THE TRADERS’ MAGAZINE SINCE 1982

http://www.traders.com/

forex channels
Trading setups for
any time frame 10

split personalities
How companies perform
in the day session vs. the
overnight 16

3-bar inside bar

On gold, silver, and oil 30

math expectations
Comparing strategies 42

INTERVIEW
Ken Calhoun of
Daytrading University 46

PRODUCT REVIEWS
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Cover March 2011.indd 2 1/21/11 12:16:22 PM

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1/11/11 2:04:39 PM
 CONTENTS MARCH 2011, Volume 29 Number 3

FOREX FOCUS
10 Channels In The
Forex Markets
by Gareth Burgess
This trading setup will stop you
from being shaken out of your
positions in any time frame.
FEATURE ARTICLE
16 Trading Companies
With Split Personalities
by Anthony Trongone
When the regular trading session
gains momentum, is the market
more likely to produce additional
gains? Here’s how the companies
in the Qqqq perform during regular
trading sessions versus overnight
trading sessions.
24 Empowering Traders
With The Russell 2000
by Gail Mercer
Ever thought of trading the
Russell 2000? Here’s how retail
traders could benefit from trading
this index.
30 Three-Bar Inside
Bar Pattern
by Johnan Prathap
This trading strategy uses an
inside bar as a three-bar pattern for
long and short positions. Find out
how it performed on gold, silver,
and crude oil contracts.
42 What Can You Expect,
Mathematically?
by Stephen Massel
Here’s a look at how mathematical
expectation allows for an apples-
to-apples comparison of trading
systems or strategies.
45 Explore Your Options REVIEW, website
by Tom Gentile 54 • MarketGauge: Big View
Got a question about options? Review: Standalone package for
market trading data
INTERVIEW 58 • NASDAQ OMX Portfolio Manager
46 Trading Momentum for the iPad
With Ken Calhoun Review: Real-time quotes and port-
folio management app
by Jayanthi Gopalakrishnan
and Bruce Faber
The president of Daytrading Uni- DEPARTMENTS
versity, Ken Calhoun has provided 6 Opening Position
online training to active traders
8 Letters to S&C
from more than 32 countries since
1999. He told us about the markets 64 Traders’ Tips
he prefers to trade and why, not to 72 Traders’ Resource
mention the most common mis- 74 Advertisers’ Index
takes he sees novice traders make. 74 Editorial Resource Index
76 Books for Traders
53 Q&A 77 Futures Liquidity
TIPS by Don Bright 78 Classified Advertising
This professional trader answers
a few of your questions. 79 †Traders’ Glossary
80 Trade News & Products
63 Futures For You
by Carley Garner
Here’s how the futures market
really works.

36 What You Don’t Know

About Candlesticks
by Thomas N. Bulkowski
Researching candlesticks yields
some surprises.

This article is the basis for Traders’ Tips

TIPS
this month.

TCA WM
These articles – and articles like them – n Cover art: John Nebraska
can be found online at www.traders.com n Cover concept: Christine Morrison
Copyright © 2011 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 • March 2011 • Technical Analysis of Stocks & Commodities

1103 contents.indd 1 1/20/11 4:15:47 PM

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company that receives the highest number of votes cast by the magazine’s subscribers over a fixed time period that ends shortly before announcement of the awards. No offer or solicitation
to buy or sell securities, securities derivatives or futures products of any kind, or any type of trading or investment advice, recommendation or strategy, is made, given or in any manner
endorsed by TradeStation Securities, Inc. or any of its affiliates. • Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performance or
success. • Active trading is generally not appropriate for someone of limited resources, limited investment or trading experience, or low risk tolerance. • There is a risk of loss in futures
trading. Options and Security Futures trading is not suitable for all investors. • Trading foreign exchange carries a high level of risk and may not be suitable for all investors. There is a
possibility that you may sustain a loss equal to or greater than your entire investment; therefore, you should not invest or risk money that you cannot afford to lose. Please visit our website
for relevant risk disclosures. • System access and trade placement and execution may be delayed or fail due to market volatility and volume, quote delays, system and software errors,
Internet traffic, outages and other factors. • All proprietary technology in TradeStation is owned by TradeStation Technologies, Inc., an affiliate of TradeStation Securities, Inc. TradeStation
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tasc_march2011.indd 1 1/11/2011 4:54:46 PM

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 March 2011 • Volume 29, Number 3
March 2006 • Volume 24, Number 3 O
Opening Position
PENING POSITION

The Traders’ MagazineTM

The Traders’ Magazine TM

In
EDITORIAL
EDITORIAL
editor@traders.com
editor@traders.com
Editor in Chief Jack K. Hutson

O
the early months of a new year, it’s not
Editor in Chief Jack K. Hutson
Editor Jayanthi Gopalakrishnan
Editor Jayanthi Gopalakrishnan
Managing Editor Elizabeth M.S. Flynn
Managing Editor Elizabeth M.S. Flynn unusual
nce againtowe hear
gotanalysts
a reminderand pundits
of just
Production Manager Karen
ProductionManager KarenE.E.Wasserman
Wasserman talk about how they think the economy will fare
how sensitive the financial markets
Director Christine
ChristineMorrison
during thesaw
course of that year.inI usually don’t
Art
Art Director Morrison are. We a major selloff the Japanese
Graphic Designer Wayne
GraphicDesigner SharonShaw
take any of them seriously, but whentriggered someonea
Yamanaka
Staff Writers
Editorial Dennis
Intern D. Peterson,
Emilie Rommel Bruce Faber
markets, which — as expected —
Webmaster Han J.David
Technical Writer Kim Penn makes
dominoa statement
effect on givingmarkets a precise figurethe
throughout of
Contributing Dennis John
Staff WritersEditors Ehlers, Bruce Faber
D. Peterson,
Anthony W. Warren, Ph.D. how much a specific market will grow,
world. Add disappointing earnings I often
numbers
wonder
from UShow they managed to come
have up with
Webmaster Han J. Kim
corporations and you a situa-
Contributing EditorsDon
ContributingWriters Bright,
John Thomas
Ehlers, KevinBulkowski,
Lund,
Martin
AnthonyPring, Barbara Ph.D.
W. Warren, Star
that number. For example, if an analyst on
tion that just got worse. So what started offTV
as
Contributing Writers Don Bright, Thomas Bulkowski,
Martin Pring, Adrienne Toghraie says he or she believes the housing market will
a strong year ended up correcting, and rather
OFFICE OF THE Publisher still drop Ianother
rapidly. must admit5% before going back
that although up, I
correc-
Publisher Jack K. Hutson
Credit OFFICE OF Eades
Manager Linda THEGardner
PUBLISHER have to pull up a chart of housing prices
tions are healthy for any market, when youto have
see how
a 2%that percentage
drop, it gets you was derived.
thinking.
PublisherEngineer
Industrial Jason K. Hutson
Jack K. Hutson As far as I can see, prices are still pointing down, which to me means that
Prior to the Federal Reserve’s F OMC meeting, I usually take a look at prices
the yield
Credit Manager
Project Sean M.
Engineer Linda
Industrial Engineer
Moore
Eades
Jason
Gardner
K. Moore
Hutson
are stillAt
curve. going to fall.
present, it’sHow much?
looking I don’t
a little flat,know. And there’s
and given that thenogeneral
way toconsensus
know until
Karen
you seethe
a change in thattoprice movement.
Accounting Assistant
Project Engineer Sean M. Moore is that Fed is going tighten at their January 31st meeting, I am concerned
Controller Mary K. Hutson
The same goes for analyzing the financial
that the yield curve may be heading markets.of
in the direction If the market
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inverted. And ifdown,
that
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Staff membershttp://www.traders.com
using
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first initialmay
plusbe
last name plus @traders.com you have to have the patience to wait for that right setup to appear on your charts
Staff members emailed through the Internet But before getting to the stage of placing that trade, you need to understand the
using first initial plus last name plus @traders.com before you hit that enter button. That price setup will have to be one where you
market you are trading. You should be able to do so after reading Paolo Pezzutti’s
Author­i­za­tion to pho­to­copy items for inter­nal or per­sonal expect your returns to be greater than the risk you take. Stephen Massel’s article,
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personal “What Can You Expect, Mathematically?” starting on page 42, will help you come
granted
use, or bytheTech­ ni­cal or
Anal­ y­sis, Inc.use for users reg­is­tclients,
ered with terns, and you need to determine if it is volatile, trending, in a trading range, moving
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Technical Cen­ter
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registered with Re-
strongly in one direction, or moving but not with much momentum.
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porting Serv­ice,
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The tools with which to do your analysis are readily available. Do the research
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6 • March 2011 • Technical Analysis of Stocks & Commodities

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 Modifying The Parabolic Stop
relating to technical analysis and this magazine. This column is our means of communica- And Reversal (April 1995)
tion with our readers. Is there something you would like to know more (or less) about? (with sidebar: “The Parabolic Trading
Tell us about it. Without a source of new ideas and subjects coming from our readers, this System”)
The parabolic stop and reversal indicator is
magazine would not exist. a popular trading tool, but it’s subject to false
Email your correspondence to Editor@Traders.com or address your correspondence signals. Here’s how it can be modified to improve
to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499. All its performance.
letters become the property of Technical Analysis, Inc. Letter-writers must include their full By Dennis Meyers
name and address for verification. Letters may be edited for length or clarity. The opinions
expressed in this column do not necessarily represent those of the magazine.—Editor The Parabolic Trading System
(November 1993)
Traders are always searching for methods with
which to manage risk through the use of stop-loss
The Clear method PARABOLIC SAR FOR METASTOCK? orders. One method that has been proposed for
determining stops is by using a mechanical formula
Editor, Editor, based on the parabolic indicator, also known as the
It was with I’ve been receiving this excellent maga- stop and reverse (SAR). How does it work?
great interest zine for many years and always look By Thom Hartle
that I read forward to the next issue. There have
Ron Black’s been many writeups in the magazine Setting Stops: A New Approach
article in the on Bollinger bands, but none for the (November 1989)
Skillfully selected exit points can often make a large
September 2010 issue of your maga- parabolic Sar() for MetaStock (Eod). difference between overall profit and loss. One
zine, “Getting Clear With Short-Term I’ve been unsuccessful when trying to commonly used exit strategy is J. Welles Wilder’s
Swings.” The concept is simple and add parabolic Sar() code to an explorer parabolic stop-and-reverse, or SAR.
signals are easy to follow (the best start- column and don’t understand why. Can By John Ehlers
ing point for any indicator!). you write a formula that could be added
In the article, the author provided to the explorer? JM internal bandS
the EasyLanguage code for displaying John Arthur Editor,
the swing line. But since many readers I have a question about
want to implement indicators using a We have redirected your inquiry to Meta­ Koos van der Merwe’s
spreadsheet, I decided to translate the Stock, since we don’t specialize in writing article in the December
Clear method to Excel. code. You might also wish to check user 2010 issue of S&C, “Less
I am providing a spreadsheet with forums for posted solutions. Stress With The JM Inter-
the Clear method applied to the S&P For those not familiar with it, the nal Band.”
500 (“Clear Spx.xls”) as well as a Word parabolic Sar (stop and reverse) was About that band trade: I am not using
document explaining how to enter for- introduced in J. Welles Wilder’s classic MetaStock charts. When he says to use
mulas in Excel. I have contacted the 1978 book, New Concepts In Technical a 15-period simple moving average
author, Ron Black, as a check, and he Trading Systems (Trend Research). (Sma) along with offsets of 2% above
has now also contributed a macro code The following are some articles and 2% below the 15 line, would it be
listing (SwingLine.xls) for those who we’ve published on the parabolic Sar. okay to substitute by using an 18-period
may want to use it. These and other articles are available and 12-period Sma as replacements for
I hope this helps those readers who from our online store at www.Traders. both of the 2% offset lines? I came up
rely on Excel to exercise technical com.—Editor with 18 and 12 because 2% of 15 is 3
analysis. (that is, 15+3=18, 15–3=12).
Marco Alves Stay InThe Market With Stop-And-Reverse In addition, I’m curious as to whether
(Working-Money.com, April 2002) van der Merwe has done any testing with
Thank you for providing this Excel If you hate being out of the market, you should those bands on 15- or 30-minute charts.
spreadsheet translation to share with take a look at this system. The parabolic time/
Am wondering how they would perform
price system indicator was developed by J.
other readers. Welles Wilder. Often referred to as parabolic SAR on currency charts.
Readers will find these Excel files or simply SAR (for “stop and reverse”), the term Greg
(Clear Spx.xls and SwingLine.xls) and comes from its appearance as a parabola when
Word file (“Implementing the Clear viewed on a chart. Koos van der Merwe replies:
Method_Excel(R).doc”) available at
By Rudy Teseo I am afraid that substituting another mov-
our website at www.Traders.com in the ing average does not work as effectively.
Subscriber Area. Login requires your
Parabolics (July 1997) If you could tell me what program are
Here’s a look at the parabolic trading system,
subscriber number and last name.— with details on the way it works and how it’s you using to analyze the markets, I may
Editor calculated. be able to provide you with a formula
By John Sweeney that would help. Remember, a 15-period

8 • March 2011 • Technical Analysis of Stocks & Commodities

+Letters 1103.indd 1 1/23/11 3:29:15 PM

 simple moving average (Sma) is adding
up the closing price of the last 15 days
and dividing it by 15. You then offset
this moving average 2% above and 2%
below. Using an 18-period moving aver-
age (MA) is taking the last 18 days and
dividing it by 18. This does not give a
15-period MA offset upward. The same
goes for the 12-period MA. I would sug-
gest you invest in a program that will
allow you to write a simple strategy such
as the JM internal band.
I can’t say whether it will work on a
15-minute or 30-minute chart, since I
have only used it for long-term investing.
I doubt that it would work for short-term
trading.
More on the JM internal bandS
Editor,
I found Koos van der Merwe’s article in
the December 2010 issue of S&C about
the JM internal bands very interesting. I
would like to adapt this method as part
of my trading strategies.
I use MetaStock but am not good at
programming explorations in Meta­
Stock. Could van der Merwe advise me
how to do that? Also, does he use other
indicators for confirmation of a trade
besides the Rsi?
Greg
Edmond, OK
Koos van der Merwe replies:
Thank you for your email. Here is the
formula for the indicator. Simply copy
and paste it into the indicator builder
in MetaStock.
Bnd:= Mov(C ,15 ,S ) ;
UpBd:=1.02*Bnd;
LwBd:=0.98*Bnd;
UpBd;
LwBd
To add it to an explorer, follow these
instructions:
Open The Explorer.
A.... Close.
B.... Ref(CLOSE, -1)
C.... Bnd:= Mov(C ,15 ,S ) ;
UpBd:=1.02*Bnd;
LwBd:=0.98*Bnd;
UpBd
D.... Bnd:= Mov(C ,15 ,S ) ;
+Letters 1103.indd 2
UpBd:=1.02*Bnd; THE LANGUAGE OF MONEY
LwBd:=0.98*Bnd; Editor,
Ref(UpBd,-1)
After carefully reread­
E.... Bnd:= Mov(C ,15 ,S ) ;
UpBd:=1.02*Bnd; ing Walter Downs’ July
LwBd:=0.98*Bnd; 2010 S&C article, “The
LwBd Language Of Money,” I
F..... Bnd:= Mov(C ,15 ,S ) ;
am convinced there are
UpBd:=1.02*Bnd;
LwBd:=0.98*Bnd; major math and logic errors involved that
Ref(LwBd,-1) significantly affect the data in the article’s
G. .... RSI(C ,14 ) Figure 1. He states on page 25 that the FB
Filter..... colA>colC AND colB<colD AND
percentage of gain per trade is 8% for the
colG < 40
case where Pct=0.30, Win=120%(F=2.2),
Loss=40% (F=0.6), and P/L=3. The cor­
The above formula is for long only.
rect formula for fixed fractional trad­
For shorts, you must alter the filter
ing is: 2.2^0.3*0.6^0.7=0.885/trade =
using the “E” and “F” formula. Hope
0.885^30=$0.0265 for 30 trades.
this helps.
1) If starting equity is $100, then the
Market Instrument Function
profit becomes: 100*0.0265–$100 =
Editor,
$-97.3. This is a serious loss of equity
The article “The Market
and is vastly different from the author’s
Instrument Function”
calculated value of $1,006. There are
published in the Decem­
two errors involved: 1) his formula
ber 2010 issue of S&C
left me very enthusiastic Continued on page 71
about using this signals processing
technique, but also perplexed as to how
to do just that.
I have a background in engineering,
but not in signals processing. After
reviewing the “mathematical discus­
sion” section several times, I still do not
understand how to compute the E(t-tau)
device instrument function. Computing
the output from the input plus device
instrument function is simple, but how
does one compute the device instrument
function from the input and output? I am
interested in an expression of the type
“E(t-tau)=...”
Could the authors provide an example
calculation or further reading sugges­
tions on computing the device instrument
function from the input + output?
Eric Lanoix
Vancouver, BC, Canada
Thank you for taking the time to review
the mathematical discussion that co-
authors Alexander Ershov and Aleksey
Gerasimov provided in the article. I
would recommend an Internet search for
“Fredholm’s integral equations of the
first kind.” There are several published
papers on this topic that may give you
further insight.—Editor For more information circle No. 4
March 2011 • Technical Analysis of Stocks & Commodities • 9
1/27/11 9:01:36 AM
 as in liquidating a bad one. As a
result, many traders tend to play
a zero-sum game. When they see
a profit, they take it. When they
see a loss, they run it.
A successful trader must trade
from a known plan — one that
not only supports the direction
of the position in the market but
also helps to remain confident
in the original decision. In this
article I’ll demonstrate that if
used properly, technical chart
analysis can be accurate and
profitable, especially in a trend-
ing market.

A trending market
A trending market is where the
best percentage trades are to be
found, but catching the trend
is easier said than done. Many
traders will spend their time
looking for a reversal instead
of remaining with the trend by
simply working from one side
of the market — that is, the buy
side in a bull trend or the sell
side in a bear trend until the
trend is over.
But if catching the trend is
difficult, then remaining with
the position is even more so.
Applying a channel to the trend,
however, can determine where

INGA POSITUR
the price reaction is likely to
continue and where it may falter.
This is technical analysis, but all
too often the trendlines are not
Trading Time Frames

Channels In
accurately placed, which can
be misleading when looking for
areas of support and resistance.

The Forex Markets

In the following example, I will
demonstrate how to determine if
a trend is unfolding and where
to apply accurate trendlines to
This trading setup will stop you from being shaken out of your positions in any time frame. establish the channel.
This technical setup will stop
by Gareth Burgess you from being shaken out of

T
your positions, especially on
he foreign exchange markets are an arena of competing forces constantly in conflict the longer-term time frame. By
with each other. The markets are torn apart by worry, uncertainty, doubt, fear and the way, it does not matter what
greed, not to mention profit. As a consequence, many traders get shaken out of their time frame you use; you will find
positions by a short-term wave of opposing news. Even when a position is showing a that the same technical criteria
profit, there is never a certainty that the market will continue in the anticipated direc- applies, even to the five-minute
tion and there is almost the same sense of relief when getting out of a good position time frame!
10 • March 2011 • Technical Analysis of Stocks & Commodities

+1103 Burgess.indd 1 1/26/11 3:58:23 PM

 FOREX FOCUS GBP/USD Spot Daily
1,6100
1,6050
1,6000
Three-point touch 1,5950
First and foremost is the three-point touch. Until the 1,5900
1,5684
investor sees the three-point touch materialize, there is 2
1,5850

no basis for a channel. The three-point touch consists of 1,5800

two reaction lows and one reaction high in a bull trend

1,5750

or two reaction highs in a bear trend with one reaction

1,5700
1,5650
low, which will then allow the first of the two trendlines 1,5600
to be established, regardless of whether the line passes 1,5550
through the prices at a later point in the trend. 1,5000
To find these reaction points, you need to see the market 1,5450
breaking out of a range. A move higher (or lower) with two
3
1,5400
or more consecutive higher closes could be the signal that

TeleTrader Software
1,5350
something has changed. This is something you will have 1 1,5300
to backtest. It doesn’t matter exactly how the trend starts 1,5250
because you need to have the reaction points, which only ‘10 16 18 20 24 26 30 Sep 03 07 09 13 15 17 21 230 27
form after the trend has already begun. Figure 1: gbp/usd weekly chart with three reaction points. The potential
At the start of any potential trend you must look for the beginning of a trend channel with three reaction points is the criteria for establishing the
two reaction lows with a reaction high (in a bull trend) found channel trendlines in both bullish or bearish markets on any time frame.
between these two reaction lows. It may take practice to
establish the channel points, but the
rule of thumb is to wait until there GBP/USD Spot
are two reaction lows and then find
Daily

the highest price level between

1,6100
1,6050
those two reaction lows (again, for 1,6000
a bull trend). Once these points are 1,5950
established, you can attach the lines 1,5900

and they remain there for the dura- 2

1,5854

tion of the trend and longer. The

1,5800
1,5750
daily chart of the British pound/ 1,5700
US dollar (Gbp/Usd) in Figure 1 1,5650
displays the beginning of a trend 1,5600
channel quite clearly. 1,5550

There are, of course, many 1,5000

ways to enter a position into the

1,5450
3
1,5400
market, and timing your position 1,5350
is just as important as managing 1,5300
1
the stop-loss. For the sake of 1,5250
argument, let us say you enter a ‘10 17 20 25 30 Sep 06 09 14 17 23 28 Oct 05 08 13 18
position on the break above the Figure 2: gbp/usd weekly chart with established trend channel. The reaction high (point 2 on the chart)
high of the doji as seen in Figure can be established after the reaction lows have been found (1 & 2 on the chart).
1 (if you are a candlestick trader,
this method will be familiar to
you). Once your position is in the market, your initial stop-loss price action against the channel lines. Figure 2 shows how the
can be placed just below the second reaction low, knowing lower channel line warns you about weakness setting into the
that the market will not return to that price level while in the trend, but more important, it helps you stay with your position.
channel. And once the market moves in your favor, you can Only a clear break below the channel line makes the bullish
bring the stop up slightly. Of course, it would be possible to trend look suspect and a break below the lower line warns
enter a position on the break above the high of the daily price you the market is about to move into a correction phase. But
range that formed at the second reaction low. you can leave the lines on the chart in case the price action
These are basic observations, of course; every trader has his returns to the channel.
or her own preference. The point is to have a strategy based on
the plan you are creating by using and applying the channel.
The reaction points are there for you to feel more confident The point is to have a strategy
in a possible trend channel unfolding. based on the plan you are creating
Later on, once the trend channel has been established, it is by using the channel.
possible to gauge the strength of the trend by observing the
March 2011 • Technical Analysis of Stocks & Commodities • 11

+1103 Burgess.indd 2 1/21/11 4:23:19 PM

 GBP/USD Spot Daily FOREX FOCUS
1,6150
1,6100

1,6050
1,6000
1,5950
In Figure 3 you see how the channel can
1,5900 still be used to gauge the market, even
2
1,5850 after the price action has left the chan-
1,5800 nel. Although you may have closed out
your position due to the market breaking
1,5750
Entry level 1,5700
1,5650 below the lower trendline, the resistance
Entry level 1,5600 at the lower channel line could be used for
1,5550
short-term trading or as a potential target.
Thus, it is useful to keep the channel on
1,5000
Stop-loss
1,5450
3
1,5400 your chart, even after price action has
1
1,5350 moved away from the channel.
1,5300
The three reaction points can help you
recognize the beginning of a trending
‘10 26 Sep 13 09 10 15 20 23 28 04 07 12 14 19 22 27

Figure 3: GBP/USD Weekly Chart With Entry Levels. The entry levels based on the three reaction market, but the real profits come from
points suggest a trend channel is forming. Daily highs and lows are used as entry and stop levels.
staying with the position and, as I have
demonstrated, by using this method you
GBP/USD Spot Daily
1,6150
can establish your position and remain
1,6100
with it even during those uncertain days
1,6033
when news or hysteria hits the market.
1,6000
1,5950 More techniques
1,5900
There are other techniques to add to this
channel, and you can experiment with
1,5850
2
other indicators and then backtest. Two
1,5800

techniques I find reliable are the moving

1,5750
1,5700
Entry level 1,5650 average and Fibonacci ratios and projec-
1,5600 tions. These can help you maintain your
position as they help to keep the price
Entry level
1,5550

Stop-loss 1,5000 action within context.

3
1,5450
In Figure 4, the 10-day simple moving
average (Sma) has been added to the daily
1,5400

chart of the Gbp/Usd. This shows how

1,5350
1
1,5300
‘10 23 26 Sep 03 07 10 15 20 23 29 Oct 07 09 14 19 22 the market finds strong buying when the
FIGURE 4: GBP/USD Weekly Chart With 10-Week Simple Moving Average. Even when price action price reacts with the Sma. Your position
breaks below the lower trendline and looks weak, the 10-week moving average provides support to the price has been established but when you see the
action and gives you the confidence to maintain your position. price action below the lower trend channel,
you may be concerned, and rightly so, as
you do not want to let any profits that you
have accumulated diminish. Seeing that the
market finds strong support at the 10-day
Sma would help you stay with your posi-
tions. If you apply a filter of, say, two daily
closes below the Sma, you would not have
closed your position when price dipped
below the lower trendline.
The next step is to try to establish
potential targets. In this case, you would
look at where continued bullishness will
take the price action. Applying Fibonacci
projections works well when you are try-
ing to establish profit targets. The key to
establishing the projected targets, however,
is in finding the right levels to project from.
Again, this is where the three reaction points
(the two reaction lows and the one reaction
“Okay, who released my bonus and perk entitlements to WikiLeaks?” high in a bull trend) can be used to establish
12 • March 2011 • Technical Analysis of Stocks & Commodities

+1103 Burgess.indd 3 1/21/11 4:24:52 PM

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++Full pg Ad Template.indd 1 1/19/11 9:30:44 AM

 FOREX FOCUS
GBP/USD Spot Daily

1,6050
1,6039
1,6000
161.8% 1,61,5950
the Fibonacci points of projection. 1,5905
Establishing the Fibonacci retracement 138.2% 1,5850
from the base of the first reaction to the high 2 1,5800
of the second reaction creates the bases for 1,5750

the retracement levels. The swing projec- 100.0% 1,5700

tion is projected up from these levels. As 1,5650

you can see in Figure 5, the market finds 61.8%

1,5600

strong resistance at the 1.382% projection

1,5550
61.8%
level before finally reaching the 1.618%
1,5000
38.2%
1,5450
projection level. Remember, a trend that 3 23.6%
1,5400
seems congested and is rising slowly is 0.0% 1,5350
not a good sign. It implies hope, but the 1 1,5300
10-day moving average helps you maintain 03 08 10 15 17 21 23 28 30 05 07 12 14 19 21 25 28

the position during such periods. Figure 5: GBP/USD Weekly Chart With Fibonacci Projections. The most exciting part about chart
One of the advantages of the daily time technical analysis is sitting down and placing these technical tools on the chart and then determining how the
market is reacting to these technical levels.
frame is that you can apply daily closes
above or below the technical levels of
importance as filters. But the short-term time frames work (www.chart-workshop.de), a provider of technical views for
just as well for the channel scenario, as you can see on the investors. He can be contacted at info@chart-workshop.de.
15-minute chart of the euro/US dollar in Figure 6, so this is
a useful technique for short-term trades as well. Suggested reading
Burgess, Gareth [2010]. “Forex Entry,” Technical Analysis of
Gareth Burgess has more than 10 years’experience in applying Stocks & Commodities, Volume 28: October.
chart techniques to investment analysis, creating technical _____ [2009]. Trading And Investing In The Forex Markets
views and strategies for corporate-level clients, and is a dedi- Using Chart Techniques, John Wiley Ltd.
cated private investor. He is founder of the Chart Workshop ‡TeleTrader Software S&C

EUR/USD Spot 15 mins

1,39800

1,39700

1,39600

1,39500

1,39400
2 1,39300

1,39200

61.8% 1,39100

1,39000

1,38900

1,38800

1,38700

161.8% 1,38600

1,38500
138.2%
1,38400

1,38300
100.0%
1,38200

1,38100
61.8%
1,38000
38.2%
1,37900
23.6%
3 1,37800
0.0%
1 1,37700

1,37600
Di 06:00 08:00 10:00 12:00 14:00 16:00 018:00 20:00 22:00 Mi 03:00 05:00 07:00 09:00 11:00 13:00 15:00 17:00 19:00 21:00 Di 03:00 05:00
Figure 6: EUR/USD 15-Minute Chart With Three Reaction Points and Channel. The short-term time frame works just as well as seen here on the
15-minute chart. The reaction points establish the trend channel. The 34-minute simple moving average keeps the picture positive and the Fibonacci projections help
maintain the position with potential target levels.

14 • March 2011 • Technical Analysis of Stocks & Commodities

+1103 Burgess.indd 4 1/21/11 4:25:32 PM

 Best Price Execution • Lowest Margin Rates • Low Cost 1 2 3

Minimize Your Trading Costs

US Margin Loan Rates Comparison US Commission Rates Comparison

1 E-mini
100 1 Stock S&P 500
$25K $200K $1.5M Shares Option Future
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optionsXpress 6.25% 5.00% 4.00% $9.95 8

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Interactive Brokers LLC is a member of NYSE, FINRA, SIPC. Supporting documentation for any claims and statistical information will be provided upon request. [1]
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++Full pg Ad Template.indd 1 1/19/11 12:32:17 PM

 16 • March 2011 • Technical Analysis of STOCKS & COMMODITIES

+Trongone.indd 1 1/21/11 12:17:22 PM

 TRADING TECHNIQUES
Adjust As Necessary
Trading Companies
With Split Personalities
When the regular trading session gains
momentum, is the market more likely to produce
additional gains? Here’s how the companies
in the QQQQ perform during regular trading
sessions versus overnight trading sessions.
A
lthough seven years have passed since then,
the trades based on my two 2004 articles about
the advantages of taking a long position in the
overnight session are still delivering attractive
profits. In these articles, I made a case for split-
ting the trading day into two separate sessions. By
trading in the hours of darkness in the three years I
investigated (2001–03), shares of the NASDAQ 100
Trust exchange traded fund (QQQQ), also known as
the cues, made $1.69 in aftermarket activity but fell
$23.61 in the regular trading session.
Since then, the cues, which were at $36.46 on
December 31, 2003, ran up to a closing price of
$54.46 by December 31, 2010. Despite this $18.00
advance in 1,763 trading days, the regular session
(subtract the day’s closing price from its opening
price) had a decline of $9.86; however, the overnight
session (compute the price change in the overnight
session by subtracting opening price of the next
trading day from today’s closing price) was able to
advance $27.86.
This article explores the possibilities of the cues
JOSE CRUZ
making a turnaround in the regular trading session
by Anthony Trongone, PhD, CTA, CFP
+Trongone.indd 2
(RTS) by showing how to monitor the running per-
formance of each trading session.
With a 62.5% weighting in the information
technology sector, the cues have no exposure to
the financial industry. Since they have an average
trading volume of more than 100 million shares,
they offer some outstanding advantages. With such
vibrant activity, they normally trade with just a
penny difference between the bid/ask price. This
liquidity is an important feature because very few
instruments offer the investor a reasonable bidding
price to buy or asking price to sell outside of the
regular trading session. In addition, this exchange
traded fund (ETF) allows investors to participate
in the collective intraday performance of the 100
companies that compose the NASDAQ 100; however,
it trades with the precision of a single security.
Because the cues track the prices of the companies
in this index, they have an almost perfect correlation
with the NQ futures. This allows you to actively
trade this futures contact as a replacement for the
cues during the day or throughout the night. This
contract trades internationally, around the clock, at
a dazzling speed with small differences between the
bid/ask price.
SPLIT PERSONALITY
Not all of the 100 companies in the NASDAQ 100
perform better after hours. Some demonstrate success
during the day, but falter badly at night. For instance,
Not all of the 100 companies in the
NASDAQ 100 perform better after
hours. Some demonstrate success
during the day, but falter at night.
March 2011 • Technical Analysis of STOCKS & COMMODITIES • 17
1/21/11 12:18:22 PM
 With this much power, you may want
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This is neither a solicitation to buy or sell any type of financial instruments, nor intended as investment recommendations. NO REPRESENTATION IS BEING MADE
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STOCK OVERNIGHT REGULAR WEIGHTING 12/31/2009 8/31/2010 PROFIT
AAPL $165.30 -$7.55 18.99 $85.35 $243.10 $157.75
GOOG $122.00 $20.37 4.11 $307.65 $450.02 $142.37
but despite this $500 advance, it
RIMM $42.84 -$40.58 1.47 $40.58 $42.84 $2.26
could still be trading in the red if
INTC $7.44 -$4.43 2.11 $14.66 $17.67 $3.01
only examined during the regular
YHOO $2.76 -$1.85 0.05 $12.20 $13.11 $0.91
trading session.
AMZN $5.74 $67.81 2.34 $51.28 $124.83 $73.55 Figure 1 breaks down each of
EBAY $0.71 $8.56 1.40 $13.96 $23.23 $9.27 these 13 companies by the more
MSFT $0.25 $3.78 4.31 $19.44 $23.47 $4.03 profitable session. In many cases
CSCO -$0.48 $4.17 2.47 $16.30 $19.99 $3.69 they appear to have a split per-
ORCL -$3.21 $7.33 2.84 $17.73 $21.85 $4.12 sonality. When this occurs, it can
SBUX -$9.89 $23.41 1.47 $9.46 $22.98 $13.52 obscure the true results of the stock.
QCOM -$13.02 $15.49 4.68 $35.83 $38.30 $2.47 For instance, Research in Motion
COST -$14.32 $18.32 0.80 $52.50 $56.50 $4.00 (Rimm), the maker of BlackBerry
SUMMARY $306.12 $114.83 47.52 $420.95 wireless smartphones, is an inter-
esting case. Without separating the
Figure 1: OVERNIGHT VS. REGULAR TRADING SESSIONS. This table breaks down the trading action for each session. sessions, its $2.26 profit appears
Clearly, some companies perform better (red highlight) in the overnight session whereas others shine brighter during the
day (blue highlight), but thanks to three stocks, the overnight had a decisive margin. These 13 companies are responsible meaningless. But splitting the trad-
for nearly half of the price action in the cues. ing sessions offers the insightful
investor a remarkable advantage,
Figure 1 shows the performance of 13 companies. (Prices come as this company had a $42.84 profit in the overnight session
from Yahoo!, so there is no adjustment for dividends.) Although (Ovs) while falling $40.58 in the regular trading session.
it is a small representation, those companies are responsible for
47.5% of its weighting as of September 1, 2010. In selecting Trading after dark
these stocks, I took those with the biggest percentage weight- Figure 2 shows the extensive run by the Qqqq to the upside in
ings, along with a few other familiar names. the overnight session. As you can see, it was mostly an uphill
Two stocks with a long history of success are big contribu- journey. During the financial crisis, the cues took a nasty fall,
tors to the advance of the overnight session. Since January 1, slipping from $55.03 (October 31, 2007) to $25.72 (March 9,
2009, Apple Inc. [Aapl] has gone from $85.35 to $243.10 (as 2009). Surely, a $29.31 decline will have a negative impact
of August 31, 2010), but how much of its profits came during on both sessions. The Ovs did not escape unscathed, losing
the regular trading session (from the opening to the closing approximately a fifth of its price ($6.01/$29.31 = 20.51%) in
bell)? Absolutely nothing! Despite this amazing run, it was those 339 trading days.
unable to turn a profit in the regular trading session. The overnight session takes on significance because its
A more historical pattern belongs to Google [Goog], which performance is reflective of premarket economic reports
began trading at $100 on August 19, 2004. After the closing in the morning (generally at 8:30) as well as afterhours
bell on October 14, 2010, with the announcement of its latest company earnings reports, and the reporting of international
earnings reports, it shot up within 60 minutes, leaving it just economic breaking news, which often take place after the
pennies shy of $600. The stock has had a spectacular run, US markets close for the day.

$30
QQQQ

25

20

15

10

5
Running performance of the cues in the overnight session
0
Jan Apr Jul Nov Feb May Sep Dec Mar Jul Oct Jan May Aug Nov Mar Jun Sep Jan Apr Jul Nov Feb May Sep
04 04 04 04 05 05 05 05 06 06 06 07 07 07 07 08 08 08 09 09 09 09 10 10 10
Figure 2: TRADING AFTER DARK. This line chart displays the cumulative performance of the cues in the overnight session. Despite the lingering bear
market, during which it took a nasty fall, it was still on the rise.

20 • March 2011 • Technical Analysis of Stocks & Commodities

+Trongone.indd 3 1/26/11 12:00:23 PM

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++Full pg Ad Template.indd 1 12/17/10 8:28:29 AM

 $16
14 QQQQ
12 Cumulative performance
10
8
6
4
2
0
-2 OVS
-4 RTS
-6
Ja Fe M A M J J A S O N D J F M A M J J A S O N D
n-0 b- ar- pr-0 ay- un-0 ul-09 ug- ep- ct-0 ov- ec- an-1 eb- ar- pr-1 ay- un-1 ul-1 ug- ep- ct-1 ov-1 ec-1
9 09 09 9 09 9 09 09 9 09 09 0 10 10 0 10 0 0 10 10 0 0 0

FIGURE 3: CUMULATIVE PERFORMANCE OF EACH SESSION JANUARY 2009–DECEMBER 31, 2010. The red line indicates the more recent perfor-
mance of the regular trading session. Benefiting from the conclusion of the 339-day bear market (March 9, 2009), it made a series of explosive moves to
the upside. After this sudden burst, however, it began trading in a sideways range, having difficulty exceeding its highest price.

MONITORING SYSTEM PERFORMANCE
In my articles, I caution the reader on the perils of trading any
system without periodically monitoring its results, because
no system works consistently across all economic settings.
Although this system has enjoyed a remarkable run, the
more active session may become the dominant force. If this
occurs, how can we position ourselves to capitalize on this
opportunity?
By maintaining a running summary of a session’s daily
price change, you can keep an accurate account of its ongoing
pattern. Figure 3 displays the daily cumulative performance
of each session from the start of 2009 until December 31,
2010.
You can easily monitor performance by adding the daily
price change for each session to its cumulative results. For
example, let’s assume that over the previous 200 trading
days, the daily price change in the regular trading session is
$10. If the stock advances 50 cents, this would increase the
cumulative price change to $10.50.
The blue line indicates the cumulative results for the over-
night session; the red line, which has the superior performance
record, represents trading during the day session.
by going on a buying spree. As the rally continued, buying
activity was indicative of the positive turnaround. Once the
bull entered the ring, the cues at $25.74 rallied to $30.90 in 10
trading days with 173 million shares per day. This growth spurt
put a $12 spacing between the sessions in autumn 2009.
After pushing above a $12 cumulative profit, the regular
trading session of the cues began trading sideways in a $4
range. After penetrating this upper range, it went racing toward
$15. Shortly after reaching this peak, the cues fell hard, crash-
ing to $6 before getting back to their winning ways in July
2010. However, the cues had to break through their previous
watermark ($14 price target) before getting back on track.
While the regular trading session was racing ahead, the
overnight session had difficulty breaking even. The OVS
advance, however, was slow but steady, with minor setbacks,
whereas the advances in the RTS were more impressive but
with greater volatility.
Can we use the RTS as a reliable yardstick to determine
future performance of the cues? When the RTS begins to rally,
is the market more likely to produce additional gains? That’s
difficult to say. Unfortunately, there are not enough of these
settings to confirm this theory.

CHANGING WINDS DIFFERENT PATTERNS

Figure 3 shows the beginnings of a shifting pattern. In looking
at the performance from January 1, 2009, to December 31,
2010, we see the regular trading session had the better run;
however, most of its $11 advance came at the tail end of a
lingering bear market.
After sitting on the sidelines, momentum traders, watching
the market recover, frantically began putting their cash to use
Not all companies establish a long-term
preference for a particular session.
Not all companies establish a long-term preference for a par-
ticular session. Our concern is with those companies that have
an existing performance imbalance between these two time
frames. Going forward, they will either sustain or reverse their
preference for favoring a particular session. The easiest to play
are those companies that retain their current direction, such as
showing strength in the OVS but weakness in the RTS.
Nevertheless, there is always the possibility that the less
profitable session will overturn the results by outperforming
the more attractive one. A regression toward the mean occurs
when a variable with an extreme performance score loses its

Continued on page 28

22 • March 2011 • Technical Analysis of STOCKS & COMMODITIES

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 TRADING TECHNIQUES

Figure 1 the average annual

volume is compared between
the following emini indexes:
emini S&P 500, Dow Jones
Industrial Average (Djia), Nas-
daq 100, S&P MidCap 400,
and the Russell 2000. It would
be a logical assumption that the
emini S&P 500 moves more
than any other market. After all,
volume fuels the markets, and
the emini S&P 500 has more
volume than any of the other
indexes. However, let us look
closer to see if the emini S&P
500 leads in tick movement or
dollar movement.
Figure 2 compares the av-
erage annual tick movement
between the following emini
indexes: S&P 500, Djia, Nas-
daq 100, S&P MidCap 400,
and the Russell 2000. As you
can see, the emini S&P 500 is
no longer the leader. In fact,
during the eight-year analysis
period, although the emini S&P
500 had the highest volume, it
was the lowest in tick movement
when compared to the other
markets.
If volume fuels the markets
and the emini S&P 500 has the
most volume, why is it consis-
tently lower in tick movement
than any of the other markets?
Since each market has differ-
ent tick values, perhaps we

Nikki Morr
need to compare the average
dollar movement to find the
answers.
Trading The Indexes In Figure 3 you see a com-

Empowering Traders parison of the annual average

movement in dollar amounts

With The Russell 2000

of the emini S&P 500 with the
following emini indexes: Djia,
Nasdaq 100, S&P MidCap
400, and Russell 2000. While
Ever thought of trading the Russell 2000? Here’s how retail traders could benefit from the emini S&P 500 is not the
trading this index. lowest in dollars compared to
the other markets, it is definitely
by Gail Mercer not the leader. In fact, when

N
comparing just the indexes,
ew traders are drawn to the emini Standard & Poor’s 500 like bees to honey. Go the emini Dow is the leader in
into any live trading room and chances are that the moderators are teaching traders ticks, but the Russell 2000 is
to trade the emini S&P 500 because it has more liquidity than any other market. In consistently the leader when
24 • March 2011 • Technical Analysis of Stocks & Commodities

+1103 Mercer.indd 1 1/21/11 3:42:58 PM

 2,500,000

2,000,000
comparing dollar amounts. This is due to the difference in tick
values. The emini Dow is $5 per tick and the emini Russell
2000 is $10 per tick.
1,500,000
ES

Volume or price movement YM

So why are new traders drawn to the emini S&P 500? Be- NQ

cause new traders have very little market experience and do 1,000,000 EMD

little or no research to see which markets move more dollar TF

for dollar, and they do not understand that traders may have
different objectives. 500,000

Figure 1: average annual volume comparison. Here’s a comparison

between the emini S&P 500 (ES), Dow (YM), NASDAQ 100 (NQ), S&P MidCap 400 0
(EMD), and the Russell 200 (TF). The ES definitely has more volume than any of
2003 2004 2005 2006 2007 2008 2009 2010
the other indexes.

For example, high-volume traders focus more on liquidity

than on capturing a large swing in price because, as the name
implies, they are trading a large number of contracts.
They have identified a high-probability setup that yields 350
small profits on a consistent basis. So the one point of
profit that is captured from a high-probability setup, 300

when traded in large volume, can become $5,000. How?

250
By only trading in markets that have sufficient liquidity,
like the emini S&P 500. 200 ES
Going back to Figure 1, you can see that the emini YM
S&P 500 can easily handle orders for 50 to 100 contracts 150
NQ
at a time. Using a one-point profit target and stop-loss of EMD

one point (one point in the emini S&P 500 equals $50 per 100
TF

Figure 2: average yearly tick movement. Here you see a comparison 50

of the average annual tick movement between the ES, YM, NQ, EMD, and TF.
Note that ES ranked lowest in tick movement compared to the other markets. 0
The YM is the leader here. 2003 2004 2005 2006 2007 2008 2009 2010

contract), and trading 100 contracts, you have a potential

gain of $5,000 if the one-point profit target is achieved.
If you lose one point, then you have a loss of $5,000. High-
volume traders must have experience and a sufficient account $3,000
size so that one or two losses will not wipe them out.
Today, most traders have come into trading after being laid
2,500
off between 2007 and 2009 from other professions. These
new traders often lack trading discipline and trading experi-
ence, and are quite often undercapitalized. While there is an 2,000
overabundance of information available, sorting through all ES

of the data can be overwhelming for new traders, especially 1,500

YM

since they are faced with the daunting task of replacing their NQ
income. They opt to simply join a live trading room and play EMD
follow the leader. 1,000 TF
However, new traders are at a disadvantage in these rooms
500
FIGURE 3: AVERAGE YEARLY DOLLAR COMPARISON. Here you see a comparison
of the annual average movement in dollar amounts. Note that the Russell 2000 (TF) 0
is the leader here.
2003 2004 2005 2006 2007 2008 2009 2010

March 2011 • Technical Analysis of Stocks & Commodities • 25

+1103 Mercer.indd 2 1/21/11 3:44:23 PM

 200 TRADING TECHNIQUES
180

160
time. During these market reports, price is often reactionary,
140 meaning that traders and price are reacting to news and eco-
nomic reports. Since traders are reacting to announcements
120 ES and price can often move quickly, it is not the best time for
100
YM new traders to be in the market.
NQ In Figure 4, note the average movement in ticks for the US
80 EMD morning and afternoon sessions. As you can see, the indexes
TF actually move more in the afternoon session than the morning
60
one. However, there are fewer market reports in the afternoons
40 and, therefore, fewer reactionary movements. And how does

20
FIGURE 4: INDEXES AVERAGE TICK MOVEMENT (US MORNING VS. AFTERNOON).
0 The indexes move more in the afternoon but since there are fewer market reports
US AM US PM then, there tend to be fewer reactionary movements.

this movement compare in dollar amounts?

$1,800 Figure 5 shows that the Russell 2000 is
the biggest mover, dollar for dollar, in the
1,600
1,490 1,530 afternoon session, followed by the emini
1,350 S&P MidCap 400.
1,400 1,310 The next step is to ensure there is suf-
1,200
ficient volume for the afternoon session.
1,075 Figure 6 indicates that the volume actu-
1,013
1,000 ES ally increases in the afternoon. Based on
905
855 YM this knowledge, you can set reasonable
800 730
745 NQ
profit targets and stop-losses. A simple yet
effective method I teach new traders is the
EMD
TF
600 10% rule. The 10% rule means that the
new trader sets his or her first profit target
400

200
FIGURE 5: DOLLAR MOVEMENT COMPARISONS FOR
MORNING VS. AFTERNOON. The Russell 2000 (TF) is the
0
biggest move, dollar for dollar, in the afternoon session.
US AM US PM

because they know little about the different markets available
and typically have smaller accounts than the moderator, and their
ability to react on the live edge of the market is also slower. So
what can these new traders do to overcome the numerous obstacles
in their path? They need to take control of their trading.
The 10% rule
The emini index markets open at 9:30 am Eastern time and
market reports come out between 8:00 and 10:30 am Eastern
to 10% of the average tick movement. For example, Figure 7
displays the average tick movement per index for the morning
and afternoon sessions.
Using the 10% rule, a trader looking at the emini Russell
2000 would set a profit target of 16 ticks. By using a risk-
to-reward ratio of 1:2, meaning for every dollar of risk there
is $2 of potential reward, the stop would be eight ticks. The
trader has now set a reasonable profit target and, using a risk-
to-reward of 1 to 2, has identified the stop-loss as well.

US AM US PM
US AM US PM
ES 81 86
ES 466205 546334
FIGURE 6: AVERAGE VOLUME US YM 171 181
YM 41282 54787
MORNING VS. AFTERNOON. Here NQ 146 149 FIGURE 7: AVERAGE TICK MOVE-
NQ 108037 132903
you see that the volume does indeed EMD 131 135 MENT: US MORNING VS. AFTERNOON
EMD 7241 8845
increase in the afternoon. TF 149 153 SESSION
TF 44955 57761

26 • March 2011 • Technical Analysis of Stocks & Commodities

+1103 Mercer.indd 3 1/23/11 4:01:28 PM

++Full pg Ad Template.indd 1 1/19/11 11:04:38 AM
 TRADING TECHNIQUES

And how much is 16 ticks on the emini Russell 2000?

TradeStation Ninja Trader
It’s $160. Since new traders should bolster themselves with Description symbol symbol Tick value
knowledge, the tick value for each of the indexes is shown
Emini S&P 500 @ES ES $12.50
in Figure 8.
Emini Dow @YM YM $5.00
EMPOWERING TRADERS Emini NASDAQ @NQ NQ $5.00
Finally, the new trader is strengthened FIGURE 8: TICK VALUES Emini Russell @TF TF $10.00
with the knowledge that: FOR THE US INDEXES
Emini S&P MidCap 400 @EMD EMD $10.00
■ Market reports occur during the US
morning sessions
Gail Mercer is a trader, director, and instructor for traders-
■ Market reports create fast price movements helpdesk.com, and is known as an “indicator expert.” Mercer
hosts a free live trading room where she teaches forex and
■ Indexes move more during the US afternoon ses-
index traders how to approach the markets. She currently
sions
trades futures, forex, indexes, and stocks.
■ Volume increases during the US afternoon sessions
SUGGESTED READING
The index with the highest dollar movement is the
Mercer, Gail [2010]. “Looking At Other Markets,” Technical
■
emini Russell 2000, followed by the emini S&P
Analysis of STOCKS & COMMODITIES, Volume 28: May.
MidCap 400, and ‡Microsoft Excel
■ The 10% rule has 1:2 profit targets and stop-losses. ‡See Editorial Resource Index S&C

TRADING TECHNIQUES

TRONGONE/COMPANIES WITH SPLIT PERSONALITIES
Continued from page 22
fizzle and it regresses to its average. This phenomenon often
produces negative results for momentum traders but opportu-
nity for contrarian investors looking to take positions against the
grain. When employing this strategy, your technical experience
in reading chart patterns contributes greatly to your ongoing
success, as early detection of an alteration in this pattern will
make the difference between success and failure.
proactive and make the necessary adjustments.
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
Asia. As one of 25 Master Educators for eSignal, he regularly
writes articles on current investment strategies. His latest
book, Trading In The Footsteps Of Sherlock Holmes, is now
available. He has been a trader in the pits of the NYBOT, and
is a frequent contributor to STOCKS & COMMODITIES.

PREDICTING A SUSTAINABLE RALLY SUGGESTED READING

There is always the possibility the regular Trongone, Anthony [2011]. Trading In The Footsteps Of
trading session will outperform its rival, but Sherlock Holmes: Balancing The Probabilities Of Success,
on a long-term basis, I will not believe this Traders Press.
until there is conclusive evidence. Of course, _____ [2004]. “Holding Overnight Positions,” Technical Anal-
with the cues in the vicinity of their highest ysis of STOCKS & COMMODITIES, Volume 22: January.
price before encountering the beginning of a _____ [2004]. “Overnight Trading,” Technical Analysis of
bear market (October 31, 2007), the possibil- STOCKS & COMMODITIES, Volume 22: April.
ity of not breaking past resistance is always a ‡eSignal
technical concern. ‡See Editorial Resource Index
Besides the prospect of previous resistance, another factor
to consider is the rising cost of some commodities (mostly
agricultural products and industrial materials). With the global
economy still facing fiscal uncertainty, an inflationary environ-
ment is certain to have a negative impact on the stock market.
If this is the case, you may be long the better-performing
session, but playing this strategy when the market is going
down will still produce losses in your account. Nevertheless,
by tracking the performance of each session, it is easier to be S&C

28 • March 2011 • Technical Analysis of STOCKS & COMMODITIES

+1103 Mercer.indd 4 1/23/11 4:03:02 PM

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 How It Works On Gold And Silver And Crude
Three-Bar Inside Bar Pattern
This trading strategy uses an inside bar as a three-bar pattern
for long and short positions. Find out how it performed on
gold, silver, and crude oil contracts.
by Johnan Prathap
W
hether you look at an intraday, daily, weekly, or monthly
chart you will, without a doubt, see many inside bars.
They appear in uptrends, downtrends, and sideways
markets. Typically, most traders think of an inside bar
as a two-bar pattern, but I have found successful trades
using an inside bar pattern as a three-bar pattern for both long
and short signals. An inside bar accompanied by higher closes
indicates a short-term uptrend, and an inside bar accompanied
30 • March 2011 • Technical Analysis of Stocks & Commodities
+1103 Prathap.indd 1
by lower closes indicates a short-term downtrend.
KEN SMITH
I tested this setup on daily data from May 2001 to August
2010 on three major commodities: gold (GC), silver (SI), and
crude oil (CL). The results are worth some consideration.
The inside bar
The typical inside bar two-bar view indicates minimal activity in
a market. It is defined as a bar (or series of bars) that is completely
within the range of the preceding bar; that is, it has a higher low
and lower high than the bar immediately before it.
Some traders consider a bar an inside bar if the high and
low are equal to the previous bar or where there are several
consecutive bars within the range of a previous bar. The “Inside
Bar Show Me” study in TradeStation will not mark bars that
1/21/11 9:15:38 AM
 I tested this setup on daily data TRADING SYSTEMS
from May 2001 to August 2010 on
three major commodities: gold, EASYLANGUAGE CODE FOR THREE-BAR INSIDE BAR
silver, and crude oil. The results
Input: Tr(0.75), Sl(0.75);
are worth some consideration.
Condition1 = Close > Close[1];
meet either of these conditions. Condition2 = High < High[1] AND Low > Low[1] ;
Many analysts tend to view inside bars as an indication Condition3 = Close < Close[1];
of declining market activity, or possibly a prelude to a large
vars: mp(0);
movement in either direction.
mp = marketposition;
Trade rules
Three-bar inside bar pattern: If mp = 0 then begin
This pattern is divided into the following two categories: If Condition1 and condition2[1] and Condition1[2] then Buy next bar at
Open;
n Three-bar inside bar positive reversal
MARCH 2011 • at Open; of STOCKS & COMMODITIES magazine
If Condition3 and condition2[1] and Condition3[2] then Sell Short next
Technical
barAnalysis
n Three-bar inside bar negative reversal
end;
If an inside bar formed insidePlease
two higher closes,Karen
contact then it Moore
is with approval or changes:
considered to be a three-bar inside bar positive reversal. If an If marketposition = 1 then begin
inside bar formed inside two lower closes, then it is considered Sell next bar at entryprice+(entryprice*Tr/100) Limit;
phone: (206)
to be a three-bar inside bar negative reversal. 938-0570 • fax: 206-938-1307
Sell • email: KMoore@Traders.com
next bar at entryprice-(entryprice*Sl/100) stop;
end;
Entry setup: If marketposition = -1 then begin
1) Three-bar positive inside bar is a:
Higher close followed by an inside bar followed by a higher
Buy to Cover next bar PROOF #2
at entryprice-(entryprice*Tr/100) Limit;
Buy to Cover next bar at entryprice+(entryprice*Sl/100) stop;
close. end;
1st bar setup: Close > Close[1]
2nd bar setup: High is lower than the previous bar’s high
and its low is higher than the previous bar’s low
Safe and Secure since 1992
3rd bar setup: Close > Close[1]
Bright Trading, LLC
When this three-bar setup forms, it is likely that the market
will advance. This is a setup to go long the market.
Join hundreds of Bright Traders Worldwide!
2) Three-bar negative inside bar is a:
Lower close followed by an inside bar followed by a lower • QUARTERLY TRAINING – register early!
close. • Free DON BRIGHT DINNER/WORKSHOPS
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www.stocktrading.com
The TradeStation code is provided in the sidebar “Easy-
Language Code For Three-Bar Inside Bar.”
800.249.7488
March 2011 • Technical Analysis of Stocks & Commodities • 31

+1103 Prathap.indd 2 1/21/11 9:20:11 AM

 TRADING SYSTEMS

-1 1,250.00
Short 1,240.00

0 1,220.00
Sell

1,200.00

1,180.00

Cover
Buy 0 1,160.00
1
1. Closed below the previous day’s close
2. Inside bar (yellow cross) 1,140.00
3. Closed below the previous day’s close

TRADESTATION
Go short 1,120.00

Figure 1: SHORT ENTRY SIGNAL. Here you see a three-bar inside bar setup from May 13 to May 17, 2010. This was a profitable short-term short signal.

Examples
On the daily chart of gold (GC) in Figure 1, a
setup formed on May 13, 2010, and an inside bar
formed on May 14 and completed on May 17.
The market closed below its previous close on
May 13, followed by an inside bar on May 14,
followed by a close that was below the previous
day’s close on May 17. This turned out to be a
profitable short-term short entry signal.
On the daily chart of crude oil (CL) in Figure 2, a setup
formed on March 29, 2010, and an inside bar on March 30.
The setup was completed on March 31. The market closed
above its previous close on March 29, followed by an inside
bar on March 30, followed by a close above the previous
day’s close on March 31. This turned out to be a profitable
short-term long entry signal.
Performance results
I tested this strategy for three commodities from May 2001 to
August 2010. The system used daily price data and subtracted
$2.50 in commissions per trade for one fixed share/contract.
The results for crude oil (CL) were positive, with the best

0 96.00
Sell
94.00
-1
Short 92.00

90.00
Buy
1 88.00

86.00
1. Closed above the previous day’s close
2. Inside bar (yellow cross) 84.00
Cover #2
3. Closed above the previous day’s close
0
82.00
Go long
80.00

Figure 2: long entry signal. A three-bar inside bar setup formed between March 29 and March 31, 2010. This was a profitable short-term long signal.

32 • March 2011 • Technical Analysis of Stocks & Commodities

+1103 Prathap.indd 3 1/21/11 9:56:12 AM

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260567mea01A
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 TRADING SYSTEMS

performance being from long trades (Figure 3). The

method performed best in gold (Figure 4) and silver
(Figure 5), gaining $22,720 and $15,025, respectively,
with around 100 trades. Gold had an equity curve
drawdown from November 2007 to September 2008.
However, it regained quickly with no major draw-
downs after that. The average net profit per trade for
both gold and silver is more than $150.

Ideas for further

research
This three-bar inside bar strategy
tends to enter long or short dur-
ing any type of trend. However,
the system also tends to hold
losing trades and profitable
trades for the same percentage
gain or loss. If you try using
different types of exits such as
trailing stops or average true

FIGURE 3: PERFORMANCE RESULTS FOR CRUDE OIL

(MAY 2001–AUGUST 2010). The best performance
was from long trades.

FIGURE 4: PERFORMANCE RESULTS FOR GOLD

(MAY 2001–AUGUST 2010). Gold gained $22,720
with very little drawdown.

“In addition to legal services, we provide the

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34 • March 2011 • Technical Analysis of Stocks & Commodities

+1103 Prathap.indd 4 1/21/11 9:21:27 AM

 range, it could result in higher profits. Crude oil
performed well in long trades and silver performed
well in short trades, so applying any filters in your
entries could change your performance results. The
drawdowns of initial capital of this system when
trading gold and silver were only 10%. Crude oil,
however, had a drawdown of 17%.

Johnan Prathap can be contacted at strategytrade@

gmail.com.

‡TradeStation MARCH 2010 • Technical Analysis of STOCKS & COMMODITIES magazine

See our Traders’ Tips section beginning on page 64
Please contact
for implementation of Johnan Prathap’s techniqueKaren
in Moore with approval or changes:
various technical analysis programs. Accompanying
program code can be found in phone: (206)
the Traders’ Tips 938-0570
area • fax: 206-938-1307 • email: KMoore@Traders.com
at Traders.com.
‡See Editorial Resource Index S&C

PROOF #1
FIGURE 5: PERFORMANCE RESULTS FOR SILVER
(MAY 2001–AUGUST 2010). Silver gained $15,025
during this time period.

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March 2011 • Technical Analysis of Stocks & Commodities • 35

+1103 Prathap.indd 5 1/21/11 9:21:50 AM

 When Candles Work Best
What You Don’t Know
About Candlesticks
Researching candlesticks yields some surprises.
by Thomas N. Bulkowski
In
writing my latest book, Encyclopedia Of Candlestick
Charts, I made some startling discoveries. I used more
than 4.7 million candle lines (price bars) for the research
with data going back as far as the 1980s in hundreds of stocks,
but not all stocks covered the entire period.
Reversals win
One famous technical analyst wrote that continuations per-
form better than reversals. That would make sense, since it is
36 • March 2011 • Technical Analysis of Stocks & Commodities
+1103 Bulkowski.indd 1
easier for price to swim with the tide than against it. There is
BRIAN TAYLOR
just one problem: That’s wrong. I tested this on thousands of
chart patterns and candlesticks with similar results for each.
Reversal candlestick patterns outperform continuations 59%
to 41% of the time.
One explanation is that the price trend in a candlestick
continuation is tired and doesn’t move far. After a reversal,
however, traders are excited and power the stock in the new
direction, leading to an extended move. Those caught on the
wrong side of the trade exit their positions and then jump on
the new trend, powering it even more.
I don’t know if that explanation is correct, but I do know
that reversals beat continuations.
1/21/11 3:46:59 PM
 General Dynamics Corp. (Aerospace/Defense, GD)
77
76
75
74
73
Primary trend
72
71
70
69
68
67
66
Evening 65
star 64
63
62
61
60
FEBRUARY 2011 • Technical Analysis of STOCKS & COMMODITIES magazine 59

CHART BY THOMAS BULKOWSKI

58
Please contact Karen Moore withUpward
approval or changes:
retrace
57
phone: (206) 938-0570 • fax: 206-938-1307 • email: KMoore@Traders.com 56
55
10 Jun Jul Aug Sep Oct Nov Dec

PROOF #1
Figure 1: trade with the trend. An evening star appears as a retrace of the downward trend. A downward breakout joins the primary downtrend.

Trade with the trend ward over several months leading to the evening star and in
If you’re a serious candlestick player, then you’ll want to the week before the candle appears. The price gaps higher
know when candles work best. Since we know that reversals and forms the evening star, followed by a resumption of the
work better than continuations, make sure that the breakout decline. When the price closes below the bottom of the candle
direction agrees with the primary trend.
For example, a bullish harami requires that the price trend
downward into the candlestick pattern. Let’s assume that
you’re expecting an upward breakout. If the primary trend NEW for 2011: BWT PRECISION AUTO TRADER - TRADE SMARTER, TRADE AUTOMATED
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you’re set. The upward breakout will join with the existing
price trend and the current will carry the stock upward.
The same is true for downward breakouts. An evening star
requires an upward price trend, but the candle acts as a bearish
reversal 72% of the time. If the primary trend is down and
the evening star appears in an upward retrace of the existing
downward move, then a downward breakout will join the
existing price trend and away she goes!
Figure 1 shows an example. The primary trend is down-

A technical analyst wrote that The Most Innovative Technical Analysis Tool Available Today
continuations perform better than Blue Wave Trading: Often Imitated...Never Duplicated

reversals. But that’s wrong. www.bluewavetrading.com • 808-281-8391

For more information circle No. 14

March 2011 • Technical Analysis of Stocks & Commodities • 37

+1103 Bulkowski.indd 2 1/26/11 4:00:05 PM

 CHARTING

pattern, it joins with the downward primary trend, leading to direction agrees with a bearish market. Performance is better
a resumption of the decline. because it follows the existing current.
As confusing as it sounds, this is an example of an upward However, price rises 9.7% in a bear market after an upward
retrace in a downward price trend. Look for this type of setup breakout compared to a rise of 7.1% in a bull market. Even
when you want to short a stock or buy at a lower price. Always trading with the prevailing trend doesn’t help in this example.
trade with the trend. In 96% of the candle pattern types I looked at, performance
in a bear market beat that in a bull market.
Candle close versus performance
• The best-performing candle patterns had closing prices Candle volume: yawn!
within a third of the price bar’s low, followed by the middle • Most candlesticks with heavy breakout day volume outper-
and high, respectively. formed their light-volume siblings.
Using the last candle line in a pattern, I split the price bar into In two out of three tests, candle volume turned out to be
thirds and determined where the price closed. Candle patterns a poor predictor of performance. In the first test, I found
such as gravestone doji, three black crows, and takuri lines that performance after volume trended down throughout the
that define the close at or near the end of the stick were not candlestick pattern led to better performance just 52% of the
included. For each candle type, I measured the performance time. That’s about random.
from the breakout (a close above or below the candle pattern) If volume in the candle pattern was above average, however,
011 • Technical toAnalysis STOCKS
the swingofhigh or low. & COMMODITIES magazinethen 58% outperformed their average or below-average counter-
For example, a bearish engulfing candle averaged an 11.7% parts. That result is a better number, but it’s still near random.
act Karen Mooredecline
with approval or changes:
in a bear market after a downward breakout when The only test that did well was heavy breakout volume. In
the last price bar’s close was within a third of the low. That 91% of the candle types I looked at, those with heavy breakout
compares
6) 938-0570 • fax: to the performance
206-938-1307 • email:associated with the middle third day volume outperformed their light-volume siblings.
KMoore@Traders.com
(9.4%) and the highest third (10.2%).
Upward breakouts in a bull market showed that the lowest Look for long shadows
third came in first (2.8% gain), followed by the middle and • Look for candles with unusually long wicks.
high thirds at 2.75% and 2.5%, respectively.
PROOF #1 A candle can have both upper and lower shadows (one or
none at all), and they appear on the charts as thin lines at either
Bear candles rule! end of a black or white rectangular body.
• Candlestick patterns in a bear market outperform, regardless When the upper or lower shadow is unusually tall, the candle
of the breakout direction. tends to outperform. A poll of the various candle types found
I sorted the candlestick patterns into bull and bear markets, that it was true 87% (upper shadows) to 88% (lower shadows)
up and down breakouts, and was surprised to discover that of the time, regardless of the breakout direction or market
candles in a bear market outperformed those in a bull market. condition (bull or bear). Look for candles with long wicks.
For example, a bullish harami shows a drop of 10.4% after
a downward breakout in a bear market compared to a drop of Tall candlesticks outperform
5.7% in a bull market. That drop is expected since the breakout • Select candles that are unusually tall.
Like long shadows, tall candles perform better than do short
ones. What does “short” and “tall” mean in this situation? It
varies from candle to candle. A pattern called “13 new price
lines” will be much taller than the typical doji, so I compared
the height to the breakout price for each candle type. I found
that tall candlesticks led to better post-breakout moves than
Advanced algorithms deliver did short ones, just like chart patterns.
low lag, low noise analysis. In fact, a poll of the various types of candlesticks showed
that 96% of tall candles outperformed short ones. If there was
one characteristic that determined performance for both chart
Now featuring patterns and candlestick patterns, it was height. Select candles
that are very tall.
Tools for...
Entry signals
I looked at three types of confirmation signals for candles:
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determines the breakout direction and confirms the candle
www.jurikres.com • 800-810-3646 • 719-686-0074
pattern as valid.
For more information circle No. 15 Candle color confirmation is seeing a white candle appear
38 • March 2011 • Technical Analysis of Stocks & Commodities

+1103 Bulkowski.indd 3 1/21/11 4:21:24 PM

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 the day after a bullish candle completes, and a black candle If I filter those 100 by removing rare ones, then just 10%
confirms a bearish candle. qualify. What do I define as rare? To make this determination,
Opening gap confirmation occurs when price gaps at the I sorted the candles by how often they appeared in a database
day’s open after a candle pattern completes, setting the breakout composed of the Standard & Poor’s 500 stocks over a 10-year
direction and confirming the candle. period starting in August 1996.
Of the three confirmation signals, the opening gap worked I used the frequency of the 51st candle to determine rare or
best probably because there was no delay in confirmation. plentiful status. For reference, the 51st candle pattern appeared
The other two signals needed another day to complete, but 1,973 times out of 1.2 million candle lines, so it’s not like
opening gap confirmation needed only the opening price to finding grains of sand at a beach. In other words, it won’t do
move higher or lower than the prior close. a candle trader any good if the best-performing candle (three
For example, if you expect a bearish reversal tomorrow and stars in the south) occurs only nine times in 4.7 million candle
price gaps open lower, that confirms the reversal 82% of the lines. If you see it once, then frame it because you may not
time. Candle color works 13%, and closing price confirmation see it again in your lifetime.
works the remaining 5% of the time. I consider a success rate of 60% as too close to random to
be tradable. Let’s raise the bar to 66% — two out of three
Few candles work times the candle should work as expected. If we were to keep
Years ago, I talked to a girl about candlesticks and told her the frequency rank the same, then only 6% would qualify. By
that since a bearish harami occurred today, price would likely these measures, it means that 94% of candle patterns either
close lower tomorrow. I was wrong. Price moved higher the can’t be found or can’t be trusted.
next day and the day after that. After making several wrong
predictions based on the bullish or bearish phrases in the Do candles work in groups?
candles’ names or their theoretical behavior, I began to distrust If you listen to some candle analysts, they will tell you that you
candles. Then I decided to research them. can’t test candles in isolation the way I did; they only work in
I looked at 103 candle types and found that 31% of them didn’t groups. In that case, think of a hypothetical situation where a
work. They were supposed to be bullish, but price closed below blind man is dropped into a house in a city where he’s never
the bottom of the candlestick pattern more often than above it, or been and instructed to find the nearest grocery store without
2011 • Technicalthey were bearish
Analysis candles that
of STOCKS & broke out upward moremagazine
COMMODITIES often. any help. He won’t be able to find the store three miles away.
For example, a bearish harami breaks out upward 53% of He represents my failed candle.
the time. It functions not as a bearish reversal candle, but as According to the candle analysts, if I were to add more
act Karen Moorea bullish
with approval or changes:
continuation. blind people to the house, thus forming a group, and then tell
That leaves 69% of candles that work, which is quite good. them to find the nearest grocery store without any outside
6) 938-0570 • fax: 206-938-1307
However, I consider• success
email: rates
KMoore@Traders.com
of less than 60% to be help, they will magically succeed! I’ll let you form your own
random or nearly so. How many of the candlestick patterns conclusions about how often that scenario would work.
work at least 60% of the time? Of the 103 candle patterns, In the meantime, I’ll stick to the 6% of candles that I con-
there are 412 combinations of up and down breakouts in bull sider to be investment grade. What are they? I’ll leave that
and bear markets. OfPROOF #1 100 or 24% work at for my next article.
those 412, only
least 60% of the time.
S&C Contributing Writer Thomas Bulkowski (who may be
reached via email by tbul@hotmail.com) is a private investor
with 30 years of experience and is considered to be a leading
expert on chart patterns. He is the author of several books,
the most recent of which is Encyclopedia Of Candlestick
StockSpotter.com VERSION
Charts. A
His free website and blog have more than 500 articles
By John F. Ehlers dedicated to price pattern research and can be found at www.
thepatternsite.com.

Suggested reading
Bulkowski, Thomas N. [2008]. Encyclopedia Of Candlestick
Actionable Trading Signals With Timing Charts, John Wiley & Sons.
_______ [2005]. Encyclopedia Of Chart Patterns, 2d ed.,
All Results Are Tracked And Verifiable John Wiley & Sons.
S&C readers PROMO CODE: TASC358 _______ [2006]. Getting Started In Chart Patterns, John
Wiley & Sons.
_______ [2002]. Trading Classic Chart Patterns, John Wiley
& Sons.
For more information circle No. 17 S&C

40 • March 2011 • Technical Analysis of Stocks & Commodities

+1103 Bulkowski.indd 4 1/21/11 4:22:11 PM

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 Measuring Trading Performance
What Can You Expect,
Mathematically?
Here’s a look at how mathematical expectation allows for an
apples-to-apples comparison of trading systems or strategies
regardless of type or style, as well as allowing the tracking of
your own trading record.
by Stephen Massel
A
huge number of different trading systems and strategies
are available in the market today, all with their own
particular focus, style, time frame, and risk. The type
of trading you engage in is a very personal matter and
depends on many factors. The things that need to be
considered include the market you are interested in; the
42 • March 2011 • Technical Analysis of Stocks & Commodities
+Massel.indd 1
amount of time you have to do the required research and to
JOHN NEBRASKA
execute and maintain your trades; your preferred time frame
(which could be from seconds to months); the style of trad-
ing whether technical, fundamental, news driven, or purely
discretionary; and of course, the size of your trading capital,
leverage, and risk tolerance.
Some of these questions are easy to answer and some
require more thought. Whether you are new to trading and
are still deciding on your preferred style and considering dif-
ferent strategies or systems, or you are an experienced trader
looking to analyze your own trading results or new systems,
mathematical expectation should prove to be a very useful
tool to have in your statistical toolbox.
1/23/11 4:17:27 PM
 MONEY MANAGEMENT
This article will define mathematical expectation and show
how it allows for an apples-to-apples comparison of trading
systems or strategies regardless of type or style, as well as
allowing the tracking of your own trading record.
Glossary
ME—Mathematical expectation, or expectancy.
ME = Win% x R/R ratio – Loss%
R/R Ratio—Reward/risk ratio. The ratio of profit target or
trade gain and risk or trade loss. For historical trades, the
ratio of average win and average loss.

What is mathematical expectation?

When assessing the past performance or backtested trading Mathematical expectancy is one of the
results of a system, there can be a whole array of metrics in- most basic things to consider when
volved. Some of them can be compared directly, while others
need to be looked at in conjunction with other metrics and an evaluating the suitability of a system.
understanding of the underlying trading style. For example, a
system that seeks to catch a trend may get stopped out a few
times for small losses, and then catch a trend for a big win. Take the 50% example, which could be a coin-toss game
Alternatively, a scalping system may trade more frequently where you make $1 every time heads comes up and lose $1
with many small winning trades but lose big when a trade every time tails comes up. It is easy to see that over time you
runs away from you. These two examples illustrate two of would most likely break even.
the most basic and important metrics when evaluating system In seeking a formula that describes these systems, it can
performance: readily be seen that win% x R/R – loss% fits the bill. This
formula is known as the mathematical expectation (ME), or
n The win percentage which, as the name implies, is expectancy.
the number of winning trades as a percentage of total
trades. Application to systems
n The reward/risk ratio (R/R ratio), which is the profit An example of a non–breakeven system is the game of roulette.
target or amount gained versus amount risked or Take the case of a bet on a single number. In the US version
lost. of the game, there are 36 red or black numbers, a zero, and a
double zero. So on the spin of the wheel, the chance of any
When looking at a trading system’s historical or backtested
results, the average trade win/loss amounts can be used as an
indication of the system’s R/R ratio:
Win% = (# Winning trades/# total trades) x 100
Reward/risk ratio = (Average win amount/average loss
amount)
Example:
n A trend-following system may have a win% of 45%
and an R/R ratio of 2.0
n A scalping system may have a win% of 70% and an
R/R ratio of 0.9.

Which system performed better? Mathematical expectation

(ME) will be able to answer that question. (See the sidebar
for definitions.)
Let’s start by considering the simple case of breakeven
systems. All four of the combinations of win% and R/R ratios
shown here result in a breakeven outcome. Mathematical
expectation basically describes the relationship between these
two key metrics:

Win% R/R Formula

75 1/3 75 x 1/3 – (100 – 75) = 0
50 1 50 x 1 – (100 – 50) = 0
33.3 2 33.3 x 2 – (100 – 33.3) = 0
66.6 0.5 66.6 x 0.5 – (100 – 66.6) = 0
…
Win% R/R Win% x R/R – Loss% = ME
March 2011 • Technical Analysis of Stocks & Commodities • 43

+Massel.indd 2 1/21/11 4:32:29 PM

 Win% vs. R/R ratio MONEY MANAGEMENT
100

90
and losing trades and find the average profit
80
and loss for each. Divide profit average by
Profit zone
70 Scalp example (26) loss average to get the R/R ratio.
If the dollar size of your wager is an
60
intrinsic part of your trading method, then
Win %

50 you can use the average dollar profit and

Roulette Trend example (35) loss amounts. However, if you are look‑
40 red/black (-5.3)
ing to evaluate the pure performance of
30 the strategy independent of varying wager
size, I suggest you use the difference be‑
20
Loss zone Breakeven (0) tween trade entry price and exit price as
10 a percentage instead (this will avoid any
adverse influence from unusually high or
0
0 0.5 1 1.5 2 2.5 3 3.5 4
low wagers).
Maintaining a moving average (say, 30)
R/R ratio
of this figure will allow you to track your
trading strategy over time that is decoupled
Figure 1: win% vs. r/r ratio. Here you see a comparison of the trend system (green), scalp system from your equity curve.
(blue), breakeven curve (orange), and roulette system red/black bet (red). A mathematical expectation of above
30 is generally considered to be good. Mathematical expectation can also be ap‑
plied prior to placing a trade. Let’s say you
are considering a certain trade for which you
one of these outcomes is 1 in 38. The payout, however, is only can estimate the probability of a successful outcome, either
35 chips per chip wagered. from experience or as defined by your strategy. Once you have
In the case of betting on red or black, the chances of being selected the stopout level (risk) and profit target, you can apply
correct are 18 out of 38, and the payout is 1 for 1. Putting the formula to calculate the ME of the trade.
these numbers into the formula yields:
Is your system profitable?
n Single number bet (1/38): 2.63 x 35 – (100 – 2.63) =
There are many important metrics to consider when evaluating
‑5.3
the suitability of a trading system or strategy, for example maxi‑
n Red/black bet (18/38): 47.37 x 1 – (100 – 47.37) = ‑5.3 mum drawdown, average trade return, and standard deviation,
to name just a few, but I would say that one of the first and
This indicates a 5.3% margin to the house for both bets, most basic things to evaluate is the mathematical expectation.
and so, over time, a losing system. This will provide a measure of the historical profitability or the
We can now apply the ME formula to evaluate the trading distance away from breakeven of one system versus another
system examples. Simply insert the win% and R/R ratios or of your own trading record.
previously obtained into the ME formula: Of course, in evaluating historical returns, the ME is look‑
ing backward, and there is no guarantee that a trading system
Trend system: 45 x 2 – (100 – 45) = 35
or strategy will continue generating returns based on its
Scalp system: 70 x 0.9 – (100 – 70) = 26
backtested or historical record. Metrics such as forward-test
We can now see that the trend system is the better per‑ results, variable sensitivity analysis, and system robustness
former. measures, among many others, need to be examined in order
Figure 1 shows where the trend system (green), scalp system to gain confidence in the probable continued performance
(blue), breakeven curve (orange), and roulette system red/ of a system, as well as a clear plan to monitor and act upon
black bet (red) exist within the win% and R/R ratio space. deviations from the expected results.
The ME, therefore, is a good way of comparing completely
different systems based on their win% and R/R ratios. It gives Stephen Massel has been trading stocks and futures and de-
a measure of how far away you are from breakeven. Obviously, veloping strategies and indicators in Wealth-Lab and other
the higher the number, the better it is; above 30 is generally applications for more than 15 years. He is the head of capital
considered good. markets at Applabs, a software testing company, and the owner
of MarketTradingSignals.com.
Application to your own trading
Mathematical expectation is also a very good way to mea‑
sure your own trading performance. Simply list your trades
(you should have at least 30 trades in order to be statistically
meaningful) and calculate the win% (100 x number of winning
trades/total number of trades). Then separate out your winning S&C

44 • March 2011 • Technical Analysis of Stocks & Commodities

+Massel.indd 3 1/21/11 4:32:45 PM

 Explore Your Options
Got a question about options?
Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com),
an education and publishing firm dedicated to teaching investors how to minimize
their risk while maximizing profits using options. To submit a question, post it to
our website at http://Message-Boards.Traders.com. Answers will be posted there,
and selected questions will appear in a future issue of S&C.
A Smarter Call to Sell?
With a long call, what would be the best
time to sell? I know that directionally, the
higher a stock goes up the more the call
stands to profit as it goes further in-the-
money. But if a call went from out-of-the
money toward being at-the-money, doesn’t
it put the option at more risk because of
time decay?
Knowing when the best time to sell is
something all option traders strive for.
Unfortunately, there is no one universal
rule that we can work as simply as a light
switch in order to capture the best guaran-
teed results. Traders look to understand the
greeks of a position and work with them as
effectively as they can while taking unique
risk tolerance levels into consideration.
In holding a long call, the trader is work-
ing with the risks (and rewards) associated
with a long delta, negative theta, positive
vega, long gamma, and then a distant rho
factor. Where an option is in its life cycle
will influence your concern with potential
time decay — that is, the negative theta
component of the position. The closer you
are to expiration while holding an at-the-
money contract, the greater the exposure
to this risk. The longer out we go, concern
regarding time decay will be a distant third
to delta and vega risks.
As a rule, with 30 calendar days left
in a call’s or put’s life is when traders
holding this type of premium should give
consideration to decay and hedging the
option. Some traders may challenge that
if there’s sufficient technical evidence for
accepting the increased theta risk. Gamma
and delta can be increasingly productive
greeks over this same period.
If the underlying stock cooperates
with the trader’s expectations of a bullish
move (for a long call), the at-risk extrinsic
value of an at-the-money call is replaced
by intrinsic value that isn’t affected by
+1103_Gentile_QA.indd 1
time decay. As stated, decay is heaviest
during the last trading month, but it also
takes smaller upward movement in the
underlying for profits to grow. The fact
is, decay risk can be quickly replaced by
larger profits as gamma and delta work
together to make the option react like a
long stock equivalent as expiration ap-
proaches if shares move favorably.
A VIX’ing Question
How can calls in the Cboe Volatility In-
dex (Vix) sometimes trade at an intrinsic
discount to the underlying instrument?
My stomach tells me there’s no free lunch
on Wall Street, but is this the sort of thing
that might be sampled profitably with a
long call position?
Let’s start by saying the Vix reflects a
composite weighting of implied volatil-
ity using S&P 500 front and near-term
contracts in order to yield a 30-day mea-
sure of expected volatility in the broader
market.
The options on the Vix are derivatives
of derivatives or second derivatives and
maintain European-style exercise; that
is, you can’t exercise prior to expiration.
They are not the “Vix” you see on the
financial news or your ticker.
While keeping all that in mind, also ap-
preciate that the Vix is a mean-reverting
instrument. This simply means that while
the instrument can, under severe circum-
stances, stretch to historical highs such as
in late 2008 and 2009, it won’t continue
to trend higher. That’s different from a
favored stock or sector that might trend
unabated for an incredibly long period.
By the same token but under opposite
market conditions, the Vix won’t go to
zero. As long as there is trading in the
broader market, some type of volatility
will exist. Prices can get incredibly cheap
on a historical basis such as the sub-10%
March 2011
Tom Gentile of Optionetics
levels reached in 2005 and 2006 due to
much lesser underlying volatility in the
market. Again, that type of trend can last
only so long before some unforeseen
catalyst jars the market and the Vix in
the other direction.
If you see a Vix option that appears to
be trading for less than intrinsic value,
it’s not; there’s no arbitrage opportunity.
Bottom line: Know which futures contract
is tied to the contract.
An Unsure Hedge
Recently, I was considering a bull call
spread in front of an earnings report.
I wanted to have a hedged position but
was concerned about assignment. What
would have been the consequences if this
had happened?
Assignment in such a situation is noth-
ing to be afraid of. A trader assigned on a
bull call spread prior to expiration enjoys
the benefit of maximizing the spread’s
profit potential earlier than they would
have been able to while holding the bonus
teaser of a synthetic long put.
Remember, such an assignment obli-
gates you to sell stock at a strike above your
purchased lower strike call. If you decided
to exercise that call, your profit would be
the difference between the strikes minus
the initial debit paid for the vertical. As
that amount is guaranteed, traders lucky
enough to find themselves in this position
will look at the long call market to see if a
sale above intrinsic value is possible.
Alternatively, the trader may opt to hold
the new hedged, synthetic long put position
if they have the margin to do so. If shares
were to collapse below the strike, the result
could be much larger profits than the one
guaranteed due to the assignment.
Contributing analysis by senior Optionetics
strategist Chris Tyler
S&C
• Technical Analysis of Stocks & Commodities • 45
1/23/11 3:10:58 PM
 INTERVIEW

Trading Momentum
With Ken Calhoun
Ken Calhoun, president of Daytrading University and StockTradingSuccess.com,
has provided online training to active traders from more than 32 countries since
1999. He is an internationally published trader who’s earned industry awards
for his professional trading systems and has trained more than 31,000 people
in more than 147 companies worldwide. Calhoun trains traders on how to trade
using one-minute candle charts, sector breakouts, gaps and market indexes using
advanced tape reading, and real-time candlestick trading techniques by using live
market examples.
A former corporate statistician and quality engineer, Calhoun has been featured
in a variety of leading trade publications and events and brings a wealth of ana-
lytical experience to the markets using real-time chart patterns to help his 8,100
traders spot entries and exits.
Technical Analysis of Stocks & Commodities Editor Jayanthi Gopalakrishnan
and Staff Writer Bruce Faber interviewed Ken Calhoun via telephone on January
10, 2011.
I prefer momentum
how did you get interested in tick-by-tick momentum trading until day and swing
Ken, trading, especially technical 1999. trading because
analysis? I like instant
I first got started with short-term What type of markets do you prefer
momentum trading back in the late to trade?
technical feedback
1990s during the Nasdaq tech bubble. I’ve made the most money in my in my trades.
I was interested in how fast you could stock trading, so that’s why I like trad-
make money when a stock ran three to ing equities the most. I still prefer stock trading range before the opening bell.
five points in less than an hour. Techni- day and swing trading as my primary So the two primary things I look for are
cal analysis was, and continues to be, trading style, because there are gaps and directional moves in the Naz premarket
absolutely critical to my success, us- other high-percentage technical trading futures and the direction of the gap in
ing micro-indicators like cup patterns, patterns that only exist in stock charts. the Spy starting at 7:30 or 8:00 am with
volume breakouts, tape reading, sector Although I’m primarily an equities premarket charts.
divergence, using the Trin and Vix, and daytrader, I also trade the emini, the ES
tape reading. and currency pairs. Recently, I have been What does that tell you?
During the tech bubble, you would trading the dollar–yen. The primary go or no-go signal, which
hear about the markets all the time. It is: Are they gapping at or near the previ-
was in the news, it was all over the place, You seem to like momentum trading. ous day’s range, or are they breaking out
and there were all these commercials of How do you actually identify markets of the previous day’s high-low range?
people buying islands — that kind of that have momentum? If they are gapping, I am going to put
thing. Those got my attention because That is a good question. You’re right on more size. So to identify breakout
I realized that there was a lot more to it in that I prefer momentum day and swing trades, I always prefer “out” days and
than what was visible. trading because I like instant technical patterns, meaning I always put on more
feedback in my trades. I don’t want to size when the broad market is outside of
So you got started at a bullish time in wait weeks or months to see a trade work the prior day’s high-low range. That’s
the markets. Were you trading mostly out. critical because out days are where the
equities? The top technical signal I use is the algorithmic traders, who are also known
Yes, I was only trading stocks back in premarket spiders (Spy) and Qqqqs, as algos, and the high-frequency trading
the late 1990s. I had traded longer term, and premarket futures, both the Nas- (Hft) programs kick in more. There
with Sep Iras and mutual funds for many daq futures (Naz) and the S&P futures is more volume when equities and/or
years before that, but I had never done (Spoos) to see if there’s a wide gap or the broad markets move outside of the
46 • March 2011 • Technical Analysis of Stocks & Commodities

+1103 Interview-Calhoun.indd 1 1/21/11 2:21:15 PM

 INTERVIEW

previous day’s high/low range. This is pattern with high volume, during the first for daytrades, I need things that are
something I have been doing since the hour of the market open. I am looking for liquid. Like you said, high volume and
those micro-cup breakouts just outside of high volatility, the two Vs, are some of
late 1990s and it still works to this day.
That is one of the most important thingsthe previous day’s highs and lows. And the filter criteria I look for. To this day I
in my own trading. that is a good institutional play too. Most have not found any software that does it
of the Wall Street traders I have worked the way I do it. I have to manually scan
NOVEMBER
What are some 2009 • Technical
setups to look for Analysis
in a withofandSTOCKS
the guys&who COMMODITIES magazine
come to my through the stuff. But that is why I pick
market with momentum? seminars say they do that. Most of their out the ones that work.
Please
Mycontact
favoriteKaren Moorelooking
setups include with approval
for setupsorarechanges:
done mathematically, but that
technical signals such as which sectors is the type of thing that their algorithms There’s something like 12,000 of them.
are moving the strongest during the first are programmed to look for. Do you go through 12,000 stocks a day
phone: (206) 938-0570 • fax: 206-938-1307 • email: KMoore@Traders.com
20 minutes of the trading day. Since I to find the gaps?
have the percent change from the open, Given that you look at premarket ac- No, I look at the list of Nasdaq gainers
I can determine if sectors such as the tivity, am I correct in assuming that and losers, I look at BigCharts, and then
Internet, semiconductors, gold, or oil you arePROOF only looking#1at the most liquid I use the hot list in my eSignal platform
are moving out. I also look at what the markets? that shows the leaderboard for the day.
Arms index is doing to give me long Yes. A good filter criteria for stocks That includes things like the biggest ad-
or short biases for the day. Then I drill to daytrade is that they have to have at vancers/decliners, as well as the general
down into which stocks are gapping and least 15,000 shares a minute, or about top 10 market leaders. Some people like
taking out new two-day highs and lows. 1.5 million shares per day. I prefer they to use heat maps. I have my quote box
This is what I do for trading the open. have a one-and-a-half to two-point aver- in which there are about 460 tickers in
The best setup I’ve found is to buy a age trading range of the previous day to there and I sort it by percent change,
stock that has made a minor gap up, say make it worthwhile. Because I am look- and I fish from the top 20 most green
between a half-point and a point, before ing to get at least half to three-quarter and most red stocks each morning. The
the open, and then make a bullish cup points with no more than a 0.4 stop out trick is to have it calculate the percent

March 2011 • Technical Analysis of Stocks & Commodities • 47

+1103 Interview-Calhoun.indd 2 1/21/11 2:21:45 PM

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For more information circle No. 20
change from open. This is a wonderful
relative strength indicator because all
460 symbols start off at zero at 9:30 in
the morning, and then the ones that are
starting to break out have the stronger
percentage change. There is an autosort
that will display top percentage change
movers on a continuous basis. By click-
ing on the ticker in the quote box I get
a display of the associated chart. I find
that is a good way to scan through what
is moving.
If a gap meets your setup criteria,
which you explained earlier, then you
don’t care if it is a breakout gap, or a
continuation gap, or any other kind of
a gap, just so long as it is a gap and it
meets your setup?
There are some very specific things I
look at. There is a whole science to it.
I have done seminars on it. The main
thing for gaps that people need to know
is that gaps tend to continue, not fade. In
opposition to a lot of what is published,
institutional traders premarket bid up
the market on open and Moo orders are
filled at 9:30. That is what causes the
in-market gap.
A lot of premarket activity is insti-
tutional. I like to see, for example, a
bullish cup following the gap. That is my
signature play. It is just a minor gap. I
don’t buy something that gapped up five
or six points. But if it gapped up a half
point, or three-fourths of a point, or if
it is a $70 or $80 stock and has gapped
up to say a point and a half or so above
the previous day’s high, and is making a
small bullish breakout on the one-minute
chart, then I will enter a long trade. But
I almost never fade gaps.
It’s the same thing for shorts. I have
48 • March 2011 • Technical Analysis of Stocks & Commodities
+1103 Interview-Calhoun.indd 3
made a lot of money shorting minor
gap down continuations. If something
has given up, say, a point and a half in
premarket and is starting to take out new
lows, then I’ll just sell that at market on
the open and then let it bleed on down.
And when do you cover those?
I use two opposing one-minute
candles. If I see, for example, two green
candles after a short, then the height of
the entire real body of the second one-
minute candle is where I have my cover
stops. Gaps are the best high-percentage
trade, at least when you find them. There
haven’t been that many the last four or
five months, but in general, good gap-
ping plays that continue are the best
high-percentage trades, especially if
the volume is higher compared to the
previous day’s opening volume.
How many charts do you look at during
a given time?
I do as many as 350 round-trips a day. I
have four widescreen monitors, so I may
have 32 thumbnail charts, and I have the
broad market charts, and my one-minute
candlestick charts, and my swing trading
chart, along with the market “pull boxes”
that have the percent change from open
for things like the S&P, the Dow Jones
Industrial Average (Djia), the Nasdaq,
and various sectors.
Did you say that you make 350 trades
a day?
That is my record, but on average it
is down between six and 15 or so. How
do I make all those trades? It is all with
just buy-stop orders that have been en-
tered before the market opens. I put on
all those orders so almost all my orders
are done automatically based on the
technical levels. It is not as frantic as it
might seem. It is not like I am clicking
away, hunched over the keyboard.
Do you trade Etfs at all?
All the time. Fas and Faz are my
favorites because they are paired, and I
do pair trades. I might go long one and
short the other simultaneously and then
roll over into the one that is working
out. That is a good advanced strategy.
I was doing that this morning. I like
the Qqqq over the Spy because of the
leverage. They move very closely but the
Qqqqs have a wider range so you get
more range for the money. So in terms
of capital allocation, I like using the
Qqqqs as an instrument for exchange
traded fund (Etf) intraday trading.
Fas and Faz are great because they
have clean charts. I sought for many
years to find a good way to describe what
I am talking about, but those charts are not
fuzzy. They have nice clean tight ranges
that don’t have large pullbacks and look
like nice ski slopes. Very clean charts.
Fas and Faz tend to have better charts
than, say, the Dxd or the Qid or some
other shorting Etfs. It is very visual.
Could the charts of Faz and Fas be
so clean because they have such huge
volumes?
Oh yes, those are speculative, trader-
driven instruments. Most of the lever-
aged Etfs are speculator-driven types
of charts anyway, and high-frequency
traded. Institutional firms and hedge
funds use algorithms and trade the heck
out of those much faster than I ever could
at home with my computer, manually
banging away at the trades. High volume
and high liquidity are probably largely
because of speculators, given that there
is no underlying company that you are
buying into. It is just an instrument for
trading. They are triple leveraged, espe-
cially Fas and Faz. They are superb for
intraday trading and swing trading, for
that matter.
Are there any indicators you like to use
to measure momentum?
The best momentum indicator for
intraday trading has always been tape
reading. I have written about this for
about a decade. Unfortunately, there is
not much out there on it. I look for the
speed of the transactions, and share size,
to increase during the time at which an
1/21/11 2:28:16 PM
 INTERVIEW

equity is taking out a two-day high, or

testing another key support or resistance
level. So for swing trading, I like to see
the average directional index (Adx)
break over 40 as a lead indicator, the
day before getting into a long trade. It
is a good volatility indicator.
Then my third-favorite momentum
indicator is to see if a stock has extended
beyond its average trading range (Atr)
on high volume. This could be on the
current day if I am still watching it in
the afternoon. It may have taken until
1:00 pm to go one and a half times its
Atr. Aig did that a couple of days back
on high volume. That’s a stock in play
that is good for trading. So I like those
outlier indicators, like a strong Adx
volatility signal, range extension beyond
its average trading range, or even tape
reading.
Tape reading is very important when
I am ready to scale into or add to share
size in an existing open position. I am
looking to see if blocks are working into
the tape and try to detect things like the
dark pools that are now drying up and
if the price is moving. It is pretty exotic,
but it works. It is complicated, and I wish
it were easier.

How do you find that information? Do

you look at time and sales, or do you look
at Level II or something like that?
I used to use Level II, but it has not
been as useful since the pricing moved
to decimalization. It is much more of a
crapshoot. There are many more fake-
outs. There were a lot of fakeouts back in
the day, but after decimalization I found
that just using the straight tape with the
price and the sizes column was the most
important lead indicator.
Momentum is also important. When
I am managing a trade, I am always
looking at the tape with my finger on the
mouse button. I will stack two or three
sequential position size trades at, say,
10-cent increments. Each time it breaks
a new dime, I will be looking at the tape
to see how fast it can move to that price
level. So that is a good, closeup technical
look at tick-by-tick data to know what
is going on in the price action today.

You actually get a sense of how fast For more information, visit the S&C ad index at Traders.com/reader/ or circle No. 21

March 2011 • Technical Analysis of Stocks & Commodities • 49

+1103 Interview-Calhoun.indd 4 1/23/11 4:22:00 PM

 things are going.
A good real-time indicator that mea-
sures how fast something is moving with
volume-weighted price action would be
great for those of us who are daytraders,
but I don’t know that there are that many
of us left. But for those of us holding
down the fort, it is a good tool to have.
What type of time frame do you use for
your chart analysis? You mentioned you
use tick charts. Beyond that, do you look
at daily charts? Do you go longer than
the daily chart?
I am a big fan of candle charts because
they work. You don’t see them all the
time. You won’t see a shooting star at
the top, and you won’t see hammers at
all bottoms, but when you do see them,
they tend to be very good, very robust.
For swing trading I start with a 90-day
daily candle chart to identify patterns
like bullish engulfing patterns, three-line
breaks, hammers, and shooting stars.
That’s it. Those are the four I focus on.
I also use 50/100/200 moving average
line crossover patterns, and if you see an
uncrossed 50/100/200 moving average
line, like Las Vegas Sands Corp. (Lvs)
on the 90-day chart, for example, then
that is a good strong breakout continu-
ation.
So after I look at that 90-day daily
candle chart, I drill down into a 55-day
Engineering Look At Cycles
by Arthur Zernov
Do cycles exist in markets? Here’s a look at the markets from
a different angle: one that will help you realize that there is a
harmony among cycles, events, and market behavior.
50 • March 2011 • Technical Analysis of Stocks & Commodities
+1103 Interview-Calhoun.indd 5
intraday 60-minute chart to help identify
cup pattern breakouts, and finally I use
a two-day, one-minute candle chart for
specific entry triggers for live intraday
trades. Using multiple time frames, what
I call nested breakout technical patterns,
has been very effective for me. You need
to use all of them.
Traders need to have a more system-
atic drilldown approach where they can
mentally make those linkages and not get
overwhelmed by too much information.
That is why I am not using Macd and
the relative strength index (Rsi) and sto-
chastic crossovers and Bollinger bands
and seven different indicators, which
produce higher alpha and beta errors
in terms of false positives and missing
breakouts. I like to keep it focused on
the strongest, most reliable, robust, and
consistent handful of three to five types
of indicators that I use as a component
system so I can go through this stuff and
instantly see whether something is worth
a trade.
Typically, the more advanced you
get, your decisions no longer focus on
whether a trade is a go. They are more
focused on what your trade size is. So if
I’m in a situation where I am not sure,
for example, if I only have one confirm-
ing technical indicator, but the Nasdaq
Composite is inside the previous day’s
range, I may still take the trade on a
Sneak preview …
Today’s K-Wave And The 1970s
by Koos van der Merwe
The Kondratieff wave theory still exists, and here’s how you
can use it to determine if we can expect a recovery in the
US economy in 2011.
breakout, but I will do so on much lighter
share size. But if we are on a two-day
high breakout, the stock is in the strongest
sector, the Trin is under 0.7 or 0.5, then
I will start the trade off with more size,
and scale up into it more aggressively.
As a trader that’s where you grow to.
You come to a point where you realize
it is much more about the share size as
a function of the technical signals that
are generated, and this is what helps you
develop your trading approach.
When you identify the markets or stocks
you are going to trade, how do you
determine when to get in?
Great question, and one my traders
ask all the time. The main signal is to
wait for a new two-day high breakout
for longs, which is a new high above
the prior day’s high and not the two-day
highs, because I use open-high-low close
(Ohlc). So I look for a new high above
the previous day’s high, preferably on
high volume, occurring during the first
hour of the trading day. I like to have a
stock move about 0.35 (back in the day,
3/8 of a point) beyond obvious support
and resistance levels to avoid a false
breakout filter. I’ve found that using this
price helps me avoid getting trapped by
market makers who are gunning stops,
or specialists on fakeout entries, yet still
gets me in on ones that are most likely
…Coming soon!
1/21/11 2:32:43 PM
 INTERVIEW
to continue. I’ll use a variety of other
technical indicators, like Atr, volume
breakouts, tape reading, and strongest-
sector stocks and Etfs to help me get
into a trade.
How do you determine when to exit?
For exits, on the back end of it, I like
to use a maximum of 0.4, which is good.
I have tested with thousands of trades
and millions of dollars worth of trades
over the last 12 years. I use a maximum
of 0.4 for a stop for intraday trades. It
might be higher for stocks like Amazon
(Amzn) and Apple (Aapl) where I might
use three-fourths of a point, but for my
core trading stocks that are between $15
and $60 per share, I use 0.4 of a stop for
intraday trades, and a two-day low, or loss
of the two-day low, today and yesterday,
for swing trades.
When I am at a two-day low, that is the
reversal of a trend and that tells me I need
to get out. I use position sizing or scaling
into and out of trades for virtually all of
my trades. They are almost never all or
nothing; this lets me use several technical
signals for enteriing and exiting, such
as the prior days’ open/high/low/close
levels, or cup pattern horizontal support
or resistance lines, to manage the trades
from start to finish, using multiple entries
and multiple exits. I’ve found for position
sizing I like to use two or three sequential
trades to enter each new position.
Why is it important to have specific rules
when it comes to trading?
Rules give you a process or a system
that can be adapted to specific market
conditions. Having a set of reliable rules
also makes it easier to make more money
trading, because you can be in a lot more
trades at the same time, automating or
leveraging your trading process. So I
almost never buy or sell anything that is
trading inside the previous day’s high/
low range, for example, and that keeps
me out of a lot of bad trades.
And that is the importance of rules.
Having rules also gives me an edge
because I use specific technical signals
that I test out in my own trades every
week. I use my background in my own
trading, because I know it works. Us-
ing the Japanese concept of kaizen, or
+1103 Interview-Calhoun.indd 6
continuous improvement, in my trades,
means I need to have a standardized
process that I use to improve and reduce
variation by testing it in the market. I
use my trading profits and losses as the
measure of success.
Do you have an action plan set up before
the open on each day you trade?
Yes. Every day starts off with me
looking at the Nasdaq premarket futures
chart to see the range and volatility. A
good, quick, technical filter I like to
see is at least in a six-point range in the
Nas premarket futures to tell me that we
have a hot open, either up or down. If
it is rangebound, a three- or four-point
range in the Nas premarket futures tells
me before the market even opens I am
not going to trade very much that day.
I also look at the Spy and Qqqq to see
directional gaps, starting at 8 am Eastern
time. I also scan the week’s direction
and volatility in the Nasdaq Composite
and S&P index charts to spot techni-
cal patterns (breakouts, breakdowns,
consolidations, and major support and
resistance). That’s the heart of my action
plan before each day because it puts all
my trades in context.
When you are golfing, how strong
is the wind out there? If you have a
30 mph headwind, then no matter how
good your fairway shot is, you are not
going to be a scratch golfer. So putting
things in context of the broad market
is important. If we are in a breakout
continuation market, that tells me I’ll be
more aggressive in my trading during the
open. But if we’re opening flat and have
been consolidating, which tends to occur
a lot during summer months, then I may
not trade at all that day, or be much more
conservative in terms of the share size
I put on. It is not a written action plan.
I just look at what is going on in terms
March 2011
For more information circle No. 22
of volatility and futures, and how many
gaps there are.
Other things to look at are the ratio of
how many different major gaps and what
the sector charts are doing. If the charts
are gapping at the open during the first
10 to 15 minutes, which ones are taking
an early lead? All this information paints
a picture of what the market is doing that
morning. Then and only then do I put
my trades in context and decide where
to put in all my buy-stop orders with my
broker interface. That is a good way to
play the market. You just adapt or shift,
like a chameleon, to the relative strength
and volatility of all those indicators, then
put on an array of trades or not, based
on how strong it is.
Before using patterns such as the
breakout continuation and the various
indicators you mentioned, did you test
them before you applied them to real-
time trading?
I test them with my real trades, but
just on very small number of shares, so
it might be a five- or 10-share trade. It
might be $100 to $200 worth of stock.
Everything I do is tested. That is the
heart and soul of a successful person in
anything. You need to test out everything,
whether it is in business or in trading, or
life in general. You have to test small.
That is the key.
When I started off daytrading, I’d put
on a minimum of 100-share lots from
the get-go and I could have something
be against me $60 to $70 back in the day
when Yahoo was over $100 a share. What
I found is the correct countermeasure is to
• Technical Analysis of Stocks & Commodities • 51
1/21/11 2:33:01 PM

start off with small pilot trades. It could
just be 10, 15, or 20 shares, then scale
up into it once you have some money
open. And of course, you need to do that
early enough so you are in a position to
capture a piece of the breakout, but not
too late in that you are buying the top.
You have to get in a bit early, but it is
much smarter than putting on large trades
at the beginning. So everything is tested
with small-share trades, and then those
breakout patterns that work the most
often are the ones that I use and scale
into more aggressively, depending on
the underlying market volatility.
Is all your trading daytrading, or do
you have some investment trades for
the long term?
I do both. I have some nonmargined
Sep Ira accounts for the longer term. For
my trading account with Interactive Bro-
ker, I use a hybrid approach. Everything
starts off as a small-share swing trade,
but the ones that work out the fastest and
start to work out the best I scale into for
a daytrade. I want to capitalize on that.
Then I add to winning positions and scale
out of the ones that are stopped, usually
with stops under $10.
I try to keep the dollar cost of my
stops very small with an array of trades
I put on. That is a good, professional
approach because I don’t absorb any
significant risk on any one trade. This
approach gives you a lot of confidence.
With $1 commissions it makes the math
work out. I could not do that with an
$8-a-side broker.
What are some of the most common mis-
takes you have seen traders make? How
can we overcome these mistakes?
In training more than 8,100 traders
these past 11 years, the #1 mistake I’ve
seen is that traders overtrade choppy
charts. They don’t have well-developed
specific technical patterns to trade. I used
to run a live trading room as well and
I have seen these mistakes being made
by thousands of people. Another big
mistake is that they trade chart patterns
and technical signals in isolation from
the broad market. If for example there’s
an upside stochastic reversal and bullish
cup breakout in Google (Goog) but the
52 • March 2011 • Technical Analysis of Stocks & Commodities
+1103 Interview-Calhoun.indd 7
INTERVIEW
broad market is flat, the Internet sector
is choppy, the Trin is at 1.0, and it’s 11
am ET, that would be a very bad trade
setup, since the broad market and sector
isn’t supporting the trade. But traders take
those kinds of trades and get stopped out
all the time.
It’s all about knowing your trading
odds and only trading when it’s in your
favor. That’s where technical analysis
comes into play. To overcome mistakes,
and this is based on a lot of experience,
traders need to combine multiple signals,
to see whether the trade makes sense.
They need to use a systems approach
versus a single-indicator one. Their
favorite book of chart patterns isn’t go-
ing to cut it. The more technical signals
you see in support of the trade, the more
likely to enter the trade and on a larger
size.
If, for example, the premarket futures
are up, they are green, the Spy has made
a minor upside gap premarket, and I see
Exxon (Xom) taking out a new high, and
the $Oix (Oil Sector index) is taking
out two-day highs with the Trin at 0.6
(bullish), then I’ll put on the trade on
a new two-day high breakout in Xom.
That is an example of a successful type
setup you need to look at. It’s just four
or five indicators, but you need to have
those in your pocket before you put on
size. Success in trading comes from
combining a handful of broad-market
technical signals with specific technical
breakouts in the chart of whatever you’re
trading.
In my early trading days, I was looking
at all of these chart pattern books and
saying, “Wow, this looks like an ascend-
ing triangle, so that means as soon as it
breaks out I should buy it!” No! There
are so many other things.
You need to look at the Trin, the time
of day, day of week, time of year, sector
and if the sector is taking out new highs.
Those are the factors that go into a deci-
sion of what size you put on in the trade.
For newer traders, it should be whether
you take the trade in the first place. That
is important, and I think the word needs
to get out to traders that they need to
trade more professionally because that is
what market makers and specialists do.
They look at all that. The Hft programs
factor in all of those variables as part of
their algorithms. The main thing that
home traders and retail traders need to
do is look at those factors and use them
to help decide the appropriate share size
before they put on a trade or scale into
a trade. That can help them stay out of
bad trades and get selectively into the
ones that are most likely to work out.
With all this high-frequency trading go-
ing on in the markets, do you think the
trading environment has changed?
Yes. What it does is make the breakout
runs not last as long, so traders need to
exit more quickly. It is one of my maxims
of trading. Be slow to enter, fast to exit.
Forget that thing about letting your profits
run, because usually the market will take
it right back thanks to algos, dark pools,
and Hfts. Professional traders always
scale in and out of the trade. Even if you
only break even or take a small win in a
trade, you should always get right back
in at the first new breakout. If I were in
from, say, 16.38 to 16.45 and the price
starts to come back down, I would take
the stop. I will still put in a new buy-stop
order at a new high, say, 16.48 to get me
back in.
The environment that traders face to-
day is much more precise than what they
have had to deal with in the past. Traders
need to take profits early and often and
use more dynamic position sizing and
scaling to more correctly manage their
trading entries and exits than they have
in years past. With rare exceptions you
don’t see these big two- or three-point
breakouts, or even one-point breakouts
that are unbroken. This is more applicable
to daytrading. For swing traders, there
are still plenty of great opportunities to
capitalize on multiweek runs. For swing
traders I don’t think that Hft has much of
an impact, but for daytraders, it does.
Thank you for speaking with us, Ken.
S&C
1/21/11 2:33:22 PM
 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.
FROM THE Q&A ARCHIVES,
A QUESTION
Don, I enjoy your articles. In reference
to your column in the December 2005
issue of Stocks & Commodities, I have
a query in regards to capitalization
requirements and possible profits refer-
enced in a market opening strategy. The
question and answer went like this:
SCALPING NYSE & ECNS
I’m trying to learn about scalping listed
stock, and since you are the listed guru, I
thought I’d ask you some questions. When
you are trading, do you prefer to go to the
specialist or to Ecns when you need fast
execution? Which of the two do you think
tends to post wider spreads? —liltrdr
You might want to check my article
called “Price Vs. Speed” (Technical
Analysis of Stocks & Commodities,
July 2004). I go into depth about why
I prefer trading with the specialist. Re-
member, we can always use the Nyse
“Ecn” (the NX function) if we want
quick executions — but I prefer getting
the best price over the quick execution.
From this, I take it that capitalization
is required in this way:
(20)(2,000) x Average share price of high-
cap S&P 500 shares
I would take the average share price
to be $89 from this link:
http://www.standardandpoors.com/indi-
ces/sp-500/en/eu/?indexId=spusa-500-
usduf--p-us-l--
So keeping this in mind, would my ar-
gument be correct? Would average share
price be unnecessarily high? I’d be inter-
ested in your thoughts on this. Thanks.
Nice to see you keep your historical
Stocks & Commodities references at
your fingertips! I can address both issues
for you, with updates to 2011. First, here’s
the opening-only strategy and capital
+1103_Bright_QA.indd 1
requirement explanation. Things have
changed in the last six years, but you can
assume this for the opening play:
• 1,000 shares each side = 2,000
shares
• Average price closer to $50 (since
you pick your own list)
• You take 2,000 x $50 = $100,000
per stock
Many traders enter 50 stocks or $5
million with $25,000 in their accounts
(20 would only be $2 million). You take
away half $2.5 million, since you can’t
be filled on both sides.
You assume about a 10% fill rate for
the other half, or $250,000. You need to
use $5 million, but do not actually use that
much buying power — a good reason to
trade with a trading firm vs. retail.
We have, of course, modified our strat-
egy for the openings as well. We now use
pricing based on electronic communica-
tions networks (Ecns) and so forth to be
sure we don’t get blindsided on the opening
gap. A lot more attention is paid to news
items, earnings, and so on (a bit more
preparation is needed than in the past).
It’s still one of our more lucrative
strategies, both standalone and in com-
bination with our pairs trading. If we see
one stock in a pair trading much higher,
premarket, we can adjust our opening
prices for the other stock to reflect this
difference. Since we trade both sides,
we often get price improvement on the
second stock.
Now to intraday scalping. Since the
2005 articles were written, we have seen
the high-frequency trading (Hft) take
over much of the daily volume. This,
along with sub-pennies (see our 2010
S&C articles regarding both Hft and
subpennies), has caused a change in
our behavior. We reset our price tickers
(time and sales) to at least four decimal
places to see if we are being undercut by
March 2011
Don Bright of Bright Trading
a hundredth of a penny or similar. If we
are, we modify our routing to take bids
and offers vs. resting on a certain price.
Look for stocks with either smaller bid/
ask spreads, or more mid-market Ecn
activity for your scalping.
Watching this price ticker has brought
on an unintended positive consequence.
Now we can “tape read” direction based
on this ticker and destinations (some
market centers now pay for us to take
their liquidity, and charge us to rest
there — see my upcoming article about
all these changes with “reverse Ecns”).
Hope this helps!
LIQUIDITY, REST, AND ROUTING
I see you have been posting about your
firm’s new approach to order routing that
is saving or making your traders a lot
of money. I remember you used to say
“take liquidity on the Nyse (or Nasdaq)
and rest or leave your orders on Arca.”
Could you explain the differences you
see now? Could you start by explaining
“take liquidity” and “rest” orders? Does
any of this routing make that much of a
difference? My broker advises me to use
only market orders anyway, so how does
this affect me?
Wow, a lot of good and timely ques-
tions. First off, thanks for reading my
posts, and be sure to keep reading S&C,
since I plan on doing an article on the
many industry changes in this regard —
about the consolidation of exchanges, the
new crop of electronic communications
networks (Ecns), and their competition.
I arranged to interview the top people at
several market centers.
Now to your questions. When we hit
a bid or take out an offer immediately,
that is called “taking liquidity.” In the
past, we always had to pay extra to do so.
Continued on page 71
• Technical Analysis of Stocks & Commodities • 53
1/23/11 3:08:15 PM
 product review

MarketGauge: Big View

DataView LLC
70 Sparta Ave, Suite 203
Sparta, NJ 07871
Phone: 888 241-3060
Internet: www.marketgauge.com
Email: info@marketgauge.com (tech
support); geoff@marketgauge.com
(sales)
Product: Standalone package for
market trading data
Requirements: No special graphics
required, but Dsl is always helpful
Price: $49/month

by Dennis D. Peterson

MARKETGAUGE BIG VIEW

ig View is part of an ensemble of
trading information from Market-
Gauge, available as a standalone
package for $49/month. The last review
of MarketGauge covered the Swing Trad-
ing course and the follow-on Mastery
Program. The Mastery Program has a
menu item called Big View, but Mar-
ketGauge actually refers to that item as
Little Big View. To sort this out, let’s
take a quick look at Little Big View and
then spend the bulk of the discussion on
Big View.
Little Big View
Little Big View is more of a summary,
especially when you look at the Market
Outlook Screen (Figure 1). The purpose
is to give the trader an idea of what
direction the market might be moving.
Sometimes it takes a moment to digest it
all. For example, in the lower section of
Figure 1,“Today’s Gauges By Category,”
contrary opinion is only slightly bearish
which, combined with all of the gauges
of this screen, is pointing to a market that
we would expect to be bullish.
When I first started trading in 1999,
these MarketGauge indicators are the
ones I used to trade marketwide items
like the Qqqqs or the Standard & Poor’s
500. Using market breadth indicators
to trade marketwide tradables has only
gotten better with the introduction of
such items as Qid, which is the inverse
54 • March 2011 • Technical Analysis of Stocks & Commodities
Figure 1: Little Big View Market Summary Data. Using a combination of market breadth indicators
(new highs and lows, advancers and decliners) predictions of market movement are shown in two sections: time
frame and category. Time frame is broken into three subsections using green and red rectangles to show degrees
of bullishness or bearishness. For example, at the top is a short-term (one to three weeks) NASDAQ prediction,
with a mildly bullish (two green rectangles out of five) prediction for last week and the same for this week. When
compared to the intermediate term, you can see that this bullishness is short term, while the long-term outlook
is bullish.
of the Qqqqs, but it moves twice as fast. seeing in 1999. Reflecting an expansion
Trading it is not for the faint of heart, es- of the data available these days, Big
pecially if you are looking at five-minute View now has five categories, and the
bars. The saying “You should only trade one depicted in Figure 2 is what you get
what you can only afford to lose” comes when you select the “Macro Analysis”
to mind because if you get emotionally category. Let’s start there.
attached to your money, you can easily The first thing you might notice is that
lose even more. almost all the indicators in the Market
Little Big View isn’t the MarketGauge Momentum category are either moving
I remembered from way back then, but averages of new highs and lows, up and
it is happily still here but now called Big down volume, or advancers and declin-
View. Let’s take a look. ers. If you click on any of the titles, you
are given the exact calculation and a brief
Macro Analysis explanation of what the data is about.
The screen capture you see in Figure 2 If you look to the right on Figure 2,
is very much like the one I remember you’ll see “Chart,” and clicking on the
If you are looking for a way to get an overview
of the market, then zero in on a particular stock,
then this is the product for you.

+PR MktGauge BigView.indd 1 1/21/11 12:00:44 PM

 Figure 2: Today’s Gauges, A MACRO View. The
familiar red and green rectangles, which represent percent-
age change, are used to indicate degrees of bullishness or
bearishness. There are five sections or categories to the
gauges, with the biggest being momentum. Clicking on a
title will result in a definition, while clicking on the chart on
the right side results in a chart displaying recommended
thresholds. You can also see gauge data for up to the
past 150 trading days.

hypertext sends you to a chart like the

one shown in Figure 3. What’s nice is that
thresholds have already been chosen for
you. You’ll also see that “Today’s Gauges”
(Figure 2) has three columns that use the
now-familiar red and green rectangles.
Each column organizes the indicators by
time frame so you can get a sense of the
market condition over the short-, interme-
diate-, and long-term time frames.
There are two column headings (Fig-
ure 2). The headings that use a change
description are only for the top three rows
(the rows with indexes in them). The
headings that use the Market Outlook
screen apply to all of the rows below.
Outlook, especially when it comes to
understanding the red and green rect-
angles, is a key concept. The number
and color of the rectangles is based on
the indicator slope, where it is relative
to the thresholds (for example, crossing
above or below) and the time spent above
or below a threshold. When you analyze
a chart, like the one shown in Figure 3,
you look to see what the indicator is doing
relative to the thresholds and the cor-
responding index prices. The rectangles
reflect MarketGauge’s experience for
setting the appropriate thresholds and
interpreting what the indicator movement
means relative to market of interest, such
as the Nyse and Nasdaq.
Some of the data shown in Today’s
Gauges is available with popular trading
platforms, but some of it is not. In the
early days, I would print out these charts,
and using a straightedge, I would draw

Figure 3: New High/Low Ratio Vs S&P 500. This

chart shows price performance. The values of the indica-
tor are useful, since they let you visualize the behavior of
the indicator relative to price performance. For example,
note that there was a sharp decline in the indicator start-
ing in May 2010 at the same time that the S&P 500 was
declining, but when the S&P 500 hit a low in July 2010,
the rebound in the indicator was delayed relative to the
S&P 500 prices.

March 2011 • Technical Analysis of Stocks & Commodities • 55

+PR MktGauge BigView.indd 2 1/21/11 12:01:06 PM

 product review

this one is no different. Figure 4 captures

most, but not all, of the data that you
are given for an overview. One thing to
notice on this page is the lefthand column
and the acronym “RS,” which stands for
“relative strength.” Relative strength will
be used in three contexts: price, sales, and
earnings per share (Eps). In my National
Association of Investor Clubs (Naic)
club, it is heresy to say something like
“moving average,” “price retracement,”
or any of the concepts that technicians
use, but happily, technicians are able to
use fundamental data, such as Eps.
Since you are going to see RS often,
let me give you the definition. For price,
RS starts by calculating the difference
between today’s price and the price one
Figure 4: Overview Screen. The items on the left will bring up screens under the HotSpots tab, including year ago for each stock. Now rank these
fundamental data. For example, you can select “Highest EPS RS.” The middle of the screen is an array depicting differences from highest to lowest, giv-
industry groups with either biggest gains or biggest losses. If this isn’t your cup of tea, just below this screen is
ing a rank of 99 to the greatest positive
hypertext entitled “Click here for today’s performance by market sector.” Just below the array of industry’s bigger
gainers and losers is an array of the leading groups over the last three months. difference. The rank then becomes a bin
so that more than one stock can have the
same rank, such as 99 for those stocks
having the biggest difference. This is done
by simply saying in the case of the 99th
percentile rank that it represents the top
1% of positive price differences. Market-
Gauge adjusts the percentage depending
on the number of items being ranked.
Eps is a bit more of a problem, but it
entails looking at the current quarter ver-
sus the same quarter a year ago, along with
this year’s total earnings performance ver-
sus last year’s total earning performance,
and then ranking. Sales are handled in a
similar fashion to earnings.

HotSpots
The HotSpots tab has four categories:
“Summary reports,” “Price and volume
views,” “Fundamental views,” and
Figure 5: Sector Performance. The familiar MarketGauge format using red and green rectangles is aug- “Market scans.” Each category has a
mented with additional columns of data, in this case fundamental data. Here, PEG is accompanied by P/E ratio. number of predefined scans. You can
The arrows at the top of the columns indicate you can sort either by ascending of descending values.
find yourself looking at HotScan’s screen
easily, since, with few exceptions, choos-
vertical lines to see where significant behavior of the market will change and not ing any item on the left of the Overview
action was taking place relative to the overnight, but over several months. You screen will open a HotSpots window. If
S&P 500 or Nasdaq. If you use this data need to be vigilant, as it is not something you click on the hypertext mentioned in
to find overbought or oversold market you can put on cruise control and let the the Figure 4 caption, you get a summary
conditions, keeping in mind that a bullish cash roll in. of sector data (Figure 5) in the HotScans
market seldom remains oversold and a format. Even if you don’t have a sector
bearish market seldom stays overbought, Overview rotation model you like, ignoring the hot
you probably have the basis for a profitable Overview is the leftmost menu item in sectors can result in trading against the
trading system. It worked for me. But a Big View. Like most of MarketGauge, trend, which is not a good idea (because
word of caution: the overall nature and/or there is a lot of data on every page, and it increases your risk).
56 • March 2011 • Technical Analysis of Stocks & Commodities

+PR MktGauge BigView.indd 3 1/23/11 4:45:01 PM

 In the discussion of RS, I mentioned
three fundamental measures; two more
are used by HotSpots, price divided by
earnings (P/E ratio) and price-to-earnings
ratio divided by growth (Peg). A very
short course in fundamental analysis
says that P/E ratios of 10 or below are
considered conservative — that is, the
stock is inexpensive. When the market
thinks a company is going to grow a lot,
it will pay more, and P/Es can shoot up
to 40 or higher. It could be argued that
any stock with a P/E above 30 is too
expensive, but that’s a matter I leave to
fundamentalists to argue over (my own Figure 6: Hyperquote Screen. Hyperquote is accessed by using a ticker symbol or just part of a company
name. The result is this modified Big View HotSpots screen with details of the company highlighted with a yellow
club could never buy Microsoft because background. All of the competing companies in the same industry group are shown below the yellow highlight. For
it was too expensive). company comparisons, MarketGauge defaults to a useful list: Today’s price change percentage and price change,
There is potentially another way around today’s volume versus average volume, market cap, and P/E ratio. Arrows at the top of columns identify which can
the “P/E ratio is too high” conundrum, and be sorted in either descending or ascending order.

that is to use Peg. The lower the Peg, the

more undervalued the stock. Stocks with
a Peg of around 1.0 are typical of what
might be considered undervalued stocks.
For example, a stock with a P/E ratio of
30 would need a 30% annual growth rate
to have a Peg of 1.0. But don’t get fooled
by the math. A stock with a P/E ratio of 10
only needs a 10% annual growth to have
a Peg of 1.0 — a company with relatively
low earnings and poor growth.
A large number of scans are available
in Big View. For example, you can look
for leading stocks by sorting on index,
sector, or industry group. Or you can
look for stocks with the highest relative
strength in price change, sales, or Eps
or stocks with unusual volume. Using
fundamental views, you’ll find that return
on equity (Roe), return on assets (Roa)
cash flow, and book value are additional
fundamental data views. And when you
get the HotSpots report, you can start
sorting to refine your choices.
overview of the market, and then zero
in on a particular stock you think will
move, then this is the product for you.
Typically below each scan is a set of
thumbnail price charts for each of the
companies listed. Each thumbnail is a
daily price chart using a line to show
price for the last year, and each is overlaid
with 50- and 200-day moving averages.
This is typical of the well-thought-out
approach that MarketGauge uses to
present data. In addition, it is rare to find
websites that integrate fundamental data
into their screens and give you a way to
sort, the way that MarketGauge does
with its ranking and relative strength
approaches.
Big View offers an expansive dataset
in real time, and Little Big View is a great
way to get started, considering it too is
packed with analysis, and you can find
it for free in the Resources section from
the home page of MarketGauge. All in
all, Big View and Little Big View are
well-thought-out products.
Dennis Peterson is a Staff Writer for
Stocks & Commodities.
Suggested reading
Peterson, Dennis D. [2011]. “Market-
Gauge: Complete Swing Trading
System,” product review, Technical
Analysis of Stocks & Commodities,
Volume 29: February.
_____ [2010]. “MarketGauge: Opening
Range Success Formula,” product
review, Technical Analysis of Stocks
& Commodities, Volume 28: May.
‡Big View (MarketGauge)
S&C

Hyperquote
Hyperquote is a nifty feature that lets you
enter a company name or ticker symbol
and then get a modified HotSpots screen
giving you fundamental and price data
about the company but also data on all of
the companies in that industry group. All
of Big View’s data is real time, including
any quotes.

Drilling down “What I want are answers to unresolved issues regarding a certain project.
If you are looking for a way to get an It is keeping me awake at night and I like to sleep at night!”
March 2011 • Technical Analysis of Stocks & Commodities • 57

+PR MktGauge BigView.indd 4 1/23/11 4:45:17 PM

 product review

Nasdaq Omx Portfolio

Manager For The iPad
NASDAQ OMX, INC.
Product: Real-time quotes and
portfolio management app
Internet: http://itunes.apple.com/us/
app/qfolio-hd-nasdaq-omx-portfolio/
id364265462?mt=8
Requirements: iPad and a wireless
Internet connection
Price: Free

by Wallace Wang

R
eal-time data is crucial for ac-
curate and timely trading, but
in the past, to get real-time
data you had to pay a monthly fee. Now,
however, if you have either a wi-fi or 3G
Internet connection and an iPad, you can
retrieve real-time data using the Nasdaq
Figure 1: portfolio manager app screen. The Portfolio Manager app can store a watchlist, a portfolio Omx Portfolio Manager app. The initial
list, and a search list of different stocks.
Portfolio Manager app screen displays
a list of stocks on the left side of the
screen, which you can divide into three
categories: a watchlist of stocks you
want to track, a portfolio list of stocks
you’re currently trading, and a search
list that lets you type in a stock symbol
and view that particular stock’s real-time
performance (Figure 1).
You can change the time frame of each
stock chart from as long as five years
to as short as intraday (with automated
real-time updates). Slide your finger on
the chart and a vertical line appears along
with a big white dot, which identifies the
stock’s exact price and volume at that
particular moment in time (Figure 2).
Besides customizing a stock chart by
selecting a different time frame, you can
also overlay a chart with simple mov-
ing averages (Smas) to help you better
understand the fluctuations of a stock
price (Figure 3).
Figure 2: charts. Each stock chart can precisely show you the price and volume at a specific point in time. While the Portfolio Manager displays
stock prices in US dollars, you can easily
choose a variety of other currencies such
as euros instead (Figure 4).
58 • March 2011 • Technical Analysis of Stocks & Commodities

+1103 PR Wang Nasdaq OMX.indd 1 1/21/11 3:32:33 PM


t
FIGURE 3: SIMPLE MOVING AVERAGE. You can overlay simple moving averages on a stock chart to help you
determine which way the stock is moving.
FIGURE 4: CURRENCY CONVERSIONS. You can easily change the currency displayed for each stock price.
Getting the latest
financial news
Since stock prices can fluctuate wildly
based on the latest news, Portfolio
Real-time data is crucial for accurate
and timely trading, but in the past, you
had to pay a monthly fee.
+1103 PR Wang Nasdaq OMX.indd 2
Manager provides two information
sources to keep you up to date. One is a
continuously changing series of videos
from the StockTwits news desk (Figure
March 2011
CHARTING
THE
STOCK
MARKET
The Wyckoff Method
Edited by Jack K. Hutson
208 pages, 6x9 inches,
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Charting The Stock Market
describes and illustrates one of the
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method applied to the bond market;
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the method to use. Details of the
Wyckoff method covered in this
book include:
◆ Point & figure charting
◆ Trends
◆ Relative strength and weakness
◆ Stop orders
◆ Forecasting
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◆ Group stock behavior
◆ Stock selection criteria
◆ Price/volume chart reading &
analysis
ORDER TOLL-FREE: (800) 832-4642
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• Technical Analysis of Stocks & Commodities • 59
1/21/11 3:32:03 PM
 5). By watching the latest ones, you
can stay up to date on crucial financial
information.
Besides giving you the latest news,
the Portfolio Manager app also gives
you access to the latest Twitter feeds
about your chosen stock. By tracking
what other people tweet in real-time, you
may be able to catch the latest news and
rumors before they appear through the
mainstream media (Figure 6).

Market Mind view

The Portfolio Manager app displays data
in a company details view, which lists
stocks on the left side of the screen and
FIGURE 5: NEWS. The Portfolio Manager app provides access to StockTwits video news. more detailed information about a single
stock on the right side. If you want a dif-
ferent view of the market, you can choose
the Market Mind view (Figure 7).
Besides displaying an intraday chart
for a specific stock at the top of the screen,
the Market Mind view also displays your
watchlist of stocks and the latest trades
in real-time so you can follow changing
stock prices as various trades arrive. To
further help you track changing stock
prices, the app flashes green or red when
a stock on your watchlist rises or falls
(Figure 8).

Customizing a stock list
While the Portfolio Manager app comes
with a watchlist of popular stocks such
as Amat, Qcom, and Msft, you can

If you want to check the

latest stock price, just
FIGURE 6: TWITTER FEEDS. By monitoring Twitter feeds about a particular stock, you can track what other tap in the search field.
people are saying and doing.

“It’s official – we’re still too big to fail. Let the good times roll!”
60 • March 2011 • Technical Analysis of Stocks & Commodities

+1103 PR Wang Nasdaq OMX.indd 3 1/21/11 3:31:43 PM

 FREE
product review

30-day trial!
Just click on the
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FIGURE 7: MARKET MIND VIEW. The View button lets you change the appearance of displayed data.

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TA10A3

March 2011 • Technical Analysis of Stocks & Commodities • 61

+1103 PR Wang Nasdaq OMX.indd 4 1/21/11 3:31:22 PM


FIGURE 9: CUSTOMIZING YOUR STOCKLIST. You can add a stock quote to the watch- or portfolio list.
FIGURE 10: PORTFOLIO LIST. The portfolio list shows you data so you can see your profits or losses in real-
time.
always add or delete stocks to custom-
ize your own. If you just want to check
the latest price for a stock not in your
watchlist, just tap in the search field
and type a stock symbol such as Armh.
Once you’ve typed in a symbol, you
can decide whether to add this quote
to your watchlist or your portfolio list
(Figure 9).
62 • March 2011 • Technical Analysis of Stocks & Commodities
+1103 PR Wang Nasdaq OMX.indd 5
product review
If you do add a stock to your portfolio
list, you can add information about it by
defining the date you bought the stock,
the number of shares you purchased, and
the price you paid. Then you’ll be able
to view your portfolio list at any time
and see how your stock is performing to
track your profits and losses in real-time
(Figure 10).
Summary
Combine the mobility of the iPad with the
Nasdaq Omx Portfolio Manager app,
and you’ll be able to access real-time
trading information wherever you can
find a wi-fi or 3G Internet connection.
Although you’ll need to rely on other
software if you want to place actual
trades, the Portfolio Manager app can
ensure you’ll never lose track of the
markets if you have to step away from
your primary trading computer.
The Portfolio Manager’s ability to
monitor real-time Twitter tweets can give
you additional insights on how various
traders see a particular stock, and the
ability to watch video news about the
financial markets ensures that you’ll
always stay informed.
The free Nasdaq Omx Portfolio Man-
ager app puts real-time financial data in
your hands wherever you take your iPad.
Unfortunately, Nasdaq does not cur-
rently offer a similar app for the iPhone
or iPod Touch, so if you’re looking for
an excuse to get an iPad, the Nasdaq
Omx Portfolio Manager app will give
you that reason right now.
When he’s not trading stocks or study-
ing chart patterns, Wallace Wang writes
computer books including Microsoft Of-
fice For Dummies, Beginning Program-
ming For Dummies, My New Mac, and
My New iPad. In addition, he develops
Windows, Macintosh, and iPhone/iPad
applications.
Suggested reading
Wang, Wallace [2011]. “Bloomberg For
The iPad,” product review, Technical
Analysis of Stocks & Commodities,
Volume 29: January.
_____ [2009]. “Trading On A Mac,”
product review, Technical Analysis
of Stocks & Commodities, Volume
27: April.
‡Nasdaq Omx Portfolio Manager for the
iPad
S&C
1/21/11 3:29:47 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

WHAT DO GAP TRADERS WANT?
What exactly are gap traders looking
for?
For those unfamiliar with gap trading,
a price gap occurs when there is a signifi-
cant difference in the closing price of the
previous session relative to the opening
price of the following session. A gap is
described by its direction; for instance,
you might hear traders refer to a gap with
an increase in price as a “gap up” or a
“gap higher.” A sharp decrease in price
from the previous session close is known
as a “gap down” or a “gap lower.”
Price gaps used to be common in
commodities due to abbreviated trad-
ing sessions relative to equities, and the
potential volatility exposure overnight
and on weekends. Although this type
of price action still occurs in the futures
markets today, it is much less common
than it once was.
The scarcity of large price gaps can
be attributed to the fact that most futures
contracts trade virtually 24 hours per day
during the week these days. Accordingly,
in most cases, there simply isn’t enough
time between trading sessions to justify
a large price move.
There are exceptions, of course, such
as during earnings season. Many corpora-
tions report results just after the close of
stock index futures at 3:15 Central time
but before the reopen of trade at 3:30.
On most days, 15 minutes of down time
is insignificant, but this is not the case
in the midst of earnings announcements
periods. If a bellwether firm reports an
earnings per share figure other than
what is expected, it is possible to see
dramatic price gaps on the reopen of
trade at 3:30.
Another opportunity for price gaps
exists on the reopen of futures trade
Sunday afternoon or evening (depend-
ing on the contract, exchange, and the
part of the country you’re in). From the
Friday afternoon close to the Sunday
reopen, all markets are closed for trade,
but during the two-day hiatus, political
events might have developed or a natural
disaster could have occurred. As a result,
gaps higher or lower from the Friday
close are more or less expected or at
least seen on a regular basis.
The lessened frequency of price gaps
has done wonders for attracting retail
traders into commodities. We have all
heard the horror stories of markets gap-
ping limit up or down, trapping traders in
positions; this is no longer a compelling
excuse to avoid commodity trading —
A gap is only possible
in the event of an over-
whelming shift in market
sentiment.
although there are certainly other argu-
ments against participating.
Most trading courses and literature will
tell you that 80% of gaps are filled. This
is probably nearly impossible to confirm,
so we will take their word for it. In addi-
tion, based on experience, it seems to be a
pretty good ballpark figure to work with.
If a market fills a gap, it means the price
of the futures contract retraced after the
gap occurred to the previous day’s closing
price (pregap price). Unfortunately, just
knowing that most gaps are filled isn’t
enough to trade profitably. Like anything
else in trading, timing is everything. In
some scenarios, a gap is filled immediately
or within days, but in other environments
it can take weeks or months for the process
to complete itself.
A gap is only possible in the event of
an overwhelming shift in market senti-
ment, and therefore, markets that have
experienced a gap should be treated with
even more respect than is usually the
case. That said, gap traders typically look
at two speculative prospective strategies
once a price gap occurs; the possibility of
fading the gap by speculating the market
will move in the opposite direction of
the gap by filling it or preparing for a
position in the direction of the gap once
it has been filled.
For instance, in early October 2010,
March corn futures gapped 45 cents
higher to $5.82½ on the Sunday evening
open following a grain report released on
the preceding Friday. The previous ses-
sion closing price was $5.37½. Bearish
traders might have opted to sell futures,
buy puts, sell calls, or a combination of
the three in anticipation of the market
trading back to $5.37½ as the gap is
filled. Bullish traders might wait for a
pullback to $5.37½ to add to longs or
initiate a position (buy calls, sell puts,
buy futures, or other).
Trading is an art, not a science; traders
should look at the gap prices as approxi-
mations, not absolutes. Even if the gap
is filled and the market later recovers,
the low of the move will likely not be
$5.37½. In this instance, March corn
sold off to make a low at $5.22 (well
below the gap price) before resuming
the rally. Some might have given up
on the trade a little below $5.37½, but
keep in mind, gap trading is a relatively
simple strategy and likely to have many
followers. So if most traders are looking
for a certain price to hold, it probably
won’t. The temporary dip to $5.22 was
probably stop-running to flush out the
weak bulls; unfortunately, this is how
markets operate.
S&C

March 2011 • Technical Analysis of Stocks & Commodities • 63

+1103_Garner_FuturesQA.indd 1 1/23/11 3:09:35 PM

 Support Forum (https://www.tradestation.com/Discussions/
For this month’s Traders’ Tips, the focus is
forum.aspx?Forum_ID=213) and search for the file “_3Bar_
Johnan Prathap’s article in this issue, “Three-
Bar Inside Bar Pattern.”
InsideBar.eld.”
Code for TradeStation is already provided A sample chart is shown in Figure 1.
in Prathap’s article. Subscribers will also find This article is for informational purposes. No type of trading or in-
the same code at the Subscriber Area of our vestment recommendation, advice, or strategy is being made, given, or
How It Works On Gold And Silver And Crude

Three-Bar Inside Bar Pattern

in any manner provided by TradeStation Securities or its affiliates.

This trading strategy uses an inside bar as a three-bar pattern by lower closes indicates a short-term downtrend.
for long and short positions. Find out how it performed on I tested this setup on daily data from May 2001 to August

website, www.Traders.com. Presented here

gold, silver, and crude oil contracts. 2010 on three major commodities: gold (GC), silver (SI), and
crude oil (CL). The results are worth some consideration.
by Johnan Prathap
The inside bar

W
hether you look at an intraday, daily, weekly, or monthly The typical inside bar two-bar view indicates minimal activity in
chart you will, without a doubt, see many inside bars. a market. It is defined as a bar (or series of bars) that is completely

—Chris Imhof
They appear in uptrends, downtrends, and sideways within the range of the preceding bar; that is, it has a higher low
markets. Typically, most traders think of an inside bar and lower high than the bar immediately before it.

is an overview of possible implementations

as a two-bar pattern, but I have found successful trades Some traders consider a bar an inside bar if the high and
using an inside bar pattern as a three-bar pattern for both long low are equal to the previous bar or note where there are sev-
and short signals. An inside bar accompanied by higher closes eral consecutive bars within the range of a previous bar. The
indicates a short-term uptrend and an inside bar accompanied “Inside Bar Show Me” study in TradeStation will not mark

for other software. TradeStation Securities, Inc.

A subsidiary of TradeStation Group, Inc.
Traders’ Tips are provided to help the reader imple-
www.TradeStation.com
ment a selected technique from an article in this issue.
The entries are contributed by various software develop-
ers or programmers for software that is capable of cus-
tomization.
Readers will find all the code listings that accompany
the following Traders’ Tips at our website, Traders.com. F Thinkorswim.com: THREE-BAR INSIDE BAR PATTERN
Provided here is some discussion of the technique's im- In “Three-Bar Inside Bar Pattern” in this issue, Johnan Prathap
plementation by the Traders’ Tips contributors as well as describes a trading strategy derived from the inside bar candle
some example charts. formation. The strategy utilizes both long and short entries
To locate Traders’ Tips at our website, use our site’s coupled with a predefined risk-management technique.
search engine, or click on the Traders’ Tips link from our We have created four strategy files utilizing our proprietary
home page. For past Traders’ Tips, click on the “Stocks programming language, thinkScript. When applied together,
& Commodities” link from our home page in the red box
they will provide the signals generated by Prathap’s method-
on the left, then click on the “Article Abstracts” link in the
red box on the left, then click on the issue of interest, then
ology (Figure 2).
on “Traders' Tips.” You can download the code for this strategy from the
thinkorswim website at the following link: http://mediaser-
ver.thinkorswim.com/transcripts/2011/thinkorswim.zip. The
code is also shown at the Stocks & Commodities website
at Traders.com along with instructions for applying it.
—Thinkorswim
F TRADESTATION: Three-Bar Inside Bar Pattern
In “Three-Bar Inside Bar Pattern” in this issue, author Johnan
Prathap describes a three-bar setup that includes a comparison
of closing prices and an inside bar as the second bar of the F METASTOCK: Three-Bar Inside Bar Pattern
three-bar pattern. The author suggests a setup for a short entry Johnan Prathap’s article in this issue, “Three-Bar Inside Bar
and a setup for a long entry, as described in the article. Pattern,” presents a pattern-based trading system. The Meta­
We have prepared the EasyLanguage code for 1) the strat- Stock formulas and instructions for adding these formulas to
egy as described in Prathap’s article; 2) a charting indicator MetaStock are available from the Stocks & Commodities
showing long and short setups; and 3) a RadarScreen indica- website at Traders.com.
tor also showing long and short setups. Both indicators in- When running the test, set the “Order execution” options
clude an alert to notify the user when a setup has occurred. to use the opening prices with zero trade delay.
To download the EasyLanguage code for the strategy and The system test formulas trigger on the bar after the pat-
the two indicators, go to the TradeStation and EasyLanguage tern so that the system tester will enter on the open of the next

Figure 1: TRADE­
STATION, Three-Bar
Inside Bar Pattern. Figure 2: THINKOR-
Shown here is a daily SWIM, Three-Bar
chart of a gold futures Inside Bar Pattern.
continuous contract dis- This thinkorswim chart
playing Johnan Prathap’s demonstrates Johnan
three-bar setup strategy. Prathap's three-bar in-
The yellow markers are side bar pattern trading
long setups per Prathap’s strategy on daily crude
article and the magenta oil. The inside bars are
markers are short setups marked in yellow on the
per the article. chart.

64 • March 2011 • Technical Analysis of Stocks & Commodities

+Traders_Tips_1103.indd 1 1/26/11 3:04:29 PM

 Figure 3: eSIGNAL, Three-Bar Inside Bar Pattern
bar. You can also create an exploration or an expert advisor to
signal on the last bar of the pattern. The formulas for this are
also shown at Traders.com and at MetaStock.com.
—William Golson
MetaStock.com
F eSIGNAL: Three-Bar Inside Bar Pattern
For this month’s Traders’ Tip, we’ve provided the formula
ThreeBar_Ibp.efs based on the formula code from Johnan Prat-
hap’s article in this issue, “Three-Bar Inside Bar Pattern.”
The study contains two formula parameters to set the val-
ues for the profit target and stop-loss levels, which may be
configured through the Edit Studies window in version 10.6
of eSignal (Advanced Chart menu → Edit Studies).
A sample chart is shown in Figure 3.
To discuss this study or download a complete copy of the
formula code, please visit the Efs Library Discussion Board
forum under the Forums link from the Support menu at www.
esignalcentral.com or visit our Efs KnowledgeBase at www.
esignalcentral.com/support/kb/efs/. The eSignal formula
scripts (Efs) are also available for copying and pasting from
the Stocks & Commodities website at Traders.com.
—Jason Keck
Interactive Data Desktop Solutions
800 815-8256, www.esignalcentral.com
F wEALTH-LAB: Three-Bar Inside Bar Pattern
This Traders’ Tip is based on “Three-Bar Inside Bar Pattern”
by Johnan Prathap in this issue.
Our WealthScript solution automatically identifies the pat-
tern on the chart with a routine called HighlightPattern that
you might find useful in other pattern-recognition scripts. As
Figure 4 shows, the three-bar pattern occurs more frequently
than you otherwise might expect in the CL, SI, and GC (which
is the symbol plotted in Figure 4) electronic sessions.
While testing the code, we noticed that short trade triggers
(that is, the last bar in the pattern) for which the close was be-
+Traders_Tips_1103.indd 2
Figure 4: WEALTH-LAB, Three-Bar Inside Bar Pattern.
The light gray and blue boxes highlight the short and long setups,
respectively.
low the low of the previous bar had a better success rate than
if the close were simply lower than the previous close. Just
toggle the “Modified short” parameter to test both versions of
the strategy. Although the modification made practically no
difference for SI, it increased the overall net profit for both
GC and CL significantly over the test period.
The code can be found at Traders.com.
—Robert Sucher
www.wealth-lab.com
F aMIBROKER: Three-Bar Inside Bar Pattern
In “Three-Bar Inside Bar Pattern” in this issue, author Johnan
Prathap presents a simple trading system based on short-term
candlestick patterns. Coding this system in AmiBroker Formula
Language is straightforward. A ready-to-use formula for the
article is shown at Traders.com. To use the formula, enter it
in the Afl Editor, then press the “Send to automatic analysis”
button. In Automatic Analysis, press the “Backtest” button
to perform a historical system test. Note that the formula has
parameters set for the CL (crude oil) contract. You may need
to modify them for testing different instruments.
—Tomasz Janeczko, AmiBroker.com
www.amibroker.com
F WORDEN BROTHERS TC2000:
Three-Bar Inside Bar Pattern
The three-bar pattern setups in Johnan Prathap’s article in this
issue (“Three-Bar Inside Bar Pattern”) are simple to implement
in TC2000 version 11 using the Personal Criteria Formula
(Pcf) language. The code follows for the positive and nega-
tive inside bar setups.
Three-Bar Positive Inside Bar
C > C1 AND L2 < L1 AND H1 < H2 AND C2 > C3
Three-Bar Negative Inside Bar
C < C1 AND L2 < L1 AND H1 < H2 AND C2 < C3
March 2011 • Technical Analysis of Stocks & Commodities • 65
1/21/11 8:58:04 AM
 Figure 5: TC2000, Three-Bar Inside Bar Pattern. Here are sample
scan results for the three-bar positive inside bar setup. This scan was done
using daily data. Platinum subscribers can run the same scan on any time
frame (daily, hourly, five-minute bars, and so forth).
Setting up the Pcfs is easy and you can use them in an
EasyScan or to sort any list in the system.
In Figure 5, we’ve used the three-bar positive inside bar
Pcf to scan the US common stocks watchlist, and it returned
143 stocks. The list is sorted by “Earnings 1-year,” putting
some familiar stocks at the top of the list.
For more information or to start a free trial of TC2000,
please visit www.TC2000.com.
—Patrick Argo and Bruce Loebrich
Worden Brothers, Inc.
www.StockFinder.com
F NEUROSHELL TRADER:
Three-Bar Inside Bar Pattern
The three-bar inside bar pattern trading system as
described by Johnan Prathap in his article in this issue can be
easily implemented with a few of NeuroShell Trader’s 800+
indicators. Simply select “New Trading Strategy…” from the
Insert menu and enter the formulas in the appropriate loca-
tions of the Trading Strategy Wizard (shown at the Stocks &
Commodities website 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 Analy-
sis…” button to view the backtest and trade-by-trade statis-
tics for the strategy.
Users of NeuroShell Trader can go to the Stocks & Com-
modities section of the NeuroShell Trader free technical
support website to download a copy of this or any previous
Traders’ Tips.
A sample chart is shown in Figure 6.
—Marge Sherald, Ward Systems Group, Inc.
301 662-7950, sales@wardsystems.com
www.neuroshell.com
F AIQ: Three-Bar Inside Bar Pattern
The Aiq code shown at Traders.com for this Traders'
Tip is for the three-bar inside bar pattern as described
66 • March 2011 • Technical Analysis of Stocks & Commodities
+Traders_Tips_1103.indd 3
Figure 6: NEUROSHELL TRADER, Three-Bar Inside Bar Pattern.
This NeuroShell Trader chart shows the three-bar inside bar pattern trading
system for daily crude oil.
by Johnan Prathap in his article in this issue, “Three-Bar Inside
Bar Pattern.”
I tested the system on three Etfs: Spy (S&P 500), Iwm
(Russell 2000 index), and Qqqq (Nasdaq 100) over the pe-
riod 1/1/2001 to 1/11/2011. I did not allow exits on the same
bar as entries, as it is impossible to tell whether the stop-loss
or the profit target would have been hit on the day of entry.
Hence, all exits were applied on the second bar of the trade.
The long trades for the portfolio lost an average of 0.17%
per trade on 119 trades. The short trades lost an average of
0.24% per trade on 170 trades. The average holding period
was 1.6 bars. Commission and slippage were not considered
in these results.
The code and Eds file can be downloaded from www.
TradersEdgeSystems.com/traderstips.htm.
—Richard Denning
info@TradersEdgeSystems.com
for AIQ Systems
F TRADERSSTUDIO: Three-Bar
Inside Bar Pattern
In testing the trading system suggested by Johnan Prathap
in his article in this issue, I used Pinnacle Data for the same
three futures contracts, ZG (electronic gold), ZU (electronic
crude oil), and ZI (electronic silver). I used the electronically
traded data since the pit trading for these contracts has nearly
disappeared and the volumes are too light. Unfortunately, I was
not able to obtain results that were close to the author’s, as the
consolidated portfolio lost $1,650 with a maximum drawdown
of $29,810 trading one each of the three contracts. In addition,
no provision was made for commission and slippage. The dif-
ference in performance is probably due to the difference in the
data between the TradeStation data (which the author used)
and the data I used from Pinnacle Data.
In Figures 7 and 8, I show the resulting consolidated eq-
uity curve and consolidated underwater equity curve, respec-
tively, for the portfolio of futures contracts using Pinnacle
Data for the electronically traded contracts.
The code can be downloaded from the TradersStudio website
1/26/11 3:01:28 PM
 Figure 7: TRADERSSTUDIO, Three-Bar Inside Bar Pattern,
equity curvE. Here is the equity curve for the period 5/1/2001
to 8/31/2010 trading one contract each of ZG, ZU, and ZI (based
FIGURE 10: WAVE59, Three-Bar Inside Bar Pattern.
on data from Pinnacle Data).
You can see a nice set of short signals in this bond chart
based on Prathap's approach.

“Traders’ Tips from Tasc Magazine” at www.tradecision.

com/support/tasc_tips/tasc_traders_tips.htm or copy the code
from the Stocks & Commodities website, www.Traders.com.
A sample chart is shown in Figure 9.
—Yana Timofeeva, Alyuda Research
510 931-7808, sales@tradecision.com
www.tradecision.com

Figure 8: TRADERSSTUDIO, Three-Bar Inside Bar Pattern,

UNDERWATER equity curve. Here is the underwater equity curve
for the period 5/1/2001 to 8/31/2010 trading one contract each of ZG,
ZU, and ZI (based on data from Pinnacle Data).
at www.TradersStudio.com→Traders Resources→FreeCode
or www.TradersEdgeSystems.com/traderstips.htm.
—Richard Denning
info@TradersEdgeSystems.com
for TradersStudio
F TRADECISION: Three-Bar Inside Bar
Pattern
The article by Johnan Prathap in this issue, “Three-Bar Inside
Bar Pattern,” describes a trading strategy that uses an inside
bar as a three-bar pattern for long and short positions.
You can use Tradecision’s Strategy Builder to recreate the
three-bar inside bar pattern strategy. The formulas can be
viewed at Traders.com.
To import the strategy into Tradecision, visit the area
F WAVE59: Three-Bar Inside Bar Pattern
In his article in this issue, Johnan Prathap describes a three-bar
inside bar pattern used to time entries and exits.
You can see a nice set of short signals in the bond chart
in Figure 10 using his approach. As an aside to readers in-
terested in conducting their own experimentation with this
method, we found superior results were attained by revers-
ing the requirement for the third bar in the particular pattern,
requiring a downward close for buy signals, and an upward
close for sells. This tweak can be accomplished by editing
lines 11 and 27 in the Wave59 code (shown at Traders.com),
and should provide fertile ground for further research.
As always, users of Wave59 can download scripts directly
using the QScript Library found at http://www.wave59.com/
library.
—Earik Beann
Wave59 Technologies Int’l, Inc.
www.wave59.com

F NINJATRADER: Three-Bar Inside Bar Pattern

FIGURE 9: TRADECISION,
GOLD DAILY CHART WITH
THE THREE-BAR INSIDE
BAR PATTERN STRATEGY
APPLIED. This shows four
profitable trading signals
generated by the three-
bar inside bar pattern
strategy for gold from July
to September 2010.
The three-bar inside bar pattern automated strategy as discussed
in “Three-Bar Inside Bar Pattern” by Johnan Prathap in this
issue has been implemented as a strategy available for download
at www.ninjatrader.com/SC/March2011SC.zip.
Once it has been downloaded, from within the NinjaTrader
Control Center window, select the menu File → Utilities →
Import NinjaScript and select the downloaded file. This strat-
egy is for NinjaTrader version 7 or greater.
March 2011 • Technical Analysis of Stocks & Commodities • 67

+Traders_Tips_1103.indd 4 1/21/11 8:58:38 AM

 Figure 12: NEOTICKER, Three-
Bar Inside Bar PatterN. Here
is how to set up the system using
NeoTicker's Backtest EZ.

Figure 11: NINJATRADER, Three-Bar Inside Bar Pattern. This

screenshot shows the ThreeBarInsideBar strategy applied to a daily continu-
ous chart of crude light (CL).

You can review the strategy source code by selecting the

menu Tools → Edit NinjaScript → Strategy from within the trades over the history of the chart.
NinjaTrader Control Center window and selecting “Three- This strategy will be available as a downloadable file for
BarInsideBar.” Trade Navigator. Click on the blue phone icon in Trade Navi-
NinjaScript uses compiled Dlls that run native, not interpret- gator, select “Download special file,” type “SC1103,” and
ed, which provides you with the highest performance possible. click on the Start button.
A sample chart implementing the strategy is shown in Fig- —Michael Herman
ure 11. Genesis Financial Technologies
—Raymond Deux & Ryan Millard www.TradeNavigator.com
NinjaTrader, LLC
www.ninjatrader.com
F UPDATA: Three-Bar Inside Pattern
This is based on Johnan Prathap’s article in this
issue, “Three-Bar Inside Pattern.”
In the article, Prathap sets up a market timing system based
F NEOTICKER: Three-Bar Inside Bar Pattern
on price patterns to determine points of trend exhaustion in
The trading setups presented in the article “Three-Bar Inside
gold, silver, and crude oil contracts, with entries into an antici-
Bar Pattern” by Johnan Prathap in this issue can be imple-
pated reversal and fixed-percentage stop and profit levels.
mented in NeoTicker using our power indicator, Backtest EZ
The Updata code for this system has been added to the Up-
(Figure 12).
data System Library and may be downloaded by clicking the
Enter the long signal formula (Listing 1) into the long entry
Custom menu and then System Library. Those who cannot
field and enter the short signal formula (Listing 2) into the
access the library due to a firewall may paste the code into the
short entry field. Then change the stop-loss style to “percent”;
Updata Custom editor and save it.
enter the stop low value of 0.75; change the target style to
A sample chart is shown in Figure 13.
“percent”; enter the target value as 0.75. Next, to get a proper —Updata Support team
system-testing result, in the “system” tab for the indicator support@updata.co.uk, www.updata.co.uk
setup, change the price multiple and minimum tick size to
match the instrument that is currently being tested.
A downloadable NeoTicker export group will be available
for download at the NeoTicker blog site (http://blog.neoticker.
com).
—Kenneth Yuen
TickQuest, Inc.

F TRADE NAVIGATOR: Three-Bar Inside Bar Pattern

The steps for recreating the strategy described by Johnan Prathap
in his article in this issue, “Three-Bar Inside Bar Pattern,” are
shown at Traders.com in the Traders’ Tips area.
You can test your new strategy by clicking the Run but-
FIGURE 13: UPDATA, Three-Bar Inside Bar Pattern. The chart shows
ton to see a report, or you can apply the strategy to a chart the three-bar inside bar pattern overlaid on the gold futures contract, with the
for a visual representation of where the strategy would place profitable trade on May 18 denoted by a hollow red arrow.

68 • March 2011 • Technical Analysis of Stocks & Commodities

+Traders_Tips_1103.indd 5 1/26/11 3:00:24 PM


FIGURE 14: TRADESIGNAL ONLINE, Three-Bar Inside Bar Pattern. Here
is an example of Johnan Prathap’s three-bar inside bar pattern strategy on a daily
chart of Brent crude.
F Tradesignal: Three-Bar Inside Bar Pattern
The three-bar inside bar pattern strategy by Johnan Prathap can
be easily implemented using the free interactive online charting
tool found at www.TradesignalOnline.com. In the tool, select
“New strategy,” enter the code (shown at Traders.com) in the
online code editor, and save it. The strategy can then be added
to any chart with a simple drag & drop (see Figure 14).
The strategy is also available in the Lexicon section of
www.TradesignalOnline.com, where it can be imported with
a single click.
—Sebastian Schenck
Tradesignal GmbH
support@tradesignalonline.com
www.TradesignalOnline.com, www.Tradesignal.com
F TradingSolutions: Three-Bar Inside Bar Pattern
In the article “Three-Bar Inside Bar Pattern” in this issue,
Johnan Prathap presents an entry-exit system for testing a
three-bar inside pattern.
The entry portion of this system is available as a func-
tion file that can be downloaded from the TradingSolutions
website (www.tradingsolutions.com) in the “Free Systems”
section. Stop-losses and profit targets can be simulated using
trading styles.
—Gary Geniesse
NeuroDimension, Inc.
800 634-3327, 352 377-5144
www.tradingsolutions.com
FIGURE 15: SHARESCOPE, Three-Bar Inside Bar Pattern. Here, Johnan
Prathap’s system is applied to natural gas. The three-bar pattern is colored red for
short trades or green for long trades. A “P” (profit) or “L” (loss) above the third bar of
each pattern indicates how the trade played out, which tells you at a glance a rough
ratio of winning to losing trades.
F SHARESCOPE: Three-Bar Inside Bar Pattern
For Johnan Prathap’s three-bar inside bar pattern system, which
is described in his article elsewhere in this issue, we’ve written a
script that colors the three-bar pattern either red for short trades
or green for long trades. In addition, we display a P (profit)
or L (loss) above the third bar of each pattern to indicate how
the trade played out. This helps you judge the suitability of the
technique when applying it to other instruments. Even over
several years’ time frame, the P and L markers will show you
at a glance a rough ratio of winning to losing trades. (See the
chart of natural gas in Figure 15.)
You can download this study from www.sharescript.co.uk.
—Tim Clarke
www.sharescope.co.uk
F VT TRADER: THREE-BAR INSIDE BAR PATTERN
TRADING SYSTEM
Our Traders’ Tip this month is based on “Three-Bar Inside
Bar Pattern” by Johnan Prathap in this issue. In the article,
Prathap describes a trading system for finding potential trad-
ing opportunities based on three-bar inside bar positive and
negative reversal patterns.
We’ll be offering Prathap’s three-bar inside bar pattern
trading system for download in our VT client forums at http://
forum.vtsystems.com along with hundreds of other precoded
and free trading systems. The specific trading rules used by
the trading system are explained in its Notes section. The
VT Trader instructions for creating the trading system can be
found at our website or at www.Traders.com.
An example of the trading system plotted on a VT Trader
chart is shown in Figure 16.
To learn more about VT Trader, please visit www.vtsystems.
com.
March 2011 • Technical Analysis of Stocks & Commodities • 69
 Figure 16: VT TRADER, Inside Bar Pattern TRADING SYSTEM. Here
is Johnan Prathap’s three-bar inside bar pattern trading system on a EUR/USD
one-hour candlestick chart in VT Trader.
—Chris Skidmore
Visual Trading Systems, LLC
212 871-1747, info@vtsystems.com
http://www.vtsystems.com
F Trading Blox: Three-Bar Inside Bar Pattern
In “Three-Bar Inside Patterns,” author Johnan Prathap presents
a trading pattern for both long and short signals on crude oil,
gold, and silver.
This can be implemented in Trading Blox. The system has
been slightly modified to set take-profit and stop-loss levels
based on volatility (as a percentage of Atr). The code can
be downloaded from http://www.automated-trading-system.
com/free-code/.
Figure 17 shows an example of the system used on crude
oil, gold, and silver from 1990 to 2010, with Atr being cal-
culated on 39 days; take-profit and stop-loss being at 1 Atr;
and risk per equity for each trade at 1%.
Note that there might be some issues when testing this sort
of system on daily data: If the take-profit and stop-loss prices
are both within the range of a single bar, it is not possible to
know which one occurs first. A pessimistic approach would
always pick the stop-loss, whereas an (over)optimistic ap-
proach would pick the take-profit.
—Jez Liberty, Au.Tra.Sy
jez@automated-trading-system.com
www.automated-trading-system.com
for Trading Blox
FIGURE 17: Trading Blox, Three-Bar Inside Bar PatterN. Here is a
sample equity curve for the system.
Find the complete collection of
Traders’ Tips and code at our website,
www.Traders.com.
Transaction duration is directly controlled by the exit con-
dition specifications, which are user controls in Prathap’s ex-
ample and also in this spreadsheet.
It is interesting to have the chart tab visible, tiled to the
bottom of the screen, with the computation and exit controls
tab tiled and visible in the upper half of the screen so that you
can see the chart while you change exit controls settings.
Model profitability is sensitive even to slight changes to
the exit controls, as reflected in the running account balance
column.
To download the spreadsheet, right-click on “Three-BarIn-
sideBarPattern.xls” and select “Save Target As.”
A sample chart output from the Excel spreadsheet is shown
in Figure 18.
—Ron McAllister
Excel and Vba Programmer
rpmac_xltt@sprynet.com
S&C

F MICROSOFT EXCEL: Three-Bar Inside Bar study

The logic presented in the sample code given in Johnan Prat-
hap’s article in this issue, “Three-Bar Inside Bar Pattern,” is
straightforward and requires nothing beyond the capabilities
of Excel cell formulas.
The entry signals for potential transactions are locked
down by Prathap’s three-bar setup logic and do not change
for different data sets. The question of which entry signals are
actually used for trades is completely controlled by whether a FIGURE 18: EXCEL, Three-Bar Inside Bar Pattern. Here is an example of
transaction is already in flight. the system implemented in Excel on Ford Motor Co.

70 • March 2011 • Technical Analysis of Stocks & Commodities

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 LETTERS TO S&C
Continued from page 9
is incorrect, and 2) expectancy=0.20.
Therefore, the optimum bet (loss) is
given by 0.20/(P/L) ratio= 20%/3=
6.7%, so that the author’s 40% bet is
six times the optimum bet of 6.7% —
little wonder a significant equity loss
occurs. This incorrect use of the profit
formula means all profit values (nine
rows, two sets of data) calculated in
Figure 1 are badly overstated and
should be corrected.
2) Downs is trying to establish the
tradeoff between profit and probabil-
ity of success (Pos). By “logic” he
scales from $100, Pos=25%, to $25,
Pos=100%. But in actual practice, this
is really a nonlinear relationship (his
is a simple proportional scaling) as it
can be calculated (for near Pos=100%,
like 99.9%) by using the author’s Por
program. At Loss=40% the Por=74%
for FB trading, as the author correctly
obtained (Pos=26%). If we now drop
the loss level from 40% to 1%, the
Por=0.001, and the Pos approaches
100% (actually, 99.9% — close
enough). But now the profit becomes:
(100*(1.03^0.3*0.99^0.7)^30)–
100=$5.65, a positive value of profit
(as the bet is below the optimum level of
6.7%). Clearly, there is a nonlinear rela-
tionship between profit and Pos, as the
loss (bet) level is changed and simple
“logic” scaling is not applicable.
It is also worth pointing out that with
two trading portfolios, the author’s “blow
out” calculation of 74%*9%=6.7%
is correct, but it should be clarified
by calling it P or (FF) to signify
the simultaneous failure of the two
equities. The “normal” Por for the two
trading equities, FB and RB, would be
given by: Por=0.5*(74%+9%)=41.5%,
signifying that the overall risk of failure
of the two lies in between the two, as
intuition would tell you. The author then
calculates PP (probability of success)
at 1–Por(FF)=1–0.07=93%, a correct
calculation, but its meaning seems
obscure, as it implies that 93% of the
time the two trading portfolios have
simultaneous success. I fail to see the
significance of that. Of more importance
+Letters 1103.indd 3
Q&A
is that the data of Figure 1 all pertains to Continued from page 53
FB betting by itself, independent of RB
However, we would also be paid to
betting, and thus no such PP calculation
leave our orders “resting” at various
(of FB and RB together) would be
market centers (like Arca). So we would
applicable anyway.
take where we paid the lowest price (with
Another error in math seems to be that
good liquidity) and rest where we got
the author mixes up equity and profit. For
paid the most. This is called “providing
very small values of loss (like 1%), the
liquidity.” It was pretty simple.
author’s equation is correct for equity:
Due to this competitiveness, some
Ending equity = 100* (1+Bet*E)^N=1
centers are now actually paying us to
00*(1+0.4*0.20)^30=$1,006, but profit
“take” their liquidity. We call these
is ending equity minus starting equity,
“inverted Ecns,” similar to inverted
which becomes $1,006–$100=$906.
Similarly, his $81 calculation is really exchange traded funds (Etfs). So by
programming our computers with smart
a loss of $-18.
order logic (or simply using hot keys, or
In conclusion, it appears that the
even more simply just picking a route
article has numerous errors in math and
and destination), we can now get paid
logic, and if the author agrees, he might
for orders that we had to pay for. In our
consider recalculating the various values
testing, it appears where we once paid
within the article.
extra for 90% of the orders, we now get
Tom Phillips
paid for more than 50%.
How much money are we talking
Author Walter Downs replies:
about? It varies, but as an example, our
As to your first enumerated point: Cal-
private Jvc trading group is estimated to
culating the percentages in a standard
save about $8,000 to $12,000 per year in
equation of returns, we see that the trader
fees. For instance, we pay 30 mils (0.003)
expects an average return of +8% per
to take liquidity on Arca, yet now we
trade. How then can he have a nega-
get paid 14 mils to take liquidity on the
tive expectation? It is obvious that your
Nasdaq Boston (Nsbq) exchange. Since
formula does not apply here.
our traders pay about about 30 to 50 mils
As to your second point: As I stated
per share, this difference could eliminate
in the article, this is not a mathematical
their overall commissions. Overall, most
equation, but rather a logical one. It is pos-
traders will see a major reduction.
sibly incorrect, but it was only mentioned
Take note: Be careful in your selection
as a possible “spit-ball” for a ballpark
of routing methods and designations.
figure of possible minimum return.
The sites that pay you to take liquidity
As to your aside regarding the “blow-
out” calculation: Your intuition is incor- may charge more to rest on that site.
For example, EdgeA pays us to take,
rect. We are not trading two portfolios.
yet EdgeX charges us to take, and vice
The probability of a FB and RB blowout
versa for resting.
can be calculated as done in the article,
As far as your broker pushing you
because there are distinct probabilities
to use market orders (likely by pricing
that the RB may never be challenged
incentives) goes, think it through, and
at all, once FB betting is occurring.
check other retail brokers; many charge
Therefore, the calculation of risk at
by the share versus the “all the shares
6.7% of total failure is accurate.
you want for $19.99” or whatever when
As to your comment regarding profit
using market orders. The average retail
calculation, I did include the original
order is less than 200 shares the last time
$100 in the final result, although it is
I checked, so it’s better to pay by the share
possible that the second figure should
versus by the ticket. And then you can
have been $181 rather than $81. Equity
use limit orders more freely.
was not “reduced” by $18.
Two points: Beware of “all the shares”
pricing for market orders, and by paying
per share (versus ticket), you can use
limit orders for better executions. Check
S&C with your broker. S&C
March 2011 • Technical Analysis of Stocks & Commodities • 71
1/23/11 3:47:08 PM
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trading services.
4. ChartPattern.com ChartPattern.com
We contacted companies that offer services to traders over
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the Internet as well as financial website developers and asked
them to fill out an online survey form to describe their Internet 6. ClearStation.com E*TRADE Group, Inc.
site. At our website in the Traders’ Resource area of Traders. 7. Working-Money.com Technical Analysis, Inc.
com, you’ll find a database of the data we collected. 8. Traders.com Advantage Technical Analysis, Inc.
The listed online services may offer charting, price quotes, 9. TFC Commodity Charts & Market Quotes TradingCharts.com, Inc.
and financial news and information; others offer a more spe- 10. www.SystemRank.com Attain Capital Mgmt.
cialized service that may be useful to investors and traders. These are the 10 online trading services viewed most often on the Traders’ Resource
Features may include stock screening, articles, discussion website, where each company is listed in order of clicks received. This is not an editorial
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72 • March 2011 • Technical Analysis of Stocks & Commodities

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76 • March 2011 • Technical Analysis of Stocks & Commodities

+1103 Books for Traders.indd 1 1/21/11 2:37:04 PM

 FUTURES LIQUIDITY

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

Trading Liquidity: Futures

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 0.8 3 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Mini S&P 500 Index CME 8.7 17.9 8 •••••••••••••••••••••••••••••••
30 Day Federal Funds CBT 0.0 0.1 1 ••••••••••••••••••••••••••
Crude Oil - Light Sweet NYM 5.5 8.4 4 ••••••••••••••••••••••••
Short Sterling LIFFE 0.1 1.4 6 •••••••••••••••••••••••
3 Yr. Cmmnwlth T-Bonds SFE 0.0 0.5 1 •••••••••••••••••••••
Natural Gas NYM 10.6 5.2 3 •••••••••••••••••••
DJ Euro Stoxx 50 Index EUREX 7.3 13.1 12 •••••••••••••••••
Brent Crude Oil IPE 4.3 7.1 4 ••••••••••••••
S&P 500 Index CME 8.7 17.9 2 ••••••••••••
Corn CBT 6.1 8.6 11 •••••••••••
Gold 100 troy oz NYM 4.4 8.8 4 ••••••••••
10 Yr Treasury Notes CBT 1.8 13.0 16 ••••••••
Soybeans 5000 bushels CBT 6.7 10.7 6 •••••••
Gas Oil ICE-EU 4.3 6.8 5 •••••••
5 Yr Treasury Notes CBT 1.1 8.2 17 ••••••
Xetra DAX-30 Stock Index EUREX 3.8 7.4 2 ••••••
FT-SE 100 Index LIFFE 5.0 17.4 10 •••••
10 Yr German Euro Bund EUREX 2.2 19.1 14 •••••
RBOB Gas NYM 5.2 7.4 4 ••••
Heating Oil #2 NYM 4.6 7.3 4 ••••
Sugar-World #11 CSCE 15.7 21.1 10 ••••
Mini Russell 2000 CME 5.6 10.8 6 •••• CBT Chicago Board of Trade
2 Yr Treasury Notes CBT 0.4 5.1 16 ••• CME Chicago Mercantile Exchange including
5 Yr German Euro BOBL EUREX 1.1 9.9 16 ••• the International Monetary Market (IMM)
2 Yr Euro Schatz EUREX 0.3 5.5 31 ••• CMX Commodity Exchange, Inc. CME Group
CAC-40 Stock Index MATIF 6.0 11.0 9 ••• EUREX European Exchange, Zurich & Frankfurt
Wheat - Soft Red CBT 8.5 13.7 11 •••
ICE-EU Intercontinental Exchange-Futures - Europe
Copper NYM 5.8 8.1 3 •••
ICE-US Intercontinental Exchange-Futures - US
Silver 5000 troy oz NYM 7.2 10.1 3 •••
KCBT Kansas City Board of Trade
US Treasury Bonds CBT 3.1 24.1 17 •••
Mini-Nasdaq 100 Index CME 7.5 13.3 10 ••• LIFFE London International Financial Futures and
Cotton #2 NYCE 7.7 9.5 4 •• Options Exchange
3 Mo EuroSwiss LIFFE 0.0 1.5 9 •• MATIF Marché à Terme International de France
Soybean Oil CBT 5.9 9.2 12 •• NYM New York Mercantile Exchange
Aust. Share Price Index SFE 8.8 21.8 8 • SFE Sydney Futures Exchange
Swiss Market Index EUREX 7.5 16.4 8 •
Euro Currency € CME 2.6 13.2 8 •
Coffee C CSCE 7.1 12.2 5 •
Long Gilt LIFFE 2.1 17.7 12 •
Japanese Yen ¥ CME 4.0 12.1 5 •
Cattle - Live CME 3.0 8.3 16 •
Wheat - Hard Red KCBT 5.7 8.8 9 •
Mexican Peso CME 4.5 4.9 7 • 1103
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).

March 2011 • Technical Analysis of Stocks & Commodities • 77

+1103 Futures Liquidity.indd 1 1/21/11 9:00:29 AM

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1103_classified.indd 78 1/21/11 8:24:03 AM

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At-the-Money (ATM) — An option
whose strike price is nearest the
current price of the underlying
deliverable.
Average Directional Movement Index
(ADX) — Indicator developed by J.
Welles Wilder to measure market
trend intensity.
Average True Range — A moving
average of the true range.
Backtesting — A strategy is tested
or optimized on historical data
and then the strategy is applied to
new data to see if the results are
consistent.
Bid and Ask — Highest price and
lowest price that an investor will
pay for a tradable.
Black-Scholes Option Pricing
Model — A model developed to
estimate the market value of option
contracts.
Bollinger Bands — Bollinger Bands
widen during increased volatility
and contract in decreased volatility,
and when broken, are an indication
that the trend is powerful and may
continue in that direction.
Breakaway Gap — When a tradable
exits a trading range by trading at
price levels that leave a price area
where no trading occurs on a bar
chart. Typically, these gaps appear
at the completion of important chart
formations.
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

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Breakout — The point when the market
price moves out of the trend channel.
Call Option — A contract that gives the
buyer of the option the right but not
the obligation to take delivery of the
underlying security at a specific price
within a certain time.
Candlestick Charts — A charting method,
originally from Japan, in which the high
and low are plotted as a single line and
are referred to as shadows. The price
range between the open and the close
is plotted as a narrow rectangle and is
referred to as the body. If the close is
above the open, the body is white. If
the close is below the open, the body
is black.
Carry Trade — A forex strategy in
which market participants purchase
currencies with high interest rates and
sell those with low rates.
Covered Call — Selling a call option while
holding an equivalent in the underlying
tradable.
Doji — A session in which the open
and close are the same (or almost the
same). Different varieties of doji lines
(such as a gravestone or long-legged
doji) depend on where the opening
and close are in relation to the entire
range. Doji lines are among the most
important individual candlestick lines.
They are also components of important
candlestick patterns.
March 2011 • Technical Analysis of STOCKS & COMMODITIES • 79
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Elliott Wave Theory — A pattern-
recognition technique published by
Ralph Nelson Elliott in 1939, which
holds that the stock market follows
a rhythm or pattern of five waves
up and three waves down to form a
complete cycle of eight waves. The
three waves down are referred to
as a “correction” of the preceding
five waves up. Fibonacci ratios are
applied to the price spans and price
targets may be projected.
Engulfing Pattern — In candlestick
terminology, a multiple candlestick
line pattern; a major reversal signal
with two opposing-color real
bodies making up the pattern. (Also
referred to as tsutsumi.)
Euro — European unit of currency,
of the European Union.
Evening Star Pattern — The bearish
counterpart of the morning star
pattern; a top reversal, it should
be acted on if it arises after an
uptrend.
Ex-Dividend Date — The day on
which shares are distributed to
shareholders; buyers who purchase
shares on or after this date are
not entitled to receive the current
dividend.
Continued on page 81
1/21/11 8:24:24 AM
 DOW Jones Indexes Introduces New
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Dow Jones Indexes announced that it
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system that will apply to all countries
covered in its major index families.
Countries included in the indexes will
be researched and assessed according to
a predefined framework built around the
needs of international portfolio investors
in three broad categories: market and reg-
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and operational efficiency. Assessments
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of classification changes, if any, will be
made in September of each year with a
minimum of six months’ notice.
www.djindexes.com
updated eSignal software offers
Customizable Interface
Interactive Data Corp. has released eS-
ignal 11, a redesign of its core software.
The new version features an improved
user-friendly interface that allows users
to focus on market analysis and trading.
It also offers a range of customization
options such as themes, object-based
charting, and more. Key features in-
clude multiple theme options, tabbed
www.interactivedata.com
80 • March 2011 • Technical Analysis of Stocks & Commodities
+1103 Trade news.indd 1
pages, support in multiple languages, Patsystems’ complete exchange solution
an integrated research window, trading when it launches early in 2012. This
integration, and other features. will include Patsystems’ trade matching
engine, clearing and settlement platform,
FXDD Launches FXDD OnDemand pretrade risk management module, and
Fxdd has launched Fxdd OnDemand, the front-end execution platform.
an interactive website featuring educa-
tion for foreign exchange traders at any
level, the latest in financial news and
forex market analysis. The site features
a learning center with educational tools
and videos for beginner, intermediate,
and advanced foreign exchange traders.
The videos highlight forex terminology,
trading concepts, technical analysis,
chart patterns, and the psychology of
trading. Forex traders will find financial
news, an economic calendar, trading
calculators, MetaTrader tools, currency www.vnx.com.vn
and market analysis, forex software,
trading signals, and more. CQG, JSE Connects to Expand
Global Market Data Coverage
Cqg, Inc., and the Johannesburg Stock
Exchange (Jse) announced that they had
made Jse market data available to Cqg
customers. Jse is the most recent addition
to Cqg’s list of market data sources and
the first exchange connection in Africa.
Real-time and historical Jse market data
is available via Cqg Integrated Client and
CqgMobile. Cqg’s consolidated market
datafeed is delivered via Internet, private
line, or custom-engineered solutions.
www.fxdd.com
Vietnam Commodity Exchange
chooses Patsystems
Patsystems has been selected as the
key technology provider for the newly
established Vietnam Commodity Ex-
change (Vne). Vne will initially trade
in steel, rubber, and coffee, and provide
an additional financial tool for producers www.cqg.com
and traders to protect themselves against
price fluctuation risks. Vne will utilize
www.patsystems.com www.jse.co.za
1/20/11 4:33:52 PM
 trend change software
based on wyckoff work
TriggerPoint Trading software helps in-
dividuals identify market trends through
springs and upthrusts, and users can trade
faster than by using the indicators as a
guide, the developer said. The software,
which is based on the work of chartist
Richard D. Wyckoff, decreases the bar-
riers that individuals encounter when
trying to understand how the market
works. The goal is to help traders make
better and easier trading decisions by
letting the color-coded indicators do the
work. The software identifies two trade
setups for identifying when the market/
trading instrument has hit support and
can rally up (buying opportunity), and
when the market/trading instrument has
hit resistance and about to drop (selling
or shorting opportunity).
www.triggerpointtrading.com
S&C
+1103 Trade news.indd 2
Continued from page 79
Exchange-Traded Funds (ETFs) —
Collections of stocks that are bought
and sold as a package on an exchange,
principally the American Stock
Exchange (AMEX).
Exponential Moving Average — A
variation of the moving average, the
EMA places more weight on the most
recent closing price.
Fade — Selling a rising price or buying
a falling price.
Fair Value — Theoretical prices generated
by an option pricing model.
Fibonacci Ratio — The ratio between
any two successive numbers in the
Fibonacci sequence. The ratio of any
number to the next higher number is
approximately 0.618, and to the lower
number approximately 1.618, after
the first four numbers of the series.
The three important ratios the series
provides are 0.618, 1.0 and 1.618.
Fisher Transform (FT) — Defines
major price reversals based on the
assumption that prices do not have a
bell-shaped curve, but applying the
FT could nearly make one.
Gann Theory — Various analytical
techniques based on price, time,
and pattern to project changes in the
direction of the markets.
Gap — A day in which the daily range
is completely above or below the
previous day’s daily range.
In-the-Money (ITM) — A call option
whose strike price is lower than the
stock or future’s price, or a put option
whose strike price is higher than the
underlying stock or future’s price.
Long — Establishing ownership of the
responsibilities of a buyer of a tradable;
holding securities in anticipation of a
price increase in that security.
Money Flow — Technical indicators that
incorporate volume and price action
to measure buying or selling pressure.
Calculated by multiplying the day’s
volume by its average price.
Moving Average — A mathematical
procedure to smooth or eliminate
the data fluctuations and to assist in
determining when to buy and sell.
Moving averages emphasize the
direction of a trend, confirm trend
March 2011
reversals, and smooth out price and
volume fluctuations or “noise” that can
confuse interpretation of the market.
Moving Average Crossovers — The point
where various moving average lines
intersect or the price line on a moving
average price bar chart. Technicians
use crossovers to signal price-based
buy and sell opportunities.
MovingAverageConvergence/Divergence
(MACD) — ­The crossing of two
exponentially smoothed moving
averages plotted above and below a
zero line. The crossover, movement
through the zero line, and divergences
generate buy and sell signals.
Near-the-Money — An option with a
strike price close to the current price
of the underlying tradable.
Out-of-the-Money (OTM) — A call option
whose exercise (strike) price is above the
current market price of the underlying
security or futures contract.
Pairs Trading — Taking a long position
and a short position on two stocks in the
same sector, creating a hedge.
Premium — The price a buyer pays to an
option writer for granting an option
contract.
Put Option — A contract to sell a specified
amount of a tradable at an agreed time
at the stated exercise price.
Relative Strength Index (RSI) — An
indicator invented by J. Welles Wilder
and used to ascertain overbought/
oversold and divergent situations.
S&P Emini — Electronically traded,
smaller-sized ($50 times the S&P
500) contracts of the Standard &
Poor’s 500.
Stochastics Oscillator — An overbought/
oversold indicator that compares
today’s price to a preset window of
high and low prices. These data are
then transformed into a range between
zero and 100 and then smoothed.
Volatility Index — A widely used measure
of market risk. Sometimes referred to
as the “investor fear gauge.”
Zigzag — In a bull market, an Elliott
three-wave pattern that subdivides
into a 5-3-5 pattern with the top of
wave B lower than the start of wave
A. In a bear market, this pattern will
be inverted.
S&C
• Technical Analysis of Stocks & Commodities • 81
1/26/11 9:55:04 AM
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