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AN ADAPTIVE MA FOR
SWING TRADING
Responsive, smooth, robust 8

EVERY LITTLE BIT HELPS

Averaging the open and close
to reduce noise 14

CAN VOLUME PREDICT

PRICE?
Volume down, price...up? 16

TRADING CONTRACTS
FOR DIFFERENCES
An instrument for traders in
some non-US countries 22

INTERVIEW
Charles Kirk 26

CANNABIS’S PROMISING
FUTURE LIES AHEAD
Or does it? 42

MARCH 2023
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 CONTENTS MARCH 2023, VOLUME 41 NUMBER 3

6 The Savvy Technician 34 Market Rap

by Stella Osoba, CMT, Esq. by Emilio Tomasini
The Traders’ MagazineTM Recognizing and applying technical “Unserious” thoughts on serious
chart patterns to trading. topics in finance.
EDITORIAL FEATURE ARTICLE 36 Futures For You
editor@traders.com
8 An Adaptive Moving Average by Carley Garner
Editor in Chief Jack K. Hutson
For Swing Trading Here’s how the futures market
Production Manager Karen E. Wasserman
by Scott Cong, PhD really works.
Graphic Designer Wayne Shaw
Here, we introduce a new adaptive
Webmaster Han J. Kim
moving average that is responsive, 37 Swing Trading 90-Day
Contributing Editors John Ehlers,
smooth, and robust. 25-SMA Pivots
Anthony W. Warren, PhD.
by Ken Calhoun
Contributing Writers Thomas Bulkowski, Martin
Pring, Barbara Star, Markos Katsanos, Leslie N.
14 Every Little Bit Helps TIPS Here is a way to identify setups to
Masonson, Karl Montevirgen by John F. Ehlers buy the pivot as price action moves
It’s simple but makes a noticeable up following a downtrend, using
improvement: You can reduce noise a 25-day simple moving average
OFFICE OF THE PUBLISHER in the data by using an average of on a 90-day candlestick chart.
Publisher Jack K. Hutson the open and close instead of using The technique is well-suited to a
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 37 Years in the Making

metastock.com/whats-new

This is neither a solicitation to buy or sell any type of financial instruments, nor intended as investment recommendations. All investment trading involves multiple substantial risks
of monetary loss. Don’t trade with money you can’t afford to lose. Trading is not suitable for everyone. Past performance, whether indicated by actual or hypothetical results or
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SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS OR TESTIMONIALS AND THE
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 The Savvy Technician
CHARTING THE MARKETS
Stella Osoba, CMT, Esq., is an attorney, trader, and financial writer in New York,
NY, and is also the Senior Editor, Trading and Investing, for Investopedia.com. Her
work in financial litigation involving regulatory bodies and large multinational
corporations led to an interest in the financial markets, then technical analysis
and the psychological aspects of market behavior. She earned a CMT charter
in 2013 and was a director-at-large on the board of the CMT Association for
four years. This column will focus on recognizing and applying technical chart
patterns to trading with flexibility and astuteness for better decision-making in
trading. She can be reached at stellaosoba@gmail.com. Stella Osoba

BUY WHEN STOCKS ARE CHEAP
“When investing, pessimism
is your friend, euphoria is
your enemy.”
—Warren Buffett
In bear markets, stocks typically
are “on sale.” The deeper the rout,
the cheaper the stocks. When we
enter deeper into bear market ter-
ritory, no one wants to own stocks.
Everything looks bad. Stock prices
fall faster and even the stoic become
pessimists. People look for alternative
asset classes to park their funds. They
sell stocks, resigning themselves
to booking losses. They search for
alternative places to park their hard-
earned funds. Maybe that’s gold, or
bonds, or even certificates of deposits
(CDs)—they are yielding 3%, maybe
4%. Great! The stock market is trash.
So “sell everything.”
According to a Bank of America
study, 73% of younger adults—those
aged between 21–42 years—believe
that it is not possible to make above-
average returns solely on traditional
stocks and bonds. So they are
turning to alternative investments
like cryptocurrencies and real estate.
Pessimism is in the air. Stocks are
falling, interest rates are rising. On
the whole, the media has nothing good
to say about stocks in particular and
the stock market in general. So why
buy stocks?
6 • March 2023 • Technical Analysis of Stocks & Commodities
How we are wired
We extrapolate what is happening
now and project it into the future.
When stocks are falling, we believe
they will fall forever. When they are
rising, we are gripped by euphoria
and believe they will rise to the sky
and beyond.
When will stocks be cheap
enough?
No one knows when stocks will have
bottomed out. Sometimes there are
signs of accumulation, which means
that stocks seem to find support at
It pays to step back
and use longer-term
charts to get a better
perspective and see
what is truly happening.
certain levels and buying appears,
preventing further declines. This
stage of the path of the individual
stock can last for months or even
years. It is also possible for the stock
to dip below the support level. But if
it truly is accumulation, it will often
rise to get back to the prior established
area of support. The thing is, while
this process is taking place, it is often
difficult to spot because we will usu-
ally be too close to price action. This
is often the time when it pays to step
back and use longer-term charts to get
a better perspective and see what is
truly happening.
A case study:
Coco-Cola (KO)
On October 19, 1987, the stock mar-
ket crashed. On that day, which has
become known as Black Monday, the
Dow Jones Industrial Average (DJIA)
plunged, losing 22.61% of its value. It
was a result of this precipitous drop
that circuit breakers were introduced
to prevent anything like that from
happening again. Even though it felt
at the time that the world was ending,
the ensuing bear market only lasted
two months, from August 1987 until
October 1987.
But during that bear market, there
was blood in the streets. Panic was
widespread and an economic crisis
ensued. It was quite likely that those
who had borne the brunt of the losses
over the prior two months swore off
stocks and the stock market for a
generation or more.
The following year, 1988, green
shoots were sprouting for those who
could see them, as the bear market
had receded. It was in that year that
Warren Buffett bought 14,172,500
shares of the Coca-Cola Company
(KO), for $592,540,000 (see Figure
1).
Why pessimism is your
friend
The general market rout pulled down
all stocks in all companies. When
there is a bear market, most stocks are
falling, even those in strong compa-
nies. Some stocks will fall more than
 The Savvy Technician
others, but stocks will fall. The thing
is not to be so focused on price that
you lose sight of value. The reason
why Buffett said “pessimism is your
friend” is because he is aware of the
buying opportunities that market
pessimism presents.

Capitulation
In the stock market, capitulation is
the stage reached by market partici-
pants where they give up hope. Up
until that point, they had held on in

the hopes of recouping losses. But as
the bear market deepens and losses
accelerate, they finally get to the stage
of extreme pessimism. Nothing is
working, and the rout feels like it will
last forever. There is no point in hold-
ing on to watch any more declines,
any more losses. Declines feel like
they could go to 100%. Remember, we
are wired to feel that way. Emotions
control. There is no sign of respite.
The media is at peak pessimism. The
wisest thing to do seems to be to sell.
Sell and accept the loss.
“Too much of a good thing
can be wonderful.”
—Mae West
In his annual letter to shareholders
in 1988, Warren Buffett repeated
Mae West’s famous line to illustrate
how he participates in companies he
understands and likes. And when he
takes positions in companies he likes,
he takes significant positions. Buffet
STOCKCHARTS.COM
FIGURE 1: COCA-COLA COMPANY (KO). In 1988, Warren Buffett bought 14,172,500 shares of Coca-Cola
Company (KO) for $592,540,000.
ing knowledgeable-sounding noises
Alternative on the airwaves, no one truly knows
what the market will do next. The
investments are fine, only thing we can be sure of is that
but the same principles as long as we have an economy and
that have governed that economy is fueled by business,
economic growth and then those businesses will continue
stock market rises and to grow. That being the case, there is
nothing new under the sun. Alterna-
falls remains. tive investments are fine, but the same
principles that have governed eco-
continued to buy KO stock into 1989 nomic growth and stock market rises
and he still holds the shares today. and falls remains. The bear market
It is said that he has not yet sold a will eventually end. Maybe not today
single share. or tomorrow, but at some point in the
future, the bear market will be over.
Conclusion Would you have positioned yourself
As stock market participants, it helps for gains, or will you still be seeking
to get some perspective. Even though out the next new thing?
there is always some confident-
sounding stock market “expert” mak-

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March 2023 • Technical Analysis of Stocks & Commodities • 7

 NEW TECHNIQUES

Result Vs. Effort

An Adaptive Moving Average

For Swing Trading
Here, we introduce a new adaptive moving average desirable that MAs change with market conditions to
that is responsive, smooth, and robust. cater to responsiveness and in the meantime minimize

In
whipsaws. Perry Kaufman’s adaptive moving average,
this article, I will propose a new adaptive first described in his 1995 book Smarter Trading, is
moving average (AMA). It adjusts its pa- a great example of how an AMA can self-adjust to
rameters automatically according to the adapt to changing environments.
volatility of market, tracking price closely This article presents a new scheme for an adap-
in trending movement, staying flat in congestion areas. tive moving average that is responsive, smooth, and
The new AMA is well suited for swing trading. robust.
This work is part of the endeavor to quantify the
innovative trading method developed by the late great Principles of moving averages
Chinese trader known as 缠中说禅 (meaning “zen Adaptive moving averages can be calculated progres-
in tangling”). The significance of his contribution is sively by:
comparable to that of candlestick versus bar chart.
AMA = a * Close + (1 − a) * AMA(1) Eq. 1
Introduction
Technical indicators provide traders with one or more where:
of the following insights about the price movement: a = Smoothing factor between 0 and 1 and to be
direction, momentum, and likely boundary. determined by the lookback period
Moving averages (MAs) are a category of indicators
that can help with all three of these attributes. One of Close = Close of the bar
MAs’ functions is to filter out the noise and reveal the AMA(1) = Previous bar’s AMA value
underlying trend. The other is to forecast the future
move and provide support/resistance. However, MAs Kaufman’s technique is to adjust the average’s smooth-
also have one distinct drawback: they introduce lag. ing factor according to the ratio of market direction
Many versions of moving averages have been de- to volatility. He uses a variable he calls the efficiency
veloped aiming to achieve fast response, reduce lag, ratio (ER):
and filter out noise as much as possible. Their perfor-
NITCHAKUL SANGPETCHARAKUN/SHUTTERSTOCK
TOMASZ MAKOWSKI/ PETERSCHREIBER.MEDIA/

mances are varied with the algorithm of the construc- Efficiency ratio = Direction / Volatility Eq. 2
tion and lookback period. To fit their style of trading,
traders make a compromise between responsiveness where:
and whipsaws when choosing a particular MA and Direction: Close – Close(n)
lookback period. Volatility: Sum (absolute value(close −
The market is always changing. Using a fixed close(1)), n).
lookback period is likely to have limited success. It is

by Scott Cong, PhD

March 2023 • Technical Analysis of Stocks & Commodities • 9
FIGURE 1: TWO SCHEMES FOR ADAPTIVE MOVING AVERAGES (AMA). This demonstrates both AMA schemes in equations 5 and 6 for the Australian stock market
index (XJO) from April 2022 to early December 2022. The price movement is divided into eight sections. The lookback period is 30. AMAs have difficulty reversing after
a sharp move in the opposite direction, going flat at such times as well as in congestion periods (D and G).
More details of Kaufman’s work can be found in his book
mentioned above and listed in “Further reading” at end.
New adaptive moving average
It is clear from equation 1 that the performance of AMA
depends on how the smoothing factor is calculated. Kauf-
man’s efficiency ratio inspires me to think of gauging
efficiency from the point of view of result versus effort:
RE = Result / Effort Eq. 3
The question is how to define result and effort logically
and sensibly.
Effort
Price travels from where it was n periods ago to the cur-
rent location. During this journey, it has been moving up
and down from bar to bar. Instead of calling this move-
ment “noise,” we can think it as “effort” because bulls
and bears battle at each bar to eventually reach where it
is now. As the movement is continuous, each bar’s range
The adaptive moving average
I propose here shows that it is
responsive to price changes,
even in a fast-moving market.
10 • March 2023 • Technical Analysis of Stocks & Commodities
can be determined by Wilder’s true range (TR). Summa-
rizing individual true ranges over n periods will get the
total range, hence:
Effort = Summation (TR, n) Eq. 4
Result
Normally, the displacement in price between now and
the beginning of the observation period n is regarded as
result (here we are only interested in the absolute value
to ensure a is always no less than zero):
Result = Absolute value of close −
Close(n periods ago) Eq. 5
This definition only considers the outcome and ignores the
details inside this process. What if we take it the other way
around and define the result based on the process instead
of the end change? Would it make sense?
For the period concerned, the price moves from begin-
ning price O to end price C. The movement reached the
highest value at H and lowest value L during the process. H
was achieved by the bulls and L by the bears. Bulls always
try to go higher and bears want to go lower. Either way,
they have the same objective: to expand the range. O and
C are just two viewing points in the battle that happen to
be the beginning and end of the observing window.
Therefore, it is also sensible to define result as the
maximum range of the move:
FIGURE 2: AMA WITH EMA AND SMA OF THE SAME PERIOD. Compare the adaptive moving average against a simple moving average (SMA) and an exponential
moving average (EMA) of the same period. The new AMA is more responsive than either of them in trending conditions.
Result = H
 ighest price of n period −
Lowest price of n period Eq. 6
Substituting either equation 5 or 6 for formula 3, the
smoothing factor can be calculated with only one line
of code:
a = Result / Sum(TR, n) Eq. 7
As the price range is always no greater than the total
journey, a is ensured to be between 0 and 1, which is a
must for equation 1 to function.
Discussions
If the price is on a single-sided trendy move, either up or
down, the maximum range is almost the same as to the
summation of individual bars’ ranges, a would be near
1 and 1−a near zero. From equation 1, the new AMA
value will be mainly determined by the current price.
Therefore, the AMA curve would track price closely in
trending situations.
In congestion areas where the range is small, a is small
too. From equation 1, the current price would contribute
little to the new AMA value. The AMA would be near
its previous level. The curve is relatively flat in these
situations.
These behaviors are exactly how we expect the AMA
to perform.
Demonstrations
Both AMA schemes in equations 5 and 6 are shown in
Figure 1 for the Australian stock market index (XJO) from
April 2022 to early December 2022.
The price movement is divided into eight sections. The
lookback period is 30.
During fast moving periods A, C, E and H, AMAs track
the price movement closely without whipsaw. At F, the price
displacement method tried to keep up with the retracement
whereas the maximum range method maintained its direc-
tion. Section B is a retracement from A’s fast down move.
AMAs clearly have difficulty reversing after a sharp move
in the opposite direction. They go flat during this period
and also in congestion periods D and G.
It is interesting to see that in some sections, the price
displacement scheme seems to perform better, while at
other times, the maximum range method works better.
Overall, the maximum range method has less fluctuations
It adjusts its parameters
automatically according to the
volatility of market, tracking price
closely in trending movement,
staying flat in congestion areas.
March 2023 • Technical Analysis of Stocks & Commodities • 11
FIGURE 3: AMA WITH 10- AND 20-PERIOD EMAS. Compare the AMA with two shorter-period EMAs of 10 and 20 periods. During fast-moving periods, the AMA
responds quicker than the 10-period EMA, and in congestion periods, it is slower than the 20-period EMA, reducing whipsaws suffered by most short-period moving
averages.

FIGURE 4: AMA OF DIFFERENT PERIODS. Compare an AMA of three different periods, 20, 30, and 40. During trending periods, the three AMAs all track the price
closely. During congestion periods, they separate a little. The AMA is not overly sensitive to the choice of parameters in a range.

and stays with the price tighter. This may be slightly advan-
tageous for trading system designers. However, it suffers
a bit more whipsaws. The price displacement scheme will
be used in later examples.
Figure 2 shows the comparison of the AMA against a
simple moving average (SMA) and an exponential mov-
12 • March 2023 • Technical Analysis of Stocks & Commodities
ing average (EMA) of the same period. Clearly, the new
AMA is more responsive than both of them in trending
conditions. It captures more trendy moves than the other
two MAs with less whipsaws, making it a better choice for
Continued on page 20
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 Averaging The Open And Close To Reduce Noise
Every Little Bit Helps
It’s simple but makes a noticeable improvement: You
can reduce noise in the data by using an average of the
open and close instead of using only the closing price.
Here’s how to do it.
by John F. Ehlers
M
arket data are sampled data. We techni-
cians usually use the closing price of a bar
to represent the sampled price for that bar.
Sometimes the average of the high, low,
and close is used to represent the sampled
data for that bar. In this article, I will show
you a simple trick that makes a small but measurable
improvement in your sample.
Reducing noise
Using sampled data, the shortest wavelength that can
be used has a wavelength of two bars. This is called the
Nyquist frequency. The digital signal processing (DSP)
trick reduces noise near the Nyquist frequency, but oth-
erwise leaves the signal unchanged in the information
band of the signal spectrum.
14 • March 2023 • Technical Analysis of Stocks & Commodities
The trick is to note that the opening price of a bar is
virtually synonymous with the closing price of the pre-
vious bar, particularly if we are dealing with intraday
data. So, averaging the opening price with the closing
price of the same bar is almost the same thing as taking
a two-bar average of the closes of continuous data. That
being the case, we can achieve a 6 dB reduction in noise
at Nyquist by using an average of the open and close,
compared to using only closing price as our sample.
An additional advantage is that the average provides a
theoretical half-bar lead along the time axis.
In fact, measured power near Nyquist using the average
of the open and the close is nearly 6 dB less than using
the close alone. Difference of the measured power in the
signal band of the spectrum (for example, at a 30-bar
period) using the two sampling techniques is impercep-
tible. Measured power reduction near Nyquist using the
average of the high, low, and close is only on the order
ALPHASPIRIT.IT/SHUTTERSTOCK
of 1 dB, making it hardly worth the effort.
Noise reduction near Nyquist is irrelevant if you are
using an indicator with a zero in its transfer function at
Nyquist or if you have a well-designed smoothing filter
such as a Hann windowed finite impulse response (FIR)
 DIGITAL SIGNAL PROCESSING
FIGURE 1: SAMPLED DATA: AVERAGING THE OPEN AND CLOSE. The example here is a 14-bar RSI on 15-minute bars of emini S&P futures data (ES). Shown
in red is the sampling using closing prices. Shown in blue is the sampling using the average of the open and close. You can see that averaging the open and close
provides a smoother indicator. The blue line is noticeably smoother than the red line with regard to the high-frequency wiggle.
filter. This is because these filters already suppress signals
near Nyquist. On the other hand, commonly used indica-
tors such as the RSI, MACD, and stochastic do not have
zeros at Nyquist in their transfer responses.
Every little bit
Figure 1 shows a comparison of using a 14-bar RSI on
15-minute bars of the emini S&P futures data. Sampling
using closing prices is shown in red. Sampling using
the average of the open and close is shown in blue. The
blue line in noticeably smoother with regard to the high-
frequency wiggle, relative to the red line.
You can reproduce this test using the EasyLanguage
code in the sidebar, “Code To Test Data Sampling, In
EasyLanguage.”
CODE TO TEST DATA SAMPLING, IN EASYLANGUAGE
// Data Sampling Test
// (c) John Ehlers 2022
Vars:
CTest(0),
OCTest(0);
CTest = RSI(close, 14);
OCTest = RSI((Open + close) / 2, 14);
Plot1(CTest, "", red, 4, 4);
Plot3(OCTest, "", blue, 4, 4);
TRADESTATION
John Ehlers, a Contributing Editor to Stocks & Com-
modities, is a pioneer in the use of cycles and DSP
(digital signal processing) technical analysis. After four
decades of dedication to advancing the field of digital
signal processing and offering products and services
to traders, he is retiring from his company, MESA
Software. He can be reached through his website at
MESAsoftware.com.
The code given in this article is available in the Article
Code section of our website, Traders.com.
See our Traders’ Tips section beginning on page 50 for
implementation of John Ehlers’ technique in various
technical analysis programs and trading platforms. Ac-
companying program code can be found in the Traders’
Tips area at Traders.com.
Further reading
Ehlers, John [2021]. “Windowing,” Technical Analysis of
Stocks & Commodities, Volume 39: September.
‡TradeStation
‡See Editorial Resource Index
March 2023 • Technical Analysis of Stocks & Commodities • 15
 Volume Down, Price...Up?
Can Volume Predict Price?
What does higher or lower volume today suggest about
tomorrow’s price? Here’s a test to find out.
by Perry J. Kaufman
V
olume is a frustrating piece of data. We all
believe that it’s important, yet no one has
shown a robust use for it. Chartists claim that
volume confirms a trend, but it’s a matter of
seeing an erratic increase in volume as prices
settle in one direction. Another rule is that
decreasing volume anticipates a trend reversal. While
that seems logical, I have never been able to show that
it’s true or timely.
In 2016, I wrote an article about bottom fishing, which
showed that volume (or volatility) could point to rever-
sals after a sharp drop in price (see “Further reading” at
end). It is the one use of volume that seems to work—a
volume spike combined with a steep sell-off triggers a
reversal.
I have written code that tests for higher or lower
volume than the previous day’s volume in the sidebar,
“Code For Higher Or Lower Volume, In EasyLanguage.”
16 • March 2023 • Technical Analysis of Stocks & Commodities
The code also provides a trading system that buys at
the close when today’s volume is less than yesterday’s
volume and exits when today’s volume is higher than
yesterday’s volume.
In Anatoly Schmidt’s 2011 book Financial Markets
and Trading, there was a reference to volume predicting
price. Having gone back over the book, I can’t find where
it was mentioned, but it stuck in my mind. Can volume
actually predict price?
A simple test
Some testing may help us find out. We can accumulate
the change in price, or returns, whenever the daily
volume increases or decreases. At the same time, we
can accumulate the returns when volatility increases or
decreases. Why not do both at the same time?
But we know that volume is erratic, so we can also
try using a moving average of volume and accumulate
the returns while the average is rising or falling. My
GSIGN76/SHUTTERSTOCK
inclination is that the smoothing nature of the moving
average might lead to more consistency. You will find a
program for this also in the sidebar.
We will look at the S&P ETF (SPY) also the Nasdaq
 TECHNICAL ANALYSIS

TRADESTATION
FIGURE 1: TRADE SIGNALS BASED ON VOLUME (SPY). This chart shows the long-only trades signaled (1,786 trades signaled over a span of about 23 years)
when today’s volume is less than yesterday’s volume. The data used in this example is SPY data from 2000 through November 2022. Annualized volatility is in the
center panel and volume is at the bottom. 52% of the signals would have been profitable. The average holding period is 2.61 days.

QQQ, Apple (AAPL), and Bank

of America (BAC), hoping that we
can find some consistency in the
results. These were not selected
as the best; they are simply what
I thought would be a reasonable
sample. Data started at 2000
through November 2022.

A picture of the trades

There will be a lot of trades and
the individual profits and losses
will be small. In Figure 1, showing
the results of SPY, there are 1,786
trades over about 23 years, or 5,796
days. 52% of them are profitable. FIGURE 2: ACCUMULATIVE RETURNS. This graph shows the theoretical returns that would have resulted
The average holding period is from taking all the trades in the example system from Figure 1, based on SPY data, long-only, over the same
timespan.
2.61 days. When volume declined,
average profits were 21.6 basis points; when volume between the moves in volume and volatility.
rose, losses were −17.0 basis points. Each trade invested The results of using a 60-day moving average of volume,
$10,000. Figure 2 shows the history of returns. recording the returns when the moving average was up or
While the returns are not large, they are consistent. down, showed similar but weaker results. The down days
You might think that only taking long positions would
always be profitable because prices have a tendency to
move higher, but days with higher volume showed absolute
losses, which would be hard to explain. It is the one use of volume that
seems to work: a volume spike
Other test results combined with a steep sell-off
In the same SPY test, I found that the correlation between triggers a reversal.
up and down volume moves compared to volatility was
only 0.12, essentially saying there is no relationship
March 2023 • Technical Analysis of Stocks & Commodities • 17
 CODE FOR HIGHER OR LOWER VOLUME, IN EASYLANGUAGE
This program is designed to test whether volume pre-
dicts price changes by looking for up and down vol-
ume changes and recording accumulated returns for
the same instrument (here, the SPY is used).
The code includes a trading system that buys at
the next open when today’s volume is less than yester-
// PJK Volume Predicts Price
// Copyright 2022-2023, P.J. Kaufman. All rights
// reserved.
// Results for SPY show that lower volume has
// positive returns
// and higher volume has negative returns
inputs: avgperiod(50), corrperiod(20), useaverage(false),
enteronclose(true),
longonly(true), printfile(true);
vars: returns(0), corr(0), avgvolume(0), avgvolatility(0),
vlty(0), volvltycorr(0),
higherdays(0), lowerdays(0), sumcorr(0), nlower-
vol(0), nhighervol(0),
nloweravgvol(0), nhigheravgvol(0), sumlowervol(0),
sumhighervol(0),
sumlowervlty(0), sumhighervlty(0), sumlower-
avgvol(0), sumhigheravgvol(0),
chgvolume(0), chgvlty(0), adate(" ");
vars: avgcorr(0), avglowervol(0), avghighervol(0),
avgloweravgvol(0),
avghigheravgvol(0), avglowervlty(0), avghigherv-
lty(0);
vars: size(0), equity(0), PL(0), PLlong(0), PLshort(0),
investment(10000);
arrays: highervol[25000](0), lowervol[25000](0), highv-
lty[25000](0),
lowevlty[25000](0);
chgvolume = 0;
if volume[1] <> 0 then chgvolume = volume/volume[1]
- 1;
avgvolume = average(volume,avgperiod);
returns = close/close[1] - 1;
vlty = stddev(returns,avgperiod)*squareroot(252);
if vlty[1] <> 0 then chgvlty = vlty/vlty[1] - 1;
corr = correlation(chgvolume,chgvlty,corrperiod);
sumcorr = sumcorr + corr;
// save return based on higher-lower volume
if volume < volume[1] then begin
nlowervol = nlowervol + 1;
sumlowervol = sumlowervol + returns;
sumlowervlty = sumlowervlty + vlty;
end
else begin
nhighervol = nhighervol + 1;
sumhighervol = sumhighervol + returns;
sumhighervlty = sumhighervlty + vlty;
end;
18 • March 2023 • Technical Analysis of Stocks & Commodities
day’s volume and exits when today’s volume is higher
than yesterday’s volume.
The code also includes a segment to smooth vol-
ume using a moving average and accumulating the
returns while the average is rising or falling.
// save return based on higher-lower average volume
if avgvolume < avgvolume[1] then begin
nloweravgvol = nloweravgvol + 1;
sumloweravgvol = sumloweravgvol + returns;
sumlowervlty = sumlowervlty + vlty;
end
else begin
nhigheravgvol = nhigheravgvol + 1;
sumhigheravgvol = sumhigheravgvol + returns;
sumhighervlty = sumhighervlty + vlty;
end;
// strategy: buy on close with lower volume, exit on
// higher volume
if (useaverage = false and volume < volume[1]) or
(useaverage and avgvolume < avgvolume[1]) then
begin
size = investment/close;
if enteronclose then begin
buy to cover all shares this bar on close;
buy size shares this bar on close;
end
else begin
buy to cover all shares next bar on open;
buy size shares next bar on open;
end;
end
else if (useaverage = false and volume > volume[1])
or
(useaverage and avgvolume > avgvolume[1])
then begin
if enteronclose then
sell all shares this bar on close
else sell all shares next bar on open;
if longonly = false then begin
size = investment/close;
if enteronclose then
sell short size shares this bar on close
else sell short size shares next bar on
open;
end;
end;
equity = netprofit + openpositionprofit;
PL = equity - equity[1];
{ dailyreturn = 0;
if investment <> 0 then dailyreturn = PL/investment;
NAV = NAV*(1 + dailyreturn);
peak = maxlist(peak,NAV);
drawdown = NAV/peak - 1;
maxdd = minlist(maxdd,drawdown); }
if marketposition > 0 then
 PLlong = PLlong + PL
else if marketposition < 0 then
PLshort = PLshort + PL;
if printfile then begin
once begin
print(file("c:\tradestation\Volume_volatility-price.
csv"), "Date,Close,Return,Volume,Vlty, "ChgVol,ChgVlty,Corr
,Nlowvol,Nhighvol,",
"NlowAvg,NhighAvg,Position,TodayPL,TotalPL");
end;
adate = ELdatetostring(date);
print(file("c:\tradestation\Volume_volatility-price.
csv"),adate, ",", close:6:4, ",", returns:4:5, ",",
volume:10:0, ",", vlty:8:4, ",", chgvolume:6:4, ",", chgv-
lty:6:4, ",", corr:4:4, ",",
nlowervol:6:0, ",",nhighervol:6:0, ",", nloweravgvol:6:0,
",", nhigheravgvol:6:0, ",",
currentcontracts:8:0, ",", PL:8:0, ",", equity:8:0);
if lastbaronchart then begin
avgcorr = sumcorr/currentbar;
avglowervol = sumlowervol/nlowervol;
FIGURE 3: HOW DOES SMOOTHING THE VOLUME DATA AFFECT RESULTS?
If volume is smoothed with a moving average, can the results from the trading
system based on up or down volume be made more consistent? In this test using
four securities, volume was smoothed and returns were accumulated based on
whether the average volume is rising or falling. This table shows a summary
of the results in basis points, per trade, from 2000 through November 2022. In
this test, smoothing the volume did not improve results.
for the moving average had returns of 11.5 basis points
while the up days had a loss of 6 basis points. The use of
a 60-day moving average did not improve results.
When testing the same method using up-down volatility
instead of volume, the returns were positive and nearly
identical for days with higher or lower volatility.
Summary of results
The table in Figure 3 is a summary of the four markets
tested. Each shows that days when the volume declined
had positive returns while days when volume rallied had
negative or lower returns. I have always found that index
markets are a better measure of general tendencies, even
avghighervol = sumhighervol/nhighervol;
avgloweravgvol = sumloweravgvol/nloweravgvol;
avghigheravgvol = sumhigheravgvol/nhigheravgvol;
avglowervlty = sumlowervlty/nlowervol;
avghighervlty = sumhighervlty/nhighervol;
print(file("c:\tradestation\Volume_volatility-price.
csv")," ");
print(file("c:\tradestation\Volume_volatility-price.
csv"),"Days,Avg Period,Corr period,",
"Avg Ret VolVlty Corr,Avg Ret Lower Vol,Avg Ret
Higher Vol,Trend Lower Avg Vol,",
"Trend Higher Avg Ret Vol,AvgLow Vlty,Avg Ret
High Vlty");
print(file("c:\tradestation\Volume_volatility-price.
csv"),currentbar:8:0, ",",
avgperiod:5:0, ",", corrperiod:5:0, ",", Avgcorr:3:5, ",", avglow-
ervol:6:5, ",",
avghighervol:6:5, ",", avgloweravgvol:6:5, ",",
avghigheravgvol:6:5, ",",
avglowervlty:5:4, ",", avghighervlty:5:4);
end;
end;
if we find more profits in individual stocks.
Note that the program I provide in the sidebar enters
and exits at the open following a day when volume was
higher or lower. I tested entering and exiting on the previ-
ous close (an option in the program), assuming that you
would know the change in volume from your trading
platform. The results were very similar.
So volume does predict price, but a moving average
of volume does not improve results. So much for my
instincts.
Perry J. Kaufman is a trader and financial engineer.
He is the author of many books on trading and market
analysis, including the sixth edition (2020) of Trading
Systems and Methods (with the first edition published in
1978 as a seminal book in the field of technical analy-
sis), as well as Kaufman Constructs Trading Systems
(2020), and the newly released book Learn To Trade
Days when the volume
declined had positive
returns while days when
volume rallied had
negative or lower returns.
March 2023 • Technical Analysis of Stocks & Commodities • 19
 (2022). For questions or comments, please go to www.
kaufmansignals.com.
This program is designed
The code given in this article is available in the Article
Code section of our website, Traders.com.
to test whether volume
predicts price changes by
Further reading looking for up and down
Kaufman, Perry [2016]. “Rules For Bottom Fishing,” volume changes and
Modern Trader magazine, March 25. recording accumulated
Schmidt, Anatoly B. [2011]. Financial Markets And
Trading, Wiley. returns for the same
Kaufman, Perry J. [2022]. Learn To Trade, Amazon. instrument.
[2020]. Trading Systems and Methods, 6th Edi-
tion, Wiley.
[2020]. Kaufman Constructs Trading Systems
(print and ebook editions), Amazon. & Commodities, Volume 40: January.
[2022]. “Trading A Moving Average System:
Important Choices,” Technical Analysis of Stocks

CONG/ADAPTIVE MOVING AVERAGE

Continued from page 12
trend detection and as a trailing stop for swing trading.
AMA with two shorter-period EMAs, 10 and 20, are
displayed in Figure 3. Interestingly, during fast-moving
periods, the AMA responds even quicker than the 10-pe-
riod EMA, while in congestion periods, it is slower than
the 20-period EMA, reducing whipsaws suffered by most
short-period moving averages.
Figure 4 shows an AMA of three different periods, 20,
30, and 40. During trending periods, the three AMAs all
track the price closely. Only during congestion periods
do they separate a little. This is a desired behavior, as
it means the AMA is not very sensitive to the choice of
parameters in a range.
conclusion
The adaptive moving average I propose here shows that
it is responsive to price changes, even in a fast-moving
market. The examples are only shown for XJO, but the
AMA works well for other instruments too. It is quite
smooth and tolerant to parameter changes. The algorithm
is very simple, requiring just one line code; nonetheless,
the performance is pleasing.
Technical indicators provide
traders with one or more of the
following insights about the price
movement: direction, momentum,
and likely boundary. Moving
averages (MAs) are a category of
indicators that can help with all
three of these attributes.
Scott Cong is a retired engineer. He taught electrical en-
gineering at one of China’s top universities before moving
to Australia in 1990. He has been a private trader for 30
years. During this long and sometimes painful journey,
he has learned that a trader needs to learn himself well
so he can succeed in the market.
further reAding
Kaufman, Perry J. [1995]. Smarter Trading, McGraw-
Hill.
Hartle, Thom [1995]. “Perry Kaufman On Market Analy-
sis,” interview, Technical Analysis of StockS & com-
moditieS, Volume 13: June.

20 • March 2023 • Technical Analysis of Stocks & Commodities

 IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
Budicak, Inc., et al. v. Lansing Trade Group, LLC, et al.
SUMMARY NOTICE OF PROPOSED CLASS ACTION SETTLEMENTS
If you transacted in CBOT Wheat Futures or Options from at least February 1, 2015 through May 15, 2015,
your rights may be affected by pending class action settlements and you may be entitled to a portion of the
settlement fund.
This Summary Notice is to alert you to two proposed Settlements, one with
Lansing Trade Group, LLC (“Lansing”) totaling $18,000,000.00 and the
second with Cascade Commodity Consulting LLC (“Cascade” and
collectively with Lansing and unidentified co-conspirators named as John
Does 6 through 10, “Defendants”), in a pending class action (the “Action”).
Lansing and Cascade deny each and every one of Plaintiffs’ allegations of
unlawful conduct, and each maintains that it has good and meritorious
defenses to the claims of liability and damages made by Plaintiffs.
The United States District Court for the District of Kansas (the “Court”)
authorized this Summary Notice and has appointed the lawyers listed below
(“Class Counsel”) to represent the Settlement Class in this Action:
Vincent Briganti
Raymond P. Girnys
Lowey Dannenberg, P.C.
44 South Broadway, Suite 1100
White Plains, NY 10601
Telephone: (914) 733-7221
vbriganti@lowey.com
rgirnys@lowey.com
Jennifer W. Sprengel
Cafferty Clobes Meriwether & Sprengel LLP
135 S. LaSalle St., Suite 3210
Chicago, IL 60603
Telephone: (312) 782-4880
jsprengel@caffertyclobes.com
Who is a member of the Settlement Class?
Subject to certain exceptions, the proposed Settlement Class consists of all
Persons and entities that transacted in CBOT Wheat Futures or Options from
at least February 1, 2015 through May 15, 2015 (the “Class Period”). Excluded
from the Settlement Class are Defendants and their direct or indirect parents,
subsidiaries, affiliates, divisions, officers, directors, employees, and agents,
whether or not named as a Defendant, the United States Government, and any
judicial officer presiding over this Action and the members of his or her
immediate family and judicial staff.
“CBOT Wheat Futures or Options” means wheat futures and options contracts
that trade on the Chicago Board of Trade (“CBOT”).
The other capitalized terms used in this Summary Notice are defined in the
detailed Notice of Proposed Class Action Settlements, June 9, 2023
Settlement Hearing Thereon, and Class Members’ Rights (“Notice”) and
the Stipulations, which are available at
www.2015CBOTWheatFuturesClassActionSettlement.com.
If you are not sure if you are included in the Settlement Class, you can get
more information, including the detailed Notice, at
www.2015CBOTWheatFuturesClassActionSettlement.com or by calling
toll-free 1-877-234-6578 (if calling from outside the United States or Canada,
call 1-414-961-6543).
What is this lawsuit about and what do the Settlements provide?
Plaintiffs allege that Defendants conspired to and successfully manipulated the
prices of CBOT Wheat Futures or Options during the Class Period by falsely
signaling demand for physical wheat, which caused the prices of CBOT Wheat
Futures or Options to be artificial. Plaintiffs further allege that Lansing
engaged in this behavior with its primary purpose to benefit its trading
positions at the expense of Class Members in violation of the Commodity
Exchange Act, 7 U.S.C. §§ 1, et seq. (the “CEA”), the Sherman Antitrust Act,
15 U.S.C. §§ 1, et seq., and the common law. Plaintiffs also allege that
Cascade wrongfully published information relating to Lansing’s alleged
market activity.
Lansing and Cascade deny Plaintiffs’ allegations, and each maintains that it
has good and meritorious defenses to Plaintiffs’ claims and would prevail if the
case were to proceed. Lansing and Cascade deny conspiring to do anything.
Lansing specifically contends that it did not send any signal to the market, nor
Case No. 2:19-cv-02449 (D. Kan.)
was its demand for the wheat underlying shipping certificates false. Lansing
further denies any and all conduct that allegedly violated the CEA or the
Sherman Antitrust Act. Nevertheless, to settle the claims in this lawsuit, and
thereby avoid the distraction and cost of further litigation, Lansing has agreed
to pay a total of $18 million (the “Settlement Fund”) in cash for the benefit of
the proposed Settlement Class. Cascade has provided substantial cooperation
to Plaintiffs’ Counsel to benefit the Class. If the Settlements are approved, the
Settlement Fund, plus interest earned from the date it was established, less any
Taxes, the reasonable costs of Class Notice and administration, any
Court-awarded attorneys’ fees, litigation expenses and costs, Incentive
Awards for Plaintiffs, and any other costs or fees approved by the Court (the
“Net Settlement Fund”) will be divided among all Class Members who file
timely and valid Proof of Claim and Release Forms (“Claim Forms”).
If the Settlements are approved, the Action will be resolved against Lansing
and Cascade. If the Settlements are not approved, Lansing and Cascade will
remain as defendants in the Action, and Plaintiffs will continue to pursue their
claims against them.
Will I get a payment?
If you are a member of the Settlement Class and do not opt out, you may
be eligible for a payment from the Net Settlement Fund if you file a
Claim Form. You also may obtain more information at
www.2015CBOTWheatFuturesClassActionSettlement.com or by calling
toll-free 1-877-234-6578 (if calling from outside the United States or Canada, call
1-414-961-6543). Claim Forms must be postmarked by July 10, 2023, or
submitted online at www.2015CBOTWheatFuturesClassActionSettlement.com
on or before 11:59 p.m. Eastern Time on July 10, 2023.
What are my rights?
If you are a member of the Settlement Class and do not opt out, you will
release certain legal rights against Lansing, Cascade, and Released Parties as
explained in the detailed Notice and Stipulations, which are available at
www.2015CBOTWheatFuturesClassActionSettlement.com. If you do
not want to take part in the proposed Settlements, you must opt out by
April 10, 2023. You may object to the proposed Settlements, the Distribution
Plan, and/or Class Counsel’s request for attorneys’ fees, payment of litigation
costs and expenses, and Plaintiffs’ application for Incentive Awards. If you
want to object, you must do so by April 10, 2023. Information on how to opt
out or object is contained in the detailed Notice, which is available at
www.2015CBOTWheatFuturesClassActionSettlement.com.
When is the Settlement Hearing?
The Court will hold a hearing at the United States District Court for the
District of Kansas, 500 State Ave., Kansas City, KS 66101 on June 9, 2023 at
9:00 a.m. Central Time to consider whether to finally approve the proposed
Settlement, Distribution Plan, the application for an award of attorneys’ fees
and payment of litigation costs and expenses, and the application for Incentive
Awards for the Plaintiffs. The Settlement Hearing may be moved to a
different date or time without notice to you, but Class Counsel will post
updates concerning dates and deadlines on the Settlement Website. Given
the current COVID-19 situation, the Settlement Hearing may be conducted
remotely. Although you do not need to attend, if you plan to do so, you
should check the Settlement Website before making travel plans. You or
your lawyer may ask to appear and speak at the hearing at your own
expense, but you do not have to. Any changes to the time and place of the
Settlement Hearing, or other deadlines, will be posted to
www.2015CBOTWheatFuturesClassActionSettlement.com as soon as is
practicable.
For more information, call toll-free 1-877-234-6578 (if calling from
outside the United States or Canada, call 1-414-961-6543) or visit
www.2015CBOTWheatFuturesClassActionSettlement.com.
**** Please do not call the Court or the Clerk of the Court for
information about the Settlement. ****
 An Instrument For Traders In Some Non-US Countries
Trading Contracts
For Differences
In some financial markets outside the US, price gaps
can be traded by using a derivative instrument called
contracts for differences. But there are risks. Traders
can minimize the risks by having a good understand-
ing of them and the costs involved. So for those outside
the US and who trade outside of US markets, here’s an
introduction to using this vehicle, along with some sug-
gestions for what to watch for.
by Gregory Aharonian
T
raders make their profits or losses on the dif-
ferences in the prices of financial instruments.
So why not trade the differences themselves
without having to pay for the underlying instru-
ment? Outside the US, there is such a vehicle,
called contract for differences (CFDs). These
are instruments for which you only have to collect or pay
the difference in a financial instrument’s movement.
22 • March 2023 • Technical Analysis of Stocks & Commodities
But first, to note it plainly before continuing: It is ille-
gal to trade CFDs in the US. Furthermore, traders outside
the US should check laws and regulations in their own
country before considering this avenue. Therefore, this
article is aimed at those with legal access to this vehicle,
as well as to simply introduce the topic of what they are
and what I have found to be some of their risks.
The advantage of using CFDs is you can forgo paying
for the underlying instrument (with all its associated
trading costs), much of the margins, and capital outlay.
The purpose of using CFDs is simply to capture the gain
or loss of the underlying.
CFDs vs. stocks, futures, and options
I’ll compare an example CFD trade to a trade in stocks,
futures, and options to help illuminate the differences.
WSF-S/SHUTTERSTOCK
Say you have a trading system to trade stocks, ETFs,
and futures with the following properties: 40% of the
signals gain $2, 20% gain $5, while 40% lose $2 within
 DERIVATIVES TRADING
a fixed time period, with at least a few trades generated
daily. The average gain per trade is $1.00 for a $200 stock.
(In this example, signals are generated by a vectorized
long short-term memory AI model (VLSM) running on
a Groq supercomputer AI chip, so this type of system
would be out of reach for retail traders, but it serves
as a real-life example.) I’ll use the stock of Goldman
Sachs (GS) to explore these trading vehicles compared
to using CFDs.
Stocks. Say the system generates a buy for GS. Buying
shares of GS require you to put up capital of around
$380 per share (the approximate price per share as of
November 2022) to capture the system’s average gain
of $1.00. If the signal generated was to short GS, you
would also have to put up additional margin (typically
10% to 20%). Capturing a per-share gain of $1.00 for a
$380 stock is about a return of 0.25%, and that would be
a hard grind to make significant gains in the long term.
If a stock were priced at $250 per share, the average
return per trade would be 0.4%; if you made 20 trades
per month, that would produce a nice monthly return of
8%. However, you would be glued to your screen all day
and all month to make that many trades in order to try
to earn that return.
Options. Buying put and call options instead of buying
or selling the underlying stock gives you leverage, and
thus you’d need fewer trades per month—for example,
50 times leverage for an option premium around $5 for
a $250 stock. But time decay across a day or two easily
costs more than $0.50, erasing at least half of the gains,
and deltas around 0.5 reduce the other half of the gains.
This is the bane of all long-only option strategies.
If you sell put and call options instead of buying put
and call options, you can mostly eliminate the time decay
penalty (though not the delta penalty). With a strategy
of selling a put and a call (that is, a straddle or strangle
options strategy), you will pay about 40% margin at
many brokerages, so those costs aren’t too much better
than for stocks. (If you short a stock, the effective margin
rate is 100% or 120%, although many brokerages will
only require 50% of the underlying stock for margin).
Shorting options has the additional risk of the options
contract being called away. And whereas with stocks,
there is just one bid/ask price quote at a time to evalu-
ate, in options trading, you have to choose from among
many bid/asks on an options chain, with multiple strike
prices for options expiring on different numbers of days
going forward.
Futures. With futures trading, you are limited to trading
indexes, currencies, and commodities, versus thousands
of choices for stocks and options. That can make diversi-
fication more difficult to achieve. Also, the margins are
usually higher, plus, futures can be more volatile than
stocks, liquidity can be a problem in some markets, and
in my opinion, futures are useful for speculation only if
you are an institutional trading room.
Contracts for differences. With trading of CFDs, the
margin required can be as low as between 10% and 25%.
Compare this to 50% to 100% margin for trading stocks
and about 50% for options. There is no delta (that is, the
delta is always 1.0). There is no time decay—you can hold
the CFD as long as you want (although some brokerages
charge overnight maintenance fees). You can realize the
entire gain of the stock movement with similar leverage
to that of an option, without the cost of borrowing shares
for short trades, and without having to worry about time
decay (which also beats buying puts to effectively short a
stock). With CFDs, you are mostly trading what trading
systems are analyzing and predicting—that is, changes
in the prices of stocks and ETFs.
CFDs: What are they, and how risky
are they?
I’ve outlined some of the benefits of trading CFDs as
compared to other vehicles. Next, I’ll look at some of
their risks.
First, what is a CFD? How does a CFD work? When you
buy and sell a CFD, by a bilateral contractual obligation,
you receive or pay out the difference in the underlying’s
price. For example, if you buy a CFD on GS and it rises
$2, then when you sell the CFD, you earn $2 (minus
commissions). If it drops $4, you pay out $4. You have
no voting rights to the underlying, nor rights to dividends,
the CFD being an equity derivative. CFDs are traded
over-the-counter through networks of brokers.
History of CFDs. CFDs were developed in the 1990s,
initially used by hedge funds in Europe to leverage com-
modities such as gold and natural gas. Soon CFDs were
CFDs are traded over-the-
counter through networks
of brokers.
March 2023 • Technical Analysis of Stocks & Commodities • 23
 extended to trading on stocks. Some firms use CFDs to
pay fewer capital gains taxes in some countries than they
would otherwise pay when trading stocks.
Underlying instruments. So what can you trade CFDs
on? Depending on the brokerage, almost anything. For
example, one brokerage allows you to trade CFDs for
forex, indexes, cryptocurrencies, stocks, commodities,
options, interest rates, bonds, and ETFs. Another broker-
age allows you to trade CFDs for forex, indexes, stocks,
bonds, and commodities. Most of the brokerages that
offer CFD trading support a variety of trading platforms,
usually including their own.
For those new to CFDs, trading CFDs on stocks is a
good way to start.
Risks. So what are some of the risks involved? One study
found that retail traders often posted huge losses. Some
brokerages state in their materials that more than 75%
of retail traders lose money trading CFDs overall.
One potential risk is that traders could get carried away
with using leverage. Suppose you have $3,500 in capital
and you buy 10 shares of GS stock at $350 per share, and
then the stock dips by $3.50. If you sold you would lose
1% of your investment. Compare this to CFDs: Say you
bought 1,000 CFDs on GS, using $3.5 margin per CFD.
If the underlying stock drops $3.50, and you sold your
CFD, you would lose 100% of your investment. This is
why articles on CFDs often tend to recommend using
stop-loss orders.
This possibility of potentially huge losses is why the
Securities & Exchange Commission (SEC) bans CFD
trading inside the US.
Beware of enticements. Here are some other important
cautions to discuss.
Many CFD brokerages have flashy websites where it is
overly easy to sign up for an account, transfer money, and
start trading. But the devil is in the contractual details.
While those details may be fully explained somewhere
When you buy and sell a CFD,
by a bilateral contractual
obligation, you receive or
pay out the difference in the
underlying’s price.
24 • March 2023 • Technical Analysis of Stocks & Commodities
on the website, that explanation may be difficult to find
and not immediately obvious, essentially buried on the
site. A failure to understand those details could lead to
significant financial losses if you are not careful.
Commissions. Commissions are one factor you must
understand. Whereas commissions may be advertised
by a brokerage as being extremely low and a low figure
is stated in one place, deeper down in the details you
may find that there is a minimum commission, requiring
you to buy more to meet that minimum. For example,
although a $0.02 commission may be advertised, you
may find there is a minimum to meet of $15 commission
for each side ($30 round trip), requiring you to buy at
least 750 shares to achieve an effective $0.02 commis-
sion. So, in the end, you would pay much more than the
quoted 2 cents.
So, it could feel like booking a hotel room online and
then being hit with extra fees when you check in, if you
are not aware of the fine print going into the situation.
There may be an optional commission for a guaranteed
stop placement (one example commission for this at one
brokerage is 0.3%).
Commission structures and fees vary with the broker-
age, and in addition, the commissions may vary by market
or by underlying. For example, a brokerage may charge
commissions starting at 0.05% for stocks, and 0.005%
to 0.1% for indexes.
Bid/asks. Another factor to understand is the bid/ask.
You may find some bid/ask spreads to be as much as
$1. At some brokerages, the bid/ask spread for CFDs on
stocks is probably little different from the spreads for
straight stock purchases or the bid/ask spreads for op-
tions on stocks. At some brokerages you may find bid/ask
spreads for CFDs on stocks to be less than 10 cents per
share, and you may find a one-cent spread for CFDs on
some popular stocks such as Apple and Google. At other
brokerages, a typical bid/ask spread for CFDs on stocks
may be in the range of $0.02 to $0.50. Other brokerages
charge no commissions but instead make their money
on the bid/ask spreads, so their spreads may be as high
as $1.00 per share.
On a separate but related note, some brokerages charge
a spread in place of a commission fee, but note that this
type of spread is different than the bid/ask spread. An
example spread charge at one brokerage is 0.15% per
transaction.
Overnight fees. Another potential cost to take into con-
sideration depending on the brokerage is overnight fees.
One example broker’s overnight fee is given as an annual
rate of about 7% (about 0.02% per day).
Account minimums. Note that if you engage in “day-
trading” of CFDs (that is, you make four or more same-
day trades within a five business-day period), per some
countries’ regulations, you may need to keep at least
$25,000 in your account, which is similar to the rules for
daytrading stocks with many conventional brokers.
Brokerages
When evaluating brokerages, here is a list of some features,
fees, and considerations you may want to check:
• The markets covered
• Bid/ask spreads
• Commissions
• Overnight fees
• Margin rates
• Platforms available to use
• Whether both long and short trades are available
It’s helpful to compare the features and costs side-by-side
and work out what the actual cost of a trade would be
with a given brokerage.
You have no voting rights to the
underlying, nor rights to dividends,
the CFD being an equity derivative.
Conclusion
CFDs can be a useful and potentially profitable instrument
to trade if you are a trader outside the US in a country
that allows trading in this instrument, and if you have a
trading system to give you reliably good trading signals.
But before you decide to trade CFDs, first do a lot of
research into the many CFD brokerages, and pay a lot of
attention to their (overly) complicated fee structures.
Gregory Aharonian is founder of KukaXoco Finance, a
startup that works with growers of coca leaf, cannabis,
cacao, coffee, and caña in Colombia, most with limited
financial resources, to assist them with leveraging their
crops for extra income. He can be reached at greg.aha-
ronian@kukaxoco.org.

CALHOUN/MOMENTUM and therefore produces entry signals

Continued from page 37
Step 3: Use an initial stop-loss of
no further than $2 under your entry.
Once you do enter, you can scale in
every several days, as long as the
trend remains intact to the upside.
Step 4: Keep an eye on the slope of
the 25-SMA line; once it starts to
pivot back downwards, then con-
sider exiting your position.
Why this teChniQue Works
Unlike other traditional moving av-
erage intervals such as the 200-day
SMA, the 25-day SMA is shorter
sooner, which is necessary for volatile
pivots. When used with charts show-
ing a wide range as seen in Figure 1,
you can get actionable entry prices
using the correct interval.
traDe ManageMent tips
This entry signal is particularly well-
suited for a position-sizing approach,
in which you add to a winning trade
over time. I will typically start a new
trade with small share size, under
$500 shares, then double the size as
it moves up in my favor. This strategy
is also well-suited to high-volatility
instruments such as tech stocks and
leveraged ETFs.
March 2023
One combination
of indicators that
seems to work fairly
consistently is a pivot
over a 25-SMA line
using a 90-day daily
candlestick chart.
Ken Calhoun moderates a popular
live trading room for active traders.
He is the founder of TradeMastery.
com, an interactive webinar site
for active traders, and is a UCLA
alumnus.
• Technical Analysis of Stocks & Commodities • 25
 INTERVIEW

Technical Trader, Mentor, Newsletter Writer, Stock Market Blogger, Philanthropist

A Conversation
With Charles Kirk
Charles E. Kirk is an independent, full-time ETF trader, and is the longtime
publisher of The Kirk Report (www.kirkreport.org), which is currently
a weekly newsletter for a closed, private subscriber base. The report
started out as a popular blog in the earlier days of the internet, in 2003,
when Kirk began regularly posting about stocks, trading, investing, and
the market, with an emphasis on education rather than recommendations
or advice. A self-taught trader and investor, he wanted to share his ideas,
research, and lessons from his experiences in the stock market so that
others might also learn and succeed in managing their portfolios on their
own, within their own skills sets and personal strengths. His philosophy
is that investors shouldn’t copy the exact tactics of others, but rather,
develop and sustain their own personal approach to investing.
Kirk earned degrees in political science and philosophy at Cornell Col-
lege, earned a law degree, and worked as a private investigator before
deciding to turn his attention full-time to the stock market, in particular,
swing trading and position trading. Kirk’s own approach to trading uses
stock screens and a few technical indicators.
His blog became a paid website in 2004, featuring a premarket report, As active, independent
an after-hours report, a live notebook, interviews with other trading
professionals, weekend chart shows, and more. He was profiled in media
investors, what we want
including The Wall Street Journal, Forbes, Bloomberg BusinessWeek, the most is the very best,
Time, Barron’s, Kiplinger, and this magazine. All the media attention at most actionable research
the time further grew his website subscriptions rapidly. and perspectives and
Stocks & Commodities contributing writer and ETF columnist Leslie nothing more.
N. Masonson interviewed Charles Kirk via email in January 2023 about
his three decades of trading and investing, his philosophy on learning,
and his experiences publishing his stock market newsletter. Having no fear can get you very far
in this business, at least initially, until
You’ve had a long and keep learning or the desire to do you blow yourself up and learn the
successful career in the better. hard way that the most challenging
stock market over the part of investing is not only making
past 30 years, attracting Your first daily financial newsletter, big returns but then keeping them.
a loyal following at The titled “MoneyXperts,” was pub- Especially when the tide turns against
Kirk Report since 2004. What do lished from late 1999 to mid-2003. you and the tactics that made those
you think are your most important Subscriptions to it skyrocketed after returns possible provide you with the
personal traits that led to these you received wide media coverage seeds of your destruction.
successes? for a cumulative 323% performance
I like to take risks, am very com- with no down years. How were you You were quoted in an April 1, 2006
NICOELNINO/SHUTTERSTOCK

petitive by nature, and really enjoy able to achieve this return? Barron’s interview as saying, “It got
the learning process and being I was very lucky. Additionally, so popular that it [the newsletter]
creative. Although I have been an what I lacked in skill, knowledge, pretty much took over my life.” You
active investor for nearly 30 years, and experience at the time, I made were working 12-hour days writing
I have never lost my enthusiasm to up for by being absolutely fearless. the newsletter, marketing it, and
26 • March 2023 • Technical Analysis of Stocks & Commodities
responding to emails. It must have
been a very stressful time and you
got to a point where you had to
drastically reassess your future path
to save your sanity, correct?
Yes, those days were crazy in
the wake of the Barron’s profile.
I suppose it is similar to what is
experienced by the social media in-
fluencers of today. Content creation,
when done extremely well, is a 24/7
endeavor and, at some point, I felt I
had to make a choice between being
a social media influencer or continu-
ing to pursue my passion for being an
entirely independent, active investor.
The time came when I couldn’t do
both well at the same time and so
a sacrifice had to be made. I chose
being an investor. I closed The Kirk
Report to new members, stopped
engaging in social media, and have
never regretted that decision.
At the time, I recall telling my
wife that The Kirk Report could be
finished within a year, as I closed
myself off from the world outside
of my membership group, but I was
fortunately wrong. My following
remained loyal and, through word of
mouth and referrals, the membership
remains as vibrant now as it did many
years ago. The Kirk Report will turn
20 years old in September 2023.
You decided to dial down your
exposure because of the constant
pressure to perform and you did
not want to manage other people’s
money out of concern about losing
their money in a rough and tumble
market. Are you comfortable with
those decisions today?
When I tell people what I do for a
living (active investing on my own), I
also tell them I have a real asshole for
a boss (myself), which is completely
true. I feel the pressure constantly to
do whatever I do to the best of my
ability and I will not be out-worked
by anyone. So that pressure you speak
of is constant and persistent. How-
ever, one of the reasons I became an
active, independent investor is to be
independent. To be my own boss and
in complete control over my destiny
for good or for ill. I never wanted to
work for anyone else or even have a
partner(s) to deal with, so I created a
special career that was a perfect fit for
me. Sure, I could have possibly made
more money through other pursuits
(including the practice of law), but
for me, that was not more important
that being on my own, doing my own
thing, the way I wanted to do them,
in my own way. Ultimately, the only
person I answer to is myself and, trust
me when I say, that bar is always set
high as I go to work each day not only
trying to make money, but to help my
members do the same.
On September 3, 2003, The Kirk
Report blog was born after you
retired the MoneyXperts newsletter.
You mentioned that writing the
blog offered you a less stressful
alternative to the daily newsletter
grind. Almost 20 years later, are
you pleased with that change?
A good friend, Irwin Yamamoto,
who had been in the newsletter busi-
ness for a lot longer than me before
his early passing, often urged me to
publish less frequently. He under-
stood the toll it was taking to publish
reports three times a day, six days a
week. While I was young that seemed
totally reasonable, but it was actually
overkill and absolutely unnecessary.
In truth, I had enough good things
to share that would require only a
weekly newsletter and so I moved in
that direction. That was a lifesaver.
One of the biggest challenges of
active investing is having too much
noise and information, and I do my
weekly report in such a way that is
a solution to that increasing problem
rather than contributing more to the
problem of information overload. I
March 2023
focus only on what matters and ignore
everything else, and teach members
to do the same.
When did it change to a weekly
format?
I made the change in 2013. I remem-
ber it fondly, because my wife and I
were sitting on a beach in Kauai where
we lived at the time and she asked me
what change I would make for my life
if I didn’t worry about any potential
negative repercussions. Basically,
what would I do if I didn’t worry that
I could fail? It’s a question all of us
should ask ourselves throughout life!
My reply was that I would go to a dif-
ferent, much changed weekly format,
raise the price of the membership, and
close the membership to new people
so I could focus only on helping those
who were with me now, and stop the
madness of trying to be some kind
of market guru.
When I announced the change,
several people I highly respected in
the newsletter business told me I was
crazy (that is, do less work for more
money), and even I thought I would
likely be out of business within a
year or two. But life has a way of
playing out differently than you
fear, sometimes in truly wonderful,
surprising ways. When you make
decisions that take you away from
your comfort zone, in the direction
of fear, sometimes really good things
follow in life and in the markets.
The Kirk Report has gone through
multiple iterations over the years in
content, format, style, and length.
Was that the result of member
input or your desire to make it
more relevant, or a combination
of the two?
I’ve always listened to members
and what they want to see and learn
in the report, and I’ve routinely made
adjustments to fit their needs. That
being said, I think there is a fine
• Technical Analysis of Stocks & Commodities • 27
 else is doing these days, How are you able to provide all
which is putting out more the data, charts, tables, story links,
The more content around the clock. commentary, and trader quotes in
indicators you As active, independent each weekly edition of the report?
use, the more you investors, what we want It must take an immense amount
will see whatever the most is the very best, for you to read, research, and then
most actionable research create the report.
you want to see in and perspectives and It is well known that those who
the chart. nothing more. That’s write well must read well and read a
what I’m always trying lot. What I provide in the newsletter
to find and share with is often inspired by what I read and
line between listening to that feed- members. The bottom line for me is think about. There are no shortcuts
back and providing a high-quality that I want The Kirk Report to be as to the process. Finding something
service, as you can’t be all things to helpful as possible and the direction of actionable value is rare and takes
all people. Steve Jobs once said that of that has been to do less rather than a lot of time and effort to discover
“Some people say ‘give the customers more. That’s the opposite path from and share. But when you find it, it’s
what they want,’ but that’s not my ap- the herd and from those who attempt worth it!
proach. Our job is to figure out what to provide a competitive service.
they’re going to want before they do.” When and why did you make the
I believe that is true. In 2004, the report became a decision to focus the report solely
To provide a useful service like m em ber-only website with a on ETFs instead of stocks?
The Kirk Report, I have to first and subscription base of over 5,000. The transition was slow but in-
foremost always put members’ in- Has your base increased over tentional and reflective of my own
terests ahead of my own. To consis- time or has it leveled off in recent approach, which is to concentrate
tently provide content and research years? What is the current annual positioning using ETFs versus ac-
that gives them what they need, not membership fee? tively trading stocks. By using ETFs,
necessarily what they want to hear The membership base has slowly I have found more consistent success
or what they think they want. There leveled off since I started not taking with less stress and less volatility, yet
is often a big difference between the on new members who are not directly without a major sacrifice in overall
two, and understanding that is only referred in by existing members. returns. One of the most important
possible with a lot of time, skill, and We’re around 3K members now, things people can do is to simplify
experience. And most importantly, which is an ideal level that makes it their approach and narrow their focus.
creating a useful service means really easy to maintain. At that level, I am Using ETFs provides the ability to do
caring about doing what’s best for able to provide good service to mem- this effectively.
those who read and follow your work bers and it’s self-supporting without
and your insights as if they were your needing additional marketing. The Did your members initially react
own beloved family members. membership fee after increasing to against this change?
$500 back in 2013 has not changed. Every change that I have ever
The blog was daily at first, wasn’t made has been questioned and
it? How did that differ in focus and So is your newsletter service closed criticized by others, including that
content from your current format, to new members currently? change. While I have earned the
a weekly newsletter? New membership is currently on a members’ trust over time, whenever
The newsletter has gone through waitlist basis. When current members you make a major shift in focus like
several major changes in format fail to renew, we open up their spot to that, it always causes irritation and
throughout its existence and it will new members, taking those who were discomfort. Change is difficult. Yet
continue to evolve, just as I do, and referred by an existing member first what is far worse is stagnation and
just as my members do. In fact, I can and working our way down the list. complacency. We all must actively
see The Kirk Report moving to a semi- Since there is so little turnover, only work to avoid those two things. We
monthly or even monthly format at a small number of people are new to do this by always challenging what
some point down the road. That’s in the report each year. In 2022, there we do and how we do it, which is
complete contrast to what everyone were less than 20 new members. never easy. When The Kirk Report
28 • March 2023 • Technical Analysis of Stocks & Commodities
 SUMMARY NOTICE OF PROPOSED CLASS ACTION SETTLEMENTS

If you entered into a European Government Bond Transaction from January 1, 2007 through and including
December 31, 2012 (“Class Period”), your rights may be affected by pending class action settlements and
you may be entitled to a portion of the settlement fund.

This notice is to alert you to proposed settlements reached with JPMorgan and State Street (collectively, the “Settling Defendants”) in In re European
Government Bonds Antitrust Litigation, No. 1:19-cv-2601 (VM) (S.D.N.Y.) and the creation of a settlement fund totaling $13,000,000. JPMorgan and
State Street also agreed to provide cooperation in connection with Plaintiffs’ continued prosecution of claims against the non-settling defendants. The
settlements with JPMorgan and State Street will resolve the claim against them in the action. JPMorgan and State Street deny any liability, fault, or
wrongdoing in connection with the allegations in the action. Litigation remains ongoing against the non-settling defendants.
The United States District Court for the Southern District of New York (the “Court”) authorized this notice. The Court appointed the lawyers listed
below to represent the Settlement Class:

Vincent Briganti Kristen M. Anderson

LOWEY DANNENBERG, P.C. SCOTT+SCOTT ATTORNEYS AT LAW LLP
44 S. Broadway, Suite 1100 230 Park Ave., 17th Floor
White Plains, NY 10601 New York, NY 10169

Gregory S. Asciolla Todd A. Seaver

DICELLO LEVITT LLC BERMAN TABACCO
485 Lexington Avenue, Suite 1001 425 California Street, Suite 2300
New York, NY 10017 San Francisco, CA 94104

Who Is a Member of the Settlement Class?

Subject to certain exceptions, the Settlement Class consists of all persons that purchased or sold one or more European Government Bond(s) in the
United States directly from a defendant (or a direct or indirect parent, subsidiary, affiliate, or division of a defendant, or any of their alleged
co-conspirators) from January 1, 2007 through December 31, 2012.
“European Government Bonds” means euro-denominated sovereign debt or bonds issued by European governments (e.g., Austria, Belgium, Cyprus,
Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain).
If you are not sure if you are included in the Settlement Class, you can get more information, by visiting
www.EuropeanGovernmentBondsSettlement.com or by calling toll-free 1-877-883-7336 (for callers outside the United States and Canada:
414-961-7813).

What Is This Lawsuit About?

Plaintiffs allege that defendants, including JPMorgan and State Street, agreed to fix prices and depress yields for European Government Bonds.
Specifically, Plaintiffs allege that defendants collusively bid above the market price for European Government Bonds at auctions in the primary market
through a process known as “overbidding”. Plaintiffs further allege that defendants profited from this misconduct by selling bonds purchased at auction
at artificially inflated prices to investors in the secondary market. Plaintiffs also allege that defendants agreed to widen bid-ask spreads in the secondary
market for European Government Bonds, thereby charging investors increased prices for purchases and paying investors decreased prices for sales of
bonds. Plaintiffs assert claims under federal antitrust law.

What Do the Settlements Provide?

To settle the claims in this lawsuit, JPMorgan agreed to pay a total of $13,000,000. JPMorgan and State Street also agreed to provide cooperation in
connection with Plaintiffs’ continued prosecution of claims against the non-settling defendants. If the settlements are approved, the settlement amount,
plus interest earned and less any taxes, notice and administration costs, Court-awarded attorneys’ fees and litigation expenses, any service awards for
Plaintiffs, and any other expenses approved by the Court will be divided among all Settlement Class Members who submit valid claim forms.

Will I Get a Payment?

If you are a member of the Settlement Class and do not opt out, you will be eligible for a payment under the Settlements if you file a valid claim form.
Claim forms must be submitted online at www.EuropeanGovernmentBondsSettlement.com on or before 11:59 p.m. Eastern time on April 26, 2023
OR mailed so that they are received by April 26, 2023.

What Are My Rights?

If you are a member of the Settlement Class and do not opt out, you will release certain legal rights against Settling Defendants and the other Released
Parties, as explained in the Court’s detailed notice and the settlement agreements, which are available at
www.EuropeanGovernmentBondsSettlement.com. If you do not want to be a member of the Settlement Class with respect to these settlements, you
must opt out by April 10, 2023. You may object to these settlements, the plan of distribution, application for an award of attorneys’ fees and litigation
expenses, and/or service awards for Plaintiffs by April 10, 2023. Information on how to opt out or object is contained in the Court’s detailed notice,
which is available at www.EuropeanGovernmentBondsSettlement.com.

When Is the Settlement Hearing?

The Court will hold a settlement hearing at the United States District Court for the Southern District of New York, Daniel Patrick Moynihan United
States Courthouse, 500 Pearl St., Courtroom 15B, New York, NY 10007, on June 2, 2023 at 11:00 a.m. to consider whether to finally approve the
settlements, plan of distribution, application for an award of attorneys’ fees and litigation expenses, and any service awards for Plaintiffs. You or your
lawyer may ask to appear and speak at the hearing at your own expense, but you do not have to.

For more information, call toll-free 1-877-883-7336

(for callers outside the United States and Canada: 414-961-7813)
or visit www.EuropeanGovernmentBondsSettlement.com.

**** Please do not call the Court or the Clerk of the Court for information about the settlements. ****
 time periods? If so, how It is my view that every market
has that worked out? cycle has rules to follow for that
It is important to surround I no longer daytrade. cycle including when, what, and
yourself with people who My timeframe is much how to trade. While the rules do
will provide constructive longer now than it used change with the cycles, recognizing
to be. These days, my what those rules are and adjusting to
feedback to you. ideal hold time is many following them is a very big part of
months, if not longer, active investing.
whenever possible. When What I don’t do is have a set of
stops changing and evolving is when you have longer timeframes, you put static rules and attempt to apply those
it will be time to say goodbye, as it time on your side, and that makes rules to all types of market environ-
will no longer serve its members in things less challenging and more ments and cycles. That is a recipe for
a helpful, productive way. rewarding. Since there’s so much disaster and significant underperfor-
focus these days on the short term, mance. I try to invest as a chameleon
When you first began full-time and since the majority’s focus is on would—adjusting to the environment
trading for yourself in 1999, did you the very short term, there is more op- we are in. The rules I apply reflect
have a specific goal of, say, turning portunity for those who can maintain the environment, or at least attempt
your $2,000 stake into $1 million, longer-term perspectives and goals. to reflect the environment.
or did you just try to increase your
portfolio value over time? You’ve been trading mostly ETFs What specific market conditions
I had a lot of crazy goals when I since 2011. Do you find that easier must line up for you to go long?
started out. As with many people and more productive than trading The price action, its overall trend,
drawn to active investing, my goals stocks? and my price pattern analysis must
were completely unrealistic. I remem- Yes, I do. It narrows my focus and support the investment. I do not
ber thinking it’d be possible to pull lowers the risk. It also lowers my simply buy and hope for the best.
in $1 million a month consistently, stress. When I was trading stocks, no Price action must confirm that what
which is a stupid thought. In truth, a matter how much I learned about a I’m seeing is a low-risk, high-reward
portfolio that could generate that kind company, I always felt like I was the setup. Otherwise, no trade.
of income would suffer such huge last to know when something wrong
swings that it would feel unbearable was happening with the company. How do you determine which ETFs
to most of us mere mortals and would News-event risk was something I to purchase?
drive you absolutely crazy along the always struggled with overcoming, Ideally, I want to exploit situations
way. But markets are seductive in even when using various options strat- that have many factors going in their
nature. They fool you into thinking egies to mitigate news-event risk. favor, not just one factor. This means
that you know more than you do, that I will often utilize quant and cycle re-
you have more skills and experience Do you frequently trade double- or search to narrow the field and identify
than others, and that you have a lasting triple-leveraged ETFs? the cream-of-the-crop setups.
edge, which, of course, is not true. I have a playbook that I work from
and share in the report each week that On average, how many trades do
Were you both daytrading and swing frequently utilizes leveraged ETFs for you execute a year and what is
trading when you began trading positions. Basically, if you can learn your average holding period for
full-time? to profitably trade these ETFs and those trades?
I was transitioning from being a manage risk, then you can trade just It varies widely. I traded like a
buy-and-hold investor focused on about anything. So they are very ef- madman in 2020–2021 during the
fundamentals to being a more active fective instruments for teaching chart Covid pandemic, like everyone else,
investor, including using shorter-term analysis and risk management. with just over 300 trades. But in 2022
timeframes. I began to daytrade the I made only 15 trades. When the
S&P 500. Do you have specific written rules environment is less receptive (down-
that must be met before putting on a trends, bear market), I often do less
Has your trading changed over the trade, or do you make trades based in order to avoid making mistakes in
years from daytrading to longer on your ingrained experience? an unreceptive environment. I have
30 • March 2023 • Technical Analysis of Stocks & Commodities
learned the importance of adjusting
the strategy to the environment and
being more aggressive only when
things are working well, and other-
wise taking it easy.
Do you use stop-loss orders in case
a position goes against you?
For every position, I have a prede-
termined stop at the level at which the
position can no longer be justified. If a
position performs in a way that would
alter my analysis of it, then I cannot
continue to own it. That’s basically my
exit criteria. For me, the price action
must justify the position; if it doesn’t,
then it’s time to sell. I do not fight the
price action, that is, the overall trend
and patterns in play.
I understand that you upgrade
your computer workstation setup
about every three years. Is that
still true?
Yes, I tend to replace everything
every three to four years. I currently
use two widescreen monitors, one in
landscape and the other in portrait
view. Much like my strategy, it started
out simple, became complex, and then
simple again. The same is true with
the tools I use. Simple is better. You
really don’t need 95% of what you
think you do or what others do. Some
of the best investors I know use only
a small laptop and only monitor the
markets once per week, rarely paying
attention to the markets when they are
open, if you can believe that!
What information are you tracking
on your screens?
Charts mostly. Price action analysis
is the foundation of my approach, so
I focus on looking at and evaluating
a lot of charts each week.
Have you attended any trading
seminars or courses to boost your
market knowledge or did you prefer
self-learning?
In the early days I did everything
I could to learn as fast as I could
including attending numerous semi-
nars, classes, and reading everything
I could get my hands on. Nowadays,
I learn mostly from my members
and from a tight circle of friends and
mentors that I have been fortunate
to have. I also learn from some who
share their work on social media.
When you started out, you had a
mentor who guided you along the
way, correct?
Yes, I reached out to those whose
writings or work had some positive
impact on me, and I was able to de-
velop some close relationships in the
years that followed. I am still friends
with many of these people today,
and often, they are the first to tell
me when I’ve missed something or
when I’m wrong about something. It
is important to surround yourself with
people who will provide construc-
tive feedback to you and who will
provide perspectives that challenge
your beliefs.
Was that a game changer that
resulted in a better understanding
of the market and how to trade it?
Having many mentors during your
investment journey is invaluable, pro-
viding that you understand that what
another person thinks and does may
not work for you. That others’ can
share insights and perspectives and
challenge your beliefs in important,
key ways, but at the end of the day,
each of us must find and utilize strate-
gies that fit us best. And, each of us is
very different with different desires
and objectives from our activities in
the markets. Not to mention skills,
personality, and psychology. For
many, it is all about feeding their egos
and proving themselves right while
for others it is all about the challenge
and making good decisions.
March 2023
You have described yourself as a
“perpetual student.” How have
you continued to build your market
knowledge and expertise over the
years?
I follow my curiosity and often
go down rabbit holes to learn new
things. This has led me not only to
explore many different areas of the
markets, but also many different
schools of thought, from psychol-
ogy to programming. Those who
do exceptionally well at investing
are usually very well-rounded in-
dividuals who have many interests
and pursuits beyond the markets.
Those other interests and pursuits
are far more important than many
understand. When the markets are
your only focus, you can become
blinded by them. Investors should
have passions beyond the markets
and should try to have a full life.
Do you find it more difficult to sell
a position than buy one, as most
traders do?
Selling positions is something
everyone struggles with but over
time you learn to manage feelings
of regret and understand there is no
room for perfection in this game. No
matter when you sell, it won’t be the
best time. What you do instead is
strive for “good enough” and when
you achieve “good enough,” that’s
all you can do.
You once said, “To trade well …
requires constant exposure to new
things, analysis and strategies.”
Can you elaborate on that?
The only way to combat compla-
cency and the human desire toward
comfort over growth is to explore
new and different ways of doing
everything we do. Only then can we
move above the plateaus we inevitably
experience during our growth and be
able to continually reinvent ourself
and our methods. Markets are always
• Technical Analysis of Stocks & Commodities • 31

Many of us place too much
emphasis on things that do
not contribute to the bottom
line and that get in our way
in unnecessary ways.
changing, and we must change and
adjust with them.
How long did it take you to become
consistently profitable?
When I do finally achieve that,
you will be the first to know! But
seriously, my objective isn’t to be
consistently profitable so much as it
is to avoid making stupid decisions
consistently—ones that can’t be jus-
tified or that aren’t aligned with my
strategies. Consistency can only come
in consistent markets, and markets are
by nature inconsistent. So the desire
for consistency is not a reasonable
objective. Rather, the goal is to make
as much as you can when you’re right
and lose the least when you’re wrong.
That’s easier said than done, but that’s
the objective.
Screening the market with various
parameters to identify potential
trading opportunities is a practice
you’ve been using for years. How
did you get involved in the screening
approach?
I once thought the holy grail to
investing in stocks was through
objective, stock-focused screening.
After many years of attempting to
prove that out, what it taught me is
how nothing works all of the time,
and every approach has its good and
bad periods. The secret, if there is
any, is to observe what is working for
the current market environment and
adjust your focus to that for as long
as that trend remains. And when—not
if—that changes, then adjust again.
32 • March 2023 • Technical Analysis of Stocks & Commodities
Which charting software
and screening platforms
do you currently use?
I use stockcharts.com
and TC2000. For screen-
ing, I use AAII and Fin-
viz.
I understand that some of
your scans are those that
uncover poor-performing equities
with decent fundamentals, positive
money flow, and improving relative
price performance. Are there any
others you could mention?
If you track the performance of
screens for relatively long periods
of time, you will often notice, as I
have, that the fundamentally focused
screens that outperform usually
utilize some form of earnings mo-
mentum as a criteria. But no matter
what the screens show, ultimately,
there must be price action validation
for the messages they provide.
How do you use relative strength
and money flow in your work?
I monitor relative strength and
money flow dynamics to identify
durable, longer-landing trends and
cycles. In the report each week we
look at the market from numerous
points of view to identify what is
working and what isn’t and whether
the price action supports investment
in those opportunities.
Have you ever used point-and-
figure charts, heiken-ashi candles,
or other charting techniques aside
from the most common ones?
I have studied these approaches
plus quite a few others. But, at the
end of the day, for me, nothing is
more useful than a clean, clutter-free
candlestick chart on multiple time-
frames. The more indicators you use,
the more you will see whatever you
want to see in the chart. There is no
better indicator than price itself.
You’ve been trading for over 30
years. What are the most deadly
trading mistakes you have encoun-
tered?
Anything that takes you out of the
game and/or puts and keeps you in-
definitely on the sidelines. Those are
killers in active trading. To do well,
the first rule is to stay alive and never
do anything that puts you in a “game
over” type of situation. Never. Once
you remove that possibility from the
equation, everything gets easier. The
worst mistake most people make in
active trading is that they try to get
rich too quickly. Once they start win-
ning and their confidence grows, they
think they are invincible. In reality,
that’s when they are likely the most
vulnerable for failure. Instead, we
should focus on getting rich slowly.
If you do that, you’ll actually be far
faster in achieving it.
You recommend that new traders
consider simulated trading or paper
trading before putting actual money
at risk. Many other well-known
long-time traders consider that
approach to be counterproductive
since you don’t experience the
pressures of losing real money,
there’s no emotional attachment to
losses, and it can lead to a false sense
of security. How would you respond
to those who hold that view?
I understand the criticisms of the
paper-trading approach. My recom-
mendation to paper trade is one of
proof of concept. If you can’t do
the work to actually prove that the
strategy works on paper, and without
emotions to interfere, then the strat-
egy doesn’t work. Period. Why put
capital into something that doesn’t
have proof of concept unless you like
losing money?
The reality is that the trader who
is disciplined enough to sit on the
sidelines and test out their approach
first before putting it into play for real
is one who is likely to succeed. Doing
that means you are approaching the
market from a scientific standpoint
rather than with a gambler mentality.
A gambler just goes for it, learns in
real time, and, if they survive the
downturns, may learn to succeed.
But most gamblers don’t survive the
learning curve. Instead, they blow
themselves up several times over until
they go broke and quit. That could
be avoided if they required proof of
concept first.
Once you have proof of concept,
you can then develop confidence and
discipline around that, which is what
paper trading can provide as a learn-
ing tool. Then once there is proof,
you put it to work and then learn the
emotional component, which is easier
if the foundation of your approach is
solid. Without a strong foundation,
however, the odds are against you
right from the start. As an active
investor, I always try to put the most
odds in my favor whenever possible
no matter what.
And, yes, I do realize that no one
follows the proof of concept advice.
I didn’t, but I also paid the price of
some hard lessons that developed
scars, and that was tough to overcome
in the years that followed. Most of us
have to learn the hard way, and that’s
okay, providing you do learn from it
and don’t give up when it gets hard.
Because I have to tell you, it will get
very hard, many times, if you do this
for as long as I have.
Do you believe that the market
has been more difficult to trade
successfully in the past decade
compared to earlier periods?
I don’t think it ever gets easier for
anyone. And oddly, the more you
learn and the more experience you
have, the more those things can get
in the way of prosperity, too. The
emotional baggage and pain from
the past will beat down and will stay
with you for a long time, and those
things will impact your ability to
actively invest well. In this business,
oddly, the less you know, the less you
fear, and the farther you can go, but
unfortunately, in time, those things
will work against you.
Since 2009, you have offered a
mentorship program. Can you
explain its purpose? How many
individuals have participated in it,
how do you decide who to accept into
the program, how many individuals
have you mentored, and is there a
charge to the participants?
I would say that, through the report,
I have mentored thousands of inves-
tors over the years. As for one-on-one
mentoring, I’ve taken in 37 people. I
initially used an application process
for the program. But now, I select
people to mentor based on our com-
munications and based on whom I
think I can really help. I only mentor
a few people at a time. I don’t charge
for my time and help, but I do require
those whom I mentor to give back and
mentor others to pay it forward.
Have you ever brought students
together to swap trading experiences
and build comradery?
Prior to the Covid pandemic, I
started organizing retreats where a
group of members would get together
for a week at an exotic location (like
St. Lucia) to talk shop and build new
friendships. It was wonderful and
something I look forward to doing
again soon. Nothing replaces in-per-
son communication and mentorship
opportunities. When I would attend
investing conferences, I gained more
by the friendships I made with other
attendees than I gained from listening
to the experts who were being paid
to give presentations. My retreats are
designed to provide opportunities to
meet and learn from others.
March 2023
Last year, 2022, was a big down
year for the markets and a difficult
trading year. What is your approach
in that type of market? How did
your overall performance compare
to prior years?
My approach in 2022 (a downtrend,
a bear market) was to stay out the
market’s way, to preserve capital,
and to avoid making big mistakes. I
was down 6.78% mostly because of
impatience and being caught in the
numerous trap reversals that were
common in last year’s downtrend.
Whenever we saw signs of significant
improvement was when the risk for
traps was greatest. That’s never easy
for active investors to navigate.
What are the three most important
lessons you’ve learned about
trading over your career?
1. Everything you need to know
can be found in the price ac-
tion.
2. Risk management and position
execution is everything.
3. Every natural instinct you have
will work against you, which
means you must have a system-
atic approach that helps reduce
your natural weaknesses.
Work-life balance is very important
to you. What percentage of your time
is devoted to the markets versus your
private time?
I work six days a week, mostly
for six hours each day (three in the
morning, three in the afternoon). Like
everyone else, I strive for balance
but often fall well short. For me, that
means working more than I should
and not taking extended periods of
time off and away from the markets
and the report.
Most traders don’t track their
Continued on page 35
• Technical Analysis of Stocks & Commodities • 33
 MARKET RAP
THE WORLD OF RETAIL TRADING
Emilio Tomasini is an adjunct professor of corporate finance at the
University of Bologna in Italy and is a professional trader. He has au-
dited over 5,000 accounts of traders during 13 years of a real-money
trading competition, giving him unique insights into what helps a retail
trader to succeed. He has expertise in technical analysis and trading
Emilio Tomasini
system design. In this column, he shares his sometimes “unserious”
thoughts on serious topics in finance. In his writings, he hopes to help the retail trader better understand the leap
from unprofitable to profitable trader, firmly believing that the right answers can come only if the right questions
are asked. At his website at www.emiliotomasini.com, he offers some of his expertise in a free video course.

THERE IS NO MAGIC IN ELLIOTT
WAVES, AND TREND IS NOT FOREVER
Technical analysis can be divided
into two broad subsets of techniques:
trend-following and mean-reverting.
As soon as you start from this per-
spective, everything becomes easier.
Whenever you face a new methodol-
ogy, you must ask yourself to which
category it belongs.
Trends do not last forever. And that
is the reason we have cycles—because
trends end and mean-revert. The mar-
ket cycles through these modes.
Because cycles exist in the markets,
we have cycle analysis, in all its
forms. Cyclical analysis is a topic that
is taught very seriously in the field
and in the universities, usually with
the help of some sophisticated statisti-
cal tools like seasonal econometric
studies and other tools.
Theoretically, Elliott waves—one
of the most controversial market
methodologies—belong to the cat-
egory of cycle analysis. But critics
of Elliott wave theory will point out
the lack of statistical tests behind it
and the lack of solid evidence show-
ing it works.
And this is not to mention the fact
that R.N. Elliott, who originated
this waves theory and for whom the
technique is named, died poor. This
fact begs the question, how successful
could this technique be then? Frankly
speaking, I believe that his wallet has
nothing to do with his ability to think;
a person can go bankrupt but still be
34 • March 2023 • Technical Analysis of Stocks & Commodities
smart and a good thinker.
Followers of Elliott wave theory,
who are numerous and often pugna-
cious about this topic, answer back
tenaciously to all these critics that
technical analysis is an art, not a
science. So all these defamatory
statements are doomed to a quick
failure under that lens.
Three decades ago, I have to say I
was among the fiercest Elliott wave
opponents. I was in the camp who
When an established
trend changes direction,
it’s the moment that you
are either stopped out
or you make a fortune.
thought the approach lacked any
statistical backing and thus could not
be taken seriously. However, over the
years, I’ve met professional traders
who convinced me otherwise. Of
course, we can talk about theory all
day long, but “show me the money.”
It turns out that there are profes-
sional traders who use Elliott wave
concepts to make profits every day
in the markets. So for that reason, the
methodology deserves some respect.
But I can also tell you that very seldom
are Elliott waves used by profes-
sional traders as a standalone trading
technique. The actual entry and exit
points are calculated according to
the healthiest and statistically strong
technical analysis techniques. Thus,
Elliott waves just provide a hint about
the market cycle and the impending
change of trend direction.
So in practice, what Elliott wave
theory does is remind you that a trend
is not forever and tells you that you
must be ready for a trend change. It
is the same reminder to a business
owner that every company has a life
cycle by which the business is born,
thrives, and then eventually goes
downhill, all over the course of a
number of years. The business owner
must be nimble enough to catch the
right moment to capitalize.
My personal belief is that Elliott
wave theory, in its purest interpreta-
tion, expresses a “mean-reverting”
approach—after the rain falls, the
sun comes out, and vice versa. In the
same way, we have some alternating
wave patterns in the markets. This is
an approach that is easier to preach
about than to follow in practice due
to its lack of precise timing. But it
tells the trader that there is a possible
change of trend direction coming.
And when is the moment that you
make the most from the markets? It’s
during a change of trend direction.
When an established trend changes
direction, it’s the moment that you
are either stopped out or you make
a fortune.
So what conclusion can we draw
from all this? In the book of Qohelet
 MARKET RAP
(Ecclesiastes) of the Bible, there is a
well-known quote that “all will be
turned to dust again.” And this is also
the message we get from Elliott wave
INTERVIEW/KIRK
Continued from page 33
trading performance using multiple
metrics (for example, win/loss ratio,
average winning and losing trade,
exit efficiency, and other measures).
Isn’t trading without this knowledge
a losing approach?
As with most things, there needs
to be some balance. While you don’t
want to be flying blind without know-
ing how well you are performing, it’s
also easy to get bogged down with
that type of data, so much so that
you become paralyzed by it for fear
of making mistakes. I recommend
that people do thorough spot checks
at times to see where they are at, but
then forget about that and focus on
managing their strategy. When you
focus on your performance data too
closely, it can become an unproduc-
tive and unprofitable waste of time,
when your focus could have been
dedicated elsewhere. Many of us
place too much emphasis on things
that do not contribute to the bottom
line and that get in our way in unnec-
essary ways. Yes, track how well you
are doing, but don’t obsess over it.
What accomplishments are you
most proud of?
Vanity is not my strong suit, but I
will say this: What gives me the most
personal satisfaction is that I’ve been
able to do what I love to do each day
and have been able to make a positive
difference for many who have fol-
lowed and supported my work these
theory: Every trend has a start and
an end, sooner or later. A trend does
not last forever. And because trends
do not last forever, cycles exist.
many years. That’s truly amazing and
I’m extremely grateful.
In your 2007 interview in this
magazine, you mentioned that you
were writing a book. I don’t see
that it was published. Do you still
plan on releasing a book? If so,
what will be its focus and potential
publication date?
I wrote and finished that book, but
have not published it! The writing
process was more for me—basically,
forcing me to put my thoughts to paper
and lessons learned up until then. I
was writing for that more than for
any other reason. I may publish the
book someday, but I’m in no hurry
to do so because my journey is far
from being over and I still have a lot
more to learn and share.
What activities do you enjoy
engaging in?
We do a lot of hiking in the moun-
tains that surround Bend, Oregon,
where we currently live. I also enjoy
riding my ATV through the forests
and in the sand dunes. And I play
pickleball four days a week.
After your three-day intensive
pickleball experience, where do you
stand in your pickle ball journey to
get to the top?
Much like with the markets, the
pursuit is ongoing! While I currently
play at the 4.5 level (5.0 is the highest),
I’m still learning and striving to do
better. The important thing is that I
love the sport, the competition, and
the many friends I have met through
March 2023
This point may seem trivial, but this
is the essence of technical analysis.
it. It has been a real blessing to me
since I started playing in 2014.
Do you have any changes planned
in your work/lifestyle mix going
forward, except for the breaks you
take during the holiday season?
I love my work and life, but like
everyone else, I would like to travel
more and make the time to do so.
Charles, thank you for sharing your
insights and your approach to trad-
ing with our readers. Much success
in all your future endeavors.
Leslie N. Masonson is president of
Cash Management Resources, a fi-
nancial consulting firm that focuses
on ETF strategies. He is an active
ETF and Nasdaq futures trader,
and the author of Buy—Don’t Hold:
Investing With ETFs Using Relative
Strength To Increase Returns With
Less Risk; and All About Market
Timing, as well as Day Trading On
The Edge. He can be reached at
lesmasonson@yahoo.com or 845
323-7276.
FURTHER READING
Gopalakrishnan, Jayanthi [2007].
“Charles Kirk Of TheKirkReport.
com,” interview, Technical Analy-
sis of StockS & commoditieS,
Volume 25: November.
Penn, David [2005]. “TheKirkRe-
port.com,” Websites For Traders,
Technical Analysis of StockS
& commoditieS, Volume 23:
March.
• Technical Analysis of Stocks & Commodities • 35
 Futures For You
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is
the senior strategist for DeCarley Trading, a division of Zaner, where she
also works as a broker. She has written five books on futures and options
trading, with the latest being Trading Commodity Options...With Creativ-
ity (July 2020), as well as A Trader’s First Book On Commodities (third
edition, October 2017) and Higher Probability Commodity Trading (July
2016). Garner also authors widely distributed e-newsletters; for a free
subscription, visit www.DeCarleyTrading.com. To submit a question, email
her at info@carleygarnertrading.com or via www.DeCarleyTrading.com.
Selected questions will appear in a future issue of S&C.
Carley Garner

HOW CAN CRYPTO INVESTORS AVOID
COUNTERPARTY RISK AND PROTECT
FUNDS? (PART 2 OF 2)
As a quick primer, last month, we dis-
cussed that cryptocurrency broker-
ages are largely unregulated and are,
therefore, not mandated to segregate
their customers’ funds from those of
their own brokerage operations. As a
result, the funds customers transfer
to the brokerage for the purpose of
trading cryptocurrencies might make
its way to fund business operations
or, worse, lavish lifestyles. On the
other hand, the futures industry
faces strict rules, regulations, and
auditing techniques to prevent them
from using client money for anything
other than margining their customer’s
trades with the futures exchanges.
Thus, it would be improbable for an
account holder at a futures brokerage
to experience financial harm if their
brokerage went belly up. As we know,
FTX brokerage customers didn’t
enjoy the same money protections;
they, and those trading with other
cryptocurrency brokerages, face
substantial counter­party risk.
Counterparty risk is the probability
that the other party in an investment
or trading transaction may not fulfill
its part of the deal and may default
on its contractual obligations. This
risk occurs before, during, and after
trades take place; counterparty
risk is something futures traders
rarely consider because they are
36 • March 2023 • Technical Analysis of Stocks & Commodities
participating in a marketplace in
which there are organized protections
of funds and market integrity.
In addition to fund segregation,
futures traders enjoy the benefits of
executing orders on a regulated and
centralized exchange. The CME
Group and ICE exchanges in the
US guarantee every transaction
occurring on their exchange. This
means if a trader goes long on a
product and experiences windfall
profits, he will be made whole even
if the short trader on the other side
In addition to fund
segregation, futures
traders enjoy the
benefits of executing
orders on a regulated
and centralized
exchange.
of the transaction cannot cover their
losses; this can happen when leverage
is involved. For example, imagine a
trader who sold a crude oil futures
contract at $130.00 per barrel on
March 7, 2022 and bought it back at
$115 later in the day. That particular
trade was unusually lucrative for the
short trader and would have netted
roughly $15,000 profit in a single
trading session.
However, for every buyer, there is
a seller, and vice versa. If someone
sold a contract at $130.00, someone
else bought it at that price. At the
time, the margin for crude oil wasn’t
high enough to cover the daily losses.
Thus, if the person holding the bag
on the long side of the market had
less than $15,000 in their account at
the time of execution, there is a good
chance the trading account would
have a negative balance (meaning the
trader lost more than was on deposit).
When trading non-exchange traded
leveraged products, such as what is
offered at cryptocurrency brokerages
like FTX, the lack of ability for the
losing trader to cover losses is a
problem for everyone. If the incident
is isolated to a few traders, it would
likely be business as usual for the
exchange and all market participants.
Still, the entire house of cards quickly
comes down if it is systemic. That,
in addition to misappropriated funds,
are the primary downfalls of FTX.
Bitcoin and Ether speculators
could have saved themselves a lot
of stress and heartache by opting
for cryptocurrency futures traded
on the Chicago Mercantile Group
Exchange. To access these futures
products, retail traders must open
an account with a regulated futures
brokerage subject to regulatory
monitoring of bank accounts. This
arrangement doesn’t guarantee fund
Continued on page 49

Swing Trading 90-Day 25-SMA
Pivots
Here is a way to identify setups to buy
the pivot as price action moves up fol-
lowing a downtrend, using a 25-day
simple moving average on a 90-day
candlestick chart. The technique
is well-suited to a position-sizing
approach and to high-volatility
instruments.
by Ken Calhoun
As
buyers come back into the
market following the bear
market of 2022, it is help-
ful to identify technical
setups for long pivot en-
FIGURE 1: TRADING THE 25-SMA REVERSAL (MARA). Here is an example of buying the pivot as price action moves up.
TRADING ON MOMENTUM
Catching Early Reversals
tries. One combination of indicators
that seems to work fairly consistently
is a pivot over a 25-SMA line using a
90-day daily candlestick chart.
25-SMA crossover entries
You can see the upwards movement in
price action of this pattern in Figure
1, a chart of Marathon Digital Hold-
ings (MARA). Note that increasing
candle ranges and volume during the
uptrend provided support to price.
Once the downtrend reversed, the
25-SMA crossover indicated a long
reversal to enter.
March 2023
Step-by-step action plan
Here’s how you can start using this
strategy:
Step 1: Visually scan for charts
that have had sustained downtrends
and are starting to pivot. For this,
you can use 90-day candlestick
charts with a 25-day simple mov-
ing average.
Step 2: Enter your position within
2 to 3 days following the upwards
crossover pattern.
Continued on page 25
eSIGNAL
• Technical Analysis of Stocks & Commodities • 37
 Explore Your Options
GOT A QUESTION ABOUT OPTIONS?
Jay Kaeppel has over three decades of experience in the options markets. He
was a head trader for a CTA firm, an options trading software developer,
and was a portfolio manager for an investment management firm. He is
presently Senior Research Analyst for Sentimentrader.com. He is the author
of several books, including The Four Biggest Mistakes In Option Trading;
The Option Trader’s Guide To Probability, Volatility, And Timing; and
Seasonal Stock Market Trends. Send your questions or topic suggestions
to Jay Kaeppel at jay@sentimentrader.com. Selected questions will appear
in a future issue of S&C.
Jay Kaeppel

BULL CALL AND BEAR PUT SPREADS:
FILTERING FOR TREND AND LIQUIDITY
I find that I favor bull call and bear
put spreads. Unfortunately, there are
so many stocks to consider and so
many potential spreads that can be
entered. I am unsure how to decide
which trade or trades to take.
The first thing to remember is that
there is no such thing as “the best
trade”—except in hindsight. As a
trader, your job is to:
1. Try to put the odds as far in your
favor as possible each time out
2. Allocate capital intelligently
3. Manage risk
Figure 1. Note that 504 stocks/ETFs
made the cutoff.
Notice the bid-ask spread in the
far right-hand column. Tight bid/ask
spreads are among the most impor­
tant factors in maintaining an edge
in options trading. To appreciate this
statement, consider buying an option
and deciding immediately that you’ve
made a mistake and want to get out.
If the bid/ask spread is 0.2%, you
will buy at one price and then turn
around and sell at a loss of −0.2%,
even if the underlying security has
not moved at all. However, if you are
speculating in thinly traded options
with a bid-ask spread of 5%, you
will incur an immediate −5% loss if
compelled to exit.
Step 2 in this example is arbitrary
but is intended once again to narrow
down to more actively and more liq­
uid traded options. In this screen, we
rank the 504 stocks/ETFs from the
first screen by average daily options
volume. Arbitrarily, we will use a
cutoff of 5,000 options traded per
day. This step cuts the number of

Let’s take a “soup to nuts” approach

to finding a trade. One caveat to bear
in mind, however, is that the steps
detailed here are an example of one
relatively objective process and are
not guaranteed to deliver winning
trades.
Two critical overarching factors
affecting your trades are liquidity
and trend. So let’s start by filtering
for these two factors. For all of the
tests discussed here, we will utilize
routines built into www.Options­
analysis.com.
OPTIONSANALYSIS.COM

Filter for liquidity

For step 1, we will look for stocks and
ETFs with an average option bid/ask FIGURE 1: SCREENING FOR LIQUIDITY (OPTION BID/ASK SPREAD). When looking for bull call or
spread of 2.5% or less and an average bear put spreads to trade, you can narrow down the choices by filtering for liquidity. This example screen
of at least 1,000 options traded daily. shows the results after filtering based on the option bid/ask spread and daily options volume for underlying
The output for this screen appears in stocks and ETFs.
38 • March 2023 • Technical Analysis of Stocks & Commodities
 Explore Your Options
securities in our list from
504 to 321. The output
for this screen appears
in Figure 2.
Filter for trend
In our last step, we will
pursue a bullish strategy
(a bull call spread). Let’s
next attempt to separate
stocks in an uptrend from
those in a downtrend. To
do so, we will run a rou­
tine that highlights only
those stocks/ETFs above
their respective 200-day
moving average. This
step cuts the number of
securities in our list from
321 to 121. The output
FIGURE 2: SCREENING FOR LIQUIDITY (DAILY OPTIONS VOL- for this screen appears
UME). Here, the results from Figure 1 are narrowed down using a
chosen threshold for “average daily options volume.” in Figure 3.
FIGURE 3: SCREENING FOR TREND. When seeking to trade a bull call spread, you can look for underlying
stocks or ETFs in an uptrend (or conversely, in a downtrend for a bear put spread). Here, a screen was run
based on stocks/ETFs above their respective 200-day moving average, serving to narrow down the results
from Figure 2.
March 2023
Finding a bull call spread
Now let’s scan our list of 121 liquid,
uptrending securities for a poten­
tially favorable bull call spread. The
input criteria we will use appear in
Figure 4.
Things to note:
• There must be some actual trading
to consider a particular option.
We need an option volume of at
least 1 and an open interest of at
least 100 to consider trading a
specific option.
• The “days to expiration” is arbi­
trarily set to a low of 55 and a high
of 120 days. This is done to force
us to enter a trade that gives the
underlying security some time to
make a move before time decay
kicks in. That said, a trader could
easily set this window to a much
shorter or longer timeframe.
• Once the output appears, we
will sort the potential trades by
“gamma.” I’ll explain. “Delta” is
an option greek value that tells you
the “stock equivalent position” for
a given option or option spread
trade. A delta of 100 indicates that
the option position will behave
like a position holding 100 shares
of the underlying security (typi­
cally at a fraction of the cost).
• “Gamma” indicates how many
deltas the position will gain or
lose based on a $1 change in the
underlying security price. It tells
us how sensitive the value of the
position is to price changes in
the underlying security. Since
we are betting on an up move
in the underlying security price,
The first thing to
remember is that there
is no such thing as “the
best trade”—except in
hindsight.
• Technical Analysis of Stocks & Commodities • 39
 Explore Your Options
high gamma gives us the most
“bang for the buck” if things go
as planned.

The output
The output for our test appears in
Figure 5.
Note that the trade with the highest
gamma involves:

• Buying the KWEB Feb17 2023

32 call @ $2.04
• Selling the KWEB Feb17 2023
42 call @ $0.28

Things to note:

FIGURE 4: LOOKING FOR A BULL CALL SPREAD. The list of possibles from Figure 3 is further scanned • This trade has 63 calendar days
based on the criteria shown here. (roughly two months) until option
expiration
• The cost to enter the trade—and
the maximum risk—is $176 for
a 1-lot
• The delta for this trade is 33.47.
This means it is roughly equivalent
to holding 33 shares of KWEB
• Buying 33 shares of KWEB at
$30.06 would cost $992. So the
option position costs only 18%
as much as buying shares
• The breakeven price for this trade
is $33.76, so the stock must rally
FIGURE 5: SORTING BY GAMMA. After running a scan using the criteria shown in Figure 4 to look for
meaningfully for this trade to
potential bull call spread options, potential trades are further sorted by gamma. Gamma is an indication
of how sensitive the value of the position is to changes in the price of the underlying security. In the case generate a profit
of looking to trade a bull call spread, a high gamma is desirable. • The maximum profit on the
trade is $824 if KWEB is above
$42 a share at the time of option
expiration

The trade particulars and the risk

curves for this trade appear in Fig­
ures 6 and 7.

Managing the trade

FIGURE 6: TRADE DETAILS. The example bull call spread option trade shown here is based on the stock Finding a trade is only step 1. From
KWEB. As you can see, this option has 63 days until expiration, and the breakeven price is $33.76, so the
here, the next step is to decide how
stock must rally meaningfully for this trade to generate a profit.
much capital to allocate. For example,
a trader with a $25K trading account
As a trader, your job is to try to put the odds as far in is willing to allocate 4% of capital—
your favor as possible each time out. or $1,000—to any trade. That means
the trader could buy a 5-lot of the
40 • March 2023 • Technical Analysis of Stocks & Commodities
 Explore Your Options

One advantage to
trading options is that
it is often possible
to adjust an existing
trade rather than exit
altogether.
KWEB trade above (INT($1,000 /
$176) = 5).
The next decision is whether to
risk the full $1,000 or to cut a loss
and try to salvage some premium if
KWEB fails to rally. FIGURE 7: RISK CURVES. As in Figure 6, the example bull call spread option trade under consideration
One other contingency to plan for here is based on the stock KWEB, with a price chart for the stock on the left, and the risk curves for different
is when to take a profit if KWEB times until expiration on the right.
rallies. This may involve monitor­
ing a favored overbought indicator to trading options is that it is often
or applying a specific percentage possible to adjust an existing trade
amount. Alternatively, one advantage rather than exit altogether.

TRADERS’ TIPS
Continued from page 55
enters a long position when it crosses above 30; a position
is closed when an opposite position is opened. Using this
simple system, the user could compare the RSI version
using the open­close average data with the version of the
RSI using only close data. And if you’re developing an
indicator­based trading system, it would certainly be worth
trying the alternative version of the indicator to be used, and
comparing the results.
The script can be downloaded from the 2023 script re­
pository on https://financial­hacker.com. The Zorro platform
can be downloaded from https://zorro­project.com.
—Petra Volkova
The Zorro Project by oP group Germany
https://zorro-project.com

Algo Q&A
DAVEY
Continued from page 56
Counting the original strategy,
we have three possible versions of a
strategy that did not trade on Fridays.
They might be exactly the same
system, even. But that is precisely
the reason that how you develop a
strategy is crucial.
I’d certainly be happy to trade
version 2 or 3 of this strategy, but
never version 1. Do you see the The most important
difference in these versions, and
why version 1 is inferior to the
aspect of this is that this
other versions? If you do not, take is a one-way decision;
some time to think about it. It is a you cannot go back once
critical consideration in strategy you decided to eliminate
development. If you do understand
the difference, congratulations—you
trading on Fridays.
are on the road to successful algo
system development.
March 2023 • Technical Analysis of Stocks & Commodities • 41
 ETFs Investing In Cannabis Stocks
Cannabis’s Promising Future
Lies Ahead, or Does It?
Cannabis ETFs offer an opportunity to participate in
an industry that is expected to mushroom in the decades
ahead as more individuals on a worldwide basis partici-
pate in its recreational and medicinal uses. Certainly,
there are legal and regulatory roadblocks ahead, and
future happenings are unknown, but having a small slice
of your portfolio "in the weeds" could turn out to be to
be an investment “high.” Check out some possible ETF
and stock opportunities here.
by Leslie N. Masonson
B
efore delving into the ETFs and stocks in the
cannabis category, let’s first define our terms.
According to one online dictionary I checked,
cannabis is “a tall plant with a stiff upright stem,
divided serrated leaves, and glandular hairs. It
is used to produce hemp fiber and as a drug.” A
secondary definition it gives is: “a dried preparation of
the flowering tops or other parts of the cannabis plant,
or a resinous extract of it (cannabis resin), smoked or
42 • March 2023 • Technical Analysis of Stocks & Commodities
consumed, generally illegally, as a psychoactive (mind-al-
tering) drug.” Marijuana is defined by Merriam-Webster’s
dictionary as follows: “the psychoactive dried resinous
flower buds and leaves of the female hemp or cannabis
plant (Cannabis sativa or C. indica) that contain high
levels of THC and are smoked, vaped, or ingested (as in
baked goods) especially for their intoxicating effect.”
Cannabis overview
The US cannabis market is the largest in the world with
2022 legal sales of about $30 billion. Global cannabis
sales are forecasted to grow about 27% annually, and
hit nearly $71 billion by 2028. Over 90% of Americans
believe cannabis should be allowed for medical and rec-
reational use. The US Congress continues to try to find
a bipartisan endgame to provide a reprieve to cannabis
BIGC STUDIO/SHUTTERSTOCK
sellers and users. The SAFE Banking Act, if it were
to have been passed, would have provided to cannabis
vendors the sorely needed access to banking services
such as cash and deposits, checking accounts, and wire
transfer services that currently are prohibited. Access to
 WHY TRADE ETFS?

these banking services with reasonable terms, reasonable Ticker Fund Name
interest rates on loans, and deposit services, especially MSOS AdvisorShares Pure US Cannabis ETF
benefitting minority-owned cannabis businesses, also MJ ETFMG Alternative Harvest ETFMG Alternative Harvest
would have been achieved if the SAFE Banking Act MJUS ETFMG U.S. Alternative Harvest ETF
was enacted. Unfortunately, it was not. Thus, minority YOLO AdvisorShares Pure Cannabis ETF
business owners were denied wealth and job creation POTX Global X Cannabis ETF
opportunities, further exacerbating the current racial CNBS Amplify Seymour Cannabis ETF
and social inequities connected to the criminalization THCX Cannabis ETF
of marijuana. TOKE Cambria Cannabis ETF
Cannabis (a.k.a. marijuana) has been around since BAD B.A.D. ETF
10,000 BC, but more recently, the onerous legal and VICE AdvisorShares Vice ETF
banking issues have made it difficult for purveyors, us- MSOX AdvisorShares MSOS 2x Daily ETF
ers, and potential ETF and stock investors to fully take PSIL AdvisorShares Psychedelics ETF
advantage of its medical and financial potential. Interest-
PSDN AdvisorShares Poseidon Dynamic Cannabis ETF
ingly, there may be some hope to turn the page on restric-
PSYK PSYK ETF
tive measures, as US President Joe Biden announced in
WEED Roundhill Cannabis ETF
early October 2022 a pardon of individuals federally
MJXL ETFMG 2X Daily Alternative Harvest ETF
convicted of marijuana possession. Unfortunately, this
FIGURE 1: CANNABIS ETFS. The tickers and names of sixteen ETFs are shown
order does not apply to those convicted on the state level.
here. There are multiple ETF sponsors, but note that AdvisorShares sponsors
That is the problem, as state and federal laws are at odds
six ETFs, and ETFMG sponsors three.
regarding the sale and use of cannabis. At least 37 states
allow medical marijuana, which has allowed users to fill
prescriptions at their local dispensary, of which there are wise stated. According to this site, there are 16 ETFs in
thousands across the country. the cannabis category (Figure 1) with total assets under
management (AUM) of $1.243 billion of which half have
Cannabis ETF overview AUM of $9 million or less, with most of those having
The New Cannabis Ventures Global Cannabis Stock a lifespan of two years or less. This ETF category is
Index was down more than 70% in 2022 after losing 26% rather new, with three ETFs coming to market in 2022
in 2021—quite a stunning two-year drop. The cannabis and five in 2021.
ETFs were among the worst ETF performers in 2022 The common characteristics of these 16 ETFs include:
with multiple ETFs in the bottom 35. Perhaps the late open-ended; equity-based US or global; specialty focused;
December 2022 cannabis stock price low represents the average expense ratio of 0.78%; 6 are passively managed
end of this waterfall decline, and therefore it may be an and 9 are actively managed; 13 listed on NYSE Arca; 8
opportune time to buy a small position as a long-term offer annual dividends, 6 offer quarterly dividends; no
hold, as conditions are slowly changing for the better leverage used except for MSOX which is 2X; all had
along a number of different fronts. losses ranging between 17% to 72% as of December 23,
All the ETF data in this article is from ETFAction. 2022, and unimpressive flows of negative $34 million
com, a comprehensive fee-based website, unless other- (MJ) to a positive $21 million (POTX); typically hold-

Ticker MSOS MJ MJUS YOLO POTX CNBS THCX TOKE BAD VICE MSOX PSIL PSDN PSYK WEED MJXL
Inception Date 9/1/20 12/3/15 5/12/21 4/17/19 9/17/19 7/23/19 7/8/19 7/25/19 12/22/21 12/12/17 8/23/22 9/15/21 11/16/21 1/31/22 4//22 7/6/21
AUM ($$) $602 $341 $80 $58 $47 $36 $25 $14 $9 $9 $7 $6 $4 $2 $1 $0
Expense Ratio 0.80% 0.75% 0.75% 0.88% 0.50% 0.75% 0.75% 0.42% 0.75% 0.99% 0.95% 1.00% 1.01% 0.75% 0.39% 1.01%
Number of holdings 8 36 7 20 18 28 23 30 52 34 0 19 3 26 16 0
Average Daily Volume 3,131,670 772,438 48,167 64,172 35,537 39,720 45,568 24,323 949 679 74,234 24,145 27,624 816 11,776 17,582
Dividend Yield 2.21% 2.11% 1.57% 1.16% 3.46% 2.30% 1.34% 0.18%
Performance YTD −71.79% −58.41% −63.85% −70.12% −65.06% −62.16% −69.44% −43.86% −16.53% −18.39% −65.64% −79.92% −86.26%
Performance — 3 years −33.44% −28.24% −46.87% −25.64% −39.39% −20.12% 3.64%
Flows YTD ($$) $347 ($30) $100 ($11) $21 $4 $4 $0 $2 ($1) $12 $7 $7 $2 $3 $1
Flows — 3 years (or less) $2,005 $426 $110 $216 $278 $156 $134 $23 $10 ($3) $12 $17 $14 $2 $3 $3

FIGURE 2: CANNABIS ETF COMPARISON. The leader by far in AUM and share volume is MSOS with almost 50% AUM despite a late start. MJ is in second place
with $341 million in AUM, while eight others have very low AUM of $9 million and daily share volume of 75,000 or much less. The long-term viability of these
latest newcomers is questionable.
March 2023 • Technical Analysis of Stocks & Commodities • 43

FIGURE 3: CANNABIS ETF PERFORMANCE SEPTEMBER 2, 2020 THROUGH DECEMBER 19, 2022. All these ETFs performed worse than the S&P 500 by far.
Both POTX and THCX were the worst performers, declining about 75% each. VICE gained 2.52%. Overall, the cannabis ETFs got crushed in recent years.
ing about an average of 25 positions; and 14 had average
daily volume below 75,000.
Basic key numbers: AUM, expense ratios,
holdings and yield
Figure 2 provides each ETF’s individual data points.
AUM is the first key number and is one of the most criti-
cal factors for an ETF to maintain and grow to remain
viable. Eight of these ETFs have AUM of $9 million or
less which is not unexpected, as eight are all newbies
within a two-year or less birth date. Over the next few
years their assets need to grow substantially to at least
$100 million to ensure their long-term viability and that
is a big uphill battle, with both MSOS and MJ already
controlling 76% of the assets between them. Clearly,
AdvisorShares Pure US Cannabis ETF (MSOS) is the
dominant player with $602 million AUM or 48% of the
category total. Surprisingly, it was the seventh ETF in
this space with an inception date of September 1, 2020,
so its dominance is an exceptional competitive accom-
plishment.
It is interesting to note that the top four ETF behemoth
sponsors, namely Blackrock, Vanguard, State Street, and
Invesco, are not represented in this space. Even more
interesting is that AdvisorShares has placed a mind-
boggling six ETFs in this off-the-beaten-track category
with total AUM of $686 million or 55% of the category
total. Their ETFs include MSOS, YOLO, VICE, MSOX
(2X leveraged), PSIL, and PSDN. MSOS is by far the
AUM leader, with 88% of their six ETFs’ AUM. In con-
clusion, their unusual single ETF buildup is extremely
rare and one that may not work out very well for the firm,
as these ETFs are all competing against each other for
attention and assets.
Similarly, but to a smaller extent, ETFMG has placed
three ETFs (MJ, MJUS, and MJXL) in the group with an
44 • March 2023 • Technical Analysis of Stocks & Commodities
STOCKCHARTS.COM
AUM total of $421 million or 33.9% of the group total.
Considering that both Advisor Shares and ETFMG cur-
rently manage the top two ETFs in the cannabis space
based on AUM, why would they add others? The answer
is not evident to me. I doubt whether those additional
ETFs will add value to their firms’ profits or still be in
existence in a few years, especially if they don’t meet
their own minimum internal hurdle rates.
The second critical factor is the annual expense ratio.
Here, five ETFs with the highest ratios are at or near the
1.00% level, which is much higher than the 0.75% or
lower for the average ETF in the ETFAction tracking of
3,070 ETFs. The lowest ratio of the group is 0.42% from
TOKE and 0.50% from POTX. The four top asset gath-
erers sported a ratio of around 0.80%. The third critical
factor is the number of portfolio holdings. Here, there is
a definite cluster of four ETFs with 28 to 52 positions.
BAD came in at 52 while MJ, CNBS, TOKE, and VICE
were around 30. Surprisingly, a few of these ETFs had
unusually low portfolio counts with PSDN at 3, MJUS
at 7, and MSOS at 8. The downside with these three is
the lack of diversification and the potential for any of
those holdings to unexpectedly blow up, resulting in a
big portfolio drawdown. Of course, it works the opposite
way on good news, but who wants to take that risk in a
volatile category? The last critical factor is the annual
dividend yield. Here there is a wider dispersion with MJ,
POTX, and BAD just above 2%, while at the low end are
PSYK, THCX, and VICE all below 1.5%. Also note that
half the group offers no dividend payments.
Cash inflows, trading volume and per-
formance comparison
Incoming cashflow is the lifeblood for an ETF to remain
a viable investment vehicle and to grow its footprint in
its category. Unfortunately, the flows for the majority
of these ETFs (except for MSOS with Ticker Percent United Dev.Ex-
Large cap Mid cap Small cap Micro cap
$347 million YTD as of December 23, Top 10 States US

2022 and MJUS with $100 million) MSOS 5.65% 5.41% 0.23% 1.66% 3.35%

are negative. MJ generated the worst MJ 79.39% 57.56% 50.19% 4.02% 4.13% 25.21% 42.90%

flows with a negative $30 million. As MJUS 107.02% 32.83% 0.00% 27.59% 7.45%

mentioned earlier, these numbers need YOLO 84.91% 43.44% 49.36% 22.39% 8.91% 29.98%

to greatly increase or many of these POTX 82.66% 32.35% 67.04% 19.37% 35.46% 44.56%

ETFs will be no longer viable for the CNBS 41.55% 27.13% 25.70% 0.03% 7.51% 15.10% 24.66%

sponsors to cover their costs, let alone THCX 53.33% 48.30% 48.87% 9.48% 24.36% 63.48%
make a profit. TOKE 62.86% 51.01% 41.20% 34.29% 14.75% 18.22% 25.13%
Not unexpectedly, the average trad- BAD 25.75% 63.81% 30.95% 50.47% 26.70% 22.68%
ing volume leader is MSOS with over VICE 47.08% 71.38% 22.67% 40.08% 20.14% 27.38% 6.52%
3.1 million shares a day. Next up is MJ PSIL 67.05% 33.73% 58.86% 9.92% 4.94% 78.07%
with a very respectable 772,438. After PSDN 7.58% 0.00% 7.58%
that, the other ETF volume totals trail PSYK 59.25% 61.07% 38.80% 10.52% 39.72% 25.18% 24.63%
off significantly, running between a low WEED 128.23% 0.00% 0.00% 22.43% 8.10%
of 679 shares a day to a high of 74,000, MJXL 64.49% 0.00% 0.00%
with the others in the range of 25,000 to FIGURE 4: CANNABIS ETFS EQUITY COMPOSITION, AS OF DECEMBER 19, 2022. The security hold-
48,000, not very meaningful. The low ings are split in varying percentages between the US and other countries. Regarding capitalization size,
trading volume of 14 out of 16 ETFs the focus was micro-cap names, with small-cap and mid-cap competing for second place.
is another indicator of lack of investor
interest, which does not bode well go-
ing forward. This volume is extremely
disappointing and certainly not very
significant for either investors or trad-
ers who may experience higher-than-
normal bid-to-ask spreads because of
a potential lack of liquidity. Thus, only
MSOS and MJ have the volume neces-
sary for decent trade execution.
Figure 3 charts the ETF price perfor-
mance for the seven oldest ETFs from
the earliest common starting date of FIGURE 5: CANNABIS ETF OVERLAP. Viewing the overlap in holdings among the 10 ETFs considered
September 2, 2020 through Decem- here reveals a lack of consistency in common names among the ETFs. The highest overlap percentage was
shown by POTX, with MJ at 46% or 14 names. Next up was POTX and THCX at 36.5% or 9 names. VICE had
ber 19, 2022. Clearly, both POTX and
the least correlation with other ETFs, with six readings of 0%.
THCX were the worst performers,
declining about 75% each, and MSOS
was not far behind, falling 71%. Interestingly, the S&P are almost evenly divided between the two geographic
500 gained 10% for this period, while VICE gained areas. And some of the other ETFs have assets spread
2.52%. So overall, the cannabis ETFs got crushed, no across the world in areas not specified in the table.
matter how you look at it. Only oil-related stocks, com- The largest concentration of assets is in the micro-cap
modities, and bonds performed much better in the 2022 area, while the remainder are divided among large-, mid-,
nasty bear market. and small-caps. Surprisingly, no two ETFs have a similar
distribution of assets among these four cap sizes, which
Portfolio composition is unusual considering the limited universe of cannabis
Figure 4 provides a comparison of the portfolio compo- stocks. So overall, there was a wide variation of holdings
sition of all of these ETFs. There is a large variance of with no two ETFs even close in their portfolio mix. This
securities held in either the US or outside the US. MJ, is an important consideration in deciding to buy one of
BAD, VICE, and PYSK have 60% or more of their port- these ETFs, as small-caps have years when they lead the
folio in the US, while POTS and PSIL are more heavily market and others where large-caps lead, and the price
weighted to ex-US developing countries. THCX and MJ performance difference between the two can be large.
March 2023 • Technical Analysis of Stocks & Commodities • 45
 FIGURE 6: CANNABIS ETF PORTFOLIO OVERLAP. Only seven stocks were in seven EFTs, and six stocks were in three ETFs. Unfortunately, all of these stocks
except for JAZZ had miserable 2022 returns.
ETF overlap
Figure 5 provides a bird’s-eye view of the number of
securities that were present in each ETF compared to all
the others for the 10 largest ETFs presented here. View-
ing the table top-down indicates the lack of consistency
in common names among these ten ETFs. One would
think that with a limited number of companies in this
business that there would be a high correlation (such as
75% or higher) of stocks in their portfolios. However,
this did not turn out to be the case.
Actually, the highest overlap percentage was shown by
POTX with MJ at 46%. The next highest was POTX with
THCX at 36.5%. MSOS, with a total of eight stocks in
its portfolio, had only a 0% to 5% match with any other
ETF. At the other end of the spectrum, VICE had 0%
overlap with six competitors. The considerable differ-
ence in portfolio overlap is another reason for caution in
buying one of these ETFs, as a poorly selected portfolio
will not perform well. That is why it is critical to evalu-
ate each stock in these portfolios on a fundamental and
technical basis.
FIGURE 7: MOJ ETF YEAR-TO-DATE PERFORMANCE. Only consumer staples components had mostly positive returns. JAZZ was a standout stock with a 23%
return, while WEED, ACB and HYM were down 71 to 94%.
46 • March 2023 • Technical Analysis of Stocks & Commodities
Figure 6 provides a listing of the top 16 holdings of all
these 16 ETFs combined. Only seven stocks were in seven
portfolios: Innovative Industrial Properties Inc. (IIPR),
Tilray Brands, Inc. (TLRY), Canopy Growth Corporation
(WEED), AFC Gamma, Inc. (AFCG), GrowGeneration
Corp. (GRWG), Charlotte’s Web Holdings, Inc. (CWEB),
and WM Technology Inc. (MAPS). Three stocks were in
six portfolios, and two stocks were in five portfolios.
Here are the top holdings of each ETF:
MSOS: IIPR, GRWG, AFCG, HYFM, UGRO, PW,
CBO.USD
MJ: MJUS (22%), VALT (10%), CRON, SNDL,
TLRY, WEED, GRWG, AFCG, REFI
MJUS: IIFR (28.7%), FGXX, AFCG, GREG,
CWEBV, MAPS, HYFM, BGXX
YOLO: MSOS (30%), JAZZ (19%), VFF (11%),
IIFR, TLRY, GRWG, HITI, WEED
POTX: IIFR (20%), TLRY (16%), WEED (14%),
AFCG, SNDL, CRON, OGI, INCR
CNBS: TLRY (8.5%), CARA (6%), JAZZ (5.4%),
 AFCG (4.8%), CRON (4.5%), GRWG (4%),
IIFR (2.9%)
Note that MJ owned a 22% stake in its firm’s other ETF
in the space, MJUS, as well as owning a 10% position
in VALT, which is the ETFMG Sit Ultra Short ETF. In
a similar situation, YOLO, an AdvisorShares ETF, owns
30% of one of its other ETFs in the space, MSOS. These
are both unusual situations since most ETFs do not own
other ETFs in the same category. Although 16 cannabis
ETFs exist, I will drill down on MSOS, MJ, MJUS, and
MSOX, which are the three largest ETFs, and the only
one with 2X leverage, respectively. You can evaluate any
others of interest on your own.
AdvisorShares Pure US Cannabis ETF (MSOS)
MSOS is an actively managed narrow portfolio of US
equities and swap contracts in the domestic cannabis and
hemp industry. The focus is on a fundamental strategy to
pinpoint cannabis-related firms, which have dominant po-
sitions with a focus primarily on profitability and growth
opportunities. MSOS is the AUM leader in the category,
although it was not the first one out of the gate but was
actually the seventh ETF to join the group. Small- and
mid-cap stocks comprise 97% of its portfolio. It has a
beta of 0.83 and an alpha of –15.87%, and an abysmal up
capture ratio of 28% and 141% down capture ratio. The
YTD performance of −72% (as of December 23, 2022) is
one of the worst of the group, but it secured $347 million
of inflows, besting all the others by a mile.
ETFMG Alternative Harvest (MJ)
MJ is a passively managed ETF that follows an index
of worldwide firms in the legal cultivation, production,
marketing, or distribution of cannabis, cannabinoids, or
tobacco products. Its goal is to benefit from the global
medicinal and recreational use of cannabis. According
to their factsheet: “There are many other significant ap-
plications for cannabis and THC-based medicines and
treatments, ranging from epilepsy to cancer treatment
to non-opioid pain management.”
It was the first ETF in this space with a December
3, 2015 inception date and has amassed $341 in AUM,
second to MSOS, which came out nearly five years later.
Its portfolio is market-cap weighted or equally weighted
based on a proprietary evaluation. The portfolio consists
of 36 components, but 32% of the assets are composed
of two of its own cannabis ETFs—MJUS and VALT. Its
yield of 2.21% is the highest of the group and its average
daily volume of over 750,000 is the second highest. This
portfolio is rebalanced quarterly.
According to its factsheet, 45% of the portfolio resides
in Canada with another 21% in the US. As far as sector
exposure, healthcare represents 52% of the portfolio with
consumer staples at 8% and financials at 4%.
Three-year performance of −33.4% is terrible, with
2022 YTD the worst of all at −58.4% but 13 percentage
points better than MSOS. It has beta of 1.61 and an alpha
of –34.91%, the latter of which is abysmal. Outflows are a
sore point with $30 million leaving the ETF (year-to-date
as of late December 2022)—the worst showing of all.
ETFMG US Alternative Harvest ETF (MJUS)
MJUS is an actively managed portfolio, born in May
2021, that seeks income and long-term capital growth.
It consists of US stocks or swap contracts related to the
cannabis industry. Its focus is to provide investors with
access to US cannabis companies as well as to multi-state
operators that cultivate, produce, market, and distribute
their products. MJUS obtains at least 50% of its net
revenue from US cannabis and derivatives.
It was interesting to note on the ETFMG website that as
of December 24, 2022, MJUS held 98.4% of its portfolio
in US treasury bills and 55.6% in specific cannabis-related
securities (part of the portfolio mentioned above). So
clearly, the portfolio has borrowings for investment pur-
poses, since the percentages add up to 154%. Moreover,
“the Fund may use total return swaps for the purpose
of achieving the approximate economic equivalent of a
purchase of a security in the Reference Index when the
Fund is not able to purchase such security directly because
of administrative, legal or other restrictions.”
MJUS has $80 million in AUM, so it is likely to reach
the magic $100 million level for survival, if interest in
cannabis picks up over the next several years, but the
competition is considerable. It has substantially outpaced
the four other ETFs born around the same time who
have AUM of $9 million, $4 million, $2 million, and
$0 million, respectively. Those four seem doomed going
forward, as far as their viability. MJUS had a –64% YTD
performance, six percentage points worse than MJ but
eight percentage points better than MSOS.
At least 37 states allow medical
marijuana, which has allowed users
to fill prescriptions at their local
dispensary, of which there are
thousands across the country.
March 2023 • Technical Analysis of Stocks & Commodities • 47
 About 28.7% of its portfolio is in the real estate sector,
2.7% in financials, and 2.6% in consumer discretionary.
Looking at the distribution of its 36% of US holdings,
79% are mid-cap, 14.6% are small-cap, and 6.3% are
micro-cap.
AdvisorShares MSOS 2x Daily ETF (MSOX)
MSOX is a unique ETF born in August 2022 and is a
fund-of-funds seeking twice the daily total return of
MSOS through swap agreements. It had a small $7 million
in AUM and an average daily volume of 74,000 shares,
and one of the highest annual expense ratios at 0.95%. It
had captured $12 million but lost $5 million as the year
progressed. That is a negative trend that could lead to its
downfall if it's not reversed in 2023. So far, it has lived
up to its goal of offering 2X performance by declining
77.5% since its inception date through December 23,
2022, while MSOS fell 42.46%. So its performance is
about five percentage points better than its bogey. The
problem with MSOX is that holding it in a bear market
does not provide a good outcome. That is why most
leveraged ETFs should be used only as very short-term
trading vehicles. On December 23, 2023, its AUM was
$4.7 million, down from $7 million on December 19,
not a good sign.
Conclusion and looking ahead
Every industry has risks that investors need to be con-
cerned about. With cannabis, its excessive regulation and
lack of federal legalization are the major ones. Moreover,
the volatility of cannabis stocks is typically much greater
than run-of-the-mill stocks. Therefore, a potential global
recession in 2023 coupled with a higher-than-normal
inflation would result in price increases in raw materials,
supplies, and equipment that would dampen producer
profits and raise the cost of cannabis.
This article provided a glimpse of the diversity and
variability of several ETFs in this category. MSOS is the
AUM leader with its capture of nearly half of the cat-
egory assets over two years and its large grab of inflows
Based on the analysis presented
here, these ETFs are not an
attractive place to be right now,
but over time they may provide
decent upside.
48 • March 2023 • Technical Analysis of Stocks & Commodities
over that period as well. It also has the highest average
daily trading volume but has performed the worst with
a 72% loss (as of close to year-end 2022). The MSOS
portfolio of eight stocks is extremely concentrated, so
it has big bets on these companies, which can work out
well or not. And recently, this category has not been a
good place to be, with a devastating performance for
any buy-and-holders.
Based on the analysis presented here, these ETFs are
not an attractive place to be right now, but over time
they may provide decent upside. Of all these ETFs, MJ
appears to be the most viable purchase candidate with
almost $350 million in AUM and 772,000 shares traded
daily with a portfolio of 36 stocks. Its performance YTD
(as of close to year-end 2022) has been less miserable,
but still down big at –58%. The future of cannabis stocks
and ETFs is unknown, but a 10- to 20-year time horizon
may provide buy-and-holders with a rewarding outcome
and may provide a portfolio boost as well, if that is the
case. For any interested long-term investors in this space,
probably no more than a 1 to 2% allocation is warranted
because of the numerous risks involved.
As of now, all of these EFTs represent a speculative
play, as they spread the assets among companies with
varying prospectives with no assurance of success. An-
other way to play this space is to buy a few of the big
players such as Jazz Pharmaceuticals Plc (JAZZ), which
my VectorVest software rates as a “buy,” and such as
AFC Gamma Inc. (AFCG) and Industrial Properties Inc.
(IIPR), which are both rated as a “hold.” You can let the
stocks sit in a portfolio, but I recommend that user-placed
trailing stop-loss orders be set up to minimize any initial
drawdown and then protect any upside if the stock price
increases. You should chart each stock’s price history,
use a few technical indicators, check their earnings and
latest industry news, and review their business before
investing a penny.
Because of all the risks involved with these ETFs and
their holdings, it is critical to read the prospectus of any
ETF you may be interested in to truly understand the
situation, as well as to carefully examine their top hold-
ings for the same reason. As an example, I recommend
reading the November 1, 2022 Summary Prospectus for
MSOS at the AdvisorShares website specifically, at:
https://advisorshares.com/wp-content/uploads/etf-
page-documents/MSOS/MSOS-Summary-Prospec-
tus.pdf?x85494
For those interested in this space but not impressed with
their recent terrible stock or ETF price performance, I
suggest checking back in five years to see how they have
performed and whether they represent a viable investing
opportunity going forward. As with many cryptocurrency,
Bitcoin, and Metaverse stocks and ETFs, cannabis stocks
and ETFs may not be ripe for picking for many years
to come. At this time, I would group all these ETFs and
stocks as speculative plays with unknown future pros-
pects and most appropriate for individuals with a high
risk tolerance with the understanding that big losses may
occur without proper risk controls. So buyer beware.
Based on the large number of competitors already in
this category, I wouldn’t expect any new entrants at least
for a few years until the regulatory and banking issues are
successfully dealt with to benefit the industry. Moreover,
the eight ETFs with AUM below $10 million will most

likely pack it in after a few years, if they exhibit lackluster
growth and/or negative or declining earnings.
For those interested in following the progress of the
cannabis industry, consider checking out the website of
the New Cannabis Ventures (see link at end of article) and
access their Public Cannabis Company Revenue Tracker
which ranks the top revenue and income-producing can-
nabis stocks. A map of the legality of marijuana is shown
in Figure 8 and the link is as follows: https://disa.com/
maps/marijuana-legality-by-state
S&C Contributing Writer and ETF Columnist Leslie N.
Masonson is president of Cash Management Resources,
a firm focusing on ETF strategies. He is an active
NASDAQ futures and ETF trader, and the author of six
books including Buy—Don’t Hold: Investing With ETFs
DISA.COM
FIGURE 8: MARIJUANA LEGALITY BY STATE. Clearly, there is no uniformity
as to the legal status of marijuana with the varying state laws. Notice that it is
only fully legal in four states.
Using Relative Strength To Increase Returns With Less
Risk, and All About Market Timing (two editions), as
well as Day Trading On The Edge. He can be reached
at lesmasonson@yahoo.com or 845 323-7276.
• www.etfmg.com • www.advisorshares.com
• www.amplifyetfs.com • www.globalxetfs.com
• www.thcxetfcom • www.badinvesmentco.com
• www.psyk-etf.com • www.newcannabisventures.com

Futures For You

GARNER
Continued from page 36
misappropriation won’t happen, but
it deems it highly unlikely. Also,
traders can buy and sell futures
freely, knowing they are at risk of
losing money from their speculations
but not from counterparty risk. In
other words, if their speculation is
accurate, the proceeds are guaranteed
and easily accessible via check,
wire, or ACH withdrawal into their
bank account. On the other hand,
crypto traders face counterparty risk
regarding the transaction itself and
then regarding the ability to withdraw
funds once gains are realized; both
operations require that the brokerage
and/or the trader on the other side
of the transaction can fulfill their
obligations.
Although futures crypto traders
don’t have the same type of product
selection a crypto brokerage client
would have, they have listed the two
most prominent coins—Bitcoin and
Ethereum. There are both full-sized
and micro versions of these futures
contracts. The traditional Bitcoin
future represents five Bitcoins and
carries a hefty margin charge of about
$27,000; the micro-sized version
is 1/10th of a Bitcoin with a $550
margin charge. The regular-sized
Ether futures contract is margined at
March 2023
Traders can buy and sell
futures freely, knowing
they are at risk of losing
money from their
speculations but not
from counterparty risk.
$22,000 per contract and represents
50 Ether coins. The micro Ether
contract is, arguably, too small at
0.10 Ether and has a margin charge
of only $45 (that is not a typo).
• Technical Analysis of Stocks & Commodities • 49
 The focus of Traders’ Tips this month is
John Ehlers’ article in this issue, “Every
Little Bit Helps.” Here, we present the
March 2023 Traders’ Tips code with pos-
sible implementations in various soft-
ware.
The code for the following Traders’ Tips
selections is posted here:
• 
Traders.com  S&C Magazine 
Traders’ Tips
At Traders.com you can also right-click
on any chart to open it in a new tab or
window and view the chart at a much
larger size.
The Traders’ Tips section is provided to
help readers implement a selected tech-
nique from an article in this issue or an-
other recent issue. The entries here are
contributed by software developers or
programmers for software that is capa-
ble of customization.

// (C) John F. Ehlers

F TRADESTATION: MARCH 2023 TRADERS’ TIPS CODE variables:

In his article in this issue, “Every Little Bit Helps,” author CTest( 0 ),
OCTest( 0 );
John Ehlers proposes that noise can be reduced merely by
averaging the open and close of a bar instead of only using CTest = RSI(Close, 14);
the closing price. The data sampling example presented in the OCTest = RSI((Open + Close) / 2, 14);
article compares the traditional RSI using close data to one
calculated using the average of the open and the close. Plot1(CTest, "W/O Sampling");
Several built-in TradeStation indicators allow a price to Plot2(OCTest, "W/ Sampling");
be specified as an input used for calculations. For example,
the built-in Mov Avg 1 Line indicator’s price input can be A sample chart is shown in Figure 1.
changed from close to (close + open) / 2. In fact, the built-in This article is for informational purposes. No type of trading
RSI indicator itself has a price input that can similarly be or investment recommendation, advice, or strategy is being made,
changed. given, or in any manner provided by TradeStation Securities or
its affiliates.
Indicator: Data Sampling Test —John Robinson
TradeStation Securities, Inc.
// TASC MAR 2022 www.TradeStation.com
// Data Sampling Test

F TRADINGVIEW: MARCH 2023 TRADERS’ TIPS CODE

Here is TradingView Pine Script code implementing the
numerical example from John Ehlers’ article in this issue,
“Every Little Bit Helps.” Taking the RSI as a test indicator,
the author demonstrates the noise reduction in the data by
using the average of the open and close instead of using just
the closing price.
The Pine Script code provided here implements this tech-
nique, and also uses a color scheme that highlights both
the RSI value and the difference between the two RSI data
streams.

// TASC Issue: March 2023 - Vol. 41, Issue 3

// Article: Every Little Bit Helps
// Article By: John F. Ehlers
FIGURE 1: TRADESTATION. This shows a TradeStation 15-minute chart of // Language: TradingView's Pine Script™ v5
// Provided By: PineCoders, for tradingview.com
the continuous emini S&P 500 contract (symbol @ES.D) with the indicator ap-
plied. Shown in red is the sampling using closing prices. Shown in blue is the //@version=5
sampling using the average of the open and close.
50 • March 2023 • Technical Analysis of Stocks & Commodities
indicator("TASC 2023.03 Every Little Bit
Helps", "ELBH",
explicit_plot_zorder = true)

// External libraries:
import kaigouthro/hsvColor/15 as h

// Constant variables:
color NTRL = #888888

// Input panel groups, titles and inline

references:
string g0 = ‘RSI Options:'
string g1 = ‘Color and Gradient Op-
tions:'
string it0 = ‘RSI Length'
string it1 = ‘Hue High'
string it2 = ‘Hue Low'
string it3 = ‘Background Opacity'
string it4 = ‘RSI Threshold Value'
string t0 = ‘Hue varies from 0 to 360,
with red at 0 ‘+
‘and 360, green at 120, blue at
240.' FIGURE 2: TRADINGVIEW. In this example TradingView chart, the color scheme highlights both the
string t1 = ‘Specifies the sensitivity of RSI value and the difference between the two RSI data streams, so you can more easily compare. One
the gradient ‘+ RSI datastream uses close data only while the other datastream uses an average of the open and the
‘to the RSI value.' close as calculated by the Pine Script code provided.

// Input options:
int len = input.int(14, it0,1,1000,1,'','',g0)
int hue1 = input.int(150,it1,0,360, 15,t0,'',g1)
int hue2 = input.int(0 , it2,0,360, 15,'','',g1)
int op = input.int(90, it3,0,100, 1, ‘','',g1)
int hbot = input.int(10, it4,5,40, 1, t1,'',g1)
zero = plot(0, ‘0', o(c1, op), 1)
hund = plot(100, ‘100', o(c2, op), 1)
fill(p1, hund, rsiC, 150 , o(fade,op), o(hc,br*90))
fill(p0, zero, rsiC, -50 , o(fade,op), o(lc,br*90))
fill(p0, p1, fh,fl, o(fade, 60), o(fade,70))

// Indicators: The indicator is available on TradingView from the Pine-

float rsiC = ta.rsi(close, len)
float oc2 = math.avg(open, close)
float rsiOC = ta.rsi(oc2, len)
// Color and gradient related calculations:
int htop = 100 - hbot
int span = htop - hbot
float smR = (rsiOC/100) * span
float pt1 = smR + hbot
float pt2 = (pt1+100)/3
float br = h.bright(chart.bg_color) < .7 ?.9:.5
float ez = h.easeOut(math.abs((rsiOC-pt2)/span-1))
float fh = math.max(rsiOC, rsiC, hbot)
float fl = math.min(rsiOC, rsiC, htop)
o(col, o) => color.new(col, o)
color c1 = h.hsv(h.stepHue(-smR, hue2, 1/ez,2),1,br, 1)
color c2 = h.hsv(h.stepHue( smR, hue1, 1/ez,2),1,br, 1)
color fade = h.hsv_gradient (rsiOC, hbot, htop, c1, c2)
color hc = h.stepGradient (rsiOC, -pt1, br, fade, c1)
color lc = h.stepGradient (rsiOC, pt1, br, c2, fade)
// Plots:
p0 = plot(rsiOC, ‘rsi(OC)', o(fade,10), 1 )
p1 = plot(rsiC, ‘rsi(C)', na)
mid = plot(50, ‘50', o(NTRL, 90), 2)
CodersTASC account: https://www.tradingview.com/u/
PineCodersTASC/#published-scripts
An example chart is shown in Figure 2.
—PineCoders, for TradingView
www.TradingView.com
F THINKORSWIM: MARCH 2023 TRADERS’ TIPS CODE
We have put together a study based on the article by John Ehlers
in this issue, “Every Little Bit Helps: Averaging The Open
And Close To Reduce Noise.” We built the study referenced
by using our proprietary scripting language, thinkscript. To
ease the loading process, simply click http://tos.mx/Wqoyzmb
or enter the URL in setup → open shared item from within
thinkorswim, then choose view thinkScript study and name
it “RSI_DataSamplingComparison” or whatever name you
prefer and can identify. You can then add the study to your
charts from the edit studies menu from within the charts tab
and then select studies.

March 2023 • Technical Analysis of Stocks & Commodities • 51

 Figure 3 shows our version of the study
on a two-day 15-minute chart of the S&P
emini futures contract. Please see Ehlers’
article in this issue for how to interpret the
indicator.
—thinkorswim
A division of TD Ameritrade, Inc.
www.thinkorswim.com

F WEALTH-LAB: MARCH 2023 TRADERS’

TIPS CODE
In “Every Little Bit Helps” in this issue,
John Ehlers suggests a simple method to
reduce data noise by using an average of
the open and close instead of using just the
closing price.
Techniques such as this come off-the-
shelf in Wealth-Lab 8. With any indicator
(not just the RSI) that allows customization FIGURE 3: THINKORSWIM. Here, the data sampling comparison study is demonstrated on a two-
of time series, traders can pick many fla- day 15-minute chart of the S&P emini futures contract.
vors of the average price without having to
program anything. In addition to OHLCV,
here are possible choices ranging from con-
ventional to exotic:

1. (Open+Close)/2 [This choice

is demonstrated on the chart in
Figure 4 as “AveragePriceOC”
2. (H+L)/2
3. (H+L+C)/3
4. (O+H+L+C)/4
5. (H+L+C+C)/4 [an average price
with double-weight closing
price]

—Gene Geren (Eugene)

Wealth-Lab team
www.wealth-lab.com

F NINJATRADER: MARCH 2023 TRADERS’

TIPS CODE
The example RSI indicator discussed in John
Ehlers’ article in this issue, “Every Little Bit FIGURE 4: WEALTH-LAB. This demonstrates creating an RSI based on the open and close average
Helps: Averaging The Open And Close To prices, plotted on a daily chart of S&P 500 SPDR ETF (SPY).
Reduce Noise,” is available for download
from the following links for NinjaTrader 8
NinjaTrader 7:
and for NinjaTrader 7: www.ninjatrader.com/SC/March2023SCNT7.zip
NinjaTrader 8:
Once the file is downloaded, you can import the indicator
www.ninjatrader.com/SC/March2023SCNT8.zip
into NinjaTrader 8 from within the control center by select-

52 • March 2023 • Technical Analysis of Stocks & Commodities

ing Tools → Import → NinjaScript Add-On
and then selecting the downloaded file for
NinjaTrader 8. To import into NinjaTrader
7, from within the control center window,
select the menu File → Utilities → Import
NinjaScript and select the downloaded file.
You can review the indicator’s source
code in NinjaTrader 8 by selecting the
menu New → NinjaScript Editor → Indica-
tors from within the control center window
and selecting the file you wish to examine.
You can review the indicator’s source code
in NinjaTrader 7 by selecting the menu
Tools → Edit NinjaScript → Indicator from
within the control center window and se-
lecting the file to examine.
NinjaScript uses compiled DLLs that run
native, not interpreted, which provides you
with the highest performance possible.
A sample chart displaying both the orig-
inal RSI based on close-only data and the
RSI based on averaged data is shown in
Figure 5.
—Chelsea Bell FIGURE 5: NINJATRADER. This 15-minute chart of the Nasdaq 100 emini displays both the RSI
NinjaTrader, LLC based on close-only data and an RSI based on averaged data.
www.ninjatrader.com

F NEUROSHELL TRADER:
MARCH 2023 TRADERS’ TIPS
CODE
In “Every Little Bit Helps” in this issue,
John Ehlers proposes averaging the open
and close as inputs to some indicators to help
reduce noise, instead of using only the close.
This technique can be easily implemented
in Neuro­Shell Trader. To implement a com-
parison between the RSI and the open-close-
averaged RSI, select “new indicator” from
the insert menu, and use the indicator wizard
to create the indicators as follows:

RSI( Close, 14)

RSI( Avg2(Open,Close), 14)
FIGURE 6: NEUROSHELL TRADER. This NeuroShell Trader chart shows a comparison between the
Figure 6 shows both the RSI and the RSI and the open-close-averaged RSI for SPY.
open-close-averaged RSI on a chart for
comparison.
Users of NeuroShell Trader can go to the
Stocks & Commodities section of the NeuroShell Trader F AIQ: MARCH 2023 TRADERS’ TIPS CODE
free technical support website to download a copy of this or The importable AIQ EDS file based on John Ehlers’
any previous Traders’ Tips. article in this issue, “Every Little Bit Helps,” can be
—Ward Systems Group, Inc. obtained on request via rdencpa@gmail.com. The code is
sales@wardsystems.com also available on the magazine’s website at Traders.com in
www.neuroshell.com the Traders’ Tips section.
Code for the author’s indicators are set up in the AIQ EDS

March 2023 • Technical Analysis of Stocks & Commodities • 53

 code file. Figure 7 shows the EDS module
backtest results using the RSI original indica-
tor. Figure 8 shows the EDS module backtest
results using the modified version of the RSI
indicator over a 10-year period using NAS-
DAQ 100 stocks. The comparison suggests
that some of the metrics improve using the
modified version and a few are worse.
The system rules are:

• Buy when the RSI crosses down

below 20
• Sell when the RSI is crosses above 80
or after 20 trading days

Code:
!Every Little Bit Helps
!Author: John F. Ehlers, TASC Mar 2023
!Coded by: Richard Denning, 1/12/2023

!Data Sampling Test

!(c) John Ehlers 2022

!INPUTS:
W1 is 14. !Wilder RSI length
W2 is 14. !Ehlers RSI length
FIGURE 7: AIQ. This shows example backtest results for classic RSI trading system rules, based on
!RSI Wilder code: closing data, over a 10-year period using NASDAQ 100 stocks.
U is [close]-val([close],1).
D is val([close],1)-[close].
L1 is 2 * W1 - 1.
AvgU is ExpAvg(iff(U>0,U,0),L1).
AvgD is ExpAvg(iff(D>=0,D,0),L1).
RSIwilder is 100-(100/(1+(AvgU/AvgD))).

!Ehlers RSI code:

OCavg is ([open] + [close])/2.
Uoc is OCavg-valresult(OCavg,1).
Doc is valresult(OCavg,1)-OCavg.
L2 is 2 * W2 - 1.
AvgU2 is ExpAvg(iff(Uoc>0,Uoc,0),L2).
AvgD2 is ExpAvg(iff(Doc>=0,Doc,0),L2).
RSIoc is 100-(100/(1+(AvgU2/AvgD2))).

!CTest is RSIwilder.
!OCTest is RSIoc.

BuyRSIwilder if RSIwilder < 20 and

valrule(RSIwilder >= 20,1).
ExitRSIwilder if RSIwilder > 80 or {Position
days}>=20.

BuyRSIoc if RSIoc < 20 and valrule(RSIoc >=

20,1).
ExitRSIoc if RSIoc > 80 or {Position days}>=20.

—Richard Denning FIGURE 8: AIQ. This shows example backtest results for the RSI trading system rules, this time
rdencpa@gmail.com based on data that averages the open and close instead of using just the closing price data, over a
for AIQ Systems 10-year period using NASDAQ 100 stocks.
54 • March 2023 • Technical Analysis of Stocks & Commodities
 nical indicators. The advantage could be a certain amount of
F TRADE NAVIGATOR: MARCH 2023 noise reduction.
TRADERS’ TIPS CODE On intraday bars, the open-close average is similar to a
In “Every Little Bit Helps: Averag- two-day simple moving average (SMA2). It makes the data a
ing the Open and Close to Reduce Noise” in this issue, John bit smoother, but at the cost of additional lag by half a bar.
Ehlers suggests using an average of the open and close data The script given here, in C for the Zorro platform, com-
instead of just close data in your indicators to slightly reduce pares the standard RSI with the open-close average RSI on
noise in the data. the S&P 500 index with 15-minute bars.
We have created a special file to make it easy to download
a library into Trade Navigator that is based on this article. void run()
The file name is “SC202303.” {
To install this new library into Trade Navigator, click on BarPeriod = 15;
StartDate = 20220629;
Trade Navigator’s file dropdown menu, then select “update
EndDate = 20220712;
data.” Next, select download special file, then erase the word asset("SPX500");
“upgrade” and type in “SC202303” (without the quotes),
then click the start button. When prompted to upgrade, click vars OC = series((priceO()+priceC())/2);
yes. If prompted to close all software, click continue. Your plot("RSI(Close)",RSI(seriesC(),14),NEW,RED);
library will now download. plot("RSI(OC)",RSI(OC,14),0,BLUE);
This library contains a template named “S&C March }
2023,” a study named “data sampling,” and two indicators
named “CTest” and “OCTest.” We can indeed see some noise reduction in the resulting
The template allows you to modify your chart with a chart, shown in Figure 9.
prebuilt indicator package and settings. To use it, open the If the user would like to investigate whether the smoother
charting pulldown menu, select the templates command, curve compensates for the half bar of additional lag, the user
then on the submenu that opens, select the “S&C March can add the following five lines to the script:
2023” template. If you are prompted to save the current chart
settings as a template, your answer will depend on whether vars RSIs = series(RSI(OC,14));
you have made any changes to your current chart template if(crossUnder(RSIs,70))
enterShort();
that you would like to keep. If you choose “yes,” changes
if(crossOver(RSIs,30))
will be saved in the prior template before switching to the enterLong();
new “S&C March 2023” template.
You can insert indicators onto your chart by opening the This code implements a simple RSI trading system, which
charting dropdown menu, select the add to chart command, enters a short position when the RSI crosses below 70, and
then on the indicators tab, find your named indicator, select
it, then click on the add button. Repeat this procedure for Continued on page 41
additional indicators if you wish.
You can apply the “data sampling” study
to your chart by opening the charting menu,
select the add to chart command, and click on
the studies tab. Here you will find the study in
question. Select it by clicking on it, then click-
ing on the add button.
If you need any assistance, our friendly
technical support staff will be happy to help
via phone or via live chat through our web-
site.
—Genesis Financial Data
Tech support 719 884-0245
www.TradeNavigator.com

F THE ZORRO PROJECT: MARCH

2023 TRADERS’ TIPS CODE
In his article in this issue, John
Ehlers proposes to use the average of the open FIGURE 9: ZORRO PROJECT. This shows the SPX with two RSIs in the bottom pane: one that is
and close, rather than the close price, for tech- based only on close data and one based on using averaged data (averaging the open and close).
March 2023 • Technical Analysis of Stocks & Commodities • 55
 Algo Q&A
ALGORITHMIC TRADING
Have a question about system or algo trading? Kevin J. Davey has over
30 years of system trading experience. Kevin is a full time trader, and also
teaches and consults via his Strategy Factory® online workshop (https://
kjtradingsystems.com). He is the author of 5 bestselling trading books, in-
cluding “Building Winning Algorithmic Trading Systems” and his latest
book “Algo Trading Cheat Codes.” Send your questions or topic suggestions
to Kevin Davey at kdavey@kjtradingsystems.com. Selected questions will
appear in a future issue of S&C.
Kevin J. Davey

HAVING YOUR CAKE
I just developed an algo I really
like. I was a little concerned with
performance, so I decided to filter
for day of week. I found that if I
excluded trading on Fridays my net
profit increased by 13%. Should I
switch to this new “no trading on
Friday” version?
If I understand your situation well,
you have an algo strategy with back-
test performance that is not quite what
you’d like. So you decided to test some
filters to improve performance, and
one of them was eliminating trades
on a certain day of the week. With
that filter, you achieved results shown
in Figure 1.
Results were much improved when
you eliminated trading on Fridays
from the backtest. And now you are
contemplating using this improved
version. Is this a good practice?
Let me turn the question around.
If the performance had gotten worse
by not trading on Fridays, would you
have asked the question? Probably
not—why would you switch to an
inferior version of the backtest?
That fact tells you the answer to your
question.
The answer is in the old phrase “you
can’t have your cake and eat it too.”
For those of you unfamiliar with this
saying, it basically means that you
can only have it so good (the original
test—having the cake), but you can’t
have it all (the enhanced test—having
the cake and eating it too). Picking
the best of the two tests is optimizing,
56 • March 2023 • Technical Analysis of Stocks & Commodities
just not in the traditional fashion. It cannot go back once you decided to
is not a good practice. In fact, it is a eliminate trading on Fridays. You
terrible thing to do, but it is a very made the decision to eliminate that
common mistake. day, and this might make the backtest
Looking at the results and then better, or it might make it worse. But
choosing the best outcome is not the you are sticking to it regardless, living
right way to do things. But how could with the result.
you incorporate eliminating Friday This is valid because the 1–2 year
trading from your strategy and still test is akin to an optimized backtest,
have it be fundamentally sound? Here and the second test over 10 years has
are two ways: roughly 8–9 years of out-of-sample
performance.
The second option is to design the
Picking the best of the “no Fridays” rule into your strategy
two tests is optimizing, from the beginning. For example,
just not in the maybe Friday is the day of a weekly
report for the instrument you trade. It
traditional fashion. is totally acceptable to build a strategy
this way. Of course, you would not
First, you could utilize a small go back and then try trading Fridays
sample of data to make the decision too. That would be very wrong! This
to eliminate Fridays. If your complete will be version 3.
backtest was 10 years, maybe you
test eliminating Fridays over one or Continued on page 41
two years of data
first. Then, if you
like the result, you
make the switch and
apply it to the whole
data history. We’ll
call this version 2,
where version 1 was
the original strategy
with the “no Friday”
filter added after the
fact.
The most impor-
tant aspect of this FIGURE 1: IS IT A GOOD IDEA TO ELIMINATE TRADING ON FRIDAYS? In
is that this is a one- one algo strategy, Friday trading was eliminating and sample results improved.
way decision; you Are these results conclusive enough to trade the modified strategy?
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March 2023 • Technical Analysis of Stocks & Commodities • 57

 FUTURES LIQUIDITY

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

Trading Liquidity: Futures

Contracts to
Effective
Commodity Futures Exchange % Margin Trade for Equal Relative Contract Liquidity
% Margin Dollar Profit
S&P 500 E-Mini (Mar ’23) CME 5.8 12.7 2 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •>>>
Ultra T-Bond (Mar ’23) CBOT 5 6.9 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
10-Year T-Note (Mar ’23) CBOT 1.9 8.4 8 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •>
30-Year T-Bond (Mar ’23) CBOT 3.5 7.4 3 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
5-Year T-Note (Mar ’23) CBOT 1.3 8.6 12 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Ultra 10-Year T-Note (Mar ’23) CBOT 2.5 7.6 5 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Soybean (Mar ’23) CBOT 2.7 5.8 3 •••••••••••••••••••••••••••••••••••••••••••••••
Russell 2000 E-Mini (Mar ’23) CME 3.4 6.8 2 ••••••••••••••••••••••••••••••••••••••••••••••
Crude Oil WTI (Mar ’23) NYMEX 9.6 6.4 2 •••••••••••••••••••••••••••••••••••••••••••••
2-Year T-Note (Mar ’23) CBOT 0.5 7.3 13 ••••••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Mar ’23) CME 7.3 16.7 2 •••••••••••••••••••••••••••••••••••••••••
Soybean Meal (Mar ’23) CBOT 1 2.5 2 ••••••••••••••••••••••••••••••••••••••••
Corn (Mar ’23) CBOT 7.3 13.1 11 ••••••••••••••••••••••
Natural Gas (Mar ’23) NYMEX 25.2 11 3 •••••••••••••••••••••
3-Month SOFR (Jun ’23) CME 0.3 5.4 16 ••••••••••••••••••••
Euro FX (Mar ’23) CME 2.1 16.3 11 ••••••••••••••••
30-Day Fed Funds (Feb ’23) CBOT 0.2 3.5 11 ••••••••••••
3-Month Eurodollar (Mar ’23) CME 0.3 5.4 16 ••••••••••••
Gasoline RBOB (Mar ’23) NYMEX 7.5 8.7 2 ••••••••••••
Gold (Feb ’23) COMEX 3.9 15.6 4 ••••••••••
S&P 500 VIX (Feb ’23) CFE 57.7 19.2 3 ••••••••••
ULSD NY Harbor (Mar ’23) NYMEX 9 10.8 2 ••••••••••
Wheat (Mar ’23) CBOT 9.9 10.5 6 ••••••••••
High Grade Copper (Mar ’23) COMEX 5.9 11.5 4 ••••••••
Silver (Mar ’23) COMEX 7.9 15.6 3 ••••••••
Sugar #11 (Mar ’23) ICE/US 6.6 12.2 17 ••••••••
Dow Futures Mini (Mar ’23) CBOT 7.8 16.9 3 •••••••
Live Cattle (Apr ’23) CME 2.7 5.5 6 ••••••
Coffee (Mar ’23) ICE/US 12.4 19.7 5 •••••
Japanese Yen (Mar ’23) CME 4.2 15.2 7 •••••
Cotton #2 (Mar ’23) ICE/US 11.5 13.8 6 ••••
British Pound (Mar ’23) CME 4 25.3 17 ••• CBOT Chicago Board of Trade, Division of CME
Hard Red Wheat (Mar ’23) KCBT 9 13.7 7 ••• CFE CBOE Futures Exchange
Australian Dollar (Mar ’23) CME 3.1 14.4 13 •• CME Chicago Mercantile Exchange
Crude Oil Brent (F) (Mar ’23) NYMEX 8.5 10.5 3 •• COMEX Commodity Exchange, Inc. CME Group
Lean Hogs (Apr ’23) CME 5.6 9.9 10 •• ICE-EU Intercontinental Exchange-Futures—Europe
Mexican Peso (Mar ’23) CME 5.4 19.9 28 •• ICE-US Intercontinental Exchange-Futures—US
Palladium (Mar ’23) NYMEX 13.3 14 1 •• KCBT Kansas City Board of Trade
Platinum (Apr ’23) NYMEX 6.6 14 8 •• MGEX Minneapolis Grain Exchange
Canadian Dollar (Mar ’23) CME 2 17.9 24 • NYMEX New York Mercantile Exchange
Canola (May ’23) ICE/CA 9.5 17.9 24 •
Cocoa (Mar ’23) ICE/US 6.1 33.5 43 • 2303
Trading Liquidity: Futures is a reference chart for speculators. It compares markets “Relative Contract Liquidity” places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi-
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. “Relative
when compared to others in the same column. Contract Liquidity” is the number of contracts to trade times total open interest times a
The number in the “Contracts to Trade for Equal Dollar Profit” column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return In volume
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price 1 or exp –2
In 5000
Excursion).

58 • March 2023 • Technical Analysis of Stocks & Commodities

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March 2023 • Technical Analysis of Stocks & Commodities • 59

 Trading Perspectives

SOME PERSPECTIVES ON THE EQUITIES WORLD

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

SOME THINGS NEVER CHANGE, AND
SOME CAN BE USED IN FRESH WAYS
I first started trading with Bright
Trading in 1998. I can still recall the
“duck sheet” we used at the time that
laid out some best practices (for that
era) when considering whether to
take a trade. (It was called a “duck
sheet” because it was a brief guide for
determining how many “ducks” are
lined up—that is, how many criteria
are met—to help know whether to
take a trade.) See Figure 1 to take a
time machine back to that era and see
this criteria table we would use.
An obvious change since then
is the markets moved to decimals
in 2001, no longer trading
in fractions. But for point-
and-click-type traders, have BUY Ducks
the principles of this “duck One
sheet” really changed? Two
The concept behind the Three
sheet was to encourage Four
traders to focus on symbols Five
with the best prospects. Six
The goal was not to have Seven
every single duck lined up,
SHORT Ducks Observations
being so analytical that you
One
end up late to the party and
Two
entering after the move is
Three
already done, but rather to
get a few ducks in a row. We
Four
seeing the criteria that were met for
them helped to reinforce rule-based
disciplines.
I have witnessed on many occa-
sions traders shorting a strong stock
in a strong group in a strong market,
expecting it to drop or revert to where
it came. While mean-reversion strate-
gies have been shown to work over
the long sample, there is a proper
framework, rules, and conditions for
betting on retracements. Traders must
Most market participants what we often do from a day-to-day
are buyers, as we have a
buy-side marketplace.
LINE UP AS MANY DUCKS AS YOU CAN
—THEN—INITIATE THE TRADE
Observations
Strong stock
Strong group
Within 3/8 of today’s high
Strong market
“Engine” of the day looks “ok”
Stocks at either “break-out” or “support” level
S&P’s in “bottom half” of today’s tick chart
Weak stock
Weak group
Within 5/8 of today’s low
Weak market
respect the market conditions, the
money flow, and the context for the
trade. These things shouldn’t be disre-
garded in favor of the trader’s feelings
or opinions, whether those opinions
are borrowed or self-imposed.
Most market participants are buy-
ers, as we have a buy-side market-
place. One could be rewarded when
buying a weak stock and expecting it
to rally at some point intraday. I am
not saying there are not opportuni-
ties to “fade” the moves, which is
perspective. But intraday, traders can
get run over by not respecting some
“ducks.” In the 2022 market, it was
easy to see a pronounced
tendency for market par-
ticipants to get “run over,”
since buying weakness was
popular to do among the
buy-the-dippers.
Let’s take this concept
of buying a strong stock in
a strong group in a strong
market and consider where
we can apply it to basket
trading. (See my previous
articles in this column for
more detailed discussions
of basket trading.)
There are a number of
BRIGHT TRADING

also had a homework sheet things that influence the 11

Five “Engine” of the day looks “weak”

on which traders would log sectors that make up the

Six Stocks at either “break-out” or “resistance” level

each trade they took and Seven S&P is in “top half” of today’s tick chart
S&P 500. For example, if
circle how many “ducks,” FIGURE 1: TRADE DECISION GUIDE, CIRCA 1998. This is the “duck sheet” the US dollar sells off, that
used at Bright Trading in 1998 as a guide to help traders decide whether to take
and which ones, were lined a trade by seeing whether enough “ducks” were lined up (that is, if enough can boost the Basic Materi-
up for those trades. Review- criteria were in place) to justify the trade. Maybe the basic principles of this als sector, specifically the
ing trades in this way and duck sheet haven’t changed much since that time? metals industries. Some
60 • March 2023 • Technical Analysis of Stocks & Commodities
 Trading Perspectives
sectors are typically at Sector Ticker
Weight % Correlation
Type Risk-On or Risk-Off
the forefront of a risk-on of SP500 to SPY

day, while others lag; the Basic Materials XLB 2.82 0.878 (10-yr) Cyclical Moderate On

opposite takes place on Communications XLC 7.82 0.903 (4-yr) Cyclical/Defensive Moderate On—Neutral

a risk-off day. Energy XLE 5.23 0.645 (10-yr) Cyclical Can be either

Within the 11 sectors Financials XLF 11.64 0.822 (10-yr) Cyclical Moderate On

are 24 industry group- Industrials XLI 8.36 0.922 (10-yr) Cyclical Either—Neutral

ings, 68 industries, and Technology XLK 26.26 0.92 (10-yr) Cyclical On

157 sub-industries or Consumer Staples XLP 6.78 0.73 (10-yr) Defensive Off
segments. I encourage Real Estate XLRE 2.77 0.774 (7-yr) Defensive Either—Neutral
traders to perform a

SECTORSPDR.COM
Utilities XLU 3.02 0.463 (10-yr) Defensive Off
deeper dive in classify- Health Care XLV 15.13 0.814 (10-yr) Defensive Either—Neutral
ing for themselves the Consumer Discretionary XLY 10.19 0.915 (10-yr) Cyclical On
industries they trade FIGURE 2: S&P SECTORS. The 11 sectors of the S&P 500 are shown with their respective Select SPDR ETF symbol, correlation
(not just the sectors to the S&P 500, and whether the sector at any given time is risk on or risk off (based on observation and various factors). Cat-
they trade) for risk-on egorizing the sectors in this way can help tell you which sectors might complement each other in a hedged basket trade.
or risk-off.
Staying with sectors for now, see when the market provides clues as to
Figure 2. The type of sector and its interests and sentiment, I can dip
whether the sector at any given time into the appropriate bucket.
is risk on or risk off as listed in this The following is an example of uti-
table stems from my observations lizing buckets. This example is from
and can be influenced by sentiment, January 6, 2023, which was a risk-on
fundamentals, and leading indicators day. And let me note that “risk-on”
like bonds, interest rates, curren- was not guesswork, as we had a news
cies, volatility, economic and macro catalyst that after a few down days
conditions. launched the market higher, in addi- FIGURE 3: BUCKETS BY THEME. In advance of
You can see from the correlations tion to it being the first Friday of the the trading day, you can curate “buckets” of stocks
that Utilities and Technology on any month of January seasonality. After with particular attributes (based on fundamental,
given day are not likely to both be the news hit and after observing the technical, statistical, or behavioral metrics). Then
the two best-performing sectors (as impact on the premarket, we dip into when the market starts to reveal itself for that day,
you can quickly go to the bucket (that is, group of
in both outperforming the remain- high beta for our long side and low symbols) with the most advantageous character-
ing nine sectors) nor the worst two beta for our short side. istics for that particular market.
performers. It’s more probable that if So isn’t this just a beta play, then?
tech is in the top four, then utilities It is a beta play, but we’re not relying So we don’t put a lot of emphasis on
will be in the bottom four. entirely on beta here, since a random the actual signal or indicator value,
Let’s call each sector a “bucket” that selection of high-beta or low-beta but rather, we prefer to look at the
contains certain tickers. A point-and- stocks is not going to do the trick. “odds.” Our program provides “odds”
click-type trader, algorithmic trader, We require qualifying the symbols and “average performance” metrics
pairs trader, or basket trader could further to increase our edge. for what may likely happen next
dip into a bucket and trade stocks that So continuing with our example, after the %BB signal value, based
have the greatest advantage related to we could grab our high-beta list and on historical performance and what
a strong group or strong market. That pop those symbols into our program has happened in the past following
fits with the Bright Trading “duck (the program we use is our Stock- that %BB signal value.
sheet” shown in Figure 1. If that makes Odds web screener) to get the %BB We then sort the list of symbols by
sense, then let me propose expanding indicator (signal) value. (The %BB this “odds” column. We capture the
the bucket concept to other types of indicates the proximity to the upper top 10 symbols showing the highest
buckets. We can create buckets of or lower Bollinger Band.) Often, the odds (that is, the probability of going
stocks with various attributes (see higher signal values are better for up from open to close on January 6).
Figure 3), whether fundamental, tech- shorts and the lower signal values are If the “odds” are less than 50, it’s less
nical, statistical, or behavioral. Then, better for longs but not necessarily. likely to go up or perform robustly. If
March 2023 • Technical Analysis of Stocks & Commodities • 61
 Trading Perspectives
it’s greater than 50, it’s more probable
to be up from open to close.
For short candidates, we dip into
the low-beta bucket and pop those
symbols into the program to get the
%BB indicator (signal) value. In the
same way, we then sort by lowest
odds. We capture the 10 symbols
with the worst odds of having an up
day on January 6. In other words,
we are selecting the best symbols
for shorting.
If you already have your buckets

STOCKODDS WEB SCREENER

planned out as discussed earlier in
this article, then the process of find-
ing long/short baskets of tickers to
trade—including copy/paste, export,
and sorting, as described here—took
only five minutes.
Figure 4 shows the symbols that
resulted in this example screen, us-
ing no discretion in selection and no
vetting. Overall, the longs, which had
greater odds, performed better than
the shorts, which had lower odds.
Buckets and baskets
It’s not only about the makeup of the
buckets, but also, what you do with the
buckets, when, and why. You could
curate a low-PE list against 52-week
highs for a particular day on which
the market may be declining.
So there are sector plays based on
your leading indicators, and your ob-
servation of whether a day is risk-on
or off. There are thematic plays based
on grouping types of stocks and their
attributes together in buckets. The
bottom line is that for basket trading
on choppy, inside days, consolidation
phases, and times when you have
no information to hang your hat on,
then stick to diversified quantitative
baskets. Anytime you have sector
concentration or you utilize themes,
you can be right with great returns,
or you can be really wrong and suf-
fer losses.
It’s about being informed and act-
ing according to that information in
62 • March 2023 • Technical Analysis of Stocks & Commodities
FIGURE 4: EXAMPLE OF UTILIZING A BUCKETS APPROACH. Here is a sample list of symbols that
resulted for potential trading during the day session open to close on January 6, 2023. This is based on
pre-curated buckets of symbols having particular characteristics. Premarket activity is observed for clues
on that day’s most likely price action. This trading day was considered a risk-on day, so a basket was curated
consisting of high beta for the long side and low beta for the short side.
a probabilistic manner. If you were symbols to deploy within those
curating baskets the night before, best buckets. Reflecting back to the “duck
practices would be to curate a risk-on, sheet” discussed at the start, it’s about
a risk-off, and a neutral basket, and working with where the money flow
most often, you would run neutral. will be the strongest.
There are some days within each Why run hedged? We hedge be-
month that, due to an engine, offer cause we can be wrong on the market
you the opportunity to press betas, or we can suffer from a sudden mar-
utilize volatility, be defensive, buy or ket event that if you were only long,
sell gaps, and so forth. One day, you could inflict serious damage to your
might buy all low PE and short all capital. By running hedged, we are
high PE, and another day you might somewhat insulated, as most stocks
short Dow Jones Industrial Average move with the market.
(DJIA) components and buy Russell It is more than that, though: We
2000 components. strive to benefit from relative per-
It all starts with developing a trad- formance day after day. We want
ing plan that includes all scenarios our longs to perform and our shorts
you can imagine and your response to to perform, and it is a constant effort
them. What buckets would you draw to improve the mousetrap to capture
from for those given scenarios? those performances.
Next, you would look for which If you are not comfortable with
deploying from the open, then you
could use these lists as a watchlist
It is not only the of ideas and execute as you see your
makeup of the indicators, the technicals, and other
buckets, but what you cues—your “ducks”—line up.
do with the buckets,
when and why.
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