Looking Forward Combining Rsi & Rsi Making A Good System Great Chart Analogs Interview Product Reviews

THE TRADERS’ MAGAZINE SINCE 1982
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Looking forward
Using yesterday’s action 10
combining rsi & rsi

Minimize risks 16
making a good
system great
Evaluating a trading system 24
CHART ANALOGs
History repeats 36
INTERVIEW
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CONTENTS JANUARY 2011, Volume 29 Number 1
10 Looking Forward With 36 Chart Analog Scenarios

Yesterday’s Action by Sam Whitehill
by Anthony Trongone Technical analysis is based on his-
Can you determine how prices will tory repeating itself, not just over a
move after looking at yesterday’s few months but over a few decades.
price action?
40 Explore Your Options
FEATURE ARTICLE TIPS
by Tom Gentile REVIEW, website
16 Combining RSI With RSI Got a question about options?
48 • Bloomberg For The iPad
by Peter Konner Review: iPad app for
Optimization and stop-losses can INTERVIEW Bloomberg News
help you minimize risks and give 42 Curtis Faith And
you better returns. Trading From Your Gut 52 • Pristine Pattern Method Scan
Review: Plugin for MetaStock
by Jayanthi Gopalakrishnan and
22 Breakway Gaps Bruce Faber
by Kenneth Gilliland One of the original Turtles, Curtis DEPARTMENTS
There are many different types Faith earned more than $30 mil- 6 Opening Position
of gaps, but this one provides the lion in his early 20s. Since then, 8 Letters to S&C
best risk–reward ratio. he’s founded successful technical
startups and developed a “whole
54 †Traders’ Glossary
mind” approach to trading. 60 Trade News & Products
24 Making A Good System Great 64 Traders’ Tips
by Donald W. Pendergast Jr.
FOREX FOCUS 72 Traders’ Resource
Once you have a trading system,
you still need to evaluate it. 56 TCA The US Dollar And 74 Advertisers’ Index
Precious Metals 74 Editorial Resource Index
31 Q&A by Donald W. Pendergast Jr. 76 Books for Traders
by Don Bright Playing the US dollar versus the 77 Futures Liquidity
This professional trader answers precious metals market dynamic 78 Classified Advertising
a few of your questions. is one of the highest-probability
trading games around. This is
especially significant at major
32 WM Follow The Market Herd trend reversals. Will the significant
With Elliott Wave support area near 76.00 even hold,
by Ryan Henry much less act as a reversal point?
If we can figure out what hap-
pened in the past, we can figure AT THE CLOSE
out what could happen in the
future.
82 Beating Emotion
by Brandon VanLandingham
So what can be done to help mini-
35 Futures For You mize emotion within our trading?
by Carley Garner The answer is in our trading process.
Here’s how the futures market
really works.
This article is the basis for Traders’ Tips
TIPS
this month.
TCA WM
These articles – and articles like them – n Cover art: Roy Weimann
can be found online at www.traders.com n Cover concept: Christine Morrison/Roy Weimann
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 • January 2011 • Technical Analysis of Stocks & Commodities
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January 2011 • Volume 29, Number 1
March 2006 • Volume 24, Number 3 O
Opening Position
PENING POSITION
The Traders’ MagazineTM

The Traders’ Magazine TM
I
EDITORIAL
EDITORIAL
editor@traders.com
editor@traders.com
Editor in Chief Jack K. Hutson
O
Editor in Chief Jack K. Hutson
Editor Jayanthi Gopalakrishnan f the behavior of the financial markets
in 2010 is anywe indication of what we of can
Editor Jayanthi Gopalakrishnan
Managing Editor Elizabeth M.S. Flynn
Managing Editor Elizabeth M.S. Flynn
nce again got a reminder just
Production ManagerKaren
ProductionManager E.E.
Karen Wasserman
Wasserman expect in 2011, I think it is safe to say that we
how sensitive the financial markets
DirectorChristine
ChristineMorrison can
are.putWethe buy & holdselloff
approach on Japanese
the back
Art
ArtDirector Morrison saw a major in the
Graphic DesignerWayne
GraphicDesigner Shaw
burner. Does that mean short-termtriggered trading isa
Sharon Yamanaka
Staff Writers
Editorial Dennis
Intern D. Peterson,
Emilie Rommel Bruce Faber
markets, which — as expected —
Webmaster Han J. David
Technical Writer Kim Penn the way toeffect
domino makeonanymarkets money throughout
in the markets the
Contributing DennisJohn
Staff WritersEditors
Anthony W. Warren, Ph.D.
Ehlers, Bruce Faber
D. Peterson, right now? There’s no guarantee that trading
world. Add disappointing earnings numbers
Webmaster Han J. Kim
Contributing EditorsDon
ContributingWriters Bright,
John Thomas
Ehlers, KevinBulkowski,
Lund,
infromthe USshort term will and
corporations generate
you have acceptable
a situa-
Martin Pring,
Anthony W. Barbara
Warren, Star
Ph.D. returns, especially since it’s common belief
tion that just got worse. So what started off as
Contributing Writers Don Bright, Thomas Bulkowski,
Martin Pring, Adrienne Toghraie
that most short-term traders lose money. We
a strong year ended up correcting, and rather
OFFICE OF THE Publisher need
rapidly.to find some
I must sort of
admit thatreliable
although method
correc-in
Publisher Jack K. Hutson
OFFICELinda OFEades
THEGardner
PUBLISHER
these unstable times.
tions are healthy for any market, when you have a 2% drop, it gets you thinking.
Unfortunately, there Reserve’s
is no one-size-fits-all strategy. So a take
goodastrategy wouldyieldbe
Credit Manager
PublisherEngineer
Industrial Jason K. Hutson
Jack K. Hutson Prior to the Federal FOMC meeting, I usually look at the
Engineer Sean
Credit Manager
Project LindaM.
Industrial Engineer
Moore
Eades Gardner to have a collection of trading systems, either systematic or discretionary, that you
curve. At present, it’s looking a little flat, and given that the general consensus
are confident
the Fedwill give you the returns youJanuary
are looking for. But keep I amin mind that
Accounting AssistantJason K.Moore
Karen Hutson
Project Engineer Sean M. Moore is that is going to tighten at their 31st meeting, concerned
Controller Mary K. Hutson
Accounting Assistants Jane Leonard
those systems need to be unique to you. Don’t just blindly follow someoneifelse’s
that the yield curve may be heading in the direction of being inverted. And that
Controller Mary K. Hutson
Advertising Sales trading system. It is extremely important that you fully understand the systemnot
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WEBSITE (available atstarting on page
our website), 22, addresses
I encourage youthe
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understand options that are and
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on
Staff membershttp://www.traders.com
may be emailed through the Internet how you can take advantage of them.
the securities you wish to trade and the time frame you wish to trade. Only then
usingmembers
first initialmay
plusbe
lastemailed
name plus @traders.com
willBut youbefore
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if the placing that trade,of theyou needistosomething
system understandyou the
Staff through the Internet
using first initial plus last name plus @traders.com
market you are trading. You should be able to do so after
are comfortable with. Further, this is an excellent way to perform an out-of-sample reading Paolo Pezzutti’s
Authorization to photocopy items for internal or personal
use,Authorization
or the internto al photocopy
or personalitems use for of internal
specific or clipersonal
ents, is
“Understanding
test, since it givesMarketyou an Structure.”
opportunityThe marketsyour
to compare follow different
results behavior
with the publishedpat-
granted
use, orby theTech nical Anal
internal ysis, Inc.use
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of specific clients,withis terns, and you need to determine if it is volatile, trending, in
ones. If your results aren’t exactly what you would like them to be, it isn’t the end a trading range, moving
the Copyby
granted right Clearance
Technical CenterInc.
Analysis, (CCC) Transactional
for users registeredRe- with
porting Service,Clearance
the Copyright provided Center
that the(CCC)
base fee of $1.00 perReport-
Transactional copy, strongly
of the world.in one
Think direction, or opportunity
of it as an moving but to notmodify
with much momentum.
the system so it is more in line
plus 50¢ perprovided
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Only when you know what the structure of the market is fully you be able to
satisfied, apply
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that have been grantedFor a the correct trading technique. But that’s just the first step. You still have to have
it again. Repeat this process till you are happy with the way the system performs.
Danvers, MA 01923. Online:
photocopy license by CCC,
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This is what will make the system unique to you. after reading this month’s Technical Analysis of
tional Reporting
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The markets are constantly evolving, and whatever trading system you use should
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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 & Commodities, June 2010), really
relating to technical analysis and this magazine. This column is our means of communica- superb; a most useful brief of Gann’s
tion with our readers. Is there something you would like to know more (or less) about? work, which still applies today. I read
Tell us about it. Without a source of new ideas and subjects coming from our readers, this a lot but can’t read everything, so a
magazine would not exist.
summary of books like this is always
Address your correspondence to: Editor, Stocks & Commodities, 4757 California Ave.
welcome. Does he have any other articles
SW, Seattle, WA 98116-4499, or email to Editor@Traders.com. All letters become the
property of Technical Analysis, Inc. Letter-writers must include their full name and address like this one?
for verification. Letters may be edited for length or clarity. The opinions expressed in this Andrew
column do not necessarily represent those of the magazine.—Editor
Koos van der Merwe replies:
Thank you for the compliment. I write
SUSPECT TRENDS momentum remains and nobody wants to for Traders.com Advantage (an online
Editor, sell what they have or short sell the stock. publication by the same publisher as
I just finished reading In this way, price moves higher, volume this magazine) weekly giving my market
L.A. Little’s article “Price decreases, and the process continues until views and applying both Elliott wave and
And Volume Disconnect” the supply/demand equation changes — Gann analysis. I also submit articles as
in the November 2010 in other words, the price reaches such a often as I can to this magazine, many
issue of Stocks & Com- level that additional sellers are willing to of which you can read in past issues. I
modities. I have a general question I part with their shares and to do so more understand that the editor is considering
was hoping he could answer for me. (I aggressively. That is when the tide finally publishing an update to my April 2010
loved the article, by the way.) turns and the retrace begins. article on Kondratieff waves.
While I completely understand his In general, the markets are dynamic Should you have any questions regard-
reasoning behind identifying disconnects and they are in an endless state of at- ing the movement of the market, you are
between price and volume as well as how tempting to discover the correct price. welcome to contact me.
to act when a suspect trend is spotted, I My attempt to distinguish between sus-
was hoping he could speak to why such pect and confirmed trends is predicated Editor: For those interested, here is a list
situations sometimes arise in the first upon the desire to understand the supply of recent articles by Koos van der Merwe
place. I know it’s a loaded question and and demand balance at critical points in Stocks & Commodities:
I don’t expect a lengthy response, but on the chart and to provide a trader’s • “Trading Forex, Technically” (January 2010)
I’m curious as to what might trigger a edge on the likelihood of a continuation • “Kondratieff Wave Comeback” (April 2010)
suspect trend. I would be happy to do or a reversal. • “Gann Charting Essentials” (June 2010)
further reading if he had any recom- • “Projecting Price And Time With Gann Fans
mendations. Gann METHODS And Angles” (July 2010)
Dave Editor, • “Gann And The Time Factor” (August 2010)
I really enjoyed the se- • “Less Stress With The JM Internal Band”
ries of articles on Gann (December 2010)
L.A. Little replies:
Suspect trends are a natural occurrence, techniques contributed Here are some recent articles by Koos van
in my opinion. They are part of the natural by Koos van der Merwe der Merwe that appeared in our online
ebb and flow of the market. In the cur- over this past year in Stocks & Com- publication, Traders.com Advantage:
rent market environment, there is less modities. I would love to learn more
• “Are My Elliott Wave Counts Too
overall interest in stocks as a result of about Gann’s methods. Could the author Conservative? You Decide” (11/18/10)
the lingering worries about the future suggest some further reading? • “What Now, Dow? Looking For Our Strategy”
that are predicated on the 2008 financial Gary (11/15/10)
debacle. Those concerns do not disappear • “LivePerson Buy?” (11/10/10)
quickly, and despite a rise in the market Koos van der Merwe replies: • “SNC-Lavalin Group” (11/08/10)
of tremendous percentages, the concern A good book to start with is Gann Made • “The Wave 4 Correction” (11/04/10)
remains for a subsequent fall along the Easy by William McLaren and Matthew
lines of 2000 and 2008. J. Foreman (Traders Press). THINKORSWIM CODE?
That’s a big-picture explanation. On Editor,
a more micro level, the ebb and flow GANN CHARTING ESSENTIALS I really like your magazine. I’m wondering
could simply be an extended stock, or a Editor, if there are plans to include Thinkorswim
general market where the larger buyers As a stock and bond trader code as a regular supported platform?
discontinue purchases because the stock in the US markets, I found Rajeev
or index has moved too far too fast. Koos van der Merwe’s
Volume decreases as a result of their article, “Gann Chart- See also the next letter and reply.—
absence, but price pushes higher because ing Essentials” (Stocks Editor
+Letters 1101.indd 1 11/24/10 9:19:57 AM

LETTERS
Metatrader 4 code?
Editor,
Do you ever publish MetaTrader 4
code in your Traders’ Tips section?
I am interested in Ron Black’s Clear
method described in your September
2010 issue.
Cliff Dominy
Unfortunately, neither Thinkorswim

nor MetaQuotes Software (developer
of MetaTrader) are currently providing
code for our Traders’ Tips section.
Sometimes, when our authors use a
particular software platform, they will
provide code for that platform with their
articles.—Editor
ERRATA: WINNING THE BATTLE

OF THE GRAINS
Editor,
In your November 2010 issue, on page
18, Figures 3 & 4 refer to “short/short
spreads” — I believe that should have
read “long/short spread.”
MP
Thank you for pointing out this error.

It should have read, “short December
corn/long December wheat spreads.”—
Editor
ERRATA: DECEMBER 2010

TRADERS’ TIPS
In our December 2010 Traders’ Tips
section, we inadvertently left out the
contribution from MetaStock. Readers
will find the December 2010 Traders’
Tip for MetaStock on the topic of the
Hull moving average at our website,
www.Traders.com. We apologize for
this omission.
To access the Traders’ Tips area at our
website, use our site’s search engine, or
visit the back issues archive.
S&C For more information, visit the S&C ad index or circle No. 6
January 2011 • Technical Analysis of Stocks & Commodities • 9
+Letters 1101.indd 2 11/23/10 7:23:55 PM

TRADING TECHNIQUEs
Hindsight For Foresight
Looking Forward
With Yesterday’s Action
Can you determine how prices will move after looking at For instance, after the Spy produces a trading day advance
ROY WEIMANN
yesterday’s price action? This analysis measures price of 2.5%, how does it perform one, two, or three days after this
movement on the S&P 500 Spdr exchange traded fund for upside rally? Are these results comparable over the next three
the next three days. days? Does a 1.5% run to the upside respond differently, or
is it more profitable to purchase the Spy after it experiences
by Anthony Trongone, PhD, Cta, Cfp less of an upside move? Are these results likely to hold for a
No
large, moderate, or small downside loss?
matter how you finish the trading day, knowing how Success comes from playing the percentages; by making an
the market will perform over the next few trading days assessment of the existing trading environment; performing
can provide you with a competitive advantage. How your analysis; and formulating your trading decisions without
can you do it? You can run an analysis that measures emotional distractions. Nevertheless, it is difficult to put the
the results of the next three days after the Standard & percentages on your side without knowing how the equities
Poor’s 500 depositary receipt (Spdr) exchange traded market performs after a range of moves.
fund (Spy) experiences a price movement. Getting this information and using it effectively can sepa-
+1101 Trongone NEW.indd 1 11/24/10 4:10:12 PM

rate an unexceptional performance from an POSITIVE TRADING DAYS
excellent one. At or above 2.00% Always be
The spiders
1.01 to 1.99% cautious of
0.01 to 0.99%
The Spy (also known as the “spiders”), with the bear.
NEGATIVE TRADING DAYS
an average daily trading volume of 242 mil-
-0.01 to -0.99%
It often
lion shares, outpace the market in the Etfs invalidates
-1.01 to -1.99%
category. As the most active instrument, the
spiders offer the best representation of investor
At or below -2.00% the results of
psychology. With extremely active pre- and Figure 1: positive vs. nega- any trading
aftermarket trading volume, the spiders are an tive days. Here are the daily price
movements of the spiders broken into
system.
attractive trading choice, since it normally has six categories, with two brackets,
just a penny difference between the bid and separating positive from negative
the ask prices. This liquidity is an important trading days. companies, which embodies two-thirds of
feature because few instruments offer the the total value of all US stocks, by going to
investor a reasonable bidding price to buy or asking price to www.sectorspdr.com.
sell outside of the regular trading session. To complete this analysis, I break the daily price movements
This Etf allows investors to participate in the collective of the spiders into six categories with two brackets, separating
intraday performance of the 500 companies in this popular positive from negative trading days (Figure 1).
index; however, it trades with the precision of a single se- Before you begin studying a particular trading system,
curity. Besides tracking these companies, it has an almost always assess the market environment for those days under
perfect correlation with the S&P 500 futures, which offers us investigation. A line chart of the 366 trading days in Figure 2
another advantage because you can actively trade this futures illustrates a steadily rising market with two perceptible cor-
contract as a replacement for the spiders during the day or the rections. These “bookend setbacks” occur at the opening of
night. This mini contract (ES) trades internationally around trading on January 2, 2009, when the spiders stood at $90.44.
the clock at a dazzling speed with small differences between They promptly began falling, hitting a price of $67.10, before
the bid/ask price. they turned and eventually ran up to $121.81. The analysis
In addition to these advantages, it also has complete trans- runs for six quarters, ending on June 30, 2010, at a closing
parency. You can obtain a comprehensive listing of these price of $103.22.
SPY (SPDR S&P 500 TRUST, D) Dynamic, 0:00-24:00 (delayed)
Volume
eSIGNAL
2009 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2010 Feb Mar Apr May Jun Jul
Figure 2: a rising market with two corrections. During these six quarters of trading, the spiders, despite a few setbacks, had an impressive upside run; the
results of your analysis should reflect this reality.

TRADING TECHNIQUES
AVERAGE AVERAGE DAILY $ RESULTS TOTAL $ RESULTS FOR EACH CATEGORY

TRADING DAY TRADING 1st 2nd 3rd
PERCENTAGE TRADING VOLUME IN trading trading trading 1st trading 2nd trading 3rd trading
CHANGE DAYS MILLIONS day day day day day day
At or above +2.00% 31 319m -$0.490 -$0.236 $0.148 -$15.20 -$7.31 $4.59
1.00 to 1.99% 49 224m $0.287 -$0.018 -$0.428 $14.08 -$0.89 -$20.99
0.01 to 0.99% 129 202m -$0.014 $0.145 $0.106 -$1.79 $18.72 $13.73
-0.01 to -0.99% 90 223m $0.002 -$0.004 $0.063 $0.22 -$0.32 $5.66
-1.00 to -1.99% 44 279m $0.128 -$0.011 $0.105 $5.63 -$0.50 $4.63
At or below -2.00% 33 362m $0.208 -$0.011 $0.054 $6.86 -$0.35 $1.78
FIGURE 3: DIFFERENCES IN TRADING VOLUME. This table breaks the 366 trading days down into six categories. After falling into either a positive
or negative percentage change category, it shows how the spiders perform over the next three days. For instance, after recording a daily advance of
≥ 2% on the next trading day, the spiders fell $15.20 in 31 trading days, leaving investors with an average daily loss of 49 cents per day.
Y 2011 • Technical Analysis of STOCKS & COMMODITIES magazine
DIFFERENCES IN TRADING VOLUME of 2% or more, the spiders sprang
ntact Karen Moore with approval or changes:
Figure 3, which provides the percentage change in the daily back the next day, flattened out
price of the spiders, is broken down into three advancing (top the day after that, and rallied
half) as well as three declining (bottom half) categories. When again on the third day.
06) 938-0570 • fax: 206-938-1307 • email: KMoore@Traders.com
comparing trading volume across each category, a negative
day has more activity in comparison to a positive trading day STRONG PERFORMANCE Above 2.00%
within the same price change bracket. (≥ 2% ADVANCE)
PROOF #2 After a stellar performance in
COMPARISONS AFTER ONE TRADING DAY evaluating the average results,
In Figure 4, the three red arrows point to the three-day direction this category gave us two days
of price movements of each category. After experiencing a loss of corrections. The next trading 1.01 to 1.99%
day, the spiders had its largest
daily decline (-49.0 cents). These
Safe and Secure since 1992 31 days had a losing record (13
advances versus 18 declines =
Bright Trading, LLC 0.419), but more discouraging
mAkE 2011 YOUR YEAR!!! 0.01 to 0.99%
was the mismatch between the
one day it rose above a dollar
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These declines continued into
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was 23.6 cents. It wasn’t until
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regained their footing, produc-
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spiders continued to perform
“Bright-at-home” Proprietary Remote. FIGURE 4: AFTER ONE TRADING
strongly. The next trading day DAY. The red arrows point to the
 Use our Capital  Professional platform had an average profit of 28.7 three-day direction of price movements
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cents, and its 29–20 record of each category. After experiencing a
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produced the highest winning loss of 2% or more, the spiders sprang
back the next day, flattened out on
percentage. Further, in counting
www.stocktrading.com the advances above or below a
the second day, and rallied again on
the third day.
dollar, the upside had a five-day
800.249.7488 advantage.
For more information circle No. 4
12 • January 2011 • Technical Analysis of STOCKS & COMMODITIES

TRADING TECHNIQUEs
On the second day, however, the to the direction of these recoveries.

spiders were flat (slightly below two PERFORMANCE NEXT-DAY TRADING CATEGORY Despite the magnitude of the loss, the
pennies per day, with more advanc- CATEGORY “≥ 2%” “≤ 2%” second-day results were nondirec-
ing days: 27 to 22). Three days later, ≥ 2.00% 1 3 tional (I am defining a nondirectional
it fell into the red, losing a total of 1.01 to 1.99% 0 3 loss as an average result of fewer
$20.99 in 49 trading days. 0.01 to 1.00% 12 13 than two cents). Across the three
-0.01 to -1.00% 8 8 categories, the third day produced a
Mild -1.01 to -1.99% 7 3 small profit. In the 167 days in this
performance ≤ -2.00% 3 3 negative category, the record for each
Considering those days category was 93 wins and 74 losses
FIGURE 5: repeat performances. This table shows the
after a positive perfor- next-day results after a strong advance or decline. For instance, (first day), 86 wins and 81 losses
mance, a slightly upward daily after generating an advance at or above 2% (≥2% column), the (second day), and 91 wins and 76
price increase offers us the most spiders were unlikely to repeat this performance (one in 31 trading losses for the third day after a loss.
attractive three-day results, even days). They were unable to produce a day with an advance within As you can determine from the aver-
the 1.01% to 1.99% range. In the 31 trading days, the next-day
after a slow start. The first day after declines outperformed advancing days 18 to 13. The next-day age scores, it appears that the steeper
a modest advance (0.01 to 0.99), results after a strong downturn, however, exhibits more symmetry the setback, the more impressive the
the average daily returns were -1.4, between the performance categories. next-day recovery.
14.5, and 10.6 cents, respectively.
In the 129 trading days, these averages saw a next-day loss Repeat performances
of $1.79, but there appears to be a profitable opportunity on The results by themselves are interesting; however, an aver-
the second ($18.72) and ($13.73) third days. age score can downplay the results. For instance, given two
days, if one day rallies 2% but the other falls 2%, the average
Negative performance gives us little information about these two days. To overcome
Within the three days of a decline, the spiders were able to this statistical deficiency, I am putting the results of the two
make a comeback in every category. The red arrows point outlying categories (above/below 2%) into one of the six
categories (Figure 5).
After a 2% change, the spiders were
able to repeat this performance on only
one occasion but unable to produce a day
in the midpositive range category. In fact,
12 of its 13 positive days made it into the
“mild” category. In looking at the declining
days, 10 crept into the two most aggressive
negative categories. Conversely, the next-
day results after a negative finish displayed
more balance between the performance
categories.
Figure 6 separates the performance
of the spiders on the following day af-
ter closing in a particular category. For
instance, when closing at or above 2%,
the next-day results held closely together,
but there was an obvious skew to the
negative. The mildly positive category
shows more thickness in the middle, and
so, more consistency in predicting the
next day’s outcome. Conversely, since
the two most negative categories carry
the most deviation, they are the most
difficult to forecast.
Yesterday’s action
says a lot
Regardless of the category, after a
decline in the spiders, the results were
similar: the steeper the decline, the more

6.00
4.00
Next-day $ results
2.00
-2.00
-4.00
-6.00
At or above 2% 1.01 to 1.99% 0.01 to 0.99% -0.01 to -0.99% -1.01 to -1.99% At or below -2%
Category
FIGURE 6: WHICH CATEGORIES ARE THE MOST DIFFICULT TO FORECAST? This chart demonstrates the next day’s performance for each of the six categories. In the
extreme categories there is a tendency for an opposite reaction. The vertical dots on the left side display the results after a strong advance. Although there was little variation
in the performance of the spiders, most of these results were negative. In contrast, after a strong decline (right side), there was more price volatility; however, it came with
more positive days.
impressive the first-day results. Although the uptick in price writes articles on current investment strategies. His latest
fades on the second day, a modest rally appears to resurface book, Trading In The Footsteps Of Sherlock Holmes, is now
on the third day. available. He has been a trader in the pits of the Nybot, and
According to the statistics, by taking an inverse position, is a frequent contributor to Stocks & Commodities.
you are putting the percentages in your corner. In looking at
the extreme categories, we did encounter one day with a repeat Suggested reading
positive performance and three days with back-to-back losses. Trongone, Anthony [2010]. Trading In The Footsteps Of
Taking a contrarian position is not always profitable, and it is Sherlock Holmes: Balancing Probabilities For Successful
especially painful to watch as the market keeps rising while Investing, Traders Press.
you are betting against another upside run. _____ [2008]. Quantitative Methods For Finance And Invest-
Be careful extrapolating these results because during the time ing, Cengage Learning.
period covered in this study, the spiders did not experience a • www.sectorspdr.com
bearish market; the fear of a long downturn was minimal. On ‡eSignal
the other hand, from October 12, 2007, until March 28, 2008, ‡See Editorial Resource Index S&C
the spiders fell from $156.33 to $131.51. During this time, they S&C
accrued losses of more than $1.00 in 45 of these 115 trading
days. Always be cautious of the bear. It often invalidates the
performance results of any trading system.
In itself, this article is instructive, but it does not look at the
entire trading system. Not included is my analysis on trading
volume. In a future article, I will discuss how trading volume
affects each category, specifically comparing the performance
of the spiders within each category, and together, these two
articles will paint a more realistic picture of what we can
expect going forward, looking back.
Anthony Trongone has taught graduate courses in psychology,

as well as graduate courses in finance, investing for capital
appreciation, and quantitative analysis in the US and across “Mom, we can pay the mortgage this
Asia. As one of 25 Master Educators for eSignal, he regularly month – I just sold everything on eBay!”
+1101 Trongone NEW.indd 5 12/3/10 9:25:38 AM

+1101 Konner.indd 1 11/24/10 3:34:39 PM

TRADING SYSTEMS
Working Two Stop Levels
Combining Rsi With Rsi

Optimization and stop-losses can help you channels, and so forth — should be kept to a
minimize risks and give you better returns. minimum.
4 The strategy should be designed to stay long
Y
ou would like to be long in a market that’s in an uptrend but also trade on the corrections
trending up, but what about when the trend in a downtrend.
turns down? Do you exit and just watch from
the sidelines, or do you try to trade on the cor- 5 Its implementation should be fairly simple.
rections in the downtrend? Here’s a simple combi-
nation where you can trade long-term uptrends and Technician Martin Pring’s Kst (“know sure thing”)
short-term corrections, all in one chart. indicator comes in three different setups — short term,
One of my previous strategies didn’t allow me intermediate term, and long term — and is designed
to enter a trade and stay there in a long and strong for weekly data. The three setups try to model the
uptrend, since the strategy was designed to use the market waves of three different periods where short
relative strength index (Rsi) on a daily basis. The term is between three and six weeks, intermediate
total return from my Rsi strategy was fair, but there term is between six weeks and nine months, and the
were many trades with little return, especially in long-term trend is between six months and three
volatile markets. years. Figure 1 shows a bar chart of the Standard &
I decided to build a new strategy with these re- Poor’s 500 and the three Kst indicators.
quirements:
Two RSI
1 The strategy should be based on a single model As I mentioned, my previous strategy was based
or indicator to keep it as simple and transparent on a daily Rsi. I have used the Rsi for quite a few
as possible. years and due to my familiarity with it, I wanted
to build a model using the Rsi on a weekly basis
2 It should be designed for weekly trading. I instead of a daily one, as in my previous strategy.
have a full-time job and can only spend time I also wanted to adapt the Kst idea of an indica-
analyzing stocks on the weekends. tor that works with more than one time span and
follow the market waves of both an uptrend and a
DAVID GOLDIN
3 The need for subjective analysis of charts downtrend.

and formations — such as support lines,
Here’s a simple combination where

by Peter Konner you can trade long-term uptrends
and short-term corrections, all in
one chart.
+1101 Konner.indd 2 11/24/10 3:34:54 PM

TRADING SYSTEMS
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
$S&P-500
MA (40)
1400
1200
1000
800
Short-term KST
Signal MA (9) 1.05
1.00
Short-term KST 0.95
0.90
0.85
Intermediate KST
Signal MA (12) 1.10
1.05
1.00
Intermediate KST 0.95
0.90
0.85
0.80
Long-term KST 1.2
Signal MA (26)
1.1
1.0
Long-term KST
AvanzaVikingen
0.9
0.8
0.7
Figure 1: one price chart, one indicator, and three time frames. Here you see the KST indicator applied to the S&P 500 from 2001 to 2010.
The Rsi measures the ratio between the upward movements of Since I like to keep things simple and transparent, I will
price and the sum of all movements during a given period. When create my model using a simple setup of two Rsis in one chart
an Rsi is between 40 and 80 (Figure 2), a stock is normally in an based on two different time periods. I will call these indicators
uptrend (B), and when the Rsi is between 60 and 20, the stock slow Rsi and quick Rsi. Whereas the Kst consists of other
is in a downtrend (C). The stock exits the downtrend when the indicators that are summed, weight adjusted, and smoothed, I
Rsi passes above 60 (E) and enters the downtrend again when want this Rsi to be simple and transparent to start with. I have
the Rsi goes below 40 (F). Finally, the A and D zones signal done an initial optimization on the two Rsi indicators and the
an overbought (A) or oversold (D) level of price. moving average of the price. The optimization suggests that on
Instead of 60 and 40, I normally use the 61 and 39 levels a weekly chart, the period of the slow Rsi should be 17 weeks
to confirm that the change in trend really has happened. With and the quick Rsi should be five weeks. The slow and quick
the Rsi, the common rule of trading is that if the Rsi exits moving averages of price are set to 40 and 10 weeks.
above the downtrend area (Figure 2: E) and price rises above Let’s focus on the slow Rsi first. As you can see from the
a certain moving average, you have a buy signal. If the Rsi monthly chart of Carlsberg in Figure 3, the slow Rsi follows
falls below the uptrend area (Figure 2: F) and price falls below the trend up and down. It moves between 40 and 80 when
the moving average, you have a sell signal. price rises (January 2005 to December 2007) and it falls to
the 60/20 area in January 2008 when
prices start to fall. In May 2009, the
Stylized RSI graph Rsi again moves above the 60 level,
100 indicating that the stock is back in
A an uptrend. These three periods are
80
B E emphasized in Figure 3 with circles
60
in the Rsi area.
C 40 From February through May 2008,
F
20 the price rose some 30% from about 420
D to 560. The slow Rsi is still showing a
0
downtrend in price, but you want this
model to react to a minor upward cor-
Figure 2: uptrend, downtrend, oversold, overbought. When the RSI is between 40 and 80, a stock
is usually in an uptrend. When it is between 60 and 20, it’s usually in a downtrend. The A zone represents the rection or short-term uptrend as well.
overbought level and the D zone represents the oversold level. Consequently, I added the quick Rsi in
+1101 Konner.indd 3 11/24/10 3:35:13 PM

04 05 06 07 08 09 10
CARLSBERG B
Slow MA (40) 650
600
550
500
450
400
350
300
250
200
150
Slow RSI (17) 100
Buy: 61
Sell: 39 Uptrend Uptrend 80
60
Downtrend
40
20
0
FIGURE 3: THE SLOW RSI. Here you see that the slow RSI moves between 40 and 80 when prices rise (January 2005 to December 2007) and falls to the 60-20 area in
January 2008 when prices fall. In May 2009 the RSI moves back above the 60-level, indicating the stock is back in an uptrend.
the same chart as the slow Rsi, as shown in Figure 4. downtrend area).
In Figure 3 you see the slow Rsi moving in the uptrend We sell at this point or go short, and wait for the quick Rsi
area (40–80) until late 2007. We were, of course, long at this to take over. This happens in February 2008 (Figure 4: A),
time. In November 2007, price fell below its 40-week moving where we buy at roughly 460. After 13 weeks, the quick Rsi
average, and shortly thereafter, the slow Rsi shifted below 40 went below 40 again (Figure 4: B). We sell at 520, thus making
and started to oscillate between 20 and 60 (also known as the a gain of 13%. The next long-term buy signal from the slow
05 06 07 08 09 10
CARLSBERG B
Slow MA (40)
650
Quick MA (10)
600
550
500
450
Sell 400
Sell 350
300
Buy 250
200
150
Slow RSI (17) 100
Buy: 61 80
Sell: 39 Buy
60
40
20
0
Quick RSI (5) 100
Buy: 61
Sell: 39
A 80
60
40
B 20
0
FIGURE 4: ADDING ANOTHER RSI. Given that the slow RSI doesn’t react well to corrections, the quick RSI was added. In November 2007 the slow RSI and moving aver-
age indicated a sell or short signal. At this point the quick RSI indicated a minor uptrend correction in February 2008. After about 13 weeks the quick RSI drifted below 40,
indicating a sell. This trade would have resulted in a 13% gain.
+1101 Konner.indd 4 11/24/10 3:35:26 PM

TRADING SYSTEMS
RSI WITH RSI
Riviera model CODE FOR AvanzaVikingen else

par(Main : instrument; if (b01[i] = TRUE) AND (b02[i] = FALSE) then
LenRSIs, LenRSIq : Integer; b03[i] := TRUE; b04[i] := FALSE;
LenMAs, LenMAq : Integer; else // ...will always be FALSE-FALSE, never TRUE-TRUE!
BuyRSIs, SellRSIs, BuyRSIq, SellRSIq : Integer; b03[i] := b03[i-1]; b04[i] := b04[i-1];
out sRSI, qRSI : RealVector; end;
out BuyRSIsLin, SellRSIsLin, BuyRSIqLin, SellRSIqLin : RealVec- end;
tor; end;
out MAsPrice, MAqPrice : RealVector; // Calculate buy and sell for QuickRSI when SlowRSI is in down-
out Buy, Sell : BooleanVector); trend, ie b04 = TRUE...
var b01, b02, b03, b04, b05, b06 : BooleanVector; b01 := (SHIFT(qRSI, 1) <= BuyRSIq) AND (qRSI > BuyRSIq) AND
i : Integer; (Price > MAqPrice) AND (b04 = TRUE);
Price : RealVector; b02 := ((SHIFT(qRSI, 1) >= SellRSIq) AND (qRSI < SellRSIq))
begin OR (Price < MAqPrice);
// Initialize buy- and sell-levels for both RSI’s // Expand the buy/sell points (opposite to FILTERBUY/-SELL in
BuyRSIsLin := BuyRSIs; Vikingen...)
SellRSIsLin := SellRSIs; b05 := FALSE; b06 := FALSE;
BuyRSIqLin := BuyRSIq; for i := 1 to LEN(b01) - 1 do
SellRSIqLin := SellRSIq; if (b01[i] = FALSE) AND (b02[i] = TRUE) then
// Prepare price and MA’s b05[i] := FALSE; b06[i] := TRUE;
Price := FILL(Main.Close); else
MAsPrice := MAVN(Price, LenMAs); if (b01[i] = TRUE) AND (b02[i] = FALSE) then
MAqPrice := MAVN(Price, LenMAq); b05[i] := TRUE; b06[i] := FALSE;
// Calculate SlowRSI and QuickRSI else // ...will always be FALSE-FALSE, never TRUE-TRUE!
sRSI := RSI(Price, LenRSIs); b05[i] := b05[i-1]; b06[i] := b06[i-1];
qRSI := RSI(Price, LenRSIq); end;
// Calculate buy- and sell points for SlowRSI end;
b01 := (SHIFT(sRSI, 1) <= BuyRSIs) AND (sRSI > BuyRSIs) AND end;
(Price > MAsPrice); // b03, b04, b05 and b06 now contains the relevant signals for
b02 := ((SHIFT(sRSI, 1) >= SellRSIs) AND (sRSI < SellRSIs)) OR buy and sell
(Price < MAsPrice); // Determine the buysignals
// Expand the buy/sell points (opposite to FILTERBUY/-SELL in b01 := (b03 AND b05) OR (b03 AND b06) OR (b04 AND b05);
Vikingen...) // Determine the sell signals
b03 := FALSE; b04 := FALSE; b02 := (b04 AND b06);
for i := 1 to LEN(b01) - 1 do Buy := FILTERBUY(b01, b02);
if (b01[i] = FALSE) AND (b02[i] = TRUE) then Sell := FILTERSELL(b01, b02);
b03[i] := FALSE; b04[i] := TRUE; end;
Rsi is given at 290 in early May 2009; we had bought at 185 Slow versus quick
in February because the quick Rsi signaled another correction, First of all, the analysis should be based on a weekly
one that just happened to be the start of a new uptrend. chart. The first part of the strategy is used by many
traders (see Figure 2):
n Buy when the slow Rsi (17w) rises above its 60-level and
the price is above its 40-week simple moving average.
n Sell when the slow Rsi (17w) falls below its 40-level and
the price is below its 40-week simple moving average.
This makes you stay long in an uptrend, and out in a

downtrend. During a downtrend — as defined by the slow
Rsi (17w) — it should be possible to trade the minor correc-
tions, although you should be aware you are trading against
the main trend.
Thus, I expand the strategy. If the slow Rsi (17w) signals
a downtrend:
n Buy when the quick Rsi (5w) rises above its 60-level and
the price is above its 10-week simple moving average
and the slow Rsi (17w) signals a downtrend.
+1101 Konner.indd 5 11/24/10 3:40:57 PM

n Sell when the quick Rsi (5w) falls below its 40-level and and is focused on long-term wave analysis and trading systems.
the price is below its 10-week simple moving average. He may be contacted at peter.konner@gmail.com.
For my purposes, I have developed the model for Avanza- Suggested reading
Vikingen, a technical analysis program used by many traders Pring, Martin [2002]. Technical Analysis Explained, McGraw-
in Scandinavia. The model, which I have named Riviera, can Hill.
be downloaded from my website at http://www.pointfigure. _____ [1992]. “Rate Of Change,” Technical Analysis of Stocks
dk. You will find the source code in the sidebar “Rsi With & Commodities, Volume 10: August.
Rsi.” In the code, I have modified the exit by using an “OR” _____ [1992]. “Summed Rate Of Change (Kst),” Techni-
statement. This is merely because it gives a quicker exit. You cal Analysis of Stocks & Commodities, Volume 10:
can use either “And” or “OR”OCTOBER 2010 • TechnicalSeptember.
conditions for the exit. Analysis of STOCKS & COMMODITIES magazine
_____ [1992]. “Identifying Trends With The Kst indicator,”
The right parameters Technical Analysis of Stocks & Commodities, Volume
Please
Every technical indicator has its contact Karen
own personality. Moore with
A trading approval or changes:
10: October.
system with a single indicator is obviously more transparent • http://www.pointfigure.dk
phone: (206)
than a system with four to six indicators, 938-0570
since you only have• fax: 206-938-1307 • email: KMoore@Traders.com
‡AvanzaVikingen
to become familiar with one.
In this article I have used the Rsi, but if you prefer Kst, See our Traders’Tips section beginning on page 64 for implementation
stochastic, the moving average convergence/divergence of Peter Konner’s technique in various technical analysis programs.
(Macd), or anything else, the concept of using one indicator Accompanying program PROOF #6in the Traders’ Tips area
code can be found
on two different time periods in the same trading system can at Traders.com.
be applied to any of these.
Finding the right parameters is always difficult. The opti- See the Subscriber Area at Traders.com for the AvanzaVikingen
mization in this example was only done on one time period code found in this article.
and only with 20 different stocks. Before using this system ‡See Editorial Resource Index S&C
in real-world trading, you need to do a more thorough testing
and optimization.
Let’s be careful ARE YOU on the wrong side of the trade too often? Do you miss the big moves?
out there It is estimated that over 75% of volume is program or automated trading.
If the market is in a down- THE BWT PRECISION INDICATORS AND AUTOTRADER can give you
the technical and psychological edge to win in today’s market.
trend, you should tighten
your stop-loss compared
to your stop levels in an
uptrend. Working with two
different stop levels is not
difficult because you al-
ways know the conditions
under which you bought a
position.
Besides the tighter stop-
loss levels in a downtrend,
you should also consider
using a slightly smaller
amount of your total capital
for each trade. If you enter any position in an uptrend with,
for example, 4% of your total capital, only 2% to 3% should
be used in a downtrend.
With these simple money management rules, you minimize
your risk significantly but are still allowed a reward when the • Simple, Clear and Accurate - No Complex Rules
• Trade Signals Plot on the Bar in Real Time
market is making its corrections. • Works on FOREX, FUTURES, STOCKS, ETF’s
• Visit our website for Video and more info
Denmark-based Peter Konner has a BSc in computer science. • Blue Wave Trading: The Innovator Since 2003
He works as a business analyst within the insurance business
and manages a private mutual fund for a number of investors. www.bluewavetrading.com • 808-281-8391
He has been using technical analysis for more than 26 years For more information circle No. 3
+1101 Konner.indd 6 12/1/10 1:39:35 PM

Far And Away
Breakaway Gaps
There are many different types of gaps, but this one a trading perspective, it provides the best risk–reward ratio
JOSE CRUZ
provides the best risk–reward ratio. when compared to other price gaps.
by Kenneth Gilliland WHY BREAKAWAY GAPS OCCUR
A
Just like gasoline, beachfront property, shoes, or any other
gap up in a stock’s price is an exciting event. Usually, commodity, the price of a stock is affected by the forces of
such moves will be covered by the financial media, supply and demand. If demand is greater than supply, the
creating hysteria and resulting in some people franti- price of an item will rise. Conversely, if supply is greater
cally buying the stock “before it’s too late.” Rarely do than demand, the price of the item will fall. If you are a
the pundits provide a reasoned and thorough explana- trend-follower, you may be of the opinion that stock prices
tion as to why the large jump in price will lead to any sort generally move up or down in a uniform fashion. However,
of substantial gains over the near future; they just report the if a situation has dramatically changed, it may cause the
awe-inspiring numbers without touching on their technical demand to rise or fall, resulting in a stock price gapping up
significance. Sometimes, armed with simply a headline, the (or down). Some examples of when a breakaway gap may
uninformed will buy the stock and get lucky. Over the long form are an earnings surprise, award of a new government
term, however, this strategy is bound to fail, as a large gap up contract, or the possibility of a buyout. Will the stock continue
in price does not necessarily mean the stock will continue to to rise? We can never know for sure, but the charts give us
rise. It is possible to trade these large price moves and jump some clues as to whether it might be worth entering a trade
on a profit-making trend, provided you learn to recognize the and riding the trend.
patterns that are more likely to succeed.
There are various types of gaps including common, run- PRICE MOVES OUT OF TRADING RANGE
away, and exhaustion gaps. For our purposes, however, the A breakout of a trading range is the main distinction that
one we will concern ourselves with is the breakaway. From separates breakaway gaps from other types of price gaps
+Gilliland.indd 1 11/23/10 8:29:46 PM

CHARTING
SBUX (Starbucks Corp.) Nasdaq GS

14 Sep 2009 Open 1949 High 20.00 Low 19.40 Close 19.89 Volume 9.3M Chg +0.19 (+0.96%) Trading the
SBUX (Daily) 19.89
19
breakaway
Buy point
17.46
gap will
Breakaway gap
Trading range ensure
16
15 that if the
14 stock price
12.78 continues
100M 12 to rise, you
75 Large increase 11 will be there
50 in volume
10 to garner
25
93021 profits.
16 23 Apr 13 20` May 11 18 26 Jun 8 15 22 Jul 13 20 27 Aug 10 17 24 Sep 8 14
Figure 1: a classic breakaway gap. After trading in a range for almost three months, the stock gaps up out of the trading range
on tremendous volume. In this case, the stock did not provide much of an opportunity to buy before the next rise in price. While the stock
did pull back, it did so on lighter volume and stayed near the closing high.
(Figure 1). A quick look at a chart can tell you whether this has supported near the breakout level and the stock will continue
occurred. If a stock has been trading between $20 and $25 for to rise. Can a breakout succeed on light volume? Absolutely!
three months and suddenly gaps up and moves out of that range, More often than not, however, the light volume breakouts
you may have a candidate for a breakaway gap. There is no set will fail, as there is no real conviction behind the move. As
period of time, but the longer a stock remains in a trading range, a trader, you must always consider the risk. Abandoning
the more significant the movement out of that range. Gaps that the move that is less likely to succeed is the prudent course
occur within a trading range are deemed common gaps. They of action.
are questionable and should not be traded, as the stock has yet
to prove that it can move to the next level beyond the current Price action throughout the day
range; those that occur at the end of a downtrend are also suspect. Another factor to consider is the price action for the day as
While this may forecast the possibility of a trend reversal, this well as the closing price. Ideally, after breaking above the
is not the sort of price move we are discussing. current trading range, the stock price will close near the high
of the session. A breakaway gap that loses most or all of its
Increase in volume gains may not be an ideal candidate. As a rule, I would steer
As you may have heard countless times, “Volume confirms
price.” This oft-used phrase also holds true for breakaway Continued on page 34
gaps. Ideally, volume
should increase sub- ISRG (Intuitive Surgical Inc.) Nasdaq GS
stantially above normal 14 Sep 2009 Open 238.84 High 242.66 Low 237.81 Close 242.66 Volume 417.8K Chg +2.26 (+0.94%)
volume levels. A 10%
ISRG (Daily) 242.66
to 20% increase in 230
Buy point
volume is not enough. 220
208.55
You should be able Trading range Breakaway 190
to look at the volume gap 180
on a chart and easily 170
160
recognize that a huge
145.69
increase in volume has
occurred (Figure 2). A 130
large spike in volume 6M Large increase
120
is a sign that the big 110
STOCKCHARTS.COM
4 in volume
institutional investors 2 100
— usually known as 417771
“smart money” — have 16 23 Apr 13 20` May 11 18 26 Jun 8 15 22 Jul 13 20 27 Aug 10 17 24 Sep 8 14
jumped on board the Figure 2: breakaway gap with strong volume. In this case, the price went sideways for a longer period of time, but ultimately
stock. This ensures that the stock did continue its rise in price. In addition, there was more price volatility involved after the initial breakout but the stock did stay
the stock price will be below the intraday low of the initial breakout.
+Gilliland.indd 2 11/23/10 8:30:12 PM

Portfolio Optimization Techniques
Making A Good System Great

Once you have a trading system, you still need to evaluate time unless they seek the guide of a market mentor or profes-
NADIR KIANSERSI
it. You can apply optimization strategies to increase sional trading system developer. For the sake of argument,
profitability, reduce drawdowns, and enhance the stability let’s say you do have all of these foundational tools and skills
of your system. at your disposal and you have been able to piece together a
reliable and profitable equity trading system for trading the
by Donald Pendergast market from the long side, one that you can use on individual
stocks in both your cash and retirement (Ira or Roth Ira, for
D
espite opinions to the contrary, building a success- example) accounts.
ful daily trading system for stocks isn’t all that Of course, now that you’ve gone as far as you can in
difficult, especially if you have the right tools, tons fine-tuning your system to work well in a range of market
of patience, and a sound understanding of why environments, what else can you do to boost its profitability
markets behave the way they do. Of course, 95% and reliability?
of all traders and investors probably are deficient in This article may offer at least a few answers to that ques-
one or more of those three critical areas of market tion by showing how to use portfolio optimization strategies
savvy, and as such they are most likely destined to in order to increase profitability, reduce drawdowns, and
trash their trading accounts within a given period of enhance system stability.
+Pendergast Good System.indd 1 11/24/10 12:54:59 PM

TRADING SYSTEMS
A simple, yet sturdy system

First, let’s look at a simple trading system, one designed to Develop, test, and refine a reliable,
enter a long stock position on a pullback in the five-period winning trading system. Then build
money flow index (Mfi) (5) with the goal of exiting with a
profit on an anticipated snap back higher, using a five-period
a suitable “house” for the system by
relative strength index (Rsi)(5) to exit with a profit or using structuring an optimized portfolio.
a fixed stop-loss to exit with a loss. This system is very short
term in nature, meaning that the use of a broad market timing value above 75 on an Eod basis; you simply close the trade
filter doesn’t appreciably change the performance (profitabil- out at the next session’s open. If your broker supports market
ity and drawdown being the two metrics that carry the most on open (Moo) orders, your job of getting a decent fill will be
weight) of it as much as you may have expected, although it that much easier when trading any system that buys or sells
might still be worth pursuing for hard-core system developers at the next session’s open, no matter what kind of system you
intent on deriving the last available penny from this strategy. rely on.
I used these 100 large-cap stocks: To perform the actual backtest of this diverse group of 100
stocks, I used a special MetaStock exploration available in
ADBE, ALTR, AMGN, APC, AAPL, T, ADSK, BHI, BBY, BIG, CA.O, Compuvision’s TradeSim Enterprise add-on for MetaStock.
CAH, CCL, CELG, CI, CTAS, CSCO, CCE, KO, STZ, CSX, DELL, TradeSim Enterprise allows MetaStock users to run exhaustive
XRAY, DVN, ERTS, LLY, EMC, EOG, EXPD, FAST, FISV, BEN, GENZ, portfolio backtesting and optimization, an ability that is vital
HRB, HOG, HAR, HRS, HCP, HSY, HES, HPQ, HNZ, HCN, HD, HON,
to traders who use a large group of stocks as the raw material
HRL, HST, ITW, IR, INTC, IBM, IPG, IFF, IGT, IP, JCP, JCI, JNJ, JPM,
KBH, K, KEY, KMB, KLAC, KR, LM, LEG, LEN, LTD, LLTC, L, LSI, for their trading activities. In the code, I also programmed in
MBI, NKE, JWN, NSC, NOVL, NVLS, ODP, ORCL, PAYX, PBCT, PCL, a fixed stop-loss of 5% for every trade; no trailing stop was
PSA, RRC, SLM, S, SPLS, HOT, SYMC, TROW, TE, TLAB, TIF, TMK, used. The TradeSim Enterprise exploration code can be found
TSS, UNH, UNM, VZ, XLNX in the sidebar “TradeSim Enterprise Code For Mfi 5 Long
Only.”
The MetaStock Explorer code for this Mfi 5-5 system
can be found in the sidebar “MetaStock Code For Mfi 5-5 It’s how you use it that matters
System.” I’m going to show you something that might seem unbe-
For this test, a price and volume filter was used to permit lievable, but it will make a convincing case for the need for
the trading of stocks that were above $7.50 per share with
a 50-day average volume of at least 400,000 shares. This TRADESIM ENTERPRISE CODE FOR MFI 5 LONG ONLY
exploration is meant to be run on daily data after the trading
session closes. All trade signal entries and exits take place TSim exploration name : MFI 5 Long only
at the next session’s opening price. The time period for the Col A name: CLOSE
backtest went from January 4, 2001, to July 29, 2010; all Col A code: CLOSE
of the stocks chosen for the test have been listed on the Col B name: Long
exchanges since at least the start of 2001, eliminating any Col B code:
skewed results. The starting account equity was $50,000 EntryTrigger := Ref((Cross( MFI(5 ),10)),-1);
and $0.012 per share was used for a commission rate, with EntryPrice := OPEN;
a $1.00 minimum commission per trade. ExitTrigger := Ref(Cross( 75, RSI(5)),-1);
All this code does is locate stocks whose five-period Mfi ExitPrice := OPEN;
has dropped below a value of 10 on an end-of-day (Eod) ExtFml( “TradeSim.Initialize”);
basis, triggering a long or buy order for the next session. It
also scans for stocks that have triggered an exit or sale of ExtFml(“TradeSim.EnableProtectiveStop”,0);
an existing long position when the five-period Rsi rises to a InitialStop:=0.95 * EntryPrice;
ExtFml( “TradeSim.RecordTrades”,
METASTOCK CODE FOR MFI 5-5 SYSTEM
“MFI 5 Long only”, { Trade Data Filename }
Exploration name : MFI 5-5 LONG, { Trade Position Type }
Col A name: CLOSE EntryTrigger, { Entry Trigger }
Col A code: CLOSE EntryPrice, { Entry Price }
Col B name: Long InitialStop, { Optional Initial Stop }
Col B code: (Cross( MFI(5),10)) ExitTrigger, { Exit Trigger }
Col C name: Exit ExitPrice, { Exit Price }
Col C code: (Cross( 75, RSI(5))) START); { Recorder Control }
Filter: colA > 7.50 AND Mov(VOLUME,50,SIMPLE) > 4000 Filter: colA > 7.50 AND Mov(VOLUME,50,SIMPLE) > 4000

TRADING SYSTEMS
TEST 1 TEST 2
Maximum portfolio size 9 Maximum portfolio size 8

Maximum new positions per day 1 Maximum new positions per day 2
Equity allocation per trade 11.11% Equity allocation per trade 12.50%
Number of trades 1,258 Number of trades 1,362
Average profit $96,909 Average profit $132,669
Average profit per trade $77.03 Average profit per trade $97.41
Standard deviation $7,791
Winning trade % 47.78%
Probability of profit 100%
Maximum peak-to-valley drawdown 15.91%
Figure 1: test results for nine-stock portfolio with one new
Figure 2: results for test 2. The maximum number of positions is 8
stock permitted per day. The average profit was over $96,000 with a
with up to two new positions permitted per day. The average profit is $132,669
maximum peak-to-valley drawdown of 15.91%.
with a maximum peak-to-valley drawdown of 19.3%.
TEST 3 TEST 4

Number of trades 1,185 Number of trades 1,091
Standard deviation $8,681 Standard deviation $9,661
Winning trade % 47.57% Winning trade % 47.35%
Probability of profit 100% Probability of profit 100%
Maximum peak-to-valley drawdown 15.77% Maximum peak-to-valley drawdown 17.88%
FIGURE 3: RESULTS FOR TEST 3. The maximum number of positions is 8 FIGURE 4: RESULTS FOR TEST 4. The maximum number of positions is 7
with one new position permitted per day. The average profit is $103,972 with with one new position permitted per day. The average profit is $111,394 with
a maximum peak-to-valley drawdown of 15.77%. a maximum peak-to-valley drawdown of 17.88%.
new position. If you learn to do this correctly, the increase in

TEST 5 overall portfolio performance can be dramatic and well worth
the time and effort.
Maximum portfolio size 6 To start off, I began with a hypothetical nine-stock portfolio
Maximum new positions per day 2 where each new stock generating a buy signal was allowed
Equity allocation per trade 16.66% 11.11% of the current account equity and where a maximum
Number of trades 1,070 of one new stock position was permitted on any day, no matter
Average profit $141,134 how many buy signals were generated. Again, the hypotheti-
Average profit per trade $131.90 cal starting equity was $50,000 and the commission rate was
Standard deviation $10,141 $0.012 per share with a $1.00 minimum commission per trade.
The critical stats derived from this 5,000-run Monte Carlo
simulation can be seen in Figure 1.
For the remainder of the Monte Carlo runs, I gradually
reduced the total number of positions to 8, 7, 6, 5, and then
FIGURE 5: RESULTS FOR TEST 5. The maximum number of positions is 6
to 4. On the even number of maximum positions (8, 6, and
with up to two new positions permitted per day. The average profit is $141,134
with a maximum peak-to-valley drawdown of 19.97%. 4), I varied the maximum number of new positions per day
between 1 and 2. For 9, 7, and 5, I left the allocation at one
new position per day. The differences in portfolio performance
portfolio optimization — that is, how many stock positions can vary — sometimes dramatically and in ways you might
to trade, how many new positions to put on in a given day, not expect to see. The rest of the test results can be seen in
and what percentage of account equity to allocate to each Figures 2–9.

TEST 6 TEST 7

Number of trades 978 Number of trades 848
Standard deviation $10,777 Standard deviation $12,271
Maximum peak-to-valley drawdown 18.42% FIGURE 7: RESULTS FOR TEST 7. The maximum number of positions
FIGURE 6: RESULTS FOR TEST 6. The maximum number of positions is is 5 with one new position permitted per day. The average profit is
6 with one new position permitted per day. The average profit is $120,354 $126,477 with a maximum peak-to-valley drawdown of 24.58%.
with a maximum peak-to-valley drawdown of 18.42%.
Ed Sullivan’s got
TEST 8 nothing on this
How’s that for a variety show? So much
Maximum portfolio size 4
for spreading the risk by trading a larger
versus a smaller portfolio, which is the
Maximum new positions per day 2
guiding force behind most mutual fund
Equity allocation per trade 25.00%
investing. This test makes a strong case
Number of trades 737 for including a smaller number of stocks in a portfolio and for
Average profit $143,584 being more aggressive in how fast new positions are added to
Average profit per trade $194.82 the portfolio on any given day. The most risk-averse portfolio
Standard deviation $13,731 in test 1 included a maximum of nine stocks and only allowed
Winning trade % 46.73% one new position per day. Compare the returns for that portfolio
Probability of profit 100% management agenda with the ones generated in test 8 by hold-
Maximum peak-to-valley drawdown 23.73% ing a maximum of four stocks and adding a maximum of two
FIGURE 8: RESULTS FOR TEST 8. The maximum number of positions new trades on any given day — the more aggressive portfolio
is 4 with two new positions added per day. The maximum profit is produced $46,675 more profit while trading the same pool
$143,584 with a maximum peak-to-valley drawdown of 23.73%. of stocks with the exact same trading system with the same
amount of initial capital over the same time period!
TEST 9
Maximum portfolio size 4

Maximum new positions per day 1
Equity allocation per trade 25.00%
Number of trades 701
Average profit $132,585
Average profit per trade $189.14
FIGURE 9: RESULTS FOR TEST 9. The maximum number of posi-
tions is 4 with one new position added per day. The maximum profit
is $132,585 with a maximum peak-to-valley drawdown is 27.72%.
“So the stock market hit 12,000 and everyone lived happily ever after.”

TRADING SYSTEMS
Net Profit vs. Security (MFI 5 Long only)
System equity results:

MFI 5-5 trading system, net profit vs. security Average profit: $143,584
Maximum portfolio positions at any time: 4 Standard deviation: $13,731
Maximum number of new positions per day: 2 Max peak to valley drawdown: 23.73%
Net profit
Test period: Jan. 4, 2001 to July 29, 2010

Starting equity: $50,000
Security
METASTOCK
Minimum (%) net profit Average (%) net profit Maximum (%) net profit
FIGURE 10: NET PROFIT VS. SECURITY (TEST 8). In this test, holding fewer stocks and adding positions more quickly allows the same system to maximize portfolio equity
during strongly trending phases in the broad market.
How can this be? One explanation is that the smaller, more test 8). The system equity results for test 8 are displayed in
aggressive portfolio outperforms during especially bullish Figure 10.
phases in the broad market simply because you’re adding new Some other tests were worth noting, too; the six-position,
positions twice as fast (of course, in a bear market, this can two stocks a day run (test 5) produced nearly as much profit
also work against you) and because the average position is ($141,134) as test 8 did, and with a noticeably smaller maxi-
more than twice as large in the first place (11.11% of account mum peak-to-valley (PV) drawdown (DD) to boot (19.97%
equity in test 1 versus 25% in the most aggressive portfolio,
t e r s
versus 23.73%). For my money, this (test 5) is the portfolio
management scheme I would use when trading this system,
wri d.
as it offers three useful advantages:
w a n t e
1 The best overall combination of average profit and
maximum peak-to-valley closed-system drawdown.
Traders.com 2 The ability to add positions aggressively during strong
Traders.com bullish phases in the market.
Traders.com 3 Fewer stocks to handle in the portfolio at any given

time. Having fewer stocks in a portfolio simply makes
it that much easier to manage and will also cause you
to maintain a sharper focus, minimizing the chance for
mistakes.
You read our publications.
There is one other incredible
Now writestatistic
for that remained
them, too!rock-
solid throughout all of the tests. Most of the tests revealed the
winning percentage rate
Fax forresume:
the Mfi 5-5 system itself to be in
206-938-1307
the mid-47% range (not bad for a206-938-0570
Call: long-only system) with only
one test dipping down below
Email:47%. Portfolio optimization had
Editor@Traders.com
nearly zero effect of theVisit:
actual performance
www.Traders.com characteristics
of the trading system used to generate the signals, but it had
a major effect on the final profitability of each of the nine
specific optimization schemes that were tested.
Another interesting stat is the maximum PV DD figures
(based on closed trade equity in all cases). Looking at test
1 again, we find a fairly modest maximum PV DD figure

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Net Profit vs. Security (MFI 5 Long only)
MFI 5-5 trading system, net profit vs. security System equity results:
Maximum portfolio positions at any time: 9 Average profit: $96,909
Maximum number of new positions per day: 1 Standard deviation: $7,791
Max peak to valley drawdown: 15.91%
Net profit (%)
Test period: Jan. 4, 2001 to July 29, 2010

Starting equity: $50,000
Security
Minimum (%) net profit Average (%) net profit Maximum (%) net profit
FIGURE 11: NET PROFIT VS. SECURITY (TEST 1). The MFI 5-5 system appears to return much greater profits when traded with fewer positions, positions that are traded
at twice the speed of this version of the portfolio management scheme, which holds more than twice as many stocks at any given time.
of 15.91%. But if we are willing to accept just a bit more Develop, test, refine
discomfort in the short term and can accept a maximum PV Applying this bit of time-honored wisdom
DD closer to 20%, we will likely reap an abundance of extra to what we’ve discussed already, the big
profits, as the results in test 5 clearly reveal. idea is this:
There are other useful stats contained in the nine test tables.
One of the easiest to spot is the amount of profit per trade, 1 Develop, test, and refine a reliable,
where there is a reliable correlation between the size of the winning trading system.
portfolio and the average profit per trade. Simply put, with a 2 Then build a suitable “house” for the
smaller portfolio size (as in tests 5 and 8, for example) you make system by structuring an optimized
fewer trades and you also make more money on those trades portfolio for the trading system’s
than in the more conservative portfolios (tests 1 and 3). positions to dwell in.
A chart showing the equity results for test 1 is displayed
in Figure 11. Analyzing the test data in aggregate, holding a By diligently attending to each of these vital tasks, the
smaller number of stocks in your actively traded portfolio, end results of your active stock trading should be satisfying.
while adding new positions aggressively, appears to offer the Sure, it will cost some extra money for the proper technical
ideal balance between risk and reward. software and also entail a lot of time-consuming testing, but
the results should be more than worth the investment in time
and capital. This particular set of portfolio optimization tests
YOUR ONLINE
should be convincing proof of that.
RESOURCE
FOR Donald Pendergast has been trading/investing since 1979, and
TECHNICAL after making a 50% gain in silver in six weeks, began a lifelong
ANALYSIS study of the financial markets, trading systems, and broad economic
trends. He develops, tests, and implements stock, forex, and futures
trading systems, and currently has two futures systems available
for autotrading at Striker Securities in Chicago, IL. He may be
reached at www.chartw59.com.
‡MetaStock
S&C

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

Routing and rerouting fees? charge you if you take liquidity by hitting a
Don, I have a question about order routing bid or taking out an offer immediately. A rule DC 20549-1090 Re: Sec Release No. 34-
that perhaps you can help me with. I trade of thumb is that you will receive $0.002 and 62445 — File No. S7-21-09), I see comments
with a respectable brokerage that caters to pay $0.003. Be very careful with this. Because agreeing with our initial thoughts and discus-
active traders. I’ve noticed in the last few of flash orders and subpennying, you might sions with the Sec back in March and April
months that I have been charged fees refer- stay parked with a $20.10 bid forever, while 2010. For example:
ring to “routing,” “rerouting,” and electronic the stock continues to trade at $20.10001 (a
communications networks (Ecn) fees. I place subpenny in front of your $20.10 bid). Set “Our earlier comments on the Commission’s
Proposal focused on issues relating to the
my orders to go to the Nyse, as suggested by your price ticker to reflect several decimal
cash equities markets as well as issues directly
my peers. I am told that there may be fees points if allowed to do so. pertaining to the listed options marketplace.
for taking of liquidity, and also that I may This may sound complicated and full We believe the aspects of flash trading that are
be entitled to collect rebates for providing of of jargon, but please strive to understand seen as troubling in the context of the equities
liquidity. I’m not sure what any of this means, this fully and ask questions of your broker; markets, namely the disincentive to post limit
but now that I’m being charged fees, I would otherwise, this can be very costly. Most of orders, the creation of private, locked markets
like to understand it better. When I called the this has changed considerably in the last that are neither transparent nor fair, and the
broker, they were very vague about it all, as if two years. anti-competitive impact of the practice apply
they weren’t sure either, but assured me that equally to the options marketplace. Arguments
to the contrary, such as the potential for op-
they were pass-through fees, not add-ons. Down the road, any improvements?
tions flash order mechanisms to provide price
Can you help? — oldtimeguy Don, I read your columns about the impact
improvement or cost savings, are misleading
Excellent questions, very timely. Although of flash orders and subpennying with a and must be viewed in light of all potential
I can’t speak directly as to how your broker- lot of interest. I went to the website www. outcomes, both positive and negative, associ-
age handles such electronic orders, I can defendtrading.com as you suggested. What ated with flash order mechanisms.”
explain how things work. If you submit a are your thoughts now, a few months after
limit order to the Nyse (as you say) to buy the flash crash and all the debates? Do you They go on:
Xyz for $20.10, and the Nyse’s best offer is see any improvements coming down the
Flash Should Be Disallowed Irrespective of
$20.11, but the overall best market (Nbbo, pike? — Eqtprof SEC Action On Fee Caps
or “national best bid and offer”) is $20.10 on Thanks for reading, and thanks for your Some arguments in support of flash trading
an Ecn “market center” like Arca. The Nms interest. As you’re probably aware, I’m in the options markets state that the practice
(that is, the National Market System) requires responding around Thanksgiving 2010, and saves customers money by potentially avoiding
that the Nyse “ship” the order to the better- this will be published in January 2011. Feel the need to route to better priced markets that
priced market. That’s great, except the Nyse free to check the above-mentioned site or charge “taker” fees. Nyse Euronext continues
will likely charge you a fee for “shipping” mine at www.stocktrading.com/Tradinginfo. to strongly believe that, in the context of the op-
htm for updates. tions markets, the concepts of flash mechanisms
the order out. These fees are usually about
and the fees that exchanges are able to charge,
three-tenths of a penny per share, which can Now to what we have been seeing cur-
and potential caps on those fees, are completely
add up quickly. rently. As discussed, my brother and a small separate and independent of each other. Com-
You should have the option to designate contingent from our firm and others testified mission consideration of these concepts, to the
your Nyse order as Dns (“do not ship”), in front of Sec about how flash trading and extent they are not already, should be bifurcated
which would stop this extra pricing. However, subpennying harm the markets and public by and analyzed irrespective of each other.
be careful what you wish for, and be sure taking away incentives for market participants
about what you’re asking them to do. You to place and leave in limit orders. Well, it ap- I won’t get into any more detail other
should be shipped out only if you’re saving pears that the officials at Nyse Euronext, on than to say we in the industry are heartened
yourself a full penny while being charged a behalf of its subsidiary options exchanges, that we may have some positive changes
small percentage of a penny. Nyse Arca, and Nyse Amex, have seen the coming. A level playing field for market
Now, about providing or taking liquidity. impact of these activities as well. makers, traders, and public investors is all
The Ecns will pay you a rebate if you leave In a recent mailing to the Sec (Elizabeth M. we’re looking for.
a limit order with them and another order Murphy Secretary Securities and Exchange
comes in and hits it. Conversely, they will Commission 100 F Street NE, Washington, S&C
+1101 Bright Stocks QA.indd 1 11/23/10 7:47:39 PM

tRADER’S NOTEBOOK
Follow The Market Herd

With Elliott Wave
If we can figure out what happened in
the past, we can figure out what could
happen in the future.
by Ryan Henry
D
oes this sound familiar?
You spend countless
hours analyzing a com-
pany’s financial strength,
market position, and industry poten-
tial. You decide that everything is on
the up and up, and that the company
deserves a place in your investment
portfolio. You buy the stock, waiting
for your payday — and then watch
in horror as the stock does the same
thing that the stocks of its lesser com-
petitors are doing. If you’re like most
traders, this is a common scenario. It’s
true that financially strong stocks in
leading industries have the potential
to be great investments. But unless
the overall market is enjoying gains,
most stocks won’t.
Of course, there’s an outside
chance you’ll uncover a stock that is
going to explode regardless of what
the market is doing. But there’s also an
outside chance you’ll find a briefcase
full of money. It might happen, but
in both instances, it’s not something
you should bank on.
The real key to successful investing
is determining the direction of the
market current and swimming in that
direction. The majority of stocks will
move with the market, so if we can
figure out where the market is headed,
finding winning stock investments
becomes easier.
Which way is the

market going?
WILLIAM L. BROWN
Determining market direction is more

than chasing economic headlines.
Even if those headlines drove market
+WM Henry.indd 1 11/24/10 3:00:05 PM

$INDU (Dow Jones Industrial Average) INDX ©StockCharts.com
1-Jul-2009 Open 8440.13 High 8580.47 Low 8393.95 Close 8504.06 Volume 2.8B Chg +65.67 (+0.78%)
$INDU (Weekly) 14000
Wave 2 13500
13000
12500
direction, chances are slim that we
12000
11500
lowly individual investors would be Wave 1 11000
10500
able to gain an edge on the people 10000
Wave 4
who do this 24 hours a day and with 9500
much better connections.

9000
8500
Fortunately, market direction 8000
is not a function of the newswire; 7500
much greater forces are at work. The Wave 3 7000
stock market, like anything else that Wave 5 6500
involves millions upon millions of 06 F M A M J J A S O N D 07 F M A M J J A S O N D 08 F M A M J J A S O N D 09 F M A M J
people, is subject to a herd mental- Figure 1: Five-Wave Decline. The Dow Jones Industrial Average followed a textbook five-wave Elliott wave pattern
ity. You’ve most likely read that you during the 2007–09 bear market decline.
don’t want to be a part of the herd
when it comes to investing because the herd is usually wrong.
That may be true, but that statement misses the real value in The headlines change, monetary policy
understanding herd behavior. changes, most things change; human
The real value lies in the fact that herd behavior is predict-
able. Herds repeat the same behavior over and over again. nature, however, does not.
Like human nature itself, the way herds behave cannot be
changed. That is exceptionally valuable information when it to get involved in what is now a well-established downtrend.
comes to investing in the stock market, so much so that we Most investors believe that the downtrend will continue,
can use it to classify where the stock market has been, and leading to a very high level of bearish sentiment. The move
also to determine where it is going. has exhausted itself. The early arrivals are already invested,
as are the trend riders and latecomers. Absent any new par-
Elliott waves ticipants, the downtrend finishes and a new uptrend begins,
The Elliott wave theory is based on tracking the predictable following the exact same progression.
movements of herd behavior to determine where the overall Why does this progression keep repeating? Because it’s hu-
market is headed. It’s a progression that repeats itself, so if man nature. The headlines change, monetary policy changes,
we can determine what has happened in the past, we can most things change; human nature, however, does not. The
determine what the future may hold. Elliott wave theory is based on determining the market’s loca-
Let’s look at the anatomy of a new downtrend to illustrate tion within this ever-repeating five-phase pattern. If that can
how the predictable herd behavior plays out. It starts with be determined, then we will know exactly where the market
the completion of an uptrend and a small decline that only a is headed.
few investors take seriously. This initial move is wave 1. The This is more than just some theoretical mumbo-jumbo.
underlying momentum has changed, but this is the last thing Look at a chart of the 2007 to 2009 decline in the Dow Jones
on most investors’ minds since the rosy times of the uptrend Industrial Average (Djia) in Figure 1 to see how this five-wave
are still fresh in their minds. progression looks in the real world.
Once the initial decline runs out of gas, a small advance
appears that we’ll call wave 2. This advance has most investors
thinking that the uptrend has resumed and the recent decline
was only there to refuel the uptrend. This creates the ideal en-
vironment for the new downtrend to pick up steam. The small
rally fades, ushering in the heart of the market descent. This is
wave 3. A big down move takes place, and it grabs the herd’s
attention. This is when most investors take notice and behave
accordingly. This only adds fuel to the fire as market participants
go about shorting or selling into the growing downtrend.
After this phase is exhausted, the market offers a reprieve
with a recovery effort. A small number of investors believe
that the decline has run its course, and the recovery will be
created by their buying efforts. This recovery is wave 4.
Unfortunately for these buyers, momentum is still down and
the recovery proves temporary.
The decline resumes, allowing the slowpokes who missed the
“It was a disquieting day at work. The sheriff seized office equipment, police
last down leg to get involved. This final phase of the decline is led senior executives away, while the media videotaped with great glee.”
wave 5. It continues only as long as new participants are willing
+WM Henry.indd 2 11/23/10 7:15:41 PM

tRADER’S NOTEBOOK
$INDU (Dow Jones Industrial Average) INDX ©StockCharts.com

Ryan Henry is the author and lead analyst
30-Jul-2010 Open 10424.17 High 10584.99 Low 10347.50 Close 10465.94 Volume 3.7B Chg +41.32 (+0.40%) at www.wavespeak.com, an investment
analysis firm with a profitable eight-year
$INDU (Weekly)
13000
12500
Wave 5 12000 track record. Wavespeak provides market
index forecasting and stock trade recom-
11500
Wave 3 11000
10500 mendations through a newsletter that is
published three times a week. Wavespeak’s
10000
Wave 1 Wave 4 9500

9000 analysis is driven by Elliott wave theory, but
8500 also includes consideration for Fibonacci
Wave 2
8000
mathematics, intermarket relationships,
breadth, volume, and money flow analysis.
7500
Wavespeak provides samples of current

7000
market forecasts on its website.

6500
08 F M A M J J A S O N D 09 F M A M J J A S O N D 10 F M A M J J
Figure 2: Five-Wave Advance. The 2009–10 advance also followed a very clear five-wave progression.
‡StockCharts.com
The progression of herd behavior is the same in market Current and past articles from Working Money, The Investors’ Maga-
uptrends as well (Figure 2). We only have to look at the most zine, can be found at Working-Money.com.
recent market uptrend for verification. ‡See Editorial Resource Index
Follow the herd

The market adage “Beware the stock market herd” may have
the right intentions, but it misses the point. By identifying
the repetitive and predictable behaviors of a herd, we can
determine where the stock market is headed. This, in turn,
allows us to make the timeliest of investments. S&C
CHARTING
BREAKAWAY GAPS/GilliLand
Continued from page 23
clear of such breakouts, as they are more likely to fall back the top of the previous trading range.
into the trading range (or worse). Prior to entering the trade, you should consider the point
at which you may wish to take a profit; scan for possible re-
Trading the breakaway gap sistance points that may impede the upward movement of the
There are many different ways to trade the breakout. After stock price. Examples include moving averages (specifically,
the market closes on the first day of the breakout, place a stop the 50- or 200-day moving average), or previous overhead
order a few cents above the previous day’s closing price, or if trading ranges. However, if the breakout occurs at or near
you are less aggressive, the intraday high. Do not worry if the an all-time high, you may want to consider holding it for a
market does not continue its uptrend the day after the breakout; longer period, possibly taking profits at various points along
in fact, a continued rise the day after may signal that the stock the way.
is about to come crashing down. Ideally, some pullback in
price on decreasing volume is more desirable, as the stock is Who doesn’t want a profit?
taking a well-deserved break after such a quick rise. While you may have missed out on the first big move, trading
the breakaway gap will ensure that if the stock’s price con-
Risk management and taking a profit tinues to rise, you will be there to garner profits. As always,
Like every other chart pattern buy signal, the breakaway gap remember that there is no sure thing in the stock market. No
is not always going to lead to a profitable trade. Every trader matter if a trade looks like a “can’t lose” situation, always
has a different risk threshold. However, there are some sug- employ stop-losses to manage risk.
gestions about where to place a stop-loss.
First, you can place it just below the opening or intraday low Kenneth Gilliland is an attorney and long-time trader.
of the breakout. This area will normally act as support. Keep
in mind that sometimes the price will undercut the intraday Suggested reading
low, only to have some buyers enter the market and support Murphy, John J. [1996]. The Visual Investor, John Wiley &
the stock. Another possible way to employ a stop-loss is if Sons.
the breakaway gap did not occur too far from the previous ‡StockCharts.com
trading range. In that case, you can place a stop-loss below ‡See Editorial Resource Index S&C
+WM Henry.indd 3 11/23/10 7:16:09 PM

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
Daytrading for you? their account equity dip (even slightly) be- Position sizing
Daytrading seems to provide traders with low the stated daytrading margin rate. This I would venture to say that most daytrad-
less risk than position trading because too adds to the likelihood of failure. ers execute quantities in excess of what is
there is no overnight exposure. How do Aside from the leverage factor, lightly ideal based on available trading capital.
you feel about the strategy? capitalized accounts might not have the Brokerage firms are partly to blame for
Traders are often drawn to daytrading means to hold positions overnight when extending highly discounted margins to
because it provides them with low barriers necessary. Stock index futures might close daytraders, but in the end, it is the trader’s
to entry, it lacks the overnight risk position at 3:15 pm CT, but that doesn’t mean your choice whether to use it.
that traders endure and, let’s face it, it is technical setup has had a chance to play How many contracts you trade at a time
exciting. The idea of speeding up your itself out. It might be crucial to hold posi- should be based on personal risk tolerance
trading results is appealing; after all, you tions into the overnight session, or even and available capital. As a rule of thumb, I
will likely use the same technical indicators the next trading day, to give your strategy recommend traders initiate a position with
and oscillators for daytrading as you would a chance to succeed. a one-lot of a mini stock index futures
for position trading, so why wait weeks for contract per $10,000. Of course, you can
the outcome? Instead, you can determine Overtrading easily trade 10 or more times this amount
whether you have what it takes to make Sometimes, those drawn to daytrading with the given account size but just because
money within a single trading day. tend to have hyperactive personalities you can doesn’t mean you should.
I’ve been a commodity broker since and this often affects their trading results Sound boring? Look at it this way: an
early 2004 and have had the privilege of a in a negative way. Rather than exercising average profit of $50 per day equates to
front-row seat to the game of retail trading. patience, many trade out of boredom; if $1,000 per month and $12,000 per year.
Based on my observations, daytrading is they don’t lose money in the market, they Assuming you were skilled enough to do
likely one of the most difficult strategies end up with a hefty commission bill that this and had started with a $10,000 account,
to employ successfully. Yet with difficulty eats away at their trading account. you would have more than doubled your
comes potential reward for those who are Most people look at being flat the market money in a year. It doesn’t take 10 lots to
capable of managing emotions and willing as a missed opportunity, but I encourage make $50 per day, but I believe trading
to put the time in to pay their dues. them to see it another way. If you are on 10 lots dramatically increases your odds
Here are a few of the most common the sidelines, you aren’t losing money and of blowing an account out.
mistakes made by daytraders: will be in a much better position to take
advantage of a promising opportunity Price averaging
Undercapitalized should it come along. Most people will tell you not to add to your
Most traders have come to the realization losers, but for those with well-capitalized
that margin requirements for intraday trad- Stop orders accounts, I believe adding to a position as
ing are set by the brokerage firm and not Most trading books and courses will tell a means of adjusting your breakeven price
the exchange. Because brokers generate you to always use stop orders, but I am makes sense. However, this is something
revenue based on commission, they often not convinced they are the best method you should treat with care. It doesn’t
entice traders with low margin rates. You of risk management. In my opinion, the mean you should buy another emini S&P
have probably seen ads claiming daytrad- use of stops often increases the odds of every handle it drops against you, but if
ers can trade an emini S&P with as little trading failure. Anybody who has experi- the market falls five to seven handles be-
as $300 as a good-faith deposit. enced a stop order being filled just before neath your entry, perhaps it is something
Nonetheless, too much leverage doesn’t the market reverses can understand the to consider. Naturally, it would be wise to
give traders an advantage; it gives them an emotional turmoil it can cause. Not only peel off contracts at various prices, should
incredible burden and dismally low prob- was that particular trade a failure but it the market turn in your favor. If you scale
abilities of success. In addition, many of could have a negative impact on trader into a trade, it is often best to scale out of
the discount firms offering low margins are psychology going forward and affect future it as well.
quick to liquidate client positions, should trades as well. S&C
+1101 Garner_FuturesQA.indd 1 11/23/10 7:46:14 PM

History Repeats Itself, But When?
Chart Analog Scenarios
Technical analysis is based on the theory that history will history. The most famous example of this is the 1987 US stock
CHRISTINE MORRISON
repeat itself. What is not so obvious, however, is that these market crash having had so many similarities to the market
historical repetitions may happen not just over a few months crash of 1929. The correlation of the price action between
but over a few decades. This is where chart analogs can be these two crashes is remarkably high.
of great value. Such comparisons are referred to as chart analogs, as they
compare a current market’s price action (or one period in time)
by Sam Whitehill to a different past period of price action that is significantly
C
correlated. The main purpose of chart analogs is to forecast
hart analogs compare a market’s price action over two future prices based on history repeating itself. These forecasts
different periods of time to discern similar technical are of particular interest near market tops and bottoms.
patterns that may repeat. Analogs, which are easy to Chart analogs do not get as much credit or coverage as they
create, have been significantly useful with comparisons deserve. This is especially true given how easy and quick
such as the 1929 versus 1987 stock market crashes. they are to use. Similar to all technical tools, however, chart
analogs are fallible and can break down. Nevertheless, they
Defining chart analogs are a valuable tool in building future market scenarios.
As noted in Edwin LeFèvre’s Reminiscences Of A Stock Op-
erator, “Nowhere does history indulge in repetitions so often Classic chart analogs
or so uniformly as in Wall Street.” Indeed, many stock chart First, consider the classic analog between the 1929 and
patterns spanning significant time periods repeat throughout 1987 US stock market crashes (Figure 1). The price action
+Whitehill.indd 1 11/23/10 6:31:29 PM

TRADING TECHNIQUES
Dow Jones Industrial Avg. 1987 vs. 1929
85
/24 7
/4/ 6
87
6
5
9/5 87
6
7
7
8
6
7
8
4/2 6
/19
3/4 6
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0/1
8/1
2/1
2/1
4/1
8/1
8/1
/14
/30
/10
1/8
8/1
9/2
7/1
6/2
3/2
5/1
1/2
11
10
12
10
12
450 3,000
400
2,500
350
300 2,000
DJIA 1987
DJIA 1929
250
1,500
200
150 1,000
DJIA 1929
100 DJIA 1987
500
50
0 0
6/2 29
29
28
28
9
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/22 9
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1/2
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9/2
7/2
9/2
4/2
11
10
11
10
12
Figure 1: 1929 vs. 1987 Us stock market crashes. Note how similar the price action is between
these two periods.

between these two periods is very highly correlated (that is, greater than 90%).
You may remember the interview with trader Paul Tudor Jones in the book The
Market Wizards in which he explained how he used just such a chart analog to help
t e r s
wri d.
forecast the crash of 1987.
Another example of a compelling chart analog appears in the 2000 crash of the
Nasdaq after the dotcom bubble. In this case, you could compare this crash to
that of 1929 or 1987, and find similar patterns. Figure 2 shows the Nasdaq 2000
crash compared to that of the 1987 Dow Jones Industrial Average (Djia) crash.
w a n t e
NASDAQ 2000 Dotcom Bubble vs. DJIA 1987 crash
86
87
87
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/
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/
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2/7
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6/7
7/7
8/6
12
10
11
6,000 3,000
5,000 2,500
You read our publications.
NASDAQ 2000
4,000 2,000
DJIA 1987
Now write for them, too!

3,000 1,500
Fax resume: 206-938-1307
2,000 NASDAQ 2000 1,000 Call: 206-938-0570
DJIA 1987 crash Email: Editor@Traders.com
TA09W1
1,000 500
Visit: www.TRADERS.com
0 0
FINANCE.YAHOO.COM
99
00
00
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99
9
99
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00
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0
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3/3
4/2
5/2
9/5
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12
11
10
Figure 2: 1987 DJIA crash vs. nasdaq 2000 crash. The bursting of the NASDAQ dotcom bubble of 2000
was highly correlated with the crash of the DJIA in late 1987.

TRADING TECHNIQUES
(Correl) in Microsoft Excel.

DJIA 2010 vs. DJIA 1997–99 The price history can be plotted
on a chart to examine the visual
97
97
98
similarities.
9
8
7
8
7
8
7
9
/199
/199
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In addition to using a highly
/
3/22
2/10
6/30
5/11
6/25
9/28
3/27
8/14
9/23
11/1
12/2
11/7
12/2
2/6/
8/9/
12,000 10,000 correlated period from the past,
9.000 you will probably want to look
10,000 8,000 at the global circumstances (that
7,000
is, economic and political condi-
8/19/2010, DJIA = 10,271
8,000 tions) during different historical
DJIA 1997–99
6,000
periods to see how they com-
DJIA 2010
6,000 5,000 pared to those in the current time.

4,000 For example, examine the Djia
4,000 3,000 from March 2009 to August 2010
DJIA 2010
2,000 compared with the summer of
2,000 DJIA 1997–99
1,000 1997 to early 1999. Not only do
the charts resemble each other,
• Technical Analysis of 0 STOCKS & COMMODITIES magazine 0
but the economic circumstances
1/1 10
09
1
10
3/3 0
09
/28 0
09
9
9/3 10
09
09
0
10
9
are similar as well. Further, the
01
1
1
00
01
00
01
/20
/20
/20
/20
/20
/20
20
0
/20
/20
/20
2/2
1/2
8/2
0/2
2/2
7/2
act Karen Moore with approval or changes:

/3/
/19
1/7
3/8
/14
9/4
8/8
6/1
Russian financial crisis of 1998

7/2
7/1
4/2
4/1
12
11
10
10
can be compared to the current

) 938-0570 • fax:FIGURE
206-938-1307 • email: KMoore@Traders.com sovereign and banking risks in
3: DJIA FROM MARCH LOWS OF 2009 TO AUGUST 19, 2010, VS. THE SUMMER OF 1997 TO EARLY 1999.
If history repeats the late 1990s, the DJIA may be a bit range-bound for the next several months as shown in the late 1998
Europe of 2010. The charts of
sideways pattern. these two periods are similar,
as shown in Figure 3.
ChoosingPROOF #1 a period in the past An alternative analog of the 2009–10 Djia can be compared
There will likely be more than one period in to that of late 1989 to early 1991. Again, these two eras are
the past that resembles the current price action economically similar. While 2009–10 was preceded by a
of a particular market segment. Practically banking and real estate crisis, the 1989–91 era was marked by
speaking, it is fast and easy to compare two the savings & loan crisis as well as the recession of 1990–91
different periods of a market’s price action. (Figure 4).
Historical data can be downloaded for free
from such sites as finance.yahoo.com. More- Use with care
over, running correlation statistics between As with all technical tools, chart analogs are not perfect. There
even a few years of daily closing prices can be will likely be more than one period in the past that appears to
done quickly by using the correlation function match the current period. Choosing which historical period
to compare to the present is not a trivial matter. Nor is how
long a time segment (three months, one year, and so on) to
compare to the past an easy choice. Comparing too short a time
period will likely lead to just noise, while too long a period
may eliminate many valuable instances. Moreover, at some
point, every chart analog will break down to the extent that
Advanced algorithms deliver the past no longer repeats or matches the current price action.
low lag, low noise analysis. Identifying a true breakdown of the correlation between past
and present price action is difficult because of deviations that
may be interpreted as either insignificant or as valid signals
Now featuring of a genuine breakdown in the chart analog.
Tools for...
Build scenarios, not just forecasts
Despite the drawbacks, chart analogs may be better used in
building scenarios rather than making outright market forecasts.
Also for: AmiBroker, Wealth-Lab, MetaTrader, Wavewi$e, Excel, Investor/RT, BioComp Profit, NeoTicker,
Tradecision, TradingSolutions, MATLAB, TradeStation, Ninja Trader, eSignal, NeuroShell Trader, Financial
This allows you to look at several highly correlated and similar
Data Calculator, Genesis TradeNavigator and TradersStudio. historical periods between the past and present without becom-
ing too myopic. Technical analysis relies in part on patterns
www.jurikres.com • 800-810-3646 • 719-686-0074
repeating themselves, and chart analogs can be thought of as
For more information circle No. 7 simply a longer time frame version of this repetition.

DJIA 2010 vs. DJIA 1989–91
Technical analysis
relies on patterns
98
12/1 90
90
0
9
1
9
4/30 0
9
0
0
0
9/12 0
9
1
9
/199
/198
/199
/199
198
/199
/198
/199
/199
/199
/199
6/19
7/19
/198
1/19
/199
repeating, and
198
198
/
6/14
6/19
3/11
4/25
3/21
3/15
9/17
1/30
7/29
12/1
10/2
11/1
1/26
5/5/
8/3/
chart analogs 12,000 3,500
can be thought of 3,000
10,000
as a longer time
2,500
frame. 8,000
JULY 2010 • Technical Analysis of STOCKS & COMMODITIES magazine
DJIA 1989–91
DJIA 2010
2,000 8/19/2010, DJIA = 10,271

6,000
Sam Whitehill has six
years’ experience in the Please contact Karen Moore with approval or changes: 1,500
4,000
financial industry, in- DJIA 2010 1,000
cluding daytrading at a phone:
2,000 (206) 938-0570 • fax: 206-938-1307 • email: KMoore@Traders.com
DJIA 1989–91
500
proprietary trading firm
and risk management at 0 0
an investment bank. He
10
09
1/1 10
9
1
8/3 10
10
7/2 09
09
09
0
0
09
10
3/3 0
00
00
01
01
01
1
holds a bachelor’s degree PROOF #1
/20
/20
/20
0
/20
/20
/20
20
/20
/20
/20
2/2
1/2
2/2
8/2
0/2
7/2
/3/
9/4
/28
/14
8/8
/19
3/8
8/1
1/7
4/2
7/1
4/1
from the University of 12
11
10
10
Virginia’s McIntire School FIGURE 4: DJIA 2010 VS. DJIA 1989–91. The price action over those two periods is highly correlated. If the remainder of 2010
of Commerce. He may be repeats the price action of early 1991, the DJIA will be range-bound as shown here.
contacted at samwhite-
hill@ymail.com.
Suggested reading
LeFèvre, Edwin [1994]. Reminiscences Of A Stock Operator,
John Wiley & Sons. Originally published in 1923.
Schwager, Jack D. [1989]. The Market Wizards, New York
The Ultimate Options
Institute of Finance/Simon & Schuster.
Whitehill, Sam [2010]. “Trading With Volume Profile,”
Trading System.
Technical Analysis of Stocks & Commodities, Volume
28: June.
• finance.yahoo.com/q/hp?s=%5EDJI+Historical+Prices
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Managed Risk dilemma. Here, vega or implied volatil- properly. To do this effectively, the time
If I’m trying to manage option posi- ity risk could reduce the call option’s necessary to capture a lift in rates means
tion risk to reduce my maximum loss value beyond the benefit of its delta going out to longer-dated options, quite
exposure, is it better to tie a stop-loss component. possibly a Leaps contract. This is due
to the market price of the options or the What if the trader decides to use an to a call’s rho factor growing larger per
underlying stock? at-the-money bull vertical in lieu of a point shift in interest rates as one goes
Managed stops can be a good tool as long call in this situation? If we make the out in time.
they act as an extra layer of portfolio assumption of the spread reducing theta When it comes to the actual positioning,
protection beyond our initial and known and vega risk by a measurable amount traders wanting positive rho risk will look
risk assumption if we’re dealing with compared to the long call strategies, we to hedge the call with short stock. This has
a limited risk strategy. The question of can see how a technical stop would con- the effect of neutralizing the call’s delta
exiting with a tighter managed loss based tinue to be effective, whereas either of the or directional risk while maintaining the
on the underlying share price versus the long call strategies might fail. required rho risk component.
prevailing option market isn’t as clear-cut. The construction of a vertical spread One potentially large and maybe unin-
This is largely up to the individual trader does present its own challenges. Primarily, tended risk that the trader maintains with
and his or her risk acceptance, as well as traders need to accept that gains and profits this position is long vega risk and negative
the strategy being employed. are limited and slower to come by if the exposure to lower implied volatility. More
To illustrate with a simple situation that trader’s technical prognosis is validated, important, as an option’s vega component
many traders can appreciate, say you’re compared to a long call strategy. Finally, will invariably be larger than its rho fac-
bullish on shares technically and initiate traders should check with their broker- tor, capturing rho risk remains secondary
an at-the-money long call strategy with age’s rules to find out whether there are to being confident in maintaining a long
less than 30 days until the contract’s ex- limitations on how positions can be closed vega position.
piration. In this position type, you have and/or managed prior to entering. One alternative option, if you’ll pardon
clearly defined risk based on the number the pun, are interest rate–related products
of contracts purchased multiplied by the “Interesting” Strategy that have listed options. One popular
purchase price. With interest rates at historic lows and vehicle that falls under this category is
Going forward and despite shares mov- hard-pressed to drop further, what type the iShares Barclays 20-Year Treasury
ing up in price and further confirming your of option strategy could take advantage Bond Fund (Tlt).
outlook on the stock, you find the passage of an increase in rates? The Tlt seeks to track the price and
of time has eroded the value of the op- Call options, which have positive rho yield performance of the Barclays Capi-
tion. Unfortunately, the rate and speed of or interest rate risk, are one good way to tal US 20+ Year Treasury Bond Index
change in the underlying hasn’t countered capture an anticipated increase in rates. by investing at least 90% of its assets
the option’s theta or time decay risk. In A long call acts as a lower-cost means in the bonds of the underlying and up to
this instance, the trader may find the need (dollar basis per contract) to holding an 5% of its assets in repos, cash, and cash
to change their stop-loss from being tied equivalent amount of shares. As borrow- equivalents.
to a technical bias to one that commits to ing costs — that is, interest rates — rise As the Tlt’s underlying drops in price
the option’s going market price if he or and the cost to hold the larger capital- as rates increase, a trader wishing to posi-
she is committed to managing position intensive stock position increases, a long tion for an increase in rates would look
risk to something other than the known call strategy becomes more attractive. at purchasing a put contract as the purest
maximum loss. Because of this relationship, the call play. Other positions such as verticals or
A trader who pursues a similar at-the- price, all else being equal, will increase calendars may deserve consideration if
money long call strategy but decides to to reflect its increased worth as an equiva- one also has a view on vega risk.
position with a longer-term option in an lent strategy for holding long stock. In
effort to dodge decay risk may nonethe- Contributing analysis by senior Optionetics
order to take advantage of rho risk in
less be faced with a comparable open-loss strategist Chris Tyler
this capacity, a trader needs to position S&C
+1101 Gentile Tyler QA.indd 1 11/23/10 7:45:35 PM

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INTERVIEW
Trading By Honed Instinct
Curtis Faith
And Trading From Your Gut
Curtis Faith is best known for getting his start as a member of the Turtles, the elite
Chicago trading group. In his early 20s, Faith earned more than $30 million as a
member of the renowned group that started as a bet between its founders, Richard
Dennis and William Eckhardt. Drawing from his experience as an original Turtle,
as well as a successful entrepreneur — having founded several software and high-
tech startups — Faith developed a “whole mind” approach that gives traders at
all skill levels the tools to become a master trader.
In Trading From Your Gut, his latest book, Faith talks about a method that is
more art than science and gives traders the tools to use all of the weapons at their
disposal: instinct and analysis.
Stocks & Commodities Editor Jayanthi Gopalakrishnan and Staff Writer Bruce
Faber interviewed Curtis Faith via telephone on November 8, 2010.
The process of building
C urtis, you were one of the

original Turtles. How did you
become one?
was some particularly unusual strategy
they used.
a new system from
scratch often involves
making judgments
I answered the ad like everybody else, How long did you do this?
but at the time I was a computer program- I traded with them for four and a half about what might be
mer working at a small software company years, which was essentially as long as important.
in Massachusetts. I was a sophomore in the program lasted. The program was
college, and I had decided to drop out of disbanded when Rich got into some legal
college and trade commodities full time. troubles with some stuff he was doing getting back into trading again in a big
I applied to the Richard Dennis program separate from the Turtles. His lawyers way over the next few months.
and was one of the 40 people they in- advised him to discontinue trading.
terviewed and one of the 12 people they You have written some books that are
chose for the program for the first year. Did you continue trading after that? very popular among traders. Your
Probably the main reason I was picked I gave it up for a while and started most recent book is Trading From
was my background in programming some software companies. I did not get Your Gut. What I found interesting
trading systems and eventually analyzing back into trading again until 2001, when is that you’re somebody who’s been in
them. This was 1983, which was way I joined a hedge fund in the US Virgin system trading, and you’ve developed
before most people were doing that sort Islands. At that point, I took a lot of the systems for trading, but you decide to
of thing. commodity strategies that we had used write a book about trading by instinct.
in the Dennis program and started to It sounds like a completely different
When you were trading with the Turtles, look into doing the same sorts of things approach to trading. Why did you
were you using a system they designed, with stocks. I have been trading on and incorporate discretionary trading into
or did you help them design a system off since then. your methodology?
as well? I did that because a lot of people trade
They gave us a couple of systems they Are you still trading? that way. I have known people who
had designed and gave us the opportunity I go in spurts. I’ll trade for a while are successful doing both, but even for
to trade them. We could change them and then not for a while. It depends on pure system traders, intuition plays an
slightly to our own taste, but they had what else is going on in my life. I like important role. If you think about it, the
done all the research for it. It was more learning new things. I like challenges. So decisions you make about trading not
or less consistent with some of the stuff I tend to have two or three new ventures based on raw information are based on
I had been researching. It was not like it going at any given point, but I plan on your instincts. Even when you are build-
+Curtis Faith Interview.indd 1 11/23/10 8:50:01 PM

ing a system you have to decide what is It sounds like it is probably a combina- you should trade minis for a while. Trade
important, what measures make sense, tion of the two. a tenth the size of a full contract until you
and what measures don’t. The process Yes. That is really what my book can manage that without getting tossed
of building a new system from scratch goes into. It is what I call “whole mind around, even if you have the money in
often involves making judgments about trading.” It refers to using the two hemi- the bank. Get a handle on your trading
what might be important. It is a process spheres of your brain for what they are before you put all of your money into
NOVEMBER 2009 • Technical Analysis of STOCKS & COMMODITIES magazine
of discovery. Trading instinctively is not good at. If you try to be an entirely left- your trading.
really saying you should be a discretion- brain trader, you won’t be as successful
Please
ary contact
trader andKaren
shoot Moore
from thewith approval
hip. It’s or changes:
as if you use both sides of your brain. You emphasize that managing risks is
the difference between intuition that is I am more right-brained than most important. Why is that?
sharpened
phone: (206) through
938-0570 trading and intuition
• fax: traders,• email:
206-938-1307 but I am definitely left-brain The biggest reason many traders fail
KMoore@Traders.com
that is sort of guessing. An expert has dominated. is because they simply take on too much
honed intuition and is able to make deci- leverage, and they blow up. That is easy
sions very quickly. One of the most difficult aspects of trad- to do, especially for beginning traders.
That does not mean those decisions ing discretionarily
PROOFis#1 controlling your Any of the derivatives, whether they are
are not based on merit. I don’t know emotions. What is a good method to not retail forex or commodities futures or
any successful traders who don’t have a let your emotions get in the way? forex futures, all have very high lever-
strategy, but I know a lot of people who The best way is through simple ex- age potential. You can get yourself into
use their intuition to decide when to enter posure. The best way to overcome any a situation where a very minor market
or when to exit, but it is always based emotional problems with trading is to movement wipes you out. If you are
on some criteria they have set up. If X, trade with small-enough amounts that the not paying attention, even if you have a
Y, and Z happen, then they buy. Or if Q, problems don’t arise. You keep doing that good strategy, you can lose money. That
R, and S happen, then they sell. Those until you can expand your trading size. is why risk is so important to manage.
particular events might be somewhat In the beginning, if you get emotionally At the end of the day, you cannot make
subjective. tossed around by the market, then maybe money if you go bust.

INTERVIEW
But considering you cannot predict That process is something you can comes after you make your decision.
which way the markets are going to go, train your brain to do very quickly. As There are several steps. The first step is
how does somebody develop the instinct you get good at it, you can spend just a to make the decision. The second step is
to determine which way the markets are second looking at a chart and know if it to validate it. If you’re searching through
going? Do you look at charts, specific is the kind of chart you want to trade. If a bunch of stocks, you might want to
indicators, or the overall market? you want to get your intuition to work, narrow it down to about 25 that you
You do it through practice. You need then you need to make those decisions would consider buying. So the process
to do a special kind of practice. What you fast. If you make them slowly, you are of looking through 1,000 charts in the
want to do is practice making very quick essentially giving your left-brain — that morning and coming up with 25 is really
decisions. You want to use the visual part is, your analytical side — a chance to look an intuitive process. You can do that very
of your brain, as opposed to the thinking at it and take over from your intuition. If quickly.
part of your brain, which is why you want you have to make the decision quickly — The process of picking among those
to make decisions quickly. that is, if you literally only give yourself 25 might be an analytical process where
I’ll give you an example. Let’s say a second to make the decision — then you validate your intuition and ask, “Do
you are trading stocks. One of the things you have no choice. You have to use your I like this chart, and why? What is good
you want to do is find good trading can- intuition. That is what forces you to make about it? What is bad about it? Does this
didates. Even if you have a rigid trading the decision. Studies indicate that when fit my criteria for my system that I ran
system, you still cannot trade everything. people do that in various fields, they are my backtests on?” These are the types of
There are too many stocks and most able to make quick assessments about things you would ask yourself. So it is an
people don’t have enough money to do it the right course of action. iteration between the different parts of
or the computer technology to be able to your brain and where each type of task
manage trading 1,000 stocks at the same Would one way to do that be to visualize is performed using the appropriate part
time. So you have to pick. That process different scenarios and getting accus- of your brain. If it is an analytical task,
is subjective even for people with fairly tomed to them? you take more time. If it is an intuitive
rigid systems. Visualizing different scenarios is what task, you do it quickly.
But to get that intuition, is there any

specific factor that helps to gain it, or is
Magazines it a combination of various things?
Intuition is an inherently difficult
Traders.com process to describe, because it happens
from the bottom up. The answers come
Get the exact information without there being an explicit reason.
Articles you want online at the That is just the way it works. It is es-
sentially a pattern matching skill, where
Books
STOCKS & COMMODITIES your brain is looking at lots of different
information and comes to a conclusion
Online Store. quickly. But there is no easy way to know
Software exactly why your brain made that deci-
• PDF versions of past articles sion. You can come up with all sorts of
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TA09E2
subscriptions likely to be successful. But if you satisfy

your analytical side and your intuition,
then you are more likely to be happy with
http://store.traders.com the trade and be able to stick to whatever

trading strategy or system you are set up Can you give us an example?
to do. You might start noticing the markets
doing something and you just think
Would the same thing apply to exiting something like, “Okay, this particular
the trades as well? day could be a huge outlier, and maybe
Yes. On exits I am more inclined to I could make some money, but maybe I
give credence to intuition. Your intuition couldn’t. But there is way more uncer-
is very well adapted to identifying hid- tainty in the market than it makes sense
den dangers that you can’t articulate. So to hold on to positions, so I am going to
if something doesn’t feel right about a exit my positions.” That is the kind of
market, getting out is a much safer thing intuitive override I am talking about. It’s
to do. If you make a mistake and get into not something you would do on a regular
something you should not have gotten basis, but something that you would do
into, that can cost you a lot of money. when something unusual happens. When
If you get out, the worst thing that can you see something happen, you might For more information circle No. 16
happen is you lose an opportunity. That have a thought process along the lines of,
is not as big of a cost as a potential big “Hey, I’m stopping trading today. I am post-crash high. We dropped back from
loss. Good traders are more willing to going to wait until whatever is causing that. In July, we were as low as 900-plus,
use their intuition for exits. this is figured out.” and now we are way back up again, and
we are sitting right up at the top.
Most people say that before you enter Do you have any strong feelings about One of two things is going to happen.
a trade, you better know where your what the markets are doing right now? Either it is going to keep going, or it is
exits are going to be. Do you subscribe We saw a rally recently. going to reverse. But if you exit right now
to that thought? I’ll tell you what I think about the [November 8, 2010], for example, then
There are three kinds of exits. There Standard & Poor’s 500. I think we are what you would find is that your chances
is the worst-case scenario exit, which sitting at one of those points that is a of being at the very top are significantly
everybody should have. That is asking, superb time, if you have been long, to high, because there is a decent chance
“If a trade goes bad, where am I getting exit. The market does this every once that the market, having had virtually an
out?” That should be a fixed number in a while. It reaches a point of what I unconstrained, straight-up move of about
that you know even before you place consider instability. What the S&P 500 200 points, is going to take a breather
the trade. has done is gone up to the 1220 range, and go the other way.
The second number is where and under which was exactly where it went toward
what circumstances you think you will the end of April 2010. It was sort of the By which you mean…
get out in a good-case scenario.
The third number is an intuitive over-
ride where the market just does not seem
right. This could be anything from the
way the market is acting to something
that you just can’t quite put your finger
on. Those cases are not too common,
but when they do happen, a lot of good
traders are willing to say, “Hey, I’m
jumping out of the markets now because
this does not seem right. Something is
going on with the market that isn’t what
I am used to seeing and therefore is not
likely to be reflected in my testing.”
“I’m disappointed there’s nothing in the budget about

allowances. So I’m emailing our congressman.”

INTERVIEW
Markets don’t just go straight up and well as it did then?

up and up. Eventually, they stop and I think trend-following will always
what we saw the other day is the kind work. It is just a brutally difficult way
of reaction you get at the end of a run. for most people to trade, because you
This may not be the top, but it has the have to stomach enormous drawdowns.
signs that I like to see at one. If I had This is why it will continue to work.
been long, I think getting out right now What happens is investors can’t handle
would be good, or waiting to see if the the drawdowns, so you will get a lot of
market drops back a little lower and if money and maybe trend-following will
getting out would be a good idea. work for a while. A lot of money will
If the S&P drops down to 1200 or higher. But if I was looking for a point come in, and then you will get the gi-
1210, that would be an exit point where to take profits, and I had been riding up, ant drawdown, and then all the money
I would say, “All right, I am going to this is where I would be taking profits. leaves, and it starts working again. That’s
wait and see what happens and maybe happened probably six or seven cycles
start looking at getting long again if the Why here? since I started trend-following trading.
market breaks up to the 1240 range.” Because if you are wrong, the risk is People will say that trend-following
Sitting at the peak is dangerous. There small. And if you are wrong, you can doesn’t work, and then it starts working
is a very high likelihood that you’ll drop get right back into the market when it again almost immediately thereafter. You
a significant amount and maybe even makes significant new highs. You haven’t will get three or four good years.
retest the lows again. really lost that much. Whereas if you are It is harder now for the big funds
It is unlikely to go straight down, but right, you are going to save yourself at because they have to pay a lot to get
who knows. The last time we had a run least two or three times that. Where else in and out, because they are managing
this big we did have an almost straight- are you going to exit on the way down? large sums of money. But for the smaller
down day. That was when the flash crash Would you exit at 1180? Would you exit investors, the biggest problem is just
occurred. It was after something like a at 1160? There isn’t a very good point at that it is hard to do. Most people cannot
three-month move where the market which to exit or to take profits if it starts handle the drawdowns.
didn’t really move against you very much moving in the other direction. Right now
at all. is a good point because you are sitting The drawdowns can be pretty signifi-
The run since the beginning of Sep- right up against the price of the old high cant, right?
tember has been unchallenged. It has from late April. So that is my take on the It depends on how much leverage
been pure bull. So that is my take on it, S&P. you are pushing. You can control the
but I don’t predict stuff. I just say, here’s drawdown depending on what you are
what I would do if the market does this, The Turtle method was predominantly trading. If you have mini contracts, then
and here’s what I would do if the market a trend-following method, if I recall. you are in decent shape, but if you have
does that. I don’t know what it is going Do you think a trend-following method to deal with full-size contracts and you
to do. It could go another 500 points would work in today’s markets just as are a smaller trader, it is hard to control
the drawdown because you are stuck
with a minimum of one contract. This
implies the minimum level of risk that
you are going to have to take on. That
is why a lot of people blow up or quit
trading. They will go down 30% or 40%,
then they lose the faith in what they are
doing and fall to pieces, and they can’t
keep trading the right way. Then they
keep losing money. That is the problem.
Most people can’t just sit there and watch
half of their money go away.
Do you still keep in touch with your

fellow Turtles?
I do from time to time. A couple of
years ago we had a reunion in Chicago.
Pretty much everybody showed up. We
definitely talk, and I have done some
“This is where the buck stops!”
business deals with some Turtles in the

past. I have had one of them sit on the ways to make the world a better place. runs Hawksbill Capital. He runs a $78
board of directors of a company I started. million fund. He was up 43%, almost
I do not do a good job of keeping in You mentioned that you have this 44% year to date as of September 2010.
touch, but I do keep in touch. “worst-case scenario” exit plan. How Paul Rabar was up 9.8%. He runs a $171
do you come up with that? million fund. William Eckhardt — he
How did you get interested in stocks in It is a combination of two things. It is was not one of the Turtles, he was one of
the first place to start writing programs a percentage, if there is no clear struc- the guys who taught us; he was Richard
when you were so young? ture nearby. But I prefer to put it around Dennis’s trading partner — runs a $350
I was 16 or 17 when I started. I just something structured. By “structure” I million fund. He was up about 10% as
chanced into it. I happened to get an mean let’s say there is a weekly high or of September. The Turtles are running
after-school job for a guy my sister had a weekly low that is not too far away over $1 billion all combined, probably
been doing some bookkeeping for. He in terms of price. I put my exit usually closer to $2 billion. And, they have had a
was looking to hire some high school some distance past that structure. This very good year, at least up until now.
students to do some programming for gives the market a chance to bounce off
him. He happened to be doing commodi- the structure and go back up before I get Amazing. Thank you, Curtis.
ties trading analysis software, and that out. I prefer to do it this way because that
is what I started to do. I did not know works better. Failing that, in certain strat- Suggested reading
anything about commodities or trading egies I use a pure percentage basis. Collins, Art [2005]. “Richard Dennis,”
when I started, but I read some books he interview, Technical Analysis of
gave me. You mentioned you had a reunion of Stocks & Commodities, Volume
the Turtles a couple of years ago. Are 23: April.
Which books? most of them still in trading, and have Eckhardt, William [1994]. “The C-Test,”
He gave me Charles MacKay’s Ex- they been as successful as you in what Technical Analysis of Stocks &
traordinary Popular Delusions and The they have done? Commodities, Volume 12: May.
Madness Of Crowds. He gave me Edwin I was the most successful during the Faith, Curtis [2010]. Trading From Your
LeFevre’s Reminiscences of A Stock program, but most of the Turtles who Gut, FT Press.
Operator. And The Crowd: A Study Of kept going were far more successful than LeBon, Gustave [1995]. The Crowd, Isis
The Popular Mind by Gustave Le Bon. I I ever was after we quit. Jerry Parker, Large Print.
read all of those and I wanted to be like for example, runs Chesapeake Capital. LeFèvre, Edwin [1994]. Reminiscences
Jesse Livermore. So I decided I wanted I think he is managing somewhere in Of A Stock Operator, John Wiley &
to be a trader. the $600 million range in his fund right Sons. Originally published in 1923.
now. MacKay, Charles [1995]. Extraordinary
When you are away from trading, what Popular Delusions And The Madness
are you involved in? So basically they are still in trading. Of Crowds, Crown Publishing.
I have a strong interest in alternative I would say half of them. Liz Cheval
S&C
energy. I spend a lot of time working on runs Emc Capital, which is worth about
poverty initiatives, and trying to figure out $170 million. Tom Shanks, for example,
YOUR ONLINE
RESOURCE
FOR
TECHNICAL
ANALYSIS

product review
Bloomberg
For The iPad
Bloomberg
http://itunes.apple.com/us/
app/bloomberg-for-ipad/
id364304764?mt=8
Product: iPad app for
Bloomberg News
Requirements: iPad, wireless
Internet connection
Price: Free
by Wallace Wang
M
ost traders spend their time in
front of a desktop computer
with a high-speed Internet con-
nection. But when you’re traveling or just
stepping away for lunch, you may not
want to cut yourself off from the latest
market news. Fortunately, with an iPad,
a wifi or 3G cellular Internet connection,
and this Bloomberg app, you can stay up
Figure 1: bloomberg app screen. The Bloomberg app screen shows a summary of market data.
to date with the market wherever you
take your iPad.
Market summary
When you first start the Bloomberg
app, it displays a summary screen that
lists the major news stories of the day,
equity indexes such as the Dow Jones
Industrial Average (Djia) or Standard &
Poor’s 500, a list of stocks that you’re
currently watching or holding, and a
currency list that shows the value of
the US dollar compared to other major
currencies (Figure 1).
To check the status of the market at
a glance, the Bloomberg app’s initial
screen provides an overall view of the
market, but if you want more detailed
information, you can tap one of the icons
displayed at the bottom of the screen:
n News
n Equity indexes
Figure 2: news. The news icon lets you scan headlines for different industries. n Custom list of stocks
n Currencies
n Commodities
+PR-Wang_Bloomberg 1101.indd 1 11/23/10 8:25:21 PM

product review
n Equity index futures

n Bonds
n Podcasts
Reading market news

Any last-minute news can greatly influ-
ence prices, so it is important to stay
current with headline stories that may
affect your portfolio. Just tap any of
the top news stories from the opening
screen and the entire article appears for
you to read. One nice touch is that you
can adjust the font size to make text
smaller (so you can read more of it on
the screen) or larger (so you can read the
text easily). For particularly interesting
articles, you can even send a copy to a
friend through any email account you’ve
set up on your iPad.
If you want to scan the headlines of
more than just the top news stories of FIGURE 3: MORE DETAIL. An area chart tracks the historical changes of the stock index over time.
the day, tap the news icon at the bottom
of the opening screen and you’ll get ac-
cess to Bloomberg headlines for stories
about other categories such as insurance
or health care (Figure 2).
Equity indexes
Rather than watch a specific stock, you
may prefer to monitor the big picture
by tracking several stock indexes such
as the S&P 500, the Djia, and Nasdaq,
or international stock indices such as the
Nikkei 225 (Tokyo Stock Exchange) or
the BE 500 (Bloomberg European 500).
The Bloomberg app lets you see all the
major stock indexes at a glance.
If you want more detail about a par-
ticular stock index such as the Djia, a
simple tap on that stock index lets you
view an area chart of that stock index’s
performance, examine how all the differ-
ent categories of that stock index may have
FIGURE 4: THE DIFFERENT INDUSTRIES. Viewing the different industries of a stock index lets you compare
changed as a pie chart, and even spot the how different industries are changing.
biggest gainers and losers for that day.
Tapping the chart tab displays an area
chart where you can switch between dif- identifying the influence of different Creating a custom
ferent time frames from as short as one industries, the Bloomberg app displays stock list
day to as long as one year (Figure 3). industries in different shades of green or Knowing the performance of a specific
If you tap the industries tab, you red, so the brighter the color, the greater stock index may be nice, but traders often
can study the industries that make up a the influence in pushing the index up or need to monitor their current positions or
particular stock index to see which in- down (Figure 4). prices of individual stocks. By tapping
dustries are providing the current growth Tap the movers tab and you can get the “My Stocks” icon, you can view a
and which industries may be dragging spot the biggest winners (and losers) for list of stocks that you can customize. If
the index down. To further aid you in each stock index for that day. you have a long list of stocks, you can

product review
condense your stock list so that it hides

the charts while only showing the current
price and recent change (Figure 5).
Over time, you’ll find new stocks to
watch and old stocks to stop monitoring,
so you’ll need to add, delete, or rear-
range your stock list using familiar touch
gestures and the iPad’s virtual keyboard
(Figure 6). For more detailed information
about any stock on your watchlist, just
tap it and a full chart appears along with
additional information such as its most
recent high and low, its volume, and its
52-week summary (Figure 7).
FIGURE 5: MY STOCKS. The My Stocks icon lets you view the performance of individual stocks.
Currencies, commodities,
index futures, bonds
Currency traders can get a quick over-
view of all the major currencies just by
tapping the currency icon at the bottom of
the open screen. All the major currencies
appear in a table including the US dollar,
euro, yen, and New Zealand dollar. The
Bloomberg app lists the major currencies
such as the US dollar and the euro, but
you can edit this currency list to compare
different currencies such as the British
pound with the Australian dollar.
If you tap the commodities icon at the
bottom of the opening screen, you can
view the latest commodity prices for met-
als, agricultural products, or energy.
Futures traders can tap the equity
index futures icon at the bottom of the
opening screen and view a list of futures
for their favorite stock index such as the
Nasdaq or Ftse 100.
FIGURE 6: STOCK LIST. Editing your stock list lets you add, delete, or rearrange your stocks.
Bond traders can tap the bond icon
to view the major bonds from North
America, Europe, Africa, and Asia. This
comparison of bonds can show you the
latest price, yield, and yield change.
Podcasts
One of the highlights of the Bloomberg
app is its ability to download audio
podcasts of news or market analysis. By
downloading and listening to these, you
can keep up with the latest news while
doing something else such as driving
or eating lunch. Combine the ability to
listen to the latest Bloomberg podcasts
with browsing the latest Bloomberg news
and you can stay informed of the market
changes whether you want to read, listen,
SENS
“You just can’t beat this stuff from the old economy.” or do a combination of both.

any trading software you may have on
your desktop computer, but it works fine
as a supplemental financial news service.
If you need to be away from your main
computer, the Bloomberg app turns your
iPad into a crucial link to the market so
you can follow the latest information.
Even if you’re at your computer, you
may find the Bloomberg app useful. Just
place your iPad on your desk and run the
Bloomberg app so you can monitor the
market on your iPad while reserving your
main computer monitors for trading.
Any trader with an iPad can find a
use for the Bloomberg app. Bloomberg
also offers an iPhone app version, which
displays similar information but within
the much smaller screen of the iPhone
or iPod touch. If you don’t have an iPad,
the Bloomberg app might just give you
FIGURE 7: WANT MORE DETAIL? Tapping on a stock displays more detailed information.
a reason to get one today.
When he’s not trading stocks or study-

Summary this Bloomberg app interesting, but far ing chart patterns, Wallace Wang writes
Since the Bloomberg app is free, there’s less useful since it only provides basic computer books including Microsoft
no reason why you shouldn’t download market data without providing more Office For Dummies, Beginning Pro-
and use it if you have an iPad. Like most detailed data like it does with stocks. gramming For Dummies, My New Mac,
free services, though, be aware that the Since the Bloomberg app relies on a and My New iPad. In addition, he also
app only provides delayed market in- wireless Internet connection to work, develops Windows, Macintosh, and
formation so you can’t accurately trade you’ll need to use it within a wifi hotspot iPhone/iPad applications.
based on its time-delayed market data. or through a 3G cellular Internet connec-
The Bloomberg app is clearly focused tion (if you have a 3G-enabled iPad). If Suggested reading
on stock traders with its ability to custom- you find yourself out of range from a Wang, Wallace [2009]. “Trading On
ize a stock watchlist and view individual wireless Internet connection, then you’ll A Mac,” Technical Analysis of
stocks or entire stock indexes in a variety find the Bloomberg app far less useful Stocks & Commodities, Volume
of time frames. If you’re a currency, for displaying the latest market news. 27: April.
commodity, or bond trader, you may find The Bloomberg app is no substitute for ‡Bloomberg iPad app S&C
Sneak preview …
Covered Call Writing Interview: Trading Options In A Volatile Market
by Jay Kaeppel by Jayanthi Gopalakrishnan
Between investment and trading, which use of options works We talked with Michael Burke of TradeStation.
for you?
…Coming soon!

product review
Pristine Pattern
Method Scan
Plugin For MetaStock
Equis International by Dennis D. Peterson Using the pattern scan called the “Bull-
90 South 400 West ish Changing of the Guard” resulted in
T
Suite 620 he Pristine Pattern Method about 16 tickers being selected (Figure
Salt Lake City, UT 84101 Scan plugin comes with screen- 1) when I was scanning the Standard &
Internet: www.equis.com ing filters, expert commentary, Poor’s 500 on August 24, 2010. One of
Email: for sales, use sales@equis.com; chart annotation, and templates to help the columns in the Exploration report
for support, use support@equis.com find patterns that fit with the Pristine ap- is “Setup,” which displays 1.000 or
Product: Plugin for MetaStock 10.1 or proach. The Pristine Method was covered 0.000. The zero represents false and “1”
MetaStock End-of-Day (Eod) in two earlier reviews in the February represents true. The first row displays
Requirements: MetaStock Professional and April 2010 issues of Stocks & Anadarko Petroleum Co. (Apc).
10 for Quote Center MetaStock Eod: 800 Commodities. “Bullish Changing of the Guard” is a
megahertz (MHz) or faster processor; MetaStock refers to its screening phrase that Pristine uses to identify an up
512 MB Ram recommended; 200 MB filters as Explorations and its expert day bar following a three-bar pattern of
available hard disk space; CD-Rom drive; commentary and chart annotation as lower highs or, in the case of candlesticks,
video card and monitor supporting at least Expert Advisors. The CD comes with a three solid red bars. For MetaStock,
256 colors at 1024x768; mouse or other 50-page manual that fits into the CD case. implementation of candlesticks’ solid
pointing device; Microsoft Windows XP There are brief explanations of each of red bars versus red-outlined bars is an
(Service Pack 1 or higher) or 2000 (SP 4 the pattern scans that you can use with important qualification since MetaStock
or higher); Internet Explorer 6.0 or later the Explorer or Expert Advisor. There are will outline a candlestick in red if its
with the latest service packs. 17 different explorations. Both courses close is less than the previous day’s
Price: $299 ($50 off with some promo- are helpful, but the first course is more close, whether it’s an up day or down
tions by calling sales directly at 800 aligned with this plugin. Let’s look at an day. If it’s a down day, then the body
882-3040) example. of the candlestick is filled in, making it
a solid red candlestick, but if it’s
an up day, then the outline of the
body is red but not filled in.
With 17 different scans or ex-
plorations available, you might
ask, “Are they all independent?”
and the answer would be yes.
MetaStock allows you to pick a
set of symbols such as the S&P
500, and using the control key,
select all 17. This generates 17
independent reports. MetaStock
also allows you to feed the results
of one scan into another because
it creates a file of the tickers from
the most recent scan, and you can
point the Exploration to the file
of those tickers that came from a
past scan. Feeding the results of
one scan into another is done one
exploration at a time.
Figure 1: exploration result using pristine scan. Columns identify attributes such as whether to buy, a
setup has occurred, and whether a security is bullish or bearish. The options on the right include saving this list of tickers Opening Apc using the “Bullish
or getting a chart of the ticker. Changing of The Guard” template
+PR Peterson 1101.indd 1 11/24/10 11:04:34 AM

Figure 2: daily apc chart using template. Buys are identified with text and up arrows. The bottom of the chart shows the results of a pro-
prietary trend indicator, which is used independent of the patterns identified in this chart. Four buys are seen on this chart and the setup for the fourth
is indicated with the blue candle and blue diamond.
results in both the current setup being what is meant by three red candlesticks However, the design of this scan
identified as well as past ones (Figure 2). or three lower highs and indeed does product does not implement a basic
If you’ve taken the course, you’ll recall mention trend; however, three slides requirement for a Pbs, and similarly for
that emphasis was placed on what Pris- before it (see Figure 3 of the February Pss (that is, “Pristine Sell Setup”), the
tine terms a “Pristine Buy Setup” (Pbs) 2010 article), a slide shows that a Pbs direction of the trend. I was told that dur-
to reflect a retracement in an uptrend. A must be in an uptrend. The beginning ing the development process, using the
Pbs is identified by either three to five red of the course is about recognizing and requirement of trend direction resulted
candlesticks or lower highs occurring in trading with the trend. in too few tickers being found.
an uptrend, reflecting a retracement. Pbss are not a common occurrence, I chose the Bullish Changing of the
However, the scan results in the Pbs since they are a three–black crow candle- Guard scan because the scans are not
being in a downtrend (Figure 2 – left- stick pattern. In chapter 7 of Candle- organized the way Part 1 training is
most two trades with “buy”). In Part 1 Power by Gregory Morris, you’ll find provided, and this was the best approxi-
of the Pristine course, where terms such that while the engulfing candle pattern mation I could find. What you find in the
as “Changing of the Guard” (Cog) are has 950 occurrences, there were only Part 1 course are various conditions that
explained, you find under the heading 17 for three black crows. Thus, a scan- add points to the setup. A basic Pbs is
of the “Pristine buy criteria” the words ning product should be a viable way to 20 points; if this is followed by a bullish
“Stocks must be in a solid up trend. work around the problem of infrequent Cog you add another 10, while a narrow
…” However, for this plugin, this is not occurrence. body or narrow range candlestick adds
required.
When I noted this, Pristine’s response
was, “… The initial description does not The Pristine Pattern Method Scan plug-in comes
include it occurring in an uptrend. See with screen filters, expert commentary, chart
the attached slide image [sic] Pbs 1 does annotation, and templates to help find patterns.
not mention trend.” The slide explains

product review
another 10 points. Keep adding points for At-the-Money (ATM) — An option whose which the high and low are plotted
conditions/signals being met, with some strike price is nearest the current price as a single line and are referred to as
setups worth more than 50 points. These of the underlying deliverable. shadows. The price range between
high-point setups do look like winners Average Directional Movement Index the open and the close is plotted as
and so it would be desirable to find them (ADX) — Indicator developed by a narrow rectangle and is referred to
via a scanning or screening ability. J. Welles Wilder to measure market as the body. If the close is above the
However, this scan product has them trend intensity. open, the body is white. If the close is
as separate scans. With a title like “Bull- Average True Range — A moving aver- below the open, the body is black.
ish Changing of the Guard” I thought it age of the true range. Carry Trade — A forex strategy in which
would identify at least 30-point setups, Backtesting — A strategy is tested or market participants purchase curren-
but this is not the case. I thought I could optimized on historical data and then cies with high interest rates and sell
work around the problem by feeding the the strategy is applied to new data to those with low rates.
results of one scan into another. Let’s see if the results are consistent. Covered Call — Selling a call option
take a look. Bid and Ask — Highest price and lowest while holding an equivalent in the
If you first scan for above-average price that an investor will pay for a underlying tradable.
volume, which could be either up or down tradable. Doji — A session in which the open
volume, you typically might get 10% Black-Scholes Option Pricing Model — and close are the same (or almost the
of the tickers scanned returned. Using A model developed to estimate the same). Different varieties of doji lines
different dates, the S&P 500 returned market value of option contracts. (such as a gravestone or long-legged
53 results, and all of the optionable Bollinger Bands — Developed by John doji) depend on where the opening
stocks, 3,600-plus, returned 212. If you Bollinger. Bollinger Bands widen and close are in relation to the entire
feed the results of the above-average during increased volatility and con- range. Doji lines are among the most
volume into the bullish Cog, you get no tract in decreased volatility, and when important individual candlestick
hits for the S&P 500 and two for the all broken, are an indication that the trend lines. They are also components of
of the optionable stocks for two typical is powerful and may continue in that important candlestick patterns.
cases. Had you tied trend into the bullish direction. Elliott Wave Theory — A pattern-
Cog, the likelihood of even finding two Breakaway Gap — When a tradable recognition technique published by
diminishes. The scan design follows the exits a trading range by trading at Ralph Nelson Elliott in 1939, which
handbook that comes with the CD case, price levels that leave a price area holds that the stock market follows
which is less restrictive than the course where no trading occurs on a bar a rhythm or pattern of five waves
but only in some instances. chart. Typically, these gaps appear up and three waves down to form a
There are no indicators to program at the completion of important chart complete cycle of eight waves. The
and backtest to find out how well these formations. three waves down are referred to as
plugin scan results work. Clearly, from Breakout — The point when the market a “correction” of the preceding five
Figure 2 a bullish Cog can work in a price moves out of the trend chan- waves up. Fibonacci ratios are applied
rg
downtrend for two or three bars. nel. to the price spans and price targets
Brownian Motion — Named for English may be projected.
For The
Summary botanist Robert Brown, who in 1827 Engulfing Pattern — In candlestick
Like all MetaStock plugins, the Pristine noticed that pollen grains suspended terminology, a multiple candlestick
Pattern Method Scan is a snap to install. in water jumped about slightly as he line pattern; a major reversal signal
iPad
If you want help on how well this plugin looked at them through a microscope. with two opposing-color real bodies
works, however, contact Pristine. In 1877 French scientist Desaulx making up the pattern. (Also referred
guessed that this motion, composed of to as tsutsumi.)
Dennis Peterson is a Staff Writer for tiny, random “jumps,” was the result Euro — European unit of currency, of
Stocks & Commodities. of the liquid’s particles bombarding the European Union.
the pollen and causing it to move. Evening Star Pattern — The bearish
Related reading Albert Einstein won the Nobel Prize counterpart of the morning star pat-
Morris, Gregory [1992]. CandlePower, in 1905 for his mathematical theory tern; a top reversal, it should be acted
Probus Publishing. of Brownian motion. on if it arises after an uptrend.
Peterson, Dennis D. [2010]. “Trading Call Option — A contract that gives the Ex-Dividend Date — The day on which
The Pristine Method,” parts 1 and buyer of the option the right but not shares are distributed to sharehold-
2, Technical Analysis of Stocks & the obligation to take delivery of the ers; buyers who purchase shares on
Commodities, Volume 28: February underlying security at a specific price or after this date are not entitled to
and April. within a certain time.
‡Pristine Pattern Method Scan Candlestick Charts — A charting
(Thomson Reuters) Continued on page 79
S&C method, originally from Japan, in

Stocks_Comm-Ad-NYTE11_Layout 1 11/22/10 4:23 PM Page 1
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NIKKI MORR
The US Dollar
And Precious Metals
Playing the US dollar versus the precious metals market dy- of savvy, opportunistic traders (Figure 1).
namic is one of the highest-probability trading games around. Swing analysis is a time-honored technique among many
This is especially significant at major trend reversals. Will the traders, and nowhere is the task easier than in markets that
significant support area near 76.00 even hold, much less act make nice, clean price swings over sustained periods of time.
as a reversal point? In the case of DX, the AB swing covered 8.63 points, finally
making a minor reversal in the area of a Keltner band (point
O
by Donald W. Pendergast Jr. B). Not surprisingly, swing BC terminated at the next higher
Keltner band (yes, these things really do identify key areas
ctober 8, 2010 of support and resistance; these Keltners are plotted 4.2 and
You’ve gotta love currencies, whether you trade them 7.5 standard deviations away from a 45-period exponential
by way of the futures or forex markets. These markets moving average [Ema], respectively).
really like to trend, and across all time frames to boot. Once swing CD got rolling (with point D yet to be deter-
The US Dollar Index (DX), one of the heavies in the mined), sharp traders would have already been doing some
currency world, is no exception, and it is well enmeshed basic math in order to calculate a possible termination area for
in a substantial intermediate-term downtrend of its own. CD, multiplying the length of swing AB (8.63 points) by 0.618
Let’s take a look at this key market’s daily chart and and then subtracting it from the value of point C (83.635).
see if we can’t decipher some of its technical warning That calculation yielded a price value of 78.30, which also
bells that are currently seeking to capture the attention happened to coincide with Keltner band 3 (with “1” being at
+Forex Pendergast.indd 1 11/23/10 8:45:57 PM

FOREX FOCUS
@DX:US Dollar Index, continuous contract; 10.6.10

Detrend: nonconfirmation with price read
93
Swing AB *.786 - point C = 76.85 92
A Lower Keltner band = 76.06
91
90
89
88
87
86
C 85
84
83
82
81
80
B 79
77.6200
77
Shaded area between 76.80 and 76.00 is next likely support/turn level 76
D? 75
CMF (34): Early warning of potentially bullish divergence 0.1

0.0
0.1
MetaStock
12 19 26 3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30 6 13 20 27 4 11 18
May June July August September October
Figure 1: POSSIBLE BULLISH DIVERGENCE. Unlike most oscillators, Keltner bands tend to provide accurate identification of support/resistance levels. They frequently
function as leading indicators, much like Fibonacci retracement and expansion levels do. Price moves to either the extreme upper or lower band may be early warnings of
a high-probability price reversal zone.
the top and “4” at the bottom). Keltner 3 was violated and October 20, 2010
the DX has continued to drop, which means that traders will The price action of the last four daily price bars leaves little
now grab their calculators and run the same calculation again, doubt that the reversal is the real deal, although it would not be
only this time plugging in a Fibonacci ratio of 0.786 into the surprising to see some “back-and-fill” gyrations (and perhaps
equation instead of 0.618. Guess what? This calculation comes even a minor double-bottom pattern).
up with a value of 76.85, which is just 79 (oh no, another The percentage of dollar bulls among large speculator
Fibonacci number!) cents above Keltner band 4 at 76.05.
Hmmm, let’s see. Maybe we should look for the area just
north of 76.00 to act as a meaningful support and/or turn area
for the DX. This is highlighted by the pink-shaded area on the
lower right portion of the chart. If this area is also violated
(if gold really starts to bust above $1,400, for example), then
pull out your calculator and plug Fibonacci ratio 1.00 and/
or 1.272 into the formula to arrive at the next set of likely
support zones.
Now that we have that numbers game out of the way, let’s
focus on the very real bullish divergence between the Chaikin
money flow (Cmf)(34) and the price of the DX itself. This is a
major early warning signal of a potential reversal, but it can only
be confirmed by the price action on the chart after the fact.
Clearly, some big-money interests in the futures market are
starting to nibble on the DX at current levels. So I thought
it would be worth my while to keep an eye on this chart just
in case the contract catches a major bid and a short-covering
rally erupts.
At the top of the chart, a mildly bullish hint is also provided
by the detrend oscillator. Note how the recent lows in the
indicator have been bottoming off of the same level, even as
the DX has been grinding lower — again, another possible
“What the devil are ‘credit default swaps,’ anyway?”
warning of slowing selling pressure.

FOREX FOCUS
DX:US Dollar Index, daily continuous contract; 10.19.10

@DX - Daily NYBOT L= 78.400 -0.021 -0.03% B= 78.390 A=78.400 0=78.590 Hi =78.610 Lo = 78.385 V = 424 Alchemy trend Catcher (8,2,true,false,true, true, true, true2,high,... 76.888 76.610, 78.385
90.000
88.000
Minimum swing
CD projections
86.000
B
84.000
Target 1 = 79.80
Target 2 = 80.63
82.000
D?
80.000
A 78.400
76.888
ClientDPenCMf (34,34) -0.0894 -0.0894
Bullish money flow divergence has played out
C 0.0500
-0.0500
CMF (34) 0.0894
TRADESTATION
-0.1500
May 10 17 24 Jun 7 14 21 28 Jul 12 19 26 Aug 9 16 23 30 Sep 6 13 20 27 Oct 11 18 25
Figure 2: alphabet soup or sound trading analysis? Maybe it’s a little of both, but using some basic swing price projection formulas can still help make your
trading method more objective and profitable.
interests (hedge funds and so on) was at a minuscule level at swing formula can be applied to any market that makes strong,
the low (based on a recent Commitments Of Traders (Cot) sustained swing moves such as the silver and gold markets.
analysis), and that also figured into the confidence level prof-
fered by the Keltner/swing support levels between $76.00 and November 16, 2010
$76.75. Not surprisingly, the gold and silver futures markets The DX has covered a lot of ground during its
have also begun notable reversals (lower) as the dollar begins slow, yet steady decline, one that kicked off on
to attract more buying interest. June 8, 2010. The index (you can trade it as a
So how far might this dollar rally go before overhead supply Dxz10 futures contract for the December 2010
thwarts further upward progress, at least temporarily? Let’s look contract) was at 89.165 then before slipping all
at the daily chart of the US Dollar Index continuous contract way down to 75.235 on November 3, 2010 — a
futures to see if there are any clues we can use (Figure 2). 15.62% decline in less than five months. The index
Since we used some basic arithmetic to arrive at the swing was in the process of hammering out an interim
BC price target in the analysis on October 18, 2010, let’s do low when that recent bottom was made, however,
the same thing to project a couple of possible terminus points and now appears to be on the verge of a full-scale
for swing CD that is in progress. Swing AB measured a paltry trend reversal move, one with initial targets in the low $80
3.47 points so we’ll simply add that to the value of point C, range. Figure 3 gives you a closer look.
which is 76.335, to arrive at a projection of 79.80. Since this One of the beautiful things about trading the Dxz10 is that
value is nearly identical to the 50% Fibonacci retracement of it can not only be used to help time trades in this key currency
swing BC (79.70), this is definitely a price at which to look benchmark, but it can also be used to assist in the timing of
for some short-term profit-taking to occur. However, if this is precious metals futures contracts, especially silver and gold.
a major trend reversal, then the Fibonacci 62% retracement at I had anticipated the 76.00 area being a possible support/
$80.63 is likely a better area to expect a potential resistance reversal point for the DX. The index finally made an interim
area to manifest. low at 75.235, not even touching the extreme lower Keltner
Finally, if we multiply the AB 3.47-point swing by 1.618 band before beginning a period of sideways movement.
and add the product to the swing BC low of 76.335 [([3.47 *
1.618] + 76.335) = 81.95], we find a more extreme price zone
in which to expect a reversal and/or pause of swing CD.
The US dollar has a lot of work to do
These are not guaranteed reversal/stall areas, but using a if it’s ever going to make it back to
simple, consistent formula like this can add an extra measure 122.00, its last major high.
of rationality and objectivity to your trading regimen. The

@DX - Daily NYBOT L=78.405 0.049 0.06% O=78.265 77.752 76.795 77.650 76.630 84.846 72.107
A very bullish trend reversal

under way in the US Dollar Index
Target #1: 80:00 near Fib 62% resistance
Target #2: 81.60 - 82.00 near Fib
79% and Keltner resistance 84.846
T2 82.073
T1
78.405
* Two “wash and rinse” bear traps
* An increasing hedge fund net long position 74.880
* A buy signal at outer edge of consolidation range (pink rectangle)
-9209.00 7986.00 72.107
Hedge funds/large specs: blue line
7,986
TRADESTATION
-9,209
Commercials: green line
TRADESTATION
FIGURE 3: REVERSAL AT HAND? Despite tons of negative sentiment toward the US dollar, this chart makes a powerful case for a bullish trend reversal for the US Dollar
Index futures contract (DXZ10). The first price target is near 80.00, with the second one near 81.60.
During the consolidation (pink-shaded box), the DX fea- DX — with predictably ominous implications for the silver
tured a couple of bear trap reversal bars (blue ovals); these and gold markets.
are typical at major tops and bottoms and lure overconfident The US dollar has a lot of work to do if it’s ever going to
bears (bulls) into believing that the existing trend is ready to make it back to 122.00, the last major high made nearly nine
continue in the same direction. years ago. This may be the first step of a very long and ardu-
Then the prices abruptly reverse, catching the bears (bulls) ous journey for the index, but only time will tell. I will be
off-guard; they then need to quickly reverse their positions watching for price action near 80.00 and then 82.00, should
or go flat. Two of these wide-range reversal bars occurring this reversal carry that high on this new swing; there could
within eight trading days of each other is certainly worthy of be some great short-term intraday short setups in the DX in
attention, and now that the DX has issued a new buy signal those areas.
(red oval), it appears that the index will have little problem
reaching the first price target level of 80.17, which is a Fi- Donald Pendergast has been trading/investing since 1979,
bonacci 62% resistance area (green-shaded line). Should the and after making a 50% gain in silver in six weeks, began a
move gather strength quickly, there’s even a chance it could lifelong study of the financial markets, trading systems, and
make it as far as the Fibonacci 79%/Keltner band confluence broad economic trends. He develops, tests, and implements
area between 81.60 and 82.00 (blue shaded line). stock, forex, and futures trading systems, and currently has two
Finally, at the lower section of this daily chart, take a look futures systems available for autotrading at Striker Securities
at the current Cot net positions in the US Dollar Index futures in Chicago, IL. He may be reached at www.chartw59.com.
— the blue line shows the net positions for the large specula-
tor/hedge fund group of traders and the green line displays ‡MetaStock ‡TradeStation
the net positions for the commercial interests in this index.
Currently, the trend-following hedge funds are continually This article was originally published in three parts on October 8,
adding to their long positions as a variety of systems give buy October 20, and November 16, 2010, at Traders.com Advantage.
Articles like this can be found at Traders.com.
signals, and hence the steadily rising blue line. Meanwhile,
the commercial interests appear to have already done the bulk
of their buying during the recent swoon (as is typical of their
behavior in a variety of commodity markets) and will likely
now be selling into strength — to the hedge funds!
There is so much negative sentiment toward the US dollar
in the currency markets (a near-record low number of bulls in
sentiment surveys) these days that even a minor move higher
could cause significant capitulation and a sharp rally in the S&C
+Forex Pendergast.indd 4 11/24/10 10:06:30 AM

optionsXpress Traders Design users to create an optimal workspace. The rmino de Buenos Aires (Matba) has
Streaming Charts Software company expects to continue to build selected Patsystems as its key technology
optionsXpress offers a series of tech- and release new tools with the goal of a provider in preparing to add electronic
nology upgrades to its proprietary full release of TradeStation 9.0 early in trading capability to its existing open
streaming charts. the first quarter of 2011. outcry operations. Matba is a futures and
Upgrades, free to optionsXpress options commodity exchange specializ-
customers, include a customizable grid EquityTrader.com Announces ing in wheat, corn and soy. Patsystems
view allowing traders to see a variety New Interactive Charts, will provide a complete exchange system
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to alternate between multiple full-sized been relaunched utilizing the latest web Patsystems’ pretrade risk management
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optionsXpress platform allows cus- EquityTrader, which was designed by
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positions into the grid or tab view with a 54-rule fuzzy logic model that evaluates
single click. It allows customers to trade stocks in two dimensions: how they
multiple asset classes from one platform have performed in the past and how
and one account. they are expected to perform in the cur-
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www.patsystems.com
Interactive Data Launches

Mobile App for iPhone
Interactive Data Mobile, a companion
offering to the Interactive Data suite
of desktop and web-based solutions
for financial professionals, has been
released.
www.EquityTrader.com The application uses the latest technol-
www.optionsxpress.com ogy, delivers streaming financial data and
Patsystems Signs With tools. It is available on Apple’s iPhone
TradeStation Launches Interactive Data 7ticks For through Apple’s iTunes App Store. Inter-
Version 9.0 Connectivity, more active Data Mobile, formerly known as
TradeStation 9.0 will allow customers Patsystems announced an agreement QuoTrek, gives financial professionals
and developers to automate and test with Interactive Data 7ticks for the and traders access to real-time streaming
strategies in the equities, options, fu- delivery of connectivity services for data on their mobile devices anytime and
tures, and forex markets, the company its new Patsystems XConnect hub in anywhere and can be used in conjunc-
said. Version 9.0 offers improved icons, Chicago. tion with Interactive Data’s desktop and
enhanced graphics and colors, and allows Interactive Data will provide Patsys-
tems with ultra low-latency networking
services, facilitating connectivity to
multiple exchanges from the Interactive
Data 7ticks data center.
By working with Interactive Data
for exchange connectivity, Patsystems
gains economies of scale, which may
be utilized by customers of XConnect.
Xconnect’s hub in Chicago will offer
connectivity to most major derivatives
markets.
www.tradestation.com In other news, the Mercado a Té- www.InteractiveDataMobile.com
+1101 Trade News_New.indd 1 11/29/10 11:49:58 AM

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web-based products. offerings to realize low-latency order
Users can create their own portfolios routing execution and real-time and his-
to obtain detailed data on an issue, view torical market data delivery objectives.
charts, follow markets or stocks, and In other news, Cqg said it had in-
monitor the market. It is also available tegrated its instrument codes into its
for the BlackBerry and other mobile Xymbology product, an identifier map-
devices. Two versions are available for ping service for exchange-traded futures
the iPhone: a free delayed version and and options contracts, for the futures and
a paid real-time version. option market with Fow Tradedata.
Cqg offers historical data integrated
CQG Delivers Enterprise-Level with graphics, technical analysis tools,
Solutions, more and trade routing, serving individual www.fowtradedata.com
Cqg announced Chicago-based Contin- and institutional traders worldwide. The
uum, a new enterprise solutions business Xymbology service builds Fow Trade-
division. The Continuum suite includes: data’s portfolio of instrument identifiers services extend beyond custom software
Continuum Connect, Development used by Isvs and market data vendors by development to system architecture,
Library, Fix Connect, Fix/Fast Direct, collaborating with key providers in the management, and QA/testing.
and an Historic Data Hub. Continuum futures and options space. Cqg futures
has recently partnered with several major and options identifiers will be distributed Sentient Trader develops
organizations to provide customized so- through Xymbology to user firms. system with Hurst theories
lutions for their platforms. Cqg also said Further, Cqg Integrated Client now Sentient Trader has interpreted and
it had partnered with Advfn to provide provides the ability to create complex developed the cyclic theories of JM
global order routing connectivity to offer order strategies that combine automated Hurst into a modern computer trading
trade execution functionality to Advfn’s spreading, aggregation, and synthetic system, the company said. The Hurst
client base. Advfn customers can now icebergs. Traders can now initiate Trading System captures all the theories
connect to Cqg’s global infrastructure orders that take advantage of Cqg’s published by Hurst in his book, Profit
using Continuum’s Fix Connect. collocated order management servers Magic Of Stock Transaction Timing, and
Advfn customers will be able to trade to monitor multiple instruments across in the more complex theories in his course
global markets though Cqg’s gateways. multiple exchanges. Traders can also (available from Traders Press).
With a presence in Europe and North and place and modify exchange orders ac-
South Americas, Advfn provides market cording to their preferences and market
data from exchanges worldwide. Firms conditions.
can take advantage of Continuum’s Api And finally, Cqg announced that Edge
Financial Technologies has joined its
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Financial Technologies specializes in
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the firm builds applications for traders www.sentienttrader.com
seeking tools for automated trading, mar-
ket analysis, and risk management. Their
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www.continuumtradingsolutions.com www.advfn.com www.traderspress.com

Sentient Trader added it had refined
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izing in technical analysis.
The Sentient Trader community has
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videos and webinars, and participation
in a user forum.
FXDD Malta Offers Yen-Based

www.nanostart.de
Trading Accounts
www.sungard.com
Fxdd, an online forex broker, now
provides forex trading accounts using
the yen as a base margin currency in SunGard Launches Valdi Ultra
addition to the US dollar, the company Low-Latency DMA for Trading
said. Fxdd expects to offer similar op- on European Markets
tions in other major currencies including SunGard has launched an ultra low-
the euro, British pound, as well as oth- latency direct market access (Dma)
ers shortly, the firm said. Fxdd offers service for pan-European equity markets
24-hour forex trading worldwide via its through its European broker-dealer, Valdi
trading platforms powered by Currenex Execution Services. Valdi addresses
and FxddAuto. the ultra low-latency requirements of
high-velocity traders, providing a broker-
www.otcqx.com
managed solution that includes clearing
and settlement.
Depositary Receipts (Adrs) on the The demand for ultra low-latency mar-
Otcqx electronic trading system. Nano- ket access continues to grow. Initially,
start Adrs, which trade under Nasry, the new Dma offering will connect to the
can now be traded like any other US Bats and Chi-X Mtfs and then extend
security during US market hours, with its connectivity to Turquoise and the
pricing and settlement in US dollars London Stock Exchange.
and with normal custody in US broker- Pan-European market access will
age accounts. The Adr program does also be offered following the initial
not constitute an offering of shares by deployment.
www.fxdd.com Nanostart AG, nor may these Adrs be
offered publicly in Germany. S&C
Nanostart AG commences
US trading of ADRs
Nanostart AG, a Frankfurt-based nano-
technology investment company, has
started trading in the US via American
www.pinkotc.com

For this month’s Traders’ TRADING SYSTEMS
Working Two Stop Levels
Tips, the focus is Peter Kon-

Combining Rsi With Rsi
ner’s article in this issue,

Optimization and stop-losses can help you channels, and so forth — should be kept to a
minimize risks and give you better returns. minimum.
4 The strategy should be designed to stay long
Y
ou would like to be long in a market that’s in an uptrend but also trade on the corrections
trending up, but what about when the trend in a downtrend.
turns down? Do you exit and just watch from
“Combining Rsi With Rsi.”

the sidelines, or do you try to trade on the cor- 5 Its implementation should be fairly simple.
rections in the downtrend? Here’s a simple combi-
nation where you can trade long-term uptrends and Technician Martin Pring’s k (“know sure thing”)
short-term corrections, all in one chart. indicator comes in three different setups — short term,
One of my previous strategies didn’t allow me intermediate term, and long term — and is designed
to enter a trade and stay there in a long and strong for weekly data. The three setups try to model the
uptrend, since the strategy was designed to use the market waves of three different periods where short
Code for the Scandinavian

relative strength index (R ) on a daily basis. The term is between three and six weeks, intermediate
total return from my R strategy was fair, but there term is between six weeks and nine months, and the
were many trades with little return, especially in long-term trend is between six months and three
volatile markets. years. Figure 1 shows a bar chart of the Standard &
I decided to build a new strategy with these re- Poor’s 500 and the three k indicators.
quirements:
T Rsi
technical analysis program

1 The strategy should be based on a single model As I mentioned, my previous strategy was based
or indicator to keep it as simple and transparent on a daily R . I have used the R for quite a few
as possible. years and due to my familiarity with it, I wanted
to build a model using the R on a weekly basis
2 It should be designed for weekly trading. I instead of a daily one, as in my previous strategy.
have a full-time job and can only spend time I also wanted to adapt the k idea of an indica-
analyzing stocks on the weekends. tor that works with more than one time span and
AvanzaVikingen is already
follow the market waves of both an uptrend and a
3 The need for subjective analysis of charts downtrend.
and formations — such as support lines,
Here’s a simple combination where

by Peter Konner you can trade long-term uptrends
and short-term corrections, all in
provided in Konner’s article

one chart.
elsewhere in this issue. (Subscribers will also find Kon-

ner’s code at the Subscriber Area of our website, www.
Traders.com.) Presented here is an overview of possible
implementations for other software.
Note to readers: This issue marks a change to our Traders’

Tips section. For a more efficient presentation of our Trad-
ers’ Tips, we have moved all the code listings from the print
magazine to our website. Meanwhile, here, you will find
discussions of the various implementations of the technique
as well as chart examples.
Traders’ Tips are provided to help the reader implement a
selected technique from an article in this issue. The entries are
contributed by various software developers or programmers
for software that is capable of customization. FIGURE 1: TRADESTATION, RSI WITH RSI. Here is a weekly bar chart of Google
At our website, Traders.com, you will find more complete displaying the built-in indicator “Mov Avg 2 Lines” (the magenta plot is a 40-bar
versions of the Traders’ Tips presented here, including code simple moving average of the close and the cyan plot is a 10-bar simple moving
listings and links. average of the close) using the “_RSI_With_RSI” strategy code. In the subgraphs,
the “_RSI” indicator is plotted, with the top graph a five-bar RSI and the bottom
To locate Traders’ Tips at our website, use our site’s search graph a 17-bar RSI.
engine, or click on the Stocks & Commodities magazine link
in the red box on the left side at Traders.com, and then click
on“Traders’ Tips” in the red box on the left. For past Tips, —Chris Imhof, TradeStation Securities, Inc.
A subsidiary of TradeStation Group, Inc.
visit the “Article Abstracts” link in the red box on the left. www.TradeStation.com
F tRADESTATION: COMBINING RSI WITH RSI F METASTOCK: COMBINING RSI WITH RSI
In “Combining Rsi With Rsi” in this issue, author Peter Peter Konner’s article in the January 2011 issue, “Combining
Konner describes the use of two different Rsi calculations Rsi With Rsi,” describes a long-term system intended to be
using different lengths to allow trading of retracements as used with weekly data. The steps to create an expert advisor
well as longer-term positions. The five-week and 17-week for MetaStock based on this system are shown in the January
Rsi values are used for entry and exits while the 17-week 2011 Traders’ Tips area at Traders.com.
—William Golson
Rsi is used for trend direction as an entry filter in the re-
Equis International
tracement entries. www.MetaStock.com
We have developed EasyLanguage code for an Rsi indica-
tor (“_Rsi”) and a strategy (“_Rsi_With_Rsi”). The “_Rsi”
indicator colors the plot to represent the trend direction as de-
termined by the 17-bar Rsi. Entry and exit conditions for the F eSIGNAL: COMBINING RSI WITH RSI
strategy can be found in the code comments in the strategy. For this month’s Traders’ Tip, we’ve provided the formula
To download the EasyLanguage code for the indicator and “RsiwithRsi.efs” based on the code from Peter Konner’s
strategy, go to the TradeStation and EasyLanguage Support article in this issue, “Combining Rsi With Rsi.”
Forum (https://www.tradestation.com/Discussions/forum. The study contains formula parameters to set the values for
aspx?Forum_ID=213) and search for the file “Combining_ the slow Rsi, quick Rsi, slow MA, quick MA, slow Rsi buy
Rsi_With_Rsi.eld.” The code is also shown at Traders.com. level, slow Rsi sell level, quick Rsi buy level, and quick Rsi
A sample chart is shown in Figure 1. sell level, which may be configured through the Edit Studies
This article is for informational purposes. No type of trading window (Advanced Chart menu→Edit Studies).
or investment recommendation, advice, or strategy is being made, To discuss this study or download complete copies of the
given, or in any manner provided by TradeStation Securities or its formula code, please visit the Efs Library Discussion Board
affiliates. forum under the Forums link from the Support menu at www.
+Traders_Tips_1101_kw.indd 1 11/23/10 8:32:49 PM

Figure 3: WEALTH-LAB, RSI WITH RSI. Here is the equity curve of the system
applied to a portfolio of the Dow 30 stocks.
FIGURE 2: eSIGNAL, COMBINING RSI WITH RSI
esignal.com or visit our Efs KnowledgeBase at http://www.

esignal.com/support/kb/efs/. The eSignal formula script (Efs)
is also available for copying and pasting from the Stocks &
Commodities website at Traders.com.
A sample chart is shown in Figure 2.
—Jason Keck
Interactive Data Desktop Solutions Figure 4: WEALTH-LAB, RSI WITH RSI. Here is a sample Wealth-Lab Developer
800 815-8256, www.esignalcentral.com 6.0 chart showing the profit/loss of a single losing trade vs. the time in each trade
(in weekly bars).
Ruling out low-probability trades with this simple tweak

F wEALTH-LAB: COMBINING RSI WITH RSI positively affected the net profit (62% vs. 56%) without
In the ongoing battle between high-frequency trading and increasing risk, and made the system tie up less capital in
sky-high IQ algorithms, in a scene filled with discretionary unproductive trades, reducing the average trade duration by
charting patterns and advanced indicators doing heavy number the whole quarter.
crunching under the hood, Peter Konner’s systematic approach To turn this extra rule on or off in Wealth-Lab 6, simply drag
described in “Combining Rsi With Rsi” stands out as an isle the parameter slider “Exit loser?” in the bottom left corner of
of clarity and simplicity. the main workspace, and rerun the strategy.
The concept of trading corrections in a downtrend is like The WealthLab code listing for this strategy can be found
having a second system blended together, potentially helping at Traders.com.
to smooth overall performance. In our test on a portfolio of —Eugene, www.wealth-lab.com
the Dow 30 stocks over the last 10 years with 5% of portfolio
equity allocated to each position, the system was profitable
and its returns exceeded net profit from buy & hold. However,
trading corrections accounted for slightly more than 6% of all F aMIBROKER: COMBINING RSI WITH RSI
entry signals (six out of 91, see Figure 3). In “Combining Rsi With Rsi” in this issue, author Peter Konner
The system is designed to trade weekly bars, and the presents a simple trading system that combines five and 17-bar
average trade in this portfolio is held for over a year. Time in Rsi. We have prepared a ready-to-use formula for the article
market is another dimension of risk, and charting the “life” (available at Traders.com). The code includes both indicator
of a trade (Figure 4) shows that the majority of losing trades code as well as the trading strategy presented in the article.
becomes losers from the start, or hang about the breakeven It also includes the Kst() function that implements the Kst
level for quite a long time. With this knowledge, a potential indicator mentioned in the article.
improvement could be introduced.
Considering this, we added a new, optional rule to the
system:
Find the complete collection of
• If after 20 (by default) weekly bars in trade, the position Traders' Tips and code at our website,
is still at its breakeven point or is losing money, close it at
the open of the next bar (that is, next Monday).
www.Traders.com.

Figure 5: STOCKFINDER, COMBINING RSI WITH RSI. The markers on the chart
show the “buy in uptrend” (cyan) and “sell in downtrend” (red) signals generated by Figure 6: NEUROSHELL TRADER, COMBINING RSI WITH RSI. Here is a sample
the conditions. Harman International (HAR) is currently showing a “buy in uptrend” NeuroShell Trader chart that shows the combined RSI trading system.
symbol along with eight more stocks in the S&P 500 list on the left.
The formula can be used in Automatic Analysis window

(for backtesting) and for a chart. To use it, enter the formula F nEUROSHELL TRADER:
in the Afl Editor, then press the “Insert Indicator” button to COMBINING RSI WITH RSI
see the chart, or press “Backtest” to perform a historical test The combined Rsi trading signals described by
of the strategy. Peter Konner in his January 2011 S&C article can be eas-
—Tomasz Janeczko, AmiBroker.com ily implemented with a few of NeuroShell Trader’s 800+
www.amibroker.com indicators using the Indicator Wizard, with the steps shown
at Traders.com.
If you have NeuroShell Trader Professional, you can also
choose whether the parameters should be optimized. After
backtesting the trading strategy, use the “Detailed Analysis
F wORDEN BROTHERS STOCKFINDER: …” button to view the backtest and trade-by-trade statistics
COMBINING RSI WITH RSI for the strategy.
In his article “Combining Rsi With Rsi” in this issue, Peter Users of NeuroShell Trader can go to the Stocks &
Konner discusses a strategy using “slow” and “fast” Rsi plots Commodities section of the NeuroShell Trader free technical
to trade in both uptrends and downtrends. support website to download a copy of this or any past
You can download the chart “Combining Rsi with Rsi” from Traders’ Tips.
the StockFinder share library by clicking Share->Browse, and A sample chart is shown in Figure 6.
searching the Charts tab. —Marge Sherald, Ward Systems Group, Inc.
The chart has four conditions built from the 10- and 40-week 301 662-7950, sales@wardsystems.com
moving averages and the five- and 17-week Rsi plots: buy in www.neuroshell.com
uptrend, sell in downtrend, buy in downtrend correction, and
sell in downtrend correction.
The conditions on the chart can be used to display markers
on the chart, light up symbols passing in the watchlist, filter F aIQ: COMBINING RSI WITH RSI
a watchlist, and also to use in the BackScanner for strategy The Aiq code for Peter Konner’s article in this issue,
testing. (See Figure 5.) “Combining Rsi With Rsi,” is shown at Traders.com.
To use the layouts, indicators, conditions, and charts I tested the author’s system on the Russell 1000 list of stocks
discussed here, you will need the StockFinder software. Go from 1/3/2000 to 11/11/2010. The table in Figure 7 shows the
to www.StockFinder.com to download the software and get results of a backtest on all trades. This summary report table
a free trial. shows the average trade is 17.63% with a 231-bar average
— Bruce Loebrich and Patrick Argo holding period.
Worden Brothers, Inc. Since it is nearly impossible to take positions in all of the
www.StockFinder.com Russell 1000 stocks, I also ran a trading simulation using the
Aiq Portfolio Manager using the same list of stocks and same
test period. I took a maximum of 10 positions at a time and
compounded profits monthly. When there were more signals

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FIGURE 9: TRADERSSTUDIO, RSI WITH RSI SYSTEM RESULTS. Here is the con-
solidated equity curve for the period 1/2/2001 to 11/10/2010. The average annual
return was approximately 19.4% on the initial capital.
Figure 7: AIQ SYSTEMS, RSI WITH RSI BACKTEST RESULTS. Here is a sum-
mary report of results for Peter Konner’s system as applied to the Russell 1000 list
of stocks over the period 1/03/2000 to 11/11/2010.
FIGURE 10: TRADERSSTUDIO, SYSTEM DRAWDOWN. Here is the consoli-

dated underwater equity curve for the period 1/2/2001 to 11/10/2010. Maximum
drawdown was approximately 34% in 2009.
Figure 8: AIQ SYSTEMS, AIQ Portfolio Manager. Here is a sample equity

curve for Peter Konner’s system as applied to the Russell 1000 list of stocks over the F TRADERSSTUDIO:
period 1/03/2000 to 11/11/2010. COMBINING RSI WITH RSI
The TradersStudio code for Peter Konner’s
article, “Combining Rsi With Rsi,” is shown at Traders.com.
than available positions, I used the quick Rsi in descending I tested the author’s system on 76 volatile and highly liquid
order to choose which signals to take so as to limit the maximum Nasdaq stocks from 1/2/2001 to 11/10/2010 trading equal
concurrent positions to 10. dollar-sized positions at $10,000 each. To take all positions,
Figure 8 shows the resulting equity curve versus the S&P starting capital is assumed to be $760,000.
500. The system beat buy & hold but took a rather large In Figure 9, I show the resulting equity curve and in Figure
drawdown in the recent bear market of 2008–09. I based my 10, I show the resulting underwater equity curve. Maximum
system on the author’s description of the system given in the drawdown was approximately 34% in 2009 with an average
text explanation rather than the system code. In the exits, the annual return of approximately 19.4% on the initial capital.
text description uses “and,” whereas the coded version uses The code can be downloaded from the TradersStudio
“or.” website at www.TradersStudio.com→Traders Resources→
The code and Eds file can be downloaded from www. FreeCode or www.TradersEdgeSystems.com/traderstips.
TradersEdgeSystems.com/traderstips.htm and is also shown htm. The code is also shown at Traders.com.
at Traders.com. —Richard Denning
—Richard Denning info@TradersEdgeSystems.com
info@TradersEdgeSystems.com for TradersStudio
for AIQ Systems

FIGURE 11: TRADECISION, MSFT WEEKLY CHART WITH RSI TECHNIQUE.
Here is an example of the two RSI indicators and two moving averages plotted on
a MSFT chart with buy and sell signals generated by Peter Konner’s RSI-with-RSI Figure 12: NINJATRADER, RSI WITH RSI. This sample screenshot shows the
trading strategy. RsiWithRsi applied to a weekly chart of Cisco (CSCO).
A sample chart implementing the strategy is in Figure 12.

—Raymond Deux & Ryan Millard
F TRADECISION: COMBINING RSI WITH RSI NinjaTrader, LLC
The article by Peter Konner in this issue, “Com- www.ninjatrader.com
bining Rsi With Rsi,” describes how to combine two Rsi
indicators to trade long-term uptrends and short-term correc-
tions, all in one strategy.
You can recreate the Rsi with Rsi strategy in Tradecision’s F NEOTICKER: COMBINING RSI WITH RSI
Strategy Builder using the following code: Based on the trading signals presented in “Combining Rsi
Long Rule:
With Rsi” by Peter Konner in this issue, I have developed
return RSI(C,17) >= 60 and C > SMA(C,40) two formula language–based backtesting systems. The first
or RSI(C,5) >= 60 and C > SMA(C,10) and RSI(C,17) < 60; one is to generate a buy signal based on a slow weekly Rsi
Short Rule:
and a moving average uptrend; the second one is for when a
return RSI(C,17) <= 40 and C < SMA(C,40) slow weekly Rsi is in a downtrend, with a signal generated
or RSI(C,5) <= 40 and C > SMA(C,10); by a fast Rsi and a fast moving average.
The first system is named Tasc Rsi long-term uptrend system
To import the strategy into Tradecision, visit the area (see Listing 1 at Traders.com). It has four parameters: MA
“Traders’Tips from TASC Magazine” at www.tradecision.com/ period, Rsi period, uptrend Rsi level, and downtrend Rsi level.
support/tasc_tips/tasc_traders_tips.htm or copy the code from A filter is added within the code so that it only takes the signal
the Stocks & Commodities website at www.Traders.com. after a simple moving average is returning valid values.
A sample chart is shown in Figure 11. The second system is named Tasc Rsi long-term downtrend
—Yana Timofeeva, Alyuda Research
510 931-7808, sales@tradecision.com system (see Listing 2 at Traders.com). It has five parameters:
www.tradecision.com slow Rsi period, fast MA period, fast Rsi period, Rsi buy level,
F NINJATRADER: COMBINING RSI WITH RSI

We created an automated strategy named “RsiWithRsi” based
on Peter Konner’s January 2011 S&C article, “Combining Rsi
With Rsi.” The strategy is available for download at www.
ninjatrader.com/SC/January2011SC.zip.
Once you have downloaded it, from within the NinjaTrader
Control Center window, select the menu File > Utilities > Import
NinjaScript and select the downloaded file. This strategy is
for NinjaTrader version 7 or greater.
You can review the strategy source code by selecting the
menu Tools→Edit NinjaScript→Strategy from within the Nin-
jaTrader Control Center window and selecting “RsiWithRsi.” Figure 13: NEOTICKER, COMBINING RSI WITH RSI, two trading sys-
NinjaScript uses compiled Dlls that run native, not inter- tems. System 1 is the long-term uptrend system and system 2 is the long-term
preted, for the highest performance possible. downtrend system.
+Traders_Tips_1101_kw.indd 5 11/24/10 10:25:03 AM

FIGURE 14: WAVE59, COMBINING RSI WITH RSI. This screen capture shows
Peter Konner’s indicator on the Dow Jones Industrial Average. Our version of indica-
tor is based on daily calculations rather than weekly.
and Rsi sell level. This code only trades when the slow Rsi is FIGURE 15: UPDATA, RSI WITH RSI. The chart shows dual-term RSIs and mov-
in a downtrend. The signal is generated from a fast Rsi and ing averages on the Danish stock Carlsberg B.
fast moving average.
A downloadable version of these trading systems will be avail-
able at the NeoTicker blog site (http://blog.neoticker.com). A com) follows the listed rules.
sample chart implementing the strategy is shown in Figure 13. The new Updata Professional Version 7 accepts code written
—Kenneth Yuen, TickQuest, Inc.
www.neoticker.com in VB.Net and C# in addition to our user-friendly custom code.
Versions of this indicator and system in all these languages
may be downloaded by clicking the Custom menu and then
System or Indicator Library. Those who cannot access the
library due to firewall issues may paste the following code
F WAVE59: COMBINING RSI WITH RSI
into the Updata Custom editor and save it.
In Peter Konner’s article “Combining Rsi With Rsi” in the
A sample chart is shown in Figure 15.
January 2011 issue of S&C, he describes a system of combin- —Updata Support team
ing Rsi with Rsi to catch trends and minimize risk. support@updata.co.uk
Figure 14 shows the indicator on the Dow Jones Industrial www.updata.co.uk
Average. We constructed the indicator as Konner describes,
but we used daily calculations extrapolated to the weekly
recommendations of the article. Thus, his 40-week moving
average became a 200-day moving average, and so on
F TRADE NAVIGATOR: COMBINING RSI WITH RSI
(assuming five trading days per week, although holidays may
Trade Navigator offers the features you need to be able to
bring about slight discrepancies). This not only gave much
recreate the strategy presented in Peter Konner’s article in the
more freedom over the parameters, it would theoretically give
January 2011 issue, “Combining Rsi With Rsi.”
(the same) signals sooner. Konner writes of trading only on the
You can test your new strategy by clicking the Run button
weekend, but some traders may be able to check a system’s
to see a report or you can apply the strategy to a chart for a
signals nightly for 15 minutes.
visual representation of where the strategy would place trades
The Wave59 script to implement this indicator in Wave59
over the history of the chart.
is shown at Traders.com. Users of Wave59 can also download
The TradeSense code to create the custom highlight bars
the script directly using the QScript Library found at http://
used in the article is shown at Traders.com.
www.wave59.com/library.
—Patrick J. Stiles Genesis Financial Technologies has already provided the
Wave59 Technologies Int’l, Inc. strategy, highlight bars, and template discussed here as a
www.wave59.com special downloadable file for Trade Navigator. Click on the
blue phone icon in Trade Navigator, select Download Special
File, type SC1101 and click on the Start button. The library
F UPDATA: COMBINING RSI WITH RSI
name will be “Combining the Rsi with Rsi,” the highlight
Our Traders’ Tip for this month is based on the
bar names will be Trending Down and Trending Down. The
article by Peter Konner, “Combining Rsi With Rsi.”
strategy name will be “Rsi with Rsi” and the template name
Konner creates a system that is simple by design using a
will be “Rsi with Rsi.”
medium-term Rsi and moving average to determine long-term —Michael Herman
trend, and a shorter-term Rsi and moving average to time entry Genesis Financial Technologies
into the market. Our code for this strategy (shown at Traders. www.TradeNavigator.com

FIGURE 16: CHARTSY, TWO-RSI as overlay. Green and red dots indicate buy/
sell signals. RSIs are used to calculate the indicators and the moving averages are
used as overlays.
F Chartsy: COMBINING RSI WITH RSI Figure 17: TRADESIGNAL, RSI WITH RSI. Here is a Tradesignal Online imple-
For Windows + Mac + Linux mentation of Peter Konner’s RSI with RSI strategy on a chart of Apple Inc.
The two-Rsi calculation described in Peter
Konner’s article in this issue is available in Chartsy using the
two-Rsi overlay plugin. To install this plugin, please go to
Tools → Plugins → Available Plugins. The plugin is preinstalled
in Chartsy version 1.4.
The overlay generates buy and sell signals based on Peter
Konner’s two-Rsi strategy and displays them as green or red
dots on the chart (Figure 16).
You can find the Java source code for the two-Rsi calculation
here:
http://chartsy.svn.sourceforge.net/viewvc/chartsy/trunk/Chartsy/Two%20
RSI/src/org/chartsy/tworsi/TwoRSI.java?revision=363&view=markup
FIGURE 18: microsoft excel, RSI combo chart
To download Chartsy, discuss these tools, and help us de-

velop other tools, please visit our forum at www.chartsy.org.
Our development staff will be happy to assist and you can with a single click.
become a Chartsy contributor yourself. —Sebastian Schenck, Tradesignal GmbH
—Larry Swing support@tradesignalonline.com
theboss@mrswing.com www.TradesignalOnline.com, www.Tradesignal.com
281 968-2718, www.mrswing.com
MICROSOFT EXCEL: COMBINING RSI WITH RSI

This tip is based on Peter Konner’s article in this issue,
“Combining Rsi With Rsi,” which describes the thinking
F Tradesignal: COMBINING RSI WITH RSI and steps in his progression from general idea to a possible
In our implementation of Peter Konner’s strategy described in trading system.
his article, “Combining Rsi With Rsi,” we include a percent- The Excel workbook with the filename “Combining Rsi
stop system and a simple position size system into the strategy With Rsi.xls” performs all of the necessary calculations in
(capital + closed equity / close price = position size). spreadsheet formulas and uses a couple of simple charting
This strategy can be easily implemented in the free Interac- steps to get the price (as candlesticks) and moving average
tive Online Charting Tool found on www.TradesignalOnline. indicators onto the same chart along with the buy and sell
com (Figure 17). In the tool, select “New Strategy,” enter the point markers.
code in the online code editor and save it. The strategy can A sample chart is shown in Figure 18.
now be added to any chart with a simple drag & drop. —Ron McAllister
The strategy is also available in the Lexicon section of rpmac_xltt@Sprynet.com
www.TradesignalOnline.com, where they can be imported S&C

Trading Systems
Trading systems can help take the subjective TRADERS'
RESOURCE
interpretation out of trading decisions by
providing automated buy and sell signals TOP 10 VIEWED
LINKS
based on preprogrammed rules. Trading
systems are usually computer programs
TRADING SYSTEMS
but can also be a real-time service issuing
signals or a set of published rules to follow. Trading System Company
They can rely on one or more trading disci- 1. AbleTrend 7.0 AbleSys Corporation
plines, such as artificial intelligence, Gann analysis, astrology, 2. Profitunity Trading Group Profitunity Trading Group
indicator sets, or custom rules.
3. Bulls ’n Bears Red Light, Gecko Software, Inc.
We contacted trading system developers and vendors and Green Light System
asked them to fill out an online survey form to describe their
4. BWT Precision Indicators Blue Wave Trading Re-
product or products. At our website at Traders.com, you’ll find search and Development
a list of the products. Just click on the Traders’ Resource link 5. Multiple timing models Formula Research, Inc.
and then on the Trading Systems category link.
6. FXCM Trading Platform Forex Capital Markets LLC
7. Thomas DeMark Trend Lines Market In&Out
8. OptionVue 5 OptionVue Systems Int’l Inc.
9. Winning Edge System - National Trading Group
Power Points (WES-PP)
10. BWT Zones SP Blue Wave Trading
Research and Development

These are the 10 trading systems clicked on most often on the Traders’
Resource website. Each company is listed in order of clicks received.
This is not an editorial rating, ranking, or opinion. For more information
on specific products and services, try checking store.Traders.com for
archived S&C product reviews.
Traders’ Resource at Traders.com

In addition to the trading system listing at Traders.com, you’ll
also find listings of other trading-related products and services
such as brokerages, data services, courses and seminars,
The product information you’ll find at our website for trading software, and more. We hope this will help you learn about
systems will help answer questions such as: What indicators products to help in your trading endeavors.
does the system utilize? What markets are followed by the
trading system? Are additional applications required to use the
trading system? What types of customer support are offered?
What are the primary features of the trading system? While we
are unable to present track records or rankings in the listing,
we hope this resource will be a starting place for finding out
more about some of the available systems and finding the right
trading system for your trading.
S&C
The information in Traders’ Resource is the most accurate at the time of posting and is subject to change. Because the vendors posting to Traders’ Resource are responsible for their own listing, Technical Analysis, Inc. declines any and
all liability for any representations made by the businesses and individuals listed. Nor can Technical Analysis, Inc. endorse any business or individual listed on Traders’ Resource. Technical Analysis, Inc. makes no warranties, express
or implied, as to the accuracy and reliability of claims herein. You agree to release Technical Analysis, Inc., together with its respective employees, agents, officers, directors and shareholders, from any and all liability and obligations
whatsoever in connection with or arising from your use of Traders’ Resource. If at any time you are not happy with the information posted to Traders’ Resource or object to any material within Traders’ Resource, your sole remedy is to
cease using it. This list is updated frequently. If you are aware of a business that should be listed, please email us at Editor@Traders.com.
+TR Trading Systems 1101.indd 1 11/23/10 9:02:00 PM

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+1101 Books for Traders.indd 1 11/23/10 7:52:13 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 1.7 5 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
3 Mo Euribor Interest Rate LIFFE 0.1 0.9 3 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
3 Yr. Cmmnwlth T-Bonds SFE 0.0 0.5 1 ••••••••••••••••••••••••••••
Mini S&P 500 Index CME 9.4 21.3 10 ••••••••••••••••••••••••••••
30 Day Federal Funds CBT 0.0 0.1 1 •••••••••••••••••••••••••••
Short Sterling LIFFE 0.1 1.1 6 ••••••••••••••••••••••••
Crude Oil - Light Sweet NYM 5.9 8.2 4 ••••••••••••••••••••••
DJ Euro Stoxx 50 Index EUREX 7.4 12.1 11 ••••••••••••••••••••
Natural Gas NYM 13.4 5.6 3 •••••••••••••••••
Brent Crude Oil IPE 4.3 6.2 4 ••••••••••••
S&P 500 Index CME 9.4 21.3 2 •••••••••••
Gold 100 troy oz NYM 4.2 8.3 4 •••••••••••
10 Yr Treasury Notes CBT 1.5 9.1 13 •••••••••••
Corn CBT 7.1 10.7 14 •••••••••
10 Yr German Euro Bund EUREX 1.7 11.4 10 ••••••••
Gas Oil ICE-EU 4.3 5.4 4 •••••••
5 Yr Treasury Notes CBT 0.9 6.1 15 ••••••
Soybeans 5000 bushels CBT 5.8 9.8 7 ••••••
5 Yr German Euro BOBL EUREX 0.8 6.1 13 •••••
Heating Oil #2 NYM 5.0 6.3 3 •••••
Xetra DAX-30 Stock Index EUREX 3.8 7.9 2 •••••
FT-SE 100 Index LIFFE 5.2 19.9 11 ••••
US Treasury Bonds CBT 2.7 15.9 12 ••••
2 Yr Euro Schatz EUREX 0.3 4.8 28 •••• CBT Chicago Board of Trade
CAC-40 Stock Index MATIF 6.5 10.7 8 •••• CME Chicago Mercantile Exchange including
Mini Russell 2000 CME 6.3 13.6 8 ••• the International Monetary Market (IMM)
2 Yr Treasury Notes CBT 0.4 5.0 16 ••• CMX Commodity Exchange, Inc. CME Group
RBOB Gas NYM 5.9 8.9 4 ••• EUREX European Exchange, Zurich & Frankfurt
Sugar-World #11 CSCE 18.0 25.6 12 •••
ICE-EU Intercontinental Exchange-Futures - Europe
Mini-Nasdaq 100 Index CME 8.2 15.8 12 •••
ICE-US Intercontinental Exchange-Futures - US
Aust. Share Price Index SFE 5.9 14.0 5 ••
KCBT Kansas City Board of Trade
Wheat - Soft Red CBT 9.5 15.4 12 ••
3 Mo EuroSwiss LIFFE 0.1 1.7 9 •• LIFFE London International Financial Futures and
Silver 5000 troy oz NYM 6.7 9.8 3 •• Options Exchange
Cotton #2 NYCE 8.3 10.5 5 •• MATIF Marché à Terme International de France
Long Gilt LIFFE 1.7 11.2 9 •• NYM New York Mercantile Exchange
Soybean Oil CBT 5.5 9.2 14 • SFE Sydney Futures Exchange
Euro Currency € CME 2.4 13.5 9 •
Japanese Yen ¥ CME 4.0 12.3 5 •
Mexican Peso CME 4.6 5.0 7 •
Copper NYM 7.4 12.9 6 •
Coffee C CSCE 8.1 15.4 6 •
Wheat - Hard Red KCBT 6.7 11.4 12 •
Swiss Market Index EUREX 7.4 16.2 9 •
Australian Dollar CME 3.0 7.7 7 •
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).
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receive the current dividend. anticipation of a price increase in that whose exercise (strike) price is
Exchange-Traded Funds (ETFs) — security. above the current market price of
Collections of stocks that are bought Money Flow — A number of technical the underlying security or futures
and sold as a package on an exchange, indicators that incorporate volume and contract.
principally the American Stock price action to measure buying or selling Pairs Trading — Taking a long position
Exchange, but also the New York pressure. Calculated by multiplying the and a short position on two stocks in
Stock Exchange and the Chicago day’s volume by its average price. the same sector, creating a hedge.
Board Options Exchange. Moving Average — A mathematical Pin Risk — A risk that an option or
Exponential Moving Average — A procedure to smooth or eliminate the futures contract faces when the price
variation of the moving average, the fluctuations in data and to assist in of the underlying asset closes at or
EMAplaces more weight on the most determining when to buy and sell. near the exercise price of the contract
recent closing price. Moving averages emphasize the direction upon expiration.
Fade — Selling a rising price or buying of a trend, confirm trend reversals, and Premium — The price a buyer pays
a falling price. smooth out price and volume fluctuations to an option writer for granting an
Fibonacci Ratio — The ratio between or “noise” that can confuse interpretation option contract.
any two successive numbers in the of the market; the sum of a value plus Put Option — A contract to sell a
Fibonacci sequence, known as phi (f). a selected number of previous values specified amount of a stock or
The three important ratios the series divided by the total number of values. commodity at an agreed time at the
provides are 0.618, 1.0 and 1.618. Moving Average Crossovers — The point stated exercise price.
Gann Theory — Various analytical where the various moving average lines Relative Strength Index (RSI) — An
techniques based on price, time, intersect each other or the price line indicator invented by J. Welles
and pattern to project changes in the on a moving average price bar chart. Wilder and used to ascertain
direction of the markets. Developed Technicians use crossovers to signal overbought/oversold and divergent
by legendary trader W.D. Gann. price-based buy and sell opportunities. situations.
Gap — A day in which the daily range Moving Average Convergence/ Divergence S&P Emini — Electronically traded,
is completely above or below the (MACD) — T he crossing of two smaller-sized ($50 times the S&P
previous day’s daily range. exponentially smoothed moving averages 500) contracts of the Standard &
In-the-Money (ITM) — A call option that are plotted above and below a zero Poor’s 500 index.
whose strike price is lower than the line. The crossover, movement through Stochastics Oscillator —An overbought/
stock or future’s price, or a put option the zero line, and divergences generate oversold indicator that compares
whose strike price is higher than the buy and sell signals. today’s price to a preset window of
underlying stock or future’s price. Near-the-Money — An option with a strike high and low prices.
Long — Establishing ownership of price close to the current price of the Volatility Index — A measure of market
the responsibilities of a buyer of underlying tradable. risk. Sometimes referred to as the
a tradable; holding securities in Out-of-the-Money (OTM) — A call option “investor fear gauge.” S&C
1101_classified.indd 95 11/23/10 1:15:46 PM

AT THE CLOSE
The trading process this over several different market cycles and time periods.
Here are a few ideas that may help: Note how the rules react to different market conditions
and you will be better able to avoid emotional judgment
1 Develop your own trading rules. Don’t rely on someone with a losing trade or a series of losing trades. You should
else’s rules that you do not fully understand on which to base backtest extensively to build confidence. This is key when
your own trading decisions. If you do not understand how you want to minimize the emotional impact on your trading.
a trading system works or why If, as an experienced trader, you
certain trading rules are in place, are faced with uncertainty, stress,
you will never be 100% confident and/or a series of losing trades,
in the trades you place. If you are you must have confidence in your
not confident in the rules in which rules to continue trading without
you make your trading decisions, allowing emotion to hinder your
you will be more likely to allow decisions. Backtesting your rules
emotion to play a bigger role in will help eliminate doubt and help
your decision-making process. you develop a strategy that does
This will become evident when not rely on your own judgment.
a trading system/rule suffers a
series of losses and you hesitate At least you’ll mini-
to act on the system/rule. mize your emotions
While applying these principles to
2 Develop trading rules that en- your own trading will not eliminate
compass all aspects of a trading emotions, it will help minimize
cycle, such as when to enter a them. Many of us don’t realize
trade, when to exit a trade, when we are allowing emotion into our
to exit a losing trade, and even trading process. We may think that
when to exit a winning trade. I by interpreting certain technical
recommend writing your trading indicators without predefined rules
rules down and placing them in a we are minimizing emotion, but
JOAN CHIVERTON
prominent place during trading. the sad truth is we are encouraging
Your rules should be used like a it. Apply these principles to your
pilot’s checklist. No matter how trading process. You will be glad
long pilots have been flying, they you did.
go over the same rules every time they crawl into the cockpit.
A trader should do the same thing. Before every trade they Brandon H. VanLandingham is cofounder and chief invest-
should go over their checklist of trading rules. Trading rules ment officer of Access Capital Management, an Oklahoma
should be precise, with nothing left to your own judgment. City, OK–based third-party money management firm serving
registered investment advisors. He may be reached at bran-
3 The final process to help eliminate emotion from your don@acmok.com.
trading is to backtest your trading rules. You should do S&C
CONDRON
“Right now, our work incentives include doughnuts, energy drinks, and for outstanding performance, a weekend in El Paso!”
+At the Close VanLand.indd 2 11/23/10 8:28:37 PM

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WM_Invest_ISLAND.indd 1 2/4/10 9:41:15 AM

AT THE CLOSE
ignore your trading rules and skip the
next signal and of course that trade
immediately becomes profitable. You
hesitate whether you should take that
last position this far after the trade sig-
nal. You continue monitoring the trade
you failed to react to in the beginning,
and now see a support and resistance
trend developing. Every time the
price pulls back to the support level,
it rallies off this bottom. Your trading
rules are telling you to sell the position
(which in this situation means not to
enter a long position), but you know
better and place your trade anyway,
ignoring your trading rule.
Just as you enter the trade, the sup-
port you previously noticed is violated
and the price of the security is now
below this level. Another losing trade
has begun and you just can’t sell out of
the position, even though your experi-
ence tells you to cut your losses. Now
you are desperate and begin looking at
a conglomerate of other trading rules
and technical indicators to justify your
decision to hold a losing trade.
This may seem a little exagger-
ated, but chances are an experienced
trader has lived through a few trading
cycles identical to the one described.
Emotional decisions are a trader’s
worst fears come true.
How do you
eliminate emotions?
Some traders believe that by subscrib-
ing to a particular trading system or
by interpreting several technical indi-
cators, they are eliminating emotion
JOAN CHIVERTON
from their trading decisions. In some
situations they minimize emotional
decisions, whereas in others they
only mask them. I have noticed that
after a losing trade I concentrate on
Beating Emotion recapturing the loss. I take on more
risk by bending my trading rules in
So what can be done to help minimize emotion within our trading? order to enter a trade earlier or hold a
The answer is in our trading process. trade longer than I otherwise would,
H
letting the emotion of recapturing a
as this ever happened to you? You go long the market or a particular loss take over.
security and it immediately goes down; you go short and it immediately So what can be done to help mini-
goes up. That is two back-to-back losses. Now extremely anxious, you mize emotion within our trading? The
answer is in our trading process.
by Brandon H. VanLandingham Continued on page 80

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THE TRADERS’ MAGAZINE SINCE 1982

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ERRATA: DECEMBER 2010

January 2011 • Technical Analysis of Stocks & Commodities • 9

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SPY (SPDR S&P 500 TRUST, D) Dynamic, 0:00-24:00 (delayed)

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12 • January 2011 • Technical Analysis of STOCKS & COMMODITIES

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On the second day, however, the to the direction of these recoveries.

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Anthony Trongone has taught graduate courses in psychology,

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Working Two Stop Levels

Combining Rsi With Rsi

4 The strategy should be designed to stay long

3 The need for subjective analysis of charts downtrend.

Here’s a simple combination where

January 2011 • Technical Analysis of Stocks & Commodities • 17

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+1101 Konner.indd 3 11/24/10 3:35:13 PM

January 2011 • Technical Analysis of Stocks & Commodities • 19

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RSI WITH RSI

Riviera model CODE FOR AvanzaVikingen else

This makes you stay long in an uptrend, and out in a

20 • January 2011 • Technical Analysis of Stocks & Commodities

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January 2011 • Technical Analysis of Stocks & Commodities • 21

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by Kenneth Gilliland WHY BREAKAWAY GAPS OCCUR

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