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CRYPTOCURRENCIES
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Part 2: Crypto winter 34

FEBRUARY 2023
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 CONTENTS FEBRUARY 2023, VOLUME 41 NUMBER 2

6 Day Trading the 10am Reversal

by Ken Calhoun
The Traders’ MagazineTM Professional traders are always on
the lookout for chart patterns that
repeat. An easy one to recognize is
EDITORIAL
editor@traders.com the daily 10am reversal pattern.
Editor in Chief Jack K. Hutson
Production Manager Karen E. Wasserman FEATURE ARTICLE
Graphic Designer Wayne Shaw 8 Trade High-Yield Bond Funds
Webmaster Han J. Kim Using EMAs—From Simple To 29 Futures For You
Contributing Editors John Ehlers,
Anthony W. Warren, PhD.
Complex by Carley Garner
Contributing Writers Thomas Bulkowski, Martin Pring,
by Ken Huck & Nelson Huck Here’s how the futures market
Barbara Star, Markos Katsanos, Leslie N. Masonson, High-yield bond funds can provide really works.
Karl Montevirgen stock equity-like returns with
significantly less volatility and 30 Improving Trading Systems
significantly smaller drawdowns. By Counting Events
OFFICE OF THE PUBLISHER Exponential moving averages by David Bergstrom
Publisher Jack K. Hutson (EMAs) are a popular way to trade
It’s a simple concept that you may
Industrial Engineer Jason K. Hutson
these funds and strategies can range
Project Engineer Sean M. Moore not have thought of. Find out how to
from very simple to complex. Read
implement it.
ADVERTISING SALES on for an approach you can use.
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http://www.traders.com
Staff members may be emailed using first initial
plus last name plus @traders.com 38 The Savvy Technician
by Stella Osoba, CMT, Esq.
Author­i­za­tion to pho­to­copy items for inter­nal or per­sonal 18 The Outside Bar: A Rare And Recognizing and applying technical
use, or the inter­nal or per­sonal use of spe­cific cli­ents, is grant- Powerful Filter chart patterns to trading.
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Sub­scrip­tions: USA: one year (13 issues) $89.99; to discover outside bar frequency in by Rob Friesen
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Sin­gle copies of most past issues from the cur­rent year are
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in book format (without ads) or digitally from www.traders.
by Emilio Tomasini DEPARTMENTS
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Discover accepted. Subscription orders: 1 800 832-4642 topics in finance. 50 Advertisers’ Index
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Can trend trading be improved by
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 TRADING ON MOMENTUM

Buying The Pivot In An Intraday Pattern

Daytrading The 10am Reversal

Professional traders are always on
the lookout for chart patterns that
repeat. An easy one to recognize is
the daily 10am reversal pattern.
by Ken Calhoun
SPY, QQQ, or leveraged ETFs such
as SQQQ and TQQQ. The trader
simply puts in a buy order for the
ETF to capitalize on the upcoming
move. In looking at Figure 1 (SQQQ,
ProShares UltraPro Short QQQ),
Step 2: If markets are trending up
from 9:30–10am, put in a buy-stop
entry for an inverse ETF like SQQQ
at $0.50 above the current price.
Step 3: Alternatively, if markets are

C
arefully look at any major index
chart over the past year (S&P,
NASDAQ, Dow, Russell);
you’ll see that markets often
reverse direction near 10am daily,
give or take a few minutes.
Here, I’ll describe a strategy for day-
trading the 10am reversal pattern.
Trading strategy for the
10am pivot
A sensible strategy involves trad-
ing index-related ETFs, like the
you can see that buyers came in and
price action reversed to the upside
at 10am.
Step-by-step action plan
Here’s how you can start using this
strategy:
Step 1: Determine if markets are
trending up or down during the
9:30–10am timeframe. Note that
if it’s a choppy directionless open,
this strategy cannot be used.
trending down from 9:30–10am, put
in a buy-stop entry for a long-bias
ETF like TQQQ at $0.50 above the
current price.
Step 4: Trail a stop of no more than
$0.50 as it moves up.
It’s simply an established
pattern used by major
institutions as well as
HFT algos.

eSIGNAL

FIGURE 1: TRADING THE 10AM REVERSAL WITH SQQQ. This shows an example of buying the pivot as price action moves up.
6 • February 2023 • Technical Analysis of Stocks & Commodities
Why this technique works
As with many consistent market
patterns, it’s simply an established
pattern used by major institutions as
well as high-frequency trading (HFT)
algos. I think of it like a 200SMA
line type of effect—it works because
so many others trade it as well. Note
this pattern does not occur at precisely
10am daily; I look to trade it between
9:55–10:05am, the timeframe in
which it often occurs.
ERRATA: SHORT-TERM CONTINUA-
TION AND REVERSAL SIGNALS
Editor,
I received an email from an astute
S&C reader who spotted an important
omission from the formula code in my
article “Short-Term Continuation and
Reversal Signals,” which appeared in
the December 2022 issue of S&C. I
had inadvertently left out the Meta-
Stock formula for the DMI oscillator,
which is the basis for one of the other
formulas in the article.
The missing indicator formula is
named “DMI Oscillator.” To use it
in MetaStock, in the formula builder,
type in:
PDI(10)-MDI(10)
It plots as a line that crosses above
and below a zero line. The line style
can be changed to a histogram style
but the indicator will be the same
color whether it is above the or below
Trade management tips
It’s useful to remember that the
duration of this trade, when entered
near 10am, is often no longer than
20 minutes. Those 20 minutes are
enough to capture most of the move.
I will often diversify with this trade.
For example, after an opening market
rally, I fade the trend at 10am with
several inverse ETFs, including
SQQQ, SOXS, and UVXY.
Exit targets are a price projection of
the earlier 9:30–10am trading range.
the zero line.
A second formula references the
DMI oscillator. It will allow users
to change the indicator color of the
histogram when it is above the zero
line and when it is below the zero line,
as I have done in the article.
The MetaStock indicator is named
“DMI Oscillator Above or Below
Zero.” The formula for those who
wish to replicate the colors I used in
the article is as follows:
If(Fml("DMI Oscillator")>=0,
Fml("DMI Oscillator"),0);
If(Fml("DMI Oscillator")<=0,
Fml("DMI Oscillator"),0);
Once it is plotted on a chart, change
the line style to histogram.
Click on the histogram above the
zero line and select a color for the
DMI indicator above zero.
Click on histogram below the zero
line and select a color for the DMI
indicator below zero.
All the other formulas presented in
the “Code For Indicators” sidebar on
page 14 of the December 2022 issue
are accurate.
My thanks to the code writers with
the various platforms who contrib-
uted to the Traders’ Tips section in
the December 2022 issue based on my
article, who were able to create and
February 2023
For example, in Figure 1, the initial
downtrend range was ($50–$48.5)
= 1.5 points, so the exit target on a
pivot entry at $48.8 is ($48.8 + $1.5)
= $50.3, which worked.
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.
duplicate the correct formulations
despite the missing information. I
admire their professionalism.
Continuation signals
text clarification
In addition, I would like to make a
clarification to the article text under
the subheading “Continuation sig-
nals” to indicate the condition for the
blue circles in regard to price.
At the bottom of page 10, the
paragraph should read: “After a
pullback in an uptrend, blue circles
appear under the price bar when both
the DMI oscillator is above its zero
line and price is above an 18-period
simple moving average. Dark red
circles appear above the price bar in a
downtrend after a minor retracement
when the DMI oscillator is below
its zero line and price is below an
18-period moving average.”
BARBARA StAR
• Technical Analysis of Stocks & Commodities • 7
 TRADING TECHNIQUES
An Exponential Moving Average Strategy
Trade High-Yield Bond Funds
Using EMAs—From Simple
To Complex
High-yield bond funds can provide stock equity-like
returns with significantly less volatility and sig-
nificantly smaller drawdowns. Exponential moving
averages (EMAs) are a popular way to trade these
funds and strategies can range from very simple to
complex. Read on for an approach you can use.
O
ne of the most common methods that inves-
tors use to trade high-yield (HY) bond funds
is with moving averages. Effective trading
signals can be built using simple moving aver-
ages (SMAs), exponential moving averages (EMAs),
or short/long dual EMA crossover (S/L EMAs—some
refer to them as fast/slow EMA crossovers).
In this article, we will limit ourselves to EMAs and
begin with a simple EMA strategy and work toward
more complex strategies that take into consideration
common trading restrictions on HY funds.
Our goal is to create a general-purpose strategy
that an investor can use to trade their favorite HY
fund or family of HY funds. Investors can also use
our methodology and modify it to meet their unique
objectives.
We want this strategy to trade well against a large
basket of open-end HY bond funds. The reason for
using open-end funds, and not HY ETFs is, to quote the
bank robber Willie Sutton, “That is where the money
is.” Simply put, the majority of individual investors
hold their HY bond investments in open-end funds,
and we have found that the performance is better
FUNTAP/SHUTTERSTOCK
using our strategy with managed open-end funds
and not as successful with ETFs; however, leveraged
closed-end (CE) HY bond funds do have merit, and
by Ken Huck & Nelson Huck
this article will look briefly at both high-yield bond
ETFs and CE funds.
Historical data
We used a HY bond index to develop the strategies.
There are a large number of HY bond indexes to
choose from, and we decided on Bank of America
Merrill Lynch High Yield B Total Return Index. Our
analysis used the Investors FastTrack (www.fasttrack.
net) database, which contains end-of-day, dividend-
adjusted data on more than 260+ open-end HY funds,
and we found that this index (FastTrack ticker MLB-)
has a correlation of 0.93 and a beta of 1.0 compared
to the average of the basket of 260+ funds. One minor
issue is that this index has a start date of 12/31/1996
in the database, which isn’t unexpected because the
HY bond market didn’t really take off until the 1990s;
however, we used the average data from the basket
of 260+ funds to create synthetic data to extend this
data back to 9/1/1988. This gave us an additional seven
years of data to test. We adjusted the average of the
basket of funds data using the technique described
in our March 2020 S&C article, “Creating Synthetic
Historical Data.” Trading systems developers don’t
agree on how much historical data to use. Some ar-
gue that markets have changed and only use recent
historical data, and others make the case for using as
much historical data as possible. We tend to be in the
second camp, but we did take a brief look at using
only more recent data.
To be clear, the signals developed have a one-day
delay. In other words, if there is trade after the mar-
ket closes on a Tuesday, the signal would indicate a
February 2023 • Technical Analysis of Stocks & Commodities • 9
trade Wednesday and receive Wednesday’s closing price
on the trade.
From 12/29/1989 to 7/12/2021 our extended index had a
buy & hold (B&H) annual total return of 6.7% with a daily
maximum drawdown (MDD) of 36.4%. For comparison, the
S&P 500 total return was 10.4% with a 55.2% MDD.

Simple EMA strategy

A few words about EMAs. We often think that EMAs
need to use “integer” number of days, that is, 5, 6, 10, etc.
However, you can actually use fractional days using the
following form: FIGURE 1: RESULTS USING A SINGLE EXPONENTIAL MOVING AVER-
AGE FOR TRADING SIGNALS (12/31/1988–7/12/2022). The simple
Et = Et-1 +a (Pt−Et-1) EMA strategy purchases a high-yield (HY) bond fund when the index (here,
the Bank of America Merrill Lynch High Yield B Total Return Index [MLB])
crosses above its EMA. The strategy moves the money to a money market
where: fund (VMFXX) when it crosses below the EMA. The results of this strategy
using an EMA with a lookback in a range of 10–150 days are shown here.
Et and Et-1 = Today’s and yesterday’s exponential This demonstrates the robustness of a wide range of parameters for an
EMA trading system.
smoothed values
Pt = Today’s price
a = The smoothing constant
a = 2/(n+1)
where n = number of days for the EMA. Note: n isn’t re-
quired to be an integer for the formula to work. We will
explain later in the article why we considered fractional
values for n.

Simple EMA strategy

The simplest EMA strategy is to purchase the HY fund
when the index moves above its EMA and sell to money
market (VMFXX) when it moves below the EMA. The
results of this strategy for a range of 10–150 days in our
EMA are shown in Figure 1.
Looking at the results in Figure 1, the graph shows the
robustness of a wide range of parameters for an EMA
FIGURE 2: RESULTS AFTER ADDING A 30-DAY MINIMUM HOLDING
PERIOD (12/31/1988–7/12/2022). Here, the same strategy as in Figure 1 is
used except this time a 30-day minimum holding period is applied to take into
account trading frequency restrictions on the bond fund that the trader may
encounter. The results are still quite good using an EMA of 18–31 days.

trading system. We may be tempted to call it a day, and

go with an EMA between 10 and 35 days. An annual re-
turn of 12% and an MDD in the 4–6% range is excellent
by any measure. It exceeds B&H of the S&P 500 with a
small fraction of the MDD. However, there a significant
problem: Most HY bond funds frown on high-frequency
trading and often require holding a fund for some mini-
Our goal is to create a general-
purpose strategy that an investor
can use to trade their favorite HY
fund or family of HY funds.
10 • February 2023 • Technical Analysis of Stocks & Commodities
mum period—often 30 days. The results in Figure 1 didn’t
place any restrictions on trading frequency or minimum
holding period. If we apply a 30-day minimum holding
period, we get the results in Figure 2.
The results in Figure 2 are still quite good using an EMA
of 18–31 days with annual returns of approximately 10%
and MDD in the 13–18% range. A few observations: Some
HY bond traders use a 50-day moving average. Note that
there is a sweet spot in Figure 2 in the 45–50 day EMA
range. Also, as we mentioned earlier, some argue for using
only recent historical data for strategy development. We
looked at a graph similar to Figure 2 but used only data
since 2007. The results were similar with good performance
in the 15- to 35-day EMA range.
What if we used a dual EMA crossover strategy, with
both a short-term and long-term (S/L) EMA? We will not
go into detail, but the results are shown in Figure 3. The
results from using a S/L EMA strategy are very similar to
the single EMA. This is because the optimum short-term
EMA is 1 to 3 days. If the short EMA is 1 day, the S/L
EMA system is equivalent to the simple EMA system. The
optimum longer-term EMA is in the 19–24 day range.
But there is a problem. The 30-day minimum hold can
occur at random. For example, if you were unfortunate
enough to purchase a HY fund just prior to the March
2020 Covid selloff you would have held the fund right
through the index exact bottom. Figure 4 is an example
of a strategy that went long on February 5 and sold at the FIGURE 3: RESULTS USING A DUAL EMA CROSSOVER STRATEGY
index’s (MBL-) absolute minimum on March 23. (See the (12/31/1988–7/12/2022). Here, results are shown for using a dual EMA
line labeled “locked” in green.) This resulted in a 19% crossover strategy, with one short-term and one longer-term EMA lookback
MDD. The strategy reentered quickly, but the damage had length, instead of using just a single-EMA system. The 30-day minimum
been done. EMAs work best when the decline is a slow holding period is included in the strategy rules. The results for the dual EMA
strategy are very similar to results from using a single EMA.
rollover. The decline in March 2020 was very fast, and
even short-duration EMA strategies can be locked into a
trade for 30 days. Applying the “failsafe” stop
But there is good news! These rapid declines occur Determining the parameters for the fail-safe stop becomes
infrequently. And most HY fund managers are willing somewhat complicated because there is a tradeoff between
to forgive the rare short-duration trade, or put you in a return, MDD, and how often the stop is applied. We now
limited-duration penalty box if you break their minimum have four parameters to optimize—the two parameters in
hold rule. So, can we fix our strategy with a “failsafe” the original S/L dual EMA crossover, and the short and
stop that triggers very infrequently? The simplest type long parameters for the S/L EMA crossover failsafe stop.
of stop would be a percentage trailing stop, but then the Also, the way the fund managers treat short-term trades
question is: “When to reenter the trade?” The approach (STT) can be based on a rolling basis. For example, if you
we took was to use a second S/L EMA on the basic S/L have a second SST within, say, 90 days, more than three
strategy equity curve. We could have used a single EMA, per year, etc., it becomes more problematic.
but we chose to use a S/L EMA crossover stop on our For our strategy, we wanted to avoid more than a hand-
strategy equity curve for
flexibility. To be clear,
this stop isn’t required
to obey the 30-day
minimum holding rule,
that is, when it triggers,
the HY bond is sold
even if the fund is held
for less than 30 days.
The strategy continues
to use the original S/L
EMAs internally, and
requires the internal eq-
uity curve to go positive
INVESTORSFASTTRACK

with respect to the fail-

safe S/L stop to reenter
HY bonds. Later, we
will show a graphical FIGURE 4: EXAMPLE OF LOCKED-IN TRADE. The strategy purchased the bond fund index (MLB-) on February 5,
example to clarify. 2020 and was locked into the trade with a 30-day hold (due to limits on trade frequency), selling at the index’s absolute
minimum on March 23. Clearly, when sudden market drops occur, the 30-day hold rule can lead to unfortunate timing.
February 2023 • Technical Analysis of Stocks & Commodities • 11
 # STT
Annual Trades Avg Short (fast) Long (slow) Short EMA Long EMA
Case # Description MDD, % in rolling
Return, % Avg/Year STT/Year EMA EMA (Stop) (Stop)
90 days
0 Buy & hold 6.7 35.4 N/A N/A N/A N/A N/A N/A N/A
1 No trade restrictions 12.5 4.5 20.2 212 7.5 1 12.5 N/A N/A
2 0 STT in 90-day window 10.1 14.7 6.5 0 0 8 11.5 N/A N/A
3 1 STT in 90-day window 10.8 3.9 5.7 1 0.4 1.3 28.8 4 99
4 2 STT in 90-day window 11.0 5.8 6.3 2 0.5 1.3 21.1 23 56
5 3 STT in 90-day window 11.1 5.7 6.4 3 0.5 1.3 21.3 27 48
6 0.1 Avg STT/year 10.1 7.0 6.0 0 0.1 1.0 27.5 36 227
7 0.2 Avg STT/year 10.6 4.4 5.4 0 0.2 1.6 28.8 6 107
8 3 STT in 90-day window* 10.1 8.2 5.4 3 0.7 1.6 20.0 25 56
9 CE funds—no restrictions 14.4 12.7 14.2 N/A N/A 1.0 36.3 4 238
FIGURE 5: RESULTS FROM GENETIC ALGORITHM OPTIMIZATION. Results include both in-sample and out-of-sample results with a short-term trade
(STT) defined as holding a fund less than 30 calendar days—*except case 8, which used 60 days as a minimum holding period.

ful of STTs within any rolling 90-day window over the
entire 30+ years of the strategy and keep the total number
of STTs to a small number.
Because of the number of parameters and trading limits
on STTs, we will use a genetic algorithm (GA) to determine
robust optimum parameters—that is, accept parameters that
are somewhat insensitive to variation of the parameters.
This is where we now explain why we used non-integer
values for our S/L EMA parameters.
For a more detailed description of how we use GA optimi-
zation, see our December 2020 S&C article, “Hedging The
S&P 500 Index Using Low-Correlation ETFs.” Within the
GA there is a robustness check on parameters. Parameters
are varied by a percentage of +/− 10%. If the strategy per-
formance is significantly impacted by this variation, then
this strategy doesn’t survive the optimization process. By
way of example: If we used a strategy of, say, 5 days for the
short/fast EMA and a value of 25 for the long/slow EMA,
we examine the parameters around the 5/25 parameters,
that is, 4.5/22.5 (S/L) days and 5.5/27.5 (S/L) days. If we
were to round to the nearest integer, the variation could
be much larger than our 10% value or not change at all for
smaller numbers. Having said this, we did use integers for
the failsafe stop S/L EMA parameters because we were
dealing with larger numbers, and larger rounding to the
nearest integer wasn’t a significant issue.
As we have noted in our previous S&C article, strategy
developers are not of one accord when it comes to opti-
We want this strategy to trade
well against a large basket of
open-end HY bond funds.
12 • February 2023 • Technical Analysis of Stocks & Commodities
mization with regard to the order of the date ranges for
in-sample (IS) and out-of-sample (OS) date ranges—that
is, OS before or after the IS date range? We decided to
use the recent data for IS because there have been several
market disruptions in recent years, and we acknowledge
recent markets are moving faster as HY bonds have in-
creased in popularity.
The IS date range chosen was 12/31/1991–12/31/2020,
and the OS date range was 11/28/1988–12/31/1991. We
retained 2021/2022 data to examine the strategy completely
outside the optimization process.
Overoptimization, or data mining, is a major issue, and
one advantage of GA optimization is that as the optimiza-
tion progresses, we can monitor OS results; and when the
OS results begin to decline we can stop the optimization
and review the most favorable strategies found to that point.
All optimizations were made to maximize annual return.
We could have included a secondary goal to minimize
MDD, but the MDDs from the optimization were quite
low without including MDD as a secondary goal. Figure 5
contains the results of GA optimizations that used various
assumptions and constraints.
Case 0 is simply B&H. Case 1 optimized parameters
for maximum return without any trading restrictions.
Case 2 put a restriction of no STT at any time during the
entire optimization, i.e., no failsafe stop. Cases 3–5 put
restrictions on the total number of STTs, i.e., 1, 2, or 3,
occurring within any rolling 90-day window. For example,
case 3 only allowed a single STT within a rolling 90-day
window. Remember, this spans the entire 33 years of the
strategy evaluation.
Cases 6 & 7 took a different approach and put a restriction
on the average number of STTs each year. For example,
if the goal is 0.1 per year then a STT would occur once a
decade on average.
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 Case 8 changed the
minimum holding pe-
riod from 30 to 60 days,
and allowed a total of 3
STTs during the roll-
ing 90-day window. It
is equivalent to case 5
but using 60 days as the
minimum holding pe-
riod rather than 30 days.
This case was intended
to evaluate the impact
on performance if a fund
management requires 60
days rather than 30 days.
There was little impact
on return, but a modest
increase in MDD. FIGURE 6: RECENT FIVE YEARS OF BOND INDEX (7/14/2017–7/14/2022) AND CASE 5 WITH & WITHOUT FAIL-
Observation: You may SAFE STOP. The results include post-optimization performance. Note that the failsafe stop helped the strategy to avoid
much of the 2020 and 2022 declines.
ask why the more restric-
tive case 3 has a lower
MDD than cases 4 & 5. That is simply the nature of the of these trades to have a higher confidence in the se-
randomness in market declines. In the future, we would lected failsafe parameters, but that would also drive up
expect case 3 to have larger drawdowns than cases that our STTs. Figure 6 shows the MLB- index and case 5
allow for more STTs. with and without the fail-safe stop for the last five years
Allowing just a single case (case 3) of a STT in a 90- (7/14/2017–7/14/2022). Note: This includes results post-
day window made a significant difference on MDD (3.9% optimization, i.e., post 12/31/2020). The failsafe stop
versus 14.7%). slightly hurt performance heading into 2020, but the stop
Digging deeper into case 5: It had 74% winning trades paid dividends by keeping the strategy out of trouble in
and 71.5% time invested in HY bonds. The number of trades the 2020 Covid decline, and during the 2022 inflation/
numbers in the 100s, which is statistically significant, but a bond decline. Without the failsafe stop, the strategy kept
system develop- trying to go long during the declines.
Ticker Ann% MDD% Cor Beta
er would likely
FAHDX 12.80 14.80 0.77 1.16
ask how often Using the strategy signal on actual
FAGIX 11.90 17.70 0.77 1.08
does the failsafe high-yield funds
FHYTX 11.00 9.10 0.80 0.95
stop trigger? The Recall that our signal strategy was based on trading the
FHIIX 10.80 6.70 0.88 0.83
answer is only 17 MLB- Index. How well does the signal strategy do with
times. We would actual HY bond funds? Of the 260+ HY bond funds in the
FHAIX 10.80 9.50 0.77 0.92
normally like FastTrack database, only 17, excluding different classes
PRHYX 10.70 7.20 0.78 0.77
to have around of the same fund, have existed since 12/31/1988. Figure 7
PHYIX 10.70 6.70 0.89 0.81
twice as many shows statistics on trading these 17 funds using the signal
AMHYX 10.60 13.20 0.77 0.85
from case 5. Also included is
the correlation and beta of
AHITX 10.50 13.20 0.79 0.85
FIGURE 7: SAMPLE RESULTS USING BOND FUND
each fund with respect to the
MHITX 10.20 6.20 0.80 0.87
VERSUS BOND INDEX. How well does the strategy do with
high-yield bond funds rather than the bond index? For this MLB- index.
INEAX 10.10 12.60 0.73 0.82
NEFHX 10.00 15.90 0.79 0.94
test, trading signals from the case 5 strategy were used with Clearly, there are differenc-
LBHYX 10.00 11.00 0.82 0.84 17 high-yield bond funds (12/31/1988–7/12/2022). Result- es in the effectiveness of the
KHYAX 9.90 7.50 0.87 0.88 ing statistics (annual return, daily maximum drawdown) trading signal for the different
are shown here. Also shown are the correlation and beta
PHCHX 9.30 7.60 0.80 0.80
of each fund with respect to the bond fund index (MLB-). funds. This isn’t too surprising
VWEHX 9.20 5.60 0.77 0.76
Although results varied due to differences in the bond funds, because funds have different
IHIYX 8.90 8.40 0.80 0.81 the signal was very effective with most funds. risk criteria and can allow
14 • February 2023 • Technical Analysis of Stocks & Commodities
holding bonds with dif-
ferent ratings and mix
of ratings. A general
observation is that the
higher-beta funds tend
to have larger MDDs
and slightly better re-
turns. The signal was
very effective with some
funds. FHIIX (Feder-
ated Hermes High In-
come Bond Fund) did
particularly well with a
return of 10.8% annual
return/6.7% MDD com-
pared to 6.9%/32.6%
B&H for FHIIX without
the signal. Graphically, FIGURE 8: RESULTS OF USING CASE 5 STRATEGY TO TRADE FXIIX. The signal was very effective with the Federated
Figure 8 shows FHIIX Hermes High Income Bond Fund (FHIIX), one of the funds from Figure 7. This table shows the annual return (logarithmic
scale) trading FHIIX with and without the signal, that is, trading FHIIX with the case 5 signal versus B&H.
with and without the
trading signal.
and the volatil- Using Case 5 Signal Using Case 9 Signal
HY bond ETFs and closed-end funds ity. Investors Ticker Ann% MDD% Ann% MDD%
As noted earlier, ETFs and CE funds don’t have trading also need to HYB 12.0 18.5 12.4 32.1
restrictions, and we looked at using the strategy on HY be aware of po- CIF 11.2 30.8 11.5 30.8
bond ETFs and CE funds. We looked at trading the largest tential liquidity HIX 10.6 21.9 8.1 28.8
HY bond ETF (HYG) using the case 5 signal. From to issues with CE DHY 10.2 18.8 11.0 32.8
4/11/2007 (ETF inception) to 7/12/2022, B&H of HYG has funds. We iden-
VLT 10.0 19.3 10.8 31.2
a 4.25% annual return with a 34.3% MDD. Meanwhile, tified 19 CE
EAD 9.8 18.9 10.2 37.5
using the case 5 signal, the performance was a 4.6% return HY bond funds
AWF 9.7 16.9 9.5 34.3
with a 13.9% MDD—certainly, a significant improvement in the Inves-
HYT 9.5 18.6 9.5 27.8
in MDD. However, over the same time period, MLB- re- tors FastTrack
turned 8.9% with a 3.5% MDD using the case 5 signal. database. On
NHS 9.5 22.0 9.2 32.6

This may be unfair comparison because we don’t care about average, these
CIK 9.4 17.3 10.1 32.5

trading restrictions on HYG; however, when we optimize funds have ap-

BLW 8.4 16.5 7.8 22.4

HYG for maximum return without any restrictions, we get proximately a HIO 7.0 15.4 7.0 24.8

5.02% annual return and a 10.5% MDD—not a significant 0.5 correlation FIGURE 9: RESULTS OF TRADING LEVERAGED
CLOSED-END HIGH-YIELD BOND FUNDS. Per-
improvement over our restricted strategy. with MLB- and formance is shown for individual closed-end (CE)
Leveraged CE funds do provide better returns, with a a beta of ap- funds using the case 5 and case 9 trading signals,
corresponding increase in MDD. In addition to the leverage, proximately 2. 12/31/2003–7/12/2022. Often, leveraged CE funds
CE fund trading prices can have premiums and discounts on Some of these provide better returns, with a corresponding increase
the net asset value, which also increases both potential gain funds have lim- in drawdown.
ited historical
data, but twelve of the funds had data from 2004 forward.
Using the case 5 signal, we get the results in Figure 9.
We often think that EMAs need For comparison, MLB- and the case 5 signal had a cor-
to use “integer” number of days. responding return/MDD of 9.0%/-5.9% over the same
However, you can actually use date range.
fractional days. Encouraged by CE funds results in Figure 8 using the
case 5 signal, we took one additional step and optimized a
signal for CE funds that became case 9 (Figure 5). Rather
February 2023 • Technical Analysis of Stocks & Commodities • 15
than using the MLB- index, we used an average of our 19
CE funds to create a synthetic index to better represent
the CE funds. There were no restrictions on trades, that
is, no minimum holding periods; however, we did include
a 0.05% trading slippage fee. The GA optimization pro-
cess used the same IS and OS date ranges used for the
open-end funds.
The annual return for case 9 using the synthetic index
of the CE funds (Figure 8) looks very encouraging with
a 14.4% return and a respectable 12.7% MDD; however,
that is where the good news ended. When we applied the
case 8 signal to individual CE fund (last two columns of
Figure 9), the annual return was not generally improved
and the MDDs were significantly worse compared with
using the case 5 signal. We should mention that the B&H
MDD for the 19 CE funds were mostly greater than 50%
with some as high as 70% so there was a significant de-
crease in the strategy MDD versus B&H. Why did we get
such poor results? A couple reasons: Optimization was on
the average of the funds; and that average curve is much
smoother than the individual funds. Also notice that the
long failsafe stop parameters are much more forgiving
than the parameters for the other cases. This tended to
prevent a close stop on the equity curve.
Concluding comments and areas
for improvement
The improvement in returns trading HY bonds, com-
pared to B&H, using EMAs is quite good, but perhaps
more important is the significant reduction in MDD. The
methodology and strategy described in this article may
serve as a starting point for strategy developers. Readers
may notice (Figure 5) that a good place to start for the
short EMA parameter is 1–2 days and 20–30 days for the
long EMA. Choosing failsafe stop parameters is a little
more problematic because they are a much wider range
of parameters, but there does appear to be a sweet spot
around the 25/50-day S/L parameters.
There are several areas for improvement. One could
argue that we should have ignored older data, and re-
stricted our analysis to more recent HY bond data—this
is worth consideration. And although we restricted STTs,
there is considerable trading in an average year. One area
to examine is to look at the impact on performance if the
number of trades is reduced. Perhaps the greatest improve-
ment would be to use the actual funds that will be traded
to create an index, rather than a generic HY bond index.
Also, we assumed a minimum hold period of 30 days for
most of our analysis, but increasing the minimum holding
to 60 days didn’t have a significant impact on results. That
may not be the case for even longer holding periods. We
16 • February 2023 • Technical Analysis of Stocks & Commodities
The improvement in returns
trading HY bonds, compared to
B&H, using EMAs is quite good,
but perhaps more important is
the significant reduction in MDD.
were disappointed with using the methodology on HY
ETFs, but the CE funds show promise for those with a
higher risk tolerance. Much more work could be done
developing a CE fund strategy.
Brothers Ken Huck and Nelson Huck are the founders of
Edge Ware, Inc. (www.edge-ware.com). Since 1995 they
have developed a number of programs to help investors
create trading systems and have consulted with money
managers. Their FastBreak Pro program was one of the
first commercially available programs to use a genetic
algorithm for optimizing trading strategies. They can be
contacted at email2ew@edge-ware.com
Further reading
Huck, Ken, and Nelson Huck [2020]. “Hedging The S&P
500 Index Using Low-Correlation ETFs,” Technical
Analysis of Stocks & Commodities, Volume 38:
December.
Huck, Ken [2020]. “Creating Synthetic Historical Data,”
Technical Analysis of Stocks & Commodities, Vol-
ume 38: March.
Kaufman, Perry J. [2005]. New Trading Systems And
Methods, 4th edition, John Wiley & Sons.
Pardo, Robert [2005]. Design, Testing, And Optimization
Of Trading Systems, 4th edition, John Wiley & Sons.
[2008]. The Evaluation And Optimization Of Trad-
ing Strategies, 2nd edition, John Wiley & Sons.
‡Investors FastTrack (https://fasttrack.net)
‡See Editorial Resource Index
 Algo Q&A
ALGORITHMIC TRADING
Have a question about system or algo trading? Kevin J. Davey has over
30 years of system trading experience. Kevin is a full time trader, and also
teaches and consults via his Strategy Factory® online workshop (https://
kjtradingsystems.com). He is the author of 5 bestselling trading books, in-
cluding “Building Winning Algorithmic Trading Systems” and his latest
book “Algo Trading Cheat Codes.” Send your questions or topic suggestions
to Kevin Davey at kdavey@kjtradingsystems.com. Selected questions will
appear in a future issue of S&C.
Kevin J. Davey

ELIMINATING STRESS?
Long-time discretionary chart trader
here, tired of the stress inherent with
this type of trading. I am thinking of
algo trading instead. If the computer
makes buy/sell decisions for me,
won’t my stress level and emotions
be eliminated?
I hear this a lot: “Oh, I will just algo
trade, there are few or no emotions
involved in that.”
What a crock.
Realize that people who espouse
the “no emotions in algo trading”
theory fall into two camps: either
they do not trade at all, or they only
trade on simulators. Keep that in
mind as you ponder following their
“wisdom.”
When real money is on the line,
emotions will be involved. Guar-
anteed.
That being said, it is possible to
reduce or temper the emotions in algo
trading. It really comes down to two
things: confidence and discipline.
Whatever style of trading you favor,
confidence is a huge part of your
success. Confidence is the ability to
weather the storm, to know that if you
just keep doing proven tasks (such as
following your algo) good outcomes
will happen.
Discipline is the proper execution
of that algo. Discipline is the key to
minimizing the impact of emotions.
Why is discipline so important?
One example: Say your current live
algo has lost three trades in a row,
which happened many times in the
backtest you ran. But you are discour-
aged by this recent performance, and
you decide to turn the algo off for a
week, since it might be broken. Of
course, the next signal is a winner,
but you missed it. To overcome this
missed trade, you double size for the
next trade. No surprise, that trade
loses. After all this, you blame the
algo and have no confidence in it
any longer.
Whatever style of
trading you favor,
confidence is a huge
part of your success.
What just happened? First, you
initially lost confidence in your algo
for no legitimate reason—since the
backtest showed three losses in a
row was possible. Then, you lacked
discipline by trading against the algo.
And in the end, you are no longer
confident nor disciplined in trading
this algo. Your emotions are likely
a wreck!
Another example: Say there is a
Fed announcement this week, or an
inflation report release, or some kind
of news event. You decide to manu-
ally overrule your strategy and turn
off signals for this week. You end
up missing out on good trades. You
kick yourself for overriding your
algo. Again, your emotions are high
with this algo.
These two simple examples make
it clear that emotions can and do play
February 2023
a significant role in algo trading. If
you can follow the rules 100% and
let the algo do its thing without
interference, then emotions can be
kept in check.
Good algo trading, therefore, starts
with having confidence in what your
algos are doing. Having properly
conducted backtests is a key part of
that. After that, you must have the
discipline to follow the algo without
fail.
The neat thing about this is once
you get in the habit of being disci-
plined with your algos and you start
to see good results, your confidence
begins to soar. You now believe in
how you are trading, which of course
makes you more disciplined and in-
duces more confidence. It is a spiral
upwards to trading success.
If you go into algo trading realizing
that emotions can play a significant
role, and understand that confidence
and discipline are the tools to keep
emotions in check, you will find
your trading endeavors a lot less
stressful.
YOUR ONLINE
RESOURCE FOR
TECHNICAL
ANALYSIS
• Technical Analysis of Stocks & Commodities • 17
 Filtering Trades To Improve Trade Selection
The Outside Bar: A Rare
And Powerful Filter
Some price patterns can be used to filter trades. Find
out the impact the “outside bar” can have on some
trend-following strategies and how useful this can be.
This article includes code to discover outside bar fre-
quency in various markets, and sample code to trade
those occurrences.
by Andrea Unger
In
the markets, trading decisions are made based
on the configuration of market prices. This is
what makes up price action. It’s commonly
said that prices incorporate all available in-
formation into their movements and that the
trader can start from the prices themselves
to decide how to trade.
I’ve always used price patterns in my systems, but
never as a starting point. At the Unger Academy, we
teach when and how to use patterns like these, which act
like filters applied to basic systems and set to a specific
trading approach.
18 • February 2023 • Technical Analysis of Stocks & Commodities
In this article, I’ll discuss a pattern called the outside
bar. This pattern can be considered rare and powerful.
I’ll show why that is so, and I’ll show its impact on some
trend-following patterns.
What is an outside bar?
A bar is called an “outside bar” (OB) if its high is above
the previous bar’s high and its low is below the previous
bar’s low.
It should be noted that in this article, I’ll always refer
to an outside bar with a daily timeframe. Figure 1 helps
to explain. On the right, you can see a daily price bar for
yesterday, with a range that exceeds the highs and lows
from the day before yesterday, represented
by the bar on the left.
This pattern indicates an increase in
volatility and doesn’t necessarily indicate
VIDEOFLOW/SHUTTERSTOCK
FIGURE 1: THE OUTSIDE BAR (DAILY TIMEFRAME). In
this diagram, on the right is a daily price bar for yesterday
with a range that exceeds the highs and lows from the day
before yesterday, represented by the bar on the left.
 PRICE PATTERNS

a market direction. In other words, it shows us that dur- countsession countOB

ing yesterday’s session, buyers and sellers took turns
moving the book until they reached both relevant highs
and lows.

Is it a common price pattern?

If we understood how the construction of this pattern
FIGURE 2: HOW RARE IS THE OUTSIDE BAR PRICE PATTERN? We
takes place, we could guess that an OB occurs very can use a simple program to count all the OBs produced by a market and
rarely. But how rarely? relate them to the total number of sessions. This table shows the percent-
To answer that question, we can use some simple code age of occurrences in different markets from 2010 to October 2022 as
(in PowerLanguage for MultiCharts) that calculates the calculated by the program.
percentage of occurrences in different markets from
2010 to the present as I write this in the third quarter input:
of 2022: mystartbar(2), myendbar(35),
length(90),
var: countOB(0), countsession(0), ID(1),
dateInDateTimeFormat(0), datereadable(""); mystop(0);
dateInDateTimeFormat = ELDateToDateTime(date); var:
datereadable = FormatDate("dd-MM-yyyy", dateInDate- mybar(0),
TimeFormat); mylonglevel(1000), myshortlevel(0),
if (high[1]>high[2] and low[1]<low[2]) then begin // valid for mypattern(true);
daily bars if sessionlastbar then mybar = 0;
countOB = countOB+1; mypattern = (highs(1)>highs(2) and lows(1)<lows(2));
end; mybar = mybar + 1;
sessioncount=sessioncount+1; mylonglevel = HighestFC(High, length);
print(File("C:\test.txt"),datereadable," ",countOB," ",ses- myshortlevel = LowestFC(Low, length);
sioncount); if mybar >= mystartbar and mybar <= myendbar and
mypattern then begin
We’ll count all the OBs produced by a market and relate buy next bar at mylonglevel stop;
them to the total number of sessions. (See Figure 2.) sellshort next bar at myshortlevel stop;
If we use this pattern as a traffic light to allow our end;
market entries (that is, we’re only allowed to trade if an setstopcontract;
OB was formed yesterday), it’s expected that the number if mystop > 0 then setstoploss(mystop);
of trades in our system will be significantly reduced by if ID = 1 then setexitonclose;
up to 90%.
The code shown above contains a mirror trigger for the
A simple system for trading the outside long and short sides, calculated on a 90-bar Donchian
bar that can be applied to different channel (length equals about two sessions). The number
markets of bars of the channel is equivalent to the estimated
Let’s analyze the impact of this pattern on instruments number of bars in a given trade.
with different characteristics. We’ll create a basket of
instruments containing CME futures, such as stock
indexes, bonds, metals, and energy commodities, and
plot each instrument using a 30-minute timeframe (so
a futures contract that trades 23 hours per day is plot-
A bar is called an “outside
ted with 46 bars per session). Specifically, we’ll use the bar” (OB) if its high is
following futures: @CL, @RB, @NG, @HO, @GC, @ above the previous bar’s
HG, @ ES, @US. high and its low is below
We’ll now need some code with which we can perform the previous bar’s low.
the first test on all underlying assets:

February 2023 • Technical Analysis of Stocks & Commodities • 19

 We use a trading time window, meaning we only
allow entries when we are within a time window that
starts one hour after the session opens and ends about
five hours before the session closes to give the trades
time to develop.
In our code, we used a Boolean-type variable called
“mypattern.” The Boolean variable is true if an OB oc-
curred in yesterday’s session or otherwise false.

if mybar >= mystartbar and mybar <= myendbar and

mypattern then begin
buy next bar at mylonglevel stop;
sellshort next bar at myshortlevel stop;
end;

From the above part of the code, we see how our system
takes a market position through stop orders, both long
and short, placed on the upper and lower levels of the
channel, respectively, but only if:

a. we are inside the trading time window

b. yesterday’s session was an outside bar.

Note that we don’t apply a stop-loss because we want

to introduce as few conditions as possible to read the
results better at this stage of the study. However, we’ll
close the position at the end of the session by applying
a time stop.
The results: How do a system’s metrics
change with or without the use of the
OB filter?
Thanks to our code, we can insert the filter ”mypattern”
or the filter “mypattern=false” to see how the results of
the original system change with and without filters (see
the three-part table in Figure 3).
For the first case, we’ll use the code already shown in
the previous section. For the second case, we’ll replace
the line highlighted in yellow with the following line:
if mybar >= mystartbar and mybar <= myendbar and
mypattern = false then begin
FIGURE 3: SYSTEM TRADES WITH AND WITHOUT THE FILTER. We can
look at how a system’s metrics change with and without the use of the outside
bar (OB) price pattern used to filter the trades taken by the system.
the number of trades will be significantly reduced,
and, consequently, the net profit will be reduced as
well (what we had expected). This is not a prob-
lem, though, since now our goal isn’t to identify a
strategy but to understand how the presence of an
OB affects the results.
• By setting mypattern to false, we are making sure
we do not trade after on OB occurs.
• Comparing the metrics of systems B and C with those
of the original system A, we can see how system
B leads to selecting trades with a higher average
trade (AT) and significantly reduces the maximum

The metrics shown in the tables in Figure 3 contain data

from 01/01/2010 to the present. If we understood how the
From the analysis of the results provided by our system, construction of this pattern
we obtained information, some of which we expected takes place, we could guess
and some of which revealed something new: that an OB occurs very
rarely. But how rarely?
• If we apply the “mypattern” filter—that is, we as-
sume that there was an OB on the previous day—
20 • February 2023 • Technical Analysis of Stocks & Commodities
 ABLETREND Trusted Reliable Signals
drawdown (max DD) in almost
all the analyzed instruments,
for Volatile Markets Since 1994
especially in dynamic markets
such as the energy futures.
• From the results of system B, Sweet Spot:
the @HG is also positively Entry Close to the dots
Helps to Define & Limit Risk
affected by the use of the OB with Potential for Big Trends
filter, while in the case of the
@GC, the system significantly
worsens the AT.
• In the case of the @ES, system
B brings tangible benefits, al-
though we know that the US
stock markets respond much Re-testing Key Support
better to mean-reverting ap- Early Buy Signal in March 2022 Revealed by AbleTrend Dots
proaches with countertrend Indicated by Buy Bar & Blue Dot
entries.

Let’s go further: Are

there other conditions
we can analyze?
So far, we’ve seen how the introduc- Fresh Sweet Spot Signals
tion of OB leads to stringent filtering Updates to Signals in Progress
of trades and improved AT of the basic *Access the New Resource from the Link Below
system in some markets (especially
in energy futures). Traders Rave Over AbleTrend
We wonder now whether any condi-
tions could affect the results in any
way. We’ll therefore ask the following
ABLETREND 7.0 COLLECTED BY
questions, focusing on the energy SINCE 1994

futures sector:

a. Yesterday, when the OB was

being developed, did the value
of the body-to-range ratio have
an impact on the systems ana-
lyzed?
b. Do the previous results change
regardless of whether yester-
day’s close was at the top or bot-
tom of OB? And if so, how?

Tests on historical data can provide

the answer to these questions. We will TEST DRIVE THE LATEST SIGNALS
change the original code periodically,
introducing or removing a single ad-
ditional condition and observing if
and how the results vary.
THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS
SHOWN IN AN ACTUAL PERFORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUAL-

For case (a), we’ll introduce the new

variable “mybodyrange” and change
the entry condition as follows:
LY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF
LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT
OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THESE BEING
SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE
PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.
February 2023 • Technical Analysis of Stocks & Commodities • 21
 var: mybodyrange(true);
mybodyrange = absvalue(opens(1)-closes(1)) >
0.5*(highs(1)-lows(1));
if mybodyrange and mybar >= mystartbar and mybar <=
myendbar and mypattern then begin
buy next bar at mylonglevel stop;
sellshort next bar at myshortlevel stop;
end;
The results are shown in the table in Figure 4. These
results show that the introduction of this new condition
and the presence of an OB leads to an increase in AT
and a decrease in max DD in almost all cases.
To examine how the results change in case (b), we’ll
introduce two new variables, “mycloseupyest” and
“myclosedownyest,” and change the entry condition as
follows:
var: mycloseupyest(true), myclosedownyest(true);
mycloseupyest = ((highs(1)-closes(1))<0.20*(highs(1)-
lows(1)));
myclosedownyest = ((closes(1)-lows(1))<0.20*(highs(1)-
lows(1)));
if mybar >= mystartbar and mybar <= myendbar and
mypattern then begin
if mycloseupyest, then buy next bar at mylonglevel
stop;
if myclosedownyest then sellshort next bar at myshort-
level stop;
end;
The results are shown in the table in Figure 5. The
results show that the position of the close, associated
with the presence of an OB, doesn’t have a clear and
significant impact on the trade results.
In all the situations studied in this section, we used
rules containing a specific value. In the first case, we
set the value 0.5 as a watershed to identify the so-called
dailyfactor (mybodyrange); in the second case we use
the value of 0.2 as a limit to indicate whether the close
of the previous day was in the high (over 80%) or low
(under 20%) part of the daily range. These parameters
could be further explored to find better solutions with
This pattern indicates an increase
in volatility and doesn’t necessarily
indicate a market direction.
22 • February 2023 • Technical Analysis of Stocks & Commodities
FIGURE 4: SYSTEM TRADES WITH THE OB FILTER. We can look at
how a system’s metrics change with the use of the OB price pattern as a
filter. This shows results from the original system with the filter applied.
The results show that the introduction of this new condition and the pres-
ence of an OB leads to an increase in average trade and a decrease in
drawdown in almost all cases.
FIGURE 5: TESTING DIFFERENT CONDITIONS. We can change the
original code from time to time to introduce or remove a single additional
condition and observe if and how the results vary. Here, two new variables
were introduced in the code to change the entry condition. In this case,
the results show that the position of the close, associated with the pres-
ence of an outside bar, doesn’t have a clear and significant impact on the
trade results.
surrounding values that provide stable results—but we’ll
leave that task to the reader.
We can conclude, however, that of the cases analyzed
in this section, the first case certainly brought the most
benefit to our starting system.
Final thoughts and further uses of OB
We’ve shown that in the case of the major energy futures,
allowing market entry only after the presence of an OB
had a significant impact on system metrics by increasing
AT and significantly reducing max DD.
Metrics improved further when OB had a body-to-
range factor of at least 50%, while the closing level of
OB didn’t provide clear benefits.
On the other hand, we observed that allowing the sys-
tem to enter only in the absence of an OB didn’t produce
significant improvements.
It would be worthwhile to continue the study and test
different entry strategies on a broader basket of instru-
ments to try to benefit from such a rare and powerful
filter.
Andrea Unger is a full-time professional trader, president
of The Unger Academy, and author of The Unger Method.
He is a four-time World Trading Champion (2008, 2009,
2010, and 2012), an honorary member of SIAT (Italian
Continued on page 43
 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.

WHY THE 50- AND 20-DAY MOVING
AVERAGES ARE STILL EFFECTIVE
TODAY
In the field of technical analysis,
there are methods and practices that
work without any reason. And since
technical analysis is an empirical ap-
proach, we are forced to accept and
acknowledge that a method works
well without necessarily knowing
why it does.
I have always wondered why this
happens in technical analysis. One
reason could be that once a method
is widely accepted by all market
participants, then it becomes self-
fulfilling.
If you walked up to a business, say,
a bakery, and asked what is the best
bakery in town, they will tell you that
they are. This is obvious.
I could liken myself to being a
“baker” in the field of technical
analysis. However, I will plainly tell
you that there are other bakers in the
field who make bread at least as good
as I do or even better.
My willingness to be fair in this
open assessment of myself may be
unusual in business. In business, the
goal is normally to convince the con-
sumer that your product or service is
the best around.
In the technical analysis arena,
there are some who make themselves
highly visible and they become public
figures in the field. I am not talking
about the hucksters who make a big
commotion over themselves only to
take your money and then disappear.
I am talking about real and hopefully
qualified professionals in the business
who deliver regular information and
opinions. I am looking at the large
following some of them can gain
these days on social media and on
video platforms on the internet. Truly,
once you start following them, you
can become quickly addicted to their
opinions.
Since the 200-day
moving average has
been around for almost
a century, we need to
look back at the times
when computers did
not exist.
I am thinking of one person in par-
ticular I enjoy watching on YouTube
(whom I won’t name here, as it’s not
the point of my discussion). I consider
his analysis brilliant. Yet his analysis
is based mostly on moving averages,
and in particular, the 50-day and 200-
day moving averages. He is a veteran
trader with many years of experience,
and having an experienced market
analyst share their analysis with other
users is valuable for many of us.
In his approach, he treats the two
moving averages almost like variable
support and resistance levels, where it
is presumed that price reactions will
tend to happen. And day by day in
his videos, he shows how effective
February 2023
the moving averages are for market
analysis, both on equity indexes and
on individual stocks.
Moving averages are a tool that
have been in use for a very long
time. They are not new or innovative.
If you were a sophisticated trader
looking for something impressively
and overly complicated, you would
surely look down your nose at popular
moving averages, considering them
trivialities. But the truth is, they are
not trivialities.
In Lawrence Connors’ well-regard-
ed books on market analysis—and
this is an author who is known for
quantitative trading techniques—his
analysis often relies on a 200-day
moving average. He found them to
be highly effective on stocks and
stock indexes. And whenever Connors
would speak about the markets, he
would show plenty of statistics to back
up what he was saying, in case you had
any doubts that there is any serious
evidence to the methodology.
Getting back to the whys and where-
fores: One of the reasons the 50- and
200-day moving averages are effec-
tive is that everybody watches them
and so everybody reacts to them. Not
everyone reacts to them in the same
way—some may buy and some may
sell, but in any case, there is reaction
in the markets all at the same moment.
It is why we can watch those averages
and reasonably expect something
Continued on page 49
• Technical Analysis of Stocks & Commodities • 23
 Focus On The Trend
Do Small Price Changes Matter
Or Are They Just Noise?
Can trend trading be improved by filtering out small
price moves to emphasize the trend? Here are two test
cases to help find out.
by Perry J. Kaufman
A
re trends more accurate if you ignore small
changes in price?
Does it really matter if the S&P, or any stock,
closes up or down by 1 tick, or even 1/10 of a
percent? Are those days just noise, or are they
important when we calculate a moving average system
or other trend-trading systems?
To be fair, removing small daily changes might im-
prove one method and not another, so we’ll look at two
very different trending techniques to see if there is any
consistency.
On-balance volume
We’ll start with Joseph Granville’s on-balance volume
(OBV), introduced in 1963. It seems like a natural ap-
24 • February 2023 • Technical Analysis of Stocks & Commodities
plication of this idea. It uses price changes to create a
trendline based on volume. The rules are simple:
If today’s S&P price closes higher, add the total volume
of today’s trading to OBV, the accumulated volume.
If the S&P closes lower, subtract today’s total volume
from OBV.
When I first studied the OBV concept, I wasn’t sure if
the cumulative value of OBV had any relationship to the
trend of prices. After all, it only uses volume. Figure 1
shows that the OBV (lower panel) applied to SPY is less
volatile than prices and has the same pattern.
I tested the moving averages from 2000 through Oc-
tober 2022, long-only, for SPY and the OBV based on
SPY. The best for both was the 80-day trend, shown in
Figure 1. Prices are in the top panel and the OBV in the
bottom panel. It is interesting to see that the trend of the
LISA-S/SHUTTERSTOCK
OBV looks smoother than the price trend.
Code for the OBV in EasyLanguage can be found
in the sidebar, “Code For Applying A Minimum-Price
 TREND TRADING

TRADESTATION
FIGURE 1: ON-BALANCE VOLUME (OBV). Shown here is a price chart with an 80-day moving average of SPY (top) and the OBV with an 80-day
moving average (bottom). The OBV is less volatile than prices but has the same pattern.

FIGURE 2: OBV TREND TRADING SYSTEM WITH AND WITHOUT PRICE

FILTER. Compare the OBV trend system results with results when using
an optimized filter (that is, using a minimum move as a price filter). Given
one moving average (80-day lookback) and one price filter (80 basis points
FIGURE 3: USING ONE FILTER AND A RANGE OF MOVING AVERAGES.
minimum move), we see that the results are much better using the filter.
Is the result from Figure 2 robust? To find out, we can look at how other
filters affect the 80-day average. Here, an 80 bp filter is applied to a range
of moving averages on the OBV.
Filter To An On-Balance Volume Trading System, In
EasyLanguage.”
filter (80 basis points, or “bp”), we see that the results
Applying an optimized minimum price are much better using the filter (Figure 2). But is this just
filter
Still using the OBV, we want to know if a minimum
price filter improves results. We create a new series that
omits any price move under our threshold filter. I tested Are those days just noise, or are
filters from 0 to 1%, applied to the 80-day moving aver- they important when we calculate
age, with the best results at 80 bp (quite large). Note that a moving average system or other
you need to use a percentage filter so that it changes as trend-trading systems?
price levels change.
Given one moving average (80 days) and one price
February 2023 • Technical Analysis of Stocks & Commodities • 25

FIGURE 4: USING A RANGE OF PRICE FILTERS AND ONE MOVING
AVERAGE. In contrast to Figure 3, here, a range of price filters is applied
to an 80-day moving average of OBV.
FIGURE 5: MOVING AVERAGE SYSTEMS. This shows the results of
testing moving averages of various lookbacks on SPY from 2000 through
October 2022. The 80-day moving average shows the best result.
an optimized result or is the concept robust?
To find out if this was an anomaly or if using a small
filter improves most trends, we first look at how different
filters affect the 80-day moving average (Figure 3), then
we look at how an 80 bp filter affects all moving aver-
CODE FOR APPLYING A MINIMUM-PRICE FILTER TO AN ON-BALANCE VOLUME TRADING SYSTEM, IN EASYLANGUAGE
// PJK
// Copyright 2012-2021,2022 P J Kaufman. All rights re-
served.
{ TSM OBV Trend
Copyright 2011, 2022, P.J.Kaufman. All rights reserved. }
inputs: period(60), minpricechange(0), longonly(true),
usefutures(false);
vars: stockinvestment(10000), futuresinvest-
ment(25000), investment(0),
MAOBV(0), size(0), OBVlocal(0);
if Close > Close[1] + minpricechange then
OBVlocal = OBVlocal[1] + Volume
else if Close < Close[1] - minpricechange then
OBVlocal = OBVlocal[1] - Volume
else
OBVlocal = OBVlocal[1];
MAOBV = average(OBVlocal,period);
26 • February 2023 • Technical Analysis of Stocks & Commodities
FIGURE 6: TESTING A MINIMUM PRICE MOVE WITH THE 80-DAY
MOVING AVERAGE. Compared here is the 80-day moving average with
and without a 95 bp (basis point) minimum move as a price filter. Total
profits are much better although the risk is higher. However, the filter has
reduced the number of trades to 3 versus 48 in the original moving aver-
age system.
age calculation periods (Figure 4). This does not cover
all combinations but increases our confidence that the
concept is valid.
In both Figures 3 and 4, the minimum-price filter
improves most cases, as seen by those returns that are
above the horizontal line. In general, using a minimum-
price filter seems to work.
Applying the minimum filter to
a standard moving average
Not many traders will opt for the OBV, so we’ll apply
the minimum filter to a standard moving average sys-
tem. EasyLanguage code for that can be found in the
sidebar, “Code For Applying A Minimum-Price Filter
To A Standard Moving Average Trading System, In
EasyLanguage.”
As a benchmark, we tested SPY from 2000 through
October 2022, long-only, for a range of moving average
calculation periods. Results are shown in Figure 5, with
the 80-day showing the best result.
if MAOBV > MAOBV[1] and marketposition <> 1 then begin
if usefutures then
size = futuresinvestment / (AvgTrueRange(20)*big
pointvalue)
else
size = stockinvestment/close;
buy size contracts next bar on open;
end
else if MAOBV < MAOBV[1] and marketposition <> -1
then begin
sell all contracts next bar on open;
if longonly = false then begin
if usefutures then
size = futuresinvestment / (AvgTrueRan
ge(20)*bigpointvalue)
else
size = stockinvestment/close;
Sell short size contract this bar on close;
end;
end;
CODE FOR APPLYING A MINIMUM-PRICE FILTER TO A STANDARD MOVING AVERAGE TRADING SYSTEM, IN EASYLANGUAGE
// PJK Moving average with minimum move then begin
// Copyright 2012-2021,2022 P J Kaufman. All rights re- sell all contracts next bar on open;
served. if longonly = false then
sell short size contracts next bar on open;
{ period = length of calculaton end;
crossoption = 0 using trendline, end;
= 1 use price crossing trendline // use price cross
longonly= "true" then only long positions if crossoption = 1 then begin
} if marketposition <> 1 and close >= AVG[np] then begin
// minPCmove in percent, e.g. 0.0001 (one basis point) buy to cover all contracts next bar on open;
buy size contracts next bar on open;
input: period(80), minPCmove(0), crossoption(0), end
longonly(false), else if marketposition <> -1 and close < AVG[np] then
usestocks(true),usefutures(false), printfiles(false); begin
input: futuresinvestment(25000),stockinvestment(10000); sell all contracts next bar on open;
vars: size(0), investment(0), ATRper(20), atrange(0), adate(" if longonly = false then
"), sell short size contracts next bar on open;
equity(0), PL(0), PLlong(0), PLshort(0), dailyreturn(0), end;
NAV(100), volper(20), returns(0), firstNAV(0), AROR(0), end;
peak(0), drawdown(0), maxdd(0), filename(" ");
vars: np(0), sum(0), ix(0); if lastbaronchart then
array: adjprices[10000](0), avg[10000](0); if marketposition > 0 then sell all contracts this bar on close
else if marketposition < 0 then buy to cover all con-
If Currentbar = 1 then begin tracts this bar on close;
if usestocks then investment = stockinvestment
else investment = futuresinvestment; equity = netprofit + openpositionprofit;
adjprices[1] = close; PL = equity - equity[1];
np = 1; dailyreturn = 0;
end; if investment <> 0 then dailyreturn = PL/investment;
NAV = NAV*(1 + dailyreturn);
// create moving average without prices with min moves peak = maxlist(peak,NAV);
// may remove a series of small moves totaling a bigger drawdown = NAV/peak - 1;
move! maxdd = minlist(maxdd,drawdown);
if currentbar <> 1 then begin if marketposition > 0 then
if close/close[1] -1 > minPCmove then begin PLlong = PLlong + PL
np = np + 1; else if marketposition < 0 then
adjprices[np] = close; PLshort = PLshort + PL;
end; if firstNAV = 0 and dailyreturn <> 0 then firstNAV = current-
end; bar;

// calculate moving average from array If printfiles then begin

sum = 0; adate = ELdatetostring(date);
if np > period then begin If Currentbar = 1 then begin
for ix = np-period+1 to np begin print(file("c:\tradestation\Trend_with_
sum = sum + adjprices[ix]; minmove_PL.csv"),"Date,Shares,DailyPL");
end; print(file("c:\tradestation\Trend_with_minmove_NAVs.
avg[np] = sum/period; csv"),"Date,NAVs");
end; print(file("c:\tradestation\Trend_with_minmove_Detail.
csv"),
if usefutures then begin "Date,Open,High,Low,Close,AdjP,MA,size,marketpositi
atrange = avgtruerange(ATRper); on,PLtoday,PLlong,",
if atrange = 0 then "PLshort,TotalPL,MaxDD,Return,NAV");
size = 0 end;
else print(file("c:\tradestation\Trend_with_minmove_
size = investment/(atrange*bigpointvalue); PL.csv"),adate, ",", currentcontracts:6:2, ",",
end; PL:8:4);
if usestocks then size = investment/close[1]; print(file("c:\tradestation\Trend_with_minmove_NAVs.
csv"),adate,",", NAV:10:3);
// set new signal print(file("c:\tradestation\Trend_with_minmove_Detail.
// use trendline csv"),adate, ",", open:8:4, ",",
if crossoption = 0 then begin high:8:4, ",", low:8:4, ",", close:8:4, ",", adjprices[np]:8:4, ",",
if marketposition <> 1 and AVG[np] > AVG[np-1] then begin AVG[np]:8:4, ",",
buy to cover all contracts next bar on open; currentcontracts:6:2, ",", marketposition:6:2, ",", PL:8:4, ",", PL-
buy size contracts next bar on open; long:8:4, ",", PLshort:8:4, ",",
end equity:8:4, ",", maxdd:8:4, ",", dailyreturn:6:5, ",", NAV:10:3);
else if marketposition <> -1 and AVG[np] < AVG[np-1] end;

We can then test a minimum price move with the 80- Figure 6. Total profits are much better although the risk
day moving average to see if it improves results. The is higher. The real problem is that there are only 3 trades
best was 95 bp, also quite large. The result is shown in compared to 48 in the original moving average. Most
February 2023 • Technical Analysis of Stocks & Commodities • 27
 small filter to ignore the small moves.
The filters will be 5, 10, and 25 basis
points. Figure 7 shows the results.
Of the four NAVs, the one without
any minimum price filter has the low-
est returns; the one with the largest
filter has the best returns. The statis-
tics in Figure 8 show that not only
do the returns improve as the filter
is larger, but the reward-to-risk ratio
improves. We were also looking for at
least as many trades as the case with
no filter, and that was satisfied.

FIGURE 7: APPLYING DIFFERENT-SIZED PRICE FILTERS TO IGNORE SMALL PRICE MOVES.
The trend system used here is a 50-day moving average on SPY. The filters applied in this test case
are 5, 10, and 25 basis points. Of the four NAVs in the result, the one without any minimum price filter
has the lowest returns. The one with the largest price filter has the best returns.
FIGURE 8: STATISTICS FROM THE TEST CASE. The statistics are shown
here for the test in Figure 7. You can see that not only do the returns improve
as the filter becomes larger, but the reward-to-risk ratio also improves. In
addition, the number of trades is now at least as many as in the case with
no filter applied.
of us would find that unacceptable. We need to look at
this differently.
Applying the minimum threshold to
a faster moving average
By choosing a faster moving average and not a particu-
larly good one, we can see how a small filter threshold
works. It is more in line with our original thinking. From
Figure 5 we can see that the 50-day calculation period is
profitable, but not one of the best. We will then apply a
We want to know if a minimum
price filter improves results, so
we create a new price series that
omits any price move under a
Conclusion
These limited tests show that remov-
ing small price moves improves
results for two trend systems—the
OBV system and a standard moving
average system. It does require creating a new price series
with small moves removed, but the improvement seems
to be worth the trouble, and you can use the code given
in this article’s sidebars to prepare your price series.
To answer the original question posed at the top: Small
price moves appear to be noise and do not help identify
the direction of the trend.
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 recently released book Learn To Trade
(2022). For questions or comments, please go to www.
kaufmansignals.com.
Further reading
Kaufman, Perry J. [2022]. Learn To Trade, Amazon.
[2020]. Trading Systems and Methods, 6th Edi-
tion, Wiley.
[2020]. Kaufman Constructs Trading Systems
(print and ebook editions), Amazon.
[2022]. “Trading A Moving Average System:
Important Choices,” Technical Analysis of Stocks
& Commodities, Volume 40: January.
‡TradeStation
‡See Editorial Resource Index

threshold filter.

28 • February 2023 • Technical Analysis of Stocks & Commodities

 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 1)
In light of the failure of FTX, a
popular centralized cryptocurrency
exchange, speculators are reminded
of the pitfalls that can come with de-
rivative trading beyond the apparent
price risk. Stock and bond traders’
deposits and investment products are
partially protected by programs such
as FDIC (Federal Deposit Insurance
Corporation) and SIPC (Securities In-
vestor Protection Corporation). How-
ever, derivative traders, particularly
forex and crypto, can be left holding
the bag should their brokerage firm
become insolvent.
The FDIC insurance program
covers cash and cash equivalent
deposits (CDs and money market)
in FDIC-insured banks with a limit
of $250,000 per person per bank.
SIPC insurance, on the other hand,
protects against the loss of cash and
securities, such as stocks and bonds
held by a customer at a SIPC-member
brokerage firm limited to $500,000.
In either case, in the unlikely event
that a brokerage or bank covered by
these insurance programs becomes
financially troubled, these programs
act as a backstop to limit the damage
inflicted on savers and investors. The
idea behind these insurance programs
is two-fold: A robust economy re-
quires a propensity to save and invest;
this is only possible if economic
participants trust the system. Also,
although life is not always fair, it
would be extremely unfortunate for
innocent savers to suffer at the hand
of a negligent bank or brokerage. Fu-
tures brokerage accounts are neither
FDIC nor SPIC insured, but there are
compliance rules in place intended to
prevent clients from being negatively
impacted by a brokerage firm’s failure
known as fund segregation policies.
I’ll soon explain further.
The FTX crypto brokerage col-
lapse brought back some personally
painful memories of the downfall of
two prominent futures brokers in the
A robust economy
requires a propensity
to save and invest;
this is only possible if
economic participants
trust the system.
early 2010s (PFG and MF Global).
The FTX failure shared several
similarities, particularly with MF
Global, which allocated client funds
to meet margin calls in sovereign
bond positions. Yet, in both sce-
narios, the brokerage firms mingled
client funds with firm funds to cover
operational costs, contribute to risky
investments, meet firm margin calls,
and lavish amenities for high-ranking
employees.
If you’ve been following FTX, all
February 2023
of this should sound familiar. How-
ever, the futures industry is highly
regulated; the CFTC (Commodity
Futures Trading Commission) sets
rules and regulations enforced by the
NFA (National Futures Association)
via audits and investigations. Because
commodity accounts don’t have the
luxury of FDIC or SIPC insurance,
the CFTC created a segregated fund
rule requiring brokerage firms to
keep customer money in a separate
bank account from firm money. With
such an arrangement, a brokerage
firm’s insolvency shouldn’t harm
client funds. If all works as designed,
upon bankruptcy of a brokerage
firm, regulators simply transfer
open positions and cash assets used
for margin by customers to another
brokerage. This leaves the troubled
broker to deal with its financial mess
without causing harm to its clients.
Except for the aforementioned PFG
and MFGlobal fiascos, this rule has
successfully safeguarded commod-
ity traders’ funds from their broker’s
insolvency.
Since the early 2010s, when these
breaches occurred, regulators have
improved auditing techniques de-
signed to deter and prevent repeat
occurrences. For example, the most
significant improvement is the elec-
tronic auditing of banking informa-
tion instead of monitoring paper
Continued on page 40
• Technical Analysis of Stocks & Commodities • 29
 Looking For Repeatable Processes As Algorithmic Trading Ideas
Improving Trading Systems
By Counting Events
It’s a simple concept that you may not have thought of.
Find out how to implement it.
by David Bergstrom
T
raders intently seek new trading signals or
predictive patterns that can lead to improved
performance. However, one of the most over-
looked methods of improving indicators is to
simply count how often an event triggers in a
rolling window.
A signal occurring once shares very little about the
current market environment, but a signal occurring four
or five times in the past five bars can give a pretty good
idea as to the current market environment. The more
information we can pass to a trading system, the better
it should fare.
Why count signals?
Trading system developers need to pass as much context
and market environment information to trading systems
30 • February 2023 • Technical Analysis of Stocks & Commodities
as possible. This is often done by combining price ac-
tion signals with market breadth, macro factors, and
non-price-based signals such as economic data and
treasury spreads.
Many traders do not have easy access to non-price-
based data, since many retail platforms only provide
OHLC (open-high-low-close) data. Signals based on
simple moments in time rarely provide enough contextual
information to create robust trading systems.
Counting the number of events or signals can better
communicate the current market environment, leading
to more robust trading systems. Counting signals can
improve price-action-only systems without the need to
incorporate non-price-based data.
Sample signal
To begin, let’s start with a simple daily trading system
ZHAOLIANG70/SHUTTERSTOCK
that was tested on S&P 500 futures emini contract (ES)
data since 2002. This system waits for a daily low that
is below the previous day’s low and then buys the next
open. We can quantify this signal as:
 TECHNICAL ANALYSIS

Low[0] <= Low[1]

where [0] denotes the current bar and

[1] marks one bar ago.
The strategy then holds the trade for
one day, selling on the following day’s
open. This strategy, trading one lot of
ES, produces the hypothetical equity
curve over 20 years shown in Figure 1,
which is a nice-looking equity curve.
This simple trading idea produced
strong profits in 2008 and 2020 (both
years that saw dramatic lows in the
market). However, this strategy is far
from a smooth ride.

Signal count
A trader could look to improve this
signal by counting the number of oc-
currences over the past N days.
The low being below the previous FIGURE 1: EQUITY CURVE FOR SIMPLE STRATEGY. In this simple strategy, the trade is held
for one day, selling on the following day’s open. This strategy, trading one lot of ES, produces this
low tells us very little about the mar- hypothetical equity curve over 20 years. This simple trading idea produced strong profits in 2008
ket environment we are currently in. and 2020, but this equity curve is far from a smooth ride. Could the system be improved?
This leaves the trading system with
very little useful information. How-
ever, counting the number of days
the event (Low[0] <= Low[1]) has
occurred in the past five days gives
more insights.
If we require that at least four of the
last five days had their respective daily
low below the previous day’s low and
the most recent day is one of those four,
then we see a significantly improved
trading signal. A hypothetical equity
curve for this revised system over the
same 20 years is shown in Figure 2.

Spreadsheet
implementation
We can implement the concept of
counting occurrences using an Excel
spreadsheet (Figure 3).
First, we need to calculate the base FIGURE 2: EQUITY CURVE FOR SIMPLE STRATEGY, INCORPORATING SIGNAL COUNTS.
signal using an if statement comparing The trading strategy from Figure 1 could be improved by incorporating more information and rules
the current bar’s low to the previous into the strategy reflecting how often the signal occurs. A hypothetical equity curve for this revised
day’s. system over the same 20 years is shown here.
Second, calculate the open-to-open
difference to simulate buying the open and selling the to find the return for any given day with a signal. We
next day’s open. then sum all these profit & loss (P&L) values to plot the
Finally, multiply the signal by the open-to-open return equity curve.
February 2023 • Technical Analysis of Stocks & Commodities • 31
 MICROSOFT EXCEL
FIGURE 3: SPREADSHEET IMPLEMENTATION, SIGNAL COUNT INFORMATION. The concept of counting signal occurrences can be implemented
using an Excel spreadsheet. First, the base signal is calculated using an if statement comparing the current bar’s low to the previous day’s. Then the
open-to-open difference is calculated to simulate buying the open and selling the next day’s open. Finally, the signal is multiplied by the open-to-open
return to find the return for any given day with a signal. To plot the equity curve, sum all the profit & loss values. The second tab, named “combined
signals,” has an additional column to count the number of signals in the past five bars. If the sum of the two signal columns (basic and count) are equal
to 2, a new signal is produced.

Python implementation
We can also implement the concept
of counting signal occurrences
using the Python programming
language (Figure 4). Here are the
steps:
First, read in the data file into a
pandas dataframe. Next, calculate
the base signal and open-to-open
returns as separate dataframe
FIGURE 4: PYTHON IMPLEMENTATION, SIGNAL COUNT INFORMATION. The same concept can be
columns.
carried out using the Python programming language. In this sample Python code listing, the base signal Finally, multiply the signal by
is calculated and open-to-open returns as separate dataframe columns. The count signal is calculated the open-to-open returns and plot
in a new dataframe column by using pandas’ rolling sum function. To view the equity curve, plot the the cumulative sum to view the
cumulative sum after multiplying the signal by the open-to-open returns. equity curve.
To calculate the count signal in
The second tab, named combined signals, has an ad- a new dataframe column, we can use pandas’ rolling
ditional column to count the number of signals in the past sum function.
five bars. If the sum of the two signal columns (basic and
count) are equal to 2, we have a new signal—a count- Build Alpha implementation
based signal. Multiply this new signal by the returns to I can also implement the concept of counting signal oc-
get a P&L graph. currences in my own software, since that is the software
I use. Here is the procedure I follow:
Select the Low[0] <= Low[1] signal and set the max
hold time to 1 (see Figure 5).
One of the most overlooked To create the count signal, create a custom comparative
methods of improving indicator that uses the count function (see Figure 6).
indicators is to simply count
how often an event triggers in Final thoughts
a rolling window. There is no holy grail indicator, but creative ways of using
the same indicator can help improve performance. All
traders can have the same data before them, but those
32 • February 2023 • Technical Analysis of Stocks & Commodities
who make the most
creative use of it will
outperform.
Single signals can
be great to get, but
don’t forget to check
alternative ways of
using the same signal,
such as counting its
occurrence, lagging
it, scaling it, or other
ways of using it.

David Bergstrom
is the founder of
Build Alpha. He has
over a decade of
professional market
experience, includ-
ing as market maker

BUILD ALPHA
and a quantitative
strategy developer FIGURE 5: SETTING UP THE BASIC STRATEGY IN BUILD ALPHA. To set up the basic trading strategy in the Build
at a high-frequency Alpha software, select the Low[0] <= Low[1] signal and set the max hold time to 1.
trading firm with a
Chicago Mercantile
Exchange (CME)
seat. He offers con-
sulting to institution-
al and professional
trading firms. He is
a self-taught pro-
grammer utilizing
C++, C#, and python.
He has a statistics
background special-
izing in data science,
machine learning,
and trading strategy
development. He can
be reached through
BuildAlpha.com. To
read more about
feature engineer-
ing and automatic
signal creation, visit
BuildAlpha.com.
FIGURE 6: SETTING THE COUNT FUNCTION IN BUILD ALPHA. To set up the function to count the signals in Build
The Excel spread- Alpha, create a custom comparative indicator that uses the count function.
sheet and code given
in this article are available in the Article Code section
of our website, Traders.com.
February 2023 • Technical Analysis of Stocks & Commodities • 33
 The “Crypto Winter” Two-Year Pattern
Cryptocurrencies And
Seasonality: Crypto Winter
Part 2
Did you know a pattern exists in cryptocurrencies where
two years of a bear market are often followed by two years
of a bull market? This is a type of seasonality that you
could profit by, both on the short and long side. Here is
what to look for to help spot the crypto winter pattern.
by Azeez Mustapha
T
he cryptocurrency market is a technical space
that requires understanding for an investor to
be profitable.
It also helps to understand that different types
of trading approaches are suitable for different
types of traders. While some traders like to be
highly active all the time, others are very comfortable with
very little activity. Some traders are very nimble; they
go in and out of the market several times within a short
period. This group of traders tries to benefit from every
peak and crest in the market. Other traders only check
34 • February 2023 • Technical Analysis of Stocks & Commodities
in and out a few times in a given period. They are very
patient as the market forms multiple peaks and crests.
That type of approach is not the result of a lack of skill
and knowledge. Instead, it is based having on a trusted
analysis that is expected to play out over the long term.
Because of those different horizons that different traders
have, they typically opt for different types of strategies.
Traders can be classified into categories based on the
type of trading strategies used. There are scalpers, who
spend only a few hours holding their trades. These trad-
ers perform their analyses on the lower timeframes, such
as the 15-minute timeframe. Then there are daytraders,
who hold their trades for less than 24 hours. These types
of traders perform their analyses on higher timeframes
than the scalpers do; their analysis revolves around the
ZOLOTOVEK/SHUTTERSTOCK
hourly chart. Then there are traders referred to as swing
traders. These traders may spend up to two weeks holding
their trades. They typically perform their analyses on the
four-hour chart. The last category and the most patient
 CRYPTOCURRENCY TRADING
FIGURE 1: CRYPTO WINTER 2022 IN BITCOIN. News and fundamental factors can affect the rise and fall in the price of cryptos, though seemingly
not as much as the crypto winter effect. In March 2022, very positive news about cryptocurriencies was prominent and trending, and yet the market
continued to crash during this crypto winter.
of all is the position trader. They may hold their trades
for months or even years. They perform their analyses
on the daily and weekly charts.
Position trading isn’t easy in the currency markets
because you can’t forecast forex easily in the long term.
However, in this article, I will describe an approach to
the cryptocurrency markets that may be quite suitable
for position traders. With this approach’s longer time ho-
rizon, it helps make position trading more manageable.
Seasonality in cryptocurrency
Studies of the crypto market have shown that the crypto
market tends to repeat certain moves over and over at
specific times. With a good understanding of the moves
that have been shown to recur in the crypto markets, a
smart trader can use the past as a tool to help predict
the future.
With its recurring moves, the crypto market can be said
to have seasonal tendencies. Seasonality is a property of
a time series in which the data goes through predictable
and recurring changes every year. “Seasonal” refers to
any predictable variation or pattern that recurs or repeats
during the year or from one year to the next. For example,
there is generally an expectation for some snow to fall
during the winter season of every year (depending on
your geographical location, of course). And with that
expectation, people tend to prepare in advance for what
they will need in snow conditions.
Studies show that there are periods when the market
is very bearish and periods when it is very bullish. Price
TRADINGVIEW
collapses have been reported to occur on occasion.
These periods are known as “crypto winter.” In essence,
“crypto winter” refers to a prolonged price decline.
Price declines and protracted price stability character-
ize crypto winter.
The “crypto winter” cycle
The period of crypto winter is generally two years in a
four-year circle. The two-year bear market precedes two
years of a bull market (which is known as the “crypto
summer”). The years 2018–2019 were a crypto winter.
Then, two years later, another bearish winter would be
expected from 2022–2023.
Fundamental analysis
The use of fundamentals is one way of analyzing the
markets. Fundamental analysis is a technique to evaluate
the crypto market by examining the economic, social,
and political factors that might impact currency prices.
In simple terms, positive external factors concerning
cryptocurrency ought to cause an increase in the value
“Crypto winter” refers to
a prolonged price decline
lasting several weeks or
months.
February 2023 • Technical Analysis of Stocks & Commodities • 35
 FIGURE 2: CRYPTO WINTER 2022 IN RIPPLE COIN. The process of Bitcoin halving during crypto winters tends to affect other cryptocurrencies. In
this chart of Ripple Coin (XRPUSD), you can see the effect of Bitcoin halving.

FIGURE 3: CRYPTO WINTER 2018 IN ETHEREUM. January 2018 saw the start of a market crash with a bearish displacement. At the beginning of
February 2018, major cryptos such as Ethereum could be sold with sufficient risk allowances in place. By the end of 2018, a 200% profit could have
been made on the amount risked. This is an example of taking advantage of the crypto seasonal effect.

of crypto. Similarly, negative external factors concerning
cryptocurrency ought to cause a decrease in the value
of crypto.
However, the seasonal tendency of cryptocurrencies
Price declines and
protracted price stability
characterize crypto winter.
36 • February 2023 • Technical Analysis of Stocks & Commodities
seems to have a more substantial effect on the crypto
market than the fundamentals. The year 2022 (the year
in which I am writing this article) provides a good ex-
ample, as follows.
See the chart of Bitcoin (BTCUSD) in Figure 1. On
March 9, 2022, there was a news release from CoinDesk.
The news events were trending and prominent during
March 2022. News headlines stated things like, “Ukraine
Has Received Close to $100M in Crypto Donations.”
That article went on to describe how the country’s deputy
minister at the Ministry of Digital Transformation stated
that Ukraine’s president “shares our vision” that the use
of crypto could be an “economic breakthrough.”
You would expect such positive news to positively
influence cryptocurrency values, and that it ought to
result in an increase in the price of cryptocurrencies.
However, the effect of the news was barely felt, as the
market continued to crash during this crypto winter, as
you can see in Figure 1. It appears that the seasonality
effect was stronger than the effect of the fundamentals
at the time.
Bitcoin halving
The phenomenon of Bitcoin halving facilitates the oc-
currence of the crypto winter. Bitcoin halving can affect
multiple cryptos, and you often will see many cryptocur-
rencies dip following a Bitcoin halving.
The very first Bitcoin halving took place on November
28, 2012 after 210,000 blocks had been mined, and the
reward was then reduced to 25 Bitcoins. After miners hit
420,000 blocks, the second halving occurred on July 9,
2016, and the payout for mining Bitcoin was reduced to
12.5 Bitcoins. On May 11, 2020, the third halving began,
bringing the mining reward down to 6.25 Bitcoins.
Two years after 2020—when the most recent halving
occurred—points to the year 2022.
The effect of the end of the Bitcoin halving on crypto
winter can be seen in the chart of Ripple Coin (XRPUSD)
in Figure 2. A trader who sold Ripple Coins during the
January 2022 bearish breakout would have profited more
than 100% of his risk.
Crypto winter’s entry and exit strategy
Figure 3 demonstrates an entry and exit approach the
trader can use to take advantage of a crypto winter. With
the knowledge that the crypto winter tends to occur ev-
ery two years in a four-year cycle, a position trader can
anticipate a sell-off.
As seen in the chart in Figure 3, the month of January
2018 revealed the initiation of the market crash with a
bearish displacement. At the beginning of February 2018,
major cryptos could be sold. Sufficient allowance should
be made by the trader in the case of bullish motion before
the bearish run. Enough risk allowance was placed above
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Studies of the crypto
market have shown that
the crypto market tends
to repeat certain moves at
specific times.
the bearish displacement in January 2018 to determine
risk. At the end of 2018, a 200% profit would be made
on the amount risked.
During a crypto winter, the trader could sell the top
20 cryptos (that aren’t stablecoins) from the earlier
part of the year and then buy them after a year or two.
(“Stablecoins” are digital currencies that are pegged to
a “stable” reserve asset such as the US dollar or gold.
Stablecoins are designed to reduce volatility relative to
unpegged cryptocurrencies such as Bitcoin.)
Due to the nature of position trading, traders are ex-
pected to “buy and forget” the coin until the anticipated
date of closing the trade.
The seasonality effect of the crypto winter phenom-
enon can help traders to profit when used well. Crypto
winter is a repeating occurrence that traders can learn
and benefit from.
Azeez Mustapha is an analyst at Instaforex Companies
Group and a blogger at Advfn.com, and as well as a
freelance author for various trading publications. He
is a trading signals provider at some websites. He can
be reached via email at azeez.mustapha@analytics.
instaforex.com.
Further reading
Mustapha, Azeez [2022]. “Cryptocurrencies And Season-
ality: Crypto Summer,” part 1, Technical Analysis of
Stocks & Commodities, Volume 40: December.
‡TradingView
‡See Editorial Resource Index
YOUR ONLINE RESOURCE
FOR TECHNICAL ANALYSIS
February 2023 • Technical Analysis of Stocks & Commodities • 37
 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

YEAR-END MARKET ANALYSIS
As we wave 2022 good-bye and look
forward to 2023, it is always a good
idea to reflect on the past and plan
for the future. As traders and inves-
tors, there is no better way to do this
than by using line charts to compare
various markets, sectors, indexes,
and stocks. This is a relatively easy,
versatile way to compare areas of
the market and to get an overview of
things that might have been missed
in the focus of interacting with the
market on a daily basis.
Knowing how to read the informa-
tion presented and the discipline to
perform this activity is a useful skill
to adopt in our ongoing journey of
mastering technical analysis research
concepts.
The rest of this article will be a
selection of charts that I have gath-
ered, and an explanation of what
they reveal.
STOCKCHARTS.COM
A selection of line charts
The Dow Jones Industrial Average
(DJIA), the granddaddy of indexes
and the most well-known, is as
good a place to start as any other.
Superimposed on the chart (Figure
1) is the Dow Jones Transportation
Average (DJTA).
When Charles Dow, the first editor
of the Wall Street Journal and creator
One sector that has
outperformed the
general stock market in
2022 is energy (XLE).
of the indexes that formed the foun-
dation of Dow theory, was observing
stock market action, he said that to
confirm a trend, the two main indexes,
which at the time were DJIA and
DJIT, must confirm.
In the final months of 2022, we can
see in the chart (Figure 1) that both
indexes are rising. Note however, that
even though the DJIA has made a
higher high, the DJTA has not. This
is something to watch in 2023.
Because of the ongoing scandal
surrounding the collapse of FTX
Trading Ltd., contagion has spread
to the wider crypto market. Bitcoin
($BTCUSD) has been in a slump for
the whole of 2022 (see Figure 2). In
the final month of 2022, as the FTX
scandal spread, BTCUSD increas-
ingly diverged from the S&P 500
index (SPX). While the SPX is rising
(see circle in Figure 2) BTCUSD is
falling, making the stock market a
better place to have assets in than
bitcoin. Will this continue to play
out in 2023?
One sector that has outperformed
the general stock market in 2022 is
energy (XLE). Figure 3 clearly shows
this. While XLE (black line) has risen

FIGURE 1: DOW JONES TRANSPORTATION INDEX (DJIT) FIGURE 2: BITCOIN ($BTCUSD)

38 • February 2023 • Technical Analysis of Stocks & Commodities
 The Savvy Technician
FIGURE 3: ENERGY (XLE)
FIGURE 5: NUCOR CORP. (NUE) COMPARED WITH THE MATERIALS FIGURE 6: TECHNOLOGY (XLK) SECTOR HAS TIGHT CORRELATION
(XLB) SECTOR
for the bulk of 2022, recently making
new highs, the SPX has struggled and
has recently formed what is looking
like a W-shaped bottom.
Copper is widely used in most sec-
tors of the economy, including elec-
tronic product transmission, power
generation, building construction,
industrial machinery, and many other
industries in many different sectors.
Because of its widespread applica-
tion, it is often used as a gauge of
the health of the general economy. In
insider lingo, it is often referred to as
“Dr. Copper” and it is usually a lead-
ing indicator. If orders for copper are
rising, it is considered an indication
that the economy is strong.
Figure 4 shows the performance of
copper correlated with the S&P 500
index during 2022.
FIGURE 4: COPPER CORRELATED WITH THE S&P 500
WITH THE SPX
The DJIA is comprised
of 30 of the largest
blue-chip companies
trading in the market,
while the SPX is
comprised of 500 of
the biggest companies.
There are drawbacks to using the
price of copper alone relative to the
market as an indicator of the health
of the economy, because if there is an
increased demand for copper because
of a shortage in the metal, the price
will rise, making it less of a reliable
indicator.
In our current inflationary environ-
ment, we are likely in the late stages
of an expansion. If inflation continues
February 2023
to rise into 2023 and the Fed contin-
ues to fight it by increasing interest
rates, the possibility of further price
lows in both the SPX and the price
of copper is likely.
We can also take promising sectors
and compare them with strong stocks
in that sector. In Figure 5, Nucor
Corp. (NUE) is compared with the
materials (XLB) sector.
As XLB has began to recover in
2022, NUE, showing strength, never
really fell significantly over the past
year and is currently trading at a
higher high.
The technology sector, represented
by the ETF XLK, which in good
times is often the strongest and most
popular sector, shows its tight correla-
tion with the SPX (see Figure 6). It
rose in a strong trend into 2021 and
• Technical Analysis of Stocks & Commodities • 39
 The Savvy Technician
FIGURE 7: DJIA & SPX TIGHT CORRELATION
plunged with the SPX in 2022. It is
currently showing signs of recovery
in line with the wider index.
The DJIA is comprised of 30 of
the largest blue-chip companies
trading in the market, while the SPX
is comprised of 500 of the biggest
companies. The DJIA is a price-
weighted index, which means that
the index is calculated by adding the
stock price of the 30 companies and
dividing by a divisor. The SPX is a
market capitalization-weighted index
which means that the share price of
each company is multiplied by the
Futures For You
GARNER
Continued from page 29
statements. Obviously, electronic
information is timelier and more reli-
able than data printed on paper.
In the Wild West of cryptocurrency
trading, no such segregation rules ex-
ist. Of course, it should be standard
practice for a brokerage firm to avoid
using customer deposits to pay bills,
meet margin calls, etc. Yet, no regula-
tory bodies are making and enforcing
such commonsense rules. Ironically,
one of the allures of cryptocurrencies
is the lack of government issuance
40 • February 2023 • Technical Analysis of Stocks & Commodities
FIGURE 8: SPX VS. USD
total number of shares outstanding.
An index divisor is then used to arrive
at a final figure.
Notwithstanding the differences in
the way these popular indexes are cal-
culated, they often move in concert, as
we can see from Figure 7. It is worth
noting as we move into the new year
that though both indexes are moving
higher, the DJIA has made a higher
high but the SPX has not.
Finally, Figure 8 shows the SPX and
the US dollar. The chart shows the
lack of correlation between the two.
When the dollar is rising, the SPX is
and backing; most notably, the assets
are not under the influence of the
Fed. However, in the end, one could
argue that none of those premises
held true. For instance, Bitcoin and
other tokens are traded like risk as-
sets. They often behave similarly to
stocks and generally with a negative
correlation to the US dollar. Thus, the
short-term fate of Bitcoin was at the
hands of central bankers after all. The
irony extends to the idea that Bitcoin
fans are seeking assets that are not
centralized. In other words, they are
not part of an exchange; instead, they
are a means of making transactions
often falling and when the dollar is
falling, the SPX is rising.
The value of charts
This article uses a sampling of charts
to show how much can be achieved
by taking different markets, sectors,
and securities and comparing them
to derive information and also to
plan strategies for future trading.
It is a versatile and very useful tool
that we have available as technical
analysts.
or, arguably, holding wealth off the
grid. Yet, FTX was a centralized
crypto exchange. Customers of FTX
learned that using a crypto exchange
located in the Bahamas wasn’t a solu-
tion to avoiding the global financial
system and central bankers.
Now that we’ve outlined the basics
of fund segregation compliance, in
next month’s column, we will take a
deeper look into how crypto traders
can mostly eliminate counterparty
risk by using futures contracts rather
than crypto brokerages.
 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

DECIDING BETWEEN STRIKE PRICES
I typically buy call options. But I am
having trouble deciding which strike
price to buy. Are there any guidelines
to decide which is best?
“Best” is in the eye of the beholder.
The key is understanding the risk/
reward tradeoff among the various
strikes. For this article, we will focus
solely on call options. But everything
here will also apply (though inversely)
to put options.
For actively traded securities,
strike prices can range from deep-
in-the-money (that is, the strike
price is well below the price of the
underlying security) to far-out-of-
the-money (that is, the strike price is
well above the price of the underlying
security. Deep-in-the-money calls
have certain relative disadvantages
compared to other strikes. They are
the most expensive to buy, offer the
least leverage, are often very thinly
traded, and sometimes have wide bid/
ask spreads.
At the far end of the spectrum,
far-out-of-the-money call options
are typically dirt cheap and, as such,
have something akin to an “a moth
to the flame” appeal to many novice
traders. While they are inexpensive
and offer the potential for massive
leverage, the problem is that the
underlying security must typically
make an uncharacteristically huge
move for the option to pay off. Bottom
line: the mathematical probability of
success is exceedingly low.
As a result, the bulk of call option
buyers tends to congregate around the
at-the-money strike, believing that
they offer the best tradeoff between
the cost of entry and the probability
of success. But the reality is, no one
strike (in, at, or out of the money) is
the “right” choice in every case.
The first question is,
“What are your
expectations?”
Before buying any call option, you
first must assess your expectations for
the underlying security. Your expec-
The reality is that
no one strike price
(in, at, or out of the
money) is the “right”
choice in every case.
tations may significantly influence
the strike you purchase. For example,
suppose you absolutely, positively
think Stock XYZ is set to explode
higher in the near term, and your
primary objective is to maximize
profitability. In that case, an out-of-
the-money option is most likely to
help you achieve that objective. But
this assumes that your expectation
turns out to be correct. If XYZ falls
apart instead, the OTM call will col-
lapse quickly in price. If the total of
all your option trades fits this “this
is the big one” scenario, you may oc-
casionally hit a big winner, but over
February 2023
the long term, your odds of success
will remain low.
Alternatively, if you think that
Stock XYZ is about to rise in price,
but you are not sure how far it will
go, nor how long it might take to
get there, then a longer-term in-the-
money call may be your best bet. This
will give the trade more time to work
out and make it less susceptible to the
ravages of time decay (remember,
every option will lose all of its time
premium by expiration, with time
decay accelerating as expiration
draws closer).
The second question is, “Which
strike makes the most sense, given
my expectation?”
The best way to address this is
to fully understand the difference
in behavior between in-the-money,
at-the-money, and out-of-the-money
strikes. For our examples, we will
focus on Cisco Systems (CSCO). On
December 12, with CSCO trading
at $49.30 a share, we will focus on
January options expiring in 39 days
on January 20.
The in-the-money strike
First, let’s look at a deep-in-the-money
call option. Figure 1 displays the par-
ticulars and risk curves for buying 1
Jan20 2023 CSCO 40 strike price call
option at the ask price of $9.55.
Note the delta value of 96.77. That
tells us that this position is roughly
equivalent to buying 100 shares of
CSCO (which would have a delta of
• Technical Analysis of Stocks & Commodities • 41
OPTIONSANALYSIS.COM Explore Your Options

FIGURE 1: RISK CURVES AND TRADE DETAILS, DEEP-IN-THE-MONEY FIGURE 2: RISK CURVES AND TRADE DETAILS, AT-THE-MONEY CALL
CALL OPTION. The example here buys one Jan20 2023 CSCO 40 strike OPTION. The example here buys one Jan20 2023 CSCO 50 strike call
call option at the ask price of $9.55. option at the ask price of $1.12.

The breakeven quickly if the price advances. On

FIGURE 3: RISK CURVES AND TRADE DETAILS, FAR-OUT-OF-THE- the most direct
MONEY CALL OPTION. The example here buys one Jan20 2023 CSCO
60 strike call option at the ask price of $0.02.
FIGURE 4: COMPARING KEY VALUES FOR
VARIOUS CHOICES OF CALL OPTIONS. It’s
helpful to compare potential trades side-by-side.
This compares the three trade examples from
Figures 1, 2, and 3.
100). The difference is that the call
option costs only $955 to buy versus
$4,930 to buy 100 shares of CSCO.
42 • February 2023 • Technical Analysis of Stocks & Commodities
price is only 0.5%
above the current
stock price. How-
ever, trading is
relatively thin,
with only five
contracts trad-
ing hands on
the most recent
day. The bottom
line: If you want
point-for-point
movement with
the stock, this is
way to get it via
options.
The at-the-money strike
Now let’s look at the at-the-money
call option. Figure 2 displays the
particulars and risk curves for buying
1 Jan20 2023 CSCO 50 strike call
option at the ask price of $1.12.
The cost is significantly reduced
from the in-the-money 40 strike price
($112 per 1-lot versus $955). Note that
trading volume is much more active
(3,442 contracts traded versus 5).
Note that the much higher gamma
(11.145 versus 1.163) tells us that this
call will gain value (i.e., higher deltas)
the other hand, the breakeven price
is further away (3.7% versus 0.5%
and time decay will become much
more of an issue if the price does
not move higher relatively quickly
(the 50-call position will lose −$1.79
per day versus −$0.43 per day for the
40-call due to time decay).
The far out-of-the-money
strike
Now let’s look at the far out-of-the-
money call option. Figure 3 displays
the particulars and risk curves for
buying 1 Jan20 2023 CSCO 60 strike
call option at the ask price of $0.02.
This is essentially the equivalent
of a financial markets lottery ticket.
A meager cost of entry, a maximum
amount of potential payoff, and an
exceedingly low potential for suc-
cess. The cost to buy a 1-lot is a mere
$2. Delta tells us that this is roughly
equivalent to buying 0.8 shares
of CSCO. The breakeven price of
$60.02 is a daunting 21.7% above the
current price of CSCO shares. The
odds of success are low; however,
if you expect that CSCO will soar
well beyond $60 a share in the next
month or so, this option can maximize
profitability.
 Explore Your Options

FIGURE 5: RISK CURVE COMPARISON, 40-STRIKE VS. 50-STRIKE. FIGURE 6: RISK CURVE COMPARISON, 40-STRIKE VS. 60-STRIKE.
You can compare risk curves to help decide which call option to purchase. The example here compares potential trades with a strike price of $40 versus
The example trade here is based on one Jan20 2023 CSCO call option, $60 for one call option on CSCO stock expiring January 20, 2023.
with a strike price of $40 versus $50.

Comparing apples-to- Summing up

apples The bottom line
Figure 4 compares the various factors is this: The lower
to consider for each potential trade. the call option
To better understand the differ- strike price, the
ences between the positions: greater the cost
and the greater
• Figure 5 displays the risk curves the probability of
for the 40-strike versus the profit compared
50-strike to higher strikes.
FIGURE 7: RISK CURVE COMPARISON, 50-STRIKE VS. 60-STRIKE.
• Figure 6 displays the risk curves The higher the The example here compares potential trades with a strike price of $50 versus
for the 40-strike versus the call option strike $60, for one call option on CSCO stock expiring January 20, 2023.
60-strike price, the lower
• Figure 7 displays the risk curves the cost, and the higher
for the 50-strike versus the the potential for a
60-strike larger payoff, but the
far lower the prob-
Finally, Figure 8 displays the ex- ability of success.
pected $ and % returns for each strike
price if held until expiration, based
on the price of CSCO at the time of FIGURE 8: COMPARISON OF EXPECTED RETURN. Comparing
expiration. side-by-side the expected reward for each potential call option trade
(if held until expiration) is helpful.

UNGER/OUTSIDE BAR furTher reaDing

Continued from page 22
Society of Technical Analysis, a branch of IFTA), and
speaks throughout Europe, America, Australia, and
Asia. He may be reached at Andrea@UngerAcademy.
com. The Unger Academy provides services to traders,
including individuals, to help them improve their ap-
proach to trading (more information can be found at
https://autc.pro/tasc2).
The code given in this article is available in the Article
Unger, Andrea [2021]. The Successful Trader’s Guide To
Money Management: Proven Strategies, Applications,
And Management Techniques, Wiley Trading.
[2021]. The Unger Method: The Winning Strategy
Of The 4-Time World Trading Champion, The Boss
Books.
[2022]. “Filters On The Test Bench,” Technical
Analysis of StockS & commoditieS, Volume 40:
November.
‡MultiCharts
‡See Editorial Resource Index

Code section of our website, Traders.com.

February 2023 • Technical Analysis of Stocks & Commodities • 43

This month, instead of focusing on a particular arti-
cle in this issue, we asked the software developers
who regularly contribute to this section to submit
something on a topic of their own choosing, whether
that be an idea, technique, or program feature. So
here, you will find some custom coding and some
helpful pointers for implementing a technique or for
using a platform feature.
Code for the following Traders’ Tips selections is
posted at the magazine's website 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 generally provided to
help readers implement a selected technique from
an article in this magazine. The entries here are
contributed by software developers or program-
mers for software that is capable of customization.

trabar Efficiency Ratio',

'IER (TASC)', false, precision = 4)
F TRADINGVIEW: FEBRUARY 2023 TRADERS’ TIPS CODE
// Libraries used by the script.
Here, we present some TradingView Pine Script code that import PineCoders/Time/3 as PCtime
implements a directional version of Perry Kaufman’s effi- import PineCoders/lower_tf/3 as PCltf
ciency ratio calculated from intrabars, that is, bars at a lower
timeframe than the chart’s. //#region ————————————————————
Constants and Inputs
The intrabar efficiency ratio (IER) is designed to gauge
// ————— Constants
the “efficiency” of intrabar price movement. This is achieved // Colors
by calculating the ratio of single-bar price changes for the color GRAY = #80808080
current chart’s timeframe to the sum of absolute intrabar color GRAY_LT = #f5f3f3
changes. The results are smoothed, which gives an indica-
// Strings
tion of how efficient changes are on the current chart’s time-
string ltfString = "2"
frame for each bar relative to the lower timeframe “noise” on string TAB_TXT = "Uses intrabars at {0}\nAvg intrabars
an average basis. In addition, unlike the standard definition per
of the efficiency ratio, the IER calculation preserves direc- chart bar: {1,number,#.#}\nChart bars covered: {2} of {3}"
tional information that
allows it to be used as a
momentum oscillator.

// TASC Issue: Janu-

ary 2023 - Vol. 41,
Issue 2
// Article: Intrabar
Efficiency Ratio
// Article By: Trad-
ingView
// Language:
TradingView's Pine
Script™ v5
// Provided By: Pine-
Coders, for trad-
ingview.com

// For a more complete

version of this indica-
tor, see:
// https://www.trad-
ingview.com/script/
o8tRZCzT-Intrabar-
Efficiency-Ratio/

//@version=5
indicator( FIGURE 1: TRADINGVIEW. The intrabar efficiency ratio (IER), which is a directional version of Perry Kaufman’s efficiency ratio, is
'TASC 2023.02 In- designed to gauge the “efficiency” of intrabar price movement. The IER calculation preserves directional information that allows it to be
used as a momentum oscillator.

44 • February 2023 • Technical Analysis of Stocks & Commodities


// Error Messages
string NI_ERR1 =
"No intrabar information exists at the '{0}' timeframe."
string NI_ERR2 = "This script uses intrabars;
the chart's timeframe must be >= 5min."
// ————— Inputs
string in10 = "Line"
string in11 = "Fill"
string in12 = "12"
string in20 = "20"
color icLine1 = input.color(#00BCD4AA, in10, "", in10)
color icLine2 = input.color(#FF5252AA, "", "", in10)
int lenInput = input.int(20, "Length", inline = in10)
color icFill1 = input.color(#00BCD4AA, in11, "", in11)
color icFill2 = input.color(#fffc52aa, "", "", in11)
color icFill3 = input.color(#FF5252AA, "", "", in11)
bool rankWeightInput = input.bool(false,
"Weigh using relative close changes", "", in12)
int rankLengthInput = input.int(100, "", inline = in12)
bool showInfoBoxInput = input.bool(true, "Show informa-
tion box")
string infoBoxSizeInput = input.string("small", "Size",
["tiny","small","normal","large","huge","auto"], "", in20)
string infoBoxYPosInput = input.string("bottom","↕",
["top","middle","bottom"], "", in20)
string infoBoxXPosInput = input.string("left", "↔",
["left", "center", "right"], "", in20)
color infoBoxColorInput = input.color(GRAY, "", "", in20)
color infoBoxTxtColorInput = input.color(GRAY_LT, "T",
"", in20)
//#endregion
//#region ————————————————————
Calculations
// ———— IER
// Get array of 'close' to 'close' changes in intrabars.
array<float> travels = request.security_lower_tf(
     syminfo.tickerid, ltfString, math.abs(ta.change(close)))
float totalTravels = array.sum(travels)
// Get 'close' to 'close' change of the chart's last two bars.
float chartBarChange = nz(ta.change(close))
// Weight on relative size of the 'close' to 'close' change.
float weight = switch
    rankWeightInput => ta.percentrank(
         math.abs(chartBarChange), rankLengthInput) /
100.0
    => 1.0
// Calculate IER and its MA.
float ier = nz(chartBarChange / totalTravels) * weight
float maMid = ta.alma(ier, lenInput, 0.85, 6)
// ———— Intrabar stats
[intrabars, chartBarsCovered, avgIntrabars] =
PCltf.ltfStats(travels)
int chartBars = bar_index + 1
//#endregion
//#region ———————————————————— Vi-
suals
plotStyle1 = plot.style_line
plotStyle2 = plot.style_linebr
plotDN = display.none
var float mR = 0.0
mR := math.max(nz(mR), math.abs(maMid)) * 0.6
float upper = math.max(0, maMid)
float lower = math.min(0, maMid)
grad = color.from_gradient(maMid, -mR, mR, icLine1,
icLine2)
plot(maMid, "Mid MA", grad, 1, plotStyle1)
plot(maMid, "Mid MA", color.new(grad, 75), 3, plotStyle1)
P1 = plot(upper, "", grad, 1, plotStyle2, display = plotDN)
P2 = plot(lower, "", grad, 1, plotStyle2, display = plotDN)
TSW = maMid >= 0
cUP = TSW ? icFill2 : icFill3
cLO = TSW ? icFill1 : icFill2
fill(P1, P2, TSW ? mR : 0, TSW ? 0 : -mR, cLO, cUP, "")
hline(0)
// Information box.
if showInfoBoxInput
    var table infoBox = table.new(infoBoxYPosInput + "_" +
     infoBoxXPosInput, 1, 1)
    string formattedLtf = PCtime.formattedNoOfPeriods(
     timeframe.in_seconds(ltfString) * 1000)
    string txt = str.format(TAB_TXT, formattedLtf,
     avgIntrabars, chartBarsCovered, chartBars)
    if barstate.isfirst
        table.cell(infoBox, 0, 0, txt,
         text_color = infoBoxTxtColorInput,
         text_size = infoBoxSizeInput,
         bgcolor = infoBoxColorInput)
    else if barstate.islast
        table.cell_set_text(infoBox, 0, 0, txt)        
// Runtime errors.
if ta.cum(intrabars) == 0 and barstate.islast
    runtime.error(str.format(NI_ERR1, ltfString))
else if timeframe.in_seconds() < 5 * 60
    runtime.error(NI_ERR2)
//#endregion
This indicator is available on TradingView: https://www.
tradingview.com/script/o8tRZCzT-Intrabar-Efficiency-Ra-
tio.
An example chart is shown in Figure 1.
—PineCoders, for TradingView
www.TradingView.com
F WEALTH-LAB: FEBRUARY 2023 TRADERS’ TIPS CODE
This month, we’d like to highlight one of Wealth-Lab’s stron-
gest points: chart pattern recognition.
With our Chart Patterns extension, all the “textbook”
patterns that traders are familiar with—such as the cup &
handle, double bottom, triangles and flags—can be automati-
cally detected and drawn on charts. You can even encode a
chart pattern of your own invention—say, the fivefold top—
and let the application scan for it.
Progress never stops though. What we consider the kill-
er feature of Wealth-Lab’s Chart Patterns extension are
grid-based patterns, which we call PriceGrids. Think of it
as computer vision, simply put. A region of a price chart
is divided into a 2D matrix (grid) and the grid cells where
February 2023 • Technical Analysis of Stocks & Commodities • 45
 prices are found are
marked with “one”
bit and the blank
cells as “zero” bits.
This process cre-
ates a visual pattern
of the price dynam-
ic. Encoded into a
“fingerprint,” it can
then be matched by
an indicator return-
ing a confidence
factor value that
reflects how closely
a pattern matches
the current price
dynamics. As the
indicator calculates
FIGURE 2: WEALTH-LAB. Here is an example of defining a pattern on a daily chart of Oracle (ORCL) using the PriceGrids feature of Wealth- values bar-by-bar, a
Lab’s Chart Patterns extension. high confidence lev-
el may suggest that
the PriceGrid pat-
tern has emerged.
Defining such
patterns is easy:
Spot what you think
is a price pattern,
drag the mouse
pointer across a
section of the chart
and let Wealth-Lab
instantly create a
PriceGrid for you
FIGURE 3: WEALTH-LAB. Once a pattern is defined, you can test the pattern on symbols you choose. Here’s an example of testing a newly (Figure 2). But be-
defined pattern on Goldman-Sachs stock (GS).
ware: The process
can get addicting!
Figure 3 shows an example of testing the new pat-
tern on a stock.
And of course, everything of that can be done
without having to write a single line of code. Drop-
ping the “Chart Patterns” or “PriceGrids” rule
onto a Building Block makes you one step closer
to building a strategy that detects chart patterns
(Figure 4) and trades them automatically in your
brokerage account.
—Gene Geren (Eugene)
Wealth-Lab team
www.wealth-lab.com

F OPTUMA: FEBRUARY 2023 TRADERS’ TIPS

FIGURE 4: WEALTH-LAB. Once you define and test a pattern, you can easily mock up a trading CODE
strategy by dropping the “Chart Patterns” or “PriceGrids” rule onto a Building Block. This shows an One of the more interesting techniques that we find
example of mocking up a trading system based on the new pattern.

46 • February 2023 • Technical Analysis of Stocks & Commodities

in W.D. Gann’s original
hand-drawn charts is that
he often plotted the posi-
tion of planets that he
thought were influential
to that security—what we
call Gann planetary lines
(GPLs).
The method he used
was to take the planet’s
longitudinal angle (from
either a heliocentric or
geocentric perspective)
and convert it into a price
using a scaling factor to
have it display in the ap-
propriate price range.
This means that 180
degrees could be plotted FIGURE 5: OPTUMA. This example of Gann planetary lines (GPLs) shows the 180-degree GPLs of Mars (in red). The method takes
at $1.80, $18.00, $1800, or the planet’s longitudinal angle and converts it into a price using a scaling factor to have it display in the appropriate price range. Optu-
ma users with the Astro module can use an Optuma script to get alerts based on when price is approaching one of the GPL levels.
even 18c. The next level is
then plotted 360 degrees
away ($3.60, $36.00, etc.
depending on the scal-
ing).
The example in Figure
5 shows the 180-degree
GPLs of Mars (in red).

Gann planetary line

alerts
When looking at these
plots, there are times
when they behave as very
effective support and re-
sistance lines. Alan Oliver
(TradingWithGann.com)
has done a detailed study
on these lines and which
planets work best with
which markets. FIGURE 6: OPTUMA. The “ASPECTS” function takes the angles and the price angles (P1 & G1) and allows the user to set a
tolerance—or orb—and the aspects to be considered. This can then also be used in scans to find any security that is coming up
The difficult part has against one of these planetary lines.
always been to get alerted
when price is approach- can scan lots of different securities.
ing one of these levels (see Figure 5). For Optuma clients The final “ASPECTS” function takes the angles and the
with the Astro module, the following script can do just that: price angles (P1 & G1) and allows us to set a tolerance—
P1=PVAL(PLANET=[Mars]); or orb—and the aspects to be considered (you can do all of
G1=GPA(); them, with “conjunction” being 360 degrees, “opposition” at
ASPECTS(P1, G1, ORB=20.0, ASPECTS=[Conjunction,O 180 degrees, “square” at 90 degrees, and so on).
pposition], EXACT=False) This can then also be used in scans to find any security
that is coming up against one of these planetary lines.
The first line of code gets the planet’s angle for each day —support@optuma.com
(i.e., Mars).
The second line of code is a new function that turns price
into an angle based on the GPL rules. You can set your own
scaling unit in this, but leaving them set to “auto” means it
February 2023 • Technical Analysis of Stocks & Commodities • 47
 FIGURE 7: ESIGNAL. The Market Screener Plus FIGURE 8: ESIGNAL. Here’s an example of selecting one of the present filters (Average_Xover).
feature of eSignal, which is included with a sub-
scription to eSignal, allows the user to integrate
technical analysis and fundamental data to scan
the markets. Using the dropdown menu at the top
of the window, the user can select from 20 preset
filters that can be used as a template to create
custom scans.

F ESIGNAL: FEBRUARY 2023

FIGURE 9: ESIGNAL. Descriptions of the different preset filters available are provided onscreen to provide an idea of
TRADERS’ TIPS CODE
the type of scan the filter will perform.
Here, we’ll focus on a robust and
useful tool in eSignal to quickly scan
the market for trading opportunities. Market Screener Plus of exchanges in the left panel. Choose the exchange you
(included with a subscription to eSignal) allows the user to wish to scan, then click apply (Figure 11).
integrate technical analysis and fundamental data to scan the The scan button can be used to periodically update the
markets. You’ll find 20 existing filters (that is, preset defaults) results, which are displayed in the window (Figure 12).
that can be used as a template to create custom scans. These To create a new filter from scratch, click the menu icon
filters can be selected using the dropdown menu at the top of (highlighted by the red box drawn on Figure 13) followed by
the window (see Figure 7). “new filter.” Choose “save filter as” to assign the filter a new
In the following example, we’ll use the preset default ti- name and save it.
tled Average_Xover. Once you have selected a default, click Back in the left panel, choose from the existing catego-
the “filter” icon (see Figure 8). The default filters all have ries:
descriptions to give you an idea of the type of scan being
performed (Figure 9). New expression—“Expressions” allow you to compare the
In the left-hand panel you can select additional scan cri- open, high, low, close, previous, volume, and more using
teria. In this example, we’ll select “exchanges” and click mathematical operators (>, <, =, etc.).
the add criterion button (Figure 10). Alternatively, you can Bar values—These include open, high, low, close, previous,
doubleclick the category to add it. Please note that by de- and volume.
fault, one exchange is available. In order to scan multiple Fundamental—EPS, 52-week high/low, PE ratio, revenue,
exchanges, you will need to upgrade to either three or five and sector are just some examples of the 45 fundamental
exchanges, which is an data fields available for Market Screener Plus.
add-on service. Technical analysis—Use a library of technical analysis
From here, click add studies (33 in total) to create advanced scans of the market
exchanges to reveal a list based on your custom settings.

FIGURE 10: ESIGNAL. You can select ad-

ditional scan criteria in the panel at left by
selecting a choice and clicking the “add cri-
terion” button (or doubleclick the category FIGURE 11: ESIGNAL. Click “add exchanges” to reveal a list of exchanges in the left panel. Choose the exchange you wish
to add it). to scan, then click “apply.”

48 • February 2023 • Technical Analysis of Stocks & Commodities

FIGURE 12: ESIGNAL. The scan button can be used to periodically update the results, which are displayed in the window.

Since Market Screener Plus provides the same functional-

ity as a watchlist window, you can also run built-in studies,
formulas, and custom expressions (based on any of the val-
ues in the Market Screener columns) to further analyze and
sort the results of your scans.
In summary, we think you’ll find Market Screener Plus
to be an invaluable tool to scan and analyze entire markets
(domestic and global) using the very same tools applied to
any other window in eSignal.
—ICE Data Services, eSignal.com

MARKET RAP
FIGURE 13: ESIGNAL. To create a new filter from scratch, click the
menu icon (highlighted by the red box) followed by “new filter.” Choose
“save filter as” to assign the filter a new name and save it.

TOMASINI/MARKET RAP 9, or 12 months. proximate it, adding the new price to

Continued from page 23
will happen. Obviously, we cannot
expect to know in advance “what”
will happen. It is enough to know
“when” something will happen.
Another theory for why these two
moving averages are effective to pay
attention to is the idea that the 50-day
moving average could represent a
three-month period and the 200-day
moving average could represent the
one-year time window. There are
indeed many market participants
who believe in the importance of
seasonal factors in stock markets, so
that according to this interpretation,
prices would move in cycles of 3, 6,
If I could add a grain of salt to this
discussion, I have always wondered
why everybody takes for granted that
a 200-day moving average is a simple
arithmetic moving average and not an
exponential moving average or some
other exotic form of moving average
such a triangular or adaptive. Here,
there may be a historical explanation:
Since the 200 MA has been around
for almost a century, we need to look
back at the times when computers did
not exist. In those times, it was easy
to calculate a simple moving aver-
age with a shortcut: You calculate
just once the 200-day mathematical
average of prices, since for the days
that follow, it will be enough to ap-
February 2023
the previous day’s average and again
dividing by 200. Dividing by 200 is
easier to calculate than dividing by
250 or 254. That could be the rea-
son why we always meet the simple
200-day moving average and not the
exponential one.
And frankly, it is endearing to
think that we are analyzing financial
markets today with a tool that dates
back a century and that shaped the
history of technical analysis, probably
mostly due to its ease of calculation
in an era when computers were still
to be invented and charts were drawn
by hand.
• Technical Analysis of Stocks & Commodities • 49
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50 • February 2023 • Technical Analysis of Stocks & Commodities

 FUTURES LIQUIDITY

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

Trading Liquidity: Futures

Contracts to
Effective
Commodity Futures Exchange % Margin Trade for Equal Relative Contract Liquidity
% Margin
Dollar Profit
S&P 500 E-Mini (Mar ’23) CME 6 13.8 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
Ultra T-Bond (Mar ’23) CBOT 5.2 6.6 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
10-Year T-Note (Mar ’23) CBOT 2.1 8.9 6 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
30-Year T-Bond (Mar ’23) CBOT 3.6 7.1 3 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
5-Year T-Note (Mar ’23) CBOT 1.5 9.4 10 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Ultra 10-Year T-Note (Mar ’23) CBOT 2.8 7.9 4 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Russell 2000 E-Mini (Mar ’23) CME 3.6 7.9 2 ••••••••••••••••••••••••••••••••••••••••••••••••
2-Year T-Note (Mar ’23) CBOT 0.6 8.2 11 ••••••••••••••••••••••••••••••••••••••••••••••
Crude Oil WTI (Feb ’23) NYMEX 10.1 6.6 1 •••••••••••••••••••••••••••••••••••••••
Soybean (Mar ’23) CBOT 2.7 5.9 3 •••••••••••••••••••••••••••••••••••••••
Soybean Meal (Mar ’23) CBOT 1 2.7 2 •••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Mar ’23) CME 7.7 15.7 2 ••••••••••••••••••••••••••••••••••••
Corn (Mar ’23) CBOT 7.6 14.1 10 •••••••••••••••••••••••
3-Month SOFR (Mar ’23) CME 0.3 6.8 14 ••••••••••••••••••••
Euro FX (Mar ’23) CME 2.2 14.1 8 ••••••••••••••••••••
Gold (Feb ’23) COMEX 3.8 18.4 5 ••••••••••••••••••
3-Month Eurodollar (Mar ’23) CME 0.3 6.7 14 ••••••••••••••
S&P 500 VIX (Jan ’23) CFE 52.7 22 3 •••••••••••••
Sugar #11 (Mar ’23) ICE/US 6.4 11.4 13 ••••••••••••
Wheat (Mar ’23) CBOT 9.7 10.8 5 •••••••••••
30-Day Fed Funds (Jan ’23) CBOT 0.2 4.6 10 ••••••••••
Silver (Mar ’23) COMEX 7.7 14.8 3 •••••••••
ULSD NY Harbor (Feb ’23) NYMEX 9.9 12.3 2 •••••••••
Dow Futures Mini (Mar ’23) CBOT 8 17.5 2 ••••••••
Gasoline RBOB (Feb ’23) NYMEX 9 9.6 2 ••••••••
Cotton #2 (Mar ’23) ICE/US 11.3 14.1 5 ••••••
High Grade Copper (Mar ’23) COMEX 6.6 14.5 4 ••••••
Japanese Yen (Mar ’23) CME 3.6 12.3 6 ••••••
Live Cattle (Feb ’23) CME 2.8 5.9 6 ••••••
Coffee (Mar ’23) ICE/US 11.8 21.4 5 •••••
British Pound (Mar ’23) CME 4 24.1 13 •••
Hard Red Wheat (Mar ’23) KCBT 8.8 14.1 6 ••• CBOT Chicago Board of Trade, Division of CME
Natural Gas (Jan ’23) NYMEX 18.3 20.7 4 ••• CFE CBOE Futures Exchange
Australian Dollar (Mar ’23) CME 4.6 23.7 13 •• CME Chicago Mercantile Exchange
Canadian Dollar (Mar ’23) CME 2.1 15.6 18 •• COMEX Commodity Exchange, Inc. CME Group
Crude Oil Brent (F) (Feb ’23) NYMEX 9.2 11.5 3 •• ICE-EU Intercontinental Exchange-Futures - Europe
Lean Hogs (Feb ’23) CME 5.7 10.2 9 •• ICE-US Intercontinental Exchange-Futures - US
Mexican Peso (Mar ’23) CME 5.7 24.9 30 •• KCBT Kansas City Board of Trade
Palladium (Mar ’23) NYMEX 15.2 16 1 •• MGEX Minneapolis Grain Exchange
Canola (Mar ’23) ICE/CA 8.9 18.5 21 • NYMEX New York Mercantile Exchange

Cocoa (Mar ’23) ICE/US 6.3 28.3 31 •
2302
Feeder Cattle (Mar ’23) CME 3.6 8.2 4 •
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).

February 2023 • Technical Analysis of Stocks & Commodities • 51

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52 • February 2023 • Technical Analysis of Stocks & Commodities

 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

TRADING GAP OPPORTUNITIES
THROUGH RELATIONSHIP-BASED
INSTRUMENTS
Most traders are familiar with market
gaps, and some know how to trade
them successfully. These past few
years have been very generous to
traders in supplying frequent gaps
to trade on. I propose that there are
more to come in 2023, which would
be good news for us production-based
and probability-based traders. It is
my opinion that due to current events
globally, we will see an abundance
of gaps, up and down, and many of
these gaps will present the opportun-
ity for retracements—what we call
“gap fills.”
There is also incredible opportunity
for utilizing relationships in stocks
and sectors. We can thereby use ETFs
as vehicles to capture profits and to
use on risk-on or risk-off days, as well
as for strategic hedging.
There are various type of gaps to
be aware of so that you can respond
with best practices. This will help
you approach the opportunities
significantly prepared, since you
won’t always be successful.
Gap fills during the day session
may be an opportunity for intraday
traders
Small gaps from the previous day ses-
sion’s close to the next day’s open of
less than 0.35% are mostly day-to-day
noise and should be approached simi-
larly to the way you approach a flat
open. We know historically that much
of the market’s gains during bull
market cycles occur in the overnight
gaps. However, the behavior from
open to close of the day session can
be quite different than that. In recent
years we have witnessed that market
participants overall pay too much
for the opportunity to profit in long
positions. They chase performance
or speculate on outcomes and “pay
up” premarket and at the open. Often
that opening price is the high of the
day—and a gap fill ensues.
Likewise, due to bad news, a deep
discount in the premarket and for the
open can occur, and again, gap fills
We know historically
that much of the
market’s gains during
bull market cycles occur
in the overnight gaps.
are often the intraday experience for
those with the granular trading plans
that intraday requires.
Catalyst-driven events and relation-
ship-based pairs trading
Apart from flat opens and minimal
gaps, which we consider the “noise”
side of the business, there are
catalyst-driven events. The outcome
for US markets can be direct or “in
sympathy” to other countries’ news
or events. Historical examples of this
type of sympathy could be seen with
the bombings in a London, England
February 2023 • Technical Analysis of
subway in 2005 or a private plane
hitting an office tower in Milan, Italy
in 2002, or of Abu Dhabi bailing out
Dubai from defaulting on its bond in
2009. Each of these events caused
amazing discounts at the US market
open, and the market subsequently
rallied to fill the gap and more. None
of those events were even close to a
direct hit on the US as was the terrorist
attack on the World Trade Center in
2001. That attack of September 11,
2001 represented a massive catalyst
that was both political and economic.
Investors exposed to market direc-
tion were impacted negatively as
soon as the markets reopened and
for the next four days afterwards.
The S&P 500 index was down −16%
YTD prior to 9/11 and then lost an-
other −11.6% right afterwards before
turning around in a sharp rally. My
office full of professional traders
and I were there with our statistical
(pairs) and risk arbitrage (mergers)
portfolios. With hundreds of equity
pairs on, and using leverage also,
we had first-hand evidence of how
resilient relationship-based trading
was to market moves, and it still is
to this day.
Not all catalysts are bad for the
market in the way investors or traders
might think. Hurricane Katrina was
a massive disaster to many lives and
caused a large area of destruction, but
the market did not go down. In fact,
there was a +3% rally in the week or
two that followed. Why? Most likely
because natural disasters cause an
Stocks & Commodities • 53
 Trading Perspectives
increase of GDP, and robust GDP
is bullish.

Technical gaps may not be imme-

diately filled
There is a difference between a
surprise catalyst and something
that changes sentiment like a dis-
appointment. When the market is
expecting the Fed to be dovish and
then discovers that they are staying
more hawkish, this disappointment
usually causes a down move that day,
and then the next day we may have a
follow-through gap. That is not the
type of gap I would expect to retrace

TRADINGVIEW
and wouldn’t expect the gap to be
filled immediately. The market needs
FIGURE 1: CONSUMER STAPLES (DEFENSIVE) VS. CONSUMER DISCRETIONARY (CYCLICAL).
to have its temper tantrum and then This shows a one-minute ratio chart of XLP versus XLY for December 13, 2022.
needs to work it out, usually dropping
down to test a support level. So we
might experience a technical gap as a
significant support or resistance level
is broken. This could be a moving
average or trendline break rather than
price points like matching highs or
lows. If the market has been up seven
days in a row and has its first gap
down day, I wouldn’t be so quick to
assume it has to fill the gap.

Using sector relationships for trad-

ing gaps in spread prices
As I’ve discussed before, I use a sta-
tistical database (called StockOdds)
to find odds and average performance
metrics on streaks, Bollinger Bands,
and many other price-based and
performance-based indicators. This
resource comes in handy for assessing
the opportunity and expectation for
the time periods of your choice as well
as the risk-adjusted returns connected
to those potential trades.
Not all catalysts are
bad for the market in
the way investors or
traders might think.
54 • February 2023 • Technical Analysis of Stocks & Commodities
FIGURE 2: UTILITIES (DEFENSIVE) VS. TECHNOLOGY (RISK-ON). This shows a one-minute
ratio chart of XLU versus XLK for December 13, 2022.
On December 13, 2022, CPI data as follows: If the first symbol is
was released that caused a significant outperforming the second symbol, the
gap up in the SPY. The S&P 500 is spread chart will show a rising spread
comprised of 11 sectors, each with a price. If the first symbol is declining
corresponding Select Sector SPDR relative to the second symbol, the
ETF. Understanding what drives each spread chart will display a declining
sector individually and in relationship spread price. In this example, you can
to other sectors can assist traders to observe the discount of XLP relative
capitalize on the day. to XLY at the open of trading on
Figure 1 displays a ratio chart of December 13, which was a significant
XLP vs. XLY. A spread ratio works gap down in the spread price. Why?
 Trading Perspectives
XLY opened at a premium and even
though XLP opened up (a big move
in the market lifts most sectors),
XLY opened up more than XLP.
Why? Market participants really
wanted to put money to work in the
discretionary sector. It’s a chicken and
egg problem: Certain stocks move the
sector. The sector ETF drags along
certain stocks. Regardless of the mix
or mechanics of it, the behavior is
typical. Risk-on events contribute to
these moves regularly.
That is not the entire story though,
as the opening premium is caused by FIGURE 3: FINANCIALS (RISK-ON) VS. HEALTHCARE (DEFENSIVE). This shows a one-minute
ratio chart of XLF versus XLV for December 13, 2022.
those players that have to have it now/
can’t wait/don’t want to miss out.
A professional mindset is to pro-
vide liquidity and look for excess,
believing through a statistical ap-
proach in mean-reversion. Short XLY
and buy XLP.
Figure 2 is the same theme of
shorting XLK and buying XLU.
Because the market here is opening
up much more than the average
move and therefore at a significant
premium, the assumption is that we
want to sell that volatility, facilitate FIGURE 4: VANGUARD VALUE (DEFENSIVE) VS. VANGUARD GROWTH (RISK-ON). This shows
the speculators, but also hedge with a one-minute ratio chart of VTV versus VUG for December 13, 2022.
defensive positions that will hold
up better for two reasons: 1) they ratio spread. XLF opened up more ETFs. VTV represents value and
were not expected to open up as than XLV, which is healthcare and VUG represents growth. What did
much percentage-wise (you may again a bit more defensive. There market participants want on this
even get premarket trades on ARCA is one more thing at play here: If morning? Growth and growth at all
displaying the levels that they are at), the market was gapping on news costs, again willing to pay anything
and 2) when the market pulls back, the that impacted bonds (bonds and to have it. I say “sold.”
defensive positions are more resilient interest rates were the drivers),
to the downside. then those instruments will impact Using spread trading on large gap
Figure 3 is reversed in that XLF is XLF. Both factors—the market’s days
the one that moves better on risk-on sentiment change and interest rates Watch spreads for amazing insights,
days and is the first symbol in the adjusting—were at play the morning and better yet, trade these combina-
of December 13. The spread opened tions, especially on large gap days.
high, and you could have shorted XLF For down market gaps, you may have
A professional mindset and bought XLV. an opportunity to reverse the bias
is to provide liquidity indicated earlier.
and look for excess, Using thematic-based relation- Good success, and send me your
believing through a ships for trading gaps in spread questions or experiences!
statistical approach in prices
mean-reversion. Figure 4 moves us outside of the
sector ETFs into style and thematic
February 2023 • Technical Analysis of Stocks & Commodities • 55
 37 Years in the Making

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