On the flipside, it
would have been challenging to use a 1.50-point stop-loss
back in October 2008, when 1.50-point moves occurred by
the minute.
Now, analyze a real example trading the emini S&P 500.
On July 7, 2009, the Adr was 15.75. Using 10% of the Adr
(15.75 x 0.10 = 1.57, rounded to 1.5) as our stop, and 15% of
the Adr (15.75 x 0.15 = 2.36, rounded to 2.25) as our profit
target, we are looking for a 2.25-point profit target and a
1.5-point stop-loss when we enter the market.
In Figure 2, we’re using a 4,500-tick chart on the emini
The Most Innovative Technical Analysis Tool Available Today
Blue Wave Trading: Often Imitated...Never Duplicated
www.bluewavetrading.com • 808-281-8391 S&P 500. Downtrend bars are highlighted in red when the
For more information circle No. 2 moving average convergence/divergence (Macd) is below
+Hodge_1006.indd 3 4/23/10 11:54:01 AM

DAYTRADING
the signal line and the zero line,

and uptrend bars are highlighted in
green when the Macd is above the
signal line and above the zero line.
To keep things simple, we’ll enter
a short position at the close of the
first bar when the Macd is showing
a confirmed downtrend (a red bar)
at 10:19 ET based on the criteria
discussed. With an entry at 887.75,
the 10% Adr stop-loss is 889.25 and
the 15% Adr profit target is 885.50,
which is hit a few bars later for a
winning trade.
Trading volatility
Using volatility to establish profit
• Technical Analysis STOCKS
targetsofand & COMMODITIES
stop-losses, you can magazine
make sure that your exits are appro- Figure 2: tick chart of emini s&p 500. A short position is entered at the close of the first bar when the MACD
act Karen Moore with approval orpriate changes:
is showing a confirmed downtrend at 10:19 ET. With an entry at 887.75, the stop-loss is 889.25 and profit target is
for all 885.50.
market condi-
tions and periods of unusual volatility. futures trading. He is the coauthor of Rockwell Trading’s
6) 938-0570 • fax: 206-938-1307 •Knowingemail: KMoore@Traders.com
when to take a loss and when to Home Study Course and conducts private coaching sessions
take a profit are crucial to the success of a with active traders around the world. He may be reached at
daytrader but making sure that your exits www.rockwelltrading.com.
are appropriate#1
PROOF for the market conditions
you are trading is just as important. Using Suggested reading
percent volatility stops and targets based Heitkoetter, Markus [2008].
on the Adr is a simple solution for any The Complete Guide To
market that all daytraders can incorporate Daytrading, Outskirts
into their trading plan. Press.
Wilder, J. Welles [1978]. New
Mark Hodge is an independent trader Concepts In Technical
and head coach at Rockwell Trading. Trading Systems, Trend
Hodge has traded all markets and time Research.
frames but specializes in short-term ‡Track ’n Trade S&C
Advanced algorithms deliver

low lag, low noise analysis.
Now featuring
Tools for...
Also for: AmiBroker, Wealth-Lab, MetaTrader, Wavewi$e, Excel, Investor/RT, BioComp Profit, NeoTicker,
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Data Calculator, Genesis TradeNavigator and TradersStudio.
www.jurikres.com • 800-810-3646 • 719-686-0074

For more information circle No. 12
+Hodge_1006.indd 4 4/23/10 11:54:40 AM

+Ehlers 1006_NEW.indd 1 4/28/10 12:17:38 PM
TRADING SYSTEMS
Cycle Or Trend?
Fractal Dimension As
A Market Mode Sensor
You can use the fractal dimension as a natural way be defined by the fractal dimension that describes
to sense whether the market is in a cycle mode or sparseness at all magnification levels.
trend mode. To determine the fractal dimension of a generalized
pattern, we cover the pattern with a number N of small
Is
objects of several various sizes S. The relationship
the market trending or cycling? What in- of the number of objects in two sets of sizes is:
tuitively seems like an easy question to
answer is perhaps one of the most vexing in N2 S1 D
=
N1 S2
all technical analysis. If a trader knows the market
mode, then a straightforward approach could be log
N2
taken to adapt a trading strategy to that mode. We N1
D=
would apply a swing trading technique such as an S1
log
S2
overbought/oversold oscillator in cycle mode and a
trend-following technique such as a moving average As an example, we can start with a pattern that is a
crossing in trend mode. In this article, we address the line segment 10 meters long. We chose the two small
cycle/trend problem using the fractal dimension. dimensions as S1 = one meter and S2 = 0.1 meter.
A number of tools have been developed to differ- Placing boxes along the line, we can fit 10 one-meter
entiate between cycle and trend modes. For example, boxes on the segment, and therefore N1 = 10. Simi-
we can compare the trend slope over a full cycle larly, we can fit 100 0.1-meter boxes on the same 10
period to the amplitude swing of the cycle and use one-meter line segment, and therefore, N2 = 100. The
the ratio. More recently, we developed empirical fractal dimension of the line then computes to:
mode decomposition to separate the market into cycle
and trend mode components. In this article, we will 100
log
10
consider the fractal dimension as a natural way to D= = 1.0
1
determine whether the market is in a cycle mode or log
0.1
trend mode.
As a second example, we will use the pattern as a
Fractal dimension square that is 10 meters on a side instead of a line seg-
There is no argument that market prices are fractal. ment. Retaining the same sizes of our small boxes as
Price charts look similar regardless of time frame. If one meter and 0.1 meter on a side, respectively, we get
you remove the labels from a five-minute chart, a daily N1 = 100 and N2 = 10,000. When the square is our pat-
chart, and a weekly chart, you would have difficulty tern, the fractal dimension therefore computes to be:
WILLIAM L BROWN
telling them apart. Fractal shapes are self-similar be-

10000
cause they have the same roughness and sparseness log
100
regardless of time interval. This self-similarity can D= = 2.0
1
log
0.1

by John F. Ehlers and Ric Way


FRACTAL DIMENSION INDICATOR IN EASYLANGUAGE TRADING SYSTEMS
Inputs: Price((H + L)/2),
N(30); {N must be an even number}
Vars: Smooth(0), fractal dimension made over different scales.

count(0), We could measure the fractal dimension of prices by covering the curve
N1(0), with a series of small boxes. This is burdensome, but if we take into account
N2(0), that the price samples are uniformly spaced, the box count is approximately
N3(0), the average slope of the curve. Therefore, we can estimate the box count
Y 2010 • Technical
HH(0),Analysis of STOCKS & COMMODITIES
as themagazine
highest price during an interval minus the lowest price during that
LL(0), interval, divided by the length of the interval itself. The equation for the
Ratio(0),
tact Karen Moore with approval or changes:
Dimen(0);
number of boxes is then:
6) 938-0570 •Smooth
fax: 206-938-1307
= (Price + 2*Price[1] +•2*Price[2]
email: +KMoore@Traders.com
Price[3]) / 6;
N1 =
HighestPrice – LowestPrice
N3 = (Highest(Smooth, N) - Lowest(Smooth, N)) / N;
Length
HH = Smooth;
LL = Smooth;
For count = 0 to N / 2 - 1 begin We compute the fractal dimension by computing N over two equal intervals
PROOF #2
If Smooth[count] > HH then HH = Smooth[count]; to get the averaging over each interval. Interval 1 covers the period from zero
If Smooth[count] < LL then LL = Smooth[count]; to T bars ago. Interval 2 covers the period from T to 2T bars ago. Therefore,
End; N1 = (HighestPrice – LowestPrice) over the interval from zero to T, divided
N1 = (HH - LL) / (N / 2); by T. Similarly, N2 = (HighestPrice – LowestPrice) is over the interval from
HH = Smooth[N / 2];
T to 2T, divided by T. We also define a N3 = (HighestPrice – LowestPrice)
LL = Smooth[N / 2];
Learn How To
For count = N / 2 to N - 1 begin over the entire interval from zero to 2T, divided by 2T. Since we are looking
backward in time, the slope computation of the fractal dimension is:
Generate A
If Smooth[count] > HH then HH = Smooth[count];
If Smooth[count] < LL then LL = Smooth[count];
End;
5%-10%
N2 = (HH - LL)/(N / 2);
If N1 > 0 and N2 > 0 and N3 > 0 then Ratio = .5*((Log(N1
D=
log N1 + N2 – log N3
log 2
Monthly Income!
+ N2) - Log(N3)) / Log(2) + Dimen[1]);
Dimen = Average(Ratio, 20);
Plot1(Dimen); No Iron Condors The fractal dimension varies over the range from D = 1 to D = 2. When
Plot2(1.6, “1.6”, Blue); D = 1 prices are in a straight line — that is, the market is in a trend mode —
No Credit Spreads
Plot3(1.4, “1.4”, Blue); the trend can be up, down, or sideways because the fractal dimension has
no sense of slope. When D = 2, the prices are swinging up and down within
A perfect square To Learn More
represents Todaygeom-
an idealized the box over the observation period; in other words, the market is in a cycle
Visit Our Website At that of
etry not found in nature. Natural fractals like mode. When D = 1.5, we have the boundary between being in a trend mode
a seashore lack the true regularity of an algorithmic or cycle mode. Since the measurement of the fractal dimension is only an
structure but are self-similar in a statistical sense. estimate, there is no clear-cut, black & white distinction between trend mode
Thus, in order to determine the fractal dimension or cycle mode at the boundary. Thus, we choose to plot a “fuzzy” boundary
of natural shapes, we must average the measured extending from D = 1.4 to D = 1.6 within that range.
The fractal dimension indicator

The EasyLanguage code to compute the fractal dimension indi-
LEARN HOW TO cator is given in the sidebar “Fractal Dimension Indicator.” We
GENERATE A choose to use the average of the high and low prices to compute
a line indicator (price) because this average is smoother than the
5%-10%
closing price alone with respect to high-frequency components.
We then smooth price using a four-tap finite impulse response
(Fir) filter to entirely notch out the two- and three-bar cycle
components. A Fir filter is similar to a moving average except
MONTHLY INCOME! that the selected coefficients enable the elimination of the un-
desired two- and three-bar period cycle components.
No Iron Condors The computation of N1, N2, and N3 are as previously
No Credit Spreads described. We then smooth the ratio using a 20-bar moving
To Learn More Today

Visit Our Website At Is the market trending or cycling? What
ConsistentOptionsIncome.com seems like an easy question may be one
of the most vexing in technical analysis.

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++Full pg Ad Template.indd 1 3/22/10 10:55:57 AM

TRADING SYSTEMS
shows that Msft is in a trend from mid-July

2008 until January 2009. From the slope
of the data, this is clearly a downtrend.
Between January and mid-April 2009, the
indicator is in the fuzzy region and from
mid-April it begins another trend. This
time the trend is up, as determined by the
slope of the data.
It may be instructive to describe the ac-
tion of the fractal dimension indicator from
a theoretical perspective. In Figure 2, this
indicator is applied to a sine wave the period
of which is continuously increasing from
MESA SOFTWARE
left to right. The period has been measured

in the bottom subgraph, and the period is
indicated on its vertical axis. In this case,
Figure 1: fractal dimension indicator in action. Here you see the fractal dimension indicator applied on the we have set the input N = 20. When the
chart of Microsoft (MSFT). The indicator shows that MSFT is in a trend from mid-July 2008 until January 2009. From the cycle period is less than N, the cycle swings
slope of the data, this is clearly a downtrend. Between January and mid-April 2009, the indicator is in the fuzzy region, fill the box and a cycle mode indication
and from mid-April begins another trend. This time the trend is up, as determined by the slope of the data.
results. When the cycle period is greater
than N, the indicator reads segments of the
average to create the resulting fractal dimension indicator. The longer cycles as trends. This is a reasonable interpretation of
length of the moving average is somewhat arbitrary, with 20 a trend. However, the prices tend to fill the box near the peaks
being a good match for the default input setting of N = 30. The and valleys of the longer cycles. The moving average in the
indicator is plotted as Plot1, with the fuzzy boundaries plotted indicator reduces the excursions of these swings to improve
as Plot2 and Plot3. interpretation of the trend mode.

The fractal dimension in action Trend or cycle?
The fractal dimension indicator is applied to approximately one By its very design, the fractal dimension is a natural descriptor
year of data of Microsoft Corp. (Msft) in Figure 1. The indicator of trend modes and cycle modes in the market. Its use provides
you with another tool to better apply your
strategies for either swing trading or trend-
following trading.
John Ehlers is a pioneer in the use of cycles

and Dsp techniques in technical analysis.
He is the author of the Mesa8 program
and is the chief scientist for www.isignals.
com. Ric Way is an independent software
developer specializing in programming
algorithmic trading systems in C#. He may
be reached at ricway@taosgroup.org.
Suggested reading
Ehlers, John F., and Ric Way [2010].
“Empirical Mode Decomposi-
tion,” Technical Analysis of
Stocks & Commodities, Vol-
ume 28: March.
‡EasyLanguage (TradeStation)
‡Mesa Software
Figure 2: fractal dimension indicator applied to a theoretical sine wave. The period of the sine See our Traders’ Tips section be-
wave continuously increases from left to right. The period has been measured in the bottom subgraph, and the period ginning on page 70 for program
is indicated on its vertical axis. In this case, we have set the input N = 20. When the cycle period is less than N, the code implementing John Ehlers’
cycle swings “fill the box” and a cycle mode indication results. When the cycle period is greater than N, the indicator technique.
reads segments of the longer cycles as trends. S&C

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101495_06_AD_Elvis_A_page.indd 1 4/15/10 1:42:42 PM
Game Plan In Accordance
The Forex Gambit

This trading strategy uses logic and analysis from math and from chess and math, I will refer to chess as “C,” and to math
BRIAN TAYLOR
chess. It’s bold, it’s aggressive, and you don’t lose sight of risk. as “M”:
I
by Walter T. Downs C and M both favor economy of time and effort in relation
to what is achieved.
am an advanced chess player, and I have an advanced In this regard, a daily time frame is the best choice. C and
education in esoteric mathematics. Together, these two M both state that the optimal strategy is composed of the
disciplines embody powerful logic and methods of most prolific factors within the general theory and body of
analysis. I have created a system based on the idea of knowledge that governs the system. The general theory of
the gambit, a term borrowed from chess. In its essence, technical analysis is:
it is the sacrifice of material in order to launch a bold
n Market action discounts everything.
attack. The gambit is everything a trading system should be:
audacious, dynamic, and fluid. When it is successful, it reaps n Prices move in trends.
great rewards.
n History will repeat itself.
Here, when I am referring to logic and analytical technique
+FX Downs.indd 1 4/23/10 12:32:58 PM

FOREX FOCUS
The forex gambit is a bold attempt
to gain the maximum profit while
not losing sight of risk.
The system
n Buy two lower lows and a closing price that is greater
Within the body of knowledge, the most prolific factor that than the midpoint of the bar and is above the Sma.
governs trend is the simple moving average (Sma). The most
n Place a stop-loss order just below the entry bar.
prolific price used is the closing price. The period used for
the Sma is determined by M and is a value that has statistical n Sell two higher highs and a closing price that is less
significance. Therefore, the value used is 30. than the midpoint of the bar and is below the Sma.
Within the body of knowledge, the most prolific factors that
govern market entry are the correction (a brief countermove n Place a stop-loss order just above the entry bar.
before the trend resumes) and the breakout (price action mov- n When a bar occurs whose range is greater than the
ing above or below a defined point). previous three ranges and whose close is in the top
C and M state that the factor used should be the one with 10% of the bar, exit a long position on the first closing
the least risk and greatest reward potential. In this regard, the
MARCH 2010 • Technical Analysis price that of STOCKS
is lower &previous
than the COMMODITIES
closing price. magazine
correction is the right choice. Within the body of knowledge,
the most prolific factors of the correction are an action (coun- n When a bar occurs whose range is greater than the
Please contact Karen
termove) and reaction (proof of resumption of the trend). Moore with approval
previous or changes:
three ranges and whose close is in the bottom
Here is a simple definition of a correction: 10% of the bar, exit a short position on the first closing
price that is higher than the previous closing price.
n A bullish correction is twophone: (206)
lower lows 938-0570
(action) and • fax: 206-938-1307 • email: KMoore@Traders.com
a closing price greater than the midpoint of the bar n Close any position that has been in the market 16 days.
(reaction proving resumption of uptrend). n Move stop-loss orders to break even on any trade that
n A bearish correction is two higher highs (action) has been in thePROOF
market two #1
days.
and a closing price less than the midpoint of the bar n Take only one trade at a time. Another trade is not
(reaction proving resumption of downtrend). opened until this trade is closed. Often, you will have
Now, let’s specify our risk point. This is the point at which
we will admit that our prediction of future events is wrong.
Safe and Secure since 1992
C and M dictate that the most prolific option should be
used. For long positions, this point is just below the low of the Bright Trading, LLC
bar on which you entered the trade. For short positions, this
point is just above the high of the bar on which you entered
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Now, you must specify the points at which you will exit
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We now have all the factors we need to build the system. For more information circle No. 3
+FX Downs.indd 2 4/23/10 12:33:55 PM

EUR/USD Bid MovS=1.3769
1.5050
1.5000
1.4950
United States.)
1.4900
Fund the account with $300. Your
1.4850 leverage level should be set to 100
1.4800 to 1, which is the maximum leverage
1.4750 allowable under the law. Your unit
size should be 1,000 units.
1.4700 What will this mean to you in
1.4650 practical terms? If you open a one-
1.4600 lot position, the margin requirement
would be $8–16, and the value of
1.4550
your position would be $0.08–0.13
1.4500 per pip (also known as a tick).
FXAccucharts.COM
1.4450 According to M, C, and gambit

play, we will now seek to gain maxi-
’09 23 24 25 28 29 30 Oct 02 05 06 07 08 09 12 13 14 15 16 19 20 21 22 23 26 27 28 29 30
mum profit in the shortest possible
FIGURE 1: A BUY PATTERN. The blue square indicates a completed buy pattern (two lower lows, and a C > midpoint time. Thus, we come to the aspect of
bet/position sizing. We will use the
of bar and > SMA). The turquoise square indicates that the exit condition has been met (A range > three previous
ranges and a C in top 10% of the bar). The yellow square indicates the trade exit (C < previous C).
logic of M to place optimal bets. The
number of lots to trade is the number
multiple trade entry signals in several markets. Take that brings the dollar amount risked plus margin closest to but
the trade with the least risk. not greater than your trading equity. Here’s an example:
n Trade all available currency pairs. Margin = 10.00
Risk = 50 (the difference between entry price
According to the logic and analysis of C and M, this is an and your stop-loss order)
efficient system. Figure 1 shows a buy pattern, exit condition One lot = 10 cents per pip
met, and long position exit. Figure 2 shows a sell pattern, exit Trading equity = $100
condition met, and short position exit. It is at this point we You would buy or sell six lots.
will use C and M to create the forex gambit.
You need to establish a trading account that represents Margin x 6 = $60
minimum risk. First of all, open a micro trading account Six lots x 10 cents = 60 cents per pip x pips at risk
with a reputable forex broker. (The brokerage should have a (50) = $30
deep financial base, and be a member of the Cftc and Nfa, Total = $90 (nearest to but not greater than
the two organizations that look after investor interests in the the trading equity)
You funded your forex micro ac-

GBP/USD Bid MovS=1.5721
count with $300. When you begin
1.6700 trading, treat $200 of this amount
1.6650
1.6600 as your reserve, and consider $100
1.6550 as your trading equity. Any amount
1.6500 of money you accumulate over and
1.6450 above your reserve is treated as trad-
1.6400
1.6350 ing equity. So if you had an initial
1.6300 trading equity of $100 and you made
1.6250 $50, you would have a trading equity
1.6200
1.6150 of $150. This amount would be used
1.6100 to calculate your bet/position size.
1.6050 Thus, your bet/position size
1.6000 varies with your trading equity. If
1.5950
1.5900 your trading equity is reduced to an
1.5850 amount that does not allow enough
1.5800 for multiple lots, reduce your posi-
1.5750 tions to one lot.
’09 02 03 04 07 08 09 10 11 14 15 16 17 18 21 22 23 24 25 28 29 30 Oct 02 05 06 07 08 09 12 13 14 If total equity were $205, you
FIGURE 2: A SELL PATTERN. The red square indicates a completed sell pattern (two higher highs, and a C < midpoint
would only have $5.00 above your
of bar and < SMA). The turquoise square indicates that the exit condition has been met (A range > three previous ranges reserve. Trade only one lot. If you
and a C in the bottom 10% of the bar). The yellow square indicates the trade exit (C > previous C). lose more and move deeper into your
+FX Downs.indd 3 4/23/10 12:34:10 PM

FOREX FOCUS
reserve, continue to trade only one lot. Continue to do this Some possible variations to consider when walking through
until your trading equity returns to a level above your $200 the trades are:
reserve level. Once you move back above your reserve level,
n A windfall profit made in just a few days — consider
you can once again trade multiple lots.
exiting.
As an example, if your total equity were $195, you would
trade one lot. If you then had a winning trade and your total n A closing price very near the midpoint criteria — consider
equity went to $250, you would have a trading equity of $50 entering.
and would have enough to apply the bet sizing formula and
n A buy or sell pattern that occurs after price has had a
trade multiple lots:
parabolic move and is very distant from the Sma —
consider standing aside.
Total equity ($250) – reserve ($200) = $50 trading equity
n When you are sitting on a large open profit and the exit
Testing the forex gambit conditions are almost correct — consider exiting.
Now we will test and analyze our system. We will explore
n A buy or sell pattern that is almost correct and is very
some concepts familiar to C but are not in the general theory
near the Sma — consider entering.
and knowledge base of accepted techniques for testing and
analyzing market systems.
In accordance with C, walking through the trades also car-
C understands a dynamic and ever-changing game. It knows ries a powerful benefit. As you walk through the trades and
that the patterns of the system will have variations that deviate continually study the variations, you will get a feel for how
in small ways. The accepted system testing application is to pop patterns play out in the future. Your grasp of the variations
the pattern, stops, and take-profit algorithm into a computer and powers of intuition will grow stronger as time passes, and
and consider the testing results as a valid representation of so too will your success with the system.
how well the system will operate in the market. Chess players who practice this method can look at any
To C, this approach is an error in logic. The computer func- variation of a pattern and pick the right move for the position
tions in a vacuum. It does not consider variations as patterns without the need for deep analysis or calculation. Bearing in
unfold and play out, nor does it consider the various market mind the strong analogy between C and trading, it is logical
states that can be in effect when the patterns occurred. The to assume that the same results will occur.
computer is not dynamic in its interpretation of events. It is You should trade mechanically and remove all subjectivity
a static interpretation of a dynamic, fluid environment. from trading. C, and the tenets that guide gambit play, suggest
Computer testing of a system often seriously understates an alternate approach:
the viability of a system. The cure for this is to walk through
your trades manually. Just as a chessmaster alters his game A trader’s style should be one of highly
plan in accordance with the exact position on the board, so too systematic discretion (Hsd)
should the trader alter his game plan as events are unfolding.
The trader should retain the patterns theme, but alter his trad-
ing in dynamic ways in response to the variation he is seeing
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variations as well. Thus, the trader remains fluid and dynamic
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”I don’t know... go ask your computer.” For more information circle No. 9
+FX Downs.indd 4 4/23/10 12:34:25 PM

FOREX FOCUS
Risk of ruin for the forex gambit
Here’s how the risk of ruin (Ror) was determined for the forex POR = (por1 + por2) / 2
gambit. In order to determine the “risk of ruin” or “gambler’s
ruin” as it is commonly referred to, the following formula was End If
used (written in a format that can be plugged into Microsoft
Excel as a spreadsheet macro): If TheError = 0 Then
POR = 1 - POR
Function POR(Win, Loss, Pct, Start, Success, Failure) Else
POR = “Error!”
‘ error checking End If
TheError = 1
If Success >= Start And Start >= Failure Then TheError = 0 End Function
‘ convert data into “coin-flip” approximations (where “Win” = avg. win, “Loss” = avg. loss, “Pct” = winning
Expectation = (Win * Pct) - (Loss * (1 - Pct)) percent, “Start” = initial account balance, “Success” = amount
StdDev = (((Pct * (Win * Win)) + ((1 - Pct) * (Loss * Loss))) ^ 0.5) that is your goal, “Failure” = amount remaining in account
P = 0.5 + (Expectation / (2 * StdDev)) that is considered to be a failure.)
Q=1-P When your account is reduced to $200, you bet only one
lot. The figures that get plugged into the Ror formula are
‘ find units of capital until success or failure derived from the statistics that are in the Figure 3 spreadsheet.
Account = (Start - Failure) / StdDev So your Ror is:
FinAccount = (Success - Failure) / StdDev
Win: $39 (388-pip average x 0.10 (1 lot))
‘ apply formula (we must do an averaging if P=0.5) Loss: $13 (131-pip average x 0.10 (1 lot))
If P <> 0.5 Then Pct: 67%
POR = (1 / (1 - ((Q / P) ^ FinAccount))) * (1 - ((Q / P) ^ Account)) Start: $200
Success: $1,000,000
Else Failure: $0
r1 = 0.50001 / 0.49999
r2 = 0.49999 / 0.50001 Plugged into the Ror formula, these statistics produce an
por1 = (1 / (1 - (r1 ^ FinAccount))) * (1 - (r1 ^ Account)) Ror of 0.000055, notably less than 0.01 (1%).
por2 = (1 / (1 - (r2 ^ FinAccount))) * (1 - (r2 ^ Account)) —W.D.
Sneak preview …
MIDAS Displacement Channel The Forgotten Oscillator
by Andrew Coles by Martha Stokes
Here’s an indicator combines channel and envelope methods Presenting an oscillator can expose the amount of energy
that accurately identifies price reversals. that is behind a price move and also pinpoint a shift in that
energy.
The Language Of Money
by Walter T. Downs
This formula for calculating risk of ruin can be used to make …Coming soon!
interesting mathematical projections of the forex gambit.
+FX Downs.indd 5 4/23/10 12:34:42 PM

$100.00 $100.00 $100.00
1 450 $289.00 0 $100 -100 $60.00
2 0 $280.00 600 $340.00 0 $60.00
3 300 $616.00 300 $748.00 0 $60.00
4 -120 $320.32 700 $2,842.40 250 $120.00
5 100 $448.45 -150 $1,136.96 150 $192.00 The formula specifies a maximum bet size compared
6 100 $627.83 0 $1,136.96 150 $307.20 to the equity of your account. If the percentage of equity
7 -150 $439.49 700 $4,320.45 75 $399.36 that you bet exceeds the formula, it is considered too
8 200 $791.08 0 $4,320.45 600 $1,357.82 aggressive or a foolish bet.
9 600 $2,689.68 125 $6,480.67 850 $5,974.43 Combining all our test results, we get an average
10 0 $2,689.68 0 $6,480.67 -200 $3,584.76 winning percentage of 67% and average odds (risk to
11 200 $4,841.42 0 $6,480.67 -250 $1,786.00 reward) of 3.03:1. Applying the Kelly formula, we see
12 300 $10,651.13 -200 $1,296.13 0 $1,786.00
that we should risk up to 56% of equity per trade. The
13 0 $10,651.13 600 $4,406.86 -200 $1,071.60
14 -100 $6,390.68 300 $9,695.09 900 $4,929.36 most our algorithm ever bets is a maximum of about
15 175 $10,864.15 0 $9,695.09 0 $4,929.36 40% of equity. We are not exceeding the Kelly limit.
16 225 $20,641.89 350 $23,268.20 0 $4,929.36 This implies that our betting scheme is smart.
17 150 $33,072.02 -100 $13,960.92 -125 $2,464.68 The other question that springs to mind is, given the
18 0 $33,027.02 -100 $8,376.55 -100 $1,478.81 test results, what is the risk of ruin, or odds that I will
19 -60 $25,100.53 800 $35,181.53 250 $2,957.62 deplete my $300 if I follow the betting algorithm and
20 -120 $13,052.28 500 $105,544.58 0 $2,957.62 account management criteria? The answer from M is
21 400 $33,935.92 0 $105,544.58 -150 $1,626.70 that you have a less than 1% chance of that happening.
22 500 $101,807.76 -100 $63,326.75 0 $1,626.70
See the sidebar on page 26 to determine how I came
23 0 $101,807.76 700 $240,641.63 0 $1,626.70
24 700 $386,869.50 -125 $120,320.82 150 $2,602.72 to the 1%.
25 400 $1,005,860.71 -120 $62,566.83 300 $5,725.98
26 450 $2,816,409.99 0 $62,566.83 0 $5,725.98 Summing up
27 400 $7,322,665.97 100 $87,593.56 0 $5,725.98 We have based our system on the most efficient techni-
28 400 $19,038,931.51 150 $140,149.69 0 $5,725.98 cal foundation. In order for us to fail, technical analysis
29 -100 $11,423,358.91 -100 $84,089,81 350 $13,742.36 itself must fail. The forex gambit is what trading is
30 0 $11,423,358.91 0 $84,089,81 450 $38,478.61 all about. It is a bold, aggressive attempt to gain the
Win 18 Win 13 Win 12 maximum profit while not losing sight of risk.
Loss 6 Loss 8 Loss 7 Instead of underestimating systems with computer
Avg win 336 Avg win 455.76 Avg win 372.91 testing, we choose the Hsd walk-through method, which
Avg loss 108 Avg loss 124.37 Avg loss 160.71 errs on the side of optimism, and we hope that we have
Win % 75% Win % 62% Win% 63% made a case for our beliefs being closer to reality than
R/R ratio 3.11 - 1 R/R ratio 3.66 - 1 R/R ratio 2.32 - 1 the commonly accepted approaches.
159 Trading days Hsd will turn you into a real trader, not a computer
FIGURE 3: SYSTEM TEST RESULTS. The HSD and bet/position sizing algorithm test results technician! The worst you can do is lose $300, and the
show that the forex gambit is capable of achieving very good profits and, in one case, massive profit potential is, for all intents and purposes, unlimited.
profits. So why not give the forex gambit a try?
Take any forex currency pair and perform your own
System test results walk-through testing using Hsd and the betting algorithm.
In three runs of 90 random trades, Figure 3 shows the variances Further, it would be of interest to code the rules and test the
you can expect with the forex gambit. Two runs scored excellent system with a computer to see just how divergent a mechanical
profits, earning $38,478.61 and $84,089.81, respectively. The approach is in comparison to the Hsd test results.
third was a home run, earning $11,423,358.91. The time taken
to complete the 90 trades was 159 trading days for each run. Walter Downs is an independent
Rather than the underestimated findings of a computer test, systems analyst and trader. He
our approach takes an optimistic view what the system is holds a doctorate in esoteric
capable of. It has been my personal experience using highly mathematics and is a chessmaster
systematic discretion (Hsd) that the generated statistics (not and a member of the International
counting the bet sizing algorithm that is a feature of the forex High IQ Society. Currently, he is
gambit) are not out of line with what occurs in real trading. As involved in implementing optimal
the Hsd trader develops a deeper understanding of variations, mathematical forex systems for
the system results just keep getting better. fx-mathematics.com. He can be
Now that we have the test results, we should take a look reached at walt123@verizon.net
at the logic of the bet/position sizing algorithm. Is it too ag- or through the fx-mathematics.
gressive? Is our gambit unsound? com website.
To answer that question, I call on M and the Kelly formula†.
The Kelly formula is defined as: ‡FXAccuCharts
‡See Editorial Resource Index
(Odds x winning percent – losing percent)/Odds S&C
+FX Downs.indd 6 4/23/10 12:37:02 PM

Becoming A Successful Forex Trader
You can learn a lot about yourself on the road to making a my beliefs about myself. Since then, I have learned a great
INGA POSLITUR
profit. deal about forex and only now am I beginning to see a trader
emerge. So read up and learn from my mistakes.
by Leslie vanWinkle
Money for nothing
I became interested in forex trading in 2005 after attending a
W
hen I discovered foreign exchange trading five workshop held by a group called FX Trainers. They began by
years ago, I thought it was the answer to my showing trades that earned 40, 75, 100, and even 300 pips.
prayers. Retail forex trading could be done When they multiplied those pips by lots, my jaw dropped at
around the clock in an up, down, or sideways the potential. The presenters emphasized the use of technical
market with only a handful of currencies to monitor, as over fundamental analysis in forex trading. I understood
opposed to 5,000 common stocks on the exchanges. I didn’t technical analysis from my work as a book editor for a stock
realize I would be embarking on a journey that would stretch market trader and felt I had a head start in this new arena. So
my intellect, flatten my emotions, test my resolve, force me I signed up for the course, opened a demo account, loaded up
to confront money management, and lead me revise many of the software, and for the next four months I joined about 40
+WM vanWinkle.indd 1 4/23/10 10:48:21 AM

Real World
other students two nights a week learning everything I could butterfly, seeking that sweet spot where I could sleep in,
about how to become a successful forex trader. We became a put in a limit order, head off to work every day, and see
community of sorts, calling ourselves the Pipsters. my account increase 10% each month as the market did my
FX Trainers taught a short-term momentum strategy bidding.
relying heavily on stochastics in one-minute, five-minute, and
15-minute charts. These trades typically earned between 10 Learning too much
and 15 pips and the basic course taught me to quickly identify But I was still miles away from that sweet spot. I intensified
and act on reversal patterns. The course was presented with my learning program. Soon I had so many strategies
a comprehensive beginner’s manual with background on the swimming in my head that I found myself confused, mixing
evolution of retail forex trading, the international banking confirming indicators with entry signals, blending strategies
system, effects of economic and political factors on the into dysfunctional hybrids, swinging from fear to greed
markets, key technical indicators, and money management. within nanoseconds, and totally forgetting my exit plan. I
Trading of any kind is an intense, isolating practice, so became so numbwitted I couldn’t even use Pierre’s Spike.
having the Pipsters to talk with was great. During breaks It was worse when I was tired, hungry, or distracted by my
we discussed the intricacies of money management, best child wanting something ridiculous like lunch money before
trading times, and lessons learned from our mistakes. My she caught her bus. I had totally lost my perspective about
trading results were not spectacular, but I knew I was at why I was doing this in the first place: to have a life! I had
the beginning of a journey and I was enthusiastic about forgotten that I already had one. It was a life that included
becoming a successful trader. feeding myself and my family, sleeping at least five hours
a night, and singing occasionally at church. Instead, I was
Strengths become weaknesses beating myself up for being an inept trader, a heartless
Two of my best and worst traits are my compulsive curiosity parent, and trading my soul for pips!
and natural intensity. As I scaled the forex learning curve, I had fallen into the trap of thinking that if I learned enough
I was totally in my element. Eventually, however, I was about the market I could master it. I ended up overloading
forced to acknowledge that the dense activity on those short with too much information, giving my brain too much stuff
time frames was twisting my brain into a knot. Plus, I was to process, more indicators to cancel each other out, and
spending hours staring at my computer screen with only a more ways to second-guess myself. I was compelled to use
handful of pips won to show for it. I wanted those 40-, 75-, all my knowledge, yet was unable to take action. Analysis
and 100-pip moves that would let me build my account, load paralysis had set in.
up on lots, grow a retirement nest egg, and have a life!
I wasn’t alone in that. FX Trainers recognized that we
Pipsters were getting restless and invited guest traders to Surrendering to entropy
present different strategies that built on our basic training. Initially, I identified the problem as
We expanded into webinars and chatted with traders from disorganization and took to designing
around the world. Over the next few months, the Pipsters trading sheets to keep track of all the
rolled through a dozen strategies in as many currencies. We different strategies and the indicators for
learned how to adjust indicators, trade off news, use Fibonacci each one. The sheets became more and
to predict retracement, and where the market would park more complex, sometimes covering two
for lunch. We used moving averages to build pretty blue pages for each trade. If I ever took the time
channels and multicolored lines that squeezed into rainbows to answer all the questions on my form, the
just before the market exploded. We stretched the Bollinger trade would have come and gone!
bands until they snapped, springing like rubber bands at My worst fears had been realized. I had become addicted
entry points, and studied the moving average convergence/ to analysis. My brain synapses had fused into microscopic
divergence (Macd) and stochastic divergence to predict replicas of red and blue candlesticks, wicks dancing as my
those thrilling trend reversals. Each strategy gained a few life ticked away, pip by pip. Then one morning I woke at 4:30
devotees among the Pipsters, who clutched their chosen holy with a nosebleed. I had had enough. I turned my charts off.
grail … and wandered off, never to be heard from again. In physics, this state of paralytic stress is referred to as
I grew particularly fond of one strategy I referred to as entropy. My trading systems had become so complex they
“Pierre’s Spike.” It was a relatively predictable movement could no longer function and were strained to the breaking
that took shape each morning when volume was high at the point. The only solution was a total breakdown of the system,
opening of the New York Stock Exchange (Nyse). I had so it could be restructured at a higher, more efficient level. But
good results with the strategy, and I liked the efficiency of I didn’t understand that then; I just felt as if I had failed.
rising at 4:45 am (that’s Pacific time, folks) and being out My charts remained dark for weeks, then months.
of the trade before my school-aged kid woke up. Still, I was Occasionally, I’d load them up and take a half-baked trade
tempted by exotic-sounding strategies like “ Big Ben” and that invariably went sour and I’d spend the next few weeks
“Midnight Express,” and I flitted from trick to trick like a after that beating myself up for wasting my time, energy, and

Real World Perhaps I’m ready to become a
consistently successful forex trader.
money, reinforcing what was clearly compulsive behavior. risk made me a two-time loser. I also learned my winning
And each time I blew a trade, I felt like a bigger loser. trades were the result of staying in the present, trusting what
the market was telling me and going with the flow.
The value of community These were huge lessons to learn. With this steady
In January 2006, I got a call from a fellow Pipster telling me feedback, my trading began to improve and my account
about a workshop being led by a pair of traders. I resisted, grew. I’d been trading demo up to this point and decided it
explaining that I didn’t think forex was my destiny. But he was time to graduate to trading live. I funded a live account
persisted. and learned my biggest lesson to date: When reality replaces
A few nights later I found myself listening to Steve Cook theory, all bets are off.
and Wade Scott of Forex Trading Coaches. They described By now I understood some of my damaging behaviors and
a strategy of momentum trading using top-down analysis to was able to curb them when they mutated into even more
detect significant trendlines and price patterns on specific interesting behaviors under the pressure of live trading. I
time frames which, when present, reveal high-probability worked through these issues while trading super–mini lots.
trades with a risk/reward ratio of 1:2 or better. Now here When I regained my equilibrium, I returned to trading mini-
was the sweet spot for those 40-, 75-, and 100-pip moves! I lots with fairly steady results. I was winning about half my
felt my prior knowledge shift into place as the system spread trades, which was pure chance, but my winning trades were
out before me with perfect logic. bigger and my losing trades smaller, so I was coming out
I thanked my fellow Pipster for inviting me. I felt I was ahead. Maybe I could do this after all!
on the road to recovery. In hindsight, those months of But life has a way of interfering with even the best-laid hopes.
downtime had served a valuable purpose, allowing my mind In January 2008, I put everything on hold to ghostwrite a book
to rest and my knowledge to settle, preparing me for my next about the failing financial industry, only to watch that industry
learning challenge. Over the next few months I attended implode and leave me treading water with the rest of the world
Forex Trading Coaches’ weekly webinar classes, studied for most of 2009. Then in October 2009, Forex Trading Coaches
PowerPoint slides and Pdfs. I reopened a demo account and invited me to a webinar they were hosting to roll out their
uploaded their customized program of chart enhancements. newly evolved Macd3 Trading System, which was generating
The Forex Trading Coaches’ momentum system relied 90% positive trades for them. They also intended to form a
on daily trends, four-hour and one-hour charts for setups, community for traders committed to learning the system.
and 15-minute charts for entry. During my sabbatical, I had I literally had nothing left to lose, so for the past four
realized that most of my stress stemmed from being forced months I’ve been attending their daily morning trading
to make snap decisions based on limited information from sessions followed by training sessions. I’ve been taking
mind-numbing one- and five-minute charts. Compared to trades and practicing their new system on some testing
that experience, 15 minutes felt like a luxurious eternity, and software they helped develop. Plus, I’m reading Trading In
I could relax and enjoy trading again. The Zone for the third time, chuckling as the author zeroes
The Coaches detailed every key element required in their in on yet another way my mind messes with my trading.
system and answered every question and explained every It has been five years since I began forex trading, and the
factor as often as necessary until we understood the system only thing that has remained the same are my fingerprints.
well enough to duplicate it on our own. This webinar forum In that time I have released nearly everything else in my
also created a community that reinforced the learning. life, so perhaps I’m ready to release those last psychological
obstacles and become a consistently successful forex trader.
Trading is your mental game Think good thoughts for me.
I worked with the Forex Trading Coaches for about a year
with steadily improving results. With this more consistent Leslie vanWinkle is a freelance writer and editor for the
system, I was able to concentrate on the mental side of trading. trading and financial industry. She can be contacted at www.
The Coaches recommended reading Trading In The Zone by easywriterproductions.com.
Mark Douglas, a book I have returned to repeatedly since.
This is what traders must do to become successful: Analyze Suggested reading
both winning and losing trades to find out what factors are Douglas, Mark [2001]. Trading In The Zone, Prentice-Hall
affecting your results. I discovered I was greedy; when a Press.
trade went well I would double-dip without reexamining the Current and past articles from Working Money, The Investors’
setup. I learned I feared loss; I hesitated pulling the trigger Magazine, can be found at Working-Money.com.
even when all my ducks were lined up. That fear of loss really
showed up in my tendency to set my stops too short. A short
stop caused me to lose faster and kept me out of a winning
trade! I also learned I had to take a risk to make a gain; when I
waited too long to enter I missed most of the move, plus I was
stopped out on the retracement. Fear of taking a calculated S&C

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TASC_MetaStock_p-tasc_04_20_10.indd 1 4/20/10 3:52 PM

Applying Momentum And Oscillators
Signal Processing Basics

Part 3
Part 1 of this series described a price model for stocks and and smoothing methods enable the trader to further determine
KEN SMITH
discussed cycle analysis methods. Part 2 covered trends and market direction and establish a trading strategy. The missing
smoothing methods with an emphasis on moving averages — piece provided here is the toolkit to time the best entry and
one of the core tools of technical analysis. The third part of exit points consistent with the chosen strategy.
this series addresses momentum and oscillators and describes
how the tools may be applied to trading systems. Turning points
Much as we would like to look at a chart and go back to the
T
by Glenn A. Barlis previous low to make a buy, we have to make buy/sell deci-
sions in real time. Trend-based systems using indicators such
ools such as the fast Fourier transform (Fft) can be as moving average crossovers, which by definition are lagging
used to determine the cycles present in historical data. indicators, can sacrifice profit potential at both ends of the trade
While not useful as a reliable predictor of stock prices, and even produce losses in certain types of markets. What the
this knowledge can be used to tune other indicators trader needs is a method to identify turning price points with
and suggest the appropriate trading strategy. Trends a good probability of being profitable.
+1006 Barlis.indd 1 4/23/10 10:31:25 AM

TRADING TECHNIQUES Signal
65
55
Let’s look at a simple example of the price
model we are using in this series: 45
Equation 3-1: 35
P = c + b * t + m * sin(w1t) + n * cos(w2t)
25
Equation 3-1 shows price as a constant 15

offset (c) added to a linear trend (b * t) plus 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170
two cyclical terms with angular frequency Figure 1: identifying local turning points. The objective is to find a method to the local peaks
w1 and w2. For the sake of clarity, we have and troughs in the signal as they occur.
not included a noise term. This is actually a
good model to use for indicator development,
since historical analysis of many tradable Derivative
stocks exhibit a reasonably linear trend with 15
two or three dominant cycle components.
Figure 1 shows the graph of this equation. 10
The objective is to find a method to the lo- 5
cal peaks and bottoms in the signal as they
occur. 0
A first-course calculus student will tell you -5
to take the first derivative of the equation. The
local maxima and minima will occur where -10
the derivative equals zero. The derivative of -15
equation 3-1 is: 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170
Equation 3-2: Figure 2: plot of the derivative. Here you see the derivative of the signal shown in Figure 1. Note
how the derivative crosses through the center point at the local minima and maxima of the signal.
dP/dt = b + m * cos(w1t) – n * sin(w2t)
Figure 2 shows the plot of the derivative. similarity to the derivative plot.
Note that the offset bias term c has been eliminated, the A number of characteristics of momentum are evident in
trend slope b is now just a constant offset term, and the cycli- this chart. First, momentum leads price but at a phase angle
cal terms have been phase shifted to the left, leading by 90 less than 90 degrees. The larger the value of N, the less lead
degrees, where the derivative crosses the center point from
positive to negative corresponds to a local maxima and where
it crosses the center from negative to positive corresponds to T
a local minima. Problem solved!
Unfortunately, we do not have a deterministic equation to
describe the noisy, stochastic reality that is actual stock prices,
so we can’t calculate the derivative. Fortunately, we do have
numerical methods that can approximate the derivative so we
may be able to get an edge good enough for trading.
Momentum ∆P
The best way to interpret the derivative is illustrated in Fig-
ure 3. The derivative at time t2 is the slope of the tangent to
the curve at time t2 as shown by the blue line T. This can be
approximated by dividing the difference in price at t2 and
nearby point t1 by the time difference. This is the slope of ∆t
the red line. As the time difference Δt approaches zero, the
calculated slope approaches the tangent slope.
Momentum is defined as the difference in price at 2 x t and
t - N. This is an approximation of the slope where we simplify,
without losing generality, by eliminating the division by the t1 t2
time difference. Figure 4 shows the momentum of the model
signal for two periods, N = 6 and N = 12. You will see the FIGURE 3: MOMENTUM. Here you see the relationship between momentum and
the derivative of a function defined at time t 2.
+1006 Barlis.indd 2 4/23/10 10:32:01 AM

Momentum TRADING TECHNIQUES
15
10
the simple moving average we studied in part
5
2. Figure 5 shows the filter characteristics of
0 momentum. The frequency axis is a log scale
to emphasize the low-frequency characteristics
-5
(for reasons that will be explained shortly). It
-10 is a high-pass filter in that the low frequencies
are attenuated and the high frequencies are
-15
passed. The pass band, however, has consider-
0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170
able ripple because the amplitude falls to zero
FIGURE 4: MOMENTUM OF the MODEL SIGNAL FOR TWO PERIODS, N=6 AND N=12. Momentum leads at frequencies where N is an integral multiple
price but at a phase angle less than 90 degrees. The larger the value of N, the less lead the momentum will of the period. The peak gain in the pass band is
have. In addition, the momentum signal accentuates the higher-frequency components with the amplitude 2, which occurs at frequencies that are a half-
getting larger and more peaked with larger N.
multiple of the period (½, 1½, and so forth).
At these frequencies, momentum is measuring
the momentum will have. Second, the momentum signal ac- the peak-to-peak value of the signal.
centuates the higher-frequency components with the amplitude The high-pass behavior is not why we are interested in
getting larger and more peaked with larger N. Momentum is momentum; in fact, it is a large annoyance. The characteristic
an unbounded indicator so the amplitude range is defined by that interests us is the phase response at low frequencies —
the peak-to-peak value at certain frequencies, as we will see. those with periods much greater than N. At these frequencies,
As with the derivative, the momentum is centered around a momentum is acting like the ΔP of Figure 3 and giving us a
value near zero. leading signal.
It turns out that momentum is the high-pass filter analog of There is a deceptive aspect of the momentum shown in
Figure 4 of which you need to be aware. We
are showing the momentum of a noise-free
Momentum – Magnitude signal so that the signal turning points, repre-
2.0 sented by the momentum crossing the center
point, are clearly delineated. The presence of
1.5 significant noise, as seen in real stock prices,
gets amplified by the momentum. This results
Magnitude
1.0 in many additional center crossings or false

indications that mask the major turning points.
0.5 Do not assign meaning to the numerical value
of momentum. The valuable information is in
0.0 its direction and zero crossing.
0.1 1.0 10.0 Something else critical you should under-
stand about momentum is that it is not a predic-
Normalized frequency
tor of future price action. Leading momentum
does not mean that the momentum curve is the
Momentum – Phase shape of prices to come. In this sense, leading
90 signal processing is an approximation of the
slope of the price curve. Because it is calcu-
60
lated with past data, momentum is actually a
30 lagged indicator of the derivative, as is evident
in Figure 3. When the momentum approaches
0
Phase
the center, all we know is that the local trend is

-30 coming to a standstill. It may continue in the
-60 same direction, stay flat, or reverse direction.
The momentum alone provides no clue to the
-90 future direction of prices.
0.1 1.0 10.0
Normalized frequency Putting momentum to work
That the trend is coming to a standstill is good
FIGURE 5: filter characteristics of momentum. The frequency scale is logarithmic to emphasize to know. If we can clean up the noise in our
the lower-frequency response. It is obviously a high-pass filter in that the low frequencies are attenuated
and the high frequencies are passed. The pass band, however, has considerable ripple because the
signal, then momentum, in conjunction with
amplitude falls to zero at frequencies where N is an integral multiple of the period. At these frequencies, other information, can be the tool that will meet
momentum is measuring the peak-to-peak value of the signal. our objective of identifying profitable turning
+1006 Barlis.indd 3 4/23/10 10:32:34 AM

Momentum development TRADING TECHNIQUES
6
P2
P1 P1’ value of P1’ is smoother than the raw signal and
P0 P0’ momentum can be calculated as:
2
Equation 3-3: P2 – P1’ = P2 – MA(2N1)
Amplitude
N1 The moving average is shown by the red

-2 curve. This results in a smoother momentum
N2 with almost no leading loss.
The momentum is still noisy, but we can get
an even smoother signal if we are willing to
-6 sacrifice some lead. We do this by calculating
51 63 75 87 99 111 123 a second moving average of the price signal so
Time both values used in the momentum calculation
FIGURE 6: developing a practical momentum indicator. Momentum of the unfiltered
are smoothed. If the second moving average has
signal (green) would be done by finding the price difference of P2 – P1 where the momentum period a window length, N2 > 2N1, you end up with the
is defined by N1. The raw signal will be noisy, which means that the momentum value will exhibit even situation shown in Figure 6 where the second
more erratic behavior. moving average is shown by the blue curve. We
now have P0’, which is the expected value of P0
points in price. We already have something in our toolkit to so that we can calculate a smoothed momentum as:
attenuate noise: the low-pass filter. We know that the low-pass
filter introduces lag, but with the proper filter constants, it may Equation 3-4: P1’ – P0’ = MA(2N1) – MA(N2)
be possible to attenuate the noise and still get a net lead when
we calculate the momentum. One way to do so would be to We have derived from our basic knowledge of signal pro-
low-pass filter the price signal and calculate the momentum cessing principles the momentum indicator we know as the
of the filtered signal. Let’s look at this approach. moving average convergence/divergence (Macd). The Macd
We would like to select a low-pass filter constant that will is smoother than pure momentum but is much less of a leading
attenuate the high-frequency noise without introducing too indicator.
much lag. This is where knowing the frequency spectrum of Let’s take what we have learned thus far to get the best
the signal (see part 1 of this series) can help us choose values Macd for the signal under study.
that can balance these requirements.
Figure 6 provides a graphical explanation of the process. Step 1: Determine the value of N1, the period of the
Momentum of the unfiltered signal (green) would be done by momentum calculation. As you can see in Figure 1,
finding the price difference of P2 – P1 where the momentum the maxima and minima will be determined by the
period is defined by N1. The raw signal will be noisy, which highest-frequency dominant cycle. You can use any
means that the momentum value will exhibit even more erratic of the cycle-finding methods mentioned in part 1 for
behavior. this purpose. You want to assign a value of N1, which
However. we also know that the expected value of P1 is the is much smaller than the period of this cycle (on the
signal moving average with a window length of 2 x N1. This order of a tenth of the cycle period) to get a good
amount of a lead. This may not be possible, and you
may have to make some sacrifice of the lead.
Step 2: Use the value of N1 to determine the window

length of the first moving average to be 2 * N1. Since
this defines the lag of the filter, it behooves us to use
the smoothest filter with the given lag. One of the
center weighted moving averages (Cwma) (see part
2) would be preferable to a simple moving average
or exponential moving average.
Step 3: Select a window length for the second moving

average that is greater than 2 * N1 while avoiding too
much lag. A value of two and a half to three times
N1 would work well. Again, a Cwma or a triangular
weighted moving average (Twma) should be used
for the moving average. The difference of these two
moving averages forms the Macd signal.
+1006 Barlis.indd 4 4/23/10 10:32:58 AM

TROW
25 The technical understand-
ing of popular indicators
provided by these articles
will enable you to select
Price
20
appropriate indicators.
15 analysis of the price data, but the

0 20 40 60 80 100 120 140 160 180 200
easiest way to get a workable fig-
Time
ure for the highest dominant cycle
FIGURE 7: daily closing price of t. rowe price (trow) with 20-day centered moving aver- length is to pick an interval and
age. You can readily identify the turning points by looking at the centered moving average. count the number of peaks in the
moving average signal. The cycle
TROW – Momentum-5
period will be the interval length
4 divided by the number of peaks. In
the example graph, we count five
peaks between time 24 and 150.
2 This gives us an average period of
25 days. Choosing a value of 5 for
0 N1 will give us a lead, which will
gives us room to work with when
we introduce lag with the moving
-2 averages. The raw momentum us-
ing this value is shown in Figure 8.
-4
The noisy nature of the momentum
0 20 40 60 80 100 120 140 160 180 200 results in many center crossings that
FIGURE 8: five-period momentum for trow. The noisy nature of the momentum results in many
mask the specific signal that we are
center crossings that mask the specific signal that you are looking for. seeking.
Step 2: Using the value of N1, you can

TROW – MACD 10/15
2.00 determine the window period for the
first moving average as 10 days.
1.00 Step 3: Using a period of 15 days for

the second moving average, you
0.00 can now calculate the Macd that
is shown in Figure 9 (red).
-1.00
The Macd provides a reliable indication
of the major turning points, but the lag in-
-2.00 troduced by the smoothing results in a less
1 21 41 61 81 101 121 141 161 181 201 timely signal than what you were hoping
to get. This is a result of the compromise
FIGURE 9: The MACD signal for TROW plotted with periods 10/15 (red) and 20/25 (blue).
The MACD provides a reliable indication of the major turning points but the lag introduced by the smoothing you had to make because of the relatively
results in a less timely signal than what you were hoping to get. This is a result of the compromise you had to short period of the dominant cycle.
make because of the relatively short period of the dominant cycle. The most common method to regain
some of the lead and to provide a readily
identifiable signal is to add a lagged Macd signal (blue) and
A practical example use the crossover of the two Macd plots as the turning point
Figure 7 shows the daily closing price for T. Rowe signal rather than the Macd center crossing.
Price (Trow) along with a 20-day centered moving
average. You want to plot the momentum and Macd Oscillators
to see how well they provide indications of the major Momentum-based indicators such as Macd, rate of change,
turning points. You can readily identify the turning percent rate of change, and momentum itself can be considered
points by looking at the centered moving average. oscillators. They oscillate about a center value and indicate
buy/sell opportunities.
Step 1: Determine a value for N1. You could do a Fft Oscillator is generally applied to any indicator whose ampli-
+1006 Barlis.indd 5 4/23/10 10:33:36 AM

TRADING TECHNIQUES
tude variations can be related to key events on the price chart. alternative trend indicator but does not always result in crisp
Most oscillators are calculated to normalize the amplitude so buy/sell signals. The same can be said for other oscillators.
they are bound within a specific range regardless of the price Oscillators are a good way to highlight a specific type of
signal. This is in contrast to the momentum and Macd where price action. It is important to understand the derivation of the
the range of these indicators is dictated by the range of the oscillator and its calculation to avoid improper interpretation
price swings. Examples of popular oscillators are J. Welles and use.
Wilder’s relative strength index (Rsi) and Lane’s stochastic.
An oscillator can be made from almost any signal relationship, Divergence
and it seems as though a new one is invented daily! The phase-leading characteristics of mo-
Normalizing is done by confining the oscillator signal within mentum offer an alternative way to under-
a specified range. This is a nonlinear compression technique stand price change. Since the momentum
and can be achieved using, for example, one of the following will turn before the price signal from which
generalized forms where A, B, C, and D are raw oscillator data it is calculated, there will be a short period
and R is the range that the oscillator is to be kept within: of time when the two signals will have
divergent (opposite sign) slopes. This is
Equation 3-5: known as a divergence. It is usually done by
drawing short-term trendlines on a graph of
R C–D the two signals. Depending on the specific
O=R– , O=R price action, the turning points can often be
1+A A–B
seen developing ahead of time. This is a graphical, nonanalyti-
cal method that displays the same information provided by the
The first example in equation 3-5 is the form of the Rsi and momentum. It can also be applied to the divergence between
the second is the generalized form of Lane’s stochastic and other oscillators and price as well as between two oscillators.
other oscillators. Normalizing the oscillator has advantages The assumption in all cases is that two signals are related but
and disadvantages; it makes it easier to compare different with a phase difference between them.
stocks or indexes and even do some statistical analysis such
as creating a sector oscillator and comparing a specific stock Volatility
to the sector. The normalization acts as a nonlinear compressor One aspect of the price signal that has been referenced a number
of the signal that serves as the basis for the oscillator. This of times but not directly addressed is volatility — the varia-
can create interpretation problems, especially at the extremes tion about the mean price value. Volatility is often depicted
of the oscillator range. on charts by channels or bands.
One popular technique is to assign overbought/oversold Various methods have been forwarded for measuring volatil-
levels to an oscillator such as the Rsi. The problem with ity, but the most common analytical measure is the standard
such absolute signals is that a trend of length greater than deviation of the price over a given time period. Standard
the calculation period will drive the Rsi value to an extreme deviation is one of the statistics calculated as part of linear
where it will stay until the trend turns. This makes the Rsi an regression, and the formula can easily be found in any statis-
tics text. The best-known use of this measure of volatility in
technical analysis is in the calculation of Bollinger bands. The
bands are constructed around a mean (averaged) price signal
based on the standard deviation of recent historical prices. The
bands lend themselves to the same signal analysis techniques
we have already discussed.
Historical volatility tells how prices have varied in the
past but do not necessarily predict how they will behave in
the future. The best guess of future volatility can be found
from option pricing. The equations for calculating option
prices, such as Black-Scholes, use an implied volatility for
calculating the price. This equation can be used with current
option prices to determine the markets consensus as to future
volatility. The Cboe Volatility Index (Vix) is probably the
most popular market volatility index.
Volatility can be an important component of a trading
strategy in two ways. First, it can be an indicator of current
market conditions — an indicator much like trend in its own
right. Second, the amount of volatility in the price signal
can affect the success of indicators used in a specific trading
+1006 Barlis.indd 6 4/23/10 10:34:31 AM

Trend TRADING TECHNIQUES
Strong Weak
Momentum trading Swing trading and momentum — to make a good trading decision.
This series has described an analytical basis for under-
Adaptive techniques Momentum standing a broad class of technical indicators using clas-
High
sical signal processing techniques. Many other aspects of

Combination of Oscillators technical analysis such as volume, pattern recognition, and
trend-following and less scientifically based methods have been left out of this
swing-trading techniques Short period indicators discussion. The techniques described cannot be used alone
to develop a trading system. You should evaluate other
Volatility
techniques in addition to those discussed here to create a

consistent reliable tool set for your trading system.
Trend-following Low profit potential
The technical understanding of popular indicators pro-
region vided by these articles will enable you to select appropriate
Moving average crossover indicators and evaluate other methods to develop a winning
Option strategies trading strategy.
Low
Channels and bands

Glenn Barlis is an electrical engineer with a master’s
degree in business administration and computer science.
Now retired, he was a research & development manager
FIGURE 10: TRADING STRATEGIES FOR DIFFERENT MARKETS for a major integrated oil company. He may be contacted
at gabarlis@rochester.rr.com.
strategy. As mentioned in the moving average discussion in Suggested reading

part 2, moving average crossover strategies tend to fare poorly Barlis, Glenn A. [2007]. “Trading
in a very volatile market. Vs. Buy & Hold,” Technical
Figure 10 provides a broad recommendation of the types of Analysis of Stocks & Com-
indicators and trading strategies that work in markets defined modities, Volume 25: Bonus
by a combination of trend and volatility. Issue.
_____ [2010]. “Signal Processing
Cycles, trends, and momentum Basics, Part 2,” Technical Analy-
The value of momentum and oscillators comes from their sis of Stocks & Commodities,
potential ability to identify turning points sooner than moving Volume 28: May.
averages. Center crossings, indicator crossovers, and diver- _____ [2010]. “Signal Processing
gences can be used for this purpose. How well these techniques Basics, Part 1,” Technical Analy-
work is dependent on the price signal characteristics and how sis of Stocks & Commodities,
well the parameters of the indicators are tuned to match the Volume 28: April.
signal. As Figure 10 shows, a complete image of the price ac- Bollinger, John [2001]. Bollinger
tion requires an analysis of multiple indicators — cycle, trend, On Bollinger Bands, McGraw-
Hill.
Faber, Bruce [1994]. “The Relative
magazines • articles • books • software Strength Index,” Technical Anal-
ysis of Stocks & Commodities,
Get the exact information Volume 12: September.
Fraisse, Jean-Olivier [1990].
you want online at the “Measuring Volatility,” Techni-
cal Analysis of Stocks & Com-
STOCKS & COMMODITIES modities, Volume 8: October.
Online Store Luisi, Joe [1997]. “The Stochastic Oscillator,” Technical Analy-
sis of Stocks & Commodities, Volume 15: December.
Pring, Martin J. [2001]. “Momentum And Divergence”
http://store.traders
store.traders.com Technical Analysis of Stocks & Commodities, Volume
19: March.
TA09E1
Star, Barbara [1994]. “The Macd Momentum Oscillator,”

Technical Analysis of Stocks & Commodities, Volume
12: February.
t-shirts • subscribe • renew • hot deals! ‡eSignal
‡See Editorial Resource Index S&C
+1006 Barlis.indd 7 4/27/10 11:07:11 AM

Q&A
SINCE YOU ASKED
Confused about some aspect of trading? Professional trader Don Bright of Bright
Trading (www.stocktrading.com), an equity trading corporation, answers a few of
your questions. To submit a question, post your question to our website at http://
Message-Boards.Traders.com. Answers will be posted there, and selected questions
will appear in a future issue of S&C.
Don Bright of Bright Trading

SURVIVAL OF THE FITTEST hit the prevailing bid price. Either way,
Don, I read your article about the you’re losing money. We try to keep it simple when
subpennies and high-frequency trading. What we have found is that there is looking at overall market neutrality.
I have also read that these new demons much less of this going in with 100-share Rather than analyze every trader’s pick
might very well kill each other off in orders. As a result, many of our traders of pairs, we generally just look at long
the near future. What steps are you and will trade in 100-share increments, dollars vs. short dollars. We, of course,
your traders taking currently to help more stocks (pairs generally), and have to be aware of “short” exchange
offset these challenges? eliminate the subpenny losses. On the traded funds (Etfs) and so on that
Good question, I’ll try to give you a more liquid stocks, especially higher- would obviously skew that risk control,
few ideas. The idea of “parking” on a volatility issues, we can take out offers but most traders use equities for their
limit price in hopes of collecting 0.002 and hit bits the way we used to back in pairs trading (many do use baskets vs.
or so in liquidity rebates seems sort of the day. Etfs, however).
silly nowadays since these subpenny Now, as far as spreading the risk
orders can flash in front you at the rate PAIRS RISK via more pairs is concerned, I’m a
of thousands per second. What happens I understand that Bright Trading is big fan, even as it relates to using
when you have 1,000 shares offered at heavily involved in pairs trading, and smaller orders (see previous answer
42.30, for example, is that these flash does quite well. My question is about regarding subpennies), which we feel
orders will go in offered at 42.2999 managing the risks involved. Some of are executed better. The analysis of
or similar and take the order from the overall market movement risk can the stocks is primary, and we tend to
you. The only time you’ll be filled is be cut down because you are somewhat like the better-valued stocks to be
when there is a large-enough order or a market-neutral with a pair, long one long vs. the growth stocks to be short.
higher limit, allowing the price to go a stock and short another. How do you However, be extra careful when doing
few pennies against you. This can cost maintain the market neutrality with a this analysis. Be aware that the lower-
a lot of money. The other alternative is single pair, and does adding more pairs capitalized companies may be takeover
for you to basically lose a penny and help or hurt the overall risk? candidates — another risk altogether.
Overall, yes, we prefer to see several
The analysis of the stocks is primary, and pairs within a sector, and multiple
sectors in a portfolio. This helps
we tend to like the better-valued stocks to eliminate consolidating too much risk
be long vs. the growth stocks to be short. in a small group of stocks.
We then move to frequency of
trading for capturing profits. When we
determine how much “should” be made
from each layer of a pair (and how many
layers we can go with overall), we must
be diligent in taking these profits. This
profit taking is actually a good method
of risk control as well, since when we
back down to even or one layer, the risk
is actually or nearly nonexistent.
To address the movement in stock
prices within a pair, we have elaborate
data banks and spread history files that
will allow us to modify our share size
per side when needed.
SENS
Hope all this helps!

“You do your best to make a profit, Andrew, and I’ll do my best to pay you.” S&C
+1006 Bright QA.indd 1 4/23/10 9:57:53 AM

tRADER’S NOTEBOOK
The Rubber Band Effect

can see his profile and the description of his
trading style on the website). Here is Steve’s
analysis of his latest winning trade—AE
Long HEV
The technical appeal of this trade of
Ener1 (Hev) involved four factors
(Figure 1):
1 A weekly descending wedge that
had resolved to the upside at the
end of last week. This caused the
impulse system to turn blue as
the share price closed back inside
the envelope.
2 The heavy exhaustive volume
that pushed the share price to a
low, and then a new low, finally
stabilizing with a moving av-
erage convergence/divergence
(Macd) crossover on the daily
chart (Figure 2).
3 The “rubber band” effect. The
price had fallen too far from value
and was due for a trip back to the
mean. Interestingly, an identical
pattern was present just prior to
the March 2009 upside reversal.
4 The high short interest ratio re-
flected the presence of too many
greedy shorts, ready to get caught
at the edge.
My trade plan called for the following:
CHRISTINE MORRISON
n Entry: Buy on a slight pullback
to the February 8, 2010, high of
$4.10
n Stop: Place the stop below the
Spike Trade.com is a group of 20 professional and semiprofessional traders involved in low of Friday’s range at $3.93
a weekly competition. Each member submits his or her pick along with the entry, target, n Target: Place it at the first break’s
and stop. The picks are submitted in private, and then all is revealed on Sunday after- low of $4.90, which coincid-
noon. At the end of each week, the Spiker who wins that week’s competition writes up ed with an interim low in July
2009.
his or her analysis of the trade.
by Alexander Elder, MD
Progress of trade
In
this article I will review the winning trade from the week ended February Hev opened on Tuesday after the Presi-
19, 2010. The trader is Stephen M., a serious semiprofessional trader dents’ Day holiday at $4.15. The stock
who is also an Idaho-based orthodontist. Steve is the newest Spiker, climbed to $4.19, and then dropped to
promoted for his excellent performance as a SpikeTrade member (you $4.10. I was filled at $4.11 (Figure 3).
+WM Elder Rubber band.indd 1 4/23/10 11:12:22 AM

HEV - Weekly NASDAQ L=4.54 -0.11 -2.37% O=4.64 5.47 5.06 6.87 4.08 4.65 4.10
9.00
8.00
7.00
6.87
I was hesitant to pull the trigger at 6.00

that point because it appeared that
5.72
5.47
5.00
5.06
a false breakout could be in the 4.54

4.00
making. Nevertheless, I remained
4.08
Rubber band stretched too far,

confident in my assessment of the -0.37 -0.50 -0.32 0.00
accompanied by a small inside bar 3.00
market and took the trade.

which has broken out of the wedge
0.60
A pennant-type consolidation 0.20
0.00
ensued, after which Hev started to

-0.20
-0.37
-0.50
climb, taking out the high of the 725117.16 0.00 -7744768.41

-1.00
day and finishing strong by the end 3,000,000
725,117.16
0.00
of the day. -3,000,000
Hev shot out of the gate on

-6,000,000
-7,744,768.41
Wednesday. It jumped up and then Apr July Oct ’09 Apr Jul Oct ’10
momentarily stalled at the slow ex- Figure 1: HEV, Weekly. A weekly descending wedge resolved to the upside. This caused the impulse system to
ponential moving average (Ema). turn blue as the share price closed back inside the envelope.
That is where I sold and took my
profit, guided by the negative diver-
gence of the force index. HEV - Daily NASDAQ L=4.54 -0.11 -2.37% O=4.64 4.43 4.33 4.96 3.89 4.64 4.52
That Wednesday, after I sold, Hev 7.50
reached a high of $4.65. Clearly, I Break and close 7.00
above the fast EMA
could have and should have held 6.50
for a much bigger gain. If I could 6.00

5.72
do it over again, I would have tight- 5.50

5.00
ened my stop as Hev fought the
4.96
MACD x-over 4.50

4.54
resistance of the 21-day Ema in-

4.43
4.33
4.00
stead of selling the whole position.
3.89
0.2909 -0.2099 -0.3554 0.0000 0.2909
At worst, I would have given up a 0.1000

0.0000
little more profit. At best, I could

-0.1000
-0.2099
-0.3000
have doubled my return over inter-

-0.3554
-0.5000
41212.05 0.00 -1095722.62
est (Roi). I could have sold half at 400,000
41,212.05
-200,000
this point and then trailed the stop

-800,000
90167.00 -1,095,722
4,000,000
on the other half. 2,500,000
1,000,000
90,167
Trade review 19 20 Nov 9 16 23 Dec 7 14 21 28 ’10 11 19 25 Feb 8 16 22

Alexander Elder comments: Steve’s Figure 2: HEV, Daily. MACD Crossover. The heavy exhaustive volume that pushed the share price to a low and
trade raises two important issues on then a new low finally stabilized with an MACD crossover on the daily chart.
strategy and short-term tactics.
The strategic issue is this: there
are two main ways to trade — val- HEV - 15 min NASDAQ L=4.57 -0.08 -1.72% O=4.64 4.57 4.57 4.65
ue trading and momentum trading. 4.60
4.57
Value traders aim to buy low, sell

4.55
Sell 4.50
high. Momentum traders strive to False break-out? @4.36 4.45
4.40
buy high, sell even higher. 4.35
Most choose between these two

4.30
Buy 4.25
strategies on their gut reaction — on
@4.11 4.20
4.15
the basis of their own instinct and 4.10
4.05
psychological attitudes. Momen- -0.01248 0.01953 0.02577 0.0000
tum traders tend to be risk seekers,
0.07000
0.05000
while value traders tend to be more 0.03000

0.02577
0.01953
0.01000
conservative. Steve clearly prefers 0.10 0.00 8.57
0.0000
-0.01248
value trading, and it works for him: 7.00

5.00
He currently leads the Spike group 3.00
1.00
0.10
in equity gains.
-1.00
10:00 11:00 12:00 13:00 2/16 9:00 10:00 11:00 12:00 13:00 2/17 9:00 10:00 11:00 12:00 13:00 2/18 9:00 10:00 11:00 12:00 13:00 2/19 9:00
The question for every value

Figure 3: False Breakout? The trade was filled at $4.11 and although it looked like a false breakout could be
trader is how to define value. Steve in the making, a pennant-type consolidation ensued, after which HEV started to climb, taking out the high of the day
and I agree that value lives in the and finishing strong at the end of the day.

HEV - Weekly
9.00
Steve’s self-criti-
8.00 cism shows that a
7.30
7.00
6.00
successful trader
5.45
5.00
5.01 does not rest on his
4.54
4.00
3.61
3.94 laurels and contin-
3.00
2.00 ues to learn.
they mark a buying opportu-
nity. When they rise above
the upper channel line, they
mark a shorting opportunity.
Several occurrences are cir-
cled on the chart in Figure 3.
Sometimes a rally does not
Oct ’08 Apr Jul Oct ’09 Apr Jul Oct ’10 reach the upper channel line;
Figure 4: Trading is a continuous learning process. The trader exited the trade after seeing a bearish divergence a single bar reaches toward it
of the force index, which was a very minor signal. In spite of the premature exit, it was still a good trade. This shows that trading and then falls away. Several
is a continuous learning process where you constantly try to improve your methods. such signals are marked with
arrows on the chart.
zone between two moving averages. When a stock trades The tactical question is where and when to take profits in
above both Emas, it is above value, and when it trades be- a trade that starts going your way. Steve exited after seeing
low them, it is below value. Prices are attached to value as if a bearish divergence of the force index, a very minor signal.
with a rubber band. When that rubber band becomes overex- He ended up kicking himself for not switching to a trailing
tended, prices are ready to snap back. stop. This technique is much favored by Kerry Lovvorn, my
My favorite method of identifying overextended prices is partner in SpikeTrade.com.
by using two channel lines, parallel to the slow Ema (see Even with a premature exit, Steve bagged the best trade
Figure 4). When prices fall below the lower channel line, for the group during that week. His self-criticism shows that
a successful trader does not rest on his laurels but continues
to learn and improve on his methods.
The SpikeTrade competition runs 52 weeks a year, and in
our next article we will review another winning trade. Let’s
see what lesson we can learn.
Alexander Elder is a professional trader based in New York

City. He is the author of Come Into My Trading Room (Bar-
ron’s 2002 Book of the Year) and Trading For A Living, con-
sidered modern classics among traders. He also wrote En-
tries & Exits and Sell And Sell Short. He runs SpikeTrade.
com together with Kerry Lovvorn, a professional trader from
Are you committed Alabama. He may be reached at info@spiketrade.com.
to being a Suggested reading

Elder, Alexander [2010]. “Channel
“Recognized Expert”? Trade Win,” Technical Analysis
of Stocks & Commodities, Vol-
CMT, the only designation for Technical Analysts that ume 28: May.
qualifies as a Series 86 exemption as recognized by FINRA. _____ [2010]. “A Gem In The Junk
Pile,” Technical Analysis of Stocks & Commodities,
Volume 28: Bonus Issue.
_____ [2010]. “How I Won My Gold,” Technical Analysis of
Registration is Open Stocks & Commodities, Volume 28: January.
_____ [2006]. Entries & Exits: Visits To 16 Trading Rooms,
Sign Up Now John Wiley & Sons.
‡StockCharts.com
‡See Editorial Resource Index
More info: cmt@mta.org or 646-652-3300
Current and past articles from Working Money, The Investors’
Magazine, can be found at Working-Money.com. S&C

FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? DeCarley Trading senior analyst
and broker Carley Garner answers your questions about today’s futures markets.
To submit a question, post your question at http://Message-Boards.Traders.com.
Answers will be posted there, and selected questions will appear in a future issue of
S&C. Visit Garner at www.DeCarleyTrading.com. Her books, Commodity Options
and A Trader’s First Book On Commodities, are available from FT Press.
Carley Garner
Looking for summer patterns looked at as selling opportunities. Un-
What are some seasonal patterns we fortunately, nobody really knows “how must understand its components.
should be looking at for summer com- high is too high” until after the fact. By definition, a stop order is a re-
modity trading? That doesn’t mean that come June 1, quest to buy or sell a futures contract
Seasonal patterns are evident in com- we should automatically sell futures, but at the market once the stated price has
modity markets throughout the entire as May winds down, traders should look been reached or becomes part of the bid/
year, but some of the best opportunities for an opportunity to look for bearish ask spread. Traditionally, a stop order
occur in summer. That said, the seasonal trades. This seasonal grain trade typical- is most often used as a means of miti-
tendency of a market is just that — an in- ly lasts over a month, so traders should gating risk of exposure or locking in a
clination to behave in a certain way, but cover before mid-July. profit. However, stop orders can also
it is not a guarantee. For seasonal trad- Don’t make the mistake of assuming be used to enter a position. If a trader
ers, it is important not to become com- that wheat follows corn and soybeans. places an order to buy July soybeans at
placent in a speculation simply because Wheat is on the opposite harvest cycle $9.55 on a stop (note that the price of a
it happens most years. Counterseasonal and therefore is seasonally bullish be- buy-stop would be higher than the cur-
moves can be fierce and have been ginning in May. The tendency for wheat rent price), they will purchase a futures
known to cause severe monetary dam- to move higher often extends into late contract at the market once prices rally
age to those caught unawares. September, but the “real” trade is to be to $9.55. This fill price might be higher
The grain markets often see a signifi- long the market, via options or futures, or lower than the stated price, depend-
cant amount of spring and summer vola- from mid-May into early July. ing on how fast prices are moving. That
tility as the markets contemplate planted May through June is also one of the said, I have yet to see a stop filled at a
acreage, growing conditions, and other best times of the year to be bullish cattle lower price, but it is possible for sub-
factors. Prices are susceptible to bouts prices. The buying interest is attributed stantially higher (worse) prices in thin
of weather spikes as traders react to to the summer barbecue season, but I or volatile market conditions.
news of conditions that are inevitably am not sure that is true. According to A limit order is also known as an
“too wet” or “too dry.” However, even reliable sources, beef consumption “or better” order because a trader plac-
during the most trying of growing con- actually declines as the weather gets ing such an order is asking for a spe-
ditions, early summer rallies have failed hotter, but so does the beef supply as cific price or better. However, the term
to maintain themselves in the long run. feedlots tend to be in a pinch, and that “limit” in stop-limit is under a different
The seasonal price peaks in corn is what pressures meat prices higher. context; again, it is a limit on slippage,
and soybeans correspond with planting Another popular seasonal trade is not the seeking of a better price.
completion. At that point, the planted the summer coffee fade†. Coffee prices The peril of a stop-limit order is that
acreage is known and it is all up to the tend to build in a spring premium to ac- it might not be possible to fill the or-
weather to deliver ideal growing condi- count for potential freezing and crop der. If the market moves too quickly
tions. You may have heard the saying damage in Colombia and Brazil. More and a trade can’t be executed within
“Rain makes grain.” Well, it’s true — often than not it turns out to be much the stated limit price, it can go unfilled.
grain traders at the Cbot will tell you ado about nothing. Accordingly, coffee If the stop-limit was placed as a means
the bias is bearish on days it is raining in prices often experience a sharp slide of protecting open profits or exiting a
midtown Chicago. Of course, too much from late May into early July. trade gone bad, this can be a dangerous
of a good thing results in flooded farm- proposition. I would not recommend
land and will have the opposite effect. STOP LIMITS using this order type to exit a position.
Conversely, a hot and dry environment When should a stop-limit order be used? A traditional stop order or even the pur-
will trigger temporary price hikes. Stop-limit orders can be confusing; chase of an option would be better.
According to the seasonal data I have is it a stop or is it a limit? A stop-limit However, if you are using stop-limits
reviewed, traders should favor the short order is simply a stop order that limits to enter a market and you can live with
side of corn and soybeans from late May the slippage that a trader is willing to potentially missing trades that would
or early June on. Large rallies in the accept. Before we can understand the have been profitable, this might be a
early to midsummer months should be potential uses for a stop-limit order, we legitimate order type. S&C
+1006 Garner QA.indd 1 4/23/10 9:58:35 AM

Know Your Support & Resistance
Trading With Volume Profile

Daytrading stocks is largely a game of knowing critical charting packages stop showing data more than six months
RUSS SPITKOVSKY
support and resistance price levels. Here’s a valuable tool in the past.
that identifies these levels quickly so you can make sound
trading decisions. Volume profile
Volume profile is a valuable trading tool that can save time
by Sam Whitehill and allow you to more easily see significant price levels that
occurred in the more distant past. Volume profile is sometimes
T
ypically, you need to scan through a substantial number referred to as “price by volume.” It is somewhat similar to
of intraday stock charts in order to identify these criti- the price activity chart in that it displays cumulative volume
cal support and resistance levels within any individual by price. It is also similar to Market Profile, but it does not
stock. This is a time-consuming and tedious process. include the time component and is considered a separate tool.
Moreover, historical chart data is not always available Essentially, volume profile is a chart showing the amount of
for a time period extending beyond six months, as some volume (number of shares traded) at each price level over
+Whitehill.indd 1 4/23/10 12:42:33 PM

CHARTING BAX 5 minute candlestick high price by volume
$60.06
$60.00
some length of time. Instead of scanning

$59.93
through many intraday charts of a stock $59.88
to find key support and resistance price $59.82
levels, you can simply generate a volume $59.76
profile chart in a fraction of the time. In $59.71
addition, you can more easily see support $59.66
and resistance levels from longer periods $59.61

in the past. $59.56
Support and resistance price levels are
Price
$59.51
important to most trading styles and of ut- $59.46
most importance to daytrading. Identifying $59.41
these price levels correctly and quickly is $59.36
not always an easy matter. For example, $59.30
you might look over candlestick charts on $59.25
hourly, daily, 15-minute, and five-minute
$59.20
time frames in order to identify and track
significant support and resistance levels
$59.15
within a particular stock of interest.

$59.10
STOCKRAGEOUS.COM
When scanning over a candlestick chart $59.05
for price levels, you have to decide whether $59.00
to focus on candles with heavier volume,

0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000 2,000,000
candles that occurred more frequently Volume (shares traded)

at one price, the time of day the candle Figure 1: volume profile chart for baxter international (7/30/09–1/29/10). This chart was
formed, and so forth. This is typically a created by summing up total volume traded at each five-minute candlestick’s highest price over the previous six
time-consuming process and can be prone months. Note the circled prices have much more volume. They should be more significant support and resistance
to costly errors if not done carefully. levels than other nearby prices with much less volume.
By using volume profile, you can in-
stantly generate a chart showing the significant support and
resistance levels of a stock according to the amount of volume
Volume profile gives a trader insight into a
traded at each price. Volume profile can be calculated by adding stock’s key support and resistance levels.
up the number of shares traded at each price, over a specified
period of time. high, low, and closing prices). After downloading the file for a
particular stock, simply open in it in a spreadsheet application
Calculating volume profile such as Microsoft Excel. Next, add up the volume at the high
There are obviously different ways to specify how to calculate price for each candlestick and follow the example in Figure 1.
the volume profile by varying the parameters. How far back You can do this using Microsoft Excel’s subtotal function.
in the past should you look? Should you look at the previous You must extract the subtotals containing the volume traded
month or the past few months? Then you have to decide what
time frame or frequency to use. Should you use a five-minute,
15-minute, hourly, or daily interval? In addition, you could
use the close, open, high, or low price of each candle on
a candlestick chart. These parameters can be changed and
tweaked to meet each trader’s need or trading system.
The example here uses the highest price of each five-minute
candlestick on a stock chart over the past six months. You can
vary which candlestick price, for example, high or low, and
how much historical price data to use in the volume profile
calculation, depending on your preferences. Some traders may
want to use a candlestick’s closing price or use a higher time
frame such as the hourly chart. See Figure 1 for an example of
a volume profile chart using the five-minute candlestick chart
of Baxter International (Bax) over the past six months.
The historical data used in creating this chart can be down-
loaded for free from stockrageous.com. The data is stored in
a .csv file. This file contains the historical price data of a par- “We’ve outsourced everything else – why not banking? That way we can
ticular stock as recorded on a candlestick chart (that is, open, use endless innuendo and almost impossible-to-trace transactions.”

FREES
STI (Suntrust Banks Inc) 5 minute candlestick high STI (Suntrust Banks Inc) © FreeStockCharts.com
price by volume
Price History
$24.40
24.45
$24.35 24.40
24.35
24.33
$24.30 24.30
24.25
$24.25
24.20
$24.20 24.15
24.10
Price
$24.15 24.05
24.00
$24.10 23.95
23.90
$24.05
23.85
$24.00 23.80
23.75
$23.95 23.70
23.65
$23.90 23.60
$23.85 23.55
23.50
$23.80
0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 Volume Moving Average 50 869.2K
Volume 500.0K
250.0K
Figure 2: suntrust banks inc. (sti) five-minute candlestick high price 0.00
by volume. Note the prices with the highest volume correspond to more significant
26 1/26/2010 3:45 PM
support/resistance levels. This is illustrated here with $24.33 being resistance and
$24.11 being support during midday on January 26, 2010.
at each price. Once these subtotals are extracted, they can be Energy Corp. (Btu) (Figure 3).
plotted as the volume profile graph. To graph them, plot the Volume profile can also be very helpful in showing price
data using Excel’s bar chart. levels that occurred in the more distant past (for instance,
over six months), as they will not be easy to find within most
Comparing volume profile to the charts charting packages. However, by looking at the volume profile
To check whether this volume profile chart provides a good chart, you can see support and resistance levels from even
indicator of support and resistance levels, in Figure 2 I have several years ago, although only at the daily level. In this case,
compared it to a five-minute candlestick chart. Another ex-
ample shows the support and resistance levels for Peabody Continued on page 53
BTU 5 minute candlestick high price by volume BTU (Peabody Energy)

$47.60 © FreeStockCharts.com
$47.57
Price History
$47.54
$47.50 47.75
$47.46 47.50
$47.43 47.25
$47.40
$47.37
47.00
$47.33 46.75
$47.30 46.50
$47.26
Price
46.25
$47.23
$47.18 46.00
$47.13 45.75
$47.10
45.50
$47.07
$47.04 45.25
$47.01 45.00
$46.98 44.75
$46.95
$46.91
44.50
$46.88 Volume Moving Average 50
$46.85 392.6K
0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 250.0K
Volume 0.00
26 1/27/2010 10:55 AM
FIGURE 3: PEABODY ENERGY CORP. VOLUME PROFILE (7/31/09–1/20/10).
Note the support at $47.38 as shown by much more volume than other nearby
prices on this volume profile chart. Candlestick chart at right as of January
26, 2010.

Explore Your Options
Got a question about options? Tom Gentile is the chief options strategist at
Optionetics (www.optionetics.com), an education and publishing firm dedicated
to teaching investors how to minimize their risk while maximizing profits using
options. To submit a question, post it to our website at http://Message-Boards.
Traders.com. Answers will be posted there, and selected questions will appear in
a future issue of S&C.
Buy Low, Sell High? are expecting an earnings-related price Tom Gentile of Optionetics
I’ve seen more than a few situations move and a drop in the IV. If those ex-
where longer-dated options trade at a pectations turn out to be correct, the date, the theoretically correct answer
significantly lower implied volatility spread’s market price/value could drop is easy. Long call holders will exercise
relative to the shorter-term contracts. in the aftermath of the report. their option position when the price of
If a trader bought the cheaper contract The long calendar, while limited in the dividend being paid is greater than
and sold the more expensive one, like risk and often an inexpensive strategy the buy-write market or associated put
with a calendar spread, it seems to me as far as the initial debit or cost per value of the strike in question.
as though there should be some type of spread is concerned, is short gamma or The reason behind this is that the call
profit opportunity. Could you please curvature and long implied volatility. owner doesn’t receive the dividend, but
shed some light on this topic? If a large-enough stock move occurs, the call’s value will drop by the amount
Great question. You’re correct in which the disparity in pricing between of “dividend times delta,” all else be-
treating what seems like one of Wall the two contract months suggests is being equal the next trading day. Say Xyz
Street’s proverbial free lunches with ing anticipated by traders, the calendar is at $22 on the eve of its ex-date and
some care. The reality? If all that was will collapse in value. pays a hefty $0.50 dividend. At the
required to turn a profit on a calendar In addition, stock movement com- same time, you own 10 front-month
spread was the simple lining up of pounded by a drop in the implieds of deep in-the-money 20 strike calls trad-
“buying low” and “selling high” im- the longer-term contract can result in a ing for $2.05.
plied volatility (IV), there’d be no one near total loss of the debit paid, as both On the ex-date, shares have the divi-
to take the other side of the position. options trade with little to no value (out- dend factored out and Xyz opens down
That’s not the case here, though. of-money) or are now so deep in-the- ‑$0.50 at $21.50. For stockholders,
Remember, in this day of access to money that only intrinsic value is left. they’ve lost on the new share price but
sophisticated pricing models, everyone If it seems too good to be true, it they receive the $0.50 payout a month
is seeing the same “attractive” skew, might be available for trading, but you later. It’s a wash on the surface, but re-
and quickly at that. That said, why IV should know why the pricing is like it ally a forced savings program for long-
prices are establishing this enticing re- is before you dive in. Determining “the term shareholders.
lationship needs to be understood be- why” rather than blindly acting on a fa- As for the trader still long the 20
fore making an informed decision. vorable skew situation will go a long call, the deep option will have lost
After further analysis, the trader may way toward a better estimate of the real $0.50 and trade for $1.50 to $1.60 with
still feel compelled to place the trade. risk and reward involved. shares at $21.50 and a matching 20
But looking elsewhere may prove to be put still quoted for $0.05 to $0.10. In
the better opportunity as we uncover a To Exercise Or Not To Exercise? saying that, wouldn’t you rather have
less secure trading edge with the calen- Recently, I owned some calls in front long stock in front of the ex-date in this
dar in question. of a stock’s ex-dividend date but didn’t situation versus holding the long call?
What might cause this seemingly really understand the impact of what But the more complicated and less dis-
good IV situation to look less compel- holding the call meant. Seeing the stock cussed part is that the trader who exer-
ling? One example that occurs with was due for a pullback, I opted to sell cises now has a much more open risk
regularity in many stocks is when an the call position and take profits. Could position of long stock at 21.50 versus
earnings announcement is approach- you explain what am I looking for in holding the calls. If shares technically
ing. When the report occurs during the order to make a more informed deci- act weaker all else being equal and you
life of the near- or short-term contract, sion other than the technical variety for aren’t able to exit efficiently, having
there is often a skew that builds up in the next time this situation comes up? missed out on the dividend could turn
the front month and where the back or You can never go broke taking prof- out to be looking like a very small sac-
longer maturity option might trade at a its, so first let me commend you on rifice in the real world.
substantial IV discount. making that decision when it appeared
Trying to capitalize on the IV spread a good time to do so. As for making Contributing analysis by senior Optionetics
between months can be riskier than an informed decision on whether to strategist Chris Tyler
initially determined because traders exercise a call in front of a stock’s ex- S&C
+1006 Gentile QA.indd 1 4/23/10 9:59:11 AM

INDICATORS
Six Tricks To Buy And Sell
Smoothing The Bollinger %b

Part 2
In the second part of this series, you will find out how to help traders get started:
BRUCE WALDMAN
use the author’s version of the Bollinger %b indicator as a 1 Use a candlestick chart when applying the Sve_BB%b.
trigger to buy and sell a stock. To succeed, you’ll have to This is because candlesticks tell you more. You will look
pull a few tricks out of the technical analysis toolkit. for candlestick reversal patterns to get a confirmation
of a possible turnaround.
by Sylvain Vervoort
2 Use the most basic tools like support, resistance, and
O
ften, the Sve_BB%b is a leading indicator making trendlines. Knowing that the Sve_BB%b is a leading
smooth moves with clear turning points. Normal indicator, you will just use the turning points of the
and hidden divergent moves make it an ideal tool indicator above and below the active standard deviation
to help find entry and exit points while watching reference levels as a signal to start drawing a trendline
price moving between the Bollinger bands. In my and not as a signal for a direct buy or sell.
last article, I looked at how this indicator could help traders 3 Keep a close eye on convergent and divergent moves
identify entry and exit points while prices are moving between between price and indicator. Ideally, you would open or
the bands. This time, I will introduce a good trading system close a position after a standard positive or negative di-
using the Sve_BB%b and include some ideas together with vergent move. The bottoms or tops of this divergence are
other technical analysis tools. There are some tricks that could
+Vervoort 1006.indd 1 4/23/10 4:36:33 PM

16.5
Trendline 16.0
200-day MA
15.5
50-day MA
15.0
preferably spaced closer together 14.5
20-day MA
than the price move before the di- Resistance
14.0
vergence because price correction 13.5
waves are generally moving faster 13.0
12.5
than price trend waves. Look for 12.0
hidden divergences and interpret 11.5
them as a possible continuation of 11.0
the previous up- or downtrend. Hammer
100
4 Use 20-, 50-, and 200-day simple SVE_BB%b
moving averages. Use the 20-day 50
simple moving average as an
aid to draw trendlines with the 0
short-term price move. Use the
MetaStock
16 23 30 7 14 21 28 4 11 18 25 2 8 15 22 29 6 13 20
50- and 200-day simple moving July August September October
averages as dynamic support and Figure 1: SVE_BB%b APPLIED TO convergys corp (CVG). Here you see the SVE_BB%b turning up from
resistance levels. below the lower dynamic reference level.
5 Use a fast-responding trailing stop

to get in and out of a trade. A good example would Trick 4: Price moved to the resistance of the 20-day
be one like my Tr&nds trailing stop introduced in the moving average and close to the resistance of the
July 2009 issue of Stocks & Commodities. Use this 50-day and 200-day moving averages.
stop as a warning signal. Look closely at the evolution
of price at that moment in time. This trailing stop is Trick 5: Since you have not opened a trade yet, there is
considered broken only if crossed by the high price. no followup with the Tr&nds trailing stop.
6 Always take care of the risk-to-reward ratio before Trick 6: If you are opening a trade here, you would use
entering a trade. the low of the hammer as your initial stop. That would
give you an acceptable risk-to-reward ratio.
Here’s an example
Let me illustrate this trading method with the chart of Con- Based on the overall analysis, you decide it is premature
vergys Corp. (Cvg) from June 2009 to October 2009. Cvg to open a position. Price continued to downtrend after a short
has already been in a long-term downtrend move and made a consolidation (Figure 2). In the area labeled (1) in Figure 2,
new lower low. In Figure 1, you can see the candlestick chart you can see lower price tops with slightly higher indicator
on top and the Sve_BB%b in the subchart with the default tops. This hidden divergence forced price down. The indicator
settings. In the price chart you have the
green 20-day, the blue 50-day, and the
red 200-day simple moving averages.
Both the last up and down moves show 1 16
convergences between the price and in- 15
dicator. The Sve_BB%b is now crossing 14
the lower reference level. Let’s analyze 13
the situation, using the six tricks I’ve 12
just explained. 11
Downtrend 10
Trick 1: On the candlestick chart, you line
9
see a hammer one day ago, but a pos-
sible reversal is not confirmed with
8
2 7
the big black candle the following Bullish
SVE_BB%b
day, since it has a closing price below
harami
100
the closing of the hammer.
1 50
Trick 2: Price bounced against the red
resistance line and is close to the 0
resistance of the brown downtrend
2
18 25 2 8 15 22 29 6 13 20 27 3
line. September October November
Trick 3: There is no divergence between Figure 2: continuation of downtrend. Lower price tops with slightly higher indicator tops (1) indicate that
price and indicator. prices are likely to move further down. The indicator is now turning up with positive divergence (2).
+Vervoort 1006_NEW.indd 2 4/26/10 8:59:21 AM

INDICATORS
16
200-day MA 15
50-day MA 14
20-day MA 13
12 Trick 4: Price moved farther away
11 from the 50- and 200-day moving
10 average. But price is close to the
Bullish 9 resistance of the 20-day moving
Downtrend line harami 8 average.
7
6 Trick 5: Since you have not opened a
5 trade yet, there is no followup with
1 4
SVE_BB%b
the Tr&nds trailing stop.
100
Trick 6: If you are going to open a
50 trade here, you would use the low
of the bullish harami pattern as
1 0 your initial stop. However, with
25 2 8 15 22 29 6 13 20 27 3 10 17 24 the resistance so close to your entry
September October November point, the trade does not have a
FIGURE 3: MOVING FURTHER DOWN. The SVE_BB%b is turning up again with a positive divergence. Should favorable risk-to-reward ratio.
you buy now?
There are clearly a number of things in favor of opening
is now turning up from below the active reference level again. a new position, but the risk-to-reward ratio is doubtful. If
Are you buying? Let’s use those six tricks again. price breaks out of the downtrend line, a better risk-to-reward
ratio may appear, presenting a more favorable buying op-
Trick 1: In the candlestick chart (Figure 2), you see a
portunity.
bullish harami bottom reversal pattern, confirmed with
Price turned against the resistance and moved further
a white candle with a higher closing price.
down (Figure 3). The Sve_BB%b is turning up again with a
Trick 2: Price accelerated during the down move and now positive divergence. Should you buy now? Let’s find out.
you have a third, steeper, brown downtrend line. Since
Trick 1: On the candlestick chart (Figure 3), you see a
there is no other reference close by, you can employ
bullish harami confirmed with a white candle that has a
the midpoint of the large black candle as a resistance
higher closing price.
level. That same level coincides with the resistance of
the last downtrend line. Trick 2: The third sharper downtrend line is now broken.
The first resistance is about 50% higher up.
Trick 3: There is a positive divergence (2) in Figure 2
with higher bottoms in the indicator and lower bot- Trick 3: There is a positive divergence (1) between higher bot-
toms in price. toms in the indicator and lower bottoms in price.
Trick 4: Price has moved far away
10.5 from the 50- and 200-day moving
20-day MA 50-day MA Tweezer 10.0
tops 9.5 averages. The last downtrend line
2 9.0 is in line with the 20-day simple
8.5 moving average.
8.0
7.5 Trick 5: Since you have not opened a
7.0 trade yet, there is no followup with
6.5 the Tr&nds trailing stop.
6.0
5.5 Trick 6: If you are going to open a
5.0 trade here, you would use the low
1 4.5
TR&NDS trailing stop
4.0 of the bullish harami pattern as
2 your initial stop. With resistance
100 far enough away, you have a good
SVE_BB%b risk-to-reward ratio.
50
0 Taking all the tricks into account, it is
20 27 3 10 17 24 1 8 115 22 29 5 12 20 26 2 clear that this is the maximum reassurance
November December 2009 February you can get for opening a long position.
FIGURE 4: ALL YOUR TRICKS SAY YES! You open a long position at $4.66 with an initial stop at $4.00. You also
You open a new long trade at the closing
start a TR&NDS trailing stop (dashed blue line). The SVE_BB%b is turning down with a negative divergence. Is it price of $4.66, keeping an initial stop at
time to take a profit? With a 67% return, it is probably a good idea. a closing price of $4.00. From this date,

INDICATORS
9.5
9.0
8.5
8.0
Trick 2: The midpoint you selected
7.5
7.0 some time ago as a resistance
6.5 level is now being confirmed as a
50-day MA 6.0 resistance level.
5.5 Trick 3: There is a negative divergence
5.0
(2) between the indicator and prices.
4.5
There are lower tops in the indicator
and higher tops in price.
100
Trick 4: It is likely that price will test
SVE_BB%b 50 the support of the 50-day moving
average.
0
27 3 10 17 24 1 8 15 22 29 5 12 20 26 2 9 17 23 Trick 5: Price is still above the
November December 2009 February Tr&nds trailing stop (blue dashed
FIGURE 5: ANOTHER BUYING OPPORTUNITY? Price continues to move up but does not break the resistance line).
level. It falls back down to a support level and breaks below the 20- and 50-day moving averages. Price also breaks
below the TR&NDS trailing stop. The six tricks do not indicate you should open a new position. Trick 6: You have a profit now of
$7.81 – $4.66 = $3.15 or 67%.
you also start a Tr&nds trailing stop (Figure 4). With these findings, you do not want to wait for a break of
From the point where you opened your position, you rely the trailing stop to close your position. You can cash in the
heavily on the initial and trailing stop (dashed blue line). Up very nice 67% profit. Now you await the next buying oppor-
until February 2, 2009, neither the initial nor the trailing stop tunity.
is broken. In Figure 4, you can see a hidden divergence (1) Prices move up for a few days but do not break out above the
that pushed price further in the direction of the previous up- resistance level (Figure 5). They fall back down to a support
trend. Now the indicator is turning below the upper standard level while breaking support of the 20- and 50-day moving
deviation reference with a negative divergence (2). Now is it averages and break below the Tr&nds trailing stop. Do you
time to take profit? already have a new buying point?
Trick 1: On the candlestick chart (Figure 4), it is interesting Trick 1: In the candlestick chart (Figure 5), there are no
to see that there are two consecutive tweezer tops with significant patterns visible.
the closing price of the big white candle at the top — the
Trick 2: A previous support and resistance line has now
first one with an equal opening price and the second with
become support. Note that this support level has been
an equal high price.
broken with a closing price of the
black candle a day ago.
9.0 Trick 3: There are no divergences
Morning doji 8.5 between price and indicator.
star bottom 8.0
reversal 7.5 Trick 4: Price will probably test the
resistance of the second, brown,
7.0
accelerating downtrend line and
6.5
the resistance of the 50-day mov-
6.0
ing average.
1 5.5
5.0 Trick 5: You have no open position,
4.5 so there is no trailing Tr&nds
stop followup.
100 Trick 6: Opening a long trade here

would not give you a good risk-
SVE_BB%b 50 to-reward ratio because of a lot
of resistance close by.
0
1
3 10 17 24 1 8 15 22 29 5 12 20 26 2 9 17 23 9 Clearly, there are not enough posi-
November December 2009 February March tive tricks that indicate you should
FIGURE 6: IS IT SAFE TO OPEN A POSITION NOW? The SVE_BB%b is turning up. There is a divergence in price. open any new positions. There was
The six tricks suggest that it is favorable to open a long position at $6.13. no further price reaction up, and price

200-day MA
10.5 It is not that difficult
10.0
9.5
to make a profit. Try
2
9.0 it yourself!
8.5
1 8.0
7.5 Trick 5: You have no open positions,
Tweezer tops; 7.0 so there is no trailing Tr&nds
(dark cloud cover
top reversal 6.5 stop followup.
pattern?) 6.0 Trick 6: If the immediate resistance
5.5
is broken, the risk-to-reward
2
100 ratio is okay. If not, the risk is
acceptable.
50
1 You take a new long position at the
SVE_BB%b closing price of $6.13, with an initial
0
stop at the low of the morning doji star
20 26 2 9 17 23 2 9 16 23 30 6 13 20 27 4 11
pattern at $5.51. You start a followup
February March April May
with the Tr&nds trailing stop. It works
FIGURE 7: TIME TO TAKE PROFITS. The SVE_BB%b is turning down. There is a negative divergence between like this:
indicator and price. Closing your long position will result in a nice profit.
continued the down move. At what appears to be a turning Trick 1: In the candlestick chart in Figure 7, you see tweezer
point in Figure 6, you can see a divergence (1) between lower tops and you could even see a kind of dark cloud cover
price bottoms and higher indicator bottoms. Are you ready to top reversal pattern, confirmed with a black candle with a
take a new long position? lower closing price.
Trick 1: Note the morning doji star bottom reversal pattern Trick 2: There is important resistance from a previous longer-
in the candlestick chart. term support line, which has now become resistance.
Trick 2: There is some support from an inverse red trendline Trick 3: There is a negative divergence (2) between price
through previous bottoms. With the downtrend line that and indicator. Before that, you see a hidden divergence
goes through price tops (on the other side), you can see (1) that pushed price higher.
a downsloping wedge pattern. This is now broken to the Trick 4: The 200-day moving average resistance is broken.
upside, creating a continuation pattern. Now you can expect a test of the 200-day moving aver-
age support.
Trick 3: There is a positive divergence between price and
indicator. Trick 5: The trailing Tr&nds stop is not yet broken.
Trick 4: You can expect some resistance from the 20- and Trick 6: If you closed your long position now, you will
50-day moving averages. enjoy a nice profit.
11.5 You bought at $6.13 and you sell now

at $10.10, giving a profit of $3.97 or 65%.
11.0
This is a valid-enough reason to close the
10.5 trade and take the profit now. This is the
second time you make more than 60%
10.0 profit in a limited period of time.
9.5 From what you have learned up to now,
it should be easy to understand why my
9.0 next buying point was at the green arrow
8.5 in Figure 8 and why I closed the position
at the level marked by the red arrow.
100 An ideal tool

The Sve_BB%b indicator is often a lead-
50 ing indicator making smooth moves with
SVE_BB%b
clear turning points. Normal and hidden
0 divergent moves make it an ideal tool to
May June July August September find entry and exit points. I hope I have
FIGURE 8: WHAT NEXT? It should be easy to understand why my next buying point was at the green arrow and made it clear that with the Sve_BB%b
why I closed the position at the level marked by the red arrow. as a synchronizing mechanism as well as

INDICATORS
It’s Time to Take Control of
Your Financial Future!
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_____ [2008]. “Trading Medium-Term Divergences,” Technical dan Zanger’s
Analysis of Stocks & Commodities, Volume 26: February.
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‡MetaStock S&C dan Zanger is a
WHITEHILL/TRADING WITH VOLUME PROFILE Monthly Trader Magazine
Continued from page 46
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the daily level means only the open, high, low, and close for 2 Years In A Row!
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References
‡Freestockcharts.com
‡stockrageous.com
Free 2 WeeK trIaL!
‡paccharts.com S&C

INTERVIEW
Being In Tune With Your Stocks
Josh DiPietro
And The Reality Of Daytrading
For every would-be trader who’s wanted to succeed instantly, there’s someone like
Josh DiPietro. DiPietro, who is the author of The Truth About Day Trading Stocks,
has been daytrading stocks for 12 years. DiPietro also operates a website, www.
daytraderjosh.com, and provides training programs for aspiring daytraders. His
strategy is succeeding little by little, day after day — do you have the patience?
To find out, Stocks & Commodities Editor Jayanthi Gopalakrishnan and Staff
Writer Bruce Faber spoke with Josh DiPietro of DayTraderJosh.com via telephone
on April 7, 2010.
osh, how did you get interested with the minimum of $1,000. It wasn’t
J in trading?
Back in my first semester in
college, I took an accounting
like a lot of money. But I did make some
good money off of that. I got lucky,
because remember, the market was sky-
class and we did a small portfolio man- rocketing. You could have thrown a dart
agement project. It hit me then that you blindfolded anywhere at the Nasdaq
could actually buy a company, own a part and made money. I got caught up in that
of it — and not have to be a billionaire hype and then everything came crashing
to do it. Then about four years after that, down on me. I got lucky. That was the
There is not one time when I
I opened my first online daytrading ac- recipe for becoming a daytrader, when am in a trade that I don’t know
count. That was when the lightbulb went you were an amateur back in 1998. exactly how much I am up or
off. I realized I could sit in my shorts down. I don’t let a system do
in sunny San Diego and buy a stock What are some memorable experiences
and make money on it without leaving you’ve had in your trading career?
that for me.
my house. That was when everything I’ve got three good examples. The
started. I was one of the first to open up first would be the first trade I ever made, and programs. I certainly stopped trading
an account online and start buying and which was Microsoft. It was 200 shares. in anything more than 1,000 shares. I
selling independently. I believe the term It went up $0.50 in just under an hour, started being more risk-adverse. Till then
was independent online daytrader. so I made a quick $100. But after com- I thought I could do anything I wanted.
But it boiled down to when, in 1998, missions I netted only $80. I couldn’t The third experience would have been
I figured out I had the capability to buy believe I actually made $100 just sitting the biggest change in my daytrading ca-
and sell stocks. That’s what grabbed me. there and in not even an hour! reer where I morphed into a professional
That’s when I realized you could make One of my bad experiences and it’s trader. That was when I sold everything
a living this way. the biggest experience to date was with I had and moved from San Diego to
Enron in 2001. I was one of many who Manhattan in New York City, and went
You were pretty young in 1998. when Enron hit $1.00, even though the to trade on a private equity trading floor.
I was definitely young. Basically, any- books were saying it was worth $8, I For the first time, I was surrounded with
one who got online and was interested in bought. I had $80,000 and bought the real professional traders. It was private
the market pretty much had an E*Trade stock with every egg in my basket, and equity so I did not need a license. I wasn’t
account back then. lo and behold, that day it almost went a broker. I had my own money, but I was
down to $0.20. I held it overnight and being leveraged as much as 50 to 1. That
What motivated you to do something the next day it went down to be worth is where I learned about pay-per-share
like that, considering it’s risky and less than a penny. So within one day I and all about daytrading. The first day,
requires capital? lost $80,000. That was my wakeup call, walking in, sitting down at my own trad-
When I first started, I thought I knew that I needed to learn more. I didn’t know ing station, everyone around me trading
everything. I was one of the idiots who anything about daytrading! was a memorable experience. I felt like
would take all the money they had and I was working on Wall Street, and I was
just throw it out there. Why not? I made Did you learn more? only about 10 blocks away from it. Since
a couple of good trades. The first time I Oh yeah. That was when I started to then it has just been daytrading. There
opened my account with E*Trade it was pay good money to go to trading seminars really hasn’t been any big changes other
+1006 Interview dipietro.indd 1 4/23/10 12:00:20 PM

++Full pg Ad Template.indd 1 1/15/10 9:28:19 AM
INTERVIEW
than writing my book, but that is really platforms are remote. This is why I can money, and I am completely comfortable
not part of daytrading. trade from Cape Cod, where I am now. with the amount I will lose. It boils down
I don’t have to be on the private equity to what you are comfortable with.
You mentioned the pay-per-share trading group floor to trade.
brokers. How is that different from When you have a system that is con-
pay-per-trade brokers? One of the first topics you discuss in sistent, you don’t look for new stocks,
Pay-per-share versus pay-per-trade is your book is about controlling your and you keep your number of shares
just what the names imply. Pay-per-trade emotions. Why is this so important, and consistent. Do you use a quantitative
is when it doesn’t matter how many how does someone go about actually system or are you discretionary?
shares you buy, you just pay one rate. doing this? Do you mean manually trading? I am
These are the online brokers such as TD I almost lost my mind on that Enron completely in control of every trade.
Ameritrade, E*Trade, the ads you see on trade. I had to break down my emotions to That is how I trade. To be more precise,
TV. They charge anywhere from $5.00 simplify my trade. I break down emotion I use what is called FastKey, or HotKey,
to $10 a trade. into primal instincts, or areas, basically which is using my keyboard to buy and
The pay-per-share is exactly what it greed and fear. I break it down into greed sell similar to the order-entry keyboards
infers. You pay per share. When you are versus fear. at the Nyse. When I am in a trade I
trading 100-share blocks, you are only Obviously, the Enron trade was not don’t take my eyes off it. My fingers
paying $0.40 a trade since it costs me fear. That was greed. As far as the emo- are constantly working because I am
$0.004 per share. Buying 100 shares at tions go, the best way to avoid your buying and selling. I don’t place a limit
a time is part of my system. emotions is to simply have a consistently order or stop order and just walk away.
As far as amateurs go, I am not going strict system. For instance, you trade the It’s all manual trading. There is not a
to say that pay-per-trade is not right for same stocks all the time. You don’t wake time when I am in a trade I don’t know
them because they have plenty of bells up one day and try to find new stocks. exactly how much I am up or down. I
and whistles, and there are a lot of things That is a mistake all beginners make. don’t let a system do that for me.
that online daytrading accounts offer That and keep your number of shares
such as comprehensive stock research. you buy consistent. That is why I only You mentioned one mistake that many
But you cannot intraday trade, the way trade with 100 shares. It is that simple. beginners make is to constantly look
I do, with a pay-per-trade brokerage There is never a time when I say, “Hey, for new stocks. What are some other
commission structure. It’s all about the maybe I should buy 1,200, or 5,000.” common mistakes they make?
structure simply because if you are pay- Never! The first thing I tell beginning trad-
ing $5.00, or especially $10 per trade, ers is that even though I have a 20-day
that means you have to make at least Never? program, after 20 days you are still not
$10 to $20 profit just to break even. A Never. Those two things alone mini- going to walk out as a professional trader.
lot of daytraders are only making $0.10 mize not only your risk, but your emo- Some traders read just one book or learn
to $0.20 per trade. By trading 100-share tions as well. If you think about it, if you a couple of strategies and then try to trade
blocks I am only making a profit of $20 buy 100 shares, at most you are going to all their money with that knowledge and
a trade. So it does not make sense to pay lose $50 or $100 on the trade, because they lose it all.
per trade. It is that simple. it is going to move a full dollar against Another thing beginners do is go to a
Most pro traders gravitate toward pay- you. In my case, I only let it move 50 free seminar and come out thinking they
per-share, the way I did. It more or less cents. Your emotions are all about how are professional traders. That is after four
found me. One day I was trading with much you are trading and how much hours of being dazzled. That is another
E*Trade and I placed 20 trades, and I you are risking. You should not have any of the big mistakes I see beginners make.
got hit with $400 in commissions. It was emotions when you are trading. When And a practical mistake many traders
$9.99 to buy, and $9.99 to sell per trade. I am trading I try to be like a robot. I make is that most don’t start off with
I made a $300 profit, so I actually lost don’t worry about every trade I enter. I pay-per-share. It always boils back to
$100 that day. That was when the bells am either going to make money or lose that.
went off in my head. That was when Let me back up a little. When I say
I knew I had to find a cheaper way to “daytrader,” I mean someone who is
trade. not holding positions overnight. They
I started searching online and found are buying and selling all day, so you
a couple of these private equity trading need a pay-per-share broker. If you are
groups in Manhattan, and realized that I a swing trader and you plan to invest,
had to move there. That does not mean maybe buy and hold 5,000 shares or more
you have to live in Manhattan to trade and hold for a month or two, then pay-
with these private equity trading groups. per-trade is the way to go. It is cheaper.
Nowadays, a lot of their brokerage But say you are buying and selling all

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INTERVIEW
day long. That’s what a lot of beginning intraday volatility is high. That is where
daytraders start off doing — they try to I make my money.
do it with a pay-per-trade account. Then I actually want volatility. I know that
what happens is they get forced to buy sounds crazy, because investors hate
more than 100 shares so they can cover volatility. I am not an investor. I am a
commission costs. Then they overexpose daytrader and daytraders love intraday
themselves because they are buying 500 volatility. So I am looking for stocks that
or 1,000 shares, or even 5,000 shares. move fast. They tend to be S&P 500,
That carries risk with it. blue-chip stocks like Amazon (Amzn),
010 • Technical Analysis of StockS & commoditieS I would say that the two most promi- Apple (Aapl), even Spy. These work
nent mistakes beginning daytraders with my type of system, where I am
en Moore with approval or changes: make is that they get into daytrading just looking for quick reversals in price.
with a pay-per-trade broker and they I want to get in and out fast and make
70 ext. 312 • fax: 206-938-1307 • email: KMoore@Traders.com
are overconfident. They think they are $0.15 to $0.25.
going to start making consistent profits Specifically, you want stocks that
immediately. It doesn’t work that way. It have, at most, a one-penny difference
took me years to get to that point. I have spread in the bid and ask. Almost all stocks
not known one trader who just comes in over $100 tend to have that. They have
and starts making money every week tight spreads on the bid and ask. You do
consistently. not want a bid and ask spread of $0.30 or
more, because if you are trying to make
What is your typical day like? $0.15 that just does not work out.
I get up every morning and watch My system is crude and it is simple.
proof #1 the premarket. I am glued to my trading I make it simple on purpose. I am not
station all day. I’m usually watching 10 investing in these companies. I just want
For more information circle No. 22 stocks, which are stocks I have been to make sure I trade on the day they are
watching for years. I might be trading just moving. I don’t want any going sideways
one of them that day, or as many as five or any that are going to drop $5.00 in 10
actively. On average, I place between 30 seconds out of the blue because some
and 40 round-trip trades and on a crazy news was released that a pharmaceutical
® day it can go up to 60. For an average day company did not get Fda approval.
it is very consistent. Again, that is one That brings me to one of my criteria.
of the keys: You have to be consistent. I never trade stocks that are government
You cannot just come in at lunchtime and regulated. In general, I trade stocks over
try to buy and sell some stock between $100 a share with a lot of intraday vola-
noon and 1:00 or something, and then tility and tend to be S&P 500 stocks and
Thank you for voting come back a couple of days later and try blue-chip stocks.
Neuroshell Trader #1 it again. It just doesn’t work that way.
You have to be in tune with your stocks. Once you pick your stocks, do you have
Artificial Intelligence Once you are, and you can hear their any strategies you follow to enter and
Software heartbeat, just ride them. exit? Do you look for certain setups?
8 years in a row! Do you use any indicators?
How do you pick these 10 stocks that I watch the one-minute candlestick
you watch? chart. That is my best friend as far as
The two biggest things I look for are indicators go. When I am watching the
the price of the stock and stocks that are one-minute candlestick chart, of course,
moving fast. I only trade stocks over it is all pricing at that point, as far as in-
$100 a share. I make it clear in my book traday support and resistance. Whenever
that beginners should trade stocks that support or resistance gets broken, I buck
are between $10 and $100. I say up to the trend. I wait for the reversal, and that
$100 because if you are not experienced is where I get my money.
enough you shouldn’t be trading stocks For instance, let’s say the resistance
more than $100. But once you have some level is at $100.25. My entry is twofold.
www.NeuroShell.com experience, you are going to want stocks I need the stock to break support or re-
301.662.7950 more than $100 a share because those sistance, and once it does, I wait for it to
For more information circle No. 24 are the ones that move the fastest. Their go through the next 25-cent range. The

25-cent range is your dollar mark, your a $60 loss. Usually when I am down 50
$1.25 mark, your $1.50, your $1.75, your cents, I am looking to get out.
$2.00 mark. Every $0.25 is a 25-cent
range. That is a general market barrier. Once you get out of, say, Aapl and you
Let’s say the intraday resistance made your 15 cents, do you go back
level is at $100.25. Once it comes up to and look for more in that stock, or do
$100.25, I wait for it to go through the you try to get into another stock on
next 25-cent barrier, which is $100.50. your list? Or are you already in four
Once it breaks through that 50-cent bar- other stocks?
rier, I short the stock. Then when it pulls amounts, especially when they are All of the above. If I am in rhythm,
back $0.15 to $0.20, I cover it and that is consistent. The hard thing is to sit there on certain days, if you take Apple, it is
where I make my money. Keep in mind all day and do this. Because I am using just perfect to trade. It is up and down,
that once it broke through those levels FastKey my fingers are constantly mov- and sideways, with volatility and tight
it probably already went up a full dol- ing. I already have problems with arthritis ranges. Those are days you just stay
lar, because we are talking about a $100 and I am only 34. A lot of retirees love with it, because you don’t have time to
stock. So it is already way overbought. to daytrade, but they cannot handle this be watching other charts, or trying to
All I am looking for is a quick 15-cent system for that reason. It’s a concern gauge other setups. So I will just sit and
reversal. This happens all the time if you most people aren’t aware of, because trade that one stock.
backtest any stocks that are more than when you are cranking away all day, your But some days I will be in four posi-
$100 and have great intraday volatil- knuckles start to get tender on you. tions. Normally, I’m never in more than
ity. Aapl just happens to be one of my five positions at once. That is because if
best stocks, one of the primary stocks I I’ve never heard anyone mention this, you have ever traded five high-volatility
trade. but it makes sense. Getting back to your stocks, try getting out of five of them
trading strategy, if you are only look- all at the same time when they are all in
That’s really not much money per ing for such a small amount per trade, the green 15 cents. What will happen is
trade, is it? where do you place your stops? that you can only get out of two of them,
Yes, just 15 to 25 cents, and 25 cents That is part of my system of consis- then the other three just went back into
is no mistake because I get out before I tency. It all goes back to emotions. I have the red. So you just missed out on your
hit the next 25-cent barrier. I don’t make a system where I will not allow price to trades. I have gotten to where I can do
more than 25 cents because the odds are move more than a certain amount. I don’t that up to five, but even five is really
that it is not going past that next 25-cent like to call it a static 50-cent stop-loss. testing my abilities. I am comfortable
barrier. So I average about $0.20. On 100 It is more of a 50-cent cushion I allow with three stocks.
shares, that is $20 after commissions of myself. When things are slow, I watch up to
$0.40 to buy and $0.40 to sell, I usually If you understand my entry point, if 10 stocks. I have about 10 in my primary
net about $19 on every trade. I am trying you wait for resistance, the stock has stocks that I always watch. Even on a
to place 30 to 40 trades a day. So I am probably shot up a dollar already. Then slow day, at least one of those stocks
definitely hustling. you are waiting for it to break through
I don’t just buy in the morning and that 25-cent barrier you’ve set up for
hold all day. I wish it were that easy. I yourself. At that point it is so overbought
have tried intraday swing trading many it’s not likely that stock is going another
times. You have to buy 500 shares to 50 cents on top of that before it pulls
make some money and hope it moves back 15 cents. One trade out of 10 goes
a dollar in your direction. Good luck up another 50 cents. At that point, I take
keeping that consistent. It is a lot easier a $50 loss.
to make 15 cents than a dollar. And this happens at least three or four
times throughout the day. You have to
That’s very true! expect that. It is part of the system. You
As soon as I am up 15 cents, I look are going to win nine trades and then lose
to get out. It so happens that by the time a trade on average. The key is I have a
I exit, the stock has already gone up stop-loss at 50 cents. I don’t just sit there
another $0.05 or $0.10. So I get lucky and let it run $2.00 against me, mainly
and make an extra $5.00 or $10 on every because it is an opportunity cost. If you
trade. Take your money and run, that’s are holding a losing position, that means
what I say. you are not making $20 every five or 10
It all goes back to emotions. I am minutes. I am very strict about getting
not greedy. I am happy making little out of a trade. I seldom take more than For more information circle No. 21

INTERVIEW
out of the 10 is offering a setup every New York and traded with pay-per-share all that data for you.
five minutes. That is a pretty long time. brokers and that is what catapulted me
If you are watching enough stocks, you into really daytrading again. That is what And you have a mentorship program?
should have a decent setup every five made me realize I can sit all day long and Yes. It is something I do on the side.
minutes. buy and sell at a very low commission I do phone conferencing on Fridays and
cost. I have learned so much through after the market closes. I have them sign
Do you play strictly against resistance, all of my losses that at the very least, I up and send them a manual. Then they
or do you play against support as have a lot to teach other people. They trade using a demo all week, and they
well? can learn from my mistakes. send me their trades on Thursday. On
Both. On any average day, I have Thursday evening I print them out and
just as many shorts as longs. As soon Do you miss the inspiration of the guys backtest them. I take notes after market
as I go short on a stock, I wait for it to around you in the trading room? on Thursday. Then after the market closes
come back down to support. As soon as When I was trading with others ono Friday I call them. I’m usually on the
it breaks support, I go long again. So I around, everybody was independent. No- phone from about 3:00 till 7:00 or 8:00.
am riding it up and down all day. body really talked to each other through I spend about half an hour with each of
the trading day. We did most of the talk- them, when I am backtesting and gauging
You struggled for a long time before you ing in the morning before trading while their performance on their trades. The
STOCKS
nical Analysis of became & COMMODITIES
a successful trader. What gave magazine
we were drinking coffee, and then those mentorship is me giving back.
you the motivation to not give up? who did well that day after the market People ask me how much I am mak-
Every time I would lose, or make a closed loved to sit around and talk about ing. With my system, it is hard to make
n Moore with approval or changes:
mistake, I would learn something. It’s a it. My inspiration did not come from the more than $1,000 a day. I am extremely
cliché to say that you learned from your actual trading. It came from talking with happy once I am up $400. It’s back to
70 • fax: 206-938-1307
mistakes, •but email:
I got to KMoore@Traders.com
the point where I others, hearing their stories, and learning that greed versus fear thing. Put it this
learned so much that I thought, “Why strategies. I learned my strategies from way: It is virtually impossible to make
stop now?” It just boiled down to my a select few in these trading rooms. Not more than $1,000 a day unless you trade
being an adrenaline junkie. I really enjoy everybody traded exactly like me. There with 500 or more shares versus 100. But
this. I enjoy PROOF
being able #4 to sit at home were intraday traders who would swing if you are trading with 500 shares, you
and just buy and sell stocks and being an trade. They would buy 5,000 shares and are overexposing yourself.
independent daytrader. You have to love hold it. But there were also guys who
it. You even have to love the losses. burned money like crazy. They would What about losing trades? How many
There were times, especially after the come in with millions of dollars and not do you have of those?
Enron trade, from 2001 until 2003, I was trade consistently. Because of my consistency and stop-
not actively daytrading. I still had my Just being there and learning the tricks loss I am seldom in the red, maybe one
account open, but I wasn’t active. That of the trade, like about pay-per-share, day a month. But I have days where
was about the only time I sort of gave up. made me realize I could trade from home, I am only up $100, and those are not
But I kept coming back. Then I moved to I didn’t have to be in that environment any such good days. I try to get up at least
more. But I would say to any beginner $400 because as long as you plug away
that if they can afford to live in Manhat- all day long, stay focused and use the
Trade Like The Pros tan, work in the heart of the markets, it is system, you are going to make at least a
Join my “Trade Like The Pros” 2 day Seminar
with LIVE trading and learn how to predict a great experience to start off trading in couple hundred dollars. Once you break
when major moves will occur in the market. one of those professional trading outfits. that consistency and start buying, say,
Learn the best setups used, that virtually make the
markets rally or fall. Master exactly how It is inspirational but not necessary. 1,000 shares at a time, you will get into
and where to enter a trade, where to place trouble. You could also get into trouble
stops and targets, and much more. With the taxes on all of those trades, if you start averaging down on a losing
Join us at these seminars: how in the world do you keep track of position, or hold a losing position all
• July 25 & 26 • every trade? day and don’t trade. I could go on and
Atlanta, GA The pay-per-share brokers I am with on, but these are things I don’t do, and
• October 17 & 18 • itemize everything for you. It is similar I mentor others on not doing.
Los Angeles, CA to what the pay-per-trade online brokers
do. They have an administrative account Is it necessary for somebody to be an
Learn to trade with confidence the E-mini’s that keeps track of every trade. You can adrenaline junkie to be a successful
S&P, DOW, FOREX, Futures and Stocks
__________________ have a printout of every trade. I would daytrader, or do you think anybody
www.trendpro.com have a stack about five feet high every can do it?
year if I actually had to print it out. But First, you have to remember the physi-
(775) 443-7677 it is all itemized and logged. There is no ological challenges. The fingers really
For more information circle No. 16 brokerage firm out there that won’t have are a problem and even your elbows

are going to be, from being in that same
position. That is the biggest factor. I get At-the-Money (ATM) — An option whose favor. In management wisdom, if
a lot of traders in my mentorship. They strike price is nearest the current price anything does go wrong, it will do so
are doing great for like the first hour, then of the underlying deliverable. in triplicate.
they just fall off because their knuckles Average Directional Movement Index Money Flow — A number of technical
can’t take it any more and they couldn’t (ADX) — Indicator developed by indicators that incorporate volume
get out of the trade because they couldn’t J. Welles Wilder to measure market and price action to measure buying
hit the button fast enough. These are trend intensity. or selling pressure. Calculated by
serious issues. Average True Range — A moving average multiplying the day’s volume by its
But you have to have the right per- of the true range. average price.
sonality. I would say half the traders in Backtesting — A strategy is tested or Moving Average — A mathematical
my mentorship program do well. They optimized on historical data and then procedure to smooth or eliminate the
understand it. But in the end it is either the strategy is applied to new data to fluctuations in data and to assist in
their fingers go on them or they realize see if the results are consistent. determining when to buy and sell.
they don’t have the patience to sit there Bid and Ask — Highest and lowest prices Moving Average Crossovers — The point
all day and just make $20 on a trade. an investor will pay for a tradable. where the various moving average
They have to place 30, 40, or 50 trades Black-Scholes Option Pricing Model — A lines intersect each other or the price
and some people just don’t want to do model developed to estimate the mar- line on a moving average price bar
that. They want to figure out how they ket value of option contracts. chart. Technicians use crossovers to
can buy 2,000 shares, and hold it for like Call Option — A contract that gives the signal price-based buy and sell op-
10 minutes, and make $1,000. buyer of the option the right but not portunities.
Good luck! It doesn’t work. If you buy the obligation to take delivery of the Moving Average Convergence/ Diver-
1,000 shares it might work for you three underlying security at a specific price gence (MACD) — The crossing of
or four days in a row. And all it takes is a within a certain time. two exponentially smoothed moving
move of a couple of dollars against you Elliott Wave Theory — A pattern- averages that are plotted above and
before your emotions come into play. recognition technique that holds that below a zero line.
The next thing you know you are down the stock market follows a rhythm Near-the-Money — An option with a strike
$6,000. It happens all the time. or pattern of five waves up and three price close to the current price of the
You need to be self-disciplined and waves down to form a complete cycle underlying tradable.
have a lot of self-constraint. And most of eight waves. Out-of-the-Money (OTM) — A call option
important, you have to be humbled by the Euro — European unit of currency. whose exercise (strike) price is above
market and not look for a golden goose Exchange-Traded Funds (ETFs) — Col- the current market price of the underly-
strategy to make tons of money sitting lections of stocks bought and sold as ing security or futures contract.
at home. A successful daytrader needs a package on an exchange, princi- Pairs Trading — Taking a long position
to realize that they have to work for their pally the American Stock Exchange and a short position on two stocks in
money. That is what it boils down to. A lot (AMEX). the same sector, creating a hedge.
of people just want to learn how to buy Fade — Selling a rising price or buying Put Option — A contract to sell a specified
low, sell high, make $5,000 a week doing a falling price. amount of a stock or commodity at an
virtually nothing. It doesn’t work that Fibonacci Ratio — The ratio between any agreed time and exercise price.
way. If it does, please show me! Because two successive numbers in the Fibo- Relative Strength Index (RSI) — An indi-
I would like to make $5,000 a week too. nacci sequence, known as phi (f). cator invented by J. Welles Wilder and
Are you kidding me? Who wouldn’t? Gann Theory — Various analytical tech- used to ascertain overbought/oversold
niques based on price, time, and pattern and divergent situations.
We all would! Thank you, Josh. to project changes in the direction of S&P Emini — Electronically traded,
the markets. smaller-sized ($50 times the S&P
Suggested reading Gap — A day in which the daily range is 500) contracts of the Standard &
DiPietro, Josh [2009]. The Truth About completely above or below the previ- Poor’s 500.
Day Trading Stocks: A Cautionary ous day’s daily range. Stochastics Oscillator — An overbought/
Tale About Hard Challenges And In-the-Money (ITM) — A call option oversold indicator that compares to-
What It Takes To Succeed, John Wiley whose strike price is lower than the day’s price to a preset window of high
& Sons. stock or future’s price, or a put option and low prices.
whose strike price is higher than the Volatility Index — A widely used measure
Note: Josh DiPietro will be hosting a underlying stock or future’s price. of market risk. Sometimes referred to
two-hour seminar at the June 2010 Trad- Kelly’s Law — In probability theory, as the “investor fear gauge.”
ers’ Expo in Los Angeles, CA. bet bigger when the odds are in your
S&C S&C

Wave59
Wave59 them well, and does many things that menu groups. Example menu groups
637B South Broadway Ste. 107 no other product does. All of the soft- are “Chart” with items like “Format,”
Boulder, CO 80305 ware is written by Ceo Earik Beann “Drawing,” “Systems,” and so on, or
Phone: 866 494-7613 and includes indicators and other tools “Measuring” with icons to display
Email: Earik@wave59.com created by Beann. His background in- various measurements such as the bar
Fax: 303 736 7144 cludes trading commodities as well as count between bars on a chart. You can
Product: Trading software bonds on the Chicago Board of Trade move the menus to any location you
Requirements: Intel Quad-Core Cpu, (Cbot). The graphical user interface want and they will actually shrink if
2.66Ghz or higher; 3GB Ram; Win- (Gui) is superb and gives you the sense you put them in a location where some
dows XP/Vista/7; high-speed Internet that something really good is coming. of the menu items can’t be displayed.
connection What prompted Beann to write this What’s available in the menus de-
Price: Pro $5,700 plus $90/month software? He was a solution provider to pends on the version of Wave59 you
for real-time datafeed or $249/month; TradeStation, but there wasn’t a way to are using as well as the datafeed. If you
end of day, $2,750 (free Yahoo data, square a chart in a way that mimicked are using the Pro version of Wave59,
MetaStock, or Ascii formatted data) or W.D. Gann’s use so he could over- it includes a real-time datafeed, and if
$149/month; private $7,500 plus $90 lay drawing objects and see how they you are using the end-of-day version,
for real-time datafeed or $299/month. might predict market turning points. you can use free Yahoo! data (if you
Beann thought it would take him six check the bottom of the main Yahoo!
by Dennis D. Peterson months, but instead it took him three Finance page, you’ll see that the data
years, and this is the result. comes from Csi), MetaStock, or Ascii-
W
ave59 is easily one of the formatted data. The real-time datafeed
most sophisticated technical General is proprietary, and you’ll need to input
analysis tools you’ll find on The first screen you see after logging on futures, stocks, and so on with a prefix.
the market. It does many things, does is a blank area surrounded by movable For example, Boeing is S.BA and the
emini is F.EPH0. There’s a sym-
bol lookup to help you.
To bring up a chart, go to the
main menu and select the left-
most icon, or find the chart menu
group and select one. After se-
lecting a chart, you are shown a
formatting screen that has seven
tabs that lets you set conditions
for your chart.
The chart will come up with-
out volume, but you can add it if
you go to the indicator list. The
list of some 50-plus indicators
includes the familiar (Macd,
Bollinger bands), the vaguely
familiar (fractal trend, Gann
swings), and some not familiar
at all (9-5 count, exhaustion bars
1, exhaustion bars 2). Pay atten-
tion to those you aren’t familiar
with because indicators like 9-5
count (Wave59 gets its name
from this indicator created by
Figure 1: DAILY CHART OF BOEING (ba) WITH OVERLAYS. The price chart is surrounded by menu groups, similar Earik Beann), which identify po-
items grouped together that you can move around. On the left portion of the price bars is a measurement drawing object, tential setups and blowoffs, are
bar count, that displays the number of bars between two price bars. The 9-5 count indicator is shown: blue and red 9s
high performers (Figure 1). Then
are setup signals, gold 5s a blowoff signal, and an 8* is a cycle that completes one bar earlier. The last bar on the chart
shows the current cycle count, which in this case is a 9. The day before the last bar had an 8, which means it is getting there are those that might sound
close to completing the cycle count. familiar, like an adaptive moving
+PR Wave 59.indd 1 4/23/10 11:20:58 AM

product review
Wave59 is like a field of dia-
monds. All you have to do is
look under a leaf, and you find
average (Figure 1: dark blue line going
through prices) and has almost no lag,
one. It’s that good.
is smooth, and an excellent choice for a
moving average crossover. There’s also
an ultra smooth momentum (Usm) in- Let’s start with time and price patterns. ting a price pattern to a price series.
dicator that makes reading divergences After selecting “Patterns” from the The pattern has been squeezed and
much easier. And, of course, there are main menu, choose “Time and price stretched to fit. What did Wave59 use
all of the usual drawing objects like Fi- patterns.” The first screen asks you for pivot peaks and valleys to fit the
bonacci retracements, Fibonacci time how many price swings you want. pattern so nicely? Gann swing points.
zones, and Gann fans. Responding with “3” will bring up a Wave59 lets you adjust the swing
When you add indicators, the first screen with a menu across the top and strength by letting you set a range with
thing you might note is that scale is a straight line with four nodes, one at starting and stopping points. In fact,
missing (Figure 1). There are two rea- the beginning and end of each of the Gann swing points are one of the pat-
sons: first, Earik Beann didn’t want to three swing segments. You can now use terns you can choose.
crunch the data in the price chart be- your cursor to drag each of the nodes to
cause, as you will see later, there are form the shape you want. In Figure 2 Drawing objects:
visuals (built-in or ones you create) in the lower right-hand corner in blue, Geometric
that need room, and second, you might you can see the shape that was created When we consider using geometric
be using a squared chart á la Gann. You using three swings. objects, we might think of them as a
can move indicators around the screen Once you have the shape you want, means to focus attention to a particular
easily using the magnet icon. There are the menu lets you add price, time, part of a price chart. A more powerful
a number of cursor icons because the space, and trendline rules. For the use is to predict turning points in soft-
software does so much: move drawing example shown in Figure 2, the price ware. Gann used square charts in his
objects, rotate geometry, move indica- rule that the middle swing = 0.5 of first work. However, there’s a catch. You’ll
tors, act as crosshairs, and show data swing is used. You can name your pat- need a square chart and you will most
values, to name a few. tern and it will appear in the list of pat- likely want to include weekends. As I
A couple of items should catch your terns available. Note in Figure 2 that mentioned before, Wave59 lets you per-
eye when you open a chart and look at there are a bunch of prebuilt patterns form both actions.
the Settings screen. First, if you select including head & shoulders as well as After selecting patterns, select “Geo-
a daily chart, a portion of the Settings congestion. Examining Figure 2, you metric patterns,” and from a list of five
screen will change, but the rest will can see how flexible Wave59 is in fit- options, choose “Pattern builder” to
remain the same. The
portion that has changed
is “time frame.” In the
right-hand corner is a se-
lection called “square.”
What’s unique about the
time frame choices is
that one of them reads
“calendar days,” and
this allows you to show
the weekends in a price
chart. Square allows
you to assign unit val-
ues of price and time to
the sides of a square as
though you were plot-
ting price data with a
square grid.
Drawing objects:
Price and time
Wave59 has two types
of drawing objects: geo- Figure 2: time and price patterns. The “load rime/price pattern” screen is overlaid on the price series chart. The highlighted
pattern “dennis1” was constructed using the build pattern interface. The preview in the lower left-hand corner shows the shape in
metric, and price and blue. The flexibility of the Wave59 software to fit the pattern to a price series can be seen on the right-hand portion of the underlying
time. We’ll look at both. price chart with the red and blue lines.
+PR Wave 59.indd 2 4/23/10 11:21:21 AM

product review
you need to have a square chart.

The emini is used in this exam-
ple and the squaring parameters
are 0.125 for each day. Had this
been the S&P 500, you might try
multiples of 12 points per day;
therefore, you would enter a 12
for the number of points and
some whole multiple (like 3) for
number of bars. Wave59 gives
you the flexibility of choosing
points per bar, hour, or day when
setting up square scaling. You
are looking for some sort of har-
FIGURE 3: Daily 30-Year Treasury Bond Prices. Prices are displayed on a squared chart where each day there monic, and the Wave59 interface
is a 0.03125 change in price. The leftmost red line identifies a swing. A blue square geometric shape is as high as the
enhances your trials.
swing is placed at the bottom of the swing. Using the intersection of diagonals, you can identify potential price turning
points as seen by the red arrows added to the chart, as well as the right-hand edge of the square. Looking at the results of using
the Fibonacci vortex on squared
grid (Figure 4), you can see why
construct the pattern of your choice. exclusively using the Fibonacci vortex, some traders use it exclusively, and
You are given a series of shapes to use so let’s take a quick look at that. why you can’t seem to make it work on
to create the pattern of your choice. charts without squared scaling. If pat-
One of the shapes is a square and can be Geometry: terns and indicators weren’t enough,
used on squared charts with some suc- Fibonacci vortex let’s try some analytic techniques in an
cess (Figure 3). There are a number of If you’ve read about Fibonacci num- area that Wave59 calls “artificial intel-
prebuilt geometric shapes such as Fibo- bers, you are likely to have come ligence.”
nacci vortex, flower of life, ellipse, and across Fibonacci spirals. The vortex
log spiral. Some people trade almost uses the spirals in a specific way. First, Artificial intelligence:
Hive technology
Wave 59 offers two features
under the heading of artificial
intelligence: neural nets and
hive technology. You might be
familiar with neural nets, but
not hive technology, since that
is the creation of Earik Beann.
Hive technology lets you input
multiple indicators and have the
software find which trade is the
best. Hive technology has the
usual ways you trade two broad
classes of indicators built into
its logic. The two classes are
range-bounded and unbounded.
An example of a range-bounded
indicator is the relative strength
index (Rsi) and would typi-
cally be traded using different
thresholds. An example of an
unbounded indicator would be
a moving average and a typical
FIGURE 4: Fibonaaci Vortex Applied To a Two-Minute chart of the Emini. After identifying a combination way to trade it would be with
of three pivot peaks/valleys (1, 2, and 3), the vortex is centered on 3. Initially, the green lines are vertical and horizontal moving average crossovers.
and are manually rotated until one of the green lines touches the pivot peak, no. 1, while at the same time a spiral is made
You start by selecting artificial
to touch the pivot valley, no. 2. It is sometimes necessary to hit the 1 or 2 key on your keyboard to make the spirals expand
or contract to get them to touch the desired pivot while a green line touches the other pivot. The result, however, is that intelligence from the Chart
price is seen to fall from the center of the vortex (pivot no. 3) until it reaches the blue spiral and then turns up. menu and then select hive tech-
+PR Wave 59.indd 3 4/23/10 11:21:36 AM

nology and hive designer. The result
is an input screen (Figure 5) where
you can choose from more than 50
indicators that you want to use.
Hive technology compares the prof-
itability of each traded system and
chooses the best based on an analysis
of that system’s profitability in contrast
to the current market environment, in
effect dynamically switching between
systems as market conditions change.
Using three indicators — Bollinger
bands, ultrasmooth momentum, and
ultrasmooth momentum slope — you
can easily develop a profitable system FIGURE 5: Hive Input Screen. You can select the indicator you wish to use from the list on the left. The next
(Figure 6). step allows you to use several versions of the same indicator by changing parameters or bounds of the indicator,
using the three buttons labeled “no adjustment,” “range-bound adjustments,” and “unbounded adjustments.”
Ephemeris
Wave59 cautions users that when they
come across the astro feature, they
may say “What is this stuff?” This is
another example of Wave59 extract-
ing the best from an area. If you are
familiar with astro applications, you’ll
be impressed with what’s been done.
Some background might help calm
your concerns.
Trader extraordinaire W.D. Gann
used the position of the planets to help
in his trading. The Atlanta Federal Re-
serve has a working paper on the sub-
ject that suggests there is a connection
between behavior and geomagnetic
storms. Using the ephemeris suggests
FIGURE 6: Daily chart of EMini Overlaid With Hive Results. Using Bollinger bands, ultrasmooth
it may be more than just geomagnetic momentum, and ultrasmooth momentum slope as inputs to the hive builder, a system is created and trades
storms. are created: long positions are shown as a blue “+1” with a blue arrowhead and shorts as a red “+1” with a red
The goal of ephemeris analysis is to arrowhead. The equity curve is displayed at the bottom.
find a time and price at an appropriate
confluence of planet positions, includ-
ing Earth’s moon. What’s appropriate?
There are a number of factors, and un-
fortunately, trial and error is one of the
better solutions. So what’s the good
news? Wave59 gives you the tools to
find the answers with a user-friendly
interface to enhance your speed and
minimize the time you spend.
Ephemeris step 1:
Pick an aspect
You start your analysis by clicking on
the ephemeris icon on the menu bar, FIGURE 7: EPHEMERIS. On the left is an Earth-centric view of the planets, including Earth’s moon. Each of the lines
which brings up a screen showing are labeled with a single letter denoting the planet, such as N for Neptune. The moon is labeled as T and the NYSE as
planet positions in an Earth-centric X. On the far right is a set of data with the heading “ASPECTS.” Under this heading are listed the degrees of separation
(aspect) between the planets and/or the moon using an Earth-centric view. The degrees of separation that are multiples
view (Figure 7). Using the aspect col- of 60 of 90 degrees, with less than a six-degree error in meeting the 60 or 90 multiple (aspects in bold have an error that
umn on the far right, choose an aspect is decreasing) are the ones listed. In the middle chart are the declinations of planet orbits relative to Earth’s orbit.
+PR Wave 59.indd 4 4/23/10 11:21:52 AM

product review
day. Wave59 has found that there

are more price points, and those
correspond to geometric shapes
that have been aligned with the
p/p or p/m pair.
Ephemeris step 2:
Align geometry
Thus, after picking the p/p or
p/m pair, you align the pair with
the appropriate geometric shape.
If the pair you are using has a
120-degree separation or aspect
such as Moon-Jup 120, you’ll be
FIGURE 8: EPHEMERIS WITH PRICE AND GEOMETRY OVERLAY. A red triangle has been drawn on the inside of the looking to align one of the three
circle and aligned with planet/moon pair “Moon–Jup 120 [error 1.86]” by putting one corner on the moon line (T) and
corners of a triangle or one of the
another corner on the Jupiter line. The line with the letter X has been rotated to go through the lower right-hand corner
of the triangle. You can input your time zone. After rotating the geometric shape to align on the desired planet/planet or six corners of a hexagon with the
moon/planet pair, the corners point to prices drawn as a blue overlay outside the circle. pair. Wave59 allows you to manu-
ally rotate the geometric shape of
with the smallest error. Since these as- 7: second from top in aspect list). your choice or have it automatically
pect angles have been preselected to What you want to know is when (as align after choosing the shape. When
be multiples of 60 or 90 degrees, you in time) the exchange of your choice, you overlay the wheel with price, the
will be choosing a planet/planet (p/p) such as the Nyse, aligns with the p/p or corners of your geometric shape are
or planet/moon (p/m) pair that has, for p/m aspect of your choice. If you were pointing at the desired price candi-
example, a 120-degree separation such to only use the pair, you would end up dates. Now all you have to do is solve
as “Moon-Jup 120 (error 2.11)” (Figure getting only two price hits during the for time.
Ephemeris step 3:
Solve for time
Besides having lines for the plan-
ets and the moon in the circle,
there are lines marked with an X
and an A. They correspond to the
midheaven (straight up from the
geographical location) and ascen-
dent (Eastern horizon point) for
the exchange you have chosen.
Both the X and A lines move with
the passage of time. You can ad-
vance time manually (hitting the
“2” key) or have it automatically
updated with real time. What you
now want to do is get the line with
the X or A to align with a corner
or your geometric shape, and since
you have rotated the geometric
shape so that one corner is on one
of the lines of the p/p or p/m pair,
the line with the X or A will also
align with another of the lines of
a p/p or p/m pair. Again, X corre-
sponds to the midheaven location
of the exchange where the trading
FIGURE 9: EPHEMERIS WITH FIVE-MINUTE CHART OF EMINI. The top chart shows an ephemeris wheel using
is occurring and A is the ascendent
hexagon geometry with a result that a turning might occur at 9:50 PST. The emini did hit a turning point at 9:55. Earlier location.
in the day, the ephemeris wheel showed a possible turning at 7:10 using Moon–Saturn and the emini did turn. Wave59 provides the latitude
+PR Wave 59.indd 5 4/23/10 11:22:18 AM

product review
and longitude of Nyse and Chica-

go, but you can add other locations
to the table. In Figure 8 the line
marked with an X (Nyse) rotates
until it strikes the corner of the
triangle. Time changes in the ban-
ner of the ephemeris screen as you
align the X or A line. Thus, you
get two times, one corresponding
to X and the other with A.
The steps are as follows: rotate
the appropriate geometric shape
so that two corners of the shape
are on the p/p or p/m pair you
have selected, then solve for time FIGURE 10: FIVE-MINUTE CHART OF QQQQ OVERLAID WITH ASTRO DATA. Vertical data are the planet rise/
by either manually advancing the underneath, and if a capital letter, the planet is passing overhead. Capital letters with a line underneath denote the
transit/set times. Each is marked with a letter for the planet it represents. If the letter is lower case, the planet is passing
X or A lines or waiting for real- planet is rising over the eastern horizon, and capital letters with a line above denote the planet is setting under the
time updates that will align the X western horizon. The blue colored oscillator on the bottom is the planet rise harmonic Index.
or A line on a corner of the geometric
shape. A geometric shape has the de- its error is greater than six degrees, and books for sale give you guidance on
grees of separation that fits the aspect Wave59 only lists those aspects that are how to use this data.
you want. less than six degrees in error. However,
You need to overlay price on the the influence of the moon is always of Backtesting
ephemeris circle using the formatting interest and when you’re looking at the Wave59 has a language similar to
screen, and input the price range and emini at 7:10, it’s hard to argue. TradeStation’s EasyLanguage called
appropriate divisor. The result is a price There are a number of other choic- QScript. You can access a library of
overlay (Figure 8: blue numbers outside es. For example, you can overlay on prebuilt scripts or just write your own
of ephemeris circle), with the corners of any price chart the planet rise/transit/ using the script builder. If you put
your geometric shape pointing to candi- set times and the planet rise harmonic buy or sell statements in your script,
date prices. In the instructional videos, (Figure 10). Some planets seem to you’ll see blue up arrows for long en-
36 is used as the appropriate divisor, but have more of an effect than others, and try points, and red down arrows for sell
Beann has found that 24 works better in generally speaking, rise and fall times points will appear on your price chart
his trading of the emini. seem to be more significant. Another when you execute the script.
February 24, 2010, chosen to illus- school of thought says some planets are You might note that the QScript (Fig-
trate (Figures 7 and 8) the ephemeris determined by a p/p or p/m pair with ure 11) doesn’t require you to declare
wheel analysis, wasn’t one that result- the tightest aspect (smallest error). For whether your variables are integers,
ed in identifying a strong turning point. the planet rise/transitset overlay, you floating or logical. It figures it out for
A better one is just two days later, Feb- choose your location such as Chicago you. The buy statement lets you have
ruary 26, 2010. There are two times of or the Nyse. Instructional videos and several different order types, such as
interest. The one with market, limit, stop, and
smallest aspect error next open. Order expi-
is Venus–node (the in- ration can be Gtc (good
tersection of Moon’s till canceled), day, or
orbit and Earth’s or- “onebar,” which means
bit around the sun) at the order is only active
9:50 PST (Figure 9), on the next bar. Maybe
but earlier in the day you’re thinking this is
with market open, all fine and dandy, but
Moon–Saturn at 7:10 I want to see how this
PST is present. astrological stuff might
When inspecting work. It’s all in there
the aspect list of the as well. You can refer-
ephemeris list at 9:50 FIGURE 11: Q SCRIPT FOR MOVING AVERAGE CROSSOVER. The top line declares that ence functions such as
“astro,” which allows
there are two inputs, namely the number of periods for the short (faster) or long (slower) moving
PST (Figure 9), you averages: Next, define two variables as the short version of the adaptive moving average (AMA)
don’t see Moon–Sat- and long version of AMA. Then, ask if one average crosses over the other, or under, and either planet inputs and re-
urn. The reason is that buy or sell. Next, plot the two averages in blue and red. turns ephemeris data,
+PR Wave 59.indd 6 4/23/10 11:24:48 AM

product review
as well as “astro declinations,” which the Eod product. For this review, the Dennis Peterson is a Staff Writer for
returns declination data. real-time product was used almost ex- Stocks & Commodities.
clusively and the Eod to verify connec-
Support tion to Yahoo! Finance data. Suggested reading
The Help menu has 10 items. Besides Beann, Earik [2007]. Trading With
“Wave59 Help” there is “Qscript Help,” Summary Wave59, Wave59 Technologies.
instructional videos, and an online fo- I found Wave59 to be carefully crafted _____ [2005]. The Handbook Of Market
rum. If that’s not enough, you can go and usable software equal or superior to Esoterica, Wave59 Technologies.
to YouTube and type in “Wave59” and the best on the market. Just the ephem- _____ [2004]. The Fibonacci Vortex
you’ll have 24 videos to choose from. eris was worth a separate review. When Handbook, OpenLibrary.org.
Earik Beann has written four books I thought I was done reviewing all the Robotti, Cesare, and Anya Krivelyova
that I recommend. You can call and features, out of curiosity I tapped my [2003]. “Playing The Field: Geomag-
talk to Beann directly if you need to, cursor on patterns and I had another netic Storms And The Stock Market,”
and he can answer any questions, or if feature to review. Not only was the Social Science Research Network.
you want to, you can create a support construction of the patterns easy and • www.maths.surrey.ac.uk/hosted-sites/R.
ticket. robust, but the way they were fitted to Knott/ Fibonacci/ fibnat.html#spiral
If you opt to buy the Eod product the data was equally impressive. When ‡Wave59
to save some money, ask specifically I clicked on hive technology, I found ‡See Editorial Resource Index
what astro items you are getting such another feature to review.
as the natal forecast, since Wave59 Wave59 is like a field of diamonds.
has learned that some techniques only All you have to do is look under the
work at intraday levels such as two or leaf of a plant, and you find another
five bars and doesn’t include them in diamond. It’s that good. S&C
DAILY UPDATES ON:

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+PR Wave 59.indd 7 4/26/10 10:45:50 AM

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1001_PTSK_A.indd 1 3/22/10 4:53:24 PM

TRADERS’ TIPS
Here is this month’s selection of Traders’Tips, contributed by various
developers of technical analysis software, all to help readers more
easily implement some of the strategies presented in this issue.
Internet users will also find these and most previous Traders’ Tips
at our website at www.Traders.com. To locate the various tips, use
our site’s search engine, or click on the Stocks & Commodities
magazine link on the left-hand side of our home page, then scroll
down to the “This month in S&C” heading in the middle section and
click on“Traders’ Tips.” For previously published Traders’ Tips,
visit the “Back issues archive” located at http://www.traders.com/
Documentation/FEEDbk_docs/backissues.html. Code can then be
copied and pasted into your program.
This month’s Traders’ Tips

are based on John Ehlers’
and Ric Way’s article in
this issue, “Fractal Dimen-
sion As A Market Mode
Sensor.”
EasyLanguage code
is already provided in the
article’s sidebar to help
readers implement the indicator. Code for other programs is
presented here as contributed by various software develop-
ers.
Readers will find these and more Traders’ Tips at the
Stocks & Commodities website at www.Traders.com in
the Traders’ Tips area, from where the code can be copied
and pasted into the appropriate program. In addition, the
code for each program is usually available at the respective Figure 1: TRADESTATION, fractal dimension indicator. Here, the Ehler-
FractDimIn indicator is plotted on a daily chart of Microsoft, Inc. (MSFT). The top
software company’s website. Thus, no retyping of code is pane displays price bars and strategy trades based on the calculated fractal dimen-
required for Internet users. sion. The bottom pane displays the fractal dimension values over time as a red line.
For Stocks & Commodities subscribers, the EasyLanguage Movement above and below the blue lines denotes entering and exiting of cycling
code found in Ehlers’ and Way’s article can be copied from the and trending periods of price action.
Subscriber Area at www.Traders.com. Login is required.
N( 30 ) ; { N must be an even number }
variables:
HalfN( 0 ),
NMinus1( 0 ),
F TRADESTATION: Fractal Dimension INDICATOR HalfNMinus1( 0 ),
John Ehlers’ and Ric Way’s article in this issue, “Fractal Log2( 0 ),
Smooth( 0 ),
Dimension As A Market Mode Sensor,” provides a method N3( 0 ),
of calculating the fractal dimension of any price series. The HH( 0 ),
authors suggest using the calculations to distinguish trending LL( 0 ),
Count( 0 ),
from cycling price movement. A strategy to backtest the idea that N1( 0 ),
the changes in the fractal dimension can identify the beginning N2( 0 ),
of trending market phases is included in the article. Ratio( 0 ),
Dimen( 0 ) ;
To download the adapted EasyLanguage code, go to the
TradeStation and EasyLanguage Support Forum (https://www. Once
tradestation.com/Discussions/forum.aspx?Forum_ID=213). begin
if Mod( N, 2 ) <> 0 or N = 0 then
Search for the file “EhlersFractalDimension.eld.” RaiseRuntimeError( "The input N must be an" +
A sample chart is shown in Figure 1. " even number." ) ;
This article is for informational purposes. No type of trading HalfN = 0.5 * N ;
or investment recommendation, advice, or strategy is being made, NMinus1 = N - 1 ;
given, or in any manner provided by TradeStation Securities or its HalfNMinus1 = HalfN - 1 ;
Log2 = Log( 2 ) ;
affiliates. end ;
Indicator: EhlersFractalDimIn Smooth = ( Price + 2 * Price[1] + 2 * Price[2] +

inputs: Price[3] ) / 6 ;
Price( MedianPrice ), N3 = ( Highest( Smooth, N ) - Lowest( Smooth, N ) ) /
Threshold( 1.4 ), N;
+Traders_Tips_1006.indd 1 4/23/10 11:49:43 AM

TRADERS’ TIPS
HH = Smooth ; LL = Smooth ;
LL = Smooth ;
for Count = 0 to HalfNMinus1
for Count = 0 to HalfNMinus1 begin
begin if Smooth[Count] > HH then
if Smooth[Count] > HH then HH = Smooth[Count] ;
HH = Smooth[Count] ; if Smooth[Count] < LL then
if Smooth[Count] < LL then LL = Smooth[Count] ;
LL = Smooth[Count] ; end ;
end ;
N1 = ( HH - LL ) / HalfN ;
N1 = ( HH - LL ) / HalfN ; HH = Smooth[HalfN] ;
HH = Smooth[HalfN] ; LL = Smooth[HalfN] ;
LL = Smooth[HalfN] ;
for Count = HalfN to NMinus1
for Count = HalfN to NMinus1 begin
begin if Smooth[Count] > HH then
if Smooth[Count] > HH then HH = Smooth[Count] ;
HH = Smooth[Count] ; if Smooth[Count] < LL then
if Smooth[Count] < LL then LL = Smooth[Count] ;
LL = Smooth[Count] ; end ;
end ;
N2 = ( HH - LL ) / HalfN ;
N2 = ( HH - LL ) / HalfN ;
if N1 > 0 and N2 > 0 and N3 > 0 then
if N1 > 0 and N2 > 0 and N3 > 0 then Ratio = 0.5 * ( ( Log( N1 + N2 ) - Log( N3 ) ) /
Ratio = 0.5 * ( ( Log( N1 + N2 ) - Log( N3 ) ) / Log2 + Dimen[1] ) ;
Log2 + Dimen[1] ) ;
Dimen = Average( Ratio, 20 ) ;
Dimen = Average( Ratio, 20 ) ;
if Dimen crosses under Threshold then
Plot1( Dimen, "Dimen" ) ; begin
Plot2( 1.6, "1.6", Blue ) ; if Close > Average( Close, TrendLength ) then
Plot3( Threshold, "Trigger", Blue ) ; Buy next bar market
else
Sell short next bar at market ;
Strategy: end ;
inputs:
Price( MedianPrice ), SetStopShare ;
Threshold( 1.4 ), SetDollarTrailing( iff( EntryPrice > 0, EntryPrice,
N( 30 ), { N must be an even number } Close ) * 0.01 * StopLossPct ) ;
TrendLength( 10 ),
StopLossPct( 5 ) ; —Mark Mills
TradeStation Securities, Inc.
variables: A subsidiary of TradeStation Group, Inc.
HalfN( 0 ), www.TradeStation.com
NMinus1( 0 ),
HalfNMinus1( 0 ),
Log2( 0 ),
Smooth( 0 ),
N3( 0 ),
HH( 0 ),
LL( 0 ),
Count( 0 ), F eSIGNAL: Fractal Dimension INDICATOR
N1( 0 ), For this month’s Traders’ Tip, we’ve provided the formula
N2( 0 ), “FractalDimension.efs, based on the code from John Ehlers’
Ratio( 0 ),
Dimen( 0 ) ; and Ric Way’s article in this issue, “Fractal Dimension As A
Market Mode Sensor.”
Once The study contains the following formula parameters:
begin
if Mod( N, 2 ) <> 0 or N = 0 then
Price source, N, Band 1 and Band 2, which may be config-
RaiseRuntimeError( "The input N must be an" + ured through the Edit Studies window (Advanced Chart menu
" even number." ) ; → Edit Studies).
HalfN = 0.5 * N ;
NMinus1 = N - 1 ;
To discuss this study or download a complete copy of the
HalfNMinus1 = HalfN - 1 ; formula code, please visit the Efs Library Discussion Board
Log2 = Log( 2 ) ; forum under the Forums link at www.esignalcentral.com or
end ; visit our Efs KnowledgeBase at www.esignalcentral.com/
Smooth = ( Price + 2 * Price[1] + 2 * Price[2] + support/kb/efs/. The eSignal formula scripts (Efs) are also
Price[3] ) / 6 ; available for copying and pasting from the Stocks & Com-
N3 = ( Highest( Smooth, N ) - Lowest( Smooth, N ) ) / modities website at Traders.com.
N;
HH = Smooth ; A sample chart is shown in Figure 2.

TRADERS’ TIPS
Figure 3: WEALTH-LAB, fractal dimension indicator. The information

Figure 2: eSIGNAL, fractal dimension indicator provided by the fractal dimension indicator is not unlike that of J. Welles Wilder’s
ADX, albeit inverted.
—Jason Keck
eSignal, a division of Interactive Data Corp.
800 815-8256, www.esignalcentral.com DataSeries n3 = (Highest.Series(smooth, N) - Lowest.
Series(smooth, N)) / N;
int per = N / 2;
DataSeries n1 = (Highest.Series(smooth, per) - Lowest.
Series(smooth, per)) / per;
DataSeries smooth_ = smooth >> per;
F WEALTH-LAB: Fractal Dimension INDICATOR DataSeries n2 = (Highest.Series(smooth_, per) - Lowest.
While the WealthScript code that replicates John Ehlers’ and Series(smooth_, per))/ per;
Ric Way’s fractal dimension indicator (Fdi) is shown here, for
DataSeries ratio = new DataSeries(Bars, "Fractal Ratio");
ease of use, Fdi will also be added to Wealth-Lab’s TascIndi- DataSeries dimen = new DataSeries(Bars, "Fractal Dimen-
cators library. sion");
A sample chart is shown in Figure 3. From the chart it is double log2 = Math.Log(2);
for (int bar = N; bar < Bars.Count; bar++)
clear that when the Fdi is rising, the market tends to remain {
in a trading range, and conversely, the market trends as the if (n1[bar] > 0 && n2[bar] > 0 && n3[bar] > 0)
indicator falls. ratio[bar] = 0.5 * ((Math.Log(n1[bar] + n2[bar]) - Math.
Log(n3[bar])) / log2 + dimen[bar-1]);
WealthScript Code (C#): else
using System; ratio[bar] = ratio[bar-1];
using System.Collections.Generic;
using System.Text; if (bar < avPer)
using System.Drawing; dimen[bar] = ratio[bar];
using WealthLab; else
using WealthLab.Indicators; dimen[bar] = SMA.Value(bar, ratio, avPer);
}
namespace WealthLab.Strategies
{ ChartPane fdPane = CreatePane(40, false, true);
public class FractalDim : WealthScript DrawHorzLine(fdPane, 1.4, Color.Blue, LineStyle.Solid, 1);
{ DrawHorzLine(fdPane, 1.6, Color.Blue, LineStyle.Solid, 1);
StrategyParameter _n; PlotSeries(fdPane, dimen, Color.Red, LineStyle.Solid, 2);
StrategyParameter _per; }
}
public FractalDim() }
{
_n = CreateParameter("N", 30, 10, 60, 2); // An even num- —Robert Sucher
ber www.wealth-lab.com
_per = CreateParameter("Average Period", 20, 10, 55, 1);
}
protected override void Execute()

{
HideVolume(); F AMIBROKER: Fractal Dimension INDICATOR
int N = _n.ValueInt; In “Fractal Dimension As A Market Mode Sensor” in this
int avPer = _per.ValueInt;
DataSeries avg = AveragePrice.Series(Bars); issue, authors John Ehlers and Ric Way present the fractal
DataSeries smooth = FIR.Series(avg, "1,2,2,1"); dimension indicator.

TRADERS’ TIPS
Figure 5: STOCKFINDER, fractal dimension indicator. Bank of America

(BAC) cycled within the “fuzzy” range from October 2009 until March 2010. The
fractal dimension indicator has dipped well below the 1.40 level to indicate a trend,
and, as you can see from the price graph, the trend is up.
Figure 4: AMIBROKER, fractal dimension indicator. Here is a MSFT
price chart with classic 30-day Bollinger bands (upper pane) and the fractal dimen-
sion indicator (lower pane), replicating the chart presented in Ehlers’ and Way’s
PlotGrid( 1.6, colorBlue );
article. PlotGrid( 1.4, colorBlue );
—Tomasz Janeczko, AmiBroker.com

Implementing it is easy in AmiBroker Formula Language. www.amibroker.com
A ready-to-use formula for the article is presented in the List-
ing 1. To use it, enter the formula in the Afl Editor, then press
the “Insert Indicator” button. Then you would need to click
on the chart with the right mouse button and choose “Param-
eters” from the context menu in order to define parameter N.
A sample chart is shown in Figure 4. F WORDEN BROTHERS STOCKFINDER:
Fractal Dimension Indicator
LISTING 1 The fractal dimension indicator described in John Ehlers’ and
Price = (H+L)/2; Ric Way’s article in this issue has now been made available in
the StockFinder indicator library.
N = Param("N", 30, 10, 100, 2 ); You can add the indicator to your chart by clicking the
Smooth = ( Price + “Add Indicator/Condition” button or by simply typing “/Frac-
2 * Ref( Price, -1 ) + tal” and choosing “fractal dimension indicator” from the list
2 * Ref( Price, -2 ) + of available indicators.
Ref( Price, -3 ) ) / 6;
Horizontal lines are plotted at the 1.40 and 1.60 levels to
N3 = (HHV( Smooth, N ) - LLV( Smooth, N ))/N; define the “fuzzy” range (see Figure 5).
For more information or to start a free trial of StockFinder,
HH2 = HHV( Smooth, N/2 );
LL2 = LLV( Smooth, N/2 );
visit www.StockFinder.com.
— Bruce Loebrich and Patrick Argo
N1 = ( HH2 - LL2 )/(N/2); Worden Brothers, Inc.
www.StockFinder.com
N2 = Ref( HH2 - LL2, - N/2 )/(N/2);
Ratio = ( log( N1 + N2 ) - log( N3 ) )/log( 2 );

F NEUROSHELL TRADER:
dimen = Null; Fractal Dimension INDICATOR
The fractal dimension indicator presented by John
for( i = 20+N; i < BarCount; i++ )
{
Ehlers and Ric Way in their article in this issue can
ratio[ i ] += Nz( dimen[ i - 1 ] ); be easily implemented in NeuroShell Trader using NeuroShell
ratio[ i ] *= 0.5; Trader’s ability to call external programs. The fractal dimension
for( sr = 0, k = 0; k < 20; k++ )
indicator can be written in C, C++, Power Basic, or Delphi.
sr += ratio[ i - k ]; After moving the EasyLanguage code given in the article to
your preferred compiler to create the fractal dimension indi-
dimen[ i ] = sr / 20; cator, you can insert the resulting indicators as follows:
}
1. Select "New Indicator …" from the Insert menu.
Plot( Dimen, "Fractal dimension", colorRed ); 2. Choose the External Program & Library Calls category.

TRADERS’ TIPS
Figure 7: AIQ SYSTEMS, fractal dimension indicator. Here is a sample

chart of the SPY with the fractal dimension indicator.
Figure 6: NEUROSHELL TRADER, fractal dimension indicator. This
sample NeuroShell Trader chart displays the fractal dimension indicator along with HalfN is N*0.5.
two example neural network trading systems. Price is ([high]+[low])*0.5.
Smooth is (Price + 2*Valresult(Price,1) + 2*Valresult(Price,2)
3. Select the appropriate External DLL Call indicator. + Valresult(Price,3)) / 6.
4. Setup the parameters to match your DLL. N1 is (HighResult(Smooth,HalfN)
5. Select the Finished button. - LowResult(Smooth,HalfN)) / (HalfN).
N2 is (HighResult(Smooth,HalfN,HalfN)
- LowResult(Smooth,HalfN,HalfN)) / (HalfN).
We think neural networks and genetic algorithms can play N3 is (HighResult(Smooth,N) - LowResult(Smooth,N)) / N.
an important part in building trading strategies using the frac- barsInto is reportDate() - ruleDate().
tal dimension indicator as an input. In two quickly built ge- end if barsInto > 60.
fracDimen is iff(end, Price, dimen ).
netically optimized nets, we also input a regression slope to dimen is 0.5*( ( Ln(N1+N2) - Ln(N3) )
determine which way the trend was going. The first net was / Ln(2) + ValResult(fracDimen, 1) ).
trained on Msft from 2003, producing a 37.1% annualized !PLOT as custom indicator:
dimenFinal is ^SimpleAvg(dimen,20).
return through April 6, 2010. In the second, we held out a
year, training only to April 3, 2009, and producing an annual- —Richard Denning
ized 30.3% return. More important, the second net persisted, richard.denning@earthlink.net
showing a 24.2% return in the last held out year. for AIQ Systems
Users of NeuroShell Trader can go to the Stocks & Com-
modities section of the NeuroShell Trader free technical sup-
port website to download a copy of this or any past Traders’ F TRADERSSTUDIO: Fractal Dimension INDICATOR
Tips. The TradersStudio code is given here for John Ehlers’ and
A sample chart is shown in Figure 6. Ric Way’s fractal dimension indicator and related functions,
—Marge Sherald, Ward Systems Group, Inc. based on “Fractal Dimension As A Market Mode Sensor” in
301 662-7950, sales@wardsystems.com this issue.
www.neuroshell.com To test the effectiveness of the fractal dimension indicator
(Fdi), I chose three different portfolios of futures contracts us-
F AIQ: Fractal Dimension INDICATOR ing reverse-adjusted daily bar data supplied by Pinnacle Data
The Aiq code is given here for the fractal dimension Systems:
indicator based on “Fractal Dimension As A Market 1. Emini index portfolio: EN, ER, ES & YM
Mode Sensor” by John Ehlers and Ric Way in this issue. 2. Full-size index portfolio: DJ, MD, ND, SP
In Figure 7, I show the indicator plotted on a chart of the 3. Day session futures portfolio: AD, BO, BP, C, CC, CD,
S&P 500 Etf (Spy). CL, CT, DJ, DX, ED, FA, FC, FX, GC, HG, HO, HU,
The code can be downloaded from the Aiq website at www. JO, JY, KC, KW, LC, LH, NG, NK, PB, RB, S, SB, SF,
aiqsystems.com and also from www.tradersedgesystems.com/ SI, SM, SP, TA, TD, UA, W
traderstips.htm. On each of these portfolios, I ran tests with both a typi-
cal oscillator and a typical trend-following system. Then to
! FRACTAL DIMENSION AS A MARKET MODE SENSOR
! Author: John Ehlers, TASC June 2010 determine the effectiveness of the trend/cycle filter, I tested
! Coded by: Richard Denning the typical systems both with and without the trend filter. The
! www.TradersEdgeSystems.com oscillator system uses a slow D stochastic, entering when the
!INPUT:
oscillator indicates a reversal from an overbought or over-
N is 30. !must be even integer sold level. The trend-following system uses a 20-bar channel
breakout for entries.
!FRACTAL DIMENSION INDICATOR:
For the oscillator system, I eliminated the signals when the

TRADERS’ TIPS
'default value for fracLen = 30
Dim Price As BarArray
Dim Smooth As BarArray
Dim count
Dim N1 As BarArray
Dim N2 As BarArray
Dim N3 As BarArray
Dim HH As BarArray
Dim LL As BarArray
Dim Ratio As BarArray
Dim Dimen As BarArray
If fracLen Mod 2 > 0 Then fracLen = fracLen + 1

Price = (H+L)/2
Smooth = (Price + 2*Price[1] + 2*Price[2] + Price[3]) / 6
'N3 = the average median 'smooth' over entire N length bars:

N3 = (Highest(Smooth,fracLen,0)-Lowest(Smooth,fracLen,0))/
fracLen
HH = Smooth
Figure 8: TRADERSSTUDIO, TABLE OF COMPARATIVE METRICS. Shown are LL = Smooth
comparative metrics for the two types of systems with and without the fractal dimen- For count = 0 To fracLen / 2 - 1
sion filter (FDI). If Smooth[count] > HH Then
HH = Smooth[count]
Fdi was in the trend mode. For the trend-following system, I End If
eliminated signals when the Fdi was in the cycle mode. If Smooth[count] < LL Then
LL = Smooth[count]
The code for each of these test systems and the explana- End If
tion of the rules can be found at www.TradersEdgeSystems. Next
com/traderstips.htm. In the table in Figure 8, I show some
'N1 = the average median 'smooth' over N/2 length bars:
sample metrics for backtests from 11/26/2002 to 4/5/2010 for N1 = (HH - LL) / (fracLen / 2)
all three portfolios. The filter applied to the oscillator shows HH = Smooth[fracLen / 2]
some improvement over taking all signals, whereas the filter LL = Smooth[fracLen / 2]
For count = fracLen / 2 To fracLen - 1
applied to the trend-following system did not improve any of If Smooth[count] > HH Then
the metrics. The results were consistent with all three port- HH = Smooth[count]
folios. In Figures 9 and 10, I show the comparative equity End If
If Smooth[count] < LL Then
curves for the two systems traded both with and without the LL = Smooth[count]
Fdi filter. End If
The code can be downloaded from the TradersStudio web- Next
site at www.TradersStudio.com → Traders Resources Free- 'N2 = the average median 'smooth' over N/2 length bars:
Code and also from www.TradersEdgeSystems.com/trader- N2 = (HH - LL) / (fracLen / 2)
stips.htm. If N1 > 0 And N2 > 0 And N3 > 0 Then
Ratio = .5*((Log(N1 + N2) - Log(N3)) / Log(2) + Dimen[1])
'FRACTAL DIMENSION AS A MARKET MODE SENSOR End If
'Author: John Ehlers, TASC June 2010 Dimen = Average(Ratio, 20, 0)
'Coded by: Richard Denning FRACTAL = Dimen
'www.TradersEdgeSystems.com End Function
'--------------------------------------------------------------------
Function FRACTAL(fracLen) 'For plotting indicator on a chart:
Figure 9: TRADERSSTUDIO, SLOW STOCHASTIC SYSTEM. Equity curves are shown for a slow stochastic system with and without the fractal dimension filter (FDI) on
the eMini index portfolio.

TRADERS’ TIPS
Figure 10: TRADERSSTUDIO, CHANNEL BREAKOUT SYSTEM. Equity curves are shown for the channel breakout system with and without the fractal dimension (FDI)
filter on the emini index portfolio.
results when used alongside other indicators. Additional in-
Sub FRACTAL_IND(fracLen,upperLine,lowerLine)
'default values:
formation, including plugins for the fractal dimension indica-
'fracLen =30 tor, can be found in the Shared Area of the StrataSearch user
'upperLine=1.6 forum.
'lowerLine=1.4 A sample chart is shown in Figure 11.
plot1(FRACTAL(fracLen))
plot2(upperLine) //*********************************************************
plot3(lowerLine) // Fractal Dimension Indicator
End Sub //*********************************************************
'-------------------------------------------------------------------- Price = parameter("Price");
N = parameter("Days");
—Richard Denning
richard.denning@earthlink.net Smooth = (Price +
for TradersStudio 2*ref(Price, -1) +
2*ref(Price, -2) +
ref(Price, -3)) / 6;
N3 = (High(Smooth, N) - Low(Smooth, N)) / N;
HH = Smooth;
LL = Smooth;
count = 0;
F STRATASEARCH: Fractal Dimension Indicator while(count < N / 2) {
In their article in this issue, John Ehlers and Ric Way present an HH = if(ref(Smooth, -count) > HH,
indicator to help determine the market mode (“Fractal Dimen- ref(Smooth, -count), HH);
LL = if(ref(Smooth, -count) < LL,
sion As A Market Mode Sensor”). ref(Smooth, -count), LL);
There is no doubt that many indicators work best in specific count+=1;
markets. For example, some indicators work best in volatile
markets, and others work best in trending markets. But iden-
tifying the current market condition is often a tricky task in
itself. The fractal dimension indicator, however, appears to do
a fine job of identifying trending markets.
As a test, we first ran a simple moving average crossover
system against the S&P 500 symbols for the year 2009, using
standard spread, slippage, and commission settings. Next, we
ran the same system again, but this time trading only when the
fractal dimension indicator was below 1.4. The results were
impressive. In particular, the percentage of profitable trades
rose from an average of 45% to an average of 80%. The num-
ber of trades dropped significantly as well, so this simple test
may not have created a complete system. But it did provide
confirmation of the effectiveness of the indicator.
StrataSearch users can explore this indicator further by
testing it alongside thousands of other trading rules in an au- Figure 11: STRATASEARCH, fractal dimension indicator. When the
fractal dimension indicator rises above 1.4, the stock is not trending (blue shaded
tomated search for winning systems. If it worked this well on area). But when the indicator drops below 1.4 (nonshaded area), a strong trend is
a simple moving average crossover, it may produce powerful indicated.

TRADERS’ TIPS
Figure 12: NINJATRADER, fractal dimension indicator. In this chart

example, the fractal dimension indicator is applied to a daily chart of Microsoft
(MSFT).
}; Figure 13: NEOTICKER, fractal dimension indicator

N1 = (HH - LL) / (N / 2);
HH = ref(Smooth, -(N / 2));

LL = ref(Smooth, -(N / 2));
count = N / 2;
while(count < N) { F NEOTICKER: Fractal Dimension INDICATOR
HH = if(ref(Smooth, -count) > HH, The fractal dimension indicator, which is presented by John
ref(Smooth, -count), HH);
LL = if(ref(Smooth, -count) < LL, Ehlers and Ric Way in their article in this issue, “Fractal Dimen-
ref(Smooth, -count), LL); sion As A Market Mode Sensor,” can be implemented using
count+=1;
}; NeoTicker formula language.
N2 = (HH - LL)/(N / 2); This indicator has two parameters. Price is a formula pa-
rameter with a default of (H+L)/2. This parameter will allow
Dimen = mov(0.5 * ((Log(N1 + N2) - Log(N3)) /
Log(2) + $PREV), 20, simple); the user to change what the price calculation is based on; N is
the number of periods to look back.
—Pete Rast A downloadable version of this indicator will be available
Avarin Systems, Inc. at the NeoTicker blog site (http://blog.neoticker.com).
www.StrataSearch.com
A sample chart implementing the strategy is shown in Fig-
ure 13.
LISTING 1
myprice := fml(data1, param1);
$N := param2;
F NINJATRADER: Fractal Dimension INDICATOR ' force N divide by 2 into integer when N input is not a even number
The fractal dimension indicator presented by John Ehlers and $half_N := if(mod($N, 2) > 0, round($N/2), $N/2);
Ric Way in their article in this issue (“Fractal Dimension As smooth := (myprice + 2*myprice(1) + 2*myprice(2) + my-
A Market Mode Sensor”), has now been implemented as an price(3))/4;
$N3 := safediv((hhv(smooth,$N) - llv(smooth,$N)),$N,0);
indicator available for download at www.ninjatrader.com/SC/ $N1 := safediv((hhv(smooth,$half_N) - llv(smooth,
June2010SC.zip. $half_N)),$half_N,0);
Once it has been downloaded, from within the NinjaTrader $N2 := safediv((hhv($half_N,smooth,$half_N)-llv($half_N,smooth,
Control Center window, select the menu File → Utilities → $half_N)),$half_N,0);
Ratio := if(($N1>0) and ($N2>0) and ($N3>0),
Import NinjaScript and select the downloaded file. This indi- 0.5*(log10($N1+$N2) - log10($N3))/(log10(2) + $dimen), 0);
cator is for NinjaTrader version 6.5 or greater. $dimen := average(Ratio, 20);
You can review the indicator’s source code by selecting plot1 := $dimen;
the menu Tools → Edit NinjaScript → Indicator from within plot2 := 1.6;
plot3 := 1.4;
the NinjaTrader Control Center window and selecting “Frac- success1 := if(mod($N, 2) > 0, 0, 1);
talDimensionIndicator.”
NinjaScript indicators are compiled Dlls that run native, —Kenneth Yuen
not interpreted, which provides you with the highest perfor- TickQuest, Inc.
mance possible.
A sample chart implementing the strategy is shown in Fig-
ure 12.
—Raymond Deux & Austin Pivarnik
NinjaTrader, LLC F TRADINGSOLUTIONS: Fractal Dimension INDICATOR
www.ninjatrader.com In “Fractal Dimension As A Market Mode Sensor” in this issue,

TRADERS’ TIPS
John Ehlers and Ric Way present a calculation for the fractal
dimension and how it can be used for helping to determine
market trend detection.
These functions are described below and are also available
as a function file that can be downloaded from the Trading-
Solutions website (www.tradingsolutions.com) in the Free
Systems section.
Function Name: Ehlers Smoothing
Short Name: ESmoothing
Inputs: Data
Div (Add (Data, Add (Mult (2, Lag (Data, 1)), Add (Mult (2, Lag
(Data, 2)), Lag (Data, 3)))), 6)
Function Name: Ehlers Fractal Box Count

Short Name: EBoxCount
Inputs: Price, Calc Period, Constant Period
Div (Sub (HighestVL (ESmoothing (Price), Calc Period, Constant
Period), LowestVL (ESmoothing (Price), Calc Period, Constant
Period)), Calc Period) FIGURE 14: UPDATA, fractal dimension indicator. This chart shows the
fractal dimension indicator on Microsoft (MSFT). Values below 1.4 from April to July
Function Name: Ehlers Fractal Dimension Indicator 2009 indicate the data is trending, the direction of which is determined by the slope
Short Name: EFDI of data, which is up.
Inputs: Price, Period
If (And (GT (EBoxCount (Price, Div (Period, 2), Period), 0), And
(GT (LagVL (EBoxCount (Price, Div (Period, 2), Period), Div (Peri- @N1=0
od, 2), Period), 0), GT (EBoxCount (Price, Period, Period), 0))), MA @N2=0
(Mult (0.5, Add (Div (Sub (Ln (Add (EBoxCount (Price, Div (Period, @N3=0
2), Period), LagVL (EBoxCount (Price, Div (Period, 2), Period), Div @HH=0
(Period, 2), Period))), Ln (EBoxCount (Price, Period, Period))), Ln @LL=0
(2)), Prev (1))), 20), 0) @RATIO=0
@DIMEN=0
@PRICE=0
—Gary Geniesse
NeuroDimension, Inc. FOR #CURDATE=0 TO #LASTDATE
800 634-3327, 352 377-5144
@PRICE=(HIGH+LOW)/2
www.tradingsolutions.com @SMOOTH=(@PRICE+2*HIST(@PRICE,1)+2*HIST(@
PRICE,2)+HIST(@PRICE,3))/6
@N3=(PHIGH(@SMOOTH,#N)-PLOW(@SMOOTH,#N))/#N
F UPDATA: Fractal Dimension INDICATOR @HH=@SMOOTH
This tip is based on “Fractal Dimension As A @LL=@SMOOTH
For #COUNT=0 TO (#N/2)-1
Market Mode Sensor” in this issue by John Ehlers if HIST(@SMOOTH,#COUNT)>@HH
and Ric Way. @HH=HIST(@SMOOTH,#COUNT)
elseif HIST(@SMOOTH,#COUNT)<@LL
In the article, Ehlers and Way describe a method for identi- @LL=HIST(@SMOOTH,#COUNT)
fying when a market is in trend or cyclical mode by creating endif
an oscillator based on a measure of the self-similarity of the Next
@N1=(@HH-@LL)/(#N/2)
data across different intervals, known as the fractal dimen- @HH=HIST(@SMOOTH,#N/2)
sion. Data is tending toward trend mode as the fractal dimen- @LL=HIST(@SMOOTH,#N/2)
sion approaches 1, the direction of which is determined by For #COUNT=(#N/2) TO (#N-1)
if HIST(@SMOOTH,#COUNT)>@HH
the slope of data. The data tends toward cyclical mode as the @HH=HIST(@SMOOTH,#COUNT)
fractal dimension approaches 2. There is a “fuzzy” boundary elseif HIST(@SMOOTH,#COUNT)<@LL
@LL=HIST(@SMOOTH,#COUNT)
from 1.6 to 1.4 where mode cannot be determined. endif
The Updata code for this indicator has been made available Next
in the Updata Indicator Library and may be downloaded by @N2=(@HH-@LL)/(#N/2)
If @N1>0 AND @N2>0 AND @N3>0
clicking the Custom menu and then Indicator Library. Those @RATIO=0.5*((LN(@N1+@N2)-LN(@N3))/LN(2)+HIST(@
who cannot access the library due to a firewall may paste the DIMEN,1))
following code into the Updata custom editor and save it. EndIf
A sample chart is shown in Figure 14. @DIMEN=SGNL(@RATIO,20,M)
@PLOT=@DIMEN
PARAMETER "N {N must be even}" #N=30 @PLOT2=1.6
NAME "Fractal Dimension Indicator Of Length" #N @PLOT3=1.4
DISPLAYSTYLE 3LINES
INDICATORTYPE CHART NEXT
COLOUR RGB(255,0,0)
COLOUR2 RGB(0,0,255) —Updata Support Team
COLOUR3 RGB(0,0,255)
@SMOOTH=0 Support@updata.co.uk
#COUNT=0 www.updata.co.uk

TRADERS’ TIPS
We’ll be offering the fractal dimension indicator for down-
load in our online forums. The VT Trader code and instruc-
tions for recreating the indicator are as follows:
1. VT Trader’s Ribbon → Technical Analysis menu → Indi-

cators group → Indicators Builder → [New] button
2. In the General tab, type the following text into each cor-
responding text box:
Name: TASC - 06/2010 - Fractal Dimension
Function Name Alias: tasc_FractalDimension
Label Mask: TASC - 06/2010 - Fractal Dimension (%Price%,%Per
iods%,%SmPer%,%SmType%) = %Dimen%
Placement: New Frame
Figure 15: CHARTSY, FRACTAL DIMENSION INDICATOR Data Inspection Alias: Fractal Dimension
3. In the Input Variable(s) tab, create the following vari-

ables:
[New] button…
Name: Price
Display Name: Price
Type: price
Default: Median Price
[New] button…
Name: Periods
Display Name: Periods (must be even number)
Type: integer (with bounds)
Default: 30
Figure 16: CHARTSY, indicator properties window Min Bounds: 2
Max Bounds: 9998
[New] button…
Name: SmPer
F Chartsy: Fractal Dimension INDICATOR Display Name: Smoothing Periods
Type: integer (with bounds)
For Windows + Mac + Linux Default: 20
The fractal dimension indicator described in the Min Bounds: 1
article by John Ehlers and Ric Way in this issue (“Fractal Dimen- Max Bounds: 9999
sion As A Market Mode Sensor”) is available as an indicator [New] button…
plugin in Chartsy. To install, please go to Tools → Plugins → Name: SmType
Display Name: Smoothing Type
Available Plugins, check it, and click Install. Type: MA Type
You can find the Java source code for this indicator here: Default: Simple
http://chartsy.svn.sourceforge.net/viewvc/chartsy/
branches/Chartsy_1_1_1/Chartsy/Fractal%20Dimen- 4. In the Output Variable(s) tab, create the following vari-
sion/src/org/chartsy/fractaldimension/FractalDimension. ables:
java?revision=158&view=markup [New] button…
A sample chart is shown in Figure 15. An indicator proper- Var Name: Dimen
ties window is shown in Figure 16. Name: (Dimension)
Line Color: dark blue
To download Chartsy, discuss these tools, or help us de- Line Width: slightly thicker
velop other tools, please visit our forum at www.chartsy.org. Line Type: solid
Our development staff will be happy to help & develop your
needs and you can become a Chartsy contributor yourself. 5. In the Horizontal Line tab, create the following horizon-
—Larry Swing tal lines:
(281) 968-2718, theboss@mrswing.com
[New] button…
www.mrswing.com Value: +1.6000
Line Color: red
Line Width: thin
Line Type: dashed
[New] button…
Value: +1.4000
Line Color: red
F VT TRADER: Fractal Dimension INDICATOR Line Width: thin
This tip is based on the article “Fractal Dimension As A Market Line Type: dashed
Mode Sensor” by John Ehlers and Ric Way in this issue.

TRADERS’ TIPS
FIGURE 17: VT TRADER, fractal dimension indicator. Here, the fractal

dimension indicator is attached to a EUR/USD 30-minute candlestick chart.
6. In the Formula tab, copy and paste the following for-

mula:
FIGURE 18: Trading Blox, fractal indicator. Note the difference when the
{Provided By: Capital Market Services, LLC & Visual Trading Systems, LLC}
{Copyright: 2010} market trend persists and when the market oscillates.
{Description: TASC, June 2010 - “Cycle or Trend? Fractal Dimen-
sion As A Market Mode Sensor” by John F. Ehlers and Ric Way} 3. Define the Instrument Permanent Variables: N1, N2, N3,
{File: tasc_FractalDimension.vtscr - Version 1.0}
Ratio, Smooth, Dimen, Line14 and Line16. All IPVs are of
N:= Periods; type “Series” with “Block” scope and a default value of zero,
HalfN:= Int(Periods/2); except for Dimen, Line14 and Line16 (scope: “System,” plot
Smooth:= (Price + 2*ref(Price,-1) + 2*ref(Price,-2) + ref(Price,-3)) / 6;
N1:= (ref(HHV(H,HalfN),-HalfN) - ref(LLV(L,HalfN),-HalfN)) / HalfN; on graph area: “Fractal”).
N2:= (HHV(H,HalfN) - LLV(L,HalfN)) / HalfN;
N3:= (HHV(H,N) - LLV(L,N)) / N; 4. Define the indicator calculations in the “Update Indica-
Ratio:= 0.5 * ((Log(N1+N2) - Log(N3)) / Log(2)+if(Dimen<>Null,D tors” script of the block:
imen,C));
Dimen:= mov(Ratio,SmPer,SmType); '-------------------------------------------------------------------
7. Click the “Save” icon in the toolbar to finish building the 'Trader's Tips June 2010
'Fractal Dimension Indicator by John Ehlers
Fractal Dimension indicator. 'Code by Jez Liberty - Au.Tra.Sy
'jez@automated-trading-system.com
To attach the indicator to a chart, click the right mouse but- 'http://www.automated-trading-system.com/
ton within the chart window and then select “Add Indicator”
→ “TASC - 06/2010 - Fractal Dimension” from the indicator Smooth = (PriceHL + 2*PriceHL[1] + 2*PriceHL[2] + PriceHL[3])
/6
list (Figure 17). 'Calculate N1, N2 and N3 using Highest and Lowest values over
To learn more about VT Trader, visit www.cmsfx.com. different periods
Risk disclaimer: Forex trading involves a substantial risk of loss N3 = ( Highest(Smooth, Lookback, 0) - Lowest(Smooth, Lookback,
0) ) / Lookback
and may not be suitable for all investors.
N2 = 2*( Highest(Smooth, Lookback/2, 0) - Lowest(Smooth, Look-
—Chris Skidmore back/2, 0) ) / Lookback
CMS Forex N1 = 2*( Highest(Smooth, Lookback/2, Lookback/2) -
(866) 51-CMSFX, trading@cmsfx.com Lowest(Smooth, Lookback/2, Lookback/2) ) / Lookback
www.cmsfx.com
if N1 > 0 and N2 > 0 and N3 > 0 then
Ratio = .5*((Log(N1 + N2) - Log(N3)) / Log(2) + Dimen[1])
endif
F Trading Blox: Fractal Dimension INDICATOR Dimen = Average(Ratio,20)
In “Fractal Dimension As A Market Mode Sensor” in this issue, '---------------------------------------------------------------------
authors John Ehlers and Ric Way explain how to calculate the
fractal indicator to recognize the market mode (that is, trend- This code can be downloaded from http://www.automated-
ing or cycling). trading-system.com/free-code/
This indicator can be implemented in Trading Blox using Figure 18 is an example of the fractal dimension indicator
the following steps: applied to a price series in Trading Blox.
—Jez Liberty, Au.Tra.Sy
1. Create a new Auxiliary Blox. Name it “Fractal Dimen- jez@automated-trading-system.com
for Trading Blox
sion Indicator”
2. Define the parameter: Lookback (integer)

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DVD_1227.indd 1 3/22/10 5:09:37 PM

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

Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity
% Margin Trade for Equal
Dollar Profit
Eurodollar Interest Rate CME 0.1 2.1 5 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
3 Mo Euribor Interest Rate LIFFE 0.1 0.9 3 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
Short Sterling LIFFE 0.1 1.4 6 ••••••••••••••••••••••••••••••••
30 Day Federal Funds CBT 0.0 0.1 1 •••••••••••••••••••••••••••••••
3 Yr. Cmmnwlth T-Bonds SFE 0.0 0.5 1 ••••••••••••••••••••••••••••••
Mini S&P 500 Index CME 9.4 21.3 10 •••••••••••••••••••••••••
Crude Oil - Light Sweet NYM 6.5 8.5 4 •••••••••••••••••••••••
DJ Euro Stoxx 50 Index EUREX 6.8 11.5 11 ••••••••••••••••••
Natural Gas NYM 15.1 6.3 3 ••••••••••••••••••
Brent Crude Oil IPE 4.7 6.5 4 ••••••••••••
S&P 500 Index CME 9.4 21.3 2 •••••••••••
10 Yr Treasury Notes CBT 1.3 9.8 17 •••••••••
Gas Oil ICE-EU 4.6 5.0 4 •••••••
Gold 100 troy oz NYM 5.9 13.7 5 •••••••
10 Yr German Euro Bund EUREX 1.5 13.5 13 ••••••
2 Yr Euro Schatz EUREX 0.3 5.0 27 ••••••
Heating Oil #2 NYM 5.9 6.1 3 •••••
2 Yr Treasury Notes CBT 0.5 7.6 18 •••••
FT-SE 100 Index LIFFE 4.8 19.8 12 ••••
5 Yr German Euro BOBL EUREX 0.9 8.0 15 ••••
RBOB Gas NYM 6.4 9.5 4 ••••
CAC-40 Stock Index MATIF 6.2 10.4 8 ••••
5 Yr Treasury Notes CBT 0.9 8.5 20 ••••
Wheat - Soft Red CBT 6.8 4.8 8 •••• CBT Chicago Board of Trade
Mini Russell 2000 CME 5.4 12.0 8 ••• CME Chicago Mercantile Exchange including
Xetra DAX-30 Stock Index EUREX 4.2 9.8 3 ••• the International Monetary Market (IMM)
Corn CBT 7.6 15.6 29 ••• CSCE Coffee, Sugar & Cocoa Exchange, New York
Soybeans 5000 bushels CBT 7.5 16.3 11 ••• EUREX European Exchange, Zurich & Frankfurt
US Treasury Bonds CBT 2.2 22.3 22 ••
IPE International Petroleum Exchange, London
Aust. Share Price Index SFE 4.9 13.6 6 ••
KCBT Kansas City Board of Trade
Mini-Nasdaq 100 Index CME 8.7 17.6 13 ••
LIFFE London International Financial Futures and
Sugar-World #11 CSCE 16.9 31.8 25 ••
Copper NYM 2.7 4.2 4 •• Options Exchange
3 Mo EuroSwiss LIFFE 0.1 1.9 10 • MATIF Marché à Terme International de France
Euro Currency € CME 2.0 10.8 8 • MCE MidAmerica Commodity Exchange, Chicago
Libor 1 Month CME 0.0 0.5 2 • NYCE New York Cotton Exchange
Long Gilt LIFFE 2.1 21.0 14 • NYM New York Mercantile Exchange
Swiss Market Index EUREX 7.3 17.7 10 • SFE Sydney Futures Exchange
Australian Dollar CME 2.6 7.6 8 •
Mexican Peso CME 6.2 6.7 7 •
Cotton #2 NYCE 5.1 7.8 9 •
Silver 5000 troy oz NYM 7.6 14.2 5 •
Japanese Yen ¥ CME 2.8 11.0 7 •
British Pound £ CME 2.2 5.9 7 •
Wheat - Hard Red KCBT 7.6 6.3 8 • 1006
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).
+1006 Futures Liquidity.indd 1 4/22/10 1:58:42 PM

Data Services
TRADERS'
The advent of the Internet has made RESOURCE
available data services of all kinds main-

tained by the vendor. This gives you, the LINKS TOP 10 VIEWED
buyer, a myriad of possibilities when DATA SERVICES
it comes to data, whether by compact
disc, satellite dish, circuit, direct dial, Data Service Company
or Internet. It is now a key issue to sort 1. LiveCharts eSignal
out, of course, when you are investigat- 2. A-Live Quotes Real Time S&P Traders Audio
ing data services, with more details to ponder. On the Futures Squawk Box
one hand, all the data maintenance hassles are taken out 3. eSignal Market Scanner eSignal
of your hands, as opposed to earlier times, when data 4. TeleChart Gold Service Worden Brothers, Inc.
cleansing was a real issue; on the other, the vendor, in its 5. TeleChart for Mutual Funds Data Service Worden Brothers, Inc.
maintenance, may be too casual for your tastes in how 6. eSignal Market-Q eSignal
it maintains the data you are given to use. 7. TeleChart Platinum Service Worden Brothers, Inc.
If you can accept data from several sources, you’re in

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9. MetaStock QuoteCenter MetaStock
10. eSignal OnDemand eSignal
sellers and resellers of data. Keep an eye out for one
with a dedicated staff to clean up the inevitable errors. These are the 10 data services clicked on most often on the Traders’ Resource
website. Each company is listed in order of clicks received. This is not an edito-
Even better is a data service with an automatic refresh rial rating or ranking. For more information on specific products and services, try
procedure that constantly processes corrections to your checking store.Traders.com for archived S&C product reviews.
historical database. After cleanliness, there’s reliability
to consider and, finally, price. Check around and take area of our website, Traders.com. There, you’ll also
advantage of any free trials. find information on other products and services such as
brokerages, publications, software, and more. Just click
Traders’ Resource at Traders.com on the Traders’ Resource link and follow the category
The table of information shown is an excerpt from the link, or use the search feature to find products or services
data service listing available at the Traders’ Resource with specific attributes within the categories.
Company Website Product Years of

historical data
AccuWeather, Inc. www.accuweather.com AccuWeather 30+ years

Acquire Media NewsTrade www.acquiremedia.com NewsTrade None
ADEST www.adest.com.au ADEST Data Services 20 years
AiStockCharts.com www.aistockcharts.com AiStockCharts.com 1992–present, end of day
AlertGuru.com www.alertguru.com AlertGuru.com Varies by ticker
AnalyzerXL LLC www.analyzerxl.com DownloaderXL 6.1.15 None
ANFutures www.anfutures.com ES, NQ, E-RUSSEL, E-MIDCAP, EUROFX, 5 years
J-YEN data
Aronow Software, LLC aronowsoftware.com COTCollector 21 years
ATRADE Investment Technologies, LLC www.findmynexttrade.com ATRADE Online - Visually Simplified Stock Alerts 1 year
Attain Capital Management www.AttainCapital.com www.CTArank.com Not provided
+TR-Data Svcs.indd 1 4/23/10 11:26:21 AM

xx • June 2010 • Technical Analysis of Stocks & Commodities
historical data
b.i.s. Boerseninformationssysteme AG www.bis.de NetBis / WinBis Not provided

Bloomberg www.bloomberg.com Bloomberg Professional Service Not provided
BondsOnline Group, Inc. www.epreferreds.com PreferredsOnline 3 years
Briefing.com www.briefing.com Briefing In Play Plus 10 years
Brightspark www.technifilter.com GEMPRO (Global Equity Manager) 5–15 years
Brite Futures, Inc. www.britefutures.com Brite Futures, Inc. Not provided
Briter Systems, Inc. www.britersystems.com Intra Day and End of Day Data Service 3 years
CallComputeComm Systems www.cot-futures.com Commitments of Traders - On-line charts 1.5 years
CANSLIM.net www.canslim.net CANSLIM.net Stock Alert Reports Not provided
CISCO Futures www.cisco-futures.com Auction Market Data: Market Profile 20+ years
CISCO Futures www.cisco-futures.com Technical Futures Data: Daily prices and ticks 20+ years
CMA Inc. www.cmastation.com TeleTicker Not provided
Commodity Research Bureau www.crbtrader.com CRB DataCenter via Internet 10 years
Commodity Research Bureau www.crbtrader.com CRB InfoTech CD-ROM 100+ years
Commodity Systems, Inc. (CSI) www.csidata.com Unfair Advantage (UA) Up to 80 years
CompuServe www.compuserve.com CompuServe Not provided
DailyAccess Corporation www.dailyaccess.com DailyAccess - Retirement Plan Solutions Not provided
DailyForex.com www.dailyforex.com Forex Reviews and Ratings Not provided
DataView, LLC www.marketgauge.com MarketGauge 1 year
eSignal www.esignal.com eSignal (plus many other data products/services) 10 years
Farm Bureau ACRES www.fbcountry.com Farm Bureau ACRES on the Internet/Satellite Not provided
Financial-edu.com www.financial-edu.com DownloaderXL - Data Downloader for Excel 20 years
Floyd Upperman & Associates www.upperman.com Floyd Upperman and Associates 33 years
Formula Research, Inc. www.formularesearch.com Spreadsheets for Formula Research Timing Models 20+ years
Genesis Financial Technologies www.GenesisFT.com Genesis Financial Data 30+
GTS Research www.GTSResearch.Net iTrade 10 years
Hammerstone NV hammerforum.com Hammer’s Institutional Forum Not provided
Hedge Fund Manager Research Corp., The www.hedgefund-index.com The Hedge Fund Consistency Index Newsletter 15 years
HyperTrader Tech, LLC www.hypertrader.it NetTrader 10 years
InstantCharts www.instantcharts.com IC Market Scanner Not provided
Interactive Data Corporation www.interactivedata-rts.com PlusFeed Not provided
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SUGGESTED READING
Looking for a deeper background in trading? Here are a few classics Hill, John [1977]. Stock & Commodity Market Trend Trading By
and standards on technical analysis.—Editor Advanced Technical Analysis, Commodity Research Institute:
Hendersonville, NC.
Achelis, Steven B. [2000]. Technical Analysis From A To Z, 2nd ed., Hurst, J.M. [1970]. Profit Magic Of Stock Transaction Timing, Prentice-
McGraw-Hill Trade. Hall.
Arms, Richard A. [1989]. The Arms Index: An Introduction to the Hutson, Jack K., David H. Weis and Craig F. Schroeder [1991]. Charting
Volume Analysis of Stock and Bond Markets, Dow Jones-Irwin. The Stock Market: The Wyckoff Method, Technical Analysis, Inc.
Bollinger, John [2001. Bollinger On Bollinger Bands, McGraw-Hill. Kaeppel, Jay [2000]. The Four Biggest Mistakes In Option Trading,
Bulkowski, Thomas [2005]. Encyclopedia Of Chart Patterns, 2d ed., Traders’ Library.
John Wiley. Kaufman, Perry J. [1995]. Smarter Trading, McGraw-Hill.
_____ [2002]. Trading Classic Chart Patterns, John Wiley & Sons. _____ [2005]. New Trading Systems And Methods, 4th ed., John Wiley
Chande, Tushar, and Stanley Kroll [1994]. The New Technical Trader, & Sons.
John Wiley & Sons. LeBon, Gustave [1995]. The Crowd, Isis Large Print.
Cohen, A.W. [1987]. How To Use The Three-Point Reversal Method Of LeFèvre, Edwin [1994]. Reminiscences Of A Stock Operator, John
Point & Figure Stock Market Timing, 9th edition, Chartcraft Inc. Wiley & Sons. Originally published in 1923.
Colby, R.W., and T.A. Meyers [2003]. The Encyclopedia Of Technical MacKay, Charles [1995]. Extraordinary Popular Delusions And The
Market Indicators, 2d ed., McGraw-Hill. Madness of Crowds, Crown Publishing.
Connors, Laurence A., and Linda Bradford Raschke [1995]. Street Meyers, Thomas [2002]. The Technical Analysis Course, 3rd ed.,
Smarts, M. Gordon Publishing. McGraw-Hill.
Edwards, Robert D., and John Magee [2007]. Technical Analysis Of Morris, Gregory L. [2006]. Candlestick Charting Explained, 3rd edt.,
Stock Trends, 9th ed., W.H.C. Bassetti, ed. AMACOM. McGraw-Hill.
Ehlers, John F. [2002]. Mesa And Trading Market Cycles, 2d ed., Murphy, John J. [1999]. Technical Analysis Of The Financial Markets,
John Wiley. New York Institute of Finance.
_____ [2001]. Rocket Science For Traders, John Wiley & Sons. Nison, Steve [1991]. Japanese Candlestick Charting Techniques, New
Fosback, Norman G. [1985]. Stock Market Logic, The Institute for York Institute of Finance/Simon & Schuster.
Econometric Research. O’Neil, William J. [2009]. How To Make Money In Stocks, 4th ed.,
Frost, A.J., and Robert Prechter [2005]. Elliott Wave Principle, 10th McGraw-Hill.
ed., New Classics Library. Pring, Martin J. [2002]. Technical Analysis Explained, 4th ed., McGraw-
Gann, W.D. [1942]. How To Make Profits In Commodities, Lambert- Hill Book Co.
Gann Publishing Co., Pomeroy, WA. Pruden, Hank [2007]. The Three Skills Of Top Trading: Behavioral
_____ [1976]. The Truth Of The Stock Tape, Lambert-Gann Publishing Systems Building, Pattern Recognition, And Mental State
Co., Pomeroy, WA. Management, John Wiley & Sons.
_____ [1927]. Tunnel Through the Air, Or Looking Back From 1940, Rhea, Robert [1962]. The Dow Theory, Rhea, Greiner & Co.
Lambert-Gann Publishing: Pomeroy, WA. Schwager, Jack D. [1989]. The Market Wizards, New York Institute of
Gartley, H.M. [1963]. Profits In The Stock Market, Lambert-Gann Finance/Simon & Schuster.
Publishing Co. _____ [1999]. Getting Started In Technical Analysis, John Wiley &
Graham, Benjamin, and David Dodd (originally); Sidney Cottle et al. Sons.
(5th ed.) [1988]. Graham & Dodd’s Security Analysis, 5th edition, Schwed, Fred, Jr. [1995]. Where Are The Customers’ Yachts? or A Good
McGraw-Hill. Hard Look At Wall Street, Wiley Investment Classics. Originally
Granville, Joseph E. [1976]. A New Strategy Of Daily Stock Market published in 1940.
Timing For Maximum Profit, Prentice-Hall/Simon & Schuster Sweeney, John [1996]. Campaign Trading: Tactics And Strategies To
Professional Publishing. Exploit The Markets, John Wiley & Sons. S&C

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A Trader’s First Reminiscences The Stock
Book On Com- Of A Stock Op- Market Cycles
modities (244 erator With New (144 pages,
pages, $34.99 Commentary $37 paperback,
hardcover, 2010, And Insights 2009, ISBN 978-
ISBN 978-0-13- On The Life And 097925721-6)
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as FT Press. You can make large profits 48159-2) by Edwin LeFèvre, annotated by major long-term
from trading commodities — but you’ll need Jon D. Markman, with a foreword by Paul cycles that gov-
significant practical knowledge of the associ- Tudor Jones, published by John Wiley & ern stock market behavior and dictates the
ated risks and market characteristics before Sons. This book is physically larger than future course of the economy. This work is
you start. That’s where this book comes in. most and printed in a two-column format. The all about how certain yearly cycles deter-
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trades. It also demystifies the industry’s story of trader Jesse Livermore like never the US survive the upcoming 120-year cycle
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is growing in popularity. The author uses ness Plus, an trading is safer than direct stock purchase.
the model of climbing a mountain to explain imprint of Grand Central Publishing, a division The author analyzed different strategies
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1006 Books for Traders.indd 1 4/23/10 12:51:55 PM

AT THE CLOSE
Continued from page 97 Fundamental rules of a trading plan
1 Protect and preserve capital
trading rules are the guidelines that must be met when any
action is taken. 2 Trade only with the main trend or the major correc-
The success of W.D. Gann’s trading ability was to pre- tions to that trend
pare in advance when to enter and exit a trade. A study of
3 Trade only when proven trading rules indicate that
his methods and rules and the proper application to time,
action can be taken
price, and pattern analysis will allow the trader to prepare
in advance for major trend changes and help identify a trend 4 Act only when:
change as it develops. This will allow you to enter the market
a A coincidence of time, price, and pattern analy-
at or near the change in the trend with minimum exposure.
sis shows a trend reversal or the termination or
Each individual trader must prove to their own satisfaction
correction to the trend
that all the rules they choose are valid, and then follow those
rules religiously. Success is then inevitable, and losses will b The market confirms the continuation of a
be small and few. A rule of thumb: if you have three con- trend
secutive losses, then stop trading for a while and review your
5 Let the market take you out of a position by a trailing
trading plan and trading rules.
stop unless the intermediate- or long-term time, price,
Discipline and patience are the two most important quali-
and pattern analysis indicates a major trend reversal.
ties for a successful trader. Always adhere to the rules and
only change them when you have three consecutive losses.
Gann stated that all successful traders had a healthy fear
Risk and the preservation of capital
The amount of exposure that is acceptable in any trade is a
of the market — that is, the fear of losing capital. You should
function of the capital available and the probability of suc-
never be afraid of taking a loss, because that is part of your
cess as determined by trading rules. Always:
trading plan. Small, infrequent losses are an inevitable part
of the business, and being afraid to take a loss indicates a n Place a stop-loss order immediately once a trade
lack of confidence in your trading plan and a lack of disci- has been entered
pline to take the needed action. If you follow all your rules
all the time, your success is ensured. n Advance the stop as the market advances to protect
According to Gann, the objective of any trading plan profits that have accumulated.
should be to be right more often than wrong, and to limit
losses and maximize profits by going with the flow and tak- Finally, W.D. Gann wrote, “The big money is made by
ing all that is offered. If the market does not move after you following the main trend or big swings and not changing
have entered a trade, get out and wait for a definite trend to position and taking profits until the market shows by its own
show itself. action that the trend has changed … when you learn the rules
and follow them, you eliminate trading on hope, fear and
guesswork, which is nothing but gambling.”
In conclusion, he wrote: “Remember that it is your mis-
takes that cause losses and not the action of the market …
therefore, strive to follow rules or keep out of speculation
else you are doomed to failure.”
Koos van der Merwe has been a technician since 1969 and
has worked as a futures trader and finally as a technical
analyst with a stock brokerage firm in Johannesburg, South
Africa. Currently, he acts as a consultant for a fee of $1,
a charge he believes is necessary because free advice usu-
ally does not carry much weight. He may be contacted at
petroosp@gmail.com.
Suggested reading
Gann, W.D. [2009]. The W.D. Gann Mas-
ter Commodities Course, snowball-
publishing.com. Reprint.
“Give me something that will

S&C
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AT THE CLOSE
Continued from page 98 people willing to pay a high or higher price until they expect
the price will no longer increase. Further, he stated that the
to the highest bidder. My friend went to look, intending to price activity of a stock was dependent on the optimism or
place a bid, but after spending a few hours looking through all pessimism of the public for the value of the stock or com-
the papers and studies, he could not find the secret to Gann’s modity sometime in the future.
success. He did not place his bid and left as confused as when Today we know this as mass psychology. Where price and
he entered. time are exact and precise, mass psychology is not. How
W.D. Gann was 31 when, in October 1909, in the presence the human mind interprets and reacts to input may change
of witnesses, in 25 market days he made depending on the perception of what that
286 transactions in various stocks on input implies. Hence we have the best
both the long and short side of the mar- investors in the world, investors such as
ket. Of these transactions, 264 resulted in Warren Buffett and George Soros, who
profits and 22 in losses. No one is sure interpret natural laws more correctly than
which of the many trading techniques most and thus profit the most.
Gann developed to achieve what he did,
long before computers were devised, but Mathematics
it seems to be a universal truth that the According to Gann’s theory, all the results
secret to Gann’s success was hard work and causes in nature can be expressed in
and the confidence to put the knowledge mathematical terms. We see this in the use
that he gained into action. of Fibonacci targets and corrections, and
Gann’s trading style involved all mar- in Elliott wave theory, the measurements
ket aspects and dimensions. His methods and corrections of the various waves.
indicated that he believed that the dimen-
sions of time, price, and pattern were in- Vibration
terrelated and vital to his strategies; one W.D. Gann interpreted vibration as the
dimension cannot be taken out of context “rate of change over time.” He stated that
with the others. All three work together a vibration is an event that repeats itself,
as one unit: whether at regular or irregular intervals; he stated that there
is a consequence or effect from every cause or action taken.
n Time. Time is the most important aspect of the Simply, price oscillates over time and either goes up or down
market. Were a trader able to determine the exact over a time period. The law of vibration tells you only that
time of a cyclical change or trend reversal in the change is constant and inevitable.
market, tremendous profits could be made. Gann became a success in the business of speculation be-
n Price. Price is the most common factor used by cause:
traders. Most trading systems use price alone to n He believed that the market was subject to the natu-
develop their trading rules, but Gann was of the be- ral laws of cause and effect and vibration
lief that price activity by itself was not acceptable.
Instead, he was of the opinion that price is just one n The reflection of these laws was time and price ac-
aspect of the whole system. tivity
n Time and price can be represented by mathematical
n Pattern. Gann was an expert at price pattern recog-
principles and relationships, and
nition, understanding how the pattern was unfold-
ing related to the time and price factors. n The study of time and price activity of the markets
would uncover the consistent and predictable rela-
An expert in Elliott wave analysis or candlestick patterns tionship in time and price activity.
could use any of these techniques as the patterns need. For
Gann’s methodology to work, time, price, and pattern fac- Price rules
tors must all occur simultaneously to indicate that a change W.D. Gann practiced the following rules in regard to price:
is likely.
1 You should analyze the major and minor price swings
for at least the previous 10 years of any market you
Natural laws
are interested in trading. Note those ratios of retrace-
Gann stated that every movement in the market is “the re-
ments and trend swings that occur most frequently; in
sult of natural laws, and of a cause which exists long before
particular, any ratios particular to that market. Note if
the effect takes place.” He wrote that a law indicated the
there are any ratios peculiar to just bull or bear mar-
certainty of an outcome, with precise predictability; that the
kets.
direction of price activity is the result of the expectations of
+Merwe At the Close.indd 2 4/28/10 9:50:26 AM

AT THE CLOSE
2 Retracements or projections of a trend swing will
terminate at or near one of the proportions of past The trading plan is a fundamental set of
price swings.
rules that guide your activity in trading.
3 Support and resistance levels are often found at the
divisions or multiples of extreme highs and lows cal-
culated over at least the previous decade. high volume usually indicates that the support or re-
4 Support and resistance is often found at divisions and sistance level is not effective and will be broken.
multiples of the squares of 144, 90, and 52 from im-
portant highs and lows. Price levels 15 Support or resistance levels are of-
calculated from these squares should ten found at swing highs or lows.
only be used for confirmation, not as 16 A normal bull market will usually
an indicator. advance above the 1x1 angle. A
5 Support and resistance is often found strong market will advance above
at Fibonacci levels, from important the 1x2 angle. In the case of the
highs and lows. In today’s comput- latter, should the market fall be-
erized world too many traders use low the 1x1 angle, a trend change
these levels, so always place yours is signaled.
at slightly above or below. 17 When a price closes above an
6 Major or minor reversals are most angle, the price should continue
likely to occur at price zones where to the next angle. This should
there is a cluster of potential sup- provide a minor support and resis-
port or resistance prices by several tance level unless the market is in
differing projection methods. a panic swing.
7 Always maintain a price alert of the 18 If the price level is in the third
major price levels that are support section in the direction of a main
or resistance levels. trend, a reversal is likely. If the
market is in the first or second sec-
8 A strong market will usually not re- tions, you may add to a position
trace more than 38% of a swing in the direction of on any correction.
the main trend. In a normal market, the retracement
should never exceed 61.8%. Trading plan and rules
9 A 50% retracement is the most frequent level where The trading plan is the fundamental set of rules that guide
retracements terminate in all markets. your activity in the business of trading and speculation. The
10 A bull market is a market that makes consecutively

Continued on page 93
higher highs and higher lows. A bear market is a market
that makes consecutively lower highs and lower lows.
11 In a bull market, once a price closes above the prior
swing high, a continuation of the main trend is likely.
Once the price has closed below the prior swing low,
the bull market is likely at or near termination and a
reversal to a bear market or at least a consolidation/
distribution phase is likely to unfold.
12 Whenever the percentage retracement of a trend
swing exceeds the percentage retracement of a prior
trend swing, an overbalance of price is the result.
This is an indication that the trend is near a termina-
tion or has likely terminated.
13 Always expect some lost motion at important sup-
port and resistance levels.
14 Note the activity of a price as it approaches an im-
portant support or resistance level. A fast move on

AT THE CLOSE
Gann Charting Essentials

Here are the basics of a traditional charting technique that Gann called the 1x1 or the 45-degree angle, represented one
JOSE CRUZ
can still be implemented in the modern financial markets. unit of price for one unit of time. If you draw a perfect square
and then draw a diagonal line from one corner of the square
W.D.
Gann, who was born in 1878, developed market to the other, you have illustrated the concept of the 1x1 angle,
forecasting methods based on geometry, astrology, which moves up one point per day.
and classic mathematics. Gann extensively used But what system did Gann use to trade the market? It was
angles in the stock market in his work. A Gann angle is a de- reported that he became a billionaire trading the market us-
rivative of a specific line on a chart. Each geometrical angle ing his various strategies, but is that true? Were his theories
(which is a line extended into space) divides time and price truly what made him a billionaire, or was it all a piece of
into proportionate parts. The most important angle, which fiction? A friend of mine told me that in 1955 when Gann
died, Gann’s widow put the contents of his study up for sale
by Koos van der Merwe Continued on page 96


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